-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bmz+SPMnnWlMHSvUKCXOaovnvtrsGBLU8DRBqNdi57SresqxG3tYYOebjp6+CwPe T9KbPfe96Q8y6QFdAh0ejQ== /in/edgar/work/20000811/0000793547-00-000009/0000793547-00-000009.txt : 20000921 0000793547-00-000009.hdr.sgml : 20000921 ACCESSION NUMBER: 0000793547-00-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAVIGATORS GROUP INC CENTRAL INDEX KEY: 0000793547 STANDARD INDUSTRIAL CLASSIFICATION: [6331 ] IRS NUMBER: 133138397 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15886 FILM NUMBER: 695415 BUSINESS ADDRESS: STREET 1: ONE PENN PLAZA STREET 2: 55TH FL CITY: NEW YORK STATE: NY ZIP: 10119 BUSINESS PHONE: 2122442333 MAIL ADDRESS: STREET 1: ONE PENN PLAZA 55TH FL CITY: NEW YORK STATE: NY ZIP: 10119 10-Q 1 0001.txt THE NAVIGATORS GROUP, INC.'S 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2000 ------------------------------------------------- Commission file number 0-15886 --------------------------------------------------------- The Navigators Group, Inc. (Exact name of registrant as specified in its charter) Delaware 13-3138397 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Penn Plaza, New York, New York 10119 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 244-2333 (Registrant's telephone number, including area code) 123 William Street, New York, New York 10038 - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------------- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. On August 4, 2000 there were 8,414,356 shares of common stock, $0.10 par value, issued and outstanding. 1 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES INDEX Page No. Part I. FINANCIAL INFORMATION: Consolidated Balance Sheets June 30, 2000 and December 31, 1999........................ 3 Consolidated Statements of Income Three Months Ended June 30, 2000 and 1999 ................. 4 Six Months Ended June 30, 2000 and 1999 ................. 5 Consolidated Statements of Cash Flows Six Months Ended June 30, 2000 and 1999 ................. 6 Notes to Interim Consolidated Financial Statements................. 7 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 11 Part II. OTHER INFORMATION ............................................ 17 2 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) June 30, December 31, 2000 1999 ---- ---- (Unaudited) ASSETS Investments and cash: Fixed maturities, available-for-sale, at fair value (amortized cost: 2000, $228,676; 1999, $227,875)........................................ $ 225,230 $222,555 Equity securities, available-for-sale, at fair value (cost: 2000, $6,058; 1999, $11,105).......................................................................... 6,344 11,840 Short-term investments, at cost which approximates fair value............................ 10,346 6,747 Cash...................................................................................... 3,646 5,546 --------- --------- Total investments and cash......................................................... 245,566 246,688 --------- --------- Premiums in course of collection............................................................ 106,361 90,857 Accrued investment income................................................................... 3,223 3,250 Prepaid reinsurance premiums................................................................ 33,546 24,765 Reinsurance receivable on paid and unpaid losses and loss adjustment expenses............... 213,481 229,111 Federal income tax recoverable.............................................................. 632 2,016 Net deferred Federal and foreign income tax benefit......................................... 12,551 13,227 Deferred policy acquisition costs........................................................... 11,063 5,878 Goodwill .............................................................................. 5,473 5,805 Other assets................................................................................ 6,755 9,727 -------- --------- Total assets....................................................................... $ 638,651 $631,324 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses.......................................... $ 370,157 $391,094 Unearned premium.......................................................................... 79,065 55,003 Reinsurance balances payable.............................................................. 25,032 24,799 Notes payable to banks.................................................................... 22,000 24,000 Net deferred state and local income tax................................................... 383 374 Accounts payable and other liabilities.................................................... 7,728 5,689 --------- --------- Total liabilities.................................................................. 504,365 500,959 --------- --------- Stockholders' equity: Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued................. - - Common stock, $.10 par value, authorized 10,000,000 shares, issued and outstanding 8,414,356 in 2000 and 8,406,970 in 1999.......................... 846 846 Additional paid-in capital................................................................ 39,413 39,447 Treasury stock, held at cost (shares: 41,314 in 2000 and 48,700 in 1999).................. (594) (700) Accumulated other comprehensive (loss).................................................... (2,159) (2,918) Retained earnings......................................................................... 96,780 93,690 --------- --------- Total stockholders' equity......................................................... 134,286 130,365 --------- --------- Total liabilities and stockholders' equity......................................... $ 638,651 $631,324 ========= =======
