-----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, CejJO9GesU7li0Q/FGClG9OPRDfvDwNS8ghvjwJKpBqbdA30v/14wbqst2Za+ujI pzdnOydV5m4Go1aZKz0H1w== 0000950123-98-003124.txt : 19980331 0000950123-98-003124.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950123-98-003124 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAVIGATORS GROUP INC CENTRAL INDEX KEY: 0000793547 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 133138397 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-15886 FILM NUMBER: 98579369 BUSINESS ADDRESS: STREET 1: 123 WILLIAM ST CITY: NEW YORK STATE: NY ZIP: 10038 BUSINESS PHONE: 2124062900 MAIL ADDRESS: STREET 2: 123 WILLIAM ST CITY: NEW YORK STATE: NY ZIP: 10038 10-K405 1 THE NAVIGATORS GROUP, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ---- to ---- COMMISSION FILE NO. 0-15886 THE NAVIGATORS GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3138397 (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 123 WILLIAM STREET, NEW YORK, NEW YORK 10038 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (212) 349-1600 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.10 PAR VALUE (Title of Class) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part Ill of this Form 10-K or any amendment to this Form 10-K X --- Aggregate market value of voting stock held by non-affiliates as of March 20, 1998 - $81,153,000 Common shares outstanding March 20, 1998 - 8,399,801 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1997 Proxy Statement are incorporated by reference in Part III, Items 10, 11, 12 and 13 of this Form 10-K. 2 PART I ITEM 1. BUSINESS GENERAL The accompanying consolidated financial statements consisting of the accounts of The Navigators Group, Inc., a Delaware holding company, and its thirteen wholly owned subsidiaries, are prepared on the basis of generally accepted accounting principles. 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") and NIC Insurance Company ("NIC"). Navigators is the Company's largest insurance subsidiary and has been active since 1983. It specializes principally in underwriting marine, aviation and onshore energy insurance. As of June 1997, the Company no longer writes inland marine insurance (except for onshore energy insurance classified as inland marine) and reduced its program business in the second half of 1997 in order to focus on its core businesses. NIC is a wholly owned subsidiary of Navigators, was licensed in 1989 and began operations in 1990. It underwrites a small book of surplus lines insurance in certain states and, pursuant to an intercompany reinsurance pooling agreement, cedes 100% of its gross direct writings from this business to Navigators in exchange for assuming 10% of Navigators net business. Navigators and NIC are collectively referred to herein as the "Insurance Companies". Navigators Corporate Underwriters Limited ("NCUL"), a subsidiary formed in the fourth quarter of 1996, is admitted to underwrite marine and related lines of business at Lloyd's of London as a corporate member with limited liability. Seven 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., Somerset of Georgia, Inc., Somerset Marine (UK) Limited ("Somerset UK") and Somerset Asia Pacific Pty. Limited ("Somerset Asia") (collectively, the "Somerset Companies"). The Somerset Companies produce, manage and underwrite insurance and reinsurance for Navigators, NIC and nine unaffiliated insurance companies. Somerset Asia was formed in the third quarter of 1996 and operates from an office in Sydney, Australia. This office concentrates on marine, onshore energy, engineering and construction business primarily in Indonesia, Thailand, Malaysia, Taiwan, China and Vietnam. Somerset Asia began writing business in early 1997 and is supported by Somerset Services Pte. Limited which provides loss prevention consultancy to Somerset Asia's assureds and producers. Somerset Services Pte. Limited, a wholly owned subsidiary of Somerset Asia, was formed in September 1997 and is located in Singapore. Somerset UK, formed in the fourth quarter of 1996, concentrates on marine, aviation, onshore energy, engineering and construction business. Navigators was authorized to operate a United Kingdom ("UK") Branch on October 22, 1997. Somerset UK began producing business in the fourth quarter of 1997 for the UK Branch of Navigators. Navigators Holdings (UK) Limited was formed on September 15, 1997 as a holding company for the Company's UK subsidiaries. During 1997, the Company merged four subsidiaries, Somerset Re Management, Inc., Navigators Management Corporation, Somerset Casualty Agency, Inc. and Somerset Property, Inc. into Somerset Marine, Inc. The Company also owns Somerset Marine Aviation Property Managers, Inc., an inactive subsidiary. 1 3 The Company's revenue is primarily comprised of premiums, commissions and investment income. The Insurance Companies derive the majority of their business from the Somerset Companies through either business written specifically for the Insurance Companies or through Navigators participation in insurance pools managed by the Somerset Companies. The insurance business and operations of the Insurance Companies are managed by Somerset Marine, Inc. The Somerset Companies specialize principally in writing marine, aviation and onshore energy insurance. They underwrite marine business through a syndicate of insurance companies, Navigators having the largest participation in the syndicate. The Somerset Companies derive their revenue from commissions, investment income, service fees and cost reimbursement arrangements from their parent company, Navigators, NIC 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 syndicate. 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. In January 1998, the Company acquired 100% of Mander, Thomas & Cooper (Underwriting Agencies) Limited, a Lloyd's of London marine underwriting managing agency, and its wholly owned subsidiary, Millennium Underwriting Limited, a Lloyd's corporate member with limited liability. Other investments include the Company's interest in Riverside Underwriters Plc, a UK Corporation (formerly known as Navigators Underwriters Plc) ("Riverside"). The Company's original ownership interest was 21% at December 31, 1995 which increased to 27% as of January 1, 1996 and decreased to approximately 8% at December 31, 1996. Riverside owns 100% of Riverside Corporate Underwriters Limited, a UK corporation, which is admitted to underwrite at Lloyd's of London as a corporate name with limited liability. The transaction to reduce the Company's ownership in Riverside did not produce a material capital gain or loss. The Company will, however, remain entitled to receive from Riverside an amount equal to the aggregate dividends that it would have received if it had continued to hold its original investment to the extent such dividends are attributable to writings at Lloyd's by Riverside Corporate Underwriters Limited during the 1994, 1995 and 1996 years of account. In connection with the reduction of the Company's investment, it has agreed to cease being manager of Riverside and Riverside Corporate Underwriters Limited, although the Company will remain entitled to profit commissions with respect to the 1994, 1995 and 1996 underwriting years. Prior to December 31, 1996, the investment was carried under the equity method of accounting. At December 31, 1996 and 1997, the investment is recorded at cost due to the reduction in ownership interest. LINES OF BUSINESS Navigators underwrites principally marine, aviation and onshore energy insurance. As underwritten by Navigators, marine insurance includes hull, energy, liability and cargo; aviation insurance includes hull and liability on commercial aircraft and on aircraft manufacturers; and onshore energy primarily covering property damage and machinery breakdown. As of June 1997, the Company no longer writes inland marine insurance (except for onshore energy insurance classified as inland marine) and reduced its program business in the second half of 1997 in order to focus on its core businesses. It also wrote a small book of property and casualty reinsurance business which has been in runoff since December 31, 1995 with only a few specialty treaties renewed in 1996 and 1997. See the table set forth in "Management's Discussion and Analysis - Results of Operations Revenues" for Navigators' gross written premium by line of business and net written premium in the aggregate for the periods indicated. 2 4 MARINE INSURANCE Navigators obtains its marine business through its participation in the pool managed by certain Somerset Companies. The composition of the pool and the level of participation of each member changes from time to time. Navigators' net participation in the marine pool was 48% in 1997, 41% in 1996 and 42% in 1995. The Somerset Companies in 1997, 1996 and 1995 received commissions equal to 7.5% of the gross premium earned on marine insurance. They also are entitled to receive a 20% contingent commission on net underwriting profits. In addition, the Company receives marine premium through NCUL's participation in certain Lloyd's syndicates. AVIATION INSURANCE Since October 1, 1995, Navigators writes 100% of the aviation business produced by the Somerset Companies. For the first nine months of 1995, Navigators' share of the aviation pool was approximately 56%. The aviation pool is managed by one of the Somerset Companies, which received commissions equal to 7.5% of the gross earned premium, and is entitled to receive a 20% contingent commission on net underwriting profits. INLAND MARINE INSURANCE As of June 1997, the Company no longer writes inland marine insurance (other than onshore energy). The Somerset Companies produced the inland marine business written by the Insurance Companies. ONSHORE ENERGY In 1996, Navigators began to underwrite onshore energy insurance which principally focuses on the oil and gas, chemical and petrochemical, and power generation industries with coverages primarily covering property damage and machinery breakdown. SPECIALTY REINSURANCE AND PROGRAM INSURANCE Navigators reinsurance business was produced and managed by one of the Somerset Companies. This reinsurance premium consisted primarily of excess of loss and quota share property, surety, and other specialty reinsurance lines. Navigators did not renew this reinsurance business after 1995 except for a few specialty treaties. The program insurance, which began in 1995, has been reduced for 1997 and currently consists of one managing general agent writing primarily general liability for contractors. REINSURANCE CEDED Navigators utilizes reinsurance principally to reduce its net liability on individual risks, to protect against catastrophic losses, to maintain desired ratios of net premiums written to statutory surplus and to stabilize loss ratios. 3 5 The ceding of reinsurance does not discharge the original insurer from its primary liability to the policyholder. The ceding company is required to pay the losses even if the assuming company fails to meet its obligations under the reinsurance agreement. Reinsurance is generally written under treaty contracts in which coverage is either on a proportional basis, where the reinsurer shares proportionately in premiums and losses, or on an excess of loss basis, where only losses above a fixed amount are reinsured. Navigators, both directly and through the syndicates in which it participates, is protected by various treaty and facultative reinsurance agreements. Navigators diversifies its reinsurance by reinsuring with a number of different reinsurers, principally in the United States and European reinsurance markets. This coverage is placed on behalf of Navigators by a number of different reinsurance intermediaries, each of which is employed because of its expertise in placing a particular type of coverage. All such intermediaries are compensated by the reinsurers. Navigators' reinsurance security committee continually monitors the financial strength of its reinsurers and the amounts of reinsurance receivables from those reinsurers. To the extent that it is determined that the ultimate amount collectible is less than the amount recorded on a receivable, a reserve is established. At December 31, 1997 and 1996, the Company had an allowance for uncollectible reinsurance of $800,000. RESERVES Insurance companies are required to maintain reserves for unpaid losses and unpaid loss adjustment expenses ("LAE") for all lines of business. These reserves are intended to cover the probable ultimate cost of settling all losses incurred and unpaid, including those incurred but not reported. The determination of reserves for losses and LAE for insurance companies such as Navigators is dependent upon the receipt of information from the various pools in which such companies participate. Generally, there is a lag between the time premiums are written and related losses and LAE are incurred, and the time such events are reported to the pools and, subsequently, to Navigators. The Insurance Companies establish reserves for reported claims when they first receive notice of the claim. In the case of direct business and assumed excess of loss reinsurance, reserves are established on a case-by-case basis by evaluating several factors, including the type of risk involved, knowledge of the circumstances surrounding such claim, severity of injury or damage, the potential for ultimate exposure, experience with the insured and the broker on the line of business, and the policy provisions relating to the type of claim. Navigators also establishes reserves for proportional treaty claims based on reports received from ceding insurers or pools in which they participate. Reserves for incurred but not reported losses for all of the Insurance Companies' business are determined in part on the basis of statistical information and in part on industry experience. Loss reserves are estimates of what the insurer or reinsurer expects to pay on claims, based on facts and circumstances then known, and it is possible that the ultimate liability may exceed or be less than such estimates. Such estimates are based, among other things, on predictions of future events and estimates of future trends in claim severity and frequency. During the loss settlement period, which, in some cases, may last several years, additional facts regarding individual claims may become known and, accordingly, it often becomes necessary to refine and adjust the estimates of liability on a claim upward or downward. 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 4 6 affecting loss payments by taking into account changes in historical payment patterns and perceived probable trends. There is generally no precise method for the subsequent evaluation of the adequacy of the consideration given to inflation, or to any other specific factor, because the eventual deficiency or redundancy of reserves is affected by many factors, some of which are interdependent. The Company records those premiums which are reported to it through the end of each calendar year. A substantial portion of the premiums are from international business. In this business, there is a significant time lag from the time the policy is bound to the receipt of the policy. Premiums relating to a calendar year may be reported in subsequent years. To the extent a lag exists in the reporting of, and the Company's accounting for, such premiums, a comparable lag occurs in this recording of related incurred but not reported losses and LAE which properly matches recorded revenue with related expenses. The Company does not discount any of its reserves. The following tables present an analysis of losses and LAE.
