Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2008
Commission file number 0-15886
The Navigators Group, Inc.
(Exact name of Registrant as specified in its charter)
|
|
|
Delaware
|
|
13-3138397 |
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(IRS Employer
Identification No.) |
|
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|
One Penn Plaza, New York, New York
|
|
10119 |
|
|
|
(Address of principal executive offices)
|
|
(Zip Code) |
(212) 244-2333
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check One):
|
|
|
|
|
|
|
Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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|
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
The number of common shares outstanding as of July 18, 2008 was 16,788,446.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
INDEX
2
Part 1. Financial Information
Item 1. Financial Statements
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Investments and cash: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale, at fair value
(amortized cost: 2008, $1,604,039; 2007, $1,508,489) |
|
$ |
1,590,566 |
|
|
$ |
1,522,320 |
|
Equity securities, available-for-sale, at fair value (cost: 2008, $70,178; 2007, $65,492) |
|
|
68,089 |
|
|
|
67,240 |
|
Short-term investments, at fair value |
|
|
174,874 |
|
|
|
170,685 |
|
Cash |
|
|
14,499 |
|
|
|
7,056 |
|
|
|
|
|
|
|
|
Total investments and cash |
|
|
1,848,028 |
|
|
|
1,767,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums in course of collection |
|
|
197,490 |
|
|
|
163,081 |
|
Commissions receivable |
|
|
444 |
|
|
|
2,381 |
|
Prepaid reinsurance premiums |
|
|
194,195 |
|
|
|
188,961 |
|
Reinsurance receivable on paid losses |
|
|
78,087 |
|
|
|
94,818 |
|
Reinsurance receivable on unpaid losses and loss adjustment expenses |
|
|
778,715 |
|
|
|
801,461 |
|
Net deferred income tax benefit |
|
|
45,412 |
|
|
|
29,249 |
|
Deferred policy acquisition costs |
|
|
55,100 |
|
|
|
51,895 |
|
Accrued investment income |
|
|
16,870 |
|
|
|
15,605 |
|
Goodwill and other intangible assets |
|
|
8,101 |
|
|
|
8,084 |
|
Other assets |
|
|
23,058 |
|
|
|
20,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,245,500 |
|
|
$ |
3,143,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses |
|
$ |
1,707,101 |
|
|
$ |
1,648,764 |
|
Unearned premium |
|
|
518,354 |
|
|
|
469,481 |
|
Reinsurance balances payable |
|
|
148,632 |
|
|
|
161,829 |
|
Senior notes |
|
|
123,732 |
|
|
|
123,673 |
|
Federal income tax payable |
|
|
16,279 |
|
|
|
10,868 |
|
Accounts payable and other liabilities |
|
|
55,045 |
|
|
|
67,050 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,569,143 |
|
|
|
2,481,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued |
|
|
|
|
|
|
|
|
Common stock, $.10 par value, shares authorized: 50,000,000 at 6/30/08 and
12/31/07; issued and outstanding: 16,788,446 (net of treasury stock) at 6/30/08
and 16,873,094 at 12/31/07 |
|
|
1,700 |
|
|
|
1,687 |
|
Additional paid-in capital |
|
|
295,304 |
|
|
|
291,616 |
|
Retained earnings |
|
|
395,755 |
|
|
|
355,084 |
|
Treasury stock, at cost (186,026 shares at 6/30/08) |
|
|
(9,816 |
) |
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
(6,586 |
) |
|
|
13,719 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
676,357 |
|
|
|
662,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
3,245,500 |
|
|
$ |
3,143,771 |
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
3
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ and shares in thousands, except net income per share)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
279,213 |
|
|
$ |
276,549 |
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Net written premium |
|
$ |
174,287 |
|
|
$ |
161,350 |
|
(Increase) in unearned premium |
|
|
(11,584 |
) |
|
|
(15,733 |
) |
|
|
|
|
|
|
|
Net earned premium |
|
|
162,703 |
|
|
|
145,617 |
|
Commission income |
|
|
467 |
|
|
|
486 |
|
Net investment income |
|
|
18,731 |
|
|
|
17,330 |
|
Net realized capital gains (losses) |
|
|
(7,976 |
) |
|
|
840 |
|
Other income (expense) |
|
|
1,010 |
|
|
|
(253 |
) |
|
|
|
|
|
|
|
Total revenues |
|
|
174,935 |
|
|
|
164,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses incurred |
|
|
91,889 |
|
|
|
79,739 |
|
Commission expense |
|
|
23,490 |
|
|
|
17,650 |
|
Other operating expenses |
|
|
33,237 |
|
|
|
28,608 |
|
Interest expense |
|
|
2,217 |
|
|
|
2,215 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
150,833 |
|
|
|
128,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
24,102 |
|
|
|
35,808 |
|
|
|
|
|
|
|
|
|
Income tax expense (benefit): |
|
|
|
|
|
|
|
|
Current |
|
|
12,156 |
|
|
|
13,505 |
|
Deferred |
|
|
(5,475 |
) |
|
|
(2,072 |
) |
|
|
|
|
|
|
|
Total income tax expense |
|
|
6,681 |
|
|
|
11,433 |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,421 |
|
|
$ |
24,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.04 |
|
|
$ |
1.45 |
|
Diluted |
|
$ |
1.03 |
|
|
$ |
1.44 |
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
16,773 |
|
|
|
16,786 |
|
Diluted |
|
|
16,912 |
|
|
|
16,919 |
|
See accompanying notes to interim consolidated financial statements.
4
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ and shares in thousands, except net income per share)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
566,359 |
|
|
$ |
577,410 |
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Net written premium |
|
$ |
362,009 |
|
|
$ |
334,369 |
|
(Increase) in unearned premium |
|
|
(43,566 |
) |
|
|
(49,706 |
) |
|
|
|
|
|
|
|
Net earned premium |
|
|
318,443 |
|
|
|
284,663 |
|
Commission income |
|
|
728 |
|
|
|
894 |
|
Net investment income |
|
|
37,569 |
|
|
|
33,546 |
|
Net realized capital gains (losses) |
|
|
(8,052 |
) |
|
|
1,041 |
|
Other income (expense) |
|
|
1,021 |
|
|
|
(324 |
) |
|
|
|
|
|
|
|
Total revenues |
|
|
349,709 |
|
|
|
319,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses incurred |
|
|
180,309 |
|
|
|
160,931 |
|
Commission expense |
|
|
44,438 |
|
|
|
34,749 |
|
Other operating expenses |
|
|
62,993 |
|
|
|
54,897 |
|
Interest expense |
|
|
4,434 |
|
|
|
4,430 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
292,174 |
|
|
|
255,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
57,535 |
|
|
|
64,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit): |
|
|
|
|
|
|
|
|
Current |
|
|
22,462 |
|
|
|
22,781 |
|
Deferred |
|
|
(5,598 |
) |
|
|
(2,015 |
) |
|
|
|
|
|
|
|
Total income tax expense |
|
|
16,864 |
|
|
|
20,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
40,671 |
|
|
$ |
44,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.42 |
|
|
$ |
2.63 |
|
Diluted |
|
$ |
2.39 |
|
|
$ |
2.60 |
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
16,817 |
|
|
|
16,771 |
|
Diluted |
|
|
17,002 |
|
|
|
16,947 |
|
See accompanying notes to interim consolidated financial statements.
5
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
Preferred Stock |
|
|
|
|
|
|
|
|
Balance at beginning and end of period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
1,687 |
|
|
$ |
1,674 |
|
Shares issued under stock plans |
|
|
13 |
|
|
|
9 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
1,700 |
|
|
$ |
1,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
291,616 |
|
|
$ |
286,732 |
|
Shares issued under stock plans |
|
|
3,688 |
|
|
|
3,301 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
295,304 |
|
|
$ |
290,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
355,084 |
|
|
$ |
259,464 |
|
Net income |
|
|
40,671 |
|
|
|
44,047 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
395,755 |
|
|
$ |
303,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
|
|
|
$ |
|
|
Treasury stock acquired |
|
|
(9,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
(9,816 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities, net of tax |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
10,186 |
|
|
$ |
849 |
|
Change in period |
|
|
(20,398 |
) |
|
|
(11,468 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
(10,212 |
) |
|
|
(10,619 |
) |
|
|
|
|
|
|
|
Cumulative translation adjustments, net of tax |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
3,533 |
|
|
|
2,624 |
|
Net adjustment for period |
|
|
93 |
|
|
|
801 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
3,626 |
|
|
|
3,425 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
(6,586 |
) |
|
$ |
(7,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity at end of period |
|
$ |
676,357 |
|
|
$ |
588,033 |
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
6
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,421 |
|
|
$ |
24,375 |
|
|
|
|
|
|
|
|
Other comprehensive (loss): |
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on securities,
net of tax (benefit) of ($9,337) and ($6,906)
in 2008 and 2007, respectively(1) |
|
|
(16,986 |
) |
|
|
(12,964 |
) |
Change in foreign currency translation gains,
net of tax expense of $909 and $376
in 2008 and 2007, respectively |
|
|
375 |
|
|
|
696 |
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
(16,611 |
) |
|
|
(12,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
810 |
|
|
$ |
12,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Disclosure of reclassification amount, net of tax: |
|
|
|
|
|
|
|
|
Unrealized holding (losses) arising
during period |
|
$ |
(22,171 |
) |
|
$ |
(12,418 |
) |
Less: reclassification adjustment for net realized
capital gains (losses) included in net income |
|
|
(5,185 |
) |
|
|
546 |
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on securities |
|
$ |
(16,986 |
) |
|
$ |
(12,964 |
) |
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
7
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
40,671 |
|
|
$ |
44,047 |
|
|
|
|
|
|
|
|
Other comprehensive (loss): |
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on securities,
net of tax (benefit) of ($10,742) and ($6,135)
in 2008 and 2007, respectively(1) |
|
|
(20,398 |
) |
|
|
(11,468 |
) |
Change in foreign currency translation gains,
net of tax expense of $50 and $432
in 2008 and 2007, respectively |
|
|
93 |
|
|
|
801 |
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
(20,305 |
) |
|
|
(10,667 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
20,366 |
|
|
$ |
33,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Disclosure of reclassification amount, net of tax: |
|
|
|
|
|
|
|
|
Unrealized holding (losses) arising
during period |
|
$ |
(25,633 |
) |
|
$ |
(10,793 |
) |
Less: reclassification adjustment for net realized capital
capital gains (losses) included in net income |
|
|
(5,235 |
) |
|
|
675 |
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on securities |
|
$ |
(20,398 |
) |
|
$ |
(11,468 |
) |
|
|
|
|
|
|
|
8
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
40,671 |
|
|
$ |
44,047 |
|
Adjustments to reconcile net income to net
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation & amortization |
|
|
2,422 |
|
|
|
1,566 |
|
Net deferred income tax expense (benefit) |
|
|
(5,598 |
) |
|
|
(2,015 |
) |
Net realized capital (gains) losses |
|
|
8,052 |
|
|
|
(1,041 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Reinsurance receivable on paid and unpaid losses and LAE |
|
|
40,156 |
|
|
|
83,662 |
|
Reserve for losses and LAE |
|
|
56,873 |
|
|
|
(15,197 |
) |
Prepaid reinsurance premiums |
|
|
(5,019 |
) |
|
|
(28,036 |
) |
Unearned premium |
|
|
48,311 |
|
|
|
76,641 |
|
Premiums in course of collection |
|
|
(34,052 |
) |
|
|
(59,036 |
) |
Commissions receivable |
|
|
1,933 |
|
|
|
948 |
|
Deferred policy acquisition costs |
|
|
(3,143 |
) |
|
|
(11,076 |
) |
Accrued investment income |
|
|
(1,342 |
) |
|
|
(944 |
) |
Reinsurance balances payable |
|
|
(13,331 |
) |
|
|
5,565 |
|
Federal income tax |
|
|
5,354 |
|
|
|
5,783 |
|
Other |
|
|
(7,887 |
) |
|
|
10,800 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
133,400 |
|
|
|
111,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
|
|
|
|
|
|
Redemptions and maturities |
|
|
72,764 |
|
|
|
91,547 |
|
Sales |
|
|
84,562 |
|
|
|
99,425 |
|
Purchases |
|
|
(253,945 |
) |
|
|
(278,382 |
) |
Equity securities, available-for-sale |
|
|
|
|
|
|
|
|
Sales |
|
|
12,063 |
|
|
|
11,071 |
|
Purchases |
|
|
(25,893 |
) |
|
|
(26,092 |
) |
Change in payable for securities |
|
|
(2,046 |
) |
|
|
(361 |
) |
Net change in short-term investments |
|
|
(3,736 |
) |
|
|
(8,126 |
) |
Purchase of property and equipment |
|
|
(1,618 |
) |
|
|
(4,353 |
) |
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(117,849 |
) |
|
|
(115,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(9,816 |
) |
|
|
|
|
Proceeds of stock issued from employee stock purchase plan |
|
|
520 |
|
|
|
301 |
|
Proceeds of stock issued from exercise of stock options |
|
|
1,188 |
|
|
|
1,113 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(8,108 |
) |
|
|
1,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on foreign currency cash |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
7,443 |
|
|
|
(2,186 |
) |
Cash at beginning of year |
|
|
7,056 |
|
|
|
2,404 |
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
14,499 |
|
|
$ |
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Federal, state and local income tax paid |
|
$ |
15,430 |
|
|
$ |
16,028 |
|
Interest paid |
|
|
4,375 |
|
|
|
4,375 |
|
Issuance of stock to directors |
|
|
200 |
|
|
|
181 |
|
See accompanying notes to interim consolidated financial statements.
9
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Unaudited)
Note 1. Accounting Policies
The accompanying interim consolidated financial statements are unaudited but reflect all
adjustments which, in the opinion of management, are necessary to provide a fair statement of the
results of The Navigators Group, Inc. and its subsidiaries for the interim periods presented on
the basis of United States generally accepted accounting principles (GAAP or U.S. GAAP). All
such adjustments are of a normal recurring nature. All significant intercompany transactions and
balances have been eliminated. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial statements and the
reported revenues and expenses during the reporting periods. The results of operations for any
interim period are not necessarily indicative of results for the full year. The terms we, us,
our and the Company as used herein are used to mean The Navigators Group, Inc. and its
subsidiaries, unless the context otherwise requires. The term Parent or Parent Company are
used to mean The Navigators Group, Inc. without its subsidiaries. These financial statements
should be read in conjunction with the consolidated financial statements and notes contained in
the Companys 2007 Annual Report on Form 10-K. Certain amounts for the prior year have been
reclassified to conform to the current years presentation.
Note 2. Reinsurance Ceded
The Companys ceded earned premiums were $99.0 million and $106.1 million for the three
months ended June 30, 2008 and 2007, respectively, and were $199.1 million and $214.0 million for
the six months ended June 30, 2008 and 2007, respectively. The Companys ceded incurred losses
were $60.3 million and $38.8 million for the three months ended June 30, 2008 and 2007,
respectively, and were $82.0 million and $102.4 million for the six months ended June 30, 2008 and
2007, respectively.
Note 3. Segment Information
The Companys subsidiaries are primarily engaged in the underwriting and management of
property and casualty insurance.
The Company classifies its business into two underwriting segments consisting of the
Insurance Companies and the Lloyds Operations, which are separately managed, and a Corporate
segment. Segment data for each of the two underwriting segments include allocations of revenues
and expenses of the Navigators Agencies and the Parent Companys expenses and related income tax
amounts.
We evaluate the performance of each segment based on its underwriting and net income results.
The Insurance Companies and the Lloyds Operations results are measured by taking into account
net earned premium, net losses and loss adjustment expenses (LAE), commission expense, other
operating expenses, commission income and other income or expense. The Corporate segment consists
of the Parent Companys investment income, interest expense and the related tax effect. Each
segment maintains its own investments, on which it earns income and realizes capital gains or
losses. Our underwriting performance is evaluated separately from the performance of our investment
portfolios.
10
The Insurance Companies consist of Navigators Insurance Company, including its branch
located in the United Kingdom (the U.K. Branch), and its wholly-owned subsidiary, Navigators
Specialty Insurance Company. They are primarily engaged in underwriting marine insurance and
related lines of business, professional liability insurance, specialty lines of business including
contractors general liability insurance,
commercial and personal umbrella and primary and excess casualty businesses, and middle
markets business consisting of general liability, commercial automobile liability and property
insurance for a variety of commercial middle markets businesses. Navigators Specialty Insurance
Company underwrites specialty and professional liability insurance on an excess and surplus lines
basis fully reinsured by Navigators Insurance Company. The Lloyds Operations primarily underwrite
marine and related lines of business along with professional liability insurance, and construction
coverages for onshore energy business at Lloyds of London (Lloyds) through Lloyds Syndicate
1221 (Syndicate 1221). The European property business, written by the Lloyds Operations and the
U.K. Branch beginning in 2006, was discontinued in the 2008 second quarter. Our Lloyds Operations
include Navigators Underwriting Agency Ltd. (NUAL), a Lloyds underwriting agency which manages
Syndicate 1221. We participate in the capacity of Syndicate 1221 through two wholly-owned Lloyds
corporate members. Navigators Management Company, Inc. (NMC) is a wholly-owned underwriting
management company which produces, manages and underwrites insurance and reinsurance for the
Company. During the 2008 second quarter, Navigators California Insurance Services, Inc. and
Navigators Special Risk, Inc., also wholly-owned underwriting management companies, were merged
into NMC.
The Insurance Companies and the Lloyds Operations underwriting results are measured based
on underwriting profit or loss and the related combined ratio, which are both non-GAAP measures of
underwriting profitability. Underwriting profit or loss is calculated from net earned premium,
less the sum of net losses and LAE, commission expense, other operating expenses and commission
income and other income (expense). The combined ratio is derived by dividing the sum of net losses
and LAE, commission expense, other operating expenses and commission income and other income
(expense) by net earned premium. A combined ratio of less than 100% indicates an underwriting
profit and over 100% indicates an underwriting loss.
Effective in 2008, the Company has reclassified certain of its business which had no effect on
its segment classifications. The inland marine business, formerly included in other business of the
Insurance Companies, is now included in the Insurance Companies marine business. Middle markets
business, formerly included in the specialty business of the Insurance Companies, is now broken out
separately. Underwriting data for prior periods has been reclassified to reflect these changes.
