<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___ to ____
COMMISSION FILE NO. 0-15886
THE NAVIGATORS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3138397
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
123 WILLIAM STREET, NEW YORK, NEW YORK 10038
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 406-2900
Securities registered pursuant to Section 12(b) of the Act: NONE
<TABLE>
<S> <C>
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.10 PAR VALUE
(Title of Class)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |X|
Aggregate market value of voting stock held by non-affiliates as of March 15,
1996 - $55,037,606
Common shares outstanding March 15, 1996 - 8,172,400
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1996 Proxy Statement are incorporated by reference
in Part III, Items 10, 11, 12 and 13 of this Form 10-K.
<PAGE> 2
PART I.
ITEM 1. BUSINESS.
GENERAL
The Navigators Group, Inc. (the "Group") is a holding company with 12
wholly owned subsidiaries. Unless the context otherwise requires, the term
"Company" as used herein means the Group and its subsidiaries.
Two of the Company's subsidiaries are insurance companies: Navigators
Insurance Company and NIC Insurance Company. Navigators Insurance Company is the
Company's largest insurance company subsidiary and has been active since 1983.
It specializes principally in underwriting marine, aviation and property
(primarily inland marine) insurance and certain lines of specialty reinsurance
and non-marine insurance. NIC Insurance Company is a wholly owned subsidiary of
Navigators Insurance Company, was licensed in 1989 and began operations in 1990.
It underwrites a small book of property insurance in certain states and,
pursuant to an intercompany reinsurance pooling agreement, cedes 100% of its
gross direct writings from this business to Navigators Insurance Company in
exchange for assuming 10% of the total retained business of Navigators Insurance
Company. Navigators Insurance Company and NIC Insurance Company are collectively
referred to herein as "Navigators".
Eight of the Company's subsidiaries are a group of underwriting
management companies: 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"). The Somerset Companies produce, manage
and underwrite insurance and reinsurance for Navigators and nine other unrelated
insurance companies.
The Somerset Companies were acquired by the Company in 1994 pursuant to
mergers (the "Mergers") that were approved by the stockholders of the Company at
a special meeting held June 30, 1994. The Company accounted for the transfer of
the Somerset Companies' assets and liabilities at historical cost under a method
of accounting similar to "pooling of interests" and, accordingly, has reported
results of operations as if the Company and the Somerset Companies had been
combined since inception.
The 1993 financial statements included herein reflect the Mergers by
including the historical accounts of the Somerset Companies.
The other two 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
direct participation in, or by reinsuring certain members of, insurance pools
managed by the Somerset Companies. The insurance business and operations of
Navigators are managed by one of the Somerset Companies, Navigators Management
Corporation ("NMC").
The Somerset Companies specialize principally in four lines of business:
marine, aviation and property (primarily inland marine) insurance and certain
lines of specialty reinsurance and non-marine insurance. In 1995 they underwrote
this business through three syndicates of insurance companies, Navigators having
the largest participation in each of the three syndicates. They derive their
revenue from commissions, investment income, service fees and cost reimbursement
arrangements from Navigators and other insurers. Commissions are earned both on
a fixed percentage of premiums and
<PAGE> 3
on underwriting profits on business placed with the participating insurance
companies within the three syndicates. 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,
premiums and commissions may increase. On the downturn of the property and
casualty cycle, supply exceeds demand, and as a result, premiums and commissions
may decrease.
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.
In addition to its wholly owned subsidiaries, as of December 31, 1995 the
Company had a 21% ownership interest in Navigators Underwriters plc. This
ownership interest increased to 27% as of January 1, 1996. Navigators
Underwriters plc, a U.K. corporation, owns 100% of Navigators Corporate
Underwriters Limited, a U.K. corporation, which has been admitted to underwrite
at Lloyd's of London as a corporate name with limited liability.
The Group, a Delaware corporation, was incorporated in November, 1982, as
the successor to a New York corporation organized in June, 1981. Navigators
Insurance Company and NIC Insurance Company were incorporated in New York in
July, 1981, and December, 1988, respectively. The Group now directly owns 100%
of Navigators Insurance Company, which in turn now directly owns 100% of NIC
Insurance Company.
LINES OF BUSINESS
Navigators underwrites principally marine, aviation, property (primarily
inland marine) insurance and certain lines of specialty reinsurance and
non-marine insurance. As underwritten by Navigators, marine insurance includes
hull, energy, liability and cargo; aviation insurance includes hull and
liability on commercial and general aircraft; property insurance includes
primarily inland marine at present, but prior to 1995 primarily included large
commercial and industrial "all risk" coverages; reinsurance includes excess of
loss and quota share property, surety, and other specialty reinsurance lines;
and non-marine insurance includes non-marine program business developed to
augment Navigators' reinsurance book. The following table sets forth Navigators'
gross written premium by line of business and net written premium in the
aggregate for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Marine....................... $ 61,684 42% $ 65,046 34% $ 71,470 33%
Aviation..................... 51,286 34% 48,482 26% 44,446 21%
Property and Inland
Marine..................... 11,620 8% 45,989 24% 72,607 34%
Specialty Reinsurance
and Non-Marine
Insurance................... 24,317 16% 30,035 16% 25,133 12%
------ --- ------- --- -------- ----
Total Gross
Premium
Written.............. $148,907 100% $189,552 100% $213,656 100%
======== ==== ======== === ======== ===
Ceded Premium
Written...................... (67,639) (98,001) (109,838)
Total Net
Premium
Written.............. $ 81,268 $ 91,551 $103,818
======== ======== ========
</TABLE>
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<PAGE> 4
MARINE INSURANCE
Navigators obtains its marine business through its direct participation
in the pools managed by certain Somerset Companies and through its reinsurance
of one or more members of this pool. The composition of the pools and the level
of participation of each member changes from time to time.
As of December 31, 1995, the marine pool consisted, in addition to
Navigators, of Christiania General Insurance Corporation of New York, Colonia
Insurance Company, Employers Mutual Casualty Co., Farmers Mutual Hail Insurance
Company of Iowa, Harleysville Mutual Insurance Company, National Liability and
Fire Insurance Co., Pennsylvania Lumbermens Mutual Insurance Company ("PLM"),
The Reinsurance Corporation of New York ("Reco"), and Worcester Insurance
Company as participants. Navigators' net participation in the marine pool was
approximately 42% in 1995 and 48% in each of 1994 and 1993.
The Somerset Companies in 1995, 1994 and 1993 received commissions equal
to 7.5% of the gross premium earned on marine insurance. They also were entitled
to receive a 20% contingent commission on net underwriting profits.
AVIATION INSURANCE
In 1995 Navigators received its aviation business both as a direct
participant, and as a reinsurer of the same pool members as the marine pool
described above. Navigators' net share of the aviation pool was 56% in 1995 and
48% in each of 1994 and 1993. On October 1, 1995, Navigators increased its
participation in commercial airline business to 100%. The aviation pool is
managed by one of the Somerset Companies, which in 1995, 1994 and 1993 received
commissions equal to 7.5% of the gross earned premiums, and was entitled to
receive a 20% contingent commission on net underwriting profits.
PROPERTY AND INLAND MARINE INSURANCE
In 1995 Navigators received its property insurance through direct
participation in pools managed by certain Somerset Companies. Navigators'
participation in the pool was 85% in each of 1995, 1994 and 1993. The remaining
15% was written by Reco. This business consists primarily of inland marine
risks, although prior to 1995 this business consisted primarily of large
commercial and industrial property risks. The Somerset Companies in 1995, 1994
and 1993 received commissions on property insurance equal to 10% of gross earned
premiums and were entitled to receive a 20% contingent commission on net
underwriting profits. The Somerset Companies in 1995, 1994 and 1993 received
commissions on inland marine insurance equal, respectively, to 7.5%, 10% and 10%
of gross earned premiums and were entitled to receive a 20% commission on net
underwriting profits. In late 1994, Navigators decided to cease writing large
commercial and industrial property risks and therefore premium volume in this
line in 1995 was greatly reduced.
SPECIALTY REINSURANCE AND NON-MARINE INSURANCE
Navigators receives its reinsurance through direct participation in a
book of business managed by one of the Somerset Companies. Navigators'
participation in this business was 100% in 1995 and in excess of 95% in 1994 and
1993. The remaining business was written by PLM. This reinsurance consists
primarily of excess of loss and quota share property, surety, and other
specialty reinsurance lines. The managing company in 1995, 1994 and 1993
received commissions of 7.5% of gross earned premium and was entitled to a
contingent commission of 20% of net underwriting profits. During 1995 Navigators
began writing a book of non-marine program business managed by the same Somerset
Company. Navigators writes 100% of this business.
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<PAGE> 5
REINSURANCE CEDED
Navigators utilizes reinsurance principally to reduce its net liability
on individual risks, to protect against catastrophic losses, to maintain desired
ratios of net premiums written to statutory surplus and to stabilize loss
ratios. Under its reinsurance programs, Navigators seeks to limit its maximum
loss per policy to $1,000,000 in any one loss event.
The ceding of reinsurance does not discharge the original insurer from
its primary liability to the policyholder. The ceding company is required to pay
the losses even if the assuming company fails to meet its obligations under the
reinsurance agreement.
Reinsurance is generally written under treaty contracts in which coverage
is either on a proportional basis, where the reinsurer shares proportionately in
premiums and losses, or on an excess of loss basis, where only losses above a
fixed point are reinsured.
Navigators, both directly and through the syndicates in which it
participates, is protected by various treaty and facultative reinsurance
agreements. Navigators diversifies its reinsurance by reinsuring with a number
of different reinsurers, principally in the United States and European
reinsurance markets. This coverage is placed on behalf of Navigators by a number
of different reinsurance intermediaries, each of which is employed because of
its expertise in placing a particular type of coverage. All such intermediaries
are compensated by the reinsurers.
Navigators' reinsurance security committee continually monitors the
financial strength of its reinsurers and the amounts of reinsurance receivables
from those reinsurers. To the extent that it is determined that the ultimate
amount collectible is less than the amount recorded on a receivable, a reserve
is established. At each of December 31, 1995 and 1994, an allowance for
uncollectible reinsurance of $800,000 was carried.
RESERVES
Insurance companies are required to maintain reserves for unpaid losses
and unpaid loss adjustment expenses ("LAE") for all lines of business. These
reserves are intended to cover the probable ultimate cost of settling all losses
incurred and unpaid, including those incurred but not reported. The
determination of reserves for losses and LAE for insurance companies such as
Navigators is dependent upon the receipt of information from the various pools
in which such companies participate. Generally, there is a lag between the time
premiums are written and related losses and LAE are incurred, and the time such
transactions are reported to the pools and, subsequently, to Navigators.
Navigators establishes reserves for reported claims when Navigators first
receives notice of the claim. In the case of direct business and assumed excess
of loss reinsurance, reserves are established by Navigators on a case-by-case
basis by evaluating several factors, including the type of risk involved,
knowledge of the circumstances surrounding such claim, severity of injury or
damage, the potential for ultimate exposure, experience of Navigators with the
insured and the broker on the line of business, and the policy provisions
relating to the type of claim. Navigators also establishes reserves for
proportional treaty claims based on reports received from ceding insurers or
pools in which they participate. Reserves for incurred but not reported losses
for all of Navigators' business are determined, in part, on the basis of
statistical information and in part on industry experience.
At any time, loss reserves are only estimates of what the insurer or
reinsurer expects to pay on claims, based on facts and circumstances then known,
and it is possible that the ultimate liability may exceed or be less than such
estimates. Such estimates are based, among other things, on predictions of
future events and estimates of future trends in claim severity and frequency.
During the loss settlement period, which, in some cases, may last several years,
additional facts regarding
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<PAGE> 6
individual claims may become known and, accordingly, it often becomes necessary
to refine and adjust the estimates of liability on a claim upward or downward.
Even then, the ultimate liability may exceed or be less than the revised
estimates. The reserving process is intended to provide implicit recognition of
the impact of inflation and other factors affecting loss payments by taking into
account changes in historical payment patterns and perceived probable trends.
There is generally no precise method, however, for the subsequent evaluation of
the adequacy of the consideration given to inflation or to any other specific
factor, because the eventual deficiency or redundancy of reserves is affected by
many factors, some of which are interdependent.
Navigators records only those premiums which are reported to it through
the end of each calendar year. However, Navigators does estimate premiums
related to quarterly reports from the pool manager which have not been received
prior to preparation of financial statements. There are two types of premium
reporting lags to which Navigators may be subject. First, there is an inherent
delay in the reporting of treaty reinsurance due to the fact that there is a lag
between the time that premium and loss activity is recorded on the books of the
reinsureds and the time the reinsured reports those activities to the reinsurer.
Second, a substantial portion of the premiums Navigators derives is from
international business. In this business, there is a significant time lag from
the time the policy is bound overseas to the receipt of the policy by the pool
manager, at which time the pool manager records the premium in its records.
Considerable premium relating to a fiscal year is reported in subsequent years
at the pool level and, therefore, at Navigators as well. To the extent a lag
exists in the reporting of, and Navigators' accounting for, such premiums, a
comparable lag occurs in this recording of related incurred but not reported
losses and LAE which properly matches recorded revenue with related expenses.
Navigators does not discount its reserves in an attempt to estimate the
present value of losses or LAE that may eventually be paid or for any other
reason. The accompanying tables present an analysis of losses and LAE.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Net reserves for losses and LAE at
beginning of year..................................... $135,377 $103,176 $ 89,361
-------- -------- --------
Provision for losses and LAE for
claims occurring in the current year.................. 54,030 97,145 61,120
Increase in estimated losses and
LAE for claims occurring in prior years............... 7,023 1,130 5,424
-------- -------- --------
Incurred losses and LAE.................................. 61,053 98,275 66,544
-------- -------- --------
Losses and LAE payments for claims
occurring during:
Current year....................................... (10,482) ( 33,374) ( 14,731)
Prior years........................................ (47,187) ( 32,700) ( 37,998)
-------- -------- --------
Losses and LAE payments.................................. (57,669) ( 66,074) ( 52,729)
-------- -------- --------
Net reserves for losses and LAE at end
of the year........................................... $138,761 $135,377 $103,176
Reinsurance receivables on unpaid losses and LAE......... 135,093 179,521 144,170
-------- -------- --------
Gross reserves for losses and LAE at end of year......... $273,854 $314,898 $247,346
======== ======== ========
</TABLE>
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<PAGE> 7
The table below presents the development of Navigators' GAAP balance
sheet reserves for 1985 through 1995. The line "Reserves for losses and LAE"
reflects the reserves at the balance sheet date for each of the indicated years
and represents the estimated amount of losses and LAE arising in all prior years
that are unpaid at the balance sheet date. The "Reserves re-estimated" lines of
the table reflect the re-estimated amount of the previously recorded reserves
based on experience as of the end of each succeeding year. The estimate changes
as more information becomes known about the frequency and severity of claims for
individual years. The "Cumulative redundancy (deficiency)" lines of the table
reflect the cumulative amounts developed as of successive years with respect to
the aforementioned reserve liability. The cumulative deficiency represents the
aggregate change in the estimates over all prior years.
For each calendar year end, the reserves for losses and LAE are not
adjusted in the table to reflect additional premiums reported to Navigators in
subsequent calendar years. However, the remainder of the table allocates losses
and LAE reported and recorded in subsequent years to all prior years starting
with the year in which the loss was incurred. For example, assume that a loss
occurred in 1985 and was not reported to Navigators until 1987, the amount of
such loss will appear as a deficiency in both 1985 and 1986, although the
premiums related to the policy may not be reported in income until 1986.
Conditions and trends that have affected development of the liability in the
past may not necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies based on these
tables.
