ITEM 1. BUSINESS
GENERAL
The Navigators Group, Inc. (the "Group") is a holding company with 15 wholly owned subsidiaries. Unless the context otherwise requires, the term "Company" as used herein means the Group and its subsidiaries.
Two of the Company's subsidiaries are insurance companies: Navigators Insurance Company and NIC Insurance Company. Navigators Insurance Company is the Company's largest insurance company subsidiary and has been active since 1983. It specializes principally in underwriting marine, aviation, property (primarily inland marine) insurance and certain lines of specialty reinsurance and non-marine insurance. NIC Insurance Company is a wholly owned subsidiary of Navigators Insurance Company, was licensed in 1989 and began operations in 1990. It underwrites a small book of surplus lines property insurance in certain states and, pursuant to an intercompany reinsurance pooling agreement, cedes 100% of its gross direct writings from this business to Navigators Insurance Company in exchange for assuming 10% of the total retained business of Navigators Insurance Company. Navigators Insurance Company and NIC Insurance Company are collectively referred to herein as "Navigators".
Another subsidiary, Navigators Corporate Underwriters Limited ("NCUL"), which was formed in the fourth quarter of 1996, is admitted to underwrite marine and related lines of business at Lloyd's of London as a corporate member with limited liability, commencing with the 1997 year of account.
Nine of the Company's subsidiaries are a group of underwriting management companies: Somerset Marine, Inc., Somerset of Georgia, Inc., Somerset Insurance Services of Texas, Inc., Somerset Insurance Services of California, Inc., Somerset Insurance Services of Washington, Inc., Somerset Re Management, Inc., Somerset Marine (UK) Limited ("Somerset (UK)"), Somerset Asia Pacific Pty Limited ("Somerset Asia") and Navigators Management Corporation ("NMC") (collectively, the "Somerset Companies"). The Somerset Companies produce, manage and underwrite insurance and reinsurance for Navigators and ten other unrelated insurance companies.
Somerset Asia, a wholly-owned subsidiary, was created in the third quarter of 1996 and will operate from an office in Sydney, Australia. This office will concentrate on marine, energy and construction business primarily in Indonesia, Thailand, Malaysia, China and Vietnam. The Australia office began writing business in early 1997.
Somerset (UK) Limited, formed in the fourth quarter of 1996, will serve as an agency office for Navigators and ten other unrelated insurance companies and will concentrate on business segments within marine, aviation, energy and construction business. Navigators expects to be authorized to operate a U.K. branch in mid 1997.
The other subsidiaries of the Company are Somerset Casualty Agency, Inc., Somerset Property, Inc. and Somerset Marine Aviation Property Managers, Inc., which are either inactive or in runoff.
The Somerset Companies other then "Somerset (UK) and Somerset Asia (the "Acquired Somerset Companies") were acquired by the Company in 1994 pursuant to mergers (the "Mergers") that were approved by the stockholders of the Company at a special meeting held June 30, 1994. The Company accounted for the transfer of the Acquired Somerset Companies' assets and liabilities at historical cost under a method of accounting similar to "a pooling of interests" and, accordingly, has reported results of operations as if the Company and the Acquired Somerset Companies had been combined since inception.
The Company's revenue is primarily comprised of premiums, commissions and investment income. Navigators derives substantially all of its business from the Somerset Companies through either business written specifically for Navigators or direct participation in, or by reinsuring certain
members of, insurance pools managed by the Somerset Companies. The insurance business and operations of Navigators are managed by NMC which is being merged into Somerset Marine, Inc. in 1997 with Somerset Marine, Inc. as the surviving company.
The Somerset Companies specialize principally in the following lines of business: marine, aviation, property (primarily inland marine) insurance and certain lines of specialty reinsurance and non-marine insurance. In 1996 the Somerset Companies underwrote the marine business through a syndicate of insurance companies, Navigators having the largest participation in the syndicate. They derive their revenue from commissions, investment income, service fees and cost reimbursement arrangements from Navigators and other insurers. Commissions are earned both on a fixed percentage of premiums and on underwriting profits on business placed with the participating insurance companies within the syndicate. Property and casualty insurance premiums are cyclical in nature and, accordingly, during a "hard market" demand for property and casualty insurance exceeds supply, or capacity, and as a result, premiums and commissions may increase. On the downturn of the property and casualty cycle, supply exceeds demand, and as a result, premiums and commissions may decrease.
Navigators and the Somerset Companies earn investment income on cash balances and invested assets. The Somerset Companies also earn investment income on fiduciary funds. Such fiduciary funds are invested, subject to applicable insurance regulations, primarily in short-term instruments.
In addition to its wholly-owned subsidiaries, as of December 31, 1995 the Company had a 21% ownership interest in Riverside Underwriters plc (formerly known as Navigators Underwriters plc) ("Riverside"). This ownership interest increased to 27% as of January 1, 1996 and had decreased to approximately 8% at December 31, 1996. Riverside, a U.K. corporation, owns 100% of Riverside Corporate Underwriters Limited, a U.K. corporation, which has been admitted to underwrite at Lloyd's of London as a corporate name with limited liability. The transaction to reduce the Company's ownership in Riverside did not produce a material capital gain or loss. The Company will, however, remain entitled to receive from Riverside an amount equal to the aggregate dividends that it would have received if it had continued to hold its original investment to the extent such dividends are attributable to writings at Lloyd's by Riverside Corporate Underwriters Limited during the 1994, 1995 and 1996 years of account. In connection with the reduction of the Company's investment, NMC will no longer be manager of Riverside and Riverside Corporate Underwriters Limited, although NMC will remain entitled to profit commissions with respect to the 1994, 1995 and 1996 years of account.
The Group, a Delaware corporation, was incorporated in November, 1982. Navigators Insurance Company and NIC Insurance Company were incorporated in New York in July, 1981, and December, 1988, respectively. The Group directly owns 100% of Navigators Insurance Company, which in turn directly owns 100% of NIC Insurance Company.
LINES OF BUSINESS
Navigators underwrites principally marine, aviation, property (primarily inland marine) insurance and certain lines of specialty reinsurance and non-marine insurance. As underwritten by Navigators, marine insurance includes hull, energy, liability and cargo; aviation insurance includes hull and liability on commercial aircraft and on aircraft manufactures; property insurance includes primarily inland marine at present, but prior to 1995 primarily included large commercial and industrial "all risk" coverages; reinsurance includes property and casualty assumed business which has been in runoff since December 31, 1995 with only a few specialty treaties renewed in 1996; and non-marine insurance includes non-marine program business developed to augment Navigators' reinsurance book. In 1996, Navigators began to underwrite onshore energy primarily covering property damage and machinery breakdown. See the table set forth in "Management's Discussion and Analysis - Results of Operations - Revenues" for Navigators' gross written premium by line of business and net written premium in the aggregate for the periods indicated.
MARINE INSURANCE
Navigators obtains its marine business through its direct participation in the pool managed by certain Somerset Companies and through its reinsurance of one or more members of this pool. The composition of the pool and the level of participation of each member changes from time to time.
As of December 31, 1996, members of the marine pool consisted, in addition to Navigators, of Christiania General Insurance Corporation of New York, Colonia Insurance Company, Employers Mutual Casualty Co., Farmers Mutual Hail Insurance Company of Iowa, Harleysville Mutual Insurance Company, National Liability and Fire Insurance Co., Pennsylvania Lumbermens Mutual Insurance Company, Insurance Corporation of New York, Worcester Insurance Company and Sorema North America Reinsurance Company as participants. Navigators' net participation in the marine pool was approximately 41% in 1996, 42% in 1995 and 48% in 1994.
The Somerset Companies in 1996, 1995 and 1994 received commissions equal to 7.5% of the gross premium earned on marine insurance. They also are entitled to receive a 20% contingent commission on net underwriting profits.
AVIATION INSURANCE
Since October 1, 1995, Navigators writes 100% of the aviation business produced by the Somerset Companies. Through September 30, 1995, Navigators received its aviation business both as a direct participant, and as a reinsurer of the same pool members as participate in the marine pool. Navigators' net share of the aviation pool was approximately 56% for the first nine months of 1995 and 48% in 1994. The aviation pool is managed by one of the Somerset Companies, which received commissions equal to 7.5% of the gross earned premiums, and is entitled to receive a 20% contingent commission on net underwriting profits.
