Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2009
Commission
file number 0-15886
The Navigators Group, Inc.
(Exact name of Registrant as specified in its charter)
|
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Delaware |
|
13-3138397 |
(State or other jurisdiction of
|
|
(IRS Employer |
incorporation or organization)
|
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Identification No.) |
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One Penn Plaza, New York, New York
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10119 |
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|
(Address of principal executive offices)
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(Zip Code) |
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|
(212) 244-2333
(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 þ No o
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate website, 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 shorter period that the
registrant was required to submit and post such files).
Yes þ No o
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 definition of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check One):
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|
|
|
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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|
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
The number of common shares outstanding as of April 27, 2009 was 16,934,225.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
INDEX
2
Part 1. Financial Information
Item 1. Financial Statements
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments and cash: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale, at fair value
(amortized cost: 2009, $1,689,179; 2008, $1,664,755) |
|
$ |
1,676,826 |
|
|
$ |
1,643,772 |
|
Equity securities, available-for-sale, at fair value (cost: 2009, $52,309; 2008, $52,523) |
|
|
51,735 |
|
|
|
51,802 |
|
Short-term investments, at fair value |
|
|
206,223 |
|
|
|
220,684 |
|
Cash |
|
|
16,644 |
|
|
|
1,457 |
|
|
|
|
|
|
|
|
Total investments and cash |
|
|
1,951,428 |
|
|
|
1,917,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums in course of collection |
|
|
201,891 |
|
|
|
170,522 |
|
Commissions receivable |
|
|
313 |
|
|
|
319 |
|
Prepaid reinsurance premiums |
|
|
167,272 |
|
|
|
188,874 |
|
Reinsurance receivable on paid losses |
|
|
70,725 |
|
|
|
67,227 |
|
Reinsurance receivable on unpaid losses and loss adjustment expenses |
|
|
851,703 |
|
|
|
853,793 |
|
Net deferred income tax benefit |
|
|
53,908 |
|
|
|
54,736 |
|
Deferred policy acquisition costs |
|
|
57,675 |
|
|
|
47,618 |
|
Accrued investment income |
|
|
16,114 |
|
|
|
17,411 |
|
Goodwill and other intangible assets |
|
|
6,532 |
|
|
|
6,622 |
|
Other assets |
|
|
26,072 |
|
|
|
24,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,403,633 |
|
|
$ |
3,349,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses |
|
$ |
1,879,895 |
|
|
$ |
1,853,664 |
|
Unearned premium |
|
|
494,455 |
|
|
|
480,665 |
|
Reinsurance balances payable |
|
|
129,296 |
|
|
|
140,319 |
|
Senior notes |
|
|
123,825 |
|
|
|
123,794 |
|
Federal income tax payable |
|
|
12,139 |
|
|
|
5,874 |
|
Accounts payable and other liabilities |
|
|
51,569 |
|
|
|
55,947 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,691,179 |
|
|
|
2,660,263 |
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.10 par value, authorized 1,000,000 shares, none
issued |
|
|
|
|
|
|
|
|
Common stock, $.10 par value, shares authorized: 50,000,000; issued and
outstanding(net of treasury shares): 16,934,225 at 3/31/09 and
16,856,073 at 12/31/08 |
|
|
1,716 |
|
|
|
1,708 |
|
Additional paid-in capital |
|
|
302,498 |
|
|
|
298,872 |
|
Retained earnings |
|
|
418,776 |
|
|
|
406,776 |
|
Treasury stock, at cost (224,754 shares for both 2009 and 2008) |
|
|
(11,540 |
) |
|
|
(11,540 |
) |
Accumulated other comprehensive income (loss) |
|
|
1,004 |
|
|
|
(6,499 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
712,454 |
|
|
|
689,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
3,403,633 |
|
|
$ |
3,349,580 |
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
3
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ and shares in thousands, except net income per share)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
275,259 |
|
|
$ |
287,146 |
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Net written premium |
|
$ |
200,652 |
|
|
$ |
187,722 |
|
Decrease (increase) in unearned premium |
|
|
(35,706 |
) |
|
|
(31,982 |
) |
|
|
|
|
|
|
|
Net earned premium |
|
|
164,946 |
|
|
|
155,740 |
|
Commission income |
|
|
(20 |
) |
|
|
261 |
|
Net investment income |
|
|
18,743 |
|
|
|
18,838 |
|
Total other-than-temporary impairments |
|
|
(26,871 |
) |
|
|
|
|
Portion of loss recognized in OCI (before tax) |
|
|
(16,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net impairment loss recognized in earnings |
|
|
(10,700 |
) |
|
|
|
|
Net realized capital (losses) |
|
|
(1,537 |
) |
|
|
(76 |
) |
Other income (expense) |
|
|
163 |
|
|
|
11 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
171,595 |
|
|
|
174,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses incurred |
|
|
100,247 |
|
|
|
88,420 |
|
Commission expense |
|
|
22,448 |
|
|
|
20,948 |
|
Other operating expenses |
|
|
30,535 |
|
|
|
29,756 |
|
Interest expense |
|
|
2,219 |
|
|
|
2,217 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
155,449 |
|
|
|
141,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense |
|
|
16,146 |
|
|
|
33,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit): |
|
|
|
|
|
|
|
|
Current |
|
|
6,750 |
|
|
|
10,306 |
|
Deferred |
|
|
(2,604 |
) |
|
|
(123 |
) |
|
|
|
|
|
|
|
Total income tax expense (benefit) |
|
|
4,146 |
|
|
|
10,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,000 |
|
|
$ |
23,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.71 |
|
|
$ |
1.38 |
|
Diluted |
|
$ |
0.71 |
|
|
$ |
1.36 |
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
16,882 |
|
|
|
16,862 |
|
Diluted |
|
|
17,002 |
|
|
|
17,052 |
|
See accompanying notes to interim consolidated financial statements.
4
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Unaudited) |
|
Preferred Stock |
|
|
|
|
|
|
|
|
Balance at beginning and end of period |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
1,708 |
|
|
$ |
1,687 |
|
Shares issued under stock plans |
|
|
8 |
|
|
|
6 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
1,716 |
|
|
$ |
1,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
298,872 |
|
|
$ |
291,616 |
|
Shares issued under stock plans |
|
|
3,626 |
|
|
|
2,530 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
302,498 |
|
|
$ |
294,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
406,776 |
|
|
$ |
355,084 |
|
Net income |
|
|
12,000 |
|
|
|
23,250 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
418,776 |
|
|
$ |
378,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
(11,540 |
) |
|
$ |
|
|
Treasury stock acquired |
|
|
|
|
|
|
(7,321 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
(11,540 |
) |
|
$ |
(7,321 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities, net of tax |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
(15,062 |
) |
|
$ |
10,186 |
|
Change in period |
|
|
16,494 |
|
|
|
(3,412 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
1,432 |
|
|
|
6,774 |
|
|
|
|
|
|
|
|
Non-credit Impairment Losses, net of Tax |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
|
|
|
|
|
|
Change in period |
|
|
(10,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
(10,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustments, net of tax |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
8,563 |
|
|
|
3,533 |
|
Net adjustment for period |
|
|
1,520 |
|
|
|
(282 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
|
10,083 |
|
|
|
3,251 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
1,004 |
|
|
$ |
10,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity at end of period |
|
$ |
712,454 |
|
|
$ |
676,877 |
|
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
5
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,000 |
|
|
$ |
23,250 |
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on securities,
net of tax expense benefit of $2,794 and ($1,813)
in 2009 and 2008, respectively (1) |
|
|
5,983 |
|
|
|
(3,412 |
) |
Change in foreign currency translation gains,
net of tax expense of $818 and ($151)
in 2009 and 2008, respectively |
|
|
1,520 |
|
|
|
(282 |
) |
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
7,503 |
|
|
|
(3,694 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
19,503 |
|
|
$ |
19,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Disclosure of reclassification amount,
net of tax: |
|
|
|
|
|
|
|
|
Unrealized holding (losses) arising
during period |
|
$ |
(2,204 |
) |
|
$ |
(3,461 |
) |
Less: reclassification adjustment for net realized
capital (losses) included in net income |
|
|
(1,140 |
) |
|
|
(49 |
) |
reclassification adjustment for impairment (losses)
recognized in net income |
|
|
(7,047 |
) |
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on securities |
|
$ |
5,983 |
|
|
$ |
(3,412 |
) |
|
|
|
|
|
|
|
See accompanying notes to interim consolidated financial statements.
6
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Unaudited) |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,000 |
|
|
$ |
23,250 |
|
Adjustments to reconcile net income to net
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation & amortization |
|
|
957 |
|
|
|
1,222 |
|
Net deferred income tax (benefit) |
|
|
(2,604 |
) |
|
|
(123 |
) |
Net realized capital (gains) losses |
|
|
12,237 |
|
|
|
76 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Reinsurance receivable on paid and unpaid losses and LA E |
|
|
(2,916 |
) |
|
|
45,418 |
|
Reserve for losses and LA E |
|
|
28,539 |
|
|
|
12,577 |
|
Prepaid reinsurance premiums |
|
|
21,318 |
|
|
|
776 |
|
Unearned premium |
|
|
14,492 |
|
|
|
31,035 |
|
Premiums in course of collection |
|
|
(31,897 |
) |
|
|
(35,297 |
) |
Commissions receivable |
|
|
7 |
|
|
|
2,109 |
|
Deferred policy acquisition costs |
|
|
(10,169 |
) |
|
|
(1,546 |
) |
A ccrued investment income |
|
|
1,294 |
|
|
|
(262 |
) |
Reinsurance balances payable |
|
|
(10,382 |
) |
|
|
(22,525 |
) |
Federal income tax |
|
|
6,719 |
|
|
|
8,076 |
|
Other |
|
|
3,333 |
|
|
|
(5,134 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
42,928 |
|
|
|
59,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
|
|
|
|
|
|
Redemptions and maturities |
|
|
32,122 |
|
|
|
35,146 |
|
Sales |
|
|
91,969 |
|
|
|
20,644 |
|
Purchases |
|
|
(153,211 |
) |
|
|
(103,436 |
) |
Equity securities, available-for-sale |
|
|
|
|
|
|
|
|
Sales |
|
|
1,420 |
|
|
|
5,514 |
|
Purchases |
|
|
(10,713 |
) |
|
|
(5,595 |
) |
Change in payable for securities |
|
|
(1,106 |
) |
|
|
1,974 |
|
Net change in short-term investments |
|
|
13,265 |
|
|
|
(647 |
) |
Purchase of property and equipment |
|
|
(2,164 |
) |
|
|
(1,072 |
) |
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(28,418 |
) |
|
|
(47,472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
(7,321 |
) |
Proceeds of stock issued from employee stock purchase plan |
|
|
344 |
|
|
|
356 |
|
Proceeds of stock issued from exercise of stock options |
|
|
333 |
|
|
|
540 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
677 |
|
|
|
(6,425 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on foreign currency cash |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash |
|
|
15,187 |
|
|
|
5,754 |
|
Cash at beginning of year |
|
|
1,457 |
|
|
|
7,056 |
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
16,644 |
|
|
$ |
12,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Federal, state and local income tax paid |
|
$ |
68 |
|
|
$ |
2,728 |
|
Interest paid |
|
|
|
|
|
|
|
|
Issuance of stock to directors |
|
|
210 |
|
|
|
200 |
|
See accompanying notes to interim consolidated 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 but reflect all
adjustments which, in the opinion of management, are necessary to provide a fair statement of the
results of The Navigators Group, Inc. and its subsidiaries 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 terms we, us,
our and the Company as used herein are 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 2008 Annual Report on Form 10-K. Certain amounts for the prior year have been
reclassified to conform to the current years presentation.
Note 2. Reinsurance Ceded
The Companys ceded earned premiums were $95.8 million and $100.0 million for the three
months ended March 31, 2009 and 2008, respectively. The Companys ceded incurred losses were
$48.8 million and $21.7 million for the three months ended March 31, 2009 and 2008, respectively.
Note 3. Segment Information
The Companys subsidiaries are primarily engaged in the underwriting and management of
property and casualty insurance.
The Company classifies its 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 revenues
and expenses of the wholly-owned underwriting agencies and the Parent Companys expenses and
related income tax amounts.
We evaluate the performance of each segment based on its underwriting and net income results.
The Insurance Companies and the Lloyds Operations results are measured by taking into account
net earned premium, net losses and loss adjustment expenses (LAE), commission expense, other
operating expenses, commission income and other income or expense. The Corporate segment consists
of the Parent Companys investment income, interest expense and the related tax effect. Each
segment 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.
8
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. They are primarily engaged in underwriting marine insurance and related lines
of business, professional liability insurance, specialty lines of business including contractors
general liability insurance, commercial and personal umbrella and primary and excess casualty
businesses, and middle markets business consisting of general liability, commercial automobile
liability and property insurance for a variety of
commercial middle markets businesses. Navigators Specialty Insurance Company underwrites
specialty and professional liability insurance on an excess and surplus lines basis fully
reinsured by Navigators Insurance Company. The Lloyds Operations primarily underwrite marine and
related lines of business along with professional liability insurance, and construction coverages
for onshore energy business at Lloyds of London (Lloyds) through Lloyds Syndicate 1221
(Syndicate 1221). The European property business, written by the Lloyds Operations and the
U.K. Branch beginning in 2006, was discontinued in the 2008 second quarter. Our Lloyds
Operations include Navigators Underwriting Agency Ltd. (NUAL), a Lloyds underwriting agency
which manages Syndicate 1221. We participate in the capacity of Syndicate 1221 through two
wholly-owned Lloyds corporate members. Navigators Management Company, Inc. (NMC) is a
wholly-owned underwriting management company which produces, manages and underwrites insurance and
reinsurance for the Company. During the 2008 second quarter, Navigators California Insurance
Services, Inc. and Navigators Special Risk, Inc., also wholly-owned underwriting management
companies, were merged into NMC.
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 premium,
less the sum of net losses and LAE, commission expense, other operating expenses and commission
income and other income (expense). The combined ratio is derived by dividing the sum of net
losses and LAE, commission expense, other operating expenses and commission income and other
income (expense) by net earned premium. A combined ratio of less than 100% indicates an
underwriting profit and over 100% indicates an underwriting loss.
Effective in 2009, the Company has reclassified certain of its business lines, which has no
effect on the segment classifications of the Insurance Company and Lloyds.
|
|
|
The offshore energy business, formerly included in the Marine and Energy
businesses of the Insurance Companies and Lloyds, is now included in the Insurance
Companies and Lloyds Property Casualty businesses. |
|
|
|
The marine lines within both the Insurance Company and Lloyds are now
presented as Marine instead of Marine and Energy, since the energy business has now
been reclassified to Property Casualty. |
|
|
|
Engineering and construction, European Property and other run-off business,
formerly included in the Other category of business within the Insurance Companies
and Lloyds, are now included under Property Casualty. |
|
|
|
The Middle Markets business, formerly broken out separately in the Insurance
Companies, is now included in the Insurance Companies Property Casualty business. |
Underwriting data for prior periods has been reclassified to reflect these changes.
9
Financial data by segment for the three ended March 31, 2009 and 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
191,983 |
|
|
$ |
83,276 |
|
|
|
|
|
|
$ |
275,259 |
|
Net written premium |
|
|
137,082 |
|
|
|
63,570 |
|
|
|
|
|
|
|
200,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
120,290 |
|
|
|
44,656 |
|
|
|
|
|
|
|
164,946 |
|
Net losses and LAE |
|
|
(70,153 |
) |
|
|
(30,094 |
) |
|
|
|
|
|
|
(100,247 |
) |
Commission expense |
|
|
(14,968 |
) |
|
|
(7,480 |
) |
|
|
|
|
|
|
(22,448 |
) |
Other operating expenses |
|
|
(24,560 |
) |
|
|
(5,981 |
) |
|
$ |
6 |
|
|
|
(30,535 |
) |
Commission income and other income (expense) |
|
|
201 |
|
|
|
(52 |
) |
|
|
(6 |
) |
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting Income (loss) |
|
|
10,810 |
|
|
|
1,049 |
|
|
|
|
|
|
|
11,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
16,207 |
|
|
|
2,383 |
|
|
|
153 |
|
|
|
18,743 |
|
Net realized capital gains (losses) |
|
|
(8,907 |
) |
|
|
(3,330 |
) |
|
|
|
|
|
|
(12,237 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
(2,219 |
) |
|
|
(2,219 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
18,110 |
|
|
|
102 |
|
|
|
(2,066 |
) |
|
|
16,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
4,533 |
|
|
|
336 |
|
|
|
(723 |
) |
|
|
4,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
13,577 |
|
|
$ |
(234 |
) |
|
$ |
(1,343 |
) |
|
$ |
12,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,497,923 |
|
|
$ |
799,907 |
|
|
$ |
90,135 |
|
|
$ |
3,403,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
58.3 |
% |
|
|
67.4 |
% |
|
|
|
|
|
|
60.8 |
% |
Commission expense ratio |
|
|
12.4 |
% |
|
|
16.8 |
% |
|
|
|
|
|
|
13.6 |
% |
Other operating expense ratio (2) |
|
|
20.3 |
% |
|
|
13.5 |
% |
|
|
|
|
|
|
18.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
91.0 |
% |
|
|
97.7 |
% |
|
|
|
|
|
|
92.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to crossfoot.
|
|
(2) |
|
Includes other operating expenses and commission income and other income (expense). |
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
77,237 |
|
|
$ |
59,023 |
|
|
$ |
136,260 |
|
Property Casualty |
|
|
84,258 |
|
|
|
13,528 |
|
|
|
97,786 |
|
Professional Liability |
|
|
30,488 |
|
|
|
10,725 |
|
|
|
41,213 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
191,983 |
|
|
$ |
83,276 |
|
|
$ |
275,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
58,459 |
|
|
$ |
49,974 |
|
|
$ |
108,433 |
|
Property Casualty |
|
|
59,976 |
|
|
|
7,595 |
|
|
|
67,571 |
|
Professional Liability |
|
|
18,647 |
|
|
|
6,001 |
|
|
|
24,648 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
137,082 |
|
|
$ |
63,570 |
|
|
$ |
200,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
37,161 |
|
|
$ |
31,175 |
|
|
$ |
68,336 |
|
Property Casualty |
|
|
65,412 |
|
|
|
7,923 |
|
|
|
73,335 |
|
Professional Liability |
|
|
17,717 |
|
|
|
5,558 |
|
|
|
23,275 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
120,290 |
|
|
$ |
44,656 |
|
|
$ |
164,946 |
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Corporate |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
191,596 |
|
|
$ |
95,550 |
|
|
|
|
|
|
$ |
287,146 |
|
Net written premium |
|
|
124,310 |
|
|
|
63,412 |
|
|
|
|
|
|
|
187,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
112,246 |
|
|
|
43,494 |
|
|
|
|
|
|
|
155,740 |
|
Net losses and LAE |
|
|
(67,356 |
) |
|
|
(21,064 |
) |
|
|
|
|
|
|
(88,420 |
) |
Commission expense |
|
|
(12,948 |
) |
|
|
(8,000 |
) |
|
|
|
|
|
|
(20,948 |
) |
Other operating expenses |
|
|
(22,148 |
) |
|
|
(7,608 |
) |
|
|
|
|
|
|
(29,756 |
) |
Commission income and other income (expense) |
|
|
258 |
|
|
|
14 |
|
|
|
|
|
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit |
|
|
10,052 |
|
|
|
6,836 |
|
|
|
|
|
|
|
16,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
15,465 |
|
|
|
2,982 |
|
|
$ |
391 |
|
|
|
18,838 |
|
Net realized capital gains (losses) |
|
|
(102 |
) |
|
|
26 |
|
|
|
|
|
|
|
(76 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
(2,217 |
) |
|
|
(2,217 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
25,415 |
|
|
|
9,844 |
|
|
|
(1,826 |
) |
|
|
33,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
7,370 |
|
|
|
3,452 |
|
|
|
(639 |
) |
|
|
10,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
18,045 |
|
|
$ |
6,392 |
|
|
$ |
(1,187 |
) |
|
$ |
23,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets (1) |
|
$ |
2,356,343 |
|
|
$ |
756,100 |
|
|
$ |
69,520 |
|
|
$ |
3,182,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
60.0 |
% |
|
|
48.4 |
% |
|
|
|
|
|
|
56.8 |
% |
Commission expense ratio |
|
|
11.5 |
% |
|
|
18.4 |
% |
|
|
|
|
|
|
13.5 |
% |
Other operating expense ratio (2) |
|
|
19.5 |
% |
|
|
17.5 |
% |
|
|
|
|
|
|
18.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
91.0 |
% |
|
|
84.3 |
% |
|
|
|
|
|
|
89.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes inter-segment transactions causing the row not to crossfoot.
|
|
(2) |
|
Includes other operating expenses and commission income and other income (expense). |
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008 |
|
|
|
Insurance |
|
|
Lloyds |
|
|
|
|
|
|
Companies |
|
|
Operations |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
71,485 |
|
|
$ |
67,154 |
|
|
$ |
138,639 |
|
Property Casualty |
|
|
100,824 |
|
|
|
17,726 |
|
|
|
118,550 |
|
Professional Liability |
|
|
19,287 |
|
|
|
10,670 |
|
|
|
29,957 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
191,596 |
|
|
$ |
95,550 |
|
|
$ |
287,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
43,463 |
|
|
$ |
48,910 |
|
|
$ |
92,373 |
|
Property Casualty |
|
|
69,114 |
|
|
|
7,710 |
|
|
|
76,824 |
|
Professional Liability |
|
|
11,733 |
|
|
|
6,792 |
|
|
|
18,525 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
124,310 |
|
|
$ |
63,412 |
|
|
$ |
187,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium: |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
26,455 |
|
|
$ |
28,793 |
|
|
$ |
55,248 |
|
Property Casualty |
|
|
71,718 |
|
|
|
8,742 |
|
|
|
80,460 |
|
Professional Liability |
|
|
14,073 |
|
|
|
5,959 |
|
|
|
20,032 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
112,246 |
|
|
$ |
43,494 |
|
|
$ |
155,740 |
|
|
|
|
|
|
|
|
|
|
|
The Insurance Companies net earned premium includes $21.2 million and $14.7 million of net
earned premium from the U.K. Branch for the three months ended March 31, 2009 and 2008,
respectively.
