Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2008
Commission file number 0-15886
The Navigators Group, Inc.
(Exact name of Registrant as specified in its charter)
|
|
|
Delaware
|
|
13-3138397 |
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(IRS Employer
Identification No.) |
|
|
|
One Penn Plaza, New York, New York
|
|
10119 |
|
|
|
(Address of principal executive offices)
|
|
(Zip Code) |
(212) 244-2333
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange
Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer
þ |
|
Accelerated filer
o |
|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
|
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 21, 2008 was 16,798,542.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
INDEX
2
Part 1. Financial Information
Item 1. Financial Statements
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Investments and cash: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale, at fair value
(amortized cost: 2008, $1,554,999; 2007, $1,508,489) |
|
$ |
1,570,971 |
|
|
$ |
1,522,320 |
|
Equity securities, available-for-sale, at fair value
(cost: 2008, $65,309; 2007, $65,492) |
|
|
59,688 |
|
|
|
67,240 |
|
Short-term investments, at fair value |
|
|
171,447 |
|
|
|
170,685 |
|
Cash |
|
|
12,810 |
|
|
|
7,056 |
|
|
|
|
|
|
|
|
Total investments and cash |
|
|
1,814,916 |
|
|
|
1,767,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums in course of collection |
|
|
198,494 |
|
|
|
163,081 |
|
Commissions receivable |
|
|
272 |
|
|
|
2,381 |
|
Prepaid reinsurance premiums |
|
|
188,223 |
|
|
|
188,961 |
|
Reinsurance receivable on paid losses |
|
|
74,183 |
|
|
|
94,818 |
|
Reinsurance receivable on unpaid losses and loss adjustment expenses |
|
|
776,767 |
|
|
|
801,461 |
|
Net deferred income tax benefit |
|
|
31,260 |
|
|
|
29,249 |
|
Deferred policy acquisition costs |
|
|
53,450 |
|
|
|
51,895 |
|
Accrued investment income |
|
|
15,867 |
|
|
|
15,605 |
|
Goodwill and other intangible assets |
|
|
8,087 |
|
|
|
8,084 |
|
Other assets |
|
|
20,756 |
|
|
|
20,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,182,275 |
|
|
$ |
3,143,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses |
|
$ |
1,661,556 |
|
|
$ |
1,648,764 |
|
Unearned premium |
|
|
500,663 |
|
|
|
469,481 |
|
Reinsurance balances payable |
|
|
139,331 |
|
|
|
161,829 |
|
Senior notes |
|
|
123,702 |
|
|
|
123,673 |
|
Federal income tax payable |
|
|
18,965 |
|
|
|
10,868 |
|
Payable for securities purchased |
|
|
1,939 |
|
|
|
|
|
Accounts payable and other liabilities |
|
|
59,242 |
|
|
|
67,050 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,505,398 |
|
|
|
2,481,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued |
|
|
|
|
|
|
|
|
Common stock, $.10 par value, shares authorized: 50,000,000 at 3/31/08 and
12/31/07;
issued and outstanding: 16,798,542 (net of Treasury stock) at 3/31/08 and 16,873,094 at
12/31/07 |
|
|
1,693 |
|
|
|
1,687 |
|
Additional paid-in capital |
|
|
294,146 |
|
|
|
291,616 |
|
Retained earnings |
|
|
378,334 |
|
|
|
355,084 |
|
Treasury stock, at cost (136,026 shares at 3/31/08) |
|
|
(7,321 |
) |
|
|
|
|
Accumulated other comprehensive income |
|
|
10,025 |
|
|
|
13,719 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
676,877 |
|
|
|
662,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
3,182,275 |
|
|
$ |
3,143,771 |
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
3
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ and shares in thousands, except net income per share)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
287,146 |
|
|
$ |
300,861 |
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Net written premium |
|
$ |
187,722 |
|
|
$ |
173,019 |
|
(Increase) in unearned premium |
|
|
(31,982 |
) |
|
|
(33,973 |
) |
|
|
|
|
|
|
|
Net earned premium |
|
|
155,740 |
|
|
|
139,046 |
|
Commission income |
|
|
261 |
|
|
|
408 |
|
Net investment income |
|
|
18,838 |
|
|
|
16,216 |
|
Net realized capital gains (losses) |
|
|
(76 |
) |
|
|
201 |
|
Other income (expense) |
|
|
11 |
|
|
|
(71 |
) |
|
|
|
|
|
|
|
Total revenues |
|
|
174,774 |
|
|
|
155,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses incurred |
|
|
88,420 |
|
|
|
81,192 |
|
Commission expense |
|
|
20,948 |
|
|
|
17,099 |
|
Other operating expenses |
|
|
29,756 |
|
|
|
26,289 |
|
Interest expense |
|
|
2,217 |
|
|
|
2,215 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
141,341 |
|
|
|
126,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
33,433 |
|
|
|
29,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit): |
|
|
|
|
|
|
|
|
Current |
|
|
10,306 |
|
|
|
9,276 |
|
Deferred |
|
|
(123 |
) |
|
|
57 |
|
|
|
|
|
|
|
|
Total income tax expense |
|
|
10,183 |
|
|
|
9,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,250 |
|
|
$ |
19,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.38 |
|
|
$ |
1.17 |
|
Diluted |
|
$ |
1.36 |
|
|
$ |
1.17 |
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
16,862 |
|
|
|
16,756 |
|
Diluted |
|
|
17,052 |
|
|
|
16,884 |
|
See accompanying notes to interim consolidated financial statements.
4
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
Preferred Stock |
|
|
|
|
|
|
|
|
Balance at beginning and end of period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
1,687 |
|
|
$ |
1,674 |
|
Shares issued under stock plans |
|
|
6 |
|
|
|
4 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
1,693 |
|
|
$ |
1,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
291,616 |
|
|
$ |
286,732 |
|
Shares issued under stock plans |
|
|
2,530 |
|
|
|
1,747 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
294,146 |
|
|
$ |
288,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
355,084 |
|
|
$ |
259,464 |
|
Net income |
|
|
23,250 |
|
|
|
19,672 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
378,334 |
|
|
$ |
279,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
|
|
|
$ |
|
|
Treasury stock acquired |
|
|
(7,321 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
(7,321 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities,
net of tax |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
10,186 |
|
|
$ |
849 |
|
Change in period |
|
|
(3,412 |
) |
|
|
1,496 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
6,774 |
|
|
|
2,345 |
|
|
|
|
|
|
|
|
Cumulative translation adjustments, net of tax |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
3,533 |
|
|
|
2,624 |
|
Net adjustment for period |
|
|
(282 |
) |
|
|
105 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
3,251 |
|
|
|
2,729 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
10,025 |
|
|
$ |
5,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity at end of period |
|
$ |
676,877 |
|
|
$ |
574,367 |
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
5
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,250 |
|
|
$ |
19,672 |
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on securities,
net of tax expense (benefit) of ($1,813) and $771
in 2008 and 2007, respectively(1) |
|
|
(3,412 |
) |
|
|
1,496 |
|
Change in foreign currency translation gains,
net of tax expense (benefit) of ($151) and $56 in 2008 and 2007, respectively |
|
|
(282 |
) |
|
|
105 |
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
(3,694 |
) |
|
|
1,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
19,556 |
|
|
$ |
21,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Disclosure of reclassification amount, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) arising
during period |
|
$ |
(3,461 |
) |
|
$ |
1,625 |
|
Less: reclassification adjustment for net realized
capital gains (losses) included in net income |
|
|
(49 |
) |
|
|
129 |
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on securities |
|
$ |
(3,412 |
) |
|
$ |
1,496 |
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
6
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,250 |
|
|
$ |
19,672 |
|
Adjustments to reconcile net income to net
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation & amortization |
|
|
1,222 |
|
|
|
703 |
|
Net deferred income tax expense (benefit) |
|
|
(123 |
) |
|
|
57 |
|
Net realized capital (gains) losses |
|
|
76 |
|
|
|
(201 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Reinsurance receivable on paid and unpaid losses and LAE |
|
|
45,418 |
|
|
|
18,344 |
|
Reserve for losses and LAE |
|
|
12,577 |
|
|
|
(3,699 |
) |
Prepaid reinsurance premiums |
|
|
776 |
|
|
|
(19,719 |
) |
Unearned premium |
|
|
31,035 |
|
|
|
53,426 |
|
Premiums in course of collection |
|
|
(35,297 |
) |
|
|
(61,862 |
) |
Commissions receivable |
|
|
2,109 |
|
|
|
298 |
|
Deferred policy acquisition costs |
|
|
(1,546 |
) |
|
|
(11,884 |
) |
Accrued investment income |
|
|
(262 |
) |
|
|
(290 |
) |
Reinsurance balances payable |
|
|
(22,525 |
) |
|
|
8,347 |
|
Federal income tax |
|
|
8,076 |
|
|
|
7,400 |
|
Other |
|
|
(5,134 |
) |
|
|
9,486 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
59,652 |
|
|
|
20,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
|
|
|
|
|
|
Redemptions and maturities |
|
|
35,146 |
|
|
|
50,738 |
|
Sales |
|
|
20,644 |
|
|
|
55,680 |
|
Purchases |
|
|
(103,436 |
) |
|
|
(174,445 |
) |
Equity securities, available-for-sale |
|
|
|
|
|
|
|
|
Sales |
|
|
5,514 |
|
|
|
4,464 |
|
Purchases |
|
|
(5,595 |
) |
|
|
(11,877 |
) |
Change in payable for securities |
|
|
1,974 |
|
|
|
8,863 |
|
Net change in short-term investments |
|
|
(647 |
) |
|
|
47,079 |
|
Purchase of property and equipment |
|
|
(1,072 |
) |
|
|
(1,898 |
) |
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(47,472 |
) |
|
|
(21,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(7,321 |
) |
|
|
|
|
Proceeds of stock issued from employee stock purchase plan |
|
|
356 |
|
|
|
301 |
|
Proceeds of stock issued from exercise of stock options |
|
|
540 |
|
|
|
241 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(6,425 |
) |
|
|
542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on foreign currency cash |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
5,754 |
|
|
|
(776 |
) |
Cash at beginning of year |
|
|
7,056 |
|
|
|
2,404 |
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
12,810 |
|
|
$ |
1,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Federal, state and local income tax paid |
|
$ |
2,728 |
|
|
$ |
1,712 |
|
Interest paid |
|
|
|
|
|
|
|
|
Issuance of stock to directors |
|
|
200 |
|
|
|
181 |
|
See accompanying notes to interim consolidated 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 provide a fair statement of the
results of The Navigators Group, Inc. and its subsidiaries for the interim periods presented on
the basis of U.S. generally accepted accounting principles (GAAP or U.S. GAAP). All such
adjustments are of a normal recurring nature. All significant intercompany transactions and
balances have been eliminated. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial statements and the
reported revenues and expenses during the reporting periods. The results of operations for any
interim period are not necessarily indicative of results for the full year. The terms we, us,
our and the Company as used herein are used to mean The Navigators Group, Inc. and its
subsidiaries, unless the context otherwise requires. The term Parent or Parent Company are
used to mean The Navigators Group, Inc. without its subsidiaries. These financial statements
should be read in conjunction with the consolidated financial statements and notes contained in
the Companys 2007 Annual Report on Form 10-K. Certain amounts for the prior year have been
reclassified to conform to the current years presentation.
Note 2. Reinsurance Ceded
The Companys ceded earned premiums were $100.0 million and $107.9 million for the three
months ended March 31, 2008 and 2007, respectively. The Companys ceded incurred losses were
$21.7 million and $63.6 million for the three months ended March 31, 2008 and 2007, respectively.
Note 3. Segment Information
The Companys subsidiaries are primarily engaged in the underwriting and management of
property and casualty insurance.
The Company classifies its business into two underwriting segments consisting of the
Insurance Companies and the Lloyds Operations, which are separately managed, and a Corporate
segment. Segment data for each of the two underwriting segments include allocations of revenues
and expenses of the Navigators Agencies and the Parent Companys expenses and related income tax
amounts.
We evaluate the performance of each segment based on its underwriting and net income results.
The Insurance Companies and the Lloyds Operations results are measured by taking into account
net earned premium, net losses and loss adjustment expenses (LAE), commission expense, other
operating expenses, commission income and other income or expense. The Corporate segment consists
of the Parent Companys investment income, interest expense and the related tax effect. Each
segment maintains its own investments, on which it earns income and realizes capital gains or
losses. Our underwriting performance is evaluated separately from the performance of our
investment portfolios.
The Insurance Companies consist of Navigators Insurance Company, including its U.K. Branch,
and its wholly-owned subsidiary, Navigators Specialty Insurance Company. They are primarily
engaged in underwriting marine insurance and related lines of business, professional liability
insurance, specialty lines of business including contractors general liability insurance,
commercial and personal umbrella and primary and excess casualty businesses, and middle markets
business consisting of general liability, commercial automobile liability and property insurance
for a variety of commercial middle markets businesses.
8
Navigators Specialty Insurance Company
underwrites specialty and professional liability insurance on an excess and surplus lines
basis fully reinsured by Navigators Insurance Company. The Lloyds Operations primarily
underwrite marine and related lines of business along with professional liability insurance,
European property business and construction coverages for onshore energy business at Lloyds of
London (Lloyds) through Lloyds Syndicate 1221 (Syndicate 1221). Our Lloyds Operations
include Navigators Underwriting Agency Ltd. (NUAL), a Lloyds underwriting agency which manages
Syndicate 1221. We participate in the capacity of Syndicate 1221 through two wholly-owned Lloyds
corporate members. The Navigators Agencies are underwriting management companies which produce,
manage and underwrite insurance and reinsurance for the Company.
The Insurance Companies and the Lloyds Operations underwriting results are measured based
on underwriting profit or loss and the related combined ratio, which are both non-GAAP measures of
underwriting profitability. Underwriting profit or loss is calculated from net earned premium,
less the sum of net losses and LAE, commission expense, other operating expenses and commission
income and other income (expense). The combined ratio is derived by dividing the sum of net
losses and LAE, commission expense, other operating expenses and commission income and other
income (expense) by net earned premium. A combined ratio of less than 100% indicates an
underwriting profit and over 100% indicates an underwriting loss.
9
Financial data by segment for the three months ended March 31, 2008 and 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
191,596 |
|
|
$ |
95,550 |
|
|
|
|
|
|
$ |
287,146 |
|
Net written premium |
|
|
124,310 |
|
|
|
63,412 |
|
|
|
|
|
|
|
187,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
112,246 |
|
|
|
43,494 |
|
|
|
|
|
|
|
155,740 |
|
Net losses and LAE |
|
|
(67,356 |
) |
|
|
(21,064 |
) |
|
|
|
|
|
|
(88,420 |
) |
Commission expense |
|
|
(12,948 |
) |
|
|
(8,000 |
) |
|
|
|
|
|
|
(20,948 |
) |
Other operating expenses |
|
|
(22,148 |
) |
|
|
(7,608 |
) |
|
|
|
|
|
|
(29,756 |
) |
Commission income and other income (expense) |
|
|
258 |
|
|
|
14 |
|
|
|
|
|
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
10,052 |
|
|
|
6,836 |
|
|
|
|
|
|
|
16,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
15,465 |
|
|
|
2,982 |
|
|
$ |
391 |
|
|
|
18,838 |
|
Net realized capital gains (losses) |
|
|
(102 |
) |
|
|
26 |
|
|
|
|
|
|
|
(76 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
(2,217 |
) |
|
|
(2,217 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
25,415 |
|
|
|
9,844 |
|
|
|
(1,826 |
) |
|
|
33,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
7,370 |
|
|
|
3,452 |
|
|
|
(639 |
) |
|
|
10,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
18,045 |
|
|
$ |
6,392 |
|
|
$ |
(1,187 |
) |
|
$ |
23,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,356,343 |
|
|
$ |
756,100 |
|
|
$ |
69,520 |
|
|
$ |
3,182,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
60.0 |
% |
|
|
48.4 |
% |
|
|
|
|
|
|
56.8 |
% |
Commission expense ratio |
|
|
11.5 |
% |
|
|
18.4 |
% |
|
|
|
|
|
|
13.5 |
% |
Other operating expense ratio (2) |
|
|
19.5 |
% |
|
|
17.5 |
% |
|
|
|
|
|
|
18.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
91.0 |
% |
|
|
84.3 |
% |
|
|
|
|
|
|
89.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to crossfoot. |
|
(2) |
|
Includes other operating expenses and commission income and other income (expense). |
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
82,535 |
|
|
$ |
74,953 |
|
|
$ |
157,488 |
|
Specialty |
|
|
78,882 |
|
|
|
|
|
|
|
78,882 |
|
Professional Liability |
|
|
19,287 |
|
|
|
10,670 |
|
|
|
29,957 |
|
Middle Markets |
|
|
8,014 |
|
|
|
|
|
|
|
8,014 |
|
Property/Other |
|
|
2,878 |
|
|
|
9,927 |
|
|
|
12,805 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
191,596 |
|
|
$ |
95,550 |
|
|
$ |
287,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
49,671 |
|
|
$ |
52,502 |
|
|
$ |
102,173 |
|
Specialty |
|
|
53,944 |
|
|
|
|
|
|
|
53,944 |
|
Professional Liability |
|
|
11,733 |
|
|
|
6,792 |
|
|
|
18,525 |
|
Middle Markets |
|
|
6,526 |
|
|
|
|
|
|
|
6,526 |
|
Property/Other |
|
|
2,436 |
|
|
|
4,118 |
|
|
|
6,554 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
124,310 |
|
|
$ |
63,412 |
|
|
$ |
187,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
33,226 |
|
|
$ |
33,992 |
|
|
$ |
67,218 |
|
Specialty |
|
|
56,669 |
|
|
|
|
|
|
|
56,669 |
|
Professional Liability |
|
|
14,073 |
|
|
|
5,959 |
|
|
|
20,032 |
|
Middle Markets |
|
|
5,697 |
|
|
|
|
|
|
|
5,697 |
|
Property/Other |
|
|
2,581 |
|
|
|
3,543 |
|
|
|
6,124 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
112,246 |
|
|
$ |
43,494 |
|
|
$ |
155,740 |
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
| |
Corporate |
| |
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
208,874 |
|
|
$ |
91,987 |
|
|
|
|
|
|
$ |
300,861 |
|
Net written premium |
|
|
122,048 |
|
|
|
50,971 |
|
|
|
|
|
|
|
173,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
101,812 |
|
|
|
37,234 |
|
|
|
|
|
|
|
139,046 |
|
Net losses and LAE |
|
|
(61,340 |
) |
|
|
(19,852 |
) |
|
|
|
|
|
|
(81,192 |
) |
Commission expense |
|
|
(11,083 |
) |
|
|
(6,016 |
) |
|
|
|
|
|
|
(17,099 |
) |
Other operating expenses |
|
|
(18,769 |
) |
|
|
(7,520 |
) |
|
|
|
|
|
|
(26,289 |
) |
Commission income and other income (expense) |
|
|
489 |
|
|
|
(152 |
) |
|
|
|
|
|
|
337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
11,109 |
|
|
|
3,694 |
|
|
|
|
|
|
|
14,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
13,654 |
|
|
|
2,151 |
|
|
$ |
411 |
|
|
|
16,216 |
|
Net realized capital gains (losses) |
|
|
243 |
|
|
|
(42 |
) |
|
|
|
|
|
|
201 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(2,215 |
) |
|
|
(2,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
25,006 |
|
|
|
5,803 |
|
|
|
(1,804 |
) |
|
|
29,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
7,911 |
|
|
|
2,054 |
|
|
|
(632 |
) |
|
|
9,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
17,095 |
|
|
$ |
3,749 |
|
|
$ |
(1,172 |
) |
|
$ |
19,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,166,439 |
|
|
$ |
822,689 |
|
|
$ |
65,240 |
|
|
$ |
3,065,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
60.2 |
% |
|
|
53.3 |
% |
|
|
|
|
|
|
58.4 |
% |
Commission expense ratio |
|
|
10.9 |
% |
|
|
16.2 |
% |
|
|
|
|
|
|
12.3 |
% |
Other operating expense ratio (2) |
|
|
18.0 |
% |
|
|
20.6 |
% |
|
|
|
|
|
|
18.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
89.1 |
% |
|
|
90.1 |
% |
|
|
|
|
|
|
89.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to crossfoot. |
|
(2) |
|
Includes other operating expenses and commission income and other income (expense). |
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
86,856 |
|
|
$ |
77,679 |
|
|
$ |
164,535 |
|
Specialty |
|
|
89,416 |
|
|
|
|
|
|
|
89,416 |
|
Professional Liability |
|
|
20,482 |
|
|
|
5,478 |
|
|
|
25,960 |
|
Middle Markets |
|
|
6,304 |
|
|
|
|
|
|
|
6,304 |
|
Property/Other |
|
|
5,816 |
|
|
|
8,830 |
|
|
|
14,646 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
208,874 |
|
|
$ |
91,987 |
|
|
$ |
300,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
45,736 |
|
|
$ |
45,488 |
|
|
$ |
91,224 |
|
Specialty |
|
|
54,585 |
|
|
|
|
|
|
|
54,585 |
|
Professional Liability |
|
|
12,192 |
|
|
|
3,383 |
|
|
|
15,575 |
|
Middle Markets |
|
|
3,969 |
|
|
|
|
|
|
|
3,969 |
|
Property/Other |
|
|
5,566 |
|
|
|
2,100 |
|
|
|
7,666 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
122,048 |
|
|
$ |
50,971 |
|
|
$ |
173,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
33,490 |
|
|
$ |
32,341 |
|
|
$ |
65,831 |
|
Specialty |
|
|
49,042 |
|
|
|
|
|
|
|
49,042 |
|
Professional Liability |
|
|
13,037 |
|
|
|
2,957 |
|
|
|
15,994 |
|
Middle Markets |
|
|
4,570 |
|
|
|
|
|
|
|
4,570 |
|
Property/Other |
|
|
1,673 |
|
|
|
1,936 |
|
|
|
3,609 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
101,812 |
|
|
$ |
37,234 |
|
|
$ |
139,046 |
|
|
|
|
|
|
|
|
|
|
|
The Insurance Companies net earned premium includes $14.7 million and $15.4 million of net
earned premium from the U.K. Branch for the three months ended March 31, 2008 and 2007,
respectively.
