UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2011
or
¨ | Transitional Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
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 incorporation or organization) |
(IRS Employer Identification No.) | |
6 International Drive, Rye Brook, New York | 10573 | |
(Address of principal executive offices) | (Zip Code) |
(914) 934-8999
(Registrants 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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer |
¨ |
Accelerated filer |
x | |||
Non-accelerated filer |
¨ |
Smaller reporting company |
¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of common shares outstanding as of October 25, 2011 was 14,291,310.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Page Number | ||||
PART I. FINANCIAL INFORMATION |
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Item 1. Financial Statements |
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Consolidated Balance Sheets |
3 | |||
4 | ||||
5 | ||||
6 | ||||
Consolidated Statements of Cash Flows (Unaudited) |
7 | |||
Notes to Interim Consolidated Financial Statements (Unaudited) |
8 | |||
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
29 | |||
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
62 | |||
62 | ||||
PART II. FINANCIAL INFORMATION |
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63 | ||||
63 | ||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
64 | |||
64 | ||||
64 | ||||
65 | ||||
66 | ||||
67 |
2
Part I. Financial Information
Item 1. | Financial Statements |
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except per share amounts)
(Unaudited) September 30, 2011 |
December 31, 2010 |
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ASSETS | ||||||||
Investments and cash: |
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Fixed maturities, available-for-sale, at fair value (amortized cost: 2011, $1,768,428; 2010, $1,855,598) |
$ | 1,827,973 | $ | 1,882,245 | ||||
Equity securities, available-for-sale, at fair value (cost: 2011, $133,616; 2010, $64,793) |
147,794 | 87,258 | ||||||
Short-term investments, at cost which approximates fair value |
159,549 | 153,057 | ||||||
Cash |
58,935 | 31,768 | ||||||
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Total investments and cash |
2,194,251 | 2,154,328 | ||||||
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Premiums receivable |
249,834 | 188,368 | ||||||
Prepaid reinsurance premiums |
170,180 | 156,869 | ||||||
Reinsurance recoverable on paid losses |
49,232 | 56,658 | ||||||
Reinsurance recoverable on unpaid losses and loss adjustment expenses |
843,546 | 843,296 | ||||||
Deferred policy acquisition costs |
61,975 | 55,201 | ||||||
Accrued investment income |
14,741 | 15,590 | ||||||
Goodwill and other intangible assets |
6,897 | 6,925 | ||||||
Current income tax receivable, net |
9,817 | 1,054 | ||||||
Deferred income tax, net |
4,250 | 15,141 | ||||||
Other assets |
18,652 | 38,029 | ||||||
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Total assets |
$ | 3,623,375 | $ | 3,531,459 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Liabilities: |
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Reserves for losses and loss adjustment expenses |
$ | 2,044,709 | $ | 1,985,838 | ||||
Unearned premiums |
528,463 | 463,515 | ||||||
Reinsurance balances payable |
113,188 | 105,904 | ||||||
Senior notes |
114,240 | 114,138 | ||||||
Accounts payable and other liabilities |
23,320 | 32,710 | ||||||
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Total liabilities |
2,823,920 | 2,702,105 | ||||||
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Stockholders equity: |
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Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued |
$ | | $ | | ||||
Common stock, $.10 par value, authorized 50,000,000 shares, issued 17,451,233 shares for 2011 and 17,274,440 shares for 2010 |
1,745 | 1,728 | ||||||
Additional paid-in capital |
324,257 | 312,588 | ||||||
Treasury stock, at cost (3,134,469 shares for 2011 and 1,532,273 shares for 2010) |
(138,611 | ) | (64,935 | ) | ||||
Retained earnings |
555,021 | 539,512 | ||||||
Accumulated other comprehensive income |
57,043 | 40,461 | ||||||
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Total stockholders equity |
799,455 | 829,354 | ||||||
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Total liabilities and stockholders equity |
$ | 3,623,375 | $ | 3,531,459 | ||||
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The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.
3
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands except share and per share amounts)
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2011 | 2010 | 2011 | 2010 | |||||||||||||
Gross written premiums |
$ | 255,318 | $ | 233,638 | $ | 830,315 | $ | 757,351 | ||||||||
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Revenues: |
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Net written premiums |
$ | 175,357 | $ | 157,807 | $ | 551,796 | $ | 512,129 | ||||||||
Change in unearned premiums |
(1,724 | ) | 10,426 | (51,908 | ) | (18,356 | ) | |||||||||
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Net earned premiums |
173,633 | 168,233 | 499,888 | 493,773 | ||||||||||||
Net investment income |
16,259 | 17,839 | 51,072 | 53,664 | ||||||||||||
Total other-than-temporary impairment losses |
(1,241 | ) | (1,034 | ) | (2,338 | ) | (1,774 | ) | ||||||||
Portion of loss recognized in other comprehensive income (before tax) |
618 | 365 | 941 | 870 | ||||||||||||
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Net other-than-temporary impairment losses recognized in earnings |
(623 | ) | (669 | ) | (1,397 | ) | (904 | ) | ||||||||
Net realized gains (losses) |
3,238 | 4,521 | 4,856 | 21,653 | ||||||||||||
Other income (expense) |
(921 | ) | 2,767 | 643 | 2,938 | |||||||||||
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Total revenues |
191,586 | 192,691 | 555,062 | 571,124 | ||||||||||||
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Expenses: |
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Net losses and loss adjustment expenses |
110,242 | 107,463 | 340,893 | 311,133 | ||||||||||||
Commission expenses |
25,934 | 25,185 | 80,164 | 76,178 | ||||||||||||
Other operating expenses |
34,989 | 34,682 | 107,341 | 103,781 | ||||||||||||
Interest expense |
2,047 | 2,045 | 6,140 | 6,133 | ||||||||||||
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Total expenses |
173,212 | 169,375 | 534,538 | 497,225 | ||||||||||||
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Income (loss) before income taxes |
18,374 | 23,316 | 20,524 | 73,899 | ||||||||||||
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Income tax expense (benefit) |
4,476 | 7,091 | 5,015 | 21,659 | ||||||||||||
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Net income (loss) |
$ | 13,898 | $ | 16,225 | $ | 15,509 | $ | 52,240 | ||||||||
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Net income per common share: |
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Basic |
$ | 0.94 | $ | 1.03 | $ | 1.02 | $ | 3.23 | ||||||||
Diluted |
$ | 0.92 | $ | 1.00 | $ | 1.00 | $ | 3.17 | ||||||||
Average common shares outstanding: |
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Basic |
14,796,309 | 15,779,902 | 15,243,603 | 16,170,493 | ||||||||||||
Diluted |
15,104,424 | 16,148,990 | 15,569,370 | 16,503,098 |
The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.
4
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (Unaudited)
(In thousands)
Nine Months Ended September 30, |
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2011 | 2010 | |||||||
Preferred stock |
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Balance at beginning and end of period |
$ | | $ | | ||||
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Common stock |
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Balance at beginning of year |
$ | 1,728 | $ | 1,721 | ||||
Shares issued under stock plan |
17 | 5 | ||||||
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Balance at end of period |
$ | 1,745 | $ | 1,726 | ||||
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Additional paid-in capital |
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Balance at beginning of year |
$ | 312,588 | $ | 304,505 | ||||
Shares issued under stock plan |
9,415 | 2,024 | ||||||
Share-based compensation |
2,254 | 4,704 | ||||||
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Balance at end of period |
$ | 324,257 | $ | 311,233 | ||||
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Treasury stock, at cost |
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Balance at beginning of year |
$ | (64,935 | ) | $ | (18,296 | ) | ||
Treasury stock acquired |
(73,676 | ) | (50,272 | ) | ||||
Issuance related to share-based compensation |
| 5,341 | ||||||
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Balance at end of period |
$ | (138,611 | ) | $ | (63,227 | ) | ||
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Retained earnings |
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Balance at beginning of year |
$ | 539,512 | $ | 469,934 | ||||
Net income (loss) |
15,509 | 52,240 | ||||||
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Balance at end of period |
$ | 555,021 | $ | 522,174 | ||||
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Accumulated other comprehensive income, net of tax |
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Balance at beginning of year |
$ | 40,461 | $ | 43,655 | ||||
Change in net unrealized gains on securities |
16,717 | 40,844 | ||||||
Change in net non-credit other-than-temporary impairment losses |
(357 | ) | (2,520 | ) | ||||
Change in net cumulative translation adjustments |
222 | 128 | ||||||
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Balance at end of period |
$ | 57,043 | $ | 82,107 | ||||
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Total stockholders equity at end of period |
$ | 799,455 | $ | 854,013 | ||||
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The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.
5
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
Three Months Ended September 30, |
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2011 | 2010 | |||||||
Net income (loss) |
$ | 13,898 | $ | 16,225 | ||||
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Other comprehensive income (loss): |
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Change in net unrealized gains (losses) on investments, net of tax expense (benefit) of $(322) and $12,806 in 2011 and 2010, respectively (1) |
(511 | ) | 24,104 | |||||
Change in foreign currency translation gains (losses), net of tax expense (benefit) of $(273) and $(165) in 2011 and 2010, respectively |
(701 | ) | (306 | ) | ||||
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Other comprehensive income (loss) |
(1,212 | ) | 23,798 | |||||
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Comprehensive income (loss) |
$ | 12,686 | $ | 40,023 | ||||
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(1) Disclosure of reclassification amount, net of tax: |
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Unrealized gains (losses) on investments arising during period |
$ | 411 | $ | 26,588 | ||||
Reclassification adjustment for net realized gains (losses) included in net income |
(1,025 | ) | (2,939 | ) | ||||
Reclassification adjustment for other-than-temporary impairment losses recognized in net income |
103 | 455 | ||||||
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Change in net unrealized gains (losses) on investments, net of tax |
$ | (511 | ) | $ | 24,104 | |||
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Nine Months Ended September 30, |
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2011 | 2010 | |||||||
Net income (loss) |
$ | 15,509 | $ | 52,240 | ||||
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Other comprehensive income (loss): |
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Change in net unrealized gains (losses) on investments, net of tax expense (benefit) of $8,251 and $20,160 in 2011 and 2010, respectively (2) |
16,360 | 38,324 | ||||||
Change in foreign currency translation gains (losses), net of tax expense (benefit) of $86 and $69 in 2011 and 2010, respectively |
222 | 128 | ||||||
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Other comprehensive income (loss) |
16,582 | 38,452 | ||||||
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Comprehensive income (loss) |
$ | 32,091 | $ | 90,692 | ||||
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(2) Disclosure of reclassification amount, net of tax: |
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Unrealized gains (losses) on investments arising during period |
$ | 15,986 | $ | 51,784 | ||||
Reclassification adjustment for net realized gains (losses) included in net income |
264 | (14,075 | ) | |||||
Reclassification adjustment for other-than-temporary impairment losses recognized in net income |
110 | 615 | ||||||
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Change in net unrealized gains (losses) on investments, net of tax |
$ | 16,360 | $ | 38,324 | ||||
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The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.
6
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended September 30, |
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2011 | 2010 | |||||||
Operating activities: |
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Net income (loss) |
$ | 15,509 | $ | 52,240 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation & amortization |
2,978 | 3,374 | ||||||
Deferred income taxes |
2,534 | 15,789 | ||||||
Net realized (gains) losses |
(4,856 | ) | (21,653 | ) | ||||
Net other-than-temporary losses recognized in earnings |
1,397 | 904 | ||||||
Changes in assets and liabilities: |
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Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses |
6,618 | 33,857 | ||||||
Reserves for losses and loss adjustment expenses |
60,681 | 6,641 | ||||||
Prepaid reinsurance premiums |
(13,496 | ) | 6,097 | |||||
Unearned premiums |
65,408 | 12,409 | ||||||
Premiums receivable |
(61,570 | ) | (11,331 | ) | ||||
Deferred policy acquisition costs |
(6,802 | ) | (3,856 | ) | ||||
Accrued investment income |
700 | 1,909 | ||||||
Reinsurance balances payable |
7,306 | (1,141 | ) | |||||
Current income taxes |
(6,755 | ) | 855 | |||||
Other |
16,670 | 18,022 | ||||||
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Net cash provided by (used in) operating activities |
86,322 | 114,116 | ||||||
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Investing activities: |
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Fixed maturities |
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Redemptions and maturities |
80,296 | 157,330 | ||||||
Sales |
464,580 | 372,971 | ||||||
Purchases |
(464,685 | ) | (467,704 | ) | ||||
Equity securities |
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Sales |
2,107 | 3,069 | ||||||
Purchases |
(70,636 | ) | (22,537 | ) | ||||
Change in payable for securities |
10,223 | 11,137 | ||||||
Net change in short-term investments |
(6,661 | ) | (87,690 | ) | ||||
Purchase of property and equipment |
(2,624 | ) | (1,076 | ) | ||||
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Net cash provided by (used in) investing activities |
12,600 | (34,500 | ) | |||||
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Financing activities: |
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Purchase of treasury stock |
(73,676 | ) | (50,272 | ) | ||||
Proceeds of stock issued from employee stock purchase plan |
822 | 868 | ||||||
Proceeds of stock issued from exercise of stock options |
1,099 | 352 | ||||||
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Net cash provided by (used in) financing activities |
(71,755 | ) | (49,052 | ) | ||||
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Increase (decrease) in cash |
27,167 | 30,564 | ||||||
Cash at beginning of year |
31,768 | 509 | ||||||
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Cash at end of period |
$ | 58,935 | $ | 31,073 | ||||
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Supplemental cash information: |
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Income taxes paid, net |
6,565 | $ | 5,596 | |||||
Interest paid |
4,025 | 4,025 | ||||||
Issuance of stock to directors |
210 | 190 |
The accompanying Notes to Interim Consolidated Financial Statements are an integral part of these financial statements.
7
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Unaudited)
Note 1. Accounting Policies
The accompanying interim consolidated financial statements are unaudited and reflect all adjustments which, in the opinion of management, are necessary to fairly present the results of The Navigators Group, Inc. and its subsidiaries for the interim periods presented on the basis of United States generally accepted accounting principles (GAAP or U.S. GAAP). All such adjustments are of a normal recurring nature. All significant intercompany transactions and balances have been eliminated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The term the Company as used herein is used to mean The Navigators Group, Inc. and its subsidiaries, unless the context otherwise requires. The term Parent or Parent Company are used to mean The Navigators Group, Inc. without its subsidiaries. These financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Companys 2010 Annual Report on Form 10-K. Certain amounts for the prior year have been reclassified to conform to the current years presentation.
Note 2. Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued accounting guidance (Accounting Standards Update (ASU) 2010-06) which improves disclosures about fair value measurements (Accounting Standards Codification (ASC or Codification) 820-10). This guidance requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 and additional disclosures regarding Level 3 purchases, sales, issuances and settlements. In addition, this guidance also requires fair value measurement disclosures for each class of assets and liabilities as well as disclosures about the valuation techniques and inputs used to measure fair value for items classified as Level 2 or Level 3. This guidance was effective as of January 1, 2010 for calendar year reporting entities with the exception of the additional disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements which became effective as of January 1, 2011 for calendar year reporting entities. Early adoption is permitted. The Company adopted this guidance in the first quarter of 2010 with the exception of the additional disclosures about purchases, sales, issuances and settlement in the roll forward of activity in Level 3 fair value measurements, which the Company adopted in the first quarter of 2011. Adoption of this guidance did not have a material effect on the Companys consolidated financial condition, results of operations or cash flows.
Recent Accounting Developments
In September 2011, the FASB issued ASU 2011-08 amending Codification topic 350 Intangibles Goodwill and Other. The amendment simplifies how goodwill is tested for impairment by permitting entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform the two step goodwill impairment test. The amendment is effective for the interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, but the Company did not early adopt and is currently evaluating the potential impact of the adoption on its consolidated financial position, results of operations and cash flows.
8
In June 2011, the FASB issued ASU 2011-05 amending Codification Topic 220 - Comprehensive Income. The amendment requires that other comprehensive income be either presented in a single continuous statement or two separate but consecutive statements. In addition, the amendment requires the disclosure of reclassification adjustments for items reclassified from other comprehensive income to net income on the face of the financial statements. The amendment is effective for the interim and annual periods beginning after December 15, 2011 and should be applied retrospectively. This standard will only affect the Companys presentation of comprehensive income and will not affect the Companys financial position, results of operations, and cash flows.
In May 2011, the FASB issued ASU 2011-04 amending Codification Topic 820 - Fair Value Measurements and Disclosures. The amendments were intended to result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendment expands and enhances current disclosures about fair value measurement and clarifies the FASBs intent regarding the application of existing fair value measurement requirements in certain circumstances. The amendments are effective for the interim and annual periods beginning after December 15, 2011 and should be applied prospectively. We are currently evaluating the impact of this amendment on the Companys consolidated financial position, results of operations and cash flows.
In October 2010, the FASB issued ASU 2010-26 amending Codification Topic 944 Financial Services Insurance; Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The amendment clarifies which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. In addition, the amendment limits deferrable costs to those that are related directly to the successful acquisition of new or renewal insurance contracts that can be capitalized. The amendment is effective for fiscal and interim periods within that fiscal year, beginning after December 15, 2011 and can be applied prospectively or retrospectively. Early adoption is permitted, but the Company did not early adopt and is currently evaluating the potential impact of the adoption on its consolidated financial position, results of operations and cash flows.
Note 3. Segment Information
The Company classifies its business into two underwriting segments consisting of the Insurance Companies segment (Insurance Companies) and the Lloyds Operations segment (Lloyds Operations), which are separately managed, and a Corporate segment (Corporate). Segment data for each of the two underwriting segments include allocations of the operating expenses of the wholly-owned underwriting management companies and the Parent Companys operating expenses and related income tax amounts. The Corporate segment consists of the Parent Companys investment income, interest expense and the related tax effect.
The Company evaluates the performance of each underwriting segment based on its underwriting and GAAP results. The Insurance Companies and the Lloyds Operations results are measured by taking into account net earned premiums, net losses and loss adjustment expenses (LAE), commission expenses, other operating expenses and other income (expense). Each segment maintains its own investments on which it earns income and realizes capital gains or losses. The Companys underwriting performance is evaluated separately from the performance of its investment portfolios.
The Insurance Companies consist of Navigators Insurance Company, including its branch located in the United Kingdom (the U.K. Branch), and its wholly-owned subsidiary, Navigators Specialty Insurance Company (Navigators Specialty). They are primarily engaged in underwriting marine insurance and related lines of business, professional liability insurance and specialty lines of business including contractors general liability insurance, commercial umbrella and primary and excess casualty businesses. Navigators Specialty underwrites specialty and professional liability insurance on an excess and surplus lines basis. Navigators Specialty is 100% reinsured by Navigators Insurance Company.
The Lloyds Operations primarily underwrite marine and related lines of business along with offshore energy, professional liability insurance and construction coverage for onshore energy business at Lloyds of London (Lloyds) through Lloyds Syndicate 1221 (Syndicate 1221). The Companys Lloyds Operations includes Navigators Underwriting Agency Ltd. (NUAL), a Lloyds underwriting agency that manages Syndicate 1221. The Company controlled 100% of the stamp capacity of Syndicate 1221 through its wholly-owned Lloyds corporate member in 2011 and 2010.
9
Navigators Management Company, Inc. (NMC) is a wholly-owned underwriting management company which produces, manages and underwrites insurance and reinsurance, and provides corporate services for the Company. The operating results for the underwriting management company are allocated to both the Insurance Companies and Lloyds Operations.
The Insurance Companies and the Lloyds Operations underwriting results are measured based on underwriting profit or loss and the related combined ratio, which are both non-GAAP measures of underwriting profitability. Underwriting profit or loss is calculated from net earned premiums, less the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense) by net earned premiums. A combined ratio of less than 100% indicates an underwriting profit and greater than 100% indicates an underwriting loss.
The following tables provide the Companys segment results for the three and nine months ended September 30, 2011 and 2010 follows:
Three Months Ended September 30, 2011 | ||||||||||||||||
In thousands |
Insurance Companies |
Lloyds Operations |
Corporate(1) | Total | ||||||||||||
Gross written premiums |
$ | 191,175 | $ | 64,143 | $ | | $ | 255,318 | ||||||||
Net written premiums |
135,292 | 40,065 | | 175,357 | ||||||||||||
Net earned premiums |
119,332 | 54,301 | | 173,633 | ||||||||||||
Net losses and loss adjustment expenses |
(76,755 | ) | (33,487 | ) | | (110,242 | ) | |||||||||
Commission expenses |
(16,514 | ) | (9,953 | ) | 533 | (25,934 | ) | |||||||||
Other operating expenses |
(25,735 | ) | (9,254 | ) | | (34,989 | ) | |||||||||
Other income (expense) |
554 | (942 | ) | (533 | ) | (921 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Underwriting profit (loss) |
$ | 882 | $ | 665 | $ | 0 | $ | 1,547 | ||||||||
Net investment income |
14,037 | 2,158 | 64 | 16,259 | ||||||||||||
Net realized gains (losses) |
2,809 | (226 | ) | 32 | 2,615 | |||||||||||
Interest expense |
| | (2,047 | ) | (2,047 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
$ | 17,728 | $ | 2,597 | $ | (1,951 | ) | $ | 18,374 | |||||||
Income tax expense (benefit) |
4,379 | 780 | (683 | ) | 4,476 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 13,349 | $ | 1,817 | $ | (1,268 | ) | $ | 13,898 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Identifiable assets |
$ | 2,692,597 | $ | 887,401 | $ | 43,377 | $ | 3,623,375 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Losses and loss adjustment expenses ratio |
64.3 | % | 61.7 | % | 63.5 | % | ||||||||||
Commission expense ratio |
13.8 | % | 18.3 | % | 14.9 | % | ||||||||||
Other operating expense ratio (2) |
21.2 | % | 18.8 | % | 20.7 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Combined ratio |
99.3 | % | 98.8 | % | 99.1 | % | ||||||||||
|
|
|
|
|
|
(1) - Includes Corporate segment intercompany eliminations.
(2) - Includes Other operating expenses and Other income.
10
Three Months Ended September 30, 2010 | ||||||||||||||||
In thousands |
Insurance Companies |
Lloyds Operations |
Corporate(1) | Total | ||||||||||||
Gross written premiums |
$ | 163,343 | $ | 70,295 | $ | | $ | 233,638 | ||||||||
Net written premiums |
107,916 | 49,891 | | 157,807 | ||||||||||||
Net earned premiums |
112,198 | 56,035 | | 168,233 | ||||||||||||
Net losses and loss adjustment expenses |
(72,306 | ) | (35,157 | ) | | (107,463 | ) | |||||||||
Commission expenses |
(14,374 | ) | (10,459 | ) | (352 | ) | (25,185 | ) | ||||||||
Other operating expenses |
(26,398 | ) | (8,301 | ) | | (34,699 | ) | |||||||||
Other income (expense) |
1,380 | 1,052 | 352 | 2,784 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Underwriting profit (loss) |
$ | 500 | $ | 3,170 | $ | | $ | 3,670 | ||||||||
Net investment income |
15,736 | 1,982 | 121 | 17,839 | ||||||||||||
Net realized gains (losses) |
4,206 | (354 | ) | | 3,852 | |||||||||||
Interest expense |
| | (2,045 | ) | (2,045 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
$ | 20,442 | $ | 4,798 | $ | (1,924 | ) | $ | 23,316 | |||||||
Income tax expense (benefit) |
6,049 | 1,715 | (673 | ) | 7,091 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 14,393 | $ | 3,083 | $ | (1,251 | ) | $ | 16,225 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Identifiable assets |
$ | 2,603,090 | $ | 841,926 | $ | 75,980 | $ | 3,520,996 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Losses and loss adjustment expenses ratio |
64.4 | % | 62.7 | % | 63.9 | % | ||||||||||
Commission expense ratio |
12.8 | % | 18.7 | % | 15.0 | % | ||||||||||
Other operating expense ratio (2) |
22.4 | % | 12.9 | % | 18.9 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Combined ratio |
99.6 | % | 94.3 | % | 97.8 | % | ||||||||||
|
|
|
|
|
|
(1) - Includes Corporate segment intercompany eliminations.
(2) - Includes Other operating expenses and Other income.
11
Nine Months Ended September 30, 2011 | ||||||||||||||||
In thousands |
Insurance Companies |
Lloyds Operations |
Corporate(1) | Total | ||||||||||||
Gross written premiums |
$ | 584,718 | $ | 245,597 | $ | | $ | 830,315 | ||||||||
Net written premiums |
389,236 | 162,560 | | 551,796 | ||||||||||||
Net earned premiums |
333,139 | 166,749 | | 499,888 | ||||||||||||
Net losses and loss adjustment expenses |
(228,882 | ) | (112,011 | ) | | (340,893 | ) | |||||||||
Commission expenses |
(45,256 | ) | (36,402 | ) | 1,494 | (80,164 | ) | |||||||||
Other operating expenses |
(79,050 | ) | (28,291 | ) | | (107,341 | ) | |||||||||
Other income (expense) |
2,871 | (734 | ) | (1,494 | ) | 643 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Underwriting profit (loss) |
$ | (17,178 | ) | $ | (10,689 | ) | $ | 0 | $ | (27,867 | ) | |||||
Net investment income |
44,009 | 6,733 | 330 | 51,072 | ||||||||||||
Net realized gains (losses) |
5,664 | (2,409 | ) | 204 | 3,459 | |||||||||||
Interest expense |
| | (6,140 | ) | (6,140 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
$ | 32,495 | $ | (6,365 | ) | $ | (5,606 | ) | $ | 20,524 | ||||||
Income tax expense (benefit) |
9,224 | (2,247 | ) | (1,962 | ) | 5,015 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 23,271 | $ | (4,118 | ) | $ | (3,644 | ) | $ | 15,509 | ||||||
|
|
|
|
|
|
|
|
|||||||||
Identifiable assets |
$ | 2,692,597 | $ | 887,401 | $ | 43,377 | $ | 3,623,375 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Losses and loss adjustment expenses ratio |
68.7 | % | 67.2 | % | 68.2 | % | ||||||||||
Commission expense ratio |
13.6 | % | 21.8 | % | 16.0 | % | ||||||||||
Other operating expense ratio (2) |
22.9 | % | 17.4 | % | 21.4 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Combined ratio |
105.2 | % | 106.4 | % | 105.6 | % | ||||||||||
|
|
|
|
|
|
(1) - Includes Corporate segment intercompany eliminations.
(2) - Includes Other operating expenses and Other income.
12
Nine Months Ended September 30, 2010 | ||||||||||||||||
In thousands |
Insurance Companies |
Lloyds Operations |
Corporate(1) | Total | ||||||||||||
Gross written premiums |
$ | 511,822 | $ | 245,529 | $ | | $ | 757,351 | ||||||||
Net written premiums |
340,657 | 171,472 | | 512,129 | ||||||||||||
Net earned premiums |
333,834 | 159,939 | | 493,773 | ||||||||||||
Net losses and loss adjustment expenses |
(205,571 | ) | (105,562 | ) | | (311,133 | ) | |||||||||
Commission expenses |
(43,351 | ) | (32,827 | ) | | (76,178 | ) | |||||||||
Other operating expenses |
(79,658 | ) | (24,161 | ) | | (103,819 | ) | |||||||||
Other income (expense) |
289 | 2,687 | | 2,976 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Underwriting profit (loss) |
$ | 5,543 | $ | 76 | $ | | $ | 5,619 | ||||||||
Net investment income |
47,040 | 6,179 | 445 | 53,664 | ||||||||||||
Net realized gains (losses) |
20,140 | 378 | 231 | 20,749 | ||||||||||||
Interest expense |
| | (6,133 | ) | (6,133 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
$ | 72,723 | $ | 6,633 | $ | (5,457 | ) | $ | 73,899 | |||||||
Income tax expense (benefit) |
21,166 | 2,403 | (1,910 | ) | 21,659 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 51,557 | $ | 4,230 | $ | (3,547 | ) | $ | 52,240 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Identifiable assets |
$ | 2,603,090 | $ | 841,926 | $ | 75,980 | $ | 3,520,996 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Losses and loss adjustment expenses ratio |
61.6 | % | 66.0 | % | 63.0 | % | ||||||||||
Commission expense ratio |
13.0 | % | 20.5 | % | 15.4 | % | ||||||||||
Other operating expense ratio (2) |
23.7 | % | 13.5 | % | 20.5 | % | ||||||||||
|
|
|
|
|
|
|||||||||||
Combined ratio |
98.3 | % | 100.0 | % | 98.9 | % | ||||||||||
|
|
|
|
|
|
(1) - Includes Corporate segment intercompany eliminations.
(2) - Includes Other operating expenses and Other income.
13
The following tables provide additional financial data by segment for the three months ended September 30, 2011 and 2010:
Three Months Ended September 30, 2011 | ||||||||||||
In thousands |
Insurance Companies |
Lloyds Operations |
Total | |||||||||
Gross written premiums: |
||||||||||||
Marine |
$ | 47,141 | $ | 26,979 | $ | 74,120 | ||||||
Property casualty |
110,975 | 29,682 | 140,657 | |||||||||
Professional liability |
33,059 | 7,482 | 40,541 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 191,175 | $ | 64,143 | $ | 255,318 | ||||||
|
|
|
|
|
|
|||||||
Net written premiums: |
||||||||||||
Marine |
$ | 34,180 | $ | 20,649 | $ | 54,829 | ||||||
Property casualty |
77,056 | 16,296 | 93,352 | |||||||||
Professional liability |
24,056 | 3,120 | 27,176 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 135,292 | $ | 40,065 | $ | 175,357 | ||||||
|
|
|
|
|
|
|||||||
Net earned premiums: |
||||||||||||
Marine |
$ | 41,951 | $ | 34,510 | $ | 76,461 | ||||||
Property casualty |
58,585 | 15,952 | 74,537 | |||||||||
Professional liability |
18,796 | 3,839 | 22,635 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 119,332 | $ | 54,301 | $ | 173,633 | ||||||
|
|
|
|
|
|
|||||||
Three Months Ended September 30, 2010 | ||||||||||||
In thousands |
Insurance Companies |
Lloyds Operations |
Total | |||||||||
Gross written premiums: |
||||||||||||
Marine |
$ | 49,406 | $ | 32,788 | $ | 82,194 | ||||||
Property casualty |
81,351 | 27,687 | 109,038 | |||||||||
Professional liability |
32,586 | 9,820 | 42,406 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 163,343 | $ | 70,295 | $ | 233,638 | ||||||
|
|
|
|
|
|
|||||||
Net written premiums: |
||||||||||||
Marine |
$ | 35,546 | $ | 27,142 | $ | 62,688 | ||||||
Property casualty |
52,677 | 17,414 | 70,091 | |||||||||
Professional liability |
19,693 | 5,335 | 25,028 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 107,916 | $ | 49,891 | $ | 157,807 | ||||||
|
|
|
|
|
|
|||||||
Net earned premiums: |
||||||||||||
Marine |
$ | 41,091 | $ | 38,254 | $ | 79,345 | ||||||
Property casualty |
50,976 | 12,202 | 63,178 | |||||||||
Professional liability |
20,131 | 5,579 | 25,710 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 112,198 | $ | 56,035 | $ | 168,233 | ||||||
|
|
|
|
|
|
The Insurance Companies net earned premiums include $21.2 million and $23.3 million of net earned premiums from the U.K. Branch for the three months ended September 30, 2011 and 2010, respectively.
14
The following tables provide additional financial data by segment for the nine months ended September 30, 2011 and 2010:
Nine Months Ended September 30, 2011 | ||||||||||||
In thousands |
Insurance Companies |
Lloyds Operations |
Total | |||||||||
Gross written premiums: |
||||||||||||
Marine |
$ | 175,812 | $ | 127,585 | $ | 303,397 | ||||||
Property casualty |
323,994 | 91,106 | 415,100 | |||||||||
Professional liability |
84,912 | 26,906 | 111,818 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 584,718 | $ | 245,597 | $ | 830,315 | ||||||
|
|
|
|
|
|
|||||||
Net written premiums: |
||||||||||||
Marine |
$ | 130,200 | $ | 102,362 | $ | 232,562 | ||||||
Property casualty |
201,978 | 47,364 | 249,342 | |||||||||
Professional liability |
57,058 | 12,834 | 69,892 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 389,236 | $ | 162,560 | $ | 551,796 | ||||||
|
|
|
|
|
|
|||||||
Net earned premiums: |
||||||||||||
Marine |
$ | 124,387 | $ | 109,222 | $ | 233,609 | ||||||
Property casualty |
156,871 | 44,105 | 200,976 | |||||||||
Professional liability |
51,881 | 13,422 | 65,303 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 333,139 | $ | 166,749 | $ | 499,888 | ||||||
|
|
|
|
|
|
|||||||
Nine Months Ended September 30, 2010 | ||||||||||||
In thousands |
Insurance Companies |
Lloyds Operations |
Total | |||||||||
Gross written premiums: |
||||||||||||
Marine |
$ | 172,136 | $ | 133,758 | $ | 305,894 | ||||||
Property casualty |
242,494 | 76,768 | 319,262 | |||||||||
Professional liability |
97,192 | 35,003 | 132,195 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 511,822 | $ | 245,529 | $ | 757,351 | ||||||
|
|
|
|
|
|
|||||||
Net written premiums: |
||||||||||||
Marine |
$ | 123,702 | $ | 111,205 | $ | 234,907 | ||||||
Property casualty |
156,674 | 43,049 | 199,723 | |||||||||
Professional liability |
60,281 | 17,218 | 77,499 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 340,657 | $ | 171,472 | $ | 512,129 | ||||||
|
|
|
|
|
|
|||||||
Net earned premiums: |
||||||||||||
Marine |
$ | 122,739 | $ | 108,541 | $ | 231,280 | ||||||
Property casualty |
152,228 | 34,880 | 187,108 | |||||||||
Professional liability |
58,867 | 16,518 | 75,385 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 333,834 | $ | 159,939 | $ | 493,773 | ||||||
|
|
|
|
|
|
The Insurance Companies net earned premiums include $64.1 million and $61.9 million of net earned premiums from the U.K. Branch for the nine months ended September 30, 2011 and 2010, respectively.
15
Note 4. Reinsurance Ceded
The Companys ceded earned premiums were $85.5 million and $81.6 million for the three months ended September 30, 2011 and 2010, respectively, and were $261.9 million and $251.4 million for the nine months ended September 30, 2011 and 2010, respectively. The Companys ceded incurred losses were $39.8 million and $42.6 million for the three months ended September 30, 2011 and 2010, respectively, and were $165.6 million and $156.0 million for the nine months ended September 30, 2011 and 2010, respectively.
