-----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, HrbYUpqK3RnzvhjOEKthFWu7Yi6VybZ06amsHsMHtTOY1m6Y6NziUun+WhG6NbNE Jqgu9mF28wrs3W3Ibnm0jg== 0000950123-99-007727.txt : 19990817 0000950123-99-007727.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950123-99-007727 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99692193 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 THE NAVIGATORS GROUP, INC. 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 June 30, 1999 ------------------------------------------------- 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 August 5, 1999 there were 8,406,970 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 June 30, 1999 and December 31, 1998.................... 3 Consolidated Statements of Income Three Months Ended June 30, 1999 and 1998.............. 4 Six Months Ended June 30, 1999 and 1998................ 5 Consolidated Statements of Cash Flows Six Months Ended June 30, 1999 and 1998................ 6 Notes to Interim Consolidated Financial Statements .............. 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 11 Part II. OTHER INFORMATION............................................... 17
2 3 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
June 30, 1999 Dec. 31, 1998 ------------- ------------- (Unaudited) ASSETS Investments and cash: Fixed maturities, available-for-sale, at fair value (amortized cost: 1999, $219,682; 1998, $232,021) ...................................... $220,318 $240,233 Equity securities, available-for-sale, at fair value (cost: 1999, $6,318; 1998, $6,506) ......................................................................... 6,930 7,400 Short-term investments, at cost which approximates fair value ........................... 19,387 5,647 Cash .................................................................................... 3,606 2,807 Other investments ....................................................................... - 1,145 -------- -------- Total investments and cash .................................................... 250,241 257,232 -------- -------- Premiums in course of collection .......................................................... 85,227 76,321 Commissions receivable .................................................................... 5,117 7,823 Accrued investment income ................................................................. 3,009 3,219 Prepaid reinsurance premiums .............................................................. 30,207 25,699 Reinsurance receivable on paid and unpaid losses and loss adjustment expenses............... 217,205 200,017 Federal income tax recoverable ............................................................ 548 398 Net deferred Federal and foreign income tax benefit ........................................ 10,215 8,002 Deferred policy acquisition costs ......................................................... 4,831 4,303 Goodwill ................................................................................ 5,860 3,855 Other assets .............................................................................. 9,443 5,217 -------- -------- Total assets .................................................................. $621,903 $592,086 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses ........................................ $356,568 $342,444 Unearned premium ........................................................................ 60,105 51,295 Reinsurance balances payable ............................................................ 31,314 24,858 Notes payable to banks .................................................................. 25,000 23,500 Net deferred state and local income tax .................................................. 1,112 1,152 Accounts payable and other liabilities .................................................. 6,128 5,571 -------- -------- Total liabilities ............................................................. 480,227 448,820 -------- -------- 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 8,406,970 in 1999 and 8,447,926 in 1998 ........................ 841 845 Additional paid-in capital .............................................................. 38,752 39,332 Accumulated other comprehensive income .................................................. 697 5,747 Retained earnings ....................................................................... 101,386 97,342 -------- -------- Total stockholders' equity .................................................... 141,676 143,266 -------- -------- Total liabilities and stockholders' equity .................................... $621,903 $592,086 ======== ========
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 JUNE 30, --------------------------- 1999 1998 ---- ---- (Unaudited) Revenues: Net earned premium ...................................................... $19,830 $16,532 Commission income ....................................................... 524 1,156 Net investment income ................................................... 3,637 3,752 Net realized capital gains ............................................... 504 522 Other income ............................................................ 165 337 ------- ------- Total revenues ................................................ 24,660 22,299 ------- ------- Operating expenses: Net losses and loss adjustment expenses incurred ........................ 10,978 8,948 Commission expense ...................................................... 4,476 3,045 Other operating expenses ................................................ 