-----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, MaFZp6nefURV/2J+fcOQJAlpiPRMpfA6FGe0UuFu9cpXKi4UscFxulMcdUUxUzZf HolSHOzlkvKroscS0j9gJQ== 0000950123-98-005211.txt : 19980518 0000950123-98-005211.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950123-98-005211 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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-Q SEC ACT: SEC FILE NUMBER: 000-15886 FILM NUMBER: 98626458 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-Q 1 FORM 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 1998 ------------------------------------------------- Commission file number 0-15886 ---------------------------------------------------------- The Navigators Group, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3138397 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 123 William Street, New York, New York 10038 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 349-1600 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. On May 6, 1998 there were 8,418,426 shares of common stock, $0.10 par value, issued and outstanding. 1 2 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES INDEX Page No. -------- Part I. FINANCIAL INFORMATION: Consolidated Balance Sheets March 31, 1998 and December 31, 1997 ................ 3 Consolidated Statements of Income Three Months Ended March 31, 1998 and 1997 .......... 4 Consolidated Statements of Cash Flows Three Months Ended March 31, 1998 and 1997 .......... 5 Notes to Interim Consolidated Financial Statements ....... 6 Management's Discussion and Analysis of Financial Condition and Results of Operations ................. 8 Part II. OTHER INFORMATION .................................. 14 2 3 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
March 31, 1998 Dec. 31, 1997 -------------- ------------- (Unaudited) ASSETS Investments and cash: Fixed maturities, available-for-sale, at fair value (amortized cost: 1998, $214,048; 1997, $218,418) .......... $ 221,382 $ 226,834 Equity securities, available-for-sale, at fair value (cost: 1998, $4,761; 1997, $4,557) ........................ 7,151 6,132 Short-term investments, at cost which approximates fair value ..................................................... 23,571 22,579 Cash ........................................................ 862 1,251 Other investments ........................................... 2,959 1,776 --------- --------- Total investments and cash .............................. 255,925 258,572 --------- --------- Premiums in course of collection .............................. 51,829 45,847 Commissions receivable ........................................ 10,016 6,434 Accrued investment income ..................................... 3,187 3,121 Prepaid reinsurance premiums .................................. 23,455 20,405 Reinsurance receivable on paid and unpaid losses and loss adjustment expenses .................................... 145,299 147,104 Federal income tax recoverable ................................ -- 164 Net deferred Federal and foreign income tax benefit ........... 7,895 7,994 Deferred policy acquisition costs ............................. 5,419 5,403 Other assets .................................................. 8,939 6,163 --------- --------- Total assets ............................................ $ 511,964 $ 501,207 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses ............ $ 277,075 $ 278,432 Unearned premium ............................................ 50,338 48,659 Reinsurance balances payable ................................ 17,607 16,539 Notes payable to banks ...................................... 20,334 20,000 Federal and foreign income tax payable ...................... 713 -- Deferred state and local income tax ......................... 989 1,184 Note payable to stockholder ................................. 942 942 Accounts payable and other liabilities ...................... 8,892 4,209 --------- --------- Total liabilities ....................................... 376,890 369,965 --------- --------- 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 8,402,801 in 1998 and 8,368,167 in 1997 ......................................... 840 837 Additional paid-in capital .................................. 38,673 38,119 Accumulated other comprehensive income....................... 6,318 6,433 Retained earnings ........................................... 89,243 85,853 --------- --------- Total stockholders' equity .............................. 135,074 131,242 --------- --------- Total liabilities and stockholders' equity .............. $ 511,964 $ 501,207 ========= =========
See accompanying notes to consolidated financial statements. 3 4 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except net income per share)