Note 4. Comprehensive Income
Comprehensive income encompasses net income, net unrealized capital gains and losses on
available for sale securities, and foreign currency translation adjustments, all of which are net
of tax. Please refer to the Consolidated Statements of Stockholders Equity and the Consolidated
Statements of Comprehensive Income, included herein, for the components of accumulated other
comprehensive income (loss) and of comprehensive income (loss), respectively.
Note 5. Stock-Based Compensation
Stock based compensation is expensed as stock awards granted under the Companys stock plans
vest with the expense being included in other operating expenses for the periods indicated. The
amounts charged to expense for stock-based compensation were $1.9 million and $1.6 million for the
three months ended March 31, 2008 and 2007, respectively.
The Company expensed $41,000 and $35,000 for the three months ended March 31, 2008 and 2007,
respectively, related to its Employee Stock Purchase Plan.
13
In addition, $50,000 was expensed in each of the three month periods ended March 31, 2008 and
2007 for stock issued annually to non-employee directors as part of their directors compensation
for serving on the Companys Board of Directors.
Note 6. Application of New Accounting Standards
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 141(R), Business Combinations, which requires most
identifiable assets, liabilities, non-controlling interests, and goodwill acquired in a business
combination to be recorded at full fair value. Under SFAS 141(R), all business combinations will
be accounted for by applying the acquisition method (referred to as the purchase method in SFAS
141, Business Combinations). SFAS 141(R) is effective for fiscal years beginning on or after
December 15, 2008 and is to be applied to business combinations occurring after the effective date.
The Company does not expect the adoption of SFAS 141(R) to have a material effect on its financial
condition or results of operations.
In December 2007, the FASB issued FASB 160, Noncontrolling Interests in Consolidated Financial
Statements, which requires noncontrolling interests (previously referred to as minority interests)
to be treated as a separate component of equity, not as a liability or other item outside of
permanent equity. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008.
The Company does not expect the adoption of SFAS 160 to have a material effect on its financial
condition or results of operations.
Note 7. Syndicate 1221
We record our pro rata share of Syndicate 1221s assets, liabilities, revenues and expenses,
after making adjustments to convert Lloyds accounting to U.S. GAAP. The most significant U.S.
GAAP adjustments relate to income recognition. Our participation in Lloyds Syndicate 1221 is
represented by and recorded as our proportionate share of the underlying assets and liabilities and
results of operations of the syndicate, since (a) we hold an undivided interest in each asset, (b)
we are proportionately liable for each liability and (c) Syndicate 1221 is not a separate legal
entity.
Lloyds presents its results on an underwriting year basis, generally closing each
underwriting year after three years. We make estimates for each underwriting year and timely
accrue the expected results. Our Lloyds Operations included in the consolidated financial
statements represent our participation in Syndicate 1221.
Syndicate 1221s stamp capacity is £123.0 million ($243.4 million) in 2008 compared to £140.0
million ($280.2 million) in 2007. Stamp capacity is a measure of the amount of premium a Lloyds
syndicate is authorized to write based on a business plan approved by the Council of Lloyds.
Syndicate 1221s capacity is expressed net of commission (as is standard at Lloyds). The
Syndicate 1221 premium recorded in the Companys financial statements is gross of commission.
Navigators provides 100% of Syndicate 1221s capacity for the 2008 and 2007 underwriting years
through Navigators Corporate Underwriters Ltd. in 2008 and through Millennium Underwriting Ltd. and
Navigators Corporate Underwriters Ltd. in 2007. The Lloyds Operations included in the
consolidated financial statements represent the Companys participation in Syndicate 1221.
The Company provides letters of credit to Lloyds to support its Syndicate 1221 capacity. If
the Company increases its participation or if Lloyds changes the capital requirements, the Company
may be required to supply additional letters of credit or other collateral acceptable to Lloyds,
or reduce the capacity of Syndicate 1221. The letters of credit are provided through a credit
facility with a consortium of banks which expires March 31, 2009. If the banks decide not to renew
the credit facility, the Company will need to find other sources to provide the letters of credit
or other collateral in order to continue to participate in Syndicate 1221. The bank facility is
collateralized by all of the common stock of Navigators Insurance Company.
14
Note 8. Income Taxes
We are subject to the tax regulations of the United States and foreign countries in which we
operate. The Company files a consolidated federal tax return, which includes all domestic
subsidiaries and the U.K. Branch. The income from the foreign operations is designated as either
U.S. connected income or non-U.S. connected income. Lloyds is required to pay U.S. income tax on
U.S. connected income written by Lloyds syndicates. Lloyds and the IRS have entered into an
agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyds and
remitted directly to the IRS. These amounts are then charged to the corporate members in
proportion to their participation in the relevant syndicates. The Companys corporate members are
subject to this agreement and will receive 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 since less than 50% of Syndicate 1221s premium is derived
within the U.K. and would therefore be subject to U.S. taxation when the Lloyds year of account
closes. Taxes are accrued at a 35% rate on our foreign source insurance income and foreign tax
credits, where available, are utilized to offset U.S. tax as permitted. The Companys effective
tax rate for Syndicate 1221 taxable income could substantially exceed 35% to the extent the Company
is unable to offset U.S. taxes paid under Subpart F tax regulations with U.K. tax credits on future
underwriting year distributions. U.S. taxes are not accrued on the earnings of the Companys
foreign agencies as these earnings are not subject to the Subpart F tax regulations. These
earnings are subject to taxes under U.K. tax regulations at a 30% 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. A finance bill
was enacted in the U.K. on July 19, 2007 that reduces the U.K. corporate tax rate from 30% to 28%
effective April 1, 2008. The effect of such tax rate change was not material to the Companys
financial statements.
A tax benefit taken in the tax return but not in the financial statements is known as an
unrecognized tax benefit. The Company had no unrecognized tax benefits at either March 31, 2008
or March 31, 2007 and does not anticipate any significant unrecognized tax benefits within the next
twelve months. The Company is currently not under examination by any major U.S. or foreign tax
authority and is generally subject to U.S. Federal, state, local, or foreign tax examinations by
tax authorities for years 2004 and subsequent. The Companys policy is to record interest and
penalties related to unrecognized tax benefits to income tax expense. The Company did not incur
any interest or penalties related to unrecognized tax benefits for the three month periods ended
March 31, 2008 and 2007.
The Company had state and local deferred tax assets amounting to potential future tax benefits
of $7.6 million and $6.3 million at March 31, 2008 and December 31, 2007, respectively. Included
in the deferred tax assets are net operating loss carryforwards of $1.6 million and $2.5 million at
March 31, 2008 and December 31, 2007, respectively. A valuation allowance was established for the
full amount of these potential future tax benefits due to the uncertainty associated with their
realization. The Companys state and local tax carryforwards at March 31, 2008 expire in 2025.
Note 9. Commitments and Contingencies
(a) The Company is not a party to, or the subject of, any material pending legal proceedings
that depart from the routine litigation incidental to the kinds of business it conducts.
(b) Whenever a member of Lloyds is unable to pay its debts to policyholders, such debts may
be payable by the Lloyds Central Fund. If Lloyds determines that the Central Fund needs to be
increased, it has the power to assess premium levies on current Lloyds members up to 3% of a
members underwriting capacity in any one year. The Company does not believe that any assessment
is likely in the foreseeable future and has not provided any allowance for such an assessment.
However, based on the Companys 2008 capacity at Lloyds of £123
million, the March 31, 2008 exchange rate of £1 equals $1.99 and assuming the maximum 3%
assessment, the Company would be assessed approximately $7.3 million.
15
Note 10. Senior Notes due May 1, 2016
On April 17, 2006, the Company completed a public debt offering of $125 million principal
amount of 7% senior unsecured notes due May 1, 2016 (the Senior Notes) and received net proceeds
of $123.5 million. The interest payment dates on the Senior Notes are each May 1 and November 1.
The effective interest rate related to the Senior Notes, based on the proceeds net of discount and
all issuance costs, approximates 7.17%. The interest expense on the Senior Notes was $2.2 million
for the first three months of both 2008 and 2007. The fair value of the Senior Notes, based on
quoted market prices, was $120.7 million and $126.7 million at March 31, 2008 and December 31,
2007, respectively.
The Senior Notes, the Companys only senior unsecured obligation, will rank equally with
future senior unsecured indebtedness. The Company may redeem the Senior Notes at any time and from
time to time, in whole or in part, at a make-whole redemption price. The terms of the Senior
Notes contain various restrictive business and financial covenants typical for debt obligations of
this type, including limitations on mergers, liens and dispositions of the common stock of certain
subsidiaries. As of March 31, 2008, the Company was in compliance with all such covenants.
Note 11. Fair Value Measurements SFAS 157 and SFAS 159
In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which was adopted by the
Company on January 1, 2008. SFAS 157 defines fair value, expands disclosure requirements around
fair value and specifies a hierarchy of valuation techniques based on whether the input to those
valuation techniques are observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect the Companys market
assumptions. These two types of inputs create the following fair value hierarchy:
|
|
|
Level 1 Quoted prices for identical instruments in active markets. |
|
|
|
|
Level 2 Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs and significant value
drivers are observable in active markets. |
|
|
|
|
Level 3 Valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable. |
This hierarchy requires the Company to use observable market data, when available, and to
minimize the use of unobservable inputs when determining fair value.
16
The following table presents, for each of the fair value hierarchy levels, the Companys fixed
maturities, equity securities and short-term investments that are measured at fair value at March
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
In Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
188,291 |
|
|
$ |
1,380,607 |
|
|
$ |
2,073 |
|
|
$ |
1,570,971 |
|
Equities securities |
|
|
54,030 |
|
|
|
5,658 |
|
|
|
|
|
|
|
59,688 |
|
Short-term investments |
|
|
28,664 |
|
|
|
142,783 |
|
|
|
|
|
|
|
171,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
270,985 |
|
|
$ |
1,529,048 |
|
|
$ |
2,073 |
|
|
$ |
1,802,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The securities classified as Level 3 in the above table consist of three structured securities
rated AAA/Aaa by Standard and Poors (S&P) and Moodys Investors Service (Moodys),
respectively, with unobservable inputs included in the Companys fixed maturities portfolio for
which price quotes from brokers were used to indicate fair value. The following table presents a
reconciliation of the beginning and ending balances for all investments measured at fair value
using Level 3 inputs during the quarter ended March 31, 2008:
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2008 |
|
|
|
($ in thousands) |
|
|
Level 3 investments as of January 1, 2008 |
|
$ |
2,603 |
|
Unrealized net gains included in
other comprehensive income (loss) |
|
|
17 |
|
Purchases, sales, paydowns and amortization |
|
|
(153 |
) |
Transfer to Level 2 |
|
|
(394 |
) |
|
|
|
|
Level 3 investments as of March 31, 2008 |
|
$ |
2,073 |
|
|
|
|
|
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS 159 provides on an instrument-by-instrument basis for most financial
assets and liabilities to be reported at with changes in fair value reported in earnings. The
Company adopted SFAS 159 on January 1, 2008 and did not elect to apply fair value accounting to any
financial instruments with future changes in value reported in earnings.
Note 12. Share Repurchases
In October, 2007 the Companys Board of Directors adopted a stock repurchase program for up to
$30 million of the Companys common stock. Purchases may be made from time to time at prevailing
prices in open market or privately negotiated transactions through December 31, 2008. The timing
and amount of purchases under the program will depend on a variety of factors, including the
trading price of the stock, market conditions and corporate and regulatory considerations. There
were no purchases made in the 2007 fourth quarter. During the first quarter of 2008, the Company
purchased 136,026 shares of its common stock in the open market at an average cost of $53.82 per
share which approximates $7.3 million in total. There is approximately $22.7 million remaining to
be used in the stock repurchase program.
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Note on Forward-Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q are forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995. All statements
other than statements of historical fact included in or incorporated by reference in this Quarterly
Report are forward-looking statements. Whenever used in this report, the words estimate,
expect, believe, may, will, intend, continue or similar expressions or their negative
are intended to identify such forward-looking statements. Forward-looking statements are derived
from information that we currently have and assumptions that we make. We cannot assure that
anticipated results will be achieved, since actual results may differ materially because of both
known and unknown risks and uncertainties which we face. We undertake no obligation to publicly
update or revise any forward-looking statement, whether as a result of new information, future
events or otherwise. Factors that could cause actual results to differ materially from our
forward-looking statements include, but are not limited to, the factors discussed in the Risk
Factors section of our 2007 Annual Report on Form 10-K as well as:
|
|
|
the effects of domestic and foreign economic conditions, and conditions which
affect the market for property and casualty insurance; |
|
|
|
|
changes in the laws, rules and regulations which apply to our insurance
companies; |
|
|
|
|
the effects of emerging claim and coverage issues on our business, including
adverse judicial or regulatory decisions and rulings; |
|
|
|
|
the effects of competition from banks and other insurers and the trend toward
self-insurance; |
|
|
|
|
risks that we face in entering new markets and diversifying the products and
services we offer; |
|
|
|
|
unexpected turnover of our professional staff; |
|
|
|
|
changing legal and social trends and inherent uncertainties in the loss
estimation process that can adversely impact the adequacy of loss reserves and the
allowance for reinsurance recoverables, including our estimates relating to ultimate
asbestos liabilities and related reinsurance recoverables; |
|
|
|
|
risks inherent in the collection of reinsurance recoverable amounts from our
reinsurers over many years into the future based on the reinsurers financial ability
and intent to meet such obligations to the Company; |
|
|
|
|
risks associated with our continuing ability to obtain reinsurance covering our
exposures at appropriate prices and/or in sufficient amounts and the related
recoverability of our reinsured losses; |
|
|
|
|
weather-related events and other catastrophes (including acts of terrorism)
impacting our insureds and/or reinsurers, including, without limitation, the impact of
Hurricanes Katrina, Rita, and Wilma and the possibility that our estimates of losses
from Hurricanes Katrina, Rita and Wilma will prove to be materially inaccurate; |
|
|
|
|
our ability to attain adequate prices, obtain new business and retain existing
business consistent with our expectations and to successfully implement our business
strategy during soft as well as hard markets; |
|
|
|
|
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; |
18
|
|
|
the inability of our internal control framework to provide absolute assurance
that all incidents of fraud or unintended material errors will be detected and
prevented; |
|
|
|
|
changes in accounting principles or policies or in our application of such
accounting principles or policies; |
|
|
|
|
the risk that our investment portfolio suffers reduced returns or investment
losses which could reduce our profitability; and |
|
|
|
|
other risks that we identify in future filings with the Securities and Exchange
Commission (the SEC), including without limitation the risks described under the
caption Risk Factors in our Annual Report on Form 10-K for the year ended December
31, 2007. |
In light of these risks, uncertainties and assumptions, any forward-looking events discussed
in this Form 10-Q may not occur. You are cautioned not to place undue reliance on any
forward-looking statements, which speak only as of their respective dates.
