-----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, CiSW05LD5zzAD+At+mpKVGokiqTj19/+6bMafN322nDmNp1KpjkfYOq7a5G0jycA 35Rn16MS1h7iVsV6oSZOMQ== 0000950123-99-010290.txt : 19991117 0000950123-99-010290.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950123-99-010290 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991116 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/A SEC ACT: SEC FILE NUMBER: 000-15886 FILM NUMBER: 99758180 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/A 1 THE NAVIGATORS GROUP 1 FORM 10-Q/A 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, 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 November 11, 1999, there were 8,406,970 shares of $0.10 par value common stock outstanding. 1 2 THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES INDEX Page No. Part I. FINANCIAL INFORMATION: Consolidated Balance Sheets September 30, 1999 and December 31, 1998 ........... 3 Consolidated Statements of Income Three Months Ended September 30, 1999 and 1998 ..... 4 Nine Months Ended September 30, 1999 and 1998 ...... 5 Consolidated Statements of Cash Flows Nine Months Ended September 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)
September 30, December 31, 1999 1998 ------------- ------------ (Unaudited) ASSETS Investments and cash: Fixed maturities, available-for-sale, at fair value (amortized cost: 1999, $224,458; 1998, $232,021) .......................................... $ 223,176 $ 240,233 Equity securities, available-for-sale, at fair value (cost: 1999, $11,176; 1998, $6,506) ............................................................................. 11,021 7,400 Short-term investments, at cost which approximates fair value ............................... 15,265 5,647 Cash ........................................................................................ 3,187 2,807 Other investments .................................................................... -- 1,145 --------- --------- Total investments and cash ........................................................... 252,649 257,232 --------- --------- Premiums in course of collection .............................................................. 80,581 76,321 Commissions receivable ........................................................................ 2,115 7,823 Accrued investment income ..................................................................... 3,184 3,219 Prepaid reinsurance premiums .................................................................. 29,073 25,699 Reinsurance receivable on paid and unpaid losses and loss adjustment expenses ................. 227,200 200,017 Federal income tax recoverable ................................................................ 2,376 398 Net deferred Federal and foreign income tax benefit ........................................... 13,171 8,002 Deferred policy acquisition costs ............................................................. 4,880 4,303 Goodwill ...................................................................................... 5,916 3,855 Other assets .................................................................................. 7,857 5,217 --------- --------- Total assets ......................................................................... $ 629,002 $ 592,086 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses ............................................ $ 370,923 $ 342,444 Unearned premium ............................................................................ 58,212 51,295 Reinsurance balances payable ................................................................ 33,013 24,858 Notes payable to banks ...................................................................... 25,000 23,500 Net deferred state and local income tax ..................................................... 553 1,152 Accounts payable and other liabilities ...................................................... 6,520 5,571 --------- --------- Total liabilities .................................................................... 494,221 448,820 --------- --------- 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 8,455,670 in 1999 and 8,447,926 in 1998 ............................................ 846 845 Additional paid-in capital .................................................................. 39,447 39,332 Treasury stock held at cost, 48,700 shares in 1999 .......................................... (700) -- Accumulated other comprehensive income (loss)................................................ (1,391) 5,747 Retained earnings ........................................................................... 96,579 97,342 --------- --------- Total stockholders' equity ........................................................... 134,781 143,266 --------- --------- Total liabilities and stockholders' equity .................................................... $ 629,002 $ 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 SEPTEMBER 30, ----------------------- 1999 1998 -------- -------- (Unaudited) Revenues: Net earned premium ............................. $ 15,258 $ 19,030 Commission income .............................. (460) 1,334 Net investment income .......................... 4,003 3,724 Net realized capital gains (losses) ............ (14) 168 Other income ................................... 83 104 -------- -------- Total revenues .......................... 18,870 24,360 -------- -------- Operating expenses: Net losses and loss adjustment expenses incurred 16,502 11,677 Commission expense ............................. 3,099 2,813 Other operating expenses ....................... 