Year Ended December 31, -------------------------------------- 1997 1996 1995 ---- ---- ---- (in thousands) Net reserves for losses and LAE at beginning of year ......................... $ 132,558 $ 138,761 $ 135,377 --------- --------- --------- Provision for losses and LAE for claims occurring in the current year ....... 53,654 51,429 54,030 Increase (decrease) in estimated losses and LAE for claims occurring in prior years .... (1,034) (2,452) 7,023 --------- --------- --------- Incurred losses and LAE ......................... 52,620 48,977 61,053 --------- --------- --------- Losses and LAE payments for claims occurring during: Current year ............................... (12,921) (15,439) (10,482) Prior years ............................... (32,416) (39,741) (47,187) --------- --------- --------- Losses and LAE payments ......................... (45,337) (55,180) (57,669) --------- --------- --------- Net reserves for losses and LAE at end of year .. 139,841 132,558 138,761 --------- --------- --------- Reinsurance receivables on unpaid balance and LAE 138,591 137,043 135,093 --------- --------- --------- Gross reserves for losses and LAE at end of year $ 278,432 $ 269,601 $ 273,854 ========= ========= =========
5 7 The table below presents the development of the Company's GAAP balance sheet reserves for 1987 through 1997. The line "Net reserves for losses and LAE" reflects the net reserves at the balance sheet date for each of the indicated years and represents the estimated amount of losses and LAE arising in all prior years that are unpaid at the balance sheet date. The "Reserves re-estimated" lines of the table reflect the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The "Cumulative redundancy (deficiency)" lines of the table reflect the cumulative amounts developed as of successive years with respect to the aforementioned reserve liability. The cumulative redundancy or deficiency represents the aggregate change in the estimates over all prior years. For each calendar year end, the net reserves for losses and LAE are not adjusted in the table to reflect additional premiums reported to the Company in subsequent calendar years. However, the remainder of the table allocates losses and LAE reported and recorded in subsequent years to all prior years starting with the year in which the loss was incurred. For example, assume that a loss occurred in 1994 and was not reported until 1996, the amount of such loss will appear as a deficiency in both 1994 and 1995, although the premiums related to the policy may not be reported in income until 1995. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on these tables. 6 8
Year Ended December 31, --------------------------------------------------------------------------------------------------- 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (In thousands) Net reserves for losses and LAE.................. $51,364 $54,326 $59,477 $70,457 $77,507 $89,361 $103,176 $135,377 $138,761 $132,558 $139,841 Reserves for losses and LAE re-estimated as of: One year later ......... 52,018 53,841 61,449 71,643 80,478 94,785 104,306 142,400 136,309 131,524 Two years later ........ 51,795 53,466 62,206 73,849 80,937 98,062 102,831 139,139 134,324 Three years later ...... 49,163 51,297 61,255 73,441 81,322 98,338 101,537 138,155 Four years later ....... 47,023 49,356 60,062 73,349 80,652 97,257 100,432 Five years later ....... 45,775 48,105 60,476 72,706 79,469 96,889 Six years later ......... 44,699 48,056 60,490 71,730 79,239 Seven years later ...... 44,701 48,176 60,382 71,620 Eight years later ...... 44,355 48,157 60,364 Nine years later ....... 43,947 48,443 Ten years later ........ 44,217 Net cumulative redundancy (deficiency) 7,147 5,883 (887) (1,163) (1,732) (7,528) 2,744 (2,778) 4,437 1,034 Net cumulative paid as of: One year later ......... 15,214 13,772 17,593 22,784 25,741 37,998 32,700 47,187 39,741 32,416 Two years later ........ 23,531 22,354 29,694 36,532 43,688 54,552 53,603 69,960 59,397 Three years later ...... 27,810 29,134 37,032 47,060 51,753 65,997 62,769 83,921 Four years later ....... 32,625 33,178 43,270 51,769 59,308 72,063 69,356 Five years later ....... 34,289 37,255 46,066 57,421 63,138 75,864 Six years later ........ 37,337 38,299 50,456 60,291 65,441 Seven years later ...... 37,492 41,705 52,521 61,837 Eight years later ...... 39,738 43,120 53,482 Nine years later ....... 40,261 43,901 Ten years later ........ 40,922 Gross liability-end of year .................... 224,191 247,346 314,898 273,854 269,601 278,432 Reinsurance recoverable ... 134,830 144,170 179,521 135,093 137,043 138,591 ------- ------- ------- ------- ------- ------- Net liability-end of year.. 89,361 103,176 135,377 138,761 132,558 139,841 Gross re-estimated latest.. 285,892 271,555 348,277 290,477 280,058 Re-estimated recoverable latest .................. 189,003 171,123 210,122 156,153 148,534 ------- ------- ------- ------- ------- Net re-estimated latest ... 96,889 100,432 138,155 134,324 131,524 Gross cumulative (deficiency) ............ (61,701) (24,209) (33,379) (16,623) (10,457)
7 9 The net cumulative deficiencies for the years ended December 31, 1989 through 1992 resulted primarily from the allocation of losses to the appropriate calendar years without regard to any additional premiums relating to such calendar years which were reported to and recorded by the Insurance Companies in subsequent periods. These deficiencies are offset, in part, by additional net earned premiums for such respective calendar years reported and recorded by the Insurance Companies in subsequent years. The net deficiency for 1994 resulted from development of losses from the Northridge, California earthquake which occurred on January 17, 1994 (the "Northridge Earthquake"). The Company had net cumulative redundancies for the remainder of the years shown in the table. The gross cumulative deficiencies for the years ended December 31, 1994 and 1995 resulted primarily from the 1994 Northridge Earthquake loss and the 1989 Exxon Valdez loss. The December 31, 1992 and 1993 gross cumulative deficiencies resulted primarily from the Exxon Valdez loss. The December 31, 1996 gross cumulative deficiency resulted from adverse development in certain lines of business. Management believes that the Insurance Companies' reserves for losses and LAE are adequate to cover the ultimate cost of losses and LAE on reported and unreported claims. ENVIRONMENTAL POLLUTION AND ASBESTOS RELATED CLAIMS In 1997 and 1996, the Insurance Companies paid gross losses and LAE of $1,510,000 and $2,794,000 resulting in net paid losses and LAE of $723,000 and $425,000, respectively, for environmental pollution and asbestos related claims. As of December 31, 1997 and 1996, the Insurance Companies carried gross reserves of $2,622,000 and $5,421,000, respectively, and net reserves of $936,000 and $1,042,000, respectively, for the potential exposure to such claims. Management believes that its reserves for such claims are adequate because the Insurance Companies' participation in such risks is generally in the higher excess layers and, based on a continuing review of such claims, management believes that a majority of these claims will be unlikely to penetrate such high excess layers of coverage; however, due to significant assumptions inherent in estimating these exposures, actual liabilities could differ from current estimates. For the year ended December 31, 1997 and 1996, open claims with environmental pollution and asbestos exposure amounted to 2,451 and 2,024, respectively. Management will continue to review its exposure to and reserves for such claims. Any potential exposure to these claims exists predominately in connection with the marine business. INVESTMENTS The investments of the Insurance Companies must comply with the insurance laws of New York State, the domiciliary state of Navigators and NIC. These laws prescribe the kind, quality and concentration of investments which may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred stocks and common stocks, real estate mortgages and real estate. The Insurance Companies' investment guidelines prohibit investments in derivatives. The Insurance Companies' investments are subject to the direction and control of its Board of Directors and are reviewed on a quarterly basis. The investments are managed by various professional fixed income and equity portfolio managers. Current investment objectives are to maximize annual after tax income in the context of preserving and enhancing capital and statutory surplus. Navigators seeks to obtain these objectives by investing in municipal bonds, U.S. Government obligations, corporate bonds, and preferred and common stocks. Due to the Company being in an alternative minimum tax ("AMT") position, the Finance Committee of the Board of Directors has reviewed the Company's concentration in municipal bonds and instructed the portfolio managers to reduce the municipal bond portfolio in 1997 and is likely to reduce it further in 1998. The Insurance Companies' investment guidelines require that at 8 10 least 90% of the fixed income portfolio be rated "A-" or better by a nationally recognized rating organization. Up to 25% of the total portfolio may be invested in equity securities including preferred stocks rated BBB-/Baa-. At December 31, 1997 and 1996, all fixed maturity and equity securities held by the Company were classified as available-for-sale. The majority of the investment income of the Somerset Companies is derived from fiduciary funds invested in accordance with the guidelines of various state insurance departments. These guidelines typically require investments in short-term instruments. The table set forth below reflects investments and income earned thereon for the Company on a consolidated basis and for the Insurance Companies for each of the three years ended December 31, 1997:
Year Ended December 31, ------------------------------------- 1997 1996 1995 ---- ---- ---- (In thousands) The Company Consolidated (1) Average investments ............ $259,636 $252,618 $247,391 Net investment income .......... 14,435 13,614 14,143 Average yield .................. 5.56% 5.39% 5.72% Navigators Insurance Company and NIC Insurance Company Average investments ............ $244,905 $231,111 $217,639 Net investment income .......... 13,696 12,578 12,422 Average yield .................. 5.59% 5.44% 5.71%
(1) Included in the Company's average investments and investment income are fiduciary cash and short-term investments not included in the balance sheet and the earnings thereon from the Somerset Companies. See Note 4 to the Company's Consolidated Financial Statements. 9 11 The following table shows the cash and investments of the Company as of December 31, 1997:
Carrying Value Percent (In thousands) Of Total Cash and short-term investments $ 23,830 9.2% U.S. Treasuries ................ 10,117 3.9 Municipal bonds ............... 132,474 51.2 Mortgage backed securities .... 22,567 8.7 Asset backed securities ....... 49,046 19.0 Corporate bonds ............... 11,540 4.5 Redeemable preferred stocks ... 1,090 0.4 Common stocks ................. 6,132 2.4 Other invested assets ......... 1,776 0.7 -------- ----- Total ....................... $258,572 100.0% ======== =====
REGULATION The Company and the Insurance Companies are subject to regulation under the insurance statutes, including holding company statutes, of various states. These regulations vary from state to state but generally require insurance holding companies, and insurers that are subsidiaries of holding companies, to register and file reports concerning their capital structure, ownership, financial condition and general business operations. Such regulations also generally require prior regulatory agency approval of changes in control of an insurer and of transactions within the holding company structure. The regulatory agencies of each state have statutory authorization to enforce their laws and regulations through various administrative orders and enforcement proceedings. The Insurance Department of the State of New York (the "Department") is the Company's principal regulatory agency. The New York Insurance Law provides that no corporation or other person may acquire control of the Company, and thus indirect control of the Insurance Companies, unless it has given notice to the Insurance Companies, and obtained prior written approval of the Superintendent of Insurance of the State of New York for such acquisition. In New York, any purchaser of 10% or more of the outstanding shares of the Company's common stock would be presumed to have acquired control of the Company, unless such presumption is rebutted. Navigators and NIC may pay dividends only out of their statutory earned surplus under New York law. Generally, the maximum amount of dividends Navigators and NIC may pay without regulatory approval in any twelve-month period is the lesser of adjusted net investment income or 10% of statutory surplus. Under insolvency or guaranty laws in most states in which Navigators and NIC operate, insurers doing business in those states can be assessed up to prescribed limits for policyholder losses of insolvent insurance companies. Navigators is licensed to engage in the insurance and reinsurance business in 48 states, the District of Columbia and Puerto Rico and is an approved reinsurer in one of the remaining two states. NIC is licensed to engage in the insurance and reinsurance business in the State of New York and is an approved surplus lines insurer in 29 other states and the District of Columbia. 10 12 As part of its general regulatory oversight process, the Department conducts detailed examinations of the books, records and accounts of New York insurance companies every three to five years. Navigators and NIC were examined by the Department for the years 1991 through 1995. Based upon discussions with the Department, the Company does not expect any material adjustments to its previously filed statutory financial statements. The Insurance Regulatory Information System ("IRIS") was developed by the National Association of Insurance Commissioners ("NAIC") and is intended primarily to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies eleven industry ratios and specifies "usual values" for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer's business. As of December 31, 1997 and 1996, both Navigators' and NIC's results were within the usual values for all IRIS ratios. From time to time various regulatory and legislative changes have been proposed in the insurance and reinsurance industry. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. The Company is unable to predict whether any of these laws and regulations will be adopted, the form in which any such laws and regulations would be adopted, or the effect, if any, these developments would have on the operations and financial condition of the Company. State insurance departments have adopted a methodology developed by the NAIC for assessing the adequacy of statutory surplus of property and casualty insurers which includes a risk-based capital formula that attempts to measure statutory capital and surplus needs based on the risks in a company's mix of products and investment portfolio. The formula is designed to allow state insurance regulators to identify potential weakly capitalized companies. Under the formula, a company determines its "risk-based capital" ("RBC") by taking into account certain risks related to the insurer's assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer's liabilities (including underwriting risks related to the nature and experience of its insurance business). The RBC rules provide for different levels of regulatory attention depending on the ratio of a company's total adjusted capital to its "authorized control level" of RBC. Based on calculations made by Navigators and NIC, their RBC level exceeds a level that would trigger regulatory attention. In their respective 1997 statutory financial statements, Navigators and NIC have complied with the NAIC's RBC reporting requirements. In addition to regulations applicable to insurance agents generally, the Somerset Companies are subject to Managing General Agents Acts in their domicile jurisdictions and in certain jurisdictions where they do business. The Company's subsidiaries domiciled in the UK are subject to regulation from the regulatory authorities in the UK including the Department of Trade and Industry, and Lloyd's of London. COMPETITION The property and casualty insurance industry is highly competitive. The demand for low-cost, high quality service has created difficult conditions in the domestic property and casualty market, including a leveling or reduction in premium rates in certain lines of business in which the Company competes. The Company believes the current situation will not improve dramatically in the foreseeable future. 11 13 The Insurance Companies face competition from both domestic and foreign marine, aviation and non-marine insurers, some of whom have longer operating histories and greater financial, marketing and management resources. Competition in the types of insurance in which the Insurance Companies are engaged is based on many factors, including the perceived overall financial strength of the Insurance Companies, pricing and other terms and conditions of products and services offered, business experience, marketing and distribution arrangements, agency and broker relationships, levels of customer service (including speed of claims payments), product differentiation and quality, operating efficiencies and underwriting. Furthermore, insureds tend to favor large, financially strong insurers, and the Insurance Companies face the risk that they will lose market share to higher rated insurers. No single insured or reinsured accounted for 10% or more of the Company's gross written premium in 1997. EMPLOYEES As of December 31, 1997, the Company had 105 employees. ITEM 2. PROPERTIES The Company's administrative offices are occupied pursuant to a lease from an unaffiliated company which expires May 14, 2000 in a building located at 123 William Street, New York, New York. Several of the Company's subsidiaries have noncancellable operating leases for their respective office location. The Company does not own any real estate. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to or the subject of, any material pending legal proceedings which depart from the ordinary routine litigation incident to the kinds of business conducted by the Company. 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 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's common stock is traded over-the-counter (The Nasdaq National Market) under the symbol NAVG. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. The high and low bid prices for the four quarters of 1997 and 1996 are as follows:
1997 1996 -------------------------------------- --------------------------------------- High Low High Low First Quarter ................. $19.75 $15.75 $20.25 $15.63 Second Quarter ............ $18.13 $15.75 $19.50 $15.75 Third Quarter ............... $21.38 $17.75 $19.63 $16.00 Fourth Quarter ............. $22.50 $18.00 $20.25 $17.75
12 14 STOCKHOLDERS There were approximately 100 holders of record of shares of the Company's common stock as of March 23, 1998. However, management believes there are in excess of 1,000 beneficial owners of the stock. DIVIDENDS The Company has not paid or declared any cash dividends on its common stock. While there presently is no intention to pay cash dividends on the common stock in the foreseeable future, future declarations, if any, and the amounts of such dividends will be dependent upon, among other factors, the earnings of the Company, its financial condition and business needs, restrictive covenants under debt arrangements, the capital and surplus requirements of its subsidiaries and applicable government regulations. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth summary consolidated financial information of the Company for each of the years in the five-year period ended December 31, 1997 derived from the Company's audited consolidated financial statements. See the Consolidated Financial Statements of the Company including notes thereto included herein.
Year Ended December 31, -------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (In thousands, except per share data) OPERATING INFORMATION: Net earned premium ............. $ 85,002 $ 78,731 $ 87,908 $ 90,483 $ 96,843 Net investment income .......... 14,435 13,614 14,143 13,034 11,588 Total revenues ................. 108,217 102,788 113,714 113,892 118,953 Income (loss) before income taxes .......... 17,184 20,874 15,563 (31,574) 25,118 Net income (loss) .............. 12,546 16,752 12,582 (20,495) 21,585 Net income (loss) per share(1): Basic ........................ $ 1.51 $ 2.04 $ 1.54 $ (2.51) $ 2.65 Diluted ...................... $ 1.50 $ 2.02 $ 1.53 $ (2.50) $ 2.64 Average common shares(1): Basic ........................ 8,296 8,197 8,154 8,151 8,146 Diluted ...................... 8,385 8,286 8,213 8,185 8,190 BALANCE SHEET INFORMATION (AT END OF PERIOD): Total investments & cash(2) .... $ 258,572 $ 240,720 $ 235,460 $ 203,103 $ 200,253 Total assets ................... 501,207 457,095 435,552 474,031 431,028 Loss and LAE reserves .......... 278,432 269,601 273,854 314,898 247,346 Notes payable .................. 20,942 17,942 20,508 28,108 7,270 Stockholders' equity(2) ........ 131,242 115,542 99,076 77,523 117,277 Book value per share(2) ........ $ 15.68 $ 14.03 $ 12.12 $ 9.51 $ 14.39
