FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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x
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Annual Report Pursuant To
Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the fiscal year ended December 31, 2007
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
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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
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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ONE PENN PLAZA, New York, New York
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10119
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(Address of principal executive offices)
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(Zip code)
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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
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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 x
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 x
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes x No 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. x
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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 definitions of large
accelerated filer, accelerated filer and
smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer x
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do
not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No x
The aggregate market value of voting stock held by
non-affiliates as of June 30, 2007 was $726,934,000.
The number of common shares outstanding as of February 8,
2008 was 16,876,174.
Documents
Incorporated by reference
Portions of the Companys 2008 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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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 and the possibility that our estimates of losses from
Hurricanes Katrina, Rita and Wilma 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;
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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.
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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 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.
3
PART I
Item 1.
Description of 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 mean The Navigators Group, Inc. and
its subsidiaries, unless the context otherwise requires. The
term Parent or Parent Company is used to
mean The Navigators Group, Inc. without its subsidiaries.
We are an international insurance holding company focusing on
specialty products for niches within the overall
property/casualty insurance market. The Companys
underwriting segments consist of insurance company operations
and operations at Lloyds of London. Our largest product
line and most long-standing area of specialization is ocean
marine insurance. We have also developed specialty niches in
professional liability insurance and in specialty liability
insurance primarily consisting of contractors liability
and 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). We participate in the capacity of
Syndicate 1221 through two wholly-owned Lloyds corporate
members.
Marine
Insurance
Our marine insurance business is underwritten both through our
Insurance Companies and our Lloyds Operations. Navigators
Insurance Company obtained marine business through participation
with other unaffiliated insurers in a marine insurance pool
managed by the Navigators Agencies which are wholly-owned
insurance agency subsidiaries of the Company. Commencing with
the 2006 underwriting year, the marine pool was eliminated and,
therefore, substantially all of the marine business generated by
the Navigators Agencies for the marine pool is exclusively for
Navigators Insurance Company. Navigators Insurance
Companys net participation in the marine pool for the 2005
underwriting year was 85%.
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. During 2004, our U.K.
Branch commenced writing 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. Commencing in 2005 we also began to insure
customs bonds.
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 2007 and 2006 underwriting years through its wholly-owned
subsidiaries, Millennium Underwriting Ltd. and Navigators
Corporate Underwriters Ltd. Navigators provided 97.5% of
Syndicate 1221s capacity for the 2005 underwriting year.
We purchased the remaining 2.5% of Syndicate 1221s
capacity in 2005 which gave us the ability to provide 100% of
Syndicate 1221s capacity in the 2006 and subsequent
underwriting years. Our share of the premiums, losses and
expenses from Syndicate 1221 is included in our consolidated
results. The largest product line within our Lloyds marine
business is currently cargo and specie, and the other
significant product lines include marine liability, offshore
energy, bluewater hull, and assumed reinsurance of other marine
insurers on an excess of loss basis. Our regional agency
operation, Navigators Underwriting Limited, generates cargo and
engineering business primarily in the Manchester area of
England, which is not traditionally served by Lloyds. 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.
Beginning with the 2006 underwriting year, the Navigators
Agencies are reimbursed for their costs by the Insurance
Companies and the Lloyds Operations. For the 2005 and
prior underwriting years, the Navigators Agencies, which
produced business for the marine pool, received management fee
commissions on the gross marine premium earned and are entitled
to receive a 20% profit commission on the net underwriting
profits of the pool. The Navigators Agencies received management
fee commissions equal to 8.75% of the gross premium earned on
marine business written by the pool for the 2005 underwriting
year and 7.5% for the prior underwriting years. The Navigators
Agencies offices writing marine business for Navigators
Insurance Company are located in
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major insurance or port locations in Chicago, Houston, London,
New York, San Francisco and Seattle. In addition NUAL, a
Navigators Agency located in London, which manages Syndicate
1221, had received expense reimbursement and a profit commission
for underwriting years prior to 2006.
Specialty
Navigators Specialty, a division of one of the Navigators
Agencies, was acquired in 1999 and primarily writes general
liability insurance focusing on small general and artisan
contractors and other targeted commercial risks. We have
developed underwriting and claims expertise which 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-sized 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 which are general liability policies for owners and
developers of larger residential homes.
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. On May 17, 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 May 24, 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. Products that the division
expects to underwrite include property, general liability and
commercial automobile insurance.
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 Navigators Agencies.
Our principal product in this division is directors and officers
liability insurance, which we offer for both privately held and
small to mid-size publicly traded corporations. With respect to
public corporations, we currently target corporations with a
market capitalization of $2 billion or less for this
business. 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 150 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.
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
On May 9, 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.
European
Property Business
On October 10, 2006, the Company announced the
establishment of a U.K. based property team to generate
specialty business lines in the U.K. and throughout Europe. The
teams focus is on U.K. property-related commercial lines
in targeted business sectors. The business is written by
Syndicate 1221 and by the U.K. Branch of Navigators Insurance
Company.
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
5
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 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 was recently combined with 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 $1.09 billion at
December 31, 2007 for ceded paid and unpaid losses and loss
adjustment expenses and ceded unearned premiums based on insurer
financial strength ratings from A.M. Best was as follows:
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A.M. Best
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Rating
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Recoverable
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Percent
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Rating (1)
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Description
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Amounts
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to Total
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($ millions)
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A++, A+
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Superior
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$
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637.4
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59
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%
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A, A−
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Excellent
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408.3
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38
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%
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B++, B+
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Very good
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3.0
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0
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%(2)
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NR
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Not rated
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36.6
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3
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%(2)
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Total
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$
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1,085.3
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100
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%
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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 33% for B++ and B+ companies and 92%
for not rated companies which includes letters of credit, ceded
balances payable and other balances held by our Insurance
Companies and our Lloyds Operations.
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6
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 approximately 76.2% of our total recoverables)
together with the collateral held by us at December 31,
2007, 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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$
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20.5
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$
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95.6
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$
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116.1
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$
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13.6
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A+
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AMB
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(2)
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Folksamerica Reinsurance Company
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21.0
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88.7
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109.7
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45.7
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A−
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AMB
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General Reinsurance Corporation
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7.1
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89.7
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96.8
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A++
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AMB
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Everest Reinsurance Company
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14.6
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40.4
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55.0
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7.5
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A+
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AMB
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National Indemnity Company
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11.6
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37.8
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49.4
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11.3
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A++
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AMB
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Transatlantic Reinsurance Company
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15.6
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33.3
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48.9
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9.5
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A+
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AMB
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Munich Reinsurance America Inc.
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9.8
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32.1
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41.9
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11.5
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A+
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AMB
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Munchener Ruckversicherungs-Gesellschaft
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6.2
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33.6
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39.8
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8.6
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A+
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AMB
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Swiss Reinsurance Company (UK) Ltd.
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5.7
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30.7
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36.4
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8.1
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A+
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AMB
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Platinum Underwriters Re
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5.8
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27.7
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33.5
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3.5
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A
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AMB
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Arch Reinsurance Company
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3.8
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25.3
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29.1
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1.0
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A
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AMB
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Partner Reinsurance Company of the U.S.
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6.1
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21.9
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28.0
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3.9
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A+
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AMB
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Scor Holding (Switzerland) AG
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5.8
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20.1
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25.9
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4.5
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A−
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AMB
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Federal Insurance Co.
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5.7
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15.6
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21.3
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5.6
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A++
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AMB
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Berkley Insurance Company
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11.4
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9.5
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20.9
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5.6
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A+
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AMB
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Arch Reinsurance Limited
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5.5
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12.0
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17.5
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17.0
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A
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AMB
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Allianz Global Corporate & Specialty AG
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16.1
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16.1
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2.9
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A+
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AMB
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Hannover Ruckversicherung
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1.4
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13.2
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14.6
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1.3
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A
|
|
|
|
AMB
|
|
Ace Property and Casualty Insurance Company
|
|
|
2.3
|
|
|
11.9
|
|
|
14.2
|
|
|
0.5
|
|
|
A+
|
|
|
|
AMB
|
|
National Liability & Fire Insurance Company
|
|
|
0.1
|
|
|
12.3
|
|
|
12.4
|
|
|
|
|
|
A++
|
|
|
|
AMB
|
|
|
|
|
|
|
|
|
|
|
Top 20 Total
|
|
|
160.0
|
|
|
667.5
|
|
|
827.5
|
|
|
161.6
|
|
|
|
|
|
|
|
|
All Other
|
|
|
29.0
|
|
|
228.8
|
|
|
257.8
|
|
|
91.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
189.0
|
|
$
|
896.3
|
|
$
|
1,085.3
|
|
$
|
253.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Collateral includes letters of
credit, ceded balances payable and other balances held by our
Insurance Companies and our Lloyds Operations.
|
(2)
|
|
A.M. Best
|
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
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.
Approximately $167.7 million and $375.8 million of the
reinsurance recoverables for paid and unpaid losses at
December 31, 2007 and 2006, 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 $10.5 million due from reinsurers
in connection with our asbestos exposures of which
$6.2 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.
7
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.
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.
The following table presents an analysis of losses and loss
adjustment expenses for each year in the three-year period ended
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Net reserves for losses and LAE at beginning of year
|
|
$
|
696,116
|
|
|
$
|
578,976
|
|
|
$
|
463,788
|
|
|
Provision for losses and LAE for claims occurring in the current
year
|
|
|
387,601
|
|
|
|
287,401
|
|
|
|
239,436
|
|
(Decrease) in estimated losses and LAE for claims occurring in
prior years
|
|
|
(47,009
|
)
|
|
|
(17,214
|
)
|
|
|
(3,781
|
)
|
|
Incurred losses and LAE
|
|
|
340,592
|
|
|
|
270,187
|
|
|
|
235,655
|
|
|
Losses and LAE paid for claims occurring during:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(46,467
|
)
|
|
|
(19,710
|
)
|
|
|
(23,486
|
)
|
Prior years
|
|
|
(142,938
|
)
|
|
|
(133,337
|
)
|
|
|
(96,981
|
)
|
|
Losses and LAE payments
|
|
|
(189,405
|
)
|
|
|
(153,047
|
)
|
|
|
(120,467
|
)
|
|
Net reserves for losses and LAE at end of year
|
|
|
847,303
|
|
|
|
696,116
|
|
|
|
578,976
|
|
|
Reinsurance receivables on unpaid losses and LAE
|
|
|
801,461
|
|
|
|
911,439
|
|
|
|
979,015
|
|
|
Gross reserves for losses and LAE at end of year
|
|
$
|
1,648,764
|
|
|
$
|
1,607,555
|
|
|
$
|
1,557,991
|
|
|
8
The segment and line of business breakdown of prior years
net reserve deficiency (redundancy) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Insurance Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
(10,695
|
)
|
|
$
|
(4,800
|
)
|
|
$
|
1,912
|
|
Specialty
|
|
|
(12,091
|
)
|
|
|
(6,060
|
)
|
|
|
875
|
|
Professional Liability
|
|
|
(10,365
|
)
|
|
|
(1,223
|
)
|
|
|
(3,045
|
)
|
Other
|
|
|
(645
|
)
|
|
|
(649
|
)
|
|
|
(2,324
|
)
|
|
Subtotal Insurance Companies
|
|
|
(33,796
|
)
|
|
|
(12,732
|
)
|
|
|
(2,582
|
)
|
Lloyds Operations
|
|
|
(13,213
|
)
|
|
|
(4,482
|
)
|
|
|
(1,199
|
)
|
|
Total
|
|
$
|
(47,009
|
)
|
|
$
|
(17,214
|
)
|
|
$
|
(3,781
|
)
|
|
The following table presents the development of the loss and LAE
reserves for 1997 through 2007. 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 1997 and was not reported until
1999, the amount of such loss will appear as a deficiency in
both 1997 and 1998. 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.
The increase in gross loss reserves on the Companys 2007
and 2006 balance sheets of $41.2 million and
$49.6 million, respectively, primarily relate to incurred
losses for events occurring in those years less loss payments.
The amount of the increase was reduced by a decrease in gross
loss reserves related to Hurricanes Katrina and Rita of
$177.4 million in 2007 compared to 2006 and
$146.5 million in 2006 compared to 2005. The gross loss
reserves related to Hurricanes Katrina and Rita were
approximately 8.6% of the total December 31, 2007 gross
loss reserves and 19.9% of the total December 31, 2006
gross loss reserves. With the recording of these losses, the
Company assessed its reinsurance coverage, potential
receivables, and the recoverability of the receivables. Losses
incurred on business recently written are primarily covered by
reinsurance agreements written by companies with whom the
Company is currently doing reinsurance business and whose credit
the Company continues to assess in the normal course of business.
As part of our risk management process, we purchase reinsurance
to limit our liability on individual risks and to protect
against catastrophic loss. We purchase both quota share
reinsurance and excess of loss reinsurance. Quota share
reinsurance is often utilized on the lower layers of risk and
excess of loss reinsurance is used above the quota share
reinsurance to limit our net retention per risk. Net retention
means the amount of losses that we keep for our own account.
Once our initial reserve is established and our net retention is
exceeded, any adverse development will directly affect the gross
loss reserve, but would generally have no impact on our net
retained loss. Generally our limits of exposure are known with
greater certainty when estimating our net loss versus our gross
loss. This situation tends to create greater volatility in the
deficiencies and redundancies of the gross reserves as compared
to the net reserves.
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
1997
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
($ in thousands)
|
|
Net reserves for losses and LAE
|
|
$
|
139,841
|
|
|
$
|
150,517
|
|
|
$
|
170,530
|
|
|
$
|
174,883
|
|
|
$
|
202,759
|
|
|
$
|
264,647
|
|
|
$
|
374,171
|
|
$
|
463,788
|
|
$
|
578,976
|
|
$
|
696,116
|
|
$
|
847,303
|
Reserves for losses and LAE re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
136,458
|
|
|
|
159,897
|
|
|
|
165,536
|
|
|
|
180,268
|
|
|
|
209,797
|
|
|
|
323,282
|
|
|
|
370,335
|
|
|
460,007
|
|
|
561,762
|
|
|
649,107
|
|
|
|
Two years later
|
|
|
138,991
|
|
|
|
149,741
|
|
|
|
160,096
|
|
|
|
183,344
|
|
|
|
266,459
|
|
|
|
328,683
|
|
|
|
360,964
|
|
|
457,769
|
|
|
523,541
|
|
|
|
|
|
|
Three years later
|
|
|
129,592
|
|
|
|
142,229
|
|
|
|
156,322
|
|
|
|
232,530
|
|
|
|
266,097
|
|
|
|
321,213
|
|
|
|
377,229
|
|
|
432,988
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
123,038
|
|
|
|
138,495
|
|
|
|
194,924
|
|
|
|
227,554
|
|
|
|
256,236
|
|
|
|
334,991
|
|
|
|
362,227
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
121,208
|
|
|
|
176,226
|
|
|
|
190,830
|
|
|
|
218,982
|
|
|
|
264,431
|
|
|
|
325,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
158,195
|
|
|
|
172,688
|
|
|
|
185,075
|
|
|
|
225,031
|
|
|
|
260,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
155,607
|
|
|
|
169,294
|
|
|
|
188,055
|
|
|
|
221,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
154,299
|
|
|
|
172,256
|
|
|
|
187,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
156,696
|
|
|
|
171,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
156,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cumulative redundancy (deficiency)
|
|
|
(16,478
|
)
|
|
|
(20,817
|
)
|
|
|
(16,892
|
)
|
|
|
(46,658
|
)
|
|
|
(57,505
|
)
|
|
|
(60,602
|
)
|
|
|
11,944
|
|
|
30,800
|
|
|
55,435
|
|
|
47,009
|
|
|
|
Net cumulative paid as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
41,798
|
|
|
|
38,976
|
|
|
|
43,301
|
|
|
|
53,646
|
|
|
|
64,785
|
|
|
|
84,385
|
|
|
|
80,034
|
|
|
96,981
|
|
|
133,337
|
|
|
142,938
|
|
|
|
Two years later
|
|
|
64,301
|
|
|
|
63,400
|
|
|
|
71,535
|
|
|
|
91,352
|
|
|
|
112,746
|
|
|
|
133,911
|
|
|
|
140,644
|
|
|
180,121
|
|
|
219,125
|
|
|
|
|
|
|
Three years later
|
|
|
74,588
|
|
|
|
79,218
|
|
|
|
88,570
|
|
|
|
114,449
|
|
|
|
138,086
|
|
|
|
170,236
|
|
|
|
195,961
|
|
|
238,673
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
81,480
|
|
|
|
89,913
|
|
|
|
101,667
|
|
|
|
127,961
|
|
|
|
159,042
|
|
|
|
208,266
|
|
|
|
223,847
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
89,066
|
|
|
|
100,314
|
|
|
|
108,146
|
|
|
|
141,384
|
|
|
|
185,037
|
|
|
|
226,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
96,203
|
|
|
|
103,823
|
|
|
|
116,752
|
|
|
|
159,389
|
|
|
|
196,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
98,170
|
|
|
|
109,771
|
|
|
|
131,579
|
|
|
|
171,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
101,980
|
|
|
|
123,092
|
|
|
|
142,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
113,738
|
|
|
|
132,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
122,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability-end of year
|
|
|
278,432
|
|
|
|
342,444
|
|
|
|
391,094
|
|
|
|
357,674
|
|
|
|
401,177
|
|
|
|
489,642
|
|
|
|
724,612
|
|
|
966,117
|
|
|
1,557,991
|
|
|
1,607,555
|
|
|
1,648,764
|
Reinsurance recoverable
|
|
|
138,591
|
|
|
|
191,927
|
|
|
|
220,564
|
|
|
|
182,791
|
|
|
|
198,418
|
|
|
|
224,995
|
|
|
|
350,441
|
|
|
502,329
|
|
|
979,015
|
|
|
911,439
|
|
|
801,461
|
|
Net liability-end of year
|
|
|
139,841
|
|
|
|
150,517
|
|
|
|
170,530
|
|
|
|
174,883
|
|
|
|
202,759
|
|
|
|
264,647
|
|
|
|
374,171
|
|
|
463,788
|
|
|
578,976
|
|
|
696,116
|
|
|
847,303
|
Gross re-estimated latest
|
|
|
343,804
|
|
|
|
387,166
|
|
|
|
431,004
|
|
|
|
465,843
|
|
|
|
524,005
|
|
|
|
647,807
|
|
|
|
706,185
|
|
|
890,062
|
|
|
1,450,562
|
|
|
1,511,406
|
|
|
|
Re-estimated recoverable latest
|
|
|
187,485
|
|
|
|
215,832
|
|
|
|
243,582
|
|
|
|
244,302
|
|
|
|
263,741
|
|
|
|
322,558
|
|
|
|
343,958
|
|
|
457,074
|
|
|
927,021
|
|
|
862,299
|
|
|
|
|
|
|
|
Net re-estimated latest
|
|
|
156,319
|
|
|
|
171,334
|
|
|
|
187,422
|
|
|
|
221,541
|
|
|
|
260,264
|
|
|
|
325,249
|
|
|
|
362,227
|
|
|
432,988
|
|
|
523,541
|
|
|
649,107
|
|
|
|
Gross cumulative redundancy (deficiency)
|
|
|
(65,372
|
)
|
|
|
(44,722
|
)
|
|
|
(39,910
|
)
|
|
|
(108,169
|
)
|
|
|
(122,828
|
)
|
|
|
(158,165
|
)
|
|
|
18,427
|
|
|
76,055
|
|
|
107,429
|
|
|
96,149
|
|
|
|
|
10
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
|
|
|
|
|
|
|
|
|
|
|
Grand
|
|
|
Excluding
|
|
|
|
|
|
|
|
|
All
|
|
|
Lloyds
|
|
Year Ended
|
|
Total
|
|
|
Asbestos
|
|
|
Total
|
|
|
Asbestos
|
|
|
Other(1)
|
|
|
Operations
|
|
|
|
|
|
($ in thousands)
|
|
|
2006
|
|
$
|
96,149
|
|
|
$
|
95,369
|
|
|
$
|
47,632
|
|
|
$
|
780
|
|
|
$
|
46,852
|
|
|
$
|
48,517
|
|
2005
|
|
|
107,429
|
|
|
|
106,895
|
|
|
|
48,719
|
|
|
|
534
|
|
|
|
48,185
|
|
|
|
58,710
|
|
2004
|
|
|
76,055
|
|
|
|
58,112
|
|
|
|
67,970
|
|
|
|
17,943
|
|
|
|
50,027
|
|
|
|
8,085
|
|
2003
|
|
|
18,427
|
|
|
|
1,667
|
|
|
|
17,926
|
|
|
|
16,760
|
|
|
|
1,166
|
|
|
|
501
|
|
2002
|
|
|
(158,165
|
)
|
|
|
(97,088
|
)
|
|
|
(145,613
|
)
|
|
|
(61,077
|
)
|
|
|
(84,536
|
)
|
|
|
(12,552
|
)
|
2001
|
|
|
(122,828
|
)
|
|
|
(61,394
|
)
|
|
|
(111,613
|
)
|
|
|
(61,434
|
)
|
|
|
(50,179
|
)
|
|
|
(11,215
|
)
|
2000
|
|
|
(108,169
|
)
|
|
|
(46,487
|
)
|
|
|
(77,567
|
)
|
|
|
(61,682
|
)
|
|
|
(15,885
|
)
|
|
|
(30,602
|
)
|
1999
|
|
|
(39,910
|
)
|
|
|
21,883
|
|
|
|
(22,534
|
)
|
|
|
(61,793
|
)
|
|
|
39,259
|
|
|
|
(17,376
|
)
|
1998
|
|
|
(44,722
|
)
|
|
|
16,918
|
|
|
|
(31,641
|
)
|
|
|
(61,640
|
)
|
|
|
29,999
|
|
|
|
(13,081
|
)
|
1997
|
|
|
(65,372
|
)
|
|
|
(12,357
|
)
|
|
|
(63,111
|
)
|
|
|
(53,015
|
)
|
|
|
(10,096
|
)
|
|
|
(2,261
|
)
|
|
Net Cumulative
Redundancy (Deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Insurance Companies
|
|
|
|
|
|
|
|
|
|
|
Grand
|
|
|
Excluding
|
|
|
|
|
|
|
|
|
All
|
|
|
Lloyds
|
|
Year Ended
|
|
Total
|
|
|
Asbestos
|
|
|
Total
|
|
|
Asbestos
|
|
|
Other(1)
|
|
|
Operations
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
47,009
|
|
|
$
|
48,788
|
|
|
$
|
33,796
|
|
|
$
|
(1,779
|
)
|
|
$
|
35,575
|
|
|
$
|
13,213
|
|
2005
|
|
|
55,435
|
|
|
|
57,443
|
|
|
|
38,832
|
|
|
|
(2,008
|
)
|
|
|
40,840
|
|
|
|
16,603
|
|
2004
|
|
|
30,800
|
|
|
|
33,337
|
|
|
|
19,747
|
|
|
|
(2,537
|
)
|
|
|
22,284
|
|
|
|
11,053
|
|
2003
|
|
|
11,944
|
|
|
|
14,886
|
|
|
|
(4,343
|
)
|
|
|
(2,942
|
)
|
|
|
(1,401
|
)
|
|
|
16,287
|
|
2002
|
|
|
(60,602
|
)
|
|
|
(25,980
|
)
|
|
|
(68,206
|
)
|
|
|
(34,622
|
)
|
|
|
(33,584
|
)
|
|
|
7,604
|
|
2001
|
|
|
(57,505
|
)
|
|
|
(22,735
|
)
|
|
|
(56,807
|
)
|
|
|
(34,770
|
)
|
|
|
(22,037
|
)
|
|
|
(698
|
)
|
2000
|
|
|
(46,658
|
)
|
|
|
(11,794
|
)
|
|
|
(37,019
|
)
|
|
|
(34,864
|
)
|
|
|
(2,155
|
)
|
|
|
(9,639
|
)
|
1999
|
|
|
(16,892
|
)
|
|
|
18,077
|
|
|
|
(14,609
|
)
|
|
|
(34,969
|
)
|
|
|
20,360
|
|
|
|
(2,283
|
)
|
1998
|
|
|
(20,817
|
)
|
|
|
14,115
|
|
|
|
(16,447
|
)
|
|
|
(34,932
|
)
|
|
|
18,485
|
|
|
|
(4,370
|
)
|
1997
|
|
|
(16,478
|
)
|
|
|
18,471
|
|
|
|
(13,731
|
)
|
|
|
(34,949
|
)
|
|
|
21,218
|
|
|
|
(2,747
|
)
|
|
|
|
|
(1)
|
|
Contains cumulative loss
development for all active and run-off lines of business
exclusive of asbestos losses.
|
The 2006 consolidated grand total gross cumulative redundancy of
$96.1 million consisted of prior year savings of
$47.6 million from the Insurance Companies and
$48.5 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 due to favorable
loss trends 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.
The 2006 consolidated grand total net cumulative redundancy of
$47.0 million consisted of prior year savings of
$33.8 million from the Insurance Companies and
$13.2 million from business written by the Lloyds
Operations. The Insurance Companies net redundancy was
generated mainly from prior year savings of: $12.1 million
in the specialty construction liability business due to
favorable loss trends across most underwriting years and lower
than expected frequency in the 2003 to 2006 underwriting years,
$10.7 million for marine and energy business mostly from
the transport and liability products partially offset by
$1.9 million of net deficiency on our 2005 Katrina and Rita
hurricane estimates, and $10 million in professional
liability business from favorable D&O loss experience in
underwriting years 2005 and 2004. The net redundancy from the
Lloyds Operations of $13.2 million included
$3.4 million due to a review of the 2005 Hurricane Katrina
and Rita loss estimates, a release of approximately
$2.0 million following a review of open claim files for the
11
years 1998 to 2001, a
$4.6 million reduction in our 2004 underwriting year
estimates for the liability book due to favorable loss trends,
and the remaining $3.2 million was mostly for offshore
energy and liability business on business underwritten during
2002.
The 2005 consolidated grand total gross cumulative redundancy of
$107.4 million consisted of prior year savings of
$48.7 million from the Insurance Companies and
$58.7 million from business written by the Lloyds
Operations. The Insurance Companies redundancy was
generated mainly from prior year savings in the specialty
construction liability 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 Hurricane Katrina and Rita gross loss
estimates.
The 2005 consolidated grand total net cumulative redundancy of
$55.4 million was mostly due to prior year savings of
$38.8 million from the Insurance Companies due to the
favorable loss development in the specialty construction
liability and professional liability businesses, and
$16.6 million from marine and energy business written by
the Lloyds Operations, including the $3.4 million
decrease in the Hurricane Katrina and Rita net loss estimates.
The 2004 consolidated grand total gross cumulative reserve
redundancy of $76.1 million consisted of prior years
savings of $68.0 million from the Insurance Companies and
$8.1 million from marine and energy business written by the
Lloyds Operations. The Insurance Companys 2004 gross
loss reserve redundancy of $68.0 million was again due to
favorable development in the specialty construction liability
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 contributor to the
2003 gross consolidated reserve savings of $18.4 million
for 2003.
The 2004 consolidated grand total net cumulative reserve
redundancy of $30.8 million was generated mostly from 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
$11.9 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 $158.2 million and
$60.6 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 Navigators Agencies in the late 1970s and first
half of the 1980s.
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 $30.6 million and
$9.6 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.
The 1997 gross cumulative deficiency of $10.1 million for
the Insurance Companies in the All Other column
mostly resulted from adverse development in the onshore energy
business and from one large 1989 claim from a run-off book of
business which also adversely affected the years prior to 1997.
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.
12
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. We had 1,100 open claims on
our specialty construction liability policies at
December 31, 2007 compared to 1,060 at December 31,
2006.
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.
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. There were 1,047 professional liability
claims open at December 31, 2007 compared to 944 at
December 31, 2006.
The following table sets forth claims data and other information
related to subprime exposure for our professional liability
business. Our management believes that its reserves for losses
and loss adjustment exposure are adequate to cover the ultimate
costs for such loss contingencies related to subprime exposure
for our professional liability business.
Professional
Liability
Reported Claims or Notices of Potential Claims
Related to Subprime Exposure(1)
December 31, 2007
($ in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
Average
|
|
Average
|
|
Excess
|
|
|
Claims(2)
|
|
Gross Limit
|
|
Net Limit(3)
|
|
Attachment
|
|
|
Primary:
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O Securities/Other Claims
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
Excess:
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O Securities Claims
|
|
|
4
|
|
|
7,500
|
|
|
4,500
|
|
$
|
37,500
|
D&O Side A Securities Claims
|
|
|
2
|
|
|
5,000
|
|
|
3,500
|
|
|
137,500
|
Other Claims
|
|
|
2
|
|
|
10,000
|
|
|
5,500
|
|
|
35,000
|
|
|
|
|
Subtotal/Average
|
|
|
8
|
|
|
7,500
|
|
|
4,500
|
|
|
|
|
|
|
|
Total
|
|
|
8
|
|
$
|
7,500
|
|
$
|
4,500
|
|
|
|
|
|
|
|
(1)
|
|
There are a total of 29
professional liability insurance policies with $2.6 million
of gross written premium written by the Insurance Companies with
possible or potential exposure to sub-prime issues. None were
written by our Lloyds Operations.
|
(2)
|
|
Claims include all professional
liability policies written by the Insurance Companies. There are
no reported claims or notices of potential claims reported for
the Lloyds Operations. All policies are claims made.
Defense costs are inside the limits of liability.
|
(3)
|
|
Amounts are net of reinsurance.
|
13
The following tables set forth our net reported loss and LAE
loss reserves and net IBNR reserves by segment and line of
business as of December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
Net
|
|
Total
|
|
% of IBNR
|
|
|
|
Net Reported
|
|
IBNR
|
|
Net Loss
|
|
to Total Net
|
|
|
|
Reserves
|
|
Reserves
|
|
Reserves
|
|
Loss Reserves
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Insurance Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
93,110
|
|
$
|
103,229
|
|
$
|
196,339
|
|
|
52.6
|
%
|
Specialty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction liability
|
|
|
36,137
|
|
|
213,453
|
|
|
249,590
|
|
|
85.5
|
%
|
All other liability
|
|
|
28,608
|
|
|
65,361
|
|
|
93,969
|
|
|
69.6
|
%
|
|
|
|
|
|
Total Specialty
|
|
|
64,745
|
|
|
278,814
|
|
|
343,559
|
|
|
81.2
|
%
|
|
|
|
|
|
Professional liability
|
|
|
20,335
|
|
|
50,584
|
|
|
70,919
|
|
|
71.3
|
%
|
Other (includes run-off business)
|
|
|
13,147
|
|
|
11,717
|
|
|
24,864
|
|
|
47.1
|
%
|
|
|
|
|
|
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 Company
|
|
$
|
288,779
|
|
$
|
558,524
|
|
$
|
847,303
|
|
|
65.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
Net
|
|
Total
|
|
% of IBNR
|
|
|
|
Net Reported
|
|
IBNR
|
|
Net Loss
|
|
to Total Net
|
|
|
|
Reserves
|
|
Reserves
|
|
Reserves
|
|
Loss Reserves
|
|
|
|
|
|
($ in thousands)
|
|
|
Insurance Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
83,295
|
|
$
|
96,098
|
|
$
|
179,393
|
|
|
53.6
|
%
|
Specialty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction liability
|
|
|
40,070
|
|
|
166,179
|
|
|
206,249
|
|
|
80.6
|
%
|
All other liability
|
|
|
15,214
|
|
|
39,381
|
|
|
54,595
|
|
|
72.1
|
%
|
|
|
|
|
|
Total Specialty
|
|
|
55,284
|
|
|
205,560
|
|
|
260,844
|
|
|
78.8
|
%
|
|
|
|
|
|
Professional liability
|
|
|
14,013
|
|
|
37,558
|
|
|
51,571
|
|
|
72.8
|
%
|
Other (includes run-off business)
|
|
|
9,867
|
|
|
9,432
|
|
|
19,299
|
|
|
48.9
|
%
|
|
|
|
|
|
Total Insurance Companies
|
|
|
162,459
|
|
|
348,648
|
|
|
511,107
|
|
|
68.2
|
%
|
|
|
|
|
|
Lloyds Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
|
77,621
|
|
|
95,876
|
|
|
173,497
|
|
|
55.3
|
%
|
Other
|
|
|
3,103
|
|
|
8,409
|
|
|
11,512
|
|
|
73.0
|
%
|
|
|
|
|
|
Total Lloyds Operations
|
|
|
80,724
|
|
|
104,285
|
|
|
185,009
|
|
|
56.4
|
%
|
|
|
|
|
|
Total Company
|
|
$
|
243,183
|
|
$
|
452,933
|
|
$
|
696,116
|
|
|
65.1
|
%
|
|
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, 2007
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.
