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 June 30, 2000
-------------------------------------------------
Commission file number 0-15886
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The Navigators Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3138397
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Penn Plaza, New York, New York 10119
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(Address of principal executive offices) (Zip Code)
(212) 244-2333
(Registrant's telephone number, including area code)
123 William Street, New York, New York 10038
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(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 August 4, 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
June 30, 2000 and December 31, 1999........................ 3
Consolidated Statements of Income
Three Months Ended June 30, 2000 and 1999 ................. 4
Six Months Ended June 30, 2000 and 1999 ................. 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 ................. 6
Notes to Interim Consolidated Financial Statements................. 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 11
Part II. OTHER INFORMATION ............................................ 17
2
<PAGE>
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
June 30, December 31,
2000 1999
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
Investments and cash:
Fixed maturities, available-for-sale, at fair value
(amortized cost: 2000, $228,676; 1999, $227,875)........................................ $ 225,230 $222,555
Equity securities, available-for-sale, at fair value (cost: 2000, $6,058;
1999, $11,105).......................................................................... 6,344 11,840
Short-term investments, at cost which approximates fair value............................ 10,346 6,747
Cash...................................................................................... 3,646 5,546
--------- ---------
Total investments and cash......................................................... 245,566 246,688
--------- ---------
Premiums in course of collection............................................................ 106,361 90,857
Accrued investment income................................................................... 3,223 3,250
Prepaid reinsurance premiums................................................................ 33,546 24,765
Reinsurance receivable on paid and unpaid losses and loss adjustment expenses............... 213,481 229,111
Federal income tax recoverable.............................................................. 632 2,016
Net deferred Federal and foreign income tax benefit......................................... 12,551 13,227
Deferred policy acquisition costs........................................................... 11,063 5,878
Goodwill .............................................................................. 5,473 5,805
Other assets................................................................................ 6,755 9,727
-------- ---------
Total assets....................................................................... $ 638,651 $631,324
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses.......................................... $ 370,157 $391,094
Unearned premium.......................................................................... 79,065 55,003
Reinsurance balances payable.............................................................. 25,032 24,799
Notes payable to banks.................................................................... 22,000 24,000
Net deferred state and local income tax................................................... 383 374
Accounts payable and other liabilities.................................................... 7,728 5,689
--------- ---------
Total liabilities.................................................................. 504,365 500,959
--------- ---------
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).................................................... (2,159) (2,918)
Retained earnings......................................................................... 96,780 93,690
--------- ---------
Total stockholders' equity......................................................... 134,286 130,365
--------- ---------
Total liabilities and stockholders' equity......................................... $ 638,651 $631,324
========= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE>
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except net income per share)
<TABLE>
Three Months Ended
June 30,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Revenues:
Net earned premium.................................................... $22,235 $19,830
Commission income..................................................... 777 524
Net investment income................................................. 4,489 3,637
Net realized capital gains............................................ 166 504
Other income.......................................................... 148 165
------ --------
Total revenues................................................. 27,815 24,660
------ --------
Operating expenses:
Net losses and loss adjustment expenses incurred...................... 13,817 10,978
Commission expense.................................................... 4,737 4,476
Other operating expenses.............................................. 5,745 6,553
Interest expense...................................................... 407 389
------- --------
Total operating expenses....................................... 24,706 22,396
------- --------
Income before income tax expense........................................ 3,109 2,264
------- --------
Income tax expense (benefit):
Current............................................................. 899 (304)
Deferred........................................................... 464 631
------- --------
Total income tax expense....................................... 1,363 327
------- --------
Net income.............................................................. $ 1,746 $ 1,937
======= ========
Net income per common share:
Basic................................................................ $ 0.21 $ 0.23
Diluted.............................................................. $ 0.21 $ 0.23
Average common shares outstanding:
Basic............................................................... 8,414 8,414
