FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2000
-------------------
Commission file number 0-15886
---------
The Navigators Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3138397
- ----------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
123 William Street, New York, New York 10038
- ------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 349-1600
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
On May 8, 2000 there were 8,414,356 shares of common stock, $0.10 par value,
issued and outstanding.
1
<PAGE>
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I. FINANCIAL INFORMATION:
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 ..................... 3
Consolidated Statements of Income
Three Months Ended March 31, 2000 and 1999 ............... 4
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999 ............... 5
Notes to Interim Consolidated Financial Statements................ 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 10
Part II. OTHER INFORMATION ............................................ 15
2
<PAGE>
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
March 31, December 31,
2000 1999
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
Investments and cash:
Fixed maturities, available-for-sale, at fair value
(amortized cost: 2000, $226,593; 1999, $227,875).................................... $221,872 $222,555
Equity securities, available-for-sale, at fair value (cost: 2000, $11,012;
1999, $11,105)...................................................................... 11,557 11,840
Short-term investments, at cost which approximates fair value......................... 4,174 6,747
Cash.................................................................................. 7,224 5,546
------- -------
Total investments and cash....................................................... 244,827 246,688
------- -------
Premiums in course of collection........................................................ 98,861 90,857
Accrued investment income............................................................... 3,249 3,250
Prepaid reinsurance premiums............................................................ 32,003 24,765
Reinsurance receivable on paid and unpaid losses and loss adjustment expenses........... 221,705 229,111
Federal income tax recoverable.......................................................... 1,596 2,016
Net deferred Federal and foreign income tax benefit..................................... 13,148 13,227
Deferred policy acquisition costs....................................................... 9,276 5,878
Goodwill ............................................................................... 5,683 5,805
Other assets............................................................................ 7,349 9,727
------- -------
Total assets................................................................... $637,697 $631,324
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses...................................... $379,276 $391,094
Unearned premium...................................................................... 67,846 55,003
Reinsurance balances payable.......................................................... 26,024 24,799
Notes payable to banks................................................................ 24,000 24,000
Deferred state and local income tax................................................... 269 374
Accounts payable and other liabilities................................................ 8,153 5,689
------- -------
Total liabilities.............................................................. 505,568 500,959
------- -------
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 : 8,414,356 in 2000 and 8,406,970 in 1999........................... 846 846
Additional paid-in capital............................................................ 39,413 39,447
Treasury stock, held at cost (shares: 41,314 in 2000 and 48,700 in 1999).............. (594) (700)
Accumulated other comprehensive (loss)................................................ (2,570) (2,918)
Retained earnings..................................................................... 95,034 93,690
------- -------
Total stockholders' equity..................................................... 132,129 130,365
------- -------
Total liabilities and stockholders' equity..................................... $637,697 $631,324
======= =======
See accompanying notes to interim consolidated financial statements.
</TABLE>
3
<PAGE>
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except net income per share)
<TABLE>
Three Months Ended
March 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Revenues:
Net earned premium.......................................... $19,572 $16,934
Commission income............................................ 516 163
Net investment income........................................ 4,350 4,269
Net realized capital gains (losses).......................... (94) 287
Other income................................................ 51 67
------ ------
Total revenues................................................. 24,395 21,720
------ ------
Operating expenses:
Net losses and loss adjustment expenses incurred............. 12,100 9,999
Commission expense........................................... 3,833 3,288
Other operating expenses..................................... 6,217 5,163
Interest expense............................................. 429 344
------- ------
Total operating expenses....................................... 22,579 18,794
------ ------
Income before income tax expense............................... 1,816 2,926
------- ------
Income tax expense (benefit):
Current.................................................... 660 996
Deferred................................................... (188) (177)
------- -------
Total income tax expense....................................... 472 819
------- ------
Net income..................................................... $ 1,344 $ 2,107
====== ======
Net income per common share:
Basic........................................................ $0.16 $0.25
Diluted...................................................... $0.16 $0.25
Average common shares outstanding:
Basic........................................................ 8,412 8,450
Diluted...................................................... 8,412 8,450
See accompanying notes to interim consolidated financial statements.
