Item 1. BUSINESS
General
The accompanying consolidated financial statements consisting of the accounts of The Navigators Group, Inc., a Delaware holding company, and its twelve active wholly owned subsidiaries are prepared on the basis of accounting principles generally accepted in the United States ("GAAP"). Unless the context otherwise requires, the term "Company" as used herein means The Navigators Group, Inc. and its subsidiaries. The term Parent Company is used to mean the Company without its subsidiaries. All significant intercompany transactions and balances have been eliminated.
The Company's two insurance company subsidiaries are Navigators Insurance Company ("Navigators Insurance"), which includes a United Kingdom Branch ("UK Branch"), and NIC Insurance Company ("NIC"). Navigators Insurance is the Company's largest insurance subsidiary and has been active since 1983. It specializes principally in underwriting marine insurance and related lines of business and a contractors' general liability program. NIC, a wholly owned subsidiary of Navigators Insurance, began operations in 1990. It underwrites a small book of surplus lines insurance in certain states and cedes 100% of its gross writings from this business to Navigators Insurance. Navigators Insurance and NIC are collectively referred to herein as the "Insurance Companies".
In order to establish a common identity under the Navigators name, the Company changed the name of several of its subsidiaries in March 2001. The new names will be used throughout this document. Five of the Company's subsidiaries are marine underwriting management companies: Navigators Management Company, Inc. (formerly Somerset Marine, Inc.), Navigators Insurance Services of Texas, Inc. (formerly Somerset Insurance Services of Texas, Inc.), Navigators California Insurance Services, Inc. (formerly Somerset Insurance Services of California, Inc.), Navigators Insurance Services of Washington, Inc. (formerly Somerset Insurance Services of Washington, Inc.) and Navigators Management (UK) Limited (formerly Somerset Marine (UK) Limited) (collectively, the "Navigators Agencies"). The Navigators Agencies described above (formerly referred to as the Somerset Companies) produce, manage and underwrite insurance and reinsurance for Navigators Insurance, NIC and four unaffiliated insurance companies.
The Navigators Agencies specialize in writing marine and related lines of business. The marine business is written through a pool of insurance companies, Navigators Insurance having the largest participation in the pool. The Navigators Agencies derive their revenue from commissions, service fees and cost reimbursement arrangements from their Parent Company, Navigators Insurance, NIC and the unaffiliated insurers. Commissions are earned both on a fixed percentage of premiums and on underwriting profits from business placed with the participating insurance companies within the pool. Other than a small amount of war and satellite business, the Company withdrew from the aviation business in October 1998 due to inadequate pricing. In 1999, the Company produced its onshore energy, engineering and construction business through the Company's facilities at Lloyd's of London ("Lloyd's"). Prior to 1999, this business was produced by the Navigators Agencies.
In April 1999, the Company acquired Anfield Insurance Services, Inc. ("Anfield"), an insurance agency located in San Francisco, California, which specializes in underwriting general liability insurance coverage for small artisan and general contractors on the West Coast. Anfield produces business exclusively for the Insurance Companies and is included with the Navigators Agencies unless otherwise noted. In 2001, Anfield will become part of Navigators California Insurance Services, Inc.
Navigators Holdings (UK) Limited is a holding company for the Company's UK subsidiaries. Navigators Management (UK) Limited produces business for the UK Branch of Navigators Insurance and four unaffiliated insurance companies. Navigators Corporate Underwriters Limited ("NCUL") is admitted to do business at Lloyd's of London ("Lloyd's") as a corporate member with limited liability. In January 1998, the Company acquired Mander, Thomas & Cooper (Underwriting Agencies) Limited ("MTC"), a Lloyd's marine underwriting managing agency which manages Lloyd's Syndicate 1221, and its wholly owned subsidiary, Millennium Underwriting Limited ("Millennium"), a Lloyd's corporate member with limited liability. Both NCUL and Millennium provide capacity to Lloyd's Syndicate 1221. In August 1999, MTC formed Pennine Underwriting Limited, an underwriting managing agency located in Northern England, which underwrites cargo and engineering business for Lloyd's Syndicate 1221. In March 2001, MTC's Board of Directors approved that MTC's name would be changed to Navigators Underwriting Agency Limited. The name change is expected to occur in 2001.
Property and casualty insurance premiums historically have been 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.
The Company's revenue is primarily comprised of premiums, commissions and investment income. The Insurance Companies derive their premium from business written by the Navigators Agencies. The Insurance Companies are managed by Navigators Management Company, Inc. The Lloyd's Operations derive their premium from business written by MTC.
Lines of Business
The Company primarily writes marine, onshore energy, engineering and construction insurance, and a contractors' general liability program. As underwritten by the Company, marine insurance includes hull, energy, liability and cargo; onshore energy primarily covers property damage with an emphasis on the oil and petrochemical sectors; and engineering and construction primarily covers construction projects including machinery, equipment and loss of use due to delays. As discussed above, the Company has generally withdrawn from the aviation market. In 1999, the production of onshore energy, engineering and construction business was transferred from Navigators Insurance to the Company's facilities at Lloyd's. See the table set forth in "Management's Discussion and Analysis - Results of Operations - Revenues" for the Company's gross written premium by segment and line of business, and ceded and net written premium by segment for the periods indicated.
Marine Insurance
Navigators Insurance obtains marine business through participation in the marine pool managed by the Navigators Agencies. The composition of the pool and the level of participation of each member changes from time to time. Navigators Insurance's net participation in the marine pool increased from 60% in 1998 to 75% in 1999 and 2000.
In 1998, 1999 and 2000, the Navigators Agencies received commissions equal to 7.5% of the gross premium earned on marine insurance and are entitled to receive a 20% profit commission on the net underwriting profits of the pool.
The Lloyd's marine premium is generated as the result of capacity provided to Syndicate 1221 by NCUL and Millennium. The Company's share of the premiums, losses and expenses from the Lloyd's marine syndicates are included in the Company's results but are not included in the Insurance Companies' results since NCUL and Millennium are not part of the Insurance Companies' operations.
Aviation Insurance
The Company's aviation business had been written by Navigators Insurance until October 1998 when Navigators Insurance decided to no longer write aviation business due to inadequate pricing, other than a small amount of war and satellite business.
Onshore Energy
In 1996, Navigators Insurance began to underwrite onshore energy insurance which principally focuses on the oil and gas, chemical and petrochemical industries with coverages primarily for property damage. In 1999 and 2000, the onshore energy business was written through the Company's facilities at Lloyd's.
Engineering and Construction
In 1997, Navigators Insurance began writing engineering and construction business consisting of coverage for construction projects including the machinery, equipment and loss of use due to delays. In 1999 and 2000, the engineering and construction business was written through the Company's facilities at Lloyd's.
Program Insurance
The program insurance, currently written by Anfield, consists primarily of general liability insurance for contractors and a small amount of commercial multi-peril insurance for restaurants and taverns.
Reinsurance Ceded
The Company utilizes reinsurance principally to reduce its exposure on individual risks, to protect against catastrophic losses, to maintain desired ratios of net premium 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 amount are reinsured.
The Company is protected by various treaty and facultative reinsurance agreements. The reinsurance is diversified by reinsuring with a number of different reinsurers, principally in the United States and European reinsurance markets. This coverage is placed on behalf of the Company's insurance operations by a number of different reinsurance intermediaries, each of which is utilized because of its expertise in placing a particular type of coverage. All such intermediaries are compensated by the reinsurers.
The Company's Reinsurance Security Committee 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 as a receivable, a reserve is established. At December 31, 2000 and 1999, the Company had an allowance for uncollectible reinsurance of $2,500,000 and $1,250,000, respectively. In addition, in 1999 the Company recorded a charge against earnings of $6.6 million for unrecoverable reinsurance from New Cap Reinsurance Corporation Limited which participated in the Company's 1997 and 1998 reinsurance programs.
Reserves
Insurance companies and Lloyd's syndicates 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 Insurance and Lloyd's corporate members such as NCUL and Millennium is dependent upon the receipt of information from the pools and syndicates 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 syndicates and, subsequently, to Navigators Insurance, NCUL and Millennium.
The Insurance Companies and Lloyd's syndicates establish reserves for reported claims when they first receive notice of the claim. Reserves are established on a case-by-case basis by evaluating several factors, including the type of risk involved, knowledge of the circumstances surrounding such claim, severity of injury or damage, the potential for ultimate exposure, experience with the insured and the broker on the line of business, and the policy provisions relating to the type of claim. Reserves for incurred but not reported losses are determined in part on the basis of statistical information and in part on industry experience.
Loss reserves are 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. Such estimates are regularly reviewed and updated and any resulting adjustments are included in income currently. Even then, the ultimate liability may exceed or be less than the revised estimates. The reserving process is intended to provide implicit recognition of the impact of inflation and other factors affecting loss payments by taking into account changes in historical payment patterns and perceived probable trends. There is generally no precise method for the subsequent evaluation of the adequacy of the consideration given to inflation, or to any other specific factor, because the eventual deficiency or redundancy of reserves is affected by many factors, some of which are interdependent. The Company does not discount any of its reserves.
The Company records those premiums which are reported to it through the end of each calendar year and accrues estimates for amounts where there is a time lag between when the policy is bound and the receipt of the policy. A substantial portion of the premiums are from international business where there can be significant time lags. To the extent that the actual premiums vary from estimates, the difference is recorded in current operations.
The following table presents an analysis of losses and LAE:
Year Ended December 31,
2000 1999 1998 (In thousands)
Net reserves for losses and LAE at beginning of year.................................. $170,530 $150,517 $139,841
Provision for losses and LAE for claims occurring in the current year................ 60,152 45,001 46,050
Lloyd's portfolio transfer - reinsurance to close........ 7,854 15,533 19,655
Increase (decrease) in estimated losses and LAE for claims occurring in prior years............. (4,994) 9,380 (3,383)
Incurred losses and LAE ................................. 63,012 69,914 62,322
Losses and LAE payments for claims occurring during: Current year.................................... (15,358) (10,925) (9,848) Prior years..................................... (43,301) (38,976) (41,798) Losses and LAE payments.................................. (58,659) (49,901) (51,646)
Net reserves for losses and LAE at end of year........... 174,883 170,530 150,517
Reinsurance receivables on unpaid losses and LAE......... 182,791 220,564 191,927
Gross reserves for losses and LAE at end of year......... $ 357,674 $ 391,094 $ 342,444 ======= ======= =======
The following table presents the development of the Company's loss and LAE reserves for 1990 through 2000. 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.
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 until 1996, the amount of such loss will appear as a deficiency in both 1994 and 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 the table.
Year Ended December 31,
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
(In thousands) Net reserves for losses and LAE................. $70,457 $77,507 $89,361 $103,176 $135,377 $138,761 $132,558 $139,841 $150,517 $170,530 $174,883 Reserves for losses and LAE re-estimated as of: One year later.......... 71,643 80,478 94,785 104,306 142,400 136,309 131,524 136,458 159,897 165,536 Two years later......... 73,849 80,937 98,062 102,831 139,139 134,324 127,901 138,991 149,741 Three years later....... 73,441 81,322 98,338 101,537 138,155 131,658 126,457 129,592 Four years later........ 73,349 80,652 97,257 100,432 135,482 131,018 117,388 Five years later........ 72,706 79,469 96,889 98,805 134,197 122,845 Six years later......... 71,730 79,239 96,358 97,740 129,213 Seven years later....... 71,620 78,742 94,457 93,812 Eight years later....... 71,003 77,167 93,578 Nine years later........ 70,622 77,549 Ten years later......... 71,336 Net cumulative redundancy (deficiency)............ (879) 42 (4,217) 9,364 6,164 15,916 15,170 10,249 776 4,994
Net cumulative paid as of: One year later.......... 22,784 25,741 37,998 32,700 47,187 39,741 32,416 41,798 38,976 43,301 Two years later......... 36,532 43,688 54,552 53,603 69,960 59,397 59,796 64,301 63,400 Three years later....... 47,060 51,753 65,997 62,769 83,921 78,821 71,420 74,588 Four years later........ 51,769 59,308 72,063 69,356 97,499 87,876 77,593 Five years later........ 57,421 63,138 75,864 75,534 104,454 92,189 Six years later......... 60,291 65,441 80,193 80,308 107,469 Seven years later....... 61,837 68,192 84,132 81,584 Eight years later....... 63,753 70,868 85,010 Nine years later........ 66,067 71,683 Ten years later......... 66,761
Gross liability-end of year........................ 224,191 247,346 314,898 273,854 269,601 278,432 342,444 391,094 357,674 Reinsurance recoverable............................ 134,830 144,170 179,521 135,093 137,043 138,591 191,927 220,564 182,791 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net liability-end of year.......................... 89,361 103,176 135,377 138,761 132,558 139,841 150,517 170,530 174,883
Gross re-estimated latest.......................... 290,608 272,071 356,589 302,199 294,593 312,859 376,796 394,259 Re-estimated recoverable latest.................... 197,030 178,259 227,376 179,354 177,205 183,267 227,055 228,723 ------- ------- ------- ------- ------- ------- ------- ------- Net re-estimated latest............................ 93,578 93,812 129,213 122,845 117,388 129,592 149,741 165,536
Gross cumulative (deficiency)...................... (66,417) (24,725) (41,691) (28,345) (24,992) (34,427) (34,352) (3,165)
The net cumulative deficiency for the year ended December 31, 1992 resulted from adverse development in certain lines of business. The 1992 and 1993 gross cumulative deficiencies resulted primarily from the 1989 Exxon Valdez loss. The gross cumulative deficiencies for 1994 and 1995 resulted primarily from the 1994 Northridge Earthquake loss, the 1989 Exxon Valdez loss and a large marine liability claim reported in 1999 affecting years 1994 through 1998. The 1996 gross cumulative deficiency resulted from adverse development in several lines of business. The 1997 gross cumulative deficiency resulted from adverse development in the onshore energy business and from one large 1989 claim from a runoff book of business which also adversely affected years prior to 1997. The deficiency in 1998 resulted from the two marine liability claims mentioned, a large energy claim incurred in 1998 and reported in 1999 and reserve strengthening in the Company's Lloyd's Operations. The adverse development on the Company's gross reserves has been mostly reinsured through excess of loss reinsurance treaties.