PROPERTY AND INLAND MARINE INSURANCE
In 1996, Navigators wrote 100% of the property business (primarily inland marine) produced by the Somerset Companies. In 1995, Navigators received its property insurance through direct participation in a pool managed by certain Somerset Companies. Navigators' participation in the pool was 85% in 1995 and 1994. The remaining 15% was written by an unaffiliated insurance company. This business consists primarily of inland marine risks, although prior to 1995 this business consisted primarily of large commercial and industrial property risks. The Somerset Companies in 1995 and 1994 received commissions on property insurance equal to 10% of gross earned premiums and were entitled to receive a 20% contingent commission on net underwriting profits. The Somerset Companies received commissions on inland marine insurance equal to 7.5% in 1996 and 1995 and 10% in 1994, of gross earned premiums and were entitled to receive a 20% commission on net underwriting profits. In late 1994, Navigators decided to cease writing large commercial and industrial property risks and therefore written premium volume in this line in 1995 and 1996 was significantly less than in 1994.
ONSHORE ENERGY
In 1996, Navigators began to underwrite onshore energy business which principally focuses on the oil and gas, chemical and petrochemical, and power generation industries with coverages primarily for property damage and machinery breakdown.
SPECIALTY REINSURANCE AND NON-MARINE INSURANCE
Navigators receives its reinsurance business through direct participation in a book of business managed by one of the Somerset Companies. Navigators' participation in this business was 100% in 1996 and 1995, and 95% in 1994. The remaining 5% in 1994 was written by an unaffiliated insurance company. This reinsurance premium consists primarily of excess of loss and quota share property, surety, and other specialty reinsurance lines. The managing company in 1996, 1995, and 1994 received commissions of 7.5% of gross earned premium and was entitled to a contingent commission of 20% of net underwriting profits. During 1995 Navigators began writing 100% of a book of non-marine program business managed by the same Somerset Company.
REINSURANCE CEDED
Navigators utilizes reinsurance principally to reduce its net liability on individual risks, to protect against catastrophic losses, to maintain desired ratios of net premiums written to statutory surplus and to stabilize loss ratios.
The ceding of reinsurance does not discharge the original insurer from its primary liability to the policyholder. The ceding company is required to pay the losses even if the assuming company fails to meet its obligations under the reinsurance agreement.
Reinsurance is generally written under treaty contracts in which coverage is either on a proportional basis, where the reinsurer shares proportionately in premiums and losses, or on an excess of loss basis, where only losses above a fixed point are reinsured.
Navigators, both directly and through the syndicates in which it participates, is protected by various treaty and facultative reinsurance agreements. Navigators diversifies its reinsurance by reinsuring with a number of different reinsurers, principally in the United States and European reinsurance markets. This coverage is placed on behalf of Navigators by a number of different reinsurance intermediaries, each of which is employed because of its expertise in placing a particular type of coverage. All such intermediaries are compensated by the reinsurers.
Navigators' reinsurance security committee continually monitors the financial strength of its reinsurers and the amounts of reinsurance receivables from those reinsurers. To the extent that it is determined that the ultimate amount collectible is less than the amount recorded on a receivable, a reserve is established. At each of December 31, 1996 and 1995, the Company had an allowance for uncollectible reinsurance of $800,000.
RESERVES
Insurance companies are required to maintain reserves for unpaid losses and unpaid loss adjustment expenses ("LAE") for all lines of business. These reserves are intended to cover the probable ultimate cost of settling all losses incurred and unpaid, including those incurred but not reported. The determination of reserves for losses and LAE for insurance companies such as Navigators is dependent upon the receipt of information from the various pools in which such companies participate. Generally, there is a lag between the time premiums are written and related losses and LAE are incurred, and the time such events are reported to the pools and, subsequently, to Navigators.
Navigators establishes reserves for reported claims when Navigators first receives notice of the claim. In the case of direct business and assumed excess of loss reinsurance, reserves are established by Navigators on a case-by-case basis by evaluating several factors, including the type of risk involved, knowledge of the circumstances surrounding such claim, severity of injury or damage, the potential for ultimate exposure, experience of Navigators with the insured and the broker on the line of business, and the policy provisions relating to the type of claim. Navigators also establishes reserves for proportional treaty claims based on reports received from ceding insurers or pools in which they participate. Reserves for incurred but not reported losses for all of Navigators' business are determined, in part, on the basis of statistical information and in part on industry experience.
At any time, loss reserves are only estimates of what the insurer or reinsurer expects to pay on claims, based on facts and circumstances then known, and it is possible that the ultimate liability may exceed or be less than such estimates. Such estimates are based, among other things, on predictions of future events and estimates of future trends in claim severity and frequency. During the loss settlement period, which, in some cases, may last several years, additional facts regarding individual claims may become known and, accordingly, it often becomes necessary to refine and adjust the estimates of liability on a claim upward or downward. Even then, the ultimate liability may exceed or be less than the revised estimates. The reserving process is intended to provide implicit recognition of the impact of inflation and other factors affecting loss payments by taking into account changes in historical payment patterns and perceived probable trends. There is generally no precise method, however, for the subsequent evaluation of the adequacy of the consideration given to inflation or to any other specific factor, because the eventual deficiency or redundancy of reserves is affected by many factors, some of which are interdependent.
Navigators records only those premiums which are reported to it through the end of each calendar year. However, Navigators does estimate premiums related to quarterly reports from the pool manager which have not been received prior to preparation of the financial statements. There are two types of premium reporting lags to which Navigators may be subject. First, there is an inherent delay in the reporting of treaty reinsurance due to the fact that there is a lag between the time that premium and loss activity is recorded on the books of the reinsureds and the time the reinsured reports those activities to the reinsurer. Second, a substantial portion of the premiums Navigators derives is from international business. In this business, there is a significant time lag from the time the policy is bound overseas to the receipt of the policy by the pool manager, at which time the pool manager records the premium in its records. Considerable premium relating to a fiscal year is reported in subsequent years at the pool level and, therefore, at Navigators as well. To the extent a lag exists in the reporting of, and Navigators' accounting for, such premiums, a comparable lag occurs in this recording of related incurred but not reported losses and LAE which properly matches recorded revenue with related expenses.
Navigators does not discount its reserves in an attempt to estimate the present value of losses or LAE that may eventually be paid or for any other reason. The accompanying tables present an analysis of losses and LAE.
The table below presents the development of Navigators' GAAP balance sheet reserves for 1986 through 1996. The line "Net reserves for losses and LAE" reflects the net reserves at the balance sheet date for each of the indicated years and represents the estimated amount of losses and LAE arising in all prior years that are unpaid at the balance sheet date. The "Reserves re-estimated" lines of the table reflect the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The "Cumulative redundancy (deficiency)" lines of the table reflect the cumulative amounts developed as of successive years with respect to the aforementioned reserve liability. The cumulative redundancy or deficiency represents the aggregate change in the estimates over all prior years.
For each calendar year end, the net reserves for losses and LAE are not adjusted in the table to reflect additional premiums reported to Navigators in subsequent calendar years. However, the remainder of the table allocates losses and LAE reported and recorded in subsequent years to all prior years starting with the year in which the loss was incurred. For example, assume that a loss occurred in 1994 and was not reported to Navigators until 1996, the amount of such loss will appear as a deficiency in both 1994 and 1995, although the premiums related to the policy may not be reported in income until 1995. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on these tables.
The net cumulative deficiencies for the years ended December 31, 1989 through 1992 resulted primarily from the allocation of losses to the appropriate calendar years without regard to any additional premiums relating to such calendar years which were reported to and recorded by Navigators in subsequent periods. These deficiencies are offset, in part, by additional net earned premiums for such respective calendar years reported and recorded by Navigators in subsequent years. The net deficiency for 1994 resulted from further development of losses from the Northridge, California earthquake (discussed below). The Company had net cumulative redundancies for the remainder of the years shown in the table.
The gross cumulative deficiencies for the years ended December 31, 1992 through the year 1995, resulted primarily from a settlement during 1996 of the Exxon Valdez loss occurring in 1989, of approximately $11,300,000, development during 1995 of approximately $26,000,000 for the 1994 Northridge Earthquake loss and other losses that developed to a lesser extent during this period. A majority of the development of these losses was reinsured.
Management believes that Navigators' reserves for losses and LAE are adequate to cover the ultimate cost of losses and LAE on reported and unreported claims.