The following table lists the Companys 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses and loss adjustment expense and ceded unearned premium (constituting approximately 74% of the total recoverable), together with the reinsurance recoverable and collateral as of September 30, 2011, and the reinsurers rating from the indicated rating agency:
Reinsurance Recoverables | Rating & | |||||||||||||||||||
In thousands |
Unearned Premium |
Paid/Unpaid Losses |
Total | Collateral Held(1) |
Rating Agency(2) |
|||||||||||||||
Swiss Reinsurance America Corporation |
5,643 | 92,482 | 98,125 | 7,756 | A | AMB | ||||||||||||||
Munich Reinsurance America Inc. |
12,442 | 75,289 | 87,731 | 2,896 | A+ | AMB | ||||||||||||||
Everest Reinsurance Company |
15,019 | 69,873 | 84,892 | 7,193 | A+ | AMB | ||||||||||||||
Transatlantic Reinsurance Company |
16,279 | 68,333 | 84,612 | 6,557 | A | AMB | ||||||||||||||
National Indemnity Company |
14,511 | 26,891 | 41,402 | 6,348 | A++ | AMB | ||||||||||||||
Partner Reinsurance Europe |
7,082 | 33,691 | 40,773 | 16,832 | AA- | S&P | ||||||||||||||
Scor Holding (Switzerland) AG |
2,888 | 34,727 | 37,615 | 7,211 | A | AMB | ||||||||||||||
Berkley Insurance Company |
1,816 | 30,877 | 32,693 | 123 | A+ | AMB | ||||||||||||||
General Reinsurance Corporation |
815 | 31,741 | 32,556 | 1,466 | A++ | AMB | ||||||||||||||
Lloyds Syndicate #2003 |
5,774 | 25,815 | 31,589 | 6,401 | A | AMB | ||||||||||||||
Munchener Ruckversicherungs-Gesellschaft |
706 | 27,400 | 28,106 | 5,885 | A+ | AMB | ||||||||||||||
White Mountains Reinsurance of America |
150 | 27,530 | 27,680 | 716 | A | AMB | ||||||||||||||
Platinum Underwriters Re |
988 | 25,787 | 26,775 | 3,000 | A | AMB | ||||||||||||||
Ace Property and Casualty Insurance Company |
2,013 | 22,982 | 24,995 | 31 | A+ | AMB | ||||||||||||||
Allied World Reinsurance |
6,824 | 15,656 | 22,480 | 2,431 | A | AMB | ||||||||||||||
AXIS Re Europe |
5,792 | 15,559 | 21,351 | 5,058 | A | AMB | ||||||||||||||
Validus Reinsurance Ltd. |
3,130 | 14,841 | 17,971 | 6,671 | A- | AMB | ||||||||||||||
Tower Insurance Company |
10,337 | 7,112 | 17,449 | 2,577 | A- | AMB | ||||||||||||||
Lloyds Syndicate #4000 |
2,225 | 11,937 | 14,162 | 1,995 | A | AMB | ||||||||||||||
Lloyds Syndicate #457 |
2,806 | 10,492 | 13,298 | 3,118 | A | AMB | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Top 20 Total |
$ | 117,240 | $ | 669,015 | $ | 786,255 | $ | 94,265 | ||||||||||||
All Other |
52,940 | 223,763 | 276,703 | 89,905 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 170,180 | $ | 892,778 | $ | 1,062,958 | $ | 184,170 | ||||||||||||
|
|
|
|
|
|
|
|
(1) | Collateral includes letter of credit balances payable and other balances held by the Companys Insurance Companies and Lloyds Operations. |
(2) | A.M. Best Company (A.M. Best) and Standard and Poors Rating Services (S&P). |
16
Note 5. Stock-Based Compensation
Stock-based compensation granted under the Companys stock plans is expensed in tranches over the vesting period. Options and non-performance based grants generally vest equally over a four year period and the options have a maximum term of ten years. Certain non-performance based grants vest over five years with one-third vesting in each of the third, fourth and fifth years. The Companys performance based share grants generally consist of two types of awards. The restricted stock units issued in 2011 will cliff vest in three years, generally with 50% vesting in full, while the vesting of the remaining 50% will be dependent on the compound annual growth in book value per share for the three years immediately prior to the vesting date, with actual shares that vest ranging between 150% to 0% of that portion of the original award. Those issued prior to 2011 generally vest over five years with one-third vesting in each of the third, fourth and fifth years, dependent on the rolling three-year average return on equity based on the three years prior to the year in which the vesting occurs, with actual shares that vest ranging between 150% to 0% of the original award.
The amounts charged to expense for stock-based compensation for the three and nine months ended September 30, 2011 and 2010 are presented in the following table:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
In thousands |
2011 | 2010 | 2011 | 2010 | ||||||||||||
Restricted stock units |
$ | 775 | $ | 1,720 | $ | 2,254 | $ | 4,704 | ||||||||
Directors restricted stock grants(1) |
64 | 45 | 184 | 135 | ||||||||||||
Employee stock purchase plan |
1 | 61 | 124 | 158 | ||||||||||||
Stock appreciation rights(2) |
(47 | ) | 108 | (100 | ) | (248 | ) | |||||||||
Stock options |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stock based compensation |
$ | 793 | $ | 1,934 | $ | 2,462 | $ | 4,749 | ||||||||
|
|
|
|
|
|
|
|
(1) | Relates to non-employee directors serving on the Parent Companys Board of Directors, all who have been elected by the Companys shareholders, as well as NUALs Board of Directors. |
(2) | All issued stock appreciation rights were exercised during 2011. The Company will no longer issue awards from the Stock Appreciation Rights Plan as a result of the 2005 Amended and Restated Stock Incentive Plan. |
Note 6. Lloyds Syndicate 1221
The Companys Lloyds Operations included in the consolidated financial statements represents its participation in Syndicate 1221. Syndicate 1221s stamp capacity is £175 million ($273 million) for the 2011 underwriting year compared to £168 million ($264 million) for the 2010 underwriting year. Stamp capacity is a measure of the amount of premiums a Lloyds syndicate is authorized to write based on a business plan approved by the Council of Lloyds. Syndicate 1221s stamp capacity is expressed net of commission (as is standard at Lloyds). The Syndicate 1221 premiums recorded in the Companys financial statements are gross of commission. The Company controlled 100% of Syndicate 1221s stamp capacity for the 2011 and 2010 underwriting years through its wholly-owned Lloyds corporate member.
The Company provides letters of credit and posts cash to Lloyds to support its participation in Syndicate 1221s stamp capacity. As of September 30, 2011, the Company had provided letters of credit of $132.6 million and did not have any cash collateral posted. If Syndicate 1221 increases its stamp capacity and the Company participates in the additional stamp capacity, or if Lloyds changes the capital requirements, the Company may be required to supply additional collateral acceptable to Lloyds. If the Company is unwilling or unable to provide additional acceptable collateral, the Company will be required to reduce its participation in the stamp capacity of Syndicate 1221. The letters of credit are provided through a credit facility with a consortium of banks which provides the Company with the ability to have letters of credit issued to support Syndicate 1221s stamp capacity at Lloyds for the 2011 and 2012 underwriting years. The ability to issue new letters of credit expires on December 31, 2011. If any letters of credit remain outstanding under the facility after December 31, 2012, we would be required to post additional collateral to secure the remaining letters of credit. If the credit facility is not renewed prior to December 31, 2012, the Company will need to find internal and/or external sources to provide either letters of credit or other collateral in order to continue to participate in Syndicate 1221. The credit facility is collateralized by all of the common stock of Navigators Insurance Company. Refer to Note 11, Credit Facility for additional information.
17
Note 7. Income Taxes
The Company is subject to the tax laws and regulations of the United States (U.S.) and foreign countries in which it operates. The Company files a consolidated U.S. federal tax return, which includes all domestic subsidiaries and the United Kingdom (U.K.) Branch. The income from the foreign operations is designated as either U.S. connected income or non-U.S. connected income. Lloyds is required to pay U.S. income tax on U.S. connected income written by Lloyds syndicates. Lloyds and the Internal Revenue Service (IRS) have entered into an agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyds and remitted directly to the IRS. These amounts are then charged to the corporate members in proportion to their participation in the relevant syndicates. The Companys corporate members are subject to this agreement and will receive U.K. tax credits for any U.S. income tax incurred up to the U.K. income tax charged on the U.S. connected income. The non-U.S. connected insurance income would generally constitute taxable income under the Subpart F income section of the Internal Revenue Code (Subpart F) since less than 50% of Syndicate 1221s premiums are derived within the U.K. and would therefore be subject to U.S. taxation when the Lloyds year of account closes. Taxes are accrued at a 35% rate on the Companys foreign source insurance income and foreign tax credits, where available, are utilized to offset U.S. tax as permitted. The Companys effective tax rate for Syndicate 1221 taxable income could substantially exceed 35% to the extent the Company is unable to offset U.S. taxes paid under Subpart F tax regulations with U.K. tax credits on future underwriting year distributions. U.S. taxes are not accrued on the earnings of the Companys foreign agencies as these earnings are not includable as Subpart F income in the current year. These earnings are subject to taxes under U.K. tax regulations at a 28% rate through March 31, 2011. A finance bill was enacted in the U.K. that reduces the U.K. corporate tax rate from 28% to 26% effective April 2011. The effect of such tax rate change was not material.
The Company has not provided for U.S. deferred income taxes on the undistributed earnings of approximately $61.6 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. However, in the future, if such earnings were distributed to the Company, taxes of approximately $1.6 million would be payable on such undistributed earnings and would be reflected in the tax provision for the year in which these earnings are no longer intended to be permanently reinvested in the foreign subsidiary, assuming all foreign tax credits are realized.
Unrecognized tax benefits are differences between tax positions taken in the tax returns and benefits recognized in the financial statements. The Company has no unrecognized tax benefits as of September 30, 2011 and 2010. The Company did not incur any interest or penalties related to unrecognized tax benefits for the three and nine months ended September 30, 2011 and 2010. The Company is currently not under examination by any major U.S. or foreign tax authority and is generally subject to U.S. Federal, state or local, or foreign tax examinations by tax authorities for 2008 and subsequent years.
The Company recorded income tax expense of $4.5 million and $5.0 million for the three and nine months ended September 30, 2011 compared to $7.1 million and $21.7 million for the comparable periods in 2010, resulting in an effective tax rate of 24.4% for the three and nine months ended September 30, 2011 and 30.4% and 29.3% for the comparable periods in 2010, respectively. The effective tax rate on net investment income was 28.6% for the three and nine months ended September 30, 2011 compared to 28.4% and 26.7% for the same periods in 2010.
The Company had state and local deferred tax assets amounting to potential future tax benefits of $1.8 million and $2.2 million as of September 30, 2011 and December 31, 2010, respectively. Included in the deferred tax assets are state and local net operating loss carry-forwards of $1.3 million and $1.4 million as of September 30, 2011 and December 31, 2010, respectively. A valuation allowance was established for the full amount of these potential future tax benefits due to the uncertainty associated with their realization. The Companys state and local tax carry-forwards as of September 30, 2011 expire from 2024 to 2030.
18
Note 8. Senior Notes due May 1, 2016
On April 17, 2006, the Company completed a public debt offering of $125 million principal amount of 7% senior notes due May 1, 2016 (the Senior Notes) and received net proceeds of $123.5 million. The interest payment dates on the Senior Notes are each May 1 and November 1. The effective interest rate related to the Senior Notes, based on the proceeds net of discount and all issuance costs, approximates 7.17%. The interest expense on the Senior Notes was $2.0 million for the three months ended September 30, 2011 and 2010, respectively, and $6.1 million for the nine months ended September 30, 2011 and 2010, respectively.
The Company may redeem the Senior Notes at any time and from time to time, in whole or in part, at a make-whole redemption price. The terms of the Senior Notes contain various restrictive business and financial covenants typical for debt obligations of this type, including limitations on mergers, liens and dispositions of the common stock of certain subsidiaries. As of September 30, 2011, the Company was in compliance with all such covenants.
In April 2009, the Company repurchased $10.0 million aggregate principal amount of the Senior Notes from an unaffiliated note holder on the open market for $7.0 million, which generated a $2.9 million pre-tax gain that was reflected in Other income. As a result of this transaction, approximately $114 million aggregate principal amount of the Senior Notes remains issued and outstanding as of September 30, 2011.
Note 9. Commitments and Contingencies
In the ordinary course of conducting business, the Companys subsidiaries are involved in various legal proceedings, either indirectly as insurers for parties or directly as defendants. Most of these proceedings are claims litigation involving the Companys subsidiaries as either (a) liability insurers defending or providing indemnity for third party claims brought against insureds or (b) insurers defending first party coverage claims brought against them. The Company accounts for such activity through the establishment of unpaid loss and loss adjustment reserves. The Companys management believes that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and cost of defense, will not be material to the Companys consolidated financial condition, results of operations, or cash flows.
The Companys subsidiaries are also from time-to-time involved with other legal actions, some of which assert claims for substantial amounts. These actions include claims asserting extra contractual obligations, such as claims involving allegations of bad faith in the handling of claims or the underwriting of policies. In general, the Company believes it has valid defenses to these cases. The Companys management expects that the ultimate liability if any, with respect to future extra-contractual matters will not be material to its consolidated financial position. Nonetheless, given the large or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of litigation, an adverse outcome in such matters could, from time-to-time, have a material adverse outcome on the Companys consolidated results of operations or cash flows in a particular fiscal quarter or year.
In October 2010, Equitas represented by Resolute Management Services Limited (Resolute) commenced a lawsuit in the Supreme Court of the State of New York (the Court Proceeding) and a separate arbitration proceeding (the Arbitration and collectively with the Court Proceeding, the Resolute Proceedings) against Navigators Management Company (NMC) Inc., a wholly-owned subsidiary of the Company. The arbitration demand and complaint in the Resolute Proceedings allege that NMC failed to make timely payments to Resolute under certain reinsurance agreements in connection with subrogation recoveries received by NMC with respect to several catastrophe losses that occurred in the late 1980s and early 1990s. Resolute alleges that it suffered damages of approximately $7.5 million as a result of the alleged delays in payment. The relative proportion of total damages sought in the Court Proceeding and Arbitration are approximately 55% and 45%, respectively. The Company believes that the claims of Resolute are without merit and it intends to vigorously contest the claims.
On October 25, 2011, an order was issued in the Court Proceeding denying NMCs motion for summary judgment and granting Resolutes cross-motion for summary judgment (the October 25th Order). The October 25th Order found that NMC had breached its obligations under the reinsurance agreements at issue in the Court Proceeding and further found that Resolute was entitled to damages for unpaid interest at the statutory rate of 9%. The Court ordered the parties to meet and confer for purposes of determining the amount of damages to be awarded. As of November 4, 2011, the parties had not reached an agreement as to the amount of damages. Navigators disagrees with the October 25th Order and intends to challenge the Order. The Arbitration is in the discovery phase and involves contracts and/or factual situations that are distinct from those in the Court Proceeding. Navigators intends to continue to vigorously contest the claims in the Arbitration.
While it is too early to predict with any certainty the ultimate outcome of the Resolute Proceedings, the Company believes that the ultimate outcome would not be expected to have a significant adverse effect on its results of operations, financial condition or liquidity, although an adverse resolution of the Resolute Proceedings could have a material adverse effect on the Companys results of operations in a particular fiscal quarter or year.
19
Note 10. Investments
The following tables set forth the Companys cash and investments as of September 30, 2011 and December 31, 2010. The table below includes other-than-temporarily impaired (OTTI) securities recognized within other comprehensive income (OCI).
As of September 30, 2011 | ||||||||||||||||||||
In thousands |
Fair Value | Gross Unrealized Gains |
Gross Unrealized Losses |
Amortized Cost |
OTTI Recognized in OCI |
|||||||||||||||
Fixed-maturities: |
||||||||||||||||||||
U.S. Government Treasury bonds, agency bonds, and foreign government bonds |
$ | 301,757 | $ | 8,656 | $ | (487 | ) | $ | 293,588 | $ | | |||||||||
States, municipalities and political subdivisions |
386,167 | 23,394 | (195 | ) | 362,968 | | ||||||||||||||
Mortgage-backed and asset-backed securities: |
||||||||||||||||||||
Agency mortgage-backed securities |
377,465 | 16,932 | (20 | ) | 360,553 | | ||||||||||||||
Residential mortgage obligations |
24,525 | 30 | (2,232 | ) | 26,727 | (1,260 | ) | |||||||||||||
Asset-backed securities |
49,915 | 779 | (86 | ) | 49,222 | | ||||||||||||||
Commerical mortgage-backed securities |
215,033 | 6,673 | (909 | ) | 209,269 | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Subtotal |
$ | 666,938 | $ | 24,414 | $ | (3,247 | ) | $ | 645,771 | $ | (1,260 | ) | ||||||||
Corporate bonds |
473,111 | 15,008 | (7,998 | ) | 466,101 | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total fixed-maturities |
$ | 1,827,973 | $ | 71,472 | $ | (11,927 | ) | $ | 1,768,428 | $ | (1,260 | ) | ||||||||
Equity securities - common stocks |
147,794 | 18,597 | (4,419 | ) | 133,616 | | ||||||||||||||
Cash |
58,935 | | | 58,935 | | |||||||||||||||
Short-term investments |
159,549 | | | 159,549 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 2,194,251 | $ | 90,069 | $ | (16,346 | ) | $ | 2,120,528 | $ | (1,260 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
As of December 31, 2010 | ||||||||||||||||||||
In thousands |
Fair Value | Gross Unrealized Gains |
Gross Unrealized Losses |
Amortized Cost |
OTTI Recognized in OCI |
|||||||||||||||
Fixed-maturities: |
||||||||||||||||||||
U.S. Government Treasury bonds, agency bonds, and foreign government bonds |
$ | 324,145 | $ | 5,229 | $ | (4,499 | ) | $ | 323,415 | $ | | |||||||||
States, municipalities and political subdivisions |
392,250 | 11,903 | (3,805 | ) | 384,152 | | ||||||||||||||
Mortgage-backed and asset-backed securities: |
||||||||||||||||||||
Agency mortgage-backed securities |
382,628 | 10,127 | (2,434 | ) | 374,935 | | ||||||||||||||
Residential mortgage obligations |
20,463 | 24 | (2,393 | ) | 22,832 | (1,646 | ) | |||||||||||||
Asset-backed securities |
46,093 | 247 | (292 | ) | 46,138 | | ||||||||||||||
Commerical mortgage-backed securities |
190,015 | 4,804 | (1,794 | ) | 187,005 | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Subtotal |
$ | 639,199 | $ | 15,202 | $ | (6,913 | ) | $ | 630,910 | $ | (1,646 | ) | ||||||||
Corporate bonds |
526,651 | 15,075 | (5,545 | ) | 517,121 | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total fixed-maturities |
$ | 1,882,245 | $ | 47,409 | $ | (20,762 | ) | $ | 1,855,598 | $ | (1,646 | ) | ||||||||
Equity securities - common stocks |
87,258 | 22,475 | (10 | ) | 64,793 | | ||||||||||||||
Cash |
31,768 | | | 31,768 | | |||||||||||||||
Short-term investments |
153,057 | | | 153,057 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 2,154,328 | $ | 69,884 | $ | (20,772 | ) | $ | 2,105,216 | $ | (1,646 | ) | ||||||||
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20
The fair value of the Companys investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, equity prices, foreign exchange rates and credit spreads. The Company does not have the intent to sell nor is it more likely than not that it will have to sell debt securities in unrealized loss positions that are not other-than-temporarily impaired before recovery. The Company may realize investment losses to the extent its liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments. Significant changes in the factors the Company considers when evaluating investment for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.
The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity as of September 30, 2011 are shown in the following table:
As of September 30, 2011 | ||||||||
In thousands |
Fair Value | Amortized Cost |
||||||
Due in one year or less |
$ | 86,286 | $ | 85,378 | ||||
Due after one year through five years |
516,118 | 506,889 | ||||||
Due after five years through ten years |
353,019 | 335,229 | ||||||
Due after ten years |
205,612 | 195,161 | ||||||
Mortgage- and asset-backed securities |
666,938 | 645,771 | ||||||
|
|
|
|
|||||
Total |
$ | 1,827,973 | $ | 1,768,428 | ||||
|
|
|
|
21
The following table summarizes all securities in a gross unrealized loss position as of September 30, 2011 and December 31, 2010, showing the aggregate fair value and gross unrealized loss by the length of time those securities had continuously been in a gross unrealized loss position as well as the relevant number of securities.
As of September 30, 2011 | As of December 31, 2010 | |||||||||||||||||||||||
In thousands except # of securities |
Number of Securities |
Fair Value |
Gross Unrealized Loss |
Number of Securities |
Fair Value |
Gross Unrealized Loss |
||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. Government Treasury bonds, agency bonds, and foreign government bonds |
||||||||||||||||||||||||
0-6 months |
8 | $ | 80,840 | $ | 230 | 36 | $ | 163,253 | $ | 4,499 | ||||||||||||||
7-12 months |
2 | 6,916 | 257 | | | | ||||||||||||||||||
> 12 months |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
10 | $ | 87,756 | $ | 487 | 36 | $ | 163,253 | $ | 4,499 | ||||||||||||||
States, municipalities and political subdivisions |
||||||||||||||||||||||||
0-6 months |
7 | $ | 6,133 | $ | 26 | 57 | $ | 112,291 | $ | 3,749 | ||||||||||||||
7-12 months |
4 | 8,809 | 131 | 1 | 1,004 | 20 | ||||||||||||||||||
> 12 months |
5 | 3,196 | 38 | 4 | 1,317 | 36 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
16 | $ | 18,138 | $ | 195 | 62 | $ | 114,612 | $ | 3,805 | ||||||||||||||
Agency mortgage-backed securities |
||||||||||||||||||||||||
0-6 months |
4 | $ | 8,049 | $ | 20 | 36 | $ | 139,226 | $ | 2,434 | ||||||||||||||
7-12 months |
| | | | | | ||||||||||||||||||
> 12 months |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
4 | $ | 8,049 | $ | 20 | 36 | $ | 139,226 | $ | 2,434 | ||||||||||||||
Residential mortgage obligations |
||||||||||||||||||||||||
0-6 months |
7 | $ | 9,407 | $ | 124 | 3 | $ | 3,215 | $ | 20 | ||||||||||||||
7-12 months |
3 | 1,520 | 111 | | | | ||||||||||||||||||
> 12 months |
47 | 11,716 | 1,997 | 52 | 15,939 | 2,373 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
57 | $ | 22,643 | $ | 2,232 | 55 | $ | 19,154 | $ | 2,393 | ||||||||||||||
Asset-backed securities |
||||||||||||||||||||||||
0-6 months |
7 | $ | 14,216 | $ | 86 | 7 | $ | 28,175 | $ | 292 | ||||||||||||||
7-12 months |
| | | | | | ||||||||||||||||||
> 12 months |
1 | 2 | | 1 | 2 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
8 | $ | 14,218 | $ | 86 | 8 | $ | 28,177 | $ | 292 | ||||||||||||||
Commercial mortgage-backed securities |
||||||||||||||||||||||||
0-6 months |
23 | $ | 53,115 | $ | 772 | 16 | $ | 78,212 | $ | 1,755 | ||||||||||||||
7-12 months |
6 | 7,078 | 120 | | | | ||||||||||||||||||
> 12 months |
1 | 220 | 17 | 2 | 491 | 39 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
30 | $ | 60,413 | $ | 909 | 18 | $ | 78,703 | $ | 1,794 | ||||||||||||||
Corporate bonds |
||||||||||||||||||||||||
0-6 months |
81 | $ | 168,290 | $ | 6,819 | 98 | $ | 214,180 | $ | 5,545 | ||||||||||||||
7-12 months |
15 | 22,737 | 1,179 | | | | ||||||||||||||||||
> 12 months |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
96 | $ | 191,027 | $ | 7,998 | 98 | $ | 214,180 | $ | 5,545 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed maturities |
221 | $ | 402,244 | $ | 11,927 | 313 | $ | 757,305 | $ | 20,762 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Equity securities - common stocks |
||||||||||||||||||||||||
0-6 months |
25 | $ | 59,039 | $ | 4,419 | 1 | $ | 322 | $ | 10 | ||||||||||||||
7-12 months |
| | | | | | ||||||||||||||||||
> 12 months |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total equity securities |
25 | $ | 59,039 | $ | 4,419 | 1 | $ | 322 | $ | 10 | ||||||||||||||
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22
We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The above unrealized losses have been determined to be temporary based on our policies.
In the above table, the residential mortgage obligations gross unrealized loss for the greater than 12 months category consists primarily of residential mortgage-backed securities. Residential mortgage-backed securities are a type of fixed income security in which residential mortgage loans are sold into a trust or special purpose vehicle, thereby securitizing the cash flows of the mortgage loans.
For debt securities, when assessing whether the amortized cost basis of the security will be recovered, the Company compares the present value of cash flows expected to be collected in relation to the current book value. Any shortfalls of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered the credit loss portion of OTTI losses and is recognized in earnings. All non-credit losses are recognized as changes in OTTI losses within OCI.
To determine whether the unrealized loss on structured securities is other-than-temporary, the Company analyzes the projections provided by its investment managers with respect to an expected principal loss under a range of scenarios and utilizes the most likely outcomes. The analysis relies on actual collateral performance measures such as default rate, prepayment rate and loss severity. These assumptions are applied throughout the remaining term of the deal, incorporating the transaction structure and priority of payments, to generate loss adjusted cash flows. Results of the analysis will indicate whether the security ultimately incurs a loss or whether there is a material impact on yield due to either a projected loss or a change in cash flow timing. A break even default rate is also calculated. A comparison of the break even default rate to the actual default rate provides an indication of the level of cushion or coverage to the first dollar principal loss. The analysis applies the stated assumptions throughout the remaining term of the transaction to forecast cash flows, which are then applied through the transaction structure to determine whether there is a loss to the security. For securities in which a tranche loss is present, and the net present value of loss adjusted cash flows is less than book value, impairment is recognized. The output data also includes a number of additional metrics such as average life remaining, original and current credit support, over 60 day delinquency and security rating.
For equity securities, in general, the Company focuses its attention on those securities with a fair value less than 80% of their cost for six or more consecutive months. If warranted as the result of conditions relating to a particular security, the Company will focus on a significant decline in fair value regardless of the time period involved. Factors considered in evaluating potential impairment include, but are not limited to, the current fair value as compared to cost of the security, the length of time the investment has been below cost and by how much. If an equity security is deemed to be other-than-temporarily impaired, the cost is written down to fair value with the loss recognized in earnings.
For equity securities, the Company considers its intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. For fixed maturity securities, the Company considers its intent to sell a security and whether it is more likely than not that the Company will be required to sell a security before the anticipated recovery as part of the process of evaluating whether a securitys unrealized loss represents an other-than-temporary decline. The Companys ability to hold such securities is supported by sufficient cash flow from its operations and from maturities within its investment portfolio in order to meet its claims payment and other disbursement obligations arising from its underwriting operations without selling such investments. With respect to securities where the decline in value is determined to be temporary and the securitys value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are made within the context of overall risk monitoring, changing information and market conditions.
The significant inputs used to measure the amount of credit loss recognized in earnings were actual delinquency rates, default probability assumptions, severity assumptions and prepayment assumptions. Projected losses are a function of both loss severity and probability of default. Default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. The Company does not intend to sell any of these securities and it is more likely than not that it will not be required to sell these securities before the recovery of the amortized cost basis.
23
The table below summarizes the Companys activity related to OTTI losses for the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
In thousands except # of securities |
Number of Securities |
Amount | Number of Securities |
Amount |
Number of Securities |
Amount | Number of Securities |
Amount | ||||||||||||||||||||||||
Total other than temporary impairment losses: |
||||||||||||||||||||||||||||||||
Corporate and other bonds |
| $ | | | $ | | | $ | | | $ | | ||||||||||||||||||||
Commercial mortgage-backed securities |
| | | | | | | | ||||||||||||||||||||||||
Residential mortgage-backed securities |
10 | 1,241 | 10 | 674 | 15 | 1,791 | 12 | 1,387 | ||||||||||||||||||||||||
Asset-backed securities |
| | | | | | | | ||||||||||||||||||||||||
Equities |
| | 1 | 360 | 1 | 547 | 2 | 387 | ||||||||||||||||||||||||
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|
|||||||||||||||||
Total |
10 | $ | 1,241 | 11 | $ | 1,034 | 16 | $ | 2,338 | 14 | $ | 1,774 | ||||||||||||||||||||
Portion of loss in accumulated other comprehensive income (loss): |
||||||||||||||||||||||||||||||||
Corporate and other bonds |
$ | | $ | | $ | | $ | | ||||||||||||||||||||||||
Commercial mortgage-backed securities |
| | | | ||||||||||||||||||||||||||||
Residential mortgage-backed securities |
618 | 365 | 941 | 870 | ||||||||||||||||||||||||||||
Asset-backed securities |
| | | | ||||||||||||||||||||||||||||
Equities |
| | | | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total |
$ | 618 | $ | 365 | $ | 941 | $ | 870 | ||||||||||||||||||||||||
Impairment losses recognized in earnings |
||||||||||||||||||||||||||||||||
Corporate and other bonds |
$ | | $ | | $ | | $ | | ||||||||||||||||||||||||
Commercial mortgage-backed securities |
| | | | ||||||||||||||||||||||||||||
Residential mortgage-backed securities |
623 | 309 | 850 | 517 | ||||||||||||||||||||||||||||
Asset-backed securities |
| | | | ||||||||||||||||||||||||||||
Equities |
| 360 | 547 | 387 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total |
$ | 623 | $ | 669 | $ | 1,397 | $ | 904 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
The following table summarizes the cumulative amounts related to the Companys credit loss portion of the OTTI losses on debt securities for the three and nine months ended September 30, 2011 and 2010 that it does not intend to sell and it is more likely than not that it will not be required to sell the securities prior to recovery of the amortized cost basis and for which the non-credit loss portion is included in other comprehensive income:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
In thousands |
2011 | 2010 | 2011 | 2010 | ||||||||||||
Beginning balance |
$ | 1,885 | $ | 2,731 | $ | 1,658 | $ | 2,523 | ||||||||
Additions for credit loss impairments recognized in the current period on securities not previously impaired |
623 | 309 | 850 | 517 | ||||||||||||
Additions for credit loss impairments recognized in the current period on securities previously impaired |
| | | | ||||||||||||
Reductions for credit loss impairments previously recognized on securities sold during the period |
| (935 | ) | | (935 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 2,508 | $ | 2,105 | $ | 2,508 | $ | 2,105 | ||||||||
|
|
|
|
|
|
|
|
24
The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity, with a gross unrealized loss as of September 30, 2011 is presented in the following table:
As of September 30, 2011 | ||||||||||||||||
Gross Unrealized Losses | Fair Value | |||||||||||||||
In thousands |
Amount | Percent of Total |
Amount | Percent of Total |
||||||||||||
Due in one year or less |
$ | 3 | 0 | % | $ | 4,509 | 1 | % | ||||||||
Due after one year through five years |
5,229 | 44 | % | 204,736 | 51 | % | ||||||||||
Due after five years through ten years |
2,592 | 22 | % | 57,144 | 14 | % | ||||||||||
Due after ten years |
856 | 7 | % | 30,532 | 8 | % | ||||||||||
Mortgage- and asset-backed securities |
3,247 | 27 | % | 105,323 | 26 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 11,927 | 100 | % | $ | 402,244 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
The change in net unrealized gains/(losses), inclusive of the change in the non credit portion of other-than-temporary impairment losses, consisted of:
Nine Months Ended September 30, |
||||||||
In thousands |
2011 | 2010 | ||||||
Fixed maturities |
$ | 32,898 | $ | 54,257 | ||||
Equity securities |
(8,287 | ) | 4,227 | |||||
|
|
|
|
|||||
Gross unrealized gains (losses) |
24,611 | 58,484 | ||||||
Deferred income tax charge (credit) |
8,251 | 20,160 | ||||||
|
|
|
|
|||||
Change in net unrealized gains (losses), net |
$ | 16,360 | $ | 38,324 | ||||
|
|
|
|
Realized gains/(losses), excluding net other-than-temporary impairment losses recognized in earnings, for the periods indicated were as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
In thousands |
2011 | 2010 | 2011 | 2010 | ||||||||||||
Fixed maturities: |
||||||||||||||||
Gains |
$ | 3,315 | $ | 4,790 | $ | 10,625 | $ | 22,440 | ||||||||
Losses |
(77 | ) | (1,036 | ) | (6,610 | ) | (1,319 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Fixed maturities, net |
$ | 3,238 | $ | 3,754 | $ | 4,015 | $ | 21,121 | ||||||||
Equity securities: |
||||||||||||||||
Gains |
$ | | $ | 773 | $ | 841 | $ | 773 | ||||||||
Losses |
| (6 | ) | (241 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Equity securities, net |
$ | | $ | 767 | $ | 841 | $ | 532 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net realized gains (losses) |
$ | 3,238 | $ | 4,521 | $ | 4,856 | $ | 21,653 | ||||||||
|
|
|
|
|
|
|
|
25
The following tables present, for each of the fair value hierarchy levels as defined in ASC 820, Fair Value Measurements, the Companys fixed maturities and equity securities by asset class that are measured at fair value as of September 30, 2011 and December 31, 2010:
As of September 30, 2011 | ||||||||||||||||
In thousands |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Fixed-maturities: |
||||||||||||||||
U.S. Government Treasury bonds, agency bonds, and foreign government bonds |
$ | 100,325 | $ | 201,432 | $ | | $ | 301,757 | ||||||||
States, municipalities and political subdivisions |
| 386,167 | | 386,167 | ||||||||||||
Mortgage-backed and asset-backed securities: |
| |||||||||||||||
Agency mortgage-backed securities |
| 377,465 | | 377,465 | ||||||||||||
Residential mortgage obligations |
| 24,525 | | 24,525 | ||||||||||||
Asset-backed securities |
| 49,915 | | 49,915 | ||||||||||||
Commercial mortgage-backed securities |
| 215,033 | | 215,033 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal |
$ | | $ | 666,938 | $ | | $ | 666,938 | ||||||||
Corporate bonds |
| 473,111 | | 473,111 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed-maturities |
$ | 100,325 | $ | 1,727,648 | $ | | $ | 1,827,973 | ||||||||
Equity securities - common stocks |
147,794 | | | 147,794 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 248,119 | $ | 1,727,648 | $ | | $ | 1,975,767 | ||||||||
|
|
|
|
|
|
|
|
As of December 31, 2010 | ||||||||||||||||
In thousands |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Fixed-maturities: |
||||||||||||||||
U.S. Government Treasury bonds, agency bonds, and foreign government bonds |
$ | 212,933 | $ | 111,212 | $ | | $ | 324,145 | ||||||||
States, municipalities and political subdivisions |
| 392,250 | | 392,250 | ||||||||||||
Mortgage-backed and asset-backed securities: |
| |||||||||||||||
Agency mortgage-backed securities |
| 382,628 | | 382,628 | ||||||||||||
Residential mortgage obligations |
| 20,463 | | 20,463 | ||||||||||||
Asset-backed securities |
| 46,093 | | 46,093 | ||||||||||||
Commercial mortgage-backed securities |
| 188,178 | 1,837 | 190,015 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Subtotal |
$ | | $ | 637,362 | $ | 1,837 | $ | 639,199 | ||||||||
Corporate bonds |
| 526,651 | | 526,651 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed-maturities |
$ | 212,933 | $ | 1,667,475 | $ | 1,837 | $ | 1,882,245 | ||||||||
Equity securities - common stocks |
87,258 | | | 87,258 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 300,191 | $ | 1,667,475 | $ | 1,837 | $ | 1,969,503 | ||||||||
|
|
|
|
|
|
|
|
The fair value of financial instruments is determined based on the following fair value hierarchy. The fair value measurement inputs and valuation techniques are similar across all asset classes within the levels outlined below.
| Level 1 Quoted prices for identical instruments in active markets. Examples are listed equity and fixed income securities traded on an exchange. Treasury securities would generally be considered Level 1. |
| Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Examples are asset-backed and mortgage-backed securities which are similar to other asset-backed or mortgage-backed securities observed in the market. |
| Level 3 Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. An example would be a private placement with minimal liquidity. |
26
The Company did not have any significant transfers between Level 1 and 2 for the three and nine months ended September 30, 2011.
