Our executive and administrative office is located at 400 Atlantic Street, Stamford, CT. The lease for this space expires in October 2023. We operate in various locations with non-cancelable operating leases including:
The following table sets forth selected consolidated financial data including consolidated financial information of our Company for each of the last five calendar years, derived from our Company’s audited Consolidated Financial Statements. The table should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, included herein.
The discussion and analysis of our financial condition and results of operations contained herein should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this Form 10-K. It contains forward-
looking statements that involve risks and uncertainties. Please refer to Forward-Looking Statements and Risk Factors for more information. Our results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those described below and elsewhere in this Form 10-K.
On December 6, 2016, our Board of Directors declared a two-for-one stock split of The Navigators Group, Inc. Common stock, to be effected in the form of a stock dividend. Stockholders of record at the close of business on December 30, 2016 received one additional share of Common stock for every share of Common stock held. The additional shares of Common stock were issued on January 20, 2017. All disclosures of shares and per share data have been retroactively adjusted to reflect the stock split for all periods presented.
(1) - We completed a two-for-one stock split on January 20, 2017. All per share data has been retroactively restated on a post-split basis.
For additional information on the drivers of Underwriting profit see the U.S. Insurance, Int’l Insurance and GlobalRe reporting segment results sections included herein.
A major component of our Underwriting profit (loss) is due to Net losses and LAE. The following table presents the impact of changes in reserves and RRPs on our Net losses and LAE ratio for the years ended December 31, 2016, 2015, and 2014:
For the year ended December 31, 2015, we recorded $64.7 million of net prior AY reserve releases including $29.3 million, $26.2 million and $9.1 million of reserve releases from our U.S. Insurance, Int’l Insurance and GlobalRe reporting segments, respectively, all due to favorable loss emergence. This was partially offset by $48.5 million of additional net current AY reserve development related to large loss activity and $0.6 million of RRPs.
As part of our overall investment strategy, we seek to build a tax efficient investment portfolio by maintaining an allocation to tax exempt municipal bonds. The tax-exempt portion of our investment portfolio was approximately 17.1% of the fixed maturities investment portfolio as of December 31, 2016. Additionally, substantially all of our equity portfolio is invested in tax efficient securities which qualify for the dividends received deduction. The tax equivalent yields for the years ended December 31, 2016, 2015 and 2014 on a consolidated basis were 2.9%, 2.7% and 2.5%, respectively.
Our Company had one credit related OTTI loss of $0.2 million from our Fixed maturities portfolio during the year ended December 31, 2016. Our Company had three credit related OTTI losses totaling $1.7 million from our equity portfolio during the year ended December 31, 2015, which were for certain common stocks in the energy sector and aerospace industry that were impacted by global economic events. Our Company did not have any credit related OTTI losses for the year ended December 31, 2014.
Net realized gains and losses are generated as part of the normal ongoing management of our investment portfolio. Net realized gains of $9.2 million for the year ended December 31, 2016 are primarily due to the sale of equity securities. Realized losses of $4.3 million and $1.6 million for the year ended December 31, 2016 in the fixed maturities and short term portfolios, respectively, are primarily due to the foreign exchange losses in our Canadian Dollar (“CAD”) and GBP portfolios. Net realized gains of $8.4 million for the year ended December 31, 2015 are primarily due to the sale of equity securities. Realized losses of $5.9 million in fixed maturities are primarily due to foreign exchange loss on the sale and maturity of fixed maturities in our Canadian portfolio. Net realized gains of $12.8 million for the year ended December 31, 2014 are primarily due to the sale of corporate bonds and equity securities.
We recorded an effective tax rate of 29.6%, 31.0% and 32.2% for December 31, 2016, 2015 and 2014, respectively. Our effective tax rate for each of the years differs from the federal tax rate of 35.0% principally due to tax-exempt investment income and dividends received deduction.
Gross written premiums increased $58.7 million for the year ended December 31, 2015 compared to the same period in 2014 due to strong new business production and improving market conditions in our P&C operating segment, which increased $53.6 million. Our
Excess Casualty and Primary Casualty divisions increased $23.5 million and $15.9 million, respectively, as a result of continued improvement within the construction market. In addition, our Environmental division increased $8.5 million due to strong new business production.
