Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2010
or
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o |
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Transitional Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 0-15886
The Navigators Group, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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13-3138397 |
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(State or other jurisdiction of
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(IRS Employer |
incorporation or organization)
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Identification No.) |
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6 International Drive, Rye Brook, New York
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10573 |
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(Address of principal executive offices)
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(Zip Code) |
(914) 934-8999
(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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definition of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check One):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company 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 July 27, 2010 was 15,825,000.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
INDEX
2
Part I. Financial Information
Item 1. Financial Statements
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
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June 30, |
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December 31, |
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2010 |
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2009 |
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(Unaudited) |
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ASSETS |
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Investments and cash: |
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Fixed
maturities, available-for-sale, at fair value (amortized cost: 2010, $1,795,021; 2009, $1,777,983) |
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$ |
1,860,628 |
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$ |
1,816,669 |
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Equity securities, available-for-sale, at fair value (cost: 2010, $62,975; 2009, $47,376) |
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72,862 |
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62,610 |
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Short-term investments, at cost which approximates fair value |
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164,827 |
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176,799 |
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Cash |
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11,941 |
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509 |
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Total investments and cash |
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2,110,258 |
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2,056,587 |
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Premiums receivable |
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221,166 |
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193,460 |
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Prepaid reinsurance premiums |
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161,356 |
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|
162,344 |
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Reinsurance recoverable on paid losses |
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52,593 |
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76,505 |
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Reinsurance recoverable on unpaid losses and loss adjustment expenses |
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800,378 |
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807,352 |
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Deferred policy acquisition costs |
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61,929 |
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56,575 |
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Accrued investment income |
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15,337 |
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17,438 |
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Goodwill and other intangible assets |
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6,717 |
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7,057 |
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Current income tax receivable, net |
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12,517 |
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4,854 |
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Deferred income tax, net |
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11,221 |
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31,222 |
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Other assets |
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26,783 |
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40,600 |
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Total assets |
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$ |
3,480,255 |
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$ |
3,453,994 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities: |
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Reserves for losses and loss adjustment expenses |
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$ |
1,919,352 |
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$ |
1,920,286 |
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Unearned premiums |
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501,172 |
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475,171 |
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Reinsurance balances payable |
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93,723 |
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98,555 |
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Senior notes |
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114,073 |
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114,010 |
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Accounts payable and other liabilities |
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37,192 |
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44,453 |
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Total liabilities |
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2,665,512 |
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2,652,475 |
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Stockholders equity: |
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Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued |
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$ |
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$ |
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Common stock, $.10 par value, authorized 50,000,000 shares, issued
17,237,242 shares for 2010 and 17,212,814 shares for 2009 |
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1,724 |
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1,721 |
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Additional paid-in capital |
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|
308,549 |
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|
304,505 |
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Treasury stock, at cost (1,411,845 shares for 2010 and 366,330 shares for 2009) |
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(59,788 |
) |
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(18,296 |
) |
Retained earnings |
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505,949 |
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469,934 |
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Accumulated other comprehensive income |
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58,309 |
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43,655 |
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Total stockholders equity |
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814,743 |
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801,519 |
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Total liabilities and stockholders equity |
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$ |
3,480,255 |
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$ |
3,453,994 |
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The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.
3
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ and shares in thousands, except net income per share)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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(Unaudited) |
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(Unaudited) |
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Gross written premiums |
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$ |
253,568 |
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$ |
272,729 |
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$ |
523,713 |
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$ |
547,988 |
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Revenues: |
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Net written premiums |
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$ |
165,005 |
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$ |
183,007 |
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$ |
354,322 |
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$ |
383,659 |
|
Change in unearned premiums |
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|
(3,534 |
) |
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(13,139 |
) |
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(28,782 |
) |
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(48,845 |
) |
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Net earned premiums |
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161,471 |
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169,868 |
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325,540 |
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334,814 |
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Net investment income |
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17,853 |
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18,656 |
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|
35,825 |
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|
37,399 |
|
Total other-than-temporary impairment losses |
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|
(489 |
) |
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(1,876 |
) |
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(740 |
) |
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(28,747 |
) |
Portion of loss recognized in other comprehensive
income (before tax) |
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|
334 |
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1,407 |
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|
504 |
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17,578 |
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Net other-than-temporary impairment losses
recognized in earnings |
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|
(155 |
) |
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(469 |
) |
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(236 |
) |
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(11,169 |
) |
Net realized gains |
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11,020 |
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|
2,596 |
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17,133 |
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|
1,059 |
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Other income (expense) |
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(899 |
) |
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5,302 |
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|
171 |
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|
5,445 |
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Total revenues |
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189,290 |
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|
195,953 |
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|
378,433 |
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367,548 |
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Expenses: |
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Net loss and loss adjustment expenses |
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99,863 |
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|
100,728 |
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203,670 |
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|
200,975 |
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Commission expenses |
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25,677 |
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26,278 |
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50,993 |
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|
48,726 |
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Other operating expenses |
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34,513 |
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|
33,019 |
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|
69,099 |
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|
63,554 |
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Interest expense |
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2,044 |
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|
2,150 |
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4,088 |
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|
4,369 |
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Total expenses |
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162,097 |
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|
162,175 |
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|
327,850 |
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|
317,624 |
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Income before income taxes |
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|
27,193 |
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|
33,778 |
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|
50,583 |
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|
49,924 |
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Income tax expense |
|
|
8,223 |
|
|
|
10,128 |
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|
14,568 |
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|
14,274 |
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|
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|
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Net income |
|
$ |
18,970 |
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|
$ |
23,650 |
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$ |
36,015 |
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$ |
35,650 |
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Net income per common share: |
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Basic |
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$ |
1.18 |
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$ |
1.40 |
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$ |
2.20 |
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$ |
2.11 |
|
Diluted |
|
$ |
1.16 |
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|
$ |
1.39 |
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$ |
2.16 |
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$ |
2.10 |
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Average common shares outstanding: |
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Basic |
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|
16,100 |
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|
|
16,938 |
|
|
|
16,369 |
|
|
|
16,910 |
|
Diluted |
|
|
16,422 |
|
|
|
16,993 |
|
|
|
16,686 |
|
|
|
17,010 |
|
The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.
4
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
($ in thousands)
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Six Months Ended
June 30, |
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|
2010 |
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|
2009 |
|
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|
(Unaudited) |
|
|
Preferred stock |
|
|
|
|
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|
Balance at beginning and end of period |
|
$ |
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|
$ |
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Common stock |
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|
Balance at beginning of year |
|
$ |
1,721 |
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|
$ |
1,708 |
|
Shares issued under stock plans |
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|
3 |
|
|
|
9 |
|
|
|
|
|
|
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|
Balance at end of period |
|
$ |
1,724 |
|
|
$ |
1,717 |
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|
|
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|
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Additional paid-in capital |
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|
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|
Balance at beginning of year |
|
$ |
304,505 |
|
|
$ |
298,872 |
|
Share-based compensation |
|
|
4,044 |
|
|
|
4,092 |
|
|
|
|
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|
Balance at end of period |
|
$ |
308,549 |
|
|
$ |
302,964 |
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|
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|
|
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Treasury stock, at cost |
|
|
|
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|
Balance at beginning of year |
|
$ |
(18,296 |
) |
|
$ |
(11,540 |
) |
Treasury stock acquired |
|
|
(46,169 |
) |
|
|
|
|
Share-based compensation |
|
|
4,677 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
(59,788 |
) |
|
$ |
(11,540 |
) |
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
Retained earnings |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
469,934 |
|
|
$ |
406,776 |
|
Net income |
|
|
36,015 |
|
|
|
35,650 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
505,949 |
|
|
$ |
442,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities, net of tax |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
30,958 |
|
|
$ |
(15,062 |
) |
Change in period |
|
|
15,522 |
|
|
|
31,179 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
46,480 |
|
|
|
16,117 |
|
|
|
|
|
|
|
|
Non-credit other-than-temporary impairment gains (losses), net of tax |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
4,000 |
|
|
|
|
|
Change in period |
|
|
(1,302 |
) |
|
|
(11,426 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
2,698 |
|
|
|
(11,426 |
) |
|
|
|
|
|
|
|
Cumulative translation adjustments, net of tax |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
8,697 |
|
|
|
8,563 |
|
Net adjustment |
|
|
434 |
|
|
|
(1,024 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
9,131 |
|
|
|
7,539 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
58,309 |
|
|
$ |
12,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity at end of period |
|
$ |
814,743 |
|
|
$ |
747,797 |
|
|
|
|
|
|
|
|
The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.
5
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
18,970 |
|
|
$ |
23,650 |
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on investments,
net of tax expense of $4,162 and $6,935 in 2010 and 2009, respectively (1) |
|
|
8,222 |
|
|
|
13,770 |
|
Change in foreign currency translation gains (losses),
net of tax benefit of $(554) and $(1,369) in 2010 and 2009, respectively |
|
|
(1,028 |
) |
|
|
(2,544 |
) |
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
7,194 |
|
|
|
11,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
26,164 |
|
|
$ |
34,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Disclosure of reclassification amount, net of tax: |
|
|
|
|
|
|
|
|
Unrealized gains (losses) on investments arising during period |
|
$ |
15,281 |
|
|
$ |
15,146 |
|
Less: reclassification adjustment for net realized
gains (losses) included in net income |
|
|
7,163 |
|
|
|
1,703 |
|
reclassification adjustment for other-than-temporary
impairment losses recognized in net income |
|
|
(104 |
) |
|
|
(327 |
) |
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on investments, net of tax |
|
$ |
8,222 |
|
|
$ |
13,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
36,015 |
|
|
$ |
35,650 |
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on investments,
net of tax expense of $7,354 and $9,729
in 2010 and 2009 |
|
|
14,220 |
|
|
|
19,753 |
|
Change in foreign currency translation gains (losses),
net of tax expense (benefit) of $234 and $(551)
in 2010 and 2009 |
|
|
434 |
|
|
|
(1,024 |
) |
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
14,654 |
|
|
|
18,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
50,669 |
|
|
$ |
54,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Disclosure of reclassification amount, net of tax: |
|
|
|
|
|
|
|
|
Unrealized gains (losses) on investments arising
during period |
|
$ |
25,196 |
|
|
$ |
12,942 |
|
Less: reclassification adjustment for net realized gains (losses)
included in net income |
|
|
11,136 |
|
|
|
563 |
|
reclassification adjustment for other-than-temporary impairment
losses recognized in net income |
|
|
(160 |
) |
|
|
(7,374 |
) |
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on securities, net of tax |
|
$ |
14,220 |
|
|
$ |
19,753 |
|
|
|
|
|
|
|
|
The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.
6
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
36,015 |
|
|
$ |
35,650 |
|
Adjustments
to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation & amortization |
|
|
2,337 |
|
|
|
2,263 |
|
Deferred income taxes |
|
|
12,438 |
|
|
|
(2,916 |
) |
Net realized (gains) losses |
|
|
(16,897 |
) |
|
|
10,110 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Reinsurance recoverable on paid and unpaid
losses and loss adjustment expenses |
|
|
26,105 |
|
|
|
(28,447 |
) |
Reserves for losses and loss adjustment expenses |
|
|
9,744 |
|
|
|
75,937 |
|
Prepaid reinsurance premiums |
|
|
216 |
|
|
|
23,527 |
|
Unearned premium |
|
|
28,706 |
|
|
|
25,508 |
|
Premiums receivable |
|
|
(29,710 |
) |
|
|
(37,060 |
) |
Deferred policy acquisition costs |
|
|
(5,883 |
) |
|
|
(11,597 |
) |
Accrued investment income |
|
|
2,100 |
|
|
|
18 |
|
Reinsurance balances payable |
|
|
(4,250 |
) |
|
|
(16,287 |
) |
Current income taxes |
|
|
(6,727 |
) |
|
|
6,635 |
|
Other |
|
|
10,172 |
|
|
|
(13,860 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
64,366 |
|
|
|
69,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
Redemptions and maturities |
|
|
84,190 |
|
|
|
65,094 |
|
Sales |
|
|
439,441 |
|
|
|
98,650 |
|
Purchases |
|
|
(529,939 |
) |
|
|
(260,161 |
) |
Equity securities |
|
|
|
|
|
|
|
|
Sales |
|
|
899 |
|
|
|
17,201 |
|
Purchases |
|
|
(16,761 |
) |
|
|
(15,287 |
) |
Change in payable for securities |
|
|
10,455 |
|
|
|
11,223 |
|
Net change in short-term investments |
|
|
5,308 |
|
|
|
34,148 |
|
Purchase of property and equipment |
|
|
(971 |
) |
|
|
(1,306 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(7,378 |
) |
|
|
(50,438 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(46,169 |
) |
|
|
|
|
Purchase of Senior notes |
|
|
|
|
|
|
(7,000 |
) |
Proceeds of stock issued from employee stock purchase plan |
|
|
415 |
|
|
|
344 |
|
Proceeds of stock issued from exercise of stock options |
|
|
198 |
|
|
|
557 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(45,556 |
) |
|
|
(6,099 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash |
|
|
11,432 |
|
|
|
12,944 |
|
Cash at beginning of year |
|
|
509 |
|
|
|
1,457 |
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
11,941 |
|
|
$ |
14,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash information: |
|
|
|
|
|
|
|
|
Income taxes paid, net |
|
$ |
7,214 |
|
|
$ |
9,688 |
|
Interest paid |
|
|
4,025 |
|
|
|
4,330 |
|
Issuance of stock to directors |
|
|
180 |
|
|
|
210 |
|
The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.
7
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Unaudited)
Note 1. Accounting Policies
The accompanying interim consolidated financial statements are unaudited and reflect all
adjustments which, in the opinion of management, are necessary to fairly present the results of
The Navigators Group, Inc. and its subsidiaries for the interim periods presented on the basis of
United States 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 are used to mean The Navigators Group, Inc. and its
subsidiaries, unless the context otherwise requires. The term Parent or Parent Company are
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 2009 Annual Report on Form 10-K. Certain amounts for the prior year have been
reclassified to conform to the current years presentation. Commission income, previously
disclosed as a separate line item in the Consolidated Statements of Income, is now included in
Other income (expense).
Note 2. Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued accounting guidance
(Accounting Standards Update (ASU) 2010-06) which improves disclosures about fair value
measurements (Accounting Standards Codification (ASC or Codification) 820-10). This guidance
adds additional disclosures regarding significant transfers in and out of Levels 1 and 2. This
guidance also adds additional disclosures regarding Level 3 purchases, sales, issuances and
settlements. In addition, this guidance also adds additional disclosures regarding fair value
measurement disclosures for each class of assets and liabilities as well as disclosures about the
valuation techniques and inputs used to measure fair value for items classified as Level 2 or Level
3. This guidance was effective as of January 1, 2010 for calendar year reporting entities with the
exception of the additional disclosures about purchases, sales, issuances and settlements in the
roll forward of activity in Level 3 fair value measurements which is effective as of January 1,
2011 for calendar year reporting entities. Early adoption is permitted. We adopted this guidance
in the first quarter of 2010 with the exception of the additional disclosures about purchases,
sales, issuances and settlement in the roll forward of activity in Level 3 fair value measurements
which we will adopt in the first quarter of 2011. Adoption of this guidance did not have a material
effect on our consolidated financial condition, results of operations or cash flows.
In June 2009, the FASB issued accounting guidance for the transfer of financial assets (ASC
860-10), which was added to the Codification under ASU 2009-16. This guidance removes the concept
of a qualifying special-purpose entity (QSPE) from existing GAAP as well as the removal of the
exception from applying ASC 810-10, Consolidation, to QSPEs. This guidance also clarifies the unit
of account eligible for sale accounting and requires that a transferor recognize and initially
measure at fair value, all financial assets obtained and liabilities incurred as a result of a
transfer of an entire financial asset (or group of entire financial assets) accounted for as a
sale. Finally, this guidance requires enhanced disclosures to provide greater transparency about
transfers of financial assets and a transferors continuing involvement with transferred financial
assets. This guidance was effective as of January 1, 2010 for calendar year reporting entities and
early adoption was not permitted. We adopted this guidance in the first quarter of 2010. Adoption
of this guidance did not have a material effect on our consolidated financial condition, results of
operations or cash flows.
8
Recent Accounting Developments
None
Note 3. Segment Information
We classify our business into two underwriting segments consisting of the Insurance Companies
segment (Insurance Companies) and the Lloyds Operations segment (Lloyds Operations), which
are separately managed, and a Corporate segment (Corporate). Segment data for each of the two
underwriting segments include allocations of the operating expenses of the wholly-owned
underwriting management companies and the Parent Companys operating expenses and related income
tax amounts. The Corporate segment consists of the Parent Companys investment income, interest
expense and the related tax effect.
We evaluate the performance of each underwriting segment based on its underwriting and GAAP
results. The Insurance Companies and the Lloyds Operations results are measured by taking into
account net earned premiums, net losses and loss adjustment expenses (LAE), commission expenses,
other operating expenses and other income (expense). Each segment 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.
The Insurance Companies consist of Navigators Insurance Company, including its branch located in
the United Kingdom (the U.K. Branch), and its wholly-owned subsidiary, Navigators Specialty
Insurance Company. They are primarily engaged in underwriting marine insurance and related lines
of business, professional liability insurance and specialty lines of business including
contractors general liability insurance, commercial umbrella and primary and excess casualty
businesses. Navigators Specialty Insurance Company underwrites specialty and professional
liability insurance on an excess and surplus lines basis. Navigators Specialty Insurance Company
is 100% reinsured by Navigators Insurance Company.
The Lloyds Operations primarily underwrite marine and related lines of business along with
offshore energy, professional liability insurance and construction coverage for onshore energy
business at Lloyds of London (Lloyds) through Lloyds Syndicate 1221 (Syndicate 1221). Our
Lloyds Operations includes Navigators Underwriting Agency Ltd. (NUAL), a Lloyds underwriting
agency which manages Syndicate 1221. We controlled 100% of the stamp capacity of Syndicate 1221
through our wholly-owned Lloyds corporate member in 2010 and 2009.
Navigators Management Company, Inc. (NMC) is a wholly-owned underwriting management company
which produces, manages and underwrites insurance and reinsurance, and provides corporate services
for the Company. The operating results for the underwriting management company are allocated to
both the Insurance Companies and Lloyds Operations.
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 premiums,
less the sum of net losses and LAE, commission expenses, other operating expenses and other income
(expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission
expenses, other operating expenses 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.