The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value using Level 3 inputs during the three and nine months ended September 30, 2011.
For The Three Months Ended September 30, 2011 | ||||||||||||||||||||||||||||||||||||
In thousands |
Beginning Balance |
Realized Gains (Losses) |
Unrealized Gains (Losses) |
Purchases | Sales | Settlements | Transfers into Level 3 |
Transfers out of Level 3 |
Ending Balance |
|||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||
Commercial Mortgage |
||||||||||||||||||||||||||||||||||||
Obligations |
$ | 4,821 | $ | | $ | | $ | | $ | | $ | | $ | | $ | (4,821 | ) | $ | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total assets |
$ | 4,821 | $ | | $ | | $ | | $ | | $ | | $ | | $ | (4,821 | ) | $ | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Nine Months Ended September 30, 2011 | ||||||||||||||||||||||||||||||||||||
In thousands |
Beginning Balance |
Realized Gains (Losses) |
Unrealized Gains (Losses) |
Purchases | Sales | Settlements | Transfers into Level 3 |
Transfers out of Level 3 |
Ending Balance |
|||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||
Commercial Mortgage |
||||||||||||||||||||||||||||||||||||
Obligations |
$ | 1,837 | $ | | $ | | $ | 4,821 | $ | | $ | | $ | | $ | (6,658 | ) | $ | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total assets |
$ | 1,837 | $ | | $ | | $ | 4,821 | $ | | $ | | $ | | $ | (6,658 | ) | $ | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010, the Company did not have any securities classified as Level 3 and there were no changes in Level 3 assets for the three and nine months ended September 30, 2010.
Note 11. Credit Facility
On April 1, 2011, we entered into a $165 million credit facility agreement with ING Bank, N.V., London Branch, individually and as Administrative Agent, and a syndicate of lenders. The credit facility is a letter of credit facility and replaces a $140 million credit facility agreement that expired March 31, 2011. The credit facility, which is denominated in U.S. dollars, will be utilized to fund the Companys participation in Syndicate 1221 through letters of credit for the 2011 and 2012 underwriting years, as well as open prior years. The letters of credit issued under the facility are denominated in British pounds and their aggregate face amount will fluctuate based on exchange rates. The ability to issue new letters of credit expires on December 31, 2011. If any letters of credit remain outstanding under the facility after December 31, 2012, we would be required to post additional collateral to secure the remaining letters of credit. As of September 30, 2011, letters of credit with an aggregate face amount of $132.6 million were outstanding under the credit facility.
This credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. The credit facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. The letter of credit facility is secured by a pledge of the stock of certain insurance subsidiaries of the Company. To the extent the aggregate face amount issued under the credit facility exceeds the commitment amount, the Company is required to post collateral with the lead bank of the consortium. The Company was in compliance with all covenants under the credit facility as of September 30, 2011.
As a result of the April 1, 2011 replacement of the expiring credit facility, the applicable margin and applicable fee rate payable under the letter of credit facility are now based on a tiered schedule that is based on the Companys then-current ratings issued by S&P and Moodys Investors Service (Moodys) with respect to the Companys senior unsecured long-term debt securities and without third-party credit enhancement and the amount of the Companys own Funds at Lloyds collateral.
27
Note 12. Share Repurchases
In May 2011, the Parent Companys Board of Directors authorized an additional $50 million under the existing share repurchase program of the Companys common stock, which increased the size of the program to $150 million. This repurchase program was initially authorized in November 2009. The share repurchase program as originally approved was scheduled to expire on December 31, 2010, however, prior to its expiration, the Parent Companys Board of Directors approved an extension to December 31, 2011.
Purchases are permitted from time to time at prevailing prices in open market or privately negotiated transactions through December 31, 2011. The timing and amount of purchases under the program depend on a variety of factors, including the trading price of the stock, market conditions and corporate and regulatory considerations.
For the three months ended September 30, 2011, the Company repurchased 749,076 shares of the Parent Companys common stock at an aggregate purchase price of $32.2 million and a weighted average price per share of $43.03 pursuant to the share repurchase program. For the nine months ended September 30, 2011, the Company repurchased 1,602,196 shares of the Parent Companys common stock at an aggregate purchase price of $73.7 million and a weighted average price per share of $45.98 pursuant to the share repurchase program. Since inception, the Company has repurchased 3,008,056 shares of the Parent Companys common stock at an aggregate purchase price of $132.4 million and a weighted average price per share of $44.02. As of September 30, 2011, approximately $17.2 million was available for future repurchases under the program.
28
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
NOTE ON FORWARD LOOKING STATEMENTS
Some of the statements in this Quarterly Report on Form 10-Q for The Navigators Group, Inc. and its subsidiaries (the Company, we, us, and our) are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in or incorporated by reference in this Quarterly Report are forward looking statements. Whenever used in this report, the words estimate, expect, believe or similar expressions or their negative are intended to identify such forward-looking statements. Forward-looking statements are derived from information that we currently have and assumptions that we make. We cannot assure that anticipated results will be achieved, since actual results may differ materially because of both known and unknown risks and uncertainties which we face. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from our forward-looking statements include, but are not limited to, the factors discussed in the Risk Factors section of our 2010 Annual Report on Form 10-K as well as:
| continued volatility in the financial markets and the current recession; |
| risks arising from the concentration of our business in marine and energy, general liability and professional liability insurance, including the risk that market conditions for these lines could change adversely or that we could experience large losses in these lines; |
| cyclicality in the property/casualty insurance business generally, and the marine insurance business specifically; |
| risks that we face in entering new markets and diversifying the products and services that we offer, including risks arising from the development of our new specialty lines or our ability to manage effectively the rapid growth in our lines of business; |
| changing legal, social and economic trends and inherent uncertainties in the loss estimation process, which could adversely impact the adequacy of loss reserves and the allowance for reinsurance recoverables; |
| risks inherent in the preparation of our financial statements, which requires us to make many estimates and judgments; |
| our ability to continue to obtain reinsurance covering our exposures at appropriate prices and/or in sufficient amounts; |
| the counterparty credit risk of our reinsurers, including risks associated with the collection of reinsurance recoverable amounts from our reinsurers, who may not pay on losses in a timely fashion, or at all; |
| the effects of competition from other insurers; |
| unexpected turnover of our professional staff and our ability to attract and retain qualified employees; |
| increases in interest rates during periods in which we must sell fixed-income securities to satisfy liquidity needs may result in realized investment losses; |
| our investment portfolio is exposed to market-wide risks and fluctuations, as well as to risks inherent in particular types of securities; |
| exposure to significant capital market risks related to changes in interest rates, credit spreads, equity prices and foreign exchange rates which may adversely affect our results of operations, financial condition or cash flows; |
| capital may not be available in the future, or may not be available on favorable terms; |
| our ability to maintain or improve our ratings to avoid the possibility of downgrades in our claims-paying and financial strength ratings significantly adversely affecting us, including reducing the number of insurance policies we write generally, or causing clients who require an insurer with a certain rating level to use higher-rated insurers; |
| risks associated with continued or increased premium levies by Lloyds of London (Lloyds) for the Lloyds Central Fund and cash calls for trust fund deposits, or a significant downgrade of Lloyds rating by A.M. Best Company; |
29
| changes in the laws, rules and regulations that apply to our insurance companies; |
| the inability of our subsidiaries to pay dividends to us in sufficient amounts, which would harm our ability to meet our obligations; |
| weather-related events and other catastrophes (including man-made catastrophes) impacting our insureds and/or reinsurers; |
| volatility in the market price of our common stock; |
| the effect of the E.U. Directive on Solvency II on how we manage our business, capital requirements and costs associated with conducting business; and |
| other risks that we identify in current and future filings with the Securities and Exchange Commission (SEC). |
In light of these risks, uncertainties and assumptions, any forward-looking events discussed in this Form 10-Q may not occur. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of their respective dates.
OVERVIEW
The discussion and analysis of our financial condition and results of operations contained herein should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this Form 10-Q. It contains forward-looking statements that involve risks and uncertainties. Please see Note on Forward-Looking Statements for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-Q.
We are an international insurance company focusing on specialty products for niches within the overall property/casualty insurance market. Our largest product line and most long-standing area of specialization is ocean marine insurance. We have also developed specialty niches in professional liability insurance and in specialty liability insurance primarily consisting of contractors liability and primary and excess liability coverages.
Our underwriting segments consist of insurance company operations (Insurance Companies) and operations at Lloyds through Lloyds Syndicate 1221 (Syndicate 1221) (Lloyds Operations). The Insurance Companies consist of Navigators Insurance Company (Navigators Insurance), which includes our branch located in the United Kingdom (the U.K. Branch), and Navigators Specialty Insurance Company (Navigators Specialty), which underwrites specialty and professional liability insurance on an excess and surplus lines basis. All of the insurance business written by Navigators Specialty is fully reinsured by Navigators Insurance pursuant to a 100% quota share reinsurance agreement. Our Lloyds Operations include Navigators Underwriting Agency Ltd. (NUAL), a wholly-owned Lloyds underwriting agency which manages Syndicate 1221. Our Lloyds Operations primarily underwrite marine and related lines of business along with offshore energy, professional liability insurance and construction coverages for onshore energy business through Syndicate 1221. We controlled 100% of Syndicate 1221s stamp capacity for the 2011 and 2010 underwriting years through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd., which is referred to as a corporate name in the Lloyds market. We have also established underwriting agencies in Antwerp, Belgium; Stockholm, Sweden; and Copenhagen, Denmark; each of which underwrites risks pursuant to binding authorities with NUAL into Syndicate 1221. We also maintain an underwriting presence in Brazil and China through our involvement with Lloyds.
30
Catastrophe Risk Management
Our Insurance Companies and Lloyds Operations have exposure to losses caused by natural and man-made catastrophic events. The frequency and severity of catastrophes are unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. We continually assess our concentration of underwriting exposures in catastrophe exposed areas globally and manage this exposure through individual risk selection and through the purchase of reinsurance. We also use modeling and concentration management tools that allow us to better monitor and control our accumulations of potential losses from catastrophe events. Despite these efforts, there remains uncertainty about the characteristics, timing and extent of insured losses given the unpredictable nature of catastrophes. The occurrence of one or more catastrophic events could have a material adverse effect on our results of operations, financial condition and/or liquidity.
We have significant natural catastrophe exposures throughout the world. We estimate that our largest exposure to loss from a single natural catastrophe event comes from an earthquake on the west coast of the United States. As of September 30, 2011, we estimate that our probable maximum pre-tax gross and net loss exposure from such an earthquake event would be approximately $157 million and $28 million, respectively, including the cost of reinsurance reinstatement premiums.
Like all catastrophe exposure estimates, the foregoing estimate of our probable maximum loss is inherently uncertain. This estimate is highly dependent upon numerous assumptions and subjective underwriting judgments. Examples of significant assumptions and judgments related to such an estimate include the intensity, depth and location of the earthquake, the various types of the insured risks exposed to the event at the time the event occurs and the estimated costs or damages incurred for each insured risk. The composition of our portfolio also makes such estimates challenging due to the non-static nature of the exposures covered under our policies in lines of business such as cargo and hull. There can be no assurances that the gross and net loss amounts that we could incur in such an event or in any natural catastrophe event would not be materially higher than the estimates discussed above given the significant uncertainties with respect to such an estimate. Moreover, our portfolio of insured risks changes dynamically over time and there can be no assurance that our probable maximum loss will not change materially over time.
The occurrence of large loss events could reduce the reinsurance coverage that is available to us and could weaken the financial condition of our reinsurers, which could have a material adverse effect on our results of operations. Although the reinsurance agreements make the reinsurers liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our policyholders as we are required to pay the losses if a reinsurer fails to meet its obligations under the reinsurance agreement. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of these claims. Either of these events would increase our costs and could have a material adverse effect on our business.
31
CRITICAL ACCOUNTING POLICIES
The Companys Annual Report on Form 10-K for the year ended December 31, 2010 discloses our critical accounting policies (see Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies). Certain of these policies are critical to the portrayal of our financial condition and results since they require management to establish estimates based on complex and subjective judgments, including those related to our estimates for losses and loss adjustment expenses (LAE) (including losses that have occurred but were not reported to us by the financial reporting date), reinsurance recoverables, written and unearned premium, the recoverability of deferred tax assets, the impairment of investment securities and accounting for Lloyds results. For additional information regarding our critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2010, pages 42 through 51.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 2: Recent Accounting Pronouncements in the Notes to Interim Consolidated Financial Statements for a discussion about accounting standards recently adopted by the Company, as well as recent accounting developments relating to standards not yet adopted by the Company.
RESULTS OF OPERATIONS
The following is a discussion and analysis of our consolidated and segment results of operations for the three and nine months ended September 30, 2011 and 2010. In presenting our financial results, we discuss our performance with reference to book value per share, underwriting profit or loss, and the combined ratio, all of which are non-GAAP financial measures of performance and/or underwriting profitability. Book value per share is calculated by dividing shareholders equity by the number of outstanding shares at any period end. Underwriting profit or loss is calculated from net earned premiums, less the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense) by net earned premiums. A combined ratio of less than 100% indicates an underwriting profit and over 100% indicates an underwriting loss. We consider such measures, which may be defined differently by other companies, to be important in the understanding of our overall results of operations.
Summary of Consolidated Results
The following table presents a summary of our consolidated financial results for the three and nine months ended September 30, 2011 and 2010:
Three Months Ended September 30, |
Nine Months Ended September 30, |
Percentage Change | ||||||||||||||||||||||
In thousands, except for per share amounts |
2011 | 2010 | 2011 | 2010 | QTD | YTD | ||||||||||||||||||
Gross written premiums |
$ | 255,318 | $ | 233,638 | $ | 830,315 | $ | 757,351 | 9.3 | % | 9.6 | % | ||||||||||||
Net written premiums |
175,357 | 157,807 | 551,796 | 512,129 | 11.1 | % | 7.7 | % | ||||||||||||||||
Total revenues |
191,586 | 192,691 | 555,062 | 571,124 | -0.6 | % | -2.8 | % | ||||||||||||||||
Total expenses |
173,212 | 169,375 | 534,538 | 497,225 | 2.3 | % | 7.5 | % | ||||||||||||||||
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Pre-tax income (loss) |
$ | 18,374 | $ | 23,316 | $ | 20,524 | $ | 73,899 | -21.2 | % | -72.2 | % | ||||||||||||
Provision (benefit) for income taxes |
4,476 | 7,091 | 5,015 | 21,659 | -36.9 | % | -76.8 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | 13,898 | $ | 16,225 | $ | 15,509 | $ | 52,240 | -14.3 | % | -70.3 | % | ||||||||||||
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|
|
|
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|
|
|
|
|
|||||||||||||
Net income (loss) per common share: |
||||||||||||||||||||||||
Basic |
$ | 0.94 | $ | 1.03 | $ | 1.02 | $ | 3.23 | ||||||||||||||||
Diluted |
$ | 0.92 | $ | 1.00 | $ | 1.00 | $ | 3.17 |
32
Net income for the three months ended September 30, 2011 was $13.9 million or $0.92 per diluted share compared to net income of $16.2 million or $1.00 per diluted share for the three months ended September 30, 2010. Included in these results were net realized gains of $2.2 million and $2.9 million after-tax for the three months ended September 30, 2011 and 2010, respectively. In addition, our net income included net other-than-temporary impairment losses recognized in earnings of $0.4 and $0.5 million after-tax for the three months ended September 30, 2011 and 2010.
Net income for the nine months ended September 30, 2011 was $15.5 million or $1.00 per diluted share compared to net income of $52.2 million or $3.17 per diluted share for the nine months ended September 30, 2010. Included in these results were net realized gains of $3.2 million and $14.1 million after-tax for the nine months ended September 30, 2011 and 2010, respectively. In addition, our net income included net other-than-temporary impairment losses recognized in earnings of $0.9 million and $0.6 million after-tax for the nine months ended September 30, 2011 and 2010.
Our book value per share as of September 30, 2011 was $55.82, increasing from $52.68 as of December 31, 2010. The increase in book value per share primarily resulted from the repurchase of $73.7 million of our common stock, as well as an improvement in the value of our consolidated investment portfolio. Primarily because of the share repurchases, our consolidated stockholders equity decreased 3.6% to $799.5 million as of September 30, 2011 compared to $829.4 million as of December 31, 2010.
Cash flow from operations was $86.3 million for the nine months ended September 30, 2011 compared to $114.1 million for the comparable period in 2010. The decrease in cash flow from operations for the nine month period was primarily due to increased paid losses as well as an increase in premiums receivable due to growth within our recently established Nav Re division. The premiums receivable for our reinsurance business remain open longer because they are collected as the underlying policies attach and are ceded to the treaties.
33
The following table presents our consolidated financial results for the three and nine months ended September 30, 2011 and 2010:
Three Months Ended September 30, |
Nine Months Ended September 30, |
Percentage Change | ||||||||||||||||||||||
In thousands |
2011 | 2010 | 2011 | 2010 | QTD | YTD | ||||||||||||||||||
Gross written premiums |
$ | 255,318 | $ | 233,638 | $ | 830,315 | $ | 757,351 | 9.3 | % | 9.6 | % | ||||||||||||
Net written premiums |
175,357 | 157,807 | 551,796 | 512,129 | 11.1 | % | 7.7 | % | ||||||||||||||||
Net earned premiums |
173,633 | 168,233 | 499,888 | 493,773 | 3.2 | % | 1.2 | % | ||||||||||||||||
Net losses and loss adjustment expenses |
(110,242 | ) | (107,463 | ) | (340,893 | ) | (311,133 | ) | 2.6 | % | 9.6 | % | ||||||||||||
Commission expenses |
(25,934 | ) | (25,185 | ) | (80,164 | ) | (76,178 | ) | 3.0 | % | 5.2 | % | ||||||||||||
Other operating expenses |
(34,989 | ) | (34,699 | ) | (107,341 | ) | (103,819 | ) | 0.8 | % | 3.4 | % | ||||||||||||
Other income (expense) |
(921 | ) | 2,784 | 643 | 2,976 | -133.1 | % | -78.4 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Underwriting profit (loss) |
$ | 1,547 | $ | 3,670 | $ | (27,867 | ) | $ | 5,619 | -57.8 | % | NM | ||||||||||||
Net investment income |
16,259 | 17,839 | 51,072 | 53,664 | -8.9 | % | -4.8 | % | ||||||||||||||||
Net other-than-temporary impairment losses recognized in earnings |
(623 | ) | (669 | ) | (1,397 | ) | (904 | ) | -6.9 | % | 54.5 | % | ||||||||||||
Net realized gains (losses) |
3,238 | 4,521 | 4,856 | 21,653 | -28.4 | % | -77.6 | % | ||||||||||||||||
Interest expense |
(2,047 | ) | (2,045 | ) | (6,140 | ) | (6,133 | ) | 0.1 | % | 0.1 | % | ||||||||||||
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|
|||||||||||||
Income (loss) before income taxes |
$ | 18,374 | $ | 23,316 | $ | 20,524 | $ | 73,899 | -21.2 | % | -72.2 | % | ||||||||||||
Income tax expense (benefit) |
4,476 | 7,091 | 5,015 | 21,659 | -36.9 | % | -76.8 | % | ||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income (loss) |
$ | 13,898 | $ | 16,225 | $ | 15,509 | $ | 52,240 | -14.3 | % | -70.3 | % | ||||||||||||
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|
|
|||||||||||||
Losses and loss adjustment expenses ratio |
63.5 | % | 63.9 | % | 68.2 | % | 63.0 | % | ||||||||||||||||
Commission expense ratio |
14.9 | % | 15.0 | % | 16.0 | % | 15.4 | % | ||||||||||||||||
Other operating expense ratio (1) |
20.7 | % | 18.9 | % | 21.4 | % | 20.5 | % | ||||||||||||||||
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|
|||||||||||||||||
Combined ratio |
99.1 | % | 97.8 | % | 105.6 | % | 98.9 | % | ||||||||||||||||
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|
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|
|
(1) - Includes Other operating expenses & Other income (expense)
NM - Percentage change not meaningful
The combined ratio for the three months ended September 30, 2011 was 99.1% compared to 97.8% for the comparable period in 2010. Our pre-tax underwriting profit declined by $2.1 million to $1.5 million for the three months ended September 30, 2011 compared to $3.7 million for the same period in 2010. The decrease in pre-tax underwriting profit is primarily attributable to prior period net reserve redundancies.
The combined ratio for the nine months ended September 30, 2011 was 105.6% compared to 98.9% for the comparable period in 2010. Our pre-tax underwriting profit decreased by $33.5 million to a $27.9 million underwriting loss for the nine months ended September 30, 2011 compared to $5.6 million of underwriting profit for the same period in 2010. The decrease in pre-tax underwriting profit is primarily due to:
| Large current accident year losses of $18.2 million from a North Sea drilling operation, a Gulf of Mexico drilling operation, as well as from an onshore industrial site. The North Sea drilling operation losses resulted in an $8.9 million first quarter net impact including $5.0 million of net loss and $3.9 million of reinstatement premiums. The Gulf of Mexico drilling operation losses resulted in a $6.9 million second quarter net impact inclusive of $4.0 million in reinstatement premiums. The onshore industrial site generated gross and net losses of $12.0 million and $2.4 million, respectively. |
| An increase in our reinsurance reinstatement premium accrual of $5.2 million. This accrual was driven by the recognition of the effect of a shift in our Marine reinsurance protections to an excess of loss program from a quota share program. As a result of this shift and the increased frequency of severity losses in recent periods, a greater portion of our IBNR was attributable to marine and energy losses that are or will be ceded to Marine Excess of Loss Reinsurance program and such cession will trigger additional reinstatement premiums. |
34
Revenues
Gross Written Premiums
The following tables set forth our gross and net written premiums and net earned premiums by segment and line of business for the periods indicated:
Three Months Ended September 30, | ||||||||||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||||||||||
In thousands |
Gross Written Premiums |
% | Net Written Premiums |
Net Earned Premiums |
Gross Written Premiums |
% | Net Written Premiums |
Net Earned Premiums |
||||||||||||||||||||||||
Insurance Companies: |
||||||||||||||||||||||||||||||||
Marine |
$ | 47,141 | 18 | % | $ | 34,180 | $ | 41,951 | $ | 49,406 | 21 | % | $ | 35,546 | $ | 41,091 | ||||||||||||||||
Property Casualty |
110,975 | 43 | % | 77,056 | 58,585 | 81,351 | 35 | % | 52,677 | 50,976 | ||||||||||||||||||||||
Professional Liability |
33,059 | 14 | % | 24,056 | 18,796 | 32,586 | 14 | % | 19,693 | 20,131 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Insurance Companies Total |
191,175 | 75 | % | 135,292 | 119,332 | 163,343 | 70 | % | 107,916 | 112,198 | ||||||||||||||||||||||
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|
|
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|
|
|
|
|
|
|
|
|
|||||||||||||||||
Lloyds Operations: |
||||||||||||||||||||||||||||||||
Marine |
26,979 | 11 | % | 20,649 | 34,510 | 32,788 | 14 | % | 27,142 | 38,254 | ||||||||||||||||||||||
Property Casualty |
29,682 | 11 | % | 16,296 | 15,952 | 27,687 | 12 | % | 17,414 | 12,202 | ||||||||||||||||||||||
Professional Liability |
7,482 | 3 | % | 3,120 | 3,839 | 9,820 | 4 | % | 5,335 | 5,579 | ||||||||||||||||||||||
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|
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|
|
|
|
|
|||||||||||||||||
Lloyds Operations Total |
64,143 | 25 | % | 40,065 | 54,301 | 70,295 | 30 | % | 49,891 | 56,035 | ||||||||||||||||||||||
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|
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|
|
|
|
|
|||||||||||||||||
Total |
$ | 255,318 | 100 | % | $ | 175,357 | $ | 173,633 | $ | 233,638 | 100 | % | $ | 157,807 | $ | 168,233 | ||||||||||||||||
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|
|||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||||||||||
In thousands |
Gross Written Premiums |
% | Net Written Premiums |
Net Earned Premiums |
Gross Written Premiums |
% | Net Written Premiums |
Net Earned Premiums |
||||||||||||||||||||||||
Insurance Companies: |
||||||||||||||||||||||||||||||||
Marine |
$ | 175,812 | 21 | % | $ | 130,200 | $ | 124,387 | $ | 172,136 | 23 | % | $ | 123,702 | $ | 122,739 | ||||||||||||||||
Property Casualty |
323,994 | 39 | % | 201,978 | 156,871 | 242,494 | 32 | % | 156,674 | 152,228 | ||||||||||||||||||||||
Professional Liability |
84,912 | 10 | % | 57,058 | 51,881 | 97,192 | 13 | % | 60,281 | 58,867 | ||||||||||||||||||||||
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Insurance Companies Total |
584,718 | 70 | % | 389,236 | 333,139 | 511,822 | 68 | % | 340,657 | 333,834 | ||||||||||||||||||||||
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|
|
|||||||||||||||||
Lloyds Operations: |
||||||||||||||||||||||||||||||||
Marine |
127,585 | 15 | % | 102,362 | 109,222 | 133,758 | 18 | % | 111,205 | 108,541 | ||||||||||||||||||||||
Property Casualty |
91,106 | 11 | % | 47,364 | 44,105 | 76,768 | 10 | % | 43,049 | 34,880 | ||||||||||||||||||||||
Professional Liability |
26,906 | 4 | % | 12,834 | 13,422 | 35,003 | 4 | % | 17,218 | 16,518 | ||||||||||||||||||||||
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|
|
|
|
|
|||||||||||||||||
Lloyds Operations Total |
245,597 | 30 | % | 162,560 | 166,749 | 245,529 | 32 | % | 171,472 | 159,939 | ||||||||||||||||||||||
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|
|
|
|
|||||||||||||||||
Total |
$ | 830,315 | 100 | % | $ | 551,796 | $ | 499,888 | $ | 757,351 | 100 | % | $ | 512,129 | $ | 493,773 | ||||||||||||||||
|
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|
|
|
|
|
|
|
|
Gross written premiums increased 9.3% to $255.3 million for the three months ended September 30, 2011 compared to $233.6 million for the same period in 2010. Gross written premiums increased 9.6% to $830.3 million for the nine months ended September 30, 2011 compared to $757.4 million for the same period in 2010. The increases in gross written premiums were primarily attributed to our Property Casualty business and the related addition of our Nav Re division which writes Accident & Health, Agriculture and Latin American reinsurance lines of business. Growth within Property Casualty is also attributable to our Excess and Primary Casualty business resulting from strong production partially offset by the run-off of our middle market commercial package business. The decrease in our Professional Liability business is attributable to our Directors and Officer Liability (D&O) lines. This decrease reflects a change in our underwriting strategy that focuses on a planned shift toward underwriting excess layers.
35
Our Marine division saw increases in the average renewal premium rates in our Inland Marine and Lloyds lines of approximately 13.1% and 1.7%, respectively, for the three months ended September 30, 2011 compared to the same period in 2010. U.K. and U.S. Marine premiums rates decreased 0.3% and 1.3%, respectively, for the period. For our Navigators Technical Risk (NavTech) we experienced an average renewal premium rate increase of approximately 8.7% for the three months ended September 30, 2011 compared to the same period in 2010, which was offset by declines in our Excess Casualty and Primary Casualty lines of 2.0% and 0.6%, respectively. The Insurance Companies and Lloyds Professional Liability division overall experienced approximately a 0.9% decrease in average renewal premium rates for the three months ended September 30, 2011 compared to 2010.
Our Marine division saw increases in the average renewal premium rates in our Inland Marine, U.K. Marine and Lloyds lines of approximately 6.7%, 2.1% and 2.2%, respectively, for the nine months ended September 30, 2011 compared to the same period in 2010. U.S. Marine premiums rates decreased 0.7% for the period. For our Property Casualty division, we experienced an average renewal premium rate increase in our NavTech line of approximately 5.3% for the nine months ended September 30, 2011 compared to the same period in 2010, which was offset by declines in our Primary and Excess Casualty lines of 4.4% and 3.3%, respectively. The Insurance Companies and Lloyds Professional Liability division overall experienced approximately 1.9% decrease in average renewal premium rates for the nine months ended September 30, 2011 compared to 2010.
The average premium rate increases or decreases as noted above for the Marine, Property Casualty and Professional Liability businesses are calculated primarily by comparing premium amounts on policies that have renewed. The premiums are judgmentally adjusted for exposure factors when deemed significant and sometimes represent an aggregation of several lines of business. The rate change calculations provide an indicated pricing trend and are not meant to be a precise analysis of the numerous factors that affect premium rates or the adequacy of such rates to cover all underwriting costs and generate an underwriting profit. The calculation can also be affected quarter by quarter depending on the particular policies and the number of policies that renew during that period. Due to market conditions, these rate changes may or may not apply to new business that generally would be more competitively priced compared to renewal business. The calculation does not reflect the rate on business that we are unwilling or unable to renew due to loss experience or competition.
Ceded Written Premiums
In the ordinary course of business, we reinsure certain insurance risks with unaffiliated insurance companies for the purpose of limiting our maximum loss exposure, protecting against catastrophic losses, and maintaining desired ratios of net premiums written to statutory surplus. The relationship of ceded to written premium varies based upon the types of business written and whether the business is written by the Insurance Companies or the Lloyds Operations.
Our reinsurance program includes contracts for proportional reinsurance, per risk and whole account excess-of-loss reinsurance for both property and casualty risks and property catastrophe excess-of-loss reinsurance. In recent years we have increased our utilization of excess-of-loss reinsurance for both property and casualty risks. Our excess-of-loss reinsurance contracts generally provide for a specific amount of coverage in excess of an attachment point and sometimes provides for reinstatement of the coverage to the extent the limit has been exhausted for payment of additional premium (referred to as reinstatement premiums). The number of reinstatements available varies by contract.
We record an estimate of the expected reinstatement premiums for losses ceded to excess-of-loss agreements where this feature applies.
36
The following table sets forth our ceded written premiums by segment and major line of business for the three and nine months ended September 30, 2011 and 2010:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
In thousands |
Ceded Written Premiums |
% of Gross Written Premiums |
Ceded Written Premiums |
% of Gross Written Premiums |
Ceded Written Premiums |
% of Gross Written Premiums |
Ceded Written Premiums |
% of Gross Written Premiums |
||||||||||||||||||||||||
Insurance Companies: |
||||||||||||||||||||||||||||||||
Marine |
$ | 12,961 | 27 | % | $ | 13,860 | 28 | % | $ | 45,612 | 26 | % | $ | 48,434 | 28 | % | ||||||||||||||||
Property Casualty |
33,919 | 31 | % | 28,674 | 35 | % | 122,016 | 38 | % | 85,820 | 35 | % | ||||||||||||||||||||
Professional Liability |
9,003 | 27 | % | 12,893 | 40 | % | 27,854 | 33 | % | 36,911 | 38 | % | ||||||||||||||||||||
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|
|
|
|
|
|
|||||||||||||||||
Total Insurance Companies |
55,883 | 29 | % | 55,427 | 34 | % | 195,482 | 33 | % | 171,165 | 33 | % | ||||||||||||||||||||
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|
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Lloyds Operations: |
||||||||||||||||||||||||||||||||
Marine |
6,330 | 23 | % | 5,646 | 17 | % | 25,223 | 20 | % | 22,553 | 17 | % | ||||||||||||||||||||
Property Casualty |
13,386 | 45 | % | 10,273 | 37 | % | 43,742 | 48 | % | 33,719 | 44 | % | ||||||||||||||||||||
Professional Liability |
4,362 | 58 | % | 4,485 | 46 | % | 14,072 | 52 | % | 17,785 | 51 | % | ||||||||||||||||||||
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|
|
|
|
|
|
|||||||||||||||||
Total Lloyds |
24,078 | 38 | % | 20,404 | 29 | % | 83,037 | 34 | % | 74,057 | 30 | % | ||||||||||||||||||||
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|
|
|
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|
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|
|
|
|
|
|||||||||||||||||
Total |
$ | 79,961 | 31 | % | $ | 75,831 | 32 | % | $ | 278,519 | 34 | % | $ | 245,222 | 32 | % | ||||||||||||||||
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|
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|
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|
|
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|
|
The decrease in the percentage of total ceded written premiums to total gross written premiums for the three months ended September 30, 2011 compared to the same period in 2010 was primarily due to a mix change resulting from new business within our recently established Nav Re division and to a lesser extent the expansion of our Professional Liability business, where our retention ratios are higher.
The increase in the percentage of total ceded written premiums to total gross written premiums for the nine months ended September 30, 2011 compared to the same period in 2010 was primarily due to the mix change resulting from new business as described above and the transfer of NavPac business to Tower Insurance Company of New York via a quota share on an in force basis which generated an additional $12.1 million of ceded premiums for nine months ended September 30, 2011.
Net Written Premiums
Net written premiums increased 11.1% and 7.7% for the three and nine months ended September 30, 2011 compared to the same periods in 2010. The impact of higher gross written premiums for the three and nine months ended September 30, 2011 was partially offset by mix change resulting from new business written by Nav Re, as discussed above. The increase for the nine months ended September 30, 2011 was also offset by the transfer of NavPac business to Tower Insurance Company of New York via a quota share on an in force basis which generated an additional $12.1 million of ceded premiums for nine months ended September 30, 2011.
Net Earned Premiums
Net earned premiums increased 3.2% for the three months ended September 30, 2011 compared to the same period in 2010 due to $1.1 million of reinstatement premiums in the third quarter of 2010. Net earned premiums increased 1.2% for the nine months ended September 30, 2011 compared to the same period in 2010. In comparison to the increase in net written premiums, the increases in net earned premiums were impacted by the mix change of new business written by Nav Re, specifically the Accident & Health lines which are recognized in earnings over a longer exposure period than our other lines of business.
37
Net Investment Income
Our net investment income was derived from the following sources:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
In thousands |
2011 | 2010 | 2011 | 2010 | ||||||||||||
Fixed maturities |
$ | 15,856 | $ | 17,506 | $ | 49,892 | $ | 52,701 | ||||||||
Equity securities |
942 | 675 | 2,584 | 1,904 | ||||||||||||
Short-term investments |
205 | 233 | 745 | 726 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment income |
$ | 17,003 | $ | 18,414 | $ | 53,221 | $ | 55,331 | ||||||||
Investment expenses |
(744 | ) | (575 | ) | (2,149 | ) | (1,667 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net investment income |
$ | 16,259 | $ | 17,839 | $ | 51,072 | $ | 53,664 | ||||||||
|
|
|
|
|
|
|
|
Net investment income decreased 8.9% and 4.8% for the three and nine months ended September 30, 2011 compared to the same period in 2010 due to lower investment yields. The annualized pre-tax investment yield, excluding net realized gains and losses and net other-than-temporary impairment losses recognized in earnings, was 3.1% and 3.2% for the three and nine months ended September 30, 2011, compared to 3.4% and 3.5% for the comparable periods in 2010.
Net Other-Than-Temporary Impairment Losses Recognized In Earnings
Our net other-than-temporary impairment (OTTI) losses recognized in earnings for the periods indicated were as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
In thousands |
2011 | 2010 | 2011 | 2010 | ||||||||||||
Fixed maturities |
$ | 623 | $ | 309 | $ | 850 | $ | 517 | ||||||||
Equity securities |
| 360 | 547 | 387 | ||||||||||||
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|
|
|
|
|
|
|||||||||
OTTI recognized in earnings |
$ | 623 | $ | 669 | $ | 1,397 | $ | 904 | ||||||||
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|
|
|
|
|
Net OTTI losses recognized in earnings for fixed maturity securities for all periods presented in the table above were primarily related to residential mortgage-backed securities.
