Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
NAVG > SEC Filings for NAVG > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for NAVIGATORS GROUP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for NAVIGATORS GROUP INC


5-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

NOTE ON FORWARD-LOOKING STATEMENTS

Some of the statements in this Quarterly Report on Form 10-Q for The Navigators Group, Inc. and its subsidiaries ("the Company," "we," "us," and "our") are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in or incorporated by reference in this Quarterly Report are forward-looking statements. Whenever used in this report, the words "estimate," "expect," "believe" or similar expressions or their negative are intended to identify such forward-looking statements. Forward-looking statements are derived from information that we currently have and assumptions that we make. We cannot assure that anticipated results will be achieved, since actual results may differ materially because of both known and unknown risks and uncertainties which we face. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Factors that could cause actual results to differ materially from our forward-looking statements include, but are not limited to, the factors discussed in the "Risk Factors" section of our 2011 Annual Report on Form 10-K as well as:

continued volatility in the financial markets and the current recession;

risks arising from the concentration of our business in marine and energy, general liability and professional liability insurance, including the risk that market conditions for these lines could change adversely or that we could experience large losses in these lines;

cyclicality in the property and casualty insurance business generally, and the marine insurance business specifically;

risks that we face in entering new markets and diversifying the products and services that we offer, including risks arising from the development of our new specialty lines or our ability to manage effectively the rapid growth in our lines of business;

changing legal, social and economic trends and inherent uncertainties in the loss estimation process, which could adversely impact the adequacy of loss reserves and the allowance for reinsurance recoverables;

risks inherent in the preparation of our financial statements, which require us to make many estimates and judgments;

our ability to continue to obtain reinsurance covering our exposures at appropriate prices and/or in sufficient amounts;

the counterparty credit risk of our reinsurers, including risks associated with the collection of reinsurance recoverable amounts from our reinsurers, who may not pay losses in a timely fashion, or at all;

the effects of competition from other insurers;

unexpected turnover of our professional staff and our ability to attract and retain qualified employees;

increases in interest rates during periods in which we must sell fixed-income securities to satisfy liquidity needs may result in realized investment losses;

our investment portfolio is exposed to market-wide risks and fluctuations, as well as to risks inherent in particular types of securities;

exposure to significant capital market risks related to changes in interest rates, credit spreads, equity prices and foreign exchange rates which may adversely affect our results of operations, financial condition or cash flows;

capital may not be available in the future, or may not be available on favorable terms;

our ability to maintain or improve our insurance company ratings, as downgrades could significantly adversely affect us, including reducing our competitive position in the industry, or causing clients to choose an insurer with a certain rating level to use higher-rated insurers;

risks associated with continued or increased premium levies by Lloyd's of London ("Lloyd's) for the Lloyd's Central Fund and cash calls for trust fund deposits, or a significant downgrade of Lloyd's rating by the A.M. Best Company ("A.M. Best");


Table of Contents
changes in the laws, rules and regulations that apply to our insurance companies;

the effect of the European Union Directive on Solvency II on how we manage our business, capital requirements and costs associated with conducting business, including the impact of the delay in the implementation of Solvency II;

the inability of our subsidiaries to pay dividends to us in sufficient amounts, which would harm our ability to meet our obligations;

weather-related events and other catastrophes (including man-made catastrophes) impacting our insureds and/or reinsurers;

volatility in the market price of our common stock;

exposure to recent uncertainties with regard to European sovereign debt holdings; and

other risks that we identify in current and future filings with the Securities and Exchange Commission ("SEC").

In light of these risks, uncertainties and assumptions, any forward-looking events discussed in this Form 10-Q may not occur. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of their respective dates.

OVERVIEW

The discussion and analysis of our financial condition and results of operations contained herein should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this Form 10-Q. It contains forward-looking statements that involve risks and uncertainties. Please refer to "Note on Forward-Looking Statements" for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-Q.

