Our executive and administrative office is located at 6 International Drive in Rye Brook, N.Y. Our lease for this space expires in February 2014. Our underwriting operations are in various locations with non-cancelable operating leases including Charlotte, NC, Chicago, IL, Coral Gables, FL, Corona, CA, Houston, TX, Irvine, CA, North Haven, CT, New York City, NY, San Francisco, CA, Schaumburg, IL, Seattle, WA, Basingstoke, London and Manchester, England and Antwerp, Belgium.
The following table sets forth selected consolidated financial data including consolidated financial information of the Company for each of the years in the five-year period ended December 31, 2007 derived from the Company’s audited consolidated financial statements. You should read the table 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 in this Annual Report on Form 10-K.
Hurricanes Katrina and Rita, the marine insurance market experienced diminished capacity and rate increases through the end of 2006, particularly for the offshore energy risks located in the Gulf of Mexico. Since the end of 2006, competitive market conditions have returned as available capacity has increased. The 2007 average renewal rates for our Insurance Companies marine business decreased approximately 1.2% for the fourth quarter and 0.1% for the twelve month period, including offshore energy 2007 average renewal rates which decreased approximately 14.2% for the fourth quarter and 2.4% for the twelve months. The 2007 average renewal rates for our Lloyd’s Operations marine business decreased approximately 5.1% for the fourth quarter and 1.2% for the twelve month period, including offshore energy 2007 average renewal rates which decreased approximately 5.5% for the fourth quarter and 3.7% for the twelve months. We expect continuing overall declines in 2008 pricing for marine lines of business, including offshore energy, as additional capacity continues to re-enter the marine market.
In the professional liability market, the enactment of the Sarbanes-Oxley Act of 2002, together with financial and accounting scandals at publicly traded corporations and the increased frequency of securities-related class action litigation, has led to heightened interest in professional liability insurance generally. Average 2007 professional liability renewal premium rates decreased approximately 5.0% for the fourth quarter and 6.6% for the twelve months compared to relatively level rates in both the 2006 and 2005 after decreasing approximately 3% in 2004 which followed substantial rate increases in 2003 and 2002, particularly for D&O insurance. The 2007 D&O insurance renewal premium rates decreased approximately 3.3% for the fourth quarter and 7.9% for the twelve months following decreases of approximately 2% for both 2006 and 2005 and a decrease of 10% in 2004. We anticipate continuing declines in 2008 pricing given the overall favorable industry underwriting results since 2002 for the professional liability lines of business.
policyholders. Accordingly, we bear credit risk with respect to our reinsurers. Specifically, our reinsurers may not pay claims made by us on a timely basis, or they may not pay some or all of these claims. Either of these events would increase our costs and could have a material adverse effect on our business. We are required to pay the losses even if a reinsurer fails to meet its obligations under the reinsurance agreement.
Hurricane Katrina struck Louisiana, Mississippi, Alabama and surrounding areas on August 29, 2005 and Hurricane Rita struck Texas and Louisiana and surrounding areas on September 24, 2005. Both storms caused significant destruction in these areas including offshore energy exposures in the Gulf of Mexico. Our initial estimates of net losses related to each hurricane were developed from a combination of preliminary claims notifications received from brokers and insureds, portfolio modeling based upon the storm tracks of these hurricanes and the Company’s own internal assessment of the exposures insured under individual policies. A substantial portion of the Company’s estimated loss is due to offshore energy exposures in the Gulf of Mexico.
Since the 2005 third quarter, the Company has been continually monitoring the development of paid and reported claims activities in relation to the estimate of ultimate losses established for the 2005 Hurricanes. The overall effect on 2007 losses incurred for the Company from the 2005 Hurricanes reviews was a benefit of $1.9 million. In addition, reinstatement costs were reduced by $0.7 million which increased net written and earned premium. See “Segment Information” included herein for discussions of the effect that the changes to the estimates related to the 2005 Hurricanes had on our Insurance Companies and Lloyd’s Operations.