6,375 5,445 Interest expense ............................... 354 403 -------- -------- Total operating expenses ................ 26,330 20,338 -------- -------- Income (loss) before income tax expense .......... (7,460) 4,022 -------- -------- Income tax expense (benefit): Current ...................................... (320) 799 Deferred ..................................... (2,332) 341 -------- -------- Total income tax expense (benefit) ...... (2,652) 1,140 -------- -------- Net income (loss) ................................ $ (4,808) $ 2,882 ======== ======== Net income (loss) per common share: Basic ................................... $ (0.57) $ 0.34 Diluted ................................. $ (0.57) $ 0.34 Average common shares outstanding: Basic ................................... 8,407 8,423 Diluted ................................. 8,410 8,455
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, ------------------------ 1999 1998 -------- -------- (Unaudited) Revenues: Net earned premium ............................. $ 52,022 $ 53,452 Commission income .............................. 228 3,715 Net investment income .......................... 11,909 11,394 Net realized capital gains ..................... 777 1,405 Other income ................................... 315 720 -------- -------- Total revenues .......................... 65,251 70,686 -------- -------- Operating expenses: Net losses and loss adjustment expenses incurred 37,479 31,040 Commission expense ............................. 10,863 8,908 Other operating expenses ....................... 18,091 16,873 Interest expense ............................... 1,087 1,134 -------- -------- Total operating expenses ................ 67,520 57,955 -------- -------- Income (loss) before income tax expense .......... (2,269) 12,731 -------- -------- Income tax expense (benefit): Current ....................................... 372 2,976 Deferred ...................................... (1,878) 364 -------- -------- Total income tax expense (benefit) ...... (1,506) 3,340 -------- -------- Net income (loss) ................................ $ (763) $ 9,391 ======== ======== Net income (loss) per common share: Basic ......................................... $ (0.09) $ 1.12 Diluted ....................................... $ (0.09) $ 1.11 Average common shares outstanding: Basic ......................................... 8,423 8,406 Diluted ....................................... 8,425 8,453
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, ----------------------- 1999 1998 -------- -------- (Unaudited) Operating activities: Net income (loss) ............................................... $ (763) $ 9,391 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation & amortization ................................... 1,262 672 Reinsurance receivable on paid and unpaid losses and loss adjustment expenses .......................... (27,184) (23,734) Reserve for losses and loss adjustment expenses ............... 28,479 20,742 Prepaid reinsurance premiums .................................. (3,374) (5,205) Unearned premium .............................................. 6,917 4,436 Premiums in course of collection .............................. (4,260) (11,512) Commissions receivable ........................................ 5,708 5,208 Deferred policy acquisition costs ............................. (576) 743 Accrued investment income ..................................... 41 (24) Reinsurance balances payable .................................. 8,457 3,028 Federal and foreign income tax ................................ (2,011) 114 Net deferred Federal and foreign income tax ................... (1,326) 497 Net realized capital (gains) .................................. (777) (1,405) Other ......................................................... (2,342) (3,759) -------- -------- Net cash provided by (used in) operating activities ......... 8,251 (808) -------- -------- Investing activities: Fixed maturities, available-for-sale Redemptions and maturities .................................... 19,595 24,074 Sales ......................................................... 39,287 23,742 Purchases ..................................................... (51,187) (50,810) Equity securities, available-for-sale Sales ......................................................... 2,804 3,207 Purchases ..................................................... (7,197) (1,355) Sale of other investments ....................................... 1,145 1,262 Net sales (purchases) of short-term investments ................. (9,618) 5,431 Payable for securities purchased ................................ (430) (889) Payment for purchase of MTC, net of cash acquired ............... -- (5,321) Payment for purchase of Anfield, net of cash acquired ........... (2,591) -- Purchase of property and equipment .............................. (523) (850) -------- -------- Net cash provided by (used in) investing activities ........... (8,715) (1,509) -------- -------- Financing activities: Stock repurchase program ......................................... (700) -- Proceeds from bank loan .......................................... 1,500 2,500 Repayment of note payable ........................................ -- (354) Proceeds from exercise of stock options .......................... 44 894 -------- -------- Net cash provided by financing activities ..................... 844 3,040 -------- -------- Increase in cash .................................................... 380 723 Cash at beginning of year ........................................... 2,807 1,251 -------- -------- Cash at end of period ............................................... $ 3,187 $ 1,974 ======== ======== Supplemental schedule of non-cash investing and financing activities: Issuance of stock to Directors ................................. $ 72 $ 72 Federal income tax paid ......................................... 1,650 1,600 Interest paid ................................................... 976 1,078