(1) In 1997, the Company adopted SFAS 128, Earnings per Share. Prior years' amounts have been restated in accordance with SFAS 128. (2) Investments and stockholders' equity for 1994 and subsequent years reflect the adoption of SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. 13 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a holding company with thirteen wholly owned subsidiaries. See "BUSINESS-General" included herein for a description of the Company. The Company's revenue is primarily comprised of premiums, commissions and investment income. The Insurance Companies derive the majority of their business from the Somerset Companies through either business written specifically for the Insurance Companies or through Navigators participation in insurance pools managed by the Somerset Companies. The insurance business and operations of the Insurance Companies are managed by one of the Somerset Companies. The Company writes business in Southeast Asia through one of the Somerset Companies. To date, the participation in this market has been limited and therefore the Company's exposure to the economic conditions in Asia does not materially effect its operations. Navigators and the Somerset Companies earn investment income on cash balances and invested assets. The Somerset Companies also earn investment income on fiduciary funds. Such fiduciary funds are invested, subject to applicable insurance regulations, primarily in short-term instruments. RESULTS OF OPERATIONS General. The 1995 results reflect development of losses from the 1994 Northridge Earthquake. During 1995 the total reported gross losses on direct property claims arising from the Northridge Earthquake increased $18.3 million from $125.4 million to $143.7 million. The Company also added gross bulk reserves of $11 million at September 30, 1995. On a net basis, the incurred losses relating to the Northridge Earthquake represented pre-tax charges of approximately $10.7 million in 1995. There was no further development of the losses from the Northridge Earthquake in 1996, however there was development of $343,000 in 1997. There can be no assurance that additional losses will not be reported or adjustments made to existing reserves. The Company's 1997 results of operations reflect intense market competition in the core marine and aviation lines. In November 1988, the voters of the State of California approved Proposition 103, which required most property and casualty insurance companies, among other things, to reduce rates charged to California insureds to a level 20% below November 8, 1987 levels. On March 19, 1996, the Company agreed with the Commissioner to settle its rollback liability under Proposition 103. The settlement cost the Company approximately $2.0 million net of recoveries from reinsurers, of which approximately $1.0 million was recorded in each of 1995 and 1996. Revenues. Gross written premium decreased from $148.9 million in 1995 to $142.5 million in 1996 and increased to $171.2 million in 1997. 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: 14 16
Year Ended December 31, ------------------------------------------------------------------------------------- 1997 1996 1995 ---- ---- ---- (In thousands) Marine ..................... $ 56,231 33% $ 51,948 36% $ 61,684 42% Aviation ................... 34,960 20 41,142 29 51,286 34 Inland Marine .............. 8,327 5 14,539 10 11,620 8 Onshore Energy ............. 9,854 6 6,902 5 __ __ Engineering and Construction 7,592 4 __ __ __ __ Lloyd's -- Marine .......... 24,654 14 __ __ __ __ Specialty Reinsurance and Program Insurance ...... 29,631 18 27,993 20 24,317 16 --------- --- --------- --- --------- --- Gross Written Premium ...... 171,249 100% 142,524 100% 148,907 100% --------- === --------- === --------- === Ceded Written Premium ...... (80,369) (58,356) (67,639) --------- --------- --------- Net Written Premium ........ $ 90,880 $ 84,168 $ 81,268 ========= ========= =========
Marine Premium. Marine gross written premium (non-Lloyd's) increased 8% from 1996 to 1997 due to Navigators' increased participation in the marine pools from 41% in 1996 to 48% in 1997. The 1996 decrease from 1995 was due primarily to decreases in premium rates. Marine premium has been subject to continued pricing competition. Aviation Premium. Aviation gross written premium decreased 15% from 1996 to 1997 due to price competition in the aviation insurance market. The 20% reduction in Navigators' aviation gross written premium from 1995 to 1996 was due to Navigators withdrawing from the general aviation business in order to concentrate on the major airlines and manufacturers and to price competition. Inland Marine Premium. As of June 1997, the Company no longer writes inland marine business (other than onshore energy). The Somerset Companies produced the inland marine business written by the Insurance Companies. Onshore Energy Premium. In 1996, Navigators began to underwrite onshore energy business which principally focuses on the oil and gas, chemical and petrochemical, and power generation industries with coverages primarily for property damage and machinery breakdown. Engineering and Construction Premium. Somerset Asia began writing engineering and construction risks in Southeast Asia in 1997. Lloyd's Marine Premium. NCUL provided capacity to two Lloyd's syndicates in 1997 which produced $24.7 million of marine premium. The premiums, losses and expenses from the Lloyd's marine syndicates are included in the Company's financials but are not included in the Insurance Companies' results since NCUL is wholly owned by the parent company. Specialty Reinsurance and Program Insurance Premium. Navigators reinsurance business was produced and managed by one of the Somerset Companies. This reinsurance premium consisted primarily of excess of loss and quota share property, surety, and other specialty reinsurance lines. Navigators did not renew this reinsurance business after 1995 except for a few specialty treaties. The program insurance, which began in 1995, has been reduced for 1997 and currently consists of one managing general agent writing primarily general liability for contractors. 15 17 Ceded Premium. In the ordinary course of business, Navigators reinsures certain insurance risks with unaffiliated insurance companies for the purpose of limiting its maximum loss exposure, protecting against catastrophic losses, and maintaining desired ratios of net premiums written to statutory surplus. The increase in the ceded premium from 1996 to 1997 resulted from the engineering and construction and the program business which is heavily reinsured, and from the ceded portion of the marine premium. The decrease in the ceded premium from 1995 to 1996 is reflective of the decrease in the written premium and price competition in the reinsurance business. Net Written Premium. The 8% increase in net written premium from 1996 to 1997 was primarily due to increases in the marine premium from both the Somerset Companies and Lloyd's along with the new engineering and construction business, partially offset by decreases in the aviation and inland marine premium. The 4% increase in net written premium from 1995 to 1996 was primarily due to Navigators increasing its participation in the aviation pool to 100% at October 1, 1995 and to less premium being ceded. Net Earned Premium. The 8% increase in net earned premium from 1996 to 1997 was primarily due to the increase in the net written premium. The 10% decrease in net earned premium from 1995 to 1996 was primarily due to the decrease in the 1995 net written premium and the effect the property business run-off had on the 1995 net earned premium. Commission Income. Commission income decreased 42% to $5.1 million in 1997 from 1996 partially due to Navigators increasing its participation in the marine pool to 48% in 1997 from 41% in 1996 which decreased both the management commission and the profit commission. Commission income decreased 17% to $8.8 million in 1996 from $10.7 million in 1995 primarily due to Navigators increasing its participation to 100% at October 1, 1995 in the aviation business managed by the Somerset Companies, which eliminated commission income paid by the former participants in the aviation insurance pool. Also, the 1996 commission income includes $826,000 of profit commissions earned under the Company's management agreement with Riverside. The commission income is also affected by profit commissions from the marine pool. Net Investment Income. Net investment income increased 6% to $14.4 million in 1997 from $13.6 million in 1996 due to the increase in invested assets and the decrease of municipal bonds in the portfolio, partially offset by a decrease in fiduciary funds held by the Somerset Companies resulting in less investment income from the funds. Net investment income decreased 4% to $13.6 million in 1996 from $14.1 million in 1995 due to decreased fiduciary funds held by the Somerset Companies, the effect on invested assets from payments of earthquake losses and generally lower yields. Operating Expenses. Net losses and loss adjustment expenses incurred. The ratio of net loss and loss adjustment expenses incurred to net earned premium was 61.9%, 62.2%, and 69.5% in 1997, 1996 and 1995, respectively. The 1997 loss ratio improved modestly over 1996. The improvement in the 1996 loss ratio compared to 1995 was primarily due to a return to more normal experience after reserving for the losses from the Northridge Earthquake. Commission expense. Commission expense as a percentage of net earned premium was 17.6%, 15.5%, and 13.9% for 1997, 1996 and 1995, respectively. The increase in the 1997 commission expense ratio compared to 1996 was primarily due to increased excess of loss reinsurance purchased in 1997 on the marine, aviation and onshore energy lines of business which lowers net premium with no corresponding ceding commission to offset the commission expense incurred on the gross premium and to a generally higher commission percentage on the Lloyd's of London premium. The increase in the 1996 commission expense ratio compared to 1995 was primarily due to the reversal of approximately 16 18 $519,000 of contingent commissions receivable recorded in 1995 on certain ceded contracts which had loss development during 1996. Other operating expenses. Other operating expenses increased 8.9% to $22.2 million primarily due to expenses incurred by Somerset (UK) in London, Somerset Asia in Australia and NCUL. The 9.4% decrease from 1995 to 1996 reflected the staff cuts in 1995 partially offset by the opening of the new offices in London and Australia in late 1996. Interest Expense. The decrease in the interest expense from 1996 to 1997 was due to $368,000 of interest expense recorded in the first quarter of 1996 attributable to the Company's rollback liability under California Proposition 103 and to fluctuations in the loan balance. The decrease in the interest expense from 1995 to 1996 was due to the reduction in the loan balance and lower interest rates. The 1995 interest expense includes $380,000 of interest expense for the Company's rollback liability under California Proposition 103. Income Taxes. The income tax expense was $4.6 million, $4.1 million and $3.0 million for 1997, 1996 and 1995, respectively. The effective tax rates for 1997, 1996 and 1995 were 27%, 20% and 19%, respectively. The increase in the 1997 rate was primarily due to not being able to utilize the losses from Somerset (UK) and Somerset Asia. The Company had a net operating loss carryforward of $3.0 million at December 31, 1995 which was fully utilized in 1996. The Company had alternative minimum tax ("AMT") carryforwards of $5.1 million, $5.8 million and $3.1 million at December 31, 1997, 1996 and 1995, respectively. The AMT carryforwards were primarily attributable to the tax benefits from the municipal bond interest. The Company has reduced its municipal bond portfolio in 1997 in order to utilize part of the AMT carryforwards. As of December 31, 1997 the net deferred Federal tax asset was $8.0 million as compared to $9.5 million at December 31, 1996. At December 31, 1997 and 1996 the Company had a $1.1 million valuation allowance against its deferred Federal tax asset. There was no valuation allowance at December 31, 1996. Equity Income in Affiliated Company. The Company holds an equity interest in Riverside, which through its wholly owned subsidiary, Riverside Corporate Underwriters Limited, is admitted to underwrite at Lloyd's of London as a corporate name with limited liability. The Company records its share of Riverside's underwriting results when sufficient information becomes available to provide reasonable estimates of earned premiums and losses. During 1996, primarily in the third quarter, the Company recorded its share of the 1994 and 1995 after tax underwriting earnings amounting to $1.4 million. During 1997, the Company recorded $376,000 of after tax underwriting earnings from its investment in Riverside. Net Income. The Company's net income decreased in 1997 to $12.5 million from $16.8 million in 1996. The 1996 net income of $16.8 million improved over the $12.6 million of income in 1995 in which year the Company suffered the adverse impact of the Northridge Earthquake. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations was $12.5 million, $7.3 million and $26.6 million for 1997, 1996 and 1995, respectively. Operating cash flow has been used primarily to acquire additional investment assets with net purchases during 1997, 1996 and 1995 of $17.6 million, $11.5 million and $12.8 million, respectively. 17 19 At December 31, 1997, the Company had committed approximately $550,000 to continue to enhance its hardware and software computer systems in 1998. Invested assets and cash (excluding fiduciary funds held by the Somerset Companies) have grown from $235.5 million at December 31, 1995 to $240.7 million at December 31, 1996 to $258.6 million at December 31, 1997. Investment income during this period was $14.1 million in 1995, $13.6 million in 1996 and $14.4 million in 1997. The average yield of the portfolio, excluding net realized capital gains, was 5.6% in 1995, 5.4% in 1996, and 5.7% in 1997 reflecting the prevailing interest rates during those years and the decrease in the tax-exempt portfolio in 1997. As of December 31, 1997, all fixed maturity securities and equity securities held by the Company were classified as available-for-sale. The majority of the invested assets are in municipal bonds rated "A" or better by Standard & Poor's or Moody's. The Company has no significant exposure to credit risk since the Company's fixed maturity investment portfolio does not contain any non-investment grade bonds. The portfolio has an average maturity of less than seven years. Management continually monitors the composition and cash flow of the investment portfolio in order to maintain the appropriate levels of liquidity. This ensures the Company's ability to satisfy claims or expenses as they become due. On August 5, 1994, the Company entered into a Credit Agreement with three banks which was amended and restated on November 19, 1996 (the "Amended Credit Agreement"). The Amended Credit Agreement provided for a $20 million revolving credit loan facility and a $30 million letter of credit facility. The revolving credit loan facility bears interest, at the election of the Company, at either the base commercial lending rate of one of the banks or at LIBOR plus 1%. At December 31, 1996, $17 million in loans were outstanding under the revolving credit loan facility at an interest rate of 6.5% and letters of credit with an aggregate face amount of $27.1 million were issued under the letter of credit facility. A December 11, 1997 amendment to the Amended Credit Agreement increased the revolving credit loan facility from $20 million to $25 million which reduces each quarter by various amounts (from $500,000 to $2,000,000) until it terminates on December 31, 2003. At December 31, 1997, $20 million in loans were outstanding under the revolving credit loan facility at an interest rate of 6.9% and letters of credit with an aggregate face amount of $26.0 million were issued under the letter of credit facility. The letters of credit are primarily utilized by NCUL as collateral to participate in two Lloyd's marine syndicates specializing in marine insurance. No letters of credit have been drawn upon. The Company also has a $942,000 note payable to its major stockholder bearing interest at 7%. Total stockholders' equity was $131.2 million at December 31, 1997, a 13.6% increase for the year primarily as the result of the Company's earnings in 1997. The Company was within the usual values for all NAIC's IRIS ratios as of December 31, 1996 and 1997. The Company's reinsurance has been placed with various U.S. companies rated "A-" or better by A.M. Best Company, Inc., as well as with foreign insurance companies and with selected syndicates of Lloyd's of London ("Lloyd's"). Certain syndicates at Lloyd's ("Loss Syndicates") and the Lloyd's market as a whole have reported significant losses in recent years. The Company has not placed any material amounts of reinsurance with these Loss Syndicates. Pursuant to the implementation of Lloyd's Plan of Reconstruction and Renewal, a significant portion of the Company's recoverables from the Loss Syndicates are now reinsured by Equitas ( a separate UK Department of Trade and Industry authorized reinsurance company established to reinsure outstanding liabilities of all Lloyd's members for all risks written in the 1992 or prior years of account). 18 20 The Company believes that the cash flow generated by the operating activities of the Company's subsidiaries will provide sufficient funds for the Company to meet its liquidity needs over the next twelve months. Beyond the next twelve months, cash flow available to the Company may be influenced by a variety of factors, including general economic conditions and conditions in the insurance and reinsurance markets, as well as fluctuations from year to year in claims experience. ECONOMIC CONDITIONS The Company is a specialty insurance company and periods of moderate economic recession or inflation tend not to have a significant direct effect on the Company's underwriting operations. They do, however, impact the Company's investment portfolio. A decrease in interest rates will tend to decrease the Company's yield on its invested assets. Management considers the potential impact of these economic trends in estimating loss reserves. Management believes that the underwriting controls it maintains, and the fact that the majority of Navigators' business is in lines of insurance which have relatively short loss payout patterns, assist in estimating ultimate claim costs more accurately and lessen the potential adverse impact of the economy on the Company. YEAR 2000 COMPLIANCE The Company is aware of the issues associated with the Year 2000 issue in existing computer systems and is currently replacing its major computer systems with systems that are Year 2000 compliant and thereby will benefit from state-of-the-art integrated systems along with being Year 2000 compliant. The project is expected to be completed in 1998. If the project is not completed timely, the Year 2000 issue may have a material impact on the operations of the Company. The costs directly related to the Year 2000 issue to date have been minimal. There can be no assurance that the systems of other companies on which the Company's systems rely will also be timely converted or that any such failure to convert by another company would not have an adverse effect on the Company's systems. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements required in response to this section are submitted as part of Item 14(a) of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the directors and the executive officers of the Company is contained under "Election of Directors" in the Company's 1998 Proxy Statement, which information is incorporated herein by reference. 19 21 ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is contained under "Compensation of Directors and Executive Officers" in the Company's 1998 Proxy Statement, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning the security ownership of the directors and officers of the registrant is contained under "Election of Directors" in the Company's 1998 Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning relationships and related transactions of the directors and officers of the Company is contained under "Certain Relationships and Related Transactions" in the Company's 1998 Proxy Statement, which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: 1. FINANCIAL STATEMENTS AND SCHEDULES: The financial statements and schedules listed in the accompanying Index to Consolidated Financial Statements and Schedules on page F-1. 2. EXHIBITS: The exhibits are listed on the accompanying Index to Exhibits on the page which immediately follows page S-8. The Exhibits include the management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601(a)(10)(iii) of Regulation S-K. (b) Reports on Form 8-K. There were no reports filed on Form 8-K during the fourth quarter of 1997. 20 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The Navigators Group, Inc. (Registrant) Dated: March 27, 1998 By:/s/ BRADLEY D. WILEY -------------- -------------------- Bradley D. Wiley Senior Vice President, CFO and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ TERENCE N. DEEKS Chairman, President and CEO March 27, 1998 - ----------------------------------- (Principal Executive Officer) Terence N. Deeks /s/ BRADLEY D. WILEY Senior Vice President, CFO March 27, 1998 - ----------------------------------- and Secretary Bradley D. Wiley (Principal Financial Officer) /s/ SALVATORE A. MARGARELLA Vice President & Treasurer March 27, 1998 - ----------------------------------- (Principal Accounting Officer) Salvatore A. Margarella /s/ ROBERT M. DEMICHELE Director March 27, 1998 - ----------------------------------- Robert M. DeMichele /s/ LEANDRO S. GALBAN, JR. Director March 27, 1998 - ----------------------------------- Leandro S. Galban, Jr. /s/ JOHN F. KNIGHT Director March 27, 1998 - ----------------------------------- John F. Knight /s/ MARC M. TRACT Director March 27, 1998 - ----------------------------------- Marc M. Tract /s/ WILLIAM D. WARREN Director March 27, 1998 - ----------------------------------- William D. Warren /s/ ROBERT F. WRIGHT Director March 27, 1998 - ----------------------------------- Robert F. Wright