</TABLE>
4
<PAGE>
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
Three Months Ended
March 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Operating activities:
Net income................................................................. $ 1,344 $ 2,107
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation & amortization................................................ 324 237
Reinsurance receivable on paid and unpaid
losses and loss adjustment expenses....................................... 7,406 (8,136)
Reserve for losses and loss adjustment expenses........................... (11,818) 8,024
Prepaid reinsurance premiums............................................... (7,238) (2,905)
Unearned premium........................................................... 12,843 5,038
Premiums in course of collection........................................... (8,004) (6,237)
Commissions receivable..................................................... 3,218 2,942
Deferred policy acquisition costs.......................................... (3,398) (106)
Accrued investment income.................................................. 1 107
Reinsurance balances payable............................................... 1,225 (401)
Federal and foreign income tax............................................. 420 1,060
Net deferred Federal and foreign income tax................................ (81) 1
Net realized capital (gains) losses........................................ 94 (287)
Other...................................................................... 2,652 342
------ -------
Net cash provided by (used in) operating activities...................... (1,012) 1,786
------ ------
Investing activities:
Fixed maturities, available-for-sale
Redemptions and maturities................................................. 4,501 8,595
Sales...................................................................... 10,603 11,038
Purchases.................................................................. (13,860) (12,360)
Equity securities, available-for-sale
Sales...................................................................... 1,178 495
Purchases.................................................................. (1,194) (491)
Payable for securities purchased............................................. - (2,158)
Net sales (purchases) of short-term investments.............................. 2,573 (2,978)
Purchase of property and equipment........................................... (1,111) (217)
------ --------
Net cash provided by investing activities.................................. 2,690 1,924
------- --------
Financing activities:
Stock repurchase program...................................................... - (382)
Proceeds from exercise of stock options...................................... - 44
------- --------
Net cash (used in) financing activities.................................... - (338)
------- --------
Increase in cash................................................................. 1,678 3,372
Cash at beginning of year........................................................ 5,546 2,807
----- -------
Cash at end of period........................................................... $ 7,224 $ 6,179
======== =======
Supplemental disclosures of cash flow information:
Issuance of Stock to Directors............................................... $ 72 $ 72
Federal income tax paid...................................................... 23 -
Interest paid................................................................ 30 -
See accompanying notes to interim consolidated financial statements.
</TABLE>
5
<PAGE>
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Unaudited)
(1) Accounting Policies
The interim consolidated financial statements are unaudited but reflect all
adjustments which, in the opinion of management, are necessary to provide a
fair statement of the results of The Navigators Group, Inc. and its
subsidiaries (the "Company") for the interim periods presented. All such
adjustments are of a normal recurring nature. The results of operations for
any interim period are not necessarily indicative of results for the full
year. These financial statements should be read in conjunction with the
financial statements and notes hereto contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999. Certain amounts
for prior years have been reclassified to conform to the current year's
presentation.
(2) Reinsurance Ceded
The Company's ceded earned premiums were $19,097,000 and $18,700,000 and
ceded losses were $17,158,000 and $20,435,000 for the three months ended
March 31, 2000 and 1999, respectively.
(3) Segments of an Enterprise
The Company's subsidiaries are primarily engaged in the writing and
management of property and casualty insurance. The Company's segments
include the Insurance Companies, the Somerset Companies and the Lloyd's
operations, each of which is managed separately. The Insurance Companies
consist of Navigators Insurance Company and NIC Insurance Company and are
primarily engaged in underwriting marine insurance and related lines of
business, and a contractors' general liability program. The Somerset
Companies are underwriting management companies which produce, manage and
underwrite insurance and reinsurance for both affiliated and
non-affiliated companies. The Lloyd's operations include a Lloyd's agency
which underwrites marine and related lines of business at Lloyd's of
London for two wholly owned Lloyd's corporate members with limited
liability. All segments are evaluated based on their GAAP underwriting or
operating results.
The results of the Insurance Companies and the Lloyd's operations
include net premiums earned, incurred losses and loss expenses, commission
expense and other underwriting expenses. The Somerset Companies' results
include commission income less other operating expenses. Each segment also
maintains their own investments, on which they earn income and realize
capital gains or losses. Other operations include intersegment income and
expense in the form of affiliated commissions, as well as income and
expense from corporate operations.