For the year ended December 31, 2015, average renewal rates decreased 1.3% as compared to the same period in 2014, with decreases in our Marine, P&C and Professional Liability operating segments of 0.7%, 1.5% and 1.4%, respectively. This was offset by new business production achieved through our continued investment in our underwriting teams in addition to improved market conditions across key businesses.
Ceded written premiums increased $13.8 million for the year ended December 31, 2015 compared to the same period in 2014, mostly due to growth in Gross written premiums. The impact of the implementation of additional proportional reinsurance programs in Marine and Professional Liability operating segments, during the second half of 2014 and the first quarter of 2015, were almost completely offset by a reduction in proportional reinsurance, in the second half of 2015, that primarily supports Excess Casualty and Environmental casualty risks within our P&C operating segment.
Net earned premiums increased $73.5 million for the year ended December 31, 2016 compared to the same period in 2015, due to growth in Gross written premiums, a reduced level of proportional reinsurance within our P&C and Professional Liability operating segments, and a $4.6 million decrease in RRPs from 2015.
Net earned premiums increased $51.5 million for the year ended December 31, 2015 compared to the same period in 2014, primarily due to growth in Gross written premiums and a reduced level of proportional reinsurance that supports certain casualty risks in the second half of 2015 within our P&C operating segment. This was partially offset by decreases in Net earned premium in both our Marine and Professional Liability operating segments, which were impacted by the implementation of additional reinsurance programs in the second half of 2014 and first quarter of 2015, as well as, a $3.6 million increase in RRPs from 2014.
The Net losses and LAE reserves as of December 31, 2016, 2015 and 2014 are as follows:
For the year ended December 31, 2016, our U.S. Insurance reporting segment recorded $1.3 million of net prior AY reserve releases driven by $10.1 million of reserve releases in our Marine operating segment, mostly due to a decline in large loss activity, partially offset by $2.8 million and $6.0 million of net prior AY reserve strengthening in our P&C and Professional Liability operating segments, mostly due to unfavorable development on large claims within our Primary Casualty and D&O divisions, and a $1.2 million
For the year ended December 31, 2015, our U.S. Insurance reporting segment recorded $29.3 million of net prior AY reserve releases driven by $24.8 million, $3.8 million and $0.7 million of reserve releases from our Marine, Professional Liability and P&C operating segments, respectively, mostly due to a decline in large loss activity. The favorable prior AY reserve releases were partially offset by a $10.0 million current AY loss related to Hurricane Joaquin. The loss ratio was also unfavorably impacted by $5.4 million of RRPs, which were primarily within our Marine operating segment.
For the year ended December 31, 2014, our U.S. Insurance reporting segment recorded $15.4 million of net prior AY reserve releases primarily driven by $29.0 million and $3.5 million of reserve releases from our Marine and Professional Liability operating segments, respectively. Marine was favorably impacted by a decline in large loss activity and Professional Liability benefited from $4.5 million favorable loss emergence within D&O due to a cash settlement of a contract dispute with a former third party administrator, partially offset by unfavorable loss emergence from our E&O division. The aforementioned releases were partially offset by $17.1 million of prior AY reserve strengthening in our P&C operating segment, primarily related to unfavorable loss activity in our Primary Casualty division. The loss ratio was also unfavorably impacted by $1.8 million of RRPs, primarily within our Marine operating segment.
The following tables summarize our financial results by operating segment for our Int’l Insurance reporting segment for the years ended December 31, 2016, 2015 and 2014:
Gross written premiums decreased $13.0 million for the year ended December 31, 2015 compared to the same period in 2014, primarily due to decreases in our P&C and Marine operating segments of $27.6 million and $6.9 million, respectively. Our P&C operating segment was impacted by severe market conditions in our Energy & Engineering division and decreased $54.7 million as compared to the same period in 2014, partially offset by growth in our Property division of $21.7 million from new business production. The decrease in our Marine operating segment is due to declines in rates coupled with lower renewal activity. The decline in Gross written premiums was partially offset by an increase of $21.3 million in our Professional Liability operating segment, driven by new business production in our E&O division.