21 23 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Independent Auditors' Report ................................................................................... F-2 Consolidated Balance Sheets at December 31, 1997 and 1996 ...................................................... F-3 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 1997 ............................................................................... F-4 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 1997 ................................................................ F-5 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1997 .................................................................... F-6 Notes to Consolidated Financial Statements ..................................................................... F-7 SCHEDULES: Schedule I Summary of Consolidated Investments -- other than investments in related parties ...................................................... S-1 Schedule II Condensed Financial Information of Registrant ...................................... S-2 Schedule III Supplementary Insurance Information ................................................. S-5 Schedule IV Reinsurance ......................................................................... S-6 Schedule V Valuation and Qualifying Accounts ................................................... S-7 Schedule VI Supplementary Insurance Information Concerning Property/Casualty Insurance Operations .............................................. S-8
F-1 24 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders The Navigators Group, Inc. We have audited the consolidated financial statements of The Navigators Group, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Navigators Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP New York, New York March 16, 1998 F-2 25 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
DECEMBER 31, ------------------------- 1997 1996 --------- -------- ASSETS Investments and cash: Fixed maturities, available-for-sale, at fair value (amortized cost: 1997, $218,418; 1996, $210,042) .......................... $ 226,834 $215,072 Equity securities, available-for-sale, at fair value (cost: 1997, $4,557; 1996, $7,538) ............................................................. 6,132 10,281 Short-term investments, at cost which approximates fair value ............... 22,579 11,826 Cash ........................................................................ 1,251 1,460 Other investments ........................................................... 1,776 2,081 --------- -------- Total investments and cash ........................................... 258,572 240,720 --------- -------- Premiums in course of collection .............................................. 45,847 35,108 Commissions receivable ........................................................ 6,434 6,782 Accrued investment income ..................................................... 3,121 3,302 Prepaid reinsurance premiums .................................................. 20,405 11,540 Reinsurance receivable on paid and unpaid losses and loss adjustment expenses . 147,104 143,345 Federal income tax recoverable ................................................ 164 33 Net deferred Federal and foreign income tax benefit ........................... 7,994 9,517 Deferred policy acquisition costs ............................................. 5,403 3,658 Other assets .................................................................. 6,163 3,090 --------- -------- Total assets ......................................................... $ 501,207 $457,095 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses ............................ $ 278,432 $269,601 Unearned premium ............................................................ 48,659 33,917 Reinsurance balances payable ................................................ 16,539 11,581 Notes payable to banks ...................................................... 20,000 17,000 Deferred state and local income tax ......................................... 1,184 1,119 Note payable to stockholder ................................................. 942 942 Accounts payable and other liabilities ...................................... 4,209 7,393 --------- -------- Total liabilities .................................................... 369,965 341,553 --------- -------- Commitments and contingencies ................................................. -- -- Stockholders' equity: Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued ... -- -- Common stock, $.10 par value, authorized 10,000,000 shares, issued and outstanding 8,368,167 in 1997 and 8,237,900 in 1996 ............ 837 824 Additional paid-in capital .................................................. 38,119 36,202 Net unrealized gains on securities available-for-sale (net of tax of $3,497 in 1997 and $2,643 in 1996) ........................................ 6,494 5,131 Foreign currency translation adjustment, net of tax ........................ (61) 78 Retained earnings ........................................................... 85,853 73,307 --------- -------- Total stockholders' equity ........................................... 131,242 115,542 --------- -------- Total liabilities and stockholders' equity ....................... $ 501,207 $457,095 ========= ========
See accompanying notes to consolidated financial statements. F-3 26 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except net income per share)
YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 -------- --------- -------- Revenues: Net earned premium ............................. $ 85,002 $ 78,731 $ 87,908 Commission income .............................. 5,083 8,798 10,658 Net investment income .......................... 14,435 13,614 14,143 Net realized capital gains ..................... 2,827 503 291 Other income ................................... 870 1,142 714 -------- --------- -------- Total revenues .......................... 108,217 102,788 113,714 -------- --------- -------- Operating expenses: Net losses and loss adjustment expenses incurred 52,620 48,977 61,053 Commission expense ............................. 14,938 12,171 12,228 Other operating expenses ....................... 22,231 20,417 22,534 Interest expense ............................... 1,244 1,737 2,336 -------- --------- -------- Total operating expenses ................ 91,033 83,302 98,151 -------- --------- -------- Equity income in affiliated company, net of tax .. -- 1,388 -- Income before income tax ......................... 17,184 20,874 15,563 Income tax expense (benefit): Current ...................................... 3,879 4,280 2,847 Deferred ..................................... 759 (158) 134 -------- --------- -------- Total income tax expense ................ 4,638 4,122 2,981 -------- --------- -------- Net income ..................................... $ 12,546 $ 16,752 $ 12,582 ======== ========= ======== Net income per common share: Basic ......................................... $ 1.51 $ 2.04 $ 1.54 Diluted ....................................... $ 1.50 $ 2.02 $ 1.53 Average common shares outstanding: Basic ......................................... 8,296 8,197 8,154 Diluted ....................................... 8,385 8,286 8,213
See accompanying notes to consolidated financial statements. F-4 27 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
YEAR ENDED DECEMBER 31, ------------------------------------------ 1997 1996 1995 --------- --------- -------- Preferred stock Balance at beginning and end of year ... $ -- $ -- $ -- ========= ========= ======== Common stock Balance at beginning of year ........... $ 824 $ 817 $ 815 Issuance of common stock during the year 13 7 2 --------- --------- -------- Balance at end of year ................. $ 837 $ 824 $ 817 ========= ========= ======== Additional paid-in capital Balance at beginning of year ........... $ 36,202 $ 35,321 $ 34,984 Issuance of common stock during the year 1,917 881 337 --------- --------- -------- Balance at end of year ................. $ 38,119 $ 36,202 $ 35,321 ========= ========= ======== Unrealized gains (losses) on available-for-sale securities Balance at beginning of year ........... $ 5,131 $ 6,273 $ (2,353) Change in unrealized gains (losses) .... 1,363 (1,142) 8,626 --------- --------- -------- Balance at end of year ................. $ 6,494 $ 5,131 $ 6,273 ========= ========= ======== Foreign currency translation adjustment Balance at beginning of year ........... $ 78 $ 110 $ 105 Change in foreign translation .......... (139) (32) 5 --------- --------- -------- Balance at end of year ................. $ (61) $ 78 $ 110 ========= ========= ======== Retained earnings Balance at beginning of year ........... $ 73,307 $ 56,555 $ 43,973 Net income ............................. 12,546 16,752 12,582 --------- --------- -------- Balance at end of year ................. $ 85,853 $ 73,307 $ 56,555 ========= ========= ======== Total stockholders' equity at end of year ... $ 131,242 $ 115,542 $ 99,076 ========= ========= ========
See accompanying notes to consolidated financial statements. F-5 28 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 -------- -------- --------- Operating activities: Net income .......................................... $ 12,546 $ 16,752 $ 12,582 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization ....................... 526 593 713 Reinsurance receivable on paid and unpaid losses and loss adjustment expenses .............. (3,759) 4,012 52,532 Reserve for losses and loss adjustment expenses ......................................... 8,831 (4,253) (41,044) Prepaid reinsurance premiums ...................... (8,865) (1,726) 2,411 Unearned premium .................................. 14,743 7,163 (8,967) Premiums in course of collection .................. (10,738) (17,137) 6,637 Commissions receivable ............................ 348 (734) (921) Deferred policy acquisition costs ................. (1,746) (1,134) 387 Accrued investment income ......................... 181 47 (400) Reinsurance balances payable ...................... 4,958 5,169 (4,590) Federal income tax ................................ (131) (1,276) 7,650 Net deferred Federal and foreign income tax ....... 683 (56) 98 Net realized capital (gains) ...................... (2,827) (503) (291) Other ............................................. (2,253) 348 (179) -------- -------- --------- Net cash provided by operating activities ....... 12,497 7,265 26,618 -------- -------- --------- Investing activities: Fixed maturities, available-for-sale Redemptions and maturities ........................ 9,745 14,683 9,513 Sales ............................................. 75,368 35,273 67,196 Purchases ......................................... (93,679) (57,212) (101,295) Equity securities, available-for-sale Sales ............................................. 9,624 2,340 1,531 Purchases ......................................... (4,017) (3,891) (2,229) Payable for securities purchased .................... (2,815) 1,268 386 Net sales (purchases) of short-term investments ..... (10,757) (4,533) 12,353 Other investments ................................... (132) 820 -- Purchase of property and equipment .................. (974) (273) (210) -------- -------- --------- Net cash (used in) investing activities ........... (17,637) (11,525) (12,755) -------- -------- --------- Financing activities: Proceeds from bank loan ............................. 3,000 -- 2,000 Repayment of bank loan .............................. -- (2,500) (8,000) Proceeds from exercise of stock options ............. 1,931 887 340 Notes payable to stockholders, net .................. -- -- (1,600) -------- -------- --------- Net cash (used in) provided by financing activities 4,931 (1,613) (7,260) -------- -------- --------- Increase (decrease) in cash ............................. (209) (5,873) 6,603 Cash at beginning of year ............................... 1,460 7,333 730 -------- -------- --------- Cash at end of year ..................................... $ 1,251 $ 1,460 $ 7,333 ======== ======== ========= Federal income tax paid ................................. $ 3,200 $ 4,928 $ 1,000 State and local income tax paid ......................... 880 307 894 Interest paid ........................................... 1,222 2,069 1,889
See accompanying notes to consolidated financial statements. F-6 29 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements consisting of the accounts of The Navigators Group, Inc., a Delaware holding company, and its thirteen wholly owned subsidiaries, are prepared on the basis of generally accepted accounting principles. Unless the context otherwise requires, the term "Company" as used herein means The Navigators Group, Inc. and its subsidiaries. All significant intercompany transactions and balances are eliminated. Certain amounts for prior years have been reclassified to conform to the current year's presentation. The Company's two insurance subsidiaries are Navigators Insurance Company ("Navigators") and NIC Insurance Company ("NIC"). Navigators is the Company's largest insurance subsidiary and has been active since 1983. It specializes principally in underwriting marine, aviation and onshore energy insurance. As of June 1997, the Company is no longer writing inland marine insurance (except for onshore energy insurance classified as inland marine) and reduced its program business in the second half of 1997 in order to focus on its core businesses. NIC is a wholly owned subsidiary of Navigators, was licensed in 1989 and began operations in 1990. It underwrites a small book of surplus lines insurance in certain states and, pursuant to an intercompany reinsurance pooling agreement, cedes 100% of its gross direct writings from this business to Navigators in exchange for assuming 10% of Navigators net business. Navigators and NIC are collectively referred to herein as the "Insurance Companies". Navigators Corporate Underwriters Limited ("NCUL"), a subsidiary formed in the fourth quarter of 1996, is admitted to underwrite marine and related lines of business at Lloyd's of London as a corporate member with limited liability. Seven 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., Somerset of Georgia, Inc., Somerset Marine (UK) Limited ("Somerset UK") and Somerset Asia Pacific Pty. Limited ("Somerset Asia") (collectively, the "Somerset Companies"). The Somerset Companies produce, manage and underwrite insurance and reinsurance for Navigators, NIC and nine unaffiliated insurance companies. Somerset Asia was formed in the third quarter of 1996 and operates from an office in Sydney, Australia. This office concentrates on marine, onshore energy, engineering and construction business primarily in Indonesia, Thailand, Malaysia, Taiwan, China and Vietnam. Somerset Asia began writing business in early 1997 and is supported by Somerset Services Pte. Limited which provides loss prevention consultancy to Somerset Asia's assureds and producers. Somerset Services Pte. Limited, a wholly owned subsidiary of Somerset Asia, was formed in September 1997 and is located in Singapore. Somerset UK, formed in the fourth quarter of 1996, concentrates on marine, aviation, energy, engineering and construction business. Navigators was authorized to operate a United Kingdom ("UK") branch on October 22, 1997. Somerset UK began producing business in the fourth quarter of 1997 for the UK Branch of Navigators. Navigators Holdings (UK) Limited was formed on September 15, 1997 as a holding company for the Company's UK subsidiaries. F-7 30 During 1997, the Company merged four subsidiaries, Somerset Re Management, Inc., Navigators Management Corporation, Somerset Casualty Agency, Inc. and Somerset Property, Inc. into Somerset Marine, Inc. The Company also owns Somerset Marine Aviation Property Managers, Inc., an inactive subsidiary. The Company's revenue is primarily comprised of premiums, commissions and investment income. The Insurance Companies derive the majority of their business from the Somerset Companies through either business written specifically for the Insurance Companies or through Navigators direct participation in, or reinsuring certain members of, insurance pools managed by the Somerset Companies. The insurance business and operations of the Insurance Companies are managed by Somerset Marine, Inc. The Somerset Companies specialize principally in writing marine, aviation and onshore energy insurance. They underwrite marine business through a syndicate of insurance companies, Navigators having the largest participation in the syndicate. The Somerset Companies derive their revenue from commissions, investment income, service fees and cost reimbursement arrangements from their parent company, Navigators, NIC 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 syndicate. 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. In January 1998, the Company acquired 100% of Mander, Thomas & Cooper (Underwriting Agencies) Limited, a Lloyd's of London marine underwriting managing agency and its wholly owned subsidiary, Millennium Underwriting Limited, a Lloyd's corporate member with limited liability. INVESTMENTS Investments are classified into one of three categories. Held-to-maturity securities are debt securities that the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Trading securities are debt and equity securities that are purchased and held principally for the purpose of selling them in the near term and are reported at fair value, with unrealized gains and losses included in earnings. Available-for-sale securities are debt and equity securities not classified as either held-to-maturity securities or trading securities and are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. As of December 31, 1997 and 1996, all fixed maturity and equity securities held by the Company were classified as available-for-sale. Premiums and discounts on fixed maturity securities are amortized into interest income over the life of the security under the interest method. Short-term investments are carried at cost, which approximates fair value. Short-term investments mature within one year from the purchase date. Realized gains and losses on sales of investments are determined on the basis of the specific identification method. When a decline in fair value of investments is considered to be "other than temporary," the investments are written down to net realizable value. The write down is considered a realized loss in the consolidated statement of income. F-8 31 PREMIUM REVENUES Insurance and reinsurance premiums are recognized as income by the Insurance Companies during the terms of the related policies based on reports received from the Somerset Companies and ceding reinsurers. Unearned premium reserves are established to cover the unexpired portion of premiums written. COMMISSION INCOME Commission income, based on estimated gross premiums earned from non-affiliated insurers, is recognized over the terms of the related policies. Contingent commission income, based on estimated net underwriting results from non-affiliated insurers, is recognized when ascertained and is included within commission income in the accompanying consolidated financial statements. Changes in prior estimates of commission income and contingent commission income are recorded when such changes become known. DEFERRED POLICY ACQUISITION COSTS Costs of acquiring business which vary with and are directly related to the production of business are deferred and amortized ratably over the period that the related premiums are recognized as earned. Such costs primarily include commission expense, certain management fees and premium taxes. The method of computing deferred policy acquisition costs limits the deferral to their estimated net realizable value based on the related unearned premiums and takes into account anticipated losses and loss adjustment expenses based on historical and current experience and anticipated investment income. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES Unpaid losses and loss adjustment expenses are determined on an individual basis for reported claims for insureds, from reports received from ceding insurers for insurance assumed from such insurers and on estimates based on Company and industry experience for incurred but not reported claims and loss adjustment expenses. The provision for unpaid losses and loss adjustment expenses has been established to cover the estimated unpaid cost of claims incurred. Management believes that the unpaid losses and loss adjustment expenses are adequate to cover the ultimate unpaid claims incurred, however, such provisions are necessarily based on estimates and, accordingly, no representation is made that the ultimate liability will not exceed such amounts. NET INCOME PER SHARE The Company adopted the Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, on December 31, 1997. SFAS No. 128 supersedes APB Opinion No. 15, Earnings per Share, and replaces primary earnings per share and fully diluted earnings per share with basic earnings per share and diluted earnings per share, respectively. The Company has restated earnings per share for all prior periods presented to comply with the provisions of SFAS No. 128. REINSURANCE CEDED Reinsurance ceded which transfers risk, premiums, commissions and recoveries on losses incurred is reflected as reductions of the respective income and expense accounts. Unearned premiums ceded and estimates of amounts recoverable from reinsurers on paid and unpaid losses are reflected as assets. F-9 32 FEDERAL INCOME TAXES The Company files a consolidated Federal income tax return with its U.S. subsidiaries. The Company applies the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. FUTURE APPLICATION OF ACCOUNTING STANDARDS SFAS No. 130, Reporting Comprehensive Income, was issued in June 1997 and establishes standards for the reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income encompasses all changes in shareholders' 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. As this new standard only requires additional information in a financial statement, it will not affect the Company's financial position or results of operations. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. The Company is currently evaluating the presentation alternatives permitted by the statement. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, was issued in June 1997 and establishes standards for the reporting of information relating to operating segments in annual financial statements, as well as disclosure of selected information in interim financial reports. This statement supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, which requires reporting segment information by industry and geographic area (industry approach). Under SFAS No. 131, operating segments are defined as components of a company for which separate financial information is available and is used by management to allocate resources and assess performance (management approach). This statement is effective for year-end 1998 financial statements. Interim financial information will be required beginning in 1999 (with comparative 1998 information). In December 1997, the American Institute of Certified Public Accountants issued Statement of Position No. 97-3, Accounting by Insurance and Other Enterprises for Insurance Related Assessments, ("SOP 97-3"). SOP 97-3 establishes standards for accounting for guaranty-fund and certain other insurance related assessments. SOP 97-3 is effective for fiscal years beginning after December 15, 1998. The adoption of this statement is not expected to have a material effect on the Company's results of operations or financial condition. F-10 33 NOTE 2. INVESTMENTS The Company's invested assets at December 31, 1997 and 1996 were as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1997 COST OR COST GAINS (LOSSES) VALUE - ----------------- ------------ ----- -------- ----- (In thousands) Fixed maturities: U.S. Government, government agencies and authorities ....... $ 9,794 $ 333 $(10) $ 10,117 States, municipalities and political subdivisions ................... 126,154 6,377 (57) 132,474 Mortgage and asset backed .......... 70,166 1,461 (14) 71,613 Corporate bonds .................... 11,279 261 -- 11,540 Redeemable preferred stock ......... 1,025 65 -- 1,090 -------- ------ ---- -------- Total fixed maturities ........ $218,418 $8,497 $(81) $226,834 ======== ====== ==== ======== Equity securities - common stocks ...... $ 4,557 $1,660 $(85) $ 6,132 ======== ====== ==== ========
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1996 COST OR COST GAINS (LOSSES) VALUE - ----------------- ------------ ----- -------- ----- (In thousands) Fixed maturities: U.S. Government, government agencies and authorities ......... $ 9,715 $ 97 $ (74) $ 9,738 States, municipalities and political subdivisions .................... 172,303 4,813 (185) 176,931 Mortgage and asset backed ............ 25,599 444 (121) 25,922 Corporate bonds ...................... 1,143 51 (1) 1,193 Redeemable preferred stock ........... 1,282 7 (1) 1,288 -------- ------ ----- -------- Total fixed maturities ...... $210,042 $5,412 $(382) $215,072 ======== ====== ===== ======== Equity securities - common stocks ....... $ 7,538 $2,771 $ (28) $ 10,281 ======== ====== ===== ========
The Company's fixed maturity securities by year of maturity were as follows:
PERIOD FROM PERCENT PERCENT DECEMBER 31, 1997 FAIR OF AMORTIZED OF TO MATURITY VALUE PORTFOLIO COST PORTFOLIO ----------- ----- --------- ---- --------- (Dollars in thousands) One year or less ................... $ 7,214 3.2% $ 7,183 3.3% One year to five years ............. 58,452 25.8 56,382 25.8 Five years to ten years ............ 66,231 29.2 62,615 28.7 More than ten years ................ 23,324 10.2 22,072 10.1 Mortgage and asset backed securities 71,613 31.6 70,166 32.1 -------- ----- -------- ----- Total ...................... $226,834 100.0% $218,418 100.0% ======== ===== ======== =====
F-11 34 Due to the periodic repayment of principal, the mortgage and asset backed securities are estimated to have an effective maturity of approximately six years. Net investment income of the Company was derived from the following sources:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 -------- -------- -------- (In thousands) Fixed maturities ..... $ 13,248 $ 12,481 $ 12,012 Equity securities .... 292 266 224 Short-term investments 1,613 1,529 2,567 -------- -------- -------- 15,153 14,276 14,803 Investment expenses .. (718) (662) (660) -------- -------- -------- Net investment income $ 14,435 $ 13,614 $ 14,143 ======== ======== ========
The Company's realized capital gains and losses were as follows:
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 ------- ----- ----- (In thousands) Fixed maturities: Gains .............................. $ 786 $ 479 $ 966 (Losses) ........................... (269) (375) (968) ------- ----- ----- 517 104 (2) ------- ----- ----- Equity securities and other investments: Gains .............................. 2,868 456 293 (Losses) ........................... (558) (57) -- ------- ----- ----- 2,310 399 293 ------- ----- ----- Net realized capital gains ............. $ 2,827 $ 503 $ 291 ======= ===== =====
At December 31, 1997 and 1996, fixed maturities with amortized values of $6,775,000 and $6,480,000, respectively, were on deposit with various State Insurance Departments. In addition, at December 31, 1997, $132,000 was on deposit with the Bank of England for Navigators' UK Branch. Also, at December 31, 1997 and 1996, fixed maturities with amortized values of $851,000 and $859,000, respectively, were pledged as security under a reinsurance treaty. At December 31, 1997, the Company did not have a material concentration of financial instruments in a single issuer. Other investments consist of the Company's interest in Riverside Underwriters Plc, a U.K. Corporation (formerly known as Navigators Underwriters Plc) ("Riverside"). The Company's original ownership interest was 21% at December 31, 1995 which increased to 27% as of January 1, 1996 and decreased to approximately 8% at December 31, 1996. Riverside owns 100% of Riverside Corporate Underwriters Limited, a U.K. corporation, which is admitted to underwrite at Lloyd's of London as a corporate name with limited liability. The transaction to reduce the Company's ownership in Riverside did not produce a material capital gain or loss. The Company remains entitled to receive from Riverside an amount equal to the aggregate dividends that it would have received if it had continued to hold its original investment to the extent such dividends are attributable to writings at Lloyd's by Riverside Corporate Underwriters Limited during the 1994, 1995 and 1996 years of account. In connection with the reduction of the Company's investment, it has agreed to cease being manager of Riverside and Riverside Corporate F-12 35 Underwriters Limited, although the Company will remain entitled to profit commissions with respect to the 1994, 1995 and 1996 underwriting years. Prior to December 31, 1996, the investment was carried under the equity method of accounting. At December 31, 1996 and 1997, the investment is recorded at cost due to the reduction in ownership interest. Included in 1996 income was $1,388,000 of equity income, net of tax. Pretax earnings for 1997 of $561,000 are included in other income since the investment was no longer carried under the equity method. The Company records its share of Riverside's earnings from underwriting when sufficient information becomes available to provide reasonable estimates of earned premiums and losses. NOTE 3. NOTES PAYABLE AND LOANS On August 5, 1994, the Company entered into a Credit Agreement with three banks which was amended and restated on November 19, 1996 (the "Amended Credit Agreement"). The Amended Credit Agreement provided for a $20 million revolving credit loan facility and a $30 million letter of credit facility. The revolving credit loan facility bears interest, at the election of the Company, at either the base commercial lending rate of one of the banks or at LIBOR plus 1%. At December 31, 1996, $17 million in loans were outstanding under the revolving credit loan facility at an interest rate of 6.5% and letters of credit with an aggregate face amount of $27.1 million were issued under the letter of credit facility. An amendment dated December 11, 1997, to the Amended Credit Agreement increased the revolving credit loan facility from $20 million to $25 million which reduces each quarter by various amounts (from $500,000 to $2,000,000) until it terminates on December 31, 2003. At December 31, 1997, $20 million in loans were outstanding under the revolving credit loan facility at an interest rate of 6.86% and letters of credit with an aggregate face amount of $26.0 million were issued under the letter of credit facility. The letters of credit are primarily utilized by NCUL as collateral to participate in two Lloyd's syndicates specializing in marine insurance. No letters of credit have been drawn upon. The Amended Credit Agreement is collateralized by shares of common stock of the Company's major subsidiaries. The Amended Credit Agreement contains covenants common to transactions of this type, including restrictions on indebtedness and liens, limitations on mergers and the sale of assets, maintaining certain consolidated total stockholders' equity, statutory surplus, minimum liquidity, loss reserves and other financial ratios. The Company also has a $942,000 note payable to its major stockholder bearing interest at 7%. NOTE 4. FIDUCIARY FUNDS The Somerset Companies maintain fiduciary accounts for the insurance pools they manage. Functions performed by the Somerset Companies include underwriting business, collecting premiums from the insured, paying claims, collecting paid recoverables from reinsurers, paying reinsurance premiums to reinsurers and remitting net account balances to member insurance companies. Funds belonging to the insurance pools are held in a fiduciary capacity and interest income earned on such funds is retained by the Somerset Companies. F-13 36 The fiduciary accounts as of December 31, 1997 and 1996 were as follows:
DECEMBER 31, -------------------------- 1997 1996 ------- -------- (In thousands) Cash and short-term investments ........... $ 2,114 $ 18,857 Premiums receivable ....................... 55,970 95,136 Reinsurance balances receivable ........... 4,644 6,582 ------- -------- Total assets ..................... $62,728 $120,575 ======= ======== Due to insurance companies ................ $62,728 $120,575 ------- -------- Total liabilities ................ $62,728 $120,575 ======= ========
The fiduciary accounts above were not included in the accompanying consolidated balance sheets. NOTE 5. INCOME TAXES The components of current and deferred income tax expense (benefit) were as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ------ ------- ------ (In thousands) Current: Federal .................... $3,328 $ 3,652 $2,294 State and local ............ 551 $ 628 $ 553 ------ ------- ------ Total ................ $3,879 $ 4,280 $2,847 ====== ======= ====== Deferred: Federal and foreign ........ $ 683 $ (57) $ 97 State and local ............ 76 (101) 37 ------ ------- ------ Total ............... $ 759 $ (158) $ 134 ====== ======= ======
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, ---------------------------------------------------------------------- 1997 1996 1995 ---- ---- ---- (Dollars in thousands) Computed expected tax expense ................... $ 6,014 35% $ 7,306 35% $ 5,447 35% Tax-exempt interest .............. (2,538) (15) (2,793) (13) (2,694) (17) Dividends received deduction ...................... (61) -- (59) -- (49) -- State & local income taxes, net of Federal income tax ............. 408 2 347 2 390 2 Valuation allowance .............. 1,108 6 (775) (4) -- -- Other ............................ (293) (1) 96 -- (113) (1) ------- -- ------- -- ------- -- $ 4,638 27% $ 4,122 20% $ 2,981 19% ======= == ======= == ======= ==
F-14 37 The tax effects of temporary differences that give rise to Federal and foreign deferred tax assets and deferred tax liabilities were as follows:
DECEMBER 31, 1997 1996 -------- -------- (In thousands) Deferred tax assets: Loss reserve discount ..................... $ 7,183 $ 6,833 Unearned premium .......................... 1,500 1,521 Alternative minimum tax carryforward ...... 5,106 5,783 Deferred state and local income tax ....... 418 388 Allowance for uncollectible reinsurance ... -- 272 Deferred compensation ..................... 30 500 Loss from foreign operation ............... 1,108 -- Other ..................................... 221 25 -------- -------- Total gross deferred tax assets .............. 15,566 15,322 Less valuation allowance ..................... (1,108) -- -------- -------- Net deferred tax assets ...................... 14,458 15,322 -------- -------- Deferred tax liabilities: Deferred acquisition costs ................ (1,188) (1,244) Unrealized gains on securities ............ (3,497) (2,643) Contingent commission receivable .......... (1,559) (1,810) Other ..................................... (220) (108) -------- -------- Total deferred tax liabilities ............... (6,464) (5,805) -------- -------- Net deferred tax asset ....................... $ 7,994 $ 9,517 ======== ========
In 1997, a tax benefit of $259,000 was credited directly to additional paid-in capital due to the exercise of stock options. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, tax planning strategies and anticipated future taxable income in making this assessment and believes it is more likely than not the Company will realize the benefits of its deductible differences at December 31, 1997, net of any valuation allowance. The establishment of the valuation allowance in the amount of $1,108,000 during the year ended December 31, 1997 is due to the uncertainty associated with the realization of the deferred tax asset for the carryforward of operating losses from the Company's foreign operations. A valuation allowance in the amount of $775,000 established in 1994 due to the uncertainty associated with the realization of a net operating loss carryforward deferred tax asset was taken down in 1996 when the Company utilized the balance of the carryforward. F-15 38 NOTE 6. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES The following table summarizes the activity in the Insurance Companies' reserve for losses and loss adjustment expenses ("LAE") during the three most recent years:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1997 1996 1995 --------- --------- --------- (In thousands) Net reserves for losses and LAE at beginning of year ................................ $ 132,558 $ 138,761 $ 135,377 --------- --------- --------- Provision for losses and LAE for claims occurring in the current year ............. 53,654 51,429 54,030 Increase (decrease) in estimated losses and LAE for claims occurring in prior years .......... (1,034) (2,452) 7,023 --------- --------- --------- Incurred losses and LAE ............................ 52,620 48,977 61,053 --------- --------- --------- Losses and LAE payments for claims occurring during: Current year ................................... (12,921) (15,439) (10,482) Prior years .................................... (32,416) (39,741) (47,187) --------- --------- --------- Losses and LAE payments ............................ (45,337) (55,180) (57,669) --------- --------- --------- Net reserves for losses and LAE at end of year ..... 139,841 132,558 138,761 --------- --------- --------- Reinsurance receivable on unpaid losses and LAE .... 138,591 137,043 135,093 --------- --------- --------- Gross reserves for losses and LAE at end of year ... $ 278,432 $ 269,601 $ 273,854 ========= ========= =========
The development of prior year incurred losses during 1995 was primarily attributable to the loss development from the Northridge Earthquake. On January 17, 1994, an earthquake (the "Northridge Earthquake") occurred in the Northridge area of Los Angeles, California. The Company's net pre-tax loss in 1994 from the Northridge Earthquake totalled $39,265,000. During 1995, 1996 and 1997, the Company incurred additional net pre-tax losses from the Northridge Earthquake of $10,721,000, $0 and $343,000, respectively. There can be no assurance given that additional losses will not be reported or adjustments made to existing reserves. During 1997, 1996 and 1995, the Insurance Companies paid gross losses and LAE of $1,510,000, $2,794,000 and $2,251,000, respectively, resulting in net paid losses and LAE of $723,000, $425,000 and $117,000, respectively, for environmental pollution and asbestos related claims. As of December 31, 1997 and 1996, the Insurance Companies carried gross reserves of $2,622,000 and $5,421,000, respectively, and net reserves of $936,000 and $1,042,000, respectively, for the potential exposure to such claims. For the year ended December 31, 1997 and 1996, open claims with environmental pollution and asbestos exposure amounted to 2,451 and 2,024, respectively. Management believes that its reserves for such claims are adequate because the Insurance Companies' participation in such risks was generally in the higher excess layers and, based on a continuing review of such claims, management believes that a majority of these claims will be unlikely to penetrate such high excess layers of coverage; however, due to the significant assumptions inherent in estimating these exposures, actual liabilities could differ from current estimates. F-16 39 NOTE 7. REINSURANCE The following table summarizes earned premium:
Year Ended December 31, 1997 1996 1995 --------- -------- -------- (In thousands) Direct ............ $ 110,453 $ 86,917 $ 93,497 Assumed ........... 46,053 48,444 64,376 Ceded ............. (71,504) (56,630) (69,965) --------- -------- -------- Net ............... $ 85,002 $ 78,731 $ 87,908 ========= ======== ========
The following table summarizes written premium:
Year Ended December 31, -------------------------------------------------- 1997 1996 1995 --------- -------- -------- (In thousands) Direct ............ $ 119,597 $ 92,261 $ 87,542 Assumed ........... 51,652 50,263 61,365 Ceded ............. (80,369) (58,356) (67,639) --------- -------- -------- Net ............... $ 90,880 $ 84,168 $ 81,268 ========= ======== ========