We are an international insurance company focusing on specialty products within the overall property and casualty insurance market. Our largest product line and most long-standing area of specialization is ocean marine insurance. We have also developed other specialty insurance lines, such as commercial primary and excess liability as well as specialty niches in professional liability, and have recently expanded our specialty reinsurance business.

We conduct operations through our Insurance Companies and our Lloyd's Operations segments. The Insurance Companies segment consists of Navigators Insurance Company, which includes a United Kingdom Branch (the "U.K. Branch"), and Navigators Specialty Insurance Company ("Navigators Specialty"), which underwrites specialty and professional liability insurance on an excess and surplus lines basis. All of the insurance business written by Navigators Specialty is fully reinsured by Navigators Insurance Company pursuant to a 100% quota share reinsurance agreement. The insurance and reinsurance business written by our Insurance Companies is underwritten through our wholly-owned underwriting management companies, Navigators Management Company, Inc. ("NMC") and Navigators Management (UK) Ltd. ("NMUK").

Our Lloyd's Operations segment includes Navigators Underwriting Agency Ltd. ("NUAL"), a Lloyd's underwriting agency which manages Navigators Syndicate 1221 at Lloyd's ("Syndicate 1221"). Our Lloyd's Operations primarily underwrite marine and related lines of business along with offshore energy insurance, professional liability insurance and construction coverages for onshore energy business at Lloyd's through Syndicate 1221. We controlled 100% of Syndicate 1221's stamp capacity for the 2012 and 2011 underwriting years through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd., which is referred to as a corporate name in the Lloyd's market. We have also established underwriting agencies in Antwerp, Belgium, Stockholm, Sweden, and Copenhagen, Denmark, which underwrite risks pursuant to binding authorities with NUAL into Syndicate 1221. We also maintain an underwriting presence in Brazil and China through contractual arrangements with local affiliates of Lloyd's.


Table of Contents

Catastrophe Risk Management

We have exposure to losses caused by hurricanes and other natural man-made catastrophic events. The frequency and severity of catastrophic events is unpredictable.

Our Insurance Companies and Lloyd's Operations have exposure to losses caused by natural and man-made catastrophic events. The frequency and severity of catastrophes are unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. We continually assess our concentration of underwriting exposures in catastrophe exposed areas globally and manage this exposure through individual risk selection and through the purchase of reinsurance. We also use modeling and concentration management tools that allow us to better monitor and control our accumulations of potential losses from catastrophe events. Despite these efforts, there remains uncertainty about the characteristics, timing and extent of insured losses given the unpredictable nature of catastrophes. The occurrence of one or more catastrophic events could have a material adverse effect on our results of operations, financial condition and/or liquidity.

We have significant natural catastrophe exposures throughout the world. We estimate that our largest exposure to loss from a single natural catastrophe event comes from an earthquake on the west coast of the United States. As of September 30, 2012 we estimate that our probable maximum pre-tax gross and net loss exposure from such an earthquake event would be approximately $170.6 million and $29.6 million, respectively, including the cost of reinsurance reinstatement premiums.

Like all catastrophe exposure estimates, the foregoing estimate of our probable maximum loss is inherently uncertain. This estimate is highly dependent upon numerous assumptions and subjective underwriting judgments. Examples of significant assumptions and judgments related to such an estimate include the intensity, depth and location of the earthquake, the various types of the insured risks exposed to the event at the time the event occurs and the estimated costs or damages incurred for each insured risk. The composition of our portfolio also makes such estimates challenging due to the non-static nature of the exposures covered under our policies in lines of business such as cargo and hull. There can be no assurances that the gross and net loss amounts that we could incur in such an event or in any natural catastrophe event would not be materially higher than the estimates discussed above given the significant uncertainties with respect to such an estimate. Moreover, our portfolio of insured risks changes dynamically over time and there can be no assurance that our probable maximum loss will not change materially over time.