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<PAGE> 8
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1985 1986 1987 1988 1989 1990
---- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Reserves for losses
and LAE.................... $13,240 $30,142 $51,364 $54,326 $59,477 $70,457
Reserves for losses and
LAE reestimated as of:
One year later........... 15,024 30,645 52,018 53,841 61,449 71,643
Two years later.......... 15,958 30,579 51,795 53,466 62,206 73,849
Three years later........ 16,560 31,644 49,163 51,297 61,255 73,441
Four years later......... 17,005 30,717 47,023 49,356 60,062 73,349
Five years later......... 17,332 29,256 45,775 48,105 60,476 72,706
Six years later.......... 17,082 29,453 44,699 48,056 60,490
Seven years later........ 17,271 28,602 44,701 48,176
Eight years later........ 16,681 28,486 44,355
Nine years later......... 16,692 28,383
Ten years later.......... 16,748
Cumulative redundancy
(deficiency) (3,508) 1,759 7,009 6,150 (1,013) (2,249)
Cumulative paid as of:
One year later........... 4,187 9,872 15,214 13,772 17,593 22,784
Two years later.......... 8,760 15,712 23,531 22,354 29,694 36,532
Three years later........ 11,534 19,131 27,810 29,134 37,032 47,060
Four years later......... 11,902 20,650 32,625 33,178 43,270 51,769
Five years later......... 12,671 22,945 34,289 37,255 46,066 57,421
Six years later.......... 13,697 23,780 37,337 38,299 50,456
Seven years later........ 13,842 25,171 37,492 41,705
Eight years later........ 13,867 24,990 39,738
Nine years later......... 14,080 26,178
Ten years later.......... 14,798
Gross liability-end of year
Reinsurance recoverable
Net Liability end of year
Gross re-estimated latest
Re-estimated recoverable
latest
Net re-estimated latest
Gross cumulative
deficiency
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Reserves for losses
and LAE.................... $77,507 $89,361 $103,176 $135,377 $138,761
Reserves for losses and
LAE reestimated as of:
One year later........... 80,478 94,785 104,306 142,400
Two years later.......... 80,937 98,062 102,831
Three years later........ 81,322 98,338
Four years later......... 80,652
Five years later.........
Six years later..........
Seven years later........
Eight years later........
Nine years later.........
Ten years later..........
Cumulative redundancy
(deficiency) (3,145) (8,977) 345 (7,023)
Cumulative paid as of:
One year later........... 25,741 37,998 32,700 47,187
Two years later.......... 43,688 54,552 53,603
Three years later........ 51,753 65,997
Four years later......... 59,308
Five years later.........
Six years later..........
Seven years later........
Eight years later........
Nine years later.........
Ten years later..........
Gross liability-end of year 224,191 247,346 314,898 273,854
Reinsurance recoverable 134,830 144,170 179,521 135,093
------- ------- ------- -------
Net Liability end of year 89,361 103,176 135,377 138,761
Gross re-estimated latest 273,396 259,358 338,472
Re-estimated recoverable 175,058 156,527 196,072
latest ------- ------- -------
Net re-estimated latest 98,338 102,831 142,400
Gross cumulative (49,205) (12,012) (23,574)
deficiency
</TABLE>
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<PAGE> 9
The table shows a cumulative redundancy for years ended December 31,
1993, 1988, 1987, and 1986 of $345,000, $6,150,000, $7,009,000 and $1,759,000,
respectively. The cumulative deficiencies for the years ended December 31, 1985,
1989 through 1992 resulted from the allocation of losses to the appropriate
calendar years without regard to any additional premiums relating to such
calendar years which were reported to and recorded by Navigators in subsequent
periods. These deficiencies are offset, in part, by additional earned premiums
for such respective calendar years reported and recorded by Navigators in
subsequent years. The deficiency for 1994 resulted from further development of
losses from the Northridge Earthquake (defined below).
Management believes that Navigators' reserves for losses and LAE are
adequate to cover the ultimate cost of losses and LAE on reported and unreported
claims.
ENVIRONMENTAL POLLUTION AND ASBESTOS RELATED CLAIMS
In 1995 Navigators paid a net amount of $117,000 for environmental
pollution and asbestos related claims. As of December 31, 1995, Navigators
carried a net reserve of $876,000 for the potential exposure of Navigators to
such claims. Management believes that its reserves for such claims are adequate,
because Navigators' participation in such risks is generally in the higher
excess layers and, based on a continuing review of such claims, management
believes that a majority of these claims will be unlikely to penetrate such high
excess layers of coverage. As of December 31, 1995, there were 1,594 open claims
with environmental pollution and asbestos exposure. Management, however, will
continue to review its exposure to and reserves for such claims. Management
believes that any potential exposure of Navigators to these claims exists
predominately in connection with the marine business.
INVESTMENT POLICY
The investment of the Company's various subsidiaries must comply with the
insurance laws of New York State, the domiciliary state of Navigators Insurance
Company and NIC Insurance Company. These laws prescribe the kind, 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 and common stocks, real estate mortgages and real
estate. Navigators has no investment in derivatives, and its investment
guidelines preclude the acquisition of derivatives.
Navigators' investments are subject to the direction and control of its
Board of Directors and are reviewed on a quarterly basis. The investments are
managed by various professional fixed income and equity portfolio managers.
Current investment objectives are to maximize annual after tax income in the
context of preserving and enhancing capital and statutory surplus. Navigators
seeks to obtain these objectives by investing principally in municipal bonds,
U.S. Government obligations, corporate bonds, and preferred and common stock.
Navigators' investment guidelines require that at least 90% of the fixed income
portfolio be rated "A" or better by a nationally recognized rating organization.
Up to 25% of the total portfolio may be invested in debt securities rated BBB,
BAA or higher, or equity securities.
In order to achieve the above-mentioned investment objectives, fixed
maturity securities are held for an indefinite period of time. These securities
may be sold in response to changes in interest rates, prepayments, regulatory
requirements, or credit risk.
The majority of the investment income of the Somerset Companies is
derived from fiduciary funds invested in accordance with the guidelines of
various state insurance departments. These guidelines typically require
investments in short-term instruments.
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<PAGE> 10
The following tables reflect the consolidated investments of the Company.
The table set forth below reflects investments and income earned thereon for the
Company on a consolidated basis, for Navigators Insurance Company and NIC
Insurance Company together as a group, and for the Somerset Companies together
as a group, for the three years ended December 31, 1995:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
The Company Consolidated
Average investments.......................... $247,392 $228,749 $213,837
Net investment income........................ 14,143 13,034 11,588
Average yield................................ 5.72% 5.70% 5.42%
Navigators Insurance Company
NIC Insurance Company and Parent
Average investments.......................... $217,639 $189,296 $176,492
Net investment income........................ 12,422 11,650 10,600
Average yield................................ 5.71% 6.15% 6.01%
The Somerset Companies(1)
Average investments.......................... $ 29,752 $ 39,453 $ 37,345
Net investment income........................ 1,721 1,384 988
Average yield................................ 5.78% 3.51% 2.65%
</TABLE>
(1) Included in the Somerset Companies average investments are fiduciary cash
and short-term investments, not included in the balance sheet, on which
the Somerset Companies earn investment income. See Footnote 6 to the
Company's Consolidated Financial Statements.
The following table summarizes the consolidated non-affiliated cash and
investments of the Company as of December 31, 1995:
<TABLE>
<CAPTION>
Carrying Value Percent
(in thousands) of Total
<S> <C> <C>
Cash and short-term investments............ $ 14,623 6%
U.S. Treasuries............................ 9,462 4%
Municipal bonds............................ 174,320 75%
Mortgage backed securities................. 21,424 9%
Asset backed securities.................... 4,250 2%
Corporate bonds............................ 1,242 1%
Common stocks.............................. 7,862 3%
-------- ---
Total............................. $233,183 100%
======== ===
</TABLE>
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<PAGE> 11
REGULATION
The Company and its insurance subsidiaries are subject to regulation
under the insurance statutes, including holding company statutes, of various
states. These regulations vary from state to state but generally require
insurance holding companies, and insurers that are subsidiaries of holding
companies, to register and file reports concerning their capital structure,
ownership, financial condition and general business operations. Such regulations
also generally require prior regulatory agency approval of changes in control of
an insurer and of transactions within the holding company structure. The
regulatory agencies of each state have statutory authorization to enforce their
laws and regulations through various administrative orders and enforcement
proceedings.
The Insurance Department of the State of New York (the "New York
Department") is the Company's principal regulatory agency. In addition,
Navigators Insurance Company is deemed to be "commercially domiciled" in
California based on past premium volume written in the state and, as a result,
the Company is subject to certain provisions of the California insurance holding
company laws, particularly those governing changes in control, the payment of
stockholder dividends and intercompany transactions. An insurer's status as
"commercially domiciled" is determined annually under a statutory formula.
Navigators Insurance Company's status may change in California in the future if
its premium volume there decreases to below 20% of its overall premium volume
over the most recent three years.
The New York Insurance Law provides that no corporation or other person
may acquire control of the Company, and thus indirect control of Navigators,
unless it has given notice to Navigators, and obtained prior written approval of
the Superintendent of Insurance of the State of New York for such acquisition.
The California insurance holding company laws similarly provide that no
corporation or other person may acquire control of the Company, and thus
indirect control of Navigators Insurance Company, unless it has given notice to
Navigators Insurance Company, and obtained prior written approval of the
California Department of Insurance for such acquisition. In both New York and
California, any purchaser of 10% (817,240 shares) or more of the outstanding
shares of Common Stock of the Company would be presumed to have acquired control
of the Company, unless such presumption is rebutted.
Navigators Insurance Company and NIC Insurance Company may pay dividends
only out of their statutory earned surplus under New York law. Generally, the
maximum amount of dividends Navigators Insurance Company and NIC Insurance
Company may pay without regulatory approval in any twelve-month period is the
lesser of adjusted net investment income or 10% of statutory surplus.
Under California law, Navigators Insurance Company will need the approval
of the California Department of Insurance for dividends which exceed the greater
of 10% of statutory surplus or 100% of net income, but not exceeding earned
surplus, in any twelve-month period.
Under insolvency or guaranty laws in most states in which Navigators
Insurance Company and NIC Insurance Company operate, insurers doing business in
those states can be assessed up to prescribed limits for policyholder losses of
insolvent insurance companies.
Navigators Insurance Company is licensed to engage in the insurance and
reinsurance business in 46 states and the District of Columbia and Puerto Rico
and is an approved reinsurer in three of the remaining four states. NIC
Insurance Company is licensed to engage in the insurance and reinsurance
business in the State of New York and is an approved surplus lines insurer in 23
other states and the District of Columbia.
-10-
<PAGE> 12
As part of its general regulatory oversight process, the New York
Department conducts detailed triennial examinations of the books, records and
accounts of New York insurance companies. Navigators Insurance Company and NIC
Insurance Company were last examined by the New York Department in 1990.
The Insurance Regulatory Information System ("IRIS") was developed by the
National Association of Insurance Commissioners ("NAIC") and is intended
primarily to assist state insurance departments in executing their statutory
mandates to oversee the financial condition of insurance companies operating in
their respective states. IRIS identifies eleven industry ratios and specifies
"usual values" for each ratio. Departure from the usual values on four or more
of the ratios can lead to inquiries from individual state insurance
commissioners as to certain aspects of an insurer's business. As of December 31,
1993, due primarily to an increase in marine and aviation premium rates, the
Company's results were outside of the usual values for two ratios (change in
writings and the estimated current reserve deficiency to surplus ratio). As of
December 31, 1994, due primarily to losses from the Northridge Earthquake
(defined below), the Company's results were outside of the usual value for one
ratio (the "Two-Year Overall Operating" ratio). As of December 31, 1995, due
primarily to losses from the Northridge Earthquake, the Company's results were
outside of the usual value for one ratio (the "Two-Year Overall Operating"
ratio). The Company does not expect that this "unusual" value will have any
effect on its operations.
From time to time various regulatory and legislative changes have been
proposed in the insurance and reinsurance industry, some of which could have an
effect on reinsurers. Among the proposals that have in the past been or are at
present being considered are the possible introduction of federal regulation in
addition to, or in lieu of, the current system of state regulation of insurers
and proposals in various state legislatures (some of which proposals have been
enacted) to conform portions of their insurance laws and regulations to various
model acts adopted by the NAIC. The Company is unable to predict whether any of
these laws and regulations will be adopted, the form in which any such laws and
regulations would be adopted, or the effect, if any, these developments would
have on the operations and financial condition of the Company.
State insurance departments have adopted a new methodology developed by
the NAIC for assessing the adequacy of statutory surplus of property and
casualty insurers which includes a risk- based capital formula that attempts to
measure statutory capital and surplus needs based on the risks in a company's
mix of products and investment portfolio. The formula is designed to allow state
insurance regulators to identify potential weakly capitalized companies. Under
the formula, a company determines its "risk-based capital" ("RBC") by taking
into account certain risks related to the insurer's assets (including risks
related to its investment portfolio and ceded reinsurance) and the insurer's
liabilities (including underwriting risks related to the nature and experience
of its insurance business). The risk-based capital rules provide for different
levels of regulatory attention depending on the ratio of a company's total
adjusted capital to its "authorized control level" of RBC. Based on calculations
made by the Company, the risk-based capital level for the Company's subsidiaries
exceeds a level that would trigger regulatory attention. In their respective
1995 statutory financial statements, the Company's insurance subsidiaries have
complied with the NAIC's risk-based capital reporting requirements.
In addition to regulations applicable to insurance agents generally, the
Somerset Companies are subject to Managing General Agents Acts in their domicile
jurisdictions. The Somerset Companies believe that they are in compliance with
such acts.
COMPETITION
The property and casualty insurance industry, comprised of approximately
900 leading national insurers and over 3,000 U.S. insurers total, is highly
competitive. The continuing effects of the recession in the early 1990s, coupled
with a demand for low-cost, high quality service, have created
-11-
<PAGE> 13
difficult conditions in the domestic property and casualty market, including a
leveling or reduction in premium rates in certain lines of business in which the
Company competes, which the Company believes will not improve dramatically in
the foreseeable future.
Navigators faces competition from both domestic and foreign marine,
aviation and non-marine insurers, some of whom have longer operating histories
and greater financial, marketing and management resources. Competition in the
types of insurance in which Navigators is engaged is based on many factors,
including the perceived overall financial strength of Navigators, pricing and
other terms and conditions of products and services offered, business
experience, marketing and distribution arrangements, agency and broker
relationships, levels of customer service (including speed of claims payments),
product differentiation and quality, operating efficiencies and underwriting.
Furthermore, insureds tend to favor large, financially strong insurers, and
Navigators faces the risk that it will lose market share to more highly rated
insurers.
EMPLOYEES
As of December 31, 1995, the Company employed 127 people, of whom 17 were
insurance underwriters.
ITEM 2. PROPERTIES.
The Company's administrative offices are occupied pursuant to a lease,
from an unaffiliated company, in a building located at 123 William Street, New
York, New York. The lease, which expires on May 14, 2000, is an obligation of
NMC. None of the Somerset Companies own any real or material personal property.
Each of the Somerset Companies has various noncancellable operating leases for
its office facilities, which expire at various dates through May 2000.
ITEM 3. 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 Company.
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 Commissioner 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of 1995.
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<PAGE> 14
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Common Stock is traded over-the-counter (The Nasdaq National Market)
under the symbol NAVG. Such over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not necessarily represent actual transactions.
The high and low bid prices for quarterly periods since January 1, 1994
are as follows:
<TABLE>
<CAPTION>
1995 1994
---------------- -------------------
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $19.75 $13.75 $ 35.00 $ 16.50
Second Quarter $15.75 $12.75 $ 20.00 $ 17.00
Third Quarter $18.50 $13.50 $ 18.75 $ 16.00
Fourth Quarter $19.50 $16.75 $ 17.25 $ 14.25
</TABLE>
STOCKHOLDERS
There were approximately 100 holders of record of shares of Common Stock
as of March 28, 1996. However, Management believes there are in excess of 1,000
beneficial owners of the Common Stock.
DIVIDENDS
No cash dividends on the Common Stock have been paid. While there
presently is no intention to pay dividends on Common Stock in the foreseeable
future, future declarations, if any, and the amounts of such dividends will be
dependent upon, among other factors, the earnings of the Company, its financial
condition and business needs, restrictive covenants under debt arrangements, the
capital and surplus requirements of its subsidiaries and applicable government
regulations.