Management believes that the 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 2000, 1999 and 1998, the Company paid gross losses and LAE of $1,158,000, $665,000 and $2,091,000, respectively, resulting in net paid losses and LAE of $173,000, $378,000 and $369,000, respectively, for environmental pollution and asbestos related claims. As of December 31, 2000 and 1999, the Company carried gross reserves of $3,364,000 and $3,712,000, respectively, and net reserves of $994,000 and $1,088,000, respectively, for the potential exposure to such claims. Management believes that its reserves for such claims are adequate because the Company's participation in such risks is generally in the higher excess layers and, based on a continuing review of such claims, it believes that a majority of these claims will be unlikely to penetrate such high excess layers of coverage; however, due to significant assumptions inherent in estimating these exposures, actual liabilities could differ from current estimates. At December 31, 2000, there were 412 open claims with environmental pollution or asbestos exposures. Management will continue to review its exposure to and reserves for such claims. Any potential exposure to these claims exists predominantly in connection with the marine business.
Investments
The investments of the Insurance Companies must comply with the insurance laws of New York State, the domiciliary state of Navigators Insurance and NIC. 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, common stocks, real estate mortgages and real estate. The Insurance Companies' investment guidelines prohibit investments in derivatives other than as a hedge against a foreign currency.
The Insurance Companies' 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 outside 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. The Insurance Companies seek to obtain these objectives by investing in municipal bonds, U.S. Government obligations, corporate bonds, and preferred and common stocks. Due to the Company being in an alternative minimum tax ("AMT") position, the portfolio managers have been reducing the municipal bond portfolio. The Insurance Companies' 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 that are actively traded on major U.S. stock exchanges. At December 31, 2000 and 1999, all fixed maturity and equity securities held by the Company were classified as available-for-sale.
The majority of the investment income of the Navigators Agencies 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. This investment income is paid to the pool members, including Navigators Insurance.
The table set forth below reflects investments and income earned thereon for the Company on a consolidated basis and for the Insurance Companies for each of the three years ended December 31, 2000: Year Ended December 31, 2000 1999 1998 (Dollars in thousands) The Company Consolidated (1) Average investments.................................. $281,770 $273,738 $259,121 Net investment income................................ 18,447 15,985 15,209 Average yield........................................ 6.55% 5.84% 5.87% Insurance Companies Average investments.................................. $241,208 $247,396 $251,422 Net investment income................................ 15,536 14,573 14,659 Average yield........................................ 6.44% 5.89% 5.83%
(1) The Company's average investments include NCUL's and Millennium's portion of the investments held by Lloyd's Syndicate 1221 which is presented in the Company's balance sheet as Funds due from Lloyd's syndicates.
The following table shows the cash and investments of the Company as of December 31, 2000:
Carrying Value Percent (In thousands) of Total
Cash and short-term investments.................. $ 19,788 7.9% U.S. Treasury Bonds and GNMAs.................... 48,474 19.3 Municipal bonds.................................. 60,483 24.1 Mortgage backed securities (excluding GNMAs)..... 15,292 6.1 Asset backed securities.......................... 44,173 17.6 Corporate bonds.................................. 56,706 22.5 Common stocks ................................ 6,269 2.5 Total ................................. $ 251,185 100.0% ========= =====
Regulation
The Parent Company, the Insurance Companies and the Lloyd's Operations are subject to regulation under the insurance statutes including holding company statutes of various states, the UK regulatory authorities and Lloyd's. These regulations vary but generally require insurance holding companies, and insurers that are subsidiaries of holding companies, to register and file reports concerning their capital structure, ownership, financial condition and general business operations. Such regulations also generally require prior regulatory agency approval of changes in control of an insurer and of transactions within the holding company structure. The regulatory agencies have statutory authorization to enforce their laws and regulations through various administrative orders and enforcement proceedings.
The State of New York Insurance Department (the "Department") is the Company's principal regulatory agency. The New York Insurance Law provides that no corporation or other person may acquire control of the Company, and thus indirect control of the Insurance Companies, unless it has given notice to the Insurance Companies, and obtained prior written approval from the Superintendent of Insurance of the State of New York for such acquisition. In New York, any purchaser of 10% or more of the outstanding shares of the Company's common stock would be presumed to have acquired control of the Company, unless such presumption is rebutted. The UK authorities and Lloyd's also have regulatory requirements concerning change in control.
Navigators Insurance and NIC may only pay dividends out of their statutory earned surplus under New York insurance law. Generally, the maximum amount of dividends Navigators Insurance and NIC 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 and NIC operate, insurers doing business in those states can be assessed up to prescribed limits for policyholder losses of insolvent insurance companies.
Navigators Insurance is licensed to engage in the insurance and reinsurance business in 49 states, the District of Columbia and Puerto Rico. NIC is licensed to engage in the insurance and reinsurance business in the State of New York and is an approved surplus lines insurer or meets the financial requirements where there is not a formal approval process in 31 states and the District of Columbia.
As part of its general regulatory oversight process, the Department conducts detailed examinations of the books, records and accounts of New York insurance companies every three to five years. Navigators Insurance and NIC were examined by the Department for the years 1991 through 1995. The Department did not recommend any adjustments to the Insurance Companies' previously filed statutory financial statements. The Insurance Companies have been advised by the Department that they are scheduled for an audit to begin in mid 2001.
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 twelve 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, 2000 and 1999, the Insurance Companies' results were within the usual values for all IRIS ratios except for the 1999 `change in net writings' ratio for NIC due to the reinsurance arrangement between NIC and Navigators Insurance.
The NAIC recently completed a project which codifies statutory accounting practices for insurance enterprises. As a result of this process, the NAIC issued a revised statutory Accounting Practices and Procedures Manual that will be effective January 1, 2001 for the calendar year 2001. The Company will prepare its statutory basis financial statements in accordance with the revised statutory manual subject to any deviations prescribed or permitted by the New York Insurance Commissioner. The Company has determined that these changes would not have resulted in a negative impact to the statutory capital and surplus of the Insurance Companies had the changes been implemented for 2000.
From time to time various regulatory and legislative changes have been proposed in the insurance and reinsurance industry. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures (some of which 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 RBC 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 Navigators Insurance and NIC, their RBC level exceeds a level that would trigger regulatory attention. In their respective 2000 statutory financial statements, Navigators Insurance and NIC have complied with the NAIC's RBC reporting requirements.
In addition to regulations applicable to insurance agents generally, the Navigators Agencies are subject to Managing General Agents Acts in their state of domicile and in certain other jurisdictions where they do business.
The Company's subsidiaries domiciled in the UK are subject to regulation from the government regulatory authorities in the UK and from Lloyd's.
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.
The Company faces competition from both domestic and foreign insurers, some of whom have longer operating histories and greater financial, marketing and management resources. Competition in the types of insurance in which the Company is engaged is based on many factors, including the perceived overall financial strength of the Company, 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 the Company faces the risk that it will lose market share to higher rated insurers.
No single insured or reinsured accounted for 10% or more of the Company's gross written premium in 2000.
Another competitive factor in the industry involves banks and brokerage firms breaking down the barriers between various segments of the financial services industry, including insurance. These efforts pose new challenges to insurance companies and agents from industries traditionally outside the insurance business.
Employees
As of December 31, 2000, the Company had 121 full-time employees.
Item 2.
Item 2. PROPERTIES
The Company's administrative offices are occupied pursuant to a lease from an unaffiliated company which expires June 30, 2010 in a building located at One Penn Plaza, New York, New York. Several of the Company's subsidiaries have noncancellable operating leases for their respective office locations.
In January 2000, the Company purchased a `flat' in London to accommodate visitors to its London operations. The cost of the flat was(pound)507,375 ($820,000) for a 75 year lease.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to or the subject of, any material pending legal proceedings which depart from the ordinary routine litigation incident to the kinds of business conducted by the Company, except for an assessment on Navigators Insurance by the Institute of London Underwriters ("ILU"). In late 1998, the ILU advised its then forty-one members, including Navigators Insurance, that they were each being assessed approximately(pound)900,000 ($1.3 million) to pay for anticipated operating deficits arising from the long term lease of the ILU building located in London (the "ILU Building"). This assessment was to be paid in cash or by providing a letter of credit.
Even assuming that Navigators Insurance could be held responsible for the assessment, Navigators Insurance has informed the ILU that it opposes the assessment as inequitable and inappropriate since it purports to force the ILU's members (without regard to the length of membership, proportionate usage of the ILU's London Processing Centre or current or past occupancy of the ILU Building) to pay now for potential worst case liabilities extending through 2011.
The ILU has, thus far, not filed suit to enforce the assessment against Navigators Insurance. In the event the ILU does file such a suit, Navigators Insurance intends to vigorously contest liability for payment of the assessment. It is not possible to forecast the ultimate liability, if any, at the present time.
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 2000.
Part II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's 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 2000 and 1999 are as follows:
2000 1999 High Low High Low
First Quarter.............. $11.31 $ 8.75 $16.13 $13.50 Second Quarter............. $10.50 $ 8.63 $15.00 $14.00 Third Quarter.............. $12.25 $ 8.75 $16.00 $13.38 Fourth Quarter............. $14.13 $ 10.75 $14.13 $ 9.13
There were approximately 100 holders of record of shares of the Company's common stock as of March 20, 2001. However, management believes there are in excess of 1,000 beneficial owners of the 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, 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, 2000 derived from the Company's audited consolidated financial statements. See the Consolidated Financial Statements of the Company including notes thereto included herein.
Year Ended December 31,
2000 1999 1998 1997 1996 (In thousands, except book value and net income per share data) Operating Information: Net earned premium.................. $ 97,240 $ 89,442 $ 91,203 $ 85,002 $ 78,731 Net investment income............... 18,447 15,985 15,209 14,435 13,614 Total revenues...................... 120,084 105,624 115,120 108,217 102,788 Income (loss) before income taxes.............. 10,338 (5,392) 15,153 17,184 20,874 Net income (loss)................... 7,032 (3,652) 11,489 12,546 16,752
Net income (loss) per share: Basic............................ $ 0.84 $ (0.43) $ 1.37 $ 1.51 $ 2.04 Diluted.......................... $ 0.84 $ (0.43) $ 1.36 $ 1.50 $ 2.02 Average common shares: Basic............................ 8,414 8,419 8,414 8,296 8,197 Diluted ........................ 8,414 8,419 8,459 8,385 8,286 Balance Sheet Information (at end of period): Total investments & cash............ $ 251,185 $246,688 $257,232 $258,572 $240,720 Total assets........................ 614,975 631,324 592,086 501,207 457,095 Loss and LAE reserves............... 357,674 391,094 342,444 278,432 269,601 Notes payable....................... 22,000 24,000 23,500 20,942 17,942 Stockholders' equity................ 143,480 130,365 143,266 131,242 115,542 Book value per share................ $ 17.05 $ 15.51 $ 16.96 $ 15.68 $ 14.03
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. The Insurance Companies derive the majority of their premium from business written by the Navigators Agencies. The Insurance Companies are managed by Navigators Management Company, Inc. The Lloyd's Operations derive their premium from business written by MTC.
Results of Operations
General. The Company's 1998, 1999 and 2000 results of operations reflect intense market competition in the marine business which started to ease slightly in 2000.
The 1999 results include a charge against earnings of approximately $6.6 million pretax resulting in an after tax charge of approximately $4.3 million as the result of unrecoverable reinsurance from New Cap Reinsurance Corporation Limited ("New Cap Re") which participated in the Company's 1997 and 1998 reinsurance programs.
Revenues. Gross written premium decreased from $172.2 million in 1998 to $167.1 million in 1999 and increased to $188.4 million in 2000. The following table sets forth the Company's gross written premium by segment and line of business, and ceded and net written premium by segment for the periods indicated:
Year Ended December 31, 2000 1999 1998 (Dollars in thousands)
Lloyd's Operations: Marine............................... $ 76,101 40% $ 63,040 38% $ 46,637 27% Engineering and Construction......... 936 1 961 1 - - Onshore Energy....................... 520 - 1,346 1 - - -------- -- -------- -- -------- -- Gross Written Premium.............. 77,557 41 65,347 40 46,637 27 -- -- -- Ceded Written Premium.............. (21,257) (12,250) (7,441) -------- ------- -------- Net Written Premium................ 56,300 53,097 39,196 -------- -------- --------
Insurance Companies: Marine............................... 81,664 44 82,086 49 64,043 37 Program Insurance.................... 28,360 15 18,581 11 15,684 9 Aviation............................. 191 - 180 - 23,405 14 Onshore Energy....................... 82 - 812 - 11,418 7 Engineering and Construction......... 452 - (77) - 9,976 6 Other................................ 119 - 183 - 1,048 - -------- -- -------- -- -------- -- Gross Written Premium.............. 110,868 59 101,765 60 125,574 73 -- -- -- Ceded Written Premium.............. (59,075) (60,778) (76,288) -------- -------- -------- Net Written Premium................ 51,793 40,987 49,286 -------- -------- --------
Total Gross Written Premium..... 188,425 100% 167,112 100% 172,211 100% === === ===
Total Ceded Written Premium..... (80,332) (73,028) (83,729) ------- ------- -------
Total Net Written Premium....... $ 108,093 $ 94,084 $ 88,482 ======== ======== ========
Lloyd's Operations
The Lloyd's premium is generated as the result of NCUL and Millennium providing capacity to Lloyd's Syndicate 1221 which is managed by MTC. The premiums, losses and expenses from the Lloyd's Operations are included in the Company's consolidated financials but are not included in the Insurance Companies' results.
Lloyd's Syndicate 1221 had capacity of(pound)66.3 million ($96.0 million) in 2000,(pound)67.0 million ($105.9 million) in 1999 and(pound)66.9 million ($111.1 million) in 1998. The Lloyd's marine business has been subject to continued pricing competition resulting in less premiums per risk relative to certain prior years. As a result, the Company wrote less than the capacity available. The pricing competition showed some signs of easing in 2000.
Marine Premium. In 2000, marine premium increased 20.7% from 1999 due to the capacity provided to Syndicate 1221 by NCUL and Millennium in the aggregate increasing from 52.5% in 1999 to 64.5% in 2000. The capacity provided to Syndicate 1221 by NCUL and Millennium increased from 39.5% in 1998 to 52.5% in 1999 resulting in the increase in premium volume.