Approximately 25% of the gross losses incurred for the 2005 Hurricanes were generated by our Lloyd’s Operations from assumed excess of loss marine reinsurance, a substantial portion of which was retroceded. A large portion of this assumed reinsurance was not renewed.
It is important to understand our accounting policies in order to understand our 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 reporting period. Certain of the estimates result from judgments that can be subjective and complex and, consequently, actual results may differ from these estimates, which would be reflected in future periods.
Reserves for Losses and LAE. 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. Actuarial methodologies are employed to assist in establishing such estimates and include judgments relative to estimates of future claims severity and frequency, length of time to develop to ultimate, judicial theories of liability and other third party factors which are often beyond our control. Due to the inherent uncertainty associated with the reserving process, the ultimate liability may be different from the original estimate. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results. Additional information regarding our loss reserves can be found in “-Results of Operations-Operating Expenses-Net Losses and Loss Adjustment Expenses Incurred,” “Description of Business-Reserves,” and Note 5, Reserves for Losses and Loss Adjustment Expenses, to our consolidated audited financial statements, all of which are included herein.
Written and Unearned Premium. Written premium is recorded based on the insurance policies that have been reported to us and the policies that have been written by agents but not yet reported to us. We 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 unearned premium reserve is established to reflect the unexpired portion of each policy at the financial reporting date. Additional information regarding our written and unearned premium can be found in Note 1, Organization and Summary of Significant Accounting Policies, and Note 6, Reinsurance, to our consolidated audited financial statements, both included herein.
Substantially all of our business is placed through agents and brokers. Since the vast majority of the Company’s gross written premium is primary or direct as opposed to assumed (92% direct in 2007, 93% direct in 2006 and 90% direct in 2005) the delays in reporting assumed premium generally do not have a significant effect on the Company’s financial statements, since we record estimates for both unreported direct and assumed premium. We also record the ceded portion of the estimated gross written premium and related acquisition costs. The earned gross, ceded and net premiums are calculated based on our earning methodology which is generally pro-rata over the policy period. Losses are also recorded in relation to the earned premium. The estimate for losses incurred on the estimated premium is based on an actuarial calculation consistent with the methodology used to determine incurred but not reported loss reserves for reported premiums.
ability to retain the investment for a period of time sufficient to allow for an anticipated recovery in value, specific credit issues related to the issuer and current economic conditions. Other-than-temporary impairment losses result in a permanent reduction of the cost basis of the underlying investment. 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. For additional detail regarding our investment portfolio at December 31, 2007 and 2006, including disclosures regarding other-than-temporary declines in investment value, see the “Description of Business-Investments” section and Note 4, Investments, to our consolidated audited financial statements, both included herein.
As mentioned above, the Company considers its intent and ability to hold a security until the value recovers as part of the process of evaluating whether a security’s unrealized loss represents an other-than-temporary decline. The Company’s ability to hold such securities is supported by sufficient cash flow from its operations and from maturities within its investment portfolio in order to meet its claims payment and other disbursement obligations arising from its underwriting operations without selling such investments. With respect to securities where the decline in value is determined to be temporary and the security’s value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are made within the context of overall risk monitoring, changing information, market conditions and assessing value relative to other comparable securities. Management of the Company’s investment portfolio is outsourced to third party investment managers. While these investment managers may, at a given point in time, believe that the preferred course of action is to hold securities with unrealized losses that are considered temporary until such losses are recovered, the dynamic nature of the portfolio management may result in a subsequent decision to sell the security and realize the loss, based upon a change in market and other factors described above. The Company believes that subsequent decisions to sell such securities are consistent with the classification of the Company’s portfolio as available-for-sale.
On April 17, 2006, the Company completed a public debt offering of $125 million principal amount of 7% senior unsecured notes due May 1, 2016 and received net proceeds of $123.5 million of which $100 million was contributed to the capital and surplus of Navigators Insurance Company.
Net investment income increased 24.2% due to the cash flow from operations. The pre- tax investment yield was 4.4% in 2007 and 2006.