11
Financial data by segment for the three and six months ended June 30, 2008 and 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
197,956 |
|
|
$ |
81,257 |
|
|
|
|
|
|
$ |
279,213 |
|
Net written premium |
|
|
128,182 |
|
|
|
46,105 |
|
|
|
|
|
|
|
174,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
117,434 |
|
|
|
45,269 |
|
|
|
|
|
|
|
162,703 |
|
Net losses and LAE |
|
|
(62,225 |
) |
|
|
(29,664 |
) |
|
|
|
|
|
|
(91,889 |
) |
Commission expense |
|
|
(14,723 |
) |
|
|
(8,767 |
) |
|
|
|
|
|
|
(23,490 |
) |
Other operating expenses |
|
|
(24,552 |
) |
|
|
(8,685 |
) |
|
|
|
|
|
|
(33,237 |
) |
Commission income and other income (expense) |
|
|
1,516 |
|
|
|
(39 |
) |
|
|
|
|
|
|
1,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
17,450 |
|
|
|
(1,886 |
) |
|
|
|
|
|
|
15,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
15,593 |
|
|
|
2,871 |
|
|
$ |
267 |
|
|
|
18,731 |
|
Net realized capital gains (losses) |
|
|
(8,053 |
) |
|
|
77 |
|
|
|
|
|
|
|
(7,976 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
(2,217 |
) |
|
|
(2,217 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
24,990 |
|
|
|
1,062 |
|
|
|
(1,950 |
) |
|
|
24,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
6,939 |
|
|
|
425 |
|
|
|
(683 |
) |
|
|
6,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
18,051 |
|
|
$ |
637 |
|
|
$ |
(1,267 |
) |
|
$ |
17,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,383,898 |
|
|
$ |
773,572 |
|
|
$ |
68,413 |
|
|
$ |
3,245,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
53.0 |
% |
|
|
65.5 |
% |
|
|
|
|
|
|
56.5 |
% |
Commission expense ratio |
|
|
12.5 |
% |
|
|
19.4 |
% |
|
|
|
|
|
|
14.4 |
% |
Other operating expense ratio (2) |
|
|
19.6 |
% |
|
|
19.3 |
% |
|
|
|
|
|
|
19.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
85.1 |
% |
|
|
104.2 |
% |
|
|
|
|
|
|
90.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to crossfoot.
|
|
(2) |
|
Includes other operating expenses and commission income and other income (expense). |
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
77,996 |
|
|
$ |
59,872 |
|
|
$ |
137,868 |
|
Specialty |
|
|
84,013 |
|
|
|
|
|
|
|
84,013 |
|
Professional Liability |
|
|
26,437 |
|
|
|
8,399 |
|
|
|
34,836 |
|
Middle Markets |
|
|
7,744 |
|
|
|
|
|
|
|
7,744 |
|
Property/Other |
|
|
1,766 |
|
|
|
12,986 |
|
|
|
14,752 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
197,956 |
|
|
$ |
81,257 |
|
|
$ |
279,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
45,123 |
|
|
$ |
38,297 |
|
|
$ |
83,420 |
|
Specialty |
|
|
57,998 |
|
|
|
|
|
|
|
57,998 |
|
Professional Liability |
|
|
15,906 |
|
|
|
5,081 |
|
|
|
20,987 |
|
Middle Markets |
|
|
7,252 |
|
|
|
|
|
|
|
7,252 |
|
Property/Other |
|
|
1,903 |
|
|
|
2,727 |
|
|
|
4,630 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
128,182 |
|
|
$ |
46,105 |
|
|
$ |
174,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
36,456 |
|
|
$ |
37,103 |
|
|
$ |
73,559 |
|
Specialty |
|
|
56,574 |
|
|
|
|
|
|
|
56,574 |
|
Professional Liability |
|
|
14,388 |
|
|
|
5,141 |
|
|
|
19,529 |
|
Middle Markets |
|
|
6,736 |
|
|
|
|
|
|
|
6,736 |
|
Property/Other |
|
|
3,280 |
|
|
|
3,025 |
|
|
|
6,305 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
117,434 |
|
|
$ |
45,269 |
|
|
$ |
162,703 |
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2007 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
198,560 |
|
|
$ |
77,989 |
|
|
|
|
|
|
$ |
276,549 |
|
Net written premium |
|
|
124,073 |
|
|
|
37,277 |
|
|
|
|
|
|
|
161,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
109,735 |
|
|
|
35,882 |
|
|
|
|
|
|
|
145,617 |
|
Net losses and LAE |
|
|
(63,725 |
) |
|
|
(16,014 |
) |
|
|
|
|
|
|
(79,739 |
) |
Commission expense |
|
|
(13,903 |
) |
|
|
(3,747 |
) |
|
|
|
|
|
|
(17,650 |
) |
Other operating expenses |
|
|
(21,057 |
) |
|
|
(7,551 |
) |
|
|
|
|
|
|
(28,608 |
) |
Commission income and other income (expense) |
|
|
96 |
|
|
|
137 |
|
|
|
|
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
11,146 |
|
|
|
8,707 |
|
|
|
|
|
|
|
19,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
14,440 |
|
|
|
2,407 |
|
|
$ |
483 |
|
|
|
17,330 |
|
Net realized capital gains |
|
|
834 |
|
|
|
6 |
|
|
|
|
|
|
|
840 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(2,215 |
) |
|
|
(2,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
26,420 |
|
|
|
11,120 |
|
|
|
(1,732 |
) |
|
|
35,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
8,163 |
|
|
|
3,875 |
|
|
|
(605 |
) |
|
|
11,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
18,257 |
|
|
$ |
7,245 |
|
|
$ |
(1,127 |
) |
|
$ |
24,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,240,321 |
|
|
$ |
774,796 |
|
|
$ |
63,374 |
|
|
$ |
3,092,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
58.1 |
% |
|
|
44.6 |
% |
|
|
|
|
|
|
54.8 |
% |
Commission expense ratio |
|
|
12.7 |
% |
|
|
10.4 |
% |
|
|
|
|
|
|
12.1 |
% |
Other operating expense ratio (2) |
|
|
19.0 |
% |
|
|
20.6 |
% |
|
|
|
|
|
|
19.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
89.8 |
% |
|
|
75.6 |
% |
|
|
|
|
|
|
86.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to crossfoot. |
|
(2) |
|
Includes other operating expenses and commission income and other income (expense). |
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2007 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
70,601 |
|
|
$ |
55,922 |
|
|
$ |
126,523 |
|
Specialty |
|
|
91,398 |
|
|
|
|
|
|
|
91,398 |
|
Professional Liability |
|
|
24,351 |
|
|
|
10,534 |
|
|
|
34,885 |
|
Middle Markets |
|
|
6,637 |
|
|
|
|
|
|
|
6,637 |
|
Property/Other |
|
|
5,573 |
|
|
|
11,533 |
|
|
|
17,106 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
198,560 |
|
|
$ |
77,989 |
|
|
$ |
276,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
37,229 |
|
|
$ |
27,038 |
|
|
$ |
64,267 |
|
Specialty |
|
|
62,490 |
|
|
|
|
|
|
|
62,490 |
|
Professional Liability |
|
|
14,767 |
|
|
|
6,126 |
|
|
|
20,893 |
|
Middle Markets |
|
|
4,624 |
|
|
|
|
|
|
|
4,624 |
|
Property/Other |
|
|
4,963 |
|
|
|
4,113 |
|
|
|
9,076 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
124,073 |
|
|
$ |
37,277 |
|
|
$ |
161,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
34,005 |
|
|
$ |
30,005 |
|
|
$ |
64,010 |
|
Specialty |
|
|
54,378 |
|
|
|
|
|
|
|
54,378 |
|
Professional Liability |
|
|
13,334 |
|
|
|
1,954 |
|
|
|
15,288 |
|
Middle Markets |
|
|
4,539 |
|
|
|
|
|
|
|
4,539 |
|
Property/Other |
|
|
3,479 |
|
|
|
3,923 |
|
|
|
7,402 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
109,735 |
|
|
$ |
35,882 |
|
|
$ |
145,617 |
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
389,552 |
|
|
$ |
176,807 |
|
|
|
|
|
|
$ |
566,359 |
|
Net written premium |
|
|
252,492 |
|
|
|
109,517 |
|
|
|
|
|
|
|
362,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
229,680 |
|
|
|
88,763 |
|
|
|
|
|
|
|
318,443 |
|
Net losses and LAE |
|
|
(129,581 |
) |
|
|
(50,728 |
) |
|
|
|
|
|
|
(180,309 |
) |
Commission expense |
|
|
(27,671 |
) |
|
|
(16,767 |
) |
|
|
|
|
|
|
(44,438 |
) |
Other operating expenses |
|
|
(46,700 |
) |
|
|
(16,293 |
) |
|
|
|
|
|
|
(62,993 |
) |
Commission income and other income (expense) |
|
|
1,774 |
|
|
|
(25 |
) |
|
|
|
|
|
|
1,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
27,502 |
|
|
|
4,950 |
|
|
|
|
|
|
|
32,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
31,058 |
|
|
|
5,853 |
|
|
$ |
658 |
|
|
|
37,569 |
|
Net realized capital gains (losses) |
|
|
(8,155 |
) |
|
|
103 |
|
|
|
|
|
|
|
(8,052 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
(4,434 |
) |
|
|
(4,434 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
50,405 |
|
|
|
10,906 |
|
|
|
(3,776 |
) |
|
|
57,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
14,309 |
|
|
|
3,877 |
|
|
|
(1,322 |
) |
|
|
16,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
36,096 |
|
|
$ |
7,029 |
|
|
$ |
(2,454 |
) |
|
$ |
40,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,383,898 |
|
|
$ |
773,572 |
|
|
$ |
68,413 |
|
|
$ |
3,245,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
56.4 |
% |
|
|
57.1 |
% |
|
|
|
|
|
|
56.6 |
% |
Commission expense ratio |
|
|
12.0 |
% |
|
|
18.9 |
% |
|
|
|
|
|
|
14.0 |
% |
Other operating expense ratio (2) |
|
|
19.6 |
% |
|
|
18.4 |
% |
|
|
|
|
|
|
19.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
88.0 |
% |
|
|
94.4 |
% |
|
|
|
|
|
|
89.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to crossfoot. |
|
(2) |
|
Includes other operating expenses and commission income and other income (expense). |
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
160,531 |
|
|
$ |
134,825 |
|
|
$ |
295,356 |
|
Specialty |
|
|
162,895 |
|
|
|
|
|
|
|
162,895 |
|
Professional Liability |
|
|
45,724 |
|
|
|
19,069 |
|
|
|
64,793 |
|
Middle Markets |
|
|
15,758 |
|
|
|
|
|
|
|
15,758 |
|
Property/Other |
|
|
4,644 |
|
|
|
22,913 |
|
|
|
27,557 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
389,552 |
|
|
$ |
176,807 |
|
|
$ |
566,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
94,794 |
|
|
$ |
90,799 |
|
|
$ |
185,593 |
|
Specialty |
|
|
111,942 |
|
|
|
|
|
|
|
111,942 |
|
Professional Liability |
|
|
27,639 |
|
|
|
11,873 |
|
|
|
39,512 |
|
Middle Markets |
|
|
13,778 |
|
|
|
|
|
|
|
13,778 |
|
Property/Other |
|
|
4,339 |
|
|
|
6,845 |
|
|
|
11,184 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
252,492 |
|
|
$ |
109,517 |
|
|
$ |
362,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
69,682 |
|
|
$ |
71,095 |
|
|
$ |
140,777 |
|
Specialty |
|
|
113,243 |
|
|
|
|
|
|
|
113,243 |
|
Professional Liability |
|
|
28,461 |
|
|
|
11,100 |
|
|
|
39,561 |
|
Middle Markets |
|
|
12,433 |
|
|
|
|
|
|
|
12,433 |
|
Property/Other |
|
|
5,861 |
|
|
|
6,568 |
|
|
|
12,429 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
229,680 |
|
|
$ |
88,763 |
|
|
$ |
318,443 |
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2007 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
407,434 |
|
|
$ |
169,976 |
|
|
|
|
|
|
$ |
577,410 |
|
Net written premium |
|
|
246,121 |
|
|
|
88,248 |
|
|
|
|
|
|
|
334,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
211,547 |
|
|
|
73,116 |
|
|
|
|
|
|
|
284,663 |
|
Net losses and LAE |
|
|
(125,065 |
) |
|
|
(35,866 |
) |
|
|
|
|
|
|
(160,931 |
) |
Commission expense |
|
|
(24,986 |
) |
|
|
(9,763 |
) |
|
|
|
|
|
|
(34,749 |
) |
Other operating expenses |
|
|
(39,826 |
) |
|
|
(15,071 |
) |
|
|
|
|
|
|
(54,897 |
) |
Commission income and other income (expense) |
|
|
585 |
|
|
|
(15 |
) |
|
|
|
|
|
|
570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
22,255 |
|
|
|
12,401 |
|
|
|
|
|
|
|
34,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
28,094 |
|
|
|
4,558 |
|
|
$ |
894 |
|
|
|
33,546 |
|
Net realized capital (losses) |
|
|
1,077 |
|
|
|
(36 |
) |
|
|
|
|
|
|
1,041 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(4,430 |
) |
|
|
(4,430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
51,426 |
|
|
|
16,923 |
|
|
|
(3,536 |
) |
|
|
64,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
16,074 |
|
|
|
5,929 |
|
|
|
(1,237 |
) |
|
|
20,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
35,352 |
|
|
$ |
10,994 |
|
|
$ |
(2,299 |
) |
|
$ |
44,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,240,321 |
|
|
$ |
774,796 |
|
|
$ |
63,374 |
|
|
$ |
3,092,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
59.1 |
% |
|
|
49.1 |
% |
|
|
|
|
|
|
56.5 |
% |
Commission expense ratio |
|
|
11.8 |
% |
|
|
13.4 |
% |
|
|
|
|
|
|
12.2 |
% |
Other operating expense ratio (2) |
|
|
18.6 |
% |
|
|
20.5 |
% |
|
|
|
|
|
|
19.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
89.5 |
% |
|
|
83.0 |
% |
|
|
|
|
|
|
87.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to crossfoot. |
|
(2) |
|
Includes other operating expenses and commission income and other income (expense). |
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2007 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
157,457 |
|
|
$ |
133,601 |
|
|
$ |
291,058 |
|
Specialty |
|
|
180,815 |
|
|
|
|
|
|
|
180,815 |
|
Professional Liability |
|
|
44,833 |
|
|
|
16,012 |
|
|
|
60,845 |
|
Middle Markets |
|
|
12,941 |
|
|
|
|
|
|
|
12,941 |
|
Property/Other |
|
|
11,388 |
|
|
|
20,363 |
|
|
|
31,751 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
407,434 |
|
|
$ |
169,976 |
|
|
$ |
577,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
82,964 |
|
|
$ |
72,526 |
|
|
$ |
155,490 |
|
Specialty |
|
|
117,076 |
|
|
|
|
|
|
|
117,076 |
|
Professional Liability |
|
|
26,959 |
|
|
|
9,509 |
|
|
|
36,468 |
|
Middle Markets |
|
|
8,593 |
|
|
|
|
|
|
|
8,593 |
|
Property/Other |
|
|
10,529 |
|
|
|
6,213 |
|
|
|
16,742 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
246,121 |
|
|
$ |
88,248 |
|
|
$ |
334,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
67,494 |
|
|
$ |
62,346 |
|
|
$ |
129,840 |
|
Specialty |
|
|
103,421 |
|
|
|
|
|
|
|
103,421 |
|
Professional Liability |
|
|
26,371 |
|
|
|
4,911 |
|
|
|
31,282 |
|
Middle Markets |
|
|
9,109 |
|
|
|
|
|
|
|
9,109 |
|
Property/Other |
|
|
5,152 |
|
|
|
5,859 |
|
|
|
11,011 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
211,547 |
|
|
$ |
73,116 |
|
|
$ |
284,663 |
|
|
|
|
|
|
|
|
|
|
|
The Insurance Companies net earned premium includes $16.4 million and $17.0 million of net
earned premium from the U.K. Branch for the three months ended June 30, 2008 and 2007,
respectively, and $31.1 million and $32.4 million of net earned premium from the U.K. Branch for
the six months ended June 30, 2008 and 2007, respectively.
Note 4. Comprehensive Income
Comprehensive income encompasses net income, net unrealized capital gains and losses on
available for sale securities, and foreign currency translation adjustments, all of which are net
of tax. Please refer to the Consolidated Statements of Stockholders Equity and the Consolidated
Statements of Comprehensive Income, included herein, for the components of accumulated other
comprehensive income (loss) and of comprehensive income (loss), respectively.
Note 5. Stock-Based Compensation
Stock-based compensation is expensed as stock awards granted under the Companys stock plans
vest, with the expense being included in other operating expenses for the periods indicated. The
amounts charged to expense for stock-based compensation were $2.5 million and $1.9 million for the
three months ended June 30, 2008 and 2007, respectively, and $4.4 million and $3.5 million for the
six months ended June 30, 2008 and 2007, respectively.
19
The Company expensed $52,000 and $35,000 for the three months ended June 30, 2008 and 2007,
respectively, and $93,000 and $70,000 for the six months ended June 30, 2008 and 2007,
respectively, related to its Employee Stock Purchase Plan.
In addition, $50,000 was expensed in each of the three month periods ended June 30, 2008 and
2007 and $100,000 was expensed in each of the six month periods ended June 30, 2008 and 2007 for
stock issued annually to non-employee directors as part of their directors compensation for
serving on the Parent Companys Board of Directors.
Note 6. Application of New Accounting Standards
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (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 141(R) to have a material effect on its financial
condition or results of operations.
In December 2007, the FASB issued SFAS 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.
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities, which amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS 161 enhances the current disclosure framework in SFAS 133 and requires companies with
derivative instruments to disclose information about how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted for under SFAS 133,
and how derivative instruments and related hedged items affect a companys financial position,
financial performance and cash flows. SFAS 161 is effective prospectively for periods beginning on
or after November 15, 2008. Early adoption is encouraged. The Company does not expect the
adoption of SFAS 161 to have a material effect on its financial condition or results of operations.
In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting
Principles, which identifies the sources of generally accepted accounting principles and provides a
framework, or hierarchy, for selecting the principles to be used in preparing U.S. GAAP financial
statements for nongovernmental entities. SFAS 162 is effective 60 days following the Securities
and Exchange Commissions approval of the Public Company Accounting Oversight Boards related
amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles, to remove the GAAP hierarchy from its auditing standards. The Company does
not expect the adoption of SFAS 162 to have a material effect on its financial condition or results
of operations.
Note 7. 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 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 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.
20
Syndicate 1221s stamp capacity is £123.0 million ($239.2 million) for the 2008 underwriting
year compared to £140.0 million ($280.2 million) for the 2007 underwriting year. 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. Navigators provides 100% of Syndicate 1221s capacity for the
2008 and 2007 underwriting years through Navigators Corporate Underwriters Ltd. in 2008 and through
Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. in 2007.
The Company provides letters of credit to Lloyds to support its Syndicate 1221 capacity. If
the Company increases its participation or if Lloyds changes the capital requirements, the Company
may be required to supply additional letters of credit or other collateral acceptable to Lloyds,
or reduce the capacity of Syndicate 1221. The letters of credit are provided through a credit
facility with a consortium of banks which expires March 31, 2009. If the banks decide not to renew
the credit facility, the Company will need to find other sources to provide the letters of credit
or other collateral in order to continue to participate in Syndicate 1221. The bank facility is
collateralized by all of the common stock of Navigators Insurance Company.
Note 8. Income Taxes
We are subject to the tax regulations of the United States (U.S.) and foreign countries in
which we operate. The Company files a consolidated federal tax return, which includes all domestic
subsidiaries and the U.K. Branch. The income from the foreign operations is designated as either
U.S. connected income or non-U.S. connected income. Lloyds is required to pay U.S. income tax on
U.S. connected income written by Lloyds syndicates. Lloyds and the IRS have entered into an
agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyds and
remitted directly to the IRS. These amounts are then charged to the corporate members in
proportion to their participation in the relevant syndicates. The Companys corporate members are
subject to this agreement and will receive United Kingdom (U.K.) tax credits for any U.S. income
tax incurred up to the U.K. income tax charged on the U.S. connected income. The non-U.S.
connected insurance income would generally constitute taxable income under the Subpart F income
section of the Internal Revenue Code (Subpart F) since less than 50% of Syndicate 1221s premium
is derived within the U.K. and would therefore be subject to U.S. taxation when the Lloyds year of
account closes. Taxes are accrued at a 35% rate on our foreign source insurance income and foreign
tax credits, where available, are utilized to offset U.S. tax as permitted. 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 28% rate effective April 1,
2008. The effective rate prior to April 1, 2008 was 30%. We have not provided for U.S. deferred
income taxes on the undistributed earnings of our non-U.S. subsidiaries since these earnings are
intended to be permanently reinvested in our non-U.S. subsidiaries. The effect of the tax rate
change was not material to the Companys financial statements.
A tax benefit taken in the tax return but not in the financial statements is known as an
unrecognized tax benefit. The Company had no unrecognized tax benefits at either June 30, 2008 or
June 30, 2007 and does not anticipate any significant unrecognized tax benefits within the next
twelve months. The Company is currently not under examination by any major U.S. or foreign tax
authority and is generally subject to U.S. Federal, state, local, or foreign tax examinations by
tax authorities for years 2004 and subsequent. The Companys policy is to record interest and
penalties related to unrecognized tax benefits to income tax expense. The Company did not incur
any interest or penalties related to unrecognized tax benefits for the three or six month periods
ended June 30, 2008 and 2007.
The Company had state and local deferred tax assets amounting to potential future tax benefits
of $7.6 million and $6.3 million at June 30, 2008 and December 31, 2007, respectively. Included in
the deferred tax assets are state and local net operating loss carryforwards of $1.2 million and
$2.5 million at June 30, 2008 and December 31, 2007, respectively. A valuation allowance was
established for the full amount of these potential future tax benefits due to the uncertainty
associated with their realization. The Companys state and local tax carryforwards at June 30,
2008 expire in 2025.
21
Note 9. Commitments and Contingencies
(a) The Company is not a party to, or the subject of, any material pending legal proceedings
that depart from the routine litigation incidental to the kinds of business it conducts.
(b) Whenever a member of Lloyds is unable to pay its debts to policyholders, such debts may
be payable by the Lloyds Central Fund. If Lloyds determines that the Central Fund needs to be
increased, it has the power to assess premium levies on current Lloyds members up to 3% of a
members underwriting capacity in any one year. The Company does not believe that any assessment
is likely in the foreseeable future and has not provided any allowance for such an assessment.
However, based on the Companys 2008 capacity at Lloyds of £123.0 million, the June 30, 2008
exchange rate of £1 equals $1.99 and assuming the maximum 3% assessment, the Company would be
assessed approximately $7.3 million.
Note 10. Senior Notes due May 1, 2016
On April 17, 2006, the Company completed a public debt offering of $125 million principal
amount of 7% senior unsecured notes due May 1, 2016 (the Senior Notes) and received net proceeds
of $123.5 million. The interest payment dates on the Senior Notes are each May 1 and November 1.