14
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,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Gross of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
Beginning gross reserves
|
|
$
|
37,171
|
|
|
$
|
56,838
|
|
$
|
78,421
|
|
Incurred loss & LAE
|
|
|
(780
|
)
|
|
|
246
|
|
|
(17,409
|
)
|
Calendar year payments
|
|
|
13,197
|
|
|
|
19,913
|
|
|
4,174
|
|
|
Ending gross reserves
|
|
$
|
23,194
|
|
|
$
|
37,171
|
|
$
|
56,838
|
|
|
Gross case loss reserves
|
|
$
|
16,014
|
|
|
$
|
29,291
|
|
$
|
48,958
|
|
Gross IBNR loss reserves
|
|
|
7,180
|
|
|
|
7,880
|
|
|
7,880
|
|
|
Ending gross reserves
|
|
$
|
23,194
|
|
|
$
|
37,171
|
|
$
|
56,838
|
|
|
Net of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
Beginning net reserves
|
|
$
|
21,381
|
|
|
$
|
30,372
|
|
$
|
31,394
|
|
Incurred loss & LAE
|
|
|
1,779
|
|
|
|
229
|
|
|
529
|
|
Calendar year payments
|
|
|
6,443
|
|
|
|
9,220
|
|
|
1,551
|
|
|
Ending net reserves
|
|
$
|
16,717
|
|
|
$
|
21,381
|
|
$
|
30,372
|
|
|
Net case loss reserves
|
|
$
|
9,715
|
|
|
$
|
13,678
|
|
$
|
22,669
|
|
Net IBNR loss reserves
|
|
|
7,002
|
|
|
|
7,703
|
|
|
7,703
|
|
|
Ending net reserves
|
|
$
|
16,717
|
|
|
$
|
21,381
|
|
$
|
30,372
|
|
|
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 2007, 2006 and 2005. The
reduction in gross incurred loss and LAE in 2005 relates to
settlement of large claims discussed above.
At December 31, 2007, the ceded asbestos paid and unpaid
recoverables were $10.5 million compared to
$23.5 million at December 31, 2006. During 2007, the
Company increased its provision for uncollectible reinsurance
for asbestos losses by $1.6 million which was recorded in
incurred losses. The Company also settled demands for
arbitration with two asbestos reinsurers.
Loss reserves for environmental losses generally consist of oil
spill claims on marine liability policies written in the
ordinary course of business. Net loss reserves for such
exposures are included in our marine loss reserves and not
separately identified.
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 $14.5 million for the cost of excess of loss
reinstatement premiums related to Hurricanes Katrina and Rita.
15
The following tables set forth our gross and net loss and LAE
reserves, incurred loss and LAE, and payments for Hurricanes
Katrina and Rita for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Gross of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning gross reserves
|
|
$
|
319,230
|
|
|
$
|
465,728
|
|
|
$
|
|
|
Incurred loss & LAE
|
|
|
(29,349
|
)
|
|
|
|
|
|
|
471,027
|
|
Calendar year payments
|
|
|
148,050
|
|
|
|
146,498
|
|
|
|
5,299
|
|
|
Ending gross reserves
|
|
$
|
141,831
|
|
|
$
|
319,230
|
|
|
$
|
465,728
|
|
|
Gross case loss reserves
|
|
$
|
94,959
|
|
|
$
|
172,916
|
|
|
$
|
210,579
|
|
Gross IBNR loss reserves
|
|
|
46,872
|
|
|
|
146,314
|
|
|
|
255,149
|
|
|
Ending gross reserves
|
|
$
|
141,831
|
|
|
$
|
319,230
|
|
|
$
|
465,728
|
|
|
Net of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning net reserves
|
|
$
|
10,003
|
|
|
$
|
19,408
|
|
|
$
|
|
|
Incurred loss & LAE
|
|
|
(1,909
|
)
|
|
|
|
|
|
|
22,288
|
|
Calendar year payments
|
|
|
3,575
|
|
|
|
9,405
|
|
|
|
2,880
|
|
|
Ending net reserves
|
|
$
|
4,519
|
|
|
$
|
10,003
|
|
|
$
|
19,408
|
|
|
Net case loss reserves
|
|
$
|
646
|
|
|
$
|
3,628
|
|
|
$
|
8,127
|
|
Net IBNR loss reserves
|
|
|
3,873
|
|
|
|
6,375
|
|
|
|
11,281
|
|
|
Ending net reserves
|
|
$
|
4,519
|
|
|
$
|
10,003
|
|
|
$
|
19,408
|
|
|
Our management believes that the estimates for the reserves for
losses and loss adjustment expenses are adequate to cover the
ultimate cost of losses and loss adjustment expenses on reported
and unreported claims. However, it is possible that the ultimate
liability may exceed or be less than such estimates. To the
extent that reserves are deficient or redundant, the amount of
such deficiency or redundancy is treated as a charge or credit
to earnings in the period in which the deficiency or redundancy
is identified. We continue to review all of our loss reserves,
including our asbestos reserves and Hurricanes Katrina and Rita
reserves, on a regular basis.
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 consoli dated 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 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
direction and control of their respective Boards of Directors
and our Finance Committee. The investment portfolio and the
performance of the investment managers are reviewed quarterly.
These investments must comply with the insurance laws of New
York State, the domiciliary state of Navigators Insurance
Company and 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 Lloyds Operations investments are subject to the
direction and control of the Board of Directors and the
Investment Committee of NUAL, as well as the Companys
Board of Directors and Finance Committee, and represent our
share of the investments held by Syndicate 1221. These
investments must comply with the rules and regulations imposed
by Lloyds and by certain overseas regulators. The
investment portfolio and the performance of the investment
managers are reviewed quarterly.
16
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, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Invested Assets and Cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies
|
|
$
|
1,421,365
|
|
|
$
|
1,203,842
|
|
|
$
|
934,878
|
|
Lloyds Operations
|
|
|
301,790
|
|
|
|
239,760
|
|
|
|
230,432
|
|
Parent Company
|
|
|
44,146
|
|
|
|
32,308
|
|
|
|
16,926
|
|
|
Consolidated
|
|
$
|
1,767,301
|
|
|
$
|
1,475,910
|
|
|
$
|
1,182,236
|
|
|
Net Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies
|
|
$
|
58,261
|
|
|
$
|
47,723
|
|
|
$
|
31,764
|
|
Lloyds Operations
|
|
|
10,524
|
|
|
|
7,694
|
|
|
|
5,061
|
|
Parent Company
|
|
|
1,877
|
|
|
|
1,478
|
|
|
|
244
|
|
|
Consolidated
|
|
$
|
70,662
|
|
|
$
|
56,895
|
|
|
$
|
37,069
|
|
|
Average Yield (amortized cost basis)
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies
|
|
|
4.50
|
%
|
|
|
4.61
|
%
|
|
|
4.25
|
%
|
Lloyds Operations
|
|
|
3.85
|
%
|
|
|
3.37
|
%
|
|
|
2.42
|
%
|
Parent Company
|
|
|
4.85
|
%
|
|
|
5.26
|
%
|
|
|
2.93
|
%
|
|
Consolidated
|
|
|
4.40
|
%
|
|
|
4.40
|
%
|
|
|
3.84
|
%
|
|
Invested assets have increased in 2007 and 2006 due to the
combination of cash flows from operations and the investment of
net proceeds from a debt issuance in the 2006 second quarter.
Investment income has increased in 2007, 2006 and 2005 due to a
combination of increased invested assets and rising investment
yields in the portfolio. The consolidated average investment
yield of the portfolio has increased due to the general increase
in market yields over the period and the increase in the
duration of the consolidated portfolio from 3.7 years at
January 1, 2005 to 4.3 years at December 31, 2007.
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 are
included in net investment income for the current period being
reported. The adjustments decreased net investment income and
net income by immaterial amounts in 2007, 2006 and 2005
All fixed maturity and equity securities are carried at fair
value. The fair value is based on market prices provided by
independent pricing services. At December 31, 2007 and
2006, all fixed-maturity and equity securities held by us were
classified as available-for-sale.
At December 31, 2007, the average quality of the investment
portfolio as rated by S&P and Moodys was AA/Aa with
an average duration of 4.3 years. All of the Companys
mortgage-backed and asset-backed securities, except for
$0.2 million, are rated
AAA/Aaa by
S&P and Moodys. The Company does not own any
collateralized debt obligations (CDOs), collateralized
loan obligations (CLOs) or asset-backed commercial paper.
17
The following tables set forth our cash and investments as of
December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
|
Unrealized
|
|
Unrealized
|
|
|
Cost or
|
December 31, 2007
|
|
Fair Value
|
|
Gains
|
|
(Losses)
|
|
|
Amortized Cost
|
|
|
|
($ in thousands)
|
|
U.S. Government Treasury bonds, GNMAs and foreign government
bonds
|
|
$
|
234,375
|
|
$
|
5,724
|
|
$
|
(337
|
)
|
|
$
|
228,988
|
States, municipalities, and political subdivisions
|
|
|
515,883
|
|
|
7,050
|
|
|
(657
|
)
|
|
|
509,490
|
Mortgage- and asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-guaranteed Government Agency bonds
|
|
|
29,818
|
|
|
342
|
|
|
(4
|
)
|
|
|
29,480
|
Mortgage-backed securities
|
|
|
232,869
|
|
|
1,824
|
|
|
(479
|
)
|
|
|
231,524
|
Collateralized mortgage obligations
|
|
|
134,899
|
|
|
524
|
|
|
(823
|
)
|
|
|
135,198
|
Commercial mortgage-backed securities
|
|
|
113,488
|
|
|
544
|
|
|
(1,031
|
)
|
|
|
113,975
|
Asset-backed securities
|
|
|
64,352
|
|
|
533
|
|
|
(79
|
)
|
|
|
63,898
|
|
Subtotal
|
|
|
575,426
|
|
|
3,767
|
|
|
(2,416
|
)
|
|
|
574,075
|
Corporate bonds
|
|
|
196,636
|
|
|
2,504
|
|
|
(1,804
|
)
|
|
|
195,936
|
|
Total fixed maturities
|
|
|
1,522,320
|
|
|
19,045
|
|
|
(5,214
|
)
|
|
|
1,508,489
|
|
Equity securitiescommon 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
|
Unrealized
|
|
Unrealized
|
|
|
Cost or
|
December 31, 2006
|
|
Fair Value
|
|
Gains
|
|
(Losses)
|
|
|
Amortized Cost
|
|
|
|
($ in thousands)
|
|
U.S. Government Treasury bonds, GNMAs and foreign government
bonds
|
|
$
|
194,210
|
|
$
|
969
|
|
$
|
(1,999
|
)
|
|
$
|
195,240
|
States, municipalities, and political subdivisions
|
|
|
361,859
|
|
|
2,719
|
|
|
(2,345
|
)
|
|
|
361,485
|
Mortgage- and asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-guaranteed Government Agency bonds
|
|
|
11,998
|
|
|
3
|
|
|
(88
|
)
|
|
|
12,083
|
Mortgage-backed securities
|
|
|
202,371
|
|
|
176
|
|
|
(2,518
|
)
|
|
|
204,713
|
Collateralized mortgage obligations
|
|
|
124,508
|
|
|
220
|
|
|
(358
|
)
|
|
|
124,646
|
Commercial mortgage-backed securities
|
|
|
94,117
|
|
|
330
|
|
|
(1,142
|
)
|
|
|
94,929
|
Asset-backed securities
|
|
|
68,566
|
|
|
213
|
|
|
(469
|
)
|
|
|
68,822
|
|
Subtotal
|
|
|
501,560
|
|
|
942
|
|
|
(4,575
|
)
|
|
|
505,193
|
Corporate bonds
|
|
|
201,088
|
|
|
1,672
|
|
|
(1,950
|
)
|
|
|
201,366
|
|
Total fixed maturities
|
|
|
1,258,717
|
|
|
6,302
|
|
|
(10,869
|
)
|
|
|
1,263,284
|
|
Equity securitiescommon stocks
|
|
|
37,828
|
|
|
6,297
|
|
|
(348
|
)
|
|
|
31,879
|
Cash
|
|
|
2,404
|
|
|
|
|
|
|
|
|
|
2,404
|
Short-term investments
|
|
|
176,961
|
|
|
|
|
|
|
|
|
|
176,961
|
|
Total
|
|
$
|
1,475,910
|
|
$
|
12,599
|
|
$
|
(11,217
|
)
|
|
$
|
1,474,528
|
|
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 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.
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, 2007, the Company owned three asset-backed
securities approximating $0.5 million with subprime
mortgage exposures. The securities are rated AAA/Aaa by S&P
and Moodys, respectively, and have an effective maturity
of 0.8 years. In addition, the Company owned eleven
collateralized mortgage obligations approximating
$20.9 million classified as
Alt-A which
is a credit category between prime and subprime. The Alt-A
bonds, also rated
AAA/Aaa,
have an effective maturity of 2.3 years. The Company is
receiving principal and/or interest payments on all of these
securities and believes such amounts are fully collectible.
18
The following three tables set forth our mortgage-backed
securities, collateralized mortgage obligations, and
asset-backed securities by those issued by FNMA and FHLMC and
the quality category (prime, Alt-A and subprime) for all other
such investments at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
Cost or
|
|
|
Fair
|
|
Unrealized
|
|
Unrealized
|
|
|
Amortized
|
|
|
Value
|
|
Gains
|
|
(Losses)
|
|
|
Cost
|
|
|
|
($ in thousands)
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA
|
|
$
|
173,773
|
|
$
|
1,539
|
|
$
|
(415
|
)
|
|
$
|
172,649
|
FHLMC
|
|
|
59,096
|
|
|
285
|
|
|
(64
|
)
|
|
|
58,875
|
Prime
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
232,869
|
|
$
|
1,824
|
|
$
|
(479
|
)
|
|
$
|
231,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
Cost or
|
|
|
Fair
|
|
Unrealized
|
|
Unrealized
|
|
|
Amortized
|
|
|
Value
|
|
Gains
|
|
(Losses)
|
|
|
Cost
|
|
|
|
($ in thousands)
|
|
Collateralized mortgage obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA
|
|
$
|
585
|
|
$
|
7
|
|
$
|
|
|
|
$
|
578
|
FNMA
|
|
|
11,359
|
|
|
154
|
|
|
|
|
|
|
11,205
|
FHLMC
|
|
|
13,455
|
|
|
169
|
|
|
|
|
|
|
13,286
|
Prime
|
|
|
88,628
|
|
|
180
|
|
|
(525
|
)
|
|
|
88,973
|
Alt-A
|
|
|
20,872
|
|
|
14
|
|
|
(298
|
)
|
|
|
21,156
|
Subprime
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
134,899
|
|
$
|
524
|
|
$
|
(823
|
)
|
|
$
|
135,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
Cost or
|
|
|
Fair
|
|
Unrealized
|
|
Unrealized
|
|
|
Amortized
|
|
|
Value
|
|
Gains
|
|
(Losses)
|
|
|
Cost
|
|
|
|
($ in thousands)
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA
|
|
$
|
3,347
|
|
$
|
148
|
|
$
|
|
|
|
$
|
3,199
|
FNMA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
|
|
|
60,553
|
|
|
385
|
|
|
(54
|
)
|
|
|
60,222
|
Alt-A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime
|
|
|
452
|
|
|
|
|
|
(25
|
)
|
|
|
477
|
|
Total
|
|
$
|
64,352
|
|
$
|
533
|
|
$
|
(79
|
)
|
|
$
|
63,898
|
|
19
The following table shows the amount and percentage of the
Companys fixed income portfolio at December 31, 2007
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
to
|
|
Rating Description
|
|
Rating
|
|
Amount
|
|
Total
|
|
|
|
|
|
($ in thousands)
|
|
|
Extremely Strong
|
|
AAA
|
|
$
|
1,296,480
|
|
|
77
|
%
|
Very Strong
|
|
AA
|
|
|
175,369
|
|
|
10
|
%
|
Strong
|
|
A
|
|
|
134,574
|
|
|
8
|
%
|
Adequate
|
|
BBB
|
|
|
62,970
|
|
|
4
|
%
|
Speculative
|
|
BB & below
|
|
|
252
|
|
|
0
|
%
|
Not Rated
|
|
NR
|
|
|
23,360
|
|
|
1
|
%
|
|
|
|
|
|
Total
|
|
AA(1)
|
|
$
|
1,693,005
|
|
|
100
|
%
|
|
|
|
|
(1)
|
|
weighted average quality rating
|
The Company owns securities credit enhanced by financial
guarantors that generally result in such securities receiving
the financial guarantors credit ratings by S&P and
Moodys. The following two tables set forth the amount of
credit enhanced securities in the fixed maturities portfolio by
category at December 31, 2007, 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
|
|
$
|
272,491
|
|
$
|
3,665
|
|
$
|
(287
|
)
|
|
$
|
269,113
|
Mortgage- and asset-backed securities
|
|
|
13,047
|
|
|
35
|
|
|
(10
|
)
|
|
|
13,022
|
Corporate bonds
|
|
|
2,194
|
|
|
3
|
|
|
(27
|
)
|
|
|
2,218
|
|
Total
|
|
$
|
287,732
|
|
$
|
3,703
|
|
$
|
(324
|
)
|
|
$
|
284,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
Cost or
|
|
Underlying
|
|
|
|
Fair
|
|
Unrealized
|
|
Unrealized
|
|
|
Amortized
|
|
Credit
|
|
|
|
Value
|
|
Gains
|
|
(Losses)
|
|
|
Cost
|
|
Rating
|
|
|
|
|
|
($ in thousands)
|
|
|
Financial guarantors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMBAC
|
|
$
|
63,003
|
|
$
|
629
|
|
$
|
(98
|
)
|
|
$
|
62,472
|
|
|
A
|
+
|
Assured Guaranty LTD
|
|
|
4,005
|
|
|
68
|
|
|
|
|
|
|
3,937
|
|
|
A
|
|
FGIC
|
|
|
54,812
|
|
|
631
|
|
|
(76
|
)
|
|
|
54,257
|
|
|
AA
|
−
|
Financial Security Assurance
|
|
|
72,046
|
|
|
1,339
|
|
|
(18
|
)
|
|
|
70,725
|
|
|
A
|
+
|
MBIA
|
|
|
76,433
|
|
|
918
|
|
|
(65
|
)
|
|
|
75,580
|
|
|
AA
|
−
|
Radian Group, Inc
|
|
|
7,681
|
|
|
78
|
|
|
(55
|
)
|
|
|
7,658
|
|
|
AA
|
−
|
XL Capital
|
|
|
9,752
|
|
|
40
|
|
|
(12
|
)
|
|
|
9,724
|
|
|
A
|
|
|
Total
|
|
$
|
287,732
|
|
$
|
3,703
|
|
$
|
(324
|
)
|
|
$
|
284,353
|
|
|
AA
|
−
|
|
The average underlying credit rating by bond insurer of the
insured securities rated by S&P or Moodys if such
securities did not have the credit enhancing insurance is
included in the Underlying Credit Rating column in
the above table. This average rating includes $16.2 million
of prerefunded municipal bonds which have an implied rating of
AAA but are not otherwise rated by S&P or Moodys.
Such average ratings exclude a total 44 of credit enhanced
securities approximating $30.9 million that do not have an
underlying rating consisting of 22 municipal bonds approximating
$15.7 million, 17 asset-backed securities approximating
$13.0 million and 5 corporate bonds approximating
$2.2 million.
If all or some of the companies providing the credit enhancing
insurance were no longer viable entities, management believes
that the credit enhanced securities are of sufficient quality to
not
20
default, or if some of the
securities did default, they would not have a material adverse
effect on the Companys financial condition or results of
operations. However, since the ratings would be reduced, it is
likely that the market values would decrease to reflect such
lower ratings.
We regularly review our fixed maturity and equity securities
portfolios to evaluate the necessity of recording impairment
losses for other-than-temporary declines in the fair value of
investments. In general, we focus our attention on those
securities whose market value was less than 80% of their cost or
amortized cost, as appropriate, for six or more consecutive
months. Other factors considered in evaluating potential
impairment include the current fair value as compared to cost or
amortized cost, as appropriate, our intent and ability to retain
the investment for a period of time sufficient to allow for an
anticipated recovery in value, specific credit issues related to
the issuer and current economic conditions.
Following is a list of the top ten corporate issuer holdings for
fixed maturities at fair value which approximates 2.4% of the
Companys fixed maturity portfolio. All such fixed
maturities are rated investment grade by S&P and
Moodys. These holdings represent direct obligations of the
issuer or its subsidiaries and exclude any government guaranteed
or government sponsored organizations, securitized, credit
enhanced or collateralized asset-backed or mortgage-backed
securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
% of
|
|
Top Ten Corporate Issuer Holdings
|
|
Fair Value
|
|
Gains/(Losses)
|
|
|
Fixed Maturities
|
|
|
|
|
|
($ in thousands)
|
|
|
Goldman Sachs Group, Inc.
|
|
$
|
5,403
|
|
($
|
27
|
)
|
|
|
0.4
|
%
|
General Electric Co.
|
|
|
4,525
|
|
|
108
|
|
|
|
0.3
|
%
|
Merrill Lynch & Co.
|
|
|
3,907
|
|
|
(80
|
)
|
|
|
0.3
|
%
|
Morgan Stanley
|
|
|
3,614
|
|
|
(23
|
)
|
|
|
0.2
|
%
|
Citigroup, Inc.
|
|
|
3,550
|
|
|
(72
|
)
|
|
|
0.2
|
%
|
Mellon Financial Corp.
|
|
|
3,202
|
|
|
6
|
|
|
|
0.2
|
%
|
American International Group, Inc.
|
|
|
3,162
|
|
|
42
|
|
|
|
0.2
|
%
|
AT&T, Inc.
|
|
|
3,061
|
|
|
(27
|
)
|
|
|
0.2
|
%
|
Commerzbank AG
|
|
|
2,995
|
|
|
51
|
|
|
|
0.2
|
%
|
Mitsubishi UFJ Financial Group, Inc
|
|
|
2,968
|
|
|
(72
|
)
|
|
|
0.2
|
%
|
|
21
The following table summarizes all securities in an unrealized
loss position at December 31, 2007 and December 31,
2006, 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, 2007
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Gross
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
Value
|
|
Loss
|
|
Value
|
|
Loss
|
|
|
|
($ in thousands)
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Treasury bonds, GNMAs and foreign government bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months
|
|
$
|
4,119
|
|
$
|
32
|
|
$
|
34,085
|
|
$
|
586
|
7-12 Months
|
|
|
|
|
|
|
|
|
20,806
|
|
|
86
|
> 12 Months
|
|
|
19,587
|
|
|
305
|
|
|
69,424
|
|
|
1,327
|
|
Subtotal
|
|
|
23,706
|
|
|
337
|
|
|
124,315
|
|
|
1,999
|
|
States, municipalities and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months
|
|
|
21,853
|
|
|
67
|
|
|
57,747
|
|
|
316
|
7-12 Months
|
|
|
6,045
|
|
|
115
|
|
|
6,661
|
|
|
80
|
> 12 Months
|
|
|
69,671
|
|
|
475
|
|
|
118,917
|
|
|
1,949
|
|
Subtotal
|
|
|
97,569
|
|
|
657
|
|
|
183,325
|
|
|
2,345
|
|
Mortgage- and asset-backed securities (excluding GNMAs)
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months
|
|
|
61,388
|
|
|
515
|
|
|
174,270
|
|
|
921
|
7-12 Months
|
|
|
48,496
|
|
|
423
|
|
|
10,444
|
|
|
65
|
> 12 Months
|
|
|
121,798
|
|
|
1,478
|
|
|
184,515
|
|
|
3,589
|
|
Subtotal
|
|
|
231,682
|
|
|
2,416
|
|
|
369,229
|
|
|
4,575
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months
|
|
|
20,722
|
|
|
255
|
|
|
27,719
|
|
|
185
|
7-12 Months
|
|
|
25,520
|
|
|
974
|
|
|
15,503
|
|
|
224
|
> 12 Months
|
|
|
38,865
|
|
|
575
|
|
|
66,014
|
|
|
1,541
|
|
Subtotal
|
|
|
85,107
|
|
|
1,804
|
|
|
109,236
|
|
|
1,950
|
|
Total Fixed Maturities
|
|
$
|
438,064
|
|
$
|
5,214
|
|
$
|
786,105
|
|
$
|
10,869
|
|
Equity securitiescommon stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months
|
|
$
|
26,257
|
|
$
|
3,494
|
|
$
|
3,265
|
|
$
|
158
|
7-12 Months
|
|
|
4,153
|
|
|
1,209
|
|
|
800
|
|
|
72
|
> 12 Months
|
|
|
53
|
|
|
1
|
|
|
782
|
|
|
118
|
|
Total Equity Securities
|
|
$
|
30,463
|
|
$
|
4,704
|
|
$
|
4,847
|
|
$
|
348
|
|
We analyze the unrealized losses quarterly to determine if any
are other-than-temporary. The above unrealized losses have been
determined to be temporary and 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. We held shares of a bond guarantee company
in our equity portfolio at December 31, 2007 which we
considered to be other-than-temporarily-impaired and recorded a
capital loss on such shares amounting to $0.7 million in
our 2007 fourth quarter. All shares were sold in January 2008.
There were no impairment losses recorded in our fixed maturity
or equity securities portfolios for the years ended
December 31, 2006 or 2005.
22
The following table shows the composition by NAIC rating and the
generally equivalent S&P and Moodys ratings of the
fixed maturity securities in our portfolio with gross unrealized
losses at December 31, 2007. Not all of the securities are
rated by S&P and/or Moodys:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Equivalent
|
|
Equivalent
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
NAIC
|
|
S&P
|
|
Moodys
|
|
|
|
Percent
|
|
|
|
|
Percent
|
|
Rating
|
|
Rating
|
|
Rating
|
|
Amount
|
|
to Total
|
|
|
Amount
|
|
to Total
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
1
|
|
AAA/AA/A
|
|
Aaa/Aa/A
|
|
$
|
4,630
|
|
|
89
|
%
|
|
$
|
417,260
|
|
|
95
|
%
|
2
|
|
BBB
|
|
Baa
|
|
|
584
|
|
|
11
|
%
|
|
|
20,804
|
|
|
5
|
%
|
3
|
|
BB
|
|
Ba
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
B
|
|
B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
CCC or lower
|
|
Caa or lower
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,214
|
|
|
100
|
%
|
|
$
|
438,064
|
|
|
100
|
%
|
|
At December 31, 2007, 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.
The scheduled maturity dates for fixed maturity securities by
the number of years until maturity at December 31, 2007 are
shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
to Total
|
|
|
Amount
|
|
to Total
|
|
|
|
|
|
($ in thousands)
|
|
|
Due in one year or less
|
|
$
|
61
|
|
|
|
1
|
%
|
|
$
|
29,818
|
|
|
7
|
%
|
Due after one year through five years
|
|
|
562
|
|
|
|
11
|
%
|
|
|
68,752
|
|
|
16
|
%
|
Due after five years through ten years
|
|
|
1,039
|
|
|
|
20
|
%
|
|
|
48,400
|
|
|
11
|
%
|
Due after ten years
|
|
|
1,136
|
|
|
|
22
|
%
|
|
|
59,412
|
|
|
14
|
%
|
Mortgage- and asset-backed securities
|
|
|
2,416
|
|
|
|
46
|
%
|
|
|
231,682
|
|
|
52
|
%
|
|
Total fixed income securities
|
|
$
|
5,214
|
|
|
|
100
|
%
|
|
$
|
438,064
|
|
|
100
|
%
|
|
Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations
with or without call or prepayment penalties. Due to the
periodic repayment of principal, the mortgage-backed and
asset-backed securities are estimated to have an effective
maturity of approximately 4.7 years.
23
Our realized capital gains and losses for the periods indicated
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
$
|
1,320
|
|
|
$
|
743
|
|
|
$
|
1,932
|
|
(Losses)
|
|
|
(1,749
|
)
|
|
|
(2,385
|
)
|
|
|
(1,680
|
)
|
|
|
|
|
(429
|
)
|
|
|
(1,642
|
)
|
|
|
252
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
|
3,626
|
|
|
|
714
|
|
|
|
1,149
|
|
(Losses)
|
|
|
(1,191
|
)
|
|
|
(98
|
)
|
|
|
(163
|
)
|
|
|
|
|
2,435
|
|
|
|
616
|
|
|
|
986
|
|
|
Net realized capital gains (losses)
|
|
$
|
2,006
|
|
|
$
|
(1,026
|
)
|
|
$
|
1,238
|
|
|
The following table details realized losses in excess of
$250,000 from sales and impairments during 2007, 2006 and 2005
and the related circumstances giving rise to the loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
Exceeded 20%
|
|
|
Date of
|
|
Proceeds
|
|
(Loss) on
|
|
|
|
|
|
Holdings at
|
|
Unrealized
|
|
of Cost or
|
Description
|
|
Sale/Impairment
|
|
from Sale
|
|
Sale
|
|
|
Impairment
|
|
|
December 31,
|
|
(Loss)
|
|
Amortized Cost
|
|
|
|
($ in thousands)
|
|
Year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MBIA, Inc.(1)
|
|
|
12/31/07
|
|
|
|
|
|
|
|
|
|
$
|
(655
|
)
|
|
$
|
627
|
|
|
|
|
|
1
|
CAPMARK Financial Gp.(2)
|
|
|
8/22/07
|
|
|
$
|
1,614
|
|
$
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIPS(3)
|
|
|
3/31/07
|
|
|
$
|
5,823
|
|
$
|
(335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIPS(3)
|
|
|
Various
|
|
|
$
|
15,418
|
|
$
|
(618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Bond insurer was considered
impaired at year-end due to losses related to the subprime
crisis.
|
(2)
|
|
CAPMARK Financial Group securities
were sold due to credit concerns.
|
(3)
|
|
Treasury inflation protection
securities were sold during 2007 and 2006 due to the widening
breakeven yield spread between TIPS and treasuries.
|
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
24
rated A (Excellentstable outlook) by
A.M. Best and A (Strongstable 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 (Excellentstable outlook) by
A.M. Best and A+ (Strongstable 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 (Adequatestable outlook) by S&P and Baa3
(Moderate credit riskstable 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.
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 in this
Form 10-K.
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, 2007.
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, 2007, 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.
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
25
our group that write business in the U.S. While these insurers
are protected by federal indemnification as provided for in
TRIA, there is a substantial deductible that must be met. This
deductible is based on a percentage of direct earned premiums
for commercial insurance lines from the previous calendar year,
equal to 7.0% during 2003, 10.0% in 2004 and 15.0% in 2005. For
losses in excess of an insurers deductible, the
participating insurers retain an additional 10.0% of the excess
losses (up to an annual aggregate cap of $100 billion),
with the balance to be covered by the Federal government. 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 potential 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.