Net Realized Gains and Losses
Our realized gains and losses for the periods indicated were as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
In thousands |
2011 | 2010 | 2011 | 2010 | ||||||||||||
Fixed maturities: |
||||||||||||||||
Gains |
$ | 3,315 | $ | 4,790 | $ | 10,625 | $ | 22,440 | ||||||||
Losses |
(77 | ) | (1,036 | ) | (6,610 | ) | (1,319 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Fixed maturities, net |
$ | 3,238 | $ | 3,754 | $ | 4,015 | $ | 21,121 | ||||||||
Equity securities: |
||||||||||||||||
Gains |
$ | | $ | 773 | $ | 841 | $ | 773 | ||||||||
Losses |
| (6 | ) | | (241 | ) | ||||||||||
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|
|
|
|
|
|||||||||
Equity securities, net |
$ | | $ | 767 | $ | 841 | $ | 532 | ||||||||
|
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|
|
|
|
|
|||||||||
Net realized gains (losses) |
$ | 3,238 | $ | 4,521 | $ | 4,856 | $ | 21,653 | ||||||||
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For the three and nine months ended September 30, 2011, we recorded $3.2 million and $4.9 million of net realized gains compared to net realized gains of $4.5 million and $21.7 million for the same period in 2010. On an after-tax basis, the net realized gains for the three and nine months ended September 30, 2011 were $2.2 million and $3.2 million, respectively, compared to $2.9 million and $14.1 million for the same periods in 2010. We typically generate realized gains and losses as part of the normal ongoing management of our investment portfolio, and the gains recorded this period include the sale of corporate bonds as part of our investment strategy to reinvest in equity securities.
38
Other Income (Expense)
Other income (expense) primarily includes foreign exchange gains and losses from our Lloyds Operations, commission income and inspection fees related to our specialty insurance business.
Expenses
Net Losses and Loss Adjustment Expenses
The ratio of net losses and LAE to net earned premiums (loss ratios) for the three and nine months ended September 30, 2011 and 2010 is presented in the following table:
Three Months Ended September 30, |
Nine Months Ended September 30, |
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Net Loss and LAE Ratio |
2011 | 2010 | 2011 | 2010 | ||||||||||||
Net Loss and LAE Payments |
51.6 | % | 53.5 | % | 56.5 | % | 58.2 | % | ||||||||
Change in reserves: |
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Current year reserves |
12.8 | % | 12.9 | % | 11.2 | % | 7.0 | % | ||||||||
Prior year deficiencies (redundancies) |
-0.9 | % | -2.5 | % | 0.5 | % | -2.2 | % | ||||||||
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Change in reserves |
11.9 | % | 10.4 | % | 11.7 | % | 4.8 | % | ||||||||
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Net loss and LAE ratio |
63.5 | % | 63.9 | % | 68.2 | % | 63.0 | % | ||||||||
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The loss ratio for the three months ended September 30, 2011 was 63.5% compared to 63.9% for the same period in 2010. The decrease in the loss ratio was primarily due to changes in prior year development, which are explained in more detail below.
The loss ratio for the nine months ended September 30, 2011 was 68.2% compared to 63.0% for the same period in 2010. The increase in the loss ratio was primarily due to the current accident year large loss activity partially offset by changes in prior year development, which are explained in more detail below.
Prior Year Reserve Deficiencies/Redundancies
The relevant factors that may have a significant impact on the establishment and adjustment of losses and LAE reserves can vary by line of business and from period to period. As part of our regular review of prior reserves, management, in consultation with our actuaries, may determine, based on their judgment that certain assumptions made in the reserving process in prior year periods may need to be revised to reflect various factors, likely including the availability of additional information. Based on their reserve analyses, management may make corresponding reserve adjustments.
The segment and line of business breakdowns of prior period net reserve deficiencies (redundancies) for the three months ended September 30, 2011 and 2010 is as follows:
Three Months Ended September 30, |
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In thousands |
2011 | 2010 | ||||||
Insurance Companies: |
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Marine |
$ | (38 | ) | $ | (558 | ) | ||
Property Casualty |
(1,846 | ) | 348 | |||||
Professional Liability |
(260 | ) | 53 | |||||
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Subtotal Insurance Companies |
$ | (2,144 | ) | $ | (157 | ) | ||
Lloyds Operations |
531 | (4,002 | ) | |||||
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Total deficiencies (redundancies) |
$ | (1,613 | ) | $ | (4,159 | ) | ||
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For the three months ended September 30, 2011, we recorded a prior period net reserve redundancy of $1.6 million primarily attributed to a favorable ruling on an old property claim within our Property Casualty division, and to a lesser extent, favorable foreign exchange across all of our divisions.
39
For the three months ended September 30, 2010, we recorded a prior period net reserve redundancy of $4.2 million primarily related to our Lloyds Operations. Our Lloyds Operations recorded a $4.0 million reserve redundancy resulting from favorable development in the Marine and NavTech business, partially offset by unfavorable development in the Professional Liability business.
The segment and line of business breakdowns of prior period net reserve deficiencies (redundancies) for the nine months ended September 30, 2011 and 2010 is as follows:
Nine Months Ended September 30, |
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In thousands |
2011 | 2010 | ||||||
Insurance Companies: |
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Marine |
$ | 539 | $ | 951 | ||||
Property Casualty |
(863 | ) | (6,946 | ) | ||||
Professional Liability |
(735 | ) | 341 | |||||
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Subtotal Insurance Companies |
$ | (1,059 | ) | $ | (5,654 | ) | ||
Lloyds Operations |
3,694 | (5,001 | ) | |||||
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Total deficiencies (redundancies) |
$ | 2,635 | $ | (10,655 | ) | |||
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For the nine months ended September 30, 2011 we recorded a prior period net reserve deficiency of $2.6 million primarily related to our Lloyds Operations, partially offset by reserve redundancies within our Property Casualty division. Our Lloyds Operations recorded $3.7 million of prior period net reserve deficiencies resulting from adverse development in Professional Liability driven by adverse claim movements for prior underwriting years in the E&O business. Our Property Casualty division recorded $0.9 million of prior period net reserve redundancies due to a favorable ruling on an old property, partially offset by adverse development on our Personal Umbrella and Liquor Liability businesses, both of which are in run-off.
For the nine months ended September 30, 2010 we recorded prior period net reserve redundancy of $10.7 million primarily related to our Property Casualty division and Lloyds Operations. Our Property Casualty division recorded $7.0 million of prior period net reserve redundancies as a result of $4.2 million of favorable development on the 2007 underwriting year for our construction liability business due to lower reported claims than expected, $2.5 million of favorable development on two run-off books of business, and $2.3 million of favorable development in our NavTech offshore lines also due to the 2007 underwriting year resulting from lower than expected reported claims. The aforementioned redundancies were partially offset by $2.0 million and $0.8 million of unfavorable development related to our Liquor Liability and Personal Umbrella business, respectively, which are in run-off. Our Lloyds Operations recorded $5.0 million of prior period net reserve redundancies resulting from favorable development in the Marine and NavTech divisions, partially offset by unfavorable development in the Professional Liability business.
Commission Expenses
Commission expenses paid to brokers and agents are generally based on a percentage of gross written premiums and are partially offset by ceding commissions we may receive on ceded written premiums. Commissions are generally deferred and recorded as deferred policy acquisition costs to the extent that they relate to unearned premium. The percentage of commission expenses to net earned premiums (commission expense ratio) for the three months ended September 30, 2011 and 2010 was relatively consistent at 14.9% and 15.0%, respectively. The commission expense ratio for the nine months ended September 30, 2011 was 16.0%, an increase from 15.4% from the same period in 2010. The increase in the commission expense ratio is due to a reduction in the ceding commission benefit related to sliding scale adjustments on our consortium quota share treaties due to large loss activity in 2011.
40
Other Operating Expenses
Other operating expenses increased 0.9% and 3.4% for the three and nine months ended September 30, 2011 compared to the same periods in 2010. The increase in other operating expenses for the three and nine months ended September 30, 2011 was primarily due to investments in new underwriting teams, and higher compliance costs, particularly on account of the implementation of Solvency II.
Income Taxes
We recorded income tax expense of $4.5 million and $5.0 million for the three and nine months ended September 30, 2011, respectively, compared to $7.1 million and $21.7 million for the comparable periods in 2010. The effective tax rate for the three and nine months ended September 30, 2011 was 24.4%, compared to 30.4% and 29.3% for the same periods in 2010. The effective tax rate on net investment income was 28.6% for the three and nine months ended September 30, 2011, compared to 28.4% and 26.7% for the same periods in 2010. As of September 30, 2011 and December 31, 2010 the net deferred federal, foreign, state and local tax assets were $4.3 million and $15.1 million, respectively.
We had net state and local deferred tax assets amounting to potential future tax benefits of $1.8 million and $2.2 million as of September 30, 2011 and December 31, 2010, respectively. Included in the deferred tax assets are state and local net operating loss carry-forwards of $1.3 million and $1.4 million as of September 30, 2011 and December 31, 2010, respectively. A valuation allowance was established for the full amount of these potential future tax benefits due to uncertainty associated with their realization. Our state and local tax carry-forwards as of September 30, 2011 expire from 2024 to 2030.
Segment Information
We classify our business into two underwriting segments consisting of the Insurance Companies and the Lloyds Operations, which are separately managed, and a Corporate segment. Segment data for each of the two underwriting segments include allocations of the operating expenses of the wholly-owned underwriting management companies and The Navigators Group, Inc.s (the Parent Companys) operating expenses and related income tax amounts. The Corporate segment consists of the Parent Companys investment income, interest expense and the related tax effect.
We evaluate the performance of each segment based on its underwriting and GAAP results. The Insurance Companies and the Lloyds Operations results are measured by taking into account net earned premium, net loss and loss adjustment expenses, commission expenses, other operating expenses and other income (expense). The Corporate segment consists of the Parent Companys investment income, interest expense and the related tax effect. Each segment also maintains its own investments, on which it earns income and realizes capital gains or losses. Our underwriting performance is evaluated separately from the performance of our investment portfolios.
Following are the financial results of our two underwriting segments.
Insurance Companies
The Insurance Companies consist of Navigators Insurance, including its U.K. Branch, and its wholly-owned subsidiary, Navigators Specialty. They are primarily engaged in underwriting marine insurance and related lines of business, professional liability insurance and specialty lines of business including contractors general liability insurance, commercial umbrella and primary and excess casualty businesses. Navigators Specialty underwrites specialty and professional liability insurance on an excess and surplus lines basis. Navigators Specialty is 100% reinsured by Navigators Insurance.
41
The following table sets forth the results of operations for the Insurance Companies for the three and nine months ended September 30, 2011 and 2010:
Three Months Ended September 30, |
Nine Months Ended September 30, |
Percentage Change | ||||||||||||||||||||||
In thousands |
2011 | 2010 | 2011 | 2010 | QTD | YTD | ||||||||||||||||||
Gross written premiums |
$ | 191,175 | $ | 163,343 | $ | 584,718 | $ | 511,822 | 17.0 | % | 14.2 | % | ||||||||||||
Net written premiums |
135,292 | 107,916 | 389,236 | 340,657 | 25.4 | % | 14.3 | % | ||||||||||||||||
Net earned premiums |
119,332 | 112,198 | 333,139 | 333,834 | 6.4 | % | -0.2 | % | ||||||||||||||||
Net losses and loss adjustment expenses |
(76,755 | ) | (72,306 | ) | (228,882 | ) | (205,571 | ) | 6.2 | % | 11.3 | % | ||||||||||||
Commission expenses |
(16,514 | ) | (14,374 | ) | (45,256 | ) | (43,351 | ) | 14.9 | % | 4.4 | % | ||||||||||||
Other operating expenses |
(25,735 | ) | (26,398 | ) | (79,050 | ) | (79,658 | ) | -2.5 | % | -0.8 | % | ||||||||||||
Other income (expense) |
554 | 1,380 | 2,871 | 289 | -59.9 | % | NM | |||||||||||||||||
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Underwriting profit (loss) |
$ | 882 | $ | 500 | $ | (17,178 | ) | $ | 5,543 | 76.4 | % | NM | ||||||||||||
Net investment income |
14,037 | 15,736 | 44,009 | 47,040 | -10.8 | % | -6.4 | % | ||||||||||||||||
Net realized gains (losses) |
2,809 | 4,206 | 5,664 | 20,140 | -33.2 | % | -71.9 | % | ||||||||||||||||
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Income (loss) before income taxes |
$ | 17,728 | $ | 20,442 | $ | 32,495 | $ | 72,723 | -13.3 | % | -55.3 | % | ||||||||||||
Income tax expense (benefit) |
4,379 | 6,049 | 9,224 | 21,166 | -27.6 | % | -56.4 | % | ||||||||||||||||
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Net income (loss) |
$ | 13,349 | $ | 14,393 | $ | 23,271 | $ | 51,557 | -7.3 | % | -54.9 | % | ||||||||||||
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Losses and loss adjustment expenses ratio |
64.3 | % | 64.4 | % | 68.7 | % | 61.6 | % | ||||||||||||||||
Commission expense ratio |
13.8 | % | 12.8 | % | 13.6 | % | 13.0 | % | ||||||||||||||||
Other operating expense ratio (1) |
21.2 | % | 22.4 | % | 22.9 | % | 23.7 | % | ||||||||||||||||
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Combined ratio |
99.3 | % | 99.6 | % | 105.2 | % | 98.3 | % | ||||||||||||||||
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(1) - Includes Other operating expenses & Other income (expense)
NM - Percentage change not meaningful
Our Insurance Companies reported net income of $13.3 million for the three months ended September 30, 2011 compared to $14.4 million for the same period in 2010.
Our Insurance Companies combined ratio for the three months ended September 30, 2011 was 99.3% compared to 99.6% for the same period in 2010. Our Insurance Companies pre-tax underwriting profit increased by $0.4 million to $0.9 million for the three months ended September 30, 2011 compared to $0.5 million for the same period in 2010. The increase in pre-tax underwriting profit was primarily attributable to the prior period net reserve redundancies.
Our Insurance Companies reported net income of $23.3 million for the nine months ended September 30, 2011 compared to $51.6 million for the same period in 2010.
42
Our Insurance Companies combined ratio for the nine months ended September 30, 2011 was 105.2% compared to 98.3% for the same period in 2010. Our Insurance Companies pre-tax underwriting profit decreased by $22.7 million to a $17.2 million pre-tax underwriting loss for the nine months ended September 30, 2011 compared to $5.5 million of underwriting profit for the same period in 2010. The decrease in pre-tax underwriting profit is largely due to:
| Large current accident year losses of $11.6 million from drilling operations in the North Sea and Gulf of Mexico. The North Sea drilling operation losses resulted in a $6.1 million first quarter net impact inclusive of reinstatement premiums. The Gulf of Mexico drilling operation losses resulted in a $5.5 million second quarter net impact, also inclusive of reinstatement premiums. |
| Prior period net reserve redundancies of $1.1 million in 2011 compared to $5.7 million of prior period net reserve redundancies in 2010. Generally, while the Insurance Companies segment has experienced favorable prior period redundancies, the ultimate loss ratios for the recent underwriting years have been increasing due to softening market conditions for the business written during those periods. |
| An increase in our reinsurance reinstatement premium accrual of $2.7 million. This accrual was driven by the recognition of the effect of a shift in our Marine reinsurance protections to an excess of loss program from a quota share program. As a result of this shift and the increased frequency of severity losses in recent periods, a greater portion of our IBNR was attributable to marine and energy losses that are or will be ceded to Marine Excess of Loss Reinsurance program and such cession will trigger additional reinstatement premiums. |
Insurance Companies Gross Written Premiums
Marine Premiums. The gross written premiums for the three and nine months ended September 30, 2011 and 2010 consisted of the following:
Three Months Ended September 30, |
Nine Months Ended September 30, |
Percentage Change | ||||||||||||||||||||||
In thousands |
2011 | 2010 | 2011 | 2010 | QTD | YTD | ||||||||||||||||||
Marine liability |
$ | 14,332 | $ | 13,592 | $ | 59,093 | $ | 59,338 | 5.4 | % | -0.4 | % | ||||||||||||
Inland marine |
7,391 | 6,793 | 25,747 | 23,310 | 8.8 | % | 10.5 | % | ||||||||||||||||
Cargo |
6,073 | 6,661 | 18,458 | 17,317 | -8.8 | % | 6.6 | % | ||||||||||||||||
Transport |
4,778 | 6,045 | 14,617 | 12,792 | -21.0 | % | 14.3 | % | ||||||||||||||||
Craft/fishing vessel |
4,618 | 4,308 | 16,979 | 15,240 | 7.2 | % | 11.4 | % | ||||||||||||||||
Bluewater hull |
4,535 | 4,679 | 14,727 | 14,838 | -3.1 | % | -0.7 | % | ||||||||||||||||
P&I |
2,887 | 3,797 | 15,250 | 14,037 | -24.0 | % | 8.6 | % | ||||||||||||||||
Other |
2,527 | 3,531 | 10,941 | 15,264 | -28.4 | % | -28.3 | % | ||||||||||||||||
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Total Marine |
$ | 47,141 | $ | 49,406 | $ | 175,812 | $ | 172,136 | -4.6 | % | 2.1 | % | ||||||||||||
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The Insurance Companies Marine gross written premiums for the three months ended September 30, 2011 decreased 4.6% compared to 2010 primarily due to reduced underwriting activity resulting from current market conditions. Competition remains significant as excess capacity remains in the sector. Economic activity has been on the upswing, increasing reported exposures, which has had a positive impact on premiums. Pricing adjustments have been insignificant and have not seen any benefit from the recent catastrophes.
The Insurance Companies Marine gross written premiums for the nine months ended September 30, 2011 increased 2.1% compared to 2010 as the Marine business experienced slight growth due to increases in average renewal rates of 1.1% for the nine months ended September 30, 2011.
43
Property Casualty Premiums. The gross written premiums for the three and nine months ended September 30, 2011 and 2010 consisted of the following:
Three Months Ended September 30, |
Nine Months Ended September 30, |
Percentage Change | ||||||||||||||||||||||
In thousands |
2011 | 2010 | 2011 | 2010 | QTD | YTD | ||||||||||||||||||
Excess Casualty |
$ | 35,178 | $ | 23,160 | $ | 97,070 | $ | 67,506 | 51.9 | % | 43.8 | % | ||||||||||||
Nav Re |
22,670 | | 71,245 | 5,841 | NM | NM | ||||||||||||||||||
Construction liability |
19,777 | 21,799 | 62,053 | 67,892 | -9.3 | % | -8.6 | % | ||||||||||||||||
Offshore energy |
17,635 | 20,632 | 43,265 | 44,256 | -14.5 | % | -2.2 | % | ||||||||||||||||
Primary casualty |
11,695 | 4,333 | 31,796 | 13,922 | 169.9 | % | 128.4 | % | ||||||||||||||||
Other |
4,020 | 11,427 | 18,565 | 43,077 | -64.8 | % | -56.9 | % | ||||||||||||||||
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Total Property Casualty |
$ | 110,975 | $ | 81,351 | $ | 323,994 | $ | 242,494 | 36.4 | % | 33.6 | % | ||||||||||||
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NM - Percentage change not meaningful
The Property Casualty gross written premiums for the three months and nine months ended September 30, 2011 increased 36.4 % and 33.6%, respectively, compared to the same periods in 2010. The increases were primarily driven by our recently established Nav Re division which produced $22.7 million and $71.2 million in gross written premiums for the three and nine months ended September 30, 2011, respectively. Additionally we saw growth in our Excess Casualty and Primary Casualty products due to an increase in underwriting activity resulting from an expansion of our underwriting team. The aforementioned increases were offset by activity within our Specialty Run-off division, reported within Other in the table above, which decreased as a result of our transfer of NavPac business to Tower Insurance Company of New York via a quota share.
Professional Liability Premiums. The gross written premiums for the three and nine months ended September 30, 2011 and 2010 consisted of the following:
Three Months Ended September 30, |
Nine Months Ended September 30, |
Percentage Change | ||||||||||||||||||||||
In thousands |
2011 | 2010 | 2011 | 2010 | QTD | YTD | ||||||||||||||||||
E&O |
$ | 21,441 | $ | 14,755 | $ | 51,014 | $ | 38,584 | 45.3 | % | 32.2 | % | ||||||||||||
D&O (public and private) |
11,571 | 17,284 | 32,997 | 54,180 | -33.1 | % | -39.1 | % | ||||||||||||||||
Other |
47 | 547 | 901 | 4,428 | -91.4 | % | -79.6 | % | ||||||||||||||||
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Total Professional Liability |
$ | 33,059 | $ | 32,586 | $ | 84,912 | $ | 97,192 | 1.5 | % | -12.6 | % | ||||||||||||
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The Professional Liability gross written premiums for the three months ended September 30, 2011 was consistent with the same period in 2010.
The Professional Liability gross written premiums for the nine months ended September 30, 2011 decreased 12.6% when compared to the same period in 2010. The decrease was primarily related to a reduction in our D&O business, reflective of a change in underwriting strategy that focuses on a planned shift toward underwriting excess layers. This was partially offset by an increase from the expansion of our E&O business driven by an investment in our underwriting teams revised underwriting strategy.
44
Lloyds Operations
The Lloyds Operations primarily underwrites marine and related lines of business along with professional liability insurance, and construction coverage for onshore energy business at Lloyds through Syndicate 1221. Our Lloyds Operations includes NUAL, a Lloyds underwriting agency which manages Syndicate 1221.
The following table sets forth the results of operations of the Lloyds Operations for the three and nine months ended September 30, 2011 and 2010:
Three Months Ended September 30, |
Nine Months Ended September 30, |
Percentage Change | ||||||||||||||||||||||
In thousands |
2011 | 2010 | 2011 | 2010 | QTD | YTD | ||||||||||||||||||
Gross written premiums |
$ | 64,143 | $ | 70,295 | $ | 245,597 | $ | 245,529 | -8.8 | % | 0.0 | % | ||||||||||||
Net written premiums |
40,065 | 49,891 | 162,560 | 171,472 | -19.7 | % | -5.2 | % | ||||||||||||||||
Net earned premiums |
54,301 | 56,035 | 166,749 | 159,939 | -3.1 | % | 4.3 | % | ||||||||||||||||
Net losses and loss adjustment expenses |
(33,487 | ) | (35,157 | ) | (112,011 | ) | (105,562 | ) | -4.8 | % | 6.1 | % | ||||||||||||
Commission expenses |
(9,953 | ) | (10,459 | ) | (36,402 | ) | (32,827 | ) | -4.8 | % | 10.9 | % | ||||||||||||
Other operating expenses |
(9,254 | ) | (8,301 | ) | (28,291 | ) | (24,161 | ) | 11.5 | % | 17.1 | % | ||||||||||||
Other income (expense) |
(942 | ) | 1,052 | (734 | ) | 2,687 | NM | NM | ||||||||||||||||
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Underwriting profit (loss) |
$ | 665 | $ | 3,170 | $ | (10,689 | ) | $ | 76 | -79.0 | % | NM | ||||||||||||
Net investment income |
2,158 | 1,982 | 6,733 | 6,179 | 8.9 | % | 9.0 | % | ||||||||||||||||
Net realized gains (losses) |
(226 | ) | (354 | ) | (2,409 | ) | 378 | -36.2 | % | NM | ||||||||||||||
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Income (loss) before income taxes |
$ | 2,597 | $ | 4,798 | $ | (6,365 | ) | $ | 6,633 | -45.9 | % | NM | ||||||||||||
Income tax expense (benefit) |
780 | 1,715 | (2,247 | ) | 2,403 | -54.5 | % | NM | ||||||||||||||||
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Net income (loss) |
$ | 1,817 | $ | 3,083 | $ | (4,118 | ) | $ | 4,230 | -41.1 | % | NM | ||||||||||||
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Losses and loss adjustment expenses ratio |
61.7 | % | 62.7 | % | 67.2 | % | 66.0 | % | ||||||||||||||||
Commission expense ratio |
18.3 | % | 18.7 | % | 21.8 | % | 20.5 | % | ||||||||||||||||
Other operating expense ratio (1) |
18.8 | % | 12.9 | % | 17.4 | % | 13.5 | % | ||||||||||||||||
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Combined ratio |
98.8 | % | 94.3 | % | 106.4 | % | 100.0 | % | ||||||||||||||||
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(1) - Includes Other operating expenses & Other income (expense)
NM - Percentage change not meaningful.
Our Lloyds Operations reported net income of $1.8 million for the three months ended September 30, 2011 compared to $3.1 million for the same period in 2010.
Our Lloyds Operations combined ratio for the three months ended September 30, 2011 was 98.8% compared to 94.3% for the same period in 2010. Our Lloyds Operations pre-tax underwriting profit decreased by $2.5 million to $0.7 million for the three months ended September 30, 2011 compared to $3.2 million for the same period in 2010. The decrease in pre-tax underwriting profit was primarily attributable to a reduction in estimated premium income and prior period net reserve redundancies in 2010.
Our Lloyds Operations reported a net loss of $4.1 million for the nine months ended September 30, 2011 compared to net income of $4.2 million for the same period in 2010.
45
Our Lloyds Operations combined ratio for the nine months ended September 30, 2011 was 106.4% compared to 100.0% for the same period in 2010. Our Lloyds Operations pre-tax underwriting profit decreased by $10.8 million to a $10.7 million pre-tax underwriting loss for the nine months ended September 30, 2011 compared to $0.1 million of underwriting profit for the same period in 2010. The decrease in pre-tax underwriting profit is largely due to:
| Adverse loss development in our Professional Liability division of $3.7 million related mostly to our E&O business for prior underwriting years. |
| Sliding scale adjustments of $2.9 million related to large loss activity that has reduced our ceding commission benefit on a large quota share treaty. |
| An increase in our reinsurance reinstatement premium accrual of $2.3 million. This accrual was driven by the recognition of the effect of a shift in our Marine reinsurance protections to an excess of loss program from a quota share program. As a result of this shift and the increased frequency of severity losses in recent periods, a greater portion of our IBNR was attributable to marine and energy losses that are or will be ceded to the Marine Excess of Loss Reinsurance program and such cession will trigger additional reinstatement premiums. |
| Current accident year large losses. Specifically, an onshore industrial site generated gross and net losses of $12.0 million and $2.4 million, respectively. |
Lloyds Operations Gross Written Premiums
We have controlled 100% of Syndicate 1221s stamp capacity since 2006. Stamp capacity is a measure of the amount of premium a Lloyds syndicate is authorized to write based on a business plan approved by the Council of Lloyds. Syndicate 1221s stamp capacity is £175 million ($273 million) in 2011 compared to £168 million ($264 million) in 2010.
The Lloyds Operations gross written premiums for the three months ended September 30, 2011 decreased 8.8% compared to the same period in 2010. The decrease in the gross written premiums was attributable to a decline in Marine and Professional Liability premiums which are described in detail below.
The Lloyds Operations gross written premium for the nine months ended September 30, 2011 was consistent compared to the same period in 2010.
Marine Premiums. The gross written premiums for the three and nine months ended September 30, 2011 and 2010 consisted of the following:
Three Months Ended September 30, |
Nine Months Ended September 30, |
Percentage Change | ||||||||||||||||||||||
In thousands |
2011 | 2010 | 2011 | 2010 | QTD | YTD | ||||||||||||||||||
Marine and energy liability |
$ | 11,153 | $ | 9,774 | $ | 51,074 | $ | 48,886 | 14.1 | % | 4.5 | % | ||||||||||||
Cargo and specie |
8,822 | 15,384 | 44,904 | 50,594 | -42.7 | % | -11.2 | % | ||||||||||||||||
Assumed reinsurance |
2,019 | 1,713 | 14,133 | 12,243 | 17.9 | % | 15.4 | % | ||||||||||||||||
War |
3,520 | 2,393 | 9,895 | 7,050 | 47.1 | % | 40.4 | % | ||||||||||||||||
Hull |
1,465 | 3,524 | 7,579 | 14,985 | -58.4 | % | -49.4 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Marine |
$ | 26,979 | $ | 32,788 | $ | 127,585 | $ | 133,758 | -17.7 | % | -4.6 | % | ||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
The Marine gross written premiums for the three and nine months ended September 30, 2011 decreased 17.7% and 4.6%, respectively, compared to the same period in 2010. The reduction is attributable to a decrease in Cargo and Hull production. Cargo production has decreased as a result of depressed activity, a reduction in commodity prices, and as a result of reductions to estimated premiums written in prior periods.
46
For the three and nine months ended September 30, 2011, average renewal premium rates increased approximately 1.7% and 2.2% compared to the same period in 2010, with larger increases on our marine and energy liability products.
Property Casualty Premiums. The gross written premiums for the three and nine months ended September 30, 2011 and 2010 consisted of the following:
Three Months Ended September 30, |
Nine Months Ended September 30, |
Percentage Change | ||||||||||||||||||||||
In thousands |
2011 | 2010 | 2011 | 2010 | QTD | YTD | ||||||||||||||||||
Offshore energy |
$ | 12,864 | $ | 12,846 | $ | 40,450 | $ | 36,701 | 0.1 | % | 10.2 | % | ||||||||||||
Engineering and construction |
8,122 | 6,686 | 21,868 | 17,859 | 21.5 | % | 22.4 | % | ||||||||||||||||
Onshore energy |
6,010 | 3,913 | 24,657 | 14,584 | 53.6 | % | 69.1 | % | ||||||||||||||||
Other |
2,686 | 4,242 | 4,131 | 7,624 | -36.7 | % | -45.8 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Property Casualty |
$ | 29,682 | $ | 27,687 | $ | 91,106 | $ | 76,768 | 7.2 | % | 18.7 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Property Casualty gross written premiums for the three and nine months ended September 30, 2011 increased 7.2% and 18.7%, respectively, compared to the same periods in 2010. The increases are primarily due to greater Onshore Energy premiums as a result of a steady production and renewal rate increases resulting from reduced competition that has occurred due to recent loss activity.
The average renewal premium rates for the three and nine months ended September 30, 2011 increased approximately 8.7% and 5.3%, respectively, compared to the same periods in 2010.
Professional Liability Premiums. The gross written premiums for the three and nine months ended September 30, 2011 and 2010 consisted of the following:
Three Months Ended September 30, |
Nine Months Ended September 30, |
Percentage Change | ||||||||||||||||||||||
In thousands |
2011 | 2010 | 2011 | 2010 | QTD | YTD | ||||||||||||||||||
D&O (public and private) |
$ | 5,747 | $ | 7,137 | $ | 20,001 | $ | 23,175 | -19.5 | % | -13.7 | % | ||||||||||||
E&O |
1,735 | 2,683 | 6,905 | 11,828 | -35.3 | % | -41.6 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Professional Liability |
$ | 7,482 | $ | 9,820 | $ | 26,906 | $ | 35,003 | -23.8 | % | -23.1 | % | ||||||||||||
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|
|
|
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|
|
|
|
|
|
The Professional Liability gross written premiums for the three and nine months ended September 30, 2011 decreased 23.8% and 23.1%, respectively, compared to the same periods in 2010, due to competitive market conditions in both the D&O and E&O businesses.
The average renewal premium rates for the Professional Liability division decreased approximately 2.0% and 1.6% for the three and nine months ended September 30, 2011, respectively, compared to the same periods in 2010.
CAPITAL RESOURCES
We monitor our capital adequacy to support our business on a regular basis. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by several ratings agencies, at a level considered necessary by management to enable our Insurance Companies to compete, (2) sufficient capital to enable our Insurance Companies to meet the capital adequacy tests performed by statutory agencies in the United States and the United Kingdom and (3) letters of credit and other forms of collateral that are necessary to support the business plan of our Lloyds Operations.
47
Our capital resources consist of funds deployed or available to be deployed to support our business operations. As of September 30, 2011 and December 31, 2010, our capital resources were as follows:
In thousands |
September 30, 2011 |
December 31, 2010 |
||||||
Senior debt |
$ | 114,240 | $ | 114,138 | ||||
Stockholders equity |
799,455 | 829,354 | ||||||
|
|
|
|
|||||
Total capitalization |
$ | 913,695 | $ | 943,492 | ||||
|
|
|
|
|||||
Ratio of debt to total capitalization |
12.5 | % | 12.1 | % |
As part of our capital management program, we may seek to raise additional capital or may seek to return capital to our stockholders through share repurchases, cash dividends or other methods (or a combination of such methods). Any such determination will be at the discretion of the Parent Companys Board of Directors and will be dependent upon our profits, financial requirements and other factors, including legal restrictions, rating agency requirements, credit facility limitations and such other factors as our Board of Directors deems relevant.
For the three months ended September 30, 2011, the Company repurchased 749,076 shares of the Parent Companys common stock at an aggregate purchase price of $32.2 million and a weighted average price per share of $43.03 pursuant to the share repurchase program. For the nine months ended September 30, 2011, the Company repurchased 1,602,196 shares of the Parent Companys common stock at an aggregate purchase price of $73.7 million and a weighted average price per share of $45.98 pursuant to the share repurchase program. Since inception, the Company has repurchased 3,008,056 shares of the Parent Companys common stock at an aggregate purchase price of $132.4 million and a weighted average price per share of $44.02. As of September 30, 2011, approximately $17.2 million was available for future repurchases under the program.
Purchases are permitted from time to time at prevailing prices in open market or privately negotiated transactions through December 31, 2011. The timing and amount of purchases under the program depend on a variety of factors, including the trading price of the stock, market conditions and corporate and regulatory considerations.
We primarily rely upon dividends from our subsidiaries to meet our Parent Companys obligations. Since the issuance of the senior debt in April 2006, the Parent Companys cash obligations primarily consist of semi-annual interest payments which are now $4.0 million. Going forward, the interest payments and any share repurchases may be made from funds currently at the Parent Company or dividends from its subsidiaries. The dividends have historically been paid by Navigators Insurance Company. Based on the December 31, 2010 surplus of Navigators Insurance Company, the approximate remaining maximum amount available for the payment of dividends by Navigators Insurance Company during 2011 without prior regulatory approval was $62.1 million. During the nine months of 2011 Navigators Insurance Company has declared and paid $35.0 million of dividends to the Parent Company, leaving $27.1 million of remaining dividend capacity for 2011.
48
Condensed Parent Company balance sheets as of September 30, 2011 (unaudited) and December 31, 2010 are shown in the table below:
In thousands |
September 30, 2011 |
December 31, 2010 |
||||||
Cash and investments |
$ | 19,840 | $ | 53,217 | ||||
Investments in subsidiaries |
881,273 | 877,999 | ||||||
Goodwill and other intangible assets |
2,534 | 2,534 | ||||||
Other assets |
14,178 | 12,028 | ||||||
|
|
|
|
|||||
Total assets |
$ | 917,825 | $ | 945,778 | ||||
|
|
|
|
|||||
Senior notes |
$ | 114,240 | $ | 114,138 | ||||
Accounts payable and other liabilities |
776 | 946 | ||||||
Accrued interest payable |
3,354 | 1,340 | ||||||
|
|
|
|
|||||
Total liabilities |
$ | 118,370 | $ | 116,424 | ||||
|
|
|
|
|||||
Stockholders equity |
$ | 799,455 | $ | 829,354 | ||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 917,825 | $ | 945,778 | ||||
|
|
|
|
On April 1, 2011, we entered into a $165 million credit facility agreement with ING Bank, N.V., London Branch, individually and as Administrative Agent, and a syndicate of lenders. The credit facility is a letter of credit facility and replaces a $140 million credit facility agreement that expired March 31, 2011. The credit facility, which is denominated in U.S. dollars, will be utilized to fund our participation in Syndicate 1221 through letters of credit for the 2011 and 2012 underwriting years, as well as open prior years. The letters of credit issued under the facility are denominated in British pounds and their aggregate face amount will fluctuate based on exchange rates. The ability to issue new letters of credit expires on December 31, 2011. If any letters of credit remain outstanding under the facility after December 31, 2012, we would be required to post additional collateral to secure the remaining letters of credit. As of September 30, 2011, letters of credit with an aggregate face amount of $132.6 million were outstanding under the credit facility.
This credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. The credit facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. The letter of credit facility is secured by a pledge of the stock of certain insurance subsidiaries of the Company. To the extent the aggregate face amount issued under the credit facility exceeds the commitment amount, we are required to post collateral with the lead bank of the consortium. We were in compliance with all covenants under the credit facility as of September 30, 2011.
As a result of the April 1, 2011 replacement of the expiring credit facility, the applicable margin and applicable fee rate payable under the letter of credit facility are now based on a tiered schedule that is based on the Companys then-current ratings issued by S&P and Moodys with respect to the Companys senior unsecured long-term debt securities and without third-party credit enhancement and the amount of the Companys own Funds at Lloyds collateral.
Time lags do occur in the normal course of business between the time gross loss reserves are paid by the Company and the time such gross paid losses are billed and collected from reinsurers. Reinsurance recoverable amounts related to those gross loss reserves as of September 30, 2011 are anticipated to be billed and collected over the next several years as the gross loss reserves are paid by the Company.
49
Generally, for pro rata or quota share reinsurers, we issue quarterly settlement statements for premiums less commissions and paid loss activity, which are expected to be settled by the end of the subsequent quarter. We have the ability to issue cash calls requiring such reinsurers to pay losses whenever paid loss activity for a claim ceded to a particular reinsurance treaty exceeds a predetermined amount (generally $1.0 million) as set forth in the pro rata treaty. For the Insurance Companies, cash calls must generally be paid within 30 calendar days. There is generally no specific settlement period for the Lloyds Operations cash call provisions, but such billings have historically on average been paid within 45 calendar days.
Generally, for excess of loss reinsurers we pay monthly or quarterly deposit premiums based on the estimated subject premiums over the contract period (usually one year) that are subsequently adjusted based on actual premiums determined after the expiration of the applicable reinsurance treaty. Paid losses subject to excess of loss recoveries are generally billed as they occur and are usually settled by reinsurers within 30 calendar days for the Insurance Companies and 30 business days for the Lloyds Operations.
We sometimes withhold funds from reinsurers and may apply ceded loss billings against such funds in accordance with the applicable reinsurance agreements.
LIQUIDITY
Consolidated Cash Flows
Net cash provided by operating activities was $86.3 million for the nine months ended September 30, 2011 compared to $114.1 million for the same period in 2010. The decrease in cash flow from operations for the nine month period was primarily due to increased paid losses as well as an increase in premiums receivable due to growth within our recently established Nav Re division. The premiums receivable for our reinsurance business remain open longer because they are collected as the underlying policies attach and are ceded to the treaties.
Net cash provided by investing activities was $12.6 million for the nine months ended September 30, 2011 compared to net cash used in investing activities of $34.5 million for the same period in 2010. This change is primarily due the sale of securities to fund our share repurchase program.
Net cash used in financing activities was $71.8 million for the nine months ended September 30, 2011 compared to $49.1 million for the comparable period in 2010. The use of cash primarily related to the repurchase of the Parent Companys common stock under our share repurchase program.
We believe that the cash flow generated by the operating activities of our subsidiaries will provide sufficient funds for us to meet our liquidity needs over the next twelve months. Beyond the next twelve months, cash flow available to us may be influenced by a variety of factors, including general economic conditions and conditions in the insurance and reinsurance markets, as well as fluctuations from year to year in claims experience.
We believe that we have adequately managed our cash flow requirements related to reinsurance recoveries from its positive cash flows and the use of available short-term funds when applicable. However, there can be no assurances that we will be able to continue to adequately manage such recoveries in the future or that collection disputes or reinsurer insolvencies will not arise that could materially increase the collection time lags or result in recoverable write-offs causing additional incurred losses and liquidity constraints to the Company. The payment of gross claims and related collections from reinsurers with respect to large losses could significantly impact our liquidity needs. However, we expect to collect our paid reinsurance recoverables generally under the terms described above.
50
Investments
As of September 30, 2011, the weighted average rating of our fixed maturity investments was AA by S&P and Aa by Moodys. The entire fixed maturity investment portfolio, except for investments with a fair value of $22.5 million, consists of investment grade bonds. As of September 30, 2011, our portfolio had a duration of 3.6 years. Management periodically projects cash flow of the investment portfolio and other sources in order to maintain the appropriate levels of liquidity in an effort to ensure our ability to satisfy claims. As of September 30, 2011 and December 31, 2010, all fixed maturity securities and equity securities held by us were classified as available-for-sale.
The following tables set forth our cash and investments as of September 30, 2011 and December 31, 2010:
As of September 30, 2011 | ||||||||||||||||||||
In thousands |
Fair Value | Gross Unrealized Gains |
Gross Unrealized Losses |
Amortized Cost |
OTTI Recognized in OCI |
|||||||||||||||
Fixed-maturities: |
||||||||||||||||||||
U.S. Government Treasury bonds, agency bonds, and foreign government bonds |
$ | 301,757 | $ | 8,656 | $ | (487 | ) | $ | 293,588 | $ | | |||||||||
States, municipalities and political subdivisions |
386,167 | 23,394 | (195 | ) | 362,968 | | ||||||||||||||
Mortgage-backed and asset-backed securities: |
||||||||||||||||||||
Agency mortgage-backed securities |
377,465 | 16,932 | (20 | ) | 360,553 | | ||||||||||||||
Residential mortgage obligations |
24,525 | 30 | (2,232 | ) | 26,727 | (1,260 | ) | |||||||||||||
Asset-backed securities |
49,915 | 779 | (86 | ) | 49,222 | | ||||||||||||||
Commerical mortgage-backed securities |
215,033 | 6,673 | (909 | ) | 209,269 | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Subtotal |
$ | 666,938 | $ | 24,414 | $ | (3,247 | ) | $ | 645,771 | $ | (1,260 | ) | ||||||||
Corporate bonds |
473,111 | 15,008 | (7,998 | ) | 466,101 | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total fixed-maturities |
$ | 1,827,973 | $ | 71,472 | $ | (11,927 | ) | $ | 1,768,428 | $ | (1,260 | ) | ||||||||
Equity securities - common stocks |
147,794 | 18,597 | (4,419 | ) | 133,616 | | ||||||||||||||
Cash |
58,935 | | | 58,935 | | |||||||||||||||
Short-term investments |
159,549 | | | 159,549 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 2,194,251 | $ | 90,069 | $ | (16,346 | ) | $ | 2,120,528 | $ | (1,260 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
As of December 31, 2010 | ||||||||||||||||||||
In thousands |
Fair Value | Gross Unrealized Gains |
Gross Unrealized Losses |
Amortized Cost |
OTTI Recognized in OCI |
|||||||||||||||
Fixed-maturities: |
||||||||||||||||||||
U.S. Government Treasury bonds, agency bonds, and foreign government bonds |
$ | 324,145 | $ | 5,229 | $ | (4,499 | ) | $ | 323,415 | $ | | |||||||||
States, municipalities and political subdivisions |
392,250 | 11,903 | (3,805 | ) | 384,152 | | ||||||||||||||
Mortgage-backed and asset-backed securities: |
||||||||||||||||||||
Agency mortgage-backed securities |
382,628 | 10,127 | (2,434 | ) | 374,935 | | ||||||||||||||
Residential mortgage obligations |
20,463 | 24 | (2,393 | ) | 22,832 | (1,646 | ) | |||||||||||||
Asset-backed securities |
46,093 | 247 | (292 | ) | 46,138 | | ||||||||||||||
Commerical mortgage-backed securities |
190,015 | 4,804 | (1,794 | ) | 187,005 | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Subtotal |
$ | 639,199 | $ | 15,202 | $ | (6,913 | ) | $ | 630,910 | $ | (1,646 | ) | ||||||||
Corporate bonds |
526,651 | 15,075 | (5,545 | ) | 517,121 | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total fixed-maturities |
$ | 1,882,245 | $ | 47,409 | $ | (20,762 | ) | $ | 1,855,598 | $ | (1,646 | ) | ||||||||
Equity securities - common stocks |
87,258 | 22,475 | (10 | ) | 64,793 | | ||||||||||||||
Cash |
31,768 | | | 31,768 | | |||||||||||||||
Short-term investments |
153,057 | | | 153,057 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 2,154,328 | $ | 69,884 | $ | (20,772 | ) | $ | 2,105,216 | $ | (1,646 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
51
Invested assets increased in the nine months of 2011 primarily due to increased valuations of the investment portfolio. The annualized pre-tax yields of our investment portfolio, excluding net realized gains and losses and net OTTI losses recognized in earnings, was 3.1% and 3.2% for the three and nine months ended September 30, 2011 compared to 3.4% and 3.5% for the three and nine months ended September 30, 2010, respectively.
The tax exempt securities portion of our investment portfolio decreased $27.6 million to approximately 19.0% of the fixed maturities investment portfolio as of September 30, 2011 compared to September 30, 2010. As a result, the effective tax rate on net investment income was 28.6% for the three and nine months ended September 30, 2011 compared to 28.4% and 26.7% for the comparable 2010 periods.
The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity as of September 30, 2011 are shown in the following table:
As of September 30, 2011 | ||||||||
In thousands |
Fair Value | Amortized Cost |
||||||
Due in one year or less |
$ | 86,286 | $ | 85,378 | ||||
Due after one year through five years |
516,118 | 506,889 | ||||||
Due after five years through ten years |
353,019 | 335,229 | ||||||
Due after ten years |
205,612 | 195,161 | ||||||
Mortgage- and asset-backed securities |
666,938 | 645,771 | ||||||
|
|
|
|
|||||
Total |
$ | 1,827,973 | $ | 1,768,428 | ||||
|
|
|
|
The following table sets forth our U.S. Treasury bonds, Agency bonds, and Foreign government bonds as of September 30, 2011 and December 31, 2010:
As of September 30, 2011 | ||||||||||||||||
In thousands |
Fair Value | Gross Unrealized Gains |
Gross Unrealized Losses |
Amortized Cost |
||||||||||||
U.S. Treasury bonds |
$ | 100,933 | $ | 5,251 | $ | (3 | ) | $ | 95,685 | |||||||
Agency bonds |
132,380 | 2,529 | (159 | ) | 130,010 | |||||||||||
Foreign government bonds |
68,444 | 876 | (325 | ) | 67,893 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 301,757 | $ | 8,656 | $ | (487 | ) | $ | 293,588 | |||||||
|
|
|
|
|
|
|
|
|||||||||
As of December 31, 2010 | ||||||||||||||||
In thousands |
Fair Value | Gross Unrealized Gains |
Gross Unrealized Losses |
Amortized Cost |
||||||||||||
U.S. Treasury bonds |
$ | 213,544 | $ | 3,552 | $ | (3,554 | ) | $ | 213,546 | |||||||
Agency bonds |
77,229 | 1,311 | (604 | ) | 76,522 | |||||||||||
Foreign government bonds |
33,372 | 366 | (341 | ) | 33,347 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 324,145 | $ | 5,229 | $ | (4,499 | ) | $ | 323,415 | |||||||
|
|
|
|
|
|
|
|
52
The following table sets forth the fifteen largest holdings categorized as states, municipalities and political subdivisions by counterparty as of September 30, 2011:
Unrealized | ||||||||||||||
Gains | ||||||||||||||
In thousands |
Fair Value | (Losses) | Book Value | S&P Rating | ||||||||||
University of Pittsburgh |
$ | 14,609 | $ | 1,276 | $ | 13,333 | AA | |||||||
New York City Transitional Finance Authority |
9,062 | 855 | 8,207 | AA+ | ||||||||||
Illinois Finance Authority |
8,075 | 115 | 7,960 | A- | ||||||||||
New York State Dormitory Authority |
7,603 | 365 | 7,238 | AA- | ||||||||||
Missouri Highway and Transportation Comm |
7,181 | 576 | 6,605 | AA+ | ||||||||||
Virginia College Building Authority |
6,925 | 648 | 6,277 | AA+ | ||||||||||
Delaware Transportation Authority |
6,918 | 684 | 6,234 | AA | ||||||||||
City of Houston, TX |
6,772 | 140 | 6,632 | A+ | ||||||||||
State of California |
6,361 | 298 | 6,063 | A- | ||||||||||
Energy Northwest |
6,197 | 264 | 5,933 | AA- | ||||||||||
Pennsylvania Turnpike Commission |
6,196 | 194 | 6,002 | A+ | ||||||||||
New York State Thruway Authority |
6,123 | 605 | 5,518 | AA | ||||||||||
New York State Environmental Facilities Corp |
5,882 | 477 | 5,405 | AA+ | ||||||||||
New Mexico Finance Authority |
5,560 | 281 | 5,279 | AA+ | ||||||||||
Minnesota Public Facilities Authority |
5,348 | 595 | 4,753 | AAA | ||||||||||
|
|
|
|
|
|
|||||||||
Subtotal |
108,812 | 7,373 | 101,439 | |||||||||||
All Other |
277,355 | 15,826 | 261,529 | |||||||||||
|
|
|
|
|
|
|||||||||
Total |
$ | 386,167 | $ | 23,199 | $ | 362,968 | ||||||||
|
|
|
|
|
|
The following table sets forth the composition of the investments categorized as states, municipalities and political subdivisions in our portfolio by generally equivalent Standard & Poors Rating Services (S&P) and Moodys Investors Service (Moodys) ratings (not all securities in our portfolio are rated by both S&P and Moodys) as of September 30, 2011. The securities that are not rated in the table below are primarily state bonds.
In thousands |
||||||||||||||
Equivalent | Net | |||||||||||||
Moodys | Unrealized | |||||||||||||
Equivalent S&P Rating |
Rating | Fair Value | Book Value | Gain (Loss) | ||||||||||
AAA/AA/A |
Aaa/Aa/A | $ | 364,259 | $ | 341,373 | $ | 22,886 | |||||||
BBB |
Baa | 16,978 | 16,683 | 295 | ||||||||||
BB |
Ba | | | | ||||||||||
B |
B | | | | ||||||||||
CCC or lower |
Caa or lower | | | | ||||||||||
NR |
NR | 4,930 | 4,912 | 18 | ||||||||||
|
|
|
|
|
|
|||||||||
$ | 386,167 | $ | 362,968 | $ | 23,199 | |||||||||
|
|
|
|
|
|
53
The following table sets forth the municipal bond holdings by sectors as of September 30, 2011 and December 31, 2010:
As of September 30, 2011 | As of December 31, 2010 | |||||||||||||||
In thousands |
Fair Value | Percent of Total |
Fair Value | Percent of Total |
||||||||||||
Municipal Sector: |
||||||||||||||||
General obligation |
16,026 | 4 | % | 13,249 | 3 | % | ||||||||||
Prerefunded |
17,815 | 5 | % | 14,122 | 4 | % | ||||||||||
Revenue |
314,051 | 81 | % | 313,166 | 80 | % | ||||||||||
Taxable |
38,275 | 10 | % | 51,713 | 13 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
386,167 | 100 | % | 392,250 | 100 | % |
We own $138.0 million of municipal securities which are credit enhanced by various financial guarantors. As of September 30, 2011, the average underlying credit rating for these securities is A+. There has been no material adverse impact to our investment portfolio or results of operations as a result of downgrades of the credit ratings for several of the financial guarantors.
We analyze our mortgage-backed and asset-backed securities by credit quality of the underlying collateral distinguishing between the securities issued by the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) which are Federal government sponsored entities, and the non-FNMA and non-FHLMC securities broken out by prime, Alternative A-paper (Alt-A) and subprime collateral. The securities issued by FNMA and FHLMC are the obligations of each respective entity. Legislation has provided for guarantees by the U.S. Government of up to $100 billion each for FNMA and FHLMC.
Prime collateral consists of mortgages or other collateral from the most creditworthy borrowers. Alt-A collateral consists of mortgages or other collateral from borrowers which have a risk potential that is greater than prime but less than subprime. The subprime collateral consists of mortgages or other collateral from borrowers with low credit ratings. Such subprime and Alt-A categories are as defined by S&P.
The following table sets forth our agency mortgage-backed securities and residential mortgage obligations by those issued by the Government National Mortgage Association (GNMA), FNMA, FHLMC, and the quality category (prime, Alt-A and subprime) for all other such investments as of September 30, 2011:
As of September 30, 2011 | ||||||||||||||||
In thousands |
Fair Value | Gross Unrealized Gains |
Gross Unrealized Losses |
Amortized Cost |
||||||||||||
Agency mortgage-backed securities: |
||||||||||||||||
GNMA |
$ | 121,051 | $ | 6,773 | $ | | $ | 114,278 | ||||||||
FNMA |
184,047 | 7,971 | (20 | ) | 176,096 | |||||||||||
FHLMC |
72,367 | 2,188 | | 70,179 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total agency mortgage-backed securities |
$ | 377,465 | $ | 16,932 | $ | (20 | ) | $ | 360,553 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Residential mortgage-backed securities : |
||||||||||||||||
Prime |
$ | 13,925 | $ | 30 | $ | (1,740 | ) | $ | 15,635 | |||||||
Alt-A |
2,106 | | (467 | ) | 2,573 | |||||||||||
Subprime |
| | | | ||||||||||||
Non-US RMBS |
8,494 | | (25 | ) | 8,519 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total residential mortgage-backed securities |
$ | 24,525 | $ | 30 | $ | (2,232 | ) | $ | 26,727 | |||||||
|
|
|
|
|
|
|
|
54
The following table sets forth the fifteen largest residential mortgage obligations as of September 30, 2011:
In thousands |
Issue Date |
Fair Value | Book Value |
Gross Unrealized Losses |
S&P Rating |
Moodys Rating | ||||||||||||||
Fosse Master Issuer Plc 11-1A A2 |
2011 | $ | 4,499 | $ | 4,500 | $ | (1 | ) | AAA | Aaa | ||||||||||
Arkle Master Issuer Plc 10-2A 1A1 |
2010 | 2,485 | 2,500 | (15 | ) | AAA | Aaa | |||||||||||||
GSR Mortgage Loan Trust 05-Ar6 1A1 |
2005 | 1,068 | 1,121 | (53 | ) | AAA | NR | |||||||||||||
Arran Residential Mortgages Fu 11-1A A1C |
2011 | 791 | 792 | (1 | ) | NR | Aaa | |||||||||||||
Wells Fargo Mtg Bkd Secs Tr 05 Ar4 2A2 |
2005 | 752 | 776 | (24 | ) | NR | Ba2 | |||||||||||||
Permanent Master Issuer Plc 11-1A 1A1 |
2011 | 600 | 600 | 0 | AAA | Aaa | ||||||||||||||
Citigroup Mtg Ln Tr Inc 04 Hyb3 1A |
2004 | 531 | 548 | (17 | ) | AA- | A3 | |||||||||||||
Bear Stearns Adjustable Rate 06 1 A1 |
2006 | 508 | 593 | (85 | ) | NR | B2 | |||||||||||||
JP Morgan Mortgage Trust 06 A4 1A1 |
2006 | 504 | 539 | (35 | ) | NR | Caa2 | |||||||||||||
First Horizon Mtg Pass-Th 05 Ar4 2A |
2005 | 490 | 467 | 23 | CC | NR | ||||||||||||||
Wells Fargo Mtg Bkd Secs Tr 06 Ar6 3A |
2006 | 480 | 541 | (61 | ) | NR | B3 | |||||||||||||
JP Morgan Mortgage Trust 07-A3 1A1 |
2007 | 469 | 519 | (50 | ) | CCC | NR | |||||||||||||
Banc of America Fdg Corp 05 F 4A1 |
2005 | 456 | 546 | (90 | ) | CCC | Caa2 | |||||||||||||
GSR Mortgage Loan Trust 06 AR1 2A1 |
2006 | 452 | 565 | (113 | ) | CC | NR | |||||||||||||
Mortgageit Trust 05 1 2A |
2005 | 450 | 530 | (80 | ) | AAA | Ba3 | |||||||||||||
|
|
|
|
|
|
|||||||||||||||
Subtotal |
14,535 | 15,137 | (602 | ) | ||||||||||||||||
All Other |
9,990 | 11,590 | (1,600 | ) | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 24,525 | $ | 26,727 | $ | (2,202 | ) | |||||||||||||
|
|
|
|
|
|
Details of the collateral of our asset-backed securities portfolio as of September 30, 2011 are presented below:
In thousands |
AAA | AA | A | BBB | BB | CCC | Fair Value |
Amortized Cost |
Unrealized Gain (Loss) |
|||||||||||||||||||||||||||
Auto loans |
$ | | $ | 5,787 | $ | 3,778 | $ | | $ | | $ | | $ | 9,565 | $ | 9,376 | $ | 189 | ||||||||||||||||||
Credit cards |
12,814 | | | | | | 12,814 | 12,566 | 248 | |||||||||||||||||||||||||||
Miscellaneous |
8,446 | 1,695 | 17,393 | | | 2 | $ | 27,536 | 27,280 | 256 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total |
$ | 21,260 | $ | 7,482 | $ | 21,171 | $ | | $ | | $ | 2 | $ | 49,915 | $ | 49,222 | $ | 693 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
The commercial mortgage-backed securities are all rated investment grade by S&P or Moodys. The following table sets forth the fifteen largest commercial mortgage backed securities as of September 30, 2011:
In thousands |
Issue Date |
Fair Value | Book Value |
Average Underlying LTV % |
Delin- quency Rate |
Subord- ination Level |
S&P Rating |
Moodys Rating | ||||||||||||||||||||
Morgan Stanley Cap I 06 IQ12 A4 |
2006 | $ | 22,453 | $ | 22,448 | 75.18 | % | 9.08 | % | 29.60 | % | AAA | NR | |||||||||||||||
Wachovia Bk Comm Mtg Tr 06 C23 A4 |
2006 | 15,294 | 15,343 | 77.33 | % | 6.41 | % | 33.34 | % | AA- | Aaa | |||||||||||||||||
Banc Of America Comm Mtg 06 2 A4 |
2006 | 12,055 | 11,904 | 76.34 | % | 11.59 | % | 30.79 | % | AAA | NR | |||||||||||||||||
GSMS 2010-C1 A2 |
2010 | 8,291 | 8,256 | 53.38 | % | 0.00 | % | 18.82 | % | NR | Aaa | |||||||||||||||||
Wachovia Bk Comm Mtg Tr 05 C18 A4 |
2006 | 7,619 | 7,025 | 39.40 | % | 0.00 | % | 8.12 | % | AAA | Aa1 | |||||||||||||||||
Four Times Square Tr 06-4TS A |
2006 | 7,573 | 7,131 | 65.71 | % | 0.00 | % | 52.76 | % | NR | Aa1 | |||||||||||||||||
Citigroup Comm Mtg Tr 06 C5 A4 |
2005 | 7,548 | 6,898 | 77.62 | % | 9.63 | % | 35.31 | % | AAA | Aaa | |||||||||||||||||
Credit Suisse Mortgage Capital 06-Oma B2 |
2006 | 7,343 | 6,947 | 77.23 | % | 10.62 | % | 29.63 | % | NR | Aaa | |||||||||||||||||
LB-UBS Comm Mtg Tr 06 C7 A3 |
2006 | 6,654 | 6,321 | 74.98 | % | 14.21 | % | 31.16 | % | AAA | NR | |||||||||||||||||
GS Mortgage Securities Corp 10-C1 B |
2006 | 5,731 | 5,727 | 66.24 | % | 9.01 | % | 32.90 | % | AAA | Aaa | |||||||||||||||||
LB-UBS Comm Mtg Tr 06 C6 A4 |
2010 | 5,684 | 6,163 | 53.38 | % | 0.00 | % | 15.26 | % | NR | Aa2 | |||||||||||||||||
Bear Stearns Comm Mtg Secs 06 T22 A4 |
2006 | 5,442 | 4,900 | 58.59 | % | 1.88 | % | 33.51 | % | NR | Aaa | |||||||||||||||||
Morgan Stanley Capital I 06 Hq10 A4 |
2006 | 4,836 | 4,715 | 73.01 | % | 12.19 | % | 31.26 | % | NR | Aaa | |||||||||||||||||
Banc of America Re-Remic Trust 11-07C1 A |
2011 | 4,775 | 4,806 | 99.48 | % | 20.70 | % | 49.52 | % | NR | Aaa | |||||||||||||||||
Citigroup/Deutsche Bk Comm Mtg 05 CD1 A4 |
2005 | 4,557 | 4,220 | 75.18 | % | 8.34 | % | 32.26 | % | AAA | Aaa | |||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Subtotal |
125,855 | 122,804 | ||||||||||||||||||||||||||
All Other |
89,178 | 86,465 | ||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Total |
$ | 215,033 | $ | 209,269 | ||||||||||||||||||||||||
|
|
|
|
The following table shows the amount and percentage of our fixed maturities as of September 30, 2011 by S&P credit rating or, if an S&P rating is not available, the equivalent Moodys rating. The table includes fixed maturities at fair value, and the total rating is the weighted average quality rating.
In thousands |
Rating | Fair Value | Percent of Total |
|||||||
Rating description: |
||||||||||
Extremely strong |
AAA | $ | 287,122 | 49 | % | |||||
Very strong |
AA | 983,095 | 19 | % | ||||||
Strong |
A | 410,140 | 25 | % | ||||||
Adequate |
BBB | 125,126 | 6 | % | ||||||
Speculative |
BB & Below | 12,705 | 1 | % | ||||||
Not rated |
NR | 9,785 | 0 | % | ||||||
|
|
|
|
|||||||
Total |
$ | 1,827,973 | 100 | % | ||||||
|
|
|
|
56
The following is a list of the top fifteen corporate bond holdings for fixed maturities at fair value as of September 30, 2011. All such fixed maturities are rated investment grade by S&P and Moodys. These holdings represent direct obligations of the issuer or its subsidiaries and exclude any government guaranteed or government sponsored organizations, securitized, credit enhanced or collateralized asset-backed or mortgage-backed securities.
In thousands |
Fair Value | Net Unrealized Gains (Losses) |
Cost or Amortized Cost |
S&P Rating | ||||||||||
General Electric |
$ | 29,465 | $ | 1,550 | $ | 27,915 | AA | |||||||
Bank of America Corp. |
23,212 | (1,816 | ) | 25,028 | BBB+ | |||||||||
Morgan Stanley |
18,501 | (1,404 | ) | 19,905 | A | |||||||||
Wells Fargo & Co |
17,983 | 291 | 17,692 | A | ||||||||||
Goldman Sach Group Inc. |
17,709 | (387 | ) | 18,096 | A | |||||||||
J.P. Morgan Chase & Co. |
16,635 | 101 | 16,534 | A+ | ||||||||||
Baker Hughes Inc. |
11,499 | 1,200 | 10,299 | A | ||||||||||
Woolworths LTD |
10,906 | 271 | 10,635 | A- | ||||||||||
HSBC Holdings PLC |
10,566 | (285 | ) | 10,851 | AA- | |||||||||
Transcanada Corp. |
10,493 | 1,135 | 9,358 | A- | ||||||||||
BNP Paribas |
9,513 | (358 | ) | 9,871 | AA+ | |||||||||
Target Corp. |
8,954 | 595 | 8,359 | A- | ||||||||||
Lloyds Banking Group PLC |
8,646 | (285 | ) | 8,931 | A+ | |||||||||
Citigroup Inc. |
7,865 | 79 | 7,786 | A- | ||||||||||
Credit Suisse Group AG |
7,034 | (219 | ) | 7,253 | A+ | |||||||||
|
|
|
|
|
|
|||||||||
Subtotal |
208,981 | 468 | 208,513 | |||||||||||
All Other |
264,130 | 6,542 | 257,588 | |||||||||||
|
|
|
|
|
|
|||||||||
Total |
$ | 473,111 | $ | 7,010 | $ | 466,101 | ||||||||
|
|
|
|
|
|
The following table sets forth the fifteen largest equity securities holdings as of September 30, 2011:
In thousands |
Fair Value | Net Unrealized Gains (Losses) |
Cost or Amortized Cost |
|||||||||
Vanguard High Dividend Yield Index |
$ | 26,332 | $ | 134 | $ | 26,198 | ||||||
Vanguard International Index |
13,872 | (1,128 | ) | 15,000 | ||||||||
Vanguard Emerging Market Stock Index |
12,833 | 61 | 12,772 | |||||||||
Vanguard Total Stock Market Index |
5,131 | 1,414 | 3,717 | |||||||||
Vanguard Pacific Stock Index |
4,148 | 799 | 3,349 | |||||||||
Vanguard European Stock Index |
3,601 | 576 | 3,025 | |||||||||
Altria Group Inc. |
2,949 | 891 | 2,058 | |||||||||
Conocophillips |
2,850 | 688 | 2,162 | |||||||||
Johnson & Johnson |
2,835 | 187 | 2,648 | |||||||||
Philip Morris International Inc. |
2,807 | 728 | 2,079 | |||||||||
Kimberly-Clark Corp |
2,741 | 670 | 2,071 | |||||||||
Dominion Resources Inc. |
2,722 | 422 | 2,300 | |||||||||
Unilever NV |
2,669 | 640 | 2,029 | |||||||||
Ameren Corp |
2,639 | 319 | 2,320 | |||||||||
Intel Corp |
2,588 | 116 | 2,472 | |||||||||
|
|
|
|
|
|
|||||||
Subtotal |
90,717 | 6,517 | 84,200 | |||||||||
All Other |
57,077 | 7,661 | 49,416 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 147,794 | $ | 14,178 | $ | 133,616 | ||||||
|
|
|
|
|
|
57
The following table summarizes all securities in a gross unrealized loss position as of September 30, 2011 and December 31, 2010, showing the aggregate fair value and gross unrealized loss by the length of time those securities had continuously been in a gross unrealized loss position as well as the number of securities:
As of September 30, 2011 | As of December 31, 2010 | |||||||||||||||||||||||
In thousands except # of securities |
Number of Securities |
Fair Value |
Gross Unrealized Loss |
Number of Securities |
Fair Value |
Gross Unrealized Loss |
||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. Government Treasury bonds, agency bonds, and foreign government bonds |
||||||||||||||||||||||||
0-6 months |
8 | $ | 80,840 | $ | 230 | 36 | $ | 163,253 | $ | 4,499 | ||||||||||||||
7-12 months |
2 | 6,916 | 257 | | | | ||||||||||||||||||
> 12 months |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
10 | $ | 87,756 | $ | 487 | 36 | $ | 163,253 | $ | 4,499 | ||||||||||||||
States, municipalities and political subdivisions |
||||||||||||||||||||||||
0-6 months |
7 | $ | 6,133 | $ | 26 | 57 | $ | 112,291 | $ | 3,749 | ||||||||||||||
7-12 months |
4 | 8,809 | 131 | 1 | 1,004 | 20 | ||||||||||||||||||
> 12 months |
5 | 3,196 | 38 | 4 | 1,317 | 36 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
16 | $ | 18,138 | $ | 195 | 62 | $ | 114,612 | $ | 3,805 | ||||||||||||||
Agency mortgage-backed securities |
||||||||||||||||||||||||
0-6 months |
4 | $ | 8,049 | $ | 20 | 36 | $ | 139,226 | $ | 2,434 | ||||||||||||||
7-12 months |
| | | | | | ||||||||||||||||||
> 12 months |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
4 | $ | 8,049 | $ | 20 | 36 | $ | 139,226 | $ | 2,434 | ||||||||||||||
Residential mortgage obligations |
||||||||||||||||||||||||
0-6 months |
7 | $ | 9,407 | $ | 124 | 3 | $ | 3,215 | $ | 20 | ||||||||||||||
7-12 months |
3 | 1,520 | 111 | | | | ||||||||||||||||||
> 12 months |
47 | 11,716 | 1,997 | 52 | 15,939 | 2,373 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
57 | $ | 22,643 | $ | 2,232 | 55 | $ | 19,154 | $ | 2,393 | ||||||||||||||
Asset-backed securities |
||||||||||||||||||||||||
0-6 months |
7 | $ | 14,216 | $ | 86 | 7 | $ | 28,175 | $ | 292 | ||||||||||||||
7-12 months |
| | | | | | ||||||||||||||||||
> 12 months |
1 | 2 | | 1 | 2 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
8 | $ | 14,218 | $ | 86 | 8 | $ | 28,177 | $ | 292 | ||||||||||||||
Commercial mortgage-backed securities |
||||||||||||||||||||||||
0-6 months |
23 | $ | 53,115 | $ | 772 | 16 | $ | 78,212 | $ | 1,755 | ||||||||||||||
7-12 months |
6 | 7,078 | 120 | | | | ||||||||||||||||||
> 12 months |
1 | 220 | 17 | 2 | 491 | 39 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
30 | $ | 60,413 | $ | 909 | 18 | $ | 78,703 | $ | 1,794 | ||||||||||||||
Corporate bonds |
||||||||||||||||||||||||
0- 6 months |
81 | $ | 168,290 | $ | 6,819 | 98 | $ | 214,180 | $ | 5,545 | ||||||||||||||
7-12 months |
15 | 22,737 | 1,179 | | | | ||||||||||||||||||
> 12 months |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
96 | $ | 191,027 | $ | 7,998 | 98 | $ | 214,180 | $ | 5,545 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed maturities |
221 | $ | 402,244 | $ | 11,927 | 313 | $ | 757,305 | $ | 20,762 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Equity securities - common stocks |
||||||||||||||||||||||||
0-6 months |
25 | $ | 59,039 | $ | 4,419 | 1 | $ | 322 | $ | 10 | ||||||||||||||
7-12 months |
| | | | | | ||||||||||||||||||
> 12 months |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total equity securities |
25 | $ | 59,039 | $ | 4,419 | 1 | $ | 322 | $ | 10 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
58
We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The above unrealized losses have been determined to be temporary based on our policies. See Critical Accounting Estimates - Impairment of Invested Assets in our 2010 Annual Report on Form 10-K for additional information on our policies.
To determine whether the unrealized loss on structured securities is other-than-temporary, we project an expected principal loss under a range of scenarios and utilize the most likely outcomes. The analysis relies on actual collateral performance measures such as default rate, prepayment rate and loss severity. These assumptions are applied throughout the remaining term of the deal, incorporating the transaction structure and priority of payments, to generate loss adjusted cash flows. Results of the analysis will indicate whether the security ultimately incurs a loss or whether there is a material impact on yield due to either a projected loss or a change in cash flow timing. A break even default rate is also calculated. A comparison of the break even default rate to the actual default rate provides an indication of the level of cushion or coverage to the first dollar principal loss. The analysis applies the stated assumptions throughout the remaining term of the transaction to forecast cash flows, which are then applied through the transaction structure to determine whether there is a loss to the security. For securities in which a tranche loss is present, and the net present value of loss adjusted cash flows is less than book value, an impairment is recognized. The output data also includes a number of additional metrics such as average life remaining, original and current credit support, over 60 day delinquency and security rating.
As of September 30, 2011, the largest single unrealized loss by issuer in the fixed maturities was $1.8 million.