Diluted............................................................. 8,414 8,414
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE>
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except net income per share)
<TABLE>
Six Months Ended
June 30,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Revenues:
Net earned premium ................................................... $ 41,808 $ 36,764
Commission income..................................................... 1,293 687
Net investment income................................................. 8,840 7,906
Net realized capital gains............................................ 71 791
Other income......................................................... 199 232
------- -------
Total revenues................................................. 52,211 46,380
------- -------
Operating expenses:
Net losses and loss adjustment expenses incurred...................... 25,917 20,977
Commission expense.................................................... 8,570 7,764
Other operating expenses.............................................. 11,962 11,716
Interest expense...................................................... 836 733
------- -------
Total operating expenses....................................... 47,285 41,190
------- -------
Income before income tax expense........................................ 4,926 5,190
------- -------
Income tax expense:
Current............................................................. 1,560 692
Deferred............................................................ 276 454
------- -------
Total income tax expense....................................... 1,836 1,146
------- -------
Net income.............................................................. $ 3,090 $ 4,044
======= =======
Net income per common share:
Basic................................................................ $ 0.37 $ 0.48
Diluted.............................................................. $ 0.37 $ 0.48
Average common shares outstanding:
Basic................................................................ 8,413 8,432
Diluted.............................................................. 8,413 8,433
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE>
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
Six Months Ended
June 30,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Operating activities:
Net income................................................................... $ 3,090 $ 4,044
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & amortization.................................................. 566 603
Net deferred income tax ..................................................... 276 505
Net realized capital (gains)................................................. (71) (791)
Changes in assets and liabilities, net of acquisitions.......................
Reinsurance receivable on paid and unpaid
losses and loss adjustment expenses..................................... 15,630 (17,188)
Reserve for losses and loss adjustment expenses............................ (20,937) 14,124
Prepaid reinsurance premiums............................................... (8,781) (4,509)
Unearned premium........................................................... 24,062 8,810
Premiums in course of collection........................................... (15,504) (8,906)
Commissions receivable..................................................... 4,071 2,706
Deferred policy acquisition costs.......................................... (5,185) (527)
Accrued investment income.................................................. 27 216
Reinsurance balances payable............................................... 233 6,757
Federal and foreign income tax............................................. 1,384 (184)
Other...................................................................... 2,813 (2,189)
-------- --------
Net cash provided by operating activities............................... 1,674 3,471
-------- --------
Investing activities:
Fixed maturities, available-for-sale
Redemptions and maturities................................................. 6,880 9,174
Sales...................................................................... 18,475 39,959
Purchases.................................................................. (26,795) (36,686)
Equity securities, available-for-sale
Sales...................................................................... 6,532 1,913
Purchases.................................................................. (1,409) (1,444)
Sales of other investments................................................... - 1,145
Payable for securities purchased............................................. - (1,076)
Net (purchases) of short-term investments.................................... (3,599) (13,740)
Payment for purchase of Anfield, net of cash acquired of $68................. - (2,591)
Purchase of property and equipment........................................... (1,658) (170)
------- --------
Net cash (used in) investing activities................................. (1,574) (3,516)
--------- ---------
Financing activities:
Purchase of treasury stock .................................................. - (700)
Proceeds from bank loan...................................................... - 1,500
Repayment of bank loan....................................................... (2,000) -
Proceeds from exercise of stock options...................................... - 44
-------- --------
Net cash provided by (used in) financing activities.......................... (2,000) 844
-------- --------
Increase (decrease) in cash ..................................................... (1,900) 799
Cash at beginning of year........................................................ 5,546 2,807
-------- --------
Cash at end of period............................................................ $ 3,646 $ 3,606
======= ========
Supplemental disclosures of cash flow information:
Federal, state and local income tax paid..................................... $ 31 $ 1,600
Interest paid................................................................ 870 706
Issuance of stock to Directors............................................... 72 72
Fair value of assets acquired................................................ - 3,915
Liabilities assumed in acquisitions.......................................... - 1,256
</TABLE>
See accompanying notes to interim consolidated financial statements.