See accompanying notes to interim consolidated financial statements. 3 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except net income per share) Three Months Ended June 30, 2000 1999 ---- ---- (Unaudited) Revenues: Net earned premium.................................................... $22,235 $19,830 Commission income..................................................... 777 524 Net investment income................................................. 4,489 3,637 Net realized capital gains............................................ 166 504 Other income.......................................................... 148 165 ------ -------- Total revenues................................................. 27,815 24,660 ------ -------- Operating expenses: Net losses and loss adjustment expenses incurred...................... 13,817 10,978 Commission expense.................................................... 4,737 4,476 Other operating expenses.............................................. 5,745 6,553 Interest expense...................................................... 407 389 ------- -------- Total operating expenses....................................... 24,706 22,396 ------- -------- Income before income tax expense........................................ 3,109 2,264 ------- -------- Income tax expense (benefit): Current............................................................. 899 (304) Deferred........................................................... 464 631 ------- -------- Total income tax expense....................................... 1,363 327 ------- -------- Net income.............................................................. $ 1,746 $ 1,937 ======= ======== Net income per common share: Basic................................................................ $ 0.21 $ 0.23 Diluted.............................................................. $ 0.21 $ 0.23 Average common shares outstanding: Basic............................................................... 8,414 8,414 Diluted............................................................. 8,414 8,414
See accompanying notes to interim consolidated financial statements. 4 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except net income per share) Six Months Ended June 30, 2000 1999 ---- ---- (Unaudited) Revenues: Net earned premium ................................................... $ 41,808 $ 36,764 Commission income..................................................... 1,293 687 Net investment income................................................. 8,840 7,906 Net realized capital gains............................................ 71 791 Other income......................................................... 199 232 ------- ------- Total revenues................................................. 52,211 46,380 ------- ------- Operating expenses: Net losses and loss adjustment expenses incurred...................... 25,917 20,977 Commission expense.................................................... 8,570 7,764 Other operating expenses.............................................. 11,962 11,716 Interest expense...................................................... 836 733 ------- ------- Total operating expenses....................................... 47,285 41,190 ------- ------- Income before income tax expense........................................ 4,926 5,190 ------- ------- Income tax expense: Current............................................................. 1,560 692 Deferred............................................................ 276 454 ------- ------- Total income tax expense....................................... 1,836 1,146 ------- ------- Net income.............................................................. $ 3,090 $ 4,044 ======= ======= Net income per common share: Basic................................................................ $ 0.37 $ 0.48 Diluted.............................................................. $ 0.37 $ 0.48 Average common shares outstanding: Basic................................................................ 8,413 8,432 Diluted.............................................................. 8,413 8,433
See accompanying notes to interim consolidated financial statements. 5 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Six Months Ended June 30, 2000 1999 ---- ---- (Unaudited) Operating activities: Net income................................................................... $ 3,090 $ 4,044 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization.................................................. 566 603 Net deferred income tax ..................................................... 276 505 Net realized capital (gains)................................................. (71) (791) Changes in assets and liabilities, net of acquisitions....................... Reinsurance receivable on paid and unpaid losses and loss adjustment expenses..................................... 15,630 (17,188) Reserve for losses and loss adjustment expenses............................ (20,937) 14,124 Prepaid reinsurance premiums............................................... (8,781) (4,509) Unearned premium........................................................... 24,062 8,810 Premiums in course of collection........................................... (15,504) (8,906) Commissions receivable..................................................... 4,071 2,706 Deferred policy acquisition costs.......................................... (5,185) (527) Accrued investment income.................................................. 27 216 Reinsurance balances payable............................................... 233 6,757 Federal and foreign income tax............................................. 1,384 (184) Other...................................................................... 2,813 (2,189) -------- -------- Net cash provided by operating activities............................... 