Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2007
Commission file number 0-15886
The Navigators Group, Inc.
(Exact name of Registrant as specified in its charter)
|
|
|
Delaware
|
|
13-3138397 |
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(IRS Employer
Identification No.) |
|
|
|
One Penn Plaza, New York, New York
|
|
10119 |
|
|
|
(Address of principal executive offices)
|
|
(Zip Code) |
(212) 244-2333
(Registrants telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
One):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
The number of common shares outstanding as of October 19, 2007 was 16,858,267.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
INDEX
2
Part 1. Financial Information
Item 1. Financial Statements
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Investments and cash: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale, at fair value (amortized cost: 2007, $1,458,458; 2006, $1,263,284) |
|
$ |
1,454,684 |
|
|
$ |
1,258,717 |
|
Equity securities, available-for-sale, at fair value (cost: 2007, $57,697; 2006, $31,879) |
|
|
63,858 |
|
|
|
37,828 |
|
Short-term investments, at cost which approximates fair value |
|
|
215,117 |
|
|
|
176,961 |
|
Cash |
|
|
4,906 |
|
|
|
2,404 |
|
|
|
|
|
|
|
|
Total investments and cash |
|
|
1,738,565 |
|
|
|
1,475,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums in course of collection |
|
|
186,865 |
|
|
|
163,309 |
|
Commissions receivable |
|
|
2,429 |
|
|
|
3,647 |
|
Prepaid reinsurance premiums |
|
|
194,742 |
|
|
|
179,493 |
|
Reinsurance receivable on paid losses |
|
|
84,043 |
|
|
|
108,878 |
|
Reinsurance receivable on unpaid losses and loss adjustment expenses |
|
|
837,545 |
|
|
|
911,439 |
|
Net deferred income tax benefit |
|
|
31,360 |
|
|
|
30,422 |
|
Deferred policy acquisition costs |
|
|
54,752 |
|
|
|
41,700 |
|
Accrued investment income |
|
|
15,548 |
|
|
|
13,052 |
|
Goodwill and other intangible assets |
|
|
8,237 |
|
|
|
8,012 |
|
Other assets |
|
|
20,906 |
|
|
|
20,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,174,992 |
|
|
$ |
2,956,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses |
|
$ |
1,645,542 |
|
|
$ |
1,607,555 |
|
Unearned premium |
|
|
484,507 |
|
|
|
415,096 |
|
Reinsurance balances payable |
|
|
179,892 |
|
|
|
194,266 |
|
Senior notes |
|
|
123,644 |
|
|
|
123,560 |
|
Federal income tax payable |
|
|
7,688 |
|
|
|
3,934 |
|
Payable for securities purchased |
|
|
27,550 |
|
|
|
166 |
|
Accounts payable and other liabilities |
|
|
79,693 |
|
|
|
60,766 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,548,516 |
|
|
|
2,405,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued |
|
|
|
|
|
|
|
|
Common stock, $.10 par value, shares authorized: 50,000,000 for 2007 and
2006; issued and outstanding: 16,856,267 for 2007 and 16,735,898 for 2006 |
|
|
1,686 |
|
|
|
1,674 |
|
Additional paid-in capital |
|
|
290,955 |
|
|
|
286,732 |
|
Retained earnings |
|
|
328,544 |
|
|
|
259,464 |
|
Accumulated other comprehensive income |
|
|
5,291 |
|
|
|
3,473 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
626,476 |
|
|
|
551,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
3,174,992 |
|
|
$ |
2,956,686 |
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
3
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ and shares in thousands, except net income per share)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
245,961 |
|
|
$ |
221,667 |
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Net written premium |
|
$ |
159,102 |
|
|
$ |
119,037 |
|
(Increase) in unearned premium |
|
|
(3,064 |
) |
|
|
(3,341 |
) |
|
|
|
|
|
|
|
Net earned premium |
|
|
156,038 |
|
|
|
115,696 |
|
Commission income |
|
|
117 |
|
|
|
639 |
|
Net investment income |
|
|
17,930 |
|
|
|
14,691 |
|
Net realized capital gains (losses) |
|
|
(66 |
) |
|
|
(151 |
) |
Other income (expense) |
|
|
298 |
|
|
|
(884 |
) |
|
|
|
|
|
|
|
Total revenues |
|
|
174,317 |
|
|
|
129,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Net losses and loss adjustment
expenses incurred |
|
|
88,019 |
|
|
|
64,456 |
|
Commission expense |
|
|
19,676 |
|
|
|
13,769 |
|
Other operating expenses |
|
|
27,902 |
|
|
|
22,683 |
|
Interest expense |
|
|
2,216 |
|
|
|
2,214 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
137,813 |
|
|
|
103,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
36,504 |
|
|
|
26,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit): |
|
|
|
|
|
|
|
|
Current |
|
|
11,520 |
|
|
|
8,126 |
|
Deferred |
|
|
(49 |
) |
|
|
410 |
|
|
|
|
|
|
|
|
Total income tax expense |
|
|
11,471 |
|
|
|
8,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
25,033 |
|
|
$ |
18,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.49 |
|
|
$ |
1.10 |
|
Diluted |
|
$ |
1.47 |
|
|
$ |
1.09 |
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
16,843 |
|
|
|
16,685 |
|
Diluted |
|
|
16,996 |
|
|
|
16,827 |
|
See accompanying notes to interim consolidated financial statements.
4
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ and shares in thousands, except net income per share)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
Gross written premium |
|
$ |
823,371 |
|
|
$ |
737,816 |
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Net written premium |
|
$ |
493,471 |
|
|
$ |
391,711 |
|
(Increase) in unearned premium |
|
|
(52,770 |
) |
|
|
(57,752 |
) |
|
|
|
|
|
|
|
Net earned premium |
|
|
440,701 |
|
|
|
333,959 |
|
Commission income |
|
|
1,011 |
|
|
|
2,465 |
|
Net investment income |
|
|
51,476 |
|
|
|
41,244 |
|
Net realized capital gains (losses) |
|
|
975 |
|
|
|
(767 |
) |
Other income (expense) |
|
|
(26 |
) |
|
|
(654 |
) |
|
|
|
|
|
|
|
Total revenues |
|
|
494,137 |
|
|
|
376,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses incurred |
|
|
248,950 |
|
|
|
193,200 |
|
Commission expense |
|
|
54,425 |
|
|
|
41,098 |
|
Other operating expenses |
|
|
82,799 |
|
|
|
61,018 |
|
Interest expense |
|
|
6,646 |
|
|
|
4,034 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
392,820 |
|
|
|
299,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
101,317 |
|
|
|
76,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit): |
|
|
|
|
|
|
|
|
Current |
|
|
34,301 |
|
|
|
27,492 |
|
Deferred |
|
|
(2,064 |
) |
|
|
(2,551 |
) |
|
|
|
|
|
|
|
Total income tax expense |
|
|
32,237 |
|
|
|
24,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
69,080 |
|
|
$ |
51,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
4.11 |
|
|
$ |
3.12 |
|
Diluted |
|
$ |
4.07 |
|
|
$ |
3.09 |
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
16,796 |
|
|
|
16,664 |
|
Diluted |
|
|
16,967 |
|
|
|
16,812 |
|
See accompanying notes to interim consolidated financial statements.
5
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
Preferred Stock |
|
|
|
|
|
|
|
|
Balance at beginning and end of period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
1,674 |
|
|
$ |
1,662 |
|
Shares issued under stock plans |
|
|
12 |
|
|
|
8 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
1,686 |
|
|
$ |
1,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
286,732 |
|
|
$ |
282,463 |
|
Employee stock plans |
|
|
441 |
|
|
|
761 |
|
Shares issued under stock plans |
|
|
3,782 |
|
|
|
2,392 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
290,955 |
|
|
$ |
285,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
259,464 |
|
|
$ |
186,901 |
|
Net income |
|
|
69,080 |
|
|
|
51,956 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
328,544 |
|
|
$ |
238,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities, net of tax |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
849 |
|
|
$ |
(884 |
) |
Change in period |
|
|
686 |
|
|
|
707 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
1,535 |
|
|
|
(177 |
) |
|
|
|
|
|
|
|
Cumulative translation adjustments, net of tax |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
2,624 |
|
|
|
96 |
|
Net adjustment for period |
|
|
1,132 |
|
|
|
1,453 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
3,756 |
|
|
|
1,549 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
5,291 |
|
|
$ |
1,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity at end of period |
|
$ |
626,476 |
|
|
$ |
527,515 |
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
6
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
Net income |
|
$ |
25,033 |
|
|
$ |
18,333 |
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Change in net unrealized gains on securities,
net of tax expense of $6,446 and $9,371
in 2007 and 2006, respectively(1) |
|
|
12,154 |
|
|
|
17,249 |
|
Change in foreign currency translation gains,
net of tax expense of $178 and $135
in 2007 and 2006, respectively |
|
|
331 |
|
|
|
252 |
|
|
|
|
|
|
|
|
Other
comprehensive income |
|
|
12,485 |
|
|
|
17,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
37,518 |
|
|
$ |
35,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Disclosure of reclassification amount, net
of tax: |
|
|
|
|
|
|
|
|
Unrealized holding gains arising
during period |
|
$ |
12,105 |
|
|
$ |
17,145 |
|
Less: reclassification adjustment for net
realized
capital (losses) included in net income |
|
|
(49 |
) |
|
|
(104 |
) |
|
|
|
|
|
|
|
Change in net unrealized gains on securities |
|
$ |
12,154 |
|
|
$ |
17,249 |
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
7
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
Net income |
|
$ |
69,080 |
|
|
$ |
51,956 |
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Change in net unrealized gains on securities,
net of tax expense of $311 and $462
in 2007 and 2006, respectively(1) |
|
|
686 |
|
|
|
707 |
|
Change in foreign currency translation gains,
net of tax expense of $610 and $782
in 2007 and 2006, respectively |
|
|
1,132 |
|
|
|
1,453 |
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
1,818 |
|
|
|
2,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
70,898 |
|
|
$ |
54,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Disclosure of reclassification amount, net of tax: |
|
|
|
|
|
|
|
|
Unrealized holding gains arising
during period |
|
$ |
1,312 |
|
|
$ |
187 |
|
Less: reclassification adjustment for net realized capital
capital gains (losses) included in net income |
|
|
626 |
|
|
|
(520 |
) |
|
|
|
|
|
|
|
Change in net unrealized gains on securities |
|
$ |
686 |
|
|
$ |
707 |
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
8
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
69,080 |
|
|
$ |
51,956 |
|
Adjustments to reconcile net income to net
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation & amortization |
|
|
2,532 |
|
|
|
1,990 |
|
Net deferred income tax expense (benefit) |
|
|
(2,064 |
) |
|
|
(2,551 |
) |
Net realized capital (gains) losses |
|
|
(975 |
) |
|
|
767 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Reinsurance receivable on paid and unpaid losses and LAE |
|
|
111,379 |
|
|
|
(21,429 |
) |
Reserve for losses and LAE |
|
|
19,306 |
|
|
|
11,677 |
|
Prepaid reinsurance premiums |
|
|
(12,558 |
) |
|
|
(42,139 |
) |
Unearned premium |
|
|
63,504 |
|
|
|
95,977 |
|
Premiums in course of collection |
|
|
(19,151 |
) |
|
|
(17,056 |
) |
Commissions receivable |
|
|
1,247 |
|
|
|
1,004 |
|
Deferred policy acquisition costs |
|
|
(12,052 |
) |
|
|
(11,764 |
) |
Accrued investment income |
|
|
(2,650 |
) |
|
|
(1,721 |
) |
Reinsurance balances payable |
|
|
(18,297 |
) |
|
|
13,684 |
|
Federal income tax |
|
|
3,193 |
|
|
|
2,138 |
|
Other |
|
|
28,842 |
|
|
|
5,561 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
231,336 |
|
|
|
88,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
|
|
|
|
|
|
Redemptions and maturities |
|
|
127,639 |
|
|
|
95,288 |
|
Sales |
|
|
136,046 |
|
|
|
111,643 |
|
Purchases |
|
|
(455,845 |
) |
|
|
(388,126 |
) |
Equity securities, available-for-sale |
|
|
|
|
|
|
|
|
Sales |
|
|
17,436 |
|
|
|
3,431 |
|
Purchases |
|
|
(41,294 |
) |
|
|
(12,121 |
) |
Change in payable for securities |
|
|
27,176 |
|
|
|
78 |
|
Net change in short-term investments |
|
|
(34,867 |
) |
|
|
(30,675 |
) |
Purchase of property and equipment |
|
|
(7,149 |
) |
|
|
(3,559 |
) |
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(230,858 |
) |
|
|
(224,041 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Net proceeds from senior notes |
|
|
|
|
|
|
123,511 |
|
Proceeds of stock issued from employee stock purchase plan |
|
|
606 |
|
|
|
536 |
|
Proceeds of stock issued from exercise of stock options |
|
|
1,406 |
|
|
|
601 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,012 |
|
|
|
124,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on foreign currency cash |
|
|
12 |
|
|
|
25 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
2,502 |
|
|
|
(11,274 |
) |
Cash at beginning of year |
|
|
2,404 |
|
|
|
13,165 |
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
4,906 |
|
|
$ |
1,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Federal, state and local income tax paid |
|
$ |
31,144 |
|
|
$ |
19,857 |
|
Interest paid |
|
|
4,375 |
|
|
|
4,715 |
|
Issuance of stock to directors |
|
|
181 |
|
|
|
140 |
|
See accompanying notes to interim consolidated financial statements.
9
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Unaudited)
Note 1. Accounting Policies
The interim consolidated financial statements are unaudited but reflect all adjustments
which, in the opinion of management, are necessary to provide a fair statement of the results of
The Navigators Group, Inc. and its subsidiaries for the interim periods presented on the basis of
U.S. generally accepted accounting principles (GAAP or U.S. GAAP). All such adjustments are
of a normal recurring nature. All significant intercompany transactions and balances have been
eliminated. The preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and the reported
revenues and expenses during the reporting periods. The results of operations for any interim
period are not necessarily indicative of results for the full year. The terms we, us, our
and the Company as used herein mean The Navigators Group, Inc. and its subsidiaries, unless the
context otherwise requires. The term Parent or Parent Company is used to mean The Navigators
Group, Inc. without its subsidiaries. These financial statements should be read in conjunction
with the consolidated financial statements and notes contained in the Companys 2006 Annual Report
on Form 10-K. Certain amounts for the prior year have been reclassified or restated to conform to
the current years presentation.
Note 2. Reinsurance Ceded
The Companys ceded earned premiums were $102.1 million and $106.0 million for the three
months ended September 30, 2007 and 2006, respectively, and were $316.1 million and $330.5 million
for the nine months ended September 30, 2007 and 2006, respectively. The Companys ceded incurred
losses were $54.5 million and $61.4 million for the three months ended September 30, 2007 and
2006, respectively, and were $156.9 million and $186.2 million for the nine months ended September
30, 2007 and 2006, respectively.
Note 3. Segment Information
The Companys subsidiaries are primarily engaged in the underwriting and management of
property and casualty insurance.
The Company classifies its business into two underwriting segments consisting of the
Insurance Companies and the Lloyds Operations, which are separately managed, and a Corporate
segment. Segment data for each of the two underwriting segments include allocations of revenues
and expenses of the Navigators Agencies (as defined below) and the Parent Companys expenses and
related income tax amounts.
We evaluate the performance of each segment based on its underwriting and net income results.
The Insurance Companies and the Lloyds Operations results are measured by taking into account
net earned premium, net losses and loss adjustment expenses (LAE), commission expense, other
operating expenses, commission income and other income or expense. The Corporate segment consists
of the Parent Companys investment income, interest expense and the related tax effect. Each
segment also maintains its own investments, on which it earns income and realizes capital gains or
losses. Our underwriting performance is evaluated separately from the performance of our
investment portfolios.
10
Our Insurance Companies consist of Navigators Insurance Company, including its United Kingdom
Branch (the U.K. Branch), and Navigators Specialty Insurance Company (formerly NIC Insurance
Company). Navigators Insurance Company, our largest insurance subsidiary, has been active since
1983. It specializes principally in underwriting marine insurance and related lines of business,
specialty liability insurance and professional liability insurance. Navigators Specialty Insurance
Company, a wholly owned subsidiary of Navigators Insurance Company, began operations in 1990. It
underwrites specialty and professional liability insurance on an excess and surplus lines basis
fully reinsured by Navigators Insurance Company. The Lloyds Operations primarily underwrite
marine and related lines of business at Lloyds of London (Lloyds) through Lloyds Syndicate
1221 (Syndicate 1221). Our Lloyds Operations include Navigators Underwriting Agency Ltd.
(NUAL), a Lloyds underwriting agency which manages Syndicate 1221. We participate in the
capacity of Syndicate 1221 through two wholly-owned Lloyds corporate members. The Navigators
Agencies are wholly-owned insurance underwriting management companies which produce, manage and
underwrite insurance and reinsurance for the Company. All segments are evaluated based on their
GAAP results.
The Insurance Companies and the Lloyds Operations underwriting results are measured based
on underwriting profit or loss and the related combined ratio, which are both non-GAAP measures of
underwriting profitability. Underwriting profit or loss is calculated from net earned premium,
less the sum of net losses and LAE, commission expense, other operating expenses and commission
income and other income (expense). The combined ratio is derived by dividing the sum of net
losses and LAE, commission expense, other operating expenses and commission income and other
income (expense) by net earned premium. A combined ratio of less than 100% indicates an
underwriting profit and over 100% indicates an underwriting loss.