ENVIRONMENTAL POLLUTION AND ASBESTOS RELATED CLAIMS
In 1996 and 1995, Navigators paid a gross amount of $2,794,000 and $2,251,000 and a net amount of $425,000 and $117,000, respectively, for environmental pollution and asbestos related claims. As of December 31, 1996 and 1995, Navigators carried a gross reserve of $5,421,000 and $4,783,000, respectively, and net reserve of $1,042,000 and $876,000, respectively, for the potential exposure of Navigators to such claims. Management believes that its reserves for such claims are adequate, because Navigators' participation in such risks is generally in the higher excess layers and, based on a continuing review of such claims, management believes that a majority of these claims will be unlikely to penetrate such high excess layers of coverage. For the year ended December 31, 1996 and 1995, open claims with environmental pollution and asbestos exposure amounted to 2,024 and 1,594, respectively. Management will continue to review its exposure to and reserves for such claims. Management believes that any potential exposure of Navigators to these claims exists predominately in connection with the marine business.
INVESTMENT POLICY
The investments of the Company's various subsidiaries must comply with the insurance laws of New York State, the domiciliary state of Navigators Insurance Company and NIC Insurance Company. These laws prescribe the kind, 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 and common stocks, real estate mortgages and real estate. Navigators has no investment in derivatives, and its investment guidelines preclude the acquisition of derivatives.
Navigators' investments are subject to the direction and control of its Board of Directors and are reviewed on a quarterly basis. The investments are managed by various professional fixed income and equity portfolio managers. Current investment objectives are to maximize annual after tax income in the context of preserving and enhancing capital and statutory surplus. Navigators seeks to obtain these objectives by investing principally in municipal bonds and, U.S. Government obligations, corporate bonds, and preferred and common stock. Due to the Company being in an alternative minimum tax ("AMT") position, the Finance Committee of the Board of Directors is reviewing the Company's concentration in municipal bonds and is likely to reduce the municipal bond portfolio in 1997. Navigators' investment guidelines require that at least 90% of the fixed income portfolio be rated "A-" or better by a nationally recognized rating organization. Up to 25%
of the total portfolio may be invested in equity securities including preferred stocks rated at BBB-/Baa-.
In order to achieve the above-mentioned investment objectives, fixed maturity securities are held for an indefinite period of time. These securities may be sold in response to changes in interest rates, prepayments, regulatory requirements, or credit risk.
The majority of the investment income of the Somerset Companies is derived from fiduciary funds invested in accordance with the guidelines of various state insurance departments. These guidelines typically require investments in short-term instruments.
The following tables reflect the consolidated investments of the Company. The table set forth below reflects investments and income earned thereon for the Company on a consolidated basis, for Navigators Insurance Company and NIC Insurance Company together as a group (including an incidental amount from the parent company), and for the Somerset Companies together as a group, for the three years ended December 31, 1996:
(1) Included in the Somerset Companies average investments are fiduciary cash and short-term investments, not included in the balance sheet, on which the Somerset Companies earn investment income. See Note 6 to the Company's Consolidated Financial Statements.
The following table summarizes the consolidated non-affiliated cash and investments of the Company as of December 31, 1996:
REGULATION
The Company and its insurance subsidiaries are subject to regulation under the insurance statutes, including holding company statutes, of various states. These regulations vary from state to state but generally require insurance holding companies, and insurers that are subsidiaries of holding companies, to register and file reports concerning their capital structure, ownership, financial condition and general business operations. Such regulations also generally require prior regulatory agency approval of changes in control of an insurer and of transactions within the holding company structure. The regulatory agencies of each state have statutory authorization to enforce their laws and regulations through various administrative orders and enforcement proceedings.
The Insurance Department of the State of New York (the "New York Department") is the Company's principal regulatory agency. In 1996, Navigators Insurance Company was deemed to be "commercially domiciled" in California based on past premium volume written in the state and, as a result, the Company was subject to certain provisions of the California insurance holding company laws, particularly those governing changes in control, the payment of stockholder dividends and intercompany transactions. An insurer's status as "commercially domiciled" is determined annually under a statutory formula. The statutory formula was revised in California effective January 1, 1997, and as a result, Navigators Insurance Company is no longer deemed to be "commercially domiciled" in California as of such date.
The New York Insurance Law provides that no corporation or other person may acquire control of the Company, and thus indirect control of Navigators, unless it has given notice to Navigators, and obtained prior written approval of the Superintendent of Insurance of the State of New York for such acquisition. In New York, any purchaser of 10% or more of the outstanding shares of the Company's common stock would be presumed to have acquired control of the Company, unless such presumption is rebutted.
Navigators Insurance Company and NIC Insurance Company may pay dividends only out of their statutory earned surplus under New York law. Generally, the maximum amount of dividends Navigators Insurance Company and NIC Insurance Company may pay without regulatory approval in any twelve-month period is the lesser of adjusted net investment income or 10% of statutory surplus.
Under insolvency or guaranty laws in most states in which Navigators Insurance Company and NIC Insurance Company operate, insurers doing business in those states can be assessed up to prescribed limits for policyholder losses of insolvent insurance companies.
Navigators Insurance Company is licensed to engage in the insurance and reinsurance business in 47 states, the District of Columbia and Puerto Rico and is an approved reinsurer in two of the remaining three states. NIC Insurance Company is licensed to engage in the insurance and reinsurance business in the State of New York and is an approved surplus lines insurer in 29 other states and the District of Columbia.
As part of its general regulatory oversight process, the New York Department conducts detailed examinations of the books, records and accounts of New York insurance companies every three to five years. Navigators Insurance Company and NIC Insurance Company are currently being examined by the New York Department for the years 1991 through 1995.
The Insurance Regulatory Information System ("IRIS") was developed by the National Association of Insurance Commissioners ("NAIC") and is intended primarily to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies eleven industry ratios and specifies "usual values" for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer's business. As of December 31, 1994 and 1995, due primarily to losses from the Northridge Earthquake (discussed in item 7), the Company's results were outside of the usual value for one ratio (the "Two-Year Overall Operating" ratio). As of December 31, 1996, the Company's results were within the usual values for all IRIS ratios.
From time to time various regulatory and legislative changes have been proposed in the insurance and reinsurance industry, some of which could have an effect on reinsurers. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. The Company is unable to predict whether any of these laws and regulations will be adopted, the form in which any such laws and regulations would be adopted, or the effect, if any, these developments would have on the operations and financial condition of the Company.
State insurance departments have adopted a methodology developed by the NAIC for assessing the adequacy of statutory surplus of property and casualty insurers which includes a risk-based capital formula that attempts to measure statutory capital and surplus needs based on the risks in a company's mix of products and investment portfolio. The formula is designed to allow state insurance regulators to identify potential weakly capitalized companies. Under the formula, a company determines its "risk-based capital" ("RBC") by taking into account certain risks related to the insurer's assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer's liabilities (including underwriting risks related to the nature and experience of its insurance business). The risk-based capital rules provide for different levels of regulatory attention depending on the ratio of a company's total adjusted capital to its "authorized control level" of RBC. Based on calculations made by the Company, the risk-based capital level for the Company's insurance subsidiaries exceeds a level that would trigger regulatory attention. In their respective 1996 statutory financial statements, the Company's insurance subsidiaries have complied with the NAIC's risk-based capital reporting requirements.
In addition to regulations applicable to insurance agents generally, the Somerset Companies are subject to Managing General Agents Acts in their domicile jurisdictions and in certain jurisdictions where they do business.
COMPETITION
The property and casualty insurance industry is highly competitive. The demand for low-cost, high quality service has created difficult conditions in the domestic property and casualty market, including a leveling or reduction in premium rates in certain lines of business in which the Company competes, which the Company believes will not improve dramatically in the foreseeable future.
Navigators faces competition from both domestic and foreign marine, aviation and non-marine insurers, some of whom have longer operating histories and greater financial, marketing and management resources. Competition in the types of insurance in which Navigators is engaged is based on many factors, including the perceived overall financial strength of Navigators, pricing and other terms and conditions of products and services offered, business experience, marketing and distribution arrangements, agency and broker relationships, levels of customer service (including speed of claims payments), product differentiation and quality, operating efficiencies and underwriting. Furthermore, insureds tend to favor large, financially strong insurers, and Navigators faces the risk that it will lose market share to more highly rated insurers.
No single insured or reinsured accounted for 10% or more of the Company's gross written premium in 1996.
EMPLOYEES
As of December 31, 1996, the Company employed 119 people.
ITEM 2.
ITEM 2. PROPERTIES
The Company's administrative offices are occupied pursuant to a lease which expires May 14, 2000, from an unaffiliated company, in a building located at 123 William Street, New York, New York. Each of the Somerset Companies has various noncancellable operating leases for its office facilities. The Company does not own any real estate.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to or the subject of, any material pending legal proceedings which depart from the ordinary routine litigation incident to the kinds of business conducted by the Company and its subsidiaries.