Note 4. Comprehensive Income
Comprehensive income encompasses net income, net unrealized capital gains and losses on
available for sale securities, and foreign currency translation adjustments, all of which are net
of tax. Please refer to the Consolidated Statements of Stockholders Equity and the Consolidated
Statements of Comprehensive Income, included herein, for the components of accumulated other
comprehensive income (loss) and of comprehensive income (loss), respectively.
Note 5. Stock-Based Compensation
Stock-based compensation is expensed as stock awards granted under the Companys stock plans
vest, with the expense being included in other operating expenses for the periods indicated. The
amounts charged to expense for stock-based compensation were $1.8 million and $1.9 million for the
three months ended March 31, 2009 and 2008, respectively. The Company expensed $41,000 for both
the three months ended March 31, 2009 and 2008 for costs related to its Employee Stock Purchase
Plan.
In addition, $52,500 and $50,000 were expensed for the three month periods ended March 31,
2009 and 2008 for stock issued annually to non-employee directors as part of their directors
compensation for serving on the Parent Companys Board of Directors.
13
Note 6. Application of New Accounting Standards
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) 141(R), Business Combinations, which requires most
identifiable assets, liabilities, non-controlling interests, and goodwill acquired in a business
combination to be recorded at full fair value. Under SFAS 141(R), all business combinations will
be accounted for by applying the acquisition method (referred to as the purchase method in SFAS
141, Business Combinations). SFAS 141(R) is effective for fiscal years beginning on or after
December 15, 2008 and is to be applied to business combinations occurring after the effective date.
The Companys adoption of SFAS 141(R) did not have a material effect on its financial condition or
results of operations.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial
Statements, which requires noncontrolling interests (previously referred to as minority interests)
to be treated as a separate component of equity, rather than as a liability or other item outside
of permanent equity. SFAS 160 is effective for fiscal years beginning on or after December 15,
2008. The Companys adoption of SFAS 160 did not have a material effect on its financial condition
or results of operations.
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities, which amends SFAS 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS 161 enhances the current disclosure framework in SFAS 133 and requires companies with
derivative instruments to disclose information about how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted for under SFAS 133,
and how derivative instruments and related hedged items affect a companys financial position,
financial performance and cash flows. SFAS 161 is effective prospectively for fiscal years and
interim periods beginning after November 15, 2008. The Companys adoption of SFAS 161 did not have
a material effect on its financial condition or results of operations.
In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting
Principles, which identifies the sources of generally accepted accounting principles and provides a
framework, or hierarchy, for selecting the principles to be used in preparing U.S. GAAP financial
statements for nongovernmental entities. SFAS 162, effective November 15, 2008, makes the
hierarchy explicitly and directly applicable to preparers of financial statements, a step that
recognizes the preparers responsibilities for selecting the accounting principles for their
financial statements. The Companys adoption of SFAS 162 did not have a material effect on its
financial condition or results of operations.
Note 7. Syndicate 1221
We record Syndicate 1221s assets, liabilities, revenues and expenses, after making
adjustments to convert Lloyds accounting to U.S. GAAP. The most significant U.S. GAAP adjustments
relate to income recognition. Our participation in Syndicate 1221 is represented by and recorded
as our proportionate share of the underlying assets and liabilities and results of operations of
the syndicate, since (a) we hold an undivided interest in each asset, (b) we are proportionately
liable for each liability and (c) Syndicate 1221 is not a separate legal entity.
Lloyds presents its results on an underwriting year basis, generally closing each
underwriting year after three years. We make estimates for each underwriting year and timely
accrue the expected results. Our Lloyds Operations included in the consolidated financial
statements represent our participation in Syndicate 1221.
Syndicate 1221s stamp capacity is £123.0 million ($176.5 million) for the 2009 underwriting
year compared to £123.0 million ($228.0 million) for the 2008 underwriting year. 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 capacity is expressed net of commission
(as is standard at Lloyds). The Syndicate 1221 premium recorded in the Companys financial
statements is gross of commission. Navigators provides
100% of Syndicate 1221s capacity for the 2009 and 2008 underwriting years through Navigators
Corporate Underwriters Ltd. in 2008 and through Millennium Underwriting Ltd. and Navigators
Corporate Underwriters Ltd. in 2007.
14
The Company provides letters of credit and posts cash to Lloyds to support its Syndicate 1221
capacity. If the Company increases its participation or if Lloyds changes the capital
requirements, the Company may be required to supply additional collateral acceptable to Lloyds, or
reduce the capacity of Syndicate 1221. The letters of credit are provided through a credit
facility with a consortium of banks that expires April 2, 2010. If the banks decide not to renew
the credit facility, the Company will need to find either internal or other external sources to
provide the letters of credit or other collateral in order to continue to participate in Syndicate
1221. The bank facility is collateralized by all of the common stock of Navigators Insurance
Company.
Note 8. Income Taxes
We are subject to the tax regulations of the United States (U.S.) and foreign countries in
which we operate. The Company files a consolidated federal tax return, which includes all domestic
subsidiaries and the 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 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 United Kingdom (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 premium
is 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 our 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 subject to the Subpart F tax regulations.
These earnings are subject to taxes under U.K. tax regulations at a 28% rate. We have not provided
for U.S. deferred income taxes on the undistributed earnings of our non-U.S. subsidiaries since
these earnings are intended to be permanently reinvested in our non-U.S. subsidiaries.
A tax benefit taken in the tax return but not in the financial statements is known as an
unrecognized tax benefit. The Company had no unrecognized tax benefits at either March 31, 2009 or
March 31, 2008 and does not anticipate any significant unrecognized tax benefits within the next
twelve months. 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 years 2005 and subsequent. The Companys policy is to record interest and
penalties related to unrecognized tax benefits to income tax expense. The Company did not incur
any interest or penalties related to unrecognized tax benefits for the three month period ended
March 31, 2009 and 2008.
The Company recorded an income tax expense of $4.1 million for the 2009 first quarter compared
to income tax expense of $10.2 million for the 2008 first quarter, resulting in effective tax rates
of 25.7% and 30.5%, respectively. The Companys effective tax rate is less than 35% due to
permanent differences between book and tax return income, with the most significant item being tax
exempt interest. The effective tax rate on net investment income was 24.9% for the 2009 three
month period compared to 26.4% for the same period in 2008. As of March 31, 2009 and December 31,
2008, the net deferred Federal, foreign, state and local tax assets were $53.9 million and $54.7
million, respectively.
15
The Company had state and local deferred tax assets amounting to potential future tax benefits
of $3.6 million and $6.2 million at March 31, 2009 and December 31, 2008, respectively. Included
in the deferred tax assets are state and local net operating loss carryforwards of $2.0 million and
$0.5 million at March 31, 2009 and December 31, 2008, 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 carryforwards at March 31,
2009 expire in 2029.
Note 9. Commitments and Contingencies
(a) The Company is not a party to, or the subject of, any material pending legal proceedings
that depart from the routine litigation incidental to the kinds of business it conducts.
(b) Whenever a member of Lloyds is unable to pay its debts to policyholders, such debts may
be payable by the Lloyds Central Fund. If Lloyds determines that the Central Fund needs to be
increased, it has the power to assess premium levies on current Lloyds members up to 3% of a
members underwriting capacity in any one year. The Company does not believe that any assessment
is likely in the foreseeable future and has not provided any allowance for such an assessment.
However, based on the Companys 2009 capacity at Lloyds of £123.0 million, the March 31, 2009
exchange rate of £1 equals $1.43 and assuming the maximum 3% assessment, the Company would be
assessed approximately $5.3 million.
Note 10. 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 unsecured 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 $2.2 million
for both of the three month periods ended March 31, 2009 and 2008. The fair value of the Senior
Notes, based on quoted market prices, was $85.3 million and $83.6 million at March 31, 2009 and
December 31, 2008, respectively.
The Senior Notes, the Companys only senior unsecured obligation, will rank equally with
future senior unsecured indebtedness. 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 March 31, 2009, the Company was in compliance with all such covenants.
In early April, the Company repurchased $10.0 million aggregate principal amount of its issued
and outstanding 7% senior notes from an unaffiliated noteholder on the open market, as a result
of which, as of the date of this filing, $115.0 million aggregate principal amount of notes remains
issued and outstanding.
Note 11. Investments
In April 2009, the FASB issued FSP FAS 157-4, Determining the Fair Value When the Volume and
Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying
Transactions that are Not Orderly. The FSP is effective for interim and annual reporting periods
ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for
periods ending after March 15, 2009. FSP FAS 157-4 provides additional guidance for estimating fair
value in accordance with FASB 157, Fair Value Measurements, when the volume and level of activity
of the asset or liability have significantly decreased and on indentifying circumstances that
indicate a transaction is not orderly. The Company elected to early adoption of FSP FAS 157-4 in
the 2009 first quarter. The adoption did not have a material effect on the Companys financial
condition or results of operations.
16
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. The FSP is effective for interim and annual reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.
FSP FAS 115-2 and FAS 124-2 modifies the requirements for recognizing other-than-temporarily
impaired debt securities, the presentation of other-than-temporary impairment losses and increases
the frequency of and expands the required disclosures about other-than-temporary impairment for
debt and equity securities. The Company elected to early adopt FSP FAS 115-2 and FAS 124-2 in the
2009 first quarter. The adoption did not have a material effect on the Companys financial
condition or results of operations.
In April 2009, the FASB issued FSP FAS 107-1 and ABP 28-1, Interim Disclosures about Fair
Value of Financial Instruments. The FSP is effective for interim reporting periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP FAS 107-1
and APB 28-1 requires disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements. The Company elected
to early adopt FSP FASB 107-1 and APB 28-1 in the 2009 first quarter. The adoption did not have an
impact on the Companys financial condition or results of operations.
The following tables set forth our cash and investments as of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
OTTI |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Recognized |
|
|
Amortized |
|
March 31, 2009 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
in OCI |
|
|
Cost |
|
|
|
($ in thousands) |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury Bonds,
agency bonds and foreign government bonds |
|
$ |
398,268 |
|
|
$ |
19,757 |
|
|
$ |
(25 |
) |
|
$ |
|
|
|
$ |
378,536 |
|
States, municipalities and political
subdivisions |
|
|
610,021 |
|
|
|
19,116 |
|
|
|
(4,230 |
) |
|
|
|
|
|
|
595,135 |
|
Mortgage- and asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
314,432 |
|
|
|
14,055 |
|
|
|
(1 |
) |
|
|
|
|
|
|
300,378 |
|
Collateralized mortgage obligations |
|
|
43,167 |
|
|
|
|
|
|
|
(7,188 |
) |
|
|
(16,103 |
) |
|
|
66,458 |
|
Asset-backed securities |
|
|
29,826 |
|
|
|
273 |
|
|
|
(785 |
) |
|
|
(68 |
) |
|
|
30,406 |
|
Commercial mortgage-backed securities |
|
|
89,648 |
|
|
|
15 |
|
|
|
(23,511 |
) |
|
|
|
|
|
|
113,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
477,073 |
|
|
|
14,343 |
|
|
|
(31,485 |
) |
|
|
(16,171 |
) |
|
|
510,386 |
|
Corporate bonds |
|
|
191,464 |
|
|
|
2,259 |
|
|
|
(15,917 |
) |
|
|
|
|
|
|
205,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,676,826 |
|
|
|
55,475 |
|
|
|
(51,657 |
) |
|
|
(16,171 |
) |
|
|
1,689,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
51,735 |
|
|
|
609 |
|
|
|
(1,183 |
) |
|
|
|
|
|
|
52,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
16,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
206,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,951,428 |
|
|
$ |
56,084 |
|
|
$ |
(52,840 |
) |
|
$ |
(16,171 |
) |
|
$ |
1,964,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above includes fixed maturity securities with unrealized
losses of $51.6 million where the fair value has been less than 80%
of book value for at least six months. The fair value of these
securities as of March 31, 2009 was $117.1 million. These losses
consist mainly of non-agency mortgage backed securities, commercial
mortgage backed securities and corporate bonds that have not been
deemed to be other-than-temporary based on our evaluation of
projected cash flows, credit enhancements, cumulative delinquencies
and losses, rating agency assessments and other factors. Management
believes these securities are trading at depressed levels due to
illiquidity in the marketplace and other market based factors rather
than the specific credit issues.
17
The following table summarizes all securities in an unrealized loss position at March 31, 2009
and December 31, 2008, showing the aggregate fair value and gross unrealized loss by the length of
time those securities have continuously been in an unrealized loss position. The information below
indicates the potential effect on future income in the event management later concludes that such
declines are considered other-than- temporary.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Fair |
|
|
Gross |
|
|
Fair |
|
|
Gross |
|
|
|
Value |
|
|
Unrealized Loss |
|
|
Value |
|
|
Unrealized Loss |
|
|
|
($ in thousands) |
|
|
Fixed Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury and Agency
Bonds and foreign government bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
$ |
4,145 |
|
|
$ |
25 |
|
|
$ |
3,862 |
|
|
$ |
145 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
4,145 |
|
|
|
25 |
|
|
|
3,862 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
47,983 |
|
|
|
704 |
|
|
|
68,727 |
|
|
|
2,187 |
|
7-12 Months |
|
|
39,666 |
|
|
|
1,282 |
|
|
|
118,910 |
|
|
|
4,376 |
|
> 12 Months |
|
|
42,095 |
|
|
|
2,244 |
|
|
|
15,918 |
|
|
|
1,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
129,744 |
|
|
|
4,230 |
|
|
|
203,555 |
|
|
|
8,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
4,623 |
|
|
|
40 |
|
|
|
30,670 |
|
|
|
939 |
|
7-12 Months |
|
|
37,388 |
|
|
|
4,364 |
|
|
|
80,618 |
|
|
|
26,966 |
|
> 12 Months |
|
|
107,162 |
|
|
|
43,252 |
|
|
|
66,218 |
|
|
|
20,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
149,173 |
|
|
|
47,656 |
|
|
|
177,506 |
|
|
|
48,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
22,335 |
|
|
|
1,733 |
|
|
|
57,805 |
|
|
|
2,445 |
|
7-12 Months |
|
|
51,700 |
|
|
|
4,569 |
|
|
|
57,971 |
|
|
|
5,893 |
|
> 12 Months |
|
|
37,345 |
|
|
|
9,615 |
|
|
|
27,873 |
|
|
|
6,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
111,380 |
|
|
|
15,917 |
|
|
|
143,649 |
|
|
|
14,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities |
|
$ |
394,442 |
|
|
$ |
67,828 |
|
|
$ |
528,572 |
|
|
$ |
71,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
$ |
6,934 |
|
|
$ |
1,175 |
|
|
$ |
8,991 |
|
|
$ |
1,941 |
|
7-12 Months |
|
|
173 |
|
|
|
8 |
|
|
|
351 |
|
|
|
46 |
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity Securities |
|
$ |
7,107 |
|
|
$ |
1,183 |
|
|
$ |
9,342 |
|
|
$ |
1,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
During the 2009 first quarter, the Company identified 54 common stocks with a fair value of
$35.8 million which were considered to be other-than-temporarily impaired. Consequently, the cost
of such securities was written down to fair value and the Company recognized realized losses of
$8.3 million. During the 2009 three month period, the Company identified two corporate bonds with
a fair value of $0.8 million which were considered to be other-than-temporarily impaired.
Consequently, the cost of such securities was written down to fair value and the Company recognized
realized losses of $0.6 million. The company elected to take early adoption of the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, which considers relevant factors in determining the impairment of a structured security.
When assessing whether the amortized cost basis of the security will be recovered, the company
compared the present value of cash flows expected to be collected. Any shortfalls of the present
value of the cash flows expected to be collected in relation to the amortized cost basis is
considered a credit loss. The company recognized a credit loss of $1.8 million for 36 structured
securities which was recognized in earnings. The company does not intend to sell any of these
structured securities and it is more likely than not that we will not be required to sell these
securities before recovery of its amortized cost basis.
The following table sets forth the summary of the credit losses recognized on our available
for sale debt securities at March 31, 2009:
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
Beginning Balance at January 1, 2009 |
|
$ |
|
|
Credit Losses on Securities not previously impaired |
|
|
1,797 |
|
|
|
|
|
Ending balance at March 31, 2009 |
|
$ |
1,797 |
|
|
|
|
|
The other-than-temporary impairments recognized in earnings were mostly related to credit
losses on non-agency residential mortgage backed securities and one subprime home equity line of
credit. The significant inputs used to measure the amount of credit loss were actual delinquency
rates, default probability assumptions and severity 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 contractual maturity by the number of years until maturity for fixed maturity securities
with unrealized losses at March 31, 2009 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized Loss |
|
|
Fair Value |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
Amount |
|
|
to Total |
|
|
Amount |
|
|
to Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
83 |
|
|
|
0 |
% |
|
$ |
5,367 |
|
|
|
1 |
% |
Due after one year through five years |
|
|
5,902 |
|
|
|
9 |
% |
|
|
82,747 |
|
|
|
21 |
% |
Due after five years through ten years |
|
|
7,726 |
|
|
|
11 |
% |
|
|
68,939 |
|
|
|
17 |
% |
Due after ten years |
|
|
6,461 |
|
|
|
10 |
% |
|
|
88,216 |
|
|
|
22 |
% |
Mortgage- and asset-backed securities |
|
|
47,656 |
|
|
|
70 |
% |
|
|
149,173 |
|
|
|
39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities |
|
$ |
67,828 |
|
|
|
100 |
% |
|
$ |
394,442 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Our realized capital gains and losses for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Fixed maturities: |
|
|
|
|
|
|
|
|
Gains |
|
$ |
2,932 |
|
|
$ |
197 |
|
(Losses) |
|
|
(3,302 |
) |
|
|
(9 |
) |
(Impairments) |
|
|
(2,361 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,731 |
) |
|
|
188 |
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
Gains |
|
|
13 |
|
|
|
263 |
|
(Losses) |
|
|
(1,180 |
) |
|
|
(527 |
) |
(Impairments) |
|
|
(8,339 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,506 |
) |
|
|
(264 |
) |
|
|
|
|
|
|
|
Net realized capital gains (losses) |
|
$ |
(12,237 |
) |
|
$ |
(76 |
) |
|
|
|
|
|
|
|
In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which was adopted by the
Company on January 1, 2008. SFAS 157 defines fair value, expands disclosure requirements around
fair value and specifies a hierarchy of valuation techniques based on whether the input to those
valuation techniques are observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect the Companys market
assumptions. These two types of inputs create the following fair value hierarchy:
|
|
|
Level 1 Quoted prices for identical instruments in active markets. |
|
|
|
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. |
|
|
|
Level 3 Valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable. |
This hierarchy requires the Company to use observable market data, when available, and to
minimize the use of unobservable inputs when determining fair value.
20
The following table presents, for each of the fair value hierarchy levels, the Companys fixed
maturities, equity securities and short-term investments that are measured at fair value at March
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
In Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
($ in thousands) |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities |
|
$ |
261,943 |
|
|
$ |
1,414,727 |
|
|
$ |
156 |
|
|
$ |
1,676,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
37,164 |
|
|
|
14,571 |
|
|
|
|
|
|
|
51,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
48,953 |
|
|
|
157,270 |
|
|
|
|
|
|
|
206,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
348,060 |
|
|
$ |
1,586,568 |
|
|
$ |
156 |
|
|
$ |
1,934,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The securities classified as Level 3 in the above table consist of structured securities rated
AAA by Standard and Poors (S&P) and Aaa by Moodys Investors Service (Moodys), with
unobservable inputs included in the Companys fixed maturities portfolio for which price quotes
from brokers were used to indicate fair value. The following table presents a reconciliation of
the beginning and ending balances for all investments measured at fair value using Level 3 inputs
during the three months ended March 31, 2009:
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
Level 3 investments as of December 31, 2008 |
|
$ |
156 |
|
Unrealized net gains included in other comprehensive income (loss) |
|
|
23 |
|
Purchases, sales, paydowns and amortization |
|
|
(23 |
) |
Transfer from Level 3 |
|
|
|
|
Transfer to Level 3 |
|
|
|
|
|
|
|
|
Level 3 investments as of March 31, 2009 |
|
$ |
156 |
|
|
|
|
|
The 2009 first quarter net realized capital losses include impairments of $10.7 million for
declines in the market value of equity and fixed income securities which were considered to be
other-than-temporary, as further discussed under the caption Investments, included herein. In
light of the declines in the fair value of these securities and the related economic circumstances
causing such declines, the Company believes that their fair value will not recover in the
foreseeable future.
Note 12. Share Repurchases
In October 2007, the Parent Companys Board of Directors adopted a stock repurchase program
for up to $30 million of the Parent Companys common stock and during 2008, the Parent Company
purchased 224,754 shares of its common stock in the open market at an average cost of $51.34 per
share for a total of $11.5 million. This program expired at December 31, 2008.