9
Financial data by segment for the three months and six months ended June 30, 2010 and 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2010 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
170,641 |
|
|
$ |
82,927 |
|
|
$ |
|
|
|
$ |
253,568 |
|
Net written premiums |
|
|
111,401 |
|
|
|
53,604 |
|
|
|
|
|
|
|
165,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
110,425 |
|
|
|
51,046 |
|
|
|
|
|
|
|
161,471 |
|
Net loss and LAE |
|
|
(64,862 |
) |
|
|
(35,001 |
) |
|
|
|
|
|
|
(99,863 |
) |
Commission expenses |
|
|
(14,615 |
) |
|
|
(11,402 |
) |
|
|
340 |
|
|
|
(25,677 |
) |
Other operating expenses |
|
|
(25,907 |
) |
|
|
(8,617 |
) |
|
|
|
|
|
|
(34,524 |
) |
Other income (expense) |
|
|
(114 |
) |
|
|
(434 |
) |
|
|
(340 |
) |
|
|
(888 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
|
4,927 |
|
|
|
(4,408 |
) |
|
|
|
|
|
|
519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
15,556 |
|
|
|
2,128 |
|
|
|
169 |
|
|
|
17,853 |
|
Net realized gains (losses) |
|
|
10,729 |
|
|
|
19 |
|
|
|
117 |
|
|
|
10,865 |
|
Other operating expenses |
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
11 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
(11 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
(2,044 |
) |
|
|
(2,044 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
31,212 |
|
|
|
(2,261 |
) |
|
|
(1,758 |
) |
|
|
27,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
9,654 |
|
|
|
(815 |
) |
|
|
(616 |
) |
|
|
8,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
21,558 |
|
|
$ |
(1,446 |
) |
|
$ |
(1,142 |
) |
|
$ |
18,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,564,004 |
|
|
$ |
829,008 |
|
|
$ |
70,742 |
|
|
$ |
3,480,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
58.7 |
% |
|
|
68.6 |
% |
|
|
|
|
|
|
61.8 |
% |
Commission expense ratio |
|
|
13.2 |
% |
|
|
22.3 |
% |
|
|
|
|
|
|
15.9 |
% |
Other operating expense ratio (2) |
|
|
23.6 |
% |
|
|
17.7 |
% |
|
|
|
|
|
|
22.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
95.5 |
% |
|
|
108.6 |
% |
|
|
|
|
|
|
99.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to cross foot. |
|
(2) |
|
Includes Other operating expenses and Other income (expense). |
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2010 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
55,204 |
|
|
$ |
41,829 |
|
|
$ |
97,033 |
|
Property Casualty |
|
|
81,797 |
|
|
|
29,122 |
|
|
|
110,919 |
|
Professional Liability |
|
|
33,640 |
|
|
|
11,976 |
|
|
|
45,616 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
170,641 |
|
|
$ |
82,927 |
|
|
$ |
253,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
37,153 |
|
|
$ |
34,421 |
|
|
$ |
71,574 |
|
Property Casualty |
|
|
54,300 |
|
|
|
13,924 |
|
|
|
68,224 |
|
Professional Liability |
|
|
19,948 |
|
|
|
5,259 |
|
|
|
25,207 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
111,401 |
|
|
$ |
53,604 |
|
|
$ |
165,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
40,554 |
|
|
$ |
34,727 |
|
|
$ |
75,281 |
|
Property Casualty |
|
|
50,171 |
|
|
|
10,763 |
|
|
|
60,934 |
|
Professional Liability |
|
|
19,700 |
|
|
|
5,556 |
|
|
|
25,256 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
110,425 |
|
|
$ |
51,046 |
|
|
$ |
161,471 |
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
189,385 |
|
|
$ |
83,344 |
|
|
$ |
|
|
|
$ |
272,729 |
|
Net written premiums |
|
|
122,359 |
|
|
|
60,648 |
|
|
|
|
|
|
|
183,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
116,223 |
|
|
|
53,645 |
|
|
|
|
|
|
|
169,868 |
|
Net losses and LAE |
|
|
(68,843 |
) |
|
|
(31,885 |
) |
|
|
|
|
|
|
(100,728 |
) |
Commission expenses |
|
|
(15,060 |
) |
|
|
(11,218 |
) |
|
|
|
|
|
|
(26,278 |
) |
Other operating expenses |
|
|
(26,906 |
) |
|
|
(6,117 |
) |
|
|
4 |
|
|
|
(33,019 |
) |
Other income (expense) |
|
|
1,655 |
|
|
|
651 |
|
|
|
(4 |
) |
|
|
2,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
7,069 |
|
|
|
5,076 |
|
|
|
|
|
|
|
12,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
16,239 |
|
|
|
2,316 |
|
|
|
101 |
|
|
|
18,656 |
|
Net realized gains (losses) |
|
|
2,210 |
|
|
|
(83 |
) |
|
|
|
|
|
|
2,127 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
3,000 |
|
|
|
3,000 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(2,150 |
) |
|
|
(2,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
25,518 |
|
|
|
7,309 |
|
|
|
951 |
|
|
|
33,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
7,171 |
|
|
|
2,624 |
|
|
|
333 |
|
|
|
10,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
18,347 |
|
|
$ |
4,685 |
|
|
$ |
618 |
|
|
$ |
23,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,571,787 |
|
|
$ |
832,751 |
|
|
$ |
80,000 |
|
|
$ |
3,500,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
59.2 |
% |
|
|
59.4 |
% |
|
|
|
|
|
|
59.3 |
% |
Commission expense ratio |
|
|
13.0 |
% |
|
|
20.9 |
% |
|
|
|
|
|
|
15.5 |
% |
Other operating expense ratio (2) |
|
|
21.7 |
% |
|
|
10.2 |
% |
|
|
|
|
|
|
18.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
93.9 |
% |
|
|
90.5 |
% |
|
|
|
|
|
|
92.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to cross foot. |
|
(2) |
|
Includes Other operating expenses and Other income (expense). |
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
57,086 |
|
|
$ |
47,273 |
|
|
$ |
104,359 |
|
Property Casualty |
|
|
94,567 |
|
|
|
25,506 |
|
|
|
120,073 |
|
Professional Liability |
|
|
37,732 |
|
|
|
10,565 |
|
|
|
48,297 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
189,385 |
|
|
$ |
83,344 |
|
|
$ |
272,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
34,956 |
|
|
$ |
40,077 |
|
|
$ |
75,033 |
|
Property Casualty |
|
|
65,704 |
|
|
|
15,070 |
|
|
|
80,774 |
|
Professional Liability |
|
|
21,699 |
|
|
|
5,501 |
|
|
|
27,200 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
122,359 |
|
|
$ |
60,648 |
|
|
$ |
183,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
34,678 |
|
|
$ |
37,038 |
|
|
$ |
71,716 |
|
Property Casualty |
|
|
63,068 |
|
|
|
11,201 |
|
|
|
74,269 |
|
Professional Liability |
|
|
18,477 |
|
|
|
5,406 |
|
|
|
23,883 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
116,223 |
|
|
$ |
53,645 |
|
|
$ |
169,868 |
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
348,479 |
|
|
$ |
175,234 |
|
|
$ |
|
|
|
$ |
523,713 |
|
Net written premiums |
|
|
232,741 |
|
|
|
121,581 |
|
|
|
|
|
|
|
354,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
221,636 |
|
|
|
103,904 |
|
|
|
|
|
|
|
325,540 |
|
Net losses and LAE |
|
|
(133,265 |
) |
|
|
(70,405 |
) |
|
|
|
|
|
|
(203,670 |
) |
Commission expenses |
|
|
(28,977 |
) |
|
|
(22,368 |
) |
|
|
352 |
|
|
|
(50,993 |
) |
Other operating expenses |
|
|
(53,260 |
) |
|
|
(15,860 |
) |
|
|
|
|
|
|
(69,120 |
) |
Other income (expense) |
|
|
(1,091 |
) |
|
|
1,635 |
|
|
|
(352 |
) |
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
|
5,043 |
|
|
|
(3,094 |
) |
|
|
|
|
|
|
1,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
31,304 |
|
|
|
4,197 |
|
|
|
324 |
|
|
|
35,825 |
|
Net realized gains (losses) |
|
|
15,934 |
|
|
|
732 |
|
|
|
231 |
|
|
|
16,897 |
|
Other operating expenses |
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
21 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
(21 |
) |
|
|
(21 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
(4,088 |
) |
|
|
(4,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
52,281 |
|
|
|
1,835 |
|
|
|
(3,533 |
) |
|
|
50,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
15,117 |
|
|
|
688 |
|
|
|
(1,237 |
) |
|
|
14,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
37,164 |
|
|
$ |
1,147 |
|
|
$ |
(2,296 |
) |
|
$ |
36,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,564,004 |
|
|
$ |
829,008 |
|
|
$ |
70,742 |
|
|
$ |
3,480,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
60.1 |
% |
|
|
67.8 |
% |
|
|
|
|
|
|
62.6 |
% |
Commission expense ratio |
|
|
13.1 |
% |
|
|
21.5 |
% |
|
|
|
|
|
|
15.7 |
% |
Other operating expense ratio (2) |
|
|
24.5 |
% |
|
|
13.7 |
% |
|
|
|
|
|
|
21.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
97.7 |
% |
|
|
103.0 |
% |
|
|
|
|
|
|
99.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to cross foot. |
|
(2) |
|
Includes Other operating expenses and Other income (expense). |
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
122,730 |
|
|
$ |
100,970 |
|
|
$ |
223,700 |
|
Property Casualty |
|
|
161,143 |
|
|
|
49,081 |
|
|
|
210,224 |
|
Professional Liability |
|
|
64,606 |
|
|
|
25,183 |
|
|
|
89,789 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
348,479 |
|
|
$ |
175,234 |
|
|
$ |
523,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
88,156 |
|
|
$ |
84,063 |
|
|
$ |
172,219 |
|
Property Casualty |
|
|
103,997 |
|
|
|
25,635 |
|
|
|
129,632 |
|
Professional Liability |
|
|
40,588 |
|
|
|
11,883 |
|
|
|
52,471 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
232,741 |
|
|
$ |
121,581 |
|
|
$ |
354,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
81,648 |
|
|
$ |
70,287 |
|
|
$ |
151,935 |
|
Property Casualty |
|
|
101,252 |
|
|
|
22,678 |
|
|
|
123,930 |
|
Professional Liability |
|
|
38,736 |
|
|
|
10,939 |
|
|
|
49,675 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
221,636 |
|
|
$ |
103,904 |
|
|
$ |
325,540 |
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
381,368 |
|
|
$ |
166,620 |
|
|
$ |
|
|
|
$ |
547,988 |
|
Net written premiums |
|
|
259,441 |
|
|
|
124,218 |
|
|
|
|
|
|
|
383,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
236,513 |
|
|
|
98,301 |
|
|
|
|
|
|
|
334,814 |
|
Net losses and LAE |
|
|
(138,996 |
) |
|
|
(61,979 |
) |
|
|
|
|
|
|
(200,975 |
) |
Commission expenses |
|
|
(30,028 |
) |
|
|
(18,698 |
) |
|
|
|
|
|
|
(48,726 |
) |
Other operating expenses |
|
|
(51,466 |
) |
|
|
(12,098 |
) |
|
|
10 |
|
|
|
(63,554 |
) |
Other income (expense) |
|
|
1,856 |
|
|
|
599 |
|
|
|
(10 |
) |
|
|
2,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
17,879 |
|
|
|
6,125 |
|
|
|
|
|
|
|
24,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
32,446 |
|
|
|
4,699 |
|
|
|
254 |
|
|
|
37,399 |
|
Net realized gains (losses) |
|
|
(6,697 |
) |
|
|
(3,413 |
) |
|
|
|
|
|
|
(10,110 |
) |
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
3,000 |
|
|
|
3,000 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(4,369 |
) |
|
|
(4,369 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
43,628 |
|
|
|
7,411 |
|
|
|
(1,115 |
) |
|
|
49,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
11,704 |
|
|
|
2,960 |
|
|
|
(390 |
) |
|
|
14,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
31,924 |
|
|
$ |
4,451 |
|
|
$ |
(725 |
) |
|
$ |
35,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,571,787 |
|
|
$ |
832,751 |
|
|
$ |
80,000 |
|
|
$ |
3,500,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
58.8 |
% |
|
|
63.0 |
% |
|
|
|
|
|
|
60.0 |
% |
Commission expense ratio |
|
|
12.7 |
% |
|
|
19.0 |
% |
|
|
|
|
|
|
14.6 |
% |
Other operating expense ratio (2) |
|
|
21.0 |
% |
|
|
11.7 |
% |
|
|
|
|
|
|
18.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
92.5 |
% |
|
|
93.7 |
% |
|
|
|
|
|
|
92.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
134,323 |
|
|
$ |
106,296 |
|
|
$ |
240,619 |
|
Property Casualty |
|
|
178,825 |
|
|
|
39,034 |
|
|
|
217,859 |
|
Professional Liability |
|
|
68,220 |
|
|
|
21,290 |
|
|
|
89,510 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
381,368 |
|
|
$ |
166,620 |
|
|
$ |
547,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
93,415 |
|
|
$ |
90,051 |
|
|
$ |
183,466 |
|
Property Casualty |
|
|
125,680 |
|
|
|
22,665 |
|
|
|
148,345 |
|
Professional Liability |
|
|
40,346 |
|
|
|
11,502 |
|
|
|
51,848 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
259,441 |
|
|
$ |
124,218 |
|
|
$ |
383,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
71,839 |
|
|
$ |
68,213 |
|
|
$ |
140,052 |
|
Property Casualty |
|
|
128,480 |
|
|
|
19,124 |
|
|
|
147,604 |
|
Professional Liability |
|
|
36,194 |
|
|
|
10,964 |
|
|
|
47,158 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
236,513 |
|
|
$ |
98,301 |
|
|
$ |
334,814 |
|
|
|
|
|
|
|
|
|
|
|
17
The Insurance Companies net earned premiums include $18.7 million and $19.0 million of net
earned premiums from the U.K. Branch for the three months ended June 30, 2010 and 2009,
respectively and $38.6 million and $40.2 million of net earned premiums from the U.K. Branch for
the six months ended June 30, 2010 and 2009, respectively.
Note 4. Reinsurance Ceded
Our ceded earned premiums were $84.3 million and $92.5 million for the three months ended June 30,
2010 and 2009, respectively and were $169.8 million and $188.3 million for the six months ended
June 30, 2010 and 2009, respectively. Our ceded incurred losses were $61.1 million and $87.7
million for the three months ended June 30, 2010 and 2009, respectively and were $113.4 million
and $136.5 million for the six months ended June 30, 2010 and 2009, respectively.
The following table lists our 20 largest reinsurers measured by the amount of reinsurance
recoverable for ceded losses and loss adjustment expense and ceded unearned premium (constituting
approximately 72.6% of our total recoverable), together with the reinsurance recoverable and
collateral at June 30, 2010, and the reinsurers rating from the indicated rating agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Recoverables |
|
|
|
|
|
|
|
|
|
Unearned |
|
|
Unpaid/Paid |
|
|
|
|
|
|
Collateral |
|
|
Rating & |
|
Reinsurer |
|
Premium |
|
|
Losses |
|
|
Total |
|
|
Held(1) |
|
|
Rating Agency(2) |
|
|
|
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swiss Reinsurance America Corporation |
|
$ |
7.4 |
|
|
$ |
84.4 |
|
|
$ |
91.8 |
|
|
$ |
6.3 |
|
|
A |
|
AMB |
Munich Reinsurance America Inc. |
|
|
23.6 |
|
|
|
67.3 |
|
|
|
90.9 |
|
|
|
5.4 |
|
|
A+ |
|
AMB |
Transatlantic Reinsurance Company |
|
|
20.8 |
|
|
|
51.1 |
|
|
|
71.9 |
|
|
|
9.2 |
|
|
A |
|
AMB |
White Mountains Reinsurance of America |
|
|
0.5 |
|
|
|
60.8 |
|
|
|
61.3 |
|
|
|
0.4 |
|
|
A- |
|
AMB |
Everest Reinsurance Company |
|
|
15.0 |
|
|
|
41.7 |
|
|
|
56.7 |
|
|
|
5.3 |
|
|
A+ |
|
AMB |
General Reinsurance Corporation |
|
|
1.5 |
|
|
|
54.6 |
|
|
|
56.1 |
|
|
|
1.2 |
|
|
A++ |
|
AMB |
National Indemnity Company |
|
|
8.3 |
|
|
|
26.4 |
|
|
|
34.7 |
|
|
|
2.4 |
|
|
A++ |
|
AMB |
Munchener Ruckversicherungs-Gesellschaft |
|
|
2.0 |
|
|
|
32.5 |
|
|
|
34.5 |
|
|
|
12.0 |
|
|
A+ |
|
AMB |
Berkley Insurance Company |
|
|
5.3 |
|
|
|
22.5 |
|
|
|
27.8 |
|
|
|
0.1 |
|
|
A+ |
|
AMB |
Partner Reinsurance Europe |
|
|
8.3 |
|
|
|
19.3 |
|
|
|
27.6 |
|
|
|
11.4 |
|
|
AA- |
|
|
S&P |
|
Platinum Underwriters Re |
|
|
3.0 |
|
|
|
24.2 |
|
|
|
27.2 |
|
|
|
1.3 |
|
|
A |
|
AMB |
Scor Holding (Switzerland) AG |
|
|
8.3 |
|
|
|
18.7 |
|
|
|
27.0 |
|
|
|
8.5 |
|
|
A- |
|
AMB |
Partner Reinsurance Company of the U.S. |
|
|
1.3 |
|
|
|
19.0 |
|
|
|
20.3 |
|
|
|
0.5 |
|
|
A+ |
|
AMB |
Swiss Re International SE |
|
|
0.7 |
|
|
|
18.7 |
|
|
|
19.4 |
|
|
|
5.4 |
|
|
A |
|
AMB |
Lloyds Syndicate #2003 |
|
|
3.4 |
|
|
|
15.4 |
|
|
|
18.8 |
|
|
|
3.7 |
|
|
A |
|
AMB |
Ace Property and Casualty Insurance Company |
|
|
4.5 |
|
|
|
12.8 |
|
|
|
17.3 |
|
|
|
2.4 |
|
|
A+ |
|
AMB |
Arch Reinsurance Company |
|
|
0.4 |
|
|
|
15.9 |
|
|
|
16.3 |
|
|
|
0.5 |
|
|
A |
|
AMB |
Hannover Ruckversicherung |
|
|
1.0 |
|
|
|
14.4 |
|
|
|
15.4 |
|
|
|
1.8 |
|
|
A |
|
AMB |
AXIS Re Europe |
|
|
3.4 |
|
|
|
8.0 |
|
|
|
11.4 |
|
|
|
3.3 |
|
|
A |
|
AMB |
Everest Reinsurance Bermuda |
|
|
4.1 |
|
|
|
6.2 |
|
|
|
10.3 |
|
|
|
3.4 |
|
|
A+ |
|
AMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Top 20 Total |
|
|
122.8 |
|
|
|
613.9 |
|
|
|
736.7 |
|
|
|
84.5 |
|
|
|
|
|
|
|
All Other |
|
|
38.6 |
|
|
|
239.1 |
|
|
|
277.7 |
|
|
|
87.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
161.4 |
|
|
$ |
853.0 |
|
|
$ |
1,014.4 |
|
|
$ |
172.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Collateral includes letters of credit, ceded balances payable and
other balances held by our Insurance Companies and our Lloyds Operations. |
|
(2) |
|
A.M. Best Company (A.M. Best, AMB) and Standard and Poors Rating
Services (S&P) |
18
Note 5. Stock-Based Compensation
Stock-based compensation granted under our stock plans is expensed in tranches over the vesting
period. Options and grants generally vest equally over a four year period and the options have a
maximum term of ten years. In some cases, grants vest over five years with one-third vesting in
each of the third, fourth and fifth years. A portion of our restricted stock unit grants are
performance based and are dependent on the rolling three-year average return on beginning equity.
The actual shares that vest will range between 150% to 0% of the original award depending on the
results. We are currently accruing for these awards at the forecasted target. The amounts charged
to expense for stock-based compensation were $0.7 million and $1.8 million for the three months
ended June 30, 2010 and 2009, respectively and were $2.7 million and $3.6 million for the six
months ended June 30, 2010 and 2009, respectively.
We expensed $49,000 and $27,000 for the three months ended June 30, 2010 and 2009, respectively and
$96,000 and $68,000 for the six months ended June 30, 2010 and 2009, respectively, related to our
Employee Stock Purchase Plan. In addition, $45,000 and $52,500 were expensed for the three months
ended June 30, 2010 and 2009, respectively and $90,000 and $105,000 were expensed for the six
months ended June 30, 2010 and 2009, respectively, related to stock compensation to non-employee
directors as part of their directors compensation for serving on the Parent Companys Board of
Directors.
Note 6. Syndicate 1221
Our Lloyds Operations included in the consolidated financial statements represents our
participation in Syndicate 1221. Syndicate 1221s stamp capacity is £168 million ($251 million) for
the 2010 underwriting year compared to £124 million ($194 million) for the 2009 underwriting year.
Stamp capacity is a measure of the amount of premiums a Lloyds syndicate is authorized to write
based on a business plan approved by the Council of Lloyds. Syndicate 1221s stamp capacity is
expressed net of commission (as is standard at Lloyds). The Syndicate 1221 premiums recorded in
our financial statements are gross of commission. We controlled 100% of Syndicate 1221s stamp
capacity for the 2010 and 2009 underwriting years through our wholly-owned Lloyds corporate
member.
We provide letters of credit and post cash to Lloyds to support our participation in Syndicate
1221s stamp capacity. As of June 30, 2010, we had provided letters of credit of $122.7 million
and did not post cash collateral. If Syndicate 1221 increases its stamp capacity and we
participate in the additional stamp capacity, or if Lloyds changes the capital requirements, we
may be required to supply additional collateral acceptable to Lloyds. If we are unwilling or
unable to provide additional acceptable collateral, we will be required to reduce our participation
in the stamp capacity of Syndicate 1221. The letters of credit are provided through a credit
facility with a consortium of banks that expires on March 31, 2011, see Note 11, Credit Facility
for additional information. If the consortium of banks decides not to renew the credit facility,
we will need to find internal and/or external sources to provide either letters of credit or other
collateral in order to continue to participate in Syndicate 1221. The credit facility is
collateralized by all of the common stock of Navigators Insurance Company.
Note 7. Income Taxes
We are subject to the tax laws and regulations of the United States (U.S.) and foreign countries
in which we operate. We file a consolidated U.S. 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 Internal Revenue Service (IRS). These amounts are then charged to the
corporate members in proportion to their participation in the relevant syndicates. Our 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 (Subpart F) since less than 50% of Syndicate 1221s
premiums are 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. Our
effective tax rate for Syndicate
1221 taxable income could substantially exceed 35% to the extent we are 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 our foreign agencies as these
earnings are not includable as Subpart F income in the current year. These earnings are subject to
taxes under U.K. tax regulations at a 28% 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.
19
A tax benefit taken in the tax return but not in the financial statements is known as an
unrecognized tax benefit. We have no unrecognized tax benefits at either June 30, 2010 or June 30,
2009 and do not anticipate any significant unrecognized tax benefits within the next twelve months.
We did not incur any interest or penalties related to unrecognized tax benefits for the three
months ended June 30, 2010 and 2009. We are currently not under examination by any major U.S. or
foreign tax authority and are generally subject to U.S. Federal, state or local, or foreign tax
examinations by tax authorities for years 2006 and subsequent.
We recorded an income tax expense of $8.2 million for the three months ended June 30, 2010 compared
to an income tax expense of $10.1 million for the comparable period in 2009, resulting in effective
tax rates of 30.2% and 30.0% respectively. Our 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. The effective tax rate on net investment income was 25.9% for the 2010 six month
period compared to 25.1% for the same period in 2009. As of June 30, 2010 and December 31, 2009,
the net deferred federal, foreign, state and local tax assets were $11.2 million and $31.2 million,
respectively.
We had state and local deferred tax assets amounting to potential future tax benefits of $2.8
million and $2.6 million at June 30, 2010 and December 31, 2009, respectively. Included in the
deferred tax assets are state and local net operating loss carry-forwards of $2.0 million and $1.3
million at June 30, 2010 and December 31, 2009, respectively. A valuation allowance was
established for the full amount of these potential future tax benefits due to the uncertainty
associated with their realization. Our state and local tax carry-forwards at June 30, 2010 expire
from 2023 to 2025.
We have not provided for U.S. deferred income taxes on the undistributed earnings of approximately
$58.8 million of our non-U.S. subsidiaries since these earnings are intended to be permanently
reinvested in the foreign subsidiaries. However, in the future, if such earnings were distributed
to us, taxes of approximately $4.1 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.
Note 8. Senior Notes due May 1, 2016
On April 17, 2006, we completed a public debt offering of $125 million principal amount of 7%
senior notes due May 1, 2016 (the Senior Notes) and received net proceeds of $123.5 million. 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,
approximates 7.17%. The interest expense on the Senior Notes was $2.0 million and $2.1 million,
respectively, for the three months ended June 30, 2010 and 2009 and was $4.1 million and $4.4
million, respectively, for the six months ended June 30, 2010 and 2009. The fair value of the
Senior Notes, based on quoted market prices, was $119.7 million and $111.7 million at June 30, 2010
and December 31, 2009, respectively.
We 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, liens and dispositions of the common stock of certain subsidiaries. As of June 30, 2010,
we were in compliance with all such covenants.
In April 2009, we repurchased $10.0 million aggregate principal amount of the Senior Notes from an
unaffiliated note holder on the open market for $7.0 million, which generated a $2.9 million pretax
gain that was reflected in Other income. As a result of this transaction, approximately $115.0
million aggregate principal amount of the Senior Notes remains issued and outstanding as of June
30, 2010.
20
Note 9. Commitments and Contingencies
In the ordinary course of conducting business, our subsidiaries are involved in various legal
proceedings, either indirectly as insurers for parties or directly as defendants. Most the these
proceedings are claims litigation involving our subsidiaries as either (a) liability insurers
defending or providing indemnity for third party claims brought against insureds or (b) insurers
defending first party coverage claims brought against them. We account for such activity through
the establishment of unpaid loss and loss adjustment reserves. Our management believes that the
ultimate liability, if any, with respect to such ordinary-course claims litigation, after
consideration of provisions made for potential losses and cost of defense, will not be material to
our consolidated financial condition, results of operations, or cash flows.
Our subsidiaries are also from time-to-time involved with other legal actions, some of which assert
claims for substantial amounts. These actions include claims asserting extra contractual
obligations, such as claims involving allegations of bad faith in the handling of claims or the
underwriting of policies. In general, we believe we have valid defenses to these cases. Our
management expects that the ultimate liability if any, with respect to future extra-contractual
matters will not be material to our consolidated financial position. Nonetheless, given the large
or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of
litigation, an adverse outcome in such matters could, from time-to-time, have a material adverse
outcome on our consolidated results of operations or cash flows in a particular fiscal quarter or
year.
21
Note 10. Investments
The following tables set forth our cash and investments as of June 30, 2010. The table below
includes other-than-temporarily impaired (OTTI) securities recognized within other comprehensive
income (OCI).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
OTTI |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Cost or |
|
|
Recognized |
|
June 30, 2010 |
|
Fair Value |
|
|
Gains |
|
|
(Losses) |
|
|
Amortized Cost |
|
|
in OCI |
|
|
|
($ in thousands) |
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
$ |
493,675 |
|
|
$ |
14,409 |
|
|
$ |
(2 |
) |
|
$ |
479,268 |
|
|
$ |
|
|
States, municipalities and political
subdivisions |
|
|
406,757 |
|
|
|
17,332 |
|
|
|
(638 |
) |
|
|
390,063 |
|
|
|
|
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
478,083 |
|
|
|
21,560 |
|
|
|
|
|
|
|
456,523 |
|
|
|
|
|
Residential mortgage obligations |
|
|
29,727 |
|
|
|
|
|
|
|
(4,990 |
) |
|
|
34,717 |
|
|
|
(3,852 |
) |
Asset-backed securities |
|
|
10,845 |
|
|
|
377 |
|
|
|
(9 |
) |
|
|
10,477 |
|
|
|
(9 |
) |
Commercial mortgage-backed securities |
|
|
106,791 |
|
|
|
4,237 |
|
|
|
(242 |
) |
|
|
102,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
625,446 |
|
|
|
26,174 |
|
|
|
(5,241 |
) |
|
|
604,513 |
|
|
|
(3,861 |
) |
Corporate bonds |
|
|
334,750 |
|
|
|
15,537 |
|
|
|
(1,964 |
) |
|
|
321,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,860,628 |
|
|
|
73,452 |
|
|
|
(7,845 |
) |
|
|
1,795,021 |
|
|
|
(3,861 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
72,862 |
|
|
|
11,316 |
|
|
|
(1,429 |
) |
|
|
62,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
11,941 |
|
|
|
|
|
|
|
|
|
|
|
11,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
164,827 |
|
|
|
|
|
|
|
|
|
|
|
164,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,110,258 |
|
|
$ |
84,768 |
|
|
$ |
(9,274 |
) |
|
$ |
2,034,764 |
|
|
$ |
(3,861 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
The fair value of our investment portfolio may fluctuate significantly in response to
various factors such as changes in interest rates, investment quality ratings, equity prices,
foreign exchange rates and credit spreads. We do not have the intent to sell nor is it more likely
than not that we will have to sell debt securities in unrealized loss positions that are not
other-than temporarily impaired before recovery. We may realize investment losses to the extent its
liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate,
liquidity or credit spread environments. Significant changes in the factors we consider when
evaluating investment for impairment losses could result in a significant change in impairment
losses reported in the consolidated financial statements.