6,663 5,747 Interest expense ........................................................ 279 367 ------- ------- Total operating expenses ...................................... 22,396 18,107 ------- ------- Income before income tax expense .......................................... 2,264 4,192 ------- ------- Income tax expense: Current ............................................................... (304) 1,038 Deferred .............................................................. 631 35 ------- ------- Total income tax expense ....................................... 327 1,073 ------- ------- Net income ................................................................ $ 1,937 $ 3,119 ======= ======= Net income per common share: Basic .................................................................. $ 0.23 $ 0.37 Diluted ................................................................ $ 0.23 $ 0.37 Average common shares outstanding: Basic ................................................................... 8,414 8,411 Diluted ................................................................. 8,414 8,450
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)
SIX MONTHS ENDED JUNE 30, -------------------------- 1999 1998 ---- ---- (Unaudited) Revenues: Net earned premium ................................................................. $36,764 $34,422 Commission income .................................................................. 687 2,380 Net investment income .............................................................. 7,906 7,670 Net realized capital gains .......................................................... 791 1,237 Other income ....................................................................... 232 617 ------- ------- Total revenues ........................................................... 46,380 46,326 ------- ------- Operating expenses: Net losses and loss adjustment expenses incurred ................................... 20,977 19,363 Commission expense ................................................................. 7,764 6,095 Other operating expenses ........................................................... 11,716 11,428 Interest expense ................................................................... 733 731 ------- ------- Total operating expenses ................................................. 41,190 37,617 ------- ------- Income before income tax expense ...................................................... 5,190 8,709 ------- ------- Income tax expense: Current .......................................................................... 692 2,176 Deferred ......................................................................... 454 24 ------- ------- Total income tax expense .................................................. 1,146 2,200 ------- ------- Net income ........................................................................... $ 4,044 $ 6,509 ======= ======= Net income per common share: Basic ............................................................................. $ 0.48 $ 0.78 Diluted ........................................................................... $ 0.48 $ 0.77 Average common shares outstanding: Basic .............................................................................. 8,432 8,398 Diluted ........................................................................ 8,433 8,446
See accompanying notes to interim consolidated financial statements. 5 6 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
SIX MONTHS ENDED JUNE 30, ---------------------- 1999 1998 ---- ---- (Unaudited) Operating activities: Net income................................................................................... $ 4,044 $ 6,509 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation & amortization .............................................................. 905 439 Reinsurance receivable on paid and unpaid losses and loss adjustment expenses .................................................... (17,188) (7,693) Reserve for losses and loss adjustment expenses .......................................... 14,124 2,695 Prepaid reinsurance premiums ............................................................. (4,509) (2,087) Unearned premium ......................................................................... 8,810 1,465 Premiums in course of collection ......................................................... (8,906) (4,394) Commissions receivable ................................................................... 2,706 5,058 Deferred policy acquisition costs ........................................................ (527) 400 Accrued investment income ................................................................ 216 172 Reinsurance balances payable ............................................................. 6,757 647 Federal and foreign income tax ........................................................... (184) (90) Net deferred Federal and foreign income tax ............................................. 505 474 Net realized capital (gains) .............................................................. (791) (1,237) Other .................................................................................... (2,491) (4,446) ------ ------ Net cash provided by (used in) operating activities .................................... 3,471 (2,088) ------ ------ Investing activities: Fixed maturities, available-for-sale Redemptions and maturities ............................................................... 