<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1996
Commission file number 0-15886
The Navigators Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
13-3138397
(IRS Employer
Identification No.)
123 William Street, New York, New York 10038
(Address of principal executive offices) (Zip Code)
(212) 406-2900
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No ______
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
On May 14, 1996 there were 8,184,401 shares of common stock, $0.10 par
value issued and outstanding.
<PAGE> 2
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. FINANCIAL INFORMATION:
Balance Sheets
March 31, 1996 and December 31, 1995......................................... 1
Statements of Income
Three Months Ended March 31, 1996 and
Three Months Ended March 31, 1995............................................ 2
Statements of Cash Flows
Three Months Ended March 31, 1996 and
Three Months Ended March 31, 1995............................................ 3
Notes to Financial Statements................................................... 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................. 7
Part II. OTHER INFORMATION........................................................ 12
</TABLE>
<PAGE> 3
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DEC. 31,
1996 1995
----------- -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost: 1996, $205,415,584; 1995,
$203,468,088)............................................ $209,103,215 $210,697,423
Equity securities, available for sale, at fair value (cost:
1996, $6,154,411; 1995, $5,587,344)...................... 8,663,996 7,861,813
Short-term investments, at cost which approximates
market................................................... 9,358,669 7,290,638
----------- -----------
Sub-total investments................................. 227,125,880 225,849,874
Investment in affiliated company........................... 2,239,952 2,277,048
----------- -----------
Total investments..................................... 229,365,832 228,126,922
Cash............................................................ 353,613 7,332,698
Premiums in course of collection................................ 23,592,368 17,971,529
Commissions receivable.......................................... 5,549,747 6,048,440
Accrued investment income....................................... 3,247,908 3,349,030
Prepaid reinsurance premiums.................................... 9,138,559 9,814,146
Reinsurance receivable on paid and unpaid losses and loss
adjustment expenses........................................... 137,095,210 147,356,684
Deferred federal income tax benefit............................. 9,887,315 8,873,030
Deferred policy acquisition costs............................... 3,009,697 2,523,180
Other assets.................................................... 3,909,548 4,156,755
----------- -----------
Total assets.......................................... $425,149,797 $435,552,414
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for loss and loss adjustment expenses............. $258,966,054 $273,854,054
Unearned premiums.......................................... 27,994,540 26,753,920
Reinsurance balances payable............................... 6,762,732 6,411,746
Loans payable to banks..................................... 18,250,000 19,500,000
Federal income tax payable................................. 881,577 1,243,364
Deferred state & local income taxes........................ 920,267 1,382,881
Notes payable to shareholders.............................. 942,034 1,007,976
Accounts payable and other liabilities..................... 9,154,842 6,322,266
----------- -----------
Total liabilities..................................... 323,872,046 336,476,207
----------- -----------
Commitments and contingencies................................... -- --
Stockholders' equity:
Preferred Stock, $.10 par value, authorized 1,000,000
shares, no shares issued................................. -- --
Common Stock, $.10 par value Authorized 10,000,000 shares
Issued and outstanding 8,184,401 in 1996 and 8,172,401 in
1995..................................................... 818,440 817,240
Additional paid-in capital................................. 35,529,179 35,321,339
Net unrealized gains on securities available for sale (net
of income taxes of $2,107,053 in 1996 and $3,231,293 in
1995).................................................... 4,090,163 6,272,511
Foreign currency translation adjustment.................... 73,089 110,185
Retained earnings.......................................... 60,766,880 56,554,932
----------- -----------
Total stockholders' equity............................ 101,277,751 99,076,207
----------- -----------
Total liabilities and stockholders' equity............ $425,149,797 $435,552,414
=========== ===========
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE> 4
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------------
1996 1995
---------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues:
Net premiums earned............................................. $19,188,829 $17,718,090
Commission income............................................... 2,066,826 2,594,170
Net investment income........................................... 3,563,297 3,412,370
Net realized capital gains...................................... 174,838 (62,147)
Other income.................................................... 203,234 217,123
----------- -----------
Total revenues.......................................... 25,197,024 23,879,606
----------- -----------
Operating expenses:
Losses and loss adjustment expenses incurred.................... 11,835,750 13,112,306
Commissions..................................................... 2,611,533 2,460,155
Other operating expenses........................................ 4,539,911 5,514,635
Interest expense................................................ 774,234 539,923
----------- -----------
Total operating expenses................................ 19,761,428 21,627,019
----------- -----------
Operating income before income taxes.............................. 5,435,596 2,252,587
Income tax expense:
Current......................................................... 1,554,205 308,329
Deferred........................................................ (330,556) (81,470)
----------- -----------
Total income tax expense................................ 1,223,649 226,859
Net income...................................................... $4,211,947 $2,025,728
=========== ===========
Per share data:
Average common and common equivalent shares outstanding......... 8,296,617 8,205,946
Net income...................................................... $ 0.51 $ 0.25
=========== ===========
</TABLE>
See accompanying notes to interim consolidated financial statements.
