Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2010
or
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o |
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Transitional Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 0-15886
The Navigators Group, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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13-3138397 |
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer
Identification No.) |
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6 International Drive, Rye Brook, New York
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10573 |
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(Address of principal executive offices)
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(Zip Code) |
(914) 934-8999
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definition of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check One):
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of common shares outstanding as of April 27, 2010 was 16,374,748.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
INDEX
2
Part I. Financial Information
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Item 1. |
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Financial Statements |
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
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March 31, |
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December 31, |
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2010 |
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2009 |
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|
(Unaudited) |
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|
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|
ASSETS |
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Investments and cash: |
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|
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|
Fixed maturities, available-for-sale, at fair value
(amortized cost: 2010, $1,762,223; 2009, $1,777,983) |
|
$ |
1,807,348 |
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|
$ |
1,816,669 |
|
Equity securities, available-for-sale, at fair value (cost: 2010, $54,624; 2009,
$47,376) |
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|
72,609 |
|
|
|
62,610 |
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Short-term investments, at cost which approximates fair value |
|
|
172,342 |
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|
176,799 |
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Cash |
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2,699 |
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|
509 |
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|
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|
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|
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Total investments and cash |
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2,054,998 |
|
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|
2,056,587 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Premiums receivable |
|
|
225,025 |
|
|
|
193,460 |
|
Prepaid reinsurance premiums |
|
|
157,201 |
|
|
|
162,344 |
|
Reinsurance recoverable on paid losses |
|
|
75,355 |
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|
76,505 |
|
Reinsurance recoverable on unpaid losses and loss adjustment expenses |
|
|
795,914 |
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|
807,352 |
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Deferred policy acquisition costs |
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|
63,133 |
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|
56,575 |
|
Accrued investment income |
|
|
16,767 |
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|
|
17,438 |
|
Goodwill and other intangible assets |
|
|
6,779 |
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|
|
7,057 |
|
Current income tax receivable, net |
|
|
5,021 |
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|
|
4,854 |
|
Deferred income tax, net |
|
|
25,643 |
|
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|
31,222 |
|
Other assets |
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34,895 |
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|
40,600 |
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|
|
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|
|
|
|
|
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|
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|
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Total assets |
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$ |
3,460,731 |
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$ |
3,453,994 |
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|
|
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|
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities: |
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Reserves for losses and loss adjustment expenses |
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$ |
1,913,760 |
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$ |
1,920,286 |
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Unearned premiums |
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|
494,061 |
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|
475,171 |
|
Reinsurance balances payable |
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|
86,376 |
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|
|
98,555 |
|
Senior notes |
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|
114,041 |
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|
114,010 |
|
Accounts payable and other liabilities |
|
|
42,449 |
|
|
|
44,453 |
|
|
|
|
|
|
|
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Total liabilities |
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2,650,687 |
|
|
|
2,652,475 |
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|
|
|
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|
|
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Stockholders equity: |
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|
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued |
|
$ |
|
|
|
$ |
|
|
Common stock, $.10 par value, authorized 50,000,000 shares, issued
17,228,278 shares for 2010 and 17,212,814 shares for 2009 |
|
|
1,723 |
|
|
|
1,721 |
|
Additional paid-in capital |
|
|
307,517 |
|
|
|
304,505 |
|
Treasury stock, at cost (853,842 shares for 2010 and 366,330 shares for 2009) |
|
|
(37,290 |
) |
|
|
(18,296 |
) |
Retained earnings |
|
|
486,979 |
|
|
|
469,934 |
|
Accumulated other comprehensive income |
|
|
51,115 |
|
|
|
43,655 |
|
|
|
|
|
|
|
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Total stockholders equity |
|
|
810,044 |
|
|
|
801,519 |
|
|
|
|
|
|
|
|
|
|
|
|
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Total liabilities and stockholders equity |
|
$ |
3,460,731 |
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|
$ |
3,453,994 |
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|
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|
The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.
3
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ and shares in thousands, except net income per share)
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Three Months Ended |
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March 31, |
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2010 |
|
|
2009 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
270,145 |
|
|
$ |
275,259 |
|
|
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|
|
|
|
|
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|
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Revenues: |
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|
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Net written premiums |
|
$ |
189,317 |
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|
$ |
200,652 |
|
Increase in unearned premiums |
|
|
(25,248 |
) |
|
|
(35,706 |
) |
|
|
|
|
|
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|
Net earned premiums |
|
|
164,069 |
|
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|
164,946 |
|
Net investment income |
|
|
17,972 |
|
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|
18,743 |
|
Total other-than-temporary impairment losses |
|
|
(251 |
) |
|
|
(26,871 |
) |
Portion of loss recognized in other
comprehensive income (before tax) |
|
|
170 |
|
|
|
16,171 |
|
|
|
|
|
|
|
|
Net other-than-temporary impairment losses |
|
|
(81 |
) |
|
|
(10,700 |
) |
Net realized gains (losses) |
|
|
6,113 |
|
|
|
(1,537 |
) |
Other income |
|
|
1,070 |
|
|
|
143 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
189,143 |
|
|
|
171,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Expenses: |
|
|
|
|
|
|
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|
Net losses and loss adjustment expenses |
|
|
103,807 |
|
|
|
100,247 |
|
Commission expenses |
|
|
25,316 |
|
|
|
22,448 |
|
Other operating expenses |
|
|
34,586 |
|
|
|
30,535 |
|
Interest expense |
|
|
2,044 |
|
|
|
2,219 |
|
|
|
|
|
|
|
|
Total expenses |
|
|
165,753 |
|
|
|
155,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income before income taxes |
|
|
23,390 |
|
|
|
16,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
6,345 |
|
|
|
4,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,045 |
|
|
$ |
12,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net income per common share: |
|
|
|
|
|
|
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|
Basic |
|
$ |
1.02 |
|
|
$ |
0.71 |
|
Diluted |
|
$ |
1.00 |
|
|
$ |
0.71 |
|
|
|
|
|
|
|
|
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|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
16,641 |
|
|
|
16,882 |
|
Diluted |
|
|
16,979 |
|
|
|
17,002 |
|
The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.
4
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
($ in thousands)
|
|
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|
|
|
|
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|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
Balance at beginning and end of period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Common stock |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
1,721 |
|
|
$ |
1,708 |
|
Shares issued under stock plans |
|
|
2 |
|
|
|
8 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
1,723 |
|
|
$ |
1,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
304,505 |
|
|
$ |
298,872 |
|
Share-based compensation |
|
|
3,012 |
|
|
|
3,626 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
307,517 |
|
|
$ |
302,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
(18,296 |
) |
|
$ |
(11,540 |
) |
Treasury stock acquired |
|
|
(23,671 |
) |
|
|
|
|
Shares
issued for share-based compensation |
|
|
4,677 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
(37,290 |
) |
|
$ |
(11,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
469,934 |
|
|
$ |
406,776 |
|
Net income |
|
|
17,045 |
|
|
|
12,000 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
486,979 |
|
|
$ |
418,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities, net of tax |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
30,958 |
|
|
$ |
(15,062 |
) |
Change in period |
|
|
6,710 |
|
|
|
16,494 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
37,668 |
|
|
|
1,432 |
|
|
|
|
|
|
|
|
Non-credit other-than-temporary impairment gains (losses), net of tax |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
4,000 |
|
|
|
|
|
Change in period |
|
|
(712 |
) |
|
|
(10,511 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
3,288 |
|
|
|
(10,511 |
) |
|
|
|
|
|
|
|
Cumulative translation adjustments, net of tax |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
8,697 |
|
|
|
8,563 |
|
Net adjustment |
|
|
1,462 |
|
|
|
1,520 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
10,159 |
|
|
|
10,083 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
51,115 |
|
|
$ |
1,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity at end of period |
|
$ |
810,044 |
|
|
$ |
712,454 |
|
|
|
|
|
|
|
|
The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.
5
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,045 |
|
|
$ |
12,000 |
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on investments,
net of tax expense (benefit) of $3,192 and $2,794 in 2010 and
2009, respectively (1) |
|
|
5,998 |
|
|
|
5,983 |
|
Change in foreign currency translation gains (losses),
net of tax expense of $788 and $818 in 2010 and 2009, respectively |
|
|
1,462 |
|
|
|
1,520 |
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
7,460 |
|
|
|
7,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
24,505 |
|
|
$ |
19,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Disclosure of reclassification amount, net of tax: |
|
|
|
|
|
|
|
|
Unrealized gains (losses) on investments arising during period |
|
$ |
9,915 |
|
|
$ |
(2,204 |
) |
Less: reclassification adjustment for net realized
gains (losses) included in net income |
|
|
3,973 |
|
|
|
(1,140 |
) |
reclassification adjustment for other-than-temporary
impairment losses recognized in net income |
|
|
(56 |
) |
|
|
(7,047 |
) |
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on investments, net of tax |
|
$ |
5,998 |
|
|
$ |
5,983 |
|
|
|
|
|
|
|
|
The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.
6
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,045 |
|
|
$ |
12,000 |
|
Adjustments to reconcile net income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation & amortization |
|
|
1,246 |
|
|
|
957 |
|
Deferred income taxes |
|
|
1,777 |
|
|
|
(2,604 |
) |
Net realized (gains) losses |
|
|
(6,032 |
) |
|
|
12,237 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Reinsurance recoverable on paid and unpaid
losses and loss adjustment expenses |
|
|
8,969 |
|
|
|
(2,916 |
) |
Reserves for losses and loss adjustment expenses |
|
|
1,376 |
|
|
|
28,539 |
|
Prepaid reinsurance premiums |
|
|
4,610 |
|
|
|
21,318 |
|
Unearned premium |
|
|
20,788 |
|
|
|
14,492 |
|
Premiums receivable |
|
|
(33,117 |
) |
|
|
(31,897 |
) |
Commissions receivable |
|
|
203 |
|
|
|
7 |
|
Deferred policy acquisition costs |
|
|
(6,982 |
) |
|
|
(10,169 |
) |
Accrued investment income |
|
|
677 |
|
|
|
1,294 |
|
Reinsurance balances payable |
|
|
(11,763 |
) |
|
|
(10,382 |
) |
Current income taxes |
|
|
366 |
|
|
|
6,719 |
|
Other |
|
|
4,961 |
|
|
|
3,333 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
4,124 |
|
|
|
42,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
|
|
|
|
|
|
Redemptions and maturities |
|
|
34,771 |
|
|
|
32,122 |
|
Sales |
|
|
165,405 |
|
|
|
91,969 |
|
Purchases |
|
|
(180,252 |
) |
|
|
(153,211 |
) |
Equity securities, available-for-sale |
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
1,420 |
|
Purchases |
|
|
(7,274 |
) |
|
|
(10,713 |
) |
Change in payable for securities |
|
|
7,451 |
|
|
|
(1,106 |
) |
Net change in short-term investments |
|
|
1,514 |
|
|
|
13,265 |
|
Purchase of property and equipment |
|
|
(491 |
) |
|
|
(2,164 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
21,124 |
|
|
|
(28,418 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(23,671 |
) |
|
|
|
|
Proceeds of stock issued from employee stock purchase plan |
|
|
415 |
|
|
|
344 |
|
Proceeds of stock issued from exercise of stock options |
|
|
198 |
|
|
|
333 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(23,058 |
) |
|
|
677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash |
|
|
2,190 |
|
|
|
15,187 |
|
Cash at beginning of year |
|
|
509 |
|
|
|
1,457 |
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
2,699 |
|
|
$ |
16,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash information: |
|
|
|
|
|
|
|
|
Income taxes paid, net |
|
$ |
3,806 |
|
|
$ |
68 |
|
Issuance of stock to directors |
|
|
180 |
|
|
|
210 |
|
The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.
7
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Unaudited)
Note 1. Accounting Policies
The accompanying interim consolidated financial statements are unaudited but reflect all
adjustments which, in the opinion of management, are necessary to fairly present the results of
The Navigators Group, Inc. and its subsidiaries for the interim periods presented on the basis of
United States generally accepted accounting principles (GAAP or U.S. GAAP). All such
adjustments are of a normal recurring nature. All significant intercompany transactions and
balances have been eliminated. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial statements and the
reported revenues and expenses during the reporting periods. The results of operations for any
interim period are not necessarily indicative of results for the full year. The terms we, us,
our and the Company as used herein are used to mean The Navigators Group, Inc. and its
subsidiaries, unless the context otherwise requires. The term Parent or Parent Company are
used to mean The Navigators Group, Inc. without its subsidiaries. These financial statements
should be read in conjunction with the consolidated financial statements and notes contained in
the Companys 2009 Annual Report on Form 10-K. Certain amounts for the prior year have been
reclassified to conform to the current years presentation. Commission income, previously
disclosed as a separate line item in the Consolidated Statements of Income, is now included in
Other income (expense).
Note 2. Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued accounting guidance
(Accounting Standards Update (ASU) 2010-06) which improves disclosures about fair value
measurements (Accounting Standards Codification (ASC or Codification) 820-10). This guidance
adds additional disclosures regarding significant transfers in and out of Levels 1 and 2. This
guidance also adds additional disclosures regarding Level 3 purchases, sales, issuances and
settlements. In addition, this guidance also adds additional disclosures regarding fair value
measurement disclosures for each class of assets and liabilities as well as disclosures about the
valuation techniques and inputs used to measure fair value for items classified as Level 2 or Level
3. This guidance was effective as of January 1, 2010 for calendar year reporting entities with the
exception of the additional disclosures about purchases, sales, issuances and settlements in the
roll forward of activity in Level 3 fair value measurements which is effective as of January 1,
2011 for calendar year reporting entities. Early adoption is permitted. We adopted this guidance
in the first quarter of 2010 with the exception of the additional disclosures about purchases,
sales, issuances and settlement in the roll forward of activity in Level 3 fair value measurements
which we will adopt in the first quarter of 2011. Adoption of this guidance did not have a material
effect on our consolidated financial condition, results of operations or cash flows.
In June 2009, the FASB issued accounting guidance for the transfer of financial assets (ASC
860-10), which was added to the Codification under ASU 2009-16. This guidance removes the concept
of a qualifying special-purpose entity (QSPE) from existing GAAP as well as the removal of the
exception from applying ASC 810-10, Consolidation, to QSPEs. This guidance also clarifies the unit
of account eligible for sale accounting and requires that a transferor recognize and initially
measure at fair value, all financial assets obtained and liabilities incurred as a result of a
transfer of an entire financial asset (or group of entire financial assets) accounted for as a
sale. Finally, this guidance requires enhanced disclosures to provide greater transparency about
transfers of financial assets and a transferors continuing involvement with transferred financial
assets. This guidance was effective as of January 1, 2010 for calendar year reporting entities and
early adoption was not permitted. We adopted this guidance in the first quarter of 2010. Adoption
of this guidance did not have a material effect on our consolidated financial condition, results of
operations or cash flows.
8
Recent Accounting Developments
None
Note 3. Segment Information
We classify our business into two underwriting segments consisting of the Insurance Companies
segment (Insurance Companies) and the Lloyds Operations segment (Lloyds Operations), which
are separately managed, and a Corporate segment (Corporate). Segment data for each of the two
underwriting segments include allocations of the operating expenses of the wholly-owned
underwriting management companies and the Parent Companys operating expenses and related income
tax amounts. The Corporate segment consists of the Parent Companys investment income, interest
expense and the related tax effect.
We evaluate the performance of each underwriting segment based on its underwriting and GAAP
results. The Insurance Companies and the Lloyds Operations results are measured by taking into
account net earned premiums, net losses and loss adjustment expenses (LAE), commission expenses,
other operating expenses and other income (expense). Each segment maintains its own investments,
on which it earns income and realizes capital gains or losses. Our underwriting performance is
evaluated separately from the performance of our investment portfolios.
The Insurance Companies consist of Navigators Insurance Company, including its branch located in
the United Kingdom (the U.K. Branch), and its wholly-owned subsidiary, Navigators Specialty
Insurance Company. They are primarily engaged in underwriting marine insurance and related lines
of business, professional liability insurance and specialty lines of business including
contractors general liability insurance, commercial umbrella and primary and excess casualty
businesses. Navigators Specialty Insurance Company underwrites specialty and professional
liability insurance on an excess and surplus lines basis. Navigators Specialty Insurance Company
is 100% reinsured by Navigators Insurance Company.
The Lloyds Operations primarily underwrite marine and related lines of business along with
offshore energy, professional liability insurance and construction coverages for onshore energy
business at Lloyds of London (Lloyds) through Lloyds Syndicate 1221 (Syndicate 1221). Our
Lloyds Operations includes Navigators Underwriting Agency Ltd. (NUAL), a Lloyds underwriting
agency which manages Syndicate 1221. We controlled 100% of the stamp capacity of Syndicate 1221
through our wholly-owned Lloyds corporate member in 2010 and 2009.
Navigators Management Company, Inc. (NMC) is a wholly-owned underwriting management company
which produces, manages and underwrites insurance and reinsurance, and provides corporate services
for the Company. The operating results for the underwriting management company are allocated to
both the Insurance Companies and Lloyds Operations.
The Insurance Companies and the Lloyds Operations underwriting results are measured based on
underwriting profit or loss and the related combined ratio, which are both non-GAAP measures of
underwriting profitability. Underwriting profit or loss is calculated from net earned premiums,
less the sum of net losses and LAE, commission expenses, other operating expenses and other income
(expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission
expenses, other operating expenses and other income (expense) by net earned premiums. A combined
ratio of less than 100% indicates an underwriting profit and over 100% indicates an underwriting
loss.
9
Financial data by segment for the three months ended March 31, 2010 and 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
177,838 |
|
|
$ |
92,307 |
|
|
$ |
|
|
|
$ |
270,145 |
|
Net written premiums |
|
|
121,340 |
|
|
|
67,977 |
|
|
|
|
|
|
|
189,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
111,211 |
|
|
|
52,858 |
|
|
|
|
|
|
|
164,069 |
|
Net loss and LAE |
|
|
(68,403 |
) |
|
|
(35,404 |
) |
|
|
|
|
|
|
(103,807 |
) |
Commission expenses |
|
|
(14,362 |
) |
|
|
(10,966 |
) |
|
|
12 |
|
|
|
(25,316 |
) |
Other operating expenses |
|
|
(27,353 |
) |
|
|
(7,243 |
) |
|
|
|
|
|
|
(34,596 |
) |
Other income (expense) |
|
|
(977 |
) |
|
|
2,069 |
|
|
|
(12 |
) |
|
|
1,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
|
116 |
|
|
|
1,314 |
|
|
|
|
|
|
|
1,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
15,748 |
|
|
|
2,069 |
|
|
|
155 |
|
|
|
17,972 |
|
Net realized gains (losses) |
|
|
5,205 |
|
|
|
713 |
|
|
|
114 |
|
|
|
6,032 |
|
Other operating expenses |
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
10 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
(10 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
(2,044 |
) |
|
|
(2,044 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
21,069 |
|
|
|
4,096 |
|
|
|
(1,775 |
) |
|
|
23,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
5,463 |
|
|
|
1,503 |
|
|
|
(621 |
) |
|
|
6,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
15,606 |
|
|
$ |
2,593 |
|
|
$ |
(1,154 |
) |
|
$ |
17,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,546,248 |
|
|
$ |
815,946 |
|
|
$ |
86,046 |
|
|
$ |
3,460,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
61.5 |
% |
|
|
67.0 |
% |
|
|
|
|
|
|
63.3 |
% |
Commission expense ratio |
|
|
12.9 |
% |
|
|
20.7 |
% |
|
|
|
|
|
|
15.4 |
% |
Other operating expense ratio (2) |
|
|
25.5 |
% |
|
|
9.8 |
% |
|
|
|
|
|
|
20.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
99.9 |
% |
|
|
97.5 |
% |
|
|
|
|
|
|
99.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to cross foot. |
|
(2) |
|
Includes Other operating expenses and Other income (expense). |
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
67,526 |
|
|
$ |
59,141 |
|
|
$ |
126,667 |
|
Property Casualty |
|
|
79,346 |
|
|
|
19,959 |
|
|
|
99,305 |
|
Professional Liability |
|
|
30,966 |
|
|
|
13,207 |
|
|
|
44,173 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
177,838 |
|
|
$ |
92,307 |
|
|
$ |
270,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
51,003 |
|
|
$ |
49,642 |
|
|
$ |
100,645 |
|
Property Casualty |
|
|
49,697 |
|
|
|
11,711 |
|
|
|
61,408 |
|
Professional Liability |
|
|
20,640 |
|
|
|
6,624 |
|
|
|
27,264 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
121,340 |
|
|
$ |
67,977 |
|
|
$ |
189,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
41,094 |
|
|
$ |
35,560 |
|
|
$ |
76,654 |
|
Property Casualty |
|
|
51,081 |
|
|
|
11,915 |
|
|
|
62,996 |
|
Professional Liability |
|
|
19,036 |
|
|
|
5,383 |
|
|
|
24,419 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
111,211 |
|
|
$ |
52,858 |
|
|
$ |
164,069 |
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
191,983 |
|
|
$ |
83,276 |
|
|
$ |
|
|
|
$ |
275,259 |
|
Net written premiums |
|
|
137,082 |
|
|
|
63,570 |
|
|
|
|
|
|
|
200,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
120,290 |
|
|
|
44,656 |
|
|
|
|
|
|
|
164,946 |
|
Net losses and LAE |
|
|
(70,153 |
) |
|
|
(30,094 |
) |
|
|
|
|
|
|
(100,247 |
) |
Commission expenses |
|
|
(14,968 |
) |
|
|
(7,480 |
) |
|
|
|
|
|
|
(22,448 |
) |
Other operating expenses |
|
|
(24,560 |
) |
|
|
(5,981 |
) |
|
|
6 |
|
|
|
(30,535 |
) |
Other income (expense) |
|
|
201 |
|
|
|
(52 |
) |
|
|
(6 |
) |
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
10,810 |
|
|
|
1,049 |
|
|
|
|
|
|
|
11,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
16,207 |
|
|
|
2,383 |
|
|
|
153 |
|
|
|
18,743 |
|
Net realized gains (losses) |
|
|
(8,907 |
) |
|
|
(3,330 |
) |
|
|
|
|
|
|
(12,237 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
(2,219 |
) |
|
|
(2,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
18,110 |
|
|
|
102 |
|
|
|
(2,066 |
) |
|
|
16,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
4,533 |
|
|
|
336 |
|
|
|
(723 |
) |
|
|
4,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
13,577 |
|
|
$ |
(234 |
) |
|
$ |
(1,343 |
) |
|
$ |
12,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,497,923 |
|
|
$ |
799,907 |
|
|
$ |
90,135 |
|
|
$ |
3,403,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
58.3 |
% |
|
|
67.4 |
% |
|
|
|
|
|
|
60.8 |
% |
Commission expense ratio |
|
|
12.4 |
% |
|
|
16.8 |
% |
|
|
|
|
|
|
13.6 |
% |
Other operating expense ratio (2) |
|
|
20.3 |
% |
|
|
13.5 |
% |
|
|
|
|
|
|
18.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
91.0 |
% |
|
|
97.7 |
% |
|
|
|
|
|
|
92.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to cross foot. |
|
(2) |
|
Includes Other operating expenses and Other income (expense). |
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
77,237 |
|
|
$ |
59,023 |
|
|
$ |
136,260 |
|
Property Casualty |
|
|
84,258 |
|
|
|
13,528 |
|
|
|
97,786 |
|
Professional Liability |
|
|
30,488 |
|
|
|
10,725 |
|
|
|
41,213 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
191,983 |
|
|
$ |
83,276 |
|
|
$ |
275,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
58,459 |
|
|
$ |
49,974 |
|
|
$ |
108,433 |
|
Property Casualty |
|
|
59,976 |
|
|
|
7,595 |
|
|
|
67,571 |
|
Professional Liability |
|
|
18,647 |
|
|
|
6,001 |
|
|
|
24,648 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
137,082 |
|
|
$ |
63,570 |
|
|
$ |
200,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
37,161 |
|
|
$ |
31,175 |
|
|
$ |
68,336 |
|
Property Casualty |
|
|
65,412 |
|
|
|
7,923 |
|
|
|
73,335 |
|
Professional Liability |
|
|
17,717 |
|
|
|
5,558 |
|
|
|
23,275 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
120,290 |
|
|
$ |
44,656 |
|
|
$ |
164,946 |
|
|
|
|
|
|
|
|
|
|
|
The Insurance Companies net earned premiums include $19.9 million and $21.2 million of net
earned premiums from the U.K. Branch for the three months ended March 31, 2010 and 2009,
respectively.