21
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 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, may, will, intend, continue 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 statement, 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 2008 Annual Report on Form 10-K as well as:
|
|
|
the effects of domestic and foreign economic conditions, and conditions which
affect the market for property and casualty insurance; |
|
|
|
changes in the laws, rules and regulations which apply to our insurance
companies; |
|
|
|
the effects of emerging claim and coverage issues on our business, including
adverse judicial or regulatory decisions and rulings; |
|
|
|
the effects of competition from banks and other insurers and the trend toward
self-insurance; |
|
|
|
risks that we face in entering new markets and diversifying the products and
services we offer; |
|
|
|
risk that the bank consortium does not renew the credit facility, which would
cause us to find other sources to provide the letters of credit or other collateral
required to continue our participation in Syndicate 1221; |
|
|
|
unexpected turnover of our professional staff; |
|
|
|
changing legal and social trends and inherent uncertainties in the loss
estimation process that can adversely impact the adequacy of loss reserves and the
allowance for reinsurance recoverables, including our estimates relating to ultimate
asbestos liabilities and related reinsurance recoverables; |
|
|
|
risks inherent in the collection of reinsurance recoverable amounts from our
reinsurers over many years into the future based on the reinsurers financial ability
and intent to meet such obligations to the Company; |
|
|
|
risks associated with our continuing ability to obtain reinsurance covering our
exposures at appropriate prices and/or in sufficient amounts and the related
recoverability of our reinsured losses; |
|
|
|
weather-related events and other catastrophes (including acts of terrorism)
impacting our insureds and/or reinsurers, including, without limitation, the impact of
Hurricanes Katrina, Rita, and Wilma in
2005 and Hurricanes Gustav and Ike in 2008 and the possibility that our estimates of losses
from such hurricanes will prove to be materially inaccurate; |
|
|
|
our ability to attain adequate prices, obtain new business and retain existing
business consistent with our expectations and to successfully implement our business
strategy during soft as well as hard markets; |
22
|
|
|
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; |
|
|
|
the inability of our internal control framework to provide absolute assurance
that all incidents of fraud or unintended material errors will be detected and
prevented; |
|
|
|
changes in accounting principles or policies or in our application of such
accounting principles or policies; |
|
|
|
the risk that our investment portfolio suffers reduced returns or investment
losses which could reduce our profitability; and |
|
|
|
other risks that we identify in future filings with the Securities and Exchange
Commission (the SEC), including without limitation the risks described under the
caption Risk Factors in our Annual Report on Form 10-K for the year ended December
31, 2008. |
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 holding company focusing on specialty products for niches
within the overall property/casualty insurance market. The Companys underwriting segments consist
of insurance company operations and operations at Lloyds of London. 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. We conduct
operations through our Insurance Companies and our Lloyds Operations. The Insurance Companies
consist of Navigators Insurance Company, which includes our U.K. Branch, and Navigators Specialty
Insurance Company, which underwrites specialty and professional liability insurance on an excess
and surplus lines basis fully reinsured by Navigators Insurance Company. Our Lloyds Operations
include NUAL, a wholly-owned Lloyds underwriting agency which manages Syndicate 1221. Our Lloyds
Operations primarily underwrite marine and related lines of business, professional liability
insurance, and construction coverages for onshore energy business at Lloyds through Syndicate
1221. The European property business written by the Lloyds Operations and the U.K. Branch
beginning in 2006 was discontinued during the 2008 second quarter. We participate in the capacity
of Syndicate 1221 through our wholly-owned Lloyds corporate member (we utilized two wholly-owned
Lloyds corporate members prior to the 2008 underwriting year). During
the 2008 second quarter the Company closed two small underwriting agencies in Manchester and
Basingstoke, England. The discontinuance of the European property business and the closing of the
underwriting agencies did not have any significant effect on the Companys financial condition or
results of operations. In July 2008, the Company opened an underwriting office in Stockholm,
Sweden to write professional liability business. In September 2008, Syndicate 1221 began to
underwrite professional and general liability insurance coverage in China through the Navigators
Underwriting Division of Lloyds Reinsurance Company (China) Ltd.
23
While management takes into consideration a wide range of factors in planning the Companys
business strategy and evaluating results of operations, there are certain factors that management
believes are fundamental to understanding how the Company is managed. First, underwriting profit
is consistently emphasized as a primary goal, above premium growth. Managements assessment of our
trends and potential growth in underwriting profit is the dominant factor in its decisions with
respect to whether or not to expand a business line, enter into a new niche, product or territory
or, conversely, to contract capacity in any business line. In addition, management focuses on
managing the costs of our operations. Management believes that careful monitoring of the costs of
existing operations and assessment of costs of potential growth opportunities are important to our
profitability. Access to capital also has a significant impact on managements outlook for our
operations. The Insurance Companies operations and ability to grow the business and take
advantage of market opportunities must take into account regulatory capital requirements and rating
agency assessments of capital adequacy.
The discussions that follow include tables that contain both our consolidated and segment
operating results for the three month period ended March 31, 2009 and 2008. In presenting our
financial results we have discussed our performance with reference to underwriting profit or loss
and the related combined ratio, both of which are non-GAAP measures of underwriting profitability.
We consider such measures, which may be defined differently by other companies, to be important in
the understanding of our overall results of operations. Underwriting profit or loss is calculated
from net earned premium, less the sum of net losses and LAE, commission expense, other operating
expenses and commission income and other income (expense). The combined ratio is derived by
dividing the sum of net losses and LAE, commission expense, other operating expenses and commission
income 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.
Managements decisions are also greatly influenced by access to specialized underwriting and
claims expertise in our lines of business. We have chosen to operate in specialty niches with
certain common characteristics which we believe provide us with the opportunity to use our
technical underwriting expertise in order to realize underwriting profit. As a result, we have
focused on underserved markets for businesses characterized by higher severity and lower frequency
of loss where we believe our intellectual capital and financial strength bring meaningful value.
In contrast, we have avoided niches that we believe have a high frequency of loss activity and/or
are subject to a high level of regulatory requirements, such as workers compensation insurance and
personal automobile insurance, because we do not believe our technical expertise is of as much
value in these types of businesses. Examples of niches that have the characteristics we look for
include bluewater hull, which provides coverage for physical damage to, for example, highly valued
cruise ships, and directors and officers liability insurance (D&O), which covers litigation
exposure of a corporations directors and officers. These types of exposures require substantial
technical expertise. We attempt to mitigate the financial impact of severe claims on our results
by conservative and detailed underwriting, prudent use of reinsurance and a balanced portfolio of
risks.
Our revenue is primarily comprised of premiums and investment income. The Insurance
Companies derive their premiums primarily from business written by Navigators Management Company,
Inc. (NMC), a wholly-owned underwriting management company which produces, manages and
underwrites insurance and reinsurance for the Company. During the 2008 second quarter, Navigators
California Insurance Services, Inc. and Navigators Special Risk, Inc., also wholly-owned
underwriting management companies, were merged into NMC. Navigators Management (UK) Ltd.
produces, manages and underwrites insurance and reinsurance for the U.K. Branch. Both NMC and
Navigators Management (UK) Ltd. are reimbursed for their actual costs. The
Lloyds Operations derive their premiums from business written by NUAL which is reimbursed
for its actual costs and, where applicable, profit commissions on the business produced for
Syndicate 1221.
From 2003 through 2006, we experienced generally beneficial market changes in our lines of
business. The marine rate increases began to level off in 2004 and into 2005, however as a result
of the substantial insurance industry losses resulting from Hurricanes Katrina and Rita, the marine
insurance market experienced diminished capacity and rate increases through the end of 2006,
particularly for the offshore energy risks located in the Gulf of Mexico. Since the end of 2006,
competitive market conditions have returned as available capacity has increased.
24
The average renewal premium rates for our Insurance Companies marine business increased
approximately 4.2% for the 2009 first quarter. The average renewal premium rates for our Lloyds
Operations marine business increased approximately 8.1% for the 2009 first quarter period.
Within our Property / Casualty lines, the contractors liability business saw several years of
favorable rate changes resulting from diminished capacity in the market in which we compete, as
many former competitors who lacked the expertise to selectively underwrite this business have been
forced to withdraw from the market and the average renewal premium rate increases were
approximately 13.5% in 2004 and 49.1% in 2003. This was followed by declines in rates of
approximately 1.0% in 2005 and 5.6% in 2006, primarily due to additional competition in the
marketplace. This decline continued into 2007 and 2008 with average renewal premium rates
declining approximately 10.7% and 11.9% respectively. We expect competitive conditions to continue
during 2009 resulting in continuing declines in pricing for contractors liability and excess
liability business and the average renewal premium rates for the contractors liability business
declined approximately 4.3% in the 2009 first quarter. Offshore energy average renewal premium
rates increased approximately 5.7% for the 2009 first quarter.
In the professional liability market, the enactment of the Sarbanes-Oxley Act of 2002,
together with financial and accounting scandals at publicly traded corporations and the increased
frequency of securities-related class action litigation, has led to heightened interest in
professional liability insurance generally. Professional liability average renewal premium rates
decreased approximately 6.6% in 2007 compared to relatively level average renewal premium rates in
2006 and 2005 after decreasing approximately 3% in 2004 which followed substantial average renewal
premium rate increases in 2003 and 2002, particularly for D&O insurance. The 2007 D&O insurance
average renewal premium rates decreased approximately 7.9% following decreases of approximately
1.7% in 2006, 2.3% in 2005 and 9.5% in 2004. The average renewal premium rates for the
professional liability business increased approximately 2.3% in the 2009 first quarter including
D&O insurance average renewal premium rates which declined approximately 0.2% for the 2009 first
quarter.
Our business is cyclical and influenced by many factors. These factors include price
competition, economic conditions, interest rates, weather-related events and other catastrophes
including natural and man-made disasters (for example hurricanes and terrorism), state regulations,
court decisions and changes in the law. The incidence and severity of catastrophes are inherently
unpredictable. Although we will attempt to manage our exposure to such events, the frequency and
severity of catastrophic events could exceed our estimates, which could have a material adverse
effect on our financial condition. Additionally, because our insurance products must be priced,
and premiums charged, before costs have fully developed, our liabilities are required to be
estimated and recorded in recognition of future loss and settlement obligations. Due to the
inherent uncertainty in estimating these liabilities, we cannot assure you that our actual
liabilities will not exceed our recorded amounts.
Catastrophe Risk Management
Our Insurance Companies and Lloyds Operations have exposure to losses caused by hurricanes
and other 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 attempt to 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 exposures. Despite these efforts, there remains
uncertainty about the characteristics, timing and extent of insured losses given the nature of
catastrophes. The occurrence of one or more severe catastrophic events could have a material
adverse effect on the Companys results of operations, financial condition or liquidity.
25
The Company has significant catastrophe exposures throughout the world with the largest
catastrophe exposure coming from offshore energy risks exposed to hurricanes in the Gulf of Mexico.
Following the 2008 hurricane season, many offshore energy policies that were in-force during
Hurricanes Gustav and Ike now have either reduced limits or have used up the entire windstorm limit
of the policy. To take account of this in assessing our overall Gulf of Mexico exposure, we have
remodeled the offshore energy exposure with these reduced windstorm limits. Based on this
assessment, the Company estimates that our probable maximum pre-tax gross and net loss exposure in
a theoretical one in two hundred and fifty year hurricane event in the Gulf of Mexico would
approximate $147 million and $26 million, respectively, including the cost of reinsurance
reinstatement premiums, which emanates from 2008 underwriting year risks that have yet to expire.
We have taken steps to reduce our aggregate exposures and to increase profitability moving
forward, and the estimated probable maximum pre-tax gross and net loss exposure in a so-called or
theoretical one in two hundred and fifty year hurricane event in the Gulf of Mexico will be
significantly lower in 2009 based on the aggregate exposure to which we are managing, and the
reinsurance protection we have purchased. The primary policies that create exposure in the Gulf of
Mexico renew largely in April and July. We are evaluating the adequacy of the pricing and terms on
these policies and in many cases we are finding that market pricing and terms do not meet our
threshold as acceptable. If this continues, our exposure to catastrophic windstorm in the Gulf of
Mexico could reduce even further.
There are a number of significant assumptions and variables related to such an estimate
including the size, force and path of the hurricane, 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. There can be no assurances that the gross and net loss amounts that the Company
could incur in such an event or in any hurricanes that may occur in the Gulf of Mexico would not be
materially higher than the estimates discussed above given the significant uncertainties with
respect to such an estimate.
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. We are required
to pay the losses even 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.
Critical Accounting Policies
It is important to understand our accounting policies in order to understand our financial
statements. Management considers certain of these policies to be critical to the presentation of
the financial results, since they require management to make significant estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets, liabilities, revenues,
expenses, and related disclosures at the financial reporting date and throughout the reporting
period. Certain of the estimates result from judgments that can be subjective and complex and
consequently actual results may differ from these estimates, which would be reflected in future
periods.
Our most critical accounting policies involve the reporting of the reserves for losses and 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 invested assets, accounting for Lloyds results and the translation of foreign
currencies.
Reserves for Losses and LAE. Reserves for losses and LAE represent an estimate of the
expected cost of the ultimate settlement and administration of losses, based on facts and
circumstances then known. Actuarial methodologies are employed to assist in establishing such
estimates and include judgments relative to estimates of future claims severity and frequency,
length of time to develop to ultimate, judicial theories of liability and other third party factors
which are often beyond our control. Due to the inherent uncertainty associated with the reserving
process, the ultimate liability may be different from the original estimate. Such estimates are
regularly reviewed and updated and any resulting adjustments are included in the current years
results.
26
Reinsurance Recoverables. The most significant reinsurance recoverables are established for
the portion of the loss reserves that are ceded to reinsurers. Reinsurance recoverables are
determined based upon the terms and conditions of reinsurance contracts which could be subject to
interpretations that differ from our own based on judicial theories of liability. In addition, we
bear credit risk with respect to our reinsurers that can be significant considering that certain of
the reserves remain outstanding for an extended period of time. We are required to pay losses even
if a reinsurer fails to meet its obligations under the applicable reinsurance agreement.
Written and Unearned Premium. Written premium is recorded based on the insurance policies
that have been reported to us and the policies that have been written by agents and brokers but not
yet reported to us. We must estimate the amount of written premium not yet reported based on
judgments relative to current and historical trends of the business being written. Such estimates
are regularly reviewed and updated and any resulting adjustments are included in the current years
results. An unearned premium reserve is established to reflect the unexpired portion of each
policy at the financial reporting date. Reinsurance reinstatement premium is earned in the period
in which the event occurred which created the need to record the reinstatement premium.
Substantially all of our business is placed through agents and brokers. Since the vast
majority of the Companys gross written premium is primary or direct as opposed to assumed, the
delays in reporting assumed premium generally do not have a significant effect on the Companys
financial statements, as we record estimates for both unreported direct and assumed premium. We
also record the ceded portion of the estimated gross written premium and related acquisition costs.
The earned gross, ceded and net premiums are calculated based on our earning methodology which is
generally pro rata over the policy period. Losses are also recorded in relation to the earned
premium. The estimate for losses incurred on the estimated premium is based on an actuarial
calculation consistent with the methodology used to determine incurred but not reported loss
reserves for reported premiums.
The portion of the Companys premium that is estimated is mostly for the marine business
written by our U.K. Branch and Lloyds Operations. We generally do not experience any significant
backlog in processing premiums. Such premium estimates are generally based on submission data
received from agents and brokers and recorded when the insurance policy or reinsurance contract is
written or bound. The estimates are regularly reviewed and updated taking into account the premium
received to date versus the estimate and the age of the estimate. To the extent that the actual
premium varies from the estimates, the difference, along with the related loss reserves and
underwriting expenses, is recorded in current operations.
Deferred Tax Assets. We apply the asset and liability method of accounting for income taxes
whereby deferred assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax basis. In assessing the realization of deferred tax assets, management
considers whether it is more likely than not that the deferred tax assets will be realized.
Impairment of Invested Assets. Impairment of invested assets results in a charge to
operations when a market decline below cost is other-than-temporary. Management regularly reviews
our fixed maturity and equity securities portfolios to evaluate the necessity of recording
impairment losses for other-than-temporary declines in the fair value of investments.
Equity securities are impaired when the fair value is less than 80% of the cost for at least
six months and in other cases where more severe declines occur for less than six months.
27
With respect to fixed maturity securities, we focus our attention on those securities whose
market value was less than 80% of their cost or amortized cost, as appropriate, for six or more
consecutive months. If warranted as the result of conditions relating to a particular security, we
will focus on a significant decline in market 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 or amortized cost of the security, as appropriate, the length of
time the investment has been below cost or amortized cost and by how much, our intent not to sell
and more likely than not that we will not be required to sell before the anticipated recovery of
its remaining amortized cost basis, specific credit issues related to the issuer and current
economic conditions. Other-than-temporary impairment losses result in a permanent reduction of the
cost basis of the underlying investment. Significant changes in the factors we consider when
evaluating investments for impairment losses could result in a significant change in impairment
losses reported in the consolidated financial statements.
As mentioned above, the Company considers its intent not to sell and more likely than not that
we will not be required to sell before the anticipated recovery as part of the process of
evaluating whether a fixed maturity 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. Management of the
Companys investment portfolio is outsourced to third party investment managers. While these
investment managers may, at a given point in time, believe that the preferred course of action is
to hold securities with unrealized losses that are considered temporary until such losses are
recovered, the dynamic nature of the portfolio management may result in a subsequent decision to
sell the security and realize the loss based upon a change in market and other factors described
above. The Company believes that subsequent decisions to sell such securities are consistent with
the classification of the Companys portfolio as available for sale.
Investment managers are required to notify management of rating agency downgrades of
securities in their portfolios as well as any potential investment valuation issues at the end of
each quarter. Investment managers are also required to notify management, and receive approval,
prior to the execution of a transaction or series of related transactions that may result in a
realized loss above a certain threshold. Additionally, investment managers are required to notify
management, and receive approval, prior to the execution of a transaction or series of related
transactions that may result in any realized loss up until a certain period beyond the close of a
quarterly accounting period.
Accounting for Lloyds Results. We record Syndicate 1221s assets, liabilities, revenues and
expenses after making adjustments to convert Lloyds accounting to U.S. GAAP. The most significant
GAAP adjustments relate to income recognition. Lloyds syndicates determine underwriting results by
year of account at the end of three years. We record adjustments to recognize underwriting results
as incurred, including the expected ultimate cost of losses incurred. These adjustments to losses
are based on actuarial analysis of syndicate accounts, including forecasts of expected ultimate
losses provided by the syndicate. At the end of the Lloyds three-year period for determining
underwriting results for an account year, the syndicate will close the account year by
reinsuring outstanding claims on that account year with the participants for the next
underwriting year. The amount to close an underwriting year into the next year is referred to as
the reinsurance to close (RITC). The RITC transaction, recorded in the fourth quarter, does not
result in any gain or loss.
Translation of Foreign Currencies. Financial statements of subsidiaries expressed in foreign
currencies are translated into U.S. dollars in accordance with SFAS 52, Foreign Currency
Translation, issued by the FASB. Under SFAS 52, functional currency assets and liabilities are
translated into U.S. dollars using period end rates of exchange and the related translation
adjustments are recorded as a separate component of accumulated other comprehensive income on the
Companys balance sheet. Statement of income amounts expressed in functional currencies are
translated using average exchange rates. Realized gains and losses resulting from foreign currency
transactions are recorded in other income (expense) in the Companys Consolidated Statements of
Income.
28
Results of Operations
The following is a discussion and analysis of our consolidated and segment results of
operations for the three months ended March 31, 2009 and 2008. Earnings per share data is
presented on a per diluted share basis.
Effective in 2009, the Company has reclassified certain of its business lines, which has no
effect on the segment classifications of the Insurance Company and Lloyds.
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|
|
The offshore energy business, formerly included in the Marine and Energy
businesses of the Insurance Companies and Lloyds, is now included in the Insurance
Companies and Lloyds Property Casualty businesses. |
|
|
|
The marine lines within both the Insurance Company and Lloyds are now
presented as Marine instead of Marine and Energy, since the energy business has now
been reclassified to Property Casualty. |
|
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|
Engineering and construction, European Property and other run-off business,
formerly included in the Other category of business within the Insurance Companies
and Lloyds, are now included under Property Casualty. |
|
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|
The Middle Markets business, formerly broken out separately in the Insurance
Companies, is now included in the Insurance Companies Property Casualty business. |
Underwriting data for prior periods has been reclassified to reflect these changes.
Net income for the three months ended March 31, 2009 was $12.0 million or $0.71 per share
compared to $23.3 million or $1.36 per share for the three months ended March 31, 2008. Included
in these results were net realized capital losses of $0.48 per share and net realized capital gains
of $0.00 per share for the three months ended March 31, 2009 and 2008, respectively. The 2009
first quarters net realized capital losses include impairments of $10.7 million for declines in
the market value of securities which were considered to be other-than-temporary, as further
discussed under the caption Investments, included herein. The after-tax loss of such impairments
was $7.0 million or $0.41 per share. Recording realized capital losses on such securities has no
impact on the Companys stockholders equity or book value per share since unrealized gains and
losses on the investment portfolio are a component of accumulated other comprehensive income
(loss).
