UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file no. 0-15886
THE NAVIGATORS GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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13-3138397
(I.R.S. Employer Identification No.) |
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6 International Drive, Rye Brook, New York
(Address of principal executive offices)
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10573
(Zip Code) |
Registrants telephone number, including area code: (914) 934-8999
Securities registered pursuant to section 12(b) of the Act:
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Title of each class:
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Name of each exchange on which registered: |
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Common Stock, $.10 Par Value
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The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the
registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of voting stock held by non-affiliates as of June 30, 2009 was
$596,076,000
The number of common shares outstanding as of February 6, 2010 was 16,877,628.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Companys 2010 Proxy Statement are incorporated by reference in Part III,
Items 10, 11, 12, 13 and 14 of this Form 10-K.
NOTE ON FORWARD-LOOKING STATEMENTS
Some of the statements in this Annual Report on Form 10-K are forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. All statements other than
statements of historical fact included in or incorporated by reference in this Annual Report are
forward-looking statements. Whenever used in this report, the words estimate, expect,
believe, may, will, intend, continue or similar expressions or their negative are
intended to identify such forward-looking statements. Forward-looking statements are derived from
information that we currently have and assumptions that we make. We cannot assure that anticipated
results will be achieved, since actual results may differ materially because of both known and
unknown risks and uncertainties which we face. Factors that could cause actual results to differ
materially from our forward-looking statements include, but are not limited to, the factors
described in Part I, Item 1A, Risk Factors of this report. In light of these risks,
uncertainties and assumptions, any forward-looking events discussed in this report may not occur.
You are cautioned not to place undue reliance on any forward-looking statements, which speak only
as of their respective dates. We undertake no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events or otherwise.
The discussion and analysis of our financial condition and results of operations contained herein
should be read in conjunction with our Consolidated Financial Statements and accompanying notes
which appear elsewhere in this report. They contain forward-looking statements that involve risks
and uncertainties. Please see the above Note on Forward-Looking Statements for more information.
Our actual results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those discussed above and elsewhere in this
report.
Part I
Item 1. BUSINESS
Overview
The accompanying Consolidated Financial Statements, consisting of the accounts of The Navigators
Group, Inc., a Delaware holding company established in 1982, and its wholly-owned subsidiaries, are
prepared on the basis of U.S. generally accepted accounting principles (GAAP or U.S. GAAP).
The preparation of these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the financial statements
and the reported revenues and expenses during the reporting periods along with related disclosures.
The terms we, us, our and the Company as used herein are used to mean The Navigators
Group, Inc. and its wholly-owned subsidiaries, unless the context otherwise requires. The terms
Parent or Parent Company as used herein are used to mean The Navigators Group, Inc. without its
subsidiaries.
We are an international insurance company focusing on specialty products within the overall
property/casualty insurance market. Our largest product line and most long-standing area of
specialization is ocean marine insurance. We have also developed specialty niches in professional
liability insurance as well as other specialty insurance lines primarily consisting of contractors
liability and primary and excess liability coverages.
3
Our revenue is primarily comprised of premiums and investment income. We derive our premiums
primarily from business written by wholly-owned underwriting management companies which produce,
manage and underwrite insurance and reinsurance for us. Our products are distributed through
multiple channels, utilizing global, national and regional retail and wholesale insurance brokers.
We conduct operations through our Insurance Companies and our Lloyds Operations segments. The
Insurance Companies segment consists of Navigators Insurance Company, which includes a United
Kingdom Branch (the U.K. Branch), and Navigators Specialty Insurance Company, which underwrites
specialty and professional liability insurance on an excess and surplus lines basis. All of the
insurance business written by Navigators Specialty Insurance Company is fully reinsured by
Navigators Insurance Company pursuant to a 100% quota share reinsurance agreement. Our Lloyds
Operations segment includes Navigators Underwriting Agency Ltd. (NUAL), a Lloyds of London
(Lloyds) underwriting agency which manages Lloyds Syndicate 1221 (Syndicate 1221). Our
Lloyds Operations primarily underwrite marine and related lines of business along with offshore
energy, professional liability insurance and construction coverages for onshore energy business at
Lloyds through Syndicate 1221. We controlled 100% of Syndicate 1221s stamp capacity for the 2009
and 2008 underwriting years through our wholly-owned subsidiary, Navigators Corporate Underwriters
Ltd., and through both Millennium Underwriting Ltd., another wholly-owned subsidiary, and
Navigators Corporate Underwriters Ltd. in 2007, which are referred to as corporate names in the
Lloyds market. We have also established underwriting agencies in Antwerp, Belgium, Stockholm,
Sweden and Copenhagen, Denmark, which underwrite risks pursuant to binding authorities with NUAL
into Syndicate 1221. For financial information by segment, see Note 3 to the Consolidated Financial
Statements in Item 8 of this report.
During the 2008 second quarter, we closed two small underwriting agencies in Manchester and
Basingstoke, England, which did not have a material effect on our financial condition or results of
operations.
While management takes into consideration a wide range of factors in planning our business strategy
and evaluating results of operations, there are certain factors that management believes are
fundamental to understanding how we are managed. First, underwriting profit is consistently
emphasized as a primary goal, above premium growth. Managements assessment of our trends and
potential growth in underwriting profit is the dominant factor in its decisions with respect to
whether or not to expand a business line, enter into a new niche, product or territory or,
conversely, to contract capacity in any business line. In addition, management focuses on
controlling the costs of our operations. Management believes that careful monitoring of the costs
of existing operations and assessment of costs of potential growth opportunities are important to
our profitability. Access to capital also has a significant impact on managements outlook for our
operations. The Insurance Companies operations and ability to grow their business and take
advantage of market opportunities are constrained by regulatory capital requirements and rating
agency assessments of capital adequacy. Similarly, the ability to grow our operations at Lloyds is
subject to Lloyds capital and operating requirements.
Managements decisions are also greatly influenced by access to specialized underwriting and claims
expertise in our lines of business. We have chosen to operate in specialty niches with certain
common characteristics which we believe provide us with the opportunity to use our technical
underwriting expertise in order to realize underwriting profit. As a result, we have focused on
underserved markets for businesses characterized by higher severity and lower frequency of loss where
we believe our intellectual capital and financial strength bring meaningful value. In contrast, we
have avoided niches that we believe have a high frequency of loss activity and/or are subject to a
high level of regulatory requirements, such as workers compensation and personal automobile
insurance, because we do not believe our technical expertise is of as much value in these types of
businesses. Examples of niches that have the characteristics we look for include bluewater hull
which provides coverage for physical damage to, for example, highly valued cruise ships, and
directors and officers liability (D&O) insurance which covers
litigation exposure of a corporations directors and officers. These types of exposures require
substantial technical expertise. We attempt to mitigate the financial impact of severe claims on
our results by conservative and detailed underwriting, prudent use of reinsurance and a balanced
portfolio of risks.
4
Business Lines
Effective in 2009, we reclassified certain business lines which had no effect on the segment
classifications of the Insurance Companies and Lloyds Operations. Underwriting data for prior
periods has been reclassified to reflect these changes.
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The offshore energy business, formerly included in the Marine and Energy
businesses of the Insurance Companies and Lloyds Operations, is now included in the
Insurance Companies and Lloyds Operations Property Casualty businesses. |
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The marine lines within both the Insurance Companies and Lloyds Operations are
now presented as Marine instead of Marine and Energy, since the offshore energy
business has now been reclassified to Property Casualty. |
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Engineering and construction, European Property and other run-off business,
formerly included in the Other category of business within the Insurance Companies
and Lloyds Operations, are now included under Property Casualty. |
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The Middle Markets business, formerly broken out separately in the Insurance
Companies, is now included in the Insurance Companies Property Casualty business. |
Marine
A summary of our business line divisions and primary products within those divisions, by operating
segment, is as follows:
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Marine Insurance Companies
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Marine liability
Bluewater hull
Brownwater hull
Cargo, specie and logistics
Protection & indemnity
Transport
Builders risk
War
Customs bonds |
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Inland Marine Insurance Companies
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Transportation
Construction equipment
Builders risk
Jewelry, fine arts & other specialties
Commercial output policy |
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Marine Lloyds Operations
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Cargo and specie
Marine liability
Bluewater hull
Marine excess-of-loss reinsurance |
5
Within the Insurance Companies marine business, there are a number of different product lines. The
largest is marine liability, which protects businesses from liability to third parties for bodily
injury or property damage stemming from their marine-related operations, such as terminals, marinas and
stevedoring. Another significant product line is bluewater hull, which provides coverage to the
owners of ocean-going vessels against physical damage to the vessels. We also underwrite insurance
for harbor craft and other small craft such as fishing vessels, providing physical damage and third
party liability coverage. We underwrite cargo insurance, which provides coverage for physical
damage to goods in the course of transit, whether by water, air or land. Our U.K. Branch also
underwrites primary marine protection and indemnity (P&I) business, which complements our marine
liability business, which is generally written above the primary layer on an excess basis. In
addition, we began to insure customs bonds in 2005. In 2006, we announced the establishment of an
Inland Marine division of Navigators Insurance Company focusing on traditional inland marine
insurance products including builders risk, contractors tools and equipment, fine arts, computer
equipment and motor truck cargo.
Navigators Management Company, Inc., a wholly-owned underwriting agent, writes marine business for
Navigators Insurance Company from offices located in major insurance or port locations in Chicago,
Houston, London, Miami, New York, San Francisco and Seattle. Navigators Management UK Ltd., another
wholly-owned underwriting agent, writes marine business in London for the UK Branch.
Prior to the 2006 underwriting year, Navigators Insurance Company obtained marine business through
participation with other unaffiliated insurers in a marine insurance pool managed by our
wholly-owned insurance agency subsidiaries. Commencing with the 2006 underwriting year, the marine
insurance pool was eliminated and, therefore, all of the marine business generated by our underwriting
agencies was exclusively for Navigators Insurance Company.
The largest product line within our Lloyds Operations marine business is currently cargo. Other
significant product lines include marine liability, specie, bluewater hull, and assumed reinsurance
of other marine insurers on an excess-of-loss basis.
Property Casualty
A summary of our business line divisions and primary products within those divisions, by operating
segment, is as follows. All of the Insurance Companies business line divisions are divisions of
Navigators Management Company, Inc.:
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Navigators Property and Casualty (NAV PAC)
Insurance Companies
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Multi-Peril
Commercial automotive
Liability
Property
Umbrella
Inland marine
Crime insurance |
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Primary Casualty Insurance Companies
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Construction liability
Construction wrap-up
Primary casualty
Environmental liability
Life sciences liability |
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Excess Casualty Insurance Companies
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Excess casualty
Commercial umbrella |
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Navigators Technical Risk (NavTech)
Insurance Companies
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Offshore energy
Onshore energy
Operational engineering
Construction |
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Casualty Lloyds Operations
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Bloodstock
U.S. Casualty written through Lloyds |
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Navigators Technical Risk (NavTech)
Lloyds Operations
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Offshore energy
Onshore energy
Engineering and construction |
6
NAV PAC writes commercial multi-peril and commercial automobile insurance business for niche
sectors such as adaptive driving firms, well drillers and armored cars. Our commercial multi-peril
products include general liability and a small amount of property insurance. We do not underwrite
workers compensation coverage. NAV PAC generally avoids writing property risks in areas with high
exposure to earthquake or windstorm losses, such as California and Florida.
The Primary Casualty division primarily writes general liability insurance focusing on small
general and artisan contractors and other targeted commercial risks. We have developed
underwriting and claims expertise that we believe has allowed us to minimize our exposure to many
of the large losses sustained in the past several years by other insurers, including losses
stemming from coverages provided to larger contractors who work on condominiums, cooperative
developments and other large housing developments. Consistent with our approach of emphasizing
underwriting profit over market share, we direct our capacity to small to medium-size general
contractors as well as artisan contractors. Commencing in 2005, we expanded our product line in
this area by writing a limited number of construction wrap-up policies that are general liability
policies for owners and developers of residential construction projects. In 2008, the Primary
Casualty division diversified its industry focus and product capability to include products
liability insurance to life sciences firms as well as environmental coverages, including liability
insurance for contractors and environmental consultants and site pollution coverage.
The Excess Casualty division provides commercial umbrella and excess casualty insurance coverage.
Areas of specialty include manufacturing and wholesale distribution, commercial construction,
residential construction, construction project and wrap-up covers, business services, hospitality
and real estate and niche programs.
In 2009, we reorganized our offshore energy, onshore energy, engineering and construction
businesses under our NavTech division, which primarily underwrites through our Lloyds Operations.
Our engineering and construction business consists of coverage for construction projects including
damage to machinery and equipment and loss of use due to delays. Our onshore and offshore energy
insurance principally focuses on the oil and gas, chemical and petrochemical industries, with
coverages primarily for property damage and business interruption.
The European property business, written by the Lloyds Operations and the U.K. Branch beginning in
2006, was discontinued during the 2008 second quarter, which did not have any significant effect on
our financial condition or results of operations.
7
Professional Liability
A summary of our business line divisions and products within those divisions, by operating segment,
is as follows:
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Navigators Professional Liability (Navigators Pro)
Insurance Companies
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Accountants professional liability
Directors & officers liability
Employment practice liability
Lawyers professional liability
Insurance agent errors & omissions
Miscellaneous professional liability |
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Navigators Professional Liability (Navigators Pro)
Lloyds Operations
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Directors & officers liability
Lawyers professional liability |
Navigators Pro, a division of one of our wholly-owned insurance agencies, writes professional
liability insurance. Our principal product in this division is directors and officers liability
insurance, which we offer for both privately held and publicly traded corporations listed on
national exchanges. In addition, we provide fiduciary liability and crime insurance to our
directors and officers liability insurance clients.
Navigators Pro writes employment practices liability, lawyers professional liability and
miscellaneous professional liability coverages. Our current target market for lawyers
professional liability is small law firms. Our U.K. Branch began writing professional liability
coverages for U.K. solicitors in October 2004 and exited this business in 2007. In 2005, we
commenced writing professional liability coverages for architects and engineers in our Insurance
Companies and international directors and officers liability business in our Lloyds Operations.
In September 2008, Syndicate 1221 began to underwrite professional and general liability insurance
coverage in China through the Navigators Underwriting Division of Lloyds Reinsurance Company
(China) Ltd.
In October 2009, we opened an underwriting office in Copenhagen, Denmark to write professional and
management liability business.
Ratings
Our ability to underwrite business is dependent upon the financial strength of the Insurance
Companies and Lloyds. Financial strength ratings represent the opinions of the rating agencies on
the financial strength of a company and its capacity to meet the obligations of insurance policies.
Independent ratings are one of the important factors that establish our competitive position in
the insurance markets. The rating agencies consider many factors in determining the financial
strength rating of an insurance company, including the relative level of statutory surplus
necessary to support the business operations of the company. These ratings are based upon factors
relevant to policyholders, agents and intermediaries and are not directed toward the protection of
investors. Such ratings are not recommendations to buy, sell or hold securities. We could be
adversely impacted by a downgrade in the Insurance Companies or Lloyds financial strength ratings,
including a possible reduction in demand for our products, higher borrowing costs and our ability
to access the capital markets.
8
For the Insurance Companies, Navigators Insurance Company and Navigators Specialty Insurance
Company utilize the financial strength ratings from A.M. Best Company (A.M. Best) and Standard
and Poors Rating Services (S&P) for underwriting purposes. Navigators Insurance Company and
Navigators Specialty Insurance Company are both rated A (Excellent stable outlook) by A.M. Best
and A (Strong stable outlook) by S&P. Syndicate 1221 utilizes the ratings from A.M. Best and
S&P for underwriting purposes which apply to all Lloyds syndicates. Lloyds is rated A
(Excellent stable outlook) by A.M. Best and A+ (Strong stable outlook) by S&P.
Debt ratings apply to short-term and long-term debt as well as preferred stock. These ratings are
assessments of the likelihood that we will make timely payments of the principal and interest for
our senior debt. It is possible that, in the future, one or more of the rating agencies may reduce
our existing debt ratings. If one or more of our debt ratings were downgraded, we could incur
higher borrowing costs and our ability to access the capital markets could be impacted.
We utilize the senior debt ratings from S&P. Our senior debt is rated BBB (Adequate stable
outlook) by S&P.
Loss Reserves
We maintain reserves for unpaid losses and unpaid loss adjustment expenses for all lines of
business. Loss reserves consist of both reserves for reported claims, known as case reserves, and
reserves for losses that have occurred but have not yet been reported, known as incurred but not
reported losses (IBNR). Case reserves are established when notice of a claim is first
received. Reserves for such reported claims 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 IBNR are determined in part on the basis of statistical information and in part
on the basis of industry experience. To the extent that reserves are deficient or redundant, the
amount of such deficiency or redundancy is treated as a charge or credit to earnings in the period
in which the deficiency or redundancy is identified. 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 loss adjustment expenses (LAE) is
dependent upon the receipt of information from insureds, brokers and agents.
Generally, there is a lag between the time premiums are written and related losses and loss
adjustment expenses are incurred, and the time such events are reported to us. Our loss reserves
include amounts related to short tail and long tail classes of business. Short tail business refers
to claims that are generally reported quickly upon occurrence of an event, making estimation of
loss reserves less complex. Our long tail business includes our marine liability, casualty and
professional liability insurance products. For the long tail lines, significant periods of time,
ranging up to several years or more, may elapse between the occurrence of the loss, the reporting
of the loss and the settlement of the claim. Generally, the longer the time span between the
incidence of a loss and the settlement of the claim, the more likely the ultimate settlement amount
will vary from the original estimate. See the Casualty and Professional Liability section
below for additional information.
9
Loss reserves are estimates of what the insurer or reinsurer expects to pay on claims, based on
facts and circumstances then known. It is possible that the ultimate liability may exceed or be
less than such estimates. In setting our loss reserve estimates, we review statistical data
covering several years, analyze patterns by line of business and consider several factors including
trends in claims frequency and severity, changes in operations, emerging economic and social
trends, inflation and changes in the regulatory and litigation environment. Based on this review,
we make a best estimate of our ultimate liability. We do not establish a range of loss estimates
around the best estimate we use to establish our reserves and loss adjustment expenses. 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 the
current periods earnings. 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.
Another factor related to reserve development is that we record those premiums which are reported
to us through the end of each calendar year and accrue estimates for premiums and loss reserves
where there is a time lag between when the policy is bound and the recording of the policy. A
substantial portion of the estimated premium is from international business where there can be
significant time lags. To the extent that the actual premium varies from estimates, the difference,
along with the related loss reserves and underwriting expenses, is recorded in current earnings.
As part of our risk management process, we purchase reinsurance to limit our liability on
individual risks and to protect against catastrophic loss. We purchase both quota share reinsurance
and excess-of-loss reinsurance. Quota share reinsurance is often utilized on the lower layers of
risk and excess-of-loss reinsurance is used above the quota share reinsurance to limit our net
retention per risk. Net retention represents the risk that we keep for our own account. Once
our initial reserve is established and our net retention is exceeded, any adverse development will
directly affect the gross loss reserve, but would generally have no impact on our net retained loss
unless the aggregate limits available under the impacted excess-of-loss reinsurance treaty are
exhausted. Generally, our limits of exposure are known with greater certainty when estimating our
net loss versus our gross loss. This situation tends to create greater volatility in the
deficiencies and redundancies of the gross reserves as compared to the net reserves.
10
The following table presents an analysis of losses and loss adjustment expenses for each of the
last three calendar years:
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Year Ended December 31, |
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2009 |
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2008 |
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2007 |
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($ in thousands) |
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Net reserves for losses and LAE at
beginning of year |
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$ |
999,871 |
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$ |
847,303 |
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$ |
696,116 |
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Provision for losses and LAE for
claims occurring in the current year |
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444,939 |
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443,877 |
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387,601 |
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Decrease in estimated losses and LAE
for claims occurring in prior years |
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(8,941 |
) |
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(50,746 |
) |
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(47,009 |
) |
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Incurred losses and LAE |
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435,998 |
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393,131 |
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340,592 |
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Losses and LAE paid for claims
occurring during: |
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Current year |
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(59,412 |
) |
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(60,104 |
) |
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(46,467 |
) |
Prior years |
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(263,523 |
) |
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(180,459 |
) |
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(142,938 |
) |
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Losses and LAE payments |
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(322,935 |
) |
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(240,563 |
) |
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(189,405 |
) |
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Net reserves for losses and LAE at end of year |
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1,112,934 |
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999,871 |
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847,303 |
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Reinsurance recoverables on unpaid losses and LAE |
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807,352 |
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853,793 |
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801,461 |
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Gross reserves for losses and LAE at end of year |
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$ |
1,920,286 |
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$ |
1,853,664 |
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$ |
1,648,764 |
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The following table presents the development of the loss and LAE reserves for 1999 through 2009.
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 loss adjustment
expenses arising in all prior years that are unpaid at the balance sheet date. The Reserves for
losses and LAE 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 reserve estimates
may change as more information becomes known about the frequency and severity of claims for
individual years. The net and gross 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 loss adjustment expenses reported and recorded in subsequent years
to all prior years starting with the year in which the loss was incurred. For example, assuming
that a loss occurred in 2000 and was not reported until 2002, the amount of such loss will appear
as a deficiency in both 2000 and 2001. 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.
11
The favorable or adverse development on our gross reserves has mostly been ceded to our
excess-of-loss reinsurance treaties. As a result of these reinsurance arrangements, while our
gross losses and related reserve deficiencies and redundancies are very sensitive to favorable or
adverse developments such as those described above, our net losses and related reserve deficiencies
and redundancies tend to be less sensitive to such developments.
Our gross loss reserves include estimated losses related to the 2005 Hurricanes Katrina and Rita
and the 2008 Hurricanes Ike and Gustav and were in total approximately 6.6% of the total December
31, 2009 gross loss reserves and 11.1% of the total December 31, 2008 gross loss reserves. In
addition, our gross loss reserves include estimated losses related to our historic asbestos
exposure and were approximately 1.2% of the total December 31, 2009 and December 31, 2008 gross
loss reserves, respectively. When recording these losses, we assess our reinsurance coverage,
potential reinsurance recoverable, and the recoverability of those balances.
Losses incurred on business recently written are primarily covered by reinsurance agreements
written by companies with whom we are currently doing reinsurance business and whose credit we
continue to assess in the normal course of business. See Managements Discussion of Financial
Condition and Results of Operations Results of Operations Operating Expenses Net Losses and
Loss Adjustment Expenses Incurred and Note 5 Loss Reserves for Losses and Loss Adjustment
Expenses in the Notes to Consolidated Financial Statements, both of which are included herein, for
additional information regarding Hurricanes Katrina, Rita, Ike and Gustav and our asbestos
exposure.
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
1999 |
|
|
2000 |
|
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for losses
and LAE |
|
$ |
170,530 |
|
|
$ |
174,883 |
|
|
$ |
202,759 |
|
|
$ |
264,647 |
|
|
$ |
374,171 |
|
|
$ |
463,788 |
|
|
$ |
578,976 |
|
|
$ |
696,116 |
|
|
$ |
847,303 |
|
|
$ |
999,871 |
|
|
$ |
1,112,934 |
|
Reserves for losses and
LAE re-estimated as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
|
165,536 |
|
|
|
180,268 |
|
|
|
209,797 |
|
|
|
323,282 |
|
|
|
370,335 |
|
|
|
460,007 |
|
|
|
561,762 |
|
|
|
649,107 |
|
|
|
796,557 |
|
|
|
990,930 |
|
|
|
|
|
Two years later |
|
|
160,096 |
|
|
|
183,344 |
|
|
|
266,459 |
|
|
|
328,683 |
|
|
|
360,964 |
|
|
|
457,769 |
|
|
|
523,541 |
|
|
|
589,044 |
|
|
|
776,844 |
|
|
|
|
|
|
|
|
|
Three years later |
|
|
156,322 |
|
|
|
232,530 |
|
|
|
266,097 |
|
|
|
321,213 |
|
|
|
377,229 |
|
|
|
432,988 |
|
|
|
481,532 |
|
|
|
555,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
194,924 |
|
|
|
227,554 |
|
|
|
256,236 |
|
|
|
334,991 |
|
|
|
362,227 |
|
|
|
401,380 |
|
|
|
461,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
190,830 |
|
|
|
218,982 |
|
|
|
264,431 |
|
|
|
325,249 |
|
|
|
343,182 |
|
|
|
391,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
|
185,075 |
|
|
|
225,031 |
|
|
|
260,264 |
|
|
|
314,332 |
|
|
|
333,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
|
188,055 |
|
|
|
221,541 |
|
|
|
257,852 |
|
|
|
305,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
|
187,422 |
|
|
|
220,045 |
|
|
|
250,021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
|
186,581 |
|
|
|
213,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later |
|
|
180,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cumulative redundancy
(deficiency) |
|
|
(9,901 |
) |
|
|
(38,315 |
) |
|
|
(47,262 |
) |
|
|
(40,404 |
) |
|
|
40,314 |
|
|
|
72,022 |
|
|
|
117,413 |
|
|
|
140,668 |
|
|
|
70,458 |
|
|
|
8,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cumulative paid as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
|
43,301 |
|
|
|
53,646 |
|
|
|
64,785 |
|
|
|
84,385 |
|
|
|
80,034 |
|
|
|
96,981 |
|
|
|
133,337 |
|
|
|
142,938 |
|
|
|
180,459 |
|
|
|
263,523 |
|
|
|
|
|
Two years later |
|
|
71,535 |
|
|
|
91,352 |
|
|
|
112,746 |
|
|
|
133,911 |
|
|
|
140,644 |
|
|
|
180,121 |
|
|
|
219,125 |
|
|
|
233,211 |
|
|
|
322,892 |
|
|
|
|
|
|
|
|
|
Three years later |
|
|
88,570 |
|
|
|
114,449 |
|
|
|
138,086 |
|
|
|
170,236 |
|
|
|
195,961 |
|
|
|
238,673 |
|
|
|
264,663 |
|
|
|
300,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
|
101,667 |
|
|
|
127,961 |
|
|
|
159,042 |
|
|
|
208,266 |
|
|
|
223,847 |
|
|
|
262,425 |
|
|
|
302,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
|
108,146 |
|
|
|
141,384 |
|
|
|
185,037 |
|
|
|
226,798 |
|
|
|
239,355 |
|
|
|
283,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
|
116,752 |
|
|
|
159,389 |
|
|
|
196,098 |
|
|
|
234,284 |
|
|
|
251,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
|
131,579 |
|
|
|
171,768 |
|
|
|
198,760 |
|
|
|
241,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
|
142,709 |
|
|
|
171,744 |
|
|
|
203,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
|
142,101 |
|
|
|
176,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later |
|
|
146,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability-end of year |
|
|
391,094 |
|
|
|
357,674 |
|
|
|
401,177 |
|
|
|
489,642 |
|
|
|
724,612 |
|
|
|
966,117 |
|
|
|
1,557,991 |
|
|
|
1,607,555 |
|
|
|
1,648,764 |
|
|
|
1,853,664 |
|
|
|
1,920,286 |
|
Reinsurance recoverable |
|
|
220,564 |
|
|
|
182,791 |
|
|
|
198,418 |
|
|
|
224,995 |
|
|
|
350,441 |
|
|
|
502,329 |
|
|
|
979,015 |
|
|
|
911,439 |
|
|
|
801,461 |
|
|
|
853,793 |
|
|
|
807,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability-end of year |
|
|
170,530 |
|
|
|
174,883 |
|
|
|
202,759 |
|
|
|
264,647 |
|
|
|
374,171 |
|
|
|
463,788 |
|
|
|
578,976 |
|
|
|
696,116 |
|
|
|
847,303 |
|
|
|
999,871 |
|
|
|
1,112,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross re-estimated latest |
|
|
429,719 |
|
|
|
463,960 |
|
|
|
529,707 |
|
|
|
639,674 |
|
|
|
698,021 |
|
|
|
862,260 |
|
|
|
1,367,835 |
|
|
|
1,388,088 |
|
|
|
1,544,672 |
|
|
|
1,851,667 |
|
|
|
|
|
Re-estimated recoverable latest |
|
|
249,289 |
|
|
|
250,763 |
|
|
|
279,685 |
|
|
|
334,623 |
|
|
|
364,164 |
|
|
|
470,493 |
|
|
|
906,272 |
|
|
|
832,640 |
|
|
|
767,828 |
|
|
|
860,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net re-estimated latest |
|
|
180,431 |
|
|
|
213,198 |
|
|
|
250,021 |
|
|
|
305,051 |
|
|
|
333,857 |
|
|
|
391,766 |
|
|
|
461,563 |
|
|
|
555,448 |
|
|
|
776,844 |
|
|
|
990,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cumulative redundancy
(deficiency) |
|
|
(38,625 |
) |
|
|
(106,286 |
) |
|
|
(128,530 |
) |
|
|
(150,032 |
) |
|
|
26,591 |
|
|
|
103,857 |
|
|
|
190,156 |
|
|
|
219,467 |
|
|
|
104,092 |
|
|
|
1,997 |
|
|
|
|
|
13
The following tables identify the approximate gross and net cumulative redundancy (deficiency) at
each year-end balance sheet date for the Insurance Companies and Lloyds Operations contained in
the preceding ten year table:
Gross Cumulative Redundancy (Deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Insurance Companies |
|
|
|
|
Year |
|
Grand |
|
|
Excluding |
|
|
|
|
|
|
|
|
|
|
All |
|
|
Lloyds |
|
Ended |
|
Total |
|
|
Asbestos |
|
|
Total |
|
|
Asbestos |
|
|
Other (1) |
|
|
Operations |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
1,997 |
|
|
$ |
2,926 |
|
|
$ |
(16,517 |
) |
|
$ |
(929 |
) |
|
$ |
(15,588 |
) |
|
$ |
18,514 |
|
2007 |
|
|
104,092 |
|
|
|
105,817 |
|
|
|
57,512 |
|
|
|
(1,725 |
) |
|
|
59,237 |
|
|
|
46,580 |
|
2006 |
|
|
219,467 |
|
|
|
220,412 |
|
|
|
131,443 |
|
|
|
(945 |
) |
|
|
132,388 |
|
|
|
88,024 |
|
2005 |
|
|
190,156 |
|
|
|
191,347 |
|
|
|
97,758 |
|
|
|
(1,191 |
) |
|
|
98,949 |
|
|
|
92,398 |
|
2004 |
|
|
103,857 |
|
|
|
87,639 |
|
|
|
84,639 |
|
|
|
16,218 |
|
|
|
68,421 |
|
|
|
19,218 |
|
2003 |
|
|
26,591 |
|
|
|
11,556 |
|
|
|
20,128 |
|
|
|
15,035 |
|
|
|
5,093 |
|
|
|
6,463 |
|
2002 |
|
|
(150,032 |
) |
|
|
(87,230 |
) |
|
|
(144,804 |
) |
|
|
(62,802 |
) |
|
|
(82,002 |
) |
|
|
(5,228 |
) |
2001 |
|
|
(128,530 |
) |
|
|
(65,371 |
) |
|
|
(117,136 |
) |
|
|
(63,159 |
) |
|
|
(53,977 |
) |
|
|
(11,394 |
) |
2000 |
|
|
(106,286 |
) |
|
|
(42,879 |
) |
|
|
(77,340 |
) |
|
|
(63,407 |
) |
|
|
(13,933 |
) |
|
|
(28,946 |
) |
1999 |
|
|
(38,625 |
) |
|
|
24,893 |
|
|
|
(21,912 |
) |
|
|
(63,518 |
) |
|
|
41,606 |
|
|
|
(16,713 |
) |
Net Cumulative Redundancy (Deficiency)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
Insurance Companies |
|
|
|
|
Year |
|
Grand |
|
|
Excluding |
|
|
|
|
|
|
|
|
|
|
All |
|
|
Lloyds |
|
Ended |
|
Total |
|
|
Asbestos |
|
|
Total |
|
|
Asbestos |
|
|
Other (1) |
|
|
Operations |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
8,941 |
|
|
$ |
8,916 |
|
|
$ |
3,079 |
|
|
$ |
25 |
|
|
$ |
3,054 |
|
|
$ |
5,862 |
|
2007 |
|
|
70,458 |
|
|
|
70,696 |
|
|
|
54,475 |
|
|
|
(238 |
) |
|
|
54,713 |
|
|
|
15,983 |
|
2006 |
|
|
140,668 |
|
|
|
142,685 |
|
|
|
104,831 |
|
|
|
(2,017 |
) |
|
|
106,848 |
|
|
|
35,837 |
|
2005 |
|
|
117,413 |
|
|
|
119,659 |
|
|
|
85,408 |
|
|
|
(2,246 |
) |
|
|
87,654 |
|
|
|
32,005 |
|
2004 |
|
|
72,022 |
|
|
|
74,797 |
|
|
|
51,083 |
|
|
|
(2,775 |
) |
|
|
53,858 |
|
|
|
20,939 |
|
2003 |
|
|
40,314 |
|
|
|
43,494 |
|
|
|
19,279 |
|
|
|
(3,180 |
) |
|
|
22,459 |
|
|
|
21,035 |
|
2002 |
|
|
(40,404 |
) |
|
|
(5,544 |
) |
|
|
(51,720 |
) |
|
|
(34,860 |
) |
|
|
(16,860 |
) |
|
|
11,316 |
|
2001 |
|
|
(47,262 |
) |
|
|
(12,254 |
) |
|
|
(47,261 |
) |
|
|
(35,008 |
) |
|
|
(12,253 |
) |
|
|
(1 |
) |
2000 |
|
|
(38,315 |
) |
|
|
(3,213 |
) |
|
|
(28,001 |
) |
|
|
(35,102 |
) |
|
|
7,101 |
|
|
|
(10,314 |
) |
1999 |
|
|
(9,901 |
) |
|
|
25,306 |
|
|
|
(6,730 |
) |
|
|
(35,207 |
) |
|
|
28,477 |
|
|
|
(3,171 |
) |
|
|
|
(1) |
|
Contains cumulative loss development for all active and run-off lines of business exclusive of asbestos losses. |
14
Casualty and Professional Liability. Substantially all of our casualty business
involves general liability policies which generate third party liability claims that are long tail
in nature. A significant portion of our general liability reserves relate to construction defect
claims. Reserves and claim frequency on this business may be impacted by legislation implemented in
California, which generally provides consumers who experience construction defects a method other
than litigation to obtain construction defect repairs. The law, which became effective July 1,
2002 with a sunset provision effective January 1, 2011, provides for an alternative dispute
resolution system that attempts to involve all parties to the claim at an early stage. This
legislation may impact claim severity, frequency and length of settlement assumptions underlying
our reserves. Accordingly, our ultimate liability may exceed or be less than current estimates due
to this variable, among others.
The professional liability business generates third party claims, which also are longer tail in
nature. The professional liability policies mainly provide coverage on a claims-made basis, whereby
coverage is generally provided only for those claims that are made during the policy period. The
substantial majority of our claims-made policies provide coverage for one year periods.
We have also issued a limited number of multi-year claims-made professional liability policies
known as tail coverage that provide for insurance protection for wrongful acts prior to the
run-off date. Such multi-year policies provide insurance protection for several years.
Loss development of our professional liability business is relatively immature, as we first began
writing the business in late 2001. Accordingly, it will take some time to better understand the
reserve trends on this business. Our professional liability loss estimates are based on expected
losses, actual reported losses, evaluation of loss trends, industry data, and the legal, regulatory
and current risk environment because anticipated loss experience in this area is less predictable
due to the small number of claims and/or erratic claim severity patterns. We believe that we have
made a reasonable estimate of the required loss reserves for professional liability. The expected
ultimate losses may be adjusted up or down as the accident years mature.
Additional information regarding our loss and loss adjustment expenses incurred and loss reserves
can be found in Managements Discussion and Analysis of Financial Condition and Results of
Operations Results of Operations Operating Expenses Net Losses and Loss Adjustment Expenses
Incurred and Note 5, Reserves for Losses and Loss Adjustment Expenses, in the Notes to
Consolidated Financial Statements, both of which are included herein.
Catastrophe Risk Management
We have exposure to losses caused by hurricanes and other natural and man-made catastrophic events.
The frequency and severity of catastrophes are unpredictable.
The extent of losses from a catastrophe is a function of both the total amount of insured exposure
in an area affected by the event and the severity of the event. We continually assess our
concentration of underwriting exposures in catastrophe exposed areas globally and attempt to manage
this exposure through individual risk selection and through the purchase of reinsurance. We also
use modeling and concentration management tools that allow us to better monitor and control our
accumulations of potential losses from catastrophe exposures. Despite these efforts, there remains
uncertainty about the characteristics, timing and extent of insured losses given the nature of
catastrophes. The occurrence of one or more severe catastrophic events could have a material
adverse effect on our results of operations, financial condition and/or liquidity.
We have significant natural catastrophe exposures throughout the world. Historically our largest
natural catastrophe exposure emanated from offshore energy platforms exposed to hurricanes in the
Gulf of Mexico. In 2009 we reduced our exposure to that peril. The majority of the offshore energy
policies that have historically exposed us to this peril renew in the second and third quarters of
the year. During the third quarter of 2009, we found the available market pricing and policy terms
to be unacceptable in most cases and, therefore, offered coverage for the peril of windstorm in the
Gulf of Mexico on only a very small number of risks. Accordingly, our current exposure to
hurricanes in the Gulf of Mexico is materially less than what it was one year ago, and it therefore
no longer represents our largest natural catastrophe exposure.
15
We estimate that our largest exposure to loss from a single natural catastrophe event now comes
from an earthquake on the west coast of the United States. As of January 1, 2010, we estimate
that our probable maximum pre-tax gross and net loss exposure for an earthquake event centered at
San Francisco, California would be approximately $127 million and $27 million, respectively,
including the cost of reinsurance reinstatement premiums.
Like all catastrophe exposure estimates, the foregoing estimate of our probable maximum loss is
inherently uncertain. This estimate is highly dependent upon numerous assumptions and subjective
underwriting judgments. Examples of significant assumptions and judgments related to such an
estimate include the intensity, depth and location of the earthquake, the various types of the
insured risks exposed to the event at the time the event occurs and the estimated costs or damages
incurred for each insured risk. The composition of our portfolio also makes such estimates
challenging due to the non-static nature of the exposures covered under our policies in lines of
business such as cargo and hull. There can be no assurances that the gross and net loss amounts
that we could incur in such an event or in any natural catastrophe event would not be materially
higher than the estimates discussed above given the significant uncertainties with respect to such
an estimate. Moreover, our portfolio of insured risks changes dynamically over time and there can
be no assurance that our probable maximum loss will not change materially over time.
The occurrence of large loss events could reduce the reinsurance coverage that is available to us
and could weaken the financial condition of our reinsurers, which could have a material adverse
effect on our results of operations. Although the reinsurance agreements make the reinsurers
liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance
arrangements do not eliminate our obligation to pay claims to our policyholders as we are required
to pay the losses if a reinsurer fails to meet its obligations under the reinsurance agreement.
Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our reinsurers may
not pay claims made by us on a timely basis, or they may not pay some or all of these claims.
Either of these events would increase our costs and could have a material adverse effect on our
business.
Hurricanes Gustav, Ike, Katrina and Rita
Hurricanes Gustav and Ike (the 2008 Hurricanes) which occurred in the 2008 third quarter and
Hurricanes Katrina and Rita (the 2005 Hurricanes) which occurred in the 2005 third quarter
generated substantial losses in our marine and energy lines of business, due principally to
offshore energy losses. There were no significant hurricane losses in 2009, 2007 or 2006 that
impacted our marine and energy lines of business.
We monitor the development of paid and reported claims activities in relation to the estimate of
ultimate losses established for the 2008 Hurricanes and the 2005 Hurricanes. Management believes
that should any adverse loss development for gross claims occur from the 2008 Hurricanes or the
2005 Hurricanes, it would be contained within our reinsurance program. Our actual losses from such
hurricanes may differ materially from our estimated losses as a result of, among other things, the
receipt of additional information from insureds or brokers, the attribution of losses to coverages that, for the purposes
of our estimates, we assumed would not be exposed and inflation in repair costs due to the limited
availability of labor and materials. If our actual losses from the 2008 Hurricanes or the 2005
Hurricanes are materially greater than our estimated losses, our business, results of operations
and financial condition could be materially adversely affected.
16
See Managements Discussion of Financial Condition and Results of Operations Results of
Operations and Overview Operating Expenses Net Losses and Loss Adjustment Expenses Incurred
and Note 5 Loss Reserves for Losses and Loss Adjustment Expenses in the Notes to Consolidated
Financial Statements, both of which are included herein, for additional information regarding
Hurricanes Katrina, Rita, Ike and Gustav.
Reinsurance Recoverables
We utilize reinsurance principally to reduce our exposure on individual risks, to protect against
catastrophic losses and to stabilize loss ratios and underwriting results. We are protected by
various treaty and facultative reinsurance agreements. The reinsurance is placed either directly
by us or through reinsurance intermediaries. The reinsurance intermediaries are compensated by the
reinsurers.
Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or
ceded to the reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay
claims to our policyholders. Accordingly, we bear credit risk with respect to our reinsurers.
Specifically, our reinsurers may not pay claims made by us on a timely basis, or they may not pay
some or all of these claims. Either of these events would increase our costs and could have a
material adverse effect on our business. Losses we incurred due to Hurricanes Katrina and Rita in
2005 and Hurricanes Gustav and Ike in 2008 significantly increased our reinsurance recoverables,
resulting in an increase to our credit risk exposure to our reinsurers.
We have established a reserve for uncollectible reinsurance in the amount of $13.8 million, which
was determined by considering reinsurer specific default risk as indicated by their financial
strength ratings.
Our exposure to credit risk from any one reinsurer is managed through diversification by reinsuring
with a number of different reinsurers, principally in the United States and European reinsurance
markets. When reinsurance is placed, our standards of acceptability generally require that a
reinsurer must have a rating from A.M. Best and/or S&P of A or better, or an equivalent financial
strength if not rated, plus at least $250 million in policyholders surplus. Our Reinsurance
Security Committee, which is included within our Enterprise Risk Management Finance and Credit
Sub-Committee, monitors the financial strength of our reinsurers and the related reinsurance
recoverables and periodically reviews the list of acceptable reinsurers.
The credit quality distribution of the Companys reinsurance recoverables of $1.05 billion at
December 31, 2009 for ceded paid and unpaid losses and loss adjustment expenses and ceded unearned
premiums based on insurer financial strength ratings from A.M. Best was as follows:
|
|
|
|
|
|
|
|
|
|
|
A.M. Best |
|
Rating |
|
Recoverable |
|
|
Percent |
|
Rating (1) |
|
Description |
|
Amounts |
|
|
of Total |
|
|
|
|
|
($ in millions) |
|
|
|
|
|
A++, A+ |
|
Superior |
|
$ |
436.7 |
|
|
|
42 |
% |
A, A- |
|
Excellent |
|
|
585.2 |
|
|
|
56 |
% |
B++, B+ |
|
Very good |
|
|
0.8 |
|
|
|
0 |
%(2) |
NR |
|
Not rated |
|
|
23.5 |
|
|
|
2 |
%(2) |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
1,046.2 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Equivalent S&P rating used for certain companies when an A.M. Best rating was unavailable. |
|
(2) |
|
The Company holds offsetting collateral of approximately 102.1% for B++
and B+ companies and 71.8% for not rated companies which includes letters of credit,
ceded balances payable and other balances held by our Insurance Companies and our
Lloyds Operations. |
17
The following table lists our 20 largest reinsurers measured by the amount of reinsurance
recoverable for ceded paid and unpaid losses and loss adjustment expense and ceded unearned premium
(constituting 75.6% of our total recoverables) together with the collateral held by us at December
31, 2009, and the reinsurers financial strength rating from the indicated rating agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Recoverables |
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
Unpaid/Paid |
|
|
|
|
|
|
Collateral |
|
|
Rating & |
|
Reinsurer |
|
Premium |
|
|
Losses |
|
|
Total |
|
|
Held (1) |
|
|
Rating Agency |
|
|
|
($ in millions) |
|
|
|
|
|
|
Swiss Reinsurance America Corporation |
|
$ |
9.0 |
|
|
$ |
97.8 |
|
|
$ |
106.8 |
|
|
$ |
9.2 |
|
|
A |
|
AMB |
(2) |
Munich Reinsurance America Inc. |
|
|
26.1 |
|
|
|
60.3 |
|
|
|
86.4 |
|
|
|
16.2 |
|
|
A+ |
|
AMB |
|
Transatlantic Reinsurance Company |
|
|
21.7 |
|
|
|
49.3 |
|
|
|
71.0 |
|
|
|
9.5 |
|
|
A |
|
AMB |
|
White Mountains Reinsurance of America |
|
|
1.2 |
|
|
|
68.6 |
|
|
|
69.8 |
|
|
|
2.3 |
|
|
A- |
|
AMB |
|
Everest Reinsurance Company |
|
|
19.9 |
|
|
|
49.4 |
|
|
|
69.3 |
|
|
|
8.5 |
|
|
A+ |
|
AMB |
|
General Reinsurance Corporation |
|
|
1.5 |
|
|
|
58.3 |
|
|
|
59.8 |
|
|
|
1.7 |
|
|
A++ |
|
AMB |
|
Munchener Ruckversicherungs-Gesellschaft |
|
|
4.9 |
|
|
|
37.0 |
|
|
|
41.9 |
|
|
|
10.2 |
|
|
A+ |
|
AMB |
|
National Indemnity Company |
|
|
7.5 |
|
|
|
29.8 |
|
|
|
37.3 |
|
|
|
3.1 |
|
|
A++ |
|
AMB |
|
Platinum Underwriters Re |
|
|
4.2 |
|
|
|
26.8 |
|
|
|
31.0 |
|
|
|
2.6 |
|
|
A |
|
AMB |
|
Berkley Insurance Company |
|
|
8.1 |
|
|
|
21.1 |
|
|
|
29.2 |
|
|
|
1.5 |
|
|
A+ |
|
AMB |
|
Scor Holding (Switzerland) AG |
|
|
5.9 |
|
|
|
19.2 |
|
|
|
25.1 |
|
|
|
5.9 |
|
|
A- |
|
AMB |
|
Swiss Re International SE |
|
|
1.3 |
|
|
|
22.2 |
|
|
|
23.5 |
|
|
|
6.2 |
|
|
A |
|
AMB |
|
Partner Reinsurance Europe |
|
|
5.6 |
|
|
|
17.6 |
|
|
|
23.2 |
|
|
|
8.7 |
|
|
AA- |
|
S&P |
|
Lloyds Syndicate #2003 |
|
|
3.6 |
|
|
|
17.9 |
|
|
|
21.5 |
|
|
|
3.4 |
|
|
A |
|
AMB |
|
Partner Reinsurance Company of the U.S. |
|
|
1.0 |
|
|
|
19.6 |
|
|
|
20.6 |
|
|
|
0.1 |
|
|
A+ |
|
AMB |
|
Arch Reinsurance Company |
|
|
0.7 |
|
|
|
15.9 |
|
|
|
16.6 |
|
|
|
0.1 |
|
|
A |
|
AMB |
|
Hannover Ruckversicherung |
|
|
1.5 |
|
|
|
14.8 |
|
|
|
16.3 |
|
|
|
2.4 |
|
|
A |
|
AMB |
|
Ace Property and Casualty Insurance Company |
|
|
3.7 |
|
|
|
12.1 |
|
|
|
15.8 |
|
|
|
1.6 |
|
|
A+ |
|
AMB |
|
Allianz Global Corporate & Specialty AG |
|
|
0.2 |
|
|
|
14.4 |
|
|
|
14.6 |
|
|
|
4.2 |
|
|
A+ |
|
AMB |
|
Federal Insurance Co. |
|
|
0.6 |
|
|
|
10.7 |
|
|
|
11.3 |
|
|
|
1.0 |
|
|
A++ |
|
AMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Top 20 Total |
|
|
128.2 |
|
|
|
662.8 |
|
|
|
791.0 |
|
|
|
98.4 |
|
|
|
|
|
|
All Other |
|
|
34.1 |
|
|
|
221.1 |
|
|
|
255.2 |
|
|
|
80.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
162.3 |
|
|
$ |
883.9 |
|
|
$ |
1,046.2 |
|
|
$ |
179.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Collateral includes letters of credit, ceded balances payable and other balances held by our Insurance Companies and our Lloyds Operations. |
|
(2) |
|
A.M. Best |
The largest portion of the collateral held consists of letters of credit obtained from
reinsurers in accordance with New York Insurance Department Regulation No. 133. Such regulation
requires collateral to be held by the ceding company from reinsurers not licensed in New York State
in order for the ceding company to take credit for the reinsurance recoverables on its statutory
balance sheet. The specific requirements governing the letters of credit include a clean and
unconditional letter of credit and an evergreen clause which prevents the expiration of the
letter of credit without due notice to the Company. Only banks considered qualified by the
National Association of Insurance Commissioners (NAIC) may be deemed acceptable issuers of
letters of credit by the New York Insurance Department. In addition, based on our credit
assessment of the reinsurer, there are certain instances where we require collateral from a
reinsurer even if the reinsurer is licensed in New York State, generally applying the requirements
of Regulation No. 133. The contractual terms of the letters of credit require that access to the
collateral is unrestricted. In the event that the counterparty to our collateral would be deemed
not qualified by the NAIC, the reinsurer would be required by agreement to replace such collateral
with acceptable security under the reinsurance agreement. There is no assurance, however, that the
reinsurer would be able to replace the counterparty bank in the event such counterparty bank
becomes unqualified and the reinsurer experiences significant financial deterioration. Under such
circumstances, we could incur a substantial loss from uncollectible reinsurance from such
reinsurer.
18
Approximately $69.7 million and $96.8 million of the reinsurance recoverables for paid and unpaid
losses at December 31, 2009 and December 31, 2008, respectively, were due from reinsurers as a
result of the losses from the 2008 Hurricanes Gustav and Ike. Approximately $68.5 million and
$101.7 million of the reinsurance recoverables for paid and unpaid losses at December 31, 2009 and
2008, respectively, were due from reinsurers as a result of the losses from the 2005 Hurricanes
Katrina and Rita. In addition, also included in reinsurance recoverable for paid and unpaid losses
were approximately $8.9 million at both December 31, 2009 and 2008 due from reinsurers in
connection with our asbestos exposures.
See Business Regulation United States below for information regarding the Terrorism Risk
Insurance Act, the Terrorism Risk Insurance Extension Act and the Terrorism Risk Insurance Program
Reauthorization Act.
Investments
The objective of our investment policy, guidelines and strategy is to maximize total investment
return in the context of preserving and enhancing shareholder value and statutory surplus of the
Insurance Companies. Secondarily, we seek to optimize after-tax investment income.
Our investments are managed by outside professional fixed-income and equity portfolio managers. We
seek to achieve our investment objectives by investing in cash equivalents and money market funds,
municipal bonds, U.S. Government bonds, U.S. Government agency guaranteed and non-guaranteed
securities, corporate bonds, mortgage-backed and asset-backed securities and common and preferred
stocks.
Our investment guidelines require that the amount of our consolidated fixed-income portfolio rated
below A- but no lower than BBB- by S&P or below A3 but no lower than Baa3 by Moodys
Investors Service (Moodys) shall not exceed 10% of our total fixed income and short-term
investments. Fixed-income securities rated below BBB- by S&P or Baa3 by Moodys combined with
any other investments not specifically permitted under our investment guidelines, cannot exceed 5%
of our consolidated stockholders equity. Investments in equity securities that are actively
traded on major U.S. stock exchanges cannot exceed 20% of consolidated stockholders equity.
Finally, our investment guidelines prohibit investments in derivatives other than as a hedge
against foreign currency exposures or the writing of covered call options on our equity portfolio.
The Insurance Companies investments are subject to the oversight of their respective Boards of
Directors and our Finance Committee of the Parent Companys Board of Directors. The investment
portfolio and the performance of the investment managers are reviewed quarterly. These investments
must comply with the insurance laws of New York State, the domiciliary state of Navigators
Insurance Company and Navigators Specialty Insurance Company. These laws prescribe the type,
quality and concentration of investments which may be made by insurance companies. In general,
these laws permit investments, within specified limits and subject to certain qualifications, in
federal, state and municipal obligations, corporate bonds, preferred stocks, common stocks, real
estate mortgages and real estate. The U.K. Branchs investments must comply with the regulations
set forth by the Financial Services Authority (FSA) in the U.K.