The scheduled maturity dates for fixed maturity securities by the number of years until maturity at
June 30, 2010 are shown in the following table:
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
|
|
|
June 30, 2010 |
|
Fair |
|
|
Amortized |
|
to Maturity |
|
Value |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
150,280 |
|
|
$ |
148,958 |
|
Due after one year through five years |
|
|
480,008 |
|
|
|
464,430 |
|
Due after five years through ten years |
|
|
350,766 |
|
|
|
330,705 |
|
Due after ten years |
|
|
254,128 |
|
|
|
246,415 |
|
Mortgage- and asset-backed (including GNMAs) |
|
|
625,446 |
|
|
|
604,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,860,628 |
|
|
$ |
1,795,021 |
|
|
|
|
|
|
|
|
23
The following table summarizes all securities in a gross unrealized loss position at June
30, 2010 and December 31, 2009, showing the aggregate fair value and gross unrealized loss by the
length of time those securities had continuously been in a gross unrealized loss position as well
as the number of securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Number of |
|
|
Fair |
|
|
Gross |
|
|
Number of |
|
|
Fair |
|
|
Gross |
|
|
|
Securities |
|
|
Value |
|
|
Unrealized Loss |
|
|
Securities |
|
|
Value |
|
|
Unrealized Loss |
|
|
|
($ in thousands except # of securities) |
|
|
Fixed Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
2 |
|
|
$ |
12,891 |
|
|
$ |
2 |
|
|
|
24 |
|
|
$ |
116,566 |
|
|
$ |
597 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
2 |
|
|
|
12,891 |
|
|
|
2 |
|
|
|
24 |
|
|
|
116,566 |
|
|
|
597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
7 |
|
|
|
10,718 |
|
|
|
77 |
|
|
|
47 |
|
|
|
108,290 |
|
|
|
2,291 |
|
7-12 Months |
|
|
6 |
|
|
|
23,920 |
|
|
|
315 |
|
|
|
4 |
|
|
|
3,534 |
|
|
|
112 |
|
> 12 Months |
|
|
15 |
|
|
|
13,342 |
|
|
|
246 |
|
|
|
23 |
|
|
|
17,777 |
|
|
|
514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
28 |
|
|
|
47,980 |
|
|
|
638 |
|
|
|
74 |
|
|
|
129,601 |
|
|
|
2,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
18,385 |
|
|
|
98 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
18,385 |
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
64 |
|
|
|
29,727 |
|
|
|
4,990 |
|
|
|
73 |
|
|
|
31,071 |
|
|
|
7,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
64 |
|
|
|
29,727 |
|
|
|
4,990 |
|
|
|
73 |
|
|
|
31,071 |
|
|
|
7,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
3 |
|
|
|
178 |
|
|
|
9 |
|
|
|
4 |
|
|
|
637 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
3 |
|
|
|
178 |
|
|
|
9 |
|
|
|
4 |
|
|
|
637 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
28,103 |
|
|
|
324 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
4 |
|
|
|
10,392 |
|
|
|
242 |
|
|
|
21 |
|
|
|
45,135 |
|
|
|
4,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
4 |
|
|
|
10,392 |
|
|
|
242 |
|
|
|
32 |
|
|
|
73,238 |
|
|
|
5,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
11 |
|
|
|
48,701 |
|
|
|
1,889 |
|
|
|
13 |
|
|
|
33,275 |
|
|
|
337 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
2 |
|
|
|
1,921 |
|
|
|
75 |
|
|
|
8 |
|
|
|
6,325 |
|
|
|
422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
13 |
|
|
|
50,622 |
|
|
|
1,964 |
|
|
|
21 |
|
|
|
39,600 |
|
|
|
759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
114 |
|
|
$ |
151,790 |
|
|
$ |
7,845 |
|
|
|
233 |
|
|
$ |
409,098 |
|
|
$ |
16,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
29 |
|
|
$ |
18,416 |
|
|
$ |
1,429 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
872 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
|
29 |
|
|
$ |
18,416 |
|
|
$ |
1,429 |
|
|
|
1 |
|
|
$ |
872 |
|
|
$ |
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
To determine whether the unrealized loss on structured securities is other-than-temporary,
we project an expected principal loss under a range of scenarios and utilize the most likely
outcomes. The analysis relies on actual collateral performance measures such as default rate,
prepayment rate and loss severity. These assumptions are applied throughout the remaining term of
the deal, incorporating the transaction structure and priority of payments, to generate loss
adjusted cash flows. Results of the analysis will indicate whether the security ultimately incurs a
loss or whether there is a material impact on yield due to either a projected loss or a change in
cash flow timing. A breakeven default rate is also calculated. A comparison to the break even
default rate to the actual default rate provides an indication of the level of cushion or coverage
to the first dollar principal loss. The analysis applies the stated assumptions throughout the
remaining term of the transaction to forecast cash flows, which are then applied through the
transaction structure to determine whether there is a loss to the security. For securities in which
a tranche loss is present, and the net present value of loss adjusted cash flows is less than book
value, impairment is recognized. The output data also includes a number of additional metrics such
as average life remaining, original and current credit support, over 60 day delinquency and
security rating.
For debt securities, when assessing whether the amortized cost basis of the security will be
recovered, we compare the present value of cash flows expected to be collected in relation to the
current book value. Any shortfalls of the present value of the cash flows expected to be collected
in relation to the amortized cost basis is considered the credit loss portion of OTTI losses and is
recognized in earnings. All non-credit losses are recognized as changes in OTTI losses within OCI.
For equity securities, in general, we focus our attention on those securities whose fair value was
less than 80% of their cost for six or more consecutive months. If warranted as the result of
conditions relating to a particular security, we will focus on a significant decline in fair value
regardless of the time period involved. Factors considered in evaluating potential impairment
include, but are not limited to, the current fair value as compared to cost of the security, the
length of time the investment has been below cost and by how much. If an equity security is deemed
to be other-than-temporarily impaired, the cost is written down to fair value with the loss
recognized in earnings.
For equity securities, we consider our intent to hold securities as part of the process of
evaluating whether a decline in fair value represents an other-than-temporary decline in value. For
fixed maturity securities, we consider our intent to sell a security and whether it is more likely
than not that we will be required to sell a security before the anticipated recovery as part of the
process of evaluating whether a securitys unrealized loss represents an other-than-temporary
decline. Our 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 and market conditions.
The significant inputs used to measure the amount of credit loss recognized in earnings were actual
delinquency rates, default probability assumptions, severity assumptions and prepayment
assumptions. Projected losses are a function of both loss severity and probability of default.
Default probability and severity assumptions differ based on property type, vintage and the stress
of the collateral. We do not intend to sell any of these securities and it is more likely than not
that we will not be required sell these securities before the recovery of the amortized cost basis.
25
The table below summarizes our activity related to OTTI losses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
($ in thousands) |
|
Securities |
|
|
Amount |
|
|
Securities |
|
|
Amount |
|
|
Securities |
|
|
Amount |
|
|
Securities |
|
|
Amount |
|
|
Total other-than-temporary impairment losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
2 |
|
|
$ |
564 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
|
4 |
|
|
|
489 |
|
|
|
6 |
|
|
|
1,493 |
|
|
|
6 |
|
|
|
713 |
|
|
|
39 |
|
|
|
19,343 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
143 |
|
Equities |
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
359 |
|
|
|
1 |
|
|
|
27 |
|
|
|
57 |
|
|
|
8,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4 |
|
|
$ |
489 |
|
|
|
14 |
|
|
$ |
1,876 |
|
|
|
7 |
|
|
$ |
740 |
|
|
|
99 |
|
|
$ |
28,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of loss in accumulated other
comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
|
|
|
|
|
334 |
|
|
|
|
|
|
|
1,402 |
|
|
|
|
|
|
|
504 |
|
|
|
|
|
|
|
17,504 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74 |
|
Equities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
334 |
|
|
|
|
|
|
$ |
1,407 |
|
|
|
|
|
|
$ |
504 |
|
|
|
|
|
|
$ |
17,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses recognized in earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
564 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
|
|
|
|
|
155 |
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
209 |
|
|
|
|
|
|
|
1,839 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
Equities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
359 |
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
8,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
155 |
|
|
|
|
|
|
$ |
469 |
|
|
|
|
|
|
$ |
236 |
|
|
|
|
|
|
$ |
11,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the cumulative amounts related to our credit loss portion of
the OTTI losses on debt securities held as of June 30, 2010 that we do not intend to sell and it is
not more likely than not that we will be required to sell the security prior to recovery of the
amortized cost basis and for which the non-credit loss portion is included in other comprehensive
income:
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
Beginning balance of at January 1, 2010 |
|
$ |
2,523 |
|
Credit losses on securities not previously impaired as of January 1, 2010 |
|
|
236 |
|
Reductions for securities sold during the period |
|
|
|
|
|
|
|
|
Ending balance at June 30, 2010 |
|
$ |
2,759 |
|
|
|
|
|
For the three and six months ended June 30, 2010, OTTI losses within OCI decreased $0.9
million and $1.9 million, respectively, primarily as a result of increases in the fair value of
securities previously impaired. For the three and six months ended June 30, 2009, OTTI losses
within OCI were $1.4 million and $17.6 million, respectively.
26
The following table summarizes the cumulative amounts related to our non-credit loss portion of the
other-than-temporary impairment losses on debt securities held within other comprehensive income
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
|
|
Number of |
|
|
Pre-Tax |
|
|
After-Tax |
|
|
Number of |
|
|
Pre-Tax |
|
|
After-Tax |
|
($ in thousands) |
|
Securities |
|
|
Amount |
|
|
Amount |
|
|
Securities |
|
|
Amount |
|
|
Amount |
|
|
Beginning balance at January 1, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
|
34 |
|
|
$ |
5,723 |
|
|
$ |
3,984 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Asset-backed securities |
|
|
1 |
|
|
|
23 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
5,746 |
|
|
$ |
4,000 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of loss in accumulated other
comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
|
6 |
|
|
$ |
504 |
|
|
$ |
328 |
|
|
|
34 |
|
|
$ |
17,504 |
|
|
$ |
11,373 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
74 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
504 |
|
|
$ |
328 |
|
|
|
|
|
|
$ |
17,578 |
|
|
$ |
11,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent net unrealized losses (gains) related to
securities in which an OTTI loss was recorded in
accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
|
36 |
|
|
$ |
(2,375 |
) |
|
$ |
(1,620 |
) |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Asset-backed securities |
|
|
1 |
|
|
|
(14 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
(2,389 |
) |
|
$ |
(1,630 |
) |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance at June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
|
36 |
|
|
$ |
3,852 |
|
|
$ |
2,692 |
|
|
|
34 |
|
|
$ |
17,505 |
|
|
$ |
11,373 |
|
Asset-backed securities |
|
|
1 |
|
|
|
9 |
|
|
|
6 |
|
|
|
1 |
|
|
|
73 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
3,861 |
|
|
$ |
2,698 |
|
|
|
|
|
|
$ |
17,578 |
|
|
$ |
11,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contractual maturity by the number of years until maturity for fixed maturity securities
with a gross unrealized loss at June 30, 2010 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 |
|
$ |
9 |
|
|
|
0 |
% |
|
$ |
2,451 |
|
|
|
2 |
% |
Due after one year through five years |
|
|
1,914 |
|
|
|
24 |
% |
|
|
51,543 |
|
|
|
33 |
% |
Due after five years through ten years |
|
|
114 |
|
|
|
1 |
% |
|
|
7,002 |
|
|
|
5 |
% |
Due after ten years |
|
|
567 |
|
|
|
7 |
% |
|
|
50,497 |
|
|
|
33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed securities |
|
|
5,241 |
|
|
|
68 |
% |
|
|
40,297 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
7,845 |
|
|
|
100 |
% |
|
$ |
151,790 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
27
The change in net unrealized gains/ (losses) consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
26,921 |
|
|
$ |
22,924 |
|
Equity securities |
|
|
(5,347 |
) |
|
|
6,558 |
|
|
|
|
|
|
|
|
|
|
|
21,574 |
|
|
|
29,482 |
|
|
|
|
|
|
|
|
|
|
Deferred income tax (charged) credited |
|
|
(7,354 |
) |
|
|
(9,729 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses), net |
|
$ |
14,220 |
|
|
$ |
19,753 |
|
|
|
|
|
|
|
|
Our realized gains and losses for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
$ |
11,281 |
|
|
$ |
1,593 |
|
|
$ |
17,651 |
|
|
$ |
4,525 |
|
(Losses) |
|
|
(26 |
) |
|
|
(196 |
) |
|
|
(283 |
) |
|
|
(3,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,255 |
|
|
|
1,397 |
|
|
|
17,368 |
|
|
|
1,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
|
|
|
|
|
1,549 |
|
|
|
|
|
|
|
1,562 |
|
(Losses) |
|
|
(235 |
) |
|
|
(350 |
) |
|
|
(235 |
) |
|
|
(1,530 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(235 |
) |
|
|
1,199 |
|
|
|
(235 |
) |
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) |
|
$ |
11,020 |
|
|
$ |
2,596 |
|
|
$ |
17,133 |
|
|
$ |
1,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
The following table presents, for each of the fair value hierarchy levels as defined in ASC
820, Fair Value Measurements, our fixed maturities and equity securities by asset class that are
measured at fair value at June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
($ in thousands) |
|
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
$ |
319,410 |
|
|
$ |
174,265 |
|
|
$ |
|
|
|
$ |
493,675 |
|
States, municipalities and political
subdivisions |
|
|
|
|
|
|
406,757 |
|
|
|
|
|
|
|
406,757 |
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
|
|
|
|
478,083 |
|
|
|
|
|
|
|
478,083 |
|
Residential mortgage obligations |
|
|
|
|
|
|
29,727 |
|
|
|
|
|
|
|
29,727 |
|
Asset-backed securities |
|
|
|
|
|
|
10,845 |
|
|
|
|
|
|
|
10,845 |
|
Commercial mortgage-backed
securities |
|
|
|
|
|
|
106,791 |
|
|
|
|
|
|
|
106,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
625,446 |
|
|
|
|
|
|
|
625,446 |
|
Corporate bonds |
|
|
|
|
|
|
334,750 |
|
|
|
|
|
|
|
334,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
319,410 |
|
|
|
1,541,218 |
|
|
|
|
|
|
|
1,860,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
72,862 |
|
|
|
|
|
|
|
|
|
|
|
72,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
392,272 |
|
|
$ |
1,541,218 |
|
|
$ |
|
|
|
$ |
1,933,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of financial instruments is determined based on the following fair value
hierarchy. The fair value measurement inputs and valuation techniques are similar across all asset
classes within the levels outlined below.
|
|
Level 1 Quoted prices for identical instruments in active markets. Examples are listed
equity and fixed income securities traded on an exchange. Treasury securities would generally
be considered Level 1. |
|
|
Level 2 Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived valuations
in which all significant inputs and significant value drivers are observable in active
markets. Examples are asset-backed and mortgage-backed securities which are similar to other
asset-backed or mortgage-backed securities observed in the market. |
|
|
Level 3 Valuations derived from valuation techniques in which one or more significant
inputs or significant value drivers are unobservable. An example would be a private placement
with minimal liquidity. |
29
We did not have any significant transfers between Level 1 and 2 for the three and six months ended June 30,
2010. We did not have any Level 3 securities activity for the six months ended June 30, 2010. The
following table presents a reconciliation of the beginning and ending balances for all investments
measured at fair value using Level 3 inputs during the six months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, 2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Level 3 investments as of January 1 |
|
|
|
|
|
$ |
156 |
|
Unrealized net gains included in other
comprehensive income (loss) |
|
|
|
|
|
|
23 |
|
Purchases, sales, paydowns and amortization |
|
|
|
|
|
|
(23 |
) |
Transfer from Level 3 |
|
|
|
|
|
|
(156 |
) |
Transfer to Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 investments as of June 30, 2009 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Note 11. Credit Facility
On April 1, 2010, we entered into a $140 million credit facility agreement entitled Fifth Amended
and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, and a
syndicate of lenders. The credit facility is a letter of credit facility and amends and replaces
the $75 million credit facility that expired by its terms on April 2, 2010. We may request that the
facility be increased by an amount not to exceed $25 million. 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 through letters of credit.
The letters of credit issued under the facility are denominated in British pounds and their
aggregate face amount will fluctuate based on exchange rates. The credit facility expires on March
31, 2011. At June 30, 2010, letters of credit with an aggregate face amount of $122.7 million were
outstanding under the credit facility.
This credit facility contains customary covenants for facilities of this type, including
restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets,
and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and
other financial ratios. The credit facility also provides for customary events of default,
including failure to pay principal, interest or fees when due, failure to comply with covenants,
any representation or warranty made by the Company being false in any material respect, default
under certain other indebtedness, certain insolvency or receivership events affecting the Company
and its subsidiaries, the occurrence of certain material judgments, or a change in control of the
Company. The letter of credit facility is secured by a pledge of the stock of certain insurance
subsidiaries of the Company. To the extent the aggregate face amount issued under the credit
facility exceeds the commitment amount, we are required to post collateral with the lead bank of
the consortium. We were in compliance with all covenants under the credit facility at June 30,
2010.
As a result of the April 1, 2010 amendment of the credit facility, the applicable margin and
applicable fee rate payable under the letter of credit facility are now based on a tiered schedule
that is based on the Companys status as determined from its then-current ratings issued by S&P and
Moodys Investors Service (Moodys) with respect to the Companys senior unsecured long-term debt
securities without third-party credit enhancement.
Note 12. Share Repurchases
In November 2009, the Parent Companys Board of Directors adopted a share repurchase program for up
to $35 million of the Parent Companys common stock. In March 2010, the Parent Companys Board of
Directors adopted a share repurchase program for up to an additional $65 million of the Parent
Companys common stock. Purchases are permitted from time to time at prevailing prices in open
market or privately negotiated transactions through December
31, 2010. The timing and amount of purchases under the program depend on a variety of factors,
including the trading price of the stock, market conditions and corporate and regulatory
considerations.
30
The following presents our share repurchases under the aforementioned programs for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Dollar Value |
|
|
|
Purchased |
|
|
|
|
|
|
of Shares that |
|
|
|
Under Publicly |
|
|
Average |
|
|
May Yet Be |
|
|
|
Announced |
|
|
Cost Paid |
|
|
Purchased Under |
|
|
|
Program |
|
|
Per Share |
|
|
the Program (1) |
|
|
|
($ in thousands, except per share) |
|
|
October 2009 |
|
|
|
|
|
|
|
|
|
$ |
35,000 |
|
November 2009 |
|
|
29,021 |
|
|
$ |
47.30 |
|
|
$ |
33,627 |
|
December 2009 |
|
|
112,555 |
|
|
$ |
47.83 |
|
|
$ |
28,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal fourth quarter |
|
|
141,576 |
|
|
$ |
47.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2009 activity |
|
|
141,576 |
|
|
$ |
47.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2010 |
|
|
171,500 |
|
|
$ |
44.32 |
|
|
$ |
20,642 |
|
February 2010 |
|
|
128,500 |
|
|
$ |
41.79 |
|
|
$ |
15,272 |
|
March 2010 |
|
|
273,600 |
|
|
$ |
39.10 |
|
|
$ |
69,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal first quarter |
|
|
573,600 |
|
|
$ |
41.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2010 |
|
|
149,912 |
|
|
$ |
40.92 |
|
|
$ |
63,439 |
|
May 2010 |
|
|
248,430 |
|
|
$ |
39.92 |
|
|
$ |
53,522 |
|
June 2010 |
|
|
159,661 |
|
|
$ |
40.38 |
|
|
$ |
47,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal second quarter |
|
|
558,003 |
|
|
$ |
40.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2010 activity |
|
|
1,131,603 |
|
|
$ |
40.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share repurchase activity |
|
|
1,273,179 |
|
|
$ |
41.57 |
|
|
$ |
47,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Balance as of the end of the month indicated. |
From July 1, 2010 through August 3, 2010, the Parent
Company purchased an additional 62,114 shares of
its common stock in the open market at an average cost of $42.15 per share for a total of $2.6
million under the aforementioned $65 million share repurchase program.
31
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 for The Navigators Group, Inc. and its
subsidiaries (the Company, we, us, and our) are forward-looking statements as defined in
the Private Securities Litigation Reform Act of 1995. All statements other than statements of
historical fact included in or incorporated by reference in this Quarterly Report are forward
looking statements. Whenever used in this report, the words estimate, expect, believe or
similar expressions or their negative 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 actual 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 factors
discussed in the Risk Factors section of our 2009 Annual Report on Form 10-K as well as:
|
|
|
continued volatility in the financial markets and the current recession; |
|
|
|
risks arising from the concentration of our business in marine and energy, general
liability and professional liability insurance, including the risk that market
conditions for these lines could change adversely or that we could experience large
losses in these lines; |
|
|
|
cyclicality in the property/casualty insurance business generally, and the marine
insurance business specifically; |
|
|
|
risks that we face in entering new markets and diversifying the products and
services that we offer, including risks arising from the development of our new
specialty lines or our ability to manage effectively the rapid growth in our lines of
business; |
|
|
|
changing legal, social and economic trends and inherent uncertainties in the loss
estimation process, which could adversely impact the adequacy of loss reserves and the
allowance for reinsurance recoverables; |
|
|
|
risks inherent in the preparation of our financial statements, which requires us to
make many estimates and judgments; |
|
|
|
our ability to continue to obtain reinsurance covering our exposures at appropriate
prices and/or in sufficient amounts; |
|
|
|
the counterparty credit risk of our reinsurers, including the other participants in
the marine pool, and other risks associated with the collection of reinsurance
recoverable amounts from our reinsurers, who may not pay on losses in a timely fashion,
or at all; |
|
|
|
the effects of competition from other insurers; |
|
|
|
unexpected turnover of our professional staff and our ability to attract and retain
qualified employees; |
|
|
|
increases in interest rates during periods in which we must sell fixed-income
securities to satisfy liquidity needs may result in realized investment losses; |
|
|
|
our investment portfolio is exposed to market-wide risks and fluctuations, as well
as to risks inherent in particular types of securities; |
|
|
|
exposure to significant capital market risks related to changes in interest rates,
credit spreads, equity prices and foreign exchange rates which may adversely affect our
results of operations, financial condition or cash flows; |
|
|
|
capital may not be available in the future, or may not be available on favorable
terms; |
|
|
|
our ability to maintain or improve our ratings to avoid 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; |
32
|
|
|
risks associated with continued or increased premium levies by Lloyds of London
(Lloyds) for the Lloyds Central Fund and cash calls for trust fund deposits, or a
significant downgrade of Lloyds rating by A.M. Best Company; |
|
|
|
changes in the laws, rules and regulations that apply to our insurance companies; |
|
|
|
the inability of our subsidiaries to pay dividends to us in sufficient amounts,
which would harm our ability to meet our obligations; |
|
|
|
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 in 2005 and Hurricanes Gustav and Ike in 2008 and
the possibility that our estimates of losses from such hurricanes will prove to be
materially inaccurate; |
|
|
|
volatility in the market price of our common stock; and |
|
|
|
other risks that we identify in current and future filings with the Securities and
Exchange Commission (SEC). |
In light of these risks, uncertainties and assumptions, any forward-looking events discussed in
this Form 10-Q may not occur. You are cautioned not to place undue reliance on any forward-looking
statements, which speak only as of their respective dates.
Overview
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.
We are an international insurance company focusing on specialty products for niches within the
overall property/casualty insurance market. Our largest product line and most long-standing area
of specialization is ocean marine insurance. We have also developed specialty niches in
professional liability insurance and in specialty liability insurance primarily consisting of
contractors liability and primary and excess liability coverages.
Our underwriting segments consist of insurance company operations (Insurance Companies) and
operations at Lloyds of London (Lloyds) through Lloyds Syndicate 1221 (Syndicate 1221)
(Lloyds Operations). The Insurance Companies consist of Navigators Insurance Company, which
includes our branch located in the United Kingdom (the U.K. Branch), and Navigators Specialty
Insurance Company, which underwrites specialty and professional liability insurance on an excess
and surplus lines basis. All of the insurance business written by Navigators Specialty Insurance
Company is fully reinsured by Navigators Insurance Company pursuant to a 100% quota share
reinsurance agreement. Our Lloyds Operations include Navigators Underwriting Agency Ltd. (NUAL),
a wholly-owned Lloyds underwriting agency which manages Syndicate 1221. Our Lloyds Operations
primarily underwrite marine and related lines of business along with offshore energy, professional
liability insurance and construction coverages for onshore energy business through Syndicate 1221.
We controlled 100% of Syndicate 1221s stamp capacity for the 2010 and 2009 underwriting years
through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd., which is referred to
as a corporate name in the Lloyds market. We have also established underwriting agencies in
Antwerp, Belgium, Stockholm, Sweden and Copenhagen, Denmark which underwrite risks pursuant to
binding authorities within NUAL into Syndicate 1221.
33
Catastrophe Risk Management
Our Insurance Companies and Lloyds Operations have exposure to losses caused by 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 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 events. Despite these efforts, there remains
uncertainty about the characteristics, timing and extent of insured losses given the unpredictable
nature of catastrophes. The occurrence of one or more catastrophic events could have a material
adverse effect on our results of operations, financial condition and/or liquidity.
We have significant natural catastrophe exposures throughout the world. We estimate that our current
largest exposure to loss from a single natural catastrophe event comes from an earthquake on the
west coast of the United States. As of June 30, 2010, we estimate that our probable maximum pre-tax
gross and net loss exposure for an earthquake event centered at Los Angeles, California would be
approximately $145 million and $26 million, respectively, including the cost of reinsurance
reinstatement premiums.