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.
26
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.
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.
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 2007.
Employees
As of December 31, 2007, the Company had 401 full-time
employees of which 314 were located in the United States, 83 in
the United Kingdom and 4 in Belgium.
Available
Information on the Internet
This report and all other filings made by the Company with the
Securities and Exchange Commission (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
27
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.
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. For the year ended
December 31, 2007, our marine and energy business accounted
for approximately 49% of our gross written premiums, our
specialty business, consisting primarily of contractors
liability insurance, accounted for approximately 36% of our
gross written premiums, our professional liability business
accounted for approximately 13% of our gross written premiums
and the remaining 2% consists of our Inland Marine and European
Property 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, such as withdrawing from the
majority of our aviation business in late 1998, and grown when
pricing allowed an acceptable return, as with entering the
professional liability business in late 2001. 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,
personal umbrella insurance, commercial automobile insurance,
general liability for certain aspects of the hospitality
industry and personal lines warranty coverage on underground
fuel tanks excluding pollution coverage. 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.
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.
28
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.
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
29
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.
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 emphasis 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 net
unrealized gain position 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 net unrealized gain position 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.
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
30
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 2007. S&P also
reaffirmed its A (Strong) rating for Navigators
Insurance Company and Navigators Specialty Insurance Company in
2007.
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
Description of BusinessRatings 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.
31
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
RegulationUnited 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.
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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|
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actual or anticipated variations in our quarterly results of
operations, including the result of catastrophes,
|
|
changes in market valuations of companies in the insurance and
reinsurance industry,
|
|
changes in expectations of future financial performance or
changes in estimates of securities analysts,
|
|
issuances of common shares or other securities in the future,
|
|
the addition or departure of key personnel, and
|
|
announcements by us or our competitors of acquisitions,
investments or strategic alliances.
|
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, North Haven, CT, New York City, NY, San
Francisco, CA, Schaumburg, IL, Seattle, WA, Basingstoke, London
and Manchester, England and Antwerp, Belgium.
32
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.
On November 22, 2006, the Company filed a demand for
arbitration against Equitas, a lead reinsurer participating in
excess of loss reinsurance agreements, with respect to
unsatisfied loss payment recovery demands that the Company has
previously presented to Equitas (the Equitas
Arbitration). The recovery demands are for the 2005
settlement of two class action lawsuits involving large asbestos
claims (together, the 2005 Settled Claims), which
2005 Settled Claims are being paid through 2007. Equitas has not
indicated any dispute with respect to recoveries on related pro
rata reinsurance agreements for such 2005 Settled Claims or with
respect to excess of loss or pro rata reinsurance for the 2004
Settled Claim referred to below. The aggregate amount of excess
of loss recoveries due from Equitas for ceded paid and unpaid
losses on the 2005 Settled Claims is approximately
$2.7 million. On November 30, 2007, the Company and
Equitas entered into a Confidential Settlement Agreement and
Release with respect to the Equitas Arbitration.
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 2007.
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
2007 and 2006 were as follows:
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|
|
|
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|
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|
|
|
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2007
|
|
2006
|
|
|
|
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High
|
|
Low
|
|
Close
|
|
High
|
|
Low
|
|
Close
|
|
|
First Quarter
|
|
$
|
53.16
|
|
$
|
45.41
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|
$
|
50.17
|
|
$
|
49.99
|
|
$
|
43.00
|
|
$
|
49.60
|
Second Quarter
|
|
$
|
54.16
|
|
$
|
47.52
|
|
$
|
53.90
|
|
$
|
50.22
|
|
$
|
39.38
|
|
$
|
43.82
|
Third Quarter
|
|
$
|
55.45
|
|
$
|
45.86
|
|
$
|
54.25
|
|
$
|
48.40
|
|
$
|
39.49
|
|
$
|
48.01
|
Fourth Quarter
|
|
$
|
66.53
|
|
$
|
53.25
|
|
$
|
65.00
|
|
$
|
49.66
|
|
$
|
45.77
|
|
$
|
48.18
|
|
Information provided to us by our transfer agent and proxy
solicitor indicates that there are approximately 350 holders of
record and 6,000 beneficial holders of our common stock.
33
Five Year Stock
Performance Graph
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:
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|
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Base
|
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Cumulative Indexed Returns
|
|
|
Period
|
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Years Ending December 31,
|
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|
Company / Index
|
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2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
The Navigators Group, Inc.
|
|
|
100
|
|
|
134.51
|
|
|
131.20
|
|
|
190.02
|
|
|
209.93
|
|
|
283.22
|
S&P 500 Index
|
|
|
100
|
|
|
128.68
|
|
|
142.69
|
|
|
149.70
|
|
|
173.34
|
|
|
182.86
|
S&P 500 Property & Casualty Insurance
|
|
|
100
|
|
|
126.41
|
|
|
139.58
|
|
|
160.68
|
|
|
181.36
|
|
|
156.04
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The Five Year Stock Performance Graph and related Indexed
Returns table, as presented above, 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, 2002 (the Base Period) and
reinvestment of dividends to the extent declared. Cumulative
returns for each year subsequent to 2002 are measured as a
change from this Base Period.
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.
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Annual Return Percentage
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Years Ending December 31,
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Company / Index
|
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2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
The Navigators Group, Inc.
|
|
|
34.51
|
|
|
−2.46
|
|
|
44.84
|
|
|
10.48
|
|
|
34.91
|
S&P 500 Index
|
|
|
28.68
|
|
|
10.88
|
|
|
4.91
|
|
|
15.79
|
|
|
5.49
|
S&P 500 Property & Casualty Insurance
|
|
|
26.41
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|
|
10.42
|
|
|
15.11
|
|
|
12.87
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|
−13.96
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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.
34
Recent Sales of
Unregistered Securities
None
Use of Proceeds
from Public Offering of Debt Securities
On April 17, 2006, we completed our public offering of
$125 million of 7% senior notes due May 1, 2016 and
received net proceeds of $123.5 million. We contributed
$100 million to the capital and surplus of Navigators
Insurance Company with the remainder kept in the Holding Company
for general corporate purposes. Our use of the offering proceeds
has been previously reported in current reports on
Form 8-K
and our quarterly reports on
Form 10-Q
that we have filed with the SEC.
Purchases of
Equity Securities by the Issuer
In October, 2007 the Companys Board of Directors adopted a
stock repurchase program for up to $30 million of the
Companys common stock. Repurchases may be made from time
to time at prevailing prices in open market or privately
negotiated transactions through December 31, 2008. The
timing and amount of the repurchase transactions under the
program will depend on a variety of factors, including the
trading price of the stock, market conditions and corporate and
regulatory considerations. We have not repurchased any of our
common stock during the year ended December 31, 2007.
35
Item 6.
Selected Financial Data
The following table sets forth selected consolidated financial
data including consolidated financial information of the Company
for each of the years in the five-year period ended
December 31, 2007 derived from the Companys audited
consolidated financial statements. You should read the table in
conjunction with Item 7, Managements Discussion
and Analysis of Financial Condition and Results of
Operations, and Item 8, Financial Statements and
Supplementary Data, included in this Annual Report on
Form 10-K.
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|
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|
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Year Ended December 31,
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|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
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($ in thousands, except per share data)
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Operating Information:
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|
|
|
|
|
|
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|
Gross written premium
|
|
$
|
1,070,707
|
|
|
$
|
970,790
|
|
|
$
|
779,579
|
|
|
$
|
696,146
|
|
|
$
|
606,492
|
|
Net written premium
|
|
|
645,796
|
|
|
|
520,807
|
|
|
|
380,659
|
|
|
|
312,730
|
|
|
|
307,128
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|
Net earned premium
|
|
|
601,977
|
|
|
|
468,323
|
|
|
|
338,551
|
|
|
|
310,995
|
|
|
|
277,651
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|
Net investment income
|
|
|
70,662
|
|
|
|
56,895
|
|
|
|
37,069
|
|
|
|
26,795
|
|
|
|
19,550
|
|
Net realized capital gains (losses)
|
|
|
2,006
|
|
|
|
(1,026
|
)
|
|
|
1,238
|
|
|
|
922
|
|
|
|
1,875
|
|
Total revenues
|
|
|
676,659
|
|
|
|
526,594
|
|
|
|
385,219
|
|
|
|
343,029
|
|
|
|
304,718
|
|
Income before income taxes
|
|
|
139,182
|
|
|
|
106,617
|
|
|
|
33,754
|
|
|
|
52,092
|
|
|
|
2,792
|
|
Net income
|
|
|
95,620
|
|
|
|
72,563
|
|
|
|
23,564
|
|
|
|
34,865
|
|
|
|
7,685
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
5.69
|
|
|
$
|
4.34
|
|
|
$
|
1.74
|
|
|
$
|
2.77
|
|
|
$
|
0.81
|
|
Diluted
|
|
$
|
5.62
|
|
|
$
|
4.30
|
|
|
$
|
1.73
|
|
|
$
|
2.74
|
|
|
$
|
0.80
|
|
Average common shares (000s):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,812
|
|
|
|
16,722
|
|
|
|
13,528
|
|
|
|
12,598
|
|
|
|
9,446
|
|
Diluted
|
|
|
17,005
|
|
|
|
16,856
|
|
|
|
13,657
|
|
|
|
12,715
|
|
|
|
9,585
|
|
Combined loss & expense ratio(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
56.6
|
%
|
|
|
57.7
|
%
|
|
|
69.6
|
%
|
|
|
60.5
|
%
|
|
|
76.0
|
%
|
Expense ratio
|
|
|
30.9
|
%
|
|
|
30.1
|
%
|
|
|
31.7
|
%
|
|
|
31.7
|
%
|
|
|
30.6
|
%
|
|
Total
|
|
|
87.5
|
%
|
|
|
87.8
|
%
|
|
|
101.3
|
%
|
|
|
92.2
|
%
|
|
|
106.6
|
%
|
Balance Sheet Information (at end of year):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments and cash
|
|
$
|
1,767,301
|
|
|
$
|
1,475,910
|
|
|
$
|
1,182,236
|
|
|
$
|
854,933
|
|
|
$
|
693,592
|
|
Total assets
|
|
|
3,143,771
|
|
|
|
2,956,686
|
|
|
|
2,583,249
|
|
|
|
1,756,678
|
|
|
|
1,379,458
|
|
Gross loss and LAE reserves
|
|
|
1,648,764
|
|
|
|
1,607,555
|
|
|
|
1,557,991
|
|
|
|
966,117
|
|
|
|
724,612
|
|
Net loss and LAE reserves
|
|
|
847,303
|
|
|
|
696,116
|
|
|
|
578,976
|
|
|
|
463,788
|
|
|
|
374,171
|
|
Senior Notes
|
|
|
123,673
|
|
|
|
123,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
662,106
|
|
|
|
551,343
|
|
|
|
470,238
|
|
|
|
328,578
|
|
|
|
290,028
|
|
Common shares outstanding (000s)
|
|
|
16,873
|
|
|
|
16,736
|
|
|
|
16,617
|
|
|
|
12,657
|
|
|
|
12,535
|
|
Book value per share(2)
|
|
$
|
39.24
|
|
|
$
|
32.94
|
|
|
$
|
28.30
|
|
|
$
|
25.96
|
|
|
$
|
23.14
|
|
Statutory surplus of Navigators Insurance Company
|
|
$
|
578,668
|
|
|
$
|
524,188
|
|
|
$
|
356,484
|
|
|
$
|
235,561
|
|
|
$
|
210,324
|
|
|
|
|
|
(1)
|
|
Calculated based on earned premium.
|
(2)
|
|
Calculated as stockholders
equity divided by actual shares outstanding as of the date
indicated.
|
36
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 for niches 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 Lloyds underwriting agency
which manages Syndicate 1221. We participate in the capacity of
Syndicate 1221 through two wholly-owned Lloyds corporate
members.
While management takes into consideration a wide range of
factors in planning the Companys business strategy and
evaluating results of operations, there are certain factors that
management believes are fundamental to understanding how the
Company is managed. First, underwriting profit is consistently
emphasized as a primary goal, above premium growth.
Managements assessment of our trends and potential growth
in underwriting profit is the dominant factor in its decisions
with respect to whether or not to expand a business line, enter
into a new niche, product or territory or, conversely, to
contract capacity in any business line. In addition, management
focuses on managing the costs of our operations. Management
believes that careful monitoring of the costs of existing
operations and assessment of costs of potential growth
opportunities are important to our profitability. Access to
capital also has a significant impact on managements
outlook for our operations. The Insurance Companies
operations and ability to grow their business and take advantage
of market opportunities are particularly constrained by
regulatory capital requirements and rating agency assessments of
capital adequacy.
The discussions that follow include tables, which contain both
our consolidated and segment operating results for each of the
years in the threeyear period ended December 31,
2007. 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) divided by
earned premium. A combined ratio of less than 100% indicates an
underwriting profit and over 100% indicates an underwriting loss.
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
coverage requirements, such as workers compensation and personal
automobile insurance, because we do not believe our technical
expertise is of as much value in these types of businesses.
Examples of niches that have the characteristics we look for
include bluewater hull which provides coverage for physical
damage to, for example, highly valued cruise ships, and
directors and officers liability (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 derive their premiums primarily
from business written by the Navigators Agencies, which are
wholly-owned insurance underwriting agencies of the Company. The
Lloyds Operations derive their premiums from business
written by NUAL. Beginning in 2006, the Navigators Agencies
produce and manage business almost exclusively for the Insurance
Companies and are reimbursed for actual costs. Prior to 2006,
the Navigators Agencies received commissions and, in some cases,
profit commissions on the business produced on behalf of the
Insurance Companies and other unaffiliated insurers. NUAL is
reimbursed for its actual costs and, where applicable, profit
commissions on the business produced for Syndicate 1221.
Up until 2006, we have experienced generally beneficial market
changes in our lines of business. As a result of several large
industry losses in the second quarter of 2001, the marine
insurance market began to experience diminished capacity and
rate increases, initially in the offshore energy line of
business. The marine rate increases began to level off in 2004
and into 2005. As a result of the substantial insurance industry
losses resulting from
37
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 2007 average renewal 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 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 2008 pricing for marine
lines of business, including offshore energy, as additional
capacity continues to re-enter the marine market.
Specialty liability losses in 2001 to 2003, particularly for our
construction liability business, also resulted in diminished
capacity in the market in which we compete, as many former
competitors who lacked the expertise to selectively underwrite
this business have been forced to withdraw from the market
resulting in approximate rate increases of 13% in 2004 and 49%
in 2003. This was followed by a slight decline in rates of
approximately 1% in 2005. The 2006 year average renewal
rates for the construction liability business declined
approximately 6%, primarily due to additional competition in the
marketplace. This decline continued into 2007 with average
renewal rates declining approximately 9.7% for the fourth
quarter and 10.7% for the twelve months. We expect competitive
conditions will continue into 2008 resulting in continued
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. Average 2007 professional
liability renewal premium rates decreased approximately 5.0% for
the fourth quarter and 6.6% for the twelve months compared to
relatively level rates in both the 2006 and 2005 after
decreasing approximately 3% in 2004 which followed substantial
rate increases in 2003 and 2002, particularly for D&O
insurance. The 2007 D&O insurance renewal premium rates
decreased approximately 3.3% for the fourth quarter and 7.9% for
the twelve months following decreases of approximately 2% for
both 2006 and 2005 and a decrease of 10% in 2004. We anticipate
continuing declines in 2008 pricing given the overall favorable
industry underwriting results since 2002 for the professional
liability lines of business.
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
Description of BusinessGeneral.
Catastrophe Risk
Management
Our Insurance Companies and Lloyds Operations have
exposure to losses caused by hurricanes and other natural and
man-made catastrophic events. The frequency and severity of
catastrophes are unpredictable.
The extent of losses from a catastrophe is a function of both
the total amount of insured exposure in an area affected by the
event and the severity of the event. We continually assess our
concentration of underwriting exposures in catastrophe exposed
areas globally and attempt to manage this exposure through
individual risk selection and through the purchase of
reinsurance. We also use modeling and concentration management
tools that allow us to better monitor and control our
accumulations of potential losses from catastrophe exposures.
Despite these efforts, there remains uncertainty about the
characteristics, timing and extent of insured losses given the
nature of catastrophes. The occurrence of one or more severe
catastrophic events could have a material adverse effect on the
Companys results of operations, financial condition or
liquidity.
The Company has significant catastrophe exposures throughout the
world with the largest catastrophe exposure for offshore energy
risks due to hurricanes in the Gulf of Mexico. Based on an
assessment made at the end of 2007 taking into account the 2008
reinsurance structure, the Company believes that its 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 would approximate
$221 million and $32 million, respectively, including
the cost of reinsurance reinstatement premiums. There are a
number of significant assumptions and related variables related
to such an estimate including the size, force and path of the
hurricane, the various types of the insured risks exposed to the
event at the time the event occurs and the estimated costs or
damages incurred for each insured risk. There can be no
assurances that the gross and net loss amounts that the Company
could incur in such an event or in any hurricanes that may occur
in the Gulf of Mexico would not be materially higher than the
estimates discussed above given the significant uncertainties
with respect to such an estimate.
The occurrence of large loss events could reduce the reinsurance
coverage that is available to us and could weaken the financial
condition of our reinsurers, which could have a material adverse
effect on our results of operations. Although the reinsurance
agreements make the reinsurers liable to us to the extent the
risk is transferred or ceded to the reinsurer, ceded reinsurance
arrangements do not eliminate our obligation to pay claims to
our
38
policyholders. Accordingly, we bear credit risk with respect to
our reinsurers. Specifically, our reinsurers may not pay claims
made by us on a timely basis, or they may not pay some or all of
these claims. Either of these events would increase our costs
and could have a material adverse effect on our business. We are
required to pay the losses even if a reinsurer fails to meet its
obligations under the reinsurance agreement.
Hurricanes
Katrina, Rita and Wilma
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. Hurricane Wilma, which occurred in the 2005 fourth
quarter, also generated substantial losses to the property and
casualty industry but was not significant to either the marine
and energy line of business or to the Company in general, in
comparison to Hurricanes Katrina and Rita. There were no
significant hurricane losses in 2007 or 2006 that impacted the
marine and energy lines of business of the Company. See
Description of BusinessLoss Reserves included
herein for a discussion of the impact of the 2005 Hurricanes on
our financial results.
The impact of the 2005 Hurricanes on our 2005 financial results
follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane
|
|
|
Hurricane
|
|
|
|
|
|
|
Katrina
|
|
|
Rita
|
|
|
Total
|
|
|
|
|
|
($ in thousands)
|
|
|
Reduction in net earned premiums for reinstatement costs
|
|
$
|
11,149
|
|
|
$
|
3,316
|
|
|
$
|
14,465
|
|
Gross losses incurred
|
|
|
261,661
|
|
|
|
209,366
|
|
|
|
471,027
|
|
Reinsurance recoverable
|
|
|
249,838
|
|
|
|
198,901
|
|
|
|
448,739
|
|
|
Net losses incurred
|
|
|
11,823
|
|
|
|
10,465
|
|
|
|
22,288
|
|
|
Underwriting loss
|
|
$
|
22,972
|
|
|
$
|
13,781
|
|
|
$
|
36,753
|
|
|
After-tax net loss
|
|
$
|
14,932
|
|
|
$
|
8,958
|
|
|
$
|
23,890
|
|
|
Reduction in earnings per share
|
|
$
|
1.10
|
|
|
$
|
0.65
|
|
|
$
|
1.75
|
|
|
Effect on combined ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio
|
|
|
5.5
|
%
|
|
|
3.7
|
%
|
|
|
9.2
|
%
|
Expense ratio
|
|
|
1.0
|
%
|
|
|
0.3
|
%
|
|
|
1.3
|
%
|
|
Combined ratio
|
|
|
6.5
|
%
|
|
|
4.0
|
%
|
|
|
10.5
|
%
|
|
Hurricane Katrina struck Louisiana, Mississippi, Alabama and
surrounding areas on August 29, 2005 and Hurricane Rita
struck Texas and Louisiana and surrounding areas on
September 24, 2005. Both storms caused significant
destruction in these areas including offshore energy exposures
in the Gulf of Mexico. Our initial estimates of net losses
related to each hurricane were developed from a combination of
preliminary claims notifications received from brokers and
insureds, portfolio modeling based upon the storm tracks of
these hurricanes and the Companys own internal assessment
of the exposures insured under individual policies. A
substantial portion of the Companys estimated loss is due
to offshore energy exposures in the Gulf of Mexico.
Since the 2005 third quarter, the Company has been continually
monitoring the development of paid and reported claims
activities in relation to the estimate of ultimate losses
established for the 2005 Hurricanes. The overall effect on 2007
losses incurred for the Company from the 2005 Hurricanes reviews
was a benefit of $1.9 million. In addition, reinstatement
costs were reduced by $0.7 million which increased net
written and earned premium. See Segment Information
included herein for discussions of the effect that the changes
to the estimates related to the 2005 Hurricanes had on our
Insurance Companies and Lloyds Operations.
Management believes that should any adverse loss development for
gross claims occur, 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 2005
Hurricanes are materially greater than our estimated losses, our
business, results of operations and financial condition could be
materially adversely affected.
Approximately 25% of the gross losses incurred for the 2005
Hurricanes were generated by our Lloyds Operations from
assumed excess of loss marine reinsurance, a substantial portion
of which was retroceded. A large portion of this assumed
reinsurance was not renewed.
To the extent a hurricane similar in force and following similar
paths of Hurricane Katrina or Rita were to occur in 2008, the
Companys gross losses would be substantially less than in
2005 given the reductions in coverages provided by the Company
in the Gulf of Mexico but the net loss would be somewhat higher
given the reduced availability of excess of loss reinsurance
protection for such exposures coupled with the increased cost of
excess of loss reinstatement premiums.
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,
39
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, Description of
BusinessReserves, and Note 5, Reserves for
Losses and Loss Adjustment Expenses, to our consolidated
audited financial statements, all of which are included herein.
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 Description of 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.
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 (92%
direct in 2007, 93% direct in 2006 and 90% direct in
2005) 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. Of
the $1.07 billion of gross written premium recorded in
2007, $106.6 million or approximately 10% was estimated.
The estimated premium was 10% and 11% of the gross written
premium in 2006 and 2005, respectively. 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.
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.
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
40
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 at December 31, 2007 and 2006,
including disclosures regarding other-than-temporary declines in
investment value, see the Description of
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, market conditions and assessing value relative to
other comparable securities. Management of the Companys
investment portfolio is outsourced to third party investment
managers. While these investment managers may, at a given point
in time, believe that the preferred course of action is to hold
securities with unrealized losses that are considered temporary
until such losses are recovered, the dynamic nature of the
portfolio management may result in a subsequent decision to sell
the security and realize the loss, based upon a change in market
and other factors described above. The Company believes that
subsequent decisions to sell such securities are consistent with
the classification of the Companys portfolio as
available-for-sale.
Investment managers are required to notify management of rating
agency downgrades of securities in their portfolios as well as
any potential investment valuation issues at the end of each
quarter. Investment managers are also required to notify
management to the extent the investment manager is contemplating
a transaction or transactions that may result in a realized loss
above a certain threshold. Additionally, investment managers are
required to notify management if they are contemplating a
transaction or transactions that may result in any realized loss
up until a certain period beyond the close of a quarterly
accounting period.
Accounting for Lloyds Results. We
record our pro rata share of Syndicate 1221s assets,
liabilities, revenues and expenses, after making adjustments to
convert Lloyds accounting to U.S. GAAP. The most
significant GAAP adjustments relate to income recognition.
Lloyds syndicates determine underwriting results by year
of account at the end of three years. We record adjustments to
recognize underwriting results as incurred, including the
expected ultimate cost of losses incurred. These adjustments to
losses are based on actuarial analysis of syndicate accounts,
including forecasts of expected ultimate losses provided by the
syndicate. At the end of the Lloyds three-year period for
determining underwriting results for an account year, the
syndicate will close the account year by reinsuring outstanding
claims on that account year with the participants for the
accounts next underwriting year. The amount to close an
underwriting year into the next year is referred to as the
reinsurance to close (RITC). The RITC transaction,
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.
Translation of Foreign Currencies. Financial
statements of subsidiaries expressed in foreign currencies are
translated into U.S. dollars in accordance with the Statement of
Financial Accounting Standards No. (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. 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, 2007, 2006 and 2005. All earnings per share
data is presented on a per diluted share basis.
Net income for 2007, 2006 and 2005 was $95.6 million or
$5.62 per share, $72.6 million or $4.30 per share and
$23.6 million or $1.73 per share, respectively. The
2005 year was adversely impacted by Hurricanes Katrina and
Rita. When excluding the storm losses in 2005, underwriting
profitability during such periods, as measured by the
Companys combined ratios, has improved for the 2007, 2006
and 2005 business written. This improvement in underwriting
profitability reflects increasing premium rates as a result of
favorable market conditions beginning in late 2000 and
continuing to a lesser extent through 2004, and then leveling
off in 2005 and remaining level or declining slightly in 2006
and 2007 except for marine offshore energy rates which increased
beginning in the 2005 fourth quarter and into 2006 as a result
of Hurricanes Katrina and Rita. We experienced premium growth as
measured by net earned premium in 2007, 2006 and 2005 of 28.5%,
38.3% and 8.9%, respectively, due to the combination of
increased premium rates, business expansion and retaining more
business.
Consolidated stockholders equity increased 20.1% to
$662.1 million or $39.24 per share at December 31,
2007 compared to $551.3 million or $32.94 per share at
December 31, 2006. The increase was primarily due to 2007
net income of $95.6 million.
41
Cash flow from operations was $284.6 million,
$146.0 million and $247.8 million in 2007, 2006 and
2005, respectively, contributing to the growth in invested
assets and net investment income. Investment income increased
24.2% in 2007 to $70.6 million compared to 2006 and
increased 53.5% in 2006 to $56.9 million compared to 2005
as the result of both the increase in invested assets and the
increase in investment yields.
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 and received net proceeds
of $123.5 million of which $100 million was
contributed to the capital and surplus of Navigators Insurance
Company.
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.
2005
Results
The 2005 results of operations reflect improved financial
performance consistent with the 2004 year excluding
hurricane losses. The 2005 results of operations were adversely
impacted by an after-tax charge of $23.9 million, or $1.75
per share, from the losses resulting from Hurricanes Katrina and
Rita. The Companys combined ratio of 101.3% was negatively
impacted by 10.5 loss ratio points from Hurricanes Katrina and
Rita while being reduced by 1.1 loss ratio points from a net
redundancy of prior years loss reserves of
$3.8 million, or $0.18 per share.
During October 2005, the Company enhanced its financial position
and ability to take advantage of market opportunities for its
insurance operations by contributing $120.0 million of the
$123.8 million of the net proceeds from its equity offering
to the statutory surplus of the Insurance Companies.
Investment income increased as pre-tax investment yields rose to
3.8% in 2005 compared to 3.5% in 2004 and as the result of
investing the 2005 cash flow from operations and the proceeds
from the October 2005 equity offering in an investment
environment where interest rates were fluctuating but generally
increasing as the result of tightening monetary policy.
42
Revenues. Gross written premium increased to
$1.07 billion in 2007 from $970.8 million in 2006 and
from $779.6 million in 2005, increases of 10.2%, 25.0% and
12.0% in 2007, 2006 and 2005, respectively. The growth in gross
premiums over the three year period reflects a combination of
business expansion in both new and existing lines of business
coupled with premium rate changes on renewal policies. The
premium rate increases or decreases as noted below for marine,
specialty and professional liability are calculated primarily by
comparing premium amounts on policies that have renewed. The
premiums are judgmentally adjusted for exposure factors when
deemed significant and sometimes represent an aggregation of
several lines of business. The rate change calculations provide
an indicated pricing trend and are not meant to be a precise
analysis of the numerous factors that affect premium rates or
the adequacy of such rates to cover all underwriting costs and
generate an underwriting profit. The calculation can also be
affected quarter by quarter depending on the particular policies
and the number of policies that renew during that period. Due to
market conditions, these rate changes may or may not apply to
new business which generally would be more competitively priced
compared to renewal business. The following table sets forth our
gross and net written premium and net earned premium by segment
and line of business for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Gross
|
|
|
|
|
Net
|
|
Net
|
|
Gross
|
|
|
|
|
Net
|
|
Net
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Net
|
|
|
|
Written
|
|
|
|
|
Written
|
|
Earned
|
|
Written
|
|
|
|
|
Written
|
|
Earned
|
|
Written
|
|
|
|
|
|
Written
|
|
|
Earned
|
|
|
|
Premium
|
|
%
|
|
|
Premium
|
|
Premium
|
|
Premium
|
|
%
|
|
|
Premium
|
|
Premium
|
|
Premium
|
|
|
%
|
|
|
Premium
|
|
|
Premium
|
|
|
|
|
|
($ in thousands)
|
|
|
Insurance Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
266,647
|
|
|
24.9
|
%
|
|
$
|
137,724
|
|
$
|
133,452
|
|
$
|
266,351
|
|
|
27.4
|
%
|
|
$
|
128,920
|
|
$
|
115,093
|
|
$
|
233,688
|
|
|
|
29.9
|
%
|
|
$
|
88,591
|
|
|
$
|
83,499
|
|
Specialty
|
|
|
381,393
|
|
|
35.6
|
%
|
|
|
263,433
|
|
|
243,915
|
|
|
311,376
|
|
|
32.1
|
%
|
|
|
195,104
|
|
|
172,479
|
|
|
210,483
|
|
|
|
27.0
|
%
|
|
|
145,199
|
|
|
|
117,208
|
|
Professional Liability
|
|
|
99,556
|
|
|
9.3
|
%
|
|
|
59,117
|
|
|
55,149
|
|
|
92,760
|
|
|
9.6
|
%
|
|
|
51,192
|
|
|
41,437
|
|
|
86,929
|
|
|
|
11.2
|
%
|
|
|
35,626
|
|
|
|
30,118
|
|
Other(1)
|
|
|
26,750
|
|
|
2.5
|
%
|
|
|
17,744
|
|
|
10,940
|
|
|
2,359
|
|
|
0.2
|
%
|
|
|
963
|
|
|
714
|
|
|
(1,419
|
)
|
|
|
−0.2
|
%
|
|
|
(1,671
|
)
|
|
|
(779
|
)
|
|
Insurance Cos. Total
|
|
|
774,346
|
|
|
72.3
|
%
|
|
|
478,018
|
|
|
443,456
|
|
|
672,846
|
|
|
69.3
|
%
|
|
|
376,179
|
|
|
329,723
|
|
|
529,681
|
|
|
|
67.9
|
%
|
|
|
267,745
|
|
|
|
230,046
|
|
|
Lloyds Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
|
225,216
|
|
|
21.0
|
%
|
|
|
131,430
|
|
|
132,443
|
|
|
245,134
|
|
|
25.3
|
%
|
|
|
127,636
|
|
|
130,644
|
|
|
207,170
|
|
|
|
26.6
|
%
|
|
|
99,797
|
|
|
|
102,632
|
|
Professional Liability
|
|
|
34,281
|
|
|
3.2
|
%
|
|
|
23,349
|
|
|
17,659
|
|
|
21,759
|
|
|
2.2
|
%
|
|
|
9,016
|
|
|
4,237
|
|
|
6,646
|
|
|
|
0.9
|
%
|
|
|
2,613
|
|
|
|
1,240
|
|
Other(2)
|
|
|
36,864
|
|
|
3.5
|
%
|
|
|
12,999
|
|
|
8,419
|
|
|
31,051
|
|
|
3.2
|
%
|
|
|
7,976
|
|
|
3,719
|
|
|
34,567
|
|
|
|
4.4
|
%
|
|
|
10,504
|
|
|
|
4,633
|
|
|
Lloyds Ops Total
|
|
|
296,361
|
|
|
27.7
|
%
|
|
|
167,778
|
|
|
158,521
|
|
|
297,944
|
|
|
30.7
|
%
|
|
|
144,628
|
|
|
138,600
|
|
|
248,383
|
|
|
|
31.9
|
%
|
|
|
112,914
|
|
|
|
108,505
|
|
|
Intercompany elimination
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
1,515
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,070,707
|
|
|
100.0
|
%
|
|
$
|
645,796
|
|
$
|
601,977
|
|
$
|
970,790
|
|
|
100.0
|
%
|
|
$
|
520,807
|
|
$
|
468,323
|
|
$
|
779,579
|
|
|
|
100.0
|
%
|
|
$
|
380,659
|
|
|
$
|
338,551
|
|
|
|
|
|
(1)
|
|
Includes inland marine, European
property and run-off business.
|
(2)
|
|
Includes European property,
engineering and construction business.
|
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, 2007
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Marine liability
|
|
|
32
|
%
|
|
|
32
|
%
|
|
|
33
|
%
|
Offshore energy
|
|
|
19
|
%
|
|
|
20
|
%
|
|
|
18
|
%
|
Cargo
|
|
|
11
|
%
|
|
|
10
|
%
|
|
|
10
|
%
|
P&I
|
|
|
10
|
%
|
|
|
9
|
%
|
|
|
6
|
%
|
Bluewater hull
|
|
|
9
|
%
|
|
|
7
|
%
|
|
|
8
|
%
|
Transport
|
|
|
7
|
%
|
|
|
10
|
%
|
|
|
12
|
%
|
Craft/fishing vessels
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
6
|
%
|
Other
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
7
|
%
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
The marine gross written premium for 2007 increased 0.1%
compared to 2006 reflecting 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 14.0% 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. The 2005
marine gross written premium increased 11.1% principally due to
growth across several lines of business including cargo,
offshore energy and liability. The rate increases in the marine
business averaged approximately 1.5% in 2005. During 2005, we
also began to insure customs bonds.