19
The Lloyds Operations investments are subject to the direction and control of the Board of
Directors and the Investment and Capital Committee of NUAL, as well as the Parent Companys Board
of Directors and Finance Committee. These investments must comply with the rules and regulations
imposed by Lloyds and the FSA.
The table set forth below reflects our total investment balances, net investment income earned
thereon and the related average yield for the last three calendar years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
Invested Assets and Cash |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
$ |
1,604,354 |
|
|
$ |
1,509,382 |
|
|
$ |
1,421,365 |
|
Lloyds Operations |
|
|
388,556 |
|
|
|
356,184 |
|
|
|
301,790 |
|
Parent Company |
|
|
63,677 |
|
|
|
52,149 |
|
|
|
44,146 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
2,056,587 |
|
|
$ |
1,917,715 |
|
|
$ |
1,767,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
$ |
65,717 |
|
|
$ |
63,544 |
|
|
$ |
58,261 |
|
Lloyds Operations |
|
|
9,229 |
|
|
|
11,655 |
|
|
|
10,524 |
|
Parent Company |
|
|
566 |
|
|
|
1,355 |
|
|
|
1,877 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
75,512 |
|
|
$ |
76,554 |
|
|
$ |
70,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Yield (amortized
cost basis) |
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
|
4.1 |
% |
|
|
4.3 |
% |
|
|
4.5 |
% |
Lloyds Operations |
|
|
2.7 |
% |
|
|
3.4 |
% |
|
|
3.9 |
% |
Parent Company |
|
|
1.0 |
% |
|
|
3.1 |
% |
|
|
4.9 |
% |
Consolidated |
|
|
3.8 |
% |
|
|
4.1 |
% |
|
|
4.4 |
% |
At December 31, 2009, the average quality of the investment portfolio was rated AA by S&P and
Aa by Moodys. All of the Companys mortgage-backed and asset-backed securities were rated AAA
by S&P and Aaa by Moodys except for 77 securities approximating $59.9 million. There were no collateralized debt obligations (CDOs), collateralized loan
obligations (CLOs), asset-backed commercial paper or credit default swaps in our investment
portfolio. At December 31, 2009 and 2008, all fixed-maturity and equity securities held by us were
classified as available-for-sale.
See Managements Discussion of Financial Condition and Results of Operations Investments and
Note 4 Investments in the Notes to Consolidated Financial Statements, both of which are included
herein, for additional information regarding investments.
20
Regulation
United States
We are subject to regulation under the insurance statutes, including holding company statutes, of
various states and applicable regulatory authorities in the United States. 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.
Navigators Insurance Company is licensed to engage in the insurance and reinsurance business in 50
states, the District of Columbia and Puerto Rico. Navigators Specialty Insurance Company is
licensed to engage in the insurance and reinsurance business in the State of New York and is an
approved surplus lines insurer or meets the financial requirements where there is not a formal
approval process in all other states and the District of Columbia.
The State of New York Insurance Department is our principal regulatory agency. New York insurance
law provides that no corporation or other person may acquire control of us, and thus indirect
control of our insurance company subsidiaries, unless it has given notice to our insurance company
subsidiaries and obtained prior written approval from the Superintendent of Insurance of the State
of New York for such acquisition. Any purchaser of 10% or more of the outstanding shares of our
common stock would be presumed to have acquired control of us, unless such presumption is rebutted.
Under New York insurance law, Navigators Insurance Company and Navigators Specialty Insurance
Company may only pay dividends out of their statutory earned surplus. Generally, the maximum
amount of dividends Navigators Insurance Company and Navigators Specialty Insurance Company may pay
without regulatory approval in any twelve-month period is the lesser of adjusted net investment
income or 10% of statutory surplus. For a discussion of our current dividend capacity, see
Managements Discussion of Financial Condition and Results of OperationsLiquidity and Capital
Resources in Item 7 of this report.
As part of its general regulatory oversight process, the New York Insurance Department conducts
detailed examinations of the books, records and accounts of New York insurance companies every
three to five years. Navigators Insurance Company and Navigators Specialty Insurance Company were
examined for the years 2001 through 2004 by the New York Insurance Department. The New York
Insurance Department commenced an examination of the years 2005 through 2009 in January 2010.
Under insolvency or guaranty laws in most states in which Navigators Insurance Company and
Navigators Specialty Insurance Company operate, insurers doing business in those states can be
assessed up to prescribed limits for policyholder losses of insolvent insurance companies. Neither
Navigators Insurance Company nor Navigators Specialty Insurance Company was subject to any material
assessments under state insolvency or guaranty laws in the last three years.
21
The Insurance Regulatory Information System, or IRIS, was developed by the 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 thirteen 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 insurers business. As of December 31, 2009,
the results for both Navigators Insurance Company and Navigators Specialty Insurance Company were
within the usual values for all IRIS ratios.
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
companys mix of products and investment portfolio. The formula is designed to allow state
insurance regulators to identify weakly capitalized companies. Under the formula, a company
determines its risk-based capital by taking into account certain risks related to the insurers
assets (including risks related to its investment portfolio and ceded reinsurance) and the
insurers liabilities (including underwriting risks related to the nature and experience of its
insurance business). The risk-based capital rules provide for different levels of regulatory
attention depending on the ratio of a companys total adjusted capital to its authorized control
level of risk-based capital. Based on calculations made by Navigators Insurance Company and
Navigators Specialty Insurance Company, their risk-based capital levels exceed the level that would
trigger regulatory attention or company action. In their respective 2008 statutory financial
statements, Navigators Insurance Company and Navigators Specialty Insurance Company have complied
with the NAICs risk-based capital reporting requirements.
In addition to regulations applicable to insurance agents generally, Navigators Management Company,
Inc. is subject to managing general agents acts in its state of domicile and in certain other
jurisdictions where it does business.
In 2002, in response to the tightening of supply in certain insurance and reinsurance markets
resulting from, among other things, the September 11, 2001 terrorist attacks, the Terrorism Risk
Insurance Act, or TRIA, was enacted. TRIA was intended to ensure the availability of insurance
coverage for acts of terrorism (as defined) in the United States of America committed by or on
behalf of foreign persons or interests. This law established a federal program through the end of
2005 to help the commercial property and casualty insurance industry cover claims related to future
losses resulting from acts of terrorism and requires insurers to offer coverage for acts of
terrorism in all commercial property and casualty policies. As a result, we are prohibited from
adding certain terrorism exclusions to those policies written by insurers in our group that write
business in the U.S. On December 22, 2005, the Terrorism Risk Insurance Extension Act of 2005, or
TRIEA, was enacted. TRIEA extended TRIA through December 31, 2007 and made several changes in the
program, including the elimination of several previously covered lines. The deductible for each
insurer was increased to 17.5% and 20% of direct earned premiums in 2006 and 2007, respectively.
For losses in excess of an insurers deductible, the Insurance Companies will retain an additional
10% and 15% of the excess losses in 2006 and 2007, respectively, with the balance to be covered by
the Federal government up to an aggregate cap of insured losses of $25 billion in 2006 and $27.5
billion in 2007. Also, TRIEA established a new program trigger under which Federal compensation
will become available only if aggregate insured losses sustained by all insurers exceed $50 million
from a certified act of terrorism occurring after March 31, 2006 and $100 million for certified
acts occurring on or after January 1, 2007. On December 26, 2007, the Terrorism Risk Insurance
Program Reauthorization Act of 2007 (TRIPRA) was enacted. TRIPRA, among other provisions,
extends for seven years the program established under TRIA, as amended. The imposition of these
TRIA deductibles could have an adverse effect on our results of operations. Potential future
changes to TRIA, including the increases in deductibles and copays and elimination of domestic
terrorism coverage proposed by the current administration, could also adversely affect us by
causing our reinsurers to increase prices or
withdraw from certain markets where terrorism coverage is required. As a result of TRIA, we are
required to offer coverage for certain terrorism risks that we may normally exclude. Occasionally
in our marine business, such coverage falls outside of our normal reinsurance program. In such
cases, our only reinsurance would be the protection afforded by TRIA.
22
Our Lloyds Operations are subject to regulation in the United States in addition to being
regulated in the United Kingdom, as discussed below. The Lloyds market is licensed to engage in
insurance business in Illinois, Kentucky and the U.S. Virgin Islands and operates as an eligible
excess and surplus lines insurer in all states and territories except Kentucky and the U.S. Virgin
Islands. Lloyds is also an accredited reinsurer in all states and territories of the United
States. Lloyds maintains various trust funds in the state of New York to protect its United
States business and is therefore subject to regulation by the New York Insurance Department, which
acts as the domiciliary department for Lloyds U.S. trust funds. There are deposit trust funds in
other states to support Lloyds reinsurance and excess and surplus lines insurance business.
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 have been enacted) to conform portions of their insurance laws and regulations to various
model acts adopted by the NAIC. We are 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 our operations and financial condition.
United Kingdom
Our United Kingdom subsidiaries and our Lloyds Operations are subject to regulation by the FSA, as
established by the Financial Services and Markets Act 2000. Our Lloyds Operations is also subject
to supervision by the Council of Lloyds. The FSA has been granted broad authorization and
intervention powers as they relate to the operations of all insurers, including Lloyds syndicates,
operating in the United Kingdom. Lloyds is authorized by the FSA and is required to implement
certain rules prescribed by the FSA, which it does by the powers it has under the Lloyds Act 1982
relating to the operation of the Lloyds market. Lloyds prescribes, in respect of its managing
agents and corporate members, certain minimum standards relating to their management and control,
solvency and various other requirements. The FSA directly monitors Lloyds managing agents
compliance with the systems and controls prescribed by Lloyds. If it appears to the FSA that
either Lloyds is not fulfilling its delegated regulatory responsibilities, or that managing agents
are not complying with the applicable regulatory rules and guidance, the FSA may intervene at its
discretion.
We participate in the Lloyds market through our ownership of NUAL, Millennium Underwriting Ltd.
and Navigators Corporate Underwriters Ltd. NUAL is the managing agent for Syndicate 1221.
We controlled 100% of Syndicate 1221s stamp capacity for the 2009 and 2008 underwriting years through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd., and through both Millennium Underwriting Ltd., another wholly-owned subsidiary, and Navigators Corporate Underwriters Ltd. in 2007, which are referred to as corporate names in the Lloyds market.
By entering into a
membership agreement with Lloyds, Millennium Underwriting Ltd. and Navigators Corporate
Underwriters Ltd. undertake to comply with all Lloyds bye-laws and regulations as well as the
provisions of the Lloyds Acts and the Financial Services and Markets Act that are applicable to
it. The operation of Syndicate 1221, as well as Millennium Underwriting Ltd. and Navigators
Corporate Underwriters Ltd. and their respective directors, is subject to the Lloyds supervisory
regime.
Underwriting capacity of a member of Lloyds must be supported by providing a deposit (referred to
as Funds at Lloyds) in the form of cash, securities or letters of credit in an amount determined
by Lloyds equal to a specified percentage of the members underwriting capacity. The amount of such deposit
is calculated by each member through the completion of an annual capital adequacy exercise. The
results of this exercise are submitted to Lloyds for approval. Lloyds then advises the member of
the amount of deposit that is required. The consent of the Council of Lloyds may be required when
a managing agent of a syndicate proposes to increase underwriting capacity for the following
underwriting year.
23
If the managing agency concludes that an appropriate reinsurance to close for a syndicate that it
manages cannot be determined or negotiated on commercially acceptable terms in respect of a
particular underwriting year, it must determine that the underwriting year remain open and be
placed into run-off. During this period there cannot be a release of the Funds at Lloyds of a
corporate member that is a member of that syndicate without the consent of Lloyds and such consent
will only be considered where the member has surplus funds at Lloyds.
The Council of Lloyds has wide discretionary powers to regulate members underwriting at Lloyds.
It may, for instance, change the basis on which syndicate expenses are allocated or vary the Funds
at Lloyds ratio or the investment criteria applicable to the provision of Funds at Lloyds.
Exercising any of these powers might affect the return on an investment of the corporate member in
a given underwriting year. Further, it should be noted that the annual business plans of a
syndicate are subject to the review and approval of the Lloyds Franchise Board. The Lloyds
Franchise Board was formally constituted on January 1, 2003. The Franchise Board is responsible
for setting risk management and profitability targets for the Lloyds market and operates a
business planning and monitoring process for all syndicates.
Corporate members continue to have insurance obligations even after all their underwriting years
have been closed by reinsurance to close. In order to continue to perform these obligations,
corporate members are required to stay in existence; accordingly, there continues to be an
administrative and financial burden for corporate members between the time their memberships have
ceased and the time their insurance obligations are extinguished, including the completion of
financial accounts in accordance with the Companies Act 1985.
If a member of Lloyds is unable to pay its debts to policyholders, such debts may be payable by
the Lloyds Central Fund, which acts similarly to state guaranty funds in the United States. If
Lloyds determines that the Central Fund needs to be increased, it has the power to assess premium
levies on current Lloyds members. The Council of Lloyds has discretion to call or assess up to
3% of a members underwriting capacity in any one year as a Central Fund contribution.
Competition
The property and casualty insurance industry is highly competitive. We face competition from both
domestic and foreign insurers, many of whom have longer operating histories and greater financial,
marketing and management resources. Competition in the types of insurance in which we are engaged
is based on many factors, including our perceived overall financial strength, 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 we face
the risk that we will lose market share to higher rated insurers.
Another competitive factor in the industry is the entrance of other financial services providers
such as banks and brokerage firms into the insurance business. These efforts pose new challenges
to insurance companies and agents from financial services companies traditionally not involved in
the insurance business.
24
Employees
As of December 31, 2009, we had 503 full-time employees of which 408 were located in the United
States, 85 in the United Kingdom, 4 in Belgium, 3 in Sweden and 3 in Denmark.
Available Information
This report and all other filings made by the Company with the SEC pursuant to Section 13(a) or
15(d) of the Exchange Act are made available to the public by the SEC. All filings can be read and
copied at the SEC Public Reference Room, located at 100 F Street, NE, Washington, DC 20549.
Information pertaining to the operation of the Public Reference Room can be obtained by calling
1-800-SEC-0330. We are an electronic filer, so all reports, proxy and information statements, and
other information can be found at the SEC website, www.sec.gov. Our website address is
http://www.navg.com. Through our website at http://www.navg.com/finance/sec_filings.phtml, we make
available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after
such material is electronically filed with or furnished to the SEC. The annual report to
stockholders, press releases and recordings of our earnings release conference calls are also
provided on our website.
25
Item 1A. RISK FACTORS
You should carefully consider each of the risks and uncertainties described below and elsewhere in
this Annual Report on Form 10-K, as well as any amendments or updates reflected in subsequent
filings with the SEC. We believe these risks and uncertainties, individually or in the aggregate,
could cause our actual results to differ materially from expected and historical results and could
materially and adversely affect our business operations. Further, additional risks and
uncertainties not presently known to us or that we currently deem immaterial may also impair our
results and business operations.
The continuing volatility in the financial markets and the current recession could have a material
adverse effect on our results of operations and financial condition.
The financial market experienced significant volatility worldwide from the third quarter of 2008
through 2009. Although the U.S. and foreign governments have taken various actions to try to
stabilize the financial markets, it is unclear whether those actions will be effective. Therefore,
the financial market volatility and the resulting negative economic impact could continue and it is
possible that it may be prolonged.
Although we continue to monitor market conditions, we cannot predict future market conditions or
their impact on our stock price or investment portfolio. Depending on market conditions, we could
incur future additional realized and unrealized losses, which could have a material adverse effect
on our results of operations and financial condition. These economic conditions have had an adverse
impact on the availability and cost of credit resources generally, which could negatively affect
our ability to obtain letters of credit utilized by our Lloyds Operations to underwrite business
through Lloyds.
In addition, the continuing financial market volatility and economic downturn could have a material
adverse affect on our insureds, agents, claimants, reinsurers, vendors and competitors. Certain of
the actions U.S. and foreign governments have taken or may take in response to the financial market
crisis have impacted certain property and casualty insurance carriers. The U.S. and foreign
governments are actively taking steps to implement additional measures to stabilize the financial
markets and stimulate the economy, and it is possible that these measures could further affect the
property and casualty insurance industry and its competitive landscape.
Our business is concentrated in marine and energy, specialty liability and professional liability
insurance, and if market conditions change adversely, or we experience large losses in these lines,
it could have a material adverse effect on our business.
As a result of our strategy to focus on specialty products in niches where we have underwriting and
claims handling expertise and to decline business where pricing does not afford what we consider to
be acceptable returns, our business is concentrated in the marine and energy, specialty liability
and professional liability lines of business. If our results of operations from any of these lines
are less favorable for any reason, including lower demand for our products on terms and conditions
that we find appropriate, flat or decreased rates for our products or increased competition, the
reduction could have a material adverse effect on our business.
26
We are exposed to cyclicality in our business that may cause material fluctuations in our results.
The property/casualty insurance business generally, and the marine insurance business specifically,
have historically been characterized by periods of intense price competition due to excess
underwriting capacity as well as periods when shortages of underwriting capacity have permitted
attractive premium levels. We have reduced business during periods of severe competition and price
declines and grown when pricing allowed an acceptable return. We expect that our business will
continue to experience the effects of this cyclicality which, over the course of time, could result
in material fluctuations in our premium volume, revenues or expenses.
We may not be successful in developing our new specialty lines which could cause us to experience
losses.
Since 2001, we have entered into a number of new specialty lines of business, primarily
professional liability, excess casualty, primary casualty, inland marine, middle markets and
commercial automobile insurance. We continue to look for appropriate opportunities to diversify
our business portfolio by offering new lines of insurance in which we believe we have sufficient
underwriting and claims expertise. However, because of our limited history in these new lines,
there is limited financial information available to help us estimate sufficient reserve amounts for
these lines and to help evaluate whether we will be able to successfully develop these new lines or
the likely ultimate losses and expenses associated with these new lines. Due to our limited
history in these lines, we may have less experience managing their development and growth than some
of our competitors. Additionally, there is a risk that the lines of business into which we expand
will not perform at the levels we anticipate.
We may be unable to manage effectively our rapid growth in our lines of business, which may
adversely affect our results.
To control our growth effectively, we must successfully manage our new and existing lines of
business. This process will require substantial management attention and additional financial
resources. In addition, our growth is subject to, among other risks, the risk that we may
experience difficulties and incur expenses related to hiring and retaining a technically proficient
workforce. Accordingly, we may fail to realize the intended benefits of expanding into new
specialty lines and we may fail to realize value from such lines relative to the resources that we
invest in them. Any difficulties associated with expanding our current and future lines of
business could adversely affect our results of operations.
We may incur additional losses if our loss reserves are insufficient.
We maintain loss reserves to cover our estimated ultimate unpaid liability for losses and loss
adjustment expenses with respect to reported and unreported claims incurred as of the end of each
accounting period. Reserves do not represent an exact calculation of liability, but instead
represent estimates, generally utilizing actuarial projection techniques and judgment at a given
accounting date. These reserve estimates are expectations of what the ultimate settlement and
administration of claims will cost based on our assessment of facts and circumstances then known,
review of historical settlement patterns, estimates of trends in claims severity, frequency, legal
theories of liability and other factors. Both internal and external events, including changes in
claims handling procedures, economic inflation, legal trends and legislative changes, may affect
the reserve estimation process. Many of these items are not directly quantifiable, particularly on
a prospective basis. Additionally, there may be significant lags between the occurrence of the
insured event and the time it is actually reported to the insurer. We continually refine reserve
estimates in a regular ongoing process as historical loss experience develops and additional claims
are reported and settled. Adjustments to reserves are reflected in the results of the periods in
which the estimates are changed. Because establishment of reserves is an inherently uncertain
process involving estimates, currently established reserves may not be sufficient. If estimated reserves are
insufficient, we will incur additional charges to earnings.
27
Our loss reserves include amounts related to short tail and long tail classes of business. Short
tail business means that claims are generally reported quickly upon occurrence of an event, making
estimation of loss reserves less complex. For the long tail lines, significant periods of time,
ranging up to several years or more, may elapse between the occurrence of the loss, the reporting
of the loss and the settlement of the claim. The longer the time span between the incidence of a
loss and the settlement of the claim, the more likely the ultimate settlement amount will vary.
Our longer tail business includes general liability, including construction defect claims, as well
as historical claims for asbestos exposures through our marine and aviation businesses and claims
relating to our run-off businesses. Our professional liability business, though long tail with
respect to settlement period, is produced on a claims-made basis (which means that the policy
in-force at the time the claim is filed, rather than the policy in-force at the time the loss
occurred, provides coverage) and is therefore, we believe, less likely to result in a significant
time lag between the occurrence of the loss and the reporting of the loss. There can be no
assurance, however, that we will not suffer substantial adverse prior period development in our
business in the future.
In addition to loss reserves, preparation of our financial statements requires us to make many
estimates and judgments.
In addition to loss reserves discussed above, the Consolidated Financial Statements contain
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses and related disclosures. On an ongoing basis we evaluate our estimates based on
historical experience and other assumptions that we believe to be reasonable under the
circumstances. Any significant change in these estimates could adversely affect our results of
operations and/or our financial condition.
We may not have access to adequate reinsurance to protect us against losses.
We purchase reinsurance by transferring part of the risk we have assumed to a reinsurance company
in exchange for part of the premium we receive in connection with the risk. The availability and
cost of reinsurance are subject to prevailing market conditions, both in terms of price and
available capacity, which can affect our business volume and profitability. Our reinsurance
programs are generally subject to renewal on an annual basis. If we are unable to renew our
expiring facilities or to obtain new reinsurance facilities, either our net exposures would
increase, which could increase our costs, or, if we were unwilling to bear an increase in net
exposures, we would have to reduce the level of our underwriting commitments, especially
catastrophe exposed risks, which would reduce our revenues and possibly net income.
Our reinsurers, including the other participants in the marine pool, may not pay on losses in a
timely fashion, or at all, which may increase our costs.
Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or
ceded to the reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay
claims to our policyholders. Accordingly, we bear credit risk with respect to our reinsurers.
Specifically, our reinsurers may not pay claims made by us on a timely basis, or they may not pay
some or all of these claims. Either of these events would increase our costs and could have a
material adverse effect on our business.
28
The operations of the marine insurance pool also expose us to reinsurance credit risk from other participants
in the marine insurance pool on business written through the 2005 underwriting year. From 1998 through 2005,
all business underwritten by the marine insurance pool was written with Navigators Insurance Company as the
primary insurer. Navigators Insurance Company then reinsured its exposure in the marine insurance pool to
the other participants based on their percentage of participation. From 1983 until 1998,
Navigators Insurance Company was the primary insurer for some of the pool business in excess of its
participation amount. As a result of these arrangements, we remain primarily liable for claims
arising out of those policies written by Navigators Insurance Company on behalf of the marine insurance pool
even if one or more of the other participants do not pay the claims they reinsured, which could
have a material adverse effect on our business. The marine insurance pool was eliminated beginning with the
2006 underwriting year.
Intense competition for our products could harm our ability to maintain or increase our
profitability and premium volume.
The property and casualty insurance industry is highly competitive. We face competition from both
domestic and foreign insurers, many of whom have longer operating histories and greater financial,
marketing and management resources. Competition in the types of insurance in which we are engaged
is based on many factors, including our perceived overall financial strength, 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 we face
the risk that we will lose market share to higher rated insurers.
We may have difficulty in continuing to compete successfully on any of these bases in the future.
If competition limits our ability to write new business at adequate rates, our ability to transact
business would be materially and adversely affected and our results of operations would be
adversely affected.
We may be unable to attract and retain qualified employees.
We depend on our ability to attract and retain qualified executive officers, experienced
underwriters and claims professionals and other skilled employees who are knowledgeable about our
specialty lines of business. If the quality of our executive officers, underwriting or claims team
and other personnel decreases, we may be unable to maintain our current competitive position in the
specialty markets in which we operate and be unable to expand our operations into new specialty
markets.
Increases in interest rates may cause us to experience losses.
Because of the unpredictable nature of losses that may arise under insurance policies, we may
require substantial liquidity at any time. Our investment portfolio, which consists largely of
fixed-income investments, is our principal source of liquidity. The market value of our
fixed-income investments is subject to fluctuation depending on changes in prevailing interest
rates and various other factors. We do not hedge our investment portfolio against interest rate
risk. Increases in interest rates during periods when we must sell fixed-income securities to
satisfy liquidity needs may result in realized investment losses.
Our investment portfolio is subject to certain risks that could adversely affect our results of
operations and/or financial condition.
Although our investment policy guidelines emphasize total investment return in the context of
preserving and enhancing shareholder value and statutory surplus of the insurance subsidiaries, our
investments are subject to market-wide risks and fluctuations, as well as to risks inherent in
particular types of securities. Due to these risks we may not be able to realize our investment
objectives. In addition, we may be forced to liquidate investments at times and prices that are not optimal, which could have an adverse
affect on our results of operations. Investment losses could significantly decrease our asset
base, thereby adversely affecting our ability to conduct business and pay claims.
29
We are exposed to significant capital market risks related to changes in interest rates, credit
spreads, equity prices and foreign exchange rates which may adversely affect our results of
operations, financial condition or cash flows.
We are exposed to significant capital markets risk related to changes in interest rates, credit
spreads, equity prices and foreign currency exchange rates. If significant, declines in equity
prices, changes in interest rates, changes in credit spreads and the strengthening or weakening of
foreign currencies against the U.S. dollar, individually or in tandem, could have a material
adverse effect on our consolidated results of operations, financial condition or cash flows.
Our exposure to interest rate risk relates primarily to the market price and cash flow variability
associated with changes in interest rates. Our investment portfolio contains interest rate
sensitive instruments, such as fixed income securities, which may be adversely affected by changes
in interest rates from governmental monetary policies, domestic and international economic and
political conditions and other factors beyond our control. A rise in interest rates would reduce
the fair value of our investment portfolio. It would also provide the opportunity to earn higher
rates of return on funds reinvested. Conversely, a decline in interest rates would increase the
fair value of our investment portfolio. We would then presumably earn lower rates of return on
assets reinvested. We may be forced to liquidate investments prior to maturity at a loss in order
to cover liabilities. Although we take measures to manage the economic risks of investing in a
changing interest rate environment, we may not be able to mitigate the interest rate risk of our
assets relative to our liabilities.
Included in our fixed income securities are asset-backed and mortgage-backed securities. Changes
in interest rates can expose us to prepayment risks on these investments. In periods of declining
interest rates, mortgage prepayments generally increase and mortgage-backed securities are prepaid
more quickly, requiring us to reinvest the proceeds at the then current rates.
Our fixed income portfolio is invested in high quality, investment-grade securities. However, we
are permitted to invest up to 5% of our book value in below investment-grade high yield fixed
income securities. These securities, which pay a higher rate of interest, also have a higher
degree of credit or default risk. These securities may also be less liquid in times of economic
weakness or market disruptions. While we have put in place procedures to monitor the credit risk
and liquidity of our invested assets, it is possible that, in periods of economic weakness, we may
experience default losses in our portfolio. This may result in a reduction of net income, capital
and cash flows.
We invest a portion of our portfolio in common stock or preferred stocks. The value of these
assets fluctuates with the equity markets. In times of economic weakness, the market value and
liquidity of these assets may decline, and may impact net income, capital and cash flows.
The functional currencies of the Companys principal insurance and reinsurance subsidiaries are the
U.S. dollar, U.K. pound and the Canadian dollar. Exchange rate fluctuations relative to the
functional currencies may materially impact our financial position. Certain of our subsidiaries
maintain both assets and liabilities in currencies different than their functional currency, which
exposes us to changes in currency exchange rates. In addition, locally-required capital levels are
invested in local currencies in order to satisfy regulatory requirements and to support local
insurance operations regardless of currency fluctuations.
30
Despite our mitigation efforts, an increase in interest rates could have a material adverse effect
on our book value.
Capital may not be available in the future, or available on unfavorable terms.
The capital needs of our business are dependent on several factors, including our ability to write
new business successfully and to establish premium rates and reserves at levels sufficient to cover
our losses. If our current capital becomes insufficient for our future plans, we may need to raise
additional capital through the issuance of stock or debt. Otherwise, in the case of insufficient
capital, we may need to limit our growth. The terms of an equity or debt offering could be
unfavorable, for example, causing dilution to our current shareholders or such securities may have
rights, preferences and privileges that are senior to our existing securities. If we were in a
situation of having inadequate capital and if we were not able to obtain additional capital, our
business, results of operations and financial condition could be adversely affected.
A downgrade in our ratings could adversely impact the competitive positions of our operating
businesses.
Ratings are a critical factor in establishing the competitive position of insurance companies. The
Insurance Companies are rated by A.M. Best and S&P. A.M. Bests and S&Ps ratings reflect their
opinions of an insurance companys financial strength, operating performance, strategic position
and ability to meet its obligations to policyholders, and are not evaluations directed to
investors. Our ratings are subject to periodic review by A.M. Best and S&P. Because these ratings
have become an increasingly important factor in establishing the competitive position of insurance
companies, if these ratings are reduced, our competitive position in the industry, and therefore
our business, could be adversely affected. A significant downgrade could result in a substantial
loss of business as policyholders might move to other companies with higher ratings. There can be
no assurance that our current ratings will continue for any given period of time. For a further
discussion of our ratings, see Business Ratings included herein.
Continued or increased premium levies by Lloyds for the Lloyds Central Fund and cash calls for
trust fund deposits or a significant downgrade of Lloyds A.M. Best rating could materially and
adversely affect us.
The Lloyds Central Fund protects Lloyds policyholders against the failure of a member of Lloyds
to meet its obligations. The Central Fund is a mechanism which in effect mutualizes unpaid
liabilities among all members, whether individual or corporate. The fund is available to back
Lloyds policies issued after 1992. Lloyds requires members to contribute to the Central Fund,
normally in the form of an annual contribution, although a special contribution may be levied. The
Council of Lloyds has discretion to call up to 3% of underwriting capacity in any one year.
Policies issued before 1993 have been reinsured by Equitas, an independent insurance company
authorized by the Financial Services Authority. However, if Equitas were to fail or otherwise be
unable to meet all of its obligations, Lloyds may take the view that it is appropriate to apply
the Central Fund to discharge those liabilities Equitas failed to meet. In that case, the Council
of Lloyds may resolve to impose a special or additional levy on the existing members, including
Lloyds corporate members, to satisfy those liabilities.
Additionally, Lloyds insurance and reinsurance business is subject to local regulation, and
regulators in the United States require Lloyds to maintain certain minimum deposits in trust funds
as protection for policyholders in the United States. These deposits may be used to cover
liabilities in the event of a major
claim arising in the United States and Lloyds may require us to satisfy cash calls to meet claims
payment obligations and maintain minimum trust fund amounts.
31
Any premium levy or cash call would increase the expenses of Millennium Underwriting Ltd. and
Navigators Corporate Underwriters Ltd., our corporate members, without providing compensating
revenues, and could have a material adverse effect on our results.
We believe that in the event that Lloyds rating is downgraded, the downgrade could have a material
adverse effect on our ability to underwrite business through our Lloyds Operations and therefore
on our financial condition or results of operations.
Our businesses are heavily regulated, and changes in regulation may reduce our profitability and
limit our growth.
Our insurance subsidiaries are subject to extensive regulation and supervision in the jurisdictions
in which they conduct business. This regulation is generally designed to protect the interests of
policyholders, as opposed to insurers and their stockholders and other investors, and relates to
authorization for lines of business, capital and surplus requirements, investment limitations,
underwriting limitations, transactions with affiliates, dividend limitations, changes in control,
premium rates and a variety of other financial and non-financial components of an insurance
companys business.
Virtually all states require insurers licensed to do business in that state to bear a portion of
the loss suffered by some insureds as the result of impaired or insolvent insurance companies. The
effect of these arrangements could reduce our profitability in any given period or limit our
ability to grow our business.
In recent years, the state insurance regulatory framework has come under increased federal
scrutiny, and some state legislatures have considered or enacted laws that may alter or increase
state authority to regulate insurance companies and insurance holding companies. Further, the NAIC
and state insurance regulators are re-examining existing laws and regulations, specifically
focusing on modifications to holding company regulations, interpretations of existing laws and the
development of new laws. Any proposed or future legislation or NAIC initiatives may be more
restrictive than current regulatory requirements or may result in higher costs.
In response to the September 11, 2001 terrorist attacks, the United States Congress has enacted
legislation designed to ensure, among other things, the availability of insurance coverage for
terrorist acts, including the requirement that insurers provide such coverage in certain
circumstances. See Business Regulation United States included herein for a discussion of the
TRIA, TRIEA and TRIPRA legislation.
32
The inability of our subsidiaries to pay dividends to us in sufficient amounts would harm our
ability to meet our obligations.
The Parent Company is a holding company and relies primarily on dividends from our subsidiaries to
meet our obligations for payment of interest and principal on outstanding debt obligations and
corporate expenses. The ability of our insurance subsidiaries to pay dividends to the Parent
Company in the future will depend on their statutory surplus, on earnings and on regulatory
restrictions. For a discussion of our insurance subsidiaries current dividend-paying ability,
please see Managements Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital Resources, included
herein. The Parent Company and our underwriting subsidiaries are subject to regulation by some
states as an insurance holding company. Such regulation generally provides that transactions
between companies within our consolidated group must be fair and equitable. Transfers of assets
among affiliated companies, certain dividend payments from underwriting subsidiaries and certain
material transactions between companies within our consolidated group may be subject to prior
notice to, or prior approval by, state regulatory authorities. Our underwriting subsidiaries are
also subject to licensing and supervision by government regulatory agencies in the jurisdictions in
which they do business. These regulations may set standards of solvency that must be met and
maintained, such as the nature of and limitations on investments, the nature of and limitations on
dividends to policyholders and stockholders and the nature and extent of required participation in
insurance guaranty funds. These regulations may affect our subsidiaries ability to provide us
with dividends.
Catastrophe losses could materially reduce our profitability.
We are exposed to claims arising out of catastrophes, particularly in our marine insurance line of
business and our NavTech business. We have experienced, and will experience in the future,
catastrophe losses which may materially reduce our profitability or harm our financial condition.
Catastrophes can be caused by various natural events, including hurricanes, windstorms,
earthquakes, hail, severe winter weather and fires. Catastrophes can also be man-made, such as the
World Trade Center attack. The incidence and severity of catastrophes are inherently
unpredictable. Although we will attempt to manage our exposure to such events, the frequency and
severity of catastrophic events could exceed our estimates, which could have a material adverse
effect on our financial condition.
The market price of Navigators common stock may be volatile.
There has been significant volatility in the market for equity securities. The price of Navigators
common stock may not remain at or exceed current levels. In addition to the other risk factors
detailed herein, the following factors may have an adverse impact on the market price of Navigators
common stock:
|
|
|
actual or anticipated variations in our quarterly results of operations, including the
result of catastrophes, |
|
|
|
changes in market valuations of companies in the insurance and reinsurance industry, |
|
|
|
changes in expectations of future financial performance or changes in estimates of
securities analysts, |
|
|
|
issuances of common shares or other securities in the future, |
|
|
|
the addition or departure of key personnel, and |
|
|
|
announcements by us or our competitors of acquisitions, investments or strategic
alliances. |
Stock markets in the United States often experience price and volume fluctuations. Market
fluctuations, as well as general political and economic conditions such as recession or interest
rate or currency rate fluctuations, could adversely affect the market price of Navigators common
stock.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
33
Item 2. PROPERTIES
Our executive and administrative office is located at 6 International Drive in Rye Brook, NY. Our
lease for this space expires in February 2014. Our underwriting operations are in various
locations with non-cancelable operating leases including Charlotte, NC, Chicago, IL, Coral Gables,
FL, Corona, CA, Houston, TX, Irvine, CA, New York City, NY, Philadelphia, PA, Pittsburgh, PA,
San Francisco, CA, Schaumburg, IL, Seattle, WA, London, England, Antwerp, Belgium, Stockholm,
Sweden and Copenhagen, Denmark.
Item 3. LEGAL PROCEEDINGS
We are working with various state insurance regulators on a matter involving
administrative fees charged by a program administrator on certain personal umbrella
insurance policies underwritten by Navigators Insurance Company that were outside of
Navigators Insurance Companys filed rates and forms. Following discovery of the issue,
Navigators Insurance Company approached regulators in the affected states to resolve
these matters, and is currently making refunds to policyholders for policy fees collected
from the time of discovery of the issue that did not comply with Navigators filed rates.
In addition, Navigators Insurance Company has terminated its relationship with the
program administrator effective August 1, 2009 and has ensured that fees will not be
collected on any policies going forward unless such fees are permitted by each state in
which they are charged. Other operating expenses for the second quarter 2009 include a
$1.3 million charge related to this matter. Navigators Insurance Company may be subject
to additional fines, refund obligations and other exposure with respect to the past fees
charged. We cannot at this time reasonably estimate the additional cost of resolving
this matter. However, we do not expect that it will have a material adverse effect on
our financial condition or results of operations.
Our subsidiaries are subject to disputes, including litigation and arbitration, arising
in the ordinary course of their insurance businesses, including claims asserting extra
contractual obligations in connection with the underwriting of policies and handling of
claims. Our estimates of the costs of settling such matters are reflected in its
aggregate reserves for losses and loss expenses, and we do not believe that the ultimate
outcome of such matters will have a material adverse effect on our financial condition or
results of operations.
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 2009.
34
Part II
Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Companys common stock is traded over-the-counter on NASDAQ 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, low and closing trade prices for the four quarters of 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
High |
|
|
Low |
|
|
Close |
|
|
High |
|
|
Low |
|
|
Close |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
57.58 |
|
|
$ |
45.30 |
|
|
$ |
47.18 |
|
|
$ |
65.01 |
|
|
$ |
50.91 |
|
|
$ |
54.40 |
|
Second Quarter |
|
$ |
49.75 |
|
|
$ |
42.80 |
|
|
$ |
44.43 |
|
|
$ |
56.99 |
|
|
$ |
47.23 |
|
|
$ |
54.05 |
|
Third Quarter |
|
$ |
56.29 |
|
|
$ |
43.59 |
|
|
$ |
55.00 |
|
|
$ |
66.74 |
|
|
$ |
43.46 |
|
|
$ |
58.00 |
|
Fourth Quarter |
|
$ |
57.64 |
|
|
$ |
45.83 |
|
|
$ |
47.11 |
|
|
$ |
60.50 |
|
|
$ |
39.29 |
|
|
$ |
54.91 |
|
Information provided to us by our transfer agent and proxy solicitor indicates that there are
approximately 321 holders of record and 4,142 beneficial holders of our common stock.
35
Five Year Stock Performance Graph
The Five Year Stock Performance Graph and related Cumulative Indexed Returns table, as
presented below, which were prepared with the aid of S&P, reflects the cumulative return on the
Companys common stock, the S&P 500 Index and the Insurance Index assuming an original investment
in each of $100 on December 31, 2004 (the Base Period) and reinvestment of dividends to the
extent declared. Cumulative returns for each year subsequent to 2004 are measured as a change
from this Base Period.
The comparison of five year cumulative returns among the Company, the companies listed in the
Standard & Poors 500 Index (S&P 500 Index) and the S&P Property & Casualty Insurance Index (the
Insurance Index) is as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base |
|
|
Cumulative Indexed Returns |
|
|
|
Period |
|
|
Years Ending December 31, |
|
Company / Index |
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Navigators Group, Inc. |
|
|
100 |
|
|
|
144.84 |
|
|
|
160.01 |
|
|
|
215.88 |
|
|
|
182.36 |
|
|
|
156.45 |
|
S&P 500 Index |
|
|
100 |
|
|
|
104.91 |
|
|
|
121.48 |
|
|
|
128.16 |
|
|
|
80.74 |
|
|
|
102.11 |
|
S&P 500 Property &
Casualty Insurance |
|
|
100 |
|
|
|
115.11 |
|
|
|
129.93 |
|
|
|
111.79 |
|
|
|
78.91 |
|
|
|
88.55 |
|
36
The following Annual Return Percentage table reflects the
annual return on the Companys common stock, the S&P 500 Index and the Insurance Index including
reinvestment of dividends to the extent declared.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Return Percentage |
|
|
|
Years Ending December 31, |
|
Company / Index |
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Navigators Group, Inc. |
|
|
44.84 |
|
|
|
10.48 |
|
|
|
34.91 |
|
|
|
-15.52 |
|
|
|
-14.21 |
|
S&P 500 Index |
|
|
4.91 |
|
|
|
15.79 |
|
|
|
5.49 |
|
|
|
-37.00 |
|
|
|
26.46 |
|
S&P 500 Property & Casualty Insurance |
|
|
15.11 |
|
|
|
12.87 |
|
|
|
-13.96 |
|
|
|
-29.41 |
|
|
|
12.21 |
|
Dividends
We have not paid or declared any cash dividends on our common stock. While there presently is no intention to pay
cash dividends on the common stock, future declarations, if any, are at the discretion of our Board of Directors and the
amounts of such dividends will be dependent upon, among other factors, our results of operations and cash flow, financial
condition and business needs, restrictive covenants under our credit facility, the capital and surplus requirements of our subsidiaries and
applicable government regulations.
Recent Sales of Unregistered Securities
None
Use of Proceeds from Public Offering of Debt Securities
None
Purchases of Equity Securities by the Issuer
In November 2009, the Companys Board of Directors adopted a stock repurchase program for up to $35
million of our common stock through December 31, 2010. Purchases are permitted from time to time
at prevailing prices in open market or privately negotiated transactions. The timing and amount of
purchases under the program depend on a variety of factors, including the trading price of the
stock, market conditions and corporate and regulatory considerations. Through December 31, 2009,
we purchased 141,576 shares of our common stock at an aggregate cost of $6.8 million. From January
1, 2010 through February 22, 2010, the Parent Company purchased an additional 300,000 shares of its
common stock in the open market at an aggregate cost of $13.0 million.
In October 2007, the Companys Board of Directors adopted a stock repurchase program for up to $30
million of the Companys common stock. Purchases were made from time to time at prevailing prices
in open market or privately negotiated transactions through the expiration of the program on
December 31, 2008. The timing and amount of purchases under the program were dependent on a
variety of factors, including the trading price of the stock, market conditions and corporate and
regulatory considerations. In total, we purchased 224,754 shares of our common stock at an
aggregate cost of $11.5 million.
37
The following table summarizes the Parent Companys purchases of its common stock during
2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Dollar Value |
|
|
|
Total |
|
|
|
|
|
|
Purchased |
|
|
of Shares that |
|
|
|
Number |
|
|
Average |
|
|
Under Publicly |
|
|
May Yet Be |
|
|
|
of Shares |
|
|
Cost Paid |
|
|
Announced |
|
|
Purchased Under |
|
|
|
Purchased |
|
|
Per Share |
|
|
Program |
|
|
the Program (1) |
|
|
|
($ in thousands, except per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,000 |
|
February 2008 |
|
|
30,202 |
|
|
$ |
54.66 |
|
|
|
30,202 |
|
|
$ |
28,349 |
|
March 2008 |
|
|
105,824 |
|
|
$ |
53.58 |
|
|
|
105,824 |
|
|
$ |
22,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal first quarter |
|
|
136,026 |
|
|
$ |
53.82 |
|
|
|
136,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2008 |
|
|
50,000 |
|
|
$ |
49.90 |
|
|
|
50,000 |
|
|
$ |
20,184 |
|
May 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,184 |
|
June 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal second quarter |
|
|
50,000 |
|
|
$ |
49.90 |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2008 |
|
|
38,728 |
|
|
$ |
44.51 |
|
|
|
38,728 |
|
|
$ |
18,460 |
|
August 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal third quarter |
|
|
38,728 |
|
|
$ |
44.51 |
|
|
|
38,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total December 31, 2008 |
|
|
224,754 |
|
|
$ |
51.34 |
|
|
|
224,754 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Balance as of the end of the month indicated. The stock repurchase program adopted in October
2007 for up to $30 million expired on December 31, 2008. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Dollar Value |
|
|
|
Total |
|
|
|
|
|
|
Purchased |
|
|
of Shares that |
|
|
|
Number |
|
|
Average |
|
|
Under Publicly |
|
|
May Yet Be |
|
|
|
of Shares |
|
|
Cost Paid |
|
|
Announced |
|
|
Purchased Under |
|
|
|
Purchased |
|
|
Per Share |
|
|
Program |
|
|
the Program (1) |
|
|
|
($ in thousands, except per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,000 |
|
November 2009 |
|
|
29,021 |
|
|
$ |
47.30 |
|
|
|
29,021 |
|
|
$ |
33,627 |
|
December 2009 |
|
|
112,555 |
|
|
$ |
47.83 |
|
|
|
112,555 |
|
|
$ |
28,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal fourth quarter |
|
|
141,576 |
|
|
$ |
47.72 |
|
|
|
141,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total December 31, 2009 |
|
|
141,576 |
|
|
$ |
47.72 |
|
|
|
141,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Balance as of the end of the month indicated. |
38
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data including consolidated
financial information of the Company for each of the last five calendar years, derived from the
Companys audited Consolidated Financial Statements. You should read the table in conjunction with
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations,
and Item 8, Financial Statements and Supplementary Data, included herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
($ in thousands, except per share data) |
|
Operating Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
1,044,918 |
|
|
$ |
1,084,922 |
|
|
$ |
1,070,707 |
|
|
$ |
970,790 |
|
|
$ |
779,579 |
|
Net written premiums |
|
|
701,255 |
|
|
|
661,615 |
|
|
|
645,796 |
|
|
|
520,807 |
|
|
|
380,659 |
|
Net earned premiums |
|
|
683,363 |
|
|
|
643,976 |
|
|
|
601,977 |
|
|
|
468,323 |
|
|
|
338,551 |
|
Net investment income |
|
|
75,512 |
|
|
|
76,554 |
|
|
|
70,662 |
|
|
|
56,895 |
|
|
|
37,069 |
|
Net realized gains (losses) (1) |
|
|
(2,660 |
) |
|
|
(38,299 |
) |
|
|
2,006 |
|
|
|
(1,026 |
) |
|
|
1,238 |
|
Total revenues |
|
|
762,880 |
|
|
|
683,666 |
|
|
|
676,659 |
|
|
|
526,594 |
|
|
|
385,219 |
|
Income before income taxes |
|
|
86,848 |
|
|
|
68,731 |
|
|
|
139,182 |
|
|
|
106,617 |
|
|
|
33,754 |
|
Net income |
|
|
63,158 |
|
|
|
51,692 |
|
|
|
95,620 |
|
|
|
72,563 |
|
|
|
23,564 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.73 |
|
|
$ |
3.08 |
|
|
$ |
5.69 |
|
|
$ |
4.34 |
|
|
$ |
1.74 |
|
Diluted |
|
$ |
3.65 |
|
|
$ |
3.04 |
|
|
$ |
5.62 |
|
|
$ |
4.30 |
|
|
$ |
1.73 |
|
Average common shares outstanding (000s): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
16,935 |
|
|
|
16,802 |
|
|
|
16,812 |
|
|
|
16,722 |
|
|
|
13,528 |
|
Diluted |
|
|
17,322 |
|
|
|
16,992 |
|
|
|
17,005 |
|
|
|
16,856 |
|
|
|
13,657 |
|
Combined loss & expense ratio (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio |
|
|
63.8 |
% |
|
|
61.0 |
% |
|
|
56.6 |
% |
|
|
57.7 |
% |
|
|
69.6 |
% |
Expense ratio |
|
|
33.4 |
% |
|
|
32.8 |
% |
|
|
30.9 |
% |
|
|
30.1 |
% |
|
|
31.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
97.2 |
% |
|
|
93.8 |
% |
|
|
87.5 |
% |
|
|
87.8 |
% |
|
|
101.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet information
(at end of year): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments and cash |
|
$ |
2,056,587 |
|
|
$ |
1,917,715 |
|
|
$ |
1,767,301 |
|
|
$ |
1,475,910 |
|
|
$ |
1,182,236 |
|
Total assets |
|
|
3,453,994 |
|
|
|
3,349,580 |
|
|
|
3,143,771 |
|
|
|
2,956,686 |
|
|
|
2,583,249 |
|
Gross losses and LAE reserves |
|
|
1,920,286 |
|
|
|
1,853,664 |
|
|
|
1,648,764 |
|
|
|
1,607,555 |
|
|
|
1,557,991 |
|
Net losses and LAE reserves |
|
|
1,112,934 |
|
|
|
999,871 |
|
|
|
847,303 |
|
|
|
696,116 |
|
|
|
578,976 |
|
Senior notes |
|
|
114,010 |
|
|
|
123,794 |
|
|
|
123,673 |
|
|
|
123,560 |
|
|
|
|
|
Stockholders equity |
|
|
801,519 |
|
|
|
689,317 |
|
|
|
662,106 |
|
|
|
551,343 |
|
|
|
470,238 |
|
Common shares outstanding (000s) |
|
|
16,846 |
|
|
|
16,856 |
|
|
|
16,873 |
|
|
|
16,736 |
|
|
|
16,617 |
|
Book value per share (3) |
|
$ |
47.58 |
|
|
$ |
40.89 |
|
|
$ |
39.24 |
|
|
$ |
32.94 |
|
|
$ |
28.30 |
|
Statutory surplus of Navigators
Insurance Company |
|
$ |
645,820 |
|
|
$ |
581,166 |
|
|
$ |
578,668 |
|
|
$ |
524,188 |
|
|
$ |
356,484 |
|
|
|
|
(1) |
|
Includes Net other-than-temporary impairment losses recognized in earnings. |
|
(2) |
|
Calculated based on earned premiums. |
|
(3) |
|
Calculated as stockholders equity divided by actual shares outstanding as of the date indicated. |
39
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our Consolidated Financial Statements and accompanying notes which
appear elsewhere in this Form 10-K. It contains forward-looking statements that involve risks and
uncertainties. Please see Note on Forward-Looking Statements and Risk Factors for more
information. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those discussed below and
elsewhere in this Form 10-K.
Overview
We are an international insurance company focusing on specialty products within the overall
property/casualty insurance market. Our largest product line and most long-standing area of
specialization is ocean marine insurance. We have also developed specialty niches in professional
liability insurance and in specialty liability insurance primarily consisting of contractors
liability and primary and excess casualty coverages.
Our revenue is primarily comprised of premiums and investment income. We derive our premiums
primarily from business written by wholly-owned underwriting management companies which produce,
manage and underwrite insurance and reinsurance for us. Our products are distributed through
multiple channels, utilizing global, national and regional retail and wholesale insurance brokers.
We conduct operations through our Insurance Companies and our Lloyds Operations segments. The
Insurance Companies segment consists of Navigators Insurance Company, which includes a United
Kingdom Branch (the U.K. Branch), and Navigators Specialty Insurance Company, which underwrites
specialty and professional liability insurance on an excess and surplus lines basis. All of the
insurance business written by Navigators Specialty Insurance Company is fully reinsured by
Navigators Insurance Company pursuant to a 100% quota share reinsurance agreement. Our Lloyds
Operations segment includes Navigators Underwriting Agency Ltd. (NUAL), a Lloyds of London
(Lloyds) underwriting agency which manages Lloyds Syndicate 1221 (Syndicate 1221). Our
Lloyds Operations primarily underwrite marine and related lines of business along with offshore
energy, professional liability insurance and construction coverages for onshore energy business at
Lloyds through Syndicate 1221. We controlled 100% of Syndicate 1221s stamp capacity for the 2009
and 2008 underwriting years through our wholly-owned subsidiary, Navigators Corporate Underwriters
Ltd., and through both Millennium Underwriting Ltd., another wholly-owned subsidiary, and
Navigators Corporate Underwriters Ltd. in 2007, which are referred to as corporate names in the
Lloyds market. We have also established underwriting agencies in Antwerp, Belgium, Stockholm,
Sweden and Copenhagen, Denmark, which underwrite risks pursuant to binding authorities with NUAL
into Syndicate 1221.