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<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth summary consolidated financial information
of the Company for each of the years in the five-year period ended December 31,
1995. The information for the five years ended December 31, 1995 has been
derived from the audited consolidated financial statements of the Company. See
the Consolidated Financial Statements of the Company including notes thereto
included herein.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OPERATING INFORMATION
Revenues:
Net premiums earned $ 87,908 $ 90,483 $ 96,843 $ 69,802 $ 50,315
Commission income 10,659 10,857 9,889 8,865 7,299
Net investment income 14,143 13,034 11,588 11,323 12,366
Net realized gains 291 (863) 521 1,909 700
Other income 713 381 112 114 108
-------- --------- -------- -------- --------
Total revenues 113,714 113,892 118,953 92,013 70,788
-------- --------- -------- -------- --------
Expenses:
Losses and loss adjustment
expenses incurred 61,053 98,275 66,544 51,654 34,616
Commissions 12,228 17,219 6,194 3,197 317
Other operating expenses 22,534 22,212 20,824 19,528 17,355
Interest expense 2,336 2,080 273 186 226
Merger expense -- 5,680 -- -- --
-------- --------- -------- -------- --------
Total expenses 98,151 145,466 93,835 74,565 52,514
-------- --------- -------- -------- --------
Operating income before income
taxes and cumulative effect of
change in accounting
principle $ 15,563 $ (31,574) $ 25,118 $ 17,448 $ 18,274
Net income (loss)(1) $ 12,582 $ (20,495) $ 21,585 $ 15,963 $ 15,925
Average common and common
equivalent shares
outstanding 8,219 8,209 8,346 8,337 8,299
Net income per share $ 1.53 $ (2.50) $ 2.59 $ 1.91 $ 1.92
BALANCE SHEET INFORMATION
(AT END OF PERIOD)
Total investments(2) $228,126 $ 202,373 $198,145 $174,407 $153,443
Total assets 435,552 474,031 431,028 376,371 281,988
Loss reserves 273,854 314,898 247,346 224,191 156,734
Total liabilities 336,476 396,508 313,751 273,330 190,063
Total stockholders' equity(2)(3) 99,076 77,523 117,277 103,041 91,926
Book value per share(2)(3) $ 12.12 $ 9.51 $ 14.39 $ 12.68 $ 11.35
</TABLE>
(1) Net income from 1992 through 1995 reflects the adoption of FASB
Statement No. 109 and from 1993 through 1995 reflects the adoption of
FASB Statement No. 113 and EITF Issue No. 93-6.
(2) Investments and stockholders' equity for 1995 and 1994 reflect the
adoption of FASB Statement No. 115.
(3) No cash dividends have been declared or paid.
-14-
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company is a holding company with ten active wholly owned
subsidiaries.
Two of the Company's subsidiaries are insurance companies: Navigators
Insurance Company and NIC Insurance Company. Navigators Insurance Company is the
Company's largest insurance company subsidiary and has been active since 1983.
It specializes principally in underwriting marine, aviation and property
(primarily inland marine) insurance and certain lines of specialty reinsurance
and non-marine insurance. NIC Insurance Company is a wholly owned subsidiary of
Navigators Insurance Company, was licensed in 1989 and began operations in 1990.
It underwrites a small book of property insurance in certain states and,
pursuant to an intercompany reinsurance pooling agreement, cedes 100% of its
gross direct writings from this business to Navigators Insurance Company in
exchange for assuming 10% of the total retained business of Navigators Insurance
Company.
Eight of the Company's subsidiaries, the Somerset Companies, are a group
of underwriting management companies. The Somerset Companies produce, manage and
underwrite insurance and reinsurance for Navigators and nine other unrelated
insurance companies.
The Somerset Companies were acquired by the Company in 1994 pursuant to
the Mergers that were approved by the stockholders of the Company at a special
meeting held June 30, 1994. The Company accounted for the transfer of the
Somerset Companies' assets and liabilities at historical cost under a method of
accounting similar to "pooling of interests" and, accordingly, has reported
results of operations as if the Company and the Somerset Companies had been
combined since inception.
The 1993 financial statements included herein reflect the Mergers by
including the historical accounts of the Somerset Companies.
The Company's revenue is primarily comprised of premiums, commissions and
investment income. Navigators derives substantially all of its business from
direct participation in, or by reinsuring certain members of, insurance pools
managed by the Somerset Companies. The insurance business and operations of
Navigators are managed by one of the Somerset Companies, NMC.
The Somerset Companies specialize principally in four lines of business:
marine, aviation and property (primarily inland marine) insurance and certain
lines of specialty reinsurance and non-marine insurance. In 1995 they underwrote
this business through three syndicates of insurance companies, Navigators having
the largest participation in each of the three syndicates. They derive their
revenue from commissions, investment income, service fees and cost reimbursement
arrangements 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 three syndicates. 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, premiums and commissions may increase. On the
downturn of the property and casualty cycle, supply exceeds demand, and as a
result, premiums and commissions may decrease.
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.
-15-
<PAGE> 17
RESULTS OF OPERATIONS
General. The 1994 results of operations of the Company were dominated by
the Northridge, California earthquake, which occurred on January 17, 1994 (the
"Northridge Earthquake"). The Company's pre-tax loss (including direct property
losses of $35,388,000, reinsurance reinstatement premiums of $1,925,000 and
reinsurance account losses of $1,952,000, but net of reinsurance) in 1994 from
the Northridge Earthquake totalled $39,265,000.
As a result of this loss, management restructured the Company by
withdrawing from the large commercial and industrial property business which
produced most of the earthquake loss, emphasizing its core ocean marine and
aviation business, and developing its inland marine business as well as a new
non-marine program book of business.
The results of 1995 reflect this restructuring in that written premiums
have been reduced while the continuing book of business has produced profits.
However, the 1995 results also reflect the further development of losses
from the Northridge Earthquake. During 1995 the total gross losses on direct
property claims arising from the Northridge Earthquake increased approximately
$18,340,000 from $125,361,000 to $143,701,000. The Company added gross bulk
reserves of $11,000,000 at September 30, 1995, which are expected to cover any
further deterioration of losses from the Northridge Earthquake. On a net basis
the losses and reserve increase relating to the Northridge Earthquake represent
pre-tax charges of approximately $10,721,000 in 1995. There can be no assurance
given that additional losses will not be reported or adjustments made to
existing reserves.
The Company's net after tax income of $21.6 million for 1993 decreased
largely as a result of the Northridge Earthquake to an after tax loss of $20.5
million in 1994 and increased to after tax income of $12.6 million in 1995,
primarily due to return to normal experience in comparison to the losses from
the Northridge Earthquake. On a per share basis, this represents after tax
income of $2.59 in 1993, a net loss of $2.50 in 1994 and after tax income of
$1.53 in 1995. Included in pre-tax income were net realized capital gains of
$521,000 in 1993, a net realized loss of $863,000 in 1994, and a net realized
gain of $291,000 in 1995. Excluding these capital gains and losses, after tax
earnings were $21.2 million in 1993, there was an after tax loss of $19.9
million in 1994, and after tax earnings were $12.4 million in 1995.
Revenues. Gross written premium went from $213.7 million in 1993 to
$189.6 million in 1994 and to $148.9 million in 1995. The following table sets
forth the Company's gross written premium by line of business and net written
premium in the aggregate for the periods indicated:
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<PAGE> 18
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Marine .............. $ 61,684 42% $ 65,046 34% $ 71,470 33%
Aviation ............ 51,286 34% 48,482 26% 44,446 21%
Property and Inland
Marine ............ 11,620 8% 45,989 24% 72,607 34%
Specialty Reinsurance
and Non-Marine
Program Insurance .. 24,317 16% 30,035 16% 25,133 12%
--------- --- --------- --- --------- ---
Total Gross
Premium
Written ..... $ 148,907 100% $ 189,552 100% $ 213,656 100%
========= === ========= === ========= ===
Ceded Premium
Written ............. (67,639) (98,001) (109,838)
--------- --------- ---------
Total Net
Premium
Written ..... $ 81,268 $ 91,551 $ 103,818
========= ========= =========
</TABLE>
As the above table indicates, since 1993 the composition of the Company's
book of business has changed significantly. The marine business has increased
from 33% to 42% reflecting the Company's commitment to this core business.
Property and inland marine has decreased significantly from 34% to 8% reflecting
the withdrawal from property catastrophe business. Aviation has increased from
21% to 34% due in large part to Navigators' increased participation in that line
of business. Reinsurance and non-marine program business has increased slightly
from 12% to 16%.
Marine Premiums. Navigators' gross marine premium decreased 9% from 1993
to 1994 and a further 5% from 1994 to 1995. The decrease in 1994 was due
primarily to decreases in premium rates during the second part of the year. The
1995 decrease was due to Navigators' reduced participation in the marine pool.
Management believes pricing in marine premium is now subject to increased
competition and significant increases in marine premium may be difficult to
achieve in the near term.
Aviation Premiums. Navigators' aviation gross written premium increased
9% from 1993 to 1994 and a further 6% from 1994 to 1995 reflecting the rate
increases during this period. Airline premium rates have now stabilized and
management does not anticipate growth in aviation premium for 1996.
Property and Inland Marine Premium. Navigators' gross property premium
and inland marine decreased 37% from 1993 to 1994 and decreased 75% from 1994 to
1995. In 1994, this business consisted primarily of large commercial and
industrial property risks, which was essentially a property catastrophe book of
business, with a relatively small amount of inland marine risks. In late 1994,
Navigators decided to cease writing large commercial and industrial property
risks and to concentrate on inland marine risks and, therefore, 1995 gross
written premium is primarily inland marine. Management anticipates growth in
this line for 1996 reflecting the emphasis now being placed on this business.
-17-
<PAGE> 19
Specialty Reinsurance and Non-Marine Insurance Premium. Reinsurance
premium has decreased 3% since 1993. The decrease was due primarily to
management's decision to decrease writing proportional reinsurance. Management
is now developing non-marine program business to augment its reinsurance book
and anticipates modest growth.
Total Premium. Net earned premium in 1993 was $96.8 million, in 1994
$90.5 million, and in 1995 $87.9 million. Net earned premium remained fairly
level from 1994 to 1995 even though net written premium declined. This is
primarily due to the Company's decision to cease writing the property line
during 1994; however, the amortization of the property unearned premium reserve
during the year resulted in only a slight decline in earned premium.
Commission Income. Commission income decreased 2% to $10.7 million during
1995 from $10.9 million and increased 9.8% during 1994. The 1994 increase was
due to increased profit commissions from the marine business. The 1995 decrease
reflects the withdrawal from the property catastrophe business.
Investment Income. Investment income increased 9% to $14.1 million during
1995 from approximately $13.0 million, and 12% from approximately $11.6 million
during 1994. This increase is due primarily to an increased amount of invested
assets.
Reinsurance Ceded. In the ordinary course of business, Navigators
reinsures certain insurance risks with unaffiliated insurance companies for the
purpose of limiting its maximum loss exposure, protecting against catastrophic
losses, and maintaining desired ratios of net premiums written to statutory
surplus. Ceded written premium decreased from $109.8 million in 1993 to $98.0
million in 1994 to $67.6 million in 1995 reflecting decreases in gross written
premium.
Expenses. The ratio of loss and loss adjustment expenses incurred to net
premiums earned ("GAAP loss ratio") was 69.5%, 108.6% and 68.7% in 1995, 1994
and 1993, respectively. The 1994 loss ratio includes direct property losses from
the Northridge Earthquake which at that time totalled $35,388,000. The decrease
in 1995 is due primarily to a return to more normal experience in comparison to
the losses from the Northridge Earthquake, various airline losses and
reinsurance costs in 1994, offset by additional Northridge Earthquake
development in 1995. The Northridge Earthquake increased the loss ratio by 12.2%
and 43.4% in 1995 and 1994, respectively.
Commission expense as a percentage of net premiums earned was 13.9%,
19.0% and 6.4% during 1995, 1994 and 1993, respectively. The increase from 1993
to 1994 is reflective of increased reinstatement premium payments to reinsurers
as a result of the Northridge Earthquake. The decrease in 1995 is due primarily
to fewer reinstatement premiums paid during the year. The reinstatement premiums
in 1994 caused earned premiums to decline but did not result in corresponding
ceding commissions.
Other operating expenses increased 1.4% in 1995 from 1994 and increased
6.7% in 1994 from 1993. Severance charges as a result of a reduction in staff
accounted for approximately $968,000 of the operating expenses in 1995. These
severance charges were offset by a commensurate decrease in salary expenses and
a decrease in guaranty fund assessments.
Interest expense reflected during 1995 is due primarily to funds borrowed
in 1994 to replace capital as a result of losses from the Northridge Earthquake.
Income Taxes. The income tax expense (benefit) for 1995 was $3.0 million,
for 1994 was $(11.0) million and for 1993 $2.9 million. The effective tax rate
for 1995, 1994 and 1993 was 19%, (35)% and 12%, respectively. The tax benefit in
1994 is attributable to the pre-tax loss. The benefit exceeds the Federal
statutory income tax rate as the tax free municipal bond income and dividends
received deduction exceeded slightly the non-deductible merger expenses, the
increase in valuation
-18-
<PAGE> 20
allowance attributable to the increase in the gross deferred tax asset, and
taxation of Somerset Companies income. As a result of the Mergers with the
Group, the Somerset Companies lost their S Corporation status effective June 30,
1994. This change in status from an S Corporation to a C Corporation resulted in
an increase in the ongoing effective Federal, state and local tax rates and an
immediate charge for Federal tax associated with accrued commissions at June 30,
1994 for which no Federal taxes had been provided.
As of December 31, 1995 the deferred Federal tax asset was $8.9 million,
as compared to $13.4 million, at December 31, 1994. At both December 31, 1995
and 1994, the Company was carrying a $775,000 valuation allowance. Management
believes the net deferred tax asset recorded at December 31, 1994 is realizable.
This belief stems from a long history of taxable income prior to 1994, the
immediate actions management took to prevent another loss of such magnitude, and
the inclusion of taxable income generated by the Somerset Companies in the
Federal income tax return as of June 30, 1994.
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 Commissioner 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations was $26.6 million, $5.3 million and $25.9
million for 1995, 1994 and 1993, respectively.
Operating cash flow has been used primarily to acquire additional
investment assets with net purchases during 1995, 1994 and 1993 of $12.8
million, $11.2 million and $25.2 million, respectively.
At December 31, 1995, there were no material commitments for capital
expenditures.
Investment assets (including fiduciary funds held by the Somerset
Companies) have grown at a compound rate of 6.7% over the last two years, from
$224.2 million at December 31, 1993 to $255.1 million at December 31, 1995.
Investment income during this period was $11.6 million in 1993, $13.0 million in
1994 and $14.1 million in 1995. The average yield of the portfolio, excluding
net realized capital gains, increased from 5.4% in 1993 to 5.7% in 1994 and to
5.7% in 1995, reflecting the significant change in interest rates during those
years as well as increased investments in taxable rather than tax free
securities.
In addition, on March 31, 1994, the Company borrowed $23 million from two
banks on a short term basis (the "Bridge Notes"). The Company replaced this loan
with longer term financing pursuant to a credit agreement dated as of August 5,
1994 (the "Credit Agreement") with three banks. The Credit Agreement provides
for (i) revolving credit loans up to $5,000,000 through August 5, 1997 (the
"Revolving Credit Loans"), (ii) a term loan of $25,000,000, (the "Term Loan"),
and (iii) an irrevocable stand-by letter of credit issued by one of the banks
for the benefit of Society of Lloyd's in the amount of (pound)2,585,000
(approximately U.S. $4,014,505 at the exchange rate as of December 31, 1995) for
the account of the Company (the "Letter of Credit"). The proceeds of the draw
down of the Revolving Credit Loans, $3,000,000, and the Term Loan were used to
repay in full all of the Company's obligations under the Bridge Notes and the
obligations of a wholly owned subsidiary of the Company, to one of the banks
under a demand note issued in connection with the borrowing of $3,000,000 by
such subsidiary for working capital. The Revolving Credit Loans, the Term Loan
and the Letter of Credit are currently collateralized by shares of common stock
of the active subsidiaries of the Company
-19-
<PAGE> 21
other than NIC Insurance Company. The Credit Agreement contains covenants common
to transactions of this type, including restrictions on indebtedness and liens,
limitations on mergers and the sale of assets, and maintenance of consolidated
total stockholders' equity, statutory surplus, minimum liquidity and loss
reserves. In addition, the covenants prevent the Company from declaring or
paying dividends during the term of the loans. See Footnote 4 to the Company's
Consolidated Financial Statements.