Note 4. Reinsurance Ceded
Our ceded earned premiums were $85.5 million and $95.8 million for the three months ended March
31, 2010 and 2009, respectively. Our ceded incurred losses were $52.2 million and $48.8 million
for the three months ended March 31, 2010 and 2009, respectively.
13
The following table lists our 20 largest reinsurers measured by the amount of reinsurance
recoverable for ceded losses and loss adjustment expense and ceded unearned premium (constituting
approximately 74.9% of our total recoverable), together with the reinsurance recoverables and
collateral at March 31, 2010, and the reinsurers rating from the indicated rating agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Recoverables |
|
|
|
|
|
|
|
|
|
Unearned |
|
|
Unpaid/Paid |
|
|
|
|
|
Collateral |
|
|
Rating & |
|
Reinsurer |
|
Premium |
|
|
Losses |
|
|
Total |
|
|
Held(1) |
|
|
Rating Agency |
|
|
|
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swiss Reinsurance America Corporation |
|
$ |
8.4 |
|
|
$ |
95.2 |
|
|
$ |
103.6 |
|
|
$ |
6.5 |
|
|
A |
AMB |
(2) |
Munich Reinsurance America Inc. |
|
|
28.0 |
|
|
|
65.3 |
|
|
|
93.3 |
|
|
|
8.9 |
|
|
A+ |
AMB | |
Transatlantic Reinsurance Company |
|
|
20.9 |
|
|
|
49.4 |
|
|
|
70.3 |
|
|
|
10.4 |
|
|
A |
AMB | |
Everest Reinsurance Company |
|
|
19.4 |
|
|
|
48.6 |
|
|
|
68.0 |
|
|
|
9.0 |
|
|
A+ |
AMB | |
White Mountains Reinsurance of America |
|
|
0.7 |
|
|
|
63.0 |
|
|
|
63.7 |
|
|
|
1.9 |
|
|
A- |
AMB | |
General Reinsurance Corporation |
|
|
1.5 |
|
|
|
56.9 |
|
|
|
58.4 |
|
|
|
1.1 |
|
|
A++ |
AMB | |
Munchener Ruckversicherungs-Gesellschaft |
|
|
3.2 |
|
|
|
33.6 |
|
|
|
36.8 |
|
|
|
11.5 |
|
|
A+ |
AMB | |
National Indemnity Company |
|
|
6.6 |
|
|
|
28.0 |
|
|
|
34.6 |
|
|
|
1.2 |
|
|
A++ |
AMB | |
Berkley Insurance Company |
|
|
6.8 |
|
|
|
22.8 |
|
|
|
29.6 |
|
|
|
1.2 |
|
|
A+ |
AMB | |
Platinum Underwriters Re |
|
|
3.8 |
|
|
|
25.6 |
|
|
|
29.4 |
|
|
|
1.7 |
|
|
A |
AMB | |
Scor Holding (Switzerland) AG |
|
|
5.8 |
|
|
|
19.4 |
|
|
|
25.2 |
|
|
|
5.9 |
|
|
A- |
AMB | |
Partner Reinsurance Europe |
|
|
5.7 |
|
|
|
17.9 |
|
|
|
23.6 |
|
|
|
9.4 |
|
|
AA- |
S&P | |
Swiss Re International SE |
|
|
0.9 |
|
|
|
20.6 |
|
|
|
21.5 |
|
|
|
5.6 |
|
|
A |
AMB | |
Partner Reinsurance Company of the U.S. |
|
|
1.0 |
|
|
|
19.9 |
|
|
|
20.9 |
|
|
|
0.1 |
|
|
A+ |
AMB | |
Ace Property and Casualty Insurance Company |
|
|
3.4 |
|
|
|
17.0 |
|
|
|
20.4 |
|
|
|
1.9 |
|
|
A+ |
AMB | |
Lloyds Syndicate #2003 |
|
|
3.3 |
|
|
|
14.8 |
|
|
|
18.1 |
|
|
|
2.7 |
|
|
A |
AMB | |
Hannover Ruckversicherung |
|
|
1.4 |
|
|
|
14.6 |
|
|
|
16.0 |
|
|
|
1.7 |
|
|
A |
AMB | |
Arch Reinsurance Company |
|
|
0.5 |
|
|
|
15.3 |
|
|
|
15.8 |
|
|
|
0.0 |
|
|
A |
AMB | |
Allianz Global Corporate & Specialty AG |
|
|
|
|
|
|
11.0 |
|
|
|
11.0 |
|
|
|
4.4 |
|
|
A+ |
AMB | |
XL Reinsurance America Inc. |
|
|
0.0 |
|
|
|
10.3 |
|
|
|
10.3 |
|
|
|
0.3 |
|
|
A |
AMB | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Top 20 Total |
|
|
121.3 |
|
|
|
649.2 |
|
|
|
770.5 |
|
|
|
85.4 |
|
|
|
|
|
All Other |
|
|
35.9 |
|
|
|
222.1 |
|
|
|
258.0 |
|
|
|
81.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
157.2 |
|
|
$ |
871.3 |
|
|
$ |
1,028.5 |
|
|
$ |
166.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Collateral includes letters of credit, ceded balances payable and
other balances held by our Insurance Companies and our Lloyds Operations. |
|
(2) |
|
A.M. Best Company (A.M. Best, AMB) and Standard and Poors Rating
Services (S&P) |
Note 5. Stock-Based Compensation
Stock-based compensation granted under our stock plans is expensed in tranches over the vesting
period. Options and grants generally vest equally over a four year period and the options have a
maximum term of ten years. In some cases, grants vest over five years with one-third vesting in
each of the third, fourth and fifth years. A portion of our restricted stock unit grants are
performance based and are dependent on the rolling three-year average return on beginning equity.
The actual shares that vest will range between 150% to 0% of the original award depending on the
results. We are currently accruing for these awards at the target. The amounts charged to expense
for stock-based compensation were $2.0 million and $1.8 million for the three months ended March
31, 2010 and 2009, respectively.
We expensed $48,000 and $41,000 for the three months ended March 31, 2010 and 2009, respectively,
related to our Employee Stock Purchase Plan. In addition, $45,000 and $52,500 were expensed for the
three months ended March 31, 2010 and 2009, respectively, related to stock compensation to
non-employee directors as part of their directors compensation for serving on the Parent Companys
Board of Directors.
14
Note 6. Syndicate 1221
Our Lloyds Operations included in the consolidated financial statements represents our
participation in Syndicate 1221. Syndicate 1221s stamp capacity is £165 million ($256 million) for
the 2010 underwriting year compared to £124 million ($194 million) for the 2009 underwriting year.
Stamp capacity is a measure of the amount of premiums a Lloyds syndicate is authorized to write
based on a business plan approved by the Council of Lloyds. Syndicate 1221s stamp capacity is
expressed net of commission (as is standard at Lloyds). The Syndicate 1221 premiums recorded in
our financial statements are gross of commission. We controlled 100% of Syndicate 1221s stamp
capacity for the 2010 and 2009 underwriting years through our wholly-owned Lloyds corporate
member.
We provide letters of credit and post cash to Lloyds to support our participation in Syndicate
1221s stamp capacity. As of March 31, 2010, we had provided letters of credit of $76.5 million
and posted cash collateral of $8.6 million. If
Syndicate 1221 increases its stamp capacity and we participate in the additional stamp capacity, or
if Lloyds changes the capital requirements, we may be required to supply additional collateral
acceptable to Lloyds. If we are unwilling or unable to provide additional acceptable collateral,
we will be required to reduce our participation in the stamp capacity of Syndicate 1221. The
letters of credit are provided through a credit facility with a consortium of banks that expires on
March 31, 2011, see Note 11, Credit Facility for additional information. If the consortium of
banks decides not to renew the credit facility, we will need to find internal and/or external
sources to provide either letters of credit or other collateral in order to continue to participate
in Syndicate 1221. The credit facility is collateralized by all of the common stock of Navigators
Insurance Company.
Note 7. Income Taxes
We are subject to the tax laws and regulations of the United States (U.S.) and foreign countries
in which we operate. We file a consolidated U.S. federal tax return, which includes all domestic
subsidiaries and the U.K. Branch. The income from the foreign operations is designated as either
U.S. connected income or non-U.S. connected income. Lloyds is required to pay U.S. income tax on
U.S. connected income written by Lloyds syndicates. Lloyds and the IRS have entered into an
agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyds and
remitted directly to the Internal Revenue Service (IRS). These amounts are then charged to the
corporate members in proportion to their participation in the relevant syndicates. Our corporate
members are subject to this agreement and will receive United Kingdom (U.K.) tax credits for any
U.S. income tax incurred up to the U.K. income tax charged on the U.S. connected income. The
non-U.S. connected insurance income would generally constitute taxable income under the Subpart F
income section of the Internal Revenue Code (Subpart F) since less than 50% of Syndicate 1221s
premiums are derived within the U.K. and would therefore be subject to U.S. taxation when the
Lloyds year of account closes. Taxes are accrued at a 35% rate on our foreign source insurance
income and foreign tax credits, where available, are utilized to offset U.S. tax as permitted. Our
effective tax rate for Syndicate 1221 taxable income could substantially exceed 35% to the extent
we are unable to offset U.S. taxes paid under Subpart F tax regulations with U.K. tax credits on
future underwriting year distributions. U.S. taxes are not accrued on the earnings of our foreign
agencies as these earnings are not includable as Subpart F income in the current year. These
earnings are subject to taxes under U.K. tax regulations at a 28% rate. We have not provided for
U.S. deferred income taxes on the undistributed earnings of our non-U.S. subsidiaries since these
earnings are intended to be permanently reinvested in our non-U.S. subsidiaries.
15
A tax benefit taken in the tax return but not in the financial statements is known as an
unrecognized tax benefit. We have no unrecognized tax benefits at either March 31, 2010 or March
31, 2009 and do not anticipate any significant unrecognized tax benefits within the next twelve
months. We did not incur any interest or penalties related to unrecognized tax benefits for the
three months ended March 31, 2010 and 2009. We are currently not under examination by any major
U.S. or foreign tax authority and are generally subject to U.S. Federal, state or local, or foreign
tax examinations by tax authorities for years 2006 and subsequent.
We recorded an income tax expense of $6.3 million for the three months ended March 31, 2010
compared to an income tax expense of $4.1 million for the comparable period in 2009, resulting in
effective tax rates of 27.1% and 25.7%, respectively. Our effective tax rate is less than 35% due
to permanent differences between book and tax return income, with the most significant item being
tax exempt interest. The effective tax rate on net investment income was 24.5% for the 2010 three
month period compared to 24.9% for the same period in 2009. As of March 31, 2010 and December 31,
2009, the net deferred federal, foreign, state and local tax assets were $25.6 million and $31.2
million, respectively.
We had state and local deferred tax assets amounting to potential future tax benefits of $2.9
million and $2.6 million at March 31, 2010 and December 31, 2009, respectively. Included in the
deferred tax assets are state and local net operating loss carryforwards of $2.0 million and $1.3
million at March 31, 2010 and December 31, 2009, respectively. A valuation allowance was
established for the full amount of these potential future tax benefits due to the uncertainty
associated with their realization. Our state and local tax carryforwards at March 31, 2010 expire
from 2023 to 2025.
We have not provided for U.S. deferred income taxes on the undistributed earnings of approximately
$60.3 million of our non-U.S. subsidiaries since these earnings are intended to be permanently
reinvested in the foreign subsidiaries. However, in the future, if such earnings were distributed
to us, taxes of approximately $4.2 million would be payable on such undistributed earnings and
would be reflected in the tax provision for the year in which these earnings are no longer intended
to be permanently reinvested in the foreign subsidiary, assuming all foreign tax credits are
realized.
Note 8. Senior Notes due May 1, 2016
On April 17, 2006, we completed a public debt offering of $125 million principal amount of 7%
senior notes due May 1, 2016 (the Senior Notes) and received net proceeds of $123.5 million. The
interest payment dates on the Senior Notes are each May 1 and November 1. The effective interest
rate related to the Senior Notes, based on the proceeds net of discount and all issuance costs,
approximates 7.17%. The interest expense on the Senior Notes was $2.0 million and $2.2 million,
respectively, for the three months ended March 31, 2010 and 2009. The fair value of the Senior
Notes, based on quoted market prices, was $115.3 million and $111.7 million at March 31, 2010 and
December 31, 2009, respectively.
We may redeem the Senior Notes at any time and from time to time, in whole or in part, at a
make-whole redemption price. The terms of the Senior Notes contain various restrictive business
and financial covenants typical for debt obligations of this type, including limitations on
mergers, liens and dispositions of the common stock of certain subsidiaries. As of March 31, 2010,
we were in compliance with all such covenants.
In April 2009, we repurchased $10.0 million aggregate principal amount of the Senior Notes from an
unaffiliated noteholder on the open market for $7.0 million, which generated a $2.9 million pretax
gain that was reflected in Other income. As a result of this transaction, approximately $115.0
million aggregate principal amount of the Senior Notes remains issued and outstanding as of March
31, 2010.
16
Note 9. Commitments and Contingencies
In the ordinary course of conducting business, our subsidiaries are involved in various legal
proceedings, either indirectly as insurers for parties or directly as defendants. Most the these
proceedings are claims litigation involving our subsidiaries as either (a) liability insurers
defending or providing indemnity for third party claims brought against insureds or (b) insurers
defending first party coverage claims brought against them. We account for such activity through
the establishment of unpaid loss and loss adjustment reserves. Our management believes that the
ultimate liability, if any, with respect to such ordinary-course claims litigation, after
consideration of provisions made for potential losses and cost of defense, will not be material to
our consolidated financial condition, results of operations, or cash flows.
Our subsidiaries are also from time-to-time involved with other legal actions, some of which assert
claims for substantial amounts. These actions include claims asserting extra contractual
obligations, such as claims involving allegations of bad faith in the handling of claims or the
underwriting of policies. For example, there is one such claim pending against one of our insureds
involving a catastrophic personal injury. In that matter, we tendered our policy limits to settle
the claim, but the tender was rejected. Our insured and the underlying plaintiff have demanded
that we pay amounts substantially in excess of our policy in order to settle the claim. In
general, we believe we have valid defenses to these cases, including the catastrophic personal
injury claim noted above. Our management expects that the ultimate liability if any, with respect
to such extra-contractual matters will not be material to our consolidated financial position.
Nonetheless, given the large or indeterminate amounts sought in certain of these matters, and the
inherent unpredictability of litigation, an adverse outcome in such matters could, from
time-to-time, have a material adverse outcome on our consolidated results of operations or cash
flows in a particular fiscal quarter or year.
17
Note 10. Investments
The following tables set forth our cash and investments as of March 31, 2010. The table below
includes other-than-temporarily impaired (OTTI) securities recognized within other comprehensive
income (OCI).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
OTTI |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Cost or |
|
|
Recognized |
|
March 31, 2010 |
|
Fair Value |
|
|
Gains |
|
|
(Losses) |
|
|
Amortized Cost |
|
|
in OCI |
|
|
|
($ in thousands) |
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
$ |
408,935 |
|
|
$ |
7,571 |
|
|
$ |
(355 |
) |
|
$ |
401,719 |
|
|
$ |
|
|
States, municipalities and political
subdivisions |
|
|
640,783 |
|
|
|
22,064 |
|
|
|
(1,996 |
) |
|
|
620,715 |
|
|
|
|
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
348,619 |
|
|
|
12,289 |
|
|
|
(108 |
) |
|
|
336,438 |
|
|
|
|
|
Residential mortgage obligations |
|
|
30,486 |
|
|
|
|
|
|
|
(6,050 |
) |
|
|
36,536 |
|
|
|
(4,685 |
) |
Asset-backed securities |
|
|
11,283 |
|
|
|
485 |
|
|
|
(34 |
) |
|
|
10,832 |
|
|
|
(34 |
) |
Commercial mortgage-backed securities |
|
|
105,728 |
|
|
|
2,494 |
|
|
|
(685 |
) |
|
|
103,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
496,116 |
|
|
|
15,268 |
|
|
|
(6,877 |
) |
|
|
487,725 |
|
|
|
(4,719 |
) |
Corporate bonds |
|
|
261,514 |
|
|
|
10,132 |
|
|
|
(682 |
) |
|
|
252,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,807,348 |
|
|
|
55,035 |
|
|
|
(9,910 |
) |
|
|
1,762,223 |
|
|
|
(4,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
72,609 |
|
|
|
17,995 |
|
|
|
(10 |
) |
|
|
54,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
2,699 |
|
|
|
|
|
|
|
|
|
|
|
2,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
172,342 |
|
|
|
|
|
|
|
|
|
|
|
172,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,054,998 |
|
|
$ |
73,030 |
|
|
$ |
(9,920 |
) |
|
$ |
1,991,888 |
|
|
$ |
(4,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
OTTI |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Cost or |
|
|
Recognized |
|
December 31, 2009 |
|
Fair Value |
|
|
Gains |
|
|
(Losses) |
|
|
Amortized Cost |
|
|
in OCI |
|
|
|
($ in thousands) |
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
$ |
471,598 |
|
|
$ |
7,397 |
|
|
$ |
(597 |
) |
|
$ |
464,798 |
|
|
$ |
|
|
States, municipalities and political
subdivisions |
|
|
676,699 |
|
|
|
25,044 |
|
|
|
(2,917 |
) |
|
|
654,572 |
|
|
|
|
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
283,578 |
|
|
|
12,607 |
|
|
|
(98 |
) |
|
|
271,069 |
|
|
|
|
|
Residential mortgage obligations |
|
|
31,071 |
|
|
|
|
|
|
|
(7,246 |
) |
|
|
38,317 |
|
|
|
(5,723 |
) |
Asset-backed securities |
|
|
16,469 |
|
|
|
612 |
|
|
|
(34 |
) |
|
|
15,891 |
|
|
|
(23 |
) |
Commercial mortgage-backed securities |
|
|
100,393 |
|
|
|
594 |
|
|
|
(5,028 |
) |
|
|
104,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
431,511 |
|
|
|
13,813 |
|
|
|
(12,406 |
) |
|
|
430,104 |
|
|
|
(5,746 |
) |
Corporate bonds |
|
|
236,861 |
|
|
|
9,111 |
|
|
|
(759 |
) |
|
|
228,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,816,669 |
|
|
|
55,365 |
|
|
|
(16,679 |
) |
|
|
1,777,983 |
|
|
|
(5,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
62,610 |
|
|
|
15,244 |
|
|
|
(10 |
) |
|
|
47,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
176,799 |
|
|
|
|
|
|
|
|
|
|
|
176,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,056,587 |
|
|
$ |
70,609 |
|
|
$ |
(16,689 |
) |
|
$ |
2,002,667 |
|
|
$ |
(5,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of our investment portfolio may fluctuate significantly in response to
various factors such as changes in interest rates, investment quality ratings, equity prices,
foreign exchange rates and credit spreads. We do not have the intent to sell nor is it more likely
than not that we will have to sell debt securities in unrealized loss positions that are not
other-than temporarily impaired before recovery. We may realize investment losses to the extent its
liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate,
liquidity or credit spread environments. Significant changes in the factors we consider when
evaluating investment for impairment losses could result in a significant change in impairment
losses reported in the consolidated financial statements.