Ceded written premiums decreased $37.9 million for the year ended December 31, 2015 compared to the same period in 2014, driven by decreases in our P&C and Marine operating segments of $30.4 million and $11.3 million, respectively. The decrease in both operating segments is primarily driven by an overall decline in Gross written premiums which attract proportional reinsurance as well as a reduction in proportional reinsurance programs. The decrease was partially offset by an increase of $3.7 million in our Professional Liability operating segment due to higher Gross written premiums with attached proportional reinsurance.
Net earned premiums increased $47.5 million for the year ended December 31, 2016 as compared to the same period in 2015. This was driven by growth in our P&C operating segment of $34.1 million, mostly due to increased production from our Property division related to expanded coverage for international exposures, and the newly formed PV&T product. In addition our Professional Liability operating segment increased $21.0 million, mostly in our Financial Institutions product. These increases were partially offset by a decrease in our Marine operating segment and increased RRPs expense of $2.9 million in 2016 compared to a release of $4.0 million in 2015, which are fully earned when written.
Net earned premiums increased $16.5 million for the year ended December 31, 2015 as compared to the same period in 2014. This was driven by increases in our Professional Liability operating segment of $15.5 million due to growth in new business in our E&O division and increases in our Marine operating segment of $8.2 million, due to a $9.7 million decrease in RRPs. These increases were partially offset by a decrease in our P&C operating segment due to the decreases in Gross written premiums.
The following tables present the impact of changes in reserves and RRPs on our Net losses and LAE ratio for the years ended December 31, 2016, 2015 and 2014:
For the year ended December 31, 2015, our Int’l Insurance reporting segment recorded $26.2 million of prior AY reserve releases, driven by our Marine and P&C operating segments of $21.9 million and $8.5 million, respectively, related to favorable loss emergence. These releases were partially offset by $4.2 million of prior AY reserve strengthening within our Professional Liability operating segment due to a large loss. Current AY reserve development of $30.2 million was driven by our Marine and P&C operating segments of $23.3 million and $6.9 million, respectively, arising from large loss activity.
The changes in Net losses and LAE ratio, as adjusted, are primarily due to the mix of business earned driven by the repositioning of certain Hull and Cargo products in our Marine operating segment and certain E&O products within our Professional Liability operating segment.
The commission expense ratio for the year ended December 31, 2016 increased 3.3 percentage points as compared to the same period in 2015, mostly due to the mix of business earned, driven by a greater proportion of Property and E&O products, which carry higher gross commission rates, less proportional reinsurance, and additional RRP’s.
The commission expense ratio for the year ended December 31, 2015 decreased 1.4 percentage points as compared to the same period in 2014, primarily driven by a favorable reduction in profit commission accrual of $0.9 million in our Marine operating segment as well as a $9.7 million decrease in RRPs as compared to the same period in 2014. These decreases were partially offset by overall growth in our Professional Liability operating segment which carries proportional reinsurance coverage that does not attract commission over-riders, as well as mix of business within our P&C operating segment principally by growth in our Property division which does not carry a proportional reinsurance program.
The following table summarizes our financial results for our GlobalRe reporting segment for the years ended December 31, 2016, 2015 and 2014:
Net earned premiums decreased $4.7 million for the year ended December 31, 2016 compared to the same period in 2015, primarily due to significant non-renewals in our A&H products, and to a lesser extent, rate reductions in our Marine product. This decline was partially offset by a change in estimated earnings in our Surety product, growth in our P&C, Agriculture and Professional Liability products, as well as an increase in assumed RRPs in our P&C product.
Net earned premiums decreased $19.8 million for the year ended December 31, 2015 compared to the same period in 2014, primarily due to the nonrenewal of business in our Agriculture and Marine products and less assumed RRPs than in prior year. The decline in Net earned premium was partially offset by growth in our A&H and P&C products.