6
<PAGE>
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Unaudited)
(1) Accounting Policies
The interim financial statements are unaudited but reflect all adjustments
which, in the opinion of management, are necessary to provide a fair
statement of the results of The Navigators Group, Inc. and its
subsidiaries (the "Company") for the interim periods presented. All such
adjustments are of a normal recurring nature. The results of operations
for any interim period are not necessarily indicative of results for the
full year. These financial statements should be read in conjunction with
the financial statements and notes contained in the Company's 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 $18,258,000 and $15,508,000 for
the three months ended June 30, 2000 and 1999, respectively, and
$37,355,000 and $34,208,000 for the six months ended June 30, 2000 and
1999, respectively. The Company's ceded incurred losses were $13,935,000
and $31,901,000 for the three months ended June 30, 2000 and 1999,
respectively, and were $31,093,000 and $52,336,000 for the six months
ended June 30, 2000 and 1999, respectively.
(3) Acquisition of Anfield Insurance Services, Inc.
In April 1999, the Company purchased 100% of Anfield Insurance Services,
Inc. ("Anfield"), an insurance agency located in San Francisco,
California. The purchase price of approximately $2,700,000 was funded
through a bank loan and working capital. Goodwill of $2,300,000 was
recorded in connection with the transaction and is being amortized over 20
years.
(4) 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. The Somerset Companies
produce, manage and underwrite insurance and reinsurance for both
affiliated and non-affiliated companies. The Lloyd's operations underwrite
marine and related lines of business at Lloyd's of London as a corporate
member with limited liability. All segments are evaluated based on their
GAAP underwriting or operating results.
The Insurance Companies and the Lloyd's operations are measured taking
into account 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,
income and expense from corporate operations, and consolidating
adjustments.
7
<PAGE>
Financial data by segment for the periods indicated were as follows:
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands)
Revenue, excluding net investment income and net realized capital gains:
<S> <C> <C> <C> <C>
Insurance Companies.............................. $ 12,120 $ 12,480 $ 23,871 $23,094
Somerset Companies............................... 2,679 2,198 5,115 4,053
Lloyd's operations.............................. 10,210 7,430 18,067 13,940
Other operations................................. (1,849) (1,589) (3,753) (3,404)
------ ------- -------- -------
Total.......................................... $ 23,160 $ 20,519 $ 43,300 $37,683
====== -====== -======- ======
Income (loss) before income taxes:
Insurance Companies.............................. $ 6,207 $ 4,612 $ 10,882 $ 9,334
Somerset Companies............................... (906) (1,804) (2,363) (3,507)
Lloyd's operations............................... (1,068) (227) (1,525) (37)
Other operations................................. (1,124) (317) (2,068) (600)
-------- -------- ------ --------
Total.......................................... $ 3,109 $ 2,264 $ 4,926 $ 5,190
======== ======== ======== ========
Income tax expense (benefit):
Insurance Companies.............................. $ 1,775 $ 1,083 $ 3,056 $ 2,455
Somerset Companies............................... (149) (545) (640) (1,115)
Lloyd's operations............................... - - - -
Other operations................................. (263) (211) (580) (194)
-------- -------- -------- --------
Total....................................... $ 1,363 $ 327 $ 1,836 $ 1,146
======== ======== ======== ========
Net income (loss):
Insurance Companies.............................. $ 4,432 $ 3,529 $ 7,826 $ 6,879
Somerset Companies............................... (757) (1,259) (1,723) (2,392)
Lloyd's operations............................... (1,068) (230) (1,525) (37)
Other operations................................. (861) (103) (1,488) (406)
-------- -------- -------- --------
Total.......................................... $ 1,746 $ 1,937 $ 3,090 $ 4,044
======== ======== ======== ========
</TABLE>
(4) Comprehensive Income
Comprehensive income encompasses all changes in stockholders' 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.