43
Specialty Premium. The gross written premium for each of
the years in the three-year period ended December 31, 2007
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Construction liability
|
|
|
47
|
%
|
|
|
51
|
%
|
|
|
62
|
%
|
Excess casualty
|
|
|
15
|
%
|
|
|
17
|
%
|
|
|
12
|
%
|
Primary casualty
|
|
|
13
|
%
|
|
|
7
|
%
|
|
|
0
|
%
|
Commercial middle markets
|
|
|
12
|
%
|
|
|
12
|
%
|
|
|
11
|
%
|
Personal umbrella
|
|
|
10
|
%
|
|
|
11
|
%
|
|
|
12
|
%
|
Other
|
|
|
3
|
%
|
|
|
2
|
%
|
|
|
3
|
%
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
The 2007 gross written premium increased 22.5% 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 47.9% 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. During 2005 we
launched our excess casualty division in the first quarter and
expanded our presence in the hospitality business by writing
general liability insurance which includes liquor law liability
coverage for commercial establishments such as bars, restaurants
and night clubs contained in our middle markets unit. We also
commenced writing first party personal lines warranty coverage
on underground fuel tanks excluding pollution coverage. The
average renewal premium rate changes in the contractors
liability business decreased approximately 11%, 6% and 1% in
2007, 2006 and 2005, respectively, following increases of 13%
and 49% in 2004 and 2003, respectively.
Professional Liability Premium. The gross
written premium for each of the years in the three-year period
ended December 31, 2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
D&O (public and private)
|
|
|
68
|
%
|
|
|
68
|
%
|
|
|
54
|
%
|
Lawyers and other professionals
|
|
|
25
|
%
|
|
|
24
|
%
|
|
|
36
|
%
|
Architects and engineers
|
|
|
7
|
%
|
|
|
8
|
%
|
|
|
10
|
%
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
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 in all lines of our professional
liability business. Average 2007 renewal premium rates for this
business decreased approximately 6.6% after being relatively
level in 2006 and 2005. D&O average renewal premium rates
decreased approximately 7.9% in 2007, 2% in 2006 and 2.3% in
2005.
During the 2006 first quarter, the Company entered into an
agreement to acquire the renewal rights to the D&O and
employment practices liability policy portfolios of Genesis
Professional Liability Managers, Inc. (Genesis). The
transaction does not include any past or existing liabilities of
the policy portfolios. The Company pays an annual override or
fee to Genesis based on gross written premium for a two year
period to the extent the Genesis business is underwritten and
renewed by the Company.
Other Premium. Other premium includes domestic inland
marine business and European property business written by the
U.K. Branch, which were both started by the Company in 2006.
Lloyds
Operations Gross Written Premium
Marine Premium. The gross written premium for
each of the years in the three-year period ended
December 31, 2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Cargo and specie
|
|
|
39
|
%
|
|
|
43
|
%
|
|
|
36
|
%
|
Offshore energy
|
|
|
22
|
%
|
|
|
24
|
%
|
|
|
15
|
%
|
Marine liability
|
|
|
21
|
%
|
|
|
19
|
%
|
|
|
19
|
%
|
Assumed reinsurance
|
|
|
11
|
%
|
|
|
7
|
%
|
|
|
9
|
%
|
Hull
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
5
|
%
|
Other
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
16
|
%
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
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 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. In September 2005, the Company purchased the
remaining outstanding 2.5% interest of Syndicate 1221s
stamp capacity for the 2006 underwriting year.
The average renewal premium rate decreased approximately 1% in
2007 and increased approximately 13% and 3% in 2006 and 2005,
respectively. The 2006 increase started in the 2005 fourth
quarter in the offshore energy business resulting from losses
caused by Hurricanes Katrina and Rita.
In January 2005, we formed Navigators NV, a subsidiary of NUAL.
Navigators NV is located in Antwerp, Belgium, and writes
transport liability, cargo and marine liability business on
behalf of Syndicate 1221.
Professional Liability Premium. Syndicate 1221 commenced
writing professional liability business during the second
quarter of 2005. The 2007 gross written premium increased 57.5%
to $34.3 million, due to continued expansion and geographic
diversification of the book and consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
E&O
|
|
|
52
|
%
|
|
|
52
|
%
|
|
|
0
|
%
|
D&O (public and private)
|
|
|
48
|
%
|
|
|
48
|
%
|
|
|
100
|
%
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Other Premium. Other premium consists of gross written
premium for European property business, engineering and
construction business which provides coverage for construction
projects including machinery, equipment and loss of use due to
44
delays and of premium for onshore energy business which
principally focuses on the oil and gas, chemical and
petrochemical industries with coverages primarily for property
damage and business interruption.
Ceded Written Premium. In the ordinary course of
business, we reinsure certain insurance risks with unaffiliated
insurance companies for the purpose of limiting our maximum loss
exposure, protecting against catastrophic losses, and
maintaining desired ratios of net premiums written to statutory
surplus. The relationship of ceded to written premium varies
based upon the types of business written and whether the
business is written by the Insurance Companies or the
Lloyds Operations.
The following table sets forth our ceded written premium by
segment and major line of business for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
|
% of
|
|
|
|
Ceded
|
|
Gross
|
|
|
Ceded
|
|
Gross
|
|
|
Ceded
|
|
Gross
|
|
|
|
Written
|
|
Written
|
|
|
Written
|
|
Written
|
|
|
Written
|
|
Written
|
|
|
|
Premium
|
|
Premium
|
|
|
Premium
|
|
Premium
|
|
|
Premium
|
|
Premium
|
|
|
|
|
|
($ in thousands)
|
|
|
Insurance Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
128,923
|
|
|
48.3
|
%
|
|
$
|
137,431
|
|
|
51.6
|
%
|
|
$
|
145,097
|
|
|
62.1
|
%
|
Specialty
|
|
|
117,960
|
|
|
30.9
|
%
|
|
|
116,272
|
|
|
37.3
|
%
|
|
|
65,284
|
|
|
31.0
|
%
|
Professional Liability
|
|
|
40,439
|
|
|
40.6
|
%
|
|
|
41,568
|
|
|
44.8
|
%
|
|
|
51,303
|
|
|
59.0
|
%
|
Other (includes run-off)
|
|
|
9,006
|
|
|
33.7
|
%
|
|
|
1,396
|
|
|
59.2
|
%
|
|
|
252
|
|
|
NM
|
|
|
Subtotal
|
|
|
296,328
|
|
|
38.3
|
%
|
|
|
296,667
|
|
|
44.1
|
%
|
|
|
261,936
|
|
|
49.5
|
%
|
|
Lloyds Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
|
93,786
|
|
|
41.6
|
%
|
|
|
117,498
|
|
|
47.9
|
%
|
|
|
107,373
|
|
|
51.8
|
%
|
Professional Liability
|
|
|
10,932
|
|
|
31.9
|
%
|
|
|
12,743
|
|
|
58.6
|
%
|
|
|
4,033
|
|
|
60.7
|
%
|
Other
|
|
|
23,865
|
|
|
64.7
|
%
|
|
|
23,075
|
|
|
74.3
|
%
|
|
|
24,063
|
|
|
69.6
|
%
|
|
Subtotal
|
|
|
128,583
|
|
|
43.4
|
%
|
|
|
153,316
|
|
|
51.5
|
%
|
|
|
135,469
|
|
|
54.5
|
%
|
|
Intercompany elimination
|
|
|
|
|
|
NM
|
|
|
|
|
|
|
NM
|
|
|
|
1,515
|
|
|
100.0
|
%
|
|
Total
|
|
$
|
424,911
|
|
|
39.7
|
%
|
|
$
|
449,983
|
|
|
46.4
|
%
|
|
$
|
398,920
|
|
|
51.2
|
%
|
|
NM = not meaningful
The ratio of total ceded written premium to total gross written
premium in 2007 was 39.7% compared to 46.4% for 2006 and 51.2%
for 2005. The Insurance Companies marine and Lloyds
Operations 2005 ceded written premium includes
$14.4 million of reinstatement premium related to the
losses from the 2005 Hurricanes.
Excluding the effect of ceded reinstatement premiums for
hurricane losses for 2005, the ratio of ceded written premium to
gross written premium was 49.3%. The decline in the ratio of
ceded written premium to gross written premium in 2007 compared
to 2006 was due to a combination of the following factors:
|
|
|
Modest reductions in the amounts of marine insurance ceded on a
pro rata basis by the Insurance Companies.
|
|
Increases in our net retentions on the professional liability
pro rata reinsurance treaty which renewed April 1, 2006. No
changes occurred for the April 1, 2007 renewal.
|
|
An increase in the proportion of specialty gross written
premium, in which we retain a higher proportion of premium
relative to our other lines, to the overall total gross written
premium. In addition, effective April 1, 2007, the Company
increased its retention from $500,000 to $1 million for the
contractors liability business which reduced the amount of
premium ceded. Somewhat offsetting retaining more contractors
liability premium, the Company generally reinsures a large
percentage of its new lines of business and increases its
retention as the business matures over time.
|
|
Reductions in the amount of business ceded on a pro rata basis
by the Lloyds Operations coupled with reductions in
reinsurer participation in our Syndicate 1221 stamp capacity.
|
The ratio of ceded written premium to gross written premium
declined in 2006 compared to 2005 due to the following factors:
|
|
|
Retaining more premiums in our marine unit.
|
|
Restructuring our professional liability reinsurance to retain
more business net effective April 1, 2006.
|
|
Purchased the 2.5% minority interest and replaced a 5% capacity
provider with our own letter of credit in Syndicate 1221
effective January 1, 2006.
|
Net Written Premium. The 2007 net written premium
increased 24.0% compared to 2006. The 2006 net written premium
increased 36.8% compared to 2005. The increase was 31.8% when
excluding the $14.5 million of ceded reinstatement premiums
resulting from the 2005 Hurricanes. 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
28.5% in 2007 compared to 2006 and increased 38.3% in 2006
compared to 2005. The 2007 and 2006 net earned premium reflects
the strong growth in written premiums discussed above and, for
2006, the effect of ceded reinstatement premiums resulting from
storm losses that affected 2005. The 2005 net earned premium was
reduced by $14.5 million of reinstatement premium as a
result of the losses from the 2005 Hurricanes. Excluding the
45
effects for ceded reinstatement premiums as a result of the 2005
Hurricanes, net earned premium increased 32.7% in 2006 compared
to 2005.
Commission Income. Commission income from
unaffiliated business decreased 43.5% to $1.7 million in
2007 compared to 2006 and decreased 45.9% to $3.1 million
in 2006 compared to $5.7 million in 2005. The 2007 and 2006
amounts reflect the elimination of the marine pool. 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.
Net Investment Income. Net investment income
increased 24.2% and 53.5% in 2007 and 2006, respectively, due
primarily to the increase in invested assets resulting from
positive cash flow from operations, net proceeds from the debt
and common stock offerings of $123.5 million and
$123.8 million received in April 2006 and October 2005,
respectively, and moderately increased yields. See the
Description of BusinessInvestments section
included herein for additional information regarding our net
investment income.
Net Realized Capital Gains (Losses). Pre-tax net
income included $2.0 million of net realized capital gains
for 2007 compared to net realized capital losses of
$1.0 million for 2006 and net realized capital gains of
$1.2 million for 2005. On an after-tax basis, the net
realized capital gains were $1.3 million or $0.08 per share
for 2007 compared to the net realized capital losses of
$0.7 million or $0.04 per share for 2006 and the net
realized capital gains of $0.8 million or $0.06 per share
for 2005.
Other Income/(Expense). Other
income/(expense) for 2007, 2006 and 2005 consisted principally
of both foreign exchange gains and (losses) of $(0.7) million,
($1.8) million and $1.7 million, respectively, primarily
related to the Lloyds Operations, and of inspection fee
income of $0.9 million, $0.9 million and
$1.0 million, respectively, related to the specialty
insurance business.
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 56.6%, 57.7% and 69.6% in
2007, 2006 and 2005, respectively. 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.
The 2005 loss ratio of 69.6% was adversely impacted by 1.1 loss
ratio points resulting from the $3.8 million net redundancy
of prior years loss reserves and by 9.2 loss ratio points
related to the 2005 Hurricanes. The pre-tax net loss as the
result of losses caused by Hurricanes Katrina and Rita of
approximately $36.7 million, including $14.5 million
of reinstatement costs, increased the 2005 combined ratio by
10.5 ratio points.
46
During 2007, we reduced our reinstatement cost estimates by
$0.7 million and our net loss incurred estimate by
$1.9 million for the 2005 Hurricanes, which increased our
2007 pre-tax income by $2.6 million. The reserve reductions
resulted from quarterly reviews of such 2005 Hurricanes
exposures during 2007, which reduced gross losses incurred by
$29.3 million and $1.9 million on a net basis. As a
result of these reviews 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 $3.4 million. A
summary of our losses incurred and reserves is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Gross of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning gross reserves
|
|
$
|
319,230
|
|
|
$
|
465,728
|
|
|
$
|
|
|
Incurred loss & LAE
|
|
|
(29,349
|
)
|
|
|
|
|
|
|
471,122
|
|
Calendar year payments
|
|
|
148,050
|
|
|
|
146,498
|
|
|
|
5,394
|
|
|
Ending gross reserves
|
|
$
|
141,831
|
|
|
$
|
319,230
|
|
|
$
|
465,728
|
|
|
Gross case loss reserves
|
|
$
|
94,959
|
|
|
$
|
172,916
|
|
|
$
|
210,579
|
|
Gross IBNR loss reserves
|
|
|
46,872
|
|
|
|
146,314
|
|
|
|
255,149
|
|
|
Ending gross reserves
|
|
$
|
141,831
|
|
|
$
|
319,230
|
|
|
$
|
465,728
|
|
|
Net of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning net reserves
|
|
$
|
10,003
|
|
|
$
|
19,408
|
|
|
$
|
|
|
Incurred loss & LAE
|
|
|
(1,909
|
)
|
|
|
|
|
|
|
22,295
|
|
Calendar year payments
|
|
|
3,575
|
|
|
|
9,405
|
|
|
|
2,887
|
|
|
Ending net reserves
|
|
$
|
4,519
|
|
|
$
|
10,003
|
|
|
$
|
19,408
|
|
|
Net case loss reserves
|
|
$
|
646
|
|
|
$
|
3,628
|
|
|
$
|
8,127
|
|
Net IBNR loss reserves
|
|
|
3,873
|
|
|
|
6,375
|
|
|
|
11,281
|
|
|
Ending net reserves
|
|
$
|
4,519
|
|
|
$
|
10,003
|
|
|
$
|
19,408
|
|
|
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,
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
($ in thousands)
|
|
|
Gross reserves for losses and LAE
|
|
$
|
1,648,764
|
|
$
|
1,607,555
|
|
$
|
41,209
|
|
Less: Reinsurance recoverable on unpaid losses and LAE reserves
|
|
|
801,461
|
|
|
911,439
|
|
|
(109,978
|
)
|
|
Net loss and LAE reserves
|
|
$
|
847,303
|
|
$
|
696,116
|
|
$
|
151,187
|
|
|
47
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, 2007
|
|
|
|
Net
|
|
Net
|
|
Total
|
|
% of IBNR
|
|
|
|
Reported
|
|
IBNR
|
|
Net Loss
|
|
to Total Net
|
|
|
|
Reserves
|
|
Reserves
|
|
Reserves
|
|
Loss Reserves
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Insurance Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
93,110
|
|
$
|
103,229
|
|
$
|
196,339
|
|
|
52.6
|
%
|
Specialty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction liability
|
|
|
36,137
|
|
|
213,453
|
|
|
249,590
|
|
|
85.5
|
%
|
All other liability
|
|
|
28,608
|
|
|
65,361
|
|
|
93,969
|
|
|
69.6
|
%
|
|
|
|
|
|
Total Specialty
|
|
|
64,745
|
|
|
278,814
|
|
|
343,559
|
|
|
81.2
|
%
|
|
|
|
|
|
Professional liability
|
|
|
20,335
|
|
|
50,584
|
|
|
70,919
|
|
|
71.3
|
%
|
Other
|
|
|
13,147
|
|
|
11,717
|
|
|
24,864
|
|
|
47.1
|
%
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Net
|
|
Net
|
|
Total
|
|
% of IBNR
|
|
|
|
Reported
|
|
IBNR
|
|
Net Loss
|
|
to Total Net
|
|
|
|
Reserves
|
|
Reserves
|
|
Reserves
|
|
Loss Reserves
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Insurance Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
83,295
|
|
$
|
96,098
|
|
$
|
179,393
|
|
|
53.6
|
%
|
Specialty
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction liability
|
|
|
40,070
|
|
|
166,179
|
|
|
206,249
|
|
|
80.6
|
%
|
All other liability
|
|
|
15,214
|
|
|
39,381
|
|
|
54,595
|
|
|
72.1
|
%
|
|
|
|
|
|
Total Specialty
|
|
|
55,284
|
|
|
205,560
|
|
|
260,844
|
|
|
78.8
|
%
|
|
|
|
|
|
Professional liability
|
|
|
14,013
|
|
|
37,558
|
|
|
51,571
|
|
|
72.8
|
%
|
Other
|
|
|
9,867
|
|
|
9,432
|
|
|
19,299
|
|
|
48.9
|
%
|
|
|
|
|
|
Total Insurance Companies
|
|
|
162,459
|
|
|
348,648
|
|
|
511,107
|
|
|
68.2
|
%
|
|
|
|
|
|
Lloyds Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
|
77,621
|
|
|
95,876
|
|
|
173,497
|
|
|
55.3
|
%
|
Other
|
|
|
3,103
|
|
|
8,409
|
|
|
11,512
|
|
|
73.0
|
%
|
|
|
|
|
|
Total Lloyds Operations
|
|
|
80,724
|
|
|
104,285
|
|
|
185,009
|
|
|
56.4
|
%
|
|
|
|
|
|
Total
|
|
$
|
243,183
|
|
$
|
452,933
|
|
$
|
696,116
|
|
|
65.1
|
%
|
|
At December, 2007, the IBNR loss reserve was $558.5 million
or 65.9% of our total loss reserves compared to
$452.9 million or 65.1% in 2006.
The increase in net loss reserves in all active lines of
business is generally a reflection of the growth in 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 incurred losses on the Companys 2007
and 2006 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 2005 Hurricanes were $141.8 million and
$137.3 million at December 31, 2007, respectively,
compared to $319.2 million and $309.2 million at
December 31, 2006.
With the recording of gross losses, the Company assesses its
reinsurance coverage, potential receivables, and the
48
recoverability of the receivables.
Losses incurred on business recently written are primarily
covered by reinsurance agreements written by companies with whom
the Company is currently doing reinsurance business and whose
credit the Company continues to assess in the normal course of
business.
As illustrated in the following table, our overall reinsurance
recoverable amounts for paid and unpaid losses have declined
during 2007 as the Company continues to bill and collect its
recoverables for Hurricanes Katrina and Rita loss payments and
retains more of its business:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
|
|
|
|
($ in thousands)
|
|
|
Gross reserves for losses and LAE
|
|
$
|
1,648,764
|
|
$
|
1,607,555
|
|
$
|
41,209
|
|
Less: Reinsurance recoverable on unpaid losses and LAE reserves
|
|
|
801,461
|
|
|
911,439
|
|
|
(109,978
|
)
|
|
Net loss and LAE reserves
|
|
$
|
847,303
|
|
$
|
696,116
|
|
$
|
151,187
|
|
|
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.
As discussed below and under the caption Description of
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 most
current underwriting year 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. Two such
instances relate to the IBNR loss reserve processes for our 2005
Hurricanes Katrina and Rita 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. At
December 31, 2007, the gross and net loss reserve amounts
of our 2005 Hurricanes Katrina and Rita losses were
$141.8 million and $4.5 million, respectively, and the
gross and net loss reserve amounts for our asbestos exposures
were $23.2 million and $16.7 million, respectively.
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.
49
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.
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.
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
50
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.
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,
IPO 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
51
in runoff since 1999, which are
periodically monitored and evaluated by claims and actuarial
personnel.
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 $47.0 million,
$17.2 million and $3.8 million net of reinsurance were
recorded in 2007, 2006 and 2005, 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.
Following is a discussion of relevant factors impacting our 2007
loss reserves:
The Insurance Companies recorded $10.7 million of net prior
years savings for marine business 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
52
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.
The Lloyds Operations recorded $13.2 million of net
prior year savings, which 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, a $4.6 million
reduction in our 2004 underwriting year estimates for the
liability book due to favorable loss trends, and the remaining
$3.2 million was mostly for offshore energy and 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 for 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 for 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 2003 to
2000 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.
Following is a discussion of relevant factors impacting our 2005
loss reserves.
As discussed above, the Company establishes reserves for the
professional liability business using ultimate loss ratios based
on industry experience. During 2005, the Insurance Companies
further reduced the reserves for such claims-made policies
compared to year-end 2004, by approximately $3.0 million
mostly all related to the 2003 and 2002 underwriting years. The
reductions were to recognize the low level of claim counts and
continued favorable development compared to expectations at the
time the reserves were initially established.
The Insurance Companies recorded $1.6 million of net prior
years savings from business assumed from the Lloyds
Operations principally related to the 2003 underwriting year
where loss reserves reductions were related to the reductions in
premium estimates.
The Insurance Companies recorded $0.8 million of net prior
years savings for run-off business principally due to
favorable loss experience on aviation business discontinued in
1999.
The Insurance Companies recorded net prior years reserve
deficiencies of $1.9 million for marine business
principally due to an increase of approximately
$4.5 million for unallocated loss adjustment expense
reserves offset by net favorable loss experience of
$2.6 million mostly related to the 2002 and prior
underwriting years.
The Insurance Companies recorded net prior years reserve
deficiencies of $0.9 million for specialty business due to
a limited amount of adverse development for a line of business
discontinued in 2005 and construction business offset by
favorable development in specialty business written in the
mid-west.
The Lloyds Operations recorded $1.2 million of net
prior years savings mostly due to the favorable settlement
of one large marine claim.
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 most current
underwriting year 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 2000
to 2007 and alternative loss development factors for the
underwriting years 2000 to 2006 rather than those actually used
in determining the Companys best estimates at
December 31, 2007. 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 2000 were not included
given the maturity of such years and their
53
relatively small contribution to
the overall IBNR loss reserve amount at December 31, 2007.
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 2000.
For the selected alternative expected loss ratios, our actuaries
observed the range of ultimate loss ratios recorded for the
underwriting years 2000 to 2006 for each major line of business
at December 31, 2007. After evaluating the range of
ultimate loss ratio variances for each underwriting year, our
actuaries judgmentally selected a range of reasonably likely
variations from the ultimate loss ratios recorded for each line
of business for each underwriting year out of the range of
reasonably possible variations for each underwriting year.
The reasonably likely ranges of potential deviation in the loss
ratios for each line of business for the 2000 to 2007
underwriting years expressed in loss ratio points are as follows:
Reasonably Likely
Loss Ratio Point Variances:
|
|
|
|
|
|
|
Decrease
|
|
Increase
|
|
|
Marine
|
|
6
|
|
6
|
Specialty
|
|
7
|
|
5
|
Professional Liability
|
|
18
|
|
13
|
Lloyds Operations
|
|
9
|
|
4
|
|
For the selected alternative loss development factors for the
2000 to 2006 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, 2007. 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 2000 to 2006 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
|
|
|
11
|
%
|
|
|
14
|
%
|
Specialty
|
|
|
10
|
%
|
|
|
11
|
%
|
Professional Liability
|
|
|
5
|
%
|
|
|
6
|
%
|
Lloyds Operations
|
|
|
14
|
%
|
|
|
13
|
%
|
|
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 2000 to 2007
underwriting years, which are believed to be more representative
compared to years prior to 2000 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 three calendar years as evidenced
by the recording of net prior year savings across each line of
business. 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,
54
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.
Sensitivity Analysis
December 31, 2007
($ in thousands, except per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Reasonably Likely Range of Deviation
|
|
|
|
Net Loss
|
|
Redundancy
|
|
|
Deficiency
|
|
|
|
Reserves
|
|
Amount
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
|
|
Insurance Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
196,339
|
|
$
|
12,351
|
|
|
6
|
%
|
|
$
|
13,701
|
|
|
|
7
|
%
|
Specialty
|
|
|
343,559
|
|
|
28,774
|
|
|
8
|
%
|
|
|
23,337
|
|
|
|
7
|
%
|
Professional Liability
|
|
|
70,919
|
|
|
6,657
|
|
|
9
|
%
|
|
|
5,454
|
|
|
|
8
|
%
|
Other
|
|
|
24,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Companies
|
|
|
635,681
|
|
|
47,782
|
|
|
8
|
%
|
|
|
42,492
|
|
|
|
7
|
%
|
Lloyds Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine and Other
|
|
|
211,622
|
|
|
20,337
|
|
|
10
|
%
|
|
|
12,066
|
|
|
|
6
|
%
|
|
Total Company
|
|
$
|
847,303
|
|
$
|
68,119
|
|
|
8
|
%
|
|
$
|
54,558
|
|
|
|
6
|
%
|
|
Increase (decrease) to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
$
|
44,277
|
|
|
|
|
|
($
|
35,463
|
)
|
|
|
|
|
|
Per
share(1)
|
|
|
|
|
$
|
2.60
|
|
|
|
|
|
($
|
2.09
|
)
|
|
|
|
|
|
|
|
|
(1)
|
|
Used 17,005,000 average diluted
shares outstanding for the year ended December 31, 2007.
|
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 12.9% in 2007, 12.4% in 2006 and 12.6%
in 2005. The 2005 commission expense ratio excluding the effects
of the 2005 Hurricanes was 12.0%.
Other Operating Expenses. The 28.8% and 17.2% increases
in other operating expenses when comparing 2007 to 2006 and
comparing 2006 to 2005, respectively, were attributable
primarily to employee related expenses resulting from expansion
of the business.
Interest Expense. The 2007 and 2006 interest expense
reflects interest on our senior notes issued in April 2006.
There was no debt outstanding in 2005.
Income Taxes. The income tax expense was
$43.6 million, $34.1 million and $10.2 million
for 2007, 2006 and 2005, respectively. The effective tax rates
for 2007, 2006 and 2005 were 31.3%, 31.9% and 30.2%,
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, 2007 and 2006, the net
deferred Federal, foreign, state and local tax assets were
$29.2 million and $30.4 million, respectively.
We are subject to the tax regulations of the United States and
foreign countries in which we operate. The Company files a
consolidated federal tax return, which includes all domestic
subsidiaries and the U.K. Branch. The income from the foreign
operations is designated as either U.S connected income or
non-U.S.
connected income. Lloyds is required to pay U.S. income
tax on U.S. connected income written by Lloyds syndicates.
Lloyds and the IRS have entered into an agreement whereby
the amount of tax due on U.S. connected income is calculated by
Lloyds and remitted directly to the IRS. These amounts are
then charged to the corporate members in proportion to their
participation in the relevant syndicates. The Companys
corporate members are subject to this agreement and will receive
U.K. tax credits for any U.S. income tax incurred up to the U.K.
income tax 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 at a 30% rate. A finance bill was enacted in the
U.K. on July 19, 2007 that reduces the U.K. corporate tax
rate from 30% to 28% effective April 1, 2008. The effect of
such tax
55
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 $45.5 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 $3.2 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 $6.3 million
and $6.0 million at December 31, 2007 and 2006,
respectively. Included in the deferred tax assets are net
operating loss carryforwards of $2.5 million and
$4.8 million at December 31, 2007 and 2006,
respectively. A valuation allowance was established for the full
amount of these potential future tax benefits due to the
uncertainty associated with their realization. The
Companys state and local tax carryforwards at
December 31, 2007 expire from 2022 to 2027.
In July 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48), an interpretation of
SFAS 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.
Segment
Information
The Companys subsidiaries are primarily engaged in the
underwriting and management of property and casualty insurance.
The Company classifies its business into two underwriting
segments consisting of the Insurance Companies and the
Lloyds Operations, which are separately managed, and a
Corporate segment. Segment data for each of the two underwriting
segments include allocations of revenues and expenses of the
Navigators Agencies and Parent Companys expenses and
related income tax amounts previously reported separately.
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 and specialty lines of business including
contractors general liability insurance, commercial and
personal umbrella and excess casualty businesses. Navigators
Specialty Insurance Company which began operations in 1990,
underwrites specialty and professional liability insurance on an
excess and surplus lines basis fully reinsured by Navigators
Insurance Company. The Navigators Agencies produce business for
the Insurance Companies.