The majority of the investment assets are in municipal bonds rated "A" or
better by Standard & Poor's or Moody's, or are in U.S. Treasury Bonds.
Navigators has avoided investing in high yield bonds. Therefore, the Company has
no significant exposure to credit risk since the Company's fixed maturity
investments portfolio does not contain any non-investment grade bonds. Both the
municipal and U.S. Treasury Bonds have an average maturity of less than eight
years. Management continually monitors the composition and cash flow of the
investment portfolio in order to maintain the appropriate levels of liquidity.
This ensures the Company's ability to satisfy claims or expenses as they become
due.
Effective January 1, 1994, the Company adopted Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." FASB Statement No. 115 addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
all investments in debt securities. Under FASB Statement No. 115, investments
are classified into three categories. Held-to-maturity securities are debt
securities that the enterprise has the positive intent and ability to hold to
maturity and are reported at amortized cost. Trading securities are debt and
equity securities that are bought and held principally for the purpose of
selling them in the near term and are reported at fair value, with unrealized
gains and losses included in earnings. Available-for-sale securities are debt
and equity securities not classified as either held-to- maturity securities or
trading securities and are reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity. As of December 31, 1995, all debt and equity securities
held by the Company were classified as available- for-sale securities.
Total stockholders' equity was $99.1 million at December 31, 1995, a
27.8% increase for the year. This increase is due to the Company's return to
profitability following the loss in 1994 as well as increases in the value of
the investment portfolio.
As of January 31, 1996, the Company has paid approximately $107.0 million
of claims related to the Northridge Earthquake, of which approximately $78.7
million is subject to indemnification by reinsurers. To date the Company has
experienced no significant difficulties collecting reinsured losses.
The Company was not in compliance with the NAIC's "Two-Year Overall
Operating" ratio in 1995. The exceptional value derived from this ratio was
primarily due to the underwriting losses resulting from the Northridge
Earthquake. If the Two-Year Overall Operating ratio is 100% or more, the NAIC
deems such results to be exceptional. During 1995, the Company's Two-Year
Overall Operating ratio was 115%. The Company does not expect that this
"unusual" value will have an effect on its operations.
The Company's reinsurance has been placed with various U.S. companies
rated "A" or better by A.M. Best Company, Inc., as well as with foreign
insurance companies and with selected syndicates of Lloyd's of London
("Lloyd's"). Certain syndicates at Lloyd's ("Loss Syndicates") and the Lloyd's
market as a whole have reported significant losses in recent years. The Company
has not placed any material amounts of reinsurance with these Loss Syndicates.
In addition, management of the Company believes that the Central Fund of Lloyd's
and other sources of liquidity available to Lloyd's, including the reserves of
Lloyd's syndicates and the personal funds of members of Lloyd's, are sufficient
to satisfy any obligations of syndicates reinsuring the Company in the event
that any such syndicates are unable to directly satisfy such obligations.
Accordingly, management of the Company believes that
-20-
<PAGE> 22
the significant losses reported by Lloyd's syndicates in recent years will not
have a material adverse effect on the Company's liquidity or results of
operations.
The Company believes that the cash flow generated by the operating
activities of the Company's subsidiaries, including the Somerset Companies, will
provide sufficient funds for the Company to meet its liquidity needs over the
next twelve months. Beyond the next twelve months, cash flow available to the
Company 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.
ECONOMIC CONDITIONS
The Company is a specialty insurance company and periods of moderate
economic recession or inflation tend not to have a significant direct effect on
the Company's underwriting operations. They do, however, impact the Company's
investment portfolio. In 1995, interest rates declined and the Company's
investment income was negatively impacted by lower yields. However, because the
price of fixed maturity investments generally increase as interest rates
decline, the market value of the Company's fixed maturity investments increased
during this period.
Management considers the potential impact of these economic trends in
estimating Navigators' loss reserves. Management believes that the underwriting
controls it maintains, plus the fact that the majority of Navigators' business
is in lines of insurance which have relatively short loss payout patterns, both
assist in estimating more accurately ultimate claim costs and lessen the
potential adverse impact of the economy on Navigators.
ACCOUNTING PRONOUNCEMENTS ADOPTED
Effective January 1, 1993, the Company adopted FASB Statement No. 113.
FASB Statement No. 113 eliminates the practice of reporting assets and
liabilities relating to reinsured contracts net of the effects of reinsurance
and provides guidance in assessing transfer of insurance risk in reinsurance,
including gain or loss recognition.
In July 1993, the EITF reached consensus positions on EITF 93-6. The
consensus position requires that the benefit or cost associated with additional
consideration be recognized to the extent any consideration would be due to or
from the reinsurer based on the contract experience to date. The amount of the
asset or liability recognized must be computed as the difference between the
total contract costs before and after the experience under the contract.
The application of FASB Statement No. 113 and EITF 93-6 served to
increase income before cumulative effect of change in accounting principle for
the year ended December 31, 1993 by $302,000. Net income for the year ended
December 31, 1993 was decreased by an amount of $597,000 reflecting the
cumulative effect of the Company's adoption of EITF 93-6.
Effective January 1, 1994, the Company adopted FASB Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities." FASB Statement No. 115 addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and all investments in debt securities.
These investments are classified into three categories as follows:
- Held-to-Maturity Securities--Debt securities that the enterprise
has the positive intent and ability to hold to maturity; reported
at amortized cost.
-21-
<PAGE> 23
- Trading Securities--Debt and equity securities that are bought
and held principally for the purpose of selling them in the near
term; reported at fair value, with unrealized gains and losses
included in earnings.
- Available-for-Sale Securities--Debt and equity securities not
classified as either held-to-maturity securities or trading
securities; reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate
component of shareholders' equity.
All debt and equity securities held by the Company are classified as
Available-for-Sale Securities. The initial adoption of FASB Statement No. 115
increased the stockholder's equity by $4,609,808 on January 1, 1994.
ACCOUNTING PRONOUNCEMENTS ISSUED NOT YET ADOPTED
In March 1995, the FASB issued Statement No. 121, "Accounting For the
Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed of."
The Statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. The accounting requirements of Statement No. 121
are effective for the Company's 1996 financial statements. The Company does not
expect the implementation of this standard to have a significant impact on its
financial position or results.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation." The Statement establishes financial accounting and
reporting standards for stock-based employee compensation plans. The Statement
encourages a fair value based method of accounting for employee stock options.
The accounting and disclosure requirements of Statement No. 123 are effective
for the Company's 1996 financial statements. The Company intends to continue to
apply the accounting provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" as allowed and will provide the
required disclosures of Statement No. 123 in its 1996 consolidated financial
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements required in response to this
section are submitted as part of Item 14(a) of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning the directors of the Group is contained under
"Election of Directors" in the Company's 1996 Proxy Statement, which information
is incorporated herein by reference.
-22-
<PAGE> 24
The executive officers of the Group as of March 28, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Terence N. Deeks 56 President, Chairman of the Board of Directors
W. Allen Barnett 54 Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
Salvatore A. Margarella 46 Controller
</TABLE>
TERENCE N. DEEKS is the founder of the Group, Navigators Insurance
Company, NIC Insurance Company and of all the Somerset Companies. He is Chairman
of the Board of Directors and President of the Company. He is a director of each
of the Somerset Companies. He is also currently Chairman of Somerset Insurance
Services of Texas, Inc., NMC, Somerset Insurance Services of Washington, Inc.,
Somerset of Georgia, Inc. and Somerset Property, Inc.
W. ALLEN BARNETT has been Senior Vice President, Chief Financial Officer,
Secretary and Treasurer of the Group since March 1987. From May 1985 to February
1987 he was an insurance industry consultant. Prior thereto, he was a financial
officer of Marsh & McLennan Companies, Inc. Mr. Barnett is also currently Senior
Vice President and director of Navigators Insurance Company and NIC Insurance
Company, and Vice President and Assistant Secretary of each of the Somerset
Companies.
SALVATORE A. MARGARELLA has been the Controller of the Group since its
inception and Vice President and Treasurer of Navigators Insurance Company since
1987 and NIC Insurance Company since 1989.
Under the securities laws of the United States, the Company's directors,
its executive (and certain other) officers, and any persons holding more than
ten percent of the Company's common stock are required to report their ownership
of the Company's common stock and any changes in that ownership to the
Securities and Exchange Commission. Specific due dates for these reports have
been established and the Company is required to report in this Form 10-K any
failure to file by these dates. All of these filing requirements were satisfied
by its directors and officers and ten percent holders. In making these
statements, the Company has relied on the written representations of its
incumbent directors and officers and its ten percent holders and copies of the
reports that they have filed with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning executive compensation is contained under
"Compensation of Directors and Executive Officers" in the Company's 1996 Proxy
Statement, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning the security ownership of the directors and
officers of the registrant is contained under "Election of Directors" in the
Company's 1996 Proxy Statement, which information is incorporated herein by
reference.
-23-
<PAGE> 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning relationships and related transactions of the
directors and officers of the Company is contained under "Certain Relationships
and Related Transactions" in the Company's 1996 Proxy Statement, which
information is incorporated herein by reference.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS AND SCHEDULES: The financial statements and
schedules listed in the accompanying Index to Consolidated Financial Statements
and Schedules on page F-1.
2. EXHIBITS: The exhibits listed on the accompanying Index to Exhibits on
page 56 in the sequential numbering system for this report, which page
immediately follows page S-8.
The Exhibits include the management contracts and compensatory plans or
arrangements required to be filed as exhibits to this Form 10-K by Item
601(a)(10)(iii) of Regulation S-K.
(b) Reports on Form 8-K. There were no reports filed on Form 8-K during
the last quarter of the period covered by this Form 10-K.
-24-
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
The Navigators Group, Inc.
(Registrant)
Dated: March 29, 1996 By:/s/ W. ALLEN BARNETT
----------------------
W. Allen Barnett
Senior Vice President,
Secretary
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ TERENCE N. DEEKS President and Chairman of the March 29, 1996
- ---------------------------
Terence N. Deeks Board (Principal Executive Officer)
/s/ W. ALLEN BARNETT Senior Vice President, Secretary March 29, 1996
- ---------------------------
W. Allen Barnett (Principal Financial Officer)
/s/ SALVATORE A. MARGARELLA Controller March 29, 1996
- ---------------------------
Salvatore A. Margarella (Principal Accounting Officer)
/s/ ROBERT M. DEMICHELE Director March 29, 1996
- ---------------------------
Robert M. DeMichele
/s/ LEANDRO S. GALBAN, JR. Director March 29, 1996
- ---------------------------
Leandro S. Galban, Jr.
/s/ JOHN F. KNIGHT Director March 29, 1996
- ---------------------------
John F. Knight
/s/ ROBERT LEPOWSKY Director March 29, 1996
- ---------------------------
Robert Lepowsky
/s/ MARC M. TRACT Director March 29, 1996
- ---------------------------
Marc M. Tract
/s/ MARION A. WOODBURY Director March 29, 1996
- ---------------------------
Marion A. Woodbury
/s/ ROBERT F. WRIGHT Director March 29, 1996
- ---------------------------
Robert F. Wright
</TABLE>
-25-
<PAGE> 27
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets at December 31, 1995 and 1994 F-3
Consolidated Statements of Income for each of the years in the three-year
period ended December 31, 1995 F-4
Consolidated Statements of Stockholders' Equity for each of the years in
the three-year period ended December 31, 1995 F-5
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1995 F-6
Notes to Consolidated Financial Statements F-7
SCHEDULES:
Schedule I Summary of Consolidated Investments--other than
investments in related parties......................... S-1
Schedule II Condensed Financial Information of Registrant.......... S-2
Schedule III Supplementary Insurance Information.................... S-5
Schedule IV Reinsurance............................................ S-6
Schedule V Valuation and Qualifying Accounts...................... S-7
Schedule VI Supplementary Insurance Information Concerning
Property/Casualty Insurance Operations................. S-8
</TABLE>
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
The Navigators Group, Inc.
We have audited the consolidated financial statements of The Navigators
Group, Inc. and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the consolidated financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Navigators Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, The
Navigators Group, Inc. and subsidiaries changed their method of accounting for
certain investments in debt and equity securities in 1994 and reinsurance ceded
in 1993.