8
<PAGE>
<TABLE>
The following table summarizes comprehensive income for the three months ended June 30, 2000 and 1999:
June 30,
------------------
2000 1999
---- ----
(In thousands)
<S> <C> <C>
Net income.............................................................. $ 1,746 $ 1,937
------- -------
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 $264 for 2000
and ($1,789) for 1999).................................... 491 (3,322)
Less: reclassification adjustment for gains included in
net income (net of income tax expense of $37 for 2000
and $176 for 1999) .............................................. 129 328
------- -------
Net unrealized gains (losses) on securities........................... 362 (3,650)
Foreign currency translation gain adjustment, net of tax expense
of $26 for 2000 and $139 for 1999................................ 49 259
------- -------
Other comprehensive income............................. 411 (3,391)
------- -------
Comprehensive income (loss).......................... $ 2,157 $ (1,454)
======= -======
The following table summarizes comprehensive income for the six months
ended June 30, 2000 and 1999:
June 30,
------------------
2000 1999
---- ----
(In thousands)
Net income.............................................................. $ 3,090 $ 4,044
------- -------
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 $374 for 2000 and
($2,474) for 1999).............................................. 695 (4,594)
Less: reclassification adjustment for gains included in net
income (net of income tax expense of $4 for 2000 and
$277 for 1999) ................................................. 67 514
-------- --------
Net unrealized gains (losses) on securities........................... 628 (5,108)
Foreign currency translation gain adjustment, net of
tax expense of $70 for 2000 and $31 for 1999.................... 131 58
------- -------
Other comprehensive income (loss)........................... 759 (5,050)
------- -------
Comprehensive income (loss)............................... $ 3,849 $ (1,006)
======= =======
</TABLE>
9
<PAGE>
The following table summarizes the components of accumulated other
comprehensive income (loss):
<TABLE>
June 30, December 31,
2000 1999
----------- ---------
(In thousands)
<S> <C> <C>
Net unrealized gains on securities available-for-sale (net of tax
(benefit) of ($1,266) in 2000 and ($1,605) in 1999).................. $ (2,352) $ (2,980)
Foreign currency translation adjustment (net of tax expense of
$104 in 2000 and $34 in 1999)........................................... 193 62
-------- --------
Accumulated other comprehensive (loss)........................ $ (2,159) $ (2,918)
======== ========
</TABLE>
(5) Future Application of Accounting Standards
The Financial Accounting Standards Board's ("FASB") 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. SFAS No. 133, as amended by SFAS No. 137,
Deferral of the Effective Date of SFAS No. 133, 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. In June 2000, the FASB issued SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an
amendment of SFAS No. 133, which amends the accounting and reporting
standards of SFAS No. 133. The adoption of these statements is not
expected to have a material effect on the Company's results of operations
or financial condition.
(6) Lloyd's Participation
In the aggregate, the Company directly and indirectly controls 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 Lloyd's capacity auctions this
year.
The minimum price that the Company is obliged to offer is 1.8 pence per
(pound)1 of capacity, 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.
10
<PAGE>
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements
Some of the statements in this Form 10-Q are not historical facts and
are "forward-looking statements" (as defined in the Private Securities
Litigation Act of 1995). These statements use words such as "believes,"
"expects," "intends," "may," "will," "should," "anticipates" (or the negative
forms of those words) and describe our strategies, goals, expectations of future
results and other forward-looking information. We derive forward-looking
information from information which we currently have and numerous assumptions
which we make. We cannot assure that results which we anticipate will be
achieved, since results may differ materially because of both known and unknown
risks and uncertainties which we face. Factors which could cause actual results
to differ materially from our forward looking statements include, but are not
limited to:
o the effects of domestic and foreign economic conditions and conditions
which affect the market for property and casualty insurance;
o laws, rules and regulations which apply to insurance companies;
o the effects of competition from banks, other insurers and the trend
toward self-insurance;
o risks which we face in entering new markets and diversifying the
products and services we offer;
o weather-related events and other catastrophes affecting our insureds;
o our ability to obtain rate increases and to retain business;
o Year 2000; and
o other risks which we identify in future filings with the Securities
and Exchange Commission, although we do not promise to update
forward-looking statements to reflect actual results or changes in
assumptions or other factors that could affect these statements.
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 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 and four unaffiliated
insurance companies.
11
<PAGE>
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 the Insurance Companies.
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, 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.