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.
Overview
We are an international insurance holding company focusing on specialty products for niches
within the overall property/casualty insurance market. The Companys underwriting segments consist
of insurance company operations and operations at Lloyds of London. Our largest product line and
most long-standing area of specialization is ocean marine insurance. We have also developed
specialty niches in professional liability insurance and in specialty liability insurance primarily
consisting of contractors liability and primary and excess liability coverages. We conduct
operations through our Insurance Companies and our Lloyds Operations. The Insurance Companies
consist of Navigators Insurance Company, which includes our U.K. Branch, and Navigators Specialty
Insurance Company, which underwrites specialty and professional liability insurance on an excess
and surplus lines basis fully reinsured by Navigators Insurance Company. Our Lloyds Operations
include NUAL, a wholly-owned Lloyds underwriting agency which manages Syndicate 1221. Our Lloyds
Operations primarily underwrite marine and related lines of business along with professional
liability insurance, European property business and construction coverages for onshore energy
business at Lloyds through Syndicate 1221. We participate in the capacity of Syndicate 1221
through our wholly-owned Lloyds corporate member (utilized two wholly-owned Lloyds corporate
members prior to the 2008 underwriting year).
While management takes into consideration a wide range of factors in planning the Companys
business strategy and evaluating results of operations, there are certain factors that management
believes are fundamental to understanding how the Company is managed. First, underwriting profit
is consistently emphasized as a primary goal, above premium growth. Managements assessment of our
trends and potential growth in underwriting profit is the dominant factor in its decisions with
respect to whether or not to expand a business line, enter into a new niche, product or territory
or, conversely, to contract capacity in any business line. In addition, management focuses on
managing the costs of our operations. Management believes that careful monitoring of the costs of
existing operations and assessment of costs of potential growth opportunities are important to our
profitability. Access to capital also has a significant impact on managements outlook for our
operations. The
Insurance Companies operations and ability to grow their business and take advantage of
market opportunities are particularly constrained by regulatory capital requirements and rating
agency assessments of capital adequacy.
19
The discussions that follow include tables, which contain both our consolidated and segment
operating results for the three month periods ended March 31, 2008 and 2007. In presenting our
financial results we have discussed our performance with reference to underwriting profit or loss
and the related combined ratio, both of which are non-GAAP measures of underwriting profitability.
We consider such measures, which may be defined differently by other companies, to be important in
the understanding of our overall results of operations. Underwriting profit or loss is calculated
from net earned premium, less the sum of net losses and LAE, commission expense, other operating
expenses and commission income and other income (expense). The combined ratio is derived by
dividing the sum of net losses and LAE, commission expense, other operating expenses and commission
income and other income (expense) by net earned premiums. A combined ratio of less than 100%
indicates an underwriting profit and over 100% indicates an underwriting loss.
Although not a financial measure, managements decisions are also greatly influenced by access
to specialized underwriting and claims expertise in our lines of business. We have chosen to
operate in specialty niches with certain common characteristics which we believe provide us with
the opportunity to use our technical underwriting expertise in order to realize underwriting
profit. As a result, we have focused on underserved markets for businesses characterized by higher
severity and lower frequency of loss where we believe our intellectual capital and financial
strength bring meaningful value. In contrast, we have avoided niches that we believe have a high
frequency of loss activity and/or are subject to a high level of regulatory requirements, such as
workers compensation and personal automobile insurance, because we do not believe our technical
expertise is of as much value in these types of businesses. Examples of niches that have the
characteristics we look for include bluewater hull which provides coverage for physical damage to,
for example, highly valued cruise ships, and directors and officers liability insurance (D&O)
which covers litigation exposure of a corporations directors and officers. These types of
exposures require substantial technical expertise. We attempt to mitigate the financial impact of
severe claims on our results by conservative and detailed underwriting, prudent use of reinsurance
and a balanced portfolio of risks.
Our revenue is primarily comprised of premiums and investment income. The Insurance Companies
derive their premiums primarily from business written by the Navigators Agencies, which are
wholly-owned insurance underwriting agencies of the Company. The Lloyds Operations derive their
premiums from business written by NUAL. Beginning in 2006, The Navigators Agencies produce and
manage business almost exclusively for the Insurance Companies and are reimbursed for actual costs.
NUAL is reimbursed for its actual costs and, where applicable, profit commissions on the business
produced for Syndicate 1221.
From 2003 through 2006, we experienced generally beneficial market changes in our lines of
business. As a result of several large industry losses in the second quarter of 2001, the marine
insurance market began to experience diminished capacity and rate increases, initially in the
offshore energy line of business. The marine rate increases began to level off in 2004 and into
2005. As a result of the substantial insurance industry losses resulting from Hurricanes Katrina
and Rita, the marine insurance market experienced diminished capacity and rate increases through
the end of 2006, particularly for the offshore energy risks located in the Gulf of Mexico. Since
the end of 2006, competitive market conditions have returned as available capacity has increased.
The average renewal premium rates for our Insurance Companies marine business decreased
approximately 0.7% for the 2008 first quarter, including offshore energy average renewal premium
rates which decreased approximately 5.6%. The average renewal premium rates for our Lloyds
Operations marine business decreased approximately 4.0% for the 2008 first quarter including
offshore energy average renewal premium rates which decreased approximately 9.5%. We expect
continuing overall declines in 2008 pricing for marine lines of business, including offshore
energy, as additional capacity continues to re-enter the marine market.
20
Specialty liability losses in 2001 to 2003, particularly for the contractors liability
business, also resulted in diminished capacity in the market in which we compete, as many former
competitors who lacked the expertise
to selectively underwrite this business have been forced to withdraw from the market resulting
in average renewal premium rate increases of approximately 13% in 2004 and 49% in 2003. This was
followed by a slight decline in rates of approximately 1% in 2005. The 2006 year average renewal
premium rates for the contractors liability business declined approximately 6%, primarily due to
additional competition in the marketplace. This decline continued into 2007 with average renewal
premium rates declining approximately 10.7%. The average renewal premium rates for the contractors
liability business declined approximately 9.3% in the 2008 first quarter. We expect competitive
conditions to continue during 2008 resulting in continuing declines in pricing for contractors
liability and excess liability business.
In the professional liability market, the enactment of the Sarbanes-Oxley Act of 2002,
together with financial and accounting scandals at publicly traded corporations and the increased
frequency of securities-related class action litigation, has led to heightened interest in
professional liability insurance generally. Average professional liability average renewal premium
rates decreased approximately 6.6% in 2007 compared to relatively level average renewal premium
rates in 2006 and 2005 after decreasing approximately 3% in 2004 which followed substantial average
renewal premium rate increases in 2003 and 2002, particularly for D&O insurance. The 2007 D&O
insurance average renewal premium rates decreased approximately 7.9% following decreases of
approximately 1.7% in 2006, 2.3% 2005 and 9.5% in 2004. The average renewal premium rates for the
professional liability business declined approximately 5.6% in the 2008 first quarter, including
D&O insurance average renewal premium rates which declined approximately 4.4%. We anticipate
continuing declines in 2008 pricing given the overall favorable industry underwriting results since
2002 for the professional liability lines of business.
Our business is cyclical and influenced by many factors. These factors include price
competition, economic conditions, interest rates, weather-related events and other catastrophes
including natural and man-made disasters (for example hurricanes and terrorism), state regulations,
court decisions and changes in the law. The incidence and severity of catastrophes are inherently
unpredictable. Although we will attempt to manage our exposure to such events, the frequency and
severity of catastrophic events could exceed our estimates, which could have a material adverse
effect on our financial condition. Additionally, because our insurance products must be priced,
and premiums charged, before costs have fully developed, our liabilities are required to be
estimated and recorded in recognition of future loss and settlement obligations. Due to the
inherent uncertainty in estimating these liabilities, we cannot assure you that our actual
liabilities will not exceed our recorded amounts.
Catastrophe Risk Management
Our Insurance Companies and Lloyds Operations have exposure to losses caused by hurricanes
and other natural and man-made catastrophic events. The frequency and severity of catastrophes are
unpredictable.
The extent of losses from a catastrophe is a function of both the total amount of insured
exposure in an area affected by the event and the severity of the event. We continually assess our
concentration of underwriting exposures in catastrophe exposed areas globally and attempt to manage
this exposure through individual risk selection and through the purchase of reinsurance. We also
use modeling and concentration management tools that allow us to better monitor and control our
accumulations of potential losses from catastrophe exposures. Despite these efforts, there remains
uncertainty about the characteristics, timing and extent of insured losses given the nature of
catastrophes. The occurrence of one or more severe catastrophic events could have a material
adverse effect on the Companys results of operations, financial condition and liquidity.
The Company has significant catastrophe exposures throughout the world. The largest
catastrophe exposure results from hurricane damage to offshore energy risks in the Gulf of Mexico.
Based on an assessment made through the end of the 2008 first quarter and taking into account the
2008 reinsurance structure, the Company believes that its estimated probable maximum pre-tax gross
and net loss exposure in a so-called or theoretical one in two hundred and fifty year hurricane
event in the Gulf of Mexico would approximate $221 million and $32 million, respectively, including
the cost of reinsurance reinstatement premiums. There are a number of significant assumptions and
related variables related to such an estimate including the size, force and path of the hurricane,
the various types of the insured risks exposed to the event at the time the event occurs and
the estimated costs or damages incurred for each insured risk. There can be no assurances
that the gross and net loss amounts that the Company could incur in such an event or in any
hurricanes that may occur in the Gulf of Mexico would not be materially higher than the estimates
discussed above given the significant uncertainties with respect to such an estimate.
21
The occurrence of large loss events could reduce the reinsurance coverage that is available to
us and could weaken the financial condition of our reinsurers, which could have a material adverse
effect on our results of operations. Although the reinsurance agreements make the reinsurers
liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance
arrangements do not eliminate our obligation to pay claims to our policyholders. Accordingly, we
bear credit risk with respect to our reinsurers. Specifically, our reinsurers may not pay claims
made by us on a timely basis, or they may not pay some or all of these claims. Either of these
events would increase our costs and could have a material adverse effect on our business. We are
required to pay the losses even if a reinsurer fails to meet its obligations under the reinsurance
agreement.
Critical Accounting Policies
It is important to understand our accounting policies in order to understand our financial
statements. Management considers certain of these policies to be critical to the presentation of
the financial results, since they require management to make significant estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets, liabilities, revenues,
expenses, and related disclosures at the financial reporting date and throughout the reporting
period. Certain of the estimates result from judgments that can be subjective and complex and
consequently actual results may differ from these estimates, which would be reflected in future
periods.
Our most critical accounting policies involve the reporting of the reserves for losses and LAE
(including losses that have occurred but were not reported to us by the financial reporting date),
reinsurance recoverables, written and unearned premium, the recoverability of deferred tax assets,
the impairment of invested assets, accounting for Lloyds results and the translation of foreign
currencies.
Reserves for Losses and LAE. Reserves for losses and LAE represent an estimate of the
expected cost of the ultimate settlement and administration of losses, based on facts and
circumstances then known. Actuarial methodologies are employed to assist in establishing such
estimates and include judgments relative to estimates of future claims severity and frequency,
length of time to develop to ultimate, judicial theories of liability and other third party factors
which are often beyond our control. Due to the inherent uncertainty associated with the reserving
process, the ultimate liability may be different from the original estimate. Such estimates are
regularly reviewed and updated and any resulting adjustments are included in the current years
results.
Reinsurance Recoverables. The most significant reinsurance recoverables are established for
the portion of the loss reserves that are ceded to reinsurers. Reinsurance recoverables are
determined based upon the terms and conditions of reinsurance contracts which could be subject to
interpretations that differ from our own based on judicial theories of liability. In addition, we
bear credit risk with respect to our reinsurers which can be significant considering that certain
of the reserves remain outstanding for an extended period of time. We are required to pay losses
even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement.
Written and Unearned Premium. Written premium is recorded based on the insurance policies
that have been reported to us and the policies that have been written by agents and brokers but not
yet reported to us. We must estimate the amount of written premium not yet reported based on
judgments relative to current and historical trends of the business being written. Such estimates
are regularly reviewed and updated and any resulting adjustments are included in the current years
results. An unearned premium reserve is established to reflect the unexpired portion of each
policy at the financial reporting date.
22
Substantially all of our business is placed through agents and brokers. Since the vast
majority of the Companys gross written premium is primary or direct as opposed to assumed, the
delays in reporting assumed premium generally do not have a significant effect on the Companys
financial statements, since we record
estimates for both unreported direct and assumed premium. We also record the ceded portion of
the estimated gross written premium and related acquisition costs. The earned gross, ceded and net
premiums are calculated based on our earning methodology which is generally pro-rata over the
policy period. Losses are also recorded in relation to the earned premium. The estimate for
losses incurred on the estimated premium is based on an actuarial calculation consistent with the
methodology used to determine incurred but not reported loss reserves for reported premiums.
The portion of the Companys premium that is estimated is mostly for the marine business
written by our U.K. Branch and Lloyds Operations. We generally do not experience any significant
backlog in processing premiums. Such premium estimates are generally based on submission data
received from agents and brokers and recorded when the insurance policy or reinsurance contract is
written or bound. The estimates are regularly reviewed and updated taking into account the premium
received to date versus the estimate and the age of the estimate. To the extent that the actual
premium varies from the estimates, the difference, along with the related loss reserves and
underwriting expenses, is recorded in current operations.
Deferred Tax Assets. We apply the asset and liability method of accounting for income taxes
whereby deferred assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. In assessing the realization of deferred tax assets, management
considers whether it is more likely than not that the deferred tax assets will be realized.
Impairment of Invested Assets. Impairment of invested assets results in a charge to
operations when a market decline below cost is other-than-temporary. Management regularly reviews
our fixed maturity and equity securities portfolios to evaluate the necessity of recording
impairment losses for other-than-temporary declines in the fair value of investments. In general,
we focus our attention on those securities whose market value was less than 80% of their cost or
amortized cost, as appropriate, for six or more consecutive months. Factors considered in
evaluating potential impairment include, but are not limited to, the current fair value as compared
to cost or amortized cost of the security, as appropriate, the length of time the investment has
been below cost or amortized cost and by how much, our intent and ability to retain the investment
for a period of time sufficient to allow for an anticipated recovery in value, specific credit
issues related to the issuer and current economic conditions. Other-than-temporary impairment
losses result in a permanent reduction of the cost basis of the underlying investment. Significant
changes in the factors we consider when evaluating investments for impairment losses could result
in a significant change in impairment losses reported in the consolidated financial statements.
As mentioned above, the Company considers its intent and ability to hold a security until the
value recovers as part of the process of evaluating whether a securitys unrealized loss represents
an
other-than-
temporary decline. The Companys ability to hold such securities is supported by sufficient cash
flow from its operations and from maturities within its investment portfolio in order to meet its
claims payment and other disbursement obligations arising from its underwriting operations without
selling such investments. With respect to securities where the decline in value is determined to
be temporary and the securitys value is not written down, a subsequent decision may be made to
sell that security and realize a loss. Subsequent decisions on security sales are made within the
context of overall risk monitoring, changing information, market conditions and assessing value
relative to other comparable securities. Management of the Companys investment portfolio is
outsourced to third party investment managers. While these investment managers may, at a given
point in time, believe that the preferred course of action is to hold securities with unrealized
losses that are considered temporary until such losses are recovered, the dynamic nature of the
portfolio management may result in a subsequent decision to sell the security and realize the loss,
based upon a change in market and other factors described above. The Company believes that
subsequent decisions to sell such securities are consistent with the classification of the
Companys portfolio as available for sale.
Investment managers are required to notify management of rating agency downgrades of
securities in their portfolios as well as any potential investment valuation issues at the end of
each quarter. Investment managers are also required to notify management to the extent the
investment manager is contemplating a transaction or transactions that may result in a realized
loss above a certain threshold. Additionally, investment
managers are required to notify management if they are contemplating a transaction or
transactions that may result in any realized loss up until a certain period beyond the close of a
quarterly accounting period.
23
Accounting for Lloyds Results. We record our pro rata share of Syndicate 1221s assets,
liabilities, revenues and expenses, after making adjustments to convert Lloyds accounting to U.S.
GAAP. The most significant GAAP adjustments relate to income recognition. Lloyds syndicates
determine underwriting results by year of account at the end of three years. We record adjustments
to recognize underwriting results as incurred, including the expected ultimate cost of losses
incurred. These adjustments to losses are based on actuarial analysis of syndicate accounts,
including forecasts of expected ultimate losses provided by the syndicate. At the end of the
Lloyds three-year period for determining underwriting results for an account year, the syndicate
will close the account year by reinsuring outstanding claims on that account year with the
participants for the next underwriting year. The amount to close an underwriting year into the
next year is referred to as the reinsurance to close (RITC). The RITC transaction, recorded in
the fourth quarter, does not result in any gain or loss.
Translation
of Foreign Currencies. Financial statements of subsidiaries expressed in foreign
currencies are translated into U.S. dollars in accordance with SFAS 52, Foreign Currency
Translation, issued by the FASB. Under SFAS 52, functional currency assets and liabilities are
translated into U.S. dollars using period end rates of exchange and the related translation
adjustments are recorded as a separate component of accumulated other comprehensive income.
Statement of income amounts expressed in functional currencies are translated using average
exchange rates.
Realized gains and losses resulting from foreign currency transactions are recorded in other
income (expense) in the Companys Consolidated Statements of Income.
Results of Operations
The following is a discussion and analysis of our consolidated and segment results of
operations for the three month periods ended March 31, 2008 and 2007. Earnings per share data is
presented on a per diluted share basis.
Effective in 2008, the Company has reclassified certain of its business for this Managements
Discussion and Analysis of Financial Condition and Results of Operations. The inland marine
business, formerly included in other business, is now included in marine business. Middle markets
business, formerly included in the specialty business, is now broken out separately. Underwriting
data for prior periods has been reclassified to reflect these changes.
Net income for the three months ended March 31, 2008 was $23.3 million or $1.36 per share
compared to $19.7 million or $1.17 per share for the three months ended March 31, 2007. Included
in these results were net realized capital gains (losses) of nil per share and $0.01 per share for
the three months ended March 31, 2008 and 2007, respectively.