Effective in 2009, we reclassified certain business lines within our segments, which had no effect
on the segment classifications of the Insurance Companies and Lloyds Operations. Underwriting data
for prior periods has been reclassified to reflect these changes.
|
|
|
The offshore energy business, formerly included in the Marine and Energy businesses of
the Insurance Companies and Lloyds Operations, is now included in the Insurance Companies
and Lloyds Operations Property Casualty businesses. |
|
|
|
The marine lines within both the Insurance Companies and Lloyds Operations are now
presented as Marine instead of Marine and Energy, since the offshore energy business
has now been reclassified to Property Casualty. |
|
|
|
Engineering and construction, European Property and other run-off business, formerly
included in the Other category of business within the Insurance Companies and Lloyds
Operations, are now included under Property Casualty. |
|
|
|
The Middle Markets business, formerly broken out separately in the Insurance
Companies, is now included in the Insurance Companies Property Casualty business. |
40
While management takes into consideration a wide range of factors in planning our business strategy
and evaluating results of operations, there are certain factors that management believes are
fundamental to understanding how we are managed. First, underwriting profit is consistently
emphasized as a primary goal, above premium growth. Managements assessment of our trends and
potential growth in underwriting profit is the dominant factor in its decisions with respect to
whether or not to expand a business line, enter into a new niche, product or territory or,
conversely, to contract capacity in any business line. In addition, management focuses on
controlling the costs of our operations. Management believes that careful monitoring of the costs
of existing operations and assessment of costs of potential growth opportunities are important to
our profitability. Access to capital also has a significant impact on managements outlook for our
operations. The Insurance Companies operations and ability to grow their business and take
advantage of market opportunities are constrained by regulatory capital requirements and rating
agency assessments of capital adequacy.
Managements decisions are also greatly influenced by access to specialized underwriting and claims
expertise in our lines of business. We have chosen to operate in specialty niches with certain
common characteristics which we believe provide us with the opportunity to use our technical
underwriting expertise in order to realize underwriting profit. As a result, we have focused on
underserved markets for businesses characterized by higher severity and low frequency of loss where
we believe our intellectual capital and financial strength bring meaningful value. In contrast, we
have avoided niches that we believe have a high frequency of loss activity and/or are subject to a
high level of regulatory requirements, such as workers compensation and personal automobile
insurance, because we do not believe our technical expertise is of as much value in these types of
businesses. Examples of niches that have the characteristics we look for include bluewater hull
which provides coverage for physical damage to, for example, highly valued cruise ships, and
directors and officers liability (D&O) insurance which covers litigation exposure of a
corporations directors and officers. These types of exposures require substantial technical
expertise. We attempt to mitigate the financial impact of severe claims on our results by
conservative and detailed underwriting, prudent use of reinsurance and a balanced portfolio of
risks.
Our total gross written premiums declined 4% in 2009 primarily due to several factors:
|
|
|
Our construction liability lines decreased 39% due to both a decline in demand resulting
from current economic conditions as well as increased competition due to new entrants into
the market. |
|
|
|
A 24% decline in our offshore energy lines primarily resulting from a planned reduction
in our Gulf of Mexico exposure as market pricing and terms did not meet our underwriting
standards. |
Partially offsetting these factors were:
|
|
|
A 39% increase in our D&O insurance lines due to continued expansion of this business. |
|
|
|
Improved pricing conditions across the majority of our lines of business, resulting in
an overall 4% increase in average renewal rates. Pricing conditions have stabilized after
experiencing declines across all of our lines in 2008 and were driven by a flight to
quality after the market turmoil at the end of 2008. |
In 2009, we decreased our use of quota share reinsurance and expanded our use of excess-of-loss
reinsurance. This change in the mix of our reinsurance resulted in an increase in our retention in
2009, which translated into higher net written premiums and net earned premiums in 2009 compared to
2008.
Our net investment income declined 1% in 2009. Our pre-tax average investment yield declined to
3.8% from 4.1% in 2008 resulting from lower short-term yields. Our total investment portfolio
continued to increase in 2009 and had exceeded $2 billion at the end of 2009. We experienced
significantly lower investment impairments in our portfolio in 2009 as the financial markets
experienced a period of stability compared to the second half of 2008.
41
Our overall loss ratio of 63.8% for 2009 increased compared to 2008 due primarily to a $42 million
decline in net prior year savings. Although we continued to realize prior year savings in our
contractors liability lines, we experienced unfavorable prior year development in our D&O and
lawyers lines relating to unfavorable development in the 2006 and 2005 through 2008 underwriting
years, respectively. Additional unfavorable prior year development in our Insurance Company marine
liability lines resulted in a 2009 underwriting loss in both the Marine and Professional Liability
divisions within the Insurance Companies segment.
The discussions that follow include tables that contain both our consolidated and segment operating
results for the last three calendar years. In presenting our financial results, we have discussed
our performance with reference to underwriting profit or loss and the related combined ratio, both
of which are non-GAAP measures of underwriting profitability. We consider such measures, which may
be defined differently by other companies, to be important in the understanding of our overall
results of operations. Underwriting profit or loss is calculated from net earned premium, less the
sum of net losses and LAE, commission expense, other operating expenses and commission income and
other income (expense). The combined ratio is derived by dividing the sum of net losses and LAE,
commission expense, other operating expenses and commission income and other income (expense) by
net earned premium. A combined ratio of less than 100% indicates an underwriting profit and over
100% indicates an underwriting loss.
For additional information regarding our business, see BusinessOverview, included herein.
Critical Accounting Policies
It is important to understand our accounting policies in order to understand our financial
statements. Management considers certain of these policies to be critical to the presentation of
the financial results, since they require management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses,
and related disclosures at the financial reporting date and throughout the reporting period.
Certain of the estimates result from judgments that can be subjective and complex and,
consequently, actual results may differ from these estimates, which would be reflected in future
periods.
Our most critical accounting policies involve the reporting of the reserves for losses and LAE
(including losses that have occurred but were not reported to us by the financial reporting date),
reinsurance recoverables, written and unearned premium, the recoverability of deferred tax assets,
the impairment of investment securities and accounting for Lloyds results.
Reserves for Losses and Loss Adjustment Expenses
Reserves for losses and loss adjustment expenses represent an estimate of the expected cost of the
ultimate settlement and administration of losses, based on facts and circumstances then known.
Actuarial methodologies are employed to assist in establishing such estimates and include judgments
relative to estimates of future claims severity and frequency, length of time to develop to
ultimate, judicial theories of liability and other third party factors which are often beyond our
control. No assurance can be given that actual claims made and related payments will not be in
excess of the amounts reserved. During the loss settlement period, it often becomes necessary to
refine and adjust the estimates of liability on a claim either upward or downward. Even after such
adjustments, ultimate liability may exceed or be less than the revised estimates.
The numerous factors that contribute to the inherent uncertainty in the process of establishing
loss reserves include: interpreting loss development activity, emerging economic and social trends,
inflation, changes in the regulatory and judicial environment and changes in our operations,
including changes in underwriting standards and claims handling procedures. The process of
establishing loss reserves is complex and imprecise as it must take into account many variables
that are subject to the outcome of future events. As a result, informed subjective judgments as to
our ultimate exposure to losses are an integral component of our loss reserving process.
42
Our actuaries generally calculate the IBNR loss reserves for each line of business by underwriting
year for major products principally using two standard actuarial methodologies which are projection
or extrapolation techniques: the loss ratio method and the Bornheutter-Ferguson method. The loss
ratio method is used to calculate the IBNR for the two most current underwriting years while the
Bornheutter-Ferguson method is used to calculate the IBNR for all prior underwriting years, except
as otherwise described below. Such methodologies are supplemented in most instances by the loss
development method and the frequency/severity method which are used to analyze and better
comprehend loss development patterns and trends in the data when making selections and judgments
under the loss ratio method and the Bornheutter-Ferguson method. In utilizing these methodologies,
each of which is generally applicable to both long tail and short tail lines of business and all of
which are described below, to develop our IBNR loss reserves, a key objective of our actuaries is
to identify aberrations and systemic changes occurring within historical experience and accurately
adjust for them so that the future can be projected more reliably. This process requires the
substantial use of informed judgment and is inherently uncertain.
There are instances in which facts and circumstances require a deviation from the general process
described above. Three such instances relate to the IBNR loss reserve processes for our 2008
Hurricanes losses, our 2005 Hurricanes losses and our asbestos exposures, where extrapolation
techniques are not applied, except in a limited way, given the unique nature of hurricane losses
and limited population of marine excess policies with potential asbestos exposures. In such
circumstances, inventories of the policy limits exposed to losses coupled with reported losses are
analyzed and evaluated principally by claims personnel and underwriters to establish IBNR loss
reserves.
A brief summary of each actuarial method discussed above follows:
Loss ratio method: This method is based on the assumption that ultimate losses vary
proportionately with premiums. Pursuant to the loss ratio method, IBNR loss reserves are
calculated by multiplying the earned premium by an expected ultimate loss ratio to estimate the
ultimate losses for each underwriting year, then subtracting the reported losses, consisting of
paid losses and case loss reserves, to determine the IBNR loss reserve amount. The ultimate loss
ratios applied are the Companys best estimates for each underwriting year and are generally
determined after evaluating a number of factors which include:
information derived by underwriters and actuaries in the initial pricing of the business, the
ultimate loss ratios established in the prior accounting period and the related judgments applied,
the ultimate loss ratios of previous underwriting years, premium rate changes, underwriting and
coverage changes, changes in terms and conditions, legislative changes, exposure trends, loss
development trends, claim frequency and severity trends, paid claims activity, remaining open case
reserves and industry data where deemed appropriate. Such factors are also evaluated when
selecting ultimate loss ratios and/or loss development factors in the methods described below.
Bornheutter-Ferguson method: The Bornheutter-Ferguson method calculates the IBNR loss reserves as
the product of the earned premium, an expected ultimate loss ratio, and a loss development factor
that represents the expected percentage of the ultimate losses that have been incurred but not yet
reported. The loss development factor equals one hundred percent less the expected percentage of
losses that have thus far been reported, which is generally calculated as an average of the
percentage of losses reported for comparable reporting periods of prior underwriting years. The
expected ultimate loss ratio is generally determined in the same manner as in the loss ratio
method.
Loss development method: The loss development method, also known as the chainladder or the
link-ratio method, develops the IBNR loss reserves by multiplying the paid or reported losses by a
loss development factor to estimate the ultimate losses, then subtracting the reported losses,
consisting of paid losses and case loss reserves, to determine the IBNR loss reserves. The loss
development factor is the reciprocal of the expected percentage of losses that have thus far been
reported, which is generally calculated as an average of the percentage of losses reported for
comparable reporting periods of prior underwriting years.
43
Frequency/severity method: The frequency/severity method calculates the IBNR loss reserves by
separately projecting claim count and average cost per claim data on either a paid or incurred
basis. It estimates the expected ultimate losses as the product of the ultimate number of claims
that are expected to be reported and the expected average amount of these claims.
An annual loss reserve study is conducted by the Companys actuaries for each major line of
business employing the methodologies as described above with the timing of such studies varying
throughout the year. Additionally, a review of the emergence of actual losses relative to
expectations for each line of business, generally derived from the annual reserve study, is
conducted each quarter to determine whether the assumptions used in the reserving process continue
to form a reasonable basis for the projection of liabilities for each product line. Such reviews
may result in maintaining or revising assumptions regarding future loss development based on
various quantitative and qualitative considerations. If actual loss activity differs from
expectations, an upward or downward adjustment to loss reserves may occur. As time passes,
estimated loss reserves for an underwriting year will be based more on historical loss activity and
loss development patterns rather than on assumptions based on underwriters input, pricing
assumptions or industry experience.
The following discusses the method used for calculating the IBNR for each line of business and key
assumptions used in applying the actuarial methods described.
Marine: Generally, two key assumptions are used by our actuaries in setting IBNR loss reserves for
major products in this line of business. The first assumption is that our historical experience
regarding paid and reported losses for each product where we have sufficient history can be relied
on to predict future loss activity. The second assumption is that our underwriters assessments as
to potential loss exposures are reliable indicators of the level of our expected loss activity.
The specific loss reserves for marine are then analyzed separately by product based on such
assumptions, except where noted below, with the major products including marine liability, cargo, P&I, transport and
bluewater hull.
The claims emergence patterns for various marine product lines vary substantially. Our largest
marine product line is marine liability, which has one of the longer loss development patterns.
Marine liability protects an insureds business from liability to third parties stemming from their
marine-related operations, such as terminal operations, stevedoring and marina operations. Since
marine liability claims generally involve a dispute as to the extent and amount of legal liability
that our insured has to a third party, these claims tend to take a longer time to develop and
settle. Other longer-tail marine product lines include P&I insurance, which provides coverage for
third party liability as well as injury to crew for vessel operators, and transport insurance,
which provides both property and third party liability on a primary basis to businesses such as
port authorities, marine terminal operators and others engaged in the infrastructure of
international transportation.
Other marine product lines have considerably
shorter periods in which losses develop and settle. Ocean cargo insurance, for example, provides
physical damage coverage to goods in the course of transit by water, air or land. By their nature,
cargo claims tend to be reported quickly as losses typically result from an obvious peril such as
fire, theft or weather. Similarly, bluewater hull insurance provides coverage against physical
damage to ocean-going vessels. Such claims for physical damage generally are discovered, reported
and settled quickly. The Company currently has extensive experience for all of these products and
thus the IBNR loss reserves for all of the marine products are determined using the key assumptions
and actuarial methodologies described above. Prior to 2007, however, as discussed below, the
Company did not have sufficient experience in the transport product line and instead used its hull
and liability products loss development experience as a key assumption in setting the IBNR loss
reserves for its transport product.
44
Property Casualty: The reserves for property and casualty are established separately by product
with the major product being contractors liability insurance. Other products include offshore energy, commercial
middle markets, primary casualty and excess casualty. Our actuaries generally utilize two key
assumptions in this line of business: first, that our historical loss development patterns are
reasonable predictors of future loss patterns and second, that our claims personnels assessment of
our claims exposures and our underwriters assessment of our expected losses are reliable
indicators of our loss exposure. However, this line of business includes a number of newer
products where there is insufficient Company historical experience to project loss reserves and/or
loss development is sparse or erratic, which makes extrapolation techniques for those products
extremely difficult to apply, and in those circumstances we typically rely more on industry data
and our underwriters input in setting assumptions for our IBNR loss reserves as opposed to
historical loss development patterns. In addition, as discussed in more detail below with respect
to construction defect reserves, our actuaries may take other market trends or events into account
in setting IBNR loss reserves.
The substantial majority of the property and casualty loss reserves are for the contractors
liability business, which insures mostly general and artisan contractors. Contractor liability
claims are categorized into two claim types: construction defect and other general liability.
Other general liability claims typically derive from workplace accidents or from negligence alleged
by third parties, and take a long time to report and settle. Construction defect claims involve
the discovery of damage to buildings that was caused by latent construction defects. These claims
take a very long time to report and to settle compared to other general liability claims. Since
construction defect claims report much later than other contractor liability claims, they are
analyzed separately in the annual loss reserve study.
We have extensive history in the contractors liability business upon which to perform actuarial
analyses and we use the key assumption noted above relating to our own historical experience as a
reliable indicator of the future for this product. However, there is inherent uncertainty in the
loss reserve estimation process for this line of business given both the long-tail nature of the
liability claims and the continuing underwriting and coverage changes, claims handling and reserve
changes, and legislative changes that have occurred over a several year period. Such factors are
judgmentally taken into account in this line of business in specific periods. The underwriting and
coverage changes include the migration to a non-admitted business from admitted business in 2003,
which allowed us to exclude certain exposures previously permitted (for example, exposure to
construction work performed prior to the policy inception), withdrawals from certain contractor
classes previously underwritten and expansion into new states beginning in 2005. Claims changes
include bringing the claim handling in-house in 1999 and changes in case reserving practices in
2003 and 2006. A California legislative change with respect to reserves and claim frequency for
construction defect repairs, became effective July 1, 2002 with a sunset provision effective
January 1, 2011. The law provides for an alternative dispute resolution system that attempts to
involve all parties to a claim at an early stage. The legislation may impact claim severity,
frequency and the length of settlement which may ultimately be different than historical loss
development assumptions employed in our loss reserve process.
Most recently, in setting the IBNR loss reserves for construction defect claims, our actuaries have
begun to consider a new qualitative factor based on their evolving concern with the recent decline
in home values caused by the subprime home mortgage crisis and its possible impact on the frequency
and severity of construction defect claims. As a result, our actuaries acknowledge this
uncertainty and anticipate claims arising from alleged construction defects contributing to housing
value declines on policies written on newly constructed homes in our portfolio. We believe our
reserves remain adequate to address such potential exposure, but we can give no assurances with
respect thereto.
Offshore energy provides physical damage coverage to offshore oil
platforms along with offshore operations related to oil exploration and production. The
significant offshore energy claims are generally caused by fire or storms, and thus tend to be
large, infrequent, quickly reported, but occasionally not quickly settled because the damage is
often extensive but not always immediately known.
The commercial middle markets or NAV PAC business consists of general liability, auto liability and
property exposures for a variety of commercial middle market businesses, principally hospitality,
manufacturing and garages. Commencing in 2007, our actuaries are segmenting and analyzing the
components of the loss development for this business among the property, liability and auto
exposures which had been previously combined.
45
Primary casualty insurance provides primary general liability coverage principally to corporations
in the construction and manufacturing sector. Excess casualty insurance is purchased by
corporations which seek higher limits of liability than are provided in their primary casualty
policies. Neither product line has a significant amount of loss activity reported to date.
Because we have limited historical experience in these products, the IBNR loss reserves for both of
these products currently are established using the loss ratio method primarily based on our
underwriters input and industry loss experience.
Loss reserves include our European property business written by the U.K. Branch
which was discontinued in 2008. We have limited loss history and rely primarily on assumptions
based on underwriters input and industry experience. In addition, loss
reserves for aviation, property and assumed reinsurance business, in run-off since 1999, are
periodically monitored and evaluated by claims and actuarial personnel.
Professional Liability: The professional liability policies mainly provide coverage on a
claims-made basis mostly for a one-year period. The reserves for professional liability are
analyzed separately by product with the major products being directors and officers (D&O)
liability coverage and errors and omissions (E&O) liability coverage for lawyers and other
professionals.
The losses for D&O business are generally very large and infrequent, and typically involve
securities class actions. D&O claims report reasonably quickly, but may take several years to
settle. While we have been writing D&O business since 2001, the limited claim history is generally
insufficient to establish IBNR loss reserves using Company data. As a result, we principally
employ assumptions based on industry experience coupled with input from its underwriters and its
claims staffs assessment of potential exposure to establish IBNR loss reserves. Another key assumption with respect to
establishing IBNR loss reserves for D&O business is that such industry experience is representative
of our future potential loss development with respect to trends in class action activity, such as
the impact of stock option backdating, laddering and, most recently, the subprime mortgage crisis.
As time passes, for a given underwriting year, additional weight is given to assumptions relating
to our actual experience and claims outstanding.
The E&O IBNR loss reserve process is similar to the process for D&O, with the exception of a
particular book of business of the U.K. Branch written from 2004 through 2006. For the U.K. Branch
E&O business, we assume the claims, while similar in nature to the claims in the U.S. E&O business,
are larger, more frequent and have a longer loss development pattern. The IBNR loss reserves for
the U.K. Branch E&O business are determined judgmentally after reviewing recent loss activity
relative to the remaining in-force policy count and the loss activity for similar insureds.
Lloyds Operations: Reserves for the Companys Lloyds Operations are reviewed separately for the
marine and professional liability lines by product. The major marine products are marine
liability, offshore energy, cargo, specie and marine reinsurance, and the major products for
professional liability are international D&O and international E&O.
The marine liability, offshore energy and cargo products and related loss exposures are similar in
nature to that described for marine business above. Specie insurance provides property coverage
for chattel, such as jewelry, fine art and cash in transit. Claims tend to be from theft or
damage, quick to report and quick to settle. Marine reinsurance is a diversified global book of
reinsurance, the majority of which consists of excess-of-loss reinsurance policies for which claims
activity tends to be large and infrequent with loss development somewhat longer than for such
products written on a direct basis. Marine reinsurance reinsures liability, cargo, hull and
offshore energy exposures that are similar in nature to the marine business described above.
The process for establishing the IBNR loss reserves for the marine and professional liability lines
of the Lloyds Operations, and the assumptions used as part of this process, are similar in nature
to the process employed by the Insurance Companies. Other business for the Lloyds Operations
include European property and inland marine products, each of which is a new line of business where
we have limited loss history and rely primarily on assumptions based on our underwriters input and
industry loss experience.
46
The Lloyds Operations products also include property coverages for engineering and construction
projects and onshore energy business, which are substantially reinsured. Losses from engineering
and construction projects tend to result from loss of use due to construction delays while losses
from onshore energy business are usually caused by fires or explosions. Large losses tend to be
catastrophic in nature and are heavily reinsured. IBNR loss reserves for attritional losses are
established based on the Syndicates extensive loss experience.
Sensitivity Analysis
We do not calculate a range of loss reserve estimates. We believe that ranges may not be a true
reflection of the potential volatility between carried loss reserves and the ultimate settlement
amount of losses incurred prior to the balance sheet date.
The actual losses may not emerge as expected, which would cause the ranges to expand or contract
from year to year. The impact of these shifts in the ranges will be greater in lines with longer
emergence patterns. The individual lines will also have greater variance than the range for the
entire book of business.
The boundaries of the reasonably likely ranges do not have a symmetrical relationship with our carried
reserves and intentionally reflect a wider variation in the increases than for the decreases and, correspondingly,
a wider deviation in the deficiency than in the redundancy.
Set forth below is a sensitivity analysis that estimates the effect on our net loss reserve
position of using alternative expected loss ratios for the underwriting years 2002 to 2009 and
alternative loss development factors for underwriting years 1997 to 2009 rather than those loss
ratios and factors actually used in determining our best estimates at December 31, 2009. The
analysis addresses each major line of business and underwriting year for which a material deviation
to our overall reserve position is believed reasonably possible, and uses what we believe is a
reasonably likely range of potential deviation for each line of business. There can be no
assurance, however, that actual reserve development will be materially consistent with either the
original or the adjusted expected loss ratios or loss development factor assumptions, or with other
assumptions made in the reserving process.
For the selected alternative expected loss ratios, our actuaries observed the range of ultimate
loss ratios recorded for the underwriting years 2002 to 2009 for each major line of business at
December 31, 2009.
47
The reasonably likely ranges of potential deviation in the loss ratios for each line of business
for the 2002 to 2009 underwriting years expressed in loss ratio points are as follows:
Reasonably likely loss ratio point variances
|
|
|
|
|
|
|
|
|
|
|
Decrease |
|
|
Increase |
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
Marine |
|
|
5 |
% |
|
|
6 |
% |
Property Casualty |
|
|
7 |
% |
|
|
14 |
% |
Professional Liability |
|
|
13 |
% |
|
|
16 |
% |
Lloyds Operations |
|
|
7 |
% |
|
|
12 |
% |
For the loss development factor variance, our actuaries employed a standard technique which is
based on the historical development factors observed for each line of business from the paid and
incurred loss development triangles with the latest evaluation at December 31, 2009. The
historical factors are used to generate alternative outcomes which could arise in the ultimate
development due to the random variability inherent in future development. The alternative outcomes
are generated by a stochastic simulation. The ranges may contract or expand if future development
deviates from historical experience.
The reasonably likely ranges of potential deviations in the aggregate or overall loss development
factors applicable to the total of all underwriting years for each line of business are as follows:
Reasonably likely ultimate loss development factor variances
|
|
|
|
|
|
|
|
|
|
|
Decrease |
|
|
Increase |
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
Marine |
|
|
9 |
% |
|
|
12 |
% |
Property Casualty |
|
|
14 |
% |
|
|
16 |
% |
Professional Liability |
|
|
27 |
% |
|
|
30 |
% |
Lloyds Operations |
|
|
14 |
% |
|
|
15 |
% |
Such sensitivity analysis was performed in the aggregate for all products in each line of business.
The use of aggregate data was considered more stable and reliable compared to a product-by-product
analysis. We cannot assure, however, that such use of aggregate data will provide a more accurate
range of the actual variations in loss development. The sensitivity analysis uses loss ratios for
the 2002 to 2009 underwriting years, which are believed to be more representative compared to years
prior to 2002 given our evolving mix of business, product changes and other factors. There can be
no assurances, however, that the use of such recent history is more predictive of actual
development as compared to employing longer periods of history. In addition, while the net loss
reserves include the net loss reserves for asbestos exposures, such amounts were excluded from the
sensitivity analysis given the nature of how such reserves are established by the Company. While
we believe such net reserves are adequate, we cannot assure that material loss development may not
arise in the future from asbestos losses given the complex nature of such exposures.
48
The total Company range amounts below were determined by aggregating the reasonably likely range
amounts for each line of business assuming that the variances in the lines of business are
uncorrelated to each other. Such amounts may not be representative of the actual aggregate
favorable or unfavorable loss development amounts that may occur over time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Reasonably Likely Range of Deviation |
|
|
|
Net Loss |
|
|
Redundancy |
|
|
Deficiency |
|
|
|
Reserve |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
213,646 |
|
|
$ |
8,546 |
|
|
|
4 |
% |
|
$ |
12,819 |
|
|
|
6 |
% |
Property Casualty |
|
|
486,412 |
|
|
|
34,049 |
|
|
|
7 |
% |
|
|
38,913 |
|
|
|
8 |
% |
Professional Liability |
|
|
107,217 |
|
|
|
13,938 |
|
|
|
13 |
% |
|
|
15,010 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Companies |
|
|
807,275 |
|
|
|
56,533 |
|
|
|
7 |
% |
|
|
66,742 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lloyds Operations |
|
|
305,659 |
|
|
|
21,396 |
|
|
|
7 |
% |
|
|
21,396 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
$ |
1,112,934 |
|
|
$ |
77,929 |
|
|
|
7 |
% |
|
$ |
88,138 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) to net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
|
|
|
$ |
50,654 |
|
|
|
|
|
|
$ |
(57,290 |
) |
|
|
|
|
Per Share (1) |
|
|
|
|
|
$ |
2.92 |
|
|
|
|
|
|
$ |
(3.31 |
) |
|
|
|
|
|
|
|
(1) |
|
Used 17.3 million average diluted shares outstanding for the year ended December 31, 2009. |
Reinsurance Recoverables. Reinsurance recoverables are established for the portion of the loss
reserves that are ceded to reinsurers. Reinsurance recoverables are determined based upon the
terms and conditions of reinsurance contracts which could be subject to interpretations that differ
from our own based on judicial theories of liability. In addition, we bear credit risk with
respect to our reinsurers which can be significant considering that certain of the reserves remain
outstanding for an extended period of time. We are required to pay losses even if a reinsurer
fails to meet its obligations under the applicable reinsurance agreement. Additional information
regarding our reinsurance recoverables can be found in the BusinessReinsurance Recoverables section and
Note 6, Reinsurance, to our consolidated financial statements, both included herein.
Written and Unearned Premium. Written premium is recorded based on the insurance policies that have
been reported to us and the policies that have been written by agents but not yet reported to us.
We must estimate the amount of written premium not yet reported based on judgments relative to
current and historical trends of the business being written. Such estimates are regularly reviewed
and updated and any resulting adjustments are included in the current years results. An unearned
premium reserve is established to reflect the unexpired portion of each policy at the financial
reporting date. Reinsurance reinstatement premium is earned in the period in which the event
occurred which created the need to record the reinstatement premium. Additional information
regarding our written and unearned premium can be found in Note 1, Organization and Summary of
Significant Accounting Policies, and Note 6, Reinsurance, to our consolidated financial statements,
both included herein.
Substantially all of our business is placed through agents and brokers. Since the vast majority of
our gross written premiums are primary or direct, as opposed to assumed, the delays in reporting
assumed premiums generally do not have a significant effect on our financial statements, since we
record estimates for both unreported direct and assumed premium. We also record the ceded portion
of the estimated gross written premium and related acquisition costs. The earned gross, ceded and
net premiums are calculated based on our earning methodology which is generally pro-rata over the
policy period. Losses are also recorded in relation to the earned premium. The estimate for
losses incurred on the estimated premium is based on an actuarial calculation consistent with the
methodology used to determine incurred but not reported loss reserves for reported premiums.
49
A portion of our premium is estimated for unreported premium, mostly for the marine business
written by our U.K. Branch and Lloyds Operations. We generally do not experience any significant
backlog in processing premiums. Such premium estimates are generally based on submission data
received from brokers and agents and recorded when the insurance policy or reinsurance contract is
written or bound. The estimates are regularly reviewed and updated taking into account the premium
received to date versus the estimate and the age of the estimate. To the extent that the actual
premium varies from the estimates, the difference, along with the related loss reserves and
underwriting expenses, is recorded in current operations.
Deferred Tax Assets. We apply the asset and liability method of accounting for income taxes
whereby deferred assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. In assessing the realization of deferred tax assets, management
considers whether it is more likely than not that the deferred tax assets will be realized.
Additional information regarding our deferred tax assets can be found in Note 1, Organization and
Summary of Significant Accounting Policies, and Note 7, Income Taxes, to our consolidated financial
statements, both included herein.
Impairment of Invested Assets. Management regularly reviews our fixed maturity and equity
securities portfolios to evaluate the necessity of recording impairment losses for
other-than-temporary declines in the fair value of investments.
In the first quarter of 2009, we adopted accounting guidance relating to the recognition and
presentation of other-than-temporary impairments (OTTI) on fixed maturity securities. When
assessing whether the amortized cost basis of a fixed maturity security will be recovered, we compare the
present value of cash flows expected to be collected to the current book value. Any shortfalls of the present value of the
cash flows expected to be collected in relation to the amortized cost basis is considered the
credit loss portion of OTTI losses and is recognized in earnings. All non-credit losses are
recognized as changes in OTTI losses within Other Comprehensive Income (OCI). Prior to 2009, when
a fixed maturity security in our investment portfolio had an unrealized loss that was deemed to be
other-than-temporary, we wrote the security down to fair value through a charge to operations.
For equity securities, in general, we focus our attention on those securities
whose fair value was less than 80% of their cost for six or more consecutive months. If warranted as the result of conditions relating to a particular security, we
will focus on a significant decline in fair value regardless of the time period involved. Factors
considered in evaluating potential impairment include, but are not limited to, the current fair
value as compared to cost of the security, the length of time the
investment has been below cost and by how much. If an equity security is deemed to be other-than-temporarily impaired, the cost is written down to fair value with the loss
recognized in earnings.
For equity securities, we consider our intent to hold securities as part of the process of
evaluating whether a decline in fair value represents an other-than-temporary decline in value. For
fixed maturity securities, we consider our intent to sell a security and whether it is more likely
than not that we will be required to sell a security before the anticipated recovery as part of the
process of evaluating whether a securitys unrealized loss represents an other-than-temporary
decline. Our ability to hold such securities is supported by sufficient cash flow from its
operations and from maturities within its investment portfolio in order to meet its claims payments
and other disbursement obligations arising from its underwriting operations without selling such
investments. With respect to securities where the decline in value is determined to be temporary
and the securitys value is not written down, a subsequent decision may be made to sell that
security and realize a loss. Subsequent decisions on security sales are made within the context of
overall risk monitoring, changing information and market conditions.
50
Day to day management of our investment portfolio is outsourced to third party investment managers.
While these investment managers may, at a given point in time, believe that the preferred course
of action is to hold securities with unrealized losses that are considered temporary until such
losses are recovered, the dynamic nature of the portfolio management may result in a subsequent
decision to sell the security and realize the loss based upon a change in market and other factors
described above. We believe that subsequent decisions to sell such securities are consistent with
the classification of our portfolio as available-for-sale. Investment managers are required to
notify management of rating agency downgrades of securities in their portfolios as well as any
potential investment valuation issues at the end of each quarter. Investment managers are also
required to notify management, and receive approval, prior to the execution of a transaction or
series of related transactions that may result in a realized loss above a certain threshold.
Additionally, investment managers are required to notify management, and receive approval, prior to
the execution of a transaction or series of related transactions that may result in any realized
loss up until a certain period beyond the close of a quarterly accounting period.
Accounting for Lloyds Results. We record Syndicate 1221s assets, liabilities, revenues and
expenses under U.S. GAAP. At the end of the Lloyds three-year period for determining underwriting
results for an account year, the syndicate will close the account year by reinsuring outstanding
claims on that account year with the participants for the accounts next underwriting year. The
amount to close an underwriting year into the next year is referred to as the reinsurance to close
(RITC). The RITC transaction, recorded in the fourth quarter, does not result in any gain or
loss. Additional information regarding our accounting for Lloyds results can be found in Note 1,
Organization and Summary of Significant Accounting Policies, to our consolidated financial
statements, included herein.
Results of Operations
The following is a discussion and analysis of our consolidated and segment results of operations
for the years ended December 31, 2009, 2008 and 2007. All earnings per share data is presented on
a per diluted share basis.
Summary
Net income for 2009, 2008 and 2007 was $63.2 million or $3.65 per diluted share, $51.7 million or
$3.04 per diluted share and $95.6 million or $5.62 per diluted share, respectively. The 2008 year
was adversely impacted by Hurricanes Gustav and Ike, reducing net income by $19.1 million and
diluted earnings per share by $1.12.
Consolidated stockholders equity increased 16.3% to $801.5 million or $47.58 per share at
December 31, 2009 compared to $689.3 million or $40.89 per share at December 31, 2008. The
increase was primarily due to 2009 net income of $63.2 million and $46.0 million of after-tax
unrealized gains in 2009 within our investment portfolio.
Cash flow from operations was $103.9 million, $245.3 million and $284.6 million in 2009, 2008 and
2007, respectively. The decline in cash flow from operations in 2009 compared to 2008 was primarily
a result of an increase in losses and LAE paid for claims of $82.4 million. Net investment income
decreased 1.4% in 2009 to $75.5 million compared to 2008 as a result of lower investment yields
partially offset by an increase in invested assets. Net investment income increased 8.3% in 2008 to
$76.6 million compared to 2007 as the result of the increase in invested assets partially offset by
lower investment yields. The pre-tax investment yield was 3.8%, 4.1% and 4.4% in 2009, 2008 and
2007, respectively.
51
2009 Results
2009 net income of $63.2 million increased $11.5 million compared to 2008 primarily as a result of
a decrease in net other-than-temporary impairment losses recognized in earnings of $25.1 million to
$11.9 million in 2009 compared to $37.0 million in 2008. Underwriting profit for 2009 declined by
$19.8 million to $19.5 million compared to $39.3 million in 2008. The decline in the underwriting
profit was primarily due to the recording of net redundancies of prior year loss reserves of $8.9
million in 2009 versus $50.7 million in 2008, a decline of $41.8 million. In addition, we recorded
a $9.3 million offshore energy loss net of reinstatement premiums resulting from a fire at a mobile
offshore drilling unit.
2008 Results
The 2008 results of operations were adversely impacted by hurricane activity and net realized
losses. Hurricanes Gustav and Ike reduced 2008 net income by $19.1 million and earnings per share
by $1.12. The combined loss and expense ratio was increased by an aggregate 4.3 ratio points for
such losses and are inclusive of reinsurance recoveries and related costs for reinsurance
reinstatement premiums. Excluding these effects, the underwriting results benefited from increased
net premium revenues despite continuing softening market conditions, and the recording of a net
redundancy of prior years loss reserves of $50.7 million, or $1.94 per share, which reduced the
2008 combined ratio of 93.8% by 7.9 loss ratio points.
Net realized losses were $38.3 million in 2008 compared to net realized gains of $2.0
million in 2007. The 2008 net realized losses include provisions of $37.0 million for declines in
the market value of securities which were considered to be other-than-temporary. These provisions
reduced 2008 net income by $24.1 million and earnings per share by $1.42 per share.
2007 Results
The 2007 results of operations reflect improved financial performance compared to 2006 due to a
combination of improved underwriting results and growth in investment income. The underwriting
results benefited from increased net premium revenues despite continuing softening market
conditions, and the recording of a net redundancy of prior years loss reserves of $47.0 million,
or $1.80 per share, which reduced the 2007 combined ratio of 87.5% by 7.8 loss ratio points.
52
Revenues
The following table sets forth our gross and net written premium and net earned premium by segment
and line of business for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
|
Premiums |
|
|
% |
|
|
Premiums |
|
|
Premiums |
|
|
Premiums |
|
|
% |
|
|
Premiums |
|
|
Premiums |
|
|
Premiums |
|
|
% |
|
|
Premiums |
|
|
Premiums |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
241,438 |
|
|
|
23.1 |
% |
|
$ |
171,289 |
|
|
$ |
157,534 |
|
|
$ |
248,080 |
|
|
|
22.9 |
% |
|
$ |
147,569 |
|
|
$ |
132,005 |
|
|
$ |
227,175 |
|
|
|
21.2 |
% |
|
$ |
117,294 |
|
|
$ |
112,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Casualty |
|
|
352,285 |
|
|
|
33.7 |
% |
|
|
227,234 |
|
|
|
246,143 |
|
|
|
405,062 |
|
|
|
37.3 |
% |
|
|
261,322 |
|
|
|
273,977 |
|
|
|
447,615 |
|
|
|
41.8 |
% |
|
|
301,607 |
|
|
|
275,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
137,053 |
|
|
|
13.1 |
% |
|
|
79,150 |
|
|
|
75,444 |
|
|
|
109,048 |
|
|
|
10.1 |
% |
|
|
63,797 |
|
|
|
57,316 |
|
|
|
99,556 |
|
|
|
9.3 |
% |
|
|
59,117 |
|
|
|
55,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Cos. Total |
|
|
730,776 |
|
|
|
69.9 |
% |
|
|
477,673 |
|
|
|
479,121 |
|
|
|
762,190 |
|
|
|
70.3 |
% |
|
|
472,688 |
|
|
|
463,298 |
|
|
|
774,346 |
|
|
|
72.3 |
% |
|
|
478,018 |
|
|
|
443,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
191,959 |
|
|
|
18.4 |
% |
|
|
156,153 |
|
|
|
142,958 |
|
|
|
192,568 |
|
|
|
17.7 |
% |
|
|
132,788 |
|
|
|
126,126 |
|
|
|
175,567 |
|
|
|
16.4 |
% |
|
|
110,577 |
|
|
|
111,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Casualty |
|
|
78,151 |
|
|
|
7.5 |
% |
|
|
45,097 |
|
|
|
39,330 |
|
|
|
91,292 |
|
|
|
8.4 |
% |
|
|
32,735 |
|
|
|
32,644 |
|
|
|
86,513 |
|
|
|
8.1 |
% |
|
|
33,852 |
|
|
|
29,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
44,032 |
|
|
|
4.2 |
% |
|
|
22,332 |
|
|
|
21,954 |
|
|
|
38,872 |
|
|
|
3.6 |
% |
|
|
23,404 |
|
|
|
21,908 |
|
|
|
34,281 |
|
|
|
3.2 |
% |
|
|
23,349 |
|
|
|
17,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Ops. Total |
|
|
314,142 |
|
|
|
30.1 |
% |
|
|
223,582 |
|
|
|
204,242 |
|
|
|
322,732 |
|
|
|
29.7 |
% |
|
|
188,927 |
|
|
|
180,678 |
|
|
|
296,361 |
|
|
|
27.7 |
% |
|
|
167,778 |
|
|
|
158,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,044,918 |
|
|
|
100.0 |
% |
|
$ |
701,255 |
|
|
$ |
683,363 |
|
|
$ |
1,084,922 |
|
|
|
100.0 |
% |
|
$ |
661,615 |
|
|
$ |
643,976 |
|
|
$ |
1,070,707 |
|
|
|
100.0 |
% |
|
$ |
645,795 |
|
|
$ |
601,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
Gross Written Premiums
The premium rate increases or decreases as noted below for marine, property casualty and
professional liability are calculated primarily by comparing premium amounts on policies that have
renewed. The premiums are judgmentally adjusted for exposure factors when deemed significant and
sometimes represent an aggregation of several lines of business. The rate change calculations
provide a pricing trend and are not meant to be a precise analysis. The calculation can also be
affected quarter by quarter depending on the particular policies and the number of policies that
renew during that period. Due to market conditions, these rate changes may or may not apply to new
business which potentially may be more competitively priced compared to renewal business.
Insurance Companies Gross Written Premiums
Marine Premiums. The gross written premiums by year, including the line of business gross written
premiums as a percentage of the total gross written premiums, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine liability |
|
$ |
83,915 |
|
|
|
34 |
% |
|
$ |
82,991 |
|
|
|
32 |
% |
|
$ |
84,270 |
|
|
|
37 |
% |
Inland marine |
|
|
28,573 |
|
|
|
12 |
% |
|
|
23,914 |
|
|
|
10 |
% |
|
|
12,154 |
|
|
|
5 |
% |
Cargo |
|
|
26,636 |
|
|
|
11 |
% |
|
|
34,202 |
|
|
|
14 |
% |
|
|
30,282 |
|
|
|
13 |
% |
P&I |
|
|
25,361 |
|
|
|
11 |
% |
|
|
28,935 |
|
|
|
12 |
% |
|
|
26,312 |
|
|
|
12 |
% |
Transport |
|
|
21,527 |
|
|
|
9 |
% |
|
|
23,013 |
|
|
|
9 |
% |
|
|
19,587 |
|
|
|
9 |
% |
Bluewater hull |
|
|
19,691 |
|
|
|
8 |
% |
|
|
17,234 |
|
|
|
7 |
% |
|
|
23,508 |
|
|
|
10 |
% |
Craft/Fishing vessel |
|
|
19,758 |
|
|
|
8 |
% |
|
|
16,545 |
|
|
|
7 |
% |
|
|
15,986 |
|
|
|
7 |
% |
Other |
|
|
15,977 |
|
|
|
7 |
% |
|
|
21,246 |
|
|
|
9 |
% |
|
|
15,076 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
241,438 |
|
|
|
100 |
% |
|
$ |
248,080 |
|
|
|
100 |
% |
|
$ |
227,175 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The marine gross written premiums for 2009 decreased 2.7% to $241.4 million compared to 2008 due to
declining premium in our cargo, war and P&I businesses due to increased competitive market
conditions. The average marine renewal premium rates during 2009 increased approximately 2%. The
marine gross written premiums for 2008 increased 9.2% to $248.1 million compared to 2007 reflecting
new business partially offset by flattening or declining premium in several classes of business due
to increased competitive market conditions. The average marine renewal premium rates during 2008
were flat.
Property Casualty Premiums. The gross written premiums by year, including the line of business
gross written premiums as a percentage of the total gross written premiums, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction liability |
|
$ |
90,627 |
|
|
|
26 |
% |
|
$ |
147,880 |
|
|
|
36 |
% |
|
$ |
179,633 |
|
|
|
40 |
% |
Commercial umbrella |
|
|
72,509 |
|
|
|
21 |
% |
|
|
63,977 |
|
|
|
16 |
% |
|
|
57,371 |
|
|
|
13 |
% |
Offshore energy |
|
|
47,368 |
|
|
|
13 |
% |
|
|
56,989 |
|
|
|
14 |
% |
|
|
51,627 |
|
|
|
12 |
% |
Primary E&S |
|
|
23,783 |
|
|
|
7 |
% |
|
|
35,744 |
|
|
|
9 |
% |
|
|
50,185 |
|
|
|
11 |
% |
Other |
|
|
117,998 |
|
|
|
33 |
% |
|
|
100,472 |
|
|
|
25 |
% |
|
|
108,799 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
352,285 |
|
|
|
100 |
% |
|
$ |
405,062 |
|
|
|
100 |
% |
|
$ |
447,615 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2009 property casualty gross written premiums decreased 13.0% to $352.3 million when compared
to 2008 reflecting weakening economic conditions that have significantly reduced demand for
construction liability, particularly in the western United States, as well as primary excess and
surplus insurance. The construction liability line has also seen significant increases in the
level of competition from new entrants. Our offshore energy line declined as we wrote very little
Gulf of Mexico wind business in 2009 as the terms and conditions were not sufficient and world wide
drilling activity slowed. Partially offsetting these declines was an increase in gross written
premiums for our commercial umbrella line and our retail umbrella line which was introduced in
2009. Our NavTech and excess casualty lines saw average renewal rate increases of approximately 8%
and 2%, respectively, whereas our contractors liability and NavPac lines saw average renewal rate
decreases of 2% and 4%, respectively. The 2008 property casualty gross written premiums decreased
9.5% to $405.1 million when compared to 2007 reflecting declines across most lines of business due
to negative renewal rate changes and the housing market slowdown, which was most pronounced in the
construction liability line.
54
Professional Liability Premiums. The gross written premiums by year, including the line of
business gross written premiums as a percentage of the total gross written premiums, consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O (public and private) |
|
$ |
99,601 |
|
|
|
73 |
% |
|
$ |
75,010 |
|
|
|
69 |
% |
|
$ |
67,973 |
|
|
|
68 |
% |
Errors and omissions |
|
|
32,129 |
|
|
|
23 |
% |
|
|
28,097 |
|
|
|
26 |
% |
|
|
24,515 |
|
|
|
25 |
% |
Architects and engineers |
|
|
5,323 |
|
|
|
4 |
% |
|
|
5,941 |
|
|
|
5 |
% |
|
|
7,068 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
137,053 |
|
|
|
100 |
% |
|
$ |
109,048 |
|
|
|
100 |
% |
|
$ |
99,556 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The professional liability gross written premiums increased 25.7% to $137.1 million in 2009
compared to 2008 reflecting continued growth and the expansion of our directors and officers
business. Partially offsetting the growth has been a reduction in lawyers business within the
errors and omissions classification as we have been in the process of re-underwriting that line and
focusing more on other segments, such as miscellaneous professional liability. Average 2009 renewal
premium rates for this business increased approximately 2% in 2009 compared to 2008. The
professional liability gross written premiums increased 9.5% to $109.0 million in 2008 compared to
2007 due to the expansion of our professional liability business and an emerging flight to quality
that occurred in the latter part of the year. Average 2008 renewal premium rates for this business
decreased approximately 4% in 2008 compared to 2007.
Lloyds Operations Gross Written Premiums
Marine Premiums. The gross written premiums by year, including the line of business gross written
premiums as a percentage of the total gross written premiums, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cargo and specie |
|
$ |
92,139 |
|
|
|
48 |
% |
|
$ |
92,789 |
|
|
|
47 |
% |
|
$ |
87,412 |
|
|
|
50 |
% |
Marine liability |
|
|
51,204 |
|
|
|
27 |
% |
|
|
58,886 |
|
|
|
31 |
% |
|
|
48,172 |
|
|
|
27 |
% |
Assumed reinsurance |
|
|
19,756 |
|
|
|
10 |
% |
|
|
17,078 |
|
|
|
9 |
% |
|
|
24,280 |
|
|
|
14 |
% |
Hull |
|
|
18,697 |
|
|
|
10 |
% |
|
|
16,416 |
|
|
|
9 |
% |
|
|
13,218 |
|
|
|
8 |
% |
War |
|
|
10,163 |
|
|
|
5 |
% |
|
|
7,399 |
|
|
|
4 |
% |
|
|
2,485 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
191,959 |
|
|
|
100 |
% |
|
$ |
192,568 |
|
|
|
100 |
% |
|
$ |
175,567 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The overall 2009 Lloyds marine gross written premiums of $192.0 million were flat compared to
2008. There were increases in most lines of business which were offset by decreases in marine
liability and cargo lines. The 2008 increase in Lloyds marine gross written premiums of 9.7%
compared to 2007 resulted from new business, particularly in the marine liability class. The
average renewal premium rate increased approximately 8.9% in 2009 and decreased 5.1% in 2008 from
the previous year, respectively.
55
Property Casualty Premiums. The gross written premiums by year, including the line of business
gross written premiums as a percentage of the total gross written premiums, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offshore energy |
|
$ |
34,469 |
|
|
|
43 |
% |
|
$ |
51,073 |
|
|
|
56 |
% |
|
$ |
49,649 |
|
|
|
57 |
% |
Onshore energy |
|
|
14,055 |
|
|
|
18 |
% |
|
|
12,726 |
|
|
|
14 |
% |
|
|
9,151 |
|
|
|
11 |
% |
Engineering &
construction |
|
|
18,383 |
|
|
|
24 |
% |
|
|
21,036 |
|
|
|
23 |
% |
|
|
18,551 |
|
|
|
21 |
% |
Bloodstock |
|
|
7,726 |
|
|
|
10 |
% |
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
0 |
% |
Property |
|
|
(76 |
) |
|
|
0 |
% |
|
|
5,631 |
|
|
|
6 |
% |
|
|
9,162 |
|
|
|
11 |
% |
US Casualty |
|
|
3,594 |
|
|
|
5 |
% |
|
|
826 |
|
|
|
1 |
% |
|
|
|
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
78,151 |
|
|
|
100 |
% |
|
$ |
91,292 |
|
|
|
100 |
% |
|
$ |
86,513 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2009 Lloyds property casualty gross written premiums of $78.2 million decreased 14.4% compared
to 2008 due to a decline in our offshore energy and engineering and construction lines as well as
the cessation of writing our property line. We began writing Bloodstock (animal mortality)
business during 2009 by participating in a facility originated by another Lloyds syndicate. The
2008 gross written premiums of $91.3 million increased 5.5% compared to 2007 due to increases in
all of our NavTech lines. Average premium renewal rates in our NavTech lines were a 10.1% increase
in 2009 and a 10.0% decrease in 2008 compared to the previous year, respectively.
Professional Liability Premiums. The gross written premiums by year, including the line of
business gross written premiums as a percentage of the total gross written premiums, consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D&O (public and
private) |
|
$ |
26,776 |
|
|
|
61 |
% |
|
$ |
15,845 |
|
|
|
41 |
% |
|
$ |
16,511 |
|
|
|
48 |
% |
E&O |
|
|
17,256 |
|
|
|
39 |
% |
|
|
23,027 |
|
|
|
59 |
% |
|
|
17,770 |
|
|
|
52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
44,032 |
|
|
|
100 |
% |
|
$ |
38,872 |
|
|
|
100 |
% |
|
$ |
34,281 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Lloyds Operations commenced writing professional liability business during the second quarter
of 2005. The 2009 and 2008 Lloyds professional liability gross written premiums increased 13.3%
and 13.4% to $44.0 million and $38.9 million, respectively, compared to the respective prior year,
due to continued expansion and geographic diversification of the book of business. We added a team
at Lloyds at the end of 2008 to write excess D&O business. In addition, during 2009 we began
writing professional liability business from our office in Stockholm, Sweden.
Ceded Written Premium In the ordinary course of business, we reinsure certain insurance
risks with unaffiliated insurance companies for the purpose of limiting our maximum loss exposure,
protecting against catastrophic losses, and maintaining desired ratios of net premiums written to
statutory surplus. The relationship of ceded to written premiums varies based upon the types of
business written and whether the business is written by the Insurance Companies or the Lloyds
Operations.