Financial data by segment for the three and nine months ended September 30, 2007 and 2006 were
as follows:
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
Gross written premium |
|
$ |
178,058 |
|
|
$ |
67,903 |
|
|
|
|
|
|
$ |
245,961 |
|
Net written premium |
|
|
109,677 |
|
|
|
49,425 |
|
|
|
|
|
|
|
159,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
109,060 |
|
|
|
46,978 |
|
|
|
|
|
|
|
156,038 |
|
Net losses and LAE |
|
|
(59,816 |
) |
|
|
(28,203 |
) |
|
|
|
|
|
|
(88,019 |
) |
Commission expense |
|
|
(13,086 |
) |
|
|
(6,590 |
) |
|
|
|
|
|
|
(19,676 |
) |
Other operating expenses |
|
|
(21,157 |
) |
|
|
(6,745 |
) |
|
|
|
|
|
|
(27,902 |
) |
Commission income and other income (expense) |
|
|
304 |
|
|
|
111 |
|
|
|
|
|
|
|
415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
15,305 |
|
|
|
5,551 |
|
|
|
|
|
|
|
20,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
14,816 |
|
|
|
2,609 |
|
|
$ |
505 |
|
|
|
17,930 |
|
Net realized capital gains (losses) |
|
|
41 |
|
|
|
(107 |
) |
|
|
|
|
|
|
(66 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
(2,216 |
) |
|
|
(2,216 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
30,162 |
|
|
|
8,053 |
|
|
|
(1,711 |
) |
|
|
36,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
9,193 |
|
|
|
2,877 |
|
|
|
(599 |
) |
|
|
11,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
20,969 |
|
|
$ |
5,176 |
|
|
$ |
(1,112 |
) |
|
$ |
25,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,292,811 |
|
|
$ |
793,661 |
|
|
$ |
65,950 |
|
|
$ |
3,174,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
54.8 |
% |
|
|
60.0 |
% |
|
|
|
|
|
|
56.4 |
% |
Commission expense ratio |
|
|
12.0 |
% |
|
|
14.0 |
% |
|
|
|
|
|
|
12.6 |
% |
Other operating expense ratio (2) |
|
|
19.1 |
% |
|
|
14.1 |
% |
|
|
|
|
|
|
17.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
85.9 |
% |
|
|
88.1 |
% |
|
|
|
|
|
|
86.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to crossfoot. |
|
(2) |
|
Includes other operating expenses and commission income and other income (expense). |
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
Gross written premium (1) |
|
$ |
163,673 |
|
|
$ |
57,780 |
|
|
|
|
|
|
$ |
221,667 |
|
Net written premium |
|
|
91,188 |
|
|
|
27,849 |
|
|
|
|
|
|
|
119,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
85,494 |
|
|
|
30,202 |
|
|
|
|
|
|
|
115,696 |
|
Net losses and LAE |
|
|
(47,926 |
) |
|
|
(16,530 |
) |
|
|
|
|
|
|
(64,456 |
) |
Commission expense |
|
|
(9,889 |
) |
|
|
(3,880 |
) |
|
|
|
|
|
|
(13,769 |
) |
Other operating expenses |
|
|
(16,697 |
) |
|
|
(5,986 |
) |
|
|
|
|
|
|
(22,683 |
) |
Commission income and other income (expense) |
|
|
661 |
|
|
|
(906 |
) |
|
|
|
|
|
|
(245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
11,643 |
|
|
|
2,900 |
|
|
|
|
|
|
|
14,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
12,345 |
|
|
|
1,774 |
|
|
$ |
572 |
|
|
|
14,691 |
|
Net realized capital (losses) |
|
|
(29 |
) |
|
|
(122 |
) |
|
|
|
|
|
|
(151 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
(2,214 |
) |
|
|
(2,214 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
23,959 |
|
|
|
4,552 |
|
|
|
(1,642 |
) |
|
|
26,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
7,658 |
|
|
|
1,627 |
|
|
|
(749 |
) |
|
|
8,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
16,301 |
|
|
$ |
2,925 |
|
|
$ |
(893 |
) |
|
$ |
18,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,050,833 |
|
|
$ |
855,348 |
|
|
$ |
50,276 |
|
|
$ |
2,961,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
56.1 |
% |
|
|
54.7 |
% |
|
|
|
|
|
|
55.7 |
% |
Commission expense ratio |
|
|
11.6 |
% |
|
|
12.8 |
% |
|
|
|
|
|
|
11.9 |
% |
Other operating expense ratio (2) |
|
|
18.8 |
% |
|
|
22.8 |
% |
|
|
|
|
|
|
19.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
86.5 |
% |
|
|
90.3 |
% |
|
|
|
|
|
|
87.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to crossfoot. |
|
(2) |
|
Includes other operating expenses and commission income and other income (expense). |
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
Gross written premium |
|
$ |
585,492 |
|
|
$ |
237,879 |
|
|
|
|
|
|
$ |
823,371 |
|
Net written premium |
|
|
355,798 |
|
|
|
137,673 |
|
|
|
|
|
|
|
493,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
320,607 |
|
|
|
120,094 |
|
|
|
|
|
|
|
440,701 |
|
Net losses and LAE |
|
|
(184,881 |
) |
|
|
(64,069 |
) |
|
|
|
|
|
|
(248,950 |
) |
Commission expense |
|
|
(38,072 |
) |
|
|
(16,353 |
) |
|
|
|
|
|
|
(54,425 |
) |
Other operating expenses |
|
|
(60,983 |
) |
|
|
(21,816 |
) |
|
|
|
|
|
|
(82,799 |
) |
Commission income and other income (expense) |
|
|
889 |
|
|
|
96 |
|
|
|
|
|
|
|
985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
37,560 |
|
|
|
17,952 |
|
|
|
|
|
|
|
55,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
42,910 |
|
|
|
7,167 |
|
|
$ |
1,399 |
|
|
|
51,476 |
|
Net realized capital gains (losses) |
|
|
1,118 |
|
|
|
(143 |
) |
|
|
|
|
|
|
975 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(6,646 |
) |
|
|
(6,646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
81,588 |
|
|
|
24,976 |
|
|
|
(5,247 |
) |
|
|
101,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
25,267 |
|
|
|
8,806 |
|
|
|
(1,836 |
) |
|
|
32,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
56,321 |
|
|
$ |
16,170 |
|
|
$ |
(3,411 |
) |
|
$ |
69,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,292,811 |
|
|
$ |
793,661 |
|
|
$ |
65,950 |
|
|
$ |
3,174,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
57.7 |
% |
|
|
53.3 |
% |
|
|
|
|
|
|
56.5 |
% |
Commission expense ratio |
|
|
11.9 |
% |
|
|
13.6 |
% |
|
|
|
|
|
|
12.3 |
% |
Other operating expense ratio (2) |
|
|
18.7 |
% |
|
|
18.1 |
% |
|
|
|
|
|
|
18.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
88.3 |
% |
|
|
85.0 |
% |
|
|
|
|
|
|
87.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to crossfoot. |
|
(2) |
|
Includes other operating expenses and commission income and other income (expense). |
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
Gross written premium |
|
$ |
496,216 |
|
|
$ |
241,600 |
|
|
|
|
|
|
$ |
737,816 |
|
Net written premium |
|
|
273,277 |
|
|
|
118,434 |
|
|
|
|
|
|
|
391,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
231,334 |
|
|
|
102,625 |
|
|
|
|
|
|
|
333,959 |
|
Net losses and LAE |
|
|
(135,556 |
) |
|
|
(57,644 |
) |
|
|
|
|
|
|
(193,200 |
) |
Commission expense |
|
|
(24,925 |
) |
|
|
(16,173 |
) |
|
|
|
|
|
|
(41,098 |
) |
Other operating expenses |
|
|
(44,096 |
) |
|
|
(16,922 |
) |
|
|
|
|
|
|
(61,018 |
) |
Commission income and other income (expense) |
|
|
2,661 |
|
|
|
(850 |
) |
|
|
|
|
|
|
1,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
29,418 |
|
|
|
11,036 |
|
|
|
|
|
|
|
40,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
34,778 |
|
|
|
5,448 |
|
|
$ |
1,018 |
|
|
|
41,244 |
|
Net realized capital (losses) |
|
|
(329 |
) |
|
|
(438 |
) |
|
|
|
|
|
|
(767 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
(4,034 |
) |
|
|
(4,034 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
63,867 |
|
|
|
16,046 |
|
|
|
(3,016 |
) |
|
|
76,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
20,442 |
|
|
|
5,650 |
|
|
|
(1,151 |
) |
|
|
24,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
43,425 |
|
|
$ |
10,396 |
|
|
$ |
(1,865 |
) |
|
$ |
51,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,050,833 |
|
|
$ |
855,348 |
|
|
$ |
50,276 |
|
|
$ |
2,961,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
58.6 |
% |
|
|
56.2 |
% |
|
|
|
|
|
|
57.9 |
% |
Commission expense ratio |
|
|
10.8 |
% |
|
|
15.8 |
% |
|
|
|
|
|
|
12.3 |
% |
Other operating expense ratio (2) |
|
|
17.9 |
% |
|
|
17.3 |
% |
|
|
|
|
|
|
17.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
87.3 |
% |
|
|
89.3 |
% |
|
|
|
|
|
|
87.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to crossfoot. |
|
(2) |
|
Includes other operating expenses and commission income and other income (expense). |
The Insurance Companies net earned premium includes $12.6 million and $12.9 million of net
earned premium from the U.K. Branch for the three months ended September 30, 2007 and 2006,
respectively, and $45.0 million and $34.2 million of net earned premium from the U.K. Branch for
the nine months ended September 30, 2007 and 2006, respectively.
Note 4. Comprehensive Income
Comprehensive income encompasses net income, net unrealized capital gains and losses on
available for sale securities, and foreign currency translation adjustments, all of which are net
of tax. Please refer to the Consolidated Statements of Stockholders Equity and the Consolidated
Statements of Comprehensive Income, included herein, for the components of accumulated other
comprehensive income (loss) and of comprehensive income (loss), respectively.
15
Note 5. Stock-Based Compensation
Stock based compensation is expensed as stock awards granted under the Companys stock plans
vest with the expense being included in other operating expenses for the periods indicated. The
amount charged to expense for stock grants was $1.4 million and $1.8 million for the three months
ended September 30, 2007 and 2006, respectively, and $3.8 million and $3.1 million for the nine
months ended September 30, 2007 and 2006, respectively. The amount charged to expense for stock
options was $140,000 and $292,000 for the three months ended September 30, 2007 and 2006,
respectively, and $441,000 and $761,000 for the nine months ended September 30, 2007 and 2006,
respectively. Stock appreciation rights resulted in an expense of $29,000 and $541,000 for the
three months ended September 30, 2007 and 2006, respectively, and an expense of $652,000 and
$563,000 for the nine months ended September 30, 2007 and 2006, respectively.
The Company expensed $45,000 and $48,000 for the three months ended September 30, 2007 and
2006, respectively, and $115,000 and $104,000 for the nine months ended September 30, 2007 and
2006, respectively, related to its Employee Stock Purchase Plan.
In addition, $50,000 and $46,000 was expensed in each of the three month periods ended
September 30, 2007 and 2006, and $150,000 and $133,000 was expensed in each of the nine month
periods ended September 30, 2007 and 2006 for stock issued annually to non-employee directors as
part of their directors compensation for serving on the Companys Board of Directors.
Note 6. Application of New Accounting Standards
In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 155, Accounting for Certain Hybrid Financial
Instruments. SFAS No. 155 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, and allows an entity to re-measure at fair value a hybrid financial
instrument that contains an embedded derivative that otherwise would require bifurcation from the
host, if the holder irrevocably elects to account for the whole instrument on a fair value basis.
Subsequent changes in the fair value of the instrument would be recognized in earnings. SFAS No.
155 also removed an exception included in an interpretation of SFAS No. 133 (Implementation Issue
No. B39) that kept holders of mortgage-backed securities from testing for the need to bifurcate the
value embedded in mortgage-backed securities related to the ability to prepay. Such exception was
subsequently reinstated on a limited basis. SFAS No. 155 is effective for financial instruments
acquired or issued after the beginning of an entitys first fiscal year that begins after September
15, 2006. The Companys adoption of SFAS No. 155 at January 1, 2007 did not have a material effect
on its financial condition or results of operations.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), an interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN
48, which was effective in the first quarter of 2007, established the threshold for recognizing the
benefits of tax-return positions in the financial statements as more-likely-than-not to be
sustained by the taxing authorities, and prescribed a measurement methodology for those positions
meeting the recognition threshold. The Companys adoption of FIN 48 at January 1, 2007 did not have
a material effect on its financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in GAAP, and enhances disclosures
about fair value measurements. SFAS No. 157, which becomes effective on January 1, 2008, applies
when other accounting pronouncements require fair value measurements; it does not require new fair
value measurements. The Company has not yet determined the estimated impact on its financial
condition or results of operations, if any, of adopting SFAS No. 157.
16
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, which permits entities to choose to measure many financial instruments and
certain warranty and insurance contracts at fair value on a contract-by-contract basis. SFAS No.
159 is effective as of the beginning of an entitys first fiscal year that begins after November
15, 2007 (January 1, 2008 for calendar-year-end companies). The Company has not yet determined the
estimated impact on its financial condition or results of operations, if any, of adopting SFAS No.
159.
Note 7. Lloyds Syndicate
We record our pro rata share of Syndicate 1221s assets, liabilities, revenues and expenses,
after making adjustments to convert Lloyds accounting to U.S. GAAP. The most significant U.S.
GAAP adjustments relate to income recognition. Lloyds syndicates determine underwriting results by
year of account at the end of three years. We record adjustments to recognize underwriting results
as incurred, including the expected ultimate cost of losses incurred. These adjustments to losses
are based on actuarial analysis of syndicate accounts, including forecasts of expected ultimate
losses provided by Syndicate 1221. At the end of the Lloyds three year period for determining
underwriting results for an account year, Syndicate 1221 will close the account year by reinsuring
outstanding claims on that account year with the participants for the accounts next underwriting
year. The amount to close an underwriting year into the next year is referred to as the
reinsurance to close. The reinsurance to close transaction is recorded in the fourth quarter as
additional written and earned premium, losses incurred, loss reserves and receivables, all in the
same amount. No gain or loss is recorded on the reinsurance to close transaction.
Syndicate 1221s stamp capacity is £140.0 million ($278.2 million) in 2007 compared to £123.5
million ($224.8 million) in 2006. Stamp capacity is a measure of the amount of premium a Lloyds
syndicate is authorized to write based on a business plan approved by the Council of Lloyds.
Syndicate 1221s capacity is expressed net of commission (as is standard at Lloyds). The
Syndicate 1221 premium recorded in the Companys financial statements is gross of commission. The
Company participates for 100% of Syndicate 1221s capacity for both the 2007 and 2006 underwriting
years. The Lloyds Operations included in the consolidated financial statements represent the
Companys participation in Syndicate 1221.
The Company provides letters of credit to Lloyds to support its Syndicate 1221 capacity. If
the Company increases its participation or if Lloyds changes the capital requirements, the Company
may be required to supply additional letters of credit or other collateral acceptable to Lloyds,
or reduce the capacity of Syndicate 1221. The letters of credit are provided through a credit
facility with a consortium of banks which expires March 31, 2009. If the banks decide not to renew
the credit facility, the Company will need to find other sources to provide the letters of credit
or other collateral in order to continue to participate in Syndicate 1221. The bank facility is
collateralized by all of the common stock of Navigators Insurance Company.
Note 8. Income Taxes
We are subject to the tax regulations of the United States and foreign countries in which we
operate. The Company files a consolidated federal tax return, which includes all domestic
subsidiaries and the U.K. Branch. The income from the foreign operations is designated as either
U.S. connected income or non-U.S. connected income. Lloyds is required to pay U.S. income tax on
U.S. connected income written by Lloyds syndicates. Lloyds and the IRS have entered into an
agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyds and
remitted directly to the IRS. These amounts are then charged to the corporate members in
proportion to their participation in the relevant syndicates. The Companys corporate members are
subject to this agreement and will receive United Kingdom (U.K.) tax credits for any U.S. income
tax incurred up to the U.K. income tax charged on the U.S. connected income. The non-U.S.
connected insurance income would generally constitute taxable income under the Subpart F income
section of the Internal Revenue Code since less than 50% of Syndicate 1221s premium is derived
within the U.K. and would therefore be subject to U.S. taxation when the Lloyds year
of account closes. Taxes are accrued at a 35% rate on our foreign source insurance income and
foreign tax credits, where available, are utilized to offset U.S. tax as permitted.
17
The Companys
effective tax rate for Syndicate 1221 taxable income could substantially exceed 35% to the extent the
Company is unable to offset U.S. taxes paid under Subpart F tax regulations with U.K. tax credits
on future underwriting year distributions. U.S. taxes are not accrued on the earnings of the
Companys foreign agencies as these earnings are not subject to the Subpart F tax regulations.
These earnings are subject to taxes under U.K. tax regulations at a 30% rate. We have not provided
for U.S. deferred income taxes on the undistributed earnings of our non-U.S. subsidiaries since
these earnings are intended to be permanently reinvested in our non-U.S.
subsidiaries. A finance bill was enacted in the U.K. on July 19, 2007 that reduces the U.K.
corporate tax rate from 30% to 28% effective April 1, 2008. The effect of such tax rate change was
not material.
As discussed in Note 6 included herein, the Company adopted FIN 48 on January 1, 2007. FIN 48
applies to all tax positions accounted for under SFAS No. 109. FIN 48 defines the confidence level
that a tax position must meet in order to be recognized in the financial statements. The tax
position must be more-likely-than-not to be sustained by the relevant taxing authority which means
a likelihood of more than 50%. If the more-likely-than-not threshold can not be reached, the
benefit should not be reflected in the financial statements. However, a company should recognize
the largest amount of the tax benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement with the taxing authorities. The determination of the 50% threshold is highly
judgmental and depends on the individual facts and circumstances. A tax benefit taken in the tax
return but not in the financial statements is known as an unrecognized tax benefit. The Company
had no unrecognized tax benefits at either January 1, 2007 or at September 30, 2007 and does not
anticipate any significant unrecognized tax benefits within the next twelve months.
The Company is currently not under examination by any major U.S. or foreign tax authority and
is generally subject to U.S. Federal, state, local, or foreign tax examinations by tax authorities
for years 2003 and subsequent. The Companys policy is to record interest and penalties related to
unrecognized tax benefits to income tax expense. The Company did not incur any interest or
penalties related to unrecognized tax benefits for the nine month periods ended September 30, 2007
and 2006.
The Company had state and local deferred tax assets amounting to potential future tax benefits
of $7.4 million and $6.0 million at September 30, 2007 and December 31, 2006, respectively.
Included in the deferred tax assets are net operating loss carryforwards of $3.8 million and $4.8
million at September 30, 2007 and December 31, 2006, respectively. A valuation allowance was
established for the full amount of these potential future tax benefits due to the uncertainty
associated with their realization.
Note 9. Commitments and Contingencies
(a) Except as follows, the Company is not a party to, or the subject of, any material legal
proceedings which depart from the ordinary routine litigation incident to the kinds of business it
conducts.
On November 22, 2006, the Company filed a demand for arbitration in New York against Equitas,
a lead reinsurer participating in excess of loss reinsurance agreements, with respect to
unsatisfied loss payment recovery demands that the Company has previously presented to Equitas (the
Equitas Arbitration). The recovery demands are for the 2005 settlement of two class action
lawsuits involving large asbestos claims (together, the 2005 Settled Claims), which 2005 Settled
Claims are being paid through 2007. Equitas has not indicated any dispute with respect to
recoveries on related pro rata reinsurance agreements for such 2005 Settled Claims or with respect
to excess of loss or pro rata reinsurance for the 2004 Settled Claim referred to below. The
aggregate amount of excess of loss recoveries due from Equitas for ceded paid and unpaid losses on
the 2005 Settled Claims is approximately $2.7 million.
The Company filed its demand for arbitration against Equitas in accordance with the applicable
provisions of the excess of loss reinsurance agreements. The Company believes that the refusal of
Equitas to satisfy the Companys payment demands is without merit and it intends to vigorously
pursue collection of its reinsurance recovery. While it is too early to predict with any certainty
the outcome of the Equitas Arbitration, the Company believes that the ultimate outcome would not be
expected to have a significant adverse effect on its results of operations, financial condition or
liquidity, although an unexpected adverse resolution of the Equitas Arbitration could have a
material adverse effect on the Companys results of operations in a particular fiscal quarter or
year.
18
(b) Whenever a member of Lloyds is unable to pay its debts to policyholders, such debts may
be payable by the Lloyds Central Fund. If Lloyds determines that the Central Fund needs to be
increased, it has the power to assess premium levies on current Lloyds members up to 3% of a
members underwriting capacity in any one year. The Company does not believe that any assessment
is likely in the foreseeable future and has not provided any allowance for such an assessment.
