Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File No. 0-15886
THE NAVIGATORS GROUP, INC.
(Exact name of the Registrant as specified in its charter)
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Delaware
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13-3138397 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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One Penn Plaza, New York, New York
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10119 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (212) 244-2333
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class:
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Name of Each Exchange on Which Registered: |
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Common Stock, $.10 Par Value
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The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. þ
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 definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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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 aggregate market value of voting stock held by non-affiliates as of June 30, 2008 was
$727,282,000.
The number of common shares outstanding as of February 6, 2009 was 16,856,073.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Companys 2009 Proxy Statement are incorporated by reference in Part III,
Items 10, 11, 12, 13 and 14 of this Form 10-K.
NOTE ON FORWARD-LOOKING STATEMENTS
Some of the statements in this Annual Report on Form 10-K 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 Annual
Report are forward-looking statements. Whenever used in this report, the words estimate,
expect, believe, may, will, intend, continue 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 statement, 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 this Form 10-K as well as:
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the effects of domestic and foreign economic conditions, and conditions which affect the
market for property and casualty insurance; |
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changes in the laws, rules and regulations which apply to our insurance companies; |
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the effects of emerging claim and coverage issues on our business, including adverse judicial
or regulatory decisions and rulings; |
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the effects of competition from banks and other insurers and the trend toward self-insurance; |
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risks that we face in entering new markets and diversifying the products and services we
offer; |
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risk that the bank consortium does not renew the credit facility, which would cause us to
find other sources to provide the letters of credit or other collateral required to continue
our participation in Syndicate 1221; |
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general economic conditions, including recent distress in the financial markets that has had
an adverse impact on the availability of credit and liquidity resources generally and could
jeopardize certain of our counterparty obligations, including those of our reinsurers and
financial institutions; |
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unexpected turnover of our professional staff; |
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changing legal and social trends and inherent uncertainties in the loss estimation process
that can adversely impact the adequacy of loss reserves and the allowance for reinsurance
recoverables, including our estimates relating to ultimate asbestos liabilities and related
reinsurance recoverables; |
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risks inherent in the collection of reinsurance recoverable amounts from our reinsurers over
many years into the future based on the reinsurers financial ability and intent to meet such
obligations to the Company; |
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risks associated with our continuing ability to obtain reinsurance covering our exposures at
appropriate prices and/or in sufficient amounts and the related recoverability of our
reinsured losses; |
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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; |
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our ability to attain adequate prices, obtain new business and retain existing business
consistent with our expectations and to successfully implement our business strategy during
soft as well as hard markets; |
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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; |
3
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the inability of our internal control framework to provide absolute assurance that all
incidents of fraud or unintended material errors will be detected and prevented; |
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changes in accounting principles or policies or in our application of such accounting
principles or policies; |
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the risk that our investment portfolio suffers reduced returns or investment losses which
could reduce our profitability; and |
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other risks that we identify in 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-K may not occur. You are cautioned not to place undue reliance on any
forward-looking statements, which speak only as of their respective dates.
The discussion and analysis of our financial condition and results of operations contained
herein should be read in conjunction with our consolidated financial statements and accompanying
notes which appear elsewhere in this Form 10-K. It contains forward-looking statements that
involve risks and uncertainties. Please see the above 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-K.
Part I
Item 1. BUSINESS
General
The accompanying consolidated financial statements consisting of the accounts of The
Navigators Group, Inc., a Delaware holding company established in 1982, and its wholly-owned
subsidiaries are prepared on the basis of U.S. generally accepted accounting principles (GAAP or
U.S. GAAP). The preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported revenues and expenses during the reporting periods along with
related disclosures. 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 terms
Parent or Parent Company as used herein are used to mean The Navigators Group, Inc. without its
subsidiaries.
We are an international insurance holding company focusing on specialty products within the
overall property/casualty insurance market. The Companys underwriting segments consist of
insurance company operations and operations at Lloyds of London. Our largest product line and
most long-standing area of specialization is ocean marine insurance. We have also developed
specialty niches in professional liability insurance and in specialty liability insurance primarily
consisting of contractors liability and primary and excess liability coverages. We conduct
operations through our Insurance Companies and our Lloyds Operations. The Insurance Companies
consist of Navigators Insurance Company, which includes a United Kingdom Branch (the U.K.
Branch), and Navigators Specialty Insurance Company, which underwrites specialty and professional
liability insurance on an excess and surplus lines basis fully reinsured by Navigators Insurance
Company. Our Lloyds Operations include Navigators Underwriting Agency Ltd. (NUAL), a Lloyds of
London (Lloyds) underwriting agency which manages Lloyds Syndicate 1221 (Syndicate 1221).
Our Lloyds Operations primarily underwrite marine and related lines of business, professional
liability insurance, and construction coverages for onshore energy business at Lloyds through
Syndicate 1221. The European property business written by the Lloyds Operations and the U.K.
Branch beginning in 2006 was discontinued during the 2008 second
quarter. We participate in the capacity of Syndicate 1221 through our wholly-owned Lloyds
corporate member (we utilized two wholly-owned Lloyds corporate members prior to the 2008
underwriting year). During the 2008 second quarter the Company closed two small underwriting
agencies in Manchester and Basingstoke, England. The discontinuance of the European property
business and the closing of the underwriting agencies did not have any significant effect on the
Companys financial condition or results of operations. In July 2008, the Company opened an
underwriting office in Stockholm, Sweden to write professional liability business. In September
2008, Syndicate 1221 began to underwrite insurance coverage in China through the Navigators
Underwriting Division of Lloyds Reinsurance Company (China) Ltd. The Companys focus in China is
on opportunities in professional and general liability lines of business.
4
Marine Insurance
Our marine insurance business is underwritten both through our Insurance Companies and our
Lloyds Operations. Prior to the 2006 underwriting year, Navigators Insurance Company obtained
marine business through participation with other unaffiliated insurers in a marine insurance pool
managed by wholly-owned insurance agency subsidiaries of the Company. Commencing with the 2006
underwriting year, the marine pool was eliminated and, therefore, all of the marine business
generated is exclusively for Navigators Insurance Company.
Within Navigators Insurance Companys marine business, there are a number of different product
lines. The largest is marine liability, which protects business from liability to third parties
for bodily injury or property damage stemming from their marine-related operations, such as
terminals, marinas and stevedoring. We insure the physical damage to offshore oil platforms along
with other offshore operations related to oil exploration and production. Another significant
product line is bluewater hull, which provides coverage to the owners of ocean-going vessels
against physical damage to the vessels. We also underwrite insurance for harbor craft and other
small craft such as fishing vessels, providing physical damage and third party liability coverage.
We underwrite cargo insurance, which provides coverage for physical damage to goods in the course
of transit, whether by water, air or land. Our U.K. Branch also underwrites primary marine P&I, or
protection and indemnity business. This complements our marine liability business, which is
generally written above the primary layer on an excess basis. In addition, we began to insure
customs bonds in 2005.
We participate in the marine and related insurance lines of the Lloyds market through NUAL,
which manages Syndicate 1221. Navigators provided 100% of Syndicate 1221s capacity for the 2008,
2007 and 2006 underwriting years through its wholly-owned subsidiaries, Millennium Underwriting
Ltd. and Navigators Corporate Underwriters Ltd. The largest product line within our Lloyds marine
business is currently cargo and marine liability, and the other significant product lines include
marine liability, offshore energy, specie, bluewater hull, and assumed reinsurance of other marine
insurers on an excess of loss basis. In January 2005, we formed Navigators NV, a wholly-owned
subsidiary of NUAL. Navigators NV is located in Antwerp, Belgium, and produces transport
liability, cargo and marine liability business on behalf of Syndicate 1221. In late 2005,
Navigators NV began to produce similar business for Navigators Insurance Company. We established a
Coral Gables, Florida office in 2007 to write marine and energy business in Latin America.
Wholly-owned insurance agencies of the Company write marine business for Navigators Insurance
Company from offices located in major insurance or port locations in Chicago, Houston, London,
Miami, New York, San Francisco and Seattle.
Specialty
Navigators Specialty, a division of one of the Companys wholly-owned insurance agencies
primarily writes general liability insurance focusing on small general and artisan contractors and
other targeted commercial risks. We have developed underwriting and
claims expertise that we
believe has allowed us to minimize our exposure to many of the large losses sustained in the past several years by other
insurers, including losses stemming from coverages provided to larger contractors who work on
condominiums, cooperative developments and other large housing developments. Consistent with our
approach of emphasizing underwriting profit over market share, we direct our capacity to small to
medium-size general contractors as well as artisan contractors. Commencing in 2005, we expanded
our product line in this area by writing a limited number of
construction wrap-up policies that are general liability policies for owners and developers
of residential construction projects.
5
In late 2002, Navigators Specialty began to write commercial multiple peril and commercial
automobile insurance business from our Midwest office. Our commercial multi-peril products include
general liability and a small amount of property insurance. We do not underwrite workers
compensation coverage. We generally avoid writing property risks in areas with high exposure to
earthquake or windstorm losses, such as California and Florida. In 2002, we also began underwriting
personal umbrella insurance. This product is typically purchased by individuals who seek higher
limits of liability than are provided in their homeowners or personal automobile policies. When
personal umbrella coverage is desired and these two primary coverages are placed with different
insurers, there is a need to place the personal umbrella insurance policy on a stand-alone basis.
At the end of 2004, we hired a small team of experienced underwriters to target excess casualty,
and commercial and personal umbrella business for Navigators Insurance Company.
Navigators Specialty also provides general liability insurance for the hospitality business
which includes liquor law liability coverage for commercial establishments such as bars,
restaurants and night clubs and commenced writing a limited amount of first party personal lines
business. In 2006, the Company announced the establishment of a Primary Casualty Division focusing
on primary casualty business produced by wholesale insurance brokers. The Primary Casualty
Division writes construction business east of the Rocky Mountains and non-construction risks
nationwide.
In 2007, the Company announced the establishment of a Specialty Program Division. The
division focuses on developing portfolios in a variety of specialty industry niches produced
through program administrators. The division underwrites property, general liability and commercial
automobile insurance. In 2008 Navigators Specialty diversified its industry focus and product
capability to include products liability insurance to life sciences firms and environmental
liability.
Professional Liability
We commenced underwriting professional liability insurance in the fourth quarter of 2001 after
attracting a team of experienced professionals. This business is produced through Navigators Pro,
a division of one of the Companys wholly-owned insurance agencies. Our principal product in this
division is directors and officers liability insurance, which we offer for both privately held and
publicly traded corporations listed on national exchanges. In addition, we provide fiduciary
liability and crime insurance to our directors and officers liability insurance clients. In 2002,
we began offering employment practices liability, lawyers professional liability and miscellaneous
professional liability coverages. Our current target market for lawyers professional liability is
law firms comprised of 300 or fewer attorneys. Our U.K. Branch began writing professional
liability coverages for U.K. solicitors in October 2004 and exited this business in 2007. In 2005,
we commenced writing professional liability coverages for architects and engineers in our Insurance
Companies and international directors and officer liability business in our Lloyds Operations.
Engineering and Construction
The Lloyds Operations write engineering and construction business consisting of coverage for
construction projects including damage to machinery and equipment and loss of use due to delays.
We believe this coverage, together with the cargo coverage
related to the project provided through our Lloyds Operations marine business unit, provides
our policyholders with risk management protection for key exposures throughout a projects
construction and operation.
6
Onshore Energy
The Lloyds Operations also write onshore energy insurance which principally focuses on the
oil and gas, chemical and petrochemical industries with coverages primarily for property damage and
business interruption.
Inland Marine
In 2006, the Company announced the establishment of an Inland Marine Division of Navigators
Insurance Company focusing on traditional inland marine insurance products including builders
risk, contractors tools and equipment, fine arts, computer equipment and motor truck cargo.
Reinsurance Recoverables
We utilize reinsurance principally to reduce our exposure on individual risks, to protect
against catastrophic losses, and to stabilize loss ratios and underwriting results. Although
reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the
reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our
policyholders. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our
reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of
these claims. Either of these events would increase our costs and could have a material adverse
effect on our business. We are required to pay the losses even if the reinsurer fails to meet its
obligations under the reinsurance agreement. Hurricanes Katrina and Rita in 2005 and Hurricanes
Gustav and Ike in 2008 significantly increased our reinsurance recoverables which increased our
credit risk.
We are protected by various treaty and facultative reinsurance agreements. Our exposure to
credit risk from any one reinsurer is managed through diversification by reinsuring with a number
of different reinsurers, principally in the United States and European reinsurance markets. To
meet our standards of acceptability, when the reinsurance is placed, a reinsurer generally must
have a rating from A.M. Best Company (A.M. Best) and/or Standard & Poors Rating Services
(S&P) of A or better, or an equivalent financial strength if not rated, plus at least $250
million in policyholders surplus. Our Reinsurance Security Committee, which is included within
our Enterprise Risk Management Reinsurance Sub-Committee, monitors the financial strength of our
reinsurers and the related reinsurance receivables and periodically reviews the list of acceptable
reinsurers. The reinsurance is placed either directly by us or through reinsurance intermediaries.
The reinsurance intermediaries are compensated by the reinsurers.
The credit quality distribution of the Companys reinsurance recoverables of $1.11 billion at
December 31, 2008 for ceded paid and unpaid losses and loss adjustment expenses and ceded unearned
premiums based on insurer financial strength ratings from A.M. Best was as follows:
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A.M. Best |
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Rating |
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Recoverable |
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Percent |
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Rating(1) |
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Description |
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Amounts |
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of Total |
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($ in millions) |
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A++, A+ |
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Superior |
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$ |
597.5 |
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54 |
% |
A, A- |
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Excellent |
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481.8 |
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43 |
% |
B++, B+ |
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Very good |
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0.9 |
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0 |
%(2) |
NR |
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Not rated |
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29.7 |
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3 |
%(2) |
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Total |
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$ |
1,109.9 |
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100 |
% |
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(1) |
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Equivalent S&P rating used for certain companies when an A.M. Best
rating was unavailable. |
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(2) |
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The Company holds offsetting collateral of approximately 73.8% for B++
and B+ companies and 81.4% for not rated companies which includes letters of credit,
ceded balances payable and other balances held by our Insurance Companies and our
Lloyds Operations. |
7
The following table lists our 20 largest reinsurers measured by the amount of
reinsurance recoverable for ceded paid and unpaid losses and loss adjustment expense and ceded
unearned premium (constituting 75.1% of our total recoverables) together with the collateral held
by us at December 31, 2008, and the reinsurers financial strength rating from the indicated rating
agency:
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Reinsurance Recoverables |
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Unearned |
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Unpaid/Paid |
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Collateral(1) |
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Rating & |
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Reinsurer |
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Premium |
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Losses |
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Total |
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Held |
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Rating Agency |
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($ in millions) |
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Swiss Reinsurance America Corporation |
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$ |
21.3 |
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$ |
116.0 |
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$ |
137.3 |
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$ |
16.2 |
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A+ |
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AMB (2) |
White Mountains Reinsurance of America |
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10.6 |
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92.4 |
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103.0 |
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26.3 |
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A- |
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AMB |
General Reinsurance Corporation |
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1.5 |
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66.6 |
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68.1 |
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0.8 |
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A++ |
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AMB |
Transatlantic Reinsurance Company |
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20.9 |
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41.5 |
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62.4 |
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10.3 |
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A |
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AMB |
Everest Reinsurance Company |
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15.9 |
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36.9 |
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52.8 |
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6.1 |
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A+ |
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AMB |
Munich Reinsurance America Inc |
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16.2 |
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35.8 |
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52.0 |
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9.7 |
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A+ |
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AMB |
Munchener Ruckversicherungs-Gesellschaft |
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10.0 |
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31.9 |
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41.9 |
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13.0 |
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A+ |
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AMB |
National Indemnity Company |
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9.3 |
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30.7 |
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40.0 |
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5.4 |
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A++ |
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AMB |
Platinum Underwriters Re |
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8.3 |
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30.3 |
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38.6 |
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4.4 |
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A |
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AMB |
Swiss Re Europe |
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6.1 |
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30.2 |
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36.3 |
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9.9 |
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A+ |
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AMB |
Lloyds Syndicate #2003 |
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7.2 |
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19.0 |
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26.2 |
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5.2 |
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A |
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AMB |
Berkley Insurance Company |
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12.5 |
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13.1 |
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25.6 |
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2.2 |
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A+ |
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AMB |
Partner Reinsurance Europe |
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8.7 |
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15.3 |
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24.0 |
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12.2 |
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AA- |
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S&P |
Scor Holding (Switzerland) AG |
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4.5 |
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18.7 |
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23.2 |
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3.9 |
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A |
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AMB |
Federal Insurance Co. |
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1.1 |
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19.2 |
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20.3 |
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2.1 |
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A++ |
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AMB |
Arch Reinsurance Company |
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1.9 |
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16.9 |
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18.8 |
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0.2 |
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A |
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AMB |
Partner Reinsurance Company of the U.S. |
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2.5 |
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14.9 |
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17.4 |
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0.2 |
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A+ |
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AMB |
Hannover Ruckversicherung |
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1.2 |
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16.0 |
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17.2 |
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2.0 |
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A |
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AMB |
Ace Property and Casualty Insurance Company |
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0.1 |
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14.6 |
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14.7 |
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A+ |
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AMB |
National Liability & Fire Insurance Company |
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|
0.0 |
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14.3 |
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14.3 |
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A++ |
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AMB |
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Top 20 Total |
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159.8 |
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674.3 |
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834.1 |
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130.1 |
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All Other |
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29.1 |
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|
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246.7 |
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275.8 |
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99.8 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
188.9 |
|
|
$ |
921.0 |
|
|
$ |
1,109.9 |
|
|
$ |
229.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
8
The largest portion of the Companys collateral consists of letters of credit obtained
from reinsurers in accordance with New York Insurance Department Regulation No. 133. Such
regulation requires collateral to be held by the ceding company from reinsurers not licensed in New
York State in order for the ceding company to take credit for the reinsurance recoverables on its
statutory balance sheet. The specific requirements governing the letters of credit include a
clean and unconditional letter of credit and an evergreen clause which prevents the expiration of
the letter of credit without due notice to the Company. Only banks considered
qualified by the National Association of Insurance Commissioners (NAIC) may be deemed
acceptable issuers of letters of credit by the New York Insurance Department. In addition, based
on our credit assessment of the reinsurer, there are certain instances where we require collateral
from a reinsurer even if the reinsurer is licensed in New York State, generally applying the
requirements of Regulation 133. The contractual terms of the letters of credit require that access
to the collateral is unrestricted. In the event that the counterparty to our collateral would be
deemed not qualified by the NAIC, the reinsurer would be required by agreement to replace such
collateral with acceptable security under the reinsurance agreement. There is no assurance,
however, that the reinsurer would be able to replace the counterparty bank in the event such
counterparty bank becomes unqualified and the reinsurer experiences significant financial
deterioration or becomes insolvent. Under such circumstances, the Company could incur a
substantial loss from uncollectible reinsurance from such reinsurer.
Approximately $101.7 million and $167.7 million of the reinsurance recoverables for paid and
unpaid losses at December 31, 2008 and 2007, respectively, were due from reinsurers as a result of
the losses from the 2005 Hurricanes Katrina and Rita. Approximately $96.8 million of the
reinsurance recoverables for paid and unpaid losses at December 31, 2008 were due from reinsurers
as a result of the losses from the 2008 Hurricanes Gustav and Ike.
Also included in reinsurance recoverable for paid and unpaid losses is approximately $8.9
million due from reinsurers in connection with our asbestos exposures of which $4.8 million is due
from Equitas (a separate United Kingdom authorized reinsurance company established to reinsure
outstanding liabilities of all Lloyds members for all risks written in the 1992 or prior years of
account). The remaining reinsurance recoverable amounts for asbestos losses are due from various
domestic and international reinsurers with no one balance greater than $0.6 million due from a
single reinsurer.
Loss Reserves
Insurance companies and Lloyds syndicates are required to maintain reserves for unpaid losses
and unpaid loss adjustment expenses for all lines of business. Loss reserves consist of both
reserves for reported claims, known as case reserves, and reserves for losses that have occurred
but have not yet been reported, known as incurred but not reported losses (IBNR). These reserves
are intended to cover the probable ultimate cost of settling all losses incurred and unpaid,
including those incurred but not reported. The determination of reserves for losses and loss
adjustment expenses (LAE) for insurance companies such as Navigators Insurance Company and
Navigators Specialty Insurance Company, and Lloyds corporate members such as Navigators Corporate
Underwriters Ltd. and Millennium Underwriting Ltd., is dependent upon the receipt of information
from insureds, brokers and agents. Generally, there is a lag between the time premiums are written
and related losses and loss adjustment expenses are incurred, and the time such events are reported
to Navigators Insurance Company, Navigators Specialty Insurance Company, Navigators Corporate
Underwriters Ltd. and Millennium Underwriting Ltd.
9
Loss reserves are established by our Insurance Companies and Syndicate 1221 for reported
claims when notice of the claim is first received. Reserves for such reported claims are
established on a case-by-case basis by evaluating several factors, including the type of risk
involved, knowledge of the circumstances surrounding such claim, severity of injury or damage, the
potential for ultimate exposure, experience with the insured and the broker on the line of
business, and the policy provisions relating to the type of claim. Reserves for IBNR are determined
in part on the basis of statistical information and in part on the basis of industry experience. 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.
Loss reserves are estimates of what the insurer or reinsurer expects to pay on claims, based
on facts and circumstances then known. It is possible that the ultimate liability may exceed
or be less than such estimates. In setting our loss reserve estimates, we review statistical
data covering several years, analyze patterns by line of business and consider several factors
including trends in claims frequency and severity, changes in operations, emerging economic and
social trends, inflation and changes in the regulatory and litigation environment. Based on this
review, we make a best estimate of our ultimate liability. We do not establish a range of loss
estimates around the best estimate we use to establish our reserves and loss adjustment expenses.
During the loss settlement period, which, in some cases, may last several years, additional facts
regarding individual claims may become known and, accordingly, it often becomes necessary to refine
and adjust the estimates of liability on a claim upward or downward. Such estimates are regularly
reviewed and updated and any resulting adjustments are included in the current periods income
statement. Even then, the ultimate liability may exceed or be less than the revised estimates. The
reserving process is intended to provide implicit recognition of the impact of inflation and other
factors affecting loss payments by taking into account changes in historical payment patterns and
perceived probable trends. There is generally no precise method for the subsequent evaluation of
the adequacy of the consideration given to inflation, or to any other specific factor, because the
eventual deficiency or redundancy of reserves is affected by many factors, some of which are
interdependent.
Another factor related to reserve development is that we record those premiums which are
reported to us through the end of each calendar year and accrue estimates for premiums and loss
reserves where there is a time lag between when the policy is bound and the recording of the
policy. A substantial portion of the estimated premium is from international business where there
can be significant time lags. To the extent that the actual premium varies from estimates, the
difference, along with the related loss reserves and underwriting expenses, is recorded in current
operations.
10
The following table presents an analysis of losses and loss adjustment expenses for each year
in the three-year period ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for losses and LAE at beginning of
year |
|
$ |
847,303 |
|
|
$ |
696,116 |
|
|
$ |
578,976 |
|
|
|
|
|
|
|
|
|
|
|
Provision for losses and LAE for claims
occurring in the current year |
|
|
443,877 |
|
|
|
387,601 |
|
|
|
287,401 |
|
(Decrease) in estimated losses and LAE for
claims occurring in prior years |
|
|
(50,746 |
) |
|
|
(47,009 |
) |
|
|
(17,214 |
) |
|
|
|
|
|
|
|
|
|
|
Incurred losses and LAE |
|
|
393,131 |
|
|
|
340,592 |
|
|
|
270,187 |
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE paid for claims occurring during |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
(60,104 |
) |
|
|
(46,467 |
) |
|
|
(19,710 |
) |
Prior years |
|
|
(180,459 |
) |
|
|
(142,938 |
) |
|
|
(133,337 |
) |
|
|
|
|
|
|
|
|
|
|
Losses and LAE payments |
|
|
(240,563 |
) |
|
|
(189,405 |
) |
|
|
(153,047 |
) |
|
|
|
|
|
|
|
|
|
|
Net reserves for losses and LAE at end of year |
|
|
999,871 |
|
|
|
847,303 |
|
|
|
696,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance receivables on unpaid losses and LAE |
|
|
853,793 |
|
|
|
801,461 |
|
|
|
911,439 |
|
|
|
|
|
|
|
|
|
|
|
Gross reserves for losses and LAE at end of year |
|
$ |
1,853,664 |
|
|
$ |
1,648,764 |
|
|
$ |
1,607,555 |
|
|
|
|
|
|
|
|
|
|
|
The following table presents the development of the loss and LAE reserves for 1998 through
2008. The line Net reserves for losses and LAE reflects the net reserves at the balance sheet
date for each of the indicated years and represents the estimated amount of losses and loss
adjustment expenses arising in all prior years that are unpaid at the balance sheet date. The
Reserves for losses and LAE re-estimated lines of the table reflect the re-estimated amount of
the previously recorded reserves based on experience as of the end of each succeeding year. The
estimate changes as more information becomes known about the frequency and severity of claims for
individual years. The net and gross cumulative redundancy (deficiency) lines of the table reflect
the cumulative amounts developed as of successive years with respect to the aforementioned reserve
liability. The cumulative redundancy or deficiency represents the aggregate change in the estimates
over all prior years.
The table allocates losses and loss adjustment expenses reported and recorded in subsequent
years to all prior years starting with the year in which the loss was incurred. For example, assume
that a loss occurred in 1999 and was not reported until 2001, the amount of such loss will appear
as a deficiency in both 1999 and 2000. Conditions and trends that have affected development of the
liability in the past may not necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies based on the table.
11
The increase in gross loss reserves on the Companys December 31, 2008 and 2007 balance sheets
of $204.9 million and $41.2 million, respectively, primarily relate to incurred losses for events
occurring in those years less loss payments. The increase in 2008 includes gross loss reserves
related to Hurricanes Gustav and Ike of $107.4 million. The amount of the increase was reduced by
a decrease in gross loss reserves related to Hurricanes Katrina and Rita of $12.2 million during
2008. The gross loss reserves related to Hurricanes Katrina, Rita, Ike and Gustav were
approximately 11.1% of the total December 31, 2008 gross loss reserves and 8.6% of the total
December 31, 2007 gross loss reserves. With the recording of these losses, the Company assessed
its reinsurance coverage, potential receivables, and the recoverability of the receivables. Losses incurred on business
recently written are primarily covered by reinsurance agreements written by companies with whom the
Company is currently doing reinsurance business and whose credit the Company continues to assess in
the normal course of business.
As part of our risk management process, we purchase reinsurance to limit our liability on
individual risks and to protect against catastrophic loss. We purchase both quota share reinsurance
and excess of loss reinsurance. Quota share reinsurance is often utilized on the lower layers of
risk and excess of loss reinsurance is used above the quota share reinsurance to limit our net
retention per risk. Net retention means the amount of losses that we keep for our own account. Once
our initial reserve is established and our net retention is exceeded, any adverse development will
directly affect the gross loss reserve, but would generally have no impact on our net retained
loss. Generally our limits of exposure are known with greater certainty when estimating our net
loss versus our gross loss. This situation tends to create greater volatility in the deficiencies
and redundancies of the gross reserves as compared to the net reserves.
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
1998 |
|
|
1999 |
|
|
2000 |
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
($ in thousands) |
|
Net reserves for losses and LAE |
|
$ |
150,517 |
|
|
$ |
170,530 |
|
|
$ |
174,883 |
|
|
$ |
202,759 |
|
|
$ |
264,647 |
|
|
$ |
374,171 |
|
|
$ |
463,788 |
|
|
$ |
578,976 |
|
|
$ |
696,116 |
|
|
$ |
847,303 |
|
|
$ |
999,871 |
|
Reserves for losses and
LAE re-estimated as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
|
159,897 |
|
|
|
165,536 |
|
|
|
180,268 |
|
|
|
209,797 |
|
|
|
323,282 |
|
|
|
370,335 |
|
|
|
460,007 |
|
|
|
561,762 |
|
|
|
649,107 |
|
|
|
796,557 |
|
|
|
|
|
Two years later |
|
|
149,741 |
|
|
|
160,096 |
|
|
|
183,344 |
|
|
|
266,459 |
|
|
|
328,683 |
|
|
|
360,964 |
|
|
|
457,769 |
|
|
|
523,541 |
|
|
|
589,044 |
|
|
|
|
|
|
|
|
|
Three years later |
|
|
142,229 |
|
|
|
156,322 |
|
|
|
232,530 |
|
|
|
266,097 |
|
|
|
321,213 |
|
|
|
377,229 |
|
|
|
432,988 |
|
|
|
481,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
138,495 |
|
|
|
194,924 |
|
|
|
227,554 |
|
|
|
256,236 |
|
|
|
334,991 |
|
|
|
362,227 |
|
|
|
401,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
176,226 |
|
|
|
190,830 |
|
|
|
218,982 |
|
|
|
264,431 |
|
|
|
325,249 |
|
|
|
343,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
|
172,688 |
|
|
|
185,075 |
|
|
|
225,031 |
|
|
|
260,264 |
|
|
|
314,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
|
169,294 |
|
|
|
188,055 |
|
|
|
221,541 |
|
|
|
257,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
|
172,256 |
|
|
|
187,422 |
|
|
|
220,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
|
171,334 |
|
|
|
186,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later |
|
|
170,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cumulative redundancy
(deficiency) |
|
|
(19,538 |
) |
|
|
(16,051 |
) |
|
|
(45,162 |
) |
|
|
(55,093 |
) |
|
|
(49,685 |
) |
|
|
30,989 |
|
|
|
62,408 |
|
|
|
97,444 |
|
|
|
107,072 |
|
|
|
50,746 |
|
|
|
|
|
Net cumulative paid as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
|
38,976 |
|
|
|
43,301 |
|
|
|
53,646 |
|
|
|
64,785 |
|
|
|
84,385 |
|
|
|
80,034 |
|
|
|
96,981 |
|
|
|
133,337 |
|
|
|
142,938 |
|
|
|
180,459 |
|
|
|
|
|
Two years later |
|
|
63,400 |
|
|
|
71,535 |
|
|
|
91,352 |
|
|
|
112,746 |
|
|
|
133,911 |
|
|
|
140,644 |
|
|
|
180,121 |
|
|
|
219,125 |
|
|
|
233,211 |
|
|
|
|
|
|
|
|
|
Three years later |
|
|
79,218 |
|
|
|
88,570 |
|
|
|
114,449 |
|
|
|
138,086 |
|
|
|
170,236 |
|
|
|
195,961 |
|
|
|
238,673 |
|
|
|
264,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
89,913 |
|
|
|
101,667 |
|
|
|
127,961 |
|
|
|
159,042 |
|
|
|
208,266 |
|
|
|
223,847 |
|
|
|
262,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
100,314 |
|
|
|
108,146 |
|
|
|
141,384 |
|
|
|
185,037 |
|
|
|
226,798 |
|
|
|
239,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
|
103,823 |
|
|
|
116,752 |
|
|
|
159,389 |
|
|
|
196,098 |
|
|
|
234,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
|
109,771 |
|
|
|
131,579 |
|
|
|
171,768 |
|
|
|
198,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
|
123,092 |
|
|
|
142,709 |
|
|
|
171,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
|
132,770 |
|
|
|
142,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
131,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability-end of year |
|
|
342,444 |
|
|
|
391,094 |
|
|
|
357,674 |
|
|
|
401,177 |
|
|
|
489,642 |
|
|
|
724,612 |
|
|
|
966,117 |
|
|
|
1,557,991 |
|
|
|
1,607,555 |
|
|
|
1,648,764 |
|
|
|
1,853,664 |
|
Reinsurance recoverable |
|
|
191,927 |
|
|
|
220,564 |
|
|
|
182,791 |
|
|
|
198,418 |
|
|
|
224,995 |
|
|
|
350,441 |
|
|
|
502,329 |
|
|
|
979,015 |
|
|
|
911,439 |
|
|
|
801,461 |
|
|
|
853,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability-end of year |
|
|
150,517 |
|
|
|
170,530 |
|
|
|
174,883 |
|
|
|
202,759 |
|
|
|
264,647 |
|
|
|
374,171 |
|
|
|
463,788 |
|
|
|
578,976 |
|
|
|
696,116 |
|
|
|
847,303 |
|
|
|
999,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross re-estimated latest |
|
|
394,242 |
|
|
|
437,429 |
|
|
|
473,055 |
|
|
|
537,778 |
|
|
|
654,022 |
|
|
|
703,954 |
|
|
|
867,558 |
|
|
|
1,386,935 |
|
|
|
1,417,529 |
|
|
|
1,560,418 |
|
|
|
|
|
Re-estimated recoverable latest |
|
|
224,187 |
|
|
|
250,848 |
|
|
|
253,010 |
|
|
|
279,926 |
|
|
|
339,690 |
|
|
|
360,772 |
|
|
|
466,178 |
|
|
|
905,403 |
|
|
|
828,485 |
|
|
|
763,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-estimated latest |
|
|
170,055 |
|
|
|
186,581 |
|
|
|
220,045 |
|
|
|
257,852 |
|
|
|
314,332 |
|
|
|
343,182 |
|
|
|
401,380 |
|
|
|
481,532 |
|
|
|
589,044 |
|
|
|
796,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cumulative redundancy
(deficiency) |
|
|
(51,798 |
) |
|
|
(46,335 |
) |
|
|
(115,381 |
) |
|
|
(136,601 |
) |
|
|
(164,380 |
) |
|
|
20,658 |
|
|
|
98,559 |
|
|
|
171,056 |
|
|
|
190,026 |
|
|
|
88,346 |
|
|
|
|
|
13
The following tables identify the approximate gross and net cumulative redundancy (deficiency)
at each year-end balance sheet date for the Insurance Companies and Lloyds Operations contained in
the preceding ten year table:
Gross Cumulative Redundancy (Deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Insurance Companies |
|
|
|
|
Year |
|
Grand |
|
|
Excluding |
|
|
|
|
|
|
|
|
|
|
All |
|
|
Lloyds |
|
Ended |
|
Total |
|
|
Asbestos |
|
|
Total |
|
|
Asbestos |
|
|
Other(1) |
|
|
Operations |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
$ |
88,346 |
|
|
$ |
89,142 |
|
|
$ |
62,024 |
|
|
$ |
(796 |
) |
|
$ |
62,820 |
|
|
$ |
26,322 |
|
2006 |
|
|
190,026 |
|
|
|
190,042 |
|
|
|
107,264 |
|
|
|
(16 |
) |
|
|
107,280 |
|
|
|
82,762 |
|
2005 |
|
|
171,056 |
|
|
|
171,318 |
|
|
|
87,801 |
|
|
|
(262 |
) |
|
|
88,063 |
|
|
|
83,255 |
|
2004 |
|
|
98,559 |
|
|
|
81,412 |
|
|
|
76,454 |
|
|
|
17,147 |
|
|
|
59,307 |
|
|
|
22,105 |
|
2003 |
|
|
20,658 |
|
|
|
4,694 |
|
|
|
14,831 |
|
|
|
15,964 |
|
|
|
(1,133 |
) |
|
|
5,827 |
|
2002 |
|
|
(164,380 |
) |
|
|
(102,507 |
) |
|
|
(155,268 |
) |
|
|
(61,873 |
) |
|
|
(93,395 |
) |
|
|
(9,112 |
) |
2001 |
|
|
(136,601 |
) |
|
|
(74,371 |
) |
|
|
(124,593 |
) |
|
|
(62,230 |
) |
|
|
(62,363 |
) |
|
|
(12,008 |
) |
2000 |
|
|
(115,381 |
) |
|
|
(52,903 |
) |
|
|
(84,656 |
) |
|
|
(62,478 |
) |
|
|
(22,178 |
) |
|
|
(30,725 |
) |
1999 |
|
|
(46,335 |
) |
|
|
16,254 |
|
|
|
(28,716 |
) |
|
|
(62,589 |
) |
|
|
33,873 |
|
|
|
(17,619 |
) |
1998 |
|
|
(51,798 |
) |
|
|
10,638 |
|
|
|
(38,447 |
) |
|
|
(62,436 |
) |
|
|
23,989 |
|
|
|
(13,351 |
) |
Net Cumulative Redundancy (Deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Insurance Companies |
|
|
|
|
Year |
|
Grand |
|
|
Excluding |
|
|
|
|
|
|
|
|
|
|
All |
|
|
Lloyds |
|
Ended |
|
Total |
|
|
Asbestos |
|
|
Total |
|
|
Asbestos |
|
|
Other(1) |
|
|
Operations |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
$ |
50,746 |
|
|
|
51,009 |
|
|
|
41,922 |
|
|
$ |
(263 |
) |
|
|
42,185 |
|
|
$ |
8,824 |
|
2006 |
|
|
107,072 |
|
|
|
109,114 |
|
|
|
78,702 |
|
|
|
(2,042 |
) |
|
|
80,744 |
|
|
|
28,370 |
|
2005 |
|
|
97,444 |
|
|
|
99,715 |
|
|
|
69,818 |
|
|
|
(2,271 |
) |
|
|
72,089 |
|
|
|
27,626 |
|
2004 |
|
|
62,408 |
|
|
|
65,208 |
|
|
|
42,084 |
|
|
|
(2,800 |
) |
|
|
44,884 |
|
|
|
20,324 |
|
2003 |
|
|
30,989 |
|
|
|
34,194 |
|
|
|
9,899 |
|
|
|
(3,205 |
) |
|
|
13,104 |
|
|
|
21,090 |
|
2002 |
|
|
(49,685 |
) |
|
|
(14,800 |
) |
|
|
(60,021 |
) |
|
|
(34,885 |
) |
|
|
(25,136 |
) |
|
|
10,336 |
|
2001 |
|
|
(55,093 |
) |
|
|
(20,060 |
) |
|
|
(54,233 |
) |
|
|
(35,033 |
) |
|
|
(19,200 |
) |
|
|
(860 |
) |
2000 |
|
|
(45,162 |
) |
|
|
(10,035 |
) |
|
|
(34,676 |
) |
|
|
(35,127 |
) |
|
|
451 |
|
|
|
(10,486 |
) |
1999 |
|
|
(16,051 |
) |
|
|
19,181 |
|
|
|
(13,116 |
) |
|
|
(35,232 |
) |
|
|
22,116 |
|
|
|
(2,935 |
) |
1998 |
|
|
(19,538 |
) |
|
|
15,657 |
|
|
|
(14,734 |
) |
|
|
(35,195 |
) |
|
|
20,461 |
|
|
|
(4,804 |
) |
|
|
|
(1) |
|
Contains cumulative loss development for all active and run-off lines of business
exclusive of asbestos losses. |
14
The 2007 consolidated grand total gross cumulative redundancy of $88.3 million consisted of
prior year savings of $62.0 million from the Insurance Companies and $26.3 million from business
written by the Lloyds Operations. The Insurance Companies gross redundancy was generated mainly
from prior year savings in the specialty construction liability business as a result of a lower
than expected frequency in the 2003 to 2006 underwriting years, and from the marine and energy
business primarily due to favorable loss trends in the liability and energy products across most
underwriting years and partially offset by large loss activity in the cargo product. The gross
redundancy from the Lloyds Operations was generated mainly from favorable loss trends in the
liability, energy, specie and reinsurance products for underwriting years 2005 and prior as a
result of shorter development patterns.
The 2007 consolidated grand total net cumulative redundancy of $50.7 million consisted of
prior year savings of $41.9 million from the Insurance Companies and $8.8 million from business
written by the Lloyds Operations. The Insurance Companies net redundancy was generated mainly
from prior year savings of: $31.6 million from the specialty construction liability business as a
result of a lower than expected frequency in the 2003 to 2006 underwriting years, and $9.3 million
for the marine and energy business primarily as a result of favorable loss trends in the liability
and energy products across most underwriting years and partially offset by large loss activity in
the cargo product. The net redundancy from the Lloyds Operations was generated mainly from
favorable development in the liability, energy, specie and reinsurance products for underwriting
years 2005 and prior as a result of shorter development patterns.
The 2006 consolidated grand total gross cumulative redundancy of $190.0 million consisted of
prior year savings of $107.2 million from the Insurance Companies and $82.8 million from business
written by the Lloyds Operations. The Insurance Companies prior year savings was generated
across most lines of business, but was concentrated in the specialty construction liability
business as a result of a lower than expected frequency in the 2003 to 2006 underwriting years, the
marine and energy business mostly from the liability and offshore products, and professional
liability business from favorable loss experience in years 2005 and 2004, which was partially
offset by an increase in the 2005 Katrina and Rita hurricane gross loss estimates of $23.6 million.
The redundancy in the Lloyds Operations was principally due to reductions in the 2005 Katrina and
Rita hurricane gross loss estimates of $52.9 million and reserve reductions in the liability and
offshore energy business across all underwriting years as a result of shortened development
patterns.
The 2006 consolidated grand total net cumulative redundancy of $107.1 million consisted of
prior year savings of $78.7 million from the Insurance Companies and $28.4 million from business
written by the Lloyds Operations. The Insurance Companies net redundancy was generated mainly
from prior year savings in the specialty construction liability business as a result of a lower
than expected frequency in the 2003 to 2006 underwriting years, the marine and energy business
mostly from the liability, offshore and transport products partially offset by $1.9 million of net
deficiency on our 2005 Katrina and Rita hurricane estimates, and the professional liability
business from favorable D&O loss experience in underwriting years 2005 and 2004. The net
redundancy from the Lloyds Operations of $28.4 million included $3.4 million due to a review of
the 2005 Hurricanes Katrina and Rita loss estimates, a release of approximately $2.0 million
following a review of open claim files for the years 1998 to 2001, and reserve reductions in the
liability and offshore energy business across all underwriting years as a result of shortened
development patterns.
15
The 2005 consolidated grand total gross cumulative redundancy of $171.1 million consisted of
prior year savings of $87.8 million from the Insurance Companies and $83.3 million from business
written by the Lloyds Operations. The Insurance Companies redundancy was generated mainly from
prior year savings in the specialty construction liability business as a result of a lower than
expected frequency in the 2003 to 2005 underwriting years and professional liability business
partially offset by the increase in the 2005 Katrina and Rita hurricane gross loss estimates during
2007. The redundancy in the Lloyds Operations was mostly due to prior years savings from the
offshore energy business written in 2005 and 2004 and reductions to our Hurricanes Katrina and Rita
gross loss estimates and reserve reductions in the liability and offshore energy business across
all underwriting years as a result of shortened development patterns.
The 2005 consolidated grand total net cumulative redundancy of $97.4 million was mostly due to
prior year savings of $69.8 million from the Insurance Companies due to the favorable loss
development in the specialty construction liability business as a result of a lower than expected
frequency in the 2003 to 2005 underwriting years and professional liability businesses, and $27.6
million from marine and energy business written by the Lloyds Operations, including the $3.4
million decrease in the Hurricanes Katrina and Rita net loss estimates and reserve reductions in the
liability and offshore energy business across all underwriting years as a result of shortened
development patterns.
The 2004 consolidated grand total gross cumulative reserve redundancy of $98.6 million
consisted of prior years savings of $76.5 million from the Insurance Companies and $22.1 million
from marine and energy business written by the Lloyds Operations. The Insurance Companys 2004
gross loss reserve redundancy of $76.5 million was due to favorable development in the specialty
construction liability business as a result of a lower than expected frequency in the 2003 to 2004
underwriting years and professional liability businesses, and also included prior years savings of
$17.9 million for the reduction of asbestos liabilities principally due to the 2005 settlements of
two large claims coupled with a reevaluation of our remaining asbestos exposures. Such 2004 gross
loss reserve savings in asbestos reserves were also the principal contributors to the 2003 gross
consolidated reserve savings of $20.7 million.
The 2004 consolidated grand total net cumulative reserve redundancy of $62.4 million was
generated mostly from the specialty construction liability business as a result of a lower than
expected frequency in the 2003 to 2004 underwriting years and the professional liability business
written by the Insurance Companies and the marine and energy business written by the Lloyds
Operations.
The 2003 grand total net cumulative reserve redundancy of $31.0 million was principally
generated from a cumulative redundancy of $16.3 million from the marine and energy business written
by the Lloyds Operations.
The 2002 consolidated grand total gross and net cumulative reserve deficiencies of $164.4
million and $49.7 million, respectively, were generated mainly from reserve actions taken in the
2003 fourth quarter for the Insurance Companies as discussed below:
Gross and net asbestos loss reserves were increased $77.8 million and $31.6 million,
respectively, as a result of a review of asbestos exposures conducted by the Company in the 2003
fourth quarter. This gross asbestos loss deficiency was subsequently reduced by $17.4 million
during 2005. Such cumulative gross and net deficiency amounts are also contained in all years
prior to 2002 in the above table since the increased reserves relate primarily to policies
underwritten by the Companys wholly-owned insurance agency subsidiaries in the late 1970s and
first half of the 1980s.
16
Gross and net specialty business reserves were increased by $52.3 million and $22.2 million,
respectively, mostly for contractors liability business written from 1999 to 2002 in reaction to
loss development trends for those years. Approximately $39.5 million, $24.9 million and $16.7
million of the gross specialty reserve increase and $20.7 million, $12.4 million and $9.4 million
of the net specialty reserve increase recorded in 2003 are contained, respectively, in the 2001,
2000 and 1999 Insurance Companies cumulative amounts.
The remaining gross and net cumulative reserve deficiencies for the Insurance Companies in the
All Other column for the years 2002 through 2000 are mainly from the marine and run-off lines of
business recorded over several years that was not related to any specific reserve action.
The 2000 Lloyds Operations gross and net cumulative reserve deficiencies of $30.7 million
and $10.5 million, respectively, resulted from our Lloyds Operations establishing reserves against
premiums from prior years which were received in excess of our original premium estimates and
strengthening the Lloyds Operations reserves related to the 1999 underwriting year. Such amounts
also affected the 1999 and 1998 year-end reserves for the Lloyds Operations in the above table.
For 1998 and 1999 years, exclusive of the 2003 asbestos and environmental reserves
strengthening, the Company experienced net cumulative reserve redundancies on a consolidated basis
principally due to favorable development from marine business.
The favorable or adverse development on our gross reserves has mostly been ceded to our excess
of loss reinsurance treaties. As a result of these reinsurance arrangements, while our gross
losses and related reserve deficiencies and redundancies are very sensitive to favorable or adverse
developments such as those described above, our net losses and related reserve deficiencies and
redundancies tend to be less sensitive to such developments.
Our loss reserves include amounts related to short tail and long tail classes of business.
Short tail business refers to claims that are generally reported quickly upon occurrence of an
event, making estimation of loss reserves less complex. Our longer tail business includes our
specialty liability and professional liability insurance. For the long tail lines, significant
periods of time, ranging up to several years or more, may elapse between the occurrence of the
loss, the reporting of the loss and the settlement of the claim. Generally, the longer the time
span between the incidence of a loss and the settlement of the claim, the more likely the ultimate
settlement amount will vary from the original estimate.
Specialty Liability and Professional Liability. Substantially all of our specialty liability
business involves general liability policies which generate third party liability claims that are
long tail in nature. A significant portion of our general liability reserves relate to construction
defect claims. Reserves and claim frequency on this business may be impacted by legislation
implemented in California, which generally provides consumers who experience construction defects a
method other than litigation to obtain construction defect repairs. The law, which became
effective July 1, 2002 with a sunset provision effective January 1, 2011, provides for an
alternative dispute resolution system that attempts to involve all parties to the claim at an early
stage. This legislation may impact claim severity, frequency and length of settlement assumptions
underlying our reserves. Accordingly, our ultimate liability may exceed or be less than current
estimates due to this variable, among others.
The professional liability class generates third party claims, which also are longer tail in
nature. The professional liability policies mainly provide coverage on a claims-made basis, whereby
coverage is generally provided only for those claims that are made during the policy period. The
substantial majority of our claims-made policies provide coverage for one year periods. The
Company has also issued a limited number of multi-year
claims-made professional liability policies known as tail coverage that provide for
insurance protection for wrongful acts prior to the run-off date. Such multi-year policies provide
insurance protection for several years.
17
Loss development of our professional liability business is relatively immature, as we first
began writing the business in late 2001. Accordingly, it will take some time to better understand
the reserve trends on this business. Our professional liability loss estimates are based on
expected losses, actual reported losses, evaluation of loss trends, industry data, and the legal,
regulatory and current risk environment because anticipated loss experience in this area is less
predictable due to the small number of claims and/or erratic claim severity patterns. We believe
that we have made a reasonable estimate of the required loss reserves for professional liability.
The expected ultimate losses may be adjusted up or down as the accident years mature.
Our management believes that its reserves for losses and loss adjustment exposure are adequate
to cover the ultimate costs for loss contingencies related to the subprime mortgage crisis for
our professional liability business. We have received nine claim notifications and there was one
new claim / notice of potential claim reported for the twelve months ended December 31, 2008.
Claims are from professional liability policies written by the Insurance Companies and there are no
reported claims or notices of potential claims reported for the Lloyds Operations. All policies
are claims-made and defense costs are included within the limits of liability.
Hurricanes Gustav and Ike. During 2008, the Company recorded gross and net loss estimates 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 the third quarter 2008 Hurricanes Gustav and Ike. The
pre-tax net loss to the Company as a result of Hurricanes Gustav and Ike was approximately $29.3
million, which increased the Companys 2008 combined ratio by 4.3 ratio points.
18
The following table sets forth our gross and net loss and LAE reserves, incurred loss and LAE,
and payments for the 2008 Hurricanes Gustav and Ike for 2008:
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, 2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
Gross of Reinsurance |
|
|
|
|
Beginning gross reserves |
|
$ |
|
|
Incurred loss & LAE |
|
|
114,000 |
|
Calendar year payments |
|
|
6,601 |
|
|
|
|
|
Ending gross reserves |
|
$ |
107,399 |
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
70,299 |
|
Gross IBNR loss reserves |
|
|
37,100 |
|
|
|
|
|
Ending gross reserves |
|
$ |
107,399 |
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
Beginning net reserves |
|
$ |
|
|
Incurred loss & LAE |
|
|
17,169 |
|
Calendar year payments |
|
|
4,246 |
|
|
|
|
|
Ending net reserves |
|
$ |
12,923 |
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
11,696 |
|
Net IBNR loss reserves |
|
|
1,227 |
|
|
|
|
|
Ending net reserves |
|
$ |
12,923 |
|
|
|
|
|
Hurricanes Katrina and Rita. During the 2005 third quarter, the Company recorded gross
and net loss estimates of $471.0 million
and $22.3 million, respectively, exclusive of $14.5 million for the cost of excess of loss
reinstatement premiums related to Hurricanes Katrina and Rita.
19
The following tables set forth our gross and net loss and LAE reserves, incurred loss and LAE,
and payments for the 2005 Hurricanes Katrina and Rita for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
141,831 |
|
|
$ |
319,230 |
|
|
$ |
465,728 |
|
Incurred loss & LAE |
|
|
(12,250 |
) |
|
|
(29,349 |
) |
|
|
|
|
Calendar year payments |
|
|
31,849 |
|
|
|
148,050 |
|
|
|
146,498 |
|
|
|
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
97,732 |
|
|
$ |
141,831 |
|
|
$ |
319,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
62,732 |
|
|
$ |
94,959 |
|
|
$ |
172,916 |
|
Gross IBNR loss reserves |
|
|
35,000 |
|
|
|
46,872 |
|
|
|
146,314 |
|
|
|
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
97,732 |
|
|
$ |
141,831 |
|
|
$ |
319,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
4,519 |
|
|
$ |
10,003 |
|
|
$ |
19,408 |
|
Incurred loss & LAE |
|
|
(990 |
) |
|
|
(1,909 |
) |
|
|
|
|
Calendar year payments |
|
|
(138 |
) |
|
|
3,575 |
|
|
|
9,405 |
|
|
|
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
3,667 |
|
|
$ |
4,519 |
|
|
$ |
10,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
279 |
|
|
$ |
646 |
|
|
$ |
3,628 |
|
Net IBNR loss reserves |
|
|
3,388 |
|
|
|
3,873 |
|
|
|
6,375 |
|
|
|
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
3,667 |
|
|
$ |
4,519 |
|
|
$ |
10,003 |
|
|
|
|
|
|
|
|
|
|
|
Asbestos Liability. Our exposure to asbestos liability principally stems from marine
liability insurance written on an occurrence basis during the mid-1980s. In general, our
participation on such risks is in the excess layers, which requires the underlying coverage to be
exhausted prior to coverage being triggered in our layer. In many instances we are one of many
insurers who participate in the defense and ultimate settlement of these claims, and we are
generally a minor participant in the overall insurance coverage and settlement.