The following table summarizes the gross unrealized investment losses by length of time where the fair value is less than 80% of amortized cost as of September 30, 2011.
As of September 30, 2011 | ||||||||||||
In thousands |
Fixed Maturities |
Equity Securities |
Total | |||||||||
Less than three months |
$ | | $ | 122 | $ | 122 | ||||||
Longer than three months and less than six months |
109 | 370 | 479 | |||||||||
Longer than six months and less than twelve months |
| | | |||||||||
Longer than twelve months |
486 | | 486 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 595 | $ | 492 | $ | 1,087 | ||||||
|
|
|
|
|
|
The fair value of our investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, equity prices, foreign exchange rates and credit spreads. We do not have the intent to sell nor is it more likely than not that we will have to sell debt securities in unrealized loss positions that are not other-than-temporarily impaired before recovery. We may realize investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments. Significant changes in the factors we consider when evaluating investment for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.
The following table shows the S&P ratings and equivalent Moodys ratings of the fixed maturity securities in our portfolio with gross unrealized losses as of September 30, 2011. Not all of the securities are rated by S&P and/or Moodys.
In thousands |
||||||||||||||||||||
Gross Unrealized Loss | Fair Value | |||||||||||||||||||
NAIC Rating |
Equivalent S&P Rating |
Equivalent Moodys Rating |
Amount | Percent of Total |
Amount | Percent of Total |
||||||||||||||
1 |
AAA/AA/A | Aaa/Aa/A | $ | 6,480 | 54 | % | $ | 330,089 | 82 | % | ||||||||||
2 |
BBB | Baa | 3,558 | 30 | % | 59,285 | 15 | % | ||||||||||||
3 |
BB | Ba | 258 | 2 | % | 1,777 | 0 | % | ||||||||||||
4 |
B | B | 559 | 5 | % | 3,239 | 1 | % | ||||||||||||
5 |
CCC or lower | Caa or lower | 1,035 | 9 | % | 6,516 | 2 | % | ||||||||||||
6 |
NR | NR | 37 | 0 | % | 1,338 | 0 | % | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
$ | 11,927 | 100 | % | $ | 402,244 | 100 | % | |||||||||||||
|
|
|
|
|
|
|
|
59
As of September 30, 2011, the gross unrealized losses in the table directly above were related to fixed maturity securities that are rated investment grade, which is defined as a security having an S&P rating of BBB or higher, or a Moodys rating of Baa3 or higher, except for $1.9 million which is rated below investment grade. Unrealized losses on investment grade securities principally relate to changes in interest rates or changes in sector-related credit spreads since the securities were acquired.
The contractual maturity by the number of years until maturity for fixed maturity securities with unrealized losses as of September 30, 2011 is shown in the following table:
As of September 30, 2011 | ||||||||||||||||
Gross Unrealized Losses | Fair Value | |||||||||||||||
In thousands |
Amount | Percent of Total |
Amount | Percent of Total |
||||||||||||
Due in one year or less |
$ | 3 | 0 | % | $ | 4,509 | 1 | % | ||||||||
Due after one year through five years |
5,229 | 44 | % | 204,736 | 51 | % | ||||||||||
Due after five years through ten years |
2,592 | 22 | % | 57,144 | 14 | % | ||||||||||
Due after ten years |
856 | 7 | % | 30,532 | 8 | % | ||||||||||
Mortgage- and asset-backed securities |
3,247 | 27 | % | 105,323 | 26 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 11,927 | 100 | % | $ | 402,244 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Due to the periodic repayment of principal, the aggregate amount of mortgage-backed and asset-backed securities is estimated to have an effective maturity of approximately 3.8 years.
60
The table below summarizes our activity related to OTTI losses for the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
In thousands except # of securities |
Number of Securities |
Amount | Number of Securities |
Amount | Number of Securities |
Amount | Number of Securities |
Amount | ||||||||||||||||||||||||
Total other than temporary impairment losses: |
||||||||||||||||||||||||||||||||
Corporate and other bonds |
| $ | | | $ | | | $ | | | $ | | ||||||||||||||||||||
Commercial mortgage-backed securities |
| | | | | | | | ||||||||||||||||||||||||
Residential mortgage-backed securities |
10 | 1,241 | 10 | 674 | 15 | 1,791 | 12 | 1,387 | ||||||||||||||||||||||||
Asset-backed securities |
| | | | | | | | ||||||||||||||||||||||||
Equities |
| | 1 | 360 | 1 | 547 | 2 | 387 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
10 | $ | 1,241 | 11 | $ | 1,034 | 16 | $ | 2,338 | 14 | $ | 1,774 | ||||||||||||||||||||
Portion of loss in accumulated other comprehensive income (loss): |
||||||||||||||||||||||||||||||||
Corporate and other bonds |
$ | | $ | | $ | | $ | | ||||||||||||||||||||||||
Commercial mortgage-backed securities |
| | | | ||||||||||||||||||||||||||||
Residential mortgage-backed securities |
618 | 365 | 941 | 870 | ||||||||||||||||||||||||||||
Asset-backed securities |
| | | | ||||||||||||||||||||||||||||
Equities |
| | | | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total |
$ | 618 | $ | 365 | $ | 941 | $ | 870 | ||||||||||||||||||||||||
Impairment losses recognized in earnings |
||||||||||||||||||||||||||||||||
Corporate and other bonds |
$ | | $ | | $ | | $ | | ||||||||||||||||||||||||
Commercial mortgage-backed securities |
| | | | ||||||||||||||||||||||||||||
Residential mortgage-backed securities |
623 | 309 | 850 | 517 | ||||||||||||||||||||||||||||
Asset-backed securities |
| | | | ||||||||||||||||||||||||||||
Equities |
| 360 | 547 | 387 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
Total |
$ | 623 | $ | 669 | $ | 1,397 | $ | 904 | ||||||||||||||||||||||||
|
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|
|
During the three and nine months ended September 30, 2011, we recognized in earnings OTTI losses of $0.6 million and $1.4 million related to non-agency mortgage-backed securities and one equity security. During the comparable periods in 2010, we recognized in earnings OTTI losses of $0.7 million and $0.9 million, respectively, related to residential mortgage-backed securities and equity securities. The significant inputs used to measure the amount of credit loss recognized in earnings were actual delinquency rates, default probability assumptions, severity assumptions and prepayment assumptions. Projected losses are a function of both loss severity and probability of default. Default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. We do not intend to sell any of these securities and it is more likely than not that we will not be required to sell these securities before the recovery of the amortized cost basis.
61
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
The following updates our disclosure regarding foreign currency exchange rate risk as previously stated in the Companys 2010 Annual Report on Form 10-K.
FOREIGN CURRENCY EXCHANGE RATE RISK
Our Lloyds Operations are exposed to foreign currency exchange rate risk primarily related to foreign-denominated cash, cash equivalents and marketable securities (foreign funds), premiums receivable, reinsurance recoverables on paid and unpaid losses and loss adjustment expenses as well as reserves for losses and loss adjustment expenses. The principal currencies creating foreign currency exchange risk for the Lloyds Operations are the British pound, the Euro and the Canadian dollar. The Lloyds Operations manages its foreign currency exchange rate risk primarily through asset-liability matching.
Based on the primary foreign-denominated balances within the Lloyds Operations as of September 30, 2011, an assumed 5%, 10% and 15% negative currency movement would result in changes as follows:
As of September 30, 2011 | ||||||||||||||||
Negative Currency Movement of | ||||||||||||||||
In thousands |
USD Equivalent | 5% | 10% | 15% | ||||||||||||
Cash, cash equivalents and marketable securities at fair value |
$ | 86.3 | $ | (4.3 | ) | $ | (8.6 | ) | $ | (12.9 | ) | |||||
Premiums receivable |
$ | 23.6 | $ | (1.2 | ) | $ | (2.4 | ) | $ | (3.5 | ) | |||||
Reinsurance recoverables on paid, unpaid losses and LAE |
$ | 63.6 | $ | (3.2 | ) | $ | (6.4 | ) | $ | (9.5 | ) | |||||
Reserves for losses and loss adjustment expenses |
$ | 165.0 | $ | 8.3 | $ | 16.5 | $ | 24.8 |
Item 4. | Controls and Procedures |
(a) | The Chief Executive Officer and Chief Financial Officer of the Company have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of the period covered by this quarterly report. Based on such evaluation, such officers have concluded that as of the end of such period the Companys disclosure controls and procedures are effective in identifying, on a timely basis, material information required to be disclosed in our reports filed or submitted under the Exchange Act. |
(b) | There have been no changes during our first fiscal quarter in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting. |
62
Part II - Other Information
Item 1. | Legal Proceedings |
In the ordinary course of conducting business, our subsidiaries are involved in various legal proceedings, either indirectly as insurers for parties or directly as defendants. Most of the these proceedings are claims litigation involving our subsidiaries as either (a) liability insurers defending or providing indemnity for third party claims brought against insureds or (b) insurers defending first party coverage claims brought against them. We account for such activity through the establishment of unpaid loss and loss adjustment reserves. Our management believes that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and cost of defense, will not be material to our consolidated financial condition, results of operations, or cash flows.
Our subsidiaries are also from time-to-time involved with other legal actions, some of which assert claims for substantial amounts. These actions include claims asserting extra contractual obligations, such as claims involving allegations of bad faith in the handling of claims or the underwriting of policies. In general, we believe we have valid defenses to these cases. Our management expects that the ultimate liability if any, with respect to such extra-contractual matters will not be material to our consolidated financial position. Nonetheless, given the large or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of litigation, an adverse outcome in such matters could, from time-to-time, have a material adverse outcome on our consolidated results of operations or cash flows in a particular fiscal quarter or year.
In October 2010, Equitas represented by Resolute Management Services Limited (Resolute) commenced a lawsuit in the Supreme Court of the State of New York (the Court Proceeding) and a separate arbitration proceeding (the Arbitration and collectively with the Court Proceeding, the Resolute Proceedings) against Navigators Management Company (NMC) Inc., a wholly-owned subsidiary of the Company. The arbitration demand and complaint in the Resolute Proceedings allege that NMC failed to make timely payments to Resolute under certain reinsurance agreements in connection with subrogation recoveries received by NMC with respect to several catastrophe losses that occurred in the late 1980s and early 1990s. Resolute alleges that it suffered damages of approximately $7.5 million as a result of the alleged delays in payment. The relative proportion of total damages sought in the Court Proceeding and Arbitration are approximately 55% and 45%, respectively. The Company believes that the claims of Resolute are without merit and it intends to vigorously contest the claims.
On October 25, 2011, an order was issued in the Court Proceeding denying NMCs motion for summary judgment and granting Resolutes cross-motion for summary judgment (the October 25th Order). The October 25th Order found that NMC had breached its obligations under the reinsurance agreements at issue in the Court Proceeding and further found that Resolute was entitled to damages for unpaid interest at the statutory rate of 9%. The Court ordered the parties to meet and confer for purposes of determining the amount of damages to be awarded. As of November 4, 2011, the parties had not reached an agreement as to the amount of damages. Navigators disagrees with the October 25th Order and intends to challenge the Order. The Arbitration is in the discovery phase and involves contracts and/or factual situations that are distinct from those in the Court Proceeding. Navigators intends to continue to vigorously contest the claims in the Arbitration.
While it is too early to predict with any certainty the ultimate outcome of the Resolute Proceedings, the Company believes that the ultimate outcome would not be expected to have a significant adverse effect on its results of operations, financial condition or liquidity, although an adverse resolution of the Resolute Proceedings could have a material adverse effect on the Companys results of operations in a particular fiscal quarter or year.
Item 1A. | Risk Factors |
There have been no material changes from the risk factors as previously disclosed in the Companys 2010 Annual Report on Form 10-K.
63
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
In May 2011, the Parent Companys Board of Directors authorized an additional $50 million under the existing share repurchase program of the Companys common stock which increased the size of the program to $150 million. This repurchase program was initially authorized in November 2009. Purchases are permitted from time to time at prevailing prices in open market or privately negotiated transactions through December 31, 2011. The timing and amount of purchases under the program depend on a variety of factors, including the trading price of the stock, market conditions and corporate and regulatory considerations.
The following presents our share repurchases under the current program for the periods indicated:
In thousands, except share and per share amounts |
Total Number of Shares Purchased |
Average Cost Paid Per Share |
Number of Shares Purchased Under Publicly Announced Program |
Dollar Value of Shares that May Yet Be Purchased Under the Program |
||||||||||||
January 2011 |
| $ | | | $ | 40,900 | ||||||||||
February 2011 |
28,835 | 52.24 | 28,835 | 39,397 | ||||||||||||
March 2011 |
227,259 | 50.79 | 227,259 | 27,848 | ||||||||||||
|
|
|
|
|||||||||||||
Subtotal first quarter |
256,094 | 50.96 | 256,094 | |||||||||||||
|
|
|
|
|||||||||||||
April 2011 |
131,469 | 51.51 | 131,469 | 21,076 | ||||||||||||
May 2011 |
143,443 | 46.12 | 143,443 | 14,461 | ||||||||||||
June 2011 |
322,114 | 46.58 | 322,114 | 49,459 | ||||||||||||
|
|
|
|
|||||||||||||
Subtotal second quarter |
597,026 | 47.55 | 597,026 | |||||||||||||
|
|
|
|
|||||||||||||
July 2011 |
82,567 | 48.00 | 82,567 | 45,495 | ||||||||||||
August 2011 |
291,415 | 41.27 | 291,415 | 33,469 | ||||||||||||
September 2011 |
375,094 | 43.31 | 375,094 | 17,224 | ||||||||||||
|
|
|
|
|||||||||||||
Subtotal third quarter |
749,076 | 43.03 | 749,076 | |||||||||||||
|
|
|
|
|||||||||||||
Total 2011 activity |
1,602,196 | 1,602,196 | ||||||||||||||
|
|
|
|
Item 3. | Defaults Upon Senior Securities |
None
None
64
Item 6. | Exhibits |
Exhibit No. |
Description of Exhibit |
|||||
10-1 | Retirement Agreement with Francis W. McDonnell | * | ||||
11-1 | Computation of Per Share Earnings | * | ||||
31-1 | Certification of CEO per Section 302 of the Sarbanes-Oxley Act | * | ||||
31-2 | Certification of CFO per Section 302 of the Sarbanes-Oxley Act | * | ||||
32-1 | Certification of CEO per Section 906 of the Sarbanes-Oxley Act | * | ||||
(This exhibit is intended to be furnished in accordance with | ||||||
Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be | ||||||
filed for purposes of section 18 of the Securities Exchange Act of | ||||||
1934, as amended, or incorporated by reference into any filing | ||||||
under the Securities Act of 1933, except as shall be expressly set | ||||||
forth by specific reference). | ||||||
32-2 | Certification of CFO per Section 906 of the Sarbanes-Oxley Act | * | ||||
(This exhibit is intended to be furnished in accordance with | ||||||
Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be | ||||||
filed for purposes of section 18 of the Securities Exchange Act of | ||||||
1934, as amended, or incorporated by reference into any filing | ||||||
under the Securities Act of 1933, except as shall be expressly set | ||||||
forth by specific reference). | ||||||
101.INS | XBRL Instance Document | * | ||||
101.SCH | XBRL Taxonomy Extension Scheme | * | ||||
101.CAL | XBRL Taxonomy Extension Calculation Database | * | ||||
101.LAB | XBRL Taxonomy Extension Label Linkbase | * | ||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | * | ||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase | * |
* | Included herein |
65
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) | ||||
Date: November 4, 2011 |
/s/ CIRO M. DEFALCO | |||
Ciro M. DeFalco | ||||
Vice President and Treasurer |
66
Exhibit No. |
Description of Exhibit |
|||||
10-1 | Retirement Agreement with Francis W. McDonnell | * | ||||
11-1 | Computation of Per Share Earnings | * | ||||
31-1 | Certification of CEO per Section 302 of the Sarbanes-Oxley Act | * | ||||
31-2 | Certification of CFO per Section 302 of the Sarbanes-Oxley Act | * | ||||
32-1 | Certification of CEO per Section 906 of the Sarbanes-Oxley Act | * | ||||
(This exhibit is intended to be furnished in accordance with | ||||||
Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be | ||||||
filed for purposes of section 18 of the Securities Exchange Act of | ||||||
1934, as amended, or incorporated by reference into any filing | ||||||
under the Securities Act of 1933, except as shall be expressly set | ||||||
forth by specific reference). | ||||||
32-2 | Certification of CFO per Section 906 of the Sarbanes-Oxley Act | * | ||||
(This exhibit is intended to be furnished in accordance with | ||||||
Regulation S-K item 601(b)(32)(ii) and shall not be deemed to be | ||||||
filed for purposes of section 18 of the Securities Exchange Act of | ||||||
1934, as amended, or incorporated by reference into any filing | ||||||
under the Securities Act of 1933, except as shall be expressly set | ||||||
forth by specific reference). | ||||||
101.INS | XBRL Instance Document | * | ||||
101.SCH | XBRL Taxonomy Extension Scheme | * | ||||
101.CAL | XBRL Taxonomy Extension Calculation Database | * | ||||
101.LAB | XBRL Taxonomy Extension Label Linkbase | * | ||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | * | ||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase | * |
* | Included herein |
67
Exhibit 10.1
RETIREMENT AGREEMENT AND RELEASE OF ALL CLAIMS
This Retirement Agreement and Release of All Claims (Agreement) is made by and between Francis W. McDonnell (McDonnell) and Navigators Management Company, Inc. (NMC) and was given to McDonnell on October 10, 2011. In consideration of the covenants and agreements contained in this document and the consideration described herein, McDonnell and NMC (collectively, the Parties) agree as follows:
1. Retirement from Employment. McDonnells employment with NMC shall terminate effective on October 31, 2011 (the Termination Date). Effective on the Termination Date, McDonnell shall resign from all Board of Director and officer positions with NMC and its subsidiaries and affiliates, including, without limitation, The Navigators Group, Inc., Navigators Insurance Company, Navigators Specialty Insurance Company and Navigators Underwriting Agency Ltd.
2. NMCs Obligations. If McDonnell timely provides to NMC a fully executed original of this Agreement, does not revoke this Agreement pursuant to Paragraph 10(g), and otherwise fulfills his obligations under this Agreement:
(a) | NMC will pay to McDonnell: |
(i) one year of continued salary equivalent to $425,000, minus applicable payroll taxes and withholdings, which shall begin to be paid on November 15, 2011 and shall be periodically paid in cash following such date in accordance with NMCs standard bi-monthly payroll practices and schedule until March 1, 2012 and the remaining unpaid balance of the $425,000 (minus applicable payroll taxes and withholding) shall be paid in a lump sum on March 12, 2012; and
(ii) McDonnells target bonus of $340,000 under The Navigators Group, Inc.s Annual Incentive Plan (AIP) for 2011, which shall be paid in cash in 2012, on or before March 12, 2012; and
(b) | The 5,500 unvested restricted share units of The Navigators Group, Inc. that were granted to McDonnell on August 5, 2008 shall vest on the Termination Date and such restricted share units shall be settled by delivery of 5,500 shares of common stock of The Navigators Group, Inc. to McDonnell on August 5, 2012. All other unvested equity awards granted to McDonnell by NMC shall be forfeited. |
3. Release by McDonnell. To the greatest extent permitted by law, McDonnell, on behalf of himself and his heirs, successors, agents, and assigns, hereby releases and forever discharges NMC, which is specifically defined for purposes of this release to include NMC and all of its predecessor, successor, parent, subsidiary, affiliated entities (specifically including, The Navigators Group, Inc., Navigators Insurance Company, and Navigators Specialty Insurance Company) and all of its/their officers, directors, employees, and agents (the Released Parties), from any and all liability for any and all claims arising on or prior to the effective date of this Agreement. This release includes, but is not limited to, any and all claims, rights, demands, and causes of action of any and every kind, whether now known or unknown, real or potential, whether arising out of any claim for wrongful termination, breach of contract, discrimination, harassment, retaliation, and/or any other tort, personal injury, or violation of
2
public policy or statute, including but not limited to Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Older Workers Benefit Protection Act, the Americans With Disabilities Act, the Fair Labor Standards Act, and any and every other federal, state, and local law, statute, and ordinance and Letter Agreements dated July 10 and 11, 2008 between McDonnell and The Navigators Group, Inc.. However, nothing in this Agreement shall be construed as waiving or releasing any claim which cannot be waived or released by private agreement of the Parties, or as prohibiting McDonnell from filing a charge or complaint, including a challenge to the validity of this Agreement, with the Equal Employment Opportunity Commission (EEOC), or as prohibiting McDonnell from participating in any investigation or proceeding conducted by the EEOC. McDonnell agrees, however, that by signing this Agreement, he waives all rights to individual relief based on claims asserted in any such EEOC proceeding. Anything to the contrary notwithstanding, nothing herein shall release any of the Released Parties from any liabilities based on (a) McDonnells right to enforce the terms and conditions of this Agreement, (b) any right or claim that arises after the date this Agreement is executed by McDonnell, (c) any right McDonnell may have to vested or accrued benefits or entitlements under any applicable plan, agreement, program, award, policy or arrangement of NMC or its parents, subsidiaries and affiliates, (d) any rights McDonnell may have as a shareholder of NMC or any of its subsidiaries or affiliates, (e) McDonnells right to indemnification and advancement of expenses in accordance with applicable laws and/or the certificate of incorporation and by-laws of NMC or its parents, subsidiaries and affiliates or this Agreement or any applicable insurance policy, or (f) any right McDonnell may have to obtain contribution as permitted by law in the event of entry of judgment against McDonnell as a result of any act or failure to act for which McDonnell, on the one hand, and the Released Parties, on the other hand, are jointly liable.
3
4. Confidentiality of NMCs Information. McDonnell acknowledges and agrees that he was given access to and has obtained knowledge and information about NMC and its subsidiary and affiliated companies which is private, confidential, proprietary, and/or constitutes trade secret information. As a material provision of this Agreement, McDonnell agrees to abide by all policies of NMC which limit the dissemination of such information and further to keep all such information completely confidential and not to disclose or publish that information to anyone, including but not limited to past, present, or prospective employees, customers, vendors, competitors, and/or business partners of NMC, and/or prospective or future employers of McDonnell, except (a) if disclosure of such information is specifically required by subpoena, court order, any governmental agency having jurisdiction or by any administrative or legislative body (including a committee thereof); (b) if disclosure of such information is required to perform McDonnells obligations under Paragraphs 11 and 12 of this Agreement; (c) if such information becomes generally known to and available for use by the public other than as a result of McDonnells acts or omissions in violation of this Paragraph 4, (d) if disclosure of such information becomes necessary in connection with the defense of any claim brought against McDonnell, NMC or any of its subsidiaries and affiliates, or (e) if disclosure of such information is made to enforce any rights or defend any claims hereunder or under any other agreement to which McDonnell is a party, provided that such disclosure is necessary to the enforcement of such rights or defense of such claims and is only disclosed to the extent necessary in the formal proceedings related thereto. To the extent McDonnell possesses or possessed such information in written or electronic form, McDonnell represents and promises
4
that he either has returned or will use reasonable efforts to return as soon as practicable after the Termination Date all such information (including all copies) to NMC, provided McDonnell shall be entitled to retain (i) papers and other materials of a personal nature, including, but not limited to, photographs, personal correspondence, personal diaries, personal calendars, and rolodexes, (ii) information showing McDonnells equity awards or compensation, or relating to expense reimbursements, (iii) information that McDonnell reasonably believes may be needed for his own tax purposes, and (iv) copies of employee benefit and compensation plans, programs, agreements and other arrangements of NMC or any of its subsidiaries or affiliates in which McDonnell was a participant or covered.
5. Nondisparagement. McDonnell agrees not to make any written or oral statement about NMC and its subsidiary and affiliated companies (specifically including The Navigators Group, Inc., Navigators Insurance Company, and Navigators Specialty Insurance Company and all of its/their officers, directors, employees, products, and services) which McDonnell knows or reasonably should know to be untrue and agrees not to make any disparaging or negative written or oral statement concerning NMC and its subsidiary and affiliated companies (specifically including The Navigators Group, Inc., Navigators Insurance Company, and Navigators Specialty Insurance Company and all of its/their officers, directors, employees, products, and services) with the intent to cause injury or harm. Each member of the current Global Leadership Team of NMC (as currently constituted and similar future successor corporate bodies) and current Board of Directors of The Navigators Group, Inc. agrees during the period of his/her employment not to make any written or oral statement about McDonnell which is known or reasonably should be known to be untrue and agrees not to make any disparaging or negative written or oral statement about McDonnell with the intent to
5
cause injury or harm. Nothing in this Agreement shall prevent the disclosure of truthful information by any Party, if required by law (including, as may be necessary, to respond in an appropriate and truthful manner to any legal process or give appropriate and truthful testimony in a legal or regulatory proceeding).
6. Non-Solicitation of Employees. McDonnell covenants and agrees that until September 30, 2012 he shall not solicit, hire, engage or attempt to hire or engage for employment, consulting or independent contracting any individual who shall have been an employee of NMC or its affiliates in the Finance or Actuarial Departments of NMC at the time of such solicitation, whether on McDonnells own behalf or on behalf of another entity in which McDonnell shall have a direct or indirect interest, as a proprietor, partner, co-venturer, creditor, stockholder, director, officer, employee, agent, representative or otherwise. Notwithstanding the foregoing, the following shall not be a violation of this Paragraph 6: (a) McDonnell responding to an unsolicited request from any such employee for advice on employment or business matters; (b) McDonnell responding to an unsolicited request for a reference regarding any such employee, by providing a reference setting forth his personal views about such person; or (c) any organization with which McDonnell is affiliated (including his employer) engaging or soliciting such employee if McDonnell was not involved (directly or indirectly) in such activity.
7. No Assignment of Claims. McDonnell warrants that he has not transferred to any other person or entity any of the rights or causes of action released in this Agreement.
8. No Other Monies Due. Except as provided herein in Paragraphs 2, 11 and 12 and the following Accrued Obligations, no other money, expense, cost, or fee shall be paid by NMC to McDonnell as part of this Agreement: (a) accrued but unpaid base salary through the
6
Termination Date; (b) payment for accrued but unused vacation days through the Termination Date in an amount equal to $21,500; (c) any unreimbursed business expenses incurred by McDonnell on or prior to the Termination Date; and (d) compensation and benefits payable to McDonnell under the terms or rules of NMCs compensation and benefit plans (other than severance plans, equity compensation plans and bonus plans) in which McDonnell participated prior to the Termination Date. NMC shall pay or provide such Accrued Obligations to McDonnell (x) in the case of (a) and (b) above, in a lump sum cash amount within thirty (30) days following the Termination Date, (y) in the case of (c) above, pursuant to NMCs expense reimbursement policy and Paragraph 14 hereof, and (z) in the case of (d) above, pursuant to the terms of the applicable compensation and benefit plans.
9. Certification of Understanding. McDonnell certifies that he understands and has voluntarily agreed to all of the terms of this Agreement. McDonnell also certifies that he does not rely and has not relied on any representation or statement made by NMC or by any agent, representative, or attorney of NMC with regard to the subject matter of this Agreement, except as set forth herein.
10. Fairness of Agreement. McDonnell understands and agrees that he:
a. Has had more than twenty-one (21) days within which to consider this Agreement before executing it.
b. Has carefully read and fully understands all of the provisions of this Agreement.
c. Is, through this Agreement, releasing NMC and related entities and individuals (as described in Paragraph 3) from any and all claims he has or may have against it/them, including claims under the Age Discrimination in Employment Act of 1967 (29 U.S.C. § 621, et seq.).
7
d. Knowingly and voluntarily agrees to all of the terms of this Agreement.
e. Knowingly and voluntarily intends to be legally bound by all of the terms of this Agreement.
f. Was advised and hereby is advised in writing to consider the terms of this Agreement and consult with an attorney of his choice prior to executing this Agreement.
g. Has a full seven (7) days following the execution of this Agreement to revoke this Agreement and has been and hereby is advised in writing that this Agreement shall not become effective or enforceable until the revocation period has expired. Any such revocation must be in a writing received by Bruce J. Byrnes, Senior Vice President, General Counsel & Chief Compliance Officer, by the seventh (7th) day, or Mr. Byrnes must be notified by phone on or before the seventh (7th) day and a written revocation must then be received by him within seven (7) days thereafter.
h. Understands that rights or claims under the Age Discrimination in Employment Act of 1967 (29 U.S.C. § 621, et seq.) that may arise after the date this Agreement is executed are not waived.
11. Post-Separation Cooperation. For a period of one year following the Termination Date, McDonnell agrees to cooperate with and make himself reasonably available to NMC (including its subsidiary and affiliated companies and its/their employees) to provide information that was learned by him during his employment, so long as such cooperation is not contrary to McDonnells own legal interests or in direct conflict with the legal interests of
8
his employer. In the event any such persons require McDonnells cooperation in accordance with this Paragraph 11, NMC shall, upon receipt of appropriate documentation from McDonnell, reimburse McDonnell for reasonable costs and expenses incurred by McDonnell as a result of providing such cooperation (including travel expenses at the same level of travel and accommodations as when he was an executive of NMC) and legal expenses if McDonnell reasonably believes separate counsel is appropriate. It is anticipated that this cooperation obligation will be limited to periodic telephone and email communications. McDonnell acknowledges that the consideration provided to him in this Agreement is ample compensation for his cooperation.
12. Indemnification. NMC and its subsidiary and affiliated companies agree to indemnify McDonnell (and provide for advancement of expenses subject to a mutually acceptable reimbursement agreement) with respect to any claim which has been or which may be asserted against him based on his acts or omissions arising out of his employment or service as an officer or director of NMC or any of its subsidiaries or affiliates, consistent with and to the fullest extent permitted by applicable law and/or the certificate of incorporation and by-laws of NMC or its parents, subsidiaries and affiliates. NMC shall also continue to provide McDonnell directors and officers liability insurance coverage (which shall be substantially the same as the coverage prior to the Termination Date) for all claims which have been or may be asserted against him based on his acts or omissions arising out of his employment or service as an officer or director of NMC or any of its subsidiaries or affiliates. McDonnell, in turn, agrees to cooperate fully with NMC and its subsidiary and affiliated companies with regard to the defense of any such claims.
9
13. No Admission of Liability. This Agreement and compliance therewith shall not be construed as an admission by NMC or McDonnell of any liability whatsoever or as an admission of any wrongdoing. NMC and McDonnell specifically disclaim all wrongdoing and disclaim any liability to the other for any alleged violation of the others rights, including any violation of common law, statute, or contract.
14. Compliance With Section 409A. This Agreement is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the Code) and will be interpreted in a manner intended to comply with Section 409A of the Code. Notwithstanding anything herein to the contrary, (i) if at the time of McDonnells separation of employment with NMC, he is a specified employee as defined in Section 409A of the Code (and any related regulations or other pronouncements thereunder) and the deferral of the commencement of any payments or benefits otherwise payable hereunder as a result of such separation of employment is necessary in order to prevent any accelerated or additional tax under Section 409A of the Code, then NMC will defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to McDonnell) until the date that is six months following McDonnells separation from employment with NMC (or the earliest date as is permitted under Section 409A of the Code) and (ii) if any other payments of money or other benefits due to McDonnell hereunder could cause the application of an accelerated or additional tax under Section 409A of the Code, such payments or other benefits shall be deferred if deferral will make such payment or other benefits compliant under Section 409A of the Code, or otherwise such payment or other benefits shall be restructured, to the extent possible, in a manner, determined by NMC, that does not cause such an accelerated or additional tax. To the extent any reimbursements or in-kind benefits due to
10
McDonnell under this Agreement constitute deferred compensation under Section 409A of the Code, any such reimbursements or in-kind benefits shall be paid to McDonnell in accordance and in compliance with the requirements of Treas. Reg. Section 1.409A -3(i)(1)(iv)(A). Each payment made under this Agreement shall be designated as a separate payment within the meaning of Section 409A of the Code. All payments to be made upon a separation from employment under this Agreement may only be made upon a separation from service within the meaning of such term under Section 409A of the Code. In implementation of the foregoing provisions, the Parties agree that (x) McDonnells termination of employment pursuant to this Agreement shall be treated solely for purposes of Section 409A of the Code as an involuntary separation from service within the meaning of Treas. Reg. Section 1.409A -1(n)(1); and (y) the payments to be made to McDonnell under Paragraphs 2(a)(i) and (ii) of this Agreement shall be treated as exempt from the requirements of Section 409A of the Code pursuant to the short term deferral exemption under Treas. Reg. Section 1.409A -1(b)(1) and therefore as not being subject to the six month delay provision referred to in clause (i) of the second sentence of this Paragraph 14.
15. Governing Law. This Agreement shall in all respects be interpreted, enforced and governed under the laws of the State of New York and any dispute arising out of or related to this Agreement shall be submitted to the state or federal courts located in the County of New York in the State of New York, whose jurisdiction is hereby consented to by the parties.
16. Severability. Should any clause or provision of this Agreement be declared illegal or unenforceable, it shall immediately become null and void, leaving the remainder of this Agreement in full force and effect.
11
17. Amendment. This Agreement may not be modified, altered or changed, except upon express written consent of an officer of NMC and McDonnell, wherein specific reference is made to this Agreement.
18. Entire Agreement of the Parties. This document supersedes any and all prior agreements or understandings, written or oral, pertaining to matters encompassed by this Agreement.
19. Signatures. This Agreement shall have no force or effect unless and until it is signed by McDonnell and an authorized representative of NMC, and then only after the revocation period set forth in Paragraph 10g has expired.
20. Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement.
21. Construction. The headings and captions of this Agreement are inserted for convenience only and shall not be deemed part of this Agreement for any purpose whatsoever. Where specific language is used to clarify by example a general statement contained herein, such specific language shall not be deemed to modify, limit or restrict in any manner the construction of the general statement to which it relates. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party.
22. Notices. Any notice, demand, claim or other communication under this Agreement will be in writing and will be deemed to have been given (a) on delivery if delivered personally or by registered or certified mail (b) on the date of transmission thereof if sent by electronic or facsimile transmission and delivery is confirmed, but, in each case, only if
12
addressed to the Parties in the following manner at the following addresses (or at the other address as a party may specify by notice to the other): (i) to NMC, to the attention of General Counsel, or such other officer of NMC designated by NMC, at NMCs principal executive offices; and (ii) to McDonnell, at his principal residence as set forth in the Companys records.
23. Consents. NMC hereby warrants and represents that (i) the execution and delivery of this Agreement and consummation of all transactions contemplated herein have been duly authorized in accordance with all corporate formalities and this Agreement and the obligations hereunder shall be binding on NMC and all of its subsidiaries and affiliates, as applicable, and (ii) the corporate officer executing this Agreement has been duly authorized to execute and deliver it.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the dates set forth below.