The effective interest rate related to the Senior Notes, based on the proceeds net of discount and
all issuance costs, approximates 7.17%. The interest expense on the Senior Notes was $2.2 million
for each of the three months ended June 30, 2008 and 2007 and $4.4 million for each of the six
months ended June 30, 2008 and 2007. The fair value of the Senior Notes, based on quoted market
prices, was $119.8 million and $126.7 million at June 30, 2008 and December 31, 2007, respectively.
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 June 30, 2008, the Company was in compliance with all such covenants.
Note 11. Fair Value Measurements
In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which was adopted by the
Company on January 1, 2008. SFAS 157 defines fair value, expands disclosure requirements around
fair value and specifies a hierarchy of valuation techniques based on whether the input to those
valuation techniques are observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect the Companys market
assumptions. These two types of inputs create the following fair value hierarchy:
|
|
|
Level 1 Quoted prices for identical instruments in active markets. |
|
|
|
Level 2 Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs and significant value
drivers are observable in active markets. |
|
|
|
Level 3 Valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable. |
22
This hierarchy requires the Company to use observable market data, when available, and to
minimize the use of unobservable inputs when determining fair value.
The following table presents, for each of the fair value hierarchy levels, the Companys fixed
maturities, equity securities and short-term investments that are measured at fair value at June
30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
In Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
177,161 |
|
|
$ |
1,412,419 |
|
|
$ |
986 |
|
|
$ |
1,590,566 |
|
Equities securities |
|
|
68,089 |
|
|
|
|
|
|
|
|
|
|
|
68,089 |
|
Short-term investments |
|
|
143,631 |
|
|
|
31,243 |
|
|
|
|
|
|
|
174,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
388,881 |
|
|
$ |
1,443,662 |
|
|
$ |
986 |
|
|
$ |
1,833,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The securities classified as Level 3 in the above table consist of structured securities rated
AAA/Aaa by Standard and Poors (S&P) and Moodys Investors Service (Moodys), respectively,
with unobservable inputs included in the Companys fixed maturities portfolio for which price
quotes from brokers were used to indicate fair value. The following table presents a
reconciliation of the beginning and ending balances for all investments measured at fair value
using Level 3 inputs during the three and six months ended June 30, 2008:
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, 2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
Level 3 investments as of April 1, 2008 |
|
$ |
2,073 |
|
Unrealized net gains included in other comprehensive income (loss) |
|
|
(18 |
) |
Purchases, sales, paydowns and amortization |
|
|
(134 |
) |
Transfer to Level 2 |
|
|
(935 |
) |
|
|
|
|
Level 3 investments as of June 30, 2008 |
|
$ |
986 |
|
|
|
|
|
23
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, 2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
Level 3 investments as of January 1, 2008 |
|
$ |
2,603 |
|
Unrealized net gains included in other comprehensive income (loss) |
|
|
(1 |
) |
Purchases, sales, paydowns and amortization |
|
|
(287 |
) |
Transfer to Level 2 |
|
|
(1,329 |
) |
|
|
|
|
Level 3 investments as of June 30, 2008 |
|
$ |
986 |
|
|
|
|
|
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value with changes in fair value reported in earnings. The Company
adopted SFAS 159 on January 1, 2008 and did not elect to apply fair value accounting to any
financial instruments with future changes in value reported in earnings.
The 2008 second quarters net realized capital losses include a
provision of $8.4 million for declines in market value of equity
securities which were considered to be other-than-temporary, as
further discussed under the caption Investments, included
herein. In light of the continuing decline in the fair value of these
securities during the quarter, the Company no longer believes that
their values will recover in the foreseeable future.
Note 12. Share Repurchases
In October 2007 the Parent Companys Board of Directors adopted a stock repurchase program for
up to $30 million of the Parent Companys common stock. Purchases 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 purchases under the program will depend on a variety of factors, including
the trading price of the stock, market conditions and corporate and regulatory considerations.
There were no purchases made in the 2007 fourth quarter. During the first six months of 2008, the
Parent Company purchased 186,026 shares of its common stock in the open market at an average cost
of $52.77 per share which approximates $9.8 million in total. There is approximately $20.2 million
remaining to be used in the stock repurchase program.
24
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Note on Forward-Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q are forward-looking statements
as defined in the Private Securities Litigation Reform Act of 1995. All statements other than
statements of historical fact included in or incorporated by reference in this Quarterly Report are
forward-looking statements. Whenever used in this report, the words estimate, expect,
believe, 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
our 2007 Annual Report on 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 (the SEC), including without limitation the risks described under the
caption Risk Factors in our Annual Report on Form 10-K for the year ended December
31, 2007. |
In light of these risks, uncertainties and assumptions, any forward-looking events discussed
in this Form 10-Q may not occur. You are cautioned not to place undue reliance on any
forward-looking statements, which speak only as of their respective dates.
Overview
The discussion and analysis of our financial condition and results of operations contained
herein should be read in conjunction with our consolidated financial statements and accompanying
notes which appear elsewhere in this Form 10-Q. It contains forward-looking statements that
involve risks and uncertainties. Please see Note on Forward-Looking Statements for more
information. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those discussed below and
elsewhere in this Form 10-Q.
We are an international insurance 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 our U.K. Branch, and Navigators Specialty
Insurance Company, which underwrites specialty and professional liability insurance on an excess
and surplus lines basis fully reinsured by Navigators Insurance Company. Our Lloyds Operations
include NUAL, a wholly-owned Lloyds underwriting agency which manages Syndicate 1221. Our Lloyds
Operations primarily underwrite marine and related lines of business, professional liability
insurance, and construction coverages for onshore energy business at Lloyds through Syndicate
1221. The European property business written by the Lloyds Operations and the U.K. Branch
beginning in 2006 will no longer be produced after the 2008 second quarter which is not expected to
have any significant effect on the Companys financial condition or results of operations. We
participate in the capacity of Syndicate 1221 through our wholly-owned Lloyds corporate member (we
utilized two wholly-owned Lloyds corporate members prior to the 2008 underwriting year). During
the 2008 second quarter the Company closed two small underwriting agencies in Manchester and
Basingstoke, England. In July 2008, the Company opened an underwriting office in Stockholm, Sweden
to write professional liability business.
26
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 the business and take advantage of market opportunities must take
into account regulatory capital requirements and rating agency assessments of capital adequacy.
The discussions that follow include tables that contain both our consolidated and segment
operating results for the three and six month periods ended June 30, 2008 and 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) by net earned premiums. 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 lower frequency of loss where we believe our intellectual capital and financial
strength bring meaningful value. In contrast, we have avoided niches that we believe have a high
frequency of loss activity and/or are subject to a high level of regulatory requirements, such as
workers compensation and personal automobile insurance, because we do not believe our technical
expertise is of as much value in these types of businesses. Examples of niches that have the
characteristics we look for include bluewater hull, which provides coverage for physical damage to,
for example, highly valued cruise ships, and directors and officers liability insurance (D&O),
which covers litigation exposure of a corporations directors and officers. These types of
exposures require substantial technical expertise. We attempt to mitigate the financial impact of
severe claims on our results by conservative and detailed underwriting, prudent use of reinsurance
and a balanced portfolio of risks.
Our revenue is primarily comprised of premiums and investment income. The Insurance
Companies derive their premiums primarily from business written by Navigators Management Company,
Inc. (NMC), a wholly-owned underwriting management company which produces, manages and
underwrites insurance and reinsurance for the Company. During the 2008 second quarter, Navigators
California Insurance Services, Inc. and Navigators Special Risk, Inc., also wholly-owned
underwriting management companies, were merged into NMC. Navigators Management (UK) Ltd.
produces, manages and underwrites insurance and reinsurance for the U.K. Branch. Both NMC and
Navigators Management (UK) Ltd. are reimbursed for their actual costs. The Lloyds Operations
derive their premiums from business written by NUAL which is reimbursed for its actual costs and,
where applicable, profit commissions on the business produced for Syndicate 1221.
From 2003 through 2006, we experienced generally beneficial market changes in our lines of
business. As a result of several large industry losses in the second quarter of 2001, the marine
insurance market began to experience diminished capacity and rate increases, initially in the
offshore energy line of business. The marine rate increases began to level off in 2004 and into
2005. As a result of the substantial insurance industry losses resulting from Hurricanes Katrina
and Rita, the marine insurance market experienced diminished capacity and rate increases through
the end of 2006, particularly for the offshore energy risks located in the Gulf of Mexico. Since
the end of 2006, competitive market conditions have returned as available capacity has increased.
The average renewal premium rates for our Insurance Companies marine business decreased
approximately 4.8% and 2.6% for the 2008 second quarter and six month period, respectively,
including offshore energy average renewal premium rates which decreased approximately 13.6% for the
second quarter of 2008 and approximately 11.8% for the first six months of 2008. The average
renewal premium rates for our Lloyds Operations marine business
decreased approximately 6.0% and 5.0% for the 2008 second quarter and six month period,
respectively, including offshore energy average renewal premium rates which decreased approximately
14.6% for the second quarter of 2008 and approximately 12.7% for the first six months of 2008. 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.
27
Specialty liability losses in 2001 to 2003, particularly for the contractors liability
business, also resulted in diminished capacity in the market in which we compete, as many former
competitors who lacked the expertise to selectively underwrite this business have been forced to
withdraw from the market resulting in average renewal premium rate increases of approximately 13.5%
in 2004 and 49.1% in 2003. This was followed by a slight decline in rates of approximately 1.0% in
2005. The 2006 year average renewal premium rates for the contractors liability business declined
approximately 5.6%, primarily due to additional competition in the marketplace. This decline
continued into 2007 with average renewal premium rates declining approximately 10.7%. The average
renewal premium rates for the contractors liability business declined approximately 14.4% in the
2008 second quarter and approximately 12.6% for the first six months of 2008. We expect
competitive conditions to continue during 2008 resulting in continuing declines in pricing for
contractors liability and excess liability business.
In the professional liability market, the enactment of the Sarbanes-Oxley Act of 2002,
together with financial and accounting scandals at publicly traded corporations and the increased
frequency of securities-related class action litigation, has led to heightened interest in
professional liability insurance generally. Professional liability average renewal premium rates
decreased approximately 6.6% in 2007 compared to relatively level average renewal premium rates in
2006 and 2005 after decreasing approximately 3% in 2004 which followed substantial average renewal
premium rate increases in 2003 and 2002, particularly for D&O insurance. The 2007 D&O insurance
average renewal premium rates decreased approximately 7.9% following decreases of approximately
1.7% in 2006, 2.3% in 2005 and 9.5% in 2004. The average renewal premium rates for the
professional liability business declined approximately 3.6% and 2.7% in the 2008 second quarter and
six month period, respectively, including D&O insurance average renewal premium rates which
declined approximately 2.5% for the 2008 second quarter and approximately 4.8% for the first six
months of 2008. 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.
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 and liquidity.
28
The Company has significant catastrophe exposures throughout the world. The largest
catastrophe exposure results from potential hurricane damage to offshore energy risks in the Gulf
of Mexico. Based on an assessment made through the end of the 2008 second quarter and 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 be approximately $208 million and $33 million,
respectively, including the cost of reinsurance reinstatement premiums. There are a number of
significant assumptions and related variables related to such an estimate including the size, force
and path of the hurricane, the various types of the insured risks exposed to the event at the time
the event occurs and the estimated costs or damages incurred for each insured risk. There can be
no assurances that the gross and net loss amounts that the Company could incur in such an event or
in any hurricanes that may occur in the Gulf of Mexico would not be materially higher than the
estimates discussed above given the significant uncertainties with respect to such an estimate.
The occurrence of large loss events could reduce the reinsurance coverage that is available to
us and could weaken the financial condition of our reinsurers, which could have a material adverse
effect on our results of operations. Although the reinsurance agreements make the reinsurers
liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance
arrangements do not eliminate our obligation to pay claims to our policyholders. Accordingly, we
bear credit risk with respect to our reinsurers. Specifically, our reinsurers may not pay claims
made by us on a timely basis, or they may not pay some or all of these claims. Either of these
events would increase our costs and could have a material adverse effect on our business. We are
required to pay the losses even if a reinsurer fails to meet its obligations under the reinsurance
agreement.
Critical Accounting Policies
It is important to understand our accounting policies in order to understand our financial
statements. Management considers certain of these policies to be critical to the presentation of
the financial results, since they require management to make significant estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets, liabilities, revenues,
expenses, and related disclosures at the financial reporting date and throughout the reporting
period. Certain of the estimates result from judgments that can be subjective and complex and
consequently actual results may differ from these estimates, which would be reflected in future
periods.
Our most critical accounting policies involve the reporting of the reserves for losses and LAE
(including losses that have occurred but were not reported to us by the financial reporting date),
reinsurance recoverables, written and unearned premium, the recoverability of deferred tax assets,
the impairment of invested assets, accounting for Lloyds results and the translation of foreign
currencies.
Reserves for Losses and LAE. Reserves for losses and LAE represent an estimate of the
expected cost of the ultimate settlement and administration of losses, based on facts and
circumstances then known. Actuarial methodologies are employed to assist in establishing such
estimates and include judgments relative to estimates of future claims severity and frequency,
length of time to develop to ultimate, judicial theories of liability and other third party factors
which are often beyond our control. Due to the inherent uncertainty associated with the reserving
process, the ultimate liability may be different from the original estimate. Such estimates are
regularly reviewed and updated and any resulting adjustments are included in the current years
results.
Reinsurance Recoverables. The most significant 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 that 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.
29
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 and brokers but not
yet reported to us. We
must estimate the amount of written premium not yet reported based on judgments relative to
current and historical trends of the business being written. Such estimates are regularly reviewed
and updated and any resulting adjustments are included in the current years results. An unearned
premium reserve is established to reflect the unexpired portion of each policy at the financial
reporting date.
Substantially all of our business is placed through agents and brokers. Since the vast
majority of the Companys gross written premium is primary or direct as opposed to assumed, the
delays in reporting assumed premium generally do not have a significant effect on the Companys
financial statements, since we record estimates for both unreported direct and assumed premium. We
also record the ceded portion of the estimated gross written premium and related acquisition costs.
The earned gross, ceded and net premiums are calculated based on our earning methodology which is
generally pro-rata over the policy period. Losses are also recorded in relation to the earned
premium. The estimate for losses incurred on the estimated premium is based on an actuarial
calculation consistent with the methodology used to determine incurred but not reported loss
reserves for reported premiums.
The portion of the Companys premium that is estimated is mostly for the marine business
written by our U.K. Branch and Lloyds Operations. We generally do not experience any significant
backlog in processing premiums. Such premium estimates are generally based on submission data
received from agents and brokers and recorded when the insurance policy or reinsurance contract is
written or bound. The estimates are regularly reviewed and updated taking into account the premium
received to date versus the estimate and the age of the estimate. To the extent that the actual
premium varies from the estimates, the difference, along with the related loss reserves and
underwriting expenses, is recorded in current operations.
Deferred Tax Assets. We apply the asset and liability method of accounting for income taxes
whereby deferred assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. In assessing the realization of deferred tax assets, management
considers whether it is more likely than not that the deferred tax assets will be realized.
Impairment of Invested Assets. Impairment of invested assets results in a charge to
operations when a market decline below cost is other-than-temporary. Management regularly reviews
our fixed maturity and equity securities portfolios to evaluate the necessity of recording
impairment losses for other-than-temporary declines in the fair value of investments. In general,
we focus our attention on those securities whose market value was less than 80% of their cost or
amortized cost, as appropriate, for six or more consecutive months. Factors considered in
evaluating potential impairment include, but are not limited to, the current fair value as compared
to cost or amortized cost of the security, as appropriate, the length of time the investment has
been below cost or amortized cost and by how much, our intent and ability to retain the investment
for a period of time sufficient to allow for an anticipated recovery in value, specific credit
issues related to the issuer and current economic conditions. Other-than-temporary impairment
losses result in a permanent reduction of the cost basis of the underlying investment. Significant
changes in the factors we consider when evaluating investments for impairment losses could result
in a significant change in impairment losses reported in the consolidated financial statements.
As mentioned above, the Company considers its intent and ability to hold a security until the
value recovers as part of the process of evaluating whether a securitys unrealized loss represents
an other-than-temporary
decline. The Companys ability to hold such securities is supported by sufficient cash flow from
its operations and from maturities within its investment portfolio in order to meet its claims
payment and other disbursement obligations arising from its underwriting operations without selling
such investments. With respect to securities where the decline in value is determined to be
temporary and the securitys value is not written down, a subsequent decision may be made to sell
that security and realize a loss. Subsequent decisions on security sales are made within the
context of overall risk monitoring, changing information, market conditions and assessing value
relative to other comparable securities. Management of the Companys investment portfolio is
outsourced to third party investment managers. While these investment managers may, at a given
point in time, believe that the preferred course of action is to hold securities with unrealized
losses that are considered temporary until such losses are recovered, the dynamic nature of the
portfolio management may result in a
subsequent decision to sell the security and realize the loss, based upon a change in market
and other factors described above. The Company believes that subsequent decisions to sell such
securities are consistent with the classification of the Companys portfolio as available for sale.
30
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 prior to the execution of
a transaction 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 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.
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.
Results of Operations
The following is a discussion and analysis of our consolidated and segment results of
operations for the three and six month periods ended June 30, 2008 and 2007. Earnings per share
data is presented on a per diluted share basis.
Effective in 2008, the Company has reclassified certain of its business for this Managements
Discussion and Analysis of Financial Condition and Results of Operations. The inland marine
business, formerly included in other business, is now included in marine business. Middle markets
business, formerly included in the specialty business, is now broken out separately. Underwriting
data for prior periods has been reclassified to reflect these changes.
Net income for the three months ended June 30, 2008 was $17.4 million or $1.03 per share
compared to $24.4 million or $1.44 per share for the three months ended June 30, 2007. Included in
these results were net realized capital losses of $0.31 per share and net realized capital gains of
$0.03 per share for the three months ended June 30, 2008 and 2007, respectively. The 2008 second
quarters net realized capital losses include a provision of $8.4 million for declines in the
market value of equity securities which were considered to be other-than-temporary, as further
discussed under the caption Investments, included herein. In light of the continuing decline in the
fair value of these securities during the quarter, the Company no longer believes that their values will
recover in the foreseeable future. The after-tax loss of such provision was
$5.5 million or $0.32 per share. Recording realized capital losses on such securities has no impact
on the Companys stockholders equity or book value per share since unrealized gains and losses on
the investment portfolio are a component of accumulated other comprehensive income (loss).
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Net income for the six months ended June 30, 2008 was $40.7 million or $2.39 per share
compared to $44.0 million or $2.60 per share for the six months ended June 30, 2007. Included in
these results were net realized capital losses of $0.31 per share and net realized capital gains of
$0.04 per share for the six months ended June 30, 2008 and 2007, respectively.
The combined ratios, which consist of the sum of the loss and LAE ratio and the expense ratio
for each period, for the 2008 second quarter and six month period were 90.4% and 89.8%,
respectively, compared to 86.4% for the 2007 second quarter and 87.8% for the first six months of
2007. The combined ratios for the 2008 second quarter and six month period were reduced by 6.5 and
7.6 loss ratio points, respectively, for net loss reserve redundancies of $10.6 million and $24.3
million, respectively, relating to prior years. The combined ratios for the 2007 second quarter
and six month period were reduced by 7.3 and 6.1 loss ratio points, respectively, for net loss
reserve redundancies of $10.6 million and $17.4 million, respectively, relating to prior years.
The net paid loss and LAE ratios for the 2008 second quarter and six month period were 29.7% and
31.2%, respectively, compared to 32.6% for the 2007 second quarter and 31.9% for the first six
months of 2007.
The 2007 second quarter and six month loss ratios included 2.4 and 1.3 loss ratio points,
respectively, in the aggregate, for U.K. flood losses in the Insurance Companies property line of
business and Lloyds marine line of business (principally cargo losses).
Cash flow from operations was $133.4 million for the first six months of 2008 compared to
$111.7 million for the comparable period in 2007. The positive cash flow contributed to the growth
in invested assets and net investment income.
Consolidated stockholders equity increased 2.2% to $676.4 million or $40.29 per share at June
30, 2008 compared to $662.1 million or $39.24 per share at December 31, 2007. The increase was
primarily due to net income of $40.7 million for the first six months of 2008 which was partially
offset by an other comprehensive loss of $20.3 million mostly due to unrealized depreciation of
investments, and treasury stock purchases of $9.8 million.
Revenues. Gross written premium increased to $279.2 million and decreased to $566.4
million in the second quarter and first six months of 2008, respectively, from $276.5 million and
$577.4 million in the second quarter and first six months of 2007, respectively, an increase of
1.0% and a decrease of 1.9%, respectively. The 2008 gross written premium is flat when compared to
2007 and generally reflects a combination of selective business expansion in new and existing lines
of business, mostly offset by the effect of premium rate changes on renewal policies on certain
lines of business and lost or cancelled business.
