The Company has significant catastrophe exposures throughout the world with the largest catastrophe exposure coming from offshore energy risks exposed to hurricanes in the Gulf of Mexico. Following the 2008 hurricane season many offshore energy accounts that suffered claims from Hurricanes Gustav and Ike now have either reduced limits or have used up the entire windstorm limit of the policy. To take account of this in assessing our overall Gulf of Mexico exposure, we have remodeled the offshore energy exposure with these reduced windstorm limits. Based on this assessment, the Company estimates that our probable maximum pre-tax gross and net loss exposure in a theoretical one in two hundred and fifty year hurricane event in the Gulf of Mexico would approximate $163 million and $27 million, respectively, including the cost of reinsurance reinstatement premiums. In the absence of the aforementioned policy limits being exhausted, our probable maximum pre-tax gross and net loss exposure would approximate $233 million and $29 million, respectively, including the cost of reinsurance reinstatement premiums.
Net income for 2008, 2007 and 2006 was $51.7 million or $3.04 per share, $95.6 million or $5.62 per share and $72.6 million or $4.30 per share, respectively. The 2008 year was adversely impacted by Hurricanes Gustav and Ike to the extent of reducing net income by $19.1 million and reducing earnings per share by $1.12.
Cash flow from operations was $245.3 million, $284.6 million and $146.0 million in 2008, 2007 and 2006, respectively, contributing to the growth in invested assets and net investment income. Investment income increased 8.3% in 2008 to $76.6 million compared to 2007 and increased 24.2% in 2007 to $70.6 million compared to 2006 as the result of the increase in invested assets in both years, partially offset by lower investment yields in 2008.
The 2007 third quarter ceded written premium of the Lloyd’s Operations was reduced by approximately $6.4 million for ceded written premium amounts that were over-estimated in prior accounting periods mostly recorded during the six months ended 2007. The estimate change which results in a higher relationship of net premiums retained to gross written premium in the 2007 third quarter was not material to the current and prior quarterly or annual accounting periods.
In addition to $12.9 million of additional net loss reserves for the 2008 Hurricanes, the increase in net loss reserves in all active lines of business is generally a reflection of the growth in net premium volume over the last three years coupled with a changing mix of business to longer tail lines of business such as the specialty lines of business (construction defect, commercial excess, primary excess and personal umbrella), professional liability lines of business and marine liability and transport business in ocean marine. These products, which typically have a longer settlement period compared to the mix of business the Company has historically written, are becoming larger components of our overall business.
Set forth below is a sensitivity analysis that estimates the effect on the Company’s net loss reserve position of using alternative expected loss ratios for the underwriting years 2001 to 2008 and alternative loss development factors for the underwriting years 2001 to 2008 rather than those actually used in determining the Company’s best estimates at December 31, 2008. The analysis addresses each major line of business and underwriting year for which a material deviation to the Company’s overall reserve position is believed reasonably possible, and uses what the Company believes is a reasonably likely range of potential deviation for each line of business. The underwriting years prior to 2001 were not included given the maturity of such years and their relatively small contribution to the overall IBNR loss reserve amount at December 31, 2008. Such underwriting years are therefore deemed to be less likely to cause a material deviation to the Company’s overall loss reserve position. There can be no assurance, however, that actual reserve development will be materially consistent with either the original or the adjusted expected loss ratios or loss development factor assumptions, or with other assumptions made in the reserving process, or that a material deviation in loss reserves will not occur for underwriting years prior to 2001.
The reasonably likely ranges of potential deviation in the loss ratios for each line of business for the 2001 to 2008 underwriting years expressed in loss ratio points are as follows:
The reasonably likely ranges of potential deviations in the aggregate or overall loss development factors for all underwriting years for each line of business are as follows:
Interest Expense. The interest expense reflects interest on our senior notes issued in April 2006.
Overall, the net earned premium increased 4.5%, 34.5% and 43.3% in 2008, 2007 and 2006, respectively, reflecting business expansion coupled with increased retention of the business written, partially offset by the effect of premium rate changes on renewal policies on certain lines of business.
The following table sets forth the impact of Hurricanes Gustav and Ike on the Insurance Companies 2008 financial results:
The 2008 earnings in the Lloyd’s Operations were impacted by losses caused by Hurricanes Gustav and Ike of approximately $13.1 million, including $5.0 million of reinstatement costs, which increased the 2008 combined ratio by 7.1 combined ratio points. The after tax effect reduced net income by $8.5 million.
The credit facility is collateralized by all of the common stock of Navigators Insurance Company. The credit agreement contains covenants common to transactions of this type, including restrictions on indebtedness and liens, limitations on dividends, stock buybacks, mergers and the sale of assets, and requirements to maintain certain consolidated tangible net worth, statutory surplus and other financial ratios. No dividends have been declared or paid by the Company through December 31, 2008. We were in compliance with all covenants at December 31, 2008.