1,674 3,471 -------- -------- Investing activities: Fixed maturities, available-for-sale Redemptions and maturities................................................. 6,880 9,174 Sales...................................................................... 18,475 39,959 Purchases.................................................................. (26,795) (36,686) Equity securities, available-for-sale Sales...................................................................... 6,532 1,913 Purchases.................................................................. (1,409) (1,444) Sales of other investments................................................... - 1,145 Payable for securities purchased............................................. - (1,076) Net (purchases) of short-term investments.................................... (3,599) (13,740) Payment for purchase of Anfield, net of cash acquired of $68................. - (2,591) Purchase of property and equipment........................................... (1,658) (170) ------- -------- Net cash (used in) investing activities................................. (1,574) (3,516) --------- --------- Financing activities: Purchase of treasury stock .................................................. - (700) Proceeds from bank loan...................................................... - 1,500 Repayment of bank loan....................................................... (2,000) - Proceeds from exercise of stock options...................................... - 44 -------- -------- Net cash provided by (used in) financing activities.......................... (2,000) 844 -------- -------- Increase (decrease) in cash ..................................................... (1,900) 799 Cash at beginning of year........................................................ 5,546 2,807 -------- -------- Cash at end of period............................................................ $ 3,646 $ 3,606 ======= ======== Supplemental disclosures of cash flow information: Federal, state and local income tax paid..................................... $ 31 $ 1,600 Interest paid................................................................ 870 706 Issuance of stock to Directors............................................... 72 72 Fair value of assets acquired................................................ - 3,915 Liabilities assumed in acquisitions.......................................... - 1,256
See accompanying notes to interim consolidated financial statements. 6 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (Unaudited) (1) Accounting Policies The interim financial statements are unaudited but reflect all adjustments which, in the opinion of management, are necessary to provide a fair statement of the results of The Navigators Group, Inc. and its subsidiaries (the "Company") for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes contained in the Company's Form 10-K for the year ended December 31, 1999. Certain amounts for prior years have been reclassified to conform to the current year's presentation. (2) Reinsurance Ceded The Company's ceded earned premiums were $18,258,000 and $15,508,000 for the three months ended June 30, 2000 and 1999, respectively, and $37,355,000 and $34,208,000 for the six months ended June 30, 2000 and 1999, respectively. The Company's ceded incurred losses were $13,935,000 and $31,901,000 for the three months ended June 30, 2000 and 1999, respectively, and were $31,093,000 and $52,336,000 for the six months ended June 30, 2000 and 1999, respectively. (3) Acquisition of Anfield Insurance Services, Inc. In April 1999, the Company purchased 100% of Anfield Insurance Services, Inc. ("Anfield"), an insurance agency located in San Francisco, California. The purchase price of approximately $2,700,000 was funded through a bank loan and working capital. Goodwill of $2,300,000 was recorded in connection with the transaction and is being amortized over 20 years. (4) Segments of an Enterprise The Company's subsidiaries are primarily engaged in the writing and management of property and casualty insurance. The Company's segments include the Insurance Companies, the Somerset Companies and the Lloyd's operations, each of which is managed separately. The Insurance Companies consist of Navigators Insurance Company and NIC Insurance Company and are primarily engaged in underwriting marine insurance and related lines of business, and a contractors' general liability program. The Somerset Companies are underwriting management companies. The Somerset Companies produce, manage and underwrite insurance and reinsurance for both affiliated and non-affiliated companies. The Lloyd's operations underwrite marine and related lines of business at Lloyd's of London as a corporate member with limited liability. All segments are evaluated based on their GAAP underwriting or operating results. The Insurance Companies and the Lloyd's operations are measured taking into account net premiums earned, incurred losses and loss expenses, commission expense and other underwriting expenses. The Somerset Companies' results include commission income less other operating expenses. Each segment also maintains their own investments, on which they earn income and realize capital gains or losses. Other operations include intersegment income and expense in the form of affiliated commissions, income and expense from corporate operations, and consolidating adjustments. 7 Financial data by segment for the periods indicated were as follows: Three Months Ended Six Months Ended June 30, June 30, ----------------------- ---------------- 2000 1999 2000 1999 ---- ---- ---- ---- (In thousands) Revenue, excluding net investment income and net realized capital gains: Insurance Companies.............................. $ 12,120 $ 12,480 $ 23,871 $23,094 Somerset Companies............................... 