The average premium rate increases or decreases as noted elsewhere in this document for the
marine, specialty and professional liability businesses are calculated primarily by comparing
premium amounts on policies that have renewed. The premiums are judgmentally adjusted for exposure
factors when deemed significant and sometimes represent an aggregation of several lines of
business. The rate change calculations
provide an indicated pricing trend and are not meant to be a precise analysis of the numerous
factors that affect premium rates or the adequacy of such rates to cover all underwriting costs and
generate an underwriting profit. The calculation can also be affected quarter by quarter depending
on the particular policies and the number of policies that renew during that period. Due to market
conditions, these rate changes may or may not apply to new business that generally would be more
competitively priced compared to renewal business.
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The following tables set forth our gross and net written premium and net earned premium by
segment and line of business for the periods indicated:
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|
|
|
($ in thousands) |
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
77,996 |
|
|
|
27.9 |
% |
|
$ |
45,123 |
|
|
$ |
36,456 |
|
|
$ |
70,601 |
|
|
|
25.5 |
% |
|
$ |
37,229 |
|
|
$ |
34,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty |
|
|
84,013 |
|
|
|
30.1 |
% |
|
|
57,998 |
|
|
|
56,574 |
|
|
|
91,398 |
|
|
|
33.1 |
% |
|
|
62,490 |
|
|
|
54,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
Liability |
|
|
26,437 |
|
|
|
9.5 |
% |
|
|
15,906 |
|
|
|
14,388 |
|
|
|
24,351 |
|
|
|
8.8 |
% |
|
|
14,767 |
|
|
|
13,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle Markets |
|
|
7,744 |
|
|
|
2.8 |
% |
|
|
7,252 |
|
|
|
6,736 |
|
|
|
6,637 |
|
|
|
2.4 |
% |
|
|
4,624 |
|
|
|
4,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property/Other |
|
|
1,766 |
|
|
|
0.6 |
% |
|
|
1,903 |
|
|
|
3,280 |
|
|
|
5,573 |
|
|
|
2.0 |
% |
|
|
4,963 |
|
|
|
3,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
Companies
Total |
|
|
197,956 |
|
|
|
70.9 |
% |
|
|
128,182 |
|
|
|
117,434 |
|
|
|
198,560 |
|
|
|
71.8 |
% |
|
|
124,073 |
|
|
|
109,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
59,872 |
|
|
|
21.4 |
% |
|
|
38,297 |
|
|
|
37,103 |
|
|
|
55,922 |
|
|
|
20.1 |
% |
|
|
27,038 |
|
|
|
30,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
Liability |
|
|
8,399 |
|
|
|
3.0 |
% |
|
|
5,081 |
|
|
|
5,141 |
|
|
|
10,534 |
|
|
|
3.8 |
% |
|
|
6,126 |
|
|
|
1,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
12,986 |
|
|
|
4.7 |
% |
|
|
2,727 |
|
|
|
3,025 |
|
|
|
11,533 |
|
|
|
4.3 |
% |
|
|
4,113 |
|
|
|
3,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds
Operations
Total |
|
|
81,257 |
|
|
|
29.1 |
% |
|
|
46,105 |
|
|
|
45,269 |
|
|
|
77,989 |
|
|
|
28.2 |
% |
|
|
37,277 |
|
|
|
35,882 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
279,213 |
|
|
|
100.0 |
% |
|
$ |
174,287 |
|
|
$ |
162,703 |
|
|
$ |
276,549 |
|
|
|
100.0 |
% |
|
$ |
161,350 |
|
|
$ |
145,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
|
Premium |
|
|
% |
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
% |
|
|
Premium |
|
|
Premium |
|
|
|
($ in thousands) |
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
160,531 |
|
|
|
28.3 |
% |
|
$ |
94,794 |
|
|
$ |
69,682 |
|
|
$ |
157,457 |
|
|
|
27.3 |
% |
|
$ |
82,964 |
|
|
$ |
67,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty |
|
|
162,895 |
|
|
|
28.8 |
% |
|
|
111,942 |
|
|
|
113,243 |
|
|
|
180,815 |
|
|
|
31.3 |
% |
|
|
117,076 |
|
|
|
103,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
Liability |
|
|
45,724 |
|
|
|
8.1 |
% |
|
|
27,639 |
|
|
|
28,461 |
|
|
|
44,833 |
|
|
|
7.8 |
% |
|
|
26,959 |
|
|
|
26,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle Markets |
|
|
15,758 |
|
|
|
2.8 |
% |
|
|
13,778 |
|
|
|
12,433 |
|
|
|
12,941 |
|
|
|
2.2 |
% |
|
|
8,593 |
|
|
|
9,109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
4,644 |
|
|
|
0.8 |
% |
|
|
4,339 |
|
|
|
5,861 |
|
|
|
11,388 |
|
|
|
2.0 |
% |
|
|
10,529 |
|
|
|
5,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
Companies
Total |
|
|
389,552 |
|
|
|
68.8 |
% |
|
|
252,492 |
|
|
|
229,680 |
|
|
|
407,434 |
|
|
|
70.6 |
% |
|
|
246,121 |
|
|
|
211,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
134,825 |
|
|
|
23.8 |
% |
|
|
90,799 |
|
|
|
71,095 |
|
|
|
133,601 |
|
|
|
23.1 |
% |
|
|
72,526 |
|
|
|
62,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
Liability |
|
|
19,069 |
|
|
|
3.4 |
% |
|
|
11,873 |
|
|
|
11,100 |
|
|
|
16,012 |
|
|
|
2.8 |
% |
|
|
9,509 |
|
|
|
4,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
22,913 |
|
|
|
4.0 |
% |
|
|
6,845 |
|
|
|
6,568 |
|
|
|
20,363 |
|
|
|
3.5 |
% |
|
|
6,213 |
|
|
|
5,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds
Operations
Total |
|
|
176,807 |
|
|
|
31.2 |
% |
|
|
109,517 |
|
|
|
88,763 |
|
|
|
169,976 |
|
|
|
29.4 |
% |
|
|
88,248 |
|
|
|
73,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
566,359 |
|
|
|
100.0 |
% |
|
$ |
362,009 |
|
|
$ |
318,443 |
|
|
$ |
577,410 |
|
|
|
100.0 |
% |
|
$ |
334,369 |
|
|
$ |
284,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
Gross Written Premium
Insurance Companies Gross Written Premium
Marine Premium. The gross written premium for the first six months of 2008 and 2007 consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Marine liability |
|
|
30.0 |
% |
|
|
30.5 |
% |
Offshore energy |
|
|
15.3 |
% |
|
|
20.3 |
% |
P&I |
|
|
11.5 |
% |
|
|
11.0 |
% |
Cargo |
|
|
10.3 |
% |
|
|
9.1 |
% |
Transport |
|
|
7.7 |
% |
|
|
7.3 |
% |
Inland marine |
|
|
7.2 |
% |
|
|
3.3 |
% |
Other |
|
|
6.9 |
% |
|
|
6.4 |
% |
Bluewater hull |
|
|
5.8 |
% |
|
|
6.7 |
% |
Craft/Fishing vessel |
|
|
5.3 |
% |
|
|
5.4 |
% |
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
The marine gross written premium for the 2008 second quarter and six month period increased
10.5% and 2.0%, respectively, compared to the same periods in 2007. The average renewal premium
rates for the 2008 second quarter and six month period decreased 4.8% and 2.6%, respectively,
reflecting increased market conditions. 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 Premium. The gross written premium for the first six months of 2008 and 2007
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Construction liability |
|
|
49.0 |
% |
|
|
50.6 |
% |
Commercial umbrella |
|
|
20.6 |
% |
|
|
18.7 |
% |
Programs |
|
|
13.5 |
% |
|
|
10.2 |
% |
Primary E&S |
|
|
11.6 |
% |
|
|
11.8 |
% |
Personal umbrella |
|
|
2.7 |
% |
|
|
2.6 |
% |
Liquor liability |
|
|
2.1 |
% |
|
|
1.0 |
% |
Monarch PAF |
|
|
0.5 |
% |
|
|
0.6 |
% |
Other |
|
|
0.0 |
% |
|
|
4.5 |
% |
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
The specialty gross written premium for the 2008 second quarter and six month period decreased
8.1% and 9.9%, respectively, compared to the same periods in 2007 due primarily to weakening
economic conditions that
have reduced demand for contractors liability insurance. The average renewal premium rates
for the contractors liability business decreased approximately 14.4% and 12.6% for the 2008 second
quarter and six month period, respectively. The recent premium rate decreases for the contractors
liability business and generally for the specialty lines of business are reflective of softening
market conditions which are expected to continue throughout 2008.
35
Professional Liability Premium. The gross written premium for the first six months of 2008
and 2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
D&O (public and private) |
|
|
62.7 |
% |
|
|
64.6 |
% |
Lawyers and other professionals |
|
|
32.0 |
% |
|
|
28.6 |
% |
Architects and engineers |
|
|
5.3 |
% |
|
|
6.8 |
% |
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
The professional liability gross written premium for the 2008 second quarter and six month
period increased 8.6% and 2.0%, respectively, compared to the same periods in 2007. The average
renewal premium rates for the professional liability business including D&O renewal premium rates
decreased by approximately 2.5% and 4.8%, in the 2008 first quarter and six month period,
respectively. We anticipate continuing declines in 2008 pricing given the overall favorable
industry underwriting results since 2002 for the professional liability lines of business.
Middle Markets Premium. Middle markets premium consists of general liability, auto liability
and property insurance for a variety of commercial middle markets businesses engaged in
contracting, light manufacturing, garage services, hospitality and real estate.
Despite the softening market conditions, the gross written premium increased 16.7% and 21.8%
for the 2008 second quarter and the first six months of 2008, respectively, compared to the same
periods in 2007, due to geographic and product diversification and consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
General liability |
|
|
48.4 |
% |
|
|
55.1 |
% |
Commercial automobile liability |
|
|
39.9 |
% |
|
|
32.4 |
% |
Property |
|
|
11.7 |
% |
|
|
12.5 |
% |
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
Property/Other Premium. Property/Other premium includes European property business written by
the U.K. Branch beginning in 2006 and run-off business. The European property business written by
the U.K. Branch was discontinued in the 2008 second quarter. Such action is not expected to have a
material impact on the U.K. Branch.
Lloyds Operations Gross Written Premium
We have provided 100% of Syndicate 1221s stamp capacity since 2006. Stamp capacity is a
measure of the amount of premium a Lloyds syndicate is authorized to write based on a business
plan approved by the Council of Lloyds. Syndicate 1221s stamp capacity is £123.0 million ($239.2
million) in 2008 compared to £140.0 million ($280.2 million) in 2007.
The Lloyds Operations gross written premium for the 2008 second quarter and six month period
increased 4.2% and 4.0%, respectively, compared to the same period in 2007, reflecting continued
expansion in the professional liability book of business and increases in new business in the
marine liability book, partially offset by weakening market conditions in the marine and energy
business overall.
36
Marine Premium. The gross written premium for the first six months of 2008 and 2007 consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Cargo and specie |
|
|
31.8 |
% |
|
|
34.1 |
% |
Marine liability |
|
|
29.5 |
% |
|
|
21.8 |
% |
Offshore energy |
|
|
19.4 |
% |
|
|
24.0 |
% |
Assumed reinsurance |
|
|
8.6 |
% |
|
|
14.1 |
% |
Hull |
|
|
7.6 |
% |
|
|
5.2 |
% |
Other |
|
|
3.1 |
% |
|
|
0.8 |
% |
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
The marine gross written premium for the 2008 second quarter and six month period increased
7.1% and 0.9%, respectively, compared to the same periods in 2007. The average renewal premium
rates decreased approximately 5.6% and 4.7% for the 2008 second quarter and six month period,
respectively. 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.
Professional Liability Premium. The gross written premium for the first six months of 2008
and 2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
E&O |
|
|
67.8 |
% |
|
|
54.3 |
% |
D&O (public and private) |
|
|
32.2 |
% |
|
|
45.7 |
% |
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
Syndicate 1221 commenced writing professional liability business during the second quarter of
2005. The gross written premium for the 2008 second quarter and six month period decreased 20.3%
and increased 19.1%, respectively, compared to the same periods in 2007. The decrease in the
second quarter was due to lower D&O premium partially offset by increased E&O premium over the six
months.
Property/Other Premium. Property/Other premium consists of gross written premium for
engineering and construction business, onshore energy business and European property business,.
The engineering and construction business provides coverage for construction projects including
machinery, equipment and loss of use due to delays. The onshore energy business principally
focuses on the oil and gas, chemical and petrochemical industries with coverages primarily for
property damage and business interruption. The European property business written by the Lloyds
Operations was discontinued in the 2008 second quarter. Such action is not expected to have a
material impact on the Lloyds Operations.
Ceded Written Premium. In the ordinary course of business, we reinsure certain
insurance risks with unaffiliated insurance companies for the purpose of limiting our maximum loss
exposure, protecting against catastrophic losses, and maintaining desired ratios of net premiums
written to statutory surplus. The relationship of ceded to written premium varies based upon the
types of business written and whether the business is written by the Insurance Companies or the
Lloyds Operations.
37
The following tables set forth our ceded written premium by segment and major line of business
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Ceded |
|
|
Gross |
|
|
Ceded |
|
|
Gross |
|
|
|
Written |
|
|
Written |
|
|
Written |
|
|
Written |
|
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
32,873 |
|
|
|
42.1 |
% |
|
$ |
33,372 |
|
|
|
47.3 |
% |
Specialty |
|
|
26,015 |
|
|
|
31.0 |
% |
|
|
28,908 |
|
|
|
31.6 |
% |
Professional Liability |
|
|
10,531 |
|
|
|
39.8 |
% |
|
|
9,584 |
|
|
|
39.4 |
% |
Middle Markets |
|
|
492 |
|
|
|
6.4 |
% |
|
|
2,013 |
|
|
|
30.3 |
% |
Property/Other |
|
|
(137 |
) |
|
|
-7.8 |
% |
|
|
610 |
|
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
69,774 |
|
|
|
35.2 |
% |
|
|
74,487 |
|
|
|
37.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
21,575 |
|
|
|
36.0 |
% |
|
|
28,884 |
|
|
|
51.7 |
% |
Professional Liability |
|
|
3,318 |
|
|
|
39.5 |
% |
|
|
4,408 |
|
|
|
41.8 |
% |
Property/Other |
|
|
10,259 |
|
|
|
79.0 |
% |
|
|
7,420 |
|
|
|
64.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
35,152 |
|
|
|
43.3 |
% |
|
|
40,712 |
|
|
|
52.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
104,926 |
|
|
|
37.6 |
% |
|
$ |
115,199 |
|
|
|
41.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Ceded |
|
|
Gross |
|
|
Ceded |
|
|
Gross |
|
|
|
Written |
|
|
Written |
|
|
Written |
|
|
Written |
|
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
65,737 |
|
|
|
40.9 |
% |
|
$ |
74,493 |
|
|
|
47.3 |
% |
Specialty |
|
|
50,953 |
|
|
|
31.3 |
% |
|
|
63,739 |
|
|
|
35.3 |
% |
Professional Liability |
|
|
18,085 |
|
|
|
39.6 |
% |
|
|
17,874 |
|
|
|
39.9 |
% |
Middle Markets |
|
|
1,980 |
|
|
|
12.6 |
% |
|
|
4,348 |
|
|
|
33.6 |
% |
Property/Other |
|
|
305 |
|
|
|
6.6 |
% |
|
|
859 |
|
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
137,060 |
|
|
|
35.2 |
% |
|
|
161,313 |
|
|
|
39.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
44,026 |
|
|
|
32.7 |
% |
|
|
61,075 |
|
|
|
45.7 |
% |
Professional Liability |
|
|
7,196 |
|
|
|
37.7 |
% |
|
|
6,503 |
|
|
|
40.6 |
% |
Property/Other |
|
|
16,068 |
|
|
|
70.1 |
% |
|
|
14,150 |
|
|
|
69.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
67,290 |
|
|
|
38.1 |
% |
|
|
81,728 |
|
|
|
48.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
204,350 |
|
|
|
36.1 |
% |
|
$ |
243,041 |
|
|
|
42.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The ratios of total ceded written premium to gross written premium in the 2008 second quarter
and six month period were 37.6% and 36.1%, respectively, compared to the 2007 second quarter and
six month period ratios of 41.7% and 42.1%, respectively. The decrease in the ratio of ceded
written premium to gross written premium for the three and six months ended June 30, 2008 compared
to the same periods in 2007 was due to a combination of the following factors:
|
|
Restructuring of the marine quota share treaties for the Insurance Companies and the
Lloyds Operations resulting in a large reduction in ceded premium. |
|
|
An increased retention from $0.5 million to $1.0 million effective April 1, 2007 for the
contractors liability business which reduced the amount of premium ceded. |
|
|
A reduction of $1.4 million of ceded written premium in the 2008 second quarter as a result
of a rescission of a reinsurers participation on an excess of loss treaty for middle markets
business. |
|
|
The elimination of a 5% reinsurer participation in our Syndicate 1221 2008 stamp capacity. |
Net Written Premium. Net written premium increased 8.0% and 8.3% in the 2008 second
quarter and six month period, respectively, compared to the same periods in 2007, primarily due to
retaining more of our business as discussed above.
Net Earned Premium. Net earned premium, which generally lags the increase in net
written premium, increased 11.7% and 11.9% in the 2008 second quarter and six month period,
respectively, compared to the same periods in 2008, as a result of the increased net written
premium discussed above.
Commission Income. Commission income from unaffiliated business decreased 3.9% and
18.6% in the 2008 second quarter and six month period, respectively, compared to the same periods
in 2007. 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.
39
Net Investment Income. Net investment income increased 8.1% and 12.0% in the 2008
second quarter and six month period compared to the same periods in 2007, due primarily to the
increase in invested assets as a result of the positive cash flow from operations somewhat offset
by a modest decline in the portfolios book yield.
Net Realized Capital Gains and Losses. Pre-tax net income included net realized
capital losses of $8.0 million for the 2008 second quarter compared to net realized capital gains
of $0.8 million for the 2007 second quarter. On an after-tax basis, the 2008 second quarter net
realized capital losses were $5.2 million or $0.31 per share compared to net realized capital gains
of $0.5 million or $0.03 per share for the 2007 second quarter. Pre-tax net income included net
realized capital losses of $8.1 million for the first six months of 2008 compared to net realized
capital gains of $1.0 million for the first six months of 2007. On an after-tax basis, the net
realized capital losses were $5.2 million or $0.31 per share for the first six months of 2008
compared to net realized capital gains of $0.7 million or $0.04 per share for the first six months
of 2007.
Other Income/(Expense). Other income/(expense) for the second quarters and six month
periods of both 2008 and 2007 consisted primarily of foreign exchange gains and losses from our
Lloyds Operations and inspection fees related to our specialty insurance business.
Operating Expenses
Net Losses and Loss Adjustment Expenses Incurred. The ratios of net losses and LAE incurred
to net earned premium (loss ratios) for the 2008 and 2007 second quarters were 56.5% and 54.8%,
respectively, and 56.6% and 56.5% for the first six months of 2008 and 2007, respectively. The loss
ratios for the second quarter of 2008 and 2007 were favorably impacted by 6.5 and 7.3 loss ratio
points, respectively, resulting from a redundancy of prior year loss reserves. The loss ratios for
the first six months of 2008 and 2007 were favorably impacted by 7.6 and 6.1 loss ratio points,
respectively, also resulting from a redundancy of prior year loss reserves.
The 2008 six month loss ratio included 2.3 loss ratio points for first quarter losses
consisting of two 2008 accident year losses for the Insurance Companies amounting to $7.2 million
related to fishing vessels and $0.9 million for 2008 flood losses in Selsey, England for the
Lloyds Operations.
The 2007 second quarter and six month loss ratios included 2.4 and 1.3 loss ratio points,
respectively, for U.K. flood losses in the Insurance Companies property line of business and the
Lloyds marine line of business (principally cargo losses).
With the recording of gross losses, the Company assesses its reinsurance coverage, potential
receivables, and the recoverability of the receivables. Losses incurred on business recently
written are primarily covered by reinsurance agreements written by companies with whom the Company
is currently doing reinsurance business and whose credit the Company continues to assess in the
normal course of business.