The occurrence of large loss events could reduce the reinsurance coverage that is available to us and could weaken the financial condition of our reinsurers, which could have a material adverse effect on our results of operations. Although the reinsurance agreements make the reinsurers liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our policyholders as we are required to pay the losses if a reinsurer fails to meet its obligations under the reinsurance agreement. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of these claims. Either of these events would increase our costs and could have a material adverse effect on our business.


Table of Contents

CRITICAL ACCOUNTING POLICIES

The Company's Annual Report on Form 10-K for the year ended December 31, 2011 discloses our critical accounting policies (refer to Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies). Certain of these policies are critical to the portrayal of our financial condition and results since they require management to establish estimates based on complex and subjective judgments, including those related to our estimates for losses and loss adjustment expenses ("LAE") (including losses that have occurred but were not reported to us by the financial reporting date), reinsurance recoverables, written and unearned premium, the recoverability of deferred tax assets, the impairment of investment securities and accounting for Lloyd's results. For additional information regarding our critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2011.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 2, Recent Accounting Pronouncements, in the Notes to Interim Consolidated Financial Statements included herein for a discussion about accounting standards recently adopted by the Company, as well as recent accounting developments relating to standards not yet adopted by the Company.

RESULTS OF OPERATIONS

The following is a discussion and analysis of our consolidated and segment results of operations for the three and nine months ended September 30, 2012 and 2011. Our financial results are presented on the basis of United States generally accepted accounting principles ("GAAP"). However, in presenting our financial results, we discuss our performance with reference to operating earnings, book value per share, underwriting profit or loss, and the combined ratio, all of which are non-GAAP financial measures of performance and/or underwriting profitability. Operating earnings is calculated as net income less after-tax net realized gains (losses) and net other-than-temporary impairment ("OTTI") losses recognized in earnings. Book value per share is calculated by dividing stockholders' equity by the number of outstanding shares at any period end. Underwriting profit or loss is calculated from net earned premiums, less the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense) by net earned premiums. A combined ratio of less than 100% indicates an underwriting profit and greater than 100% indicates an underwriting loss. We consider such measures, which may be defined differently by other companies, to be important in the understanding of our overall results of operations by highlighting the underlying profitability of our insurance business.

Summary of Consolidated Results

The following table presents a summary of our consolidated financial results for
the three and nine months ended September 30, 2012 and 2011:



                                           Three Months Ended           Nine Months Ended
                                              September 30,               September 30,            Percentage Change
In thousands, except per share amounts     2012          2011          2012          2011          QTD            YTD
Gross written premiums                   $ 298,742     $ 255,318     $ 964,878     $ 830,315         17.0 %        16.2 %
Net written premiums                       188,046       175,357       621,343       551,796          7.2 %        12.6 %
Total revenues                             220,409       191,586       633,287       555,062         15.0 %        14.1 %
Total expenses                             202,269       173,212       582,838       534,538         16.8 %         9.0 %

Pre-tax income (loss)                    $  18,140     $  18,374     $  50,449     $  20,524         -1.3 %       145.8 %
Provision (benefit) for income taxes         5,225         4,476        14,731         5,015         16.7 %          NM

Net income (loss)                        $  12,915     $  13,898     $  35,718     $  15,509         -7.1 %       130.3 %

Net income (loss) per common share:
Basic                                    $    0.92     $    0.94     $    2.55     $    1.02
Diluted                                  $    0.90     $    0.92     $    2.51     $    1.00

NM - Percentage change not meaningful


Table of Contents

Net income for the three months ended September 30, 2012 was $12.9 million or $0.90 per diluted share compared to $13.9 million or $0.92 per diluted share for the three months ended September 30, 2011. Operating earnings for the three months ended September 30, 2012 were $9.8 million or $0.69 per diluted share compared to $12.0 million or $0.80 per diluted share for the comparable period in 2011. In comparison to net income, operating earnings excludes after-tax net realized gains of $3.1 million for the three months ended September 30, 2012. For the three months ended September 30, 2011 operating earnings excluded after tax net realized gains of $2.2 million and after-tax OTTI losses of $0.4 million. The decrease in our operating earnings for the three months ended September 30, 2012 was largely attributable to a reduction in net investment income due to lower investment yields.