Like all catastrophe exposure estimates, the foregoing estimate of our probable maximum loss is
inherently uncertain. This estimate is highly dependent upon numerous assumptions and subjective
underwriting judgments. Examples of significant assumptions and judgments related to such an
estimate include the intensity, depth and location of the earthquake, 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. The composition of our portfolio also makes such estimates
challenging due to the non-static nature of the exposures covered under our policies in lines of
business such as cargo and hull. There can be no assurances that the gross and net loss amounts
that we could incur in such an event or in any natural catastrophe event would not be materially
higher than the estimates discussed above given the significant uncertainties with respect to such
an estimate. Moreover, our portfolio of insured risks changes dynamically over time and there can
be no assurance that our probable maximum loss will not change materially over time.
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 as we are required
to pay the losses if a reinsurer fails to meet its obligations under the reinsurance agreement.
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.
Critical Accounting Policies
The Companys Annual Report on Form 10-K for the year ended December 31, 2009 discloses our
critical accounting policies (see Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical Accounting Policies). Certain of these policies are
critical to the portrayal of our financial condition and results since they require management to
establish estimates based on complex and subjective judgments, including those related to our
estimates for loss and loss adjustment expenses (LAE) (including losses that have occurred but
were not reported to us by the financial reporting date), reinsurance recoverables, written and
unearned premium, the recoverability of deferred tax assets, the impairment of investment
securities and accounting for Lloyds results. For additional information regarding our critical
accounting policies, refer to our 2009 Annual Report on Form 10-K for the year ended December 31,
2009, pages 42 through 51.
34
Recent Accounting Pronouncements
Refer to Note 2: Recent Accounting Pronouncements in the Notes to Interim Consolidated Financial
Statements for a discussion about accounting standards recently adopted by the Company, as well as
recent accounting developments relating to standards not yet adopted by the Company.
Results of Operations
The following is a discussion and analysis of our consolidated and segment results of operations
for the three and six months ended June 30, 2010 and 2009. Earnings per share data is presented on
a per diluted share basis. 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 expenses, other operating expenses and other income (expense). The
combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other
operating expenses 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.
Net income for the three months ended June 30, 2010 was $19.0 million or $1.16 per diluted share
compared to $23.7 million or $1.39 per diluted share for the three months ended June 30, 2009.
Included in these results were net realized gains of $7.2 million and $1.7 million after-tax for
the three months ended June 30, 2010 and 2009, respectively. Our net realized gains in the second
quarter resulted from the sale of the majority of our general obligation municipal obligations, the
proceeds of which were reinvested in corporate bonds and agency mortgage-backed securities. In
addition, our net income included net other-than-temporary impairment losses recognized in earnings
of $0.1 million and $0.3 million after-tax for the three months ended June 30, 2010 and 2009,
respectively.
Net income for the three and six months ended June 30, 2009 included a gain related to the
repurchase of $10 million aggregate principal amount of our 7.0% Senior notes from an unaffiliated
note-holder on the open market for $7 million, which net of amortized costs resulted in a pre-tax
gain of $2.9 million and added $0.11 to earnings per share.
The combined ratio for the three months ended June 30, 2010 was 99.7% compared to 92.9% for the
comparable period in 2009. The increase in the loss ratios for the 2010 periods was partially due
to the impact of reinstatement premiums on net earned premiums related to the Deepwater Horizon and
West Atlas oil drilling rig losses. See Net Losses and Loss Adjustment Expenses section below. In
addition, there was favorable prior year reserve development of $5.3 million and $6.5 million for
the three and six months ended June 30, 2010 compared to prior year favorable development of $9.5
million and $15.2 million for the comparable periods in 2009. The net paid loss and LAE ratio for
the three months ended June 30, 2010 was 61.1% compared to 36.4% for the comparable period in 2009.
Cash flow from operations was $64.4 million for the first six months of 2010 compared to $69.5
million for the comparable period in 2009. This decrease was primarily due to a $64.0 million
increase in paid losses as well as an overall decline in the operating results in the first six
months of 2010 compared with the same period in 2009. Partially offsetting these declines was an
increase in the cash flow due to improved collections on reinsurance recoverables in the first six
months of 2010 compared with the same period in 2009.
Consolidated stockholders equity increased 1.6% to $814.7 million or $51.48 per share at June 30,
2010 compared to $801.5 million or $47.58 per share at December 31, 2009. The increase in
stockholders equity was primarily due to net income and unrealized investment portfolio gains.
35
REVENUES
Gross written premiums decreased to $253.6 million and $523.7 million in the three months and six
months ended June 30, 2010, respectively compared to $272.7 million and $548.0 million in the 2009
comparable periods. The decrease in the 2010 second quarter and six month gross written premiums
compared to 2009 was primarily due to the run-off of
our personal umbrella lines as well as a continued decline in our construction liability lines in
the Property Casualty business.
The average renewal premium rates for our Insurance Companies and Lloyds Operations marine
business increased approximately 3% and 4%, respectively, for the six months ended June 30, 2010
compared to the same period in 2009. For our Property Casualty division, we experienced average
renewal premium rate declines in our primary casualty, excess casualty and NavTech lines of
approximately 3%, 4% and 1%, respectively. The Insurance Companies and Lloyds professional
liability division overall experienced an approximately 2% decrease in average renewal premium
rates for the six months ended June 30, 2010 compared to 2009.
The average premium rate increases or decreases as noted above for the marine, property casualty
and professional liability businesses 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 that generally would be more competitively priced compared to renewal business. The
calculation does not reflect the rate on business that we are unwilling or unable to renew due to
loss experience or competition.
36
The following tables set forth our gross and net written premiums and net earned premiums by
segment and line of business for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
|
Premiums |
|
|
% |
|
|
Premiums |
|
|
Premiums |
|
|
Premiums |
|
|
% |
|
|
Premiums |
|
|
Premiums |
|
|
|
($ in thousands) |
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
55,204 |
|
|
|
22 |
% |
|
$ |
37,153 |
|
|
$ |
40,554 |
|
|
$ |
57,086 |
|
|
|
21 |
% |
|
$ |
34,956 |
|
|
$ |
34,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Casualty |
|
|
81,797 |
|
|
|
32 |
% |
|
|
54,300 |
|
|
|
50,171 |
|
|
|
94,567 |
|
|
|
34 |
% |
|
|
65,704 |
|
|
|
63,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
33,640 |
|
|
|
13 |
% |
|
|
19,948 |
|
|
|
19,700 |
|
|
|
37,732 |
|
|
|
14 |
% |
|
|
21,699 |
|
|
|
18,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies Total |
|
|
170,641 |
|
|
|
67 |
% |
|
|
111,401 |
|
|
|
110,425 |
|
|
|
189,385 |
|
|
|
69 |
% |
|
|
122,359 |
|
|
|
116,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
41,829 |
|
|
|
17 |
% |
|
|
34,421 |
|
|
|
34,727 |
|
|
|
47,273 |
|
|
|
18 |
% |
|
|
40,077 |
|
|
|
37,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Casualty |
|
|
29,122 |
|
|
|
11 |
% |
|
|
13,924 |
|
|
|
10,763 |
|
|
|
25,506 |
|
|
|
9 |
% |
|
|
15,070 |
|
|
|
11,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
11,976 |
|
|
|
5 |
% |
|
|
5,259 |
|
|
|
5,556 |
|
|
|
10,565 |
|
|
|
4 |
% |
|
|
5,501 |
|
|
|
5,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations Total |
|
|
82,927 |
|
|
|
33 |
% |
|
|
53,604 |
|
|
|
51,046 |
|
|
|
83,344 |
|
|
|
31 |
% |
|
|
60,648 |
|
|
|
53,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
253,568 |
|
|
|
100 |
% |
|
$ |
165,005 |
|
|
$ |
161,471 |
|
|
$ |
272,729 |
|
|
|
100 |
% |
|
$ |
183,007 |
|
|
$ |
169,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
|
Premiums |
|
|
% |
|
|
Premiums |
|
|
Premiums |
|
|
Premiums |
|
|
% |
|
|
Premiums |
|
|
Premiums |
|
|
|
($ in thousands) |
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
122,730 |
|
|
|
24 |
% |
|
$ |
88,156 |
|
|
$ |
81,648 |
|
|
$ |
134,323 |
|
|
|
25 |
% |
|
$ |
93,415 |
|
|
$ |
71,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Casualty |
|
|
161,143 |
|
|
|
31 |
% |
|
|
103,997 |
|
|
|
101,252 |
|
|
|
178,825 |
|
|
|
33 |
% |
|
|
125,680 |
|
|
|
128,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
64,606 |
|
|
|
12 |
% |
|
|
40,588 |
|
|
|
38,736 |
|
|
|
68,220 |
|
|
|
12 |
% |
|
|
40,346 |
|
|
|
36,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies Total |
|
|
348,479 |
|
|
|
67 |
% |
|
|
232,741 |
|
|
|
221,636 |
|
|
|
381,368 |
|
|
|
70 |
% |
|
|
259,441 |
|
|
|
236,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
100,970 |
|
|
|
19 |
% |
|
|
84,063 |
|
|
|
70,287 |
|
|
|
106,296 |
|
|
|
19 |
% |
|
|
90,051 |
|
|
|
68,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Casualty |
|
|
49,081 |
|
|
|
9 |
% |
|
|
25,635 |
|
|
|
22,678 |
|
|
|
39,034 |
|
|
|
7 |
% |
|
|
22,665 |
|
|
|
19,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
25,183 |
|
|
|
5 |
% |
|
|
11,883 |
|
|
|
10,939 |
|
|
|
21,290 |
|
|
|
4 |
% |
|
|
11,502 |
|
|
|
10,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations Total |
|
|
175,234 |
|
|
|
33 |
% |
|
|
121,581 |
|
|
|
103,904 |
|
|
|
166,620 |
|
|
|
30 |
% |
|
|
124,218 |
|
|
|
98,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
523,713 |
|
|
|
100 |
% |
|
$ |
354,322 |
|
|
$ |
325,540 |
|
|
$ |
547,988 |
|
|
|
100 |
% |
|
$ |
383,659 |
|
|
$ |
334,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Gross Written Premiums
Insurance Companies Gross Written Premiums
Marine Premiums. The gross written premiums for the three and six months ended June 30, 2010 and
2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine liability |
|
$ |
20,966 |
|
|
|
38 |
% |
|
$ |
21,730 |
|
|
|
38 |
% |
|
|
-4 |
% |
Inland marine |
|
|
7,625 |
|
|
|
14 |
% |
|
|
7,409 |
|
|
|
13 |
% |
|
|
3 |
% |
P&I |
|
|
3,118 |
|
|
|
6 |
% |
|
|
5,598 |
|
|
|
10 |
% |
|
|
-44 |
% |
Other |
|
|
5,393 |
|
|
|
9 |
% |
|
|
4,562 |
|
|
|
8 |
% |
|
|
18 |
% |
Cargo |
|
|
4,435 |
|
|
|
8 |
% |
|
|
5,633 |
|
|
|
10 |
% |
|
|
-21 |
% |
Craft/Fishing vessel |
|
|
5,062 |
|
|
|
9 |
% |
|
|
4,920 |
|
|
|
9 |
% |
|
|
3 |
% |
Bluewater hull |
|
|
5,535 |
|
|
|
10 |
% |
|
|
4,776 |
|
|
|
8 |
% |
|
|
16 |
% |
Transport |
|
|
3,070 |
|
|
|
6 |
% |
|
|
2,458 |
|
|
|
4 |
% |
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
55,204 |
|
|
|
100 |
% |
|
$ |
57,086 |
|
|
|
100 |
% |
|
|
-3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Insurance Companies marine gross written premiums for the 2010 second quarter decreased 3.3%
compared to the same period in 2009. The competition in this sector remains significant and excess
capacity continues to exist. The average renewal premium rates for marine liability increased 9%
for the three months ended June 30, 2010 primarily due to large increases in our energy liability
lines. Most of the other lines experienced average renewal premium rate declines in the second
quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine liability |
|
$ |
45,746 |
|
|
|
38 |
% |
|
$ |
48,813 |
|
|
|
36 |
% |
|
|
-6 |
% |
Inland marine |
|
|
16,517 |
|
|
|
13 |
% |
|
|
15,845 |
|
|
|
12 |
% |
|
|
4 |
% |
P&I |
|
|
10,240 |
|
|
|
8 |
% |
|
|
17,948 |
|
|
|
13 |
% |
|
|
-43 |
% |
Other |
|
|
11,733 |
|
|
|
10 |
% |
|
|
9,332 |
|
|
|
7 |
% |
|
|
26 |
% |
Cargo |
|
|
10,656 |
|
|
|
9 |
% |
|
|
14,410 |
|
|
|
11 |
% |
|
|
-26 |
% |
Craft/Fishing vessel |
|
|
10,932 |
|
|
|
9 |
% |
|
|
9,361 |
|
|
|
7 |
% |
|
|
17 |
% |
Bluewater hull |
|
|
10,159 |
|
|
|
8 |
% |
|
|
10,930 |
|
|
|
8 |
% |
|
|
-7 |
% |
Transport |
|
|
6,747 |
|
|
|
5 |
% |
|
|
7,684 |
|
|
|
6 |
% |
|
|
-12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
122,730 |
|
|
|
100 |
% |
|
$ |
134,323 |
|
|
|
100 |
% |
|
|
-9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Insurance Companies marine gross written premiums for the 2010 six month period decreased 8.6%
compared to the same period in 2009 due primarily to the reasons described in the three month
change above. For the six months ended June 30, 2010, the average renewal premium rates for marine
liability increased 4%. Craft/Fishing vessel, Transport, P&I and Inland Marine also experienced
increased average renewal premium rates.
39
Property Casualty Premiums. The gross written premiums for the three and six months ended June 30,
2010 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction liability |
|
$ |
25,931 |
|
|
|
32 |
% |
|
$ |
29,320 |
|
|
|
31 |
% |
|
|
-12 |
% |
Commercial umbrella |
|
|
28,034 |
|
|
|
34 |
% |
|
|
23,273 |
|
|
|
25 |
% |
|
|
20 |
% |
Offshore energy |
|
|
14,409 |
|
|
|
18 |
% |
|
|
13,998 |
|
|
|
15 |
% |
|
|
3 |
% |
Primary E&S |
|
|
1,400 |
|
|
|
2 |
% |
|
|
1,980 |
|
|
|
2 |
% |
|
|
-29 |
% |
Other |
|
|
12,023 |
|
|
|
14 |
% |
|
|
25,996 |
|
|
|
27 |
% |
|
|
-54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
81,797 |
|
|
|
100 |
% |
|
$ |
94,567 |
|
|
|
100 |
% |
|
|
-14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The property casualty gross written premiums for the three months ended June 30, 2010 decreased
13.5% compared to the same period in 2009, due primarily to the run-off of our personal umbrella
line as well as continuing weak economic conditions that have reduced demand for construction
liability insurance. Our commercial umbrella business line experienced growth in 2010 due to the
investments we made in 2008 and 2009 in new underwriters. For the three months ended June 30, 2010,
the average renewal premium rates for our casualty lines including construction liability declined
modestly. Our NavTech lines saw average renewal rate decreases that occurred earlier in the year
reverse following the Deepwater Horizon event, resulting in rate increases of 15-20% by the end of
the second quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction liability |
|
$ |
47,957 |
|
|
|
30 |
% |
|
$ |
56,772 |
|
|
|
32 |
% |
|
|
-16 |
% |
Commercial umbrella |
|
|
44,347 |
|
|
|
28 |
% |
|
|
38,363 |
|
|
|
21 |
% |
|
|
16 |
% |
Offshore energy |
|
|
23,624 |
|
|
|
15 |
% |
|
|
23,324 |
|
|
|
13 |
% |
|
|
1 |
% |
Primary E&S |
|
|
3,454 |
|
|
|
2 |
% |
|
|
3,459 |
|
|
|
2 |
% |
|
|
0 |
% |
Other |
|
|
41,761 |
|
|
|
25 |
% |
|
|
56,907 |
|
|
|
32 |
% |
|
|
-27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
161,143 |
|
|
|
100 |
% |
|
$ |
178,825 |
|
|
|
100 |
% |
|
|
-10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The property casualty gross written premiums for the six months ended June 30, 2010 decreased 9.9%
compared to the same period in 2009 due primarily to the reasons described in the three month
change above. For the six months ended June 30, 2010, the average renewal premium rates for our
casualty lines including construction liability declined modestly. Our NavTech lines saw average
renewal rate decreases that occurred earlier in the year reverse following the Deepwater Horizon
event, resulting in rate increases of 15-20% by the end of the second quarter.
40
Professional Liability Premiums. The gross written premiums for the three and six months ended
June 30, 2010 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O (public and private) |
|
$ |
20,753 |
|
|
|
62 |
% |
|
$ |
29,396 |
|
|
|
78 |
% |
|
|
-29 |
% |
Errors and omissions |
|
|
12,080 |
|
|
|
36 |
% |
|
|
7,242 |
|
|
|
19 |
% |
|
|
67 |
% |
Architects and engineers |
|
|
807 |
|
|
|
2 |
% |
|
|
1,094 |
|
|
|
3 |
% |
|
|
-26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
33,640 |
|
|
|
100 |
% |
|
$ |
37,732 |
|
|
|
100 |
% |
|
|
-11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The professional liability gross written premiums for the three months ended June 30, 2010
decreased 10.8% compared to the same period in 2009. The decline in D&O gross written premiums was
due to a shift in underwriting toward excess layers. The increase in the E&O gross written premiums
was due to growth in our program for smaller law firms. For the three months ended June 30, 2010,
the average renewal premium rates for the professional liability business decreased approximately
6% compared to the same period in 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O (public and private) |
|
$ |
36,896 |
|
|
|
57 |
% |
|
$ |
47,734 |
|
|
|
70 |
% |
|
|
-23 |
% |
Errors and omissions |
|
|
25,967 |
|
|
|
40 |
% |
|
|
18,441 |
|
|
|
27 |
% |
|
|
41 |
% |
Architects and engineers |
|
|
1,743 |
|
|
|
3 |
% |
|
|
2,045 |
|
|
|
3 |
% |
|
|
-15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
64,606 |
|
|
|
100 |
% |
|
$ |
68,220 |
|
|
|
100 |
% |
|
|
-5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The professional liability gross written premiums for the six months ended June 30, 2010 decreased
5.3% compared to the same period in 2009 due primarily to the reasons described in the three month
change above. For the six months ended June 30, 2010, the average renewal premium rates for the
professional liability business decreased approximately 3% compared to the same period in 2009.
Lloyds Operations Gross Written Premiums
We have controlled 100% of Syndicate 1221s stamp capacity since 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 £168 million ($251 million)
in 2010 compared to £124 million ($194 million) in 2009.
The Lloyds Operations gross written premiums for the three and six months ended June 30, 2010
were flat and increased 5.2% compared to the same periods in 2009. The increase in the year to
date gross written premiums was attributable to higher property casualty and professional liability
premiums which are described in detail below.
41
Marine Premiums. The gross written premiums for the three and six months ended June 30, 2010 and
2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine liability |
|
$ |
13,584 |
|
|
|
32 |
% |
|
$ |
11,982 |
|
|
|
25 |
% |
|
|
13 |
% |
Cargo and specie |
|
|
14,128 |
|
|
|
34 |
% |
|
|
21,350 |
|
|
|
46 |
% |
|
|
-34 |
% |
Assumed reinsurance |
|
|
4,034 |
|
|
|
10 |
% |
|
|
5,435 |
|
|
|
11 |
% |
|
|
-26 |
% |
Hull |
|
|
7,834 |
|
|
|
19 |
% |
|
|
6,678 |
|
|
|
14 |
% |
|
|
17 |
% |
Other |
|
|
2,249 |
|
|
|
5 |
% |
|
|
1,828 |
|
|
|
4 |
% |
|
|
23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
41,829 |
|
|
|
100 |
% |
|
$ |
47,273 |
|
|
|
100 |
% |
|
|
-12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The marine gross written premium for the three months ended June 30, 2010 declined 11.5% compared
to the same period in 2009. Our assumed reinsurance business line declined as we exited the U.S.
property catastrophe business. For the three months ended June 30, 2010, average renewal premium
rates increased approximately 4% compared to the same period in 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine liability |
|
$ |
39,112 |
|
|
|
39 |
% |
|
$ |
32,827 |
|
|
|
31 |
% |
|
|
19 |
% |
Cargo and specie |
|
|
35,210 |
|
|
|
35 |
% |
|
|
43,037 |
|
|
|
40 |
% |
|
|
-18 |
% |
Assumed reinsurance |
|
|
10,530 |
|
|
|
10 |
% |
|
|
15,759 |
|
|
|
15 |
% |
|
|
-33 |
% |
Hull |
|
|
11,461 |
|
|
|
11 |
% |
|
|
10,427 |
|
|
|
10 |
% |
|
|
10 |
% |
Other |
|
|
4,657 |
|
|
|
5 |
% |
|
|
4,246 |
|
|
|
4 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
100,970 |
|
|
|
100 |
% |
|
$ |
106,296 |
|
|
|
100 |
% |
|
|
-5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The marine gross written premium for the six months ended June 30, 2010 declined 5.0% compared to
the same period in 2009 due primarily to the reasons described in the three month change above. For
the six months ended June 30, 2010, average renewal premium rates increased approximately 4%
compared to the same period in 2009.
42
Property Casualty Premiums. The gross written premiums for the three and six months ended June 30,
2010 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offshore Energy |
|
$ |
13,449 |
|
|
|
46 |
% |
|
$ |
12,032 |
|
|
|
46 |
% |
|
|
12 |
% |
Engineering and Construction |
|
|
6,214 |
|
|
|
21 |
% |
|
|
4,802 |
|
|
|
19 |
% |
|
|
29 |
% |
Onshore Energy |
|
|
8,359 |
|
|
|
29 |
% |
|
|
6,849 |
|
|
|
27 |
% |
|
|
22 |
% |
US Property Casualty |
|
|
1,025 |
|
|
|
4 |
% |
|
|
1,440 |
|
|
|
6 |
% |
|
|
-29 |
% |
Bloodstock |
|
|
109 |
|
|
|
0 |
% |
|
|
415 |
|
|
|
2 |
% |
|
|
-74 |
% |
Property |
|
|
(34 |
) |
|
|
0 |
% |
|
|
(32 |
) |
|
|
0 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
29,122 |
|
|
|
100 |
% |
|
$ |
25,506 |
|
|
|
100 |
% |
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Property Casualty gross written premiums for the three months ended June 30, 2010 increased
14.2% compared to the same period in 2009 due to improved trade conditions in our NavTech Offshore
energy business line resulting from the Deepwater Horizon incident. The U.S. property casualty
business is primarily comprised of non-admitted risks in the state of New York. The average renewal
premium rates for the three months ended June 30, 2010 for our offshore energy lines increased
approximately 4% and our onshore energy and engineering lines decreased approximately 11% and was
flat, respectively, compared to the same period in 2009. Our NavTech lines saw average renewal rate
decreases that occurred earlier in the year reverse following the Deepwater Horizon event,
resulting in rate increases of 15-20% by the end of the second quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offshore Energy |
|
$ |
23,855 |
|
|
|
48 |
% |
|
$ |
18,331 |
|
|
|
47 |
% |
|
|
30 |
% |
Engineering and Construction |
|
|
11,173 |
|
|
|
23 |
% |
|
|
8,364 |
|
|
|
21 |
% |
|
|
34 |
% |
Onshore Energy |
|
|
10,671 |
|
|
|
22 |
% |
|
|
9,284 |
|
|
|
24 |
% |
|
|
15 |
% |
US Property Casualty |
|
|
1,354 |
|
|
|
3 |
% |
|
|
2,720 |
|
|
|
7 |
% |
|
|
-50 |
% |
Bloodstock |
|
|
2,067 |
|
|
|
4 |
% |
|
|
415 |
|
|
|
1 |
% |
|
|
398 |
% |
Property |
|
|
(39 |
) |
|
|
0 |
% |
|
|
(80 |
) |
|
|
0 |
% |
|
|
-51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
49,081 |
|
|
|
100 |
% |
|
$ |
39,034 |
|
|
|
100 |
% |
|
|
26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Property Casualty gross written premiums for the six months ended June 30, 2010 increased 25.7%
compared to the same period in 2009 due primarily to the reasons described in the three month
change above. For the six months ended June 30, 2010, the average renewal premium rates offshore
energy and engineering lines were flat and increased approximately 1%, respectively, and for our
onshore energy lines decreased approximately 9% compared to the same period in 2009. Our NavTech
lines saw average renewal rate decreases that occurred earlier in the year reverse following the
Deepwater Horizon event, resulting in rate increases of 15-20% by the end of the second quarter.