The Company's revenue is primarily comprised of premiums, commissions and
investment income. The Insurance Companies, managed by Somerset Marine, Inc.,
derive the majority of their premium from business written by the Somerset
Companies and Anfield. 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 six months of 2000 increased
30% to $103,835,000 from $79,865,000 for the first six months of 1999.
12
<PAGE>
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>
Six Months Ended June 30,
2000 1999
Dollars in thousands)
<S> <C> <C> <C> <C>
Lloyd's Operations:
Marine................................................... $ 43,847 42% $ 21,573 27%
Engineering and Construction............................. 578 1 -
Onshore Energy........................................... 278 - - -
--------- --- -------- ---
Total Lloyd's Operations............................. 44,703 43 21,573 27
--------- --- -------- ---
Insurance Companies:
Marine.................................................. 45,999 44 47,951 60
Program Insurance....................................... 11,556 11 7,932 10
Other ................................................... 1,577 2 2,409 3
--------- --- -------- ---
Total Insurance Companies............................ 59,132 57 58,292 73
--------- --- -------- ---
Total Gross Written Premium.......................... 103,835 100% 79,865 100%
------- === -------- ===
Total Ceded Written Premium.......................... (46,136) (38,717)
--------- --------
Total Net Written Premium............................ $ 57,699 $ 41,148
========= =======
</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.
Lloyd's Syndicate 1221 has capacity of (pound)66.3 million (converts to
$104.1 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 premium 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 Lloyd's capacity auctions this year.
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 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.
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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 when
comparing the first six months of 2000 to the first six months of 1999.
Navigators Insurance's participation in the marine pools was 75% in 1999 and
2000.
Program Insurance Premium. The program insurance, primarily written by
Anfield, consists primarily of general liability insurance for contractors and a
small amount of commercial multi-peril insurance for restaurants and taverns.
The 46% increase in the premium, when comparing the first six months 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
relationship of ceded to written premium varies based upon the types of business
written and whether the business is written by the Insurance Companies or the
Lloyd's operations. The Company wrote a larger percentage of Lloyd's premium
which generally carries a higher retention rate.
Net Written Premium. Net written premium increased 40% when comparing the
first six months of 2000 to the first six months of 1999 primarily due to the
increase in the marine business written by the Lloyd's operations.
Net Earned Premium. Net earned premium increased 14% for the first six
months of 2000 to $41,808,000 as compared to $36,764,000 for the first six
months of 1999. Net earned premium for the three months ended June 30, 2000 and
1999 was $22,235,000 and $19,830,000, respectively.
Commission Income. Commission income generated by the Somerset Companies
increased to $1,293,000 for the first six months of 2000 from $687,000 for the
first six months of 1999 and also increased 48% for the three months ended June
30, 2000 from the same period in 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.
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<PAGE>
Net Investment Income. Net investment income increased 12% to $8,840,000
for the first six months of 2000 from $7,906,000 for the corresponding period in
1999 and increased 23% to $4,489,000 for the three months ended June 30, 2000
from $3,637,000 during the corresponding period in 1999. These increases are
primarily due to higher interest rates on the Insurance Companies investments
and the Company's increased participation in the Lloyd's operations which earn
income on investments held by Lloyd's Syndicate 1221 in which the Company
participates. Such investments represent funds due to the Company from Syndicate
1221.
Net Realized Capital Gains. Pre-tax net income included $71,000 of realized
capital gains for the first six months of 2000 compared to $791,000 for the same
period last year. On an after tax basis, the realized capital gains were $0.01
per diluted share and $0.06 per diluted share for the first six months of 2000
and 1999, respectively. Pre-tax net income for the three months ended June 30,
2000 and 1999 included realized capital gains of $166,000 and $504,000,
respectively. On an after tax basis, the realized capital gains were $0.02 per
diluted share and $0.04 per diluted share for the three months ended June 30,
2000 and 1999, respectively.
Operating Expenses.
------------------
Net Loss and Loss Adjustment Expenses Incurred. The ratio of net loss and
loss adjustment expenses incurred to net earned premium was 62.0% and 57.1% for
the first six months of 2000 and 1999, respectively. This increase was primarily
due to higher loss ratios in the Lloyd's operations. The loss ratios were 62.1%
and 55.4% for the three months ended June 30, 2000 and 1999, respectively.