However, based on the Companys 2007 capacity at Lloyds of £140 million, the September 30, 2007
exchange rate of £1 equals $2.04 and assuming the maximum 3% assessment, the Company would be
assessed approximately $8.6 million.
Note 10. Senior Notes due May 1, 2016
On April 17, 2006, the Company completed a public debt offering of $125 million principal
amount of 7% senior unsecured notes due May 1, 2016 (the Senior Notes) and received net proceeds
of $123.5 million. The Company contributed $100 million of the proceeds to the capital and surplus
of Navigators Insurance Company and retained the remainder at the Parent Company for general
corporate purposes. The interest payment dates on the Senior Notes are each May 1 and November 1.
The effective interest rate related to the Senior Notes, based on the proceeds net of discount and
all issuance costs, is approximately 7.17%.
The Senior Notes, the Companys only senior unsecured obligation, will rank equally with
future senior unsecured indebtedness. The Company may redeem the Senior Notes at any time and from
time to time, in whole or in part, at a make-whole redemption price. The terms of the Senior
Notes contain various restrictive business and financial covenants typical for debt obligations of
this type, including limitations on mergers, and liens or dispositions of the common stock of
certain subsidiaries. As of September 30, 2007, the Company was in compliance with all such
covenants.
The interest expense for the three and nine months ended September 30, 2007 was $2.2 million
and $6.6 million, respectively. The interest expense from the April 17, 2006 issuance date to
September 30, 2006 was $4.0 million. The fair value, which is based on the quoted market price at
September 30, 2007, was $127.8 million.
19
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of
Operations |
Note on Forward-Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q are forward-looking statements
as defined in the Private Securities Litigation Reform Act of 1995. Whenever used in this report,
the words estimate, expect, believe or similar expressions are intended to identify such
forward-looking statements. Forward-looking statements are derived from information that we
currently have and assumptions that we make. We cannot assure that anticipated results will be
achieved, since results may differ materially because of both known and unknown risks and
uncertainties which we face. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
Factors that could cause actual results to differ materially from our forward-looking statements
include, but are not limited to:
|
|
|
the effects of domestic and foreign economic conditions, and conditions which
affect the market for property and casualty insurance; |
|
|
|
|
changes in the laws, rules and regulations which apply to our insurance
companies; |
|
|
|
|
the effects of emerging claim and coverage issues on our business, including
adverse judicial or regulatory decisions and rulings; |
|
|
|
|
the effects of competition from banks and other insurers and the trend toward
self-insurance; |
|
|
|
|
risks that we face in entering new markets and diversifying the products and
services we offer; |
|
|
|
|
unexpected turnover of our professional staff; |
|
|
|
|
changing legal and social trends and inherent uncertainties in the loss
estimation process that can adversely impact the adequacy of loss reserves and the
allowance for reinsurance recoverables, including our estimates relating to ultimate
asbestos liabilities and related reinsurance recoverables; |
|
|
|
|
risks inherent in the collection of reinsurance recoverable amounts from our
reinsurers over many years into the future based on the reinsurers financial ability
and intent to meet such obligations to the Company; |
|
|
|
|
risks associated with our continuing ability to obtain reinsurance covering our
exposures at appropriate prices and/or in sufficient amounts and the related
recoverability of our reinsured losses; |
|
|
|
|
weather-related events and other catastrophes (including acts of terrorism)
impacting our insureds and/or reinsurers, including, without limitation, the impact of
Hurricanes Katrina, Rita, and Wilma and the possibility that our estimates of losses
from Hurricanes Katrina, Rita and Wilma will prove to be materially inaccurate; |
|
|
|
|
our ability to attain adequate prices, obtain new business and retain existing
business consistent with our expectations; |
|
|
|
|
the possibility of downgrades in our claims-paying and financial strength
ratings significantly adversely affecting us, including reducing the number of
insurance policies we write generally, or causing clients who require an insurer with a
certain rating level to use higher-rated insurers; |
|
|
|
|
the inability of our internal control framework to provide absolute assurance
that all incidents of fraud or unintended material errors will be detected and
prevented; |
20
|
|
|
the risk that our investment portfolio suffers reduced returns or investment
losses which could reduce our profitability; and |
|
|
|
|
other risks that we identify in future filings with the Securities and Exchange
Commission (the SEC), including without limitation the risks described under the
caption Risk Factors in our Annual Report on Form 10-K for the year ended December
31, 2006. |
In light of these risks, uncertainties and assumptions, any forward-looking events discussed
in this Form 10-Q may not occur. You are cautioned not to place undue reliance on any
forward-looking statements, which speak only as of their respective dates.
The discussion and analysis of our financial condition and results of operations contained
herein should be read in conjunction with our consolidated financial statements and accompanying
notes which appear elsewhere in this Form 10-Q. It contains forward-looking statements that
involve risks and uncertainties. Please see Note on Forward-Looking Statements for more
information. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those discussed below and
elsewhere in this Form 10-Q.
Overview
We are an international insurance holding company focusing on specialty products for niches
within the overall property/casualty insurance market. The Companys underwriting segments consist
of insurance company operations and operations at Lloyds of London. Our largest product line and
most long-standing area of specialization is ocean marine insurance. We have also developed
specialty niches in professional liability insurance and in specialty liability insurance primarily
consisting of contractors liability and excess liability coverages. We conduct operations through
our Insurance Companies and our Lloyds Operations. The Insurance Companies consist of Navigators
Insurance Company, which includes our U.K. Branch, and Navigators Specialty Insurance Company,
which underwrites specialty and professional liability insurance on an excess and surplus lines
basis fully reinsured by Navigators Insurance Company. Our Lloyds Operations include NUAL, a
Lloyds underwriting agency which manages Syndicate 1221. We participate in the capacity of
Syndicate 1221 through two wholly-owned Lloyds corporate members.
While management takes into consideration a wide range of factors in planning the Companys
business strategy and evaluating results of operations, there are certain factors that management
believes are fundamental to understanding how the Company is managed. First, underwriting profit
is consistently emphasized as a primary goal, above premium growth. Managements assessment of our
trends and potential growth in underwriting profit is the dominant factor in its decisions with
respect to whether or not to expand a business line, enter into a new niche, product or territory
or, conversely, to contract capacity in any business line. In addition, management focuses on
managing the costs of our operations. Management believes that careful monitoring of the costs of
existing operations and assessment of costs of potential growth opportunities are important to our
profitability. Access to capital also has a significant impact on managements outlook for our
operations. The Insurance Companies operations and ability to grow their business and take
advantage of market opportunities are particularly constrained by regulatory capital requirements
and rating agency assessments of capital adequacy.
The discussions that follow include tables, which contain both our consolidated and segment
operating results for the three and nine month periods ended September 30, 2007 and 2006. In
presenting our financial results we have discussed our performance with reference to underwriting
profit or loss and the related combined ratio, both of which are non-GAAP measures of underwriting
profitability. We consider such measures, which may be defined differently by other companies, to
be important in the understanding of our overall results of operations. Underwriting profit or
loss is calculated from net earned premium, less the sum of net losses and LAE, commission expense,
other operating expenses and commission income and other income (expense). The combined ratio is
derived by dividing the sum of net losses and LAE, commission expense, other operating
expenses and commission income and other income (expense) by net earned premiums. A combined
ratio of less than 100% indicates an underwriting profit and over 100% indicates an underwriting
loss.
21
Although not a financial measure, managements decisions are also greatly influenced by access
to specialized underwriting and claims expertise in our lines of business. We have chosen to
operate in specialty niches with certain common characteristics which we believe provide us with
the opportunity to use our technical underwriting expertise in order to realize underwriting
profit. As a result, we have focused on underserved markets for businesses characterized by higher
severity and lower frequency of loss where we believe our intellectual capital and financial
strength bring meaningful value. In contrast, we have avoided niches that we believe have a high
frequency of loss activity and/or are subject to a high level of regulatory requirements, such as
workers compensation and personal automobile insurance, because we do not believe our technical
expertise is of as much value in these types of businesses. Examples of niches that have the
characteristics we look for include bluewater hull which provides coverage for physical damage to,
for example, highly valued cruise ships, and directors and officers liability insurance (D&O)
which covers litigation exposure of a corporations directors and officers. These types of
exposures require substantial technical expertise. We attempt to mitigate the financial impact of
severe claims on our results by conservative and detailed underwriting, prudent use of reinsurance
and a balanced portfolio of risks.
Our revenue is primarily comprised of premiums and investment income. The Insurance Companies
derive their premiums primarily from business written by the Navigators Agencies, which are
wholly-owned insurance underwriting agencies of the Company. The Lloyds Operations derive their
premiums from business written by NUAL. Beginning in 2006, the Navigators Agencies produce and
manage business almost exclusively for the Insurance Companies and are reimbursed for actual costs.
Prior to 2006, the Navigators Agencies received commissions and, in some cases, profit commissions
on the business produced on behalf of the Insurance Companies and other unaffiliated insurers.
NUAL is reimbursed for its actual costs and, where applicable, profit commissions on the business
produced for Syndicate 1221.
Over the past several years, we have experienced generally beneficial market changes in our
lines of business. As a result of several large industry losses in the second quarter of 2001, the
marine insurance market began to experience diminished capacity and rate increases, initially in
the offshore energy line of business. The marine rate increases began to level off in 2004 and
into 2005. As a result of the substantial insurance industry losses resulting from Hurricanes
Katrina and Rita, the marine insurance market experienced diminished capacity and rate increases
through the end of 2006, particularly for the offshore energy risks located in the Gulf of Mexico.
Since the end of 2006, competitive market conditions returned as available capacity has increased.
The 2007 average renewal rates for our Insurance Companies marine business decreased approximately
1.7% for the third quarter and were flat for the nine month period, including offshore energy
average renewal rates which decreased approximately 3.6% for the third quarter and increased
approximately 1.4% for the nine month period. The 2007 average renewal rates for our Lloyds
Operations marine business decreased approximately 3.3% for the third quarter and were flat for
the nine month period, including offshore energy average renewal rates which decreased
approximately 6.4% for the third quarter and 3.5% for the nine month period.
Specialty liability losses in 2001 to 2003, particularly for the contractors liability
business, also resulted in diminished capacity in the market in which we compete, as many former
competitors who lacked the expertise to selectively underwrite this business have been forced to
withdraw from the market resulting in approximate rate increases of 13% in 2004 and 49% in 2003.
This was followed by a slight decline in rates of approximately 1% in 2005. The 2006 year average
renewal rates for the contractors liability business declined approximately 6%, primarily due to
additional competition in the marketplace. This decline continued into the 2007 third quarter and
nine month period with average renewal rates declining approximately 15.3% and 11.4%, respectively.
We expect these competitive conditions to continue during 2007 resulting in continuing declines in
pricing for contractors liability and excess liability business.
In the professional liability market, the enactment of the Sarbanes-Oxley Act of 2002,
together with financial and accounting scandals at publicly traded corporations and the increased
frequency of securities-
related class action litigation, has led to heightened interest in professional liability
insurance generally. Average professional liability renewal premium rates decreased approximately
5.8% and 6.6% in the 2007 third quarter and nine month period, respectively, compared to relatively
level renewal rates in 2006 and 2005 after decreasing approximately 3% in 2004 which followed
substantial renewal rate increases in 2003 and 2002, particularly for D&O insurance. The D&O
insurance premium renewal rates decreased approximately 7.7% and 8.6% in the 2007 third quarter and
nine month period, respectively, after decreases of approximately 2% in 2005 and 10% in 2004. We
anticipate continuing declines in 2007 pricing given the overall favorable industry underwriting
results since 2002 for the professional liability lines of business.
22
Our business is cyclical and influenced by many factors. These factors include price
competition, economic conditions, interest rates, weather-related events and other catastrophes
including natural and man-made disasters (for example hurricanes and terrorism), state regulations,
court decisions and changes in the law. The incidence and severity of catastrophes are inherently
unpredictable. Although we will attempt to manage our exposure to such events, the frequency and
severity of catastrophic events could exceed our estimates, which could have a material adverse
effect on our financial condition. Additionally, because our insurance products must be priced,
and premiums charged, before costs have fully developed, our liabilities are required to be
estimated and recorded in recognition of future loss and settlement obligations. Due to the
inherent uncertainty in estimating these liabilities, we cannot assure you that our actual
liabilities will not exceed our recorded amounts.
Catastrophe Risk Management
Our Insurance Companies and Lloyds Operations have exposure to losses caused by hurricanes
and other natural and man-made catastrophic events. The frequency and severity of catastrophes are
unpredictable.
The extent of losses from a catastrophe is a function of both the total amount of insured
exposure in an area affected by the event and the severity of the event. We continually assess our
concentration of underwriting exposures in catastrophe exposed areas globally and attempt to manage
this exposure through individual risk selection and through the purchase of reinsurance. We also
use modeling and concentration management tools that allow us to better monitor and control our
accumulations of potential losses from catastrophe exposures. Despite these efforts, there remains
uncertainty about the characteristics, timing and extent of insured losses given the nature of
catastrophes. The occurrence of one or more severe catastrophic events could have a material
adverse effect on the Companys results of operations, financial condition or liquidity.
The Company has significant catastrophe exposures throughout the world with the largest
catastrophe exposure for offshore energy risks due to hurricanes in the Gulf of Mexico. Based on
an assessment made through the end of the 2007 third quarter, the Company believes that its
estimated probable maximum pre-tax gross and net loss exposure in a theoretical one in two hundred
and fifty year hurricane event in the Gulf of Mexico would approximate $212 million and $30
million, respectively, including the cost of reinsurance reinstatement premiums. There are a
number of significant assumptions and related variables related to such an estimate including the
size, force and path of the hurricane, the various types of the insured risks exposed to the event
at the time the event occurs and the estimated costs or damages incurred for each insured risk.
There can be no assurances that the gross and net loss amounts that the Company could incur in such
an event or in any hurricanes that may occur in the Gulf of Mexico would not be materially higher
than the estimates discussed above given the significant uncertainties with respect to such an
estimate.
The occurrence of large loss events could reduce the reinsurance coverage that is available to
us and could weaken the financial condition of our reinsurers, which could have a material adverse
effect on our results of operations. Although the reinsurance agreements make the reinsurers
liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance
arrangements do not eliminate our obligation to pay claims to our policyholders. Accordingly, we
bear credit risk with respect to our reinsurers. Specifically, our reinsurers may not pay claims
made by us on a timely basis, or they may not pay some or all of these claims.
Either of these events would increase our costs and could have a material adverse effect on
our business. We are required to pay the losses even if a reinsurer fails to meet its obligations
under the reinsurance agreement.
23
Critical Accounting Policies
It is important to understand our accounting policies in order to understand our financial
statements. Management considers certain of these policies to be critical to the presentation of
the financial results, since they require management to make significant estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets, liabilities, revenues,
expenses, and related disclosures at the financial reporting date and throughout the reporting
period. Certain of the estimates result from judgments that can be subjective and complex and
consequently actual results may differ from these estimates, which would be reflected in future
periods.
Our most critical accounting policies involve the reporting of the reserves for losses and LAE
(including losses that have occurred but were not reported to us by the financial reporting date),
reinsurance recoverables, written and unearned premium, the recoverability of deferred tax assets,
the impairment of invested assets, accounting for Lloyds results and the translation of foreign
currencies.
Reserves for Losses and LAE. Reserves for losses and LAE represent an estimate of the
expected cost of the ultimate settlement and administration of losses, based on facts and
circumstances then known. Actuarial methodologies are employed to assist in establishing such
estimates and include judgments relative to estimates of future claims severity and frequency,
length of time to develop to ultimate, judicial theories of liability and other third party factors
which are often beyond our control. Due to the inherent uncertainty associated with the reserving
process, the ultimate liability may be different from the original estimate. Such estimates are
regularly reviewed and updated and any resulting adjustments are included in the current years
results.
Reinsurance Recoverables. Reinsurance recoverables are established for the portion of the
loss reserves that are ceded to reinsurers. Reinsurance recoverables are determined based upon the
terms and conditions of reinsurance contracts which could be subject to interpretations that differ
from our own based on judicial theories of liability. In addition, we bear credit risk with
respect to our reinsurers which can be significant considering that certain of the reserves remain
outstanding for an extended period of time. We are required to pay losses even if a reinsurer
fails to meet its obligations under the applicable reinsurance agreement.
Written and Unearned Premium. Written premium is recorded based on the insurance policies
that have been reported to us and the policies that have been written by agents but not yet
reported to us. We must estimate the amount of written premium not yet reported based on judgments
relative to current and historical trends of the business being written. Such estimates are
regularly reviewed and updated and any resulting adjustments are included in the current years
results. An unearned premium reserve is established to reflect the unexpired portion of each
policy at the financial reporting date.
Substantially all of our business is placed through agents and brokers. Since the vast
majority of the Companys gross written premium is primary or direct as opposed to assumed, the
delays in reporting assumed premium generally do not have a significant effect on the Companys
financial statements, since we record estimates for both unreported direct and assumed premium. We
also record the ceded portion of the estimated gross written premium and related acquisition costs.
The earned gross, ceded and net premiums are calculated based on our earning methodology which is
generally pro-rata over the policy period. Losses are also recorded in relation to the earned
premium. The estimate for losses incurred on the estimated premium is based on an actuarial
calculation consistent with the methodology used to determine incurred but not reported loss
reserves for reported premiums.
A portion of the Companys premium is estimated for unreported premium, mostly for the marine
business written by our U.K. Branch and Lloyds Operations. We generally do not experience any
significant backlog in processing premiums. Such premium estimates are generally based on
submission data received from
brokers and agents and recorded when the insurance policy or reinsurance contract is written
or bound. The estimates are regularly reviewed and updated taking into account the premium
received to date versus the estimate and the age of the estimate. To the extent that the actual
premium varies from the estimates, the difference, along with the related loss reserves and
underwriting expenses, is recorded in current operations.
Deferred Tax Assets. We apply the asset and liability method of accounting for income taxes
whereby deferred assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. In assessing the realization of deferred tax assets, management
considers whether it is more likely than not that the deferred tax assets will be realized.
24
Impairment of Investment Securities. Impairment of investment securities results in a charge
to operations when a market decline below cost is other-than-temporary. Management regularly
reviews our fixed maturity and equity securities portfolios to evaluate the necessity of recording
impairment losses for other-than-temporary declines in the fair value of investments. In general,
we focus our attention on those securities whose market value was less than 80% of their cost or
amortized cost, as appropriate, for six or more consecutive months. Factors considered in
evaluating potential impairment include, but are not limited to, the current fair value as compared
to cost or amortized cost of the security, as appropriate, the length of time the investment has
been below cost or amortized cost and by how much, our intent and ability to retain the investment
for a period of time sufficient to allow for an anticipated recovery in value, specific credit
issues related to the issuer and current economic conditions. Other-than-temporary impairment
losses result in a permanent reduction of the cost basis of the underlying investment. Significant
changes in the factors we consider when evaluating investments for impairment losses could result
in a significant change in impairment losses reported in the consolidated financial statements.