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 $19,587,000 and $22,523,000 for the three months ended September 30, 1999 and 1998, respectively, and were $53,795,000 and $59,046,000 for the nine months ended September 30, 1999 and 1998, respectively. The Company's ceded incurred losses were $39,810,000 and $35,704,000 for the three months ended September 30, 1999 and 1998, respectively, and were $92,146,000 and $76,177,000 for the nine months ended September 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 which 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 corporate members with limited liability and a Lloyd's agency. The Insurance Companies and the Lloyd's operations are evaluated based on their GAAP underwriting results. The Somerset Companies are evaluated based on their GAAP 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 Nine Months Ended September 30, September 30, ----------------------- ----------------------- 1999 1998 1999 1998 -------- -------- -------- -------- (In thousands) Revenue, excluding net investment income and realized gains on investments: Insurance Companies ................................................. $ 9,173 $ 13,929 $ 32,267 $ 38,869 Somerset Companies .................................................. (153) 3,809 3,900 10,233 Lloyd's operations .................................................. 6,311 5,203 20,251 14,888 Other operations (includes corporate activity and consolidating adjustments) ....................................... (450) (2,473) (3,853) (6,103) -------- -------- -------- -------- Total ......................................................... $ 14,881 $ 20,468 $ 52,565 $ 57,887 ======== ======== ======== ======== Income (loss) before income tax expense (benefit): Insurance Companies ................................................. $ (1,662) $ 5,147 $ 7,672 $ 16,048 Somerset Companies .................................................. (3,677) (117) (7,184) (1,321) Lloyd's operations .................................................. (1,996) 97 (2,033) 287 Other operations .................................................... (125) (1,105) (724) (2,283) -------- -------- -------- -------- Total ............................................................... $ (7,460) $ 4,022 $ (2,269) $ 12,731 ======== ======== ======== ======== Income tax expense (benefit): Insurance Companies ................................................. $ (1,405) $ 1,277 $ 1,050 $ 3,990 Somerset Companies .................................................. (1,264) 270 (2,379) 218 Lloyd's operations .................................................. 221 (221) 221 (221) Other operations .................................................... (204) (186) (398) (647) -------- -------- -------- -------- Total ...................................................... $ (2,652) $ 1,140 $ (1,506) $ 3,340 ======== ======== ======== ======== Net income (loss): Insurance Companies ................................................. $ (257) $ 3,870 $ 6,622 $ 12,058 Somerset Companies .................................................. (2,413) (387) (4,805) (1,539) Lloyd's operations .................................................. (2,217) 318 (2,254) 508 Other operations .................................................... 79 (919) (326) (1,636) -------- -------- -------- -------- Total ............................................................... $ (4,808) $ 2,882 $ (763) $ 9,391 ======== ======== ======== ========
(4) Comprehensive Income 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 September 30, 1999 and 1998:
September 30, --------------------- 1999 1998 ------- ------- (In thousands) Net income (loss) .................................................... $(4,808) $ 2,882 ------- ------- Other comprehensive income, net of tax: Net unrealized gains (losses) on securities available for sale: Unrealized holding gain (loss) arising during period (net of tax expense (benefit) of $(928) for 1999 and $771 for 1998) ................................................. (1,723) 1,432 Less: reclassification adjustment for gains (losses) included in net income (net of income tax expense of $12 for 1999 and $206 for 1998) .................................. 22 382 ------- ------- Net unrealized gain (loss) on securities .................... (1,745) 1,050 Foreign currency translation gains (losses) adjustment, net of tax (342) 53 ------- ------- Other comprehensive income (loss) ........................ (2,087) 1,103 ------- ------- Comprehensive income (loss) .......................... $(6,895) $ 3,985 ======= =======
The following table summarizes comprehensive income for the nine months ended September 30, 1999 and 1998:
September 30, --------------------- 1999 1998 ------- ------- (In thousands) Net income (loss) ................................................ $ (763) $ 9,391 ------- ------- Other comprehensive income, net of tax: Net unrealized gains (losses) on securities available for sale: Unrealized holding gain (loss) arising during period (net of tax (benefit) expense of $(3,374) for 1999 and $925 for 1998) ............................................. (6,266) 1,718 Less: reclassification adjustment for gains included in net income (net of income tax expense of $248 for 1999 and $639 for 1998) ................................... 587 1,186 ------- ------- Net unrealized gains (losses) on securities .............. (6,853) 532 Foreign currency translation gain (loss) adjustment, net of tax (285) 152 ------- ------- Other comprehensive income (loss) .................... (7,138) 684 ------- ------- Comprehensive income (loss) ....................... $(7,901) $10,075 ======= =======