The changes in Net losses and LAE ratio, as adjusted, are primarily due to mix of business earned, driven by less Net earned premium within our A&H product, which attracted higher ultimate loss ratios, partially offset by our P&C product.
The Commission expense ratio increased 1.6 percentage points for the year ended December 31, 2016 compared to the same period in 2015, resulting from an increase in earned premium for our P&C, Agriculture and Professional Liability products that attract higher commission rates, as well as additional profit commission expenses in our A&H and P&C products.
Other operating expenses increased $3.4 million for the year ended December 31, 2016 compared to the same period in 2015, due to growth in our underwriting teams and support staff, as well as increases in the allocation of corporate overhead.
Navigators Insurance Company may pay dividends to our Parent Company out of our statutory earned surplus pursuant to statutory restrictions imposed under the New York insurance law. As of December 31, 2016, the maximum amount available for the payment of dividends by Navigators Insurance Company in 2017 without prior regulatory approval is $102.7 million.
Navigators Corporate Underwriters, Ltd., our wholly-owned corporate member at Lloyd’s, may pay dividends to our Parent Company up to the extent of available profits that have been distributed from the Syndicate. As of December 31, 2016, that amount was $3.0 million (£2.4 million).
On October 4, 2013, we completed a public debt offering for $265.0 million of 5.75% Senior notes and received net proceeds of $263.3 million. The effective interest rate related to the net proceeds received from the 5.75% Senior notes is approximately 5.86%. Interest is payable on the 5.75% Senior notes each April 15 and October 15.
On November 4, 2016, NUAL entered into a credit facility for 14.0 million Australian Dollars with Barclays Bank PLC. Interest is payable under this facility at a rate of 1.25% per annum. The facility may be cancelled by either party after providing written notice. This credit facility contains customary covenants for facilities of this type, including a restriction on future encumbrances that are outside the ordinary course of business, and a requirement to maintain at least £75.0 million of Funds at Lloyd’s. As of December 31, 2016, letters of credit with an aggregate face amount of 14.0 million Australian Dollars were outstanding under the credit facility, and our Company was in compliance with all covenants.
On November 7, 2016, we entered into a credit facility agreement with ING Bank N.V., London Branch, individually and as Administrative Agent and a syndicate of lenders (the “Club Facility”), which is secured by all the common stock of NIC and requires us to maintain at least forty percent of the outstanding amounts under such facility as Funds at Lloyd’s. The Club Facility has two tranches with one tranche extending a $140.0 million commitment and the other tranche extending a £60.0 million commitment. In addition, in order to support the increased underwriting capacity of the Syndicate for the 2017 UWY, we amended that certain $25.0 million credit facility with ING Bank N.V., London Branch dated November 20, 2015, on November 7, 2016 to extend the term for an additional two years (the “Bilateral Facility”). Both of these facilities, as well as the November 4, 2016 facility, are used to fund underwriting obligations at Lloyd’s for the 2017 UWY, as well as open prior UWYs.
We generally maintain the ability to issue certain classes of debt and equity securities via a universal shelf registration statement filed with the SEC, which is renewed every three years. The shelf registration provides us the means to access the debt and equity markets relatively quickly. Our current shelf registration was filed on April 14, 2015 with the SEC and expires in 2018. This report is not an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state.
Net cash used in investing activities was $211.4 million for the year ended December 31, 2016 compared to $249.9 million for the comparable period in 2015. The decrease in cash used in investing activities reflects higher net investment purchases in 2015 as compared with 2016 as we deployed excess cash held at December 31, 2014 into our investment portfolio.
Net cash used in financing activities was $2.1 million for the year ended December 31, 2016 compared with net cash provided by financing activities of $1.4 million for the same period in 2015. The fluctuation in cash used in financing activities is the result of instituting a quarterly cash dividend paid on our Company’s Common stock in the third quarter.