The combined ratios, which consist of the sum of the loss and LAE ratio and the expense ratio
for each period, for the 2009 first quarter period was 92.8 % compared to 89.2% for the comparable
period in 2008. The combined ratio for the 2009 first quarter was reduced by 3.5 loss ratio points
for net loss reserve redundancies of $5.8 million relating to prior years. The combined ratio for
the 2008 first quarter was reduced by 8.8 loss ratio points for net loss reserve redundancies of
$13.7 million relating to prior years. The net paid loss and LAE ratio for the 2009 first quarter
was 43.6 % compared to 32.7% for the comparable period in 2008.
Cash flow from operations was $42.9 million for the 2009 three month period compared to $59.7
million for the comparable period in 2008.
Consolidated stockholders equity increased 3.4% to $ 712.5 million or $ 42.07 per share at
March 31, 2009 compared to $689.3 million or $40.89 per share at December 31, 2008. The increase
was due to net income.
29
Revenues. Gross written premium was $275.3 million in the 2009 first quarter,
compared to $287.1 million in the 2008 comparable period. The decrease in the 2009 first quarter
gross written premium compared to 2008 generally reflects a combination of selective business
expansion in new and existing lines of business, offset by the effect of premium rate changes on
renewal policies on certain lines of business and lost or cancelled business.
The average premium rate increases or decreases as noted elsewhere in this document for the
marine, property casualty and professional liability businesses are calculated primarily by
comparing premium amounts on policies that have renewed. The premiums are judgmentally adjusted
for exposure factors when deemed significant and sometimes represent an aggregation of several
lines of business. The rate change calculations provide an indicated pricing trend and are not
meant to be a precise analysis of the numerous factors that affect premium rates or the adequacy of
such rates to cover all underwriting costs and generate an underwriting profit. The calculation
can also be affected quarter by quarter depending on the particular policies and the number of
policies that renew during that period. Due to market conditions, these rate changes may or may
not apply to new business that generally would be more competitively priced compared to renewal
business.
30
The following tables set forth our gross and net written premium and net earned premium by
segment and line of business for the periods indicated:
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|
|
|
|
|
|
|
|
|
|
|
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|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
Written |
|
|
|
|
|
|
Written |
|
|
Earned |
|
|
|
Premium |
|
|
% |
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
% |
|
|
Premium |
|
|
Premium |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
77,237 |
|
|
|
28.1 |
% |
|
$ |
58,459 |
|
|
$ |
37,161 |
|
|
$ |
71,485 |
|
|
|
24.9 |
% |
|
$ |
43,463 |
|
|
$ |
26,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Casualty |
|
|
84,258 |
|
|
|
30.6 |
% |
|
|
59,976 |
|
|
|
65,412 |
|
|
|
100,824 |
|
|
|
35.1 |
% |
|
|
69,114 |
|
|
|
71,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
30,488 |
|
|
|
11.1 |
% |
|
|
18,647 |
|
|
|
17,717 |
|
|
|
19,287 |
|
|
|
6.7 |
% |
|
|
11,733 |
|
|
|
14,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies Total |
|
|
191,983 |
|
|
|
69.8 |
% |
|
|
137,082 |
|
|
|
120,290 |
|
|
|
191,596 |
|
|
|
66.7 |
% |
|
|
124,310 |
|
|
|
112,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
59,023 |
|
|
|
21.4 |
% |
|
|
49,974 |
|
|
|
31,175 |
|
|
|
67,154 |
|
|
|
23.4 |
% |
|
|
48,910 |
|
|
|
28,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Casualty |
|
|
13,528 |
|
|
|
4.9 |
% |
|
|
7,595 |
|
|
|
7,923 |
|
|
|
17,726 |
|
|
|
6.2 |
% |
|
|
7,710 |
|
|
|
8,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability |
|
|
10,725 |
|
|
|
3.9 |
% |
|
|
6,001 |
|
|
|
5,558 |
|
|
|
10,670 |
|
|
|
3.7 |
% |
|
|
6,792 |
|
|
|
5,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations Total |
|
|
83,276 |
|
|
|
30.2 |
% |
|
|
63,570 |
|
|
|
44,656 |
|
|
|
95,550 |
|
|
|
33.3 |
% |
|
|
63,412 |
|
|
|
43,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
275,259 |
|
|
|
100.0 |
% |
|
$ |
200,652 |
|
|
$ |
164,946 |
|
|
$ |
287,146 |
|
|
|
100.0 |
% |
|
$ |
187,722 |
|
|
$ |
155,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Gross Written Premium
Insurance Companies Gross Written Premium
Marine Premium. The gross written premium for the first three months of 2009 and 2008
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Marine liability |
|
|
35.1 |
% |
|
|
35.6 |
% |
P&I |
|
|
16.0 |
% |
|
|
15.9 |
% |
Cargo |
|
|
11.4 |
% |
|
|
11.0 |
% |
Inland marine |
|
|
10.9 |
% |
|
|
7.5 |
% |
Bluewater hull |
|
|
8.0 |
% |
|
|
6.6 |
% |
Transport |
|
|
6.8 |
% |
|
|
9.2 |
% |
Craft/Fishing vessel |
|
|
5.8 |
% |
|
|
6.2 |
% |
Other |
|
|
6.0 |
% |
|
|
8.0 |
% |
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
The marine gross written premium for the 2009 first quarter increased 8.0% compared to the
same period in 2008. The average renewal premium rates for the 2009 first quarter increased 4.2%.
The recent insurance industry dislocations and storm losses are expected to impact the market, but
the outcome of those changes is still uncertain.
Property / Casualty Premium. The gross written premium for the first three months of 2009 and
2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Construction liability |
|
|
28.5 |
% |
|
|
39.0 |
% |
Commercial umbrella |
|
|
19.7 |
% |
|
|
16.5 |
% |
Programs |
|
|
12.0 |
% |
|
|
10.1 |
% |
Nav Pac |
|
|
11.2 |
% |
|
|
7.9 |
% |
Nav Tech |
|
|
11.1 |
% |
|
|
10.8 |
% |
Primary E&S |
|
|
8.5 |
% |
|
|
10.5 |
% |
Personal Umbrella |
|
|
1.9 |
% |
|
|
2.0 |
% |
Other |
|
|
7.1 |
% |
|
|
3.2 |
% |
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
The property/casualty gross written premium for the 2009 first quarter decreased 16.4%
compared to the same period in 2008, due primarily to weakening economic conditions that have
reduced demand for construction liability insurance. The average renewal premium rates for the
construction liability business decreased approximately 4.3% for the 2009 first quarter. The
recent premium rate decreases for the construction liability business and generally for the
specialty lines of business are reflective of softening market conditions which are expected to
continue for the remainder of 2009.
32
Professional Liability Premium. The gross written premium for the first three months of 2009
and 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
D&O (public and private) |
|
|
60.2 |
% |
|
|
56.6 |
% |
Lawyers |
|
|
18.7 |
% |
|
|
32.0 |
% |
E&O (MPL) |
|
|
18.0 |
% |
|
|
6.3 |
% |
Architects and engineers |
|
|
3.1 |
% |
|
|
5.1 |
% |
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
The professional liability gross written premium for the 2009 first quarter increased 58.1%
compared to the same period in 2008 as we have hired additional underwriters in both New York and
London to expand this business resulting from increased insurer demand for insurers with excellent
financial strength and market dislocations caused by weakness in other market participants. The
premium growth occurred in our D&O and E&O lines. These have historically been the most profitable
segments of our professional liability business. The lawyers professional lines generated an
underwriting loss for the quarter due to adverse loss development. Premium writings have declined
as a percentage of total premium written due to an underwriting decision to deemphasize this
product line due in part to the economic recession. Architects and engineers premiums written
declined as a percentage of total premiums written due to a reduction in insured demand resulting
from the effects of the economic recession on construction activity. The average renewal premium
rates for the professional liability business increased by approximately 2.3% in the 2009 first
quarter.
Lloyds Operations Gross Written Premium
We have provided 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 £123.0 million ($176.5
million) in 2009 compared to £123.0 million ($228 million) in 2008.
The Lloyds Operations gross written premium for the 2009 first quarter decreased 12.8%
compared to the same period in 2008. This decrease is attributable to both the adverse impact of
the decline in the sterling exchange rate together with the closure during 2008 of the Syndicates
UK Property book.
Marine Premium. The gross written premium for the first three months of 2009 and 2008
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Cargo and specie |
|
|
36.7 |
% |
|
|
34.0 |
% |
Marine liability |
|
|
35.3 |
% |
|
|
42.4 |
% |
Assumed reinsurance |
|
|
17.5 |
% |
|
|
12.9 |
% |
Hull |
|
|
6.4 |
% |
|
|
6.4 |
% |
Other |
|
|
4.1 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
The marine gross written premium for the 2009 first quarter decreased 12.1% compared to the
same period in 2008. The average renewal premium rates increased approximately 8.1% for the 2009
first quarter. These increases have been offset by the negative impact of foreign exchange
movements. The Marine liability account reduced from 42.4% to 35.3% due to a small number of large
accounts that will now incept later in 2009.
33
Property / Casualty Premium. The gross written premium for the first three months of 2009 and
2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Nav Tech |
|
|
90.9 |
% |
|
|
81.3 |
% |
US Property Casualty |
|
|
9.5 |
% |
|
|
0.0 |
% |
Property |
|
|
-0.4 |
% |
|
|
18.7 |
% |
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
The property/casualty gross written premium for the 2009 first quarter decreased 23.7%
compared to the same period in 2008 due to our decision to place the Property book into run-off in
2008. The average renewal premium rates increased approximately 10.4% for the 2009 first quarter.
The US property casualty business is primarily non-admitted risks in the state of New York.
Professional Liability Premium. The gross written premium for the first three months of 2009
and 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
E&O |
|
|
61.8 |
% |
|
|
78.1 |
% |
D&O (public and private) |
|
|
38.2 |
% |
|
|
21.9 |
% |
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
The gross written premium for the 2009 first quarter increased 0.5% compared to the same
period in 2008.
Ceded Written Premium. 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.
34
The following tables set forth our ceded written premium by segment and major line of business
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Ceded |
|
|
Gross |
|
|
Ceded |
|
|
Gross |
|
|
|
Written |
|
|
Written |
|
|
Written |
|
|
Written |
|
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
Premium |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
18,778 |
|
|
|
24.3 |
% |
|
$ |
28,022 |
|
|
|
39.2 |
% |
Property Casualty |
|
|
24,282 |
|
|
|
28.8 |
% |
|
|
31,710 |
|
|
|
31.5 |
% |
Professional Liability |
|
|
11,841 |
|
|
|
38.8 |
% |
|
|
7,554 |
|
|
|
39.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
54,901 |
|
|
|
28.6 |
% |
|
|
67,286 |
|
|
|
35.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
9,049 |
|
|
|
15.3 |
% |
|
|
18,244 |
|
|
|
27.2 |
% |
Property Casualty |
|
|
5,933 |
|
|
|
43.9 |
% |
|
|
10,016 |
|
|
|
56.5 |
% |
Professional Liability |
|
|
4,724 |
|
|
|
44.0 |
% |
|
|
3,878 |
|
|
|
36.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
19,706 |
|
|
|
23.7 |
% |
|
|
32,138 |
|
|
|
33.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
74,607 |
|
|
|
27.1 |
% |
|
$ |
99,424 |
|
|
|
34.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The percentage of total ceded written premium to gross written premium in the 2009 first
quarter was 27.1%, which compares to the 2008 first quarter ratio of 34.6%. The changes in the
percentages of ceded written premium to gross written premium for the three months ended March 31,
2009 compared to the same period in 2008 was due to a reduction in the amount of marine and energy
(included within Property Casualty) quota share reinsurance purchased for the Insurance Companies
and the Lloyds Operations that were effective January 1, 2009 resulting in a large reduction in
ceded premium.
Net Written Premium. Net written premium increased 6.9% in the 2009 first quarter
compared to the same period in 2008 due to the reduction in ceded marine premiums in both the
Insurance Company and Lloyds Operations.
Net Earned Premium. Net earned premium, which generally lags the increase in net
written premium, increased 5.9% in the 2009 first quarter compared to the same period in 2008 due
to the increase in net written premium throughout 2008 and in the first quarter of 2009.
Commission Income. Commission income from unaffiliated business decreased $0.3
million in the 2009 first quarter compared to the same period in 2008. Beginning with the 2006
underwriting year, there was no longer any marine pool unaffiliated insurance companies with the
elimination of the marine pool and no longer any unaffiliated participants at Syndicate 1221 with
the purchase of the minority interest. Any profit commission would therefore result from the
run-off of underwriting years prior to 2006.
Net Investment Income. Net investment income decreased 0.5% in the 2009 first quarter
compared to the same period in 2008, due to lower yields on our short-term balances.
35
Net Realized Capital Gains and Losses. Pre-tax net income included net realized
capital losses of $12.2 million for the 2009 first quarter compared to net realized capital losses
of $0.08 million for the 2008 first quarter. On an after-tax basis, the 2009 first quarter net
realized capital losses were $8.2 million or $0.48 per share compared to net realized capital
losses of $0.05 million or $0.00 per share for the 2008 first quarter.
The 2009 first quarter net realized capital losses include provisions of $10.7 million for
declines in the market value of securities which were considered to be other-than-temporary. The
after-tax effect of such provisions on the 2009 first quarter period was $7.0 million or $0.41 per
share.
Other Income/(Expense). Other income/(expense) for the first quarters of both 2009
and 2008 consisted primarily of foreign exchange gains and losses from our Lloyds Operations and
inspection fees related to our specialty insurance business.
Operating Expenses
Net Losses and Loss Adjustment Expenses Incurred. The ratio of net losses and LAE incurred
to net earned premium (loss ratios) for the 2009 and 2008 first quarters was 60.8% and 56.8%,
respectively. The loss ratio for the three months of 2009 was favorably impacted by 3.5 loss ratio
points and 2008 was favorably impacted by 8.8 loss ratio points, also resulting from the effect of
prior year loss reserves.
With the recording of gross losses, the Company assesses its reinsurance coverage, potential
receivables, and the recoverability of the receivables. Losses incurred on business recently
written are primarily covered by reinsurance agreements written by companies with whom the Company
is currently doing reinsurance business and whose credit the Company continues to assess in the
normal course of business.
The following table shows overall reinsurance recoverable amounts for paid and unpaid losses.
Approximately $95.8 million and $96.8 million of paid and unpaid losses at March 31, 2009 and
December 31, 2008, respectively, were due from reinsurers as a result of the losses from Hurricanes
Gustav and Ike. Approximately $94.5 million and $101.7 million of paid and unpaid losses at March
31, 2009 and December 31, 2008, respectively, were due from reinsurers as a result of the losses
from Hurricanes Katrina and Rita.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
($ in thousands) |
|
Reinsurance recoverables: |
|
|
|
|
|
|
|
|
|
|
|
|
Paid losses |
|
$ |
70,725 |
|
|
$ |
67,227 |
|
|
$ |
3,498 |
|
Unpaid losses and LAE reserves |
|
|
851,703 |
|
|
|
853,793 |
|
|
|
(2,090 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
922,428 |
|
|
$ |
921,020 |
|
|
$ |
1,408 |
|
|
|
|
|
|
|
|
|
|
|
36
The following table sets forth gross reserves for losses and LAE reduced for reinsurance
recoverable on such amounts resulting in net loss and LAE reserves (a non-GAAP measure reconciled
in the following table) as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves for losses and LAE |
|
$ |
1,879,895 |
|
|
$ |
1,853,664 |
|
|
|
1.4 |
% |
Less: Reinsurance recoverable on unpaid
losses and LAE reserves |
|
|
851,703 |
|
|
|
853,793 |
|
|
|
-0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
Net loss and LAE reserves |
|
$ |
1,028,192 |
|
|
$ |
999,871 |
|
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth our net reported loss and LAE reserves and net incurred but not
reported (IBNR) reserves (non-GAAP measures reconciled above) by segment and line of business as
of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
Net |
|
|
Net |
|
|
Total |
|
|
% of IBNR |
|
|
|
Reported |
|
|
IBNR |
|
|
Net Loss |
|
|
to Total Net |
|
|
|
Reserves |
|
|
Reserves |
|
|
Reserves |
|
|
Loss Reserves |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
106,949 |
|
|
$ |
96,636 |
|
|
$ |
203,585 |
|
|
|
47.5 |
% |
Property Casualty |
|
|
116,354 |
|
|
|
359,035 |
|
|
|
475,389 |
|
|
|
75.5 |
% |
Professional Liability |
|
|
32,443 |
|
|
|
58,992 |
|
|
|
91,435 |
|
|
|
64.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Companies |
|
|
255,746 |
|
|
|
514,663 |
|
|
|
770,409 |
|
|
|
66.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
97,211 |
|
|
|
83,218 |
|
|
|
180,429 |
|
|
|
46.1 |
% |
Property Casualty |
|
|
21,788 |
|
|
|
23,438 |
|
|
|
45,226 |
|
|
|
51.8 |
% |
Professional Liability |
|
|
6,416 |
|
|
|
25,712 |
|
|
|
32,128 |
|
|
|
80.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lloyds Operations |
|
|
125,415 |
|
|
|
132,368 |
|
|
|
257,783 |
|
|
|
51.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
$ |
381,161 |
|
|
$ |
647,031 |
|
|
$ |
1,028,192 |
|
|
|
62.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Net |
|
|
Net |
|
|
Total |
|
|
% of IBNR |
|
|
|
Reported |
|
|
IBNR |
|
|
Net Loss |
|
|
to Total Net |
|
|
|
Reserves |
|
|
Reserves |
|
|
Reserves |
|
|
Loss Reserves |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
96,244 |
|
|
$ |
96,995 |
|
|
$ |
193,239 |
|
|
|
50.2 |
% |
Property Casualty |
|
|
115,810 |
|
|
|
358,305 |
|
|
|
474,115 |
|
|
|
75.6 |
% |
Professional Liability |
|
|
22,913 |
|
|
|
58,793 |
|
|
|
81,706 |
|
|
|
72.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance Companies |
|
|
234,967 |
|
|
|
514,093 |
|
|
|
749,060 |
|
|
|
68.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyds Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
|
99,233 |
|
|
|
78,293 |
|
|
|
177,526 |
|
|
|
44.1 |
% |
Property Casualty |
|
|
26,218 |
|
|
|
16,386 |
|
|
|
42,604 |
|
|
|
38.5 |
% |
Professional Liability |
|
|
5,822 |
|
|
|
24,859 |
|
|
|
30,681 |
|
|
|
81.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Lloyds Operations |
|
|
131,273 |
|
|
|
119,538 |
|
|
|
250,811 |
|
|
|
47.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Company |
|
$ |
366,240 |
|
|
$ |
633,631 |
|
|
$ |
999,871 |
|
|
|
63.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2009, the IBNR loss reserve was $647.0 million or 62.9% of our total loss
reserves compared to $633.6 million or 63.4% at December 31, 2008.
The increase in net loss reserves in all active lines of business is generally a reflection of
the growth in net premium volume over the last three years coupled with a changing mix of business
to longer tail lines of business such as the specialty lines of business (construction defect,
commercial excess, primary excess and personal umbrella), professional liability lines of business
and marine liability and transport business in ocean marine. These products, which typically have
a longer settlement period compared to the mix of business the Company has historically written,
are becoming larger components of our overall business.
Our reserving practices and the establishment of any particular reserve reflect managements
judgment concerning sound financial practice and do not represent any admission of liability with
respect to any claims made against us. No assurance can be given that actual claims made and
related payments will not be in excess of the amounts reserved. During the loss settlement period,
it often becomes necessary to refine and adjust the estimates of liability on a claim either upward
or downward. Even after such adjustments, ultimate liability may exceed or be less than the
revised estimates.
There are a number of factors that could cause actual losses and LAE to differ materially from
the amount that we have reserved for losses and LAE.
The process of establishing loss reserves is complex and imprecise as it must take into
account many variables that are subject to the outcome of future events. As a result, informed
subjective judgments as to our ultimate exposure to losses are an integral component of our loss
reserving process.
The Companys actuaries generally calculate the IBNR loss reserves for each line of business
by underwriting year for major products using standard actuarial methodologies which are projection
or extrapolation techniques. This process requires the substantial use of informed judgment and is
inherently uncertain.
38
There are instances in which facts and circumstances require a deviation from the general
process described above. Two such instances relate to the IBNR loss reserve processes for our
hurricane losses (Rita, Katrina, Gustav, Ike) and our asbestos exposures, where extrapolation
techniques are not applied, except in a limited way, given the unique nature of hurricane losses
and limited population of marine excess policies with potential asbestos exposures. In such
circumstances, inventories of the policy limits exposed to losses coupled with reported losses are
analyzed and evaluated principally by claims personnel and underwriters to establish IBNR loss
reserves.
Hurricanes Gustav and Ike. During 2008, the Company recorded gross and net loss estimates of
$114.0 million and $17.2 million, respectively, exclusive of $12.2 million for the cost of excess
of loss reinstatement premiums related to Hurricanes Gustav and Ike.
The following table sets forth the Companys gross and net loss and LAE reserves, incurred
loss and LAE, and payments for Hurricanes Gustav and Ike for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Year Ended |
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
($ in thousands) |
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
107,399 |
|
|
|
|
|
Incurred loss & LAE |
|
|
|
|
|
$ |
114,000 |
|
Calendar year payments |
|
|
11,160 |
|
|
|
6,601 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
96,239 |
|
|
$ |
107,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
70,753 |
|
|
$ |
70,299 |
|
Gross IBNR loss reserves |
|
|
25,486 |
|
|
|
37,100 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
96,239 |
|
|
$ |
107,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
12,923 |
|
|
|
|
|
Incurred loss & LAE |
|
|
449 |
|
|
$ |
17,169 |
|
Calendar year payments |
|
|
6,637 |
|
|
|
4,246 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
6,735 |
|
|
$ |
12,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
6,075 |
|
|
$ |
11,696 |
|
Net IBNR loss reserves |
|
|
660 |
|
|
|
1,227 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
6,735 |
|
|
$ |
12,923 |
|
|
|
|
|
|
|
|
Approximately $95.8 million and $96.8 million of paid and unpaid losses at March 31, 2009 and
December 31, 2008, respectively, were due from reinsurers as a result of the losses from Hurricanes
Gustav and Ike.