/s/ KPMG PEAT MARWICK LLP
New York, New York
March 12, 1996,
except as to Note 16,
which is as of
March 19, 1996
F-2
<PAGE> 29
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1994
---- ----
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost: 1995, $203,468,088; 1994, $179,313,149) $210,697,423 $174,579,590
Equity securities, at fair value (cost: 1995, $5,587,344;
1994, $4,595,463) 7,861,813 5,763,444
Short-term investments, at cost which approximates
fair value 7,290,638 19,643,813
------------ ------------
Total non-affiliated investments 225,849,874 199,986,847
Investment in affiliated company 2,277,048 2,386,258
------------ ------------
Total investments 228,126,922 202,373,105
Cash 7,332,698 730,047
Premiums in course of collection 17,971,529 24,608,943
Commissions receivable 6,048,440 5,126,953
Accrued investment income 3,349,030 2,949,340
Prepaid reinsurance premiums 9,814,146 12,224,772
Reinsurance receivable on paid and unpaid loss and
loss adjustment expenses 147,356,684 199,888,216
Federal income tax recoverable -- 6,406,340
Deferred federal income tax benefit 8,873,030 13,413,513
Deferred policy acquisition costs 2,523,180 2,910,422
Other assets 4,156,755 3,399,430
------------ ------------
Total assets $435,552,414 $474,031,081
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for loss and loss adjustment expenses $273,854,054 $314,898,083
Unearned premiums 26,753,920 35,721,013
Reinsurance balances payable 6,411,746 11,002,226
Loans payable to banks 19,500,000 25,500,000
Federal income tax payable 1,243,364 --
Deferred state and local income taxes 1,382,881 1,221,459
Notes payable to shareholders 1,007,976 2,608,072
Accounts payable and other liabilities 6,322,266 5,556,994
------------ ------------
Total liabilities 336,476,207 396,507,847
============ ============
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 8,172,401 in 1995 and 8,151,401
in 1994 817,240 815,140
Additional paid-in capital 35,321,339 34,983,877
Net unrealized gains (losses) on securities available for sale (net of income
taxes (benefits) of $3,231,293 in 1995
and $(1,212,296) in 1994) 6,272,511 (2,353,281)
Foreign currency translation adjustment 110,185 105,033
Retained earnings 56,554,932 43,972,465
------------ ------------
Total stockholders' equity 99,076,207 77,523,234
------------ ------------
Total liabilities and stockholders' equity $435,552,414 $474,031,081
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 30
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net premiums earned $ 87,907,784 $ 90,482,619 $ 96,842,842
Commission income 10,658,508 10,857,147 9,888,925
Net investment income 14,142,842 13,034,384 11,588,202
Net realized capital gains (losses) 290,919 (862,789) 521,046
Other income 714,244 380,871 111,918
------------ ------------ ------------
Total revenues 113,714,297 113,892,232 118,952,933
------------ ------------ ------------
Operating expenses:
Net losses and loss adjustment expenses
incurred 61,053,384 98,275,358 66,544,087
Commission expense 12,227,956 17,218,799 6,193,603
Other operating expenses 22,534,095 22,212,279 20,824,420
Interest expense 2,335,589 2,080,086 272,564
Merger expenses -- 5,679,697 --
------------ ------------ -----------
Total operating expenses 98,151,024 145,466,219 93,834,674
------------ ------------ ------------
Operating income (loss) before income taxes 15,563,273 (31,573,987) 25,118,259
Income tax expense (benefit):
Current 2,846,957 (5,309,050) 3,637,976
Deferred 133,849 (5,769,738) (702,321)
------------ ------------ ------------
Total income tax expense (benefit) 2,980,806 (11,078,788) 2,935,655
------------ ------------ ------------
Income (loss) before cumulative effect of
change in accounting principle 12,582,467 (20,495,199) 22,182,604
Cumulative effect of change in accounting
principle (net of income tax of $307,625
in 1993) -- -- (597,155)
------------ ------------ ------------
Net income (loss) $ 12,582,467 $(20,495,199) $ 21,585,449
============ ============ ============
Per share data:
Average common and common equivalent shares
outstanding 8,219,118 8,208,794 8,345,554
Income (loss) before cumulative change in
accounting principle $ 1.53 $ (2.50) $ 2.66
Cumulative effect of change in accounting
principle -- -- (.07)
------------ ------------ ------------
Net income (loss) $ 1.53 $ (2.50) $ 2.59
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 31
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Preferred Stock
Balance at beginning of year $ -- $ -- $ --
Issuance of preferred stock -- -- --
----------- ------------ ------------
Balance at end of period $ -- $ -- $ --
=========== ============ ============
Common Stock
Balance at beginning of year $ 815,140 $ 815,044 $ 812,818
Issuance of common stock 2,100 96 2,226
----------- ------------ ------------
Balance at end of period $ 817,240 $ 815,140 $ 815,044
=========== ============ ============
Additional Paid-In Capital
Balance at beginning of year $34,983,877 $ 33,219,001 $ 32,752,892
Issuance of common stock 337,462 9,390 466,154
Somerset stock
retirement/treasury stock sold -- -- (45)
Capitalization of Somerset
undistributed earnings -- 1,755,486 --
----------- ------------ ------------
Balance at end of period $35,321,339 $ 34,983,877 $ 33,219,001
=========== ============ ============
Unrealized gains (losses) on
securities available-for-sale
Balance at beginning of year $(2,353,281) $ 697,272 $ 490,462
Cumulative unrealized
gains at 1/1/94 due to
implementation of FASB 115 -- 4,609,808 --
Change in unrealized gains
(losses) 8,625,792 (7,660,361) 206,810
----------- ------------ ------------
Balance at end of period $ 6,272,511 $ (2,353,281) $ 697,272
=========== ============ ============
Foreign Currency Translation
Adjustment
Balance at beginning of year $ 105,033 $ -- $ --
Change in foreign translation 5,152 105,033 --
----------- ------------ ------------
Balance at end of period $ 110,185 $ 105,033 $ --
=========== ============ ============
Retained Earnings
Balance at beginning of year $43,972,465 $ 82,546,149 $ 68,984,974
Net income (loss) 12,582,467 (20,495,199) 21,585,449
Capitalization of Somerset
undistributed earnings -- (1,755,482) --
Distribution to "S" Corporation
shareholders -- (16,323,003) (8,024,274)
----------- ------------ ------------
Balance at end of period $56,554,932 $ 43,972,465 $ 82,546,149
=========== ============ ============
Total Stockholders' Equity
at end of period $99,076,207 $ 77,523,234 $117,277,466
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 32
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 12,582,467 $(20,495,199) $ 21,585,449
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & amortization 713,512 646,054 384,616
Reinsurance receivable on paid and unpaid
losses and loss adjustment expenses 52,531,532 (48,407,613) (13,765,078)
Reserve for losses and loss adjustment
expenses (41,044,029) 67,551,697 23,155,502
Prepaid reinsurance premiums 2,410,626 11,970,330 (7,039,917)
Unearned premiums (8,967,093) (10,985,803) 14,015,485
Premiums in course of collection 6,637,414 6,168,555 (3,311,334)
Commissions receivable (921,487) (357,059) (662,041)
Deferred policy acquisition costs 387,242 (71,906) (1,010,371)
Accrued investment income (399,690) (96,286) (547,035)
Reinsurance balances payable (4,590,480) 4,868,240 (2,645,826)
Deposits with reinsurers 907,500 (907,500)
Funds due reinsurers -- (447,070) 443,727
Federal income tax recoverable 6,406,340 (6,243,834) 855,648
Federal income tax payable 1,243,364 -- --
Deferred federal income taxes 98,186 (6,090,437) (1,060,782)
Net realized gains on investments (290,919) 862,789 (521,046)
Other (178,835) 5,484,838 (3,023,790)
------------- ------------ -------------
Net cash provided by operating activities $ 26,618,150 $ 5,264,796 $ 25,945,707
------------- ------------ -------------
Investing activities:
Fixed maturities available for sale
Redemption and maturities $ 9,512,604 $ 9,406,440 $ 11,104,153
Sales 67,196,132 24,333,595 66,901,278
Purchases (101,294,720) (45,540,645) (105,054,485)
Equity securities
Sales 1,530,894 3,521,508 1,561,257
Purchases (2,229,379) (1,236,196) (6,455,693)
Payable for securities purchased 386,197 42,943 (1,736,944)
Net sale (purchases) of short-term
investments 12,353,175 (799,210) 11,408,199
Investment in affiliate -- -- (2,581,515)
Purchase of property and equipment (209,868) (895,425) (402,183)
Other -- -- 37,022
------------- ------------ -------------
Net cash used in investing activities $ (12,754,965) $(11,166,990) $ (25,218,911)
------------- ------------ -------------
Financing activities:
Proceeds from bank loans $ 2,000,000 $ 51,000,000 $ 7,270,000
Repayment of bank loans (8,000,000) (32,770,000) (450,000)
Proceeds from exercise of stock options 339,562 9,485 468,380
Notes payable to shareholders, net (1,600,096) 2,608,072 --
Distribution to shareholders -- (16,323,003) (8,024,274)
Other -- -- (45)
------------- ------------ -------------
Net cash provided by financing activities $ (7,260,534) $ 4,524,554 $ (735,939)
------------- ------------ -------------
Increase (decrease) in cash $ 6,602,651 $ (1,377,640) $ (9,143)
Cash at beginning of period 730,047 2,107,687 2,116,830
------------- ------------ -------------
Cash at end of period $ 7,332,698 $ 730,047 $ 2,107,687
============= ============ =============
</TABLE>
Actual federal taxes paid in the years 1995, 1994 and 1993 amounted to
$1,000,000, $0 and $1,900,000, respectively. State and local taxes paid in the
years 1995, 1994 and 1993 amounted to $894,204, $1,432,000 and $681,000,
respectively. Interest paid during 1995, 1994 and 1993 amounted to $1,889,087,
$2,105,919, and $379,834, respectively.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 33
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements, which include the
accounts of The Navigators Group, Inc. (the "Group" or the "Company") and its
subsidiaries, are prepared on the basis of generally accepted accounting
principles. All significant intercompany transactions and balances are
eliminated.
On June 30, 1994, the stockholders of the Group approved eight
substantially identical agreements of merger providing for the acquisition by
the Group of eight affiliated underwriting agencies, 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 known as the "Somerset
Companies").
The Group issued 2,875,000 shares of its common stock for all the
outstanding common stock of the Somerset Companies. The mergers were accounted
for under a method of accounting similar to "pooling of interests." Prior to the
mergers, the consolidated financial statements of the Group and subsidiaries
included the accounts of Navigators Insurance Company and NIC Insurance Company
(collectively known as the "Insurance Companies"). As of the date of the mergers
and for all prior periods presented, the consolidated financial statements of
the Group and subsidiaries include the accounts of the Insurance Companies and
the Somerset Companies.
The Company is now a Holding Company which owns the Insurance Companies
and the Somerset Companies. The Somerset Companies specialize in underwriting
marine, aviation and property (primarily inland marine) insurance and certain
lines of specialty reinsurance and non-marine insurance. The Insurance Companies
derive substantially all of their business from direct participation in, or by
reinsuring certain members of, insurance pools managed by the Somerset
Companies. In addition to the Insurance Companies' participation in the
insurance pools, nine other non-affiliated insurance companies participate, for
which commission income is earned as reflected in the consolidated income
statement. Commission expense as reflected in the consolidated income statements
represents the Insurance Companies' portion of acquisition costs incurred by the
Somerset Companies from non-affiliated brokers and agents.
INVESTMENTS
Effective January 1, 1994, the Company adopted Financial Accounting
Standard No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." FASB Statement No. 115 addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
all investments in debt securities. Under FASB Statement No. 115, investments
are classified into three categories. Held-to-maturity securities are debt
securities that the enterprise has the positive intent and ability to hold to
maturity and are reported at amortized cost. Trading securities are debt and
equity securities that are bought and held principally for the purpose of
selling them in the near term and are reported at fair value, with unrealized
gains and losses included in earnings. Available-for-sale securities are debt
and equity securities not classified as either held-to-maturity securities or
trading securities and are reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
stockholders' equity. As of December 31, 1995, and December 31, 1994, all debt
and equity securities held by the Company are classified as available-for-sale
securities.
Short-term investments are carried at cost which approximates fair
value.
Realized gains and losses on sales of investments are determined on the
basis of the specific identification method. When a decline in fair value of
investments is considered to be "other than temporary," the investments are
written down to net
F-7
<PAGE> 34
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
realizable value. The write down is considered a realized loss in the statement
of income.
PREMIUM REVENUES
Insurance and reinsurance premiums are recognized as income by the
Insurance Companies during the terms of the related policies based on reports
received from the Somerset Companies and ceding reinsurers. Unearned premium
reserves are established to cover the unexpired portion of premiums written.
COMMISSION INCOME
Commission income, based on estimated gross premiums earned from non
affiliated insurers, is recognized over the terms of the related policies.
Contingent commission income, based on estimated net underwriting results from
non affiliated insurers, is recognized when ascertained and is included within
commission income in the accompanying consolidated financial statements. Changes
in prior estimates of commission income and contingent commission income are
recorded when such changes become known.
DEFERRED POLICY ACQUISITION COSTS
Costs of acquiring business which vary with and are directly related to
the production of business are deferred and amortized ratably over the period
that the related premiums are recognized as earned. Such costs primarily include
commission expense, certain management fees and premium taxes. The method of
computing deferred policy acquisition costs limits the deferral to their
estimated net realizable value based on the related unearned premiums and takes
into account anticipated losses and loss adjustment expenses based on historical
and current experience and anticipated investment income.
RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Unpaid losses and loss adjustment expenses are determined on an
individual basis for reported claims from insureds, from reports received from
ceding insurers for insurance assumed from such insurers and on estimates based
on Company and industry experience for incurred but not reported claims and loss
adjustment expenses. The provision for unpaid losses and loss adjustment
expenses has been established to cover the estimated unpaid cost of claims
incurred. Management believes that the unpaid losses and loss adjustment
expenses are adequate to cover the ultimate unpaid claims incurred; however,
such provisions are necessarily based on estimates and, accordingly, no
representation is made that the ultimate liability will not exceed such amounts.
NET INCOME PER SHARE
Net income per share is based on the weighted average number of shares
of common stock outstanding, and, if dilutive, shares issuable under stock
option plans.
REINSURANCE CEDED
With respect to reinsurance ceded which transfers risk, premiums,
commissions and recoveries on losses incurred are reflected as reductions of the
respective income and expense accounts. Unearned premiums ceded and estimates of
amounts recoverable from reinsurers on paid and unpaid losses are reflected as
assets.
Beginning in 1993, reinsurance contracts that do not transfer risk,
under the provisions set forth by FASB Statement No. 113 "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," are
accounted for as deposits in the balance sheet, and therefore are not included
in the Company's income statement.
F-8
<PAGE> 35
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Also beginning in 1993, benefits or costs associated with additional
consideration under certain multiple year retrospectively rated reinsurance
contracts are recognized to the extent any consideration would be due to or from
the reinsurer based on the contract experience to date.
FEDERAL INCOME TAXES
The Company files a consolidated Federal tax return, which includes the
taxable income of its subsidiaries. For 1993 and 1994, taxable income excluded
the Somerset Companies taxable income from the beginning of the period, January
1, 1993, to the date of the consummation of the mergers, June 30, 1994 (see
Footnote 7). The Company applies the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred tax 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 bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values for fixed maturity securities are based on independent
pricing services. The fair values for equity securities are based on quoted
market prices. Fair values of short-term investments are carried at cost, which
approximates fair value. The fair value of the loans payable to banks
approximates carrying value since the interest rate charged is computed using
market rates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
ACCOUNTING PRONOUNCEMENTS ADOPTED
Effective January 1, 1994, the Company adopted Financial Accounting
Standard No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." FASB Statement No. 115 addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
all investments in debt securities. The initial adoption of FASB Statement No.
115 increased stockholders' equity by $4,609,808 on January 1, 1994.
Effective January 1, 1993, the Company adopted FASB Statement No. 113.
FASB Statement No. 113 eliminates the practice of reporting assets and
liabilities relating to reinsured contracts net of the effects of reinsurance.
FASB Statement No. 113 also provides guidance in assessing transfer of insurance
risk in reinsurance, including gain and loss recognition.
In July 1993, the Emerging Issues Task Force ("EITF") reached consensus
positions on EITF Issue No. 93-6, "Accounting for Multiple-Year Retrospectively
Rated Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). The consensus
position requires that the benefit or cost associated with additional
consideration be recognized to the extent any consideration would be due to or
from the reinsurer based on the contract experience to date. The amount of the
asset or liability recognized must be computed as the difference between the
total contract costs before and after the experience under the contract.
F-9
<PAGE> 36
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The application of FASB Statement No. 113 and EITF 93-6 served to
increase income before cumulative effect of change in accounting principle for
the year ended December 31, 1993 by $302,000. Net income for the year ended
December 31, 1993 was decreased by an amount of $597,000 reflecting the
cumulative effect of the Company's adoption of EITF 93-6.
NOTE 2--INVESTMENTS
The Company's invested assets at December 31, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1995 COST OR COST GAIN LOSS VALUE
- ----------------- ------------ ---- ---- -----
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. government, government
agencies and authorities $ 34,337,512 $ 954,051 $ (155,709) $ 35,135,854
States, municipalities and
political subdivisions 167,980,435 6,427,308 (88,074) 174,319,669
All other corporate bonds 1,150,141 91,759 -- 1,241,900
------------ ---------- ----------- ------------
Total fixed maturities $203,468,088 $7,473,118 $ (243,783) $210,697,423
------------ ---------- ----------- ------------
Equity securities:
Common stocks $ 5,587,344 $2,383,371 $ (108,902) $ 7,861,813
------------ ---------- ----------- ------------
Short-term investments $ 7,290,638 $ -- $ -- $ 7,290,638
------------ ---------- ----------- ------------
Total non-affiliated
investments $216,346,070 $9,856,489 $ (352,685) $225,849,874
============ ========== =========== ============
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1994 COST OR COST GAIN LOSS VALUE
- ----------------- ------------ ---- ---- -----
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. government, government
agencies and authorities $ 30,645,066 $ 128,112 $(1,412,752) $ 29,360,426
States, municipalities and
political subdivisions 135,382,899 1,000,142 (4,368,084) 132,014,957
All other corporate bonds 3,316,047 -- (80,977) 3,235,070
Redeemable preferred stock 9,969,137 -- -- 9,969,137
------------ ---------- ----------- ------------
Total fixed maturities $179,313,149 $1,128,254 $(5,861,813) $174,579,590
------------ ---------- ----------- ------------
Equity securities:
Common stocks $ 4,595,463 $1,351,603 $ (183,622) $ 5,763,444
------------ ---------- ----------- ------------
Short-term investments $ 19,643,813 $ -- $ -- $ 19,643,813
------------ ---------- ----------- ------------
Total non-affiliated
investments $203,552,425 $2,479,857 $(6,045,435) $199,986,847
============ ========== =========== ============
</TABLE>
F-10
<PAGE> 37
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The table set forth below indicates the composition of the Group's
fixed maturities and short-term investments by year of maturity as of December
31, 1995:
<TABLE>
<CAPTION>
PERIOD FROM CARRYING (FAIR) PERCENT PERCENT
DECEMBER 31, 1995 VALUE OF AMORTIZED COST OF
TO MATURITY (IN THOUSANDS) PORTFOLIO (IN THOUSANDS) PORTFOLIO
----------- -------------- --------- -------------- ---------
<S> <C> <C> <C> <C>
One year or less $ 16,697 7% $ 16,521 7%
One year to five years 38,480 18 37,055 18
Five years to ten years 95,447 44 91,953 44
More than ten years 41,690 19 40,002 19
Asset backed securities 4,250 2 3,987 2
Mortgage backed 21,424 10 21,241 10
securities
-------- --- -------- ---
Total $217,988 100% $210,759 100%
======== === ======== ===
</TABLE>
Net investment income of the Company was derived from the following
sources:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Fixed maturities $12,011,656 $11,271,357 $10,102,234
Equity securities 224,279 194,179 829,697
Short-term investments 2,567,400 2,072,858 1,298,380
----------- ----------- -----------
14,803,335 13,538,394 12,230,311
Investment expenses (660,493) (504,010) (642,109)
----------- ----------- -----------
Net investment income $14,142,842 $13,034,384 $11,588,202
=========== =========== ===========
</TABLE>
The table set forth below indicates the gross realized gains and losses
on sales and writedowns of fixed maturities and equity securities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Fixed maturities:
Gross gains $ 966,072 $ 356,455 $ 993,316
Gross losses (968,549) (1,262,015) (430,212)
Equity securities:
Gross gains 293,396 234,854 173,981
Gross losses -- (192,083) (216,039)
--------- ----------- ---------
Net realized gains (losses) $ 290,919 $ (862,789) $ 521,046
========= =========== =========
</TABLE>
During 1994 realized losses of $926,000 were recognized on securities
in which the decline in fair value was other than temporary. There were no such
declines in 1995 or 1993.