40
As illustrated in the following table, our overall reinsurance recoverable amounts for paid
and unpaid losses have declined during the first six months of 2008 as the Company continues to
bill and collect its recoverables for Hurricanes Katrina and Rita loss payments and retains more of
its business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
($ in thousands) |
|
Reinsurance recoverables: |
|
|
|
|
|
|
|
|
|
|
|
|
Paid losses |
|
$ |
78,087 |
|
|
$ |
94,818 |
|
|
$ |
(16,731 |
) |
Unpaid losses and LAE reserves |
|
|
778,715 |
|
|
|
801,461 |
|
|
|
(22,746 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
856,802 |
|
|
$ |
896,279 |
|
|
$ |
(39,477 |
) |
|
|
|
|
|
|
|
|
|
|
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) as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves for losses and LAE |
|
$ |
1,707,101 |
|
|
$ |
1,648,764 |
|
|
|
3.5 |
% |
Less: Reinsurance recoverable on unpaid
losses and LAE reserves |
|
|
778,715 |
|
|
|
801,461 |
|
|
|
-2.8 |
% |
|
|
|
|
|
|
|
|
|
|
Net loss and LAE reserves |
|
$ |
928,386 |
|
|
$ |
847,303 |
|
|
|
9.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
During the 2008 second quarter, the Company assumed approximately $2.9 million of gross
reserves for losses and LAE and related reinsurance recoverables for paid and unpaid losses of $0.8
million and $1.4 million, respectively, from a former pool member on a loss portfolio transaction.
Such run-off business was previously underwritten by the Company in 1998 and prior years. The
Company is also settling such run-off claims. The transaction was not material to the 2008 second
quarter net income.
41
The following tables set forth our net reported loss and LAE reserves and net incurred but not
reported (IBNR) reserves (non-GAAP measures reconciled above) by segment and line of business as
of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
|
Net |
|
|
Net |
|
|
Total |
|
|
% of IBNR |
|
|
|
Reported |
|
|
IBNR |
|
|
Net Loss |
|
|
to Total Net |
|
|
|
Reserves |
|
|
Reserves |
|
|
Reserves |
|
|
Loss Reserves |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
104,796 |
|
|
$ |
108,502 |
|
|
$ |
213,298 |
|
|
|
50.9 |
% |
Specialty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
Liability |
|
|
42,028 |
|
|
|
223,057 |
|
|
|
265,085 |
|
|
|
84.1 |
% |
All other
liability |
|
|
22,496 |
|
|
|
71,545 |
|
|
|
94,041 |
|
|
|
76.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Specialty |
|
|
64,524 |
|
|
|
294,602 |
|
|
|
359,126 |
|
|
|
82.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
Liability |
|
|
22,383 |
|
|
|
55,936 |
|
|
|
78,319 |
|
|
|
71.4 |
% |
Middle Markets |
|
|
12,055 |
|
|
|
12,681 |
|
|
|
24,736 |
|
|
|
51.3 |
% |
Property/Other |
|
|
10,870 |
|
|
|
9,827 |
|
|
|
20,697 |
|
|
|
47.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Insurance
Companies |
|
|
214,628 |
|
|
|
481,548 |
|
|
|
696,176 |
|
|
|
69.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
104,679 |
|
|
|
89,886 |
|
|
|
194,565 |
|
|
|
46.2 |
% |
Other |
|
|
12,238 |
|
|
|
25,407 |
|
|
|
37,645 |
|
|
|
67.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Lloyds
Operations |
|
|
116,917 |
|
|
|
115,293 |
|
|
|
232,210 |
|
|
|
49.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Company |
|
$ |
331,545 |
|
|
$ |
596,841 |
|
|
$ |
928,386 |
|
|
|
64.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
Net |
|
|
Net |
|
|
Total |
|
|
% of IBNR |
|
|
|
Reported |
|
|
IBNR |
|
|
Net Loss |
|
|
to Total Net |
|
|
|
Reserves |
|
|
Reserves |
|
|
Reserves |
|
|
Loss Reserves |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
93,467 |
|
|
$ |
103,500 |
|
|
$ |
196,967 |
|
|
|
52.5 |
% |
Specialty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction Liability |
|
|
36,137 |
|
|
|
213,453 |
|
|
|
249,590 |
|
|
|
85.5 |
% |
All other liability |
|
|
17,139 |
|
|
|
55,032 |
|
|
|
72,171 |
|
|
|
76.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Specialty |
|
|
53,276 |
|
|
|
268,485 |
|
|
|
321,761 |
|
|
|
83.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
20,335 |
|
|
|
50,584 |
|
|
|
70,919 |
|
|
|
71.3 |
% |
Middle Markets |
|
|
11,469 |
|
|
|
10,329 |
|
|
|
21,798 |
|
|
|
47.4 |
% |
Property/Other |
|
|
12,790 |
|
|
|
11,446 |
|
|
|
24,236 |
|
|
|
47.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Companies |
|
|
191,337 |
|
|
|
444,344 |
|
|
|
635,681 |
|
|
|
69.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
89,957 |
|
|
|
93,069 |
|
|
|
183,026 |
|
|
|
50.9 |
% |
Other |
|
|
7,485 |
|
|
|
21,111 |
|
|
|
28,596 |
|
|
|
73.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lloyds Operations |
|
|
97,442 |
|
|
|
114,180 |
|
|
|
211,622 |
|
|
|
54.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
$ |
288,779 |
|
|
$ |
558,524 |
|
|
$ |
847,303 |
|
|
|
65.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2008, the IBNR loss reserve was $596.8 million or 64.3% of our total loss reserves
compared to $558.5 million or 65.9% at December 31, 2007.
The increase in net loss reserves in all active lines of business is generally a reflection of
the growth in net premium volume over the last three years coupled with a changing mix of business
to longer tail lines of business such as the specialty lines of business (construction defect,
commercial excess, primary excess and personal umbrella), professional liability lines of business
and marine liability and transport business in ocean marine. These products, which typically have
a longer settlement period compared to the mix of business the Company has historically written,
are becoming larger components of our overall business.
Our reserving practices and the establishment of any particular reserve reflect managements
judgment concerning sound financial practice and do not represent any admission of liability with
respect to any claims made against us. No assurance can be given that actual claims made and
related payments will not be in excess of the amounts reserved. During the loss settlement period,
it often becomes necessary to refine and adjust the estimates of liability on a claim either upward
or downward. Even after such adjustments, ultimate liability may exceed or be less than the
revised estimates.
There are a number of factors that could cause actual losses and LAE to differ materially from
the amount that we have reserved for losses and LAE.
43
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 using standard actuarial methodologies which are projection
or extrapolation techniques. 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
asbestos exposures and our Hurricanes Katrina and Rita losses, 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.
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 June 30, 2008 are for: (i) one large settled claim for
excess insurance policy limits exposed to a class action suit against an insured involved in the
manufacturing or distribution of asbestos products being paid over several years (two other large
settled claims were fully paid in 2007); (ii) other insureds not directly involved in the
manufacturing or distribution of asbestos products, but that have more than incidental asbestos
exposure for their purchase or use of products that contained asbestos; and (iii) attritional
asbestos claims that could be expected to occur over time. Substantially all of our asbestos
liability reserves are included in our marine loss reserves.
Gross and net reserves for losses and LAE related to asbestos exposures increased $2.4 million
and $1.3 million, respectively, in the 2008 second quarter as a result of an assumed loss portfolio
transaction with a former pool member discussed above.
The Company believes that there are no remaining known claims where it would suffer a material
loss as a result of excess policy limits being exposed to class action suits for insureds involved
in the manufacturing or distribution of asbestos products. There can be no assurances, however,
that material loss development may not arise in the future from existing asbestos claims or new
claims given the evolving and complex legal environment that may directly impact the outcome of the
asbestos exposures of our insureds.
44
The following table sets forth our gross and net loss and LAE reserves for our asbestos
exposures for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Year Ended |
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
23,194 |
|
|
$ |
37,171 |
|
Incurred losses & LAE |
|
|
594 |
|
|
|
(780 |
) |
Calendar year payments |
|
|
(2,238 |
) |
|
|
13,197 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
26,026 |
|
|
$ |
23,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
18,170 |
|
|
$ |
16,014 |
|
Gross IBNR loss reserves |
|
|
7,856 |
|
|
|
7,180 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
26,026 |
|
|
$ |
23,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
16,717 |
|
|
$ |
21,381 |
|
Incurred losses & LAE |
|
|
570 |
|
|
|
1,779 |
|
Calendar year payments |
|
|
(1,350 |
) |
|
|
6,443 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
18,637 |
|
|
$ |
16,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
10,986 |
|
|
$ |
9,715 |
|
Net IBNR loss reserves |
|
|
7,651 |
|
|
|
7,002 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
18,637 |
|
|
$ |
16,717 |
|
|
|
|
|
|
|
|
To the extent the Company incurs additional gross loss development for its historic asbestos
exposure, the 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.
At June 30, 2008, the ceded asbestos paid and unpaid recoverables were $10.6 million compared
to $10.5 million at December 31, 2007. Such recoverables increased as a result of an assumed loss
portfolio transaction with a former pool member.
Loss reserves for environmental losses generally consist of oil spill claims on marine
liability policies written in the ordinary course of business. Net loss reserves for such
exposures are included in our marine loss reserves and are not separately identified.
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 $14.5 million
for the cost of excess of loss reinstatement premiums related to Hurricanes Katrina and Rita.
45
The following table sets forth our gross and net loss and LAE reserves, incurred loss and LAE,
and payments for Hurricanes Katrina and Rita for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Year Ended |
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
|
($ in thousands) |
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
141,831 |
|
|
$ |
319,230 |
|
Incurred loss & LAE |
|
|
125 |
|
|
|
(29,349 |
) |
Calendar year payments |
|
|
12,929 |
|
|
|
148,050 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
129,027 |
|
|
$ |
141,831 |
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
82,669 |
|
|
$ |
94,959 |
|
Gross IBNR loss reserves |
|
|
46,358 |
|
|
|
46,872 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
129,027 |
|
|
$ |
141,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
4,519 |
|
|
$ |
10,003 |
|
Incurred loss & LAE |
|
|
(476 |
) |
|
|
(1,909 |
) |
Calendar year payments |
|
|
(373 |
) |
|
|
3,575 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
4,416 |
|
|
$ |
4,519 |
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
340 |
|
|
$ |
646 |
|
Net IBNR loss reserves |
|
|
4,076 |
|
|
|
3,873 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
4,416 |
|
|
$ |
4,519 |
|
|
|
|
|
|
|
|
Approximately $133.7 million and $167.7 million of paid and unpaid losses at June 30, 2008 and
December 31, 2007, respectively, were due from reinsurers as a result of the losses from Hurricanes
Katrina and Rita.
46
Professional Liability Subprime Exposure. The following table sets forth reported claims and
notices of potential claims, the average gross and net limits by policy and the average amount
where our policy attaches related to subprime exposure for our professional liability business at
June 30, 2008. The Companys management believes that the reserves for losses and LAE are adequate
to cover the ultimate costs for such loss contingencies related to subprime exposure for the
professional liability business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
|
of |
|
|
Gross |
|
|
Net |
|
|
Excess |
|
|
|
Claims (1) |
|
|
Limit |
|
|
Limit (2) |
|
|
Attachment |
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
Primary: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O
Securities/Other
Claims |
|
|
1 |
|
|
$ |
1,000 |
|
|
$ |
650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Excess/Average |
|
|
8 |
|
|
|
7,500 |
|
|
|
4,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
9 |
|
|
$ |
6,778 |
|
|
$ |
4,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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 included within the
limits of liability. There was one new claim/ notice of potential claim reported for the
six months ended June 30, 2008. |
|
(2) |
|
Amounts are net of reinsurance. |
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 periods 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 period reserve redundancies of $10.6 million and $10.6 million, net of reinsurance, were
recorded in the 2008 and 2007 second quarters, respectively, and $24.3 million and $17.4 million,
net of reinsurance, were recorded in the first six months of 2008 and 2007, respectively, as
discussed below. The relevant factors that may have a significant impact on the establishment and
adjustment of loss and LAE reserves can vary by line of business and from period to period.
47
The segment and line of business breakdowns of prior period net reserve deficiencies
(redundancies) were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
Marine |
|
$ |
(5,679 |
) |
|
$ |
49 |
|
Specialty |
|
|
(3,136 |
) |
|
|
(3,978 |
) |
Professional Liability |
|
|
(911 |
) |
|
|
(2,084 |
) |
Middle Markets |
|
|
(500 |
) |
|
|
|
|
Property/Other |
|
|
(1,426 |
) |
|
|
522 |
|
|
|
|
|
|
|
|
Subtotal Insurance Companies |
|
|
(11,652 |
) |
|
|
(5,491 |
) |
Lloyds Operations |
|
|
1,072 |
|
|
|
(5,126 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(10,580 |
) |
|
$ |
(10,617 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
Marine |
|
$ |
(5,979 |
) |
|
$ |
(1,451 |
) |
Specialty |
|
|
(10,436 |
) |
|
|
(6,178 |
) |
Professional Liability |
|
|
(1,211 |
) |
|
|
(4,084 |
) |
Middle Markets |
|
|
700 |
|
|
|
|
|
Property/Other |
|
|
(3,226 |
) |
|
|
522 |
|
|
|
|
|
|
|
|
Subtotal Insurance Companies |
|
|
(20,152 |
) |
|
|
(11,191 |
) |
Lloyds Operations |
|
|
(4,108 |
) |
|
|
(6,226 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(24,260 |
) |
|
$ |
(17,417 |
) |
|
|
|
|
|
|
|
Following is a discussion of relevant factors related to the $10.6 million prior period net
reserve redundancy recorded in the 2008 second quarter:
The Insurance Companies recorded $5.7 million of prior period net savings for marine business
comprised of $0.5 million for reductions of cargo claims, $2.2 million on 2006 and 2007 liability
business, $1.4 million for 2006 P&I business of which $0.6 million was due to case reserve
reductions, $1.7 million due to reinsurance
recoveries on balances previously written off for business written prior to 1998 offset by
$0.1 million of net adverse loss development on other lines of business.
The Insurance Companies recorded $3.1 million of prior period net savings for specialty
business comprised mostly of $7.4 million of net favorable development in construction liability
business due to favorable loss trends for business written from 2001 to 2006 offset by
approximately $0.7 million of unfavorable loss activity for construction business written in 1997
and 1998, and $3.6 million of adverse loss development from discontinued business.
48
The Insurance Companies recorded $0.9 million of net prior period savings for professional
liability business mostly emanating from $0.3 million of favorable development on E&O business
written for law firms, $0.2 million from D&O business and $0.4 million from UK solicitors business
run-off.
The Insurance Companies recorded prior period net savings of $1.0 million for European
property business due to loss reserve take downs and $0.4 million for run-off business mostly
related to aviation and space business discontinued in 1999.
The Lloyds Operations recorded $1.1 million of prior period net reserve deficiencies
comprised of $2.2 million for offshore energy losses (including $2.7 million for a 2005 loss less
$0.5 million of savings in other energy losses), $0.5 million for European property business
written in 2006 and 2007, offset by $1.6 million of favorable development across other lines of
business: liability ($0.6 million), assumed reinsurance ($0.6 million) and professional liability
($0.4 million).
Following is a discussion of relevant factors related
to the $13.7 million prior period net reserve redundancy recorded in the 2008 first quarter:
The Insurance Companies recorded $0.3 million of prior period net savings for marine business
comprised of $2.5 million of favorable development in marine liability business from 2006 and prior
years offset by adverse loss development of $2.2 million from other lines of business of which $1.7
million was for cargo losses consisting mostly of loss activity related to three cargo claims.
The Insurance Companies recorded $7.3 million of prior period net savings for specialty
business comprised of $8.9 million of favorable development in construction liability business due
to favorable loss trends for business written from 2003 to 2006, $2.3 million of favorable
development for personal umbrella business written in 2007, offset by adverse loss development of
$3.3 million from discontinued business and $0.6 million from program business written in 2007 and
2006.
The Insurance Companies recorded $1.2 million of prior period net deficiencies for middle
markets business principally for business written in 2004 and 2003 of which $0.5 million was for
one large claim on a policy written in 2003.
The Insurance Companies recorded $1.8 million of prior period net savings for run-off
business, included in property/other in the above table, principally due to the lack of loss
activity for aviation and space business discontinued in 1999.
The Lloyds Operations recorded $5.2 million of prior period net savings mostly emanating from
refinements to the actuarial methodology employed to project ultimate loss estimates by line of
business. The methodology employed in the 2008 first quarter separately determined ultimate losses
on a gross and ceded basis to establish net IBNR estimates. Prior methodology used net loss
amounts to determine such estimates. The net result of the 2008 first quarter analysis was to
reduce ultimate loss estimates by approximately $9.7 million for short tail classes of business
mostly related to 2005 and prior years (cargo $3.2 million, energy $4.6 million, reinsurance $2.1
million, offset by $0.2 million of loss development for other lines of business). Such prior year
savings were
offset by strengthening reserves of approximately $4.5 million for business written in 2007
and 2006 for liability business ($2.3 million) and energy business ($2.1 million) and various other
classes of business ($0.1 million). Such strengthening has taken into effect the changes in the
reinsurance program for increased net retentions that have occurred in 2007 and 2006 compared to
prior years.
49
Our management believes that the estimates for the reserves for losses and LAE are adequate to
cover the ultimate cost of losses and loss adjustment expenses on reported and unreported claims.
However, it is possible that the ultimate liability may exceed or be less than such estimates. To
the extent that reserves are deficient or redundant, the amount of such deficiency or redundancy is
treated as a charge or credit to earnings in the period in which the deficiency or redundancy is
identified. We continue to review all of our loss reserves, including our asbestos reserves and
Hurricanes Katrina and Rita reserves, on a regular basis.
Commission Expense. Commission expense paid to unaffiliated brokers and agents is generally
based on a percentage of the gross written premium and is reduced by ceding commissions the Company
may receive on the ceded written premium. Commissions are generally deferred and recorded as
deferred policy acquisition costs to the extent that they relate to unearned premium. The
percentage of commission expense to net earned premiums in the 2008 second quarter and six month
period were 14.4% and 13.9%, respectively, compared to 12.1% and 12.2% for the comparable periods
in 2007. The increases are mostly attributable to greater retentions, particularly on our marine
quota share treaties, which have reduced the ceding commission benefit. The Lloyds Operations
commission expense also increased in the 2008 second quarter and decreased in the 2007 second
quarter due to refinements in amounts recorded in prior periods for ceding commission due from
reinsurers.
Other Operating Expenses. The increases of 16.2% and 14.7% in other operating expenses in the
2008 second quarter and six month period, compared to the same periods in 2007, were attributable
primarily to employee-related expenses resulting from expansion of the business and investments in
technology to support this growth. In addition, effective June 30, 2008, the Company closed
regional U.K. offices in Manchester and Basingstoke and entered into a renewal rights transaction
with a U.K. insurer to provide for an orderly closure of the offices. Additionally, the Company
discontinued underwriting U.K. small commercial property business and eliminated six operations
positions in the U.S. Severance and other costs associated with those actions contributed one point
to the 2008 second quarter expense ratio.
Income Taxes. The income tax expense was $6.7 million and $11.4 million for the
second quarters of 2008 and 2007, respectively, resulting in effective tax rates of 27.7% and
31.9%, respectively. The income tax expense was $16.9 million and $20.8 million for the first six
months of 2008 and 2007, respectively, resulting in effective tax rates of 29.3% and 32.0%,
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. The
effective tax rate on net investment income was 25.9% for the first six months of 2008 compared to
28.3% for the comparable 2007 period. As of June 30, 2008 and December 31, 2007, the net deferred
Federal, foreign, state and local tax assets were $45.4 million and $29.2 million, respectively.
We are subject to the tax regulations of the United States and foreign countries in which we
operate. The Company files a consolidated federal tax return, which includes all domestic
subsidiaries and the U.K. Branch. The income from the foreign operations is designated as either
U.S. connected income or non-U.S. connected income. Lloyds is required to pay U.S. income tax on
U.S. connected income written by Lloyds syndicates. Lloyds and the IRS have entered into an
agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyds and
remitted directly to the IRS. These amounts are then charged to the corporate members in
proportion to their participation in the relevant syndicates. The Companys corporate members are
subject to this agreement and will receive U.K. tax credits for any U.S. income tax incurred up to
the U.K. income tax charged on the U.S. income. The non-U.S. connected insurance income would
generally constitute taxable income under the Subpart F income section of the Internal Revenue Code
since less than 50% of the Companys premium is derived within the U.K. and would therefore be
subject to U.S. taxation when the Lloyds year of account closes. Taxes are accrued at a 35% rate
on our foreign source insurance income and foreign tax credits, where available, are utilized to
offset
U.S. tax as permitted. The Companys effective tax rate for Syndicate 1221 taxable income
could substantially exceed 35% to the extent the Company is unable to offset U.S. taxes paid under
Subpart F tax regulations with U.K. tax credits on future underwriting year distributions. U.S.
taxes are not accrued on the earnings of the Companys foreign agencies as these earnings are not
subject to the Subpart F tax regulations. These earnings are subject to taxes under U.K. tax
regulations at a 28% rate effective April 1, 2008. The effective rate prior to April 1, 2008 was
30%. The effect of the tax rate change was not material to the Companys financial statements.