56
The following table sets forth our ceded written premium by segment and major line of business for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Ceded |
|
|
Gross |
|
|
Ceded |
|
|
Gross |
|
|
Ceded |
|
|
Gross |
|
|
|
Written |
|
|
Written |
|
|
Written |
|
|
Written |
|
|
Written |
|
|
Written |
|
|
|
Premiums |
|
|
Premiums |
|
|
Premiums |
|
|
Premiums |
|
|
Premiums |
|
|
Premiums |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
70,149 |
|
|
|
29.1 |
% |
|
$ |
100,511 |
|
|
|
40.5 |
% |
|
$ |
109,881 |
|
|
|
48.4 |
% |
Property Casualty |
|
|
125,051 |
|
|
|
35.5 |
% |
|
|
143,740 |
|
|
|
35.5 |
% |
|
|
146,008 |
|
|
|
32.6 |
% |
Professional Liability |
|
|
57,903 |
|
|
|
42.2 |
% |
|
|
45,251 |
|
|
|
41.5 |
% |
|
|
40,439 |
|
|
|
40.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
253,103 |
|
|
|
34.6 |
% |
|
|
289,502 |
|
|
|
38.0 |
% |
|
|
296,328 |
|
|
|
38.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
35,806 |
|
|
|
18.7 |
% |
|
|
59,780 |
|
|
|
31.0 |
% |
|
|
64,990 |
|
|
|
37.0 |
% |
Property Casualty |
|
|
33,054 |
|
|
|
42.3 |
% |
|
|
58,557 |
|
|
|
64.1 |
% |
|
|
52,661 |
|
|
|
60.9 |
% |
Professional Liability |
|
|
21,700 |
|
|
|
49.3 |
% |
|
|
15,468 |
|
|
|
39.8 |
% |
|
|
10,932 |
|
|
|
31.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
90,560 |
|
|
|
28.8 |
% |
|
|
133,805 |
|
|
|
41.5 |
% |
|
|
128,583 |
|
|
|
43.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
343,663 |
|
|
|
32.9 |
% |
|
$ |
423,307 |
|
|
|
39.0 |
% |
|
$ |
424,911 |
|
|
|
39.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The percentage of total ceded written premiums to total gross written premium in 2009 was
32.9% compared to 39.0% in 2008 and 39.7% in 2007. The Insurance Companies and Lloyds Operations
2008 ceded written premiums includes $7.2 million and $5.0 million, respectively, of
reinstatement premiums related to the losses from Hurricanes Gustav and Ike. Excluding the effect
of reinstatement premiums for the 2008 Hurricanes losses, the ratio of ceded written premium to
gross written premium was 38.4%. The declines in the ratio of ceded written premiums to gross
written premiums in 2009 compared to 2008 was due to the a reduction in the amount of marine and
energy quota share reinsurance purchased for both the Insurance Companies and Lloyds Operations in
2009 as well as the impact of the $12.2 million of reinstatement premiums recognized in 2008
relating to the 2008 Hurricanes.
Net Written Premiums The 2009 net written premiums increased 6.0% compared to 2008
primarily due to the aforementioned reduction in the amount of marine and energy quota share
reinsurance purchased in 2009. The 2009 increase was 4.1% compared to 2008 when excluding the
$12.2 million of ceded reinstatement premiums resulting from the 2008 Hurricanes. The 2008 net
written premiums increased 2.4% compared to 2007. The 2008 increase was 4.3% compared to 2007 when
excluding the $12.2 million of ceded reinstatement premiums resulting from the 2008 Hurricanes.
Net Earned Premiums Net earned premiums increased 6.1% in 2009 compared to 2008 and
increased 7.0% in 2008 compared to 2007. The 2009 and 2008 net earned premium increases reflect
the changes in written premiums discussed above. The 2008 net earned premium was reduced by $12.2
million of reinstatement premium as a result of the losses from the 2008 Hurricanes. Excluding the
effects of ceded reinstatement premiums as a result of the 2008 Hurricanes, net earned premium
increased 4.1% in 2009 compared to 2008 and 9.0% in 2008 compared to 2007.
57
Commission Income Commission income from unaffiliated business decreased 91.4% to $0.1
million in 2009 compared to 2008 and decreased 42.1% to $1.0 million in 2008 compared to $1.7
million in 2007. Beginning with the 2006 underwriting year, there are no longer any unaffiliated
marine pool insurance companies and we purchased the Syndicate 1221 minority interest, therefore
any profit commission therefore results from the run-off of underwriting years prior to 2006.
Net Investment Income Net investment income decreased 1.4% in 2009 to $75.5 million
compared to 2008 as a result of lower investment yields partially offset by an increase in invested
assets resulting from positive cash flow from operations. Net investment income increased 8.3% in
2008 to $76.6 million compared to 2007 as the result of the increase in invested assets resulting
from positive cash flow from operations partially offset by lower investment yields. The pre-tax
investment yield was 3.8%, 4.1% and 4.4% in 2009, 2008 and 2007, respectively. See the
Investments section below for additional information regarding our net investment income.
Net Other-Than-Temporary Impairment Losses Recognized in Earnings
Our net other-than-temporary impairment losses recognized in earnings for the periods indicated
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
(3,101 |
) |
|
$ |
(8,604 |
) |
|
$ |
|
|
Equity securities |
|
|
(8,776 |
) |
|
|
(28,441 |
) |
|
|
(655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other-than-temporary impairment losses
recognized in earnings |
|
$ |
(11,877 |
) |
|
$ |
(37,045 |
) |
|
$ |
(655 |
) |
|
|
|
|
|
|
|
|
|
|
The 2009 other-than-temporary impairments were primarily related to additional impairments on
equity securities that were impaired in 2008 as well as impairments on residential mortgage-backed
securities. The after-tax effects of net other-than-temporary impairment losses recognized in
earnings on the 2009 and 2008 net income were $7.8 million or $0.45 per diluted share and $24.1
million or $1.42 per share, respectively. In 2009, we recognized in earnings OTTI losses of $2.5
million and $0.08 million related to non-agency mortgage and asset-backed securities, respectively.
In 2009, we recognized in earnings OTTI losses of $8.8 million on 56 common stocks resulting from
additional impairments on equity securities that were impaired in 2008. In addition, in 2009 we
recognized in earnings OTTI losses of $0.6 million on 2 corporate bonds.
The 2008 other-than-temporary impairments were primarily due to equity impairments where the market
value of the security was less than 80% of the book value for six consecutive months resulting from
the significant overall market declines in the second half of 2008. In addition, 2008 also included
impairments on residential mortgage-backed securities. During 2008, we identified equity securities
with fair value of $34.4 million which were considered to be other-than-temporarily impaired.
Consequently, the cost of such securities was written down to fair value and we recognized realized
losses of $28.4 million. The equity impairments include $8.6 million in write-downs to fair value
for various broad based ETFs and mutual funds where the fair value was less than 80% of the book
value. During 2008, we identified fixed maturity securities with fair value of $7.4 million which
were considered to be other-than-temporarily impaired. Consequently, the cost of such securities was
written down to fair value and we recognized realized losses of $8.6 million.
58
The significant inputs used to measure the amount of credit loss recognized in earnings were actual
delinquency rates, default probability assumptions, severity assumptions and prepayment
assumptions. Projected losses are a function of both loss severity and probability of default.
Default probability and severity assumptions differ based on property type, vintage and the stress
of the collateral. We do not intend to sell any of these securities and it is more likely than not
that we will not be required sell these securities before the recovery of the amortized cost basis.
Net Realized Gains (Losses)
Our realized gains and losses for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
$ |
18,312 |
|
|
$ |
3,650 |
|
|
$ |
1,320 |
|
(Losses) |
|
|
(9,676 |
) |
|
|
(1,670 |
) |
|
|
(1,749 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
8,636 |
|
|
|
1,980 |
|
|
|
(429 |
) |
|
|
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
|
2,110 |
|
|
|
720 |
|
|
|
3,626 |
|
(Losses) |
|
|
(1,529 |
) |
|
|
(3,954 |
) |
|
|
(536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
581 |
|
|
|
(3,234 |
) |
|
|
3,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) |
|
$ |
9,217 |
|
|
$ |
(1,254 |
) |
|
$ |
2,661 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax net income included $9.2 million of net realized gains for 2009 compared to $1.3 million of
net realized losses for 2008 and net realized gains of $2.7 million for 2007. On an after-tax
basis, the net realized gains for 2009 were $5.9 million or $0.34 per diluted share compared to the
net realized losses of $0.8 million or $0.05 per diluted share for 2008 and the net realized gains
of $1.7 million or $0.10 per diluted share for 2007. Net realized gains and losses are generated
from the sale of securities in the normal course of management of the investment portfolio.
Other Income/(Expense) Other income/(expense) for 2009, 2008 and 2007 consisted primarily
of foreign exchange gains and losses from our Lloyds Operations and inspection fees related to our
specialty insurance business.
Operating Expenses
Net Losses and Loss Adjustment Expenses Incurred
The ratios of net losses and loss adjustment expenses to net earned premiums (loss ratios) were
63.8%, 61.0% and 56.6% in 2009, 2008 and 2007, respectively. The 2009 loss ratio of 63.8% was
favorably impacted by 1.3 loss ratio points resulting from an $8.9 million net redundancy of prior
years loss reserves. The 2008 loss ratio of 61.0% was favorably impacted by 7.9 loss ratio points
resulting from the $50.7 million net redundancy of prior years loss reserves and adversely
impacted by 3.7 loss ratio points related to the 2008 Hurricanes. The result of underwriting
losses caused by Hurricanes Gustav and Ike of approximately $29.3 million, including $12.2 million
of reinstatement costs, increased the 2008 combined
ratio by 4.3 ratio points. The 2007 loss ratio of 56.6% was favorably impacted by 7.8 loss ratio
points resulting from the $47.0 million net redundancy of prior year loss reserves. The 2007 loss
ratio also included 0.9 loss ratio points for the U.K. flood losses in the Insurance Companies
U.K. Branchs property business and the Lloyds marine cargo business.
59
During 2008 and 2007, reserve reductions resulting from periodic reviews of the 2005 Hurricanes
exposures reduced gross losses incurred by $12.3 million and $29.3 million, respectively. The
reductions to the 2005 Hurricanes gross reserve estimates resulted in reductions of $1.0 million
and $1.9 million to our 2008 and 2007 net loss incurred estimates, respectively, and reductions of
$0.8 million and $0.7 million to our 2008 and 2007 reinstatement cost estimates, respectively. As
a result of these reviews in 2007, we also reallocated our net retention for these events between
our Insurance Companies and Lloyds operations and the result was to increase the Insurance
Companies loss incurred by $1.5 million and decrease the Lloyds loss incurred by $3.4 million.
During 2009 there was a minor increase in the gross and net losses incurred for the 2005 Hurricanes
of $0.7 million and $0.1 million, respectively.
Prior Year Reserve Redundancies/Deficiencies
As part of our regular review of prior reserves, our actuaries may determine, based on their
judgment, that certain assumptions made in the reserving process in prior years may need to be
revised to reflect various factors, likely including the availability of additional information.
Based on their reserve analyses, our actuaries may make corresponding reserve adjustments.
Prior year reserve redundancies of $8.9 million, $50.7 million and $47.0 million net of reinsurance
were recorded in 2009, 2008 and 2007, respectively, as discussed below. The relevant factors that
may have a significant impact on the establishment and adjustment of loss and LAE reserves can vary
by line of business and from period to period.
To the extent that reserves are deficient or redundant, the amount of such deficiency or
redundancy is recorded as a charge or credit to earnings in the period in which the deficiency or
redundancy is identified based on the information that is available at that time.
The segment and line of business breakdowns of prior period net reserve deficiencies (redundancies)
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
Insurance Companies |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
11,893 |
|
|
$ |
(5,298 |
) |
|
$ |
(11,595 |
) |
Property Casualty |
|
|
(35,658 |
) |
|
|
(33,065 |
) |
|
|
(11,836 |
) |
Professional Liability |
|
|
20,686 |
|
|
|
(3,559 |
) |
|
|
(10,365 |
) |
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
$ |
(3,079 |
) |
|
$ |
(41,922 |
) |
|
$ |
(33,796 |
) |
Lloyds Operations |
|
|
(5,862 |
) |
|
|
(8,824 |
) |
|
|
(13,213 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(8,941 |
) |
|
$ |
(50,746 |
) |
|
$ |
(47,009 |
) |
|
|
|
|
|
|
|
|
|
|
Following is a discussion of relevant factors impacting our 2009 loss reserves:
The Insurance Companies recorded $11.9 million of net prior year unfavorable development for the
marine business, of which $10.6 million arose in the marine liability business due to large loss
activity in excess of
our prior expectations mostly across underwriting years 2005 to 2008 that we recognized by reserve
strengthening.
60
The Insurance Companies recorded $35.7 million of net prior year savings for property casualty
business in total. The favorable development included:
|
|
|
$36.5 million for contractors liability due to an actuarial review conducted
in 2009 which indicated that loss development on the 2006 and prior underwriting years
has been more favorable than our prior expectations for those underwriting years |
|
|
|
$9.3 million from our primary E&S lines and $6.2 million in excess casualty
business due to favorable loss trends in underwriting years 2007 and prior, and |
|
|
|
$8.0 million of favorable development on our offshore energy (NavTech) book due
to favorable claims trends across a number of prior underwriting years. |
Partially offsetting these favorable developments were adverse development of:
|
|
|
$12.0 million in our Nav Pac business due to reported
loss activity in excess of our prior expectations from most underwriting years
resulting from reviews of open claims in the auto and liability lines of business |
|
|
|
$6.4 million from our liquor business, which is now in
run-off, and |
|
|
|
$5.9 million in our personal umbrella books of business across most
underwriting years where large loss activity has exceeded our expectations. |
The Insurance Companies recorded $20.7 million of net prior year unfavorable development for
professional liability.
|
|
|
The directors and officers liability book of business had $12.4 million of adverse
development, which was primarily attributable to the unexpected development of previously
reported claims in the 2006 and prior underwriting years. This loss activity was
inconsistent with the loss emergence trends that we observed in calendar years 2007 and
2008 and it caused us to increase our ultimate loss projections in the 2006 and prior
underwriting years, as well as those in the more current underwriting years. |
|
|
|
The lawyers liability book of business had adverse development of $8.3 million due to
reported loss activity in underwriting years 2005 to 2008 in excess of our prior
expectations. |
The Lloyds Operations recorded $5.9 million of net favorable development which included: $11.0
million on Marine business concentrated in the liability specie and cargo books due to reported
losses being less than our expectations in underwriting years 2004 to 2008 and $2.5 million on
offshore energy business due to favorable loss trends in several years, partially offset by $4.7
million of adverse loss development in the professional liability books due to reported loss
activity in excess of our expectations in the lawyers liability book of business for losses occurring in 2007
and $3.0 million in the property book due to an extension in the loss development pattern for the
2006 and 2007 underwriting years.
Following is a discussion of relevant factors impacting our 2008 loss reserves:
The Insurance Companies recorded $5.3 million of net prior year savings for marine business,
primarily comprised of $4.7 million of savings in the marine liability business, $2.8 million of
savings in the protection and indemnity business, $1.4 million of savings in the transport business
and $1.4 million of
savings due to a review of reinsurance recoverable in the second quarter of 2008, partially offset
by $2.7 million of strengthening in the cargo business, $1.4 million of strengthening in the craft
and hull businesses, and $0.7 million recorded for a commutation with a reinsurer. The favorable
development for marine liability, protection and indemnity, and transport was primarily due to
reduced claims activity for underwriting years 2003 through 2006 as well as IBNR loss reserve
reductions that resulted from the reduced claims activity. The adverse development for cargo,
craft and hull was primarily due to several large claims in underwriting years 2005 and 2006.
61
The Insurance Companies recorded $33.1 million of net prior year savings for property casualty
business. This included $31.6 million savings in the contractors liability business, $3.8 million
of savings in the offshore energy business, $3.7 million of net prior year savings in the property
and aviation run-off business $1.4 million of savings in the commercial umbrella business, $1.0
million of savings in the personal umbrella business, and $0.8 million of savings in the primary
E&S business; partially offset by $1.6 million of net adverse development in the middle markets
business as a result of an actuarial analysis that indicated that strengthening is required for the
automobile coverage due to frequency and severity in excess of our expectations and $7.1 million of
strengthening due to greater than expected loss activity in a discontinued liquor liability program
and $0.8 million of strengthening in the program business. The favorable development for
contractors liability, commercial umbrella, personal umbrella and primary E&S were primarily due
to reduced claims activity in underwriting years 2003 through 2006. The favorable development for
the aviation business was as a result of an actuarial analysis that indicated that the losses are
substantially reported and the IBNR loss reserves could be reduced. The adverse development for
the liquor liability business was due to a discontinued program and the adverse development on the
programs business was due to an active program.
The Insurance Companies recorded $3.6 million of net prior year savings for professional
liability. This was primarily due to the reduction in case and IBNR reserves for the directors and
officers business in underwriting years 2004 through 2006 resulting from reported losses being less
than anticipated during 2008.
The Lloyds Operations recorded $8.8 million of net prior year savings, primarily in the marine
liability, energy, specie and reinsurance business for underwriting years 2005 and prior. The
favorable development is the result of more extensive analysis of the potential future development
which led us to shorten the development patterns.
Following is a discussion of relevant factors impacting our 2007 loss reserves:
The Insurance Companies recorded $11.6 million of net prior years savings in the marine business
primarily comprised of $6.5 million of savings in the transport business, $3.7 million of savings
in the marine liability business, $1.6 million of savings in the cargo business, $1.0 million of
savings in each of the hull; partially offset by $1.6 million for uncollectible reinsurance
recoverables for asbestos losses. The favorable development for the
liability, cargo and hull coverages was primarily due to reduced claim activity for the 2005 and 2006
underwriting years. Prior to 2007, because the Company did not have sufficient experience in the
transport product line, it instead used its hull and liability products loss development experience
as a key assumption in setting the IBNR loss reserves for its transport product. Commencing in
2007, our actuaries determined that the Companys loss development experience for its transport
product had become sufficiently credible to begin establishing transport reserves using such
experience, which resulted in the prior year savings referred to above recorded for this business.
62
The Insurance Companies recorded $11.8 million of net prior years savings almost entirely for
its property casualty business related to the contractors liability business for the years 1998 through 2006.
The prior years savings recorded for contractors liability business was due mostly to continued
favorable loss frequency and severity trends for 2003 to 2006 compared to expectations. Our
actuaries believe that the favorable loss frequency trends result primarily from a number of
underwriting and coverage changes since 2002, including the migration to non-admitted business from
admitted business in 2003, which allowed the Company to exclude certain previously permitted
exposures (for example, exposure to construction work performed prior to the policy inception), and
withdrawals from certain contractor classes previously underwritten. Our actuaries believe that
the favorable loss severity trends result primarily from improved claim practices coupled with a
California legislative change, effective in mid-2002, which provides for an alternative dispute
resolution system with respect to construction defect claims and is intended to avoid or mitigate
costly litigation and claims settlements. While our actuaries were unable to precisely quantify
the impact of each of the foregoing factors, such factors were judgmentally taken into account in
recording such prior years savings for contractors liability business by evaluating actual loss
development compared to expected loss development coupled with a frequency and severity claims
analysis conducted in 2007.
The Insurance Companies have historically reserved for the professional liability business using
ultimate loss ratios based on industry experience for this line of business given the Companys
limited claims history. Such industry experience is heavily influenced by the historical frequency
and severity of large securities class action lawsuits. During 2007, the Insurance Companies
reduced the net reserves for such claims-made policies compared to year-end 2006 by $10.4 million,
mostly related to policies issued in 2004 and 2005. The reductions were made to recognize both the
low level of open claim counts and the lack of observed claim severity compared to expectations at
the time the reserves were initially established using industry experience.
The Lloyds Operations recorded $13.2 million of net prior year savings, comprised of $3.4 million
due to a review of the 2005 Hurricanes Katrina and Rita loss estimates, a release of approximately
$2.0 million following a review of open claim files for the years 1998 to 2001, a $4.6 million
reduction in our 2004 underwriting year estimates for the marine liability book due to favorable
loss trends, and the remaining $3.2 million was mostly for offshore energy and marine liability
business on business underwritten during 2002.
Hurricanes Gustav and Ike
During 2008, we recorded gross and net loss estimates of $114.0 million and $17.2 million,
respectively, exclusive of $12.2 million for the cost of excess-of-loss reinstatement premiums,
related to the third quarter 2008 Hurricanes Gustav and Ike. Our pre-tax net loss as a result of
Hurricanes Gustav and Ike was approximately $29.3 million, which increased our 2008 combined ratio
by 4.3 ratio points.
63
The following table sets forth our gross and net loss and LAE reserves, incurred loss and LAE, and
payments for the 2008 Hurricanes Gustav and Ike for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
107,399 |
|
|
$ |
|
|
Incurred loss & LAE |
|
|
1,039 |
|
|
|
114,000 |
|
Calendar year payments |
|
|
48,929 |
|
|
|
6,601 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
59,509 |
|
|
$ |
107,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
34,015 |
|
|
$ |
70,299 |
|
Gross IBNR loss reserves |
|
|
25,494 |
|
|
|
37,100 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
59,509 |
|
|
$ |
107,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
12,923 |
|
|
$ |
|
|
Incurred loss & LAE |
|
|
978 |
|
|
|
17,169 |
|
Calendar year payments |
|
|
11,218 |
|
|
|
4,246 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
2,683 |
|
|
$ |
12,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
1,793 |
|
|
$ |
11,696 |
|
Net IBNR loss reserves |
|
|
890 |
|
|
|
1,227 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
2,683 |
|
|
$ |
12,923 |
|
|
|
|
|
|
|
|
Hurricanes Katrina and Rita
During the 2005 third quarter, we recorded gross and net loss estimates of $471.0 million and $22.3
million, respectively, exclusive of $14.5 million for the cost of excess-of-loss reinstatement
premiums, related to Hurricanes Katrina and Rita.
64
The following tables set forth our gross and net loss and LAE reserves, incurred loss and LAE, and
payments for the 2005 Hurricanes Katrina and Rita for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
97,732 |
|
|
$ |
141,831 |
|
|
$ |
319,230 |
|
Incurred loss & LAE |
|
|
671 |
|
|
|
(12,250 |
) |
|
|
(29,349 |
) |
Calendar year payments |
|
|
31,365 |
|
|
|
31,849 |
|
|
|
148,050 |
|
|
|
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
67,038 |
|
|
$ |
97,732 |
|
|
$ |
141,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
49,291 |
|
|
$ |
62,732 |
|
|
$ |
94,959 |
|
Gross IBNR loss reserves |
|
|
17,747 |
|
|
|
35,000 |
|
|
|
46,872 |
|
|
|
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
67,038 |
|
|
$ |
97,732 |
|
|
$ |
141,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
3,667 |
|
|
$ |
4,519 |
|
|
$ |
10,003 |
|
Incurred loss & LAE |
|
|
114 |
|
|
|
(990 |
) |
|
|
(1,909 |
) |
Calendar year payments |
|
|
245 |
|
|
|
(138 |
) |
|
|
3,575 |
|
|
|
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
3,536 |
|
|
$ |
3,667 |
|
|
$ |
4,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
183 |
|
|
$ |
279 |
|
|
$ |
646 |
|
Net IBNR loss reserves |
|
|
3,353 |
|
|
|
3,388 |
|
|
|
3,873 |
|
|
|
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
3,536 |
|
|
$ |
3,667 |
|
|
$ |
4,519 |
|
|
|
|
|
|
|
|
|
|
|
Asbestos Liability
Our exposure to asbestos liability principally stems from marine liability insurance written on an
occurrence basis during the mid-1980s. In general, our participation on such risks is in the
excess layers, which requires the underlying coverage to be exhausted prior to coverage being
triggered in our layer. In many instances we are one of many insurers who participate in the
defense and ultimate settlement of these claims, and we are generally a minor participant in the
overall insurance coverage and settlement.
The reserves for asbestos exposures at December 31, 2009 are for: (i) one large settled claim for
excess insurance policy limits exposed to a class action suit against an insured involved in the
manufacturing or distribution of asbestos products being paid over several years (two other large
settled claims were fully paid in 2007); (ii) other insureds not directly involved in the
manufacturing or distribution of asbestos products, but that have more than incidental asbestos
exposure for their purchase or use of products that contained asbestos; and (iii) attritional
asbestos claims that could be expected to occur over time. Substantially all of our asbestos
liability reserves are included in our marine loss reserves.
We believe that there are no remaining known claims where we would suffer a material loss as a
result of excess policy limits being exposed to class action suits for insureds involved in the
manufacturing or distribution of asbestos products. There can be no assurances, however, that
material loss development may not arise in the future from existing asbestos claims or new claims
given the evolving and complex legal environment that may directly impact the outcome of the
asbestos exposures of our insureds.
65
The following tables set forth our gross and net loss and LAE reserves for our asbestos exposures
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
21,774 |
|
|
$ |
23,194 |
|
|
$ |
37,171 |
|
Incurred loss & LAE |
|
|
928 |
|
|
|
796 |
|
|
|
(780 |
) |
Calendar year payments |
|
|
555 |
|
|
|
2,216 |
|
|
|
13,197 |
|
|
|
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
22,147 |
|
|
$ |
21,774 |
|
|
$ |
23,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
14,291 |
|
|
$ |
13,918 |
|
|
$ |
16,014 |
|
Gross IBNR loss reserves |
|
|
7,856 |
|
|
|
7,856 |
|
|
|
7,180 |
|
|
|
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
22,147 |
|
|
$ |
21,774 |
|
|
$ |
23,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
16,683 |
|
|
$ |
16,717 |
|
|
$ |
21,381 |
|
Incurred loss & LAE |
|
|
(25 |
) |
|
|
263 |
|
|
|
1,779 |
|
Calendar year payments |
|
|
(105 |
) |
|
|
297 |
|
|
|
6,443 |
|
|
|
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
16,763 |
|
|
$ |
16,683 |
|
|
$ |
16,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
9,112 |
|
|
$ |
9,032 |
|
|
$ |
9,715 |
|
Net IBNR loss reserves |
|
|
7,651 |
|
|
|
7,651 |
|
|
|
7,002 |
|
|
|
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
16,763 |
|
|
$ |
16,683 |
|
|
$ |
16,717 |
|
|
|
|
|
|
|
|
|
|
|
The ceded asbestos paid and unpaid recoverables were $8.9 million at December 31, 2009 and
2008, respectively. During 2007, we increased our provision for uncollectible reinsurance for
asbestos losses by $1.6 million which was recorded in incurred losses. In addition, in 2007, we
settled demands for arbitration with two asbestos reinsurers. We believe that we will be able to
collect reinsurance on the gross portion of its historic gross asbestos exposure in the above
table. To the extent we incur additional gross loss development for our historic asbestos exposure,
we do not expect to realize additional reinsurance recoverables.
66
Loss Reserves
As illustrated in the following table, our overall reinsurance recoverable amounts for paid and
unpaid losses have decreased during 2009 as we utilized less reinsurance in 2009 compared to 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverables: |
|
|
|
|
|
|
|
|
|
|
|
|
Paid losses |
|
$ |
76,505 |
|
|
$ |
67,227 |
|
|
$ |
9,278 |
|
Unpaid losses and LAE reserves |
|
|
807,352 |
|
|
|
853,793 |
|
|
|
(46,441 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
883,857 |
|
|
$ |
921,020 |
|
|
$ |
(37,163 |
) |
|
|
|
|
|
|
|
|
|
|
The following table sets forth our gross reserves for losses and LAE reduced for reinsurance
recoverable on such amounts resulting in net loss and LAE reserves (a non-GAAP measure reconciled
in the following table) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves for losses and LAE |
|
$ |
1,920,286 |
|
|
$ |
1,853,664 |
|
|
$ |
66,622 |
|
Less: Reinsurance recoverable on unpaid
losses and LAE reserves |
|
|
807,352 |
|
|
|
853,793 |
|
|
|
(46,441 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss and LAE reserves |
|
$ |
1,112,934 |
|
|
$ |
999,871 |
|
|
$ |
113,063 |
|
|
|
|
|
|
|
|
|
|
|
67
The following tables set forth our net case loss and LAE reserves and net IBNR reserves (a non-GAAP
measure reconciled above) by segment and line of business for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Net |
|
|
Net |
|
|
Total |
|
|
% of IBNR |
|
|
|
Reported |
|
|
IBNR |
|
|
Net Loss |
|
|
to Total Net |
|
|
|
Reserves |
|
|
Reserves |
|
|
Reserves |
|
|
Loss Reserves |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
113,604 |
|
|
$ |
100,042 |
|
|
$ |
213,646 |
|
|
|
46.8 |
% |
Property Casualty |
|
|
134,427 |
|
|
|
351,985 |
|
|
|
486,412 |
|
|
|
72.4 |
% |
Professional liability |
|
|
38,410 |
|
|
|
68,807 |
|
|
|
107,217 |
|
|
|
64.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Companies |
|
|
286,441 |
|
|
|
520,834 |
|
|
|
807,275 |
|
|
|
64.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
107,800 |
|
|
|
101,851 |
|
|
|
209,651 |
|
|
|
48.6 |
% |
Property Casualty |
|
|
27,148 |
|
|
|
25,175 |
|
|
|
52,323 |
|
|
|
48.1 |
% |
Professional liability |
|
|
7,442 |
|
|
|
36,243 |
|
|
|
43,685 |
|
|
|
83.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lloyds Operations |
|
|
142,390 |
|
|
|
163,269 |
|
|
|
305,659 |
|
|
|
53.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
428,831 |
|
|
$ |
684,103 |
|
|
$ |
1,112,934 |
|
|
|
61.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Net |
|
|
Net |
|
|
Total |
|
|
% of IBNR |
|
|
|
Reported |
|
|
IBNR |
|
|
Net Loss |
|
|
to Total Net |
|
|
|
Reserves |
|
|
Reserves |
|
|
Reserves |
|
|
Loss Reserves |
|
|
|
($ in thousands) |
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
96,244 |
|
|
$ |
96,995 |
|
|
$ |
193,239 |
|
|
|
50.2 |
% |
Property Casualty |
|
|
115,810 |
|
|
|
358,305 |
|
|
|
474,115 |
|
|
|
75.6 |
% |
Professional liability |
|
|
22,913 |
|
|
|
58,793 |
|
|
|
81,706 |
|
|
|
72.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Companies |
|
|
234,967 |
|
|
|
514,093 |
|
|
|
749,060 |
|
|
|
68.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
99,233 |
|
|
|
78,293 |
|
|
|
177,526 |
|
|
|
44.1 |
% |
Property Casualty |
|
|
26,218 |
|
|
|
16,386 |
|
|
|
42,604 |
|
|
|
38.5 |
% |
Professional liability |
|
|
5,822 |
|
|
|
24,859 |
|
|
|
30,681 |
|
|
|
81.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lloyds Operations |
|
|
131,273 |
|
|
|
119,538 |
|
|
|
250,811 |
|
|
|
47.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
366,240 |
|
|
$ |
633,631 |
|
|
$ |
999,871 |
|
|
|
63.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
At December 31, 2009, the IBNR loss reserve was $684.1 million or 61.5% of our total loss reserves
compared to $633.6 million or 63.4% in 2008.
The increase in net loss reserves in all active lines of business is generally a reflection of the
growth in net premium volume over the last three years coupled with a changing mix of business to
longer tail lines of business such as the specialty lines of business (construction defect,
commercial excess, primary excess), professional liability lines of business and marine liability
and transport business in ocean marine. These products, which typically have a longer settlement
period compared to the mix of business we have historically written, are becoming larger components
of our overall business.
Commission Expense. Commission expenses paid to unaffiliated brokers and agents are
generally based on a percentage of the gross written premiums and are reduced by ceding commissions
we may receive on the ceded written premiums. Commissions are generally deferred and recorded as
deferred policy acquisition costs to the extent that they relate to unearned premium. The
percentages of commission expenses to net earned premium was 14.5% in 2009, 13.9% in 2008 and 12.9%
in 2007. The 2008 commission expense ratio excluding the effects of the 2008 Hurricanes was 13.7%.
Other Operating Expense. The 7.7% and 11.5% increases in other operating expenses when comparing
2009 to 2008 and comparing 2008 to 2007, respectively, were attributable primarily to employee
related expenses resulting from expansion of the business.
Interest Expense. The interest expense reflects interest on our Senior notes issued in April 2006.
Income Taxes
The income tax expense was $23.7 million, $17.0 million and $43.6 million for 2009, 2008 and 2007,
respectively. The effective tax rates for 2009, 2008 and 2007 were 27.3%, 24.8% and 31.3%,
respectively. Our effective tax rate was less than 35% due to permanent differences between book
and tax return income, with the most significant item being tax exempt interest. As of December
31, 2009 and 2008, the net deferred federal, foreign, state and local tax assets were $31.2 million
and $54.7 million, respectively.
We are subject to the tax regulations of the United States and foreign countries in which we
operate. We file a consolidated federal tax return, which includes all domestic subsidiaries and
the U.K. Branch. The income from the foreign operations is designated as either U.S. connected
income or non-U.S. connected income. Lloyds is required to pay U.S. income tax on U.S. connected
income written by Lloyds syndicates. Lloyds and the IRS have entered into an agreement whereby
the amount of tax due on U.S. connected income is calculated by Lloyds and remitted directly to
the IRS. These amounts are then charged to the corporate members in proportion to their
participation in the relevant syndicates. Our corporate members are subject to this agreement and
will receive U.K. tax credits for any U.S. income tax incurred up to the U.K. income tax charged on
the U.S. income. The non-U.S. connected insurance income would generally constitute taxable income
under the Subpart F income section of the Internal Revenue Code since less than 50% of our premium
is derived within the U.K. and would therefore be subject to U.S. taxation when the Lloyds year of
account closes. Taxes are accrued at a 35% rate on our foreign source insurance income and foreign
tax credits, where available, are utilized to offset U.S. tax as permitted. Our effective tax rate
for Syndicate 1221 taxable income could substantially exceed 35% to the extent we are unable to
offset U.S. taxes paid under Subpart F tax regulations with U.K. tax credits on future underwriting
year distributions. U.S. taxes are not accrued on the earnings of our foreign agencies as these
earnings are not subject to the Subpart F tax regulations. These earnings are subject to taxes
under U.K. tax regulations. A finance bill was enacted in the U.K. on July 19, 2007 that reduces
the U.K. corporate tax rate from 30% to 28% effective April 1, 2008. The effect of such tax rate
change was not material to our financial statements.
We have not provided for U.S. deferred income taxes on the undistributed earnings of approximately
$57.6 million of our non-U.S. subsidiaries since these earnings are intended to be permanently
reinvested in the foreign subsidiary. However, in the future, if such earnings were distributed to
the Company, taxes of approximately $4.0 million would be payable on such undistributed earnings
and would be reflected in the tax provision for the year in which these earnings are no longer
intended to be permanently reinvested in the non-U.S. subsidiary assuming all foreign tax credits
are realized.
69
We had net state and local deferred tax assets amounting to potential future tax benefits of $2.6
million and $6.2 million at December 31, 2009 and 2008, respectively. Included in the deferred tax
assets are net operating loss carryforwards of $1.3 million and $0.5 million at December 31, 2009
and 2008, respectively. A valuation allowance was established for the full amount of these
potential future tax benefits due to the uncertainty associated with their realization. Our state
and local tax carryforwards at December 31, 2009 expire from 2023 to 2025.
Segment Information
We classify our business into two underwriting segments consisting of the Insurance Companies and
the Lloyds Operations, which are separately managed, and a Corporate segment. Segment data for
each of the two underwriting segments include allocations of revenues and expenses of the
wholly-owned underwriting management companies and the Parent Companys operating expenses and
related income tax amounts. The Corporate segment consists of the Parent Companys investment
income, interest expense and the related tax effect.
We evaluate the performance of each segment based on its underwriting and GAAP results. The
Insurance Companies and the Lloyds Operations results are measured by taking into account net
earned premiums,
net losses and loss adjustment expenses, commission expenses, other operating expenses, commission
income and other income (expense). Each segment also maintains its own investments, on which it
earns income and realizes capital gains or losses. Our underwriting performance is evaluated
separately from the performance of our investment portfolios.
Following are the financial results of our two underwriting segments.
Insurance Companies
The Insurance Companies consist of Navigators Insurance Company, including its U.K. Branch, and its
wholly-owned subsidiary, Navigators Specialty Insurance Company. They are primarily engaged in
underwriting marine insurance and related lines of business, professional liability insurance and
specialty lines of business including contractors general liability insurance, commercial umbrella
and primary and excess casualty businesses. Navigators Specialty Insurance Company underwrites specialty and
professional liability insurance on an excess and surplus lines basis. Navigators Specialty
Insurance Company is 100% reinsured by Navigators Insurance Company.
70
The following table sets
forth the results of operations for the Insurance Companies for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
730,776 |
|
|
$ |
762,190 |
|
|
$ |
774,346 |
|
Net written premiums |
|
|
477,673 |
|
|
|
472,688 |
|
|
|
478,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
479,121 |
|
|
|
463,298 |
|
|
|
443,456 |
|
Net losses and loss adjustment expenses |
|
|
(304,672 |
) |
|
|
(275,767 |
) |
|
|
(256,652 |
) |
Commission expenses |
|
|
(61,949 |
) |
|
|
(55,752 |
) |
|
|
(52,490 |
) |
Other operating expenses |
|
|
(104,801 |
) |
|
|
(92,297 |
) |
|
|
(81,053 |
) |
Commission income and other income (expense) |
|
|
3,498 |
|
|
|
2,145 |
|
|
|
1,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
11,197 |
|
|
|
41,627 |
|
|
|
54,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
65,717 |
|
|
|
63,544 |
|
|
|
58,261 |
|
Net realized gains (losses) |
|
|
533 |
|
|
|
(37,822 |
) |
|
|
1,973 |
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
77,447 |
|
|
|
67,349 |
|
|
|
115,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
19,819 |
|
|
|
16,401 |
|
|
|
35,061 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
57,628 |
|
|
$ |
50,948 |
|
|
$ |
79,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
|
$ |
2,554,037 |
|
|
$ |
2,477,139 |
|
|
$ |
2,322,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expenses ratio |
|
|
63.6 |
% |
|
|
59.5 |
% |
|
|
57.9 |
% |
Commission expense ratio |
|
|
12.9 |
% |
|
|
12.0 |
% |
|
|
11.8 |
% |
Other operating expenses ratio (1) |
|
|
21.1 |
% |
|
|
19.5 |
% |
|
|
17.9 |
% |
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
97.6 |
% |
|
|
91.0 |
% |
|
|
87.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Other operating expenses and Commission income and
Other income (expense). |
71
The following table sets
forth the underwriting results for the Insurance Companies for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premiums |
|
|
Incurred |
|
|
Expenses |
|
|
Profit (Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
157,534 |
|
|
$ |
109,916 |
|
|
$ |
50,451 |
|
|
$ |
(2,833 |
) |
|
|
69.8 |
% |
|
|
32.0 |
% |
|
|
101.8 |
% |
Property Casualty |
|
|
246,143 |
|
|
|
123,775 |
|
|
|
86,116 |
|
|
|
36,252 |
|
|
|
50.3 |
% |
|
|
35.0 |
% |
|
|
85.3 |
% |
Professional Liability |
|
|
75,444 |
|
|
|
70,981 |
|
|
|
26,685 |
|
|
|
(22,222 |
) |
|
|
94.1 |
% |
|
|
35.4 |
% |
|
|
129.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
479,121 |
|
|
$ |
304,672 |
|
|
$ |
163,252 |
|
|
$ |
11,197 |
|
|
|
63.6 |
% |
|
|
34.0 |
% |
|
|
97.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premiums |
|
|
Incurred |
|
|
Expenses |
|
|
Profit (Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
132,005 |
|
|
$ |
84,099 |
|
|
$ |
38,184 |
|
|
$ |
9,722 |
|
|
|
63.7 |
% |
|
|
28.9 |
% |
|
|
92.6 |
% |
Property Casualty |
|
|
273,977 |
|
|
|
158,457 |
|
|
|
87,310 |
|
|
|
28,210 |
|
|
|
57.8 |
% |
|
|
31.9 |
% |
|
|
89.7 |
% |
Professional
Liability |
|
|
57,316 |
|
|
|
33,211 |
|
|
|
20,410 |
|
|
|
3,695 |
|
|
|
57.9 |
% |
|
|
35.6 |
% |
|
|
93.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
463,298 |
|
|
$ |
275,767 |
|
|
$ |
145,904 |
|
|
$ |
41,627 |
|
|
|
59.5 |
% |
|
|
31.5 |
% |
|
|
91.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premiums |
|
|
Incurred |
|
|
Expenses |
|
|
Profit (Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
112,370 |
|
|
$ |
64,802 |
|
|
$ |
31,878 |
|
|
$ |
15,690 |
|
|
|
57.7 |
% |
|
|
28.4 |
% |
|
|
86.1 |
% |
Property Casualty |
|
|
275,937 |
|
|
|
159,248 |
|
|
|
80,509 |
|
|
|
36,180 |
|
|
|
57.7 |
% |
|
|
29.2 |
% |
|
|
86.9 |
% |
Professional
Liability |
|
|
55,149 |
|
|
|
32,602 |
|
|
|
19,646 |
|
|
|
2,901 |
|
|
|
59.1 |
% |
|
|
35.6 |
% |
|
|
94.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
443,456 |
|
|
$ |
256,652 |
|
|
$ |
132,033 |
|
|
$ |
54,771 |
|
|
|
57.9 |
% |
|
|
29.7 |
% |
|
|
87.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall, the net earned premium increased 3.4%, 4.5% and 34.5% in 2009, 2008 and 2007,
respectively, reflecting overall increased retention of the business written, higher average
renewal rates in 2009 overall business expansion in 2007 and expansion of our professional
liability business. These factors were partially offset by a decline in our property casualty
business in 2009 as well as overall average renewal rate declines in 2008.
The 2009 underwriting results were favorably impacted by $3.1 million or 0.6 loss ratio points for
net prior year savings, which is discussed in the prior year reserve redundancies/deficiencies
section. The 2009 net prior year savings declined $38.8 million compared to 2008.
72
The following table sets forth the impact of Hurricanes Gustav and Ike on the Insurance Companies
2008 financial results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane |
|
|
Hurricane |
|
|
|
|
|
|
Gustav |
|
|
Ike |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in net earned premiums
for reinstatement costs |
|
$ |
(871 |
) |
|
$ |
(6,343 |
) |
|
$ |
(7,214 |
) |
Gross losses incurred |
|
|
7,200 |
|
|
|
53,800 |
|
|
|
61,000 |
|
Reinsurance recoverable |
|
|
4,377 |
|
|
|
47,546 |
|
|
|
51,923 |
|
|
|
|
|
|
|
|
|
|
|
Net losses incurred |
|
|
2,823 |
|
|
|
6,254 |
|
|
|
9,077 |
|
|
|
|
|
|
|
|
|
|
|
Underwriting loss |
|
$ |
(3,694 |
) |
|
$ |
(12,597 |
) |
|
$ |
(16,291 |
) |
|
|
|
|
|
|
|
|
|
|
After-tax net loss |
|
$ |
(2,401 |
) |
|
$ |
(8,188 |
) |
|
$ |
(10,589 |
) |
|
|
|
|
|
|
|
|
|
|
Reduction in earnings per share |
|
$ |
(0.14 |
) |
|
$ |
(0.48 |
) |
|
$ |
(0.62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on combined ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
0.7 |
% |
|
|
2.1 |
% |
|
|
2.8 |
% |
Expense ratio |
|
|
0.1 |
% |
|
|
0.4 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
0.8 |
% |
|
|
2.5 |
% |
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
|
The 2008 underwriting results were favorably impacted by $41.9 million or 9.0 loss ratio
points for net prior year savings, which is discussed in the prior year reserve
redundancies/deficiencies section. The 2008 pre-tax net loss to the Insurance Companies as the
result of losses caused by Hurricanes Gustav and Ike of approximately $16.3 million, including $7.2
million of reinstatement costs, increased the Insurance Companies 2008 combined ratio by 10.1
combined ratio points. The after-tax effect reduced net income by $10.6 million.
The 2007 underwriting results were favorably impacted by approximately $33.8 million or 7.6 loss
ratio points for net prior year savings across all of our lines of business due to favorable loss
development trends.
Reviews of our Insurance Companies Hurricanes Katrina and Rita exposures during 2007 resulted in a
reduction to the Insurance Companies pre-tax income by $1.5 million. Much of this impact was the
result of reallocating our net retention for these events between our Insurance Companies and
Lloyds Operations.
The approximate annualized pre-tax yields on the Insurance Companies investment portfolio,
excluding net realized capital gains and losses, approximated 4.1%, 4.3% and 4.5% for 2009, 2008
and 2007, respectively. The increase in net investment income in 2009, 2008 and 2007 versus the
comparable prior year was primarily due to the investment of new funds from positive cash flow from
operations. The portfolios duration was 4.7 years at December 31, 2009 and 4.8 years at December
31, 2008.
The 2009 and 2008 results included provisions of $10.2 million and $36.4
million, respectively, for declines in the market value of securities which were considered to be
other-than-temporary. The after-tax effects of such provisions on the 2009 and 2008 net income
were $6.7 million and $23.7 million, respectively.
73
Lloyds Operations
The Lloyds Operations primarily underwrite marine and related lines of business along with
professional liability insurance, and construction coverages for onshore energy business at
Lloyds through Syndicate 1221. The European property business, written by the Lloyds Operations
and the U.K. Branch beginning in 2006, was discontinued in the 2008 second quarter. Our Lloyds
Operations includes NUAL, a Lloyds underwriting agency which manages Syndicate 1221.
Syndicate
1221s stamp capacity was £124 million ($194 million) in 2009, £123 million ($228
million) in 2008 and £140 million ($280 million) in 2007. Stamp capacity is a measure of the
amount of premium a Lloyds syndicate is authorized to write as determined by the Council of
Lloyds. We controlled 100% of Syndicate 1221s total stamp capacity in 2009, 2008 and 2007
through our wholly-owned Lloyds corporate member (we utilized two wholly-owned Lloyds corporate
members prior to the 2008 underwriting year). Syndicate 1221s stamp capacity is expressed net of
commission (as is standard at Lloyds). The Syndicate 1221 premium recorded in our financial
statements is gross of commission. We provide letters of credit to Lloyds to support our
participation in Syndicate 1221s stamp capacity as discussed below under the caption Liquidity and
Capital Resources.
74
The following table sets
forth the results of operations of the Lloyds Operations for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
314,142 |
|
|
$ |
322,732 |
|
|
$ |
296,361 |
|
Net written premiums |
|
|
223,582 |
|
|
|
188,927 |
|
|
|
167,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
204,242 |
|
|
|
180,678 |
|
|
|
158,521 |
|
Net losses and loss adjustment expenses |
|
|
(131,326 |
) |
|
|
(117,364 |
) |
|
|
(83,940 |
) |
Commission expenses |
|
|
(37,727 |
) |
|
|
(34,033 |
) |
|
|
(25,123 |
) |
Other operating expenses |
|
|
(27,896 |
) |
|
|
(30,961 |
) |
|
|
(29,356 |
) |
Commission income and other income (expense) |
|
|
961 |
|
|
|
(600 |
) |
|
|
504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
|
8,254 |
|
|
|
(2,280 |
) |
|
|
20,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
9,229 |
|
|
|
11,655 |
|
|
|
10,524 |
|
Net realized gains (losses) |
|
|
(3,193 |
) |
|
|
(477 |
) |
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
14,290 |
|
|
|
8,898 |
|
|
|
31,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
5,582 |
|
|
|
3,269 |
|
|
|
10,946 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,708 |
|
|
$ |
5,629 |
|
|
$ |
20,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
|
$ |
799,577 |
|
|
$ |
779,800 |
|
|
$ |
744,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expenses ratio |
|
|
64.3 |
% |
|
|
65.0 |
% |
|
|
53.0 |
% |
Commission expense ratio |
|
|
18.5 |
% |
|
|
18.8 |
% |
|
|
15.8 |
% |
Other operating expenses ratio (1) |
|
|
13.2 |
% |
|
|
17.5 |
% |
|
|
18.2 |
% |
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
96.0 |
% |
|
|
101.3 |
% |
|
|
87.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Other operating expenses and Commission income and Other income
(expense). |
The 2009 earnings in the Lloyds Operations improved $3.1 million compared to 2008. The
Lloyds Operations utilized less reinsurance in 2009 compared to 2008, resulting in higher net
premiums. In addition, 2008 results were impacted by losses caused by Hurricanes Gustav and Ike of
approximately $13.1 million, including $5.0 million of reinstatement costs, which increased the
2008 combined ratio by 7.1 combined ratio points and reduced net income by $8.5 million.
The 2009 underwriting results were favorably impacted by approximately $5.9 million or 2.9 loss
ratio points for net prior years savings due to favorable loss development trends which are
discussed in the prior year reserve redundancies/deficiencies section. The 2009 net prior years
savings was a decline of $3.0 million compared to 2008.
75
The following table sets forth the impact of Hurricanes Gustav and Ike on the Lloyds Operations
2008 financial results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hurricane |
|
|
Hurricane |
|
|
|
|
|
|
Gustav |
|
|
Ike |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in net earned premiums
for reinstatement costs |
|
$ |
(672 |
) |
|
$ |
(4,292 |
) |
|
$ |
(4,964 |
) |
Gross losses incurred |
|
|
6,800 |
|
|
|
46,200 |
|
|
|
53,000 |
|
Reinsurance recoverable |
|
|
4,623 |
|
|
|
40,285 |
|
|
|
44,908 |
|
|
|
|
|
|
|
|
|
|
|
Net losses incurred |
|
|
2,177 |
|
|
|
5,915 |
|
|
|
8,092 |
|
|
|
|
|
|
|
|
|
|
|
Underwriting loss |
|
$ |
(2,849 |
) |
|
$ |
(10,207 |
) |
|
$ |
(13,056 |
) |
|
|
|
|
|
|
|
|
|
|
After-tax net loss |
|
$ |
(1,852 |
) |
|
$ |
(6,635 |
) |
|
$ |
(8,487 |
) |
|
|
|
|
|
|
|
|
|
|
Reduction in earnings per share |
|
$ |
(0.11 |
) |
|
$ |
(0.39 |
) |
|
$ |
(0.50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on combined ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
1.4 |
% |
|
|
4.7 |
% |
|
|
6.1 |
% |
Expense ratio |
|
|
0.2 |
% |
|
|
0.8 |
% |
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
1.6 |
% |
|
|
5.5 |
% |
|
|
7.1 |
% |
|
|
|
|
|
|
|
|
|
|
The 2008 earnings in the Lloyds Operations were impacted by losses caused by Hurricanes
Gustav and Ike of approximately $13.1 million, including $5.0 million of reinstatement costs, which
increased the 2008 combined ratio by 7.1 combined ratio points. The after tax effect reduced net
income by $8.5 million.
The 2008 underwriting results were favorably impacted by approximately $8.8 million or 4.9 loss
ratio points for net prior years savings due to favorable loss development trends, primarily in
the liability and offshore energy lines in underwriting years 2006 and prior, which is discussed in
the prior year reserve redundancies/deficiencies section. The 2007 earnings in the Lloyds
Operations reflect the continued favorable loss development trends.
The 2007 underwriting results were favorably impacted by approximately $13.2 million or 8.3 loss
ratio points for net prior years savings due to favorable loss development trends, primarily in
our 2004 and 2005 underwriting years.
Reviews of our Lloyds Operations Hurricanes Katrina and Rita exposures during 2007 resulted in a
reduction to the storm loss estimates and increased pre-tax income by $4.1 million consisting of
$3.4 million of decreases to incurred losses and a $0.7 million reduction in our reinstatement cost
estimates. A portion of this impact was the result of reallocating our net retention for these
events between our Insurance Companies and Lloyds Operations.
The pre-tax yields on the Lloyds Operations investments, excluding net realized capital gains and
losses, approximated 2.7%, 3.4% and 3.9% for 2009, 2008 and 2007, respectively. Such yields are
net of interest credits to certain reinsurers for funds withheld by our Lloyds Operations.
Generally, the Lloyds
Operations investments have been invested with a relatively short average duration, which is
reflected in the yield, in order to meet liquidity needs. The decrease in the Lloyds Operations
net investment income in 2009 was due to lower investment yields. The increase in the Lloyds
Operations net investment income in 2008 and 2007 is reflective of the increased investment
portfolio primarily due to positive cash flow from operations. The average duration of the Lloyds
Operations investment portfolio was 1.6 years at December 31, 2009 compared to 1.4 years at
December 31, 2008.
The 2009 and 2008 results included provisions of $1.6 million and $0.7 million,
respectively, for declines in the market value of securities which were considered to be
other-than-temporary. The after-tax effects of such provisions on the 2009 and 2008 net income
were $1.2 million and $0.5 million, respectively.
76
See Results of Operations and Overview Income Taxes for a discussion of the Lloyds Operations
income taxes, included herein.
Off-Balance Sheet Transactions
We have no material off-balance sheet transactions with the exception of our letter of credit
facility. For a discussion of our letter of credit facility, see Liquidity and Capital
Resources, included herein.