6
<PAGE>
The following tables present financial data by segment for the periods
indicated:
<TABLE>
Three Months Ended
March 31,
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Revenue, excluding net investment income and realized gains on investments:
Insurance Companies.................................................... $11,751 $10,615
Somerset Companies..................................................... 2,436 1,855
Lloyd's operations..................................................... 7,857 6,510
Other operations (includes corporate activity and
consolidating adjustments).......................................... (1,905) (1,816)
------ ------
Total............................................................... $20,139 $17,164
====== ======
Income (loss) before income tax expense (benefit):
Insurance Companies.................................................... $ 4,675 $ 4,722
Somerset Companies..................................................... (1,457) (1,703)
Lloyd's operations..................................................... (457) 190
Other operations....................................................... (945) (283)
------ ------
Total............................................................... $ 1,816 $ 2,926
====== ======
Income tax expense (benefit):
Insurance Companies.................................................... $ 1,281 $ 1,372
Somerset Companies..................................................... (491) (570)
Lloyd's operations..................................................... - (3)
Other operations....................................................... (318) 20
------ ------
Total............................................................... $ 472 $ 819
====== ======
Net income (loss):
Insurance Companies.................................................... $ 3,394 $ 3,350
Somerset Companies..................................................... (966) (1,133)
Lloyd's operations..................................................... (457) 193
Other operations....................................................... (627) (303)
------ ------
Total............................................................... $ 1,344 $ 2,107
====== ======
</TABLE>
(4) Comprehensive Income
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.
7
<PAGE>
The following table summarizes comprehensive income:
<TABLE>
Three Months Ended
March 31,
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Net income.............................................................. $1,344 $2,107
----- -----
Other comprehensive income, net of tax:
Net unrealized gains (losses) on securities available for sale:
Unrealized holding gain (loss) arising during period
(net of income tax expense (benefit) of $176 for 2000 and
$(865) for 1999) ............................................... 327 (1,607)
Reclassification adjustment for gains (losses) included in
net income (net of tax expense (benefit) of $(33)
for 2000 and $80 for 1999)...................................... (61) 149
----- -------
Net unrealized gain (loss) on securities.............................. 266 (1,458)
Foreign currency translation gain (loss) adjustment, net of tax
expense (benefit) of $44 for 2000 and $(108) for 1999........... 82 (201)
----- -------
Other comprehensive income (loss)......................... 348 (1,659)
Comprehensive income................................. $1,692 $ 448
===== =======
</TABLE>
The following table summarizes the components of accumulated other
comprehensive income (loss):
<TABLE>
March 31, December 31,
2000 1999
----------- -----------
(In thousands)
<S> <C> <C>
Net unrealized (losses) on securities available-for-sale
(net of tax (benefit) of $(1,461) in 2000 and
$(1,605) in 1999).................................................... $(2,714) $(2,980)
Foreign currency translation adjustment (net of tax expense
(benefit) of $78 in 2000 and $34 in 1999)............................ 144 62
------ ------
Accumulated other comprehensive (loss)........................... $(2,570) $(2,918)
====== ======
</TABLE>
(5) Future Application of Accounting Standards
The Financial Accounting Standards Board's Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, was issued in June 1998 and
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement, as amended by SFAS No. 137, is
effective for all fiscal quarters of fiscal years beginning after June 15,
2000. Earlier application is encouraged, but it is permitted only as of
the beginning of any fiscal quarter that begins after issuance of this
statement. SFAS No. 133 should not be applied retroactively to financial
statements of prior periods. The adoption of this statement is not
expected to have a material effect on the Company's results of operations
or financial condition.
8
<PAGE>
(6) Lloyd's Participation
The Company has direct and indirect control over 75.6% of Lloyd's
Syndicate 1221's capacity for the 2000 underwriting year. Since the
controlled capacity exceeds 75%, Lloyd's Mandatory Byelaw (No. 5 of 1999)
requires the Company to make a mandatory offer to noncontrolled
participants for their capacity. The offer will take the form of an
Announced Auction Offer to be made at the first Lloyd's capacity auction
in July 2000.