Engineering and Construction Premium. In 1999, the Robertson Consortium managed by MTC began writing engineering and construction business for Syndicate 1221. The business consists of coverage for construction projects including machinery, equipment and loss of use due to delays. Previously, the engineering and construction business was written for Navigators Insurance.
Onshore Energy. In 1999, the Robertson Consortium also began writing onshore energy business for Syndicate 1221. The business principally focuses on the oil and gas, chemical and petrochemical industries with coverages primarily for property damage. Previously, the onshore energy business was written for Navigators Insurance.
Lloyd's presents its results on an underwriting year basis, generally closing each underwriting year after three years. The Company makes estimates for each year and timely accrues the expected results. At Lloyd's, the amount to close an underwriting year into the next year is referred to as the "reinsurance to close." At December 31, 2000, Syndicate 1221 closed its 1998 underwriting year, the net effect of which resulted in a portfolio transfer to NCUL and Millennium of $7.9 million at December 31, 2000. At December 31, 1999, Syndicate 1221 and an unaffiliated syndicate on which NCUL participated in 1997 closed their 1997 underwriting year resulting in a portfolio transfer to NCUL of $15.5 million at December 31, 1999. At December 31, 1998, Syndicate 1221 and an unaffiliated syndicate on which NCUL participated in 1997, closed their 1996 underwriting year resulting in a portfolio transfer to NCUL of $19.7 million at December 31, 1998. These transactions accounted for part of the increases in the premium volume in the Company's Lloyd's Operations. The reinsurance to close transactions were recorded as additional written and earned premium, losses incurred, loss reserves and receivables, all in the same amount. There were no gains or losses recorded on the transactions.
The Company controlled 75.6% of Syndicate 1221's capacity for the 2000 underwriting year. The actual capacity was (pound)66,297,000 ($95,985,000) of which the Company directly controlled(pound)42,772,000 ($61,925,000) or 64.5% and indirectly controlled(pound)7,340,000 ($10,627,000) or 11.1%. Since the controlled capacity exceeded 75% in 2000, Lloyd's Mandatory Byelaw (No. 5 of 1999) required the Company to make a mandatory offer to noncontrolled participants for their capacity at the first Lloyd's capacity auctions beginning in July 2000. As a result, the Company purchased an additional(pound)7,379,000 ($11,018,000) of capacity for 2001 through the auction process in 2000 at a total cost of(pound)133,000 ($199,000).
The offer was made at 1.8 pence per(pound)1 of capacity which is the minimum price that the Company was obliged to offer, being the highest price paid for capacity during the prior 12 months. If the Company were to exceed the 90% control threshold, Lloyd's Major Syndicate Transactions Byelaw (No. 18 of 1997) allows for a Minority Buy-out to be effected. In such a transaction the remaining participants are required to give up their capacity in return for compensation which must be at least equal to the offer price preceding the buy-out. Syndicate 1221's capacity for 2001 will be approximately(pound)66.3 million of which the Company will directly control 67.4% and indirectly control 20.7%.
The Company provides letters of credit to Lloyd's to support its Syndicate 1221 capacity. If the amount of capacity controlled increases, the Company will be required to supply additional letters of credit or other collateral acceptable to Lloyd's, or reduce the capacity of Syndicate 1221.
Insurance Companies
Marine Premium. Marine gross written premium remained relatively unchanged from 1999 to 2000. Written premium increased 28.2% from 1998 to 1999 primarily due to Navigators Insurance increasing its participation in the marine pool. Navigators Insurance's participation in the marine pool was 75% in 2000 and 1999 and 60% in 1998.
Program Insurance Premium. The program insurance, currently written by Anfield, consists primarily of general liability insurance for contractors and a small amount of commercial multi-peril insurance for restaurants and taverns. The premium increased 52.6% from 1999 to 2000 and 18.5% from 1998 to 1999 due to the expansion of these programs.
Aviation Premium. Navigators Insurance withdrew from aviation business effective October 1998, other than a small amount of war and satellite business, due to inadequate pricing in the aviation insurance market.
Onshore Energy Premium. In 1996, Navigators Insurance began to underwrite onshore energy insurance which principally focused on the oil and gas, chemical and petrochemical, and power generation industries with coverages primarily for property damage. Beginning in 1999, the onshore energy business was written through the Company's facilities at Lloyd's.
Engineering and Construction Premium. In 1997, Navigators Insurance began writing engineering and construction business consisting of coverage for construction projects including the machinery, equipment and loss of use due to delays. Beginning in 1999, the engineering and construction business was written through the Company's facilities at Lloyd's. In early 1999, the Company closed its Somerset Asia Pacific Limited office in Australia which, along with Navigators Management UK, had previously produced this business for Navigators Insurance.
Ceded Written Premium. In the ordinary course of business, the Company 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. The increase in ceded premium in the Lloyd's Operations during 2000 was due to the purchase of additional quota share protection in the marine business and increased gross written premium. The Insurance Companies' ceded premium declined 2.8% from 1999 to 2000 primarily due to more favorable reinsurance rates in the program insurance. The decrease in the ceded premium from 1998 to 1999 resulted from the decrease in engineering and aviation business which were heavily reinsured.
Net Written Premium. Net written premium increased 14.9% from 1999 to 2000 primarily due to the increases in the Lloyd's marine business and the program business. Net written premium increased 6.3% from 1998 to 1999 primarily due to increases in the marine premium partially offset by decreases in other lines of business as described above.
Net Earned Premium. Net earned premium increased 8.7% from 1999 to 2000 primarily due to the increase in the written premium. The 1.9% decrease from 1998 to 1999 was primarily due to higher unearned premium in the Lloyd's Operations and a smaller reinsurance to close premium in 1999 which is recorded as fully earned premium.
Commission Income. Commission income increased in 2000 primarily due to the absence to a great extent of the factors that reduced commission income in 1999. Commission income decreased from 1998 to 1999 due to Navigators Insurance increasing its participation in the marine pool from 60% in 1998 to 75% in 1999, the losses related to unrecoverable reinsurance which reduced the profit commission, the Company's reduction of its commission income estimates due to the extremely competitive rate environment and less profit commission earned by MTC in 1999 than in 1998.
Net Investment Income. Net investment income increased 15.4% from 1999 to 2000 and 5.1% from 1998 to 1999 primarily due to an increase in investment income allocated to NCUL and Millennium from the investments at the Lloyd's syndicates due to their increased participation in Syndicate 1221 and reduction in the Insurance Companies' municipal portfolio. Increased yield in the portfolio and reduction in the expenses to manage the portfolio also increased investment income in 2000. The investments at NCUL and Millennium are represented by funds due from the Lloyd's syndicates to the Company.
Operating Expenses
Net Losses and Loss Adjustment Expenses Incurred. The ratio of net loss and loss adjustment expenses incurred to net earned premium was 64.8%, 78.2%, and 68.3% in 2000, 1999, and 1998, respectively. The decrease in the 2000 loss ratio compared to 1999 was primarily due to the unrecoverable reinsurance for New Cap Re recorded in 1999 and to the lower reinsurance to close premium in 2000 of $7.9 million compared to $15.5 million in 1999. The increase in the 1999 loss ratio compared to 1998 was primarily due to unrecoverable reinsurance from New Cap Re and higher loss ratios on the Lloyd's premium, partially offset by the decrease in the reinsurance to close premium in 1999 of $15.5 million compared to $19.7 million in 1998. The reinsurance to close premium is recorded at a 100% loss ratio since the premium received represents estimated ultimate losses. The 1999 loss ratio excluding the New Cap Re unrecoverable reinsurance was 70.8%. The loss reserves were not discounted.
Commission Expense. Commission expense as a percentage of net earned premium was 20.6%, 16.5% and 13.0% for 2000, 1999, and 1998, respectively. The same ratios without the reinsurance to close premium were 22.5%, 19.9% and 16.6% in 2000, 1999 and 1998, respectively. The increase in the 2000 commission expense ratio compared to 1999 was primarily due to the increase in the Lloyd's premium which generally has a higher commission expense. The reinsurance to close premium increases earned premium but does not change the commission expense, therefore the ratio of commission expense to earned premium decreases. The increase in the 1999 commission expense ratio compared to 1998 was also primarily due to increased commissions at Lloyd's.
Other Operating Expenses. The change in other operating expenses from 1999 to 2000 was minimal. Other operating expenses increased 2.5% from 1998 to 1999 primarily due to the acquisition of Anfield on April 2, 1999 and increased expenses in the Lloyd's Operations due to the Company's increased participation in its Lloyd's syndicate, partially offset by reduced expenses from the closing of the Somerset Asia Pacific Limited office in Australia from which the company incurred a foreign exchange loss of $346,000.
Interest Expense. The increase in interest expense from 1999 to 2000 was primarily due to higher interest rates charged on the loan balance.
Income Taxes. The income tax expense (benefit) was $3.3 million, ($1.7) million, and $3.7 million for 2000, 1999, and 1998, respectively. The effective tax rates for 2000, 1999, and 1998 were 32.0%, 32.3% and 24.2%, respectively. The tax benefit in 1999 compared to the tax expense in 1998 was primarily due to operating losses in 1999. The Company had alternative minimum tax ("AMT") carryforwards of $5.3 million, $6.4 million and $4.7 million at December 31, 2000, 1999, and 1998, respectively. The AMT carryforwards were primarily attributable to the tax benefits from municipal bond interest. The Company began reducing its municipal bond portfolio in 1997.
As of December 31, 2000 and 1999, the net deferred Federal, foreign, state and local tax asset was $9.0 million and $12.9 million, respectively. At December 31, 2000 the Company had a $5.8 million valuation allowance against its deferred tax asset compared to a $4.5 million valuation allowance at December 31, 1999. The valuation allowance is necessitated by the uncertainty associated with the realization of the deferred tax asset for the carryforward of operating losses from certain of the Company's foreign, state and local operations.
Net Income (Loss). The Company had net income of $7.0 million in 2000 compared to a net (loss) of ($3.7) million in 1999 and net income of $11.5 million in 1998. The loss in 1999 was primarily due to unrecoverable reinsurance, price competition, higher loss ratios in the Lloyd's Operations and expenses related to the foreign expansion in London.
Liquidity and Capital Resources
Cash flow provided by (used in) operations was $1.6 million, $8.9 million and ($3.0) million for 2000, 1999 and 1998, respectively. Operating cash flow in 1999 and 2000 was used primarily to acquire additional investment assets and to reduce debt. The negative operating cash flow in 1998 was primarily due to the payment of loss reserves on runoff business and less premiums received, partially due to Lloyd's disbursing cash only after an underwriting year has closed, normally three years later.
Invested assets and cash increased from $246.7 million at December 31, 1999 to $251.2 million at December 31, 2000. The increase was primarily due to the fair value of the fixed maturities portfolio moving from a $5.3 million unrealized loss at December 31, 1999 to a $3.3 million unrealized gain at December 31, 2000. Net investment income was $15.2 million in 1998, $16.0 million in 1999 and $18.4 million in 2000. The average yield of the portfolio, excluding net realized capital gains, was 5.87% in 1998, 5.84% in 1999, and 6.55% in 2000 reflecting the prevailing interest rates during those years, the decrease in the tax-exempt portfolio and reduction in expenses to manage the portfolio in 2000. As of December 31, 2000, all fixed maturity securities and equity securities held by the Company were classified as available-for-sale.
The average rating of the Company's fixed maturity investments is AA by Standard & Poor's and Aa by Moody's. The Company has no significant exposure to credit risk since the Company's fixed maturity investment portfolio primarily consists of investment grade bonds. The portfolio has an average maturity of approximately 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.
The decrease in reserves for losses and loss adjustment expenses and the related decrease in the reinsurance receivable on paid and unpaid losses and loss adjustment expenses at December 31, 2000 as compared to 1999 was primarily due to the payment of reserves and recovery of reinsurance during 2000 on various large energy and aviation claims.
On December 21, 1998, the Company entered into a new bank credit facility which replaced the prior facility. The new credit facility, as amended on September 20, 2000, provides a $26 million revolving line of credit at an interest rate of either, at the Company's election, the base commercial lending rate of one of the banks or at LIBOR plus 1.25% on the used portion of the line of credit. The commitment fee on the unused portion of the line of credit is 0.25%. The line of credit facility reduces each quarter by amounts between $1.0 million and $2.25 million beginning January 1, 2000 until it terminates on November 19, 2004. At December 31, 2000 and 1999, $22 million and $24 million in loans were outstanding, respectively, under the revolving line of credit facility at an interest rate of 7.6% and 7.1%, respectively. The credit facility also provides for a $55 million letter of credit facility which is utilized primarily by NCUL and Millennium to participate in Lloyd's Syndicate 1221 managed by MTC. The cost of the letters of credit is 1.3% for the used portion and 0.25% for the unused portion of the letter of credit facility. At December 31, 2000 and 1999, letters of credit with an aggregate face amount of $46.6 million and $42.2 million, respectively, were issued under the letter of credit facility. In 2000, $78,500 of these letters of credit were drawn upon.
The bank credit facility is collateralized by shares of common stock of the Company's major subsidiary. It contains covenants common to transactions of this type, including restrictions on indebtedness and liens, limitations on mergers and the sale of assets, maintaining certain consolidated total stockholders' equity, statutory surplus, minimum liquidity, loss reserves and other financial ratios. At December 31, 2000, the Company complied with all covenants.
Total stockholders' equity was $143.5 million at December 31, 2000, a 10.1% increase for the year as the result of the Company's net income in 2000 and the unrealized gain in the investment portfolio.
The Company's reinsurance has been placed with various U.S. companies rated "A-" or better by A.M. Best Company, as well as with foreign insurance companies and with selected syndicates of Lloyd's. Pursuant to the implementation of Lloyd's Plan of Reconstruction and Renewal, a portion of the Company's recoverables are now reinsured by Equitas (a separate UK 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 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 affect on the Company's underwriting operations. They do, however, impact the Company's investment portfolio. A decrease in interest rates will tend to decrease the Company's yield and have a positive effect on the fair value of its invested assets. An increase in interest rates will tend to increase the Company's yield and have a negative effect on the fair value of its invested assets.