Tabular Disclosure of Contractual Obligations
The following table sets forth the best estimate of our known contractual obligations with
respect to the items indicated at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
Contractual Obligations |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for losses and LAE (1) |
|
$ |
1,920,286 |
|
|
$ |
731,746 |
|
|
$ |
668,866 |
|
|
$ |
267,634 |
|
|
$ |
252,040 |
|
7% Senior Notes (2) |
|
|
167,325 |
|
|
|
8,050 |
|
|
|
16,100 |
|
|
|
16,100 |
|
|
|
127,075 |
|
Operating Leases |
|
|
54,757 |
|
|
|
7,379 |
|
|
|
15,403 |
|
|
|
13,549 |
|
|
|
18,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,142,368 |
|
|
$ |
747,175 |
|
|
$ |
700,369 |
|
|
$ |
297,283 |
|
|
$ |
397,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts determined are estimates which are subject to a high degree of
variation and uncertainty, and are not subject to any specific payment schedule since the
timing of these obligations are not set contractually. The amounts in the above table exclude
reinsurance recoveries of $807 million. See Business Loss Reserves included herein. |
|
(2) |
|
Includes interest payments. |
77
Investments
The following tables set forth our cash and investments as of December 31, 2009 and 2008. The table
as of December 31, 2009 includes other-than-temporarily impaired (OTTI) securities recognized
within other comprehensive income (OCI).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
OTTI |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Cost or |
|
|
Recognized |
|
December 31, 2009 |
|
Fair Value |
|
|
Gains |
|
|
(Losses) |
|
|
Amortized Cost |
|
|
in OCI |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
$ |
471,598 |
|
|
$ |
7,397 |
|
|
$ |
(597 |
) |
|
$ |
464,798 |
|
|
$ |
|
|
States, municipalities and political
subdivisions |
|
|
676,699 |
|
|
|
25,044 |
|
|
|
(2,917 |
) |
|
|
654,572 |
|
|
|
|
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
283,578 |
|
|
|
12,607 |
|
|
|
(98 |
) |
|
|
271,069 |
|
|
|
|
|
Residential mortgage obligations |
|
|
31,071 |
|
|
|
|
|
|
|
(7,246 |
) |
|
|
38,317 |
|
|
|
(5,723 |
) |
Asset-backed securities |
|
|
16,469 |
|
|
|
612 |
|
|
|
(34 |
) |
|
|
15,891 |
|
|
|
(23 |
) |
Commercial mortgage-backed securities |
|
|
100,393 |
|
|
|
594 |
|
|
|
(5,028 |
) |
|
|
104,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
431,511 |
|
|
|
13,813 |
|
|
|
(12,406 |
) |
|
|
430,104 |
|
|
|
(5,746 |
) |
Corporate bonds |
|
|
236,861 |
|
|
|
9,111 |
|
|
|
(759 |
) |
|
|
228,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,816,669 |
|
|
|
55,365 |
|
|
|
(16,679 |
) |
|
|
1,777,983 |
|
|
|
(5,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
62,610 |
|
|
|
15,244 |
|
|
|
(10 |
) |
|
|
47,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
176,799 |
|
|
|
|
|
|
|
|
|
|
|
176,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,056,587 |
|
|
$ |
70,609 |
|
|
$ |
(16,689 |
) |
|
$ |
2,002,667 |
|
|
$ |
(5,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Cost or |
|
December 31, 2008 |
|
Fair Value |
|
|
Gains |
|
|
(Losses) |
|
|
Amortized Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
$ |
361,656 |
|
|
$ |
25,741 |
|
|
$ |
(145 |
) |
|
$ |
336,060 |
|
States, municipalities and political
subdivisions |
|
|
614,609 |
|
|
|
12,568 |
|
|
|
(8,036 |
) |
|
|
610,077 |
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
299,775 |
|
|
|
10,930 |
|
|
|
(26 |
) |
|
|
288,871 |
|
Residential mortgage obligations |
|
|
56,743 |
|
|
|
|
|
|
|
(27,119 |
) |
|
|
83,862 |
|
Asset-backed securities |
|
|
29,436 |
|
|
|
5 |
|
|
|
(1,289 |
) |
|
|
30,720 |
|
Commercial mortgage-backed securities |
|
|
92,684 |
|
|
|
|
|
|
|
(20,350 |
) |
|
|
113,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
478,638 |
|
|
|
10,935 |
|
|
|
(48,784 |
) |
|
|
516,487 |
|
Corporate bonds |
|
|
188,869 |
|
|
|
1,398 |
|
|
|
(14,660 |
) |
|
|
202,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,643,772 |
|
|
|
50,642 |
|
|
|
(71,625 |
) |
|
|
1,664,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
51,802 |
|
|
|
1,266 |
|
|
|
(1,987 |
) |
|
|
52,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
1,457 |
|
|
|
|
|
|
|
|
|
|
|
1,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
220,684 |
|
|
|
|
|
|
|
|
|
|
|
220,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,917,715 |
|
|
$ |
51,908 |
|
|
$ |
(73,612 |
) |
|
$ |
1,939,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets increased in 2009 compared to 2008 primarily due to cash flows from operations as
well as unrealized gains in 2009. Invested assets increased in 2008 compared to 2007 primarily due
to positive cash flows from operations partially offset by unrealized losses in 2008. The
consolidated average investment yield of the portfolio decreased in 2009 to 3.8% from 4.1% due to
the general decline in market yields over the period. The portfolios duration was 4.2 years and
4.3 years as of December 31, 2009 and 2008, respectively. Since the beginning of 2009, the
tax-exempt portion of our investment portfolio has increased by $30.1 million to approximately
34.9% of the fixed maturities investment portfolio at December 31, 2009 compared to approximately
36.8% at December 31, 2008.
We are a specialty insurance company and periods of moderate economic recession or inflation tend
not to have a significant direct effect on our underwriting operations. They do, however, impact
our investment portfolio. A decrease in interest rates will tend to decrease our yield and have a
positive effect on the fair value of our invested assets. An increase in interest rates will tend
to increase our yield and have a negative effect on the fair value of our invested assets.
79
Prepayment assumptions associated with the mortgage-backed and asset-backed securities are reviewed
on a periodic basis. When changes in prepayment assumptions are deemed necessary as the result of
actual prepayments differing from anticipated prepayments, securities are revalued based upon the
new prepayment assumptions utilizing the retrospective accounting method.
All fixed maturities, short-term investments and equity securities are carried at fair value. All
prices for our fixed maturities, short-term investments and equity securities valued as Level 1 or
Level 2 in the fair value hierarchy, as defined in the Financial Accounts Standards Board
Accounting Standards Codification 820 (ASC 820), Fair Value Measurements, are received from
independent pricing services utilized by one of our outside investment managers whom we employ to
assist us with investment accounting services. This manager utilizes a pricing committee which
approves the use of one or more independent pricing service vendors. The pricing committee
consists of five or more members, one from senior management and one from the accounting group with
the remainder from the asset class specialists and client strategists. The pricing source of each
security is determined in accordance with the pricing source procedures approved by the pricing
committee. The investment manager uses supporting documentation received from the independent
pricing service vendor detailing the inputs, models and processes used in the independent pricing
service vendors evaluation process to determine the appropriate fair value hierarchy. Any pricing
where the input is based solely on a broker price is deemed to be a Level 3 price.
Management has reviewed this process by which the manager determines the prices and has obtained
alternative pricing to validate a sampling of the pricing and assess their reasonableness.
80
The following table presents, for each of the fair value hierarchy levels, our fixed
maturities, equity securities and short-term investments that are measured at fair value as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
In Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
331,925 |
|
|
$ |
1,484,744 |
|
|
$ |
|
|
|
$ |
1,816,669 |
|
Equity securities |
|
|
62,610 |
|
|
|
|
|
|
|
|
|
|
|
62,610 |
|
Short-term investments |
|
|
9,992 |
|
|
|
166,807 |
|
|
|
|
|
|
|
176,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
404,527 |
|
|
$ |
1,651,551 |
|
|
$ |
|
|
|
$ |
2,056,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no significant judgments made in classifying instruments in the fair value
hierarchy.
The following table presents a reconciliation of the beginning and ending balances for all
investments measured at fair value using Level 3 inputs during the twelve months ended December 31,
2009:
|
|
|
|
|
|
|
Twelve Months Ended |
|
($ in thousands) |
|
December 31, 2009 |
|
|
|
|
|
|
Level 3 investments as of January 1 |
|
$ |
156 |
|
Unrealized net gains included in other
comprehensive income (loss) |
|
|
23 |
|
Purchases, sales, paydowns and amortization |
|
|
(23 |
) |
Transfer from Level 3 |
|
|
(156 |
) |
Transfer to Level 3 |
|
|
|
|
|
|
|
|
Level 3 investments as of December 31 |
|
$ |
|
|
|
|
|
|
81
The following tables set forth our U.S. Treasury bonds, agency bonds and foreign government bonds
as of December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
December 31, 2009 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bonds |
|
$ |
362,614 |
|
|
$ |
5,549 |
|
|
$ |
(560 |
) |
|
$ |
357,625 |
|
Agency bonds |
|
|
82,739 |
|
|
|
1,489 |
|
|
|
|
|
|
|
81,250 |
|
Foreign government bonds |
|
|
26,245 |
|
|
|
359 |
|
|
|
(37 |
) |
|
|
25,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
471,598 |
|
|
$ |
7,397 |
|
|
$ |
(597 |
) |
|
$ |
464,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
December 31, 2008 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bonds |
|
$ |
290,059 |
|
|
$ |
23,243 |
|
|
$ |
(143 |
) |
|
$ |
266,959 |
|
Agency bonds |
|
|
58,401 |
|
|
|
2,008 |
|
|
|
(2 |
) |
|
|
56,395 |
|
Foreign government bonds |
|
|
13,196 |
|
|
|
490 |
|
|
|
|
|
|
|
12,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
361,656 |
|
|
$ |
25,741 |
|
|
$ |
(145 |
) |
|
$ |
336,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
The following table sets forth the fifteen largest holdings categorized as state, municipalities
and political subdivisions by counterparty as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
S&P |
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
Rating |
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State of Washington |
|
$ |
17,428 |
|
|
$ |
799 |
|
|
$ |
(25 |
) |
|
$ |
16,654 |
|
|
AA |
Texas State Transportation Commission |
|
|
15,542 |
|
|
|
|
|
|
|
(163 |
) |
|
|
15,705 |
|
|
AA+ |
University of Pittsburgh |
|
|
14,060 |
|
|
|
574 |
|
|
|
|
|
|
|
13,486 |
|
|
AA |
City of San Antonio |
|
|
11,581 |
|
|
|
571 |
|
|
|
|
|
|
|
11,010 |
|
|
AA |
City of Chicago |
|
|
11,401 |
|
|
|
377 |
|
|
|
(32 |
) |
|
|
11,056 |
|
|
A- |
Virginia Resources Authority |
|
|
11,389 |
|
|
|
826 |
|
|
|
|
|
|
|
10,563 |
|
|
AAA |
County of Fairfax |
|
|
11,027 |
|
|
|
|
|
|
|
(70 |
) |
|
|
11,097 |
|
|
AAA |
State of Louisiana |
|
|
9,992 |
|
|
|
518 |
|
|
|
|
|
|
|
9,474 |
|
|
A+ |
State of Wisconsin |
|
|
9,962 |
|
|
|
479 |
|
|
|
|
|
|
|
9,483 |
|
|
AA- |
Salt River Project Agricultural Improvement |
|
|
9,931 |
|
|
|
155 |
|
|
|
|
|
|
|
9,776 |
|
|
AA |
Commonwealth of Massachusetts |
|
|
9,059 |
|
|
|
581 |
|
|
|
(7 |
) |
|
|
8,485 |
|
|
AA |
New York City Transitional Finance Authority |
|
|
8,107 |
|
|
|
|
|
|
|
(343 |
) |
|
|
8,450 |
|
|
AA |
City of New York |
|
|
8,026 |
|
|
|
288 |
|
|
|
(20 |
) |
|
|
7,758 |
|
|
AA- |
Illinois Finance Authority |
|
|
8,015 |
|
|
|
69 |
|
|
|
(222 |
) |
|
|
8,168 |
|
|
BBB+ |
Cypress-Fairbanks Independent School Dist |
|
|
7,985 |
|
|
|
131 |
|
|
|
|
|
|
|
7,854 |
|
|
AA- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
163,505 |
|
|
|
5,368 |
|
|
|
(882 |
) |
|
|
159,019 |
|
|
|
|
|
All Other |
|
|
513,194 |
|
|
|
19,676 |
|
|
|
(2,035 |
) |
|
|
495,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
676,699 |
|
|
$ |
25,044 |
|
|
$ |
(2,917 |
) |
|
$ |
654,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the composition of the investments categorized as states,
municipalities and political subdivisions in our portfolio by generally equivalent S&P and Moodys
ratings (not all securities in our portfolio are rated by both S&P and Moodys) as of December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent |
|
Equivalent |
|
|
|
|
|
|
|
|
|
Net |
|
S&P |
|
Moodys |
|
|
|
|
|
|
|
|
|
Unrealized |
|
Rating |
|
Rating |
|
Fair Value |
|
|
Book Value |
|
|
Gain/(Loss) |
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA/AA/A |
|
Aaa/Aa/A |
|
$ |
639,802 |
|
|
$ |
617,620 |
|
|
$ |
22,182 |
|
BBB |
|
Baa |
|
|
27,668 |
|
|
|
27,641 |
|
|
|
27 |
|
BB |
|
Ba |
|
|
2,000 |
|
|
|
2,014 |
|
|
|
(14 |
) |
B |
|
B |
|
|
|
|
|
|
|
|
|
|
|
|
CCC or lower |
|
Caa or lower |
|
|
|
|
|
|
|
|
|
|
|
|
N/A |
|
N/A |
|
|
7,229 |
|
|
|
7,297 |
|
|
|
(68 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
676,699 |
|
|
$ |
654,572 |
|
|
$ |
22,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
83
We own $282 million of municipal securities which are credit enhanced by various financial
guarantors. As of December 31, 2009, the average underlying credit rating is A+. There has been
no material adverse impact to our investment portfolio or results of operations as a result of
recent downgrades of the credit ratings for several of the financial guarantors.
We analyze our mortgage-backed and asset-backed securities by credit quality of the underlying
collateral distinguishing between the securities issued by the Federal National Mortgage
Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) which are Federal
government sponsored entities, and the non-FNMA and non-FHLMC securities broken out by prime, Alt-A
and subprime collateral. The securities issued by FNMA and FHLMC are the obligations of each
respective entity. Recent legislation has provided for guarantees by the U.S. Government of up to
$100 billion each for FNMA and FHLMC.
Prime collateral consists of mortgages or other collateral from the most creditworthy borrowers.
Alt-A collateral consists of mortgages or other collateral from borrowers which have a risk
potential that is greater than prime but less than subprime. The subprime collateral consists of
mortgages or other collateral from borrowers with low credit ratings. Such subprime and Alt-A
categories are as defined by S&P.
At December 31, 2009, we owned asset-backed securities approximating $0.1 million with subprime
mortgage exposures. The securities have an effective maturity of 3.1 years. In addition, we owned
residential mortgage obligations approximating $1.5 million classified as Alt-A which is a credit
category between prime and subprime. The Alt-A bonds have an effective maturity of 5.6 years. We
are receiving principal and/or interest payments on all of these securities and believe such
amounts are fully collectible.
84
The following tables set forth our mortgage-backed securities, residential mortgage obligations and
asset-backed securities by those issued by the Government National Mortgage Association (GNMA),
FNMA, FHLMC, and the quality category (prime, Alt-A and subprime) for all other such investments as
of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Agency mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
$ |
44,351 |
|
|
$ |
1,300 |
|
|
$ |
(53 |
) |
|
$ |
43,104 |
|
FNMA |
|
|
173,786 |
|
|
|
8,716 |
|
|
|
(11 |
) |
|
|
165,081 |
|
FHLMC |
|
|
65,441 |
|
|
|
2,591 |
|
|
|
(34 |
) |
|
|
62,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
283,578 |
|
|
$ |
12,607 |
|
|
$ |
(98 |
) |
|
$ |
271,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Residential mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
$ |
29,565 |
|
|
$ |
|
|
|
$ |
(6,836 |
) |
|
$ |
36,401 |
|
Alt-A |
|
|
1,506 |
|
|
|
|
|
|
|
(410 |
) |
|
|
1,916 |
|
Subprime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
31,071 |
|
|
$ |
|
|
|
$ |
(7,246 |
) |
|
$ |
38,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
$ |
16,323 |
|
|
$ |
612 |
|
|
$ |
(10 |
) |
|
$ |
15,721 |
|
Alt-A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime |
|
|
146 |
|
|
|
|
|
|
|
(24 |
) |
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
16,469 |
|
|
$ |
612 |
|
|
$ |
(34 |
) |
|
$ |
15,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
The following table sets forth the fifteen largest residential mortgage obligations as of December
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue |
|
|
Fair |
|
|
Book |
|
|
Unrealized |
|
|
S&P |
|
Moodys |
Security Description |
|
Date |
|
|
Value |
|
|
Value |
|
|
(Loss) |
|
|
Rating |
|
Rating |
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMAC Mtg Corp Ln Tr 05 Ar6 2A1 |
|
|
2005 |
|
|
$ |
2,907 |
|
|
$ |
3,489 |
|
|
$ |
(582 |
) |
|
BB |
|
B3 |
Merrill Lynch Mtg Inv Inc 05 A9 2A1E |
|
|
2005 |
|
|
|
2,569 |
|
|
|
3,523 |
|
|
|
(954 |
) |
|
B+ |
|
NR |
Wells Fargo Mtg Bkd Secs Tr 06 Ar5 2A1 |
|
|
2006 |
|
|
|
2,469 |
|
|
|
2,725 |
|
|
|
(256 |
) |
|
NR |
|
Caa1 |
Wells Fargo Mtg Bkd Secs Tr 05 Ar4 2A2 |
|
|
2005 |
|
|
|
966 |
|
|
|
1,102 |
|
|
|
(136 |
) |
|
NR |
|
A2 |
Merrill Lynch Mtg Inv Inc 05 A9 2A1 |
|
|
2005 |
|
|
|
742 |
|
|
|
780 |
|
|
|
(38 |
) |
|
BBB |
|
NR |
Bear Stearns Adjustable Rate 06 1 A1 |
|
|
2006 |
|
|
|
712 |
|
|
|
814 |
|
|
|
(102 |
) |
|
NR |
|
Baa1 |
GSR Mortgage Loan Trust 06 Ar1 2A1 |
|
|
2006 |
|
|
|
662 |
|
|
|
833 |
|
|
|
(171 |
) |
|
BB |
|
NR |
Wells Fargo Mtg Bkd Secs Tr 06 Ar6 3A |
|
|
2006 |
|
|
|
641 |
|
|
|
773 |
|
|
|
(132 |
) |
|
NR |
|
B2 |
JP Morgan Mortgage Trust 06 A4 1A1 |
|
|
2006 |
|
|
|
628 |
|
|
|
869 |
|
|
|
(241 |
) |
|
NR |
|
B3 |
Master Adj Rate Mtg Tr 05 6 5A1 |
|
|
2005 |
|
|
|
618 |
|
|
|
811 |
|
|
|
(193 |
) |
|
B- |
|
Baa2 |
Bear Stearns Adjustable Rate 05 3 2A1 |
|
|
2005 |
|
|
|
610 |
|
|
|
706 |
|
|
|
(96 |
) |
|
BB |
|
Ba1 |
Mortgageit Trust 05 1 2A |
|
|
2005 |
|
|
|
605 |
|
|
|
672 |
|
|
|
(67 |
) |
|
AAA |
|
Aaa |
JP Morgan Mortgage Trust 07-A3 1A1 |
|
|
2007 |
|
|
|
604 |
|
|
|
890 |
|
|
|
(286 |
) |
|
CCC |
|
NR |
Wells Fargo Mortgage Backed Se 06-Ar14 2 |
|
|
2006 |
|
|
|
577 |
|
|
|
722 |
|
|
|
(145 |
) |
|
NR |
|
Caa1 |
JP Morgan Mortgage Trust 05 A4 3A1 |
|
|
2005 |
|
|
|
556 |
|
|
|
600 |
|
|
|
(44 |
) |
|
AAA |
|
Baa1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
15,866 |
|
|
|
19,309 |
|
|
|
(3,443 |
) |
|
|
|
|
All Other |
|
|
|
|
|
|
15,205 |
|
|
|
19,008 |
|
|
|
(3,803 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
31,071 |
|
|
$ |
38,317 |
|
|
$ |
(7,246 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details of the collateral of our asset-backed securities portfolio as of December 31, 2009 are
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Amortized |
|
|
Unrealized |
|
|
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
BB |
|
|
CC |
|
|
Fair Value |
|
|
Cost |
|
|
Gain/(Loss) |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Loans |
|
$ |
7,331 |
|
|
$ |
3,574 |
|
|
$ |
461 |
|
|
$ |
1,633 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
12,999 |
|
|
$ |
12,556 |
|
|
$ |
443 |
|
Credit Cards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88 |
|
|
|
|
|
|
|
88 |
|
|
|
91 |
|
|
|
(3 |
) |
Miscellaneous |
|
|
3,235 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145 |
|
|
|
3,382 |
|
|
|
3,244 |
|
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,566 |
|
|
$ |
3,576 |
|
|
$ |
461 |
|
|
$ |
1,633 |
|
|
$ |
88 |
|
|
$ |
145 |
|
|
$ |
16,469 |
|
|
$ |
15,891 |
|
|
$ |
578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
The commercial mortgage-backed securities are all rated investment grade by S&P or by Moodys. The
following table sets forth the fifteen largest commercial mortgage-backed securities portfolio as
of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue |
|
|
Fair |
|
|
Book |
|
|
Underlying |
|
|
Delinq. |
|
|
Subord. |
|
|
S&P |
|
|
Moodys |
|
Security Description |
|
Date |
|
|
Value |
|
|
Value |
|
|
LTV % |
|
|
Rate |
|
|
Level |
|
|
Rating |
|
|
Rating |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wachovia Bank Comm Mtg 05 C18 A4 |
|
|
2005 |
|
|
$ |
6,806 |
|
|
$ |
6,859 |
|
|
|
72.18 |
% |
|
|
8.80 |
% |
|
|
32.07 |
% |
|
AAA |
|
Aaa |
GS Mtg Secs Corp II 05 GG4 A4A |
|
|
2005 |
|
|
|
6,487 |
|
|
|
6,608 |
|
|
|
71.96 |
% |
|
|
7.15 |
% |
|
|
30.86 |
% |
|
AAA |
|
Aaa |
Four Times Square 06-4TS A |
|
|
2006 |
|
|
|
5,943 |
|
|
|
7,029 |
|
|
|
39.40 |
% |
|
|
0.00 |
% |
|
|
7.94 |
% |
|
AAA |
|
Aa1 |
Citigroup/Deutsche Bank Comm Mtg 05 CD1 A4 |
|
|
2005 |
|
|
|
5,840 |
|
|
|
5,867 |
|
|
|
68.74 |
% |
|
|
8.73 |
% |
|
|
30.97 |
% |
|
AAA |
|
Aaa |
LB-UBS Comm Mtg Trust 06 C7 A3 |
|
|
2006 |
|
|
|
5,775 |
|
|
|
6,330 |
|
|
|
66.98 |
% |
|
|
6.06 |
% |
|
|
29.99 |
% |
|
AAA |
|
NR |
Bear Stearns Comm Mtg Secs 06 T22 A4 |
|
|
2006 |
|
|
|
4,933 |
|
|
|
4,883 |
|
|
|
57.39 |
% |
|
|
0.41 |
% |
|
|
28.20 |
% |
|
NR |
|
Aaa |
Bear Stearns Comm Mtg Secs 07 PW15 A4 |
|
|
2007 |
|
|
|
4,414 |
|
|
|
5,135 |
|
|
|
69.96 |
% |
|
|
17.44 |
% |
|
|
30.31 |
% |
|
A+ |
|
Aaa |
Banc Of America Comm Mtg Inc 07 1 A4 |
|
|
2007 |
|
|
|
4,189 |
|
|
|
4,780 |
|
|
|
74.54 |
% |
|
|
13.28 |
% |
|
|
30.49 |
% |
|
NR |
|
Aaa |
Morgan Stanley Capital I 07 HQ11 A4 |
|
|
2007 |
|
|
|
4,163 |
|
|
|
4,787 |
|
|
|
70.94 |
% |
|
|
3.67 |
% |
|
|
30.23 |
% |
|
A |
|
Aaa |
Merrill Lynch Mtg Trust 05 CIP1 A4 |
|
|
2005 |
|
|
|
3,936 |
|
|
|
4,035 |
|
|
|
70.86 |
% |
|
|
14.00 |
% |
|
|
31.01 |
% |
|
NR |
|
Aaa |
Commercial Mtg Pass Through Cert 05 C6 A5A |
|
|
2005 |
|
|
|
3,932 |
|
|
|
4,053 |
|
|
|
72.20 |
% |
|
|
8.77 |
% |
|
|
29.89 |
% |
|
AAA |
|
Aaa |
Morgan Stanley Capital I 04 T13 A4 |
|
|
2004 |
|
|
|
3,316 |
|
|
|
3,327 |
|
|
|
58.81 |
% |
|
|
0.00 |
% |
|
|
15.53 |
% |
|
NR |
|
Aaa |
Citigroup Comm Mtg Trust 06 C5 A4 |
|
|
2006 |
|
|
|
3,250 |
|
|
|
3,511 |
|
|
|
69.00 |
% |
|
|
14.80 |
% |
|
|
30.37 |
% |
|
NR |
|
Aaa |
GE Capital Comm Mtg Svcs 02 1A A3 |
|
|
2002 |
|
|
|
2,634 |
|
|
|
2,502 |
|
|
|
72.46 |
% |
|
|
2.63 |
% |
|
|
25.03 |
% |
|
NR |
|
Aaa |
CSFB Mtg Secs Corp 03 C3 A5 |
|
|
2003 |
|
|
|
2,559 |
|
|
|
2,523 |
|
|
|
62.03 |
% |
|
|
3.49 |
% |
|
|
20.69 |
% |
|
AAA |
|
Aaa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
68,177 |
|
|
|
72,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
|
|
|
|
|
32,216 |
|
|
|
32,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
100,393 |
|
|
$ |
104,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the amount and percentage of our fixed maturities and short-term investments at
December 31, 2009 by S&P credit rating or, if an S&P rating is not available, the equivalent
Moodys rating. The table includes fixed maturities and short-term investments at fair value, and
the total rating is the weighted average quality rating.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
Rating |
|
|
|
Fair |
|
|
of |
|
Description |
|
Rating |
|
Value |
|
|
Total |
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Extremely Strong |
|
AAA |
|
$ |
1,124,403 |
|
|
|
57 |
% |
Very Strong |
|
AA |
|
|
494,764 |
|
|
|
25 |
% |
Strong |
|
A |
|
|
275,016 |
|
|
|
14 |
% |
Adequate |
|
BBB |
|
|
67,400 |
|
|
|
3 |
% |
Speculative |
|
BB & below |
|
|
24,656 |
|
|
|
1 |
% |
Not Rated |
|
NR |
|
|
7,229 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
AA |
|
$ |
1,993,468 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
87
Following is a list of the top fifteen corporate bond holdings for fixed maturities at fair value.
All such fixed maturities are rated investment grade by S&P and Moodys. These holdings represent
direct obligations of the issuer or its subsidiaries and exclude any government guaranteed or
government sponsored organizations, securitized, credit enhanced or collateralized asset-backed or
mortgage-backed securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
S&P |
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
Rating |
|
|
($ in thousands) |
Issuers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Electric |
|
$ |
20,475 |
|
|
$ |
777 |
|
|
$ |
(9 |
) |
|
$ |
19,707 |
|
|
AA |
Southern Co |
|
|
11,797 |
|
|
|
149 |
|
|
|
(159 |
) |
|
|
11,807 |
|
|
A |
Conoco Phillips |
|
|
11,428 |
|
|
|
225 |
|
|
|
|
|
|
|
11,203 |
|
|
A |
Goldman Sachs Group |
|
|
10,927 |
|
|
|
258 |
|
|
|
|
|
|
|
10,669 |
|
|
A- |
Bank of America Corp |
|
|
8,823 |
|
|
|
248 |
|
|
|
(33 |
) |
|
|
8,608 |
|
|
A- |
Transcanada Corp |
|
|
8,445 |
|
|
|
349 |
|
|
|
|
|
|
|
8,096 |
|
|
A- |
Citigroup Inc |
|
|
6,912 |
|
|
|
129 |
|
|
|
(170 |
) |
|
|
6,953 |
|
|
BBB+ |
JP Morgan Chase & Co |
|
|
6,345 |
|
|
|
44 |
|
|
|
|
|
|
|
6,301 |
|
|
A |
Statoilhydro ASA |
|
|
5,830 |
|
|
|
277 |
|
|
|
|
|
|
|
5,553 |
|
|
AA- |
Wells Fargo & Co |
|
|
5,216 |
|
|
|
243 |
|
|
|
(25 |
) |
|
|
4,998 |
|
|
A+ |
Scana Corp |
|
|
5,206 |
|
|
|
105 |
|
|
|
|
|
|
|
5,101 |
|
|
A- |
Morgan Stanley |
|
|
5,112 |
|
|
|
184 |
|
|
|
|
|
|
|
4,928 |
|
|
A- |
Mead Johnson Nutrition Co |
|
|
4,943 |
|
|
|
|
|
|
|
(35 |
) |
|
|
4,978 |
|
|
BBB- |
Bank of New York |
|
|
3,658 |
|
|
|
190 |
|
|
|
|
|
|
|
3,468 |
|
|
A+ |
Pfizer Inc |
|
|
3,623 |
|
|
|
300 |
|
|
|
|
|
|
|
3,323 |
|
|
A+ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
118,740 |
|
|
|
3,478 |
|
|
|
(431 |
) |
|
|
115,693 |
|
|
|
All Other |
|
|
118,121 |
|
|
|
5,633 |
|
|
|
(328 |
) |
|
|
112,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
236,861 |
|
|
$ |
9,111 |
|
|
$ |
(759 |
) |
|
$ |
228,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
The following table sets forth the fifteen largest equity securities holdings as of December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Issuers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vanguard Total Stock Market Index |
|
$ |
4,656 |
|
|
$ |
1,361 |
|
|
$ |
|
|
|
$ |
3,295 |
|
Vanguard Emerging Market Stock Index |
|
|
4,207 |
|
|
|
1,771 |
|
|
|
|
|
|
|
2,436 |
|
Vanguard Pacific Stock Index |
|
|
3,967 |
|
|
|
1,041 |
|
|
|
|
|
|
|
2,926 |
|
Vanguard European Stock Index |
|
|
3,883 |
|
|
|
1,292 |
|
|
|
|
|
|
|
2,591 |
|
PPG Industries |
|
|
1,818 |
|
|
|
626 |
|
|
|
|
|
|
|
1,192 |
|
3M Co |
|
|
1,794 |
|
|
|
553 |
|
|
|
|
|
|
|
1,241 |
|
Merck & Co Inc |
|
|
1,782 |
|
|
|
462 |
|
|
|
|
|
|
|
1,320 |
|
The Boeing Co |
|
|
1,719 |
|
|
|
327 |
|
|
|
|
|
|
|
1,392 |
|
Kraft Foods Inc |
|
|
1,713 |
|
|
|
211 |
|
|
|
|
|
|
|
1,502 |
|
Philip Morris International Inc |
|
|
1,711 |
|
|
|
352 |
|
|
|
|
|
|
|
1,359 |
|
EI Du Pont De Nemours & Co |
|
|
1,705 |
|
|
|
404 |
|
|
|
|
|
|
|
1,301 |
|
Diageo PLC |
|
|
1,704 |
|
|
|
512 |
|
|
|
|
|
|
|
1,192 |
|
Unilever NV |
|
|
1,660 |
|
|
|
654 |
|
|
|
|
|
|
|
1,006 |
|
BP PLC |
|
|
1,641 |
|
|
|
506 |
|
|
|
|
|
|
|
1,135 |
|
Johnson & Johnson |
|
|
1,617 |
|
|
|
189 |
|
|
|
|
|
|
|
1,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
35,577 |
|
|
|
10,261 |
|
|
|
|
|
|
|
25,316 |
|
All Other |
|
|
27,033 |
|
|
|
4,983 |
|
|
|
(10 |
) |
|
|
22,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
62,610 |
|
|
$ |
15,244 |
|
|
$ |
(10 |
) |
|
$ |
47,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
The following table summarizes all securities in an unrealized loss position at December 31, 2009
and 2008, showing the aggregate fair value and gross unrealized loss by the length of time those
securities have continuously been in an unrealized loss position as well as the number of
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
# of |
|
|
Fair |
|
|
Gross |
|
|
# of |
|
|
Fair |
|
|
Gross |
|
|
|
Securities |
|
|
Value |
|
|
Unrealized Loss |
|
|
Securities |
|
|
Value |
|
|
Unrealized Loss |
|
|
|
($ in thousands except # of securities) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
24 |
|
|
$ |
116,566 |
|
|
$ |
597 |
|
|
|
4 |
|
|
$ |
3,862 |
|
|
$ |
145 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
24 |
|
|
|
116,566 |
|
|
|
597 |
|
|
|
4 |
|
|
|
3,862 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
47 |
|
|
|
108,290 |
|
|
|
2,291 |
|
|
|
72 |
|
|
|
68,727 |
|
|
|
2,187 |
|
7-12 Months |
|
|
4 |
|
|
|
3,534 |
|
|
|
112 |
|
|
|
73 |
|
|
|
118,910 |
|
|
|
4,376 |
|
> 12 Months |
|
|
23 |
|
|
|
17,777 |
|
|
|
514 |
|
|
|
17 |
|
|
|
15,918 |
|
|
|
1,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
74 |
|
|
|
129,601 |
|
|
|
2,917 |
|
|
|
162 |
|
|
|
203,555 |
|
|
|
8,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
5 |
|
|
|
18,385 |
|
|
|
98 |
|
|
|
3 |
|
|
|
2,130 |
|
|
|
6 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
3,471 |
|
|
|
9 |
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
962 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
5 |
|
|
|
18,385 |
|
|
|
98 |
|
|
|
20 |
|
|
|
6,563 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65 |
|
|
|
39,012 |
|
|
|
20,779 |
|
> 12 Months |
|
|
73 |
|
|
|
31,071 |
|
|
|
7,246 |
|
|
|
14 |
|
|
|
10,315 |
|
|
|
6,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
73 |
|
|
|
31,071 |
|
|
|
7,246 |
|
|
|
79 |
|
|
|
49,327 |
|
|
|
27,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
22,079 |
|
|
|
653 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
6,630 |
|
|
|
550 |
|
> 12 Months |
|
|
4 |
|
|
|
637 |
|
|
|
34 |
|
|
|
2 |
|
|
|
224 |
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
4 |
|
|
|
637 |
|
|
|
34 |
|
|
|
65 |
|
|
|
28,933 |
|
|
|
1,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
11 |
|
|
|
28,103 |
|
|
|
324 |
|
|
|
6 |
|
|
|
6,461 |
|
|
|
280 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
31,505 |
|
|
|
5,628 |
|
> 12 Months |
|
|
21 |
|
|
|
45,135 |
|
|
|
4,704 |
|
|
|
26 |
|
|
|
54,717 |
|
|
|
14,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
32 |
|
|
|
73,238 |
|
|
|
5,028 |
|
|
|
53 |
|
|
|
92,683 |
|
|
|
20,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
13 |
|
|
|
33,275 |
|
|
|
337 |
|
|
|
75 |
|
|
|
57,805 |
|
|
|
2,445 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89 |
|
|
|
57,971 |
|
|
|
5,893 |
|
> 12 Months |
|
|
8 |
|
|
|
6,325 |
|
|
|
422 |
|
|
|
40 |
|
|
|
27,873 |
|
|
|
6,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
21 |
|
|
|
39,600 |
|
|
|
759 |
|
|
|
204 |
|
|
|
143,649 |
|
|
|
14,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
233 |
|
|
$ |
409,098 |
|
|
$ |
16,679 |
|
|
|
587 |
|
|
$ |
528,572 |
|
|
$ |
71,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
17 |
|
|
$ |
8,991 |
|
|
$ |
1,941 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
351 |
|
|
|
46 |
|
> 12 Months |
|
|
1 |
|
|
|
872 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
|
1 |
|
|
$ |
872 |
|
|
$ |
10 |
|
|
|
19 |
|
|
$ |
9,342 |
|
|
$ |
1,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The
above unrealized losses have been determined to be temporary based on our policies. See Critical
Accounting Estimates Impairment of Invested Assets for additional information on our policies.
The residential mortgage obligations gross unrealized loss in the above table for the greater than
12 months category consists primarily of residential mortgage-backed securities. Residential
mortgage-backed securities are a type of fixed income security in which residential mortgage loans
are sold into a trust or special purpose vehicle, thereby securitizing the cash flows of the
mortgage loans.
To determine whether the unrealized loss on structured securities is other-than-temporary, we
project an expected principal loss under a range of scenarios and utilize the most likely outcomes.
The analysis relies on actual collateral performance measures such as default rate, prepayment rate
and loss severity. These assumptions are applied throughout the remaining term of the deal,
incorporating the transaction structure and priority of payments, to generate loss adjusted cash
flows. Results of the analysis will indicate whether the security ultimately incurs a loss or
whether there is a material impact on yield due to either a projected loss or a change in cash flow
timing. A breakeven default rate is also calculated. A comparison to the break even default rate to
the actual default rate provides an indication of the level of cushion or coverage to the first
dollar principal loss. The analysis applies these assumptions throughout the remaining term of the
transaction to forecast cash flows, which are then applied through the transaction structure to
determine whether there is a loss to the security. For securities in which a tranche loss is
present, and the net present value of loss adjusted cash flows is less than book value, an
impairment is recognized. The output data also includes a number of additional metrics such as
average life remaining, original and current credit support, over 60 day delinquency and security
rating.
As of December 31, 2009, the largest single unrealized loss by an issuer in the fixed maturities
category was $1.1 million.
The following table summarizes the gross unrealized investment losses as of December 31, 2009 by
length of time where the fair value is less than 80% of amortized cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period for Which Fair Value is Less than 80% of Amortized Cost |
|
|
|
|
|
|
|
|
|
|
|
6 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
Longer than 3 |
|
|
or longer, less |
|
|
|
|
|
|
|
|
|
Less than 3 |
|
|
months, less |
|
|
than 12 |
|
|
12 months |
|
|
|
|
|
|
months |
|
|
than 6 months |
|
|
months |
|
|
or longer |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(4,520 |
) |
|
$ |
(4,520 |
) |
Equity Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(4,520 |
) |
|
$ |
(4,520 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of our investment portfolio may fluctuate significantly in response to
various factors such as changes in interest rates, investment quality ratings, equity prices,
foreign exchange rates and credit spreads. We do not have the intent to sell nor is it more likely
than not that we will have to sell debt securities in unrealized loss positions that are not
other-than temporarily impaired before recovery. We may realize investment losses to the extent our
liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate,
liquidity or credit spread environments. Significant changes in the factors we consider when
evaluating impairment losses could result in a significant change in impairment losses reported in
the consolidated financial statements.
91
The following table shows the composition by NAIC rating and the generally equivalent S&P and
Moodys ratings of the fixed maturity securities in our portfolio with gross unrealized losses at
December 31, 2009. Not all of the securities are rated by S&P and/or Moodys:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Equivalent |
|
Equivalent |
|
Unrealized Loss |
|
|
Fair Value |
|
NAIC |
|
S&P |
|
Moodys |
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
Rating |
|
Rating |
|
Rating |
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
|
|
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
AAA/AA/A |
|
Aaa/Aa/A |
|
$ |
9,979 |
|
|
|
59 |
% |
|
$ |
356,726 |
|
|
|
87 |
% |
2 |
|
BBB |
|
Baa |
|
|
1,050 |
|
|
|
6 |
% |
|
|
24,186 |
|
|
|
6 |
% |
3 |
|
BB |
|
Ba |
|
|
300 |
|
|
|
2 |
% |
|
|
4,156 |
|
|
|
1 |
% |
4 |
|
B |
|
B |
|
|
2,979 |
|
|
|
18 |
% |
|
|
11,630 |
|
|
|
3 |
% |
5 |
|
CCC or lower |
|
Caa or lower |
|
|
2,276 |
|
|
|
14 |
% |
|
|
8,871 |
|
|
|
2 |
% |
6 |
|
N/A |
|
N/A |
|
|
95 |
|
|
|
1 |
% |
|
|
3,529 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
16,679 |
|
|
|
100 |
% |
|
$ |
409,098 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009, the gross unrealized losses in the table directly above are
related to fixed maturity securities that are rated investment grade, which is defined by us as a
security having an NAIC rating of 1 or 2, an S&P rating of BBB- or higher, or a Moodys rating of
Baa3 or higher. Unrealized losses on investment grade securities principally relate to changes
in interest rates or changes in sector-related credit spreads since the securities were acquired.
92
The contractual maturity by the number of years until maturity for fixed maturity securities
with unrealized losses at December 31, 2009 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized Loss |
|
|
Fair Value |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
23 |
|
|
|
0 |
% |
|
$ |
4,006 |
|
|
|
1 |
% |
Due after one year through five years |
|
|
596 |
|
|
|
4 |
% |
|
|
109,756 |
|
|
|
27 |
% |
Due after five years through ten
years |
|
|
1,554 |
|
|
|
9 |
% |
|
|
95,386 |
|
|
|
23 |
% |
Due after ten years |
|
|
2,100 |
|
|
|
13 |
% |
|
|
76,619 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed securities |
|
|
12,406 |
|
|
|
74 |
% |
|
|
123,331 |
|
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities |
|
$ |
16,679 |
|
|
|
100 |
% |
|
$ |
409,098 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment penalties. Due to the
periodic repayment of principal, the mortgage-backed and asset-backed securities are estimated to
have an effective maturity of approximately 3.5 years.
Liquidity and Capital Resources
Cash flows from operations were $103.9 million, $245.3 million and $284.6 million for 2009, 2008,
and 2007, respectively. The decline in cash flow from operations in 2009 compared to 2008 was
primarily a result of an increase in losses and LAE paid for claims of $82.4 million. Operating
cash flow was used primarily to acquire additional investments of fixed income securities.
Investments and cash increased to $2.06 billion at December 31, 2009 from $1.92 billion at December
31, 2008. The increase was primarily due to the positive cash flow from operations. Net
investment income was $75.5 million for 2009, $76.6 million for 2008 and $70.7 million for 2007.
The approximate pre-tax yields of the investment portfolio, excluding net realized gains and
losses, were 3.8% for 2009 and 4.1% for 2008 and 4.4% for 2007. The decline in the pre-tax
investment yields was due to a decline in yields for our short duration investment holdings.
At December 31, 2009, the weighted average rating of our fixed maturity investments was AA by S&P
and Aa by Moodys. We believe that we have limited exposure to credit risk since the fixed
maturity investment portfolio, except for $31.9 million, consists of investment-grade bonds. At
December 31, 2009, our investment portfolio had an average maturity of 5.1 years and a duration of
4.2 years. Management periodically projects cash flow of the investment portfolio and other
sources in order to maintain the appropriate levels of liquidity to ensure our ability to satisfy
claims. As of December 31, 2009 and 2008, all fixed maturity securities and equity securities held
by us were classified as available-for-sale.
93
On April 3, 2009, we entered into a $75 million credit facility agreement entitled Fourth Amended
and Restated Credit Agreement with a consortium of banks, and is a letter of credit facility that
replaced the credit facility that expired on March 31, 2009. The credit facility expires on April
2, 2010. The credit facility is utilized primarily by Navigators Corporate Underwriters Ltd. and
Millennium Underwriting Ltd. to fund our participation in Syndicate 1221 through letters of credit.
The letters of credit issued under the facility are denominated in British pounds and their
aggregate face amount will fluctuate based on exchange rates. The credit facility had previously
been amended in February 2007 to increase the letters of credit available under the credit facility
from $115 million to $180 million and to increase the line of credit available under the credit
facility from $10 million to $20 million. In addition, the expiration of the credit facility was
extended from June 30, 2007 to March 31, 2009.
The credit facility contains customary covenants for facilities of this type, including
restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets,
and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and
other financial ratios. The credit facility also provides for customary events of default,
including failure to pay principal, interest or fees when due, failure to comply with covenants,
any representation or warranty made by the Company being false in any material respect, default
under certain other indebtedness, certain insolvency or receivership events affecting the Company
and its subsidiaries, the occurrence of certain material judgments, or a change in control of the
Company. The letter of credit facility is collateralized by all of the common stock of Navigators
Insurance Company and to the extent the aggregate face amount issued under the credit facility
exceeds $75 million on account of these fluctuations we are required to post collateral with the
lead bank of the consortium, which we have done as of December 31, 2009 in the amount of $8.6
million. We were in compliance with all covenants at December 31, 2009. At December 31, 2009,
letters of credit with an aggregate face amount of $81.5 million were issued under the credit
facility.
As a result of the April 3, 2009 amendment, the cost of the letter of credit portion of the credit
facility increased to 2.00% from 0.75% for the issued letters of credit and to 0.375% from 0.10%
for the unutilized portion of the letter of credit facility. As a result of the 2007 amendment,
the cost of the letter of credit portion of the credit facility was reduced to 0.75% from 1.00% for
the issued letters of credit and to 0.10% from 0.125% for the unutilized portion of the letter of
credit facility. The cost of the line of credit portion of the credit facility was also reduced to
0.75% from 1.00% over our choice of LIBOR or prime for the utilized portion and to 0.10% from
0.125% for the unutilized portion.
Our reinsurance has been placed with various U.S. and foreign insurance companies and with selected
syndicates at Lloyds. Pursuant to the implementation of Lloyds Plan of Reconstruction and
Renewal, a portion of our recoverables are now reinsured by Equitas (a separate United Kingdom
authorized reinsurance company established to reinsure outstanding liabilities of all Lloyds
members for all risks written in the 1992 or prior years of account).
Time lags do occur in the normal course of business between the time gross losses are paid by the
Company and the time such gross losses are billed and collected from reinsurers. Reinsurance
recoverable amounts related to those gross loss reserves are anticipated to be billed and collected
over the next several years as gross losses are paid by the Company.
Generally, for pro rata or quota share reinsurers, including pool participants, we issue quarterly
settlement statements for premiums less commissions and paid loss activity, which are expected to
be settled by the end of the subsequent quarter. We have the ability to issue cash calls
requiring such reinsurers to pay losses whenever paid loss activity for a claim ceded to a
particular reinsurance treaty exceeds a predetermined amount (generally $1.0 million) as set forth
in the pro-rata treaty. For the Insurance Companies, cash calls must generally be paid within 30
calendar days. There is generally no specific settlement period for the Lloyds Operations cash
call provisions, but such billings are usually paid within 45 calendar days.
94
Generally, for excess-of-loss reinsurers we pay monthly or quarterly deposit premiums based on the
estimated subject premiums over the contract period (usually one year) which are subsequently
adjusted based on actual premiums determined after the expiration of the applicable reinsurance
treaty. Paid losses subject to excess-of-loss recoveries are generally billed as they occur and
are usually settled by reinsurers within 30 calendar days for the Insurance Companies and 30
business days for the Lloyds Operations.
We sometimes withhold funds from reinsurers and may apply ceded loss billings against such funds in
accordance with the applicable reinsurance agreements.
At December 31, 2009, ceded asbestos paid and unpaid losses recoverable were $8.9 million. We
generally experience significant collection delays for a large portion of reinsurance recoverable
amounts for asbestos losses given that certain reinsurers are in run-off or otherwise no longer
active in the reinsurance business. Such circumstances are considered in our ongoing assessment of
such reinsurance recoverables.
We believe that we have adequately managed our cash flow requirements related to reinsurance
recoveries from our positive cash flows and the use of available short-term funds when applicable.
However, there can be no assurances that we will be able to continue to adequately manage such
recoveries in the future or that collection disputes or reinsurer insolvencies will not arise that
could materially increase the collection time lags or result in recoverable write-offs causing
additional incurred losses and liquidity constraints to the Company. The payment of gross claims
and related collections from reinsurers with respect to Hurricanes Gustav, Ike, Katrina and Rita
could significantly impact our liquidity needs. However, we expect to continue to pay these
hurricane losses over a period of years from cash flow and, if needed, short-term investments. We
expect to collect our paid reinsurance recoverables generally under the terms described above.
We believe that the cash flow generated by the operating activities of our subsidiaries will
provide sufficient funds for us to meet our liquidity needs over the next twelve months. Beyond
the next twelve months, cash flow available to us may be influenced by a variety of factors,
including general economic conditions and conditions in the insurance and reinsurance markets, as
well as fluctuations from year to year in claims experience.
Our capital resources consist of funds deployed or available to be deployed to support our
business operations. At December 31, 2009 and 2008, our capital resources were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Senior debt |
|
$ |
114,010 |
|
|
$ |
123,794 |
|
Stockholders equity |
|
|
801,519 |
|
|
|
689,317 |
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
915,529 |
|
|
$ |
813,111 |
|
|
|
|
|
|
|
|
Ratio of debt to total capitalization |
|
|
12.5 |
% |
|
|
15.2 |
% |
|
|
|
|
|
|
|
95
The increase in stockholders equity in 2009 was primarily due to 2009 net income of $63.2 million
and $46.0 million of unrealized gains in 2009 within our investment portfolio. The increase in
stockholders equity in 2008 was primarily due to net income of $51.7 million partially offset by
$25.2 million of unrealized losses in 2008 within our investment portfolio.
We monitor our capital adequacy to support our business on a regular basis. The future capital
requirements of our business will depend on many factors, including our ability to write new
business successfully and to establish premium rates and reserves at levels sufficient to cover
losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and
financial strength ratings as evaluated by independent rating agencies. In particular, we require
(1) sufficient capital to maintain our financial strength ratings, as issued by several ratings
agencies, at a level considered necessary by management to enable our Insurance Companies to
compete; (2) sufficient capital to enable our Insurance Companies to meet the capital adequacy
tests performed by statutory agencies in the United States and the United Kingdom and (3) letters
of credit and other forms of collateral that are necessary to support the business plan of our
Lloyds Operations.
As part of our capital management program, we may seek to raise additional capital or may seek to
return capital to our shareholders through share repurchases, cash dividends or other methods (or a
combination of such methods). Any such determination will be at the discretion of our board of
directors and will be dependent upon our profits, financial requirements and other factors,
including legal restrictions, rating agency requirements, credit facility limitations and such
other factors as our board of directors deems relevant.
In November 2009, the Companys Board of Directors adopted a stock repurchase program for up to $35
million of our common stock through December 31, 2010. Purchases under the program will be made
from time to time at prevailing prices in open market or privately negotiated transactions. The
timing and amount of purchases under the program to date are dependent on a variety of factors,
including the trading price of the stock, market conditions and corporate and regulatory
considerations. Through December 31, 2009 we purchased 141,576 shares of our common stock at an
aggregate cost of $6.8 million. From January 1, 2010 through February 22, 2010, the Parent Company
purchased an additional 300,000 shares of its common stock in the open market at an aggregate cost of
$13.0 million.
In October 2007, the Companys Board of Directors adopted a stock repurchase program for up to $30
million of our common stock. Purchases were made from time to time at prevailing prices in open
market or privately negotiated transactions through the expiration of the program on December 31,
2008. The timing and amount of purchases under the program were dependent on a variety of factors,
including the trading price of the stock, market conditions and corporate and regulatory
considerations. In total, we purchased 224,754 shares of our common stock at an aggregate cost of
$11.5 million.
To the extent that our existing capital is insufficient to fund our future operating requirements
or maintain such ratings, we may need to raise additional funds through financings or limit our
growth. If we are not able to obtain adequate capital, our business, results of operations and
financial condition could be adversely affected, which could include, among other things, the
following possible outcomes: (1) potential downgrades in the financial strength ratings assigned
by ratings agencies to our Insurance Companies which could place the Company at a competitive
disadvantage compared to higher-rated competitors; (2) reductions in the amount of business that
our Insurance Companies or Lloyds Operations are able to write in order to meet capital
adequacy-based tests enforced by statutory agencies; and (3) any resultant ratings downgrades
could, among other things, affect our ability to write business and increase the cost of the credit
facility.