56
Following are the results of operations for the Insurance
Companies for each of the years in the three-year period ended
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Gross written premium
|
|
$
|
774,346
|
|
|
$
|
672,846
|
|
|
$
|
529,681
|
|
Net written premium
|
|
|
478,018
|
|
|
|
376,179
|
|
|
|
267,745
|
|
Net earned premium
|
|
|
443,456
|
|
|
|
329,723
|
|
|
|
230,046
|
|
Net losses and loss adjustment expenses
|
|
|
(256,652
|
)
|
|
|
(191,740
|
)
|
|
|
(155,293
|
)
|
Commission expense
|
|
|
(52,490
|
)
|
|
|
(36,412
|
)
|
|
|
(22,984
|
)
|
Other operating expenses
|
|
|
(81,053
|
)
|
|
|
(62,459
|
)
|
|
|
(52,353
|
)
|
Commission income and other income (expense)
|
|
|
1,510
|
|
|
|
3,552
|
|
|
|
4,712
|
|
|
Underwriting profit
|
|
|
54,771
|
|
|
|
42,664
|
|
|
|
4,128
|
|
Investment income
|
|
|
58,261
|
|
|
|
47,723
|
|
|
|
31,764
|
|
Net realized capital gains (losses)
|
|
|
1,973
|
|
|
|
(622
|
)
|
|
|
1,705
|
|
|
Income before income tax expense
|
|
|
115,005
|
|
|
|
89,765
|
|
|
|
37,597
|
|
Income tax expense
|
|
|
35,061
|
|
|
|
28,843
|
|
|
|
11,535
|
|
|
Net income
|
|
$
|
79,944
|
|
|
$
|
60,922
|
|
|
$
|
26,062
|
|
|
Identifiable assets
|
|
$
|
2,322,647
|
|
|
$
|
2,105,293
|
|
|
$
|
1,793,064
|
|
|
Loss and loss expenses ratio
|
|
|
57.9
|
%
|
|
|
58.2
|
%
|
|
|
67.5
|
%
|
Commission expense ratio
|
|
|
11.8
|
%
|
|
|
11.0
|
%
|
|
|
10.0
|
%
|
Other operating expenses ratio(1)
|
|
|
17.9
|
%
|
|
|
17.9
|
%
|
|
|
20.7
|
%
|
|
Combined ratio
|
|
|
87.6
|
%
|
|
|
87.1
|
%
|
|
|
98.2
|
%
|
|
|
|
|
(1)
|
|
Includes other operating
expenses and commission income and other income
(expense).
|
Following are the underwriting results of the Insurance
Companies for each of the years in the three-year period ended
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
133,452
|
|
$
|
77,593
|
|
$
|
39,180
|
|
$
|
16,679
|
|
|
|
58.1
|
%
|
|
|
29.4
|
%
|
|
|
87.5
|
%
|
Specialty
|
|
|
243,915
|
|
|
136,220
|
|
|
66,206
|
|
|
41,489
|
|
|
|
55.8
|
%
|
|
|
27.1
|
%
|
|
|
82.9
|
%
|
Professional Liability
|
|
|
55,149
|
|
|
32,602
|
|
|
19,646
|
|
|
2,901
|
|
|
|
59.1
|
%
|
|
|
35.6
|
%
|
|
|
94.7
|
%
|
Other
|
|
|
10,940
|
|
|
10,237
|
|
|
7,001
|
|
|
(6,298
|
)
|
|
|
NM
|
|
|
|
NM
|
|
|
|
NM
|
|
|
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
|
|
$
|
115,093
|
|
$
|
65,856
|
|
$
|
31,339
|
|
$
|
17,898
|
|
|
|
57.2
|
%
|
|
|
27.2
|
%
|
|
|
84.4
|
%
|
Specialty
|
|
|
172,479
|
|
|
99,112
|
|
|
50,138
|
|
|
23,229
|
|
|
|
57.5
|
%
|
|
|
29.1
|
%
|
|
|
86.6
|
%
|
Professional Liability
|
|
|
41,437
|
|
|
26,756
|
|
|
12,648
|
|
|
2,033
|
|
|
|
64.6
|
%
|
|
|
30.5
|
%
|
|
|
95.1
|
%
|
Other
|
|
|
714
|
|
|
16
|
|
|
1,194
|
|
|
(496
|
)
|
|
|
NM
|
|
|
|
NM
|
|
|
|
NM
|
|
|
Total
|
|
$
|
329,723
|
|
$
|
191,740
|
|
$
|
95,319
|
|
$
|
42,664
|
|
|
|
58.2
|
%
|
|
|
28.9
|
%
|
|
|
87.1
|
%
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
Net
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned
|
|
|
and LAE
|
|
|
Underwriting
|
|
Underwriting
|
|
|
Loss
|
|
|
Expense
|
|
|
Combined
|
|
|
|
Premium
|
|
|
Incurred
|
|
|
Expenses
|
|
Gain(Loss)
|
|
|
Ratio
|
|
|
Ratio
|
|
|
Ratio
|
|
|
|
|
Marine
|
|
$
|
83,499
|
|
|
$
|
68,184
|
|
|
$
|
24,620
|
|
$
|
(9,305
|
)
|
|
|
81.7
|
%
|
|
|
29.5
|
%
|
|
|
111.2
|
%
|
Specialty
|
|
|
117,208
|
|
|
|
71,139
|
|
|
|
36,353
|
|
|
9,716
|
|
|
|
60.7
|
%
|
|
|
31.0
|
%
|
|
|
91.7
|
%
|
Professional Liability
|
|
|
30,118
|
|
|
|
18,292
|
|
|
|
9,637
|
|
|
2,189
|
|
|
|
60.7
|
%
|
|
|
32.0
|
%
|
|
|
92.7
|
%
|
Other
|
|
|
(779
|
)
|
|
|
(2,322
|
)
|
|
|
15
|
|
|
1,528
|
|
|
|
NM
|
|
|
|
NM
|
|
|
|
NM
|
|
|
Total
|
|
$
|
230,046
|
|
|
$
|
155,293
|
|
|
$
|
70,625
|
|
$
|
4,128
|
|
|
|
67.5
|
%
|
|
|
30.7
|
%
|
|
|
98.2
|
%
|
|
NM=not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding the losses from the 2005 Hurricanes, underwriting
results generally reflect the favorable industry market
conditions since 2001 coupled with satisfactory loss trends in
the aforementioned periods. The Insurance Companies experienced
premium growth in all three active lines of business as
reflected in the above tables. Overall, the net earned premium
increased 34.5%, 43.3% and 0.6% in 2007, 2006 and 2005,
respectively, reflecting business expansion in the specialty and
professional liability business units coupled with increased
retention of the business written, partially offset by the
effect of premium rate changes on renewal policies on certain
lines of business.
The 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.
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 2005 underwriting results were favorably impacted by
approximately $2.6 million or 1.1 loss ratio points for net
prior year savings of which $3.0 million was for
professional liability business, $1.6 million for business
assumed from our Lloyds Operations and $0.8 million
for run-off business, partially offset by deficiencies of
$1.9 million for marine business and $0.9 million for
specialty business.
The pre-tax net loss to the Insurance Companies as the result of
losses caused by Hurricanes Katrina and Rita of approximately
$16.6 million, including $9.1 million of reinstatement
costs, increased the Insurance Companies 2005 combined ratio by
6.9 ratio points.
Reviews of our Insurance Companies Hurricanes Katrina and Rita
exposures during 2007 resulted in a reduction to the Insurance
Companies pre-tax income by $1.5 million. Much of this
impact was the result of reallocating our net retention for
these events between our Insurance Companies and Lloyds
Operations
A summary of our losses incurred and reserves for the 2005
Hurricanes Katrina and Rita is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
2005
|
|
|
|
($ in thousands)
|
|
Gross of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
Beginning gross reserves
|
|
$
|
121,896
|
|
|
$
|
195,724
|
|
$
|
|
Incurred loss & LAE
|
|
|
23,579
|
|
|
|
|
|
|
198,500
|
Calendar year payments
|
|
|
53,235
|
|
|
|
73,828
|
|
|
2,776
|
|
Ending gross reserves
|
|
$
|
92,240
|
|
|
$
|
121,896
|
|
$
|
195,724
|
|
Gross case loss reserves
|
|
$
|
63,382
|
|
|
$
|
66,860
|
|
$
|
111,822
|
Gross IBNR loss reserves
|
|
|
28,858
|
|
|
|
55,036
|
|
|
83,902
|
|
Ending gross reserves
|
|
$
|
92,240
|
|
|
$
|
121,896
|
|
$
|
195,724
|
|
Net of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
Beginning net reserves
|
|
$
|
1,837
|
|
|
$
|
6,023
|
|
$
|
|
Incurred loss & LAE
|
|
|
1,495
|
|
|
|
|
|
|
7,431
|
Calendar year payments
|
|
|
(168
|
)
|
|
|
4,186
|
|
|
1,408
|
|
Ending net reserves
|
|
$
|
3,500
|
|
|
$
|
1,837
|
|
$
|
6,023
|
|
Net case loss reserves
|
|
$
|
|
|
|
$
|
|
|
$
|
4,670
|
Net IBNR loss reserves
|
|
|
3,500
|
|
|
|
1,837
|
|
|
1,353
|
|
Ending net reserves
|
|
$
|
3,500
|
|
|
$
|
1,837
|
|
$
|
6,023
|
|
58
The approximate annualized pre-tax yields on the Insurance
Companies investment portfolio approximated 4.5%, 4.6% and
4.3% for 2007, 2006 and 2005, 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 our
April debt offering, in an environment of gradually increasing
interest rates. The portfolios duration was 4.8 years
and 4.4 years at December 31, 2007 and 2006,
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. NUAL owns Navigators Underwriting Ltd., an
underwriting managing agency with its principal office in
Manchester, England, which underwrites cargo and engineering
business for Syndicate 1221. In January 2005, we formed
Navigators NV in Antwerp, Belgium, a wholly-owned subsidiary of
NUAL. Navigators NV produces transport liability, cargo and
marine liability premium on behalf of Syndicate 1221. The
Lloyds Operations and Navigators Management (UK) Limited,
a Navigators Agency which produces business for the U.K. Branch,
are subsidiaries of Navigators Holdings (UK) Limited located in
the United Kingdom.
Syndicate 1221s stamp capacity was £140 million
($280 million) in 2007, £123 million
($226 million) in 2006 and £135 million
($246 million) in 2005. The stamp capacity for 2006 and
2005 was reduced to minimize the costs associated with unused
stamp capacity in 2004 coupled with anticipated declining market
conditions in 2006 and 2005 following an increase in 2004. 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 2007 and 2006 and 97.5% in, 2005. In September
2005, the Company purchased the remaining outstanding minority
interest of Syndicate 1221s capacity for the 2006
underwriting year. Syndicate 1221s stamp capacity is
expressed net of commission (as is standard at Lloyds).
The Syndicate 1221 premium recorded in the Companys
financial statements is gross of commission.
Lloyds presents its results on an underwriting year basis,
generally closing each underwriting year after three years. We
make estimates for each underwriting year and timely accrue the
expected results. Our Lloyds Operations included in the
consolidated financial statements represent our participation in
Syndicate 1221.
Lloyds syndicates report the amounts of premiums, claims,
and expenses recorded in an underwriting account for a
particular year to the companies or individuals that participate
in the syndicates. The syndicates generally keep accounts open
for three years. Traditionally, three years have been necessary
to report substantially all premiums associated with an
underwriting year and to report most related claims, although
claims may remain unsettled after the underwriting year is
closed. A Lloyds syndicate typically closes an
underwriting year by reinsuring outstanding claims on that
underwriting year with the participants for the next
underwriting year. The ceding participants pay the assuming
participants an amount based on the unearned premiums and
outstanding claims in the underwriting year at the date of the
assumption. Our participation in Syndicate 1221 is represented
by and recorded as our proportionate share of the underlying
assets and liabilities and results of operations of the
syndicate since (i) we hold an undivided interest in each
asset, (ii) we are proportionately liable for each
liability and (iii) Syndicate 1221 is not a separate legal
entity. At Lloyds, the amount to close an underwriting
year into the next year is referred to as the reinsurance to
close (RITC) transaction. The RITC amounts represent
the transfer of the assets and liabilities from the participants
of a closing underwriting year to the participants of the next
underwriting year. To the extent our participation in the
syndicate changes, the RITC amounts vary accordingly. The RITC
transaction, recorded in the fourth quarter, does not result in
any gain or loss. We provide letters of credit to Lloyds
to support our participation in Syndicate 1221s stamp
capacity as discussed below under the caption Liquidity and
Capital Resources.
Whenever a member of Lloyds is unable to pay its debts to
policyholders, such debts may be payable by the Lloyds
Central Fund. If Lloyds determines that the Central Fund
needs to be increased, it has the power to assess premium levies
on current Lloyds members up to 3% of a members
underwriting capacity in any one year. The Company does not
believe that any assessment is likely in the foreseeable future
and has not provided any allowance for such an assessment.
However, based on the Companys 2007 capacity at
Lloyds of £140 million, the December 31,
2007 exchange rate of £1 equaled $1.98 and in the event of
a maximum 3% assessment, the Company would be assessed
approximately $8.3 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
$5.9 million at June 30, 2007, were repaid during the
2007 third quarter from a bond offering completed by
Lloyds in September 2007.
59
Following are the results of operations of the Lloyds
Operations for each of the years in the three-year period ended
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Gross written premium
|
|
$
|
296,361
|
|
|
$
|
297,944
|
|
|
$
|
248,383
|
|
Net written premium
|
|
|
167,778
|
|
|
|
144,628
|
|
|
|
112,914
|
|
Net earned premium
|
|
|
158,521
|
|
|
|
138,600
|
|
|
|
108,505
|
|
Net losses and loss adjustment expenses
|
|
|
(83,940
|
)
|
|
|
(78,447
|
)
|
|
|
(80,362
|
)
|
Commission expense
|
|
|
(25,123
|
)
|
|
|
(21,375
|
)
|
|
|
(19,687
|
)
|
Other operating expenses
|
|
|
(29,356
|
)
|
|
|
(23,296
|
)
|
|
|
(20,786
|
)
|
Commission income and other income (expense)
|
|
|
504
|
|
|
|
(1,150
|
)
|
|
|
3,649
|
|
|
Underwriting profit (loss)
|
|
|
20,606
|
|
|
|
14,332
|
|
|
|
(8,681
|
)
|
Investment income
|
|
|
10,524
|
|
|
|
7,694
|
|
|
|
5,061
|
|
Net realized capital gains (losses)
|
|
|
33
|
|
|
|
(404
|
)
|
|
|
(467
|
)
|
|
Income (loss) before income tax expense (benefit)
|
|
|
31,163
|
|
|
|
21,622
|
|
|
|
(4,087
|
)
|
Income tax expense (benefit)
|
|
|
10,946
|
|
|
|
7,601
|
|
|
|
(1,431
|
)
|
|
Net income (loss)
|
|
$
|
20,217
|
|
|
$
|
14,021
|
|
|
$
|
(2,656
|
)
|
|
Identifiable assets
|
|
$
|
744,002
|
|
|
$
|
806,948
|
|
|
$
|
773,079
|
|
|
Loss and loss expenses ratio
|
|
|
53.0
|
%
|
|
|
56.6
|
%
|
|
|
74.1
|
%
|
Commission expense ratio
|
|
|
15.8
|
%
|
|
|
15.4
|
%
|
|
|
18.1
|
%
|
Other operating expenses ratio(1)
|
|
|
18.2
|
%
|
|
|
17.6
|
%
|
|
|
15.8
|
%
|
|
Combined ratio
|
|
|
87.0
|
%
|
|
|
89.6
|
%
|
|
|
108.0
|
%
|
|
|
|
|
(1)
|
|
Includes other operating
expenses and commission income and other income
(expense).
|
The Lloyds Operations have been experiencing business
expansion coupled with improving underwriting results as a
result of the generally favorable market conditions for marine
and energy business from late 2001 through 2003, and continuing
to a lesser extent in 2004. Premium rate increases occurred in
2005 and continued into 2006 following Hurricanes Katrina and
Rita, particularly in the offshore energy business, while the
rates in 2007 decreased 1.2% for marine and energy business and
decreased 3.4% in our professional liability business.
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.
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 2005 pre-tax net loss in the Lloyds Operations was a
result of losses caused by Hurricanes Katrina and Rita of
approximately $20.2 million, including $5.3 million of
reinstatement costs, which increased the Lloyds Operations
2005 combined ratio by 18.6 ratio points.
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 $0.7 million reduction in our reinstatement cost
estimates. A portion of this impact was the result of
reallocating our net retention for these events between our
Insurance Companies and Lloyds Operations.
60
A summary of our losses incurred and reserves for the 2005
Hurricanes Katrina and Rita is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
|
2006
|
|
2005
|
|
|
|
($ in thousands)
|
|
Gross of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
Beginning gross reserves
|
|
$
|
197,334
|
|
|
$
|
270,004
|
|
$
|
|
Incurred loss & LAE
|
|
|
(52,928
|
)
|
|
|
|
|
|
272,622
|
Calendar year payments
|
|
|
94,815
|
|
|
|
72,670
|
|
|
2,618
|
|
Ending gross reserves
|
|
$
|
49,591
|
|
|
$
|
197,334
|
|
$
|
270,004
|
|
Gross case loss reserves
|
|
$
|
31,577
|
|
|
$
|
106,056
|
|
$
|
98,757
|
Gross IBNR loss reserves
|
|
|
18,014
|
|
|
|
91,278
|
|
|
171,247
|
|
Ending gross reserves
|
|
$
|
49,591
|
|
|
$
|
197,334
|
|
$
|
270,004
|
|
Net of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
Beginning net reserves
|
|
$
|
8,166
|
|
|
$
|
13,385
|
|
$
|
|
Incurred loss & LAE
|
|
|
(3,404
|
)
|
|
|
|
|
|
14,864
|
Calendar year payments
|
|
|
3,743
|
|
|
|
5,219
|
|
|
1,479
|
|
Ending net reserves
|
|
$
|
1,019
|
|
|
$
|
8,166
|
|
$
|
13,385
|
|
Net case loss reserves
|
|
$
|
646
|
|
|
$
|
3,628
|
|
$
|
3,457
|
Net IBNR loss reserves
|
|
|
373
|
|
|
|
4,538
|
|
|
9,928
|
|
Ending net reserves
|
|
$
|
1,019
|
|
|
$
|
8,166
|
|
$
|
13,385
|
|
Approximately 43% of the gross losses incurred for Hurricanes
Katrina and Rita were generated from assumed excess of loss
marine reinsurance, a substantial portion of which was
retroceded. A large portion of this assumed reinsurance was not
renewed during 2006.
The 2005 underwriting results were favorably impacted by
approximately $1.2 million or 1.1 loss ratio points for net
prior years savings.
The pre-tax yields on the Lloyds Operations
investments approximated 3.9%, 3.4% and 2.4% for 2007, 2006 and
2005, respectively. 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 and to the
increase in the yield. The increase in the Lloyds
Operations 2007 yield compared to 2006 reflects
Navigators increased participation in Syndicate 1221 as
shown in the table below. As our participation increases we
retain a larger share of the Syndicates investment income.
The increase in the Lloyds Operations 2006 yield
compared to 2005 reflected the 2006 increases made to the
Federal Funds Rate by the Federal Reserve. The average duration
of the Lloyds Operations investment portfolio was
1.6 years at December 31, 2007 compared to
1.0 years at December 31, 2006. Such yields are net of
interest credits to certain reinsurers for funds withheld by our
Lloyds Operations.
See Results of Operations and OverviewIncome
Taxes for a discussion of the Lloyds Operations
income taxes.
The table below illustrates the Companys participation for
each year of account in Syndicate 1221:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
(£ in millions)
|
|
|
Syndicate stamp capacity
|
|
|
£140
|
|
|
|
£123
|
|
|
|
£135
|
|
Lloyds Operations corporate capital participation
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
97.5
|
%
|
Third party participants
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
2.5
|
%
|
Reinsurers participation
|
|
|
5.0
|
%
|
|
|
10.0
|
%
|
|
|
14.1
|
%
|
Lloyds Operations consolidated net participation(1)
|
|
|
95.0
|
%
|
|
|
90.0
|
%
|
|
|
83.4
|
%
|
|
|
|
|
(1)
|
|
Participation after reinsurance of
the Lloyds Operations corporate capital vehicles,
but before other third party reinsurance.
|
For 2008, Syndicate 1221s stamp capacity is
£123 million ($244 million) and our participation
is 100%, with no reinsurer participation.
Off-Balance Sheet
Transactions
For a discussion of our letter of credit facility, see
Liquidity and Capital Resources included
herein.
61
Tabular
Disclosure of Contractual Obligations
The following table sets forth our known contractual obligations
with respect to the items indicated at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
More than
|
Contractual Obligations
|
|
Total
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years
|
|
|
|
($ in thousands)
|
|
Reserves for losses and LAE(1)
|
|
$
|
1,648,764
|
|
$
|
596,795
|
|
$
|
608,273
|
|
$
|
233,874
|
|
$
|
209,822
|
7% Senior Notes(2)
|
|
|
199,375
|
|
|
8,750
|
|
|
17,500
|
|
|
17,500
|
|
|
155,625
|
Operating Leases
|
|
|
55,283
|
|
|
5,859
|
|
|
18,612
|
|
|
11,110
|
|
|
19,702
|
|
Total
|
|
$
|
1,903,422
|
|
$
|
611,404
|
|
$
|
644,385
|
|
$
|
262,484
|
|
$
|
385,149
|
|
|
|
|
(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 $801 million. See
BusinessLoss Reserves included herein.
|
(2)
|
|
Includes interest payments.
|
Investments
For a discussion of our investments, see Description
of BusinessInvestments included herein.
Liquidity and
Capital Resources
Cash flows from operations were $284.6 million,
$146.0 million and $247.8 million for 2007, 2006, and
2005, respectively. Operating cash flow was used primarily to
acquire additional investments of fixed income securities.
Investments and cash increased to $1.77 billion at
December 31, 2007 from $1.48 billion at
December 31, 2006. The increase was primarily due to the
positive cash flow from operations. Net investment income was
$70.7 million for 2007, $56.9 million for 2006 and
$37.1 million for 2005.
The approximate pre-tax yields of the investment portfolio,
excluding net realized capital gains and losses, were 4.4% for
both 2007 and 2006, and 3.8% for 2005.
At December 31, 2007, the weighted average rating of our
fixed maturity investments was AA by
Standard & Poors and Aa by
Moodys. We believe that we have limited exposure to credit
risk since the fixed maturity investment portfolio, except for
$0.3 million consists of investment-grade bonds. At
December 31, 2007, our investment portfolio had an average
maturity of 5.5 years and a duration of 4.3 years.
Management continually monitors the composition and cash flow of
the investment portfolio in order to maintain the appropriate
levels of liquidity to ensure our ability to satisfy claims.
Impairment losses of $0.7 million were recorded in 2007. No
impairment losses were incurred in 2006 or 2005. As of
December 31, 2007 and 2006, 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, 2007, letters of credit with an aggregate face
amount of $107 million were issued under the credit
facility. The line of credit was unused at December 31,
2007.
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, 2007. We were in compliance with all covenants
at December 31, 2007.
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. During
2007, 2006 and 2005, approximately 38%, 46% and 73%,
respectively, of gross incurred losses of approximately
$551 million, $498 million and $886 million,
respectively, were ceded to
62
reinsurers. Such recoverable
amounts are anticipated to be billed and collected over the next
several years as gross losses are paid by the Company.
Generally, for pro rata or quota share reinsurers, including
pool participants, the Company issues quarterly settlement
statements for premiums less commissions and paid loss activity,
which are expected to be settled by the end of the subsequent
quarter. The Company has the ability to issue cash
calls requiring such reinsurers to pay losses whenever
paid loss activity for a claim ceded to a particular reinsurance
treaty exceeds a predetermined amount (generally
$1.0 million) as set forth in the pro-rata treaty. For the
Insurance Companies, cash calls must generally be paid within 30
calendar days. There is generally no specific settlement period
for the Lloyds Operations cash call provisions, but such
billings are usually paid within 45 calendar days.
Generally, for excess of loss reinsurers the Company pays
monthly or quarterly deposit premiums based on the estimated
subject premiums over the contract period (usually one year)
which are subsequently adjusted based on actual premiums
determined after the expiration of the applicable reinsurance
treaty. Paid losses subject to excess of loss recoveries are
generally billed as they occur and are usually settled by
reinsurers within 30 calendar days for the Insurance Companies
and 30 business days for the Lloyds Operations.
The Company sometimes withholds funds from reinsurers and may
apply ceded loss billings against such funds in accordance with
the applicable reinsurance agreements.
At December 31, 2007, ceded asbestos paid and unpaid losses
recoverable were $10.5 million of which $6.2 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
Katrina and Rita could significantly impact the Companys
liquidity needs. However, we expect to continue to pay the
losses from the 2005 Hurricanes over a period of years from cash
flow and, if needed, short-term investments and expect to
collect our paid reinsurance recoverables generally under the
terms described above.
We believe that the cash flow generated by the operating
activities of our subsidiaries will provide sufficient funds for
us to meet our liquidity needs over the next twelve months.
Beyond the next twelve months, cash flow available to us may be
influenced by a variety of factors, including general economic
conditions and conditions in the insurance and reinsurance
markets, as well as fluctuations from year to year in claims
experience.
Our capital resources consist of funds deployed or available to
be deployed to support our business operations. At
December 31, 2007 and 2006, our capital resources were as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
($ in thousands)
|
|
|
Senior debt
|
|
|
$123,673
|
|
|
|
$123,560
|
|
Stockholders equity
|
|
|
662,106
|
|
|
|
551,343
|
|
|
Total capitalization
|
|
|
$779,779
|
|
|
|
$674,903
|
|
|
Ratio of debt to total capitalization
|
|
|
15.7
|
%
|
|
|
18.3
|
%
|
|
The increases in stockholders equity in 2007 and 2006 were
principally due to net income of $95.6 million in 2007 and
$72.6 million in 2006. The Company completed its public
offering of senior debt on April 17, 2006 and received net
proceeds of $123.5 million of which $100 million was
contributed to the capital and surplus of Navigators Insurance
Company.
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.
63
In October, 2007 the Companys Board of Directors adopted a
stock repurchase program for up to $30 million of the
Companys common stock. Repurchases may be made from time
to time at prevailing prices in open market or privately
negotiated transactions through December 31, 2008. The
timing and amount of the repurchase transactions under the
program will depend on a variety of factors, including the
trading price of the stock, market conditions and corporate and
regulatory considerations. We have not repurchased any of our
common stock during the year ended December 31, 2007.
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.
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 Navigators 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 holding company obligations. Since the issuance of the
senior debt in April 2006, the holding company cash obligations
primarily consist of semi-annual interest payments of
$4.4 million. Going forward, the interest payments on the
Companys senior debt will be made from one or a
combination of funds at the Parent Company, dividends from its
subsidiaries and the $20 million line of credit. The
dividends have historically been paid by Navigators Insurance
Company. Based on the December 31, 2007, surplus of
Navigators Insurance Company, the approximate remaining maximum
amount available for the payment of dividends by Navigators
Insurance Company during 2008 without prior regulatory approval
was $57.9 million. Dividends of $8.0 million, $0 and
$3.0 million were paid by Navigators Insurance Company
during 2007, 2006 and 2005, respectively.
Condensed Parent Company balance sheets as of December 31,
2007 and 2006 are shown in the table below:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
($ in thousands)
|
|
Cash and investments
|
|
$
|
44,146
|
|
$
|
32,308
|
Investments in subsidiaries
|
|
|
735,351
|
|
|
634,299
|
Goodwill and other intangible assets
|
|
|
2,534
|
|
|
2,534
|
Other assets
|
|
|
6,821
|
|
|
12,939
|
|
Total assets
|
|
$
|
788,852
|
|
$
|
682,080
|
|
7% Senior Notes due May 1, 2016
|
|
$
|
123,673
|
|
$
|
123,560
|
Accounts payable and other liabilities
|
|
|
1,615
|
|
|
1,590
|
Accrued interest payable
|
|
|
1,458
|
|
|
1,458
|
Deferred compensation payable
|
|
|
|
|
|
4,129
|
|
Total liabilities
|
|
|
126,746
|
|
|
130,737
|
|
Stockholders equity
|
|
|
662,106
|
|
|
551,343
|
|
Total liabilities and stockholders equity
|
|
$
|
788,852
|
|
$
|
682,080
|
|
At December 31, 2007 and 2006, approximately
$5.1 million and $4.2 million, respectively, of
investments were held in a tax escrow account on behalf of
Navigators Insurance Company until the two-year tax loss
carryback periods expire.
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
64
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.
We also consider the potential impact of economic trends in
estimating loss reserves. Our management believes that the
underwriting controls it maintains, and the fact that a
significant amount of our business is in lines of insurance
which have relatively short loss payout patterns, assist in
estimating ultimate claim costs more reasonably and lessen the
potential adverse impact of the economy on us.
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, 2007. 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, 2007 was $1.77 billion of which 86.1% 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, 2007. 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, 2007.
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, 2007. Based on historical
observations, it is unlikely that all interest rate yield curves
would shift in the same direction at the same time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Shift in Basis Points
|
|
|
|
|
|
|
|
−100
|
|
|
−50
|
|
|
0
|
|
|
+50
|
|
|
+100
|
|
|
|
|
|
($ in thousands)
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total market value
|
|
$
|
1,765,127
|
|
|
$
|
1,729,235
|
|
|
$
|
1,693,005
|
|
|
$
|
1,656,605
|
|
|
$
|
1,619,867
|
|
Market value change from base
|
|
|
4.26
|
%
|
|
|
2.14
|
%
|
|
|
0.00
|
%
|
|
|
−2.15
|
%
|
|
|
−4.32
|
%
|
Change in unrealized value
|
|
$
|
72,122
|
|
|
$
|
36,230
|
|
|
$
|
|
|
|
$
|
(36,400
|
)
|
|
$
|
(73,138
|
)
|
|
65
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,
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
($ in thousands)
|
|
Fair value of equity securities
|
|
$
|
67,240
|
|
$
|
37,828
|
Pre-tax impact of 10 percent decline in market prices for
equity exposures
|
|
$
|
6,724
|
|
$
|
3,783
|
|
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.
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 ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on our evaluation under the
framework in Internal ControlIntegrated Framework, our
management concluded that our internal control over financial
reporting was effective as of December 31, 2007.
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, 2007, as stated in their reported 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 And Executive Officers Of The Company
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
66
Committee and the Audit Committees financial expert of the
Company is contained under Board of Directors and
Committees in the Companys 2008 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 2008 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 2008 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 2008 Proxy Statement, which information is
incorporated herein by reference.
Item 13.
Certain Relationships And Related Transactions
Information concerning relationships and related transactions of
the directors and officers of the Company is contained under
Related Party Transactions in the Companys
2008 Proxy Statement, which information is incorporated herein
by reference. Information concerning director
independence is contained under Board of Directors and
Committees in the Companys 2008 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
2008 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.
|
67
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 20, 2008
Paul J. Malvasio
Executive 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.
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Name
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Title
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Date
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/s/ TERENCE
N. DEEKS
Terence
N. Deeks
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Chairman
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February 20, 2008
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/s/ STANLEY
A. GALANSKI
Stanley
A. Galanski
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President and Chief Executive Officer (Principal Executive
Officer)
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February 20, 2008
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/s/ PAUL
J. MALVASIO
Paul
J. Malvasio
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Executive Vice President and Chief Financial Officer (Principal
Financial Officer)
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February 20, 2008
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/s/ BRADLEY
D. WILEY
Bradley
D. Wiley
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Senior Vice President, Financial Compliance Officer and Chief
Risk Officer (Principal Accounting Officer)
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February 20, 2008
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/s/ H.J.
MERVYN BLAKENEY
H.J.