Management considers the potential impact of these economic trends in estimating loss reserves. Management believes that the underwriting controls it maintains, and the fact that the majority of the Company's business is in lines of insurance which have relatively short loss payout patterns, assist in estimating ultimate claim costs more reasonably and lessen the potential adverse impact of the economy on the Company.
Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, and other relevant market rate or price changes. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are traded. The following is a discussion of the Company's primary market risk exposures and how those exposures are currently managed as of December 31, 2000. The Company's market risk sensitive instruments are entered into for purposes other than trading.
The carrying value of the Company's investment portfolio as of December 31, 2000 was $251.2 million of which 89.6% was invested in fixed maturity securities. The primary market risk to the investment portfolio is interest rate risk associated with investments in fixed maturity securities. The Company's exposure to equity price risk and foreign exchange risk is not significant. The Company has no commodity risk.
For fixed maturity securities, short-term liquidity needs and the potential liquidity needs of the business are key factors in managing the portfolio. The portfolio duration relative to the liabilities' duration is primarily managed through investment transactions.
For the Company's investment portfolio, there were no significant changes in the Company's primary market risk exposures or in how those exposures are managed compared to the year ended December 31, 1999. The Company does not currently anticipate significant changes in its primary market risk exposures or in how those exposures are managed in future reporting periods based upon what is known or expected to be in effect in future reporting periods.
The Company is subject to interest rate risk on its notes payable to banks as changes in interest rates would impact future earnings, however, this interest rate risk exposure is not considered significant.
Sensitivity Analysis
Sensitivity analysis is defined as the measurement of potential loss in future earnings, fair values or cash flows of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates and other market rates or prices over a selected time. In the Company's sensitivity analysis model, a hypothetical change in market rates is selected that is expected to reflect reasonably possible near-term changes in those rates. The term "near-term" means a period of time going forward up to one year from the date of the consolidated financial statements. Actual results may differ from the hypothetical change in market rates assumed in this disclosure, especially since this sensitivity analysis does not reflect the results of any actions that would be taken by the Company to mitigate such hypothetical losses in fair value.
In this sensitivity analysis model, the Company uses fair values to measure its potential loss. The sensitivity analysis model includes fixed maturities and short-term investments. The primary market risk to the Company's market sensitive instruments is interest rate risk. The sensitivity analysis model uses a 100 basis point change in interest rates to measure the hypothetical change in fair value of financial instruments included in the model.
For invested assets, modified duration modeling is used to calculate changes in fair values. Durations on invested assets are adjusted for call, put and interest rate reset features. Duration on tax exempt securities is adjusted for the fact that the yield on such securities is less sensitive to changes in interest rates compared to Treasury securities. Invested asset portfolio durations are calculated on a market value weighted basis, including accrued investment income, using holdings as of December 31, 2000.
The sensitivity analysis model used by the Company produces a loss in fair value of market sensitive instruments of $11.0 million based on a 100 basis point increase in interest rates as of December 31, 2000. This loss amount only reflects the impact on an interest rate increase on the fair value of the Company's fixed maturities and short-term investments, which constitute approximately 39.6% of total assets as of December 31, 2000.
Based on the sensitivity analysis model used by the Company, the loss in fair value of market sensitive instruments, as a result of a 100 basis point increase in interest rates as of December 2000, is not material.
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 Company is contained under "Election of Directors" in the Company's 2001 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 2001 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 2001 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 2001 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 are 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 fourth quarter of 2000.
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, 2001 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.
Name Title Date
/s/ TERENCE N. DEEKS Chairman, President and CEO (Principal March 28, 2001 Terence N. Deeks Executive Officer)
/s/ BRADLEY D. WILEY Senior Vice President, CFO March 28, 2001 Bradley D. Wiley and Secretary (Principal Financial Officer)
/s/ SALVATORE A. MARGARELLA Vice President and Treasurer March 28, 2001 Salvatore A. Margarella (Principal Accounting Officer)
/s/ ROBERT M. DEMICHELE Director March 28, 2001 Robert M. DeMichele
/s/ LEANDRO S. GALBAN, JR. Director March 28, 2001 Leandro S. Galban, Jr.
/s/ MARC M. TRACT Director March 28, 2001 Marc M. Tract
/s/ WILLIAM D. WARREN Director March 28, 2001 William D. Warren
/s/ ROBERT F. WRIGHT Director March 28, 2001 Robert F. Wright
/s/ HOWARD M. ZELIKOW Director March 28, 2001 Howard M. Zelikow
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Independent Auditors' Report...............................................................
Consolidated Balance Sheets at December 31, 2000 and 1999..................................
Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2000...........................................................
Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2000............................................
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2000................................................
Notes to Consolidated Financial Statements.................................................
SCHEDULES:
Schedule I Summary of Consolidated Investments--other than investments in related parties............................................. S-1
Schedule II Condensed Financial Information of Registrant............................. S-2
Schedule III Supplementary Insurance Information ....................................... S-5
Schedule IV Reinsurance................................................................ S-6
Schedule V Valuation and Qualifying Accounts.......................................... S-7
Schedule VI Supplementary Information Concerning Property-Casualty Insurance Operations............................ S-8
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders The Navigators Group, Inc.
We have audited the consolidated balance sheets of The Navigators Group, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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.
KPMG LLP
New York, New York March 26, 2001
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, 2000 1999
ASSETS Investments and cash: Fixed maturities, available-for-sale, at fair value (amortized cost: 2000, $221,807; 1999, $227,875)....................................... $225,128 $222,555 Equity securities, available-for-sale, at fair value (cost: 2000, $5,608; 1999, $11,105) ........................................................................ 6,269 11,840 Short-term investments, at cost which approximates fair value........................... 18,186 6,747 Cash..................................................................................... 1,602 5,546 ------- -------- Total investments and cash......................................................... 251,185 246,688 ------- -------
Premiums in course of collection............................................................ 35,282 35,614 Funds due from Lloyd's syndicates........................................................... 68,912 55,243 Accrued investment income................................................................... 3,125 3,250 Prepaid reinsurance premiums................................................................ 26,274 24,765 Reinsurance receivable on paid and unpaid losses and loss adjustment expenses............... 195,713 229,111 Federal income tax recoverable.............................................................. 463 2,016 Net deferred Federal and foreign income tax benefit......................................... 9,399 13,227 Deferred policy acquisition costs........................................................... 8,400 5,878 Goodwill ................................................................................... 5,278 5,805 Other assets................................................................................ 10,944 9,727 ------- --------
Total assets....................................................................... $614,975 $631,324 ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses.......................................... $357,674 $391,094 Unearned premium.......................................................................... 66,238 55,003 Reinsurance balances payable.............................................................. 20,402 24,799 Notes payable to banks.................................................................... 22,000 24,000 Net deferred state and local income tax................................................... 398 374 Accounts payable and other liabilities.................................................... 4,783 5,689 ------- -------- Total liabilities.................................................................. 471,495 500,959 ------- -------
Commitments and contingencies...............................................................
Stockholders' equity: Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued................. -- -- Common stock, $.10 par value, authorized 10,000,000 shares, issued and outstanding 8,414,356 in 2000 and 8,406,970 in 1999......................... 846 846 Additional paid-in capital................................................................ 39,413 39,447 Treasury stock held at cost (shares: 41,314 in 2000 and 48,700 in 1999).................. (594) (700) Accumulated other comprehensive income (loss): Net unrealized gains (losses) on securities available-for-sale (net of tax expense (benefit) of $1,394 in 2000 and ($1,605) in 1999).............................................. 2,822 (2,980) Foreign currency translation adjustment (net of tax expense of $146 in 2000 and $34 in 1999)......................................................................... 271 62 Retained earnings......................................................................... 100,722 93,690 ------- -------- Total stockholders' equity......................................................... 143,480 130,365 ------- -------
Total liabilities and stockholders' equity......................................... $614,975 $631,324 ======= ======= See accompanying notes to consolidated financial statements.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except net income per share)
Year Ended December 31, 2000 1999 1998
Revenues: Net earned premium................................................... $ 97,240 $ 89,442 $ 91,203 Commission income.................................................... 3,787 482 6,569 Net investment income................................................ 18,447 15,985 15,209 Net realized capital gains (losses).................................. 265 (443) 1,431 Other income........................................................ 345 158 708 ------- ------- -------- Total revenues..................................................... 120,084 105,624 115,120 ------- ------- -------
Operating expenses: Net losses and loss adjustment expenses incurred..................... 63,012 69,914 62,322 Commission expense................................................... 20,078 14,721 11,864 Other operating expenses............................................. 24,775 24,879 24,264 Interest expense..................................................... 1,881 1,502 1,517 ------- ------- -------- Total operating expenses........................................... 109,746 111,016 99,967 ------- ------- --------
Income (loss) before income tax expense (benefit)....................... 10,338 (5,392) 15,153 ------- ------- --------
Income tax expense (benefit): Current.............................................................. 2,565 (450) 3,100 Deferred............................................................. 741 (1,290) 564 ------- ------- -------- Total income tax expense (benefit)............................... 3,306 (1,740) 3,664 ------- ------- --------
Net Income (Loss)....................................................... $ 7,032 $ (3,652) $ 11,489 ======= ======== ========
Net income (loss) per common share: Basic................................................................ $ 0.84 $ (0.43) $ 1.37 Diluted.............................................................. $ 0.84 $ (0.43) $ 1.36
Average common shares outstanding: Basic................................................................ 8,414 8,419 8,414 Diluted.............................................................. 8,414 8,419 8,459
See accompanying notes to consolidated financial statements.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
Year Ended December 31, 2000 1999 1998
Preferred stock Balance at beginning and end of year.............. $ -- $ -- $ -- ========= ======== ========
Common stock Balance at beginning of year...................... $ 846 $ 845 $ 837 Issuance of common stock during the year.......... -- 1 8 --------- -------- -------- Balance at end of year............................ $ 846 $ 846 $ 845 ========= ======== ========
Additional paid-in capital Balance at beginning of year...................... $ 39,447 $ 39,332 $ 38,119 Issuance of common stock during the year.......... (34) 115 1,213 --------- -------- -------- Balance at end of year............................ $ 39,413 $ 39,447 $ 39,332 ========= ======== ========
Retained earnings Balance at beginning of year...................... $ 93,690 $ 97,342 $ 85,853 Net income (loss)................................. 7,032 $ 7,032 (3,652) $ (3,652) 11,489 $11,489 --------- ------- -------- ------- -------- ------ Balance at end of year............................ $ 100,722 $ 93,690 $ 97,342 ========= ======== ========
Treasury stock held at cost Balance at beginning of year...................... $ (700) $ -- $ -- Purchase of Treasury stock........................ -- (700) -- Shares issued to Directors........................ 106 -- -- --------- -------- -------- Balance at end of year............................ $ (594) $ (700) $ -- ========= ======== ========
Accumulated other comprehensive income (loss) Balance at beginning of year...................... $ (2,918) $ 5,747 $ 6,433 Net unrealized gains (losses) on securities, net of tax expense (benefit) of $2,999, ($4,792) and ($310) in 2000, 1999 and 1998, respectively (1). 5,802 (8,899) (575) Foreign currency gain (loss) net of tax expense (benefit) of $112, $126 and ($60) in 2000, 1999 and 1998, respectively.................... 209 234 (111) ------- ------- ------- Other comprehensive income (loss)................. 6,011 6,011 (8,665) (8,665) (686) (686) --------- ------- -------- -------- -------- ------ Comprehensive income (loss)....................... $13,043 $(12,317) $ 10,803 ====== ======= ======= Balance at end of year............................ $ 3,093 $ (2,918) $ 5,747 ========= ======== ========
Total stockholders' equity at end of year............ $ 143,480 $ 130,365 $ 143,266 ========= ======== =======
(1) Disclosure of reclassification amount: Unrealized holding gains (losses) arising....... during period................................. $ 6,005 $ (8,625) $ 628 Less: reclassification adjustment for net (gains) included in net income................ (203) (274) (1,203) ------- ------- ------- Net unrealized gains (losses) on securities..... $ 5,802 $ (8,899) $ (575) ======= ======= =======
See accompanying notes to consolidated financial statements.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2000 1999 1998 Operating activities: Net income (loss)........................................... $ 7,032 $ (3,652) $ 11,489 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation & amortization................................ 1,173 1,361 833 Net deferred income tax ................................... 741 (1,290) 564 Net realized capital (gains) losses........................ (265) 443 (1,431) Changes in assets and liabilities, net of acquisitions: Reinsurance receivable on paid and unpaid losses and loss adjustment expenses...................... 33,398 (29,094) (52,913) Reserve for losses and loss adjustment expenses............ (33,420) 48,650 64,012 Prepaid reinsurance premiums............................... (1,509) 934 (5,294) Unearned premium........................................... 11,235 3,707 2,636 Premiums in course of collection........................... 332 6,361 (6,771) Funds due from Lloyd's syndicates.......................... (13,435) (20,897) (23,703) Deferred policy acquisition costs.......................... (2,522) (1,575) 1,100 Accrued investment income.................................. 125 (25) (59) Reinsurance balances payable............................... (4,397) 242 8,319 Federal income tax......................................... 1,553 (1,651) (261) Other...................................................... 1,524 5,383 (1,510) -------- -------- -------- Net cash provided by (used in) operating activities.... 1,565 8,897 (2,989) -------- -------- -------- Investing activities: Fixed maturities, available-for-sale Redemptions and maturities .............................. 11,516 43,295 24,074 Sales ................................................... 60,133 25,335 28,664 Purchases ............................................... (66,240) (64,365) (66,373) Equity securities, available-for-sale Sales ................................................... 9,653 3,341 3,285 Purchases ............................................... (3,422) (8,087) (3,083) Payment for purchase of MTC, net of cash acquired of $489 ... -- (26) (5,321) Payment for purchase of Anfield, net of cash acquired of $68. -- (2,591) -- (Receivable) payable for securities.......................... (1,800) (2,158) 2,832 Net (purchases) sales of short-term investments ............ (11,439) (1,100) 16,932 Other investments .......................................... -- 1,145 1,262 Purchase of property and equipment ......................... (1,910) (791) (1,166) -------- -------- -------- Net cash provided by (used in) investing activities .. (3,509) (6,002) 1,106 -------- -------- -------- Financing activities: Proceeds from bank loan .................................... 3,000 1,500 3,500 Repayment of bank loan ..................................... (5,000) (1,000) (340) Proceeds from exercise of stock options .................... -- 44 1,221 Purchase of treasury stock................................... -- (700) -- Repayment of note payable to stockholder ................... -- -- (942) -------- -------- -------- Net cash provided by (used in) financing activities (2,000) (156) 3,439 -------- -------- --------- Increase (decrease) in cash ................................... (3,944) 2,739 1,556 Cash at beginning of year ..................................... 5,546 2,807 1,251 -------- -------- --------- Cash at end of year ........................................... $ 1,602 $ 5,546 $ 2,807 ========= ======== ======== Supplemental disclosures of cash flow information: Federal, state and local income tax paid .................... $ 1,236 $ 1,050 $ 3,599 Interest paid .............................................. 1,805 1,530 1,605 Issuance of stock to directors............................... 72 72 72 Fair value of assets acquired................................ -- 4,204 10,495 Liabilities assumed in acquisitions.......................... -- 1,519 4,685
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 consisting of the accounts of The Navigators Group, Inc., a Delaware holding company, and its sixteen wholly owned subsidiaries, are prepared on the basis of accounting principles generally accepted in the United States ("GAAP"). Unless the context otherwise requires, the term "Company" as used herein means The Navigators Group, Inc. and its subsidiaries. All significant intercompany transactions and balances are eliminated. Certain amounts for prior years have been reclassified to conform to the current year's presentation.