Net income for the nine months ended September 30, 2012 was $35.7 million or $2.51 per diluted share compared to $15.5 million or $1.00 per diluted share for the nine months ended September 30, 2011. Operating earnings for the nine months ended September 30, 2012 were $29.1 million or $2.04 per diluted share compared to $13.3 million or $0.85 per diluted share for the comparable period in 2011. In comparison to net income, operating earnings excludes after-tax net realized gains of $7.0 million and after-tax OTTI losses of $0.4 million for the nine months ended September 30, 2012. For the nine months ended September 30, 2011 operating earnings excluded after-tax net realized gains of $3.2 million and after-tax OTTI losses of $0.9 million. The increase in our operating earnings for the nine months ended September 30, 2012 was largely attributable to stronger underwriting results, partially offset by a decrease in net investment income driven by lower investment yields and $4.5 million of investment expenses related to the settlement of a dispute with Equitas over foregone interest on amounts that were due on certain reinsurance contracts. The results for the first nine months of the year include net losses of $12.9 million related to significant large losses from our marine business, including the grounding of the cruise ship Costa Concordia off the coast of Italy.

Our book value per share as of September 30, 2012 was $62.32, increasing from $57.57 as of December 31, 2011. The increase in book value per share primarily resulted from our increased results of operations and improvements in the value of our consolidated investment portfolio. Our consolidated stockholders' equity increased 8.9% to $874.8 million as of September 30, 2012 compared to $803.4 million as of December 31, 2011.

Cash flow from operations was $69.1 million for the nine months ended September 30, 2012 compared to $86.3 million for the comparable period in 2011. The decrease in cash flow from operations was due to increases in paid losses and current income taxes paid, partially offset by improved collections on premium receivables and reinsurance recoverables.


Table of Contents

The following table presents our consolidated underwriting results and provides a reconciliation of our underwriting profit or loss to GAAP net income or net loss for the three and nine months ended September 30, 2012 and 2011:

                                            Three Months Ended              Nine Months Ended
                                              September 30,                   September 30,               Percentage Change
In thousands                               2012            2011            2012            2011            QTD           YTD
Gross written premiums                  $  298,742      $  255,318      $  964,878      $  830,315           17.0 %       16.2 %
Net written premiums                       188,046         175,357         621,343         551,796            7.2 %       12.6 %
Net earned premiums                        201,262         173,633         580,398         499,888           15.9 %       16.1 %
Net losses and loss adjustment
expenses                                  (128,850 )      (110,242 )      (370,242 )      (340,893 )         16.9 %        8.6 %
Commission expenses                        (31,258 )       (25,934 )       (90,211 )       (80,164 )         20.5 %       12.5 %
Other operating expenses                   (40,112 )       (34,989 )      (116,238 )      (107,341 )         14.6 %        8.3 %
Other income (expense)                         789            (921 )         2,087             643             NM           NM

Underwriting profit (loss)              $    1,831      $    1,547      $    5,794      $  (27,867 )         18.4 %         NM
Net investment income                       13,597          16,259          40,632          51,072          -16.4 %      -20.4 %
Net other-than-temporary impairment
losses recognized in earnings                   -             (623 )          (650 )        (1,397 )           NM        -53.5 %
Net realized gains (losses)                  4,761           3,238          10,820           4,856           47.0 %      122.8 %
Interest expense                            (2,049 )        (2,047 )        (6,147 )        (6,140 )          0.1 %        0.1 %

Income (loss) before income taxes       $   18,140      $   18,374      $   50,449      $   20,524           -1.3 %      145.8 %
Income tax expense (benefit)                 5,225           4,476          14,731           5,015           16.7 %         NM

Net income (loss)                       $   12,915      $   13,898      $   35,718      $   15,509           -7.1 %      130.3 %