Hurricanes Katrina and Rita. During the 2005 third quarter, the Company recorded gross and
net loss estimates of $471.0 million and $22.3 million, respectively, exclusive of $14.5 million
for the cost of excess of loss reinstatement premiums related to Hurricanes Katrina and Rita.
39
The following table sets forth the Companys gross and net loss and LAE reserves, incurred
loss and LAE, and payments for Hurricanes Katrina and Rita for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Year Ended |
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
($ in thousands) |
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
97,732 |
|
|
$ |
141,831 |
|
Incurred loss & LAE |
|
|
(1,849 |
) |
|
|
(12,250 |
) |
Calendar year payments |
|
|
2,840 |
|
|
|
31,849 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
93,043 |
|
|
$ |
97,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
62,944 |
|
|
$ |
62,732 |
|
Gross IBNR loss reserves |
|
|
30,099 |
|
|
|
35,000 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
93,043 |
|
|
$ |
97,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
3,667 |
|
|
$ |
4,519 |
|
Incurred loss & LAE |
|
|
130 |
|
|
|
(990 |
) |
Calendar year payments |
|
|
189 |
|
|
|
(138 |
) |
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
3,608 |
|
|
$ |
3,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
213 |
|
|
$ |
279 |
|
Net IBNR loss reserves |
|
|
3,395 |
|
|
|
3,388 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
3,608 |
|
|
$ |
3,667 |
|
|
|
|
|
|
|
|
Approximately $94.5 million and $101.7 million of paid and unpaid losses at March 31, 2009 and
December 31, 2008, respectively, were due from reinsurers as a result of the losses from Hurricanes
Katrina and Rita.
Asbestos Liability. Our exposure to asbestos liability principally stems from marine liability
insurance written on an occurrence basis during the mid-1980s. In general, our participation on
such risks is in the excess layers, which requires the underlying coverage to be exhausted prior to
coverage being triggered in our layer. In many instances we are one of many insurers who
participate in the defense and ultimate settlement of these claims, and we are generally a minor
participant in the overall insurance coverage and settlement.
The reserves for asbestos exposures at March 31, 2009 are for: (i) one large settled claim for
excess insurance policy limits exposed to a class action suit against an insured involved in the
manufacturing or distribution of asbestos products being paid over several years (two other large
settled claims were fully paid in 2007); (ii) other insureds not directly involved in the
manufacturing or distribution of asbestos products, but that have more than incidental asbestos
exposure for their purchase or use of products that contained asbestos; and (iii) attritional
asbestos claims that could be expected to occur over time. Substantially all of our asbestos
liability reserves are included in our marine loss reserves.
The Company believes that there are no remaining known claims where it would suffer a material
loss as a result of excess policy limits being exposed to class action suits for insureds involved
in the manufacturing or distribution of asbestos products. There can be no assurances, however,
that material loss development may not arise in the future from existing asbestos claims or new
claims given the evolving and complex legal environment that may directly impact the outcome of the
asbestos exposures of our insureds.
40
The following table sets forth our gross and net loss and LAE reserves for our asbestos
exposures for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Year Ended |
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Gross of Reinsurance |
|
|
|
|
|
|
|
|
Beginning gross reserves |
|
$ |
21,774 |
|
|
$ |
23,194 |
|
Incurred losses & LAE |
|
|
11 |
|
|
|
796 |
|
Calendar year payments |
|
|
53 |
|
|
|
2,216 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
21,732 |
|
|
$ |
21,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
|
$ |
13,876 |
|
|
$ |
13,918 |
|
Gross IBNR loss reserves |
|
|
7,856 |
|
|
|
7,856 |
|
|
|
|
|
|
|
|
Ending gross reserves |
|
$ |
21,732 |
|
|
$ |
21,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
Beginning net reserves |
|
$ |
16,683 |
|
|
$ |
16,717 |
|
Incurred losses & LAE |
|
|
51 |
|
|
|
263 |
|
Calendar year payments |
|
|
(102 |
) |
|
|
297 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
16,836 |
|
|
$ |
16,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
|
$ |
9,185 |
|
|
$ |
9,032 |
|
Net IBNR loss reserves |
|
|
7,651 |
|
|
|
7,651 |
|
|
|
|
|
|
|
|
Ending net reserves |
|
$ |
16,836 |
|
|
$ |
16,683 |
|
|
|
|
|
|
|
|
To the extent the Company incurs additional gross loss development for its historic asbestos
exposure, the allowance for uncollectible reinsurance would increase for the reinsurers that are
insolvent, in run-off or otherwise no longer active in the reinsurance business. The Company
continues to believe that it will be able to collect reinsurance on the gross portion of its
historic gross asbestos exposure in the above table.
At March 31, 2009, the ceded asbestos paid and unpaid recoverables were $8.2 million compared
to $8.9 million at December 31, 2008.
Loss reserves for environmental losses generally consist of oil spill claims on marine
liability policies written in the ordinary course of business. Net loss reserves for such
exposures are included in our marine loss reserves and are not separately identified.
41
Prior Year Reserve Redundancies/Deficiencies
As part of our regular review of prior reserves, the Companys actuaries may determine, based
on their judgment, that certain assumptions made in the reserving process in prior periods may need
to be revised to reflect various factors, likely including the availability of additional
information. Based on their reserve analyses, our actuaries may make corresponding reserve
adjustments.
Prior period reserve redundancies of $5.8 million and $13.7 million, net of reinsurance, were
recorded in the 2009 and 2008 first quarters, respectively, as discussed below. The relevant
factors that may have a significant impact on the establishment and adjustment of loss and LAE
reserves can vary by line of business and from period to period.
The segment and line of business breakdowns of prior period net reserve deficiencies
(redundancies) were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Insurance Companies: |
|
|
|
|
|
|
|
|
Marine |
|
$ |
1,958 |
|
|
$ |
(300 |
) |
Property Casualty |
|
|
(11,713 |
) |
|
|
(7,900 |
) |
Professional Liability |
|
|
4,623 |
|
|
|
(300 |
) |
|
|
|
|
|
|
|
Subtotal Insurance Companies |
|
|
(5,132 |
) |
|
|
(8,500 |
) |
Lloyds Operations |
|
|
(635 |
) |
|
|
(5,180 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(5,767 |
) |
|
$ |
(13,680 |
) |
|
|
|
|
|
|
|
Following is a discussion of relevant factors related to the $5.8 million prior period net
reserve deficiency recorded in the 2009 first quarter:
The Insurance Companies recorded $2.0 million of prior period net reserve deficiencies for
marine business which included $1.4 million for increased liability reserves due to large loss
activity, and $1.0 million for hull and $0.9 million for transport business due reported claims
activity, partially offset by $1.8 million of savings in the protection and indemnity (P&I) line
of business due to reductions in our loss assumptions for the more recent underwriting years.
The Insurance Companies recorded $11.7 million of prior period net savings for property
casualty business comprised mostly of $8.5 million of net favorable development in construction
liability business due to favorable loss trends for business written from 2005 to 2007, $2.7
million of favorable development on primary casualty business on business written from 2005 to 2006
due to reported losses less than our expectations, $1.4 million of favorable development on
commercial umbrella business on business written from 2004 to 2006 due to reported losses less than
our expectations, and $4.9 million in the offshore energy lines of business due to a reduction in
the estimate for a large reported claim and generally lower claim activity than expected. These
redundancies were partially offset by prior period net reserve deficiencies in the middle markets
and specialty run-off lines of $1.6 million and $1.2 million, respectively, due to loss activity in
excess of expectations.
The Insurance Companies recorded $4.6 million of net prior period deficiencies for
professional liability business mostly emanating from E&O business written in 2006 and 2007 due to
reported losses being greater than expectations.
42
The Lloyds Operations recorded $0.6 million of prior period net savings comprised of savings
of $3.1 million for marine business due to favorable loss activity in the liability and cargo
lines, partially offset by deficiencies of $1.1 million in the international E&O line due to higher
reported loss activity and $0.5 million in our engineering book due to a large reported loss.
Reserves for the run off Property book were strengthened by an additional $0.5 million after worse
than expected claims development in the quarter.
Following is a discussion of relevant factors related to the $13.7 million prior period net
reserve redundancy recorded in the 2008 first quarter:
The Insurance Companies recorded $0.3 million of prior period net savings for marine business
comprised of $2.5 million of favorable development in marine liability business from 2006 and prior
years offset by adverse loss development of $2.2 million from other lines of business of which $1.7
million was for cargo losses consisting mostly of loss activity related to three cargo claims.
The Insurance Companies recorded $7.9 million of prior period net savings for property
casualty business comprised of $8.9 million of favorable development in construction liability
business due to favorable loss trends for business written from 2003 to 2006 and $2.3 million of
favorable development for personal umbrella business written in 2007, partially offset by adverse
loss development of $3.3 million from discontinued business. We also recorded $1.2 million of
prior period net deficiencies for middle markets business principally for business written in 2004
and 2003 of which $0.5 million was for one large claim on a policy written in 2003 and $1.8 million
of prior period net savings for run-off business principally due to the lack of loss activity for
aviation and space business discontinued in 1999.
The Lloyds Operations recorded $5.2 million of prior period net savings mostly emanating from
refinements to the actuarial methodology employed to project ultimate loss estimates by line of
business. The methodology employed in the 2008 first quarter separately determined ultimate losses
on a gross and ceded basis to establish net IBNR estimates. The prior methodology used net loss
amounts to determine such estimates. The net result of the 2008 first quarter analysis was to
reduce ultimate loss estimates by approximately $9.7 million for short tail classes of business
mostly related to 2005 and prior years (cargo $3.2 million, energy $4.6 million and reinsurance
$2.1 million, partially offset by $0.2 million of loss development for other lines of business).
Such prior year savings were offset by strengthening reserves of approximately $4.5 million for
business written in 2007 and 2006 for liability business ($2.3 million) and energy business ($2.1
million) and various other classes of business ($0.1 million). Such strengthening has taken into
effect the changes in the reinsurance program for increased net retentions that have occurred in
2007 and 2006 compared to prior years.
Our management believes that the estimates for the reserves for losses and LAE are adequate to
cover the ultimate cost of losses and loss adjustment expenses on reported and unreported claims.
However, it is possible that the ultimate liability may exceed or be less than such estimates. To
the extent that reserves are deficient or redundant, the amount of such deficiency or redundancy is
treated as a charge or credit to earnings in the period in which the deficiency or redundancy is
identified. We continue to review all of our loss reserves, including our asbestos reserves and
hurricane reserves, on a regular basis.
Commission Expense. Commission expense paid to unaffiliated brokers and agents is generally
based on a percentage of the gross written premium and is reduced by ceding commissions the Company
may receive on the ceded written premium. Commissions are generally deferred and recorded as
deferred policy acquisition costs to the extent that they relate to unearned premium. The
percentage of commission expense to net earned premiums in the 2009 first quarter was 13.6%
compared to 13.5% for the same period in 2008. The increase is mostly attributable to greater
retentions, particularly on our marine quota share treaties, which have reduced the ceding
commission benefit.
Other Operating Expenses. The increase of 2.6% in other operating expenses in the 2009 first
quarter compared to the same period in 2008, was attributable primarily to employee-related
expenses resulting from
expansion of the business and investments in technology to support this growth. Partially
offsetting these increases was a benefit of approximately $2.0 million from the decline in value of
our London based GBP denominated expenses when reported in US dollars compared to the first quarter
of 2008.
43
Income Taxes. The Company recorded an income tax expense of $4.1 million for the 2009
first quarter compared to income tax expense of $10.2 million for the 2008 first quarter, resulting
in effective tax rates of 25.7% and 30.5%, respectively. The Companys effective tax rate is less
than 35% due to permanent differences between book and tax return income, with the most significant
item being tax exempt interest. The effective tax rate on net investment income was 24.9% for the
2009 three month period compared to 26.4% for the same period in 2008. As of March 31, 2009 and
December 31, 2008 the net deferred Federal, foreign, state and local tax assets were $53.9 million
and $54.7 million, respectively.
We are subject to the tax regulations of the U.S. and foreign countries in which we operate.
The Company files a consolidated Federal tax return, which includes all domestic subsidiaries and
the 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 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. income. The non-U.S. connected insurance income would generally constitute
taxable income under the Subpart F income section of the Internal Revenue Code since less than 50%
of the Companys premium is 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 our 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 subject to the
Subpart F tax regulations. These earnings are subject to taxes under U.K. tax regulations at a 28%
rate.
We have not provided for U.S. deferred income taxes on the undistributed earnings of
approximately $48.3 million of our non-U.S. subsidiaries since these earnings are intended to be
permanently reinvested in the foreign subsidiaries. However, in the future, if such earnings were
distributed to the Company, taxes of approximately $3.4 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.
The Company had net state and local deferred tax assets amounting to potential future tax
benefits of $3.6 million and $6.2 million at March 31, 2009 and December 31, 2008, respectively.
Included in the deferred tax assets are state and local net operating loss carryforwards of $2.0
million and $0.5 million at March 31, 2009 and December 31, 2008, 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 carryforwards at
March 31, 2009 expire in 2029.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), an interpretation of SFAS 109. FIN 48, which became effective in 2007,
establishes the threshold for recognizing the benefits of tax-return positions in the financial
statements as more-likely-than-not to be sustained by the taxing authorities, and prescribes a
measurement methodology for those positions meeting the recognition threshold. The Companys
adoption of FIN 48 at January 1, 2007 did not have a material effect on its financial condition or
results of operations.
44
Segment Information
The Companys subsidiaries are primarily engaged in the underwriting and management of
property and casualty insurance.
The Company classifies its 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 revenues and expenses
of the wholly-owned underwriting agencies and the Parent Companys expenses and related income tax
amounts.
We evaluate the performance of each segment based on its underwriting and net income results.
The Insurance Companies and the Lloyds Operations results are measured by taking into account
net earned premium, net losses and loss adjustment expenses, commission expense, other operating
expenses and commission income 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 the Companys two underwriting segments.
Insurance Companies
The Insurance Companies consist of Navigators Insurance Company, including its U.K. Branch,
and its wholly-owned subsidiary, Navigators Specialty Insurance Company. Navigators Insurance
Company is our largest insurance subsidiary and has been active since 1983. It is primarily
engaged in underwriting marine insurance and related lines of business, professional liability
insurance, specialty lines of business including construction general liability insurance,
commercial and personal umbrella and primary and excess casualty businesses, and middle markets
business consisting of general liability, commercial automobile liability and property insurance
for a variety of commercial middle markets businesses. Navigators Specialty Insurance Company
underwrites specialty and professional liability insurance on an excess and surplus lines basis
fully reinsured by Navigators Insurance Company. NMC and Navigators Management (UK) Ltd. produce,
manage and underwrite insurance and reinsurance business for the Insurance Companies.
45
The following table sets forth the results of operations for the Insurance Companies for the
three months ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
191,983 |
|
|
$ |
191,596 |
|
Net written premium |
|
|
137,082 |
|
|
|
124,310 |
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
120,290 |
|
|
|
112,246 |
|
Net losses and LAE |
|
|
(70,153 |
) |
|
|
(67,356 |
) |
Commission expense |
|
|
(14,968 |
) |
|
|
(12,948 |
) |
Other operating expenses |
|
|
(24,560 |
) |
|
|
(22,148 |
) |
Commission income and other income (expense) |
|
|
201 |
|
|
|
258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
|
10,810 |
|
|
|
10,052 |
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
16,207 |
|
|
|
15,465 |
|
Net realized capital gains (losses) |
|
|
(8,907 |
) |
|
|
(102 |
) |
|
|
|
|
|
|
|
Income before income taxes |
|
|
18,110 |
|
|
|
25,415 |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
4,533 |
|
|
|
7,370 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,577 |
|
|
$ |
18,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
58.3 |
% |
|
|
60.0 |
% |
Commission expense ratio |
|
|
12.4 |
% |
|
|
11.5 |
% |
Other operating expense ratio (1) |
|
|
20.3 |
% |
|
|
19.5 |
% |
|
|
|
|
|
|
|
Combined ratio |
|
|
91.0 |
% |
|
|
91.0 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes other operating expenses and commission income and other income
(expense). |
46
The following tables set forth the underwriting results of the Insurance Companies for the
three months ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Profit/(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
37,161 |
|
|
$ |
26,390 |
|
|
$ |
11,622 |
|
|
$ |
(851 |
) |
|
|
71.0 |
% |
|
|
31.3 |
% |
|
|
102.3 |
% |
Property Casualty |
|
|
65,412 |
|
|
|
28,004 |
|
|
|
20,753 |
|
|
|
16,655 |
|
|
|
42.8 |
% |
|
|
31.7 |
% |
|
|
74.5 |
% |
Professional Liability |
|
|
17,717 |
|
|
|
15,759 |
|
|
|
6,952 |
|
|
|
(4,994 |
) |
|
|
89.0 |
% |
|
|
39.2 |
% |
|
|
128.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
120,290 |
|
|
$ |
70,153 |
|
|
$ |
39,327 |
|
|
$ |
10,810 |
|
|
|
58.3 |
% |
|
|
32.7 |
% |
|
|
91.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008 |
|
|
|
($ in thousands) |
|
|
|
Net |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned |
|
|
and LAE |
|
|
Underwriting |
|
|
Underwriting |
|
|
Loss |
|
|
Expense |
|
|
Combined |
|
|
|
Premium |
|
|
Incurred |
|
|
Expenses |
|
|
Profit/(Loss) |
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
$ |
26,455 |
|
|
$ |
22,313 |
|
|
$ |
9,169 |
|
|
$ |
(5,027 |
) |
|
|
84.3 |
% |
|
|
34.7 |
% |
|
|
119.0 |
% |
Property Casualty |
|
|
71,718 |
|
|
|
36,138 |
|
|
|
20,571 |
|
|
|
15,009 |
|
|
|
50.4 |
% |
|
|
28.7 |
% |
|
|
79.1 |
% |
Professional Liability |
|
|
14,073 |
|
|
|
8,905 |
|
|
|
5,098 |
|
|
|
70 |
|
|
|
63.3 |
% |
|
|
36.2 |
% |
|
|
99.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
112,246 |
|
|
$ |
67,356 |
|
|
$ |
34,838 |
|
|
$ |
10,052 |
|
|
|
60.0 |
% |
|
|
31.0 |
% |
|
|
91.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium of the Insurance Companies increased 7.2% in the 2009 first quarter
compared to the same period in 2008, primarily reflecting increased net written premiums.
The 2009 first quarter loss ratio was favorably impacted by prior period loss reserve
redundancies of $5.1 million or 4.3 loss ratio points.
Generally, while the Insurance Companies have experienced favorable prior period redundancies
in 2008 and 2007, the ultimate loss ratios for the most recent underwriting years of 2009 and 2008
have been increasing due to softening market conditions for the business written during those
periods.
The approximate annualized pre-tax yields on the Insurance Companies investment portfolio,
excluding net realized capital gains and losses, were 4.3% for the 2009 first quarter compared to
4.4 % for the comparable 2008 period. The average durations of the Insurance Companies invested
assets at March 31, 2009 was 4.8 years compared to 4.7 years at March 31, 2008. Net investment
income increased in the 2009 first quarter compared to the same period in 2008 primarily due to the
investment of new funds from cash flow, partially offset by the decrease in yields on short term
investments.
47
Lloyds Operations
The Lloyds Operations consist of NUAL, which manages Syndicate 1221, Millennium Underwriting
Ltd. and Navigators Corporate Underwriters Ltd. Both Millennium Underwriting Ltd. and Navigators
Corporate Underwriters Ltd. are Lloyds corporate members with limited liability and provide
capacity to Syndicate 1221. NUAL owns Navigators Underwriting Ltd., an underwriting managing
agency that underwrites cargo and engineering business for Syndicate 1221. In January 2005, we
formed Navigators NV in Antwerp, Belgium, a wholly-owned subsidiary of NUAL. Navigators NV
produces transport liability, cargo and marine liability premium for Syndicate 1221. In July 2008,
we opened an underwriting office in Stockholm, Sweden to write professional liability business for
Syndicate 1221. The Lloyds Operations and Navigators Management (UK) Limited, which produces
business for the U.K. Branch, are subsidiaries of Navigators Holdings (UK) Limited located in the
United Kingdom. In September 2008, Syndicate 1221 began to underwrite insurance coverage in China
through the Navigators Underwriting Division of Lloyds Reinsurance Company (China) Ltd. The
Companys focus in China is on opportunities in professional and general liability lines of
business.
Syndicate 1221s stamp capacity is £123.0 million ($176.5 million) in 2009 compared to £123.0
million ($228 million) in 2008. Stamp capacity is a measure of the amount of premium a Lloyds
syndicate is authorized to write as determined by the Council of Lloyds. Syndicate 1221s stamp
capacity is expressed net of commission (as is standard at Lloyds). The Syndicate 1221 premium
recorded in the Companys financial statements is gross of commission. Navigators provides 100% of
Syndicate 1221s capacity for the 2009 and 2008 underwriting years through Navigators Corporate
Underwriters Ltd. in 2008 and through Navigators Corporate Underwriters Ltd. in 2008.
