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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
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) 349-1600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.10 PAR VALUE
(Title of Class)
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 Ill 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 20,
1998 - $81,153,000 Common shares outstanding March 20, 1998 - 8,399,801
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1997 Proxy Statement are incorporated by reference
in Part III, Items 10, 11, 12 and 13 of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
The accompanying consolidated financial statements consisting of the
accounts of The Navigators Group, Inc., a Delaware holding company, and its
thirteen wholly owned subsidiaries, are prepared on the basis of generally
accepted accounting principles. Unless the context otherwise requires, the term
"Company" as used herein means The Navigators Group, Inc. and its subsidiaries.
All significant intercompany transactions and balances are eliminated.
The Company's two insurance subsidiaries are Navigators Insurance
Company ("Navigators") and NIC Insurance Company ("NIC"). Navigators is the
Company's largest insurance subsidiary and has been active since 1983. It
specializes principally in underwriting marine, aviation and onshore energy
insurance. As of June 1997, the Company no longer writes inland marine insurance
(except for onshore energy insurance classified as inland marine) and reduced
its program business in the second half of 1997 in order to focus on its core
businesses. NIC is a wholly owned subsidiary of Navigators, was licensed in 1989
and began operations in 1990. It underwrites a small book of surplus lines
insurance in certain states and, pursuant to an intercompany reinsurance pooling
agreement, cedes 100% of its gross direct writings from this business to
Navigators in exchange for assuming 10% of Navigators net business. Navigators
and NIC are collectively referred to herein as the "Insurance Companies".
Navigators Corporate Underwriters Limited ("NCUL"), a subsidiary formed
in the fourth quarter of 1996, is admitted to underwrite marine and related
lines of business at Lloyd's of London as a corporate member with limited
liability.
Seven of the Company's subsidiaries are underwriting management
companies: Somerset Marine, Inc., Somerset Insurance Services of Texas, Inc.,
Somerset Insurance Services of California, Inc., Somerset Insurance Services of
Washington, Inc., Somerset of Georgia, Inc., Somerset Marine (UK) Limited
("Somerset UK") and Somerset Asia Pacific Pty. Limited ("Somerset Asia")
(collectively, the "Somerset Companies"). The Somerset Companies produce, manage
and underwrite insurance and reinsurance for Navigators, NIC and nine
unaffiliated insurance companies.
Somerset Asia was formed in the third quarter of 1996 and operates from
an office in Sydney, Australia. This office concentrates on marine, onshore
energy, engineering and construction business primarily in Indonesia, Thailand,
Malaysia, Taiwan, China and Vietnam. Somerset Asia began writing business in
early 1997 and is supported by Somerset Services Pte. Limited which provides
loss prevention consultancy to Somerset Asia's assureds and producers. Somerset
Services Pte. Limited, a wholly owned subsidiary of Somerset Asia, was formed in
September 1997 and is located in Singapore.
Somerset UK, formed in the fourth quarter of 1996, concentrates on
marine, aviation, onshore energy, engineering and construction business.
Navigators was authorized to operate a United Kingdom ("UK") Branch on October
22, 1997. Somerset UK began producing business in the fourth quarter of 1997 for
the UK Branch of Navigators.
Navigators Holdings (UK) Limited was formed on September 15, 1997 as a
holding company for the Company's UK subsidiaries.
During 1997, the Company merged four subsidiaries, Somerset Re
Management, Inc., Navigators Management Corporation, Somerset Casualty Agency,
Inc. and Somerset Property, Inc. into Somerset Marine, Inc. The Company also
owns Somerset Marine Aviation Property Managers, Inc., an inactive subsidiary.
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The Company's revenue is primarily comprised of premiums, commissions
and investment income. The Insurance Companies derive the majority of their
business from the Somerset Companies through either business written
specifically for the Insurance Companies or through Navigators participation in
insurance pools managed by the Somerset Companies. The insurance business and
operations of the Insurance Companies are managed by Somerset Marine, Inc.
The Somerset Companies specialize principally in writing marine,
aviation and onshore energy insurance. They underwrite marine business through a
syndicate of insurance companies, Navigators having the largest participation in
the syndicate. The Somerset Companies derive their revenue from commissions,
investment income, service fees and cost reimbursement arrangements from their
parent company, Navigators, NIC and the unaffiliated 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 syndicate.
Property and casualty insurance premiums historically have been 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.
In January 1998, the Company acquired 100% of Mander, Thomas & Cooper
(Underwriting Agencies) Limited, a Lloyd's of London marine underwriting
managing agency, and its wholly owned subsidiary, Millennium Underwriting
Limited, a Lloyd's corporate member with limited liability.
Other investments include the Company's interest in Riverside Underwriters
Plc, a UK Corporation (formerly known as Navigators Underwriters Plc)
("Riverside"). The Company's original ownership interest was 21% at December 31,
1995 which increased to 27% as of January 1, 1996 and decreased to approximately
8% at December 31, 1996. Riverside owns 100% of Riverside Corporate Underwriters
Limited, a UK corporation, which is admitted to underwrite at Lloyd's of London
as a corporate name with limited liability. The transaction to reduce the
Company's ownership in Riverside did not produce a material capital gain or
loss. The Company will, however, remain entitled to receive from Riverside an
amount equal to the aggregate dividends that it would have received if it had
continued to hold its original investment to the extent such dividends are
attributable to writings at Lloyd's by Riverside Corporate Underwriters Limited
during the 1994, 1995 and 1996 years of account. In connection with the
reduction of the Company's investment, it has agreed to cease being manager of
Riverside and Riverside Corporate Underwriters Limited, although the Company
will remain entitled to profit commissions with respect to the 1994, 1995 and
1996 underwriting years. Prior to December 31, 1996, the investment was carried
under the equity method of accounting. At December 31, 1996 and 1997, the
investment is recorded at cost due to the reduction in ownership interest.
LINES OF BUSINESS
Navigators underwrites principally marine, aviation and onshore energy
insurance. As underwritten by Navigators, marine insurance includes hull,
energy, liability and cargo; aviation insurance includes hull and liability on
commercial aircraft and on aircraft manufacturers; and onshore energy primarily
covering property damage and machinery breakdown. As of June 1997, the Company
no longer writes inland marine insurance (except for onshore energy insurance
classified as inland marine) and reduced its program business in the second
half of 1997 in order to focus on its core businesses. It also wrote a small
book of property and casualty reinsurance business which has been in runoff
since December 31, 1995 with only a few specialty treaties renewed in 1996 and
1997. See the table set forth in "Management's Discussion and Analysis -
Results of Operations Revenues" for Navigators' gross written premium by line
of business and net written premium in the aggregate for the periods indicated.
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MARINE INSURANCE
Navigators obtains its marine business through its participation in the
pool managed by certain Somerset Companies. The composition of the pool and the
level of participation of each member changes from time to time. Navigators' net
participation in the marine pool was 48% in 1997, 41% in 1996 and 42% in 1995.
The Somerset Companies in 1997, 1996 and 1995 received commissions equal to
7.5% of the gross premium earned on marine insurance. They also are entitled to
receive a 20% contingent commission on net underwriting profits.
In addition, the Company receives marine premium through NCUL's
participation in certain Lloyd's syndicates.
AVIATION INSURANCE
Since October 1, 1995, Navigators writes 100% of the aviation business
produced by the Somerset Companies. For the first nine months of 1995,
Navigators' share of the aviation pool was approximately 56%. The aviation pool
is managed by one of the Somerset Companies, which received commissions equal to
7.5% of the gross earned premium, and is entitled to receive a 20% contingent
commission on net underwriting profits.
INLAND MARINE INSURANCE
As of June 1997, the Company no longer writes inland marine insurance
(other than onshore energy). The Somerset Companies produced the inland marine
business written by the Insurance Companies.
ONSHORE ENERGY
In 1996, Navigators began to underwrite onshore energy insurance which
principally focuses on the oil and gas, chemical and petrochemical, and power
generation industries with coverages primarily covering property damage and
machinery breakdown.
SPECIALTY REINSURANCE AND PROGRAM INSURANCE
Navigators reinsurance business was produced and managed by one of the
Somerset Companies. This reinsurance premium consisted primarily of excess of
loss and quota share property, surety, and other specialty reinsurance lines.
Navigators did not renew this reinsurance business after 1995 except for a few
specialty treaties. The program insurance, which began in 1995, has been reduced
for 1997 and currently consists of one managing general agent writing primarily
general liability for contractors.
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.
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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 amount 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 December 31, 1997 and 1996, the Company had an allowance for
uncollectible reinsurance of $800,000.
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
events are reported to the pools and, subsequently, to Navigators.
The Insurance Companies establish reserves for reported claims when they
first receive notice of the claim. In the case of direct business and assumed
excess of loss reinsurance, reserves are established 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 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 the Insurance
Companies' business are determined in part on the basis of statistical
information and in part on industry experience.
Loss reserves are 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
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
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affecting loss payments by taking into account changes in historical payment
patterns and perceived probable trends. There is generally no precise method 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.
The Company records those premiums which are reported to it through the end
of each calendar year. A substantial portion of the premiums are from
international business. In this business, there is a significant time lag from
the time the policy is bound to the receipt of the policy. Premiums relating to
a calendar year may be reported in subsequent years. To the extent a lag exists
in the reporting of, and the Company's 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.
The Company does not discount any of its reserves. The following tables
present an analysis of losses and LAE.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Net reserves for losses and LAE at
beginning of year ......................... $ 132,558 $ 138,761 $ 135,377
--------- --------- ---------
Provision for losses and LAE for
claims occurring in the current year ....... 53,654 51,429 54,030
Increase (decrease) in estimated losses and
LAE for claims occurring in prior years .... (1,034) (2,452) 7,023
--------- --------- ---------
Incurred losses and LAE ......................... 52,620 48,977 61,053
--------- --------- ---------
Losses and LAE payments for claims
occurring during:
Current year ............................... (12,921) (15,439) (10,482)
Prior years ............................... (32,416) (39,741) (47,187)
--------- --------- ---------
Losses and LAE payments ......................... (45,337) (55,180) (57,669)
--------- --------- ---------
Net reserves for losses and LAE at end of year .. 139,841 132,558 138,761
--------- --------- ---------
Reinsurance receivables on unpaid balance and LAE 138,591 137,043 135,093
--------- --------- ---------
Gross reserves for losses and LAE at end of year $ 278,432 $ 269,601 $ 273,854
========= ========= =========
</TABLE>
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The table below presents the development of the Company's GAAP balance
sheet reserves for 1987 through 1997. The line "Net reserves for losses and LAE"
reflects the net 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 redundancy or
deficiency represents the aggregate change in the estimates over all prior
years.
For each calendar year end, the net reserves for losses and LAE are not
adjusted in the table to reflect additional premiums reported to the Company 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 1994 and was not reported until 1996, the amount of such loss will
appear as a deficiency in both 1994 and 1995, although the premiums related to
the policy may not be reported in income until 1995. 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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<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net reserves for losses
and LAE.................. $51,364 $54,326 $59,477 $70,457 $77,507 $89,361 $103,176 $135,377 $138,761 $132,558 $139,841
Reserves for losses and
LAE re-estimated as of:
One year later ......... 52,018 53,841 61,449 71,643 80,478 94,785 104,306 142,400 136,309 131,524
Two years later ........ 51,795 53,466 62,206 73,849 80,937 98,062 102,831 139,139 134,324
Three years later ...... 49,163 51,297 61,255 73,441 81,322 98,338 101,537 138,155
Four years later ....... 47,023 49,356 60,062 73,349 80,652 97,257 100,432
Five years later ....... 45,775 48,105 60,476 72,706 79,469 96,889
Six years later ......... 44,699 48,056 60,490 71,730 79,239
Seven years later ...... 44,701 48,176 60,382 71,620
Eight years later ...... 44,355 48,157 60,364
Nine years later ....... 43,947 48,443
Ten years later ........ 44,217
Net cumulative redundancy
(deficiency) 7,147 5,883 (887) (1,163) (1,732) (7,528) 2,744 (2,778) 4,437 1,034
Net cumulative paid as of:
One year later ......... 15,214 13,772 17,593 22,784 25,741 37,998 32,700 47,187 39,741 32,416
Two years later ........ 23,531 22,354 29,694 36,532 43,688 54,552 53,603 69,960 59,397
Three years later ...... 27,810 29,134 37,032 47,060 51,753 65,997 62,769 83,921
Four years later ....... 32,625 33,178 43,270 51,769 59,308 72,063 69,356
Five years later ....... 34,289 37,255 46,066 57,421 63,138 75,864
Six years later ........ 37,337 38,299 50,456 60,291 65,441
Seven years later ...... 37,492 41,705 52,521 61,837
Eight years later ...... 39,738 43,120 53,482
Nine years later ....... 40,261 43,901
Ten years later ........ 40,922
Gross liability-end of
year .................... 224,191 247,346 314,898 273,854 269,601 278,432
Reinsurance recoverable ... 134,830 144,170 179,521 135,093 137,043 138,591
------- ------- ------- ------- ------- -------
Net liability-end of year.. 89,361 103,176 135,377 138,761 132,558 139,841
Gross re-estimated latest.. 285,892 271,555 348,277 290,477 280,058
Re-estimated recoverable
latest .................. 189,003 171,123 210,122 156,153 148,534
------- ------- ------- ------- -------
Net re-estimated latest ... 96,889 100,432 138,155 134,324 131,524
Gross cumulative
(deficiency) ............ (61,701) (24,209) (33,379) (16,623) (10,457)
</TABLE>
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The net cumulative deficiencies for the years ended December 31, 1989
through 1992 resulted primarily 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 the Insurance Companies in
subsequent periods. These deficiencies are offset, in part, by additional net
earned premiums for such respective calendar years reported and recorded by the
Insurance Companies in subsequent years. The net deficiency for 1994 resulted
from development of losses from the Northridge, California earthquake which
occurred on January 17, 1994 (the "Northridge Earthquake"). The Company had net
cumulative redundancies for the remainder of the years shown in the table.
The gross cumulative deficiencies for the years ended December 31, 1994
and 1995 resulted primarily from the 1994 Northridge Earthquake loss and the
1989 Exxon Valdez loss. The December 31, 1992 and 1993 gross cumulative
deficiencies resulted primarily from the Exxon Valdez loss. The December 31,
1996 gross cumulative deficiency resulted from adverse development in certain
lines of business.
Management believes that the Insurance Companies' 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 1997 and 1996, the Insurance Companies paid gross losses and LAE of
$1,510,000 and $2,794,000 resulting in net paid losses and LAE of $723,000 and
$425,000, respectively, for environmental pollution and asbestos related claims.
As of December 31, 1997 and 1996, the Insurance Companies carried gross reserves
of $2,622,000 and $5,421,000, respectively, and net reserves of $936,000 and
$1,042,000, respectively, for the potential exposure to such claims. 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 significant assumptions inherent in estimating
these exposures, actual liabilities could differ from current estimates. For the
year ended December 31, 1997 and 1996, open claims with environmental pollution
and asbestos exposure amounted to 2,451 and 2,024, respectively. Management will
continue to review its exposure to and reserves for such claims. Any potential
exposure to these claims exists predominately in connection with the marine
business.
INVESTMENTS
The investments of the Insurance Companies must comply with the
insurance laws of New York State, the domiciliary state of Navigators and NIC.