The combined ratios, which consist of the sum of the loss and LAE ratio and the expense ratio
for each period, for the 2008 and 2007 first quarters were 89.2% and 89.4%, respectively. The
combined ratio for the 2008 first quarter was reduced by 8.8 loss ratio points for net loss reserve
redundancies relating to prior periods of $13.7 million or $0.52 per share. The combined ratio
for the 2007 first quarter was reduced by 4.9 loss ratio points for net loss reserve redundancies
relating to prior periods of $6.8 million or $0.26 per share. The net paid loss and LAE ratio for
the 2008 first quarter was 32.7% compared to 31.3% for the 2007 first quarter.
Cash flow from operations was $59.7 million for the 2008 first quarter compared to $20.1
million for the comparable period in 2007. The positive cash flow contributed to the growth in
invested assets and net investment income.
24
Consolidated stockholders equity increased 2.2% to $676.9 million or $40.29 per share at
March 31, 2008 compared to $662.1 million or $39.24 per share at December 31, 2007. The increase
was primarily due to net income of $23.3 million for the first three months of 2008.
Revenues. Gross written premium decreased 4.6% to $287.1 million in the first quarter
of 2008 from $300.9 million in the first quarter of 2007. The decrease in the 2008 gross written
premium generally reflects a softening market.
The average premium rate increases or decreases as noted elsewhere in this document for the
marine, specialty and professional liability businesses are calculated primarily by comparing
premium amounts on policies that have renewed. The premiums are judgmentally adjusted for exposure
factors when deemed significant and sometimes represent an aggregation of several lines of
business. The rate change calculations provide an indicated pricing trend and are not meant to be
a precise analysis of the numerous factors that affect premium rates or the adequacy of such rates
to cover all underwriting costs and generate an underwriting profit. The calculation can also be
affected quarter by quarter depending on the particular policies and the number of policies that
renew during that period. Due to market conditions, these rate changes may or may not apply to new
business which generally would be more competitively priced compared to renewal business.
25
The following table sets forth our gross and net written premium and net earned premium by
segment and line of business for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
|
Premium |
|
|
% |
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
% |
|
|
Premium |
|
|
Premium |
|
|
|
($ in thousands) |
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
82,535 |
|
|
|
28.7 |
% |
|
$ |
49,671 |
|
|
$ |
33,226 |
|
|
$ |
86,856 |
|
|
|
28.9 |
% |
|
$ |
45,736 |
|
|
$ |
33,490 |
|
Specialty |
|
|
78,882 |
|
|
|
27.5 |
% |
|
|
53,944 |
|
|
|
56,669 |
|
|
|
89,416 |
|
|
|
29.7 |
% |
|
|
54,585 |
|
|
|
49,042 |
|
Professional Liability |
|
|
19,287 |
|
|
|
6.7 |
% |
|
|
11,733 |
|
|
|
14,073 |
|
|
|
20,482 |
|
|
|
6.8 |
% |
|
|
12,192 |
|
|
|
13,037 |
|
Middle Markets |
|
|
8,014 |
|
|
|
2.8 |
% |
|
|
6,526 |
|
|
|
5,697 |
|
|
|
6,304 |
|
|
|
2.1 |
% |
|
|
3,969 |
|
|
|
4,570 |
|
Property/Other |
|
|
2,878 |
|
|
|
1.0 |
% |
|
|
2,436 |
|
|
|
2,581 |
|
|
|
5,816 |
|
|
|
1.9 |
% |
|
|
5,566 |
|
|
|
1,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies Total |
|
|
191,596 |
|
|
|
66.7 |
% |
|
|
124,310 |
|
|
|
112,246 |
|
|
|
208,874 |
|
|
|
69.4 |
% |
|
|
122,048 |
|
|
|
101,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
74,953 |
|
|
|
26.1 |
% |
|
|
52,502 |
|
|
|
33,992 |
|
|
|
77,679 |
|
|
|
25.8 |
% |
|
|
45,488 |
|
|
|
32,341 |
|
Professional Liability |
|
|
10,670 |
|
|
|
3.7 |
% |
|
|
6,792 |
|
|
|
5,959 |
|
|
|
5,478 |
|
|
|
1.8 |
% |
|
|
3,383 |
|
|
|
2,957 |
|
Other |
|
|
9,927 |
|
|
|
3.5 |
% |
|
|
4,118 |
|
|
|
3,543 |
|
|
|
8,830 |
|
|
|
3.0 |
% |
|
|
2,100 |
|
|
|
1,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations Total |
|
|
95,550 |
|
|
|
33.3 |
% |
|
|
63,412 |
|
|
|
43,494 |
|
|
|
91,987 |
|
|
|
30.6 |
% |
|
|
50,971 |
|
|
|
37,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany elimination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
287,146 |
|
|
|
100.0 |
% |
|
$ |
187,722 |
|
|
$ |
155,740 |
|
|
$ |
300,861 |
|
|
|
100.0 |
% |
|
$ |
173,019 |
|
|
$ |
139,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Gross Written Premium
Insurance Companies Gross Written Premium
Marine Premium. The gross written premium for the first three months of 2008 and 2007 consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Marine liability |
|
|
31 |
% |
|
|
30 |
% |
P&I |
|
|
14 |
% |
|
|
13 |
% |
Offshore energy |
|
|
13 |
% |
|
|
17 |
% |
Cargo |
|
|
10 |
% |
|
|
9 |
% |
Transport |
|
|
8 |
% |
|
|
8 |
% |
Inland marine |
|
|
7 |
% |
|
|
3 |
% |
Other |
|
|
6 |
% |
|
|
7 |
% |
Bluewater hull |
|
|
6 |
% |
|
|
7 |
% |
Craft/Fishing vessel |
|
|
5 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
The marine gross written premium for the 2008 first quarter decreased 5.0% compared to the
same period in 2007 reflecting flattening or declining premium in several classes of business due
to increased competitive market conditions. The average renewal premium rates during the 2008
first quarter decreased 0.7%. We expect continuing overall declines in 2008 pricing for marine
lines of business, including offshore energy, as additional capacity continues to re-enter the
marine market.
Specialty Premium. The gross written premium for the first three months of 2008 and 2007
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Construction liability |
|
|
50 |
% |
|
|
50 |
% |
Commercial umbrella |
|
|
21 |
% |
|
|
18 |
% |
Programs |
|
|
13 |
% |
|
|
10 |
% |
Primary E&S |
|
|
11 |
% |
|
|
14 |
% |
Personal umbrella |
|
|
3 |
% |
|
|
3 |
% |
Liquor liability |
|
|
2 |
% |
|
|
1 |
% |
Other |
|
|
0 |
% |
|
|
4 |
% |
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
The specialty gross written premium for the 2008 first quarter decreased 11.8% compared to the
same period in 2007 due primarily to weakening economic conditions that have reduced demand for
contractors liability insurance. The average renewal premium rates decreased by approximately 9.3%
for the contractors liability business in the 2008 first quarter. The recent premium rate
decreases for the contractors liability business and generally for the specialty lines of business
are reflective of softening market conditions which are expected to continue throughout 2008.
27
Professional Liability Premium. The gross written premium for the first three months of 2008
and 2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
D&O (public and private) |
|
|
57 |
% |
|
|
60 |
% |
Lawyers and other professionals |
|
|
38 |
% |
|
|
33 |
% |
Architects and engineers |
|
|
5 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
The professional liability gross written premium for the 2008 first quarter decreased 5.8%
compared to the same period in 2007. The average renewal premium rates for the professional
liability business including D&O renewal premium rates decreased by approximately 5.6% in the 2008
first quarter. We anticipate continuing declines in 2008 pricing given the overall favorable
industry underwriting results since 2002 for the professional liability lines of business.
Middle Markets Premium. Middle markets premium consists of general liability, auto liability
and property insurance for a variety of commercial middle markets businesses engaged in
contracting, light manufacturing, garage services, hospitality and real estate.
Despite the softening market conditions, the gross written premium increased 27.1% for the
first three months of 2008 due to geographic and product diversification and consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
General liability |
|
|
49 |
% |
|
|
55 |
% |
Commercial automobile liability |
|
|
38 |
% |
|
|
32 |
% |
Property |
|
|
13 |
% |
|
|
13 |
% |
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
Property/Other Premium. Property/Other premium includes European property business written by
the U.K. Branch beginning in 2006 and run-off business.
Lloyds Operations Gross Written Premium
We have provided 100% of Syndicate 1221s stamp capacity since 2006. Stamp capacity is a
measure of the amount of premium a Lloyds syndicate is authorized to write based on a business
plan approved by the Council of Lloyds. Syndicate 1221s stamp capacity is £123.0 million ($243.4
million) in 2008 compared to £140.0 million ($280.2 million) in 2007.
The Lloyds Operations gross written premium for the 2008 first quarter increased 3.9%
compared to the same period in 2007 reflecting continued expansion in the professional liability
book of business partially offset by a decline in marine and energy business due to weakening
market conditions.
28
Marine Premium. The gross written premium for the first three months of 2008 and 2007
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Marine liability |
|
|
37 |
% |
|
|
27 |
% |
Cargo and specie |
|
|
31 |
% |
|
|
38 |
% |
Assumed reinsurance |
|
|
12 |
% |
|
|
12 |
% |
Offshore energy |
|
|
10 |
% |
|
|
18 |
% |
Hull |
|
|
6 |
% |
|
|
4 |
% |
Other |
|
|
4 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
The marine gross written premium for the 2008 first quarter decreased 3.5% compared to the
same period in 2007. The decrease was due to the flattening or declining premium in several
classes of business due to increased competitive market conditions. The average renewal premium
rates decreased approximately 4.0% for the 2008 first quarter. We expect continuing overall
declines in 2008 pricing for marine lines of business, including offshore energy, as additional
capacity continues to re-enter the marine market.
Professional Liability Premium. The gross written premium for the first three months of 2008
and 2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
E&O |
|
|
78 |
% |
|
|
68 |
% |
D&O (public and private) |
|
|
22 |
% |
|
|
32 |
% |
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
Syndicate 1221 commenced writing professional liability business during the second quarter of
2005. The 2008 first quarter gross written premium increased 94.7%, compared to the same period in
2007, due to continued expansion and geographic diversification of the business.
Property/Other Premium. Property/Other premium consists of gross written premium for European
property business, engineering and construction business which provides coverage for construction
projects including machinery, equipment and loss of use due to delays and of premium for onshore
energy business which principally focuses on the oil and gas, chemical and petrochemical industries
with coverages primarily for property damage and business interruption.
Ceded Written Premium. In the ordinary course of business, we reinsure certain
insurance risks with unaffiliated insurance companies for the purpose of limiting our maximum loss
exposure, protecting against catastrophic losses, and maintaining desired ratios of net premiums
written to statutory surplus. The relationship of ceded to written premium varies based upon the
types of business written and whether the business is written by the Insurance Companies or the
Lloyds Operations.
29
The following table sets forth our ceded written premium by segment and major line of business
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Ceded |
|
|
Gross |
|
|
Ceded |
|
|
Gross |
|
|
|
Written |
|
|
Written |
|
|
Written |
|
|
Written |
|
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
32,864 |
|
|
|
39.8 |
% |
|
$ |
41,120 |
|
|
|
47.3 |
% |
Specialty |
|
|
24,938 |
|
|
|
31.6 |
% |
|
|
34,831 |
|
|
|
39.0 |
% |
Professional Liability |
|
|
7,554 |
|
|
|
39.2 |
% |
|
|
8,290 |
|
|
|
40.5 |
% |
Middle Markets |
|
|
1,488 |
|
|
|
18.6 |
% |
|
|
2,335 |
|
|
|
37.0 |
% |
Property/Other |
|
|
442 |
|
|
|
15.4 |
% |
|
|
250 |
|
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
67,286 |
|
|
|
35.1 |
% |
|
|
86,826 |
|
|
|
41.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
22,451 |
|
|
|
30.0 |
% |
|
|
32,191 |
|
|
|
41.4 |
% |
Professional Liability |
|
|
3,878 |
|
|
|
36.3 |
% |
|
|
2,095 |
|
|
|
38.2 |
% |
Property/Other |
|
|
5,809 |
|
|
|
58.5 |
% |
|
|
6,730 |
|
|
|
76.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
32,138 |
|
|
|
33.6 |
% |
|
|
41,016 |
|
|
|
44.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
99,424 |
|
|
|
34.6 |
% |
|
$ |
127,842 |
|
|
|
42.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The ratios of total ceded written premium to gross written premium in the 2008 and 2007 first
quarters were 34.6% and 42.5%, respectively. The decrease in the ratio of ceded written premium to
gross written premium for the three months ended March 31, 2008 compared to the same period in 2007
was due to a combination of the following factors:
|
|
Restructuring of the marine quota share treaties for the Insurance Companies and the
Lloyds Operations resulting in a large reduction in ceded premium. |
|
|
|
An increased retention from $0.5 million to $1.0 million effective April 1, 2007 for the
contractors liability business which reduced the amount of premium ceded. |
|
|
|
The elimination of a 5% reinsurer participation in our Syndicate 1221 2008 stamp capacity. |
Net Written Premium. Net written premium increased 8.5% in the 2008 first quarter,
compared to the same period in 2007, primarily due to retaining more of our business as discussed
above.
Net Earned Premium. Net earned premium, which generally lags the increase in net
written premium, increased 12.0% in the 2008 first quarter compared to the same period in 2007, as
a result of the increased net written premium discussed above.
30
Commission Income. Commission income from unaffiliated business decreased 36.0% in
the 2008 first quarter compared to the same period in 2007. Beginning with the 2006 underwriting
year, there are no longer any marine pool unaffiliated insurance companies with the elimination of
the marine pool and no longer any unaffiliated participants at Syndicate 1221 with the purchase of
the minority interest. Any profit commission would therefore result from the run-off of
underwriting years prior to 2006.
Net Investment Income. Net investment income increased 16.2% in the 2008 first
quarter compared to the same period in 2007, due primarily to the increase in invested assets as a
result of the positive cash flow from operations somewhat offset by a modest decline in the
portfolios book yield.
Net Realized Capital Gains and Losses. Pre-tax net income included $0.08 million of
net realized capital losses for the 2008 first quarter compared to $0.2 million of net realized
capital gains for the 2007 first quarter. On an after-tax basis, the 2008 first quarter net
realized capital loss was $0.00 per share compared to a net realized capital gain of $0.1 million
or $0.01 per share for the 2007 first quarter.
Other Income/(Expense). Other income/(expense) for the first quarters of 2008 and
2007 consisted primarily of foreign exchange gains and losses from our Lloyds Operations and
inspection fees related to our specialty insurance business.
Operating Expenses
Net Losses and Loss Adjustment Expenses Incurred. The ratios of net losses and LAE incurred
to net earned premium (loss ratios) for the 2008 and 2007 first quarters were 56.8% and 58.4%,
respectively. The 2008 first quarter loss ratio was favorably impacted by 8.8 loss ratio points
resulting from the $13.7 million net redundancy of prior year loss reserves. The 2007 first
quarter loss ratio was favorably impacted by 4.9 loss ratio points resulting from the $6.8 million
net redundancy of prior year loss reserves.
The 2008 first quarter losses incurred include 2008 accident year losses of $7.2 million for
two marine insurance claims in the Insurance Companies: a liability loss for the sinking of a
fishing vessel and a hull loss for fire damage to a fishing vessel. The Lloyds Operations
property book also incurred $0.9 million of 2008 first quarter flood losses in Selsey, England.
Such losses increased the 2008 first quarter loss ratio by 5.2 loss ratio points.
With the recording of gross losses, the Company assesses its reinsurance coverage, potential
receivables, and the recoverability of the receivables. Losses incurred on business recently
written are primarily covered by reinsurance agreements written by companies with whom the Company
is currently doing reinsurance business and whose credit the Company continues to assess in the
normal course of business.
31
As illustrated in the following table, our overall reinsurance recoverable amounts for paid
and unpaid losses have declined during the 2008 first quarter as the Company continues to bill and
collect its recoverables for Hurricanes Katrina and Rita loss payments and retains more of its
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
($ in thousands) |
|
Reinsurance recoverables: |
|
|
|
|
|
|
|
|
|
|
|
|
Paid losses |
|
$ |
74,183 |
|
|
$ |
94,818 |
|
|
$ |
(20,635 |
) |
Unpaid losses and LAE reserves |
|
|
776,767 |
|
|
|
801,461 |
|
|
|
(24,694 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
850,950 |
|
|
$ |
896,279 |
|
|
$ |
(45,329 |
) |
|
|
|
|
|
|
|
|
|
|
The following table sets forth gross reserves for losses and LAE reduced for reinsurance
recoverable on such amounts resulting in net loss and LAE reserves (a non-GAAP measure reconciled
in the following table) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
($ in thousands) |
|
|
|
|
|
Gross reserves for losses and LAE |
|
$ |
1,661,556 |
|
|
$ |
1,648,764 |
|
|
|
0.8 |
% |
Less: Reinsurance recoverable on unpaid
losses and LAE reserves |
|
|
776,767 |
|
|
|
801,461 |
|
|
|
-3.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
Net loss and LAE reserves |
|
$ |
884,789 |
|
|
$ |
847,303 |
|
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
32
The following tables set forth our net reported loss and LAE reserves and net IBNR reserves (a
non-GAAP measure reconciled above) by segment and line of business for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
Net |
|
|
Net |
|
|
Total |
|
|
% of IBNR |
|
|
|
Reported |
|
|
IBNR |
|
|
Net Loss |
|
|
to Total Net |
|
|
|
Reserves |
|
|
Reserves |
|
|
Reserves |
|
|
Loss Reserves |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
103,002 |
|
|
$ |
103,627 |
|
|
$ |
206,629 |
|
|
|
50.2 |
% |
Specialty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction Liability |
|
|
41,362 |
|
|
|
214,979 |
|
|
|
256,341 |
|
|
|
83.9 |
% |
All other liability |
|
|
22,231 |
|
|
|
60,716 |
|
|
|
82,947 |
|
|
|
73.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Specialty |
|
|
63,593 |
|
|
|
275,695 |
|
|
|
339,288 |
|
|
|
81.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
23,195 |
|
|
|
53,278 |
|
|
|
76,473 |
|
|
|
69.7 |
% |
Middle Markets |
|
|
10,936 |
|
|
|
12,339 |
|
|
|
23,275 |
|
|
|
53.0 |
% |
Property/Other |
|
|
12,422 |
|
|
|
10,787 |
|
|
|
23,209 |
|
|
|
46.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Companies |
|
|
213,148 |
|
|
|
455,726 |
|
|
|
668,874 |
|
|
|
68.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
95,940 |
|
|
|
87,360 |
|
|
|
183,300 |
|
|
|
47.7 |
% |
Other |
|
|
10,222 |
|
|
|
22,393 |
|
|
|
32,615 |
|
|
|
68.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lloyds Operations |
|
|
106,162 |
|
|
|
109,753 |
|
|
|
215,915 |
|
|
|
50.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
$ |
319,310 |
|
|
$ |
565,479 |
|
|
$ |
884,789 |
|
|
|
63.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
Net |
|
|
Net |
|
|
Total |
|
|
% of IBNR |
|
|
|
Reported |
|
|
IBNR |
|
|
Net Loss |
|
|
to Total Net |
|
|
|
Reserves |
|
|
Reserves |
|
|
Reserves |
|
|
Loss Reserves |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
93,467 |
|
|
$ |
103,500 |
|
|
$ |
196,967 |
|
|
|
52.5 |
% |
Specialty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction Liability |
|
|
36,137 |
|
|
|
213,453 |
|
|
|
249,590 |
|
|
|
85.5 |
% |
All other liability |
|
|
17,139 |
|
|
|
55,032 |
|
|
|
72,171 |
|
|
|
76.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Specialty |
|
|
53,276 |
|
|
|
268,485 |
|
|
|
321,761 |
|
|
|
83.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
20,335 |
|
|
|
50,584 |
|
|
|
70,919 |
|
|
|
71.3 |
% |
Middle Markets |
|
|
11,469 |
|
|
|
10,329 |
|
|
|
21,798 |
|
|
|
47.4 |
% |
Property/Other |
|
|
12,790 |
|
|
|
11,446 |
|
|
|
24,236 |
|
|
|
47.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Companies |
|
|
191,337 |
|
|
|
444,344 |
|
|
|
635,681 |
|
|
|
69.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
89,957 |
|
|
|
93,069 |
|
|
|
183,026 |
|
|
|
50.9 |
% |
Other |
|
|
7,485 |
|
|
|
21,111 |
|
|
|
28,596 |
|
|
|
73.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lloyds Operations |
|
|
97,442 |
|
|
|
114,180 |
|
|
|
211,622 |
|
|
|
54.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
$ |
288,779 |
|
|
$ |
558,524 |
|
|
$ |
847,303 |
|
|
|
65.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008, the IBNR loss reserve was $565.5 million or 63.9% of our total loss
reserves compared to $558.5 million or 65.9% at December 31, 2007.