The Company's two insurance subsidiaries are Navigators Insurance Company ("Navigators Insurance"), which includes a United Kingdom Branch ("UK Branch"), and NIC Insurance Company ("NIC"). Navigators Insurance is the Company's largest insurance subsidiary and has been active since 1983. It specializes principally in underwriting marine insurance and related lines of business, and a contractors' general liability program. NIC, a wholly owned subsidiary of Navigators Insurance, began operations in 1990. It underwrites a small book of surplus lines insurance in certain states and cedes 100% of its gross direct writings from this business to Navigators Insurance. Navigators Insurance and NIC are collectively referred to herein as the "Insurance Companies".
In order to establish a common identity under the Navigators name, the Company changed the name of several of its subsidiaries in March 2001. The new names will be used throughout this document. Five of the Company's subsidiaries are marine underwriting management companies: Navigators Management Company, Inc. (formerly Somerset Marine, Inc.), Navigators Insurance Services of Texas, Inc. (formerly Somerset Insurance Services of Texas, Inc.), Navigators California Insurance Services, Inc. (formerly Somerset Insurance Services of California, Inc.), Navigators Insurance Services of Washington, Inc. (formerly Somerset Insurance Services of Washington, Inc.) and Navigators Management (UK) Limited (formerly Somerset Marine (UK) Limited) (collectively, the "Navigators Agencies"). The Navigators Agencies described above (formerly referred to as the Somerset Companies) produce, manage and underwrite insurance and reinsurance for Navigators Insurance, NIC and four unaffiliated insurance companies.
In April 1999, the Company acquired Anfield Insurance Services, Inc. ("Anfield"), an insurance agency located in San Francisco, California, which specializes in underwriting general liability insurance coverage for small artisan and general contractors on the West Coast. The purchase price of approximately $2.7 million, funded through a bank loan and working capital, resulted in goodwill of approximately $2.3 million which is being amortized over 20 years. The acquisition has been accounted for under the purchase method of accounting. Anfield produces business exclusively for the Insurance Companies and is included with the Navigators Agencies unless otherwise noted. In 2001, Anfield will become part of Navigators California Insurance Services, Inc.
Navigators Holdings (UK) Limited is a holding company for the Company's UK subsidiaries. Navigators Management (UK) Limited produces business for the UK Branch of Navigators Insurance. Navigators Corporate Underwriters Limited ("NCUL") is admitted to do business at Lloyd's of London ("Lloyd's") as a corporate member with limited liability. In January 1998, the Company acquired Mander, Thomas & Cooper (Underwriting Agencies) Limited ("MTC"), a Lloyd's marine underwriting managing agency which manages Lloyd's Syndicate 1221, and its wholly owned subsidiary, Millennium Underwriting Limited ("Millennium"), a Lloyd's corporate member with limited liability. The purchase price consists of initial cash payments, acquisition costs and contingent consideration based upon future performance. The purchase price of approximately $6.2 million was funded through a bank loan and working capital. In addition, the purchase agreement requires payment of additional consideration based on the performance of Lloyd's Syndicate 1221 managed by MTC. Goodwill of approximately $4.0 million has been recorded to date in connection with the transaction. The goodwill is being amortized over 20 years. Additional goodwill may be recorded in future years when the amount of the future performance contingencies are determinable. The acquisition has been accounted for under the purchase method of accounting. In August 1999, MTC formed Pennine Underwriting Limited, an underwriting managing agency located in Northern England, which underwrites cargo and engineering business for Lloyd's Syndicate 1221. In March 2001, MTC's Board of Directors approved that MTC's name would be changed to Navigators Underwriting Agency Limited. The name change is expected to take place in 2001.
During 1999, the Company closed Somerset Asia Pacific Limited, a wholly owned subsidiary operating in Australia from which it incurred a foreign exchange loss of $346,000.
The Company's revenue is primarily comprised of premiums, commissions and investment income. The Insurance Companies, managed by Navigators Management Company, Inc. derive their premium from business written by the Navigators Agencies. The Lloyd's Operations derive their premium primarily from business written by MTC.
Investments
Investments are classified into one of 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 purchased 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 in other comprehensive income as a separate component of stockholders' equity. As of December 31, 2000 and 1999, all fixed maturity and equity securities held by the Company were classified as available-for-sale. Premiums and discounts on fixed maturity securities are amortized into interest income over the life of the security under the interest method.
Prepayment assumptions for mortgage and asset backed securities were obtained from broker/dealer survey values or from outside investment managers. These assumptions are consistent with the current interest rate and economic environment. The retrospective adjustment method is used to value all securities.
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.
Funds Due From Lloyd's Syndicates
Funds due from Lloyd's syndicates consist primarily of investments, cash and premiums receivable resulting primarily from the Company's participation in Lloyd's Syndicate 1221. These assets are used for the settlement of losses and payment of expenses related to the business written by the syndicates including payment of the amount to close an underwriting year. The investments included in the funds due from Lloyd's syndicates are recorded at fair value with unrealized gains and losses reported in other comprehensive income as a separate component of stockholders' equity.
Lloyd's presents its results on an underwriting year basis, generally closing each underwriting year after three years. The Company makes estimates for each year and timely accrues the expected results. At Lloyd's, the amount to close an underwriting year into the next year is referred to as the "reinsurance to close". The reinsurance to close was $7.9 million and $15.5 million at December 31, 2000 and 1999, respectively. The reinsurance to close transactions are recorded as additional written and earned premium, losses incurred, loss reserves and receivables, all in the same amount. There were no gains or losses recorded on the transactions.
Premium Revenues
Insurance premiums are recognized as income by the Company during the terms of the related policies. Unearned premium reserves are established to cover the unexpired portion of written premiums.
Commission Income
Commission income consists of commissions and profit commissions from the unaffiliated insurance companies. Commissions from those unaffiliated insurers are based on gross earned premiums and are recognized over the terms of the related policies. Profit commission is based on estimated net underwriting results of the unaffiliated insurers. Changes in prior estimates of 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, other underwriting expenses and premium taxes. The method of computing deferred policy acquisition costs limits the deferral to their estimated net realizable value based on the related unearned premiums and takes into account anticipated losses and loss adjustment expenses and maintenance expenses based on historical and current experience and anticipated investment income based on a 5% rate of return.
Reserve for Losses and Loss Adjustment Expenses
Unpaid losses and loss adjustment expenses are determined on an individual basis for claims reported on direct business for insureds, from reports received from ceding insurers for insurance assumed from such insurers and on estimates based on Company and industry experience for incurred but not reported claims and loss adjustment expenses. The provision for unpaid losses and loss adjustment expenses has been established to cover the estimated unpaid cost of claims incurred. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year's results. 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
The Company calculates its net income (loss) per share in accordance with the Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. Basic earnings per share was computed by dividing net income by the weighted average number of shares outstanding for the period. Diluted earnings per share reflects the basic earnings per share adjusted for the potential dilution that would occur if the issued stock options were exercised.
Reinsurance Ceded
Reinsurance ceded which transfers risk, premiums, commissions and recoveries on losses incurred is 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.
Depreciation and Amortization
Depreciation of furniture and fixtures and electronic data processing equipment, and amortization of computer software is provided over the estimated useful lives of the respective assets, ranging from five to seven years, using the straight-line method. Amortization of leasehold improvements is provided over the estimated lives of the leases using the straight-line method.
The Company capitalizes the costs of computer software developed or purchased for internal use. As of December 31, 2000 and 1999, unamortized computer software costs were $1.1 million and $1.3 million, respectively. Amortization of computer software expense amounted to $377,000 and $332,000 in 2000 and 1999, respectively. There was no computer software amortization expense in 1998.
Goodwill
Goodwill was $5.3 million and $5.8 million at December 31, 2000 and 1999, respectively, net of accumulated amortization of $790,000 and $487,000, respectively. Amortization expense was $304,000, $283,000 and $203,000 in 2000, 1999 and 1998, respectively.
The Company regularly evaluates the recoverability of goodwill and other acquired intangible assets. The carrying value of such assets would be reduced through a direct write-off if, in management's judgment, it was probable that projected future operating income, before amortization of goodwill, would not be sufficient on an undiscounted basis to recover the carrying value.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, establishes financial accounting and reporting standards for stock-based compensation plans. As permitted by SFAS 123, the Company will continue to use the accounting method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). Companies using APB 25 are required to make pro forma footnote disclosures of net income and earnings per share as if the fair value method of accounting, as defined in SFAS 123, had been applied.
Federal Income Taxes
The Company files a consolidated Federal income tax return with its U.S. subsidiaries. The Company applies the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax 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.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Future Application of Accounting Standards
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998 and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133, as amended by SFAS 137, Deferral of the Effective Date of SFAS 133, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Earlier application is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after issuance of this statement. SFAS 133 should not be applied retroactively to financial statements of prior periods. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133, which amends certain accounting and reporting standards of SFAS No. 133. The adoption of these statements is not expected to have any effect on the Company's results of operations or financial condition.
Note 2. Investments
The Company's fixed maturities and equity securities at December 31, 2000 and 1999 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair December 31, 2000 Cost or Cost Gains (Losses) Value (In thousands) Fixed maturities:
U.S. Government Treasury Bonds and GNMAs.......................... $ 46,320 $ 2,230 $ (76) $ 48,474 States, municipalities and political subdivisions....................... 59,132 1,588 (237) 60,483 Mortgage and asset backed (excluding GNMAs).................. 59,869 658 (1,062) 59,465 Corporate bonds....................... 56,486 985 (765) 56,706 -------- ------ ------- --------
Total fixed maturities............. $221,807 $ 5,461 $(2,140) $ 225,128 ======= ====== ====== =======
Equity securities - common stocks........ $ 5,608 $ 888 $ (227) $ 6,269 ======= ====== ======= =====
Gross Gross Amortized Unrealized Unrealized Fair December 31, 1999 Cost or Cost Gains (Losses) Value (In thousands) Fixed maturities:
U.S. Government Treasury Bonds and GNMAs.......................... $ 43,382 $ 206 $ (1,340) $ 42,248 States, municipalities and political subdivisions....................... 93,965 1,472 (1,586) 93,851 Mortgage and asset backed (excluding GNMAs).................. 52,249 4 (2,465) 49,788 Corporate bonds....................... 37,258 21 (1,629) 35,650 Redeemable preferred stock............ 1,021 6 (9) 1,018 ------- ------ ------- -------
Total fixed maturities............. $227,875 $ 1,709 $ (7,029) $222,555 ======= ====== ====== =======
Equity securities - common stocks........ $ 11,105 $ 1,222 $ (487) $ 11,840 ======= ====== ======== =======
The Company's fixed maturity securities by years of maturity were as follows:
Period from December 31, 2000 Amortized Fair to Maturity Cost Value (In thousands)
One year or less................................... $ 4,646 $ 4,671 Over one year through five years................... 37,594 38,456 Over five years through ten years.................. 52,663 55,828 More than ten years................................ 29,599 29,821 Mortgage and asset backed (including GNMAs)........ 97,305 96,352 -------- --------
Total........................................... $221,807 $225,128 ======= =======
Due to the periodic repayment of principal, the mortgage and asset backed securities are estimated to have an effective maturity of approximately six years. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Net investment income of the Company was derived from the following sources:
Year Ended December 31, 2000 1999 1998 (In thousands)
Fixed maturities.......................... $17,801 $15,713 $13,784 Equity securities......................... 252 363 230 Short-term investments.................... 997 573 1,874 ------- ------ ------ 19,050 16,649 15,888 Investment expenses....................... (603) (664) (679) ------- ---- ----
Net investment income..................... $18,447 $15,985 $15,209 ====== ====== ======
The Company's realized capital gains and losses were as follows:
Year Ended December 31, 2000 1999 1998 (In thousands)
Fixed maturities: Gains.................................. $ 975 $ 1,108 $ 768 (Losses)............................... (1,454) (549) (99) ------- ----- ----- (479) 559 669 ------- ----- ------- Equity securities and other investments: Gains.................................. 1,168 492 1,196 (Losses)............................... (424) (1,494) (434) ------- ------ ----- 744 (1,002) 762 ------- ------ ----- Net realized capital gains (losses)....... $ 265 $ (443) $1,431 ======= ======= =====
At December 31, 2000 and 1999, fixed maturities with amortized values of $6,814,000 and $6,825,000, respectively, were on deposit with various State Insurance Departments. In addition, at December 31, 2000 and 1999, $137,000 and $132,000, respectively, were on deposit with the Bank of England for Navigators Insurance's UK Branch. Also, at December 31, 2000 and 1999, $405,000 of investments were pledged as security under a reinsurance treaty.