Our ability to underwrite business is dependent upon the financial strength of NIC, NSIC and Lloyd’s business. Financial strength ratings represent the opinions of the rating agencies on the financial strength of a company and its capacity to meet the obligations of insurance policies. Independent ratings are important to our competitive position in the insurance markets. The rating agencies consider many factors in determining the financial strength rating of an insurance company, including the relative level of statutory surplus necessary to support the business operations of our Company. These ratings are based upon factors relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Such ratings are not recommendations to buy, sell or hold securities. We could be adversely impacted by a downgrade in our financial strength ratings, including a possible reduction in demand for our products, higher borrowing costs and our ability to access the capital markets.
We utilize the senior debt ratings from S&P. Our senior debt is rated BBB (Adequate) by S&P.
The following table sets forth the best estimate of our known contractual obligations with respect to the items indicated as of December 31, 2016:
The following table summarizes the composition of our available- for- sale investments at fair value:
The following table sets forth our U.S. Treasury bonds, agency bonds and foreign government bonds, as well as our state, municipality and political subdivision bond holdings by type:
The following table sets forth our agency mortgage-backed securities (“AMBS”) issued by the Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) and the quality category (prime, Alternative A-paper (“Alt-A”) and subprime) for residential mortgage -backed securities (“RMBS”) as of December 31, 2016:
Details of the collateral of our asset-backed securities portfolio as of December 31, 2016 are presented below:
The following table summarizes the gross unrealized investment losses as of December 31, 2016 by length of time where the fair value was less than 80.0% of amortized cost:
During the year ended December 31, 2016, we recognized one credit related OTTI loss of $0.2 million in our Fixed maturities portfolio. During the year ended December 31, 2015, we recognized three credit related OTTI losses of $1.7 million for certain common stocks in the energy sector and aerospace industry. Our Company did not have credit related OTTI losses for the year ended December 31, 2014.
The fair value of our investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, equity prices, foreign exchange rates and credit spreads. We do not have the intent to sell nor is it more likely than not that we will have to sell Fixed maturities in unrealized loss positions that are not other-than-temporarily impaired before recovery. For structured securities, default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. We do not intend to sell any of these securities and it is more likely than not that, we will not be required to sell these securities before the recovery of the amortized cost basis. For Equity securities, we also consider our intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. We may realize investment losses to the extent our liquidity needs require the disposition of Fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments. Significant changes in the factors we consider when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the Consolidated Financial Statements.
The reserves for asbestos exposures as of December 31, 2016 are for: (i) one large settled claim for excess insurance policy limits exposed to a class action suit against an insured involved in the manufacturing or distribution of asbestos products being paid over several years and (ii) attritional asbestos claims that could be expected to occur over time. Substantially all of our asbestos liability reserves are included in our U.S. Marine operating segment loss reserves.
Our Company has significant natural catastrophe exposures throughout the world. We estimate that the largest exposure to loss from a single natural catastrophe event comes from a hurricane on the east coast of the U.S. As of December 31, 2016, our Company estimates that the probable maximum pre-tax gross and net loss exposure from such a hurricane event would be approximately $140.0 million and $46.1 million, respectively, including the cost of RRPs.
Like all catastrophe exposure estimates, the foregoing estimate of the probable maximum loss is inherently uncertain. This estimate is highly dependent upon numerous assumptions and subjective underwriting judgments. Examples of significant assumptions and judgments related to such an estimate include the intensity, depth and location of a hurricane, the various types of the insured risks exposed to the event at the time the event occurs and the estimated costs or damages incurred for each insured risk. The composition of the portfolio also makes such estimates challenging due to the non-static nature of the exposures covered under the policies in products such as Cargo and Hull. There can be no assurances that the gross and net loss amounts that our Company could incur in such an event or in any natural catastrophe event would not be materially higher than the estimates discussed above given the significant uncertainties with respect to such an estimate. Moreover, the portfolio of insured risks changes dynamically over time and there can be no assurance that the probable maximum loss will not change materially over time.
reinsurance is placed either directly by our Company or through reinsurance intermediaries. The reinsurance intermediaries are compensated by the reinsurers.
