The following table sets forth summary consolidated financial information of the Company for each of the years in the five-year period ended December 31, 2001 derived from the Company's audited consolidated financial statements. See the Consolidated Financial Statements of the Company including notes thereto included herein.
The Company's revenue is primarily comprised of premiums, commissions and investment income. The Insurance Companies derive their premium from business written by the Navigators Agencies. The Lloyd's Operations derive their premium from business written by NUAL.
It is important to understand the Company's accounting policies in order to understand its financial statements. Management considers certain of these policies to be critical to the presentation of the financial results since they require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the financial reporting date and throughout the period being reported upon. Certain of the estimates result from judgments that can be subjective and complex, and consequently actual results may differ from these estimates.
The Company's most critical accounting policies involve the reporting of the reserves for losses and loss adjustment expenses (including losses that have occurred but were not reported to the Company by the financial reporting date), reinsurance recoverables, written and unearned premium, the recoverability of deferred tax assets, the impairment of invested assets, and goodwill.
Written premium is recorded based on the insurance policies that have been reported to the Company and the policies that have been written by the agents but not yet reported to the Company. The Company must estimate the amount of written premium not yet reported based on judgments relative to current and historical trends of the business being written. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year's results. An
The Company has recorded valuation allowances related to deferred tax assets resulting from net operating loss carry forwards due to the uncertainty associated with the realization of the deferred tax asset related to certain of the Company's foreign, state and local operations. See Note 5 to the Company's consolidated financial statements, included herein.
The Company regularly evaluates the recoverability of goodwill and other acquired intangible assets. The carrying value of such assets would be reduced through a direct write-off if it was probable that projected future operating income, before amortization of goodwill, would not be sufficient to recover the carrying value. See Note 1 to the Company's consolidated financial statements, included herein.
General. The Company's 2001, 2000 and 1999 results of operations reflect intense market competition in the marine business which started to ease slightly in 2000. Premium rates started to increase in 2001.
Revenues. Gross written premium increased to $278.2 million in 2001 from $188.4 million in 2000 and from $167.1 million in 1999. The following table sets forth the Company's gross written premium by segment and line of business, and ceded and net written premium by segment for the periods indicated:
The Lloyd's premium is generated as the result of NCUL and Millennium providing capacity to Lloyd's Syndicate 1221 which is managed by NUAL.
Lloyd's Syndicate 1221 had capacity of £66.3 million ($95.5 million) in 2001, £66.3 million ($96.0 million) in 2000 and £67.0 million ($105.9 million) in 1999. Syndicate 1221's capacity is expressed net of commission (as is standard at Lloyd's) of approximately 21%. The Company participates for 67.4%, 64.5% and 52.5% of Syndicate 1221's capacity for the 2001, 2000 and 1999 underwriting years, respectively. 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 wrote less than the capacity available. The pricing competition showed some signs of easing in 2000 and prices increased in 2001. 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. The Lloyd's Operations included in the consolidated financial statements represent the Company's participation in Syndicate 1221.
At Lloyd's, the amount to close an underwriting year into the next year is referred to as the "reinsurance to close." At December 31, 2001, Syndicate 1221 closed its 1999 underwriting year, the net effect of which resulted in a portfolio transfer to NCUL and Millennium of $4.2 million at December 31, 2001. At December 31, 2000, Syndicate 1221 closed its 1998 underwriting year, the net effect of which resulted in a portfolio transfer to NCUL and Millennium of $7.9 million at December 31, 2000. At December 31, 1999, Syndicate 1221 and an unaffiliated syndicate on which NCUL participated in 1997 closed their 1997 underwriting years resulting in a portfolio transfer to NCUL of $15.5 million at December 31, 1999. These transactions accounted for part of the increases in the premium volume in the Lloyd's Operations. The reinsurance to close transactions were recorded as additional written and earned premium, losses incurred, loss reserves and receivables, all in the same amount. There were no gains or losses recorded on the transactions.