Three Months Ended March 31, --------------------- 1998 1997 ---- ---- (Unaudited) Revenues: Net earned premium .......................................... $ 17,890 $ 18,406 Commission income ........................................... 1,224 1,595 Net investment income ....................................... 3,918 3,371 Net realized capital gains .................................. 715 212 Other income ................................................ 280 353 --------- --------- Total revenues .......................................... 24,027 23,937 --------- --------- Operating expenses: Net losses and loss adjustment expenses incurred ............ 10,415 10,846 Commission expense .......................................... 3,050 3,140 Other operating expenses .................................... 5,681 5,351 Interest expense ............................................ 364 287 --------- --------- Total operating expenses ................................ 19,510 19,624 --------- --------- Income before income tax ...................................... 4,517 4,313 Income tax expense (benefit): Current ................................................... 1,138 562 Deferred .................................................. (11) 516 --------- --------- Total income tax expense ................................ 1,127 1,078 --------- --------- Net income .................................................... $ 3,390 $ 3,235 ========= ========= Net income per common share: Basic ....................................................... $ 0.40 $ 0.39 Diluted ..................................................... $ 0.40 $ 0.39 Average common shares outstanding: Basic ....................................................... 8,385 8,261 Diluted ..................................................... 8,435 8,312
See accompanying notes to interim consolidated financial statements. 4 5 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Three Months Ended March 31, ------------------- 1998 1997 ---- ---- (Unaudited) Operating activities: Net income ................................................ $ 3,390 $ 3,235 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & amortization ............................. 258 98 Reinsurance receivable on paid and unpaid losses and loss adjustment expenses ................... 1,805 11,056 Reserve for losses and loss adjustment expenses ............................................... (1,357) (10,763) Prepaid reinsurance premiums ............................ (3,050) 172 Unearned premium ........................................ 1,679 (197) Premiums in course of collection ........................ (5,982) 2,446 Commissions receivable .................................. 78 (508) Deferred policy acquisition costs ....................... (16) (209) Accrued investment income ............................... (27) (286) Reinsurance balances payable ............................ 1,068 (234) Federal income tax ...................................... 851 349 Net deferred Federal and foreign income tax ............. 198 340 Net realized capital (gains) ............................ (715) (212) Other ................................................... (1,344) (617) --------- --------- Net cash provided by (used in) operating activities ... (3,164) 4,670 --------- --------- Investing activities: Fixed maturities, available-for-sale Redemptions and maturities .............................. 12,525 2,857 Sales ................................................... 12,144 2,368 Purchases ............................................... (19,958) (9,328) Equity securities, available-for-sale Sales ................................................... 1,023 729 Purchases ............................................... -- (1,235) Payable for securities purchased .......................... 836 (1,959) Net sales (purchases) of short-term investments ........... (992) 1,809 Payment for purchase of MTC, net of cash acquired ......... (2,975) -- Purchase of property and equipment ........................ (385) (212) --------- --------- Net cash provided by (used in) investing activities ..... 2,218 (4,971) --------- --------- Financing activities: Proceeds from exercise of stock options ................... 557 497 --------- --------- Net cash provided by financing activities ............... 557 497 --------- --------- Increase (decrease) in cash ................................... (389) 196 Cash at beginning of year ..................................... 1,251 1,460 --------- --------- Cash at end of period ......................................... $ 862 $ 1,656 ========= =========