19
The scheduled maturity dates for fixed maturity securities by the number of years until maturity at
March 31, 2010 are shown in the following table:
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
|
|
|
March 31, 2010 |
|
Fair |
|
|
Amortized |
|
to Maturity |
|
Value |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
202,918 |
|
|
$ |
200,767 |
|
Due after one year through five years |
|
|
413,412 |
|
|
|
396,940 |
|
Due after five years through ten years |
|
|
388,296 |
|
|
|
376,251 |
|
Due after ten years |
|
|
306,606 |
|
|
|
300,540 |
|
Mortgage- and asset-backed (including GNMAs) |
|
|
496,116 |
|
|
|
487,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,807,348 |
|
|
$ |
1,762,223 |
|
|
|
|
|
|
|
|
The following table summarizes all securities in a gross unrealized loss position at March
31, 2010 and December 31, 2009, showing the aggregate fair value and gross unrealized loss by the
length of time those securities had continuously been in a gross unrealized loss position as well
as the number of securities.
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
# of |
|
|
Fair |
|
|
Gross |
|
|
# of |
|
|
Fair |
|
|
Gross |
|
|
|
Securities |
|
|
Value |
|
|
Unrealized Loss |
|
|
Securities |
|
|
Value |
|
|
Unrealized Loss |
|
|
|
($ in thousands except # of securities) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
15 |
|
|
$ |
31,720 |
|
|
$ |
355 |
|
|
|
24 |
|
|
$ |
116,566 |
|
|
$ |
597 |
|
7-12 Months |
|
|
1 |
|
|
|
985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
16 |
|
|
|
32,705 |
|
|
|
355 |
|
|
|
24 |
|
|
|
116,566 |
|
|
|
597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
33 |
|
|
|
88,859 |
|
|
|
1,408 |
|
|
|
47 |
|
|
|
108,290 |
|
|
|
2,291 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
3,534 |
|
|
|
112 |
|
> 12 Months |
|
|
22 |
|
|
|
19,582 |
|
|
|
588 |
|
|
|
23 |
|
|
|
17,777 |
|
|
|
514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
55 |
|
|
|
108,441 |
|
|
|
1,996 |
|
|
|
74 |
|
|
|
129,601 |
|
|
|
2,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
14 |
|
|
|
92,247 |
|
|
|
108 |
|
|
|
5 |
|
|
|
18,385 |
|
|
|
98 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
14 |
|
|
|
92,247 |
|
|
|
108 |
|
|
|
5 |
|
|
|
18,385 |
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
64 |
|
|
|
30,486 |
|
|
|
6,050 |
|
|
|
73 |
|
|
|
31,071 |
|
|
|
7,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
64 |
|
|
|
30,486 |
|
|
|
6,050 |
|
|
|
73 |
|
|
|
31,071 |
|
|
|
7,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
3 |
|
|
|
188 |
|
|
|
34 |
|
|
|
4 |
|
|
|
637 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
3 |
|
|
|
188 |
|
|
|
34 |
|
|
|
4 |
|
|
|
637 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
28,103 |
|
|
|
324 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
10 |
|
|
|
24,775 |
|
|
|
685 |
|
|
|
21 |
|
|
|
45,135 |
|
|
|
4,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
10 |
|
|
|
24,775 |
|
|
|
685 |
|
|
|
32 |
|
|
|
73,238 |
|
|
|
5,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
16 |
|
|
|
59,921 |
|
|
|
516 |
|
|
|
13 |
|
|
|
33,275 |
|
|
|
337 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
3 |
|
|
|
2,217 |
|
|
|
166 |
|
|
|
8 |
|
|
|
6,325 |
|
|
|
422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
19 |
|
|
|
62,138 |
|
|
|
682 |
|
|
|
21 |
|
|
|
39,600 |
|
|
|
759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
181 |
|
|
$ |
350,980 |
|
|
$ |
9,910 |
|
|
|
233 |
|
|
$ |
409,098 |
|
|
$ |
16,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
2 |
|
|
$ |
796 |
|
|
$ |
10 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
872 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
|
2 |
|
|
$ |
796 |
|
|
$ |
10 |
|
|
|
1 |
|
|
$ |
872 |
|
|
$ |
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
To determine whether the unrealized loss on structured securities is other-than-temporary,
we project an expected principal loss under a range of scenarios and utilize the most likely
outcomes. The analysis relies on actual collateral performance measures such as default rate,
prepayment rate and loss severity. These assumptions are applied throughout the remaining term of
the deal, incorporating the transaction structure and priority of payments, to generate loss
adjusted cash flows. Results of the analysis will indicate whether the security ultimately incurs a
loss or whether there is a material impact on yield due to either a projected loss or a change in
cash flow timing. A breakeven default rate is also calculated. A comparison to the break even
default rate to the actual default rate provides an indication of the level of cushion or coverage
to the first dollar principal loss. The analysis applies the stated assumptions throughout the
remaining term of the transaction to forecast cash flows, which are then applied through the
transaction structure to determine whether there is a loss to the security. For securities in which
a tranche loss is present, and the net present value of loss adjusted cash flows is less than book
value, an impairment is recognized. The output data also includes a number of additional metrics
such as average life remaining, original and current credit support, over 60 day delinquency and
security rating.
For debt securities, when assessing whether the amortized cost basis of the security will be
recovered, we compare the present value of cash flows expected to be collected in relation to the
current book value. Any shortfalls of the present value of the cash flows expected to be collected
in relation to the amortized cost basis is considered the credit loss portion of OTTI losses and is
recognized in earnings. All non-credit losses are recognized as changes in OTTI losses within OCI.
For equity securities, in general, we focus our attention on those securities whose fair value was
less than 80% of their cost for six or more consecutive months. If warranted as the result of
conditions relating to a particular security, we will focus on a significant decline in fair value
regardless of the time period involved. Factors considered in evaluating potential impairment
include, but are not limited to, the current fair value as compared to cost of the security, the
length of time the investment has been below cost and by how much. If an equity security is deemed
to be other-than-temporarily impaired, the cost is written down to fair value with the loss
recognized in earnings.
For equity securities, we consider our intent to hold securities as part of the process of
evaluating whether a decline in fair value represents an other-than-temporary decline in value. For
fixed maturity securities, we consider our intent to sell a security and whether it is more likely
than not that we will be required to sell a security before the anticipated recovery as part of the
process of evaluating whether a securitys unrealized loss represents an other-than-temporary
decline. Our ability to hold such securities is supported by sufficient cash flow from its
operations and from maturities within its investment portfolio in order to meet its claims payment
and other disbursement obligations arising from its underwriting operations without selling such
investments. With respect to securities where the decline in value is determined to be temporary
and the securitys value is not written down, a subsequent decision may be made to sell that
security and realize a loss. Subsequent decisions on security sales are made within the context of
overall risk monitoring, changing information and market conditions.
The significant inputs used to measure the amount of credit loss recognized in earnings were actual
delinquency rates, default probability assumptions, severity assumptions and prepayment
assumptions. Projected losses are a function of both loss severity and probability of default.
Default probability and severity assumptions differ based on property type, vintage and the stress
of the collateral. We do not intend to sell any of these securities and it is more likely than not
that we will not be required sell these securities before the recovery of the amortized cost basis.
For the three months ended March 31, 2010, OTTI losses within OCI decreased $1.0 million primarily
as a result of increases in the fair value of securities previously impaired. For the three months
ended March 31, 2009, OTTI losses within OCI were $16.2 million.
22
The table below summarizes our activity related to OTTI losses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
($ in thousands) |
|
No. |
|
|
Amount |
|
|
No. |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds |
|
|
|
|
|
$ |
|
|
|
|
2 |
|
|
$ |
564 |
|
Residential mortgage-backed securities |
|
|
2 |
|
|
|
224 |
|
|
|
35 |
|
|
|
17,849 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
119 |
|
Equities |
|
|
1 |
|
|
|
27 |
|
|
|
54 |
|
|
|
8,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3 |
|
|
$ |
251 |
|
|
|
92 |
|
|
$ |
26,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of loss in accumulated other
comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Residential mortgage-backed securities |
|
|
|
|
|
|
170 |
|
|
|
|
|
|
|
16,102 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
Equities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
170 |
|
|
|
|
|
|
$ |
16,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses recognized in earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
564 |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
1,747 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
Equities |
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
8,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
81 |
|
|
|
|
|
|
$ |
10,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
The following table summarizes the cumulative amounts related to our credit loss portion of
the OTTI losses on debt securities held as of March 31, 2010 that we do not intend to sell and it
is not more likely than not that we will be required to sell the security prior to recovery of the
amortized cost basis and for which the non-credit loss portion is included in other comprehensive
income:
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
Beginning balance of at January 1, 2010 |
|
$ |
2,523 |
|
Credit losses on securities not previously impaired as of December 31, 2009 |
|
|
54 |
|
Reductions for securities sold during the period |
|
|
|
|
|
|
|
|
Ending balance at March 31, 2010 |
|
$ |
2,577 |
|
|
|
|
|
The contractual maturity by the number of years until maturity for fixed maturity securities
with a gross unrealized loss at March 31, 2010 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized Loss |
|
|
Fair Value |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
16 |
|
|
|
0 |
% |
|
$ |
5,878 |
|
|
|
2 |
% |
Due after one year through five years |
|
|
235 |
|
|
|
2 |
% |
|
|
42,264 |
|
|
|
12 |
% |
Due after five years through ten years |
|
|
1,231 |
|
|
|
12 |
% |
|
|
88,163 |
|
|
|
25 |
% |
Due after ten years |
|
|
1,551 |
|
|
|
16 |
% |
|
|
66,979 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed securities |
|
|
6,877 |
|
|
|
70 |
% |
|
|
147,696 |
|
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
9,910 |
|
|
|
100 |
% |
|
$ |
350,980 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
24
The change in net unrealized gains/ (losses) consisted of:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
6,439 |
|
|
$ |
8,630 |
|
Equity securities |
|
|
2,751 |
|
|
|
147 |
|
|
|
|
|
|
|
|
|
|
|
9,190 |
|
|
|
8,777 |
|
|
|
|
|
|
|
|
|
|
Deferred income tax (charged) credited |
|
|
(3,192 |
) |
|
|
(2,794 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses), net |
|
$ |
5,998 |
|
|
$ |
5,983 |
|
|
|
|
|
|
|
|
Our realized gains and losses for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
Gains |
|
$ |
6,370 |
|
|
$ |
2,932 |
|
(Losses) |
|
|
(257 |
) |
|
|
(3,302 |
) |
|
|
|
|
|
|
|
|
|
|
6,113 |
|
|
|
(370 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
Gains |
|
|
|
|
|
|
13 |
|
(Losses) |
|
|
|
|
|
|
(1,180 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) |
|
$ |
6,113 |
|
|
$ |
(1,537 |
) |
|
|
|
|
|
|
|
25
The following table presents, for each of the fair value hierarchy levels as defined in ASC
820, Fair Value Measurements, our fixed maturities and equity securities by asset class that are
measured at fair value at March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
$ |
285,455 |
|
|
$ |
123,480 |
|
|
$ |
|
|
|
$ |
408,935 |
|
States, municipalities and political
subdivisions |
|
|
|
|
|
|
640,783 |
|
|
|
|
|
|
|
640,783 |
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
|
|
|
|
348,619 |
|
|
|
|
|
|
|
348,619 |
|
Residential mortgage obligations |
|
|
|
|
|
|
30,486 |
|
|
|
|
|
|
|
30,486 |
|
Asset-backed securities |
|
|
|
|
|
|
11,283 |
|
|
|
|
|
|
|
11,283 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
105,728 |
|
|
|
|
|
|
|
105,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
496,116 |
|
|
|
|
|
|
|
496,116 |
|
Corporate bonds |
|
|
|
|
|
|
261,514 |
|
|
|
|
|
|
|
261,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
285,455 |
|
|
|
1,521,893 |
|
|
|
|
|
|
|
1,807,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
72,609 |
|
|
|
|
|
|
|
|
|
|
|
72,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
358,064 |
|
|
$ |
1,521,893 |
|
|
$ |
|
|
|
$ |
1,879,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of financial instruments is determined based on the following fair value
hierarchy. The fair value measurement inputs and valuation techniques are similar across all asset
classes within the levels outlined below.
|
|
Level 1 Quoted prices for identical instruments in active markets. Examples are listed
equity and fixed income securities traded on an exchange. Treasury securities would generally
be considered Level 1. |
|
|
Level 2 Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived valuations
in which all significant inputs and significant value drivers are observable in active
markets. Examples are asset-backed and mortgage-backed securities which are similar to other
asset-backed or mortgage-backed securities observed in the market. |
|
|
Level 3 Valuations derived from valuation techniques in which one or more significant
inputs or significant value drivers are unobservable. An example would be a private placement
with minimal liquidity. |
26
We did not have any significant transfers between Level 1 and 2 for the three months ended March
31, 2010. We did not have any Level 3 securities activity for the three months ended March 31,
2010. The following table presents a reconciliation of the beginning and ending balances for all
investments measured at fair value using Level 3 inputs during the three months ended March 31,
2009:
|
|
|
|
|
|
|
Three Months Ended |
|
($ in thousands) |
|
March 31, 2009 |
|
|
|
|
|
|
Level 3 investments as of January 1 |
|
$ |
156 |
|
Unrealized net gains included in other comprehensive income (loss) |
|
|
23 |
|
Purchases, sales, paydowns and amortization |
|
|
(23 |
) |
Transfer from Level 3 |
|
|
|
|
Transfer to Level 3 |
|
|
|
|
|
|
|
|
Level 3 investments as of March 31, 2009 |
|
$ |
156 |
|
|
|
|
|
Note 11. Credit Facility
We have a credit facility provided through a consortium of banks. Through March 31, 2010, the
credit facility made available to the Company letters of credit up to $75 million. At March 31,
2010, letters of credit with an aggregate face amount of $76.5 million were issued under the credit
facility.
On April 1, 2010, we entered into a $140 million credit facility agreement entitled Fifth Amended
and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, and a
syndicate of lenders. The credit facility is a letter of credit facility and amends and replaces
the $75 million credit facility that expired by its terms on April 2, 2010. We may request that the
facility be increased by an amount not to exceed $25 million. The credit facility, which is
denominated in U.S. dollars, is utilized primarily by Navigators Corporate Underwriters Ltd. and
Millennium Underwriting Ltd. to fund our participation in Syndicate 1221 through letters of credit.
The letters of credit issued under the facility are denominated in British pounds and their
aggregate face amount will fluctuate based on exchange rates. The credit facility expires on March
31, 2011.
The
credit facility contains customary covenants for facilities of this
type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the
sale of assets, and requirements as to maintaining certain consolidated tangible net worth,
statutory surplus and other financial ratios. The credit facility also provides for customary
events of default, including failure to pay principal, interest or fees when due, failure to comply
with covenants, any representation or warranty made by the Company being false in any material
respect, default under certain other indebtedness, certain insolvency or receivership events
affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a
change in control of the Company. The letter of credit facility is secured by a pledge of the stock
of certain insurance subsidiaries of the Company. To the extent the aggregate face amount issued
under the credit facility exceeds the commitment amount, we are required to post collateral with
the lead bank of the consortium. We were in compliance with all
covenants under the credit facility at March 31, 2010.
As a result of the April 1, 2010 amendment of the credit facility, the applicable margin and
applicable fee rate payable under the letter of credit facility are now based on a tiered schedule
that is based on the Companys status as determined from its then-current ratings issued by S&P and
Moodys Investors Service (Moodys) with respect to the Companys senior unsecured long-term debt
securities without third-party credit enhancement.
27
Note 12. Share Repurchases
In November 2009, the Parent Companys Board of Directors adopted a stock repurchase program for up
to $35 million of the Parent Companys common stock. In March 2010, the Parent Companys Board of
Directors adopted a stock repurchase program for up to $65 million of the Parent Companys common
stock. This repurchase program is in addition to our existing $35 million share repurchase program
adopted in November 2009. Purchases are permitted from time to time at prevailing prices in open
market or privately negotiated transactions through December 31, 2010. The timing and amount of
purchases under the program depend on a variety of factors, including the trading price of the
stock, market conditions and corporate and regulatory considerations. During the fourth quarter of
2009, the Parent Company purchased 141,576 shares of its common stock in the open market at an
average cost of $47.72 per share for a total of $6.8 million. During the first quarter of 2010,
the Parent Company purchased 573,600 shares of its common stock in the open market at an average
cost of $41.27 per share for a total of $23.7 million. From April 1, 2010 through May 4, 2010, the
Parent Company purchased an additional 179,812 shares of its common stock in the open market at an
average cost of $40.70 per share for a total of $7.3 million under the stock repurchase
program.
Note 13. Subsequent Events
Our insurance subsidiaries provided property reinsurance covering the Deepwater Horizon oil drilling rig that
exploded in the Gulf of Mexico on April 20th, 2010 and subsequently sank. We received loss notifications for the first
party property damage related to the loss of the Deepwater Horizon. Our net physical damage loss for this claim is
currently estimated to be approximately $4.6 million, net of tax, reinsurance and reinstatement premiums.
We also participated in various layers of the marine liability insurance programs purchased by
entities with potential liability exposures related to the Deepwater Horizon incident. At this
point in time, we are unable to accurately estimate the potential liability arising from the
Deepwater Horizon incident, the allocation of that liability amongst the various participants, or
what recoveries would be available to the participants from other applicable insurance coverage.
If losses were incurred in the various marine liability insurance layers in which we participate
on, we believe our exposure would be mitigated by the substantial reinsurance coverage we
maintain. Our management expects that the ultimate liability, if any, for the marine liability
portion of the Deepwater Horizon loss will not be material to our consolidated financial position,
but if a significant portion of the marine liability layers in which we participate were to be
exhausted, the loss could potentially have a material adverse effect on our consolidated results of
operations or cash flows in a particular fiscal quarter or year.
28
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of
Operations |
Note on Forward-Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q for The Navigators Group, Inc. and its
subsidiaries (the Company, we, us, and our) are forward-looking statements as defined in
the Private Securities Litigation Reform Act of 1995. All statements other than statements of
historical fact included in or incorporated by reference in this Quarterly Report are forward
looking statements. Whenever used in this report, the words estimate, expect, believe or
similar expressions or their negative are intended to identify such forward-looking statements.
Forward-looking statements are derived from information that we currently have and assumptions that
we make. We cannot assure that anticipated results will be achieved, since actual results may
differ materially because of both known and unknown risks and uncertainties which we face. We
undertake no obligation to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. Factors that could cause actual results to
differ materially from our forward-looking statements include, but are not limited to, the factors
discussed in the Risk Factors section of our 2009 Annual Report on Form 10-K as well as:
|
|
|
continued volatility in the financial markets and the current recession; |
|
|
|
risks arising from the concentration of our business in marine and energy, general
liability and professional liability insurance, including the risk that market
conditions for these lines could change adversely or that we could experience large
losses in these lines; |
|
|
|
cyclicality in the property/casualty insurance business generally, and the marine
insurance business specifically; |
|
|
|
risks that we face in entering new markets and diversifying the products and
services that we offer, including risks arising from the development of our new
specialty lines or our ability to manage effectively the rapid growth in our lines of
business; |
|
|
|
changing legal, social and economic trends and inherent uncertainties in the loss
estimation process, which could adversely impact the adequacy of loss reserves and the
allowance for reinsurance recoverables; |
|
|
|
risks inherent in the preparation of our financial statements, which requires us to
make many estimates and judgments; |
|
|
|
our ability to continue to obtain reinsurance covering our exposures at appropriate
prices and/or in sufficient amounts; |
|
|
|
the counterparty credit risk of our reinsurers, including the other participants in
the marine pool, and other risks associated with the collection of reinsurance
recoverable amounts from our reinsurers, who may not pay on losses in a timely fashion,
or at all; |
|
|
|
the effects of competition from other insurers; |
|
|
|
unexpected turnover of our professional staff and our ability to attract and retain
qualified employees; |
|
|
|
increases in interest rates during periods in which we must sell fixed-income
securities to satisfy liquidity needs may result in realized investment losses; |
|
|
|
our investment portfolio is exposed to market-wide risks and fluctuations, as well
as to risks inherent in particular types of securities; |
|
|
|
exposure to significant capital market risks related to changes in interest rates,
credit spreads, equity prices and foreign exchange rates which may adversely affect our
results of operations, financial condition or cash flows; |
|
|
|
capital may not be available in the future, or may not be available on favorable
terms; |
|
|
|
our ability to maintain or improve our ratings to avoid the possibility of
downgrades in our claims-paying and financial strength ratings significantly adversely
affecting us, including reducing the number of insurance policies we write generally,
or causing clients who require an insurer with a certain rating level to use
higher-rated insurers; |
29
|
|
|
risks associated with continued or increased premium levies by Lloyds of London
(Lloyds) for the Lloyds Central Fund and cash calls for trust fund deposits, or a
significant downgrade of Lloyds rating by A.M. Best Company; |
|
|
|
changes in the laws, rules and regulations that apply to our insurance companies; |
|
|
|
the inability of our subsidiaries to pay dividends to us in sufficient amounts,
which would harm our ability to meet our obligations; |
|
|
|
weather-related events and other catastrophes (including acts of terrorism)
impacting our insureds and/or reinsurers, including, without limitation, the impact of
Hurricanes Katrina, Rita and Wilma in 2005 and Hurricanes Gustav and Ike in 2008 and
the possibility that our estimates of losses from such hurricanes will prove to be
materially inaccurate; |
|
|
|
volatility in the market price of our common stock; and |
|
|
|
other risks that we identify in current and future filings with the Securities and
Exchange Commission (SEC). |
In light of these risks, uncertainties and assumptions, any forward-looking events discussed in
this Form 10-Q may not occur. You are cautioned not to place undue reliance on any forward-looking
statements, which speak only as of their respective dates.