9,174 17,999 Sales .................................................................................... 39,959 16,332 Purchases ................................................................................ (36,686) (35,269) Equity securities, available-for-sale Sales .................................................................................... 1,913 2,216 Purchases ................................................................................ (1,444) (1,061) Other investments: Sales ..................................................................................... 1,145 - Payable for securities purchased ........................................................... (1,076) 787 Net sales (purchases) of short-term investments ............................................ (13,740) 6,087 Payment for purchase of MTC, net of cash acquired .......................................... - (5,245) Payment for purchase of Anfield, net of cash acquired........................................ (2,591) - Purchase of property and equipment ......................................................... (170) (602) ------ ------ Net cash provided by (used in) investing activities ...................................... (3,516) 1,244 ------ ------ Financing activities: Stock repurchase program ..................................................................... (700) - Proceeds from bank loan ...................................................................... 1,500 2,500 Proceeds from exercise of stock options ..................................................... 44 754 ------ ------ Net cash provided by financing activities ................................................ 844 3,254 ------ ------ Increase in cash ................................................................................ 799 2,410 Cash at beginning of year .................................................................. 2,807 1,741 ------ ------ Cash at end of period ...................................................................... $ 3,606 $ 4,151 ====== ====== Supplemental schedule of non-cash investing and financing activities: Issuance of stock to Directors ............................................................ $ 72 $ 72 Federal income tax paid.......................................................................... 1,600 1,600 Interest paid.................................................................................... 706 656
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 contained in the Company's Form 10-K for the year ended December 31, 1998. 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 $15,508,000 and $19,446,000 for the three months ended June 30, 1999 and 1998, respectively, and $34,208,000 and $36,523,000 for the six months ended June 30, 1999 and 1998, respectively. The Company's ceded incurred losses were $31,901,000 and $26,007,000 for the three months ended June 30, 1999 and 1998, respectively, and were $52,336,000 and $40,473,000 for the six months ended June 30, 1999 and 1998, respectively. (3) Acquisition of Anfield Insurance Services, Inc. In April 1999, the Company purchased 100% of Anfield Insurance Services, Inc. ("Anfield"), an insurance agency located in San Francisco, California. The purchase price of approximately $2,700,000 was funded through a bank loan and working capital. Goodwill of $2,300,000 was recorded in connection with the transaction and is being amortized over 20 years. (4) Segments of an Enterprise The Company's subsidiaries are primarily engaged in the writing and management of property and casualty insurance. The Company's segments include the Insurance Companies, the Somerset Companies and the Lloyd's operations, each of which is managed separately. The Insurance Companies consist of Navigators Insurance Company and NIC Insurance Company and are primarily engaged in underwriting marine insurance and related lines of business. The Somerset Companies are underwriting management companies. The Somerset Companies produce, manage and underwrite insurance and reinsurance for both affiliated and non-affiliated companies. The Lloyd's operations underwrite marine and related lines of business at Lloyd's of London as a corporate member with limited liability. All segments are evaluated based on their GAAP underwriting or operating results. The Insurance Companies and the Lloyd's operations are measured taking into account net premiums earned, incurred losses and loss expenses, commission expense and other underwriting expenses. The Somerset Companies' results include commission income less other operating expenses. Each segment also maintains their own investments, on which they earn income and realize capital gains or losses. Other operations include intersegment income and expense in the form of affiliated commissions, as well as income and expense from corporate operations. 7 8 Financial data by segment for the periods indicated were as follows:
Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (In thousands) Revenue, excluding net investment income and realized gains on investments: Insurance Companies.............................................. $12,480 $12,077 $23,094 $24,940 Somerset Companies............................................... 2,198 3,364 4,053 6,424 Lloyd's operations............................................... 7,430 4,495 13,940 9,685 Other operations (includes corporate activity and consolidating adjustments).................................... (1,589) (1,911) (3,404) (3,630) ------- ------- ------- ------- Total.................................................... $20,519 $18,025 $37,683 $37,419 ======= ======= ======= ======= Income (loss) before income tax expense (benefit): Insurance Companies.............................................. $ 4,612 $ 5,173 $ 9,334 $10,901 Somerset Companies............................................... (1,804) (438) (3,507) (1,204) Lloyd's operations............................................... (227) 162 (37) 190 Other operations................................................. (317) (705) (600) (1,178) ------- ------- ------- ------- Total ......................................................... $ 2,264 $ 4,192 $ 5,190 $ 8,709 ======= ======= ======= ======= Income tax expense (benefit): Insurance Companies.............................................. $ 1,083 $ 1,385 $ 2,455 $ 2,713 Somerset Companies............................................... (545) 70 (1,115) (52) Lloyd's operations............................................... - (35) - - Other operations................................................. (211) (347) (194) (461) ------- ------- ------- ------- Total................................................... $ 327 $ 1,073 $ 1,146 $ 2,200 ======= ======= ======= ======= Net income (loss): Insurance Companies.............................................. $ 3,529 $ 3,788 $ 6,879 $ 8,188 Somerset Companies............................................... (1,259) (508) (2,392) (1,152) Lloyd's operations............................................... (230) 197 (37) 190 Other operations................................................. (103) (358) (406) (717) ------- ------- ------- ------- Total ......................................................... $ 1,937 $ 3,119 $ 4,044 $ 6,509 ======= ======= ======= =======
(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. 8 9 The following table summarizes comprehensive income for the three months ended June 30, 1999 and 1998:
June 30, ----------------------- 1999 1998 ---- ---- (In thousands) Net income .............................................................. $ 1,937 $3,119 ------- ------ Other comprehensive income, net of tax: Net unrealized (losses) on securities available for sale: Unrealized holding gain (loss) arising during period (net of income tax (benefit) of ($2,183) for 1999 and $(5) for 1998) (4,054) (6) Less: reclassification adjustment for gains included in net income (net of income tax expense of ($218) for 1999 and $183 for 1998) ......................................... (404) 339 ------- ------ Net unrealized gains (losses) on securities ................... (3,650) (345) Foreign currency translation adjustment, net of tax .................... 259 41 ------- ------ Other comprehensive income............................... (3,391) (304) ------- ------ Comprehensive income (loss).......................... $(1,454) $2,815 ======= ======
The following table summarizes comprehensive income for the six months ended June 30, 1999 and 1998:
June 30, ---------------- 1999 1998 ---- ---- (In thousands) Net income ........................................................................ $ 4,044 $6,509 ------- ------ 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 (benefit) expense of ($3,048) for 1999 and $152 for 1998) ............................................................... (5,661) 286 Less: reclassification adjustment for gains/(losses) included in net income (net of income tax (benefit) expense of ($298) for 1999 and $433 for 1998)............................................ (553) 804 ------- ------ Net unrealized gains (losses) on securities............................... (5,108) (518) Foreign currency translation adjustment, net of tax ............................. 58 99 ------- ------ Other comprehensive income (loss) .................................. (5,050) (419) ------- ------ Comprehensive income (loss) .................................. $(1,006) $6,090 ======= ======
9 10 The following table summarizes the components of accumulated other comprehensive income:
June 30, December 31, 1999 1998 ---------- -------------- (In thousands) Net unrealized gains on securities available-for-sale (net of tax of $437 in 1999 and $3,187 in 1998) ........................................... $ 811 $5,919 Foreign currency translation adjustment, net of tax ............................ (114) (172) ----- ----- Accumulated other comprehensive income ............................... $ 697 $5,747 ===== =====
(5) Future Application of Accounting Standards SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998 and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In June 1999, SFAS No. 137 was issued which deferred the effective date of SFAS No. 133 from being effective for all fiscal quarters of fiscal years beginning after June 15, 1999 to all fiscal quarters of all fiscal years beginning after June 15, 2000. Earlier application is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after issuance of this statement. SFAS No. 133 should not be applied retroactively to financial statements of prior periods. The adoption of this statement is not expected to have a material effect on the Company's results of operations or financial condition. (6) Adoption of Accounting Standards 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 did not have a material effect on the Company's results of operations or financial condition. SOP 98-5, Reporting the Costs of Start-Up Activities, was issued in April 1998 and requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998. Restatement of previously issued financial statements is not permitted. The adoption of the SOP did not have a material effect on the Company's results of operations or financial condition. 