The reserves for asbestos exposures at December 31, 2008 are for: (i) one large settled claim
for excess insurance policy limits exposed to a class action suit against an insured involved in
the manufacturing or distribution of asbestos products being paid over several years (two other
large settled claims were fully paid in 2007); (ii) other insureds not directly involved in the
manufacturing or distribution of asbestos products, but that have more than incidental asbestos
exposure for their purchase or use of products that contained asbestos; and (iii) attritional
asbestos claims that could be expected to occur over time. Substantially all of our asbestos
liability reserves are included in our marine loss reserves.
The Company believes that there are no remaining known claims where it would suffer a material
loss as a result of excess policy limits being exposed to class action suits for insureds involved
in the manufacturing or distribution of asbestos products. There can be no assurances, however,
that material loss development may not arise in the future from existing asbestos claims or new
claims given the evolving and complex legal environment that may directly impact the outcome of the
asbestos exposures of our insureds.
20
The following tables set forth our gross and net loss and LAE reserves for our asbestos
exposures for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
23,194 |
|
|
$ |
37,171 |
|
|
$ |
56,838 |
|
Incurred loss & LAE |
|
|
796 |
|
|
|
(780 |
) |
|
|
246 |
|
Calendar year payments |
|
|
2,216 |
|
|
|
13,197 |
|
|
|
19,913 |
|
|
|
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
21,774 |
|
|
$ |
23,194 |
|
|
$ |
37,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
13,918 |
|
|
$ |
16,014 |
|
|
$ |
29,291 |
|
Gross IBNR loss reserves |
|
|
7,856 |
|
|
|
7,180 |
|
|
|
7,880 |
|
|
|
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
21,774 |
|
|
$ |
23,194 |
|
|
$ |
37,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
16,717 |
|
|
$ |
21,381 |
|
|
$ |
30,372 |
|
Incurred loss & LAE |
|
|
263 |
|
|
|
1,779 |
|
|
|
229 |
|
Calendar year payments |
|
|
297 |
|
|
|
6,443 |
|
|
|
9,220 |
|
|
|
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
16,683 |
|
|
$ |
16,717 |
|
|
$ |
21,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
9,032 |
|
|
$ |
9,715 |
|
|
$ |
13,678 |
|
Net IBNR loss reserves |
|
|
7,651 |
|
|
|
7,002 |
|
|
|
7,703 |
|
|
|
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
16,683 |
|
|
$ |
16,717 |
|
|
$ |
21,381 |
|
|
|
|
|
|
|
|
|
|
|
To the extent the Company incurs additional gross loss development for its historic
asbestos exposure, the Companys allowance for uncollectible reinsurance would increase for the
reinsurers that are insolvent, in run-off or otherwise no longer active in the reinsurance
business. The Company continues to believe that it will be able to collect reinsurance on the
gross portion of its historic gross asbestos exposure in the above table. Gross loss development
for asbestos exposure was not significant in 2008, 2007 and 2006.
At December 31, 2008, the ceded asbestos paid and unpaid recoverables were $8.9 million
compared to $10.5 million at December 31, 2007. During 2007, the Company increased its provision
for uncollectible reinsurance for asbestos losses by $1.6 million which was recorded in incurred
losses. Also in 2007, the Company settled demands for arbitration with two asbestos reinsurers.
Our management believes that the estimates for the reserves for losses and loss adjustment
expenses are adequate to cover the ultimate cost of losses and loss adjustment expenses on reported
and unreported claims. However, it is possible that the ultimate liability may exceed or be less
than such estimates. To the extent that reserves are deficient or redundant, the amount of such
deficiency or redundancy is treated as a charge or credit to earnings in the period in which the
deficiency or redundancy is identified. We continue to review all of our loss reserves, including
our asbestos reserves and Hurricanes Gustav, Ike, Katrina and Rita reserves, on a regular basis.
21
Additional information regarding our loss reserves can be found in Managements Discussion
and Analysis of Financial Condition and Results of OperationsResults of Operations and
OverviewOperating ExpensesNet Losses and Loss Adjustment Expenses Incurred and Note 5, Reserves
for Losses and Loss Adjustment Expenses, to our consolidated audited financial statements, both of
which are included herein.
Investments
The objective of the Companys investment policy, guidelines and strategy is to maximize total
investment return in the context of preserving and enhancing shareholder value and statutory
surplus of the Insurance Companies. Secondarily, an important consideration is to optimize the
after-tax book income.
The investments are managed by outside professional fixed-income and equity portfolio
managers. The Company seeks to achieve its investment objectives by investing in cash equivalents
and money market funds, municipal bonds, U.S. Government bonds, U.S. Government agency guaranteed
and non-guaranteed securities, corporate bonds, mortgage-backed and asset-backed securities and
common and preferred stocks. Our investment guidelines require that the amount of the consolidated
fixed-income portfolio rated below A- but no lower than BBB- by S&P or below A3 but no lower
than Baa3 by Moodys Investor Services (Moodys) shall not exceed 10% of the total fixed income
and short-term investments. Securities rated below BBB- by S&P or Baa3 by Moodys combined
with any other investments not specifically permitted under the investment guidelines, can not
exceed 5% of consolidated stockholders equity. Investments in equity securities that are actively
traded on major U.S. stock exchanges can not exceed 20% of consolidated stockholders equity. Our
investment guidelines prohibit investments in derivatives other than as a hedge against foreign
currency exposures or the writing of covered call options on the equity portfolio.
The Insurance Companies investments are subject to the oversight of their respective Boards
of Directors and our Finance Committee of the Parent Companys Board of Directors. The investment
portfolio and the performance of the investment managers are reviewed quarterly. These investments
must comply with the insurance laws of New York State, the domiciliary state of Navigators
Insurance Company and Navigators Specialty Insurance Company. These laws prescribe the type,
quality and concentration of investments which may be made by insurance companies. In general,
these laws permit investments, within specified limits and subject to certain qualifications, in
federal, state and municipal obligations, corporate bonds, preferred stocks, common stocks, real
estate mortgages and real estate. The U.K. Branchs investments must comply with the regulations
set forth by the Financial Services Authority (FSA) in the U.K.
The Lloyds Operations investments are subject to the direction and control of the Board of
Directors and the Investment Committee of NUAL, as well as the Parent Companys Board of Directors
and Finance Committee. These investments must comply with the rules and regulations imposed by
Lloyds and the FSA.
22
The table set forth below reflects investments, the net investment income earned thereon and
the related average yield for each of the years in the three-year period ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
Invested Assets and Cash |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
$ |
1,509,382 |
|
|
$ |
1,421,365 |
|
|
$ |
1,203,842 |
|
Lloyds Operations |
|
|
356,184 |
|
|
|
301,790 |
|
|
|
239,760 |
|
Parent Company |
|
|
52,149 |
|
|
|
44,146 |
|
|
|
32,308 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
1,917,715 |
|
|
$ |
1,767,301 |
|
|
$ |
1,475,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
$ |
63,544 |
|
|
$ |
58,261 |
|
|
$ |
47,723 |
|
Lloyds Operations |
|
|
11,655 |
|
|
|
10,524 |
|
|
|
7,694 |
|
Parent Company |
|
|
1,355 |
|
|
|
1,877 |
|
|
|
1,478 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
76,554 |
|
|
$ |
70,662 |
|
|
$ |
56,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Yield (amortized cost basis) |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
|
4.3 |
% |
|
|
4.5 |
% |
|
|
4.6 |
% |
Lloyds Operations |
|
|
3.4 |
% |
|
|
3.9 |
% |
|
|
3.4 |
% |
Parent Company |
|
|
3.1 |
% |
|
|
4.9 |
% |
|
|
5.3 |
% |
Consolidated |
|
|
4.1 |
% |
|
|
4.4 |
% |
|
|
4.4 |
% |
Invested assets have increased in 2008 and 2007 primarily due to the cash flows from
operations, partially offset by unrealized losses, which drove the increase in investment income
over those periods. The consolidated average investment yield of the portfolio decreased in 2008
due to the general decline in market yields over the period and the duration has remained constant
at 4.3 years as of December 31, 2008 and 2007.
At December 31, 2008, the average quality of the investment portfolio was rated AA by S&P
and Aa by Moodys. All of the Companys mortgage-backed and asset-backed securities are rated
AAA by S&P and Aaa by Moodys except for 33 securities approximating $28.3 million, which were
all rated investment grade. There are no collateralized debt obligations (CDOs), collateralized
loan obligations (CLOs), asset backed commercial paper or credit default swaps in the Companys
investment portfolio. At December 31, 2008 and 2007, all fixed-maturity and equity securities held
by us were classified as available-for-sale.
Prepayment assumptions associated with the mortgage-backed and asset-backed securities are
reviewed on a periodic basis. When changes in prepayment assumptions are deemed necessary as the
result of actual prepayments differing from anticipated prepayments, securities are revalued based
upon the new prepayment assumptions utilizing the retrospective accounting method.
Since the beginning of 2008, the Companys tax-exempt portion of its investment portfolio has
increased by $99.2 million to approximately 36.8% of the fixed maturities investment portfolio at
December 31, 2008 compared to approximately 33.2% at December 31, 2007. As a result, the effective
tax rate on net investment income decreased to 25.7% for 2008 compared to 27.8% for 2007 and 28.8% for
2006.
23
Effective January 1, 2008, the Company adopted the Statement of Financial Accounting Standards
No. (SFAS) 157 which defines fair value, establishes a consistent framework for measuring fair
value and expands disclosure requirements about fair value measurements. SFAS 157, among other
things, requires the Company to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. A hierarchy of valuation techniques is specified in
SFAS 157 based on whether the inputs to those valuation techniques are observable or unobservable.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs
reflect market data obtained from investment managers or brokers. These two types of inputs have
created the following fair value hierarchy:
|
|
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. |
All fixed maturities, short-term investments and equity securities are carried at fair value.
All prices for our fixed maturities, short-term investments and equity securities valued as level 1
or level 2 in the SFAS 157 fair value hierarchy 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 SFAS 157 pricing 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.
24
The following table presents, for each of the fair value hierarchy levels, the Companys fixed
maturities, equity securities and short-term investments that are measured at fair value as of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
In Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities |
|
$ |
271,392 |
|
|
$ |
1,372,224 |
|
|
$ |
156 |
|
|
$ |
1,643,772 |
|
Equity securities |
|
|
51,802 |
|
|
|
|
|
|
|
|
|
|
|
51,802 |
|
Short-term investments |
|
|
59,957 |
|
|
|
160,727 |
|
|
|
|
|
|
|
220,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
383,151 |
|
|
$ |
1,532,951 |
|
|
$ |
156 |
|
|
$ |
1,916,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The one security classified as level 3 in the above table is rated investment grade by
both S&P and Moodys, with unobservable inputs included in the Companys fixed maturities portfolio
for which price quotes from brokers were used to indicate fair value. There were no significant
judgments made in classifying instruments in SFAS 157 hierarchy.
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 twelve months ended December 31,
2008:
|
|
|
|
|
|
|
Twelve Months Ended |
|
|
|
December 31, 2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
Level 3 investments as of January 1, 2008 |
|
$ |
2,603 |
|
Unrealized net gains included in other comprehensive income (loss) |
|
|
(94 |
) |
Purchases, sales, paydowns and amortization |
|
|
(704 |
) |
Transfer from Level 3 |
|
|
(1,979 |
) |
Transfer to Level 3 |
|
|
330 |
|
|
|
|
|
Level 3 investments as of December 31, 2008 |
|
$ |
156 |
|
|
|
|
|
The $0.2 million in level 3 consists of one security being priced with unobservable
inputs.
25
The following tables set forth our cash and investments as of December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
December 31, 2008 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
U.S. Government Treasury and Agency
Bonds and foreign government bonds |
|
$ |
361,656 |
|
|
$ |
25,741 |
|
|
$ |
(145 |
) |
|
$ |
336,060 |
|
States, municipalities, and political
subdivisions |
|
|
614,609 |
|
|
|
12,568 |
|
|
|
(8,036 |
) |
|
|
610,077 |
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
299,775 |
|
|
|
10,930 |
|
|
|
(26 |
) |
|
|
288,871 |
|
Collateralized mortgage obligations |
|
|
56,743 |
|
|
|
|
|
|
|
(27,119 |
) |
|
|
83,862 |
|
Asset-backed securities |
|
|
29,436 |
|
|
|
5 |
|
|
|
(1,289 |
) |
|
|
30,720 |
|
Commercial mortgage-backed securities |
|
|
92,684 |
|
|
|
|
|
|
|
(20,350 |
) |
|
|
113,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
478,638 |
|
|
|
10,935 |
|
|
|
(48,784 |
) |
|
|
516,487 |
|
Corporate bonds |
|
|
188,869 |
|
|
|
1,398 |
|
|
|
(14,660 |
) |
|
|
202,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,643,772 |
|
|
|
50,642 |
|
|
|
(71,625 |
) |
|
|
1,664,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
51,802 |
|
|
|
1,266 |
|
|
|
(1,987 |
) |
|
|
52,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
1,457 |
|
|
|
|
|
|
|
|
|
|
|
1,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
220,684 |
|
|
|
|
|
|
|
|
|
|
|
220,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,917,715 |
|
|
$ |
51,908 |
|
|
$ |
(73,612 |
) |
|
$ |
1,939,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
December 31, 2007 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
U.S. Government Treasury and Agency
Bonds and foreign government bonds |
|
$ |
256,131 |
|
|
$ |
5,984 |
|
|
$ |
(63 |
) |
|
$ |
250,210 |
|
States, municipalities, and political
subdivisions |
|
|
515,883 |
|
|
|
7,050 |
|
|
|
(657 |
) |
|
|
509,490 |
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
266,270 |
|
|
|
2,177 |
|
|
|
(758 |
) |
|
|
264,851 |
|
Collateralized mortgage obligations |
|
|
109,560 |
|
|
|
253 |
|
|
|
(822 |
) |
|
|
110,129 |
|
Asset-backed securities |
|
|
64,352 |
|
|
|
533 |
|
|
|
(79 |
) |
|
|
63,898 |
|
Commercial mortgage-backed securities |
|
|
113,488 |
|
|
|
544 |
|
|
|
(1,031 |
) |
|
|
113,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
553,670 |
|
|
|
3,507 |
|
|
|
(2,690 |
) |
|
|
552,853 |
|
Corporate bonds |
|
|
196,636 |
|
|
|
2,504 |
|
|
|
(1,804 |
) |
|
|
195,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,522,320 |
|
|
|
19,045 |
|
|
|
(5,214 |
) |
|
|
1,508,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
67,240 |
|
|
|
6,452 |
|
|
|
(4,704 |
) |
|
|
65,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
7,056 |
|
|
|
|
|
|
|
|
|
|
|
7,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
170,685 |
|
|
|
|
|
|
|
|
|
|
|
170,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,767,301 |
|
|
$ |
25,497 |
|
|
$ |
(9,918 |
) |
|
$ |
1,751,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth our U.S. Treasury and Agency Bonds and foreign government bonds
as of December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
December 31, 2008 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bonds |
|
$ |
290,059 |
|
|
$ |
23,243 |
|
|
$ |
(143 |
) |
|
$ |
266,959 |
|
Agency Bonds |
|
|
58,401 |
|
|
|
2,008 |
|
|
|
(2 |
) |
|
|
56,395 |
|
Foreign Government Bonds |
|
|
13,196 |
|
|
|
490 |
|
|
|
|
|
|
|
12,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
361,656 |
|
|
$ |
25,741 |
|
|
$ |
(145 |
) |
|
$ |
336,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
December 31, 2007 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bonds |
|
$ |
191,876 |
|
|
$ |
5,359 |
|
|
$ |
(27 |
) |
|
$ |
186,544 |
|
Agency Bonds |
|
|
55,158 |
|
|
|
612 |
|
|
|
(4 |
) |
|
|
54,550 |
|
Foreign Government Bonds |
|
|
9,097 |
|
|
|
13 |
|
|
|
(32 |
) |
|
|
9,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
256,131 |
|
|
$ |
5,984 |
|
|
$ |
(63 |
) |
|
$ |
250,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
The following table sets forth the fifteen largest municipal holdings by counterparty as of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
S&P |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
Rating |
|
|
|
($ in thousands) |
|
Issuers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth of Massachusetts |
|
$ |
15,446 |
|
|
$ |
585 |
|
|
$ |
|
|
|
$ |
14,861 |
|
|
AA |
State of Wisconsin |
|
|
9,623 |
|
|
|
84 |
|
|
|
|
|
|
|
9,539 |
|
|
AA- |
State of Louisiana |
|
|
9,477 |
|
|
|
57 |
|
|
|
(158 |
) |
|
|
9,578 |
|
|
A+ |
State of California |
|
|
9,017 |
|
|
|
32 |
|
|
|
(628 |
) |
|
|
9,613 |
|
|
A+ |
State of North Carolina |
|
|
9,017 |
|
|
|
401 |
|
|
|
|
|
|
|
8,616 |
|
|
AAA |
State of Washington |
|
|
8,193 |
|
|
|
346 |
|
|
|
|
|
|
|
7,847 |
|
|
AA |
Commonwealth of Pennsylvania |
|
|
8,119 |
|
|
|
256 |
|
|
|
(78 |
) |
|
|
7,941 |
|
|
AA |
State of Ohio |
|
|
7,652 |
|
|
|
247 |
|
|
|
|
|
|
|
7,405 |
|
|
AA+ |
Illinois Finance Authority |
|
|
7,380 |
|
|
|
16 |
|
|
|
(71 |
) |
|
|
7,435 |
|
|
BBB+ |
City of Phoenix |
|
|
7,328 |
|
|
|
274 |
|
|
|
|
|
|
|
7,054 |
|
|
AA+ |
Delaware Transportation Authority |
|
|
6,715 |
|
|
|
351 |
|
|
|
|
|
|
|
6,364 |
|
|
AA- |
City of Chicago |
|
|
6,662 |
|
|
|
275 |
|
|
|
|
|
|
|
6,387 |
|
|
A- |
Adams County School District |
|
|
6,662 |
|
|
|
|
|
|
|
(285 |
) |
|
|
6,947 |
|
|
BBB+ |
Virginia Resources Authority |
|
|
6,398 |
|
|
|
133 |
|
|
|
|
|
|
|
6,265 |
|
|
AAA |
New York Local Government Assistance |
|
|
6,355 |
|
|
|
|
|
|
|
(319 |
) |
|
|
6,674 |
|
|
AAA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
124,044 |
|
|
|
3,057 |
|
|
|
(1,539 |
) |
|
|
122,526 |
|
|
|
|
|
All Other |
|
|
490,565 |
|
|
|
9,511 |
|
|
|
(6,497 |
) |
|
|
487,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
614,609 |
|
|
$ |
12,568 |
|
|
$ |
(8,036 |
) |
|
$ |
610,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the composition of the municipal bonds 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 December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent |
|
Equivalent |
|
|
|
|
|
|
|
|
|
|
|
S&P |
|
Moodys |
|
|
|
|
|
|
|
|
|
Unrealized |
|
Rating |
|
Rating |
|
Fair Value |
|
|
Book Value |
|
|
Gain/(Loss) |
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA/AA/A |
|
Aaa/Aa/A |
|
$ |
578,648 |
|
|
$ |
573,079 |
|
|
$ |
5,569 |
|
BBB |
|
Baa |
|
|
34,055 |
|
|
|
34,976 |
|
|
|
(921 |
) |
BB |
|
Ba |
|
|
|
|
|
|
|
|
|
|
|
|
B |
|
B |
|
|
|
|
|
|
|
|
|
|
|
|
CCC or lower |
|
Caa or lower |
|
|
|
|
|
|
|
|
|
|
|
|
N/A |
|
N/A |
|
|
1,906 |
|
|
|
2,022 |
|
|
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
614,609 |
|
|
$ |
610,077 |
|
|
$ |
4,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Of the $614.6 million of municipal bonds held in our portfolio, $45.4 million are prerefunded
municipal bonds, which are secured by U.S. Treasury securities.
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 guaranteed by each respective
entity but are not guaranteed by the Federal government. However, recent 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.
At December 31, 2008, the Company owned asset-backed securities approximating $0.2 million
with subprime mortgage exposures. The securities are rated investment grade and have an effective
maturity of 1.8 years. In addition, the Company owned collateralized mortgage obligations
approximating $9.2 million classified as Alt-A which is a credit category between prime and
subprime. The Alt-A bonds, also rated investment grade, have an effective maturity of 4.4 years.
The Company is receiving principal and/or interest payments on all of these securities and believes
such amounts are fully collectible.
The following tables set forth our mortgage-backed securities, collateralized mortgage
obligations, and asset-backed securities and the quality category (prime, Alt-A and subprime) for
such investments as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
$ |
42,258 |
|
|
$ |
1,043 |
|
|
$ |
(5 |
) |
|
$ |
41,220 |
|
FNMA |
|
|
189,232 |
|
|
|
6,848 |
|
|
|
(21 |
) |
|
|
182,405 |
|
FHLMC |
|
|
68,285 |
|
|
|
3,039 |
|
|
|
|
|
|
|
65,246 |
|
Prime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
299,775 |
|
|
$ |
10,930 |
|
|
$ |
(26 |
) |
|
$ |
288,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Collateralized
mortgage
obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
FNMA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
|
48,329 |
|
|
|
|
|
|
|
(25,043 |
) |
|
|
73,372 |
|
Alt-A |
|
|
8,414 |
|
|
|
|
|
|
|
(2,076 |
) |
|
|
10,490 |
|
Subprime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
56,743 |
|
|
$ |
|
|
|
$ |
(27,119 |
) |
|
$ |
83,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the fifteen largest collateralized mortgage obligations as of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue |
|
|
Fair |
|
|
Book |
|
|
Unrealized |
|
|
S&P |
|
|
Moodys |
|
Security Description |
|
Date |
|
|
Value |
|
|
Value |
|
|
(Loss) |
|
|
Rating |
|
|
Rating |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MLCC Mortgage Investors Inc 06 2 |
|
|
2006 |
|
|
$ |
4,065 |
|
|
$ |
4,597 |
|
|
$ |
(532 |
) |
|
AAA |
|
Aaa |
Countrywide Alternative Loan Trust 05 85CB |
|
|
2005 |
|
|
|
3,880 |
|
|
|
3,880 |
|
|
|
|
|
|
BBB |
|
Aaa |
Citigroup Mortgage Loan Trust 06 AR2 |
|
|
2006 |
|
|
|
3,597 |
|
|
|
5,404 |
|
|
|
(1,807 |
) |
|
NR |
|
A3 |
GMAC Mortgage Corp Loan Trust 05 AR6 |
|
|
2005 |
|
|
|
3,491 |
|
|
|
4,437 |
|
|
|
(946 |
) |
|
AAA |
|
Aaa |
Wells Fargo Mortgage Backed 06 AR8 |
|
|
2006 |
|
|
|
3,386 |
|
|
|
6,173 |
|
|
|
(2,787 |
) |
|
AAA |
|
NR |
Merrill Lynch Mortgage Backed 07 2 |
|
|
2007 |
|
|
|
2,957 |
|
|
|
4,871 |
|
|
|
(1,914 |
) |
|
NR |
|
Aa3 |
Wells Fargo Mortgage Backed 06AR5 |
|
|
2006 |
|
|
|
2,467 |
|
|
|
3,813 |
|
|
|
(1,346 |
) |
|
NR |
|
Baa1 |
Merrill Lynch Mortgage Investors 05 A9 |
|
|
2005 |
|
|
|
2,390 |
|
|
|
4,260 |
|
|
|
(1,870 |
) |
|
AAA |
|
NR |
Countrywide Home Loan Mortgage 06 HYB1 |
|
|
2006 |
|
|
|
2,198 |
|
|
|
2,198 |
|
|
|
|
|
|
A |
|
Aaa |
Countrywide Home Loan Mortgage 05 HY10 |
|
|
2005 |
|
|
|
1,115 |
|
|
|
1,115 |
|
|
|
|
|
|
AAA |
|
Aaa |
Wells Fargo Mortgage Backed 05AR4 |
|
|
2005 |
|
|
|
1,101 |
|
|
|
1,542 |
|
|
|
(441 |
) |
|
NR |
|
Aaa |
Merrill Lynch Mortgage Investors 05 A9 |
|
|
2005 |
|
|
|
1,025 |
|
|
|
1,221 |
|
|
|
(196 |
) |
|
AAA |
|
NR |
Bank of America Mortgage 04 F |
|
|
2004 |
|
|
|
968 |
|
|
|
992 |
|
|
|
(24 |
) |
|
AAA |
|
Aaa |
Master Adjustable Rate Mortage 05 6 |
|
|
2005 |
|
|
|
937 |
|
|
|
1,029 |
|
|
|
(92 |
) |
|
AAA |
|
A2 |
Countrywide Alternative Loan Trust 07 HY5R |
|
|
2007 |
|
|
|
773 |
|
|
|
1,449 |
|
|
|
(676 |
) |
|
AAA |
|
Aaa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
34,350 |
|
|
|
46,981 |
|
|
|
(12,631 |
) |
|
|
|
|
|
|
|
|
All Other |
|
|
|
|
|
|
22,393 |
|
|
|
36,881 |
|
|
|
(14,488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
56,743 |
|
|
$ |
83,862 |
|
|
$ |
(27,119 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
FNMA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
|
28,421 |
|
|
|
5 |
|
|
|
(1,178 |
) |
|
|
29,594 |
|
Alt-A |
|
|
793 |
|
|
|
|
|
|
|
(25 |
) |
|
|
818 |
|
Subprime |
|
|
222 |
|
|
|
|
|
|
|
(86 |
) |
|
|
308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
29,436 |
|
|
$ |
5 |
|
|
$ |
(1,289 |
) |
|
$ |
30,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details of the collateral of our asset backed securities portfolio as of December 31, 2008 are
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Amortized |
|
|
Unrealized |
|
|
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
Fair Value |
|
|
Cost |
|
|
Gain/(Loss) |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Loans |
|
$ |
15,453 |
|
|
$ |
1,971 |
|
|
$ |
1,061 |
|
|
$ |
3,312 |
|
|
$ |
21,797 |
|
|
$ |
22,801 |
|
|
$ |
(1,004 |
) |
Credit Cards |
|
|
802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
802 |
|
|
|
825 |
|
|
|
(23 |
) |
Miscellaneous |
|
|
6,617 |
|
|
|
|
|
|
|
|
|
|
|
220 |
|
|
|
6,837 |
|
|
|
7,094 |
|
|
|
(257 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
22,872 |
|
|
$ |
1,971 |
|
|
$ |
1,061 |
|
|
$ |
3,532 |
|
|
$ |
29,436 |
|
|
$ |
30,720 |
|
|
$ |
(1,284 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
The commercial mortgage-backed securities are all rated AAA by S&P or Aaa by Moodys. The
following table sets forth the fifteen largest commercial mortgage backed securities portfolio as
of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue |
|
|
Fair |
|
|
Book |
|
|
Underlying |
|
|
Delinq. |
|
|
Subord. |
|
|
S&P |
|
|
Moodys |
|
Security Description |
|
Date |
|
|
Value |
|
|
Value |
|
|
LTV % |
|
|
Rate |
|
|
Level |
|
|
Rating |
|
|
Rating |
|
|
|
($ in thousands) |
|
|
Wachovia Bank Commercial Mortgage 05 C18 |
|
|
2005 |
|
|
$ |
5,666 |
|
|
$ |
6,839 |
|
|
|
71.8 |
% |
|
|
0.8 |
% |
|
|
31.1 |
% |
|
AAA |
|
Aaa |
GS Mortgage Securities Corp II 05 GG4 |
|
|
2005 |
|
|
|
5,404 |
|
|
|
6,594 |
|
|
|
72.0 |
% |
|
|
0.0 |
% |
|
|
30.5 |
% |
|
AAA |
|
Aaa |
LB-UBS Mortgage Commercial Mortgage
Trust 06 C6 |
|
|
2006 |
|
|
|
5,295 |
|
|
|
6,790 |
|
|
|
63.6 |
% |
|
|
0.7 |
% |
|
|
30.2 |
% |
|
AAA |
|
Aaa |
LB-UBS Mortgage Commercial Mortgage
Trust 06 C7 |
|
|
2006 |
|
|
|
4,907 |
|
|
|
6,334 |
|
|
|
63.8 |
% |
|
|
0.9 |
% |
|
|
30.1 |
% |
|
AAA |
|
Aaa |
Citigroup/Deutsche Bank Comm 05 CD1 |
|
|
2005 |
|
|
|
4,852 |
|
|
|
5,874 |
|
|
|
68.4 |
% |
|
|
0.2 |
% |
|
|
30.5 |
% |
|
AAA |
|
Aaa |
Four Times Square Trust 06 4TS |
|
|
2006 |
|
|
|
4,848 |
|
|
|
7,031 |
|
|
|
39.4 |
% |
|
|
0.0 |
% |
|
|
7.9 |
% |
|
AAA |
|
Aaa |
Bear Stearns Commercial Mortgage 06 T22 |
|
|
2006 |
|
|
|
4,190 |
|
|
|
4,883 |
|
|
|
57.7 |
% |
|
|
0.0 |
% |
|
|
27.9 |
% |
|
AAA |
|
Aaa |
Bear Stearns Commercial Mortgage 07 PW15 |
|
|
2007 |
|
|
|
3,942 |
|
|
|
5,138 |
|
|
|
68.1 |
% |
|
|
0.4 |
% |
|
|
30.2 |
% |
|
AAA |
|
Aaa |
Banc of America Commercial Mortgage 07 1 |
|
|
2007 |
|
|
|
3,528 |
|
|
|
4,784 |
|
|
|
69.6 |
% |
|
|
0.7 |
% |
|
|
30.1 |
% |
|
AAA |
|
Aaa |
Morgan Stanley Capital I 07 HQ11 |
|
|
2007 |
|
|
|
3,523 |
|
|
|
4,792 |
|
|
|
69.4 |
% |
|
|
1.2 |
% |
|
|
30.1 |
% |
|
AAA |
|
Aaa |
Commercial Mortgage Pass Throu 05 C6 |
|
|
2005 |
|
|
|
3,317 |
|
|
|
4,054 |
|
|
|
71.0 |
% |
|
|
2.7 |
% |
|
|
30.3 |
% |
|
AAA |
|
Aaa |
Merrill Lynch Mortgage Trust 05 CIP1 |
|
|
2005 |
|
|
|
3,301 |
|
|
|
4,034 |
|
|
|
68.8 |
% |
|
|
0.2 |
% |
|
|
30.7 |
% |
|
AAA |
|
Aaa |
Morgan Stanley Capital I 04 T13 |
|
|
2004 |
|
|
|
2,790 |
|
|
|
3,323 |
|
|
|
58.8 |
% |
|
|
0.0 |
% |
|
|
15.0 |
% |
|
AAA |
|
Aaa |
Citigroup Commercial Mortgage 06 C5 |
|
|
2006 |
|
|
|
2,743 |
|
|
|
3,513 |
|
|
|
68.8 |
% |
|
|
2.2 |
% |
|
|
30.3 |
% |
|
AAA |
|
Aaa |
GE Capital Commercial Mortgage 02 1A |
|
|
2002 |
|
|
|
2,348 |
|
|
|
2,504 |
|
|
|
71.9 |
% |
|
|
2.8 |
% |
|
|
23.8 |
% |
|
AAA |
|
Aaa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
60,654 |
|
|
|
76,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
|
|
|
|
|
32,030 |
|
|
|
36,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
92,684 |
|
|
$ |
113,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the amount and percentage of the Companys fixed income portfolio
at December 31, 2008 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 |
|
$ |
1,170,908 |
|
|
|
63 |
% |
Very Strong |
|
AA |
|
|
346,936 |
|
|
|
19 |
% |
Strong |
|
A |
|
|
243,014 |
|
|
|
13 |
% |
Adequate |
|
BBB |
|
|
101,518 |
|
|
|
5 |
% |
Speculative |
|
BB & below |
|
|
174 |
|
|
|
0 |
% |
Not Rated |
|
NR |
|
|
1,906 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
AA |
|
$ |
1,864,456 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
32
The Company owns securities credit enhanced by financial guarantors. The following two tables
set forth the amount of credit enhanced securities in the fixed maturities portfolio by category at
December 31, 2008, identify the amount insured by each financial guarantor and identify the average
underlying credit rating of such credit enhanced securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Credit enhanced securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and political
subdivisions |
|
$ |
336,288 |
|
|
$ |
6,181 |
|
|
$ |
(4,250 |
) |
|
$ |
334,357 |
|
Mortgage- and asset-backed
securities |
|
|
6,344 |
|
|
|
|
|
|
|
(530 |
) |
|
|
6,874 |
|
Corporate bonds |
|
|
1,584 |
|
|
|
13 |
|
|
|
(63 |
) |
|
|
1,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
344,216 |
|
|
$ |
6,194 |
|
|
$ |
(4,843 |
) |
|
$ |
342,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
Underlying |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
Credit |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
Rating |
|
|
|
($ in thousands) |
|
Financial guarantors: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMBAC |
|
$ |
72,636 |
|
|
$ |
1,264 |
|
|
$ |
(1,252 |
) |
|
$ |
72,624 |
|
|
AA- |
Assured Guaranty LTD |
|
|
3,869 |
|
|
|
4 |
|
|
|
(52 |
) |
|
|
3,917 |
|
|
A |
FGIC |
|
|
58,553 |
|
|
|
938 |
|
|
|
(424 |
) |
|
|
58,039 |
|
|
AA- |
Financial Security Assurance |
|
|
85,563 |
|
|
|
2,031 |
|
|
|
(1,092 |
) |
|
|
84,624 |
|
|
A+ |
MBIA |
|
|
110,753 |
|
|
|
1,818 |
|
|
|
(1,575 |
) |
|
|
110,510 |
|
|
AA- |
Radian Group, Inc |
|
|
5,276 |
|
|
|
47 |
|
|
|
(291 |
) |
|
|
5,520 |
|
|
A |
XL Capital |
|
|
7,566 |
|
|
|
92 |
|
|
|
(157 |
) |
|
|
7,631 |
|
|
A+ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
344,216 |
|
|
$ |
6,194 |
|
|
$ |
(4,843 |
) |
|
$ |
342,865 |
|
|
AA- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The average underlying credit rating of the insured securities in the above table rated
by S&P or Moodys if such securities did not have the credit enhancing insurance is included in the
Underlying Credit Rating. This average rating includes $20.1 million of pre-refunded municipal
bonds which have an implied rating of AAA but are not otherwise rated by S&P or Moodys. Such
average ratings exclude credit enhanced securities approximating $19.9 million that do not have an
underlying rating consisting of municipal bonds approximating $12.0 million, asset-backed
securities approximating $6.3 million and corporate bonds approximating $1.6 million.
If all or some of the companies providing the credit enhancing insurance were no longer viable
entities, management believes that the credit enhanced securities are of sufficient quality to not
default, or if some of the securities did default, they would not have a material adverse effect on
the Companys financial condition or results of operations. However, since the ratings would be
reduced, it is likely that the market values would decrease to reflect such lower ratings.
33
Following is a list of the top fifteen corporate issuer holdings for fixed maturities at fair
value. All such fixed maturities are rated investment grade by S&P and Moodys. These holdings
represent direct obligations of the issuer or its subsidiaries and exclude any government
guaranteed or government sponsored organizations, securitized, credit enhanced or collateralized
asset-backed or mortgage-backed securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
S&P |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
Rating |
|
|
|
($ in thousands) |
|
Issuers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of
America Corp. |
|
$ |
9,399 |
|
|
$ |
36 |
|
|
$ |
(253 |
) |
|
$ |
9,616 |
|
|
A |
Citigroup,
Inc. |
|
|
7,197 |
|
|
|
20 |
|
|
|
(202 |
) |
|
|
7,379 |
|
|
A- |
Wells Fargo
& Co. |
|
|
5,707 |
|
|
|
34 |
|
|
|
(118 |
) |
|
|
5,791 |
|
|
AA- |
Goldman Sachs Group |
|
|
4,872 |
|
|
|
|
|
|
|
(550 |
) |
|
|
5,422 |
|
|
A |
General Electric |
|
|
4,849 |
|
|
|
27 |
|
|
|
(8 |
) |
|
|
4,830 |
|
|
AAA |
European Investment Bank |
|
|
4,805 |
|
|
|
197 |
|
|
|
|
|
|
|
4,608 |
|
|
AAA |
Morgan Stanley |
|
|
4,524 |
|
|
|
|
|
|
|
(432 |
) |
|
|
4,956 |
|
|
A- |
Bank of New York |
|
|
3,230 |
|
|
|
45 |
|
|
|
(11 |
) |
|
|
3,196 |
|
|
A+ |
AT&T,
Inc. |
|
|
3,007 |
|
|
|
|
|
|
|
(76 |
) |
|
|
3,083 |
|
|
A |
Deere &
Co. |
|
|
2,714 |
|
|
|
5 |
|
|
|
(29 |
) |
|
|
2,738 |
|
|
A |
Pepsi
Bottling Group Inc. |
|
|
2,686 |
|
|
|
|
|
|
|
(54 |
) |
|
|
2,740 |
|
|
A |
Cargill, Inc. |
|
|
2,606 |
|
|
|
|
|
|
|
(216 |
) |
|
|
2,822 |
|
|
A |
Conoco Phillips |
|
|
2,550 |
|
|
|
14 |
|
|
|
(1 |
) |
|
|
2,537 |
|
|
A |
Mitsubishi UFJ Financial Group |
|
|
2,530 |
|
|
|
|
|
|
|
(503 |
) |
|
|
3,033 |
|
|
A |
Progress
Energy, Inc. |
|
|
2,475 |
|
|
|
29 |
|
|
|
(60 |
) |
|
|
2,506 |
|
|
BBB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
$ |
63,151 |
|
|
$ |
407 |
|
|
$ |
(2,513 |
) |
|
$ |
65,257 |
|
|
|
|
|
All Other |
|
|
125,718 |
|
|
|
991 |
|
|
|
(12,147 |
) |
|
|
136,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
188,869 |
|
|
$ |
1,398 |
|
|
$ |
(14,660 |
) |
|
$ |
202,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We regularly review our fixed maturity and equity securities portfolios to evaluate the
necessity of recording impairment losses for other-than-temporary declines in the fair value of
investments. In general, we focus our attention on those securities whose market value was less
than 80% of their cost or amortized cost, as appropriate, for six or more consecutive months. If
warranted as the result of conditions relating to a particular security, we will focus on a
significant decline in market value regardless of the time period involved. Other factors
considered in evaluating potential impairment include the current fair value as compared to cost or
amortized cost, as appropriate, our intent and ability to retain the investment for a period of
time sufficient to allow for an anticipated recovery in value, specific credit issues related to
the issuer and current economic conditions.
As mentioned above, the Company considers its intent and ability to hold a security until the
value recovers as part of the process of evaluating whether a securitys unrealized loss
represents other-than-temporary decline. The Companys ability to hold such securities is
supported by sufficient cash flow from its operations and from maturities within its investment
portfolio in order to meet its claims payment and other disbursement obligations arising from its
underwriting operations without selling such investments. With respect to securities where the
decline in value is determined to be temporary and the securitys value is not written down, a
subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on
security sales are made within the context of overall risk
monitoring, changing information and market
conditions. Management of the
Companys investment portfolio is outsourced to third party investment managers. While these
investment managers may, at a given point in time, believe that the preferred course of action is
to hold securities with unrealized losses that are considered temporary until such losses are
recovered, the dynamic nature of the portfolio management may result in a subsequent decision to
sell the security and realize the loss, based upon a change in market and other factors described
above.
34
The following table sets forth the fifteen largest equity securities holdings as of December
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Issuers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vanguard Total Stock Market Index |
|
$ |
3,614 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,614 |
|
Vanguard Pacific Stock Index |
|
|
3,273 |
|
|
|
4 |
|
|
|
|
|
|
|
3,269 |
|
Vanguard European Stock Index |
|
|
2,939 |
|
|
|
11 |
|
|
|
|
|
|
|
2,928 |
|
Vanguard Emerging Market Stock Index |
|
|
2,385 |
|
|
|
5 |
|
|
|
|
|
|
|
2,380 |
|
Chevron Corp. |
|
|
2,005 |
|
|
|
271 |
|
|
|
|
|
|
|
1,734 |
|
Bristol-Myers Squibb Co. |
|
|
1,313 |
|
|
|
164 |
|
|
|
|
|
|
|
1,149 |
|
Unilever NV |
|
|
1,260 |
|
|
|
108 |
|
|
|
|
|
|
|
1,152 |
|
HJ Heinz Co. |
|
|
1,215 |
|
|
|
|
|
|
|
(47 |
) |
|
|
1,262 |
|
Johnson & Johnson |
|
|
1,188 |
|
|
|
|
|
|
|
(5 |
) |
|
|
1,193 |
|
Wells Fargo & Co. |
|
|
1,143 |
|
|
|
49 |
|
|
|
|
|
|
|
1,094 |
|
Ishares MSCI Japan Index Fund |
|
|
1,134 |
|
|
|
|
|
|
|
|
|
|
|
1,134 |
|
Verizon Communications Inc. |
|
|
1,129 |
|
|
|
87 |
|
|
|
|
|
|
|
1,042 |
|
Comcast Corp. |
|
|
1,097 |
|
|
|
|
|
|
|
|
|
|
|
1,097 |
|
JP Morgan Chase & Co. |
|
|
1,095 |
|
|
|
|
|
|
|
(266 |
) |
|
|
1,361 |
|
BP PLC |
|
|
1,065 |
|
|
|
|
|
|
|
|
|
|
|
1,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
25,855 |
|
|
|
699 |
|
|
|
(318 |
) |
|
|
25,474 |
|
All Other |
|
|
25,947 |
|
|
|
567 |
|
|
|
(1,669 |
) |
|
|
27,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
51,802 |
|
|
$ |
1,266 |
|
|
$ |
(1,987 |
) |
|
$ |
52,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
The following table summarizes all securities in an unrealized loss position at December 31,
2008 and December 31, 2007, showing the aggregate fair value and gross unrealized loss by the
length of time those securities have continuously been in an unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
|
Fair |
|
|
Gross |
|
|
Fair |
|
|
Gross |
|
|
|
Value |
|
|
Unrealized Loss |
|
|
Value |
|
|
Unrealized Loss |
|
|
|
($ in thousands) |
|
Fixed Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Treasury and Agency
Bonds and foreign government bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
$ |
3,862 |
|
|
$ |
145 |
|
|
$ |
6,316 |
|
|
$ |
30 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
6,527 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
3,862 |
|
|
|
145 |
|
|
|
12,843 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
68,727 |
|
|
|
2,187 |
|
|
|
21,853 |
|
|
|
67 |
|
7-12 Months |
|
|
118,910 |
|
|
|
4,376 |
|
|
|
6,045 |
|
|
|
115 |
|
> 12 Months |
|
|
15,918 |
|
|
|
1,473 |
|
|
|
69,671 |
|
|
|
475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
203,555 |
|
|
|
8,036 |
|
|
|
97,569 |
|
|
|
657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
30,670 |
|
|
|
939 |
|
|
|
59,191 |
|
|
|
517 |
|
7-12 Months |
|
|
80,618 |
|
|
|
26,966 |
|
|
|
48,496 |
|
|
|
423 |
|
> 12 Months |
|
|
66,218 |
|
|
|
20,879 |
|
|
|
134,858 |
|
|
|
1,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
177,506 |
|
|
|
48,784 |
|
|
|
242,545 |
|
|
|
2,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
57,805 |
|
|
|
2,445 |
|
|
|
20,722 |
|
|
|
255 |
|
7-12 Months |
|
|
57,971 |
|
|
|
5,893 |
|
|
|
25,520 |
|
|
|
974 |
|
> 12 Months |
|
|
27,873 |
|
|
|
6,322 |
|
|
|
38,865 |
|
|
|
575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
143,649 |
|
|
|
14,660 |
|
|
|
85,107 |
|
|
|
1,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities |
|
$ |
528,572 |
|
|
$ |
71,625 |
|
|
$ |
438,064 |
|
|
$ |
5,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
$ |
8,991 |
|
|
$ |
1,941 |
|
|
$ |
26,257 |
|
|
$ |
3,494 |
|
7-12 Months |
|
|
351 |
|
|
|
46 |
|
|
|
4,153 |
|
|
|
1,209 |
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity Securities |
|
$ |
9,342 |
|
|
$ |
1,987 |
|
|
$ |
30,463 |
|
|
$ |
4,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
The following table summarizes the gross unrealized investment losses by length of time where
the fair value is less than 80% of amortized cost.
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 |
|
|
|
|
($
in thousands) |
|
months |
|
|
than 6 months |
|
|
months |
|
|
or longer |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities |
|
$ |
|
|
|
$ |
(477 |
) |
|
$ |
(22,841 |
) |
|
$ |
(20,870 |
) |
|
$ |
(44,188 |
) |
Equity Securities |
|
|
|
|
|
|
(1,090 |
) |
|
|
|
|
|
|
|
|
|
|
(1,090 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
(1,567 |
) |
|
$ |
(22,841 |
) |
|
$ |
(20,870 |
) |
|
$ |
(45,278 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We analyze the unrealized losses quarterly to determine if any are
other-than-temporary. The above unrealized losses have been determined to be temporary and
generally result from changes in market conditions.
When a security in our investment portfolio has an unrealized loss that is deemed to be
other-than-temporary, we write the security down to fair value through a charge to operations.
Significant changes in the factors we consider when evaluating investments for impairment losses
could result in a significant change in impairment losses reported in the consolidated financial
statements.
During 2008, the Company identified equity securities with fair value of $34.4 million which
were considered to be other-than-temporarily impaired. Consequently, the cost of such securities
was written down to fair value and the Company recognized realized losses of $28.4 million. The
equity impairments include $8.6 million in write-downs to fair value for various broad based ETFs
and mutual funds where the fair value was less than 80% of the book value. During 2008, the Company
identified fixed maturity securities with fair value of $7.4 million which were considered to be
other-than-temporarily impaired. Consequently, the cost of such securities was written down to
fair value and the Company recognized realized losses of $8.6 million. The total pretax impairment
losses recorded in 2008 were $37.0 million.
The table above shows that we have fixed maturity securities with unrealized losses of $43.7
million where the fair value has been less than book value for at least six months. The fair value
of these securities as of December 31, 2008 was $91.1 million. These losses consist mainly of
non-agency mortgage-backed securities and have not been deemed to be other-than-temporary based on
our evaluation of projected cash flows, credit enhancements, cumulative delinquencies and losses,
rating agency assessments and other factors. Management believes these securities are trading at
depressed levels due to illiquidity in the marketplace and other market based factors rather than
the specific credit issues.
The Company held common shares of a bond guarantee company in its equity portfolio at December
31, 2007 which were considered to be other-than-temporarily-impaired and recognized a realized loss
on such shares amounting to $0.7 million in the 2007 fourth quarter.
There were no impairment losses recorded in our fixed maturity or equity securities portfolios
for the year ended December 31, 2006.
37
We have classified our fixed maturity impairments by what we believe is the cause of the
decline in fair value as follows:
|
|
|
|
|
|
|
|
|
|
|
Credit |
|
|
Market |
|
|
|
Risk |
|
|
Conditions |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Corporate Bonds |
|
$ |
748 |
|
|
$ |
|
|
Non-agency mortgage-backed securities |
|
|
169 |
|
|
|
7,686 |
|
|
|
|
|
|
|
|
Total |
|
$ |
917 |
|
|
$ |
7,686 |
|
|
|
|
|
|
|
|
The impaired corporate bond was subsequently sold at a gain of $0.6 million from the
impaired value when the fair value rose due to the purchase of the issuer by another financial
institution.
The portion of impairment attributable to credit risk for mortgage backed securities is the
amount of projected principal loss, and any remainder is classified as impairment due to reductions
in fair value caused by market conditions such as illiquidity or other general market based
factors.
The following table shows the composition by NAIC rating and the generally equivalent S&P and
Moodys ratings of the fixed maturity securities in our portfolio with gross unrealized losses at
December 31, 2008. Not all of the securities are rated by S&P and/or Moodys:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Equivalent |
|
Equivalent |
|
Unrealized Loss |
|
|
Fair Value |
|
NAIC |
|
S&P |
|
Moodys |
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
Rating |
|
Rating |
|
Rating |
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
|
|
|
|
|
|
($ in thousands) |
1 |
|
AAA/AA/A |
|
Aaa/Aa/A |
|
$ |
58,588 |
|
|
|
82 |
% |
|
$ |
438,015 |
|
|
|
83 |
% |
2 |
|
BBB |
|
Baa |
|
|
12,843 |
|
|
|
18 |
% |
|
|
88,477 |
|
|
|
17 |
% |
3 |
|
BB |
|
Ba |
|
|
78 |
|
|
|
0 |
% |
|
|
174 |
|
|
|
0 |
% |
4 |
|
B |
|
B |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
CCC or lower |
|
Caa or lower |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
N/A |
|
N/A |
|
|
116 |
|
|
|
|
|
|
|
1,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
71,625 |
|
|
|
100 |
% |
|
$ |
528,572 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, the gross unrealized losses in the table directly above are
related to fixed maturity securities that are rated investment grade, which is defined by us as a
security having an NAIC rating of 1 or 2, an S&P rating of BBB- or higher, or a Moodys rating of
Baa3 or higher. Unrealized losses on investment grade securities principally relate to changes
in interest rates or changes in sector-related credit spreads since the securities were acquired.
Any such unrealized losses are recognized in income if the securities are sold or if the decline in
fair value is deemed to be other-than-temporary.
38
The contractual maturity by the number of years until maturity for fixed maturity
securities with unrealized losses at December 31, 2008 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 |
|
$ |
127 |
|
|
|
0 |
% |
|
$ |
6,815 |
|
|
|
1 |
% |
Due after one year through five years |
|
|
6,064 |
|
|
|
8 |
% |
|
|
113,851 |
|
|
|
22 |
% |
Due after five years through ten years |
|
|
8,206 |
|
|
|
11 |
% |
|
|
89,342 |
|
|
|
17 |
% |
Due after ten years |
|
|
8,444 |
|
|
|
12 |
% |
|
|
141,058 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed securities |
|
|
48,784 |
|
|
|
69 |
% |
|
|
177,506 |
|
|
|
33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities |
|
$ |
71,625 |
|
|
|
100 |
% |
|
$ |
528,572 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment penalties. Due to the
periodic repayment of principal, the mortgage-backed and asset-backed securities are estimated to
have an effective maturity of approximately 2.7 years.
Our realized capital gains and losses for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
$ |
3,650 |
|
|
$ |
1,320 |
|
|
$ |
743 |
|
(Losses) |
|
|
(1,670 |
) |
|
|
(1,749 |
) |
|
|
(2,385 |
) |
(Impairments) |
|
|
(8,604 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,624 |
) |
|
|
(429 |
) |
|
|
(1,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
|
720 |
|
|
|
3,626 |
|
|
|
714 |
|
(Losses) |
|
|
(3,954 |
) |
|
|
(536 |
) |
|
|
(98 |
) |
(Impairments) |
|
|
(28,441 |
) |
|
|
(655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,675 |
) |
|
|
2,435 |
|
|
|
616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital gains (losses) |
|
$ |
(38,299 |
) |
|
$ |
2,006 |
|
|
$ |
(1,026 |
) |
|
|
|
|
|
|
|
|
|
|
39
Ratings
The Companys ability to underwrite business in the Insurance Companies is dependent upon the
financial strength and claims paying ability ratings of the Insurance Companies. Financial
strength ratings represent the opinions of the rating agencies on the financial strength of a
company and its capacity to meet the obligations of insurance policies. Independent ratings are
one of the important factors that establish our competitive position in the insurance markets. The
rating agencies consider many factors in determining the financial strength rating of an insurance
company, including the relative level of statutory surplus necessary to support the business
operations of the company. These ratings are based upon factors relevant to policyholders, agents
and intermediaries and are not directed toward the protection of investors. Such ratings are not
recommendations to buy, sell or hold securities.