Overview
The discussion and analysis of our financial condition and results of operations contained herein
should be read in conjunction with our consolidated financial statements and accompanying notes
which appear elsewhere in this Form 10-Q. It contains forward-looking statements that involve
risks and uncertainties. Please see Note on Forward-Looking Statements for more information.
Our actual results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those discussed below and elsewhere in this
Form 10-Q.
We are an international insurance company focusing on specialty products for niches within the
overall property/casualty insurance market. Our largest product line and most long-standing area
of specialization is ocean marine insurance. We have also developed specialty niches in
professional liability insurance and in specialty liability insurance primarily consisting of
contractors liability and primary and excess liability coverages.
Our underwriting segments consist of insurance company operations (Insurance Companies) and
operations at Lloyds of London (Lloyds) through Lloyds Syndicate 1221 (Syndicate 1221)
(Lloyds Operations). The Insurance Companies consist of Navigators Insurance Company, which
includes our branch located in the United Kingdom (the U.K. Branch), and Navigators Specialty
Insurance Company, which underwrites specialty and professional liability insurance on an excess
and surplus lines basis. All of the insurance business written by Navigators Specialty Insurance
Company is fully reinsured by Navigators Insurance Company pursuant to a 100% quota share
reinsurance agreement. Our Lloyds Operations include Navigators Underwriting Agency Ltd. (NUAL),
a wholly-owned Lloyds underwriting agency which manages Syndicate 1221. Our Lloyds Operations
primarily underwrite marine and related lines of business along with offshore energy, professional
liability insurance and construction coverages for onshore energy business through Syndicate 1221.
We controlled 100% of Syndicate 1221s stamp capacity for the 2010 and 2009 underwriting years
through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd., which is referred to
as a corporate name in the Lloyds market. We have also established underwriting agencies in
Antwerp, Belgium, Stockholm, Sweden and Copenhagen, Denmark, which underwrite risks pursuant to
binding authorities within NUAL into Syndicate 1221.
30
Catastrophe Risk Management
Our Insurance Companies and Lloyds Operations have exposure to losses caused by natural and
man-made catastrophic events. The frequency and severity of catastrophes are unpredictable.
The extent of losses from a catastrophe is a function of both the total amount of insured exposure
in an area affected by the event and the severity of the event. We continually assess our
concentration of underwriting exposures in catastrophe exposed areas globally and manage this
exposure through individual risk selection and through the purchase of reinsurance. We also use
modeling and concentration management tools that allow us to better monitor and control our
accumulations of potential losses from catastrophe events. Despite these efforts, there remains
uncertainty about the characteristics, timing and extent of insured losses given the unpredictable
nature of catastrophes. The occurrence of one or more catastrophic events could have a material
adverse effect on our results of operations, financial condition and/or liquidity.
We have significant natural catastrophe exposures throughout the world. We estimate that our
largest exposure to loss from a single natural catastrophe event comes from an earthquake on the
west coast of the United States. As of March 31, 2010, we estimate that our probable maximum
pre-tax gross and net loss exposure for an earthquake event centered at San Francisco, California
would be approximately $131 million and $27 million, respectively, including the cost of
reinsurance reinstatement premiums.
Like all catastrophe exposure estimates, the foregoing estimate of our probable maximum loss is
inherently uncertain. This estimate is highly dependent upon numerous assumptions and subjective
underwriting judgments. Examples of significant assumptions and judgments related to such an
estimate include the intensity, depth and location of the earthquake, the various types of the
insured risks exposed to the event at the time the event occurs and the estimated costs or damages
incurred for each insured risk. The composition of our portfolio also makes such estimates
challenging due to the non-static nature of the exposures covered under our policies in lines of
business such as cargo and hull. There can be no assurances that the gross and net loss amounts
that we could incur in such an event or in any natural catastrophe event would not be materially
higher than the estimates discussed above given the significant uncertainties with respect to such
an estimate. Moreover, our portfolio of insured risks changes dynamically over time and there can
be no assurance that our probable maximum loss will not change materially over time.
The occurrence of large loss events could reduce the reinsurance coverage that is available to us
and could weaken the financial condition of our reinsurers, which could have a material adverse
effect on our results of operations. Although the reinsurance agreements make the reinsurers liable
to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance
arrangements do not eliminate our obligation to pay claims to our policyholders as we are required
to pay the losses if a reinsurer fails to meet its obligations under the reinsurance agreement.
Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our reinsurers may
not pay claims made by us on a timely basis, or they may not pay some or all of these claims.
Either of these events would increase our costs and could have a material adverse effect on our
business.
Critical Accounting Policies
The Companys Annual Report on Form 10-K for the year ended December 31, 2009 discloses our
critical accounting policies (see Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical Accounting Policies). Certain of these policies are
critical to the portrayal of our financial condition and results since they require management to
establish estimates based on complex and subjective judgments, including those related to our
estimates for loss and LAE (including losses that have occurred but were not reported to us by the
financial reporting date), reinsurance recoverables, written and unearned premium, the
recoverability of deferred tax assets, the impairment of investment securities and accounting for
Lloyds results. For additional information regarding our critical accounting policies, refer to
our 2009 Annual Report on Form 10-K for the year ended December 31, 2009, pages 42 through 51.
31
Recent Accounting Pronouncements
Refer to Note 2: Recent Accounting Pronouncements in the Notes to Interim Consolidated Financial
Statements for a discussion about accounting standards recently adopted by the Company, as well as
recent accounting developments relating to standards not yet adopted by the Company.
Results of Operations
The following is a discussion and analysis of our consolidated and segment results of operations
for the three months ended March 31, 2010 and 2009. Earnings per share data is presented on a per
diluted share basis. In presenting our financial results, we have discussed our performance with
reference to underwriting profit or loss and the related combined ratio, both of which are non-GAAP
measures of underwriting profitability. We consider such measures, which may be defined
differently by other companies, to be important in the understanding of our overall results of
operations. Underwriting profit or loss is calculated from net earned premium, less the sum of net
losses and LAE, commission expenses, other operating expenses and other income (expense). The
combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other
operating expenses and other income (expense) by net earned premiums. A combined ratio of less
than 100% indicates an underwriting profit and over 100% indicates an underwriting loss.
Net income for the three months ended March 31, 2010 was $17.0 million or $1.00 per diluted share
compared to $12.0 million or $0.71 per diluted share for the three months ended March 31, 2009.
Included in these results were net realized gains of $3.9 million after-tax and net realized losses
of $1.2 million after-tax for the three months ended March 31, 2010 and 2009,
respectively. In addition, our net income included net other-than-temporary impairment losses
recognized in earnings of $0.01 million and $7.0 million after-tax for the three months ended March
31, 2010 and 2009, respectively.
The combined ratio for the three months ended March 31, 2010 was 99.1% compared to 92.8% for the
comparable period in 2009. The combined ratio for the three months ended March 31, 2010 was
reduced by 0.8 loss ratio points for net loss reserve redundancies of $1.2 million relating to
prior years. The combined ratio for the three months ended March 31, 2009 was reduced by 3.5 loss
ratio points for net loss reserve redundancies of $5.8 million relating to prior years. The net
paid loss and LAE ratio for the three months ended March 30, 2010 was 60.3% compared to 43.6% for
the comparable period in 2009.
Cash flow from operations was $4.1 million for the first three months of 2010 compared to $42.9
million for the comparable period in 2009. This decrease was primarily due to a $27.0 million
negative variance in our cash flows related to an increase in paid losses in the first three months
of 2010 compared with the same period in 2009 as well as a decline in the overall operating
results.
Consolidated stockholders equity increased 1.1% to $810.0 million or $49.47 per share at March 31,
2010 compared to $801.5 million or $47.58 per share at December 31, 2009. The increase was due to
net income and unrealized investment portfolio gains.
REVENUES
Gross written premiums decreased to $270.1 million in the three months ended March 31, 2010
compared to $275.3 million in the 2009 comparable period. The 1.9% decrease in the 2010 first
quarter gross written premiums compared to 2009 was due to a $9.6 million decrease in our Marine
gross written premiums, primarily due to a decline in our protection and indemnity (P&I) business
line. The decrease in the 2010 first quarter gross written premium was partially offset by a $3.0
million and $1.5 million increase in our Professional Liability and Property Casualty divisions,
respectively.
32
The average renewal premium rates for our Insurance Companies and Lloyds Operations marine
business increased approximately 5% for the three months ended March 31, 2010 compared to the same
period in 2009. For our property and casualty division, we generally experienced average renewal
premium rate declines in our primary and excess casualty lines offset by a 7% increase in our
offshore NavTech line. The Insurance Companies and Lloyds
professional liability division overall experienced an approximately 1% increase in average renewal
premium rates compared to 2009.
The average premium rate increases or decreases as noted above for the marine, property casualty
and professional liability businesses are calculated primarily by comparing premium amounts on
policies that have renewed. The premiums are judgmentally adjusted for exposure factors when
deemed significant and sometimes represent an aggregation of several lines of business. The rate
change calculations provide an indicated pricing trend and are not meant to be a precise analysis
of the numerous factors that affect premium rates or the adequacy of such rates to cover all
underwriting costs and generate an underwriting profit. The calculation can also be affected
quarter by quarter depending on the particular policies and the number of policies that renew
during that period. Due to market conditions, these rate changes may or may not apply to new
business that generally would be more competitively priced compared to renewal business. The
calculation does not reflect the rate on business that we are unwilling or unable to renew due to
loss experience or competition.
33
The following tables set forth our gross and net written premiums and net earned premiums by
segment and line of business for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
|
Premiums |
|
|
% |
|
|
Premiums |
|
|
Premiums |
|
|
Premiums |
|
|
% |
|
|
Premiums |
|
|
Premiums |
|
|
|
($ in thousands) |
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
67,526 |
|
|
|
25 |
% |
|
$ |
51,003 |
|
|
$ |
41,094 |
|
|
$ |
77,237 |
|
|
|
28 |
% |
|
$ |
58,459 |
|
|
$ |
37,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Casualty |
|
|
79,346 |
|
|
|
30 |
% |
|
|
49,697 |
|
|
|
51,081 |
|
|
|
84,258 |
|
|
|
31 |
% |
|
|
59,976 |
|
|
|
65,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
30,966 |
|
|
|
11 |
% |
|
|
20,640 |
|
|
|
19,036 |
|
|
|
30,488 |
|
|
|
11 |
% |
|
|
18,647 |
|
|
|
17,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies
Total |
|
|
177,838 |
|
|
|
66 |
% |
|
|
121,340 |
|
|
|
111,211 |
|
|
|
191,983 |
|
|
|
70 |
% |
|
|
137,082 |
|
|
|
120,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
59,141 |
|
|
|
22 |
% |
|
|
49,642 |
|
|
|
35,560 |
|
|
|
59,023 |
|
|
|
21 |
% |
|
|
49,974 |
|
|
|
31,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Casualty |
|
|
19,959 |
|
|
|
7 |
% |
|
|
11,711 |
|
|
|
11,915 |
|
|
|
13,528 |
|
|
|
5 |
% |
|
|
7,595 |
|
|
|
7,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
13,207 |
|
|
|
5 |
% |
|
|
6,624 |
|
|
|
5,383 |
|
|
|
10,725 |
|
|
|
4 |
% |
|
|
6,001 |
|
|
|
5,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations Total |
|
|
92,307 |
|
|
|
34 |
% |
|
|
67,977 |
|
|
|
52,858 |
|
|
|
83,276 |
|
|
|
30 |
% |
|
|
63,570 |
|
|
|
44,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
270,145 |
|
|
|
100 |
% |
|
$ |
189,317 |
|
|
$ |
164,069 |
|
|
$ |
275,259 |
|
|
|
100 |
% |
|
$ |
200,652 |
|
|
$ |
164,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
Gross Written Premiums
Insurance Companies Gross Written Premiums
Marine Premiums. The gross written premiums for the first three months of 2010 and 2009 consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine liability |
|
$ |
24,780 |
|
|
|
37 |
% |
|
$ |
27,083 |
|
|
|
35 |
% |
Inland marine |
|
|
8,892 |
|
|
|
13 |
% |
|
|
8,436 |
|
|
|
11 |
% |
P&I |
|
|
7,122 |
|
|
|
11 |
% |
|
|
12,350 |
|
|
|
16 |
% |
Other |
|
|
6,340 |
|
|
|
9 |
% |
|
|
4,770 |
|
|
|
6 |
% |
Cargo |
|
|
6,221 |
|
|
|
9 |
% |
|
|
8,777 |
|
|
|
11 |
% |
Craft/Fishing vessel |
|
|
5,870 |
|
|
|
9 |
% |
|
|
4,441 |
|
|
|
6 |
% |
Bluewater hull |
|
|
4,624 |
|
|
|
7 |
% |
|
|
6,154 |
|
|
|
8 |
% |
Transport |
|
|
3,677 |
|
|
|
5 |
% |
|
|
5,226 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
67,526 |
|
|
|
100 |
% |
|
$ |
77,237 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Insurance Companies marine gross written premiums for the three months ended March 31, 2010
decreased 12.6% compared to the same period in 2009. The competition in this sector remains
significant and excess capacity continues to exist. The average renewal premium rates for the first
quarter of 2010 were generally flat across most lines compared to the same periods in 2009 with the
exceptions of P&I, Transport and Inland Marine, which generally experienced increases compared to
2009.
Property Casualty Premiums. The gross written premiums for the first three months of 2010 and 2009
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
Construction liability |
|
$ |
22,026 |
|
|
|
28 |
% |
|
$ |
27,452 |
|
|
|
33 |
% |
Commercial umbrella |
|
|
16,313 |
|
|
|
21 |
% |
|
|
15,090 |
|
|
|
18 |
% |
Offshore energy |
|
|
9,215 |
|
|
|
12 |
% |
|
|
9,326 |
|
|
|
11 |
% |
Primary E&S |
|
|
2,054 |
|
|
|
3 |
% |
|
|
1,479 |
|
|
|
2 |
% |
Other |
|
|
29,738 |
|
|
|
36 |
% |
|
|
30,911 |
|
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
79,346 |
|
|
|
100 |
% |
|
$ |
84,258 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The property casualty gross written premiums for the three months ended March 31, 2010
decreased 5.8% compared to the same period in 2009, due primarily to continuing weak economic
conditions that have reduced demand for construction liability insurance. Our commercial umbrella
business line experienced growth in 2010 due to the hiring of new underwriters. The average renewal
premium rates for the construction liability business decreased approximately 3% for the three
months ended March 31, 2010 compared to the same period in 2009. Our excess casualty and primary
E&S business lines experienced declines in average renewal premium rates of 2% and 7% compared to
2009, respectively. Our offshore energy business line experienced an increase in its average
renewal premium rate of 14% compared to 2009.
35
Professional Liability Premiums. The gross written premiums for the first three months of 2010 and
2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O (public and private) |
|
$ |
16,143 |
|
|
|
52 |
% |
|
$ |
18,338 |
|
|
|
60 |
% |
Errors and omissions |
|
|
13,887 |
|
|
|
45 |
% |
|
|
11,199 |
|
|
|
37 |
% |
Architects and engineers |
|
|
936 |
|
|
|
3 |
% |
|
|
951 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30,966 |
|
|
|
100 |
% |
|
$ |
30,488 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The professional liability gross written premiums for the first quarter of 2010 increased
1.6% compared to the same period in 2009 resulting from additional underwriters in both New York
and London as well as growth in our program for smaller law firms. The increase in gross written
premiums was partially offset by a 12.0% decline in our D&O business line due primarily to
increased competition. The average renewal premium rates for the professional liability business
increased approximately 1% for the three months ended March 31, 2010 compared to the same period in
2009.
Lloyds Operations Gross Written Premiums
We have controlled 100% of Syndicate 1221s stamp capacity since 2006. Stamp capacity is a measure
of the amount of premium a Lloyds syndicate is authorized to write based on a business plan
approved by the Council of Lloyds. Syndicate 1221s stamp capacity is £165 million ($256 million)
in 2010 compared to £124 million ($194 million) in 2009.
The Lloyds Operations gross written premiums for the three months ended March 31, 2010 increased
10.8% compared to the same period in 2009. The increase was attributable to higher property
casualty and professional liability premiums which are described in detail below.
Marine Premiums. The gross written premiums for the first three months of 2010 and 2009 consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine liability |
|
$ |
25,528 |
|
|
|
43 |
% |
|
$ |
20,845 |
|
|
|
35 |
% |
Cargo and specie |
|
|
21,082 |
|
|
|
36 |
% |
|
|
21,687 |
|
|
|
38 |
% |
Assumed reinsurance |
|
|
6,496 |
|
|
|
11 |
% |
|
|
10,324 |
|
|
|
17 |
% |
Hull |
|
|
3,627 |
|
|
|
6 |
% |
|
|
3,749 |
|
|
|
6 |
% |
Other |
|
|
2,408 |
|
|
|
4 |
% |
|
|
2,418 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
59,141 |
|
|
|
100 |
% |
|
$ |
59,023 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The marine gross written premium for the three months ended March 31, 2010 remained flat
compared to the same period in 2009. The increase in marine liability gross written premiums was
due to improved market conditions as well as an increase in average renewal premium rates of
approximately 3% compared to 2009. Our assumed reinsurance business line declined as we exited the
U.S. property catastrophe business. The overall average renewal premium rates for the Marine
division increased approximately 5% for the three months ended March 31, 2010 compared to the same
period in 2009.
36
Property Casualty Premiums. The gross written premiums for the first three months of 2010 and 2009
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offshore Energy |
|
$ |
10,406 |
|
|
|
51 |
% |
|
$ |
6,299 |
|
|
|
47 |
% |
Engineering and Construction |
|
|
4,959 |
|
|
|
25 |
% |
|
|
3,562 |
|
|
|
26 |
% |
Onshore Energy |
|
|
2,312 |
|
|
|
12 |
% |
|
|
2,435 |
|
|
|
18 |
% |
US Property Casualty |
|
|
329 |
|
|
|
2 |
% |
|
|
1,280 |
|
|
|
9 |
% |
Bloodstock |
|
|
1,958 |
|
|
|
10 |
% |
|
|
|
|
|
|
0 |
% |
Property |
|
|
(5 |
) |
|
|
0 |
% |
|
|
(48 |
) |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
19,959 |
|
|
|
100 |
% |
|
$ |
13,528 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The property casualty gross written premiums for the three months ended March 31, 2010
increased 47.5% compared to the same period in 2009 due to strong
production. The average renewal premium rates for engineering and construction and
onshore energy increased 3% and decreased 2%, respectively, compared to the same period in 2009.
The US property casualty business is primarily comprised of non-admitted risks in the state of New
York.
Professional Liability Premiums. The gross written premiums for the first three months of 2010 and
2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O (public and private) |
|
$ |
6,582 |
|
|
|
50 |
% |
|
$ |
4,100 |
|
|
|
38 |
% |
E&O |
|
|
6,625 |
|
|
|
50 |
% |
|
|
6,625 |
|
|
|
62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,207 |
|
|
|
100 |
% |
|
$ |
10,725 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross written premiums for the three months ended March 31, 2010 increased 23.1%
compared to the same period in 2009. The increase was primarily due to higher excess D&O premiums
being generated from an underwriting team that we hired at the end of 2008. The average renewal
premiums rates increased approximately 1% in the first quarter of 2010 compared to the same period
in 2009.
Ceded Written Premiums
In the ordinary course of business, we reinsure certain insurance risks with unaffiliated insurance
companies for the purpose of limiting our maximum loss exposure, protecting against catastrophic
losses, and maintaining desired ratios of net premiums written to statutory surplus. The
relationship of ceded to written premium varies based upon the types of business written and
whether the business is written by the Insurance Companies or the Lloyds Operations.
37
The following tables set forth our ceded written premiums by segment and major line of
business for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Ceded |
|
|
Gross |
|
|
Ceded |
|
|
Gross |
|
|
|
Written |
|
|
Written |
|
|
Written |
|
|
Written |
|
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
16,523 |
|
|
|
24 |
% |
|
$ |
18,778 |
|
|
|
24 |
% |
Property Casualty |
|
|
29,649 |
|
|
|
37 |
% |
|
|
24,282 |
|
|
|
29 |
% |
Professional Liability |
|
|
10,326 |
|
|
|
33 |
% |
|
|
11,841 |
|
|
|
39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
56,498 |
|
|
|
32 |
% |
|
|
54,901 |
|
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
9,499 |
|
|
|
16 |
% |
|
|
9,049 |
|
|
|
15 |
% |
Property Casualty |
|
|
8,248 |
|
|
|
41 |
% |
|
|
5,933 |
|
|
|
44 |
% |
Professional Liability |
|
|
6,583 |
|
|
|
50 |
% |
|
|
4,724 |
|
|
|
44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
24,330 |
|
|
|
26 |
% |
|
|
19,706 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
80,828 |
|
|
|
30 |
% |
|
$ |
74,607 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in the percentage of total ceded written premiums to total gross written
premiums for the three months ended March 31, 2010 compared to the same period in 2009 was
primarily due to an increase in the amount of quota share reinsurance purchased for a property
casualty run-off book of business that is being transitioned to another carrier.