Mervyn Blakeney
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Director
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February 20, 2008
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/s/ PETER
A. CHENEY
Peter
A. Cheney
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Director
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February 20, 2008
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/s/ ROBERT
W. EAGER, JR.
Robert
W. Eager, Jr.
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Director
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February 20, 2008
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/s/ WILLIAM
T. FORRESTER
William
T. Forrester
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Director
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February 20, 2008
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/s/ LEANDRO
S. GALBAN, JR.
Leandro
S. Galban, Jr.
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Director
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February 20, 2008
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/s/ JOHN
F. KIRBY
John
F. Kirby
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Director
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February 20, 2008
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68
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Name
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Title
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Date
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/s/ MARC
M. TRACT
Marc
M. Tract
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Director
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February 20, 2008
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/s/ ROBERT
F. WRIGHT
Robert
F. Wright
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Director
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February 20, 2008
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69
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
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Report of Independent Registered Public Accounting Firm
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F-2
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Report of Independent Registered Public Accounting Firm
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F-3
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Consolidated Balance Sheets at December 31, 2007 and
2006
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F-4
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Consolidated Statements of Income for each of the years in
the three-year period ended December 31, 2007
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F-5
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Consolidated Statements of Stockholders Equity for each
of the years in the three-year period ended December 31,
2007
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F-6
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Consolidated Statements of Comprehensive Income for each of
the years in the three-year period ended December 31,
2007
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F-7
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Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2007
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F-8
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Notes to Consolidated Financial Statements
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F-9
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SCHEDULES:
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Schedule I
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Summary of Consolidated InvestmentsOther Than
Investments in Related Parties
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S-1
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Schedule II
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Condensed Financial Information of Registrant
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S-2
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Schedule III
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Supplementary Insurance Information
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S-5
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Schedule IV
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Reinsurance
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S-6
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Schedule V
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Valuation and Qualifying Accounts
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S-7
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Schedule VI
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Supplementary Information Concerning Property-Casualty
Insurance Operations
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S-8
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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, 2007 and 2006, 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, 2007. 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, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, 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, 2007, 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 20, 2008 expressed an unqualified opinion on
the effectiveness of the Companys internal control over
financial reporting.
KPMG LLP
New York, New York
February 20, 2008
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, 2007, based on criteria established in
Internal ControlIntegrated 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, 2007, based on
criteria established in Internal ControlIntegrated
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, 2007 and 2006, 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, 2007, and
our report dated February 20, 2008 expressed an unqualified
opinion on those consolidated financial statements.
KPMG LLP
New York, New York
February 20, 2008
F-3
THE NAVIGATORS
GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share
data)
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December 31,
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2007
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2006
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ASSETS
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Investments and cash:
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Fixed maturities, available-for-sale, at fair value
(amortized cost: 2007, $1,508,489; 2006, $1,263,284)
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$
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1,522,320
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$
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1,258,717
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Equity securities, available-for-sale, at fair value (cost:
2007, $65,492; 2006, $31,879)
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67,240
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37,828
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Short-term investments, at cost which approximates fair value
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170,685
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176,961
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Cash
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7,056
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2,404
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Total investments and cash
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1,767,301
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1,475,910
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Premiums in course of collection
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163,081
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163,309
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Commissions receivable
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2,381
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3,647
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Prepaid reinsurance premiums
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188,961
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179,493
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Reinsurance receivable on paid losses
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94,818
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108,878
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Reinsurance receivable on unpaid losses and loss adjustment
expense
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801,461
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911,439
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Net deferred income tax benefit
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|
|
29,249
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30,422
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Deferred policy acquisition costs
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51,895
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41,700
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Accrued investment income
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|
15,605
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|
13,052
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Goodwill and other intangible assets
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8,084
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8,012
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Other assets
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20,935
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20,824
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Total assets
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$
|
3,143,771
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$
|
2,956,686
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LIABILITIES AND STOCKHOLDERS EQUITY
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Liabilities:
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Reserves for losses and loss adjustment expenses
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$
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1,648,764
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$
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1,607,555
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Unearned premium
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469,481
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415,096
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Reinsurance balances payable
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|
|
161,829
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194,266
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Senior notes
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|
123,673
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|
|
123,560
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Federal income tax payable
|
|
|
10,868
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|
|
3,934
|
Accounts payable and other liabilities
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|
|
67,050
|
|
|
60,932
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Total liabilities
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2,481,665
|
|
|
2,405,343
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|
Stockholders equity:
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Preferred stock, $.10 par value, authorized
1,000,000 shares, none issued
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Common stock, $.10 par value, 50,000,000 shares authorized;
issued and outstanding: 16,873,094 for 2007 and 16,735,898 for
2006
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1,687
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|
1,674
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Additional paid-in capital
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|
|
291,616
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|
286,732
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Retained earnings
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|
|
355,084
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|
259,464
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Accumulated other comprehensive income
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|
|
13,719
|
|
|
3,473
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Total stockholders equity
|
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|
662,106
|
|
|
551,343
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Total liabilities and stockholders equity
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$
|
3,143,771
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|
$
|
2,956,686
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|
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)
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|
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|
|
|
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|
|
Year Ended December 31,
|
|
|
|
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|
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2007
|
|
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2006
|
|
|
2005
|
|
|
|
|
Gross written premium
|
|
$
|
1,070,707
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|
|
$
|
970,790
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|
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$
|
779,579
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|
|
Revenues:
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|
|
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Net written premium
|
|
$
|
645,796
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|
|
$
|
520,807
|
|
|
$
|
380,659
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|
(Increase) in unearned premium
|
|
|
(43,819
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)
|
|
|
(52,484
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)
|
|
|
(42,108
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)
|
|
Net earned premium
|
|
|
601,977
|
|
|
|
468,323
|
|
|
|
338,551
|
|
Commission income
|
|
|
1,736
|
|
|
|
3,075
|
|
|
|
5,686
|
|
Net investment income
|
|
|
70,662
|
|
|
|
56,895
|
|
|
|
37,069
|
|
Net realized capital gains (losses)
|
|
|
2,006
|
|
|
|
(1,026
|
)
|
|
|
1,238
|
|
Other income (expense)
|
|
|
278
|
|
|
|
(673
|
)
|
|
|
2,675
|
|
|
Total revenues
|
|
|
676,659
|
|
|
|
526,594
|
|
|
|
385,219
|
|
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Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses incurred
|
|
|
340,592
|
|
|
|
270,187
|
|
|
|
235,655
|
|
Commission expense
|
|
|
77,613
|
|
|
|
57,787
|
|
|
|
42,671
|
|
Other operating expenses
|
|
|
110,409
|
|
|
|
85,755
|
|
|
|
73,139
|
|
Interest expense
|
|
|
8,863
|
|
|
|
6,248
|
|
|
|
|
|
|
Total operating expenses
|
|
|
537,477
|
|
|
|
419,977
|
|
|
|
351,465
|
|
|
Income before income tax expense (benefit)
|
|
|
139,182
|
|
|
|
106,617
|
|
|
|
33,754
|
|
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
47,963
|
|
|
|
38,644
|
|
|
|
15,826
|
|
Deferred
|
|
|
(4,401
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)
|
|
|
(4,590
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)
|
|
|
(5,636
|
)
|
|
Total income tax expense
|
|
|
43,562
|
|
|
|
34,054
|
|
|
|
10,190
|
|
|
Net income
|
|
$
|
95,620
|
|
|
$
|
72,563
|
|
|
$
|
23,564
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
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|
Basic
|
|
$
|
5.69
|
|
|
$
|
4.34
|
|
|
$
|
1.74
|
|
Diluted
|
|
$
|
5.62
|
|
|
$
|
4.30
|
|
|
$
|
1.73
|
|
Average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,812
|
|
|
|
16,722
|
|
|
|
13,528
|
|
Diluted
|
|
|
17,005
|
|
|
|
16,856
|
|
|
|
13,657
|
|
|
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,
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
2005
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning and end of period
|
|
$
|
|
|
$
|
|
|
|
$
|
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
1,674
|
|
$
|
1,662
|
|
|
$
|
1,266
|
|
Shares issued for public offering
|
|
|
|
|
|
|
|
|
|
380
|
|
Shares issued under stock plans
|
|
|
13
|
|
|
12
|
|
|
|
16
|
|
|
Balance at end of period
|
|
$
|
1,687
|
|
$
|
1,674
|
|
|
$
|
1,662
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
286,732
|
|
$
|
282,463
|
|
|
$
|
154,670
|
|
Shares issued for public offering
|
|
|
|
|
|
|
|
|
|
123,432
|
|
Effect of SFAS 123 for stock options
|
|
|
581
|
|
|
1,498
|
|
|
|
1,046
|
|
Shares issued under stock plans
|
|
|
4,303
|
|
|
2,771
|
|
|
|
3,315
|
|
|
Balance at end of period
|
|
$
|
291,616
|
|
$
|
286,732
|
|
|
$
|
282,463
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
259,464
|
|
$
|
186,901
|
|
|
$
|
163,337
|
|
Net income for period
|
|
|
95,620
|
|
|
72,563
|
|
|
|
23,564
|
|
|
Balance at end of period
|
|
$
|
355,084
|
|
$
|
259,464
|
|
|
$
|
186,901
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
849
|
|
$
|
(884
|
)
|
|
$
|
7,416
|
|
Change in period
|
|
|
9,337
|
|
|
1,733
|
|
|
|
(8,300
|
)
|
|
Balance at end of period
|
|
|
10,186
|
|
|
849
|
|
|
|
(884
|
)
|
|
Cumulative translation adjustments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
2,624
|
|
|
96
|
|
|
|
1,889
|
|
Net adjustment for period
|
|
|
909
|
|
|
2,528
|
|
|
|
(1,793
|
)
|
|
Balance at end of period
|
|
|
3,533
|
|
|
2,624
|
|
|
|
96
|
|
|
Balance at end of period
|
|
$
|
13,719
|
|
$
|
3,473
|
|
|
$
|
(788
|
)
|
|
Total stockholders equity at end of period
|
|
$
|
662,106
|
|
$
|
551,343
|
|
|
$
|
470,238
|
|
|
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,
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
2005
|
|
|
|
|
Net income
|
|
$
|
95,620
|
|
$
|
72,563
|
|
|
$
|
23,564
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on securities, net of
tax expense (benefit) of $4,858, $1,010 and $(4,469) in 2007,
2006 and 2005, respectively(1)
|
|
|
9,337
|
|
|
1,733
|
|
|
|
(8,300
|
)
|
Change in foreign currency translation gains or (losses), net of
tax expense (benefit) of $490, $1,361 and $(965) in 2007, 2006
and 2005, respectively
|
|
|
909
|
|
|
2,528
|
|
|
|
(1,793
|
)
|
|
Other comprehensive income (loss)
|
|
|
10,246
|
|
|
4,261
|
|
|
|
(10,093
|
)
|
|
Comprehensive income
|
|
$
|
105,866
|
|
$
|
76,824
|
|
|
$
|
13,471
|
|
|
(1) Disclosure of reclassification amount, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
(losses) arising during period
|
|
$
|
10,643
|
|
$
|
1,046
|
|
|
$
|
(7,495
|
)
|
Less: reclassification
adjustment for net gains (losses) included in net income
|
|
|
1,306
|
|
|
(687
|
)
|
|
|
805
|
|
|
Change in net unrealized
gains (losses) on securities, net of tax
|
|
$
|
9,337
|
|
$
|
1,733
|
|
|
$
|
(8,300
|
)
|
|
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,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
95,620
|
|
|
$
|
72,563
|
|
|
$
|
23,564
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation & amortization
|
|
|
3,350
|
|
|
|
3,011
|
|
|
|
1,947
|
|
Net deferred income tax (benefit)
|
|
|
(4,401
|
)
|
|
|
(4,590
|
)
|
|
|
(5,636
|
)
|
Net realized capital (gains) losses
|
|
|
(2,006
|
)
|
|
|
1,026
|
|
|
|
(1,238
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance receivable on paid and unpaid losses and loss
adjustment expenses
|
|
|
129,314
|
|
|
|
50,019
|
|
|
|
(515,897
|
)
|
Reserve for losses and loss adjustment expenses
|
|
|
34,844
|
|
|
|
(25,104
|
)
|
|
|
627,700
|
|
Prepaid reinsurance premiums
|
|
|
(8,410
|
)
|
|
|
(35,354
|
)
|
|
|
(11,042
|
)
|
Unearned premium
|
|
|
52,131
|
|
|
|
81,734
|
|
|
|
57,624
|
|
Premiums in course of collection
|
|
|
2,470
|
|
|
|
5,712
|
|
|
|
10,939
|
|
Commissions receivable
|
|
|
1,279
|
|
|
|
39
|
|
|
|
(541
|
)
|
Deferred policy acquisition costs
|
|
|
(9,770
|
)
|
|
|
(9,142
|
)
|
|
|
(7,907
|
)
|
Accrued investment income
|
|
|
(2,553
|
)
|
|
|
(2,618
|
)
|
|
|
(3,096
|
)
|
Reinsurance balances payable
|
|
|
(34,342
|
)
|
|
|
1,342
|
|
|
|
48,841
|
|
Federal income tax
|
|
|
6,847
|
|
|
|
228
|
|
|
|
(3,613
|
)
|
Other
|
|
|
20,270
|
|
|
|
7,164
|
|
|
|
26,117
|
|
|
Net cash provided by operating activities
|
|
|
284,643
|
|
|
|
146,030
|
|
|
|
247,762
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemptions and maturities
|
|
|
156,730
|
|
|
|
120,947
|
|
|
|
22,026
|
|
Sales
|
|
|
218,044
|
|
|
|
157,645
|
|
|
|
323,158
|
|
Purchases
|
|
|
(624,092
|
)
|
|
|
(539,401
|
)
|
|
|
(639,962
|
)
|
Equity securities, available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
30,702
|
|
|
|
6,287
|
|
|
|
5,964
|
|
Purchases
|
|
|
(61,930
|
)
|
|
|
(17,812
|
)
|
|
|
(5,559
|
)
|
Change in payable for securities
|
|
|
(428
|
)
|
|
|
(604
|
)
|
|
|
(2,204
|
)
|
Net change in short-term investments
|
|
|
7,560
|
|
|
|
(4,527
|
)
|
|
|
(73,022
|
)
|
Purchase of property and equipment
|
|
|
(8,804
|
)
|
|
|
(4,703
|
)
|
|
|
(3,152
|
)
|
Purchase of additional Syndicate 1221 capacity
|
|
|
|
|
|
|
|
|
|
|
(2,342
|
)
|
|
Net cash (used in) investing activities
|
|
|
(282,218
|
)
|
|
|
(282,168
|
)
|
|
|
(375,093
|
)
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from stock offering
|
|
|
|
|
|
|
|
|
|
|
123,862
|
|
Net proceeds from debt offering
|
|
|
|
|
|
|
123,538
|
|
|
|
|
|
Proceeds of stock issued from Employee Stock Purchase Plan
|
|
|
606
|
|
|
|
536
|
|
|
|
419
|
|
Proceeds of stock issued from exercise of stock options
|
|
|
1,627
|
|
|
|
1,265
|
|
|
|
1,570
|
|
|
Net cash provided by financing activities
|
|
|
2,233
|
|
|
|
125,339
|
|
|
|
125,851
|
|
|
Effect of exchange rate changes on foreign currency cash
|
|
|
(6
|
)
|
|
|
38
|
|
|
|
(31
|
)
|
Increase (decrease) in cash
|
|
|
4,652
|
|
|
|
(10,761
|
)
|
|
|
(1,511
|
)
|
Cash at beginning of year
|
|
|
2,404
|
|
|
|
13,165
|
|
|
|
14,676
|
|
|
Cash at end of year
|
|
$
|
7,056
|
|
|
$
|
2,404
|
|
|
$
|
13,165
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal, state and local income tax paid
|
|
|
40,046
|
|
|
|
31,533
|
|
|
|
17,867
|
|
Interest paid
|
|
|
8,750
|
|
|
|
4,715
|
|
|
|
|
|
Issuance of stock to directors
|
|
|
181
|
|
|
|
140
|
|
|
|
123
|
|
|
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 means The Navigators Group, Inc.
and its subsidiaries, unless the context otherwise requires. The
term Parent or Parent Company is used to
mean The Navigators Group, Inc. without its subsidiaries. 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 for niches within the overall
property/casualty insurance market. The Companys
underwriting segments consist of insurance company operations
and operations at Lloyds of London. Our largest product
line and most long-standing area of specialization is ocean
marine insurance. We have also developed specialty niches in
professional liability insurance and in specialty liability
insurance primarily consisting of contractors liability
and excess liability coverages. We conduct operations through
our Insurance Companies and, our Lloyds Operations. The
Insurance Companies consist of Navigators Insurance Company,
which includes 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, discussed below,
include Lloyds Syndicate 1221 (Syndicate
1221). We participate in the capacity of Syndicate 1221
through two wholly-owned Lloyds corporate members.
The Navigators Agencies, which consist of wholly-owned insurance
underwriting agencies, produce, manage and underwrite insurance
and reinsurance business for the Company and are reimbursed for
their costs by the Insurance Companies and the Lloyds
Operations. During 2005, the Navigators Agencies wrote marine
and related business for Navigators Insurance Company and two
unaffiliated insurance companies. The three insurance companies
comprised a marine insurance pool. Marine insurance policies
were issued by Navigators Insurance Company with the business
shared through the pool. Navigators Insurance Company had an 85%
net participation in the pool for the 2005 underwriting year.
Beginning with the 2006 underwriting year, the marine pool was
eliminated and, therefore, substantially all of the marine
business generated by the Navigators Agencies that formerly
generated business for the marine pool was exclusively for
Navigators Insurance Company.
Navigators Holdings (UK) Limited is a holding company for the
Companys U.K. subsidiaries consisting of the Lloyds
Operations and Navigators Management (UK) Limited, a Navigators
Agency, which produces business for the U.K. Branch of
Navigators Insurance Company. The Lloyds Operations
consist of Navigators Underwriting Agency Ltd.
(NUAL), a Lloyds underwriting managing agency
which manages Syndicate 1221, Millennium Underwriting Ltd.
(Millennium) and Navigators Corporate Underwriters
Ltd. (NCUL). Both Millennium and NCUL are
Lloyds corporate members with limited liability and
provide capacity to Syndicate 1221. NUAL owns Navigators
Underwriting Ltd., an underwriting managing agency with its
principal office in Manchester, England, which underwrites cargo
and engineering business for Syndicate 1221. In January 2005, we
formed Navigators NV in Antwerp, Belgium, a wholly-owned
subsidiary of NUAL. Navigators NV produces transport liability,
cargo and marine liability premium on behalf of our Syndicate
1221.
Our revenue is primarily comprised of premiums and investment
income. The Insurance Companies derive their premiums primarily
from business written by the Navigators Agencies. The
Lloyds Operations derive their premiums from business
written by NUAL. Beginning in 2006, the Navigators Agencies
produce and manage business almost exclusively for the Insurance
Companies and are reimbursed for actual costs. Prior to 2006,
the Navigators Agencies received commissions and, in some cases,
profit commissions on the business produced on behalf of the
Insurance Companies and other unaffiliated insurers. NUAL is
reimbursed for its actual costs and, where applicable, profit
commissions on the business produced for Syndicate 1221.
Investments
As of December 31, 2007 and 2006, 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. All fixed
maturity and equity securities are carried at fair value. The
fair values are based on market prices provided by independent
pricing services.
The accounting treatment applied to the Companys
investments in mortgage-backed and asset-backed securities is in
accordance with Statement of Financial Accounting Standards
(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
F-9
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 through a charge to operations.
Syndicate
1221
We record our pro rata share of Syndicate 1221s assets,
liabilities, revenues and expenses, after making adjustments to
convert Lloyds accounting to U.S. GAAP. The most
significant U.S. GAAP adjustments relate to income recognition.
Our participation in Lloyds Syndicate 1221 is represented
by and recorded as our proportionate share of the underlying
assets and liabilities and results of operations of the
syndicate, since (a) we hold an undivided interest in each
asset, (b) we are proportionately liable for each liability
and (c) Syndicate 1221 is not a separate legal entity.
Lloyds syndicates determine underwriting results by year
of account at the end of three years. 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 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 the
syndicate changes, the reinsurance to close amounts vary
accordingly. Navigators provided 100% of Syndicate 1221s
capacity for the 2007 and 2006 underwriting years through its
wholly-owned subsidiaries, Millennium and NCUL. Navigators
provided 97.5% of Syndicate 1221s capacity for the 2005
underwriting year. At December 31, 2007, 2006 and 2005, the
Company closed its 2005, 2004 and 2003 underwriting years,
respectively, into the next underwriting year, the net effect of
which was not significant to either NCUL or Millennium. The RITC
transaction does not result in any gain or loss.
Syndicate 1221s stamp capacity was £140 million
($280 million) in 2007, £123 million
($226 million) in 2006 and £135 million
($246 million) in 2005. 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 both the 2007 and 2006
underwriting years and for 97.5% for the 2005 underwriting year.
The Lloyds operations included in the consolidated
financial statements represent the Companys participation
in Syndicate 1221.
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
F-10
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.
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.
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 $8.1 million and
$8.0 million at December 31, 2007 and 2006,
respectively. The goodwill and other intangible assets consist
of $2.5 million for the Navigators Agencies at both
December 31, 2007 and 2006, and $5.6 million and
$5.5 million for the Lloyds Operations at
December 31, 2007 and 2006, respectively. 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. The
December 31, 2006 goodwill and intangible assets of
$8.0 million consists of $5.3 million of goodwill and
$2.7 million of other intangible assets. Goodwill and other
intangible assets on the
F-11
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, 2007.
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.
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.
Of the $1.07 billion of gross written premium recorded in
2007, $106.6 million or approximately 10% was estimated.
The estimated premium was 10% and 11% of the gross written
premium in 2006 and 2005, respectively. Such premium estimates
are generally based on submission data received from brokers and
agents and recorded when the insurance policy or reinsurance
contract is bound and written. The estimates are regularly
reviewed and updated taking into account the premium received to
date versus the estimate and the age of the estimate. To the
extent that the actual premium varies from the estimates, the
difference, along with the related loss reserves and
underwriting expenses, is recorded in current operations.
Consolidated
Statements of Cash Flows
Beginning in 2006, the Company made certain adjustments to the
Consolidated Statement of Cash Flows (Cash Flow
Statement) to identify the impact of foreign exchange rate
changes on each section of the cash flow statement. The cash
flow statements for 2005 have been restated to reflect this
change.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
As
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
|
|
|
($ in thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
238,826
|
|
|
$
|
8,936
|
|
|
$
|
247,762
|
|
Net cash (used in) investing activities
|
|
|
(366,188
|
)
|
|
|
(8,905
|
)
|
|
|
(375,093
|
)
|
Net cash provided by financing activities
|
|
|
125,851
|
|
|
|
|
|
|
|
125,851
|
|
Effects of exchange rate changes on foreign currency cash
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
Application of
New Accounting Standards
In February 2006, the FASB issued SFAS 155, Accounting
for Certain Hybrid Financial Instruments. SFAS 155
amends SFAS 133, Accounting for Derivative Instruments
and Hedging Activities, and SFAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, and allows an entity to re-measure at fair
value a hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation from the
host, if the holder irrevocably elects to account for the whole
instrument on a fair value basis. Subsequent
F-12
changes in the fair value of the instrument would be recognized
in earnings. SFAS 155 also removed an exception included in
an interpretation of SFAS 133 (Implementation Issue
No. B39) that kept holders of mortgage-backed securities
from testing for the need to bifurcate the value embedded in
mortgage-backed securities related to the ability to prepay.
Such exception was subsequently reinstated on a limited basis.
SFAS 155 is effective for financial instruments acquired or
issued after the beginning of an entitys first fiscal year
that begins after September 15, 2006. The Companys
adoption of SFAS 155 at January 1, 2007 did not have a
material effect on its financial condition or results of
operations.
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48), an interpretation of FASB
Statement 109, Accounting for Income Taxes. FIN 48,
which was effective in the first quarter of 2007, established
the threshold for recognizing the benefits of tax-return
positions in the financial statements as more-likely-than-not to
be sustained by the taxing authorities, and prescribed a
measurement methodology for those positions meeting the
recognition threshold. The Companys adoption of
FIN 48 at January 1, 2007 did not have a material
effect on its financial condition or results of operations.
In September 2006, the FASB issued SFAS 157, Fair Value
Measurements. SFAS 157 defines fair value, establishes
a framework for measuring fair value in GAAP, and enhances
disclosures about fair value measurements. SFAS 157, which
becomes effective on January 1, 2008, applies when other
accounting pronouncements require fair value measurements; it
does not require new fair value measurements. On
December 14, 2007, the FASB circulated Proposed FSP
FAS 157-b
for comments due by January 16, 2008. This proposed FSP
(FASB Staff Position) would delay the effective date of
SFAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at
least annually). The Company does not expect the adoption of
SFAS 157 to have a material effect on its financial
condition or results of operations.
In February 2007, the FASB issued SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities,
which permits entities to choose to measure many financial
instruments and certain warranty and insurance contracts at fair
value on a contract by contract basis. SFAS 159 becomes
effective on January 1, 2008. The Company does not expect
the adoption of SFAS 159 to have a material effect on its
financial condition or results of operations.
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) is effective for fiscal years beginning on or
after December 15, 2008 and is to be applied to business
combinations occurring after the effective date. The Company
does not expect the adoption of SFAS 159 to have a material
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 is effective for fiscal years beginning on
or after December 15, 2008. The Company does not expect the
adoption of SFAS 160 to 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, 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
|
|
F-13
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
Average
|
|
Net
|
|
|
Net
|
|
Shares
|
|
Income
|
|
|
Income
|
|
Outstanding
|
|
Per Share
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
|
$
|
23,564,000
|
|
|
13,528,393
|
|
$
|
1.74
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
Stock options and grants
|
|
|
|
|
|
128,229
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
|
$
|
23,564,000
|
|
|
13,656,622
|
|
$
|
1.73
|
|
Certain outstanding options to purchase common shares were not
included in the respective computations of diluted earnings per
common share because the options exercise prices were
greater than the average market price of the common shares. For
each of the years presented, these outstanding options consisted
of the following: none for 2007 and 2006; 1,500 shares for
2005 at an average exercise price of $36.03 expiring in 2015.
Note 3.
Segment Information
The Companys subsidiaries are primarily engaged in the
underwriting and management of property and casualty insurance.
Effective in 2006, the Company classifies its business into two
underwriting segments consisting of the Insurance Companies and
the Lloyds Operations, which are separately managed, and a
Corporate segment. Segment data for each of the two underwriting
segments include allocations of revenues and expenses of the
Navigators Agencies and Parent Companys expenses and
related income tax amounts previously reported separately.
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. Segment data for 2005 has been restated
to reflect this change in segment reporting.
The Insurance Companies consist of Navigators Insurance Company,
including its U.K. Branch, and its wholly-owned subsidiary,
Navigators Specialty Insurance Company. They are primarily
engaged in underwriting marine insurance and related lines of
business, professional liability insurance and specialty lines
of business including contractors general liability
insurance, commercial and personal umbrella and excess casualty
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, European property business and construction coverages
for onshore energy business at Lloyds of London through
Syndicate 1221. The Navigators Agencies are underwriting
management companies which produce, manage and underwrite
insurance and reinsurance for the Company.
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 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.
F-14
Financial data by segment for 2007, 2006 and 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
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).
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
Insurance
|
|
Lloyds
|
|
|
|
|
Companies
|
|
Operations
|
|
Total
|
|
|
|
($ in thousands)
|
|
Gross written premium:
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
266,647
|
|
$
|
225,216
|
|
$
|
491,863
|
Specialty
|
|
|
381,393
|
|
|
|
|
|
381,393
|
Professional Liability
|
|
|
99,556
|
|
|
34,281
|
|
|
133,837
|
Other
|
|
|
26,750
|
|
|
36,864
|
|
|
63,614
|
|
Total
|
|
$
|
774,346
|
|
$
|
296,361
|
|
$
|
1,070,707
|
|
Net written premium:
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
137,724
|
|
$
|
131,430
|
|
$
|
269,154
|
Specialty
|
|
|
263,433
|
|
|
|
|
|
263,433
|
Professional Liability
|
|
|
59,117
|
|
|
23,349
|
|
|
82,466
|
Other
|
|
|
17,744
|
|
|
12,999
|
|
|
30,743
|
|
Total
|
|
$
|
478,018
|
|
$
|
167,778
|
|
$
|
645,796
|
|
Net earned premium:
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
133,452
|
|
$
|
132,443
|
|
$
|
265,895
|
Specialty
|
|
|
243,915
|
|
|
|
|
|
243,915
|
Professional Liability
|
|
|
55,149
|
|
|
17,659
|
|
|
72,808
|
Other
|
|
|
10,940
|
|
|
8,419
|
|
|
19,359
|
|
Total
|
|
$
|
443,456
|
|
$
|
158,521
|
|
$
|
601,977
|
|
F-15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
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
|
|
|
42,664
|
|
|
|
14,332
|
|
|
|
|
|
|
|
56,996
|
|
Investment income
|
|
|
47,723
|
|
|
|
7,694
|
|
|
$
|
1,478
|
|
|
|
56,895
|
|
Net realized capital (losses)
|
|
|
(622
|
)
|
|
|
(404
|
)
|
|
|
|
|
|
|
(1,026
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(6,248
|
)
|
|
|
(6,248
|
)
|
|
Income (loss) 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 expenses 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
Insurance
|
|
Lloyds
|
|
|
|
|
Companies
|
|
Operations
|
|
Total
|
|
|
|
($ in thousands)
|
|
Gross written premium:
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
266,351
|
|
$
|
245,134
|
|
$
|
511,485
|
Specialty
|
|
|
311,376
|
|
|
|
|
|
311,376
|
Professional Liability
|
|
|
92,760
|
|
|
21,759
|
|
|
114,519
|
Other
|
|
|
2,359
|
|
|
31,051
|
|
|
33,410
|
|
Total
|
|
$
|
672,846
|
|
$
|
297,944
|
|
$
|
970,790
|
|
Net written premium:
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
128,920
|
|
$
|
127,636
|
|
$
|
256,556
|
Specialty
|
|
|
195,104
|
|
|
|
|
|
195,104
|
Professional Liability
|
|
|
51,192
|
|
|
9,016
|
|
|
60,208
|
Other
|
|
|
963
|
|
|
7,976
|
|
|
8,939
|
|
Total
|
|
$
|
376,179
|
|
$
|
144,628
|
|
$
|
520,807
|
|
Net earned premium:
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
115,093
|
|
$
|
130,644
|
|
$
|
245,737
|
Specialty
|
|
|
172,479
|
|
|
|
|
|
172,479
|
Professional Liability
|
|
|
41,437
|
|
|
4,237
|
|
|
45,674
|
Other
|
|
|
714
|
|
|
3,719
|
|
|
4,433
|
|
Total
|
|
$
|
329,723
|
|
$
|
138,600
|
|
$
|
468,323
|
|
F-16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
Insurance
|
|
|
Lloyds
|
|
|
|
|
|
|
|
|
|
Companies
|
|
|
Operations
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
($ in thousands)
|
|
|
Gross written premium(1)
|
|
$
|
529,681
|
|
|
$
|
248,383
|
|
|
|
|
|
|
$
|
779,579
|
|
Net written premium
|
|
|
267,745
|
|
|
|
112,914
|
|
|
|
|
|
|
|
380,659
|
|
Net earned premium
|
|
|
230,046
|
|
|
|
108,505
|
|
|
|
|
|
|
|
338,551
|
|
Net losses and loss adjustment expenses
|
|
|
(155,293
|
)
|
|
|
(80,362
|
)
|
|
|
|
|
|
|
(235,655
|
)
|
Commission expense
|
|
|
(22,984
|
)
|
|
|
(19,687
|
)
|
|
|
|
|
|
|
(42,671
|
)
|
Other operating expenses
|
|
|
(52,353
|
)
|
|
|
(20,786
|
)
|
|
|
|
|
|
|
(73,139
|
)
|
Commission income and other income (expense)
|
|
|
4,712
|
|
|
|
3,649
|
|
|
|
|
|
|
|
8,361
|
|
|
Underwriting profit (loss)
|
|
|
4,128
|
|
|
|
(8,681
|
)
|
|
|
|
|
|
|
(4,553
|
)
|
Investment income
|
|
|
31,764
|
|
|
|
5,061
|
|
|
$
|
244
|
|
|
|
37,069
|
|
Net realized capital gains (losses)
|
|
|
1,705
|
|
|
|
(467
|
)
|
|
|
|
|
|
|
1,238
|
|
|
Income before income tax expense (benefit)
|
|
|
37,597
|
|
|
|
(4,087
|
)
|
|
|
244
|
|
|
|
33,754
|
|
Income tax expense (benefit)
|
|
|
11,535
|
|
|
|
(1,431
|
)
|
|
|
86
|
|
|
|
10,190
|
|
|
Net income (loss)
|
|
$
|
26,062
|
|
|
$
|
(2,656
|
)
|
|
$
|
158
|
|
|
$
|
23,564
|
|
|
Identifiable assets(1)
|
|
$
|
1,793,064
|
|
|
$
|
773,079
|
|
|
$
|
23,155
|
|
|
$
|
2,583,249
|
|
|
Loss and loss expenses ratio
|
|
|
67.5
|
%
|
|
|
74.1
|
%
|
|
|
|
|
|
|
69.6
|
%
|
Commission expense ratio
|
|
|
10.0
|
%
|
|
|
18.1
|
%
|
|
|
|
|
|
|
12.6
|
%
|
Other operating expense ratio(2)
|
|
|
20.7
|
%
|
|
|
15.8
|
%
|
|
|
|
|
|
|
19.1
|
%
|
|
Combined ratio
|
|
|
98.2
|
%
|
|
|
108.0
|
%
|
|
|
|
|
|
|
101.3
|
%
|
|
|
|
|
(1)
|
|
Includes inter-segment balances
causing the row not to crossfoot.
|
(2)
|
|
Includes other operating
expenses and commission income and other income
(expense).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
Insurance
|
|
|
Lloyds
|
|
Intercompany
|
|
|
|
|
|
Companies
|
|
|
Operations
|
|
Elimination
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
Gross written premium:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
233,688
|
|
|
$
|
207,170
|
|
$
|
|
|
|
$
|
440,858
|
Specialty
|
|
|
210,483
|
|
|
|
|
|
|
|
|
|
|
210,483
|
Professional Liability
|
|
|
86,929
|
|
|
|
6,646
|
|
|
|
|
|
|
93,575
|
Other
|
|
|
(1,419
|
)
|
|
|
34,567
|
|
|
1,515
|
|
|
|
34,663
|
|
Total
|
|
$
|
529,681
|
|
|
$
|
248,383
|
|
$
|
1,515
|
|
|
$
|
779,579
|
|
Net written premium:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
88,591
|
|
|
$
|
99,797
|
|
$
|
|
|
|
$
|
188,388
|
Specialty
|
|
|
145,199
|
|
|
|
|
|
|
|
|
|
|
145,199
|
Professional Liability
|
|
|
35,626
|
|
|
|
2,613
|
|
|
|
|
|
|
38,239
|
Other
|
|
|
(1,671
|
)
|
|
|
10,504
|
|
|
|
|
|
|
8,833
|
|
Total
|
|
$
|
267,745
|
|
|
$
|
112,914
|
|
$
|
|
|
|
$
|
380,659
|
|
Net earned premium:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
83,499
|
|
|
$
|
102,632
|
|
$
|
|
|
|
$
|
186,131
|
Specialty
|
|
|
117,208
|
|
|
|
|
|
|
|
|
|
|
117,208
|
Professional Liability
|
|
|
30,118
|
|
|
|
1,240
|
|
|
|
|
|
|
31,358
|
Other
|
|
|
(779
|
)
|
|
|
4,633
|
|
|
|
|
|
|
3,854
|
|
Total
|
|
$
|
230,046
|
|
|
$
|
108,505
|
|
$
|
|
|
|
$
|
338,551
|
|
The Insurance Companies net earned premium includes
$62.2 million, $49.8 million and $40.5 million of
net earned premium from the U.K. Branch for 2007, 2006 and 2005,
respectively.
