-----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, JYc+3yFoZhW1Xf3mOpCvgAxSsat4XIKN2Gx4mwlBdwjsXrgJcr3QymCUtDwWjS+7 UZsjpCWRuNcA/AtRmjhm1A== 0000950123-98-010004.txt : 19981118 0000950123-98-010004.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950123-98-010004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98752579 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 September 30, 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 November 12, 1998 there were 8,431,426 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 September 30, 1998 and December 31, 1997................................ 3 Consolidated Statements of Income Three Months Ended September 30, 1998 and 1997.......................... 4 Nine Months Ended September 30, 1998 and 1997........................... 5 Consolidated Statements of Cash Flows Nine Months Ended September 30, 1998 and 1997........................... 6 Notes to Interim Consolidated Financial Statements.............................. 7 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 10 Part II. OTHER INFORMATION........................................................... 17
2 3 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
September 30, December 31, 1998 1997 ---- ---- (Unaudited) ASSETS Investments and cash: Fixed maturities, available-for-sale, at fair value (amortized cost: 1998, $221,600; 1997, $218,418) ........................ $232,042 $226,834 Equity securities, available-for-sale, at fair value (cost: 1998, $4,848; 1997, $4,557) ........................................................... 5,216 6,132 Short-term investments, at cost which approximates fair value ............. 17,147 22,579 Cash ...................................................................... 1,974 1,251 Other investments ......................................................... 1,309 1,776 -------- -------- Total investments and cash ......................................... 257,688 258,572 -------- -------- Premiums in course of collection ............................................ 57,359 45,847 Commissions receivable ...................................................... 4,886 6,434 Accrued investment income ................................................... 3,184 3,121 Prepaid reinsurance premiums ................................................ 25,610 20,405 Reinsurance receivable on paid and unpaid losses and loss adjustment expenses 170,838 147,104 Federal income tax recoverable .............................................. 24 164 Net deferred Federal and foreign income tax benefit ......................... 7,215 7,994 Deferred policy acquisition costs ........................................... 4,660 5,403 Other assets ................................................................ 10,834 6,163 -------- -------- Total assets ....................................................... $542,298 $501,207 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses .......................... $299,174 $278,432 Unearned premium .......................................................... 53,096 48,659 Reinsurance balances payable .............................................. 19,567 16,539 Notes payable to banks .................................................... 22,840 20,000 Net deferred state and local income tax ................................... 902 1,184 Note payable to stockholder ............................................... 588 942 Accounts payable and other liabilities .................................... 3,859 4,209 -------- -------- Total liabilities .................................................. 400,026 369,965 -------- -------- 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 8,427,676 in 1998 and 8,368,167 in 1997 .......... 843 837 Additional paid-in capital ................................................ 39,068 38,119 Accumulated other comprehensive income .................................... 7,117 6,433 Retained earnings ......................................................... 95,244 85,853 -------- -------- Total stockholders' equity ......................................... 142,272 131,242 -------- -------- Total liabilities and stockholders' equity ......................... $542,298 $501,207 ======== ========
See accompanying notes to interim 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 SEPTEMBER 30, ---------------------------- 1998 1997 -------- -------- (Unaudited) Revenues: Net earned premium ............................. $ 19,030 $ 21,701 Commission income .............................. 1,334 1,086 Net investment income .......................... 3,724 3,749 Net realized capital gains ..................... 168 1,798 Other income (expense) ......................... 104 (249) -------- -------- Total revenues .......................... 24,360 28,085 -------- -------- Operating expenses: Net losses and loss adjustment expenses incurred 11,677 13,161 Commission expense ............................. 2,813 4,606 Other operating expenses ....................... 5,445 5,213 Interest expense ............................... 403 323 -------- -------- Total operating expenses ................ 20,338 23,303 -------- -------- Income before income tax ......................... 4,022 4,782 -------- -------- Income tax expense: Current ...................................... 799 1,282 Deferred ..................................... 341 37 -------- -------- Total income tax expense ................ 1,140 1,319 -------- -------- Net income ....................................... $ 2,882 $ 3,463 ======== ======== Net income per common share: Basic ......................................... $ 0.34 $ 0.42 Diluted ....................................... $ 0.34 $ 0.41 Average common shares outstanding: Basic ......................................... 8,423 8,311 Diluted ....................................... 8,455 8,382