50
We have not provided for U.S. deferred income taxes on the undistributed earnings of
approximately $52.9 million of our non-U.S. subsidiaries since these earnings are intended to be
permanently reinvested in the foreign subsidiaries. However, in the future, if such earnings were
distributed to the Company, taxes of approximately $3.7 million would be payable on such
undistributed earnings and would be reflected in the tax provision for the year in which these
earnings are no longer intended to be permanently reinvested in the foreign subsidiary, assuming
all foreign tax credits are realized.
The Company had net state and local deferred tax assets amounting to potential future tax
benefits of $7.6 million and $6.3 million at June 30, 2008 and December 31, 2007, respectively.
Included in the deferred tax assets are state and local net operating loss carryforwards of $1.2
million and $2.5 million at June 30, 2008 and December 31, 2007, respectively. A valuation
allowance was established for the full amount of these potential future tax benefits due to the
uncertainty associated with their realization. The Companys state and local tax carryforwards at
June 30, 2008 expire in 2025.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), an interpretation of SFAS 109. FIN 48, which became effective in 2007,
establishes the threshold for recognizing the benefits of tax-return positions in the financial
statements as more-likely-than-not to be sustained by the taxing authorities, and prescribes a
measurement methodology for those positions meeting the recognition threshold. The Companys
adoption of FIN 48 at January 1, 2007 did not have a material effect on its financial condition or
results of operations.
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 the Parent Companys expenses and related income tax amounts.
We evaluate the performance of each segment based on its underwriting and net income results.
The Insurance Companies and the Lloyds Operations results are measured by taking into account
net earned premium, net losses and loss adjustment expenses, commission expense, other operating
expenses and commission income and other income (expense). The Corporate segment consists of the
Parent Companys investment income, interest expense and the related tax effect. Each segment also
maintains its own investments, on which it earns income and realizes capital gains or losses. Our
underwriting performance is evaluated separately from the performance of our investment portfolios.
Following are the financial results of the Companys two underwriting segments.
Insurance Companies
The Insurance Companies consist of Navigators Insurance Company, including its U.K. Branch,
and its wholly-owned subsidiary, Navigators Specialty Insurance Company. Navigators Insurance
Company is our largest
insurance subsidiary and has been active since 1983. It is primarily engaged in underwriting
marine insurance and related lines of business, professional liability insurance, specialty lines
of business including contractors general liability insurance, commercial and personal umbrella and
primary and excess casualty businesses, and middle markets business consisting of general
liability, commercial automobile liability and property insurance for a variety of commercial
middle markets businesses. Navigators Specialty Insurance Company, which began operations in 1990,
underwrites specialty and professional liability insurance on an excess and surplus lines basis
fully reinsured by Navigators Insurance Company. NMC and Navigators Management (UK) Ltd. produce,
manage and underwrite insurance and reinsurance business for the Insurance Companies.
51
The following table sets forth the results of operations for the Insurance Companies for the
three and six months ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written
premium |
|
$ |
197,956 |
|
|
$ |
198,560 |
|
|
$ |
389,552 |
|
|
$ |
407,434 |
|
Net written premium |
|
|
128,182 |
|
|
|
124,073 |
|
|
|
252,492 |
|
|
|
246,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
117,434 |
|
|
|
109,735 |
|
|
|
229,680 |
|
|
|
211,547 |
|
Net losses and LAE |
|
|
(62,225 |
) |
|
|
(63,725 |
) |
|
|
(129,581 |
) |
|
|
(125,065 |
) |
Commission expense |
|
|
(14,723 |
) |
|
|
(13,903 |
) |
|
|
(27,671 |
) |
|
|
(24,986 |
) |
Other operating
expenses |
|
|
(24,552 |
) |
|
|
(21,057 |
) |
|
|
(46,700 |
) |
|
|
(39,826 |
) |
Commission income
and other income
(expense) |
|
|
1,516 |
|
|
|
96 |
|
|
|
1,774 |
|
|
|
585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
17,450 |
|
|
|
11,146 |
|
|
|
27,502 |
|
|
|
22,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment
income |
|
|
15,593 |
|
|
|
14,440 |
|
|
|
31,058 |
|
|
|
28,094 |
|
Net realized
capital gains
(losses) |
|
|
(8,053 |
) |
|
|
834 |
|
|
|
(8,155 |
) |
|
|
1,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before
income taxes |
|
|
24,990 |
|
|
|
26,420 |
|
|
|
50,405 |
|
|
|
51,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
6,939 |
|
|
|
8,163 |
|
|
|
14,309 |
|
|
|
16,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
18,051 |
|
|
$ |
18,257 |
|
|
$ |
36,096 |
|
|
$ |
35,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
53.0 |
% |
|
|
58.1 |
% |
|
|
56.4 |
% |
|
|
59.1 |
% |
Commission expense
ratio |
|
|
12.5 |
% |
|
|
12.7 |
% |
|
|
12.0 |
% |
|
|
11.8 |
% |
Other operating
expense ratio
(1) |
|
|
19.6 |
% |
|
|
19.0 |
% |
|
|
19.6 |
% |
|
|
18.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
85.1 |
% |
|
|
89.8 |
% |
|
|
88.0 |
% |
|
|
89.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes other operating expenses and commission income and other income
(expense). |
52
The following tables set forth the underwriting results of the Insurance Companies for the
three and six months ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2008 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Profit/(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
36,456 |
|
|
$ |
17,497 |
|
|
$ |
12,194 |
|
|
$ |
6,765 |
|
|
|
48.0 |
% |
|
|
33.4 |
% |
|
|
81.4 |
% |
Specialty |
|
|
56,574 |
|
|
|
33,614 |
|
|
|
16,685 |
|
|
|
6,275 |
|
|
|
59.4 |
% |
|
|
29.5 |
% |
|
|
88.9 |
% |
Professional
Liability |
|
|
14,388 |
|
|
|
7,374 |
|
|
|
5,020 |
|
|
|
1,994 |
|
|
|
51.3 |
% |
|
|
34.9 |
% |
|
|
86.2 |
% |
Middle Markets |
|
|
6,736 |
|
|
|
3,719 |
|
|
|
2,751 |
|
|
|
266 |
|
|
|
55.2 |
% |
|
|
40.8 |
% |
|
|
96.0 |
% |
Property/Other |
|
|
3,280 |
|
|
|
21 |
|
|
|
1,109 |
|
|
|
2,150 |
|
|
|
0.6 |
% |
|
|
33.8 |
% |
|
|
34.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
117,434 |
|
|
$ |
62,225 |
|
|
$ |
37,759 |
|
|
$ |
17,450 |
|
|
|
53.0 |
% |
|
|
32.1 |
% |
|
|
85.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2007 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Profit/(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
34,005 |
|
|
$ |
17,913 |
|
|
$ |
12,340 |
|
|
$ |
3,752 |
|
|
|
52.7 |
% |
|
|
36.3 |
% |
|
|
89.0 |
% |
Specialty |
|
|
54,378 |
|
|
|
31,261 |
|
|
|
14,317 |
|
|
|
8,800 |
|
|
|
57.5 |
% |
|
|
26.3 |
% |
|
|
83.8 |
% |
Professional
Liability |
|
|
13,334 |
|
|
|
7,741 |
|
|
|
5,330 |
|
|
|
263 |
|
|
|
58.1 |
% |
|
|
39.9 |
% |
|
|
98.0 |
% |
Middle Markets |
|
|
4,539 |
|
|
|
2,045 |
|
|
|
1,723 |
|
|
|
771 |
|
|
|
45.1 |
% |
|
|
38.0 |
% |
|
|
83.1 |
% |
Property/Other |
|
|
3,479 |
|
|
|
4,765 |
|
|
|
1,154 |
|
|
|
(2,440 |
) |
|
|
137.0 |
% |
|
|
33.2 |
% |
|
|
170.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
109,735 |
|
|
$ |
63,725 |
|
|
$ |
34,864 |
|
|
$ |
11,146 |
|
|
|
58.1 |
% |
|
|
31.7 |
% |
|
|
89.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Profit/(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
69,682 |
|
|
$ |
41,868 |
|
|
$ |
23,256 |
|
|
$ |
4,558 |
|
|
|
60.1 |
% |
|
|
33.4 |
% |
|
|
93.5 |
% |
Specialty |
|
|
113,243 |
|
|
|
63,094 |
|
|
|
32,183 |
|
|
|
17,966 |
|
|
|
55.7 |
% |
|
|
28.4 |
% |
|
|
84.1 |
% |
Professional Liability |
|
|
28,461 |
|
|
|
16,279 |
|
|
|
10,118 |
|
|
|
2,064 |
|
|
|
57.2 |
% |
|
|
35.6 |
% |
|
|
92.8 |
% |
Middle Markets |
|
|
12,433 |
|
|
|
8,003 |
|
|
|
4,740 |
|
|
|
(310 |
) |
|
|
64.4 |
% |
|
|
38.1 |
% |
|
|
102.5 |
% |
Property/Other |
|
|
5,861 |
|
|
|
337 |
|
|
|
2,300 |
|
|
|
3,224 |
|
|
|
5.8 |
% |
|
|
39.2 |
% |
|
|
45.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
229,680 |
|
|
$ |
129,581 |
|
|
$ |
72,597 |
|
|
$ |
27,502 |
|
|
|
56.4 |
% |
|
|
31.6 |
% |
|
|
88.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2007 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Profit/(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
67,494 |
|
|
$ |
38,235 |
|
|
$ |
20,114 |
|
|
$ |
9,145 |
|
|
|
56.6 |
% |
|
|
29.8 |
% |
|
|
86.4 |
% |
Specialty |
|
|
103,421 |
|
|
|
60,288 |
|
|
|
29,195 |
|
|
|
13,938 |
|
|
|
58.3 |
% |
|
|
28.2 |
% |
|
|
86.5 |
% |
Professional Liability |
|
|
26,371 |
|
|
|
16,225 |
|
|
|
9,653 |
|
|
|
493 |
|
|
|
61.5 |
% |
|
|
36.5 |
% |
|
|
98.0 |
% |
Middle Markets |
|
|
9,109 |
|
|
|
4,785 |
|
|
|
3,336 |
|
|
|
988 |
|
|
|
52.5 |
% |
|
|
36.6 |
% |
|
|
89.1 |
% |
Property/Other |
|
|
5,152 |
|
|
|
5,532 |
|
|
|
1,929 |
|
|
|
(2,309 |
) |
|
|
107.4 |
% |
|
|
37.4 |
% |
|
|
144.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
211,547 |
|
|
$ |
125,065 |
|
|
$ |
64,227 |
|
|
$ |
22,255 |
|
|
|
59.1 |
% |
|
|
30.4 |
% |
|
|
89.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium of the Insurance Companies increased 7.0% and 8.6% in the 2008 second
quarter and six month period, respectively, compared to the same periods in 2007, primarily
reflecting increased retention of the business written.
Underwriting results generally reflect the favorable industry market conditions up until 2006
(excluding the 2005 losses from Hurricanes Katrina and Rita) coupled with satisfactory loss trends
in the aforementioned periods. The 2008 second quarter and six month period loss ratios were
favorably impacted by prior period loss reserve redundancies of $11.7 million or 9.9 loss ratio
points and $20.2 million or 8.8 loss ratio points, respectively. The 2007 second quarter and six
month period loss ratios were favorably impacted by prior period loss reserve redundancies of $5.5
million or 5.0 loss ratio points and $11.2 million or 5.3 loss ratio points, respectively.
Generally, while the Insurance Companies have experienced favorable prior period redundancies
in 2008 and 2007, the ultimate loss ratios for the most recent underwriting years of 2008 and 2007
have been increasing due to softening market conditions for the business written during those
periods.
The approximate annualized pre-tax yields on the Insurance Companies investment portfolio,
excluding net realized capital gains and losses, were 4.3% for both the 2008 second quarter and six
month period, respectively, compared to 4.6% for both of the comparable 2007 periods. The average
durations of the Insurance Companies invested assets at June 30, 2008 was 4.8 years compared to
4.3 years at June 30, 2007. Net investment income increased in the 2008 second quarter and six
month period compared to the same periods in 2007 primarily due to the investment of new funds from
cash flow, partially offset by the decrease in yields.
54
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 that underwrites cargo and engineering business for Syndicate 1221. In January 2005, we
formed Navigators NV in Antwerp, Belgium, a wholly-owned subsidiary of NUAL. Navigators NV
produces transport liability, cargo and marine liability premium for Syndicate 1221. In July 2008,
we opened an underwriting office in Stockholm, Sweden to write professional liability business for
Syndicate 1221. The 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 is £123.0 million ($239.2 million) in 2008 compared to £140.0
million ($280.2 million) in 2007. Stamp capacity is a measure of the amount of premium a Lloyds
syndicate is authorized to write as determined by the Council of Lloyds. 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. Navigators provides 100% of
Syndicate 1221s capacity for the 2008 and 2007 underwriting years through Navigators Corporate
Underwriters Ltd. in 2008 and through Millennium Underwriting Ltd. and Navigators Corporate
Underwriters Ltd. in 2007.
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.
55
The following table sets forth the results of operations of the Lloyds Operations for the
three and six months ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
81,257 |
|
|
$ |
77,989 |
|
|
$ |
176,807 |
|
|
$ |
169,976 |
|
Net written premium |
|
|
46,105 |
|
|
|
37,277 |
|
|
|
109,517 |
|
|
|
88,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
45,269 |
|
|
|
35,882 |
|
|
|
88,763 |
|
|
|
73,116 |
|
Net losses and LAE |
|
|
(29,664 |
) |
|
|
(16,014 |
) |
|
|
(50,728 |
) |
|
|
(35,866 |
) |
Commission expense |
|
|
(8,767 |
) |
|
|
(3,747 |
) |
|
|
(16,767 |
) |
|
|
(9,763 |
) |
Other operating expenses |
|
|
(8,685 |
) |
|
|
(7,551 |
) |
|
|
(16,293 |
) |
|
|
(15,071 |
) |
Commission income and other income (expense) |
|
|
(39 |
) |
|
|
137 |
|
|
|
(25 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
(1,886 |
) |
|
|
8,707 |
|
|
|
4,950 |
|
|
|
12,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
2,871 |
|
|
|
2,407 |
|
|
|
5,853 |
|
|
|
4,558 |
|
Net realized capital gains (losses) |
|
|
77 |
|
|
|
6 |
|
|
|
103 |
|
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
1,062 |
|
|
|
11,120 |
|
|
|
10,906 |
|
|
|
16,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
425 |
|
|
|
3,875 |
|
|
|
3,877 |
|
|
|
5,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
637 |
|
|
$ |
7,245 |
|
|
$ |
7,029 |
|
|
$ |
10,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
65.5 |
% |
|
|
44.6 |
% |
|
|
57.1 |
% |
|
|
49.1 |
% |
Commission expense ratio |
|
|
19.4 |
% |
|
|
10.4 |
% |
|
|
18.9 |
% |
|
|
13.4 |
% |
Other operating expense ratio (1) |
|
|
19.3 |
% |
|
|
20.6 |
% |
|
|
18.4 |
% |
|
|
20.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
104.2 |
% |
|
|
75.6 |
% |
|
|
94.4 |
% |
|
|
83.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes other operating expenses and commission income and other income
(expense). |
The Lloyds Operations had been experiencing business expansion coupled with improving
underwriting results as a result of the generally favorable market conditions for marine and energy
business from late 2001 through 2003, and continuing to a lesser extent in 2004. Marine and energy
premium rate increases occurred in 2005 and continued into 2006 following Hurricanes Katrina and
Rita, particularly in the offshore energy business, while the average renewal premium rates in 2007
decreased approximately 1.2% for the marine and energy business and decreased approximately 3.4% in
our professional liability business. The average renewal premium rates for the second quarter of
2008 decreased approximately 6.0% for the marine and energy business and decreased approximately
3.6% for the professional liability business. The average renewal premium rates for the first six
months of 2008 decreased approximately 5.0% for the marine and energy business and decreased
approximately 2.7% for the professional liability business.
The 2008 six month earnings in the Lloyds Operations reflect the continued favorable loss
development trends. The 2008 second quarter loss ratio was adversely impacted by prior period loss
reserve deficiencies of $1.1 million or 2.4 loss ratio points compared to the 2007 second quarter
loss ratio which was favorably impacted by prior period loss reserve redundancies of $5.1 million
or 14.3 loss ratio points. The loss ratio for the first six months of 2008 was favorably impacted
by prior period loss reserve redundancies of $4.1 million or 4.6 loss ratio points compared to the
loss ratio for the first six months of 2007 which was favorably impacted by prior period loss
reserve redundancies of $6.2 million or 8.5 loss ratio points.
56
Generally, while the Lloyds Operations has experienced favorable prior period net
redundancies in 2008 and 2007, ultimate loss ratios for the more recent underwriting years of 2008
and 2007 have been increasing due to softening market conditions for the business written during
those periods.
The approximate annualized pre-tax yields on the Lloyds Operations investment portfolio,
excluding net realized capital gains and losses, were 3.5% and 3.6% for the 2008 second quarter and
six month period, respectively, compared to 3.8% and 3.7% for the comparable 2007 periods. The
average duration of our Lloyds Operations invested assets at June 30, 2008 was 1.4 years compared
to 1.5 years at June 30, 2007. The increase in the Lloyds Operations net investment income is
reflective of the increased investment portfolio primarily due to positive cash flow. Such yields
are net of interest credits to certain reinsurers for funds withheld by our Lloyds Operations.
Off-Balance Sheet Transactions
There have been no material changes in the information concerning off-balance sheet
transactions as stated in the Companys 2007 Annual Report on Form 10-K.
Tabular Disclosure of Contractual Obligations
There have been no material changes in the operating lease or capital lease information
concerning contractual obligations as stated in the Companys 2007 Annual Report on Form 10-K.
Total reserves for losses and LAE were $1.7 billion at June 30, 2008 compared to $1.6 billion at
December 31, 2007. There were no significant changes in the Companys lines of business or claims
handling that would create a material change in the percentage relationship of the projected
payments by period to the total reserves.
The following table sets forth our contractual obligations with respect to the 7% senior
unsecured notes due May 1, 2016 discussed in the Notes to Interim Consolidated Financial
Statements, included herein:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7% Senior Notes |
|
$ |
195,000 |
|
|
$ |
8,750 |
|
|
$ |
17,500 |
|
|
$ |
17,500 |
|
|
$ |
151,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
The objective of the Companys investment policy, guidelines and strategy is to maximize total
investment return in the context of preserving and enhancing stockholder value and statutory
surplus of the Insurance Companies. Secondarily, an important consideration is to optimize the
after-tax book income.
The investments are managed by outside professional fixed-income and equity portfolio
managers. The Company seeks to achieve its investment objectives by investing in cash equivalents
and money market funds, municipal bonds, U.S. Government bonds, U.S. Government agency guaranteed
and non-guaranteed securities, corporate bonds, mortgage-backed and asset-backed securities and
common and preferred stocks. Our investment guidelines require that the amount of the consolidated
fixed income portfolio rated below A- but no lower than BBB- by S&P or below A3 but no lower
than Baa3 by Moodys shall not exceed 10% of the total fixed income and short-term investments.
Securities rated below BBB- by S&P or below Baa3 by Moodys combined with any other investments
not specifically permitted under the investment guidelines, can not exceed 5% of consolidated
stockholders equity. Investments in equity securities that are actively traded on major U.S.
stock exchanges can not exceed 20% of consolidated stockholders equity. Our investment guidelines
prohibit investments in derivatives other than as a hedge against foreign currency exposures or the
writing of covered call options on the equity portfolio.
57
The Insurance Companies investments are subject to the oversight of each of their respective
Board of Directors and our Finance Committee. The investment portfolio and the performance of the
investment managers are reviewed quarterly. These investments must comply with the insurance laws
of New York State, the domiciliary state of Navigators Insurance Company and Navigators Specialty
Insurance Company. These laws prescribe the type, quality and concentration of investments which
may be made by insurance companies. In general, these laws permit investments, within specified
limits and subject to certain qualifications, in Federal, state and municipal obligations,
corporate bonds, preferred stocks, common stocks, mortgages and real estate.
The Lloyds Operations investments are subject to the oversight of the Board of Directors and
the Investment Committee of NUAL, as well as the Parent Companys Board of Directors and Finance
Committee. These investments must comply with the rules and regulations imposed by Lloyds and by
certain overseas regulators. The investment portfolio and the performance of the investment
managers are reviewed quarterly.