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. The Insurance Companies' investment
guidelines prohibit investments in derivatives.
The Insurance Companies' 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 in municipal
bonds, U.S. Government obligations, corporate bonds, and preferred and common
stocks. Due to the Company being in an alternative minimum tax ("AMT") position,
the Finance Committee of the Board of Directors has reviewed the Company's
concentration in municipal bonds and instructed the portfolio managers to reduce
the municipal bond portfolio in 1997 and is likely to reduce it further in 1998.
The Insurance Companies' investment guidelines require that at
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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 equity securities including preferred stocks rated BBB-/Baa-.
At December 31, 1997 and 1996, all fixed maturity and equity securities
held by the Company were classified as available-for-sale.
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.
The table set forth below reflects investments and income earned
thereon for the Company on a consolidated basis and for the Insurance Companies
for each of the three years ended December 31, 1997:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
The Company Consolidated (1)
Average investments ............ $259,636 $252,618 $247,391
Net investment income .......... 14,435 13,614 14,143
Average yield .................. 5.56% 5.39% 5.72%
Navigators Insurance Company and
NIC Insurance Company
Average investments ............ $244,905 $231,111 $217,639
Net investment income .......... 13,696 12,578 12,422
Average yield .................. 5.59% 5.44% 5.71%
</TABLE>
(1) Included in the Company's average investments and investment income are
fiduciary cash and short-term investments not included in the balance sheet and
the earnings thereon from the Somerset Companies. See Note 4 to the Company's
Consolidated Financial Statements.
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The following table shows the cash and investments of the Company as of December
31, 1997:
<TABLE>
<CAPTION>
Carrying Value Percent
(In thousands) Of Total
<S> <C> <C>
Cash and short-term investments $ 23,830 9.2%
U.S. Treasuries ................ 10,117 3.9
Municipal bonds ............... 132,474 51.2
Mortgage backed securities .... 22,567 8.7
Asset backed securities ....... 49,046 19.0
Corporate bonds ............... 11,540 4.5
Redeemable preferred stocks ... 1,090 0.4
Common stocks ................. 6,132 2.4
Other invested assets ......... 1,776 0.7
-------- -----
Total ....................... $258,572 100.0%
======== =====
</TABLE>
REGULATION
The Company and the Insurance Companies 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 "Department") is
the Company's principal regulatory agency. The New York Insurance Law provides
that no corporation or other person may acquire control of the Company, and thus
indirect control of the Insurance Companies, unless it has given notice to the
Insurance Companies, and obtained prior written approval of the Superintendent
of Insurance of the State of New York for such acquisition. In New York, any
purchaser of 10% or more of the outstanding shares of the Company's common stock
would be presumed to have acquired control of the Company, unless such
presumption is rebutted.
Navigators and NIC may pay dividends only out of their statutory earned
surplus under New York law. Generally, the maximum amount of dividends
Navigators and NIC may pay without regulatory approval in any twelve-month
period is the lesser of adjusted net investment income or 10% of statutory
surplus.
Under insolvency or guaranty laws in most states in which Navigators
and NIC operate, insurers doing business in those states can be assessed up to
prescribed limits for policyholder losses of insolvent insurance companies.
Navigators is licensed to engage in the insurance and reinsurance
business in 48 states, the District of Columbia and Puerto Rico and is an
approved reinsurer in one of the remaining two states. NIC is licensed to engage
in the insurance and reinsurance business in the State of New York and is an
approved surplus lines insurer in 29 other states and the District of Columbia.
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As part of its general regulatory oversight process, the Department
conducts detailed examinations of the books, records and accounts of New York
insurance companies every three to five years. Navigators and NIC were examined
by the Department for the years 1991 through 1995. Based upon discussions with
the Department, the Company does not expect any material adjustments to its
previously filed statutory financial statements.
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,
1997 and 1996, both Navigators' and NIC's results were within the usual values
for all IRIS ratios.
From time to time various regulatory and legislative changes have been
proposed in the insurance and reinsurance industry. 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 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 RBC 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
Navigators and NIC, their RBC level exceeds a level that would trigger
regulatory attention. In their respective 1997 statutory financial statements,
Navigators and NIC have complied with the NAIC's RBC 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 and in certain jurisdictions where they do business.
The Company's subsidiaries domiciled in the UK are subject to
regulation from the regulatory authorities in the UK including the Department of
Trade and Industry, and Lloyd's of London.
COMPETITION
The property and casualty insurance industry is highly competitive. The
demand for low-cost, high quality service has created 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. The
Company believes the current situation will not improve dramatically in the
foreseeable future.
11
<PAGE> 13
The Insurance Companies face 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 the Insurance Companies are engaged is based
on many factors, including the perceived overall financial strength of the
Insurance Companies, 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 the Insurance Companies face the risk that they will lose market
share to higher rated insurers.
No single insured or reinsured accounted for 10% or more of the
Company's gross written premium in 1997.
EMPLOYEES
As of December 31, 1997, the Company had 105 employees.
ITEM 2. PROPERTIES
The Company's administrative offices are occupied pursuant to a lease
from an unaffiliated company which expires May 14, 2000 in a building located at
123 William Street, New York, New York. Several of the Company's subsidiaries
have noncancellable operating leases for their respective office location. The
Company does not own any real estate.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to or the subject of, any material pending
legal proceedings which depart from the ordinary routine litigation incident to
the kinds of business conducted by 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 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is traded over-the-counter (The Nasdaq
National Market) under the symbol NAVG. 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 the four quarters of 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------- ---------------------------------------
High Low High Low
<S> <C> <C> <C> <C>
First Quarter ................. $19.75 $15.75 $20.25 $15.63
Second Quarter ............ $18.13 $15.75 $19.50 $15.75
Third Quarter ............... $21.38 $17.75 $19.63 $16.00
Fourth Quarter ............. $22.50 $18.00 $20.25 $17.75
</TABLE>
12
<PAGE> 14
STOCKHOLDERS
There were approximately 100 holders of record of shares of the
Company's common stock as of March 23, 1998. However, management believes there
are in excess of 1,000 beneficial owners of the stock.
DIVIDENDS
The Company has not paid or declared any cash dividends on its common
stock. While there presently is no intention to pay cash dividends on the 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.
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, 1997 derived from the Company's audited consolidated financial
statements. See the Consolidated Financial Statements of the Company including
notes thereto included herein.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING INFORMATION:
Net earned premium ............. $ 85,002 $ 78,731 $ 87,908 $ 90,483 $ 96,843
Net investment income .......... 14,435 13,614 14,143 13,034 11,588
Total revenues ................. 108,217 102,788 113,714 113,892 118,953
Income (loss)
before income taxes .......... 17,184 20,874 15,563 (31,574) 25,118
Net income (loss) .............. 12,546 16,752 12,582 (20,495) 21,585
Net income (loss) per share(1):
Basic ........................ $ 1.51 $ 2.04 $ 1.54 $ (2.51) $ 2.65
Diluted ...................... $ 1.50 $ 2.02 $ 1.53 $ (2.50) $ 2.64
Average common shares(1):
Basic ........................ 8,296 8,197 8,154 8,151 8,146
Diluted ...................... 8,385 8,286 8,213 8,185 8,190
BALANCE SHEET INFORMATION
(AT END OF PERIOD):
Total investments & cash(2) .... $ 258,572 $ 240,720 $ 235,460 $ 203,103 $ 200,253
Total assets ................... 501,207 457,095 435,552 474,031 431,028
Loss and LAE reserves .......... 278,432 269,601 273,854 314,898 247,346
Notes payable .................. 20,942 17,942 20,508 28,108 7,270
Stockholders' equity(2) ........ 131,242 115,542 99,076 77,523 117,277
Book value per share(2) ........ $ 15.68 $ 14.03 $ 12.12 $ 9.51 $ 14.39
</TABLE>
(1) In 1997, the Company adopted SFAS 128, Earnings per Share. Prior years'
amounts have been restated in accordance with SFAS 128.
(2) Investments and stockholders' equity for 1994 and subsequent years
reflect the adoption of SFAS 115, Accounting for Certain Investments in
Debt and Equity Securities.
13
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a holding company with thirteen wholly owned
subsidiaries. See "BUSINESS-General" included herein for a description of the
Company.
The Company's revenue is primarily comprised of premiums, commissions
and investment income. The Insurance Companies derive the majority of their
business from the Somerset Companies through either business written
specifically for the Insurance Companies or through Navigators participation in
insurance pools managed by the Somerset Companies. The insurance business and
operations of the Insurance Companies are managed by one of the Somerset
Companies.
The Company writes business in Southeast Asia through one of the
Somerset Companies. To date, the participation in this market has been limited
and therefore the Company's exposure to the economic conditions in Asia does not
materially effect its operations.
Navigators and the Somerset Companies earn investment income on cash
balances and invested assets. The Somerset Companies also earn investment income
on fiduciary funds. Such fiduciary funds are invested, subject to applicable
insurance regulations, primarily in short-term instruments.
RESULTS OF OPERATIONS
General. The 1995 results reflect development of losses from the 1994
Northridge Earthquake. During 1995 the total reported gross losses on direct
property claims arising from the Northridge Earthquake increased $18.3 million
from $125.4 million to $143.7 million. The Company also added gross bulk
reserves of $11 million at September 30, 1995. On a net basis, the incurred
losses relating to the Northridge Earthquake represented pre-tax charges of
approximately $10.7 million in 1995. There was no further development of the
losses from the Northridge Earthquake in 1996, however there was development of
$343,000 in 1997. There can be no assurance that additional losses will not be
reported or adjustments made to existing reserves.
The Company's 1997 results of operations reflect intense market
competition in the core marine and aviation lines.
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
settlement cost the Company approximately $2.0 million net of recoveries from
reinsurers, of which approximately $1.0 million was recorded in each of 1995 and
1996.
Revenues. Gross written premium decreased from $148.9 million in 1995
to $142.5 million in 1996 and increased to $171.2 million in 1997. 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:
14
<PAGE> 16
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Marine ..................... $ 56,231 33% $ 51,948 36% $ 61,684 42%
Aviation ................... 34,960 20 41,142 29 51,286 34
Inland Marine .............. 8,327 5 14,539 10 11,620 8
Onshore Energy ............. 9,854 6 6,902 5 __ __
Engineering and Construction 7,592 4 __ __ __ __
Lloyd's -- Marine .......... 24,654 14 __ __ __ __
Specialty Reinsurance
and Program Insurance ...... 29,631 18 27,993 20 24,317 16
--------- --- --------- --- --------- ---
Gross Written Premium ...... 171,249 100% 142,524 100% 148,907 100%
--------- === --------- === --------- ===
Ceded Written Premium ...... (80,369) (58,356) (67,639)
--------- --------- ---------
Net Written Premium ........ $ 90,880 $ 84,168 $ 81,268
========= ========= =========
</TABLE>
Marine Premium. Marine gross written premium (non-Lloyd's) increased 8%
from 1996 to 1997 due to Navigators' increased participation in the marine pools
from 41% in 1996 to 48% in 1997. The 1996 decrease from 1995 was due primarily
to decreases in premium rates. Marine premium has been subject to continued
pricing competition.
Aviation Premium. Aviation gross written premium decreased 15% from
1996 to 1997 due to price competition in the aviation insurance market. The 20%
reduction in Navigators' aviation gross written premium from 1995 to 1996 was
due to Navigators withdrawing from the general aviation business in order to
concentrate on the major airlines and manufacturers and to price competition.
Inland Marine Premium. As of June 1997, the Company no longer writes
inland marine business (other than onshore energy). The Somerset Companies
produced the inland marine business written by the Insurance Companies.
Onshore Energy Premium. In 1996, Navigators began to underwrite onshore
energy business which principally focuses on the oil and gas, chemical and
petrochemical, and power generation industries with coverages primarily for
property damage and machinery breakdown.
Engineering and Construction Premium. Somerset Asia began writing
engineering and construction risks in Southeast Asia in 1997.
Lloyd's Marine Premium. NCUL provided capacity to two Lloyd's
syndicates in 1997 which produced $24.7 million of marine premium. The premiums,
losses and expenses from the Lloyd's marine syndicates are included in the
Company's financials but are not included in the Insurance Companies' results
since NCUL is wholly owned by the parent company.
Specialty Reinsurance and Program Insurance Premium. Navigators
reinsurance business was produced and managed by one of the Somerset Companies.
This reinsurance premium consisted primarily of excess of loss and quota share
property, surety, and other specialty reinsurance lines. Navigators did not
renew this reinsurance business after 1995 except for a few specialty treaties.
The program insurance, which began in 1995, has been reduced for 1997 and
currently consists of one managing general agent writing primarily general
liability for contractors.
15
<PAGE> 17
Ceded Premium. 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. The
increase in the ceded premium from 1996 to 1997 resulted from the engineering
and construction and the program business which is heavily reinsured, and from
the ceded portion of the marine premium. The decrease in the ceded premium from
1995 to 1996 is reflective of the decrease in the written premium and price
competition in the reinsurance business.
Net Written Premium. The 8% increase in net written premium from 1996
to 1997 was primarily due to increases in the marine premium from both the
Somerset Companies and Lloyd's along with the new engineering and construction
business, partially offset by decreases in the aviation and inland marine
premium. The 4% increase in net written premium from 1995 to 1996 was primarily
due to Navigators increasing its participation in the aviation pool to 100% at
October 1, 1995 and to less premium being ceded.
Net Earned Premium. The 8% increase in net earned premium from 1996 to
1997 was primarily due to the increase in the net written premium. The 10%
decrease in net earned premium from 1995 to 1996 was primarily due to the
decrease in the 1995 net written premium and the effect the property business
run-off had on the 1995 net earned premium.
Commission Income. Commission income decreased 42% to $5.1 million in
1997 from 1996 partially due to Navigators increasing its participation in the
marine pool to 48% in 1997 from 41% in 1996 which decreased both the management
commission and the profit commission. Commission income decreased 17% to $8.8
million in 1996 from $10.7 million in 1995 primarily due to Navigators
increasing its participation to 100% at October 1, 1995 in the aviation business
managed by the Somerset Companies, which eliminated commission income paid by
the former participants in the aviation insurance pool. Also, the 1996
commission income includes $826,000 of profit commissions earned under the
Company's management agreement with Riverside. The commission income is also
affected by profit commissions from the marine pool.
Net Investment Income. Net investment income increased 6% to $14.4
million in 1997 from $13.6 million in 1996 due to the increase in invested
assets and the decrease of municipal bonds in the portfolio, partially offset by
a decrease in fiduciary funds held by the Somerset Companies resulting in less
investment income from the funds. Net investment income decreased 4% to $13.6
million in 1996 from $14.1 million in 1995 due to decreased fiduciary funds held
by the Somerset Companies, the effect on invested assets from payments of
earthquake losses and generally lower yields.
Operating Expenses.
Net losses and loss adjustment expenses incurred. The ratio of net loss
and loss adjustment expenses incurred to net earned premium was 61.9%, 62.2%,
and 69.5% in 1997, 1996 and 1995, respectively. The 1997 loss ratio improved
modestly over 1996. The improvement in the 1996 loss ratio compared to 1995 was
primarily due to a return to more normal experience after reserving for the
losses from the Northridge Earthquake.