At December 31, 1995 and 1994, fixed maturities with a face value of
$5,230,000 were on deposit with the various State Insurance Departments.
Also, at December 31, 1995 and 1994, fixed maturities with a face value
of approximately $841,000 and $3,571,000 were pledged as security under a
reinsurance treaty.
At December 31, 1995, the Company did not have a material concentration
of financial instruments in a single investee.
F-11
<PAGE> 38
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--NORTHRIDGE EARTHQUAKE
On January 17, 1994, an earthquake (the "Northridge Earthquake")
occurred in the vicinity of the Northridge area of Los Angeles, California. The
Company's pre-tax loss (including direct property losses of $35,388,000,
reinsurance reinstatement premiums of $1,925,000 and reinsurance account losses
of $1,952,000, but net of reinsurance) in 1994 from the Northridge Earthquake
totalled $39,265,000. During 1995, the Company incurred an additional
$10,721,000 pre-tax charges including a $4,500,000 net general reserve
established at the end of the third quarter of 1995. The estimated total gross
loss on direct property claims is $143,701,000 at December 31, 1995. There can
be no assurance given that additional losses will not be reported or adjustments
made to existing reserves.
NOTE 4--NOTES PAYABLE AND LOANS
On February 10, 1994, a bank loan of $2,270,000 outstanding at December
31, 1993, the proceeds of which were used to purchase a portion of the Company's
investment in Navigators Underwriters plc (see Note 5), was fully repaid. In
1992, the Somerset Companies entered into an unsecured line of credit agreement
with a major bank, which provided for borrowings up to $5,000,000. The interest
rate was the prime rate. Borrowings on the line of credit were due on demand.
During 1994, the $5,000,000 outstanding under the line of credit was fully
repaid from the proceeds of the revolving credit loans (see below) and operating
cash.
In conjunction with the mergers, the Somerset Companies distributed
$5,280,263 in the form of notes payable to the then existing shareholders of the
Somerset Companies. These notes represent certain pre-merger income to such
shareholders and were interest free through December 31, 1994. The Group paid
$2,672,193 and $1,666,035 of these notes on December 30, 1994 and 1995,
respectively. The remainder, $942,035, is due to the holders on demand.
On March 31, 1994, the Company entered into demand loans of an
aggregate of $23,000,000 principal amount (the "Bridge Notes") with two banks.
On August 5, 1994, the Company entered into a Credit Agreement (the
"Credit Agreement") with three banks. The Credit Agreement provides for (i)
revolving credit loans up to $5,000,000 through August 5, 1997 (the "Revolving
Credit Loans"), (ii) a term loan of $25,000,000, the principal of which is
payable in quarterly installments of $1,250,000 for the first eight quarters and
$3,750,000 for the last four quarters, with the last installment due on June 30,
1997 (the "Term Loan"), and (iii) an irrevocable stand-by letter of credit
issued by one of the banks for the benefit of Society of Lloyd's in the amount
of (pound)2,585,000 (approximately U.S. $4,014,505 at the exchange rate as of
December 31, 1995) for the account of the Company (the "Letter of Credit"). The
proceeds of the draw down of the Revolving Credit Loans, $3,000,000, and the
Term Loan were used to repay in full all of the Company's obligations under the
Bridge Notes and the obligations of Somerset Insurance Services of Texas, Inc.
("Somerset of Texas"), a wholly owned subsidiary of the Company, to one of the
banks under a demand note issued in connection with the borrowing of $3,000,000
by Somerset of Texas for working capital. The Revolving Credit Loans bear
interest at the prime rate of one of the banks plus .25%. The Term Loan bears
interest, at the election of the Company, at either the prime rate of one of the
banks plus .25% or at LIBOR plus 2.25%. At December 31, 1994, the interest rate
for both the Revolving Credit Loans and the Term Loan was 8%. At December 31,
1995, the interest rate for the Term Loan at LIBOR plus 2.25% was 7.9% and for
the Revolving Credit Loans at prime rate plus .25% was 8.5%. Any amounts drawn
under the Letter of Credit and not repaid initially bear interest at the prime
rate plus .25% of one of the banks. The Revolving Credit Loans, the Term Loan
and the Letter of Credit are currently collateralized by shares of common stock
of the active subsidiaries of the Company other than NIC Insurance Company. The
F-12
<PAGE> 39
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Credit Agreement contains covenants common to transactions of this type,
including restrictions on indebtedness and liens, limitations on mergers and the
sale of assets, and maintenance of consolidated total stockholders' equity,
statutory surplus, minimum liquidity and loss reserves. In addition, the
covenants prevent the Company from declaring or paying dividends during the term
of the loans. The term loan's principal was paid down from $25,000,000 to
$22,500,000 at December 31, 1994 and to $17,500,000 at December 31, 1995. The
revolving credit loans were reduced from $3,000,000 at December 31, 1994 to
$2,000,000 at December 31, 1995.
NOTE 5--INVESTMENT IN AFFILIATE
The investment in affiliate represents the Group's 21% ownership
interest in Navigators Underwriters plc, which includes a loan of $2,329,500 and
equity loss of $52,452 at December 31, 1995. Navigators Underwriters plc, a U.K.
corporation, owns 100% of Navigators Corporate Underwriters Limited, a U.K.
corporation, which has been admitted to underwrite at Lloyd's of London as a
corporate name with limited liability. The investment is carried under the
equity method of accounting. In addition, the Company maintains an irrevocable
stand-by letter of credit (see Note 4) in an amount of (pound)2,585,000
(approximately U.S. $4,014,505 at the exchange rate as of December 31, 1995) to
collateralize the investment in accordance with Lloyd's of London requirements.
NOTE 6--FIDUCIARY FUNDS
The Somerset Companies maintain separate fiduciary accounts which
record all the underlying insurance transactions of the insurance pools which
they manage. These transactions primarily include collecting premiums from the
insured, collecting paid recoverables from reinsurers, paying claims as losses
become payable, paying reinsurance premiums to reinsurers and remitting net
account balances to member insurance companies. Unremitted amounts to members of
the insurance pools are held in a fiduciary capacity and interest income earned
on such funds inure to the benefit of the Somerset Companies.
A summary of the fiduciary accounts as of December 31, 1995 and 1994 is
as follows:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Cash and short-term investments $ 29,967,000 $ 26,192,000
Premiums receivable 92,774,000 141,664,000
Reinsurance balances 9,885,000 25,051,000
------------ ------------
Total assets $132,626,000 $192,907,000
============ ============
Due to insurance companies 132,626,000 192,907,000
------------ ------------
Total liabilities $132,626,000 $192,907,000
============ ============
</TABLE>
The fiduciary accounts above were not included in the accompanying
consolidated balance sheets.
F-13
<PAGE> 40
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--FEDERAL INCOME TAXES
The components of current and deferred income tax expense (benefit) are
as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $2,293,504 $(6,379,379) $2,889,121
State and Local 553,453 1,070,329 748,855
---------- ----------- ----------
Total $2,846,957 $(5,309,050) $3,637,976
========== =========== =========
Deferred:
Federal $ 96,893 $(6,090,662) $ (753,157)
State and Local 36,956 320,924 50,836
---------- ----------- ----------
Total $ 133,849 $(5,769,738) $ (702,321)
========== =========== ==========
</TABLE>
A reconciliation of total income taxes applicable to pre-tax operating
income and the amounts computed by applying the Federal statutory income tax
rate to the pre-tax operating income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax
expense (benefit) $ 5,447,146 35% $(11,050,895) (35)% $ 8,791,391 35%
Tax exempt interest (2,694,475) (17) (2,385,517) (8) (2,224,310) (9)
Dividends received
deduction (48,686) -- (188,248) (1) (167,846) --
State & local income taxes 389,670 2 800,293 3 799,691 3
Net increase in
consolidated pre-tax
income attributable to
the inclusion of the
Somerset Companies'
income not subject to
federal taxation -- -- (1,486,073) (5) (4,012,088) (16)
Change in Somerset
Companies' tax
status from
S Corporations to
C Corporations -- -- 1,279,445 4 -- --
Merger expenses -- -- 809,497 3 -- --
Valuation allowance -- -- 775,000 3 -- --
Other (112,849) (1) 367,710 1 (251,183) (1)
----------- --- ------------ --- ----------- ---
$ 2,980,806 19% $(11,078,788) (35)% $ 2,935,655 12%
=========== === ============ === =========== ===
</TABLE>
The mergers between the Group and the Somerset Companies were
consummated on June 30, 1994. A business combination between an S Corporation
and a tax-paying corporation automatically terminates the S Corporation
election. The Somerset Companies prior to the mergers were S Corporations and as
a result of the mergers their tax status changed to C Corporations. Accordingly,
a charge to earnings of $1,279,445 was recorded at June 30, 1994 to reflect
taxes on income previously earned but not yet
F-14
<PAGE> 41
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
taxed. Therefore, as of July 1, 1994 and thereafter, taxable income of the
Group includes all consolidated subsidiaries.
The tax effects of temporary differences that give rise to Federal
deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Loss reserve discount $ 7,191,340 $ 7,141,020
Unearned premium reserves 1,151,905 1,603,437
Unrealized loss on investments -- 1,212,269
Writedown of securities in which
decline in value is other than
temporary -- 314,926
Net operating loss carryforward 3,022,374 4,863,960
Alternative minimum tax carryforward 3,069,083 775,579
Deferred state and local income taxes 429,847 423,616
Allowance for uncollectible reinsurance 272,000 272,000
Deferred Compensation 225,524 --
Leasehold Amortization 101,174 --
Other -- 45,023
----------- -----------
Total gross deferred tax assets $15,463,247 $16,651,830
Less valuation allowance (775,000) (775,000)
----------- -----------
Net deferred tax assets 14,688,247 $15,876,830
Deferred tax liabilities:
Deferred acquisition costs (857,881) (989,434)
Deferred taxes on unrealized gain (3,231,293) --
Contingent commission receivable (1,509,418) (1,120,463)
Commission income (216,625) (324,938)
Other -- (28,482)
----------- -----------
Total deferred tax liabilities (5,815,217) (2,463,317)
----------- -----------
Net deferred tax asset $ 8,873,030 $13,413,513
=========== ===========
</TABLE>
The net operating loss carryforward will expire, if not used, in 2009.
A valuation allowance is required for deferred income tax benefits where it is
more likely than not that some portion of the deferred income tax benefits will
not be realized. The valuation allowance in the amount of $775,000 is due to the
uncertainty associated with the realization of the gross deferred tax asset.
Management believes, based on the Company's historical record of generating
taxable income and its expectations of future taxable income, the net deferred
tax asset is realizable; however, change in the valuation allowance in the near
term may be recorded if estimates of future taxable income are changed.
F-15
<PAGE> 42
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--RESERVES FOR LOSS AND LOSS ADJUSTMENT EXPENSES
The following table summarizes the activity in the Insurance Companies'
reserve for loss and loss adjustment expenses during the three most recent
fiscal years:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Net reserves for losses and LAE
at beginning of year $ 135,377 $ 103,176 $ 89,361
Provision for losses and LAE for
claims occurring in the current
year 54,030 97,145 61,120
Increase in estimated losses and
LAE for claims occurring in
prior years 7,023 1,130 5,424
--------- --------- ---------
Incurred losses and LAE 61,053 98,275 66,544
--------- --------- ---------
Losses and LAE payments for
claims occurring during:
Current year (10,482) (33,374) (14,731)
Prior years (47,187) (32,700) (37,998)
--------- --------- ---------
Losses and LAE payments $ (57,669) (66,074) (52,729)
--------- --------- ---------
Net reserves for losses and LAE
at end of year $ 138,761 $ 135,377 $ 103,176
Reinsurance receivables on unpaid
losses and LAE 135,093 179,521 144,170
--------- --------- ---------
Gross reserves for losses and LAE
at end of year $ 273,854 $ 314,898 $ 247,346
========= ========= =========
</TABLE>
The development of prior year incurred losses during 1995 is primarily
attributable to the loss development from Northridge Earthquake. Increase in
estimated losses and LAE for claims occurring in prior years for 1994 and 1993
is due primarily to the allocation of losses to the appropriate calendar years
without regard to any additional premium relating to such calendar years which
were reported to and recorded by the Insurance Companies in subsequent periods.
During 1995, 1994 and 1993, the Insurance Companies paid a net amount
of $117,000, $83,000 and $177,000, respectively for environmental pollution and
asbestos related claims. As of December 31, 1995 and 1994, the Insurance
Companies carried a net case reserve of $876,000 and $657,000, respectively, for
the potential exposure of the Insurance Companies to such claims. As of December
31, 1995, there were 1,594 open claims with environmental pollution and asbestos
exposure. Management believes that its reserves for such claims are adequate,
because the Insurance Companies participation in such risks is generally in the
higher excess layers and, based on a continuing review of such claims,
management believes that a majority of these claims will be unlikely to
penetrate such high excess layers of coverage; however, due to the significant
assumptions inherent in estimating these exposures, actual liabilities could
differ from current estimates.
NOTE 9--BUSINESS TRANSACTIONS WITH AFFILIATES
The Group receives investment management services from Lexington
Management Company ("Lexington"). Lexington provides investment advisory
services to Navigators for an annual fee of 20 basis points on the first $50
million of invested assets, and
F-16
<PAGE> 43
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10 basis points on any excess up to $100 million. The Investment Agreement may
be terminated by either party upon 30 days written notice. Investment advisory
expense reflected in the accompanying consolidated statements of operations were
$158,282, $152,324 and $145,399 for the years ended December 31, 1995, 1994 and
1993, respectively.
NOTE 10--REINSURANCE
In the ordinary course of business, the Insurance Companies reinsure
certain insurance risks with unaffiliated insurance companies for the purpose of
limiting their maximum loss exposure, protecting against catastrophic losses,
and maintaining desired ratios of net premiums written to statutory surplus.
The following table summarizes premiums earned:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Direct $ 93,497,238 $ 126,006,187 $ 129,069,957
Assumed 64,376,261 74,461,310 70,570,900
Ceded (69,965,715) (109,984,878) (102,798,015)
------------ ------------- -------------
Net $ 87,907,784 $ 90,482,619 $ 96,842,842
============ ============= =============
</TABLE>
The following table summarizes premiums written:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Direct $ 87,542,455 $ 113,729,150 $ 142,533,725
Assumed 61,364,751 75,822,542 71,122,627
Ceded (67,639,613) (98,000,822) (109,837,932)
------------ ------------- -------------
Net $ 81,267,593 $ 91,550,870 $ 103,818,420
============ ============= =============
</TABLE>
Ceded losses and loss adjustment expenses incurred were $43,551,046,
$158,225,000 and $99,412,237 in 1995, 1994, and 1993, respectively.
A contingent liability exists with respect to reinsurance ceded, since
the Insurance Companies would be required to pay losses in the event the
assuming reinsurers are unable to meet their obligations under their reinsurance
agreements with the Insurance Companies.