2,679 2,198 5,115 4,053 Lloyd's operations.............................. 10,210 7,430 18,067 13,940 Other operations................................. (1,849) (1,589) (3,753) (3,404) ------ ------- -------- ------- Total.......................................... $ 23,160 $ 20,519 $ 43,300 $37,683 ====== -====== -======- ====== Income (loss) before income taxes: Insurance Companies.............................. $ 6,207 $ 4,612 $ 10,882 $ 9,334 Somerset Companies............................... (906) (1,804) (2,363) (3,507) Lloyd's operations............................... (1,068) (227) (1,525) (37) Other operations................................. (1,124) (317) (2,068) (600) -------- -------- ------ -------- Total.......................................... $ 3,109 $ 2,264 $ 4,926 $ 5,190 ======== ======== ======== ======== Income tax expense (benefit): Insurance Companies.............................. $ 1,775 $ 1,083 $ 3,056 $ 2,455 Somerset Companies............................... (149) (545) (640) (1,115) Lloyd's operations............................... - - - - Other operations................................. (263) (211) (580) (194) -------- -------- -------- -------- Total....................................... $ 1,363 $ 327 $ 1,836 $ 1,146 ======== ======== ======== ======== Net income (loss): Insurance Companies.............................. $ 4,432 $ 3,529 $ 7,826 $ 6,879 Somerset Companies............................... (757) (1,259) (1,723) (2,392) Lloyd's operations............................... (1,068) (230) (1,525) (37) Other operations................................. (861) (103) (1,488) (406) -------- -------- -------- -------- Total.......................................... $ 1,746 $ 1,937 $ 3,090 $ 4,044 ======== ======== ======== ========
(4) Comprehensive Income Comprehensive income encompasses all changes in stockholders' equity (except those arising from transactions with owners) and includes net income, net unrealized capital gains or losses on available for sale securities and foreign currency translation adjustments. 8 The following table summarizes comprehensive income for the three months ended June 30, 2000 and 1999: June 30, ------------------ 2000 1999 ---- ---- (In thousands) Net income.............................................................. $ 1,746 $ 1,937 ------- ------- Other comprehensive income, net of tax: Net unrealized gains (losses) on securities available for sale: Unrealized holding gain (loss) arising during period (net of income tax expense (benefit) of $264 for 2000 and ($1,789) for 1999).................................... 491 (3,322) Less: reclassification adjustment for gains included in net income (net of income tax expense of $37 for 2000 and $176 for 1999) .............................................. 129 328 ------- ------- Net unrealized gains (losses) on securities........................... 362 (3,650) Foreign currency translation gain adjustment, net of tax expense of $26 for 2000 and $139 for 1999................................ 49 259 ------- ------- Other comprehensive income............................. 411 (3,391) ------- ------- Comprehensive income (loss).......................... $ 2,157 $ (1,454) ======= -====== The following table summarizes comprehensive income for the six months ended June 30, 2000 and 1999: June 30, ------------------ 2000 1999 ---- ---- (In thousands) Net income.............................................................. $ 3,090 $ 4,044 ------- ------- Other comprehensive income, net of tax: Net unrealized gains (losses) on securities available for sale: Unrealized holding gain (loss) arising during period (net of income tax expense (benefit) of $374 for 2000 and ($2,474) for 1999).............................................. 695 (4,594) Less: reclassification adjustment for gains included in net income (net of income tax expense of $4 for 2000 and $277 for 1999) ................................................. 67 514 -------- -------- Net unrealized gains (losses) on securities........................... 628 (5,108) Foreign currency translation gain adjustment, net of tax expense of $70 for 2000 and $31 for 1999.................... 131 58 ------- ------- Other comprehensive income (loss)........................... 759 (5,050) ------- ------- Comprehensive income (loss)............................... $ 3,849 $ (1,006) ======= =======
9 The following table summarizes the components of accumulated other comprehensive income (loss): June 30, December 31, 2000 1999 ----------- --------- (In thousands) Net unrealized gains on securities available-for-sale (net of tax (benefit) of ($1,266) in 2000 and ($1,605) in 1999).................. $ (2,352) $ (2,980) Foreign currency translation adjustment (net of tax expense of $104 in 2000 and $34 in 1999)........................................... 193 62 -------- -------- Accumulated other comprehensive (loss)........................ $ (2,159) $ (2,918) ======== ========
(5) Future Application of Accounting Standards The Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998 and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, Deferral of the Effective Date of SFAS No. 133, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Earlier application is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after issuance of this statement. SFAS No. 133 should not be applied retroactively to financial statements of prior periods. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133, which amends the accounting and reporting standards of SFAS No. 133. The adoption of these statements is not expected to have a material effect on the Company's results of operations or financial condition. (6) Lloyd's Participation In the aggregate, the Company directly and indirectly controls 75.6% of Lloyd's Syndicate 1221's capacity for the 2000 underwriting year. Since the controlled capacity exceeds 75%, Lloyd's Mandatory Byelaw (No. 5 of 1999) requires the Company to make a mandatory offer to noncontrolled participants for their capacity. The offer will take the form of an Announced Auction Offer to be made at the Lloyd's capacity auctions this year. The minimum price that the Company is obliged to offer is 1.8 pence per (pound)1 of capacity, being the highest price paid for capacity during the last 12 months. Whether or not, or to what extent the offer is accepted by the offerees is to some extent dependent on the price offered. As such, it is unlikely that the acceptance will result in a cost that is material to the Company. For the purposes of guidance, each 10% of capacity accepting at 1.8 pence per (pound)1 of capacity will result in a cost to the Company of approximately $200,000. In addition, it is anticipated the administrative and legal costs of making the offer will be approximately $40,000. If the Company were to exceed the 90% control threshold as a result of the offer, Lloyd's Major Syndicate Transactions Byelaw (No. 18 of 1997) allows for a Minority Buy-out to be effected. In such a transaction, the remaining participants are required to give up their capacity in return for compensation which must be at least equal to the offer price preceding the buy-out. 10 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking statements Some of the statements in this Form 10-Q are not historical facts and are "forward-looking statements" (as defined in the Private Securities Litigation Act of 1995). These statements use words such as "believes," "expects," "intends," "may," "will," "should," "anticipates" (or the negative forms of those words) and describe our strategies, goals, expectations of future results and other forward-looking information. We derive forward-looking information from information which we currently have and numerous assumptions which we make. We cannot assure that results which we anticipate will be achieved, since results may differ materially because of both known and unknown risks and uncertainties which we face. Factors which could cause actual results to differ materially from our forward looking statements include, but are not limited to: o the effects of domestic and foreign economic conditions and conditions which affect the market for property and casualty insurance; o laws, rules and regulations which apply to insurance companies; o the effects of competition from banks, other insurers and the trend toward self-insurance; o risks which we face in entering new markets and diversifying the products and services we offer; o weather-related events and other catastrophes affecting our insureds; o our ability to obtain rate increases and to retain business; o Year 2000; and o other risks which we identify in future filings with the Securities and Exchange Commission, although we do not promise to update forward-looking statements to reflect actual results or changes in assumptions or other factors that could affect these statements. General The accompanying consolidated financial statements consisting of the accounts of The Navigators Group, Inc., a Delaware holding company, and its sixteen wholly owned subsidiaries, are prepared on the basis of generally accepted accounting principles ("GAAP"). Unless the context otherwise requires, the term "Company" as used herein means The Navigators Group, Inc. and its subsidiaries. All significant intercompany transactions and balances are eliminated. The Company's two insurance subsidiaries are Navigators Insurance Company ("Navigators Insurance"), which includes a United Kingdom Branch ("UK Branch"), and NIC Insurance Company ("NIC"). Navigators Insurance is the Company's largest insurance subsidiary and has been active since 1983. It specializes principally in underwriting marine insurance and related lines of business, and a contractors' general liability program. NIC, a wholly owned subsidiary of Navigators Insurance, began operations in 1990. It underwrites a small book of surplus lines insurance in certain states and cedes 100% of its gross direct writings from this business to Navigators Insurance. Navigators Insurance and NIC are collectively referred to herein as the "Insurance Companies". Five of the Company's subsidiaries are underwriting management companies: Somerset Marine, Inc., Somerset Insurance Services of Texas, Inc., Somerset Insurance Services of California, Inc., Somerset Insurance Services of Washington, Inc. and Somerset Marine (UK) Limited ("Somerset UK") (collectively, the "Somerset Companies"). The Somerset Companies produce, manage and underwrite insurance and reinsurance for Navigators Insurance and four unaffiliated insurance companies. 11 In April 1999, the Company acquired Anfield Insurance Services, Inc. ("Anfield"), an insurance agency located in San Francisco, California, which specializes in underwriting general liability insurance coverage for small artisan and general contractors on the West Coast for the Insurance Companies. The Somerset Companies specialize in writing marine and related lines of business. The marine business is written through a pool of insurance companies, Navigators Insurance having the largest participation in the pool. The Somerset Companies derive their revenue from commissions, service fees and cost reimbursement arrangements from their parent company, Navigators Insurance, and the unaffiliated insurers. Commissions are earned both on a fixed percentage of premiums and on underwriting profits on business placed with the participating insurance companies within the pool. Property and casualty insurance premiums historically have been cyclical in nature and, accordingly, during a "hard market" demand for property and casualty insurance exceeds supply, or capacity, and as a result, premiums and commissions may increase. On the downturn of the property and casualty cycle, supply exceeds