Ceded losses and loss adjustment expenses incurred were $57,340,000, $61,964,000 and $43,551,000 in 1997, 1996, and 1995, respectively. A contingent liability exists with respect to reinsurance ceded, since the Insurance Companies would be required to pay losses in the event the assuming reinsurers are unable to meet their obligations under their reinsurance agreements with the Insurance Companies. At December 31, 1997, the Company had reinsurance receivables from the following four reinsurers which were in excess of 5% of the Insurance Companies' statutory surplus: Underwriters at Lloyds, $17,740,000; SCOR Reinsurance Company, $10,177,000; Chiyoda Fire and Marine Insurance, $7,652,000; Government Insurance Office of New South Wales, $6,856,000. The Company's reinsurance security committee continually monitors the financial strength of its reinsurers and the related reinsurance receivables. An allowance is established to the extent that it is determined that the ultimate amount collectible is less than the amount recorded as a receivable. At December 31, 1997 and 1996, there was an allowance for uncollectible reinsurance of $800,000. The expense recorded for uncollectible reinsurance was $286,000, $0 and $688,000 for 1997, 1996 and 1995, respectively. NOTE 8. FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of the Company's financial instruments:
DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------------- ------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- --------- -------- (In thousands) Financial assets: Fixed maturities ............. $226,834 $226,834 $215,072 $215,072 Equity securities ............ 6,132 6,132 10,281 10,281 Short-term investments ....... 22,579 22,579 11,826 11,826 Commissions receivable ....... 6,434 6,232 6,782 6,491 Financial liabilities: Loans payable to banks ...... 20,000 20,000 17,000 17,000
F-17 40 The carrying amounts shown in the table are included in the consolidated balance sheets under the indicated captions. The fair values of fixed maturity and equity securities are based on quoted market prices at the reporting date for those or similar investments. Short-term investments are carried at cost, which approximates fair value. The carrying amounts of premium receivables approximate fair value because of the short maturity of those instruments. Included within commissions receivable are contingent commissions receivable which are billed by the Somerset Companies to participants of the insurance pools two calendar years subsequent to a given underwriting year and, as a result, fair value is less than carrying value. Fair value of contingent commissions receivable is estimated based on the present value of anticipated cash flows based on interest rates of debt instruments with similar maturities. The fair value of the Company's loans payable to banks approximates carrying value since the interest rate charged is computed using market rates. NOTE 9. STOCK OPTION PLANS The Company has an Incentive Stock Option Plan and a Non Qualified Stock Option Plan which allow for the grant to key employees of the Company, its subsidiaries and affiliates, options to purchase an aggregate of 900,000 shares of its common stock. All options are granted at exercise prices no less than 90% of the fair market value of the common stock on the date of the grant. No amounts are charged to expense upon the granting of options under the plans. Options vest equally over a four year period and have a maximum term of ten years. Stock options outstanding at December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995 ------------------------ ------------------------ ------------------------- AVERAGE AVERAGE AVERAGE NO. OF EXERCISE NO. OF EXERCISE NO. OF EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE -------- --------- ------- --------- ------- --------- Options outstanding at beginning of year .. 624,001 $ 18.73 783,800 $ 18.68 703,625 $ 21.13 Granted .............. 25,000 $ 17.00 -- -- 222,300 $ 14.75 Exercised ............ (126,325) $ 12.67 (65,499) $ 13.54 (21,000) $ 16.17 Canceled ............. (44,751) $ 28.12 (94,300) $ 22.15 (121,125) $ 26.16 -------- ------- ------- Options outstanding at end of year ........ 477,925 $ 19.37 624,001 $ 18.73 783,800 $ 18.68 ======== ======= ======= Number of shares exercisable ........ 365,650 $ 20.75 402,126 $ 20.12 391,400 $ 19.01
The Company has a Stock Appreciation Rights Plan which allows for the grant of up to 300,000 stock appreciation rights at prices of no less than 90% of the fair market value of the common stock. The Company granted 25,500, 166,000 and 111,500 stock appreciation rights in 1997, 1996 and 1995, respectively. The amounts charged to expense in 1997, 1996 and 1995 were $147,000, $46,000 and $0, respectively. The Company accounts for stock options in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, which requires compensation expense to be recognized only if the fair value of the underlying stock at the grant date exceeds the exercise price of the option. Accordingly, no compensation cost has been recognized for stock options. F-18 41 Had compensation cost for the Company's stock options been determined consistent with SFAS No. 123, Accounting for Stock Based Compensation, the Company's net income and income per share would have been reduced to the pro forma amounts indicated in the following table:
1997 1996 1995 ---- ---- ---- Net income As Reported $12,546 $16,752 $12,582 Pro Forma $12,295 $16,529 $12,359 Basic income per share As Reported $ 1.51 $ 2.04 $ 1.54 Pro Forma $ 1.48 $ 2.02 $ 1.51 Diluted income per share As Reported $ 1.50 $ 2.02 $ 1.53 Pro Forma $ 1.47 $ 1.99 $ 1.50
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for the options granted: no dividend yield; expected volatility of 31.8% and 35.3% in 1997 and 1995, respectively; risk free interest rate of 6.0% for 1997 and 1995; and expected life of 6 years for 1997 and 5.75 years for 1995. The weighted average fair value of options granted was $6.30 and $7.99 in 1997 and 1995, respectively. The following table summarizes information about options outstanding at December 31, 1997:
OUTSTANDING AVERAGE REMAINING AVERAGE EXERCISABLE AVERAGE PRICE RANGE SHARES CONTRACT LIFE EXERCISE PRICE SHARES EXERCISE PRICE - ----------- ------ ------------- -------------- ------ -------------- $12-15 251,675 7.1 $14.21 158,150 $14.07 16-19 99,250 4.5 17.68 80,500 17.84 28-34 127,000 5.2 30.91 127,000 30.91
NOTE 10. EMPLOYEE BENEFITS The Company sponsors a defined contribution plan covering substantially all employees. Contributions are equal to 15% of each eligible employee's gross pay (plus bonus of up to $2,500) up to the amount permitted by certain Federal regulations. Employees vest at 20% per year beginning at the end of the second year and are therefore fully vested after six years of service. Plan expense, included within operating expenses, amounted to $686,000, $839,000 and $991,000 in 1997, 1996 and 1995, respectively. The Company established a 401(k) Plan effective January 1, 1995 for all eligible employees. Each eligible employee can contribute up to 8% of their salary limited by certain Federal regulations. The Company does not match any of the employee contributions. NOTE 11. DIVIDENDS FROM SUBSIDIARIES AND STATUTORY FINANCIAL INFORMATION Navigators may pay dividends to the Company out of its statutory earned surplus pursuant to statutory restrictions imposed under the New York Insurance Law. The maximum amount available for the payment of dividends by Navigators during 1998 without prior regulatory approval is $10,996,000. Navigators paid no dividends to the Company in 1997, 1996 or 1995. Navigators UK Branch was capitalized at $10 million in October 1997 and is required to maintain certain capital requirements under UK regulations. F-19 42 The Insurance Companies' statutory net income as filed with the regulatory authorities for 1997, 1996 and 1995 was $15,714,000, $13,308,000 and $8,524,000, respectively. The statutory surplus as filed with the regulatory authorities was $109,957,000 and $96,075,000 at December 31, 1997 and 1996, respectively. The Insurance Companies, domiciled in New York State, prepare and file their statutory financial statements in accordance with accounting practices prescribed or permitted by the New York State Insurance Department. Prescribed statutory accounting practices ("SAP") include a variety of publications of the National Association of Insurance Commissioners, as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The Insurance Companies do not apply any permitted accounting practices. The significant differences between SAP and generally accepted accounting principles (GAAP) are that under SAP: (1) acquisition and commission costs are expensed when incurred while under GAAP these costs are deferred and amortized as the related premium is earned; (2) bonds are stated at amortized cost, while under GAAP bonds are held in an available-for-sale account and reported at fair value, with unrealized gains and losses recognized as a separate component of stockholder's equity; (3) federal income taxes are recorded when payable while under GAAP deferred taxes are provided to reflect temporary differences between the carrying values and tax bases 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 State Insurance Department (the "Department") conducts detailed examinations of the books, records and accounts of New York insurance companies every three to five years. The Insurance Companies were examined by the Department for the years 1991 through 1995. Based upon discussions with the Department, the Company does not expect any material adjustments to its previously filed statutory financial statements. NOTE 12. LEASES Future minimum annual rental commitments at December 31, 1997, under various noncancellable operating leases for the Company's office facilities, which expire at various dates through July 31, 2003, are as follows:
(In thousands) YEAR ENDED DECEMBER 31, 1998 ................................ $1,424 1999 ................................ 1,339 2000 ................................ 769 2001 ................................ 378 2002 and after ...................... 291 ------ Total ............................... $4,201 ======
The Company is also liable for additional payments to the landlords for certain annual cost increases. Rent expense for the years ended December 31, 1997, 1996 and 1995 was $1,522,000, $1,577,000, and $1,437,000, respectively. F-20 43 NOTE 13. EARNINGS PER COMMON SHARE Following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for the years ended December 31, 1997, 1996 and 1995:
1997 --------------------------------------------------------- Average Shares Income Income Outstanding Per Share ----------- ----------- --------- Basic EPS: Income available to common stockholders $12,546,000 8,296,429 $1.51 Effect of Dilutive Securities: Stock options 88,091 Diluted EPS: Income available to common stockholders $12,546,000 8,384,520 $1.50
1996 --------------------------------------------------------- Average Shares Income Income Outstanding Per Share ----------- ----------- --------- Basic EPS: Income available to common stockholders $16,752,000 8,196,994 $2.04 Effect of Dilutive Securities: Stock options 88,964 Diluted EPS: Income available to common stockholders $16,752,000 8,285,958 $2.02
1995 --------------------------------------------------------- Average Shares Income Income Outstanding Per Share ----------- ----------- --------- Basic EPS: Income available to common stockholders $12,582,000 8,154,214 $1.54 Effect of Dilutive Securities: Stock options 58,721 Diluted EPS: Income available to common stockholders $12,582,000 8,212,935 $1.53
Certain outstanding options to purchase common shares were not included in the respective computations of diluted earnings per common share because the options' exercise prices were greater than the average market price of the common shares. For each of the years presented these outstanding options consisted of the following: during 1997, 173,125 shares at an average price of $27.65 expiring in years 2000 to 2003; during 1996, 164,250 shares at an average price of $30.98 expiring in years 2001 to 2003; and during 1995, 201,750 shares at an average price of $30.71 expiring in years 2001 to 2003. NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED) The results of operations for the quarterly periods during 1997 and 1996 were as follows. Due to changes in the number of shares outstanding and to rounding, quarterly per share amounts may not add to the total for the year. F-21 44
THREE MONTH PERIOD ENDED -------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1997 1997 1997 1997 ---- ---- ---- ---- (In thousands, except net income per share) Total revenues ..................... $23,937 $28,122 $28,085 $28,074 Income before income tax ........... $ 4,313 $ 4,336 $ 4,782 $ 3,753 Net income ......................... $ 3,235 $ 3,156 $ 3,463 $ 2,692 Per share data: Net income per share - Basic ....... $ 0.39 $ 0.38 $ 0.42 $ 0.32 Net income per share - Diluted ..... $ 0.39 $ 0.38 $ 0.41 $ 0.32
THREE MONTH PERIOD ENDED ------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1996 1996 1996 1996 (In thousands, except net income per share) Total revenues ..................... $25,197 $24,386 $25,794 $27,411 Income before income tax ........... $ 5,436 $ 5,121 $ 6,321 $ 3,996 Net income ......................... $ 4,212 $ 3,797 $ 5,252 $ 3,491 Per share data: Net income per share - Basic ...... $ 0.52 $ 0.46 $ 0.64 $ 0.42 Net income per share - Diluted .... $ 0.51 $ 0.46 $ 0.63 $ 0.42
NOTE 15. SUBSEQUENT EVENT In January 1998, the Company purchased 100% of Mander, Thomas & Cooper (Underwriting Agencies) Limited, a Lloyd's of London marine underwriting managing agency and its wholly owned subsidiary, Millennium Underwriting Limited. The purchase price consists of initial cash payments plus future performance contingent consideration. The total purchase price is not material to the Company's total assets. F-22 45 SCHEDULE I THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES SUMMARY OF CONSOLIDATED INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1997
Amount at which shown in the Amortized consolidated Type of Investment Cost or Cost Fair value balance sheet - ------------------ ------------ ---------- ------------- Fixed maturities: Bonds: United States Government, government agencies and authorities .......... $ 9,794 $ 10,117 $ 10,117 States, municipalities and political subdivisions 126,154 132,474 132,474 Mortgage and asset backed .. 70,166 71,613 71,613 Corporate bonds ............ 11,279 11,540 11,540 Redeemable preferred stock . 1,025 1,090 1,090 -------- -------- -------- Total fixed maturities 218,418 226,834 226,834 -------- -------- -------- Equity securities: Common stocks: Industrial, miscellaneous and all other ........... 4,557 6,132 6,132 -------- -------- -------- Short-term investments ......... 22,579 xxxx 22,579 -------- -------- -------- Other investments .............. 1,776 xxxx 1,776 -------- -------- -------- Total investments ..... $247,330 $ xxxx $257,321 ======== ======== ========
S-1 46 SCHEDULE II THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT THE NAVIGATORS GROUP, INC. BALANCE SHEETS (Parent Company) (In thousands, except share data)
DECEMBER 31, ------------------------- A S S E T S 1997 1996 --------- -------- Cash ............................................... $ -- $ 103 Investment in wholly owned subsidiaries, at equity ....................................... 141,826 126,630 Short-term investments ............................. -- 933 Other assets ....................................... 10,163 6,529 --------- -------- Total assets ......................... $ 151,989 $134,195 ========= ======== L I A B I L I T I E S Notes payable to banks ............................. $ 20,000 $ 17,000 Accounts payable and other liabilities ............. 747 1,653 --------- -------- Total liabilities ......................... 20,747 18,653 --------- -------- Commitments and contingencies ...................... -- -- S T O C K H O L D E R S ' E Q U I T Y Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued ................... -- -- Common stock, $.10 par value, authorized 10,000,000 shares, issued and outstanding 8,368,167 in 1997 and 8,237,900 in 1996 ........ 837 824 Additional paid-in capital ........................ 38,119 36,202 Net unrealized gains on securities available-for-sale, net of tax ................. 6,494 5,131 Foreign currency translation adjustment, net of tax (61) 78 Retained earnings .................................. 85,853 73,307 --------- -------- Total stockholders' equity ................ 131,242 115,542 --------- -------- Total liabilities and stockholders' equity $ 151,989 $134,195 ========= ========
S-2 47 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, ---------------------------------------- 1997 1996 1995 -------- -------- -------- Revenues: Net investment income .............. $ 22 $ 14 $ 159 Net realized capital loss .......... (320) -- -- Dividends received from wholly owned subsidiaries ..................... -- 4,819 2,924 Other Income ......................... 727 513 -- Operating expenses and income taxes .. (1,768) (2,935) (3,393) -------- -------- -------- Income (loss) before equity in undistributed net income of wholly owned subsidiaries ....... (1,339) 2,411 (310) Equity in undistributed net income of wholly owned subsidiaries ...... 13,885 12,953 12,892 Equity in undistributed net income of affiliated company ....... -- 1,388 -- -------- -------- -------- Net income ........................... $ 12,546 $ 16,752 $ 12,582 ======== ======== ========
S-3 48 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, ---------------------------------------- 1997 1996 1995 -------- -------- -------- Operating activities: Net income ......................................... $ 12,546 $ 16,752 $ 12,582 Adjustments to reconcile net income to net cash provided by (used in ) operations: Equity in undistributed net income of wholly owned subsidiaries ............................. (13,885) (12,953) (12,892) Other ............................................ (4,628) (3,408) 5,701 -------- -------- -------- Net cash provided by (used in) operating activities (5,967) 391 5,391 -------- -------- -------- Investing activities: Investment in affiliate ............................ -- 820 -- Net (increase) decrease in short-term investments ....................................... 933 (933) 1,631 -------- -------- -------- Net cash provided by (used in) investing activities 933 (113) 1,631 -------- -------- -------- Financing activities: Proceeds from bank ................................. 3,000 -- 2,000 loan Repayment of bank loan ............................. -- (2,500) (8,000) Proceeds from exercise of stock options ........... 1,931 887 340 -------- -------- -------- Net cash provided by (used in) financing activities 4,931 (1,613) (5,660) -------- -------- -------- Increase (decrease) in cash .......................... (103) (1,335) 1,362 Cash Beginning of Period ............................. 103 1,438 76 -------- -------- -------- Cash End of Period ................................... $ 0 $ 103 $ 1,438 ======== ======== ========
S-4 49 SCHEDULE III THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION (In thousands)
Reserve Deferred for losses Other policy policy and loss claims and Net Net acquisition adjustment Unearned benefits earned investment Period costs expenses Premiums payable premium income(1) ------ ----------- --------- -------- ------- ------- --------- Year ended December 31, 1997 Property-Casualty .............. $5,403 $278,432 $48,659 $ -- $85,002 $13,776 Year ended December 31, 1996 Property-Casualty .............. $3,658 $269,601 $33,917 $ -- $78,731 $12,514 Year ended December 31, 1995 Property-Casualty .............. $2,523 $273,854 $26,754 $ -- $87,908 $12,361
Losses Amortization and loss of deferred adjustment policy Other Net expenses acquisition operating written Period incurred costs(2) expenses(1) premium ------ -------- ------------- ---------- ------- Year ended December 31, 1997 Property-Casualty .............. $52,620 $24,565 $4,073 $90,880 Year ended December 31, 1996 Property-Casualty .............. $48,977 $22,793 $2,507 $84,168 Year ended December 31, 1995 Property-Casualty .............. $61,053 $26,513 $2,670 $81,268
(1) Net investment income and other operating expenses reflect only such amounts attributable to the Company's insurance operations. (2) Amortization of deferred policy acquisition costs reflects only such amounts attributable to the Company's insurance operations. A portion of these costs is eliminated upon consolidation. S-5 50 SCHEDULE IV THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES REINSURANCE Written Premium (Dollars in thousands)