The increase in net loss reserves in all active lines of business is generally a reflection of
the growth in net premium volume over the last three years coupled with a changing mix of business
to longer tail lines of business such as the specialty lines of business (construction defect,
commercial excess, primary excess and personal umbrella), professional liability lines of business
and marine liability and transport business in ocean marine. These products, which typically have
a longer settlement period compared to the mix of business the Company has historically written,
are becoming larger components of our overall business.
Our reserving practices and the establishment of any particular reserve reflect managements
judgment concerning sound financial practice and do not represent any admission of liability with
respect to any claims made against us. No assurance can be given that actual claims made and
related payments will not be in excess of the amounts reserved. During the loss settlement period,
it often becomes necessary to refine and adjust the estimates of liability on a claim either upward
or downward. Even after such adjustments, ultimate liability may exceed or be less than the
revised estimates.
There are a number of factors that could cause actual losses and loss adjustment expenses to
differ materially from the amount that we have reserved for losses and loss adjustment expenses.
34
The process of establishing loss reserves is complex and imprecise as it must take into
account many variables that are subject to the outcome of future events. As a result, informed
subjective judgments as to our ultimate exposure to losses are an integral component of our loss
reserving process.
The Companys actuaries generally calculate the IBNR loss reserves for each line of business
by underwriting year for major products using standard actuarial methodologies which are projection
or extrapolation techniques. This process requires the substantial use of informed judgment and is
inherently uncertain.
There are instances in which facts and circumstances require a deviation from the general
process described above. Two such instances relate to the IBNR loss reserve processes for our
asbestos exposures and our Hurricanes Katrina and Rita losses, where extrapolation techniques are
not applied, except in a limited way, given the unique nature of hurricane losses and limited
population of marine excess policies with potential asbestos exposures. In such circumstances,
inventories of the policy limits exposed to losses coupled with reported losses are analyzed and
evaluated principally by claims personnel and underwriters to establish IBNR loss reserves.
Asbestos Liability. Our exposure to asbestos liability principally stems from marine liability
insurance written on an occurrence basis during the mid-1980s. In general, our participation on
such risks is in the excess layers, which requires the underlying coverage to be exhausted prior to
coverage being triggered in our layer. In many instances we are one of many insurers who
participate in the defense and ultimate settlement of these claims, and we are generally a minor
participant in the overall insurance coverage and settlement.
The reserves for asbestos exposures at March 31, 2008 are for: (i) one large settled claim for
excess insurance policy limits exposed to a class action suit against an insured involved in the
manufacturing or distribution of asbestos products being paid over several years (two other large
settled claims were fully paid in 2007); (ii) other insureds not directly involved in the
manufacturing or distribution of asbestos products, but that have more than incidental asbestos
exposure for their purchase or use of products that contained asbestos; and (iii) attritional
asbestos claims that could be expected to occur over time. Substantially all of our asbestos
liability reserves are included in our marine loss reserves.
The Company believes that there are no remaining known claims where it would suffer a material
loss as a result of excess policy limits being exposed to class action suits for insureds involved
in the manufacturing or distribution of asbestos products. There can be no assurances, however,
that material loss development may not arise in the future from existing asbestos claims or new
claims given the evolving and complex legal environment that may directly impact the outcome of the
asbestos exposures of our insureds.
35
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, 2008 |
|
|
December 31, 2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
23,194 |
|
|
$ |
37,171 |
|
Incurred losses & LAE |
|
|
121 |
|
|
|
(780 |
) |
Calendar year payments |
|
|
35 |
|
|
|
13,197 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
23,280 |
|
|
$ |
23,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
16,101 |
|
|
$ |
16,014 |
|
Gross IBNR loss reserves |
|
|
7,179 |
|
|
|
7,180 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
23,280 |
|
|
$ |
23,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
16,717 |
|
|
$ |
21,381 |
|
Incurred losses & LAE |
|
|
106 |
|
|
|
1,779 |
|
Calendar year payments |
|
|
27 |
|
|
|
6,443 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
16,796 |
|
|
$ |
16,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
9,794 |
|
|
$ |
9,715 |
|
Net IBNR loss reserves |
|
|
7,002 |
|
|
|
7,002 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
16,796 |
|
|
$ |
16,717 |
|
|
|
|
|
|
|
|
To the extent the Company incurs additional gross loss development for its historic asbestos
exposure the Companys allowance for uncollectible reinsurance would increase for the reinsurers
that are insolvent, in run-off or otherwise no longer active in the reinsurance business. The
Company continues to believe that it will be able to collect reinsurance on the gross portion of
its historic gross asbestos exposure in the above table. Gross or net loss development for
asbestos exposure was not significant in the three months ended March 31, 2008 or 2007.
At March 31, 2008, the ceded asbestos paid and unpaid recoverables were $10.0 million compared
to $10.5 million at December 31, 2007.
Loss reserves for environmental losses generally consist of oil spill claims on marine
liability policies written in the ordinary course of business. Net loss reserves for such
exposures are included in our marine loss reserves and are not separately identified.
Hurricanes Katrina and Rita. During the 2005 third quarter, the Company recorded gross and
net loss estimates of $471 million and $22.3 million, respectively, exclusive of $14.5 million for
the cost of excess of loss reinstatement premiums related to Hurricanes Katrina and Rita.
36
The following table sets forth our gross and net loss and LAE reserves, incurred loss and LAE,
and payments for Hurricanes Katrina and Rita for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Year Ended |
|
|
|
March 31, 2008 |
|
|
December 31, 2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
141,831 |
|
|
$ |
319,230 |
|
Incurred loss & LAE |
|
|
0 |
|
|
|
(29,349 |
) |
Calendar year payments |
|
|
5,837 |
|
|
|
148,050 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
135,994 |
|
|
$ |
141,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
89,032 |
|
|
$ |
94,959 |
|
Gross IBNR loss reserves |
|
|
46,962 |
|
|
|
46,872 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
135,994 |
|
|
$ |
141,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
4,519 |
|
|
$ |
10,003 |
|
Incurred loss & LAE |
|
|
(5 |
) |
|
|
(1,909 |
) |
Calendar year payments |
|
|
(35 |
) |
|
|
3,575 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
4,549 |
|
|
$ |
4,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
592 |
|
|
$ |
646 |
|
Net IBNR loss reserves |
|
|
3,957 |
|
|
|
3,873 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
4,549 |
|
|
$ |
4,519 |
|
|
|
|
|
|
|
|
Approximately $145.3 million and $167.7 million of paid and unpaid losses at March 31, 2008
and December 31, 2007, respectively, were due from reinsurers as a result of the losses from
Hurricanes Katrina and Rita.
37
Professional Liability Subprime Exposure. The following table sets forth reported claims and
notices of potential claims, the average gross and net limits by policy and the average amount
where our policy attaches related to subprime exposure for our professional liability business at
March 31, 2008. The Companys management believes that the reserves for losses and loss adjustment
expenses are adequate to cover the ultimate costs for such loss contingencies related to subprime
exposure for the professional liability business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
|
of |
|
|
Gross |
|
|
Net |
|
|
Excess |
|
|
|
Claims (1) |
|
|
Limit |
|
|
Limit (2) |
|
|
Attachment |
|
|
|
($ in thousands) |
|
Primary: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O Securities/Other Claims |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O Securities Claims |
|
|
4 |
|
|
|
7,500 |
|
|
|
4,500 |
|
|
$ |
37,500 |
|
D&O Side A Securities Claims |
|
|
2 |
|
|
|
5,000 |
|
|
|
3,500 |
|
|
|
137,500 |
|
Other Claims |
|
|
2 |
|
|
|
10,000 |
|
|
|
5,500 |
|
|
|
35,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal/Average |
|
|
8 |
|
|
|
7,500 |
|
|
|
4,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
8 |
|
|
$ |
7,500 |
|
|
$ |
4,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Claims include all professional liability policies written by the Insurance Companies.
There are no reported claims or notices of potential claims reported for the Lloyds
Operations. All policies are claims made. Defense costs are included within the limits of
liability. There were no new claims or notices of potential claims reported for the three
months ended March 31, 2008. |
|
(2) |
|
Amounts are net of reinsurance. |
Prior Year Reserve Redundancies/Deficiencies
As part of our regular review of prior reserves, the Companys actuaries may determine, based
on their judgment, that certain assumptions made in the reserving process in prior years may need
to be revised to reflect various factors, likely including the availability of additional
information. Based on their reserve analyses, our actuaries may make corresponding reserve
adjustments.
Prior year reserve redundancies of $13.7 million and $6.8 million, net of reinsurance, were
recorded in the first quarters 2008 and 2007, respectively, as discussed below. The relevant
factors that may have a significant impact on the establishment and adjustment of loss and LAE
reserves can vary by line of business and from period to period.
38
The segment and line of business breakdowns of prior period net reserve deficiencies
(redundancies) were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
Marine |
|
$ |
(300 |
) |
|
$ |
(1,500 |
) |
Specialty |
|
|
(7,300 |
) |
|
|
(2,200 |
) |
Professional Liability |
|
|
(300 |
) |
|
|
(2,000 |
) |
Middle Markets |
|
|
1,200 |
|
|
|
|
|
Property/Other |
|
|
(1,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
Subtotal Insurance Companies |
|
|
(8,500 |
) |
|
|
(5,700 |
) |
Lloyds Operations |
|
|
(5,180 |
) |
|
|
(1,100 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(13,680 |
) |
|
$ |
(6,800 |
) |
|
|
|
|
|
|
|
Following is a discussion of relevant factors impacting our 2008 loss reserves:
The Insurance Companies recorded $0.3 million of prior year savings for marine business
comprised of $2.5 million of favorable development in marine liability business from 2006 and prior
years offset by adverse loss development of $2.2 million from other lines of business of which $1.7
million was for cargo losses consisting mostly of loss activity related to three cargo claims.
The Insurance Companies recorded $7.3 million of prior year savings for specialty business
comprised of $8.9 million of favorable development in construction liability business due to
favorable loss trends for business written in 2003 to 2006, $2.3 million of favorable development
for personal umbrella business written in 2007, offset by adverse loss development of $3.3 million
from discontinued business and $0.6 million from program business written in 2007 and 2006.
The Insurance Companies recorded $1.2 million of net prior year deficiencies for middle
markets business principally for business written in 2004 and 2003 of which $0.5 million was for
one large claim on a policy written in 2003.
The Insurance Companies recorded $1.8 million of prior year savings for run-off business,
included in property/other in the above table, principally due to the lack of loss activity for
aviation and space business discontinued in 1999.
The Lloyds Operations recorded $5.2 million of prior year savings mostly emanating from
refinements to the actuarial methodology employed to project ultimate loss estimates by line of
business. The methodology employed in the 2008 first quarter separately determined ultimate losses
on a gross and ceded basis to establish net IBNR estimates. Prior methodology used net loss
amounts to determine such estimates. The net results of the 2008 first quarter analysis was to
reduce ultimate loss estimates by approximately $9.7 million for short tail classes of business
mostly related to 2005 and prior years (cargo $3.2 million, energy $4.6 million, reinsurance $2.1
million, offset by $0.2 million of loss development for other lines of business). Such prior year
savings were offset by strengthening reserves of approximately $4.5 million for business written in
2007 and 2006 for liability business ($2.3 million) and energy business ($2.1 million) and various
other classes of business ($0.1 million). Such strengthening has taken into effect the changes in
the reinsurance program for increased net retentions that have occurred in 2007 and 2006 compared
to prior years.
39
Our management believes that the estimates for the reserves for losses and loss adjustment
expenses are adequate to cover the ultimate cost of losses and loss adjustment expenses on reported
and unreported claims. However, it is possible that the ultimate liability may exceed or be less
than such estimates. To the extent that reserves are deficient or redundant, the amount of such
deficiency or redundancy is treated as a charge or credit to earnings in the period in which the
deficiency or redundancy is identified. We continue to review all of our loss reserves, including
our asbestos reserves and Hurricanes Katrina and Rita reserves, on a regular basis.
Commission Expense. Commission expense paid to unaffiliated brokers and agents is generally
based on a percentage of the gross written premium and is reduced by ceding commissions the Company
may receive on the ceded written premium. Commissions are generally deferred and recorded as
deferred policy acquisition costs to the extent that they relate to unearned premium. The
percentage of commission expense to net earned premiums in the 2008 first quarter was 13.5%
compared to 12.3% for the comparable period in 2007. The increase is attributable to greater
retentions, particularly on our marine quota share treaties, which have reduced the ceding
commission benefit.
Other Operating Expenses. The 13% increase in other operating expenses in the 2008 first
quarter compared to the same period in 2007 was attributable primarily to employee-related expenses
resulting from expansion of the business and investments in technology to support this growth.
Income Taxes. The income tax expense was $10.2 million and $9.3 million for the first
quarters of 2008 and 2007, respectively, resulting in effective tax rates of 30.5% and 32.2%,
respectively. The Companys effective tax rate is less than 35% due to permanent differences
between book and tax return income, with the most significant item being tax exempt interest. The
effective tax rate on net investment income was 26.4% for the 2008 first quarter compared to 28.4%
for the comparable 2007 period. As of March 31, 2008 and December 31, 2007, the net deferred
Federal, foreign, state and local tax assets were $31.3 million and $29.2 million, respectively.
We are subject to the tax regulations of the United States and foreign countries in which we
operate. The Company files a consolidated federal tax return, which includes all domestic
subsidiaries and the U.K. Branch. The income from the foreign operations is designated as either
U.S. connected income or non-U.S. connected income. Lloyds is required to pay U.S. income tax on
U.S. connected income written by Lloyds syndicates. Lloyds and the IRS have entered into an
agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyds and
remitted directly to the IRS. These amounts are then charged to the corporate members in
proportion to their participation in the relevant syndicates. The Companys corporate members are
subject to this agreement and will receive U.K. tax credits for any U.S. income tax incurred up to
the U.K. income tax charged on the U.S. income. The non-U.S. connected insurance income would
generally constitute taxable income under the Subpart F income section of the Internal Revenue Code
since less than 50% of the Companys premium is derived within the U.K. and would therefore be
subject to U.S. taxation when the Lloyds year of account closes. Taxes are accrued at a 35% rate
on our foreign source insurance income and foreign tax credits, where available, are utilized to
offset U.S. tax as permitted. The Companys effective tax rate for Syndicate 1221 taxable income
could substantially exceed 35% to the extent the Company is unable to offset U.S. taxes paid under
Subpart F tax regulations with U.K. tax credits on future underwriting year distributions. U.S.
taxes are not accrued on the earnings of the Companys foreign agencies as these earnings are not
subject to the Subpart F tax regulations. These earnings are subject to taxes under U.K. tax
regulations at a 30% rate. A finance bill was enacted in the U.K. on July 19, 2007 that reduces
the U.K. corporate tax rate from 30% to 28% effective April 1, 2008. The effect of such tax rate
change was not material to the Companys financial statements.
We have not provided for U.S. deferred income taxes on the undistributed earnings of
approximately $52 million of our non-U.S. subsidiaries since these earnings are intended to be
permanently reinvested in the foreign subsidiaries. However, in the future, if such earnings were
distributed to the Company, taxes of approximately $3.6 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.
40
The Company had net state and local deferred tax assets amounting to potential future tax
benefits of $7.6 million and $6.3 million at March 31, 2008 and December 31, 2007, respectively.
Included in the deferred tax assets are net operating loss carryforwards of $1.6 million and $2.5
million at March 31, 2008 and December 31, 2007, respectively. A valuation allowance was
established for the full amount of these potential future tax benefits due to the uncertainty
associated with their realization. The Companys state and local tax carryforwards at March 31,
2008 expire in 2025.
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48), an interpretation of SFAS 109. FIN 48,
which became effective in 2007, establishes the threshold for recognizing the benefits of
tax-return positions in the financial statements as more-likely-than-not to be sustained by the
taxing authorities, and prescribes a measurement methodology for those positions meeting the
recognition threshold. The Companys adoption of FIN 48 at January 1, 2007 did not have a material
effect on its financial condition or results of operations.