Net Written Premiums
Net written premiums decreased 5.6% in the three months ended March 31, 2010 compared to the same
period in 2009 due to both the aforementioned increase in quota share reinsurance purchased for the
Insurance Companies and the Lloyds Operations in 2010 as well as lower gross written premiums in
2010.
Net Earned Premiums
Net earned premiums decreased 0.5% in the three months ended March 31, 2010 compared to the same
period in 2009.
38
Net Investment Income
Our net investment income was derived from the following sources:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
17,740 |
|
|
$ |
18,368 |
|
Equity securities |
|
|
556 |
|
|
|
745 |
|
Short-term investments |
|
|
235 |
|
|
|
368 |
|
|
|
|
|
|
|
|
|
|
|
18,531 |
|
|
|
19,481 |
|
Investment expenses |
|
|
(559 |
) |
|
|
(738 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
17,972 |
|
|
$ |
18,743 |
|
|
|
|
|
|
|
|
Net investment income decreased 4.1% for the three months ended March 31, 2010 compared to
the same period in 2009 due to lower available cash flow from operations as well as lower
short-term investment yields.
Net Other-Than-Temporary Impairment Losses Recognized In Earnings
Our net other-than-temporary impairment losses recognized in earnings for the periods indicated
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
(54 |
) |
|
$ |
(2,360 |
) |
Equity securities |
|
|
(27 |
) |
|
|
(8,340 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other-than-temporary impairment losses
recognized in earnings |
|
$ |
(81 |
) |
|
$ |
(10,700 |
) |
|
|
|
|
|
|
|
In the first quarter of 2010, we recorded net other-than-temporary impairment losses
recognized in earnings on two residential mortgage-backed securities and one equity security
totaling $0.1 million. In the first quarter of 2009, we recorded $10.7 million of net
other-than-temporary impairment losses recognized in earnings mostly related to credit losses on
non-agency residential mortgage backed securities and one subprime home equity line of credit.
39
Net Realized Gains and Losses
Our realized gains and losses for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
Gains |
|
$ |
6,370 |
|
|
$ |
2,932 |
|
(Losses) |
|
|
(257 |
) |
|
|
(3,302 |
) |
|
|
|
|
|
|
|
|
|
|
6,113 |
|
|
|
(370 |
) |
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
Gains |
|
|
|
|
|
|
13 |
|
(Losses) |
|
|
|
|
|
|
(1,180 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) |
|
$ |
6,113 |
|
|
$ |
(1,537 |
) |
|
|
|
|
|
|
|
Pre-tax net income included $6.1 million of net realized gains for the three months ended
March 31, 2010 compared with a pre-tax loss of $1.5 million for the comparable period in 2009. On
an after-tax basis, the net realized gains for the first three months of 2010 were $3.9 million
compared with net realized losses of $1.2 million. We generate realized gains and losses as part of
the normal ongoing management of our investment portfolio.
Other Income/(Expense)
Other income/(expense) primarily includes foreign exchange gains and losses from our Lloyds
Operations, commission income and inspection fees related to our specialty insurance business.
EXPENSES
Net Losses and Loss Adjustment Expenses
The ratios of net losses and LAE to net earned premiums (loss ratios) for the three months ended
March 31, 2010 was 63.3% compared to 60.8% for the comparable period in 2009. The loss ratios for
the first quarter of 2010 and 2009 were favorably impacted by 0.8 and 3.5 loss ratio points,
respectively, resulting from a redundancy of prior year loss reserves.
In conjunction with the recording of gross losses, we assessed our reinsurance coverage, potential
receivables, and the recoverability of the receivables. Losses incurred on business recently
written are primarily covered by reinsurance agreements written by companies with whom we are
currently doing reinsurance business and whose credit we continue to assess in the normal course of
business.
40
The following table presents our reinsurance recoverable amounts as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverables: |
|
|
|
|
|
|
|
|
|
|
|
|
Paid losses |
|
$ |
75,355 |
|
|
$ |
76,505 |
|
|
$ |
(1,150 |
) |
Unpaid losses and LAE reserves |
|
|
795,914 |
|
|
|
807,352 |
|
|
|
(11,438 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
871,269 |
|
|
$ |
883,857 |
|
|
$ |
(12,588 |
) |
|
|
|
|
|
|
|
|
|
|
The following table sets forth gross reserves for losses and LAE, reinsurance recoverable on
such amounts and net losses and LAE reserves (a non-GAAP measure reconciled in the following table)
as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves for losses and LAE |
|
$ |
1,913,760 |
|
|
$ |
1,920,286 |
|
|
$ |
(6,526 |
) |
Less: Reinsurance recoverable on unpaid losses and LAE reserves |
|
|
795,914 |
|
|
|
807,352 |
|
|
|
(11,438 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss and LAE reserves |
|
$ |
1,117,846 |
|
|
$ |
1,112,934 |
|
|
$ |
4,912 |
|
|
|
|
|
|
|
|
|
|
|
41
The following tables set forth our net reported losses and LAE reserves and net incurred but
not reported (IBNR) reserves (non-GAAP measures reconciled below) by segment and line of business
as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
Net |
|
|
Net |
|
|
Total |
|
|
% of IBNR |
|
|
|
Reported |
|
|
IBNR |
|
|
Net Loss |
|
|
to Total Net |
|
|
|
Reserves |
|
|
Reserves |
|
|
Reserves |
|
|
Loss Reserves |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
113,864 |
|
|
$ |
98,044 |
|
|
$ |
211,908 |
|
|
|
46.3 |
% |
Property Casualty |
|
|
139,708 |
|
|
|
348,242 |
|
|
|
487,950 |
|
|
|
71.4 |
% |
Professional liability |
|
|
37,765 |
|
|
|
65,382 |
|
|
|
103,147 |
|
|
|
63.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Companies |
|
|
291,337 |
|
|
|
511,668 |
|
|
|
803,005 |
|
|
|
63.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
110,889 |
|
|
|
101,925 |
|
|
|
212,814 |
|
|
|
47.9 |
% |
Property Casualty |
|
|
26,671 |
|
|
|
28,409 |
|
|
|
55,080 |
|
|
|
51.6 |
% |
Professional liability |
|
|
9,246 |
|
|
|
37,701 |
|
|
|
46,947 |
|
|
|
80.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lloyds Operations |
|
|
146,806 |
|
|
|
168,035 |
|
|
|
314,841 |
|
|
|
53.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
438,143 |
|
|
$ |
679,703 |
|
|
$ |
1,117,846 |
|
|
|
60.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Net |
|
|
Net |
|
|
Total |
|
|
% of IBNR |
|
|
|
Reported |
|
|
IBNR |
|
|
Net Loss |
|
|
to Total Net |
|
|
|
Reserves |
|
|
Reserves |
|
|
Reserves |
|
|
Loss Reserves |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
113,604 |
|
|
$ |
100,042 |
|
|
$ |
213,646 |
|
|
|
46.8 |
% |
Property Casualty |
|
|
134,427 |
|
|
|
351,985 |
|
|
|
486,412 |
|
|
|
72.4 |
% |
Professional liability |
|
|
38,410 |
|
|
|
68,807 |
|
|
|
107,217 |
|
|
|
64.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Companies |
|
|
286,441 |
|
|
|
520,834 |
|
|
|
807,275 |
|
|
|
64.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
107,800 |
|
|
|
101,851 |
|
|
|
209,651 |
|
|
|
48.6 |
% |
Property Casualty |
|
|
27,148 |
|
|
|
25,175 |
|
|
|
52,323 |
|
|
|
48.1 |
% |
Professional liability |
|
|
7,442 |
|
|
|
36,243 |
|
|
|
43,685 |
|
|
|
83.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lloyds Operations |
|
|
142,390 |
|
|
|
163,269 |
|
|
|
305,659 |
|
|
|
53.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
428,831 |
|
|
$ |
684,103 |
|
|
$ |
1,112,934 |
|
|
|
61.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
The increase in net loss reserves is generally a reflection of the growth in net premium
volume over the last three years coupled with a changing mix of business to longer-tail lines of
business such as the specialty lines of business (construction defect, commercial excess, primary
excess), professional liability lines of business and marine liability
and transport business in ocean marine. These lines of business, which typically have a longer
settlement period compared to the mix of business we have historically written, are becoming larger
components of our overall business.
Our reserving practices and the establishment of any particular reserve reflect managements
judgment and do not represent any admission of liability with respect to any claims made against
us. No assurance can be given that actual claims made and related payments will not be in excess
of the amounts reserved. During the loss settlement period, it often becomes necessary to refine
and adjust the estimates of liability on a claim either upward or downward. Even after such
adjustments, ultimate liability may exceed or be less than the revised estimates. The process of
establishing loss reserves is complex and imprecise as it must take into account many variables
that are subject to the outcome of future events. As a result, informed subjective judgments as to
our ultimate exposure to losses are an integral component of our loss reserving process. Our
actuaries generally calculate the IBNR loss reserves for each line of business by underwriting year
for major products using standard actuarial methodologies. This process requires the substantial
use of informed judgment and is inherently uncertain.
There are instances in which facts and circumstances require a deviation from the general process
described above. Three such instances relate to the IBNR loss reserve processes for our 2008
Hurricane losses, our 2005 Hurricanes losses and our asbestos exposures, where extrapolation
techniques are not applied, except in a limited way, given the unique nature of hurricane losses
and limited population of marine excess policies with potential asbestos exposures. In such
circumstances, inventories of the policy limits exposed to losses coupled with reported losses are
analyzed and evaluated principally by claims personnel and underwriters to establish IBNR loss
reserves.
For additional information regarding our accounting policies regarding net losses and loss
adjustment expenses, please see our Critical Accounting Policies in our 2009 Annual Report on Form
10-K for the year ended December 31, 2009, pages 42 to 49.
Hurricanes Gustav and Ike
For the year ended December 31, 2008, we incurred gross and net losses and LAE of $114.0 million
and $17.2 million, respectively, exclusive of $12.2 million for the cost of excess of loss
reinstatement premiums, related to Hurricanes Gustav and Ike.
43
The following table sets forth our gross and net loss and LAE reserves, incurred losses and LAE and
payments for Hurricanes Gustav and Ike for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Year Ended |
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
59,509 |
|
|
$ |
107,399 |
|
Incurred loss & LAE |
|
|
(16 |
) |
|
|
1,039 |
|
Calendar year payments |
|
|
3,601 |
|
|
|
48,929 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
55,892 |
|
|
$ |
59,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
29,335 |
|
|
$ |
34,015 |
|
Gross IBNR loss reserves |
|
|
26,557 |
|
|
|
25,494 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
55,892 |
|
|
$ |
59,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
2,683 |
|
|
$ |
12,923 |
|
Incurred loss & LAE |
|
|
43 |
|
|
|
978 |
|
Calendar year payments |
|
|
350 |
|
|
|
11,218 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
2,376 |
|
|
$ |
2,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
2,811 |
|
|
$ |
1,793 |
|
Net IBNR loss reserves |
|
|
(435 |
) |
|
|
890 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
2,376 |
|
|
$ |
2,683 |
|
|
|
|
|
|
|
|
Approximately $58.9 million and $69.7 million of paid and unpaid losses at March 31, 2010
and December 31, 2009, respectively, were due from reinsurers as a result of the losses from
Hurricanes Gustav and Ike.
Hurricanes Katrina and Rita
During the 2005 third quarter, we incurred gross and net losses and LAE of $471.0 million and $22.3
million, respectively, exclusive of $14.5 million for the cost of excess of loss reinstatement
premiums, related to Hurricanes Katrina and Rita.
44
The following table sets forth our gross and net loss and LAE reserves, incurred losses and LAE and
payments for Hurricanes Katrina and Rita for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Year Ended |
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
($ in thousands) |
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
67,038 |
|
|
$ |
97,732 |
|
Incurred loss & LAE |
|
|
229 |
|
|
|
671 |
|
Calendar year payments |
|
|
12,977 |
|
|
|
31,365 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
54,290 |
|
|
$ |
67,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
35,033 |
|
|
$ |
49,291 |
|
Gross IBNR loss reserves |
|
|
19,257 |
|
|
|
17,747 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
54,290 |
|
|
$ |
67,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
3,536 |
|
|
$ |
3,667 |
|
Incurred loss & LAE |
|
|
258 |
|
|
|
114 |
|
Calendar year payments |
|
|
73 |
|
|
|
245 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
3,721 |
|
|
$ |
3,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
53 |
|
|
$ |
183 |
|
Net IBNR loss reserves |
|
|
3,668 |
|
|
|
3,353 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
3,721 |
|
|
$ |
3,536 |
|
|
|
|
|
|
|
|
Approximately $62.7 million and $68.5 million of paid and unpaid losses at March 31, 2010
and December 31, 2009, respectively, were due from reinsurers as a result of the losses from
Hurricanes Katrina and Rita.
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 March 31, 2010 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.
We believe that there are no remaining known claims where we 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.
45
The following table sets forth our gross and net loss and LAE reserves for our asbestos exposures
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Year Ended |
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
22,147 |
|
|
$ |
21,774 |
|
Incurred losses & LAE |
|
|
(54 |
) |
|
|
928 |
|
Calendar year payments |
|
|
186 |
|
|
|
555 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
21,907 |
|
|
$ |
22,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
14,051 |
|
|
$ |
14,291 |
|
Gross IBNR loss reserves |
|
|
7,856 |
|
|
|
7,856 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
21,907 |
|
|
$ |
22,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
16,763 |
|
|
$ |
16,683 |
|
Incurred losses & LAE |
|
|
(11 |
) |
|
|
(25 |
) |
Calendar year payments |
|
|
90 |
|
|
|
(105 |
) |
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
16,662 |
|
|
$ |
16,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
9,011 |
|
|
$ |
9,112 |
|
Net IBNR loss reserves |
|
|
7,651 |
|
|
|
7,651 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
16,662 |
|
|
$ |
16,763 |
|
|
|
|
|
|
|
|
At March 31, 2010 and December 31, 2009, the ceded asbestos paid and unpaid reinsurance
recoverables were $8.9 million. We continue to believe that we will be able to collect reinsurance
on the gross portion of our historic gross asbestos exposure in the above table. To the extent we
incur additional gross loss development for our historic asbestos exposure, we do not expect to
realize additional reinsurance recoverables.
Prior Year Reserve Redundancies/Deficiencies
The relevant factors that may have a significant impact on the establishment and adjustment of loss
and LAE reserves can vary by line of business and from period to period. As part of our regular
review of prior reserves, management, in consultation with our actuaries, may determine, based on
their judgment that certain assumptions made in the reserving process in prior periods may need to
be revised to reflect various factors, likely including the availability of additional information.
Based on their reserve analyses, management may make corresponding reserve adjustments.
Prior period reserve redundancies of $1.2 million, net of reinsurance, were recorded in the three
months ended March 31, 2010 compared with $5.8 million for the comparable period in 2009.
46
The segment and line of business breakdowns of prior period net reserve deficiencies (redundancies)
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
Marine |
|
$ |
696 |
|
|
$ |
1,958 |
|
Property Casualty |
|
|
(1,541 |
) |
|
|
(11,713 |
) |
Professional Liability |
|
|
192 |
|
|
|
4,623 |
|
|
|
|
|
|
|
|
Subtotal Insurance Companies |
|
|
(653 |
) |
|
|
(5,132 |
) |
Lloyds Operations |
|
|
(593 |
) |
|
|
(635 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(1,246 |
) |
|
$ |
(5,767 |
) |
|
|
|
|
|
|
|
Following is a discussion of relevant factors related to the $1.2 million prior period net
reserve redundancy recorded in the 2010 first quarter:
The Insurance Companies recorded $0.7 million of prior period net reserve deficiencies for marine
business resulting primarily from $1.2 million of increased liability reserves on reported losses
from two older underwriting years, partially offset by favorable loss activity on several other
lines, none of which was significant.
The Insurance Companies recorded $1.5 million of prior period net savings for property casualty
business comprised mostly of favorable loss development of $2.5 million on two run-off books of
business and $1.4 million in on our offshore business due to favorable loss emergence, partially
offset by $1.8 million of reported loss activity in excess of our expectation on a run-off liquor
liability book of business.
The Insurance Companies recorded $0.2 million of net prior period deficiencies for directors and
officers business due to an increase in our loss ratio assumption of the 2009 underwriting year
mostly offset by the favorable settlement of a large lawyers claim and favorable loss emergence on
a run-off book of lawyers business emanating from the United Kingdom.
The Lloyds Operations recorded $0.6 million of prior period net savings that included $0.7 million
across several marine lines due to favorable loss activity, none of which was significant.
Following is a discussion of relevant factors related to the $5.8 million prior period net reserve
redundancy recorded in the 2009 first quarter:
The Insurance Companies recorded $2.0 million of prior period net reserve deficiencies for marine
business which included $1.4 million for increased liability reserves due to large loss activity,
and $1.0 million for hull and $0.9 million for transport business due reported claims activity,
partially offset by $1.8 million of savings in the protection and indemnity (P&I) line of
business due to reductions in our loss assumptions for the more recent underwriting years.
The Insurance Companies recorded $11.7 million of prior period net savings for property casualty
business comprised mostly of $8.5 million of net favorable development in construction liability
business due to favorable loss trends for business written from 2005 to 2007, $2.7 million of
favorable development on primary casualty business on business written from 2005 to 2006 due to
reported losses less than our expectations, $1.4 million of favorable development on commercial
umbrella business on business written from 2004 to 2006 due to reported losses less than our
expectations, and $4.9 million in the offshore energy lines of business due to a reduction in the
estimate for a large reported claim and generally lower claim activity than expected. These
redundancies were partially offset by prior period net reserve deficiencies in the middle markets
and specialty run-off lines of $1.6 million and $1.2 million, respectively, due to loss activity in
excess of expectations.
47
The Insurance Companies recorded $4.6 million of net prior period deficiencies for professional
liability business mostly emanating from E&O business written in 2006 and 2007 due to reported
losses being greater than expectations.
The Lloyds Operations recorded $0.6 million of prior period net savings comprised of savings of
$3.1 million for marine business due to favorable loss activity in the liability and cargo lines,
partially offset by deficiencies of $1.1 million in the international E&O line due to higher
reported loss activity and $0.5 million in our engineering book due to a large reported loss.
Reserves for the run off Property book were strengthened by an additional $0.5 million after worse
than expected claims development in the quarter.
Our management believes that the estimates for the reserves for losses and LAE are adequate to
cover the ultimate cost of losses and loss adjustment expenses on reported and unreported claims.
However, it is possible that the ultimate liability may exceed or be less than such estimates. To
the extent that reserves are deficient or redundant, the amount of such deficiency or redundancy is
treated as a charge or credit to earnings in the period in which the deficiency or redundancy is
identified. We continue to review all of our loss reserves, including our asbestos reserves and
hurricane reserves, on a regular basis.
Commission Expenses
Commission expenses paid to brokers and agents are generally based on a percentage of gross written
premiums and are partially offset by ceding commissions we may receive on ceded written premiums.
Commissions are generally deferred and recorded as deferred policy acquisition costs to the extent
that they relate to unearned premium. The percentage of commission expenses to net earned premiums
for the three months ended March 31, 2010 was 15.4% compared to 13.6% for the comparable period in
2009. The increase in the net commission ratios in the first quarter of 2010 when compared to the
same period in 2009 was mostly attributable to greater retentions for net premiums earned in 2010
for the 2009 underwriting year, particularly on our marine quota share treaties, which have reduced
the ceding commission benefit.
Other Operating Expenses
Other operating expenses increased $4.1 million for the three months ended March 31, 2010 compared
to the same period in 2009. The increase in other operating expenses for the first quarter 2010 was
primarily the net result of a 9% increase in staff count offset by a reduction in our UK-based
expenses when measured in US dollars due to an 8% reduction in the average exchange rate for
sterling.
INCOME TAXES
We recorded an income tax expense of $6.3 million for the three months ended March 31, 2010
compared to an income tax expense of $4.1 million for the comparable period in 2009, resulting in
effective tax rates of 27.1% and 25.7%, respectively. Our effective tax rate is typically less
than 35% due to permanent differences between book and tax return income, with the most significant
item being tax exempt interest. The effective tax rate on net investment income was 24.5% for the
three months ended March 31, 2010 compared to 24.9% for the same period in 2009. As of March 31,
2010 and December 31, 2009 the net deferred federal, foreign, state and local tax assets were $25.6
million and $31.2 million, respectively.
We had net state and local deferred tax assets amounting to potential future tax benefits of $2.9
million and $2.6 million at March 31, 2010 and December 31, 2009, respectively. Included in the
deferred tax assets are state and local net operating loss carryforwards of $2.0 million and $1.3
million at March 31, 2010 and December 31, 2009, respectively. A valuation allowance was
established for the full amount of these potential future tax benefits due to uncertainty
associated with their realization. Our state and local tax carryforwards at March 31, 2010 expire
from 2023 to 2025.
48
Segment Information
We classify our business into two underwriting segments consisting of the Insurance Companies and
the Lloyds Operations, which are separately managed, and a Corporate segment. Segment data for
each of the two underwriting segments include allocations of the operating expenses of the
wholly-owned underwriting management companies and
The Navigators Group, Inc.s (the Parent Companys) operating expenses and related income tax
amounts. The Corporate segment consists of the Parent Companys investment income, interest expense
and the related tax effect.
We evaluate the performance of each segment based on its underwriting and GAAP results. The
Insurance Companies and the Lloyds Operations results are measured by taking into account net
earned premium, net loss and loss adjustment expenses, commission expenses, other operating
expenses and other income (expense). The Corporate segment consists of the Parent Companys
investment income, interest expense and the related tax effect. Each segment also maintains its
own investments, on which it earns income and realizes capital gains or losses. Our underwriting
performance is evaluated separately from the performance of our investment portfolios.