See accompanying notes to interim consolidated financial statements. 4 5 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except net income per share)
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 ------- ------- (Unaudited) Revenues: Net earned premium .................................. $53,452 $62,276 Commission income ................................... 3,715 4,202 Net investment income ............................... 11,394 10,676 Net realized capital gains .......................... 1,405 2,252 Other income ........................................ 720 738 ------- ------- Total revenues ............................... 70,686 80,144 ------- ------- Operating expenses: Net losses and loss adjustment expenses incurred..... 31,040 37,418 Commission expense .................................. 8,908 11,672 Other operating expenses ............................ 16,873 16,696 Interest expense .................................... 1,134 927 ------- ------- Total operating expenses ..................... 57,955 66,713 ------- ------- Income before income tax .............................. 12,731 13,431 ------- ------- Income tax expense: Current ........................................... 2,976 2,712 Deferred .......................................... 364 865 ------- ------- Total income tax expense ..................... 3,340 3,577 ------- ------- Net income ............................................ $ 9,391 $ 9,854 ======= ======= Net income per common share: Basic .............................................. $ 1.12 $ 1.19 Diluted ............................................ $ 1.11 $ 1.18 Average common shares outstanding: Basic .............................................. 8,406 8,285 Diluted ............................................ 8,453 8,365
See accompanying notes to interim consolidated financial statements. 5 6 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 -------- -------- (Unaudited) Operating activities: Net income ............................................ $ 9,391 $ 9,854 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation & amortization ......................... 672 352 Reinsurance receivable on paid and unpaid losses and loss adjustment expenses ................ (23,734) 1,425 Reserve for losses and loss adjustment expenses ..... 20,742 2,526 Prepaid reinsurance premiums ........................ (5,205) (8,927) Unearned premium .................................... 4,436 13,137 Premiums in course of collection .................... (11,512) (7,474) Commissions receivable .............................. 5,208 (281) Deferred policy acquisition costs ................... 743 (1,873) Accrued investment income ........................... (24) 138 Reinsurance balances payable ........................ 3,028 3,804 Federal and foreign income tax ...................... 114 62 Net deferred Federal and foreign income tax ......... 497 593 Net realized capital (gains) ........................ (1,405) (2,252) Other ............................................... (3,759) 689 -------- -------- Net cash provided by (used in) operating activities (808) 11,773 -------- -------- Investing activities: Fixed maturities, available-for-sale Redemptions and maturities .......................... 24,074 8,267 Sales ............................................... 23,742 63,568 Purchases ........................................... (50,810) (72,646) Equity securities, available-for-sale Sales ............................................... 3,207 8,633 Purchases ........................................... (1,355) (4,008) Payable for securities purchased ...................... (889) (3,258) Sale of other investments ............................. 1,262 -- Net sales (purchases) of short-term investments ....... 5,431 (12,902) Payment for purchase of MTC, net of cash acquired ..... (5,321) -- Purchase of property and equipment .................... (850) (635) -------- -------- Net cash provided by (used in) investing activities . (1,509) (12,981) -------- -------- Financing activities: Proceeds from bank loan ................................ 2,500 -- Repayment of note payable .............................. (354) -- Proceeds from exercise of stock options ................ 894 1,234 -------- -------- Net cash provided by financing activities ........... 3,040 1,234 -------- -------- Increase in cash .......................................... 723 26 Cash at beginning of year ................................. 1,251 1,460 -------- -------- Cash at end of period ..................................... $ 1,974 $ 1,486 ======== ========
See accompanying notes to interim consolidated financial statements. 6 7 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 thereto 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 $22,523,000 and $18,540,000 for the three months ended September 30, 1998 and 1997, respectively, and $59,046,000 and $52,700,000 for the nine months ended September 30, 1998 and 1997, respectively. The Company's ceded incurred losses were $35,704,000 and $22,146,000 for the three months ended September 30, 1998 and 1997, respectively, and were $76,177,000 and $41,995,000 for the nine months ended September 30, 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 stockholders' equity (except those arising from transactions with owners) and includes net income, net unrealized capital gains or losses on available for sale securities and foreign currency translation adjustments. Application of SFAS No. 130 did not impact amounts previously reported for net income or affect the comparability of previously issued financial statements. 7 8 The following table summarizes comprehensive income for the three months ended September 30, 1998 and 1997:
September 30, ------------------------ 1998 1997 ------ ------ (In thousands) Net income ........................................................... $2,882 $3,463 ------ ------ Other comprehensive income, net of tax: Net unrealized gains (losses) on securities available for sale: Unrealized holding gain arising during period (net of income tax expense of $771 for 1998 and $1,233 for 1997) ................... 1,432 2,394 Less: reclassification adjustment for gains included in net income (net of income tax expense of $206 for 1998 and $720 for 1997) ........................................... 382 1,398 Foreign currency translation adjustment, net of tax ................. 53 13 ------ ------ Other comprehensive income............................... 1,103 1,009 ------ ------ Comprehensive income ............................... $3,985 $4,472 ====== ======
The following table summarizes comprehensive income for the nine months ended September 30, 1998 and 1997:
September 30, ---------------------------- 1998 1997 -------- -------- (In thousands) Net income ........................................................... $ 9,391 $ 9,854 -------- -------- Other comprehensive income, net of tax: Net unrealized gains (losses) on securities available for sale: Unrealized holding gain arising during period (net of income tax expense of $925 for 1998 and $1,206 for 1997) .................. 1,718 2,346 Less: reclassification adjustment for gains included in net income (net of income tax expense of $639 for 1998 and $874 for 1997) ......................................... 1,186 1,698 Foreign currency translation adjustment, net of tax ................ 152 (52) -------- -------- Other comprehensive income ............................. 684 596 -------- -------- Comprehensive income .............................. $ 10,075 $ 10,450 ======== ========
The following table summarizes the components of accumulated other comprehensive income:
September 30, December 31, 1998 1997 ------- ------- (In thousands) Net unrealized gains on securities available-for-sale (net of tax of $3,783 in 1998 and $3,497 in 1997) .............................. $ 7,026 $ 6,494 Foreign currency translation adjustment, net of tax ................ 91 (61) ------- ------- Accumulated other comprehensive income ................... $ 7,117 $ 6,433 ======= =======
8 9 (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, effective for fiscal years beginning after December 15, 1998, establishes standards for accounting for guaranty-fund and certain other insurance related assessments. The adoption of this statement is not expected to have a material effect on the Company's results of operations or financial condition. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998 and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, earlier application is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after issuance of this statement. SFAS No. 133 should not be applied retroactively to financial statements of prior periods. The adoption of this statement will have no 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 of approximately $4,000,000 is being amortized over 20 years. Additional goodwill may be recorded in future years when the amount of the future performance contingencies are determinable. 9 10 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 fourteen 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. The Company currently specializes principally in underwriting marine, 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. Six 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 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 currently specialize principally in producing marine, 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 pool for 1998. The Somerset Companies derive their revenue from commissions, service fees and cost reimbursement arrangements from their parent company, Navigators Insurance, NIC and the unaffiliated insurers. Commissions are earned both from a fixed percentage of premiums and from underwriting profits on business placed with the participating insurance companies within the pool. Property and casualty insurance premiums historically have been cyclical in nature and, accordingly, during a "hard market" demand for property and casualty insurance exceeds supply, or capacity, and as a result, 10 11 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, 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, 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. MTC manages Lloyd's Syndicate 1221. The Company's revenue primarily consists 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. 11 12 RESULTS OF OPERATIONS General. The Company's results of operations for the nine months ended September 30, 1998 and 1997 reflect intense market competition in the marine and aviation lines. Revenues. Gross written premium for the first nine months of 1998 decreased by 9% to $116,740,000 from $128,113,000 for the first nine 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:
Nine Months Ended September 30, --------------------------------------------------------------------------- 1998 1997 ------------------------------- ------------------------------- (Dollars in thousands) Marine ........................ $ 46,330 40% $ 40,992 32% Lloyd's - Marine .............. 17,920 15 18,206 14 Aviation ...................... 23,146 20 24,891 19 Inland Marine ................. (139) -- 7,984 6 Onshore Energy ................ 8,350 7 7,461 6 Engineering and Construction... 8,163 7 4,812 4 Specialty Reinsurance and Program Insurance ....... 12,970 11 23,767 19 --------- --------- --------- --------- Gross Written Premium ......... 116,740 100% 128,113 100% --------- ========= --------- ========= Ceded Written Premium ......... (64,195) (61,627) --------- --------- Net Written Premium ........... $ 52,545 $ 66,486 ========= =========