10 11 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"), which includes a United Kingdom Branch ("UK") Branch and NIC Insurance Company ("NIC"). Navigators Insurance is the Company's largest insurance subsidiary and has been active since 1983. It specializes principally in underwriting marine insurance. NIC, a wholly owned subsidiary of Navigators Insurance, began operations in 1990. It underwrites a small book of surplus lines insurance in certain states and cedes 100% of its gross direct writings from this business to Navigators Insurance. Navigators Insurance and NIC are collectively referred to herein as the "Insurance Companies". Five of the Company's subsidiaries are underwriting management companies: Somerset Marine, Inc., Somerset Insurance Services of Texas, Inc., Somerset Insurance Services of California, Inc., Somerset Insurance Services of Washington, Inc. and Somerset Marine (UK) Limited ("Somerset UK") (collectively, the "Somerset Companies"). The Somerset Companies produce, manage and underwrite insurance and reinsurance for Navigators Insurance, NIC and four unaffiliated insurance companies. The Somerset Companies specialize principally in producing marine insurance premium. They underwrite marine business for a syndicate of insurance companies with Navigators Insurance having a 75% participation in the syndicate for 1999. The Somerset Companies derive their revenue from commissions, investment income, service fees and cost reimbursement arrangements from the Company, Navigators Insurance 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 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. 11 12 Navigators Holdings (UK) Limited is a holding company for the Company's UK subsidiaries. Somerset UK produces business for the UK Branch of Navigators Insurance. Navigators Corporate Underwriters Limited ("NCUL") is admitted to do business at Lloyd's of London as a corporate member with limited liability. In January 1998, the Company acquired 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. In August 1999, MTC formed Pennine Underwriting Limited, an underwriting managing agency located in Northern England, to underwrite cargo and engineering business for Lloyd's Syndicate 1221 managed by MTC. In April 1999, the Company acquired Anfield, an insurance agency located in San Francisco, California, which specializes in underwriting general liability insurance coverage for small artisan and general contractors on the West Coast. 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 Insurance's participation in insurance pools managed by the Somerset Companies. The Insurance Companies are managed by Somerset Marine, Inc. RESULTS OF OPERATIONS The Company's 1999 and 1998 results of operations reflect intense market competition in the marine business. Revenues. Gross written premium for the first six months of 1999 increased 10% to $79,865,000 from $72,409,000 for the first six months of 1998. 12 13 The following table sets forth the Company's gross written premium by line of business and net written premium in the aggregate for the periods indicated:
Six Months Ended June 30, ------------------------ 1999 1998 ------------- ------------------- (Dollars in thousands) Lloyd's Operations: Marine ......................................... $ 21,573 27% $ 12,473 17% Insurance Companies: Marine ......................................... 47,951 60 28,359 39 Aviation ...................................... 264 - 12,684 17 Onshore Energy ................................... 1,284 2 6,206 9 Engineering and Construction....................... 642 1 4,057 6 Program Insurance ................................. 7,932 10 8,444 12 Other ............................................. 219 - 186 - ------ ---- ------ ---- Gross Written Premium................................ 79,865 100% 72,409 100% ------ === ------ === Ceded Written Premium................................ (38,717) (38,685) ------ ------ Net Written Premium.................................. $ 41,148 $ 33,724 ====== ======
LLOYD'S OPERATIONS Lloyd's Marine Premium. The Lloyd's marine premium is generated as the result of NCUL and Millennium providing capacity to Lloyd's Syndicate 1221 managed by MTC. The premiums, losses and expenses from the Lloyd's 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. The Lloyd's gross written premium for the six months ended June 30, 1999 increased 73% from the same period in 1998 due to the Company's increased participation in Syndicate 1221. INSURANCE COMPANIES Marine Premium. Marine gross written premium increased 69% when comparing the first six months of 1999 to the first six months of 1998 primarily due to, beginning July 1, 1998, Navigators Insurance writing 100% of the marine risk and then ceding to the other pool members. Prior to July 1, 1998, each pool member's gross written premium was equal to the pool member's participation in the pool instead of assuming its participation from Navigators Insurance. Navigators Insurance's participation in the marine pools increased from 60% in 1998 to 75% in 1999. Aviation Premium. Aviation gross written premium decreased from the first six months of 1998 to 1999 as the result of Navigators Insurance's withdrawal from aviation business effective October 1998, other than a small amount of war and satellite business, due to inadequate pricing in the aviation insurance market. 