Commission expense. Commission expense as a percentage of net earned
premium was 17.6%, 15.5%, and 13.9% for 1997, 1996 and 1995, respectively. The
increase in the 1997 commission expense ratio compared to 1996 was primarily due
to increased excess of loss reinsurance purchased in 1997 on the marine,
aviation and onshore energy lines of business which lowers net premium with no
corresponding ceding commission to offset the commission expense incurred on the
gross premium and to a generally higher commission percentage on the Lloyd's of
London premium. The increase in the 1996 commission expense ratio compared to
1995 was primarily due to the reversal of approximately
16
<PAGE> 18
$519,000 of contingent commissions receivable recorded in 1995 on certain ceded
contracts which had loss development during 1996.
Other operating expenses. Other operating expenses increased 8.9% to
$22.2 million primarily due to expenses incurred by Somerset (UK) in London,
Somerset Asia in Australia and NCUL. The 9.4% decrease from 1995 to 1996
reflected the staff cuts in 1995 partially offset by the opening of the new
offices in London and Australia in late 1996.
Interest Expense. The decrease in the interest expense from 1996 to
1997 was due to $368,000 of interest expense recorded in the first quarter of
1996 attributable to the Company's rollback liability under California
Proposition 103 and to fluctuations in the loan balance. The decrease in the
interest expense from 1995 to 1996 was due to the reduction in the loan balance
and lower interest rates. The 1995 interest expense includes $380,000 of
interest expense for the Company's rollback liability under California
Proposition 103.
Income Taxes. The income tax expense was $4.6 million, $4.1 million and
$3.0 million for 1997, 1996 and 1995, respectively. The effective tax rates for
1997, 1996 and 1995 were 27%, 20% and 19%, respectively. The increase in the
1997 rate was primarily due to not being able to utilize the losses from
Somerset (UK) and Somerset Asia. The Company had a net operating loss
carryforward of $3.0 million at December 31, 1995 which was fully utilized in
1996. The Company had alternative minimum tax ("AMT") carryforwards of $5.1
million, $5.8 million and $3.1 million at December 31, 1997, 1996 and 1995,
respectively. The AMT carryforwards were primarily attributable to the tax
benefits from the municipal bond interest. The Company has reduced its municipal
bond portfolio in 1997 in order to utilize part of the AMT carryforwards.
As of December 31, 1997 the net deferred Federal tax asset was $8.0
million as compared to $9.5 million at December 31, 1996. At December 31, 1997
and 1996 the Company had a $1.1 million valuation allowance against its deferred
Federal tax asset. There was no valuation allowance at December 31, 1996.
Equity Income in Affiliated Company. The Company holds an equity
interest in Riverside, which through its wholly owned subsidiary, Riverside
Corporate Underwriters Limited, is admitted to underwrite at Lloyd's of London
as a corporate name with limited liability. The Company records its share of
Riverside's underwriting results when sufficient information becomes available
to provide reasonable estimates of earned premiums and losses. During 1996,
primarily in the third quarter, the Company recorded its share of the 1994 and
1995 after tax underwriting earnings amounting to $1.4 million. During 1997, the
Company recorded $376,000 of after tax underwriting earnings from its investment
in Riverside.
Net Income. The Company's net income decreased in 1997 to $12.5 million
from $16.8 million in 1996. The 1996 net income of $16.8 million improved over
the $12.6 million of income in 1995 in which year the Company suffered the
adverse impact of the Northridge Earthquake.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations was $12.5 million, $7.3 million and $26.6
million for 1997, 1996 and 1995, respectively. Operating cash flow has been used
primarily to acquire additional investment assets with net purchases during
1997, 1996 and 1995 of $17.6 million, $11.5 million and $12.8 million,
respectively.
17
<PAGE> 19
At December 31, 1997, the Company had committed approximately $550,000
to continue to enhance its hardware and software computer systems in 1998.
Invested assets and cash (excluding fiduciary funds held by the
Somerset Companies) have grown from $235.5 million at December 31, 1995 to
$240.7 million at December 31, 1996 to $258.6 million at December 31, 1997.
Investment income during this period was $14.1 million in 1995, $13.6 million in
1996 and $14.4 million in 1997. The average yield of the portfolio, excluding
net realized capital gains, was 5.6% in 1995, 5.4% in 1996, and 5.7% in 1997
reflecting the prevailing interest rates during those years and the decrease in
the tax-exempt portfolio in 1997. As of December 31, 1997, all fixed maturity
securities and equity securities held by the Company were classified as
available-for-sale.
The majority of the invested assets are in municipal bonds rated "A" or
better by Standard & Poor's or Moody's. The Company has no significant exposure
to credit risk since the Company's fixed maturity investment portfolio does not
contain any non-investment grade bonds. The portfolio has an average maturity of
less than seven 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.
On August 5, 1994, the Company entered into a Credit Agreement with
three banks which was amended and restated on November 19, 1996 (the "Amended
Credit Agreement"). The Amended Credit Agreement provided for a $20 million
revolving credit loan facility and a $30 million letter of credit facility. The
revolving credit loan facility bears interest, at the election of the Company,
at either the base commercial lending rate of one of the banks or at LIBOR plus
1%. At December 31, 1996, $17 million in loans were outstanding under the
revolving credit loan facility at an interest rate of 6.5% and letters of credit
with an aggregate face amount of $27.1 million were issued under the letter of
credit facility.
A December 11, 1997 amendment to the Amended Credit Agreement increased
the revolving credit loan facility from $20 million to $25 million which reduces
each quarter by various amounts (from $500,000 to $2,000,000) until it
terminates on December 31, 2003. At December 31, 1997, $20 million in loans were
outstanding under the revolving credit loan facility at an interest rate of 6.9%
and letters of credit with an aggregate face amount of $26.0 million were issued
under the letter of credit facility. The letters of credit are primarily
utilized by NCUL as collateral to participate in two Lloyd's marine syndicates
specializing in marine insurance. No letters of credit have been drawn upon.
The Company also has a $942,000 note payable to its major stockholder
bearing interest at 7%.
Total stockholders' equity was $131.2 million at December 31, 1997, a
13.6% increase for the year primarily as the result of the Company's earnings in
1997.
The Company was within the usual values for all NAIC's IRIS ratios as
of December 31, 1996 and 1997.
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.
Pursuant to the implementation of Lloyd's Plan of Reconstruction and Renewal, a
significant portion of the Company's recoverables from the Loss Syndicates are
now reinsured by Equitas ( a separate UK Department of Trade and Industry
authorized reinsurance company established to reinsure outstanding liabilities
of all Lloyd's members for all risks written in the 1992 or prior years of
account).
18
<PAGE> 20
The Company believes that the cash flow generated by the operating
activities of the Company's subsidiaries 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. A decrease in interest rates will tend to decrease the
Company's yield on its invested assets.
Management considers the potential impact of these economic trends in
estimating loss reserves. Management believes that the underwriting controls it
maintains, and the fact that the majority of Navigators' business is in lines of
insurance which have relatively short loss payout patterns, assist in estimating
ultimate claim costs more accurately and lessen the potential adverse impact of
the economy on the Company.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the Year 2000 issue
in existing computer systems and is currently replacing its major computer
systems with systems that are Year 2000 compliant and thereby will benefit from
state-of-the-art integrated systems along with being Year 2000 compliant. The
project is expected to be completed in 1998. If the project is not completed
timely, the Year 2000 issue may have a material impact on the operations of the
Company. The costs directly related to the Year 2000 issue to date have been
minimal. There can be no assurance that the systems of other companies on which
the Company's systems rely will also be timely converted or that any such
failure to convert by another company would not have an adverse effect on the
Company's systems.
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 and the executive officers of the
Company is contained under "Election of Directors" in the Company's 1998 Proxy
Statement, which information is incorporated herein by reference.
19
<PAGE> 21
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is contained under
"Compensation of Directors and Executive Officers" in the Company's 1998 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 1998 Proxy Statement, which information is incorporated herein by
reference.
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 1998 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 are listed on the accompanying Index to
Exhibits on the page which 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 fourth quarter of 1997.
20
<PAGE> 22
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 27, 1998 By:/s/ BRADLEY D. WILEY
-------------- --------------------
Bradley D. Wiley
Senior Vice President, CFO
and 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 Chairman, President and CEO March 27, 1998
- ----------------------------------- (Principal Executive Officer)
Terence N. Deeks
/s/ BRADLEY D. WILEY Senior Vice President, CFO March 27, 1998
- ----------------------------------- and Secretary
Bradley D. Wiley (Principal Financial Officer)
/s/ SALVATORE A. MARGARELLA Vice President & Treasurer March 27, 1998
- ----------------------------------- (Principal Accounting Officer)
Salvatore A. Margarella
/s/ ROBERT M. DEMICHELE Director March 27, 1998
- -----------------------------------
Robert M. DeMichele
/s/ LEANDRO S. GALBAN, JR. Director March 27, 1998
- -----------------------------------
Leandro S. Galban, Jr.
/s/ JOHN F. KNIGHT Director March 27, 1998
- -----------------------------------
John F. Knight
/s/ MARC M. TRACT Director March 27, 1998
- -----------------------------------
Marc M. Tract
/s/ WILLIAM D. WARREN Director March 27, 1998
- -----------------------------------
William D. Warren
/s/ ROBERT F. WRIGHT Director March 27, 1998
- -----------------------------------
Robert F. Wright
</TABLE>
21
<PAGE> 23
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
Independent Auditors' Report ................................................................................... F-2
Consolidated Balance Sheets at December 31, 1997 and 1996 ...................................................... F-3
Consolidated Statements of Income for each of the years in the three-year
period ended December 31, 1997 ............................................................................... F-4
Consolidated Statements of Stockholders' Equity for each of the years in
the three-year period ended December 31, 1997 ................................................................ F-5
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1997 .................................................................... 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>
F-1
<PAGE> 24
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, 1997 and 1996,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, 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.
KPMG Peat Marwick LLP
New York, New York
March 16, 1998
F-2
<PAGE> 25
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
--------- --------
<S> <C> <C>
ASSETS
Investments and cash:
Fixed maturities, available-for-sale, at fair value
(amortized cost: 1997, $218,418; 1996, $210,042) .......................... $ 226,834 $215,072
Equity securities, available-for-sale, at fair value (cost: 1997, $4,557;
1996, $7,538) ............................................................. 6,132 10,281
Short-term investments, at cost which approximates fair value ............... 22,579 11,826
Cash ........................................................................ 1,251 1,460
Other investments ........................................................... 1,776 2,081
--------- --------
Total investments and cash ........................................... 258,572 240,720
--------- --------
Premiums in course of collection .............................................. 45,847 35,108
Commissions receivable ........................................................ 6,434 6,782
Accrued investment income ..................................................... 3,121 3,302
Prepaid reinsurance premiums .................................................. 20,405 11,540
Reinsurance receivable on paid and unpaid losses and loss adjustment expenses . 147,104 143,345
Federal income tax recoverable ................................................ 164 33
Net deferred Federal and foreign income tax benefit ........................... 7,994 9,517
Deferred policy acquisition costs ............................................. 5,403 3,658
Other assets .................................................................. 6,163 3,090
--------- --------
Total assets ......................................................... $ 501,207 $457,095
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses ............................ $ 278,432 $269,601
Unearned premium ............................................................ 48,659 33,917
Reinsurance balances payable ................................................ 16,539 11,581
Notes payable to banks ...................................................... 20,000 17,000
Deferred state and local income tax ......................................... 1,184 1,119
Note payable to stockholder ................................................. 942 942
Accounts payable and other liabilities ...................................... 4,209 7,393
--------- --------
Total liabilities .................................................... 369,965 341,553
--------- --------
Commitments and contingencies ................................................. -- --
Stockholders' equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued ... -- --
Common stock, $.10 par value, authorized 10,000,000 shares,
issued and outstanding 8,368,167 in 1997 and 8,237,900 in 1996 ............ 837 824
Additional paid-in capital .................................................. 38,119 36,202
Net unrealized gains on securities available-for-sale (net of tax of
$3,497 in 1997 and $2,643 in 1996) ........................................ 6,494 5,131
Foreign currency translation adjustment, net of tax ........................ (61) 78
Retained earnings ........................................................... 85,853 73,307
--------- --------
Total stockholders' equity ........................................... 131,242 115,542
--------- --------
Total liabilities and stockholders' equity ....................... $ 501,207 $457,095
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 26
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except net income per share)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Revenues:
Net earned premium ............................. $ 85,002 $ 78,731 $ 87,908
Commission income .............................. 5,083 8,798 10,658
Net investment income .......................... 14,435 13,614 14,143
Net realized capital gains ..................... 2,827 503 291
Other income ................................... 870 1,142 714
-------- --------- --------
Total revenues .......................... 108,217 102,788 113,714
-------- --------- --------
Operating expenses:
Net losses and loss adjustment expenses incurred 52,620 48,977 61,053
Commission expense ............................. 14,938 12,171 12,228
Other operating expenses ....................... 22,231 20,417 22,534
Interest expense ............................... 1,244 1,737 2,336
-------- --------- --------
Total operating expenses ................ 91,033 83,302 98,151
-------- --------- --------
Equity income in affiliated company, net of tax .. -- 1,388 --
Income before income tax ......................... 17,184 20,874 15,563
Income tax expense (benefit):
Current ...................................... 3,879 4,280 2,847
Deferred ..................................... 759 (158) 134
-------- --------- --------
Total income tax expense ................ 4,638 4,122 2,981
-------- --------- --------
Net income ..................................... $ 12,546 $ 16,752 $ 12,582
======== ========= ========
Net income per common share:
Basic ......................................... $ 1.51 $ 2.04 $ 1.54
Diluted ....................................... $ 1.50 $ 2.02 $ 1.53
Average common shares outstanding:
Basic ......................................... 8,296 8,197 8,154
Diluted ....................................... 8,385 8,286 8,213
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 27
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Preferred stock
Balance at beginning and end of year ... $ -- $ -- $ --
========= ========= ========
Common stock
Balance at beginning of year ........... $ 824 $ 817 $ 815
Issuance of common stock during the year 13 7 2
--------- --------- --------
Balance at end of year ................. $ 837 $ 824 $ 817
========= ========= ========
Additional paid-in capital
Balance at beginning of year ........... $ 36,202 $ 35,321 $ 34,984
Issuance of common stock during the year 1,917 881 337
--------- --------- --------
Balance at end of year ................. $ 38,119 $ 36,202 $ 35,321
========= ========= ========
Unrealized gains (losses) on
available-for-sale securities
Balance at beginning of year ........... $ 5,131 $ 6,273 $ (2,353)
Change in unrealized gains (losses) .... 1,363 (1,142) 8,626
--------- --------- --------
Balance at end of year ................. $ 6,494 $ 5,131 $ 6,273
========= ========= ========
Foreign currency translation adjustment
Balance at beginning of year ........... $ 78 $ 110 $ 105
Change in foreign translation .......... (139) (32) 5
--------- --------- --------
Balance at end of year ................. $ (61) $ 78 $ 110
========= ========= ========
Retained earnings
Balance at beginning of year ........... $ 73,307 $ 56,555 $ 43,973
Net income ............................. 12,546 16,752 12,582
--------- --------- --------
Balance at end of year ................. $ 85,853 $ 73,307 $ 56,555
========= ========= ========
Total stockholders' equity at end of year ... $ 131,242 $ 115,542 $ 99,076
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 28
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Operating activities:
Net income .......................................... $ 12,546 $ 16,752 $ 12,582
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & amortization ....................... 526 593 713
Reinsurance receivable on paid and unpaid
losses and loss adjustment expenses .............. (3,759) 4,012 52,532
Reserve for losses and loss adjustment
expenses ......................................... 8,831 (4,253) (41,044)
Prepaid reinsurance premiums ...................... (8,865) (1,726) 2,411
Unearned premium .................................. 14,743 7,163 (8,967)
Premiums in course of collection .................. (10,738) (17,137) 6,637
Commissions receivable ............................ 348 (734) (921)
Deferred policy acquisition costs ................. (1,746) (1,134) 387
Accrued investment income ......................... 181 47 (400)
Reinsurance balances payable ...................... 4,958 5,169 (4,590)
Federal income tax ................................ (131) (1,276) 7,650
Net deferred Federal and foreign income tax ....... 683 (56) 98
Net realized capital (gains) ...................... (2,827) (503) (291)
Other ............................................. (2,253) 348 (179)
-------- -------- ---------
Net cash provided by operating activities ....... 12,497 7,265 26,618
-------- -------- ---------
Investing activities:
Fixed maturities, available-for-sale
Redemptions and maturities ........................ 9,745 14,683 9,513
Sales ............................................. 75,368 35,273 67,196
Purchases ......................................... (93,679) (57,212) (101,295)
Equity securities, available-for-sale
Sales ............................................. 9,624 2,340 1,531
Purchases ......................................... (4,017) (3,891) (2,229)
Payable for securities purchased .................... (2,815) 1,268 386
Net sales (purchases) of short-term investments ..... (10,757) (4,533) 12,353
Other investments ................................... (132) 820 --
Purchase of property and equipment .................. (974) (273) (210)
-------- -------- ---------
Net cash (used in) investing activities ........... (17,637) (11,525) (12,755)
-------- -------- ---------
Financing activities:
Proceeds from bank loan ............................. 3,000 -- 2,000
Repayment of bank loan .............................. -- (2,500) (8,000)
Proceeds from exercise of stock options ............. 1,931 887 340
Notes payable to stockholders, net .................. -- -- (1,600)
-------- -------- ---------
Net cash (used in) provided by financing activities 4,931 (1,613) (7,260)
-------- -------- ---------
Increase (decrease) in cash ............................. (209) (5,873) 6,603
Cash at beginning of year ............................... 1,460 7,333 730
-------- -------- ---------
Cash at end of year ..................................... $ 1,251 $ 1,460 $ 7,333
======== ======== =========
Federal income tax paid ................................. $ 3,200 $ 4,928 $ 1,000
State and local income tax paid ......................... 880 307 894
Interest paid ........................................... 1,222 2,069 1,889
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 29
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 consisting of the
accounts of The Navigators Group, Inc., a Delaware holding company, and its
thirteen wholly owned subsidiaries, are prepared on the basis of generally
accepted accounting principles. Unless the context otherwise requires, the term
"Company" as used herein means The Navigators Group, Inc. and its subsidiaries.