At December 31, 1995 reinsurance receivables from seven reinsurers
approximated $68 million or 46% of reinsurance receivables of which $10 million
is collateralized. The seven reinsurers in which the receivables are recorded
are as follows: Underwriters at Lloyds, $21,365,000; Reinsurance Corporation of
New York, $14,190,000; SCOR Reinsurance Company, $14,126,000; Frankona
Ruckversicherungs A.G., $6,310,000; Chiyoda Fire and Marine Insurance,
$4,658,000; Reliance Insurance Company, $3,895,000; and Shelter Mutual Insurance
Company, $3,604,000.
The Company's reinsurance security committee continually monitors the
financial strength of its reinsurers and the amounts of reinsurance receivables
from those reinsurers. To the extent that it is determined that the ultimate
amount collectible is less than the amount recorded on a receivable, a reserve
is established. At December 31, 1995 and 1994, an allowance for uncollectible
reinsurance of $800,000 is recorded.
F-17
<PAGE> 44
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Corporation's financial instruments at December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
---- ----
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Financial assets:
Non-affiliated
investments $225,849,874 $225,849,874 $199,986,847 $199,986,847
Commissions $ 6,048,440 $ 5,750,450 $ 5,126,953 $ 4,843,785
receivable
Financial
liabilities:
Loans payable to $ 19,500,000 $ 19,500,000 $ 25,500,000 $ 25,500,000
banks
</TABLE>
The carrying amounts shown in the table are included in the statement of
financial position under the indicated captions.
The carrying amounts of cash and premium receivables approximate fair value
because of the short maturity of those instruments. The fair values of debt
securities and equity investments are based on quoted market prices at the
reporting date for those or similar investments.
Included within commissions receivable is contingent commissions receivable
which is billed by the Somerset Companies to participants of the insurance pools
two calendar years subsequent to a given underwriting year and, as a result,
fair value is less than carrying value. Fair value of contingent commissions
receivable is estimated based on the present value of anticipated cash flows
based on interest rates of debt instruments with similar maturities.
The fair value of the Company's loans payable to banks approximates
carrying value since the interest rate charged is computed using market rates.
NOTE 12--STOCK OPTION PLANS
The Company has an Incentive Stock Option Plan and a Non Qualified Stock
Option Plan which allow for the grant to key employees of the Group, its
subsidiaries and affiliates, of options to purchase an aggregate of 900,000
shares of common stock. Under the Non Qualified Stock Option Plan, stock
appreciation rights may also be granted.
All options are granted at exercise prices which approximate the fair
market value of the common stock on the date of the grant. No amounts are
charged to expense upon the granting of options under the plans.
F-18
<PAGE> 45
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Common stock options outstanding at December 31, consisted of the
following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
AVERAGE AVERAGE AVERAGE
NO. OF EXERCISE NO. OF EXERCISE NO. OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 703,625 $21.13 593,125 $22.51 503,325 $19.45
-------- ------ -------- ------ -------- ------
Granted 222,300 14.75 120,000 14.00 125,000 34.00
Exercised (21,000) 16.17 (1,000) 10.00 (22,263) 15.04
Cancelled (121,125) 26.16 (8,500) 18.00 (12,937) 27.18
-------- ------ -------- ------ -------- ------
Options outstanding at
end of year 783,800 $18.68 703,625 $21.13 593,125 $22.51
======== ====== ======== ====== ======== ======
No. of shares
exercisable 391,400 $19.01 386,975 $18.73 303,000 $16.55
======== ====== ======== ====== ======== ======
</TABLE>
On December 29, 1995, the Company granted 89,200 stock appreciation rights
at $17, the fair market value of the common stock on the date of the grant. No
amount was charged to expense in 1995.
NOTE 13--EMPLOYEE BENEFITS
The Somerset Companies sponsor a defined contribution plan covering
substantially all employees. Contributions are equal to 15% of each eligible
employee's gross pay (plus bonus of up to $2,500), with a maximum contribution
of $22,500 in 1995 and 1994 and $30,000 in 1993 per employee. Employees are
fully vested at 6 years of service. Plan expense, included within operating
expenses, amounted to $990,566, $1,080,960 and $1,037,236 in 1995, 1994 and
1993, respectively.
NOTE 14--MERGER EXPENSES
At December 31, 1993, the Company had paid $3,380,442 in expenses related
to the mergers (see Note 1). These payments, which were comprised primarily of
special bonuses to employees and professional fees, were the expenses of the
combined enterprise, and therefore, were deferred as of December 31, 1993. The
expenses, along with additional charges of $2,299,255 during 1994, were charged
to earnings upon consummation of the mergers during the second quarter of 1994.
NOTE 15--DIVIDENDS FROM SUBSIDIARIES AND STATUTORY FINANCIAL INFORMATION
The Insurance Companies may pay dividends to the Group out of its statutory
earned surplus pursuant to statutory restrictions imposed under the New York
Insurance Law. The maximum amount available for the payment of dividends by the
Insurance Companies during 1996 without prior regulatory approval is
approximately $8,553,452. In 1995, 1994 and 1993 the Insurance Companies paid
dividends of $0, $5,300,000 and $2,512,000 respectively, to the Group.
Combined net income and policyholders' surplus of the Insurance Companies
determined in accordance with statutory accounting practices and as filed with
insurance regulatory authorities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ 8,523,962 $(26,799,263) $11,319,339
Policyholders' surplus $85,534,521 $ 73,697,863 $82,226,567
</TABLE>
F-19
<PAGE> 46
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Insurance Companies, domiciled in New York State, prepare their
statutory financial statements in accordance with accounting practices
prescribed or permitted by the New York State Insurance Department. Prescribed
statutory accounting practices include a variety of publications of the National
Association of Insurance Commissioners (NAIC), as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. The Insurance
Companies' statutory accounting practices are prescribed.
NOTE 16--COMMITMENTS AND CONTINGENCIES
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 Commissioner 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 to the
Company. In addition, the Company is a defendant in various legal actions
arising from the normal course of its business. Management does not believe that
the outcome of these actions will result in a material adverse effect on the
Company.
NOTE 17--LEASES
Future minimum annual rental commitments at December 31, 1995, under
various noncancellable operating leases for the Company's office facilities,
which expire at various dates through May 2000, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1996 1,395,000
1997 947,000
1998 797,000
1999 786,394
2000 315,606
----------
Total $4,241,000
==========
</TABLE>
The Company is also liable for additional payments to the landlords for
certain annual cost increases. Rent expense for the years ended December 31,
1995, 1994, and 1993 was $1,437,446, $1,592,743 and $1,337,676, respectively.
F-20
<PAGE> 47
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18--QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995
<S> <C> <C> <C> <C>
Net Premiums earned $ 17,718,090 $ 20,933,858 $ 24,908,174 $ 24,347,662
Commission income 2,594,170 2,879,776 2,588,599 2,595,963
Net investment income 3,412,370 3,441,732 3,508,621 3,780,119
Net realized gains (62,147) 376,517 (283,795) 260,344
Other income 217,123 272,641 248,907 (24,427)
------------ ------------ ------------ ------------
Total revenues 23,879,606 27,904,524 30,970,506 30,959,661
Total operating
expenses 21,627,019 24,042,501 27,025,934 25,455,570
Income tax expense
(benefit) (226,859) (856,399) (864,824) (1,032,724)
------------ ------------ ------------ ------------
Net income $ 2,025,728 $ 3,005,624 $ 3,079,748 $ 4,471,367
============ ============ ============ ============
Per share data:
Average common and
common equivalent
shares outstanding $ 8,205,946 $ 8,176,309 $ 8,202,123 $ 8,292,219
------------ ------------ ------------ ------------
Net income (loss) per
share $ 0.25 $ 0.37 $ 0.38 $ 0.54
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1994 1994 1994 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net premiums earned $ 24,024,484 $ 22,440,458 $ 17,795,064 $ 26,222,613
Commission income 2,640,717 2,861,573 2,582,822 2,772,035
Net investment income 3,045,425 3,327,237 3,261,044 3,400,678
Net realized gains 241,829 14,427 (82,785) (1,036,260)
Other income 32,975 18,973 365,649 (36,726)
------------ ------------ ------------ ------------
Total revenues 29,985,430 28,662,668 23,921,794 31,322,340
Total operating
expenses 55,598,658 32,131,619 26,167,872 31,568,070
Income tax expense
(benefit) (13,677,176) 1,242,961 2,012,521 (657,094)
------------ ------------ ------------ ------------
Net income (loss) ($11,936,052) ($ 4,711,912) ($ 4,258,599) $ 411,364
============ ============ ============ ============
Per share data:
Average common and
common equivalent
shares outstanding 8,233,140 8,208,929 8,196,919 8,196,265
------------ ------------ ------------ ------------
Net income (loss) per
share ($ 1.45) ($ 0.58) ($ 0.52) $ 0.05
============ ============ ============ ============
</TABLE>
F-21
<PAGE> 48
SCHEDULE I
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUMMARY OF CONSOLIDATED INVESTMENTS--OTHER THAN INVESTMENTS
IN RELATED PARTIES
December 31, 1995
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN THE
COST OR CONSOLIDATED
TYPE OF INVESTMENT AMORTIZED COST FAIR VALUE BALANCE SHEET
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Government
and government agencies
and authorities $ 34,337,512 $ 35,135,854 $ 35,135,854
States, municipalities
and political
subdivisions 167,980,435 174,319,669 174,319,669
All other corporate bonds 1,150,141 1,241,900 1,241,900
------------ ------------ ------------
Total fixed maturities 203,468,088 210,697,423 210,697,423
------------ ------------ ------------
Equity securities:
Common stocks:
Industrial, miscellaneous
and all other 5,587,344 7,861,813 7,861,813
------------ ------------ ------------
Short-term investments 7,290,638 7,290,638 7,290,638
------------ ------------ ------------
Total investments $216,346,070 $225,849,874 $225,849,874
============ ============ ============
</TABLE>
S-1
<PAGE> 49
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE NAVIGATORS GROUP, INC.
BALANCE SHEETS
(Parent Company)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
A S S E T S 1995 1994
---- ----
<S> <C> <C>
Cash $ 1,438,257 $ 75,738
Investment in wholly owned subsidiaries, at
equity 114,818,292 93,296,102
Investment in affiliate, at equity 2,277,048 2,386,258
Short-term investments -- 1,631,090
Other 2,131,967 6,307,546
------------ -------------
Total Assets $120,665,564 $ 103,696,734
============ =============
L I A B I L I T I E S
Bank loan payable 19,500,000 $ 25,500,000
Accounts payable and other liabilities $ 2,089,357 673,500
------------ -------------
Total liabilities $ 21,589,357 $ 26,173,500
------------ -------------
Commitments and contingencies -- --
S T O C K H O L D E R S ' E Q U I T Y
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
8,172,401 in 1995 and 8,151,401 in 1994 817,240 815,140
Additional paid-in capital $ 35,321,339 $ 34,983,877
Net unrealized gains (losses) on
available-for-sale
securities, net of income taxes 6,272,511 (2,353,281)
Foreign currency translation adjustment 110,185 105,033
Retained earnings $ 56,554,932 $ 43,972,465
------------ -------------
Total Stockholders' Equity $ 99,076,207 $ 77,523,234
------------ -------------
Total liabilities and stockholders' equity $120,665,564 $ 103,696,734
============ =============
</TABLE>
S-2
<PAGE> 50
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
THE NAVIGATORS GROUP, INC.
STATEMENTS OF INCOME
(Parent Company)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net investment income $ 159,108 $ 104,883 $ 42,295
Dividends received from wholly owned
subsidiary 2,923,767 8,325,376 2,511,665
Operating expenses and income taxes (3,396,807) (5,702,798) (1,854,904)
------------ ------------ ------------
Gain (loss) before equity in
undistributed net income
of wholly owned subsidiaries (309,982) 2,727,461 699,056
Equity (loss) in undistributed
net income of
wholly owned subsidiaries 12,892,449 (23,222,660) 21,483,548
------------ ------------ ------------
Income (loss) before cumulative
effect of change in
accounting principle 12,582,467 (20,495,199) 22,182,604
Cumulative effect of change in
accounting principle -- -- (597,155)
------------ ------------ ------------
Net income (loss) $ 12,582,467 $(20,495,199) $ 21,585,449
============ ============ ============
</TABLE>
S-3
<PAGE> 51
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
THE NAVIGATORS GROUP, INC.
STATEMENTS OF CASH FLOWS
(Parent Company)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operating Activities: $ 12,582,467 $(20,495,199) $ 21,585,449
Net Income (loss)
Adjustments to reconcile net income
to net cash provided by operations:
Equity in undistributed net income
of wholly owned subsidiary (12,892,449) 23,222,659 (20,886,393)
Other 5,701,849 (3,260,450) (1,013,699)
------------ ------------ ------------
Net cash provided by (used in)
operating activities 5,391,867 (532,990) (314,643)
------------ ------------ ------------
Investing Activities:
Investment in Affiliates -- (22,823,750) (2,581,515)
Purchases of fixed maturities -- -- (1,503,663)
Sale of fixed maturities -- 1,527,150 --
Net (increase) decrease in short
term investments 1,631,090 (1,424,889) 1,642,538
------------ ------------ ------------
Net cash used in investing
activities 1,631,090 (22,721,489) (2,442,640)
------------ ------------ ------------
Financial Activities:
Bank loan proceeds 2,000,000 51,000,000 2,270,000
Repayment of bank loans (8,000,000) (27,770,000) --
Proceeds from exercise of stock
options 339,562 9,485 468,380
------------ ------------ ------------
Net cash provided by (used in)
financing activities (5,660,438) 23,239,485 2,738,380
------------ ------------ ------------
Increase (decrease) in cash 1,362,519 (14,994) (18,903)
Cash Beginning of Period 75,738 90,732 109,635
------------ ------------ ------------
Cash End of Period $ 1,438,257 $ 75,738 $ 90,732
============ ============ ============
</TABLE>
S-4
<PAGE> 52
SCHEDULE III
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
RESERVE
DEFERRED FOR LOSSES OTHER POLICY
POLICY AND LOSS CLAIMS AND NET
ACQUISITION ADJUSTMENT UNEARNED BENEFITS PREMIUMS
PERIOD COSTS EXPENSES PREMIUMS PAYABLE EARNED
------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Property-Casualty $2,523,180 $273,854,054 $26,753,920 $-- $87,907,784
---------- ------------ ----------- --- -----------
Year ended December 31, 1994
Property-Casualty $2,910,422 $314,898,083 $35,721,013 $-- $90,482,619
---------- ------------ ----------- --- -----------
Year ended December 31, 1993
Property-Casualty $2,838,516 $247,346,386 $46,706,816 $-- $96,842,842
---------- ------------ ----------- --- -----------
<CAPTION>
LOSSES AMORTIZATION
AND LOSS OF DEFERRED
NET ADJUSTMENT POLICY OTHER NET
INVESTMENT EXPENSES ACQUISITION OPERATING PREMIUMS
INCOME(1) INCURRED COSTS(2) EXPENSES(1) WRITTEN
----------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Property-Casualty $12,360,748 $61,053,384 $26,512,776 $2,669,916 $ 81,267,593
----------- ----------- ----------- ---------- ------------
Year ended December 31, 1994
Property-Casualty $11,545,176 $98,275,358 $34,528,424 $3,524,289 $ 91,550,870
----------- ----------- ----------- ---------- ------------
Year ended December 31, 1993
Property-Casualty $10,558,061 $66,544,087 $22,549,657 $2,761,129 $103,818,420
----------- ----------- ----------- ---------- ------------
</TABLE>
(1) Net investment income and other operating expenses reflect only such
amounts attributable to the Company's insurance subsidiaries.
(2) Amortization of deferred policy acquisition costs reflects only such
amounts attributable to the Company's insurance subsidiaries. A portion
of these costs is eliminated upon consolidation.