demand, and as a result, premiums and commissions may decrease. Navigators Holdings (UK) Limited is a holding company for the Company's UK subsidiaries. Somerset UK produces business for the UK Branch of Navigators Insurance and four unaffiliated insurance companies. Navigators Corporate Underwriters Limited ("NCUL") is admitted to do business at Lloyd's of London as a corporate member with limited liability. The Company owns Mander, Thomas & Cooper (Underwriting Agencies) Limited ("MTC"), a Lloyd's marine underwriting managing agency which manages Lloyd's Syndicate 1221, and MTC's wholly owned subsidiary, Millennium Underwriting Limited ("Millennium"), a Lloyd's corporate member with limited liability. In August 1999, MTC formed Pennine Underwriting Limited, an underwriting managing agency located in Northern England, which underwrites cargo and engineering business for Lloyd's Syndicate 1221. The Company's revenue is primarily comprised of premiums, commissions and investment income. The Insurance Companies, managed by Somerset Marine, Inc., derive the majority of their premium from business written by the Somerset Companies and Anfield. The Lloyd's operations derive their premium from business written by MTC. Results of Operations The Company's 2000 and 1999 results of operations reflect intense market competition in the marine business. Revenues. Gross written premium for the first six months of 2000 increased 30% to $103,835,000 from $79,865,000 for the first six months of 1999. 12 The following table sets forth the Company's gross written premium by line of business and net written premium in the aggregate for the periods indicated: Six Months Ended June 30, 2000 1999 Dollars in thousands) Lloyd's Operations: Marine................................................... $ 43,847 42% $ 21,573 27% Engineering and Construction............................. 578 1 - Onshore Energy........................................... 278 - - - --------- --- -------- --- Total Lloyd's Operations............................. 44,703 43 21,573 27 --------- --- -------- --- Insurance Companies: Marine.................................................. 45,999 44 47,951 60 Program Insurance....................................... 11,556 11 7,932 10 Other ................................................... 1,577 2 2,409 3 --------- --- -------- --- Total Insurance Companies............................ 59,132 57 58,292 73 --------- --- -------- --- Total Gross Written Premium.......................... 103,835 100% 79,865 100% ------- === -------- === Total Ceded Written Premium.......................... (46,136) (38,717) --------- -------- Total Net Written Premium............................ $ 57,699 $ 41,148 ========= =======
Lloyd's Operations The Lloyd's premium is generated as the result of NCUL and Millennium providing capacity to Lloyd's Syndicate 1221 managed by MTC. The premiums, losses and expenses from the Lloyd's operations are included in the Company's consolidated financials but are not included in the Insurance Companies' results since NCUL and Millennium are wholly owned by the parent company. Lloyd's Syndicate 1221 has capacity of (pound)66.3 million (converts to $104.1 million) in 2000 and had capacity of (pound)67.0 million (converts to $105.9 million) in 1999. The Lloyd's marine business has been subject to continued pricing competition resulting in less premium per risk relative to certain prior years. As a result, the Company has been writing less premium than the capacity available. Lloyd's presents its results on an underwriting year basis, generally closing each underwriting year after three years. The Company makes estimates for each year and timely accrues the expected results. In the aggregate, the Company directly and indirectly controls 75.6% of Syndicate 1221's capacity for the 2000 underwriting year. Since the controlled capacity exceeds 75%, Lloyd's Mandatory Byelaw (No. 5 of 1999) requires the Company to make a mandatory offer to noncontrolled participants for their capacity. The offer will take the form of an Announced Auction Offer to be made at the Lloyd's capacity auctions this year. The Company provides letters of credit to Lloyd's to support its Syndicate 1221 capacity. If the amount of capacity controlled increases, the Company will be required to supply additional letters of credit or other collateral acceptable to Lloyd's, or to reduce the capacity of Syndicate 1221. Marine Premium. In 2000, marine premium increased from 1999 due to the capacity directly provided to Syndicate 1221 by NCUL and Millennium in the aggregate increasing from 52.5% in 1999 to 64.5% in 2000 on a larger premium base. 13 Engineering and Construction Premium. In mid 1999, the Robertson Consortium managed by MTC began writing engineering and construction business consisting of coverage for construction projects including machinery, equipment and loss of use due to delays. Previously, the engineering and construction business was written by Somerset Asia Pacific Limited in Australia and Somerset UK, wholly-owned subsidiaries of the Company, for Navigators Insurance. The Australia office was closed in 1999. Onshore Energy Premium. In mid 1999, the Robertson Consortium began writing onshore energy business which principally focuses on the oil and gas, chemical and petrochemical, and power generation industries with coverages primarily for property damage and machinery breakdown. The business was previously written by Navigators Insurance. Insurance Companies Marine Premium. Marine gross written premium stayed relatively flat when comparing the first six months of 2000 to the first six months of 1999. Navigators Insurance's participation in the marine pools was 75% in 1999 and 2000. Program Insurance Premium. The program insurance, primarily written by Anfield, consists primarily of general liability insurance for