F-17
Note 4.
Investments
The Companys fixed maturities and equity securities at
December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
|
Unrealized
|
|
Unrealized
|
|
|
Cost or
|
December 31, 2007
|
|
Fair Value
|
|
Gains
|
|
(Losses)
|
|
|
Amortized Cost
|
|
|
|
($ in thousands)
|
|
U.S. Government Treasury bonds, GNMAs and foreign government
bonds
|
|
$
|
234,375
|
|
$
|
5,724
|
|
$
|
(337
|
)
|
|
$
|
228,988
|
States, municipalities, and political subdivisions
|
|
|
515,883
|
|
|
7,050
|
|
|
(657
|
)
|
|
|
509,490
|
Mortgage- and asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-guaranteed Government Agency bonds
|
|
|
29,818
|
|
|
342
|
|
|
(4
|
)
|
|
|
29,480
|
Mortgage-backed securities
|
|
|
232,869
|
|
|
1,824
|
|
|
(479
|
)
|
|
|
231,524
|
Collateralized mortgage obligations
|
|
|
134,899
|
|
|
524
|
|
|
(823
|
)
|
|
|
135,198
|
Commercial mortgage-backed securities
|
|
|
113,488
|
|
|
544
|
|
|
(1,031
|
)
|
|
|
113,975
|
Asset-backed securities
|
|
|
64,352
|
|
|
533
|
|
|
(79
|
)
|
|
|
63,898
|
|
Subtotal
|
|
|
575,426
|
|
|
3,767
|
|
|
(2,416
|
)
|
|
|
574,075
|
Corporate bonds
|
|
|
196,636
|
|
|
2,504
|
|
|
(1,804
|
)
|
|
|
195,936
|
|
Total fixed maturities
|
|
|
1,522,320
|
|
|
19,045
|
|
|
(5,214
|
)
|
|
|
1,508,489
|
|
Equity securitiescommon 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
|
Unrealized
|
|
Unrealized
|
|
|
Cost or
|
December 31, 2006
|
|
Fair Value
|
|
Gains
|
|
(Losses)
|
|
|
Amortized Cost
|
|
|
|
($ in thousands)
|
|
U.S. Government Treasury bonds, GNMAs and foreign government
bonds
|
|
$
|
194,210
|
|
$
|
969
|
|
$
|
(1,999
|
)
|
|
$
|
195,240
|
States, municipalities, and political subdivisions
|
|
|
361,859
|
|
|
2,719
|
|
|
(2,345
|
)
|
|
|
361,485
|
Mortgage- and asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-guaranteed Government Agency bonds
|
|
|
11,998
|
|
|
3
|
|
|
(88
|
)
|
|
|
12,083
|
Mortgage-backed securities
|
|
|
202,371
|
|
|
176
|
|
|
(2,518
|
)
|
|
|
204,713
|
Collateralized mortgage obligations
|
|
|
124,508
|
|
|
220
|
|
|
(358
|
)
|
|
|
124,646
|
Commercial mortgage-backed securities
|
|
|
94,117
|
|
|
330
|
|
|
(1,142
|
)
|
|
|
94,929
|
Asset-backed securities
|
|
|
68,566
|
|
|
213
|
|
|
(469
|
)
|
|
|
68,822
|
|
Subtotal
|
|
|
501,560
|
|
|
942
|
|
|
(4,575
|
)
|
|
|
505,193
|
Corporate bonds
|
|
|
201,088
|
|
|
1,672
|
|
|
(1,950
|
)
|
|
|
201,366
|
|
Total fixed maturities
|
|
|
1,258,717
|
|
|
6,302
|
|
|
(10,869
|
)
|
|
|
1,263,284
|
|
Equity securitiescommon stocks
|
|
|
37,828
|
|
|
6,297
|
|
|
(348
|
)
|
|
|
31,879
|
Cash
|
|
|
2,404
|
|
|
|
|
|
|
|
|
|
2,404
|
Short-term investments
|
|
|
176,961
|
|
|
|
|
|
|
|
|
|
176,961
|
|
Total
|
|
$
|
1,475,910
|
|
$
|
12,599
|
|
$
|
(11,217
|
)
|
|
$
|
1,474,528
|
|
We regularly review our fixed maturity and equity securities
portfolios to evaluate the necessity of recording impairment
losses for other-than-temporary declines in the fair value of
investments. In general, we focus our attention on those
securities whose market value was less than 80% of their cost or
amortized cost, as appropriate, for six or more consecutive
months. Other factors considered in evaluating potential
impairment include the current fair value as compared to cost or
amortized cost, as appropriate, our intent and ability to retain
the investment for a period of time sufficient to allow for an
anticipated recovery in value, specific credit issues related to
the issuer and current economic conditions.
As mentioned above, the Company considers its intent and ability
to hold a security until the value recovers as part of the
process of evaluating whether a securitys unrealized loss
represents an other-than-temporary decline. The Companys
ability to hold such securities is supported by sufficient cash
flow from its operations and from maturities within its
investment portfolio in order to meet its claims payment and
other disbursement obligations arising from its underwriting
operations without selling such investments. With respect to
securities where the decline in value is determined to be
temporary and the securitys value is not written down, a
subsequent decision may be made to sell that security and
realize a loss. Subsequent decisions on security sales
F-18
are made within the context of
overall risk monitoring, new information, market conditions and
assessing value relative to other comparable securities.
Management of the Companys investment portfolio is
outsourced to third party investment managers. While these
investment managers may, at a given point in time, believe that
the preferred course of action is to hold securities with
unrealized losses that are considered temporary until such
losses are recovered, the dynamic nature of the portfolio
management may result in a subsequent decision to sell the
security and realize the loss, based upon a change in market and
other factors described above. The Company believes that
subsequent decisions to sell such securities are consistent with
the classification of the Companys portfolio as available
for sale.
When a security in our investment portfolio has an unrealized
loss that is deemed to be other-than-temporary, we write the
security down to fair value through a charge to operations.
Significant changes in the factors we consider when evaluating
investments for impairment losses could result in a significant
change in impairment losses reported in the consolidated
financial statements. We held shares of a bond guarantee company
in our equity portfolio at December 31, 2007 which we
considered to be other-than-temporarily-impaired and recorded a
capital loss on such shares amounting to $0.7 million in
our 2007 fourth quarter. All shares were sold in January 2008.
There were no impairment losses recorded in our fixed maturity
or equity securities portfolios for the years ended
December 31, 2006 or 2005.
The following table summarizes all securities in an unrealized
loss position at December 31, 2007 and 2006, showing the
aggregate fair value and gross unrealized loss by the length of
time those securities have continuously been in an unrealized
loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
|
|
|
|
|
Fair
|
|
Gross
|
|
Fair
|
|
Gross
|
|
|
Value
|
|
Unrealized Loss
|
|
Value
|
|
Unrealized Loss
|
|
|
|
($ in thousands)
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Treasury bonds, GNMAs and foreign government bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months
|
|
$
|
4,119
|
|
$
|
32
|
|
$
|
34,085
|
|
$
|
586
|
7-12 Months
|
|
|
|
|
|
|
|
|
20,806
|
|
|
86
|
> 12 Months
|
|
|
19,587
|
|
|
305
|
|
|
69,424
|
|
|
1,327
|
|
Subtotal
|
|
|
23,706
|
|
|
337
|
|
|
124,315
|
|
|
1,999
|
|
States, municipalities and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months
|
|
|
21,853
|
|
|
67
|
|
|
57,747
|
|
|
316
|
7-12 Months
|
|
|
6,045
|
|
|
115
|
|
|
6,661
|
|
|
80
|
> 12 Months
|
|
|
69,671
|
|
|
475
|
|
|
118,917
|
|
|
1,949
|
|
Subtotal
|
|
|
97,569
|
|
|
657
|
|
|
183,325
|
|
|
2,345
|
|
Mortgage- and asset-backed securities (excluding GNMAs)
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months
|
|
|
61,388
|
|
|
515
|
|
|
174,270
|
|
|
921
|
7-12 Months
|
|
|
48,496
|
|
|
423
|
|
|
10,444
|
|
|
65
|
> 12 Months
|
|
|
121,798
|
|
|
1,478
|
|
|
184,515
|
|
|
3,589
|
|
Subtotal
|
|
|
231,682
|
|
|
2,416
|
|
|
369,229
|
|
|
4,575
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months
|
|
|
20,722
|
|
|
255
|
|
|
27,719
|
|
|
185
|
7-12 Months
|
|
|
25,520
|
|
|
974
|
|
|
15,503
|
|
|
224
|
> 12 Months
|
|
|
38,865
|
|
|
575
|
|
|
66,014
|
|
|
1,541
|
|
Subtotal
|
|
|
85,107
|
|
|
1,804
|
|
|
109,236
|
|
|
1,950
|
|
Total Fixed Maturities
|
|
$
|
438,064
|
|
$
|
5,214
|
|
$
|
786,105
|
|
$
|
10,869
|
|
Equity securitiescommon stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months
|
|
$
|
26,257
|
|
$
|
3,494
|
|
$
|
3,265
|
|
$
|
158
|
7-12 Months
|
|
|
4,153
|
|
|
1,209
|
|
|
800
|
|
|
72
|
> 12 Months
|
|
|
53
|
|
|
1
|
|
|
782
|
|
|
118
|
|
Total Equity Securities
|
|
$
|
30,463
|
|
$
|
4,704
|
|
$
|
4,847
|
|
$
|
348
|
|
|
We analyze the unrealized losses quarterly to determine if any
are other-than-temporary. The above unrealized losses have been
determined to be temporary and resulted from changes in market
conditions.
F-19
The scheduled maturity dates for fixed maturity securities by
the number of years until maturity at December 31, 2007 are
shown in the following table:
|
|
|
|
|
|
|
|
|
Fair
|
|
Amortized
|
Period from December 31, 2007 to Maturity
|
|
Value
|
|
Cost
|
|
|
|
($ in thousands)
|
|
Due in one year or less
|
|
$
|
42,415
|
|
$
|
42,442
|
Due after one year through five years
|
|
|
322,763
|
|
|
319,587
|
Due after five years through ten years
|
|
|
307,550
|
|
|
302,020
|
Due after ten years
|
|
|
274,166
|
|
|
270,365
|
Mortgage- and asset-backed (including GNMAs)
|
|
|
575,426
|
|
|
574,075
|
|
Total
|
|
$
|
1,522,320
|
|
$
|
1,508,489
|
|
|
Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations
with or without call or prepayment penalties. Due to the
periodic repayment of principal, the mortgage-backed and
asset-backed securities are estimated to have an effective
maturity of approximately 4.7 years.
The Companys net investment income was derived from the
following sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Fixed maturities
|
|
$
|
64,435
|
|
|
$
|
51,102
|
|
|
$
|
35,551
|
|
Equity securities
|
|
|
1,767
|
|
|
|
1,168
|
|
|
|
799
|
|
Short-term investments
|
|
|
7,363
|
|
|
|
7,058
|
|
|
|
2,307
|
|
|
|
|
|
73,565
|
|
|
|
59,328
|
|
|
|
38,657
|
|
Investment expenses
|
|
|
(2,903
|
)
|
|
|
(2,433
|
)
|
|
|
(1,588
|
)
|
|
Net investment income
|
|
$
|
70,662
|
|
|
$
|
56,895
|
|
|
$
|
37,069
|
|
|
|
The Companys realized capital gains and losses were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
$
|
1,320
|
|
|
$
|
743
|
|
|
$
|
1,932
|
|
(Losses)
|
|
|
(1,749
|
)
|
|
|
(2,385
|
)
|
|
|
(1,680
|
)
|
|
|
|
|
(429
|
)
|
|
|
(1,642
|
)
|
|
|
252
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
|
3,626
|
|
|
|
714
|
|
|
|
1,149
|
|
(Losses)
|
|
|
(1,191
|
)
|
|
|
(98
|
)
|
|
|
(163
|
)
|
|
|
|
|
2,435
|
|
|
|
616
|
|
|
|
986
|
|
|
Net realized capital gains (losses)
|
|
$
|
2,006
|
|
|
$
|
(1,026
|
)
|
|
$
|
1,238
|
|
|
|
At December 31, 2007 and 2006, fixed maturities with
amortized values of $10.6 million and $10.5 million,
respectively, were on deposit with various State Insurance
Departments. In addition, at December 31, 2007, 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, 2007 and 2006, $0.3 million
of investments were pledged as security under a reinsurance
treaty.
At December 31, 2007 and 2006, the Company did not have a
concentration of greater than 10% of invested assets in a single
non-U.S.
government issuer.
The fair values of fixed maturity and equity securities are
based on market prices provided by independent pricing services
at the reporting date. Short-term investments are carried at
cost, which approximates fair value. The carrying amounts of
premium receivables approximate fair value because of the short
duration of those instruments.
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
F-20
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.
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.
The following table summarizes the activity in the
Companys reserve for losses and LAE during the three most
recent years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Net reserves for losses and LAE at beginning of year
|
|
$
|
696,116
|
|
|
$
|
578,976
|
|
|
$
|
463,788
|
|
|
Provision for losses and LAE for claims occurring in the current
year
|
|
|
387,601
|
|
|
|
287,401
|
|
|
|
239,436
|
|
(Decrease) in estimated losses and LAE for claims occurring in
prior years
|
|
|
(47,009
|
)
|
|
|
(17,214
|
)
|
|
|
(3,781
|
)
|
|
Incurred losses and LAE
|
|
|
340,592
|
|
|
|
270,187
|
|
|
|
235,655
|
|
|
Losses and LAE paid for claims occurring during:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(46,467
|
)
|
|
|
(19,710
|
)
|
|
|
(23,486
|
)
|
Prior years
|
|
|
(142,938
|
)
|
|
|
(133,337
|
)
|
|
|
(96,981
|
)
|
|
Losses and LAE payments
|
|
|
(189,405
|
)
|
|
|
(153,047
|
)
|
|
|
(120,467
|
)
|
|
Net reserves for losses and LAE at end of year
|
|
|
847,303
|
|
|
|
696,116
|
|
|
|
578,976
|
|
|
Reinsurance receivables on unpaid losses and LAE
|
|
|
801,461
|
|
|
|
911,439
|
|
|
|
979,015
|
|
|
Gross reserves for losses and LAE at end of year
|
|
$
|
1,648,764
|
|
|
$
|
1,607,555
|
|
|
$
|
1,557,991
|
|
|
|
F-21
The segment and line of business breakdown of prior years
net reserve deficiency (redundancy) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Insurance Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine
|
|
$
|
(10,695
|
)
|
|
$
|
(4,800
|
)
|
|
$
|
1,912
|
|
Specialty
|
|
|
(12,091
|
)
|
|
|
(6,060
|
)
|
|
|
875
|
|
Professional Liability
|
|
|
(10,365
|
)
|
|
|
(1,223
|
)
|
|
|
(3,045
|
)
|
Other
|
|
|
(645
|
)
|
|
|
(649
|
)
|
|
|
(2,324
|
)
|
|
Subtotal Insurance Companies
|
|
|
(33,796
|
)
|
|
|
(12,732
|
)
|
|
|
(2,582
|
)
|
Lloyds Operations
|
|
|
(13,213
|
)
|
|
|
(4,482
|
)
|
|
|
(1,199
|
)
|
|
Total
|
|
$
|
(47,009
|
)
|
|
$
|
(17,214
|
)
|
|
$
|
(3,781
|
)
|
|
|
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,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Gross of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning gross reserves
|
|
$
|
37,171
|
|
|
$
|
56,838
|
|
$
|
78,421
|
|
Incurred loss & LAE
|
|
|
(781
|
)
|
|
|
246
|
|
|
(17,409
|
)
|
Calendar year payments
|
|
|
13,197
|
|
|
|
19,913
|
|
|
4,174
|
|
|
Ending gross reserves
|
|
$
|
23,193
|
|
|
$
|
37,171
|
|
$
|
56,838
|
|
|
Gross case loss reserves
|
|
$
|
16,014
|
|
|
$
|
29,291
|
|
$
|
48,958
|
|
Gross IBNR loss reserves
|
|
|
7,179
|
|
|
|
7,880
|
|
|
7,880
|
|
|
Ending gross reserves
|
|
$
|
23,193
|
|
|
$
|
37,171
|
|
$
|
56,838
|
|
|
Net of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning net reserves
|
|
$
|
21,381
|
|
|
$
|
30,372
|
|
$
|
31,394
|
|
Incurred loss & LAE
|
|
|
1,779
|
|
|
|
229
|
|
|
529
|
|
Calendar year payments
|
|
|
6,443
|
|
|
|
9,220
|
|
|
1,551
|
|
|
Ending net reserves
|
|
$
|
16,717
|
|
|
$
|
21,381
|
|
$
|
30,372
|
|
|
Net case loss reserves
|
|
$
|
9,715
|
|
|
$
|
13,678
|
|
$
|
22,669
|
|
Net IBNR loss reserves
|
|
|
7,002
|
|
|
|
7,703
|
|
|
7,703
|
|
|
Ending net reserves
|
|
$
|
16,717
|
|
|
$
|
21,381
|
|
$
|
30,372
|
|
|
|
The reserves for asbestos exposures at December 31, 2007
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 settlements
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 are 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.
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 2007, 2006 and 2005. The
reduction in gross incurred loss and LAE in 2005 relates to
settlement of large claims discussed above.
At December 31, 2007, the ceded asbestos paid and unpaid
recoverables were $10.5 million compared to
$23.5 million at December 31, 2006. During 2007, the
Company increased its provision for uncollectible reinsurance
for asbestos losses by $1.6 million which was recorded in
incurred losses. The Company also settled demands for
arbitration with two asbestos reinsurers.
Loss reserves for environmental losses generally consist of oil
spill claims on marine liability policies written in the
ordinary
F-22
course of business. Loss reserves for such exposures are
included in our marine loss reserves and not separately
identified.
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 asbestos reserves, along with
all of our reserves, on a regular basis.
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
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 was recently merged into 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 $1.09 billion at
December 31, 2007 for ceded paid and unpaid losses and loss
adjustment expenses and ceded unearned premiums based on insurer
financial strength ratings from A. M. Best or S&P was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Recoverable
|
|
Percent
|
|
A.M. Best Rating(1)
|
|
Description
|
|
Amounts
|
|
to Total
|
|
|
|
|
|
|
|
($ millions)
|
|
|
|
|
A++, A+
|
|
|
Superior
|
|
$
|
637.4
|
|
|
59
|
%
|
A, A−
|
|
|
Excellent
|
|
|
408.3
|
|
|
38
|
%
|
B++, B+
|
|
|
Very good
|
|
|
3.0
|
|
|
0
|
%(2)
|
NR
|
|
|
Not rated
|
|
|
36.6
|
|
|
3
|
%(2)
|
|
Total
|
|
|
|
|
$
|
1,085.3
|
|
|
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 33% for B++ and B+ companies and 92%
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-23
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 76.2% of our total recoverables) together with the
reinsurance recoverables and collateral at December 31,
2007, 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
|
|
$
|
20.5
|
|
$
|
95.6
|
|
$
|
116.1
|
|
$
|
13.6
|
|
|
A+
|
|
|
|
AMB(2
|
)
|
Folksamerica Reinsurance Company
|
|
|
21.0
|
|
|
88.7
|
|
|
109.7
|
|
|
45.7
|
|
|
A−
|
|
|
|
AMB
|
|
General Reinsurance Corporation
|
|
|
7.1
|
|
|
89.7
|
|
|
96.8
|
|
|
|
|
|
A++
|
|
|
|
AMB
|
|
Everest Reinsurance Company
|
|
|
14.6
|
|
|
40.4
|
|
|
55.0
|
|
|
7.5
|
|
|
A+
|
|
|
|
AMB
|
|
National Indemnity Company
|
|
|
11.6
|
|
|
37.8
|
|
|
49.4
|
|
|
11.3
|
|
|
A++
|
|
|
|
AMB
|
|
Transatlantic Reinsurance Company
|
|
|
15.6
|
|
|
33.3
|
|
|
48.9
|
|
|
9.5
|
|
|
A+
|
|
|
|
AMB
|
|
Munich Reinsurance America Inc.
|
|
|
9.8
|
|
|
32.1
|
|
|
41.9
|
|
|
11.5
|
|
|
A+
|
|
|
|
AMB
|
|
Munchener Ruckversicherungs-Gesellschaft
|
|
|
6.2
|
|
|
33.6
|
|
|
39.8
|
|
|
8.6
|
|
|
A+
|
|
|
|
AMB
|
|
Swiss Reinsurance Company (UK) Ltd.
|
|
|
5.7
|
|
|
30.7
|
|
|
36.4
|
|
|
8.1
|
|
|
A+
|
|
|
|
AMB
|
|
Platinum Underwriters Re
|
|
|
5.8
|
|
|
27.7
|
|
|
33.5
|
|
|
3.5
|
|
|
A
|
|
|
|
AMB
|
|
Arch Reinsurance Company
|
|
|
3.8
|
|
|
25.3
|
|
|
29.1
|
|
|
1.0
|
|
|
A
|
|
|
|
AMB
|
|
Partner Reinsurance Company of the U.S.
|
|
|
6.1
|
|
|
21.9
|
|
|
28.0
|
|
|
3.9
|
|
|
A+
|
|
|
|
AMB
|
|
Scor Holding (Switzerland) AG
|
|
|
5.8
|
|
|
20.1
|
|
|
25.9
|
|
|
4.5
|
|
|
A−
|
|
|
|
AMB
|
|
Federal Insurance Co.
|
|
|
5.7
|
|
|
15.6
|
|
|
21.3
|
|
|
5.6
|
|
|
A++
|
|
|
|
AMB
|
|
Berkley Insurance Company
|
|
|
11.4
|
|
|
9.5
|
|
|
20.9
|
|
|
5.6
|
|
|
A+
|
|
|
|
AMB
|
|
Arch Reinsurance Limited
|
|
|
5.5
|
|
|
12.0
|
|
|
17.5
|
|
|
17.0
|
|
|
A
|
|
|
|
AMB
|
|
Allianz Global Corporate & Specialty AG
|
|
|
|
|
|
16.1
|
|
|
16.1
|
|
|
2.9
|
|
|
A+
|
|
|
|
AMB
|
|
Hannover Ruckversicherung
|
|
|
1.4
|
|
|
13.2
|
|
|
14.6
|
|
|
1.3
|
|
|
A
|
|
|
|
AMB
|
|
Ace Property and Casualty Insurance Company
|
|
|
2.3
|
|
|
11.9
|
|
|
14.2
|
|
|
0.5
|
|
|
A+
|
|
|
|
AMB
|
|
National Liability & Fire Insurance Company
|
|
|
0.1
|
|
|
12.3
|
|
|
12.4
|
|
|
|
|
|
A++
|
|
|
|
AMB
|
|
|
|
|
|
|
|
|
|
|
Top 20 Total
|
|
|
160.0
|
|
|
667.5
|
|
|
827.5
|
|
|
161.6
|
|
|
|
|
|
|
|
|
All Other
|
|
|
29.0
|
|
|
228.8
|
|
|
257.8
|
|
|
91.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
189.0
|
|
$
|
896.3
|
|
$
|
1,085.3
|
|
$
|
253.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Collateral includes letters of
credit, ceded balances payable and other balances held by our
Insurance Companies and our Lloyds Operations.
|
(2)
|
|
A.M. Best
|
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.
Approximately $167.7 million and $375.8 million of the
reinsurance recoverables for paid and unpaid losses at
December 31, 2007 and 2006, respectively, were due from
reinsurers as a result of Hurricanes Katrina and Rita.
Also included in reinsurance recoverable for paid and unpaid
losses is approximately $10.5 million due from reinsurers
in connection with our asbestos exposures of which
$6.2 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 balance greater than $0.6 million due from a single
reinsurer.
F-24
The following table summarizes written premium:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Direct
|
|
$
|
989,652
|
|
|
$
|
904,863
|
|
|
$
|
701,094
|
|
Assumed
|
|
|
81,055
|
|
|
|
65,927
|
|
|
|
78,485
|
|
Ceded
|
|
|
(424,911
|
)
|
|
|
(449,983
|
)
|
|
|
(398,920
|
)
|
|
Net
|
|
$
|
645,796
|
|
|
$
|
520,807
|
|
|
$
|
380,659
|
|
|
|
The following table summarizes earned premium:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Direct
|
|
$
|
940,447
|
|
|
$
|
811,794
|
|
|
$
|
653,064
|
|
Assumed
|
|
|
78,164
|
|
|
|
65,660
|
|
|
|
76,795
|
|
Ceded
|
|
|
(416,634
|
)
|
|
|
(409,131
|
)
|
|
|
(391,308
|
)
|
|
Net
|
|
$
|
601,977
|
|
|
$
|
468,323
|
|
|
$
|
338,551
|
|
|
|
The following table summarizes losses and loss adjustment
expenses incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Direct
|
|
$
|
532,445
|
|
|
$
|
475,148
|
|
|
$
|
745,416
|
|
Assumed
|
|
|
18,314
|
|
|
|
22,854
|
|
|
|
140,321
|
|
Ceded
|
|
|
(210,167
|
)
|
|
|
(227,815
|
)
|
|
|
(650,082
|
)
|
|
Net
|
|
$
|
340,592
|
|
|
$
|
270,187
|
|
|
$
|
235,655
|
|
|
|
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
$921,000, $558,000 and $1,387,000 for 2007, 2006 and 2005,
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 at a 30% rate. A finance bill was enacted in the
U.K. on July 19, 2007 that reduces the U.K. corporate tax
rate from 30% to 28% effective April 1, 2008. The effect of
such tax rate change was not material to the Companys
financial statements.
We have not provided for U.S. deferred income taxes on the
undistributed earnings of approximately $45.5 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
$3.2 million would be payable on such undistributed
earnings and would be reflected in the tax provision for the
year in which these earnings are no longer intended to be
permanently reinvested in the
non-U.S.
subsidiary assuming all foreign tax credits are realized.
F-25
The components of current and deferred income tax expense
(benefit) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Current income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal and foreign
|
|
$
|
47,963
|
|
|
$
|
38,644
|
|
|
$
|
15,841
|
|
State and local
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
Subtotal
|
|
|
47,963
|
|
|
|
38,644
|
|
|
|
15,826
|
|
|
Deferred income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal and foreign
|
|
|
(4,401
|
)
|
|
|
(4,590
|
)
|
|
|
(5,672
|
)
|
State and local
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
Subtotal
|
|
|
(4,401
|
)
|
|
|
(4,590
|
)
|
|
|
(5,636
|
)
|
|
Total income tax expense
|
|
$
|
43,562
|
|
|
$
|
34,054
|
|
|
$
|
10,190
|
|
|
|
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,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
($ in thousands)
|
|
|
Computed expected tax expense
|
|
$
|
48,714
|
|
|
|
35.0
|
%
|
|
$
|
37,316
|
|
|
|
35.0
|
%
|
|
$
|
11,814
|
|
|
|
35.0
|
%
|
Tax-exempt interest
|
|
|
(4,736
|
)
|
|
|
−3.4
|
%
|
|
|
(3,331
|
)
|
|
|
−3.1
|
%
|
|
|
(1,899
|
)
|
|
|
−5.6
|
%
|
Dividends received deduction
|
|
|
(345
|
)
|
|
|
−0.2
|
%
|
|
|
(243
|
)
|
|
|
−0.2
|
%
|
|
|
(166
|
)
|
|
|
−0.5
|
%
|
State and local income taxes, net of Federal income tax
|
|
|
64
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
14
|
|
|
|
0.0
|
%
|
Change in the state and local tax net operating loss carryforward
|
|
|
(358
|
)
|
|
|
−0.3
|
%
|
|
|
(981
|
)
|
|
|
−1.0
|
%
|
|
|
(516
|
)
|
|
|
−3.6
|
%
|
Change in the valuation allowance
|
|
|
358
|
|
|
|
0.3
|
%
|
|
|
981
|
|
|
|
1.0
|
%
|
|
|
516
|
|
|
|
3.6
|
%
|
Other
|
|
|
(135
|
)
|
|
|
−0.1
|
%
|
|
|
312
|
|
|
|
0.2
|
%
|
|
|
427
|
|
|
|
1.3
|
%
|
|
Actual tax expense and rate
|
|
$
|
43,562
|
|
|
|
31.3
|
%
|
|
$
|
34,054
|
|
|
|
31.9
|
%
|
|
$
|
10,190
|
|
|
|
30.2
|
%
|
|
|
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,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
($ in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Loss reserve discount
|
|
$
|
28,857
|
|
|
$
|
24,847
|
|
Unearned premium
|
|
|
14,467
|
|
|
|
12,048
|
|
Compensation related
|
|
|
5,190
|
|
|
|
2,313
|
|
State and local net deferred tax assets
|
|
|
6,348
|
|
|
|
5,990
|
|
Other
|
|
|
922
|
|
|
|
737
|
|
|
Total gross deferred tax assets
|
|
|
55,784
|
|
|
|
45,935
|
|
Less: Valuation allowance
|
|
|
(6,348
|
)
|
|
|
(5,990
|
)
|
|
Total deferred tax assets
|
|
|
49,436
|
|
|
|
39,945
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred acquisition costs
|
|
|
(10,794
|
)
|
|
|
(8,602
|
)
|
Net unrealized gains on securities
|
|
|
(5,394
|
)
|
|
|
(534
|
)
|
Net deferred state and local income tax
|
|
|
(254
|
)
|
|
|
(254
|
)
|
Other
|
|
|
(3,745
|
)
|
|
|
(133
|
)
|
|
Total deferred tax liabilities
|
|
|
(20,187
|
)
|
|
|
(9,523
|
)
|
|
Net deferred tax asset
|
|
$
|
29,249
|
|
|
$
|
30,422
|
|
|
|
F-26
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, 2007, net of any valuation allowance.