2
<PAGE> 5
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
(UNAUDITED)
Operating activities:
Net income................................................... $ 4,211,947 $ 2,025,728
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation & amortization................................ 134,593 181,901
Reinsurance receivable on paid and unpaid losses and loss
adjustment expenses....................................... 10,261,474 12,386,819
Reserve for losses and loss adjustment expenses............ (14,888,000) (3,738,010)
Prepaid reinsurance premiums............................... 675,587 4,879,174
Unearned premiums.......................................... 1,240,620 (7,470,659)
Premiums in course of collection........................... (5,620,839) 8,194,594
Commissions receivable..................................... 498,693 (449,238)
Deferred policy acquisition costs.......................... (486,517) 363,283
Accrued investment income.................................. 101,122 71,418
Reinsurance balances payable............................... 350,986 (3,994,009)
Federal income taxes recoverable........................... -- 158,821
Federal income taxes payable............................... (361,787) --
Deferred federal income taxes.............................. 109,955 (85,838)
Net realized losses (gains) on investments................. (174,838) 62,147
Other...................................................... (1,041,316) (1,980,870)
----------- -----------
Net cash provided by operating activities............. (4,988,320) $10,605,261
----------- -----------
Investing activities:
Fixed maturities available for sale at fair value:
Redemption and maturities.................................. $ 3,858,715 $ 411,010
Sales...................................................... 18,283,178 21,171,214
Purchases.................................................. (24,111,678) (22,479,777)
Equity securities:
Sales...................................................... 556,914 152,857
Purchases.................................................. (1,035,128) (476,217)
Payable for securities purchased............................. 3,579,922 (2,028,556)
Net sale (purchases) of short-term investments............... (2,068,031) (2,513,089)
Purchase of property and equipment........................... (13,697) (64,507)
----------- -----------
Net cash used in investing activities................. $ (949,805) $(5,827,065)
----------- -----------
Financing activities:
Proceeds from bank loans..................................... $ -- $ 1,000,000
Repayment of bank loans...................................... (1,250,000) (4,250,000)
Notes payable to shareholders................................ -- (13,204)
Proceeds from exercise of stock options...................... 209,040 --
----------- -----------
Net cash provided by financing activities............. (1,040,960) (3,263,204)
----------- -----------
Increase (decrease) in cash.................................. (6,979,085) 1,514,992
Cash at beginning of period.................................. 7,332,698 730,047
----------- -----------
Cash at end of period........................................ $ 353,613 $2,245,039
=========== ===========
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE> 6
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(1) Accounting Policies
The interim financial statements are unaudited but reflect all adjustments
which, in the opinion of management, are necessary to provide a fair
statement of the results of The Navigators Group, Inc. and its subsidiaries
(the "Company") for the interim periods presented. All such adjustments are
of a normal recurring nature. The results of operations for any interim
period are not necessarily indicative of results for the full year. These
financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Company's Form 10-K for the
year ended December 31, 1995.