Debt ratings apply to short-term and long-term debt as well as preferred stock. These ratings
are assessments of the likelihood that we will make timely payments of the principal and interest
for our senior debt.
It is possible that, in the future, one or more of the rating agencies may reduce our existing
ratings. If one or more of our ratings were downgraded, we could incur higher borrowing costs and
our ability to access the capital markets could be impacted. In addition, the Insurance Companies
could be adversely impacted by a downgrade in our financial strength ratings, including a possible
reduction in demand for our products in certain markets.
The Insurance Companies utilize the ratings from A.M. Best and S&P for underwriting purposes.
The Insurance Companies are rated A (Excellent stable outlook) by A.M. Best and A (Strong -
stable outlook) by S&P. Syndicate 1221 utilizes the ratings from A.M. Best and S&P for
underwriting purposes which apply to all Lloyds of London syndicates. Lloyds of London is rated
A (Excellent stable outlook) by A.M. Best and A+ (Strong stable outlook) by S&P. In
addition, the Company utilizes the senior debt ratings from S&P and Moodys. The Companys senior
debt is rated BBB (Adequate stable outlook) by S&P and Baa3 (Moderate credit risk stable
outlook) by Moodys.
Regulation
United States
We are subject to regulation under the insurance statutes, including holding company statutes,
of various states and applicable regulatory authorities in the United States. These regulations
vary but generally require insurance holding companies, and insurers that are subsidiaries of
holding companies, to register and file reports concerning their capital structure, ownership,
financial condition and general business operations. Such regulations also generally require prior
regulatory agency approval of changes in control of an insurer and of transactions within the
holding company structure. The regulatory agencies have statutory authorization to enforce their
laws and regulations through various administrative orders and enforcement proceedings.
The State of New York Insurance Department is our principal regulatory agency. The New York
insurance law provides that no corporation or other person may acquire control of us, and thus
indirect control of our insurance company subsidiaries, unless it has given notice to our insurance
company subsidiaries and obtained prior written approval from the Superintendent of Insurance of
the State of New York for such acquisition. In New York, any purchaser of 10% or more of the
outstanding shares of our common stock would be presumed to have acquired control of us, unless
such presumption is rebutted.
40
Navigators Insurance Company and Navigators Specialty Insurance Company may
only pay dividends out of their statutory earned surplus under New York insurance law.
Generally, the maximum amount of dividends Navigators Insurance Company and Navigators Specialty
Insurance Company may pay without regulatory approval in any twelve-month period is the lesser of
adjusted net investment income or 10% of statutory surplus. For a discussion of our current
dividend capacity, see Managements Discussion of Financial Condition and Results of
OperationsLiquidity and Capital Resources included herein.
Under insolvency or guaranty laws in most states in which Navigators Insurance Company and
Navigators Specialty Insurance Company operate, insurers doing business in those states can be
assessed up to prescribed limits for policyholder losses of insolvent insurance companies. Neither
Navigators Insurance Company nor Navigators Specialty Insurance Company was subject to any material
assessments under state insolvency or guarantee laws during the three year period ended December
31, 2008.
Navigators Insurance Company is licensed to engage in the insurance and reinsurance business
in 50 states, the District of Columbia and Puerto Rico. Navigators Specialty Insurance Company is
licensed to engage in the insurance and reinsurance business in the State of New York and is an
approved surplus lines insurer or meets the financial requirements where there is not a formal
approval process in all other states and the District of Columbia.
As part of its general regulatory oversight process, the New York Insurance Department
conducts detailed examinations of the books, records and accounts of New York insurance companies
every three to five years. Navigators Insurance Company and Navigators Specialty Insurance Company
were examined for the years 2001 through 2004 by the New York Insurance Department.
The Insurance Regulatory Information System, or IRIS, was developed by the NAIC and is
intended primarily to assist state insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating in their respective states. IRIS
identifies thirteen industry ratios and specifies usual values for each ratio. Departure from
the usual values on four or more of the ratios can lead to inquiries from individual state
insurance commissioners as to certain aspects of an insurers business. As of December 31, 2008,
the results for both Navigators Insurance Company and Navigators Specialty Insurance Company were
within the usual values for all IRIS ratios. All of the business written by Navigators Specialty
Insurance Company is reinsured by Navigators Insurance Company.
The NAIC has codified statutory accounting practices for insurance enterprises. As a result
of this process, the NAIC issued a revised statutory Accounting Practices and Procedures Manual
that became effective January 1, 2001 and is updated each year. We prepare our statutory basis
financial statements in accordance with the most recently updated statutory manual subject to any
deviations prescribed or permitted by the New York Insurance Commissioner.
The NAIC adopted model legislation in December 2004 implementing new disclosure requirements
with respect to compensation of insurance producers. The model legislation requires that insurance
producers obtain the consent of the insured and disclose to the insured, where such producers
receive any compensation from the insured, the amount of compensation from the insurer. In those
cases where the contingent commission is not known, producers would be required to provide a
reasonable estimate of the amount and method for calculating such compensation. Producers who
represent companies and do not receive compensation from the insured would have a duty to disclose
that relationship in certain circumstances. The model legislation has been adopted by some states
and is being considered by others.
41
In 2002, in response to the tightening of supply in certain insurance and reinsurance markets
resulting from, among other things, the September 11, 2001 terrorist attacks, the U.S. Terrorism
Risk Insurance Act, or TRIA, was enacted. TRIA was intended to ensure the availability of
insurance coverage for acts of terrorism (as defined) in the United States of America committed
by or on behalf of foreign persons or interests. This law established a federal program through
the end of 2005 to help the commercial property and casualty insurance industry cover claims
related to future losses resulting from acts of terrorism and requires insurers to offer coverage
for acts of terrorism in all commercial property and casualty policies. As a result, we are
prohibited from adding certain terrorism exclusions to those policies written by insurers in our
group that write business in the U.S. The imposition of these TRIA deductibles could have an
adverse effect on our results of operations. Potential future changes to TRIA could also adversely
affect us by causing our reinsurers to increase prices or withdraw from certain markets where
terrorism coverage is required. As a result of TRIA, we are required to offer coverage for certain
terrorism risks that we may normally exclude. Occasionally in our marine business, such coverage
falls outside of our normal reinsurance program. In such cases, our only reinsurance would be the
protection afforded by TRIA.
On December 22, 2005, the Terrorism Risk Insurance Extension Act of 2005, or TRIEA, was
enacted. TRIEA extends TRIA through December 31, 2007 and made several changes in the program,
including the elimination of several previously covered lines. The deductible for each insurer was
increased to 17.5% and 20% of direct earned premiums in 2006 and 2007, respectively. For losses in
excess of an insurers deductible, the Insurance Companies will retain an additional 10% and 15% of
the excess losses in 2006 and 2007, respectively, with the balance to be covered by the Federal
government up to an aggregate cap of insured losses of $25 billion in 2006 and $27.5 billion in
2007. Also, TRIEA established a new program trigger under which Federal compensation will become
available only if aggregate insured losses sustained by all insurers exceed $50 million from a
certified act of terrorism occurring after March 31, 2006 and $100 million for certified acts
occurring on or after January 1, 2007.
On December 26, 2007, the Terrorism Risk Insurance Program Reauthorization Act of 2007
(TRIPRA) was enacted. TRIPRA, among other provisions, extends for seven years the program
established under TRIA, as amended.
State insurance departments have adopted a methodology developed by the NAIC for assessing the
adequacy of statutory surplus of property and casualty insurers which includes a risk-based capital
formula that attempts to measure statutory capital and surplus needs based on the risks in a
companys mix of products and investment portfolio. The formula is designed to allow state
insurance regulators to identify weakly capitalized companies. Under the formula, a company
determines its risk-based capital by taking into account certain risks related to the insurers
assets (including risks related to its investment portfolio and ceded reinsurance) and the
insurers liabilities (including underwriting risks related to the nature and experience of its
insurance business). The risk-based capital rules provide for different levels of regulatory
attention depending on the ratio of a companys total adjusted capital to its authorized control
level of risk-based capital. Based on calculations made by Navigators Insurance Company and
Navigators Specialty Insurance Company, their risk-based capital levels exceed the level that would
trigger regulatory attention or company action. In their respective 2007 statutory financial
statements, Navigators Insurance Company and Navigators Specialty Insurance Company have complied
with the NAICs risk-based capital reporting requirements.
In addition to regulations applicable to insurance agents generally, the Navigators Agencies
are subject to managing general agents acts in their state of domicile and in
certain other jurisdictions where they do business.
42
Our Lloyds Operations are subject to regulation in the United States in addition to being
regulated in the United Kingdom, as discussed below. The Lloyds of London market is licensed to
engage in insurance business in Illinois, Kentucky and the U.S. Virgin Islands and operates as an
eligible excess and surplus lines insurer in all states and territories except Kentucky and the
U.S. Virgin Islands. Lloyds is also an accredited reinsurer in all states and territories of the
United States. Lloyds maintains various trust funds in the state of New York to protect its
United States business and is therefore subject to regulation by the New York Insurance Department,
which acts as the domiciliary department for Lloyds U.S. trust funds. There are deposit trust
funds in other states to support Lloyds reinsurance and excess and surplus lines insurance
business.
From time to time, various regulatory and legislative changes have been proposed in the
insurance and reinsurance industry. Among the proposals that have in the past been or are at
present being considered are the possible introduction of federal regulation in addition to, or in
lieu of, the current system of state regulation of insurers and proposals in various state
legislatures (some of which have been enacted) to conform portions of their insurance laws and
regulations to various model acts adopted by the NAIC. We are unable to predict whether any of
these laws and regulations will be adopted, the form in which any such laws and regulations would
be adopted, or the effect, if any, these developments would have on our operations and financial
condition.
United Kingdom
Our United Kingdom subsidiaries and our Lloyds Operations are subject to regulation by the
Financial Services Authority, as established by the Financial Services and Markets Act 2000. Our
Lloyds Operations is also subject to supervision by the Council of Lloyds. The Financial
Services Authority has been granted broad authorization and intervention powers as they relate to
the operations of all insurers, including Lloyds syndicates, operating in the United Kingdom.
Lloyds is authorized by the Financial Services Authority and is required to implement certain
rules prescribed by the Financial Services Authority, which it does by the powers it has under the
Lloyds Act 1982 relating to the operation of the Lloyds market. Lloyds prescribes, in respect
of its managing agents and corporate members, certain minimum standards relating to their
management and control, solvency and various other requirements. The Financial Services Authority
directly monitors Lloyds managing agents compliance with the systems and controls prescribed by
Lloyds. If it appears to the Financial Services Authority that either Lloyds is not fulfilling
its delegated regulatory responsibilities, or that managing agents are not complying with the
applicable regulatory rules and guidance, the Financial Services Authority may intervene at its
discretion.
We participate in the Lloyds of London market through our ownership of NUAL, Millennium
Underwriting Ltd. and Navigators Corporate Underwriters Ltd. NUAL is the managing agent for
Syndicate 1221. Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. provide
underwriting capacity to Syndicate 1221 and are therefore Lloyds corporate members. By entering
into a membership agreement with Lloyds, Millennium Underwriting Ltd. and Navigators Corporate
Underwriters Ltd. undertake to comply with all Lloyds bye-laws and regulations as well as the
provisions of the Lloyds Acts and the Financial Services and Markets Act that are applicable to
it. The operation of Syndicate 1221, as well as Millennium Underwriting Ltd. and Navigators
Corporate Underwriters Ltd. and their respective directors, is subject to the Lloyds supervisory
regime.
Underwriting capacity of a member of Lloyds must be supported by providing a deposit
(referred to as Funds at Lloyds) in the
form of cash, securities or letters of credit in an amount determined by Lloyds equal to a
specified percentage of the members underwriting capacity. The amount of such deposit is
calculated by each member through the completion of an annual capital adequacy exercise. The
results of this exercise are submitted to Lloyds for approval. Lloyds then advises the member of
the amount of deposit that is required. The consent of the Council of Lloyds may be required when
a managing agent of a syndicate proposes to increase underwriting capacity for the following
underwriting year.
43
In 2003, the Financial Services Authority updated the minimum solvency margin requirements for
all insurers, including corporate members of Lloyds, which took effect for financial years
commencing on or after January 1, 2004. Under these requirements, Lloyds must demonstrate that
each member has sufficient assets to meet its underwriting liabilities plus a required solvency
margin which is generally higher than would have been the case under the previous rules. This
margin can have the effect of reducing the amount of funds available to distribute as profits to
the member or increasing the amount required to be funded by the member to cover its solvency
margin.
If the managing agency concludes that an appropriate reinsurance to close for a syndicate that
it manages cannot be determined or negotiated on commercially acceptable terms in respect of a
particular underwriting year, it must determine that the underwriting year remain open and be
placed into run-off. During this period there cannot be a release of the Funds at Lloyds of a
corporate member that is a member of that syndicate without the consent of Lloyds and such consent
will only be considered where the member has surplus funds at Lloyds.
The Council of Lloyds has wide discretionary powers to regulate members underwriting at
Lloyds. It may, for instance, change the basis on which syndicate expenses are allocated or vary
the Funds at Lloyds ratio or the investment criteria applicable to the provision of Funds at
Lloyds. Exercising any of these powers might affect the return on an investment of the corporate
member in a given underwriting year. Further, it should be noted that the annual business plans of
a syndicate are subject to the review and approval of the Lloyds Franchise Board. The Lloyds
Franchise Board was formally constituted on January 1, 2003. The Franchise Board is responsible
for setting risk management and profitability targets for the Lloyds market and operates a
business planning and monitoring process for all syndicates.
Corporate members continue to have insurance obligations even after all their underwriting
years have been closed by reinsurance to close. In order to continue to perform these obligations,
corporate members are required to stay in existence; accordingly, there continues to be an
administrative and financial burden for corporate members between the time their memberships have
ceased and the time their insurance obligations are extinguished, including the completion of
financial accounts in accordance with the Companies Act 1985.
If a member of Lloyds is unable to pay its debts to policyholders, such debts may be payable
by the Lloyds Central Fund, which acts similarly to state guaranty funds in the United States. If
Lloyds determines that the Central Fund needs to be increased, it has the power to assess premium
levies on current Lloyds members. The Council of Lloyds has discretion to call or assess up to
3% of a members underwriting capacity in any one year as a Central Fund contribution. In
addition, Lloyds has added a second tier of assets to the existing Central Fund. The second tier
was being built up through a compulsory interest bearing loan to the Society from the members. The
loans were repaid during the 2007 third quarter from a bond offering completed by Lloyds in
September 2007.
44
Competition
The property and casualty insurance industry is highly competitive. We face competition from
both domestic and foreign insurers, many of whom have longer operating histories and greater
financial, marketing and management resources. Competition in the types of insurance in which we
are engaged is based on many factors, including our perceived overall financial strength, pricing
and other terms and conditions of products and services offered, business experience, marketing and
distribution arrangements, agency and broker relationships, levels of customer service (including
speed of claims payments), product differentiation and quality, operating efficiencies and
underwriting. Furthermore, insureds tend to favor large, financially strong insurers, and we face
the risk that we will lose market share to higher rated insurers.
Another competitive factor in the industry is the entrance of other financial services
providers such as banks and brokerage firms into the insurance business. These efforts pose new
challenges to insurance companies and agents from financial services companies traditionally not
involved in the insurance business.
No single insured or reinsured accounted for 10% or more of our gross written premium in 2008.
Employees
As of December 31, 2008, the Company had 445 full-time employees of which 359 were located in
the United States, 80 in the United Kingdom, 4 in Belgium and 2 in Sweden.
Available Information on the Internet
This report and all other filings made by the Company with the SEC pursuant to Section 13(a)
or 15(d) of the Exchange Act are made available to the public by the SEC. All filings can be read
and copied at the SEC Public Reference Room, located at 100 F Street, NE, Washington, DC 20549.
Information pertaining to the operation of the Public Reference Room can be obtained by calling
1-800-SEC-0330. Further, the Company is an electronic filer, so all reports, proxy and information
statements, and other information can be found at the SEC website, www.sec.gov. The Companys
website address is http://www.navg.com. Through its website at
http://www.navg.com/finance/sec_filings.phtml, the Company makes available, free of charge, its
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports as soon as reasonably practicable after such material is electronically
filed with or furnished to the SEC. The annual report to stockholders, press releases and
recordings of our earnings release conference calls are also provided on our website.
Item 1A. RISK FACTORS
You should carefully consider each of the risks and uncertainties described below and
elsewhere in this Annual Report on Form 10-K, as well as any amendments or updates reflected in
subsequent filings with the SEC. We believe these risks and uncertainties, individually or in the
aggregate, could cause our actual results to differ materially from expected and historical results
and could materially and adversely affect our business operations. Further, additional risks and
uncertainties not presently known to us or that we currently deem immaterial may also impair our
results and business operations.
The continuing volatility in the financial markets and the current recession could have a
material adverse effect on our results of operations and financial condition.
The significant financial market volatility experienced worldwide during the third and fourth
quarters of 2008 has continued in 2009 and the impact on the U.S. and foreign economies appears to
be worsening. Although the U.S. and other foreign governments have taken various actions to try to
stabilize the financial markets, it is unclear whether those
actions will be effective. Therefore, the financial market volatility and the resulting
negative economic impact could continue and it is possible that it may be prolonged.
45
Although we continue to monitor market conditions, we cannot predict future market conditions
or their impact on our stock price or investment portfolio. Depending on market conditions, we
could incur future additional realized and unrealized losses, which could have a material adverse
effect on our results of operations and financial condition. These economic conditions have had an
adverse impact on the availability and cost of credit resources generally, which could negatively
affect our ability to obtain letters of credit utilized by our Lloyds Operations to underwrite
business through Lloyds of London.
In addition, the continuing financial market volatility and economic downturn could have a
material adverse affect on our insureds, agents, claimants, reinsurers, vendors and competitors.
Certain of the actions the U.S. Government has taken or may take in response to the financial
market crisis have impacted certain property and casualty insurance carriers. The government is
actively taking steps to implement additional measures to stabilize the financial markets and
stimulate the economy, and it is possible that these measures could further affect the property and
casualty insurance industry and its competitive landscape.
Our business is concentrated in marine and energy, general liability and professional liability
insurance, and if market conditions change adversely, or we experience large losses in these lines,
it could have a material adverse effect on our business.
As a result of our strategy to focus on specialty products in niches where we have
underwriting and claims handling expertise and to decline business where pricing does not afford
what we consider to be acceptable returns, our business is concentrated in the marine and energy,
specialty liability and professional liability lines of business. If our results of operations
from any of these lines are less favorable for any reason, including lower demand for our products
on terms and conditions that we find appropriate, flat or decreased rates for our products or
increased competition, the reduction could have a material adverse effect on our business.
We are exposed to cyclicality in our business that may cause material fluctuations in our results.
The property/casualty insurance business generally, and the marine insurance business
specifically, have historically been characterized by periods of intense price competition due to
excess underwriting capacity as well as periods when shortages of underwriting capacity have
permitted attractive premium levels. We have reduced business during periods of severe competition
and price declines and grown when pricing allowed an acceptable return. We expect that our
business will continue to experience the effects of this cyclicality, which over the course of
time, could result in material fluctuations in our premium volume, revenues or expenses.
We may not be successful in developing our new specialty lines which could cause us to experience
losses.
Since 2001, we have entered into a number of new specialty lines of business including
professional liability, excess casualty, primary casualty, inland marine, middle markets, personal
umbrella insurance, commercial automobile insurance, general liability for certain aspects of the
hospitality industry and personal lines coverage on underground fuel tanks. We continue to look
for appropriate opportunities to diversify our business portfolio by offering new lines of
insurance in which we believe we have sufficient underwriting and claims expertise. However,
because of our limited history in these new lines, there is limited financial information available
to help us estimate sufficient reserve amounts for these lines and to help evaluate
whether we will be able to successfully develop these new lines or the likely ultimate losses
and expenses associated with these new lines. Due to our limited history in these lines, we may
have less experience managing their development and growth than some of our competitors.
Additionally, there is a risk that the lines of business into which we expand will not perform at
the levels we anticipate.
46
We may be unable to manage effectively our rapid growth in our lines of business, which may
adversely affect our results.
To control our growth effectively, we must successfully manage our new and existing lines of
business. This process will require substantial management attention and additional financial
resources. In addition, our growth is subject to, among other risks, the risk that we may
experience difficulties and incur expenses related to hiring and retaining a technically proficient
workforce. Accordingly, we may fail to realize the intended benefits of expanding into new
specialty lines and we may fail to realize value from such lines relative to the resources that we
invest in them. Any difficulties associated with expanding our current and future lines of
business could adversely affect our results of operations.
We may incur additional losses if our loss reserves are insufficient.
We maintain loss reserves to cover our estimated ultimate unpaid liability for losses and loss
adjustment expenses with respect to reported and unreported claims incurred as of the end of each
accounting period. Reserves do not represent an exact calculation of liability, but instead
represent estimates, generally utilizing actuarial projection techniques and judgment at a given
accounting date. These reserve estimates are expectations of what the ultimate settlement and
administration of claims will cost based on our assessment of facts and circumstances then known,
review of historical settlement patterns, estimates of trends in claims severity, frequency, legal
theories of liability and other factors. Both internal and external events, including changes in
claims handling procedures, economic inflation, legal trends and legislative changes, may affect
the reserve estimation process. Many of these items are not directly quantifiable, particularly on
a prospective basis. Additionally, there may be significant lags between the occurrence of the
insured event and the time it is actually reported to the insurer. We continually refine reserve
estimates in a regular ongoing process as historical loss experience develops and additional claims
are reported and settled. Adjustments to reserves are reflected in the results of the periods in
which the estimates are changed. Because establishment of reserves is an inherently uncertain
process involving estimates, currently established reserves may not be sufficient. If estimated
reserves are insufficient, we will incur additional income statement charges.
Our loss reserves include amounts related to short tail and long tail classes of business.
Short tail business means that claims are generally reported quickly upon occurrence of an event,
making estimation of loss reserves less complex. For the long tail lines, significant periods of
time, ranging up to several years or more, may elapse between the occurrence of the loss, the
reporting of the loss and the settlement of the claim. The longer the time span between the
incidence of a loss and the settlement of the claim, the more likely the ultimate settlement amount
will vary. Our longer tail business includes general liability, including construction defect
claims, as well as historical claims for asbestos exposures through our marine and aviation
businesses and claims relating to our run-off businesses. Our professional liability business,
though long tail with respect to settlement period, is produced on a claims-made basis (which means
that the policy in-force at the time the claim is filed, rather than the policy in-force at the
time the loss occurred, provides coverage) and is therefore, we believe, less likely to result in a
significant time lag between the occurrence of the loss and the reporting of the loss. There can
be no assurance, however, that we will not suffer substantial adverse prior
period development in our business in the future.
47
In addition to loss reserves, preparation of our financial statements requires us to make many
estimates and judgments.
In addition to loss reserves discussed above, the consolidated financial statements contain
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures. On an ongoing basis we evaluate our estimates based on
historical experience and other assumptions that we believe to be reasonable under the
circumstances. Any significant change in these estimates could adversely affect our results of
operations and/or our financial condition.
We may not have access to adequate reinsurance to protect us against losses.
We purchase reinsurance by transferring part of the risk we have assumed to a reinsurance
company in exchange for part of the premium we receive in connection with the risk. The
availability and cost of reinsurance are subject to prevailing market conditions, both in terms of
price and available capacity, which can affect our business volume and profitability. Our
reinsurance programs are generally subject to renewal on an annual basis. If we are unable to
renew our expiring facilities or to obtain new reinsurance facilities, either our net exposures
would increase, which could increase our costs, or, if we were unwilling to bear an increase in net
exposures, we would have to reduce the level of our underwriting commitments, especially
catastrophe exposed risks, which would reduce our revenues and possibly net income.
Our reinsurers, including the other participants in the marine pool, may not pay on losses in a
timely fashion, or at all, which may increase our costs.
Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or
ceded to the reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay
claims to our policyholders. Accordingly, we bear credit risk with respect to our reinsurers.
Specifically, our reinsurers may not pay claims made by us on a timely basis, or they may not pay
some or all of these claims. Either of these events would increase our costs and could have a
material adverse effect on our business.
The operations of the marine pool also expose us to reinsurance credit risk from other
participants in the marine pool on business written through the 2005 underwriting year. From 1998
through 2005, all business underwritten by the marine pool was written with Navigators Insurance
Company as the primary insurer. Navigators Insurance Company then reinsured its exposure in the
marine pool to the other participants based on their percentage of participation. From 1983 until
1998, Navigators Insurance Company was the primary insurer for some of the pool business in excess
of its participation amount. As a result of these arrangements, we remain primarily liable for
claims arising out of those policies written by Navigators Insurance Company on behalf of the
marine pool even if one or more of the other participants do not pay the claims they reinsured,
which could have a material adverse effect on our business. The marine pool was eliminated
beginning with the 2006 underwriting year.
Intense competition for our products could harm our ability to maintain or increase our
profitability and premium volume.
The property and casualty insurance industry is highly competitive. We face competition from
both domestic and foreign insurers, many of whom have longer operating histories and greater
financial, marketing and management resources. Competition in the types of insurance in which we
are engaged is based on many factors, including our perceived overall financial strength, pricing
and other terms and conditions of products and services offered, business experience, marketing and
distribution arrangements, agency and broker
relationships, levels of customer service (including speed of claims payments), product
differentiation and quality, operating efficiencies and underwriting. Furthermore, insureds tend
to favor large, financially strong insurers, and we face the risk that we will lose market share to
higher rated insurers.
48
The entry of banks and brokerage firms into the insurance business poses new challenges for
insurance companies and agents. These challenges from industries traditionally outside the
insurance business could heighten the competition in the property and casualty industry.
We may have difficulty in continuing to compete successfully on any of these bases in the
future. If competition limits our ability to write new business at adequate rates, our ability to
transact business would be materially and adversely affected and our results of operations would be
adversely affected.
We may be unable to attract and retain qualified employees.
We depend on our ability to attract and retain qualified executive officers, experienced
underwriters and claims professionals and other skilled employees who are knowledgeable about our
specialty lines of business. If the quality of our executive officers, underwriting or claims team
and other personnel decreases, we may be unable to maintain our current competitive position in the
specialty markets in which we operate and be unable to expand our operations into new specialty
markets.
Increases in interest rates may cause us to experience losses.
Because of the unpredictable nature of losses that may arise under insurance policies, we may
require substantial liquidity at any time. Our investment portfolio, which consists largely of
fixed-income investments, is our principal source of liquidity. The market value of our
fixed-income investments is subject to fluctuation depending on changes in prevailing interest
rates and various other factors. We do not hedge our investment portfolio against interest rate
risk. Increases in interest rates during periods when we must sell fixed-income securities to
satisfy liquidity needs may result in realized investment losses.
Our investment portfolio is subject to certain risks that could adversely affect our results of
operations and/or financial condition.
Although our investment policy guidelines emphasize total investment return in the context of
preserving and enhancing shareholder value and statutory surplus of the insurance subsidiaries, our
investments are subject to market-wide risks and fluctuations, as well as to risks inherent in
particular types of securities. Due to these risks we may not be able to realize our investment
objectives. In addition, we may be forced to liquidate investments at times and prices that are
not optimal, which could have an adverse affect on our results of operations. Investment losses
could significantly decrease our asset base, thereby adversely affecting our ability to conduct
business and pay claims.
We are exposed 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.
We are exposed to significant capital markets risk related to changes in interest rates,
credit spreads, equity prices and foreign currency exchange rates. If significant, declines in
equity prices, changes in interest rates, changes in credit spreads and the strengthening or
weakening of foreign currencies against the U.S. dollar, individually or in tandem, could have a
material adverse effect on our consolidated results of operations, financial condition or cash
flows.
Our exposure to interest rate risk relates primarily to the market price and cash flow
variability associated with changes in interest
rates. Our investment portfolio contains interest rate sensitive instruments, such as fixed
income securities, which may be adversely affected by changes in interest rates from governmental
monetary policies, domestic and international economic and political conditions and other factors
beyond our control. A rise in interest rates would reduce the fair value of our investment
portfolio. It would also provide the opportunity to earn higher rates of return on funds
reinvested. Conversely, a decline in interest rates would increase the fair value of our
investment portfolio. We would then presumably earn lower rates of return on assets reinvested.
We may be forced to liquidate investments prior to maturity at a loss in order to cover
liabilities. Although we take measures to manage the economic risks of investing in a changing
interest rate environment, we may not be able to mitigate the interest rate risk of our assets
relative to our liabilities.
49
Included in our fixed income securities are asset-backed and mortgage-backed securities.
Changes in interest rates can expose us to prepayment risks on these investments. In periods of
declining interest rates, mortgage prepayments generally increase and mortgage-backed securities
are prepaid more quickly, requiring us to reinvest the proceeds at the then current rates.
Our fixed income portfolio is invested in high quality, investment-grade securities. However,
we are permitted to invest up to 5% of the Companys book value in below investment-grade high
yield fixed income securities. These securities, which pay a higher rate of interest, also have a
higher degree of credit or default risk. These securities may also be less liquid in times of
economic weakness or market disruptions. While we have put in place procedures to monitor the
credit risk and liquidity of our invested assets, it is possible that, in periods of economic
weakness, we may experience default losses in our portfolio. This may result in a reduction of net
income, capital and cash flows.
We invest a portion of our portfolio in common stock or preferred stocks. The value of these
assets fluctuates with the equity markets. In times of economic weakness, the market value and
liquidity of these assets may decline, and may impact net income, capital and cash flows.
The functional currencies of the Companys principal insurance and reinsurance subsidiaries
are the U.S. dollar, U.K. sterling and the Canadian dollar. Exchange rate fluctuations relative to
the functional currencies may materially impact our financial position. Certain of our
subsidiaries maintain both assets and liabilities in currencies different than their functional
currency, which exposes us to changes in currency exchange rates. In addition, locally-required
capital levels are invested in local currencies in order to satisfy regulatory requirements and to
support local insurance operations regardless of currency fluctuations.
Despite our mitigation efforts, an increase in interest rates could have a material adverse
effect on our book value.
Capital may not be available in the future, or available on unfavorable terms.
The capital needs of our business is dependent on several factors, including our ability to
write new business successfully and to establish premium rates and reserves at levels sufficient to
cover our losses. If our current capital becomes insufficient for our future plans, we may need to
raise additional capital through the issuance of stock or debt. Otherwise, in the case of
insufficient capital, we may need to limit our growth. The terms of an equity or debt offering
could be unfavorable, for example, causing dilution to our current shareholders or such securities
may have rights, preferences and privileges that are senior to our existing securities. If we were
in a situation of having inadequate capital and if we were not able to obtain additional capital,
our business, results of operations and financial condition could be adversely affected.
A downgrade in our ratings could adversely impact the competitive positions of our operating
businesses.
Ratings are a critical factor in establishing the competitive position of insurance companies.
The Insurance Companies are rated by A.M. Best and S&P. A.M. Bests and S&Ps ratings reflect
their opinions of an insurance companys financial strength, operating performance, strategic
position and ability to meet its obligations to policyholders, and are not evaluations directed to
investors. Our ratings are subject to periodic review by A.M. Best and S&P. A.M. Best reaffirmed
its A (Excellent) rating for Navigators Insurance Company and Navigators Specialty Insurance
Company in 2008. S&P also reaffirmed its A (Strong) rating for Navigators Insurance Company and
Navigators Specialty Insurance Company in 2008.
50
Because these ratings have become an increasingly important factor in establishing the
competitive position of insurance companies, if these ratings are reduced, our competitive position
in the industry, and therefore our business, could be adversely affected. A significant downgrade
could result in a substantial loss of business as policyholders might move to other companies with
higher ratings. There can be no assurance that our current ratings will continue for any given
period of time. For a further discussion of our ratings, see Business Ratings included herein.
Continued or increased premium levies by Lloyds for the Lloyds Central Fund and cash calls for
trust fund deposits or a significant downgrade of Lloyds A.M. Best rating could materially and
adversely affect us.
The Lloyds Central Fund protects Lloyds policyholders against the failure of a member of
Lloyds to meet its obligations. The Central Fund is a mechanism which in effect mutualizes unpaid
liabilities among all members, whether individual or corporate. The fund is available to back
Lloyds policies issued after 1992. Lloyds requires members to contribute to the Central Fund,
normally in the form of an annual contribution, although a special contribution may be levied. The
Council of Lloyds has discretion to call up to 3% of underwriting capacity in any one year.
Policies issued before 1993 have been reinsured by Equitas, an independent insurance company
authorized by the Financial Services Authority. However, if Equitas were to fail or otherwise be
unable to meet all of its obligations, Lloyds may take the view that it is appropriate to apply
the Central Fund to discharge those liabilities Equitas failed to meet. In that case, the Council
of Lloyds may resolve to impose a special or additional levy on the existing members, including
Lloyds corporate members, to satisfy those liabilities.
Additionally, Lloyds insurance and reinsurance business is subject to local regulation, and
regulators in the United States require Lloyds to maintain certain minimum deposits in trust funds
as protection for policyholders in the United States. These deposits may be used to cover
liabilities in the event of a major claim arising in the United States and Lloyds may require us
to satisfy cash calls to meet claims payment obligations and maintain minimum trust fund amounts.
Any premium levy or cash call would increase the expenses of Millennium Underwriting Ltd. and
Navigators Corporate Underwriters Ltd., our corporate members, without providing compensating
revenues, and could have a material adverse effect on our results.
The Lloyds of London market is currently rated A (Excellent) by A.M. Best and A+ (Strong)
by S&P. We believe that in the event that Lloyds rating is downgraded below A- in the future,
the downgrade could have a material adverse effect on our ability to underwrite business through
our Lloyds Operations and therefore on our financial condition or results of operations.
Our businesses are heavily regulated, and changes in regulation may reduce our profitability and
limit our growth.
Our insurance subsidiaries are subject to extensive regulation and supervision in the
jurisdictions in which they conduct business. This regulation is generally designed to protect the
interests of policyholders, as opposed to insurers and their stockholders and other investors, and
relates to authorization for lines of business, capital and surplus requirements, investment
limitations, underwriting limitations, transactions with affiliates, dividend limitations, changes
in control, premium rates and a variety of other financial and non-financial components of an
insurance companys business.
51
Virtually all states require insurers licensed to do business in that state to bear a portion
of the loss suffered by some insureds as the result of impaired or insolvent insurance companies.
The effect of these arrangements could reduce our profitability in any given period or limit our
ability to grow our business.
In recent years, the state insurance regulatory framework has come under increased federal
scrutiny, and some state legislatures have considered or enacted laws that may alter or increase
state authority to regulate insurance companies and insurance holding companies. Further, the NAIC
and state insurance regulators are re-examining existing laws and regulations, specifically
focusing on modifications to holding company regulations, interpretations of existing laws and the
development of new laws. Any proposed or future legislation or NAIC initiatives may be more
restrictive than current regulatory requirements or may result in higher costs.
In response to the September 11, 2001 terrorist attacks, the United States Congress has
enacted legislation designed to ensure, among other things, the availability of insurance coverage
for terrorist acts, including the requirement that insurers provide such coverage in certain
circumstances. See Regulation United States included herein for a discussion of the TRIA,
TRIEA and TRIPRA legislation.
The inability of our subsidiaries to pay dividends to us in sufficient amounts would harm our
ability to meet our obligations.
We are a holding company and rely primarily on dividends from our subsidiaries to meet our
obligations for payment of interest and principal on outstanding debt obligations and corporate
expenses. The ability of our insurance subsidiaries to pay dividends to us in the future will
depend on their statutory surplus, on earnings and on regulatory restrictions. For a discussion of
our insurance subsidiaries current dividend-paying ability, please see Managements Discussion
and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources,
included herein. We and our underwriting subsidiaries are subject to regulation by some states as
an insurance holding company. Such regulation generally provides that transactions between
companies within our consolidated group must be fair and equitable. Transfers of assets among
affiliated companies, certain dividend payments from underwriting subsidiaries and certain material
transactions between companies within our consolidated group may be subject to prior notice to, or
prior approval by, state regulatory authorities. Our underwriting subsidiaries are also subject to
licensing and supervision by government regulatory agencies in the jurisdictions in which they do
business. These regulations may set standards of solvency that must be met and maintained, such as
the nature of and limitations on investments, the nature of and limitations on dividends to
policyholders and stockholders and the nature and extent of required participation in insurance
guaranty funds. These regulations may affect our subsidiaries ability to provide us with
dividends.
Catastrophe losses could materially reduce our profitability.
We are exposed to claims arising out of catastrophes, particularly in our marine
insurance line of business. We have experienced, and will experience in the future,
catastrophe losses which may materially reduce our profitability or harm our financial condition.
Catastrophes can be caused by various natural events, including hurricanes, windstorms,
earthquakes, hail, severe winter weather and fires. Catastrophes can also be man-made, such as the
World Trade Center attack. The incidence and severity of catastrophes are inherently
unpredictable. Although we will attempt to manage our exposure to such events, the frequency and
severity of catastrophic events could exceed our estimates, which could have a material adverse
effect on our financial condition.
52
The market price of Navigators common stock may be volatile.
There has been significant volatility in the market for equity securities. The price of
Navigators common stock may not remain at or exceed current levels. The following factors may have
an adverse impact on the market price of Navigators common stock:
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actual or anticipated variations in our quarterly results of operations, including the
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changes in expectations of future financial performance or changes in estimates of
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issuances of common shares or other securities in the future, |
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announcements by us or our competitors of acquisitions, investments or strategic
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Stock markets in the United States often experience price and volume fluctuations. Market
fluctuations, as well as general political and economic conditions such as recession or interest
rate or currency rate fluctuations, could adversely affect the market price of Navigators common
stock.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
Our executive and administrative office is located at 6 International Drive in Rye Brook, N.Y.
Our lease for this space expires in February 2014. Our underwriting operations are in various
locations with non-cancelable operating leases including Charlotte, NC, Chicago, IL, Coral Gables,
FL, Corona, CA, Houston, TX, Irvine, CA, New York City, NY, San Francisco, CA, Schaumburg, IL,
Seattle, WA, London, England, Antwerp, Belgium and Stockholm, Sweden.
Item 3. LEGAL PROCEEDINGS
Except as described below, the Company is not a party to, or the subject of, any material
pending legal proceedings which depart from the ordinary routine litigation incident to the kinds
of business that it conducts.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of
2008.
53
Part II
Item 5.
MARKET FOR COMPANYS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
The Companys common stock is traded over-the-counter on NASDAQ under the symbol NAVG.
Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not necessarily represent actual transactions.
The high, low and closing trade prices for the four quarters of 2008 and 2007 were as follows:
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2008 |
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2007 |
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High |
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Low |
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Close |
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High |
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Low |
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Close |
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First Quarter |
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$ |
65.01 |
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$ |
50.91 |
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$ |
54.40 |
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$ |
53.16 |
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$ |
45.41 |
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$ |
50.17 |
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Second Quarter |
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$ |
56.99 |
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$ |
47.23 |
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$ |
54.05 |
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$ |
54.16 |
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$ |
47.52 |
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$ |
53.90 |
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Third Quarter |
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$ |
66.74 |
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$ |
43.46 |
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$ |
58.00 |
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$ |
55.45 |
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$ |
45.86 |
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$ |
54.25 |
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Fourth Quarter |
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$ |
60.50 |
|
|
$ |
39.29 |
|
|
$ |
54.91 |
|
|
$ |
66.53 |
|
|
$ |
53.25 |
|
|
$ |
65.00 |
|
Information provided to us by our transfer agent and proxy solicitor indicates that there are
approximately 300 holders of record and 9,131 beneficial holders of our common stock.
54
Five Year Stock Performance Graph
The Five Year Stock Performance Graph and related Cumulative Indexed Returns table, as
presented below, which were prepared with the aid of S&P, reflects the cumulative return on the
Companys common stock, the S&P 500 Index and the Insurance Index assuming an original investment
in each of $100 on December 31, 2003 (the Base Period) and reinvestment of dividends to the
extent declared. Cumulative returns for each year subsequent to 2003 are measured as a change
from this Base Period.
The comparison of five year cumulative returns among the Company, the companies listed in the
Standard & Poors 500 Index (S&P 500 Index) and the S&P Property & Casualty Insurance Index (the
Insurance Index) is as follows:
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base |
|
|
Cumulative Indexed Returns |
|
|
|
Period |
|
|
Years Ending December 31, |
|
Company / Index |
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Navigators Group, Inc. |
|
|
100 |
|
|
|
97.54 |
|
|
|
141.27 |
|
|
|
156.07 |
|
|
|
210.56 |
|
|
|
177.87 |
|
S&P 500 Index |
|
|
100 |
|
|
|
110.88 |
|
|
|
116.33 |
|
|
|
134.70 |
|
|
|
142.10 |
|
|
|
89.53 |
|
S&P 500 Property &
Casualty Insurance |
|
|
100 |
|
|
|
110.42 |
|
|
|
127.11 |
|
|
|
143.47 |
|
|
|
123.44 |
|
|
|
87.13 |
|
The following Annual Return Percentage table, which was prepared with the aid of S&P,
reflects the annual return on the Companys common stock, the S&P 500 Index and the Insurance
Index including reinvestment of dividends to the extent declared.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Return Percentage |
|
|
|
Years Ending December 31, |
|
Company / Index |
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Navigators Group, Inc. |
|
|
-2.46 |
|
|
|
44.84 |
|
|
|
10.48 |
|
|
|
34.91 |
|
|
|
-15.52 |
|
S&P 500 Index |
|
|
10.88 |
|
|
|
4.91 |
|
|
|
15.79 |
|
|
|
5.49 |
|
|
|
-37.00 |
|
S&P 500 Property &
Casualty Insurance |
|
|
10.42 |
|
|
|
15.11 |
|
|
|
12.87 |
|
|
|
-13.96 |
|
|
|
-29.41 |
|
Dividends
The Company has not paid or declared any cash dividends on its common stock. While
there presently is no intention to pay cash dividends on the common stock, future declarations, if
any, are at the discretion of our Board of Directors and the amounts of such dividends will be
dependent upon, among other factors, the earnings of the Company, its financial condition and
business needs, restrictive covenants under its credit facility, the capital and surplus
requirements of its subsidiaries and applicable government regulations.
Recent Sales of Unregistered Securities
None
Use of Proceeds from Public Offering of Debt Securities
None
Purchases of Equity Securities by the Issuer
In October, 2007 the Companys Board of Directors adopted a stock repurchase program for up to
$30 million of the Companys common stock. Purchases were made from time to time at prevailing
prices in open market or privately negotiated transactions through the expiration of the program on
December 31, 2008. The timing and amount of purchases under the program were dependent on a
variety of factors, including the trading price of the stock, market conditions and corporate and
regulatory considerations. In total, we purchased 224,754 shares of our common stock at an
aggregate cost of $11.5 million.
56
The following table summarizes the Parent Companys purchases of its common stock during 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Dollar Value |
|
|
|
Total |
|
|
|
|
|
|
Purchased |
|
|
of Shares that |
|
|
|
Number |
|
|
Average |
|
|
Under Publicly |
|
|
May Yet Be |
|
|
|
of Shares |
|
|
Cost Paid |
|
|
Announced |
|
|
Purchased Under |
|
($ in thousands, except per share) |
|
Purchased |
|
|
Per Share |
|
|
Program |
|
|
the Program(1) |
|
January 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,000 |
|
February 2008 |
|
|
30,202 |
|
|
$ |
54.66 |
|
|
|
30,202 |
|
|
$ |
28,349 |
|
March 2008 |
|
|
105,824 |
|
|
$ |
53.58 |
|
|
|
105,824 |
|
|
$ |
22,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal first
quarter |
|
|
136,026 |
|
|
$ |
53.82 |
|
|
|
136,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2008 |
|
|
50,000 |
|
|
$ |
49.90 |
|
|
|
50,000 |
|
|
$ |
20,184 |
|
May 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,184 |
|
June 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal second
quarter |
|
|
50,000 |
|
|
$ |
49.90 |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2008 |
|
|
38,728 |
|
|
$ |
44.51 |
|
|
|
38,728 |
|
|
$ |
18,460 |
|
August 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal third
quarter |
|
|
38,728 |
|
|
$ |
44.51 |
|
|
|
38,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total December
31, 2008 |
|
|
224,754 |
|
|
$ |
51.34 |
|
|
|
224,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Balance as of the end of the month indicated. |
57
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data including
consolidated financial information of the Company for each of the years in the five-year period
ended December 31, 2008 derived from the Companys audited consolidated financial statements. You
should read the table in conjunction with Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary
Data, included herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
($ in thousands, except per share data) |
|
|
|
|
|
Operating Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
1,084,922 |
|
|
$ |
1,070,707 |
|
|
$ |
970,790 |
|
|
$ |
779,579 |
|
|
$ |
696,146 |
|
Net written premium |
|
|
661,615 |
|
|
|
645,796 |
|
|
|
520,807 |
|
|
|
380,659 |
|
|
|
312,730 |
|
Net earned premium |
|
|
643,976 |
|
|
|
601,977 |
|
|
|
468,323 |
|
|
|
338,551 |
|
|
|
310,995 |
|
Net investment income |
|
|
76,554 |
|
|
|
70,662 |
|
|
|
56,895 |
|
|
|
37,069 |
|
|
|
26,795 |
|
Net realized capital gains (losses) |
|
|
(38,299 |
) |
|
|
2,006 |
|
|
|
(1,026 |
) |
|
|
1,238 |
|
|
|
922 |
|
Total revenues |
|
|
683,666 |
|
|
|
676,659 |
|
|
|
526,594 |
|
|
|
385,219 |
|
|
|
343,029 |
|
Income before income taxes |
|
|
68,731 |
|
|
|
139,182 |
|
|
|
106,617 |
|
|
|
33,754 |
|
|
|
52,092 |
|
Net income |
|
|
51,692 |
|
|
|
95,620 |
|
|
|
72,563 |
|
|
|
23,564 |
|
|
|
34,865 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.08 |
|
|
$ |
5.69 |
|
|
$ |
4.34 |
|
|
$ |
1.74 |
|
|
$ |
2.77 |
|
Diluted |
|
$ |
3.04 |
|
|
$ |
5.62 |
|
|
$ |
4.30 |
|
|
$ |
1.73 |
|
|
$ |
2.74 |
|
Average common shares (000s): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
16,802 |
|
|
|
16,812 |
|
|
|
16,722 |
|
|
|
13,528 |
|
|
|
12,598 |
|
Diluted |
|
|
16,992 |
|
|
|
17,005 |
|
|
|
16,856 |
|
|
|
13,657 |
|
|
|
12,715 |
|
Combined
loss & expense ratio (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio |
|
|
61.0 |
% |
|
|
56.6 |
% |
|
|
57.7 |
% |
|
|
69.6 |
% |
|
|
60.5 |
% |
Expense ratio |
|
|
32.8 |
% |
|
|
30.9 |
% |
|
|
30.1 |
% |
|
|
31.7 |
% |
|
|
31.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
93.8 |
% |
|
|
87.5 |
% |
|
|
87.8 |
% |
|
|
101.3 |
% |
|
|
92.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Information
(at end of year): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments and cash |
|
$ |
1,917,715 |
|
|
$ |
1,767,301 |
|
|
$ |
1,475,910 |
|
|
$ |
1,182,236 |
|
|
$ |
854,933 |
|
Total assets |
|
|
3,349,580 |
|
|
|
3,143,771 |
|
|
|
2,956,686 |
|
|
|
2,583,249 |
|
|
|
1,756,678 |
|
Gross loss and LAE reserves |
|
|
1,853,664 |
|
|
|
1,648,764 |
|
|
|
1,607,555 |
|
|
|
1,557,991 |
|
|
|
966,117 |
|
Net loss and LAE reserves |
|
|
999,871 |
|
|
|
847,303 |
|
|
|
696,116 |
|
|
|
578,976 |
|
|
|
463,788 |
|
Senior notes |
|
|
123,794 |
|
|
|
123,673 |
|
|
|
123,560 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
689,317 |
|
|
|
662,106 |
|
|
|
551,343 |
|
|
|
470,238 |
|
|
|
328,578 |
|
Common shares outstanding (000s) |
|
|
16,856 |
|
|
|
16,873 |
|
|
|
16,736 |
|
|
|
16,617 |
|
|
|
12,657 |
|
Book value
per share (2) |
|
$ |
40.89 |
|
|
$ |
39.24 |
|
|
$ |
32.94 |
|
|
$ |
28.30 |
|
|
$ |
25.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory surplus of Navigators
Insurance Company |
|
$ |
581,166 |
|
|
$ |
578,668 |
|
|
$ |
524,188 |
|
|
$ |
356,484 |
|
|
$ |
235,561 |
|
|
|
|
(1) |
|
Calculated based on earned premium. |
|
(2) |
|
Calculated as stockholders equity divided by actual shares outstanding as of the date
indicated. |
58
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our consolidated financial statements and accompanying notes
which appear elsewhere in this Form 10-K. It contains forward-looking statements that involve
risks and uncertainties. Please see Note on Forward-Looking Statements and Risk Factors 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-K.
Overview
We are an international insurance holding company focusing on specialty products within the
overall property/casualty insurance market. The Companys underwriting segments consists of
insurance company operations and operations at Lloyds of London. Our largest product line and
most long-standing area of specialization is ocean marine insurance. We have also developed
specialty niches in professional liability insurance and in specialty liability insurance primarily
consisting of contractors liability and primary and excess liability coverages. We conduct
operations through our Insurance Companies and our Lloyds Operations. The Insurance Companies
consist of Navigators Insurance Company, which includes our U.K. Branch, and Navigators Specialty
Insurance Company, which underwrites specialty and professional liability insurance on an excess
and surplus lines basis fully reinsured by Navigators Insurance Company. Our Lloyds Operations
include NUAL, a wholly-owned Lloyds underwriting agency which manages Syndicate 1221. We
participate in the capacity of Syndicate 1221 through our wholly-owned Lloyds corporate member.
While management takes into consideration a wide range of factors in planning the Companys
business strategy and evaluating results of operations, there are certain factors that management
believes are fundamental to understanding how the Company is managed. First, underwriting profit
is consistently emphasized as a primary goal, above premium growth. Managements assessment of our
trends and potential growth in underwriting profit is the dominant factor in its decisions with
respect to whether or not to expand a business line, enter into a new niche, product or territory
or, conversely, to contract capacity in any business line. In addition, management focuses on
controlling the costs of our operations. Management believes that careful monitoring of the costs
of existing operations and assessment of costs of potential growth opportunities are important to
our profitability. Access to capital also has a significant impact on managements outlook for our
operations. The Insurance Companies operations and ability to grow their business and take
advantage of market opportunities are constrained by regulatory capital requirements and rating
agency assessments of capital adequacy.
The discussions that follow include tables that contain both our consolidated and segment
operating results for each of the years in the three-year period ended December 31, 2008. In
presenting our financial results we have discussed our performance with reference to underwriting
profit or loss and the related combined ratio, both of which are non-GAAP measures of underwriting
profitability. We consider such measures, which may be defined differently by other companies, to
be important in the understanding of our overall results of operations. Underwriting profit or
loss is calculated from net earned premium, less the sum of net losses and LAE, commission expense,
other operating expenses and commission income and other income (expense). The combined ratio is
derived by dividing the sum of net losses and LAE, commission expense, other operating expenses and
commission income and other income (expense) by net earned premium. A combined ratio of less than
100% indicates an underwriting profit and over 100% indicates an underwriting loss.