Lloyds presents its results on an underwriting year basis, generally closing each
underwriting year after three years. We make estimates for each underwriting year and timely
accrue the expected results. Our Lloyds Operations included in the consolidated financial
statements represent our participation in Syndicate 1221.
Lloyds syndicates report the amounts of premiums, claims, and expenses recorded in an
underwriting account for a particular year to the companies or individuals that participate in the
syndicates. The syndicates generally keep accounts open for three years. Traditionally, three
years have been necessary to report substantially all premiums associated with an underwriting year
and to report most related claims, although claims may remain unsettled after the underwriting year
is closed. A Lloyds syndicate typically closes an underwriting year by reinsuring outstanding
claims on that underwriting year with the participants for the next underwriting year. The ceding
participants pay the assuming participants an amount based on the unearned premiums and outstanding
claims in the underwriting year at the date of the assumption. At Lloyds, the amount to close an
underwriting year into the next year is referred to as the reinsurance to close (RITC)
transaction. The RITC amounts represent the transfer of the assets and liabilities from the
participants of a closing underwriting year to the participants of the next underwriting year. To
the extent our participation in the syndicate changes, the RITC amounts vary accordingly. The RITC
transaction, recorded in the fourth quarter, does not result in any gain or loss. We provide
letters of credit and other collateral to Lloyds to support our participation in Syndicate 1221s
stamp capacity as discussed below under the caption Liquidity and Capital Resources.
Whenever a member of Lloyds is unable to pay its debts to policyholders, such debts may be
payable by the Lloyds Central Fund. If Lloyds determines that the Central Fund needs to be
increased, it has the power to assess premium levies on current Lloyds members up to 3% of a
members underwriting capacity in any one year. The Company does not believe that any assessment
is likely in the foreseeable future and has not provided any allowance for such an assessment.
48
The following table sets forth the results of operations of the Lloyds Operations for the
three months ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Gross written premium |
|
$ |
83,276 |
|
|
$ |
95,550 |
|
Net written premium |
|
|
63,570 |
|
|
|
63,412 |
|
|
|
|
|
|
|
|
|
|
Net earned premium |
|
|
44,656 |
|
|
|
43,494 |
|
Net losses and LAE |
|
|
(30,094 |
) |
|
|
(21,064 |
) |
Commission expense |
|
|
(7,480 |
) |
|
|
(8,000 |
) |
Other operating expenses |
|
|
(5,981 |
) |
|
|
(7,608 |
) |
Commission income and other income (expense) |
|
|
(52 |
) |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
|
|
1,049 |
|
|
|
6,836 |
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
2,383 |
|
|
|
2,982 |
|
Net realized capital gains (losses) |
|
|
(3,330 |
) |
|
|
26 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
102 |
|
|
|
9,844 |
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
336 |
|
|
|
3,452 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(234 |
) |
|
$ |
6,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and LAE ratio |
|
|
67.4 |
% |
|
|
48.4 |
% |
Commission expense ratio |
|
|
16.8 |
% |
|
|
18.4 |
% |
Other operating expense ratio (1) |
|
|
13.5 |
% |
|
|
17.5 |
% |
|
|
|
|
|
|
|
Combined ratio |
|
|
97.7 |
% |
|
|
84.3 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes other operating expenses and commission income and other income
(expense). |
Marine and energy premium rate increases occurred in 2005 and continued into 2006 following
Hurricanes Katrina and Rita, particularly in the offshore energy business. Market conditions then
began to soften and the average renewal premium rates in 2007 decreased approximately 1.2% for the
marine and energy lines and decreased approximately 3.4% in the professional liability business.
The average renewal premium rates for 2008 decreased approximately 8.2% for the marine and energy
business and decreased approximately 1.3% for the professional liability business. The average
renewal premium rates for the first quarter of 2009 increased approximately 8.1% for the marine
business, increased approximately 10.3% for the offshore business and increased approximately 1.8%
for the professional liability business.
The 2009 three month earnings in the Lloyds Operations reflect the continued favorable loss
development trends as the loss ratio was favorably impacted by prior period loss reserve
redundancies of $0.6 million or 1.4 loss ratio points.
Generally, while the Lloyds Operations have experienced favorable prior period net
redundancies in calendar years 2008 and 2007, ultimate loss ratios for the more recent underwriting
years of 2008 and 2007 have been increasing due to softening market conditions for the business
written during those periods.
49
The approximate annualized pre-tax yield on the Lloyds Operations investment portfolio,
excluding net realized capital gains and losses, was 2.8% for the 2009 first quarter compared to
3.7% for the comparable 2008 period. The average duration of our Lloyds Operations invested
assets at March 31, 2009 was 1.7 years compared to 1.5 years at March 31, 2008. The decrease in
the Lloyds Operations net investment income is reflective of the lower yields on short term
investments. Such yields are net of interest credits to certain reinsurers for funds withheld by
our Lloyds Operations.
Off-Balance Sheet Transactions
There have been no material changes in the information concerning off-balance sheet
transactions as stated in the Companys 2008 Annual Report on Form 10-K.
Tabular Disclosure of Contractual Obligations
There have been no material changes in the operating lease or capital lease information
concerning contractual obligations as stated in the Companys 2008 Annual Report on Form 10-K.
Total reserves for losses and LAE were $1.88 billion and $1.85 billion at March 31, 2009 and December 31, 2008, respectively. There
were no significant changes in the Companys lines of business or claims handling that would create
a material change in the percentage relationship of the projected payments by period to the total
reserves.
The following table sets forth our contractual obligations with respect to the 7% senior
unsecured notes due May 1, 2016 discussed in the Notes to Interim Consolidated Financial
Statements, included herein:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7% Senior Notes |
|
$ |
175,680 |
|
|
$ |
8,355 |
|
|
$ |
16,100 |
|
|
$ |
16,100 |
|
|
$ |
135,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In early April 2009, the Company repurchased $10.0 million aggregate principal amount of its issued
and outstanding 7% senior notes from an unaffiliated noteholder on the open market, as a result of
which, as of the date of this filing, $115.0 million aggregate principal amount of notes remains
issued and outstanding.
Investments
The objective of the Companys investment policy, guidelines and strategy is to maximize total
investment return in the context of preserving and enhancing stockholder value and the statutory
surplus of the Insurance Companies. Secondarily, an important consideration is to optimize the
after-tax book income.
The investments are managed by outside professional fixed-income and equity portfolio
managers. The Company seeks to achieve its investment objectives by investing in cash equivalents
and money market funds, municipal bonds, U.S. Government bonds, U.S. Government agency guaranteed
and non-guaranteed securities, corporate bonds, mortgage-backed and asset-backed securities and
common and preferred stocks. Our investment guidelines require that the amount of the consolidated
fixed income portfolio rated below A- but no lower than
BBB- by S&P or below A3 but no lower than Baa3 by Moodys shall not exceed 10% of the
total fixed income and short-term investments. Securities rated below BBB- by S&P or below
Baa3 by Moodys combined with any other investments not specifically permitted under the
investment guidelines, can not exceed 5% of consolidated stockholders equity. Investments in
equity securities that are actively traded on major U.S. stock exchanges can not exceed 20% of
consolidated stockholders equity. Our investment guidelines prohibit investments in derivatives
other than as a hedge against foreign currency exposures or the writing of covered call options on
the equity portfolio.
50
The Insurance Companies investments are subject to the oversight of each of their respective
Board of Directors and the Finance Committee of the Parent Companys Board of Directors. The
investment portfolio and the performance of the investment managers are reviewed quarterly. These
investments must comply with the insurance laws of New York State, the domiciliary state of
Navigators Insurance Company and Navigators Specialty Insurance Company. These laws prescribe the
type, quality and concentration of investments which may be made by insurance companies. In
general, these laws permit investments, within specified limits and subject to certain
qualifications, in Federal, state and municipal obligations, corporate bonds, preferred stocks,
common stocks, mortgages and real estate.
The Lloyds Operations investments are subject to the oversight of the Board of Directors and
the Investment Committee of NUAL, as well as the Parent Companys Board of Directors and Finance
Committee. These investments must comply with the rules and regulations imposed by Lloyds and by
certain overseas regulators. The investment portfolio and the performance of the investment
managers are reviewed quarterly.
At March 31, 2009, the average quality of the investment portfolio was rated AA by S&P and
Aa by Moodys. All of the Companys mortgage-backed and asset-backed securities were rated AAA
by S&P and Aaa by Moodys, except for forty securities approximating $30.8 million. There are no
collateralized debt obligations (CDOs), collateralized loan obligations (CLOs), asset
backed commercial paper or credit default swaps in the Companys investment portfolio. At March
31, 2009 and December 31, 2008, all fixed-maturity and equity securities held by us were classified
as available-for-sale.
The approximate annualized pre-tax yields of the investment portfolio, excluding net realized
capital gains and losses, were 3.9% and 4.2% for the 2009 and 2008 first quarter, respectively.
Since the first quarter of 2008, the Companys tax-exempt securities portion of its investment
portfolio has increased by $40.6 million to approximately 35.9% of the fixed maturities investment
portfolio at March 31, 2009 compared to approximately 35.7% at March 31, 2008. As a result, the
effective tax rate on net investment income was 24.9% for the 2009 first quarter compared to 26.4%
for the comparable 2008 period.
Effective January 1, 2008, the Company adopted SFAS 157 which defines fair value, establishes
a consistent framework for measuring fair value and expands disclosure requirements about fair
value measurements. SFAS 157, among other things, requires the Company to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value. A
hierarchy of valuation techniques is specified in SFAS 157 based on whether the inputs to those
valuation techniques are observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect market data obtained from
investment managers or brokers. These two types of inputs have created the following fair value
hierarchy:
|
|
|
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. |
51
All fixed maturities, short-term investments and equity securities are carried at fair value.
All prices for our fixed maturities, short-term investments and equity securities valued as level 1
or level 2 in the SFAS 157 fair value hierarchy are received from independent pricing services
utilized by one of our outside investment managers. The manager utilizes a pricing committee which
approves the use of one or more independent pricing service vendors. The pricing committee
consists of five or more members, one from senior management and one from the accounting group with
the remainder from the asset class specialists and client strategists. The pricing source of each
security is determined in accordance with the pricing source procedures approved by the pricing
committee. The investment manager uses supporting documentation received from the independent
pricing service vendor detailing the inputs, models and processes used in the independent pricing
service vendors evaluation process to determine the appropriate SFAS 157 pricing hierarchy. Any
pricing where the input is based solely on a broker price is deemed to be a Level 3 price.
Monthly, each asset class specialist at the investment manager reviews the pricing blotter
spreadsheet displaying securities priced beyond a certain tolerance level and securities with
negative yields to affirm that the valuations are appropriate or to provide the rationale and
supporting documentation for a change. The pricing committee reviews the pricing blotter at the
pricing committee meeting.
Management has reviewed this process by which the manager determines the prices and has
obtained alternative pricing to validate a sampling of the pricing and assess their reasonableness.
The following table presents, for each of the fair value hierarchy levels, the Companys fixed
maturities, equity securities and short-term investments that are measured at fair value at March
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
In Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
|
($ in thousands) |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities |
|
$ |
261,943 |
|
|
$ |
1,414,727 |
|
|
$ |
156 |
|
|
$ |
1,676,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
37,164 |
|
|
|
14,571 |
|
|
|
|
|
|
|
51,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
investments |
|
|
48,953 |
|
|
|
157,270 |
|
|
|
|
|
|
|
206,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
348,060 |
|
|
$ |
1,586,568 |
|
|
$ |
156 |
|
|
$ |
1,934,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The securities classified as Level 3 in the above table consist of one security rated
investment grade by both S&P and Moodys, with unobservable inputs included in the Companys fixed
maturities portfolio for which price quotes from brokers were used to indicate fair value.
52
The following table presents a reconciliation of the beginning and ending balances for all
investments measured at fair value using Level 3 inputs during the quarter ended March 31, 2009:
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
Level 3 investments as of December 31, 2008 |
|
$ |
156 |
|
Unrealized net gains included in other comprehensive income (loss) |
|
|
23 |
|
Purchases, sales, paydowns and amortization |
|
|
(23 |
) |
Transfer from Level 3 |
|
|
|
|
Transfer to Level 3 |
|
|
|
|
|
|
|
|
Level 3 investments as of March 31, 2009 |
|
$ |
156 |
|
|
|
|
|
The following tables set forth our cash and investments as of March 31, 2009 and December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
OTTI |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Recognized |
|
|
Amortized |
|
March 31, 2009 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
in OCI |
|
|
Cost |
|
|
|
($ in thousands) |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury Bonds,
agency bonds and foreign government bonds |
|
$ |
398,268 |
|
|
$ |
19,757 |
|
|
$ |
(25 |
) |
|
$ |
|
|
|
$ |
378,536 |
|
States, municipalities and political
subdivisions |
|
|
610,021 |
|
|
|
19,116 |
|
|
|
(4,230 |
) |
|
|
|
|
|
|
595,135 |
|
Mortgage- and asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
314,432 |
|
|
|
14,055 |
|
|
|
(1 |
) |
|
|
|
|
|
|
300,378 |
|
Collateralized mortgage obligations |
|
|
43,167 |
|
|
|
|
|
|
|
(7,188 |
) |
|
|
(16,103 |
) |
|
|
66,458 |
|
Asset-backed securities |
|
|
29,826 |
|
|
|
273 |
|
|
|
(785 |
) |
|
|
(68 |
) |
|
|
30,406 |
|
Commercial mortgage-backed securities |
|
|
89,648 |
|
|
|
15 |
|
|
|
(23,511 |
) |
|
|
|
|
|
|
113,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
477,073 |
|
|
|
14,343 |
|
|
|
(31,485 |
) |
|
|
(16,171 |
) |
|
|
510,386 |
|
Corporate bonds |
|
|
191,464 |
|
|
|
2,259 |
|
|
|
(15,917 |
) |
|
|
|
|
|
|
205,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,676,826 |
|
|
|
55,475 |
|
|
|
(51,657 |
) |
|
|
(16,171 |
) |
|
|
1,689,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
51,735 |
|
|
|
609 |
|
|
|
(1,183 |
) |
|
|
|
|
|
|
52,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
16,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
206,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,951,428 |
|
|
$ |
56,084 |
|
|
$ |
(52,840 |
) |
|
$ |
(16,171 |
) |
|
$ |
1,964,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
OTTI |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Recognized |
|
|
Amortized |
|
December 31, 2008 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
in OCI |
|
|
Cost |
|
|
|
($ in thousands) |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury Bonds,
agency bonds and foreign government bonds |
|
$ |
361,656 |
|
|
$ |
25,741 |
|
|
$ |
(145 |
) |
|
$ |
|
|
|
$ |
336,060 |
|
States, municipalities and political
subdivisions |
|
|
614,609 |
|
|
|
12,568 |
|
|
|
(8,036 |
) |
|
|
|
|
|
|
610,077 |
|
Mortgage- and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
299,775 |
|
|
|
10,930 |
|
|
|
(26 |
) |
|
|
|
|
|
|
288,871 |
|
Collateralized mortgage obligations |
|
|
56,743 |
|
|
|
|
|
|
|
(27,119 |
) |
|
|
|
|
|
|
83,862 |
|
Asset-backed securities |
|
|
29,436 |
|
|
|
5 |
|
|
|
(1,289 |
) |
|
|
|
|
|
|
30,720 |
|
Commercial mortgage-backed securities |
|
|
92,684 |
|
|
|
|
|
|
|
(20,350 |
) |
|
|
|
|
|
|
113,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
478,638 |
|
|
|
10,935 |
|
|
|
(48,784 |
) |
|
|
|
|
|
|
516,487 |
|
Corporate bonds |
|
|
188,869 |
|
|
|
1,398 |
|
|
|
(14,660 |
) |
|
|
|
|
|
|
202,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
1,643,772 |
|
|
|
50,642 |
|
|
|
(71,625 |
) |
|
|
|
|
|
|
1,664,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
51,802 |
|
|
|
1,266 |
|
|
|
(1,987 |
) |
|
|
|
|
|
|
52,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
1,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
220,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,917,715 |
|
|
$ |
51,908 |
|
|
$ |
(73,612 |
) |
|
$ |
|
|
|
$ |
1,939,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth our U.S. Treasury and Agency Bonds and foreign government bonds
as of March 31, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
March 31, 2009 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bonds |
|
$ |
310,020 |
|
|
$ |
17,448 |
|
|
$ |
(2 |
) |
|
$ |
292,574 |
|
Agency Bonds |
|
|
77,234 |
|
|
|
2,163 |
|
|
|
(3 |
) |
|
|
75,074 |
|
Foreign Government Bonds |
|
|
11,014 |
|
|
|
146 |
|
|
|
(20 |
) |
|
|
10,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
398,268 |
|
|
$ |
19,757 |
|
|
$ |
(25 |
) |
|
$ |
378,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
December 31, 2008 |
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bonds |
|
$ |
290,059 |
|
|
$ |
23,243 |
|
|
$ |
(143 |
) |
|
$ |
266,959 |
|
Agency Bonds |
|
|
58,401 |
|
|
|
2,008 |
|
|
|
(2 |
) |
|
|
56,395 |
|
Foreign Government Bonds |
|
|
13,196 |
|
|
|
490 |
|
|
|
|
|
|
|
12,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
361,656 |
|
|
$ |
25,741 |
|
|
$ |
(145 |
) |
|
$ |
336,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 FHLMC securities broken out by prime, Alt-A and
subprime collateral. The securities issued by FNMA and FHLMC are the obligations of each
respective entity. Recent 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.
At March 31, 2009, the Company owned two asset-backed securities approximating $0.2 million
with subprime mortgage exposures. The securities have an effective maturity of 1.7 years. In
addition, the Company owned five collateralized mortgage obligations and asset-backed securities
approximating $1.5 million classified as Alt-A. They have an effective maturity of 5.2 years. Such
subprime and Alt-A categories are as defined by S&P. The Company is receiving principal and/or
interest payments on all of these securities and believes such amounts are fully collectible.