13 14 Onshore Energy Premium. In 1996, Navigators Insurance 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 decrease in the premium from 1998 to 1999 was due to the Company's decision in 1999 to close the Somerset Asia Pacific Pty Limited office in Australia which produced the majority of this business. Beginning in mid 1999, all of the onshore energy business is being written through the Company's facilities at Lloyd's in which the UK Branch participates. Engineering and Construction Premium. In 1997, the Company began writing engineering and construction business consisting of coverage for construction projects including machinery, equipment and loss of use due to delays. The decrease in the premium from 1998 to 1999 was due to the Company's decision in 1999 to close the Somerset Asia Pacific Pty Limited office in Australia which produced the majority of this business. Beginning in mid 1999, all of the engineering and construction business is being written through the Company's facilities at Lloyd's in which the UK Branch participates. Program Insurance Premium. The program business currently consists of Anfield writing contractors' general liability premium consisting of liability insurance coverage for small artisan and general contractors. Ceded Premium. In the ordinary course of business, the Company reinsures certain insurance risks with unaffiliated insurance companies for the purpose of limiting its maximum loss exposure, protecting against catastrophic losses, and maintaining desired ratios of net premiums written to statutory surplus. In general, the Company retains more of the premium produced by the Lloyd's operations than the premium produced by the Insurance Companies. Net Written Premium. Net written premium increased 22% when comparing the first six months of 1998 to the first six months of 1999 primarily due to the increase in the marine business partially offset by decreases in other lines as described above. Navigators Insurance's participation in the marine pools increased from 60% in 1998 to 75% in 1999. Net Earned Premium. Net earned premium increased 7% for the first six months of 1999 to $36,764,000 as compared to $34,422,000 for the first six months of 1998. Net earned premium for the first three months ended June 30, 1999 and 1998 was $19,830,000 and $16,532,000, 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 generated by the Somerset Companies decreased from $2,380,000 for the first six months of 1998 to $687,000 for the first six months of 1999 and also decreased 55% for the three months ended June 30, 1999 from the same period in 1998. The decrease was primarily due to Navigators Insurance's increased participation in the marine pool which resulted in the Company receiving less commission income from the unaffiliated members of the pool. 14 15 Net Investment Income. Net investment income increased 3% to $7,906,000 during the first six months of 1999 from $7,670,000 during the corresponding period in 1998 and decreased 3% to $3,637,000 during the three months ended June 30, 1999 from $3,752,000 during the corresponding period in 1998. These minor fluctuations in investment income are primarily due to the Lloyd's operations which earn income on investments held by the Lloyd's syndicates in which the Company participates. Such investments represent funds due from the syndicates to the Company. Net Realized Capital Gains. Pre-tax net income included $791,000 of realized capital gains for the first six months of 1999 compared to $1,237,000 for the same period last year. On an after tax basis, the realized capital gains were $0.06 per share in 1999 and $0.10 per share in 1998. Pre-tax net income for the three months ended June 30, 1999 and 1998 included realized capital gains of $504,000 and $522,000, respectively. On an after tax basis the realized capital gains represented $0.04 per share for each of the three-month periods. Operating Expenses. Net Loss and Loss Adjustment Expenses Incurred. The ratio of net loss and loss adjustment expenses incurred to net earned premium was 57.1% and 56.3% during the first six months of 1999 and 1998, respectively. This increase was primarily due to higher loss ratios in the Lloyd's operations related to the more recent underwriting years. These ratios were 55.4% and 54.1% for the three months ended June 30, 1999 and 1998, respectively. Commission Expense. Commission expense as a percentage of net earned premium was 21.1% and 17.7% during the first six months of 1999 and 1998, respectively, and 22.6% and 18.4% for the three months ended June 30, 1999 and 1998, respectively. The increase was primarily due to higher commission rates in the Lloyd's operations. Other Operating Expenses. Other operating expenses increased 3% to $11,716,000 during the first six months of 1999 from $11,428,000 during the corresponding period of 1998 and increased 16% for the three months ended June 30, 1999 compared to the same period in 1998. This increase was primarily due to the acquisition of Anfield on April 2, 1999 and increased expenses from the Company's Lloyd's operations due to the Company's increased participation in its Lloyd's syndicate, partially offset by expense reductions in the Company's other foreign operations. Interest Expense. Interest expense was $733,000 during the first six months of 1999 compared to $731,000 during the corresponding period of 1998. Interest on an increase in the loan balance under the Company's Amended Credit Agreement (as defined below) from $22,500,000 at June 30, 1998 to $25,000,000 at June 30, 1999, was partially offset by lower interest rates for the 1999 period. 