Segment Information
The Companys subsidiaries are primarily engaged in the underwriting and management of
property and casualty insurance.
The Company classifies its business into two underwriting segments consisting of the Insurance
Companies and the Lloyds Operations, which are separately managed, and a Corporate segment.
Segment data for each of the two underwriting segments include allocations of revenues and expenses
of the Navigators Agencies and the Parent Companys expenses and related income tax amounts.
We evaluate the performance of each segment based on its underwriting and net income results.
The Insurance Companies and the Lloyds Operations results are measured by taking into account
net earned premium, net losses and loss adjustment expenses, commission expense, other operating
expenses and commission income and other income (expense). The Corporate segment consists of the
Parent Companys investment income, interest expense and the related tax effect. Each segment also
maintains its own investments, on which it earns income and realizes capital gains or losses. Our
underwriting performance is evaluated separately from the performance of our investment portfolios.
Following are the financial results of the Companys two underwriting segments.
Insurance Companies
The Insurance Companies consist of Navigators Insurance Company, including its U.K. Branch,
and its wholly-owned subsidiary, Navigators Specialty Insurance Company. Navigators Insurance
Company is our largest insurance subsidiary and has been active since 1983. It is primarily
engaged in underwriting marine insurance and related lines of business, professional liability
insurance, specialty lines of business including contractors general liability insurance,
commercial and personal umbrella and primary and excess casualty businesses, and middle markets
business consisting of general liability, commercial automobile liability and property insurance
for a variety of commercial middle markets businesses. Navigators Specialty Insurance Company
which began operations in 1990, underwrites specialty and professional liability insurance on an
excess and surplus lines basis fully reinsured by Navigators Insurance Company. The Navigators
Agencies produce business for the Insurance Companies.
41
Following are the results of operations for the Insurance Companies for the three months ended
March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
191,596 |
|
|
$ |
208,874 |
|
Net written premium |
|
|
124,310 |
|
|
|
122,048 |
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
112,246 |
|
|
|
101,812 |
|
Net losses and LAE |
|
|
(67,356 |
) |
|
|
(61,340 |
) |
Commission expense |
|
|
(12,948 |
) |
|
|
(11,083 |
) |
Other operating expenses |
|
|
(22,148 |
) |
|
|
(18,769 |
) |
Commission income and other income (expense) |
|
|
258 |
|
|
|
489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
10,052 |
|
|
|
11,109 |
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
15,465 |
|
|
|
13,654 |
|
Net realized capital gains (losses) |
|
|
(102 |
) |
|
|
243 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
25,415 |
|
|
|
25,006 |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
7,370 |
|
|
|
7,911 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
18,045 |
|
|
$ |
17,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
60.0 |
% |
|
|
60.2 |
% |
Commission expense ratio |
|
|
11.5 |
% |
|
|
10.9 |
% |
Other operating expense ratio (1) |
|
|
19.5 |
% |
|
|
18.0 |
% |
|
|
|
|
|
|
|
Combined ratio |
|
|
91.0 |
% |
|
|
89.1 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes other operating expenses and commission income and other income (expense). |
42
Following are the underwriting results of the Insurance Companies for the three months ended
March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Profit/(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
33,226 |
|
|
$ |
24,371 |
|
|
$ |
11,062 |
|
|
$ |
(2,207 |
) |
|
|
73.4 |
% |
|
|
33.3 |
% |
|
|
106.7 |
% |
Specialty |
|
|
56,669 |
|
|
|
29,480 |
|
|
|
15,498 |
|
|
|
11,691 |
|
|
|
52.0 |
% |
|
|
27.3 |
% |
|
|
79.3 |
% |
Professional
Liability |
|
|
14,073 |
|
|
|
8,905 |
|
|
|
5,098 |
|
|
|
70 |
|
|
|
63.3 |
% |
|
|
36.2 |
% |
|
|
99.5 |
% |
Middle Markets |
|
|
5,697 |
|
|
|
4,284 |
|
|
|
1,989 |
|
|
|
(576 |
) |
|
|
75.2 |
% |
|
|
34.8 |
% |
|
|
110.0 |
% |
Property/Other |
|
|
2,581 |
|
|
|
316 |
|
|
|
1,191 |
|
|
|
1,074 |
|
|
|
12.2 |
% |
|
|
46.1 |
% |
|
|
58.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
112,246 |
|
|
$ |
67,356 |
|
|
$ |
34,838 |
|
|
$ |
10,052 |
|
|
|
60.0 |
% |
|
|
31.0 |
% |
|
|
91.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Profit/(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine & Energy |
|
$ |
33,490 |
|
|
$ |
20,323 |
|
|
$ |
7,773 |
|
|
$ |
5,394 |
|
|
|
60.7 |
% |
|
|
23.2 |
% |
|
|
83.9 |
% |
Specialty |
|
|
49,042 |
|
|
|
29,026 |
|
|
|
14,879 |
|
|
|
5,137 |
|
|
|
59.2 |
% |
|
|
30.3 |
% |
|
|
89.5 |
% |
Professional
Liability |
|
|
13,037 |
|
|
|
8,484 |
|
|
|
4,323 |
|
|
|
230 |
|
|
|
65.1 |
% |
|
|
33.1 |
% |
|
|
98.2 |
% |
Middle Markets |
|
|
4,570 |
|
|
|
2,740 |
|
|
|
1,613 |
|
|
|
217 |
|
|
|
60.0 |
% |
|
|
35.3 |
% |
|
|
95.3 |
% |
Property/Other |
|
|
1,673 |
|
|
|
767 |
|
|
|
775 |
|
|
|
131 |
|
|
NM |
|
|
NM |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
101,812 |
|
|
$ |
61,340 |
|
|
$ |
29,363 |
|
|
$ |
11,109 |
|
|
|
60.2 |
% |
|
|
28.9 |
% |
|
|
89.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium of the Insurance Companies increased 10% in the 2008 first quarter compared
to the same period in 2007 reflecting increased retention of the business written.
Underwriting results generally reflect the favorable industry market conditions over the last
three to four years (excluding the losses from Hurricanes Katrina and Rita) coupled with
satisfactory loss trends in the aforementioned periods. The 2008 first quarter loss ratio was
favorably impacted by prior period loss reserve redundancies of $8.5 million or 7.6 loss ratio
points. The 2007 first quarter loss ratio was favorably impacted by prior period loss reserve
redundancies of $5.7 million or 5.6 loss ratio points.
The approximate annualized pre-tax yields on the Insurance Companies investment portfolio,
excluding net realized capital gains and losses, were 4.4% for the 2008 first quarter compared to
4.5% for the comparable 2007 period. The average duration of the Insurance Companies invested
assets at March 31, 2008 was 4.7 years compared to 4.5 years at March 31, 2007. Net investment
income increased in the 2008 first quarter compared to the same period in 2007 primarily due to the
investment of new funds from cash flow, partially offset by a slight decrease in yields.
43
Lloyds Operations
The Lloyds Operations consist of NUAL, which manages Syndicate 1221, Millennium Underwriting
Ltd. and Navigators Corporate Underwriters Ltd. Both Millennium Underwriting Ltd. and Navigators
Corporate Underwriters Ltd. are Lloyds corporate members with limited liability and provide
capacity to Syndicate 1221. NUAL owns Navigators Underwriting Ltd., an underwriting managing
agency with its principal office in Manchester, England, which underwrites cargo and engineering
business for Syndicate 1221. In January 2005, we formed Navigators NV in Antwerp, Belgium, a
wholly-owned subsidiary of NUAL. Navigators NV produces transport liability, cargo and marine
liability premium on behalf of Syndicate 1221. The Lloyds Operations and Navigators Management
(UK) Limited, a Navigators Agency which produces business for the U.K. Branch, are subsidiaries of
Navigators Holdings (UK) Limited located in the United Kingdom.
Syndicate 1221s stamp capacity is £123.0 million ($243.4 million) in 2008 compared to £140.0
million ($280.2 million) in 2007. Stamp capacity is a measure of the amount of premium a Lloyds
syndicate is authorized to write as determined by the Council of Lloyds. Syndicate 1221s stamp
capacity is expressed net of commission (as is standard at Lloyds). The Syndicate 1221 premium
recorded in the Companys financial statements is gross of commission. Navigators provides 100% of
Syndicate 1221s capacity for the 2008 and 2007 underwriting years through Navigators Corporate
Underwriters Ltd. in 2008 and through Millennium Underwriting Ltd. and Navigators Corporate
Underwriters Ltd. in 2007.
Lloyds presents its results on an underwriting year basis, generally closing each
underwriting year after three years. We make estimates for each underwriting year and timely
accrue the expected results. Our Lloyds Operations included in the consolidated financial
statements represent our participation in Syndicate 1221.
Lloyds syndicates report the amounts of premiums, claims, and expenses recorded in an
underwriting account for a particular year to the companies or individuals that participate in the
syndicates. The syndicates generally keep accounts open for three years. Traditionally, three
years have been necessary to report substantially all premiums associated with an underwriting year
and to report most related claims, although claims may remain unsettled after the underwriting year
is closed. A Lloyds syndicate typically closes an underwriting year by reinsuring outstanding
claims on that underwriting year with the participants for the next underwriting year. The ceding
participants pay the assuming participants an amount based on the unearned premiums and outstanding
claims in the underwriting year at the date of the assumption. Our participation in Syndicate 1221
is represented by and recorded as our proportionate share of the underlying assets and liabilities
and results of operations of the syndicate since (i) we hold an undivided interest in each asset,
(ii) we are proportionately liable for each liability and (iii) Syndicate 1221 is not a separate
legal entity. At Lloyds, the amount to close an underwriting year into the next year is referred
to as the reinsurance to close (RITC) transaction. The RITC amounts represent the transfer of
the assets and liabilities from the participants of a closing underwriting year to the participants
of the next underwriting year. To the extent our participation in the syndicate changes, the RITC
amounts vary accordingly. The RITC transaction, recorded in the fourth quarter, does not result in
any gain or loss. We provide letters of credit to Lloyds to support our participation in
Syndicate 1221s stamp capacity as discussed below under the caption Liquidity and Capital
Resources.
Whenever a member of Lloyds is unable to pay its debts to policyholders, such debts may be
payable by the Lloyds Central Fund. If Lloyds determines that the Central Fund needs to be
increased, it has the power to assess premium levies on current Lloyds members up to 3% of a
members underwriting capacity in any one year. The Company does not believe that any assessment
is likely in the foreseeable future and has not provided any allowance for such an assessment.
44
Following are the results of operations of the Lloyds Operations for the three months ended
March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
95,550 |
|
|
$ |
91,987 |
|
Net written premium |
|
|
63,412 |
|
|
|
50,971 |
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
43,494 |
|
|
|
37,234 |
|
Net losses and LAE |
|
|
(21,064 |
) |
|
|
(19,852 |
) |
Commission expense |
|
|
(8,000 |
) |
|
|
(6,016 |
) |
Other operating expenses |
|
|
(7,608 |
) |
|
|
(7,520 |
) |
Commission income and other income (expense) |
|
|
14 |
|
|
|
(152 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
6,836 |
|
|
|
3,694 |
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
2,982 |
|
|
|
2,151 |
|
Net realized capital gains (losses) |
|
|
26 |
|
|
|
(42 |
) |
|
|
|
|
|
|
|
Income before income taxes |
|
|
9,844 |
|
|
|
5,803 |
|
|
Income tax expense |
|
|
3,452 |
|
|
|
2,054 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,392 |
|
|
$ |
3,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
48.4 |
% |
|
|
53.3 |
% |
Commission expense ratio |
|
|
18.4 |
% |
|
|
16.2 |
% |
Other operating expense ratio (1) |
|
|
17.5 |
% |
|
|
20.6 |
% |
|
|
|
|
|
|
|
Combined ratio |
|
|
84.3 |
% |
|
|
90.1 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes other operating expenses and commission income and other income (expense). |
The Lloyds Operations have been experiencing business expansion coupled with improving
underwriting results as a result of the generally favorable market conditions for marine and energy
business from late 2001 through 2003, and continuing to a lesser extent in 2004. Marine and energy
premium rate increases occurred in 2005 and continued into 2006 following Hurricanes Katrina and
Rita, particularly in the offshore energy business, while the average renewal premium rates in 2007
decreased approximately 1.2% for the marine and energy business and decreased approximately 3.4% in
our professional liability business. The average renewal premium rates for the first three months
of 2008 decreased approximately 4.0% for the marine and energy business and decreased approximately
2.9% for the professional liability business.
The 2008 earnings in the Lloyds Operations reflect the continued favorable loss development
trends. The 2008 first quarter loss ratio was favorably impacted by prior period loss reserve
redundancies of $5.2 million or 11.9 loss ratio points. The 2007 first quarter loss ratio was
favorably impacted by prior period loss reserve redundancies of $1.1 million or 3.0 loss ratio
points.
The approximate annualized pre-tax yields on the Lloyds Operations investment portfolio,
excluding net realized capital gains and losses, were 3.7% for the 2008 first quarter compared to
3.6% for the comparable 2007 period. The average duration of our Lloyds Operations invested
assets at March 31, 2008 was 1.5 years compared to 1.6 years at March 31, 2007. The increase in
the Lloyds Operations net investment income is reflective of the increased investment portfolio
primarily due to positive cash flow and to the slight increase in the yield. Such yields are net
of interest credits to certain reinsurers for funds withheld by our Lloyds Operations.
45
Off-Balance Sheet Transactions
There have been no material changes in the information concerning off-balance sheet
transactions as stated in the Companys 2007 Annual Report on Form 10-K.
Tabular Disclosure of Contractual Obligations
There have been no material changes in the operating lease or capital lease information
concerning contractual obligations as stated in the Companys 2007 Annual Report on Form 10-K.
Total reserves for losses and LAE were $1.7 billion at March 31, 2008 compared to $1.6 billion at
December 31, 2007. There were no significant changes in the Companys lines of business or claims
handling that would create a material change in the percentage relationship of the projected
payments by period to the total reserves.
The following table sets forth our contractual obligations with respect to the 7% senior
unsecured notes due May 1, 2016 discussed in the Notes to Interim Consolidated Financial
Statements, included herein:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7% Senior Notes |
|
$ |
199,375 |
|
|
$ |
8,750 |
|
|
$ |
17,500 |
|
|
$ |
17,500 |
|
|
$ |
155,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
The objective of the Companys investment policy, guidelines and strategy is to maximize total
investment return in the context of preserving and enhancing shareholder value and statutory
surplus of the Insurance Companies. Secondarily, an important consideration is to optimize the
after-tax book income.
The investments are managed by outside professional fixed-income and equity portfolio
managers. The Company seeks to achieve its investment objectives by investing in cash equivalents
and money market funds, municipal bonds, U.S. Government bonds, U.S. Government agency guaranteed
and non-guaranteed securities, corporate bonds, mortgage-backed and asset-backed securities and
common and preferred stocks. Our investment guidelines require that the amount of the consolidated
fixed income portfolio rated below A- but no lower than BBB- by Standard & Poors (S&P) or
below A3 but no lower than Baa3 by Moodys Investors Service (Moodys) shall not exceed 10%
of the total fixed income and short-term investments. Securities rated below BBB- by S&P or
below Baa3 by Moodys combined with any other investments not specifically permitted under the
investment guidelines, can not exceed 5% of consolidated stockholders equity. Investments in
equity securities that are actively traded on major U.S. stock exchanges can not exceed 20% of
consolidated stockholders equity. Our investment guidelines prohibit investments in derivatives
other than as a hedge against foreign currency exposures or the writing of covered call options on
the equity portfolio.
The Insurance Companies investments are subject to the oversight of their respective Board of
Directors and our Finance Committee. The investment portfolio and the performance of the
investment managers are reviewed quarterly. These investments must comply with the insurance laws
of New York State, the domiciliary state of Navigators Insurance Company and Navigators Specialty
Insurance Company. These laws prescribe the type, quality and concentration of investments which
may be made by insurance companies. In general, these laws permit investments, within specified
limits and subject to certain qualifications, in Federal, state and municipal obligations,
corporate bonds, preferred stocks, common stocks, mortgages and real estate.
46
The Lloyds Operations investments are subject to the oversight of the Board of Directors and
the Investment Committee of NUAL, as well as the Companys Board of Directors and Finance
Committee. These investments must comply with the rules and regulations imposed by Lloyds and by
certain overseas regulators. The investment portfolio and the performance of the investment
managers are reviewed quarterly.
At March 31, 2008, the average quality of the investment portfolio as rated by S&P and Moodys
was AA/Aa with an average duration of 4.2 years. All of the Companys mortgage-backed and
asset-backed securities are rated AAA/Aaa by S&P and Moodys, respectively, except for four
asset-backed securities approximating $5.3 million, three of which are rated A-/A3 and one rated
BBB-/Baa3. The Company does not own any collateralized debt obligations (CDOs), collateralized
loan obligations (CLOs) or asset backed commercial paper.
At March 31, 2008 and December 31, 2007, all fixed-maturity and equity securities held by us
were classified as available-for-sale.
Effective January 1, 2008, the Company adopted SFAS 157 which defines fair value, establishes
a consistent framework for measuring fair value and expands disclosure requirements about fair
value measurements. SFAS 157, among other things, requires the Company to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. A
hierarchy of valuation techniques is specified in SFAS 157 based on whether the inputs to those
valuation techniques are observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect market data obtained from
investment managers or brokers. These two types of inputs have created the following fair value
hierarchy:
|
|
|
Level 1 Quoted prices for identical instruments in active markets. Examples
are listed equity and fixed income securities traded on an exchange. Treasury
securities would generally be considered level 1. |
|
|
|
|
Level 2 Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs and significant value
drivers are observable in active markets. Examples are ABS and MBS securities which
are similar to other ABS or MBS securities observed in the market. |
|
|
|
|
Level 3 Valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable. An example would
be a private placement with minimal liquidity. |
All fixed maturities, short-term investments and equity securities are carried at fair value.
All prices for our fixed maturities, short-term investments and equity securities valued as level 1
or level 2 in the SFAS 157 fair value hierarchy are received from independent pricing services.
Prices for any securities derived from level 3 criteria in the fair value hierarchy are developed
by one of our outside investment managers.