9
<PAGE>
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
The accompanying consolidated financial statements consisting of the
accounts of The Navigators Group, Inc., a Delaware holding company, and its
sixteen wholly owned subsidiaries, are prepared on the basis of generally
accepted accounting principles ("GAAP"). 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 Insurance"), which includes a United Kingdom Branch ("UK Branch"),
and NIC Insurance Company ("NIC"). Navigators Insurance is the Company's largest
insurance subsidiary and has been active since 1983. It specializes principally
in underwriting marine insurance and related lines of business and a
contractors' general liability program. NIC, a wholly owned subsidiary of
Navigators Insurance, began operations in 1990. It underwrites a small book of
surplus lines insurance in certain states and cedes 100% of its gross direct
writings from this business to Navigators Insurance. Navigators Insurance and
NIC are collectively referred to herein as the "Insurance Companies".
Five of the Company's subsidiaries are marine underwriting management
companies: Somerset Marine, Inc., Somerset Insurance Services of Texas, Inc.,
Somerset Insurance Services of California, Inc., Somerset Insurance Services of
Washington, Inc. and Somerset Marine (UK) Limited ("Somerset UK") (collectively,
the "Somerset Companies"). The Somerset Companies produce, manage and underwrite
insurance and reinsurance for Navigators Insurance, NIC and four unaffiliated
insurance companies.
In April 1999, the Company acquired Anfield Insurance Services, Inc.
("Anfield"), an insurance agency located in San Francisco, California, which
specializes in underwriting general liability insurance coverage for small
artisan and general contractors on the West Coast for Navigators Insurance.
The Somerset Companies specialize in writing marine and related lines of
business. The marine business is written through a pool of insurance companies,
Navigators Insurance having the largest participation in the pool. The Somerset
Companies derive their revenue from commissions, service fees and cost
reimbursement arrangements from their parent company, Navigators Insurance, 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 pool. 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.
Navigators Holdings (UK) Limited is a holding company for the Company's UK
subsidiaries. Somerset UK produces business for the UK Branch of Navigators
Insurance and four unaffiliated insurance companies. Navigators Corporate
Underwriters Limited ("NCUL") is admitted to do business at Lloyd's of London as
a corporate member with limited liability. The Company owns Mander, Thomas &
Cooper (Underwriting Agencies) Limited ("MTC"), a Lloyd's marine underwriting
managing agency which manages Lloyd's Syndicate 1221, and MTC's wholly owned
subsidiary, Millennium Underwriting Limited ("Millennium"), a Lloyd's corporate
member with limited liability. In August 1999, MTC formed Pennine Underwriting
Limited, an underwriting managing agency located in Northern England, which
underwrites cargo and engineering business for Lloyd's Syndicate 1221.
10
<PAGE>
The Company's revenue is primarily comprised of premiums, commissions and
investment income. The Insurance Companies derive the majority of their premium
from business written by the Somerset Companies and Anfield. The Insurance
Companies are managed by Somerset Marine, Inc. The Lloyd's operations derive
their premium from business written by MTC.
Results of Operations
The Company's 2000 and 1999 results of operations reflect intense market
competition in the marine business.
Revenues. Gross written premium for the first three months of 2000
increased by 27% to $51,648,000 from $40,672,000 for the first three months of
1999.
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:
<TABLE>
Three Months Ended March 31,
2000 1999
----------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Lloyd's Operations:
Marine.............................................. $20,594 40% $10,784 27%
Engineering and Construction........................ 176 - - -
Onshore Energy...................................... 133 - - -
------ -- ------ -
Total Lloyd's Operations........................ 20,903 40 10,784 27
------ -- ------ --
Insurance Companies:
Marine.............................................. 24,436 48 23,871 59
Program Insurance................................... 5,228 10 3,922 9
Other............................................... 1,081 2 2,095 5
------ -- ------ --
Total Insurance Companies....................... 30,745 60 29,888 73
------ -- ------ --
Total Gross Written Premium..................... 51,648 100% 40,672 100%
------ === ------ ===
Total Ceded Written Premium..................... (26,335) (21,605)
------ ------
Total Net Written Premium....................... $25,313 $19,067
====== ======
</TABLE>
Lloyd's Operations
The Lloyd's premium is generated as the result of NCUL and Millennium
providing capacity to Lloyd's Syndicate 1221 managed by MTC. The premiums,
losses and expenses from the Lloyd's operations are included in the Company's
consolidated financials but are not included in the Insurance Companies' results
since NCUL and Millennium are wholly owned by the parent company.