All significant intercompany transactions and balances are eliminated. Certain
amounts for prior years have been reclassified to conform to the current year's
presentation.
The Company's two insurance subsidiaries are Navigators Insurance
Company ("Navigators") and NIC Insurance Company ("NIC"). Navigators is the
Company's largest insurance subsidiary and has been active since 1983. It
specializes principally in underwriting marine, aviation and onshore energy
insurance. As of June 1997, the Company is no longer writing inland marine
insurance (except for onshore energy insurance classified as inland marine) and
reduced its program business in the second half of 1997 in order to focus on its
core businesses. NIC is a wholly owned subsidiary of Navigators, was licensed in
1989 and began operations in 1990. It underwrites a small book of surplus lines
insurance in certain states and, pursuant to an intercompany reinsurance pooling
agreement, cedes 100% of its gross direct writings from this business to
Navigators in exchange for assuming 10% of Navigators net business. Navigators
and NIC are collectively referred to herein as the "Insurance Companies".
Navigators Corporate Underwriters Limited ("NCUL"), a subsidiary formed
in the fourth quarter of 1996, is admitted to underwrite marine and related
lines of business at Lloyd's of London as a corporate member with limited
liability.
Seven of the Company's subsidiaries are underwriting management
companies: Somerset Marine, Inc., Somerset Insurance Services of Texas, Inc.,
Somerset Insurance Services of California, Inc., Somerset Insurance Services of
Washington, Inc., Somerset of Georgia, Inc., Somerset Marine (UK) Limited
("Somerset UK") and Somerset Asia Pacific Pty. Limited ("Somerset Asia")
(collectively, the "Somerset Companies"). The Somerset Companies produce, manage
and underwrite insurance and reinsurance for Navigators, NIC and nine
unaffiliated insurance companies.
Somerset Asia was formed in the third quarter of 1996 and operates from
an office in Sydney, Australia. This office concentrates on marine, onshore
energy, engineering and construction business primarily in Indonesia, Thailand,
Malaysia, Taiwan, China and Vietnam. Somerset Asia began writing business in
early 1997 and is supported by Somerset Services Pte. Limited which provides
loss prevention consultancy to Somerset Asia's assureds and producers. Somerset
Services Pte. Limited, a wholly owned subsidiary of Somerset Asia, was formed in
September 1997 and is located in Singapore.
Somerset UK, formed in the fourth quarter of 1996, concentrates on
marine, aviation, energy, engineering and construction business. Navigators was
authorized to operate a United Kingdom ("UK") branch on October 22, 1997.
Somerset UK began producing business in the fourth quarter of 1997 for the UK
Branch of Navigators.
Navigators Holdings (UK) Limited was formed on September 15, 1997 as a
holding company for the Company's UK subsidiaries.
F-7
<PAGE> 30
During 1997, the Company merged four subsidiaries, Somerset Re
Management, Inc., Navigators Management Corporation, Somerset Casualty Agency,
Inc. and Somerset Property, Inc. into Somerset Marine, Inc. The Company also
owns Somerset Marine Aviation Property Managers, Inc., an inactive subsidiary.
The Company's revenue is primarily comprised of premiums, commissions
and investment income. The Insurance Companies derive the majority of their
business from the Somerset Companies through either business written
specifically for the Insurance Companies or through Navigators direct
participation in, or reinsuring certain members of, insurance pools managed by
the Somerset Companies. The insurance business and operations of the Insurance
Companies are managed by Somerset Marine, Inc.
The Somerset Companies specialize principally in writing marine,
aviation and onshore energy insurance. They underwrite marine business through a
syndicate of insurance companies, Navigators having the largest participation in
the syndicate. The Somerset Companies derive their revenue from commissions,
investment income, service fees and cost reimbursement arrangements from their
parent company, Navigators, NIC and the unaffiliated 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 syndicate.
Property and casualty insurance premiums historically have been 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.
In January 1998, the Company acquired 100% of Mander, Thomas & Cooper
(Underwriting Agencies) Limited, a Lloyd's of London marine underwriting
managing agency and its wholly owned subsidiary, Millennium Underwriting
Limited, a Lloyd's corporate member with limited liability.
INVESTMENTS
Investments are classified into one of three categories.
Held-to-maturity securities are debt securities that the Company 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 purchased 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, 1997 and
1996, all fixed maturity and equity securities held by the Company were
classified as available-for-sale. Premiums and discounts on fixed maturity
securities are amortized into interest income over the life of the security
under the interest method.
Short-term investments are carried at cost, which approximates fair
value. Short-term investments mature within one year from the purchase date.
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 realizable value. The write down is considered a realized
loss in the consolidated statement of income.
F-8
<PAGE> 31
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 for 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
The Company adopted the Financial Accounting Standards Board's ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
Share, on December 31, 1997. SFAS No. 128 supersedes APB Opinion No. 15,
Earnings per Share, and replaces primary earnings per share and fully diluted
earnings per share with basic earnings per share and diluted earnings per share,
respectively. The Company has restated earnings per share for all prior periods
presented to comply with the provisions of SFAS No. 128.
REINSURANCE CEDED
Reinsurance ceded which transfers risk, premiums, commissions and
recoveries on losses incurred is 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.
F-9
<PAGE> 32
FEDERAL INCOME TAXES
The Company files a consolidated Federal income tax return with its
U.S. subsidiaries. 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.
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.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
SFAS No. 130, Reporting Comprehensive Income, was issued in June 1997
and establishes standards for the reporting and presentation of comprehensive
income and its components in a full set of financial statements. Comprehensive
income encompasses all changes in shareholders' equity (except those arising
from transactions with owners) and includes net income, net unrealized capital
gains or losses on available for sale securities and foreign currency
translation adjustments. As this new standard only requires additional
information in a financial statement, it will not affect the Company's financial
position or results of operations. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted. The
Company is currently evaluating the presentation alternatives permitted by the
statement.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, was issued in June 1997 and establishes standards for the reporting
of information relating to operating segments in annual financial statements, as
well as disclosure of selected information in interim financial reports. This
statement supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, which requires reporting segment information by industry and
geographic area (industry approach). Under SFAS No. 131, operating segments are
defined as components of a company for which separate financial information is
available and is used by management to allocate resources and assess performance
(management approach). This statement is effective for year-end 1998 financial
statements. Interim financial information will be required beginning in 1999
(with comparative 1998 information).
In December 1997, the American Institute of Certified Public
Accountants issued Statement of Position No. 97-3, Accounting by Insurance and
Other Enterprises for Insurance Related Assessments, ("SOP 97-3"). SOP 97-3
establishes standards for accounting for guaranty-fund and certain other
insurance related assessments. SOP 97-3 is effective for fiscal years beginning
after December 15, 1998. The adoption of this statement is not expected to have
a material effect on the Company's results of operations or financial condition.
F-10
<PAGE> 33
NOTE 2. INVESTMENTS
The Company's invested assets at December 31, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1997 COST OR COST GAINS (LOSSES) VALUE
- ----------------- ------------ ----- -------- -----
(In thousands)
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government, government
agencies and authorities ....... $ 9,794 $ 333 $(10) $ 10,117
States, municipalities and political
subdivisions ................... 126,154 6,377 (57) 132,474
Mortgage and asset backed .......... 70,166 1,461 (14) 71,613
Corporate bonds .................... 11,279 261 -- 11,540
Redeemable preferred stock ......... 1,025 65 -- 1,090
-------- ------ ---- --------
Total fixed maturities ........ $218,418 $8,497 $(81) $226,834
======== ====== ==== ========
Equity securities - common stocks ...... $ 4,557 $1,660 $(85) $ 6,132
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1996 COST OR COST GAINS (LOSSES) VALUE
- ----------------- ------------ ----- -------- -----
(In thousands)
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Government, government
agencies and authorities ......... $ 9,715 $ 97 $ (74) $ 9,738
States, municipalities and political
subdivisions .................... 172,303 4,813 (185) 176,931
Mortgage and asset backed ............ 25,599 444 (121) 25,922
Corporate bonds ...................... 1,143 51 (1) 1,193
Redeemable preferred stock ........... 1,282 7 (1) 1,288
-------- ------ ----- --------
Total fixed maturities ...... $210,042 $5,412 $(382) $215,072
======== ====== ===== ========
Equity securities - common stocks ....... $ 7,538 $2,771 $ (28) $ 10,281
======== ====== ===== ========
</TABLE>
The Company's fixed maturity securities by year of maturity were as
follows:
<TABLE>
<CAPTION>
PERIOD FROM PERCENT PERCENT
DECEMBER 31, 1997 FAIR OF AMORTIZED OF
TO MATURITY VALUE PORTFOLIO COST PORTFOLIO
----------- ----- --------- ---- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One year or less ................... $ 7,214 3.2% $ 7,183 3.3%
One year to five years ............. 58,452 25.8 56,382 25.8
Five years to ten years ............ 66,231 29.2 62,615 28.7
More than ten years ................ 23,324 10.2 22,072 10.1
Mortgage and asset backed securities 71,613 31.6 70,166 32.1
-------- ----- -------- -----
Total ...................... $226,834 100.0% $218,418 100.0%
======== ===== ======== =====
</TABLE>
F-11
<PAGE> 34
Due to the periodic repayment of principal, the mortgage and asset
backed securities are estimated to have an effective maturity of approximately
six years.
Net investment income of the Company was derived from the following
sources:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Fixed maturities ..... $ 13,248 $ 12,481 $ 12,012
Equity securities .... 292 266 224
Short-term investments 1,613 1,529 2,567
-------- -------- --------
15,153 14,276 14,803
Investment expenses .. (718) (662) (660)
-------- -------- --------
Net investment income $ 14,435 $ 13,614 $ 14,143
======== ======== ========
</TABLE>
The Company's realized capital gains and losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
------- ----- -----
(In thousands)
<S> <C> <C> <C>
Fixed maturities:
Gains .............................. $ 786 $ 479 $ 966
(Losses) ........................... (269) (375) (968)
------- ----- -----
517 104 (2)
------- ----- -----
Equity securities and other investments:
Gains .............................. 2,868 456 293
(Losses) ........................... (558) (57) --
------- ----- -----
2,310 399 293
------- ----- -----
Net realized capital gains ............. $ 2,827 $ 503 $ 291
======= ===== =====
</TABLE>
At December 31, 1997 and 1996, fixed maturities with amortized values
of $6,775,000 and $6,480,000, respectively, were on deposit with various State
Insurance Departments. In addition, at December 31, 1997, $132,000 was on
deposit with the Bank of England for Navigators' UK Branch. Also, at December
31, 1997 and 1996, fixed maturities with amortized values of $851,000 and
$859,000, respectively, were pledged as security under a reinsurance treaty.
At December 31, 1997, the Company did not have a material concentration
of financial instruments in a single issuer.
Other investments consist of the Company's interest in Riverside
Underwriters Plc, a U.K. Corporation (formerly known as Navigators Underwriters
Plc) ("Riverside"). The Company's original ownership interest was 21% at
December 31, 1995 which increased to 27% as of January 1, 1996 and decreased to
approximately 8% at December 31, 1996. Riverside owns 100% of Riverside
Corporate Underwriters Limited, a U.K. corporation, which is admitted to
underwrite at Lloyd's of London as a corporate name with limited liability. The
transaction to reduce the Company's ownership in Riverside did not produce a
material capital gain or loss. The Company remains entitled to receive from
Riverside an amount equal to the aggregate dividends that it would have received
if it had continued to hold its original investment to the extent such dividends
are attributable to writings at Lloyd's by Riverside Corporate Underwriters
Limited during the 1994, 1995 and 1996 years of account. In connection with the
reduction of the Company's investment, it has agreed to cease being manager of
Riverside and Riverside Corporate
F-12
<PAGE> 35
Underwriters Limited, although the Company will remain entitled to profit
commissions with respect to the 1994, 1995 and 1996 underwriting years. Prior to
December 31, 1996, the investment was carried under the equity method of
accounting. At December 31, 1996 and 1997, the investment is recorded at cost
due to the reduction in ownership interest.
Included in 1996 income was $1,388,000 of equity income, net of tax.