As mentioned above, the Company considers its intent and ability to hold a security until the
value recovers as part of the process of evaluating whether a securitys unrealized loss represents
an other-than- temporary decline. The Companys ability to hold such securities is supported by
sufficient cash flow from its operations and from maturities within its investment portfolio in
order to meet its claims payment and other disbursement obligations arising from its underwriting
operations without selling such investments. With respect to securities where the decline in value
is determined to be temporary and the securitys value is not written down, a subsequent decision
may be made to sell that security and realize a loss. Subsequent decisions on security sales are
made within the context of overall risk monitoring, changing information, market conditions and
assessing value relative to other comparable securities. Management of the Companys investment
portfolio is outsourced to third party investment managers. While these investment managers may,
at a given point in time, believe that the preferred course of action is to hold securities with
unrealized losses that are considered temporary until such losses are recovered, the dynamic nature
of the portfolio management may result in a subsequent decision to sell the security and realize
the loss, based upon a change in market and other factors described above. The Company believes
that subsequent decisions to sell such securities are consistent with the classification of the
Companys portfolio as available for sale.
Investment managers are required to notify management of rating agency downgrades of
securities in their portfolios as well as any potential investment valuation issues at the end of
each quarter. Investment managers are also required to notify management to the extent the
investment manager is contemplating a transaction or transactions that may result in a realized
loss above a certain threshold. Additionally, investment managers are required to notify
management if they are contemplating a transaction or transactions that may result in any realized
loss up until a certain period beyond the close of a quarterly accounting period.
Accounting for Lloyds Results. We record our pro rata share of Syndicate 1221s assets,
liabilities, revenues and expenses, after making adjustments to convert Lloyds accounting to U.S.
GAAP. The most significant GAAP adjustments relate to income recognition. Lloyds syndicates
determine underwriting results by year of account at the end of three years. We record adjustments
to recognize underwriting results as incurred, including the expected ultimate cost of losses
incurred. These adjustments to losses are based on actuarial
analysis of syndicate accounts, including forecasts of expected ultimate losses provided by
the syndicate. At the end of the Lloyds three-year period for determining underwriting results
for an account year, the syndicate will close the account year by reinsuring outstanding claims on
that account year with the participants for the accounts next underwriting year. The amount to
close an underwriting year into the next year is referred to as the reinsurance to close (RITC).
The RITC transaction is recorded in the fourth quarter as additional written and earned premium,
losses incurred, loss reserves and receivables, all in the same amount. There are no gains or
losses recorded on the RITC transaction.
25
Translation of Foreign Currencies. Financial statements of subsidiaries expressed in foreign
currencies are translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency
Translation, issued by the FASB. Under SFAS 52, functional currency assets and liabilities are
translated into U.S. dollars using period end rates of exchange and the related translation
adjustments are recorded as a separate component of accumulated other comprehensive income.
Statement of income amounts expressed in functional currencies are translated using average
exchange rates.
Results of Operations
The following is a discussion and analysis of our consolidated and segment results of
operations for the three and nine month periods ended September 30, 2007 and 2006. All earnings
per share data is presented on a per diluted share basis.
Net income for the three months ended September 30, 2007 was $25.0 million or $1.47 per share
compared to $18.3 million or $1.09 per share for the three months ended September 30, 2006.
Included in these results were net realized capital gains (losses) of $0.00 per share and $(0.01)
per share for the three months ended September 30, 2007 and 2006, respectively.
Net income for the nine months ended September 30, 2007 was $69.1 million or $4.07 per share
compared to $52.0 million or $3.09 per share for the nine months ended September 30, 2006.
Included in these results were net realized capital gains (losses) of $0.04 per share and $(0.03)
per share for the nine months ended September 30, 2007 and 2006, respectively.
The combined ratios, which consist of the sum of the loss and LAE ratio and the expense ratio
for each period, for the 2007 third quarter and nine month period were 86.6% and 87.4%,
respectively, compared to 87.4% for the 2006 third quarter and 87.9% for the first nine months of
2006. The combined ratios for the 2007 third quarter and nine month period were reduced by 7.8 and
6.7 loss ratio points, respectively, for net loss reserve redundancies of $12.2 million and $29.6
million, respectively, relating to prior periods. The combined ratios for the 2006 third quarter
and nine month period were reduced by 5.1 and 3.8 loss ratio points, respectively, for net loss
reserve redundancies of $6.0 million and $12.7 million, respectively, relating to prior periods.
The net paid loss and LAE ratios for the 2007 third quarter and nine month period were 29.6% and
31.1%, respectively, compared to 35.9% for the 2006 third quarter and 34.6% for the first nine
months of 2006.
The 2007 third quarter and nine month period included incurred losses of $2.0 million or 1.3
loss ratio points and $5.6 million or 1.3 loss ratio points for U.K. flood losses. Approximately
$4.0 million was recorded for property losses and $1.6 million for cargo losses for the two events
that occurred in the 2007 second and third quarters.
Cash flow from operations was $231.3 million for the first nine months of 2007 compared to
$88.1 million for the comparable period in 2006. The positive cash flow contributed to the growth
in invested assets and net investment income.
Consolidated stockholders equity increased 14% to $626.5 million or $37.17 per share at
September 30, 2007 compared to $551.3 million or $32.94 per share at December 31, 2006. The
increase was primarily due to net income of $69.1 million for the first nine months of 2007.
Revenues. Gross written premium increased to $246.0 million and $823.4 million in the
third quarter and first nine months of 2007, respectively, from $221.7 million and $737.8 million
in the third quarter and first nine months of 2006, increases of 11% and 12%, respectively. The
growth in the 2007 gross written premium generally reflects a combination of business expansion in
both new and existing lines of business, partially offset by the effect of premium rate changes on
renewal policies on certain lines of business. As discussed below under Lloyds Operations Gross
Written Premium, the 2007 third quarter and nine month period gross written premium excludes
advance premium, however advance premium was recorded as gross written premium in our Lloyds
Operations in the 2006 third quarter and nine month period. The inclusion or exclusion of advance
premium in gross written premium has no impact on revenues or net income for either accounting
period since premiums are earned commencing with the effective date of an insurance policy.
26
The premium rate changes discussed elsewhere in this document for marine, specialty and
professional liability are calculated primarily by comparing premium amounts on policies that have
renewed. The premiums are judgmentally adjusted for exposure factors when deemed significant and
sometimes represent an aggregation of several lines of business. The rate change calculations
provide an indicated pricing trend and are not meant to be a precise analysis of the numerous
factors that affect premium rates or the adequacy of such rates to cover all underwriting costs and
generate an underwriting profit. The calculation can also be affected quarter by quarter depending
on the particular policies and the number of policies that renew during that period. Due to market
conditions, these rate changes may or may not apply to new business which is generally more
competitively priced compared to renewal business.
The following tables set forth our gross and net written premium and net earned premium by
segment and line of business for the periods indicated:
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
|
Premium |
|
|
% |
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
% |
|
|
Premium |
|
|
Premium |
|
|
|
($ in thousands) |
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
53,040 |
|
|
|
21.5 |
% |
|
$ |
24,207 |
|
|
$ |
29,520 |
|
|
$ |
54,116 |
|
|
|
24.3 |
% |
|
$ |
24,566 |
|
|
$ |
29,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty |
|
|
95,627 |
|
|
|
38.9 |
% |
|
|
68,441 |
|
|
|
62,796 |
|
|
|
85,675 |
|
|
|
38.7 |
% |
|
|
52,923 |
|
|
|
45,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
24,546 |
|
|
|
10.0 |
% |
|
|
14,447 |
|
|
|
14,184 |
|
|
|
22,848 |
|
|
|
10.3 |
% |
|
|
13,450 |
|
|
|
10,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
4,845 |
|
|
|
2.0 |
% |
|
|
2,582 |
|
|
|
2,560 |
|
|
|
1,034 |
|
|
|
0.5 |
% |
|
|
249 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies Total |
|
|
178,058 |
|
|
|
72.4 |
% |
|
|
109,677 |
|
|
|
109,060 |
|
|
|
163,673 |
|
|
|
73.8 |
% |
|
|
91,188 |
|
|
|
85,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
50,060 |
|
|
|
20.3 |
% |
|
|
37,373 |
|
|
|
41,607 |
|
|
|
44,962 |
|
|
|
20.3 |
% |
|
|
23,743 |
|
|
|
29,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
9,639 |
|
|
|
3.9 |
% |
|
|
8,692 |
|
|
|
4,587 |
|
|
|
9,015 |
|
|
|
4.1 |
% |
|
|
3,381 |
|
|
|
1,525 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
8,204 |
|
|
|
3.4 |
% |
|
|
3,360 |
|
|
|
784 |
|
|
|
3,803 |
|
|
|
1.7 |
% |
|
|
725 |
|
|
|
(449 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations Total |
|
|
67,903 |
|
|
|
27.6 |
% |
|
|
49,425 |
|
|
|
46,978 |
|
|
|
57,780 |
|
|
|
26.1 |
% |
|
|
27,849 |
|
|
|
30,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany elimination |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
214 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
245,961 |
|
|
|
100.0 |
% |
|
$ |
159,102 |
|
|
$ |
156,038 |
|
|
$ |
221,667 |
|
|
|
100.0 |
% |
|
$ |
119,037 |
|
|
$ |
115,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
|
Premium |
|
|
% |
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
% |
|
|
Premium |
|
|
Premium |
|
|
|
($ in thousands) |
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
205,296 |
|
|
|
24.9 |
% |
|
$ |
105,453 |
|
|
$ |
96,531 |
|
|
$ |
209,928 |
|
|
|
28.5 |
% |
|
$ |
101,891 |
|
|
$ |
80,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty |
|
|
289,383 |
|
|
|
35.2 |
% |
|
|
194,109 |
|
|
|
175,326 |
|
|
|
219,843 |
|
|
|
29.8 |
% |
|
|
136,246 |
|
|
|
121,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
69,379 |
|
|
|
8.4 |
% |
|
|
41,406 |
|
|
|
40,555 |
|
|
|
65,164 |
|
|
|
8.8 |
% |
|
|
34,894 |
|
|
|
29,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
21,434 |
|
|
|
2.6 |
% |
|
|
14,830 |
|
|
|
8,195 |
|
|
|
1,281 |
|
|
|
0.2 |
% |
|
|
246 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies Total |
|
|
585,492 |
|
|
|
71.1 |
% |
|
|
355,798 |
|
|
|
320,607 |
|
|
|
496,216 |
|
|
|
67.3 |
% |
|
|
273,277 |
|
|
|
231,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
183,661 |
|
|
|
22.3 |
% |
|
|
109,899 |
|
|
|
103,953 |
|
|
|
202,074 |
|
|
|
27.4 |
% |
|
|
107,026 |
|
|
|
99,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
25,651 |
|
|
|
3.1 |
% |
|
|
18,201 |
|
|
|
9,498 |
|
|
|
16,104 |
|
|
|
2.1 |
% |
|
|
6,326 |
|
|
|
2,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
28,567 |
|
|
|
3.5 |
% |
|
|
9,573 |
|
|
|
6,643 |
|
|
|
23,422 |
|
|
|
3.2 |
% |
|
|
5,082 |
|
|
|
1,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations Total |
|
|
237,879 |
|
|
|
28.9 |
% |
|
|
137,673 |
|
|
|
120,094 |
|
|
|
241,600 |
|
|
|
32.7 |
% |
|
|
118,434 |
|
|
|
102,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany elimination |
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
823,371 |
|
|
|
100.0 |
% |
|
$ |
493,471 |
|
|
$ |
440,701 |
|
|
$ |
737,816 |
|
|
|
100.0 |
% |
|
$ |
391,711 |
|
|
$ |
333,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Gross Written Premium
Insurance Companies Gross Written Premium
Marine Premium. The gross written premium for the first nine months of 2007 consisted of
31.4% marine liability, 20.9% offshore energy, 9.7% cargo, 7.4% transport, 10.5% protection and
indemnity (P&I) and 8.3% bluewater hull with the remainder in several other marine related classes
of business.
The marine gross written premium for the 2007 third quarter and nine month period decreased
2.0% and 2.2%, respectively, compared to the same periods in 2006 reflecting flattening or
declining premium in several classes of business due to increased competitive market conditions.
The average renewal premium rates during the 2007 third quarter decreased 1.7% and the nine month
period was flat. We expect continuing pricing declines in 2007 for marine business, including
offshore energy business, as additional capacity re-enters the marine market.
Specialty Premium. The gross written premium for the first nine months of 2007 consisted of
48.0% contractors liability business, 15.5% excess casualty business, 11.4% primary casualty
business, 13.1% commercial middle markets business, 2.5% personal umbrella business and 9.5% other
targeted commercial risks.
The specialty gross written premium for the 2007 third quarter and nine month period increased
11.6% and 31.6%, respectively, compared to the same periods in 2006 reflecting growth across all
lines of business including premiums generated from our primary casualty business which started in
the 2006 third quarter. The average renewal premium rates decreased by approximately 15.3% and
11.4% for the contractors liability business in the 2007 third quarter and nine month period,
respectively. The recent premium rate decreases for the contractors liability business and
generally for the specialty lines of business are reflective of softening market conditions which
are expected to continue throughout 2007.
Professional Liability Premium. The gross written premium for the first nine months of 2007
consisted of 66.6% D&O liability coverage for privately held and publicly traded corporations,
26.0% professional liability coverage for lawyers and other professionals and 7.4% professional
liability coverage for architects and engineers.
The professional liability gross written premium for the 2007 third quarter and nine month
period increased 7.4% and 6.5%, respectively, compared to the same periods in 2006. The average
overall renewal premium rates for the professional liability business decreased by approximately
5.8% and 6.6% in the 2007 third quarter and nine month period, respectively. D&O renewal premium
rates, included in the overall professional liability rate change, also decreased by approximately
7.7% and 8.6% in the 2007 third quarter and nine month period, respectively. We anticipate
continuing declines in 2007 pricing given the overall favorable industry underwriting results for
this business.
Other Premium. The gross written premium for the 2007 third quarter and nine month period
includes inland marine business and European property business written by the U.K. Branch, which
were both started by the Company in 2006.
Lloyds Operations Gross Written Premium
Our gross written premium is based on the amount of Syndicate 1221s stamp capacity that we
provide. Our percentage of participation in the stamp capacity is 100% for both 2007 and 2006.
Stamp capacity is a measure of the amount of premium a Lloyds syndicate is authorized to write
based on a business plan approved by the Council of Lloyds. Syndicate 1221s stamp capacity is
£140.0 million ($278.2 million) in 2007 compared to £123.5 million ($224.8 million) in 2006.
30
Gross written premium increased 17.5% and net written premium increased 77.5% in the 2007
third quarter compared to the 2006 third quarter. Gross written premium and net written premium
decreased approximately 1.5% and increased 16.2%, respectively, for the first nine months of 2007
compared to the same period in 2006. Commencing in 2007, advance premium has been excluded from
gross written premium of our Lloyds Operations and deferred to future periods where it will be
recorded in the quarterly periods which correspond to the applicable effective dates of the
insurance policies. Advance premium represents gross written premium on bound policies with
effective dates subsequent to the end of the quarter. Advance premiums of approximately $11.1
million were excluded from gross written premium for the nine months ended September 30, 2007,
while advance premiums included in gross written premium for the nine months ended September 30,
2006 were approximately $4.2 million. The Lloyds Operations gross written premium for the three
and nine months ended September 30, 2006 excluding advance premiums were $63.0 million and $237.4
million, respectively.
The 2007 advance premium amounts, net of commissions, have been included in other liabilities
on the September 30, 2007 balance sheet. The inclusion of such amounts in gross written premium in
2006 and exclusion of such amounts in the 2007 gross written premium had no impact on revenues or
net income for either accounting period since premiums are earned commencing with the effective
date of an insurance policy.
Marine Premium. The gross written premium for the first nine months of 2007 consisted of
31.6% cargo and specie, 22.5% offshore energy and 18.4% marine liability with the remainder in
several other marine related classes of business.
The marine gross written premium for the 2007 third quarter and nine month period increased
11.3% and decreased 9.1%, respectively, compared to the same periods in 2006. The changes were due
to the combination of flattening or declining premium in several classes of business due to
increased competitive market conditions and the timing of the recording of advance premium
discussed above. The average renewal premium rates decreased approximately 3.3% for the 2007 third
quarter and were flat for the nine month period. We expect overall flat to moderate declines in
2007 pricing for marine business, including offshore energy business, as additional capacity
re-enters the marine market.
Professional Liability Premium. The gross written premium for the first nine months of 2007
consisted of 45% D&O liability coverage for privately held and publicly traded corporations and 55%
professional liability coverage for lawyers and other professionals.
Other Premium. The gross written premium for the 2007 third quarter and nine month period
consisted of European property business, and engineering and construction business which provides
coverage for construction projects including machinery, equipment and loss of use due to delays and
of premium for onshore energy business which principally focuses on the oil and gas, chemical and
petrochemical industries with coverages primarily for property damage and business interruption.
Ceded Written Premium. In the ordinary course of business, we reinsure certain
insurance risks with unaffiliated insurance companies for the purpose of limiting our maximum loss
exposure, protecting against catastrophic losses, and maintaining desired ratios of net premiums
written to statutory surplus. The relationship of ceded to written premium varies based upon the
types of business written and whether the business is written by the Insurance Companies or the
Lloyds Operations.