At June 30, 2008, the average quality of the investment portfolio as rated by S&P and Moodys
was AA/Aa, respectively, with an average duration of 4.3 years. All of the Companys
mortgage-backed and asset-backed securities are rated AAA/Aaa by S&P and Moodys, respectively,
except for ten securities approximating $6.3 million, which are all rated investment grade. The
Company does not own any collateralized debt obligations (CDOs), collateralized loan obligations
(CLOs) or asset backed commercial paper.
At June 30, 2008 and December 31, 2007, all fixed-maturity and equity securities held by us
were classified as available-for-sale.
Effective January 1, 2008, the Company adopted SFAS 157 which defines fair value, establishes
a consistent framework for measuring fair value and expands disclosure requirements about fair
value measurements. SFAS 157, among other things, requires the Company to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. A
hierarchy of valuation techniques is specified in SFAS 157 based on whether the inputs to those
valuation techniques are observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect market data obtained from
investment managers or brokers. These two types of inputs have created the following fair value
hierarchy:
|
|
|
Level 1 Quoted prices for identical instruments in active markets. Examples
are listed equity and fixed income securities traded on an exchange. Treasury
securities would generally be considered level 1. |
|
|
|
Level 2 Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs and significant value
drivers are observable in active markets. Examples are ABS and MBS securities which
are similar to other ABS or MBS securities observed in the market. |
|
|
|
Level 3 Valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable. An example would
be a private placement with minimal liquidity. |
All fixed maturities, short-term investments and equity securities are carried at fair value.
All prices for our fixed maturities, short-term investments and equity securities valued as level 1
or level 2 in the SFAS 157 fair value hierarchy are received from independent pricing services.
Prices for any securities derived from level 3 criteria in the fair value hierarchy are developed
by one of our outside investment managers.
58
The following table presents, for each of the fair value hierarchy levels, the Companys fixed
maturities, equity securities and short-term investments that are measured at fair value at June
30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
In Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
177,161 |
|
|
$ |
1,412,419 |
|
|
$ |
986 |
|
|
$ |
1,590,566 |
|
Equities securities |
|
|
68,089 |
|
|
|
|
|
|
|
|
|
|
|
68,089 |
|
Short-term investments |
|
|
143,631 |
|
|
|
31,243 |
|
|
|
|
|
|
|
174,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
388,881 |
|
|
$ |
1,443,662 |
|
|
$ |
986 |
|
|
$ |
1,833,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The securities classified as Level 3 in the above table consist of two structured securities
rated AAA/Aaa by S&P and Moodys, respectively, with unobservable inputs included in the
Companys fixed maturities portfolio for which price quotes from brokers were used to indicate fair
value.
The following table presents a reconciliation of the beginning and ending balances for all
investments measured at fair value using level 3 inputs during the quarter ended June 30, 2008:
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, 2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
Level 3 investments as of April 1, 2008 |
|
$ |
2,073 |
|
Unrealized net gains included in other comprehensive income (loss) |
|
|
(18 |
) |
Purchases, sales, paydowns and amortization |
|
|
(134 |
) |
Transfer to Level 2 |
|
|
(935 |
) |
|
|
|
|
Level 3 investments as of June 30, 2008 |
|
$ |
986 |
|
|
|
|
|
The following table presents a reconciliation of the beginning and ending balances for all
investments measured at fair value using Level 3 inputs during the six months ended June 30, 2008:
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, 2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
Level 3 investments as of January 1, 2008 |
|
$ |
2,603 |
|
Unrealized net gains included in other comprehensive income (loss) |
|
|
(1 |
) |
Purchases, sales, paydowns and amortization |
|
|
(287 |
) |
Transfer to Level 2 |
|
|
(1,329 |
) |
|
|
|
|
Level 3 investments as of June 30, 2008 |
|
$ |
986 |
|
|
|
|
|
59
The following tables set forth our cash and investments as of June 30, 2008 and December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
June 30, 2008 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury Bonds,
GNMAs and foreign government bonds |
|
$ |
237,360 |
|
|
$ |
5,444 |
|
|
$ |
(471 |
) |
|
$ |
232,387 |
|
States, municipalities and political
subdivisions |
|
|
612,577 |
|
|
|
4,007 |
|
|
|
(4,952 |
) |
|
|
613,522 |
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-guaranteed government agency bonds |
|
|
28,711 |
|
|
|
373 |
|
|
|
(58 |
) |
|
|
28,396 |
|
Mortgage-backed securities |
|
|
235,304 |
|
|
|
709 |
|
|
|
(1,955 |
) |
|
|
236,550 |
|
Collateralized mortgage obligations |
|
|
114,005 |
|
|
|
404 |
|
|
|
(8,074 |
) |
|
|
121,675 |
|
Asset-backed securities |
|
|
51,868 |
|
|
|
504 |
|
|
|
(249 |
) |
|
|
51,613 |
|
Commercial mortgage-backed securities |
|
|
108,168 |
|
|
|
67 |
|
|
|
(5,229 |
) |
|
|
113,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
538,056 |
|
|
|
2,057 |
|
|
|
(15,565 |
) |
|
|
551,564 |
|
Corporate bonds |
|
|
202,573 |
|
|
|
1,210 |
|
|
|
(5,203 |
) |
|
|
206,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,590,566 |
|
|
|
12,718 |
|
|
|
(26,191 |
) |
|
|
1,604,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
68,089 |
|
|
|
3,407 |
|
|
|
(5,496 |
) |
|
|
70,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
14,499 |
|
|
|
|
|
|
|
|
|
|
|
14,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
174,874 |
|
|
|
|
|
|
|
|
|
|
|
174,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,848,028 |
|
|
$ |
16,125 |
|
|
$ |
(31,687 |
) |
|
$ |
1,863,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
December 31, 2007 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Asset-backed securities |
|
|
64,352 |
|
|
|
533 |
|
|
|
(79 |
) |
|
|
63,898 |
|
Commercial mortgage-backed securities |
|
|
113,488 |
|
|
|
544 |
|
|
|
(1,031 |
) |
|
|
113,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 securities common stocks |
|
|
67,240 |
|
|
|
6,452 |
|
|
|
(4,704 |
) |
|
|
65,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
7,056 |
|
|
|
|
|
|
|
|
|
|
|
7,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
170,685 |
|
|
|
|
|
|
|
|
|
|
|
170,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,767,301 |
|
|
$ |
25,497 |
|
|
$ |
(9,918 |
) |
|
$ |
1,751,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We 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.
60
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 June 30, 2008, the Company owned two asset-backed securities approximating $0.4 million
with subprime mortgage exposures. The securities are rated AAA/Aaa by S&P and Moodys,
respectively, and have an effective maturity of 0.9 years. In addition, the Company owned eleven
collateralized mortgage obligations and asset-backed securities approximating $16.6 million
classified as Alt-A, which is a credit category between prime and subprime. The Alt-A bonds, also
rated AAA/Aaa, have an effective maturity of 2.1 years. Such subprime and Alt-A categories are
as defined by S&P. The Company is receiving principal and/or interest payments on all of these
securities and believes such amounts are fully collectible.
The following tables set forth our mortgage-backed securities, collateralized mortgage
obligations, and asset-backed securities by those issued by FNMA, FHLMC and certain GNMA
securities, and the quality category (prime, Alt-A and subprime) for all other such investments at
June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA |
|
$ |
181,321 |
|
|
$ |
573 |
|
|
$ |
(1,303 |
) |
|
$ |
182,051 |
|
FHLMC |
|
|
53,983 |
|
|
|
136 |
|
|
|
(652 |
) |
|
|
54,499 |
|
Prime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
235,304 |
|
|
$ |
709 |
|
|
$ |
(1,955 |
) |
|
$ |
236,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
$ |
440 |
|
|
$ |
7 |
|
|
$ |
|
|
|
$ |
433 |
|
FNMA |
|
|
9,861 |
|
|
|
171 |
|
|
|
|
|
|
|
9,690 |
|
FHLMC |
|
|
12,156 |
|
|
|
226 |
|
|
|
|
|
|
|
11,930 |
|
Prime |
|
|
76,096 |
|
|
|
|
|
|
|
(5,589 |
) |
|
|
81,685 |
|
Alt-A |
|
|
15,452 |
|
|
|
|
|
|
|
(2,485 |
) |
|
|
17,937 |
|
Subprime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
114,005 |
|
|
$ |
404 |
|
|
$ |
(8,074 |
) |
|
$ |
121,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
$ |
2,657 |
|
|
$ |
89 |
|
|
$ |
|
|
|
$ |
2,568 |
|
FNMA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
|
47,724 |
|
|
|
415 |
|
|
|
(215 |
) |
|
|
47,524 |
|
Alt-A |
|
|
1,131 |
|
|
|
|
|
|
|
(21 |
) |
|
|
1,152 |
|
Subprime |
|
|
356 |
|
|
|
|
|
|
|
(13 |
) |
|
|
369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
51,868 |
|
|
$ |
504 |
|
|
$ |
(249 |
) |
|
$ |
51,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The commercial mortgage-backed securities are all rated AAA by S&P or Aaa by Moodys.
The following table shows the amount and percentage of the Companys fixed maturities and
short-term investments at fair value at June 30, 2008 by S&P credit rating or, if an S&P rating is
not available, the equivalent Moodys rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
Rating |
|
|
|
|
|
|
|
to |
|
Description |
|
Rating |
|
Amount |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Extremely Strong |
|
AAA |
|
$ |
1,176,137 |
|
|
|
67 |
% |
Very Strong |
|
AA |
|
|
275,958 |
|
|
|
16 |
% |
Strong |
|
A |
|
|
239,874 |
|
|
|
13 |
% |
Adequate |
|
BBB |
|
|
71,820 |
|
|
|
4 |
% |
Speculative |
|
BB & below |
|
|
217 |
|
|
|
0 |
% |
Not Rated |
|
NR |
|
|
1,435 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
AAA(1) |
|
$ |
1,765,441 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Weighted average quality rating. |
62
The Company owns securities credit enhanced by financial guarantors. The following tables set
forth the amount of credit enhanced securities in the fixed maturities portfolio by category at
June 30, 2008, identify the amount insured by each financial guarantor and identify the average
underlying credit rating of such credit enhanced securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Credit enhanced securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and political
subdivisions |
|
$ |
346,179 |
|
|
$ |
2,019 |
|
|
$ |
(3,319 |
) |
|
$ |
347,479 |
|
Mortgage- and asset-backed securities |
|
|
9,119 |
|
|
|
15 |
|
|
|
(191 |
) |
|
|
9,295 |
|
Corporate bonds |
|
|
1,645 |
|
|
|
3 |
|
|
|
(41 |
) |
|
|
1,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
356,943 |
|
|
$ |
2,037 |
|
|
$ |
(3,551 |
) |
|
$ |
358,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
Underlying |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
Credit |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
Rating |
|
|
|
($ in thousands) |
|
Financial guarantors: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMBAC |
|
$ |
70,463 |
|
|
$ |
344 |
|
|
$ |
(886 |
) |
|
$ |
71,005 |
|
|
|
A+ |
|
Assured Guaranty LTD |
|
|
3,923 |
|
|
|
|
|
|
|
(4 |
) |
|
|
3,927 |
|
|
|
A |
|
FGIC |
|
|
55,378 |
|
|
|
215 |
|
|
|
(452 |
) |
|
|
55,615 |
|
|
AA- |
|
Financial Security Assurance |
|
|
91,881 |
|
|
|
898 |
|
|
|
(574 |
) |
|
|
91,557 |
|
|
|
A+ |
|
MBIA |
|
|
117,351 |
|
|
|
514 |
|
|
|
(1,403 |
) |
|
|
118,240 |
|
|
AA- |
|
Radian
Group, Inc. |
|
|
7,652 |
|
|
|
66 |
|
|
|
(41 |
) |
|
|
7,627 |
|
|
|
A+ |
|
XL Capital |
|
|
10,295 |
|
|
|
|
|
|
|
(191 |
) |
|
|
10,486 |
|
|
|
A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
356,943 |
|
|
$ |
2,037 |
|
|
$ |
(3,551 |
) |
|
$ |
358,457 |
|
|
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 $16.5 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 of 35 credit enhanced securities
approximating $23 million that do not have an underlying rating consisting of 17 municipal bonds
approximating $12 million, 15 asset-backed securities approximating $9 million and 3 corporate
bonds approximating $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
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.
63
We regularly review our fixed maturity and equity securities portfolios to evaluate the
necessity of recording impairment losses for other-than-temporary declines in the fair value of
investments. In general, we focus our attention on those securities whose market value was less
than 80% of their cost or amortized cost, as appropriate, for six or more consecutive months.
Other factors considered in evaluating potential impairment include the current fair value as
compared to cost or amortized cost, as appropriate, our intent and ability to retain the investment
for a period of time sufficient to allow for an anticipated recovery in value, specific credit
issues related to the issuer and current economic conditions.
As mentioned above, the Company considers its intent and ability to hold a security until the
value recovers as part of the process of evaluating whether a securitys unrealized loss represents
an other-than-temporary decline. The Companys ability to hold such securities is supported by
sufficient cash flow from its operations and from maturities within its investment portfolio in
order to meet its claims payment and other disbursement obligations arising from its underwriting
operations without selling such investments. With respect to securities where the decline in value
is determined to be temporary and the securitys value is not written down, a subsequent decision
may be made to sell that security and realize a loss. Subsequent decisions on security sales are
made within the context of overall risk monitoring, changing information, market conditions and
assessing value relative to other comparable securities. Management of the Companys investment
portfolio is outsourced to third party investment managers. While these investment managers may,
at a given point in time, believe that the preferred course of action is to hold securities with
unrealized losses that are considered temporary until such losses are recovered, the dynamic nature
of the portfolio management may result in a subsequent decision to sell the security and realize
the loss, based upon a change in market and other factors described above. The Company believes
that subsequent decisions to sell such securities are consistent with the classification of the
Companys portfolio as available for sale.
64
The following table summarizes all securities in an unrealized loss position at June 30, 2008
and December 31, 2007, showing the aggregate fair value and gross unrealized loss by the length of
time those securities have continuously been in an unrealized loss position. The information below
indicates the potential effect upon future income in the event management later concludes that such
declines are considered other-than- temporary.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
|
Fair |
|
|
Gross |
|
|
Fair |
|
|
Gross |
|
|
|
Value |
|
|
Unrealized Loss |
|
|
Value |
|
|
Unrealized Loss |
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury
Bonds, GNMAs and foreign
government bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
$ |
16,545 |
|
|
$ |
219 |
|
|
$ |
4,119 |
|
|
$ |
32 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
6,093 |
|
|
|
253 |
|
|
|
19,587 |
|
|
|
305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
22,638 |
|
|
|
472 |
|
|
|
23,706 |
|
|
|
337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
255,431 |
|
|
|
4,123 |
|
|
|
21,853 |
|
|
|
67 |
|
7-12 Months |
|
|
9,522 |
|
|
|
384 |
|
|
|
6,045 |
|
|
|
115 |
|
> 12 Months |
|
|
11,798 |
|
|
|
445 |
|
|
|
69,671 |
|
|
|
475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
276,751 |
|
|
|
4,952 |
|
|
|
97,569 |
|
|
|
657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed securities
(excluding GNMAs) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
263,656 |
|
|
|
7,300 |
|
|
|
61,388 |
|
|
|
515 |
|
7-12 Months |
|
|
17,553 |
|
|
|
2,400 |
|
|
|
48,496 |
|
|
|
423 |
|
> 12 Months |
|
|
92,204 |
|
|
|
5,865 |
|
|
|
121,798 |
|
|
|
1,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
373,413 |
|
|
|
15,565 |
|
|
|
231,682 |
|
|
|
2,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
93,253 |
|
|
|
1,878 |
|
|
|
20,722 |
|
|
|
255 |
|
7-12 Months |
|
|
8,457 |
|
|
|
698 |
|
|
|
25,520 |
|
|
|
974 |
|
> 12 Months |
|
|
27,181 |
|
|
|
2,626 |
|
|
|
38,865 |
|
|
|
575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
128,891 |
|
|
|
5,202 |
|
|
|
85,107 |
|
|
|
1,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities |
|
$ |
801,693 |
|
|
$ |
26,191 |
|
|
$ |
438,064 |
|
|
$ |
5,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
$ |
29,789 |
|
|
$ |
3,090 |
|
|
$ |
26,257 |
|
|
$ |
3,494 |
|
7-12 Months |
|
|
9,493 |
|
|
|
2,138 |
|
|
|
4,153 |
|
|
|
1,209 |
|
> 12 Months |
|
|
640 |
|
|
|
268 |
|
|
|
53 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity Securities |
|
$ |
39,922 |
|
|
$ |
5,496 |
|
|
$ |
30,463 |
|
|
$ |
4,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
As of June 30, 2008, there were 776 fixed maturities out of a total of 1,418 fixed maturities
in an unrealized loss position. The largest single unrealized loss in the fixed maturities was
$1.2 million. There were 40 equity securities out of a total of 76 equity securities in an
unrealized loss position. The largest single unrealized loss in the equity securities was $0.6
million.
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.
When a security in our investment portfolio has an unrealized loss that is deemed to be
other-than-temporary, we write the security down to fair value through a charge to operations.
Significant changes in the factors we consider when evaluating investments for impairment losses
could result in a significant change in impairment losses reported in the consolidated financial
statements.
During the 2008 second quarter, the Company identified 16 common stocks with a fair value of
$9.2 million which were considered to be other-than-temporarily impaired. Consequently, the cost
of such securities was written down to fair value and the Company recognized a realized loss of
$8.4 million. There were no impairment losses recorded in our fixed maturity or equity securities
portfolios in the first six months of 2007.
The following table shows the composition by National Association of Insurance Commissioners
(NAIC) rating and the generally equivalent S&P and Moodys ratings of the fixed maturity
securities in our portfolio with gross unrealized losses at June 30, 2008. Not all of the
securities are rated by S&P and/or Moodys.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Equivalent |
|
Equivalent |
|
Unrealized Loss |
|
|
Fair Value |
|
NAIC |
|
S&P |
|
Moodys |
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
Rating |
|
Rating |
|
Rating |
|
Amount |
|
|
to Total |
|
|
Amount |
|
|
to Total |
|
|
|
|
|
|
|
($ in thousands) |
|
|
1 |
|
AAA/AA/A |
|
Aaa/Aa/A |
|
$ |
24,108 |
|
|
|
92 |
% |
|
$ |
747,089 |
|
|
|
93 |
% |
2 |
|
BBB |
|
Baa |
|
|
2,048 |
|
|
|
8 |
% |
|
|
54,387 |
|
|
|
7 |
% |
3 |
|
BB |
|
Ba |
|
|
35 |
|
|
|
0 |
% |
|
|
217 |
|
|
|
0 |
% |
4 |
|
B |
|
B |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
CCC or lower |
|
Caa or lower |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
N/A |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
26,191 |
|
|
|
100 |
% |
|
$ |
801,693 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2008, the gross unrealized losses in the table directly above are related to fixed
maturity securities that are rated investment grade, which is defined as a security having an NAIC
rating of 1 or 2, an S&P rating of BBB- or higher, or a Moodys rating of Baa3 or higher,
except for $0.2 million which is rated below investment grade. Unrealized losses on investment
grade securities principally relate to changes in interest rates or changes in sector-related
credit spreads since the securities were acquired. Any such unrealized losses are recognized in
income, if the securities are sold, or if the decline in fair value is deemed other-than-temporary.
66
The contractual maturity by the number of years until maturity for fixed maturity securities
with unrealized losses at June 30, 2008 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized Loss |
|
|
Fair Value |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
Amount |
|
|
to Total |
|
|
Amount |
|
|
to Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
18 |
|
|
|
0 |
% |
|
$ |
7,650 |
|
|
|
1 |
% |
Due after one year through five years |
|
|
1,633 |
|
|
|
6 |
% |
|
|
102,553 |
|
|
|
13 |
% |
Due after five years through ten years |
|
|
3,849 |
|
|
|
15 |
% |
|
|
138,302 |
|
|
|
17 |
% |
Due after ten years |
|
|
5,126 |
|
|
|
20 |
% |
|
|
179,775 |
|
|
|
22 |
% |
Mortgage- and asset-backed securities |
|
|
15,565 |
|
|
|
59 |
% |
|
|
373,413 |
|
|
|
47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities |
|
$ |
26,191 |
|
|
|
100 |
% |
|
$ |
801,693 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected maturities may differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties. Due to the periodic
repayment of principal, the aggregate amount of mortgage-backed and asset-backed securities are
estimated to have an effective maturity of approximately 4.7 years.