In November 1988, the voters of the State of California approved Proposition 103, which required most property and casualty insurance companies, among other things, to reduce rates charged to California insureds to a level 20% below November 8, 1987 levels. On March 19, 1996, the Company agreed with the California Insurance Department to settle its rollback liability under Proposition 103. The settlement cost the Company approximately $2.0 million net of recoveries from reinsurers of which $1.0 million was recorded in each of 1995 and 1996.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Stock is traded over-the-counter (The Nasdaq National Market) under the symbol NAVG. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.
The high and low bid prices for the four quarters of 1996 and 1995 are as follows:
STOCKHOLDERS
There were approximately 100 holders of record of shares of Common Stock as of March 28, 1997. However, Management believes there are in excess of 1,000 beneficial owners of the Company's common stock.
DIVIDENDS
The Company has not paid or declared any cash dividends on its common stock. While there presently is no intention to pay cash dividends on the common stock in the foreseeable future, future declarations, if any, and the amounts of such dividends will be dependent upon, among other factors, the earnings of the Company, its financial condition and business needs, restrictive covenants under debt arrangements, the capital and surplus requirements of its subsidiaries and applicable government regulations.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summary consolidated financial information of the Company for each of the years in the five-year period ended December 31, 1996. The information for the five years ended December 31, 1996 has been derived from the audited consolidated financial statements of the Company. See the Consolidated Financial Statements of the Company including notes thereto included herein.
(1) Net income from 1993 and subsequent reflects the adoption of SFAS 113 and EITF Issue No. 93-6.
(2) Investments and stockholders' equity for 1994 and subsequent reflect the adoption of SFAS 115.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a holding company with twelve active wholly-owned subsidiaries. See "BUSINESS-General" included herein for a description of the Company.
The Company's revenue is primarily comprised of premiums, commissions and investment income. Navigators derives substantially all of its business from direct participation in, or by reinsuring certain members of, insurance pools managed by the Somerset Companies. The insurance business and operations of Navigators are managed by NMC, one of the Somerset Companies.
The Somerset Companies specialize principally in the following lines of business: marine, aviation and property (primarily inland marine) insurance and certain lines of specialty reinsurance and non-marine insurance. In 1996, Navigators began to underwrite onshore energy business primarily covering property damage and machinery breakdown. In 1996, the Somerset Companies underwrote the marine business through a syndicate of insurance companies, Navigators having the largest participation in the syndicate. The Somerset Companies derive their revenue from commissions, investment income, service fees and cost reimbursement arrangements from Navigators and other insurers. Commissions are earned both on a fixed percentage of premiums and on underwriting profits on business placed with the participating insurance companies within the syndicate. Property and casualty insurance premiums are cyclical in nature and, accordingly, during a "hard market" demand for property and casualty insurance exceeds supply, or capacity, and as a result, premiums and commissions may increase. On the downturn of the property and casualty cycle, supply exceeds demand, and as a result, premiums and commissions may decrease.
Navigators and the Somerset Companies earn investment income on cash balances and invested assets. The Somerset Companies also earn investment income on fiduciary funds. Such fiduciary funds are invested, subject to applicable insurance regulations, primarily in short-term instruments.
RESULTS OF OPERATIONS
General The 1994 results of operations of the Company were dominated by the Northridge, California earthquake, which occurred on January 17, 1994 (the "Northridge Earthquake"). The Company's pre-tax loss (including direct property losses of $35,388,000, reinsurance reinstatement premiums of $1,925,000 and reinsurance assumed losses of $1,952,000, but net of reinsurance) in 1994 from the Northridge Earthquake totalled $39,265,000. As a result of this loss, management restructured the Company by withdrawing from the large commercial and industrial property business which produced most of the earthquake loss, emphasizing its core ocean marine and aviation business, and developing its inland marine business as well as a new non-marine program book of business.
The results of 1996 and 1995 reflect this restructuring in that written premiums have been reduced while the continuing book of business has produced profits. However, the 1995 results also reflect the further development of losses from the Northridge Earthquake. During 1995 the total reported gross losses on direct property claims arising from the Northridge Earthquake increased approximately $18,340,000 from $125,361,000 to $143,701,000. The Company also added gross bulk reserves of $11,000,000 at September 30, 1995, which are expected to cover any further deterioration of losses from the Northridge Earthquake. On a net basis, the incurred losses relating to the Northridge Earthquake represented pre-tax charges of approximately $10,721,000 in 1995. There was no further development of the losses from the Northridge
Earthquake in 1996, however, there can be no assurance given that additional losses will not be reported or adjustments made to existing reserves.
Revenues Gross written premium decreased from $189.6 million in 1994 to $148.9 million in 1995 to $142.5 million in 1996. The following table sets forth the Company's gross written premium by line of business and net written premium in the aggregate for the periods indicated:
Marine Premiums. Navigators' gross marine premium decreased 5% from 1994 to 1995 and 16% from 1995 to 1996. The 1995 decrease was due to Navigators' reduced participation in the marine pool along with premium rate decreases. The 1996 decrease was due primarily to decreases in premium rates. The competition causing premium rates to decrease affects the gross written premium in that less premium is received for the policies written or the Company may decide to not write the policy. Management believes pricing in marine premium is subject to increased competition.
Aviation Premiums. Navigators' aviation gross written premium increased 6% from 1994 to 1995 reflecting the increase in Navigators' participation in the aviation pool from approximately 56% for the first nine months of 1995 to 100% beginning October 1, 1995. The 20% reduction in Navigators' aviation gross written premium from 1995 to 1996 was due to Navigators withdrawing from the general aviation business in order to concentrate on the major airlines and manufacturers, to price competition and to a general decrease in the amount of exposure per risk.
Property and Inland Marine Premium. Navigators' gross property and inland marine premium decreased 75% from 1994 to 1995. In 1994, this business consisted primarily of large commercial and industrial property risks, which was essentially a property catastrophe book of business, with a relatively small amount of inland marine risks. In late 1994, Navigators decided to cease writing large commercial and industrial property risks and to concentrate on inland marine risks and, therefore, 1995 gross written premium is primarily inland marine. The 25% increase in this line of business from 1995 to 1996 reflects the emphasis placed on inland marine in 1996. However, due to heavy price competition and possible adverse selection in competing with the major carriers, less emphasis will be placed on inland marine going forward.
Onshore Energy. In 1996, Navigators began to underwrite onshore energy business which principally focuses on the oil and gas, chemical and petrochemical, and power generation industries with coverages primarily for property damage and machinery breakdown.
Specialty Reinsurance and Non-Marine Insurance Premium. During the early part of 1996, Navigators' management decided to discontinue writing assumed reinsurance, with the exception of a few specialty contracts. The reduction in reinsurance premium was partially offset in 1996 by an expansion of the specialty program business.
Net Written Premium. Navigators net written premium decreased 11% from 1994 to 1995 primarily due to the decrease in the property premium. The 4% increase in net written premium from 1995 to 1996 was primarily due to Navigators increasing its participation in the aviation pool to 100% at October 1, 1995 and to less premium being ceded. The decreases in the ceded premium are reflective of decreases in the gross written premium but are also due to price competition in the reinsurance business.
Net Earned Premium. The 3% decrease in net earned premium from 1994 to 1995 was due to the decrease in the net written premium partially offset by the run-off of the property business cancelled in 1994 and 1995. The 10% decrease in net earned premium from 1995 to 1996 was primarily due to the decrease in the 1995 net written premium and the effect that the property business run-off had on the 1995 net earned premium.
Commission Income. Commission income decreased 17% to $8.8 million in 1996 from $10.7 million in 1995 primarily due to Navigators increasing its participation to 100% at October 1, 1995 in the aviation business managed by the Somerset Companies, which eliminated commission income paid by the former participants in the aviation insurance pool. The 1996 commission income includes $826,000 of profit commissions earned under the Company's management agreement with Riverside. Commission income decreased 2% to $10.7 million in 1995 from $10.9 million in 1994 reflecting the withdrawal from the property catastrophe business. The commission income is also affected by profit commissions from the marine pool.
Net Investment Income. Net investment income decreased 4% to $13.6 million in 1996 from $14.1 million in 1995 due to decreased fiduciary funds held by the Somerset Companies, the effect on invested assets from payments of earthquake losses and generally lower yields. Net investment income increased 9% to $14.1 million in 1995 from $13.0 million in 1994 due primarily to an increased amount of invested assets.
Reinsurance Ceded. In the ordinary course of business, Navigators reinsures certain insurance risks with unaffiliated insurance companies for the purpose of limiting its maximum loss exposure, protecting against catastrophic losses, and maintaining desired ratios of net premiums written to statutory surplus. Ceded written premium decreased from $98.0 million in 1994 to $67.6 million in 1995 to $58.4 million in 1996 reflecting decreases in gross written premium and lower prices in the reinsurance market.