31
The following tables set forth our ceded written premium by segment and major line of business
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Ceded |
|
|
Gross |
|
|
Ceded |
|
|
Gross |
|
|
|
Written |
|
|
Written |
|
|
Written |
|
|
Written |
|
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
28,833 |
|
|
|
54.4 |
% |
|
$ |
29,550 |
|
|
|
54.6 |
% |
Specialty |
|
|
27,186 |
|
|
|
28.4 |
% |
|
|
32,752 |
|
|
|
38.2 |
% |
Professional Liability |
|
|
10,099 |
|
|
|
41.1 |
% |
|
|
9,398 |
|
|
|
41.1 |
% |
Other |
|
|
2,263 |
|
|
NM |
|
|
785 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
68,381 |
|
|
|
38.4 |
% |
|
|
72,485 |
|
|
|
44.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
12,687 |
|
|
|
25.3 |
% |
|
|
21,219 |
|
|
|
47.2 |
% |
Professional Liability |
|
|
947 |
|
|
|
9.8 |
% |
|
|
5,634 |
|
|
|
62.5 |
% |
Other |
|
|
4,844 |
|
|
|
59.0 |
% |
|
|
3,078 |
|
|
|
80.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
18,478 |
|
|
|
27.2 |
% |
|
|
29,931 |
|
|
|
51.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany elimination |
|
|
|
|
|
NM |
|
|
214 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
86,859 |
|
|
|
35.3 |
% |
|
$ |
102,630 |
|
|
|
46.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
NM = not meaningful
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Ceded |
|
|
Gross |
|
|
Ceded |
|
|
Gross |
|
|
|
Written |
|
|
Written |
|
|
Written |
|
|
Written |
|
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
99,843 |
|
|
|
48.6 |
% |
|
$ |
108,037 |
|
|
|
51.5 |
% |
Specialty |
|
|
95,274 |
|
|
|
32.9 |
% |
|
|
83,597 |
|
|
|
38.0 |
% |
Professional Liability |
|
|
27,973 |
|
|
|
40.3 |
% |
|
|
30,270 |
|
|
|
46.5 |
% |
Other |
|
|
6,604 |
|
|
|
30.8 |
% |
|
|
1,035 |
|
|
|
80.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
229,694 |
|
|
|
39.2 |
% |
|
|
222,939 |
|
|
|
44.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
73,762 |
|
|
|
40.2 |
% |
|
|
95,048 |
|
|
|
47.0 |
% |
Professional Liability |
|
|
7,450 |
|
|
|
29.0 |
% |
|
|
9,778 |
|
|
|
60.7 |
% |
Other |
|
|
18,994 |
|
|
|
66.5 |
% |
|
|
18,340 |
|
|
|
78.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
100,206 |
|
|
|
42.1 |
% |
|
|
123,166 |
|
|
|
51.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany elimination |
|
|
|
|
|
NM |
|
|
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
329,900 |
|
|
|
40.1 |
% |
|
$ |
346,105 |
|
|
|
46.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
NM = not meaningful
The ratios of total ceded written premium to gross written premium in the 2007 third quarter
and nine month period were 35.3% and 40.1%, respectively, compared to the 2006 third quarter and
nine month period ratios of 46.3% and 46.9%, respectively. The decrease in the ratio of ceded
written premium to gross written premium for the three and nine months ended September 30, 2007
compared to the same periods in 2006 was due to a combination of the following factors:
|
|
Modest reductions in the amounts of marine reinsurance ceded on a pro
rata basis by the Insurance Companies. |
|
|
|
Reductions in the amount of business ceded on a pro rata basis by the
Lloyds Operations coupled with reductions in reinsurer participation
in our Syndicate 1221 stamp capacity. The 2007 third quarter ceded
written premium of the Lloyds Operations was reduced by approximately
$6.4 million for ceded written premium amounts that were over
estimated in prior accounting periods mostly recorded during the six
months ended 2007. The estimate change which results in a higher
relationship of net premiums retained to gross written premium in the
2007 third quarter was not material to the current and prior quarterly
accounting periods. |
|
|
|
An increase in the proportion of specialty gross premiums, in which we
retain a higher proportion of premium relative to our other lines, to
the overall total amount. In addition, effective April 1, 2007, the
Company increased its net retention from $500,000 to $1 million for
the contractors liability business which reduced the amount of premium
ceded. Somewhat offsetting retaining more contractors liability
premium, the Company generally reinsures a large percentage of its new
lines of business and increases its retention as the business matures
over time. |
|
|
|
Increases in our net retentions on the professional liability pro rata
reinsurance treaty which renewed April 1, 2006. No changes to
retentions occurred for the April 1, 2007 renewal. |
33
Net Written Premium. Net written premium increased 33.7% and 26.0% in the 2007 third
quarter and nine month period, respectively, compared to the same periods in 2006, primarily due to
business expansion in the Navigators Insurance Companys specialty business unit and the Lloyds
Operations marine and professional liability businesses. In addition, the rate of growth in net
written premium exceeds the rate of growth in gross written premium as we are retaining more of our
business as discussed above.
Net Earned Premium. Net earned premium, which generally lags the increase in net
written premium, increased 34.9% and 32.0% in the 2007 third quarter and nine month period,
respectively, compared to the same periods in 2006, as a result of the increased net written
premium discussed above.
Commission Income. Commission income from unaffiliated business was $0.1 million and
$1.0 million in the 2007 third quarter and nine month period, respectively, compared to $0.6
million and $2.5 million in the 2006 third quarter and nine month period, respectively. The
declines in the 2007 periods were primarily due to the elimination of the marine pool as of January
1, 2006 resulting in a decline in unaffiliated commission income from the pool.
Net Investment Income. Net investment income increased 22% and 25% in the 2007 third
quarter and nine month period, respectively, compared to the same periods in 2006, due to the
increase in invested assets as a result of the positive cash flow from operations.
Net Realized Capital Gains and Losses. Pre-tax net income included a net realized
capital loss of $66,000 for the 2007 third quarter compared to a net realized capital loss of
$151,000 for the 2006 third quarter. On an after-tax basis, the 2007 third quarter net realized
capital loss was $49,000 or $0.00 per share compared to a net realized capital loss of $104,000 or
$0.01 per share for the 2006 third quarter. Pre-tax net income included a net realized capital
gain of $975,000 for the first nine months of 2007 compared to a net realized capital loss of
$767,000 for the first nine months of 2006. On an after-tax basis, the net realized capital gain
was $626,000 or $0.04 per share for the first nine months of 2007 compared to a net realized
capital loss of $520,000 or $0.03 per share for the first nine months of 2006.
Other Income/(Expense). Other income/(expense) for the third quarters and first nine
months of both 2007 and 2006 consisted primarily of foreign exchange gains and losses from our
Lloyds Operations and inspection fees related to the specialty insurance business.
Operating Expenses
Net Losses and Loss Adjustment Expenses Incurred. The ratios of net losses and LAE incurred
to net earned premium (loss ratios) for the 2007 and 2006 third quarters were 56.4% and 55.7%,
respectively, and 56.5% and 57.9% for the first nine months of 2007 and 2006, respectively. The
loss ratios for the third quarter of 2007 and 2006 were favorably impacted by 7.8 and 5.1 loss
ratio points, respectively, resulting from a redundancy of prior period loss reserves. The loss
ratios for the first nine months of 2007 and 2006 were favorably impacted by 6.7 and 3.8 loss ratio
points, respectively, also resulting from a redundancy of prior period loss reserves.
The 2007 third quarter and nine month loss ratios both included 1.3 loss ratio points for U.K.
flood losses in the Insurance Companies property line of business and Lloyds marine line of
business (principally cargo losses), respectively.
34
The following table sets forth gross reserves for losses and LAE reduced for reinsurance
recoverable on such amounts resulting in net loss and LAE reserves (a non-GAAP measure reconciled in the
following table):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Gross reserves for losses and LAE |
|
$ |
1,645,542 |
|
|
$ |
1,607,555 |
|
Less: Reinsurance recoverable on unpaid
losses and LAE reserves |
|
|
837,545 |
|
|
|
911,439 |
|
|
|
|
|
|
|
|
Net loss and
LAE reserves |
|
$ |
807,997 |
|
|
$ |
696,116 |
|
|
|
|
|
|
|
|
The following tables set forth our net reported loss and LAE reserves and net IBNR reserves by
segment and line of business as of September 30, 2007 and December 31, 2006 (a non-GAAP measure
reconciled above):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
|
Net |
|
|
Net |
|
|
Total |
|
|
% of IBNR |
|
|
|
Reported |
|
|
IBNR |
|
|
Net Loss |
|
|
to Total Net |
|
|
|
Reserves |
|
|
Reserves |
|
|
Reserves |
|
|
Loss Reserves |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
90,345 |
|
|
$ |
100,760 |
|
|
$ |
191,105 |
|
|
|
52.7 |
% |
Specialty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction liability |
|
|
37,272 |
|
|
|
201,172 |
|
|
|
238,444 |
|
|
|
84.4 |
% |
All other liability |
|
|
24,436 |
|
|
|
57,223 |
|
|
|
81,659 |
|
|
|
70.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Specialty |
|
|
61,708 |
|
|
|
258,395 |
|
|
|
320,103 |
|
|
|
80.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional liability |
|
|
21,820 |
|
|
|
46,299 |
|
|
|
68,119 |
|
|
|
68.0 |
% |
Other |
|
|
12,615 |
|
|
|
12,402 |
|
|
|
25,017 |
|
|
|
49.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance
Companies |
|
|
186,488 |
|
|
|
417,856 |
|
|
|
604,344 |
|
|
|
69.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
81,582 |
|
|
|
91,688 |
|
|
|
173,270 |
|
|
|
52.9 |
% |
Other |
|
|
8,464 |
|
|
|
21,919 |
|
|
|
30,383 |
|
|
|
72.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lloyds Operations |
|
|
90,046 |
|
|
|
113,607 |
|
|
|
203,653 |
|
|
|
55.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
$ |
276,534 |
|
|
$ |
531,463 |
|
|
$ |
807,997 |
|
|
|
65.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
Net |
|
|
Net |
|
|
Total |
|
|
% of IBNR |
|
|
|
Reported |
|
|
IBNR |
|
|
Net Loss |
|
|
to Total Net |
|
|
|
Reserves |
|
|
Reserves |
|
|
Reserves |
|
|
Loss Reserves |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
83,295 |
|
|
$ |
96,098 |
|
|
$ |
179,393 |
|
|
|
53.6 |
% |
Specialty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction liability |
|
|
40,070 |
|
|
|
166,179 |
|
|
|
206,249 |
|
|
|
80.6 |
% |
All other liability |
|
|
15,214 |
|
|
|
39,381 |
|
|
|
54,595 |
|
|
|
72.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Specialty |
|
|
55,284 |
|
|
|
205,560 |
|
|
|
260,844 |
|
|
|
78.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional liability |
|
|
14,013 |
|
|
|
37,558 |
|
|
|
51,571 |
|
|
|
72.8 |
% |
Other |
|
|
9,867 |
|
|
|
9,432 |
|
|
|
19,299 |
|
|
|
48.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Companies |
|
|
162,459 |
|
|
|
348,648 |
|
|
|
511,107 |
|
|
|
68.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
77,621 |
|
|
|
95,876 |
|
|
|
173,497 |
|
|
|
55.3 |
% |
Other |
|
|
3,103 |
|
|
|
8,409 |
|
|
|
11,512 |
|
|
|
73.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lloyds Operations |
|
|
80,724 |
|
|
|
104,285 |
|
|
|
185,009 |
|
|
|
56.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
$ |
243,183 |
|
|
$ |
452,933 |
|
|
$ |
696,116 |
|
|
|
65.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The recoverable amounts above do not include $84.0 million and $108.9 million of reinsurance
recoverable for paid losses at September 30, 2007 and December 31, 2006, respectively, of which
$27.8 million and $66.6 million, respectively, related to the gross loss payments for Hurricanes
Katrina and Rita.
With the recording of gross losses, the Company assesses its reinsurance coverage, potential
receivables, and the recoverability of the receivables. Losses incurred on business recently
written are primarily covered by reinsurance agreements written by companies with whom the Company
is currently doing reinsurance business and whose credit the Company continues to assess in the
normal course of business.
Our overall reinsurance recoverable amounts for paid and unpaid losses have declined during
2007 as the Company continues to bill and collect its recoverables for Hurricanes Katrina and Rita
loss payments and retains more of its business:
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine |
|
|
|
September 30, |
|
|
December 31, |
|
|
Month |
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverables: |
|
|
|
|
|
|
|
|
|
|
|
|
Paid losses |
|
$ |
84,043 |
|
|
$ |
108,878 |
|
|
$ |
(24,835 |
) |
Unpaid losses and LAE
reserves |
|
|
837,545 |
|
|
|
911,439 |
|
|
|
(73,894 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
921,588 |
|
|
$ |
1,020,317 |
|
|
$ |
(98,729 |
) |
|
|
|
|
|
|
|
|
|
|
Our reserving practices and the establishment of any particular reserve reflect managements
judgment concerning sound financial practice and do not represent any admission of liability with
respect to any claims made against us. No assurance can be given that actual claims made and
related payments will not be in excess of the amounts reserved. During the loss settlement period,
it often becomes necessary to refine and adjust the estimates of liability on a claim either upward
or downward. Even after such adjustments, ultimate liability may exceed or be less than the
revised estimates.
There are a number of factors that could cause actual losses and loss adjustment expenses to
differ materially from the amount that we have reserved for losses and loss adjustment expenses.
The process of establishing loss reserves is complex and imprecise as it must take into
account many variables that are subject to the outcome of future events. As a result, informed
subjective judgments as to our ultimate exposure to losses are an integral component of our loss
reserving process.
IBNR loss reserves are calculated by the Companys actuaries using several standard actuarial
methodologies, including the paid and incurred loss development and the paid and incurred
Bornheutter-Ferguson loss methods. Additional analyses, such as frequency/severity analyses, are
performed for certain books of business.
While an annual loss reserve study is conducted for each line of business, the timing of such
studies varies throughout the year. Additionally, a review of the emergence of actual losses
relative to expectations for each line of business is conducted each quarter. A separate analysis
of our asbestos and environmental liability exposures is also performed annually and updated
quarterly. Any adjustments that result from this review are recorded in the quarter in which they
are identified.
The actuarial methods generally utilize analysis of historical patterns of the development of
paid and reported losses for each line of business by underwriting year. This process relies on
the basic assumption that past experience, adjusted for the effects of current developments and
likely trends, is an appropriate basis for predicting future outcomes. This basic assumption is
particularly relevant for our marine and energy business written by our Insurance Companies and
Lloyds Operations where we generally rely on the substantial loss development data accumulated
over many years to establish IBNR loss reserves for immature underwriting years.
For certain long tail classes of business where anticipated loss experience is less
predictable because of the small number of claims and/or erratic claim severity patterns, estimates
are based on both expected losses and actual reported losses. These classes include our
contractors liability business and directors and officers liability business, among others. For
these classes, we set ultimate losses for each underwriting year reflecting several factors,
including our evaluation of loss trends and the current risk environment. The expected ultimate
losses are adjusted as the underwriting year matures.
37
While we have a significant amount of loss development data that is utilized by our actuaries
to establish the IBNR loss reserves for our contractors liability business, there have been
significant changes relating to this product and its market that could affect the applicability of
our data. For example, one factor that may affect reserves and claim frequency is legislation
implemented in California, which generally provides consumers who experience construction defects a
method other than litigation to obtain defect repairs. The law, which became effective July 1,
2002 with a sunset provision effective January 1, 2011, provides for an alternative dispute
resolution system that attempts to involve all parties to the claim at an early stage. This
legislation may impact claim severity, frequency and length of settlement assumptions underlying
our reserves. Accordingly, our ultimate liability may exceed or be less than current estimates due
to this variable, among others. There were approximately 1,062 contractors liability claims open
at September 30, 2007 compared to 1,060 at December 31, 2006.
The professional liability business generates third-party claims which also are longer tail in
nature. The professional liability policies mostly provide coverage on a claims-made basis,
whereby coverage is generally provided only for those claims that are made during the policy
period. These claims often involve a lengthy litigation period after being reported. Our
professional liability business is relatively immature, as we first began writing the business in
late 2001. Accordingly, it will take some time to better understand the reserve trends on this
business. Given the limited history of this business, the actuaries generally utilize industry
data to initially establish IBNR loss reserves, which are subsequently adjusted based on actual and
expected claim emergence as each underwriting year matures. There were approximately 1,047
professional liability claims open at September 30, 2007 compared to 944 at December 31, 2006.
At the start of each underwriting year, our actuaries and management determine an initial
selected ultimate loss ratio for each line of business. Management participation generally
includes the underwriter for the particular line of business, executive management, and claims and
finance personnel. Generally, such determinations are based on prior year history modified where
deemed appropriate for observed changes in premium rates, terms, conditions, exposures, and loss
trends. Industry data is generally utilized for new lines of business.
As underwriting years age, for each subsequent quarter and following years, our actuaries,
with management, continue to update and refine their estimates of selected ultimate loss ratios for
each line of business, by underwriting year, using the actuarial methods referred to above and
incorporating relevant factors that generally include actual loss development, recent claims
activity, number and dollar amount of open claims, risk characteristics of the particular line of
business, the potential effects of changes in underwriting and claims procedures, historic
performance relative to expectations and the relationship of the IBNR reserve levels across
underwriting years and between similar lines of business. The output of this process results in
refinements to the ultimate loss ratios. Such refinements to the ultimate loss ratios for the
prior underwriting years generate prior year redundancies or deficiencies recorded in the year such
refinements are made.
Asbestos Liability. Our exposure to asbestos liability principally stems from marine liability
insurance written on an occurrence basis during the mid-1980s. In general, our participation on
such risks is in the excess layers, which requires the underlying coverage to be exhausted prior to
coverage being triggered in our layer. In many instances we are one of many insurers who
participate in the defense and ultimate settlement of these claims, and we are generally a minor
participant in the overall insurance coverage and settlement.
The reserves for asbestos exposures at September 30, 2007 and December 31, 2006 are for: (i)
the 2005 fourth quarter settlements of two large claims aggregating approximately $28 million for
excess insurance policy limits exposed to class action suits against two insureds involved in the
manufacturing or distribution of asbestos products, each settlement is being paid over a two year
period that started in 2006; (ii) the 2004 settlement of a large claim approximating $25 million
exposed to a class action suit which settlement is being paid over a seven year period that started
in June 2005; (iii) other insureds not directly involved in the manufacturing or distribution of
asbestos products, but that have more than incidental asbestos exposure for their purchase or use
of products
that contained asbestos; and (iv) attritional asbestos claims that could be expected to occur
over time. Substantially all of our asbestos liability reserves are included in our marine loss
reserves.
The Company believes that there are no remaining known claims where it would suffer a material
loss as a result of excess policy limits being exposed to class action suits for insureds involved
in the manufacturing or distribution of asbestos products. There can be no assurances, however,
that material loss development may not
arise in the future from existing asbestos claims or new claims given the evolving and complex
legal environment that may directly impact the outcome of the asbestos exposures of our insureds.
38
The following tables set forth our gross and net loss and LAE reserves for our asbestos
exposures for the periods indicated, which we believe are subject to uncertainties greater than
those presented by other types of claims:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Year Ended |
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
37,171 |
|
|
$ |
56,838 |
|
Incurred losses & LAE |
|
|
(91 |
) |
|
|
246 |
|
Calendar year payments |
|
|
13,169 |
|
|
|
19,913 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
23,911 |
|
|
$ |
37,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
16,031 |
|
|
$ |
29,291 |
|
Gross IBNR loss reserves |
|
|
7,880 |
|
|
|
7,880 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
23,911 |
|
|
$ |
37,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
21,381 |
|
|
$ |
30,372 |
|
Incurred losses & LAE |
|
|
1,870 |
|
|
|
229 |
|
Calendar year payments |
|
|
5,816 |
|
|
|
9,220 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
17,435 |
|
|
$ |
21,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
9,732 |
|
|
$ |
13,678 |
|
Net IBNR loss reserves |
|
|
7,703 |
|
|
|
7,703 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
17,435 |
|
|
$ |
21,381 |
|
|
|
|
|
|
|
|
To the extent the Company incurs additional gross loss development for its historic asbestos
exposure the Companys allowance for uncollectible reinsurance would increase for the reinsurers
that are insolvent, in run-off or otherwise no longer active in the reinsurance business. The
Company continues to believe that it will be able to collect reinsurance on the gross portion of
its historic gross asbestos exposure in the above table. Net loss development for gross asbestos
exposure was not significant in the three and nine months ended September 30, 2007 or 2006.
At September 30, 2007, the ceded asbestos paid and unpaid recoverables were $15.9 million
compared to $23.5 million at December 31, 2006. During the 2007 second quarter, the Company
increased its provision for uncollectible reinsurance recoverables for asbestos losses by $1.6
million.
Loss reserves for environmental losses generally consist of oil spill claims on marine
liability policies written in the ordinary course of business. Net loss reserves for such
exposures are included in our marine loss reserves and are not separately identified.
39
Hurricanes Katrina and Rita. During the 2005 third quarter, the Company recorded gross and
net loss estimates of $471 million and $22.3 million, respectively, exclusive of $14.5 million for
the cost of excess of loss reinstatement premiums related to Hurricanes Katrina and Rita.