See accompanying notes to consolidated financial statements. 5 6 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (1) Accounting Policies The interim financial statements are unaudited but reflect all adjustments which, in the opinion of management, are necessary to provide a fair statement of the results of The Navigators Group, Inc. and its subsidiaries (the "Company") for the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes hereto contained in the Company's Form 10-K for the year ended December 31, 1997. Certain amounts for prior years have been reclassified to conform to the current year's presentation. (2) Reinsurance Ceded The Company's ceded earned premiums were $17,077,000 and $17,014,000 and ceded losses were $14,466,000 and $11,879,000 for the three months ended March 31, 1998 and 1997, respectively. (3) 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. (4) Comprehensive Income The Company adopted SFAS No. 130, Reporting Comprehensive Income, as of January 1, 1998. SFAS No. 130 establishes standards for the reporting and presentation of comprehensive income and its components in the 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. Application of SFAS No. 130 will not impact amounts previously reported for net income or affect the comparability of previously issued financial statements. 6 7 The following table summarizes comprehensive income for the three months ended March 31, 1998 and 1997:
March 31, --------------- 1998 1997 ---- ---- In thousands Net income ...................................................... $ 3,390 $ 3,235 Other comprehensive income, net of tax: Net unrealized gains (losses) on securities available for sale: Unrealized holding gain (loss) arising during period (net of income tax expense (benefit) of $157 for 1998 and $(844) for 1997) ................................. 292 (1,637) Less: reclassification adjustment for gains included in net income (net of income tax expense of $250 for 1998 and $72 for 1997) .................... 465 140 Foreign currency translation adjustment, net of tax ........ 58 (71) ------- ------- Other comprehensive income ........................ (115) (1,848) ------- ------- Comprehensive income ......................... $ 3,275 $ 1,387 ======= ======= The following table summarizes the componants of accumulated other comprehensive income: March 31, December 31, --------- ------------ 1998 1997 ---- ---- (In thousands) Net unrealized gains on securities available-for-sale (net of tax of $3,463 in 1998 and $3,497 in 1997)........ $6,321 $6,494 Foreign currency translation adjustment, net of tax......... (3) (61) ------ ------ Accumulated other comprehensive income...................... $6,318 $6,433 ====== ======
(5) Future Application of Accounting Standards 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. (6) Acquisition of Mander, Thomas & Cooper (Underwriting Agencies) Limited 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 purchase was funded through a bank loan and working capital. The total purchase price was not material to the Company's total assets. The acquisition has been recorded under the purchase method of accounting. Goodwill amounted to $3,992,000 and is being amortized over 20 years. Additional goodwill may be recorded in future years when the amount of the future performance contingencies are determinable. 7 8 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations General The accompanying consolidated financial statements consisting of the accounts of The Navigators Group, Inc., a Delaware holding company, and its fifteen 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 Insurance") and NIC Insurance Company ("NIC"). Navigators Insurance is the Company's largest insurance subsidiary and has been active since 1983. It specializes principally in underwriting marine, aviation, onshore energy, engineering and construction insurance. NIC, a wholly owned subsidiary of Navigators Insurance, began operations in 1990. It underwrites a small book of surplus lines insurance in certain states and, pursuant to an intercompany reinsurance pooling agreement, cedes 100% of its gross direct writings from this business to Navigators Insurance in exchange for assuming 10% of Navigators Insurance's net premium. Navigators Insurance 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 do 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 Insurance, NIC and six unaffiliated insurance companies. The Somerset Companies specialize principally in producing marine, aviation, onshore energy, engineering and construction insurance premium. They underwrite marine business for a syndicate of insurance companies with Navigators Insurance having a 60% participation in the syndicate for 1998. The Somerset Companies derive their revenue from commissions, investment income, service fees and cost reimbursement arrangements from their parent company, Navigators Insurance, NIC and the unaffiliated insurers. Commissions are earned both from a fixed percentage of premiums and from 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 8 9 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. Somerset Asia was formed in the third quarter of 1996 and operates from an office in Sydney, Australia. This office concentrates on producing marine, onshore energy, engineering and construction insurance premium 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 producing marine, aviation, onshore energy, engineering and construction insurance premium. Navigators Insurance was authorized to operate an 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 Insurance ("UK Branch"). Navigators Holdings (UK) Limited was formed on September 15, 1997 as a holding company for the Company's UK subsidiaries. The Company also owns Somerset Marine Aviation Property Managers, Inc., an inactive subsidiary. In January 1998, the Company acquired 100% of Mander, Thomas & Cooper (Underwriting Agencies) Limited ("MTC"), a Lloyd's of London marine underwriting managing agency, and its wholly owned subsidiary, Millennium Underwriting Limited ("Millennium"), a Lloyd's corporate member with limited liability. 