Expenses. The ratio of loss and loss adjustment expenses incurred to net earned premium was 62.2%, 69.5% and 108.6% in 1996, 1995 and 1994, respectively. The 1994 loss ratio was adversely impacted by the Northridge Earthquake. The loss ratio improved in 1995 compared to 1994, even though 1995 included significant adverse development from the Northridge Earthquake losses. This was due primarily to a return to more normal experience in comparison to the 1994 losses from the Northridge Earthquake, various airline losses and reinsurance costs in 1994. The Northridge Earthquake increased the loss ratio by 12.2% and 43.4% in 1995 and 1994, respectively. The improved loss ratio in 1996 compared to 1995 was due primarily to a return to more normal experience. The lower rates in the marine business was partially offset by lower costs for reinsurance.
Commission expense as a percentage of net earned premium was 15.5%, 13.9% and 19.0% for 1996, 1995 and 1994, respectively. The decrease in 1995 compared to 1994 was due primarily to a reduction in the amount of Northridge Earthquake reinstatement premiums incurred during the year. The reinstatement premiums in 1994 caused earned premiums to decline but did not result in corresponding ceding commissions. The increase in the 1996 commission expense ratio compared to 1995 was primarily due to the reversal of approximately $519,000 of contingent commissions receivable recorded in 1995 on certain ceded contracts which had loss development during 1996.
Other operating expenses as a percentage of net earned premium were 24.5%, 25.6% and 24.0% for 1996, 1995 and 1994, respectively. Severance charges as a result of a reduction in staff accounted for approximately $968,000 of the operating expenses in 1995 partially offset by a commensurate decrease in salary expense. The decrease from 1995 to 1996 reflected the staff cuts in 1995 partially offset by the opening of the new offices in London and Australia in late 1996.
Interest expense is due primarily to funds borrowed in 1994 to replace capital as a result of losses from the Northridge Earthquake. The decrease in the interest expanse from 1995 to 1996 is due primarily to paying down part of the loan balance and lower interest rates. The 1996 and 1995 interest expense includes $368,000 and $380,000 of interest expense on the Company's rollback liability under California Proposition 103.
Income Taxes. The income tax expense was $4.7 million for 1996 and $3.0 million for 1995. There was an income tax benefit of $11.0 million for 1994 primarily attributable to the losses from the Northridge Earthquake. The effective tax rates for 1996, 1995 and 1994 were 20%, 19% and (35%), respectively. The Company had net operating loss carryforwards of $4.9 million at December 31, 1994 and $3.0 million at December 31, 1995 which was fully utilized in 1996. The Company had alternative minimum tax ("AMT") carryforwards of $5.8 million, $3.1 million and $0.8 million at December 31, 1996, 1995 and 1994, respectively. The AMT carryforwards were primarily attributable to the tax benefits from the municipal bond interest. The Company is reviewing its investment philosophy and will most likely reduce its municipal bond portfolio.
As of December 31, 1996 the net deferred Federal tax asset was $9.5 million as compared to $8.9 million at December 31, 1995. At December 31, 1995 the Company had a $775,000 valuation allowance against its deferred Federal tax asset. Management believes that it is more likely than not that the net deferred Federal tax asset recorded at December 31, 1996 is realizable and therefore, has not provided for any valuation allowance at December 31, 1996. This belief stems from a long history of taxable income prior to the Northridge Earthquake in 1994, the immediate actions management took to prevent another loss of such magnitude, and the inclusion of taxable income generated by the Somerset Companies in the Federal income tax return beginning July 1, 1994.
Equity Income in Affiliated Company. The Company holds an equity interest in Riverside, which through its wholly-owned subsidiary, Riverside Corporate Underwriters Limited, is admitted to underwrite at Lloyd's of London as a corporate name with limited liability. The Company records its share of Riverside's underwriting results when sufficient information becomes available to provide reasonable estimates of earned premiums and losses. During 1996, primarily in the third quarter, the Company recorded its share of the 1994 and 1995 underwriting earnings amounting to $1,387,942 after tax.
Net Income. The Company's net income improved in 1995 to income of $12.6 million from a loss of $20.5 million in 1994. The 1994 loss was primarily attributable to the Northridge Earthquake which also adversely impacted 1995 earnings as previously discussed. The 1996 net
income of $16.8 million reflects more normal experience even with the rate decreases in the marine business.
In November 1988, the voters of the State of California approved Proposition 103, which required most property and casualty insurance companies, among other things, to reduce rates charged to California insureds to a level 20% below November 8, 1987 levels. On March 19, 1996, the Company agreed with the Commissioner to settle its rollback liability under Proposition 103. The settlement cost the Company approximately $2.0 million net of recoveries from reinsurers of which approximately $1.0 million was recorded in each of 1995 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations was $7.3 million, $26.6 million and $5.3 million for 1996, 1995 and 1994, respectively. Operating cash flow has been used primarily to acquire additional investment assets with net purchases during 1996, 1995 and 1994 of $11.5 million, $12.8 million and $11.2 million, respectively.
At December 31, 1996, there were no material commitments for capital expenditures, although the Company has committed approximately $1.0 million to enhance its hardware and software computer systems in 1997.
Invested assets and cash (excluding fiduciary funds held by the Somerset Companies) have grown from $203.1 million at December 31, 1994 to $235.5 million at December 31, 1995 to $240.7 million at December 31, 1996. Investment income during this period was $13.0 million in 1994, $14.1 million in 1995 and $13.6 million in 1996. The average yield of the portfolio, excluding net realized capital gains, was 5.7% in 1994 and 1995 and decreased to 5.4% in 1996, reflecting the prevailing interest rates during those years. As of December 31, 1996, all debt and equity securities held by the Company were classified as available-for-sale securities.
The majority of the invested assets are in municipal bonds rated "A" or better by Standard & Poor's or Moody's, or are in U.S. Treasury Bonds. Navigators has avoided investing in high yield bonds. Therefore, the Company has no significant exposure to credit risk since the Company's fixed maturity investment portfolio does not contain any non-investment grade bonds. The portfolio has an average maturity of less than seven years. Management continually monitors the composition and cash flow of the investment portfolio in order to maintain the appropriate levels of liquidity. This ensures the Company's ability to satisfy claims or expenses as they become due.
The Company's credit agreement, which was amended on November 19, 1996 (the "Amended Credit Agreement"), provides for a $20 million revolving credit loan facility of which $17 million was being utilized at December 31, 1996 and a $30 million letter of credit facility of which $27.1 million (In Pounds Sterling 15.8 million) was being utilized at December 31, 1996. The letters of credit consist of In Pounds Sterling 2,585,000 for the Company's portion of the business conducted by Riverside and In Pounds Sterling 7,000,000 and In Pounds Sterling 6,250,000 for 1997 capacity being provided for two separate Lloyd's of London marine syndicates. The Amended Credit Agreement is collateralized by shares of common stock of the active subsidiaries of the Company other than NIC Insurance Company and Somerset Asia Pacific Pty Limited. The Amended Credit Agreement contains covenants common to agreements of this type. The aggregate amounts available under the revolving credit loan facility decrease in quarterly increments in the amount of $500,000 commencing with the quarter beginning January 1, 1997 through the quarter ended September 30, 1999, and in varying increments thereafter through December 31, 2002. See Note 4 to the Company's Consolidated Financial Statements.
Total stockholders' equity was $115.5 million at December 31, 1996, a 16.6% increase for the year primarily as the result of the Company's earnings in 1996.
As of December 31, 1996, the Company has paid approximately $128.4 million of claims related to the Northridge Earthquake, of which approximately $94.8 million is subject to indemnification by reinsurers. To date the Company has experienced no significant difficulties collecting reinsured losses.
The Company was not in compliance with the NAIC's IRIS "Two-Year Overall Operating" ratio in 1995. The exceptional value derived from this ratio was primarily due to the underwriting losses resulting from the Northridge Earthquake. If the Two-Year Overall Operating ratio is 100% or more, the NAIC deems such results to be exceptional. During 1995, the Company's Two-Year Overall Operating ratio was 115%. The Company was within the usual values for all IRIS ratios as of December 31, 1996.