(2) Reinsurance Ceded
The Company's ceded earned premiums were $11,982,800 and $21,039,928 for the
three months ended March 31, 1996 and 1995, respectively. The Company's
ceded losses were $7,497,911 and $19,354,793 for the three months ended
March 31, 1996 and 1995, respectively.
4
<PAGE> 7
THE NAVIGATORS GROUP, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL
The Company is a holding company with 12 wholly owned subsidiaries.
Two of the Company's subsidiaries, Navigators Insurance Company and NIC
Insurance Company ("NIC"), specialize principally in underwriting marine,
aviation and property (including inland marine) insurance, and certain lines of
specialty reinsurance and non-marine insurance. Navigators Insurance Company has
been active since 1983. NIC is a wholly owned subsidiary of Navigators Insurance
Company, was licensed in 1989 and began operations during 1990. Navigators
Insurance Company and NIC are collectively referred to herein as "Navigators."
Eight of the Company's subsidiaries, Somerset Marine, Inc., Somerset of
Georgia, Inc., Somerset Insurance Services of Texas, Inc., Somerset Insurance
Services of California, Inc., Somerset Insurance Services of Washington, Inc.,
Somerset Property, Inc., Somerset Re Management, Inc. and Navigators Management
Corporation (collectively, the "Somerset Companies"), are a group of
underwriting management companies which produce, manage and underwrite insurance
and reinsurance for Navigators and nine other unrelated insurance companies. The
other subsidiaries of the Company are Somerset Casualty Agency, Inc. and
Somerset Marine Aviation Property Managers Inc., which are both inactive.
The Company's revenue is primarily comprised of premiums, commissions and
investment income. Navigators derives substantially all of its business from
insurance underwritten by the Somerset Companies. The insurance business and
operations of Navigators are managed by one of the Somerset Companies,
Navigators Management Corporation.
The Somerset Companies specialize principally in four lines of business:
marine, aviation and property (including inland marine) insurance, and certain
lines of specialty reinsurance and non-marine insurance. They underwrite marine
business through a syndicate of insurance companies, Navigators having the
largest participation in the syndicate. The remaining lines of business are
underwritten exclusively for the account of Navigators. The Somerset Companies
derive their revenue from commissions, investment income and service fees from
Navigators and other insurers. Commissions are earned both on a fixed percentage
of premiums and on underwriting profits on business placed with the
participating insurance companies within the marine syndicate. Property and
casualty insurance premiums are cyclical in nature and, accordingly, during a
"hard market" demand for property and casualty insurance exceeds supply, or
capacity, and as a result,
5
<PAGE> 8
premiums and commissions increase. On the downturn of the property and casualty
cycle, supply exceeds demand, and as a result, premiums and commissions
decrease.
Navigators and the Somerset Companies earn investment income on cash
balances and invested assets. The Somerset Companies also earn investment income
on fiduciary funds. Such fiduciary funds are invested, subject to applicable
insurance regulations, primarily in short-term instruments.
RESULTS OF OPERATIONS
General. The results of operations of the Company during the first quarter
of 1996 reflect management's emphasis on the Company's core ocean marine
business, its inland marine business and its non-marine program book of
business.
Revenues. Gross written premium for the first three months of 1996
increased by 3.6% to $32,411,000 from $31,287,000 for the first three months of
1995.
The following table sets forth Navigators' gross written premium by line of
business and net written premium in the aggregate:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
1996 1995
------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Marine.......................................... $13,652 42% $12,957 42%
Aviation........................................ 8,424 26% 11,357 36%
Property and Inland Marine...................... 3,882 12% 2,544 8%
Reinsurance and Non-Marine Program Insurance.... 6,453 20% 4,429 14%
------- --- ------- ---
Total Gross Premium Written........... $32,411 100% $31,287 100%
======= === ======= ===
Ceded Premium Written........................... (11,306) (16,244)
------- --- ------- ---
Total Net Premium Written............. 21,105 15,043
======= === ======= ===
</TABLE>
Marine Premium. Marine gross premium increased 5% when comparing the first
three months of 1996 to the first three months of 1995. Management believes this
increase is due to management's emphasis on this core line of business. Although
the marine market is competitive at this time, management anticipates a modest
increase in the total amount of marine business written in 1996 compared to
1995.