59
Although not a financial measure, managements decisions are also greatly influenced by access
to specialized underwriting and claims expertise in our lines of business. We have chosen to
operate in specialty niches with certain common characteristics which we believe provide us with
the opportunity to use our technical underwriting expertise in order to realize underwriting
profit. As a result, we have focused on underserved markets for businesses characterized by higher
severity and low frequency of loss where we believe our intellectual capital and financial strength
bring meaningful value. In contrast, we have avoided niches that we believe have a high frequency
of loss activity and/or are subject to a high level of regulatory requirements, such as workers
compensation and personal automobile insurance, because we do not believe our technical expertise
is of as much value in these types of businesses. Examples of niches that have the
characteristics we look for include bluewater hull which provides coverage for physical damage
to, for example, highly valued cruise ships, and directors and officers liability (D&O) insurance
which covers litigation exposure of a corporations directors and officers. These types of
exposures require substantial technical expertise. We attempt to mitigate the financial impact of
severe claims on our results by conservative and detailed underwriting, prudent use of reinsurance
and a balanced portfolio of risks.
Our revenue is primarily comprised of premiums and investment income. The Insurance Companies
and Lloyds Operations derive their premiums primarily from business written by wholly-owned
underwriting management companies which produce, manage and underwrite insurance and reinsurance
for the Company. The Companys products are distributed through multiple channels, utilizing
global, national and regional brokers as well as wholesalers.
The premium rate increases or decreases as noted below for marine, specialty and professional
liability are calculated primarily by comparing premium amounts on policies that have renewed. The
premiums are judgmentally adjusted for exposure factors when deemed significant and sometimes
represent an aggregation of several lines of business. The rate change calculations provide an
indicated pricing trend and are not meant to be a precise analysis of the numerous factors that
affect premium rates or the adequacy of such rates to cover all underwriting costs and generate an
underwriting profit. The calculation can also be affected quarter by quarter depending on the
particular policies and the number of policies that renew during that period. Due to market
conditions, these rate changes may or may not apply to new business which generally would be more
competitively priced compared to renewal business.
As a result of the substantial insurance industry losses resulting from Hurricanes Katrina and
Rita, the marine insurance market experienced diminished capacity and rate increases through the
end of 2006, particularly for the offshore energy risks located in the Gulf of Mexico. Since the
end of 2006, competitive market conditions have returned as available capacity has increased. The
2008 average renewal premium rates for our Insurance Companies marine business increased
approximately 0.4% for the fourth quarter and decreased approximately 2.1% for the twelve month
period, including offshore energy 2008 average renewal premium rates which increased approximately
2.3% for the fourth quarter and decreased approximately 9.6% for the twelve months. The 2008
average renewal rates for our Lloyds Operations marine business decreased approximately 9.9% for
the fourth quarter and 6.2% for the twelve month period, including offshore energy 2008 average
renewal rates which increased approximately 4.0% for the fourth quarter and decreased approximately
10.4% for the twelve months. The 2007 average renewal premium rates for our Insurance Companies
marine business decreased approximately 1.2% for the fourth quarter and 0.1% for the twelve month
period, including offshore energy 2007 average renewal premium
60
rates which decreased approximately
14.2% for the fourth quarter and 2.4% for the twelve months. The 2007 average renewal rates for
our Lloyds Operations marine business decreased approximately 5.1% for the fourth quarter and 1.2%
for the twelve month period, including offshore energy 2007 average renewal rates which decreased
approximately 5.5% for the fourth quarter and 3.7% for the twelve months. We expect continuing
overall declines in 2009 pricing for most marine lines of business, except offshore energy and
marine liability which may strengthen due to the 2008 storm losses, as additional capacity
continues to re-enter the marine market.
Specialty liability losses in 2001 to 2003, particularly for construction liability business,
resulted in diminished capacity in the market in which we compete, as many former competitors who
lacked the expertise to selectively underwrite this business were forced to withdraw from the
market resulting in approximate premium rate increases of 13.5% in 2004 and 49.1% in 2003. This
was followed by a slight decline in rates of approximately 1.0% in 2005. The 2006 year average
renewal rates for the construction liability business declined approximately 5.6%, primarily due to
additional competition in the marketplace. This decline continued into 2007 with average renewal
premium rates declining approximately 9.7% for the fourth quarter and 10.7% for the twelve months.
In 2008, average renewal premium rates declined approximately 10.2% for the fourth quarter and
11.9% for the twelve months. We expect competitive conditions will continue into 2009 resulting in
continued but slowing rate of declines in pricing for construction liability and excess liability
business.
In the professional liability market, the enactment of the Sarbanes-Oxley Act of 2002,
together with financial and accounting scandals at publicly traded corporations and the increased
frequency of securities-related class action litigation, has led to heightened interest in
professional liability insurance generally. Following substantial average professional liability
renewal rate increases in 2002 and 2003, particularly for D&O insurance, average renewal rates
decreased approximately 3.2% in 2004 and then remained relatively level in 2005 and 2006 followed
by an approximate 6.6% decrease in 2007. Average 2008 professional liability renewal premium rates
increased approximately 0.2% for the fourth quarter and decreased approximately 4.5% for the twelve
months. The 2008 D&O insurance renewal premium rates increased approximately 0.5% for the fourth
quarter and decreased approximately 2.7% for the twelve months. The 2007 D&O insurance renewal
premium rates decreased approximately 7.9% following decreases of approximately 1.7% for 2006 and
2.3% for 2005 and 9.5% for 2004. We anticipate a stabilization in 2009 pricing given the industry
dislocation.
Our business is cyclical and influenced by many factors. These factors include price
competition, economic conditions, interest rates, weather-related events and other catastrophes
including natural and man-made disasters (for example hurricanes and terrorism), state regulations,
court decisions and changes in the law. The incidence and severity of catastrophes are inherently
unpredictable. Although we will attempt to manage our exposure to such events, the frequency and
severity of catastrophic events could exceed our estimates, which could have a material adverse
effect on our financial condition. Additionally, because our insurance products must be priced,
and premiums charged, before costs have fully developed, our liabilities are required to be
estimated and recorded in recognition of future loss and settlement obligations. Due to the
inherent uncertainty in estimating these liabilities, we cannot assure you that our actual
liabilities will not exceed our recorded amounts.
For additional information regarding our business, see BusinessGeneral, included herein.
61
Catastrophe Risk Management
Our Insurance Companies and Lloyds Operations have exposure to losses caused by hurricanes
and other natural and man-made catastrophic events. The frequency and severity of catastrophes are
unpredictable.
The extent of losses from a catastrophe is a function of both the total amount of insured
exposure in an area affected by the event and the severity of the event. We continually assess our
concentration of underwriting exposures in catastrophe exposed areas globally and attempt to manage
this exposure through individual risk selection and through the purchase of reinsurance. We also
use modeling and concentration management tools that allow us to better monitor and control our
accumulations of potential losses from catastrophe exposures. Despite these efforts, there remains
uncertainty about the characteristics, timing and extent of insured losses given the nature of
catastrophes. The occurrence of one or more severe catastrophic events could have a material
adverse effect on the Companys results of operations, financial condition or liquidity.
The Company has significant catastrophe exposures throughout the world with the largest
catastrophe exposure coming from offshore energy risks exposed to hurricanes in the Gulf of Mexico.
Following the 2008 hurricane season many offshore energy accounts that suffered claims from
Hurricanes Gustav and Ike now have either reduced limits or have used up the entire windstorm limit
of the policy. To take account of this in assessing our overall Gulf of Mexico exposure, we have
remodeled the offshore energy exposure with these reduced windstorm limits. Based on this
assessment, the Company estimates that our probable maximum pre-tax gross and net loss exposure in
a theoretical one in two hundred and fifty year hurricane event in the Gulf of Mexico would
approximate $163 million and $27 million, respectively, including the cost of reinsurance
reinstatement premiums. In the absence of the aforementioned policy limits being exhausted, our
probable maximum pre-tax gross and net loss exposure would approximate $233 million and $29
million, respectively, including the cost of reinsurance reinstatement premiums.
We are in the process of reassessing the way in which we manage our Gulf of Mexico exposures
and the reinsurance protection that is purchased to protect those risks. We are taking steps to
reduce our aggregate exposures and to increase profitability moving forward. The estimated
probable maximum pre-tax gross and net loss exposure in a so-called or theoretical one in two
hundred and fifty year hurricane event in the Gulf of Mexico could be significantly different in
2009 depending on the market conditions and reinsurance protection we purchase. The primary
policies that create exposure in the Gulf of Mexico renew largely in April and July. We will
evaluate the adequacy of the pricing
and terms on these policies at that time. If we do not find the pricing and terms to be
acceptable our exposure to catastrophic windstorm in the Gulf of Mexico could reduce substantially.
There are a number of significant assumptions and variables related to such an estimate
including the size, force and path of the hurricane, the various types of the insured risks exposed
to the event at the time the event occurs and the estimated costs or damages incurred for each
insured risk. There can be no assurances that the gross and net loss amounts that the Company
could incur in such an event or in any hurricanes that may occur in the Gulf of Mexico would not be
materially higher than the estimates discussed above given the significant uncertainties with
respect to such an estimate.
The occurrence of large loss events could reduce the reinsurance coverage that is available to
us and could weaken the financial condition of our reinsurers, which could have a material adverse
effect on our results of operations. Although the reinsurance agreements make the reinsurers
liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance
arrangements do not eliminate our obligation to pay claims to our policyholders. We are required
to pay the losses even 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.
62
Hurricanes Gustav, Ike, Katrina and Rita
Hurricanes Gustav and Ike (the 2008 Hurricanes) which occurred in the 2008 third quarter and
Hurricanes Katrina and Rita (the 2005 Hurricanes) which occurred in the 2005 third quarter
generated substantial losses to the property and casualty industry and the marine and energy
insurance market due principally to offshore energy losses. There were no significant hurricane
losses in 2007 or 2006 that impacted the marine and energy lines of business of the Company.
The Company monitors the development of paid and reported claims activities in relation to the
estimate of ultimate losses established for the 2008 Hurricanes and the 2005 Hurricanes.
Management believes that should any adverse loss development for gross claims occur from the
2008 Hurricanes or the 2005 Hurricanes, it would be contained within our reinsurance program. Our
actual losses from such hurricanes may differ materially from our estimated losses as a result of,
among other things, the receipt of additional information from insureds or brokers, the attribution
of losses to coverages that for the purposes of our estimates we assumed would not be exposed and
inflation in repair costs due to the limited availability of labor and materials. If our actual
losses from the 2008 Hurricanes or the 2005 Hurricanes are materially greater than our estimated
losses, our business, results of operations and financial condition could be materially adversely
affected.
See Business Loss Reserves included herein for a discussion of the impact of the 2008
Hurricanes and the 2005 Hurricanes on our financial results.
Critical Accounting Policies
It is important to understand our accounting policies in order to understand our financial
statements. Management considers certain of these policies to be critical to the presentation of
the financial results, since they require management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses,
and related disclosures at the financial reporting date and throughout the reporting period.
Certain of the estimates result from judgments that can be subjective and complex and,
consequently, actual results may differ from these estimates, which would be reflected in future
periods.
Our most critical accounting policies involve the reporting of the reserves for losses and LAE
(including losses that have occurred but were not reported to us by the financial reporting date),
reinsurance recoverables, written and unearned premium, the recoverability of deferred tax assets,
the impairment of invested assets, accounting for Lloyds results and the translation of foreign
currencies.
Reserves for Losses and LAE. Reserves for losses and LAE represent an estimate of the
expected cost of the ultimate settlement and administration of losses, based on facts and
circumstances then known. Actuarial methodologies are employed to assist in establishing such
estimates and include judgments relative to estimates of future claims severity and frequency,
length of time to develop to ultimate,
judicial theories of liability and other third party factors which are often beyond our
control. Due to the inherent uncertainty associated with the reserving process, the ultimate
liability may be different from the original estimate. Such estimates are regularly reviewed and
updated and any resulting adjustments are included in the current years results. Additional
information regarding our loss reserves can be found in Results of OperationsOperating
ExpensesNet Losses and Loss Adjustment Expenses Incurred, BusinessReserves, and Note 5,
Reserves for Losses and Loss Adjustment Expenses, to our consolidated audited financial statements,
all of which are included herein.
63
Reinsurance Recoverables. Reinsurance recoverables are established for the portion of the
loss reserves that are ceded to reinsurers. Reinsurance recoverables are determined based upon the
terms and conditions of reinsurance contracts which could be subject to interpretations that differ
from our own based on judicial theories of liability. In addition, we bear credit risk with
respect to our reinsurers which can be significant considering that certain of the reserves remain
outstanding for an extended period of time. We are required to pay losses even if a reinsurer
fails to meet its obligations under the applicable reinsurance agreement. Additional information
regarding our reinsurance recoverables can be found in the BusinessReinsurance Ceded section and
Note 6, Reinsurance, to our consolidated audited financial statements, both included herein.
Written and Unearned Premium. Written premium is recorded based on the insurance policies that
have been reported to us and the policies that have been written by agents but not yet reported to
us. We must estimate the amount of written premium not yet reported based on judgments relative to
current and historical trends of the business being written. Such estimates are regularly reviewed
and updated and any resulting adjustments are included in the current years results. An unearned
premium reserve is established to reflect the unexpired portion of each policy at the financial
reporting date. Reinsurance reinstatement premium is earned in the period in which the event
occurred which created the need to record the reinstatement premium. Additional information
regarding our written and unearned premium can be found in Note 1, Organization and Summary of
Significant Accounting Policies, and Note 6, Reinsurance, to our consolidated audited financial
statements, both included herein.
Substantially all of our business is placed through agents and brokers. Since the vast
majority of the Companys gross written premium is primary or direct as opposed to assumed the
delays in reporting assumed premium generally do not have a significant effect on the Companys
financial statements, since we record estimates for both unreported direct and assumed premium. We
also record the ceded portion of the estimated gross written premium and related acquisition costs.
The earned gross, ceded and net premiums are calculated based on our earning methodology which is
generally pro-rata over the policy period. Losses are also recorded in relation to the earned
premium. The estimate for losses incurred on the estimated premium is based on an actuarial
calculation consistent with the methodology used to determine incurred but not reported loss
reserves for reported premiums.
A portion of the Companys premium is estimated for unreported premium, mostly for the marine
business written by our U.K. Branch and Lloyds Operations. We generally do not experience any
significant backlog in processing premiums. Such premium estimates are generally based on
submission data received from brokers and agents and recorded when the insurance policy or
reinsurance contract is written or bound. The estimates are regularly reviewed and updated taking
into account the premium received to date versus the estimate and the age of the estimate. To the
extent that the actual premium varies from the estimates, the difference, along with the related
loss reserves and underwriting expenses, is recorded in current operations.
Deferred Tax Assets. We apply the asset and liability method of accounting for income taxes
whereby deferred assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. In assessing the realization of deferred tax assets, management
considers whether it is more likely than not that the deferred tax assets will be realized.
Additional information regarding our deferred tax assets can be found in Note 1, Organization and
Summary of Significant Accounting Policies, and Note 7, Income Taxes, to our consolidated audited
financial statements, both included herein.
64
Impairment of Investment Securities. Impairment of investment securities results in a charge
to operations when a market decline below
cost is other-than-temporary. Management regularly reviews our fixed maturity and equity
securities portfolios to evaluate the necessity of recording impairment losses for
other-than-temporary declines in the fair value of investments. In general, we focus our attention
on those securities whose market value was less than 80% of their cost or amortized cost, as
appropriate, for six or more consecutive months. Factors considered in evaluating potential
impairment include, but are not limited to, the current fair value as compared to cost or amortized
cost of the security, as appropriate, the length of time the investment has been below cost or
amortized cost and by how much, our intent and ability to retain the investment for a period of
time sufficient to allow for an anticipated recovery in value, specific credit issues related to
the issuer and current economic conditions. Other-than-temporary impairment losses result in a
permanent reduction of the cost basis of the underlying investment. Significant changes in the
factors we consider when evaluating investments for impairment losses could result in a significant
change in impairment losses reported in the consolidated financial statements. For additional
detail regarding our investment portfolio, including disclosures regarding other-than-temporary
declines in investment value, see the BusinessInvestments section and Note 4, Investments, to
our consolidated audited financial statements, both included herein.
As mentioned above, the Company considers its intent and ability to hold a security until the
value recovers as part of the process of evaluating whether a securitys unrealized loss represents
an other-than-temporary decline. The Companys ability to hold such securities is supported by
sufficient cash flow from its operations and from maturities within its investment portfolio in
order to meet its claims payment and other disbursement obligations arising from its underwriting
operations without selling such investments. With respect to securities where the decline in value
is determined to be temporary and the securitys value is not written down, a subsequent decision
may be made to sell that security and realize a loss. Subsequent decisions on security sales are
made within the context of overall risk monitoring, changing information and market conditions.
Management of the Companys investment portfolio is outsourced to third party investment managers.
While these investment managers may, at a given point in time, believe that the preferred course of
action is to hold securities with unrealized losses that are considered temporary until such losses
are recovered, the dynamic nature of the portfolio management may result in a subsequent decision
to sell the security and realize the loss, based upon a change in market and other factors
described above. The Company believes that subsequent decisions to sell such securities are
consistent with the classification of the Companys portfolio as available-for-sale.
Investment managers are required to notify management of rating agency downgrades of
securities in their portfolios as well as any potential investment valuation issues at the end of
each quarter. Investment managers are also required to notify management, and receive prior
approval, prior to the execution of a transaction or series of related transactions that may result
in a realized loss above a certain threshold. Additionally, investment managers are required to
notify management, and receive approval, prior to the execution of a transaction or series of
related transactions that may result in any realized loss up until a certain period beyond the
close of a quarterly accounting period.
Accounting for Lloyds Results. We record Syndicate 1221s assets, liabilities, revenues and
expenses under U.S. GAAP. At the end of the Lloyds three-year period for determining underwriting
results for an account year, the syndicate will close the account year by reinsuring outstanding
claims on that account year with the participants for the accounts next underwriting year. The
amount to close an underwriting year into the next year is referred to as the reinsurance to close
(RITC). The RITC transaction, recorded in the fourth quarter, does not result in any gain or
loss. Additional information regarding our accounting for Lloyds results can be found in Note 1,
Organization and Summary of Significant Accounting Policies, to our consolidated audited financial
statements, included herein.
65
Translation of Foreign Currencies. Financial statements of subsidiaries expressed in foreign
currencies are translated into U.S. dollars in accordance with SFAS 52, Foreign Currency
Translation, issued by the Financial Accounting Standards Board (FASB). Under SFAS 52,
functional currency assets and liabilities are translated into U.S. dollars using period end rates
of exchange and the related translation adjustments are recorded as a separate component of
accumulated other comprehensive income on the Companys balance sheet. Statement of income amounts
expressed in functional currencies are translated using average exchange rates.
Realized gains and losses resulting from foreign currency transactions are recorded in other
income (expense) in the Companys Consolidated Statements of Income.
Results of Operations and Overview
The following is a discussion and analysis of our consolidated and segment results of
operations for the years ended December 31, 2008, 2007 and 2006. All earnings per share data is
presented on a per diluted share basis.
Effective in 2008, the Company has reclassified certain of its business for this Managements
Discussion and Analysis of Financial Condition and Results of Operations. The inland marine
business, formerly included in other business, is now included in marine business. Middle markets
business, formerly included in the specialty business, is now broken out separately. Underwriting
data for prior periods has been reclassified to reflect these changes.
Net income for 2008, 2007 and 2006 was $51.7 million or $3.04 per share, $95.6 million or
$5.62 per share and $72.6 million or $4.30 per share, respectively. The 2008 year was adversely
impacted by Hurricanes Gustav and Ike to the extent of reducing net income by $19.1 million and
reducing earnings per share by $1.12.
Consolidated stockholders equity increased 4.1% to $689.3 million or $40.89 per share at
December 31, 2008 compared to $662.1 million or $39.24 per share at December 31, 2007. The
increase was primarily due to 2008 net income of $51.7 million partially offset by the increase in
unrealized losses in the Companys investment portfolio.
Cash flow from operations was $245.3 million, $284.6 million and $146.0 million in 2008, 2007
and 2006, respectively, contributing to the growth in invested assets and net investment income.
Investment income increased 8.3% in 2008 to $76.6 million compared to 2007 and increased 24.2% in
2007 to $70.6 million compared to 2006 as the result of the increase in invested assets in both
years, partially offset by lower investment yields in 2008.
2008 Results
The 2008 results of operations were adversely impacted by hurricane activity and net realized
capital losses. Hurricanes Gustav and Ike reduced 2008 net income by $19.1 million and earnings
per share by $1.12. The combined loss and expense ratio was increased by an aggregate 4.3 ratio
points for such losses and are inclusive of reinsurance recoveries and related costs for
reinsurance reinstatement premiums. Excluding these effects, our financial performance compared to
2007 was stable due to a combination of growth in investment income offset by lower underwriting
profits.
The underwriting results benefited from increased net premium revenues despite continuing
softening market conditions, and the recording of a net redundancy of prior years loss reserves of
$50.7 million, or $1.94 per share, which reduced the 2008 combined ratio of 93.8% by 7.9 loss ratio
points.
Net investment income increased 8.3% due to the cash flow from operations. The pre-tax
investment yield was 4.1% in 2008 compared to 4.4% in 2007.
66
2007 Results
The 2007 results of operations reflect improved financial performance compared to 2006 due to
a combination of improved underwriting results and the growth in investment income.
The underwriting results benefited from increased net premium revenues despite continuing
softening market conditions, and the recording of a net redundancy of prior years loss reserves of
$47.0 million, or $1.80 per share, which reduced the 2007 combined ratio of 87.5% by 7.8 loss ratio
points.
Net investment income increased 24.2% due to the cash flow from operations. The pre-tax
investment yield was 4.4% in 2007 and 2006.
2006 Results
The 2006 results of operations reflect improved financial performance compared to 2005
(excluding the 2005 Hurricanes) due to a combination of improved underwriting results and the
growth in net investment income.
The 2006 underwriting results generally benefited from increased net premium revenues and the
stable or slightly declining market conditions in the professional liability and general liability
markets and improved market conditions as reflected in increased premium rates in the marine
business coupled with the recording of a net redundancy of prior years loss reserves of $17.2
million, or $0.66 per share, which reduced the 2006 combined ratio of 87.8% by 3.7 loss ratio points.
Net investment income increased 53.5% due to the cash flow from operations coupled with the
net proceeds from the Companys April 2006 debt offering and the Companys October 2005 equity
offering, and the increase in the pre-tax investment yield to 4.4% in 2006 compared to 3.8% in
2005.
Revenues. Gross written premium increased to $1.08 billion in 2008 from $1.07 billion in 2007
and from $970.8 million in 2006, increases of 1.3%, 10.2% and 25.0% in 2008, 2007 and 2006,
respectively. The growth in gross premiums over the three year period reflects a combination of
business expansion in both new and existing lines of business coupled with premium rate changes on
renewal policies.
67
The following table sets forth our gross and net written premium and net earned premium by
segment and line of business for the periods indicated:
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Year Ended December 31, |
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|
2008 |
|
|
2007 |
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|
2006 |
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Gross |
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|
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Net |
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|
Net |
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|
Gross |
|
|
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|
Net |
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|
Net |
|
|
Gross |
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|
|
|
|
Net |
|
|
Net |
|
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
|
Premium |
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|
% |
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|
Premium |
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|
Premium |
|
|
Premium |
|
|
% |
|
|
Premium |
|
|
Premium |
|
|
Premium |
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|
% |
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|
Premium |
|
|
Premium |
|
|
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|
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($ in thousands) |
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|
Insurance Companies: |
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|
|
|
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|
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|
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|
|
|
|
|
|
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|
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|
|
|
|
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|
Marine & Energy |
|
$ |
305,066 |
|
|
|
28.1 |
% |
|
$ |
169,055 |
|
|
$ |
153,429 |
|
|
$ |
278,801 |
|
|
|
26.0 |
% |
|
$ |
141,817 |
|
|
$ |
135,617 |
|
|
|
266,675 |
|
|
|
27.5 |
% |
|
|
129,032 |
|
|
|
115,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Specialty |
|
|
311,846 |
|
|
|
28.7 |
% |
|
|
209,871 |
|
|
|
220,722 |
|
|
|
355,523 |
|
|
|
33.2 |
% |
|
|
242,569 |
|
|
|
223,724 |
|
|
|
288,622 |
|
|
|
29.7 |
% |
|
|
176,931 |
|
|
|
156,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
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|
|
|
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|
Middle Markets |
|
|
30,095 |
|
|
|
2.8 |
% |
|
|
24,558 |
|
|
|
22,692 |
|
|
|
25,870 |
|
|
|
2.4 |
% |
|
|
20,864 |
|
|
|
20,191 |
|
|
|
22,754 |
|
|
|
2.3 |
% |
|
|
18,173 |
|
|
|
16,449 |
|
|
|
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|
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|
|
|
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|
Professional Liability |
|
|
109,048 |
|
|
|
10.1 |
% |
|
|
63,797 |
|
|
|
57,316 |
|
|
|
99,556 |
|
|
|
9.3 |
% |
|
|
59,117 |
|
|
|
55,149 |
|
|
|
92,760 |
|
|
|
9.6 |
% |
|
|
51,192 |
|
|
|
41,437 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (1) |
|
|
6,135 |
|
|
|
0.6 |
% |
|
|
5,407 |
|
|
|
9,139 |
|
|
|
14,596 |
|
|
|
1.4 |
% |
|
|
13,651 |
|
|
|
8,775 |
|
|
|
2,035 |
|
|
|
0.2 |
% |
|
|
851 |
|
|
|
697 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Cos.
Total |
|
|
762,190 |
|
|
|
70.3 |
% |
|
|
472,688 |
|
|
|
463,298 |
|
|
|
774,346 |
|
|
|
72.3 |
% |
|
|
478,018 |
|
|
|
443,456 |
|
|
|
672,846 |
|
|
|
69.3 |
% |
|
|
376,179 |
|
|
|
329,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
|
243,698 |
|
|
|
22.4 |
% |
|
|
153,641 |
|
|
|
146,152 |
|
|
|
225,216 |
|
|
|
21.0 |
% |
|
|
131,430 |
|
|
|
132,443 |
|
|
|
245,134 |
|
|
|
25.3 |
% |
|
|
127,636 |
|
|
|
130,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
38,872 |
|
|
|
3.6 |
% |
|
|
23,404 |
|
|
|
21,908 |
|
|
|
34,281 |
|
|
|
3.2 |
% |
|
|
23,349 |
|
|
|
17,659 |
|
|
|
21,759 |
|
|
|
2.2 |
% |
|
|
9,016 |
|
|
|
4,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (2) |
|
|
40,162 |
|
|
|
3.7 |
% |
|
|
11,882 |
|
|
|
12,618 |
|
|
|
36,864 |
|
|
|
3.5 |
% |
|
|
12,999 |
|
|
|
8,419 |
|
|
|
31,051 |
|
|
|
3.2 |
% |
|
|
7,976 |
|
|
|
3,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Ops. Total |
|
|
322,732 |
|
|
|
29.7 |
% |
|
|
188,927 |
|
|
|
180,678 |
|
|
|
296,361 |
|
|
|
27.7 |
% |
|
|
167,778 |
|
|
|
158,521 |
|
|
|
297,944 |
|
|
|
30.7 |
% |
|
|
144,628 |
|
|
|
138,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,084,922 |
|
|
|
100.0 |
% |
|
$ |
661,615 |
|
|
$ |
643,976 |
|
|
$ |
1,070,707 |
|
|
|
100.0 |
% |
|
$ |
645,796 |
|
|
$ |
601,977 |
|
|
$ |
970,790 |
|
|
|
100.0 |
% |
|
$ |
520,807 |
|
|
$ |
468,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inland marine, European property and run-off business.
|
|
(2) |
|
Includes European property, engineering and construction business. |
68
Gross Written Premium
Insurance Companies Gross Written Premium
Marine Premium. The gross written premium for each of the years in the three-year period
ended December 31, 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine liability |
|
|
27 |
% |
|
|
31 |
% |
|
|
33 |
% |
Offshore energy |
|
|
19 |
% |
|
|
19 |
% |
|
|
19 |
% |
Cargo |
|
|
11 |
% |
|
|
11 |
% |
|
|
10 |
% |
P&I |
|
|
9 |
% |
|
|
9 |
% |
|
|
9 |
% |
Transport |
|
|
8 |
% |
|
|
7 |
% |
|
|
10 |
% |
Inland Marine |
|
|
8 |
% |
|
|
4 |
% |
|
|
0 |
% |
Other |
|
|
7 |
% |
|
|
5 |
% |
|
|
6 |
% |
Bluewater hull |
|
|
6 |
% |
|
|
8 |
% |
|
|
7 |
% |
Craft/Fishing vessel |
|
|
5 |
% |
|
|
6 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
The marine gross written premium for 2008 increased 9.4% compared to 2007 due to new business
partially offset by flattening or declining premium in several classes of business due to increased
competitive market conditions. The average marine renewal premium rates during 2008 decreased
approximately 2.1%. The marine gross written premium for 2007 increased 4.5% compared to 2006
reflecting new business partially offset by flattening or declining premium in several classes of
business due to increased competitive market conditions. The average marine renewal premium rates
during 2007 decreased approximately 0.1%. The marine gross written premium for 2006 increased
14.1% compared to 2005 due to growth across several lines of business including offshore energy
which benefited from rate increases following losses from the 2005 Hurricanes and protection and
indemnity where growth was driven by new business. The average overall marine renewal premium
rates during 2006 increased approximately 11%, including the approximate 54% increase in offshore
energy rates which was primarily the result of the 2005 Hurricane losses.
Specialty Premium. The gross written premium for each of the years in the three-year period
ended December 31, 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction liability |
|
|
48 |
% |
|
|
51 |
% |
|
|
55 |
% |
Commercial umbrella |
|
|
21 |
% |
|
|
16 |
% |
|
|
18 |
% |
Programs |
|
|
15 |
% |
|
|
12 |
% |
|
|
9 |
% |
Primary E&S |
|
|
11 |
% |
|
|
14 |
% |
|
|
7 |
% |
Personal umbrella |
|
|
3 |
% |
|
|
3 |
% |
|
|
5 |
% |
Liquor liability |
|
|
2 |
% |
|
|
1 |
% |
|
|
1 |
% |
Monarch PAF |
|
|
0 |
% |
|
|
0 |
% |
|
|
1 |
% |
Other |
|
|
0 |
% |
|
|
3 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
The 2008 gross written premium decreased 12.3% when compared to 2007 reflecting declines
across most lines of business due to negative renewal rate changes and the housing market slowdown,
which is most pronounced in the construction liability line. The 2007 gross written premium
increased 23.2% when compared to 2006 reflecting growth across all lines of business including
primary casualty which started in the third quarter of 2006. The 2006 gross written premium
increased 53.5% when compared to 2005 also reflecting growth across all lines of business along
with including premiums generated from our primary casualty business which started in the third
quarter of 2006. The average renewal premium rate changes in the contractors liability business
decreased approximately 11.9%, 10.7% and 5.6% in 2008, 2007 and 2006, respectively, following a
relatively flat market in 2005 and increases of 13% and 49% in 2004 and 2003, respectively.
Middle Market Premium. The gross written premium for each of the years in the three-year
period ended December 31, 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General liability |
|
|
44 |
% |
|
|
53 |
% |
|
|
62 |
% |
Commercial automobile liability |
|
|
42 |
% |
|
|
34 |
% |
|
|
28 |
% |
Property |
|
|
14 |
% |
|
|
13 |
% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
The gross written premium for 2008 increased 16.3% compared to 2007 due to product and
geographic expansion. The gross written premiums for 2007 increased 13.7% compared to 2006. The
average renewal premium rate during 2008 decreased approximately 3.9%.
69
Professional Liability Premium. The gross written premium for each of the years in the
three-year period ended December 31, 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O (public and private) |
|
|
69 |
% |
|
|
68 |
% |
|
|
68 |
% |
Lawyers and other professionals |
|
|
26 |
% |
|
|
25 |
% |
|
|
24 |
% |
Architects and engineers |
|
|
5 |
% |
|
|
7 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
The professional liability premium increased 9.5% to $109.0 million in 2008 from $99.6 million
in 2007 reflecting continued growth and the expansion of our professional liability business, and
an emerging flight to quality that occurred in the latter part of the year. Average 2008 renewal
premium rates for this business decreased approximately 3.9% in 2008. The professional liability
premium increased 7.3% to $99.6 million in 2007 from $92.8 million in 2006 when it increased 6.7%
from $86.9 million in 2005 reflecting growth and the expansion of our professional liability
business. Average 2008 and 2007 renewal premium rates for this business decreased approximately
3.9% and 6.6%, respectively, after being relatively level in 2006. D&O average renewal premium
rates decreased approximately 2.7% in 2008, 7.9% in 2007 and 2.0% in 2006.
Property/Other Premium. Property/ Other premium includes European property business written by
the U.K. Branch beginning in 2006 and run-off business. The European property business written by
the U.K. Branch was discontinued in the 2008 second quarter. Such action did not have any material
impact on the U.K. Branch.
Lloyds Operations Gross Written Premium
Marine Premium. The gross written premium for each of the years in the three-year period
ended December 31, 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cargo and specie |
|
|
38 |
% |
|
|
39 |
% |
|
|
43 |
% |
Marine liability |
|
|
24 |
% |
|
|
21 |
% |
|
|
19 |
% |
Offshore energy |
|
|
21 |
% |
|
|
22 |
% |
|
|
24 |
% |
Assumed reinsurance |
|
|
7 |
% |
|
|
11 |
% |
|
|
7 |
% |
Hull |
|
|
7 |
% |
|
|
6 |
% |
|
|
6 |
% |
Other |
|
|
3 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
The 2008 increase in gross written premium of 8.2% resulted from new business, particularly in
the marine liability class. The 2007 decrease in gross written premium of 8.1% resulted from
generally deteriorating market conditions that have led us to decline risks that we believe are not
adequately priced, particularly in the offshore energy line of business. In addition, some premium
estimates recorded during 2006 have been lowered during 2007, which has reduced the 2007 calendar
year gross written premium. The 2006 increase of 18.3% resulted from growth across several lines
of business but primarily offshore energy which benefited from rate increases following losses from
the 2005 Hurricanes.
The average renewal premium rate decreased approximately 6.2% in 2008 and 1.2% in 2007 and
increased approximately 13.0% in 2006. The 2006 increase started in the 2005 fourth quarter in the
offshore energy business resulting from losses caused by the 2005 Hurricanes.
Professional Liability Premium. The gross written premium for each of the years in the
three-year period ended December 31, 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E&O |
|
|
59 |
% |
|
|
52 |
% |
|
|
52 |
% |
D&O (public and private) |
|
|
41 |
% |
|
|
48 |
% |
|
|
48 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
Syndicate 1221 commenced writing professional liability business during the second quarter of
2005. The 2008 and 2007 gross written premium increased 13.4% to $38.9 million and 57.5% to $34.3
million, respectively, compared to the prior year, due to continued expansion and geographic
diversification of the book of business.
70
Property/Other Premium. Property/Other premium consists of gross written premium for
engineering and construction business, onshore energy business and European property business. The
engineering and construction business provides coverage for construction projects including
machinery, equipment and loss of use due to delays. The onshore energy business principally
focuses on the oil and gas, chemical and petrochemical industries with coverages primarily for
property damage and business interruption. The European property business was discontinued in the
2008 second quarter. Such action did not have a material impact on the Lloyds Operations.
Ceded Written Premium. In the ordinary course of business, we reinsure certain
insurance risks with unaffiliated insurance companies for the purpose of limiting our maximum loss
exposure, protecting against catastrophic losses, and maintaining desired ratios of net premiums
written to statutory surplus. The relationship of ceded to written premium varies based upon the
types of business written and whether the business is written by the Insurance Companies or the
Lloyds Operations.
The following table sets forth our ceded written premium by segment and major line of business
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Ceded |
|
|
Gross |
|
|
Ceded |
|
|
Gross |
|
|
Ceded |
|
|
Gross |
|
|
|
Written |
|
|
Written |
|
|
Written |
|
|
Written |
|
|
Written |
|
|
Written |
|
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
136,011 |
|
|
|
44.6 |
% |
|
$ |
136,984 |
|
|
|
49.1 |
% |
|
$ |
137,643 |
|
|
|
51.6 |
% |
Specialty |
|
|
101,975 |
|
|
|
32.7 |
% |
|
|
112,954 |
|
|
|
31.8 |
% |
|
|
111,691 |
|
|
|
38.7 |
% |
Middle Markets |
|
|
5,537 |
|
|
|
18.4 |
% |
|
|
5,006 |
|
|
|
19.4 |
% |
|
|
4,581 |
|
|
|
20.1 |
% |
Professional Liability |
|
|
45,251 |
|
|
|
41.5 |
% |
|
|
40,439 |
|
|
|
40.6 |
% |
|
|
41,568 |
|
|
|
44.8 |
% |
Other |
|
|
728 |
|
|
|
11.9 |
% |
|
|
945 |
|
|
|
6.5 |
% |
|
|
1,184 |
|
|
|
58.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
289,502 |
|
|
|
38.0 |
% |
|
|
296,328 |
|
|
|
38.3 |
% |
|
|
296,667 |
|
|
|
44.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
90,057 |
|
|
|
37.0 |
% |
|
|
93,786 |
|
|
|
41.6 |
% |
|
|
117,498 |
|
|
|
47.9 |
% |
Professional Liability |
|
|
15,468 |
|
|
|
39.8 |
% |
|
|
10,932 |
|
|
|
31.9 |
% |
|
|
12,743 |
|
|
|
58.6 |
% |
Other |
|
|
28,280 |
|
|
|
70.4 |
% |
|
|
23,865 |
|
|
|
64.7 |
% |
|
|
23,075 |
|
|
|
74.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
133,805 |
|
|
|
41.5 |
% |
|
|
128,583 |
|
|
|
43.4 |
% |
|
|
153,316 |
|
|
|
51.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
423,307 |
|
|
|
39.0 |
% |
|
$ |
424,911 |
|
|
|
39.7 |
% |
|
$ |
449,983 |
|
|
|
46.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The percentage of total ceded written premium to total gross written premium in 2008
was 39.0% compared to 39.7% in 2007 and 46.4% in 2006. The Insurance Companies and Lloyds
Operations 2008 ceded marine written premium includes $7.2 million and $5.0 million, respectively,
of reinstatement premium related to the losses from Hurricanes Gustav and Ike.
71
Excluding the effect of ceded reinstatement premiums for the 2008 Hurricanes losses, the ratio
of ceded written premium to gross written premium was 38.4%. The declines in the ratio of ceded
written premium to gross written premium in 2008 compared to 2007 and in 2007 compared to 2006 were
due to a combination of the following factors:
|
|
Restructuring of the 2008 marine quota share treaties for the Insurance Companies and the
Lloyds Operations resulting in a large reduction in ceded premium. |
|
|
Reinstatement premium of $12.2 million related to Hurricanes Gustav and Ike recorded in
2008, as discussed above. |
|
|
A reduction of $1.4 million of ceded written premium in the 2008 second quarter as a result
of the rescission of a reinsurers participation on an excess of loss treaty for middle
markets business. |
|
|
An increased retention from $0.5 million to $1.0 million effective April 1, 2007 for the
contractors liability business which reduced the amount of premium ceded. |
|
|
Increases in our net retentions on the professional liability pro rata reinsurance treaty
which renewed April 1, 2006. |
|
|
The elimination of a 5% reinsurer participation in our Syndicate 1221 2008 stamp capacity. |
|
|
The 2007 third quarter ceded written premium of the Lloyds Operations was reduced by
approximately $6.4 million for ceded written premium amounts that were over-estimated in prior
accounting periods mostly recorded during the six months ended 2007. The estimate change
which results in a higher relationship of net premiums retained to gross written premium in
the 2007 third quarter was not material to the current and prior quarterly or annual
accounting periods. |
Net Written Premium. The 2008 net written premium increased 2.4% compared to 2007.
The increase was 4.3% when excluding the $12.2 million of ceded reinstatement premiums resulting
from the 2008 Hurricanes. The 2007 net written premium increased 24.0% compared to 2006. The
increases in net written premium are reflective of the changes in gross written and ceded written
premium discussed above.
Net Earned Premium. Net earned premium increased 7.0% in 2008 compared to 2007 and
increased 28.5% in 2007 compared to 2006. The 2008 and 2007 net earned premium increases reflect
the changes in written premiums discussed above. The 2008 net earned premium was reduced by $12.2
million of reinstatement premium as a result of the losses from the 2008 Hurricanes. Excluding the
effects of ceded reinstatement premiums as a result of the 2008 Hurricanes, net earned premium
increased 9.0% in 2008 compared to 2007.
Commission Income. Commission income from unaffiliated business decreased 42.1% to
$1.0 million in 2008 compared to 2007 and decreased 43.5% to $1.7 million in 2007 compared to $3.1
million in 2006. Beginning with the 2006 underwriting year, there are no longer any marine pool
unaffiliated insurance companies with the elimination of the marine pool and no longer any
unaffiliated participants at Syndicate 1221 with the purchase of the minority interest. Any profit
commission therefore results from the run-off of underwriting years prior to 2006.
Net Investment Income. Net investment income increased 8.3% and 24.2% in 2008 and
2007, respectively, due primarily to the increase in invested assets resulting from positive cash
flow from operations and the net proceeds from the debt offering of $123.5 million received in
April 2006. See the BusinessInvestments section included herein for additional information
regarding our net investment income.
Net Realized Capital Gains (Losses). Pre-tax net income included $38.3 million of net
realized capital losses for 2008 compared to $2.0 million of net realized capital gains for 2007
and net realized capital losses of $1.0 million for 2006. On an after-tax basis, the net realized
capital losses were $24.9 million or $1.46 per share compared to the net realized capital gains of
$1.3 million or $0.08 per share for 2007 and the net realized capital losses of $0.7 million or
$0.04 per share for 2006.
The 2008 and 2007 net realized capital losses include provisions of $37.0 million and $0.7
million, respectively, for declines in the market value of securities which were considered to be
other than temporary. The after-tax effects of such provisions on the 2008 and 2007 net income
were $24.1 million or $1.42 per share and $0.4 million or $0.3 per share, respectively.
Other Income/(Expense). Other income/(expense) for 2008, 2007 and 2006 consisted
primarily of foreign exchange gains and losses from our Lloyds Operations and inspection fees
related to our specialty insurance business.
72
Operating Expenses
Net Losses and Loss Adjustment Expenses Incurred. The ratios of net loss and loss adjustment
expenses incurred to net earned premium (loss ratios) were 61.0%, 56.6% and 57.7% in 2008, 2007 and
2006, respectively. The 2008 loss ratio of 61.0% was favorably impacted by 7.9 loss ratio points
resulting from the $50.7 million net redundancy of prior years loss reserves and adversely
impacted by 3.7 loss ratio points related to the 2008 Hurricanes. The result of underwriting
losses caused by Hurricanes Gustav and Ike of approximately $29.3 million, including $12.2 million
of reinstatement costs, increased the 2008 combined ratio by 4.3 ratio points. The 2007 loss ratio
of 56.6% was favorably impacted by 7.8 loss ratio points resulting from the $47.0 million net
redundancy of prior year loss reserves. The 2007 loss ratio also included 0.9 loss ratio points
for the U.K. flood losses in the Insurance Companies U.K. Branchs property business and the
Lloyds marine cargo business. The 2006 loss ratio of 57.7% was favorably impacted by 3.7 loss
ratio points resulting from the $17.2 million net redundancy of prior year loss reserves.
During 2008 and 2007, reserve reductions resulting from periodic reviews of the 2005
Hurricanes exposures reduced gross losses incurred by $12.3 million and $29.3 million,
respectively. The reductions to the 2005 Hurricanes gross reserve estimates resulted in reductions
of $1.0 million and $1.9 million to our 2008 and 2007 net loss incurred estimates, respectively,
and reductions of $0.8 million and $0.7 million to our 2008 and 2007 reinstatement cost estimates,
respectively. As a result of these reviews in 2007, we also reallocated our net retention for
these events between our Insurance Companies and Lloyds operations and the result was to increase
the Insurance Companies loss incurred by $1.5 million and decrease the Lloyds loss incurred by
$3.4 million.
Additional information regarding our incurred losses and loss reserves for the 2008 Hurricanes
and the 2005 Hurricanes can be found in Business Loss Reserves, included herein.
With the recording of gross losses, the Company assesses its reinsurance coverage, potential
receivables, and the recoverability of the receivables. Losses incurred on business recently
written are primarily covered by reinsurance agreements written by companies with whom the Company
is currently doing reinsurance business and whose credit the Company continues to assess in the
normal course of business.
As illustrated in the following table, our overall reinsurance recoverable amounts for paid
and unpaid losses have increased during 2008 as the Company recorded reinsurance recoverables for
the 2008 Hurricanes, while the reinsurance recoverable amounts for paid losses have declined as the
Company continues to bill and collect its recoverables for the 2005 Hurricanes loss payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverables: |
|
|
|
|
|
|
|
|
|
|
|
|
Paid losses |
|
$ |
67,227 |
|
|
$ |
94,818 |
|
|
$ |
(27,591 |
) |
Unpaid losses and LAE reserves |
|
|
853,793 |
|
|
|
801,461 |
|
|
|
52,332 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
921,020 |
|
|
$ |
896,279 |
|
|
$ |
24,741 |
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth gross reserves for losses and LAE reduced for reinsurance
recoverable on such amounts resulting in net loss and LAE reserves (a non-GAAP measure reconciled
in the following table) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves for losses and LAE |
|
$ |
1,853,664 |
|
|
$ |
1,648,764 |
|
|
$ |
204,900 |
|
Less: Reinsurance recoverable on unpaid
losses and LAE reserves |
|
|
853,793 |
|
|
|
801,461 |
|
|
|
52,332 |
|
|
|
|
|
|
|
|
|
|
|
Net loss and LAE reserves |
|
$ |
999,871 |
|
|
$ |
847,303 |
|
|
$ |
152,568 |
|
|
|
|
|
|
|
|
|
|
|
73
The following tables sets forth our net reported loss and LAE reserves and net IBNR reserves
(a non-GAAP measure reconciled above) by segment and line of business for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Net |
|
|
Net |
|
|
Total |
|
|
% of IBNR |
|
|
|
Reported |
|
|
IBNR |
|
|
Net Loss |
|
|
to Total Net |
|
|
|
Reserves |
|
|
Reserves |
|
|
Reserves |
|
|
Loss Reserves |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
118,263 |
|
|
$ |
115,713 |
|
|
$ |
233,976 |
|
|
|
49.5 |
% |
Specialty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction liability |
|
|
44,415 |
|
|
|
232,243 |
|
|
|
276,658 |
|
|
|
83.9 |
% |
All other liability |
|
|
26,683 |
|
|
|
80,412 |
|
|
|
107,095 |
|
|
|
75.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Specialty |
|
|
71,098 |
|
|
|
312,655 |
|
|
|
383,753 |
|
|
|
81.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional liability |
|
|
22,913 |
|
|
|
58,793 |
|
|
|
81,706 |
|
|
|
72.0 |
% |
Middle Markets |
|
|
11,983 |
|
|
|
16,627 |
|
|
|
28,610 |
|
|
|
58.1 |
% |
Property/Other |
|
|
10,710 |
|
|
|
10,305 |
|
|
|
21,015 |
|
|
|
49.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance
Companies |
|
|
234,967 |
|
|
|
514,093 |
|
|
|
749,060 |
|
|
|
68.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
117,232 |
|
|
|
89,698 |
|
|
|
206,930 |
|
|
|
43.3 |
% |
Other |
|
|
14,041 |
|
|
|
29,840 |
|
|
|
43,881 |
|
|
|
68.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lloyds Operations |
|
|
131,273 |
|
|
|
119,538 |
|
|
|
250,811 |
|
|
|
47.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
366,240 |
|
|
$ |
633,631 |
|
|
$ |
999,871 |
|
|
|
63.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
Net |
|
|
Net |
|
|
Total |
|
|
% of IBNR |
|
|
|
Reported |
|
|
IBNR |
|
|
Net Loss |
|
|
to Total Net |
|
|
|
Reserves |
|
|
Reserves |
|
|
Reserves |
|
|
Loss Reserves |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
93,467 |
|
|
$ |
103,500 |
|
|
$ |
196,967 |
|
|
|
52.5 |
% |
Specialty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction liability |
|
|
36,137 |
|
|
|
213,453 |
|
|
|
249,590 |
|
|
|
85.5 |
% |
All other liability |
|
|
17,139 |
|
|
|
55,031 |
|
|
|
72,170 |
|
|
|
76.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Specialty |
|
|
53,276 |
|
|
|
268,484 |
|
|
|
321,760 |
|
|
|
83.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional liability |
|
|
20,335 |
|
|
|
50,584 |
|
|
|
70,919 |
|
|
|
71.3 |
% |
Middle Markets |
|
|
11,469 |
|
|
|
10,329 |
|
|
|
21,798 |
|
|
|
47.4 |
% |
Property/Other |
|
|
12,790 |
|
|
|
11,447 |
|
|
|
24,237 |
|
|
|
47.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Companies |
|
|
191,337 |
|
|
|
444,344 |
|
|
|
635,681 |
|
|
|
69.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
89,957 |
|
|
|
93,069 |
|
|
|
183,026 |
|
|
|
50.9 |
% |
Other |
|
|
7,485 |
|
|
|
21,111 |
|
|
|
28,596 |
|
|
|
73.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lloyds Operations |
|
|
97,442 |
|
|
|
114,180 |
|
|
|
211,622 |
|
|
|
54.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
288,779 |
|
|
$ |
558,524 |
|
|
$ |
847,303 |
|
|
|
65.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2008, the IBNR loss reserve was $633.6 million or 63.4% of our total loss
reserves compared to $558.5 million or 65.9% in 2007.
In addition to $12.9 million of additional net loss reserves for the 2008 Hurricanes, the
increase in net loss reserves in all active lines of business 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 and personal umbrella), professional liability lines of business
and marine liability and transport business in ocean marine. These products, which typically have
a longer settlement period compared to the mix of business the Company has historically written,
are becoming larger components of our overall business.
The increase in gross loss reserves on the Companys 2008 and 2007 balance sheets primarily
relates to incurred losses for events occurring in those years less loss payments. Gross loss
reserves and related reinsurance recoverable amounts related to losses from the 2008 Hurricanes
were $107.4 million and $94.5 million at December 31, 2008. Gross loss reserves and related
reinsurance recoverable amounts related to losses from the 2005 Hurricanes were $97.7 million and
$94.1 million at December 31, 2008, respectively, compared to $141.8 million and $137.3 million at
December 31, 2007, respectively.
Our reserving practices and the establishment of any particular reserve reflect managements
judgment concerning sound financial practice and do not represent any admission of liability with
respect to any claims made against us. No assurance can be given that actual claims made and
related payments will not be in excess of the amounts reserved. During the loss settlement period,
it often becomes necessary to refine and adjust the estimates of liability on a claim either upward
or downward. Even after such adjustments, ultimate liability may exceed or be less than the
revised estimates.
75
As discussed below and under the caption BusinessLoss Reserves, there are a number of
factors that could cause actual losses and loss adjustment expenses to differ materially from the
amount that we have reserved for losses and loss adjustment expenses.
The process of establishing loss reserves is complex and imprecise as it must take into
account many variables that are subject to the outcome of future events. As a result, informed
subjective judgments as to our ultimate exposure to losses are an integral component of our loss
reserving process.