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 Companies are managed by Somerset Marine, Inc. Other investments include the Company's 8% interest in Riverside Underwriters Plc ("Riverside"), which through a wholly owned subsidiary is admitted to underwrite at Lloyd's of London as a corporate name with limited liability. The investment in Riverside is recorded at cost. 9 10 Results of Operations The Company's 1998 and 1997 results of operations reflect intense market competition in the core marine and aviation lines. Revenues. Gross written premium for the first three months of 1998 increased by 4% to $36,644,000 from $35,223,000 for the first three months of 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:
Three Months Ended March 31, -------------------------------- 1998 1997 ------------ ------------ (Dollars in thousands) Marine ..................... $ 14,335 39% $ 9,575 27% Aviation ................... 5,286 14 9,738 28 Inland Marine .............. 353 1 4,506 13 Onshore Energy ............. 2,764 8 3,144 9 Engineering and Construction 3,767 10 -- -- Lloyd's - Marine ........... 6,523 18 -- -- Specialty Reinsurance and Program Insurance .... 3,616 10 8,260 23 -------- --- -------- --- Gross Written Premium ...... 36,644 100% 35,223 100% -------- === -------- === Ceded Written Premium ...... (20,125) (16,841) -------- -------- Net Written Premium ........ $ 16,519 $ 18,382 ======== ========
Marine Premium. Marine gross written premium (non-Lloyd's) increased 50% when comparing the first quarter of 1998 to the first quarter of 1997 primarily due to Navigators increasing its participation in the marine pool from 48% to 60% and the first full quarter of premium from the UK Branch. Aviation Premium. Aviation gross written premium decreased 46% from the first three months of 1997 to 1998 due to generally lower rates on aviation business and the recording of return premiums from rate adjustments on certain profitable large airline policies. Inland Marine Premium. As of June 1997, the Company no longer writes inland marine business. 10 11 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. The Onshore Energy premium decreased 12% from the first three months of 1997 to 1998. Engineering and Construction Premium. The Company began writing engineering and construction business in mid 1997. The business is produced by Somerset Asia and Somerset UK. Lloyd's Marine Premium. NCUL provided capacity to Lloyd's Syndicate 1221 managed by MTC and one other Lloyd's syndicate in 1998 and 1997, and Millennium provided capacity to Syndicate 1221 in 1998. 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 and Millennium are wholly owned by the parent company. Specialty Reinsurance and Program Insurance Premium. Navigators Insurance's reinsurance business was produced and managed by one of the Company's subsidiaries. This reinsurance premium consisted primarily of excess of loss and quota share property, surety, and other specialty reinsurance lines. Navigators Insurance did not renew this business after 1995 except for a few treaties which were written through 1997. The program insurance, which began in 1995, was reduced during 1997 and currently consists of one managing general agent writing primarily general liability insurance for contractors. Ceded Premium. In the ordinary course of business, Navigators Insurance 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 when comparing the first three months of 1997 to 1998 resulted from the engineering and construction business, which is heavily reinsured, and from the purchase of additional reinsurance to protect the marine business. Net Written Premium. Net written premium decreased 10% when comparing the first three months of 1997 to the first three months of 1998 primarily due to the decrease in the program and aviation premium and the Company's decision to no longer write inland marine and specialty reinsurance business, partially offset by the increase in the marine premium. Net Earned Premium. Net earned premium decreased 3% for the first three months of 1998 to $17,890,000 as compared to $18,406,000 for the first three months of 1997. Net earned premium generally follows the pattern of written premium but at a slower rate since unearned premium from the prior year is partially earned in the current period along with a portion of the premium written in the current period. Commission Income. Commission income decreased 23% from $1,595,000 for the first quarter of 1997 to $1,224,000 for the first quarter of 1998. The decrease is primarily due to Navigators Insurance's increased participation