Following are the financial results of our two underwriting segments.
Insurance Companies
The Insurance Companies consist of Navigators Insurance Company, including its U.K. Branch, and its
wholly-owned subsidiary, Navigators Specialty Insurance Company. They are primarily engaged in
underwriting marine insurance and related lines of business, professional liability insurance and
specialty lines of business including contractors general liability insurance, commercial umbrella
and primary and excess casualty businesses. Navigators Specialty Insurance Company underwrites
specialty and professional liability insurance on an excess and surplus lines basis. Navigators
Specialty Insurance Company is 100% reinsured by Navigators Insurance Company.
49
The following table sets forth the results of operations for the Insurance Companies for the
three months ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
March 31, |
|
|
% |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
177,838 |
|
|
$ |
191,983 |
|
|
|
-7 |
% |
Net written premiums |
|
|
121,340 |
|
|
|
137,082 |
|
|
|
-11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
111,211 |
|
|
|
120,290 |
|
|
|
-8 |
% |
Net losses and LAE |
|
|
(68,403 |
) |
|
|
(70,153 |
) |
|
|
-2 |
% |
Commission expenses |
|
|
(14,362 |
) |
|
|
(14,968 |
) |
|
|
-4 |
% |
Other operating expenses |
|
|
(27,353 |
) |
|
|
(24,560 |
) |
|
|
11 |
% |
Other income (expense) |
|
|
(977 |
) |
|
|
201 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
116 |
|
|
|
10,810 |
|
|
|
-99 |
% |
|
|
Net investment income |
|
|
15,748 |
|
|
|
16,207 |
|
|
|
-3 |
% |
Net realized gains (losses) |
|
|
5,205 |
|
|
|
(8,907 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
21,069 |
|
|
|
18,110 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
5,463 |
|
|
|
4,533 |
|
|
|
21 |
% |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,606 |
|
|
$ |
13,577 |
|
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
61.5 |
% |
|
|
58.3 |
% |
|
|
|
|
Commission expense ratio |
|
|
12.9 |
% |
|
|
12.4 |
% |
|
|
|
|
Other operating expense ratio (1) |
|
|
25.5 |
% |
|
|
20.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
99.9 |
% |
|
|
91.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Other operating expenses and Other income (expense). |
50
The following tables set forth the underwriting results of the Insurance Companies for the
three months ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Profit/(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
41,094 |
|
|
$ |
26,133 |
|
|
$ |
14,928 |
|
|
$ |
33 |
|
|
|
63.6 |
% |
|
|
36.3 |
% |
|
|
99.9 |
% |
Property Casualty |
|
|
51,081 |
|
|
|
32,126 |
|
|
|
20,316 |
|
|
|
(1,361 |
) |
|
|
62.9 |
% |
|
|
39.8 |
% |
|
|
102.7 |
% |
Professional
Liability |
|
|
19,036 |
|
|
|
10,144 |
|
|
|
7,448 |
|
|
|
1,444 |
|
|
|
53.3 |
% |
|
|
39.1 |
% |
|
|
92.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
111,211 |
|
|
$ |
68,403 |
|
|
$ |
42,692 |
|
|
$ |
116 |
|
|
|
61.5 |
% |
|
|
38.4 |
% |
|
|
99.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Profit/(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
37,161 |
|
|
$ |
26,390 |
|
|
$ |
11,622 |
|
|
$ |
(851 |
) |
|
|
71.0 |
% |
|
|
31.3 |
% |
|
|
102.3 |
% |
Property Casualty |
|
|
65,412 |
|
|
|
28,004 |
|
|
|
20,753 |
|
|
|
16,655 |
|
|
|
42.8 |
% |
|
|
31.7 |
% |
|
|
74.5 |
% |
Professional
Liability |
|
|
17,717 |
|
|
|
15,759 |
|
|
|
6,952 |
|
|
|
(4,994 |
) |
|
|
89.0 |
% |
|
|
39.2 |
% |
|
|
128.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
120,290 |
|
|
$ |
70,153 |
|
|
$ |
39,327 |
|
|
$ |
10,810 |
|
|
|
58.3 |
% |
|
|
32.7 |
% |
|
|
91.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums of the Insurance Companies decreased 7.5% for the three months ended
March 31, 2010 compared to the same period in 2009. The decrease was primarily due to the reduction
in net written premiums, primarily in our construction liability business line.
The loss ratio for the three months ended March 31, 2010 was favorably impacted by prior period
loss reserve redundancies of $0.7 million, or 0.6 loss ratio points. The loss ratio for the three
months ended March 31, 2009 was favorably impacted by prior period loss reserve redundancies of
$5.1 million, or 4.3 loss ratio points. Generally, while the Insurance Companies has experienced
favorable prior period redundancies, the ultimate loss ratios for the most recent underwriting
years of 2009 and 2008 have been increasing due to softening market conditions for the business
written during those periods.
The annualized pre-tax yield on the Insurance Companies investment portfolio, excluding net
realized gains and losses and net other-than-temporary impairment losses recognized in earnings,
was 3.9% for the three months ended March 31, 2010 compared to 4.3% for the comparable 2009 period.
The average duration of the Insurance Companies invested assets was 4.7 years at March 31, 2010
and 4.8 years at March 31, 2009. Net investment income decreased in the three months ended March
31, 2010 compared to the same period in 2009 primarily due to both lower available cash flow from
operations as well as a decrease in yields on short-term investments.
51
Lloyds Operations
The Lloyds Operations primarily underwrite marine and related lines of business along with
professional liability insurance, and construction coverages for onshore energy business at Lloyds
through Syndicate 1221. Our Lloyds Operations includes NUAL, a Lloyds underwriting agency which
manages Syndicate 1221.
The following table sets forth the results of operations of the Lloyds Operations for the three
months ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
% |
|
|
|
2010 |
|
|
2009 |
|
|
Change |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
92,307 |
|
|
$ |
83,276 |
|
|
|
11 |
% |
Net written premiums |
|
|
67,977 |
|
|
|
63,570 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
52,858 |
|
|
|
44,656 |
|
|
|
18 |
% |
Net losses and LAE |
|
|
(35,404 |
) |
|
|
(30,094 |
) |
|
|
18 |
% |
Commission expenses |
|
|
(10,966 |
) |
|
|
(7,480 |
) |
|
|
47 |
% |
Other operating expenses |
|
|
(7,243 |
) |
|
|
(5,981 |
) |
|
|
21 |
% |
Other income (expense) |
|
|
2,069 |
|
|
|
(52 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
1,314 |
|
|
|
1,049 |
|
|
|
25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
2,069 |
|
|
|
2,383 |
|
|
|
-13 |
% |
Net realized gains (losses) |
|
|
713 |
|
|
|
(3,330 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
4,096 |
|
|
|
102 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
1,503 |
|
|
|
336 |
|
|
|
347 |
% |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2,593 |
|
|
$ |
(234 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
67.0 |
% |
|
|
67.4 |
% |
|
|
|
|
Commission expense ratio |
|
|
20.7 |
% |
|
|
16.8 |
% |
|
|
|
|
Other operating expense ratio (1) |
|
|
9.8 |
% |
|
|
13.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
97.5 |
% |
|
|
97.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Other operating expenses and Other income (expense). |
52
Net earned premiums of the Lloyds Operations increased 18.4% for the three months ended
March 31, 2010 compared to the same period in 2009. The increase was primarily due to greater net
written premiums during 2009.
The loss ratio of 67.0% for the three months ended March 31, 2010 was favorably impacted by prior
period loss reserve redundancies of $0.6 million, or 1.1 loss ratio points. The loss ratio of 67.4%
for the three months ended March 31, 2009 was favorably impacted by prior period loss reserve
redundancies of $0.6 million, or 1.4 loss ratio points. Generally, while the Lloyds Operations
have experienced favorable prior period net redundancies in calendar years 2009 and 2008, ultimate
loss ratios for the more recent underwriting years of 2009 and 2008 have been increasing due to
softening market conditions for the business written during those periods.
The annualized pre-tax yield on the Lloyds Operations investment portfolio, excluding net
realized gains and losses and net other-than-temporary impairment losses recognized in earnings,
was 2.3% for the three months ended March 31, 2010 compared to 2.8% for the comparable period in
2009. The average duration of the Lloyds Operations invested assets at March 31, 2010 was 2.0
years compared to 1.7 years at March 31, 2009. Net investment income decreased in the three months
ended March 31, 2010 compared to the same period in 2009 primarily due to both lower available cash
flow from operations as well as a decrease in yields on short-term investments. Such yields are net
of interest credits to certain reinsurers for funds withheld by our Lloyds Operations.
Investments
The following tables set forth our cash and investments as of March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
OTTI |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Cost or |
|
|
Recognized |
|
March 31, 2010 |
|
Fair Value |
|
|
Gains |
|
|
(Losses) |
|
|
Amortized Cost |
|
|
in OCI |
|
|
|
($ in thousands) |
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
$ |
408,935 |
|
|
$ |
7,571 |
|
|
$ |
(355 |
) |
|
$ |
401,719 |
|
|
$ |
|
|
States, municipalities and political
subdivisions |
|
|
640,783 |
|
|
|
22,064 |
|
|
|
(1,996 |
) |
|
|
620,715 |
|
|
|
|
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
348,619 |
|
|
|
12,289 |
|
|
|
(108 |
) |
|
|
336,438 |
|
|
|
|
|
Residential mortgage obligations |
|
|
30,486 |
|
|
|
|
|
|
|
(6,050 |
) |
|
|
36,536 |
|
|
|
(4,685 |
) |
Asset-backed securities |
|
|
11,283 |
|
|
|
485 |
|
|
|
(34 |
) |
|
|
10,832 |
|
|
|
(34 |
) |
Commercial mortgage-backed securities |
|
|
105,728 |
|
|
|
2,494 |
|
|
|
(685 |
) |
|
|
103,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
496,116 |
|
|
|
15,268 |
|
|
|
(6,877 |
) |
|
|
487,725 |
|
|
|
(4,719 |
) |
Corporate bonds |
|
|
261,514 |
|
|
|
10,132 |
|
|
|
(682 |
) |
|
|
252,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,807,348 |
|
|
|
55,035 |
|
|
|
(9,910 |
) |
|
|
1,762,223 |
|
|
|
(4,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
72,609 |
|
|
|
17,995 |
|
|
|
(10 |
) |
|
|
54,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
2,699 |
|
|
|
|
|
|
|
|
|
|
|
2,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
172,342 |
|
|
|
|
|
|
|
|
|
|
|
172,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,054,998 |
|
|
$ |
73,030 |
|
|
$ |
(9,920 |
) |
|
$ |
1,991,888 |
|
|
$ |
(4,719 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
OTTI |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Cost or |
|
|
Recognized |
|
December 31, 2009 |
|
Fair Value |
|
|
Gains |
|
|
(Losses) |
|
|
Amortized Cost |
|
|
in OCI |
|
|
|
($ in thousands) |
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
$ |
471,598 |
|
|
$ |
7,397 |
|
|
$ |
(597 |
) |
|
$ |
464,798 |
|
|
$ |
|
|
States, municipalities and political
subdivisions |
|
|
676,699 |
|
|
|
25,044 |
|
|
|
(2,917 |
) |
|
|
654,572 |
|
|
|
|
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
283,578 |
|
|
|
12,607 |
|
|
|
(98 |
) |
|
|
271,069 |
|
|
|
|
|
Residential mortgage obligations |
|
|
31,071 |
|
|
|
|
|
|
|
(7,246 |
) |
|
|
38,317 |
|
|
|
(5,723 |
) |
Asset-backed securities |
|
|
16,469 |
|
|
|
612 |
|
|
|
(34 |
) |
|
|
15,891 |
|
|
|
(23 |
) |
Commercial mortgage-backed securities |
|
|
100,393 |
|
|
|
594 |
|
|
|
(5,028 |
) |
|
|
104,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
431,511 |
|
|
|
13,813 |
|
|
|
(12,406 |
) |
|
|
430,104 |
|
|
|
(5,746 |
) |
Corporate bonds |
|
|
236,861 |
|
|
|
9,111 |
|
|
|
(759 |
) |
|
|
228,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,816,669 |
|
|
|
55,365 |
|
|
|
(16,679 |
) |
|
|
1,777,983 |
|
|
|
(5,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
62,610 |
|
|
|
15,244 |
|
|
|
(10 |
) |
|
|
47,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
176,799 |
|
|
|
|
|
|
|
|
|
|
|
176,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,056,587 |
|
|
$ |
70,609 |
|
|
$ |
(16,689 |
) |
|
$ |
2,002,667 |
|
|
$ |
(5,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets decreased in the first three months of 2010 primarily due to the funding of
share repurchases of $23.7 million, partially offset by available cash flow from operations. The
annualized pre-tax yield of the investment portfolio, excluding net realized gains and losses and
net other-than-temporary impairment losses recognized in earnings, was 3.6% for the three months
ended March 31, 2010 compared to 3.9% for the comparable 2009 period.
The tax exempt securities portion of our investment portfolio has increased by $32.8 million to
approximately 32.8% of the fixed maturities investment portfolio at March 31, 2010 compared to
March 31, 2009. As a result, the effective tax rate on net investment income was 24.5% for the
three months ended March 31, 2010 compared to 24.9% for the comparable 2009 period.
All fixed maturities and equity securities are carried at fair value. All prices for our fixed
maturities and equity securities categorized as Level 1 or Level 2 in the fair value hierarchy, as
defined in the Financial Accounts Standards Board Accounting Standards Codification 820 (ASC
820), Fair Value Measurements, are received from independent pricing services utilized by one of
our outside investment managers whom we employ to assist us with investment accounting services.
This manager utilizes a pricing committee which approves the use of one or more independent pricing
service vendors. The pricing committee consists of five or more members, one from senior
management and one from the accounting group with the remainder from the asset class specialists
and client strategists. The pricing source of each security is determined in accordance with the
pricing source procedures approved by the pricing committee. The investment manager uses
supporting documentation received from the independent pricing service vendor detailing the inputs,
models and processes used in the independent pricing service vendors evaluation process
to determine the appropriate fair value hierarchy. Any pricing where the input is based solely on
a broker price is deemed to be a Level 3 price.
Management has reviewed this process by which the manager determines the prices and has obtained
alternative pricing to validate a sampling of the pricing and assess their reasonableness.
54
The following table presents, for each of the fair value hierarchy levels, the fair value of our
fixed maturities and equity securities by asset class at March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
($ in thousands) |
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
$ |
285,455 |
|
|
$ |
123,480 |
|
|
$ |
|
|
|
$ |
408,935 |
|
States, municipalities and political
subdivisions |
|
|
|
|
|
|
640,783 |
|
|
|
|
|
|
|
640,783 |
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
|
|
|
|
348,619 |
|
|
|
|
|
|
|
348,619 |
|
Residential mortgage obligations |
|
|
|
|
|
|
30,486 |
|
|
|
|
|
|
|
30,486 |
|
Asset-backed securities |
|
|
|
|
|
|
11,283 |
|
|
|
|
|
|
|
11,283 |
|
Commercial mortgage-backed
securities |
|
|
|
|
|
|
105,728 |
|
|
|
|
|
|
|
105,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
496,116 |
|
|
|
|
|
|
|
496,116 |
|
Corporate bonds |
|
|
|
|
|
|
261,514 |
|
|
|
|
|
|
|
261,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
285,455 |
|
|
|
1,521,893 |
|
|
|
|
|
|
|
1,807,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
72,609 |
|
|
|
|
|
|
|
|
|
|
|
72,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
358,064 |
|
|
$ |
1,521,893 |
|
|
$ |
|
|
|
$ |
1,879,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no significant judgments made in classifying instruments in the fair value
hierarchy.
The scheduled maturity dates for fixed maturity securities by the number of years until maturity at
March 31, 2010 are shown in the following table:
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
|
|
|
March 31, 2010 |
|
Fair |
|
|
Amortized |
|
to Maturity |
|
Value |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
202,918 |
|
|
$ |
200,767 |
|
Due after one year through five years |
|
|
413,412 |
|
|
|
396,940 |
|
Due after five years through ten years |
|
|
388,296 |
|
|
|
376,251 |
|
Due after ten years |
|
|
306,606 |
|
|
|
300,540 |
|
Mortgage- and asset-backed (including GNMAs) |
|
|
496,116 |
|
|
|
487,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,807,348 |
|
|
$ |
1,762,223 |
|
|
|
|
|
|
|
|
55
The following tables set forth our U.S. Treasury and Agency Bonds and foreign government
bonds as of March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
March 31, 2010 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bonds |
|
$ |
304,969 |
|
|
$ |
5,535 |
|
|
$ |
(274 |
) |
|
$ |
299,708 |
|
Agency bonds |
|
|
80,598 |
|
|
|
1,712 |
|
|
|
|
|
|
|
78,886 |
|
Foreign government bonds |
|
|
23,368 |
|
|
|
324 |
|
|
|
(81 |
) |
|
|
23,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
408,935 |
|
|
$ |
7,571 |
|
|
$ |
(355 |
) |
|
$ |
401,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
December 31, 2009 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bonds |
|
$ |
362,614 |
|
|
$ |
5,549 |
|
|
$ |
(560 |
) |
|
$ |
357,625 |
|
Agency bonds |
|
|
82,739 |
|
|
|
1,489 |
|
|
|
|
|
|
|
81,250 |
|
Foreign government bonds |
|
|
26,245 |
|
|
|
359 |
|
|
|
(37 |
) |
|
|
25,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
471,598 |
|
|
$ |
7,397 |
|
|
$ |
(597 |
) |
|
$ |
464,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
The following table sets forth the fifteen largest holdings categorized as state,
municipalities and political subdivisions by counterparty as of March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
Cost or |
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
Amortized |
|
|
S&P |
|
|
|
Value |
|
|
Gains/(Losses) |
|
|
Cost |
|
|
Rating |
|
|
|
($ in thousands) |
|
Issuers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State of Washington |
|
$ |
17,332 |
|
|
$ |
710 |
|
|
$ |
16,622 |
|
|
AA |
|
Texas State Transportation Commission |
|
|
15,434 |
|
|
|
(231 |
) |
|
|
15,665 |
|
|
AA+ |
|
University of Pittsburgh |
|
|
14,096 |
|
|
|
630 |
|
|
|
13,466 |
|
|
AA |
|
City of San Antonio |
|
|
11,674 |
|
|
|
680 |
|
|
|
10,994 |
|
|
AA |
|
Virginia Resources Authority |
|
|
11,266 |
|
|
|
721 |
|
|
|
10,545 |
|
|
AAA |
|
County of Fairfax |
|
|
10,940 |
|
|
|
(107 |
) |
|
|
11,047 |
|
|
AAA |
|
City of Chicago |
|
|
10,396 |
|
|
|
362 |
|
|
|
10,034 |
|
|
AA- |
|
State of Wisconsin |
|
|
10,001 |
|
|
|
533 |
|
|
|
9,468 |
|
|
A+ |
|
Salt River Project Agricultural Improvement |
|
|
9,831 |
|
|
|
74 |
|
|
|
9,757 |
|
|
AA |
|
Commonwealth of Massachusetts |
|
|
8,951 |
|
|
|
545 |
|
|
|
8,406 |
|
|
AA |
|
New York City Transitional Finance Authority |
|
|
8,413 |
|
|
|
(23 |
) |
|
|
8,436 |
|
|
AA |
|
Cypress-Fairbanks Independent School Dist |
|
|
8,071 |
|
|
|
219 |
|
|
|
7,852 |
|
|
AA- |
|
City of New York |
|
|
8,025 |
|
|
|
280 |
|
|
|
7,745 |
|
|
AA- |
|
Illinois Finance Authority |
|
|
8,007 |
|
|
|
(146 |
) |
|
|
8,153 |
|
|
BBB+ |
|
County of Hamilton |
|
|
7,837 |
|
|
|
34 |
|
|
|
7,803 |
|
|
A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
160,274 |
|
|
|
4,281 |
|
|
|
155,993 |
|
|
|
|
|
All Other |
|
|
480,509 |
|
|
|
15,787 |
|
|
|
464,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
640,783 |
|
|
$ |
20,068 |
|
|
$ |
620,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
The following table sets forth the composition of the investments categorized as states,
municipalities and political subdivisions in our portfolio by generally equivalent S&P and Moodys
ratings (not all securities in our portfolio are rated by both S&P and Moodys) as of March 31,
2010. The securities that are not rated in the table below are primarily state bonds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent |
|
Equivalent |
|
|
|
|
|
|
|
|
|
Net |
|
S&P |
|
Moodys |
|
|
|
|
|
|
|
|
|
Unrealized |
|
Rating |
|
Rating |
|
Fair Value |
|
|
Book Value |
|
|
Gain/(Loss) |
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA/AA/A |
|
Aaa/Aa/A |
|
$ |
602,406 |
|
|
$ |
582,675 |
|
|
$ |
19,731 |
|
BBB |
|
Baa |
|
|
29,163 |
|
|
|
28,753 |
|
|
|
410 |
|
BB |
|
Ba |
|
|
2,000 |
|
|
|
2,011 |
|
|
|
(11 |
) |
B |
|
B |
|
|
|
|
|
|
|
|
|
|
|
|
CCC or lower |
|
Caa or lower |
|
|
|
|
|
|
|
|
|
|
|
|
NR |
|
NR |
|
|
7,214 |
|
|
|
7,276 |
|
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
640,783 |
|
|
$ |
620,715 |
|
|
$ |
20,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
We own $254 million of municipal securities which are credit enhanced by various financial
guarantors. As of March 31, 2010, the average underlying credit rating for these securities is A+.