43
Professional Liability Premiums. The gross written premiums for the three and six months ended
June 30, 2010 and 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O (public and private) |
|
$ |
9,456 |
|
|
|
79 |
% |
|
$ |
6,495 |
|
|
|
61 |
% |
|
|
46 |
% |
E&O |
|
|
2,520 |
|
|
|
21 |
% |
|
|
4,070 |
|
|
|
39 |
% |
|
|
-38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,976 |
|
|
|
100 |
% |
|
$ |
10,565 |
|
|
|
100 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross written premiums for the three months ended June 30, 2010 increased 13.4% compared to the
same period in 2009. The increase in gross written premiums was primarily due to higher excess D&O
premiums being generated from an underwriting team that we hired at the end of 2008. The average
renewal premiums rates decreased approximately 2% for the three months ended June 30, 2010 compared
to the same period in 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
($ in thousands) |
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O (public and private) |
|
$ |
16,038 |
|
|
|
64 |
% |
|
$ |
10,595 |
|
|
|
50 |
% |
|
|
51 |
% |
E&O |
|
|
9,145 |
|
|
|
36 |
% |
|
|
10,695 |
|
|
|
50 |
% |
|
|
-14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25,183 |
|
|
|
100 |
% |
|
$ |
21,290 |
|
|
|
100 |
% |
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross written premiums for the six months ended June 30, 2010 increased 18.3% compared to the
same period in 2009 due primarily to the reasons described in the three month change above. The
average renewal premiums rates were flat for the six months ended June 30, 2010 compared to the
same period in 2009.
Ceded Written Premiums
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.
44
The following tables set forth our ceded written premiums by segment and major line of business for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Ceded |
|
|
Gross |
|
|
Ceded |
|
|
Gross |
|
|
|
Written |
|
|
Written |
|
|
Written |
|
|
Written |
|
|
|
Premiums |
|
|
Premiums |
|
|
Premiums |
|
|
Premiums |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
18,051 |
|
|
|
33 |
% |
|
$ |
22,130 |
|
|
|
39 |
% |
Property Casualty |
|
|
27,497 |
|
|
|
34 |
% |
|
|
28,863 |
|
|
|
31 |
% |
Professional Liability |
|
|
13,692 |
|
|
|
41 |
% |
|
|
16,033 |
|
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
59,240 |
|
|
|
35 |
% |
|
|
67,026 |
|
|
|
35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
7,408 |
|
|
|
18 |
% |
|
|
7,196 |
|
|
|
15 |
% |
Property Casualty |
|
|
15,198 |
|
|
|
52 |
% |
|
|
10,436 |
|
|
|
41 |
% |
Professional Liability |
|
|
6,717 |
|
|
|
56 |
% |
|
|
5,064 |
|
|
|
48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
29,323 |
|
|
|
35 |
% |
|
|
22,696 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
88,563 |
|
|
|
35 |
% |
|
$ |
89,722 |
|
|
|
33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Ceded |
|
|
Gross |
|
|
Ceded |
|
|
Gross |
|
|
|
Written |
|
|
Written |
|
|
Written |
|
|
Written |
|
|
|
Premiums |
|
|
Premiums |
|
|
Premiums |
|
|
Premiums |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
34,574 |
|
|
|
28 |
% |
|
$ |
40,908 |
|
|
|
30 |
% |
Property Casualty |
|
|
57,146 |
|
|
|
35 |
% |
|
|
53,145 |
|
|
|
30 |
% |
Professional Liability |
|
|
24,018 |
|
|
|
37 |
% |
|
|
27,874 |
|
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
115,738 |
|
|
|
33 |
% |
|
|
121,927 |
|
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
16,907 |
|
|
|
17 |
% |
|
|
16,245 |
|
|
|
15 |
% |
Property Casualty |
|
|
23,446 |
|
|
|
48 |
% |
|
|
16,369 |
|
|
|
42 |
% |
Professional Liability |
|
|
13,300 |
|
|
|
53 |
% |
|
|
9,788 |
|
|
|
46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
53,653 |
|
|
|
31 |
% |
|
|
42,402 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
169,391 |
|
|
|
32 |
% |
|
$ |
164,329 |
|
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in the percentage of total ceded written premiums to total gross written premiums for
the three and six months ended June 30, 2010 compared to the same period in 2009 was primarily due
to reinstatement costs recorded in the second quarter of 2010 resulting from both the Deepwater
Horizon and West Atlas losses ($7.9 million).
Net Written Premiums
Net written premiums decreased 9.8% and 7.6% for the three and six months ended June 30, 2010
compared to the same periods in 2009 due to lower gross written premiums in 2010 as well as the
increase in ceded premiums noted above.
Net Earned Premiums
Net earned premiums decreased 4.9% and 2.8% for the three and six months ended June 30, 2010
compared to the same periods in 2009.
46
Net Investment Income
Our net investment income was derived from the following sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
17,456 |
|
|
$ |
18,442 |
|
|
$ |
35,196 |
|
|
$ |
36,810 |
|
Equity securities |
|
|
673 |
|
|
|
510 |
|
|
|
1,229 |
|
|
|
1,255 |
|
Short-term investments |
|
|
257 |
|
|
|
438 |
|
|
|
492 |
|
|
|
806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,386 |
|
|
|
19,390 |
|
|
|
36,917 |
|
|
|
38,871 |
|
Investment expenses |
|
|
(533 |
) |
|
|
(734 |
) |
|
|
(1,092 |
) |
|
|
(1,472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
17,853 |
|
|
$ |
18,656 |
|
|
$ |
35,825 |
|
|
$ |
37,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income decreased 4.3% and 4.2% for the 2010 second quarter and six month periods
compared to the same periods in 2009 due to lower short-term investment yields.
Net Other-Than-Temporary Impairment Losses Recognized In Earnings
Our net other-than-temporary impairment losses recognized in earnings for the periods indicated
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
(155 |
) |
|
$ |
(110 |
) |
|
$ |
(209 |
) |
|
$ |
(2,472 |
) |
Equity securities |
|
|
|
|
|
|
(359 |
) |
|
|
(27 |
) |
|
|
(8,697 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other-than-temporary impairment losses
recognized in earnings |
|
$ |
(155 |
) |
|
$ |
(469 |
) |
|
$ |
(236 |
) |
|
$ |
(11,169 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2010, we recorded net other-than-temporary impairment
losses recognized in earnings of $0.2 million and $0.2 million, respectively, relating primarily to
residential mortgage-backed securities. For the comparable periods in the prior year, we recorded
$0.5 million and $11.2 million of net other-than-temporary impairment losses recognized in earnings
primarily related to equity securities and residential mortgage-backed securities.
47
Net Realized Gains and Losses
Our realized gains and losses for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
$ |
11,281 |
|
|
$ |
1,593 |
|
|
$ |
17,651 |
|
|
$ |
4,525 |
|
(Losses) |
|
|
(26 |
) |
|
|
(196 |
) |
|
|
(283 |
) |
|
|
(3,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,255 |
|
|
|
1,397 |
|
|
|
17,368 |
|
|
|
1,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
|
|
|
|
|
1,549 |
|
|
|
|
|
|
|
1,562 |
|
(Losses) |
|
|
(235 |
) |
|
|
(350 |
) |
|
|
(235 |
) |
|
|
(1,530 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(235 |
) |
|
|
1,199 |
|
|
|
(235 |
) |
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) |
|
$ |
11,020 |
|
|
$ |
2,596 |
|
|
$ |
17,133 |
|
|
$ |
1,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2010, we recorded $11.0 million and $17.1 million of
net realized gains compared to net realized gains of $2.6 million and $1.1 million for the
comparable periods in 2009. On an after-tax basis, the net realized gains for the three and six
months ended were $7.2 million and $11.1 million compared with net realized gains of $1.7 million
and $0.5 million. We generate realized gains and losses as part of the normal ongoing management of
our investment portfolio. Our net realized gains in the second quarter resulted from the sale of
the majority of our general obligation municipal obligations, the proceeds of which were reinvested
in corporate bonds and agency mortgage-backed securities.
48
Other Income/(Expense)
Other income/(expense) primarily includes foreign exchange gains and losses from our Lloyds
Operations, commission income and inspection fees related to our specialty insurance business.
However, the second quarter of 2009 also included a $2.9 million gain related to the repurchase of
$10 million aggregate principal amount of our issued and outstanding 7.0% Senior notes from an
unaffiliated note-holder on the open market for $7 million.
EXPENSES
Net Losses and Loss Adjustment Expenses
The ratios of net losses and LAE to net earned premiums (loss ratios) for the three and six
months ended June 30, 2010 were 61.8% and 62.6%, respectively, and were 59.3% and 60.0%,
respectively for the comparable periods in 2009. The increase in the loss ratios for the 2010
periods was primarily attributable to Deepwater Horizon and West Atlas oil rig losses. In
addition, there was favorable prior year reserve development of $5.3 million and $6.5 million for
the three and six months ended June 30, 2010 compared to prior year favorable development of $9.5
million and $15.2 million for the comparable periods in 2009.
Our insurance subsidiaries provided property reinsurance and liability insurance covering the
Deepwater Horizon oil drilling rig that exploded in the Gulf of Mexico on April 20th,
2010 and subsequently sank. During the second quarter, we incurred gross loss and loss adjustment
expenses of $19.5 million relating to the Deepwater Horizon incident. We ceded $13.5 million of
this gross loss to our reinsurance program, which triggered reinsurance reinstatement premiums of
$4.7 million. The remaining net loss of $6.0 million was within our loss expectations with respect
to the current accident year in the impacted lines of business.
We participated in various excess layers of the marine liability, directors and officer, excess
liability insurance programs purchased by entities with potential liability exposures related to
the Deepwater Horizon incident. At this point in time, we are unable to accurately estimate the
ultimate potential liability arising from the Deepwater Horizon incident, the allocation of that
liability amongst the various participants, or what recoveries would be available to the
participants from other applicable insurance coverage. If losses were incurred in the various
excess insurance programs in which we participate, we believe our exposure would be mitigated by
the substantial reinsurance coverage we maintain. Our management expects that the ultimate
liability, if any, for the Deepwater Horizon loss will not be material to our consolidated
financial position, but if a significant portion of the insurance programs in which we participate
were to be exhausted, the loss, including related reinstatement premiums, could potentially have a
material adverse effect on our consolidated results of operations or cash flows in a particular
fiscal quarter or year.
The second quarter was also impacted by additional gross losses of $9.0 million arising from the
West Atlas oil rig loss, which occurred in late 2009, due to unexpectedly high costs incurred in
the removal of the damaged wreck. This additional gross loss was fully ceded to our reinsurance
program, but the cession triggered additional reinsurance reinstatement premiums of $3.2 million.
In conjunction with the recording of gross losses, we assessed our reinsurance coverage, potential
receivables, and the recoverability of the receivables. Losses incurred on business recently
written are primarily covered by reinsurance agreements written by companies with whom we are
currently doing reinsurance business and whose credit we continue to assess in the normal course of
business.
49
The following table presents our reinsurance recoverable amounts as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverables: |
|
|
|
|
|
|
|
|
|
|
|
|
Paid losses |
|
$ |
52,593 |
|
|
$ |
76,505 |
|
|
$ |
(23,912 |
) |
Unpaid losses and LAE reserves |
|
|
800,378 |
|
|
|
807,352 |
|
|
|
(6,974 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
852,971 |
|
|
$ |
883,857 |
|
|
$ |
(30,886 |
) |
|
|
|
|
|
|
|
|
|
|
The following table sets forth gross reserves for losses and LAE, reinsurance recoverable on such
amounts and net losses and LAE reserves (a non-GAAP measure reconciled in the following table) as
of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves for losses and LAE |
|
$ |
1,919,352 |
|
|
$ |
1,920,286 |
|
|
$ |
(934 |
) |
Less: Reinsurance recoverable on unpaid
losses and LAE reserves |
|
|
800,378 |
|
|
|
807,352 |
|
|
|
(6,974 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss and LAE reserves |
|
$ |
1,118,974 |
|
|
$ |
1,112,934 |
|
|
$ |
6,040 |
|
|
|
|
|
|
|
|
|
|
|
50
The following tables set forth our net reported losses and LAE reserves and net incurred but not
reported (IBNR) reserves (non-GAAP measures reconciled below) by segment and line of business as
of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
Net |
|
|
Net |
|
|
Total |
|
|
% of IBNR |
|
|
|
Reported |
|
|
IBNR |
|
|
Net Loss |
|
|
to Total Net |
|
|
|
Reserves |
|
|
Reserves |
|
|
Reserves |
|
|
Loss Reserves |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
111,760 |
|
|
$ |
96,925 |
|
|
$ |
208,685 |
|
|
|
46.4 |
% |
Property Casualty |
|
|
145,609 |
|
|
|
339,370 |
|
|
|
484,979 |
|
|
|
70.0 |
% |
Professional liability |
|
|
42,193 |
|
|
|
63,912 |
|
|
|
106,105 |
|
|
|
60.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Companies |
|
|
299,562 |
|
|
|
500,207 |
|
|
|
799,769 |
|
|
|
62.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
111,957 |
|
|
|
107,213 |
|
|
|
219,170 |
|
|
|
48.9 |
% |
Property Casualty |
|
|
25,561 |
|
|
|
27,293 |
|
|
|
52,854 |
|
|
|
51.6 |
% |
Professional liability |
|
|
9,913 |
|
|
|
37,268 |
|
|
|
47,181 |
|
|
|
79.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lloyds Operations |
|
|
147,431 |
|
|
|
171,774 |
|
|
|
319,205 |
|
|
|
53.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
446,993 |
|
|
$ |
671,981 |
|
|
$ |
1,118,974 |
|
|
|
60.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Net |
|
|
Net |
|
|
Total |
|
|
% of IBNR |
|
|
|
Reported |
|
|
IBNR |
|
|
Net Loss |
|
|
to Total Net |
|
|
|
Reserves |
|
|
Reserves |
|
|
Reserves |
|
|
Loss Reserves |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
113,604 |
|
|
$ |
100,042 |
|
|
$ |
213,646 |
|
|
|
46.8 |
% |
Property Casualty |
|
|
134,427 |
|
|
|
351,985 |
|
|
|
486,412 |
|
|
|
72.4 |
% |
Professional liability |
|
|
38,410 |
|
|
|
68,807 |
|
|
|
107,217 |
|
|
|
64.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Companies |
|
|
286,441 |
|
|
|
520,834 |
|
|
|
807,275 |
|
|
|
64.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
107,800 |
|
|
|
101,851 |
|
|
|
209,651 |
|
|
|
48.6 |
% |
Property Casualty |
|
|
27,148 |
|
|
|
25,175 |
|
|
|
52,323 |
|
|
|
48.1 |
% |
Professional liability |
|
|
7,442 |
|
|
|
36,243 |
|
|
|
43,685 |
|
|
|
83.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lloyds Operations |
|
|
142,390 |
|
|
|
163,269 |
|
|
|
305,659 |
|
|
|
53.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
428,831 |
|
|
$ |
684,103 |
|
|
$ |
1,112,934 |
|
|
|
61.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in net loss reserves is generally a reflection of the growth in net premium volume
over the last three years coupled with a changing mix of business to longer-tail lines of business
such as the specialty lines of business (construction defect, commercial excess, primary excess),
professional liability lines of business and marine liability and transport business in ocean
marine. These lines of business, which typically have a longer settlement period compared to the
mix of business we have historically written, are becoming larger components of our overall
business.
Our reserving practices and the establishment of any particular reserve reflect managements
judgment and do not represent any admission of liability with respect to any claims made against
us. No assurance can be given that actual claims made and related payments will not be in excess
of the amounts reserved. During the loss settlement period, it often becomes necessary to refine
and adjust the estimates of liability on a claim either upward or downward. Even after such
adjustments, ultimate liability may exceed or be less than the revised estimates. The 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. Our
actuaries generally calculate the IBNR loss reserves for each line of business by underwriting year
for major products using standard actuarial methodologies. This process requires the substantial
use of informed judgment and is inherently uncertain.
There are instances in which facts and circumstances require a deviation from the general process
described above. Three such instances relate to the IBNR loss reserve processes for our 2008
Hurricane losses, our 2005 Hurricanes losses and our asbestos exposures, where extrapolation
techniques are not applied, except in a limited way, given the unique nature of hurricane losses
and limited population of marine excess policies with potential asbestos exposures. In such
circumstances, inventories of the policy limits exposed to losses coupled with reported losses are
analyzed and evaluated principally by claims personnel and underwriters to establish IBNR loss
reserves.
For additional information regarding our accounting policies regarding net losses and loss
adjustment expenses, please see our Critical Accounting Policies in our 2009 Annual Report on Form
10-K for the year ended December 31, 2009, pages 42 to 49.
52
Hurricanes Gustav and Ike
For the year ended December 31, 2008, we incurred gross and net losses and LAE of $114.0 million
and $17.2 million, respectively, exclusive of $12.2 million for the cost of excess of loss
reinstatement premiums, related to Hurricanes Gustav and Ike.
The following table sets forth our gross and net loss and LAE reserves, incurred losses and LAE and
payments for Hurricanes Gustav and Ike for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Year Ended |
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
59,509 |
|
|
$ |
107,399 |
|
Incurred loss & LAE |
|
|
(2,042 |
) |
|
|
1,039 |
|
Calendar year payments |
|
|
5,986 |
|
|
|
48,929 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
51,481 |
|
|
$ |
59,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
31,734 |
|
|
$ |
34,015 |
|
Gross IBNR loss reserves |
|
|
19,747 |
|
|
|
25,494 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
51,481 |
|
|
$ |
59,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
2,683 |
|
|
$ |
12,923 |
|
Incurred loss & LAE |
|
|
25 |
|
|
|
978 |
|
Calendar year payments |
|
|
949 |
|
|
|
11,218 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
1,759 |
|
|
$ |
2,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
2,241 |
|
|
$ |
1,793 |
|
Net IBNR loss reserves |
|
|
(482 |
) |
|
|
890 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
1,759 |
|
|
$ |
2,683 |
|
|
|
|
|
|
|
|
Approximately $52.3 million and $69.7 million of paid and unpaid losses at June 30, 2010 and
December 31, 2009, respectively, were due from reinsurers as a result of the losses from Hurricanes
Gustav and Ike.
Hurricanes Katrina and Rita
During the 2005 third quarter, we incurred gross and net losses and LAE of $471.0 million and $22.3
million, respectively, exclusive of $14.5 million for the cost of excess of loss reinstatement
premiums, related to Hurricanes Katrina and Rita.
53
The following table sets forth our gross and net loss and LAE reserves, incurred losses and LAE and
payments for Hurricanes Katrina and Rita for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Year Ended |
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
($ in thousands) |
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
67,038 |
|
|
$ |
97,732 |
|
Incurred loss & LAE |
|
|
459 |
|
|
|
671 |
|
Calendar year payments |
|
|
15,832 |
|
|
|
31,365 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
51,665 |
|
|
$ |
67,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
38,512 |
|
|
$ |
49,291 |
|
Gross IBNR loss reserves |
|
|
13,153 |
|
|
|
17,747 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
51,665 |
|
|
$ |
67,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
3,536 |
|
|
$ |
3,667 |
|
Incurred loss & LAE |
|
|
32 |
|
|
|
114 |
|
Calendar year payments |
|
|
76 |
|
|
|
245 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
3,492 |
|
|
$ |
3,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
53 |
|
|
$ |
183 |
|
Net IBNR loss reserves |
|
|
3,439 |
|
|
|
3,353 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
3,492 |
|
|
$ |
3,536 |
|
|
|
|
|
|
|
|
Approximately $51.7 million and $68.5 million of paid and unpaid losses at June 30, 2010 and
December 31, 2009, respectively, were due from reinsurers as a result of the losses from Hurricanes
Katrina and Rita.
Prior Year Reserve Redundancies/Deficiencies
The relevant factors that may have a significant impact on the establishment and adjustment of loss
and LAE reserves can vary by line of business and from period to period. As part of our regular
review of prior reserves, management, in consultation with our actuaries, may determine, based on
their judgment that certain assumptions made in the reserving process in prior periods may need to
be revised to reflect various factors, likely including the availability of additional information.
Based on their reserve analyses, management may make corresponding reserve adjustments.
54
The segment and line of business breakdowns of prior period net reserve deficiencies (redundancies)
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
Marine |
|
$ |
813 |
|
|
$ |
2,169 |
|
Property Casualty |
|
|
(5,753 |
) |
|
|
(12,804 |
) |
Professional Liability |
|
|
96 |
|
|
|
5,745 |
|
|
|
|
|
|
|
|
Subtotal Insurance Companies |
|
|
(4,844 |
) |
|
|
(4,890 |
) |
Lloyds Operations |
|
|
(406 |
) |
|
|
(4,588 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(5,250 |
) |
|
$ |
(9,478 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
Marine |
|
$ |
1,509 |
|
|
$ |
4,127 |
|
Property Casualty |
|
|
(9,697 |
) |
|
|
(24,517 |
) |
Professional Liability |
|
|
2,691 |
|
|
|
10,368 |
|
|
|
|
|
|
|
|
Subtotal Insurance Companies |
|
|
(5,497 |
) |
|
|
(10,022 |
) |
Lloyds Operations |
|
|
(999 |
) |
|
|
(5,223 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(6,496 |
) |
|
$ |
(15,245 |
) |
|
|
|
|
|
|
|
Following is a discussion of relevant factors related to the $5.3 million prior period net reserve
redundancy recorded in the 2010 second quarter:
The Insurance Companies recorded $0.8 million of prior period net reserve deficiencies for marine
business resulting from $0.8 million of increased liability reserves on the 2007
underwriting year. While there was prior year loss activity on several other lines, none of the
activity was significant.
The Insurance Companies recorded $5.8 million of prior period net savings for property casualty
business primarily comprised of $4.2 million of favorable development on the 2007 underwriting year
for our construction liability business due to lower reported claims than expected. In addition,
there was $0.9 million of favorable development in our NavTech offshore lines also due to favorable
development on the 2007 underwriting year resulting from lower reported claims than expected.
Partially offsetting the above were prior period net reserve deficiencies of $0.8 million in our
personal umbrella lines and $0.2 million for our liquor liability lines, both of which are in
run-off.
The Lloyds Operations recorded $0.4 million of prior period net savings.
Following is a discussion of relevant factors related to the $1.2 million prior period net reserve
redundancy recorded in the 2010 first quarter:
The Insurance Companies recorded $0.7 million of prior period net reserve deficiencies for marine
business resulting primarily from $1.2 million of increased liability reserves on reported losses
from two older underwriting years, partially offset by favorable loss activity on several other
lines, none of which was significant.
55
The Insurance Companies recorded $1.5 million of prior period net savings for property casualty
business comprised mostly of favorable loss development of $2.5 million on two run-off books of
business and $1.4 million in on our
offshore business due to favorable loss emergence, partially offset by $1.8 million of reported
loss activity in excess of our expectation on a run-off liquor liability book of business.
The Insurance Companies recorded $0.2 million of net prior period deficiencies for directors and
officers business due to an increase in our loss ratio assumption of the 2009 underwriting year
mostly offset by the favorable settlement of a large lawyers claim and favorable loss emergence on
a run-off book of lawyers business emanating from the United Kingdom.
The Lloyds Operations recorded $0.6 million of prior period net savings that included $0.7 million
across several marine lines due to favorable loss activity, none of which was significant.
Following is a discussion of relevant factors related to the $9.5 million prior period net reserve
redundancy recorded in the 2009 second quarter:
The Insurance Companies recorded $2.2 million of prior period net reserve deficiencies for marine
business resulting from $2.1 million of increased liability reserves due to loss activity that
exceeded our expectations and an update of the loss development factors for this business. The
remaining activity nets to $0.1 million of prior period net reserve deficiencies and included a
$1.9 million marine liability case reserve for a Hurricane Gustav claim that was offset by a
reduction in IBNR within the offshore line of business in our property casualty business, and
savings of $1.0 million for craft and $0.9 million in the protection and indemnity (P&I) line of
business both due to favorable loss trends for the 2007 and 2008 underwriting years.
The Insurance Companies recorded $12.8 million of prior period net savings for property casualty
business comprised mostly of $15.6 million of net favorable development in construction liability
business due to favorable loss trends for business written from 2006 and prior, a $1.9 million
reduction in Hurricane Gustav IBNR that was offset by a case reserve in our marine liability line
of business, $3.7 million of favorable development on commercial umbrella business on business
written from 2004 to 2006 due to reported losses less than our expectations, $2.3 million of
favorable development on primary excess and surplus business written from 2006 to 2007 due to
reported losses less than our expectations and $1.2 million in the offshore energy lines of
business due to generally lower claim activity than expected. These redundancies were partially
offset by prior period net reserve deficiencies in the middle markets, liquor liability, personal
umbrella and specialty run-off lines of $5.2 million, $3.7 million, $2.5 million and $1.4 million,
respectively, due to loss activity in excess of expectations. The middle markets development
occurred in the 2005 to 2008 underwriting years resulting from reported loss activity and a
detailed study that documented a shift in the mix of business to lines with a higher loss ratio and
a longer development pattern.