9 10 The following table summarizes the components of accumulated other comprehensive income:
September 30, December 31, 1999 1998 ------------- ------------ (In thousands) Net unrealized gains (losses) on securities available-for-sale (net of tax (benefit) expense of $(503) in 1999 and $3,187 in 1998) ....... $ (935) $ 5,919 Foreign currency translation (loss) adjustment, net of tax ........... (456) (172) ------- ------- Accumulated other comprehensive income (loss) ........................ $(1,391) $ 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 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"), which includes a United Kingdom Branch ("UK") Branch and NIC Insurance Company ("NIC"). Navigators Insurance is the Company's largest insurance subsidiary and has been active since 1983. It specializes principally in underwriting marine insurance and related lines of business. 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 pool of insurance companies with Navigators Insurance having a 75% participation in the pool for 1999. The Somerset Companies derive their revenue from commissions, 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 pool. Property and casualty insurance premiums historically have been cyclical in nature and, accordingly, during a "hard market" demand for property and casualty insurance exceeds supply, or capacity, and as a result, premiums and commissions may increase. On the downturn of the property and casualty cycle, supply exceeds demand, and as a result, premiums and commissions may decrease. 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 which manages Lloyd's Syndicate 1221, 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, which underwrites cargo and engineering business for Lloyd's Syndicate 1221. 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 business written 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. The third quarter 1999 results include a charge against earnings of approximately $6.5 million pretax resulting in an after tax charge of approximately $4.2 million or $0.50 per fully diluted share. The charge is the result of nonrecoverable reinsurance from New Cap Reinsurance Corporation Limited ("New Cap Re"). As reported in the Company's September 3, 1999 news release, New Cap Re, which participated in the Company's 1997 and 1998 reinsurance programs, has been put under the control of an Administrator for possible liquidation. Revenues. Gross written premium for the first nine months of 1999 decreased 3.5% to $112,667,000 from $116,740,000 for the first nine 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:
Nine Months Ended September 30, ---------------------------------------------------------- 1999 1998 ------------------------- ------------------------- (Dollars in thousands) Lloyd's Operations: Marine ..................... $ 32,109 28% $ 17,920 15% Insurance Companies: Marine ..................... 65,353 58 46,330 40 Aviation ................... 354 -- 23,146 20 Onshore Energy ............. 937 1 8,350 7 Engineering and Construction 617 1 8,163 7 Program Insurance .......... 13,142 12 12,065 10 Other ...................... 155 -- 766 1 --------- --------- --------- --------- Gross Written Premium ........ 112,667 100% 116,740 100% --------- --------- --------- --------- Ceded Written Premium ........ (57,172) (64,195) --------- --------- Net Written Premium .......... $ 55,495 $ 52,545 ========= =========
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 nine months ended September 30, 1999 increased 79.2% 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 41% when comparing the first nine months of 1999 to the first nine 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 nine months of 1998 to 1999 as the result of Navigators Insurance's withdrawal from the 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 coverages 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 is primarily produced by Anfield writing contractors' general liability premium consisting of liability insurance coverage for small artisan and general contractors. The Company started writing a package policy for restaurants and taverns in the third quarter of 1999. 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 5.6% for the first nine months of 1999 to $55,495,000 compared to $52,545,000 for the same period in 1998 primarily due to the increase in the marine business partially offset by decreases in other lines as described above and by $825,000 of reinsurance reinstatement premium related to one loss. Net Earned Premium. Net earned premium decreased 2.7% for the first nine months of 1999 to $52,022,000 compared to $53,452,000 for the first nine months of 1998. Commission Income. Commission income generated by the Somerset Companies decreased from $3,715,000 for the first nine months of 1998 to $228,000 for the first nine months of 1999. The decrease was primarily due to the losses related to New Cap Re, the Company's reduction of its commission income estimates due to the extremely competitive rate environment and 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 4.5% to $11,909,000 during the first nine months