S-5
<PAGE> 53
SCHEDULE IV
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
REINSURANCE
Premium Written
<TABLE>
<CAPTION>
CEDED TO ASSUMED PERCENTAGE
DIRECT OTHER FROM OTHER NET OF AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
------ --------- --------- ------ --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Property-Casualty $ 87,542,455 $ 67,639,613 $61,364,751 $ 81,267,593 76%
------------ ------------ ----------- ------------ --
Year ended December 31, 1994
Property-Casualty $113,729,150 $ 98,000,822 $75,822,542 $ 91,550,870 83%
------------ ------------ ----------- ------------ --
Year ended December 31, 1993
Property-Casualty $142,533,725 $109,837,932 $71,122,627 $103,818,420 69%
------------ ------------ ----------- ------------ --
</TABLE>
S-6
<PAGE> 54
SCHEDULE V
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. C
COL. A COL. B ADDITIONS COL. D COL. E
------ ------ --------- ------ ------
BALANCE AT BALANCE AT
JANUARY 1, CHARGED TO CHARGED TO DEDUCTIONS-- DECEMBER 31,
DESCRIPTION 1995 COSTS AND EXPENSES OTHER ACCOUNTS DESCRIBE 1995
----------- ---- ------------------ -------------- -------- ----
<S> <C> <C> <C> <C> <C>
Allowance for $800,000 $-- $-- $-- $800,000
------- --- --- --- -------
uncollectible
reinsurance
</TABLE>
S-7
<PAGE> 55
SCHEDULE VI
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
<TABLE>
<CAPTION>
RESERVE
DEFERRED FOR LOSSES
AFFILIATIONS POLICY AND LOSS DISCOUNT, NET
WITH ACQUISITION ADJUSTMENT IF ANY, UNEARNED PREMIUMS
REGISTRANT COSTS EXPENSES DEDUCTED PREMIUMS EARNED
- ---------- ----- -------- -------- -------- ------
CONSOLIDATED SUBSIDIARIES
- -------------------------
Year ended December 31, 1995 $2,523,180 $273,854,054 $ -- $26,753,920 $87,907,784
---------- ------------ ------------ ----------- -----------
Year ended December 31, 1994 $2,910,422 $314,898,083 $ -- $35,721,013 $90,482,619
---------- ------------ ------------ ----------- -----------
Year ended December 31, 1993 $2,838,516 $247,346,386 $ -- $46,706,816 $96,842,842
---------- ------------ ------------ ----------- -----------
<CAPTION>
LOSSES AND LOSS
ADJUSTMENT EXPENSES AMORTIZATION
INCURRED RELATED TO OF DEFERRED
NET ------------------- POLICY OTHER NET
INVESTMENT CURRENT PRIOR ACQUISITION OPERATING PREMIUMS
INCOME(1) YEAR YEARS COSTS(2) EXPENSES(1) WRITTEN
--------- ----- ----- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1995 $12,360,748 $54,030,109 $7,023,275 $26,512,776 $2,669,916 $ 81,267,593
----------- ----------- ---------- ----------- ---------- ------------
Year ended December 31, 1994 $11,545,176 $97,145,358 $1,130,000 $34,528,424 $3,524,289 $ 91,550,870
----------- ----------- ---------- ----------- ---------- ------------
Year ended December 31, 1993 $10,558,061 $61,120,087 $5,424,000 $22,549,657 $2,761,129 $103,818,420
----------- ----------- ---------- ----------- ---------- ------------
</TABLE>
(1) Net investment income and other operating expenses reflect only such
amounts attributable to the Company's insurance subsidiaries.
(2) Amortization of deferred policy acquisition costs reflects only such
amounts attributable to the Company's insurance subsidiaries. A portion
of these costs is eliminated upon consolidation.
S-8
<PAGE> 56
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ----------- ---------------------- ------------
<S> <C> <C>
2 Form of Agreement and Plan of Merger, dated
October 26, 1993, by and among The Navigators
Group, Inc., the respective acquisition
subsidiary, the respective Affiliated Company
and the respective stockholders of such
Affiliated Company (a)
3-1 Restated Certificate of Incorporation (b)
3-2 By-laws, as amended (b)
10-1 Management Agreement between Navigators
Insurance Company and Navigators Management
Corporation (b)
10-2 Agreement between The Navigators Group, Inc.
and Navigators Management Corporation (b)
10-3 Stock Option Plan (b)(c)
10-4 Non-Qualified Stock Option Plan (a)(c)
10-5 Employment Agreement with Terence N. Deeks (d)
10-6 Employment Agreement with W. Allen Barnett (d)
10-7 Consulting Agreement between The Navigators
Group, Inc. and Robert F. Wright Associates,
Inc. (d)
10-8 Credit Agreement dated as of August 5, 1994,
as amended September 23, 1994 and as of
January 1, 1995, among The Navigators Group,
Inc., as Borrower, and Brown Brothers
Harriman & Co., NBD Bank, N.A. and First
Union National Bank of North Carolina, as
Lenders, and Brown Brothers Harriman & Co.,
as Agent (d)
10-9 Third Amendment and Waiver to Credit
Agreement, dated as of September 30, 1995 --
11-1 Statement re Computation of Per Share
Earnings --
21-1 Subsidiaries of Registrant --
23-1 Consent of Independent Auditor --
27-1 Financial Data Schedule --
28-1 Information from reports furnished to state
insurance regulatory authorities (e)
</TABLE>
- ---------------
(a) Previously filed under Commission File No. 33-75918 as part of Form S-4,
incorporated herein by reference thereto.
(b) Previously filed under Commission file No. 33-5667 as part of Form S-1,
incorporated herein by reference thereto.
(c) Management contracts of compensatory plans or arrangements required to be
filed as exhibits to this Form 10-K by Item 601(10)(iii) of Regulation S-K,
previously filed as indicated and incorporated herein by reference.
(d) Previously filed with the Company's Form 10-K for the year ended December
31, 1994, incorporated herein by reference thereto.
(e) Submitted in paper format under cover of Form SE.
<PAGE> 1
Exhibit 10-9
THIRD AMENDMENT AND WAIVER TO CREDIT AGREEMENT
THIRD AMENDMENT AND WAIVER TO CREDIT AGREEMENT dated as of
September 30, 1995 ("Third Amendment and Waiver") among THE NAVIGATORS GROUP,
INC. (the "Borrower"), BROWN BROTHERS HARRIMAN & CO., ("BBH&Co."), NBD BANK
(formerly NBD BANK, N.A.; "NBD"), FIRST UNION NATIONAL, BANK OF NORTH CAROLINA
("First Union") (each of BBH&Co., NBD and First Union a "Lender" and,
collectively, the "Lenders") and BROWN BROTHERS HARRIMAN & CO., as agent for the
Lenders (in such capacity, together with its successors and assigns in such
capacity, the "Agent")
PRELIMINARY STATEMENT. Reference is made to the Credit
Agreement dated as of August 5, 1994 among the Borrower, the Lenders and the
Agent, as amended by that certain Letter Agreement dated September 23, 1994, and
as further amended by the Amendment to Credit Agreement and Pledge Agreement
dated as of January 1, 1995 (as so amended, the "Credit Agreement"). Any term
used herein and not otherwise defined herein shall have the meaning assigned to
such term in the Credit Agreement.
Each of the parties hereto have agreed to amend the Credit
Agreement and to waive compliance with certain provisions thereof as hereinafter
set forth.
SECTION 1. Amendments to Credit Agreement. The Credit
Agreement is, effective as of this date hereof and subject to the satisfaction
of the conditions precedent set forth in Section 3 hereof, hereby amended as
follows:
(a) The definition of "Loss and LAE Factor" is amended by
adding the following at the end thereof:
"; provided, however, for the Quarterly Period ended September
30, 1995 and each Quarterly Period thereafter, the Additional
Earthquake Development incurred in such Period will be
subtracted from (x) above."
(b) The following definitions are inserted in their proper
alphabetical order:
"'Additional Earthquake Development' means, as of any
particular date, the difference (to the extent it is a
positive number), up to a maximum of Six Million Dollars
($6,000,000), between (1) the total of (a) the net direct
property losses incurred by Borrower with respect to the
Northridge Earthquake through such date and (b) all reserves
maintained as of such date based upon or related to the
Northridge Earthquake and (2) Forty-Two Million Forty-Eight
Thousand Dollars ($42,048,000)."
"'Northridge Earthquake' means the earthquake
centered in Northridge California which occurred on January
17, 1994."
(c) Section 9.08(4), Reporting Requirements, is amended by
adding the following at the end thereof: "together with the calculation of the
Additional Earthquake Development for the applicable period."
(d) Section 11.06, Minimum Consolidated Net Income, is amended
by adding the following after the phrase "Consolidated Net Income" in the first
sentence of such Section the following: "plus the Additional Earthquake
Development incurred during such Fiscal Year".
SECTION 2. Waiver. On each of March 31, 1995 and June 30,
1995, the Borrower was not in compliance with Section 11.04, Minimum Liquidity
of Borrower, and Section 11.08, Combined Ratio. For the consecutive Fiscal
Quarters ended December 30, 1994 and March 31, 1995, the Borrower and its
Consolidated Subsidiaries were not in compliance with Section 11.06, Minimum
Consolidated Net Income. The Borrower has requested that the Lenders and the
Agent waive each
<PAGE> 2
such failure to comply. Upon the conditions set forth below, each Lender and the
Agent waives the Borrower's or the Borrower's and its Consolidated
Subsidiaries', as the case may be, compliance as of the dates set forth above,
with (1) Section 11.04, Minimum Liquidity of Borrower, (2) Section 11.06,
Minimum Consolidated Net Income, and (3) Section 11.08, Combined Ratio.
Neither the Agent nor any Lender waives any future
noncompliance by the Borrower or the Borrower and its Consolidated Subsidiaries,
as the case may be, with Sections 11.04, 11.06, and 11.08.
SECTION 3. Conditions of Effectiveness. This Third Amendment
and Waiver shall become effective on the date on which each of the following
conditions has been fulfilled:
(1) Third Amendment and Waiver. The Borrower, the Lenders, and
the Agent shall each have executed and delivered this Third Amendment and
Waiver;
(2) Officer's Certificate, etc. The following statements shall
be true and the Agent shall have received a certificate signed by a duly
authorized officer of the Borrower dated the date hereof stating that, after
giving effect to this Third Amendment and Waiver and the transactions
contemplated hereby:
(a) The representations and warranties contained in the
Credit Agreement and in each of the Loan Documents
are correct on and as of the date hereof as though
made on and as of such date (unless stated to relate
solely to an earlier date, in which case such
representations and warranties shall have been
correct as of such earlier date); and
(b) No Default or Event of Default has occurred and is
continuing.
SECTION 4. Reference to and Effect on the Loan Documents. (a)
Upon the effectiveness of Section 1 hereof, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the other Loan Documents
to the Credit Agreement, shall mean and be a reference to the Credit Agreement
previously amended and as amended hereby.
(b) Except as specifically amended above, the Credit Agreement
and all other Loan Documents shall remain in full force and effect and are
hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Third
Amendment and Waiver shall not, except as expressly provided herein, operate as
a waiver of any right, power or remedy of the Lenders or the Agent under any of
the Loan Documents, nor constitute a waiver of any provision of any of the Loan
Documents.
SECTION 5. Costs, Expenses and Taxes. The Borrower agrees to
pay on demand all costs and expenses of the Agent in connection with the
preparation, reproduction, execution and delivery of this Third Amendment and
Waiver and the other instruments and documents to be delivered hereunder
(including the fees and out-of-pocket expenses of external counsel for the
Agent, but not the legal fees for internal or external legal counsel of the
Lenders), with respect thereto. In addition, the Borrower shall pay any and all
stamp and other taxes and fees payable or determined to be payable in connection
with the execution and delivery, filing or recording of this Third Amendment and
Waiver and the other instruments and documents to be delivered hereunder, and
agrees to hold the Agent and each Lender harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such taxes or fees.
SECTION 6. Governing Law. This Third Amendment and Waiver
shall be governed by and construed in accordance with the laws of the State of
New York applicable to agreements made and to be performed entirely within such
State.
-2-
<PAGE> 3
SECTION 7. Headings. Section headings in this Third Amendment
and Waiver are included herein for convenience of reference only and shall not
constitute a part of this Third Amendment and Waiver for any other purpose.
SECTION 8. Counterparts. The Third Amendment and Waiver may be
executed by the parties hereto in separate counterparts, each of which, when so
executed and delivered, shall be an original, but all such counterparts shall
together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Third
Amendment and Waiver to be executed by their respective officers thereunto duly
authorized as of the date first above written.
THE NAVIGATORS GROUP, INC.,
as Borrower
By /s/ W. Allen Barnett
------------------------------
Name: W. Allen Barnett
Title: Senior Vice President,
Secretary
per pro BROWN BROTHERS HARRIMAN & CO., as
Lender
By /s/ Joseph P. Donlan
------------------------------
Name: Joseph P. Donlan
NBD BANK, as Lender
By /s/ Jon P. Dady
------------------------------
Name: Jon P. Dady
Title: Vice President
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA, as Lender
By /s/ Bill A. Shirley
------------------------------
Name: Bill A. Shirley
Title: Vice President
per pro BROWN BROTHERS HARRIMAN &
CO., as Agent
By /s/ Joseph P. Donlan
------------------------------
Name: Joseph P. Donlan
-3-
<PAGE> 1
EXHIBIT 11-1
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
Earnings Per Share of Common Stock and Common Stock Equivalents
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net income applicable to common stock $ 12,582,467 $(20,495,199) $21,585,449
Average number of common shares
outstanding $ 8,154,214 $ 8,150,776 8,145,996
Add:
Assumed exercise of stock options and
partially paid stock options
exercised(1) 64,904 58,018 199,558
------------ ------------ -----------
Common and common equivalent shares
outstanding 8,219,118 8,208,794 8,345,554
============ ============ ===========
Net income per share assuming exercise
of common stock equivalents $ (1.53) $ (2.50) $ 2.59
============ ============ ===========
</TABLE>
- -------------------------------
(1) Computed for purposes of primary earnings per share. There is no
significant difference between earnings per share on a primary or fully
diluted basis.
<PAGE> 1
EXHIBIT 21-1
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction in
Name which organized
- ---- ---------------
Navigators Insurance Company New York
NIC Insurance Company New York
Somerset Marine, Inc. New York
Somerset of Georgia, Inc. Georgia
Somerset Insurance Services of Texas, Inc. Texas
(doing business as Somerset Aviation, Inc.)
Somerset Insurance Services of California, Inc. California
Somerset Insurance Services of Washington, Inc. Washington
Somerset Property, Inc. New York
Somerset Re Management, Inc. Delaware
Navigators Management Corporation New York
Somerset Casualty Agency, Inc. New York
Somerset Marine Aviation Property Managers, Inc. New Jersey
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
The Navigators Group, Inc.
We consent to incorporation by reference in Registration Statement No. 33-51608
on Form S-8 of The Navigators Group, Inc. and subsidiaries of our report dated
March 12, 1996, except as to Note 16, which is as of March 19, 1996, relating
to the consolidated balance sheets of The Navigators Group, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1995, and all related schedules,
which report appears in the December 31, 1995 Annual Report on Form 10-K of The
Navigators Group, Inc. and subsidiaries. Our report refers to The Navigators
Group, Inc. and subsidiaries change in method of accounting for certain
investments in debt and equity securities in 1994 and reinsurance ceded in 1993.
/s/ KPMG Peat Marwick LLP
New York, New York
March 28, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 210697423
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 7861813
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 228126922
<CASH> 7332698
<RECOVER-REINSURE> 147356684
<DEFERRED-ACQUISITION> 2523180
<TOTAL-ASSETS> 435552414
<POLICY-LOSSES> 273854054
<UNEARNED-PREMIUMS> 26753920
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 20507976
0
0
<COMMON> 817240
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<TOTAL-LIABILITY-AND-EQUITY> 435552414
87907784
<INVESTMENT-INCOME> 14142842
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<UNDERWRITING-AMORTIZATION> 12227956
<UNDERWRITING-OTHER> 22534095
<INCOME-PRETAX> 15563273
<INCOME-TAX> 2980806
<INCOME-CONTINUING> 12582467
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12582467
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.53
<RESERVE-OPEN> 135377082
<PROVISION-CURRENT> 54030000
<PROVISION-PRIOR> 7023000
<PAYMENTS-CURRENT> 10482000
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<CUMULATIVE-DEFICIENCY> 7023000
</TABLE>