The Insurance Companies recorded $5.7 million of net prior period deficiencies for professional
liability business that included $2.7 million of reserve strengthening in our large lawyers book of
business written from 2006 to 2008 due to reported losses being greater than expectations and the
incorporation of a reserve study which resulted in higher loss ratio assumptions for those years.
Our large lawyers book is in the process of being re-underwritten due to the adverse trends we have
observed in the last several quarters and the current economic weakness. We also incurred large
loss activity in our D&O book in underwriting years 2005 and 2007 that resulted in $2.7 million of
adverse development.
The Lloyds Operations recorded $4.6 million of prior period net savings comprised of $5.3 million
for marine business due to favorable loss activity in the liability, reinsurance and cargo lines,
partially offset by deficiencies of $0.6 million in the international E&O line due to higher
reported loss activity. Within the property casualty account, reserves in our run-off property
book were strengthened by $1.1 million due to worse than expected claims development in the quarter
although this adverse development was partially absorbed by reserve releases of $0.9 million within
the rest of the property casualty account.
Following is a discussion of relevant factors related to the $5.8 million prior period net reserve
redundancy recorded in the 2009 first quarter:
The Insurance Companies recorded $2.0 million of prior period net reserve deficiencies for marine
business which included $1.4 million for increased liability reserves due to large loss activity,
and $1.0 million for hull and $0.9 million for transport business due to reported claims activity,
partially offset by $1.8 million of savings in the protection
and indemnity (P&I) line of business due to reductions in our loss assumptions for the more
recent underwriting years.
56
The Insurance Companies recorded $11.7 million of prior period net savings for property casualty
business comprised mostly of $8.5 million of net favorable development in construction liability
business due to favorable loss trends for business written from 2005 to 2007, $2.7 million of
favorable development on primary casualty business on business written from 2005 to 2006 due to
reported losses less than our expectations, $1.4 million of favorable development on commercial
umbrella business on business written from 2004 to 2006 due to reported losses less than our
expectations, and $4.9 million in the offshore energy lines of business due to a reduction in the
estimate for a large reported claim and generally lower claim activity than expected. These
redundancies were partially offset by prior period net reserve deficiencies in the middle markets
and specialty run-off lines of $1.6 million and $1.2 million, respectively, due to loss activity in
excess of expectations.
The Insurance Companies recorded $4.6 million of net prior period deficiencies for professional
liability business mostly emanating from E&O business written in 2006 and 2007 due to reported
losses being greater than expectations.
The Lloyds Operations recorded $0.6 million of prior period net savings comprised of savings of
$3.1 million for marine business due to favorable loss activity in the liability and cargo lines,
partially offset by deficiencies of $1.1 million in the international E&O line due to higher
reported loss activity and $0.5 million in our engineering book due to a large reported loss.
Reserves for the run off Property book were strengthened by an additional $0.5 million after worse
than expected claims development in the quarter.
Our management believes that the estimates for the reserves for losses and LAE 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
hurricane reserves, on a regular basis.
Commission Expenses
Commission expenses paid to brokers and agents are generally based on a percentage of gross written
premiums and are partially offset by ceding commissions we may receive on ceded written premiums.
Commissions are generally deferred and recorded as deferred policy acquisition costs to the extent
that they relate to unearned premium. The percentage of commission expenses to net earned premiums
for the 2010 second quarter and six month period were 15.9% and 15.7% compared to 15.5% and 14.6%
for the comparable periods in 2009. The increase in the net commission ratios for the three and
six month periods of 2010 when compared to the same periods in 2009 were mostly attributable to
greater retentions for net premiums earned in 2010 for the 2009 underwriting year, particularly on
our marine quota share treaties, which have reduced the ceding commission benefit. In addition,
reinstatement costs of $7.9 million recorded in the second quarter of 2010 resulting from both the
Deepwater Horizon and West Atlas losses resulted in lower net earned premiums which increased the
net commission ratios.
Other Operating Expenses
Other operating expenses increased $1.5 million and $5.5 million for the 2010 second quarter and
six month periods compared to the same periods in 2009. The increase in other operating expenses in
the first six months of 2010 compared to 2009 was due primarily to investments in new underwriting
teams, additional letter of credit fees due to the increased size of our facility, higher Lloyds
charges due to greater capacity and higher compliance costs, particularly Solvency II. For the
second quarter and six month periods in 2010, our operating expense ratios increased due to the
explanations above as well as the impact of the reinstatement costs of $7.9 million recorded in the
second quarter of 2010 resulting from both the Deepwater Horizon and West Atlas losses, resulting
in lower net earned premiums which increased the operating expense ratios.
57
INCOME TAXES
We recorded an income tax expense of $8.2 million and $14.6 million for the three and six months
ended June 30, 2010 compared to an income tax expense of $10.1 million and $14.3 million for the
comparable period in 2009, respectively. Our effective tax rates were 30.2% and 30.0% for the
second quarter and six month periods in 2010 compared to 28.8% and 28.6%, respectively. Our
effective tax rate is typically less than 35% due to permanent differences between book and tax
return income, with the most significant item being tax exempt interest. The effective tax rate on
net investment income was 25.9% for the 2010 six month period compared to 25.1% for the same period
in 2009. As of June 30, 2010 and December 31, 2009 the net deferred federal, foreign, state and
local tax assets were $11.2 million and $31.2 million, respectively.
We had net state and local deferred tax assets amounting to potential future tax benefits of $2.8
million and $2.6 million at June 30, 2010 and December 31, 2009, respectively. Included in the
deferred tax assets are state and local net operating loss carry-forwards of $2.0 million and $1.3
million at June 30, 2010 and December 31, 2009, respectively. A valuation allowance was
established for the full amount of these potential future tax benefits due to uncertainty
associated with their realization. Our state and local tax carry-forwards at June 30, 2010 expire
from 2023 to 2025.
Segment Information
We classify our 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 the operating expenses of the
wholly-owned underwriting management companies and The Navigators Group, Inc.s (the Parent
Companys) operating expenses and related income tax amounts. The Corporate segment consists of
the Parent Companys investment income, interest expense and the related tax effect.
We evaluate the performance of each segment based on its underwriting and GAAP results. The
Insurance Companies and the Lloyds Operations results are measured by taking into account net
earned premium, net loss and loss adjustment expenses, commission expenses, other operating
expenses 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 our two underwriting segments.
Insurance Companies
The Insurance Companies consist of Navigators Insurance Company, including its U.K. Branch, and its
wholly-owned subsidiary, Navigators Specialty Insurance Company. They are primarily engaged in
underwriting marine insurance and related lines of business, professional liability insurance and
specialty lines of business including contractors general liability insurance, commercial umbrella
and primary and excess casualty businesses. Navigators Specialty Insurance Company underwrites
specialty and professional liability insurance on an excess and surplus lines basis. Navigators
Specialty Insurance Company is 100% reinsured by Navigators Insurance Company.
58
The following table sets forth the results of operations for the Insurance Companies for the three
and six months ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
170,641 |
|
|
$ |
189,385 |
|
|
$ |
348,479 |
|
|
$ |
381,368 |
|
Net written premiums |
|
|
111,401 |
|
|
|
122,359 |
|
|
|
232,741 |
|
|
|
259,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
110,425 |
|
|
|
116,223 |
|
|
|
221,636 |
|
|
|
236,513 |
|
Net losses and LAE |
|
|
(64,862 |
) |
|
|
(68,843 |
) |
|
|
(133,265 |
) |
|
|
(138,996 |
) |
Commission expenses |
|
|
(14,615 |
) |
|
|
(15,060 |
) |
|
|
(28,977 |
) |
|
|
(30,028 |
) |
Other operating expenses |
|
|
(25,907 |
) |
|
|
(26,906 |
) |
|
|
(53,260 |
) |
|
|
(51,466 |
) |
Other income (expense) |
|
|
(114 |
) |
|
|
1,655 |
|
|
|
(1,091 |
) |
|
|
1,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
4,927 |
|
|
|
7,069 |
|
|
|
5,043 |
|
|
|
17,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
15,556 |
|
|
|
16,239 |
|
|
|
31,304 |
|
|
|
32,446 |
|
Net realized gains (losses) |
|
|
10,729 |
|
|
|
2,210 |
|
|
|
15,934 |
|
|
|
(6,697 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
31,212 |
|
|
|
25,518 |
|
|
|
52,281 |
|
|
|
43,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
9,654 |
|
|
|
7,171 |
|
|
|
15,117 |
|
|
|
11,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
21,558 |
|
|
$ |
18,347 |
|
|
$ |
37,164 |
|
|
$ |
31,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
58.7 |
% |
|
|
59.2 |
% |
|
|
60.1 |
% |
|
|
58.8 |
% |
Commission expense ratio |
|
|
13.2 |
% |
|
|
13.0 |
% |
|
|
13.1 |
% |
|
|
12.7 |
% |
Other operating expense ratio (1) |
|
|
23.6 |
% |
|
|
21.7 |
% |
|
|
24.5 |
% |
|
|
21.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
95.5 |
% |
|
|
93.9 |
% |
|
|
97.7 |
% |
|
|
92.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Other operating expenses and Other income (expense). |
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2010 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premiums |
|
|
Incurred |
|
|
Expenses |
|
|
Profit/(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
40,554 |
|
|
$ |
25,521 |
|
|
$ |
14,171 |
|
|
$ |
862 |
|
|
|
62.9 |
% |
|
|
35.0 |
% |
|
|
97.9 |
% |
Property Casualty |
|
|
50,171 |
|
|
|
24,936 |
|
|
|
19,192 |
|
|
|
6,043 |
|
|
|
49.7 |
% |
|
|
38.3 |
% |
|
|
88.0 |
% |
Professional Liability |
|
|
19,700 |
|
|
|
14,405 |
|
|
|
7,273 |
|
|
|
(1,978 |
) |
|
|
73.1 |
% |
|
|
36.9 |
% |
|
|
110.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
110,425 |
|
|
$ |
64,862 |
|
|
$ |
40,636 |
|
|
$ |
4,927 |
|
|
|
58.7 |
% |
|
|
36.8 |
% |
|
|
95.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premiums |
|
|
Incurred |
|
|
Expenses |
|
|
Profit/(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
34,678 |
|
|
$ |
25,238 |
|
|
$ |
10,572 |
|
|
$ |
(1,132 |
) |
|
|
72.8 |
% |
|
|
30.5 |
% |
|
|
103.3 |
% |
Property Casualty |
|
|
63,068 |
|
|
|
28,446 |
|
|
|
23,559 |
|
|
|
11,063 |
|
|
|
45.1 |
% |
|
|
37.4 |
% |
|
|
82.5 |
% |
Professional Liability |
|
|
18,477 |
|
|
|
15,159 |
|
|
|
6,180 |
|
|
|
(2,862 |
) |
|
|
82.0 |
% |
|
|
33.4 |
% |
|
|
115.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
116,223 |
|
|
$ |
68,843 |
|
|
$ |
40,311 |
|
|
$ |
7,069 |
|
|
|
59.2 |
% |
|
|
34.7 |
% |
|
|
93.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premiums |
|
|
Incurred |
|
|
Expenses |
|
|
Profit/(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
81,648 |
|
|
$ |
51,654 |
|
|
$ |
29,099 |
|
|
$ |
895 |
|
|
|
63.3 |
% |
|
|
35.6 |
% |
|
|
98.9 |
% |
Property Casualty |
|
|
101,252 |
|
|
|
57,062 |
|
|
|
39,508 |
|
|
|
4,682 |
|
|
|
56.4 |
% |
|
|
39.0 |
% |
|
|
95.4 |
% |
Professional Liability |
|
|
38,736 |
|
|
|
24,549 |
|
|
|
14,721 |
|
|
|
(534 |
) |
|
|
63.4 |
% |
|
|
38.0 |
% |
|
|
101.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
221,636 |
|
|
$ |
133,265 |
|
|
$ |
83,328 |
|
|
$ |
5,043 |
|
|
|
60.1 |
% |
|
|
37.6 |
% |
|
|
97.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premiums |
|
|
Incurred |
|
|
Expenses |
|
|
Profit/(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
71,839 |
|
|
$ |
51,628 |
|
|
$ |
22,194 |
|
|
$ |
(1,983 |
) |
|
|
71.9 |
% |
|
|
30.9 |
% |
|
|
102.8 |
% |
Property Casualty |
|
|
128,480 |
|
|
|
56,450 |
|
|
|
44,312 |
|
|
|
27,718 |
|
|
|
43.9 |
% |
|
|
34.5 |
% |
|
|
78.4 |
% |
Professional Liability |
|
|
36,194 |
|
|
|
30,918 |
|
|
|
13,132 |
|
|
|
(7,856 |
) |
|
|
85.4 |
% |
|
|
36.3 |
% |
|
|
121.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
236,513 |
|
|
$ |
138,996 |
|
|
$ |
79,638 |
|
|
$ |
17,879 |
|
|
|
58.8 |
% |
|
|
33.7 |
% |
|
|
92.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
Net earned premiums of the Insurance Companies decreased 5.0% and 6.3% respectively for the 2010
second quarter and six month periods compared to the same periods in 2009. The decrease was
primarily due to the reduction in net written premiums, primarily in our construction liability
business line. In addition, there was a total of $1.7 million of reinstatement premiums related to
both the Deepwater Horizon loss that occurred in April 2010 and further gross development on the
West Atlas loss which occurred in the second half of 2009.
The loss ratios for the 2010 second quarter and six month periods increased compared to the prior
year as a result of favorable prior year development of $4.8 million or 4.4 loss ratio points and
$5.5 million or 2.5 loss ratio points recorded in the comparable periods in 2009, respectively,
partially offset by the impact of the aforementioned reinstatement premiums. Generally, while the
Insurance Companies has experienced favorable prior period redundancies, the ultimate loss ratios
for the most recent underwriting years of 2009 and 2008 have been increasing due to softening
market conditions for the business written during those periods.
The annualized pre-tax yield on the Insurance Companies investment portfolio, excluding net
realized gains and losses and net other-than-temporary impairment losses recognized in earnings,
was 3.9% for the 2010 second quarter and six month periods compared to 4.1% and 4.2% for the
comparable 2009 periods. The average duration of the Insurance Companies invested assets was 4.4
years at June 30, 2010 and 4.8 years at June 30, 2009. Net investment income decreased in the
three months ended June 30, 2010 compared to the same period in 2009 primarily due to a decrease in
yields on short-term investments.
Lloyds Operations
The Lloyds Operations primarily underwrite marine and related lines of business along with
professional liability insurance, and construction coverages for onshore energy business at Lloyds
through Syndicate 1221. Our Lloyds Operations includes NUAL, a Lloyds underwriting agency which
manages Syndicate 1221.
61
The following table sets forth the results of operations of the Lloyds Operations for the three
and six months ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
82,927 |
|
|
$ |
83,344 |
|
|
$ |
175,234 |
|
|
$ |
166,620 |
|
Net written premiums |
|
|
53,604 |
|
|
|
60,648 |
|
|
|
121,581 |
|
|
|
124,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
51,046 |
|
|
|
53,645 |
|
|
|
103,904 |
|
|
|
98,301 |
|
Net losses and LAE |
|
|
(35,001 |
) |
|
|
(31,885 |
) |
|
|
(70,405 |
) |
|
|
(61,979 |
) |
Commission expenses |
|
|
(11,402 |
) |
|
|
(11,218 |
) |
|
|
(22,368 |
) |
|
|
(18,698 |
) |
Other operating expenses |
|
|
(8,617 |
) |
|
|
(6,117 |
) |
|
|
(15,860 |
) |
|
|
(12,098 |
) |
Other income (expense) |
|
|
(434 |
) |
|
|
651 |
|
|
|
1,635 |
|
|
|
599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
(4,408 |
) |
|
|
5,076 |
|
|
|
(3,094 |
) |
|
|
6,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
2,128 |
|
|
|
2,316 |
|
|
|
4,197 |
|
|
|
4,699 |
|
Net realized gains (losses) |
|
|
19 |
|
|
|
(83 |
) |
|
|
732 |
|
|
|
(3,413 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
(2,261 |
) |
|
|
7,309 |
|
|
|
1,835 |
|
|
|
7,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
(815 |
) |
|
|
2,624 |
|
|
|
688 |
|
|
|
2,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(1,446 |
) |
|
$ |
4,685 |
|
|
$ |
1,147 |
|
|
$ |
4,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
68.6 |
% |
|
|
59.4 |
% |
|
|
67.8 |
% |
|
|
63.0 |
% |
Commission expense ratio |
|
|
22.3 |
% |
|
|
20.9 |
% |
|
|
21.5 |
% |
|
|
19.0 |
% |
Other operating expense ratio (1) |
|
|
17.7 |
% |
|
|
10.2 |
% |
|
|
13.7 |
% |
|
|
11.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
108.6 |
% |
|
|
90.5 |
% |
|
|
103.0 |
% |
|
|
93.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Other operating expenses and Other income (expense). |
Net earned premiums of the Lloyds Operations decreased 4.8% and increased 5.7% for the 2010 second
quarter and six month period compared to the same periods in 2009. The increase was primarily due
to greater net written premiums during 2009 and was partially offset by reinstatement premiums
related to Deepwater Horizon and West Atlas that reduced net earned premiums $6.2 million in the
second quarter.
The loss ratios of 68.6% and 67.8% for the three and six months ended June 30, 2010 were negatively
impacted by the aforementioned reinstatement premiums. The Lloyds Operations realized prior year
reserve redundancies of $0.4 million, or 0.8 loss ratio points, and $1.0 million, or 1.0 loss ratio
points, in the three and six months ended June 30, 2010. The loss ratio of 63.0% for the six months
ended June 30, 2009 was favorably impacted by prior period loss reserve redundancies of $5.2
million, or 5.3 loss ratio points. Generally, while the Lloyds Operations have experienced
favorable prior period net redundancies in calendar years 2009 and 2008, ultimate loss ratios for
the more recent underwriting years of 2009 and 2008 have been increasing due to softening market
conditions for the business written during those periods.
The annualized pre-tax yield on the Lloyds Operations investment portfolio, excluding net
realized gains and losses and net other-than-temporary impairment losses recognized in earnings,
was 2.4% and 2.3% respectively, for the 2010 second quarter and six month period compared to 2.6%
and 2.7% respectively, for the comparable period in 2009. The average duration of the Lloyds
Operations invested assets at June 30, 2010 was 2.0 years compared to 1.6 years at June 30, 2009.
Net investment income decreased in the six months ended June 30, 2010 compared to the same period
in 2009 primarily due to a decrease in yields on short-term investments. Such yields are net of
interest credits to certain reinsurers for funds withheld by our Lloyds Operations.
62
Investments
The following tables set forth our cash and investments as of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
OTTI |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Cost or |
|
|
Recognized |
|
June 30, 2010 |
|
Fair Value |
|
|
Gains |
|
|
(Losses) |
|
|
Amortized Cost |
|
|
in OCI |
|
|
|
($ in thousands) |
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
$ |
493,675 |
|
|
$ |
14,409 |
|
|
$ |
(2 |
) |
|
$ |
479,268 |
|
|
$ |
|
|
States, municipalities and political
subdivisions |
|
|
406,757 |
|
|
|
17,332 |
|
|
|
(638 |
) |
|
|
390,063 |
|
|
|
|
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
478,083 |
|
|
|
21,560 |
|
|
|
|
|
|
|
456,523 |
|
|
|
|
|
Residential mortgage obligations |
|
|
29,727 |
|
|
|
|
|
|
|
(4,990 |
) |
|
|
34,717 |
|
|
|
(3,852 |
) |
Asset-backed securities |
|
|
10,845 |
|
|
|
377 |
|
|
|
(9 |
) |
|
|
10,477 |
|
|
|
(9 |
) |
Commercial mortgage-backed securities |
|
|
106,791 |
|
|
|
4,237 |
|
|
|
(242 |
) |
|
|
102,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
625,446 |
|
|
|
26,174 |
|
|
|
(5,241 |
) |
|
|
604,513 |
|
|
|
(3,861 |
) |
Corporate bonds |
|
|
334,750 |
|
|
|
15,537 |
|
|
|
(1,964 |
) |
|
|
321,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,860,628 |
|
|
|
73,452 |
|
|
|
(7,845 |
) |
|
|
1,795,021 |
|
|
|
(3,861 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
72,862 |
|
|
|
11,316 |
|
|
|
(1,429 |
) |
|
|
62,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
11,941 |
|
|
|
|
|
|
|
|
|
|
|
11,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
164,827 |
|
|
|
|
|
|
|
|
|
|
|
164,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,110,258 |
|
|
$ |
84,768 |
|
|
$ |
(9,274 |
) |
|
$ |
2,034,764 |
|
|
$ |
(3,861 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
OTTI |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Cost or |
|
|
Recognized |
|
December 31, 2009 |
|
Fair Value |
|
|
Gains |
|
|
(Losses) |
|
|
Amortized Cost |
|
|
in OCI |
|
($ in thousands) |
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
$ |
471,598 |
|
|
$ |
7,397 |
|
|
$ |
(597 |
) |
|
$ |
464,798 |
|
|
$ |
|
|
States, municipalities and political
subdivisions |
|
|
676,699 |
|
|
|
25,044 |
|
|
|
(2,917 |
) |
|
|
654,572 |
|
|
|
|
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
283,578 |
|
|
|
12,607 |
|
|
|
(98 |
) |
|
|
271,069 |
|
|
|
|
|
Residential mortgage obligations |
|
|
31,071 |
|
|
|
|
|
|
|
(7,246 |
) |
|
|
38,317 |
|
|
|
(5,723 |
) |
Asset-backed securities |
|
|
16,469 |
|
|
|
612 |
|
|
|
(34 |
) |
|
|
15,891 |
|
|
|
(23 |
) |
Commercial mortgage-backed securities |
|
|
100,393 |
|
|
|
594 |
|
|
|
(5,028 |
) |
|
|
104,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
431,511 |
|
|
|
13,813 |
|
|
|
(12,406 |
) |
|
|
430,104 |
|
|
|
(5,746 |
) |
Corporate bonds |
|
|
236,861 |
|
|
|
9,111 |
|
|
|
(759 |
) |
|
|
228,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,816,669 |
|
|
|
55,365 |
|
|
|
(16,679 |
) |
|
|
1,777,983 |
|
|
|
(5,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
62,610 |
|
|
|
15,244 |
|
|
|
(10 |
) |
|
|
47,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
176,799 |
|
|
|
|
|
|
|
|
|
|
|
176,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,056,587 |
|
|
$ |
70,609 |
|
|
$ |
(16,689 |
) |
|
$ |
2,002,667 |
|
|
$ |
(5,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets increased in the first six months of 2010 primarily due to available cash flow from operations
partially offset by the funding of share
repurchases of $46.2 million. The
annualized pre-tax yields of our investment portfolio, excluding net realized gains and losses and
net other-than-temporary impairment losses recognized in earnings, were 3.6% and 3.5% for the 2010
second quarter and six month periods compared to 3.8% and 3.9% for the comparable 2009 periods.
The tax exempt securities portion of our investment portfolio has decreased by $258.1 million to
approximately 20.2% of the fixed maturities investment portfolio at June 30, 2010 compared to June
30, 2009. As a result, the effective tax rate on net investment income was 27.2% for the three
months ended June 30, 2010 compared to 25.2% for the comparable 2009 period.
All fixed maturities and equity securities are carried at fair value. All prices for our fixed
maturities and equity securities categorized as Level 1 or Level 2 in the fair value hierarchy, as
defined in the Financial Accounts Standards Board Accounting Standards Codification 820 (ASC
820), Fair Value Measurements, are received from independent pricing services utilized by one of
our outside investment managers whom we employ to assist us with investment accounting services.
This manager utilizes a pricing committee which approves the use of one or more independent pricing
service vendors. The pricing committee consists of five or more members, one from senior
management and one from the accounting group with the remainder from the asset class specialists
and client strategists. The pricing source of each security is determined in accordance with the
pricing source procedures approved by the pricing committee. The investment manager uses
supporting documentation received from the independent pricing service vendor detailing the inputs,
models and processes used in the independent pricing service vendors evaluation process to
determine the appropriate fair value hierarchy. Any pricing where the input is based solely on a
broker price is deemed to be a Level 3 price.
Management has reviewed this process by which the manager determines the prices and has obtained
alternative pricing to validate a sampling of the pricing and assess their reasonableness.