55
The following table sets forth the fifteen largest municipal holdings by counterparty as of
March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
S&P |
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
Rating |
|
|
($ in thousands) |
Issuers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth of Massachusetts |
|
$ |
15,572 |
|
|
$ |
829 |
|
|
$ |
(15 |
) |
|
$ |
14,758 |
|
|
AA |
State of Wisconsin |
|
|
9,757 |
|
|
|
232 |
|
|
|
|
|
|
|
9,525 |
|
|
AA- |
State of Louisiana |
|
|
9,593 |
|
|
|
61 |
|
|
|
(20 |
) |
|
|
9,552 |
|
|
A+ |
State of Washington |
|
|
9,355 |
|
|
|
508 |
|
|
|
|
|
|
|
8,847 |
|
|
AA |
State of California |
|
|
9,116 |
|
|
|
68 |
|
|
|
(550 |
) |
|
|
9,598 |
|
|
A |
Commonwealth of Pennsylvania |
|
|
8,361 |
|
|
|
435 |
|
|
|
|
|
|
|
7,926 |
|
|
AA |
State of North Carolina |
|
|
8,131 |
|
|
|
534 |
|
|
|
|
|
|
|
7,597 |
|
|
AAA |
Virginia Resources Authority |
|
|
7,819 |
|
|
|
418 |
|
|
|
|
|
|
|
7,401 |
|
|
AAA |
State of Ohio |
|
|
7,785 |
|
|
|
394 |
|
|
|
|
|
|
|
7,391 |
|
|
AA+ |
Illinois Finance Authority |
|
|
7,642 |
|
|
|
24 |
|
|
|
(304 |
) |
|
|
7,922 |
|
|
BBB+ |
Delaware Transportation Authority |
|
|
6,906 |
|
|
|
553 |
|
|
|
|
|
|
|
6,353 |
|
|
AA- |
Adams County School District |
|
|
6,866 |
|
|
|
|
|
|
|
(72 |
) |
|
|
6,938 |
|
|
BBB+ |
New York Local Government Assistance |
|
|
6,772 |
|
|
|
120 |
|
|
|
|
|
|
|
6,652 |
|
|
AA- |
City of Chicago |
|
|
6,711 |
|
|
|
340 |
|
|
|
|
|
|
|
6,371 |
|
|
A- |
State of Maine |
|
|
6,349 |
|
|
|
522 |
|
|
|
|
|
|
|
5,827 |
|
|
AA- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
$ |
126,735 |
|
|
$ |
5,038 |
|
|
$ |
(961 |
) |
|
$ |
122,658 |
|
|
|
All Other |
|
|
483,286 |
|
|
|
14,078 |
|
|
|
(3,269 |
) |
|
|
472,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
610,021 |
|
|
$ |
19,116 |
|
|
$ |
(4,230 |
) |
|
$ |
595,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the composition of the municipal bonds in our portfolio by
generally equivalent S&P and Moodys ratings (not all of the securities in our portfolio are rated
by both S&P and Moodys) as of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent |
|
Equivalent |
|
|
|
|
|
|
|
|
|
|
|
S&P |
|
Moodys |
|
|
|
|
|
|
|
|
|
Unrealized |
|
Rating |
|
Rating |
|
Fair Value |
|
|
Book Value |
|
|
Gain/(Loss |
|
|
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA/AA/A |
|
Aaa/Aa/A |
|
$ |
572,717 |
|
|
$ |
556,779 |
|
|
$ |
15,938 |
|
BBB |
|
Baa |
|
|
34,008 |
|
|
|
34,901 |
|
|
|
(893 |
) |
BB |
|
Ba |
|
|
1,413 |
|
|
|
1,435 |
|
|
|
(22 |
) |
B |
|
B |
|
|
|
|
|
|
|
|
|
|
|
|
CCC or lower |
|
Caa or lower |
|
|
|
|
|
|
|
|
|
|
|
|
N/A |
|
N/A |
|
|
1,883 |
|
|
|
2,020 |
|
|
|
(137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
610,021 |
|
|
$ |
595,135 |
|
|
$ |
14,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
56
The following tables set forth our mortgage-backed securities, collateralized mortgage
obligations, and asset-backed securities by those issued by GNMA, FNMA, FHLMC, and the quality
category (prime, Alt-A and subprime) for all other such investments at March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
$ |
41,227 |
|
|
$ |
1,424 |
|
|
$ |
|
|
|
$ |
39,803 |
|
FNMA |
|
|
202,042 |
|
|
|
9,235 |
|
|
|
(1 |
) |
|
|
192,808 |
|
FHLMC |
|
|
71,163 |
|
|
|
3,396 |
|
|
|
|
|
|
|
67,767 |
|
Prime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alt-A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subprime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
314,432 |
|
|
$ |
14,055 |
|
|
$ |
(1 |
) |
|
$ |
300,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
FNMA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
|
42,250 |
|
|
|
|
|
|
|
(22,772 |
) |
|
|
65,022 |
|
Alt-A |
|
|
917 |
|
|
|
|
|
|
|
(519 |
) |
|
|
1,436 |
|
Subprime |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
43,167 |
|
|
$ |
|
|
|
$ |
(23,291 |
) |
|
$ |
66,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
The following table sets forth the fifteen largest collateralized mortgage obligations as of
March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue |
|
|
Fair |
|
|
Book |
|
|
Unrealized |
|
|
S&P |
|
Moodys |
Security Description |
|
Date |
|
|
Value |
|
|
Value |
|
|
(Loss) |
|
|
Rating |
|
Rating |
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MLCC Mortgage Investors Inc 06 2 |
|
|
2006 |
|
|
$ |
3,586 |
|
|
$ |
4,415 |
|
|
$ |
(829 |
) |
|
AAA |
|
Aaa |
Wells Fargo Mortgage Backed 06 AR8 |
|
|
2006 |
|
|
|
3,348 |
|
|
|
5,867 |
|
|
|
(2,519 |
) |
|
AAA |
|
NR |
Citigroup Mortgage Loan Trust 06 AR2 |
|
|
2006 |
|
|
|
3,299 |
|
|
|
4,926 |
|
|
|
(1,627 |
) |
|
N/A |
|
A3 |
Merrill Lynch Mortgage Backed 07 2 |
|
|
2007 |
|
|
|
2,773 |
|
|
|
4,591 |
|
|
|
(1,818 |
) |
|
|
|
Aa3 |
GMAC Mortgage Corp Loan Trust 05 AR6 |
|
|
2005 |
|
|
|
2,753 |
|
|
|
4,243 |
|
|
|
(1,490 |
) |
|
AAA |
|
Aaa |
Merrill Lynch Mortgage Investors 05 A9 |
|
|
2005 |
|
|
|
2,669 |
|
|
|
4,170 |
|
|
|
(1,501 |
) |
|
AAA |
|
N/A |
Wells Fargo Mortgage Backed 06 AR5 |
|
|
2006 |
|
|
|
2,098 |
|
|
|
3,439 |
|
|
|
(1,341 |
) |
|
N/A |
|
Baa1 |
Wells Fargo Mortgage Backed 05 AR4 |
|
|
2005 |
|
|
|
1,084 |
|
|
|
1,455 |
|
|
|
(371 |
) |
|
N/A |
|
Aaa |
Bank of America Mortgage 04 F |
|
|
2004 |
|
|
|
976 |
|
|
|
995 |
|
|
|
(19 |
) |
|
AAA |
|
Aaa |
Merrill Lynch Mortgage Investors 05 A9 |
|
|
2005 |
|
|
|
931 |
|
|
|
1,165 |
|
|
|
(234 |
) |
|
AAA |
|
|
Bear Stearns Adjustable Rate 06 1 |
|
|
2006 |
|
|
|
702 |
|
|
|
950 |
|
|
|
(248 |
) |
|
|
|
Aa1 |
Master Adjustable Rate Mortage 05 6 |
|
|
2005 |
|
|
|
699 |
|
|
|
934 |
|
|
|
(235 |
) |
|
AAA |
|
Baa2 |
Bank of America Funding Corp 06 D |
|
|
2006 |
|
|
|
628 |
|
|
|
894 |
|
|
|
(266 |
) |
|
AAA |
|
N/A |
JP Morgan Mortgage Trust 05 A4 |
|
|
2005 |
|
|
|
588 |
|
|
|
773 |
|
|
|
(185 |
) |
|
AAA |
|
Aaa |
Mortgageit Trust 05 1 |
|
|
2005 |
|
|
|
570 |
|
|
|
838 |
|
|
|
(268 |
) |
|
AAA |
|
Aaa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
$ |
26,704 |
|
|
$ |
39,655 |
|
|
$ |
(12,951 |
) |
|
|
|
|
All Other |
|
|
|
|
|
|
16,463 |
|
|
|
26,803 |
|
|
|
(10,340 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
43,167 |
|
|
$ |
66,458 |
|
|
$ |
(23,291 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GNMA |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
FNMA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLMC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
|
29,117 |
|
|
|
273 |
|
|
|
(648 |
) |
|
|
29,492 |
|
Alt-A |
|
|
545 |
|
|
|
|
|
|
|
(136 |
) |
|
|
681 |
|
Subprime |
|
|
164 |
|
|
|
|
|
|
|
(69 |
) |
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
29,826 |
|
|
$ |
273 |
|
|
$ |
(853 |
) |
|
$ |
30,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
Details of the collateral of our asset-backed securities portfolio as of March 31, 2009 are
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Amortized |
|
|
Unrealized |
|
|
|
AAA |
|
|
AA |
|
|
A |
|
|
BBB |
|
|
CCC |
|
|
Fair Value |
|
|
Cost |
|
|
Gain/(Loss) |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Loans |
|
$ |
13,500 |
|
|
$ |
4,731 |
|
|
$ |
906 |
|
|
$ |
2,846 |
|
|
$ |
|
|
|
$ |
21,983 |
|
|
$ |
22,429 |
|
|
$ |
(446 |
) |
Credit Cards |
|
|
548 |
|
|
|
|
|
|
|
|
|
|
|
269 |
|
|
|
|
|
|
|
817 |
|
|
|
825 |
|
|
|
(8 |
) |
Miscellaneous |
|
|
6,320 |
|
|
|
|
|
|
|
545 |
|
|
|
|
|
|
|
161 |
|
|
|
7,026 |
|
|
|
7,152 |
|
|
|
(126 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
20,368 |
|
|
$ |
4,731 |
|
|
$ |
1,451 |
|
|
$ |
3,115 |
|
|
$ |
161 |
|
|
$ |
29,826 |
|
|
$ |
30,406 |
|
|
$ |
(580 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The commercial mortgage-backed securities are all rated investment grade. The
following table sets forth the fifteen largest commercial mortgage backed securities portfolio as
of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue |
|
|
Fair |
|
|
Book |
|
|
Unrealized |
|
|
Underlying |
|
|
Delinq. |
|
|
Subord. |
|
|
S&P |
|
|
Moodys |
|
Security Description |
|
Date |
|
|
Value |
|
|
Value |
|
|
Loss |
|
|
LTV% |
|
|
Rate |
|
|
Level |
|
|
Rating |
|
|
Rating |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wachovia Bank Commercial Mortgage 05 C18 |
|
|
2005 |
|
|
$ |
5,454 |
|
|
$ |
6,844 |
|
|
$ |
(1,390 |
) |
|
|
72.1 |
% |
|
|
0.8 |
% |
|
|
31.2 |
% |
|
AAA |
|
Aaa |
GS Mortgage Securities Corp II 05 GG4 |
|
|
2005 |
|
|
|
4,956 |
|
|
|
6,597 |
|
|
|
(1,641 |
) |
|
|
72.0 |
% |
|
|
0.2 |
% |
|
|
30.6 |
% |
|
AAA |
|
Aaa |
LB-UBS Mortgage Commercial Mortgage
Trust 06 C6 |
|
|
2006 |
|
|
|
4,858 |
|
|
|
6,789 |
|
|
|
(1,931 |
) |
|
|
63.6 |
% |
|
|
0.9 |
% |
|
|
30.2 |
% |
|
AAA |
|
Aaa |
Four Times Square Trust 06 4TS |
|
|
2006 |
|
|
|
4,756 |
|
|
|
7,030 |
|
|
|
(2,274 |
) |
|
|
39.4 |
% |
|
|
0.0 |
% |
|
|
7.9 |
% |
|
AA+ |
|
Aa1 |
Citigroup/Deutsche Bank Comm 05 CD1 |
|
|
2005 |
|
|
|
4,700 |
|
|
|
5,873 |
|
|
|
(1,173 |
) |
|
|
68.4 |
% |
|
|
0.9 |
% |
|
|
30.6 |
% |
|
AAA |
|
Aaa |
LB-UBS Mortgage Commercial Mortgage
Trust 06 C7 |
|
|
2006 |
|
|
|
4,499 |
|
|
|
6,333 |
|
|
|
(1,834 |
) |
|
|
63.8 |
% |
|
|
1.2 |
% |
|
|
30.1 |
% |
|
AAA |
|
N/A |
Bear Stearns Commercial Mortgage 06 T22 |
|
|
2006 |
|
|
|
4,223 |
|
|
|
4,883 |
|
|
|
(660 |
) |
|
|
57.4 |
% |
|
|
0.0 |
% |
|
|
27.9 |
% |
|
N/A |
|
Aaa |
Bear Stearns Commercial Mortgage 07 PW15 |
|
|
2007 |
|
|
|
3,728 |
|
|
|
5,137 |
|
|
|
(1,409 |
) |
|
|
67.6 |
% |
|
|
0.1 |
% |
|
|
30.2 |
% |
|
AAA |
|
Aaa |
Banc of America Commercial Mortgage 07 1 |
|
|
2007 |
|
|
|
3,496 |
|
|
|
4,783 |
|
|
|
(1,287 |
) |
|
|
70.1 |
% |
|
|
1.0 |
% |
|
|
30.4 |
% |
|
N/A |
|
Aaa |
Morgan Stanley Capital I 07 HQ11 |
|
|
2007 |
|
|
|
3,327 |
|
|
|
4,791 |
|
|
|
(1,464 |
) |
|
|
69.6 |
% |
|
|
1.4 |
% |
|
|
30.1 |
% |
|
AAA |
|
Aaa |
Commercial Mortgage Pass Throu 05 C6 |
|
|
2005 |
|
|
|
3,129 |
|
|
|
4,054 |
|
|
|
(925 |
) |
|
|
71.3 |
% |
|
|
4.0 |
% |
|
|
30.3 |
% |
|
AAA |
|
Aaa |
Merrill Lynch Mortgage Trust 05 CIP1 |
|
|
2005 |
|
|
|
3,099 |
|
|
|
4,034 |
|
|
|
(935 |
) |
|
|
68.8 |
% |
|
|
1.0 |
% |
|
|
30.8 |
% |
|
N/A |
|
Aaa |
Morgan Stanley Capital I 04 T13 |
|
|
2004 |
|
|
|
2,655 |
|
|
|
3,324 |
|
|
|
(669 |
) |
|
|
58.8 |
% |
|
|
0.0 |
% |
|
|
15.2 |
% |
|
N/A |
|
Aaa |
Citigroup Cmmercial Mortgage 06 C5 |
|
|
2006 |
|
|
|
2,423 |
|
|
|
3,513 |
|
|
|
(1,090 |
) |
|
|
68.6 |
% |
|
|
1.6 |
% |
|
|
30.2 |
% |
|
N/A |
|
Aaa |
GE Capital Commercial Mortgage 02 1A |
|
|
2002 |
|
|
|
2,417 |
|
|
|
2,504 |
|
|
|
(87 |
) |
|
|
72.1 |
% |
|
|
1.5 |
% |
|
|
24.1 |
% |
|
N/A |
|
Aaa |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
$ |
57,720 |
|
|
$ |
76,489 |
|
|
$ |
(18,769 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other |
|
|
|
|
|
|
31,928 |
|
|
|
36,655 |
|
|
|
(4,727 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
89,648 |
|
|
$ |
113,144 |
|
|
$ |
(23,496 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
The following table shows the amount and percentage of the Companys fixed maturities and
short-term investments at fair value at March 31, 2009 by S&P credit rating or, if an S&P rating is
not available, the equivalent Moodys rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
Rating |
|
|
|
|
|
|
|
to |
|
Description |
|
Rating |
|
Amount |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Extremely Strong |
|
AAA |
|
$ |
1,179,106 |
|
|
|
63 |
% |
Very Strong |
|
AA |
|
|
360,571 |
|
|
|
19 |
% |
Strong |
|
A |
|
|
236,168 |
|
|
|
13 |
% |
Adequate |
|
BBB |
|
|
100,120 |
|
|
|
5 |
% |
Speculative |
|
BB & below |
|
|
5,201 |
|
|
|
0 |
% |
Not Rated |
|
NR |
|
|
1,883 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
1,883,049 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
The Company owns securities credit enhanced by financial guarantors. The following tables set
forth the amount of credit enhanced securities in the fixed maturities portfolio by category at
March 31, 2009, identify the amount insured by each financial guarantor and identify the average
underlying credit rating of such credit enhanced securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Credit enhanced securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and political
subdivisions |
|
$ |
319,932 |
|
|
$ |
8,953 |
|
|
$ |
(2,485 |
) |
|
$ |
313,464 |
|
Mortgage- and asset-backed securities |
|
|
8,484 |
|
|
|
4 |
|
|
|
(366 |
) |
|
|
8,846 |
|
Corporate bonds |
|
|
1,556 |
|
|
|
|
|
|
|
(57 |
) |
|
|
1,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
329,972 |
|
|
$ |
8,957 |
|
|
$ |
(2,908 |
) |
|
$ |
323,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
Underlying |
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
Credit |
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
Rating |
|
|
($ in thousands) |
Financial guarantors: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMBAC |
|
$ |
66,286 |
|
|
$ |
1,623 |
|
|
$ |
(672 |
) |
|
$ |
65,335 |
|
|
A+ |
Assured Guaranty LTD |
|
|
3,821 |
|
|
|
2 |
|
|
|
(93 |
) |
|
|
3,912 |
|
|
A |
FGIC |
|
|
51,893 |
|
|
|
1,326 |
|
|
|
(495 |
) |
|
|
51,062 |
|
|
AA- |
Financial Security Assurance |
|
|
91,036 |
|
|
|
3,163 |
|
|
|
(383 |
) |
|
|
88,256 |
|
|
AA- |
MBIA |
|
|
104,560 |
|
|
|
2,621 |
|
|
|
(732 |
) |
|
|
102,671 |
|
|
AA- |
Radian
Group, Inc. |
|
|
5,170 |
|
|
|
55 |
|
|
|
(400 |
) |
|
|
5,515 |
|
|
A |
XL Capital |
|
|
7,206 |
|
|
|
167 |
|
|
|
(133 |
) |
|
|
7,172 |
|
|
A+ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
329,972 |
|
|
$ |
8,957 |
|
|
$ |
(2,908 |
) |
|
$ |
323,923 |
|
|
AA- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
The average underlying credit rating of the insured securities in the above table rated by S&P
or Moodys if such securities did not have the credit enhancing insurance is included in the
Underlying Credit Rating column. This average rating includes $11.5 million of prerefunded
municipal bonds which have an implied rating of AAA but are not otherwise rated by S&P or
Moodys. Such average ratings exclude a total of 30 credit enhanced securities approximating $21.5
million that do not have an underlying rating consisting of 17 municipal bonds approximating $11.8
million, 11 asset-backed securities approximating $8.5 million and 2 corporate bonds approximating
$1.3 million.
If all or some of the companies providing the credit enhancing insurance were no longer viable
entities, management believes that the securities are of sufficient quality to not default, or if
some of the securities did default, they would not have a material adverse effect on the Companys
financial condition or results of operations. However, since the ratings would be reduced, it is
likely that the fair values would decrease to reflect such lower ratings.
61
The following table sets forth the fair value of the Companys fifteen largest corporate bonds
and their individual rating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
S&P |
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
Rating |
|
|
($ in thousands) |
Issuers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America Corp. |
|
$ |
6,774 |
|
|
$ |
|
|
|
$ |
(1,269 |
) |
|
$ |
8,043 |
|
|
A- |
Citigroup,
Inc. |
|
|
6,292 |
|
|
|
|
|
|
|
(1,081 |
) |
|
|
7,373 |
|
|
BBB+ |
Wells Fargo
& Co. |
|
|
5,195 |
|
|
|
|
|
|
|
(385 |
) |
|
|
5,580 |
|
|
A+ |
Morgan Stanley |
|
|
4,679 |
|
|
|
|
|
|
|
(270 |
) |
|
|
4,949 |
|
|
A- |
Goldman Sachs Group |
|
|
4,638 |
|
|
|
|
|
|
|
(782 |
) |
|
|
5,420 |
|
|
A- |
General Electric |
|
|
4,459 |
|
|
|
|
|
|
|
(371 |
) |
|
|
4,830 |
|
|
AA |
Pfizer Inc. |
|
|
3,387 |
|
|
|
191 |
|
|
|
|
|
|
|
3,196 |
|
|
AA |
Eli Lilly
& Co. |
|
|
3,343 |
|
|
|
95 |
|
|
|
|
|
|
|
3,248 |
|
|
A+ |
Pepsi
Bottling Group Inc. |
|
|
3,268 |
|
|
|
155 |
|
|
|
|
|
|
|
3,113 |
|
|
A |
Bank of New York |
|
|
3,248 |
|
|
|
70 |
|
|
|
(19 |
) |
|
|
3,197 |
|
|
A+ |
AT&T,
Inc. |
|
|
2,932 |
|
|
|
22 |
|
|
|
(172 |
) |
|
|
3,082 |
|
|
A |
Cargill, Inc. |
|
|
2,778 |
|
|
|
|
|
|
|
(46 |
) |
|
|
2,824 |
|
|
A |
Verizon
Communications Inc. |
|
|
2,721 |
|
|
|
28 |
|
|
|
|
|
|
|
2,693 |
|
|
BBB |
Conoco Phillips |
|
|
2,645 |
|
|
|
113 |
|
|
|
|
|
|
|
2,532 |
|
|
A |
Progress
Energy, Inc. |
|
|
2,529 |
|
|
|
25 |
|
|
|
|
|
|
|
2,504 |
|
|
BBB |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
$ |
58,888 |
|
|
$ |
699 |
|
|
$ |
(4,395 |
) |
|
$ |
62,584 |
|
|
|
All Other |
|
|
132,576 |
|
|
|
1,560 |
|
|
|
(11,522 |
) |
|
|
142,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
191,464 |
|
|
$ |
2,259 |
|
|
$ |
(15,917 |
) |
|
$ |
205,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities are impaired when the fair value is less than 80% of the cost for at least
six months and in other cases where more severe declines occur for less than six months.
With respect to fixed maturity securities, we focus our attention on those securities whose
market value was less than 80% of their cost or amortized cost, as appropriate, for six or more
consecutive months. If warranted as the result of conditions relating to a particular security, we
will focus on a significant decline in market 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 or amortized cost of the security, as appropriate, the length of
time the investment has been below cost or amortized cost and by how much, our intent not to sell
and more likely than not that we will not be required to sell before the anticipated recovery of
its remaining amortized cost basis, specific credit issues related to the issuer and current
economic conditions. Other-than-temporary impairment losses result in a permanent reduction of the
cost basis of the underlying investment. Significant changes in the factors we consider when
evaluating investments for impairment losses could result in a significant change in impairment
losses reported in the consolidated financial statements.
As mentioned above, the Company considers its intent not to sell and it is more likely than
not that we will not be required to sell 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, market conditions and assessing value relative to other
comparable securities. Management of the Companys investment portfolio is outsourced to third
party investment managers. While these investment managers may, at a given point in time, believe
that the preferred course of action is to hold
securities with unrealized losses that are considered temporary until such losses are
recovered, the dynamic nature of the portfolio management may result in a subsequent decision to
sell the security and realize the loss, based upon a change in market and other factors described
above.