The Companys actuaries generally calculate the IBNR loss reserves for each line of business
by underwriting year for major products principally using two standard actuarial methodologies
which are projection or extrapolation techniques: the loss ratio method and the
Bornheutter-Ferguson method. The loss ratio method is used to calculate the IBNR for the two most
current underwriting years while the Bornheutter-Ferguson method is used to calculate the IBNR for
all prior underwriting years, except as otherwise described below. Such methodologies are
supplemented in most instances by the loss development method and the frequency/severity method
which are used to analyze and better comprehend loss development patterns and trends in the data
when making selections and judgments under the loss ratio method and the Bornheutter-Ferguson
method. In utilizing these methodologies, each of which is generally applicable to both long-tail
and short-tail lines of business and all of which are described below, to develop our IBNR loss
reserves, a key objective of our actuaries is to identify aberrations and systemic changes
occurring within historical experience and accurately adjust for them so that the future can be
projected more reliably. 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 Hurricanes 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.
A brief summary of each actuarial method discussed above follows:
Loss ratio method: This method is based on the assumption that ultimate losses vary
proportionately with premiums. Pursuant to the loss ratio method, IBNR loss reserves are
calculated by multiplying the earned premium by an expected ultimate loss ratio to estimate the
ultimate losses for each underwriting year, then subtracting the reported losses, consisting of
paid losses and case loss reserves, to determine the IBNR loss reserve amount. The ultimate loss
ratios applied are the Companys best estimates for each underwriting year and are generally
determined after evaluating a number of factors which include: information derived by underwriters
and actuaries in the initial pricing of the business, the ultimate loss ratios established in the
prior accounting period and the related judgments applied, the ultimate loss ratios of previous
underwriting years, premium rate changes, underwriting and coverage changes, changes in terms and
conditions, legislative changes, exposure trends, loss development trends, claim frequency and
severity trends, paid claims activity, remaining open case reserves and industry data where deemed
appropriate. Such factors are also evaluated when selecting ultimate loss ratios and/or loss
development factors in the methods described below.
Bornheutter-Ferguson method: The Bornheutter-Ferguson method calculates the IBNR loss
reserves as the product of the earned premium, an expected ultimate loss ratio, and a loss
development factor that represents the expected percentage of the ultimate losses that have been
incurred but not yet reported. The loss development factor equals one hundred percent less the
expected percentage of losses that have thus far been reported, which is generally calculated as an
average of the percentage of losses reported for comparable reporting periods of prior underwriting
years. The expected ultimate loss ratio is generally determined in the same manner as in the loss
ratio method.
76
Loss development method: The loss development method, also known as the chainladder or the
link-ratio method, develops the IBNR loss reserves by multiplying the paid or reported losses by a
loss development factor to estimate the ultimate losses, then subtracting the reported losses,
consisting of paid losses and case loss reserves, to determine the IBNR loss reserves. The loss
development factor is the reciprocal of the expected percentage of losses that have thus far been
reported, which is generally calculated as an average of the percentage of losses reported for
comparable reporting periods of prior underwriting years.
Frequency/severity method: The frequency/severity method calculates the IBNR loss reserves by
separately projecting claim count and average cost per claim data on either a paid or incurred
basis. It estimates the expected ultimate losses as the product of the ultimate number of claims
that are expected to be reported and the expected average amount of these claims.
An annual loss reserve study is conducted by the Companys actuaries for each major line of
business employing the methodologies as described above with the timing of such studies varying
throughout the year. Additionally, a review of the emergence of actual losses relative to
expectations for each line of business, generally derived from the annual reserve study, is
conducted each quarter to determine whether the assumptions used in the reserving process continue
to form a reasonable basis for the projection of liabilities for each product line. Such reviews
may result in maintaining or revising assumptions regarding future loss development based on
various quantitative and qualitative considerations. If actual loss activity differs from
expectations, an upward or downward adjustment to loss reserves may occur. As time passes,
estimated loss reserves for an underwriting year will be based more on historical loss activity and
loss development patterns rather than on assumptions based on underwriters input, pricing
assumptions or industry experience.
The following discusses the method used for calculating the IBNR for each line of business and
key assumptions used in applying the actuarial methods described.
Marine: Generally, two key assumptions are used by our actuaries in setting IBNR loss
reserves for major products in this line of business. The first assumption is that our historical
experience regarding paid and reported losses for each product where we have sufficient history can
be relied on to predict future loss activity. The second assumption is that our underwriters
assessments as to potential loss exposures are reliable indicators of the level of our expected
loss activity. The specific loss reserves for marine are then analyzed separately by product based
on such assumptions, except where noted below, with the major products including marine liability,
offshore energy, cargo, protection and indemnity (P&I), transport and bluewater hull.
The claims emergence patterns for various marine product lines vary substantially. Our
largest marine product line is marine liability, which has one of the longer loss development
patterns. Marine liability protects an insureds business from liability to third parties stemming
from their marine-related operations, such as terminal operations, stevedoring and marina
operations. Since marine liability claims generally involve a dispute as to the extent and amount
of legal liability that our insured has to a third party, these claims tend to take a longer time
to develop and settle. Other longer-tail marine product lines include P&I insurance, which
provides coverage for third party liability as well as injury to crew for vessel operators, and
transport insurance, which provides both property and third party liability on a primary basis to
businesses such as port authorities, marine terminal operators and others engaged in the
infrastructure of international transportation. Offshore energy provides physical damage coverage
to offshore oil platforms along with offshore operations related to oil exploration and production.
The significant offshore energy claims are generally caused by fire or storms, and thus tend to be
large, infrequent, quickly reported, but occasionally not quickly settled because the damage is
often extensive but not always immediately known. Other marine product lines have considerably
shorter periods in which losses develop and settle. Ocean cargo insurance, for example, provides
physical damage coverage to goods in the course of transit by water, air or land. By their nature,
cargo claims tend to be reported quickly as losses typically result from an obvious peril such as
fire, theft or weather. Similarly, bluewater hull insurance provides coverage against physical
damage to ocean-going vessels. Such claims for physical damage generally are discovered, reported
and settled quickly. The Company currently has extensive experience for all of these products and
thus the IBNR loss reserves for all of the marine products are determined using the key assumptions
and actuarial methodologies described above. Prior to 2007, however, as discussed below, the
Company did not have sufficient experience in the transport product line and instead used its hull
and liability products loss development experience as a key assumption in setting the IBNR loss
reserves for its transport product.
77
Specialty: The reserves for specialty are established separately by product with the major
product being contractors liability insurance. Other products include commercial middle markets,
personal umbrella, primary casualty and excess casualty. Our actuaries generally utilize two key
assumptions in this line of business: first, that our historical loss development patterns are
reasonable predictors of future loss patterns and second, that our claims personnels assessment of
our claims exposures and our underwriters assessment of our expected losses are reliable
indicators of our loss exposure. However, this line of business includes a number of newer
products where there is insufficient Company historical experience to project loss reserves and/or
loss development is sparse or erratic, which makes extrapolation techniques for those products
extremely difficult to apply, and in those circumstances we typically rely more on industry data
and our underwriters input in setting assumptions for our IBNR loss reserves as opposed to
historical loss development patterns. In addition, as discussed in more detail below with respect
to construction defect reserves, our actuaries may take other market trends or events into account
in setting IBNR loss reserves.
The substantial majority of the specialty loss reserves are for the contractors liability
business, which insures mostly general and artisan contractors. Contractor liability claims are
categorized into two claim types: construction defect and other general liability. Other general
liability claims typically derive from workplace accidents or from negligence alleged by third
parties, and take a long time to report and settle. Construction defect claims involve the
discovery of damage to buildings that was caused by latent construction defects. These claims take
a very long time to report and to settle compared to other general liability claims. Since
construction defect claims report much later than other contractor liability claims, they are
analyzed separately in the annual loss reserve study.
The Company has extensive history in the contractors liability business upon which to perform
actuarial analyses and does use the key assumption noted above relating to its own historical
experience as a reliable indicator of the future for this product. However, there is inherent
uncertainty in the loss reserve estimation process for this line of business given both the
long-tail nature of the liability claims and the continuing underwriting and coverage changes,
claims handling and reserve changes, and legislative changes that have occurred over a several year
period. Such factors are judgmentally taken into account in this line of business in specific
periods. The underwriting and coverage changes include the migration to a non-admitted business
from admitted business in 2003, which allowed the Company to exclude certain exposures previously
permitted (for example, exposure to construction work performed prior to the policy inception),
withdrawals from certain contractor classes previously underwritten and expansion into new states
beginning in 2005. Claims changes include bringing the claim handling in-house in 1999 and changes
in case reserving practices in 2003 and 2006. A California legislative change, the effects of
which are yet to be fully understood by the industry, with respect to reserves and claim frequency
for construction defect repairs, became effective July 1, 2002 with a sunset provision effective
January 1, 2011. The law provides for an alternative dispute resolution system that attempts to
involve all parties to a claim at an early stage. The legislation may be impacting claim severity,
frequency and the length of settlement which may ultimately be different than historical loss
development assumptions employed in our loss reserve process.
78
Most recently, in setting the IBNR loss reserves for construction defect claims, the Companys
actuaries have begun to consider a new qualitative factor based on their evolving concern with the
recent decline in home values caused by the sub-prime home mortgage crisis and its possible impact
on the frequency and severity of construction defect claims. As a result, the Companys actuaries
acknowledge this uncertainty and anticipate claims arising from alleged construction defects
contributing to housing value declines on policies written on newly constructed homes in our
portfolio. We believe our reserves remain adequate to address such potential exposure, but we can
give no assurances with respect thereto.
The commercial middle markets business consists of general liability, auto liability and
property exposures for a variety of commercial middle market businesses, principally hospitality,
manufacturing and garages. Commencing in 2007, our actuaries are segmenting and analyzing the
components of the loss development for this business among the property, liability and auto
exposures which had been previously combined.
Personal umbrella coverage is purchased by individuals who seek higher limits of liability
than are provided in their homeowners or personal automobile policies. Losses tend to be large and
infrequent, and often result from automobile accidents. They are reserved primarily using the
Companys historical loss experience.
Primary casualty insurance provides primary general liability coverage principally to
corporations in the construction and manufacturing sector. Excess casualty insurance is purchased
by corporations which seek higher limits of liability than are provided in their primary casualty
policies. Neither product line has a significant amount of loss activity reported to date.
Because the Company has limited historical experience in these products, the IBNR loss reserves for
both of these products currently are established using the loss ratio method primarily based on our
underwriters input and industry loss experience.
Professional liability: The professional liability policies mainly provide coverage on a
claims-made basis mostly for a one-year period. The reserves for professional liability are
analyzed separately by product with the major products being directors and officers (D&O)
liability coverage and errors and omissions (E&O) liability coverage for lawyers and other
professionals.
The losses for D&O business are generally very large and infrequent, and typically involve
securities class actions. D&O claims report reasonably quickly, but may take several years to
settle. While the Company has been writing D&O business since 2001, the limited claim history is
generally insufficient to establish IBNR loss reserves using Company data. As a result, the
Company principally employs assumptions based on industry experience coupled with input from its
underwriters and its claims staffs assessment of potential exposure to establish IBNR loss
reserves. Another key assumption with respect to establishing IBNR loss reserves for D&O business
is that such industry experience is representative of our future potential loss development with
respect to trends in class action activity, such as the impact of stock option backdating,
laddering and, most recently, the sub-prime mortgage crisis. As time passes, for a given
underwriting year, additional weight is given to assumptions relating to our actual experience and
claims outstanding.
The E&O IBNR loss reserve process is similar to the process for D&O, with the exception of a
particular book of business of the U.K. Branch written from 2004 through 2006. For the U.K Branch
E&O business, we assume the claims, while similar in nature to the claims in the U.S. E&O business,
are larger, more frequent and have a longer loss development pattern. The IBNR loss reserves for
the U.K. Branch E&O business are determined judgmentally after reviewing recent loss activity
relative to the remaining in-force policy count and the loss activity for similar insureds.
Other: Loss reserves for other include inland marine business and European property business
written by the U.K. Branch. Both businesses were started in 2006. The Company has limited loss
history and relies primarily on assumptions based on underwriters input and industry experience.
Also included are loss reserves for aviation, property and assumed reinsurance business in runoff
since 1999, which are periodically monitored and evaluated by claims and actuarial personnel.
79
Lloyds Operations: Reserves for the Companys Lloyds Operations are reviewed separately for
the marine and professional liability lines by product. The major marine products are marine
liability, offshore energy, cargo, specie and marine reinsurance, and the major products for
professional liability are international D&O and international E&O.
The marine liability, offshore energy and cargo products and related loss exposures are
similar in nature to that described for marine business above. Specie insurance provides property
coverage for chattel, such as jewelry, fine art and cash in transit. Claims tend to be from theft
or damage, and thus are small, quick to report and quick to settle. Marine reinsurance is a
diversified global book of reinsurance, the majority of which consists of excess of loss
reinsurance policies for which claims activity tends to be large and infrequent with loss
development somewhat longer than for such products written on a direct basis. Marine reinsurance
reinsures liability, cargo, hull and offshore energy exposures that are similar in nature to the
marine business described above.
The process for establishing the IBNR loss reserves for the marine and professional liability
lines of the Lloyds Operations, and the assumptions used as part of this process, are similar in
nature to the process employed by the Insurance Companies. Other business for the Lloyds
Operations includes European property and inland marine products, each of which is a new line of
business where we have limited loss history and rely primarily on assumptions based on our
underwriters input and industry loss experience.
The Lloyds Operations products also include property coverages for engineering and
construction projects and onshore energy business, which are substantially reinsured. Losses from
engineering and construction projects tend to result from loss of use due to construction delays
while losses from onshore energy business are usually caused by fires or explosions. Large losses
tend to be catastrophic in nature and are heavily reinsured. IBNR loss reserves for attritional
losses are established based on the Syndicates extensive loss experience.
Prior Year Reserve Redundancies/Deficiencies
As part of our regular review of prior reserves, the Companys actuaries may determine, based
on their judgment, that certain assumptions made in the reserving process in prior years may need
to be revised to reflect various factors, likely including the availability of additional
information. Based on their reserve analyses, our actuaries may make corresponding reserve
adjustments.
Prior year reserve redundancies of $50.7 million, $47.0 million and $17.2 million net of
reinsurance were recorded in 2008, 2007 and 2006, respectively, as discussed below. The relevant
factors that may have a significant impact on the establishment and adjustment of loss and LAE
reserves can vary by line of business and from period to period.
To the extent that reserves are deficient or redundant, the amount of such deficiency or
redundancy is recorded as a charge or credit to earnings in the period in which the deficiency or
redundancy is identified.
80
The segment and line of business breakdowns of prior period net reserve deficiencies
(redundancies) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
Insurance Companies |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
(9,291 |
) |
|
$ |
(10,695 |
) |
|
$ |
(4,800 |
) |
Specialty |
|
|
(27,021 |
) |
|
|
(12,091 |
) |
|
|
(6,060 |
) |
Professional Liability |
|
|
(3,559 |
) |
|
|
(10,365 |
) |
|
|
(1,223 |
) |
Middle Markets |
|
|
1,600 |
|
|
|
|
|
|
|
|
|
Property/Other |
|
|
(3,651 |
) |
|
|
(645 |
) |
|
|
(649 |
) |
|
|
|
|
|
|
|
|
|
|
Subtotal Insurance Companies |
|
|
(41,922 |
) |
|
|
(33,796 |
) |
|
|
(12,732 |
) |
Lloyds Operations |
|
|
(8,824 |
) |
|
|
(13,213 |
) |
|
|
(4,482 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(50,746 |
) |
|
$ |
(47,009 |
) |
|
$ |
(17,214 |
) |
|
|
|
|
|
|
|
|
|
|
Following is a discussion of relevant factors impacting our 2008 loss reserves:
The Insurance Companies recorded $9.3 million of net prior year savings for marine business,
primarily comprised of $4.7 million of savings in the marine liability business, $3.8 million of
savings in the offshore energy business, $2.8 million of savings in the protection and indemnity
business, $1.4 million of savings in the transport business and $1.4 million of savings due to a
review of reinsurance recoverable in the second quarter of 2008, partially offset by $2.7 million
of strengthening in the cargo business, $1.4 million of strengthening in the craft and hull
businesses, and $0.7 million recorded for a commutation with a reinsurer. The favorable
development for marine liability, offshore energy, protection and indemnity, and transport was
primarily due to reduced claims activity for underwriting years 2003 through 2006 as well as IBNR
loss reserve reductions that resulted from the reduced claims activity. The adverse development
for cargo, craft and hull was primarily due to several large claims in underwriting years 2005 and
2006. The adverse development recorded for the commutation is due to the fact that the discounted
reserves were assumed from the reinsurer but the undiscounted reserves were recorded in the
financials.
The Insurance Companies recorded $27.0 million of net prior year savings for specialty
business, which is comprised of $31.6 million savings in the contractors liability business, $1.4
million of savings in the commercial umbrella business, $1.0 million of savings in the personal
umbrella business, and $0.8 million of savings in the primary E&S business; partially offset by
$7.1 million of strengthening due to greater than expected loss activity in a discontinued liquor
liability program and $0.8 million of strengthening in the program business. The favorable
development for contractors liability, commercial umbrella, personal umbrella and primary E&S were
primarily due to reduced claims activity in underwriting years 2003 through 2006. The adverse
development for the liquor liability business was due to a discontinued program and the adverse
development on the programs business was due to an active program.
The Insurance Companies recorded $3.6 million of net prior year savings for professional
liability. This was primarily due to the reduction in case and IBNR reserves for the directors and
officers business in underwriting years 2004 through 2006 resulting from reported losses being less
than anticipated. Directors and officers coverage is claims-made, so no new claims can be reported
for underwriting years 2006 and prior after December 31, 2008.
The Company reviews the IBNR loss
reserves for these underwriting years relative to the open claims to determine if there is
potential for development in the open claims. Since there are a lower than expected number of open
claims remaining for underwriting years 2006 and prior, the IBNR loss reserves were reduced.
81
The Insurance Companies recorded $1.6 million of net adverse development in the middle markets
business as a result of an actuarial analysis that indicated that strengthening is required for the
automobile coverage due to frequency and severity in excess of our expectations.
The Insurance Companies recorded $3.7 million of net prior year savings in the property and
aviation run-off business as a result of an actuarial analysis that indicated that the losses are
substantially reported and the IBNR loss reserves can be reduced.
The Lloyds Operations recorded $8.8 million of net prior year savings, primarily in the
marine liability, energy, specie and reinsurance business for underwriting years 2005 and prior.
The favorable development is the result of more extensive analysis of the potential future
development which led us to shorten the development patterns.
Following is a discussion of relevant factors impacting our 2007 loss reserves:
The Insurance Companies recorded $10.7 million of net prior years savings in the marine
business primarily comprised of $6.5 million of savings in the transport business, $3.7 million of
savings in the marine liability business, $1.6 million of savings in the cargo business, $1.0
million of savings in each of the hull and offshore energy businesses; partially offset by $1.9
million of 2005 Hurricanes Katrina and Rita loss development and $1.6 million for uncollectible
reinsurance recoverables for asbestos losses. The favorable development for the liability, cargo,
hull and offshore energy coverages was primarily due to reduced claim activity for the 2005 and
2006 underwriting years. Prior to 2007, because the Company did not have sufficient experience in
the transport product line, it instead used its hull and liability products loss development
experience as a key assumption in setting the IBNR loss reserves for its transport product.
Commencing in 2007, our actuaries determined that the Companys loss development experience for its
transport product had become sufficiently credible to begin establishing transport reserves using
such experience, which resulted in the prior year savings referred to above recorded for this
business.
The Insurance Companies recorded $12.1 million of net prior years savings for specialty
business related to the contractors liability business for the years 1998 through 2006. The prior
years savings recorded for contractors liability business was due mostly to continued favorable
loss frequency and severity trends for 2003 to 2006 compared to expectations. Our actuaries
believe that the favorable loss frequency trends result primarily from a number of underwriting and
coverage changes since 2002, including the migration to non-admitted business from admitted
business in 2003, which allowed the Company to exclude certain previously permitted exposures (for
example, exposure to construction work performed prior to the policy inception), and withdrawals
from certain contractor classes previously underwritten. Our actuaries believe that the favorable
loss severity trends result primarily from improved claim practices coupled with a California
legislative change, effective in mid-2002, which provides for an alternative dispute resolution
system with respect to construction defect claims and is intended to avoid or mitigate costly
litigation and claims settlements. While our actuaries were unable to precisely quantify the
impact of each of the foregoing factors, such factors were judgmentally taken into account in
recording such prior years savings for contractors liability business by evaluating actual loss
development compared to expected loss development coupled with a frequency and severity claims
analysis conducted in 2007.
The Insurance Companies have historically reserved for the professional liability business
using ultimate loss ratios based on industry experience for this line of business given the
Companys limited claims history. Such industry experience is heavily influenced by the historical
frequency and severity of large securities class action lawsuits. During 2007 the Insurance
Companies reduced the net reserves for such claims-made policies compared to year-end 2006 by $10.4
million, mostly related to policies issued in 2004 and 2005. The reductions were made to recognize
both the low level of open claim counts and the lack of claim severity compared to expectations at
the time the reserves were initially established using industry experience.
In 2007, the Insurance Companies recorded approximately $0.6 million of net prior year savings
from run-off business, principally resulting from a review of open claims files in the aviation
business that was discontinued in 1999.
82
The Lloyds Operations recorded $13.2 million of net prior year savings, comprised of $3.4
million due to a review of the 2005 Hurricanes Katrina and Rita loss estimates, a release of
approximately $2.0 million following a review of open claim files for the years 1998 to 2001, a
$4.6 million reduction in our 2004 underwriting year estimates for the marine liability book due to
favorable loss trends, and the remaining $3.2 million was mostly for offshore energy and marine
liability business on business underwritten during 2002.
Following is a discussion of relevant factors impacting our 2006 loss reserves:
The Insurance Companies recorded $4.8 million of net prior years savings in the marine
business consisting of $7.9 million for business written in 2004 and 2005 mostly for favorable loss
experience in cargo and marine liability business, partially offset by net prior years reserve
deficiencies of $3.1 million for 2003 and prior years.
The Insurance Companies recorded $6.1 million of net prior years savings in the specialty
business of which $18.6 million was for favorable loss trends for construction liability business
written in 2005 and 2004 offset by net prior years reserve deficiencies of $12.5 million
principally for business written from 2000 to 2003 which was mostly for construction defect claims
emergence in those years.
As discussed above, the Company establishes reserves for the professional liability business
using ultimate loss ratios based on industry experience. During 2006 the Insurance Companies
further reduced the net reserves for such claims-made policies compared to year-end 2005, by $1.2
million mostly related to the 2004 year. The reductions were to recognize the low level of open
claim counts and continued favorable development compared to expectations at the time the reserves
were initially established.
The Lloyds Operations recorded $4.5 million of net prior years savings, which included $1.1
million related to a loss commutation for the 1999 to 2002 years, with the balance spread across
several lines of business in the 2002 to 2004 years.
Sensitivity Analysis
We do not calculate a range of loss reserve estimates. We believe that ranges may not be a
true reflection of the potential volatility between carried loss reserves and the ultimate
settlement amount of losses incurred prior to the balance sheet date. The numerous factors that
contribute to the inherent uncertainty in the process of establishing loss reserves include:
interpreting loss development activity, emerging economic and social trends, inflation, changes in
the regulatory and judicial environment and changes in our operations, including changes in
underwriting standards and claims handling procedures.
The Companys actuaries use various assumptions in determining a best estimate of reserves for
each line of business. The importance of any specific assumption can vary by both individual
product within a line of business and underwriting year. If actual experience differs from key
assumptions used in establishing reserves, there is potential for significant variation in the
development of loss reserves, particularly for long-tail casualty classes of business.
As discussed above, our actuaries generally apply the loss ratio method to calculate the IBNR
loss reserve for the two most current underwriting years while the Bornhuetter-Ferguson method is
used to calculate the IBNR loss reserves for all prior underwriting years except in certain
situations such as when limited or insufficient historical data is available.
Set forth below is a sensitivity analysis that estimates the effect on the Companys net loss
reserve position of using alternative expected loss ratios for the underwriting years 2001 to 2008
and alternative loss development factors for the underwriting years 2001 to 2008 rather than those
actually used in determining the Companys best estimates at December 31, 2008. The analysis
addresses each major line of business and underwriting year for which a material deviation to the
Companys overall reserve position is believed reasonably possible, and uses what the Company
believes is a reasonably likely range of potential deviation for each line of business. The
underwriting years prior to 2001 were not included given the maturity of such years and their
relatively small contribution to the overall IBNR loss reserve amount at December 31, 2008. Such
underwriting years are therefore deemed to be less likely to cause a material deviation to the
Companys overall loss reserve position. There can be no assurance, however, that actual reserve
development will be materially consistent with either the original or the adjusted expected loss
ratios or loss development factor assumptions, or with other assumptions made in the reserving
process, or that a material deviation in loss reserves will not occur for underwriting years prior
to 2001.
83
For the selected alternative expected loss ratios, our actuaries observed the range of
ultimate loss ratios recorded for the underwriting years 2001 to 2008 for each major line of
business at December 31, 2008.
The reasonably likely ranges of potential deviation in the loss ratios for each line of
business for the 2001 to 2008 underwriting years expressed in loss ratio points are as follows:
Reasonably likely loss ratio point variances
|
|
|
|
|
|
|
|
|
|
|
Decrease |
|
|
Increase |
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
6 |
% |
|
|
8 |
% |
Specialty |
|
|
4 |
% |
|
|
4 |
% |
Professional Liability |
|
|
14 |
% |
|
|
8 |
% |
Syndicate |
|
|
9 |
% |
|
|
7 |
% |
For the selected alternative loss development factors for the 2001 to 2007 underwriting
years, our actuaries observed the range of historical loss development factors recorded for such
underwriting years for each major line of business at December 31, 2008. After evaluating the
range of loss development factor variances for each underwriting year, our actuaries judgmentally
selected a range of reasonably likely variations to determine alternative IBNR loss reserve amounts
compared to the amounts recorded for each line of business for the underwriting years 2001 to 2007
out of the range of reasonably possible variations for such underwriting years. Such variations
represent the differences in the time that it takes for losses to develop for an underwriting year.
The reasonably likely ranges of potential deviations in the aggregate or overall loss
development factors for all underwriting years for each line of business are as follows:
Reasonably likely ultimate loss development factor variances
|
|
|
|
|
|
|
|
|
|
|
Decrease |
|
|
Increase |
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
13 |
% |
|
|
13 |
% |
Specialty |
|
|
7 |
% |
|
|
9 |
% |
Professional Liability |
|
|
11 |
% |
|
|
14 |
% |
Syndicate |
|
|
10 |
% |
|
|
13 |
% |
84
Such sensitivity analysis was performed in the aggregate for all products in each line
of business. The use of aggregate data was considered more stable and reliable compared to a
product-by-product analysis. We cannot assure you, however, that such use of aggregate data will
provide a more accurate range of the actual variations in loss development. The sensitivity
analysis uses loss ratios and loss development patterns for the 2001 to 2008 underwriting years,
which are believed to be more representative compared to years prior to 2001 given the Companys
evolving mix of business, product changes and other factors. There can be no assurances, however,
that the use of such recent history is more predictive of actual development as compared to
employing longer periods of history. In addition, while the net loss reserves include the net loss
reserves for asbestos exposures, such amounts were excluded from the sensitivity analysis given the
nature of how such reserves are established by the Company. While we believe such net reserves are
adequate, we cannot assure you that material loss development may not arise in the future from
asbestos losses given the complex nature of such exposures.
A significant factor influencing the results of the sensitivity analysis has been the
generally favorable loss trends experienced in the most recent four calendar years. Future loss
activity may in fact deviate substantially from recent experience by becoming less favorable or, in
fact, unfavorable. In such event, future loss activity could lead to smaller than reasonably
likely loss reserve savings or larger than reasonably likely loss reserve deficiencies as
identified below.
The sensitivity analysis also reflects a likely range of impact on reported financial results
by aggregating calculated redundancy amounts and deficiency amounts for each line of business. The
total Company range amounts below were determined by adding the reasonably likely range amounts for
each line of business, which are uncorrelated to each other, and therefore such amounts may not be
representative of the actual aggregate favorable or unfavorable loss development amounts that may
occur over time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Reasonably Likely Range of Deviation |
|
|
|
Net Loss |
|
|
Redundancy |
|
|
Deficiency |
|
|
|
Reserve |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
233,976 |
|
|
$ |
13,936 |
|
|
|
6 |
% |
|
$ |
17,426 |
|
|
|
7 |
% |
Specialty |
|
|
412,363 |
|
|
|
21,635 |
|
|
|
5 |
% |
|
|
24,227 |
|
|
|
6 |
% |
Professional Liability |
|
|
81,706 |
|
|
|
9,108 |
|
|
|
11 |
% |
|
|
10,250 |
|
|
|
13 |
% |
Other |
|
|
21,015 |
|
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Companies |
|
|
749,060 |
|
|
|
44,679 |
|
|
|
6 |
% |
|
|
51,903 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Other |
|
|
250,811 |
|
|
|
23,556 |
|
|
|
9 |
% |
|
|
22,410 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
$ |
999,871 |
|
|
$ |
68,235 |
|
|
|
7 |
% |
|
$ |
74,313 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) to net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
|
|
|
$ |
44,353 |
|
|
|
|
|
|
$ |
(48,303 |
) |
|
|
|
|
Per Share (1) |
|
|
|
|
|
$ |
2.61 |
|
|
|
|
|
|
$ |
(2.84 |
) |
|
|
|
|
|
|
|
(1) |
|
Used 17.0 million average diluted shares outstanding for the year ended
December 31, 2008. |
Commission Expense. Commission expense paid to unaffiliated brokers and agents is
generally based on a percentage of the gross written premium and is reduced by ceding commissions
the Company may receive on the ceded written premium. Commissions are generally deferred and
recorded as deferred policy acquisition costs to the extent that they relate to unearned premium.
The percentages of commission expense to net earned premium were 13.9% in 2008, 12.9% in 2007 and
12.4% in 2006. The 2008 commission expense ratio excluding the effects of the 2008 Hurricanes was
13.7%.
85
Other Operating Expenses. The 11.5% and 28.8% increases in other operating expenses when
comparing 2008 to 2007 and comparing 2007 to 2006, respectively, were attributable primarily to
employee related expenses resulting from expansion of the business.
Interest Expense. The interest expense reflects interest on our senior notes issued in April
2006.
Income Taxes. The income tax expense was $17.0 million, $43.6 million and $34.1 million for
2008, 2007 and 2006, respectively. The effective tax rates for 2008, 2007 and 2006 were 24.8%,
31.3% and 31.9%, respectively. The Companys effective tax rate is less than 35% due to permanent
differences between book and tax return income, with the most significant item being tax exempt
interest. As of December 31, 2008 and 2007, the net deferred Federal, foreign, state and local tax
assets were $54.7 million and $29.2 million, respectively.
We are subject to the tax regulations of the United States and foreign countries in which we
operate. The Company files a consolidated federal tax return, which includes all domestic
subsidiaries and the U.K. Branch. The income from the foreign operations is designated as either
U.S connected income or non-U.S. connected income. Lloyds is required to pay U.S. income tax on
U.S. connected income written by Lloyds syndicates. Lloyds and the IRS have entered into an
agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyds and
remitted directly to the IRS. These amounts are then charged to the corporate members in
proportion to their participation in the relevant syndicates. The Companys corporate members are
subject to this agreement and will receive U.K. tax credits for any U.S. income tax incurred up to
the U.K. income tax charged on the U.S. income. The non-U.S. connected insurance income would
generally constitute taxable income under the Subpart F income section of the Internal Revenue Code
since less than 50% of the Companys premium is derived within the U.K. and would therefore be
subject to U.S. taxation when the Lloyds year of account closes. Taxes are accrued at a 35% rate
on our foreign source insurance income and foreign tax credits, where available, are utilized to
offset U.S. tax as permitted. The Companys effective tax rate for Syndicate 1221 taxable income
could substantially exceed 35% to the extent the Company is unable to offset U.S. taxes paid under
Subpart F tax regulations with U.K. tax credits on future underwriting year distributions. U.S.
taxes are not accrued on the earnings of the Companys foreign agencies as these earnings are not
subject to the Subpart F tax regulations. These earnings are subject to taxes under U.K. tax
regulations. A finance bill was enacted in the U.K. on July 19, 2007 that reduces
the U.K. corporate tax rate from 30% to 28% effective April 1, 2008. The effect of such tax rate
change was not material to the Companys financial statements.
We have not provided for U.S. deferred income taxes on the undistributed earnings of
approximately $48.4 million of our non-U.S. subsidiaries since these earnings are intended to be
permanently reinvested in the foreign subsidiary. However, in the future, if such earnings were
distributed to the Company, taxes of approximately $3.4 million would be payable on such
undistributed earnings and would be reflected in the tax provision for the year in which these
earnings are no longer intended to be permanently reinvested in the foreign subsidiary assuming all
foreign tax credits are realized.
The Company had net state and local deferred tax assets amounting to potential future tax
benefits of $6.2 million at both December 31, 2008 and 2007. Included in
the deferred tax assets are net operating loss carryforwards of $0.5 million and $2.5 million at
December 31, 2008 and 2007, respectively. A valuation allowance was established for the full
amount of these potential future tax benefits due to the uncertainty associated with their
realization. The Companys state and local tax carryforwards at December 31, 2008 expire from 2021
to 2025.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), an interpretation of SFAS 109, Accounting for Income Taxes. FIN 48, which became
effective in 2007, established the threshold for recognizing the benefits of tax-return positions
in the financial statements as more-likely-than-not to be sustained by the taxing authorities, and
prescribes a measurement methodology for those positions meeting the recognition threshold. The
Companys adoption of FIN 48 at January 1, 2007 did not have a material effect on its financial
condition or results of operations.
86
Segment Information
The Companys subsidiaries are primarily engaged in the underwriting and management of
property and casualty insurance.
The Company classifies its business into two underwriting segments consisting of the Insurance
Companies and the Lloyds Operations, which are separately managed, and a corporate segment.
Segment data for each of the two underwriting segments include allocations of revenues and expenses
of the wholly-owned underwriting agencies and the Parent Companys expenses and related income tax
amounts.
We evaluate the performance of each segment based on its underwriting and net income results.
The Insurance Companies and the Lloyds Operations results are measured by taking into account
net earned premium, net losses and loss adjustment expenses, commission expense, other operating
expenses and commission income and other income (expense). The corporate segment consists of the
Parent Companys investment income, interest expense and the related tax effect. Each segment also
maintains its own investments, on which it earns income and realizes capital gains or losses. Our
underwriting performance is evaluated separately from the performance of our investment portfolios.
Following are the financial results of the Companys two underwriting segments.
Insurance Companies
The Insurance Companies consist of Navigators Insurance Company, including its U.K. Branch,
and its wholly-owned subsidiary, Navigators Specialty Insurance Company. Navigators Insurance
Company is our largest insurance subsidiary and has been active since 1983. It is primarily
engaged in underwriting marine insurance and related lines of business, professional liability
insurance, specialty lines of business including contractors general liability insurance,
commercial and personal umbrella and primary and excess casualty businesses, and middle markets
business consisting of general liability, commercial automobile liability and property insurance
for a variety of commercial middle markets businesses. Navigators Specialty Insurance Company
underwrites specialty and professional liability insurance on an excess and surplus lines basis
fully reinsured by Navigators Insurance Company. Wholly-owned underwriting agencies produce,
manage and underwrite insurance and reinsurance business for the Insurance Companies.
87
The following table sets forth the results of operations for the Insurance
Companies for each of the years in the three-year period ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
762,190 |
|
|
$ |
774,346 |
|
|
$ |
672,846 |
|
Net written premium |
|
|
472,688 |
|
|
|
478,018 |
|
|
|
376,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
463,298 |
|
|
|
443,456 |
|
|
|
329,723 |
|
Net losses and loss adjustment expenses |
|
|
(275,767 |
) |
|
|
(256,652 |
) |
|
|
(191,740 |
) |
Commission expense |
|
|
(55,752 |
) |
|
|
(52,490 |
) |
|
|
(36,412 |
) |
Other operating expenses |
|
|
(92,297 |
) |
|
|
(81,053 |
) |
|
|
(62,459 |
) |
Commission income and other income (expense) |
|
|
2,145 |
|
|
|
1,510 |
|
|
|
3,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
41,627 |
|
|
|
54,771 |
|
|
|
42,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
63,544 |
|
|
|
58,261 |
|
|
|
47,723 |
|
Net realized capital gains (losses) |
|
|
(37,822 |
) |
|
|
1,973 |
|
|
|
(622 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
67,349 |
|
|
|
115,005 |
|
|
|
89,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
16,401 |
|
|
|
35,061 |
|
|
|
28,843 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
50,948 |
|
|
$ |
79,944 |
|
|
$ |
60,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
|
$ |
2,477,139 |
|
|
$ |
2,322,647 |
|
|
$ |
2,105,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expenses ratio |
|
|
59.5 |
% |
|
|
57.9 |
% |
|
|
58.2 |
% |
Commission expense ratio |
|
|
12.0 |
% |
|
|
11.8 |
% |
|
|
11.0 |
% |
Other operating expenses ratio (1) |
|
|
19.5 |
% |
|
|
17.9 |
% |
|
|
17.9 |
% |
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
91.0 |
% |
|
|
87.6 |
% |
|
|
87.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes other operating expenses and commission income and other
income (expense). |
88
The following table sets forth the underwriting results for the Insurance Companies for each
of the years in the three-year period ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Gain(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
153,429 |
|
|
$ |
103,606 |
|
|
$ |
48,380 |
|
|
$ |
1,443 |
|
|
|
67.5 |
% |
|
|
31.5 |
% |
|
|
99.0 |
% |
Specialty |
|
|
220,722 |
|
|
|
119,847 |
|
|
|
64,427 |
|
|
|
36,448 |
|
|
|
54.3 |
% |
|
|
29.2 |
% |
|
|
83.5 |
% |
Middle Markets |
|
|
22,692 |
|
|
|
17,125 |
|
|
|
8,977 |
|
|
|
(3,410 |
) |
|
|
75.5 |
% |
|
|
39.6 |
% |
|
|
115.1 |
% |
Professional Liability |
|
|
57,316 |
|
|
|
33,211 |
|
|
|
20,410 |
|
|
|
3,695 |
|
|
|
57.9 |
% |
|
|
35.6 |
% |
|
|
93.5 |
% |
Property/Other |
|
|
9,139 |
|
|
|
1,978 |
|
|
|
3,710 |
|
|
|
3,451 |
|
|
|
21.6 |
% |
|
|
40.6 |
% |
|
|
62.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
463,298 |
|
|
$ |
275,767 |
|
|
$ |
145,904 |
|
|
$ |
41,627 |
|
|
|
59.5 |
% |
|
|
31.5 |
% |
|
|
91.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Gain(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
135,617 |
|
|
$ |
78,808 |
|
|
$ |
42,386 |
|
|
$ |
14,423 |
|
|
|
58.1 |
% |
|
|
31.3 |
% |
|
|
89.4 |
% |
Specialty |
|
|
223,724 |
|
|
|
125,555 |
|
|
|
59,784 |
|
|
|
38,385 |
|
|
|
56.1 |
% |
|
|
26.7 |
% |
|
|
82.8 |
% |
Middle Markets |
|
|
20,191 |
|
|
|
10,665 |
|
|
|
6,422 |
|
|
|
3,104 |
|
|
|
52.8 |
% |
|
|
31.8 |
% |
|
|
84.6 |
% |
Professional
Liability |
|
|
55,149 |
|
|
|
32,602 |
|
|
|
19,646 |
|
|
|
2,901 |
|
|
|
59.1 |
% |
|
|
35.6 |
% |
|
|
94.7 |
% |
Property/Other |
|
|
8,775 |
|
|
|
9,022 |
|
|
|
3,795 |
|
|
|
(4,042 |
) |
|
|
102.8 |
% |
|
|
43.3 |
% |
|
|
146.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
443,456 |
|
|
$ |
256,652 |
|
|
$ |
132,033 |
|
|
$ |
54,771 |
|
|
|
57.9 |
% |
|
|
29.7 |
% |
|
|
87.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Gain(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
115,109 |
|
|
$ |
65,864 |
|
|
$ |
32,229 |
|
|
$ |
17,016 |
|
|
|
57.2 |
% |
|
|
28.0 |
% |
|
|
85.2 |
% |
Specialty |
|
|
156,031 |
|
|
|
91,120 |
|
|
|
44,371 |
|
|
|
20,540 |
|
|
|
58.4 |
% |
|
|
28.4 |
% |
|
|
86.8 |
% |
Middle Markets |
|
|
16,449 |
|
|
|
7,992 |
|
|
|
5,767 |
|
|
|
2,690 |
|
|
|
48.6 |
% |
|
|
35.1 |
% |
|
|
83.7 |
% |
Professional Liability |
|
|
41,437 |
|
|
|
26,756 |
|
|
|
12,648 |
|
|
|
2,033 |
|
|
|
64.6 |
% |
|
|
30.5 |
% |
|
|
95.1 |
% |
Property/Other |
|
|
697 |
|
|
|
8 |
|
|
|
304 |
|
|
|
385 |
|
|
|
1.2 |
% |
|
43.6 |
% |
|
44.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
329,723 |
|
|
$ |
191,740 |
|
|
$ |
95,319 |
|
|
$ |
42,664 |
|
|
|
58.2 |
% |
|
|
28.9 |
% |
|
|
87.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
Overall, the net earned premium increased 4.5%, 34.5% and 43.3% in 2008, 2007 and 2006,
respectively, reflecting business expansion coupled with increased retention of the business
written, partially offset by the effect of premium rate changes on renewal policies on certain
lines of business.
The 2008 underwriting results were favorably impacted by $41.9 million or 9.0 loss ratio points for
net prior year savings, which is discussed in the prior year reserve redundancies/deficiencies section. The 2008 pre-tax net loss to the Insurance Companies as the result of losses caused by
Hurricanes Gustav and Ike of approximately $16.3 million, including $7.2 million of reinstatement
costs, increased the Insurance Companies 2008 combined ratio by 10.1 combined ratio points. The
after tax effect reduced net income by $10.6 million.
The following table sets forth the impact of Hurricanes Gustav and Ike on the Insurance
Companies 2008 financial results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane |
|
|
Hurricane |
|
|
|
|
|
|
Gustav |
|
|
Ike |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in net earned premiums for reinstatement costs |
|
$ |
(871 |
) |
|
$ |
(6,343 |
) |
|
$ |
(7,214 |
) |
Gross losses incurred |
|
|
7,200 |
|
|
|
53,800 |
|
|
|
61,000 |
|
Reinsurance recoverable |
|
|
4,377 |
|
|
|
47,546 |
|
|
|
51,923 |
|
|
|
|
|
|
|
|
|
|
|
Net losses incurred |
|
|
2,823 |
|
|
|
6,254 |
|
|
|
9,077 |
|
|
|
|
|
|
|
|
|
|
|
Underwriting loss |
|
$ |
(3,694 |
) |
|
$ |
(12,597 |
) |
|
$ |
(16,291 |
) |
|
|
|
|
|
|
|
|
|
|
After-tax net loss |
|
$ |
(2,401 |
) |
|
$ |
(8,188 |
) |
|
$ |
(10,589 |
) |
|
|
|
|
|
|
|
|
|
|
Reduction in earnings per share |
|
$ |
(0.14 |
) |
|
$ |
(0.48 |
) |
|
$ |
(0.62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on combined ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
0.7 |
% |
|
|
2.1 |
% |
|
|
2.8 |
% |
Expense ratio |
|
|
0.1 |
% |
|
|
0.4 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
0.8 |
% |
|
|
2.5 |
% |
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
|
The 2007 underwriting results were favorably impacted by approximately $33.8 million or 7.6
loss ratio points for net prior year savings across all of our lines of business due to favorable
loss development trends.
Reviews of our Insurance Companies Hurricanes Katrina and Rita exposures during 2007 resulted
in a reduction to the Insurance Companies pre-tax income by $1.5 million. Much of this impact was
the result of reallocating our net retention for these events between our Insurance Companies and
Lloyds Operations.
The 2006 underwriting results were favorably impacted by approximately $12.7 million or 3.9
loss ratio points for net prior year savings predominately from our specialty and marine lines of
business due to favorable loss development trends.
The approximate annualized pre-tax yields on the Insurance Companies investment portfolio,
excluding net realized capital gains and losses, approximated 4.3%, 4.5% and 4.6% for 2008, 2007
and 2006, respectively. The increase in the 2007 investment income compared to 2006 was primarily
due to the investment of new funds from cash flow. The increase in the 2006 investment income
compared to 2005 was primarily due to the investment of new funds from cash flow, increase in the
portfolios yield and the Companys $100 million statutory surplus contribution from the net
proceeds of the Companys April 2006 debt offering, in an environment of gradually increasing
interest rates. The portfolios duration was 4.8 years at both December 31, 2008 and 2007,
respectively.
90
The 2008 and 2007 net realized capital losses include provisions of $36.7 million and $0.7
million, respectively, for declines in the market value of securities which were considered to be
other than temporary. The after-tax effects of such provisions on the 2008 and 2007 net income
were $23.9 million and $0.4 million, respectively.
Lloyds Operations
The Lloyds Operations consist of NUAL, which manages Syndicate 1221, Millennium Underwriting
Ltd. and Navigators Corporate Underwriters Ltd. Both Millennium Underwriting Ltd. and Navigators
Corporate Underwriters Ltd. are Lloyds corporate members with limited liability and provide
capacity to Syndicate 1221. Navigators Underwriting Ltd., a wholly-owned underwriting managing
agency, underwrites cargo and engineering business for Syndicate 1221. In January 2005, we formed
Navigators NV in Antwerp, Belgium, a wholly-owned subsidiary of NUAL. Navigators NV produces
transport liability, cargo and marine liability premium for Syndicate 1221. In July 2008, we
opened an underwriting office in Stockholm, Sweden to write professional liability business for
Syndicate 1221. The companies comprising our Lloyds Operations and Navigators Management (UK)
Limited, which produces business for the U.K. Branch, are subsidiaries of Navigators Holdings (UK)
Limited located in the United Kingdom. In September 2008, Syndicate 1221 began to underwrite
insurance coverage in China through the Navigators Underwriting Division of Lloyds Reinsurance
Company (China) Ltd. The Companys focus in China is on opportunities in professional and general
liability lines of business.
Syndicate 1221s stamp capacity was £123 million ($228 million) in 2008, £140 million ($280
million) in 2007 and £123 million ($226 million) in 2006. Stamp capacity is a measure of the
amount of premium a Lloyds syndicate is authorized to write as determined by the Council of
Lloyds. We provided 100% of Syndicate 1221s total stamp capacity in 2008, 2007 and 2006.
Syndicate 1221s stamp capacity is expressed net of commission (as is standard at Lloyds). The
Syndicate 1221 premium recorded in the Companys financial statements is gross of commission.
We provide letters of credit to Lloyds to support our participation in Syndicate 1221s stamp
capacity as discussed below under the caption Liquidity and Capital Resources.
Whenever a member of Lloyds is unable to pay its debts to policyholders, such debts may be
payable by the Lloyds Central Fund. If Lloyds determines that the Central Fund needs to be
increased, it has the power to assess premium levies on current Lloyds members up to 3% of a
members underwriting capacity in any one year. The Company does not believe that any assessment
is likely in the foreseeable future and has not provided any allowance for such an assessment.
However, based on the Companys 2008 capacity at Lloyds of £123 million, the December 31, 2008
exchange rate of £1 equaled $1.46 and in the event of a maximum 3% assessment, the Company would be
assessed approximately $5.4 million. In addition, beginning with the 2005 underwriting year,
Lloyds added a second tier of assets to the existing Central Fund. This second tier was built up
through a compulsory interest bearing loan to the Society of Lloyds from the Lloyds members based
on the stamp capacity of each syndicate for the respective underwriting year. The funds were
invested in assets eligible for Society of Lloyds solvency. The loans, of which the Company had
$5.9 million at June 30, 2007, were repaid during the 2007 third quarter from a bond offering
completed by Lloyds in September 2007.
91
The following table sets forth the results of operations of the Lloyds Operations for each of
the years in the three-year period ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
322,732 |
|
|
$ |
296,361 |
|
|
$ |
297,944 |
|
Net written premium |
|
|
188,927 |
|
|
|
167,778 |
|
|
|
144,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
180,678 |
|
|
|
158,521 |
|
|
|
138,600 |
|
Net losses and loss adjustment expenses |
|
|
(117,364 |
) |
|
|
(83,940 |
) |
|
|
(78,447 |
) |
Commission expense |
|
|
(34,033 |
) |
|
|
(25,123 |
) |
|
|
(21,375 |
) |
Other operating expenses |
|
|
(30,961 |
) |
|
|
(29,356 |
) |
|
|
(23,296 |
) |
Commission income and other income (expense) |
|
|
(600 |
) |
|
|
504 |
|
|
|
(1,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
|
(2,280 |
) |
|
|
20,606 |
|
|
|
14,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
11,655 |
|
|
|
10,524 |
|
|
|
7,694 |
|
Net realized capital gains (losses) |
|
|
(477 |
) |
|
|
33 |
|
|
|
(404 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
8,898 |
|
|
|
31,163 |
|
|
|
21,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
3,269 |
|
|
|
10,946 |
|
|
|
7,601 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,629 |
|
|
$ |
20,217 |
|
|
$ |
14,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
|
$ |
779,800 |
|
|
$ |
744,002 |
|
|
$ |
806,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expenses ratio |
|
|
65.0 |
% |
|
|
53.0 |
% |
|
|
56.6 |
% |
Commission expense ratio |
|
|
18.8 |
% |
|
|
15.8 |
% |
|
|
15.4 |
% |
Other operating expenses ratio (1) |
|
|
17.5 |
% |
|
|
18.2 |
% |
|
|
17.6 |
% |
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
101.3 |
% |
|
|
87.0 |
% |
|
|
89.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes other operating expenses and commission income and other income (expense). |
Marine and energy premium rate increases occurred in 2005 and continued into 2006
following Hurricanes Katrina and Rita, particularly in the offshore energy business. Market
conditions then began to soften and the average renewal premium rates in 2007 decreased
approximately 1.2% for the marine and energy business and decreased approximately 3.4% in the
professional liability business. The average renewal premium rates for 2008 decreased
approximately 8.2% for the marine and energy business and decreased approximately 1.3% for the
professional liability business.
The 2008 earnings in the Lloyds Operations were impacted by losses caused by Hurricanes
Gustav and Ike of approximately $13.1 million, including $5.0 million of reinstatement costs, which
increased the 2008 combined ratio by 7.1 combined ratio points. The after tax effect reduced net
income by $8.5 million.
The 2008 underwriting results were favorably impacted by approximately $8.8 million or 4.9
loss ratio points for net prior years savings due to favorable loss development
trends, primarily in the liability and offshore energy lines in underwriting years 2006 and
prior, which is discussed in the prior year reserve redundancies/deficiencies section.
92
The following table sets forth the impact of Hurricanes Gustav and Ike on the Lloyds
Operations 2008 financial results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane |
|
|
Hurricane |
|
|
|
|
|
|
Gustav |
|
|
Ike |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in net earned premiums for
reinstatement costs |
|
$ |
(672 |
) |
|
$ |
(4,292 |
) |
|
$ |
(4,964 |
) |
Gross losses incurred |
|
|
6,800 |
|
|
|
46,200 |
|
|
|
53,000 |
|
Reinsurance recoverable |
|
|
4,623 |
|
|
|
40,285 |
|
|
|
44,908 |
|
|
|
|
|
|
|
|
|
|
|
Net losses incurred |
|
|
2,177 |
|
|
|
5,915 |
|
|
|
8,092 |
|
|
|
|
|
|
|
|
|
|
|
Underwriting loss |
|
$ |
(2,849 |
) |
|
$ |
(10,207 |
) |
|
$ |
(13,056 |
) |
|
|
|
|
|
|
|
|
|
|
After-tax net loss |
|
$ |
(1,852 |
) |
|
$ |
(6,635 |
) |
|
$ |
(8,487 |
) |
|
|
|
|
|
|
|
|
|
|
Reduction in earnings per share |
|
$ |
(0.11 |
) |
|
$ |
(0.39 |
) |
|
$ |
(0.50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on combined ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
1.4 |
% |
|
|
4.7 |
% |
|
|
6.1 |
% |
Expense ratio |
|
|
0.2 |
% |
|
|
0.8 |
% |
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
1.6 |
% |
|
|
5.5 |
% |
|
|
7.1 |
% |
|
|
|
|
|
|
|
|
|
|
The 2007 earnings in the Lloyds Operations reflect the continued favorable loss
development trends. The 2007 underwriting results were favorably impacted by approximately $13.2
million or 8.3 loss ratio points for net prior years savings due to favorable loss development
trends, primarily in our 2004 and 2005 underwriting years.