11
<PAGE>
Lloyd's Syndicate 1221 has capacity of (pound)66.3 million (converts to
$106.5 million) in 2000 and had capacity of (pound)67.0 million (converts to
$105.9 million) in 1999. The Lloyd's marine business has been subject to
continued pricing competition resulting in less premiums per risk relative to
certain prior years. As a result, the Company has been writing less premium than
the capacity available.
Lloyd's presents its results on an underwriting year basis, generally
closing each underwriting year after three years. The Company makes estimates
for each year and timely accrues the expected results.
In the aggregate, the Company directly and indirectly controls 75.6% of
Syndicate 1221's capacity for the 2000 underwriting year. Since the controlled
capacity exceeds 75%, Lloyd's Mandatory Byelaw (No. 5 of 1999) requires the
Company to make a mandatory offer to noncontrolled participants for their
capacity. The offer will take the form of an Announced Auction Offer to be made
at the first Lloyd's capacity auction in July 2000.
The offer may be made at 1.8 pence per (pound)1 of capacity which is the
minimum price that the Company is obliged to offer, being the highest price paid
for capacity during the last 12 months. Whether or not, or to what extent the
offer is accepted by the offerees is to some extent dependent on the price
offered. As such, it is unlikely that the acceptance will result in a cost that
is material to the Company. For the purposes of guidance, each 10% of capacity
accepting at 1.8 pence per (pound)1 of capacity will result in a cost to the
Company of approximately $200,000. In addition, it is anticipated the
administrative and legal costs of making the offer will be approximately
$40,000. If the Company were to exceed the 90% control threshold as a result of
the offer, Lloyd's Major Syndicate Transactions Byelaw (No. 18 of 1997) allows
for a Minority Buy-out to be effected. In such a transaction the remaining
participants are required to give up their capacity in return for compensation
which must be at least equal to the offer price preceding the buy-out.
The Company provides letters of credit to Lloyd's to support its Syndicate
1221 capacity. If the amount of capacity controlled increases, the Company will
be required to supply additional letters of credit or other collateral
acceptable to Lloyd's, or to reduce the capacity of Syndicate 1221.
Marine Premium. In 2000, marine premium increased 91% from 1999 due to the
capacity directly provided to Syndicate 1221 by NCUL and Millennium in the
aggregate increasing from 52.5% in 1999 to 64.5% in 2000 on a larger premium
base.
Engineering and Construction Premium. In mid 1999, the Robertson Consortium
managed by MTC began writing engineering and construction business consisting of
coverage for construction projects including machinery, equipment and loss of
use due to delays. Previously, the engineering and construction business was
written by Somerset Asia Pacific Limited in Australia and Somerset UK,
wholly-owned subsidiaries of the Company, for Navigators Insurance. The
Australia office was closed in 1999.
Onshore Energy Premium. In mid 1999, the Robertson Consortium began writing
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. The business was previously written by
Navigators Insurance.
Insurance Companies
Marine Premium. Marine gross written premium stayed relatively flat,
increasing 2% when comparing the first quarter of 2000 to the first quarter of
1999.
12
<PAGE>
Program Insurance Premium. The program insurance, primarily written by
Anfield Insurance Services, Inc. ("Anfield"), consists primarily of general
liability insurance for contractors and a small amount of commercial multi-peril
insurance for restaurants and taverns. The 33% increase in the premium, when
comparing the first quarters of 2000 and 1999, resulted from increases in the
business written by Anfield.
Ceded Premium. In the ordinary course of business, the Company 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 22%
increase in the ceded premium in the first quarter of 2000 compared to the first
quarter of 1999 was primarily due to the increase in gross premiums written by
the Lloyd's operations.
Net Written Premium. Net written premium increased 33% when comparing the
first three months of 2000 to the first three months of 1999 primarily due to
the increase in the marine business written by the Lloyd's operations which
generally retains more of the gross written premium than the amount retained by
the Insurance Companies.