The following tables set forth our gross and net loss and LAE reserves, incurred loss and LAE,
and payments for Hurricanes Katrina and Rita for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Year Ended |
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
319,230 |
|
|
$ |
465,728 |
|
Incurred loss & LAE |
|
|
(15,004 |
) |
|
|
|
|
Calendar year payments |
|
|
115,885 |
|
|
|
146,498 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
188,341 |
|
|
$ |
319,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
75,938 |
|
|
$ |
172,916 |
|
Gross IBNR loss reserves |
|
|
112,403 |
|
|
|
146,314 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
188,341 |
|
|
$ |
319,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
10,003 |
|
|
$ |
19,408 |
|
Incurred loss & LAE |
|
|
(1,154 |
) |
|
|
|
|
Calendar year payments |
|
|
3,524 |
|
|
|
9,405 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
5,325 |
|
|
$ |
10,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
1,103 |
|
|
$ |
3,628 |
|
Net IBNR loss reserves |
|
|
4,222 |
|
|
|
6,375 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
5,325 |
|
|
$ |
10,003 |
|
|
|
|
|
|
|
|
Our management believes that the estimates for the reserves for losses and loss adjustment
expenses are adequate to cover the ultimate cost of losses and loss adjustment expenses on reported
and unreported claims. However, it is possible that the ultimate liability may exceed or be less
than such estimates. To the extent that reserves are deficient or redundant, the amount of such
deficiency or redundancy is treated as a charge or credit to earnings in the period in which the
deficiency or redundancy is identified. We continue to review all of our loss reserves, including
our asbestos reserves and Hurricanes Katrina and Rita reserves, on a regular basis.
Commission Expense. Commission expense paid to unaffiliated brokers and agents is generally
based on a percentage of the gross written premium and is reduced by ceding commissions the Company
may receive on the ceded written premium. Commissions are generally deferred and recorded as
deferred policy acquisition costs to the extent that they relate to unearned premium. The ratios
of commission expense to net earned premiums in the 2007 third quarter and nine month period were
12.6% and 12.3%, respectively, compared to 11.9% and 12.3% for the comparable periods in 2006.
Other Operating Expenses. The 23.0% and 35.7% increases in other operating expenses in the
2007 third quarter and nine month period compared to the same periods in 2006 were attributable
primarily to employee-related expenses resulting from expansion of the business and investments in
technology to support this growth. Included in other operating expenses for the three and nine
months ended September 30, 2007 were $1.6 million and $4.9 million, respectively, in the aggregate
for employee stock options, stock grants and stock appreciation rights expense compared to $2.6
million and $4.4 million for the comparable periods in 2006.
40
Income Taxes. The income tax expense was $11.5 million and $8.5 million for the third
quarters of 2007 and 2006, respectively, resulting in effective tax rates of 31.4% and 31.8%,
respectively. The income tax expense was $32.2 million and $24.9 million for the first nine months
of 2007 and 2006, respectively, resulting in effective tax rates of 31.8% and 32.4%, respectively.
The Companys effective tax rate is less than 35% due to permanent differences between book and tax
return income, with the most significant item being tax exempt interest. As of September 30, 2007
and December 31, 2006, the net deferred Federal, foreign, state and local tax assets were $31.4
million and $30.4 million, respectively.
We are subject to the tax regulations of the United States and foreign countries in which we
operate. The Company files a consolidated federal tax return, which includes all domestic
subsidiaries and the U.K. Branch.
The income from the foreign operations is designated as either U.S. connected income or
non-U.S. connected income. Lloyds is required to pay U.S. income tax on U.S. connected income
written by Lloyds syndicates. Lloyds and the IRS have entered into an agreement whereby the
amount of tax due on U.S. connected income is calculated by Lloyds and remitted directly to the
IRS. These amounts are then charged to the corporate members in proportion to their participation
in the relevant syndicates. The Companys corporate members are subject to this agreement and will
receive U.K. tax credits for any U.S. income tax incurred up to the U.K. income tax charge on the
U.S. income. The non-U.S. connected insurance income would generally constitute taxable income
under the Subpart F income section of the Internal Revenue Code since less than 50% of the
Companys premium is derived within the U.K. and would therefore be subject to U.S. taxation when
the Lloyds year of account closes. Taxes are accrued at a 35% rate on our foreign source
insurance income and foreign tax credits, where available, are utilized to offset U.S. tax as
permitted. The Companys effective tax rate for Syndicate 1221 taxable income could substantially
exceed 35% to the extent the Company is unable to offset U.S. taxes paid under Subpart F tax
regulations with U.K. tax credits on future underwriting year distributions. U.S. taxes are not
accrued on the earnings of the Companys foreign agencies as these earnings are not subject to the
Subpart F tax regulations. These earnings are subject to taxes under U.K. tax regulations. These
earnings are subject to taxes under U.K. tax regulations currently at a 30% rate. A finance bill
was enacted in the U.K. on July 19, 2007 that reduces the U.K. corporate tax rate from 30% to 28%
effective April 1, 2008. The effect of such tax rate change was not material to the Companys
financial statements.
We have not provided for U.S. deferred income taxes on the undistributed earnings of
approximately $42.6 million of our non-U.S. subsidiaries since these earnings are intended to be
permanently reinvested in our non-U.S. subsidiaries. However, in the future, if such earnings were
distributed to the Company, taxes of approximately $6.7 million would be payable on such
undistributed earnings and would be reflected in the tax provision for the year in which these
earnings are no longer intended to be permanently reinvested in the foreign subsidiary assuming all
foreign tax credits are realized.
The Company had net state and local deferred tax assets amounting to potential future tax
benefits of $7.4 million and $6.0 million at September 30, 2007 and December 31, 2006,
respectively. Included in the deferred tax assets are net operating loss carryforwards of $3.8
million and $4.8 million at September 30, 2007 and December 31, 2006, respectively. A valuation
allowance was established for the full amount of these potential future tax benefits due to the
uncertainty associated with their realization. The Companys state and local tax carryforwards at
September 30, 2007 expire from 2019 to 2027.
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48), an interpretation of SFAS No. 109. FIN 48,
which became effective in the first quarter of 2007, establishes the threshold for recognizing the
benefits of tax-return positions in the financial statements as more-likely-than-not to be
sustained by the taxing authorities, and prescribes a measurement methodology for those positions
meeting the recognition threshold. The Companys adoption of FIN 48 at January 1, 2007 did not
have a material effect on its financial condition or results of operations.
41
Segment Information
The Company classifies its business into two underwriting segments consisting of the Insurance
Companies and the Lloyds Operations, which are separately managed, and a Corporate segment.
Segment data for each of the two underwriting segments include allocations of revenues and expenses
of the Navigators Agencies and the Parent Companys expenses and related income tax amounts.
We evaluate the performance of each segment based on its underwriting and net income results.
The Insurance Companies and the Lloyds Operations results are measured by taking into account
net earned premium, net losses and loss adjustment expenses, commission expense, other operating
expenses and commission income and other income (expense). The Corporate segment consists of the
Parent Companys investment income, interest expense and the related tax effect. Each segment also
maintains its own investments,
on which it earns income and realizes capital gains or losses. Our underwriting performance
is evaluated separately from the performance of our investment portfolios.
Following are the financial results of the Companys two underwriting segments.
Insurance Companies
Our Insurance Companies consist of Navigators Insurance Company, including its U.K. Branch,
and Navigators Specialty Insurance Company. Navigators Insurance Company, our largest insurance
subsidiary, has been active since 1983. It specializes principally in underwriting marine insurance
and related lines of business, specialty liability insurance and professional liability insurance.
Navigators Specialty Insurance Company, a wholly owned subsidiary of Navigators Insurance Company,
began operations in 1990. It underwrites specialty and professional liability insurance on an
excess and surplus lines basis fully reinsured by Navigators Insurance Company. The Navigators
Agencies produce business for the Insurance Companies.
42
Following are the results of operations for the Insurance Companies for the three and nine
months ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
178,058 |
|
|
$ |
163,673 |
|
|
$ |
585,492 |
|
|
$ |
496,216 |
|
Net written premium |
|
|
109,677 |
|
|
|
91,188 |
|
|
|
355,798 |
|
|
|
273,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
109,060 |
|
|
|
85,494 |
|
|
|
320,607 |
|
|
|
231,334 |
|
Net losses and LAE |
|
|
(59,816 |
) |
|
|
(47,926 |
) |
|
|
(184,881 |
) |
|
|
(135,556 |
) |
Commission expense |
|
|
(13,086 |
) |
|
|
(9,889 |
) |
|
|
(38,072 |
) |
|
|
(24,925 |
) |
Other operating expenses |
|
|
(21,157 |
) |
|
|
(16,697 |
) |
|
|
(60,983 |
) |
|
|
(44,096 |
) |
Commission income and other income (expense) |
|
|
304 |
|
|
|
661 |
|
|
|
889 |
|
|
|
2,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
15,305 |
|
|
|
11,643 |
|
|
|
37,560 |
|
|
|
29,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
14,816 |
|
|
|
12,345 |
|
|
|
42,910 |
|
|
|
34,778 |
|
Net realized capital gains (losses) |
|
|
41 |
|
|
|
(29 |
) |
|
|
1,118 |
|
|
|
(329 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
30,162 |
|
|
|
23,959 |
|
|
|
81,588 |
|
|
|
63,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
9,193 |
|
|
|
7,658 |
|
|
|
25,267 |
|
|
|
20,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
20,969 |
|
|
$ |
16,301 |
|
|
$ |
56,321 |
|
|
$ |
43,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
54.8 |
% |
|
|
56.1 |
% |
|
|
57.7 |
% |
|
|
58.6 |
% |
Commission expense ratio |
|
|
12.0 |
% |
|
|
11.6 |
% |
|
|
11.9 |
% |
|
|
10.8 |
% |
Other operating expense ratio (1) |
|
|
19.1 |
% |
|
|
18.8 |
% |
|
|
18.7 |
% |
|
|
17.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
85.9 |
% |
|
|
86.5 |
% |
|
|
88.3 |
% |
|
|
87.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes other operating expenses and commission income and other income (expense). |
43
Following are the underwriting results of the Insurance Companies for the three and nine
months ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2007 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Combined Ratio |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Profit/(Loss) |
|
|
Loss |
|
|
Expense |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
29,520 |
|
|
$ |
19,239 |
|
|
$ |
9,767 |
|
|
$ |
514 |
|
|
|
65.2 |
% |
|
|
33.1 |
% |
|
|
98.3 |
% |
Specialty |
|
|
62,796 |
|
|
|
30,153 |
|
|
|
17,338 |
|
|
|
15,305 |
|
|
|
48.0 |
% |
|
|
27.6 |
% |
|
|
75.6 |
% |
Professional
Liability |
|
|
14,184 |
|
|
|
8,764 |
|
|
|
5,217 |
|
|
|
203 |
|
|
|
61.8 |
% |
|
|
36.8 |
% |
|
|
98.6 |
% |
Other |
|
|
2,560 |
|
|
|
1,660 |
|
|
|
1,617 |
|
|
|
(717 |
) |
|
NM |
|
|
NM |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
109,060 |
|
|
$ |
59,816 |
|
|
$ |
33,939 |
|
|
$ |
15,305 |
|
|
|
54.8 |
% |
|
|
31.1 |
% |
|
|
85.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Combined Ratio |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Profit/(Loss) |
|
|
Loss |
|
|
Expense |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
29,291 |
|
|
$ |
17,064 |
|
|
$ |
8,696 |
|
|
$ |
3,531 |
|
|
|
58.3 |
% |
|
|
29.7 |
% |
|
|
88.0 |
% |
Specialty |
|
|
45,234 |
|
|
|
24,216 |
|
|
|
13,713 |
|
|
|
7,305 |
|
|
|
53.5 |
% |
|
|
30.3 |
% |
|
|
83.8 |
% |
Professional
Liability |
|
|
10,938 |
|
|
|
6,417 |
|
|
|
3,615 |
|
|
|
906 |
|
|
|
58.7 |
% |
|
|
33.1 |
% |
|
|
91.8 |
% |
Other |
|
|
31 |
|
|
|
229 |
|
|
|
(99 |
) |
|
|
(99 |
) |
|
NM |
|
|
NM |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
85,494 |
|
|
$ |
47,926 |
|
|
$ |
25,925 |
|
|
$ |
11,643 |
|
|
|
56.1 |
% |
|
|
30.4 |
% |
|
|
86.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Combined Ratio |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Profit(Loss) |
|
|
Loss |
|
|
Expense |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
96,531 |
|
|
$ |
57,116 |
|
|
$ |
28,488 |
|
|
$ |
10,927 |
|
|
|
59.2 |
% |
|
|
29.5 |
% |
|
|
88.7 |
% |
Specialty |
|
|
175,326 |
|
|
|
95,226 |
|
|
|
49,869 |
|
|
|
30,231 |
|
|
|
54.3 |
% |
|
|
28.4 |
% |
|
|
82.7 |
% |
Professional
Liability |
|
|
40,555 |
|
|
|
24,989 |
|
|
|
14,870 |
|
|
|
696 |
|
|
|
61.6 |
% |
|
|
36.6 |
% |
|
|
98.2 |
% |
Other |
|
|
8,195 |
|
|
|
7,550 |
|
|
|
4,939 |
|
|
|
(4,294 |
) |
|
NM |
|
|
NM |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
320,607 |
|
|
$ |
184,881 |
|
|
$ |
98,166 |
|
|
$ |
37,560 |
|
|
|
57.7 |
% |
|
|
30.6 |
% |
|
|
88.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Combined Ratio |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Profit(Loss) |
|
|
Loss |
|
|
Expense |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
80,679 |
|
|
$ |
47,609 |
|
|
$ |
22,038 |
|
|
$ |
11,032 |
|
|
|
59.0 |
% |
|
|
27.3 |
% |
|
|
86.3 |
% |
Specialty |
|
|
121,133 |
|
|
|
69,177 |
|
|
|
35,312 |
|
|
|
16,644 |
|
|
|
57.1 |
% |
|
|
29.2 |
% |
|
|
86.3 |
% |
Professional
Liability |
|
|
29,494 |
|
|
|
18,715 |
|
|
|
9,076 |
|
|
|
1,703 |
|
|
|
63.5 |
% |
|
|
30.8 |
% |
|
|
94.3 |
% |
Other |
|
|
28 |
|
|
|
55 |
|
|
|
(66 |
) |
|
|
39 |
|
|
NM |
|
|
NM |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
231,334 |
|
|
$ |
135,556 |
|
|
$ |
66,360 |
|
|
$ |
29,418 |
|
|
|
58.6 |
% |
|
|
28.7 |
% |
|
|
87.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium of the Insurance Companies increased 27.6% and 38.6% in the 2007 third
quarter and nine month period compared to the same periods in 2006 reflecting business expansion in
the specialty and professional liability business units coupled with increased retention of the
business written, partially offset by the effect of premium rate changes on renewal policies on
certain lines of business. The average renewal marine and energy premium rates decreased
approximately 1.7% during the 2007 third quarter and were flat for the nine month period.
Excluding the 2005 Hurricane Losses, underwriting results generally reflect the favorable
industry market conditions over the last three to four years coupled with satisfactory loss trends
in the aforementioned periods. The 2007 third quarter loss ratio was favorably impacted by prior
period loss reserve redundancies of $11.0 million or 10.1 loss ratio points. The 2006 third
quarter loss ratio was favorably impacted by prior period loss reserve redundancies of $4.9 million
or 5.7 loss ratio points. The loss ratio for the first nine months of 2007 was favorably impacted
by prior period loss reserve redundancies of $22.2 million or 6.9 loss ratio points. The loss
ratio for the first nine months of 2007 includes 0.6 loss ratio points or $2.0 million of 2007
second quarter U.K. flood losses for European property business recorded in the other line of
business. The loss ratio for the first nine months of 2006 was favorably impacted by prior period
loss reserve redundancies of $9.3 million or 4.0 loss ratio points.
The approximate annualized pre-tax yields on the Insurance Companies investment portfolio,
excluding net realized capital gains and losses, was 4.5% for both the 2007 third quarter and nine
month period, compared to 4.7% and 4.6% for the comparable 2006 periods. The average duration of
our Insurance Companies invested assets at September 30, 2007 was 4.6 years compared to 4.4 years
at September 30, 2006. Net investment income increased in the 2007 third quarter and nine month
period compared to the same periods in 2006 primarily due to the positive cash flows resulting in a
larger investment portfolio including the statutory surplus contribution of $100 million from the
net proceeds of our April 2006 7% Senior Notes offering.
45
Lloyds Operations
The Lloyds Operations consist of NUAL, which manages Syndicate 1221, Millennium Underwriting
Ltd. and Navigators Corporate Underwriters Ltd. Both Millennium Underwriting Ltd. and Navigators
Corporate Underwriters Ltd. are Lloyds corporate members with limited liability and provide
capacity to Syndicate 1221. NUAL owns Navigators Underwriting Ltd., an underwriting managing agency
with its principal office in Manchester, England, which underwrites cargo and engineering business
for Syndicate 1221. Navigators NV, a wholly owned subsidiary of NUAL located in Antwerp, Belgium,
produces transport liability, cargo and marine liability premium on behalf of Syndicate 1221. The
Lloyds Operations and Navigators Management (UK) Limited, a Navigators Agency which produces
business for the U.K. Branch, are subsidiaries of Navigators Holdings (UK) Limited located in the
United Kingdom.
Syndicate 1221 has stamp capacity of £140.0 million ($278.2 million) in 2007 compared to
£123.5 million ($224.8 million) in 2006. Stamp capacity is a measure of the amount of premium a
Lloyds syndicate is authorized to write based on a business plan approved by the Council of
Lloyds. The Company participates for 100% of Syndicate 1221s capacity for both the 2007 and 2006
underwriting years.
Syndicate 1221s stamp capacity is expressed net of commission (as is standard at Lloyds).
The Syndicate 1221 premium recorded in the Companys financial statements is gross of commission.
Lloyds presents its results on an underwriting year basis, generally closing each underwriting
year after three years. We make estimates for each underwriting year and timely accrue the
expected results. Our Lloyds Operations included in the consolidated financial statements
represent our participation in Syndicate 1221.
Lloyds syndicates report the amounts of premiums, claims, and expenses recorded in an
underwriting account for a particular year to the companies or individuals that participate in the
syndicates. The syndicates generally keep accounts open for three years. Traditionally, three
years have been necessary to report substantially all premiums associated with an underwriting year
and to report most related claims, although claims may remain unsettled after the underwriting year
is closed. A Lloyds syndicate typically closes an underwriting year by reinsuring outstanding
claims on that underwriting year with the participants for the next underwriting year. The ceding
participants pay the assuming participants an amount based on the unearned premiums and outstanding
claims in the underwriting year at the date of the assumption. Our participation in Syndicate 1221
is represented by and recorded as our proportionate share of the underlying assets and liabilities
and results of operations of the syndicate since (i) we hold an undivided interest in each asset,
(ii) we are proportionately liable for each liability and (iii) Syndicate 1221 is not a separate
legal entity. At Lloyds, the amount to close an underwriting year into the next year is referred
to as the reinsurance to close (RITC) transaction. The RITC amounts represent the transfer of
the assets and liabilities from the participants of a closing underwriting year to the participants
of the next underwriting year. To the extent our participation in the syndicate changes, the RITC
amounts vary accordingly. The RITC transaction is recorded in the fourth quarter as additional
written and earned premium, losses incurred, loss reserves and receivables, all in the same amount.