The Company's reinsurance has been placed with various U.S. companies rated "A" or better by A.M. Best Company, Inc., as well as with foreign insurance companies and with selected syndicates of Lloyd's of London ("Lloyd's"). Certain syndicates at Lloyd's ("Loss Syndicates") and the Lloyd's market as a whole have reported significant losses in recent years. The Company has not placed any material amounts of reinsurance with these Loss Syndicates. Pursuant to the implementation of Lloyd's Plan of Reconstruction and Renewal, a significant portion of the Company's recoverables from the Loss Syndicates are now reinsured by Equitas (a separate U.K. Department of Trade authorized reinsurance company established to reinsure outstanding liabilities of all Lloyd's members for all risks written in the 1992 or prior years of account).
The Company believes that the cash flow generated by the operating activities of the Company's subsidiaries, including the Somerset Companies, will provide sufficient funds for the Company to meet its liquidity needs over the next twelve months. Beyond the next twelve months, cash flow available to the Company 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.
ECONOMIC CONDITIONS
The Company is a specialty insurance company and periods of moderate economic recession or inflation tend not to have a significant direct effect on the Company's underwriting operations. They do, however, impact the Company's investment portfolio. In 1996, the Company's yield on its invested assets declined and the Company's investment income was negatively impacted by lower yields.
Management considers the potential impact of these economic trends in estimating Navigators' loss reserves. Management believes that the underwriting controls it maintains, plus the fact that the majority of Navigators' business is in lines of insurance which have relatively short loss payout patterns, both assist in estimating more accurately ultimate claim costs and lessen the potential adverse impact of the economy on Navigators.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required in response to this section are submitted as part of Item 14(a) of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors and the executive officers of the Group is contained under "Election of Directors" in the Company's 1997 Proxy Statement, which information is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is contained under "Compensation of Directors and Executive Officers" in the Company's 1997 Proxy Statement, which information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of the directors and officers of the registrant is contained under "Election of Directors" in the Company's 1997 Proxy Statement, which information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning relationships and related transactions of the directors and officers of the Company is contained under "Certain Relationships and Related Transactions" in the Company's 1997 Proxy Statement, which information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS AND SCHEDULES: The financial statements and schedules listed in the accompanying Index to Consolidated Financial Statements and Schedules on page
2. EXHIBITS: The exhibits listed on the accompanying Index to Exhibits on the page which immediately follows page S-8.
The Exhibits include the management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601(a)(10)(iii) of Regulation S-K.
(b) Reports on Form 8-K. There were no reports filed on Form 8-K during the last quarter of the period covered by this Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
Dated: March 28, 1997 By:/s/ BRADLEY D. WILEY -------------------------- Bradley D. Wiley Senior Vice President, CFO and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders The Navigators Group, Inc.
We have audited the consolidated financial statements of The Navigators Group, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Navigators Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, The Navigators Group, Inc. and subsidiaries changed their method of accounting for certain investments in debt and equity securities in 1994.
/s/ KPMG PEAT MARWICK LLP
New York, New York March 14, 1997.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes to consolidated financial statements.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Actual federal taxes paid in the years 1996, 1995 and 1994 amounted to $4,928,159, $1,000,000 and $0, respectively. State and local taxes paid in the years 1996, 1995 and 1994 amounted to $307,427, $894,204 and $1,432,000, respectively. Interest paid during 1996, 1995 and 1994 amounted to $2,069,235, $1,889,087, and $2,105,919, respectively.
See accompanying notes to consolidated financial statements.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. --ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements, which include the accounts of The Navigators Group, Inc. (the "Group" or the "Company") and its subsidiaries, are prepared on the basis of generally accepted accounting principles. All significant intercompany transactions and balances are eliminated.
On June 30, 1994, the stockholders of the Group approved eight substantially identical agreements of merger providing for the acquisition by the Group of eight affiliated underwriting agencies, Somerset Marine, Inc., Somerset of Georgia, Inc., Somerset Insurance Services of Texas, Inc., Somerset Insurance Services of California, Inc., Somerset Insurance Services of Washington, Inc., Somerset Property, Inc., Somerset Re Management, Inc. and Navigators Management Corporation (collectively known as the "Acquired Somerset Companies").
The Group issued 2,875,000 shares of its common stock for all the outstanding common stock of the Acquired Somerset Companies. The mergers were accounted for under a method of accounting similar to "pooling of interests." Prior to the mergers, the consolidated financial statements of the Group and subsidiaries included the accounts of Navigators Insurance Company and NIC Insurance Company (collectively known as the "Insurance Companies"). As of the date of the mergers and for all prior periods presented, the consolidated financial statements of the Group and subsidiaries include the accounts of the Insurance Companies and the Acquired Somerset Companies.
The Company is a holding company which owns the Insurance Companies, the Acquired Somerset Companies and five other subsidiaries: Somerset Asia Pacific Pty Limited ("Somerset Asia"), an agency office located in Sydney, Australia; Somerset Marine (UK) Limited ("Somerset (UK)"), agency office located in London, England; Navigators Corporate Underwriters Limited, a corporate member admitted to underwrite at Lloyd's of London with limited liability; and Somerset Casualty Agency, Inc. and Somerset Aviation Property Managers, Inc., which are inactive. The Acquired Somerset Companies (other than Somerset Property, Inc. which is inactive), Somerset Asia and Somerset (UK) are hereinafter referred to collectively as the "Somerset Companies". The Somerset Companies specialize in underwriting marine, aviation and property (primarily inland marine) insurance and certain lines of specialty reinsurance and non-marine insurance. The Insurance Companies derive substantially all of their business from the Somerset Companies through either business written specifically for the Insurance Companies or direct participation in, or by reinsuring certain members of, insurance pools managed by the Somerset Companies. In addition to the Insurance Companies' participation in the insurance pools, ten other non-affiliated insurance companies participate, for which commission income is earned as reflected in the consolidated income statement. Commission expense as reflected in the consolidated income statements represents the Insurance Companies' portion of acquisition costs incurred by the Somerset Companies from non-affiliated brokers and agents.
INVESTMENTS
Effective January 1, 1994, the Company adopted the Financial Accounting Statements Board's ("FASB") Statement of Financial Accounting Standard ("SFAS") 115 "Accounting for Certain Investments in Debt and Equity Securities." pSFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and all investments in debt securities. Under SFAS 115, investments are classified into three categories. Held-to-maturity securities are debt securities that the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Trading securities are debt and equity securities that are bought and held principally for the purpose of selling them in the near term and are reported at fair value, with unrealized gains and losses included in earnings. Available-for-sale securities are debt and equity securities not classified as either held-to-maturity securities or trading securities and are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. As of December 31, 1996 and 1995, all debt and equity securities held by the Company were classified as available-for-sale securities.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Short-term investments are carried at cost, which approximates fair value. Short-term investments mature within one year from the purchase date.
Realized gains and losses on sales of investments are determined on the basis of the specific identification method. When a decline in fair value of investments is considered to be "other than temporary," the investments are written down to net realizable value. The write down is considered a realized loss in the consolidated statement of income.
PREMIUM REVENUES
Insurance and reinsurance premiums are recognized as income by the Insurance Companies during the terms of the related policies based on reports received from the Somerset Companies and ceding reinsurers. Unearned premium reserves are established to cover the unexpired portion of premiums written.
COMMISSION INCOME
Commission income, based on estimated gross premiums earned from non-affiliated insurers, is recognized over the terms of the related policies. Contingent commission income, based on estimated net underwriting results from non-affiliated insurers, is recognized when ascertained and is included within commission income in the accompanying consolidated financial statements. Changes in prior estimates of commission income and contingent commission income are recorded when such changes become known.
DEFERRED POLICY ACQUISITION COSTS
Costs of acquiring business which vary with and are directly related to the production of business are deferred and amortized ratably over the period that the related premiums are recognized as earned. Such costs primarily include commission expense, certain management fees and premium taxes. The method of computing deferred policy acquisition costs limits the deferral to their estimated net realizable value based on the related unearned premiums and takes into account anticipated losses and loss adjustment expenses based on historical and current experience and anticipated investment income.
RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Unpaid losses and loss adjustment expenses are determined on an individual basis for reported claims from insureds, from reports received from ceding insurers for insurance assumed from such insurers and on estimates based on Company and industry experience for incurred but not reported claims and loss adjustment expenses. The provision for unpaid losses and loss adjustment expenses has been established to cover the estimated unpaid cost of claims incurred. Management believes that the unpaid losses and loss adjustment expenses are adequate to cover the ultimate unpaid claims incurred; however, such provisions are necessarily based on estimates and, accordingly, no representation is made that the ultimate liability will not exceed such amounts.
NET INCOME PER SHARE
Net income per share is based on the weighted average number of shares of common stock outstanding, and, if dilutive, shares issuable under stock option plans.