The Company had state and local deferred tax assets amounting to
potential future tax benefits of $6.3 million and
$6.0 million at December 31, 2007 and 2006,
respectively. Included in the deferred tax assets are net
operating loss carryforwards of $2.5 million and
$4.8 million at December 31, 2007 and 2006,
respectively. A valuation allowance was established for the full
amount of these potential future tax benefits due to the
uncertainty associated with their realization. The
Companys state and local tax carryforwards at
December 31, 2007 expire from 2022 to 2027.
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.
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, 2007, letters of credit with an aggregate face
amount of $107 million were issued under the credit
facility. The line of credit was unused at December 31,
2007.
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, 2007. We were in compliance with all covenants
at December 31, 2007.
Note 9.
Senior Notes
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 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 at December 31,
2007, was $127 million.
Note 10.
Fiduciary Funds
Prior to 2006, the Navigators Agencies managed insurance pools
in which Navigators Insurance Company participated. Functions
performed by the Navigators Agencies included underwriting
business, collecting premiums from the insured, paying claims,
collecting paid recoverables from reinsurers, paying reinsurance
premiums to reinsurers and remitting net account balances to
member insurance companies. Funds received by the Company
belonging to non-related participants in the former insurance
pools are not material. They are held in a fiduciary capacity
and are included in the accompanying consolidated balance sheets.
F-27
Note 11.
Commitments and Contingencies
a. Future minimum annual rental commitments at December 31,
2007 under various noncancellable operating leases for the
Companys office facilities, which expire at various dates
through 2018, are as follows:
|
|
|
|
Year Ended December 31,
|
|
($ in thousands)
|
|
|
2008
|
|
$
|
5,859
|
2009
|
|
|
6,600
|
2010
|
|
|
6,214
|
2011
|
|
|
5,798
|
2012
|
|
|
5,751
|
Subsequent to 2012
|
|
|
25,061
|
|
Total
|
|
$
|
55,283
|
|
|
The Company is also liable for additional payments to the
landlords for certain annual cost increases. Rent expense for
the years ended December 31, 2007, 2006 and 2005 was
$6.4 million, $4.8 million and $3.1 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 2007 capacity at
Lloyds of £140 million, the December 31,
2007 exchange rate of £1 equals $1.98 and assuming the
maximum 3% assessment, the Company would be assessed
approximately $8.3 million.
Note 12.
Share Capital
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,
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in thousands)
|
|
Balance, beginning of year
|
|
|
16,736
|
|
|
16,617
|
|
|
12,657
|
Public offering
|
|
|
|
|
|
|
|
|
3,795
|
Vested stock grants
|
|
|
33
|
|
|
32
|
|
|
37
|
Employee stock purchase plan
|
|
|
15
|
|
|
15
|
|
|
16
|
Stock options exercised
|
|
|
89
|
|
|
72
|
|
|
112
|
|
Balance, end of year
|
|
|
16,873
|
|
|
16,736
|
|
|
16,617
|
|
|
There are no preferred shares issued.
In October 2005, the Company completed an underwritten public
offering of 3,795,000 shares, including the over allotment
option, and received net proceeds of $123.8 million. The
proceeds were used to contribute $120 million to the
Insurance Companies and for other general corporate purposes.
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, 2007, the maximum amount available for the
payment of dividends by Navigators Insurance Company during 2008
without prior regulatory approval was $57.9 million.
Navigators Insurance Company paid $8.0 million in dividends
to the Company in 2007 and $3.0 million in 2005. No
dividends were paid by Navigators Insurance Company in 2006. The
U.K. Branch is required to maintain certain capital requirements
under U.K. regulations.
The Insurance Companies statutory net income as filed with
the regulatory authorities for 2007, 2006 and 2005 was
$68.5 million, $48.7 million and $18.7 million,
respectively. The statutory surplus as filed with the regulatory
authorities was $578.7 million and $524.2 million at
December 31, 2007 and 2006, respectively.
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
F-28
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.
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, 2007, 427,809 of such
awards were issued leaving 572,191 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 amounts charged to
expense were $5.3 million, $4.3 million and
$1.5 million in 2007, 2006 and 2005, respectively. In
addition, $25,000 in each of 2007 and 2006 and $20,000 in 2005
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 2007, 2006 and 2005 for the stock earned by
directors was $200,000, $177,000 and $140,000, respectively.
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, 2007, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Stock grants outstanding at beginning of year
|
|
|
250,149
|
|
|
|
99,708
|
|
|
|
94,460
|
|
Granted
|
|
|
203,725
|
|
|
|
208,623
|
|
|
|
58,458
|
|
Vested
|
|
|
(40,827
|
)
|
|
|
(40,574
|
)
|
|
|
(50,874
|
)
|
Forfeited
|
|
|
(21,181
|
)
|
|
|
(17,608
|
)
|
|
|
(2,336
|
)
|
|
Balance at end of year
|
|
|
391,866
|
|
|
|
250,149
|
|
|
|
99,708
|
|
|
|
Stock options outstanding at December 31, 2007, 2006 and
2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
Average
|
|
|
|
|
Average
|
|
|
|
|
Average
|
|
|
No. of
|
|
|
Exercise
|
|
No. of
|
|
|
Exercise
|
|
No. of
|
|
|
Exercise
|
|
|
Shares
|
|
|
Prices
|
|
Shares
|
|
|
Prices
|
|
Shares
|
|
|
Prices
|
|
|
Options outstanding at beginning of year
|
|
|
475,250
|
|
|
$
|
22.45
|
|
|
554,000
|
|
|
$
|
21.85
|
|
|
641,875
|
|
|
$
|
19.87
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,500
|
|
|
$
|
33.29
|
Exercised
|
|
|
(88,525
|
)
|
|
$
|
18.38
|
|
|
(71,750
|
)
|
|
$
|
17.30
|
|
|
(112,375
|
)
|
|
$
|
13.97
|
Expired or forfeited
|
|
|
(2,375
|
)
|
|
$
|
29.11
|
|
|
(7,000
|
)
|
|
$
|
28.25
|
|
|
(17,000
|
)
|
|
$
|
27.15
|
|
Options outstanding at end of year
|
|
|
384,350
|
|
|
$
|
23.34
|
|
|
475,250
|
|
|
$
|
22.45
|
|
|
554,000
|
|
|
$
|
21.85
|
|
Number of options exercisable
|
|
|
329,600
|
|
|
$
|
22.12
|
|
|
355,000
|
|
|
$
|
20.01
|
|
|
342,750
|
|
|
$
|
17.34
|
|
|
F-29
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
assumptions used by year for the options granted indicated in
the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
Dividend yield
|
|
|
N/A
|
|
|
N/A
|
|
|
0.0
|
%
|
Risk free interest rate
|
|
|
N/A
|
|
|
N/A
|
|
|
4.0
|
%
|
Expected volatility
|
|
|
N/A
|
|
|
N/A
|
|
|
31.1
|
%
|
Expected life
|
|
|
N/A
|
|
|
N/A
|
|
|
6 years
|
|
Weighted average fair value
|
|
|
N/A
|
|
|
N/A
|
|
$
|
12.76
|
|
|
N/Anot applicable since no options were issued in 2007 or
2006.
The following table summarizes information about options
outstanding at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Average Remaining
|
|
Average
|
|
Exercisable
|
|
Average
|
Price Range
|
|
Options
|
|
Contract Life
|
|
Exercise Price
|
|
Options
|
|
Exercise Price
|
|
|
$10 to $15
|
|
|
69,375
|
|
|
1.9
|
|
$
|
11.60
|
|
|
69,375
|
|
$
|
11.60
|
$16 to $20
|
|
|
80,850
|
|
|
4.3
|
|
$
|
17.06
|
|
|
80,850
|
|
$
|
17.06
|
$21 to $30
|
|
|
192,625
|
|
|
5.9
|
|
$
|
28.02
|
|
|
158,625
|
|
$
|
27.84
|
$31 to $37
|
|
|
41,500
|
|
|
7.2
|
|
$
|
33.29
|
|
|
20,750
|
|
$
|
33.29
|
|
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 2007, 2006 and 2005 were
$1.4 million, $0.6 million and $1.7 million,
respectively.
Stock appreciation rights outstanding at December 31, 2007,
2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Average
|
|
|
|
|
Average
|
|
|
|
|
|
Exercise
|
|
|
|
|
Exercise
|
|
|
|
|
Exercise
|
|
|
SARs
|
|
|
Prices
|
|
SARs
|
|
|
Prices
|
|
SARs
|
|
|
Prices
|
|
|
SARs outstanding at beginning of year
|
|
|
118,750
|
|
|
$
|
13.41
|
|
|
137,750
|
|
|
$
|
13.51
|
|
|
179,750
|
|
|
$
|
14.19
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(53,500
|
)
|
|
$
|
12.98
|
|
|
(19,000
|
)
|
|
$
|
14.16
|
|
|
(38,875
|
)
|
|
$
|
16.01
|
Expired or forfeited
|
|
|
(1,000
|
)
|
|
$
|
22.50
|
|
|
|
|
|
|
|
|
|
(3,125
|
)
|
|
$
|
21.35
|
|
SARs outstanding at end of year
|
|
|
64,250
|
|
|
$
|
13.63
|
|
|
118,750
|
|
|
$
|
13.41
|
|
|
137,750
|
|
|
$
|
13.51
|
|
Number of SARs exercisable
|
|
|
64,250
|
|
|
$
|
13.63
|
|
|
118,750
|
|
|
$
|
13.41
|
|
|
134,875
|
|
|
$
|
13.32
|
|
|
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 7,399 shares purchased in 2008 from funds withheld
during the July 1, 2007 to December 31, 2007 offering
period. There were 14,803 shares purchased in 2007 from
funds withheld during the offering periods of July 1, 2006
to December 31, 2006 and January 1, 2007 to
June 30, 2007. 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
2007, 2006 and 2005 was $165,000, $139,000 and $106,000,
respectively.
Note 15.
Retirement Plans
The Company sponsors a defined contribution plan covering
substantially all its U.S. employees. Contributions are equal to
15% 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
F-30
plan, was $3.0 million, $2.6 million and
$2.0 million in 2007, 2006 and 2005, 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 $1.9 million, $1.4 million and
$1.0 million for 2007, 2006 and 2005, respectively. Such
expenses are included in other operating expenses.
The Company has a 401(k) Plan for all eligible employees. Each
eligible employee can contribute a portion of their salary
limited by certain Federal regulations. The Company does not
match any of the employee contributions.
Beginning in 2008, changes have been made to the U.S. defined
contribution plan and the 401(k) Plan. The annual contribution
to the defined contribution plan has been reduced from 15% to
7.5% and a 100% match has been established for the first 4% that
each eligible employee contributes to the 401(k) Plan. In
addition, the Company has the discretion of contributing an
additional 4% to each eligible employees 401(k) Plan.
Note 16.
Quarterly Financial Data (Unaudited)
Following is a summary of quarterly financial data for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
($ 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 (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
|
|
Other operating expenses
|
|
|
26,289
|
|
|
|
28,608
|
|
|
|
27,902
|
|
|
|
27,610
|
|
Interest expense
|
|
|
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 $123.5 million from the
April 2006 debt offering.
F-31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
($ in thousands, except net income per share)
|
|
|
Gross written premium
|
|
$
|
263,784
|
|
|
$
|
252,365
|
|
|
$
|
221,667
|
|
|
$
|
232,974
|
|
Net written premium
|
|
|
143,426
|
|
|
|
129,248
|
|
|
|
119,037
|
|
|
|
129,096
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
|
103,722
|
|
|
|
114,541
|
|
|
|
115,696
|
|
|
|
134,364
|
|
Commission income
|
|
|
1,286
|
|
|
|
540
|
|
|
|
639
|
|
|
|
610
|
|
Net investment income
|
|
|
12,550
|
|
|
|
14,003
|
|
|
|
14,691
|
|
|
|
15,651
|
|
Net realized capital (losses)
|
|
|
(424
|
)
|
|
|
(192
|
)
|
|
|
(151
|
)
|
|
|
(259
|
)
|
Other income (expense)
|
|
|
186
|
|
|
|
44
|
|
|
|
(884
|
)
|
|
|
(19
|
)
|
|
Total revenues
|
|
|
117,320
|
|
|
|
128,936
|
|
|
|
129,991
|
|
|
|
150,347
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses incurred
|
|
|
62,117
|
|
|
|
66,627
|
|
|
|
64,456
|
|
|
|
76,987
|
|
Commission expense
|
|
|
13,705
|
|
|
|
13,624
|
|
|
|
13,769
|
|
|
|
16,689
|
|
Interest expense
|
|
|
18,408
|
|
|
|
19,927
|
|
|
|
22,683
|
|
|
|
24,737
|
|
Other operating expenses
|
|
|
|
|
|
|
1,820
|
|
|
|
2,214
|
|
|
|
2,214
|
|
|
Total operating expenses
|
|
|
94,230
|
|
|
|
101,998
|
|
|
|
103,122
|
|
|
|
120,627
|
|
|
Income before income tax expense
|
|
|
23,090
|
|
|
|
26,938
|
|
|
|
26,869
|
|
|
|
29,720
|
|
Income tax expense
|
|
|
7,565
|
|
|
|
8,840
|
|
|
|
8,536
|
|
|
|
9,113
|
|
|
Net income
|
|
$
|
15,525
|
|
|
$
|
18,098
|
|
|
$
|
18,333
|
|
|
$
|
20,607
|
|
|
Comprehensive income
|
|
$
|
6,437
|
|
|
$
|
11,845
|
|
|
$
|
35,834
|
|
|
$
|
22,708
|
|
Combined ratio
|
|
|
89.4
|
%
|
|
|
87.0
|
%
|
|
|
87.4
|
%
|
|
|
87.7
|
%
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.93
|
|
|
$
|
1.09
|
|
|
$
|
1.10
|
|
|
$
|
1.23
|
|
Diluted
|
|
$
|
0.93
|
|
|
$
|
1.08
|
|
|
$
|
1.09
|
|
|
$
|
1.22
|
|
|
The increase in 2006 revenues as compared to 2005 was primarily
due to the increase in written premium resulting from new
business and rate increases on new and renewal business in 2005.
Net investment income increased as the result of positive cash
flow increasing the investment portfolio, the net proceeds of
$123.5 million from the April debt offering and an increase
in the overall investment yield.
F-32
SCHEDULE I
THE NAVIGATORS
GROUP, INC. AND SUBSIDIARIES
SUMMARY OF CONSOLIDATED INVESTMENTSOTHER THAN
INVESTMENTS
IN RELATED PARTIES
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
|
Unrealized
|
|
Unrealized
|
|
|
Cost or
|
December 31, 2007
|
|
Fair Value
|
|
Gains
|
|
(Losses)
|
|
|
Amortized Cost
|
|
|
|
($ in thousands)
|
|
U.S. Government Treasury bonds, GNMAs and foreign government
bonds
|
|
$
|
234,375
|
|
$
|
5,724
|
|
$
|
(337
|
)
|
|
$
|
228,988
|
States, municipalities, and political subdivisions
|
|
|
515,883
|
|
|
7,050
|
|
|
(657
|
)
|
|
|
509,490
|
Mortgage- and asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-guaranteed Government Agency bonds
|
|
|
29,818
|
|
|
342
|
|
|
(4
|
)
|
|
|
29,480
|
Mortgage-backed securities
|
|
|
232,869
|
|
|
1,824
|
|
|
(479
|
)
|
|
|
231,524
|
Collateralized mortgage obligations
|
|
|
134,899
|
|
|
524
|
|
|
(823
|
)
|
|
|
135,198
|
Commercial mortgage-backed securities
|
|
|
113,488
|
|
|
544
|
|
|
(1,031
|
)
|
|
|
113,975
|
Asset-backed securities
|
|
|
64,352
|
|
|
533
|
|
|
(79
|
)
|
|
|
63,898
|
|
Subtotal
|
|
|
575,426
|
|
|
3,767
|
|
|
(2,416
|
)
|
|
|
574,075
|
Corporate bonds
|
|
|
196,636
|
|
|
2,504
|
|
|
(1,804
|
)
|
|
|
195,936
|
|
Total fixed maturities
|
|
|
1,522,320
|
|
|
19,045
|
|
|
(5,214
|
)
|
|
|
1,508,489
|
|
Equity securitiescommon 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
|
|
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,
|
|
|
|
ASSETS
|
|
2007
|
|
|
2006
|
|
|
Cash and investments
|
|
$
|
44,146
|
|
|
$
|
32,308
|
Investments in subsidiaries
|
|
|
735,351
|
|
|
|
634,299
|
Goodwill and other intangible assets
|
|
|
2,534
|
|
|
|
2,534
|
Other assets
|
|
|
6,821
|
|
|
|
12,939
|
|
Total assets
|
|
$
|
788,852
|
|
|
$
|
682,080
|
|
LIABILITIES
|
|
|
|
|
|
|
|
7% Senior Notes due May 1, 2016
|
|
$
|
123,673
|
|
|
$
|
123,560
|
Accounts payable and other liabilities
|
|
|
1,615
|
|
|
|
1,590
|
Accrued interest payable
|
|
|
1,458
|
|
|
|
1,458
|
Deferred compensation payable
|
|
|
|
|
|
|
4,129
|
|
Total liabilities
|
|
|
126,746
|
|
|
|
130,737
|
|
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: 16,873,094 for 2007 and 16,735,898 for
2006
|
|
|
1,687
|
|
|
|
1,674
|
Additional paid-in capital
|
|
|
291,616
|
|
|
|
286,732
|
Retained earnings
|
|
|
355,084
|
|
|
|
259,464
|
Accumulated other comprehensive income:
|
|
|
|
|
|
|
|
Net unrealized gains on securities available-for-sale, net of tax
|
|
|
10,186
|
|
|
|
849
|
Foreign currency translation adjustment, net of tax
|
|
|
3,533
|
|
|
|
2,624
|
|
Total stockholders equity
|
|
|
662,106
|
|
|
|
551,343
|
|
Total liabilities and stockholders equity
|
|
$
|
788,852
|
|
|
$
|
682,080
|
|
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,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
1,877
|
|
|
$
|
1,478
|
|
|
$
|
244
|
|
Dividends received from wholly-owned subsidiaries
|
|
|
8,000
|
|
|
|
|
|
|
|
3,000
|
|
|
Total revenues
|
|
|
9,877
|
|
|
|
1,478
|
|
|
|
3,244
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
8,863
|
|
|
|
6,248
|
|
|
|
|
|
Other (income) expense
|
|
|
(1,996
|
)
|
|
|
2,072
|
|
|
|
4,208
|
|
|
Total expenses
|
|
|
6,867
|
|
|
|
8,320
|
|
|
|
4,208
|
|
|
Income (loss) before income tax (benefit)
|
|
|
3,010
|
|
|
|
(6,842
|
)
|
|
|
(964
|
)
|
Income tax (benefit)
|
|
|
(1,804
|
)
|
|
|
(2,390
|
)
|
|
|
(1,387
|
)
|
|
Income (loss) before equity in undistributed net income of
wholly owned subsidiaries
|
|
|
4,814
|
|
|
|
(4,452
|
)
|
|
|
423
|
|
Equity in undistributed net income of wholly owned subsidiaries
|
|
|
90,806
|
|
|
|
77,015
|
|
|
|
23,141
|
|
|
Net Income
|
|
$
|
95,620
|
|
|
$
|
72,563
|
|
|
$
|
23,564
|
|
|
|
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,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
95,620
|
|
|
$
|
72,563
|
|
|
$
|
23,564
|
|
Adjustments to reconcile net income to net cash (used in)
provided by operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net (income) of wholly- owned
subsidiaries
|
|
|
(98,806
|
)
|
|
|
(77,015
|
)
|
|
|
(26,141
|
)
|
Dividends received from subsidiaries
|
|
|
8,000
|
|
|
|
|
|
|
|
3,000
|
|
Other
|
|
|
4,792
|
|
|
|
(5,505
|
)
|
|
|
6,425
|
|
|
Net cash (used in) provided by operating activities
|
|
|
9,606
|
|
|
|
(9,957
|
)
|
|
|
6,848
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale Purchases
|
|
|
10,500
|
|
|
|
(20,137
|
)
|
|
|
|
|
Investments in wholly-owned subsidiaries
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
(120,000
|
)
|
Net (increase) decrease in short-term investments
|
|
|
(20,497
|
)
|
|
|
5,792
|
|
|
|
(12,663
|
)
|
|
Net cash (used in) investing activities
|
|
|
(9,997
|
)
|
|
|
(114,345
|
)
|
|
|
(132,663
|
)
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from stock offering
|
|
|
|
|
|
|
|
|
|
|
123,862
|
|
Net proceeds from debt offering
|
|
|
|
|
|
|
123,538
|
|
|
|
|
|
Proceeds of stock issued from employee stock purchase plan
|
|
|
606
|
|
|
|
536
|
|
|
|
419
|
|
Proceeds of stock issued from exercise of stock options
|
|
|
1,627
|
|
|
|
1,265
|
|
|
|
1,570
|
|
|
Net cash provided by financing activities
|
|
|
2,233
|
|
|
|
125,339
|
|
|
|
125,851
|
|
|
Increase (decrease) in cash
|
|
|
1,842
|
|
|
|
1,037
|
|
|
|
36
|
|
Cash at beginning of year
|
|
|
1,261
|
|
|
|
224
|
|
|
|
188
|
|
|
Cash at end of year
|
|
$
|
3,103
|
|
|
$
|
1,261
|
|
|
$
|
224
|
|
|
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, 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
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies
|
|
|
$14,361
|
|
|
$994,079
|
|
|
$223,592
|
|
|
$
|
|
|
$230,046
|
|
|
$31,764
|
|
|
$155,293
|
|
|
$22,984
|
|
|
$52,353
|
|
|
$267,745
|
Lloyds Operations
|
|
|
15,336
|
|
|
563,912
|
|
|
92,924
|
|
|
|
|
|
108,505
|
|
|
5,061
|
|
|
80,362
|
|
|
19,687
|
|
|
20,786
|
|
|
112,914
|
|
|
|
|
$29,697
|
|
|
$1,557,991
|
|
|
$316,516
|
|
|
$
|
|
|
$338,551
|
|
|
$36,825
|
|
|
$235,655
|
|
|
$42,671
|
|
|
$73,139
|
|
|
$380,659
|
|
|
|
|
|
(1)
|
|
Net investment income and other
operating expenses reflect only such amounts attributable to the
Companys insurance operations.
|
(2)
|
|
Amortization of deferred policy
acquisition costs reflects only such amounts attributable to the
Companys insurance operations. A portion of these costs is
eliminated in consolidation.
|
S-5
SCHEDULE IV
THE NAVIGATORS
GROUP, INC. AND SUBSIDIARIES REINSURANCE
Written Premium
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Ceded to
|
|
Assumed
|
|
|
|
|
of Amount
|
|
|
|
Direct
|
|
Other
|
|
from Other
|
|
|
Net
|
|
Assumed
|
|
|
|
Amount
|
|
Companies
|
|
Companies
|
|
|
Amount
|
|
to Net
|
|
|
|
|
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
|
%
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property-Casualty
|
|
$
|
701,094
|
|
$
|
398,920
|
|
$
|
78,485
|
|
|
$
|
380,659
|
|
|
21
|
%
|
|
|
S-6
SCHEDULE V
THE NAVIGATORS
GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged
|
|
|
|
|
|
|
|
|
Balance at
|
|
(Credited) to
|
|
Charged to
|
|
|
|
Balance at
|
|
|
January 1,
|
|
Costs and
|
|
Other
|
|
Deductions
|
|
December 31,
|
Description
|
|
2007
|
|
Expenses
|
|
Accounts
|
|
(Describe)
|
|
2007
|
|
|
Allowance for uncollectible reinsurance
|
|
$
|
8,473
|
|
$
|
921
|
|
$
|
|
|
$
|
|
|
$
|
9,394
|
|
Valuation allowance in deferred taxes
|
|
$
|
5,990
|
|
$
|
358
|
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$
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$
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$
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6,348
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S-7
SCHEDULE VI
THE NAVIGATORS
GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION
CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
($ in thousands)
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Reserve
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Losses and Loss Adjustment
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Amortization
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Deferred
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for Losses
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Expenses Incurred Related to
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of Deferred
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Affiliation
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Policy
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and Loss
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Discount,
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Net
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Net
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Policy
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Other
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Net
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with
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Acquisition
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Adjustment
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if any,
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Unearned
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Earned
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Investment
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Current
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Prior
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Acquisition
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Operating
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Written
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Registrant
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Costs
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Expenses
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Deducted
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Premium
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Premium
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Income(1)
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Year
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Years
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Costs(2)
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Expenses(1)
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Premium
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Consolidated Subsidiaries
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Year ended December 31, 2007
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$
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51,895
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$
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1,648,764
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$
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$
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469,481
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$
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601,977
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$
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68,785
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$
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387,601
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$
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(47,009
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)
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$
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77,613
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$
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110,409
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$
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645,796
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Year ended December 31, 2006
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$
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41,700
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$
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1,607,555
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$
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$
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415,096
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$
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468,323
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$
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55,417
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$
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287,401
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$
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(17,214
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)
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$
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57,787
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$
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85,755
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$
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520,807
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Year ended December 31, 2005
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$
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29,697
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$
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1,557,991
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$
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$
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316,516
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$
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338,551
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$
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36,825
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$
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239,436
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$
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(3,781
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)
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$
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42,671
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$
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73,139
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$
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380,659
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(1)
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Net investment income and other
operating expenses reflect only such amounts attributable to the
Companys Insurance Operations.
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(2)
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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.
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S-8
INDEX TO EXHIBITS
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Previously Filed and
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Incorporated Herein
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Exhibit No.
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Description of Exhibit
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by Reference to:
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3-1
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Restated Certificate of Incorporation
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Form S-8 filed July 26, 2002 (File No. 333-97183)
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3-2
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Certificate of Amendment to the Restated Certificate of
Incorporation
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Form S-8 filed July 26, 2002 (File No. 333-97183)
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3-3
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By-laws, as amended
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Form S-1 (File No. 33-5667)
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3-4
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Certificate of Amendment to the Restated Certificate of
Incorporation
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Form 10-Q for June 30, 2006
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4-1
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Specimen of Common Stock certificate, par value $0.10 per share
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Form S-8 filed June 20, 2003 (File No. 333-106317)
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10-1
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Management Agreement between Navigators Insurance Company and
Navigators Management Company, Inc. (formerly Somerset Marine,
Inc.)
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Form S-1 (File No. 33-5667)
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10-2
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Agreement between the Company and Navigators Management Company,
Inc. (formerly Somerset Marine, Inc.)
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Form S-1 (File No. 33-5667)
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10-3*
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Stock Option Plan
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Form S-1 (File No. 33-5667)
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10-4*
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Non-Qualified Stock Option Plan
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Form S-4 (File No. 33-75918)
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10-5
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Agreement with Bradley D. Wiley dated June 3, 1997
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Form 10-K for December 31, 1997
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10-6
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Employment Agreement with Salvatore A. Margarella dated
March 1, 1999
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Form 10-K for December 31, 1998
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10-7
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Employment Agreement with Stanley A. Galanski effective
March 26, 2001
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Form 10-Q for March 31, 2001
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10-8
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Employment Agreement with R. Scott Eisdorfer dated
September 1, 1999
|
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Form 10-K for December 31, 2002
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10-9*
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2002 Stock Incentive Plan
|
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Proxy Statement for May 30, 2002
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10-10*
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Employee Stock Purchase Plan
|
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Proxy Statement for May 29, 2003
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10-11*
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Executive Performance Incentive Plan
|
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Proxy Statement for May 29, 2003
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10-12
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Form of Indemnity Agreement by the Company and the Selling
Stockholders (as defined therein)
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Amendment No. 2 to Form S-3 dated October 1, 2003 (File No.
333-108424)
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10-13
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Agreement with Paul J. Malvasio dated October 9, 2003
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Form 10-K for December 31, 2003
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10-14
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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)
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Form 10-Q for September 30, 2004
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10-15
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Form of Option Award Certificate for the 2002 Stock Incentive
Plan (approved at Annual Meeting of Shareholders held
May 30, 2002)
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Form 10-Q for September 30, 2004
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10-16
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Agreement with Jane E. Keller
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Form 10-Q for September 30, 2004
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10-17
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Common Stock Grant Award to Stanley A. Galanski under the 2002
Stock Incentive Plan
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Form 8-K filed December 14, 2004
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10-18
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Commutation Agreement between Navigators Insurance Company and
Somerset Insurance Limited
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Form 8-K filed January 18, 2005
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10-19
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Second Amended and Restated Credit Agreement among the Company
and the Lenders dated January 31, 2005
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Form 8-K filed February 4, 2005
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10-20*
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2005 Stock Incentive Plan
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Proxy Statement for May 20, 2005
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10-21
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Agreement with Elliot S. Orol
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|
Form 10-Q for June 30, 2005
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10-22
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Agreement with John F. Kirby
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Form 8-K filed July 7, 2006
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10-23
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Third Amended and Restated Credit Agreement among the Company
and the Lenders dated February 2, 2007
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|
Form 8-K filed February 7, 2007
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11-1
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|
Statement re Computation of Per Share Earnings
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**
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21-1
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Subsidiaries of Registrant
|
|
**
|
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23-1
|
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Consent of Independent Registered Public Accounting Firm
|
|
**
|
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31-1
|
|
|
Certification of CEO per Section 302 of the Sarbanes-Oxley
Act
|
|
**
|
|
31-2
|
|
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Certification of CFO per Section 302 of the Sarbanes-Oxley
Act
|
|
**
|
|
32-1
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|
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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)
|
|
**
|
|
|
|
|
|
|
|
|
|
|
|
Previously Filed and
|
|
|
|
|
Incorporated Herein
|
Exhibit No.
|
|
Description of Exhibit
|
|
by Reference to:
|
|
|
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
|
|
|