contractors and a small amount of commercial multi-peril insurance for restaurants and taverns. The 46% increase in the premium, when comparing the first six months of 2000 and 1999, resulted from increases in the business written by Anfield. Ceded Premium. In the ordinary course of business, the Company reinsures certain insurance risks with unaffiliated insurance companies for the purpose of limiting its maximum loss exposure, protecting against catastrophic losses, and maintaining desired ratios of net premiums written to statutory surplus. The relationship of ceded to written premium varies based upon the types of business written and whether the business is written by the Insurance Companies or the Lloyd's operations. The Company wrote a larger percentage of Lloyd's premium which generally carries a higher retention rate. Net Written Premium. Net written premium increased 40% when comparing the first six months of 2000 to the first six months of 1999 primarily due to the increase in the marine business written by the Lloyd's operations. Net Earned Premium. Net earned premium increased 14% for the first six months of 2000 to $41,808,000 as compared to $36,764,000 for the first six months of 1999. Net earned premium for the three months ended June 30, 2000 and 1999 was $22,235,000 and $19,830,000, respectively. Commission Income. Commission income generated by the Somerset Companies increased to $1,293,000 for the first six months of 2000 from $687,000 for the first six months of 1999 and also increased 48% for the three months ended June 30, 2000 from the same period in 1999. The increase was primarily due to Navigators Insurance's normal review of the estimates used to calculate the commission income resulting in a reduction to those estimates in 1999 due to the extremely competitive rate environment. 14 Net Investment Income. Net investment income increased 12% to $8,840,000 for the first six months of 2000 from $7,906,000 for the corresponding period in 1999 and increased 23% to $4,489,000 for the three months ended June 30, 2000 from $3,637,000 during the corresponding period in 1999. These increases are primarily due to higher interest rates on the Insurance Companies investments and the Company's increased participation in the Lloyd's operations which earn income on investments held by Lloyd's Syndicate 1221 in which the Company participates. Such investments represent funds due to the Company from Syndicate 1221. Net Realized Capital Gains. Pre-tax net income included $71,000 of realized capital gains for the first six months of 2000 compared to $791,000 for the same period last year. On an after tax basis, the realized capital gains were $0.01 per diluted share and $0.06 per diluted share for the first six months of 2000 and 1999, respectively. Pre-tax net income for the three months ended June 30, 2000 and 1999 included realized capital gains of $166,000 and $504,000, respectively. On an after tax basis, the realized capital gains were $0.02 per diluted share and $0.04 per diluted share for the three months ended June 30, 2000 and 1999, respectively. Operating Expenses. ------------------ Net Loss and Loss Adjustment Expenses Incurred. The ratio of net loss and loss adjustment expenses incurred to net earned premium was 62.0% and 57.1% for the first six months of 2000 and 1999, respectively. This increase was primarily due to higher loss ratios in the Lloyd's operations. The loss ratios were 62.1% and 55.4% for the three months ended June 30, 2000 and 1999, respectively. Commission Expense. Commission expense as a percentage of net earned premium was 20.5% and 21.1% for the first six months of 2000 and 1999, respectively, and 21.3% and 22.6% for the three months ended June 30, 2000 and 1999, respectively. The decrease in the commission rate was due to the increase in the Lloyd's premium as the Lloyd's premium generally has a lower commission rate than the business written by the Insurance Companies. Other Operating Expenses. Other operating expenses increased 2% to $11,962,000 during the first six months of 2000 from $11,716,000 during the corresponding period of 1999 primarily due to the acquisition of Anfield on April 2, 1999. Other operating expenses decreased 12.3% for the three months ended June 30, 2000 compared to the same period in 1999 primarily due to lower costs in the Company's foreign operations. Interest Expense. Interest expense was $836,000 during the first six months of 2000 compared to $733,000 during the corresponding period of 1999. This increase was due to higher interest rates, partially offset by a decrease in the loan balance. Income Taxes. The effective tax rate was 37.3% and 22.1% for the six months ended June 30, 2000 and 1999, respectively. The increase in the tax rate was primarily due to the Company's inability to utilize losses from its foreign operations. Net Income. The Company had net income of $3,090,000 for the first six months of 2000 compared to $4,044,000 for the same period last year. On a diluted per share basis, this represents net income per share of $0.37 and $0.48 for the first six months of 2000 and 1999, respectively. The Company had net income of $1,746,000 or $0.21 per diluted share for the three months ended June 30, 2000 compared to net income of $1,937,000 or $0.23 per diluted share for the same period in 1999. Liquidity and Capital Resources Cash flow from operations was $1,674,000 and $3,471,000 for the first six months of 2000 and 1999, respectively. Invested assets and cash decreased slightly to $245,566,000 at June 30, 2000 from $246,688,000 at December 31, 1999. 