in the marine pool which results in the Company receiving less commission income from the unaffiliated members of the pool. 11 12 Net Investment Income. Net investment income increased 16% to $3,918,000 during the first three months of 1998 from $3,371,000 during the corresponding period in 1997. This increase was due primarily to the overall increase in invested assets and the decrease of the amount of municipal bonds in the portfolio. Net Realized Capital Gains. Pre-tax net income included $715,000 of realized capital gains for the first three months of 1998 compared to $212,000 for the same period last year. On an after tax basis, the realized capital gains were $0.06 per share in 1998 and $0.02 per share in 1997. Operating Expenses. Net Loss and Loss Adjustment Expenses Incurred. The ratio of net loss and loss adjustment expenses incurred to net earned premium was 58.2% and 58.9% during the first three months of 1998 and 1997, respectively. This decrease was primarily due to better results in the company's program business and the decrease in inland marine and specialty reinsurance business written which generally had a greater loss ratio. Commission Expense. Commission expense as a percentage of net earned premium was 17.0% and 17.1% during the first three months of 1998 and 1997, respectively. Other Operating Expenses. Other operating expenses increased 6% to $5,681,000 during the first three months of 1998 from $5,351,000 during the corresponding period of 1997. This increase was primarily due to expenses incurred by Somerset UK, Somerset Asia and NCUL. Interest Expense. Interest expense increased 27% to $364,000 during the first three months of 1998 from $287,000 during the corresponding period of 1997. This increase is primarily due to an increase in the loan balance under the Company's Amended Credit Agreement (as defined below) from $17,000,000 at March 31, 1997 to $20,000,000 at March 31, 1998 and higher interest rates in the 1998 period. Income Taxes. The effective tax rate was 25.0% for each of the three months ended March 31, 1998 and 1997. Net Income. The Company had net income of $3,390,000 for the first quarter of 1998 compared to $3,235,000 for the same period last year. On a diluted per share basis, this represents net income per share of $0.40 and $0.39 for the 1998 and 1997 first quarters, respectively. 12 13 Liquidity and Capital Resources Cash flow from operations was $(3,164,000) and $4,670,000 for the first three months of 1998 and 1997, respectively. Invested assets and cash decreased to $255,925,000 at March 31, 1998 from $258,572,000 at December 31, 1997. The Company's credit agreement, as amended, currently provides for a $25 million revolving credit loan facility, which reduces each quarter by amounts ranging from $500,000 to $2,000,000 until it terminates on December 31, 2003, and a $30 million letter of credit facility. At March 31, 1998, $20 million in loans were outstanding under the revolving credit loan facility at an interest rate of 6.6% and letters of credit with an aggregate face amount of $29 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. As of March 31, 1998, the Company's consolidated stockholders' equity was $135,074,000, an increase of 3% from $131,242,000 at December 31, 1997. Year 2000 Compliance The Company is aware of the issues associated with 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 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 the 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 sytems. 13 14 Part II - Other Information Item 1. Legal Proceedings: The Company is not a party to or the subject of, any material pending legal proceedings which depart from the ordinary routine litigation incident to the kinds of business conducted by the Company. Item 2. Changes in Securities: None. Item 3. Defaults Upon Senior Securities: None. Item 4. Submissions of Matters to a Vote of Securities Holders: None. Item 5. Other Information: None. Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits:
Exhibit No. Description of Exhibit ----------- ---------------------- 27.1 Financial Data Schedule
(b) Reports on Form 8-K: There were no reports on Form 8-K filed for the three months ended March 31, 1998. 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Navigators Group, Inc. -------------------------------------- (Registrant) Dated: May 15, 1998 /s / Bradley D. Wiley ------------ -------------------------------------- Bradley D. Wiley Senior Vice President, Chief Financial Officer and Secretary 15 16 INDEX OF EXHIBITS
Sequentially Numbered Exhibit No. Description of Exhibit Page - ----------- ---------------------- ------------ 27.1 Financial Data Schedule
16 EX-27 2 FINANCIAL DATA SCHEDULE
7 1000 3-MOS DEC-31-1997 JAN-01-1998 MAR-31-1998 221,382 0 0 7,151 0 0 255,063 862 145,299 5,419 511,964 277,075 50,338 0 0 21,276 840 0 0 134,234 511,964 17,890 3,918 715 1,504 10,415 3,050 5,681 4,517 1,127 3,390 0 0 0 3,390 0.40 0.40 139,841 0 0 0 0 138,921 0
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