Commission Expense. Commission expense as a percentage of net earned
premium was 20.5% and 21.1% for the first six months of 2000 and 1999,
respectively, and 21.3% and 22.6% for the three months ended June 30, 2000 and
1999, respectively. The decrease in the commission rate was due to the increase
in the Lloyd's premium as the Lloyd's premium generally has a lower commission
rate than the business written by the Insurance Companies.
Other Operating Expenses. Other operating expenses increased 2% to
$11,962,000 during the first six months of 2000 from $11,716,000 during the
corresponding period of 1999 primarily due to the acquisition of Anfield on
April 2, 1999. Other operating expenses decreased 12.3% for the three months
ended June 30, 2000 compared to the same period in 1999 primarily due to lower
costs in the Company's foreign operations.
Interest Expense. Interest expense was $836,000 during the first six months
of 2000 compared to $733,000 during the corresponding period of 1999. This
increase was due to higher interest rates, partially offset by a decrease in the
loan balance.
Income Taxes. The effective tax rate was 37.3% and 22.1% for the six months
ended June 30, 2000 and 1999, respectively. The increase in the tax rate was
primarily due to the Company's inability to utilize losses from its foreign
operations.
Net Income. The Company had net income of $3,090,000 for the first six
months of 2000 compared to $4,044,000 for the same period last year. On a
diluted per share basis, this represents net income per share of $0.37 and $0.48
for the first six months of 2000 and 1999, respectively. The Company had net
income of $1,746,000 or $0.21 per diluted share for the three months ended June
30, 2000 compared to net income of $1,937,000 or $0.23 per diluted share for the
same period in 1999.
Liquidity and Capital Resources
Cash flow from operations was $1,674,000 and $3,471,000 for the first six
months of 2000 and 1999, respectively. Invested assets and cash decreased
slightly to $245,566,000 at June 30, 2000 from $246,688,000 at December 31,
1999.
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The Company's bank credit facility provided for a $23,000,000 revolving
line of credit facility at June 30, 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
June 30, 2000, $22,000,000 in loans were outstanding under the revolving line of
credit facility at an interest rate of 7.8%. The letter of credit facility is
utilized primarily by NCUL and Millennium to participate in Lloyd's syndicate
1221 managed by MTC. At June 30, 2000, letters of credit with an aggregate face
amount of $47,276,000 were issued under the letter of credit facility.
As of June 30, 2000, the Company's consolidated stockholders' equity was
$134,286,000 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
efforts were rewarded as no computer related Y2K problems have been 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. The Company has not incurred
any losses as the result of Y2K Issues.
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 June 30, 2000 and 1999, 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.
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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:
------------------------------------------------------
On June 1, 2000, the Company's stockholders voted for the following
matters at the annual stockholders' meeting:
(a) The election of seven (7) directors to serve until the 2001 Annual
Meeting of Stockholders or until their respective successors have
been duly elected and qualified. The results of the voting were as
follows:
Name For Withheld
Terence N. Deeks 6,428,448 38,281
Robert M. DeMichele 6,422,148 44,581
Leandro S. Galban, Jr. 6,415,548 51,181
Marc M. Tract 6,415,548 51,181
William D. Warren 6,388,993 77,736
Robert F. Wright 6,422,148 44,581
Howard M. Zelikow 6,393,798 72,931
(b) The ratification of the appointment of KPMG LLP as the Company's
independent auditors. The stockholders cast 6,465,729 votes for,
900 votes against and 100 votes abstaining ratification.
Item 5. Other Information:
-----------------
None.
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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 six months ended
June 30, 2000.
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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: August 11, 2000 /s / Bradley D. Wiley
--------------- -----------------------------------------
Bradley D. Wiley
Senior Vice President, Chief Financial
Officer and Secretary
19
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INDEX OF EXHIBITS
Sequentially
Numbered
Exhibit No. Description of Exhibit Page
27.1 Financial Data Schedule
20
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