The following natural disasters generated substantial losses within our U.S. and Int’l Marine operating segments and our Energy & Engineering divisions within our U.S. and Int’l P&C operating segments: the Alberta Wildfires, which occurred in the second quarter of 2016, Hurricane Joaquin, which occurred in the fourth quarter of 2015, Superstorm Sandy, which occurred in the fourth quarter of 2012 and Hurricanes Gustav and Ike, which occurred in the third quarter of 2008. As of December 31, 2016, the net reserves for Hurricane Gustav and Ike and Superstorm Sandy are, in total, $64 thousand. Management believes that should any adverse loss development for gross claims occur from the aforementioned wildfires, hurricanes and Superstorm Sandy, it would be contained within the reinsurance program.
Our Company has established a reserve for uncollectible reinsurance in the amount of $12.1 million and $6.9 million as of December 31, 2016 and 2015, respectively. Our reserve is determined by considering reinsurer specific default risk as indicated by their financial strength ratings, as well as additional default risk for asbestos and environmental related recoverables or an individual impairment assessment for certain reinsurers that exhibit additional default risk. Actual uncollectible reinsurance could potentially differ from the estimate. The increase in our reserves for uncollectible reinsurance as compared to 2015 is driven primarily by one of our reinsurers having been placed under supervision of a conservator by the State of California. We will continue to monitor the conservation process and assess our potential exposure.
Reserves for losses and LAE represent an estimate of the expected cost of the ultimate settlement and administration of losses, based on facts and circumstances then known less the amount paid to date. Our actuaries calculate indicated IBNR loss reserves by UWY for major product groupings using standard actuarial methodologies, which are projection or extrapolation techniques, including: (a) the loss ratio method, (b) the loss development method, (c) the Bornhuetter-Ferguson method and (d) the frequency/severity method. Each of these methodologies is generally applicable to both long tail and short tail lines of business depending on a variety of circumstances. Informed subjective judgments as to our ultimate exposure to losses are an integral component of our loss reserving process due to numerous factors that contribute to the inherent uncertainty in the process of establishing loss reserves, including:
This method is based on the assumption that ultimate losses vary proportionately with premiums. Pursuant to the loss ratio method, IBNR loss reserves are calculated by multiplying the earned premium by an expected ultimate loss ratio to estimate the ultimate losses for each UWY, then subtracting the reported losses, consisting of paid losses and case loss reserves, to determine the IBNR loss reserve amount. The ultimate loss ratios applied are our Company’s best estimates for each UWY and are generally determined after evaluating a number of factors which include: information derived by underwriters and actuaries in the initial pricing of our business, the ultimate loss ratios established in the prior accounting period and the related judgments applied, the ultimate loss ratios of previous UWYs, premium rate changes, underwriting and coverage changes, changes in terms and conditions, legislative changes, exposure trends, loss development trends, claim frequency and severity trends, paid claims activity, remaining open case reserves and industry data where deemed appropriate. Such factors are also evaluated when selecting ultimate loss ratios and/or loss development factors in the methods described below.
The data distribution as of December 31, 2016 as measured by net case reserves outstanding is as follows:
(2) - Calculated using average diluted shares of 30,031,609 for the year ended December 31, 2016. We completed a two-for-one stock split on January 20, 2017. All share and per share data has been retroactively restated on a post-split basis.
A range of reasonable estimates has been developed based on the historical volatility of held reserves versus current estimates for the purposes of this sensitivity analysis. The history indicates that our held reserves tend to be 6.6% redundant with a standard deviation of 7.1%. We have ignored the historical conservatism and built a range around the current held amounts. Our Company’s lines of business, the market pricing adequacy and our Company’s underwriting strategies have changed dynamically over the past ten years. The impact from the shift on ranges will be greater for lines with longer emergence patterns. The individual lines will also have
Management regularly reviews our fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. Our investment portfolio is the largest component of consolidated assets and a multiple of stockholder’s equity. OTTI could be material to our financial condition and results of operations. Refer to Note 3, Investments, in the Notes to Consolidated Financial Statements for additional information.
Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. We determine the fair value of certain financial instruments based on their underlying