There has been no material adverse impact to our investment portfolio or results of operations as a
result of downgrades of the credit ratings for several of the financial guarantors.
We analyze our mortgage-backed and asset-backed securities by credit quality of the underlying
collateral distinguishing between the securities issued by the Federal National Mortgage
Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) which are Federal
government sponsored entities, and the non-FNMA and non-FHLMC securities broken out by prime, Alt-A
and subprime collateral. The securities issued by FNMA and FHLMC are the obligations of each
respective entity. Recent legislation has provided for guarantees by the U.S. Government of up to
$100 billion each for FNMA and FHLMC.
Prime collateral consists of mortgages or other collateral from the most creditworthy borrowers.
Alt-A collateral consists of mortgages or other collateral from borrowers which have a risk
potential that is greater than prime but less than subprime. The subprime collateral consists of
mortgages or other collateral from borrowers with low credit ratings. Such subprime and Alt-A
categories are as defined by S&P.
58
The following tables set forth our agency mortgage-backed securities, residential mortgage
obligations and asset-backed securities by those issued by the Government National Mortgage
Association (GNMA), FNMA, FHLMC, and the quality category (prime, Alt-A and subprime) for all
other such investments at March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
mortgage-backed
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
$ |
116,201 |
|
|
$ |
1,282 |
|
|
$ |
(72 |
) |
|
$ |
114,991 |
|
FNMA |
|
|
162,550 |
|
|
|
8,288 |
|
|
|
(17 |
) |
|
|
154,279 |
|
FHLMC |
|
|
69,868 |
|
|
|
2,719 |
|
|
|
(19 |
) |
|
|
67,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
348,619 |
|
|
$ |
12,289 |
|
|
$ |
(108 |
) |
|
$ |
336,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
$ |
29,053 |
|
|
$ |
|
|
|
$ |
(5,644 |
) |
|
$ |
34,697 |
|
Alt-A |
|
|
1,433 |
|
|
|
|
|
|
|
(406 |
) |
|
|
1,839 |
|
Subprime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30,486 |
|
|
$ |
|
|
|
$ |
(6,050 |
) |
|
$ |
36,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
$ |
11,155 |
|
|
$ |
485 |
|
|
$ |
|
|
|
$ |
10,670 |
|
Alt-A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime |
|
|
128 |
|
|
|
|
|
|
|
(34 |
) |
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,283 |
|
|
$ |
485 |
|
|
$ |
(34 |
) |
|
$ |
10,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
The following table sets forth the fifteen largest residential mortgage obligations as of
March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
Issue |
|
|
Fair |
|
|
Book |
|
|
Unrealized |
|
|
S&P |
|
|
Moodys |
|
Security Description |
|
Date |
|
|
Value |
|
|
Value |
|
|
(Loss) |
|
|
Rating |
|
|
Rating |
|
|
|
($ in thousands) |
|
|
|
|
|
Gmac Mtg Corp Ln Tr 05 Ar6 2A1 |
|
|
2005 |
|
|
$ |
2,799 |
|
|
$ |
3,314 |
|
|
$ |
(515 |
) |
|
CCC |
|
B3 |
|
Merrill Lynch Mtg Inv Inc 05 A9 2A1E |
|
|
2005 |
|
|
|
2,731 |
|
|
|
3,350 |
|
|
|
(619 |
) |
|
CCC |
|
NR |
Wells Fargo Mtg Bkd Secs Tr 06 Ar5
2A1 |
|
|
2006 |
|
|
|
2,366 |
|
|
|
2,617 |
|
|
|
(251 |
) |
|
NR |
|
Caa1 |
Wells Fargo Mtg Bkd Secs Tr 05 Ar4
2A2 |
|
|
2005 |
|
|
|
909 |
|
|
|
1,034 |
|
|
|
(125 |
) |
|
NR |
|
A2 |
|
Bear Stearns Adjustable Rate 06 1 A1 |
|
|
2006 |
|
|
|
702 |
|
|
|
776 |
|
|
|
(74 |
) |
|
NR |
|
B2 |
|
JP Morgan Mortgage Trust 07-A3 1A1 |
|
|
2007 |
|
|
|
674 |
|
|
|
846 |
|
|
|
(172 |
) |
|
CCC |
|
NR |
GSR Mortgage Loan Trust 06 Ar1 2A1 |
|
|
2006 |
|
|
|
670 |
|
|
|
795 |
|
|
|
(125 |
) |
|
B+ |
|
|
NR |
Merrill Lynch Mtg Inv Inc 05 A9 2A1 |
|
|
2005 |
|
|
|
647 |
|
|
|
671 |
|
|
|
(24 |
) |
|
BB- |
|
NR |
Wells Fargo Mtg Bkd Secs Tr 06 Ar6 3A |
|
|
2006 |
|
|
|
634 |
|
|
|
744 |
|
|
|
(110 |
) |
|
NR |
|
B2 |
|
Master Adj Rate Mtg Tr 05 6 5A1 |
|
|
2005 |
|
|
|
608 |
|
|
|
791 |
|
|
|
(183 |
) |
|
CCC |
|
Baa2 |
Citigroup Mtg Ln Tr Inc 04 Hyb3 1A |
|
|
2004 |
|
|
|
605 |
|
|
|
671 |
|
|
|
(66 |
) |
|
AA- |
|
A1 |
|
JP Morgan Mortgage Trust 06 A4 1A1 |
|
|
2006 |
|
|
|
585 |
|
|
|
844 |
|
|
|
(259 |
) |
|
NR |
|
B3 |
|
Banc Of America Fdg Corp 05 F 4A1 |
|
|
2005 |
|
|
|
584 |
|
|
|
715 |
|
|
|
(131 |
) |
|
CCC |
|
B1 |
|
JP Morgan Mortgage Trust 05 A6 7A1 |
|
|
2005 |
|
|
|
554 |
|
|
|
653 |
|
|
|
(99 |
) |
|
CCC |
|
NR |
Mortgageit Trust 05 1 2A |
|
|
2005 |
|
|
|
553 |
|
|
|
639 |
|
|
|
(86 |
) |
|
AAA |
|
Aaa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
15,621 |
|
|
|
18,460 |
|
|
|
(2,839 |
) |
|
|
|
|
|
|
|
|
All Other |
|
|
|
|
|
|
14,865 |
|
|
|
18,076 |
|
|
|
(3,211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
30,486 |
|
|
$ |
36,536 |
|
|
$ |
(6,050 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
Details of the collateral of our asset-backed securities portfolio as of March 31, 2010 are
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Amortized |
|
|
Unrealized |
|
|
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
BB |
|
|
CC |
|
|
Fair Value |
|
|
Cost |
|
|
Gain/(Loss) |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Loans |
|
$ |
4,012 |
|
|
$ |
2,857 |
|
|
|
|
|
|
$ |
1,312 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,181 |
|
|
$ |
7,871 |
|
|
$ |
310 |
|
Credit Cards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
59 |
|
|
|
59 |
|
|
|
|
|
Miscellaneous |
|
|
2,915 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126 |
|
|
|
3,043 |
|
|
|
2,902 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,927 |
|
|
$ |
2,859 |
|
|
$ |
|
|
|
$ |
1,312 |
|
|
$ |
59 |
|
|
$ |
126 |
|
|
$ |
11,283 |
|
|
$ |
10,832 |
|
|
$ |
451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The commercial mortgage-backed securities are all rated investment grade by S&P or Moodys.
The following table sets forth the fifteen largest commercial mortgage backed securities as of
March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue |
|
|
Fair |
|
|
Book |
|
|
Underlying |
|
|
Delinq. |
|
|
Subord. |
|
|
S&P |
|
|
Moodys |
|
Security Description |
|
Date |
|
|
Value |
|
|
Value |
|
|
LTV % |
|
|
Rate |
|
|
Level |
|
|
Rating |
|
|
Rating |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wachovia Bk Comm Mtg Tr 05 C18 A4 |
|
|
2005 |
|
|
$ |
7,231 |
|
|
$ |
6,865 |
|
|
|
71.96 |
% |
|
|
10.29 |
% |
|
|
33.32 |
% |
|
AAA |
|
Aaa |
Four Times Square Tr 06-4Ts A |
|
|
2006 |
|
|
|
7,028 |
|
|
|
7,028 |
|
|
|
39.40 |
% |
|
|
0.00 |
% |
|
|
8.83 |
% |
|
AAA |
|
Aa1 |
GS Mtg Secs Corp II 05 GG4 A4A |
|
|
2005 |
|
|
|
6,765 |
|
|
|
6,611 |
|
|
|
72.22 |
% |
|
|
14.19 |
% |
|
|
31.96 |
% |
|
AAA |
|
Aaa |
LB-UbS Comm Mtg Tr 06 C7 A3 |
|
|
2006 |
|
|
|
6,323 |
|
|
|
6,329 |
|
|
|
66.88 |
% |
|
|
6.16 |
% |
|
|
29.96 |
% |
|
AAA |
|
NR |
Citigroup/Deutsche Bk Comm Mtg 05
CD1 A4 |
|
|
2005 |
|
|
|
6,062 |
|
|
|
5,866 |
|
|
|
69.41 |
% |
|
|
11.13 |
% |
|
|
31.09 |
% |
|
AAA |
|
Aaa |
Bear Stearns Comm Mtg Secs 06 T22 A4 |
|
|
2006 |
|
|
|
5,128 |
|
|
|
4,883 |
|
|
|
57.39 |
% |
|
|
0.56 |
% |
|
|
28.31 |
% |
|
NR |
|
Aaa |
Bear Stearns Comm Mtg Secs 07 PW15 A4 |
|
|
2007 |
|
|
|
4,928 |
|
|
|
5,134 |
|
|
|
70.86 |
% |
|
|
18.66 |
% |
|
|
30.39 |
% |
|
A+ |
|
Aaa |
Banc Of America Comm Mtg Inc 07 1 A4 |
|
|
2007 |
|
|
|
4,659 |
|
|
|
4,778 |
|
|
|
75.31 |
% |
|
|
18.55 |
% |
|
|
30.50 |
% |
|
NR |
|
Aaa |
Morgan Stanley Capital I 07 HQ11 A4 |
|
|
2007 |
|
|
|
4,532 |
|
|
|
4,786 |
|
|
|
73.12 |
% |
|
|
6.14 |
% |
|
|
30.25 |
% |
|
A |
|
Aaa |
Commercial Mtg Pt Cert 05 C6 A5A |
|
|
2005 |
|
|
|
4,187 |
|
|
|
4,053 |
|
|
|
73.11 |
% |
|
|
8.54 |
% |
|
|
30.39 |
% |
|
AAA |
|
Aaa |
Merrill Lynch Mtg Tr 05 CIP1 A4 |
|
|
2005 |
|
|
|
4,133 |
|
|
|
4,036 |
|
|
|
72.54 |
% |
|
|
23.63 |
% |
|
|
31.39 |
% |
|
NR |
|
Aaa |
Citigroup Comm Mtg Tr 06 C5 A4 |
|
|
2006 |
|
|
|
3,516 |
|
|
|
3,510 |
|
|
|
73.31 |
% |
|
|
5.70 |
% |
|
|
30.39 |
% |
|
NR |
|
Aaa |
Morgan Stanley Capital I 04 T13 A4 |
|
|
2004 |
|
|
|
3,425 |
|
|
|
3,328 |
|
|
|
58.81 |
% |
|
|
0.87 |
% |
|
|
15.66 |
% |
|
NR |
|
Aaa |
GE Capital Comm Mtg Svcs 02 1A A3 |
|
|
2002 |
|
|
|
2,657 |
|
|
|
2,501 |
|
|
|
74.50 |
% |
|
|
2.70 |
% |
|
|
25.10 |
% |
|
NR |
|
Aaa |
CSFB Mtg Secs Corp 03 C3 A5 |
|
|
2003 |
|
|
|
2,648 |
|
|
|
2,529 |
|
|
|
63.60 |
% |
|
|
5.28 |
% |
|
|
21.26 |
% |
|
AAA |
|
Aaa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
73,222 |
|
|
|
72,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
|
|
|
|
|
32,506 |
|
|
|
31,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
105,728 |
|
|
$ |
103,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
The following table shows the amount and percentage of our fixed maturities and short-term
investments at March 31, 2010 by S&P credit rating or, if an S&P rating is not available, the
equivalent Moodys rating. The table includes fixed maturities and short-term investments at fair
value, and the total rating is the weighted average quality rating.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
Rating |
|
|
|
Fair |
|
|
of |
|
Description |
|
Rating |
|
Value |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Extremely Strong |
|
AAA |
|
$ |
1,116,971 |
|
|
|
56 |
% |
Very Strong |
|
AA |
|
|
450,103 |
|
|
|
23 |
% |
Strong |
|
A |
|
|
309,610 |
|
|
|
16 |
% |
Adequate |
|
BBB |
|
|
71,895 |
|
|
|
4 |
% |
Speculative |
|
BB & below |
|
|
23,897 |
|
|
|
1 |
% |
Not Rated |
|
NR |
|
|
7,214 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
AA |
|
$ |
1,979,690 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
62
Following is a list of the top fifteen corporate bond holdings for fixed maturities at fair
value at March 31, 2010. All such fixed maturities are rated investment grade by S&P and Moodys.
These holdings represent direct obligations of the issuer or its subsidiaries and exclude any
government guaranteed or government sponsored organizations, securitized, credit enhanced or
collateralized asset-backed or mortgage-backed securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
Cost or |
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
Amortized |
|
|
S&P |
|
|
|
Value |
|
|
Gains/(Losses) |
|
|
Cost |
|
|
Rating |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Electric |
|
$ |
20,979 |
|
|
$ |
1,268 |
|
|
$ |
19,711 |
|
|
AA |
|
Southern Co |
|
|
11,825 |
|
|
|
17 |
|
|
|
11,808 |
|
|
A |
|
Conoco Phillips |
|
|
11,366 |
|
|
|
183 |
|
|
|
11,183 |
|
|
A |
|
Goldman Sachs Group |
|
|
10,950 |
|
|
|
305 |
|
|
|
10,645 |
|
|
A- |
|
Baker Hughes Inc |
|
|
10,461 |
|
|
|
(105 |
) |
|
|
10,566 |
|
|
A |
|
Citigroup Inc |
|
|
8,679 |
|
|
|
56 |
|
|
|
8,623 |
|
|
BBB+ |
|
Pepsico Inc |
|
|
8,541 |
|
|
|
379 |
|
|
|
8,162 |
|
|
A- |
|
Transcanada Corp |
|
|
8,456 |
|
|
|
381 |
|
|
|
8,075 |
|
|
A- |
|
Consolidated Edison |
|
|
8,203 |
|
|
|
42 |
|
|
|
8,161 |
|
|
A- |
|
J.P. Morgan Chase & Co |
|
|
6,357 |
|
|
|
62 |
|
|
|
6,295 |
|
|
A |
|
FPL Group Inc |
|
|
5,890 |
|
|
|
(44 |
) |
|
|
5,934 |
|
|
BBB+ |
|
Bank of America Corp |
|
|
5,813 |
|
|
|
209 |
|
|
|
5,604 |
|
|
A- |
|
Scana Corp |
|
|
5,209 |
|
|
|
116 |
|
|
|
5,093 |
|
|
A- |
|
Wells Fargo & Co |
|
|
5,202 |
|
|
|
215 |
|
|
|
4,987 |
|
|
A+ |
|
Morgan Stanley |
|
|
5,128 |
|
|
|
207 |
|
|
|
4,921 |
|
|
A- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
133,059 |
|
|
|
3,291 |
|
|
|
129,768 |
|
|
|
|
|
All Other |
|
|
128,455 |
|
|
|
6,159 |
|
|
|
122,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
261,514 |
|
|
$ |
9,450 |
|
|
$ |
252,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
The following table sets forth the fifteen largest equity securities holdings as of March
31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains/(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuers: |
|
|
|
|
|
|
|
|
|
|
|
|
Vanguard Total Stock Market Index |
|
$ |
4,937 |
|
|
$ |
1,622 |
|
|
$ |
3,315 |
|
Vanguard Emerging Market Stock Index |
|
|
4,311 |
|
|
|
1,875 |
|
|
|
2,436 |
|
Vanguard Pacific Stock Index |
|
|
4,225 |
|
|
|
1,299 |
|
|
|
2,926 |
|
Vanguard European Stock Index |
|
|
3,831 |
|
|
|
1,240 |
|
|
|
2,591 |
|
General Electric Co |
|
|
2,361 |
|
|
|
546 |
|
|
|
1,815 |
|
Nokia OYJ |
|
|
2,356 |
|
|
|
475 |
|
|
|
1,881 |
|
The Boeing Co |
|
|
2,305 |
|
|
|
913 |
|
|
|
1,392 |
|
EI Du Pont De Nemours & Co |
|
|
2,253 |
|
|
|
612 |
|
|
|
1,641 |
|
Conocophillips |
|
|
2,170 |
|
|
|
320 |
|
|
|
1,850 |
|
Intel Corp |
|
|
2,089 |
|
|
|
222 |
|
|
|
1,867 |
|
Kraft Foods Inc |
|
|
2,059 |
|
|
|
409 |
|
|
|
1,650 |
|
PPG Industries Inc |
|
|
2,031 |
|
|
|
839 |
|
|
|
1,192 |
|
Diageo PLC |
|
|
1,956 |
|
|
|
472 |
|
|
|
1,484 |
|
Chevron Corp |
|
|
1,865 |
|
|
|
356 |
|
|
|
1,509 |
|
Philip Morris International Inc |
|
|
1,852 |
|
|
|
493 |
|
|
|
1,359 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
40,601 |
|
|
|
11,693 |
|
|
|
28,908 |
|
All Other |
|
|
32,008 |
|
|
|
6,292 |
|
|
|
25,716 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
72,609 |
|
|
$ |
17,985 |
|
|
$ |
54,624 |
|
|
|
|
|
|
|
|
|
|
|
64
The following table summarizes all securities in a gross unrealized loss position at March
31, 2010 and December 31, 2009, showing the aggregate fair value and gross unrealized loss by the
length of time those securities had continuously been in a gross unrealized loss position as well
as the number of securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
# of |
|
|
Fair |
|
|
Gross |
|
|
# of |
|
|
Fair |
|
|
Gross |
|
|
|
Securities |
|
|
Value |
|
|
Unrealized Loss |
|
|
Securities |
|
|
Value |
|
|
Unrealized Loss |
|
|
|
($ in thousands except # of securities) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
15 |
|
|
$ |
31,720 |
|
|
$ |
355 |
|
|
|
24 |
|
|
$ |
116,566 |
|
|
$ |
597 |
|
7-12 Months |
|
|
1 |
|
|
|
985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
16 |
|
|
|
32,705 |
|
|
|
355 |
|
|
|
24 |
|
|
|
116,566 |
|
|
|
597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
33 |
|
|
|
88,859 |
|
|
|
1,408 |
|
|
|
47 |
|
|
|
108,290 |
|
|
|
2,291 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
3,534 |
|
|
|
112 |
|
> 12 Months |
|
|
22 |
|
|
|
19,582 |
|
|
|
588 |
|
|
|
23 |
|
|
|
17,777 |
|
|
|
514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
55 |
|
|
|
108,441 |
|
|
|
1,996 |
|
|
|
74 |
|
|
|
129,601 |
|
|
|
2,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
14 |
|
|
|
92,247 |
|
|
|
108 |
|
|
|
5 |
|
|
|
18,385 |
|
|
|
98 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
14 |
|
|
|
92,247 |
|
|
|
108 |
|
|
|
5 |
|
|
|
18,385 |
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
64 |
|
|
|
30,486 |
|
|
|
6,050 |
|
|
|
73 |
|
|
|
31,071 |
|
|
|
7,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
64 |
|
|
|
30,486 |
|
|
|
6,050 |
|
|
|
73 |
|
|
|
31,071 |
|
|
|
7,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
3 |
|
|
|
188 |
|
|
|
34 |
|
|
|
4 |
|
|
|
637 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
3 |
|
|
|
188 |
|
|
|
34 |
|
|
|
4 |
|
|
|
637 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
28,103 |
|
|
|
324 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
10 |
|
|
|
24,775 |
|
|
|
685 |
|
|
|
21 |
|
|
|
45,135 |
|
|
|
4,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
10 |
|
|
|
24,775 |
|
|
|
685 |
|
|
|
32 |
|
|
|
73,238 |
|
|
|
5,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
16 |
|
|
|
59,921 |
|
|
|
516 |
|
|
|
13 |
|
|
|
33,275 |
|
|
|
337 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
3 |
|
|
|
2,217 |
|
|
|
166 |
|
|
|
8 |
|
|
|
6,325 |
|
|
|
422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
19 |
|
|
|
62,138 |
|
|
|
682 |
|
|
|
21 |
|
|
|
39,600 |
|
|
|
759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
181 |
|
|
$ |
350,980 |
|
|
$ |
9,910 |
|
|
|
233 |
|
|
$ |
409,098 |
|
|
$ |
16,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
2 |
|
|
$ |
796 |
|
|
$ |
10 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
872 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
|
2 |
|
|
$ |
796 |
|
|
$ |
10 |
|
|
|
1 |
|
|
$ |
872 |
|
|
$ |
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
We analyze the unrealized losses quarterly to determine if any are other-than-temporary.
The above unrealized losses have been determined to be temporary based on our policies. See
Critical Accounting Estimates Impairment of Invested Assets in our 2009 Annual Report on Form
10-K for additional information on our policies.
To determine whether the unrealized loss on structured securities is other-than-temporary, we
project an expected principal loss under a range of scenarios and utilize the most likely outcomes.