6
<PAGE> 9
Aviation Premium. Aviation gross premium decreased 26% from the first
three months of 1995 to the first three months of 1996. This decrease reflects
management's decision to reduce Navigators' aviation business in response to
underwriting losses in this line of business.
Property Premium. Property and Inland Marine gross premium increased 53%
from the first three months of 1995 to the first three months of 1996 reflecting
the continuing development of the Company's inland marine book of business. The
Company decided in late 1994 to cease writing large commercial and industrial
property risks, which is essentially a property catastrophe book of business,
and to concentrate on the inland marine risks.
Specialty Reinsurance and Non-Marine Insurance Premium. Gross specialty
reinsurance and non-marine insurance premium increased 46% from the first three
months of 1995 to the first three months of 1996. The increase was due primarily
to the emergence of new non-marine program business, which management began
developing in the last half of 1995 to augment its reinsurance book.
Ceded Premium. The decrease in ceded premium results primarily from
changes in the Company's reinsurance program.
Total Premium. Net earned premium for the first three months of 1996 was
$19,189,000 as compared to $17,718,000 for the first three months of 1995. Net
earned premium generally follows the pattern of written premium; however, the
run-off off the property book in 1995 resulted in net earned premiums which
exceeded net written premiums.
Commission income, based on gross premiums earned and net underwriting
profits during the first three months of 1996 was approximately $2,067,000
compared to approximately $2,594,000 during the corresponding period in 1995.
The decrease is primarily a result of Navigators' decision to increase its
participation in the aviation business managed by the Somerset Companies to
100%, which eliminated commission income paid by the former participants in the
aviation insurance pool.
Investment income increased 4% to approximately $3,563,000 during the first
three months of 1996 from approximately $3,412,000 during the corresponding
period in 1995. This increase is due primarily to the increased amount of
invested assets.
Included in pre-tax net income were $175,000 in realized capital gains for
the first three months of 1996 and $62,000 in realized capital losses for the
same period last year. On an after tax basis these represent realized gains of
$0.01 and $0 per share for the respective periods.
Expenses. The ratio of loss and loss adjustment expenses incurred to net
premiums earned was 61.7% and 74.0% during the first three months of 1996 and
1995, respectively. The 1995 loss ratio includes additional net loss development
of $2,580,000 from
7
<PAGE> 10
the Northridge, California earthquake, which occurred on January 17, 1994 (the
"Northridge Earthquake"). The decrease is due primarily to a return to more
normal experience in comparison to the adverse development on losses from the
Northridge Earthquake in1995.
Commission expense as a percentage of net premiums earned were 13.6% and
13.9% during the first three months of 1996 and 1995, respectively.
Other operating expenses decreased 17.7% to approximately $4,540,000
during the first three months of 1996 from approximately $5,515,000 during the
corresponding period in 1995. This decrease is primarily due to the severance
charges incurred in the first quarter of 1995 and savings on operational
expenses resulting from the Company's restructuring and headcount reduction
that began in early 1995.
Interest expense increased 43.3% to approximately $774,000 during the first
three months of 1996 from approximately $540,000 during the corresponding period
of 1995. This increase is primarily due to the interest expense on the Company's
rollback liability under Proposition 103 settled with the State of California
Insurance Department on March 19, 1996.
The effective tax rate was a 22.5% expense and a 10.1% expense for the
three months ended March 31, 1996 and 1995, respectively.
For the first three months of 1996, the Company had after tax income of
$4,212,000 compared to after tax income of $2,026,000 for the same period last
year, primarily due to a return to normal experience in comparison to the losses
from the Northridge Earthquake. On a per share basis, this represents net income
of $0.51 and $0.25 for the first three months of 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations was $(4,988,000) and $10,605,000 for the first
three months of 1996 and 1995, respectively.