62
The following table sets forth the fifteen largest equity securities holdings as of March 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Cost or |
|
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
|
Amortized |
|
|
|
Value |
|
|
Gains |
|
|
(Losses) |
|
|
Cost |
|
|
|
($ in thousands) |
|
Issuers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vanguard Total Stock Market Index |
|
$ |
3,228 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,228 |
|
Vanguard Pacific Stock Index |
|
|
2,818 |
|
|
|
|
|
|
|
|
|
|
|
2,818 |
|
Vanguard European Stock Index |
|
|
2,446 |
|
|
|
|
|
|
|
|
|
|
|
2,446 |
|
Vanguard Emerging Market Stock Inde |
|
|
2,388 |
|
|
|
8 |
|
|
|
|
|
|
|
2,380 |
|
Chevron Corp |
|
|
1,822 |
|
|
|
176 |
|
|
|
|
|
|
|
1,646 |
|
Johnson & Johnson |
|
|
1,683 |
|
|
|
|
|
|
|
(201 |
) |
|
|
1,884 |
|
Barclays PLC |
|
|
1,647 |
|
|
|
|
|
|
|
|
|
|
|
1,647 |
|
State Street Corp. |
|
|
1,311 |
|
|
|
46 |
|
|
|
|
|
|
|
1,265 |
|
Bristol-Myers Squibb Co. |
|
|
1,238 |
|
|
|
89 |
|
|
|
|
|
|
|
1,149 |
|
Altria Group |
|
|
1,190 |
|
|
|
46 |
|
|
|
|
|
|
|
1,144 |
|
BP PLC |
|
|
1,135 |
|
|
|
|
|
|
|
|
|
|
|
1,135 |
|
Nolia OYJ |
|
|
1,126 |
|
|
|
|
|
|
|
|
|
|
|
1,126 |
|
ConocoPhillips |
|
|
1,104 |
|
|
|
|
|
|
|
|
|
|
|
1,104 |
|
FPL Group
Inc. |
|
|
1,103 |
|
|
|
127 |
|
|
|
|
|
|
|
976 |
|
AT&T
Inc. |
|
|
1,093 |
|
|
|
13 |
|
|
|
|
|
|
|
1,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
$ |
25,332 |
|
|
$ |
505 |
|
|
$ |
(201 |
) |
|
$ |
25,028 |
|
All Other |
|
|
26,403 |
|
|
|
104 |
|
|
|
(982 |
) |
|
|
27,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
51,735 |
|
|
$ |
609 |
|
|
$ |
(1,183 |
) |
|
$ |
52,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
The following table summarizes all securities in an unrealized loss position at March 31, 2009
and December 31, 2008, showing the aggregate fair value and gross unrealized loss by the length of
time those securities have continuously been in an unrealized loss position. The information below
indicates the potential effect on future income in the event management later concludes that such declines are
considered other-than- temporary.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Fair |
|
|
Gross |
|
|
Fair |
|
|
Gross |
|
|
|
Value |
|
|
Unrealized Loss |
|
|
Value |
|
|
Unrealized Loss |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Treasury and Agency
Bonds and foreign government bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
$ |
4,145 |
|
|
$ |
25 |
|
|
$ |
3,862 |
|
|
$ |
145 |
|
7-12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
4,145 |
|
|
|
25 |
|
|
|
3,862 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
47,983 |
|
|
|
704 |
|
|
|
68,727 |
|
|
|
2,187 |
|
7-12 Months |
|
|
39,666 |
|
|
|
1,282 |
|
|
|
118,910 |
|
|
|
4,376 |
|
> 12 Months |
|
|
42,095 |
|
|
|
2,244 |
|
|
|
15,918 |
|
|
|
1,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
129,744 |
|
|
|
4,230 |
|
|
|
203,555 |
|
|
|
8,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage- and asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
4,623 |
|
|
|
40 |
|
|
|
30,670 |
|
|
|
939 |
|
7-12 Months |
|
|
37,388 |
|
|
|
4,364 |
|
|
|
80,618 |
|
|
|
26,966 |
|
> 12 Months |
|
|
107,162 |
|
|
|
43,252 |
|
|
|
66,218 |
|
|
|
20,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
149,173 |
|
|
|
47,656 |
|
|
|
177,506 |
|
|
|
48,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
|
22,335 |
|
|
|
1,733 |
|
|
|
57,805 |
|
|
|
2,445 |
|
7-12 Months |
|
|
51,700 |
|
|
|
4,569 |
|
|
|
57,971 |
|
|
|
5,893 |
|
> 12 Months |
|
|
37,345 |
|
|
|
9,615 |
|
|
|
27,873 |
|
|
|
6,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
111,380 |
|
|
|
15,917 |
|
|
|
143,649 |
|
|
|
14,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities |
|
$ |
394,442 |
|
|
$ |
67,828 |
|
|
$ |
528,572 |
|
|
$ |
71,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities common stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 Months |
|
$ |
6,934 |
|
|
$ |
1,175 |
|
|
$ |
8,991 |
|
|
$ |
1,941 |
|
7-12 Months |
|
|
173 |
|
|
|
8 |
|
|
|
351 |
|
|
|
46 |
|
> 12 Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity Securities |
|
$ |
7,107 |
|
|
$ |
1,183 |
|
|
$ |
9,342 |
|
|
$ |
1,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009, the largest single unrealized loss by issuer in the fixed maturities was
$2.5 million and the largest single unrealized loss by issuer in the equity securities was $0.3
million.
64
The following table summarizes the gross unrealized investment losses by length of time where
the fair value is less than 80% of amortized cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 months |
|
|
|
|
|
|
|
|
|
|
|
|
|
Longer than 3 |
|
|
or longer, less |
|
|
|
|
|
|
|
|
|
Less than 3 |
|
|
months, less |
|
|
than 12 |
|
|
12 months |
|
|
|
|
|
|
months |
|
|
than 6 months |
|
|
months |
|
|
or longer |
|
|
Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities |
|
$ |
(282 |
) |
|
$ |
(712 |
) |
|
$ |
(4,008 |
) |
|
$ |
(47,636 |
) |
|
$ |
(52,638 |
) |
Equity Securities |
|
|
(622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(904 |
) |
|
$ |
(712 |
) |
|
$ |
(4,008 |
) |
|
$ |
(47,636 |
) |
|
$ |
(53,260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above includes fixed maturity securities with unrealized
losses of $51.6 million where the fair value has been less than 80%
of book value for at least six months. The fair value of these
securities as of March 31, 2009 was $117.1 million. These losses
consist mainly of non-agency mortgage backed securities, commerical
mortgage backed securities and corporate bonds that have not been
deemed to be other-than-temporary based on our evaluation of
projected cash flows, credit enhancements, cumulative delinquencies
and losses, rating agency assessments and other factors. Management
believes these securities are trading at depressed levels due to
illiquidity in the marketplace and other market based factors rather
than the specific credit issues.
We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The
above unrealized losses have been determined to be temporary and resulted from changes in market
conditions.
When a security in our investment portfolio has an unrealized loss that is deemed to be
other-than-temporary, we write the security down to fair value through a charge to operations.
Significant changes in the factors we consider when evaluating investments for impairment losses
could result in a significant change in impairment losses reported in the consolidated financial
statements.
During the 2009 first quarter, the Company identified 54 common stocks with a fair value of
$35.8 million which were considered to be other-than-temporarily impaired. Consequently, the cost
of such securities was written down to fair value and the Company recognized realized losses of
$8.3 million. During the 2009 first quarter, the Company identified two corporate bonds with a
fair value of $0.8 million which were considered to be other-than-temporarily impaired.
Consequently, the cost of such securities was written down to fair value and the Company recognized
realized losses of $0.6 million. The Company elected to take early adoption of the new FASB
proposal, which considers relevant factors in determining the impairment of a structured security.
When assessing whether the amortized cost basis of the security will be recovered, the Company
compared the present value of cash flows expected to be collected. Any shortfalls of the present
value of the cash flows expected to be collected in relation to the amortized cost basis is
considered a credit loss. The Company recognized a credit loss of $1.8 million for 36 structured
securities which was recognized in earnings. The Company does not intend to sell any of these
structured securities and it is more likely than not that we will not be required to sell these
securities before recovery of its amortized cost basis.
The following table sets forth the summary of the credit losses recognized on our available
for sale debt securities at March 31, 2009:
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
Beginning Balance at January 1, 2009 |
|
$ |
|
|
Credit Losses on Securities not previously impaired |
|
|
1,797 |
|
|
|
|
|
Ending balance at March 31,2009 |
|
$ |
1,797 |
|
|
|
|
|
65
The following table shows the composition by National Association of Insurance Commissioners
(NAIC) rating and the generally equivalent S&P and Moodys ratings of the fixed maturity
securities in our portfolio with gross unrealized losses at March 31, 2009. Not all of the
securities are rated by S&P and/or Moodys.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Equivalent |
|
Equivalent |
|
Unrealized Loss |
|
|
Fair Value |
|
NAIC |
|
S&P |
|
Moodys |
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
Rating |
|
Rating |
|
Rating |
|
Amount |
|
|
to Total |
|
|
Amount |
|
|
to Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
AAA/AA/A |
|
Aaa/Aa/A |
|
$ |
53,610 |
|
|
|
80 |
% |
|
$ |
310,743 |
|
|
|
80 |
% |
2 |
|
BBB |
|
Baa |
|
|
12,341 |
|
|
|
18 |
% |
|
|
76,615 |
|
|
|
19 |
% |
3 |
|
BB |
|
Ba |
|
|
1,246 |
|
|
|
2 |
% |
|
|
4,332 |
|
|
|
1 |
% |
4 |
|
B |
|
B |
|
|
426 |
|
|
|
|
|
|
|
708 |
|
|
|
|
|
5 |
|
CCC or lower |
|
Caa or lower |
|
|
68 |
|
|
|
|
|
|
|
161 |
|
|
|
|
|
6 |
|
N/A |
|
N/A |
|
|
137 |
|
|
|
|
|
|
|
1,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
67,828 |
|
|
|
100 |
% |
|
$ |
394,442 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2009, the gross unrealized losses in the table directly above are related to
fixed maturity securities that are rated investment grade, which is defined as a security having an
NAIC rating of 1 or 2, an S&P rating of BBB or higher, or a Moodys rating of Baa3 or
higher, except for $1.7 million which is rated below investment grade. Unrealized losses on
investment grade securities principally relate to changes in interest rates or changes in
sector-related credit spreads since the securities were acquired. Any such unrealized losses are
recognized in income, if the securities are sold, or if the decline in fair value is deemed
other-than-temporary.
The contractual maturity by the number of years until maturity for fixed maturity securities
with unrealized losses at March 31, 2009 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized Loss |
|
|
Fair Value |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
Amount |
|
|
to Total |
|
|
Amount |
|
|
to Total |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
83 |
|
|
|
0 |
% |
|
$ |
5,367 |
|
|
|
1 |
% |
Due after one year through five years |
|
|
5,902 |
|
|
|
9 |
% |
|
|
82,747 |
|
|
|
21 |
% |
Due after five years through ten years |
|
|
7,726 |
|
|
|
11 |
% |
|
|
68,939 |
|
|
|
17 |
% |
Due after ten years |
|
|
6,461 |
|
|
|
10 |
% |
|
|
88,216 |
|
|
|
22 |
% |
Mortgage- and asset-backed securities |
|
|
47,656 |
|
|
|
70 |
% |
|
|
149,173 |
|
|
|
39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities |
|
$ |
67,828 |
|
|
|
100 |
% |
|
$ |
394,442 |
|
|
|
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 2.8 years.
66
Our realized capital gains and losses for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
($ in thousands) |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
Gains |
|
$ |
2,932 |
|
|
$ |
197 |
|
(Losses) |
|
|
(3,302 |
) |
|
|
(9 |
) |
(Impairments) |
|
|
(2,361 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,731 |
) |
|
|
188 |
|
|
|
|
|
|
|
|
Equity securities: |
|
|
|
|
|
|
|
|
Gains |
|
|
13 |
|
|
|
263 |
|
(Losses) |
|
|
(1,180 |
) |
|
|
(527 |
) |
(Impairments) |
|
|
(8,339 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,506 |
) |
|
|
(264 |
) |
|
|
|
|
|
|
|
Net realized capital gains (losses) |
|
$ |
(12,237 |
) |
|
$ |
(76 |
) |
|
|
|
|
|
|
|
The total impairment losses recorded in the 2009 first quarter period were $10.7 million.
Reinsurance Recoverables
We utilize reinsurance principally to reduce our exposure on individual risks, to protect
against catastrophic losses, and to stabilize loss ratios and underwriting results. Although
reinsurance makes the reinsurer 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. 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. We are required to pay the losses even if the reinsurer fails to meet its
obligations under the reinsurance agreement.
We are protected by various treaty and facultative reinsurance agreements. Our exposure to
credit risk from any one reinsurer is managed through diversification by reinsuring with a number
of different reinsurers, principally in the U.S. and European reinsurance markets. To meet our
standards of acceptability, when the reinsurance is placed, a reinsurer generally must have an A.M.
Best Company and/or S&P rating of A or better, or equivalent financial strength if not rated,
plus at least $250 million in policyholders surplus. Our Reinsurance Security Committee, which is
part of our Enterprise Risk Management Reinsurance Sub-Committee, monitors the financial strength
of our reinsurers and the related reinsurance receivables and periodically reviews the list of
acceptable reinsurers. The reinsurance is placed either directly by us or through reinsurance
intermediaries. The reinsurance intermediaries are compensated by the reinsurers.
Approximately $95.8 million and $96.8 million of paid and unpaid losses at March 31, 2009 and
December 31, 2008, respectively, were due from reinsurers as a result of the losses from Hurricanes
Gustav and Ike. Approximately $94.5 million and $101.7 million of paid and unpaid losses at March
31, 2009 and December 31, 2008, respectively, were due from reinsurers as a result of the losses
from Hurricanes Katrina and Rita.
The Company continues to periodically monitor the financial condition and ongoing activities
of its reinsurers, in order to assess the adequacy of its allowance for uncollectible reinsurance.
67
Liquidity and Capital Resources
Cash flows from operations were $42.9 million and $59.7 million for the three months ended
March 31, 2009 and 2008, respectively. The positive operating cash flow was primarily due to the
increase in net written premium, collected investment income, decrease in reinsurance recoverable
on paid losses and fewer paid losses relating to Hurricanes Katrina and Rita. Operating cash flow
was used primarily to acquire additional investment assets.
Investments and cash increased $33.7 million to $1.95 billion at March 31, 2009 from December
31, 2008. The increase was due to the positive cash flow from operations, partially offset by
declines in market value.
Net investment income was $18.7 million and $18.8 million for the three months ended March 31,
2009 and 2008, respectively. The decline results from lower yields on our short-term balances.
At March 31, 2009, 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 $7.1 million,
consists of investment grade bonds. At March 31, 2009, our portfolio had an average maturity of
5.6 years and duration of 4.3 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 March 31, 2009 and December 31, 2008, all fixed
maturity securities and equity securities held by us were classified as available-for-sale.
The Company has a credit facility provided through a consortium of banks. Through March 31,
2009, the credit facility made available to the Company letters of credit up to $180 million and a
line of credit of $20 million. At March 31, 2009, letters of credit with an aggregate face amount
of $91.2 million were issued under the credit facility. The line of credit was unused at March
31, 2009. This credit facility expired on March 31, 2009.
On April 3, 2009, the Company entered into a $75 million credit facility agreement entitled
Fourth Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative
Agent, and a syndicate of lenders. As amended, the credit facility is a letter of credit facility
and replaces the $200 million credit facility that expired by its terms on March 31, 2009. The
credit facility will continue to be used primarily to support the Companys capacity at its Lloyds
of London operations. As a result of this amendment, the cost of the letter of credit portion of
the credit facility increased to 2.00% from 0.75% for the issued letters of credit and to 0.375%
from 0.10% for the unutilized portion of the letter of credit facility. The credit facility
expires on April 2, 2010.
Each of the above mentioned credit facilities contain or contained 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. Each of the credit facilities also
provides or provided for customary events of defaults, 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 Company is or
was in compliance with all the covenants of the applicable credit facility at the date of this
filing and at March 31, 2009, respectively.
The credit facility is collateralized by all of the common stock of Navigators Insurance
Company. The credit facility, which is denominated in U.S. dollars, is utilized primarily by
Navigators Corporate Underwriters
Ltd. and Millenium Underwriting Ltd. to fund our participation in Syndicate 1221, which is
denominated in British pounds.
68
Our reinsurance has been placed with various U.S. and foreign insurance companies and with
selected syndicates at Lloyds. Pursuant to the implementation of Lloyds Plan of Reconstruction
and Renewal, a portion of our recoverables are now reinsured by Equitas (a separate U.K. authorized
reinsurance company established to reinsure outstanding liabilities of all Lloyds members for all
risks written in the 1992 or prior years of account).
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 at March 31, 2009 are
anticipated to be billed and collected over the next several years as the gross loss reserves are
paid by the Company.
Generally, for pro rata or quota share reinsurers, including pool participants, the Company
issues quarterly settlement statements for premiums less commissions and paid loss activity, which
are expected to be settled by the end of the subsequent quarter. The Company has 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 are usually paid within 45 calendar days.
Generally, for excess of loss reinsurers the Company pays 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.
The Company sometimes withholds funds from reinsurers and may apply ceded loss billings
against such funds in accordance with the applicable reinsurance agreements.
March 31, 2009, ceded asbestos paid and unpaid recoverables were $8.2 million compared to $8.9
million at December 31, 2008. Of such amounts at March 31, 2009, $4.5 million was due from
Equitas. The Company generally experiences significant collection delays for a large portion of
reinsurance recoverable amounts for asbestos losses given that certain reinsurers are in run-off or
otherwise no longer active in the reinsurance business. Such circumstances are considered in the
Companys ongoing assessment of such reinsurance recoverables.
The Company believes that it has adequately managed its 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 the Company 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 Hurricanes
Gustav, Ike, Katrina and Rita could significantly impact the Companys liquidity needs. However,
we expect to continue to pay these hurricane losses over a period of years from cash flow and, if
needed, short-term investments. We expect to collect our paid reinsurance recoverables generally
under the terms described above.
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.
69
Our capital resources consist of funds deployed or available to be deployed to support our
business operations. At March 31, 2009 and December 31, 2008, our capital resources were as
follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Senior debt |
|
$ |
123,825 |
|
|
$ |
123,794 |
|
Stockholders equity |
|
|
712,454 |
|
|
|
689,317 |
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
836,279 |
|
|
$ |
813,111 |
|
|
|
|
|
|
|
|
Ratio of debt to total capitalization |
|
|
14.8 |
% |
|
|
15.2 |
% |
|
|
|
|
|
|
|
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.
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 our 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.
In October 2007, the Parent Companys Board of Directors adopted a stock repurchase program
for up to $30 million of the Parent Companys common stock and during 2008, the Parent Company
purchased 224,754 shares of its common stock in the open market at an average cost of $51.34 per
share for a total of $11.5 million. This program expired at December 31, 2008.
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 of $4.4 million. Going forward, the
semi-annual interest payment will be $4.0 million when adjusting for the recent debt repurchase of
$10.0 million in April 2009, the interest payments and any stock 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, 2008 surplus of Navigators Insurance Company, the approximate remaining maximum
amount available at March 31, 2009 for the payment of dividends by Navigators Insurance Company
during 2008 without prior regulatory approval was $48.1 million. Navigators Insurance Company
declared and paid a $10.0 million dividend to the Parent Company in the first quarter of 2009.
70
Condensed Parent Company balance sheets as of March 31, 2009 (unaudited) and December 31, 2008
are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
Cash and investments |
|
$ |
80,257 |
|
|
$ |
52,149 |
|
Investments in subsidiaries |
|
|
762,898 |
|
|
|
751,864 |
|
Goodwill and other intangible assets |
|
|
2,534 |
|
|
|
2,534 |
|
Other assets |
|
|
(5,269 |
) |
|
|
8,769 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
840,420 |
|
|
$ |
815,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other liabilities |
|
$ |
495 |
|
|
$ |
747 |
|
Accrued interest payable |
|
|
3,646 |
|
|
|
1,458 |
|
7% Senior Notes due May 1, 2016 |
|
|
123,825 |
|
|
|
123,794 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
127,966 |
|
|
|
125,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
712,454 |
|
|
|
689,317 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
840,420 |
| |
$ |
815,316 |
|
|
|
|
|
|
|
|
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the information concerning market risk as stated in the
Companys 2008 Annual Report on Form 10-K.
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. |
Part II Other Information
Item 1. Legal Proceedings
The Company is working with various state insurance regulators on a matter involving policy
fees charged by a program administrator on certain personal umbrella insurance policies
underwritten by Navigators Insurance Company that were outside of Navigators Insurance Companys
filed rates. Following discovery of the issue, Navigators Insurance Company approached regulators
in the affected states to resolve these matters, and is currently making refunds to policyholders
for policy fees collected from the time of discovery of the issue that did not comply with
Navigators Insurance Companys filed rates. In addition, Navigators Insurance Company has
terminated its relationship with the program administrator effective August 1, 2009 and has ensured
that fees will not be collected on any policies going forward unless such fees are permitted by
each state in which they are charged. Navigators Insurance Company may be subject to fines,
additional refund obligations and other exposure with respect to the past fees charged. The
Company cannot at this time reasonably estimate the cost of resolving this matter. However, we do
not expect that it will have a material adverse effect on the Companys financial condition or
results of operations.
71
The Company is not a party to, or the subject of, any other material pending legal proceedings
that depart from the routine litigation incidental to the kinds of business it conducts.
Item 1A. Risk Factors
There have been no material changes from the risk factors as previously disclosed in the
Companys 2008 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In October, 2007 the Parent Companys Board of Directors adopted a stock repurchase program
for up to $30 million of the parent Companys common stock. Purchases may be made from time to
time at prevailing prices in open market or privately negotiated transactions through December 31,
2008. The timing and amount of purchases under the program will depend on a variety of factors,
including the trading price of the stock, market conditions and corporate and regulatory
considerations. During 2008, the Parent Company purchased 224,754 shares of its common stock in
the open market at an average cost of $51.34 per share for a total of $11.5 million. The program
expired at December 31, 2008.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submissions of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
11-1
|
|
Statement re 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). |
72
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
The Navigators Group, Inc. |
|
|
(Registrant)
|
|
Date: May 1, 2009 |
/s/ Francis W. McDonnell
|
|
|
Francis W. McDonnell |
|
|
Senior Vice President
and Chief Financial Officer |
|
73
INDEX OF EXHIBITS
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
11-1 |
|
Statement re 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). |
74