Reviews of our Lloyds Operations Hurricanes Katrina and Rita exposures during 2007 resulted
in a reduction to the storm loss estimates and increased pre-tax income by $4.1 million consisting
of $3.4 million of decreases to incurred losses and a $0.7 million reduction in our reinstatement
cost estimates. A portion of this impact was the result of reallocating our net retention for
these events between our Insurance Companies and Lloyds Operations.
The 2006 earnings in the Lloyds Operations reflect the strong growth in premiums and
continued favorable loss development trends. The 2006 underwriting results were favorably impacted
by approximately $4.5 million or 3.2 loss ratio points for net prior years savings due to
favorable loss development trends, primarily in our 2004 and 2005 underwriting years.
The pre-tax yields on the Lloyds Operations investments, excluding net realized capital
gains and losses, approximated 3.4%, 3.9% and 3.4% for 2008, 2007 and 2006, respectively. Such
yields are net of interest credits to certain reinsurers for funds withheld by our Lloyds
Operations. Generally, the Lloyds Operations investments have been invested with a relatively
short average duration, which is reflected in the yield, in order to meet liquidity needs. The
increase in the Lloyds Operations net investment income is reflective of the
increased investment portfolio primarily due to positive cash flow. The average duration of the
Lloyds Operations investment portfolio was 1.4 years at December 31, 2008 compared to 1.6 years at
December 31, 2007.
See Results of Operations and Overview Income Taxes for a discussion of the Lloyds
Operations income taxes, included herein.
93
The table below illustrates the Companys participation for each year of account in Syndicate
1221:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(£ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Syndicate stamp capacity |
|
£ |
123 |
|
|
£ |
140 |
|
|
£ |
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations corporate capital participation |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurers participation |
|
|
0.0 |
% |
|
|
5.0 |
% |
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations consolidated net participation (1) |
|
|
100.0 |
% |
|
|
95.0 |
% |
|
|
90.0 |
% |
|
|
|
(1) |
|
Participation after reinsurance of the Lloyds Operations corporate capital vehicles,
but before other third party reinsurance. |
For 2009, Syndicate 1221s stamp capacity is £115 million ($168 million) and our
consolidated net participation is 100%. We have applied to increase our 2009 stamp capacity to
£125 million to enable us to increase our writings resulting from new business opportunities.
Off-Balance Sheet Transactions
For a discussion of our letter of credit facility, see Liquidity and Capital Resources,
included herein.
Tabular Disclosure of Contractual Obligations
The following table sets forth our known contractual obligations with respect to the
items indicated at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for
losses and LAE (1) |
|
$ |
1,853,664 |
|
|
$ |
583,173 |
|
|
$ |
662,089 |
|
|
$ |
301,779 |
|
|
$ |
306,623 |
|
7% Senior Notes (2) |
|
|
190,625 |
|
|
|
8,750 |
|
|
|
17,500 |
|
|
|
17,500 |
|
|
|
146,875 |
|
Operating Leases |
|
|
47,872 |
|
|
|
5,655 |
|
|
|
18,792 |
|
|
|
9,565 |
|
|
|
13,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,092,161 |
|
|
$ |
597,578 |
|
|
$ |
698,381 |
|
|
$ |
328,844 |
|
|
$ |
467,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts determined are estimates which are subject to a high degree of
variation and uncertainty, and are not subject to any specific payment schedule since the
timing of these obligations are not set contractually. The amounts in the above table exclude
reinsurance recoveries of $854 million. See Business Loss Reserves included
herein. |
|
(2) |
|
Includes interest payments. |
94
Investments
For a discussion of our investments, see BusinessInvestments included herein.
Liquidity and Capital Resources
Cash flows from operations were $245.3 million, $284.6 million and $146.0 million for 2008,
2007, and 2006, respectively. Operating cash flow was used primarily to acquire additional
investments of fixed income securities.
Investments and cash increased to $1.92 billion at December 31, 2008 from $1.77 billion at
December 31, 2007. The increase was primarily due to the positive cash flow from operations. Net
investment income was $76.6 million for 2008, $70.7 million for 2007 and $56.9 million for 2006.
The approximate pre-tax yields of the investment portfolio, excluding net realized capital
gains and losses, were 4.1% for 2008 and 4.4% for both 2007 and 2006.
At December 31, 2008, the weighted average rating of our fixed maturity investments was AA
by Standard & Poors and Aa by Moodys. We believe that we have limited exposure to credit risk
since the fixed maturity investment portfolio, except for $28.3 million consists of
investment-grade bonds. At December 31, 2008, our investment portfolio had an average maturity of
5.7 years and a duration of 4.3 years. Management periodically projects cash flow of the
investment portfolio and other sources in order to maintain the appropriate levels of liquidity to
ensure our ability to satisfy claims. Impairment losses of $37.0 million and $0.7 million were
recorded in 2008 and 2007, respectively. No impairment losses were incurred in 2006. As of
December 31, 2008 and 2007, all fixed maturity securities and equity securities held by us were
classified as available-for-sale.
The Company has a credit facility provided through a consortium of banks. The credit facility
was amended in February 2007 to increase the letters of credit available under the credit facility
from $115 million to $180 million and to increase the line of credit available under the credit
facility from $10 million to $20 million. Also, the expiration of the credit facility was extended
from June 30, 2007 to March 31, 2009. If at that time the bank consortium does not renew the
credit facility, we will need to find other sources to provide the letters of credit or other
collateral in order to continue our participation in Syndicate 1221. The credit facility, which is
denominated in U.S. dollars, is utilized primarily by Navigators Corporate Underwriters Ltd. and
Millennium Underwriting Ltd. to fund our participation in Syndicate 1221 which is denominated in
British sterling. At December 31, 2008, letters of credit with
an aggregate face amount of $78.4
million were issued under the credit facility. The line of credit was unused at December 31, 2008.
As a result of the amendment, the cost of the letter of credit portion of the credit facility
was reduced to 0.75% from 1.00% for the issued letters of credit and to 0.10% from 0.125% for the
unutilized portion of the letter of credit facility. The cost of the line of credit portion of the
credit facility was also reduced to 0.75% from 1.00% over the Companys choice of LIBOR or prime
for the utilized portion and to 0.10% from 0.125% for the unutilized portion.
The credit facility is collateralized by all of the common stock of Navigators Insurance
Company. The credit agreement contains covenants common to transactions of this type, including
restrictions on indebtedness and liens, limitations on dividends, stock buybacks, mergers and the
sale of assets, and requirements to maintain certain consolidated tangible net worth, statutory
surplus and other financial ratios. No dividends have been declared or paid by the Company through
December 31, 2008. We were in compliance with all covenants at December 31, 2008.
Our reinsurance has been placed with various U.S. and foreign insurance companies and with
selected syndicates at Lloyds. Pursuant to the implementation of Lloyds Plan of Reconstruction
and Renewal, a portion of our recoverables are now reinsured by Equitas (a separate United Kingdom
authorized reinsurance company established to reinsure outstanding liabilities of all Lloyds
members for all risks written in the 1992 or prior years of account).
Time lags do occur in the normal course of business between the time gross losses are
paid by the Company and the time such gross losses are billed and collected from reinsurers.
Reinsurance recoverable amounts related to those gross loss reserves are anticipated to be billed
and collected over the next several years as gross losses are paid by the Company.
95
Generally, for pro rata or quota share reinsurers, including pool participants, the Company
issues quarterly settlement statements for premiums less commissions and paid loss activity, which
are expected to be settled by the end of the subsequent quarter. The Company has the ability to
issue cash calls requiring such reinsurers to pay losses whenever paid loss activity for a claim
ceded to a particular reinsurance treaty exceeds a predetermined amount (generally $1.0 million) as
set forth in the pro-rata treaty. For the Insurance Companies, cash calls must generally be paid
within 30 calendar days. There is generally no specific settlement period for the Lloyds
Operations cash call provisions, but such billings are usually paid within 45 calendar days.
Generally, for excess of loss reinsurers the Company pays monthly or quarterly deposit
premiums based on the estimated subject premiums over the contract period (usually one year) which
are subsequently adjusted based on actual premiums determined after the expiration of the
applicable reinsurance treaty. Paid losses subject to excess of loss recoveries are generally
billed as they occur and are usually settled by reinsurers within 30 calendar days for the
Insurance Companies and 30 business days for the Lloyds Operations.
The Company sometimes withholds funds from reinsurers and may apply ceded loss billings
against such funds in accordance with the applicable reinsurance agreements.
At December 31, 2008, ceded asbestos paid and unpaid losses recoverable were $8.9 million of
which $4.8 million was due from Equitas. The Company generally experiences significant collection
delays for a large portion of reinsurance recoverable amounts for asbestos losses given that
certain reinsurers are in run-off or otherwise no longer active in the reinsurance business. Such
circumstances are considered in the Companys ongoing assessment of such reinsurance recoverables.
The Company believes that it has adequately managed its cash flow requirements related to
reinsurance recoveries from its positive cash flows and the use of available short-term funds when
applicable. However, there can be no assurances that the Company will be able to continue to
adequately manage such recoveries in the future or that collection disputes or reinsurer
insolvencies will not arise that could materially increase the collection time lags or result in
recoverable write-offs causing additional incurred losses and liquidity constraints to the Company.
The payment of gross claims and related collections from reinsurers with respect to Hurricanes
Gustav, Ike, Katrina and Rita could significantly impact the Companys 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.
96
Our capital resources consist of funds deployed or available to be deployed to support our
business operations. At December 31, 2008 and 2007, our capital resources were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Senior debt |
|
$ |
123,794 |
|
|
$ |
123,673 |
|
Stockholders equity |
|
|
689,317 |
|
|
|
662,106 |
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
813,111 |
|
|
$ |
785,779 |
|
|
|
|
|
|
|
|
Ratio of debt to total capitalization |
|
|
15.2 |
% |
|
|
15.7 |
% |
|
|
|
|
|
|
|
The increase in stockholders equity in 2008 was primarily due to net income of $51.7
million, partially offset by unrealized investment portfolio losses and treasury stock purchases.
The increase in stockholders equity in 2007 was primarily due to net income of $95.6 million.
We monitor our capital adequacy to support our business on a regular basis. The future
capital requirements of our business will depend on many factors, including our ability to write
new business successfully and to establish premium rates and reserves at levels sufficient to cover
losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and
financial strength ratings as evaluated by independent rating agencies. In particular, we require
(1) sufficient capital to maintain our financial strength ratings, as issued by several ratings
agencies, at a level considered necessary by management to enable our Insurance Companies to
compete; (2) sufficient capital to enable our Insurance Companies to meet the capital adequacy
tests performed by statutory agencies in the United States and the United Kingdom and (3) letters
of credit and other forms of collateral that are necessary to support the business 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 shareholders 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 October, 2007 the Companys Board of Directors adopted a stock repurchase program for up to
$30 million of the Companys common stock. Purchases were made from time to time at prevailing
prices in open market or privately negotiated transactions through the expiration of the program on
December 31, 2008. The timing and amount of purchases under the program were dependent on a
variety of factors, including the trading price of the stock, market conditions and corporate and
regulatory considerations. In total, we purchased 224,754 shares of our common stock at an
aggregate cost of $11.5 million.
To the extent that our existing capital is insufficient to fund our future operating
requirements or maintain such ratings, we may need to raise additional funds through financings or
limit our growth. If we are not able to obtain adequate capital, our business, results of
operations and financial condition could be adversely affected, which could include, among other
things, the following possible outcomes: (1) potential downgrades in the financial strength
ratings assigned by ratings agencies to our Insurance Companies which could place the Company at a
competitive disadvantage compared to higher-rated competitors; (2)
reductions in the amount of business that our Insurance Companies or Lloyds Operations are
able to write in order to meet capital adequacy-based tests enforced by statutory agencies; and (3)
any resultant ratings downgrades could, among other things, affect our ability to write business
and increase the cost of the credit facility.
In addition to common share capital, we may need to depend on external sources of finance to
support our underwriting activities, which can be in the form (or any combination) of debt
securities, preference shares, common equity and bank credit facilities providing loans and/or
letters of credit. Any equity or debt financing, if available at all, may be on terms that are
unfavorable to us. In the case of equity financings, dilution to our shareholders could result,
and, in any case, such securities may have rights, preferences and privileges that are senior to
those of our outstanding securities.
97
In July 2006, the Company filed a universal shelf registration statement with the Securities
and Exchange Commission. This registration statement, which expires in July 2009, allows for the
future possible offer and sale by the Company of up to $300 million, in the aggregate, of various
types of securities, including common stock, preferred stock or debt securities. The shelf
registration statement enables us to efficiently access the public equity or debt markets in order
to meet future capital needs, if necessary. This report is not an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities in any state in
which such offer, solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of such state.
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 of $4.4 million. Going forward, the
interest payments on the Companys senior debt will be made from one or a combination of funds at
the Parent Company or dividends from its subsidiaries. The dividends have historically been paid
by Navigators Insurance Company. Based on the December 31, 2008, surplus of Navigators Insurance
Company, the approximate maximum amount available for the payment of dividends by Navigators
Insurance Company during 2009 without prior regulatory approval was $58.1 million. Dividends of
$20.0 million and $8.0 million were paid by Navigators Insurance Company during 2008 and 2007,
respectively. No dividends were paid by Navigators Insurance Company in 2006.
Condensed Parent Company balance sheets as of December 31, 2008 and 2007 are shown in the
table below:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Cash and investments |
|
$ |
52,149 |
|
|
$ |
44,146 |
|
Investments in subsidiaries |
|
|
751,864 |
|
|
|
735,351 |
|
Goodwill and other intangible assets |
|
|
2,534 |
|
|
|
2,534 |
|
Other assets |
|
|
8,769 |
|
|
|
6,821 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
815,316 |
|
|
$ |
788,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7% Senior Notes due May 1, 2016 |
|
$ |
123,794 |
|
|
$ |
123,673 |
|
Accounts payable and other liabilities |
|
|
747 |
|
|
|
1,615 |
|
Accrued interest payable |
|
|
1,458 |
|
|
|
1,458 |
|
Deferred compensation payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
125,999 |
|
|
|
126,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
689,317 |
|
|
|
662,106 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
815,316 |
|
|
$ |
788,852 |
|
|
|
|
|
|
|
|
98
Economic Conditions
We are a specialty insurance company and periods of moderate economic recession or inflation
tend not to have a significant direct effect on our underwriting operations. They do, however,
impact our investment portfolio. A decrease in interest rates will tend to decrease our yield and
have a positive effect on the fair value of our invested assets. An increase in interest rates
will tend to increase our yield and have a negative effect on the fair value of our invested
assets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Sensitive Instruments and Risk Management
Market risk represents the potential for loss due to adverse changes in the fair value of
financial instruments. We are exposed to potential loss to various market risks, including changes
in interest rates, equity prices and foreign currency exchange rates. Market risk is directly
influenced by the volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of our primary market risk exposures and how those
exposures have been managed through December 31, 2008. Our market risk sensitive instruments are
entered into for purposes other than trading and speculation.
The carrying value of our investment portfolio as of December 31, 2008 was $1.9 billion of
which 85.7% was invested in fixed-maturity securities. The primary market risk to our investment
portfolio is interest rate risk associated with investments in fixed-maturity securities. We do
not have any commodity risk exposure.
For fixed maturity securities, short-term liquidity needs and the potential liquidity needs of
the business are key factors in managing the portfolio. The portfolio duration relative to the
liabilities duration is primarily managed through investment transactions.
There were no significant changes regarding the investment portfolio in our primary market
risk exposures or in how those exposures were managed for the twelve months ended December 31,
2008. We do not currently anticipate significant changes in our primary market risk exposures or
in how those exposures are managed in future reporting periods based upon what is known or expected
to be in effect in future reporting periods.
Interest Rate Risk Sensitivity Analysis
Sensitivity analysis is defined as the measurement of potential loss in future earnings, fair
values or cash flows of market sensitive instruments resulting from one or more selected
hypothetical changes in interest rates and other market rates or prices over a selected time. In
our sensitivity analysis model, a hypothetical change in market rates is selected that is expected
to reflect reasonably possible near-term changes in those rates. Near-term means a period of
time going forward up to one year from the date of the consolidated financial statements. Actual
results may differ from the hypothetical change in market rates assumed in this disclosure,
especially since this sensitivity analysis does not reflect the results of any actions that would
be taken by us to mitigate such hypothetical losses in fair value.
In this sensitivity analysis model, we use fair values to measure our potential loss. The
sensitivity analysis model includes fixed maturities and short-term investments. The primary
market risk to our market-sensitive instruments is interest rate risk. The sensitivity analysis
model uses a 50 and 100 basis points change in interest rates to measure the hypothetical change in
fair value of financial instruments included in the model. Changes in interest rates will have an
immediate effect on comprehensive income and shareholders equity but will not ordinarily have an
immediate effect on net income. As interest rates rise, the market value of our interest rate
sensitive securities will decrease. Conversely, as interest rates fall, the market value of our
interest rate sensitive securities will increase.
For invested assets, modified duration modeling is used to calculate changes in fair values.
Durations on invested assets are adjusted for call, put and interest rate reset features. Duration
on tax-exempt securities is adjusted for the fact that the yield on such securities is less
sensitive to changes in interest rates compared to Treasury securities. Invested asset
portfolio durations are calculated on a market value weighted basis, including accrued investment
income, using holdings as of December 31, 2008.
99
The following table summarizes the effect that an immediate, parallel shift in the interest
rate yield curve would have had on our portfolio at December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Shift in Basis Points |
|
|
|
-100 |
|
|
-50 |
|
|
0 |
|
|
+50 |
|
|
+100 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total market
value |
|
$ |
1,940,899 |
|
|
$ |
1,902,677 |
|
|
$ |
1,864,456 |
|
|
$ |
1,826,421 |
|
|
$ |
1,788,573 |
|
Market value
change from base |
|
|
4.10 |
% |
|
|
2.05 |
% |
|
|
0.00 |
% |
|
|
-2.04 |
% |
|
|
-4.07 |
% |
Change in
unrealized value |
|
$ |
76,443 |
|
|
$ |
38,221 |
|
|
$ |
|
|
|
$ |
(38,035 |
) |
|
$ |
(75,883 |
) |
Equity Price Risk
Our portfolio of equity securities, which we carry on our balance sheet at fair value, has
exposure to price risk. This risk is defined as the potential loss in fair value resulting from
adverse changes in stock prices. Our U.S. equity portfolio is benchmarked to the S&P 500 index and
changes in that index may approximate the impact on our portfolio.
The following table provides additional information on our exposure to equity price
risk:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Fair value of equity securities |
|
$ |
51,802 |
|
|
$ |
67,240 |
|
Pre-tax impact of 10 percent decline in market prices for equity exposures |
|
$ |
5,180 |
|
|
$ |
6,724 |
|
Foreign currency exchange rate risk
Our Lloyds Operations maintain both assets and liabilities in certain foreign currencies.
Therefore, foreign exchange rate risk is generally limited to net assets denominated in those
foreign currencies. The principal currencies creating foreign exchange risk for us are the British
sterling, the Euro and the Canadian dollar.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required in response to this section are submitted as
part of Item 15(a) of this report.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange act of 1934, as amended (the Exchange Act). Based on this evaluation, our
Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by this annual report.
100
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the
supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation
under the framework in Internal Control Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of December 31, 2008.
The Companys independent registered public accounting firm, KPMG LLP, has audited the
effectiveness of the Companys internal control over financial reporting as of December 31, 2008,
as stated in their report which is included herein.
Changes in Internal Control over Financial Reporting
There have been no changes during our fourth fiscal quarter in our internal control over
financial reporting that have materially affected, or are reasonably likely to materially affect
our internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
Part III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning the directors and the executive officers of the Company is contained
under Election of Directors in the Companys 2008 Proxy Statement, which information is
incorporated herein by reference. Information concerning the Audit Committee and the Audit
Committees financial expert of the Company is contained under Board of Directors and Committees
in the Companys 2009 Proxy Statement, which information is incorporated herein by reference.
The Company has adopted a Code of Ethics for Chief Executive Officer and Senior Financial
Officers, which is applicable to our Chief Executive Officer, Chief Financial Officer, Treasurer,
Controller and all other persons performing similar functions. A copy of such Code is available on
the Companys website at www.navg.com under the Corporate Governance link. Any amendments to, or
waivers of, such Code which apply to any of the financial professionals listed above will be
disclosed on our website under the same link promptly following the date of such amendment or
waiver.
Item 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is contained under Compensation Discussion and
Analysis in the Companys 2009 Proxy Statement, which information is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning the security ownership of the directors and officers of the Company is
contained under Election of Directors and Compensation Discussion and
Analysis in the Companys 2009 Proxy Statement, which information is incorporated herein by
reference. Information concerning securities that are available to be issued under the Companys
equity compensation plans is contained under Equity Compensation Plan Information in the
Companys 2009 Proxy Statement, which information is incorporated herein by reference.
101
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning relationships and related transactions of the directors and officers of
the Company is contained under Related Party Transactions in the Companys 2009 Proxy Statement,
which information is incorporated herein by reference. Information concerning director
independence is contained under Board of Directors and Committees in the Companys 2009 Proxy
Statement, which information is incorporated herein by reference.
Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning the principal accountants fees and services for the Company is
contained under Independent Registered Public Accounting Firm in the Companys 2009 Proxy
Statement, which information is incorporated herein by reference.
Part IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
|
a. |
|
Financial Statements and Schedules: The financial statements and schedules that
are listed in the accompanying Index to Consolidated Financial Statements and Schedules on
page F-1. |
|
|
b. |
|
Exhibits: The exhibits that are listed in the accompanying Index to Exhibits on
the page which immediately follows page S-8. The exhibits include the management contracts
and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K
by Item 601(a)(10)(iii) of Regulation S-K. |
102
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
The Navigators Group, Inc.
(Company)
|
|
Dated: February 23, 2009 |
By: |
/s/ FRANCIS W. MCDONNELL
|
|
|
|
Francis W. McDonnell |
|
|
|
Senior Vice President and
Chief Financial Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the capacities and on the
dates indicated.
|
|
|
|
|
Name |
|
Title |
|
Date |
|
|
|
|
|
/s/ TERENCE N. DEEKS
Terence N. Deeks
|
|
Chairman
|
|
February 23, 2009 |
|
|
|
|
|
/s/ STANLEY A. GALANSKI
Stanley A. Galanski
|
|
President and Chief Executive
Officer
(Principal Executive Officer)
|
|
February 23, 2009 |
|
|
|
|
|
/s/ FRANCIS W. MCDONNELL
Francis W. McDonnell
|
|
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
|
|
February 23, 2009 |
|
|
|
|
|
/s/ THOMAS C. CONNOLLY
Thomas C. Connolly
|
|
Vice President and Treasurer
Navigators Management Company
(Principal Accounting Officer)
|
|
February 23, 2009 |
|
|
|
|
|
/s/ H.J. MERVYN BLAKENEY
H.J. Mervyn Blakeney
|
|
Director
|
|
February 23, 2009 |
|
|
|
|
|
/s/ PETER A. CHENEY
Peter A. Cheney
|
|
Director
|
|
February 23, 2009 |
|
|
|
|
|
/s/ WILLIAM T. FORRESTER
William T. Forrester
|
|
Director
|
|
February 23, 2009 |
|
|
|
|
|
/s/ LEANDRO S. GALBAN, JR.
Leandro S. Galban, Jr.
|
|
Director
|
|
February 23, 2009 |
|
|
|
|
|
/s/ JOHN F. KIRBY
John F. Kirby
|
|
Director
|
|
February 23, 2009 |
|
|
|
|
|
/s/ MARC M. TRACT
Marc M. Tract
|
|
Director
|
|
February 23, 2009 |
|
|
|
|
|
/s/ ROBERT F. WRIGHT
Robert F. Wright
|
|
Director
|
|
February 23, 2009 |
103
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-6 |
|
|
|
|
|
|
|
|
|
F-7 |
|
|
|
|
|
|
|
|
|
F-8 |
|
|
|
|
|
|
|
|
|
F-9 |
|
|
|
|
|
|
SCHEDULES: |
|
|
|
|
|
|
|
|
|
|
|
|
S-1 |
|
|
|
|
|
|
|
|
|
S-2 |
|
|
|
|
|
|
|
|
|
S-5 |
|
|
|
|
|
|
|
|
|
S-6 |
|
|
|
|
|
|
|
|
|
S-7 |
|
|
|
|
|
|
|
|
|
S-8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Navigators Group, Inc.
We have audited the accompanying consolidated balance sheets of The Navigators Group, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of income,
stockholders equity, comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 2008. In connection with our audits of the consolidated financial
statements, we also have audited the consolidated financial statement schedules as listed in the
accompanying index. These consolidated financial statements and financial statement schedules are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Navigators Group, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2008, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), The Navigators Group, Inc. and subsidiaries internal control over
financial reporting as of December 31, 2008, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated February 24, 2009 expressed an unqualified opinion on the
effectiveness of the Companys internal control over financial reporting.
New York, New York
February 24, 2009
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Navigators Group, Inc.
We have audited The Navigators Group, Inc. and subsidiaries internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Navigators Group, Inc. and subsidiaries management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included under Item 9A, Managements Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, The Navigators Group, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of The Navigators Group, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of income,
stockholders equity, comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 2008, and our report dated February 24, 2009 expressed an unqualified
opinion on those consolidated financial statements.
New York, New York
February 24, 2009
F-3
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
Investments and cash: |
|
|
|
|
|
|
|
|
Fixed
maturities, available-for-sale, at fair value (amortized cost: 2008, $1,664,755; 2007, $1,508,489) |
|
$ |
1,643,772 |
|
|
$ |
1,522,320 |
|
Equity securities, available-for-sale, at fair value (cost: 2008, $52,523; 2007, $65,492) |
|
|
51,802 |
|
|
|
67,240 |
|
Short-term investments, at cost which approximates fair value |
|
|
220,684 |
|
|
|
170,685 |
|
Cash |
|
|
1,457 |
|
|
|
7,056 |
|
|
|
|
|
|
|
|
Total investments and cash |
|
|
1,917,715 |
|
|
|
1,767,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums in course of collection |
|
|
170,522 |
|
|
|
163,081 |
|
Commissions receivable |
|
|
319 |
|
|
|
2,381 |
|
Prepaid reinsurance premiums |
|
|
188,874 |
|
|
|
188,961 |
|
Reinsurance receivable on paid losses |
|
|
67,227 |
|
|
|
94,818 |
|
Reinsurance receivable on unpaid losses and loss adjustment expense |
|
|
853,793 |
|
|
|
801,461 |
|
Net deferred income tax benefit |
|
|
54,736 |
|
|
|
29,249 |
|
Deferred policy acquisition costs |
|
|
47,618 |
|
|
|
51,895 |
|
Accrued investment income |
|
|
17,411 |
|
|
|
15,605 |
|
Goodwill and other intangible assets |
|
|
6,622 |
|
|
|
8,084 |
|
Other assets |
|
|
24,743 |
|
|
|
20,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,349,580 |
|
|
$ |
3,143,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses |
|
$ |
1,853,664 |
|
|
$ |
1,648,764 |
|
Unearned premium |
|
|
480,665 |
|
|
|
469,481 |
|
Reinsurance balances payable |
|
|
140,319 |
|
|
|
161,829 |
|
Senior notes |
|
|
123,794 |
|
|
|
123,673 |
|
Federal income tax payable |
|
|
5,874 |
|
|
|
10,868 |
|
Accounts payable and other liabilities |
|
|
55,947 |
|
|
|
67,050 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,660,263 |
|
|
|
2,481,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued |
|
|
|
|
|
|
|
|
Common stock, $.10 par value, 50,000,000 shares authorized; issued and
outstanding: 16,856,073 (net of treasury shares) for 2008 and 16,873,094 for 2007 |
|
|
1,708 |
|
|
|
1,687 |
|
Additional paid-in capital |
|
|
298,872 |
|
|
|
291,616 |
|
Treasury stock, at cost (224,754 shares at 12/31/08) |
|
|
(11,540 |
) |
|
|
|
|
Retained earnings |
|
|
406,776 |
|
|
|
355,084 |
|
Accumulated other comprehensive income |
|
|
(6,499 |
) |
|
|
13,719 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
689,317 |
|
|
|
662,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
3,349,580 |
|
|
$ |
3,143,771 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ and shares in thousands, except net income per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
1,084,922 |
|
|
$ |
1,070,707 |
|
|
$ |
970,790 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium |
|
$ |
661,615 |
|
|
$ |
645,796 |
|
|
$ |
520,807 |
|
(Increase) in unearned premium |
|
|
(17,639 |
) |
|
|
(43,819 |
) |
|
|
(52,484 |
) |
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
643,976 |
|
|
|
601,977 |
|
|
|
468,323 |
|
Commission income |
|
|
1,005 |
|
|
|
1,736 |
|
|
|
3,075 |
|
Net investment income |
|
|
76,554 |
|
|
|
70,662 |
|
|
|
56,895 |
|
Net realized capital gains (losses) |
|
|
(38,299 |
) |
|
|
2,006 |
|
|
|
(1,026 |
) |
Other income (expense) |
|
|
430 |
|
|
|
278 |
|
|
|
(673 |
) |
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
683,666 |
|
|
|
676,659 |
|
|
|
526,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses incurred |
|
|
393,131 |
|
|
|
340,592 |
|
|
|
270,187 |
|
Commission expense |
|
|
89,785 |
|
|
|
77,613 |
|
|
|
57,787 |
|
Other operating expenses |
|
|
123,148 |
|
|
|
110,409 |
|
|
|
85,755 |
|
Interest expense |
|
|
8,871 |
|
|
|
8,863 |
|
|
|
6,248 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
614,935 |
|
|
|
537,477 |
|
|
|
419,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense (benefit) |
|
|
68,731 |
|
|
|
139,182 |
|
|
|
106,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
33,561 |
|
|
|
47,963 |
|
|
|
38,644 |
|
Deferred |
|
|
(16,522 |
) |
|
|
(4,401 |
) |
|
|
(4,590 |
) |
|
|
|
|
|
|
|
|
|
|
Total income tax expense |
|
|
17,039 |
|
|
|
43,562 |
|
|
|
34,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
51,692 |
|
|
$ |
95,620 |
|
|
$ |
72,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.08 |
|
|
$ |
5.69 |
|
|
$ |
4.34 |
|
Diluted |
|
$ |
3.04 |
|
|
$ |
5.62 |
|
|
$ |
4.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
16,802 |
|
|
|
16,812 |
|
|
|
16,722 |
|
Diluted |
|
|
16,992 |
|
|
|
17,005 |
|
|
|
16,856 |
|
See accompanying notes to consolidated financial statements.
F-5
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning and end of year |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
1,687 |
|
|
$ |
1,674 |
|
|
$ |
1,662 |
|
Shares issued under stock plans |
|
|
21 |
|
|
|
13 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
1,708 |
|
|
$ |
1,687 |
|
|
$ |
1,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
291,616 |
|
|
$ |
286,732 |
|
|
$ |
282,463 |
|
Shares issued under stock plans |
|
|
7,256 |
|
|
|
4,884 |
|
|
|
4,269 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
298,872 |
|
|
$ |
291,616 |
|
|
$ |
286,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock held at cost |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Treasury stock acquired |
|
|
(11,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
(11,540 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
355,084 |
|
|
$ |
259,464 |
|
|
$ |
186,901 |
|
Net income |
|
|
51,692 |
|
|
|
95,620 |
|
|
|
72,563 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
406,776 |
|
|
$ |
355,084 |
|
|
$ |
259,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
10,186 |
|
|
$ |
849 |
|
|
$ |
(884 |
) |
Change in year |
|
|
(25,248 |
) |
|
|
9,337 |
|
|
|
1,733 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
(15,062 |
) |
|
|
10,186 |
|
|
|
849 |
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustments, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
3,533 |
|
|
|
2,624 |
|
|
|
96 |
|
Net adjustment |
|
|
5,030 |
|
|
|
909 |
|
|
|
2,528 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
8,563 |
|
|
|
3,533 |
|
|
|
2,624 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
(6,499 |
) |
|
$ |
13,719 |
|
|
$ |
3,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity at end of year |
|
$ |
689,317 |
|
|
$ |
662,106 |
|
|
$ |
551,343 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
Net income |
|
$ |
51,692 |
|
|
$ |
95,620 |
|
|
$ |
72,563 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on securities,
net of tax expense (benefit) of $(12,034), $4,858 and $1,010
in 2008, 2007 and 2006, respectively(1) |
|
|
(25,248 |
) |
|
|
9,337 |
|
|
|
1,733 |
|
Change in foreign currency translation gains or (losses),
net of tax expense of $2,709, $490 and $1,361
in 2008, 2007 and 2006, respectively |
|
|
5,030 |
|
|
|
909 |
|
|
|
2,528 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
(20,218 |
) |
|
|
10,246 |
|
|
|
4,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
31,474 |
|
|
$ |
105,866 |
|
|
$ |
76,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Disclosure of reclassification amount, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising
during period |
|
$ |
(50,142 |
) |
|
$ |
10,643 |
|
|
$ |
1,046 |
|
Less: reclassification adjustment for net
gains (losses) included in net income |
|
|
(24,894 |
) |
|
|
1,306 |
|
|
|
(687 |
) |
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on securities, net of tax |
|
$ |
(25,248 |
) |
|
$ |
9,337 |
|
|
$ |
1,733 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
51,692 |
|
|
$ |
95,620 |
|
|
$ |
72,563 |
|
Adjustments to reconcile net income to net
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation & amortization |
|
|
4,761 |
|
|
|
3,350 |
|
|
|
3,011 |
|
Net deferred income tax (benefit) |
|
|
(16,522 |
) |
|
|
(4,401 |
) |
|
|
(4,590 |
) |
Net realized capital (gains) losses |
|
|
38,299 |
|
|
|
(2,006 |
) |
|
|
1,026 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance receivable on paid and unpaid
losses and loss adjustment expenses |
|
|
(48,314 |
) |
|
|
129,314 |
|
|
|
50,019 |
|
Reserve for losses and loss adjustment expenses |
|
|
237,817 |
|
|
|
34,844 |
|
|
|
(25,104 |
) |
Prepaid reinsurance premiums |
|
|
(3,701 |
) |
|
|
(8,410 |
) |
|
|
(35,354 |
) |
Unearned premium |
|
|
20,183 |
|
|
|
52,131 |
|
|
|
81,734 |
|
Premiums in course of collection |
|
|
(14,369 |
) |
|
|
2,470 |
|
|
|
5,712 |
|
Commissions receivable |
|
|
2,020 |
|
|
|
1,279 |
|
|
|
39 |
|
Deferred policy acquisition costs |
|
|
2,627 |
|
|
|
(9,770 |
) |
|
|
(9,142 |
) |
Accrued investment income |
|
|
(1,822 |
) |
|
|
(2,553 |
) |
|
|
(2,618 |
) |
Reinsurance balances payable |
|
|
(10,048 |
) |
|
|
(34,342 |
) |
|
|
1,342 |
|
Federal income tax |
|
|
(798 |
) |
|
|
6,847 |
|
|
|
228 |
|
Other |
|
|
(16,550 |
) |
|
|
20,270 |
|
|
|
7,164 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
245,275 |
|
|
|
284,643 |
|
|
|
146,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
Redemptions and maturities |
|
|
131,674 |
|
|
|
156,730 |
|
|
|
120,947 |
|
Sales |
|
|
186,106 |
|
|
|
218,044 |
|
|
|
157,645 |
|
Purchases |
|
|
(473,295 |
) |
|
|
(624,092 |
) |
|
|
(539,401 |
) |
Equity securities, available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
22,041 |
|
|
|
30,702 |
|
|
|
6,287 |
|
Purchases |
|
|
(40,746 |
) |
|
|
(61,930 |
) |
|
|
(17,812 |
) |
Change in payable for securities |
|
|
(112 |
) |
|
|
(428 |
) |
|
|
(604 |
) |
Net change in short-term investments |
|
|
(61,431 |
) |
|
|
7,560 |
|
|
|
(4,527 |
) |
Purchase of property and equipment |
|
|
(7,548 |
) |
|
|
(8,804 |
) |
|
|
(4,703 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(243,311 |
) |
|
|
(282,218 |
) |
|
|
(282,168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury Stock |
|
|
(11,540 |
) |
|
|
|
|
|
|
|
|
Net proceeds from debt offering |
|
|
|
|
|
|
|
|
|
|
123,538 |
|
Proceeds of stock issued from Employee Stock Purchase Plan |
|
|
963 |
|
|
|
606 |
|
|
|
536 |
|
Proceeds of stock issued from exercise of stock options |
|
|
3,014 |
|
|
|
1,627 |
|
|
|
1,265 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
(7,563 |
) |
|
|
2,233 |
|
|
|
125,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on foreign currency cash |
|
|
|
|
|
|
(6 |
) |
|
|
38 |
|
Increase (decrease) in cash |
|
|
(5,599 |
) |
|
|
4,652 |
|
|
|
(10,761 |
) |
Cash at beginning of year |
|
|
7,056 |
|
|
|
2,404 |
|
|
|
13,165 |
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year |
|
$ |
1,457 |
|
|
$ |
7,056 |
|
|
$ |
2,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal, state and local income tax paid |
|
|
34,990 |
|
|
|
40,046 |
|
|
|
31,533 |
|
Interest paid |
|
|
8,750 |
|
|
|
8,750 |
|
|
|
4,715 |
|
Issuance of stock to directors |
|
|
200 |
|
|
|
181 |
|
|
|
140 |
|
See accompanying notes to consolidated financial statements.
F-8
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
The accompanying consolidated financial statements consisting of the accounts of The
Navigators Group, Inc., a Delaware holding company established in 1982, and its wholly-owned
subsidiaries are prepared on the basis of U.S. generally accepted accounting principles (GAAP or
U.S. GAAP). 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 terms
Parent or Parent Company are used to mean The Navigators Group, Inc. without its subsidiaries.
All significant intercompany transactions and balances have been eliminated. Certain amounts for
prior years have been reclassified to conform to the current years presentation.
We are an international insurance holding company focusing on specialty products within the
overall property/casualty insurance market. The Companys underwriting segments consist of
insurance company operations and operations at Lloyds of London. Our largest product line and
most long-standing area of specialization is ocean marine insurance. We have also developed
specialty niches in professional liability insurance and in specialty liability insurance primarily
consisting of contractors liability and primary and excess liability coverages. We conduct
operations through our Insurance Companies and, our Lloyds Operations.
The Insurance Companies consist of Navigators Insurance Company, which includes a United
Kingdom Branch (the U.K. Branch), and Navigators Specialty Insurance Company, which underwrites
specialty and professional liability insurance on an excess and surplus lines basis fully reinsured
by Navigators Insurance Company.
Our Lloyds Operations include Navigators Underwriting Agency Ltd., a Lloyds of London
(Lloyds) underwriting agency which manages Lloyds Syndicate 1221 (Syndicate 1221). Our
Lloyds Operations primarily underwrite marine and related lines of business, professional
liability insurance, and construction coverages for onshore energy business at Lloyds through
Syndicate 1221. We participate in the capacity of Syndicate 1221 through our wholly-owned Lloyds
corporate member (we utilized two wholly-owned Lloyds corporate members prior to the 2008
underwriting year).
Our revenue is primarily comprised of premiums and investment income. The Insurance Companies
and Lloyds Operations derive their premiums primarily from business written by wholly-owned
underwriting management companies which produce, manage and underwrite insurance and reinsurance
for the Company. The Companys products are distributed through multiple channels, utilizing
global, national and regional brokers as well as wholesalers.
Investments
As of December 31, 2008 and 2007, all fixed maturity and equity securities held by the Company
were classified as available-for-sale. Available-for-sale securities are debt and equity
securities not classified as either held-to-maturity securities or trading securities and are
reported at fair value, with unrealized gains and losses excluded from earnings and reported in
other comprehensive income as a separate component of stockholders equity. Premiums and discounts
on fixed maturity securities are amortized into interest income over the life of the security under
the interest method. Fixed maturity securities include bonds and mortgage-backed and asset-backed
securities. Equity securities consist of common stock.
F-9
All fixed maturities, short-term investments and equity securities are carried at fair value.
All prices for our fixed maturities, short-term investments and equity securities valued as level 1
or level 2 in the Statement of Financial Accounting Standards No. (SFAS) 157 fair value hierarchy
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.
When
a security in our investment portfolio has an unrealized loss that is
deemed to be other-than-temporary, we write the security down to fair
value through a charge to operations. Significant changes in the
factors we consider when evaluating investments for impairment losses
could result in a significant change in impairment losses reported in
the consolidated financial statements. Risk factors vary by asset
type and include length and magnitude of the unrealized loss, credit
worthiness of the issuer, duration of the underlying security, rating
agency assessment, and default, severity and prepayment assumptions.
The accounting treatment applied to the Companys investments in mortgage-backed and
asset-backed securities is in accordance with SFAS 91, Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases issued by the
Financial Accounting Standards Board (FASB). Anticipated prepayments and expected maturities are
utilized in applying the interest rate method to our mortgage-backed and asset-backed securities.
An effective yield is calculated based on projected principal cash flows at the time of original
purchase. The effective yield is used to amortize the purchase price of the security over the
securitys expected life. Book values are adjusted to reflect the amortization of premium or
accretion of discount on a monthly basis.
The projected principal cash flows are based on certain prepayment assumptions which are
generated using a prepayment model. The prepayment model uses a number of factors to estimate
prepayment activity including the current levels of interest rates, (refinancing incentive) time of
year (seasonality), economic activity (including housing turnover) and term and age of the
underlying collateral (burnout, seasoning). Prepayment assumptions associated with the
mortgage-backed and asset-backed securities are reviewed on a periodic basis. When changes in
prepayment assumptions are deemed necessary as the result of actual prepayments differing from
anticipated prepayments, securities are revalued based upon the new prepayment assumptions
utilizing the retrospective adjustment method, whereby the effective yield is recalculated to
reflect actual payments to date and anticipated future payments. The investment in such securities
is adjusted to the amount that would have existed had the new effective yield been applied since
the acquisition of the security. Such adjustments, if any, are included in net investment income
for the current period being reported.
Short-term investments are carried at cost, which approximates fair value. Short-term
investments mature within one year from the purchase date.
Realized gains and losses on sales of investments are recognized when the related trades are
executed and are determined on the basis of the specific identification method. When a decline in
fair value of an investment is considered to be other-than-temporary, the investment is written
down to fair value with the loss included in net realized capital losses in the Companys
Consolidated Statements of Income.
Syndicate 1221
We record Syndicate 1221s assets, liabilities, revenues and expenses, after making
adjustments to convert Lloyds accounting to U.S. GAAP. The most significant U.S. GAAP adjustments
relate to income recognition. Lloyds syndicates determine underwriting results by year of account
at the end of three years. We record adjustments to recognize underwriting results as incurred,
including the ultimate cost of losses incurred. These adjustments to losses are based on actuarial
analysis of Syndicate 1221s accounts, including forecasts of expected ultimate losses. At the end of the Lloyds three year period for
determining underwriting results for an account year, the Syndicate
1221 will close the account
year by reinsuring outstanding claims on that account year with the participants for the accounts
next underwriting year. The amount to close an underwriting year into the next year is referred to
as the reinsurance to close (RITC). The ceding participants pay the assuming participants an
amount based on the unearned premiums and outstanding claims in the underwriting account at the
date of the assumption. The reinsurance to close amounts represent the transfer of the assets and
liabilities from the participants of a closing underwriting year to the participants of the next
underwriting year. To the extent our participation in
Syndicate 1221 changes, the reinsurance to
close amounts vary accordingly. Navigators provides 100% of Syndicate 1221s capacity through
wholly-owned subsidiaries.
F-10
Syndicate 1221s stamp capacity was £123 million ($228 million) in 2008, £140 million ($280
million) in 2007 and £123 million ($226 million) in 2006. Stamp capacity is a measure of the
amount of premium a Lloyds syndicate is authorized to write based on a business plan approved by
the Council of Lloyds. Syndicate 1221s capacity is expressed net of commission (as is standard
at Lloyds). The Syndicate 1221 premium recorded in the Companys financial statements is gross of
commission. The Company participates for 100% of Syndicate 1221s stamp capacity for the 2008,
2007 and 2006 underwriting years.
Translation of Foreign Currencies
Financial statements of subsidiaries expressed in foreign currencies are translated into U.S.
dollars in accordance with SFAS 52, Foreign Currency Translation issued by the FASB. Under SFAS
52, functional currency assets and liabilities are translated into U.S. dollars using period end
rates of exchange and the related translation adjustments are recorded as a separate component of
accumulated other comprehensive income. Statement of income amounts expressed in functional
currencies are translated using average exchange rates. Realized gains and losses resulting from
foreign currency transactions are recorded in other income (expense) in the Companys Consolidated
Statements of Income.
Premium Revenues
Insurance premiums are recognized as revenue ratably over the period of the insurance contract
or over the period of risk if the period of risk differs significantly from the contract period.
Written premium is recorded based on the insurance policies that have been reported to the Company
and the policies that have been written by the agents but not yet reported to the Company. The
Company must estimate the amount of written premium not yet reported based on judgments relative to
current and historical trends of the business being written. Such estimates are regularly reviewed
and updated and any resulting adjustments are included in the current years results. An unearned
premium reserve is established to reflect the unexpired portion of each policy at the financial
reporting date.
Commission Income
Commission income consists of commissions and profit commissions from the unaffiliated
insurance companies in the marine pool and profit commissions from the unaffiliated participants at
Syndicate 1221. Commissions from those unaffiliated insurers are based on gross earned premiums
and are recognized as revenue ratably over the same period as the related premiums are recognized
as revenue. Profit commission is based on estimated net underwriting income of the unaffiliated
parties and is accrued over the period in which the related income is recognized. Changes in prior
estimates of commission income are recorded when such changes become known. Beginning with the
2006 underwriting year, there are no longer any marine pool unaffiliated insurance companies with
the elimination of the marine pool and no longer any unaffiliated participants at Syndicate 1221
with the purchase of the minority interest. Any profit commission would
therefore result from the run-off of underwriting years prior to 2006.
F-11
Deferred Policy Acquisition Costs
Costs of acquiring business which vary with and are directly related to the production of
business are deferred and amortized ratably over the period that the related premiums are
recognized as revenue. Such costs primarily include commission expense, other underwriting
expenses and premium taxes. The method of computing deferred policy acquisition costs limits the
deferral to their estimated net realizable value based on the related unearned premiums and takes
into account anticipated losses and loss adjustment expenses, commission expense and operating
expenses based on historical and current experience and anticipated investment income.
Reserves for Losses and Loss Adjustment Expenses
Unpaid losses and loss adjustment expenses are determined on an individual basis for claims
reported on direct business for insureds, from reports received from ceding insurers for insurance
assumed from such insurers and on estimates based on Company and industry experience for incurred
but not reported claims and loss adjustment expenses (IBNR). IBNR loss reserves are calculated
by the Companys actuaries using several standard actuarial methodologies, including the paid and
incurred loss development and the paid and incurred Bornheutter-Ferguson loss methods. Additional
analyses, such as frequency/severity analyses, are performed for certain books of business. The
provision for unpaid losses and loss adjustment expenses has been established to cover the
estimated unpaid cost of claims incurred. Such estimates are regularly reviewed and updated and
any resulting adjustments are included in the current years results. Management believes that the
liability it has recognized for unpaid losses and loss adjustment expenses is a reasonable estimate
of the ultimate unpaid claims incurred, however, such provisions are necessarily based on estimates
and, accordingly, no representation is made that the ultimate liability will not differ materially
from the amounts recorded in the accompanying consolidated financial statements. Losses and loss
adjustment expenses are recorded on an undiscounted basis.
Net Income per Share
Basic earnings per share is computed by dividing net income by the weighted average number of
shares outstanding for the period. Diluted earnings per share reflects the basic earnings per
share adjusted for the potential dilution that would occur if all issued stock options were
exercised and all stock grants were fully vested.
Reinsurance Ceded
In the normal course of business, reinsurance is purchased by the Company from insurers or
reinsurers to reduce the amount of loss arising from claims. In order to determine the proper
accounting for the reinsurance, management analyzes the reinsurance agreements to determine whether
the reinsurance should be classified as prospective or retroactive based upon the terms of the
reinsurance agreement and whether the reinsurer has assumed significant insurance risk to the
extent that the reinsurer may realize a significant loss from the transaction.
Prospective reinsurance is reinsurance in which an assuming company agrees to reimburse the
ceding company for losses that may be incurred as a result of future insurable events covered under
contracts subject to the reinsurance. Retroactive reinsurance is reinsurance in which an assuming
company agrees to reimburse a ceding company for liabilities incurred as a result of past insurable
events covered under contracts subject to the reinsurance. The analysis of the reinsurance
contract terms has determined that all of the Companys reinsurance is prospective reinsurance with
adequate transfer of insurance risk to the reinsurer to qualify for reinsurance accounting treatment.
F-12
Ceded reinsurance premiums and any related ceding commission and ceded losses are reflected as
reductions of the respective income or expense accounts over the terms of the reinsurance
contracts. Prepaid reinsurance premiums represent the portion of premiums ceded to reinsurers
applicable to the unexpired terms of the reinsurance contracts in force. Reinsurance reinstatement
premiums are recognized in the same period as the loss event that gave rise to the reinstatement
premiums. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsured policy. Unearned premiums ceded and estimates of amounts
recoverable from reinsurers on paid and unpaid losses are reflected as assets. Provisions are made
for estimated unrecoverable reinsurance.
Depreciation and Amortization
Depreciation of furniture and fixtures and electronic data processing equipment, and
amortization of computer software is provided over the estimated useful lives of the respective
assets, ranging from three to seven years, using the straight-line method. Amortization of
leasehold improvements is provided over the shorter of the useful lives of those improvements or
the contractual terms of the leases using the straight-line method.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets were $6.6 million and $8.1 million at December 31, 2008
and 2007, respectively. The goodwill and other intangible assets consist of $2.5 million for the
Navigators Agencies at both December 31, 2008 and 2007, and $4.1 million and $5.6 million for the
Lloyds Operations at December 31, 2008 and 2007, respectively. The December 31, 2008 goodwill
and intangible assets of $6.6 million consists of $4.6 million of goodwill and $2.0 million of
other intangible assets. The December 31, 2007 goodwill and other intangible assets of $8.1
million consists of $5.4 million of goodwill and $2.7 million of other intangible assets. Goodwill
and other intangible assets on the Companys consolidated balance sheets may fluctuate due to
changes in the currency exchange rates between the U.S. dollar and the British sterling.
SFAS 141, Business Combinations, requires that the purchase method of accounting be used for
all business combinations initiated after September 30, 2001. It also specifies that intangible
assets acquired in a purchase method business combination be recognized and reported apart from
goodwill. SFAS 142, Goodwill and Other Intangible Assets, changes the accounting for goodwill and
intangible assets that have indefinite useful lives from an amortization approach to an
impairment-only approach that requires that those assets be tested at least annually for
impairment. The Company completed its annual impairment review of goodwill and other intangible
assets resulting in no impairment as of December 31, 2008.