Net Earned Premium. Net earned premium increased 16% for the first three
months of 2000 to $19,572,000 as compared to $16,934,000 for the first three
months of 1999. Net earned premium generally follows the pattern of written
premium but at a slower rate since unearned premium from the prior year is
partially earned in the current period along with a portion of the premium
written in the current period.
Commission Income. Commission income generated by the Somerset Companies
increased to $516,000 for the first quarter of 2000 from $163,000 for the first
quarter of 1999. The increase was primarily due to Navigators Insurance's normal
review of the estimates used to calculate the commission income resulting in a
reduction to those estimates in 1999 due to the extremely competitive rate
environment.
Net Investment Income. Net investment income increased 2% to $4,350,000
during the first three months of 2000 from $4,269,000 during the corresponding
period in 1999. This increase was primarily due to slightly higher rates in
2000.
Net Realized Capital Gains. Pre-tax net income included $94,000 of realized
capital losses for the first three months of 2000 compared to $287,000 of
realized capital gains for the same period last year. On an after tax basis, the
realized capital losses were $0.01 per share in 2000 compared to realized
capital gains of $0.02 per share in 1999.
Operating Expenses.
- ------------------
Net Loss and Loss Adjustment Expenses Incurred. The ratio of net loss and
loss adjustment expenses incurred to net earned premium was 61.8% and 59.0%
during the first three months of 2000 and 1999, respectively. This increase was
primarily due to increased premium from the Lloyd's operations which has a
higher loss ratio in the more recent underwriting years.
Commission Expense. Commission expense as a percentage of net earned
premium was 19.6% and 19.4% during the first three months of 2000 and 1999,
respectively. The increase was due to higher commission rates in the Lloyd's
operations.
Other Operating Expenses. Other operating expenses increased 23.4% to
$6,217,000 during the first three months of 2000 from $5,163,000 during the
corresponding period of 1999. This increase was primarily due to the addition of
Anfield, which was purchased on April 2, 1999, and increased writings in the
companies Lloyd's operations.
13
<PAGE>
Interest Expense. Interest expense increased to $429,000 during the first
three months of 2000 from $344,000 during the corresponding period of 1999. This
increase was primarily due to higher interest rates and a higher average loan
balance during the first quarter of 2000.
Income Taxes. The effective tax rate was 26.0% and 28.0% for the three months
ended March 31, 2000 and 1999, respectively.
Net Income. The Company had net income of $1,344,000 for the first quarter of
2000 compared to $2,107,000 for the same period last year. On a diluted per
share basis, this represents net income per share of $0.16 and $0.25 for the
2000 and 1999 first quarters, respectively.
Liquidity and Capital Resources
Cash flow from operations was $(1,012,000) and $1,786,000 for the first
three months of 2000 and 1999, respectively. Invested assets and cash decreased
to $244,827,000 at March 31, 2000 from $246,688,000 at December 31, 1999.
The Company's bank credit facility provided for a $24,000,000 revolving
line of credit facility at March 31, 2000, which reduces each quarter by amounts
ranging between $1,000,000 to $2,250,000 beginning January 1, 2000 until it
terminates on November 19, 2003, and a $60,000,000 letter of credit facility. At
March 31, 2000, $24,000,000 in loans were outstanding under the revolving line
of credit facility at an interest rate of 7.1%. The letter of credit facility is
utilized primarily by NCUL and Millennium to participate in Lloyd's syndicate
1221 managed by MTC. At March 31, 2000, letters of credit with an aggregate face
amount of $49,559,000 were issued under the letter of credit facility.
As of March 31, 2000, the Company's consolidated stockholders' equity was
$132,129,000 compared to $130,365,000 at December 31, 1999. The increase was
primarily due to net income and, to a lesser extent, decreases in unrealized
losses in the investment portfolio.
Year 2000 Compliance
The "Year 2000 Issue" or "Y2K Issue" is a term used to describe the
predicted problems that could have arisen as a result of the inability of some
computer programs and embedded chips to distinguish dates beginning with 19 from
dates beginning with 20. This Y2K Issue could have resulted in a variety of
potential problems for all businesses from inaccurate processing of dates and
date-sensitive calculations to system failures and disruptions in operations.