Ceded to Assumed Percentage Direct other from other Net of amount Amount companies companies Amount assumed to net ------ --------- --------- ------ -------------- Year ended December 31, 1997 Property-Casualty .............. $119,597 $80,369 $51,652 $90,880 57% -------- ------- ------- ------- --- Year ended December 31, 1996 Property-Casualty .............. $ 92,261 $58,356 $50,263 $84,168 60% -------- ------- ------- ------- --- Year ended December 31, 1995 Property-Casualty .............. $ 87,542 $67,639 $61,365 $81,268 76% -------- ------- ------- ------- ---
S-6 51 SCHEDULE V THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Col. A Col. B Col. C Col. D Col. E Additions -------------------------------------- Balance at Balance at January 1, Charged to Charged to Deductions December 31, Description 1997 Costs and Expenses Other Accounts Describe 1997 ----------- ---- ------------------ -------------- -------- ---- Allowance for uncollectible reinsurance $800 $ -- $ -- $ -- $ 800 ---- ------ ---- ---- ------ Valuation allowance in deferred taxes $ -- $1,108 $ -- $ -- $1,108 ---- ------ ---- ---- ------
S-7 52 SCHEDULE VI THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS (In thousands)
Reserve Deferred for losses Affiliations policy and loss Discount, Net Net with acquisition adjustment if any, Unearned earned investment Registrant costs expenses deducted premium premium income(1) ------ -------- ------- ------- ------- ------- Consolidated subsidiaries - ------------------------- Year ended December 31, 1997 $5,403 $278,432 $ -- $48,659 $85,002 $13,776 ------ -------- ------- ------- ------- ------- Year ended December 31, 1996 $3,658 $269,601 $ -- $33,917 $78,731 $12,514 ------ -------- ------- ------- ------- ------- Year ended December 31, 1995 $2,523 $273,854 $ -- $26,754 $87,908 $12,361 ------ -------- ------- ------- ------- -------
Losses and loss adjustment Amortization expenses incurred related to of deferred Affiliations ---------------------------- policy Other Net with Current Prior acquisition operating written Registrant year years costs(2) expenses(1) premium ------- ------- ------- ------ ------- Consolidated subsidiaries - ------------------------- Year ended December 31, 1997 $53,654 $(1,034) $24,565 $4,073 $90,880 ------- ------- ------- ------ ------- Year ended December 31, 1996 $51,429 $(2,452) $22,793 $2,507 $84,168 ------- ------- ------- ------ ------- Year ended December 31, 1995 $54,030 $ 7,023 $26,513 $2,670 $81,268 ------- ------- ------- ------ -------
(1) Net investment income and other operating expenses reflect only such amounts attributable to the Company's insurance operations. (2) Amortization of deferred policy acquisition costs reflects only such amounts attributable to the Company's insurance operations. A portion of these costs is eliminated upon consolidation. S-8 53 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT 3-1 Restated Certificate of Incorporation (a) 3-2 By-laws, as amended (a) 10-1 Management Agreement between Navigators Insurance Company and Somerset Marine, Inc. (a) 10-2 Agreement between The Navigators Group, Inc. and Somerset Marine, Inc. (a) 10-3 Stock Option Plan (a)(b) 10-4 Non-Qualified Stock Option Plan (b) 10-5 Employment Agreement with Terence N. Deeks (c) 10-6 Employment Agreement with W. Allen Barnett (c) 10-7 Letter Agreement with Michael J. Abdallah (d) 10-8 Consulting Agreement between The Navigators Group, Inc. and Robert F. Wright Associates, Inc. (c) 10-9 Amended and Restated Credit Agreement dated as of November 26, 1996, among The Navigators Group, Inc., as Borrower, Brown Brothers Harriman & Co., NBD Bank, First Union National Bank of North Carolina, as Lenders, First National Bank of Chicago, as Issuing Bank, and Brown Brothers Harriman & Co., as Agent. (d) 10-10 Agreement with Bradley D. Wiley 10-11 First Amendment dated April 9, 1997 to the Amended and Restated Credit Agreement dated November 26, 1996 10-12 Second Amendment dated December 11, 1997 to Amended and Restated Credit Agreement dated November 26, 1996 10-13 Consulting Agreement between The Navigators Group, Inc. and William D. Warren 11-1 Statement re Computation of Per Share Earnings 21-1 Subsidiaries of Registrant 23-1 Consent of Independent Auditor 27-1 Financial Data Schedule 28-1 Information from reports furnished to state insurance regulatory authorities (e)
- --------------- (a) Previously filed under Commission file No. 33-5667 as part of Form S-1, incorporated herein by reference thereto. (b) Management contracts of compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601(10)(iii) of Regulation S-K, previously filed as indicated and incorporated herein by reference. (c)(d) Previously filed with the Company's Form 10-K for the year ended December 31, 1994 (c) and 1996 (d), incorporated herein by reference thereto. (e) Submitted in paper format under cover of Form SE. EX-10.10 2 AGREEMENT WITH BRADLEY D. WILEY 1 EXHIBIT 10-10 AGREEMENT Agreement (this "Agreement") entered into and effective this 3rd day of June, 1997 between Bradley D. Wiley of Ringwood, New Jersey (the "Executive") and The Navigators Group, Inc., a corporation with an office located at 123 William Street, New York, N.Y. 10038 (the "Company"). W I T N E S S E T H: WHEREAS, both the Company and Executive believe there are mutual advantages to entering into this Agreement, to induce the Executive to remain in the employ of the Company. NOW THEREFORE, in consideration of the material advantages accruing to the two parties and the mutual covenants herein, the Company and Executive agree with each other as follows: 1. DEFINITIONS. (a) "Affiliate" means any person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, any other Person. (b) "Base Annual Compensation" means the base salary of the Executive on an annualized basis, exclusive of any bonus and/or other benefits to which the Executive may be entitled during the Term. (c) "Board" means the Board of Directors of the Company. (d) "Bonus" means the bonus payment (in addition to Base Annual Compensation) that has, in the discretion of the Board of the Company, been paid (or accrued) to Executive following a calendar year to reward the Executive for performance during such calendar year. (e) "Change in Control" means any of (i) the sale by the Company of at least Fifty Percent (50%) of its assets to any Person, (ii) the merger or consolidation of the Company with any Person in which the shareholders of the Company immediately prior to such merger or consolidation receive less than Fifty (50%) of the outstanding voting shares of the new or continuing Person, (iii) the sale, exchange, or other disposition to a Person, or Persons under common control (or the acquisition through a tender offer or exchange offer by a Person or Persons under common 2 control), in one transaction or a series of related transactions of greater than Thirty-Three (33%) of the outstanding shares of the Company's common stock, or (iv) Terence N. Deeks no longer holds any office with the Company and is not a director. (f) "Closing Date" means the effective date of any Change in Control during the Term of this Agreement. (g) "Code" means the Internal Revenue Code of 1986 as in effect at the time with respect to which such term is used. (h) "Company" means The Navigators Group, Inc., a Delaware corporation, and all of the Subsidiaries. (i) "Constructive Discharge" shall be deemed to occur upon the occurrence during the Covered Period of any of the following: (i) a material, adverse change in the Executive's title or position, for example if the Executive is no longer Chief Financial Officer of the Company (other than resulting from a Discharge for Cause), which adverse change continues for more than Thirty (30) days following written notice from the Executive; (ii) a substantial reduction in the Executive's responsibilities (including, without limitation, a termination of Executive by the Company other than a Discharge for Cause), which reduction continues for more than Thirty (30) days after written notice from the Executive setting forth in reasonable detail the nature of such reduction in responsibilities; (iii) any reduction in the Executive's Base Annual Compensation below the Base Annual Compensation in effect immediately prior to the Closing Date of a Change in Control (other than a reduction resulting from or in connection with a Discharge for Cause), which reduction is not cured within Thirty (30) days following written notice from the Executive; (iv) the failure, following a Change in Control, of a successor corporation to assume this Agreement and all obligations and undertakings of the Company hereunder, which failure continues for more than Thirty (30) days following written notice from the Executive to such successor corporation; (v) a portfolio transfer by the Company of Fifty Percent (50%) or more of the aggregate loss reserves of the Company; and/or (vi) any other transaction by the Company that constitutes a "runoff" of greater than Fifty Percent (50%) of the Company's insurance business. (j) "Covered Period" means the period commencing on the earlier of the Pre-Closing Date and the Closing Date and ending Two (2) years after the Closing Date. (k) "Discharge for Cause" shall, during the Covered Period, be deemed to occur only following the termination of Executive's employment by the Board upon a good faith determination by the Board that any of the following has occurred: (i) the commission by Executive of any act which, if successfully prosecuted by the appropriate authorities, would constitute a felony under state or 2 3 federal law; (ii) Executive's embezzlement or intentional misappropriation of any property of the Company (it being understood that the use by the Executive of Company office supplies at home to facilitate his performance of his duties to the Company shall not be construed as embezzlement or intentional misappropriation of property of the Company); (iii) the intentional or knowing commission by the Executive of an act that causes the Company or any of its Affiliates to be in contravention of any material provision of applicable law or any material rules and regulations of any governmental or other regulatory body having jurisdiction over the business and affairs of the Company or its Affiliates; (iv) the continued insubordination of the Executive or his dereliction of duties after written notice from the Board specifying the insubordination or dereliction of duties and a reasonable opportunity (not less than Ten (10) days) to cure have been given to the Executive; or (v) Executive's having divulged, furnished or made accessible to anyone other than the Company, its directors, officers, employees, auditors, bankers, rating agencies, analysts, regulatory agencies and legal advisors, other than in the regular course of the business of the Company, any confidential knowledge or information relating to the customers, employees, operations, financial condition, revenues or projections of the Company, other than information in the public domain which has not been improperly disclosed by the Executive. Such determination by the Board may be made only after reasonable written notice to the Executive from a member of the Board setting forth details of the allegations which may constitute Discharge for Cause and after an opportunity for such Participant, together with his counsel, to be heard by the Board. Notwithstanding the foregoing, in the event Executive disputes, in an arbitration pursuant to Section 6, below, that an event permitting Discharge for Cause has occurred (a "Challenged Termination"), then the Company shall, until the Arbitrators render their judgement with respect to the Challenged Termination (a) permit the Executive to participate, to the extent Executive continues to be eligible notwithstanding the Challenged Termination, in all medical, dental, life insurance and short and long-term disability plans in which Executive was entitled to participate prior to the Challenged Termination (each a "Plan" and collectively the "Plans"), subject to the terms and conditions that were in effect prior to the Challenged Termination, as such terms and conditions may be amended subsequent to the Challenged Termination, and (b) if the Executive is not eligible to participate in a Plan or Plans by virtue because of his termination, pay to the Executive, on a monthly basis, an amount equal to the aggregate amount paid by the Company on behalf of the Executive with respect to the Plan or Plans for which the Executive is not eligible because of his termination. (1) "Person" means an individual, partnership, firm, trust, corporation or other similar entity. When two or more Persons 3 4 act as a partnership, limited partnership, limited liability company, syndicate or other group for the purpose of acquiring, holding or disposing of securities of the Company, such partnership, limited partnership, syndicate or group shall be deemed a "Person" for the purposes of this Agreement. (m) "Pre Closing Date" means, with respect to the types of Change in Control described in Sections 1(e) (i), 1(e) (ii) and/or 1(e) (iii), above, the effective date of the written agreement for such asset sale, merger or consolidation, or stock purchase agreement, as the case may be, between the Company and the Person or Persons to whom the Company's assets or shares of Common Stock are being sold, or with whom the Company is merging or consolidating, as the case may be. (n) "Primary Benefit" shall have the meaning accorded thereto in Section 3(a). (o) "Subsidiary" means any Person of which a majority of the capital stock having voting power for the election of directors or other governing board is owned by the Company and/or one or more of the Subsidiaries. Any term used in this Agreement in the masculine gender shall include the feminine gender. 2. DISCHARGE FOR CAUSE. Notwithstanding anything to the contrary in this Agreement, Discharge for Cause of the Executive by the Board shall not constitute Constructive Discharge. 3. TERMINATION BY THE EXECUTIVE FOLLOWING CONSTRUCTIVE DISCHARGE. (a) In the event of the Constructive Discharge of the Executive during the Covered Period, the Executive shall, subject to the next succeeding sentence, be entitled to send written notice (the "Termination Notice") to the Company (or any successor or continuing Person) stating that he is terminating his employment with the Company (or such successor or continuing Person) due to such Constructive Discharge. In the event the Company terminates the Executive other than a Discharge for Cause, the Termination Notice shall be deemed to have been sent by Executive on the date of such termination. The Termination Notice with respect to any other Constructive Discharge must be sent within Six (6) Months of the effective date of such Constructive Discharge, or the Executive shall be deemed to have waived his rights under this Section 3 with respect to such Constructive Discharge. Provided the Executive sends the Termination Notice within such Six (6) Month period, the Company (or such successor or continuing Person) shall pay to the Executive: 4 5 (i) an amount (the "Primary Benefit") equal to One Hundred Fifty Percent (150%) of the Base Annual Compensation of the Executive in effect immediately prior to the effective date of the Constructive Discharge. The Primary Benefit shall be paid to the Executive in twelve (12) equal monthly installments, commencing on the first business day of the first calendar month following receipt of the Termination Notice; and (ii) within Thirty (30) Days following receipt of the Termination Notice, the amount (the "Pro Rata Bonus") that results from the following calculation: (A) the Bonus paid (or accrued and to be paid) to the Executive with respect to the calendar year immediately preceding the calendar year of the Constructive Discharge, multiplied by (B) a fraction, the numerator of which is the number of days elapsed in the calendar year of the Constructive Discharge, and the denominator of which is 365. The Primary Benefit and Pro Rata Bonus shall be in satisfaction of any and all other compensation, bonus, severance and/or other payments of any kind whatsoever, otherwise due or to be paid to the Executive, except for accrued, but not paid, Base Annual Compensation and accrued and to be paid bonus from any prior period, and except for the payments to the Executive pursuant to Section 3 (b). (b) In addition to the Primary Benefit and the Pro Rata Bonus, the Company shall, for the twelve (12) month period commencing with receipt of the Termination Notice: (i) permit the Executive to participate, to the extent Executive continues to be eligible, in all medical, dental, life insurance, short and long-term disability plans, 401K and Money Purchase Plans (or their successor plans) in which Executive was entitled to participate prior to delivery of the Termination Notice (each a "Plan" and collectively the "Plans"), subject to the terms and conditions that were in effect prior to the delivery of the Termination Notice, as such terms and conditions may be amended subsequent to delivery of the Termination Notice, and (ii) if the Executive is not eligible to participate in a Plan or Plans by virtue of his termination, pay to the Executive, on the first business day of each of the twelve months subsequent to receipt of the Termination Notice, an amount equal to the aggregate amount paid by the Company on behalf of the Executive with respect to the Plan or Plans for which the Executive is not eligible because of his termination. (c) Notwithstanding anything to the contrary in this Agreement and/or any other agreement between the Company and the Executive in effect on the date hereof, in the event a 5 6 Constructive Discharge shall occur, then each Award under the Company's Phantom Stock Appreciation Rights Plan theretofore granted to the Executive, and each other option theretofore granted to the Executive by the Company shall, to the extent not theretofore exercised or expired, become immediately exercisable in full and shall expire on the earlier to occur of (i) the expiration of the period of twelve (12) months after the date of such Constructive Discharge and (ii) the date specified in such Award. 4. TERM; TERMINATION. The term of this Agreement (the "Term") shall commence on the date first written above and continue for so long as the Executive is employed by the Company (or any successor or continuing Person); provided, however, that the obligations of the Company (or any successor or continuing Person) under Section 3 shall survive such termination. 5. NOTICES. Any notice or other communication to the Executive or the Company (or any successor or continuing Person) pursuant to this Agreement shall be in writing and shall be deemed given when personally delivered or sent by registered or certified mail, return receipt requested, at the addresses set forth below, or at such other address as the Executive or the Company (or any successor or continuing Person) shall have specified by notice to the other in the manner herein provided: If to Executive: Bradley D. Wiley 35 Olive Lane Ringwood, N.J. 07456 If to the Company (or any successor or continuing Person): The Navigators Group, Inc. Attention: Terence N. Deeks 123 William Street New York, N.Y. 10038 6. Arbitration (a) Any dispute or difference of opinion arising out of, with respect to or in connection with this Agreement shall be submitted to binding arbitration before an arbitration panel consisting of one arbitrator to be chosen by the Company, the other by Executive, and the third arbitrator (the "Umpire") to be chosen by the two arbitrators. All of the arbitrators shall be active or retired disinterested executive officers of insurance 6 7 or reinsurance companies or Lloyd's Underwriters. In the event that either party fails to choose an arbitrator within thirty (30) days following a written request by the other party to do so, the requesting party may choose a second arbitrator on behalf of the other party. If the two arbitrators fail to agree upon the selection of an Umpire within thirty (30) days following their appointment, each arbitrator shall nominate three candidates within ten (10) days thereafter, two of whom the other shall decline, and the decision between the remaining two candidates shall be made by drawing lots. (b) The decision of a majority of the arbitrators shall be final and binding on both parties. The arbitrators shall not have the right or authority to award punitive damages. (c) (i) All expenses of the Company in any arbitration hereunder and/or any action or proceeding to confirm, vacate or modify any judgement rendered in an arbitration hereunder, including, without limitation, all legal fees, all costs and expenses of its arbitrator and 50% of the costs and expenses of the Umpire, and any and all other costs of the Company arising out of such arbitration, action or proceeding, shall be borne by the Company, whether or not it is the prevailing party. (ii) Except as provided in Section 6(c) (iii), below, all expenses of the Executive in any arbitration hereunder and/or any action or proceeding to confirm, vacate or modify any judgement rendered in an arbitration hereunder, including, without limitation, all legal fees, all costs and expenses of the Executive's arbitrator and 50% of the costs and expenses of the Umpire, and any and all other costs of the Executive arising out of such arbitration, action or proceeding, shall be borne by the Executive. (iii) In the event the arbitrators award the Executive any amount that the Executive claimed was due him and that the Company refused to pay, then all expenses of the Executive in the arbitration and/or any action or proceeding to confirm, vacate or modify the judgement rendered, including, without limitation, all legal fees, all costs and expenses of the Executive's arbitrator and 100% of the costs and expenses of the Umpire, and any and all other costs of the Executive arising out of such arbitration, action or proceeding, shall be borne by the Company. 