96
In addition to common share capital, we may need to depend on external sources of finance to
support our underwriting activities, which can be in the form (or any combination) of debt
securities, preference shares, common equity and bank credit facilities providing loans and/or
letters of credit. Any equity or debt financing, if available at all, may be on terms that are
unfavorable to us. In the case of equity financings, dilution to our shareholders could result,
and, in any case, such securities may have rights, preferences and privileges that are senior to
those of our outstanding securities.
In July 2009, we filed a universal shelf registration statement with the Securities and Exchange
Commission. This registration statement, which expires in July 2012, allows for the future
possible offer and sale by the Company of up to $500 million in the aggregate of various types of
securities including common stock, preferred stock, debt securities, depositary shares, warrants,
units or preferred. The shelf registration statement enables us to efficiently access the public
equity or debt markets in order to meet future capital needs, if necessary. This report is not an
offer to sell or the solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of such state.
We primarily rely upon dividends from our subsidiaries to meet our Parent Companys obligations.
Since the issuance of the senior debt in April 2006, the Parent Companys cash obligations
primarily consist of semi-annual interest payments of $4.0 million. Going forward, the interest
payments on our senior debt will be made from one or a combination of funds at the Parent Company
or dividends from its subsidiaries. The dividends have historically been paid by Navigators
Insurance Company. Based on the December 31, 2009 surplus of Navigators Insurance Company, the
approximate maximum amount available for the payment of dividends by Navigators Insurance Company
during 2010 without prior regulatory approval was $64.6 million. Dividends of $25.0 million and
$20.0 million were paid by Navigators Insurance Company during 2009 and 2008, respectively.
Condensed Parent Company balance sheets as of December 31, 2009 and 2008 are shown in the
table below:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Cash and investments |
|
$ |
63,676 |
|
|
$ |
52,149 |
|
Investments in subsidiaries |
|
|
846,295 |
|
|
|
751,864 |
|
Goodwill and other intangible assets |
|
|
2,534 |
|
|
|
2,534 |
|
Other assets |
|
|
5,213 |
|
|
|
8,769 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
917,718 |
|
|
$ |
815,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7% Senior Notes |
|
$ |
114,010 |
|
|
$ |
123,794 |
|
Accounts payable and other liabilities |
|
|
847 |
|
|
|
747 |
|
Accrued interest payable |
|
|
1,342 |
|
|
|
1,458 |
|
Deferred compensation payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
116,199 |
|
|
|
125,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
801,519 |
|
|
|
689,317 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
917,718 |
|
|
$ |
815,316 |
|
|
|
|
|
|
|
|
97
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Sensitive Instruments and Risk Management
Market risk represents the potential for loss due to adverse changes in the fair value of financial
instruments. We are exposed to potential loss to various market risks, including changes in
interest rates, equity prices and foreign currency exchange rates. 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 our primary market risk exposures and how those
exposures have been managed through December 31, 2009. Our market risk sensitive instruments are
entered into for purposes other than trading and speculation.
The carrying value of our investment portfolio as of December 31, 2009 was $2.06 billion of which
88.3% was invested in fixed maturity securities. The primary market risk to our investment
portfolio is interest rate risk associated with investments in fixed maturity securities. We do
not have any commodity risk exposure.
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.
There were no significant changes regarding the investment portfolio in our primary market risk
exposures or in how those exposures were managed for the twelve months ended December 31, 2009. We
do not currently anticipate significant changes in our 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.
Interest Rate Risk 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
our sensitivity analysis model, a hypothetical change in market rates is selected that is expected
to reflect reasonably possible near-term changes in those rates. 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 us to mitigate such hypothetical losses in fair value.
In this sensitivity analysis model, we use fair values to measure our potential loss. The
sensitivity analysis model includes fixed maturities and short-term investments. The primary
market risk to our market-sensitive instruments is interest rate risk. The sensitivity analysis
model uses a 50 and 100 basis points change in interest rates to measure the hypothetical change in
fair value of financial instruments included in the model. Changes in interest rates will have an
immediate effect on comprehensive income and shareholders equity but will not ordinarily have an
immediate effect on net income. As interest rates rise, the market value of our interest rate
sensitive securities will decrease. Conversely, as interest rates fall, the market value of our
interest rate sensitive securities will increase.
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, 2009.
98
The following table summarizes the effect that an immediate, parallel shift in the interest rate
yield curve would have had on our portfolio at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Shift in Basis Points |
|
|
|
-100 |
|
|
-50 |
|
|
0 |
|
|
+50 |
|
|
+100 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total market value |
|
$ |
2,087,958 |
|
|
$ |
2,040,514 |
|
|
$ |
1,993,468 |
|
|
$ |
1,946,821 |
|
|
$ |
1,900,971 |
|
Market value change from base |
|
|
4.74 |
% |
|
|
2.36 |
% |
|
|
|
|
|
|
-2.34 |
% |
|
|
-4.64 |
% |
Change in unrealized value |
|
$ |
94,490 |
|
|
$ |
47,046 |
|
|
$ |
|
|
|
$ |
(46,647 |
) |
|
$ |
(92,497 |
) |
Equity Price Risk
Our portfolio of equity securities currently valued at $62.6 million, which we carry on our balance
sheet at fair value, has exposure to price risk. This risk is defined as the potential loss in
fair value resulting from adverse changes in stock prices. Our U.S. equity portfolio is
benchmarked to the S&P 500 index and changes in that index may approximate the impact on our
portfolio.
Foreign currency exchange rate risk
Our Lloyds Operations maintain both assets and liabilities in certain foreign currencies.
Therefore, foreign exchange rate risk is generally limited to net assets denominated in those
foreign currencies. The principal currencies creating foreign exchange risk for us are the British
pound, the Euro and the Canadian dollar.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements required in response to this section are submitted as part of
Item 15(a) of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange
act of 1934, as amended (the Exchange Act). Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this annual report.
99
Managements Report on Internal Control over Financial Reporting
(a) Managements annual report on internal control over financial reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the
supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation
under the framework in Internal Control Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of December 31, 2009.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree or compliance with the policies or procedures may deteriorate.
The Companys independent registered public accounting firm, KPMG LLP, has audited the
effectiveness of the Companys internal control over financial reporting as of December 31, 2009,
as stated in their report in item (b) below.
100
(b) Attestation report of the registered public accounting firm
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Navigators Group, Inc.
We have audited The Navigators Group, Inc. and subsidiaries internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Navigators Group, Inc. and subsidiaries management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included under Item 9A, Managements Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, The Navigators Group, Inc. and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of The Navigators Group, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income,
stockholders equity, comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 2009, and our report dated
February 26, 2010 expressed an unqualified
opinion on those consolidated financial statements.
KPMG LLP
New York, New York
February 26, 2010
101
(c) Changes in internal control over financial reporting
There have been no changes during our fourth fiscal quarter in our internal control over financial
reporting that have materially affected, or are reasonably likely to materially affect our internal
control over financial reporting.
Item 9B. OTHER INFORMATION
None.
Part III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning our directors and executive officers is contained under Election of
Directors in our 2010 Proxy Statement, which information is incorporated herein by reference.
Information concerning the Audit Committee and the Audit Committees financial expert of the
Company is contained under Board of Directors and Committees in our 2010 Proxy Statement, which
information is incorporated herein by reference.
We have adopted a Code of Ethics for Chief Executive Officer and Senior Financial Officers, which
is applicable to our Chief Executive Officer, Chief Financial Officer, Treasurer, Controller and
all other persons performing similar functions. A copy of such Code is available on our website at
www.navg.com under the Corporate Governance link. Any amendments to, or waivers of, such Code
which apply to any of the financial professionals listed above will be disclosed on our website
under the same link promptly following the date of such amendment or waiver.
Item 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is contained under Compensation Discussion and
Analysis in our 2010 Proxy Statement, which information is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning the security ownership of the directors and officers of the Company is
contained under Election of Directors and Compensation Discussion and Analysis in our 2010
Proxy Statement, which information is incorporated herein by reference. Information concerning
securities that are available to be issued under our equity compensation plans is contained under
Equity Compensation Plan Information in our 2010 Proxy Statement, which information is
incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning relationships and related transactions of our directors and officers is
contained under Related Party Transactions in our 2010 Proxy Statement, which information is
incorporated herein by reference. Information concerning director independence is contained under
Board of Directors and Committees in our 2010 Proxy Statement, which information is incorporated
herein by reference.
102
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning the principal accountants fees and services for the Company is contained
under Independent Registered Public Accounting Firm in the Companys 2010 Proxy Statement, which
information is incorporated herein by reference.
Part IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
|
a. |
|
Financial Statements and Schedules: The financial statements and schedules that
are listed in the accompanying Index to Consolidated Financial Statements and Schedules on
page F-1. |
|
b. |
|
Exhibits: The exhibits that are listed in 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. |
103
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
The Navigators Group, Inc.
(Company)
|
|
Dated: February 26, 2010 |
By: |
/s/ FRANCIS W. MCDONNELL
|
|
|
|
Francis W. McDonnell |
|
|
|
Senior Vice President and
Chief Financial Officer |
|
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 Company and in the capacities and on the dates
indicated.
|
|
|
|
|
Name |
|
Title |
|
Date |
|
|
|
|
|
/s/ TERENCE N. DEEKS
Terence N. Deeks
|
|
Chairman
|
|
February 26, 2010 |
|
|
|
|
|
/s/ STANLEY A. GALANSKI
Stanley A. Galanski
|
|
President and Chief Executive Officer
(Principal Executive Officer)
|
|
February 26, 2010 |
|
|
|
|
|
/s/ FRANCIS W. MCDONNELL
Francis W. McDonnell
|
|
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
|
|
February 26, 2010 |
|
|
|
|
|
/s/ THOMAS C. CONNOLLY
Thomas C. Connolly
|
|
Vice President and Treasurer
Navigators Management Company
(Principal Accounting Officer)
|
|
February 26, 2010 |
|
|
|
|
|
/s/ H.J. MERVYN BLAKENEY
H.J. Mervyn Blakeney
|
|
Director
|
|
February 26, 2010 |
|
|
|
|
|
/s/ PETER A. CHENEY
Peter A. Cheney
|
|
Director
|
|
February 26, 2010 |
|
|
|
|
|
/s/ WILLIAM T. FORRESTER
William T. Forrester
|
|
Director
|
|
February 26, 2010 |
|
|
|
|
|
/s/ JOHN F. KIRBY
John F. Kirby
|
|
Director
|
|
February 26, 2010 |
|
|
|
|
|
/s/ MARC M. TRACT
Marc M. Tract
|
|
Director
|
|
February 26, 2010 |
|
|
|
|
|
/s/ ROBERT F. WRIGHT
Robert F. Wright
|
|
Director
|
|
February 26, 2010 |
104
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
|
|
|
|
|
F-2 |
|
|
|
|
|
F-3 |
|
|
|
|
|
F-4 |
|
|
|
|
|
F-5 |
|
|
|
|
|
F-6 |
|
|
|
|
|
F-7 |
|
|
|
|
|
F-8 |
|
|
|
SCHEDULES: |
|
|
|
|
|
|
|
S-1 |
|
|
|
|
|
S-2 |
|
|
|
|
|
S-5 |
|
|
|
|
|
S-6 |
|
|
|
|
|
S-7 |
|
|
|
|
|
S-8 |
|
|
|
|
|
|
|
|
|
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Navigators Group, Inc.
We have audited the accompanying consolidated balance sheets of The Navigators Group, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income,
stockholders equity, comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 2009. 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 Companys 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 the standards of the Public Company Accounting Oversight
Board (United States). 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, 2009 and 2008, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2009, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of
evaluating other-than-temporary impairments of debt securities due to the adoption of new
accounting requirements issued by the Financial Accounting Standards Board, as of January 1, 2009.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), The Navigators Group, Inc. and subsidiaries internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated February 26, 2010 expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
KPMG LLP
New York, New York
February 26, 2010
F-2
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Investments and cash: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale, at fair value
(amortized cost: 2009, $1,777,983; 2008, $1,664,755) |
|
$ |
1,816,669 |
|
|
$ |
1,643,772 |
|
Equity securities, available-for-sale, at fair value (cost: 2009, $47,376; 2008, $52,523) |
|
|
62,610 |
|
|
|
51,802 |
|
Short-term investments, at cost which approximates fair value |
|
|
176,799 |
|
|
|
220,684 |
|
Cash |
|
|
509 |
|
|
|
1,457 |
|
|
|
|
|
|
|
|
Total investments and cash |
|
|
2,056,587 |
|
|
|
1,917,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums receivable |
|
|
193,460 |
|
|
|
170,522 |
|
Prepaid reinsurance premiums |
|
|
162,344 |
|
|
|
188,874 |
|
Reinsurance recoverable on paid losses |
|
|
76,505 |
|
|
|
67,227 |
|
Reinsurance recoverable on unpaid losses and loss adjustment expenses |
|
|
807,352 |
|
|
|
853,793 |
|
Deferred policy acquisition costs |
|
|
56,575 |
|
|
|
47,618 |
|
Accrued investment income |
|
|
17,438 |
|
|
|
17,411 |
|
Goodwill and other intangible assets |
|
|
7,057 |
|
|
|
6,622 |
|
Current income tax receivable, net |
|
|
4,854 |
|
|
|
|
|
Deferred income tax, net |
|
|
31,222 |
|
|
|
54,736 |
|
Other assets |
|
|
40,600 |
|
|
|
25,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,453,994 |
|
|
$ |
3,349,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses |
|
$ |
1,920,286 |
|
|
$ |
1,853,664 |
|
Unearned premiums |
|
|
475,171 |
|
|
|
480,665 |
|
Reinsurance balances payable |
|
|
98,555 |
|
|
|
140,319 |
|
Senior notes |
|
|
114,010 |
|
|
|
123,794 |
|
Federal income taxes payable |
|
|
|
|
|
|
5,874 |
|
Accounts payable and other liabilities |
|
|
44,453 |
|
|
|
55,947 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,652,475 |
|
|
|
2,660,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued |
|
$ |
|
|
|
$ |
|
|
Common stock, $.10 par value, authorized 50,000,000 shares, issued
17,212,814 shares for 2009 and 17,080,826 shares for 2008 |
|
|
1,721 |
|
|
|
1,708 |
|
Additional paid-in capital |
|
|
304,505 |
|
|
|
298,872 |
|
Treasury stock, at cost (366,330 shares for 2009 and 224,754 shares for 2008) |
|
|
(18,296 |
) |
|
|
(11,540 |
) |
Retained earnings |
|
|
469,934 |
|
|
|
406,776 |
|
Accumulated other comprehensive income (loss) |
|
|
43,655 |
|
|
|
(6,499 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
801,519 |
|
|
|
689,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
3,453,994 |
|
|
$ |
3,349,580 |
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
F-3
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ and shares in thousands, except net income per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
1,044,918 |
|
|
$ |
1,084,922 |
|
|
$ |
1,070,707 |
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums |
|
$ |
701,255 |
|
|
$ |
661,615 |
|
|
$ |
645,796 |
|
Increase in unearned premiums |
|
|
(17,892 |
) |
|
|
(17,639 |
) |
|
|
(43,819 |
) |
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
683,363 |
|
|
|
643,976 |
|
|
|
601,977 |
|
Commission income |
|
|
87 |
|
|
|
1,005 |
|
|
|
1,736 |
|
Net investment income |
|
|
75,512 |
|
|
|
76,554 |
|
|
|
70,662 |
|
Total other-than-temporary impairment losses |
|
|
(29,265 |
) |
|
|
(37,045 |
) |
|
|
(655 |
) |
Portion of loss recognized in other |
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive income (before tax) |
|
|
17,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other-than-temporary impairment losses |
|
|
|
|
|
|
|
|
|
|
|
|
recognized in earnings |
|
|
(11,877 |
) |
|
|
(37,045 |
) |
|
|
(655 |
) |
Net realized gains (losses) |
|
|
9,217 |
|
|
|
(1,254 |
) |
|
|
2,661 |
|
Other income |
|
|
6,578 |
|
|
|
430 |
|
|
|
278 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
762,880 |
|
|
|
683,666 |
|
|
|
676,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses |
|
|
435,998 |
|
|
|
393,131 |
|
|
|
340,592 |
|
Commission expenses |
|
|
98,908 |
|
|
|
89,785 |
|
|
|
77,613 |
|
Other operating expenses |
|
|
132,671 |
|
|
|
123,148 |
|
|
|
110,409 |
|
Interest expense |
|
|
8,455 |
|
|
|
8,871 |
|
|
|
8,863 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
676,032 |
|
|
|
614,935 |
|
|
|
537,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
86,848 |
|
|
|
68,731 |
|
|
|
139,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
23,690 |
|
|
|
17,039 |
|
|
|
43,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
63,158 |
|
|
$ |
51,692 |
|
|
$ |
95,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
3.73 |
|
|
$ |
3.08 |
|
|
$ |
5.69 |
|
Diluted |
|
$ |
3.65 |
|
|
$ |
3.04 |
|
|
$ |
5.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
16,935 |
|
|
|
16,802 |
|
|
|
16,812 |
|
Diluted |
|
|
17,322 |
|
|
|
16,992 |
|
|
|
17,005 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
F-4
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning and end of year |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
1,708 |
|
|
$ |
1,687 |
|
|
$ |
1,674 |
|
Shares issued under stock plans |
|
|
13 |
|
|
|
21 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
1,721 |
|
|
$ |
1,708 |
|
|
$ |
1,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
298,872 |
|
|
$ |
291,616 |
|
|
$ |
286,732 |
|
Shares issued under stock plans |
|
|
5,633 |
|
|
|
7,256 |
|
|
|
4,884 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
304,505 |
|
|
$ |
298,872 |
|
|
$ |
291,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock held at cost |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
(11,540 |
) |
|
$ |
|
|
|
$ |
|
|
Treasury stock acquired |
|
|
(6,756 |
) |
|
|
(11,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
(18,296 |
) |
|
$ |
(11,540 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
406,776 |
|
|
$ |
355,084 |
|
|
$ |
259,464 |
|
Net income |
|
|
63,158 |
|
|
|
51,692 |
|
|
|
95,620 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
469,934 |
|
|
$ |
406,776 |
|
|
$ |
355,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
(15,062 |
) |
|
$ |
10,186 |
|
|
$ |
849 |
|
Change in year |
|
|
46,020 |
|
|
|
(25,248 |
) |
|
|
9,337 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
30,958 |
|
|
|
(15,062 |
) |
|
|
10,186 |
|
|
|
|
|
|
|
|
|
|
|
Non-credit other-than-temporary impairment gains (losses),
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
|
|
|
|
|
|
|
|
|
|
Change in period |
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
4,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustments, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
8,563 |
|
|
|
3,533 |
|
|
|
2,624 |
|
Net adjustment |
|
|
134 |
|
|
|
5,030 |
|
|
|
909 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
8,697 |
|
|
|
8,563 |
|
|
|
3,533 |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
43,655 |
|
|
$ |
(6,499 |
) |
|
$ |
13,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity at end of year |
|
$ |
801,519 |
|
|
$ |
689,317 |
|
|
$ |
662,106 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
F-5
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
63,158 |
|
|
$ |
51,692 |
|
|
$ |
95,620 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on investments,
net of tax expense (benefit) of $25,602, $(12,034) and $4,858
in 2009, 2008 and 2007, respectively(1) |
|
|
50,020 |
|
|
|
(25,248 |
) |
|
|
9,337 |
|
Change in foreign currency translation gains (losses),
net of tax expense of $72, $2,709 and $490
in 2009, 2008 and 2007, respectively |
|
|
134 |
|
|
|
5,030 |
|
|
|
909 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
50,154 |
|
|
|
(20,218 |
) |
|
|
10,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
113,312 |
|
|
$ |
31,474 |
|
|
$ |
105,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Disclosure of reclassification amount, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on investments arising
during period |
|
$ |
48,068 |
|
|
$ |
(50,142 |
) |
|
$ |
10,643 |
|
Less: reclassification adjustment for net realized gains (losses)
included in net income |
|
|
5,882 |
|
|
|
(768 |
) |
|
|
1,732 |
|
reclassification adjustment for other-than-temporary impairment
losses recognized in net income |
|
|
(7,834 |
) |
|
|
(24,126 |
) |
|
|
(426 |
) |
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on
securities, net of tax |
|
$ |
50,020 |
|
|
$ |
(25,248 |
) |
|
$ |
9,337 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
F-6
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
63,158 |
|
|
$ |
51,692 |
|
|
$ |
95,620 |
|
Adjustments to reconcile net income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation & amortization |
|
|
4,551 |
|
|
|
4,761 |
|
|
|
3,350 |
|
Deferred income taxes |
|
|
(2,285 |
) |
|
|
(16,522 |
) |
|
|
(4,401 |
) |
Net realized (gains) losses |
|
|
2,660 |
|
|
|
38,299 |
|
|
|
(2,006 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable on paid and unpaid
losses and loss adjustment expenses |
|
|
42,781 |
|
|
|
(48,314 |
) |
|
|
129,314 |
|
Reserves for losses and loss adjustment expenses |
|
|
54,050 |
|
|
|
237,817 |
|
|
|
34,844 |
|
Prepaid reinsurance premiums |
|
|
27,788 |
|
|
|
(3,701 |
) |
|
|
(8,410 |
) |
Unearned premium |
|
|
(8,872 |
) |
|
|
20,183 |
|
|
|
52,131 |
|
Premiums receivable |
|
|
(20,447 |
) |
|
|
(14,369 |
) |
|
|
2,470 |
|
Commissions receivable |
|
|
284 |
|
|
|
2,020 |
|
|
|
1,279 |
|
Deferred policy acquisition costs |
|
|
(8,394 |
) |
|
|
2,627 |
|
|
|
(9,770 |
) |
Accrued investment income |
|
|
(11 |
) |
|
|
(1,822 |
) |
|
|
(2,553 |
) |
Reinsurance balances payable |
|
|
(42,808 |
) |
|
|
(10,048 |
) |
|
|
(34,342 |
) |
Current income taxes |
|
|
(12,094 |
) |
|
|
(798 |
) |
|
|
6,847 |
|
Other |
|
|
3,549 |
|
|
|
(16,550 |
) |
|
|
20,270 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
103,910 |
|
|
|
245,275 |
|
|
|
284,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
Redemptions and maturities |
|
|
135,374 |
|
|
|
131,674 |
|
|
|
156,730 |
|
Sales |
|
|
473,913 |
|
|
|
186,106 |
|
|
|
218,044 |
|
Purchases |
|
|
(728,216 |
) |
|
|
(473,295 |
) |
|
|
(624,092 |
) |
Equity securities, available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
18,899 |
|
|
|
22,041 |
|
|
|
30,702 |
|
Purchases |
|
|
(21,947 |
) |
|
|
(40,746 |
) |
|
|
(61,930 |
) |
Change in payable for securities |
|
|
(15,836 |
) |
|
|
(112 |
) |
|
|
(428 |
) |
Net change in short-term investments |
|
|
47,821 |
|
|
|
(61,431 |
) |
|
|
7,560 |
|
Purchase of property and equipment |
|
|
(2,781 |
) |
|
|
(7,548 |
) |
|
|
(8,804 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(92,773 |
) |
|
|
(243,311 |
) |
|
|
(282,218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(6,756 |
) |
|
|
(11,540 |
) |
|
|
|
|
Purchase of Senior notes |
|
|
(7,000 |
) |
|
|
|
|
|
|
|
|
Proceeds of stock issued from employee stock purchase plan |
|
|
727 |
|
|
|
963 |
|
|
|
606 |
|
Proceeds of stock issued from exercise of stock options |
|
|
944 |
|
|
|
3,014 |
|
|
|
1,627 |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(12,085 |
) |
|
|
(7,563 |
) |
|
|
2,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on foreign currency cash |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
Increase (decrease) in cash |
|
|
(948 |
) |
|
|
(5,599 |
) |
|
|
4,652 |
|
Cash at beginning of year |
|
|
1,457 |
|
|
|
7,056 |
|
|
|
2,404 |
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year |
|
$ |
509 |
|
|
$ |
1,457 |
|
|
$ |
7,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash information: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
37,089 |
|
|
$ |
34,990 |
|
|
$ |
40,046 |
|
Interest paid |
|
|
8,355 |
|
|
|
8,750 |
|
|
|
8,750 |
|
Issuance of stock to directors |
|
|
210 |
|
|
|
200 |
|
|
|
181 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
F-7
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
Organization
The accompanying consolidated financial statements, consisting of the accounts of The Navigators
Group, Inc., a Delaware holding company established in 1982, and its wholly-owned subsidiaries, are
prepared on the basis of U.S. generally accepted accounting principles (GAAP or U.S. GAAP).
The terms we, us, our and the Company as used herein are used to mean The Navigators Group,
Inc. and its subsidiaries, unless the context otherwise requires. The terms Parent or Parent
Company are used to mean The Navigators Group, Inc. without its subsidiaries. All significant
intercompany transactions and balances have been eliminated. Certain amounts for prior years have
been reclassified to conform to the current years presentation.
We are an international insurance company focusing on specialty products within the overall
property/casualty insurance market. Our largest product line and most long-standing area of
specialization is ocean marine insurance. We have also developed specialty niches in professional
liability insurance as well as other specialty insurance lines such as contractors liability and
primary and excess liability coverages.
Our revenue is primarily comprised of premiums and investment income. We derive our premiums
primarily from business written by wholly-owned underwriting management companies which produce,
manage and underwrite insurance and reinsurance for us. Our products are distributed through
multiple channels, utilizing global, national and regional retail and wholesale insurance brokers.
We conduct operations through our Insurance Companies and our Lloyds Operations segments. The
Insurance Companies segment consists of Navigators Insurance Company, which includes a United
Kingdom Branch (the U.K. Branch), and Navigators Specialty Insurance Company, which underwrites
specialty and professional liability insurance on an excess and surplus lines basis. All of the
insurance business written by Navigators Specialty Insurance Company is fully reinsured by
Navigators Insurance Company pursuant to a 100% quota share reinsurance agreement. Our Lloyds
Operations segment includes Navigators Underwriting Agency Ltd. (NUAL), a Lloyds of London
(Lloyds) underwriting agency which manages Lloyds Syndicate 1221 (Syndicate 1221). Our
Lloyds Operations primarily underwrite marine and related lines of business along with offshore
energy, professional liability insurance and construction coverages for onshore energy business at
Lloyds through Syndicate 1221. We controlled 100% of Syndicate 1221s stamp capacity for the 2009
and 2008 underwriting years through our wholly owned subsidiary, Navigators Corporate Underwriters
Ltd., and through both Millennium Underwriting Ltd., another wholly owned subsidiary, and
Navigators Corporate Underwriters Ltd. in 2007, which are referred to as corporate names in the
Lloyds market. We have also established underwriting agencies in Antwerp, Belgium, Stockholm,
Sweden and Copenhagen, Denmark, which underwrite risks pursuant to binding authorities with NUAL
into Syndicate 1221. For financial information by segment, see Note 3: Segment Information to the
Consolidated Financial Statements.
F-8
Significant Accounting Policies
Cash
Cash includes cash on hand, demand deposits with banks and treasury bills with original maturities
of less than 90 days.
Investments
As of December 31, 2009 and 2008, all fixed maturity and equity securities held by the Company were
classified as available-for-sale. 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. Premiums and discounts on fixed maturity
securities are amortized into interest income over the life of the security under the interest
method. Fixed maturity securities include bonds and mortgage-backed and asset-backed securities.
Equity securities consist of common stock.
All fixed maturities, short-term investments and equity securities are carried at fair value. All
prices for our fixed maturities, short-term investments and equity securities valued as Level 1 or
Level 2 in the fair value hierarchy, as defined in the Financial Accounts Standards Board
Accounting Standards Codification 820 (ASC 820), Fair Value Measurements, are received from
independent pricing services utilized by one of our outside investment managers whom we employ to
assist us with investment accounting services. This manager utilizes a pricing committee which
approves the use of one or more independent pricing service vendors. The pricing committee
consists of five or more members, one from senior management and one from the accounting group with
the remainder from the asset class specialists and client strategists. The pricing source of each
security is determined in accordance with the pricing source procedures approved by the pricing
committee. The investment manager uses supporting documentation received from the independent
pricing service vendor detailing the inputs, models and processes used in the independent pricing
service vendors evaluation process to determine the appropriate fair value hierarchy. Any pricing
where the input is based solely on a broker price is deemed to be a Level 3 price. Management has
reviewed this process by which the manager determines the prices and has obtained alternative
pricing to validate a sampling of the pricing and assess their reasonableness.
For mortgage-backed and asset-backed securities, anticipated prepayments and expected maturities
are utilized in applying the interest rate method to our mortgage-backed and asset-backed
securities. An effective yield is calculated based on projected principal cash flows at the time
of original purchase. The effective yield is used to amortize the purchase price of the security
over the securitys expected life. Book values are adjusted to reflect the amortization of premium
or accretion of discount on a monthly basis.
The projected principal cash flows are based on certain prepayment assumptions which are generated
using a prepayment model. The prepayment model uses a number of factors to estimate prepayment
activity including the current levels of interest rates, (refinancing incentive) time of year
(seasonality), economic activity (including housing turnover) and term and age of the underlying
collateral (burnout, seasoning). Prepayment assumptions associated with the mortgage-backed and
asset-backed securities are reviewed on a periodic basis. When changes in prepayment assumptions
are deemed necessary as the result of actual prepayments differing from anticipated prepayments,
securities are revalued based upon the new prepayment assumptions utilizing the retrospective
adjustment method, whereby the
effective yield is recalculated to reflect actual payments to date and anticipated future payments.
The investment in such securities is adjusted to the amount that would have existed had the new
effective yield been applied since the acquisition of the security. Such adjustments, if any, are
included in net investment income for the current period being reported.
F-9
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 recognized when the related trades are
executed and are determined on the basis of the specific identification method.
Management regularly reviews our fixed maturity and equity securities portfolios to evaluate the
necessity of recording impairment losses for other-than-temporary declines in the fair value of
investments.
In the first quarter of 2009, we adopted accounting guidance relating to the recognition and
presentation of other-than-temporary impairments (OTTI) on fixed maturity securities. When
assessing whether the amortized cost basis of a fixed maturity security will be recovered, we compare the
present value of cash flows expected to be collected to the current book value. Any shortfalls of the present value of the
cash flows expected to be collected in relation to the amortized cost basis is considered the
credit loss portion of OTTI losses and is recognized in earnings. All non-credit losses are
recognized as changes in OTTI losses within Other Comprehensive Income (OCI). Prior to 2009, when a fixed maturity
security in our investment portfolio had an unrealized loss that was deemed to be
other-than-temporary, we wrote the security down to fair value through a charge to operations.
For equity securities, in general, we focus our attention on those securities
whose fair value was less than 80% of their cost for six or more
consecutive months. If warranted as the result of conditions relating to a particular security, we
will focus on a significant decline in fair value regardless of the time period involved. Factors
considered in evaluating potential impairment include, but are not limited to, the current fair
value as compared to cost of the security, as appropriate, the length of time the
investment has been below cost and by how much. If an equity security is deemed to be other-than-temporarily impaired, the cost is written down to fair value with the loss
recognized in earnings.
For equity securities, we consider our intent to hold securities as part of the process of
evaluating whether a decline in fair value represents an other-than-temporary decline in value. For
fixed maturity securities, we consider our intent to sell a security and whether it is more likely
than not that we will be required to sell a security before the anticipated recovery as part of the
process of evaluating whether a securitys unrealized loss represents an other-than-temporary
decline. Our ability to hold such securities is supported by sufficient cash flow from its
operations and from maturities within its investment portfolio in order to meet its claims payment
and other disbursement obligations arising from its underwriting operations without selling such
investments. With respect to securities where the decline in value is determined to be temporary
and the securitys value is not written down, a subsequent decision may be made to sell that
security and realize a loss. Subsequent decisions on security sales are made within the context of
overall risk monitoring, changing information and market conditions.
Day to day management of our investment portfolio is outsourced to third party investment managers.
While these investment managers may, at a given point in time, believe that the preferred course
of action is to hold securities with unrealized losses that are considered temporary until such
losses are recovered,
the dynamic nature of the portfolio management may result in a subsequent decision to sell the
security and realize the loss based upon a change in market and other factors described above. We
believe that subsequent decisions to sell such securities are consistent with the classification of
our portfolio as available-for-sale. Investment managers are required to notify management of
rating agency downgrades of securities in their portfolios as well as any potential investment
valuation issues at the end of each quarter. Investment managers are also required to notify
management, and receive approval, prior to the execution of a transaction or series of related
transactions that may result in a realized loss above a certain threshold. Additionally,
investment managers are required to notify management, and receive approval, prior to the execution
of a transaction or series of related transactions that may result in any realized loss up until a
certain period beyond the close of a quarterly accounting period.
F-10
Syndicate 1221
We record Syndicate 1221s assets, liabilities, revenues and expenses under U.S. GAAP. Lloyds
syndicates determine underwriting results by year of account at the end of three years. We record
adjustments to recognize underwriting results as incurred, including the ultimate cost of losses
incurred. These adjustments to losses are based on actuarial analysis of Syndicate 1221s
accounts, including forecasts of expected ultimate losses. At the end of the Lloyds three year
period for determining underwriting results for an account year, Syndicate 1221 will close the
account year by reinsuring outstanding claims on that account year with the participants for the
accounts next underwriting year. The amount to close an underwriting year into the next year is
referred to as the reinsurance to close (RITC). The RITC transaction, recorded in the fourth
quarter, does not result in any gain or loss. The ceding participants pay the assuming participants
an amount based on the unearned premiums and outstanding claims in the underwriting account at the
date of the assumption. The reinsurance to close amounts represents the transfer of the assets and
liabilities from the participants of a closing underwriting year to the participants of the next
underwriting year. To the extent our participation in Syndicate 1221 changes, the reinsurance to
close amounts vary accordingly.
Translation of Foreign Currencies
Functional currency assets and liabilities are translated into U.S. dollars using period end rates
of exchange and the related translation adjustments are recorded as a separate component of
Accumulated other comprehensive income. Statement of income amounts expressed in functional
currencies are translated using average exchange rates. Realized gains and losses resulting from
foreign currency transactions are recorded in Other income (expense) in our Consolidated Statements
of Income.
Premium Revenues
Insurance premiums are recognized as revenue ratably over the period of the insurance contract or
over the period of risk if the period of risk differs significantly from the contract period.
Written premium is recorded based on the insurance policies that have been reported to us and the
policies that have been written by the agents but not yet reported to us. We must estimate the
amount of written premium not yet reported based on judgments relative to current and historical
trends of the business being written. Such estimates are regularly reviewed and updated and any
resulting adjustments are included in the current years results. An unearned premium reserve is
established to reflect the unexpired portion of each policy at the financial reporting date.
F-11
Commission Income
Commission income consists of commissions and profit commissions from the unaffiliated insurance
companies in the marine pool and profit commissions from the unaffiliated participants at Syndicate
1221. Commissions from those unaffiliated insurers are based on gross earned premiums and are
recognized as revenue ratably over the same period as the related premiums are recognized as
revenue. Profit commission is based on estimated net underwriting income of the unaffiliated
parties and is accrued over the period in which the related income is recognized. Changes in prior
estimates of commission income are recorded when such changes become known. Beginning with the
2006 underwriting year, there are no longer any marine pool unaffiliated insurance companies with
the elimination of the marine pool and no longer any unaffiliated participants at Syndicate 1221
with the purchase of the minority interest. Any profit commission would therefore result from the
run-off of underwriting years prior to 2006.
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
revenue. 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, commission expense and operating expenses based on
historical and current experience and anticipated investment income.
Reserves 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 (IBNR). IBNR loss reserves are calculated
by our actuaries using several standard actuarial methodologies, including the paid and incurred
loss development and the paid and incurred Bornheutter-Ferguson loss methods. Additional analyses,
such as frequency/severity analyses, are performed for certain books of business. 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 years results. Management believes that the liability it
has recognized for unpaid losses and loss adjustment expenses is a reasonable estimate of 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 differ materially from
the amounts recorded in the accompanying consolidated financial statements. Losses and loss
adjustment expenses are recorded on an undiscounted basis.
Earnings per Share
Basic earnings per share is computed by dividing net income by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects the basic earnings
per share adjusted for the potential dilution that would occur if all issued stock options were
exercised and all stock grants were fully vested.
F-12
Reinsurance Ceded
In the normal course of business, reinsurance is purchased by us from insurers or reinsurers to
reduce the amount of loss arising from claims. In order to determine the proper accounting for the
reinsurance, management analyzes the reinsurance agreements to determine whether the reinsurance
should be classified as prospective or retroactive based upon the terms of the reinsurance
agreement and whether the reinsurer has assumed significant insurance risk to the extent that the
reinsurer may realize a significant loss from the transaction.
Prospective reinsurance is reinsurance in which an assuming company agrees to reimburse the ceding
company for losses that may be incurred as a result of future insurable events covered under
contracts subject to the reinsurance. Retroactive reinsurance is reinsurance in which an assuming
company agrees to reimburse a ceding company for liabilities incurred as a result of past insurable
events covered under contracts subject to the reinsurance. The analysis of the reinsurance
contract terms has determined that all of our reinsurance is prospective reinsurance with adequate
transfer of insurance risk to the reinsurer to qualify for reinsurance accounting treatment.
Ceded reinsurance premiums and any related ceding commission and ceded losses are reflected as
reductions of the respective income or expense accounts over the terms of the reinsurance
contracts. Prepaid reinsurance premiums represent the portion of premiums ceded to reinsurers
applicable to the unexpired terms of the reinsurance contracts in force. Reinsurance reinstatement
premiums are recognized in the same period as the loss event that gave rise to the reinstatement
premiums. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsured policy. Unearned premiums ceded and estimates of amounts
recoverable from reinsurers on paid and unpaid losses are reflected as assets. Provisions are made
for estimated unrecoverable reinsurance.
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 three to seven years, using the straight-line method. Amortization of leasehold improvements
is provided over the shorter of the useful lives of those improvements or the contractual terms of
the leases using the straight-line method.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets were $7.1 million and $6.6 million at December 31, 2009 and
2008, respectively. The goodwill and other intangible assets consist of $2.5 million for the
underwriting agencies at both December 31, 2009 and 2008, and $4.6 million and $4.1 million for the
Lloyds Operations at December 31, 2009 and 2008, respectively. The December 31, 2009 goodwill and
intangible assets of $7.1 million consists of $4.9 million of goodwill and $2.2 million of other
intangible assets. The December 31, 2008 goodwill and other intangible assets of $6.6 million
consists of $4.6 million of goodwill and $2.0 million of other intangible assets. Goodwill and
other intangible assets on the Companys consolidated balance sheets may fluctuate due to changes
in the currency exchange rates between the U.S. dollar and the British pound.
We completed our annual impairment review of goodwill and other intangible assets which resulted in
no impairment as of December 31, 2009.
F-13
Stock-Based Compensation
All equity-based awards granted to employees and existing awards modified on or after January 1,
2003 are accounted for at fair value with compensation expense recorded in net income. For
equity-based awards that contain a vesting period, compensation expense is generally recorded over
the vesting period. In some cases, grants vest over five years with one-third vesting in each of
the third, fourth and fifth years.
Income Taxes
We apply 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 basis. 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. In addition to all of our reserves
for losses and loss adjustment expenses being an estimate, a portion of our premiums are estimated
for unreported premiums, mostly for the marine business written by our U.K. Branch and Lloyds
Operations. We generally do not experience any significant backlog in processing premiums. Such
premium estimates are generally based on submission data received from brokers and agents and
recorded when the insurance policy or reinsurance contract is bound and written. The estimates are
regularly reviewed and updated taking into account the premium received to date versus the estimate
and the age of the estimate. To the extent that the actual premium varies from the estimates, the
difference, along with the related loss reserves and underwriting expenses, is recorded in current
operations.
Recently Adopted Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued new accounting guidance on
the Accounting Standards Codification (ASC or Codification). The Codification is the single
source of authoritative GAAP to be applied by nongovernmental entities. The Codification is not
intended to change GAAP but rather reorganize divergent accounting literature into an accessible
and user-friendly system. The Codification was effective for financial statements issued for
interim and annual periods ending after September 15, 2009. We adopted this guidance as of the
third quarter of 2009. Adoption of this guidance did not have an effect on our consolidated
financial condition, results of operations or cash flows. Technical references to GAAP included in
these Notes to Interim Consolidated Financial Statements are provided under the Codification
structure.
In September 2009, the FASB issued accounting guidance (Accounting Standards Update (ASU)
2009-05) for measuring liabilities at fair value (ASC 820-10). This guidance provides clarification
on the measurement of liabilities when a quoted price in an active market for an identical
liability is not available. In addition, the guidance clarifies that the existence of a restriction
preventing the transfer of the liability should not be included as a separate input or adjustment
to adjustment to other inputs when determining the fair value of a liability. Finally, the guidance
clarifies that both a quoted price in an active market for the identical liability at the
measurement date and the quoted price for the identical liability when trader as an asset in an
active market when no adjustments to the quoted price of the asset are required are Level 1 fair
value measurements. This guidance was effective for interim and annual periods beginning after
August 27, 2009. We adopted this guidance in the fourth quarter of 2009. Adoption of this guidance
did not have a material effect on our consolidated financial condition, results of operations or
cash flows.
F-14
In
May 2009, the FASB issued accounting guidance for subsequent
events (ASC 855-10, as amended by ASU 2010-09). This guidance
establishes general standards for the disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. This guidance sets
forth: 1) The period after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition or disclosure in
the financial statements; 2) The circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in the financial statements; and 3) The
disclosures that an entity should make about events that occurred after the balance sheet date.
This guidance was effective for interim and annual financial periods ending after September 15,
2009. We adopted this guidance in the third quarter of 2009. Adoption of this guidance did not
have a material effect on our consolidated financial condition, results of operations or cash
flows.
In April 2009, the FASB issued accounting guidance that amends fair value measurements and
disclosures (ASC 820-10-65). This guidance provides additional guidance for estimating fair value
when the volume and level of activity of the asset or liability have significantly decreased and on
identifying circumstances that indicate a transaction is not orderly. This guidance was effective
for interim and annual reporting periods ending after September 15, 2009, and shall be applied
prospectively. Early adoption was permitted for periods ending after March 15, 2009. We elected to
early adopt this guidance in the first quarter of 2009. Adoption of this guidance did not have a
material effect on our consolidated financial condition, results of operations or cash flows.
In April 2009, the FASB issued accounting guidance for debt and equity investment securities (ASC
320-10-65). This guidance modifies the requirements for recognizing an other-than-temporary
impairment on debt securities, the presentation of other-than-temporary impairment losses and
increases the frequency of and expands the required disclosures for debt and equity securities.
This guidance was effective for interim and annual reporting periods ending after September 15,
2009, with early adoption permitted for periods ending after March 15, 2009. We elected to early
adopt this guidance in the first quarter of 2009. Adoption of this guidance did not have a material
effect on our consolidated financial condition, results of operations or cash flows.
In April 2009, the FASB issued accounting guidance for interim disclosures for financial
instruments (ASC 825-10-65). This guidance requires disclosures of fair value of financial
instruments for interim reporting periods of publicly traded companies as well as in annual
financial statements. This guidance was effective for interim reporting periods ending after
September 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We
elected to early adopt this guidance in the first quarter of 2009.
Adoption of this guidance did not have a material effect on our consolidated financial condition,
results of operations or cash flows.
In April 2008, the FASB issued accounting guidance for the useful life of intangible assets (ASC
350-30-55). This guidance amends the factors to be considered in determining the useful life of
intangible assets. Its intent is to improve the consistency between the useful life of an
intangible asset and the period of expected cash flows used to measure such assets fair value.
This guidance was effective for fiscal years beginning after December 15, 2008. We adopted this
guidance in the first quarter of 2009. Adoption of this guidance did not have a material effect on
our consolidated financial condition, results of operations or cash flows.
F-15
In March 2008, the FASB issued accounting guidance for disclosures about derivative instruments and
hedging activities (ASC 815-10). This guidance requires enhanced disclosures about an entitys
derivative and hedging activities and thereby improves the transparency of financial reporting.
This guidance was effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early adoption encouraged. We adopted this guidance in the
first quarter of 2009. Adoption of this guidance did not have a material effect on our consolidated
financial condition, results of operations or cash flows.
In December 2007, the FASB issued accounting guidance for business combinations (ASC 805-10). This
guidance amends the recognition provisions for assets and liabilities acquired in a business
combination, including those arising from contractual and non-contractual contingencies. In
addition, this guidance also amends the recognition criteria for contingent consideration. This
guidance became effective as of January 1, 2009. We adopted this guidance in the first quarter of
2009. Adoption of this guidance did not have a material effect on our consolidated financial
condition, results of operations or cash flows.
Recent Accounting Developments
In January 2010, the FASB issued accounting guidance (ASU 2010-06) which improves disclosures about
fair value measurements (ASC 820-10). This guidance adds additional disclosures regarding
significant transfers in and out of Levels 1 and 2. This guidance also adds additional disclosures
regarding Level 3 purchases, sales, issuances and settlements. In addition, this guidance also adds
additional disclosures regarding fair value measurement disclosures for each class of assets and
liabilities as well as disclosures about the valuation techniques and inputs used to measure fair
value for items classified as Level 2 or Level 3. This guidance is effective as of January 1, 2010
for calendar year reporting entities with the exception of the additional disclosures about
purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value
measurements which is effective as of January 1, 2011 for calendar year reporting entities. Early
adoption is permitted. We are currently evaluating the potential impact of adopting this guidance
on its consolidated financial condition, results of operations and cash flows.
In June 2009, the FASB issued accounting guidance for the transfer of financial assets (ASC
860-10), which was added to the Codification under ASU 2009-16. This guidance removes the concept
of a qualifying special-purpose entity (QSPE) from existing GAAP as well as the removal of the
exception from applying ASC 810-10, Consolidation, to QSPEs. This guidance also clarifies the unit
of account eligible for sale accounting and requires that a transferor recognize and initially
measure at fair value, all financial assets obtained and liabilities incurred as a result of a
transfer of an entire financial asset (or group of entire financial assets) accounted for as a
sale. Finally, this guidance requires enhanced disclosures to provide greater transparency about
transfers of financial assets and a transferors
continuing involvement with transferred financial assets. This guidance is effective as of
January 1, 2010 for calendar year reporting entities and early adoption is not permitted. We are
currently evaluating the potential impact of adopting this guidance on its consolidated financial
condition, results of operations and cash flows.
F-16
Note 2. Earnings Per 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, 2009 |
|
|
|
|
|
|
|
Average |
|
|
Net |
|
|
|
Net |
|
|
Shares |
|
|
Income |
|
|
|
Income |
|
|
Outstanding |
|
|
Per Share |
|
|
|
($ and shares in thousands, except net income per share) |
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders |
|
$ |
63,158 |
|
|
|
16,935 |
|
|
$ |
3.73 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and grants |
|
|
|
|
|
|
387 |
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders |
|
$ |
63,158 |
|
|
|
17,322 |
|
|
$ |
3.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
Average |
|
|
Net |
|
|
|
Net |
|
|
Shares |
|
|
Income |
|
|
|
Income |
|
|
Outstanding |
|
|
Per Share |
|
|
|
($ and shares in thousands, except net income per share) |
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders |
|
$ |
51,692 |
|
|
|
16,802 |
|
|
$ |
3.08 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and grants |
|
|
|
|
|
|
190 |
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders |
|
$ |
51,692 |
|
|
|
16,992 |
|
|
$ |
3.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
Average |
|
|
Net |
|
|
|
Net |
|
|
Shares |
|
|
Income |
|
|
|
Income |
|
|
Outstanding |
|
|
Per Share |
|
|
|
($ and shares in thousands, except net income per share) |
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders |
|
$ |
95,620 |
|
|
|
16,812 |
|
|
$ |
5.69 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and grants |
|
|
|
|
|
|
193 |
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders |
|
$ |
95,620 |
|
|
|
17,005 |
|
|
$ |
5.62 |
|
F-17
Options to purchase common shares are not included in the respective computations of diluted
earnings per common share when the options exercise price is greater than the average market price
of the common shares. This situation did not occur for the years presented in the tables directly
above.
Note 3. Segment Information
We classify our business into two underwriting segments consisting of the Insurance Companies and
the Lloyds Operations, which are separately managed, and a Corporate segment. Segment data for
each of the two underwriting segments include allocations of revenues and expenses of the
wholly-owned underwriting management companies and the Parent Companys operating expenses and
related income tax amounts. The Corporate segment consists of the Parent Companys investment
income, interest expense and the related tax effect.
We evaluate the performance of each segment based on its underwriting and GAAP results. The
Insurance Companies and the Lloyds Operations results are measured by taking into account net
earned premiums, net losses and loss adjustment expenses, commission expenses, other operating
expenses, commission income and other income (expense). Each segment also maintains its own
investments, on which it earns income and realizes capital gains or losses. Our underwriting
performance is evaluated separately from the performance of our investment portfolios.
The Insurance Companies consist of Navigators Insurance Company, including its U.K. Branch, and its
wholly-owned subsidiary, Navigators Specialty Insurance Company. They are primarily engaged in
underwriting marine insurance and related lines of business, professional liability insurance and
specialty lines of business including contractors general liability insurance, commercial umbrella
and primary and excess casualty businesses. Navigators Specialty Insurance Company underwrites specialty and
professional liability insurance on an excess and surplus lines basis. Navigators Specialty
Insurance Company is 100% reinsured by Navigators Insurance Company.
The Lloyds Operations primarily underwrite marine and related lines of business along with
offshore energy, professional liability insurance and construction coverages for onshore energy
business at Lloyds through Syndicate 1221. The European property business, written by the
Lloyds Operations and the U.K. Branch beginning in 2006, was discontinued in the 2008 second
quarter. Our Lloyds Operations includes NUAL, a Lloyds underwriting agency which manages
Syndicate 1221.
Syndicate
1221s stamp capacity was £124 million ($194 million) in 2009, £123 million ($228
million) in 2008 and £140 million ($280 million) in 2007. Stamp capacity is a measure of the
amount of premium a Lloyds syndicate is authorized to write as determined by the Council of
Lloyds. We controlled 100% of Syndicate 1221s total stamp capacity in 2009, 2008 and 2007
through our wholly-owned Lloyds corporate member (we utilized two wholly-owned Lloyds corporate
members prior to the 2008 underwriting year). Syndicate 1221s stamp capacity is expressed net of
commission (as is standard at Lloyds). The Syndicate 1221 premium recorded in our financial
statements is gross of commission. We provide letters of credit to Lloyds to support our
participation in Syndicate 1221s stamp capacity, see Note 8, Credit Facility.
Navigators Management Company, Inc. (NMC) is a wholly-owned underwriting management company
which produces, manages and underwrites insurance and reinsurance, and provides corporate services
for the Company. During the second quarter of 2008, Navigators California Insurance Services,
Inc. and Navigators Special Risk, Inc., also wholly-owned underwriting management companies, were
merged into NMC. The operating results for the underwriting management companies are allocated to
both the Insurance Companies and Lloyds Operations.