The Company had considered the Y2K Issue a high priority since 1996 and had
taken certain steps to address this important aspect of its operations. The
Company had formed an Executive Committee comprised of senior management from
all departments to address the issues. The efforts were rewarded as no computer
related Y2K problems were experienced. The Company will continue to monitor the
situation but remains confident that there will not be any future computer
related Y2K problems.
The Company is at risk from policyholders' claims for insurance coverage
due to their Y2K exposures. Although the Company has not received any
significant insurance claims based on losses resulting from Y2K Issues, there
can be no assurance that policyholders will not suffer losses of this type and
seek compensation under the Company's insurance policies. If any claims are
made, the Company's obligations, if any, will depend on the facts and
circumstances of the claim and provisions of the policy. At this time, the
Company is unable to determine whether an adverse impact, if any, in connection
with the foregoing circumstances would be material.
14
<PAGE>
The aforementioned Year 2000 discussion contains forward-looking statements
about matters that are inherently difficult to predict the effect on the
Company. Such statements are made under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995 and involve a number of risks
and uncertainties that could materially affect future results.
Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the information concerning market
risk as stated in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
Stock Repurchase Program
On January 6, 1999, the Company announced a stock repurchase program for up
to $3,000,000 of its common stock. At March 31, 1999, the Company had
repurchased 26,400 shares of stock at a cost of $382,000. At March 31, 2000, the
Company had repurchased 48,700 shares of stock at a cost of $700,000. During the
first quarter of 2000, the Company issued 7,386 of those repurchased shares to
the non-employee Directors as part of the Directors' annual compensation
amounting in the aggregate to $72,000.
Part II - Other Information
Item 1. 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, except for an assessment on Navigators Insurance by the
Institute of London Underwriters ("ILU"). In late 1998, the ILU
advised its forty-one members, including Navigators Insurance,
that they were each being assessed approximately (pound)900,000 to
pay for anticipated operating deficits arising from the ILU's long
term lease of the building occupied by the ILU in London. This
matter is currently not in litigation and Navigators Insurance
continues to oppose the assessment as inequitable and
inappropriate. Discussions with the ILU are ongoing and the
Company's ultimate liability, if any, is not possible to forecast
at the present time.
Item 2. Changes in Securities:
---------------------
None.
Item 3. Defaults Upon Senior Securities:
-------------------------------
None.
Item 4. Submissions of Matters to a Vote of Securities Holders:
------------------------------------------------------
None.
Item 5. Other Information:
-----------------
None.
15
<PAGE>
Item 6. Exhibits and Reports on Form 8-K:
--------------------------------
(a) Exhibits:
Exhibit No. Description of Exhibit
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months
ended March 31, 2000.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Navigators Group, Inc.
--------------------------
(Registrant)
Dated: May 12, 2000 /s / Bradley D. Wiley
------------ ------------------------
Bradley D. Wiley
Senior Vice President, Chief Financial
Officer and Secretary
17
<PAGE>
INDEX OF EXHIBITS
Sequentially
Numbered
Exhibit No. Description of Exhibit Page
27.1 Financial Data Schedule
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 221,872
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 11,557
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 237,603
<CASH> 7,224
<RECOVER-REINSURE> 221,705
<DEFERRED-ACQUISITION> 9,276
<TOTAL-ASSETS> 637,697
<POLICY-LOSSES> 379,276
<UNEARNED-PREMIUMS> 67,846
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 24,000
0
0
<COMMON> 846
<OTHER-SE> 131,283
<TOTAL-LIABILITY-AND-EQUITY> 637,697
19,572
<INVESTMENT-INCOME> 4,350
<INVESTMENT-GAINS> (94)
<OTHER-INCOME> 567
<BENEFITS> 12,100
<UNDERWRITING-AMORTIZATION> 3,833
<UNDERWRITING-OTHER> 6,217
<INCOME-PRETAX> 1,816
<INCOME-TAX> 472
<INCOME-CONTINUING> 1,344
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,344
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.16
<RESERVE-OPEN> 170,530
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 166,601
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