15 16 Income Taxes. The effective tax rate was 22.1% and 25.3% for the six months ended June 30, 1999 and 1998, respectively. The decrease in the tax rate was primarily due to a decrease in taxable income from the Somerset Companies. Net Income. The Company had net income of $4,044,000 for the first six months of 1999 compared to $6,509,000 for the same period last year. On a diluted per share basis, this represents net income per share of $0.48 and $0.77 for the first six months of 1999 and 1998, respectively. The Company had net income of $1,937,000 or $0.23 per share for the three months ended June 30, 1999 compared to net income of $3,119,000 or $0.37 per share for the same period in 1998. The decrease in net income is primarily due to the increases in losses and commissions. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations was $3,471,000 and $(2,088,000) for the first six months of 1999 and 1998, respectively. Invested assets and cash decreased to $250,241,000 at June 30, 1999 from $257,232,000 at December 31, 1998 due to decreases in the unrealized investment gains and the purchase of Anfield. The Company's bank credit facility currently provides for a $25 million revolving line of credit facility, which reduces each quarter by amounts ranging between $1,000,000 to $2,250,000 beginning January 1, 2000 until it terminates on November 19, 2003, and a $60 million letter of credit facility. At June 30, 1999, $25,000,000 in loans were outstanding under the revolving line of credit facility at an interest rate of 6.0%. The letter of credit facility is utilized primarily by NCUL and Millennium to participate in Lloyd's syndicate 1221 managed by MTC. At June 30, 1999, letters of credit with an aggregate face amount of $41,085,000 were issued under the letter of credit facility. No letters of credit have been drawn upon. As of June 30, 1999, the Company's consolidated stockholders' equity was $141,676,000 compared to $143,266,000 at December 31, 1998. The decrease was primarily due to decreases in the unrealized gains and the stock repurchase program partially offset by net income. YEAR 2000 COMPLIANCE The Company is aware of the issues related to existing computer systems and has replaced 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 systems were implemented in 1999 and are currently being tested. The testing should be completed in the third quarter of 1999. The actions being taken to resolve the Company's Year 2000 issue, as described in detail in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, are on schedule. 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. 16 17 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the information concerning market risk as stated in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. STOCK REPURCHASE PROGRAM On January 6, 1999, the Company announced a stock repurchase program for up to $3,000,000 of its common stock. At June 30, 1999, the Company had repurchased 48,700 shares at a cost of $700,000. PART II - OTHER INFORMATION Item 1. Legal Proceedings: The Company is not a party to or the subject of any material pending legal proceedings which depart from the ordinary routine litigation incident to the kinds of business conducted by the Company, except for an assessment on Navigators Insurance by the Institute of London Underwriters ("ILU"). In late 1998, the ILU advised its forty-one members, including Navigators Insurance, that they were each being assessed approximately Pound Sterling 900,000 to pay for anticipated operating deficits arising from the ILU's long term lease of the building occupied by the ILU in London. This matter is currently not in litigation and Navigators Insurance continues to oppose the assessment as inequitable and inappropriate. Discussions with the ILU are ongoing and the Company's ultimate liability, if any, is not possible to forecast at the present time. Item 2. Changes in Securities: None. Item 3. Defaults Upon Senior Securities: None. 17 18 Item 4. Submissions of Matters to a Vote of Securities Holders: On May 27, 1999, the Company's stockholders voted for the following matters at the annual stockholders' meeting: (a) The election of seven (7) directors to serve until the 2000 Annual Meeting of Stockholders or until their respective successors have been duly elected and qualified. The results of the voting were as follows:
Name For Withheld ---- --- -------- Terence N. Deeks 6,647,379 29,050 Robert M. DeMichele 6,647,379 29,050 Leandro S. Galban 6,647,379 29,050 Marc M. Tract 6,636,779 39,650 William D. Warren 6,625,529 50,900 Robert F. Wright 6,647,379 29,050 Howard M. Zelikow 6,647,379 29,050
(b) The ratification of the appointment of KPMG LLP as the Company's independent auditors. The stockholders cast 6,676,129 votes for and 300 votes against ratification with no abstention votes. 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 six months ended June 30, 1999. 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Navigators Group, Inc. -------------------------------- (Registrant) Dated: August 13, 1999 /s / Bradley D. Wiley ------------------- -------------------------------- Bradley D. Wiley Senior Vice President, Chief Financial Officer and Secretary 19 20 INDEX OF EXHIBITS
Sequentially Numbered Exhibit No. Description of Exhibit Page - ----------- ---------------------- ------------ 27.1 Financial Data Schedule
20 EX-27.1 2 FINANCIAL DATA SCHEDULE
7 1000 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 220,318 0 0 6,930 0 0 246,635 3,606 217,205 4,831 621,903 356,568 60,105 0 0 25,000 0 0 841 140,836 621,903 36,764 7,906 791 919 29,977 7,764 11,716 5,190 1,146 4,044 0 0 0 4,044 0.48 0.48 150,517 0 0 0 0 148,512 0
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