At December 31, 2000, the Company did not have a concentration of greater than 10% of invested assets in a single issuer.
In 1998, the Company disposed of its investment in Riverside Underwriters Plc ("Riverside"). The Company received a payment of (pound)225,000 ($382,000) in 1998 and recorded a loss on the disposal of(pound)250,000 ($420,000). The remaining payments of(pound)300,000 and (pound)225,000 were due in 1999 and 2000, respectively. The payment due in 1999 was not received and it was considered unlikely that the 1999 or 2000 payments would be received in the foreseeable future. Therefore, the Company recorded an additional loss on the investment in 1999 of(pound)525,000 ($865,000). No payments were received in 2000.
In addition to the disposal of the investment in Riverside, pretax earnings (losses) related to Riverside for 1999 and 1998 of ($215,000) and $393,000, respectively, were included in other income. The Company recorded its share of Riverside's earnings from underwriting when sufficient information became available to provide reasonable estimates of earned premiums and losses. The last underwriting year that the Company participated at Lloyd's through Riverside was 1996 which closed on December 31, 1998 under the Lloyd's three year methodology.
Note 3. Notes Payable and Letters of Credit
On December 21, 1998, the Company entered into a new bank credit facility, as amended, which replaced the prior facility. The new credit facility, as amended on September 20, 2000, provides a $26 million revolving line of credit at an interest rate of either, at the Company's election, the base commercial lending rate of one of the banks or at LIBOR plus 1.25% on the used portion of the line of credit. The commitment fee on the unused portion of the line of credit is 0.25%. The line of credit facility reduces each quarter by amounts between $1.0 million and $2.25 million beginning January 1, 2000 until it terminates on November 19, 2004. At December 31, 2000 and 1999, $22 million and $24 million in loans were outstanding, respectively, under the revolving line of credit facility at an interest rate of 7.6% and 7.1%, respectively. The credit facility also provides for a $55 million letter of credit facility which is utilized primarily by NCUL and Millennium to participate in Lloyd's Syndicate 1221 managed by MTC. The cost of the letters of credit is 1.3% for the used portion and 0.25% for the unused portion of the letter of credit facility. At December 31, 2000 and 1999, letters of credit with an aggregate face amount of $46.6 million and $42.2 million, respectively, were issued under the letter of credit facility. In 2000, $78,500 of these letters of credit were drawn upon.
The credit facility is collateralized by shares of common stock of the Company's major subsidiary and contains certain financial covenants consisting of requirements for minimum consolidated tangible net worth, minimum statutory surplus, minimum risk-based capital and a leverage ratio
Note 4. Fiduciary Funds
The Navigators Agencies maintain fiduciary accounts for the insurance pools they manage. Functions performed by the Navigators Agencies include underwriting business, collecting premiums from the insured, paying claims, collecting paid recoverables from reinsurers, paying reinsurance premiums to reinsurers and remitting net account balances to member insurance companies. Funds belonging to the insurance pools are held in a fiduciary capacity.
The fiduciary accounts as of December 31, 2000 and 1999 were as follows:
December 31, 2000 1999 (In thousands)
Cash and short-term investments............. $12,991 $ 7,019 Premiums receivable......................... 32,932 31,802 Reinsurance balances receivable (payable)... (4,304) (378) -------- ------
Total assets......................... $41,619 $38,443 ====== ======
Due to insurance companies.................. $41,619 $38,443 ------ ------
Total liabilities.................... $41,619 $38,443 ====== ======
The fiduciary accounts above were not included in the accompanying consolidated balance sheets.
Note 5. Income Taxes
The components of current and deferred income tax expense (benefit) were as follows:
Year Ended December 31, 2000 1999 1998 (In thousands) Current: Federal and foreign...................... $2,507 $ (499) $ 2,887 State and local.......................... 58 49 213 ------ ------ ------
Total................................. $2,565 $ (450) $ 3,100 ===== ======= =====
Deferred: Federal and foreign...................... $ 718 $ (560) $ 595 State and local.......................... 23 (730) (31) ----- ------ ----
Total................................. $ 741 $(1,290) $ 564 ===== ====== ======
A reconciliation of total income taxes applicable to pre-tax operating income and the amounts computed by applying the Federal statutory income tax rate to the pre-tax operating income was as follows:
2000 1999 1998 (Dollars in thousands) Computed expected tax expense.............................. $3,618 35.0% $(1,887) (35.0)% $5,304 35.0% Tax-exempt interest......................... (1,313) (12.7) (1,747) (32.4) (2,139) (14.1) Dividends received deduction................ (59) (0.6) (88) (1.6) (48) (0.3) State and local income taxes, net of Federal income tax....................... 53 0.6 (442) (8.2) 118 0.8 State and local tax net operating loss carryforward............................. (453) (4.4) (941) (17.5) -- -- Valuation allowance......................... 1,375 13.3 2,879 53.4 465 3.0 Other....................................... 85 0.8 486 9.0 (36) (0.2) ----- ---- -------- ----- ------ ----
$3,306 32.0% $(1,740) (32.3)% $3,664 24.2% ===== ==== ====== ===== ===== ====
The tax effects of temporary differences that give rise to Federal, foreign, state and local deferred tax assets and deferred tax liabilities were as follows:
December 31, 2000 1999 (In thousands)
Deferred tax assets: Loss reserve discount...................................... $ 6,386 $ 6,195 Unearned premium........................................... 1,817 1,309 Alternative minimum tax carryforward....................... 5,276 6,376 Net unrealized losses on securities........................ -- 1,605 Foreign operations net operating loss carryforward......... 4,433 3,511 State and local net operating loss carryforward............ 1,394 941 Other...................................................... 418 531 ------- ------- Total gross deferred tax assets............................... 19,724 20,468 Less valuation allowance...................................... (5,827) (4,452) ------- ------- Total deferred tax assets................................ 13,897 16,016 ------- -------
Deferred tax liabilities: Deferred acquisition costs................................. (1,339) (824) Contingent commission receivable........................... (1,765) (1,965) Net unrealized gains on securities......................... (1,394) -- Net deferred state and local income tax.................... (398) (374) ------- ------- Total deferred tax liabilities........................... (4,896) (3,163) ------- ------
Net deferred tax asset................................... $ 9,001 $12,853 ======= ======
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, tax planning strategies and anticipated future taxable income in making this assessment and believes it is more likely than not the Company will realize the benefits of its deductible differences at December 31, 2000, net of any valuation allowance.
Valuation allowances of $4,433,000 and $3,511,000 for the years ended December 31, 2000 and 1999, respectively, were established due to the uncertainty associated with the realization of the deferred tax asset for the carryforward of operating losses from the Company's foreign operations.
The Company also had net state and local operating loss carryforwards amounting to potential future tax benefits of $1,394,000 and $941,000 at December 31, 2000 and 1999, respectively. A valuation allowance was established for the amount of the tax benefit due to the uncertainty associated with the realization of the deferred tax asset.
Note 6. Reserves for Losses and Loss Adjustment Expenses
The following table summarizes the activity in the Company's reserve for losses and loss adjustment expenses ("LAE") during the three most recent years:
Year Ended December 31, 2000 1999 1998 (In thousands)
Net reserves for losses and LAE at beginning of year.............................. $170,530 $150,517 $139,841 ------- ------- ------- Provision for losses and LAE for claims occurring in the current year............. 60,152 45,001 46,050 Lloyd's portfolio transfer - reinsurance to close.... 7,854 15,533 19,655 Increase (decrease) in estimated losses and LAE for claims occurring in prior years.......... (4,994) 9,380 (3,383) -------- -------- -------- Incurred losses and LAE.............................. 63,012 69,914 62,322 -------- -------- -------- Losses and LAE payments for claims occurring during: Current year.................................. (15,358) (10,925) (9,848) Prior years................................... (43,301) (38,976) (41,798) -------- ------ ------- Losses and LAE payments.............................. ( 58,659) (49,901) (51,646) ------- ------ ------- Net reserves for losses and LAE at end of year....... 174,883 170,530 150,517 ------- ------- -------
Reinsurance receivable on unpaid losses and LAE...... 182,791 220,564 191,927 ------- ------- -------
Gross reserves for losses and LAE at end of year..... $357,674 $391,094 $ 342,444 ======= ======= =========
The deficiency for the year ended December 31, 1998 resulted from the unrecoverable reinsurance from New Cap Re and reserve strengthening in the Company's Lloyd's subsidiary.
The Company controlled 75.6% of Syndicate 1221's capacity for the 2000 underwriting year. The actual capacity was (pound)66,297,000 ($95,985,000) of which the Company directly controlled(pound)42,772,000 ($61,925,000) or 64.5% and indirectly controlled (pound)7,340,000 ($10,627,000) or 11.1%. Since the controlled capacity exceeded 75% in 2000, Lloyd's Mandatory Byelaw (No. 5 of 1999) required the Company to make a mandatory offer to noncontrolled participants for their capacity at the first Lloyd's capacity auctions beginning in July 2000. As a result, the Company purchased an additional(pound)7,379,000 ($11,018,000) of capacity for 2001 through the auction process in 2000 at a total cost of(pound)133,000 ($199,000).
The offer was made at 1.8 pence per(pound)1 of capacity which is the minimum price that the Company was obliged to offer, being the highest price paid for capacity during the prior 12 months. If the Company exceeds the 90% control threshold, Lloyd's Major Syndicate Transactions Byelaw (No. 18 of 1997) allows for a Minority Buy-out to be effected. In such a transaction the remaining participants are required to give up their capacity in return for compensation which must be at least equal to the offer price preceding the buy-out. Syndicate 1221's capacity for 2001 will be approximately(pound)66.3 million of which the Company will directly control 67.4% and indirectly control 20.7%.
The Company provides letters of credit to Lloyd's to support its Syndicate 1221 capacity. If the amount of capacity controlled increases, the Company will be required to supply additional letters of credit or other collateral acceptable to Lloyd's, or to reduce the capacity of Syndicate 1221.
During 2000, 1999 and 1998, the Company paid gross losses and LAE of $1,158,000, $665,000 and $2,091,000, respectively, resulting in net paid losses and LAE of $173,000, $378,000 and $369,000, respectively, for environmental pollution and asbestos related claims. As of December 31, 2000 and 1999, the Insurance Companies carried gross reserves of $3,364,000 and $3,712,000, respectively, and net reserves of $994,000 and $1,088,000, respectively, for the potential exposure to such claims. At December 31, 2000, there were 412 open claims with environmental pollution or asbestos exposures. 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.
Note 7. Reinsurance
The following table summarizes earned premium:
Year Ended December 31, 2000 1999 1998 (In thousands)
Direct............................. $144,057 $107,939 $102,256 Assumed............................ 32,791 55,465 67,422 Ceded.............................. (79,608) (73,962) (78,475) ------- ------- ------- Net................................ $ 97,240 $ 89,442 $ 91,203 ======== ======= =======
The following table summarizes written premium:
Year Ended December 31, 2000 1999 1998 (In thousands)
Direct............................. $155,888 $120,426 $ 92,910 Assumed............................ 32,537 46,686 79,301 Ceded.............................. (80,332) (73,028) (83,729) -------- ------- ------- Net................................ $108,093 $ 94,084 $ 88,482 ======= ======= ========
The 2000, 1999 and 1998 assumed written and earned premium includes $7.9 million, $15.5 million, and $19.7 million, respectively, of Lloyd's portfolio transfers to close the 1998, 1997 and 1996 underwriting years, respectively.
Ceded losses and loss adjustment expenses incurred were $60,602,000, $112,870,000, and $126,392,000 in 2000, 1999, and 1998, respectively.
A contingent liability exists with respect to reinsurance ceded, since the Company would be required to pay losses in the event the assuming reinsurers are unable to meet their obligations under their reinsurance agreements.
At December 31, 2000, the Company had uncollateralized reinsurance receivables from the following six reinsurers which were in excess of 5% of the Insurance Companies' statutory surplus: Folksamerica Reinsurance Company, $8,903,000; General Reinsurance Company, $8,075,000; American Reinsurance Company, $6,750,000; Employers Mutual Casualty Company, $5,910,000; Insurance Corporation of New York, $5,893,000; and National Liability & Fire Insurance Company, $5,772,000.
The Company's Reinsurance Security Committee monitors the financial strength of its reinsurers and the related reinsurance receivables. 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, 2000 and 1999, there was an allowance for uncollectible reinsurance of $2,500,000 and $1,250,000, respectively. The expense recorded for uncollectible reinsurance was $1,250,000, $7,016,000 and $58,000 for 2000, 1999 and 1998, respectively. The 1999 expense for uncollectible reinsurance is primarily the result of New Cap Reinsurance Corporation Limited, which participated on the Company's 1998 and 1999 reinsurance programs, being under the control of an Administrator for possible liquidation.
Note 8. Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company's financial instruments:
December 31, 2000 December 31, 1999 Carrying Fair Carrying Fair Amount Value Amount Value (In thousands) Financial assets: Fixed maturities............ $225,128 $225,128 $222,555 $222,555 Equity securities........... 6,269 6,269 11,840 11,840 Short-term investments...... 18,186 18,186 6,747 6,747 Financial liabilities: Notes payable to banks...... $ 22,000 $ 22,000 $ 24,000 $ 24,000
The carrying amounts shown in the table are included in the consolidated balance sheets under the indicated captions.
The fair values of fixed maturity and equity securities are based on quoted market prices at the reporting date for those or similar investments. Short-term investments are carried at cost, which approximates fair value. The carrying amounts of premium receivables approximate fair value because of the short maturity of those instruments.
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 9. 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 Company, its subsidiaries and affiliates, options to purchase an aggregate of 900,000 shares of its common stock.
All options are exercisable upon vesting for one share of the Company's common stock and are granted at exercise prices no less than 90% of 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. Options vest equally over a four year period and have a maximum term of ten years.