There are no gains or losses recorded on the RITC transaction.
We provide letters of credit to Lloyds to support our participation in Syndicate 1221s stamp
capacity as discussed below under the caption Liquidity and Capital Resources.
Whenever a member of Lloyds is unable to pay its debts to policyholders, such debts may be
payable by the Lloyds Central Fund. If Lloyds determines that the Central Fund needs to be
increased, it has the power to assess premium levies on current Lloyds members up to 3% of a
members underwriting capacity in any one year. The Company does not believe that any assessment
is likely in the foreseeable future and has not provided any allowance for such an assessment.
However, based on the Companys 2007 capacity at Lloyds of £140 million, the September 30, 2007
exchange rate of £1 equals $2.04 and in the event of a maximum 3% assessment, the Company would be
assessed approximately $8.6 million. In addition, beginning with the 2005 underwriting year,
Lloyds added a second tier of assets to the existing central fund. This second tier was being
built up through a compulsory interest bearing loan to the Society of Lloyds from the Lloyds
members based on the
stamp capacity of each syndicate for the respective underwriting year. The funds were
invested in assets eligible for Society of Lloyds solvency. At June 30, 2007, the Company had
$5.9 million of assets loaned to this fund which were repaid during the 2007 third quarter from a
bond offering completed by Lloyds in September 2007.
46
Following are the results of operations of the Lloyds Operations for the three and nine
months ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
67,903 |
|
|
$ |
57,780 |
|
|
$ |
237,879 |
|
|
$ |
241,600 |
|
Net written premium |
|
|
49,425 |
|
|
|
27,849 |
|
|
|
137,673 |
|
|
|
118,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
46,978 |
|
|
|
30,202 |
|
|
|
120,094 |
|
|
|
102,625 |
|
Net losses and LAE |
|
|
(28,203 |
) |
|
|
(16,530 |
) |
|
|
(64,069 |
) |
|
|
(57,644 |
) |
Commission expense |
|
|
(6,590 |
) |
|
|
(3,880 |
) |
|
|
(16,353 |
) |
|
|
(16,173 |
) |
Other operating expenses |
|
|
(6,745 |
) |
|
|
(5,986 |
) |
|
|
(21,816 |
) |
|
|
(16,922 |
) |
Commission income and other income (expense) |
|
|
111 |
|
|
|
(906 |
) |
|
|
96 |
|
|
|
(850 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
5,551 |
|
|
|
2,900 |
|
|
|
17,952 |
|
|
|
11,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
2,609 |
|
|
|
1,774 |
|
|
|
7,167 |
|
|
|
5,448 |
|
Net realized capital gains (losses) |
|
|
(107 |
) |
|
|
(122 |
) |
|
|
(143 |
) |
|
|
(438 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,053 |
|
|
|
4,552 |
|
|
|
24,976 |
|
|
|
16,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
2,877 |
|
|
|
1,627 |
|
|
|
8,806 |
|
|
|
5,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,176 |
|
|
$ |
2,925 |
|
|
$ |
16,170 |
|
|
$ |
10,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
60.0 |
% |
|
|
54.7 |
% |
|
|
53.3 |
% |
|
|
56.2 |
% |
Commission expense ratio |
|
|
14.0 |
% |
|
|
12.8 |
% |
|
|
13.6 |
% |
|
|
15.8 |
% |
Other operating expense ratio (1) |
|
|
14.1 |
% |
|
|
22.8 |
% |
|
|
18.1 |
% |
|
|
17.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
88.1 |
% |
|
|
90.3 |
% |
|
|
85.0 |
% |
|
|
89.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes other operating expenses and commission income and other income (expense). |
The Lloyds Operations have been experiencing business expansion coupled with improving
underwriting results as a result of the generally favorable market conditions for marine and energy
business from late 2001 through 2003, and continuing to a lesser extent in 2004. Marine and energy
premium rate increases occurred in 2005 and continued into 2006 following Hurricanes Katrina and
Rita, particularly in the offshore energy business. The average renewal marine and energy premium
rates decreased approximately 3.3% during the 2007 third quarter and were flat for the nine month
period.
The 2007 third quarter loss ratio was favorably impacted by prior period loss reserve
redundancies of $1.2 million or 2.5 loss ratio points. The 2006 third quarter loss ratio was
favorably impacted by prior period loss reserve redundancies of $1.1 million or 3.6 loss ratio
points. The loss ratio for the first nine months of 2007 was favorably impacted by prior period
loss reserve redundancies of $7.4 million or 6.2 loss ratio points. The loss ratio for the first
nine months of 2006 was favorably impacted by prior period loss reserve redundancies of $3.4
million or 3.3 loss ratio points.
47
The loss ratio for the 2007 third quarter and nine month period includes 4.2 and 3.0 loss
ratio points or $2.0 million and $3.6 million, respectively, for the 2007 second and third quarters
U.K. flood losses related to European property business and marine cargo business.
The increases in other operating expenses in the 2007 third quarter and nine month period
compared to the same periods in 2006 were attributable primarily to the increase in
employee-related expenses, investments in technology, the increase in the average foreign exchange
rates used to convert British sterling to U.S. dollars and an increase in the Lloyds related
expenses.
The approximate annualized pre-tax yields on the Lloyds Operations investment portfolio,
excluding net realized capital gains and losses, were 3.6% for both the 2007 third quarter and nine
month period, compared to 3.2% for both of the comparable 2006 periods. The average duration of
our Lloyds Operations invested assets at September 30, 2007 was 1.4 years compared to 1.2 years at
September 30, 2006. Net investment income increased in the 2007 third quarter and nine month
period compared to the same periods in 2006 primarily due to the positive cash flows resulting in a
larger investment portfolio.
Off-Balance Sheet Transactions
There have been no material changes in the information concerning off-balance sheet
transactions as stated in the Companys 2006 Annual Report on Form 10-K.
Tabular Disclosure of Contractual Obligations
There have been no material changes in the operating lease or capital lease information
concerning contractual obligations as stated in the Companys 2006 Annual Report on Form 10-K.
Total reserves for losses and LAE were $1.6 billion at both September 30, 2007 and December 31,
2006. There were no significant changes in the Companys lines of business or claims handling that
would create a material change in the percentage relationship of the projected payments by period
to the total reserves.
The following table sets forth our contractual obligations with respect to the 7% senior
unsecured notes due May 1, 2016 discussed in the Notes to Interim Consolidated Financial
Statements, included herein:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7% Senior Notes |
|
$ |
203,750 |
|
|
$ |
8,750 |
|
|
$ |
17,500 |
|
|
$ |
17,500 |
|
|
$ |
160,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
The objective of the Companys investment policy, guidelines and strategy is to maximize total
investment return in the context of preserving and enhancing shareholder value and statutory
surplus of the Insurance Companies. Secondarily, an important consideration is to optimize the
after-tax book income.
48
The investments are managed by outside professional fixed-income and equity portfolio
managers. The Company seeks to achieve its investment objectives by investing in cash equivalents
and money market funds, municipal bonds, U.S. Government bonds, U.S. Government agency guaranteed
and non-guaranteed securities, corporate bonds, mortgage-backed and asset-backed securities and
common and preferred stocks. Our investment guidelines require that the amount of the consolidated
fixed income portfolio rated below A- but no lower than BBB- by Standard & Poors (S&P) or
below A3 but no lower than Baa3 by Moodys Investors Service (Moodys) shall not exceed 10%
of the total of fixed income and short-term investments. Securities rated below BBB- by S&P or
below Baa3 by Moodys combined with any other investments not specifically permitted under the
investment guidelines, can not exceed 5% of consolidated stockholders equity. Investments in
equity securities that are actively traded on major U.S. stock exchanges can not exceed 20% of
consolidated stockholders equity. Our investment guidelines prohibit investments in derivatives
other than as a hedge against foreign currency exposures or the writing of covered call options on
the equity portfolio.
The Insurance Companies investments are subject to the direction and control of their
respective Board of Directors and our Finance Committee. The investment portfolio and the
performance of the investment managers are reviewed quarterly. These investments must comply with
the insurance laws of New York State, the domiciliary state of Navigators Insurance Company and
Navigators Specialty Insurance Company. These laws prescribe the type, quality and concentration
of investments which may be made by insurance companies. In general, these laws permit
investments, within specified limits and subject to certain qualifications, in Federal, state and
municipal obligations, corporate bonds, preferred stocks, common stocks, mortgages and real estate.
The Lloyds Operations investments are subject to the direction and control of the Board of
Directors and the Investment Committee of NUAL, as well as the Companys Board of Directors and
Finance Committee, and represent our share of the investments held by Syndicate 1221. These
investments must comply with the rules and regulations imposed by Lloyds and by certain overseas
regulators. The investment portfolio and the performance of the investment managers are reviewed
quarterly.
All fixed maturity and equity securities are carried at fair value. The fair value is based
on quoted market prices or dealer quotes provided by independent pricing services.
The following tables set forth our cash and investments as of September 30, 2007 and December
31, 2006:
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
September 30, 2007 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury Bonds,
GNMAs and foreign government bonds |
|
$ |
205,074 |
|
|
$ |
1,697 |
|
|
$ |
(1,381 |
) |
|
$ |
204,758 |
|
States, municipalities and political
Subdivisions |
|
|
498,186 |
|
|
|
3,612 |
|
|
|
(1,803 |
) |
|
|
496,377 |
|
Mortgage- and asset-backed securities
(excluding GNMAs) |
|
|
541,847 |
|
|
|
1,141 |
|
|
|
(6,132 |
) |
|
|
546,838 |
|
Corporate bonds |
|
|
209,577 |
|
|
|
1,525 |
|
|
|
(2,433 |
) |
|
|
210,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,454,684 |
|
|
|
7,975 |
|
|
|
(11,749 |
) |
|
|
1,458,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
63,858 |
|
|
|
7,559 |
|
|
|
(1,398 |
) |
|
|
57,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
4,906 |
|
|
|
|
|
|
|
|
|
|
|
4,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
215,117 |
|
|
|
|
|
|
|
|
|
|
|
215,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,738,565 |
|
|
$ |
15,534 |
|
|
$ |
(13,147 |
) |
|
$ |
1,736,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
December 31, 2006 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury Bonds,
GNMAs and foreign government bonds |
|
$ |
206,214 |
|
|
$ |
972 |
|
|
$ |
(2,086 |
) |
|
$ |
207,328 |
|
States, municipalities and political
Subdivisions |
|
|
361,859 |
|
|
|
2,719 |
|
|
|
(2,345 |
) |
|
|
361,485 |
|
Mortgage- and asset-backed securities
(excluding GNMAs) |
|
|
489,556 |
|
|
|
939 |
|
|
|
(4,488 |
) |
|
|
493,105 |
|
Corporate bonds |
|
|
201,088 |
|
|
|
1,672 |
|
|
|
(1,950 |
) |
|
|
201,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,258,717 |
|
|
|
6,302 |
|
|
|
(10,869 |
) |
|
|
1,263,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
37,828 |
|
|
|
6,297 |
|
|
|
(348 |
) |
|
|
31,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
2,404 |
|
|
|
|
|
|
|
|
|
|
|
2,404 |
|
|
Short-term investments |
|
|
176,961 |
|
|
|
|
|
|
|
|
|
|
|
176,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,475,910 |
|
|
$ |
12,599 |
|
|
$ |
(11,217 |
) |
|
$ |
1,474,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
At September 30, 2007 and December 31, 2006, all fixed-maturity and equity securities held by
us were classified as available-for-sale.
We regularly review our fixed maturity and equity securities portfolios to evaluate the
necessity of recording impairment losses for other-than-temporary declines in the fair value of
investments. In general, we focus our attention on those securities whose market value was less
than 80% of their cost or amortized cost, as appropriate, for six or more consecutive months.
Other factors considered in evaluating potential impairment include the current fair value as
compared to cost or amortized cost, as appropriate, our intent and ability to retain the investment
for a period of time sufficient to allow for an anticipated recovery in value, specific credit
issues related to the issuer and current economic conditions.
As mentioned above, the Company considers its intent and ability to hold a security until the
value recovers as part of the process of evaluating whether a securitys unrealized loss represents
an other-than-temporary decline. The Companys ability to hold such securities is supported by
sufficient cash flow from its operations and from maturities within its investment portfolio in
order to meet its claims payment and other disbursement obligations arising from its underwriting
operations without selling such investments. With respect to securities where the decline in value
is determined to be temporary and the securitys value is not written down, a subsequent decision
may be made to sell that security and realize a loss. Subsequent decisions on security sales are
made within the context of overall risk monitoring, changing information, market conditions and
assessing value relative to other comparable securities. Management of the Companys investment
portfolio is outsourced to third party investment managers. While these investment managers may,
at a given point in time, believe that the preferred course of action is to hold securities with
unrealized losses that are considered temporary until such losses are recovered, the dynamic nature
of the portfolio management may result in a subsequent decision to sell the security and realize
the loss, based upon a change in market and other factors
described above. The Company believes that subsequent decisions to sell such securities are
consistent with the classification of the Companys portfolio as available for sale.
When a security in our investment portfolio has an unrealized loss that is deemed to be
other-than-temporary, we write the security down to fair value through a charge to operations.
Significant changes in the factors we consider when evaluating investments for impairment losses
could result in a significant change in impairment losses reported in the consolidated financial
statements. There were no impairment losses recorded in our fixed maturity or equity securities
portfolios in the first nine months of 2007 or 2006.
At September 30, 2007, the average quality of the investment portfolio as rated by S&P and
Moodys was AA/Aa with an average duration of 4.1 years. All of the Companys mortgage-backed and
asset-backed securities, except for $1.2 million, are rated AAA/Aaa by S&P and Moodys, and the
Company does not own any collateralized debt obligations (CDOs), collateralized loan obligations
(CLOs) or asset backed commercial paper.
At September 30, 2007, the Company had $486,000 of mortgage-backed securities with subprime
mortgage exposures. The securities are rated AAA/Aaa and have an effective maturity of 0.5 years.
We also own four mortgage-backed securities totaling $12,643,000 at September 30, 2007 classified
as Alt A which is a credit category between prime and subprime. The Alt A bonds, also rated
AAA/Aaa, have an effective maturity of 2.4 years. The Company is receiving principal and/or
interest payments on all these securities and believes such amounts are fully collectible.
The following table summarizes all securities in an unrealized loss position at September 30,
2007 and December 31, 2006, showing the aggregate fair value and gross unrealized loss by the
length of time those securities had been continuously in an unrealized loss position:
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
Fair |
|
|
Gross Unrealized |
|
|
Fair |
|
|
Gross Unrealized |
|
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
Fixed Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury Bonds, GNMAs and foreign
government bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
$ |
4,417 |
|
|
$ |
10 |
|
|
$ |
34,085 |
|
|
$ |
586 |
|
7-12 Months |
|
|
16,741 |
|
|
|
250 |
|
|
|
20,806 |
|
|
|
86 |
|
> 12 Months |
|
|
43,490 |
|
|
|
1,121 |
|
|
|
69,424 |
|
|
|
1,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
64,648 |
|
|
|
1,381 |
|
|
|
124,315 |
|
|
|
2,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
44,938 |
|
|
|
277 |
|
|
|
57,747 |
|
|
|
316 |
|
7-12 Months |
|
|
53,709 |
|
|
|
289 |
|
|
|
6,661 |
|
|
|
80 |
|
> 12 Months |
|
|
107,220 |
|
|
|
1,237 |
|
|
|
118,917 |
|
|
|
1,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
205,867 |
|
|
|
1,803 |
|
|
|
183,325 |
|
|
|
2,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed securities (excluding GNMAs) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
109,219 |
|
|
|
547 |
|
|
|
174,270 |
|
|
|
921 |
|
7-12 Months |
|
|
142,789 |
|
|
|
2,370 |
|
|
|
10,444 |
|
|
|
65 |
|
> 12 Months |
|
|
158,289 |
|
|
|
3,215 |
|
|
|
184,515 |
|
|
|
3,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
410,297 |
|
|
|
6,132 |
|
|
|
369,229 |
|
|
|
4,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
48,968 |
|
|
|
787 |
|
|
|
27,719 |
|
|
|
185 |
|
7-12 Months |
|
|
13,041 |
|
|
|
466 |
|
|
|
15,503 |
|
|
|
224 |
|
> 12 Months |
|
|
65,437 |
|
|
|
1,180 |
|
|
|
66,014 |
|
|
|
1,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
127,446 |
|
|
|
2,433 |
|
|
|
109,236 |
|
|
|
1,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities |
|
$ |
808,258 |
|
|
$ |
11,749 |
|
|
$ |
786,105 |
|
|
$ |
10,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
$ |
17,223 |
|
|
$ |
1,257 |
|
|
$ |
3,265 |
|
|
$ |
158 |
|
7-12 Months |
|
|
905 |
|
|
|
128 |
|
|
|
800 |
|
|
|
72 |
|
> 12 Months |
|
|
304 |
|
|
|
13 |
|
|
|
782 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity Securities |
|
$ |
18,432 |
|
|
$ |
1,398 |
|
|
$ |
4,847 |
|
|
$ |
348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The
above unrealized losses have been determined to be temporary and resulted from changes in market
conditions.
52
The following table shows the composition by National Association of Insurance Commissioners
(NAIC) rating and the generally equivalent S&P and Moodys ratings of the fixed maturity
securities in our portfolio with gross unrealized losses at September 30, 2007. Some of the
securities are not rated by S&P and/or Moodys.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Equivalent |
|
Equivalent |
|
Unrealized Loss |
|
|
Fair Value |
|
NAIC |
|
S&P |
|
Moodys |
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
Rating |
|
Rating |
|
Rating |
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
|
|
|
|
|
|
($ in thousands) |
|
|
1 |
|
AAA/AA/A |
|
Aaa/Aa/A |
|
$ |
10,956 |
|
|
|
93 |
% |
|
$ |
770,130 |
|
|
|
95 |
% |
2 |
|
BBB |
|
Baa |
|
|
785 |
|
|
|
7 |
% |
|
|
37,884 |
|
|
|
5 |
% |
3 |
|
BB |
|
Ba |
|
|
8 |
|
|
|
|
|
|
|
244 |
|
|
|
|
|
4 |
|
B |
|
B |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
CCC or lower |
|
Caa or lower |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
N/A |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
11,749 |
|
|
|
100 |
% |
|
$ |
808,258 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2007, all of the gross unrealized losses in the table directly above are
related to fixed maturity securities that are rated investment grade except for one bond with an
unrealized loss of $8,000. Investment grade is defined as a security having a NAIC rating of 1 or
2, an S&P rating of BBB or higher, or a Moodys rating of Baa3 or higher. Unrealized losses
on investment grade securities principally relate to changes in interest rates or changes in
sector-related credit spreads since the securities were acquired. Any such unrealized losses are
recognized in income, if the securities are sold, or if the decline in fair value is deemed
other-than-temporary.