64
The following table presents, for each of the fair value hierarchy levels, the fair value of our
fixed maturities and equity securities by asset class at June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
$ |
319,410 |
|
|
$ |
174,265 |
|
|
$ |
|
|
|
$ |
493,675 |
|
States, municipalities and political
subdivisions |
|
|
|
|
|
|
406,757 |
|
|
|
|
|
|
|
406,757 |
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
|
|
|
|
478,083 |
|
|
|
|
|
|
|
478,083 |
|
Residential mortgage obligations |
|
|
|
|
|
|
29,727 |
|
|
|
|
|
|
|
29,727 |
|
Asset-backed securities |
|
|
|
|
|
|
10,845 |
|
|
|
|
|
|
|
10,845 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
106,791 |
|
|
|
|
|
|
|
106,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
625,446 |
|
|
|
|
|
|
|
625,446 |
|
Corporate bonds |
|
|
|
|
|
|
334,750 |
|
|
|
|
|
|
|
334,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
319,410 |
|
|
|
1,541,218 |
|
|
|
|
|
|
|
1,860,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
72,862 |
|
|
|
|
|
|
|
|
|
|
|
72,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
392,272 |
|
|
$ |
1,541,218 |
|
|
$ |
|
|
|
$ |
1,933,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no significant judgments made in classifying instruments in the fair value hierarchy.
The scheduled maturity dates for fixed maturity securities by the number of years until maturity at
June 30, 2010 are shown in the following table:
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
|
|
|
June 30, 2010 |
|
Fair |
|
|
Amortized |
|
to Maturity |
|
Value |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
150,280 |
|
|
$ |
148,958 |
|
Due after one year through five years |
|
|
480,008 |
|
|
|
464,430 |
|
Due after five years through ten years |
|
|
350,766 |
|
|
|
330,705 |
|
Due after ten years |
|
|
254,128 |
|
|
|
246,415 |
|
Mortgage- and asset-backed (including GNMAs) |
|
|
625,446 |
|
|
|
604,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,860,628 |
|
|
$ |
1,795,021 |
|
|
|
|
|
|
|
|
65
The following tables set forth our U.S. Treasury and Agency Bonds and foreign government bonds as
of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
June 30, 2010 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bonds |
|
$ |
331,947 |
|
|
$ |
11,046 |
|
|
$ |
(2 |
) |
|
$ |
320,903 |
|
Agency bonds |
|
|
139,055 |
|
|
|
2,953 |
|
|
|
|
|
|
|
136,102 |
|
Foreign government bonds |
|
|
22,673 |
|
|
|
410 |
|
|
|
|
|
|
|
22,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
493,675 |
|
|
$ |
14,409 |
|
|
$ |
(2 |
) |
|
$ |
479,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
December 31, 2009 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bonds |
|
$ |
362,614 |
|
|
$ |
5,549 |
|
|
$ |
(560 |
) |
|
$ |
357,625 |
|
Agency bonds |
|
|
82,739 |
|
|
|
1,489 |
|
|
|
|
|
|
|
81,250 |
|
Foreign government bonds |
|
|
26,245 |
|
|
|
359 |
|
|
|
(37 |
) |
|
|
25,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
471,598 |
|
|
$ |
7,397 |
|
|
$ |
(597 |
) |
|
$ |
464,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
The following table sets forth the fifteen largest holdings categorized as state, municipalities
and political subdivisions by counterparty as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
Cost or |
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
Amortized |
|
|
S&P |
|
|
Value |
|
|
Gains/(Losses) |
|
|
Cost |
|
|
Rating |
|
|
($ in thousands) |
Issuers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas State Transportation Commission |
|
$ |
15,491 |
|
|
$ |
(134 |
) |
|
$ |
15,625 |
|
|
AAA |
University of Pittsburgh |
|
|
14,216 |
|
|
|
772 |
|
|
|
13,444 |
|
|
AA |
City of San Antonio |
|
|
11,803 |
|
|
|
825 |
|
|
|
10,978 |
|
|
AA |
Virginia Resources Authority |
|
|
11,585 |
|
|
|
1,058 |
|
|
|
10,527 |
|
|
AAA |
Salt River Project Agricultural Improvement |
|
|
9,900 |
|
|
|
161 |
|
|
|
9,739 |
|
|
AA |
New York City Transitional Finance Authority |
|
|
8,674 |
|
|
|
251 |
|
|
|
8,423 |
|
|
AA+ |
Illinois Finance Authority |
|
|
8,146 |
|
|
|
7 |
|
|
|
8,139 |
|
|
BBB+ |
County of Hamilton |
|
|
7,993 |
|
|
|
196 |
|
|
|
7,797 |
|
|
A+ |
New York Local Government Assistance |
|
|
7,018 |
|
|
|
477 |
|
|
|
6,541 |
|
|
AA |
Missouri Highway and Transportation
Comm |
|
|
6,992 |
|
|
|
292 |
|
|
|
6,700 |
|
|
AA+ |
Delaware Transportation Authority |
|
|
6,983 |
|
|
|
688 |
|
|
|
6,295 |
|
|
AA |
Virginia College Building Authority |
|
|
6,733 |
|
|
|
406 |
|
|
|
6,327 |
|
|
AA+ |
City of Chicago |
|
|
6,459 |
|
|
|
62 |
|
|
|
6,397 |
|
|
AA |
Purdue University |
|
|
6,302 |
|
|
|
(10 |
) |
|
|
6,312 |
|
|
AA |
Pennsylvania Turnpike Commission |
|
|
6,175 |
|
|
|
119 |
|
|
|
6,056 |
|
|
A+ |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
134,470 |
|
|
|
5,170 |
|
|
|
129,300 |
|
|
|
All Other |
|
|
272,287 |
|
|
|
11,524 |
|
|
|
260,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
406,757 |
|
|
$ |
16,694 |
|
|
$ |
390,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
The following table sets forth the composition of the investments categorized as states,
municipalities and political subdivisions in our portfolio by generally equivalent S&P and Moodys
ratings (not all securities in our portfolio are rated by both S&P and Moodys) as of June 30,
2010. The securities that are not rated in the table below are primarily state bonds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent |
|
Equivalent |
|
|
|
|
|
|
|
|
|
Net |
|
S&P |
|
Moodys |
|
|
|
|
|
|
|
|
|
Unrealized |
|
Rating |
|
Rating |
|
Fair Value |
|
|
Book Value |
|
|
Gain/(Loss) |
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA/AA/A |
|
Aaa/Aa/A |
|
$ |
381,759 |
|
|
$ |
365,283 |
|
|
$ |
16,476 |
|
BBB |
|
Baa |
|
|
15,790 |
|
|
|
15,543 |
|
|
|
247 |
|
BB |
|
Ba |
|
|
2,000 |
|
|
|
2,007 |
|
|
|
(7 |
) |
B |
|
B |
|
|
|
|
|
|
|
|
|
|
|
|
CCC or lower |
|
Caa or lower |
|
|
|
|
|
|
|
|
|
|
|
|
NR |
|
NR |
|
|
7,208 |
|
|
|
7,230 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
406,757 |
|
|
$ |
390,063 |
|
|
$ |
16,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
We own $160 million of municipal securities which are credit enhanced by various financial
guarantors. As of June 30, 2010, the average underlying credit rating for these securities is A+.
There has been no material adverse impact to our investment portfolio or results of operations as a
result of downgrades of the credit ratings for several of the financial guarantors.
We analyze our mortgage-backed and asset-backed securities by credit quality of the underlying
collateral distinguishing between the securities issued by the Federal National Mortgage
Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) which are Federal
government sponsored entities, and the non-FNMA and non-FHLMC securities broken out by prime, Alt-A
and subprime collateral. The securities issued by FNMA and FHLMC are the obligations of each
respective entity. Legislation has provided for guarantees by the U.S. Government of up to $100
billion each for FNMA and FHLMC.
Prime collateral consists of mortgages or other collateral from the most creditworthy borrowers.
Alt-A collateral consists of mortgages or other collateral from borrowers which have a risk
potential that is greater than prime but less than subprime. The subprime collateral consists of
mortgages or other collateral from borrowers with low credit ratings. Such subprime and Alt-A
categories are as defined by S&P.
68
The following tables set forth our agency mortgage-backed securities, residential mortgage
obligations and asset-backed securities by those issued by the Government National Mortgage
Association (GNMA), FNMA, FHLMC, and the quality category (prime, Alt-A and subprime) for all
other such investments at June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Agency
mortgage-backed
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
$ |
254,693 |
|
|
$ |
7,365 |
|
|
$ |
|
|
|
$ |
247,328 |
|
FNMA |
|
|
156,380 |
|
|
|
10,534 |
|
|
|
|
|
|
|
145,846 |
|
FHLMC |
|
|
67,010 |
|
|
|
3,661 |
|
|
|
|
|
|
|
63,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
478,083 |
|
|
$ |
21,560 |
|
|
$ |
|
|
|
$ |
456,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Residential mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
$ |
28,268 |
|
|
$ |
|
|
|
$ |
(4,674 |
) |
|
$ |
32,942 |
|
Alt-A |
|
|
1,459 |
|
|
|
|
|
|
|
(316 |
) |
|
|
1,775 |
|
Subprime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
29,727 |
|
|
$ |
|
|
|
$ |
(4,990 |
) |
|
$ |
34,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
Asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
$ |
10,701 |
|
|
$ |
377 |
|
|
$ |
|
|
|
$ |
10,324 |
|
Alt-A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime |
|
|
144 |
|
|
|
|
|
|
|
(9 |
) |
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,845 |
|
|
$ |
377 |
|
|
$ |
(9 |
) |
|
$ |
10,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
The following table sets forth the fifteen largest residential mortgage obligations as of June 30,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue |
|
Fair |
|
|
Book |
|
|
Unrealized |
|
|
S&P |
|
Moodys |
Security Description |
|
Date |
|
Value |
|
|
Value |
|
|
(Loss) |
|
|
Rating |
|
Rating |
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gmac Mtg Corp Ln Tr 05 Ar6 2A1 |
|
2005 |
|
$ |
2,786 |
|
|
$ |
3,191 |
|
|
$ |
(405 |
) |
|
CCC |
|
Caa3 |
Merrill Lynch Mtg Inv Inc 05 A9 2A1E |
|
2005 |
|
|
2,612 |
|
|
|
3,154 |
|
|
|
(542 |
) |
|
CCC |
|
NR |
Wells Fargo Mtg Bkd Secs Tr 06 Ar5 2A1 |
|
2006 |
|
|
2,260 |
|
|
|
2,482 |
|
|
|
(222 |
) |
|
NR |
|
Caa2 |
Wells Fargo Mtg Bkd Secs Tr 05 Ar4 2A2 |
|
2005 |
|
|
914 |
|
|
|
979 |
|
|
|
(65 |
) |
|
NR |
|
Ba2 |
GSR Mortgage Loan Trust 06 Ar1 2A1 |
|
2006 |
|
|
653 |
|
|
|
764 |
|
|
|
(111 |
) |
|
B+ |
|
NR |
JP Morgan Mortgage Trust 07-A3 1A1 |
|
2007 |
|
|
651 |
|
|
|
816 |
|
|
|
(165 |
) |
|
CCC |
|
NR |
Bear Stearns Adjustable Rate 06 1A1 |
|
2006 |
|
|
646 |
|
|
|
741 |
|
|
|
(95 |
) |
|
NR |
|
B2 |
JP Morgan Mortgage Trust 06 A4 1A1 |
|
2006 |
|
|
645 |
|
|
|
820 |
|
|
|
(175 |
) |
|
NR |
|
Caa2 |
Citigroup Mtg Ln Tr Inc 04 Hyb3 1A |
|
2004 |
|
|
616 |
|
|
|
655 |
|
|
|
(39 |
) |
|
AA- |
|
A1 |
Wells Fargo Mtg Backed Secs Trust 06 AR6 3A |
|
2006 |
|
|
603 |
|
|
|
706 |
|
|
|
(103 |
) |
|
NR |
|
B3 |
Master Adj Rate Mtg Trust 05 6 5A1 |
|
2005 |
|
|
596 |
|
|
|
695 |
|
|
|
(99 |
) |
|
CCC |
|
Caa2 |
Banc Of America Fdg Corp 06 D 3A1 |
|
2006 |
|
|
580 |
|
|
|
734 |
|
|
|
(154 |
) |
|
CCC |
|
NR |
Banc Of America Fdg Corp 05 F 4A1 |
|
2005 |
|
|
576 |
|
|
|
698 |
|
|
|
(122 |
) |
|
CCC |
|
B1 |
Bear Stearns Adjustable Rate 05 3 2A1 |
|
2005 |
|
|
565 |
|
|
|
613 |
|
|
|
(48 |
) |
|
CCC |
|
Caa2 |
Mortgageit Trust 05 1 2A |
|
2005 |
|
|
544 |
|
|
|
626 |
|
|
|
(82 |
) |
|
AAA |
|
Aaa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
15,247 |
|
|
|
17,674 |
|
|
|
(2,427 |
) |
|
|
|
|
All Other |
|
|
|
|
14,480 |
|
|
|
17,043 |
|
|
|
(2,563 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
29,727 |
|
|
$ |
34,717 |
|
|
$ |
(4,990 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details of the collateral of our asset-backed securities portfolio as of June 30, 2010 are
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Amortized |
|
|
Unrealized |
|
|
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
BB |
|
|
CC |
|
|
Fair Value |
|
|
Cost |
|
|
Gain/(Loss) |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Loans |
|
$ |
2,393 |
|
|
$ |
4,527 |
|
|
$ |
|
|
|
$ |
985 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,905 |
|
|
$ |
7,692 |
|
|
$ |
213 |
|
Credit Cards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
34 |
|
|
|
34 |
|
|
|
|
|
Miscellaneous |
|
|
2,762 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
142 |
|
|
|
2,906 |
|
|
|
2,751 |
|
|
|
155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,155 |
|
|
$ |
4,527 |
|
|
$ |
|
|
|
$ |
987 |
|
|
$ |
34 |
|
|
$ |
142 |
|
|
$ |
10,845 |
|
|
$ |
10,477 |
|
|
$ |
368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
The commercial mortgage-backed securities are all rated investment grade by S&P or Moodys. The
following table sets forth the fifteen largest commercial mortgage backed securities as of June 30,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue |
|
Fair |
|
|
Book |
|
|
Underlying |
|
|
Delinq. |
|
|
Subord. |
|
S&P |
|
Moodys |
|
Security Description |
|
Date |
|
Value |
|
|
Value |
|
|
LTV % |
|
|
Rate |
|
|
Level |
|
Rating |
|
Rating |
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four Times Square Tr 06-4Ts A |
|
2006 |
|
$ |
7,400 |
|
|
$ |
7,028 |
|
|
|
39.40 |
% |
|
|
0.00 |
% |
|
7.99% |
|
AAA |
|
Aa1 |
Wachovia Bk Comm Mtg Tr 05 C18-A4 |
|
2005 |
|
|
7,369 |
|
|
|
6,870 |
|
|
|
97.28 |
% |
|
|
13.62 |
% |
|
33.90% |
|
AAA |
|
Aaa |
GS Mtg Secs Corp II 05 GG4 A4A |
|
2005 |
|
|
6,932 |
|
|
|
6,615 |
|
|
|
73.28 |
% |
|
|
15.11 |
% |
|
32.03% |
|
AAA |
|
Aaa |
LB-UBS Comm Mtg Tr 06 C7 A3 |
|
2006 |
|
|
6,501 |
|
|
|
6,328 |
|
|
|
68.03 |
% |
|
|
7.79 |
% |
|
30.00% |
|
AAA |
|
NR |
Citigroup/Deutsche Bk Comm Mtg 05 CD1 A4 |
|
2005 |
|
|
6,267 |
|
|
|
5,887 |
|
|
|
71.29 |
% |
|
|
10.79 |
% |
|
31.52% |
|
AAA |
|
Aaa |
Bear Stearns Comm Mtg Secs 06 T22 A4 |
|
2006 |
|
|
5,235 |
|
|
|
4,895 |
|
|
|
57.65 |
% |
|
|
0.56 |
% |
|
28.37% |
|
NR |
|
Aaa |
Bear Stearns Comm Mtg Secs 07 PW15 A4 |
|
2007 |
|
|
5,012 |
|
|
|
5,133 |
|
|
|
70.76 |
% |
|
|
17.86 |
% |
|
30.37% |
|
A+ |
|
Aaa |
Banc Of America Comm Mtg Inc 07 1 A4 |
|
2007 |
|
|
4,809 |
|
|
|
4,777 |
|
|
|
77.05 |
% |
|
|
18.50 |
% |
|
30.53% |
|
NR |
|
Aaa |
Morgan Stanley Capital I 07 HQ11 A4 |
|
2007 |
|
|
4,720 |
|
|
|
4,784 |
|
|
|
73.44 |
% |
|
|
6.07 |
% |
|
30.15% |
|
A |
|
Aaa |
Commercial Mtg Pt Cert 05 C6 A5A |
|
2005 |
|
|
4,255 |
|
|
|
4,052 |
|
|
|
74.04 |
% |
|
|
9.81 |
% |
|
31.17% |
|
AAA |
|
Aaa |
Merrill Lynch Mtg Tr 05 CIP1 A4 |
|
2005 |
|
|
4,240 |
|
|
|
4,036 |
|
|
|
77.66 |
% |
|
|
14.30 |
% |
|
33.27% |
|
NR |
|
Aaa |
Citigroup Comm Mtg Tr 06 C5 A4 |
|
2006 |
|
|
3,567 |
|
|
|
3,510 |
|
|
|
73.25 |
% |
|
|
6.04 |
% |
|
30.32% |
|
NR |
|
Aaa |
Morgan Stanley Capital I 04 T13 A4 |
|
2004 |
|
|
3,444 |
|
|
|
3,329 |
|
|
|
58.34 |
% |
|
|
2.03 |
% |
|
16.18% |
|
NR |
|
Aaa |
CSFB Mtg Secs Corp 03 C3 A5 |
|
2003 |
|
|
2,682 |
|
|
|
2,534 |
|
|
|
62.83 |
% |
|
|
4.30 |
% |
|
20.78% |
|
AAA |
|
Aaa |
Greenwich CAP Comm Fdg Corp 04 GG1 A7 |
|
2004 |
|
|
2,672 |
|
|
|
2,488 |
|
|
|
72.39 |
% |
|
|
4.10 |
% |
|
17.87% |
|
AAA |
|
Aaa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
75,105 |
|
|
|
72,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
|
|
|
31,686 |
|
|
|
30,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
106,791 |
|
|
$ |
102,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the amount and percentage of our fixed maturities and short-term
investments at June 30, 2010 by S&P credit rating or, if an S&P rating is not available, the
equivalent Moodys rating. The table includes fixed maturities and short-term investments at fair
value, and the total rating is the weighted average quality rating.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
Rating |
|
|
|
Fair |
|
|
of |
|
Description |
|
Rating |
|
Value |
|
|
Total |
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Extremely Strong |
|
AAA |
|
$ |
1,303,638 |
|
|
|
65 |
% |
Very Strong |
|
AA |
|
|
301,394 |
|
|
|
15 |
% |
Strong |
|
A |
|
|
321,603 |
|
|
|
16 |
% |
Adequate |
|
BBB |
|
|
63,726 |
|
|
|
3 |
% |
Speculative |
|
BB & below |
|
|
27,886 |
|
|
|
1 |
% |
Not Rated |
|
NR |
|
|
7,208 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
AA |
|
$ |
2,025,455 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
71
Following is a list of the top fifteen corporate bond holdings for fixed maturities at fair value
at June 30, 2010. All such fixed maturities are rated investment grade by S&P and Moodys. These
holdings represent direct obligations of the issuer or its subsidiaries and exclude any government
guaranteed or government sponsored organizations, securitized, credit enhanced or collateralized
asset-backed or mortgage-backed securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
Cost or |
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
Amortized |
|
|
S&P |
|
|
Value |
|
|
Gains/(Losses) |
|
|
Cost |
|
|
Rating |
|
|
($ in thousands) |
Issuers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Electric |
|
$ |
21,618 |
|
|
$ |
1,901 |
|
|
$ |
19,717 |
|
|
AA |
Barclays Capital PLC |
|
|
17,167 |
|
|
|
50 |
|
|
|
17,118 |
|
|
AA- |
Bank of America Corp |
|
|
16,293 |
|
|
|
231 |
|
|
|
16,063 |
|
|
A- |
Wells Fargo & Co |
|
|
15,952 |
|
|
|
248 |
|
|
|
15,703 |
|
|
A+ |
Citigroup Inc |
|
|
12,776 |
|
|
|
11 |
|
|
|
12,765 |
|
|
BBB+ |
Morgan Stanley |
|
|
12,681 |
|
|
|
(71 |
) |
|
|
12,752 |
|
|
A- |
Southern Co |
|
|
12,541 |
|
|
|
733 |
|
|
|
11,808 |
|
|
A |
Goldman Sachs Group Inc |
|
|
12,360 |
|
|
|
97 |
|
|
|
12,262 |
|
|
A- |
ConocoPhilips |
|
|
11,787 |
|
|
|
624 |
|
|
|
11,162 |
|
|
A |
J.P. Morgan Chase & Co |
|
|
11,552 |
|
|
|
239 |
|
|
|
11,313 |
|
|
A |
Baker Hughes Inc |
|
|
10,698 |
|
|
|
175 |
|
|
|
10,523 |
|
|
A |
Deutsche Bank AG |
|
|
10,071 |
|
|
|
140 |
|
|
|
9,932 |
|
|
A+ |
Transcanada Corp |
|
|
8,757 |
|
|
|
703 |
|
|
|
8,054 |
|
|
A- |
Pepsico Inc |
|
|
8,732 |
|
|
|
575 |
|
|
|
8,157 |
|
|
A- |
Consolidated Edison |
|
|
8,573 |
|
|
|
431 |
|
|
|
8,142 |
|
|
A- |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
191,558 |
|
|
|
6,087 |
|
|
|
185,471 |
|
|
|
All Other |
|
|
143,192 |
|
|
|
7,486 |
|
|
|
135,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
334,750 |
|
|
$ |
13,573 |
|
|
$ |
321,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
The following table sets forth the fifteen largest equity securities holdings as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains/(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Issuers: |
|
|
|
|
|
|
|
|
|
|
|
|
Vanguard Total Stock Market Index |
|
$ |
4,380 |
|
|
$ |
1,043 |
|
|
$ |
3,337 |
|
Vanguard Emerging Market Stock Index |
|
|
3,920 |
|
|
|
1,484 |
|
|
|
2,436 |
|
Vanguard Pacific Stock Index |
|
|
3,696 |
|
|
|
770 |
|
|
|
2,926 |
|
Vanguard European Stock Index |
|
|
3,229 |
|
|
|
638 |
|
|
|
2,591 |
|
Nextera Energy Inc |
|
|
2,569 |
|
|
|
123 |
|
|
|
2,446 |
|
Astrazeneca PLC |
|
|
2,196 |
|
|
|
450 |
|
|
|
1,746 |
|
Johnson & Johnson |
|
|
2,094 |
|
|
|
31 |
|
|
|
2,063 |
|
EI Du Pont De Nemours & Co |
|
|
2,093 |
|
|
|
452 |
|
|
|
1,641 |
|
Conocophillips |
|
|
2,081 |
|
|
|
231 |
|
|
|
1,850 |
|
Bristol-Myers Squibb Co |
|
|
2,049 |
|
|
|
269 |
|
|
|
1,780 |
|
Kimberly Clark Corp |
|
|
2,001 |
|
|
|
319 |
|
|
|
1,681 |
|
The Boeing Co |
|
|
1,992 |
|
|
|
600 |
|
|
|
1,392 |
|
Philip Morris International Inc |
|
|
1,992 |
|
|
|
288 |
|
|
|
1,704 |
|
HJ Heinz Co |
|
|
1,986 |
|
|
|
117 |
|
|
|
1,869 |
|
Altria Group Inc |
|
|
1,966 |
|
|
|
346 |
|
|
|
1,620 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
38,244 |
|
|
|
7,161 |
|
|
|
31,082 |
|
All Other |
|
|
34,618 |
|
|
|
2,726 |
|
|
|
31,893 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
72,862 |
|
|
$ |
9,887 |
|
|
$ |
62,975 |
|
|
|
|
|
|
|
|
|
|
|
73
The following table summarizes all securities in a gross unrealized loss position at June 30, 2010
and December 31, 2009, showing the aggregate fair value and gross unrealized loss by the length of
time those securities had continuously been in a gross unrealized loss position as well as the
number of securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Number of |
|
|
Fair |
|
|
Gross |
|
|
Number of |
|
|
Fair |
|
|
Gross |
|
|
|
Securities |
|
|
Value |
|
|
Unrealized Loss |
|
|
Securities |
|
|
Value |
|
|
Unrealized Loss |
|
|
|
($ in thousands except # of securities) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
2 |
|
|
$ |
12,891 |
|
|
$ |
2 |
|
|
|
24 |
|
|
$ |
116,566 |
|
|
$ |
597 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
2 |
|
|
|
12,891 |
|
|
|
2 |
|
|
|
24 |
|
|
|
116,566 |
|
|
|
597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
7 |
|
|
|
10,718 |
|
|
|
77 |
|
|
|
47 |
|
|
|
108,290 |
|
|
|
2,291 |
|
7-12 Months |
|
|
6 |
|
|
|
23,920 |
|
|
|
315 |
|
|
|
4 |
|
|
|
3,534 |
|
|
|
112 |
|
> 12 Months |
|
|
15 |
|
|
|
13,342 |
|
|
|
246 |
|
|
|
23 |
|
|
|
17,777 |
|
|
|
514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
28 |
|
|
|
47,980 |
|
|
|
638 |
|
|
|
74 |
|
|
|
129,601 |
|
|
|
2,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
18,385 |
|
|
|
98 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
18,385 |
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
64 |
|
|
|
29,727 |
|
|
|
4,990 |
|
|
|
73 |
|
|
|
31,071 |
|
|
|
7,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
64 |
|
|
|
29,727 |
|
|
|
4,990 |
|
|
|
73 |
|
|
|
31,071 |
|
|
|
7,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
3 |
|
|
|
178 |
|
|
|
9 |
|
|
|
4 |
|
|
|
637 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
3 |
|
|
|
178 |
|
|
|
9 |
|
|
|
4 |
|
|
|
637 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
28,103 |
|
|
|
324 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
4 |
|
|
|
10,392 |
|
|
|
242 |
|
|
|
21 |
|
|
|
45,135 |
|
|
|
4,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
4 |
|
|
|
10,392 |
|
|
|
242 |
|
|
|
32 |
|
|
|
73,238 |
|
|
|
5,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
11 |
|
|
|
48,701 |
|
|
|
1,889 |
|
|
|
13 |
|
|
|
33,275 |
|
|
|
337 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
2 |
|
|
|
1,921 |
|
|
|
75 |
|
|
|
8 |
|
|
|
6,325 |
|
|
|
422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
13 |
|
|
|
50,622 |
|
|
|
1,964 |
|
|
|
21 |
|
|
|
39,600 |
|
|
|
759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
114 |
|
|
$ |
151,790 |
|
|
$ |
7,845 |
|
|
|
233 |
|
|
$ |
409,098 |
|
|
$ |
16,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
29 |
|
|
$ |
18,416 |
|
|
$ |
1,429 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
872 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
|
29 |
|
|
$ |
18,416 |
|
|
$ |
1,429 |
|
|
|
1 |
|
|
$ |
872 |
|
|
$ |
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The above
unrealized losses have been determined to be temporary based on our policies. See Critical
Accounting Estimates Impairment of Invested Assets in our 2009 Annual Report on Form 10-K for
additional information on our policies.