Dated: October 25, 2011 |
FRANCIS W. MCDONNELL | |||
/s/ Francis W. McDonnell | ||||
Dated: October 25, 2011 |
NAVIGATORS MANAGEMENT COMPANY, INC. |
By: | /s/ Bruce J. Byrnes |
BRUCE J. BYRNES | ||||
TITLE: SENIOR VICE PRESIDENT |
13
Exhibit 11-1
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
The following table presents the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2011 and 2010:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
In thousands except share and per share amounts |
2011 | 2010 | 2011 | 2010 | ||||||||||||
Net income (loss) |
$ | 13,898 | $ | 16,225 | $ | 15,509 | $ | 52,240 | ||||||||
Basic weighted average shares |
14,796,309 | 15,779,902 | 15,243,603 | 16,170,493 | ||||||||||||
Effect of common stock equivalents: |
||||||||||||||||
Assumed exercise of stock options and vesting of stock grants |
308,115 | 369,088 | 325,767 | 332,605 | ||||||||||||
|
|
|
|
|
|
|
|
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Diluted weighted average shares |
15,104,424 | 16,148,990 | 15,569,370 | 16,503,098 | ||||||||||||
Net income (loss) per common share: |
||||||||||||||||
Basic |
$ | 0.94 | $ | 1.03 | $ | 1.02 | $ | 3.23 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted |
$ | 0.92 | $ | 1.00 | $ | 1.00 | $ | 3.17 | ||||||||
|
|
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|
|
|
|
|
Exhibit 31-1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PER
SECTION 302 OF THE SARBANES-OXLEY ACT
I, Stanley A. Galanski, certify that:
1. | I have reviewed this report on Form 10-Q of The Navigators Group, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I, are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 4, 2011 |
/s/ Stanley A. Galanski | |||||
Name: |
Stanley A. Galanski | |||||
Title: |
President and Chief Executive Officer (Principal Executive Officer) |
Exhibit 31-2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PER
SECTION 302 OF THE SARBANES-OXLEY ACT
I, Ciro M. DeFalco, certify that:
1. | I have reviewed this report on Form 10-Q of The Navigators Group, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 4, 2011 |
/s/ Ciro M. DeFalco | |||||
Name: |
Ciro M. DeFalco | |||||
Title: |
Vice President and Treasurer | |||||
(Principal Financial Officer) |
Exhibit 32-1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Navigators Group, Inc. (the Company) on Form 10-Q for the period ending September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Stanley A. Galanski, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Stanley A. Galanski |
Stanley A. Galanski |
President and Chief Executive Officer |
November 4, 2011 |
A signed original of this written statement required by Section 906 has been provided to The Navigators Group, Inc. and will be retained by The Navigators Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32-2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Navigators Group, Inc. (the Company) on Form 10-Q for the period ending September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Ciro M. DeFalco, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Ciro M. DeFalco |
Ciro M. DeFalco |
Vice President and Treasurer |
November 4, 2011 |
A signed original of this written statement required by Section 906 has been provided to The Navigators Group, Inc. and will be retained by The Navigators Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Share data | Sep. 30, 2011 | Dec. 31, 2010 |
---|---|---|
Fixed maturities, available-for-sale, amortized cost | $ 1,768,428 | $ 1,855,598 |
Equity securities, available-for-sale, cost | $ 133,616 | $ 64,793 |
Preferred stock, par value | $ 0.10 | $ 0.10 |
Preferred stock, authorized shares | 1,000,000 | 1,000,000 |
Preferred stock, issued shares | 0 | 0 |
Common stock, par value | $ 0.10 | $ 0.10 |
Common stock, authorized shares | 50,000,000 | 50,000,000 |
Common stock, issued shares | 17,451,233 | 17,274,440 |
Treasury stock, shares | 3,134,469 | 1,532,273 |
CONSOLIDATED STATEMENTS OF INCOME (USD $) In Thousands, except Per Share data | 3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |
Gross written premiums | $ 255,318 | $ 233,638 | $ 830,315 | $ 757,351 |
Revenues: | ||||
Net written premiums | 175,357 | 157,807 | 551,796 | 512,129 |
Change in unearned premiums | (1,724) | 10,426 | (51,908) | (18,356) |
Net earned premiums | 173,633 | 168,233 | 499,888 | 493,773 |
Net investment income | 16,259 | 17,839 | 51,072 | 53,664 |
Total other-than-temporary impairment losses | (1,241) | (1,034) | (2,338) | (1,774) |
Portion of loss recognized in other comprehensive income (before tax) | 618 | 365 | 941 | 870 |
Net other-than-temporary impairment losses recognized in earnings | (623) | (669) | (1,397) | (904) |
Net realized gains (losses) | 3,238 | 4,521 | 4,856 | 21,653 |
Other income (expense) | (921) | 2,767 | 643 | 2,938 |
Total revenues | 191,586 | 192,691 | 555,062 | 571,124 |
Expenses: | ||||
Net losses and loss adjustment expenses | 110,242 | 107,463 | 340,893 | 311,133 |
Commission expenses | 25,934 | 25,185 | 80,164 | 76,178 |
Other operating expenses | 34,989 | 34,682 | 107,341 | 103,781 |
Interest expense | 2,047 | 2,045 | 6,140 | 6,133 |
Total expenses | 173,212 | 169,375 | 534,538 | 497,225 |
Income (loss) before income taxes | 18,374 | 23,316 | 20,524 | 73,899 |
Income tax expense (benefit) | 4,476 | 7,091 | 5,015 | 21,659 |
Net income (loss) | $ 13,898 | $ 16,225 | $ 15,509 | $ 52,240 |
Net income per common share: | ||||
Basic | $ 0.94 | $ 1.03 | $ 1.02 | $ 3.23 |
Diluted | $ 0.92 | $ 1.00 | $ 1.00 | $ 3.17 |
Average common shares outstanding: | ||||
Basic | 14,796,309 | 15,779,902 | 15,243,603 | 16,170,493 |
Diluted | 15,104,424 | 16,148,990 | 15,569,370 | 16,503,098 |
Stock-Based Compensation (Tables) | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Components for Stock-Based Compensation | The amounts charged to expense for stock-based compensation for the three and nine months ended September 30, 2011 and 2010 are presented in the following table:
|
Document and Entity Information | 9 Months Ended | |
---|---|---|
Sep. 30, 2011 | Oct. 25, 2011 | |
Document Information [Line Items] | ||
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Sep. 30, 2011 | |
Document Fiscal Year Focus | 2011 | |
Document Fiscal Period Focus | Q3 | |
Trading Symbol | NAVG | |
Entity Registrant Name | Navigators Group Inc | |
Entity Central Index Key | 0000793547 | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Accelerated Filer | |
Entity Common Stock, Shares Outstanding | 14,291,310 |
Share Repurchases - Additional Information (Detail) (USD $) | 1 Months Ended | 23 Months Ended | 3 Months Ended | 9 Months Ended |
---|---|---|---|---|
May 31, 2011 | Sep. 30, 2011 | Sep. 30, 2011
Repurchase Of Equity | Sep. 30, 2011
Repurchase Of Equity | |
Equity, Class of Treasury Stock [Line Items] | ||||
Share repurchase program, authorized amount | $ 50,000,000 | $ 150,000,000 | ||
Number of shares repurchased | 3,008,056 | 749,076 | 1,602,196 | |
Aggregate purchase price | 132,400,000 | 32,200,000 | 73,700,000 | |
Weighted average price Per Share | $ 44.02 | $ 43.03 | $ 45.98 | |
Amount available for future repurchases | $ 17,200,000 |
Segment Results (Detail) (USD $) In Thousands, unless otherwise specified | 3 Months Ended | 9 Months Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | Dec. 31, 2010 | |||||||||
Segment Reporting Information [Line Items] | |||||||||||||
Gross written premiums | $ 255,318 | $ 233,638 | $ 830,315 | $ 757,351 | |||||||||
Net written premiums | 175,357 | 157,807 | 551,796 | 512,129 | |||||||||
Net earned premiums | 173,633 | 168,233 | 499,888 | 493,773 | |||||||||
Net losses and loss adjustment expenses | (110,242) | (107,463) | (340,893) | (311,133) | |||||||||
Commission expenses | (25,934) | (25,185) | (80,164) | (76,178) | |||||||||
Other operating expenses | (34,989) | (34,699) | (107,341) | (103,819) | |||||||||
Other income (expense) | (921) | 2,784 | 643 | 2,976 | |||||||||
Underwriting profit (loss) | 1,547 | 3,670 | (27,867) | 5,619 | |||||||||
Net investment income | 16,259 | 17,839 | 51,072 | 53,664 | |||||||||
Net realized gains (losses) | 2,615 | 3,852 | 3,459 | 20,749 | |||||||||
Interest expense | (2,047) | (2,045) | (6,140) | (6,133) | |||||||||
Income (loss) before income taxes | 18,374 | 23,316 | 20,524 | 73,899 | |||||||||
Income tax expense (benefit) | 4,476 | 7,091 | 5,015 | 21,659 | |||||||||
Net income (loss) | 13,898 | 16,225 | 15,509 | 52,240 | |||||||||
Identifiable assets | 3,623,375 | 3,520,996 | 3,623,375 | 3,520,996 | 3,531,459 | ||||||||
Losses and loss adjustment expenses ratio | 63.50% | 63.90% | 68.20% | 63.00% | |||||||||
Commission expense ratio | 14.90% | 15.00% | 16.00% | 15.40% | |||||||||
Other operating expense ratio | 20.70% | [1] | 18.90% | [1] | 21.40% | [1] | 20.50% | [2] | |||||
Combined ratio | 99.10% | 97.80% | 105.60% | 98.90% | |||||||||
Insurance Companies | |||||||||||||
Segment Reporting Information [Line Items] | |||||||||||||
Gross written premiums | 191,175 | 163,343 | 584,718 | 511,822 | |||||||||
Net written premiums | 135,292 | 107,916 | 389,236 | 340,657 | |||||||||
Net earned premiums | 119,332 | 112,198 | 333,139 | 333,834 | |||||||||
Net losses and loss adjustment expenses | (76,755) | (72,306) | (228,882) | (205,571) | |||||||||
Commission expenses | (16,514) | (14,374) | (45,256) | (43,351) | |||||||||
Other operating expenses | (25,735) | (26,398) | (79,050) | (79,658) | |||||||||
Other income (expense) | 554 | 1,380 | 2,871 | 289 | |||||||||
Underwriting profit (loss) | 882 | 500 | (17,178) | 5,543 | |||||||||
Net investment income | 14,037 | 15,736 | 44,009 | 47,040 | |||||||||
Net realized gains (losses) | 2,809 | 4,206 | 5,664 | 20,140 | |||||||||
Income (loss) before income taxes | 17,728 | 20,442 | 32,495 | 72,723 | |||||||||
Income tax expense (benefit) | 4,379 | 6,049 | 9,224 | 21,166 | |||||||||
Net income (loss) | 13,349 | 14,393 | 23,271 | 51,557 | |||||||||
Identifiable assets | 2,692,597 | 2,603,090 | 2,692,597 | 2,603,090 | |||||||||
Losses and loss adjustment expenses ratio | 64.30% | 64.40% | 68.70% | 61.60% | |||||||||
Commission expense ratio | 13.80% | 12.80% | 13.60% | 13.00% | |||||||||
Other operating expense ratio | 21.20% | [1] | 22.40% | [1] | 22.90% | [1] | 23.70% | [2] | |||||
Combined ratio | 99.30% | 99.60% | 105.20% | 98.30% | |||||||||
Lloyd's Operations | |||||||||||||
Segment Reporting Information [Line Items] | |||||||||||||
Gross written premiums | 64,143 | 70,295 | 245,597 | 245,529 | |||||||||
Net written premiums | 40,065 | 49,891 | 162,560 | 171,472 | |||||||||
Net earned premiums | 54,301 | 56,035 | 166,749 | 159,939 | |||||||||
Net losses and loss adjustment expenses | (33,487) | (35,157) | (112,011) | (105,562) | |||||||||
Commission expenses | (9,953) | (10,459) | (36,402) | (32,827) | |||||||||
Other operating expenses | (9,254) | (8,301) | (28,291) | (24,161) | |||||||||
Other income (expense) | (942) | 1,052 | (734) | 2,687 | |||||||||
Underwriting profit (loss) | 665 | 3,170 | (10,689) | 76 | |||||||||
Net investment income | 2,158 | 1,982 | 6,733 | 6,179 | |||||||||
Net realized gains (losses) | (226) | (354) | (2,409) | 378 | |||||||||
Income (loss) before income taxes | 2,597 | 4,798 | (6,365) | 6,633 | |||||||||
Income tax expense (benefit) | 780 | 1,715 | (2,247) | 2,403 | |||||||||
Net income (loss) | 1,817 | 3,083 | (4,118) | 4,230 | |||||||||
Identifiable assets | 887,401 | 841,926 | 887,401 | 841,926 | |||||||||
Losses and loss adjustment expenses ratio | 61.70% | 62.70% | 67.20% | 66.00% | |||||||||
Commission expense ratio | 18.30% | 18.70% | 21.80% | 20.50% | |||||||||
Other operating expense ratio | 18.80% | [1] | 12.90% | [1] | 17.40% | [1] | 13.50% | [2] | |||||
Combined ratio | 98.80% | 94.30% | 106.40% | 100.00% | |||||||||
Corporate | |||||||||||||
Segment Reporting Information [Line Items] | |||||||||||||
Commission expenses | 533 | [2] | (352) | [2] | 1,494 | [2] | |||||||
Other income (expense) | (533) | [2] | 352 | [2] | (1,494) | [2] | |||||||
Underwriting profit (loss) | 0 | [2] | 0 | [2] | |||||||||
Net investment income | 64 | [2] | 121 | [2] | 330 | [2] | 445 | [2] | |||||
Net realized gains (losses) | 32 | [2] | 204 | [2] | 231 | [2] | |||||||
Interest expense | (2,047) | [2] | (2,045) | [2] | (6,140) | [2] | (6,133) | [2] | |||||
Income (loss) before income taxes | (1,951) | [2] | (1,924) | [2] | (5,606) | [2] | (5,457) | [2] | |||||
Income tax expense (benefit) | (683) | [2] | (673) | [2] | (1,962) | [2] | (1,910) | [2] | |||||
Net income (loss) | (1,268) | [2] | (1,251) | [2] | (3,644) | [2] | (3,547) | [2] | |||||
Identifiable assets | $ 43,377 | [2] | $ 75,980 | [2] | $ 43,377 | [2] | $ 75,980 | [2] | |||||
|
Credit Facility - Additional Information (Detail) (USD $) In Millions | 1 Months Ended | 9 Months Ended |
---|---|---|
Mar. 31, 2011 | Sep. 30, 2011 | |
Line of Credit Facility [Line Items] | ||
Line of credit facility | $ 140 | |
Line of credit facility, expiration date | Mar. 31, 2011 | |
Issuance of new letters of credit, expiry date | Dec. 31, 2011 | |
Line of credit facility, covenant terms | This credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. The credit facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. | |
Line of credit facility, covenant compliance | The Company was in compliance with all covenants under the credit facility as of September 30, 2011. | |
Lloyd's Operations | Syndicate 1221 | ||
Line of Credit Facility [Line Items] | ||
Line of credit facility, expiration date | Dec. 31, 2012 | |
Issuance of new letters of credit, expiry date | Dec. 31, 2011 | |
Aggregate face amount of letters of credit outstanding | 132.6 | |
Amended and Restated Credit Agreement | ||
Line of Credit Facility [Line Items] | ||
Line of credit facility | $ 165 | |
Line of credit facility, expiration date | Dec. 31, 2012 |
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Reinsurance Ceded | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reinsurance Ceded | Note 4. Reinsurance Ceded The Company’s ceded earned premiums were $85.5 million and $81.6 million for the three months ended September 30, 2011 and 2010, respectively, and were $261.9 million and $251.4 million for the nine months ended September 30, 2011 and 2010, respectively. The Company’s ceded incurred losses were $39.8 million and $42.6 million for the three months ended September 30, 2011 and 2010, respectively, and were $165.6 million and $156.0 million for the nine months ended September 30, 2011 and 2010, respectively. The following table lists the Company’s 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses and loss adjustment expense and ceded unearned premium (constituting approximately 74% of the total recoverable), together with the reinsurance recoverable and collateral as of September 30, 2011, and the reinsurers’ rating from the indicated rating agency:
|
Financial Data by Segment (Detail) (USD $) In Thousands | 3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |
Segment Reporting Information [Line Items] | ||||
Gross written premiums | $ 255,318 | $ 233,638 | $ 830,315 | $ 757,351 |
Net written premiums | 175,357 | 157,807 | 551,796 | 512,129 |
Net earned premiums | 173,633 | 168,233 | 499,888 | 493,773 |
Insurance Companies | ||||
Segment Reporting Information [Line Items] | ||||
Gross written premiums | 191,175 | 163,343 | 584,718 | 511,822 |
Net written premiums | 135,292 | 107,916 | 389,236 | 340,657 |
Net earned premiums | 119,332 | 112,198 | 333,139 | 333,834 |
Insurance Companies | Marine | ||||
Segment Reporting Information [Line Items] | ||||
Gross written premiums | 47,141 | 49,406 | 175,812 | 172,136 |
Net written premiums | 34,180 | 35,546 | 130,200 | 123,702 |
Net earned premiums | 41,951 | 41,091 | 124,387 | 122,739 |
Insurance Companies | Property Casualty | ||||
Segment Reporting Information [Line Items] | ||||
Gross written premiums | 110,975 | 81,351 | 323,994 | 242,494 |
Net written premiums | 77,056 | 52,677 | 201,978 | 156,674 |
Net earned premiums | 58,585 | 50,976 | 156,871 | 152,228 |
Insurance Companies | Professional Liability | ||||
Segment Reporting Information [Line Items] | ||||
Gross written premiums | 33,059 | 32,586 | 84,912 | 97,192 |
Net written premiums | 24,056 | 19,693 | 57,058 | 60,281 |
Net earned premiums | 18,796 | 20,131 | 51,881 | 58,867 |
Lloyd's Operations | ||||
Segment Reporting Information [Line Items] | ||||
Gross written premiums | 64,143 | 70,295 | 245,597 | 245,529 |
Net written premiums | 40,065 | 49,891 | 162,560 | 171,472 |
Net earned premiums | 54,301 | 56,035 | 166,749 | 159,939 |
Lloyd's Operations | Marine | ||||
Segment Reporting Information [Line Items] | ||||
Gross written premiums | 26,979 | 32,788 | 127,585 | 133,758 |
Net written premiums | 20,649 | 27,142 | 102,362 | 111,205 |
Net earned premiums | 34,510 | 38,254 | 109,222 | 108,541 |
Lloyd's Operations | Property Casualty | ||||
Segment Reporting Information [Line Items] | ||||
Gross written premiums | 29,682 | 27,687 | 91,106 | 76,768 |
Net written premiums | 16,296 | 17,414 | 47,364 | 43,049 |
Net earned premiums | 15,952 | 12,202 | 44,105 | 34,880 |
Lloyd's Operations | Professional Liability | ||||
Segment Reporting Information [Line Items] | ||||
Gross written premiums | 7,482 | 9,820 | 26,906 | 35,003 |
Net written premiums | 3,120 | 5,335 | 12,834 | 17,218 |
Net earned premiums | 3,839 | 5,579 | 13,422 | 16,518 |
Marine | ||||
Segment Reporting Information [Line Items] | ||||
Gross written premiums | 74,120 | 82,194 | 303,397 | 305,894 |
Net written premiums | 54,829 | 62,688 | 232,562 | 234,907 |
Net earned premiums | 76,461 | 79,345 | 233,609 | 231,280 |
Property Casualty | ||||
Segment Reporting Information [Line Items] | ||||
Gross written premiums | 140,657 | 109,038 | 415,100 | 319,262 |
Net written premiums | 93,352 | 70,091 | 249,342 | 199,723 |
Net earned premiums | 74,537 | 63,178 | 200,976 | 187,108 |
Professional Liability | ||||
Segment Reporting Information [Line Items] | ||||
Gross written premiums | 40,541 | 42,406 | 111,818 | 132,195 |
Net written premiums | 27,176 | 25,028 | 69,892 | 77,499 |
Net earned premiums | $ 22,635 | $ 25,710 | $ 65,303 | $ 75,385 |
Change in Net Unrealized Gains/(Losses) (Detail) (USD $) In Thousands | 3 Months Ended | 9 Months Ended | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |||||||||
Gross unrealized gains (losses) | $ 24,611 | $ 58,484 | ||||||||||
Deferred income tax charge (credit) | (322) | 12,806 | 8,251 | 20,160 | ||||||||
Change in net unrealized gains (losses) on investments, net of tax | (511) | [1] | 24,104 | [1] | 16,360 | [2] | 38,324 | [2] | ||||
Fixed maturities | ||||||||||||
Gross unrealized gains (losses) | 32,898 | 54,257 | ||||||||||
Equity Securities | ||||||||||||
Gross unrealized gains (losses) | $ (8,287) | $ 4,227 | ||||||||||
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Summary of Aggregate Fair Value and Gross Unrealized Loss by the Length of Time those Securities had Continuously been in a Gross Unrealized Loss Position as Well as the Number of Securities (Detail) (USD $) In Thousands, unless otherwise specified | Sep. 30, 2011
Investment | Dec. 31, 2010
Investment |
---|---|---|
Fixed maturities | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 221 | 313 |
Fair Value | $ 402,244 | $ 757,305 |
Gross Unrealized Loss | 11,927 | 20,762 |
Fixed maturities | U.S. Government Treasury bonds, agency bonds and foreign government bonds | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 10 | 36 |
Fair Value | 87,756 | 163,253 |
Gross Unrealized Loss | 487 | 4,499 |
Fixed maturities | U.S. Government Treasury bonds, agency bonds and foreign government bonds | 0-6 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 8 | 36 |
Fair Value | 80,840 | 163,253 |
Gross Unrealized Loss | 230 | 4,499 |
Fixed maturities | U.S. Government Treasury bonds, agency bonds and foreign government bonds | 7-12 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 2 | |
Fair Value | 6,916 | |
Gross Unrealized Loss | 257 | |
Fixed maturities | States, municipalities and political subdivisions | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 16 | 62 |
Fair Value | 18,138 | 114,612 |
Gross Unrealized Loss | 195 | 3,805 |
Fixed maturities | States, municipalities and political subdivisions | 0-6 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 7 | 57 |
Fair Value | 6,133 | 112,291 |
Gross Unrealized Loss | 26 | 3,749 |
Fixed maturities | States, municipalities and political subdivisions | 7-12 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 4 | 1 |
Fair Value | 8,809 | 1,004 |
Gross Unrealized Loss | 131 | 20 |
Fixed maturities | States, municipalities and political subdivisions | > 12 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 5 | 4 |
Fair Value | 3,196 | 1,317 |
Gross Unrealized Loss | 38 | 36 |
Fixed maturities | Agency mortgage-backed securities | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 4 | 36 |
Fair Value | 8,049 | 139,226 |
Gross Unrealized Loss | 20 | 2,434 |
Fixed maturities | Agency mortgage-backed securities | 0-6 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 4 | 36 |
Fair Value | 8,049 | 139,226 |
Gross Unrealized Loss | 20 | 2,434 |
Fixed maturities | Residential Mortgage Backed Securities | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 57 | 55 |
Fair Value | 22,643 | 19,154 |
Gross Unrealized Loss | 2,232 | 2,393 |
Fixed maturities | Residential Mortgage Backed Securities | 0-6 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 7 | 3 |
Fair Value | 9,407 | 3,215 |
Gross Unrealized Loss | 124 | 20 |
Fixed maturities | Residential Mortgage Backed Securities | 7-12 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 3 | |
Fair Value | 1,520 | |
Gross Unrealized Loss | 111 | |
Fixed maturities | Residential Mortgage Backed Securities | > 12 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 47 | 52 |
Fair Value | 11,716 | 15,939 |
Gross Unrealized Loss | 1,997 | 2,373 |
Fixed maturities | Asset-backed securities | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 8 | 8 |
Fair Value | 14,218 | 28,177 |
Gross Unrealized Loss | 86 | 292 |
Fixed maturities | Asset-backed securities | 0-6 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 7 | 7 |
Fair Value | 14,216 | 28,175 |
Gross Unrealized Loss | 86 | 292 |
Fixed maturities | Asset-backed securities | > 12 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 1 | 1 |
Fair Value | 2 | 2 |
Fixed maturities | Commercial mortgage-backed securities | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 30 | 18 |
Fair Value | 60,413 | 78,703 |
Gross Unrealized Loss | 909 | 1,794 |
Fixed maturities | Commercial mortgage-backed securities | 0-6 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 23 | 16 |
Fair Value | 53,115 | 78,212 |
Gross Unrealized Loss | 772 | 1,755 |
Fixed maturities | Commercial mortgage-backed securities | 7-12 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 6 | |
Fair Value | 7,078 | |
Gross Unrealized Loss | 120 | |
Fixed maturities | Commercial mortgage-backed securities | > 12 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 1 | 2 |
Fair Value | 220 | 491 |
Gross Unrealized Loss | 17 | 39 |
Fixed maturities | Corporate bonds | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 96 | 98 |
Fair Value | 191,027 | 214,180 |
Gross Unrealized Loss | 7,998 | 5,545 |
Fixed maturities | Corporate bonds | 0-6 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 81 | 98 |
Fair Value | 168,290 | 214,180 |
Gross Unrealized Loss | 6,819 | 5,545 |
Fixed maturities | Corporate bonds | 7-12 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 15 | |
Fair Value | 22,737 | |
Gross Unrealized Loss | 1,179 | |
Equity Securities | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 25 | 1 |
Fair Value | 59,039 | 322 |
Gross Unrealized Loss | 4,419 | 10 |
Equity Securities | 0-6 months | ||
Gain (Loss) on Investments [Line Items] | ||
Number of Securities | 25 | 1 |
Fair Value | 59,039 | 322 |
Gross Unrealized Loss | $ 4,419 | $ 10 |
Segment Information - Additional Information (Detail) (USD $) In Thousands, unless otherwise specified | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011
UK Branch
Insurance Companies | Sep. 30, 2010
UK Branch
Insurance Companies | Sep. 30, 2011
UK Branch
Insurance Companies | Sep. 30, 2010
UK Branch
Insurance Companies | Sep. 30, 2011
Navigators Insurance Company | Sep. 30, 2011
Lloyd's Operations | Sep. 30, 2010
Lloyd's Operations | Sep. 30, 2011
Lloyd's Operations | Sep. 30, 2010
Lloyd's Operations | Sep. 30, 2011
Lloyd's Operations
Syndicate 1221 | Dec. 31, 2010
Lloyd's Operations
Syndicate 1221 | Sep. 30, 2011
Insurance Companies | Sep. 30, 2010
Insurance Companies | Sep. 30, 2011
Insurance Companies | Sep. 30, 2010
Insurance Companies | |
Segment Reporting Information [Line Items] | |||||||||||||||||||
Percentage of Navigators Specialty Insurance Company reinsured by Navigators Insurance Company | 100.00% | ||||||||||||||||||
Percentage control of stamp capacity | 100.00% | 100.00% | |||||||||||||||||
Maximum combined ratio indicating underwriting profit | 100.00% | ||||||||||||||||||
Minimum combined ratio indicating underwriting loss | 100.00% | ||||||||||||||||||
Net earned premiums | $ 173,633 | $ 168,233 | $ 499,888 | $ 493,773 | $ 21,200 | $ 23,300 | $ 64,100 | $ 61,900 | $ 54,301 | $ 56,035 | $ 166,749 | $ 159,939 | $ 119,332 | $ 112,198 | $ 333,139 | $ 333,834 |
Commitments and Contingencies | 9 Months Ended |
---|---|
Sep. 30, 2011 | |
Commitments and Contingencies | Note 9. Commitments and Contingencies In the ordinary course of conducting business, the Company’s subsidiaries are involved in various legal proceedings, either indirectly as insurers for parties or directly as defendants. Most of these proceedings are claims litigation involving the Company’s subsidiaries as either (a) liability insurers defending or providing indemnity for third party claims brought against insureds or (b) insurers defending first party coverage claims brought against them. The Company accounts for such activity through the establishment of unpaid loss and loss adjustment reserves. The Company’s management believes that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and cost of defense, will not be material to the Company’s consolidated financial condition, results of operations, or cash flows. The Company’s subsidiaries are also from time-to-time involved with other legal actions, some of which assert claims for substantial amounts. These actions include claims asserting extra contractual obligations, such as claims involving allegations of bad faith in the handling of claims or the underwriting of policies. In general, the Company believes it has valid defenses to these cases. The Company’s management expects that the ultimate liability if any, with respect to future extra-contractual matters will not be material to its’ consolidated financial position. Nonetheless, given the large or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of litigation, an adverse outcome in such matters could, from time-to-time, have a material adverse outcome on the Company’s consolidated results of operations or cash flows in a particular fiscal quarter or year. In October 2010, Equitas represented by Resolute Management Services Limited (“Resolute”) commenced a lawsuit in the Supreme Court of the State of New York (the “Court Proceeding”) and a separate arbitration proceeding (the “Arbitration” and collectively with the Court Proceeding, the “Resolute Proceedings”) against Navigators Management Company (“NMC”) Inc., a wholly-owned subsidiary of the Company. The arbitration demand and complaint in the Resolute Proceedings allege that NMC failed to make timely payments to Resolute under certain reinsurance agreements in connection with subrogation recoveries received by NMC with respect to several catastrophe losses that occurred in the late 1980’s and early 1990’s. Resolute alleges that it suffered damages of approximately $7.5 million as a result of the alleged delays in payment. The relative proportion of total damages sought in the Court Proceeding and Arbitration are approximately 55% and 45%, respectively. The Company believes that the claims of Resolute are without merit and it intends to vigorously contest the claims. On October 25, 2011, an order was issued in the Court Proceeding denying NMC’s motion for summary judgment and granting Resolute’s cross-motion for summary judgment (the “October 25th Order”). The October 25th Order found that NMC had breached its obligations under the reinsurance agreements at issue in the Court Proceeding and further found that Resolute was entitled to damages for unpaid interest at the statutory rate of 9%. The Court ordered the parties to meet and confer for purposes of determining the amount of damages to be awarded. As of November 4, 2011, the parties had not reached an agreement as to the amount of damages. Navigators disagrees with the October 25th Order and intends to challenge the Order. The Arbitration is in the discovery phase and involves contracts and/or factual situations that are distinct from those in the Court Proceeding. Navigators intends to continue to vigorously contest the claims in the Arbitration. While it is too early to predict with any certainty the ultimate outcome of the Resolute Proceedings, the Company believes that the ultimate outcome would not be expected to have a significant adverse effect on its results of operations, financial condition or liquidity, although an adverse resolution of the Resolute Proceedings could have a material adverse effect on the Company’s results of operations in a particular fiscal quarter or year. |
Commitments and Contingencies - Additional Information (Detail) (USD $) In Millions, unless otherwise specified | 1 Months Ended | 1 Months Ended | ||
---|---|---|---|---|
Oct. 31, 2010
Pending or Threatened Litigation | Oct. 31, 2010
Court Proceeding | Oct. 25, 2011
Court Proceeding
Settlement of Litigation | Oct. 31, 2010
Arbitration | |
Loss Contingencies [Line Items] | ||||
Damage sought by Resolute as a result of alleged delayed payments | $ 7.5 | |||
Relative proportion of total damages sought | 55.00% | 45.00% | ||
Statutory interest rate | 9.00% |
Lloyd's Syndicate 1221 | 9 Months Ended |
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Sep. 30, 2011 | |
Lloyd's Syndicate 1221 | Note 6. Lloyd’s Syndicate 1221 The Company’s Lloyd’s Operations included in the consolidated financial statements represents its’ participation in Syndicate 1221. Syndicate 1221’s stamp capacity is £175 million ($273 million) for the 2011 underwriting year compared to £168 million ($264 million) for the 2010 underwriting year. Stamp capacity is a measure of the amount of premiums a Lloyd’s syndicate is authorized to write based on a business plan approved by the Council of Lloyd’s. Syndicate 1221’s stamp capacity is expressed net of commission (as is standard at Lloyd’s). The Syndicate 1221 premiums recorded in the Company’s financial statements are gross of commission. The Company controlled 100% of Syndicate 1221’s stamp capacity for the 2011 and 2010 underwriting years through its’ wholly-owned Lloyd’s corporate member. The Company provides letters of credit and posts cash to Lloyd’s to support its’ participation in Syndicate 1221’s stamp capacity. As of September 30, 2011, the Company had provided letters of credit of $132.6 million and did not have any cash collateral posted. If Syndicate 1221 increases its stamp capacity and the Company participates in the additional stamp capacity, or if Lloyd’s changes the capital requirements, the Company may be required to supply additional collateral acceptable to Lloyd’s. If the Company is unwilling or unable to provide additional acceptable collateral, the Company will be required to reduce its’ participation in the stamp capacity of Syndicate 1221. The letters of credit are provided through a credit facility with a consortium of banks which provides the Company with the ability to have letters of credit issued to support Syndicate 1221’s stamp capacity at Lloyd’s for the 2011 and 2012 underwriting years. The ability to issue new letters of credit expires on December 31, 2011. If any letters of credit remain outstanding under the facility after December 31, 2012, we would be required to post additional collateral to secure the remaining letters of credit. If the credit facility is not renewed prior to December 31, 2012, the Company will need to find internal and/or external sources to provide either letters of credit or other collateral in order to continue to participate in Syndicate 1221. The credit facility is collateralized by all of the common stock of Navigators Insurance Company. Refer to Note 11, Credit Facility for additional information. |
Credit Facility | 9 Months Ended |
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Sep. 30, 2011 | |
Credit Facility | Note 11. Credit Facility On April 1, 2011, we entered into a $165 million credit facility agreement with ING Bank, N.V., London Branch, individually and as Administrative Agent, and a syndicate of lenders. The credit facility is a letter of credit facility and replaces a $140 million credit facility agreement that expired March 31, 2011. The credit facility, which is denominated in U.S. dollars, will be utilized to fund the Company’s participation in Syndicate 1221 through letters of credit for the 2011 and 2012 underwriting years, as well as open prior years. The letters of credit issued under the facility are denominated in British pounds and their aggregate face amount will fluctuate based on exchange rates. The ability to issue new letters of credit expires on December 31, 2011. If any letters of credit remain outstanding under the facility after December 31, 2012, we would be required to post additional collateral to secure the remaining letters of credit. As of September 30, 2011, letters of credit with an aggregate face amount of $132.6 million were outstanding under the credit facility. This credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. The credit facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. The letter of credit facility is secured by a pledge of the stock of certain insurance subsidiaries of the Company. To the extent the aggregate face amount issued under the credit facility exceeds the commitment amount, the Company is required to post collateral with the lead bank of the consortium. The Company was in compliance with all covenants under the credit facility as of September 30, 2011. As a result of the April 1, 2011 replacement of the expiring credit facility, the applicable margin and applicable fee rate payable under the letter of credit facility are now based on a tiered schedule that is based on the Company’s then-current ratings issued by S&P and Moody’s Investors Service (“Moody’s”) with respect to the Company’s senior unsecured long-term debt securities and without third-party credit enhancement and the amount of the Company’s own ‘Funds at Lloyd’s’ collateral. |
Income Taxes | 9 Months Ended |
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Sep. 30, 2011 | |
Income Taxes | Note 7. Income Taxes The Company is subject to the tax laws and regulations of the United States (“U.S.”) and foreign countries in which it operates. The Company files a consolidated U.S. federal tax return, which includes all domestic subsidiaries and the United Kingdom (“U.K.”) Branch. The income from the foreign operations is designated as either U.S. connected income or non-U.S. connected income. Lloyd’s is required to pay U.S. income tax on U.S. connected income written by Lloyd’s syndicates. Lloyd’s and the Internal Revenue Service (“IRS”) have entered into an agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyd’s and remitted directly to the IRS. These amounts are then charged to the corporate members in proportion to their participation in the relevant syndicates. The Company’s corporate members are subject to this agreement and will receive U.K. tax credits for any U.S. income tax incurred up to the U.K. income tax charged on the U.S. connected income. The non-U.S. connected insurance income would generally constitute taxable income under the Subpart F income section of the Internal Revenue Code (“Subpart F”) since less than 50% of Syndicate 1221’s premiums are derived within the U.K. and would therefore be subject to U.S. taxation when the Lloyd’s year of account closes. Taxes are accrued at a 35% rate on the Company’s foreign source insurance income and foreign tax credits, where available, are utilized to offset U.S. tax as permitted. The Company’s effective tax rate for Syndicate 1221 taxable income could substantially exceed 35% to the extent the Company is unable to offset U.S. taxes paid under Subpart F tax regulations with U.K. tax credits on future underwriting year distributions. U.S. taxes are not accrued on the earnings of the Company’s foreign agencies as these earnings are not includable as Subpart F income in the current year. These earnings are subject to taxes under U.K. tax regulations at a 28% rate through March 31, 2011. A finance bill was enacted in the U.K. that reduces the U.K. corporate tax rate from 28% to 26% effective April 2011. The effect of such tax rate change was not material. The Company has not provided for U.S. deferred income taxes on the undistributed earnings of approximately $61.6 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. However, in the future, if such earnings were distributed to the Company, taxes of approximately $1.6 million would be payable on such undistributed earnings and would be reflected in the tax provision for the year in which these earnings are no longer intended to be permanently reinvested in the foreign subsidiary, assuming all foreign tax credits are realized. Unrecognized tax benefits are differences between tax positions taken in the tax returns and benefits recognized in the financial statements. The Company has no unrecognized tax benefits as of September 30, 2011 and 2010. The Company did not incur any interest or penalties related to unrecognized tax benefits for the three and nine months ended September 30, 2011 and 2010. The Company is currently not under examination by any major U.S. or foreign tax authority and is generally subject to U.S. Federal, state or local, or foreign tax examinations by tax authorities for 2008 and subsequent years. The Company recorded income tax expense of $4.5 million and $5.0 million for the three and nine months ended September 30, 2011 compared to $7.1 million and $21.7 million for the comparable periods in 2010, resulting in an effective tax rate of 24.4% for the three and nine months ended September 30, 2011 and 30.4% and 29.3% for the comparable periods in 2010, respectively. The effective tax rate on net investment income was 28.6% for the three and nine months ended September 30, 2011 compared to 28.4% and 26.7% for the same periods in 2010. The Company had state and local deferred tax assets amounting to potential future tax benefits of $1.8 million and $2.2 million as of September 30, 2011 and December 31, 2010, respectively. Included in the deferred tax assets are state and local net operating loss carry-forwards of $1.3 million and $1.4 million as of September 30, 2011 and December 31, 2010, respectively. A valuation allowance was established for the full amount of these potential future tax benefits due to the uncertainty associated with their realization. The Company’s state and local tax carry-forwards as of September 30, 2011 expire from 2024 to 2030. |
Lloyd's Syndicate 1221 - Additional Information (Detail) In Millions, unless otherwise specified | 1 Months Ended | 9 Months Ended | |||
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Mar. 31, 2011 | Sep. 30, 2011
Lloyd's Operations
Syndicate 1221
USD ($) | Sep. 30, 2011
Lloyd's Operations
Syndicate 1221
GBP (£) | Sep. 30, 2010
Lloyd's Operations
Syndicate 1221
USD ($) | Sep. 30, 2010
Lloyd's Operations
Syndicate 1221
GBP (£) | |
Ceded Credit Risk [Line Items] | |||||
Syndicate 1221's stamp capacity | $ 273 | £ 175 | $ 264 | £ 168 | |
Percentage control of stamp capacity | 100.00% | 100.00% | 100.00% | 100.00% | |
Letters of credit | $ 132.6 | ||||
Issuance of new letters of credit, expiry date | Dec. 31, 2011 | Dec. 31, 2011 | Dec. 31, 2011 | ||
Credit facility expiry date | Mar. 31, 2011 | Dec. 31, 2012 | Dec. 31, 2012 |
Stock-Based Compensation | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Stock-Based Compensation | Note 5. Stock-Based Compensation Stock-based compensation granted under the Company’s stock plans is expensed in tranches over the vesting period. Options and non-performance based grants generally vest equally over a four year period and the options have a maximum term of ten years. Certain non-performance based grants vest over five years with one-third vesting in each of the third, fourth and fifth years. The Company’s performance based share grants generally consist of two types of awards. The restricted stock units issued in 2011 will cliff vest in three years, generally with 50% vesting in full, while the vesting of the remaining 50% will be dependent on the compound annual growth in book value per share for the three years immediately prior to the vesting date, with actual shares that vest ranging between 150% to 0% of that portion of the original award. Those issued prior to 2011 generally vest over five years with one-third vesting in each of the third, fourth and fifth years, dependent on the rolling three-year average return on equity based on the three years prior to the year in which the vesting occurs, with actual shares that vest ranging between 150% to 0% of the original award. The amounts charged to expense for stock-based compensation for the three and nine months ended September 30, 2011 and 2010 are presented in the following table:
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $) In Thousands | 3 Months Ended | 9 Months Ended | ||||||||||
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Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |||||||||
Net income (loss) | $ 13,898 | $ 16,225 | $ 15,509 | $ 52,240 | ||||||||
Other comprehensive income (loss): | ||||||||||||
Change in net unrealized gains (losses) on investments, net of tax expense (benefit) of $(322) and $12,806 in 2011 and 2010 (For Three Months Ended), and net of tax expense (benefit) of $8,251 and $20,160 in 2011 and 2010 (For Nine Months Ended), respectively | (511) | [1] | 24,104 | [1] | 16,360 | [2] | 38,324 | [2] | ||||
Change in foreign currency translation gains (losses), net of tax expense (benefit) of $(273)] and $(165) in 2011 and 2010 (For Three Months Ended), and net of tax expense (benefit) of $86] and $69 in 2011 and 2010 (For Nine Months Ended), respectively | (701) | (306) | 222 | 128 | ||||||||
Other comprehensive income (loss) | (1,212) | 23,798 | 16,582 | 38,452 | ||||||||
Comprehensive income (loss) | $ 12,686 | $ 40,023 | $ 32,091 | $ 90,692 | ||||||||
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Accounting Policies | 9 Months Ended |
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Sep. 30, 2011 | |
Accounting Policies | Note 1. Accounting Policies The accompanying interim consolidated financial statements are unaudited and reflect all adjustments which, in the opinion of management, are necessary to fairly present the results of The Navigators Group, Inc. and its subsidiaries for the interim periods presented on the basis of United States generally accepted accounting principles (“GAAP” or “U.S. GAAP”). All such adjustments are of a normal recurring nature. All significant intercompany transactions and balances have been eliminated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The term “the Company” as used herein is used to mean The Navigators Group, Inc. and its subsidiaries, unless the context otherwise requires. The term “Parent” or “Parent Company” are used to mean The Navigators Group, Inc. without its subsidiaries. These financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s 2010 Annual Report on Form 10-K. Certain amounts for the prior year have been reclassified to conform to the current year’s presentation. |
Components for Stock-Based Compensation (Detail) (USD $) In Thousands | 3 Months Ended | 9 Months Ended | ||||||||||
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Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||||||||||
Stock based compensation | $ 793 | $ 1,934 | $ 2,462 | $ 4,749 | ||||||||
Restricted stock units | ||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||||||||||
Stock based compensation | 775 | 1,720 | 2,254 | 4,704 | ||||||||
Directors restricted stock grants | ||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||||||||||
Stock based compensation | 64 | [1] | 45 | [1] | 184 | [1] | 135 | [1] | ||||
Employee stock purchase plan | ||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||||||||||
Stock based compensation | 1 | 61 | 124 | 158 | ||||||||
Stock appreciation rights | ||||||||||||
Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||||||||||||
Stock based compensation | $ (47) | [2] | $ 108 | [2] | $ (100) | [2] | $ (248) | [2] | ||||
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Recent Accounting Pronouncements | 9 Months Ended |
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Sep. 30, 2011 | |
Recent Accounting Pronouncements | Note 2. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements In January 2010, the Financial Accounting Standards Board (“FASB”) issued accounting guidance (Accounting Standards Update (“ASU”) 2010-06) which improves disclosures about fair value measurements (Accounting Standards Codification (“ASC” or “Codification”) 820-10). This guidance requires additional disclosures regarding significant transfers in and out of Levels 1 and 2 and additional disclosures regarding Level 3 purchases, sales, issuances and settlements. In addition, this guidance also requires fair value measurement disclosures for each class of assets and liabilities as well as disclosures about the valuation techniques and inputs used to measure fair value for items classified as Level 2 or Level 3. This guidance was effective as of January 1, 2010 for calendar year reporting entities with the exception of the additional disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements which became effective as of January 1, 2011 for calendar year reporting entities. Early adoption is permitted. The Company adopted this guidance in the first quarter of 2010 with the exception of the additional disclosures about purchases, sales, issuances and settlement in the roll forward of activity in Level 3 fair value measurements, which the Company adopted in the first quarter of 2011. Adoption of this guidance did not have a material effect on the Company’s consolidated financial condition, results of operations or cash flows. Recent Accounting Developments In September 2011, the FASB issued ASU 2011-08 amending Codification topic 350 – Intangibles – Goodwill and Other. The amendment simplifies how goodwill is tested for impairment by permitting entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform the two step goodwill impairment test. The amendment is effective for the interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, but the Company did not early adopt and is currently evaluating the potential impact of the adoption on its’ consolidated financial position, results of operations and cash flows.