The analysis relies on actual collateral performance measures such as default rate, prepayment rate
and loss severity. These assumptions are applied throughout the remaining term of the deal,
incorporating the transaction structure and priority of payments, to generate loss adjusted cash
flows. Results of the analysis will indicate whether the security ultimately incurs a loss or
whether there is a material impact on yield due to either a projected loss or a change in cash flow
timing. A breakeven default rate is also calculated. A comparison to the break even default rate
to the actual default rate provides an indication of the level of cushion or coverage to the first
dollar principal loss. The analysis applies the stated assumptions throughout the remaining term of
the transaction to forecast cash flows, which are then applied through the transaction structure to
determine whether there is a loss to the security. For securities in which a tranche loss is
present, and the net present value of loss adjusted cash flows is less than book value, an
impairment is recognized. The output data also includes a number of additional metrics such as
average life remaining, original and current credit support, over 60 day delinquency and security
rating.
As of March 31, 2010, the largest single unrealized loss by issuer in the fixed maturities was $0.6
million.
The following table summarizes the gross unrealized investment losses by length of time where the
fair value is less than 80% of amortized cost as of March 31, 2010.
Period for Which Fair Value is Less than 80% of Amortized Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
Longer than 3 |
|
|
or longer, less |
|
|
|
|
|
|
|
|
|
Less than 3 |
|
|
months, less |
|
|
than 12 |
|
|
12 months |
|
|
|
|
|
|
months |
|
|
than 6 months |
|
|
months |
|
|
or longer |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
Fixed maturities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(2,391 |
) |
|
$ |
(2,391 |
) |
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(2,391 |
) |
|
$ |
(2,391 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of our investment portfolio may fluctuate significantly in response to
various factors such as changes in interest rates, investment quality ratings, equity prices,
foreign exchange rates and credit spreads. We do not have the intent to sell nor is it more likely
than not that we will have to sell debt securities in unrealized loss positions that are not
other-than temporarily impaired before recovery. We may realize investment losses to the extent our
liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate,
liquidity or credit spread environments. Significant changes in the factors we consider when
evaluating investment for impairment losses could result in a significant change in impairment
losses reported in the consolidated financial statements.
66
The following table shows the S&P ratings and equivalent Moodys ratings of the fixed maturity
securities in our portfolio with gross unrealized losses at March 31, 2010. Not all of the
securities are rated by S&P and/or Moodys.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
Equivalent |
|
Equivalent |
|
Unrealized Loss |
|
|
Fair Value |
|
S&P |
|
Moodys |
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
Rating |
|
Rating |
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA/AA/A |
|
Aaa/Aa/A |
|
$ |
4,455 |
|
|
|
45 |
% |
|
$ |
305,081 |
|
|
|
87 |
% |
BBB |
|
Baa |
|
|
713 |
|
|
|
7 |
% |
|
|
18,894 |
|
|
|
5 |
% |
BB |
|
Ba |
|
|
232 |
|
|
|
2 |
% |
|
|
3,686 |
|
|
|
1 |
% |
B |
|
B |
|
|
492 |
|
|
|
5 |
% |
|
|
2,391 |
|
|
|
1 |
% |
CCC or lower |
|
Caa or lower |
|
|
3,923 |
|
|
|
40 |
% |
|
|
17,403 |
|
|
|
5 |
% |
NR |
|
NR |
|
|
95 |
|
|
|
1 |
% |
|
|
3,525 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
9,910 |
|
|
|
100 |
% |
|
$ |
350,980 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010, the gross unrealized losses in the table directly above are related to
fixed maturity securities that are rated investment grade, which is defined as a security having an
S&P rating of BBB or higher, or a Moodys rating of Baa3 or higher, except for $4.6 million
which is rated below investment grade. The non-rated securities primarily consist of municipal
bonds. Unrealized losses on investment grade securities principally relate to changes in interest
rates or changes in sector-related credit spreads since the securities were acquired.
The contractual maturity by the number of years until maturity for fixed maturity securities with
unrealized losses at March 31, 2010 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized Loss |
|
|
Fair Value |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
16 |
|
|
|
0 |
% |
|
$ |
5,878 |
|
|
|
2 |
% |
Due after one year through five years |
|
|
235 |
|
|
|
2 |
% |
|
|
42,264 |
|
|
|
12 |
% |
Due after five years through ten years |
|
|
1,231 |
|
|
|
12 |
% |
|
|
88,163 |
|
|
|
25 |
% |
Due after ten years |
|
|
1,551 |
|
|
|
16 |
% |
|
|
66,979 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed securities |
|
|
6,877 |
|
|
|
70 |
% |
|
|
147,696 |
|
|
|
42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
9,910 |
|
|
|
100 |
% |
|
$ |
350,980 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment penalties. Due to the
periodic repayment of principal, the aggregate amount of mortgage-backed and asset-backed
securities is estimated to have an effective maturity of approximately 3.7 years.
67
The table below summarizes our activity related to OTTI losses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
($ in thousands) |
|
No. |
|
|
Amount |
|
|
No. |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment
losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds |
|
|
|
|
|
$ |
|
|
|
|
2 |
|
|
$ |
564 |
|
Residential mortgage-backed securities |
|
|
2 |
|
|
|
224 |
|
|
|
35 |
|
|
|
17,849 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
119 |
|
Equities |
|
|
1 |
|
|
|
27 |
|
|
|
54 |
|
|
|
8,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3 |
|
|
$ |
251 |
|
|
|
92 |
|
|
$ |
26,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of loss in accumulated other
comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Residential mortgage-backed securities |
|
|
|
|
|
|
170 |
|
|
|
|
|
|
|
16,102 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
Equities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
170 |
|
|
|
|
|
|
$ |
16,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses recognized in earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
564 |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
1,747 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50 |
|
Equities |
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
8,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
81 |
|
|
|
|
|
|
$ |
10,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2010, we recognized in earnings OTTI losses of $0.05
million related to two non-agency mortgage and asset-backed securities. During the first quarter of
2009, we recognized a credit loss of $1.8 million for 36 structured securities which was recognized
in earnings. The significant inputs used to measure the amount of credit loss recognized in
earnings were actual delinquency rates, default probability assumptions, severity assumptions and
prepayment assumptions. Projected losses are a function of both loss severity and probability of
default. Default probability and severity assumptions differ based on property type, vintage and
the stress of the collateral. We do not intend to sell any of these securities and it is more
likely than not that we will not be required sell these securities before the recovery of the
amortized cost basis.
During the three months ended March 31, 2010, we recognized in earnings OTTI losses of $0.03
million on one common stock resulting from additional impairments on equity securities that were
impaired in 2009. During the first quarter of 2009, we identified 54 common stocks with a fair
value of $35.8 million which were considered to be other-than-temporarily impaired and we
recognized in earnings OTTI losses of $8.3 million.
During the first quarter of 2009, we identified two corporate bonds with a fair value of $0.8
million which were considered to be other-than-temporarily impaired and we recognized in earnings
OTTI losses of $0.6 million.
For the three months ended March 31, 2010, OTTI losses within OCI decreased $1.0 million primarily
as a result of increases in the fair value of securities previously impaired. For the three months
ended March 31, 2009, OTTI losses within OCI were $16.2 million.
68
The following table summarizes the cumulative amounts related to our credit loss portion of the
other-than-temporary impairment losses on debt securities held as of March 31, 2010 that we do not
intend to sell and it is not more likely than not that we will be required to sell the security
prior to recovery of the amortized cost basis and for which the non-credit portion is included in
other comprehensive income:
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
Beginning balance of at January 1, 2010 |
|
$ |
2,523 |
|
Credit losses on securities not previously impaired as of December 31, 2009 |
|
|
54 |
|
Reductions for securities sold during the period |
|
|
|
|
|
|
|
|
Ending balance at March 31, 2010 |
|
$ |
2,577 |
|
|
|
|
|
Liquidity and Capital Resources
Net cash provided by operating activities was $4.1 million for the three months ended March 31,
2010 compared to net cash provided by operating activities of $42.9 million for the comparable
period in 2009, a decrease of $38.8 million. This decrease was primarily due to a $27.0 million
negative variance in our cash flows related to an increase in paid losses in the first three months
of 2010 compared with the same period in 2009 as well as a decline in the overall operating
results.
Net cash provided by investing activities was $21.1 million for the three months ended March 31,
2010 compared to net cash used in investing activities of $28.4 million for the comparable period
in 2009. This change is primarily due to sale of securities to fund our share repurchase program.
Net cash used in financing activities was $23.1 million for the three months ended March 31, 2010
compared to net cash provided by financing activities of $0.7 million for the comparable period in
2009. These uses of cash primarily related to the repurchase of $23.7 million of the Companys
common stock in 2010 under the Companys stock repurchase plan.
At March 31, 2010, the weighted average rating of our fixed maturity investments was AA by S&P
and Aa by Moodys. The entire fixed maturity investment portfolio, except for $31.1 million,
consists of investment grade bonds. At March 31, 2010, our portfolio had an average maturity of
5.1 years and duration of 4.2 years. Management periodically projects cash flow of the investment
portfolio and other sources in order to maintain the appropriate levels of liquidity in an effort
to ensure our ability to satisfy claims. As of March 31, 2010 and December 31, 2009, all fixed
maturity securities and equity securities held by us were classified as available-for-sale.
We have a credit facility provided through a consortium of banks. Through March 31, 2010, the
credit facility made available to the Company letters of credit up to $75 million. At March 31,
2010, letters of credit with an aggregate face amount of $76.5 million were issued under the credit
facility.
On April 1, 2010, we entered into a $140 million credit facility agreement entitled Fifth Amended
and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, and a
syndicate of lenders. The credit facility is a letter of credit facility and amends and replaces
the $75 million credit facility that expired by its terms on April 2, 2010. We may request that the
facility be increased by an amount not to exceed $25 million. The credit facility, which is
denominated in U.S. dollars, is utilized primarily by Navigators Corporate Underwriters Ltd. and
Millennium
Underwriting Ltd. to fund our participation in Syndicate 1221 through letters of credit. The
letters of credit issued under the facility are denominated in British pounds and their aggregate
face amount will fluctuate based on exchange rates. The credit facility expires on March 31, 2011.
69
The
credit facility contains customary covenants for facilities of this
type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the
sale of assets, and requirements as to maintaining certain consolidated tangible net worth,
statutory surplus and other financial ratios. The credit facility also provides for customary
events of default, including failure to pay principal, interest or fees when due, failure to comply
with covenants, any representation or warranty made by the Company being false in any material
respect, default under certain other indebtedness, certain insolvency or receivership events
affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a
change in control of the Company. The letter of credit facility is secured by a pledge of the stock
of certain insurance subsidiaries of the Company. To the extent the aggregate face amount issued
under the credit facility exceeds the commitment amount, we are required to post collateral with
the lead bank of the consortium. We were in compliance with all covenants under the credit
facility at March 31, 2010.
As a result of the April 1, 2010 amendment of the credit facility, the applicable margin and
applicable fee rate payable under the letter of credit facility are now based on a schedule that is
decided based on the Companys status as determined from its then-current ratings issued by S&P and
Moodys with respect to the Companys senior unsecured long-term debt securities without
third-party credit enhancement.
Pursuant to the implementation of Lloyds Plan of Reconstruction and Renewal, a portion of our
recoverables are now reinsured by Resolute Management Services Limited (a separate U.K. authorized
reinsurance company established to reinsure outstanding liabilities of all Lloyds members for all
risks written in the 1992 or prior years of account, previously known as Equitas).
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 March 31, 2010 are
anticipated to be billed and collected over the next several years as the gross loss reserves are
paid by the Company.
Generally, for pro rata or quota share reinsurers, including pool participants, we issue quarterly
settlement statements for premiums less commissions and paid loss activity, which are expected to
be settled by the end of the subsequent quarter. We have the ability to issue cash calls
requiring such reinsurers to pay losses whenever paid loss activity for a claim ceded to a
particular reinsurance treaty exceeds a predetermined amount (generally $1.0 million) as set forth
in the pro rata treaty. For the Insurance Companies, cash calls must generally be paid within 30
calendar days. There is generally no specific settlement period for the Lloyds Operations cash
call provisions, but such billings have historically on average been paid within 45 calendar days.
Generally, for excess of loss reinsurers we pay monthly or quarterly deposit premiums based on the
estimated subject premiums over the contract period (usually one year) that are subsequently
adjusted based on actual premiums determined after the expiration of the applicable reinsurance
treaty. Paid losses subject to excess of loss recoveries are generally billed as they occur and
are usually settled by reinsurers within 30 calendar days for the Insurance Companies and 30
business days for the Lloyds Operations.
We sometimes withhold funds from reinsurers and may apply ceded loss billings against such funds in
accordance with the applicable reinsurance agreements.
At March 31, 2010 and December 31, 2009, ceded asbestos paid and unpaid recoverables were $8.9
million. Of such amounts at March 31, 2010, $4.4 million was due from Resolute Management Services
Limited. We generally experience significant collection delays for a large portion of reinsurance
recoverable amounts for asbestos losses given that certain reinsurers are in run-off or otherwise
no longer active in the reinsurance business. Such circumstances are considered in our ongoing
assessment of such reinsurance recoverables.
We believe that we have adequately managed our cash flow requirements related to reinsurance
recoveries from its positive cash flows and the use of available short-term funds when applicable.
However, there can be no assurances that we will be able to continue to adequately manage such
recoveries in the future or that collection disputes or
reinsurer insolvencies will not arise that could materially increase the collection time lags or
result in recoverable write-offs causing additional incurred losses and liquidity constraints to
the Company. The payment of gross claims and related collections from reinsurers with respect to
Hurricanes Gustav, Ike, Katrina and Rita could significantly impact our liquidity needs. However,
we expect to continue to pay these hurricane losses over a period of years from cash flow and, if
needed, short-term investments. We expect to collect our paid reinsurance recoverables generally
under the terms described above.
70
Our insurance subsidiaries provided property reinsurance covering the Deepwater Horizon oil drilling rig that
exploded in the Gulf of Mexico on April 20th, 2010 and subsequently sank. We received loss notifications for the first
party property damage related to the loss of the Deepwater Horizon. Our net physical damage loss for this claim is
currently estimated to be approximately $4.6 million, net of tax, reinsurance and reinstatement premiums.
We also participated in various layers of the marine liability insurance programs purchased by
entities with potential liability exposures related to the Deepwater Horizon incident. At this
point in time, we are unable to accurately estimate the potential liability arising from the
Deepwater Horizon incident, the allocation of that liability amongst the various participants, or
what recoveries would be available to the participants from other applicable insurance coverage.
If losses were incurred in the various marine liability insurance layers in which we participate,
we believe our exposure would be mitigated by the substantial reinsurance coverage we maintain.
Our management expects that the ultimate liability, if any, for the marine liability portion of the
Deepwater Horizon loss will not be material to our consolidated financial position, but if a
significant portion of the marine liability layers in which we participate were to be exhausted,
the loss could potentially have a material adverse effect on our consolidated results of operations
or cash flows in a particular fiscal quarter or year.
We believe that the cash flow generated by the operating activities of our subsidiaries will
provide sufficient funds for us to meet our liquidity needs over the next twelve months. Beyond
the next twelve months, cash flow available to us may be influenced by a variety of factors,
including general economic conditions and conditions in the insurance and reinsurance markets, as
well as fluctuations from year to year in claims experience.
Our capital resources consist of funds deployed or available to be deployed to support our business
operations. At March 31, 2010 and December 31, 2009, our capital resources were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Senior debt |
|
$ |
114,041 |
|
|
$ |
114,010 |
|
Stockholders equity |
|
|
810,044 |
|
|
|
801,519 |
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
924,085 |
|
|
$ |
915,529 |
|
|
|
|
|
|
|
|
Ratio of debt to total capitalization |
|
|
12.3 |
% |
|
|
12.5 |
% |
|
|
|
|
|
|
|
We monitor our capital adequacy to support our business on a regular basis. The future
capital requirements of our business will depend on many factors, including our ability to write
new business successfully and to establish premium rates and reserves at levels sufficient to cover
losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and
financial strength ratings as evaluated by independent rating agencies. In particular, we require
(1) sufficient capital to maintain our financial strength ratings, as issued by several ratings
agencies, at a level considered necessary by management to enable our Insurance Companies to
compete, (2) sufficient capital to enable our Insurance Companies to meet the capital adequacy
tests performed by statutory agencies in the United States and the United Kingdom and (3) letters
of credit and other forms of collateral that are necessary to support the business plan of our
Lloyds Operations.
As part of our capital management program, we may seek to raise additional capital or may seek to
return capital to our stockholders through share repurchases, cash dividends or other methods (or a
combination of such methods). Any such determination will be at the discretion of our Board of
Directors and will be dependent upon our profits, financial requirements and other factors,
including legal restrictions, rating agency requirements, credit facility limitations and such
other factors as our board of directors deems relevant.
71
In November 2009, the Parent Companys Board of Directors adopted a stock repurchase program for up
to $35 million of the Parent Companys common stock. In March 2010, the Parent Companys Board of
Directors adopted a stock repurchase program for up to $65 million of the Parent Companys common
stock. This repurchase program is in addition to our existing $35 million share repurchase program
adopted in November 2009. Purchases are permitted from time to time at prevailing prices in open
market or privately negotiated transactions through December 31, 2010. The timing and amount of
purchases under the program depend on a variety of factors, including the trading price of the
stock, market conditions and corporate and regulatory considerations. During the fourth quarter of
2009, the Parent Company purchased 141,576 shares of its common stock in the open market at an
average cost of $47.72 per share for a total of $6.8 million. During the first quarter of 2010,
the Parent Company purchased 573,600 shares of its common stock in the open market at an average
cost of $41.27 per share for a total of $23.7 million. From April 1, 2010 through May 4, 2010, the
Parent Company purchased an additional 179,812 shares of its common stock in the open market at an
average cost of $40.70 per share for a total of $7.3 million under the stock repurchase
program.
We primarily rely upon dividends from our subsidiaries to meet our Parent Companys obligations.
Since the issuance of the senior debt in April 2006, the Parent Companys cash obligations
primarily consist of semi-annual interest payments which are now $4.0 million. Going forward, the
interest payments and any stock repurchases may be made from funds currently at the Parent Company
or dividends from its subsidiaries. The dividends have historically been paid by Navigators
Insurance Company. Based on the December 31, 2009 surplus of Navigators Insurance Company, the
approximate remaining maximum amount available for the payment of dividends by Navigators Insurance
Company during 2010 without prior regulatory approval was $64.6 million. Navigators Insurance
Company declared and paid a $15.0 million dividend to the Parent Company in the first three months
of 2010, leaving $49.6 million of remaining dividend capacity for 2010.
Condensed Parent Company balance sheets as of March 31, 2010 (unaudited) and December 31, 2009 are
shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Cash and investments |
|
$ |
57,336 |
|
|
$ |
63,676 |
|
Investments in subsidiaries |
|
|
857,160 |
|
|
|
846,295 |
|
Goodwill and other intangible assets |
|
|
2,534 |
|
|
|
2,534 |
|
Other assets |
|
|
11,032 |
|
|
|
5,213 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
928,062 |
|
|
$ |
917,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7% Senior Notes |
|
$ |
114,041 |
|
|
$ |
114,010 |
|
Accounts payable and other liabilities |
|
|
623 |
|
|
|
847 |
|
Accrued interest payable |
|
|
3,354 |
|
|
|
1,342 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
118,018 |
|
|
|
116,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
810,044 |
|
|
|
801,519 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
928,062 |
|
|
$ |
917,718 |
|
|
|
|
|
|
|
|
72
|
|
|
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 2009 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 first fiscal quarter in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting. |
Part II Other Information
|
|
|
Item 1. |
|
Legal Proceedings |
In the ordinary course of conducting business, our subsidiaries are involved in various legal
proceedings, either indirectly as insurers for parties or directly as defendants. Most the these
proceedings are claims litigation involving our subsidiaries as either (a) liability insurers
defending or providing indemnity for third party claims brought against insureds or (b) insurers
defending first party coverage claims brought against them. We account for such activity through
the establishment of unpaid loss and loss adjustment reserves. Our management believes that the
ultimate liability, if any, with respect to such ordinary-course claims litigation, after
consideration of provisions made for potential losses and cost of defense, will not be material to
our consolidated financial condition, results of operations, or cash flows.
Our subsidiaries are also from time-to-time involved with other legal actions, some of which assert
claims for substantial amounts. These actions include claims asserting extra contractual
obligations, such as claims involving allegations of bad faith in the handling of claims or the
underwriting of policies. For example, there is one such claim pending against one of our insureds
involving a catastrophic personal injury. In that matter, we tendered our policy limits to settle
the claim, but the tender was rejected. Our insured and the underlying plaintiff have demanded
that we pay amounts substantially in excess of our policy in order to settle the claim. In
general, we believe we have valid defenses to these cases, including the catastrophic personal
injury claim noted above. Our management expects that the ultimate liability if any, with respect
to such extra-contractual matters will not be material to our consolidated financial position.
Nonetheless, given the large or indeterminate amounts sought in certain of these matters, and the
inherent unpredictability of litigation, an adverse outcome in such matters could, from
time-to-time, have a material adverse outcome on our consolidated results of operations or cash
flows in a particular fiscal quarter or year.
There have been no material changes from the risk factors as previously disclosed in the Companys
2009 Annual Report on Form 10-K.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
None
73
|
|
|
Item 3. |
|
Defaults Upon Senior Securities |
None
|
|
|
Item 5. |
|
Other Information |
None
|
|
|
|
|
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).
|
|
* |
74
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: May 7, 2010
|
|
/s/ Francis W. McDonnell
|
|
|
|
|
Francis W. McDonnell |
|
|
|
|
Senior Vice President |
|
|
|
|
and Chief Financial Officer |
|
|
75
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).
|
|
* |
76