Stock options outstanding at December 31, 2000, 1999 and 1998 were as follows:
2000 1999 1998 Average Average Average No. of Exercise No. of Exercise No. of Exercise Shares Prices Shares Prices Shares Prices
Options outstanding at beginning of year....... 243,650 $19.01 442,750 $19.79 477,925 $19.37 Granted............... 277,500 $10.65 30,000 $14.00 79,500 $17.00 Exercised............. - - (3,100) $14.25 (75,925) $14.09 Expired or forfeited.. (10,250) $12.82 (226,000) $19.80 (38,750) $20.07 ------- -------- ------- Options outstanding at end of year............. 510,900 $14.59 243,650 $19.01 442,750 $19.79 ======= ======= ======= Number of options exercisable............. 241,025 $18.56 176,338 $20.29 370,750 $20.33
The Company has a Stock Appreciation Rights Plan which allows for the grant of up to 300,000 stock appreciation rights at prices of no less than 90% of the fair market value of the common stock. The Company granted 116,000, 2,500 and 13,500 stock appreciation rights in 2000, 1999 and 1998, respectively. The amounts charged to expense (recovered) in 2000, 1999 and 1998 were $32,000, $0 and ($171,000), respectively.
The Company accounts for stock options in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, which requires compensation expense to be recognized only if the fair value of the underlying stock at the grant date exceeds the exercise price of the option. Accordingly, no compensation cost has been recognized for stock options. Had compensation cost for the Company's stock options been determined consistent with SFAS No. 123, Accounting for Stock Based Compensation, the Company's net income and income per share would have been reduced to the pro forma amounts indicated in the following table:
2000 1999 1998
Net income (loss) (in thousands): As reported $ 7,032 $ (3,652) $ 11,489 Pro forma $ 6,855 $ (3,738) $ 11,243
Basic income (loss) per share: As reported $ 0.84 $ (0.43) $ 1.37 Pro forma $ 0.81 $ (0.44) $ 1.34
Diluted income (loss) per share: As reported $ 0.84 $ (0.43) $ 1.36 Pro forma $ 0.81 $ (0.44) $ 1.33
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for the options granted: no dividend yield; expected volatility of 33.9%, 33.0% and 32.3% in 2000, 1999 and 1998, respectively; risk free interest rate of 6%, 6% and 5% for 2000, 1999 and 1998, respectively; and expected life of 6 years for 2000, 1999 and 1998. The weighted average fair value of options granted was $4.75, $6.16 and $7.03 in 2000, 1999 and 1998, respectively.
The following table summarizes information about options outstanding at December 31, 2000:
Outstanding Average Remaining Average Exercisable Average Price Range Shares Contract Life Exercise Price Shares Exercise Price
$10 to $11 270,500 9.4 10.65 26,000 10.88 $14 to $17 180,400 5.6 15.14 155,025 15.12 $28 to $34 60,000 2.2 30.75 60,000 30.75
Note 10. Employee Benefits
The Company sponsors a defined contribution plan covering substantially all its U.S. 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 vest at 20% per year beginning at the end of the second year and are therefore fully vested after six years of service. Plan expense, included within operating expenses, amounted to $708,000, $731,000 and $607,000 in 2000, 1999 and 1998, respectively. The Company sponsors a similar plan under UK regulations for its UK employees for which the Company had expenses of $420,000, $358,000 and $142,000 for 2000, 1999 and 1998, respectively.
The Company has a 401(k) Plan for all eligible employees. Each eligible employee can contribute up to 8% of their salary limited by certain Federal regulations. The Company does not match any of the employee contributions.
Note 11. Dividends from Subsidiaries and Statutory Financial Information
Navigators Insurance may pay dividends to the Company 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 Navigators Insurance during 2000 without prior regulatory approval is $11,464,000. Navigators Insurance paid $11,000,000 in dividends to the Company in 2000 and $8,500,000 in 1999.
The UK Branch is required to maintain certain capital requirements under UK regulations.
The Insurance Companies' statutory net income as filed with the regulatory authorities for 2000, 1999 and 1998 was $16,334,000, $9,320,000 and $17,987,000, respectively. The statutory surplus as filed with the regulatory authorities was $114,642,000 and $110,273,000 at December 31, 2000 and 1999, respectively.
The Insurance Companies, domiciled in New York State, prepare and file their statutory financial statements in accordance with accounting practices prescribed or permitted by the New York State Insurance Department. Prescribed statutory accounting practices ("SAP") include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), 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.
The significant differences between SAP and GAAP are that under SAP: (1) acquisition and commission costs are expensed when incurred while under GAAP these costs are deferred and amortized as the related premium is earned; (2) bonds are stated at amortized cost, while under GAAP bonds are held in an available-for-sale account and reported at fair value, with unrealized gains and losses recognized in other comprehensive income as a separate component of stockholder's equity; (3) federal income taxes are recorded when payable while under GAAP deferred taxes are provided to reflect temporary differences between the carrying values and tax basis of assets and liabilities; (4) unearned premiums and loss reserves are reflected net of ceded amounts while under GAAP the unearned premiums and loss reserves are reflected gross of ceded amounts; (5) agents' balances over ninety days due are excluded from the balance sheet, and uncollateralized amounts due from unauthorized reinsurers are deducted from surplus, while under GAAP they are restored to the balance sheet, subject to the usual tests regarding recoverability.
The NAIC recently completed a process intended to codify statutory accounting practices for insurance enterprises. As a result of this process, the NAIC will issue a revised statutory Accounting Practices and Procedures Manual that will be effective January 1, 2001 for the calendar year 2001. The Company will prepare its statutory basis financial statements in accordance with the revised statutory manual subject to any deviations prescribed or permitted by the New York insurance commissioner. The Company has determined that these changes would not have resulted in a negative impact to the statutory capital and surplus of the Insurance Companies had the changes been implemented for 2000.
As part of its general regulatory oversight process, the New York State Insurance Department (the "Department") conducts detailed examinations of the books, records and accounts of New York insurance companies every three to five years. The Insurance Companies were examined by the Department for the years 1991 through 1995. There were no adjustments to the Insurance Companies' previously filed statutory financial statements.
Note 12. Commitments and Contingencies
a. Future minimum annual rental commitments at December 31, 2000 under various noncancellable operating leases for the Company's office facilities, which expire at various dates through 2010, are as follows:
Year Ended December 31, (In thousands)
2001................................... $ 1,489 2002................................... 1,462 2003................................... 1,398 2004................................... 1,205 2005 and subsequent.................... 5,218 --------
Total.................................. $ 10,772 ========
The Company is also liable for additional payments to the landlords for certain annual cost increases. Rent expense for the years ended December 31, 2000, 1999 and 1998 was $1,590,000, $1,468,000 and $1,298,000, respectively.
b. The Company is not a party to or the subject of, any material pending legal proceedings which depart from the ordinary routine litigation incident to the kinds of business conducted by the Company, except for an assessment on Navigators Insurance by the Institute of London Underwriters ("ILU"). In late 1998, the ILU advised its then current forty-one members, including Navigators Insurance, that they were each being assessed approximately(pound)900,000 ($1.3 million) to pay for anticipated operating deficits arising from the long term lease of the ILU building located in London (the "ILU Building"). This assessment was to be paid in cash or by providing a letter of credit.
Even assuming that Navigators Insurance could be held responsible for the assessment, Navigators Insurance has informed the ILU that it opposes the assessment as inequitable and inappropriate since it purports to force the ILU's members (without regard to the length of membership, proportionate usage of the ILU's London Processing Centre or current or past occupancy of the ILU Building) to pay now for potential worst case liabilities extending through 2011.
The ILU has, thus far, not filed suit to enforce the assessment against Navigators Insurance. In the event the ILU does file such a suit, Navigators Insurance intends to vigorously contest liability for payment of the assessment. It is not possible to forecast the ultimate liability, if any, at the present time.
Note 13. Segment Information
The Company's subsidiaries are primarily engaged in the writing and management of property and casualty insurance. The Company's segments include the Insurance Companies, the Navigators Agencies and the Lloyd's Operations, each of which is managed separately. The Insurance Companies consist of Navigators Insurance and NIC and currently are primarily engaged in underwriting marine insurance and related lines of business, and a contractors' general liability program. The Navigators Agencies are underwriting management companies which produce, manage and underwrite insurance and reinsurance for both affiliated and unaffiliated companies. The Lloyd's Operations underwrite marine and related lines of business at Lloyd's of London. All segments are evaluated based on their GAAP underwriting or operating results which are prepared using the accounting policies described in the summary of significant accounting policies in Note 1.
The Insurance Companies and the Lloyd's Operations are measured taking into account net premiums earned, incurred losses and loss expenses, commission expense and other underwriting expenses. The Navigators Agencies' results include commission income less other operating expenses. Each segment also maintains their own investments, on which they earn income and realize capital gains or losses. Other operations include intersegment income and expense in the form of affiliated commissions, income and expense from corporate operations and consolidating adjustments.
Financial data by segment for 1998 through 2000 is as follows:
Year ended December 31, 2000 1999 1998 (In thousands)
Revenue, excluding net investment income and net realized capital gains (losses): Insurance Companies........................................ $ 44,389 $ 42,001 $ 50,983 Navigators Agencies........................................ 13,120 5,430 12,935 Lloyd's Operations......................................... 53,114 48,266 42,455 Other operations........................................... (9,251) (5,615) (7,893) ------- --------- -------- Total.................................................... $101,372 $ 90,082 $ 98,480 ======= ========= ========
Net investment income: Insurance Companies........................................ $ 15,536 $ 14,573 $ 14,658 Navigators Agencies........................................ 98 65 8 Lloyd's Operations......................................... 2,796 1,342 535 Other operations........................................... 17 5 8 --------- --------- -------- Total.................................................... $ 18,447 $ 15,985 $ 15,209 ========= ========= ========
Net realized capital gains (losses): Insurance Companies........................................ $ 177 $ 295 $ 1,851 Navigators Agencies........................................ - - - Lloyd's Operations......................................... 88 127 - Other operations........................................... - (865) (420) --------- --------- -------- Total.................................................... $ 265 $ (443) $ 1,431 ========= ========== ========
Income loss before tax expense (benefit): Insurance Companies........................................ $ 18,890 $ 10,474 $ 20,458 Navigators Agencies........................................ (1,947) (9,857) (2,619) Lloyd's Operations......................................... (2,296) (4,395) 279 Other operations........................................... (4,309) (1,614) (2,965) --------- --------- ------ Total.................................................... $ 10,338 $ (5,392) $ 15,153 ========= ========= ========
Income tax expense (benefit): Insurance Companies........................................ $ 5,241 $ 2,021 $ 4,922 Navigators Agencies........................................ (484) (3,286) (76) Lloyd's Operations......................................... - 221 - Other operations........................................... (1,451) (696) (1,182) --------- --------- -------- Total.................................................... $ 3,306 $ (1,740) $ 3,664 ========= ========= ========
Net income (loss): Insurance Companies........................................ $ 13,649 $ 8,453 $ 15,536 Navigators Agencies........................................ (1,463) (6,570) (2,543) Lloyd's Operations......................................... (2,296) (4,616) 279 Other operations........................................... (2,858) (919) (1,783) --------- --------- -------- Total.................................................... $ 7,032 $ (3,652) $ 11,489 ========= ========= ========
Identifiable assets: Insurance Companies........................................ $506,863 $543,035 $532,320 Navigators Agencies........................................ 11,741 2,478 15,406 Lloyd's Operations......................................... 95,229 70,112 50,069 Other operations........................................... 1,142 15,699 (5,708) --------- ------- ------- Total.................................................... $ 614,975 $631,324 $592,087 ========= ======= =======
Note 14. Earnings Per Common Share
Following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for the periods indicated:
Year ended December 31, 2000
Average Net Net Shares Income Income Outstanding Per Share Basic EPS: Income available to common stockholders ........... $7,032,000 8,413,851 $0.84 Effect of Dilutive Securities: Stock options.......................................... - Diluted EPS: Income available to common stockholders .......... $7,032,000 8,413,851 $0.84
Year ended December 31, 1999
Average Net Net Shares (Loss) (Loss) Outstanding Per Share Basic EPS: Income (loss) available to common stockholders......... $(3,652,000) 8,419,318 $(0.43) Effect of Dilutive Securities: Stock options ......................................... 53 Diluted EPS: (Loss) available to common stockholders .......... $(3,652,000) 8,419,371 $(0.43)
Year ended December 31, 1998
Average Net Net Shares Income Income Outstanding Per Share Basic EPS: Income available to common stockholders ........... $11,489,000 8,414,237 $1.37 Effect of Dilutive Securities: Stock options ........................................ 44,789 Diluted EPS: Income available to common stockholders............... $11,489,000 8,459,026 $1.36
Certain outstanding options to purchase common shares were not included in the respective computations of diluted earnings per common share because the options' exercise prices were greater than the average market price of the common shares. For each of the years presented, these outstanding options consisted of the following: during 2000, 510,900 shares at an average price of $14.59 expiring in years 2001 to 2010; during 1999, 213,650 shares at an average price of $19.71 expiring in years 2000 to 2008; and during 1998, 156,125 shares at an average price of $27.96 expiring in years 2000 to 2003.
Note 15. Quarterly Financial Data (Unaudited)
The results of operations for the quarterly periods during 2000 and 1999 were as follows.
Three Month Period Ended March 31, June 30, Sept. 30, Dec. 31, 2000 2000 2000 2000 (In thousands, except net income per share)
Total revenues...................... $ 24,395 $ 27,815 $ 24,124 $ 43,750 Income before income tax............ $ 1,816 $ 3,109 $ 1,872 $ 3,541 Net income.......................... $ 1,344 $ 1,746 $ 1,610 $ 2,332 Comprehensive income................ $ 1,692 $ 2,156 $ 3,268 $ 5,927
Per share data: Net income per share - Basic........ $ 0.16 $ 0.21 $ 0.19 $ 0.28 Net income per share - Diluted...... $ 0.16 $ 0.21 $ 0.19 $ 0.28
Three Month Period Ended March 31, June 30, Sept. 30, Dec. 31, 1999 1999 1999 1999 (In thousands, except net income per share)
Total revenues.......................... $ 21,720 $ 24,660 $ 18,870 $ 40,374 Income (loss) before income tax......... $ 2,926 $ 2,264 $ (7,460) $ (3,123) Net income (loss)....................... $ 2,107 $ 1,937 $ (4,808) $ (2,888) Comprehensive income (loss)............. $ 448 $ (1,454) $ (6,895) $ (4,416)
Per share data: Net income (loss) per share - Basic..... $ 0.25 $ 0.23 $ (0.57) $ (0.34) Net income (loss) per share - Diluted... $ 0.25 $ 0.23 $ (0.57) $ (0.34)
The increase in fourth quarter 2000 and 1999 revenues as compared to the previous three quarters was primarily due to the Lloyd's reinsurance to close portfolio transfer of $7.9 million and $15.5 million, respectively.