47
The following table presents, for each of the fair value hierarchy levels, the Companys fixed
maturities, equity securities and short-term investments that are measured at fair value at March
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
In Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
188,291 |
|
|
$ |
1,380,607 |
|
|
$ |
2,073 |
|
|
$ |
1,570,971 |
|
Equities securities |
|
|
54,030 |
|
|
|
5,658 |
|
|
|
|
|
|
|
59,688 |
|
Short-term investments |
|
|
28,664 |
|
|
|
142,783 |
|
|
|
|
|
|
|
171,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
270,985 |
|
|
$ |
1,529,048 |
|
|
$ |
2,073 |
|
|
$ |
1,802,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The securities classified as Level 3 in the above table consist of three structured securities
rated AAA/Aaa by S&P and Moodys, respectively, with unobservable inputs included in the Companys
fixed maturities portfolio for which price quotes from brokers were used to indicate fair value.
The following table presents a reconciliation of the beginning and ending balances for all
investments measured at fair value using Level 3 inputs during the quarter ended March 31, 2008:
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
Level 3 investments as of January 1, 2008 |
|
$ |
2,603 |
|
Unrealized net gains included in
other comprehensive income (loss) |
|
|
17 |
|
Purchases, sales, paydowns and amortization |
|
|
(153 |
) |
Transfer to Level 2 |
|
|
(394 |
) |
|
|
|
|
Level 3 investments as of March 31, 2008 |
|
$ |
2,073 |
|
|
|
|
|
48
The following tables set forth our cash and investments as of March 31, 2008 and December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
March 31, 2008 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury Bonds,
GNMAs and foreign government bonds |
|
$ |
247,946 |
|
|
$ |
11,885 |
|
|
$ |
(101 |
) |
|
$ |
236,162 |
|
States, municipalities and political
subdivisions |
|
|
572,056 |
|
|
|
9,224 |
|
|
|
(2,708 |
) |
|
|
565,540 |
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-guaranteed government agency bonds |
|
|
34,802 |
|
|
|
872 |
|
|
|
|
|
|
|
33,930 |
|
Mortgage-backed securities |
|
|
228,621 |
|
|
|
3,940 |
|
|
|
(114 |
) |
|
|
224,795 |
|
Collateralized mortgage obligations |
|
|
124,946 |
|
|
|
698 |
|
|
|
(6,107 |
) |
|
|
130,355 |
|
Asset-backed securities |
|
|
58,786 |
|
|
|
817 |
|
|
|
(266 |
) |
|
|
58,235 |
|
Commercial mortgage-backed securities |
|
|
111,458 |
|
|
|
132 |
|
|
|
(2,348 |
) |
|
|
113,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
558,613 |
|
|
|
6,459 |
|
|
|
(8,835 |
) |
|
|
560,989 |
|
Corporate bonds |
|
|
192,356 |
|
|
|
3,555 |
|
|
|
(3,507 |
) |
|
|
192,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,570,971 |
|
|
|
31,123 |
|
|
|
(15,151 |
) |
|
|
1,554,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
59,688 |
|
|
|
3,699 |
|
|
|
(9,320 |
) |
|
|
65,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
12,810 |
|
|
|
|
|
|
|
|
|
|
|
12,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
171,447 |
|
|
|
|
|
|
|
|
|
|
|
171,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,814,916 |
|
|
$ |
34,822 |
|
|
$ |
(24,471 |
) |
|
$ |
1,804,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
December 31, 2007 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury Bonds,
GNMAs and foreign government bonds |
|
$ |
234,375 |
|
|
$ |
5,724 |
|
|
$ |
(337 |
) |
|
$ |
228,988 |
|
States, municipalities and political
subdivisions |
|
|
515,883 |
|
|
|
7,050 |
|
|
|
(657 |
) |
|
|
509,490 |
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-guaranteed government agency bonds |
|
|
29,818 |
|
|
|
342 |
|
|
|
(4 |
) |
|
|
29,480 |
|
Mortgage-backed securities |
|
|
232,869 |
|
|
|
1,824 |
|
|
|
(479 |
) |
|
|
231,524 |
|
Collateralized mortgage obligations |
|
|
134,899 |
|
|
|
524 |
|
|
|
(823 |
) |
|
|
135,198 |
|
Asset-backed securities |
|
|
64,352 |
|
|
|
533 |
|
|
|
(79 |
) |
|
|
63,898 |
|
Commercial mortgage-backed securities |
|
|
113,488 |
|
|
|
544 |
|
|
|
(1,031 |
) |
|
|
113,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
575,426 |
|
|
|
3,767 |
|
|
|
(2,416 |
) |
|
|
574,075 |
|
Corporate bonds |
|
|
196,636 |
|
|
|
2,504 |
|
|
|
(1,804 |
) |
|
|
195,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,522,320 |
|
|
|
19,045 |
|
|
|
(5,214 |
) |
|
|
1,508,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
67,240 |
|
|
|
6,452 |
|
|
|
(4,704 |
) |
|
|
65,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
7,056 |
|
|
|
|
|
|
|
|
|
|
|
7,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
170,685 |
|
|
|
|
|
|
|
|
|
|
|
170,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,767,301 |
|
|
$ |
25,497 |
|
|
$ |
(9,918 |
) |
|
$ |
1,751,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
We analyze our mortgage-backed and asset-backed securities by credit quality of the
underlying collateral distinguishing between the securities issued by the Federal National Mortgage
Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) which are Federal
government sponsored entities, and the non-FNMA and FHLMC securities broken out by prime, Alt-A and
subprime collateral. The securities issued by FNMA and FHLMC are guaranteed by each respective
entity but are not guaranteed by the Federal government.
Prime collateral consists of mortgages or other collateral from the most creditworthy
borrowers. Alt-A collateral consists of mortgages or other collateral from borrowers which have a
risk potential that is greater than prime but less than subprime. The subprime collateral consists
of mortgages or other collateral from borrowers with low credit ratings. Such subprime and Alt-A
categories are as defined by S&P.
At March 31, 2008, the Company owned two asset-backed securities approximating $0.4 million
with subprime mortgage exposures. The securities are rated AAA/Aaa by S&P and Moodys,
respectively, and have an effective maturity of 0.7 years. In addition, the Company owned eleven
collateralized mortgage obligations approximating $18.5 million classified as Alt-A which is a
credit category between prime and subprime. The Alt-A bonds, also rated AAA/Aaa, have an effective
maturity of 2.2 years. Such subprime and Alt-A categories are as defined by S&P. The Company is
receiving principal and/or interest payments on all of these securities and believes such amounts
are fully collectible.
The following tables set forth our mortgage-backed securities, collateralized mortgage
obligations, and asset-backed securities by those issued by FNMA and FHLMC and the quality category
(prime, Alt-A and subprime) for all other such investments at March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FNMA |
|
$ |
170,909 |
|
|
$ |
3,028 |
|
|
$ |
(96 |
) |
|
$ |
167,977 |
|
FHLMC |
|
|
57,712 |
|
|
|
912 |
|
|
|
(18 |
) |
|
|
56,818 |
|
Prime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
228,621 |
|
|
$ |
3,940 |
|
|
$ |
(114 |
) |
|
$ |
224,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
$ |
517 |
|
|
$ |
9 |
|
|
$ |
|
|
|
$ |
508 |
|
FNMA |
|
|
10,836 |
|
|
|
261 |
|
|
|
|
|
|
|
10,575 |
|
FHLMC |
|
|
13,062 |
|
|
|
373 |
|
|
|
|
|
|
|
12,689 |
|
Prime |
|
|
82,013 |
|
|
|
55 |
|
|
|
(4,451 |
) |
|
|
86,409 |
|
Alt-A |
|
|
18,518 |
|
|
|
|
|
|
|
(1,656 |
) |
|
|
20,174 |
|
Subprime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
124,946 |
|
|
$ |
698 |
|
|
$ |
(6,107 |
) |
|
$ |
130,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
Asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
$ |
2,880 |
|
|
$ |
182 |
|
|
$ |
|
|
|
$ |
2,698 |
|
FNMA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
|
55,528 |
|
|
|
635 |
|
|
|
(235 |
) |
|
|
55,128 |
|
Alt-A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime |
|
|
378 |
|
|
|
|
|
|
|
(31 |
) |
|
|
409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
58,786 |
|
|
$ |
817 |
|
|
$ |
(266 |
) |
|
$ |
58,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The commercial mortgage-backed securities are all rated AAA by S&P or Aaa by Moodys.
The following table shows the amount and percentage of the Companys fixed maturities and
short-term investments at fair value at March 31, 2008 by S&P credit rating or, if an S&P rating is
not available, the equivalent Moodys rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
Rating |
|
|
|
|
|
|
|
to |
|
Description |
|
Rating |
|
Amount |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Extremely Strong |
|
AAA |
|
$ |
1,236,946 |
|
|
|
71 |
% |
Very Strong |
|
AA |
|
|
243,905 |
|
|
|
14 |
% |
Strong |
|
A |
|
|
191,639 |
|
|
|
11 |
% |
Adequate |
|
BBB |
|
|
69,688 |
|
|
|
4 |
% |
Speculative |
|
BB & below |
|
|
240 |
|
|
|
0 |
% |
Not Rated |
|
NR |
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
AA(1) |
|
$ |
1,742,418 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Weighted average quality rating. |
51
The Company owns securities credit enhanced by financial guarantors. The following tables set
forth the amount of credit enhanced securities in the fixed maturities portfolio by category at
March 31, 2008, identify the amount insured by each financial guarantor and identify the average
underlying credit rating of such credit enhanced securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Credit enhanced securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and political
subdivisions |
|
$ |
318,022 |
|
|
$ |
4,885 |
|
|
$ |
(1,529 |
) |
|
$ |
314,666 |
|
Mortgage- and asset-backed securities |
|
|
10,879 |
|
|
|
2 |
|
|
|
(250 |
) |
|
|
11,127 |
|
Corporate bonds |
|
|
2,174 |
|
|
|
12 |
|
|
|
(29 |
) |
|
|
2,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
331,075 |
|
|
$ |
4,899 |
|
|
$ |
(1,808 |
) |
|
$ |
327,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
Underlying |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
Credit |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
Rating |
|
|
|
($ in thousands) |
|
|
|
|
Financial guarantors: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMBAC |
|
$ |
65,878 |
|
|
$ |
809 |
|
|
$ |
(561 |
) |
|
$ |
65,630 |
|
|
|
A+ |
|
Assured Guaranty LTD |
|
|
3,952 |
|
|
|
20 |
|
|
|
|
|
|
|
3,932 |
|
|
|
A |
|
FGIC |
|
|
64,190 |
|
|
|
788 |
|
|
|
(232 |
) |
|
|
63,634 |
|
|
AA- |
Financial Security
Assurance |
|
|
79,470 |
|
|
|
1,791 |
|
|
|
(270 |
) |
|
|
77,949 |
|
|
|
A+ |
|
MBIA |
|
|
98,456 |
|
|
|
1,379 |
|
|
|
(578 |
) |
|
|
97,655 |
|
|
AA- |
Radian Group, Inc |
|
|
7,702 |
|
|
|
98 |
|
|
|
(41 |
) |
|
|
7,645 |
|
|
AA- |
XL Capital |
|
|
11,427 |
|
|
|
14 |
|
|
|
(126 |
) |
|
|
11,539 |
|
|
|
A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
331,075 |
|
|
$ |
4,899 |
|
|
$ |
(1,808 |
) |
|
$ |
327,984 |
|
|
AA- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The average underlying credit rating by bond insurer of the insured securities rated by S&P or
Moodys if such securities did not have the credit enhancing insurance is included in the
Underlying Credit Rating column in the above table. This average rating includes $22 million of
prerefunded municipal bonds which have an implied rating of AAA but are not otherwise rated by S&P
or Moodys. Such average ratings exclude a total of 40 credit enhanced securities approximating
$29 million that do not have an underlying rating consisting of 20 municipal bonds approximating
$16 million, 16 asset-backed securities approximating $11 million and 4 corporate bonds
approximating $2 million.
If all or some of the companies providing the credit enhancing insurance were no longer viable
entities, management believes that the credit enhanced securities are of sufficient quality to not
default, or if some of the securities did default, they would not have a material adverse effect on
the Companys financial condition or results of operations. However, since the ratings would be
reduced, it is likely that the market values would decrease to reflect such lower ratings.
52
We regularly review our fixed maturity and equity securities portfolios to evaluate the
necessity of recording impairment losses for other-than-temporary declines in the fair value of
investments. In general, we focus our attention on those securities whose market value was less than 80% of their cost or
amortized cost, as appropriate, for six or more consecutive months. Other factors considered in evaluating
potential impairment include the current fair value as compared to cost or amortized cost, as
appropriate, our intent and ability to retain the investment for a period of time sufficient to
allow for an anticipated recovery in value, specific credit issues related to the issuer and
current economic conditions.
As mentioned above, the Company considers its intent and ability to hold a security until the
value recovers as part of the process of evaluating whether a securitys unrealized loss represents
an other-than-temporary decline. The Companys ability to hold such securities is supported by
sufficient cash flow from its operations and from maturities within its investment portfolio in
order to meet its claims payment and other disbursement obligations arising from its underwriting
operations without selling such investments. With respect to securities where the decline in value
is determined to be temporary and the securitys value is not written down, a subsequent decision
may be made to sell that security and realize a loss. Subsequent decisions on security sales are
made within the context of overall risk monitoring, changing information, market conditions and
assessing value relative to other comparable securities. Management of the Companys investment
portfolio is outsourced to third party investment managers. While these investment managers may,
at a given point in time, believe that the preferred course of action is to hold securities with
unrealized losses that are considered temporary until such losses are recovered, the dynamic nature
of the portfolio management may result in a subsequent decision to sell the security and realize
the loss, based upon a change in market and other factors described above. The Company believes
that subsequent decisions to sell such securities are consistent with the classification of the
Companys portfolio as available for sale.
53
The following table summarizes all securities in an unrealized loss position at March 31, 2008
and December 31, 2007, showing the aggregate fair value and gross unrealized loss by the length of
time those securities have continuously been in an unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
December 31, 2007 |
|
|
|
Fair |
|
|
Gross Unrealized |
|
|
Fair |
|
|
Gross Unrealized |
|
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury
Bonds, GNMAs and
foreign
government bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
$ |
2,179 |
|
|
$ |
4 |
|
|
$ |
4,119 |
|
|
$ |
32 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
6,470 |
|
|
|
97 |
|
|
|
19,587 |
|
|
|
305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
8,649 |
|
|
|
101 |
|
|
|
23,706 |
|
|
|
337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
116,402 |
|
|
|
1,990 |
|
|
|
21,853 |
|
|
|
67 |
|
7-12 Months |
|
|
9,175 |
|
|
|
327 |
|
|
|
6,045 |
|
|
|
115 |
|
> 12 Months |
|
|
13,256 |
|
|
|
391 |
|
|
|
69,671 |
|
|
|
475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
138,833 |
|
|
|
2,708 |
|
|
|
97,569 |
|
|
|
657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and
asset-backed securities
(excluding GNMAs) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
121,619 |
|
|
|
4,657 |
|
|
|
61,388 |
|
|
|
515 |
|
7-12 Months |
|
|
18,110 |
|
|
|
1,730 |
|
|
|
48,496 |
|
|
|
423 |
|
> 12 Months |
|
|
80,960 |
|
|
|
2,448 |
|
|
|
121,798 |
|
|
|
1,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
220,689 |
|
|
|
8,835 |
|
|
|
231,682 |
|
|
|
2,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
34,229 |
|
|
|
1,089 |
|
|
|
20,722 |
|
|
|
255 |
|
7-12 Months |
|
|
15,169 |
|
|
|
1,452 |
|
|
|
25,520 |
|
|
|
974 |
|
> 12 Months |
|
|
18,291 |
|
|
|
966 |
|
|
|
38,865 |
|
|
|
575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
67,689 |
|
|
|
3,507 |
|
|
|
85,107 |
|
|
|
1,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities |
|
$ |
435,860 |
|
|
$ |
15,151 |
|
|
$ |
438,064 |
|
|
$ |
5,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities -
common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
$ |
28,106 |
|
|
$ |
5,413 |
|
|
$ |
26,257 |
|
|
$ |
3,494 |
|
7-12 Months |
|
|
7,314 |
|
|
|
3,664 |
|
|
|
4,153 |
|
|
|
1,209 |
|
> 12 Months |
|
|
523 |
|
|
|
243 |
|
|
|
53 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity Securities |
|
$ |
35,943 |
|
|
$ |
9,320 |
|
|
$ |
30,463 |
|
|
$ |
4,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The
above unrealized losses have been determined to be temporary and resulted from changes in market
conditions.
When a security in our investment portfolio has an unrealized loss that is deemed to be
other-than-temporary, we write the security down to fair value through a charge to operations.
Significant changes in the factors we consider when evaluating investments for impairment losses
could result in a significant change in impairment losses reported in the consolidated financial
statements. There were no impairment losses recorded in our fixed maturity or equity securities
portfolios in the first quarters of 2008 or 2007.
The following table shows the composition by National Association of Insurance Commissioners
(NAIC) rating and the generally equivalent S&P and Moodys ratings of the fixed maturity
securities in our portfolio with gross unrealized losses at March 31, 2008. Not all of the
securities are rated by S&P and/or Moodys.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Equivalent |
|
Equivalent |
|
Unrealized Loss |
|
|
Fair Value |
|
NAIC |
|
S&P |
|
Moodys |
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
Rating |
|
Rating |
|
Rating |
|
Amount |
|
|
to Total |
|
|
Amount |
|
|
to Total |
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
AAA/AA/A |
|
Aaa/Aa/A |
|
$ |
13,648 |
|
|
|
90 |
% |
|
$ |
405,776 |
|
|
|
93 |
% |
2 |
|
BBB |
|
Baa |
|
|
1,492 |
|
|
|
10 |
% |
|
|
29,844 |
|
|
|
7 |
% |
3 |
|
BB |
|
Ba |
|
|
11 |
|
|
|
0 |
% |
|
|
240 |
|
|
|
0 |
% |
4 |
|
B |
|
B |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
CCC or lower |
|
Caa or lower |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
N/A |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
15,151 |
|
|
|
100 |
% |
|
$ |
435,860 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008, the gross unrealized losses in the table directly above are related to
fixed maturity securities that are rated investment grade, which is defined as a security having an
NAIC rating of 1 or 2, an S&P rating of BBB- or higher, or a Moodys rating of Baa3 or higher,
except for $0.2 million which is rated BB/Ba. Unrealized losses on investment grade securities
principally relate to changes in interest rates or changes in sector-related credit spreads since
the securities were acquired. Any such unrealized losses are recognized in income, if the
securities are sold, or if the decline in fair value is deemed other-than-temporary.