The scheduled maturity dates for fixed maturity securities in an unrealized loss position at
September 30, 2007 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized Loss |
|
|
Fair Value |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
|
|
($ in thousands) |
|
|
Due in one year or less |
|
$ |
123 |
|
|
|
1 |
% |
|
$ |
27,115 |
|
|
|
3 |
% |
Due after one year through five years |
|
|
1,506 |
|
|
|
13 |
% |
|
|
141,102 |
|
|
|
17 |
% |
Due after five years through ten years |
|
|
1,653 |
|
|
|
14 |
% |
|
|
102,022 |
|
|
|
13 |
% |
Due after ten years |
|
|
2,335 |
|
|
|
20 |
% |
|
|
127,722 |
|
|
|
16 |
% |
Mortgage- and asset-backed securities |
|
|
6,132 |
|
|
|
52 |
% |
|
|
410,297 |
|
|
|
51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities |
|
$ |
11,749 |
|
|
|
100 |
% |
|
$ |
808,258 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected maturities may differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties. Due to the periodic
repayment of principal, the mortgage-backed and asset-backed securities are estimated to have an
effective maturity of approximately 4.7 years.
53
Our realized capital gains and losses for the three and nine months ended September 30, 2007
and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
$ |
23 |
|
|
$ |
8 |
|
|
$ |
500 |
|
|
$ |
349 |
|
(Losses) |
|
|
(816 |
) |
|
|
(198 |
) |
|
|
(1,535 |
) |
|
|
(1,605 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(793 |
) |
|
|
(190 |
) |
|
|
(1,035 |
) |
|
|
(1,256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
|
888 |
|
|
|
41 |
|
|
|
2,285 |
|
|
|
525 |
|
(Losses) |
|
|
(161 |
) |
|
|
(2 |
) |
|
|
(275 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
727 |
|
|
|
39 |
|
|
|
2,010 |
|
|
|
489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital gains (losses) |
|
$ |
(66 |
) |
|
$ |
(151 |
) |
|
$ |
975 |
|
|
$ |
(767 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details realized losses in excess of $250,000 from sales and impairments
during the first nine months of 2007 and 2006 and the related circumstances giving rise to the
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
Exceeded 20% |
|
|
|
Date of |
|
|
Proceeds |
|
|
(Loss) on |
|
|
|
|
|
|
Holdings at |
|
|
Unrealized |
|
|
of Cost or |
|
Description |
|
Sale |
|
|
from Sale |
|
|
Sale |
|
|
Impairment |
|
|
September 30, 2007 |
|
|
(Loss) |
|
|
Amortized Cost |
|
($ in thousands) |
|
Nine months ended September 30, 2007 and 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPMARK Financial GP (1) |
|
|
8/22/2007 |
|
|
$ |
1,614 |
|
|
|
($330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIPS (2) |
|
|
3/31/2007 |
|
|
$ |
5,823 |
|
|
|
($335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIPS (2) |
|
|
3/31/2006 |
|
|
$ |
15,418 |
|
|
|
($305 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
CAPMARK Financial Group securities were sold due to credit concerns. |
|
(2) |
|
Treasury inflation protection securities (TIPS) were sold during the 2007 and 2006
and first quarters due to the widening breakeven yield spread between TIPS and Treasuries. |
Reinsurance Recoverables
We utilize reinsurance principally to reduce our exposure on individual risks, to protect
against catastrophic losses, and to stabilize loss ratios and underwriting results. Although
reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the
reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our
policyholders. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our
reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of
these claims. Either of these events would increase our costs and could have a material adverse
effect on our business. We are required to pay the losses even if the reinsurer fails to meet its
obligations under the reinsurance agreement. Hurricanes Katrina and Rita increased our reinsurance
recoverables significantly which increased our credit risk.
54
We are protected by various treaty and facultative reinsurance agreements. Our exposure to
credit risk from any one reinsurer is managed through diversification by reinsuring with a number
of different reinsurers, principally in the United States and European reinsurance markets. To
meet our standards of acceptability, when the reinsurance is placed, a reinsurer generally must
have an A.M. Best Company and/or S&P rating of A or better, or equivalent financial strength if
not rated, plus at least $250 million in policyholders surplus. Our Reinsurance Security
Committee monitors the financial strength of our reinsurers and the related reinsurance receivables
and periodically reviews the list of acceptable reinsurers. The reinsurance is placed either
directly by us or through reinsurance intermediaries. The reinsurance intermediaries are
compensated by the reinsurers.
The Company continues to periodically monitor the financial condition and ongoing activities
of its reinsurers, in order to assess the adequacy of its allowance for uncollectible reinsurance.
Liquidity and Capital Resources
Cash flows from operations were $231.3 million and $88.1 million for the nine months ended
September 30, 2007 and 2006, respectively. The positive operating cash flow was primarily due to
the increase in net written premium, collected investment income, decrease in reinsurance
recoverable on paid losses and fewer paid losses relating to the 2005 hurricanes. Operating cash
flow was used primarily to acquire additional investment assets.
Investments and cash increased to $1.7 billion at September 30, 2007 from $1.5 billion at
December 31, 2006. The increase was due to the positive cash flow from operations. Net investment
income was $18.0 million and $14.7 million for the three months ended September 30, 2007 and 2006,
respectively, and $51.5 million and $41.2 million for the nine months ended September 30, 2007 and
2006, respectively.
The approximate annualized pre-tax yields of the investment portfolio, excluding net realized
capital gains and losses, were 4.3% and 4.5% for the 2007 and 2006 third quarters, respectively.
The approximate annualized pre-tax yields of the investment portfolio, excluding net realized
capital gains and losses, were 4.4% for both the 2007 and 2006 nine month periods. As of
September 30, 2007 and December 31, 2006, all fixed maturity securities and equity securities held
by us were classified as available-for-sale.
At September 30, 2007, the weighted average rating of our fixed maturity investments was AA
by Standard & Poors and Aa by Moodys. We believe that we have limited exposure to credit risk
since, the entire fixed maturity investment portfolio, except for $244,000, consists of investment
grade bonds. At September 30, 2007, our portfolio had an average maturity of 5.3 years and
duration of 4.1 years. Management continually monitors the composition and cash flow of the
investment portfolio in order to maintain the appropriate levels of liquidity in an effort to
ensure our ability to satisfy claims.
We have a credit facility provided through a consortium of banks. The credit facility was
amended in February 2007 to increase the letters of credit available under the facility from $115
million to $180 million and to increase the line of credit under the facility from $10 million to
$20 million. Also, the expiration of the credit facility was extended from June 30, 2007 to March
31, 2009. If, at that time, the bank consortium does not renew the credit facility, we will need
to find other sources to provide the letters of credit or other collateral required to continue our
participation in Syndicate 1221. The credit facility, which is denominated in U.S. dollars, is
utilized primarily by Navigators Corporate Underwriters Ltd. and Millennium Underwriting Ltd. to
fund our participation in Syndicate 1221 which is denominated in British pounds. At September 30,
2007, letters of credit with an aggregate face amount of $108.1 million were issued under the
credit facility. The line of credit was unused at September 30, 2007.
The credit facility is collateralized by all of the common stock of Navigators Insurance
Company. The credit agreement contains covenants common to transactions of this type, including
restrictions on indebtedness and liens, limitations on dividends, stock buy backs, mergers and the
sale of assets, and requirements to maintain certain consolidated tangible net worth, statutory
surplus and other financial ratios. No dividends have been declared or paid by the Company through
September 30, 2007. We were in compliance with all covenants at September 30, 2007.
55
Our reinsurance has been placed with various U.S. and foreign insurance companies and with
selected syndicates at Lloyds. Pursuant to the implementation of Lloyds Plan of Reconstruction
and Renewal, a portion of our recoverables are now reinsured by Equitas (a separate United Kingdom
authorized reinsurance company established to reinsure outstanding liabilities of all Lloyds
members for all risks written in the 1992 or prior years of account).
Time lags do occur in the normal course of business between the time gross losses are paid by
the Company and the time such gross losses are billed and collected from reinsurers. Recoverable
amounts at September 30, 2007 are anticipated to be billed and collected over the next several
years as gross losses are paid by the Company.
Generally, for pro-rata or quota share reinsurers, including pool participants, the Company
issues quarterly settlement statements for premiums less commissions and paid loss activity, which
are expected to be settled by the end of the subsequent quarter. The Company has the ability to
issue cash calls requiring such reinsurers to pay losses whenever paid loss activity for a claim
ceded to a particular reinsurance treaty exceeds a predetermined amount (generally $1.0 million) as
set forth in the pro-rata treaty. For the Insurance Companies, cash calls must generally be paid
within 30 calendar days. There is generally no specific settlement period for the Lloyds
Operations cash call provisions, but such billings are usually paid within 45 calendar days.
Generally, for excess of loss reinsurers the Company pays monthly or quarterly deposit
premiums based on the estimated subject premiums over the contract period (usually one year) which
are subsequently adjusted based on actual premiums determined after the expiration of the
applicable reinsurance treaty. Paid losses
subject to excess of loss recoveries are generally billed as they occur and are usually
settled by reinsurers within 30 calendar days for the Insurance Companies and 30 business days for
the Lloyds Operations.
The Company sometimes withholds funds from reinsurers and may apply ceded loss billings
against such funds in accordance with the applicable reinsurance agreements.
At September 30, 2007, the ceded asbestos paid and unpaid recoverables were $15.9 million
compared to $23.5 million at December 31, 2006. Of such amounts at September 30, 2007, $9.0
million was due from Equitas. In November 2006, the Company filed an arbitration demand against
Equitas for paid losses recoverable on settled asbestos claims. The approximate ceded paid and
unpaid recoverable amounts relating to the arbitration is $2.7 million. See Part II Item 1 Legal
Proceedings, for a discussion of the arbitration. The Company generally experiences significant
collection delays for a large portion of reinsurance recoverable amounts for asbestos losses given
that certain reinsurers are in run-off or otherwise no longer active in the reinsurance business.
Such circumstances are considered in the Companys ongoing assessment of such reinsurance
recoverables.
The Company believes that it has adequately managed its cash flow requirements related to
reinsurance recoveries from its positive cash flows and the use of available short-term funds when
applicable. However, there can be no assurances that the Company will be able to continue to
adequately manage such recoveries in the future or that collection disputes or reinsurer
insolvencies will not arise that could materially increase the collection time lags or result in
recoverable write-offs causing additional incurred losses and liquidity constraints to the Company.
The payment of gross claims and related collections from reinsurers with respect to Hurricanes
Katrina and Rita could significantly impact the Companys liquidity needs. However, we expect to
pay these hurricane losses over a period of years from cash flow and, if needed, short-term
investments and expect to collect our paid reinsurance recoverables generally under the terms
described above.
We believe that the cash flow generated by the operating activities of our subsidiaries will
provide sufficient funds for us to meet our liquidity needs over the next twelve months. Beyond
the next twelve months, cash flow available to us may be influenced by a variety of factors,
including general economic conditions and conditions in the insurance and reinsurance markets, as
well as fluctuations from year to year in claims experience.
56
Our capital resources consist of funds deployed or available to be deployed to support our
business operations. At September 30, 2007 and December 31, 2006, our capital resources were as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
Senior debt |
|
$ |
123,644 |
|
|
$ |
123,560 |
|
Stockholders equity |
|
|
626,476 |
|
|
|
551,343 |
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
750,120 |
|
|
$ |
674,903 |
|
|
|
|
|
|
|
|
Ratio of debt to total capitalization |
|
|
16.5 |
% |
|
|
18.3 |
% |
|
|
|
|
|
|
|
The Company completed its public offering of senior debt on April 17, 2006 and received net
proceeds of $123.5 million of which $100 million was contributed to the capital and surplus of
Navigators Insurance Company. The increase in stockholders equity in 2007 was primarily due to
2007 nine month net income of $69.1 million.
We monitor our capital adequacy to support our business on a regular basis. The future
capital requirements of our business will depend on many factors, including our ability to write
new business
successfully and to establish premium rates and reserves at levels sufficient to cover losses.
Our ability to underwrite is largely dependent upon the quality of our claims paying and financial
strength ratings as evaluated by independent rating agencies. In particular, we require (1)
sufficient capital to maintain our financial strength ratings, as issued by several ratings
agencies, at a level considered necessary by management to enable our Insurance Companies to
compete, (2) sufficient capital to enable our Insurance Companies to meet the capital adequacy
tests performed by statutory agencies in the United States and the United Kingdom and (3) letters
of credit and other forms of collateral that are necessary to support the business.
On October 29, 2007 the Board of Directors adopted a stock repurchase program for up to $30
million of the Companys common stock. Repurchases may be made from time to time at prevailing
prices in open market or privately negotiated transactions through December 31, 2008. The timing
and amount of the repurchase transactions under the program will depend on a variety of factors,
including the trading price of the stock, market conditions and corporate and regulatory
considerations.
We primarily rely upon dividends from our subsidiaries to meet our holding company
obligations. Since the issuance of the senior debt in April 2006, the holding company cash
obligations primarily consist of semi-annual interest payments of $4.4 million. Going forward, the
interest payments and any stock repurchases will be made from a combination of funds currently at
the Parent Company, dividends from its subsidiaries or the $20 million line of credit. The
dividends have historically been paid by Navigators Insurance Company. Based on the December 31,
2006 surplus of Navigators Insurance Company the approximate remaining maximum amount available at
September 30, 2007 for the payment of dividends by Navigators Insurance Company during 2007 without
prior regulatory approval was $56.7 million. Navigators Insurance Company declared a $2.0 million
dividend in each of the first, second and third quarters of 2007. No dividends were declared or
paid by Navigators Insurance Company during 2006.
57
Condensed Parent Company balance sheets as of September 30, 2007 (unaudited) and December 31,
2006 are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
Cash and investments |
|
$ |
43,684 |
|
|
$ |
32,308 |
|
Investments in subsidiaries |
|
|
701,369 |
|
|
|
634,299 |
|
Goodwill and other intangible assets |
|
|
2,534 |
|
|
|
2,534 |
|
Other assets |
|
|
8,428 |
|
|
|
12,939 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
756,015 |
|
|
$ |
682,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
$ |
1,150 |
|
|
$ |
1,590 |
|
Accrued interest payable |
|
|
3,646 |
|
|
|
1,458 |
|
Deferred compensation payable |
|
|
1,099 |
|
|
|
4,129 |
|
7% Senior Notes due May 1, 2016 |
|
|
123,644 |
|
|
|
123,560 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
129,539 |
|
|
|
130,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
626,476 |
|
|
|
551,343 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
756,015 |
|
|
$ |
682,080 |
|
|
|
|
|
|
|
|
At September 30, 2007, approximately $5.0 million of investments are held in a tax escrow
account on behalf of Navigators Insurance Company until the two-year tax loss carryback period
expires.
Deferred compensation payable represents accrued costs for employee stock appreciation rights
which are paid by the operating subsidiaries when such stock appreciation rights are exercised.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the information concerning market risk as stated in the
Companys 2006 Annual Report on Form 10-K.
Item 4. Controls and Procedures
|
(a) |
|
The Chief Executive Officer and Chief Financial Officer of the Company
have evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the Exchange Act)), as of the end of the period covered by this
quarterly report. Based on such evaluation, such officers have concluded that as of
the end of such period the Companys disclosure controls and procedures are
effective in identifying, on a timely basis, material information required to be
disclosed in our reports filed or submitted under the Exchange Act. |
|
|
(b) |
|
There have been no changes during our third fiscal quarter in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting. |
58
Part II Other Information
Item 1. Legal Proceedings
Except as described below, the Company is not a party to, or the subject of, any material
pending legal proceedings which depart from the ordinary routine litigation incident to the kinds
of business that it conducts.
On November 22, 2006, the Company filed a demand for arbitration in New York against Equitas,
a lead reinsurer participating in excess of loss reinsurance agreements, with respect to
unsatisfied loss payment recovery demands that the Company has previously presented to Equitas (the
Equitas Arbitration). The recovery demands are for the 2005 settlement of two class action
lawsuits involving large asbestos claims (together, the 2005 Settled Claims), which 2005 Settled
Claims are being paid through 2007. Equitas has not indicated any dispute with respect to
recoveries on related pro rata reinsurance agreements for such 2005 Settled Claims or with respect
to excess of loss or pro rata reinsurance for the 2004 Settled Claim referred to below. The
aggregate amount of excess of loss recoveries due from Equitas for ceded paid and unpaid losses on
the 2005 Settled Claims is approximately $2.7 million.
The Company filed its demand for arbitration against Equitas in accordance with the applicable
provisions of the excess of loss reinsurance agreements. The Company believes that the refusal of
Equitas to satisfy the Companys payment demands is without merit and it intends to vigorously
pursue collection of its reinsurance recovery. While it is too early to predict with any certainty
the outcome of the Equitas Arbitration, the Company believes that the ultimate outcome would not be
expected to have a significant adverse effect on its results of operations, financial condition or
liquidity, although an unexpected adverse resolution of the Equitas Arbitration could have a
material adverse effect on the Companys results of operations in a particular fiscal quarter or
year.
Item 1A. Risk Factors
There have been no material changes from the risk factors as previously disclosed in the
Companys 2006 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
59
Item 4. Submissions of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
11-1
|
|
Statement re Computation of Per Share Earnings
|
|
* |
31-1
|
|
Certification of CEO per Section 302 of the Sarbanes-Oxley Act
|
|
* |
31-2
|
|
Certification of CFO per Section 302 of the Sarbanes-Oxley Act
|
|
* |
32-1
|
|
Certification of CEO per Section 906 of the Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance
with Regulation S-K item 601(b)(32)(ii) and shall not be
deemed to be filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the
Securities Act of 1933, except as shall be expressly set
forth by specific reference).
|
|
* |
32-2
|
|
Certification of CFO per Section 906 of the
Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance
with Regulation S-K item 601(b)(32)(ii) and shall not be
deemed to be filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the
Securities Act of 1933, except as shall be expressly set
forth by specific reference).
|
|
* |
60
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
The Navigators Group, Inc. |
|
|
|
|
(Registrant) |
|
|
|
|
|
|
|
Date: October 31, 2007
|
|
/s / Paul J. Malvasio
Paul J. Malvasio
|
|
|
|
|
Executive Vice President |
|
|
|
|
and Chief Financial Officer |
|
|
61
INDEX OF EXHIBITS
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
11-1
|
|
Statement re Computation of Per Share Earnings
|
|
* |
|
|
|
|
|
31-1
|
|
Certification of CEO per Section 302 of the Sarbanes-Oxley Act
|
|
* |
|
|
|
|
|
31-2
|
|
Certification of CFO per Section 302 of the Sarbanes-Oxley Act
|
|
* |
|
|
|
|
|
32-1
|
|
Certification of CEO per Section 906 of the Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance
with Regulation S-K item 601(b)(32)(ii) and shall not be
deemed to be filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the
Securities Act of 1933, except as shall be expressly set
forth by specific reference).
|
|
* |
|
|
|
|
|
32-2
|
|
Certification of CFO per Section 906 of the Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance
with Regulation S-K item 601(b)(32)(ii) and shall not be
deemed to be filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the
Securities Act of 1933, except as shall be expressly set
forth by specific reference).
|
|
* |
62