SCHEDULE I THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES SUMMARY OF CONSOLIDATED INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 2000 (In thousands)
Amount at which shown in the Amortized consolidated Type of Investment Cost or Cost Fair value balance sheet
Fixed maturities: Bonds: United States Government Treasury Bonds and GNMAs .......................... $ 46,320 $ 48,474 $ 48,474 States, municipalities and political subdivisions................ 59,132 60,483 60,483 Mortgage and asset backed................... (excluding GNMAs)......................... 59,869 59,465 59,465 Corporate bonds............................. 56,486 56,706 56,706 ------- ------- ------- Total fixed maturities................ 221,807 225,128 225,128 ------- ------- -------
Equity securities: Common stocks: Industrial, miscellaneous and all other............................. 5,608 6,269 6,269 Short-term investments........................... 18,186 18,186 18,186 ------- ------- -------
Total investments..................... $245,601 $249,583 $249,583 ======= ======= =======
S-1
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT THE NAVIGATORS GROUP, INC.
BALANCE SHEETS (Parent Company) (In thousands, except share data)
December 31, A S S E T S 2000 1999
Cash .......................................................... $ 50 $ 281 Investment in wholly owned subsidiaries, at equity.................................................... 144,909 138,345 Short-term investments.......................................... 400 -- Other assets.................................................... 20,851 16,227 --------- --------
Total assets........................................... $ 166,210 $154,853 ========= =======
L I A B I L I T I E S
Notes payable to banks.......................................... $ 22,000 $ 24,000 Accounts payable and other liabilities.......................... 730 488 --------- --------
Total liabilities...................................... 22,730 24,488 --------- --------
Commitments and contingencies...................................
S T O C K H O L D E R S' E Q U I T Y
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued................................ -- -- Common stock, $.10 par value, authorized 10,000,000 shares, issued and outstanding 8,414,356 in 2000 and 8,406,970 in 1999...................... 846 846 Additional paid-in capital...................................... 39,413 39,447 Retained earnings............................................... 100,722 93,690 Treasury stock held at cost (shares: 41,314 in 2000 and 48,700 in 1999).............................................. (594) (700) Accumulated other comprehensive income (loss): Net unrealized gains (losses) on securities available-for-sale, net of tax............................... 2,822 (2,980) Foreign currency translation adjustment, net of tax.......... 271 62 ---------- --------
Total stockholders' equity............................. 143,480 130,365 ---------- -------
Total liabilities and stockholders' equity............. $ 166,210 $154,853 ========= =======
S-2
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) THE NAVIGATORS GROUP, INC.
STATEMENTS OF INCOME (Parent Company) (In thousands)
Year Ended December 31, 2000 1999 1998
Revenues: Net investment income............................. $ 17 $ 4 $ 7 Net realized capital losses....................... -- (865) (420) Dividends received from wholly owned subsidiaries.................................... 11,000 11,000 5,000 Other income...................................... (10) (222) 591 Operating expenses and income taxes............... (2,865) (1,731) (1,944) -------- ------ ------ Income before equity in undistributed net income of wholly owned subsidiaries.................... 8,142 8,186 3,234 Equity in undistributed net income (loss) of wholly owned subsidiaries.................... (1,110) (11,838) 8,255 -------- ------- --------
Net Income (Loss)................................. $ 7,032 $ (3,652) $11,489 ======== ======== ======
S-3
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) THE NAVIGATORS GROUP, INC.
STATEMENTS OF CASH FLOWS (Parent Company) (In thousands)
Year Ended December 31, 2000 1999 1998
Operating activities: Net income (loss)........................................ $ 7,032 $(3,652) $11,489 Adjustments to reconcile net income to net cash provided by (used in) operations: Net realized capital losses............................ -- 864 420 Equity in undistributed net income of wholly owned subsidiaries................................... 1,110 11,838 (8,255) Other.................................................. (4,311) (5,860) (4,475) ------ ------- ------ Net cash provided by (used in) operating activities.. 3,831 3,190 (821) ------- ------- -------
Investing activities: Investment in affiliate.................................. (1,662) (2,865) (5,144) Sale of other investments................................ -- -- 1,356 Net (increase) decrease in short-term investments........ (400) 17 (17) ------ ------- ------- Net cash (used in) investing activities.............. (2,062) (2,848) (3,805) ------- ------- -------
Financing activities: Proceeds from bank loan.................................. 3,000 1,500 3,500 Repayment of bank loan................................... (5,000) (1,000) -- Purchase of Treasury stock............................... -- (700) -- Proceeds from exercise of stock options.................. -- 44 1,221 ------- ------- ------- Net cash provided by (used in) financing activities.. (2,000) (156) 4,721 ------- ------- -------
Increase (decrease) in cash................................. (231) 186 95 Cash Beginning of Year...................................... 281 95 -- ------- ------- ------- Cash End of Year..................................... $ 50 $ 281 $ 95 ======= ======= =======
S-4
SCHEDULE III
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION (In thousands)
Reserve Losses Amortization Deferred for losses Other policy and loss of deferred policy and loss claims and Net Net adjustment policy Other Net acquisition adjustment Unearned benefits earned investment expenses acquisition operating written Period costs expenses premiums payable premium income (1) incurred costs(2) expenses(1) premium
Year ended December 31, 2000 Insurance Companies.............. $3,826 $ 284,280 $49,216 $ -- $ 44,539 $15,536 $22,472 $15,217 $2,771 $ 51,793 Lloyd's Operations............... 4,574 73,394 17,022 -- 52,701 2,578 40,540 12,849 4,258 56,300 ----- -------- ------ -------- ------ ------- ------ ------ ----- ------- $8,400 $ 357,674 $66,238 $ -- $ 97,240 $18,114 $63,012 $28,066 $7,029 $108,093 ====== ======= ====== ======= ====== ====== ====== ====== ===== ======= Year ended December 31, 1999 Insurance Companies.............. $2,355 $ 333,262 $42,596 $ -- $ 41,970 $14,573 $31,070 $12,897 $2,428 $ 40,987 Lloyd's Operations............... 3,523 57,832 12,407 -- 47,472 1,222 38,844 9,632 4,586 53,097 ----- -------- ------ -------- ------ ------ ------ ------ ----- -------- $5,878 $ 391,094 $55,003 $ -- $ 89,442 $15,795 $69,914 $22,529 $7,014 $ 94,084 ===== ======= ====== ======== ====== ====== ====== ====== ===== Year ended December 31, 1998 Insurance Companies.............. $2,813 $ 307,788 $44,681 $ -- $ 51,033 $14,658 $30,123 $14,613 $2,299 $ 49,287 Lloyd's Operations............... 1,490 34,656 6,614 -- 40,170 347 32,199 5,032 2,720 39,195 ----- -------- ------ -------- ------ ------ ------ ------ ----- ------- $4,303 $ 342,444 $51,295 $ -- $ 91,203 $15,005 $62,322 $19,645 $5,019 $ 88,482 ===== ======= ====== ======== ====== ====== ====== ====== ===== ======
(1) Net investment income and other operating expenses reflect only such amounts attributable to the Company's insurance operations.
(2) Amortization of deferred policy acquisition costs reflects only such amounts attributable to the Company's insurance operations. A portion of these costs is eliminated upon consolidation.
S-5
SCHEDULE IV THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES REINSURANCE
Written Premium (Dollars in thousands)
Ceded to Assumed Percentage Direct other from other Net of amount Amount companies companies amount assumed to net
Year ended December 31, 2000 Property-Casualty............. $155,888 $80,332 $32,537 $108,093 30% ------- ------ ------ ------- --- Year ended December 31, 1999 Property-Casualty............. $120,426 $73,028 $46,686 $ 94,084 50% ------- ------ ------ -------- --- Year ended December 31, 1998 Property-Casualty............. $ 92,910 $83,729 $79,301 $ 88,482 90% ------- ------ ------ -------- ---
S-6
SCHEDULE V
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Col. A Col. B Col. C Col. D Col. E Additions
Balance at Balance at January 1, Charged to Charged to Deductions December 31, Description 2000 Costs and Expenses Other Accounts Describe 2000
Allowance for uncollectible reinsurance $1,250,000 $1,250,000 $ - $ - $2,500,000
Valuation allowance in deferred taxes $4,452,000 $1,375,000 $ - $ - $5,827,000
S-7
SCHEDULE VI
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (In thousands)
Reserve Amort. Deferred for losses Losses and LAE of deferred Affiliation policy and loss Discount, Net Net incurred related to policy Other Net with acquisition adjustment if any, Unearned earned investment Current Prior acquisition oper. written Registrant costs expenses deducted Premium premium income(1) year years costs(2) exps.(1) premium
Consolidated Subsidiaries
Year ended December 31, 2000 $8,400 $357,674 $ -- $66,238 $97,240 $18,114 $68,006 $(4,994) $28,066 $7,029 $108,093 ----- ------- ------- ------ ------ ------ ------ ------ ------ ----- -------
Year ended December 31, 1999 $5,878 $391,094 $ -- $55,003 $89,442 $15,795 $60,534 $ 9,380 $22,529 $7,014 $ 94,084 ----- ------- ------- ------ ------ ------ ------ ------ ------ ----- -------
Year ended December 31, 1998 $4,303 $342,444 $ -- $51,295 $91,203 $15,005 $65,705 $(3,383) $19,645 $5,019 $ 88,482 ----- ------- ------- ------ ------ ------ ------ ------ ------ ----- -------
(1) Net investment income and other operating expenses reflect only such amounts attributable to the Company's insurance operations.
(2) Amortization of deferred policy acquisition costs reflects only such amounts attributable to the Company's insurance operations. A portion of these costs is eliminated upon consolidation.
S-8
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
3-1 Restated Certificate of Incorporation (a) 3-2 By-laws, as amended (a) 10-1 Management Agreement between Navigators Insurance Company and Somerset Marine, Inc. (a) 10-2 Agreement between The Navigators Group, Inc. and Somerset Marine, Inc. (a) 10-3 Stock Option Plan (a)(b) 10-4 Non-Qualified Stock Option Plan (b) 10-8 Consulting Agreement between The Navigators Group, Inc. and Robert F. Wright Associates, Inc. (c) 10-9 Amended and Restated Credit Agreement dated November 26, 1996, among The Navigators Group, Inc. and Lenders (d) 10-10 Agreement with Bradley D. Wiley dated June 3, 1997 (e) 10-11 First Amendment dated April 9, 1997 to the Amended and Restated Credit Agreement dated November 26, 1996 (e) 10-12 Second Amendment dated December 11, 1997 to the Amended and Restated Credit Agreement dated November 26, 1996 (e) 10-13 Consulting Agreement between The Navigators Group, Inc. and William D. Warren (e) 10-14 Amended and Restated Credit Agreement dated December 21, 1998, among The Navigators Group, Inc. and Lenders (f) 10-15 Employment Agreement with Salvatore A. Margarella dated March 1, 1999 (f) 10-16 Amendment No. 1 dated March 28, 2000 to the Amended and Restated Credit Agreement dated December 21, 1998, among The Navigators Group, Inc. and the Lender (g) 10-17 Amendment No. 2 dated September 20, 2000 to the Amended and Restated Credit Agreement dated December 21, 1998, among The Navigators Group, Inc. and the Lenders (g) 11-1 Statement re Computation of Per Share Earnings 21-1 Subsidiaries of Registrant 23-1 Consent of Independent Auditor
(a) Previously filed under Commission file No. 33-5667 as part of Form S-1, incorporated herein by reference thereto.
(b) 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.
(c)(d)(e)(f)(g)Previously filed with the Company's document as indicated and incorporated herein by reference thereto: Form 10-K for the year ended December 31, 1994 (c), 1996 (d), 1997 (e) and 1998 (f); Form 10-Q for September 30, 2000 (g).
S-9
EXHIBIT 11-1
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS (LOSS)
Earnings (Loss) Per Share of Common Stock and Common Stock Equivalents
(In thousands, except per share data)
Year Ended December 31,
2000 1999 1998
Net income (loss) applicable to common stock $7,032 $ (3,652) $ 11,489
Average number of common shares outstanding 8,414 8,419 8,414
Net income (loss) per share - Basic $ 0.84 $ (0.43) $ 1.37
Average number of common shares outstanding 8,414 8,419 8,414 Add: Assumed exercise of stock options -- -- 45 ------ ------- --------
Common and common equivalent shares outstanding 8,414 8,419 8,459 ====== ======= ========
Net income (loss) per share - Diluted $ 0.84 $ (0.43) $ 1.36
EXHIBIT 21-1
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 2000
Jurisdiction in Name which organized
Navigators Insurance Company New York NIC Insurance Company New York Somerset Marine, Inc. New York Somerset Insurance Services of Texas, Inc. Texas Somerset Insurance Services of California, Inc. California Anfield Insurance Services, Inc. California Somerset Insurance Services of Washington, Inc. Washington Somerset Marine Aviation Property Managers, Inc. New Jersey Somerset Asia Pacific Pty Ltd. Sydney, Australia Somerset Marine (UK) Ltd. England Navigators Corporate Underwriters Ltd. England Navigators Holdings (UK) Ltd. England Somerset Services Pte Ltd. Singapore Mander, Thomas & Cooper (Underwriting Agencies) Ltd. England Millennium Underwriting Ltd. England Pennine Underwriting Limited England
EXHIBIT 23-1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors The Navigators Group, Inc.
We consent to incorporation by reference in the registration statement (No. 33-51608) on Form S-8 of The Navigators Group, Inc. and subsidiaries of our report dated March 26, 2001, relating to the consolidated balance sheets of The Navigators Group, Inc. and subsidiaries as of December 31, 2000, and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2000, and all related schedules, which report appears in the December 31, 2000, Annual Report on Form 10-K of The Navigators Group, Inc. and subsidiaries.
/s/ KPMG LLP
New York, New York March 30, 2001