15 The Company's bank credit facility provided for a $23,000,000 revolving line of credit facility at June 30, 2000, which reduces each quarter by amounts ranging between $1,000,000 to $2,250,000 beginning January 1, 2000 until it terminates on November 19, 2003, and a $60,000,000 letter of credit facility. At June 30, 2000, $22,000,000 in loans were outstanding under the revolving line of credit facility at an interest rate of 7.8%. The letter of credit facility is utilized primarily by NCUL and Millennium to participate in Lloyd's syndicate 1221 managed by MTC. At June 30, 2000, letters of credit with an aggregate face amount of $47,276,000 were issued under the letter of credit facility. As of June 30, 2000, the Company's consolidated stockholders' equity was $134,286,000 compared to $130,365,000 at December 31, 1999. The increase was primarily due to net income and, to a lesser extent, decreases in unrealized losses in the investment portfolio. Year 2000 Compliance The "Year 2000 Issue" or "Y2K Issue" is a term used to describe the predicted problems that could have arisen as a result of the inability of some computer programs and embedded chips to distinguish dates beginning with 19 from dates beginning with 20. This Y2K Issue could have resulted in a variety of potential problems for all businesses from inaccurate processing of dates and date-sensitive calculations to system failures and disruptions in operations. The Company had considered the Y2K Issue a high priority since 1996 and had taken certain steps to address this important aspect of its operations. The efforts were rewarded as no computer related Y2K problems have been experienced. The Company will continue to monitor the situation but remains confident that there will not be any future computer related Y2K problems. The Company is at risk from policyholders' claims for insurance coverage due to their Y2K exposures. Although the Company has not received any significant insurance claims based on losses resulting from Y2K Issues, there can be no assurance that policyholders will not suffer losses of this type and seek compensation under the Company's insurance policies. If any claims are made, the Company's obligations, if any, will depend on the facts and circumstances of the claim and provisions of the policy. At this time, the Company is unable to determine whether an adverse impact, if any, in connection with the foregoing circumstances would be material. The Company has not incurred any losses as the result of Y2K Issues. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the information concerning market risk as stated in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Stock Repurchase Program On January 6, 1999, the Company announced a stock repurchase program for up to $3,000,000 of its common stock. At June 30, 2000 and 1999, the Company had repurchased 48,700 shares of stock at a cost of $700,000. During the first quarter of 2000, the Company issued 7,386 of those repurchased shares to the non-employee Directors as part of the Directors' annual compensation amounting in the aggregate to $72,000. 16 Part II - Other Information Item 1. Legal Proceedings: ------------------ The Company is not a party to or the subject of any material pending legal proceedings which depart from the ordinary routine litigation incident to the kinds of business conducted by the Company, except for an assessment on Navigators Insurance by the Institute of London Underwriters ("ILU"). In late 1998, the ILU advised its forty-one members, including Navigators Insurance, that they were each being assessed approximately (pound)900,000 to pay for anticipated operating deficits arising from the ILU's long term lease of the building occupied by the ILU in London. This matter is currently not in litigation and Navigators Insurance continues to oppose the assessment as inequitable and inappropriate. Discussions with the ILU are ongoing and the Company's ultimate liability, if any, is not possible to forecast at the present time. Item 2. Changes in Securities: --------------------- None. Item 3. Defaults Upon Senior Securities: ------------------------------- None. Item 4. Submissions of Matters to a Vote of Securities Holders: ------------------------------------------------------ On June 1, 2000, the Company's stockholders voted for the following matters at the annual stockholders' meeting: (a) The election of seven (7) directors to serve until the 2001 Annual Meeting of Stockholders or until their respective successors have been duly elected and qualified. The results of the voting were as follows: Name For Withheld Terence N. Deeks 6,428,448 38,281 Robert M. DeMichele 6,422,148 44,581 Leandro S. Galban, Jr. 6,415,548 51,181 Marc M. Tract 6,415,548 51,181 William D. Warren 6,388,993 77,736 Robert F. Wright 6,422,148 44,581 Howard M. Zelikow 6,393,798 72,931 (b) The ratification of the appointment of KPMG LLP as the Company's independent auditors. The stockholders cast 6,465,729 votes for, 900 votes against and 100 votes abstaining ratification. Item 5. Other Information: ----------------- None. 17 Item 6. Exhibits and Reports on Form 8-K: -------------------------------- (a) Exhibits: Exhibit No. Description of Exhibit 27.1 Financial Data Schedule (b) Reports on Form 8-K: There were no reports on Form 8-K filed for the six months ended June 30, 2000. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Navigators Group, Inc. -------------------------- (Registrant) Dated: August 11, 2000 /s / Bradley D. Wiley --------------- ----------------------------------------- Bradley D. Wiley Senior Vice President, Chief Financial Officer and Secretary 19 INDEX OF EXHIBITS Sequentially Numbered Exhibit No. Description of Exhibit Page 27.1 Financial Data Schedule 20 EX-27 2 0002.txt FDS --
7 1000 U.S. DOLLARS 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 1 225,230 0 0 6,344 0 0 241,920 3,646 213,481 11,063 638,651 370,157 79,065 0 0 22,000 0 0 846 133,440 638,651 41,808 8,840 71 1,492 25,917 8,570 11,962 4,926 1,836 3,090 0 0 0 3,090 0.37 0.37 170,530 0 0 0 0 166,606 0
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