Losses and loss adjustment expenses
ratio                                         64.0 %          63.5 %          63.8 %          68.2 %
Commission expense ratio                      15.5 %          14.9 %          15.5 %          16.0 %
Other operating expense ratio (1)             19.6 %          20.7 %          19.7 %          21.4 %

Combined ratio                                99.1 %          99.1 %          99.0 %         105.6 %

(1) - Includes Other operating expenses & Other income (expense)

NM - Percentage change not meaningful

The combined ratio for the three months ended September 30, 2012 and 2011 was 99.1%. Our pre-tax underwriting profit increased $0.3 million to $1.8 million for the three months ended September 30, 2012 and included $11.0 million of current accident year loss emergence from our Agriculture reinsurance business that was driven by significant drought related crop losses across the U.S. We also had net prior period reserve redundancies of $9.1 million from our Lloyd's Operations.

The combined ratio for the nine months ended September 30, 2012 was 99.0% compared to 105.6% for the same period in 2011. Our pre-tax underwriting results increased $33.7 million to a $5.8 million underwriting profit for the nine months ended September 30, 2012 compared to an underwriting loss of $27.9 million for the same period in 2011.

Our underwriting results for the nine months ended September 30, 2012 reflect net losses of $12.9 million, inclusive of $10.8 million of reinsurance reinstatement premiums, related to several large losses from our Marine business including the grounding of the cruise ship Costa Concordia off the coast of Italy. The results also include $11.0 million of current accident year loss emergence from our Agriculture reinsurance business as well as net prior period reserve redundancies of $19.2 million from our Lloyd's Operations.

Our underwriting results for the nine months ended September 30, 2011 included net losses of $18.2 million, inclusive of $7.9 million in reinsurance reinstatement premiums, related to large losses from our energy business, as well as an increase in our reinsurance reinstatement premium accrual of $5.2 million reflecting our shift to excess-of-loss reinsurance protection in our Marine business.


Table of Contents

Revenues

Gross Written Premiums

The following tables set forth our gross written premiums, net written premiums
and net earned premiums by segment and line of business for the three and nine
months ended September 30, 2012 and 2011:



                                                                   Three Months Ended September 30,
                                                       2012                                                 2011
                                   Gross                     Net           Net          Gross                     Net           Net
                                  Written                  Written       Earned        Written                  Written       Earned
In thousands                     Premiums        %        Premiums      Premiums      Premiums        %        Premiums      Premiums
Insurance Companies:
Marine                           $  44,879        15 %    $  32,615     $  40,592     $  47,141        18 %    $  34,180     $  41,951
Property Casualty                  139,948        47 %       83,449        83,993       110,975        43 %       77,056        58,585
Professional Liability              33,534        11 %       26,084        24,505        33,059        14 %       24,056        18,796

Insurance Companies Total          218,361        73 %      142,148       149,090       191,175        75 %      135,292       119,332

Lloyd's Operations:
Marine                              37,716        13 %       27,939        34,002        26,979        11 %       20,649        34,510
Property Casualty                   32,789        11 %       11,633        11,870        29,682        11 %       16,296        15,952
Professional Liability               9,876         3 %        6,326         6,300         7,482         3 %        3,120         3,839

Lloyd's Operations Total            80,381        27 %       45,898        52,172        64,143        25 %       40,065        54,301

Total                            $ 298,742       100 %    $ 188,046     $ 201,262     $ 255,318       100 %    $ 175,357     $ 173,633

                                                                         Nine Months Ended September 30,
                                                          2012                                                    2011
                                     Gross                     Net                           Gross                     Net
                                    Written                  Written       Net Earned       Written                  Written       Net Earned
In thousands                       Premiums        %        Premiums        Premiums       Premiums        %        Premiums        Premiums
Insurance Companies:
Marine                             $ 156,640        17 %    $ 107,266     $    111,402     $ 175,812        21 %    $ 130,200     $    124,387
. . .
  Add NAVG to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for NAVG - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.