Pretax earnings for 1997 of $561,000 are included in other income since the
investment was no longer carried under the equity method. The Company records
its share of Riverside's earnings from underwriting when sufficient information
becomes available to provide reasonable estimates of earned premiums and losses.
NOTE 3. NOTES PAYABLE AND LOANS
On August 5, 1994, the Company entered into a Credit Agreement with
three banks which was amended and restated on November 19, 1996 (the "Amended
Credit Agreement"). The Amended Credit Agreement provided for a $20 million
revolving credit loan facility and a $30 million letter of credit facility. The
revolving credit loan facility bears interest, at the election of the Company,
at either the base commercial lending rate of one of the banks or at LIBOR plus
1%. At December 31, 1996, $17 million in loans were outstanding under the
revolving credit loan facility at an interest rate of 6.5% and letters of credit
with an aggregate face amount of $27.1 million were issued under the letter of
credit facility.
An amendment dated December 11, 1997, to the Amended Credit Agreement
increased the revolving credit loan facility from $20 million to $25 million
which reduces each quarter by various amounts (from $500,000 to $2,000,000)
until it terminates on December 31, 2003. At December 31, 1997, $20 million in
loans were outstanding under the revolving credit loan facility at an interest
rate of 6.86% and letters of credit with an aggregate face amount of $26.0
million were issued under the letter of credit facility. The letters of credit
are primarily utilized by NCUL as collateral to participate in two Lloyd's
syndicates specializing in marine insurance. No letters of credit have been
drawn upon.
The Amended Credit Agreement is collateralized by shares of common
stock of the Company's major subsidiaries. The Amended Credit Agreement contains
covenants common to transactions of this type, including restrictions on
indebtedness and liens, limitations on mergers and the sale of assets,
maintaining certain consolidated total stockholders' equity, statutory surplus,
minimum liquidity, loss reserves and other financial ratios.
The Company also has a $942,000 note payable to its major stockholder
bearing interest at 7%.
NOTE 4. FIDUCIARY FUNDS
The Somerset Companies maintain fiduciary accounts for the insurance
pools they manage. Functions performed by the Somerset Companies include
underwriting business, collecting premiums from the insured, paying claims,
collecting paid recoverables from reinsurers, paying reinsurance premiums to
reinsurers and remitting net account balances to member insurance companies.
Funds belonging to the insurance pools are held in a fiduciary capacity and
interest income earned on such funds is retained by the Somerset Companies.
F-13
<PAGE> 36
The fiduciary accounts as of December 31, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------- --------
(In thousands)
<S> <C> <C>
Cash and short-term investments ........... $ 2,114 $ 18,857
Premiums receivable ....................... 55,970 95,136
Reinsurance balances receivable ........... 4,644 6,582
------- --------
Total assets ..................... $62,728 $120,575
======= ========
Due to insurance companies ................ $62,728 $120,575
------- --------
Total liabilities ................ $62,728 $120,575
======= ========
</TABLE>
The fiduciary accounts above were not included in the accompanying
consolidated balance sheets.
NOTE 5. INCOME TAXES
The components of current and deferred income tax expense (benefit)
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------ ------- ------
(In thousands)
<S> <C> <C> <C>
Current:
Federal .................... $3,328 $ 3,652 $2,294
State and local ............ 551 $ 628 $ 553
------ ------- ------
Total ................ $3,879 $ 4,280 $2,847
====== ======= ======
Deferred:
Federal and foreign ........ $ 683 $ (57) $ 97
State and local ............ 76 (101) 37
------ ------- ------
Total ............... $ 759 $ (158) $ 134
====== ======= ======
</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 was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Computed expected
tax expense ................... $ 6,014 35% $ 7,306 35% $ 5,447 35%
Tax-exempt interest .............. (2,538) (15) (2,793) (13) (2,694) (17)
Dividends received
deduction ...................... (61) -- (59) -- (49) --
State & local income taxes, net of
Federal income tax ............. 408 2 347 2 390 2
Valuation allowance .............. 1,108 6 (775) (4) -- --
Other ............................ (293) (1) 96 -- (113) (1)
------- -- ------- -- ------- --
$ 4,638 27% $ 4,122 20% $ 2,981 19%
======= == ======= == ======= ==
</TABLE>
F-14
<PAGE> 37
The tax effects of temporary differences that give rise to Federal and
foreign deferred tax assets and deferred tax liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Loss reserve discount ..................... $ 7,183 $ 6,833
Unearned premium .......................... 1,500 1,521
Alternative minimum tax carryforward ...... 5,106 5,783
Deferred state and local income tax ....... 418 388
Allowance for uncollectible reinsurance ... -- 272
Deferred compensation ..................... 30 500
Loss from foreign operation ............... 1,108 --
Other ..................................... 221 25
-------- --------
Total gross deferred tax assets .............. 15,566 15,322
Less valuation allowance ..................... (1,108) --
-------- --------
Net deferred tax assets ...................... 14,458 15,322
-------- --------
Deferred tax liabilities:
Deferred acquisition costs ................ (1,188) (1,244)
Unrealized gains on securities ............ (3,497) (2,643)
Contingent commission receivable .......... (1,559) (1,810)
Other ..................................... (220) (108)
-------- --------
Total deferred tax liabilities ............... (6,464) (5,805)
-------- --------
Net deferred tax asset ....................... $ 7,994 $ 9,517
======== ========
</TABLE>
In 1997, a tax benefit of $259,000 was credited directly to additional
paid-in capital due to the exercise of stock options.
In assessing the realization of deferred tax assets, management
considers whether it is more likely than not that the deferred tax assets will
be realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, tax planning strategies and anticipated
future taxable income in making this assessment and believes it is more likely
than not the Company will realize the benefits of its deductible differences at
December 31, 1997, net of any valuation allowance.
The establishment of the valuation allowance in the amount of
$1,108,000 during the year ended December 31, 1997 is due to the uncertainty
associated with the realization of the deferred tax asset for the carryforward
of operating losses from the Company's foreign operations.
A valuation allowance in the amount of $775,000 established in 1994 due
to the uncertainty associated with the realization of a net operating loss
carryforward deferred tax asset was taken down in 1996 when the Company utilized
the balance of the carryforward.
F-15
<PAGE> 38
NOTE 6. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table summarizes the activity in the Insurance Companies'
reserve for losses and loss adjustment expenses ("LAE") during the three most
recent years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Net reserves for losses and LAE at
beginning of year ................................ $ 132,558 $ 138,761 $ 135,377
--------- --------- ---------
Provision for losses and LAE for
claims occurring in the current year ............. 53,654 51,429 54,030
Increase (decrease) in estimated losses and
LAE for claims occurring in prior years .......... (1,034) (2,452) 7,023
--------- --------- ---------
Incurred losses and LAE ............................ 52,620 48,977 61,053
--------- --------- ---------
Losses and LAE payments for claims occurring during:
Current year ................................... (12,921) (15,439) (10,482)
Prior years .................................... (32,416) (39,741) (47,187)
--------- --------- ---------
Losses and LAE payments ............................ (45,337) (55,180) (57,669)
--------- --------- ---------
Net reserves for losses and LAE at end of year ..... 139,841 132,558 138,761
--------- --------- ---------
Reinsurance receivable on unpaid losses and LAE .... 138,591 137,043 135,093
--------- --------- ---------
Gross reserves for losses and LAE at end of year ... $ 278,432 $ 269,601 $ 273,854
========= ========= =========
</TABLE>
The development of prior year incurred losses during 1995 was primarily
attributable to the loss development from the Northridge Earthquake.
On January 17, 1994, an earthquake (the "Northridge Earthquake")
occurred in the Northridge area of Los Angeles, California. The Company's net
pre-tax loss in 1994 from the Northridge Earthquake totalled $39,265,000. During
1995, 1996 and 1997, the Company incurred additional net pre-tax losses from the
Northridge Earthquake of $10,721,000, $0 and $343,000, respectively. There can
be no assurance given that additional losses will not be reported or adjustments
made to existing reserves.
During 1997, 1996 and 1995, the Insurance Companies paid gross losses
and LAE of $1,510,000, $2,794,000 and $2,251,000, respectively, resulting in net
paid losses and LAE of $723,000, $425,000 and $117,000, respectively, for
environmental pollution and asbestos related claims. As of December 31, 1997 and
1996, the Insurance Companies carried gross reserves of $2,622,000 and
$5,421,000, respectively, and net reserves of $936,000 and $1,042,000,
respectively, for the potential exposure to such claims. For the year ended
December 31, 1997 and 1996, open claims with environmental pollution and
asbestos exposure amounted to 2,451 and 2,024, respectively. Management believes
that its reserves for such claims are adequate because the Insurance Companies'
participation in such risks was 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.
F-16
<PAGE> 39
NOTE 7. REINSURANCE
The following table summarizes earned premium:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
--------- -------- --------
(In thousands)
<S> <C> <C> <C>
Direct ............ $ 110,453 $ 86,917 $ 93,497
Assumed ........... 46,053 48,444 64,376
Ceded ............. (71,504) (56,630) (69,965)
--------- -------- --------
Net ............... $ 85,002 $ 78,731 $ 87,908
========= ======== ========
</TABLE>
The following table summarizes written premium:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
--------- -------- --------
(In thousands)
<S> <C> <C> <C>
Direct ............ $ 119,597 $ 92,261 $ 87,542
Assumed ........... 51,652 50,263 61,365
Ceded ............. (80,369) (58,356) (67,639)
--------- -------- --------
Net ............... $ 90,880 $ 84,168 $ 81,268
========= ======== ========
</TABLE>
Ceded losses and loss adjustment expenses incurred were $57,340,000,
$61,964,000 and $43,551,000 in 1997, 1996, and 1995, 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, 1997, the Company had reinsurance receivables from the
following four reinsurers which were in excess of 5% of the Insurance Companies'
statutory surplus: Underwriters at Lloyds, $17,740,000; SCOR Reinsurance
Company, $10,177,000; Chiyoda Fire and Marine Insurance, $7,652,000; Government
Insurance Office of New South Wales, $6,856,000.
The Company's reinsurance security committee continually monitors the
financial strength of its reinsurers and the related reinsurance receivables. An
allowance is established to the extent that it is determined that the ultimate
amount collectible is less than the amount recorded as a receivable. At December
31, 1997 and 1996, there was an allowance for uncollectible reinsurance of
$800,000. The expense recorded for uncollectible reinsurance was $286,000, $0
and $688,000 for 1997, 1996 and 1995, respectively.
NOTE 8. FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities ............. $226,834 $226,834 $215,072 $215,072
Equity securities ............ 6,132 6,132 10,281 10,281
Short-term investments ....... 22,579 22,579 11,826 11,826
Commissions receivable ....... 6,434 6,232 6,782 6,491
Financial liabilities:
Loans payable to banks ...... 20,000 20,000 17,000 17,000
</TABLE>
F-17
<PAGE> 40
The carrying amounts shown in the table are included in the
consolidated balance sheets under the indicated captions.
The fair values of fixed maturity and equity securities are based on quoted
market prices at the reporting date for those or similar investments. Short-term
investments are carried at cost, which approximates fair value. The carrying
amounts of premium receivables approximate fair value because of the short
maturity of those instruments.
Included within commissions receivable are contingent commissions
receivable which are 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 9. 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 Company, its
subsidiaries and affiliates, options to purchase an aggregate of 900,000 shares
of its common stock.
All options are granted at exercise prices no less than 90% of 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. Options vest
equally over a four year period and have a maximum term of ten years.
Stock options outstanding at December 31, 1997, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ------------------------ -------------------------
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 .. 624,001 $ 18.73 783,800 $ 18.68 703,625 $ 21.13
Granted .............. 25,000 $ 17.00 -- -- 222,300 $ 14.75
Exercised ............ (126,325) $ 12.67 (65,499) $ 13.54 (21,000) $ 16.17
Canceled ............. (44,751) $ 28.12 (94,300) $ 22.15 (121,125) $ 26.16
-------- ------- -------
Options outstanding at
end of year ........ 477,925 $ 19.37 624,001 $ 18.73 783,800 $ 18.68
======== ======= =======
Number of shares
exercisable ........ 365,650 $ 20.75 402,126 $ 20.12 391,400 $ 19.01
</TABLE>
The Company has a Stock Appreciation Rights Plan which allows for the grant
of up to 300,000 stock appreciation rights at prices of no less than 90% of the
fair market value of the common stock. The Company granted 25,500, 166,000 and
111,500 stock appreciation rights in 1997, 1996 and 1995, respectively. The
amounts charged to expense in 1997, 1996 and 1995 were $147,000, $46,000 and $0,
respectively.
The Company accounts for stock options in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, which requires compensation expense to be recognized only if the fair
value of the underlying stock at the grant date exceeds the exercise price of
the option. Accordingly, no compensation cost has been recognized for stock
options.
F-18
<PAGE> 41
Had compensation cost for the Company's stock options been determined
consistent with SFAS No. 123, Accounting for Stock Based Compensation, the
Company's net income and income per share would have been reduced to the pro
forma amounts indicated in the following table:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net income As Reported $12,546 $16,752 $12,582
Pro Forma $12,295 $16,529 $12,359
Basic income per share As Reported $ 1.51 $ 2.04 $ 1.54
Pro Forma $ 1.48 $ 2.02 $ 1.51
Diluted income per share As Reported $ 1.50 $ 2.02 $ 1.53
Pro Forma $ 1.47 $ 1.99 $ 1.50
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
the options granted: no dividend yield; expected volatility of 31.8% and 35.3%
in 1997 and 1995, respectively; risk free interest rate of 6.0% for 1997 and
1995; and expected life of 6 years for 1997 and 5.75 years for 1995. The
weighted average fair value of options granted was $6.30 and $7.99 in 1997 and
1995, respectively.
The following table summarizes information about options outstanding at December
31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING AVERAGE REMAINING AVERAGE EXERCISABLE AVERAGE
PRICE RANGE SHARES CONTRACT LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- ----------- ------ ------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$12-15 251,675 7.1 $14.21 158,150 $14.07
16-19 99,250 4.5 17.68 80,500 17.84
28-34 127,000 5.2 30.91 127,000 30.91
</TABLE>
NOTE 10. EMPLOYEE BENEFITS
The Company sponsors 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) up to the amount permitted by certain Federal
regulations. Employees vest at 20% per year beginning at the end of the second
year and are therefore fully vested after six years of service. Plan expense,
included within operating expenses, amounted to $686,000, $839,000 and $991,000
in 1997, 1996 and 1995, respectively.
The Company established a 401(k) Plan effective January 1, 1995 for all
eligible employees. Each eligible employee can contribute up to 8% of their
salary limited by certain Federal regulations. The Company does not match any of
the employee contributions.
NOTE 11. DIVIDENDS FROM SUBSIDIARIES AND STATUTORY FINANCIAL INFORMATION
Navigators may pay dividends to the Company 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 Navigators
during 1998 without prior regulatory approval is $10,996,000. Navigators paid no
dividends to the Company in 1997, 1996 or 1995.
Navigators UK Branch was capitalized at $10 million in October 1997 and is
required to maintain certain capital requirements under UK regulations.
F-19
<PAGE> 42
The Insurance Companies' statutory net income as filed with the regulatory
authorities for 1997, 1996 and 1995 was $15,714,000, $13,308,000 and $8,524,000,
respectively. The statutory surplus as filed with the regulatory authorities was
$109,957,000 and $96,075,000 at December 31, 1997 and 1996, respectively.