Our realized capital gains and losses for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
$ |
1,329 |
|
|
$ |
27 |
|
|
$ |
1,526 |
|
|
$ |
477 |
|
(Losses) |
|
|
(426 |
) |
|
|
(281 |
) |
|
|
(435 |
) |
|
|
(719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
903 |
|
|
|
(254 |
) |
|
|
1,091 |
|
|
|
(242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
|
180 |
|
|
|
1,147 |
|
|
|
443 |
|
|
|
1,397 |
|
(Losses) (1) |
|
|
(9,059 |
) |
|
|
(53 |
) |
|
|
(9,586 |
) |
|
|
(114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,879 |
) |
|
|
1,094 |
|
|
|
(9,143 |
) |
|
|
1,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital gains (losses) |
|
$ |
(7,976 |
) |
|
$ |
840 |
|
|
$ |
(8,052 |
) |
|
$ |
1,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $8,412,000 for other-than-temporary impairments on common stock for the
2008 second quarter and six month period. |
67
The following table details realized losses in excess of $250,000 from sales, and all
impairments recorded during the first six months of 2008 and 2007 and the related circumstances
giving rise to the loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
Exceeded 20% |
|
|
|
Date of |
|
|
Proceeds |
|
|
Loss on |
|
|
Impairment |
|
|
Holdings at |
|
|
Unrealized |
|
|
of Cost or |
|
Description |
|
Sale |
|
|
from Sale |
|
|
Sale |
|
|
Loss |
|
|
June 30, 2008 |
|
|
Loss |
|
|
Amortized Cost |
|
|
|
($ in thousands) |
|
Six months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allied Capital Corporation |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
$ |
(546 |
) |
|
$ |
642 |
|
|
|
|
|
|
|
10 |
|
American
International Group, Inc. |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
(1,262 |
) |
|
|
804 |
|
|
|
|
|
|
|
12 |
|
Bank of America Corporation |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
(421 |
) |
|
|
597 |
|
|
|
|
|
|
|
9 |
|
Bristol-Myers Squibb Co. |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
(343 |
) |
|
|
938 |
|
|
|
|
|
|
|
12 |
|
Citigroup
Inc. |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
(678 |
) |
|
|
365 |
|
|
|
|
|
|
|
13 |
|
Dow Chemical
Co. |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
(325 |
) |
|
|
1,052 |
|
|
|
|
|
|
|
15 |
|
KeyCorp. |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
(653 |
) |
|
|
272 |
|
|
|
|
|
|
|
15 |
|
Legg Mason
Inc. |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
(537 |
) |
|
|
575 |
|
|
|
|
|
|
|
12 |
|
Lennar Corporation |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
(140 |
) |
|
|
202 |
|
|
|
|
|
|
|
8 |
|
Merrill
Lynch & Co., Inc. |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
(222 |
) |
|
|
197 |
|
|
|
|
|
|
|
9 |
|
Motorola Inc. |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
(900 |
) |
|
|
637 |
|
|
|
|
|
|
|
8 |
|
Pfizer Inc. |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
(480 |
) |
|
|
860 |
|
|
|
|
|
|
|
13 |
|
Pinnacle West Capital Corporation |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
(430 |
) |
|
|
969 |
|
|
|
|
|
|
|
14 |
|
Regions Financial Corporation |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
(471 |
) |
|
|
277 |
|
|
|
|
|
|
|
10 |
|
UnitedHealth
Group, Inc. |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
(256 |
) |
|
|
491 |
|
|
|
|
|
|
|
6 |
|
Wachovia Corporation |
|
|
(1) |
|
|
|
|
|
|
|
|
|
|
|
(748 |
) |
|
|
367 |
|
|
|
|
|
|
|
12 |
|
Sprint Nextel Corporation (2) |
|
|
3/19/2008 |
|
|
$ |
143 |
|
|
$ |
(347 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legg Mason Inc. (2) |
|
|
6/4/2008 |
|
|
|
470 |
|
|
|
(363 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
613 |
|
|
$ |
(710 |
) |
|
$ |
(8,412 |
) |
|
$ |
9,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIPS (3) |
|
|
3/31/2007 |
|
|
$ |
5,823 |
|
|
$ |
(335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Securities owned at June 30, 2008 which had an impairment loss. |
|
(2) |
|
Securities sold due to losses not considered to be recoverable in the foreseeable
future. |
|
(3) |
|
Treasury inflation protection securities (TIPS) were sold during the 2007 first quarter
due to the widening breakeven yield spread between TIPS and Treasuries. |
The total impairment loss recorded in the second quarter was $8.4 million. We continue to
hold all of the securities with other-than-temporary impairments.
Reinsurance Recoverables
We utilize reinsurance principally to reduce our exposure on individual risks, to protect
against catastrophic losses, and to stabilize loss ratios and underwriting results. Although
reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the
reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our
policyholders. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our
reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of
these claims. Either of these events would increase our costs and could have a material adverse
effect on our business. We are required to pay the losses even if the reinsurer fails to meet its
obligations under the reinsurance agreement.
68
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 U.S. and European reinsurance markets. To meet our
standards of acceptability, when the reinsurance is placed, a reinsurer generally must have an A.M.
Best Company and/or S&P rating of A or better, or equivalent financial strength if not rated,
plus at least $250 million in policyholders surplus. Our Reinsurance Security Committee, which is
part of our Enterprise Risk Management Reinsurance Sub-Committee, monitors the financial strength
of our reinsurers and the related reinsurance receivables and periodically reviews the list of
acceptable reinsurers. The reinsurance is placed either directly by us or through reinsurance
intermediaries. The reinsurance intermediaries are compensated by the reinsurers.
Approximately $133.7 million and $167.7 million of the reinsurance recoverables for paid and
unpaid losses at June 30, 2008 and December 31, 2007, respectively, were due from reinsurers as a
result of the losses from Hurricanes Katrina and Rita.
The Company continues to periodically monitor the financial condition and ongoing activities
of its reinsurers, in order to assess the adequacy of its allowance for uncollectible reinsurance.
Liquidity and Capital Resources
Cash flows from operations were $133.4 million and $111.7 million for the six months ended
June 30, 2008 and 2007, respectively. The positive operating cash flow was primarily due to the
increase in net written premium, collected investment income, decrease in reinsurance recoverable
on paid losses and fewer paid losses relating to Hurricanes Katrina and Rita. Operating cash flow
was used primarily to acquire additional investment assets.
Investments and cash increased to $1.85 billion at June 30, 2008 from $1.77 billion at
December 31, 2007. The increase was due to the positive cash flow from operations. Net investment
income was $18.7 million and $17.3 million for the three months ended June 30, 2008 and 2007,
respectively, and $37.6 million and $33.5 million for the six months ended June 30, 2008 and 2007,
respectively.
The approximate annualized pre-tax yields of the investment portfolio, excluding net realized
capital gains and losses, were 4.1 and 4.5% for the 2008 and 2007 second quarters, respectively.
The approximate annualized pre-tax yields of the investment portfolio, excluding net realized
capital gains and losses, were 4.2% and 4.4% for the 2008 and 2007 six month periods, respectively.
As of June 30, 2008 and December 31, 2007, all fixed maturity securities and equity securities
held by us were classified as available-for-sale.
Since the beginning of 2008, the Company has allocated approximately $104 million to high
quality tax-exempt securities which approximate 39% of the fixed maturities investment portfolio at
June 30, 2008 compared to approximately 34% at December 31, 2008. As a result, the effective tax
rate on net investment income was 25.4% and 25.9% for the 2008 second quarter and six month period,
respectively, compared to 28.2% and 28.3% for the comparable 2007 periods.
At June 30, 2008, the weighted average rating of our fixed maturity investments was AA by
S&P and Aa by Moodys. We believe that we have limited exposure to credit risk since the entire
fixed maturity investment portfolio, except for $0.2 million, consists of investment grade bonds.
At June 30, 2008, our portfolio had an average maturity of 5.6 years and 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 in an effort to ensure our ability to satisfy
claims.
69
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 facility from
$115 million to $180 million and to increase the line of credit under the facility from $10 million
to $20 million. Also, the expiration of the credit facility was extended from June 30, 2007 to
March 31, 2009. If, at that time, the bank consortium does not renew the credit facility, we will
need to find other sources to provide the letters of credit or other collateral required to
continue our participation in Syndicate 1221. The credit facility, which is denominated in U.S.
dollars, is utilized primarily by Navigators Corporate Underwriters Ltd. and Millennium
Underwriting Ltd. to fund our participation in Syndicate 1221, which is denominated in British
pounds. At June 30, 2008, letters of credit with an aggregate face amount of $106.7 million were
issued under the credit facility. The line of credit was unused at June 30, 2008.
As a result of the amendment, the cost of the letter of credit portion of the credit facility
was reduced to 0.75% from 1.00% for the issued letters of credit and to 0.10% from 0.125% for the
unutilized portion of the letter of credit facility. The cost of the line of credit portion of the
credit facility was also reduced to 0.75% from 1.00% over the Companys choice of LIBOR or prime
for the utilized portion and to 0.10% from 0.125% for the
unutilized portion.
The credit facility is collateralized by all of the common stock of Navigators Insurance
Company. The credit agreement contains covenants common to transactions of this type, including
restrictions on indebtedness and liens, limitations on dividends, stock buy backs, mergers and the
sale of assets, and requirements to maintain certain consolidated tangible net worth, statutory
surplus and other financial ratios. No dividends have been declared or paid by the Company through
June 30, 2008. We were in compliance with all covenants at June 30, 2008.
Our reinsurance has been placed with various U.S. and foreign insurance companies and with
selected syndicates at Lloyds. Pursuant to the implementation of Lloyds Plan of Reconstruction
and Renewal, a portion of our recoverables are now reinsured by Equitas (a separate U.K. authorized
reinsurance company established to reinsure outstanding liabilities of all Lloyds members for all
risks written in the 1992 or prior years of account).
Time lags do occur in the normal course of business between the time gross loss reserves are
paid by the Company and the time such gross paid losses are billed and collected from reinsurers.
Reinsurance recoverable amounts related to those gross loss reserves at June 30, 2008 are
anticipated to be billed and collected over the next several years as the gross loss reserves are
paid by the Company.
Generally, for pro-rata or quota share reinsurers, including pool participants, 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) that
are subsequently adjusted based on actual premiums determined after the expiration of the
applicable reinsurance treaty. Paid losses subject to excess of loss recoveries are generally
billed as they occur and are usually settled by reinsurers within 30 calendar days for the
Insurance Companies and 30 business days for the Lloyds Operations.
The Company sometimes withholds funds from reinsurers and may apply ceded loss billings
against such funds in accordance with the applicable reinsurance agreements.
At June 30, 2008, ceded asbestos paid and unpaid recoverables were $10.6 million compared to
$10.5 million at December 31, 2007. Of such amounts at June 30, 2008, $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.
70
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 these hurricane losses over a period of years from cash flow and, if needed,
short-term investments. We expect to collect our paid reinsurance recoverables generally under the
terms described above.
We believe that the cash flow generated by the operating activities of our subsidiaries will
provide sufficient funds for us to meet our liquidity needs over the next twelve months. Beyond
the next twelve months, cash flow available to us may be influenced by a variety of factors,
including general economic conditions and conditions in the insurance and reinsurance markets, as
well as fluctuations from year to year in claims experience.
Our capital resources consist of funds deployed or available to be deployed to support our
business operations. At June 30, 2008 and December 31, 2007, our capital resources were as
follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Senior debt |
|
$ |
123,732 |
|
|
$ |
123,673 |
|
Stockholders equity |
|
|
676,357 |
|
|
|
662,106 |
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
800,089 |
|
|
$ |
785,779 |
|
|
|
|
|
|
|
|
Ratio of debt to total capitalization |
|
|
15.5 |
% |
|
|
15.7 |
% |
|
|
|
|
|
|
|
The increase in stockholders equity in 2008 was primarily due to 2008 net income partially
offset by the other comprehensive loss mostly due to unrealized depreciation of investments, and
treasury stock purchases.
We monitor our capital adequacy to support our business on a regular basis. The future
capital requirements of our business will depend on many factors, including our ability to write
new business successfully and to establish premium rates and reserves at levels sufficient to cover
losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and
financial strength ratings as evaluated by independent rating agencies. In particular, we require
(1) sufficient capital to maintain our financial strength ratings, as issued by several ratings
agencies, at a level considered necessary by management to enable our Insurance Companies to
compete, (2) sufficient capital to enable our Insurance Companies to meet the capital adequacy
tests performed by statutory agencies in the United States and the United Kingdom and (3) letters
of credit and other forms of collateral that are necessary to support the business plan of our
Lloyds Operations.
As part of our capital management program, we may seek to raise additional capital or may seek
to return capital to our stockholders through share repurchases, cash dividends or other methods
(or a combination of such methods). Any such determination will be at the discretion of our Board
of Directors and will be dependent upon our profits, financial requirements and other factors,
including legal restrictions, rating agency requirements, credit facility limitations and such
other factors as our board of directors deems relevant.
71
In October, 2007 the Parent Companys Board of Directors adopted a stock repurchase program
for up to $30 million of the Parent Companys common stock. Purchases 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 purchases under the program will depend on a variety of factors,
including the trading price of the stock, market conditions and corporate and regulatory
considerations. Through June 30, 2008, we have purchased 186,026 shares of our common stock at a
total cost of $9.8 million.
We primarily rely upon dividends from our subsidiaries to meet our Parent Companys
obligations. Since the issuance of the senior debt in April 2006, the Parent Companys cash
obligations primarily consist of semi-annual interest payments of $4.4 million. Going forward, the
interest payments and any stock repurchases will be made from a combination of funds currently 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 at
June 30, 2008 for the payment of dividends by Navigators Insurance Company during 2008 without
prior regulatory approval was $47.9 million. Navigators Insurance Company declared and paid a $5.0
million dividend to the Parent Company in each of the first and second quarters of 2008.
Condensed Parent Company balance sheets as of June 30, 2008 (unaudited) and December 31, 2007
are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Cash and investments |
|
$ |
43,881 |
|
|
$ |
44,146 |
|
Investments in subsidiaries |
|
|
748,595 |
|
|
|
735,351 |
|
Goodwill and other intangible assets |
|
|
2,534 |
|
|
|
2,534 |
|
Other assets |
|
|
7,510 |
|
|
|
6,821 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
802,520 |
|
|
$ |
788,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
$ |
973 |
|
|
$ |
1,615 |
|
Accrued interest payable |
|
|
1,458 |
|
|
|
1,458 |
|
7% Senior Notes due May 1, 2016 |
|
|
123,732 |
|
|
|
123,673 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
126,163 |
|
|
|
126,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
676,357 |
|
|
|
662,106 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
802,520 |
|
|
$ |
788,852 |
|
|
|
|
|
|
|
|
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the information concerning market risk as stated in the
Companys 2007 Annual Report on Form 10-K.
Item 4. Controls and Procedures
|
(a) |
|
The Chief Executive Officer and Chief Financial Officer of the Company
have evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the Exchange Act)), as of the end of the period covered by this
quarterly report. Based on such evaluation, such officers have concluded that as of
the end of such period the Companys disclosure controls and procedures are
effective in identifying, on a timely basis, material information required to be
disclosed in our reports filed or submitted under the Exchange Act. |
|
|
(b) |
|
There have been no changes during our second fiscal quarter in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting. |
72
Part II Other Information
Item 1. Legal Proceedings
The Company is not a party to, or the subject of, any material pending legal proceedings that
depart from the routine litigation incidental to the kinds of business it conducts.
Item 1A. Risk Factors
There have been no material changes from the risk factors as previously disclosed in the
Companys 2007 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In October, 2007 the Parent Companys Board of Directors adopted a stock repurchase program
for up to $30 million of the parent Companys common stock. Purchases may be made from time to
time at prevailing prices in open market or privately negotiated transactions through December 31,
2008. The timing and amount of purchases under the program will depend on a variety of factors,
including the trading price of the stock, market conditions and corporate and regulatory
considerations.
73
The following table summarizes the Parent Companys purchases of its common stock for the 2008
second quarter:
($ in thousands, except per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Dollar Value |
|
|
|
Total |
|
|
|
|
|
|
Purchased |
|
|
of Shares that |
|
|
|
Number |
|
|
Average |
|
|
Under Publicly |
|
|
May Yet Be |
|
|
|
of Shares |
|
|
Cost Paid |
|
|
Announced |
|
|
Purchased Under |
|
|
|
Purchased |
|
|
Per Share |
|
|
Program |
|
|
the Program (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,000 |
|
February 2008 |
|
|
30,202 |
|
|
$ |
54.66 |
|
|
|
30,202 |
|
|
$ |
28,349 |
|
March 2008 |
|
|
105,824 |
|
|
$ |
53.58 |
|
|
|
105,824 |
|
|
$ |
22,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal first quarter |
|
|
136,026 |
|
|
$ |
53.82 |
|
|
|
136,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2008 |
|
|
50,000 |
|
|
$ |
49.90 |
|
|
|
50,000 |
|
|
$ |
20,184 |
|
May 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,184 |
|
June 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal second quarter |
|
|
50,000 |
|
|
$ |
49.90 |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Six Months |
|
|
186,026 |
|
|
$ |
52.77 |
|
|
|
186,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Balance as of the end of the month indicated. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submissions of Matters to a Vote of Security Holders
On May 28, 2008, the Companys stockholders voted for the following matters at the annual
stockholders meeting:
|
a) |
|
The election of all nine (9) directors of the Parent Company to serve
until the 2009 Annual Meeting of Stockholders or until their respective successors
have been duly elected and qualified. The results of the voting were as follows: |
|
|
|
|
|
|
|
|
|
Name |
|
Votes For |
|
|
Votes Withheld |
|
|
|
|
|
|
|
|
|
|
H. J. Mervyn Blakeney |
|
|
14,504,698 |
|
|
|
1,556,292 |
|
Peter A. Cheney |
|
|
15,649,671 |
|
|
|
411,319 |
|
Terence N. Deeks |
|
|
15,224,049 |
|
|
|
836,941 |
|
W. Thomas Forrester |
|
|
15,649,671 |
|
|
|
411,319 |
|
Stanley A. Galanski |
|
|
15,219,689 |
|
|
|
841,301 |
|
Leandro S. Galban, Jr. |
|
|
15,423,793 |
|
|
|
637,197 |
|
John F. Kirby |
|
|
15,260,032 |
|
|
|
800,958 |
|
Marc M. Tract |
|
|
14,885,342 |
|
|
|
1,175,648 |
|
Robert F. Wright |
|
|
15,172,492 |
|
|
|
888,498 |
|
|
b) |
|
The Companys Employee Stock Purchase Plan was approved with
14,942,622 votes cast for, 54,906 votes cast against and 332,163 votes
abstaining. |
74
|
c) |
|
The Companys Executive Performance Incentive Plan was approved with
15,243,516 votes cast for, 475,481 votes cast against and 341,993 votes abstaining. |
|
|
d) |
|
The appointment of KPMG LLP as the Companys independent auditors for
2008 was ratified with 15,806,027 votes cast for, 254,588 votes cast against and 375
votes abstaining. |
Item 5. Other Information
None
Item 6. Exhibits
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
|
|
|
|
11-1
|
|
Statement re Computation of Per Share Earnings
|
|
* |
31-1
|
|
Certification of CEO per Section 302 of the Sarbanes-Oxley Act
|
|
* |
31-2
|
|
Certification of CFO per Section 302 of the Sarbanes-Oxley Act
|
|
* |
32-1
|
|
Certification of CEO per Section 906 of the Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance
with Regulation S-K item 601(b)(32)(ii) and shall not be
deemed to be filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the
Securities Act of 1933, except as shall be expressly set
forth by specific reference).
|
|
* |
32-2
|
|
Certification of CFO per Section 906 of the
Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance
with Regulation S-K item 601(b)(32)(ii) and shall not be
deemed to be filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the
Securities Act of 1933, except as shall be expressly set
forth by specific reference).
|
|
* |
75
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
The Navigators Group, Inc. |
|
|
(Registrant)
|
|
Date: July 30, 2008 |
/s/ Paul J. Malvasio
|
|
|
Paul J. Malvasio |
|
|
Executive Vice President
and Chief Financial Officer |
|
|
76
INDEX OF EXHIBITS
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
|
|
|
|
11-1
|
|
Statement re Computation of Per Share Earnings
|
|
* |
31-1
|
|
Certification of CEO per Section 302 of the Sarbanes-Oxley Act
|
|
* |
31-2
|
|
Certification of CFO per Section 302 of the Sarbanes-Oxley Act
|
|
* |
32-1
|
|
Certification of CEO per Section 906 of the Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance
with Regulation S-K item 601(b)(32)(ii) and shall not be
deemed to be filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the
Securities Act of 1933, except as shall be expressly set
forth by specific reference).
|
|
* |
32-2
|
|
Certification of CFO per Section 906 of the Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance
with Regulation S-K item 601(b)(32)(ii) and shall not be
deemed to be filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the
Securities Act of 1933, except as shall be expressly set
forth by specific reference).
|
|
* |
77