The Company provides letters of credit to Lloyd's to support its participation in Syndicate 1221's capacity. If the Company increases its participation or if Lloyd's changes the capital requirements, the Company may be required to supply additional letters of credit or other collateral acceptable to Lloyd's, or reduce the capacity of Syndicate 1221. The letters of credit are provided through the credit facility which the Company maintains with a consortium of banks. The credit facility agreement requires that the banks vote whether or not to renew the letter of credit portion of the facility each year. If the banks decide not to renew the letter of credit facility, the Company will need to find other sources to provide the letters of credit or other collateral in order to continue to participate in Syndicate 1221.
Marine Premium. In 2001, marine premium increased 38.3% from 2000 due to the increase in premium rates resulting in higher premiums on renewal and new business and due to the capacity provided to Syndicate 1221 by NCUL and Millennium increasing from 64.5% in 2000 to 67.4% in 2001. The higher premium rates made the business more attractive resulting in the Lloyd's Operations increasing its writings of new business. The capacity provided to Syndicate 1221 by NCUL and Millennium increased from 52.5% in 1999 to 64.5% in 2000 resulting in the increase in premium volume.
Onshore Energy. In 1999, NUAL also began writing onshore energy business for Syndicate 1221. The business principally focuses on the oil and gas, chemical and petrochemical industries with coverages primarily for property damage and business interruption. The increase in 2001 was due to new business written.
Navigators Specialty Premium. The Navigators specialty insurance (formerly known as Anfield or program insurance), written by the Company's Specialty Division, consists primarily of general liability insurance for contractors as well as small commercial risks. The premium increased 94.4% from 2000 to 2001 and 52.6% from 1999 to 2000 due to increased rates and expansion of the specialty business.
Net Written Premium. Net written premium increased 59.6% from 2000 to 2001 due to the increase in the gross written premium and the decrease in the percentage of ceded premium from 42.6% in 2000 to 38.0% in 2001. It increased 14.9% from 1999 to 2000 primarily due to the increases in the Lloyd's marine business and the specialty business.
Commission Income. The increase in commission income from 2000 to 2001 of 11.9% was due to the increase in marine premium for which the Company receives commission from unaffiliated insurers. Commission income increased in 2000 primarily due to the absence to a great extent of the factors that reduced commission income in 1999 which included the losses related to unrecoverable reinsurance resulting in reductions to the profit commission, and the Company's reduction of its commission income estimates due to the extremely competitive rate environment.
Net Realized Capital Gains/(Losses). Pre-tax net income included $790,000 of net realized capital gains/(losses) for 2001 compared to $265,000 for 2000 and ($443,000) for 1999. On an after tax basis, the net realized capital gains/(losses) were $0.09 per share, $0.02 per share and ($0.03) per share for 2001, 2000 and 1999, respectively. The 2001 net realized capital gains include $1,618,000 of impairment losses recorded on two of the Company's asset backed securities.
Net Losses and Loss Adjustment Expenses Incurred. The ratio of net loss and loss adjustment expenses incurred to net earned premium was 70.7%, 64.8%, and 78.2% in 2001, 2000, and 1999, respectively. The increase in the loss ratio from 2000 to 2001 was primarily due to the losses resulting from approximately $4.1 million of net losses related to the September 11, 2001 terrorist attack on the World Trade Center accounting for 2.7 points of the loss ratio and from approximately $1.9 million of net losses resulting from one large offshore energy claim (Petrobras) in the first quarter of 2001 accounting for 1.3 points of the loss ratio. Gross losses resulting from the terrorist attack were $17.7 million and ceded losses were $13.1 million which are reinsured by highly rated reinsurers. In October 2001, $8.1 million of the losses were paid and recovered from the reinsurers. The decrease in the 2000 loss ratio compared to 1999 was primarily due to the unrecoverable reinsurance for New Cap Re recorded in 1999 and to the lower reinsurance to close premium in 2000 of $7.9 million compared to $15.5 million in 1999. The reinsurance to close premium is recorded at a 100% loss ratio since the premium received represents estimated ultimate losses. The 1999 loss ratio excluding the New Cap Re unrecoverable reinsurance was 70.8%. The Company does not discount any of its loss reserves.