Marine Premium. Marine gross written premium (non-Lloyd's) increased 13% when comparing the first nine months of 1998 to the first nine months of 1997 primarily due to Navigators Insurance increasing its participation in the marine pool from 48% to 60% and the premium produced from the UK Branch. Lloyd's Marine Premium. The Lloyd's marine premium is generated as the result of capacity provided to Syndicate 1221 by NCUL and Millennium in 1998 and capacity provided to Syndicate 1221 and an unaffiliated syndicate by NCUL in 1997. 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 not owned by the Insurance Companies. Aviation Premium. Aviation gross written premium decreased 7% from the first nine 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. The 12 13 Company announced on October 5, 1998 that it will not renew its airline business at the current premium levels. Inland Marine Premium. As of June 1997, the Company no longer writes traditional inland marine business. 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. The Company began writing engineering and construction business in mid 1997. The business is produced by Somerset Asia and Somerset UK. Specialty Reinsurance and Program Insurance Premium. Navigators Insurance's reinsurance premium consisted primarily of excess of loss and quota share property, surety, and other specialty reinsurance lines. This business was not renewed 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 written premium to statutory surplus. Net Written Premium. Net written premium decreased 21% when comparing the first nine months of 1997 to the first nine months of 1998 primarily due to the additional use of reinsurance and the decrease in the aviation, program and inland marine premium. Net Earned Premium. Net earned premium decreased 14% for the first nine months of 1998 to $53,452,000 as compared to $62,276,000 for the first nine months of 1997. Net earned premium for the three months ended September 30, 1998 and 1997 was $19,030,000 and $21,701,000, respectively. 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 12% from $4,202,000 for the first nine months of 1997 to $3,715,000 for the first nine months of 1998 and increased 23% for the three months ended September 30, 1998 from the same period in 1997. The decrease for the first nine months 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. The increase in the third quarter was primarily due to additional profit commission on marine business recorded in the third quarter 1998 and the inclusion of commission income from MTC, while the third quarter 1997 included a charge for a large marine claim. 13 14 Net Investment Income. Net investment income increased 7% to $11,394,000 during the first nine months of 1998 from $10,676,000 during the corresponding period in 1997 and decreased 1% to $3,724,000 during the three months ended September 30, 1998 from $3,749,000 during the corresponding period in 1997. The increase for the nine months 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 income included $1,405,000 of realized capital gains for the first nine months of 1998 compared to $2,252,000 for the same period last year. On an after tax basis, the realized capital gains were $0.11 per share in 1998 and $0.18 per share in 1997. Pre-tax income for the three months ended September 30, 1998 and 1997 included realized capital gains of $168,000 and $1,798,000, respectively. On an after tax basis the realized capital gains represented $0.01 per share and $0.14 per share for the respective three month periods. Included in net realized capital gains for the third quarter of 1998 is a loss of $421,000 from the Company's disposal of its 8% investment in Riverside Underwriters Plc. Operating Expenses. Net Loss and Loss Adjustment Expenses Incurred. The ratio of net loss and loss adjustment expenses incurred to net earned premium was 58.1% and 60.1% during the first nine months of 1998 and 1997, respectively. This decrease was primarily due to a decrease in losses in the Company's program, inland marine and specialty reinsurance business. These ratios were 61.4% and 60.6% for the three months ended September 30, 1998 and 1997, respectively. Commission Expense. Commission expense as a percentage of net earned premium was 16.7% and 18.7% during the first nine months of 1998 and 1997, respectively, and 14.8% and 21.2% for the three months ended September 30, 1998 and 1997, respectively. The decreases were primarily due to increased proportional reinsurance for which the Company receives an overriding commission and a decrease in the Company's reinsurance assumed business which generally had a higher commission expense. Other Operating Expenses. Other operating expenses increased to $16,873,000 during the first nine months of 1998 from $16,696,000 during the corresponding period of 1997 and increased 4% for the three months ended September 30, 1998 compared to the same period in 1997. These increases were primarily due to our international expansion. Interest Expense. Interest expense increased to $1,134,000 during the first nine months of 1998 from $927,000 during the corresponding period of 1997. This increase and the related increase in the third quarter of 1998 were primarily due to an increase in the loan balance under the Company's Amended Credit Agreement (as defined below) from $17,000,000 at September 30, 1997 to $22,500,000 at September 30, 1998. Income Taxes. The effective tax rates were 26.2% and 26.6% for the nine months ended September 30, 1998 and 1997, respectively. 14 15 Net Income. The Company had net income of $9,391,000 for the first nine months of 1998 compared to $9,854,000 for the same period last year. On a diluted per share basis, this represents net income per share of $1.11 and $1.18 for the first nine months of 1998 and 1997, respectively. The Company had net income of $2,882,000 or $0.34 per share for the three months ended September 30, 1998 compared to net income of $3,463,000 or $0.41 per share for the same period in 1997. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations was $(808,000) and $11,773,000 for the first nine months of 1998 and 1997, respectively. The negative cash flow in 1998 is primarily due to the payment of reserves on runoff business. Invested assets and cash decreased slightly to $257,688,000 at September 30, 1998 from $258,572,000 at December 31, 1997. The Company's credit agreement, as amended, currently provides for a $25 million revolving 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 September 30, 1998, $22.5 million in loans were outstanding under the revolving loan facility at an interest rate of 6.48% and letters of credit with an aggregate face amount of $29.5 million were issued under the letter of credit facility. The letters of credit are primarily utilized by NCUL as collateral to participate in Lloyd's Syndicate 1221 specializing in marine insurance and managed by MTC. No letters of credit have been drawn upon. In November 1998, the Company replaced its existing credit agreement and with a new credit agreement providing for a $25 million revolving loan facility which begins reducing in 2000 and terminates in 2003, and a $50 million letter of credit facility. The letters of credit will be primarily utilized by NCUL and Millennium as collateral to participate in Lloyd's Syndicate 1221 managed by MTC. As of September 30, 1998, the Company's consolidated stockholders' equity was $142,272,000, an increase of 8.4% from $131,242,000 at December 31, 1997. YEAR 2000 COMPLIANCE The Year 2000 problem relates to existing computer programs that use the last two digits to refer to a year with the assumption that the first two digits are 19. If not corrected, certain computer applications could stop running or provide inaccurate results when the first two digits of the year should be 20. The Company has considered the Year 2000 problem a high priority since 1996 and is currently replacing its major computer systems with Year 2000 compliant systems and thereby will benefit from state-of-the-art integrated systems along with being Year 2000 compliant. The Year 2000 Committee (the "Committee") includes the Company's Chief Financial Officer and senior members of the Company's Claims, Human Resources and Information Technology departments. The major goal of the Committee has been to identify critical systems that will be impacted by the Year 2000 problem, and to replace or correct the systems. The Committee provides reports to the Executive Committee as well as the Board of Directors. If the project is not completed timely, the Year 2000 issue may have a material impact on the operations of the Company. 15 16 The Company is replacing its underwriting, claims and accounting systems with state-of-the-art systems that are Year 2000 compliant. To accomplish this, internal resources have been supplemented with outside consultants. The Company expects to complete the conversion of data and to be operating on the Year 2000 compliant systems for the first quarter of 1999. December 31, 1998. All of the personal computer off-the-shelf software used by the Company is from major vendors that are either currently Year 2000 compliant or plan to be in future releases. The Company is in the process of systematically replacing the personal computer and AS400 hardware to be Year 2000 compliant by November 30, 1998. The majority of the hardware and software has been installed. The focus is now on the conversion of existing data. If for some reason the data could not be converted timely, the contingency plan is to use the Year 2000 compliant systems without the historical data. The costs associated with the above, approximately $1,000,000, relate primarily to the replacement of systems that needed to be replaced regardless of the Year 2000 issue. The costs directly related to the Year 2000 problem are minimal. As part of the overall Year 2000 Plan, business partners are being contacted to determine their progress on Year 2000 efforts. Each reply is evaluated to determine the Company's future relationship with each respondent. This effort will continue into 1999. Although the Company has not received any claims based on losses resulting from year 2000 issues, there can be no assurance that insureds will not suffer losses of this type and seek compensation under the Company's insurance policies. If any claims are made, the Company's obligations, if any, will depend on the facts and circumstances of the claim and provisions of the policy. At this time, the Company is unable to determine whether the adverse impact, if any, in connection with the foregoing circumstances would be material. The aforementioned Year 2000 discussion contains forward looking statements in respect to completion of Year 2000 compliance and the effect on the Company. Such statements are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties which could materially affect future results. 16 17 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 nine months ended September 30, 1998. 17 18 SIGNATURE 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: November 13, 1998 /s / Bradley D. Wiley ------------------------ ----------------------------------------- Bradley D. Wiley Senior Vice President, Chief Financial Officer and Secretary 18 19 INDEX OF EXHIBITS
Sequentially Numbered Exhibit No. Description of Exhibit Page - ----------- ---------------------- ---- 27.1 Financial Data Schedule
19 EX-27.1 2 FINANCIAL DATA SCHEDULE
7 1,000 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 232,042 0 0 5,216 0 0 255,714 1,974 170,838 4,660 542,298 299,174 53,096 0 0 23,428 0 0 843 141,429 542,298 53,452 11,394 1,405 720 31,040 8,908 16,873 12,731 3,340 9,391 0 0 0 9,391 1.12 1.11 139,841 0 0 0 0 132,387 0
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