REINSURANCE CEDED
With respect to reinsurance ceded which transfers risk, premiums, commissions and recoveries on losses incurred are reflected as reductions of the respective income and expense accounts. Unearned premiums ceded and estimates of amounts recoverable from reinsurers on paid and unpaid losses are reflected as assets.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEDERAL INCOME TAXES
The Company files a consolidated Federal tax return, which includes the taxable income of its subsidiaries. For 1994, taxable income excluded the Acquired Somerset Companies taxable income from the beginning of the period, January 1, 1994, to the date of the consummation of the mergers, June 30, 1994 (see Note 7). The Company applies the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values for fixed maturity securities are based on independent pricing services. The fair values for equity securities are based on quoted market prices. Fair values of short-term investments are carried at cost, which approximates fair value. The fair value of the loans payable to banks approximates carrying value since the interest rate charged is computed using market rates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
NOTE 2.--INVESTMENTS
The Company's non-affiliated invested assets and cash at December 31, 1996 and 1995 were as follows:
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The table set forth below indicates the composition of the Group's fixed maturities and short-term investments by year of maturity as of December 31, 1996:
Net investment income of the Company was derived from the following sources:
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The table set forth below indicates the gross realized gains and losses on sales and writedowns of fixed maturities and equity securities:
During 1994 realized losses of $926,000 were recognized on securities in which the decline in fair value was other than temporary. There were no such declines in 1996 or 1995.
At December 31, 1996 and 1995, fixed maturities with a face value of $6,480,000 and $5,230,000 were on deposit with the various State Insurance Departments.
Also, at December 31, 1996 and 1995, fixed maturities with a face value of approximately $841,000 were pledged as security under a reinsurance treaty.
At December 31, 1996, the Company did not have a material concentration of financial instruments in a single investee.
NOTE 3.--NORTHRIDGE EARTHQUAKE
On January 17, 1994, an earthquake (the "Northridge Earthquake") occurred in the vicinity of the Northridge area of Los Angeles, California. The Company's pre-tax loss (including direct property losses of $35,388,000, reinsurance reinstatement premiums of $1,925,000 and reinsurance assumed losses of $1,952,000, but net of reinsurance) in 1994 from the Northridge Earthquake totalled $39,265,000. During 1995, the Company incurred an additional $10,721,000 pre-tax charge including a $4,500,000 net general reserve established at the end of the third quarter of 1995. The estimated total gross reported loss on direct property claims is $143,701,000 at December 31, 1995 and $149,681,000 at December 31, 1996. There can be no assurance given that additional losses will not be reported or adjustments made to existing reserves.
NOTE 4.--NOTES PAYABLE AND LOANS
In conjunction with the mergers, the Acquired Somerset Companies distributed $5,280,263 in the form of notes payable to the then existing shareholders of the Acquired Somerset Companies. These notes represent certain pre-merger income to such shareholders and were interest free through December 31, 1994. The remainder, $942,034 is due to the holder on demand.
On August 5, 1994, the Company entered into a Credit Agreement (the "Credit Agreement") with three banks. The Credit Agreement provided for (i) revolving credit loans up to $5,000,000 through August 5, 1997 (the "Revolving Credit Loans"), (ii) a term loan of $25,000,000, the principal of which was payable in quarterly installments due on June 30, 1997 (the "Term Loan"), and (iii) and irrevocable stand-by letter of credit issued by one of the banks for the benefit of Society of Lloyd's in the amount of L.2,585,0000 for the account of the Company. The Term Loan's principal was $17,500,000 and Revolving Credit Loans were $2,000,000 at December 31, 1995.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On November 19, 1996, the Company amended and restated the Credit Agreement (as amended and restated, the "Amended Credit Agreement"). The Amended Credit Agreement provides for (i) a $20 million revolving credit loan facility, under which the aggregate amount available will be reduced by $500,000 for the first eleven quarters, and by varying amounts for the last eight quarters, with the facility terminating on December 31, 2002 (the "Revolving Credit Facility"), and (ii) a $30 million letter of credit facility (the "Letter of Credit Facility"). The Revolving Credit Facility bears interest, at the election of the Company, at either the base commercial lending rate of one of the banks or at LIBOR plus 1%. Any amounts drawn under the Letter of Credit Facility and not repaid bear interest at the base commercial lending rate of one of the banks. At December 31, 1996, $17 million in loans were outstanding under the Revolving Credit Facility (at an interest rate of 6.5%) and letters of credit with an aggregate face amount of L.15,835,000 (approximately U.S. $27,100,000 at the exchange rate as of December 31, 1996) were issued under the Letter of Credit Facility. No amounts were drawn under the Letter of Credit Facility during the year.
The Revolving Credit Facility and the Letter of Credit Facility are collateralized by shares of common stock of the active subsidiaries of the Company other than NIC Insurance Company and Somerset Asia Pacific Pty Limited. The Amended Credit Agreement contains covenants common to transactions of this type, including restrictions on indebtedness and liens, limitations on mergers and the sale of assets, maintenance of consolidated total stockholders' equity, statutory surplus, minimum liquidity, loss reserves and other financial ratios.
NOTE 5.--INVESTMENT IN AFFILIATE
The investment in affiliate represents the Group's ownership interest in Riverside Underwriters plc (formerly known as Navigators Underwriters plc) ("Riverside"). The Group's original ownership interest was 21% at December 31, 1995 which increased to 27% as of January 1, 1996 and decreased to approximately 8% at December 31, 1996. Riverside, a U.K. corporation, owned 100% of Riverside Corporate Underwriters Limited, a U.K. corporation, which has been admitted to underwrite at Lloyd's of London as a corporate name with limited liability. The transaction to reduce the Company's ownership in Riverside did not produce a material capital gain or loss. The Company will, however, remain entitled to receive from Riverside an amount equal to the aggregate dividends that it would have received if it had continued to hold its original investment to the extent such dividends are attributable to writings at Lloyd's by Riverside Corporate Underwriters Limited during the 1994, 1995 and 1996 years of account. In connection with the reduction of the Company's investment, Navigators Management Corporation ("NMC") has agreed to cease being manager of Riverside and Riverside Corporate Underwriters Limited, although NMC will remain entitled to profit commissions with respect to the 1994, 1995 and 1996 underwriting years. Prior to December 31, 1996, the investment was carried under the equity method of accounting. At December 31, 1996, the investment is recorded at cost due to the reduction in ownership interest. In addition, the Company's Letter of Credit Facility (see Note 4) includes L.2,585,000 (approximately U.S. $4,427,000 at the exchange rate as of December 31, 1996) to collateralize the investment in accordance with Lloyd's of London requirements.
Included in 1996 income is $1,387,942 of equity income, net of tax. The Company records its share of Riverside's earnings from underwriting when sufficient information becomes available to provide reasonable estimates of earned premiums and losses. During 1996, information about Riverside's profits for two years, 1994 and 1995, became available enabling the Company to record the above income.
NOTE 6.--FIDUCIARY FUNDS
The Somerset Companies maintain separate fiduciary accounts which record all the underlying insurance transactions of the insurance pools which they manage. These transactions primarily include collecting premiums from the insured, collecting paid recoverables from reinsurers, paying claims as losses become payable, paying reinsurance premiums to reinsurers and remitting net account balances to member insurance companies. Unremitted amounts to members of the insurance pools are held in a fiduciary capacity and interest income earned on such funds inure to the benefit of the Somerset Companies.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the fiduciary accounts as of December 31, 1996 and 1995 is as follows:
The fiduciary accounts above were not included in the accompanying consolidated balance sheets.
NOTE 7. --INCOME TAXES
The components of current and deferred income tax expense (benefit) are as follows:
A reconciliation of total income taxes applicable to pre-tax operating income and the amounts computed by applying the Federal statutory income tax rate to the pre-tax operating income is as follows:
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The mergers between the Group and the Somerset Companies were consummated on June 30, 1994. A business combination between an S Corporation and a tax-paying corporation automatically terminates the S Corporation election. The Somerset Companies prior to the mergers were S Corporations and as a result of the mergers their tax status changed to C Corporations. Accordingly, a charge to earnings of $1,279,445 was recorded at June 30, 1994 to reflect taxes on income previously earned but not yet taxed. Therefore, as of July 1, 1994 and thereafter, taxable income of the Group includes all consolidated subsidiaries.