The Insurance Companies, domiciled in New York State, prepare and file
their statutory financial statements in accordance with accounting practices
prescribed or permitted by the New York State Insurance Department. Prescribed
statutory accounting practices ("SAP") include a variety of publications of the
National Association of Insurance Commissioners, as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. The Insurance
Companies do not apply any permitted accounting practices.
The significant differences between SAP and generally accepted accounting
principles (GAAP) are that under SAP: (1) acquisition and commission costs are
expensed when incurred while under GAAP these costs are deferred and amortized
as the related premium is earned; (2) bonds are stated at amortized cost, while
under GAAP bonds are held in an available-for-sale account and reported at fair
value, with unrealized gains and losses recognized as a separate component of
stockholder's equity; (3) federal income taxes are recorded when payable while
under GAAP deferred taxes are provided to reflect temporary differences between
the carrying values and tax bases of assets and liabilities; (4) unearned
premiums and loss reserves are reflected net of ceded amounts while under GAAP
the unearned premiums and loss reserves are reflected gross of ceded amounts;
(5) agents' balances over ninety days due are excluded from the balance sheet,
and uncollateralized amounts due from unauthorized reinsurers are deducted from
surplus, while under GAAP they are restored to the balance sheet, subject to the
usual tests regarding recoverability.
As part of its general regulatory oversight process, the New York
State Insurance Department (the "Department") conducts detailed examinations of
the books, records and accounts of New York insurance companies every three to
five years. The Insurance Companies were examined by the Department for the
years 1991 through 1995. Based upon discussions with the Department, the Company
does not expect any material adjustments to its previously filed statutory
financial statements.
NOTE 12. LEASES
Future minimum annual rental commitments at December 31, 1997, under
various noncancellable operating leases for the Company's office facilities,
which expire at various dates through July 31, 2003, are as follows:
<TABLE>
<CAPTION>
(In thousands)
YEAR ENDED DECEMBER 31,
<S> <C>
1998 ................................ $1,424
1999 ................................ 1,339
2000 ................................ 769
2001 ................................ 378
2002 and after ...................... 291
------
Total ............................... $4,201
======
</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,
1997, 1996 and 1995 was $1,522,000, $1,577,000, and $1,437,000, respectively.
F-20
<PAGE> 43
NOTE 13. EARNINGS PER COMMON SHARE
Following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share ("EPS") computations for the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
Average
Shares Income
Income Outstanding Per Share
----------- ----------- ---------
<S> <C> <C> <C>
Basic EPS:
Income available to common stockholders $12,546,000 8,296,429 $1.51
Effect of Dilutive Securities:
Stock options 88,091
Diluted EPS:
Income available to common stockholders $12,546,000 8,384,520 $1.50
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
Average
Shares Income
Income Outstanding Per Share
----------- ----------- ---------
<S> <C> <C> <C>
Basic EPS:
Income available to common stockholders $16,752,000 8,196,994 $2.04
Effect of Dilutive Securities:
Stock options 88,964
Diluted EPS:
Income available to common stockholders $16,752,000 8,285,958 $2.02
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
Average
Shares Income
Income Outstanding Per Share
----------- ----------- ---------
<S> <C> <C> <C>
Basic EPS:
Income available to common stockholders $12,582,000 8,154,214 $1.54
Effect of Dilutive Securities:
Stock options 58,721
Diluted EPS:
Income available to common stockholders $12,582,000 8,212,935 $1.53
</TABLE>
Certain outstanding options to purchase common shares were not included in
the respective computations of diluted earnings per common share because the
options' exercise prices were greater than the average market price of the
common shares. For each of the years presented these outstanding options
consisted of the following: during 1997, 173,125 shares at an average price of
$27.65 expiring in years 2000 to 2003; during 1996, 164,250 shares at an average
price of $30.98 expiring in years 2001 to 2003; and during 1995, 201,750 shares
at an average price of $30.71 expiring in years 2001 to 2003.
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations for the quarterly periods during 1997 and 1996
were as follows. Due to changes in the number of shares outstanding and to
rounding, quarterly per share amounts may not add to the total for the year.
F-21
<PAGE> 44
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
--------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997
---- ---- ---- ----
(In thousands, except net income per share)
<S> <C> <C> <C> <C>
Total revenues ..................... $23,937 $28,122 $28,085 $28,074
Income before income tax ........... $ 4,313 $ 4,336 $ 4,782 $ 3,753
Net income ......................... $ 3,235 $ 3,156 $ 3,463 $ 2,692
Per share data:
Net income per share - Basic ....... $ 0.39 $ 0.38 $ 0.42 $ 0.32
Net income per share - Diluted ..... $ 0.39 $ 0.38 $ 0.41 $ 0.32
</TABLE>
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
-------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996
(In thousands, except net income per share)
<S> <C> <C> <C> <C>
Total revenues ..................... $25,197 $24,386 $25,794 $27,411
Income before income tax ........... $ 5,436 $ 5,121 $ 6,321 $ 3,996
Net income ......................... $ 4,212 $ 3,797 $ 5,252 $ 3,491
Per share data:
Net income per share - Basic ...... $ 0.52 $ 0.46 $ 0.64 $ 0.42
Net income per share - Diluted .... $ 0.51 $ 0.46 $ 0.63 $ 0.42
</TABLE>
NOTE 15. SUBSEQUENT EVENT
In January 1998, the Company purchased 100% of Mander, Thomas & Cooper
(Underwriting Agencies) Limited, a Lloyd's of London marine underwriting
managing agency and its wholly owned subsidiary, Millennium Underwriting
Limited. The purchase price consists of initial cash payments plus future
performance contingent consideration. The total purchase price is not material
to the Company's total assets.
F-22
<PAGE> 45
SCHEDULE I
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUMMARY OF CONSOLIDATED INVESTMENTS -- OTHER THAN INVESTMENTS
IN RELATED PARTIES
December 31, 1997
<TABLE>
<CAPTION>
Amount at which
shown in the
Amortized consolidated
Type of Investment Cost or Cost Fair value balance sheet
- ------------------ ------------ ---------- -------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Government,
government agencies
and authorities .......... $ 9,794 $ 10,117 $ 10,117
States, municipalities
and political subdivisions 126,154 132,474 132,474
Mortgage and asset backed .. 70,166 71,613 71,613
Corporate bonds ............ 11,279 11,540 11,540
Redeemable preferred stock . 1,025 1,090 1,090
-------- -------- --------
Total fixed maturities 218,418 226,834 226,834
-------- -------- --------
Equity securities:
Common stocks:
Industrial, miscellaneous
and all other ........... 4,557 6,132 6,132
-------- -------- --------
Short-term investments ......... 22,579 xxxx 22,579
-------- -------- --------
Other investments .............. 1,776 xxxx 1,776
-------- -------- --------
Total investments ..... $247,330 $ xxxx $257,321
======== ======== ========
</TABLE>
S-1
<PAGE> 46
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
THE NAVIGATORS GROUP, INC.
BALANCE SHEETS
(Parent Company)
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
A S S E T S 1997 1996
--------- --------
<S> <C> <C>
Cash ............................................... $ -- $ 103
Investment in wholly owned subsidiaries,
at equity ....................................... 141,826 126,630
Short-term investments ............................. -- 933
Other assets ....................................... 10,163 6,529
--------- --------
Total assets ......................... $ 151,989 $134,195
========= ========
L I A B I L I T I E S
Notes payable to banks ............................. $ 20,000 $ 17,000
Accounts payable and other liabilities ............. 747 1,653
--------- --------
Total liabilities ......................... 20,747 18,653
--------- --------
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, none issued ................... -- --
Common stock, $.10 par value, authorized
10,000,000 shares, issued and outstanding
8,368,167 in 1997 and 8,237,900 in 1996 ........ 837 824
Additional paid-in capital ........................ 38,119 36,202
Net unrealized gains on securities
available-for-sale, net of tax ................. 6,494 5,131
Foreign currency translation adjustment, net of tax (61) 78
Retained earnings .................................. 85,853 73,307
--------- --------
Total stockholders' equity ................ 131,242 115,542
--------- --------
Total liabilities and stockholders' equity $ 151,989 $134,195
========= ========
</TABLE>
S-2
<PAGE> 47
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
THE NAVIGATORS GROUP, INC.
STATEMENTS OF INCOME
(Parent Company)
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Net investment income .............. $ 22 $ 14 $ 159
Net realized capital loss .......... (320) -- --
Dividends received from wholly owned
subsidiaries ..................... -- 4,819 2,924
Other Income ......................... 727 513 --
Operating expenses and income taxes .. (1,768) (2,935) (3,393)
-------- -------- --------
Income (loss) before equity in
undistributed net income
of wholly owned subsidiaries ....... (1,339) 2,411 (310)
Equity in undistributed net income
of wholly owned subsidiaries ...... 13,885 12,953 12,892
Equity in undistributed net
income of affiliated company ....... -- 1,388 --
-------- -------- --------
Net income ........................... $ 12,546 $ 16,752 $ 12,582
======== ======== ========
</TABLE>
S-3
<PAGE> 48
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
THE NAVIGATORS GROUP, INC.
STATEMENTS OF CASH FLOWS
(Parent Company)
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income ......................................... $ 12,546 $ 16,752 $ 12,582
Adjustments to reconcile net income
to net cash provided by (used in ) operations:
Equity in undistributed net income of wholly
owned subsidiaries ............................. (13,885) (12,953) (12,892)
Other ............................................ (4,628) (3,408) 5,701
-------- -------- --------
Net cash provided by (used in) operating activities (5,967) 391 5,391
-------- -------- --------
Investing activities:
Investment in affiliate ............................ -- 820 --
Net (increase) decrease in short-term
investments ....................................... 933 (933) 1,631
-------- -------- --------
Net cash provided by (used in) investing activities 933 (113) 1,631
-------- -------- --------
Financing activities:
Proceeds from bank ................................. 3,000 -- 2,000
loan
Repayment of bank loan ............................. -- (2,500) (8,000)
Proceeds from exercise of stock options ........... 1,931 887 340
-------- -------- --------
Net cash provided by (used in) financing activities 4,931 (1,613) (5,660)
-------- -------- --------
Increase (decrease) in cash .......................... (103) (1,335) 1,362
Cash Beginning of Period ............................. 103 1,438 76
-------- -------- --------
Cash End of Period ................................... $ 0 $ 103 $ 1,438
======== ======== ========
</TABLE>
S-4
<PAGE> 49
SCHEDULE III
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
<TABLE>
<CAPTION>
Reserve
Deferred for losses Other policy
policy and loss claims and Net Net
acquisition adjustment Unearned benefits earned investment
Period costs expenses Premiums payable premium income(1)
------ ----------- --------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Property-Casualty .............. $5,403 $278,432 $48,659 $ -- $85,002 $13,776
Year ended December 31, 1996
Property-Casualty .............. $3,658 $269,601 $33,917 $ -- $78,731 $12,514
Year ended December 31, 1995
Property-Casualty .............. $2,523 $273,854 $26,754 $ -- $87,908 $12,361
</TABLE>
<TABLE>
<CAPTION>
Losses Amortization
and loss of deferred
adjustment policy Other Net
expenses acquisition operating written
Period incurred costs(2) expenses(1) premium
------ -------- ------------- ---------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Property-Casualty .............. $52,620 $24,565 $4,073 $90,880
Year ended December 31, 1996
Property-Casualty .............. $48,977 $22,793 $2,507 $84,168
Year ended December 31, 1995
Property-Casualty .............. $61,053 $26,513 $2,670 $81,268
</TABLE>
(1) Net investment income and other operating expenses reflect only such
amounts attributable to the Company's insurance operations.
(2) Amortization of deferred policy acquisition costs reflects only such
amounts attributable to the Company's insurance operations. A portion
of these costs is eliminated upon consolidation.
S-5
<PAGE> 50
SCHEDULE IV
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
REINSURANCE
Written Premium
(Dollars in thousands)
<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, 1997
Property-Casualty .............. $119,597 $80,369 $51,652 $90,880 57%
-------- ------- ------- ------- ---
Year ended December 31, 1996
Property-Casualty .............. $ 92,261 $58,356 $50,263 $84,168 60%
-------- ------- ------- ------- ---
Year ended December 31, 1995
Property-Casualty .............. $ 87,542 $67,639 $61,365 $81,268 76%
-------- ------- ------- ------- ---
</TABLE>
S-6
<PAGE> 51
SCHEDULE V
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
Additions
--------------------------------------
Balance at Balance at
January 1, Charged to Charged to Deductions December 31,
Description 1997 Costs and Expenses Other Accounts Describe 1997
----------- ---- ------------------ -------------- -------- ----
<S> <C> <C> <C> <C> <C>
Allowance for
uncollectible
reinsurance $800 $ -- $ -- $ -- $ 800
---- ------ ---- ---- ------
Valuation allowance in
deferred taxes
$ -- $1,108 $ -- $ -- $1,108
---- ------ ---- ---- ------
</TABLE>
S-7
<PAGE> 52
SCHEDULE VI
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Reserve
Deferred for losses
Affiliations policy and loss Discount, Net Net
with acquisition adjustment if any, Unearned earned investment
Registrant costs expenses deducted premium premium income(1)
------ -------- ------- ------- ------- -------
Consolidated subsidiaries
- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997 $5,403 $278,432 $ -- $48,659 $85,002 $13,776
------ -------- ------- ------- ------- -------
Year ended December 31, 1996 $3,658 $269,601 $ -- $33,917 $78,731 $12,514
------ -------- ------- ------- ------- -------
Year ended December 31, 1995 $2,523 $273,854 $ -- $26,754 $87,908 $12,361
------ -------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Losses and loss adjustment Amortization
expenses incurred related to of deferred
Affiliations ---------------------------- policy Other Net
with Current Prior acquisition operating written
Registrant year years costs(2) expenses(1) premium
------- ------- ------- ------ -------
Consolidated subsidiaries
- -------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997 $53,654 $(1,034) $24,565 $4,073 $90,880
------- ------- ------- ------ -------
Year ended December 31, 1996 $51,429 $(2,452) $22,793 $2,507 $84,168
------- ------- ------- ------ -------
Year ended December 31, 1995 $54,030 $ 7,023 $26,513 $2,670 $81,268
------- ------- ------- ------ -------
</TABLE>
(1) Net investment income and other operating expenses reflect only such
amounts attributable to the Company's insurance operations.
(2) Amortization of deferred policy acquisition costs reflects only such
amounts attributable to the Company's insurance operations. A portion
of these costs is eliminated upon consolidation.