7 8 7. VENUE; GOVERNING LAW. Any arbitration proceedings shall take place in New York, New York unless another location is mutually agreed upon by the parties to this Agreement or by a majority of the arbitrators. Notwithstanding the situs of the arbitration, the arbitrators, shall apply the law of New York (but not the arbitration law of that state, the intent of the parties being that the United States Arbitration Act, 9 U.S.C. ss. 1, et seq. shall control questions of arbitrability, confirmation, modification, vacatur and the like.) This Agreement shall be governed by the laws of the State of New York. 8. JURISDICTION. Judgment upon the final decision of the arbitrators may be entered in, and any actions or proceedings regarding confirmation, modification or vacatur of such judgement may be brought in, the courts of the United States for the Southern District of New York or (to the extent exclusive jurisdiction exists therefor) of the State of New York, New York County, and the parties hereto irrevocably submit to the non-exclusive jurisdiction of such courts in respect of any such action, proceedings or dispute. The parties hereto irrevocably waive, to the fullest extent permitted by law, any objection that they may now or hereafter have to the laying of venue of any such action or proceeding in the courts of the State of New York, New York County or in the United States District Court for the Southern District of New York and any claim that any such action, proceeding or dispute brought in any such court has been brought in any inconvenient forum. 9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties and contains all the agreements between them with respect to the subject matter hereof. It also supersedes any and all other agreements or contracts, either oral or written, between the parties with respect to the subject matter hereof. 10. AMENDMENT. The terms and conditions of this Agreement may be amended only by a writing executed by the Company (or any successor or continuing Person) and by Executive. 11. SEVERABILITY. The invalidity or unenforceability of any particular provision of this Agreement shall not affect its other provisions, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision had been omitted. 12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company, its successors and assigns, including, without limitation any Person into which the Company may be merged or by which it may be acquired, and shall be binding upon and shall inure to the benefit of Executive, his administrators, executors, 8 9 legatees, heirs, and assigns. The Executive shall not assign all or any portion of his rights and/or responsibilities under this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first written above. THE NAVIGATORS GROUP, INC. By: /s/ Terence N. Deeks ---------------------------- Terence N. Deeks, President /s/ Bradley D. Wiley ---------------------------- Bradley D. Wiley 9 EX-10.11 3 FRIST AMENDMENT DATED APRIL 9, 1997 1 EXHIBIT 10-11 FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT dated as of April 9, 1997 ("First Amendment") among THE NAVIGATORS GROUP, INC. (the "Borrower"), BROWN BROTHERS HARRIMAN & CO., ("BBH&Co."), NBD BANK (formerly NBD BANK, N.A.; "NBD"), FIRST UNION NATIONAL BANK OF NORTH CAROLINA ("First Union") (each of BBH&Co., NBD and First Union a "Lender" and, collectively, the "Lenders"), THE FIRST NATIONAL BANK OF CHICAGO, as issuer of Letters of Credit (as defined in the Credit Agreement referred to below) ("Issuing Bank") and BROWN BROTHERS HARRIMAN & CO., as agent for the Lenders and the Issuing Bank (in such capacity, together with its successors and assigns in such capacity, the "Agent"). PRELIMINARY STATEMENT. Reference is made to the Amended and Restated Credit Agreement dated as of November 26, 1996 among the Borrower, the Lenders, the Issuing Bank and the Agent (the "Credit Agreement"). Any term used herein and not otherwise defined herein shall have the meaning assigned to such term in the Credit Agreement. Each of the parties hereto have agreed to amend certain provisions of the Credit Agreement as hereinafter set forth. SECTION 1. Amendments to Credit Agreement. The Credit Agreement is, effective as of this date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, hereby amended as follows: (a) The following definition is added in its proper alphabetical order: "Significant Subsidiary" shall mean a Subsidiary of the Borrower (1) the assets of which are greater than or equal to ten percent (10%) of the aggregate assets of the Borrower and its Consolidated Subsidiaries or (2) the revenues of which are greater than or equal to ten percent (10%) of the aggregate revenues of the Borrower and its Consolidated Subsidiaries. (b) Section 7.12. Amendments to Borrower Pledge Agreement, shall be amended by (i) deleting "January 31, 1997" in the first line thereof and inserting in its place the following: "August 21, 1997", (ii) deleting each reference to "Somerset Asia Pacific Pty. Ltd." contained therein, and (iii) inserting at the end thereof the 2 following: "Once Somerset Asia Pacific Pty. Ltd. becomes a Significant Subsidiary, the Borrower shall satisfy the following conditions with regard to its pledge of the stock of Somerset Asia Pacific Pty. Ltd: (1) Amendment to Borrower Pledge Agreement. The Borrower shall execute and deliver an amendment to the Borrower Pledge Agreement in form and substance satisfactory to the Lenders to effect a pledge of the stock of Somerset Asia Pacific Pty. Ltd. and the Borrower will deliver the certificates representing the shares pledged pursuant to such amendment to Borrower Pledge Agreement and undated stock powers executed in blank for each such certificate and the Borrower will take any and all other actions and execute any other agreements required to give the Agent a first priority perfected security interest in such stock; and (2) Opinion of Counsel. The Borrower shall deliver an opinion of counsel, dated the date of such pledge of stock, in a form acceptable to the Lenders, covering among other items, the perfection of the Agent's security interest in such stock." SECTION 2. Conditions of Effectiveness. This First Amendment shall become effective on the date on which each of the following conditions has been fulfilled: (1) First Amendment. The Borrower, the Lenders, the Issuing Bank and the Agent shall each have executed and delivered this First Amendment; (2) First Amendment to Pledge Agreement. The Borrower shall have executed and delivered the First Amendment to Pledge Agreement, together with the certificates representing the shares pledged pursuant to such First Amendment to Pledge Agreement and undated stock powers executed in blank for each such certificate; (3) Evidence of All Corporate Action of the Borrower. Certified copies, dated the date hereof, of all corporate action taken by the Borrower, including resolutions of its Board of Directors, authorizing the execution, delivery, and performance of this First Amendment and each of the documents being delivered in connection herewith; (4) Opinion of Counsel. A favorable opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel for the 2 3 Borrower dated the date hereof; (5) Officer's Certificate, etc. The following statements shall be true and the Agent shall have received a certificate signed by a duly authorized officer of the Borrower dated the date hereof stating that, after giving effect to this First Amendment and the transactions contemplated hereby: (a) The representations and warranties contained in the Credit Agreement and in each of the Loan Documents are correct on and as of the date hereof as though made on and as of such date; and (b) No Default or Event of Default has occurred and is continuing. (6) Additional Documentation. The Agent shall have received such other approvals, opinions or documents as any Lender or the Issuing Bank may reasonably request. SECTION 3. Reference to and Effect on the Loan Documents. (a) Upon the effectiveness of Section 1 hereof, on and after the date hereof each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference in the other Loan Documents to the Credit Agreement, shall mean and be a reference to the Credit Agreement previously amended and as amended hereby. (b) Except as specifically amended above, the Credit Agreement and all other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this First Amendment shall not operate as a waiver of any right, power or remedy of the Lenders, the Issuing Bank or the Agent under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. SECTION 4. Costs, Expenses and Taxes. The Borrower agrees to pay on demand all costs and expenses of the Agent in connection with the preparation, reproduction, execution and delivery of this First Amendment and the other instruments and documents to be delivered hereunder (including the fees and out-of-pocket expenses of external counsel for the Agent, but not the legal fees for internal or external legal counsel of the Lenders), with respect thereto. In addition, the Borrower shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this First Amendment and the other instruments and documents to be delivered hereunder, and 3 4 agrees to hold the Agent and each Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes or fees. SECTION 5. Governing Law. This First Amendment shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such State. SECTION 6. Headings. Section headings in this First Amendment are included herein for convenience of reference only and shall not constitute a part of this First Amendment for any other purpose. SECTION 7. Counterparts. The First Amendment may be executed by the parties hereto in separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written. THE NAVIGATORS GROUP, INC., as Borrower By /s/ Bradley D. Wiley ---------------------------------- Name: Bradley D. Wiley Title: Sr VP & CFO THE FIRST NATIONAL BANK OF CHICAGO, as Issuing Bank By ---------------------------------- Name: Title: per pro BROWN BROTHERS HARRIMAN & CO., as Lender By ---------------------------------- Name: 4 EX-10.12 4 SECOND AMENDMENT DATED DECEMBER 11, 1997 1 EXHIBIT 10-12 SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT dated as of December 11, 1997 ("Second Amendment") among THE NAVIGATORS GROUP, INC. (the "Borrower"), BROWN BROTHERS HARRIMAN & CO., ("BBH&Co."), NBD BANK (formerly NBD BANK, N .A.; "NBD"), FIRST UNION NATIONAL BANK (formerly First Union National Bank of North Carolina; "FUNB") (each of BBH&Co., NBD and First Union a "Lender" and, collectively, the "Lenders"), THE FIRST NATIONAL BANK OF CHICAGO, as issuer of Letters of Credit (as defined in the Credit Agreement referred to below) ("Issuing Bank") and BROWN BROTHERS HARRIMAN & CO., as agent for the Lenders and the Issuing Bank (in such capacity, together with its successors and assigns in such capacity, the "Agent"). PRELIMINARY STATEMENT. Reference is made to the Amended and Restated Credit Agreement dated as of November 26, 1996 among the Borrower, the Lenders, the Issuing Bank and the Agent, as amended by the First Amendment to the Amended and Restated Credit Agreement dated as of April 9, 1997 (as so amended, the "Credit Agreement"). Any term used herein and not otherwise defined herein shall have the meaning assigned to such term in the Credit Agreement. Each of the parties hereto have agreed to amend certain provisions of the Credit Agreement as hereinafter set forth. SECTION 1. Amendments to Credit Agreement. The Credit Agreement is, effective as of this date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, hereby amended as follows: (a) The definition of "Revolving Credit Commitment" is amended in its entirety to read as follows: "Revolving Credit Commitment" means for each period specified below the amount specified for such period:
Period Amount ------ ------ From December 11, 1997 to and $25,000,000 including December 31, 1997 From January 1, 1998 to and including $24,500,000 March 31, 1998 From April 1, 1998 to and including $24,000,000
2
Period Amount ------ ------ June 30, 1998 From July 1,1998 to and including $23,500,000 September 30, 1998 From October 1, 1998 to and including $23,000,000 December 31, 1998 From January 1, 1999 to and including $22,500,000 March 31, 1999 From April 1, 1999 to and including $22,000,000 June 30, 1999 From July 1, 1999 to and including $21,500,000 September 30, 1999 From October 1, 1999 to and including $20,000,000 December 31, 1999 From January 1, 2000 to and including $18,000,000 March 31, 2000 From April 1, 2000 to and including $16,000,000 June 30, 2000 From July 1, 2000 to and including $14,000,000 September 30, 2000 From October 1, 2000 to and including $12,000,000 December 31, 2000 From January 1, 2001 to and including $11,250,000 March 31, 2001 From April 1, 2001 to and including $10,500,000 June 30, 2001 From July 1, 2001 to and including $ 9,750,000 September 30, 2001 From October 1, 2001 to and including $ 9,000,000 December 31, 2002 From January 1, 2003 to and including $ 7,000,000 March 31, 2003 From April 1, 2003 to and including $ 5,250,000 June 30, 2003 From July 1, 2003 to and including $ 3,500,000 September 30, 2003 From October 1, 2003 to and including $ 1,750,000 December 31, 2003
(b) The definition of "Revolving Credit Termination Date" is amended in its entirety to read as follows: "Revolving Credit Termination Date" means December 31, 2003. 2 3 (c) Section 10.01, Events of Default, is amended by deleting clause "(13)" thereof in its entirety. SECTION 2. Conditions of Effectiveness. This Second Amendment shall become effective on the date on which each of the following conditions has been fulfilled: (1) Second Amendment. The Borrower, the Lenders, the Issuing Bank and the Agent shall each have executed and delivered this Second Amendment; (2) Amendment Fee. The Borrower shall pay to the Agent for the benefit of the Lenders an amendment fee in an amount equal to $35,000.00. (2) Officer's Certificate, etc. The following statements shall be true and the Agent shall have received a certificate signed by a duly authorized officer of the Borrower dated the date hereof stating that, after giving effect to this Second Amendment and the transactions contemplated hereby: (a) The representations and warranties contained in the Credit Agreement and in each of the Loan Documents are correct on and as of the date hereof as though made on and as of such date; and (b) No Default or Event of Default has occurred and is continuing. (6) Additional Documentation. The Agent shall have received such other approvals, opinions or documents as any Lender or the Issuing Bank may reasonably request. SECTION 3. Reference to and Effect on the Loan Documents. (a) Upon the effectiveness of Section 1 hereof, on and after the date hereof each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference in the other Loan Documents the Credit Agreement, shall mean and be a reference to the Credit Agreement previously amended and as amended hereby. (b) Except as specifically amended above, the Credit Agreement and all other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Second Amendment shall not operate as a waiver of any right, power or remedy of the Lenders, the Issuing Bank or the Agent under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. SECTION 4. Costs, Expenses and Taxes. The Borrower agrees to pay 4 Lenders, the Issuing Bank or the Agent under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents. SECTION 4. Costs, Expenses and Taxes. The Borrower agrees to pay on demand all costs and expenses of the Agent in connection with the preparation, reproduction, execution and delivery of this Second Amendment and the other instruments and documents to be delivered hereunder (including the fees and out-of-pocket expenses of external counsel for the Agent, but not the legal fees for internal or external legal counsel of the Lenders), with respect thereto. In addition, the Borrower shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Second Amendment and the other instruments and documents to be delivered hereunder, and agrees to hold the Agent and each Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes or fees. SECTION 5. Governing Law. This Second Amendment shall be governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such State. SECTION 6. Headings. Section headings in this Second Amendment are included herein for convenience of reference only and shall not constitute a part of this Second Amendment for any other purpose. SECTION 7. Counterparts. The Second Amendment may be executed by the parties hereto in separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written. THE NAVIGATORS GROUP, INC., as Borrower By /s/ Bradley D. Wiley --------------------------- Name: Bradley D. Wiley Title: Sr VP, CFO & Secretary 4 EX-10.13 5 CONSULTING AGREEMENT 1 EXHIBIT 10-13 July 8, 1996 Mr. William D. Warren Chairman, CEO & President National Reinsurance Corporation 777 Long Ridge Road P.O. Box 10167 Stamford, CT 06904 Dear Bill: This is a follow up to the brief conversation we had at the last Navigators' Board Meeting. Our Group has some major decisions to make during the next twelve months and I will need all the help and advice I can get. I value your input tremendously, and I would appreciate being able to counsel with you from time to time during this period to help ensure we make the right calls. I would feel much more comfortable if, in addition to the regular Directors fees etc., I could pay you a further modest retainer of say $25,000 per annum, payable bi-annually, this way I will not be as reluctant to come to you for advice on topics where I know you can help me. If this arrangement is agreeable to you I suggest we make it effective July 1. Many thanks. Sincerely, TND:ac EX-11.1 6 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11-1 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS Earnings Per Share of Common Stock and Common Stock Equivalents (In thousands, except per share data)
YEAR ENDED DECEMBER 31, ----------------------------------- 1997 1996 1995 ------- ------- ------- Net income applicable to common stock ......... $12,546 $16,752 $12,582 Average number of common shares outstanding ... 8,296 8,197 8,154 Net income per share - Basic .................. $ 1.51 $ 2.04 $ 1.54 Average number of common shares outstanding ... 8,296 8,197 8,154 Add: Assumed exercise of stock options ........ 89 89 59 ------- ------- ------- Common and common equivalent shares outstanding 8,385 8,286 8,213 ======= ======= ======= Net income per share - Diluted ................ $ 1.50 $ 2.02 $ 1.53
EX-21.1 7 SUBSIDIARIES OF REGISTRANT 1 EXHIBIT 21-1 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 1997: JURISDICTION IN NAME WHICH ORGANIZED - ---- --------------- Navigators Insurance Company New York NIC Insurance Company New York Somerset Marine, Inc. New York Somerset of Georgia, Inc. Georgia Somerset Insurance Services of Texas, Inc. Texas Somerset Insurance Services of California, Inc. California Somerset Insurance Services of Washington, Inc. Washington Somerset Marine Aviation Property Managers, Inc. New Jersey Somerset Asia Pacific Pty Limited Sydney, Australia Somerset Marine (UK) Limited London, UK Navigators Corporate Underwriters, Ltd. London, UK Navigators Holdings (UK) Limited London, UK Somerset Services Pte. Ltd. Singapore EX-23.1 8 CONSENT OF INDEPENDENT AUDITOR 1 EXHIBIT 23-1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors The Navigators Group, Inc. and Subsidiaries: We consent to the incorporation by reference in Registration Statement No. 33-51608 on Form S-8 of The Navigators Group, Inc. and Subsidiaries of our report dated March 16, 1998, relating to the consolidated balance sheets of The Navigators Group, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows and related schedules for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 Annual Report on Form 10-K of The Navigators Group, Inc. and Subsidiaries. /s/ KPMG PEAT MARWICK LLP New York, New York March 30, 1998 EX-27.1 9 FINANCIAL DATA SCHEDULE
7 1000 U.S.DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 226,834 0 0 6,132 0 0 257,321 1,251 147,104 5,403 501,207 278,432 48,659 0 0 20,942 0 0 837 130,405 501,207 85,002 14,435 2,827 5,953 52,620 14,938 22,231 17,184 4,638 12,546 0 0 0 12,546 1.51 1.50 132,558 53,654 (1,034) (12,921) (32,416) 139,841 (1,034)
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