The following table sets forth summary consolidated financial information of the Company for each of the years in the five-year period ended December 31, 1997 derived from the Company's audited consolidated financial statements. See the Consolidated Financial Statements of the Company including notes thereto included herein.
(2) Investments and stockholders' equity for 1994 and subsequent years reflect the adoption of SFAS 115, Accounting for Certain Investments in Debt and Equity Securities.
The Company's revenue is primarily comprised of premiums, commissions and investment income. The Insurance Companies derive the majority of their business from the Somerset Companies through either business written specifically for the Insurance Companies or through Navigators participation in insurance pools managed by the Somerset Companies. The insurance business and operations of the Insurance Companies are managed by one of the Somerset Companies.
The Company's 1997 results of operations reflect intense market competition in the core marine and aviation lines.
Marine Premium. Marine gross written premium (non-Lloyd's) increased 8% from 1996 to 1997 due to Navigators' increased participation in the marine pools from 41% in 1996 to 48% in 1997. The 1996 decrease from 1995 was due primarily to decreases in premium rates. Marine premium has been subject to continued pricing competition.
Aviation Premium. Aviation gross written premium decreased 15% from 1996 to 1997 due to price competition in the aviation insurance market. The 20% reduction in Navigators' aviation gross written premium from 1995 to 1996 was due to Navigators withdrawing from the general aviation business in order to concentrate on the major airlines and manufacturers and to price competition.
Onshore Energy Premium. In 1996, Navigators began to underwrite onshore energy business which principally focuses on the oil and gas, chemical and petrochemical, and power generation industries with coverages primarily for property damage and machinery breakdown.
Engineering and Construction Premium. Somerset Asia began writing engineering and construction risks in Southeast Asia in 1997.
Lloyd's Marine Premium. NCUL provided capacity to two Lloyd's syndicates in 1997 which produced $24.7 million of marine premium. The premiums, losses and expenses from the Lloyd's marine syndicates are included in the Company's financials but are not included in the Insurance Companies' results since NCUL is wholly owned by the parent company.
Net Written Premium. The 8% increase in net written premium from 1996 to 1997 was primarily due to increases in the marine premium from both the Somerset Companies and Lloyd's along with the new engineering and construction business, partially offset by decreases in the aviation and inland marine premium. The 4% increase in net written premium from 1995 to 1996 was primarily due to Navigators increasing its participation in the aviation pool to 100% at October 1, 1995 and to less premium being ceded.
Commission Income. Commission income decreased 42% to $5.1 million in 1997 from 1996 partially due to Navigators increasing its participation in the marine pool to 48% in 1997 from 41% in 1996 which decreased both the management commission and the profit commission. Commission income decreased 17% to $8.8 million in 1996 from $10.7 million in 1995 primarily due to Navigators increasing its participation to 100% at October 1, 1995 in the aviation business managed by the Somerset Companies, which eliminated commission income paid by the former participants in the aviation insurance pool. Also, the 1996 commission income includes $826,000 of profit commissions earned under the Company's management agreement with Riverside. The commission income is also affected by profit commissions from the marine pool.
Interest Expense. The decrease in the interest expense from 1996 to 1997 was due to $368,000 of interest expense recorded in the first quarter of 1996 attributable to the Company's rollback liability under California Proposition 103 and to fluctuations in the loan balance. The decrease in the interest expense from 1995 to 1996 was due to the reduction in the loan balance and lower interest rates. The 1995 interest expense includes $380,000 of interest expense for the Company's rollback liability under California Proposition 103.
As of December 31, 1997 the net deferred Federal tax asset was $8.0 million as compared to $9.5 million at December 31, 1996. At December 31, 1997 and 1996 the Company had a $1.1 million valuation allowance against its deferred Federal tax asset. There was no valuation allowance at December 31, 1996.
At December 31, 1997, the Company had committed approximately $550,000 to continue to enhance its hardware and software computer systems in 1998.
A December 11, 1997 amendment to the Amended Credit Agreement increased the revolving credit loan facility from $20 million to $25 million which reduces each quarter by various amounts (from $500,000 to $2,000,000) until it terminates on December 31, 2003. At December 31, 1997, $20 million in loans were outstanding under the revolving credit loan facility at an interest rate of 6.9% and letters of credit with an aggregate face amount of $26.0 million were issued under the letter of credit facility. The letters of credit are primarily utilized by NCUL as collateral to participate in two Lloyd's marine syndicates specializing in marine insurance. No letters of credit have been drawn upon.
The Company was within the usual values for all NAIC's IRIS ratios as of December 31, 1996 and 1997.
The Company is aware of the issues associated with the Year 2000 issue in existing computer systems and is currently replacing its major computer systems with systems that are Year 2000 compliant and thereby will benefit from state-of-the-art integrated systems along with being Year 2000 compliant. The project is expected to be completed in 1998. If the project is not completed timely, the Year 2000 issue may have a material impact on the operations of the Company. The costs directly related to the Year 2000 issue to date have been minimal. There can be no assurance that the systems of other companies on which the Company's systems rely will also be timely converted or that any such failure to convert by another company would not have an adverse effect on the Company's systems.