55
The scheduled maturity by the number of years until maturity for fixed maturity securities
with unrealized losses at March 31, 2008 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized Loss |
|
|
Fair Value |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
Amount |
|
|
to Total |
|
|
Amount |
|
|
to Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
33 |
|
|
|
0 |
% |
|
$ |
7,594 |
|
|
|
2 |
% |
Due after one year through five years |
|
|
797 |
|
|
|
5 |
% |
|
|
23,372 |
|
|
|
5 |
% |
Due after five years through ten years |
|
|
2,027 |
|
|
|
13 |
% |
|
|
65,823 |
|
|
|
15 |
% |
Due after ten years |
|
|
3,459 |
|
|
|
23 |
% |
|
|
118,382 |
|
|
|
27 |
% |
Mortgage- and asset-backed securities |
|
|
8,835 |
|
|
|
59 |
% |
|
|
220,689 |
|
|
|
51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities |
|
$ |
15,151 |
|
|
|
100 |
% |
|
$ |
435,860 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected maturities may differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties. Due to the periodic
repayment of principal, the aggregate amount of mortgage-backed and asset-backed securities are
estimated to have an effective maturity of approximately 4.6 years.
Our realized capital gains and losses for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
Gains |
|
$ |
197 |
|
|
$ |
450 |
|
(Losses) |
|
|
(9 |
) |
|
|
(438 |
) |
|
|
|
|
|
|
|
|
|
|
188 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
Gains |
|
|
263 |
|
|
|
250 |
|
(Losses) |
|
|
(527 |
) |
|
|
(61 |
) |
|
|
|
|
|
|
|
|
|
|
(264 |
) |
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital gains (losses) |
|
$ |
(76 |
) |
|
$ |
201 |
|
|
|
|
|
|
|
|
56
The following table details realized losses in excess of $250,000 from sales and impairments
during the first three months of 2008 and 2007 and the related circumstances giving rise to the
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
Exceeded 20% |
|
|
|
Date of |
|
|
Proceeds |
|
|
Loss on |
|
|
|
|
|
|
Holdings at |
|
|
Unrealized |
|
|
of Cost or |
|
Description |
|
Sale |
|
|
from Sale |
|
|
Sale |
|
|
Impairment |
|
|
March 31, 2008 |
|
|
Loss |
|
|
Amortized Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TIPS (1) |
|
|
3/31/2007 |
|
|
$ |
5,823 |
|
|
$ |
(335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Treasury inflation protection securities (TIPS) were sold during the 2007 first
quarters due to the widening breakeven yield spread between TIPS and Treasuries. |
Reinsurance Recoverables
We utilize reinsurance principally to reduce our exposure on individual risks, to protect
against catastrophic losses, and to stabilize loss ratios and underwriting results. Although
reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the
reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our
policyholders. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our
reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of
these claims. Either of these events would increase our costs and could have a material adverse
effect on our business. We are required to pay the losses even if the reinsurer fails to meet its
obligations under the reinsurance agreement.
We are protected by various treaty and facultative reinsurance agreements. Our exposure to
credit risk from any one reinsurer is managed through diversification by reinsuring with a number
of different reinsurers, principally in the United States and European reinsurance markets. To
meet our standards of acceptability, when the reinsurance is placed, a reinsurer generally must
have an A.M. Best Company and/or S&P rating of A or better, or equivalent financial strength if
not rated, plus at least $250 million in policyholders surplus. Our Reinsurance Security
Committee, which is part of our Enterprise Risk Management Reinsurance Sub-Committee, monitors the
financial strength of our reinsurers and the related reinsurance receivables and periodically
reviews the list of acceptable reinsurers. The reinsurance is placed either directly by us or
through reinsurance intermediaries. The reinsurance intermediaries are compensated by the
reinsurers.
Approximately $145.3 million and $167.7 million of the reinsurance recoverables for paid and
unpaid losses at March 31, 2008 and December 31, 2007, respectively, were due from reinsurers as a
result of the losses from Hurricanes Katrina and Rita.
The Company continues to periodically monitor the financial condition and ongoing activities
of its reinsurers, in order to assess the adequacy of its allowance for uncollectible reinsurance.
Liquidity and Capital Resources
Cash flows from operations were $59.7 million and $20.1 million for the three months ended
March 31, 2008 and 2007, respectively. The positive operating cash flow was primarily due to the
increase in net written premium, collected investment income, decrease in reinsurance recoverable
on paid losses and fewer paid losses relating to the Hurricanes Katrina and Rita. Operating cash
flow was used primarily to acquire additional investment assets.
57
Investments and cash increased to $1.81 billion at March 31, 2008 from $1.77 billion at
December 31, 2007. The increase was due to the positive cash flow from operations. Net investment
income was $18.8 million
and $16.2 million for the three months ended March 31, 2008 and 2007, respectively. The
approximate annualized pre-tax yields of the investment portfolio, excluding net realized capital
gains and losses, were 4.2% and 4.4% for the 2008 and 2007 first quarters, respectively.
At March 31, 2008, the weighted average rating of our fixed maturity investments was AA by
Standard & Poors and Aa by Moodys. We believe that we have limited exposure to credit risk
since the entire fixed maturity investment portfolio, except for $0.2 million, consists of
investment grade bonds. At March 31, 2008, our portfolio had an average maturity of 5.5 years and
duration of 4.2 years. Management continually monitors the composition and cash flow of the
investment portfolio in order to maintain the appropriate levels of liquidity in an effort to
ensure our ability to satisfy claims.
The Company has a credit facility provided through a consortium of banks. The credit facility
was amended in February 2007 to increase the letters of credit available under the facility from
$115 million to $180 million and to increase the line of credit under the facility from $10 million
to $20 million. Also, the expiration of the credit facility was extended from June 30, 2007 to
March 31, 2009. If, at that time, the bank consortium does not renew the credit facility, we will
need to find other sources to provide the letters of credit or other collateral required to
continue our participation in Syndicate 1221. The credit facility, which is denominated in U.S.
dollars, is utilized primarily by Navigators Corporate Underwriters Ltd. and Millennium
Underwriting Ltd. to fund our participation in Syndicate 1221 which is denominated in British
pounds. At March 31, 2008, letters of credit with an aggregate face amount of $106.9 million were
issued under the credit facility. The line of credit was unused at March 31, 2008.
As a result of the amendment, the cost of the letter of credit portion of the credit facility
was reduced to 0.75% from 1.00% for the issued letters of credit and to 0.10% from 0.125% for the
unutilized portion of the letter of credit facility. The cost of the line of credit portion of the
credit facility was also reduced to 0.75% from 1.00% over the Companys choice of LIBOR or prime
for the utilized portion and to 0.10% from 0.125% for the unutilized portion.
The credit facility is collateralized by all of the common stock of Navigators Insurance
Company. The credit agreement contains covenants common to transactions of this type, including
restrictions on indebtedness and liens, limitations on dividends, stock buy backs, mergers and the
sale of assets, and requirements to maintain certain consolidated tangible net worth, statutory
surplus and other financial ratios. No dividends have been declared or paid by the Company through
March 31, 2008. We were in compliance with all covenants at March 31, 2008.
Our reinsurance has been placed with various U.S. and foreign insurance companies and with
selected syndicates at Lloyds. Pursuant to the implementation of Lloyds Plan of Reconstruction
and Renewal, a portion of our recoverables are now reinsured by Equitas (a separate United Kingdom
authorized reinsurance company established to reinsure outstanding liabilities of all Lloyds
members for all risks written in the 1992 or prior years of account).
Time lags do occur in the normal course of business between the time gross 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, 2008 are
anticipated to be billed and collected over the next several years as the gross loss reserves are
paid by the Company.
Generally, for pro-rata or quota share reinsurers, including pool participants, the Company
issues quarterly settlement statements for premiums less commissions and paid loss activity, which
are expected to be settled by the end of the subsequent quarter. The Company has the ability to
issue cash calls requiring such reinsurers to pay losses whenever paid loss activity for a claim
ceded to a particular reinsurance treaty exceeds a predetermined amount (generally $1.0 million) as
set forth in the pro-rata treaty. For the Insurance Companies,
cash calls must generally be paid within 30 calendar days. There is generally no specific
settlement period for the Lloyds Operations cash call provisions, but such billings are usually
paid within 45 calendar days.
58
Generally, for excess of loss reinsurers the Company pays monthly or quarterly deposit
premiums based on the estimated subject premiums over the contract period (usually one year) which
are subsequently adjusted based on actual premiums determined after the expiration of the
applicable reinsurance treaty. Paid losses subject to excess of loss recoveries are generally
billed as they occur and are usually settled by reinsurers within 30 calendar days for the
Insurance Companies and 30 business days for the Lloyds Operations.
The Company sometimes withholds funds from reinsurers and may apply ceded loss billings
against such funds in accordance with the applicable reinsurance agreements.
At March 31, 2008, ceded asbestos paid and unpaid recoverables were $10.0 million compared to
$10.5 million at December 31, 2007. Of such amounts at March 31, 2008, $5.9 million was due from
Equitas. The Company generally experiences significant collection delays for a large portion of
reinsurance recoverable amounts for asbestos losses given that certain reinsurers are in run-off or
otherwise no longer active in the reinsurance business. Such circumstances are considered in the
Companys ongoing assessment of such reinsurance recoverables.
The Company believes that it has adequately managed its cash flow requirements related to
reinsurance recoveries from its positive cash flows and the use of available short-term funds when
applicable. However, there can be no assurances that the Company will be able to continue to
adequately manage such recoveries in the future or that collection disputes or reinsurer
insolvencies will not arise that could materially increase the collection time lags or result in
recoverable write-offs causing additional incurred losses and liquidity constraints to the Company.
The payment of gross claims and related collections from reinsurers with respect to Hurricanes
Katrina and Rita could significantly impact the Companys liquidity needs. However, we expect to
continue to pay these hurricane losses over a period of years from cash flow and, if needed,
short-term investments and expect to collect our paid reinsurance recoverables generally under the
terms described above.
We believe that the cash flow generated by the operating activities of our subsidiaries will
provide sufficient funds for us to meet our liquidity needs over the next twelve months. Beyond
the next twelve months, cash flow available to us may be influenced by a variety of factors,
including general economic conditions and conditions in the insurance and reinsurance markets, as
well as fluctuations from year to year in claims experience.
Our capital resources consist of funds deployed or available to be deployed to support our
business operations. At March 31, 2008 and December 31, 2007, our capital resources were as
follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Senior debt |
|
$ |
123,702 |
|
|
$ |
123,673 |
|
Stockholders equity |
|
|
676,877 |
|
|
|
662,106 |
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
800,579 |
|
|
$ |
785,779 |
|
|
|
|
|
|
|
|
Ratio of debt to total capitalization |
|
|
15.5 |
% |
|
|
15.7 |
% |
|
|
|
|
|
|
|
The increase in stockholders equity in 2008 was primarily due to 2008 first quarter net
income offset by treasury stock purchases and a decline in accumulated other comprehensive income.
59
We monitor our capital adequacy to support our business on a regular basis. The future
capital requirements of our business will depend on many factors, including our ability to write
new business successfully and to establish premium rates and reserves at levels sufficient to cover
losses. Our ability to
underwrite is largely dependent upon the quality of our claims paying and financial strength
ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient
capital to maintain our financial strength ratings, as issued by several ratings agencies, at a
level considered necessary by management to enable our Insurance Companies to compete, (2)
sufficient capital to enable our Insurance Companies to meet the capital adequacy tests performed
by statutory agencies in the United States and the United Kingdom and (3) letters of credit and
other forms of collateral that are necessary to support the business plan of our Lloyds
Operations.
As part of our capital management program, we may seek to raise additional capital or may seek
to return capital to our shareholders through share repurchases, cash dividends or other methods
(or a combination of such methods). Any such determination will be at the discretion of our board
of directors and will be dependent upon our profits, financial requirements and other factors,
including legal restrictions, rating agency requirements, credit facility limitations and such
other factors as our board of directors deems relevant.
In October, 2007 the Board of Directors adopted a stock repurchase program for up to $30
million of the Companys common stock. Purchases may be made from time to time at prevailing
prices in open market or privately negotiated transactions through December 31, 2008. The timing
and amount of purchases under the program will depend on a variety of factors, including the
trading price of the stock, market conditions and corporate and regulatory considerations. Through
March 31, 2008, we have purchased 136,026 shares of our common stock at a total cost of $7.3
million.
We primarily rely upon dividends from our subsidiaries to meet our Parent Companys
obligations. Since the issuance of the senior debt in April 2006, the Parent Companys cash
obligations primarily consist of semi-annual interest payments of $4.4 million. Going forward, the
interest payments and any stock repurchases will be made from a combination of funds currently at
the Parent Company, dividends from its subsidiaries and the $20 million line of credit. The
dividends have historically been paid by Navigators Insurance Company. Based on the December 31,
2007 surplus of Navigators Insurance Company, the approximate remaining maximum amount available at
March 31, 2008 for the payment of dividends by Navigators Insurance Company during 2008 without
prior regulatory approval was $52.9 million. Navigators Insurance Company declared and paid a $5.0
million dividend to the Parent Company in the first quarter of 2008.
60
Condensed Parent Company balance sheets as of March 31, 2008 (unaudited) and December 31, 2007
are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Cash and investments |
|
$ |
43,102 |
|
|
$ |
44,146 |
|
Investments in subsidiaries |
|
|
751,212 |
|
|
|
735,351 |
|
Goodwill and other intangible assets |
|
|
2,534 |
|
|
|
2,534 |
|
Other assets |
|
|
8,238 |
|
|
|
6,821 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
805,086 |
|
|
$ |
788,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
$ |
861 |
|
|
|
1,615 |
|
Accrued interest payable |
|
|
3,646 |
|
|
|
1,458 |
|
7% Senior Notes due May 1, 2016 |
|
|
123,702 |
|
|
|
123,673 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
128,209 |
|
|
|
126,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
676,877 |
|
|
|
662,106 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
805,086 |
|
|
$ |
788,852 |
|
|
|
|
|
|
|
|
At March 31, 2008, approximately $5.2 million of investments are held in a tax escrow account
on behalf of Navigators Insurance Company until the two-year tax loss carryback period expires.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the information concerning market risk as stated in the
Companys 2007 Annual Report on Form 10-K.
Item 4. Controls and Procedures
|
(a) |
|
The Chief Executive Officer and Chief Financial Officer of the Company
have evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the Exchange Act)), as of the end of the period covered by this
quarterly report. Based on such evaluation, such officers have concluded that as of
the end of such period the Companys disclosure controls and procedures are
effective in identifying, on a timely basis, material information required to be
disclosed in our reports filed or submitted under the Exchange Act. |
|
|
(b) |
|
There have been no changes during our 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
The Company is not a party to, or the subject of, any material pending legal proceedings that
depart from the routine litigation incidental to the kinds of business it conducts.
There have been no material changes from the risk factors as previously disclosed in the
Companys 2007 Annual Report on Form 10-K.
61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In October, 2007 the Board of Directors adopted a stock repurchase program for up to $30
million of the Companys common stock. Purchases may be made from time to time at prevailing
prices in open market or privately negotiated transactions through December 31, 2008. The timing
and amount of purchases under the program will depend on a variety of factors, including the
trading price of the stock, market conditions and corporate and regulatory considerations.
The following table summarizes the Companys purchases of its common stock for the 2008 first
quarter:
($
in thousands, except per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Dollar Value |
|
|
|
Total |
|
|
|
|
|
|
Purchased |
|
|
of Shares that |
|
|
|
Number |
|
|
Average |
|
|
Under Publicly |
|
|
May Yet Be |
|
|
|
of Shares |
|
|
Cost Paid |
|
|
Announced |
|
|
Purchased Under |
|
|
|
Purchased |
|
|
Per Share |
|
|
Program |
|
|
the Program (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,000 |
|
February 2008 |
|
|
30,202 |
|
|
$ |
54.66 |
|
|
|
30,202 |
|
|
$ |
28,349 |
|
March 2008 |
|
|
105,824 |
|
|
$ |
53.58 |
|
|
|
105,824 |
|
|
$ |
22,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
136,026 |
|
|
$ |
53.82 |
|
|
|
136,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Balance as of the end of the month indicated. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submissions of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
|
|
|
|
10-1
|
|
Paul J. Malvasio Letter Agreement and Retirement Agreement
|
|
* |
11-1
|
|
Statement re Computation of Per Share Earnings
|
|
* |
31-1
|
|
Certification of CEO per Section 302 of the Sarbanes-Oxley Act
|
|
* |
31-2
|
|
Certification of CFO per Section 302 of the Sarbanes-Oxley Act
|
|
* |
32-1
|
|
Certification of CEO per Section 906 of the Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance
with Regulation S-K item 601(b)(32)(ii) and shall not be
deemed to be filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the
Securities Act of 1933, except as shall be expressly set
forth by specific reference).
|
|
* |
32-2
|
|
Certification of CFO per Section 906 of the Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance
with Regulation S-K item 601(b)(32)(ii) and shall not be
deemed to be filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the
Securities Act of 1933, except as shall be expressly set
forth by specific reference).
|
|
* |
62
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: April 30, 2008 |
/s/ Paul J. Malvasio
|
|
|
Paul J. Malvasio |
|
|
Executive Vice President
and Chief Financial Officer |
|
63
INDEX OF EXHIBITS
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
|
|
|
|
10-1
|
|
Paul J. Malvasio Letter Agreement and Retirement Agreement
|
|
* |
11-1
|
|
Statement re Computation of Per Share Earnings
|
|
* |
31-1
|
|
Certification of CEO per Section 302 of the Sarbanes-Oxley Act
|
|
* |
31-2
|
|
Certification of CFO per Section 302 of the Sarbanes-Oxley Act
|
|
* |
32-1
|
|
Certification of CEO per Section 906 of the Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance
with Regulation S-K item 601(b)(32)(ii) and shall not be
deemed to be filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the
Securities Act of 1933, except as shall be expressly set
forth by specific reference).
|
|
* |
32-2
|
|
Certification of CFO per Section 906 of the Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance
with Regulation S-K item 601(b)(32)(ii) and shall not be
deemed to be filed for purposes of section 18 of the
Securities Exchange Act of 1934, as amended, or
incorporated by reference into any filing under the
Securities Act of 1933, except as shall be expressly set
forth by specific reference).
|
|
* |
64