Stock-Based Compensation
SFAS 123, Accounting for Stock-Based Compensation, establishes financial accounting and
reporting standards for stock-based compensation plans. Effective January 1, 2003, the Company
adopted the fair value recognition provisions of SFAS 123. In December 2004, the FASB issued SFAS
123 (revised 2004), Share Based Payment, which is a revision of SFAS 123, Accounting for
Stock-Based Compensation, eliminating the alternative use of APB 25 in 2005. The adoption of SFAS
123 (revised 2004) had no material effect on the Companys results of operations or financial
condition since the Company adopted the fair value recognition provisions of SFAS 123 in 2003. See
Note 14, Stock Option Plans, Stock Grants, Stock Appreciation Rights and Employee Stock Purchase
Plan, to our consolidated financial statements, included herein.
Federal Income Taxes
The Company files a consolidated Federal income tax return with its U.S. subsidiaries. The
Company applies the asset and liability method of accounting for income taxes. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. See Note 7, Income Taxes, to our consolidated financial
statements, included herein.
F-13
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. In addition to all of our reserves
for losses and loss adjustment expenses being an estimate, a portion of the Companys premium is
estimated for unreported premium, mostly for the marine business written by our U.K. Branch and
Lloyds Operations. We generally do not experience any significant backlog in processing premiums.
Such premium estimates are generally based on submission data received from brokers and agents and
recorded when the insurance policy or reinsurance contract is bound and written. The estimates are
regularly reviewed and updated taking into account the premium received to date versus the estimate
and the age of the estimate. To the extent that the actual premium varies from the estimates, the
difference, along with the related loss reserves and underwriting expenses, is recorded in current
operations.
Application of New Accounting Standards
In December 2007, the FASB issued SFAS 141(R), Business Combinations, which requires most
identifiable assets, liabilities, non-controlling interests, and goodwill acquired in a business
combination to be recorded at full fair value. Under SFAS 141(R), all business combinations will
be accounted for by applying the acquisition method (referred to as the purchase method in SFAS
141, Business Combinations). SFAS 141(R), effective for fiscal years beginning on or after
December 15, 2008, is to be applied to business combinations occurring after the effective date.
The Companys adoption of SFAS 141(R) at December 31, 2008 did not have any effect on its financial
condition or results of operations.
In December 2007, the FASB issued FASB 160, Noncontrolling Interests in Consolidated Financial
Statements, which requires noncontrolling interests (previously referred to as minority interests)
to be treated as a separate component of equity, not as a liability or other item outside of
permanent equity. SFAS 160 was effective for fiscal years beginning on or after December 15, 2008.
The Companys adoption of SFAS 160 at December 31, 2008 did not have any effect on its financial
condition or results of operations.
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities, which amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS 161 enhances the current disclosure framework in SFAS 133 and requires companies with
derivative instruments to disclose information about how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted for under SFAS 133,
and how derivative instruments and related hedged items affect a companys financial position,
financial performance and cash flows. SFAS 161 was effective prospectively for fiscal years and
interim periods beginning after November 15, 2008. The Companys adoption of SFAS 161 did not
have any effect on its financial condition or results of operations.
F-14
In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting
Principles, which identifies the sources of generally accepted accounting principles and provides a
framework, or hierarchy, for selecting the principles to be used in preparing U.S. GAAP financial
statements for nongovernmental entities. SFAS 162, effective November 15, 2008, makes the
hierarchy explicitly and directly applicable to preparers of financial statements, a step that
recognizes the preparers responsibilities for selecting the accounting principles for their
financial statements. The Companys adoption of SFAS 162 did not have any effect on its financial
condition or results of operations.
In January 2009, the FASB issued FASB Statement of Position (FSP) EITF 99-20-a, Amendments
to the Impairment and Interest Income Measurement Guidance of EITF Issue No. 99-20, which amends
the impairment (and related interest income measurement) guidance in EITF Issue No. 99-20,
Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests That Continue to be Held by a Transferor in Securitized Financial Assets. FSP EITF
99-20-a makes the impairment model for beneficial interests more consistent with the impairment
model in FASB 115, Accounting for Certain Investments in Debt and Equity Securities. The Companys
adoption of EITF 99-20-a did not have a material effect on its financial condition or results of
operations.
Note 2. Earnings per Common Share
Following is a reconciliation of the numerators and denominators of the basic and diluted
earnings per share (EPS) computations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
Average |
|
|
Net |
|
|
|
Net |
|
|
Shares |
|
|
Income |
|
|
|
Income |
|
|
Outstanding |
|
|
Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders |
|
$ |
51,691,583 |
|
|
|
16,801,713 |
|
|
$ |
3.08 |
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and grants |
|
|
|
|
|
|
189,998 |
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders |
|
$ |
51,691,583 |
|
|
|
16,991,711 |
|
|
$ |
3.04 |
|
F-15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
Average |
|
|
Net |
|
|
|
Net |
|
|
Shares |
|
|
Income |
|
|
|
Income |
|
|
Outstanding |
|
|
Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
stockholders |
|
$ |
95,620,201 |
|
|
|
16,812,451 |
|
|
$ |
5.69 |
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and grants |
|
|
|
|
|
|
192,398 |
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common
stockholders |
|
$ |
95,620,201 |
|
|
|
17,004,849 |
|
|
$ |
5.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
|
|
|
|
Average |
|
|
Net |
|
|
|
Net |
|
|
Shares |
|
|
Income |
|
|
|
Income |
|
|
Outstanding |
|
|
Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders |
|
$ |
72,563,000 |
|
|
|
16,721,964 |
|
|
$ |
4.34 |
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and grants |
|
|
|
|
|
|
133,646 |
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders |
|
$ |
72,563,000 |
|
|
|
16,855,610 |
|
|
$ |
4.30 |
|
Options to purchase common shares are not included in the respective computations of
diluted earnings per common share when the options exercise price is greater than the average
market price of the common shares. This situation did not occur for the years presented in the
tables directly above.
Note 3. Segment Information
The Companys subsidiaries are primarily engaged in the underwriting and management of
property and casualty insurance.
The Company classifies its business into two underwriting segments consisting of the
Insurance Companies and the Lloyds Operations, which are separately managed, and a corporate
segment. Segment data for each of the two underwriting segments include allocations of revenues
and expenses of the wholly-owned underwriting agencies and the Parent Companys expenses and
related income tax amounts.
We evaluate the performance of each segment based on its underwriting and net income results.
The Insurance Companies and Lloyds Operations results are measured by taking into account net
earned premium, net losses and loss adjustment expenses (LAE), commission expense, other
operating expenses, commission income and other income or expense. The corporate segment consists
of the Parent Companys investment income, interest expense and the related tax effect. Each
segment 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.
F-16
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, specialty lines of business including contractors general liability insurance,
commercial and personal umbrella and primary and excess casualty businesses, and middle markets
business consisting of general liability, commercial automobile liability and property insurance for a variety of commercial
middle markets businesses. Navigators Specialty Insurance Company underwrites specialty and
professional liability insurance on an excess and surplus lines basis fully reinsured by
Navigators Insurance Company. The Lloyds Operations primarily underwrite marine and related
lines of business along with professional liability insurance, and construction coverages for
onshore energy business at Lloyds through Syndicate 1221. The European property business,
written by the Lloyds Operations and the U.K. Branch beginning in 2006, was discontinued in the
2008 second quarter. Our Lloyds Operations include Navigators Underwriting Agency Ltd., a
Lloyds underwriting agency which manages Syndicate 1221. We participate in the capacity of
Syndicate 1221 through two wholly-owned Lloyds corporate members.
The Insurance Companies and the Lloyds Operations underwriting results are measured based
on underwriting profit or loss and the related combined ratio, which are both non-GAAP measures of
underwriting profitability. Underwriting profit or loss is calculated from net earned premium,
less the sum of net losses and LAE, commission expense, other operating expenses and commission
income and other income (expense). The combined ratio is derived by dividing the sum of net
losses and LAE, commission expense, other operating expenses and commission income and other
income (expense) by net earned premium. A combined ratio of less than 100% indicates an
underwriting profit and over 100% indicates an underwriting loss.
Effective in 2008, the Company has reclassified certain of its business which had no effect on
its segment classifications. The inland marine business, formerly included in other business of
the Insurance Companies, is now included in the Insurance Companies marine business. Middle
markets business, formerly included in the specialty business of the Insurance Companies, is now
broken out separately. Underwriting data for prior periods has been reclassified to reflect these
changes.
F-17
Financial data by segment for 2008, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
762,190 |
|
|
$ |
322,732 |
|
|
|
|
|
|
$ |
1,084,922 |
|
Net written premium |
|
|
472,688 |
|
|
|
188,927 |
|
|
|
|
|
|
|
661,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
463,298 |
|
|
|
180,678 |
|
|
|
|
|
|
|
643,976 |
|
Net losses and loss adjustment expenses |
|
|
(275,767 |
) |
|
|
(117,364 |
) |
|
|
|
|
|
|
(393,131 |
) |
Commission expense |
|
|
(55,752 |
) |
|
|
(34,033 |
) |
|
|
|
|
|
|
(89,785 |
) |
Other operating expenses |
|
|
(92,297 |
) |
|
|
(30,961 |
) |
|
$ |
110 |
|
|
|
(123,148 |
) |
Commission income and other income (expense) |
|
|
2,145 |
|
|
|
(600 |
) |
|
|
(110 |
) |
|
|
1,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
|
41,627 |
|
|
|
(2,280 |
) |
|
|
|
|
|
|
39,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
63,544 |
|
|
|
11,655 |
|
|
|
1,355 |
|
|
|
76,554 |
|
Net realized capital gains (losses) |
|
|
(37,822 |
) |
|
|
(477 |
) |
|
|
|
|
|
|
(38,299 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
(8,871 |
) |
|
|
(8,871 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit) |
|
|
67,349 |
|
|
|
8,898 |
|
|
|
(7,516 |
) |
|
|
68,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
16,401 |
|
|
|
3,269 |
|
|
|
(2,631 |
) |
|
|
17,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
50,948 |
|
|
$ |
5,629 |
|
|
$ |
(4,885 |
) |
|
$ |
51,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,477,139 |
|
|
$ |
779,800 |
|
|
$ |
63,452 |
|
|
$ |
3,349,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expenses ratio |
|
|
59.5 |
% |
|
|
65.0 |
% |
|
|
|
|
|
|
61.0 |
% |
Commission expense ratio |
|
|
12.0 |
% |
|
|
18.8 |
% |
|
|
|
|
|
|
13.9 |
% |
Other operating expenses ratio (2) |
|
|
19.5 |
% |
|
|
17.5 |
% |
|
|
|
|
|
|
18.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
91.0 |
% |
|
|
101.3 |
% |
|
|
|
|
|
|
93.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment
balances causing the row not to crossfoot. |
|
(2) |
|
Includes other operating expenses and commission income and other income (expense). |
F-18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
305,066 |
|
|
$ |
243,698 |
|
|
$ |
548,764 |
|
Specialty |
|
|
311,846 |
|
|
|
|
|
|
|
311,846 |
|
Middle Markets |
|
|
30,095 |
|
|
|
|
|
|
|
30,095 |
|
Professional Liability |
|
|
109,048 |
|
|
|
38,872 |
|
|
|
147,920 |
|
Other |
|
|
6,135 |
|
|
|
40,162 |
|
|
|
46,297 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
762,190 |
|
|
$ |
322,732 |
|
|
$ |
1,084,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
169,055 |
|
|
$ |
153,641 |
|
|
$ |
322,696 |
|
Specialty |
|
|
209,871 |
|
|
|
|
|
|
|
209,871 |
|
Middle Markets |
|
|
24,558 |
|
|
|
|
|
|
|
24,558 |
|
Professional Liability |
|
|
63,797 |
|
|
|
23,404 |
|
|
|
87,201 |
|
Other |
|
|
5,407 |
|
|
|
11,882 |
|
|
|
17,289 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
472,688 |
|
|
$ |
188,927 |
|
|
$ |
661,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
153,429 |
|
|
$ |
146,152 |
|
|
$ |
299,581 |
|
Specialty |
|
|
220,722 |
|
|
|
|
|
|
|
220,722 |
|
Middle Markets |
|
|
22,692 |
|
|
|
|
|
|
|
22,692 |
|
Professional Liability |
|
|
57,316 |
|
|
|
21,908 |
|
|
|
79,224 |
|
Other |
|
|
9,139 |
|
|
|
12,618 |
|
|
|
21,757 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
463,298 |
|
|
$ |
180,678 |
|
|
$ |
643,976 |
|
|
|
|
|
|
|
|
|
|
|
F-19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
774,346 |
|
|
$ |
296,361 |
|
|
|
|
|
|
$ |
1,070,707 |
|
Net written premium |
|
|
478,018 |
|
|
|
167,778 |
|
|
|
|
|
|
|
645,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
443,456 |
|
|
|
158,521 |
|
|
|
|
|
|
|
601,977 |
|
Net losses and loss adjustment expenses |
|
|
(256,652 |
) |
|
|
(83,940 |
) |
|
|
|
|
|
|
(340,592 |
) |
Commission expense |
|
|
(52,490 |
) |
|
|
(25,123 |
) |
|
|
|
|
|
|
(77,613 |
) |
Other operating expenses |
|
|
(81,053 |
) |
|
|
(29,356 |
) |
|
|
|
|
|
|
(110,409 |
) |
Commission income and other income (expense) |
|
|
1,510 |
|
|
|
504 |
|
|
|
|
|
|
|
2,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
54,771 |
|
|
|
20,606 |
|
|
|
|
|
|
|
75,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
58,261 |
|
|
|
10,524 |
|
|
$ |
1,877 |
|
|
|
70,662 |
|
Net realized capital gains (losses) |
|
|
1,973 |
|
|
|
33 |
|
|
|
|
|
|
|
2,006 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(8,863 |
) |
|
|
(8,863 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit) |
|
|
115,005 |
|
|
|
31,163 |
|
|
|
(6,986 |
) |
|
|
139,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
35,061 |
|
|
|
10,946 |
|
|
|
(2,445 |
) |
|
|
43,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
79,944 |
|
|
$ |
20,217 |
|
|
$ |
(4,541 |
) |
|
$ |
95,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,322,647 |
|
|
$ |
744,002 |
|
|
$ |
53,501 |
|
|
$ |
3,143,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expenses ratio |
|
|
57.9 |
% |
|
|
53.0 |
% |
|
|
|
|
|
|
56.6 |
% |
Commission expense ratio |
|
|
11.8 |
% |
|
|
15.8 |
% |
|
|
|
|
|
|
12.9 |
% |
Other operating expenses ratio (2) |
|
|
17.9 |
% |
|
|
18.2 |
% |
|
|
|
|
|
|
18.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
87.6 |
% |
|
|
87.0 |
% |
|
|
|
|
|
|
87.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment
balances causing the row not to crossfoot. |
|
(2) |
|
Includes other operating expenses and commission income and other income (expense). |
F-20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
278,801 |
|
|
$ |
225,216 |
|
|
$ |
504,017 |
|
Specialty |
|
|
355,523 |
|
|
|
|
|
|
|
355,523 |
|
Middle Markets |
|
|
25,870 |
|
|
|
|
|
|
|
25,870 |
|
Professional Liability |
|
|
99,556 |
|
|
|
34,281 |
|
|
|
133,837 |
|
Other |
|
|
14,596 |
|
|
|
36,864 |
|
|
|
51,460 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
774,346 |
|
|
$ |
296,361 |
|
|
$ |
1,070,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
141,817 |
|
|
$ |
131,430 |
|
|
$ |
273,247 |
|
Specialty |
|
|
242,569 |
|
|
|
|
|
|
|
242,569 |
|
Middle Markets |
|
|
20,864 |
|
|
|
|
|
|
|
20,864 |
|
Professional Liability |
|
|
59,117 |
|
|
|
23,349 |
|
|
|
82,466 |
|
Other |
|
|
13,651 |
|
|
|
12,999 |
|
|
|
26,650 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
478,018 |
|
|
$ |
167,778 |
|
|
$ |
645,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
135,617 |
|
|
$ |
132,443 |
|
|
$ |
268,060 |
|
Specialty |
|
|
223,724 |
|
|
|
|
|
|
|
223,724 |
|
Middle Markets |
|
|
20,191 |
|
|
|
|
|
|
|
20,191 |
|
Professional Liability |
|
|
55,149 |
|
|
|
17,659 |
|
|
|
72,808 |
|
Other |
|
|
8,775 |
|
|
|
8,419 |
|
|
|
17,194 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
443,456 |
|
|
$ |
158,521 |
|
|
$ |
601,977 |
|
|
|
|
|
|
|
|
|
|
|
F-21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
672,846 |
|
|
$ |
297,944 |
|
|
|
|
|
|
$ |
970,790 |
|
Net written premium |
|
|
376,179 |
|
|
|
144,628 |
|
|
|
|
|
|
|
520,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
329,723 |
|
|
|
138,600 |
|
|
|
|
|
|
|
468,323 |
|
Net losses and loss adjustment expenses |
|
|
(191,740 |
) |
|
|
(78,447 |
) |
|
|
|
|
|
|
(270,187 |
) |
Commission expense |
|
|
(36,412 |
) |
|
|
(21,375 |
) |
|
|
|
|
|
|
(57,787 |
) |
Other operating expenses |
|
|
(62,459 |
) |
|
|
(23,296 |
) |
|
|
|
|
|
|
(85,755 |
) |
Commission income and other income (expense) |
|
|
3,552 |
|
|
|
(1,150 |
) |
|
|
|
|
|
|
2,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
|
42,664 |
|
|
|
14,332 |
|
|
|
|
|
|
|
56,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
47,723 |
|
|
|
7,694 |
|
|
$ |
1,478 |
|
|
|
56,895 |
|
Net realized capital gains (losses) |
|
|
(622 |
) |
|
|
(404 |
) |
|
|
|
|
|
|
(1,026 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
(6,248 |
) |
|
|
(6,248 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense (benefit) |
|
|
89,765 |
|
|
|
21,622 |
|
|
|
(4,770 |
) |
|
|
106,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
28,843 |
|
|
|
7,601 |
|
|
|
(2,390 |
) |
|
|
34,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
60,922 |
|
|
$ |
14,021 |
|
|
$ |
(2,380 |
) |
|
$ |
72,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,105,293 |
|
|
$ |
806,948 |
|
|
$ |
47,781 |
|
|
$ |
2,956,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expenses ratio |
|
|
58.2 |
% |
|
|
56.6 |
% |
|
|
|
|
|
|
57.7 |
% |
Commission expense ratio |
|
|
11.0 |
% |
|
|
15.4 |
% |
|
|
|
|
|
|
12.3 |
% |
Other operating expense ratio (2) |
|
|
17.9 |
% |
|
|
17.6 |
% |
|
|
|
|
|
|
17.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
87.1 |
% |
|
|
89.6 |
% |
|
|
|
|
|
|
87.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment
balances causing the row not to crossfoot. |
|
(2) |
|
Includes other operating expenses and commission income and other income (expense). |
F-22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
266,675 |
|
|
$ |
245,134 |
|
|
$ |
511,809 |
|
Specialty |
|
|
288,622 |
|
|
|
|
|
|
|
288,622 |
|
Middle Markets |
|
|
22,754 |
|
|
|
|
|
|
|
22,754 |
|
Professional Liability |
|
|
92,760 |
|
|
|
21,759 |
|
|
|
114,519 |
|
Other |
|
|
2,035 |
|
|
|
31,051 |
|
|
|
33,086 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
672,846 |
|
|
$ |
297,944 |
|
|
$ |
970,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
129,032 |
|
|
$ |
127,636 |
|
|
$ |
256,668 |
|
Specialty |
|
|
176,931 |
|
|
|
|
|
|
|
176,931 |
|
Middle Markets |
|
|
18,173 |
|
|
|
|
|
|
|
18,173 |
|
Professional Liability |
|
|
51,192 |
|
|
|
9,016 |
|
|
|
60,208 |
|
Other |
|
|
851 |
|
|
|
7,976 |
|
|
|
8,827 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
376,179 |
|
|
$ |
144,628 |
|
|
$ |
520,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
115,109 |
|
|
$ |
130,644 |
|
|
$ |
245,753 |
|
Specialty |
|
|
156,031 |
|
|
|
|
|
|
|
156,031 |
|
Middle Markets |
|
|
16,449 |
|
|
|
|
|
|
|
16,449 |
|
Professional Liability |
|
|
41,437 |
|
|
|
4,237 |
|
|
|
45,674 |
|
Other |
|
|
697 |
|
|
|
3,719 |
|
|
|
4,416 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
329,723 |
|
|
$ |
138,600 |
|
|
$ |
468,323 |
|
|
|
|
|
|
|
|
|
|
|
The Insurance Companies net earned premium includes $69.0 million, $62.2 million and $49.8
million of net earned premium from the U.K. Branch for 2008, 2007 and 2006, respectively.
F-23
Note 4. Investments
In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which was adopted
by the Company on January 1, 2008. SFAS 157 defines fair value, expands disclosure requirements
around fair value and specifies a hierarchy of valuation techniques based on whether the input to
those valuation techniques are observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect the Companys market
assumptions. These two types of inputs create the following fair value hierarchy:
|
|
|
Level 1 Quoted prices
for identical instruments in active markets. |
|
|
|
Level 2 Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs and significant value
drivers are observable in active markets. |
|
|
|
Level 3 Valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable. |
This hierarchy requires the Company to use observable market data, when available, and to
minimize the use of unobservable inputs when determining fair value.
The following table presents, for each of the fair value hierarchy levels, the Companys fixed
maturities, equity securities and short-term investments that are measured at fair value at
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
In Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities |
|
$ |
271,392 |
|
|
$ |
1,372,224 |
|
|
$ |
156 |
|
|
$ |
1,643,772 |
|
Equity securities |
|
|
51,802 |
|
|
|
|
|
|
|
|
|
|
|
51,802 |
|
Short-term investments |
|
|
59,957 |
|
|
|
160,727 |
|
|
|
|
|
|
|
220,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
383,151 |
|
|
$ |
1,532,951 |
|
|
$ |
156 |
|
|
$ |
1,916,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
The one security classified as level 3 in the above table consists of a structured security
rated AAA by Standard and Poors (S&P) and Aaa by Moodys Investors Service (Moodys), with
unobservable inputs included in the Companys fixed maturities portfolio for which price quotes
from brokers were used to indicate fair value. The following table presents a reconciliation of
the beginning and ending balances for all investments measured at fair value using level 3 inputs
for the twelve months ended December 31, 2008:
|
|
|
|
|
|
|
Twelve Months Ended |
|
|
|
December 31, 2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
Level 3 investments as of January 1, 2008 |
|
$ |
2,603 |
|
Unrealized net gains included in other comprehensive income (loss) |
|
|
(94 |
) |
Purchases, sales, paydowns and amortization |
|
|
(704 |
) |
Transfer from Level 3 |
|
|
(1,979 |
) |
Transfer to Level 3 |
|
|
330 |
|
|
|
|
|
Level 3 investments as of December 31, 2008 |
|
$ |
156 |
|
|
|
|
|
All fixed maturities, short-term investments and equity securities are carried at fair value.
All prices for our fixed maturities, short-term investments and equity securities valued as level 1
or level 2 in the SFAS 157 fair value hierarchy are received from independent pricing services
utilized by one of our outside investment managers. The investment 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 SFAS 157
pricing hierarchy. Any pricing where the input is based solely on a broker price is deemed to be a
level 3 price.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value with changes in fair value reported in earnings. The Company
adopted SFAS 159 on January 1, 2008 and did not elect to apply fair value accounting to any
financial instruments with future changes in value reported in earnings.
FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157, delays the
effective date of SFAS 157 for non-financial assets and non-financial liabilities that are not
measured at fair value on a recurring basis (at least annually) until fiscal years beginning after
November 15, 2008. The Company does not expect the adoption of FSP FAS 157-2 to have a material
effect on its financial condition or results of operations.
In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active, with an immediate effective date, including
prior periods for which financial statements have not been issued. FSP FAS 157-3 amends SFAS 157
to clarify the application of fair value in inactive markets and allows for the use of managements
internal assumptions about cash flows with appropriately risk-adjusted discount rates when relevant
observable market data does not exist. The objective of SFAS 157 has not changed and continues to
be the determination of the price that would be received in an orderly transaction that is not a
forced liquidation or distressed sale at the measurement date. The adoption of FSP FAS 157-3 in
the 2008 third quarter did not have a material effect on the Companys financial condition or
results of operations.
F-25
The Companys fixed maturities and equity securities at December 31, 2008 and 2007 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Cost or |
|
December 31, 2008 |
|
Fair Value |
|
|
Gains |
|
|
(Losses) |
|
|
Amortized Cost |
|
|
|
($ in thousands) |
|
U.S. Government Treasury and Agency Bonds and foreign government bonds |
|
$ |
361,656 |
|
|
$ |
25,741 |
|
|
$ |
(145 |
) |
|
$ |
336,060 |
|
States, municipalities, and political
subdivisions |
|
|
614,609 |
|
|
|
12,568 |
|
|
|
(8,036 |
) |
|
|
610,077 |
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
299,775 |
|
|
|
10,930 |
|
|
|
(26 |
) |
|
|
288,871 |
|
Collateralized mortgage obligations |
|
|
56,743 |
|
|
|
|
|
|
|
(27,119 |
) |
|
|
83,862 |
|
Asset-backed securities |
|
|
29,436 |
|
|
|
5 |
|
|
|
(1,289 |
) |
|
|
30,720 |
|
Commercial mortgage-backed securities |
|
|
92,684 |
|
|
|
|
|
|
|
(20,350 |
) |
|
|
113,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
478,638 |
|
|
|
10,935 |
|
|
|
(48,784 |
) |
|
|
516,487 |
|
Corporate bonds |
|
|
188,869 |
|
|
|
1,398 |
|
|
|
(14,660 |
) |
|
|
202,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,643,772 |
|
|
|
50,642 |
|
|
|
(71,625 |
) |
|
|
1,664,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
51,802 |
|
|
|
1,266 |
|
|
|
(1,987 |
) |
|
|
52,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
1,457 |
|
|
|
|
|
|
|
|
|
|
|
1,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
220,684 |
|
|
|
|
|
|
|
|
|
|
|
220,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,917,715 |
|
|
$ |
51,908 |
|
|
$ |
(73,612 |
) |
|
$ |
1,939,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Cost or |
|
December 31, 2007 |
|
Fair Value |
|
|
Gains |
|
|
(Losses) |
|
|
Amortized Cost |
|
|
|
($ in thousands) |
|
U.S. Government Treasury and Agency Bonds and foreign government bonds |
|
$ |
256,131 |
|
|
$ |
5,984 |
|
|
$ |
(63 |
) |
|
$ |
250,210 |
|
States, municipalities, and political
subdivisions |
|
|
515,883 |
|
|
|
7,050 |
|
|
|
(657 |
) |
|
|
509,490 |
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
266,270 |
|
|
|
2,177 |
|
|
|
(758 |
) |
|
|
264,851 |
|
Collateralized mortgage obligations |
|
|
109,560 |
|
|
|
253 |
|
|
|
(822 |
) |
|
|
110,129 |
|
Asset-backed securities |
|
|
64,352 |
|
|
|
533 |
|
|
|
(79 |
) |
|
|
63,898 |
|
Commercial mortgage-backed securities |
|
|
113,488 |
|
|
|
544 |
|
|
|
(1,031 |
) |
|
|
113,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
553,670 |
|
|
|
3,507 |
|
|
|
(2,690 |
) |
|
|
552,853 |
|
Corporate bonds |
|
|
196,636 |
|
|
|
2,504 |
|
|
|
(1,804 |
) |
|
|
195,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,522,320 |
|
|
|
19,045 |
|
|
|
(5,214 |
) |
|
|
1,508,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
67,240 |
|
|
|
6,452 |
|
|
|
(4,704 |
) |
|
|
65,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
7,056 |
|
|
|
|
|
|
|
|
|
|
|
7,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
170,685 |
|
|
|
|
|
|
|
|
|
|
|
170,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,767,301 |
|
|
$ |
25,497 |
|
|
$ |
(9,918 |
) |
|
$ |
1,751,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We regularly review our fixed maturity and equity securities portfolios to evaluate the
necessity of recording impairment losses for other-than-temporary declines in the fair value of
investments. In general, we focus our attention on those securities whose market value was less
than 80% of their cost or amortized cost, as appropriate, for six or more consecutive months. If
warranted as the result of conditions relating to a particular security, we will focus on a
significant decline in market value regardless of the time period involved. Other factors
considered in evaluating potential impairment include the current fair value as compared to cost or
amortized cost, as appropriate, our intent and ability to retain the investment for a period of
time sufficient to allow for an anticipated recovery in value, specific credit issues related to
the issuer and current economic conditions.
F-27
As mentioned above, the Company considers its intent and ability to hold a security until the
value recovers as part of the process of evaluating whether a securitys unrealized loss represents
an other-than-temporary decline. The Companys ability to hold such securities is supported by
sufficient cash flow from its operations and from maturities within its investment portfolio in
order to meet its claims payment and other disbursement obligations arising from its underwriting
operations without selling such investments. With respect to securities where the decline in value
is determined to be temporary and the securitys value is not written down, a subsequent decision
may be made to sell that security and realize a loss. Subsequent decisions on security sales are
made within the context of overall risk monitoring, new information
and market conditions. Management of the Companys investment
portfolio is outsourced to third party investment managers. While these investment managers may,
at a given point in time, believe that the preferred course of action is to hold securities with
unrealized losses that are considered temporary until such losses are recovered, the dynamic nature
of the portfolio management may result in a subsequent decision to sell the security and realize
the loss, based upon a change in market and other factors described above.
When a security in our investment portfolio has an unrealized loss that is deemed to be
other-than-temporary, we write the security down to fair value through a charge to operations.
Significant changes in the factors we consider when evaluating investments for impairment losses
could result in a significant change in impairment losses reported in the consolidated financial
statements.
The 2008 and 2007 net realized capital losses include impairments of $37.0 million and $0.7
million, respectively, for declines in the market value of securities which were considered to be
other-than-temporary. In light of the declines in the fair value of these securities and the
related economic circumstances causing such declines, the Company believes that their fair value
will not recover in the foreseeable future. There were no such impairments recorded in 2006.
F-28
The following table summarizes all securities in an unrealized loss position at December 31,
2008 and 2007, showing the aggregate fair value and gross unrealized loss by the length of time
those securities have continuously been in an unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
|
Fair |
|
|
Gross |
|
|
Fair |
|
|
Gross |
|
|
|
Value |
|
|
Unrealized Loss |
|
|
Value |
|
|
Unrealized Loss |
|
|
|
($ in thousands) |
|
Fixed Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Treasury and Agency
Bonds and foreign government bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
$ |
3,862 |
|
|
$ |
145 |
|
|
$ |
6,316 |
|
|
$ |
30 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
6,527 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
3,862 |
|
|
|
145 |
|
|
|
12,843 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
68,727 |
|
|
|
2,187 |
|
|
|
21,853 |
|
|
|
67 |
|
7-12 Months |
|
|
118,910 |
|
|
|
4,376 |
|
|
|
6,045 |
|
|
|
115 |
|
> 12 Months |
|
|
15,918 |
|
|
|
1,473 |
|
|
|
69,671 |
|
|
|
475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
203,555 |
|
|
|
8,036 |
|
|
|
97,569 |
|
|
|
657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
30,670 |
|
|
|
939 |
|
|
|
59,191 |
|
|
|
517 |
|
7-12 Months |
|
|
80,618 |
|
|
|
26,966 |
|
|
|
48,496 |
|
|
|
423 |
|
> 12 Months |
|
|
66,218 |
|
|
|
20,879 |
|
|
|
134,858 |
|
|
|
1,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
177,506 |
|
|
|
48,784 |
|
|
|
242,545 |
|
|
|
2,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
57,805 |
|
|
|
2,445 |
|
|
|
20,722 |
|
|
|
255 |
|
7-12 Months |
|
|
57,971 |
|
|
|
5,893 |
|
|
|
25,520 |
|
|
|
974 |
|
> 12 Months |
|
|
27,873 |
|
|
|
6,322 |
|
|
|
38,865 |
|
|
|
575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
143,649 |
|
|
|
14,660 |
|
|
|
85,107 |
|
|
|
1,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities |
|
$ |
528,572 |
|
|
$ |
71,625 |
|
|
$ |
438,064 |
|
|
$ |
5,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
$ |
8,991 |
|
|
$ |
1,941 |
|
|
$ |
26,257 |
|
|
$ |
3,494 |
|
7-12 Months |
|
|
351 |
|
|
|
46 |
|
|
|
4,153 |
|
|
|
1,209 |
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity Securities |
|
$ |
9,342 |
|
|
$ |
1,987 |
|
|
$ |
30,463 |
|
|
$ |
4,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We analyze the unrealized losses quarterly to determine if any are other-than-temporary.
The above unrealized losses have been determined to be temporary and resulted from changes in
market conditions.
F-29
The table above includes fixed maturity securities with unrealized losses of $43.7 million
where the fair value has been less than 80% of book value for at least six months. The fair value
of these securities as of December 31, 2008 was $91.1 million. These losses consist mainly of
non-agency mortgage backed securities and have not been deemed to be other-than-temporary based on
our evaluation of projected cash flows, credit enhancements, cumulative delinquencies and losses,
rating agency assessments and other factors. Management believes these securities are trading at
depressed levels due to illiquidity in the marketplace and other market based factors rather than
the specific credit issues.
The scheduled maturity dates for fixed maturity securities by the number of years until
maturity at December 31, 2008 are shown in the following table:
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
|
|
|
December 31, 2008 |
|
Fair |
|
|
Amortized |
|
to Maturity |
|
Value |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
63,869 |
|
|
$ |
63,404 |
|
Due after one year through five years |
|
|
470,919 |
|
|
|
465,799 |
|
Due after five years through ten years |
|
|
362,393 |
|
|
|
352,696 |
|
Due after ten years |
|
|
267,953 |
|
|
|
266,369 |
|
Mortgage- and asset-backed (including GNMAs) |
|
|
478,638 |
|
|
|
516,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,643,772 |
|
|
$ |
1,664,755 |
|
|
|
|
|
|
|
|
Expected maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment penalties. Due to the
periodic repayment of principal, the mortgage-backed and asset-backed securities are estimated to
have an effective maturity of approximately 2.7 years.
The Companys net investment income was derived from the following sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
73,493 |
|
|
$ |
64,435 |
|
|
$ |
51,102 |
|
Equity securities |
|
|
2,359 |
|
|
|
1,767 |
|
|
|
1,168 |
|
Short-term investments |
|
|
3,925 |
|
|
|
7,363 |
|
|
|
7,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,777 |
|
|
|
73,565 |
|
|
|
59,328 |
|
Investment expenses |
|
|
(3,223 |
) |
|
|
(2,903 |
) |
|
|
(2,433 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
76,554 |
|
|
$ |
70,662 |
|
|
$ |
56,895 |
|
|
|
|
|
|
|
|
|
|
|
F-30
The Companys realized capital gains and losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
$ |
3,650 |
|
|
$ |
1,320 |
|
|
$ |
743 |
|
(Losses) |
|
|
(1,670 |
) |
|
|
(1,749 |
) |
|
|
(2,385 |
) |
(Impairments) |
|
|
(8,604 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,624 |
) |
|
|
(429 |
) |
|
|
(1,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
|
720 |
|
|
|
3,626 |
|
|
|
714 |
|
(Losses) |
|
|
(3,954 |
) |
|
|
(536 |
) |
|
|
(98 |
) |
(Impairments) |
|
|
(28,441 |
) |
|
|
(655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,675 |
) |
|
|
2,435 |
|
|
|
616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital gains (losses) |
|
$ |
(38,299 |
) |
|
$ |
2,006 |
|
|
$ |
(1,026 |
) |
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 and 2007, fixed maturities with amortized values of $9.9 million
and $10.6 million, respectively, were on deposit with various State Insurance Departments. In
addition, at December 31, 2008, investments of $1.2 million were on deposit at a U.K. bank to
comply with the regulatory requirements of the Financial Services Authority for Navigators
Insurance Companys U.K. Branch. Also, at both December 31, 2008 and 2007, $0.3 million of
investments were pledged as security under a reinsurance treaty.
At December 31, 2008 and 2007, the Company did not have a concentration of greater than 5% of
invested assets in a single non-U.S. government backed issuer.
Note 5. Reserves for Losses and Loss Adjustment Expenses
Insurance companies and Lloyds syndicates are required to maintain reserves for unpaid losses
and unpaid loss adjustment expenses for all lines of business. These reserves are intended to
cover the probable ultimate cost of settling all losses incurred and unpaid, including those
incurred but not reported. The determination of reserves for losses and loss adjustment expenses
(LAE) for insurance companies such as Navigators Insurance Company and Navigators Specialty
Insurance Company, and Lloyds corporate members such as Navigators Corporate Underwriters Ltd. and
Millennium Underwriting Ltd. is dependent upon the receipt of information from the agents and
brokers which produce the insurance business for the Company. Generally, there is a lag between
the time premiums are written and related losses and loss adjustment expenses are incurred, and the
time such events are reported to the agents and brokers and, subsequently, to Navigators Insurance
Company, Navigators Specialty Insurance Company, Navigators Corporate Underwriters Ltd. and
Millennium Underwriting Ltd.
F-31
Loss reserves are established by our Insurance Companies and Syndicate 1221 for reported
claims when notice of the claim is first received. Reserves for such reported claims are
established on a case-by-case basis by evaluating several factors, including the type of risk
involved, knowledge of the circumstances surrounding such claim, severity of injury or damage, the
potential for ultimate exposure, experience with the insured and the agent or broker on the line of
business, and the policy provisions relating to the type of claim. Reserves for IBNR are
determined in part on the basis of statistical information, in part on industry experience and in
part on the judgment of our senior corporate officers. They are calculated by the Companys
actuaries using several standard actuarial methodologies, including the paid and incurred loss
development and the paid and incurred Bornheutter-Ferguson loss methods. Additional analyses, such
as frequency/severity analyses, are performed for certain books of business. 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 recognized.
Loss reserves are estimates of what the insurer or reinsurer expects to pay on claims, based
on facts and circumstances then known. It is possible that the ultimate liability may exceed or be
less than such estimates. In setting our loss reserve estimates, we review statistical data
covering several years, analyze patterns by line of business and consider several factors including
trends in claims frequency and severity, changes in operations, emerging economic and social
trends, inflation and changes in the regulatory and litigation environment. Using the
aforementioned actuarial methods and different underlying assumptions, our actuaries produce a
number of point estimates for each class of business. After reviewing the appropriateness of the
underlying assumptions, management selects the carried reserve for each class of business. We do
not calculate a range of loss reserve estimates. We believe that ranges may not be a true
reflection of the potential volatility between carried loss reserves and the ultimate settlement
amount of losses incurred prior to the balance sheet date. The numerous factors that contribute to
the inherent uncertainty in the process of establishing loss reserves include: interpreting loss
development activity, emerging economic and social trends, inflation, changes in the regulatory and
judicial environment and changes in our operations, including changes in underwriting standards and
claims handling procedures. During the loss settlement period, which, in some cases, may last
several years, additional facts regarding individual claims may become known and, accordingly, it
often becomes necessary to refine and adjust the estimates of liability on a claim upward or
downward. Such estimates are regularly reviewed and updated and any resulting adjustments are
included in the current years income statement. Even then, the ultimate liability may exceed or
be less than the revised estimates. The reserving process is intended to provide implicit
recognition of the impact of inflation and other factors affecting loss payments by taking into
account changes in historical payment patterns and perceived probable trends. There is generally
no precise method for the subsequent evaluation of the adequacy of the consideration given to
inflation, or to any other specific factor, because the eventual deficiency or redundancy of
reserves is affected by many factors, some of which are interdependent.
F-32
The following table summarizes the activity in the Companys reserve for losses and LAE during
the three most recent years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
Net reserves for losses and LAE at
beginning of year |
|
$ |
847,303 |
|
|
$ |
696,116 |
|
|
$ |
578,976 |
|
|
|
|
|
|
|
|
|
|
|
Provision for losses and LAE for
claims occurring in the current year |
|
|
443,877 |
|
|
|
387,601 |
|
|
|
287,401 |
|
(Decrease) in estimated losses and LAE
for claims occurring in prior years |
|
|
(50,746 |
) |
|
|
(47,009 |
) |
|
|
(17,214 |
) |
|
|
|
|
|
|
|
|
|
|
Incurred losses and LAE |
|
|
393,131 |
|
|
|
340,592 |
|
|
|
270,187 |
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE paid for claims
occurring during: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
(60,104 |
) |
|
|
(46,467 |
) |
|
|
(19,710 |
) |
Prior years |
|
|
(180,459 |
) |
|
|
(142,938 |
) |
|
|
(133,337 |
) |
|
|
|
|
|
|
|
|
|
|
Losses and LAE payments |
|
|
(240,563 |
) |
|
|
(189,405 |
) |
|
|
(153,047 |
) |
|
|
|
|
|
|
|
|
|
|
Net reserves for losses and LAE at end of year |
|
|
999,871 |
|
|
|
847,303 |
|
|
|
696,116 |
|
|
|
|
|
|
|
|
|
|
|
Reinsurance receivables on unpaid losses and LAE |
|
|
853,793 |
|
|
|
801,461 |
|
|
|
911,439 |
|
|
|
|
|
|
|
|
|
|
|
Gross reserves for losses and LAE at end of year |
|
$ |
1,853,664 |
|
|
$ |
1,648,764 |
|
|
$ |
1,607,555 |
|
|
|
|
|
|
|
|
|
|
|
The segment and line of business breakdowns of prior years net reserve deficiency
(redundancy) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
Insurance Companies |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
(9,291 |
) |
|
$ |
(10,695 |
) |
|
$ |
(4,800 |
) |
Specialty |
|
|
(27,021 |
) |
|
|
(12,091 |
) |
|
|
(6,060 |
) |
Professional Liability |
|
|
(3,559 |
) |
|
|
(10,365 |
) |
|
|
(1,223 |
) |
Middle Markets |
|
|
1,600 |
|
|
|
|
|
|
|
|
|
Property/Other |
|
|
(3,651 |
) |
|
|
(645 |
) |
|
|
(649 |
) |
|
|
|
|
|
|
|
|
|
|
Subtotal Insurance Companies |
|
|
(41,922 |
) |
|
|
(33,796 |
) |
|
|
(12,732 |
) |
Lloyds Operations |
|
|
(8,824 |
) |
|
|
(13,213 |
) |
|
|
(4,482 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(50,746 |
) |
|
$ |
(47,009 |
) |
|
$ |
(17,214 |
) |
|
|
|
|
|
|
|
|
|
|
The
2008 consolidated net redundancy of $50.7 million consisted of
prior year savings of $41.9 million from the Insurance Companies
and $8.8 million from business written by the Lloyds
Operations. The Insurance Companies net redundancy was
generated mainly from prior year savings of $31.6 million from
the specialty construction liability business as a result of a lower
than expected frequency in the 2003 to 2006 underwriting years and
$9.3 million from the marine and energy business primarily as a
result of favorable loss trends in the liability and energy products
across most underwriting years, partially offset by large loss
activity in the cargo product. The net redundancy from the
Lloyds Operations was generated mainly from favorable
development in the marine liability, energy, specie and reinsurance
products for underwriting years 2005 and prior as a result of shorter
development patterns.
Management believes that the reserves for losses and loss adjustment expenses are adequate to
cover the ultimate cost of losses and loss adjustment expenses on reported and unreported claims.
We continue to review our reserves on a regular basis.
F-33
Note 6. Reinsurance
We utilize reinsurance principally to reduce our exposure on individual risks, to protect
against catastrophic losses, and to stabilize loss ratios and underwriting results. Although
reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the
reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our
policyholders. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our
reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of
these claims. Either of these events would increase our costs and could have a material adverse
effect on our business. We are required to pay the losses even if the reinsurer fails to meet its
obligations under the reinsurance agreement. Hurricanes Gustav and Ike in 2008 and Hurricanes
Katrina and Rita in 2005 significantly increased our reinsurance recoverables which increased our
credit risk.
We are protected by various treaty and facultative reinsurance agreements. Our exposure to
credit risk from any one reinsurer is managed through diversification by reinsuring with a number
of different reinsurers, principally in the United States and European reinsurance markets. To
meet our standards of acceptability, when the reinsurance is placed, a reinsurer generally must
have a rating from A.M. Best Company (A.M. Best) and/or Standard & Poors Rating Services
(S&P) of A or better, or an equivalent financial strength if not rated, plus at least $250
million in policyholders surplus. Our Reinsurance Security Committee, which is part of our
Enterprise Risk Management Reinsurance Sub-Committee, monitors the financial strength of our
reinsurers and the related reinsurance receivables and periodically reviews the list of acceptable
reinsurers. The reinsurance is placed either directly by us or through reinsurance intermediaries.
The reinsurance intermediaries are compensated by the reinsurers.
The credit quality distribution of the Companys reinsurance recoverables of $1.11 billion at
December 31, 2008 for ceded paid and unpaid losses and loss adjustment expenses and ceded unearned
premiums based on insurer financial strength ratings from A. M. Best or S&P was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
A.M. Best |
|
Rating |
|
|
Recoverable |
|
|
Percent |
|
Rating(1) |
|
Description |
|
|
Amounts |
|
|
of Total |
|
|
|
|
|
|
|
($ in millions) |
|
|
|
|
|
A++, A+ |
|
Superior |
|
$ |
597.5 |
|
|
|
54 |
% |
A, A- |
|
Excellent |
|
|
481.8 |
|
|
|
43 |
% |
B++, B+ |
|
Very good |
|
|
0.9 |
|
|
|
0 |
%(2) |
NR |
|
Not rated |
|
|
29.7 |
|
|
|
3 |
%(2) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
1,109.9 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Equivalent S&P rating used for certain companies when an A.M. Best
rating was unavailable |
|
(2) |
|
The Company holds offsetting collateral of approximately 73.8% for B++
and B+ companies and 81.4% for not rated companies which includes letters of credit,
ceded balances payable and other balances held by our Insurance Companies and our
Lloyds Operations. |
F-34
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 75.1% of our total recoverables) together with the reinsurance recoverables and
collateral at December 31, 2008, and the reinsurers rating from the indicated rating agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Recoverables |
|
|
|
|
|
|
|
|
|
Unearned |
|
|
Unpaid/Paid |
|
|
|
|
|
|
Collateral(1) |
|
|
Rating & |
|
Reinsurer |
|
Premium |
|
|
Losses |
|
|
Total |
|
|
Held |
|
|
Rating Agency |
|
|
|
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swiss Reinsurance America Corporation |
|
$ |
21.3 |
|
|
$ |
116.0 |
|
|
$ |
137.3 |
|
|
$ |
16.2 |
|
|
|
A+ |
|
|
|
AMB |
(2) |
White Mountains Reinsurance of America |
|
|
10.6 |
|
|
|
92.4 |
|
|
|
103.0 |
|
|
|
26.3 |
|
|
|
A- |
|
|
|
AMB |
|
General Reinsurance Corporation |
|
|
1.5 |
|
|
|
66.6 |
|
|
|
68.1 |
|
|
|
0.8 |
|
|
|
A++ |
|
|
|
AMB |
|
Transatlantic Reinsurance Company |
|
|
20.9 |
|
|
|
41.5 |
|
|
|
62.4 |
|
|
|
10.3 |
|
|
|
A |
|
|
|
AMB |
|
Everest Reinsurance Company |
|
|
15.9 |
|
|
|
36.9 |
|
|
|
52.8 |
|
|
|
6.1 |
|
|
|
A+ |
|
|
|
AMB |
|
Munich
Reinsurance America Inc. |
|
|
16.2 |
|
|
|
35.8 |
|
|
|
52.0 |
|
|
|
9.7 |
|
|
|
A+ |
|
|
|
AMB |
|
Munchener Ruckversicherungs-Gesellschaft |
|
|
10.0 |
|
|
|
31.9 |
|
|
|
41.9 |
|
|
|
13.0 |
|
|
|
A+ |
|
|
|
AMB |
|
National Indemnity Company |
|
|
9.3 |
|
|
|
30.7 |
|
|
|
40.0 |
|
|
|
5.4 |
|
|
|
A++ |
|
|
|
AMB |
|
Platinum Underwriters Re |
|
|
8.3 |
|
|
|
30.3 |
|
|
|
38.6 |
|
|
|
4.4 |
|
|
|
A |
|
|
|
AMB |
|
Swiss Re Europe |
|
|
6.1 |
|
|
|
30.2 |
|
|
|
36.3 |
|
|
|
9.9 |
|
|
|
A+ |
|
|
|
AMB |
|
Lloyds Syndicate #2003 |
|
|
7.2 |
|
|
|
19.0 |
|
|
|
26.2 |
|
|
|
5.2 |
|
|
|
A |
|
|
|
AMB |
|
Berkley Insurance Company |
|
|
12.5 |
|
|
|
13.1 |
|
|
|
25.6 |
|
|
|
2.2 |
|
|
|
A+ |
|
|
|
AMB |
|
Partner Reinsurance Europe |
|
|
8.7 |
|
|
|
15.3 |
|
|
|
24.0 |
|
|
|
12.2 |
|
|
|
AA- |
|
|
|
S&P |
|
Scor Holding (Switzerland) AG |
|
|
4.5 |
|
|
|
18.7 |
|
|
|
23.2 |
|
|
|
3.9 |
|
|
|
A |
|
|
|
AMB |
|
Federal
Insurance Co. |
|
|
1.1 |
|
|
|
19.2 |
|
|
|
20.3 |
|
|
|
2.1 |
|
|
|
A++ |
|
|
|
AMB |
|
Arch Reinsurance Company |
|
|
1.9 |
|
|
|
16.9 |
|
|
|
18.8 |
|
|
|
0.2 |
|
|
|
A |
|
|
|
AMB |
|
Partner
Reinsurance Company of the U.S. |
|
|
2.5 |
|
|
|
14.9 |
|
|
|
17.4 |
|
|
|
0.2 |
|
|
|
A+ |
|
|
|
AMB |
|
Hannover Ruckversicherung |
|
|
1.2 |
|
|
|
16.0 |
|
|
|
17.2 |
|
|
|
2.0 |
|
|
|
A |
|
|
|
AMB |
|
Ace Property and Casualty Insurance Company |
|
|
0.1 |
|
|
|
14.6 |
|
|
|
14.7 |
|
|
|
|
|
|
|
A+ |
|
|
|
AMB |
|
National Liability & Fire Insurance Company |
|
|
0.0 |
|
|
|
14.3 |
|
|
|
14.3 |
|
|
|
|
|
|
|
A++ |
|
|
|
AMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Top 20 Total |
|
|
159.8 |
|
|
|
674.3 |
|
|
|
834.1 |
|
|
|
130.1 |
|
|
|
|
|
|
|
|
|
All Other |
|
|
29.1 |
|
|
|
246.7 |
|
|
|
275.8 |
|
|
|
99.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
188.9 |
|
|
$ |
921.0 |
|
|
$ |
1,109.9 |
|
|
$ |
229.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 |
The largest portion of the Companys collateral consists of letters of credit obtained
from reinsurers in accordance with New York Insurance Department Regulation No. 133. Such
regulation requires collateral to be held by the ceding company from assuming companies not
licensed in New York State in order for the ceding company to take credit for the reinsurance
recoverables on its statutory balance sheet. The specific requirements governing the letters of
credit include a clean and unconditional letter of credit and an evergreen clause which prevents
the expiration of the letter of credit without due notice to the Company. Only banks considered
qualified by the NAIC may be deemed acceptable issuers of letters of credit by the New York
Insurance Department. In addition, based on our
credit assessment of the reinsurer, there are certain instances where we require collateral
from a reinsurer even if the reinsurer is licensed in New York State, generally applying the
requirements of Regulation 133. The contractual terms of the letters of credit require that access
to the collateral is unrestricted. In the event that the counter-party to our collateral would be
deemed not qualified by the NAIC, the reinsurer would be required by agreement to replace such
collateral with acceptable security under the reinsurance agreement. There is no assurance,
however, that the reinsurer would be able to replace the counter-party bank in the event such
counter-party bank becomes unqualified and the reinsurer experiences significant financial
deterioration or becomes insolvent. Under such circumstances, the Company could incur a
substantial loss from uncollectible reinsurance from such reinsurer.