F-18
Effective in 2009, we reclassified certain business lines within our segments, which had no effect
on the segment classifications of the Insurance Companies and Lloyds Operations. Underwriting data
for prior periods has been reclassified to reflect these changes.
|
|
|
The offshore energy business, formerly included in the Marine and Energy
businesses of the Insurance Companies and Lloyds Operations, is now included in the
Insurance Companies and Lloyds Operations Property Casualty businesses. |
|
|
|
The marine lines within both the Insurance Companies and Lloyds Operations are
now presented as Marine instead of Marine and Energy, since the offshore energy
business has now been reclassified to Property Casualty. |
|
|
|
Engineering and construction, European Property and other run-off business,
formerly included in the Other category of business within the Insurance Companies
and Lloyds Operations, are now included under Property Casualty. |
|
|
|
The Middle Markets business, formerly broken out separately in the Insurance
Companies, is now included in the Insurance Companies Property Casualty business. |
F-19
Financial data by segment for 2009, 2008 and 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
730,776 |
|
|
$ |
314,142 |
|
|
$ |
|
|
|
$ |
1,044,918 |
|
Net written premiums |
|
|
477,673 |
|
|
|
223,582 |
|
|
|
|
|
|
|
701,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
479,121 |
|
|
|
204,242 |
|
|
|
|
|
|
|
683,363 |
|
Net losses and loss adjustment expenses |
|
|
(304,672 |
) |
|
|
(131,326 |
) |
|
|
|
|
|
|
(435,998 |
) |
Commission expenses |
|
|
(61,949 |
) |
|
|
(37,727 |
) |
|
|
768 |
|
|
|
(98,908 |
) |
Other operating expenses |
|
|
(104,801 |
) |
|
|
(27,896 |
) |
|
|
|
|
|
|
(132,697 |
) |
Commission income and other income (expense) |
|
|
3,498 |
|
|
|
961 |
|
|
|
(768 |
) |
|
|
3,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
11,197 |
|
|
|
8,254 |
|
|
|
|
|
|
|
19,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
65,717 |
|
|
|
9,229 |
|
|
|
566 |
|
|
|
75,512 |
|
Net realized gains (losses) |
|
|
533 |
|
|
|
(3,193 |
) |
|
|
|
|
|
|
(2,660 |
) |
Other operating expenses |
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
26 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
2,974 |
|
|
|
2,974 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(8,455 |
) |
|
|
(8,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit) |
|
|
77,447 |
|
|
|
14,290 |
|
|
|
(4,889 |
) |
|
|
86,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
19,819 |
|
|
|
5,582 |
|
|
|
(1,711 |
) |
|
|
23,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
57,628 |
|
|
$ |
8,708 |
|
|
$ |
(3,178 |
) |
|
$ |
63,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,554,037 |
|
|
$ |
799,577 |
|
|
$ |
71,422 |
|
|
$ |
3,453,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expenses ratio |
|
|
63.6 |
% |
|
|
64.3 |
% |
|
|
|
|
|
|
63.8 |
% |
Commission expense ratio |
|
|
12.9 |
% |
|
|
18.5 |
% |
|
|
|
|
|
|
14.5 |
% |
Other operating expenses ratio (2) |
|
|
21.1 |
% |
|
|
13.2 |
% |
|
|
|
|
|
|
18.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
97.6 |
% |
|
|
96.0 |
% |
|
|
|
|
|
|
97.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to cross foot. |
|
(2) |
|
Includes Other operating expenses and Commission income and other income (expense). |
F-20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
241,438 |
|
|
$ |
191,959 |
|
|
$ |
433,397 |
|
Property Casualty |
|
|
352,285 |
|
|
|
78,151 |
|
|
|
430,436 |
|
Professional Liability |
|
|
137,053 |
|
|
|
44,032 |
|
|
|
181,085 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
730,776 |
|
|
$ |
314,142 |
|
|
$ |
1,044,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
171,289 |
|
|
$ |
156,153 |
|
|
$ |
327,442 |
|
Property Casualty |
|
|
227,234 |
|
|
|
45,097 |
|
|
|
272,331 |
|
Professional Liability |
|
|
79,150 |
|
|
|
22,332 |
|
|
|
101,482 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
477,673 |
|
|
$ |
223,582 |
|
|
$ |
701,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
157,534 |
|
|
$ |
142,958 |
|
|
$ |
300,492 |
|
Property Casualty |
|
|
246,143 |
|
|
|
39,330 |
|
|
|
285,473 |
|
Professional Liability |
|
|
75,444 |
|
|
|
21,954 |
|
|
|
97,398 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
479,121 |
|
|
$ |
204,242 |
|
|
$ |
683,363 |
|
|
|
|
|
|
|
|
|
|
|
F-21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
762,190 |
|
|
$ |
322,732 |
|
|
$ |
|
|
|
$ |
1,084,922 |
|
Net written premiums |
|
|
472,688 |
|
|
|
188,927 |
|
|
|
|
|
|
|
661,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
463,298 |
|
|
|
180,678 |
|
|
|
|
|
|
|
643,976 |
|
Net losses and loss adjustment expenses |
|
|
(275,767 |
) |
|
|
(117,364 |
) |
|
|
|
|
|
|
(393,131 |
) |
Commission expenses |
|
|
(55,752 |
) |
|
|
(34,033 |
) |
|
|
|
|
|
|
(89,785 |
) |
Other operating expenses |
|
|
(92,297 |
) |
|
|
(30,961 |
) |
|
|
110 |
|
|
|
(123,148 |
) |
Commission income and other income (expense) |
|
|
2,145 |
|
|
|
(600 |
) |
|
|
(110 |
) |
|
|
1,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
|
41,627 |
|
|
|
(2,280 |
) |
|
|
|
|
|
|
39,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
63,544 |
|
|
|
11,655 |
|
|
|
1,355 |
|
|
|
76,554 |
|
Net realized gains (losses) |
|
|
(37,822 |
) |
|
|
(477 |
) |
|
|
|
|
|
|
(38,299 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
(8,871 |
) |
|
|
(8,871 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (benefit) |
|
|
67,349 |
|
|
|
8,898 |
|
|
|
(7,516 |
) |
|
|
68,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
16,401 |
|
|
|
3,269 |
|
|
|
(2,631 |
) |
|
|
17,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
50,948 |
|
|
$ |
5,629 |
|
|
$ |
(4,885 |
) |
|
$ |
51,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,477,139 |
|
|
$ |
779,800 |
|
|
$ |
63,452 |
|
|
$ |
3,349,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expenses ratio |
|
|
59.5 |
% |
|
|
65.0 |
% |
|
|
|
|
|
|
61.0 |
% |
Commission expense ratio |
|
|
12.0 |
% |
|
|
18.8 |
% |
|
|
|
|
|
|
13.9 |
% |
Other operating expenses ratio (2) |
|
|
19.5 |
% |
|
|
17.5 |
% |
|
|
|
|
|
|
18.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
91.0 |
% |
|
|
101.3 |
% |
|
|
|
|
|
|
93.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to cross foot. |
|
(2) |
|
Includes Other operating expenses and Commission income and other income (expense). |
F-22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
248,080 |
|
|
$ |
192,568 |
|
|
$ |
440,648 |
|
Property Casualty |
|
|
405,062 |
|
|
|
91,292 |
|
|
|
496,354 |
|
Professional Liability |
|
|
109,048 |
|
|
|
38,872 |
|
|
|
147,920 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
762,190 |
|
|
$ |
322,732 |
|
|
$ |
1,084,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
147,569 |
|
|
$ |
132,788 |
|
|
$ |
280,357 |
|
Property Casualty |
|
|
261,322 |
|
|
|
32,735 |
|
|
|
294,057 |
|
Professional Liability |
|
|
63,797 |
|
|
|
23,404 |
|
|
|
87,201 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
472,688 |
|
|
$ |
188,927 |
|
|
$ |
661,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
132,005 |
|
|
$ |
126,126 |
|
|
$ |
258,131 |
|
Property Casualty |
|
|
273,977 |
|
|
|
32,644 |
|
|
|
306,621 |
|
Professional Liability |
|
|
57,316 |
|
|
|
21,908 |
|
|
|
79,224 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
463,298 |
|
|
$ |
180,678 |
|
|
$ |
643,976 |
|
|
|
|
|
|
|
|
|
|
|
F-23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
774,346 |
|
|
$ |
296,361 |
|
|
$ |
|
|
|
$ |
1,070,707 |
|
Net written premiums |
|
|
478,018 |
|
|
|
167,778 |
|
|
|
|
|
|
|
645,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
443,456 |
|
|
|
158,521 |
|
|
|
|
|
|
|
601,977 |
|
Net losses and loss adjustment expenses |
|
|
(256,652 |
) |
|
|
(83,940 |
) |
|
|
|
|
|
|
(340,592 |
) |
Commission expenses |
|
|
(52,490 |
) |
|
|
(25,123 |
) |
|
|
|
|
|
|
(77,613 |
) |
Other operating expenses |
|
|
(81,053 |
) |
|
|
(29,356 |
) |
|
|
|
|
|
|
(110,409 |
) |
Commission income and other income (expense) |
|
|
1,510 |
|
|
|
504 |
|
|
|
|
|
|
|
2,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
|
54,771 |
|
|
|
20,606 |
|
|
|
|
|
|
|
75,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
58,261 |
|
|
|
10,524 |
|
|
|
1,877 |
|
|
|
70,662 |
|
Net realized gains (losses) |
|
|
1,973 |
|
|
|
33 |
|
|
|
|
|
|
|
2,006 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(8,863 |
) |
|
|
(8,863 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense (benefit) |
|
|
115,005 |
|
|
|
31,163 |
|
|
|
(6,986 |
) |
|
|
139,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
35,061 |
|
|
|
10,946 |
|
|
|
(2,445 |
) |
|
|
43,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
79,944 |
|
|
$ |
20,217 |
|
|
$ |
(4,541 |
) |
|
$ |
95,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,322,647 |
|
|
$ |
744,002 |
|
|
$ |
53,501 |
|
|
$ |
3,143,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss expenses ratio |
|
|
57.9 |
% |
|
|
53.0 |
% |
|
|
|
|
|
|
56.6 |
% |
Commission expense ratio |
|
|
11.8 |
% |
|
|
15.8 |
% |
|
|
|
|
|
|
12.9 |
% |
Other operating expense ratio (2) |
|
|
17.9 |
% |
|
|
18.2 |
% |
|
|
|
|
|
|
18.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
87.6 |
% |
|
|
87.0 |
% |
|
|
|
|
|
|
87.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to cross foot. |
|
(2) |
|
Includes Other operating expenses and Commission income and other income (expense). |
F-24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
227,175 |
|
|
$ |
175,567 |
|
|
$ |
402,742 |
|
Property Casualty |
|
|
447,615 |
|
|
|
86,513 |
|
|
|
534,128 |
|
Professional Liability |
|
|
99,556 |
|
|
|
34,281 |
|
|
|
133,837 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
774,346 |
|
|
$ |
296,361 |
|
|
$ |
1,070,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
117,294 |
|
|
$ |
110,577 |
|
|
$ |
227,871 |
|
Property Casualty |
|
|
301,607 |
|
|
|
33,852 |
|
|
|
335,459 |
|
Professional Liability |
|
|
59,117 |
|
|
|
23,349 |
|
|
|
82,466 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
478,018 |
|
|
$ |
167,778 |
|
|
$ |
645,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
112,370 |
|
|
$ |
111,380 |
|
|
$ |
223,750 |
|
Property Casualty |
|
|
275,937 |
|
|
|
29,482 |
|
|
|
305,419 |
|
Professional Liability |
|
|
55,149 |
|
|
|
17,659 |
|
|
|
72,808 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
443,456 |
|
|
$ |
158,521 |
|
|
$ |
601,977 |
|
|
|
|
|
|
|
|
|
|
|
The Insurance Companies net earned premiums include $85.4 million, $69.0 million and $62.2 million
of net earned premiums from the U.K. Branch for 2009, 2008 and 2007, respectively.
F-25
Note 4. Investments
The following tables set forth our cash and investments as of December 31, 2009 and 2008. The table
as of December 31, 2009 includes OTTI securities recognized within OCI.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
OTTI |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Cost or |
|
|
Recognized |
|
December 31, 2009 |
|
Fair Value |
|
|
Gains |
|
|
(Losses) |
|
|
Amortized Cost |
|
|
in OCI |
|
|
|
($ in thousands) |
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
$ |
471,598 |
|
|
$ |
7,397 |
|
|
$ |
(597 |
) |
|
$ |
464,798 |
|
|
$ |
|
|
States, municipalities and political
subdivisions |
|
|
676,699 |
|
|
|
25,044 |
|
|
|
(2,917 |
) |
|
|
654,572 |
|
|
|
|
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
283,578 |
|
|
|
12,607 |
|
|
|
(98 |
) |
|
|
271,069 |
|
|
|
|
|
Residential mortgage obligations |
|
|
31,071 |
|
|
|
|
|
|
|
(7,246 |
) |
|
|
38,317 |
|
|
|
(5,723 |
) |
Asset-backed securities |
|
|
16,469 |
|
|
|
612 |
|
|
|
(34 |
) |
|
|
15,891 |
|
|
|
(23 |
) |
Commercial mortgage-backed securities |
|
|
100,393 |
|
|
|
594 |
|
|
|
(5,028 |
) |
|
|
104,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
431,511 |
|
|
|
13,813 |
|
|
|
(12,406 |
) |
|
|
430,104 |
|
|
|
(5,746 |
) |
Corporate bonds |
|
|
236,861 |
|
|
|
9,111 |
|
|
|
(759 |
) |
|
|
228,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,816,669 |
|
|
|
55,365 |
|
|
|
(16,679 |
) |
|
|
1,777,983 |
|
|
|
(5,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
62,610 |
|
|
|
15,244 |
|
|
|
(10 |
) |
|
|
47,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
176,799 |
|
|
|
|
|
|
|
|
|
|
|
176,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,056,587 |
|
|
$ |
70,609 |
|
|
$ |
(16,689 |
) |
|
$ |
2,002,667 |
|
|
$ |
(5,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Cost or |
|
December 31, 2008 |
|
Fair Value |
|
|
Gains |
|
|
(Losses) |
|
|
Amortized Cost |
|
|
|
($ in thousands) |
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
$ |
361,656 |
|
|
$ |
25,741 |
|
|
$ |
(145 |
) |
|
$ |
336,060 |
|
States, municipalities and political
subdivisions |
|
|
614,609 |
|
|
|
12,568 |
|
|
|
(8,036 |
) |
|
|
610,077 |
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
299,775 |
|
|
|
10,930 |
|
|
|
(26 |
) |
|
|
288,871 |
|
Residential mortgage obligations |
|
|
56,743 |
|
|
|
|
|
|
|
(27,119 |
) |
|
|
83,862 |
|
Asset-backed securities |
|
|
29,436 |
|
|
|
5 |
|
|
|
(1,289 |
) |
|
|
30,720 |
|
Commercial mortgage-backed securities |
|
|
92,684 |
|
|
|
|
|
|
|
(20,350 |
) |
|
|
113,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
478,638 |
|
|
|
10,935 |
|
|
|
(48,784 |
) |
|
|
516,487 |
|
Corporate bonds |
|
|
188,869 |
|
|
|
1,398 |
|
|
|
(14,660 |
) |
|
|
202,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,643,772 |
|
|
|
50,642 |
|
|
|
(71,625 |
) |
|
|
1,664,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
51,802 |
|
|
|
1,266 |
|
|
|
(1,987 |
) |
|
|
52,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
1,457 |
|
|
|
|
|
|
|
|
|
|
|
1,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
220,684 |
|
|
|
|
|
|
|
|
|
|
|
220,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,917,715 |
|
|
$ |
51,908 |
|
|
$ |
(73,612 |
) |
|
$ |
1,939,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of financial instruments are determined based on the following fair value hierarchy:
|
|
Level 1 Quoted prices for identical instruments in active markets. Examples are listed
equity and fixed income securities traded on an exchange. Treasury securities would generally
be considered level 1. |
|
|
Level 2 Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived valuations
in which all significant inputs and significant value drivers are observable in active
markets. Examples are asset-backed and mortgage-backed securities which are similar to other
asset-backed or mortgage-backed securities observed in the market. |
|
|
Level 3 Valuations derived from valuation techniques in which one or more significant
inputs or significant value drivers are unobservable. An example would be a private placement
with minimal liquidity. |
F-27
The following table presents the fair value hierarchy for our fixed maturities, equity securities
and short-term investments that are measured at fair value as of December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
In Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
331,925 |
|
|
$ |
1,484,744 |
|
|
$ |
|
|
|
$ |
1,816,669 |
|
Equity securities |
|
|
62,610 |
|
|
|
|
|
|
|
|
|
|
|
62,610 |
|
Short-term investments |
|
|
9,992 |
|
|
|
166,807 |
|
|
|
|
|
|
|
176,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
404,527 |
|
|
$ |
1,651,551 |
|
|
$ |
|
|
|
$ |
2,056,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
In Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
271,392 |
|
|
$ |
1,372,224 |
|
|
$ |
156 |
|
|
$ |
1,643,772 |
|
Equity securities |
|
|
51,802 |
|
|
|
|
|
|
|
|
|
|
|
51,802 |
|
Short-term investments |
|
|
59,957 |
|
|
|
160,727 |
|
|
|
|
|
|
|
220,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
383,151 |
|
|
$ |
1,532,951 |
|
|
$ |
156 |
|
|
$ |
1,916,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no significant judgments made in classifying instruments in the fair value hierarchy.
F-28
The following table presents a reconciliation of the beginning and ending balances for all
investments measured at fair value using Level 3 inputs during the twelve months ended December 31,
2009 and 2008:
|
|
|
|
|
|
|
Twelve Months Ended |
|
($ in thousands) |
|
December 31, 2009 |
|
|
|
|
|
|
Level 3 investments as of January 1 |
|
$ |
156 |
|
Unrealized net gains included in other comprehensive income (loss) |
|
|
23 |
|
Purchases, sales, paydowns and amortization |
|
|
(23 |
) |
Transfer from Level 3 |
|
|
(156 |
) |
Transfer to Level 3 |
|
|
|
|
|
|
|
|
Level 3 investments as of December 31 |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended |
|
|
|
December 31, 2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
Level 3 investments as of January 1 |
|
$ |
2,603 |
|
Unrealized net gains included in other comprehensive income (loss) |
|
|
(94 |
) |
Purchases, sales, paydowns and amortization |
|
|
(704 |
) |
Transfer from Level 3 |
|
|
(1,979 |
) |
Transfer to Level 3 |
|
|
330 |
|
|
|
|
|
Level 3 investments as of December 31 |
|
$ |
156 |
|
|
|
|
|
The following table shows the amount and percentage of our fixed maturities and short-term investments at December 31,
2009 by S&P credit rating or, if an S&P rating is not available, the equivalent Moodys rating. The
table includes fixed maturities and short-term investments at fair value, and the total rating is
the weighted average quality rating.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
Rating |
|
|
|
|
|
Fair |
|
|
of |
|
Description |
|
Rating |
|
|
Value |
|
|
Total |
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extremely Strong |
|
AAA |
|
$ |
1,124,403 |
|
|
|
57 |
% |
Very Strong |
|
AA |
|
|
494,764 |
|
|
|
25 |
% |
Strong |
|
A |
|
|
275,016 |
|
|
|
14 |
% |
Adequate |
|
BBB |
|
|
67,400 |
|
|
|
3 |
% |
Speculative |
|
BB & below |
|
|
24,656 |
|
|
|
1 |
% |
Not Rated |
|
NR |
|
|
7,229 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
AA |
|
$ |
1,993,468 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
F-29
The scheduled maturity dates for fixed maturity securities by the number of years until
maturity at December 31, 2009 are shown in the following table:
|
|
|
|
|
|
|
|
|
Period from |
|
|
|
|
|
|
December 31, 2009 |
|
Fair |
|
|
Amortized |
|
to Maturity |
|
Value |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
135,927 |
|
|
$ |
134,614 |
|
Due after one year through five years |
|
|
561,016 |
|
|
|
542,206 |
|
Due after five years through ten years |
|
|
371,156 |
|
|
|
359,966 |
|
Due after ten years |
|
|
317,059 |
|
|
|
311,093 |
|
Mortgage- and asset-backed (including GNMAs) |
|
|
431,511 |
|
|
|
430,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,816,669 |
|
|
$ |
1,777,983 |
|
|
|
|
|
|
|
|
Expected maturities may differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment penalties. Due to the
periodic repayment of principal, the mortgage-backed and asset-backed securities are estimated to
have an effective maturity of approximately 3.5 years.
F-30
The following table summarizes all securities in an unrealized loss position at December 31, 2009
and 2008, showing the aggregate fair value and gross unrealized loss by the length of time those
securities have continuously been in an unrealized loss position as well as the number of
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
# of |
|
|
Fair |
|
|
Gross |
|
|
# of |
|
|
Fair |
|
|
Gross |
|
|
|
Securities |
|
|
Value |
|
|
Unrealized Loss |
|
|
Securities |
|
|
Value |
|
|
Unrealized Loss |
|
|
|
($ in thousands except # of securities) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
24 |
|
|
$ |
116,566 |
|
|
$ |
597 |
|
|
|
4 |
|
|
$ |
3,862 |
|
|
$ |
145 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
24 |
|
|
|
116,566 |
|
|
|
597 |
|
|
|
4 |
|
|
|
3,862 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
47 |
|
|
|
108,290 |
|
|
|
2,291 |
|
|
|
72 |
|
|
|
68,727 |
|
|
|
2,187 |
|
7-12 Months |
|
|
4 |
|
|
|
3,534 |
|
|
|
112 |
|
|
|
73 |
|
|
|
118,910 |
|
|
|
4,376 |
|
> 12 Months |
|
|
23 |
|
|
|
17,777 |
|
|
|
514 |
|
|
|
17 |
|
|
|
15,918 |
|
|
|
1,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
74 |
|
|
|
129,601 |
|
|
|
2,917 |
|
|
|
162 |
|
|
|
203,555 |
|
|
|
8,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
5 |
|
|
|
18,385 |
|
|
|
98 |
|
|
|
3 |
|
|
|
2,130 |
|
|
|
6 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
3,471 |
|
|
|
9 |
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
962 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
5 |
|
|
|
18,385 |
|
|
|
98 |
|
|
|
20 |
|
|
|
6,563 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65 |
|
|
|
39,012 |
|
|
|
20,779 |
|
> 12 Months |
|
|
73 |
|
|
|
31,071 |
|
|
|
7,246 |
|
|
|
14 |
|
|
|
10,315 |
|
|
|
6,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
73 |
|
|
|
31,071 |
|
|
|
7,246 |
|
|
|
79 |
|
|
|
49,327 |
|
|
|
27,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
22,079 |
|
|
|
653 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
6,630 |
|
|
|
550 |
|
> 12 Months |
|
|
4 |
|
|
|
637 |
|
|
|
34 |
|
|
|
2 |
|
|
|
224 |
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
4 |
|
|
|
637 |
|
|
|
34 |
|
|
|
65 |
|
|
|
28,933 |
|
|
|
1,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
11 |
|
|
|
28,103 |
|
|
|
324 |
|
|
|
6 |
|
|
|
6,461 |
|
|
|
280 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
31,505 |
|
|
|
5,628 |
|
> 12 Months |
|
|
21 |
|
|
|
45,135 |
|
|
|
4,704 |
|
|
|
26 |
|
|
|
54,717 |
|
|
|
14,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
32 |
|
|
|
73,238 |
|
|
|
5,028 |
|
|
|
53 |
|
|
|
92,683 |
|
|
|
20,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
13 |
|
|
|
33,275 |
|
|
|
337 |
|
|
|
75 |
|
|
|
57,805 |
|
|
|
2,445 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89 |
|
|
|
57,971 |
|
|
|
5,893 |
|
> 12 Months |
|
|
8 |
|
|
|
6,325 |
|
|
|
422 |
|
|
|
40 |
|
|
|
27,873 |
|
|
|
6,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
21 |
|
|
|
39,600 |
|
|
|
759 |
|
|
|
204 |
|
|
|
143,649 |
|
|
|
14,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
233 |
|
|
$ |
409,098 |
|
|
$ |
16,679 |
|
|
|
587 |
|
|
$ |
528,572 |
|
|
$ |
71,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
17 |
|
|
$ |
8,991 |
|
|
$ |
1,941 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
351 |
|
|
|
46 |
|
> 12 Months |
|
|
1 |
|
|
|
872 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
|
1 |
|
|
$ |
872 |
|
|
$ |
10 |
|
|
|
19 |
|
|
$ |
9,342 |
|
|
$ |
1,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The above
unrealized losses have been determined to be temporary based on our policies.
The residential mortgage obligations gross unrealized loss in the above table for the greater than
12 months category consists primarily of residential mortgage-backed securities. Residential
mortgage-backed securities are a type of fixed income security in which residential mortgage loans
are sold into a trust or special purpose vehicle, thereby securitizing the cash flows of the
mortgage loans.
To determine whether the unrealized loss on structured securities is other-than-temporary, we
project an expected principal loss under a range of scenarios and utilize the most likely outcomes.
The analysis relies on actual collateral performance measures such as default rate, prepayment rate
and loss severity. These assumptions are applied throughout the remaining term of the deal,
incorporating the transaction structure and priority of payments, to generate loss adjusted cash
flows. Results of the analysis will indicate whether the security ultimately incurs a loss or
whether there is a material impact on yield due to either a projected loss or a change in cash flow
timing. A breakeven default rate is also calculated. A comparison to the break even default rate to
the actual default rate provides an indication of the level of cushion or coverage to the first
dollar principal loss. The analysis applies these assumptions throughout the remaining term of the
transaction to forecast cash flows, which are then applied through the transaction structure to
determine whether there is a loss to the security. For securities in which a tranche loss is
present, and the net present value of loss adjusted cash flows is less than book value, an
impairment is recognized. The output data also includes a number of additional metrics such as
average life remaining, original and current credit support, over 60 day delinquency and security
rating.
As of December 31, 2009, the largest single unrealized loss by issuer in the fixed maturities was
$1.1 million.
The following table summarizes the cumulative amounts related to our credit loss portion of the
OTTI losses on debt securities held as of December 31, 2009 that we do not intend to sell and it is
more likely than not that we will not be required to sell prior to recovery of the amortized cost
basis and for which the non-credit loss portion is included in other comprehensive income:
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
Beginning balance of at January 1, 2009 |
|
$ |
|
|
Credit losses on securities not previously impaired as of December 31, 2008 |
|
|
3,102 |
|
Reductions for securities sold during the period |
|
|
(579 |
) |
|
|
|
|
Ending balance at December 31, 2009 |
|
$ |
2,523 |
|
|
|
|
|
F-32
The following table summarizes the gross unrealized investment losses as of December 31, 2009 by
length of time where the fair value is less than 80% of amortized cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period for Which Fair Value is Less than 80% of Amortized Cost |
|
|
|
|
|
|
|
|
|
|
|
6 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
Longer than 3 |
|
|
or longer, less |
|
|
|
|
|
|
|
|
|
Less than 3 |
|
|
months, less |
|
|
than 12 |
|
|
12 months |
|
|
|
|
|
|
months |
|
|
than 6 months |
|
|
months |
|
|
or longer |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(4,520 |
) |
|
$ |
(4,520 |
) |
Equity Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(4,520 |
) |
|
$ |
(4,520 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of our investment portfolio may fluctuate significantly in response to
various factors such as changes in interest rates, investment quality ratings, equity prices,
foreign exchange rates and credit spreads. We do not have the intent to sell nor is it more likely
than not that we will have to sell debt securities in unrealized loss positions that are not
other-than temporarily impaired before recovery. We may realize investment losses to the extent our
liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate,
liquidity or credit spread environments. Significant changes in the factors we consider when
evaluating impairment losses could result in a significant change in impairment losses reported in
the consolidated financial statements.
F-33
The table below summarizes our activity related to OTTI losses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended |
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
($ in thousands) |
|
No. |
|
|
Amount |
|
|
No. |
|
|
Amount |
|
|
No. |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds |
|
|
2 |
|
|
$ |
564 |
|
|
|
1 |
|
|
$ |
748 |
|
|
|
|
|
|
$ |
|
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
|
39 |
|
|
|
19,783 |
|
|
|
4 |
|
|
|
7,856 |
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
1 |
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities |
|
|
56 |
|
|
|
8,775 |
|
|
|
59 |
|
|
|
28,441 |
|
|
|
1 |
|
|
|
655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
98 |
|
|
$ |
29,265 |
|
|
|
64 |
|
|
$ |
37,045 |
|
|
|
1 |
|
|
$ |
655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of loss in accumulated other
comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
|
|
|
|
|
17,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
|
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
17,388 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses recognized in earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other bonds |
|
|
|
|
|
$ |
564 |
|
|
|
|
|
|
$ |
748 |
|
|
|
|
|
|
$ |
|
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities |
|
|
|
|
|
|
2,459 |
|
|
|
|
|
|
|
7,856 |
|
|
|
|
|
|
|
|
|
Asset-backed securities |
|
|
|
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities |
|
|
|
|
|
|
8,775 |
|
|
|
|
|
|
|
28,441 |
|
|
|
|
|
|
|
655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
11,877 |
|
|
|
|
|
|
$ |
37,045 |
|
|
|
|
|
|
$ |
655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2009, we recognized in earnings OTTI losses of $2.5 million related to non-agency mortgage and
asset-backed securities. The significant inputs used to measure the amount of credit loss
recognized in earnings were actual delinquency rates, default probability assumptions, severity
assumptions and prepayment assumptions. Projected losses are a function of both loss severity and
probability of default. Default probability and severity assumptions differ based on property type,
vintage and the stress of the collateral. We do not intend to sell any of these securities and it
is more likely than not that we will not be required sell these securities before the recovery of
the amortized cost basis. In 2009, we recognized in earnings OTTI losses of $8.8 million on 56
common stocks resulting from additional impairments on equity securities that were impaired in
2008. In addition, in 2009 we recognized in earnings OTTI losses of $0.6 million on 2 corporate
bonds.
F-34
For the twelve months ended December 31, 2009, for securities that we recognized an OTTI in
earnings, we initially recorded $17.4 million in OTTI losses in OCI as a result of non-credit
losses on non-agency residential mortgage-backed securities. Subsequent declines in unrealized
losses related to the value of securities for which an OTTI loss in OCI was initially recorded
resulted in a balance of $5.7 million of OTTI losses in OCI as of December 31, 2009.
During 2008, we identified equity securities with fair value of $34.4 million which were considered
to be other-than-temporarily impaired. Consequently, the cost of such securities was written down
to fair value and we recognized realized losses of $28.4 million. The equity impairments included
$8.6 million in write-downs to fair value for various broad based ETFs and mutual funds where the
fair value was less than 80% of the book value. During 2008, we identified fixed maturity
securities with fair value of $7.4 million which were considered to be other-than-temporarily
impaired. Consequently, the cost of such securities was written down to fair value and we
recognized realized losses of $8.6 million.
We held common shares of a bond guarantee company in our equity portfolio at December 31, 2007
which were considered to be other-than-temporarily-impaired and recognized a realized loss on such
shares amounting to $0.7 million in the 2007 fourth quarter.
The contractual maturity by the number of years until maturity for fixed maturity securities
with unrealized losses at December 31, 2009 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized Loss |
|
|
Fair Value |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
Amount |
|
|
of Total |
|
|
Amount |
|
|
of Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
23 |
|
|
|
0 |
% |
|
$ |
4,006 |
|
|
|
1 |
% |
Due after one year through five years |
|
|
596 |
|
|
|
4 |
% |
|
|
109,756 |
|
|
|
27 |
% |
Due after five years through ten years |
|
|
1,554 |
|
|
|
9 |
% |
|
|
95,386 |
|
|
|
23 |
% |
Due after ten years |
|
|
2,100 |
|
|
|
13 |
% |
|
|
76,619 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed securities |
|
|
12,406 |
|
|
|
74 |
% |
|
|
123,331 |
|
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities |
|
$ |
16,679 |
|
|
|
100 |
% |
|
$ |
409,098 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
Our net investment income was derived from the following sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
74,779 |
|
|
$ |
73,493 |
|
|
$ |
64,435 |
|
Equity securities |
|
|
2,464 |
|
|
|
2,359 |
|
|
|
1,767 |
|
Short-term investments |
|
|
811 |
|
|
|
3,925 |
|
|
|
7,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,054 |
|
|
|
79,777 |
|
|
|
73,565 |
|
Investment expenses |
|
|
(2,542 |
) |
|
|
(3,223 |
) |
|
|
(2,903 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
75,512 |
|
|
$ |
76,554 |
|
|
$ |
70,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our realized gains and losses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
$ |
18,312 |
|
|
$ |
3,650 |
|
|
$ |
1,320 |
|
(Losses) |
|
|
(9,676 |
) |
|
|
(1,670 |
) |
|
|
(1,749 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
8,636 |
|
|
|
1,980 |
|
|
|
(429 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
|
|
2,110 |
|
|
|
720 |
|
|
|
3,626 |
|
(Losses) |
|
|
(1,529 |
) |
|
|
(3,954 |
) |
|
|
(536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
581 |
|
|
|
(3,234 |
) |
|
|
3,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) |
|
$ |
9,217 |
|
|
$ |
(1,254 |
) |
|
$ |
2,661 |
|
|
|
|
|
|
|
|
|
|
|
F-36
The change in net unrealized gains/(losses) consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Fixed maturity investments |
|
$ |
59,667 |
|
|
$ |
(34,813 |
) |
|
$ |
18,396 |
|
Equity investments |
|
|
15,955 |
|
|
|
(2,469 |
) |
|
|
(4,201 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
75,622 |
|
|
|
(37,282 |
) |
|
|
14,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax (charged) credited |
|
|
(25,602 |
) |
|
|
12,034 |
|
|
|
(4,858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses), net |
|
$ |
50,020 |
|
|
$ |
(25,248 |
) |
|
$ |
9,337 |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 and 2008, fixed maturities with amortized values of $10.6 million and
$9.9 million, respectively, were on deposit with various state insurance departments. In addition,
at December 31, 2009, investments of $1.2 million were on deposit at a U.K. bank to comply with the
regulatory requirements of the Financial Services Authority for Navigators Insurance Companys U.K.
Branch. At December 31, 2009, fixed maturities with amortized values of $19.9 million were on
deposit at Lloyds. In addition, at both December 31, 2009 and 2008, $0.3 million of investments
were pledged as security under a reinsurance treaty.
At December 31, 2009 and 2008, we did not have a concentration of greater than 5% of invested
assets in a single non-U.S. government-backed issuer.
F-37
Note 5. Reserves for Losses and Loss Adjustment Expenses
Insurance companies and Lloyds syndicates are required to maintain reserves for unpaid losses and
unpaid loss adjustment expenses 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 loss adjustment expenses (LAE) for
insurance companies such as Navigators Insurance Company and Navigators Specialty Insurance
Company, and Lloyds corporate members such as Navigators Corporate Underwriters Ltd. and
Millennium Underwriting Ltd. is dependent upon the receipt of information from the agents and
brokers which produce the insurance business for us. Generally, there is a lag between the time
premiums are written and related losses and loss adjustment expenses are incurred, and the time
such events are reported to the agents and brokers and, subsequently, to Navigators Insurance
Company, Navigators Specialty Insurance Company, Navigators Corporate Underwriters Ltd. and
Millennium Underwriting Ltd.
Case reserves are established by our Insurance Companies and Syndicate 1221 for reported claims
when notice of the claim is first received. Reserves for such reported claims 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 agent or broker on the line of business, and the
policy provisions relating to the type of claim. Reserves for IBNR are determined in part on the
basis of statistical information, in part on industry experience and in part on the judgment of our
senior corporate officers. They are calculated by our actuaries using several standard actuarial
methodologies, including the paid and incurred loss development and the paid and incurred
Bornheutter-Ferguson loss methods. Additional analyses, such as frequency/severity analyses, are
performed for certain books of business. To the extent that reserves are deficient or redundant,
the amount of such deficiency or redundancy is treated as a charge or credit to earnings in the
period in which the deficiency or redundancy is recognized.
Loss reserves are estimates of what the insurer or reinsurer expects to pay on claims, based on
facts and circumstances then known. It is possible that the ultimate liability may exceed or be
less than such estimates. In setting our loss reserve estimates, we review statistical data
covering several years, analyze patterns by line of business and consider several factors including
trends in claims frequency and severity, changes in operations, emerging economic and social
trends, inflation and changes in the regulatory and litigation environment. Using the
aforementioned actuarial methods and different underlying assumptions, our actuaries produce a
number of point estimates for each class of business. After reviewing the appropriateness of the
underlying assumptions, management selects the carried reserve for each class of business. We do
not calculate a range of loss reserve estimates. We believe that ranges may not be a true
reflection of the potential volatility between carried loss reserves and the ultimate settlement
amount of losses incurred prior to the balance sheet date. The numerous factors that contribute to
the inherent uncertainty in the process of establishing loss reserves include: interpreting loss
development activity, emerging economic and social trends, inflation, changes in the regulatory and
judicial environment and changes in our operations, including changes in underwriting standards and
claims handling procedures. 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 the current years income statement. 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.
F-38
The following table summarizes the activity in our reserve for losses and LAE during the
three most recent years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for losses and LAE at
beginning of year |
|
$ |
999,871 |
|
|
$ |
847,303 |
|
|
$ |
696,116 |
|
|
|
|
|
|
|
|
|
|
|
Provision for losses and LAE for
claims occurring in the current year |
|
|
444,939 |
|
|
|
443,877 |
|
|
|
387,601 |
|
Decrease in estimated losses and LAE
for claims occurring in prior years |
|
|
(8,941 |
) |
|
|
(50,746 |
) |
|
|
(47,009 |
) |
|
|
|
|
|
|
|
|
|
|
Incurred losses and LAE |
|
|
435,998 |
|
|
|
393,131 |
|
|
|
340,592 |
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE paid for claims
occurring during: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
(59,412 |
) |
|
|
(60,104 |
) |
|
|
(46,467 |
) |
Prior years |
|
|
(263,523 |
) |
|
|
(180,459 |
) |
|
|
(142,938 |
) |
|
|
|
|
|
|
|
|
|
|
Losses and LAE payments |
|
|
(322,935 |
) |
|
|
(240,563 |
) |
|
|
(189,405 |
) |
|
|
|
|
|
|
|
|
|
|
Net reserves for losses and LAE at end of year |
|
|
1,112,934 |
|
|
|
999,871 |
|
|
|
847,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverables on unpaid losses and LAE |
|
|
807,352 |
|
|
|
853,793 |
|
|
|
801,461 |
|
|
|
|
|
|
|
|
|
|
|
Gross reserves for losses and LAE at end of year |
|
$ |
1,920,286 |
|
|
$ |
1,853,664 |
|
|
$ |
1,648,764 |
|
|
|
|
|
|
|
|
|
|
|
The segment breakdown of prior years net reserve deficiency
(redundancy) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
11,893 |
|
|
$ |
(5,298 |
) |
|
$ |
(11,595 |
) |
Property Casualty |
|
|
(35,658 |
) |
|
|
(33,065 |
) |
|
|
(11,836 |
) |
Professional Liability |
|
|
20,686 |
|
|
|
(3,559 |
) |
|
|
(10,365 |
) |
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
$ |
(3,079 |
) |
|
$ |
(41,922 |
) |
|
$ |
(33,796 |
) |
Lloyds Operations |
|
|
(5,862 |
) |
|
|
(8,824 |
) |
|
|
(13,213 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(8,941 |
) |
|
$ |
(50,746 |
) |
|
$ |
(47,009 |
) |
|
|
|
|
|
|
|
|
|
|
The 2009 consolidated net redundancy of $8.9 million consisted of prior year savings of $3.0
million from the Insurance Companies and $5.9 million from the Lloyds Operations.
F-39
The Insurance Companies recorded $11.9 million of net prior year unfavorable development for the
marine business primarily due to large loss activity in excess of our prior expectations mostly
across underwriting years 2005 to 2008 that we recognized by reserve strengthening. In the property
casualty business, the Insurance Companies recorded $35.7 million of net prior year savings
primarily due to $36.5 million for contractors liability due to reduced claims activity in
underwriting years 2006 and prior as well as savings in our primary E&S lines, excess casualty
lines and offshore energy lines due to favorable loss trends across a number of prior underwriting
years. Partially offsetting these favorable developments in the property casualty division were
adverse development in our Nav Pac, liquor and personal umbrella books of business. The Insurance
Companies recorded $20.7 million of net prior year unfavorable development for professional
liability primarily due to $12.4 million of adverse development in the D&O lines, concentrated in
the 2006 and prior underwriting years, due to loss activity in excess of our prior expectations as
well as adverse development of $8.3 million in the lawyers lines recognizing to reported loss
activity in underwriting years 2005 to 2008 in excess of our prior expectations.
The Lloyds Operations recorded $5.9 million of net favorable development primarily due to marine
business concentrated in the liability specie and cargo books due to reported losses being less
than our expectations in underwriting years 2004 to 2008 as well as favorable development in our
offshore energy business. The net favorable development was partially offset by adverse loss
development in the professional liability books due to reported loss activity in excess of our
expectations in the lawyers line of business for losses occurring in 2007 and adverse development
in the property book due to an extension in the loss development pattern for the 2006 and 2007
underwriting years.
Management believes that the reserves for losses and loss adjustment expenses are adequate to cover
the ultimate cost of losses and loss adjustment expenses on reported and unreported claims. We
continue to review our reserves on a regular basis.
Note 6. Reinsurance
We utilize reinsurance principally to reduce our exposure on individual risks, to protect against
catastrophic losses, and to stabilize loss ratios and underwriting results. Although reinsurance
makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer,
ceded reinsurance arrangements do not eliminate our obligation to pay claims to our policyholders.
Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our reinsurers may
not pay claims made by us on a timely basis, or they may not pay some or all of these claims.
Either of these events would increase our costs and could have a material adverse effect on our
business. We are required to pay the losses even if the reinsurer fails to meet its obligations
under the reinsurance agreement. Hurricanes Gustav and Ike in 2008 and Hurricanes Katrina and Rita
in 2005 significantly increased our reinsurance recoverables which increased our credit risk.
We have established a reserve for uncollectible reinsurance in the amount of $13.8 million, which
is determined by considering reinsurer specific default risk as indicated by their financial
strength ratings.
We are protected by various treaty and facultative reinsurance agreements. Our exposure to credit
risk from any one reinsurer is managed through diversification by reinsuring with a number of
different reinsurers, principally in the United States and European reinsurance markets. To meet
our standards of acceptability, when the reinsurance is placed, a reinsurer generally must have a
rating from A.M. Best Company (A.M. Best) and/or S&P of A or better, or an equivalent financial
strength if not rated, plus at least $250 million in policyholders surplus. Our Reinsurance
Security Committee, which is part of our Enterprise Risk Management Reinsurance Sub-Committee,
monitors the financial strength of our
reinsurers and the related reinsurance receivables and periodically reviews the list of acceptable
reinsurers. The reinsurance is placed either directly by us or through reinsurance intermediaries.
The reinsurance intermediaries are compensated by the reinsurers.
F-40
The credit quality distribution of our reinsurance recoverables of $1.05 billion at December
31, 2009 for ceded paid and unpaid losses and loss adjustment expenses and ceded unearned premiums
based on insurer financial strength ratings from A. M. Best or S&P was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
A.M. Best |
|
Rating |
|
|
Recoverable |
|
|
Percent |
|
Rating (1) |
|
Description |
|
|
Amounts |
|
|
of Total |
|
|
|
|
|
|
|
($ in millions) |
|
|
|
|
|
A++, A+ |
|
Superior |
|
$ |
436.7 |
|
|
|
42 |
% |
A, A- |
|
Excellent |
|
|
585.2 |
|
|
|
56 |
% |
B++, B+ |
|
Very good |
|
|
0.8 |
|
|
|
0 |
%(2) |
NR |
|
Not rated |
|
|
23.5 |
|
|
|
2 |
%(2) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
1,046.2 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Equivalent S&P rating used for certain companies when an A.M. Best
rating was unavailable. |
|
(2) |
|
The Company holds offsetting collateral of approximately 102.1% for B++
and B+ companies and 71.8% for not rated companies which includes letters of credit,
ceded balances payable and other balances held by our Insurance Companies and our
Lloyds Operations. |
The following table lists our 20 largest reinsurers measured by the amount of reinsurance
recoverable for ceded losses and loss adjustment expense and ceded unearned premium (constituting
approximately 75.6% of our total recoverables) together with the reinsurance recoverables and
collateral at December 31, 2009, and the reinsurers rating from the indicated rating agency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Recoverables |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
Unpaid/Paid |
|
|
|
|
|
|
Collateral |
|
|
|
Rating & |
|
Reinsurer |
|
Premium |
|
|
Losses |
|
|
Total |
|
|
Held (1) |
|
|
|
Rating Agency |
|
|
|
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swiss Reinsurance America Corporation |
|
$ |
9.0 |
|
|
$ |
97.8 |
|
|
$ |
106.8 |
|
|
$ |
9.2 |
|
|
|
A |
|
|
AMB |
(2) |
Munich Reinsurance America Inc. |
|
|
26.1 |
|
|
|
60.3 |
|
|
|
86.4 |
|
|
|
16.2 |
|
|
|
A+ |
|
|
AMB |
|
Transatlantic Reinsurance Company |
|
|
21.7 |
|
|
|
49.3 |
|
|
|
71.0 |
|
|
|
9.5 |
|
|
|
A |
|
|
AMB |
|
White Mountains Reinsurance of America |
|
|
1.2 |
|
|
|
68.6 |
|
|
|
69.8 |
|
|
|
2.3 |
|
|
|
A- |
|
|
AMB |
|
Everest Reinsurance Company |
|
|
19.9 |
|
|
|
49.4 |
|
|
|
69.3 |
|
|
|
8.5 |
|
|
|
A+ |
|
|
AMB |
|
General Reinsurance Corporation |
|
|
1.5 |
|
|
|
58.3 |
|
|
|
59.8 |
|
|
|
1.7 |
|
|
|
A++ |
|
|
AMB |
|
Munchener Ruckversicherungs-Gesellschaft |
|
|
4.9 |
|
|
|
37.0 |
|
|
|
41.9 |
|
|
|
10.2 |
|
|
|
A+ |
|
|
AMB |
|
National Indemnity Company |
|
|
7.5 |
|
|
|
29.8 |
|
|
|
37.3 |
|
|
|
3.1 |
|
|
|
A++ |
|
|
AMB |
|
Platinum Underwriters Re |
|
|
4.2 |
|
|
|
26.8 |
|
|
|
31.0 |
|
|
|
2.6 |
|
|
|
A |
|
|
AMB |
|
Berkley Insurance Company |
|
|
8.1 |
|
|
|
21.1 |
|
|
|
29.2 |
|
|
|
1.5 |
|
|
|
A+ |
|
|
AMB |
|
Scor Holding (Switzerland) AG |
|
|
5.9 |
|
|
|
19.2 |
|
|
|
25.1 |
|
|
|
5.9 |
|
|
|
A- |
|
|
AMB |
|
Swiss Re International SE |
|
|
1.3 |
|
|
|
22.2 |
|
|
|
23.5 |
|
|
|
6.2 |
|
|
|
A |
|
|
AMB |
|
Partner Reinsurance Europe |
|
|
5.6 |
|
|
|
17.6 |
|
|
|
23.2 |
|
|
|
8.7 |
|
|
|
AA- |
|
|
|
S&P |
|
Lloyds Syndicate #2003 |
|
|
3.6 |
|
|
|
17.9 |
|
|
|
21.5 |
|
|
|
3.4 |
|
|
|
A |
|
|
AMB |
|
Partner Reinsurance Company of the U.S. |
|
|
1.0 |
|
|
|
19.6 |
|
|
|
20.6 |
|
|
|
0.1 |
|
|
|
A+ |
|
|
AMB |
|
Arch Reinsurance Company |
|
|
0.7 |
|
|
|
15.9 |
|
|
|
16.6 |
|
|
|
0.1 |
|
|
|
A |
|
|
AMB |
|
Hannover Ruckversicherung |
|
|
1.5 |
|
|
|
14.8 |
|
|
|
16.3 |
|
|
|
2.4 |
|
|
|
A |
|
|
AMB |
|
Ace Property and Casualty Insurance Company |
|
|
3.7 |
|
|
|
12.1 |
|
|
|
15.8 |
|
|
|
1.6 |
|
|
|
A+ |
|
|
AMB |
|
Allianz Global Corporate & Specialty AG |
|
|
0.2 |
|
|
|
14.4 |
|
|
|
14.6 |
|
|
|
4.2 |
|
|
|
A+ |
|
|
AMB |
|
Federal Insurance Co. |
|
|
0.6 |
|
|
|
10.7 |
|
|
|
11.3 |
|
|
|
1.0 |
|
|
|
A++ |
|
|
AMB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Top 20 Total |
|
|
128.2 |
|
|
|
662.8 |
|
|
|
791.0 |
|
|
|
98.4 |
|
|
|
|
|
|
|
|
|
All Other |
|
|
34.1 |
|
|
|
221.1 |
|
|
|
255.2 |
|
|
|
80.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
162.3 |
|
|
$ |
883.9 |
|
|
$ |
1,046.2 |
|
|
$ |
179.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Collateral includes letters of credit, ceded balances payable and other balances held
by our Insurance Companies and our Lloyds Operations. |
|
(2) |
|
A.M. Best |
F-41
The largest portion of our collateral consists of letters of credit obtained from reinsurers
in accordance with New York Insurance Department Regulation No. 133. Such regulation requires
collateral to be held by the ceding company from assuming companies not licensed in New York State
in order for the ceding company to take credit for the reinsurance recoverables on its statutory
balance sheet. The specific requirements governing the letters of credit include a clean and
unconditional letter of credit and an evergreen clause which prevents the expiration of the
letter of credit without due notice to the Company. Only banks considered qualified by the NAIC may
be deemed acceptable issuers of letters of credit by the New York Insurance Department. In
addition, based on our credit assessment of the reinsurer, there are certain instances where we
require collateral from a reinsurer even if the reinsurer is licensed in New York State, generally
applying the requirements of Regulation No. 133. The contractual terms of the letters of credit require
that access to the collateral is unrestricted. In the event that the counter-party to our
collateral would be deemed not qualified by the NAIC, the reinsurer would be required by agreement
to replace such collateral with acceptable security under the reinsurance agreement. There is no
assurance, however, that the reinsurer would be able to replace the counter-party bank in the event
such counter-party bank becomes unqualified and the reinsurer experiences significant financial
deterioration or becomes insolvent. Under such circumstances, we could incur a substantial loss
from uncollectible reinsurance from such reinsurer.
Approximately $69.7 million and $96.8 million of the reinsurance recoverables for paid and unpaid
losses at December 31, 2009 and 2008, respectively, were due from reinsurers as a result of the
losses from Hurricanes Gustav and Ike. Approximately $68.5 million and $101.7 million of the
reinsurance recoverables for paid and unpaid losses at December 31, 2009 and 2008, respectively,
were due from reinsurers as a result of the losses from Hurricanes Katrina and Rita. In addition,
also included in reinsurance recoverable for paid and unpaid losses is approximately $8.9 million
due from reinsurers in connection with our asbestos exposures.
The following table summarizes written premium:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
966,251 |
|
|
$ |
1,016,521 |
|
|
$ |
989,652 |
|
Assumed |
|
|
78,667 |
|
|
|
68,401 |
|
|
|
81,055 |
|
Ceded |
|
|
(343,663 |
) |
|
|
(423,307 |
) |
|
|
(424,911 |
) |
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
701,255 |
|
|
$ |
661,615 |
|
|
$ |
645,796 |
|
|
|
|
|
|
|
|
|
|
|
F-42
The following table summarizes earned premium:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
977,170 |
|
|
$ |
993,123 |
|
|
$ |
940,447 |
|
Assumed |
|
|
78,932 |
|
|
|
69,989 |
|
|
|
78,164 |
|
Ceded |
|
|
(372,739 |
) |
|
|
(419,136 |
) |
|
|
(416,634 |
) |
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
683,363 |
|
|
$ |
643,976 |
|
|
$ |
601,977 |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes losses and loss adjustment expenses incurred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
$ |
625,558 |
|
|
$ |
646,095 |
|
|
$ |
532,445 |
|
Assumed |
|
|
44,318 |
|
|
|
38,013 |
|
|
|
18,314 |
|
Ceded |
|
|
(233,878 |
) |
|
|
(290,977 |
) |
|
|
(210,167 |
) |
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
435,998 |
|
|
$ |
393,131 |
|
|
$ |
340,592 |
|
|
|
|
|
|
|
|
|
|
|
We are required to pay losses in the event the assuming reinsurers are unable to meet their
obligations under their reinsurance agreements. Charges for uncollectible reinsurance amounts, all
of which were recorded to incurred losses, were $2.0 million, $2.4 million and $0.9 million for
2009, 2008 and 2007, respectively.