Investment assets grew at the rate of 1% during the first three months of
1996 to $229,366,000 at March 31, 1996. Investment income during the three
months was $3,563,000, an increase of 4%, reflecting increased assets.
The Company has entered into a credit agreement dated as of August 5, 1994.
Pursuant to the credit agreement, the Company may borrow, subject to certain
conditions, up to an aggregate of $5,000,000 in revolving credit loans. As of
March 31, 1996, the Company had outstanding $2,000,000 in revolving credit
loans.
As of March 31, 1996, the Company's consolidated stockholders' equity was
$101,278,000, an increase from $99,076,000 as of December 31, 1995.
8
<PAGE> 11
THE NAVIGATORS GROUP, INC. & SUBSIDIARIES
Part II -- Other Information
Item 1. Legal Proceedings: Neither the Company nor any of its
subsidiaries is a party to, nor is the property thereof the subject
of, any pending legal proceedings which depart from the ordinary
routine litigation incident to the kinds of business conducted by the
Company and its subsidiaries or, if such proceedings constitute other
than routine litigation, in which there is a reasonable possibility of
an adverse decision which could have any material adverse effect upon
the financial condition of the Companny
In November 1988, the voters of the state of California approved
Proposition 103, which required most property and casualty insurance
companies, among other things, to reduce rates charged to California
insureds to a level 20% below November 8, 1987 levels. On March 19,
1996, the Company agreed with the Insurance Commissioner of the State
of California to settle its rollback liability under Proposition 103.
The Company expects to be able to recover some portion of this
settlement from reinsurers. As a result of these recoveries and
existing reserves, management does not believe this settlement will
have a material adverse effect on the Company. The settlement is not
affected by the preliminary injunction issued in Proposition 103
Enforcement Project v. Quakenbush, LASC Case No. BS037146.
Item 2. Changes in Securities:
None.
Item 3. Defaults Upon Senior Securities:
None.
Item 4. Submissions of Matters to a Vote of Securities Holders:
None.
Item 5. Other Information:
None.
9
<PAGE> 12
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit No. Description of Exhibit
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the
three months ended March 31, 1996.
10
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Navigators Group, Inc.
(Registrant)
May 15, 1996 /s/ W. Allen Barnett
(Date) W. Allen Barnett, Senior Vice
President, Chief Financial Officer
11
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ------------ --------------------------------------------------- ------------
<C> <S> <C>
27.1 Financial Data Schedule
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 7
<CURRENCY> U.S. DOLLARD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 209,103,215
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 8,663,996
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 229,365,832
<CASH> 353,613
<RECOVER-REINSURE> 137,095,210
<DEFERRED-ACQUISITION> 3,009,697
<TOTAL-ASSETS> 425,149,797
<POLICY-LOSSES> 258,966,054
<UNEARNED-PREMIUMS> 27,994,540
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 19,192,034
0
0
<COMMON> 818,440
<OTHER-SE> 100,459,311
<TOTAL-LIABILITY-AND-EQUITY> 425,149,797
19,188,829
<INVESTMENT-INCOME> 3,563,297
<INVESTMENT-GAINS> 174,838
<OTHER-INCOME> 2,270,060
<BENEFITS> 11,835,750
<UNDERWRITING-AMORTIZATION> 2,611,533
<UNDERWRITING-OTHER> 4,539,911
<INCOME-PRETAX> 5,435,596
<INCOME-TAX> 1,223,649
<INCOME-CONTINUING> 4,211,947
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,211,947
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
<RESERVE-OPEN> 138,760,610
<PROVISION-CURRENT> 13,197,755
<PROVISION-PRIOR> (1,362,000)
<PAYMENTS-CURRENT> 626,209
<PAYMENTS-PRIOR> 14,148,025
<RESERVE-CLOSE> 135,822,133
<CUMULATIVE-DEFICIENCY> (1,362,000)
</TABLE>