of 1999 from $11,394,000 during the corresponding period in 1998 and increased 7.5% to $4,003,000 during the three months ended September 30, 1999 from $3,724,000 during the corresponding period in 1998. The increase in net investment income is 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 income included $777,000 of realized capital gains for the first nine months of 1999 compared to $1,405,000 for the same period last year. On an after tax basis, the realized capital gains were $0.06 per share in 1999 and $0.11 per share in 1998. Pre-tax income for the three months ended September 30, 1999 and 1998 included realized capital losses of $14,000 and gains of $168,000, respectively. On an after tax basis the realized capital gains for the three months ended September 30, 1998 represented $0.01 per share. There was no effect on the earnings per share for the three months ended September 30, 1999. Operating Expenses. Net Loss and Loss Adjustment Expenses Incurred. The ratio of net loss and loss adjustment expenses incurred to net earned premium was 72.0% and 58.1% during the first nine months of 1999 and 1998, respectively. This increase was primarily due to the losses ceded to New Cap Re which have been determined to be uncollectible due to New Cap Re being put into receivership and to a lesser extent due to higher loss ratios in the Lloyd's operations including one unaffiliated syndicate from which we have since withdrawn. The ratios were 108.2% and 61.4% for the three months ended September 30, 1999 and 1998, respectively. The New Cap Re losses represent 11.5% and 39.3% of the loss ratio for the nine and three months ended September 30, 1999, respectively. Commission Expense. Commission expense as a percentage of net earned premium was 20.9% and 16.7% during the first nine months of 1999 and 1998, respectively, and 20.3% and 14.8% for the three months ended September 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 7.2% to $18,091,000 during the first nine months of 1999 from $16,873,000 during the corresponding period of 1998 and increased 17.1% for the three months ended September 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 $1,087,000 during the first nine months of 1999 compared to $1,134,000 during the corresponding period of 1998. The interest on the increase in the loan balance under the Company's Amended Credit Agreement (as defined below) from $22,500,000 at September 30, 1998 to $25,000,000 at September 30, 1999, was partially offset by lower interest rates for the 1999 period. 15 16 Income Taxes. The Company had a tax benefit of $1,506,000 on a pretax loss of $2,269,000 for the nine months ended September 30, 1999. The effective tax benefit rate of 66.4% is primarily the result of tax exempt investment income along with the pretax loss. The current tax expense for the nine months ended September 30, 1999 is the result of the Company's alternative minimum tax position. The effective tax rate was 26.2% for the nine months ended September 30, 1998. Net Income. The Company had a net loss of $763,000 for the first nine months of 1999 compared to net income of $9,391,000 for the same period last year. On a diluted per share basis, this represents a net loss per share of $0.09 and net income per share of $1.11 for the first nine months of 1999 and 1998, respectively. The Company had net loss of $4,808,000 or $0.57 per share for the three months ended September 30, 1999 compared to net income of $2,882,000 or $0.34 per share for the same period in 1998. The decrease in net income is primarily due to the New Cap Re losses and higher loss ratios in the Lloyd's operation. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations was $8,251,000 and $(808,000) for the first nine months of 1999 and 1998, respectively. Invested assets and cash decreased to $252,649,000 at September 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 September 30, 1999, $25,000,000 in loans were outstanding under the revolving line of credit facility at an interest rate of 6.3%. The letter of credit facility is utilized primarily by NCUL and Millennium to participate in Lloyd's syndicate 1221 managed by MTC. At September 30, 1999, letters of credit with an aggregate face amount of $42,885,000 were issued under the letter of credit facility. No letters of credit have been drawn upon. As of September 30, 1999, the Company's consolidated stockholders' equity was $134,781,000 compared to $143,266,000 at December 31, 1998. The decrease was primarily due to the net loss for the nine months ended September 30, 1999 and decreases in the unrealized gains in the investment portfolio. 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 and tested in 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 September 30, 1999, the Company had repurchased 48,700 shares of stock 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: 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, 1999. 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: November 15, 1999 /s/ Bradley D. Wiley ----------------- ----------------------------------------- Bradley D. Wiley Senior Vice President, Chief Financial Officer and Secretary 18 19 INDEX OF EXHIBITS Exhibit No. Description of Exhibit 27.1 Financial Data Schedule 19 EX-27.1 2 FINANCIAL DATA SCHEDULE
7 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 223,176 0 0 11,021 0 0 249,462 3,187 227,200 4,880 629,002 370,923 58,212 0 0 25,000 0 0 846 133,935 629,002 52,022 11,909 777 543 37,479 10,863 18,091 (2,269) (1,506) (763) 0 0 0 (763) (0.09) (0.09) 150,517 0 0 0 0 141,939 0
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