F-35
Approximately $96.8 million of the reinsurance recoverables for paid and unpaid losses at
December 31, 2008 were due from reinsurers as a result of the losses from Hurricanes Gustav and
Ike. Approximately $101.7 million and $167.7 million of the reinsurance recoverables for paid and
unpaid losses at December 31, 2008 and 2007, respectively, were due from reinsurers as a result of
the losses from Hurricanes Katrina and Rita.
Also included in reinsurance recoverable for paid and unpaid losses is approximately $8.9
million due from reinsurers in connection with our asbestos exposures of which $4.8 million
is due from Equitas (a separate United Kingdom authorized reinsurance company established to
reinsure outstanding liabilities of all Lloyds members for all risks written in the 1992 or
prior years of account).
The following table summarizes written premium:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
1,016,521 |
|
|
$ |
989,652 |
|
|
$ |
904,863 |
|
Assumed |
|
|
68,401 |
|
|
|
81,055 |
|
|
|
65,927 |
|
Ceded |
|
|
(423,307 |
) |
|
|
(424,911 |
) |
|
|
(449,983 |
) |
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
661,615 |
|
|
$ |
645,796 |
|
|
$ |
520,807 |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes earned premium:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
993,123 |
|
|
$ |
940,447 |
|
|
$ |
811,794 |
|
Assumed |
|
|
69,989 |
|
|
|
78,164 |
|
|
|
65,660 |
|
Ceded |
|
|
(419,136 |
) |
|
|
(416,634 |
) |
|
|
(409,131 |
) |
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
643,976 |
|
|
$ |
601,977 |
|
|
$ |
468,323 |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes losses and loss adjustment expenses incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
646,095 |
|
|
$ |
532,445 |
|
|
$ |
475,148 |
|
Assumed |
|
|
38,013 |
|
|
|
18,314 |
|
|
|
22,854 |
|
Ceded |
|
|
(290,977 |
) |
|
|
(210,167 |
) |
|
|
(227,815 |
) |
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
393,131 |
|
|
$ |
340,592 |
|
|
$ |
270,187 |
|
|
|
|
|
|
|
|
|
|
|
F-36
The Company is required to pay losses in the event the assuming reinsurers are unable
to meet their obligations under their reinsurance agreements. Charges for uncollectible
reinsurance amounts, all of which were recorded to incurred losses, were $2.4 million, $0.9 million
and $0.6 million for 2008, 2007 and 2006, respectively.
Note 7. Income Taxes
We are subject to the tax regulations of the United States and foreign countries in which we
operate. The Company files a consolidated federal tax return, which includes all domestic
subsidiaries and the U.K. Branch. The income from the foreign operations is designated as either
U.S connected income or non-U.S. connected income. Lloyds is required to pay U.S. income tax on
U.S. connected income written by Lloyds syndicates. Lloyds and the IRS have entered into an
agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyds and
remitted directly to the IRS. These amounts are then charged to the corporate members in
proportion to their participation in the relevant syndicates. The Companys corporate members are
subject to this agreement and will receive U.K. tax credits for any U.S. income tax incurred up to
the U.K. income tax charged on the U.S. income. The non-U.S. connected insurance income would
generally constitute taxable income under the Subpart F income section of the Internal Revenue Code
since less than 50% of the Companys premium is derived within the U.K. and would therefore be
subject to U.S. taxation when the Lloyds year of account closes. Taxes are accrued at a 35% rate
on our foreign source insurance income and foreign tax credits, where available, are utilized to
offset U.S. tax as permitted. The Companys effective tax rate for Syndicate 1221 taxable income
could substantially exceed 35% to the extent the Company is unable to offset U.S. taxes paid under
Subpart F tax regulations with U.K. tax credits on future underwriting year distributions. U.S.
taxes are not accrued on the earnings of the Companys foreign agencies as these earnings are not
subject to the Subpart F tax regulations. These earnings are subject to taxes under U.K. tax
regulations. A finance bill was enacted in the U.K. on July 19, 2007 that reduces
the U.K. corporate tax rate from 30% to 28% effective April 1, 2008. The effect of such tax rate
change was not material to the Companys financial statements.
We have not provided for U.S. deferred income taxes on the undistributed earnings of
approximately $48.4 million of our non-U.S. subsidiaries since these earnings are intended to be
permanently reinvested in our non-U.S. subsidiaries. However, in the future, if such earnings were
distributed to the Company, taxes of approximately $3.4 million would be payable on such
undistributed earnings and would be reflected in the tax provision for the year in which these
earnings are no longer intended to be permanently reinvested in the non-U.S. subsidiary assuming
all foreign tax credits are realized.
F-37
The components of current and deferred income tax expense (benefit) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal and foreign |
|
$ |
33,126 |
|
|
$ |
47,864 |
|
|
$ |
38,644 |
|
State and local |
|
|
435 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
33,561 |
|
|
|
47,963 |
|
|
|
38,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal and foreign |
|
|
(16,522 |
) |
|
|
(4,401 |
) |
|
|
(4,590 |
) |
State and local |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
(16,522 |
) |
|
|
(4,401 |
) |
|
|
(4,590 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense |
|
$ |
17,039 |
|
|
$ |
43,562 |
|
|
$ |
34,054 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of total income taxes applicable to pre-tax operating income and the amounts
computed by applying the Federal statutory income tax rate to the pre-tax operating income was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computed expected tax expense |
|
$ |
24,056 |
|
|
|
35.0 |
% |
|
$ |
48,714 |
|
|
|
35.0 |
% |
|
$ |
37,316 |
|
|
|
35.0 |
% |
Tax-exempt interest |
|
|
(6,650 |
) |
|
|
-9.7 |
% |
|
|
(4,736 |
) |
|
|
-3.4 |
% |
|
|
(3,331 |
) |
|
|
-3.1 |
% |
Dividends received deduction |
|
|
(493 |
) |
|
|
-0.7 |
% |
|
|
(345 |
) |
|
|
-0.2 |
% |
|
|
(243 |
) |
|
|
-0.2 |
% |
State and local income taxes,
net of
Federal income tax |
|
|
284 |
|
|
|
0.4 |
% |
|
|
64 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
0.0 |
% |
Change in the state and local
tax net
deferred tax assets |
|
|
(154 |
) |
|
|
-0.2 |
% |
|
|
(358 |
) |
|
|
-0.3 |
% |
|
|
(981 |
) |
|
|
-1.0 |
% |
Change in the valuation allowance |
|
|
154 |
|
|
|
0.2 |
% |
|
|
358 |
|
|
|
0.3 |
% |
|
|
981 |
|
|
|
1.0 |
% |
Other |
|
|
(158 |
) |
|
|
-0.2 |
% |
|
|
(135 |
) |
|
|
-0.1 |
% |
|
|
312 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual tax expense and rate |
|
$ |
17,039 |
|
|
|
24.8 |
% |
|
$ |
43,562 |
|
|
|
31.3 |
% |
|
$ |
34,054 |
|
|
|
31.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
The tax effects of temporary differences that give rise to Federal, foreign, state and local
deferred tax assets and deferred tax liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Loss reserve discount |
|
$ |
31,393 |
|
|
$ |
28,857 |
|
Unearned premium |
|
|
15,125 |
|
|
|
14,467 |
|
Capital Loss |
|
|
12,735 |
|
|
|
336 |
|
Compensation related |
|
|
6,012 |
|
|
|
5,190 |
|
State and local net deferred tax assets |
|
|
6,194 |
|
|
|
6,183 |
|
Other |
|
|
682 |
|
|
|
497 |
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
72,141 |
|
|
|
55,530 |
|
Less: Valuation allowance |
|
|
(6,194 |
) |
|
|
(6,348 |
) |
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
65,947 |
|
|
|
49,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Deferred acquisition costs |
|
|
(11,658 |
) |
|
|
(10,794 |
) |
Net unrealized gains (losses) on securities |
|
|
6,640 |
|
|
|
(5,394 |
) |
Other |
|
|
(6,193 |
) |
|
|
(3,745 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(11,211 |
) |
|
|
(19,933 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
54,736 |
|
|
$ |
29,249 |
|
|
|
|
|
|
|
|
In assessing the realization of deferred tax assets, management considers whether it is
more likely than not that the deferred tax assets will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the scheduled reversal
of deferred tax liabilities, tax planning strategies and anticipated future taxable income in
making this assessment and believes it is more likely than not that the Company will realize the
benefits of its deductible differences at December 31, 2008, net of any valuation allowance.
The Company had state and local deferred tax assets amounting to potential future tax benefits
of $6.2 million at both December 31, 2008 and 2007. Included in the
deferred tax assets are net operating loss carryforwards of $0.5 million and $2.5 million at
December 31, 2008 and 2007, respectively. A valuation allowance was established for the full
amount of these potential future tax benefits due to the uncertainty associated with their
realization. The Companys state and local tax carryforwards at December 31, 2008 expire from 2021
to 2025.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), an interpretation of FASB Statement 109, Accounting for Income Taxes. FIN 48,
which was effective in the first quarter of 2007, established the threshold for recognizing the
benefits of tax-return positions in the financial statements as more-likely-than-not to be
sustained by the taxing authorities, and prescribed a measurement methodology for those positions
meeting the recognition threshold. The Companys adoption of FIN 48 at January 1, 2007 did not
have a material effect on its financial condition or results of operations.
F-39
Note 8. Credit Facility
The Company has a credit facility provided through a consortium of banks. The credit facility
was amended in February 2007 to increase the letters of credit available under the credit facility
from $115 million to $180 million and to increase the line of credit available under the credit
facility from $10 million to $20 million. Also, the expiration of the credit facility was extended
from June 30, 2007 to March 31, 2009. If at that time the bank consortium does not renew the
credit facility, we will need to find other sources to provide the letters of credit or other
collateral in order to continue our participation in Syndicate 1221. The credit facility, which is
denominated in U.S. dollars, is utilized primarily by Navigators Corporate Underwriters Ltd. and
Millennium Underwriting Ltd. to fund our participation in Syndicate 1221 which is denominated in
British sterling. At December 31, 2008, letters of credit with an aggregate face amount of $78.4
million were issued under the credit facility. The line of credit was unused at December 31, 2008.
As a result of the 2007 amendment, the cost of the letter of credit portion of the credit
facility was reduced to 0.75% from 1.00% for the issued letters of credit and to 0.10% from 0.125%
for the unutilized portion of the letter of credit facility. The cost of the line of credit
portion of the credit facility was also reduced to 0.75% from 1.00% over the Companys choice of
LIBOR or prime for the utilized portion and to 0.10% from 0.125% for the unutilized portion.
The credit facility is collateralized by all of the common stock of Navigators Insurance
Company. The credit agreement contains covenants common to transactions of this type, including
restrictions on indebtedness and liens, limitations on dividends, stock buybacks, mergers and the
sale of assets, and requirements to maintain certain consolidated tangible net worth, statutory
surplus and other financial ratios. No dividends have been declared or paid by the Company through
December 31, 2008. We were in compliance with all covenants at December 31, 2008.
Note 9. Senior Note due May 1, 2016
On April 17, 2006, the Company completed a public debt offering of $125 million principal
amount of 7% senior unsecured notes due May 1, 2016 (the Senior Notes) and received net proceeds
of $123.5 million. The Company contributed $100 million of the proceeds to the capital and surplus
of Navigators Insurance Company and retained the remainder at the Parent Company for general
corporate purposes. Interest will be paid on the Senior Notes each May 1 and November 1. The
effective interest rate related to the Senior Notes, based on the proceeds net of discount and all
issuance costs, is approximately 7.17%.
The Senior Notes, the Companys only senior unsecured obligation, will rank equally with
future senior unsecured indebtedness. The Company may redeem the Senior Notes at any time and from
time to time, in whole or in part, at a make-whole redemption price. The terms of the Senior
Notes contain various restrictive business and financial covenants typical for debt obligations of
this type, including limitations on mergers, liens and dispositions of the common stock of certain
subsidiaries. As of December 31, 2007, the Company was in compliance with all such covenants.
Interest expense in each of 2008 and 2007 was $8.9 million compared to $6.2 million from the
April 17, 2006 issuance date to December 31, 2006. The fair value of the Senior Notes, which is
based on the quoted market price was $83.6 million at December 31, 2008 and $126.7 million at
December 31, 2007.
F-40
Note 10. Fiduciary Funds
Prior to 2006, the Navigators Agencies managed insurance pools in which Navigators
Insurance Company participated. Functions performed by the Navigators Agencies included
underwriting business, collecting premiums from the insured, paying claims, collecting paid
recoverables from reinsurers, paying reinsurance premiums to reinsurers and remitting net account
balances to member insurance companies. Funds received by the Company belonging to non-related
participants in the former insurance pools are not material. They are held in a fiduciary capacity
and are included in the accompanying consolidated balance sheets.
Note 11. Commitments and Contingencies
|
a. |
|
Future minimum annual rental commitments at December 31, 2008 under various noncancellable
operating leases for the Companys office facilities, which expire at various dates through
2018, are as follows: |
|
|
|
|
|
Year Ended December 31, |
|
($ in thousands) |
|
|
|
|
|
|
2009 |
|
$ |
5,655 |
|
2010 |
|
|
6,733 |
|
2011 |
|
|
6,041 |
|
2012 |
|
|
6,018 |
|
2013 |
|
|
5,616 |
|
Subsequent to 2013 |
|
|
17,809 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
47,872 |
|
|
|
|
|
The Company is also liable for additional payments to the landlords for certain annual
cost increases. Rent expense for the years ended December 31,
2008, 2007 and 2006 was $7.1
million, $6.4 million and $4.8 million, respectively.
|
b. |
|
The Company is not a party to, or the subject of, any material pending legal proceedings
which depart from the ordinary routine litigation incident to the kinds of business that it
conducts. |
|
c. |
|
Wherever a member of Lloyds is unable to pay its debts to policyholders, such debts may be
payable by the Lloyds Central Fund. If Lloyds determines that the Central Fund needs to be
increased, it has the power to assess premium levies on current Lloyds members up to 3% of a
members underwriting capacity in any one year. The Company does not believe that any
assessment is likely in the foreseeable future and has not provided any allowance for such an
assessment. However, based on the Companys 2008 capacity at Lloyds of £123 million, the
December 31, 2008 exchange rate of £1 equals $1.46 and assuming the maximum 3% assessment, the
Company would be assessed approximately $5.4 million. |
F-41
Note 12. Share Capital and Share Repurchases
The Companys authorized share capital consists of 50,000,000 common shares with a par value
of $0.10 per share and 1,000,000 preferred shares with a par value of $0.10 per share.
|
b. |
|
Issued and outstanding |
Changes in the Companys issued and outstanding common shares are reflected in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
16,873 |
|
|
|
16,736 |
|
|
|
16,617 |
|
Vested stock grants |
|
|
36 |
|
|
|
33 |
|
|
|
32 |
|
Employee stock purchase plan |
|
|
17 |
|
|
|
15 |
|
|
|
15 |
|
Stock options exercised |
|
|
155 |
|
|
|
89 |
|
|
|
72 |
|
Treasury shares purchased |
|
|
(225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
|
16,856 |
|
|
|
16,873 |
|
|
|
16,736 |
|
|
|
|
|
|
|
|
|
|
|
There are no preferred shares issued.
In
October 2007, the Parent Companys Board of Directors adopted a stock repurchase program for
up to $30 million of the Parent Companys common stock. Purchases were permitted from time to time
at prevailing prices in open market or privately negotiated transactions through December 31, 2008.
The timing and amount of purchases under the program depended on a variety of factors, including
the trading price of the stock, market conditions and corporate and regulatory considerations.
There were no purchases made in the 2007 fourth quarter. During 2008, the Parent Company purchased
224,754 shares of its common stock in the open market at an average cost of $51.34 per share for a
total of $11.5 million. The program expired at December 31, 2008.
Note 13. Dividends from Subsidiaries and Statutory Financial Information
Navigators
Insurance Company may pay dividends to the Company out of its statutory earned
surplus pursuant to statutory restrictions imposed under the New York insurance law. At December
31, 2008, the maximum amount available for the payment of dividends by Navigators Insurance Company
during 2009 without prior regulatory approval was $58.1 million. Navigators Insurance Company paid
$20.0 million in dividends to the Company in 2008 and $8.0 million in 2007. No dividends were paid
by Navigators Insurance Company in 2006.
The Insurance Companies statutory net income as filed with the regulatory authorities for
2008, 2007 and 2006 was $34.0 million, $68.5 million and $48.7 million, respectively. The
statutory surplus as filed with the regulatory authorities was $581.2 million and $578.7 million at
December 31, 2008 and 2007, respectively.
F-42
The NAIC has codified statutory accounting practices for insurance enterprises. As a result of
this process, the NAIC issued a revised statutory Accounting Practices and Procedures Manual that
became effective January 1, 2001 and is updated each year. We prepare our statutory basis
financial
statements in accordance with the most recently updated statutory manual subject to any
deviations prescribed or permitted by the New York Insurance Commissioner.
The significant differences between SAP and GAAP, as they relate to the Companys operations,
are that under SAP: (1) acquisition and commission costs are expensed when incurred while under
GAAP these costs are deferred and amortized as the related premium is earned; (2) bonds are stated
at amortized cost, while under GAAP bonds are classified as available-for-sale and reported at fair
value, with unrealized gains and losses recognized in other comprehensive income as a separate
component of stockholders equity; (3) certain deferred tax assets are not permitted to be
included in statutory surplus, while under GAAP deferred taxes are provided to reflect all
temporary differences between the carrying values and tax basis of assets and liabilities; (4)
unearned premiums and loss reserves are reflected net of ceded amounts while under GAAP the
unearned premiums and loss reserves are reflected gross of ceded amounts; (5) agents balances over
ninety days due are excluded from the balance sheet, and uncollateralized amounts due from
unauthorized reinsurers are deducted from surplus, while under GAAP they are restored to the
balance sheet, subject to the usual tests regarding recoverability.
As part of its general regulatory oversight process, the New York Insurance Department
conducts detailed examinations of the books, records and accounts of New York insurance companies
every three to five years. Navigators Insurance Company and Navigators Specialty Insurance Company
were examined by the New York Insurance Department for the years 2001 through 2004. The U.K.
Branch is required to maintain certain capital requirements under U.K. regulations and subject to
examination by the U.K. Financial Services Authority.
Note 14. Stock Option Plans, Stock Grants, Stock Appreciation Rights and Employee Stock Purchase
Plan
Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS
123, Accounting for Stock-Based Compensation and the modified prospective method of adoption
selected under the provisions of SFAS 148, Accounting for Stock-Based Compensation-Transition and
Disclosure.
At the Companys May 2005 Annual Meeting, the stockholders approved the 2005 Stock Incentive
Plan. The 2005 Stock Incentive Plan authorizes the issuance in the aggregate of 1,000,000
incentive stock options, non-incentive stock options, restricted shares and stock appreciation
rights for the Companys common stock. As of December 31, 2008, 657,760 of such awards were issued
leaving 342,240 awards available to be issued in subsequent periods. Upon the approval of the 2005
Stock Incentive Plan, no further awards are being issued under any of the Companys other stock
plans or the stock appreciation rights plan currently in effect. All stock options issued under
the 2005 Stock Incentive Plan are exercisable upon vesting for one share of the Companys common
stock and are granted at exercise prices no less than the fair market value of the Companys common
stock on the date of grant.
Stock grants are expensed as they vest. The pretax amounts charged to expense were $8.8
million, $5.3 million and $4.3 million in 2008, 2007 and 2006, respectively. In addition, $30,000
in 2008 and $25,000 in each of 2007 and 2006 of the Companys common stock was earned by each
non-employee director as a portion of the directors compensation for serving on the Companys
Board of Directors. The stock is issued in the first quarter of the year following the year of
service and is fully vested when issued. The expense for 2008, 2007 and 2006 for the stock earned
by directors was $210,000, $200,000 and $177,000, respectively.
F-43
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.
Unvested restricted stock grants outstanding at December 31, 2008, 2007 and 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock grants outstanding at
beginning of year |
|
|
391,866 |
|
|
|
250,149 |
|
|
|
99,708 |
|
Granted |
|
|
243,587 |
|
|
|
203,725 |
|
|
|
208,623 |
|
Vested |
|
|
(63,768 |
) |
|
|
(40,827 |
) |
|
|
(40,574 |
) |
Forfeited |
|
|
(13,636 |
) |
|
|
(21,181 |
) |
|
|
(17,608 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
558,049 |
|
|
|
391,866 |
|
|
|
250,149 |
|
|
|
|
|
|
|
|
|
|
|
The pretax amounts charged to expense for stock options were $235,000, $581,000 and $946,000
in 2008, 2007 and 2006, respectively. Stock options outstanding at December 31, 2008, 2007 and
2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
No. of |
|
|
Exercise |
|
|
No. of |
|
|
Exercise |
|
|
No. of |
|
|
Exercise |
|
|
|
Shares |
|
|
Prices |
|
|
Shares |
|
|
Prices |
|
|
Shares |
|
|
Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
beginning of year |
|
|
384,350 |
|
|
$ |
23.34 |
|
|
|
475,250 |
|
|
$ |
22.45 |
|
|
|
554,000 |
|
|
$ |
21.85 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(152,350 |
) |
|
$ |
19.78 |
|
|
|
(88,525 |
) |
|
$ |
18.38 |
|
|
|
(71,750 |
) |
|
$ |
17.30 |
|
Expired or forfeited |
|
|
(250 |
) |
|
$ |
29.11 |
|
|
|
(2,375 |
) |
|
$ |
29.11 |
|
|
|
(7,000 |
) |
|
$ |
28.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
end of year |
|
|
231,750 |
|
|
$ |
25.67 |
|
|
|
384,350 |
|
|
$ |
23.34 |
|
|
|
475,250 |
|
|
$ |
22.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of options
exercisable |
|
|
230,250 |
|
|
$ |
25.62 |
|
|
|
329,600 |
|
|
$ |
22.12 |
|
|
|
355,000 |
|
|
$ |
20.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
The following table summarizes information about options outstanding at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Average Remaining |
|
|
Average |
|
|
Exercisable |
|
|
Average |
|
Price Range |
|
Options |
|
|
Contract Life |
|
|
Exercise Price |
|
|
Options |
|
|
Exercise Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$10 to $15 |
|
|
11,875 |
|
|
|
1.7 |
|
|
$ |
10.50 |
|
|
|
11,875 |
|
|
$ |
10.50 |
|
$16 to $20 |
|
|
41,500 |
|
|
|
3.2 |
|
|
$ |
17.35 |
|
|
|
41,500 |
|
|
$ |
17.35 |
|
$21 to $30 |
|
|
156,875 |
|
|
|
4.9 |
|
|
$ |
27.96 |
|
|
|
156,875 |
|
|
$ |
27.96 |
|
$31 to $37 |
|
|
21,500 |
|
|
|
6.2 |
|
|
$ |
33.39 |
|
|
|
20,000 |
|
|
$ |
33.37 |
|
The Company has a Stock Appreciation Rights Plan which allows for the grant of up to
300,000 stock appreciation rights (SARs) at prices of no less than 90% of the fair market value
of the common stock. As a result of the approval of the 2005 Stock Incentive Plan, no further
awards are expected to be issued from the Stock Appreciation Rights Plan. The pre-tax amounts
charged to expense in 2008, 2007 and 2006 were $(0.6) million, $1.4 million and $0.6 million,
respectively.
Stock appreciation rights outstanding at December 31, 2008, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
SARs |
|
|
Prices |
|
|
SARs |
|
|
Prices |
|
|
SARs |
|
|
Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs outstanding at
beginning of year |
|
|
64,250 |
|
|
$ |
13.63 |
|
|
|
118,750 |
|
|
$ |
13.41 |
|
|
|
137,750 |
|
|
$ |
13.51 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(5,000 |
) |
|
$ |
10.50 |
|
|
|
(53,500 |
) |
|
$ |
12.98 |
|
|
|
(19,000 |
) |
|
$ |
14.16 |
|
Expired or forfeited |
|
|
|
|
|
|
|
|
|
|
(1,000 |
) |
|
$ |
22.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs outstanding at
end of year |
|
|
59,250 |
|
|
$ |
13.89 |
|
|
|
64,250 |
|
|
$ |
13.63 |
|
|
|
118,750 |
|
|
$ |
13.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of SARs
exercisable |
|
|
59,250 |
|
|
$ |
13.89 |
|
|
|
64,250 |
|
|
$ |
13.63 |
|
|
|
118,750 |
|
|
$ |
13.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
The Company offers an Employee Stock Purchase Plan (the ESPP) to all of its eligible
employees. The employee is offered the opportunity to purchase the Companys common stock at 90%
of fair market value at the lower of the price at the beginning or the end of each six month
offering period. Employees can invest up to 10% of their base compensation through payroll
withholding towards the purchase of the Companys common stock subject to the lesser of 1,000
shares or total market value of $25,000. There will be approximately 7,177 shares purchased in
2009 from funds withheld during the July 1, 2008 to December 31, 2008 offering period. There were
16,489 shares purchased in 2008 in the aggregate from funds withheld during the offering periods of
July 1, 2007 to December 31, 2007 and January 1, 2008 to June 30, 2008. The ESPP is compensatory
under SFAS 123 and therefore the Company is required to expense both the value of the 10% discount
and the look-back option which
provides for the more favorable price at either the beginning or end of the offering period.
The amount of expense recorded for 2008, 2007 and 2006 were $0.2 million, $0.2 million and $0.1
million, respectively.
Note 15. Retirement Plans
The Company sponsors a defined contribution plan covering substantially all its U.S.
employees. For 2008, contributions are equal to 7.5% (15% for 2007 and 2006) of each eligible
employees gross pay (plus bonus of up to $2,500) up to the amount permitted by certain Federal
regulations. Employees vest at 20% per year beginning at the end of their second year and an
additional 20% at the end of each subsequent year until being fully vested after six years of
service. The expense recorded for the plan, was $2.8 million, $3.0 million and $2.6 million in
2008, 2007 and 2006, respectively. The Company sponsors a similar defined contribution plan under
U.K. regulations for its U.K. employees. Contributions, which are fully vested when made, are
equal to 15% of each eligible employees gross base salary. The expense recorded for this plan was
$1.4 million, $1.9 million and $1.4 million for 2008, 2007 and 2006, respectively. Such expenses
are included in other operating expenses.
The Company has a 401(k) Plan for all eligible employees. Each eligible employee can
contribute a portion of their salary limited by certain Federal regulations. Beginning in 2008,
the Company matches 100% of the first 4% that each eligible employee contributes. In addition,
beginning in 2008 the Company has the discretion of contributing an additional 4% to each eligible
employees 401(k) Plan.
F-46
Note 16. Quarterly Financial Data (Unaudited)
Following is a summary of quarterly financial data for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
Sept. 30, |
|
|
Dec. 31, |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
|
($ in thousands, except net income per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
287,146 |
|
|
$ |
279,213 |
|
|
$ |
252,943 |
|
|
$ |
265,620 |
|
Net written premium |
|
|
187,722 |
|
|
|
174,287 |
|
|
|
140,318 |
|
|
|
159,288 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
155,740 |
|
|
|
162,703 |
|
|
|
154,040 |
|
|
|
171,493 |
|
Commission income |
|
|
261 |
|
|
|
467 |
|
|
|
8 |
|
|
|
269 |
|
Net investment income |
|
|
18,838 |
|
|
|
18,731 |
|
|
|
19,322 |
|
|
|
19,663 |
|
Net realized capital (losses) |
|
|
(76 |
) |
|
|
(7,976 |
) |
|
|
(5,516 |
) |
|
|
(24,731 |
) |
Other income (expense) |
|
|
11 |
|
|
|
1,010 |
|
|
|
(119 |
) |
|
|
(472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
174,774 |
|
|
|
174,935 |
|
|
|
167,735 |
|
|
|
166,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment
expenses incurred |
|
|
88,420 |
|
|
|
91,889 |
|
|
|
113,269 |
|
|
|
99,553 |
|
Commission expense |
|
|
20,948 |
|
|
|
23,490 |
|
|
|
22,357 |
|
|
|
22,990 |
|
Other operating expenses |
|
|
29,756 |
|
|
|
33,237 |
|
|
|
30,601 |
|
|
|
29,554 |
|
Interest expense |
|
|
2,217 |
|
|
|
2,217 |
|
|
|
2,218 |
|
|
|
2,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
141,341 |
|
|
|
150,833 |
|
|
|
168,445 |
|
|
|
154,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
expense (benefit) |
|
|
33,433 |
|
|
|
24,102 |
|
|
|
(710 |
) |
|
|
11,906 |
|
Income tax expense (benefit) |
|
|
10,183 |
|
|
|
6,681 |
|
|
|
(1,711 |
) |
|
|
1,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,250 |
|
|
$ |
17,421 |
|
|
$ |
1,001 |
|
|
$ |
10,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
19,556 |
|
|
$ |
810 |
|
|
$ |
(20,245 |
) |
|
$ |
31,353 |
|
|
Combined ratio |
|
|
89.2 |
% |
|
|
90.4 |
% |
|
|
107.9 |
% |
|
|
88.9 |
% |
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.38 |
|
|
$ |
1.04 |
|
|
$ |
0.06 |
|
|
$ |
0.60 |
|
Diluted |
|
$ |
1.36 |
|
|
$ |
1.03 |
|
|
$ |
0.06 |
|
|
$ |
0.59 |
|
The increase in 2008 revenues as compared to 2007 was primarily due to the increase in written
premium resulting from business expansion in our specialty and professional liability operations,
coupled with the retention of more of our premiums by purchasing less reinsurance. Net investment
income increased as the result of positive cash flow increasing the investment portfolio.
F-47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
Sept. 30, |
|
|
Dec. 31, |
|
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
|
($ in thousands, except net income per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
300,861 |
|
|
$ |
276,546 |
|
|
$ |
245,961 |
|
|
$ |
247,336 |
|
Net written premium |
|
|
173,019 |
|
|
|
161,350 |
|
|
|
159,102 |
|
|
|
152,325 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
139,046 |
|
|
|
145,617 |
|
|
|
156,038 |
|
|
|
161,276 |
|
Commission income |
|
|
408 |
|
|
|
486 |
|
|
|
117 |
|
|
|
725 |
|
Net investment income |
|
|
16,216 |
|
|
|
17,330 |
|
|
|
17,930 |
|
|
|
19,186 |
|
Net realized capital gains (losses) |
|
|
201 |
|
|
|
840 |
|
|
|
(66 |
) |
|
|
1,031 |
|
Other income (expense) |
|
|
(71 |
) |
|
|
(253 |
) |
|
|
298 |
|
|
|
304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
155,800 |
|
|
|
164,020 |
|
|
|
174,317 |
|
|
|
182,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment
expenses incurred |
|
|
81,192 |
|
|
|
79,739 |
|
|
|
88,019 |
|
|
|
91,642 |
|
Commission expense |
|
|
17,099 |
|
|
|
17,650 |
|
|
|
19,676 |
|
|
|
23,188 |
|
Interest expense |
|
|
26,289 |
|
|
|
28,608 |
|
|
|
27,902 |
|
|
|
27,610 |
|
Other operating expenses |
|
|
2,215 |
|
|
|
2,215 |
|
|
|
2,216 |
|
|
|
2,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
126,795 |
|
|
|
128,212 |
|
|
|
137,813 |
|
|
|
144,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
29,005 |
|
|
|
35,808 |
|
|
|
36,504 |
|
|
|
37,865 |
|
Income tax expense |
|
|
9,333 |
|
|
|
11,433 |
|
|
|
11,471 |
|
|
|
11,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
19,672 |
|
|
$ |
24,375 |
|
|
$ |
25,033 |
|
|
$ |
26,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
21,273 |
|
|
$ |
12,107 |
|
|
$ |
37,518 |
|
|
$ |
34,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
89.4 |
% |
|
|
86.4 |
% |
|
|
86.6 |
% |
|
|
87.7 |
% |
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.17 |
|
|
$ |
1.45 |
|
|
$ |
1.49 |
|
|
$ |
1.57 |
|
Diluted |
|
$ |
1.17 |
|
|
$ |
1.44 |
|
|
$ |
1.47 |
|
|
$ |
1.55 |
|
The increase in 2007 revenues as compared to 2006 was primarily due to the increase in
written premium resulting from business expansion in our specialty and professional liability
operations, coupled with the retention of more of our premiums by purchasing less reinsurance. Net
investment income increased as the result of positive cash flow increasing the investment portfolio
and the net proceeds of $123.5 million from the April 2006 debt offering.
F-48
SCHEDULE I
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUMMARY OF CONSOLIDATED INVESTMENTSOTHER THAN INVESTMENTS
IN RELATED PARTIES
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Cost or |
|
December 31, 2008 |
|
Fair Value |
|
|
Gains |
|
|
(Losses) |
|
|
Amortized Cost |
|
|
|
($ in thousands) |
|
U.S. Government Treasury and Agency
Bonds and foreign government bonds |
|
$ |
361,656 |
|
|
$ |
25,741 |
|
|
$ |
(145 |
) |
|
$ |
336,060 |
|
States, municipalities, and political
subdivisions |
|
|
614,609 |
|
|
|
12,568 |
|
|
|
(8,036 |
) |
|
|
610,077 |
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
299,775 |
|
|
|
10,930 |
|
|
|
(26 |
) |
|
|
288,871 |
|
Collateralized mortgage obligations |
|
|
56,743 |
|
|
|
|
|
|
|
(27,119 |
) |
|
|
83,862 |
|
Asset-backed securities |
|
|
29,436 |
|
|
|
5 |
|
|
|
(1,289 |
) |
|
|
30,720 |
|
Commercial mortgage-backed securities |
|
|
92,684 |
|
|
|
|
|
|
|
(20,350 |
) |
|
|
113,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
478,638 |
|
|
|
10,935 |
|
|
|
(48,784 |
) |
|
|
516,487 |
|
Corporate bonds |
|
|
188,869 |
|
|
|
1,398 |
|
|
|
(14,660 |
) |
|
|
202,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,643,772 |
|
|
|
50,642 |
|
|
|
(71,625 |
) |
|
|
1,664,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
51,802 |
|
|
|
1,266 |
|
|
|
(1,987 |
) |
|
|
52,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
1,457 |
|
|
|
|
|
|
|
|
|
|
|
1,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
220,684 |
|
|
|
|
|
|
|
|
|
|
|
220,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,917,715 |
|
|
$ |
51,908 |
|
|
$ |
(73,612 |
) |
|
$ |
1,939,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-1
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE NAVIGATORS GROUP, INC.
BALANCE SHEETS
(Parent Company)
($ in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
Cash and investments |
|
$ |
52,149 |
|
|
$ |
44,146 |
|
Investments in subsidiaries |
|
|
751,864 |
|
|
|
735,351 |
|
Goodwill and other intangible assets |
|
|
2,534 |
|
|
|
2,534 |
|
Other assets |
|
|
8,769 |
|
|
|
6,821 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
815,316 |
|
|
$ |
788,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7% Senior Notes due May 1, 2016 |
|
$ |
123,794 |
|
|
$ |
123,673 |
|
Accounts payable and other liabilities |
|
|
747 |
|
|
|
1,615 |
|
Accrued interest payable |
|
|
1,458 |
|
|
|
1,458 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
125,999 |
|
|
|
126,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.10 par value,
1,000,000 shares authorized, none issued |
|
|
|
|
|
|
|
|
Common stock, $.10 par value, 50,000,000 shares
authorized; issued and outstanding: 16,856,073 for
2008 (net of treasury shares) and 16,873,094 for 2007 |
|
|
1,708 |
|
|
|
1,687 |
|
Additional paid-in capital |
|
|
298,872 |
|
|
|
291,616 |
|
Treasury stock, at cost (224,754 shares at 12/31/08) |
|
|
(11,540 |
) |
|
|
|
|
Retained earnings |
|
|
406,776 |
|
|
|
355,084 |
|
Accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities
available-for-sale, net of tax |
|
|
(15,062 |
) |
|
|
10,186 |
|
Foreign currency translation adjustment, net of tax |
|
|
8,563 |
|
|
|
3,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
689,317 |
|
|
|
662,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
815,316 |
|
|
$ |
788,852 |
|
|
|
|
|
|
|
|
S-2
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
THE NAVIGATORS GROUP, INC.
STATEMENTS OF INCOME
(Parent Company)
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
1,354 |
|
|
$ |
1,877 |
|
|
$ |
1,478 |
|
Dividends received from wholly-owned
subsidiaries |
|
|
20,000 |
|
|
|
8,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
21,354 |
|
|
|
9,877 |
|
|
|
1,478 |
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
8,871 |
|
|
|
8,863 |
|
|
|
6,248 |
|
Other (income) expense |
|
|
1,016 |
|
|
|
(1,996 |
) |
|
|
2,072 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
9,887 |
|
|
|
6,867 |
|
|
|
8,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax (benefit) |
|
|
11,467 |
|
|
|
3,010 |
|
|
|
(6,842 |
) |
Income tax (benefit) |
|
|
(3,495 |
) |
|
|
(1,804 |
) |
|
|
(2,390 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before equity in undistributed net
income of wholly owned subsidiaries |
|
|
14,962 |
|
|
|
4,814 |
|
|
|
(4,452 |
) |
Equity in undistributed net income of wholly owned
subsidiaries |
|
|
36,730 |
|
|
|
90,806 |
|
|
|
77,015 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
51,692 |
|
|
$ |
95,620 |
|
|
$ |
72,563 |
|
|
|
|
|
|
|
|
|
|
|
S-3
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
THE NAVIGATORS GROUP, INC.
STATEMENTS OF CASH FLOWS
(Parent Company)
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
51,692 |
|
|
$ |
95,620 |
|
|
$ |
72,563 |
|
Adjustments to reconcile net income
to net cash (used in) provided by operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net (income) of wholly-
owned subsidiaries |
|
|
(56,730 |
) |
|
|
(98,806 |
) |
|
|
(77,015 |
) |
Dividends received from subsidiaries |
|
|
20,000 |
|
|
|
8,000 |
|
|
|
|
|
Other |
|
|
604 |
|
|
|
4,792 |
|
|
|
(5,505 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
15,566 |
|
|
|
9,606 |
|
|
|
(9,957 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
9,637 |
|
|
|
|
|
|
|
|
|
Purchases |
|
|
(13,500 |
) |
|
|
10,500 |
|
|
|
(20,137 |
) |
Investments in wholly-owned subsidiaries |
|
|
|
|
|
|
|
|
|
|
(100,000 |
) |
Net (increase) decrease in short-term investments |
|
|
2,432 |
|
|
|
(20,497 |
) |
|
|
5,792 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(1,431 |
) |
|
|
(9,997 |
) |
|
|
(114,345 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from debt offering |
|
|
|
|
|
|
|
|
|
|
123,538 |
|
Purchase of Treasury Stock |
|
|
(11,540 |
) |
|
|
|
|
|
|
|
|
Proceeds of stock issued from employee stock purchase plan |
|
|
963 |
|
|
|
606 |
|
|
|
536 |
|
Proceeds of stock issued from exercise of stock options |
|
|
3,014 |
|
|
|
1,627 |
|
|
|
1,265 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
(7,563 |
) |
|
|
2,233 |
|
|
|
125,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
6,572 |
|
|
|
1,842 |
|
|
|
1,037 |
|
Cash at beginning of year |
|
|
3,103 |
|
|
|
1,261 |
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year |
|
$ |
9,675 |
|
|
$ |
3,103 |
|
|
$ |
1,261 |
|
|
|
|
|
|
|
|
|
|
|
S-4
SCHEDULE III
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses |
|
|
Amortization |
|
|
|
|
|
|
|
|
|
Deferred |
|
|
for losses |
|
|
|
|
|
|
Other policy |
|
|
|
|
|
|
|
|
|
|
and loss |
|
|
of deferred |
|
|
|
|
|
|
|
|
|
policy |
|
|
and loss |
|
|
|
|
|
|
claims and |
|
|
Net |
|
|
Net |
|
|
adjustment |
|
|
policy |
|
|
Other |
|
|
Net |
|
|
|
acquisition |
|
|
adjustment |
|
|
Unearned |
|
|
benefits |
|
|
earned |
|
|
investment |
|
|
expenses |
|
|
acquisition |
|
|
operating |
|
|
written |
|
|
|
costs |
|
|
expenses |
|
|
premiums |
|
|
payable |
|
|
premium |
|
|
income (1) |
|
|
incurred |
|
|
costs (2) |
|
|
expenses (1) |
|
|
premium |
|
Year ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
$ |
33,308 |
|
|
$ |
1,359,231 |
|
|
$ |
348,824 |
|
|
$ |
|
|
|
$ |
463,298 |
|
|
$ |
63,544 |
|
|
$ |
275,767 |
|
|
$ |
55,752 |
|
|
$ |
92,297 |
|
|
$ |
472,688 |
|
Lloyds Operations |
|
|
14,310 |
|
|
|
494,433 |
|
|
|
131,841 |
|
|
|
|
|
|
|
180,678 |
|
|
|
11,655 |
|
|
|
117,364 |
|
|
|
34,033 |
|
|
|
30,961 |
|
|
|
188,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
47,618 |
|
|
$ |
1,853,664 |
|
|
$ |
480,665 |
|
|
$ |
|
|
|
$ |
643,976 |
|
|
$ |
75,199 |
|
|
$ |
393,131 |
|
|
$ |
89,785 |
|
|
$ |
123,258 |
|
|
$ |
661,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
$ |
30,840 |
|
|
$ |
1,201,595 |
|
|
$ |
336,261 |
|
|
$ |
|
|
|
$ |
443,456 |
|
|
$ |
58,261 |
|
|
$ |
256,652 |
|
|
$ |
52,490 |
|
|
$ |
81,053 |
|
|
$ |
478,018 |
|
Lloyds Operations |
|
|
21,055 |
|
|
|
447,169 |
|
|
|
133,220 |
|
|
|
|
|
|
|
158,521 |
|
|
|
10,524 |
|
|
|
83,940 |
|
|
|
25,123 |
|
|
|
29,356 |
|
|
|
167,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
51,895 |
|
|
$ |
1,648,764 |
|
|
$ |
469,481 |
|
|
$ |
|
|
|
$ |
601,977 |
|
|
$ |
68,785 |
|
|
$ |
340,592 |
|
|
$ |
77,613 |
|
|
$ |
110,409 |
|
|
$ |
645,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
$ |
24,578 |
|
|
$ |
1,079,379 |
|
|
$ |
292,803 |
|
|
$ |
|
|
|
$ |
329,723 |
|
|
$ |
47,723 |
|
|
$ |
191,740 |
|
|
$ |
36,412 |
|
|
$ |
62,459 |
|
|
$ |
376,179 |
|
Lloyds Operations |
|
|
17,122 |
|
|
|
528,176 |
|
|
|
122,293 |
|
|
|
|
|
|
|
138,600 |
|
|
|
7,694 |
|
|
|
78,447 |
|
|
|
21,375 |
|
|
|
23,296 |
|
|
|
144,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
41,700 |
|
|
$ |
1,607,555 |
|
|
$ |
415,096 |
|
|
$ |
|
|
|
$ |
468,323 |
|
|
$ |
55,417 |
|
|
$ |
270,187 |
|
|
$ |
57,787 |
|
|
$ |
85,755 |
|
|
$ |
520,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net investment income and other operating expenses reflect only such amounts attributable
to the Companys insurance operations. |
|
(2) |
|
Amortization of deferred policy acquisition costs reflects only such amounts attributable
to the Companys insurance operations. A portion of these costs is eliminated in consolidation. |
S-5
SCHEDULE IV
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
REINSURANCE
Written Premium
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded to |
|
|
Assumed |
|
|
|
|
|
|
Percentage |
|
|
|
Direct |
|
|
other |
|
|
from other |
|
|
Net |
|
|
of amount |
|
|
|
Amount |
|
|
companies |
|
|
companies |
|
|
amount |
|
|
assumed to net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property-Casualty |
|
$ |
1,016,521 |
|
|
$ |
423,307 |
|
|
$ |
68,401 |
|
|
$ |
661,615 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property-Casualty |
|
$ |
989,652 |
|
|
$ |
424,911 |
|
|
$ |
81,055 |
|
|
$ |
645,796 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property-Casualty |
|
$ |
904,863 |
|
|
$ |
449,983 |
|
|
$ |
65,927 |
|
|
$ |
520,807 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-6
SCHEDULE V
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
January 1, |
|
|
Charged (Credited) to |
|
|
Charged to |
|
|
Deductions |
|
|
December 31, |
|
Description |
|
2008 |
|
|
Costs and Expenses |
|
|
Other Accounts |
|
|
(Describe) |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
uncollectible
reinsurance |
|
$ |
9,394 |
|
|
$ |
2,411 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
11,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance in
deferred taxes |
|
$ |
6,348 |
|
|
$ |
(154 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
6,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-7
SCHEDULE VI
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
Deferred |
|
|
for losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment |
|
|
of deferred |
|
|
|
|
|
|
|
Affiliation |
|
policy |
|
|
and loss |
|
|
Discount, |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
expenses incurred related to |
|
|
policy |
|
|
Other |
|
|
Net |
|
with |
|
acquisition |
|
|
adjustment |
|
|
if any, |
|
|
Unearned |
|
|
earned |
|
|
investment |
|
|
Current |
|
|
Prior |
|
|
acquisition |
|
|
operating |
|
|
written |
|
Registrant |
|
costs |
|
|
expenses |
|
|
deducted |
|
|
premium |
|
|
premium |
|
|
income (1) |
|
|
year |
|
|
years |
|
|
costs (2) |
|
|
expenses (1) |
|
|
premium |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008 |
|
$ |
47,618 |
|
|
$ |
1,853,664 |
|
|
$ |
|
|
|
$ |
480,665 |
|
|
$ |
643,976 |
|
|
$ |
75,199 |
|
|
$ |
443,877 |
|
|
$ |
(50,746 |
) |
|
$ |
89,785 |
|
|
$ |
123,258 |
|
|
$ |
661,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
$ |
51,895 |
|
|
$ |
1,648,764 |
|
|
$ |
|
|
|
$ |
469,481 |
|
|
$ |
601,977 |
|
|
$ |
68,785 |
|
|
$ |
387,601 |
|
|
$ |
(47,009 |
) |
|
$ |
77,613 |
|
|
$ |
110,409 |
|
|
$ |
645,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006 |
|
$ |
41,700 |
|
|
$ |
1,607,555 |
|
|
$ |
|
|
|
$ |
415,096 |
|
|
$ |
468,323 |
|
|
$ |
55,417 |
|
|
$ |
287,401 |
|
|
$ |
(17,214 |
) |
|
$ |
57,787 |
|
|
$ |
85,755 |
|
|
$ |
520,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net investment income and
other operating expenses reflect only such amounts attributable
to the Companys Insurance Operations. |
|
(2) |
|
Amortization of deferred
policy acquisition costs reflects only such amounts attributable
to the Companys Insurance Operations. A portion of these costs is eliminated in
consolidation. |
S-8
INDEX TO EXHIBITS
|
|
|
|
|
|
|
|
|
Previously Filed and |
|
|
|
|
Incorporated Herein |
Exhibit No. |
|
Description of Exhibit |
|
by Reference to: |
|
3-1
|
|
Restated Certificate of Incorporation
|
|
Form S-8 filed July 26, 2002
(File No. 333-97183) |
3-2
|
|
Certificate of Amendment to the Restated Certificate of Incorporation
|
|
Form S-8 filed July 26, 2002
(File No. 333-97183) |
3-3
|
|
By-laws, as amended
|
|
Form S-1 (File No. 33-5667) |
3-4
|
|
Certificate of Amendment to the Restated Certificate of Incorporation
|
|
Form 10-Q for June 30, 2006 |
4-1
|
|
Specimen of Common Stock certificate, par value $0.10
per share
|
|
Form S-8 filed June 20, 2003
(File No. 333-106317) |
10-1
|
|
Management Agreement between Navigators Insurance Company
and Navigators Management Company, Inc. (formerly Somerset
Marine, Inc.)
|
|
Form S-1 (File No. 33-5667) |
10-2
|
|
Agreement between the Company and Navigators Management
Company, Inc. (formerly Somerset Marine, Inc.)
|
|
Form S-1 (File No. 33-5667) |
10-3*
|
|
Stock Option Plan
|
|
Form S-1 (File No. 33-5667) |
10-4*
|
|
Non-Qualified Stock Option Plan
|
|
Form S-4 (File No. 33-75918) |
10-5
|
|
Agreement with Bradley D. Wiley dated June 3, 1997
|
|
Form 10-K for December 31, 1997 |
10-6
|
|
Employment Agreement with Salvatore A. Margarella dated
March 1, 1999
|
|
Form 10-K for December 31, 1998 |
10-7
|
|
Employment Agreement with Stanley A. Galanski effective
March 26, 2001
|
|
Form 10-Q for March 31, 2001 |
10-8
|
|
Employment Agreement with R. Scott Eisdorfer dated
September 1, 1999
|
|
Form 10-K for December 31, 2002 |
10-9*
|
|
2002 Stock Incentive Plan
|
|
Proxy Statement for May 30, 2002 |
10-10*
|
|
Employee Stock Purchase Plan
|
|
Proxy Statement for May 29, 2003 |
10-11*
|
|
Executive Performance Incentive Plan
|
|
Proxy Statement for May 29, 2003 |
10-12
|
|
Form of Indemnity Agreement by the Company and the Selling
Stockholders (as defined therein)
|
|
Amendment No. 2 to Form S-3
dated October 1, 2003 (File No. 333-108424) |
10-13
|
|
Agreement with Paul J. Malvasio dated October 9, 2003
|
|
Form 10-K for December 31, 2003 |
10-14
|
|
Form of Stock Grant Award Certificate and Restricted Stock
Agreement for the 2002 Stock Incentive Plan (approved at Annual
Meeting of Shareholders held May 30, 2002)
|
|
Form 10-Q for September 30, 2004 |
10-15
|
|
Form of Option Award Certificate for the 2002 Stock Incentive
Plan (approved at Annual Meeting of Shareholders held May 30,
2002)
|
|
Form 10-Q for September 30, 2004 |
10-16
|
|
Agreement with Jane E. Keller
|
|
Form 10-Q for September 30, 2004 |
10-17
|
|
Common Stock Grant Award to Stanley A. Galanski under the
2002 Stock Incentive Plan
|
|
Form 8-K filed December 14, 2004 |
10-18
|
|
Commutation Agreement between Navigators Insurance Company
and Somerset Insurance Limited
|
|
Form 8-K filed January 18, 2005 |
10-19
|
|
Second Amended and Restated Credit Agreement among the
Company and the Lenders dated January 31, 2005
|
|
Form 8-K filed February 4, 2005 |
10-20*
|
|
2005 Stock Incentive Plan
|
|
Proxy Statement for May 20, 2005 |
10-21
|
|
Agreement with Elliot S. Orol
|
|
Form 10-Q for June 30, 2005 |
10-22
|
|
Agreement with John F. Kirby
|
|
Form 8-K filed July 7, 2006 |
10-23
|
|
Third Amended and Restated Credit Agreement among the
Company and the Lenders dated February 2, 2007
|
|
Form 8-K filed February 7, 2007 |
|
|
|
|
|
|
|
|
|
Previously Filed and |
|
|
|
|
Incorporated Herein |
Exhibit No. |
|
Description of Exhibit |
|
by Reference to: |
|
10-24
|
|
Paul J. Malvasio Letter Agreement and Retirement Agreement
|
|
Form 10-Q for March 31, 2008 |
10-25
|
|
Agreement with Francis W. McDonnell
|
|
Form 8-K filed July 29, 2008 |
11-1
|
|
Statement re Computation of Per Share Earnings
|
|
** |
21-1
|
|
Subsidiaries of Registrant
|
|
** |
23-1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
** |
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).
|
|
** |
|
|
|
* |
|
Compensatory plan. |
|
** |
|
Included herein. |