S-8
<PAGE> 53
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
<S> <C> <C>
3-1 Restated Certificate of Incorporation (a)
3-2 By-laws, as amended (a)
10-1 Management Agreement between Navigators Insurance Company and
Somerset Marine, Inc. (a)
10-2 Agreement between The Navigators Group, Inc. and Somerset Marine,
Inc. (a)
10-3 Stock Option Plan (a)(b)
10-4 Non-Qualified Stock Option Plan (b)
10-5 Employment Agreement with Terence N. Deeks (c)
10-6 Employment Agreement with W. Allen Barnett (c)
10-7 Letter Agreement with Michael J. Abdallah (d)
10-8 Consulting Agreement between The Navigators Group, Inc. and Robert
F. Wright Associates, Inc. (c)
10-9 Amended and Restated Credit Agreement dated as of November 26,
1996, among The Navigators Group, Inc., as Borrower, Brown Brothers
Harriman & Co., NBD Bank, First Union National Bank of North
Carolina, as Lenders, First National Bank of Chicago, as Issuing
Bank, and Brown Brothers Harriman & Co., as Agent. (d)
10-10 Agreement with Bradley D. Wiley
10-11 First Amendment dated April 9, 1997 to the Amended and Restated
Credit Agreement dated November 26, 1996
10-12 Second Amendment dated December 11, 1997 to Amended and
Restated Credit Agreement dated November 26, 1996
10-13 Consulting Agreement between The Navigators Group, Inc. and William
D. Warren
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. 33-5667 as part of Form S-1,
incorporated herein by reference thereto.
(b) 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.
(c)(d) Previously filed with the Company's Form 10-K for the year ended
December 31, 1994 (c) and 1996 (d), incorporated herein by reference
thereto.
(e) Submitted in paper format under cover of Form SE.
<PAGE> 1
EXHIBIT 10-10
AGREEMENT
Agreement (this "Agreement") entered into and effective this 3rd day of
June, 1997 between Bradley D. Wiley of Ringwood, New Jersey (the "Executive")
and The Navigators Group, Inc., a corporation with an office located at 123
William Street, New York, N.Y. 10038 (the "Company").
W I T N E S S E T H:
WHEREAS, both the Company and Executive believe there are mutual
advantages to entering into this Agreement, to induce the Executive to remain in
the employ of the Company.
NOW THEREFORE, in consideration of the material advantages accruing to the
two parties and the mutual covenants herein, the Company and Executive agree
with each other as follows:
1. DEFINITIONS.
(a) "Affiliate" means any person that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, any other Person.
(b) "Base Annual Compensation" means the base salary of the Executive on
an annualized basis, exclusive of any bonus and/or other benefits to which the
Executive may be entitled during the Term.
(c) "Board" means the Board of Directors of the Company.
(d) "Bonus" means the bonus payment (in addition to Base Annual
Compensation) that has, in the discretion of the Board of the Company, been paid
(or accrued) to Executive following a calendar year to reward the Executive for
performance during such calendar year.
(e) "Change in Control" means any of (i) the sale by the Company of at
least Fifty Percent (50%) of its assets to any Person, (ii) the merger or
consolidation of the Company with any Person in which the shareholders of the
Company immediately prior to such merger or consolidation receive less than
Fifty (50%) of the outstanding voting shares of the new or continuing Person,
(iii) the sale, exchange, or other disposition to a Person, or Persons under
common control (or the acquisition through a tender offer or exchange offer by a
Person or Persons under common
<PAGE> 2
control), in one transaction or a series of related transactions of greater than
Thirty-Three (33%) of the outstanding shares of the Company's common stock, or
(iv) Terence N. Deeks no longer holds any office with the Company and is not a
director.
(f) "Closing Date" means the effective date of any Change in Control
during the Term of this Agreement.
(g) "Code" means the Internal Revenue Code of 1986 as in effect at the
time with respect to which such term is used.
(h) "Company" means The Navigators Group, Inc., a Delaware corporation,
and all of the Subsidiaries.
(i) "Constructive Discharge" shall be deemed to occur upon the occurrence
during the Covered Period of any of the following: (i) a material, adverse
change in the Executive's title or position, for example if the Executive is no
longer Chief Financial Officer of the Company (other than resulting from a
Discharge for Cause), which adverse change continues for more than Thirty (30)
days following written notice from the Executive; (ii) a substantial reduction
in the Executive's responsibilities (including, without limitation, a
termination of Executive by the Company other than a Discharge for Cause), which
reduction continues for more than Thirty (30) days after written notice from the
Executive setting forth in reasonable detail the nature of such reduction in
responsibilities; (iii) any reduction in the Executive's Base Annual
Compensation below the Base Annual Compensation in effect immediately prior to
the Closing Date of a Change in Control (other than a reduction resulting from
or in connection with a Discharge for Cause), which reduction is not cured
within Thirty (30) days following written notice from the Executive; (iv) the
failure, following a Change in Control, of a successor corporation to assume
this Agreement and all obligations and undertakings of the Company hereunder,
which failure continues for more than Thirty (30) days following written notice
from the Executive to such successor corporation; (v) a portfolio transfer by
the Company of Fifty Percent (50%) or more of the aggregate loss reserves of the
Company; and/or (vi) any other transaction by the Company that constitutes a
"runoff" of greater than Fifty Percent (50%) of the Company's insurance
business.
(j) "Covered Period" means the period commencing on the earlier of the
Pre-Closing Date and the Closing Date and ending Two (2) years after the Closing
Date.
(k) "Discharge for Cause" shall, during the Covered Period, be deemed to
occur only following the termination of Executive's employment by the Board upon
a good faith determination by the Board that any of the following has occurred:
(i) the commission by Executive of any act which, if successfully prosecuted by
the appropriate authorities, would constitute a felony under state or
2
<PAGE> 3
federal law; (ii) Executive's embezzlement or intentional misappropriation of
any property of the Company (it being understood that the use by the Executive
of Company office supplies at home to facilitate his performance of his duties
to the Company shall not be construed as embezzlement or intentional
misappropriation of property of the Company); (iii) the intentional or knowing
commission by the Executive of an act that causes the Company or any of its
Affiliates to be in contravention of any material provision of applicable law or
any material rules and regulations of any governmental or other regulatory body
having jurisdiction over the business and affairs of the Company or its
Affiliates; (iv) the continued insubordination of the Executive or his
dereliction of duties after written notice from the Board specifying the
insubordination or dereliction of duties and a reasonable opportunity (not less
than Ten (10) days) to cure have been given to the Executive; or (v) Executive's
having divulged, furnished or made accessible to anyone other than the Company,
its directors, officers, employees, auditors, bankers, rating agencies,
analysts, regulatory agencies and legal advisors, other than in the regular
course of the business of the Company, any confidential knowledge or information
relating to the customers, employees, operations, financial condition, revenues
or projections of the Company, other than information in the public domain which
has not been improperly disclosed by the Executive. Such determination by the
Board may be made only after reasonable written notice to the Executive from a
member of the Board setting forth details of the allegations which may
constitute Discharge for Cause and after an opportunity for such Participant,
together with his counsel, to be heard by the Board. Notwithstanding the
foregoing, in the event Executive disputes, in an arbitration pursuant to
Section 6, below, that an event permitting Discharge for Cause has occurred (a
"Challenged Termination"), then the Company shall, until the Arbitrators render
their judgement with respect to the Challenged Termination (a) permit the
Executive to participate, to the extent Executive continues to be eligible
notwithstanding the Challenged Termination, in all medical, dental, life
insurance and short and long-term disability plans in which Executive was
entitled to participate prior to the Challenged Termination (each a "Plan" and
collectively the "Plans"), subject to the terms and conditions that were in
effect prior to the Challenged Termination, as such terms and conditions may be
amended subsequent to the Challenged Termination, and (b) if the Executive is
not eligible to participate in a Plan or Plans by virtue because of his
termination, pay to the Executive, on a monthly basis, an amount equal to the
aggregate amount paid by the Company on behalf of the Executive with respect to
the Plan or Plans for which the Executive is not eligible because of his
termination.
(1) "Person" means an individual, partnership, firm, trust, corporation or
other similar entity. When two or more Persons
3
<PAGE> 4
act as a partnership, limited partnership, limited liability company, syndicate
or other group for the purpose of acquiring, holding or disposing of securities
of the Company, such partnership, limited partnership, syndicate or group shall
be deemed a "Person" for the purposes of this Agreement.
(m) "Pre Closing Date" means, with respect to the types of Change in
Control described in Sections 1(e) (i), 1(e) (ii) and/or 1(e) (iii), above, the
effective date of the written agreement for such asset sale, merger or
consolidation, or stock purchase agreement, as the case may be, between the
Company and the Person or Persons to whom the Company's assets or shares of
Common Stock are being sold, or with whom the Company is merging or
consolidating, as the case may be.
(n) "Primary Benefit" shall have the meaning accorded thereto in Section
3(a).
(o) "Subsidiary" means any Person of which a majority of the capital stock
having voting power for the election of directors or other governing board is
owned by the Company and/or one or more of the Subsidiaries.
Any term used in this Agreement in the masculine gender shall include the
feminine gender.
2. DISCHARGE FOR CAUSE.
Notwithstanding anything to the contrary in this Agreement, Discharge for
Cause of the Executive by the Board shall not constitute Constructive Discharge.
3. TERMINATION BY THE EXECUTIVE FOLLOWING CONSTRUCTIVE DISCHARGE.
(a) In the event of the Constructive Discharge of the Executive during the
Covered Period, the Executive shall, subject to the next succeeding sentence, be
entitled to send written notice (the "Termination Notice") to the Company (or
any successor or continuing Person) stating that he is terminating his
employment with the Company (or such successor or continuing Person) due to such
Constructive Discharge. In the event the Company terminates the Executive other
than a Discharge for Cause, the Termination Notice shall be deemed to have been
sent by Executive on the date of such termination. The Termination Notice with
respect to any other Constructive Discharge must be sent within Six (6) Months
of the effective date of such Constructive Discharge, or the Executive shall be
deemed to have waived his rights under this Section 3 with respect to such
Constructive Discharge. Provided the Executive sends the Termination Notice
within such Six (6) Month period, the Company (or such successor or continuing
Person) shall pay to the Executive:
4
<PAGE> 5
(i) an amount (the "Primary Benefit") equal to One Hundred Fifty
Percent (150%) of the Base Annual Compensation of the Executive in
effect immediately prior to the effective date of the Constructive
Discharge. The Primary Benefit shall be paid to the Executive in
twelve (12) equal monthly installments, commencing on the first
business day of the first calendar month following receipt of the
Termination Notice; and
(ii) within Thirty (30) Days following receipt of the Termination
Notice, the amount (the "Pro Rata Bonus") that results from the
following calculation: (A) the Bonus paid (or accrued and to be
paid) to the Executive with respect to the calendar year immediately
preceding the calendar year of the Constructive Discharge,
multiplied by (B) a fraction, the numerator of which is the number
of days elapsed in the calendar year of the Constructive Discharge,
and the denominator of which is 365.
The Primary Benefit and Pro Rata Bonus shall be in satisfaction of any and all
other compensation, bonus, severance and/or other payments of any kind
whatsoever, otherwise due or to be paid to the Executive, except for accrued,
but not paid, Base Annual Compensation and accrued and to be paid bonus from any
prior period, and except for the payments to the Executive pursuant to Section 3
(b).
(b) In addition to the Primary Benefit and the Pro Rata Bonus, the Company
shall, for the twelve (12) month period commencing with receipt of the
Termination Notice: (i) permit the Executive to participate, to the extent
Executive continues to be eligible, in all medical, dental, life insurance,
short and long-term disability plans, 401K and Money Purchase Plans (or their
successor plans) in which Executive was entitled to participate prior to
delivery of the Termination Notice (each a "Plan" and collectively the "Plans"),
subject to the terms and conditions that were in effect prior to the delivery
of the Termination Notice, as such terms and conditions may be amended
subsequent to delivery of the Termination Notice, and (ii) if the Executive is
not eligible to participate in a Plan or Plans by virtue of his termination, pay
to the Executive, on the first business day of each of the twelve months
subsequent to receipt of the Termination Notice, an amount equal to the
aggregate amount paid by the Company on behalf of the Executive with respect to
the Plan or Plans for which the Executive is not eligible because of his
termination.
(c) Notwithstanding anything to the contrary in this Agreement and/or any
other agreement between the Company and the Executive in effect on the date
hereof, in the event a
5
<PAGE> 6
Constructive Discharge shall occur, then each Award under the Company's Phantom
Stock Appreciation Rights Plan theretofore granted to the Executive, and each
other option theretofore granted to the Executive by the Company shall, to the
extent not theretofore exercised or expired, become immediately exercisable in
full and shall expire on the earlier to occur of (i) the expiration of the
period of twelve (12) months after the date of such Constructive Discharge and
(ii) the date specified in such Award.
4. TERM; TERMINATION.
The term of this Agreement (the "Term") shall commence on the date first
written above and continue for so long as the Executive is employed by the
Company (or any successor or continuing Person); provided, however, that the
obligations of the Company (or any successor or continuing Person) under Section
3 shall survive such termination.
5. NOTICES.
Any notice or other communication to the Executive or the Company (or any
successor or continuing Person) pursuant to this Agreement shall be in writing
and shall be deemed given when personally delivered or sent by registered or
certified mail, return receipt requested, at the addresses set forth below, or
at such other address as the Executive or the Company (or any successor or
continuing Person) shall have specified by notice to the other in the manner
herein provided:
If to Executive:
Bradley D. Wiley
35 Olive Lane
Ringwood, N.J. 07456
If to the Company (or any successor or continuing Person):
The Navigators Group, Inc.
Attention: Terence N. Deeks
123 William Street
New York, N.Y. 10038
6. Arbitration
(a) Any dispute or difference of opinion arising out of, with respect to
or in connection with this Agreement shall be submitted to binding arbitration
before an arbitration panel consisting of one arbitrator to be chosen by the
Company, the other by Executive, and the third arbitrator (the "Umpire") to be
chosen by the two arbitrators. All of the arbitrators shall be active or retired
disinterested executive officers of insurance
6
<PAGE> 7
or reinsurance companies or Lloyd's Underwriters. In the event that either party
fails to choose an arbitrator within thirty (30) days following a written
request by the other party to do so, the requesting party may choose a second
arbitrator on behalf of the other party. If the two arbitrators fail to agree
upon the selection of an Umpire within thirty (30) days following their
appointment, each arbitrator shall nominate three candidates within ten (10)
days thereafter, two of whom the other shall decline, and the decision between
the remaining two candidates shall be made by drawing lots.
(b) The decision of a majority of the arbitrators shall be final and
binding on both parties. The arbitrators shall not have the right or authority
to award punitive damages.
(c) (i) All expenses of the Company in any arbitration hereunder and/or
any action or proceeding to confirm, vacate or modify any judgement rendered in
an arbitration hereunder, including, without limitation, all legal fees, all
costs and expenses of its arbitrator and 50% of the costs and expenses of the
Umpire, and any and all other costs of the Company arising out of such
arbitration, action or proceeding, shall be borne by the Company, whether or not
it is the prevailing party.
(ii) Except as provided in Section 6(c) (iii), below, all expenses of the
Executive in any arbitration hereunder and/or any action or proceeding to
confirm, vacate or modify any judgement rendered in an arbitration hereunder,
including, without limitation, all legal fees, all costs and expenses of the
Executive's arbitrator and 50% of the costs and expenses of the Umpire, and any
and all other costs of the Executive arising out of such arbitration, action or
proceeding, shall be borne by the Executive.
(iii) In the event the arbitrators award the Executive any amount that the
Executive claimed was due him and that the Company refused to pay, then all
expenses of the Executive in the arbitration and/or any action or proceeding to
confirm, vacate or modify the judgement rendered, including, without limitation,
all legal fees, all costs and expenses of the Executive's arbitrator and 100% of
the costs and expenses of the Umpire, and any and all other costs of the
Executive arising out of such arbitration, action or proceeding, shall be borne
by the Company.