Note 7. Income Taxes
We are subject to the tax regulations of the United States and foreign countries in which we
operate. We file a consolidated U.S. federal tax return, which includes all domestic subsidiaries
and the U.K. Branch. The income from the foreign operations is designated as either U.S. connected
income or non-U.S. connected income. Lloyds is required to pay U.S. income tax on U.S. connected
income written by Lloyds syndicates. Lloyds and the IRS have entered into an agreement whereby
the amount of tax due on U.S. connected income is calculated by Lloyds and remitted directly to
the IRS. These amounts are then charged to the corporate members in proportion to their
participation in the relevant syndicates. Our corporate members are subject to this agreement and
will receive U.K. tax credits for any U.S. income tax incurred up to the U.K. income tax charged on
the U.S. income. The non-U.S. connected insurance income would generally constitute taxable income
under the Subpart F income section of the Internal Revenue Code since less than 50% of our premium
is derived within the U.K. and would therefore be subject to U.S. taxation when the Lloyds year of
account closes. Taxes are accrued at a 35% rate on our
foreign source insurance income and foreign tax credits, where available, are utilized to offset
U.S. tax as permitted. Our effective tax rate for Syndicate 1221 taxable income could substantially
exceed 35% to the extent we are unable to offset U.S. taxes paid under Subpart F tax regulations
with U.K. tax credits on future underwriting year distributions. U.S. taxes are not accrued on the
earnings of our foreign agencies as these earnings are not subject to the Subpart F tax
regulations. These earnings are subject to taxes under U.K. tax regulations. A finance bill was
enacted in the U.K. on July 19, 2007 that reduces the U.K. corporate tax rate from 30% to 28%
effective April 1, 2008. The effect of such tax rate change was not material to our financial
statements.
F-43
|
|
The components of current and deferred income tax expense (benefit) were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal and foreign |
|
$ |
25,833 |
|
|
$ |
33,126 |
|
|
$ |
47,864 |
|
State and local |
|
|
142 |
|
|
|
435 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
25,975 |
|
|
|
33,561 |
|
|
|
47,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax benefit: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal and foreign |
|
|
(2,285 |
) |
|
|
(16,522 |
) |
|
|
(4,401 |
) |
State and local |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
(2,285 |
) |
|
|
(16,522 |
) |
|
|
(4,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense |
|
$ |
23,690 |
|
|
$ |
17,039 |
|
|
$ |
43,562 |
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computed expected tax expense |
|
$ |
30,397 |
|
|
|
35.0 |
% |
|
$ |
24,056 |
|
|
|
35.0 |
% |
|
$ |
48,714 |
|
|
|
35.0 |
% |
Tax-exempt interest |
|
|
(7,051 |
) |
|
|
-8.1 |
% |
|
|
(6,650 |
) |
|
|
-9.7 |
% |
|
|
(4,736 |
) |
|
|
-3.4 |
% |
Dividends received deduction |
|
|
(508 |
) |
|
|
-0.6 |
% |
|
|
(493 |
) |
|
|
-0.7 |
% |
|
|
(345 |
) |
|
|
-0.2 |
% |
Current state and local income taxes,
net of federal income tax |
|
|
93 |
|
|
|
0.1 |
% |
|
|
284 |
|
|
|
0.4 |
% |
|
|
64 |
|
|
|
0.0 |
% |
Change in the deferred state and local
income tax, net of deferred tax assets |
|
|
3,546 |
|
|
|
4.1 |
% |
|
|
(154 |
) |
|
|
-0.2 |
% |
|
|
(358 |
) |
|
|
-0.3 |
% |
Change in the valuation allowance |
|
|
(3,546 |
) |
|
|
-4.1 |
% |
|
|
154 |
|
|
|
0.2 |
% |
|
|
358 |
|
|
|
0.3 |
% |
Other |
|
|
759 |
|
|
|
0.9 |
% |
|
|
(158 |
) |
|
|
-0.2 |
% |
|
|
(135 |
) |
|
|
-0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual tax expense and rate |
|
$ |
23,690 |
|
|
|
27.3 |
% |
|
$ |
17,039 |
|
|
|
24.8 |
% |
|
$ |
43,562 |
|
|
|
31.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
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, |
|
|
|
2009 |
|
|
2008 |
|
|
|
($ in thousands) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Loss reserve discount |
|
$ |
31,798 |
|
|
$ |
31,393 |
|
Unearned premiums |
|
|
15,023 |
|
|
|
15,125 |
|
Realized losses |
|
|
19,327 |
|
|
|
12,735 |
|
Compensation related |
|
|
6,052 |
|
|
|
6,012 |
|
Net unrealized losses on securities |
|
|
|
|
|
|
6,640 |
|
State and local net deferred tax assets |
|
|
2,648 |
|
|
|
6,194 |
|
Other |
|
|
721 |
|
|
|
682 |
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
75,569 |
|
|
|
78,781 |
|
Less: Valuation allowance |
|
|
(2,648 |
) |
|
|
(6,194 |
) |
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
72,921 |
|
|
|
72,587 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Deferred acquisition costs |
|
|
(12,205 |
) |
|
|
(11,658 |
) |
Net unrealized gains on securities |
|
|
(18,962 |
) |
|
|
|
|
Other |
|
|
(10,532 |
) |
|
|
(6,193 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(41,699 |
) |
|
|
(17,851 |
) |
|
|
|
|
|
|
|
Net deferred income tax asset |
|
$ |
31,222 |
|
|
$ |
54,736 |
|
|
|
|
|
|
|
|
We have not provided for U.S. deferred income taxes on the undistributed earnings of approximately
$57.6 million of our non-U.S. subsidiaries since these earnings are intended to be permanently
reinvested in our non-U.S. subsidiaries. However, in the future, if such earnings were distributed
to the Company, taxes of approximately $4.0 million would be payable on such undistributed earnings
and would be reflected in the tax provision for the year in which these earnings are no longer
intended to be permanently reinvested in the non-U.S. subsidiary assuming all foreign tax credits
are realized.
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 that we will realize the benefits of its
deductible differences at December 31, 2009, net of any valuation allowance.
We had state and local deferred tax assets amounting to potential future tax benefits of $2.6
million and $6.2 million for December 31, 2009 and 2008, respectively. Included in the deferred tax
assets are net operating loss carryforwards of $1.3 million and $0.5 million at December 31, 2009
and 2008, respectively. A valuation allowance was established for the full amount of these
potential future tax benefits due to the uncertainty associated with their realization. Our state
and local tax carryforwards at December 31, 2009 expire from 2023 to 2025.
F-45
As of December 31, 2009 and 2008, we had no material unrecognized tax benefits. For the years ended
December 31, 2009, 2008 and 2007, we did not recognize any interest or penalties in our statement
of operations. U.S. federal, state and foreign income tax returns for the tax years 2006 through
2008 are subject to examination by the relevant tax authorities.
Note 8. Credit Facility
On April 3, 2009, we entered into a $75 million credit facility agreement entitled Fourth Amended
and Restated Credit Agreement with a consortium of banks, and is a letter of credit facility that
replaced the credit facility that expired on March 31, 2009. The credit facility expires on April
2, 2010. The credit facility is utilized primarily by Navigators Corporate Underwriters Ltd. and
Millennium Underwriting Ltd. to fund our participation in Syndicate 1221 through letters of credit.
The letters of credit issued under the facility are denominated in British pounds and their
aggregate face amount will fluctuate based on exchange rates. The credit facility had previously
been amended in February 2007 to increase the letters of credit available under the credit facility
from $115 million to $180 million and to increase the line of credit available under the credit
facility from $10 million to $20 million. In addition, the expiration of the credit facility was
extended from June 30, 2007 to March 31, 2009.
The credit facility contains customary covenants for facilities of this type, including
restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets,
and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and
other financial ratios. The credit facility also provides for customary events of default,
including failure to pay principal, interest or fees when due, failure to comply with covenants,
any representation or warranty made by the Company being false in any material respect, default
under certain other indebtedness, certain insolvency or receivership events affecting the Company
and its subsidiaries, the occurrence of certain material judgments, or a change in control of the
Company. The letter of credit facility is collateralized by all of the common stock of Navigators
Insurance Company and to the extent the aggregate face amount issued
under the credit facility exceeds $75 million on account of these fluctuations we are required to
post collateral with the lead bank of the consortium, which we have done as of December 31, 2009 in
the amount of $8.6 million. We were in compliance with all covenants at December 31, 2009. At
December 31, 2009, letters of credit with an aggregate face amount of $81.5 million were issued
under the credit facility.
As a result of the April 3, 2009 amendment, the cost of the letter of credit portion of the credit
facility increased to 2.00% from 0.75% for the issued letters of credit and to 0.375% from 0.10%
for the unutilized portion of the letter of credit facility. As a result of the 2007 amendment, the
cost of the letter of credit portion of the credit facility was reduced to 0.75% from 1.00% for the
issued letters of credit and to 0.10% from 0.125% for the unutilized portion of the letter of
credit facility. The cost of the line of credit portion of the credit facility was also reduced to
0.75% from 1.00% over our choice of LIBOR or prime for the utilized portion and to 0.10% from
0.125% for the unutilized portion.
F-46
Note 9. Senior Note due May 1, 2016
On April 17, 2006, we completed a public debt offering of $125 million principal amount of 7%
senior unsecured notes due May 1, 2016 (the Senior Notes) and received net proceeds of $123.5
million. We contributed $100 million of the proceeds to the capital and surplus of Navigators
Insurance Company and retained the remainder at the Parent Company for general corporate purposes.
Interest is payable on the Senior Notes each May 1 and November 1. The effective interest rate
related to the Senior Notes, based on the proceeds net of discount and all issuance costs, is
approximately 7.17%.
In April 2009, we repurchased $10.0 million aggregate principal amount of the Senior Notes from an
unaffiliated noteholder on the open market for $7.0 million, which generated a $2.9 million pretax
gain that is reflected in Other income. As a result of this transaction, approximately $115.0
million aggregate principal amount of the Senior Notes remains issued and outstanding.
The Senior Notes, our only senior unsecured obligation, will rank equally with future senior
unsecured indebtedness. We may redeem the Senior Notes at any time and from time to time, in whole
or in part, at a make-whole redemption price. The terms of the Senior Notes contain various
restrictive business and financial covenants typical for debt obligations of this type, including
limitations on mergers, liens and dispositions of the common stock of certain subsidiaries. As of
December 31, 2009, we were in compliance with all such covenants.
Interest expense on the Senior Notes in 2009 and 2008 was $8.5 million and $8.9 million. The fair
value of the Senior Notes, which is based on the quoted market price, was $111.7 million at
December 31, 2009 and $83.6 million at December 31, 2008.
Note 10. Fiduciary Funds
Prior to 2006, the underwriting agencies managed insurance pools in which Navigators Insurance
Company participated. Functions performed by the underwriting agencies included underwriting
business, collecting premiums from the insured, paying claims, collecting paid recoverables from
reinsurers, paying reinsurance premiums to reinsurers and remitting net account balances to member
insurance companies. Funds received by the Company belonging to non-related participants in the
former insurance pools are not material. They are held in a fiduciary capacity and are included in
the accompanying consolidated balance sheets.
F-47
Note 11. Commitments and Contingencies
Future minimum annual rental commitments at December 31, 2009 under various noncancellable
operating leases for our office facilities, which expire at various dates through 2020, are as
follows:
|
|
|
|
|
Year Ended December 31, |
|
($ in thousands) |
|
2010 |
|
$ |
7,379 |
|
2011 |
|
|
7,892 |
|
2012 |
|
|
7,511 |
|
2013 |
|
|
7,431 |
|
2014 |
|
|
6,118 |
|
Subsequent to 2014 |
|
|
18,426 |
|
|
|
|
|
Total |
|
$ |
54,757 |
|
|
|
|
|
We are also liable for additional payments to the landlords for certain annual cost
increases. Rent expense for the years ended December 31, 2009, 2008 and 2007 was $8.6 million,
$7.1 million and $6.4 million, respectively.
We are working with various state insurance regulators on a matter involving administrative fees
charged by a program administrator on certain personal umbrella insurance policies underwritten by
Navigators Insurance Company that were outside of Navigators Insurance Companys filed rates and
forms. Following discovery of the issue, Navigators Insurance Company approached regulators in the
affected states to resolve these matters, and is currently making refunds to policyholders for
policy fees collected from the time of discovery of the issue that did not comply with Navigators
filed rates. In addition, Navigators Insurance Company has terminated its relationship with the
program administrator effective August 1, 2009 and has ensured that fees will not be collected on
any policies going forward unless such fees are permitted by each state in which they are charged.
Other operating expenses for the second quarter 2009 include a $1.3 million charge related to this
matter. Navigators Insurance Company may be subject to additional fines, refund obligations and
other exposure with respect to the past fees charged. We cannot at this time reasonably estimate
the additional cost of resolving this matter. However, we do not expect that it will have a
material adverse effect on our financial condition or results of operations.
Our subsidiaries are subject to disputes, including litigation and arbitration, arising in the
ordinary course of their insurance businesses, including claims asserting extra contractual
obligations in connection with the underwriting of policies and handling of claims. Our estimates
of the costs of settling such matters are reflected in its aggregate reserves for losses and loss
expenses, and we do not believe that the ultimate outcome of such matters will have a material
adverse effect on our financial condition or results of operations.
Wherever a member of Lloyds is unable to pay its debts to policyholders, such debts may be payable
by the Lloyds Central Fund. If Lloyds determines that the Central Fund needs to be increased, it
has the power to assess premium levies on current Lloyds members up to 3% of a members
underwriting capacity in any one year. We do not believe that any assessment is likely in the
foreseeable future and, therefore, have not provided any allowance for such an assessment.
F-48
Note 12. Share Capital and Share Repurchases
Our authorized share capital consists of 50,000,000 common shares with a par value of $0.10 per
share and 1,000,000 preferred shares with a par value of $0.10 per share.
Changes in our issued and outstanding common shares are reflected in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
|
|
16,856 |
|
|
|
16,873 |
|
|
|
16,736 |
|
Vested stock grants |
|
|
74 |
|
|
|
36 |
|
|
|
33 |
|
Employee stock purchase plan |
|
|
17 |
|
|
|
17 |
|
|
|
15 |
|
Stock options exercised |
|
|
41 |
|
|
|
155 |
|
|
|
89 |
|
Treasury shares purchased |
|
|
(142 |
) |
|
|
(225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
|
16,846 |
|
|
|
16,856 |
|
|
|
16,873 |
|
|
|
|
|
|
|
|
|
|
|
There are no preferred shares issued.
In November 2009, the Parent Companys Board of Directors adopted a stock repurchase program for up
to $35 million of the Parent Companys common stock. Purchases are permitted from time to time at
prevailing prices in open market or privately negotiated transactions through December 31, 2010.
The timing and amount of purchases under the program depend on a variety of factors, including the
trading price of the stock, market conditions and corporate and regulatory considerations. During
the fourth quarter of 2009, the Parent Company purchased 141,576 shares of its common stock in the
open market at an average cost of $47.72 per share for a total of $6.8 million. From January 1,
2010 through February 22, 2010, the Parent Company purchased an additional 300,000 shares of its
common stock in the open market at an aggregate cost of $13.0 million.
In October 2007, the Parent Companys Board of Directors adopted a stock repurchase program for up
to $30 million of the Parent Companys common stock. Purchases were permitted from time to time at
prevailing prices in open market or privately negotiated transactions through December 31, 2008.
The timing and amount of purchases under the program depended on a variety of factors, including
the trading price of the stock, market conditions and corporate and regulatory considerations.
There were no purchases made in the 2007 fourth quarter. During 2008, the Parent Company purchased
224,754 shares of its common stock in the open market at an average cost of $51.34 per share for a
total of $11.5 million. The program expired at December 31, 2008.
Note 13. Dividends from Subsidiaries and Statutory Financial Information
Navigators Insurance Company may pay dividends to the Parent Company out of its statutory earned
surplus pursuant to statutory restrictions imposed under the New York insurance law. At December
31, 2009, the maximum amount available for the payment of dividends by Navigators Insurance Company
during 2010 without prior regulatory approval was $64.6 million. Navigators Insurance Company paid
$25.0 million, $20.0 million and $8.0 million in dividends to the Parent Company in 2009, 2008 and
2007, respectively.
F-49
The Insurance Companies statutory net income as filed with the regulatory authorities for 2009
(unaudited), 2008 and 2007 was $44.5 million, $34.0 million and $68.5 million, respectively. The
statutory surplus as filed with the regulatory authorities was $645.8 million and $581.2 million at
December 31, 2009 (unaudited) and 2008, respectively.
The NAIC has codified statutory accounting practices for insurance enterprises. As a result of this
process, the NAIC issued a revised statutory Accounting Practices and Procedures Manual that became
effective January 1, 2001, and is updated each year. We prepare our statutory basis financial
statements in accordance with the most recently updated statutory manual subject to any deviations
prescribed or permitted by the New York Insurance Commissioner. The significant differences between
SAP and GAAP, as they relate to our operations, 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 classified as available-for-sale and reported at fair value, with unrealized gains
and losses recognized in other comprehensive income as a separate component of stockholders
equity; (3) certain deferred tax assets are not permitted to be included in statutory surplus,
while under GAAP deferred taxes are provided to reflect all 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.
As part of its general regulatory oversight process, the New York Insurance Department conducts
detailed examinations of the books, records and accounts of New York insurance companies every
three to five years. Navigators Insurance Company and Navigators Specialty Insurance Company were
examined by the New York Insurance Department for the years 2001 through 2004. The New York
Insurance Department commenced an examination of the years 2005 through 2009 in January 2010. The
U.K. Branch is required to maintain certain capital requirements under U.K. regulations and subject
to examination by the U.K. Financial Services Authority.
Note 14. Stock Option Plans, Stock Grants, Stock Appreciation Rights and Employee Stock Purchase
Plan
At our May 2005 Annual Meeting, the stockholders approved the 2005 Stock Incentive Plan. The 2005
Stock Incentive Plan authorizes the issuance in the aggregate of 1,000,000 incentive stock options,
non-incentive stock options, restricted shares and stock appreciation rights for our common stock.
In April 2009, the stockholders approved an amendment to the 2005 Stock Incentive Plan increasing
the available number of incentive stock options, non-incentive stock options, restricted shares and
stock appreciation rights from 1,000,000 to 1,500,000. As of December 31, 2009, 827,946 of such
awards were issued leaving 672,054 awards available to be issued in subsequent periods. Upon the
approval of the 2005 Stock Incentive Plan, no further awards are being issued under any of our
other stock plans or the stock appreciation rights plan. All stock options issued under the 2005
Stock Incentive Plan are exercisable upon vesting for one share of our common stock and are granted
at exercise prices no less than the fair market value of our common stock on the date of grant.
F-50
Stock grants are expensed in tranches over the vesting period. The pretax amounts charged to
expense were $8.8 million, $8.8 million and $5.3 million in 2009, 2008 and 2007, respectively. In
addition, $30,000 in each of 2009 and 2008 and $25,000 in 2007 of the Companys common stock was
earned by each non-employee director as a portion of the directors compensation for serving on the
Companys Board of Directors. The stock is issued in the first quarter of the year following the
year of service and is fully vested when issued. The expense for 2009, 2008 and 2007 for the stock
earned by directors was $180,000, $210,000 and $200,000, respectively.
Options and grants generally vest equally over a four year period and the options have a maximum
term of ten years. In some cases, grants vest over five years with one-third vesting in each of
the third, fourth and fifth years.
A portion of our restricted stock grants are performance based and dependent on the rolling
three-year average return on beginning equity. The actual shares that vest will range between 150%
to 0% of the original award depending on the results. We are currently accruing for these awards
at the target.
Unvested restricted stock grants outstanding at December 31, 2009, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock grants outstanding at
beginning of year |
|
|
558,049 |
|
|
|
391,866 |
|
|
|
250,149 |
|
Granted |
|
|
202,731 |
|
|
|
243,587 |
|
|
|
203,725 |
|
Vested |
|
|
(104,677 |
) |
|
|
(63,768 |
) |
|
|
(40,827 |
) |
Forfeited |
|
|
(36,364 |
) |
|
|
(13,636 |
) |
|
|
(21,181 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
619,739 |
|
|
|
558,049 |
|
|
|
391,866 |
|
|
|
|
|
|
|
|
|
|
|
The pretax amounts charged to expense for stock options were zero, $235,000 and $581,000 in 2009,
2008 and 2007, respectively.
F-51
Stock options outstanding at December 31, 2009, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
No. of |
|
|
Exercise |
|
|
No. of |
|
|
Exercise |
|
|
No. of |
|
|
Exercise |
|
|
|
Shares |
|
|
Prices |
|
|
Shares |
|
|
Prices |
|
|
Shares |
|
|
Prices |
|
|
Options outstanding at
beginning of year |
|
|
231,750 |
|
|
$ |
25.62 |
|
|
|
384,350 |
|
|
$ |
23.34 |
|
|
|
475,250 |
|
|
$ |
22.45 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(40,750 |
) |
|
$ |
23.16 |
|
|
|
(152,350 |
) |
|
$ |
19.78 |
|
|
|
(88,525 |
) |
|
$ |
18.38 |
|
Expired or
forfeited |
|
|
|
|
|
$ |
|
|
|
|
(250 |
) |
|
$ |
29.11 |
|
|
|
(2,375 |
) |
|
$ |
29.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
end of year |
|
|
191,000 |
|
|
$ |
26.21 |
|
|
|
231,750 |
|
|
$ |
25.67 |
|
|
|
384,350 |
|
|
$ |
23.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of options
exercisable |
|
|
191,000 |
|
|
$ |
26.21 |
|
|
|
230,250 |
|
|
$ |
25.62 |
|
|
|
329,600 |
|
|
$ |
22.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about options outstanding at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Average Remaining |
|
|
Average |
|
|
Exercisable |
|
|
Average |
|
Price Range |
|
Options |
|
|
Contract Life |
|
|
Exercise Price |
|
|
Options |
|
|
Exercise Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$10 to $15 |
|
|
6,250 |
|
|
|
0.7 |
|
|
$ |
10.50 |
|
|
|
6,250 |
|
|
$ |
10.50 |
|
$16 to $20 |
|
|
35,500 |
|
|
|
2.2 |
|
|
$ |
17.45 |
|
|
|
35,500 |
|
|
$ |
17.45 |
|
$21 to $30 |
|
|
127,750 |
|
|
|
4.0 |
|
|
$ |
28.20 |
|
|
|
127,750 |
|
|
$ |
28.20 |
|
$31 to $37 |
|
|
21,500 |
|
|
|
5.2 |
|
|
$ |
33.39 |
|
|
|
21,500 |
|
|
$ |
33.39 |
|
We have a Stock Appreciation Rights Plan which allows for the grant of up to 300,000 stock
appreciation rights (SARs) at prices of no less than 90% of the fair market value of the common
stock. As a result of the approval of the 2005 Stock Incentive Plan, no further awards will be
issued from the Stock Appreciation Rights Plan. The pre-tax amounts charged to expense relating to
SARs in 2009, 2008 and 2007 were $(0.4) million, $(0.6) million and $1.4 million, respectively.
F-52
SARs outstanding at December 31, 2009, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
SARs |
|
|
Prices |
|
|
SARs |
|
|
Prices |
|
|
SARs |
|
|
Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs outstanding at
beginning of year |
|
|
59,250 |
|
|
$ |
13.89 |
|
|
|
64,250 |
|
|
$ |
13.63 |
|
|
|
118,750 |
|
|
$ |
13.41 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(7,250 |
) |
|
$ |
12.76 |
|
|
|
(5,000 |
) |
|
$ |
10.50 |
|
|
|
(53,500 |
) |
|
$ |
12.98 |
|
Expired or
forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,000 |
) |
|
$ |
22.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs outstanding at
end of year |
|
|
52,000 |
|
|
$ |
14.05 |
|
|
|
59,250 |
|
|
$ |
13.89 |
|
|
|
64,250 |
|
|
$ |
13.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of SARs
exercisable |
|
|
52,000 |
|
|
$ |
14.05 |
|
|
|
59,250 |
|
|
$ |
13.89 |
|
|
|
64,250 |
|
|
$ |
13.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We offer an Employee Stock Purchase Plan (the ESPP) to all of our eligible employees. The
employee is offered the opportunity to purchase our common stock at 90% of fair market value at the
lower of the price at the beginning or the end of each six month offering period. Employees can
invest up to 10% of their base compensation through payroll withholding towards the purchase of our
common stock subject to the lesser of 1,000 shares or total market value of $25,000. There will be
approximately 10,198 shares purchased in 2010 from funds withheld during the July 1, 2009 to
December 31, 2009 offering period. There were 16,761 shares purchased in 2009 in the aggregate
from funds withheld during the offering periods of July 1, 2008 to December 31, 2008 and January 1,
2009 to June 30, 2009. We expense both the value of the 10% discount and the look-back option
which provides for the more favorable price at either the beginning or end of the offering period.
The amount of expense recorded for 2009, 2008 and 2007 relating to the ESPP was $0.2 million, $0.2
million and $0.2 million, respectively.
Note 15. Retirement Plans
We sponsor a defined contribution plan covering substantially all our U.S. employees. For 2009 and
2008, Company contributions were equal to 7.5% (15% for 2007) of each eligible employees 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 their second year and an additional 20% at the end of
each subsequent year until being fully vested after six years of service. The expense recorded for
the defined contribution plan was $2.7 million, $2.8 million and $3.0 million in 2009, 2008 and
2007, respectively. We sponsor a similar defined contribution plan under U.K. regulations for our
U.K. employees. Contributions, which are fully vested when made, are equal to 15% of each eligible
employees gross base salary. The expense recorded for the U.K. defined contribution plan was $1.4
million, $1.4 million and $1.9 million for 2009, 2008 and 2007, respectively. Such expenses are
included in Other operating expenses.
F-53
We have a 401(k) plan for all eligible employees. Each eligible employee can contribute a portion
of their salary, limited by certain Federal regulations. Beginning in 2008, we matched 100% of the
first 4% that each eligible employee contributes. In addition, beginning in 2008, we have the
discretion of contributing up to 4% to each eligible employees 401(k) plan irrespective of the
employees contribution amount. The expense recorded for such plan was $1.2 million and $0.9
million for 2009 and 2008, respectively.
Note 16. Quarterly Financial Data (Unaudited)
Following is a summary of quarterly financial data for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
Sept. 30, |
|
|
Dec. 31, |
|
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
|
($ in thousands, except net income per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
275,259 |
|
|
$ |
272,729 |
|
|
$ |
245,191 |
|
|
$ |
251,739 |
|
Net written premiums |
|
|
200,652 |
|
|
|
183,007 |
|
|
|
156,001 |
|
|
|
161,595 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
164,946 |
|
|
|
169,868 |
|
|
|
171,271 |
|
|
|
177,278 |
|
Commission income |
|
|
(20 |
) |
|
|
55 |
|
|
|
144 |
|
|
|
(92 |
) |
Net investment income |
|
|
18,743 |
|
|
|
18,656 |
|
|
|
19,110 |
|
|
|
19,003 |
|
Total other-than-temporary impairment losses |
|
|
(26,871 |
) |
|
|
(1,876 |
) |
|
|
(22 |
) |
|
|
(496 |
) |
Portion of loss recognized in Other
comprehensive
income (before tax) |
|
|
16,171 |
|
|
|
1,407 |
|
|
|
(525 |
) |
|
|
335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other-than-temporary impairment losses
recognized in earnings |
|
|
(10,700 |
) |
|
|
(469 |
) |
|
|
(547 |
) |
|
|
(161 |
) |
Net realized gains (losses) |
|
|
(1,537 |
) |
|
|
2,596 |
|
|
|
6,682 |
|
|
|
1,476 |
|
Other income (expense) |
|
|
163 |
|
|
|
5,247 |
|
|
|
1,097 |
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
171,595 |
|
|
|
195,953 |
|
|
|
197,757 |
|
|
|
197,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment
expenses |
|
|
100,247 |
|
|
|
100,728 |
|
|
|
107,591 |
|
|
|
127,432 |
|
Commission expenses |
|
|
22,448 |
|
|
|
26,278 |
|
|
|
22,852 |
|
|
|
27,330 |
|
Other operating expenses |
|
|
30,535 |
|
|
|
33,019 |
|
|
|
35,018 |
|
|
|
34,099 |
|
Interest expense |
|
|
2,219 |
|
|
|
2,150 |
|
|
|
2,042 |
|
|
|
2,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
155,449 |
|
|
|
162,175 |
|
|
|
167,503 |
|
|
|
190,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
16,146 |
|
|
|
33,778 |
|
|
|
30,254 |
|
|
|
6,670 |
|
Income tax expense |
|
|
4,146 |
|
|
|
10,128 |
|
|
|
8,822 |
|
|
|
594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,000 |
|
|
$ |
23,650 |
|
|
$ |
21,432 |
|
|
$ |
6,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
19,503 |
|
|
$ |
34,876 |
|
|
$ |
62,119 |
|
|
$ |
(3,186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
92.8 |
% |
|
|
92.9 |
% |
|
|
95.9 |
% |
|
|
106.5 |
% |
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.71 |
|
|
$ |
1.40 |
|
|
$ |
1.26 |
|
|
$ |
0.36 |
|
Diluted |
|
$ |
0.71 |
|
|
$ |
1.39 |
|
|
$ |
1.24 |
|
|
$ |
0.35 |
|
F-54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
Sept. 30, |
|
|
Dec. 31, |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
|
($ in thousands, except net income per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums |
|
$ |
287,146 |
|
|
$ |
279,213 |
|
|
$ |
252,943 |
|
|
$ |
265,620 |
|
Net written premiums |
|
|
187,722 |
|
|
|
174,287 |
|
|
|
140,318 |
|
|
|
159,288 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
|
|
155,740 |
|
|
|
162,703 |
|
|
|
154,040 |
|
|
|
171,493 |
|
Commission income |
|
|
261 |
|
|
|
467 |
|
|
|
8 |
|
|
|
269 |
|
Net investment income |
|
|
18,838 |
|
|
|
18,731 |
|
|
|
19,322 |
|
|
|
19,663 |
|
Total other-than-temporary impairment losses |
|
|
|
|
|
|
(8,412 |
) |
|
|
(4,748 |
) |
|
|
(23,885 |
) |
Portion of loss recognized in Other
comprehensive
income (before tax) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other-than-temporary impairment losses
recognized in earnings |
|
|
|
|
|
|
(8,412 |
) |
|
|
(4,748 |
) |
|
|
(23,885 |
) |
Net realized gains (losses) |
|
|
(76 |
) |
|
|
436 |
|
|
|
(768 |
) |
|
|
(846 |
) |
Other income (expense) |
|
|
11 |
|
|
|
1,010 |
|
|
|
(119 |
) |
|
|
(472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
174,774 |
|
|
|
174,935 |
|
|
|
167,735 |
|
|
|
166,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment
expenses |
|
|
88,420 |
|
|
|
91,889 |
|
|
|
113,269 |
|
|
|
99,553 |
|
Commission expenses |
|
|
20,948 |
|
|
|
23,490 |
|
|
|
22,357 |
|
|
|
22,990 |
|
Other operating expenses |
|
|
29,756 |
|
|
|
33,237 |
|
|
|
30,601 |
|
|
|
29,554 |
|
Interest expense |
|
|
2,217 |
|
|
|
2,217 |
|
|
|
2,218 |
|
|
|
2,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
141,341 |
|
|
|
150,833 |
|
|
|
168,445 |
|
|
|
154,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
33,433 |
|
|
|
24,102 |
|
|
|
(710 |
) |
|
|
11,906 |
|
Income tax expense (benefit) |
|
|
10,183 |
|
|
|
6,681 |
|
|
|
(1,711 |
) |
|
|
1,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,250 |
|
|
$ |
17,421 |
|
|
$ |
1,001 |
|
|
$ |
10,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
19,556 |
|
|
$ |
810 |
|
|
$ |
(20,245 |
) |
|
$ |
31,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
89.2 |
% |
|
|
90.4 |
% |
|
|
107.9 |
% |
|
|
88.9 |
% |
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.38 |
|
|
$ |
1.04 |
|
|
$ |
0.06 |
|
|
$ |
0.60 |
|
Diluted |
|
$ |
1.36 |
|
|
$ |
1.03 |
|
|
$ |
0.06 |
|
|
$ |
0.59 |
|
F-55
SCHEDULE I
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUMMARY OF CONSOLIDATED INVESTMENTSOTHER THAN INVESTMENTS
IN RELATED PARTIES
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
OTTI |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Cost or |
|
|
Recognized |
|
December 31, 2009 |
|
Fair Value |
|
|
Gains |
|
|
(Losses) |
|
|
Amortized Cost |
|
|
in OCI |
|
|
|
($ in thousands) |
|
U.S. Government Treasury bonds, agency
bonds and foreign government bonds |
|
$ |
471,598 |
|
|
$ |
7,397 |
|
|
$ |
(597 |
) |
|
$ |
464,798 |
|
|
$ |
|
|
States, municipalities and political
subdivisions |
|
|
676,699 |
|
|
|
25,044 |
|
|
|
(2,917 |
) |
|
|
654,572 |
|
|
|
|
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
283,578 |
|
|
|
12,607 |
|
|
|
(98 |
) |
|
|
271,069 |
|
|
|
|
|
Residential mortgage obligations |
|
|
31,071 |
|
|
|
|
|
|
|
(7,246 |
) |
|
|
38,317 |
|
|
|
(5,723 |
) |
Asset-backed securities |
|
|
16,469 |
|
|
|
612 |
|
|
|
(34 |
) |
|
|
15,891 |
|
|
|
(23 |
) |
Commercial mortgage-backed
securities |
|
|
100,393 |
|
|
|
594 |
|
|
|
(5,028 |
) |
|
|
104,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
431,511 |
|
|
|
13,813 |
|
|
|
(12,406 |
) |
|
|
430,104 |
|
|
|
(5,746 |
) |
Corporate bonds |
|
|
236,861 |
|
|
|
9,111 |
|
|
|
(759 |
) |
|
|
228,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,816,669 |
|
|
|
55,365 |
|
|
|
(16,679 |
) |
|
|
1,777,983 |
|
|
|
(5,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
62,610 |
|
|
|
15,244 |
|
|
|
(10 |
) |
|
|
47,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
176,799 |
|
|
|
|
|
|
|
|
|
|
|
176,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,056,587 |
|
|
$ |
70,609 |
|
|
$ |
(16,689 |
) |
|
$ |
2,002,667 |
|
|
$ |
(5,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, |
|
|
|
2009 |
|
|
2008 |
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
Cash and investments |
|
$ |
63,676 |
|
|
$ |
52,149 |
|
Investments in subsidiaries |
|
|
846,295 |
|
|
|
751,864 |
|
Goodwill and other intangible assets |
|
|
2,534 |
|
|
|
2,534 |
|
Other assets |
|
|
5,213 |
|
|
|
8,769 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
917,718 |
|
|
$ |
815,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7% Senior Notes |
|
$ |
114,010 |
|
|
$ |
123,794 |
|
Accounts payable and other liabilities |
|
|
847 |
|
|
|
747 |
|
Accrued interest payable |
|
|
1,342 |
|
|
|
1,458 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
116,199 |
|
|
|
125,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.10 par value,
1,000,000 shares authorized, none issued |
|
|
|
|
|
|
|
|
Common stock, $.10 par value, 50,000,000 shares authorized:
authorized; issued 17,212,814 shares for 2009 and
17,080,826 for 2008 |
|
|
1,721 |
|
|
|
1,708 |
|
Additional paid-in capital |
|
|
304,505 |
|
|
|
298,872 |
|
Treasury stock, at cost (366,330 shares for 2009 and
224,754 shares 2008) |
|
|
(18,296 |
) |
|
|
(11,540 |
) |
Retained earnings |
|
|
469,934 |
|
|
|
406,776 |
|
Accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities
available-for-sale, net of tax |
|
|
34,958 |
|
|
|
(15,062 |
) |
Foreign currency translation adjustment, net of tax |
|
|
8,697 |
|
|
|
8,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
801,519 |
|
|
|
689,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
917,718 |
|
|
$ |
815,316 |
|
|
|
|
|
|
|
|
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, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
583 |
|
|
$ |
1,354 |
|
|
$ |
1,877 |
|
Dividends received from wholly-owned subsidiaries |
|
|
25,000 |
|
|
|
20,000 |
|
|
|
8,000 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
25,583 |
|
|
|
21,354 |
|
|
|
9,877 |
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
8,455 |
|
|
|
8,871 |
|
|
|
8,863 |
|
Other (income) expense |
|
|
(1,482 |
) |
|
|
1,016 |
|
|
|
(1,996 |
) |
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
6,973 |
|
|
|
9,887 |
|
|
|
6,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax benefit |
|
|
18,610 |
|
|
|
11,467 |
|
|
|
3,010 |
|
Income tax benefit |
|
|
(2,174 |
) |
|
|
(3,495 |
) |
|
|
(1,804 |
) |
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed net
income of wholly owned subsidiaries |
|
|
20,784 |
|
|
|
14,962 |
|
|
|
4,814 |
|
Equity in undistributed net income of wholly-owned
subsidiaries |
|
|
42,374 |
|
|
|
36,730 |
|
|
|
90,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
63,158 |
|
|
$ |
51,692 |
|
|
$ |
95,620 |
|
|
|
|
|
|
|
|
|
|
|
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, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
63,158 |
|
|
$ |
51,692 |
|
|
$ |
95,620 |
|
Adjustments to reconcile net income
to net cash provided by (used in) operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net income of
wholly-owned subsidiaries |
|
|
(42,374 |
) |
|
|
(56,730 |
) |
|
|
(98,806 |
) |
Dividends received from subsidiaries |
|
|
25,000 |
|
|
|
20,000 |
|
|
|
8,000 |
|
Other |
|
|
(20,318 |
) |
|
|
604 |
|
|
|
4,792 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
25,466 |
|
|
|
15,566 |
|
|
|
9,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
9,103 |
|
|
|
9,637 |
|
|
|
|
|
Purchases |
|
|
(34,932 |
) |
|
|
(13,500 |
) |
|
|
10,500 |
|
Net (increase) decrease in short-term investments |
|
|
13,863 |
|
|
|
2,432 |
|
|
|
(20,497 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(11,966 |
) |
|
|
(1,431 |
) |
|
|
(9,997 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution |
|
|
(2,000 |
) |
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
(6,756 |
) |
|
|
(11,540 |
) |
|
|
|
|
Purchase of Senior notes |
|
|
(7,000 |
) |
|
|
|
|
|
|
|
|
Proceeds of stock issued from employee stock purchase plan |
|
|
727 |
|
|
|
963 |
|
|
|
606 |
|
Proceeds of stock issued from exercise of stock options |
|
|
944 |
|
|
|
3,014 |
|
|
|
1,627 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(14,085 |
) |
|
|
(7,563 |
) |
|
|
2,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
(585 |
) |
|
|
6,572 |
|
|
|
1,842 |
|
Cash at beginning of year |
|
|
9,675 |
|
|
|
3,103 |
|
|
|
1,261 |
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year |
|
$ |
9,090 |
|
|
$ |
9,675 |
|
|
$ |
3,103 |
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
costs |
|
|
expenses |
|
|
premiums |
|
|
payable |
|
|
premiums |
|
|
income (1) |
|
|
incurred |
|
|
costs (2) |
|
|
expenses (1) |
|
|
premiums |
|
|
Year ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
$ |
34,872 |
|
|
$ |
1,395,876 |
|
|
$ |
334,798 |
|
|
$ |
|
|
|
$ |
479,121 |
|
|
$ |
65,717 |
|
|
$ |
304,672 |
|
|
$ |
61,949 |
|
|
$ |
104,801 |
|
|
$ |
477,673 |
|
Lloyds Operations |
|
|
21,703 |
|
|
|
524,410 |
|
|
|
140,373 |
|
|
|
|
|
|
|
204,242 |
|
|
|
9,229 |
|
|
|
131,326 |
|
|
|
37,727 |
|
|
|
27,896 |
|
|
|
223,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
56,575 |
|
|
$ |
1,920,286 |
|
|
$ |
475,171 |
|
|
$ |
|
|
|
$ |
683,363 |
|
|
$ |
74,946 |
|
|
$ |
435,998 |
|
|
$ |
99,676 |
|
|
$ |
132,697 |
|
|
$ |
701,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
$ |
33,308 |
|
|
$ |
1,359,231 |
|
|
$ |
348,824 |
|
|
$ |
|
|
|
$ |
463,298 |
|
|
$ |
63,544 |
|
|
$ |
275,767 |
|
|
$ |
55,752 |
|
|
$ |
92,297 |
|
|
$ |
472,688 |
|
Lloyds Operations |
|
|
14,310 |
|
|
|
494,433 |
|
|
|
131,841 |
|
|
|
|
|
|
|
180,678 |
|
|
|
11,655 |
|
|
|
117,364 |
|
|
|
34,033 |
|
|
|
30,961 |
|
|
|
188,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
47,618 |
|
|
$ |
1,853,664 |
|
|
$ |
480,665 |
|
|
$ |
|
|
|
$ |
643,976 |
|
|
$ |
75,199 |
|
|
$ |
393,131 |
|
|
$ |
89,785 |
|
|
$ |
123,258 |
|
|
$ |
661,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies |
|
$ |
30,840 |
|
|
$ |
1,201,595 |
|
|
$ |
336,261 |
|
|
$ |
|
|
|
$ |
443,456 |
|
|
$ |
58,261 |
|
|
$ |
256,652 |
|
|
$ |
52,490 |
|
|
$ |
81,053 |
|
|
$ |
478,018 |
|
Lloyds Operations |
|
|
21,055 |
|
|
|
447,169 |
|
|
|
133,220 |
|
|
|
|
|
|
|
158,521 |
|
|
|
10,524 |
|
|
|
83,940 |
|
|
|
25,123 |
|
|
|
29,356 |
|
|
|
167,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
51,895 |
|
|
$ |
1,648,764 |
|
|
$ |
469,481 |
|
|
$ |
|
|
|
$ |
601,977 |
|
|
$ |
68,785 |
|
|
$ |
340,592 |
|
|
$ |
77,613 |
|
|
$ |
110,409 |
|
|
$ |
645,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net investment income and Other operating expenses reflect only such amounts attributable
to the Companys insurance operations. |
|
(2) |
|
Amortization of deferred policy acquisition costs reflects only such amounts attributable
to the Companys insurance operations. A portion of these costs is eliminated in consolidation. |
S-5
SCHEDULE IV
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
REINSURANCE
Written Premiums
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded to |
|
|
Assumed |
|
|
|
|
|
|
Percentage |
|
|
|
Direct |
|
|
other |
|
|
from other |
|
|
Net |
|
|
of amount |
|
|
|
Amount |
|
|
companies |
|
|
companies |
|
|
amount |
|
|
assumed to net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property-Casualty |
|
$ |
966,251 |
|
|
$ |
343,663 |
|
|
$ |
78,667 |
|
|
$ |
701,255 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property-Casualty |
|
$ |
1,016,521 |
|
|
$ |
423,307 |
|
|
$ |
68,401 |
|
|
$ |
661,615 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property-Casualty |
|
$ |
989,652 |
|
|
$ |
424,911 |
|
|
$ |
81,055 |
|
|
$ |
645,796 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-6
SCHEDULE V
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
January 1, |
|
|
Charged (Credited) to |
|
|
Charged to |
|
|
Deductions |
|
|
December 31, |
|
Description |
|
2009 |
|
|
Costs and Expenses |
|
|
Other Accounts |
|
|
(Describe) |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
uncollectible
reinsurance |
|
$ |
11,805 |
|
|
$ |
1,994 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
13,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance in
deferred taxes |
|
$ |
6,194 |
|
|
$ |
(3,546 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-7
SCHEDULE VI
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
Deferred |
|
|
for losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment |
|
|
of deferred |
|
|
|
|
|
|
|
Affiliation |
|
policy |
|
|
and loss |
|
|
Discount, |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
expenses incurred related to |
|
|
policy |
|
|
Other |
|
|
Net |
|
with |
|
acquisition |
|
|
adjustment |
|
|
if any, |
|
|
Unearned |
|
|
earned |
|
|
investment |
|
|
Current |
|
|
Prior |
|
|
acquisition |
|
|
operating |
|
|
written |
|
Registrant |
|
costs |
|
|
expenses |
|
|
deducted |
|
|
premiums |
|
|
premiums |
|
|
income (1) |
|
|
year |
|
|
years |
|
|
costs (2) |
|
|
expenses (1) |
|
|
premiums |
|
Consolidated Subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009 |
|
$ |
56,575 |
|
|
$ |
1,920,286 |
|
|
$ |
|
|
|
$ |
475,171 |
|
|
$ |
683,363 |
|
|
$ |
74,946 |
|
|
$ |
444,939 |
|
|
$ |
(8,941 |
) |
|
$ |
99,676 |
|
|
$ |
132,697 |
|
|
$ |
701,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008 |
|
$ |
47,618 |
|
|
$ |
1,853,664 |
|
|
$ |
|
|
|
$ |
480,665 |
|
|
$ |
643,976 |
|
|
$ |
75,199 |
|
|
$ |
443,877 |
|
|
$ |
(50,746 |
) |
|
$ |
89,785 |
|
|
$ |
123,258 |
|
|
$ |
661,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007 |
|
$ |
51,895 |
|
|
$ |
1,648,764 |
|
|
$ |
|
|
|
$ |
469,481 |
|
|
$ |
601,977 |
|
|
$ |
68,785 |
|
|
$ |
387,601 |
|
|
$ |
(47,009 |
) |
|
$ |
77,613 |
|
|
$ |
110,409 |
|
|
$ |
645,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net investment income and Other operating expenses reflect only such amounts attributable
to the Companys insurance operations. |
|
(2) |
|
Amortization of Deferred policy acquisition costs reflects only such amounts attributable
to the Companys insurance operations. A portion of these costs is eliminated in consolidation. |
S-8
INDEX TO EXHIBITS
|
|
|
|
|
|
|
|
|
|
|
Previously Filed and |
|
|
|
|
|
Incorporated Herein |
Exhibit No. |
|
Description of Exhibit |
|
by Reference to: |
|
3-1
|
|
|
Restated Certificate of Incorporation
|
|
Form S-8 filed July 26, 2002
(File No. 333-97183) |
3-2
|
|
|
Certificate of Amendment to the Restated Certificate of Incorporation
|
|
Form S-8 filed July 26, 2002
(File No. 333-97183) |
3-3
|
|
|
By-laws, as amended
|
|
Form S-1 (File No. 33-5667) |
3-4
|
|
|
Certificate of Amendment to the Restated Certificate of Incorporation
|
|
Form 10-Q for June 30, 2006 |
4-1
|
|
|
Specimen of Common Stock certificate, par value $0.10 per share
|
|
Form S-8 filed June 20, 2003
(File No. 333-106317) |
10-1
|
|
|
Management Agreement between Navigators Insurance Company
and Navigators Management Company, Inc. (formerly Somerset
Marine, Inc.)
|
|
Form S-1 (File No. 33-5667) |
10-2
|
|
|
Agreement between the Company and Navigators Management
Company, Inc. (formerly Somerset Marine, Inc.)
|
|
Form S-1 (File No. 33-5667) |
10-3
|
* |
|
Stock Option Plan
|
|
Form S-1 (File No. 33-5667) |
10-4
|
* |
|
Non-Qualified Stock Option Plan
|
|
Form S-4 (File No. 33-75918) |
10-5
|
|
|
Agreement with Bradley D. Wiley dated June 3, 1997
|
|
Form 10-K for December 31, 1997 |
10-6
|
|
|
Employment Agreement with Salvatore A. Margarella dated
March 1, 1999
|
|
Form 10-K for December 31, 1998 |
10-7
|
|
|
Employment Agreement with Stanley A. Galanski effective
March 26, 2001
|
|
Form 10-Q for March 31, 2001 |
10-8
|
|
|
Employment Agreement with R. Scott Eisdorfer dated
September 1, 1999
|
|
Form 10-K for December 31, 2002 |
10-9
|
* |
|
2002 Stock Incentive Plan
|
|
Proxy Statement for May 30, 2002 |
10-10
|
* |
|
Employee Stock Purchase Plan
|
|
Proxy Statement for May 29, 2003 |
10-11
|
* |
|
Executive Performance Incentive Plan
|
|
Proxy Statement for May 29, 2003 |
10-12
|
|
|
Form of Indemnity Agreement by the Company and the Selling
Stockholders (as defined therein)
|
|
Amendment No. 2 to Form S-3
dated October 1, 2003 (File No. 333-108424) |
10-14
|
|
|
Form of Stock Grant Award Certificate and Restricted Stock
Agreement for the 2002 Stock Incentive Plan (approved at Annual
Meeting of Shareholders held May 30, 2002)
|
|
Form 10-Q for September 30, 2004 |
10-15
|
|
|
Form of Option Award Certificate for the 2002 Stock Incentive
Plan (approved at Annual Meeting of Shareholders held May 30,
2002)
|
|
Form 10-Q for September 30, 2004 |
10-16
|
|
|
Agreement with Jane E. Keller |
|
Form 10-Q for September 30, 2004 |
10-17
|
|
|
Common Stock Grant Award to Stanley A. Galanski under the
2002 Stock Incentive Plan
|
|
Form 8-K filed December 14, 2004 |
10-18
|
|
|
Commutation Agreement between Navigators Insurance Company
and Somerset Insurance Limited
|
|
Form 8-K filed January 18, 2005 |
10-19
|
|
|
Second Amended and Restated Credit Agreement among the
Company and the Lenders dated January 31, 2005
|
|
Form 8-K filed February 4, 2005 |
10-20
|
* |
|
2005 Stock Incentive Plan
|
|
Proxy Statement for May 20, 2005 |
10-23
|
|
|
Third Amended and Restated Credit Agreement among the
Company and the Lenders dated February 2, 2007
|
|
Form 8-K filed February 7, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Previously Filed and |
|
|
|
|
|
Incorporated Herein |
Exhibit No. |
|
Description of Exhibit |
|
by Reference to: |
|
10-24
|
|
|
Paul J. Malvasio Letter Agreement and Retirement Agreement
|
|
Form 10-Q for March 31, 2008 |
10-25 |
|
|
Agreement with Francis W. McDonnell
|
|
Form 8-K filed July 29, 2008 |
10-26 |
|
|
Fourth Amended and Restated Credit Agreement
among the Company and the Lender dated April 3, 2009 |
|
Form 8-K filed April 7, 2009 |
10-27 |
* |
|
Amended 2005 Stock Incentive Plan
|
|
Proxy Statement for April 29, 2009 |
10-28 |
|
|
Agreement with Bruce J. Byrnes
|
|
Form 8-K filed June 16, 2009 |
11-1
|
|
|
Statement re Computation of Per Share Earnings
|
|
** |
21-1
|
|
|
Subsidiaries of Registrant
|
|
** |
23-1
|
|
|
Consent of Independent Registered Public Accounting Firm
|
|
** |
31-1
|
|
|
Certification of CEO per Section 302 of the Sarbanes-Oxley Act
|
|
** |
31-2
|
|
|
Certification of CFO per Section 302 of the Sarbanes-Oxley Act
|
|
** |
32-1
|
|
|
Certification of CEO per Section 906 of the Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance with
regulation S-K item 601(b)(32)(ii) and shall not be deemed
to be filed for purposes of section 18 of the Securities Exchange
Act of 1934, as amended, or incorporated by reference into
any filing under the Securities Act of 1933, except as shall be
expressly set forth by specific reference).
|
|
** |
32-2
|
|
|
Certification of CFO per Section 906 of the Sarbanes-Oxley Act
(This exhibit is intended to be furnished in accordance with
regulation S-K item 601(b)(32)(ii) and shall not be deemed
to be filed for purposes of section 18 of the Securities Exchange
Act of 1934, as amended, or incorporated by reference into any
filing under the Securities Act of 1933, except as shall be
expressly set forth by specific reference).
|
|
** |
|
|
|
* |
|
Compensatory plan. |
|
** |
|
Included herein. |