The tax effects of temporary differences that give rise to Federal deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 were as follows:
A valuation allowance in the amount of $775,000 was established in 1994 due to the uncertainty associated with the realization of the gross deferred tax asset. In 1996, the Company utilized the balance of its NOL carryforward. Management believes that it is more likely than not that the net deferred Federal tax asset is realizable and therefore, has not provided for any valuation allowance at December 31, 1996.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8.--RESERVES FOR LOSS AND LOSS ADJUSTMENT EXPENSES
The following table summarizes the activity in the Insurance Companies' reserve for loss and loss adjustment expenses during the three most recent fiscal years:
The development of prior year incurred losses during 1995 was primarily attributable to the loss development from Northridge Earthquake.
During 1996, 1995 and 1994, the Insurance Companies paid a gross amount of $2,794,000, $2,251,000 and $181,000, respectively, and a net amount of $425,000, $117,000 and $83,000, respectively for environmental pollution and asbestos related claims. As of December 31, 1996 and 1995, the Insurance Companies carried a gross reserves of $5,421,000 and $4,783,000, respectively, and a net case reserve of $1,042,000 and $876,000, respectively, for the potential exposure of the Insurance Companies to such claims. For the year ended December 31, 1996 and 1995, open claims with environmental pollution and asbestos exposure amounted to 2,024 and 1,594, respectively. Management believes that its reserves for such claims are adequate, because the Insurance Companies participation in such risks was generally in the higher excess layers and, based on a continuing review of such claims, management believes that a majority of these claims will be unlikely to penetrate such high excess layers of coverage; however, due to the significant assumptions inherent in estimating these exposures, actual liabilities could differ from current estimates.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9.--REINSURANCE
The following table summarizes premiums earned:
The following table summarizes premiums written:
Ceded losses and loss adjustment expenses incurred were $61,964,370, $43,551,046 and $158,225,000 in 1996, 1995, and 1994, respectively.
A contingent liability exists with respect to reinsurance ceded, since the Insurance Companies would be required to pay losses in the event the assuming reinsurers are unable to meet their obligations under their reinsurance agreements with the Insurance Companies.
At December 31, 1996 the Company had reinsurance receivables from the following five reinsurers which are in excess of 5% of the insurance companies surplus: Underwriters at Lloyds, $27,143,000; SCOR Reinsurance Company, $7,701,000; Chiyoda Fire and Marine Insurance, $7,372,000; Insurance Corporation of New York, $7,105,000; Frankona Ruckversicherungs A.G, $5,029,000.
The Company's reinsurance security committee continually monitors the financial strength of its reinsurers and the amounts of reinsurance receivables from those reinsurers. An allowance is established to the extent that it is determined that the ultimate amount collectible is less than the amount recorded as a receivable. At December 31, 1996 and 1995, an allowance for uncollectible reinsurance of $800,000 was recorded. The expense recorded for uncollectible reinsurance was $0, $688,000 and $1,209,000 for 1996, 1995 and 1994, respectively.
10. --FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1996 and 1995.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The carrying amounts shown in the table are included in the Consolidated Balance Sheets under the indicated captions.
The carrying amounts of cash and premium receivables approximate fair value because of the short maturity of those instruments. The fair values of debt securities and equity investments are based on quoted market prices at the reporting date for those or similar investments.
Included within commissions receivable is contingent commissions receivable which is billed by the Somerset Companies to participants of the insurance pools two calendar years subsequent to a given underwriting year and, as a result, fair value is less than carrying value. Fair value of contingent commissions receivable is estimated based on the present value of anticipated cash flows based on interest rates of debt instruments with similar maturities.
The fair value of the Company's loans payable to banks approximates carrying value since the interest rate charged is computed using market rates.
NOTE 11. --STOCK OPTION PLANS
The Company has an Incentive Stock Option Plan and a Non Qualified Stock Option Plan which allow for the grant to key employees of the Group, its subsidiaries and affiliates, of options to purchase an aggregate of 900,000 shares of common stock. Under the Non Qualified Stock Option Plan, stock appreciation rights may also be granted.
All options are granted at exercise prices which approximate the fair market value of the common stock on the date of the grant. No amounts are charged to expense upon the granting of options under the plans.
Common stock options outstanding at December 31, consisted of the following:
The Company granted 166,000 and 111,500 stock appreciation rights at $17, the approximate fair market value of the common stock on the date of the grant in 1996 and 1995, receptively. The amounts charged to expense in 1996 and 1995 were $45,586 and $0 respectively.
Effective January 1, 1996, the Company adopted the provisions of SFAS 123 "Accounting for Stock Based Compensation" which requires the Company to either record compensation expense or provide additional disclosures with respect to stock awards and stock option grants made after December 31, 1994. As permitted under the statement, the company continued to apply the provisions of APB Opinion No. 25 "Accounting for Stock issued to Employees." Had compensation expense for the Company stock option awards been determined in accordance with SFAS 123, the effect on the Company's 1996 and 1995 net earnings would not have been material.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about options outstanding at December 31, 1996:
NOTE 12.--EMPLOYEE BENEFITS
The Somerset Companies sponsor a defined contribution plan covering substantially all employees. Contributions are equal to 15% of each eligible employee's gross pay (plus bonus of up to $2,500) up to the amount permitted by certain Federal regulations. Employees are fully vested after six years of service. Plan expense, included within operating expenses, amounted to $839,467, $990,556 and $1,080,960 in 1996, 1995 and 1994, respectively.
NOTE 13.--MERGER EXPENSES
Expenses of $5,679,697 related to the merger of the Acquired Somerset Companies with the Company were expensed in the second quarter of 1994.
NOTE 14.--DIVIDENDS FROM SUBSIDIARIES AND STATUTORY FINANCIAL INFORMATION
The Insurance Companies may pay dividends to the Group out of its statutory earned surplus pursuant to statutory restrictions imposed under the New York Insurance Law. The maximum amount available for the payment of dividends by the Insurance Companies during 1997 without prior regulatory approval is approximately $9,607,000. The Insurance Companies paid no dividends to the Group in 1996 or 1995 but did pay dividends of $5,300,000 in 1994.
Combined net income (loss) and policyholders' surplus of the Insurance Companies determined in accordance with statutory accounting practices and as filed with insurance regulatory authorities are as follows:
The Insurance Companies, domiciled in New York State, prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the New York State Insurance Department. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners, as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The Insurance Companies do not apply any permitted accounting practices.
As part of its general regulatory oversight process, the New York State Insurance Department conducts detailed examinations of the books, records and accounts of New York Insurance companies every three to five years. Navigators Insurance Company and NIC Insurance Company are currently being examined by the New York State Insurance Department for the years 1991 through 1995.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. -- LEASES
Future minimum annual rental commitments at December 31, 1996, under various noncancellable operating leases for the Company's office facilities, which expire at various dates through May 2000, are as follows:
The Company is also liable for additional payments to the landlords for certain annual cost increases. Rent expense for the years ended December 31, 1996, 1995, and 1994 was $1,576,565, $1,437,446 and $1,592,743, respectively.
NOTE 16. -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations for the quarterly periods during 1996 and 1995 are as follows. Due to changes in the number of shares outstanding, quarterly per share amounts may not add to the total for the year.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SCHEDULE I THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES SUMMARY OF CONSOLIDATED INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1996
S-1
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT THE NAVIGATORS GROUP, INC.
BALANCE SHEETS (Parent Company)
S-2 SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) THE NAVIGATORS GROUP, INC.
STATEMENTS OF INCOME (Parent Company)
S-3
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) THE NAVIGATORS GROUP, INC.
STATEMENTS OF CASH FLOWS (Parent Company)
S-4
SCHEDULE III
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION
(1) Net investment income and other operating expenses reflect only such amounts attributable to the Company's insurance subsidiaries.
(2) Amortization of deferred policy acquisition costs reflects only such amounts attributable to the Company's insurance subsidiaries. A portion of these costs is eliminated upon consolidation.
S-5
SCHEDULE IV
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES REINSURANCE
Premium Written
S-6
SCHEDULE V
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
S-7
SCHEDULE VI
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
(1) Net investment income and other operating expenses reflect only such amounts attributable to the Company's insurance subsidiaries.
(2) Amortization of deferred policy acquisition costs reflects only such amounts attributable to the Company's insurance subsidiaries. A portion of these costs is eliminated upon consolidation.
S-8
INDEX TO EXHIBITS
(a) Previously filed under Commission File No. 33-75918 as part of Form S-4, incorporated herein by reference thereto.
(b) Previously filed under Commission file No. 33-5667 as part of Form S-1, incorporated herein by reference thereto.
(c) Management contracts of compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601(10)(iii) of Regulation S-K, previously filed as indicated and incorporated herein by reference.
(d) Previously filed with the Company's Form 10-K for the year ended December 31, 1994, incorporated herein by reference thereto.
(e) Submitted in paper format under cover of Form SE.