Commission Expense. Commission expense as a percentage of net earned premium was 20.7%, 20.6%, and 16.5% for 2001, 2000, and 1999, respectively. The same ratios without the reinsurance to close premium were 21.3%, 22.5% and 19.9% in 2001, 2000 and 1999, respectively. The decrease in the 2001 commission expense compared to 2000 was primarily due to the increase in the Insurance Companies' marine premium. The increase in the 2000 commission expense ratio compared to 1999 was primarily due to the increase in the Lloyd's premium which generally has a higher commission expense. The reinsurance to close premium increases earned premium but does not change the commission expense, therefore the ratio of commission expense to earned premium decreases.
Income Taxes. The income tax expense (benefit) was $1.7 million, $3.3 million and ($1.7) million for 2001, 2000 and 1999, respectively. The effective tax rates for 2001, 2000 and 1999 were 31.6%, 32.0% and (32.3%), respectively. The Company had alternative minimum tax ("AMT") carryforwards of $3.9 million, $5.3 million and $6.4 million at December 31, 2001, 2000,
The average rating of the Company's fixed maturity investments is AA by Standard & Poor's and Aa by Moody's. The Company has no significant exposure to credit risk since the fixed maturity investment portfolio primarily consists of investment grade bonds. The portfolio has an average maturity of 6.5 years and a duration of 4.3 years. Management continually monitors the composition and cash flow of the investment portfolio in order to maintain the appropriate levels of liquidity in order to ensure the Company's ability to satisfy claims. The Company incurred impairment losses totaling $1.6 million on two asset backed securities in 2001.
The increase in reserves for losses and loss adjustment expenses and the related increase in the reinsurance receivable on paid and unpaid losses and loss adjustment expenses at December 31, 2001 as compared to 2000 was primarily due to the reserves on the increase in the earned premium in 2001 compared to 2000.
Total stockholders' equity was $147.2 million at December 31, 2001, a 2.6% increase for the year as the result of the Company's net income in 2001.
The carrying value of the Company's investment portfolio as of December 31, 2001 was $278.3 million of which 86.5% was invested in fixed maturity securities. The primary market risk to the investment portfolio is interest rate risk associated with investments in fixed maturity securities. The Company's exposure to equity price risk and foreign exchange risk is not significant. The Company has no commodity risk.
There were no significant changes regarding the investment portfolio in the Company's primary market risk exposures or in how those exposures are managed compared to the year ended December 31, 2000, other than the movement from tax exempt to taxable securities and the recorded impairment losses totaling $1.6 million in 2001 on two of its asset backed securities. The Company does not currently anticipate significant changes in its primary market risk exposures or in how those exposures are managed in future reporting periods based upon what is known or expected to be in effect in future reporting periods.
Sensitivity analysis is defined as the measurement of potential loss in future earnings, fair values or cash flows of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates and other market rates or prices over a selected time. In the Company's sensitivity analysis model, a hypothetical change in market rates is selected that is expected to reflect reasonably possible near-term changes in those rates. The term "near-term" means a period of time going forward up to one year from the date of the consolidated financial statements. Actual results may differ from the hypothetical change in market rates assumed in this disclosure, especially since this sensitivity analysis does not reflect the results of any actions that would be taken by the Company to mitigate such hypothetical losses in fair value.
In this sensitivity analysis model, the Company uses fair values to measure its potential loss. The sensitivity analysis model includes fixed maturities and short-term investments. The primary market risk to the Company's market sensitive instruments is interest rate risk. The sensitivity analysis model uses a 100 basis point change in interest rates to measure the hypothetical change in fair value of financial instruments included in the model.
The sensitivity analysis model used by the Company produces a loss in fair value of market sensitive instruments of $9.2 million based on a 100 basis point increase in interest rates as of December 31, 2001. This loss amount only reflects the impact on an interest rate increase on the fair value of the Company's fixed maturities and short-term investments, which constitute approximately 38% of total assets as of December 31, 2001.
Based on the sensitivity analysis model used by the Company, the loss in fair value of market sensitive instruments, as a result of a 100 basis point increase in interest rates as of December 31, 2001, is not material.