In June 2011, the FASB issued ASU 2011-05 amending Codification Topic 220 - Comprehensive Income. The amendment requires that other comprehensive income be either presented in a single continuous statement or two separate but consecutive statements. In addition, the amendment requires the disclosure of reclassification adjustments for items reclassified from other comprehensive income to net income on the face of the financial statements. The amendment is effective for the interim and annual periods beginning after December 15, 2011 and should be applied retrospectively. This standard will only affect the Company’s presentation of comprehensive income and will not affect the Company’s financial position, results of operations, and cash flows. In May 2011, the FASB issued ASU 2011-04 amending Codification Topic 820 - Fair Value Measurements and Disclosures. The amendments were intended to result in common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). The amendment expands and enhances current disclosures about fair value measurement and clarifies the FASB’s intent regarding the application of existing fair value measurement requirements in certain circumstances. The amendments are effective for the interim and annual periods beginning after December 15, 2011 and should be applied prospectively. We are currently evaluating the impact of this amendment on the Company’s consolidated financial position, results of operations and cash flows. In October 2010, the FASB issued ASU 2010-26 amending Codification Topic 944 – Financial Services – Insurance; Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The amendment clarifies which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. In addition, the amendment limits deferrable costs to those that are related directly to the successful acquisition of new or renewal insurance contracts that can be capitalized. The amendment is effective for fiscal and interim periods within that fiscal year, beginning after December 15, 2011 and can be applied prospectively or retrospectively. Early adoption is permitted, but the Company did not early adopt and is currently evaluating the potential impact of the adoption on its’ consolidated financial position, results of operations and cash flows. |
Reinsurance Ceded - Additional Information (Detail) (USD $) In Millions, unless otherwise specified | 3 Months Ended | 9 Months Ended | ||
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Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |
Ceded Credit Risk [Line Items] | ||||
Ceded premiums earned | $ 85.5 | $ 81.6 | $ 261.9 | $ 251.4 |
Ceded losses incurred | $ 39.8 | $ 42.6 | $ 165.6 | $ 156.0 |
Percentage of reinsurance recoverable of 20 largest reinsurers | 74.00% |
Summary of Cumulative Amounts Related to Credit Loss Portion of the OTTI Losses on Debt Securities (Detail) (USD $) In Thousands | 3 Months Ended | 9 Months Ended | ||
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Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |
Other than Temporary Impairment, Credit Losses Recognized in Earnings [Line Items] | ||||
Beginning balance | $ 1,885 | $ 2,731 | $ 1,658 | $ 2,523 |
Additions for credit loss impairments recognized in the current period on securities not previously impaired | 623 | 309 | 850 | 517 |
Additions for credit loss impairments recognized in the current period on securities previously impaired | ||||
Reductions for credit loss impairments previously recognized on securities sold during the period | (935) | (935) | ||
Ending balance | $ 2,508 | $ 2,105 | $ 2,508 | $ 2,105 |
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Investments | Note 10. Investments The following tables set forth the Company’s cash and investments as of September 30, 2011 and December 31, 2010. The table below includes other-than-temporarily impaired (“OTTI”) securities recognized within other comprehensive income (“OCI”).
The fair value of the Company’s investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, equity prices, foreign exchange rates and credit spreads. The Company does not have the intent to sell nor is it more likely than not that it will have to sell debt securities in unrealized loss positions that are not other-than-temporarily impaired before recovery. The Company may realize investment losses to the extent its’ liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments. Significant changes in the factors the Company considers when evaluating investment for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements. The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity as of September 30, 2011 are shown in the following table:
The following table summarizes all securities in a gross unrealized loss position as of September 30, 2011 and December 31, 2010, showing the aggregate fair value and gross unrealized loss by the length of time those securities had continuously been in a gross unrealized loss position as well as the relevant number of securities.
We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The above unrealized losses have been determined to be temporary based on our policies. In the above table, the residential mortgage obligations gross unrealized loss for the greater than 12 months category consists primarily of residential mortgage-backed securities. Residential mortgage-backed securities are a type of fixed income security in which residential mortgage loans are sold into a trust or special purpose vehicle, thereby securitizing the cash flows of the mortgage loans. For debt securities, when assessing whether the amortized cost basis of the security will be recovered, the Company compares the present value of cash flows expected to be collected in relation to the current book value. Any shortfalls of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered the credit loss portion of OTTI losses and is recognized in earnings. All non-credit losses are recognized as changes in OTTI losses within OCI. To determine whether the unrealized loss on structured securities is other-than-temporary, the Company analyzes the projections provided by its investment managers with respect to an expected principal loss under a range of scenarios and utilizes the most likely outcomes. The analysis relies on actual collateral performance measures such as default rate, prepayment rate and loss severity. These assumptions are applied throughout the remaining term of the deal, incorporating the transaction structure and priority of payments, to generate loss adjusted cash flows. Results of the analysis will indicate whether the security ultimately incurs a loss or whether there is a material impact on yield due to either a projected loss or a change in cash flow timing. A break even default rate is also calculated. A comparison of the break even default rate to the actual default rate provides an indication of the level of cushion or coverage to the first dollar principal loss. The analysis applies the stated assumptions throughout the remaining term of the transaction to forecast cash flows, which are then applied through the transaction structure to determine whether there is a loss to the security. For securities in which a tranche loss is present, and the net present value of loss adjusted cash flows is less than book value, impairment is recognized. The output data also includes a number of additional metrics such as average life remaining, original and current credit support, over 60 day delinquency and security rating. For equity securities, in general, the Company focuses its’ attention on those securities with a fair value less than 80% of their cost for six or more consecutive months. If warranted as the result of conditions relating to a particular security, the Company will focus on a significant decline in fair value regardless of the time period involved. Factors considered in evaluating potential impairment include, but are not limited to, the current fair value as compared to cost of the security, the length of time the investment has been below cost and by how much. If an equity security is deemed to be other-than-temporarily impaired, the cost is written down to fair value with the loss recognized in earnings. For equity securities, the Company considers its’ intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. For fixed maturity securities, the Company considers its’ intent to sell a security and whether it is more likely than not that the Company will be required to sell a security before the anticipated recovery as part of the process of evaluating whether a security’s unrealized loss represents an other-than-temporary decline. The Company’s ability to hold such securities is supported by sufficient cash flow from its’ operations and from maturities within its’ investment portfolio in order to meet its’ claims payment and other disbursement obligations arising from its’ underwriting operations without selling such investments. With respect to securities where the decline in value is determined to be temporary and the security’s value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are made within the context of overall risk monitoring, changing information and market conditions. The significant inputs used to measure the amount of credit loss recognized in earnings were actual delinquency rates, default probability assumptions, severity assumptions and prepayment assumptions. Projected losses are a function of both loss severity and probability of default. Default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. The Company does not intend to sell any of these securities and it is more likely than not that it will not be required to sell these securities before the recovery of the amortized cost basis.
The table below summarizes the Company’s activity related to OTTI losses for the periods indicated:
The following table summarizes the cumulative amounts related to the Company’s credit loss portion of the OTTI losses on debt securities for the three and nine months ended September 30, 2011 and 2010 that it does not intend to sell and it is more likely than not that it will not be required to sell the securities prior to recovery of the amortized cost basis and for which the non-credit loss portion is included in other comprehensive income:
The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity, with a gross unrealized loss as of September 30, 2011 is presented in the following table:
The change in net unrealized gains/(losses), inclusive of the change in the non credit portion of other-than-temporary impairment losses, consisted of:
Realized gains/(losses), excluding net other-than-temporary impairment losses recognized in earnings, for the periods indicated were as follows:
The following tables present, for each of the fair value hierarchy levels as defined in ASC 820, Fair Value Measurements, the Company’s fixed maturities and equity securities by asset class that are measured at fair value as of September 30, 2011 and December 31, 2010:
The fair value of financial instruments is determined based on the following fair value hierarchy. The fair value measurement inputs and valuation techniques are similar across all asset classes within the levels outlined below.
The Company did not have any significant transfers between Level 1 and 2 for the three and nine months ended September 30, 2011. The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value using Level 3 inputs during the three and nine months ended September 30, 2011.
As of September 30, 2010, the Company did not have any securities classified as Level 3 and there were no changes in Level 3 assets for the three and nine months ended September 30, 2010. |
Segment Information | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Information | Note 3. Segment Information The Company classifies its’ business into two underwriting segments consisting of the Insurance Companies segment (“Insurance Companies”) and the Lloyd’s Operations segment (“Lloyd’s Operations”), which are separately managed, and a Corporate segment (“Corporate”). Segment data for each of the two underwriting segments include allocations of the operating expenses of the wholly-owned underwriting management companies and the Parent Company’s operating expenses and related income tax amounts. The Corporate segment consists of the Parent Company’s investment income, interest expense and the related tax effect. The Company evaluates the performance of each underwriting segment based on its underwriting and GAAP results. The Insurance Companies’ and the Lloyd’s Operations’ results are measured by taking into account net earned premiums, net losses and loss adjustment expenses (“LAE”), commission expenses, other operating expenses and other income (expense). Each segment maintains its own investments on which it earns income and realizes capital gains or losses. The Company’s underwriting performance is evaluated separately from the performance of its’ investment portfolios. The Insurance Companies consist of Navigators Insurance Company, including its branch located in the United Kingdom (the “U.K. Branch”), and its wholly-owned subsidiary, Navigators Specialty Insurance Company (“Navigators Specialty”). They are primarily engaged in underwriting marine insurance and related lines of business, professional liability insurance and specialty lines of business including contractors general liability insurance, commercial umbrella and primary and excess casualty businesses. Navigators Specialty underwrites specialty and professional liability insurance on an excess and surplus lines basis. Navigators Specialty is 100% reinsured by Navigators Insurance Company. The Lloyd’s Operations primarily underwrite marine and related lines of business along with offshore energy, professional liability insurance and construction coverage for onshore energy business at Lloyd’s of London (“Lloyd’s”) through Lloyd’s Syndicate 1221 (“Syndicate 1221”). The Company’s Lloyd’s Operations includes Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s underwriting agency that manages Syndicate 1221. The Company controlled 100% of the stamp capacity of Syndicate 1221 through its’ wholly-owned Lloyd’s corporate member in 2011 and 2010.
Navigators Management Company, Inc. (“NMC”) is a wholly-owned underwriting management company which produces, manages and underwrites insurance and reinsurance, and provides corporate services for the Company. The operating results for the underwriting management company are allocated to both the Insurance Companies and Lloyd’s Operations. The Insurance Companies’ and the Lloyd’s Operations’ underwriting results are measured based on underwriting profit or loss and the related combined ratio, which are both non-GAAP measures of underwriting profitability. Underwriting profit or loss is calculated from net earned premiums, less the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense) by net earned premiums. A combined ratio of less than 100% indicates an underwriting profit and greater than 100% indicates an underwriting loss. The following tables provide the Company’s segment results for the three and nine months ended September 30, 2011 and 2010 follows:
(1) - Includes Corporate segment intercompany eliminations. (2) - Includes Other operating expenses and Other income.
(1) - Includes Corporate segment intercompany eliminations. (2) - Includes Other operating expenses and Other income.
(1) - Includes Corporate segment intercompany eliminations. (2) - Includes Other operating expenses and Other income.
(1) - Includes Corporate segment intercompany eliminations. (2) - Includes Other operating expenses and Other income.
The following tables provide additional financial data by segment for the three months ended September 30, 2011 and 2010:
The Insurance Companies’ net earned premiums include $21.2 million and $23.3 million of net earned premiums from the U.K. Branch for the three months ended September 30, 2011 and 2010, respectively.
The following tables provide additional financial data by segment for the nine months ended September 30, 2011 and 2010:
The Insurance Companies’ net earned premiums include $64.1 million and $61.9 million of net earned premiums from the U.K. Branch for the nine months ended September 30, 2011 and 2010, respectively. |
Segment Information (Tables) | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Segment Results | The following tables provide the Company’s segment results for the three and nine months ended September 30, 2011 and 2010 follows:
(1) - Includes Corporate segment intercompany eliminations. (2) - Includes Other operating expenses and Other income.
(1) - Includes Corporate segment intercompany eliminations. (2) - Includes Other operating expenses and Other income.
(1) - Includes Corporate segment intercompany eliminations. (2) - Includes Other operating expenses and Other income.
(1) - Includes Corporate segment intercompany eliminations. (2) - Includes Other operating expenses and Other income. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Data by Segment | The following tables provide additional financial data by segment for the three months ended September 30, 2011 and 2010:
The Insurance Companies’ net earned premiums include $21.2 million and $23.3 million of net earned premiums from the U.K. Branch for the three months ended September 30, 2011 and 2010, respectively.
The following tables provide additional financial data by segment for the nine months ended September 30, 2011 and 2010:
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Investments - Additional Information (Detail) (Equity Securities) | Sep. 30, 2011 |
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Equity Securities | |
Schedule of Investments [Line Items] | |
Percentage of fair value over cost | 80.00% |
Lists of 20 Largest Reinsurers Measured by Reinsurance Recoverable (Detail) (USD $) In Thousands | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | Dec. 31, 2010 | Sep. 30, 2011
Swiss Reinsurance America Corporation | Sep. 30, 2011
Munich Reinsurance America Inc. | Sep. 30, 2011
Everest Reinsurance Company | Sep. 30, 2011
Transatlantic Reinsurance Company | Sep. 30, 2011
National Indemnity Company | Sep. 30, 2011
Partner Reinsurance Europe | Sep. 30, 2011
Scor Holding (Switzerland) AG | Sep. 30, 2011
Berkley Insurance Company | Sep. 30, 2011
General Reinsurance Corporation | Sep. 30, 2011
Lloyd's Syndicate #2003 | Sep. 30, 2011
Munchener Ruckversicherungs-Gesellschaft | Sep. 30, 2011
White Mountains Reinsurance of America | Sep. 30, 2011
Platinum Underwriters Re | Sep. 30, 2011
Ace Property and Casualty Insurance Company | Sep. 30, 2011
Allied World Reinsurance | Sep. 30, 2011
AXIS Re Europe | Sep. 30, 2011
Validus Reinsurance Ltd | Sep. 30, 2011
Tower Insurance Company | Sep. 30, 2011
Lloyd Syndicate #4000 | Sep. 30, 2011
Lloyd Syndicate #457 | Sep. 30, 2011
Insurance Companies | Sep. 30, 2011
All Other | ||||||||||||||||||||||||||||
Ceded Credit Risk [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||
Reinsurance Recoverables Unearned Premium | $ 170,180 | $ 156,869 | $ 5,643 | $ 12,442 | $ 15,019 | $ 16,279 | $ 14,511 | $ 7,082 | $ 2,888 | $ 1,816 | $ 815 | $ 5,774 | $ 706 | $ 150 | $ 988 | $ 2,013 | $ 6,824 | $ 5,792 | $ 3,130 | $ 10,337 | $ 2,225 | $ 2,806 | $ 117,240 | $ 52,940 | |||||||||||||||||||||||||||
Reinsurance Recoverables Paid/Unpaid Losses | 892,778 | 92,482 | 75,289 | 69,873 | 68,333 | 26,891 | 33,691 | 34,727 | 30,877 | 31,741 | 25,815 | 27,400 | 27,530 | 25,787 | 22,982 | 15,656 | 15,559 | 14,841 | 7,112 | 11,937 | 10,492 | 669,015 | 223,763 | ||||||||||||||||||||||||||||
Reinsurance Recoverables Total | 1,062,958 | 98,125 | 87,731 | 84,892 | 84,612 | 41,402 | 40,773 | 37,615 | 32,693 | 32,556 | 31,589 | 28,106 | 27,680 | 26,775 | 24,995 | 22,480 | 21,351 | 17,971 | 17,449 | 14,162 | 13,298 | 786,255 | 276,703 | ||||||||||||||||||||||||||||
Collateral Held | $ 184,170 | [1] | $ 7,756 | [1] | $ 2,896 | [1] | $ 7,193 | [1] | $ 6,557 | [1] | $ 6,348 | [1] | $ 16,832 | [1] | $ 7,211 | [1] | $ 123 | [1] | $ 1,466 | [1] | $ 6,401 | [1] | $ 5,885 | [1] | $ 716 | [1] | $ 3,000 | [1] | $ 31 | [1] | $ 2,431 | [1] | $ 5,058 | [1] | $ 6,671 | [1] | $ 2,577 | [1] | $ 1,995 | [1] | $ 3,118 | [1] | $ 94,265 | [1] | $ 89,905 | [1] | |||||
Rating | A | [2] | A+ | [2] | A+ | [2] | A | [2] | A++ | [2] | AA- | [2] | A | [2] | A+ | [2] | A++ | [2] | A | [2] | A+ | [2] | A | [2] | A | [2] | A+ | [2] | A | [2] | A | [2] | A- | [2] | A- | [2] | A | [2] | A | [2] | |||||||||||
Rating Agency | AMB | [2] | AMB | [2] | AMB | [2] | AMB | [2] | AMB | [2] | S&P | [2] | AMB | [2] | AMB | [2] | AMB | [2] | AMB | [2] | AMB | [2] | AMB | [2] | AMB | [2] | AMB | [2] | AMB | [2] | AMB | [2] | AMB | [2] | AMB | [2] | AMB | [2] | AMB | [2] | |||||||||||
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Reinsurance Ceded (Tables) | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Lists of 20 Largest Reinsurers Measured by Reinsurance Recoverable | The following table lists the Company’s 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses and loss adjustment expense and ceded unearned premium (constituting approximately 74% of the total recoverable), together with the reinsurance recoverable and collateral as of September 30, 2011, and the reinsurers’ rating from the indicated rating agency:
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Realized Gains and Losses Excluding Net Other-Than-Temporary Impairment Losses Recognized in Earnings (Detail) (USD $) In Thousands | 3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |
Gain (Loss) on Investments [Line Items] | ||||
Net realized gains (losses) | $ 3,238 | $ 4,521 | $ 4,856 | $ 21,653 |
Fixed maturities | ||||
Gain (Loss) on Investments [Line Items] | ||||
Gains | 3,315 | 4,790 | 10,625 | 22,440 |
Losses | (77) | (1,036) | (6,610) | (1,319) |
Net realized gains (losses) | 3,238 | 3,754 | 4,015 | 21,121 |
Equity Securities | ||||
Gain (Loss) on Investments [Line Items] | ||||
Gains | 773 | 841 | 773 | |
Losses | (6) | (241) | ||
Net realized gains (losses) | $ 767 | $ 841 | $ 532 |
Investments (Tables) | 9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Cash and Investments Including Other-Than-Temporarily Impaired ("OTTI") Securities Recognized within Other Comprehensive Income ("OCI") | The following tables set forth the Company’s cash and investments as of September 30, 2011 and December 31, 2010. The table below includes other-than-temporarily impaired (“OTTI”) securities recognized within other comprehensive income (“OCI”).
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Scheduled Maturity Dates for Fixed Maturity Securities by Number of Years Until Maturity | The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity as of September 30, 2011 are shown in the following table:
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Summary of Aggregate Fair Value and Gross Unrealized Loss by the Length of Time those Securities had Continuously been in a Gross Unrealized Loss Position as Well as the Number of Securities | The following table summarizes all securities in a gross unrealized loss position as of September 30, 2011 and December 31, 2010, showing the aggregate fair value and gross unrealized loss by the length of time those securities had continuously been in a gross unrealized loss position as well as the relevant number of securities.
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Summary of Activity Related to OTTI Losses | The table below summarizes the Company’s activity related to OTTI losses for the periods indicated:
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Summary of Cumulative Amounts Related to Credit Loss Portion of the OTTI Losses on Debt Securities | The following table summarizes the cumulative amounts related to the Company’s credit loss portion of the OTTI losses on debt securities for the three and nine months ended September 30, 2011 and 2010 that it does not intend to sell and it is more likely than not that it will not be required to sell the securities prior to recovery of the amortized cost basis and for which the non-credit loss portion is included in other comprehensive income:
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Contractual Maturity by Number of Years Until Maturity for Fixed Maturity Securities with a Gross Unrealized Loss | The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity, with a gross unrealized loss as of September 30, 2011 is presented in the following table:
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Change in Net Unrealized Gains/(Losses) | The change in net unrealized gains/(losses), inclusive of the change in the non credit portion of other-than-temporary impairment losses, consisted of:
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Realized Gains and Losses Excluding Net Other-Than-Temporary Impairment Losses Recognized in Earnings | Realized gains/(losses), excluding net other-than-temporary impairment losses recognized in earnings, for the periods indicated were as follows:
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Fixed Maturities and Equity Securities by Asset Class that are Measured at Fair Value | The following tables present, for each of the fair value hierarchy levels as defined in ASC 820, Fair Value Measurements, the Company’s fixed maturities and equity securities by asset class that are measured at fair value as of September 30, 2011 and December 31, 2010:
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Reconciliation of Beginning and Ending Balances for All Investments Measured at Fair Value Using Level 3 Inputs | The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value using Level 3 inputs during the three and nine months ended September 30, 2011.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) (USD $) In Thousands | 3 Months Ended | 9 Months Ended | ||||||||||
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Sep. 30, 2011 | Sep. 30, 2010 | Sep. 30, 2011 | Sep. 30, 2010 | |||||||||
Tax expense (benefit), change in net unrealized gains (losses) on investments | $ (322) | $ 12,806 | $ 8,251 | $ 20,160 | ||||||||
Tax (benefit) expense change in foreign currency translation (losses) gains | (273) | (165) | 86 | 69 | ||||||||
Disclosure of reclassification amount, net of tax: | ||||||||||||
Unrealized gains (losses) on investments arising during period | 411 | 26,588 | 15,986 | 51,784 | ||||||||
Reclassification adjustment for net realized gains (losses) included in net income | (1,025) | (2,939) | 264 | (14,075) | ||||||||
Reclassification adjustment for other-than-temporary impairment losses recognized in net income | 103 | 455 | 110 | 615 | ||||||||
Change in net unrealized gains (losses) on investments, net of tax | $ (511) | [1] | $ 24,104 | [1] | $ 16,360 | [2] | $ 38,324 | [2] | ||||
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Senior Notes due May 1, 2016 | 9 Months Ended |
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Sep. 30, 2011 | |
Senior Notes due May 1, 2016 | Note 8. Senior Notes due May 1, 2016 On April 17, 2006, the Company completed a public debt offering of $125 million principal amount of 7% senior notes due May 1, 2016 (the “Senior Notes”) and received net proceeds of $123.5 million. The interest payment dates on the Senior Notes are each May 1 and November 1. The effective interest rate related to the Senior Notes, based on the proceeds net of discount and all issuance costs, approximates 7.17%. The interest expense on the Senior Notes was $2.0 million for the three months ended September 30, 2011 and 2010, respectively, and $6.1 million for the nine months ended September 30, 2011 and 2010, respectively. The Company may redeem the Senior Notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price. The terms of the Senior Notes contain various restrictive business and financial covenants typical for debt obligations of this type, including limitations on mergers, liens and dispositions of the common stock of certain subsidiaries. As of September 30, 2011, the Company was in compliance with all such covenants. In April 2009, the Company repurchased $10.0 million aggregate principal amount of the Senior Notes from an unaffiliated note holder on the open market for $7.0 million, which generated a $2.9 million pre-tax gain that was reflected in Other income. As a result of this transaction, approximately $114 million aggregate principal amount of the Senior Notes remains issued and outstanding as of September 30, 2011. |
Senior Notes due May 1, 2016 - Additional Information (Detail) (USD $) In Millions, unless otherwise specified | 1 Months Ended | 3 Months Ended | 9 Months Ended | ||||
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Mar. 31, 2011 | Apr. 30, 2009
Senior Notes due May 1, 2016 | Apr. 17, 2006
Senior Notes due May 1, 2016 | Sep. 30, 2011
Senior Notes due May 1, 2016 | Sep. 30, 2010
Senior Notes due May 1, 2016 | Sep. 30, 2011
Senior Notes due May 1, 2016 | Sep. 30, 2010
Senior Notes due May 1, 2016 | |
Debt Instrument [Line Items] | |||||||
Principal amount of senior notes | $ 125 | ||||||
Interest rate stated on senior notes | 7.00% | ||||||
Senior notes due date | Mar. 31, 2011 | May 01, 2016 | |||||
Net proceeds from issuance of senior notes | 123.5 | ||||||
Interest payment dates on senior notes | The interest payment dates on the Senior Notes are each May 1 and November 1. | ||||||
Effective interest rate related to senior notes | 7.17% | ||||||
Interest expense on senior notes | 2.0 | 2.0 | 6.1 | 6.1 | |||
Debt instrument, covenant compliance | As of September 30, 2011, the Company was in compliance with all such covenants. | ||||||
Aggregate principal amount of senior notes repurchased from unaffiliated note holder | 10.0 | ||||||
Repurchased senior notes | 7.0 | ||||||
Pretax gain from repurchased of senior notes | 2.9 | ||||||
Outstanding principal amount of senior notes | $ 114 | $ 114 |
Share Repurchases | 9 Months Ended |
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Sep. 30, 2011 | |
Share Repurchases | Note 12. Share Repurchases In May 2011, the Parent Company’s Board of Directors authorized an additional $50 million under the existing share repurchase program of the Company’s common stock, which increased the size of the program to $150 million. This repurchase program was initially authorized in November 2009. The share repurchase program as originally approved was scheduled to expire on December 31, 2010, however, prior to its expiration, the Parent Company’s Board of Directors approved an extension to December 31, 2011. Purchases are permitted from time to time at prevailing prices in open market or privately negotiated transactions through December 31, 2011. The timing and amount of purchases under the program depend on a variety of factors, including the trading price of the stock, market conditions and corporate and regulatory considerations. For the three months ended September 30, 2011, the Company repurchased 749,076 shares of the Parent Company’s common stock at an aggregate purchase price of $32.2 million and a weighted average price per share of $43.03 pursuant to the share repurchase program. For the nine months ended September 30, 2011, the Company repurchased 1,602,196 shares of the Parent Company’s common stock at an aggregate purchase price of $73.7 million and a weighted average price per share of $45.98 pursuant to the share repurchase program. Since inception, the Company has repurchased 3,008,056 shares of the Parent Company’s common stock at an aggregate purchase price of $132.4 million and a weighted average price per share of $44.02. As of September 30, 2011, approximately $17.2 million was available for future repurchases under the program. |