To determine whether the unrealized loss on structured securities is other-than-temporary, we
project an expected principal loss under a range of scenarios and utilize the most likely outcomes.
The analysis relies on actual collateral performance measures such as default rate, prepayment rate
and loss severity. These assumptions are applied throughout the remaining term of the deal,
incorporating the transaction structure and priority of payments, to generate loss adjusted cash
flows. Results of the analysis will indicate whether the security ultimately incurs a loss or
whether there is a material impact on yield due to either a projected loss or a change in cash flow
timing. A breakeven default rate is also calculated. A comparison to the break even default rate
to the actual default rate provides an indication of the level of cushion or coverage to the first
dollar principal loss. The analysis applies the stated assumptions throughout the remaining term of
the transaction to forecast cash flows, which are then applied through the transaction structure to
determine whether there is a loss to the security. For securities in which a tranche loss is
present, and the net present value of loss adjusted cash flows is less than book value, an
impairment is recognized. The output data also includes a number of additional metrics such as
average life remaining, original and current credit support, over 60 day delinquency and security
rating.
As of June 30, 2010, the largest single unrealized loss by issuer in the fixed maturities was $1.6
million.
The following table summarizes the gross unrealized investment losses by length of time where the
fair value is less than 80% of amortized cost as of June 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period for Which Fair Value is Less than 80% of Amortized Cost |
|
|
|
|
|
|
|
|
|
|
|
6 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
Longer than 3 |
|
|
or longer, less |
|
|
|
|
|
|
|
|
|
Less than 3 |
|
|
months, less |
|
|
than 12 |
|
|
12 months |
|
|
|
|
|
|
months |
|
|
than 6 months |
|
|
months |
|
|
or longer |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(1,318 |
) |
|
$ |
(1,318 |
) |
Equity securities |
|
|
(304 |
) |
|
|
(341 |
) |
|
|
|
|
|
|
|
|
|
|
(645 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(304 |
) |
|
$ |
(341 |
) |
|
$ |
|
|
|
$ |
(1,318 |
) |
|
$ |
(1,963 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of our investment portfolio may fluctuate significantly in response to various
factors such as changes in interest rates, investment quality ratings, equity prices, foreign
exchange rates and credit spreads. We do not have the intent to sell nor is it more likely than
not that we will have to sell debt securities in unrealized loss positions that are not other-than
temporarily impaired before recovery. We may realize investment losses to the extent our liquidity
needs require the disposition of fixed maturity securities in unfavorable interest rate, liquidity
or credit spread environments. Significant changes in the factors we consider when evaluating
investment for impairment losses could result in a significant change in impairment losses reported
in the consolidated financial statements.
75
The following table shows the S&P ratings and equivalent Moodys ratings of the fixed maturity
securities in our portfolio with gross unrealized losses at June 30, 2010. Not all of the
securities are 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 |
|
$ |
1,748 |
|
|
|
22 |
% |
|
$ |
109,189 |
|
|
|
72 |
% |
2 |
|
BBB |
|
Baa |
|
|
1,688 |
|
|
|
22 |
% |
|
|
11,749 |
|
|
|
8 |
% |
3 |
|
BB |
|
Ba |
|
|
140 |
|
|
|
2 |
% |
|
|
4,170 |
|
|
|
3 |
% |
4 |
|
B |
|
B |
|
|
656 |
|
|
|
8 |
% |
|
|
4,737 |
|
|
|
3 |
% |
5 |
|
CCC or lower |
|
Caa or lower |
|
|
3,532 |
|
|
|
45 |
% |
|
|
18,561 |
|
|
|
12 |
% |
6 |
|
NR |
|
NR |
|
|
81 |
|
|
|
1 |
% |
|
|
3,384 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
7,845 |
|
|
|
100 |
% |
|
$ |
151,790 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2010, the gross unrealized losses in the table directly above are related to fixed
maturity securities that are rated investment grade, which is defined as a security having an S&P
rating of BBB- or higher, or a Moodys rating of Baa3 or higher, except for $4.4 million which
is rated below investment grade. The non-rated securities primarily consist of municipal bonds.
Unrealized losses on investment grade securities principally relate to changes in interest rates or
changes in sector-related credit spreads since the securities were acquired.
The contractual maturity by the number of years until maturity for fixed maturity securities with
unrealized losses at June 30, 2010 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized Loss |
|
|
Fair Value |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
9 |
|
|
|
0 |
% |
|
$ |
2,451 |
|
|
|
2 |
% |
Due after one year through five years |
|
|
1,914 |
|
|
|
24 |
% |
|
|
51,543 |
|
|
|
33 |
% |
Due after five years through ten years |
|
|
114 |
|
|
|
1 |
% |
|
|
7,002 |
|
|
|
5 |
% |
Due after ten years |
|
|
567 |
|
|
|
7 |
% |
|
|
50,497 |
|
|
|
33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed securities |
|
|
5,241 |
|
|
|
68 |
% |
|
|
40,297 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
7,845 |
|
|
|
100 |
% |
|
$ |
151,790 |
|
|
|
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 aggregate amount of mortgage-backed and asset-backed securities is
estimated to have an effective maturity of approximately 2.8 years.
76
The table below summarizes our activity related to other-than-temporary impairment (OTTI) losses
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
|
($ in thousands) |
|
Securities |
|
|
Amount |
|
|
Securities |
|
|
Amount |
|
|
Securities |
|
|
Amount |
|
|
Securities |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
2 |
|
|
$ |
564 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
|
4 |
|
|
|
489 |
|
|
|
6 |
|
|
|
1,493 |
|
|
|
6 |
|
|
|
713 |
|
|
|
39 |
|
|
|
19,343 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
143 |
|
Equities |
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
359 |
|
|
|
1 |
|
|
|
27 |
|
|
|
57 |
|
|
|
8,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4 |
|
|
$ |
489 |
|
|
|
14 |
|
|
$ |
1,876 |
|
|
|
7 |
|
|
$ |
740 |
|
|
|
99 |
|
|
$ |
28,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of loss in accumulated other
comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
|
|
|
|
|
334 |
|
|
|
|
|
|
|
1,402 |
|
|
|
|
|
|
|
504 |
|
|
|
|
|
|
|
17,504 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74 |
|
Equities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
334 |
|
|
|
|
|
|
$ |
1,407 |
|
|
|
|
|
|
$ |
504 |
|
|
|
|
|
|
$ |
17,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses recognized in earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
564 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
|
|
|
|
|
155 |
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
209 |
|
|
|
|
|
|
|
1,839 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
Equities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
359 |
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
8,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
155 |
|
|
|
|
|
|
$ |
469 |
|
|
|
|
|
|
$ |
236 |
|
|
|
|
|
|
$ |
11,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the 2010 second quarter and six month period, we recognized in earnings OTTI losses of $0.2
million and $0.2 million, respectively, related to non-agency mortgage-backed securities and an equity security.
During the comparable periods in 2009, we recognized in earnings OTTI losses of $0.5 million and
$11.2 million, respectively, related to non-agency mortgage-backed securities, asset-backed securities and equity
securities. The significant inputs used to measure the amount of credit loss recognized in earnings
were actual delinquency rates, default probability assumptions, severity assumptions and prepayment
assumptions. Projected losses are a function of both loss severity and probability of default.
Default probability and severity assumptions differ based on property type, vintage and the stress
of the collateral. We do not intend to sell any of these securities and it is more likely than not
that we will not be required to sell these securities before the recovery of the amortized cost basis.
For the 2010 second quarter and six month period, OTTI losses within OCI decreased $0.9 million and
$1.9 million, respectively, primarily as a result of increases in the fair value of securities
previously impaired. For the comparable periods in 2009, OTTI losses within OCI increased $1.4
million and $17.6 million, respectively.
The following table summarizes the cumulative amounts related to our credit loss portion of the
OTTI losses on debt securities held as of June 30, 2010 that we do not intend to sell and it is not
more likely than not that we will be required to sell the security prior to recovery of the
amortized cost basis and for which the non-credit portion is included in other comprehensive
income:
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
Beginning balance of at January 1, 2010 |
|
$ |
2,523 |
|
Credit losses on securities not previously impaired as of January 1, 2010 |
|
|
236 |
|
Reductions for securities sold during the period |
|
|
|
|
|
|
|
|
Ending balance at June 30, 2010 |
|
$ |
2,759 |
|
|
|
|
|
77
Liquidity and Capital Resources
Net cash provided by operating activities was $64.4 million for the six months ended June 30, 2010
compared to net cash provided by operating activities of $69.5 million for the comparable period in
2009, a decrease of $5.1 million. This decrease was primarily due to a $64.0 million increase in
paid losses as well as an overall decline in the operating results in the first six months of 2010
compared with the same period in 2009. Partially offsetting these declines was an increase in the
cash flow due to improved collections on reinsurance recoverables in the first six months of 2010
compared with the same period in 2009.
Net cash used by investing activities was $7.4 million for the six months ended June 30, 2010
compared to net cash used in investing activities of $50.4 million for the comparable period in
2009. This change is primarily due to sale of securities to fund our share repurchase program.
Net cash used in financing activities was $45.6 million for the six months ended June 30, 2010
compared to net cash used by financing activities of $6.1 million for the comparable period in
2009. These uses of cash primarily related to the repurchase of $46.2 million of the Companys
common stock in 2010 under the Companys share repurchase plan.
At June 30, 2010, the weighted average rating of our fixed maturity investments was AA by S&P and
Aa by Moodys. The entire fixed maturity investment portfolio, except for $35.1 million,
consists of investment grade bonds. At June 30, 2010, our portfolio had an average maturity of 4.7
years and duration of 4.0 years. Management periodically projects cash flow of the investment
portfolio and other sources in order to maintain the appropriate levels of liquidity in an effort
to ensure our ability to satisfy claims. As of June 30, 2010 and December 31, 2009, all fixed
maturity securities and equity securities held by us were classified as available-for-sale.
On April 1, 2010, we entered into a $140 million credit facility agreement entitled Fifth Amended
and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, and a
syndicate of lenders. The credit facility is a letter of credit facility and amends and replaces
the $75 million credit facility that expired by its terms on April 2, 2010. We may request that the
facility be increased by an amount not to exceed $25 million. 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 through letters of credit.
The letters of credit issued under the facility are denominated in British pounds and their
aggregate face amount will fluctuate based on exchange rates. The credit facility expires on March
31, 2011. At June 30, 2010, letters of credit with an aggregate face amount of $122.7 million were
outstanding under the credit facility.
The above mentioned credit facility contains customary covenants for facilities of this type,
including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of
assets, and requirements as to maintaining certain consolidated tangible net worth, statutory
surplus and other financial ratios. The credit facility also provides for customary events of
default, including failure to pay principal, interest or fees when due, failure to comply with
covenants, any representation or warranty made by the Company being false in any material respect,
default under certain other indebtedness, certain insolvency or receivership events affecting the
Company and its subsidiaries, the occurrence of certain material judgments, or a change in control
of the Company. The letter of credit facility is secured by a pledge of the stock of certain
insurance subsidiaries of the Company. To the extent the aggregate face amount issued under the
credit facility exceeds the commitment amount, we are required to post collateral with the lead
bank of the consortium. We were in compliance with all covenants under the credit facility at June
30, 2010.
As a result of the April 1, 2010 amendment of the credit facility, the applicable margin and
applicable fee rate payable under the letter of credit facility are now based on a schedule that is
decided based on the Companys status as determined from its then-current ratings issued by S&P and
Moodys with respect to the Companys senior unsecured long-term debt securities without
third-party credit enhancement.
Pursuant to the implementation of Lloyds Plan of Reconstruction and Renewal, a portion of our
recoverables are now reinsured by Resolute Management Services Limited (a separate U.K. authorized
reinsurance company established to reinsure outstanding liabilities of all Lloyds members for all
risks written in the 1992 or prior years of account, previously known as Equitas).
78
Time lags do occur in the normal course of business between the time gross loss reserves are paid
by the Company and the time such gross paid losses are billed and collected from reinsurers.
Reinsurance recoverable amounts related to those gross loss reserves at June 30, 2010 are
anticipated to be billed and collected over the next several years as the gross loss reserves are
paid by the Company.
Generally, for pro rata or quota share reinsurers, including pool participants, we issue quarterly
settlement statements for premiums less commissions and paid loss activity, which are expected to
be settled by the end of the subsequent quarter. We have 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 have historically on average been paid within 45 calendar days.
Generally, for excess of loss reinsurers we pay monthly or quarterly deposit premiums based on the
estimated subject premiums over the contract period (usually one year) that 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.
We sometimes withhold funds from reinsurers and may apply ceded loss billings against such funds in
accordance with the applicable reinsurance agreements.
At June 30, 2010 and December 31, 2009, ceded asbestos paid and unpaid recoverables were $8.7
million and $8.9 million, respectively. Of such amounts at June 30, 2010, $4.3 million was due
from Resolute Management Services Limited. We generally experience 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 our ongoing assessment of such reinsurance recoverables.
We believe that we have adequately managed our 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 we 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 Gustav, Ike, Katrina and Rita
could significantly impact our liquidity needs. However, we expect to continue to pay these
hurricane losses over a period of years from cash flow and, if needed, short-term investments. We
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.
79
Our capital resources consist of funds deployed or available to be deployed to support our business
operations. At June 30, 2010 and December 31, 2009, our capital resources were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Senior debt |
|
$ |
114,073 |
|
|
$ |
114,010 |
|
Stockholders equity |
|
|
814,743 |
|
|
|
801,519 |
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
928,816 |
|
|
$ |
915,529 |
|
|
|
|
|
|
|
|
Ratio of debt to total capitalization |
|
|
12.3 |
% |
|
|
12.5 |
% |
|
|
|
|
|
|
|
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 plan of our
Lloyds Operations.
As part of our capital management program, we may seek to raise additional capital or may seek to
return capital to our stockholders through share repurchases, cash dividends or other methods (or a
combination of such methods). Any such determination will be at the discretion of our Board of
Directors and will be dependent upon our profits, financial requirements and other factors,
including legal restrictions, rating agency requirements, credit facility limitations and such
other factors as our board of directors deems relevant.
In November 2009, the Parent Companys Board of Directors adopted a share repurchase program for up
to $35 million of the Parent Companys common stock. In March 2010, the Parent Companys Board of
Directors adopted a share repurchase program for up to an additional $65 million of the Parent
Companys common stock. Purchases are permitted from time to time at prevailing prices in open
market or privately negotiated transactions through December 31, 2010. The timing and amount of
purchases under the program depend on a variety of factors, including the trading price of the
stock, market conditions and corporate and regulatory considerations.
80
The following presents our share repurchases under the current program for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Dollar Value |
|
|
|
Purchased |
|
|
|
|
|
|
of Shares that |
|
|
|
Under Publicly |
|
|
Average |
|
|
May Yet Be |
|
|
|
Announced |
|
|
Cost Paid |
|
|
Purchased Under |
|
|
|
Program |
|
|
Per Share |
|
|
the Program (1) |
|
|
|
($ in thousands, except per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2009 |
|
|
|
|
|
|
|
|
|
$ |
35,000 |
|
November 2009 |
|
|
29,021 |
|
|
$ |
47.30 |
|
|
$ |
33,627 |
|
December 2009 |
|
|
112,555 |
|
|
$ |
47.83 |
|
|
$ |
28,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal fourth quarter |
|
|
141,576 |
|
|
$ |
47.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2009 activity |
|
|
141,576 |
|
|
$ |
47.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2010 |
|
|
171,500 |
|
|
$ |
44.32 |
|
|
$ |
20,642 |
|
February 2010 |
|
|
128,500 |
|
|
$ |
41.79 |
|
|
$ |
15,272 |
|
March 2010 |
|
|
273,600 |
|
|
$ |
39.10 |
|
|
$ |
69,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal first quarter |
|
|
573,600 |
|
|
$ |
41.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2010 |
|
|
149,912 |
|
|
$ |
40.92 |
|
|
$ |
63,439 |
|
May 2010 |
|
|
248,430 |
|
|
$ |
39.92 |
|
|
$ |
53,522 |
|
June 2010 |
|
|
159,661 |
|
|
$ |
40.38 |
|
|
$ |
47,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal second quarter |
|
|
558,003 |
|
|
$ |
40.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2010 activity |
|
|
1,131,603 |
|
|
$ |
40.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share repurchase activity |
|
|
1,273,179 |
|
|
$ |
41.57 |
|
|
$ |
47,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Balance as of the end of the month indicated. |
From July 1, 2010 through August 3, 2010, the Parent Company purchased an additional 62,114 shares of
its common stock in the open market at an average cost of $42.15 per share for a total of $2.6
million under the aforementioned $65 million share repurchase program.
We primarily rely upon dividends from our subsidiaries to meet our Parent Companys obligations.
Since the issuance of the senior debt in April 2006, the Parent Companys cash obligations
primarily consist of semi-annual interest payments which are now $4.0 million. Going forward, the
interest payments and any share repurchases may be made from funds currently at the Parent Company
or dividends from its subsidiaries. The dividends have historically been paid by Navigators
Insurance Company. Based on the December 31, 2009 surplus of Navigators Insurance Company, the
approximate remaining maximum amount available for the payment of dividends by Navigators Insurance
Company during 2010 without prior regulatory approval was $64.6 million. Navigators Insurance
Company declared and paid $25.0 million of dividends to the Parent Company in the first six months
of 2010, leaving $39.6 million of remaining dividend capacity for 2010.
81
Condensed Parent Company balance sheets as of June 30, 2010 (unaudited) and December 31, 2009 are
shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Cash and investments |
|
$ |
37,309 |
|
|
$ |
63,676 |
|
Investments in subsidiaries |
|
|
874,503 |
|
|
|
846,295 |
|
Goodwill and other intangible assets |
|
|
2,534 |
|
|
|
2,534 |
|
Other assets |
|
|
17,840 |
|
|
|
5,213 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
932,186 |
|
|
$ |
917,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7% Senior Notes |
|
$ |
114,073 |
|
|
$ |
114,010 |
|
Accounts payable and other liabilities |
|
|
2,028 |
|
|
|
847 |
|
Accrued interest payable |
|
|
1,342 |
|
|
|
1,342 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
117,443 |
|
|
|
116,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
814,743 |
|
|
|
801,519 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
932,186 |
|
|
$ |
917,718 |
|
|
|
|
|
|
|
|
82
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The following updates our disclosure regarding foreign currency exchange rate risk as previously
stated in the Companys 2009 Annual Report on Form 10-K.
Foreign Currency Exchange Rate Risk
Our Lloyds Operations are exposed to foreign currency exchange rate risk primarily related to
foreign-denominated cash, cash equivalents and marketable securities (foreign funds), premiums
receivable, reinsurance recoverables on paid and unpaid losses and loss adjustment expenses as well
as reserves for losses and loss adjustment expenses. The principal currencies creating foreign
currency exchange risk for the Lloyds Operations are the British pound, the Euro and the Canadian
dollar. The Lloyds Operations manages its foreign currency exchange rate risk primarily through
asset-liability matching.
Based on the primary foreign-denominated balances within the Lloyds Operations at June 30, 2010,
an assumed 5%, 10% and 15% negative currency movement would result in changes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USD equivalent |
|
|
|
|
|
|
as of |
|
|
Negative currency movement of |
|
(amounts in millions) |
|
June 30, 2010 |
|
|
5% |
|
|
10% |
|
|
15% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and marketable securities at fair value |
|
$ |
82.6 |
|
|
$ |
(4.1 |
) |
|
$ |
(8.3 |
) |
|
$ |
(12.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums receivable |
|
$ |
29.1 |
|
|
$ |
(1.5 |
) |
|
$ |
(2.9 |
) |
|
$ |
(4.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverables on paid, unpaid losses and loss adjustment expenses |
|
$ |
66.3 |
|
|
$ |
(3.3 |
) |
|
$ |
(6.6 |
) |
|
$ |
(9.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses |
|
$ |
(155.0 |
) |
|
$ |
7.7 |
|
|
$ |
15.5 |
|
|
$ |
23.2 |
|
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 first 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. |
83
Part II Other Information
Item 1. Legal Proceedings
In the ordinary course of conducting business, our subsidiaries are involved in various legal
proceedings, either indirectly as insurers for parties or directly as defendants. Most the these
proceedings are claims litigation involving our subsidiaries as either (a) liability insurers
defending or providing indemnity for third party claims brought against insureds or (b) insurers
defending first party coverage claims brought against them. We account for such activity through
the establishment of unpaid loss and loss adjustment reserves. Our management believes that the
ultimate liability, if any, with respect to such ordinary-course claims litigation, after
consideration of provisions made for potential losses and cost of defense, will not be material to
our consolidated financial condition, results of operations, or cash flows.
Our subsidiaries are also from time-to-time involved with other legal actions, some of which assert
claims for substantial amounts. These actions include claims asserting extra contractual
obligations, such as claims involving allegations of bad faith in the handling of claims or the
underwriting of policies. In general, we believe we have valid defenses to these cases. Our
management expects that the ultimate liability if any, with respect to such extra-contractual
matters will not be material to our consolidated financial position. Nonetheless, given the large
or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of
litigation, an adverse outcome in such matters could, from time-to-time, have a material adverse
outcome on our consolidated results of operations or cash flows 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
2009 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
Item 5. Other Information
None
84
Item 6. Exhibits
|
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
10-1
|
|
|
Stephen
Coward Service Agreement
|
|
* |
10-2
|
|
|
Michael
Civisca Employment Agreement
|
|
* |
10-3
|
|
|
Paul
Hennessy Employment Agreement
|
|
* |
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).
|
|
* |
85
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: August 5, 2010
|
|
/s/ Francis W. McDonnell |
|
|
|
|
Francis W. McDonnell
|
|
|
|
|
Senior Vice President |
|
|
|
|
and Chief Financial Officer |
|
|
86
INDEX OF EXHIBITS
|
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
10-1
|
|
|
Stephen
Coward Service Agreement
|
|
* |
10-2
|
|
|
Michael
Civisca Employment Agreement
|
|
* |
10-3
|
|
|
Paul
Hennessy Employment Agreement
|
|
* |
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).
|
|
* |
87