7
<PAGE> 8
7. VENUE; GOVERNING LAW.
Any arbitration proceedings shall take place in New York, New York unless
another location is mutually agreed upon by the parties to this Agreement or by
a majority of the arbitrators. Notwithstanding the situs of the arbitration, the
arbitrators, shall apply the law of New York (but not the arbitration law of
that state, the intent of the parties being that the United States Arbitration
Act, 9 U.S.C. ss. 1, et seq. shall control questions of arbitrability,
confirmation, modification, vacatur and the like.) This Agreement shall be
governed by the laws of the State of New York.
8. JURISDICTION. Judgment upon the final decision of the arbitrators may be
entered in, and any actions or proceedings regarding confirmation, modification
or vacatur of such judgement may be brought in, the courts of the United States
for the Southern District of New York or (to the extent exclusive jurisdiction
exists therefor) of the State of New York, New York County, and the parties
hereto irrevocably submit to the non-exclusive jurisdiction of such courts in
respect of any such action, proceedings or dispute.
The parties hereto irrevocably waive, to the fullest extent permitted by
law, any objection that they may now or hereafter have to the laying of venue of
any such action or proceeding in the courts of the State of New York, New York
County or in the United States District Court for the Southern District of New
York and any claim that any such action, proceeding or dispute brought in any
such court has been brought in any inconvenient forum.
9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the
parties and contains all the agreements between them with respect to the subject
matter hereof. It also supersedes any and all other agreements or contracts,
either oral or written, between the parties with respect to the subject matter
hereof.
10. AMENDMENT. The terms and conditions of this Agreement may be amended only by
a writing executed by the Company (or any successor or continuing Person) and by
Executive.
11. SEVERABILITY. The invalidity or unenforceability of any particular provision
of this Agreement shall not affect its other provisions, and this Agreement
shall be construed in all respects as if such invalid or unenforceable provision
had been omitted.
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Company,
its successors and assigns, including, without limitation any Person into which
the Company may be merged or by which it may be acquired, and shall be binding
upon and shall inure to the benefit of Executive, his administrators, executors,
8
<PAGE> 9
legatees, heirs, and assigns. The Executive shall not assign all or any portion
of his rights and/or responsibilities under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date first written above.
THE NAVIGATORS GROUP, INC.
By: /s/ Terence N. Deeks
----------------------------
Terence N. Deeks,
President
/s/ Bradley D. Wiley
----------------------------
Bradley D. Wiley
9
<PAGE> 1
EXHIBIT 10-11
FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT dated as of
April 9, 1997 ("First Amendment") 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"), THE FIRST NATIONAL BANK OF CHICAGO, as issuer of Letters of Credit
(as defined in the Credit Agreement referred to below) ("Issuing Bank") and
BROWN BROTHERS HARRIMAN & CO., as agent for the Lenders and the Issuing Bank (in
such capacity, together with its successors and assigns in such capacity, the
"Agent").
PRELIMINARY STATEMENT. Reference is made to the Amended and Restated
Credit Agreement dated as of November 26, 1996 among the Borrower, the Lenders,
the Issuing Bank and the Agent (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 certain provisions
of the Credit Agreement 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 2 hereof, hereby amended as follows:
(a) The following definition is added in its proper alphabetical
order:
"Significant Subsidiary" shall mean a Subsidiary of the
Borrower (1) the assets of which are greater than or equal to ten
percent (10%) of the aggregate assets of the Borrower and its
Consolidated Subsidiaries or (2) the revenues of which are greater
than or equal to ten percent (10%) of the aggregate revenues of the
Borrower and its Consolidated Subsidiaries.
(b) Section 7.12. Amendments to Borrower Pledge Agreement, shall be
amended by (i) deleting "January 31, 1997" in the first line thereof and
inserting in its place the following: "August 21, 1997", (ii) deleting each
reference to "Somerset Asia Pacific Pty. Ltd." contained therein, and (iii)
inserting at the end thereof the
<PAGE> 2
following:
"Once Somerset Asia Pacific Pty. Ltd. becomes a Significant
Subsidiary, the Borrower shall satisfy the following conditions with
regard to its pledge of the stock of Somerset Asia Pacific Pty. Ltd:
(1) Amendment to Borrower Pledge Agreement. The Borrower shall
execute and deliver an amendment to the Borrower Pledge Agreement in
form and substance satisfactory to the Lenders to effect a pledge of
the stock of Somerset Asia Pacific Pty. Ltd. and the Borrower will
deliver the certificates representing the shares pledged pursuant to
such amendment to Borrower Pledge Agreement and undated stock powers
executed in blank for each such certificate and the Borrower will
take any and all other actions and execute any other agreements
required to give the Agent a first priority perfected security
interest in such stock; and
(2) Opinion of Counsel. The Borrower shall deliver an opinion of
counsel, dated the date of such pledge of stock, in a form
acceptable to the Lenders, covering among other items, the
perfection of the Agent's security interest in such stock."
SECTION 2. Conditions of Effectiveness. This First Amendment shall
become effective on the date on which each of the following conditions has been
fulfilled:
(1) First Amendment. The Borrower, the Lenders, the Issuing Bank and
the Agent shall each have executed and delivered this First Amendment;
(2) First Amendment to Pledge Agreement. The Borrower shall have
executed and delivered the First Amendment to Pledge Agreement, together with
the certificates representing the shares pledged pursuant to such First
Amendment to Pledge Agreement and undated stock powers executed in blank for
each such certificate;
(3) Evidence of All Corporate Action of the Borrower. Certified
copies, dated the date hereof, of all corporate action taken by the Borrower,
including resolutions of its Board of Directors, authorizing the execution,
delivery, and performance of this First Amendment and each of the documents
being delivered in connection herewith;
(4) Opinion of Counsel. A favorable opinion of LeBoeuf, Lamb, Greene
& MacRae, L.L.P., counsel for the
2
<PAGE> 3
Borrower dated the date hereof;
(5) 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 First Amendment 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;
and
(b) No Default or Event of Default has occurred and is continuing.
(6) Additional Documentation. The Agent shall have received such
other approvals, opinions or documents as any Lender or the Issuing Bank may
reasonably request.
SECTION 3. 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 First
Amendment shall not operate as a waiver of any right, power or remedy of the
Lenders, the Issuing Bank or the Agent under any of the Loan Documents, nor
constitute a waiver of any provision of any of the Loan Documents.
SECTION 4. 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 First Amendment 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 First Amendment and the other instruments
and documents to be delivered hereunder, and
3
<PAGE> 4
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 5. Governing Law. This First Amendment 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.
SECTION 6. Headings. Section headings in this First Amendment are
included herein for convenience of reference only and shall not constitute a
part of this First Amendment for any other purpose.
SECTION 7. Counterparts. The First Amendment 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 First
Amendment 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/ Bradley D. Wiley
----------------------------------
Name: Bradley D. Wiley
Title: Sr VP & CFO
THE FIRST NATIONAL BANK OF CHICAGO,
as Issuing Bank
By
----------------------------------
Name:
Title:
per pro BROWN BROTHERS HARRIMAN &
CO., as Lender
By
----------------------------------
Name:
4
<PAGE> 1
EXHIBIT 10-12
SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT dated as
of December 11, 1997 ("Second Amendment") 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 (formerly First Union National
Bank of North Carolina; "FUNB") (each of BBH&Co., NBD and First Union a "Lender"
and, collectively, the "Lenders"), THE FIRST NATIONAL BANK OF CHICAGO, as issuer
of Letters of Credit (as defined in the Credit Agreement referred to below)
("Issuing Bank") and BROWN BROTHERS HARRIMAN & CO., as agent for the Lenders and
the Issuing Bank (in such capacity, together with its successors and assigns in
such capacity, the "Agent").
PRELIMINARY STATEMENT. Reference is made to the Amended and Restated
Credit Agreement dated as of November 26, 1996 among the Borrower, the Lenders,
the Issuing Bank and the Agent, as amended by the First Amendment to the Amended
and Restated Credit Agreement dated as of April 9, 1997 (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 certain provisions
of the Credit Agreement 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 2 hereof, hereby amended as follows:
(a) The definition of "Revolving Credit Commitment" is amended in
its entirety to read as follows:
"Revolving Credit Commitment" means for each period specified below
the amount specified for such period:
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
From December 11, 1997 to and $25,000,000
including December 31, 1997
From January 1, 1998 to and including $24,500,000
March 31, 1998
From April 1, 1998 to and including $24,000,000
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
June 30, 1998
From July 1,1998 to and including $23,500,000
September 30, 1998
From October 1, 1998 to and including $23,000,000
December 31, 1998
From January 1, 1999 to and including $22,500,000
March 31, 1999
From April 1, 1999 to and including $22,000,000
June 30, 1999
From July 1, 1999 to and including $21,500,000
September 30, 1999
From October 1, 1999 to and including $20,000,000
December 31, 1999
From January 1, 2000 to and including $18,000,000
March 31, 2000
From April 1, 2000 to and including $16,000,000
June 30, 2000
From July 1, 2000 to and including $14,000,000
September 30, 2000
From October 1, 2000 to and including $12,000,000
December 31, 2000
From January 1, 2001 to and including $11,250,000
March 31, 2001
From April 1, 2001 to and including $10,500,000
June 30, 2001
From July 1, 2001 to and including $ 9,750,000
September 30, 2001
From October 1, 2001 to and including $ 9,000,000
December 31, 2002
From January 1, 2003 to and including $ 7,000,000
March 31, 2003
From April 1, 2003 to and including $ 5,250,000
June 30, 2003
From July 1, 2003 to and including $ 3,500,000
September 30, 2003
From October 1, 2003 to and including $ 1,750,000
December 31, 2003
</TABLE>
(b) The definition of "Revolving Credit Termination Date" is amended
in its entirety to read as follows:
"Revolving Credit Termination Date" means December 31, 2003.
2
<PAGE> 3
(c) Section 10.01, Events of Default, is amended by deleting clause
"(13)" thereof in its entirety.
SECTION 2. Conditions of Effectiveness. This Second Amendment shall
become effective on the date on which each of the following conditions has been
fulfilled:
(1) Second Amendment. The Borrower, the Lenders, the Issuing Bank
and the Agent shall each have executed and delivered this Second Amendment;
(2) Amendment Fee. The Borrower shall pay to the Agent for the
benefit of the Lenders an amendment fee in an amount equal to $35,000.00.
(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 Second Amendment 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;
and
(b) No Default or Event of Default has occurred and is continuing.
(6) Additional Documentation. The Agent shall have received such
other approvals, opinions or documents as any Lender or the Issuing Bank may
reasonably request.
SECTION 3. 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
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 Second
Amendment shall not operate as a waiver of any right, power or remedy of the
Lenders, the Issuing Bank or the Agent under any of the Loan Documents, nor
constitute a waiver of any provision of any of the Loan Documents.
SECTION 4. Costs, Expenses and Taxes. The Borrower agrees to pay
<PAGE> 4
Lenders, the Issuing Bank or the Agent under any of the Loan Documents, nor
constitute a waiver of any provision of any of the Loan Documents.
SECTION 4. 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 Second Amendment 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 Second Amendment 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 5. Governing Law. This Second Amendment 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.
SECTION 6. Headings. Section headings in this Second Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Second Amendment for any other purpose.
SECTION 7. Counterparts. The Second Amendment 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 Second
Amendment 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/ Bradley D. Wiley
---------------------------
Name: Bradley D. Wiley
Title: Sr VP, CFO & Secretary
4
<PAGE> 1
EXHIBIT 10-13
July 8, 1996
Mr. William D. Warren
Chairman, CEO & President
National Reinsurance Corporation
777 Long Ridge Road
P.O. Box 10167
Stamford, CT 06904
Dear Bill:
This is a follow up to the brief conversation we had at the last Navigators'
Board Meeting.
Our Group has some major decisions to make during the next twelve months and I
will need all the help and advice I can get. I value your input tremendously,
and I would appreciate being able to counsel with you from time to time during
this period to help ensure we make the right calls.
I would feel much more comfortable if, in addition to the regular Directors fees
etc., I could pay you a further modest retainer of say $25,000 per annum,
payable bi-annually, this way I will not be as reluctant to come to you for
advice on topics where I know you can help me.
If this arrangement is agreeable to you I suggest we make it effective July 1.
Many thanks.
Sincerely,
TND:ac
<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,
-----------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net income applicable to common stock ......... $12,546 $16,752 $12,582
Average number of common shares outstanding ... 8,296 8,197 8,154
Net income per share - Basic .................. $ 1.51 $ 2.04 $ 1.54
Average number of common shares outstanding ... 8,296 8,197 8,154
Add: Assumed exercise of stock options ........ 89 89 59
------- ------- -------
Common and common equivalent shares outstanding 8,385 8,286 8,213
======= ======= =======
Net income per share - Diluted ................ $ 1.50 $ 2.02 $ 1.53
</TABLE>
<PAGE> 1
EXHIBIT 21-1
THE NAVIGATORS GROUP, INC.
AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 1997:
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
Somerset Insurance Services of California, Inc. California
Somerset Insurance Services of Washington, Inc. Washington
Somerset Marine Aviation Property Managers, Inc. New Jersey
Somerset Asia Pacific Pty Limited Sydney, Australia
Somerset Marine (UK) Limited London, UK
Navigators Corporate Underwriters, Ltd. London, UK
Navigators Holdings (UK) Limited London, UK
Somerset Services Pte. Ltd. Singapore
<PAGE> 1
EXHIBIT 23-1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
The Navigators Group, Inc. and Subsidiaries:
We consent to the 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 16, 1998, relating to the consolidated balance sheets of The
Navigators Group, Inc. and Subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, stockholders' equity and cash
flows and related schedules for each of the years in the three-year period
ended December 31, 1997, which report appears in the December 31, 1997 Annual
Report on Form 10-K of The Navigators Group, Inc. and Subsidiaries.
/s/ KPMG PEAT MARWICK LLP
New York, New York
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 226,834
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 6,132
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 257,321
<CASH> 1,251
<RECOVER-REINSURE> 147,104
<DEFERRED-ACQUISITION> 5,403
<TOTAL-ASSETS> 501,207
<POLICY-LOSSES> 278,432
<UNEARNED-PREMIUMS> 48,659
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 20,942
0
0
<COMMON> 837
<OTHER-SE> 130,405
<TOTAL-LIABILITY-AND-EQUITY> 501,207
85,002
<INVESTMENT-INCOME> 14,435
<INVESTMENT-GAINS> 2,827
<OTHER-INCOME> 5,953
<BENEFITS> 52,620
<UNDERWRITING-AMORTIZATION> 14,938
<UNDERWRITING-OTHER> 22,231
<INCOME-PRETAX> 17,184
<INCOME-TAX> 4,638
<INCOME-CONTINUING> 12,546
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,546
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.50
<RESERVE-OPEN> 132,558
<PROVISION-CURRENT> 53,654
<PROVISION-PRIOR> (1,034)
<PAYMENTS-CURRENT> (12,921)
<PAYMENTS-PRIOR> (32,416)
<RESERVE-CLOSE> 139,841
<CUMULATIVE-DEFICIENCY> (1,034)
</TABLE>