The 2006 underwriting results generally benefited from increased net premium revenues and the stable or slightly declining market conditions in the professional liability and general liability markets and improved market conditions as reflected in increased premium rates in the marine business coupled with the recording of a net redundancy of prior years’ loss reserves of $17.2 million, or $0.66 per share, which reduced the 2006 combined ratio of 87.8% by 3.7 loss ratio points.
The marine gross written premium for 2007 increased 0.1% compared to 2006 reflecting flattening or declining premium in several classes of business due to increased competitive market conditions. The average marine renewal premium rates during 2007 decreased approximately 0.1%. The marine gross written premium for 2006 increased 14.0% compared to 2005 due to growth across several lines of business including offshore energy which benefited from rate increases following losses from the 2005 Hurricanes and protection and indemnity where growth was driven by new business. The average overall marine renewal premium rates during 2006 increased approximately 11%, including the approximate 54% increase in offshore energy rates which was primarily the result of the 2005 Hurricane losses. The 2005 marine gross written premium increased 11.1% principally due to growth across several lines of business including cargo, offshore energy and liability. The rate increases in the marine business averaged approximately 1.5% in 2005. During 2005, we also began to insure customs bonds.
Specialty Premium. The gross written premium for each of the years in the three-year period ended December 31, 2007 consisted of the following:
In January 2005, we formed Navigators NV, a subsidiary of NUAL. Navigators NV is located in Antwerp, Belgium, and writes transport liability, cargo and marine liability business on behalf of Syndicate 1221.
Professional Liability Premium. Syndicate 1221 commenced writing professional liability business during the second quarter of 2005. The 2007 gross written premium increased 57.5% to $34.3 million, due to continued expansion and geographic diversification of the book and consisted of the following:
Increases in our net retentions on the professional liability pro rata reinsurance treaty which renewed April 1, 2006. No changes occurred for the April 1, 2007 renewal.
An increase in the proportion of specialty gross written premium, in which we retain a higher proportion of premium relative to our other lines, to the overall total gross written premium. In addition, effective April 1, 2007, the Company increased its retention from $500,000 to $1 million for the contractors liability business which reduced the amount of premium ceded. Somewhat offsetting retaining more contractors liability premium, the Company generally reinsures a large percentage of its new lines of business and increases its retention as the business matures over time.
effects for ceded reinstatement premiums as a result of the 2005 Hurricanes, net earned premium increased 32.7% in 2006 compared to 2005.
Net Investment Income. Net investment income increased 24.2% and 53.5% in 2007 and 2006, respectively, due primarily to the increase in invested assets resulting from positive cash flow from operations, net proceeds from the debt and common stock offerings of $123.5 million and $123.8 million received in April 2006 and October 2005, respectively, and moderately increased yields. See the “Description of Business-Investments” section included herein for additional information regarding our net investment income.
Other Income/(Expense). Other income/(expense) for 2007, 2006 and 2005 consisted principally of both foreign exchange gains and (losses) of $(0.7) million, ($1.8) million and $1.7 million, respectively, primarily related to the Lloyd’s Operations, and of inspection fee income of $0.9 million, $0.9 million and $1.0 million, respectively, related to the specialty insurance business.
The 2005 loss ratio of 69.6% was adversely impacted by 1.1 loss ratio points resulting from the $3.8 million net redundancy of prior years’ loss reserves and by 9.2 loss ratio points related to the 2005 Hurricanes. The pre-tax net loss as the result of losses caused by Hurricanes Katrina and Rita of approximately $36.7 million, including $14.5 million of reinstatement costs, increased the 2005 combined ratio by 10.5 ratio points.
During 2007, we reduced our reinstatement cost estimates by $0.7 million and our net loss incurred estimate by $1.9 million for the 2005 Hurricanes, which increased our 2007 pre-tax income by $2.6 million. The reserve reductions resulted from quarterly reviews of such 2005 Hurricanes’ exposures during 2007, which reduced gross losses incurred by $29.3 million and $1.9 million on a net basis. As a result of these reviews we also reallocated our net retention for these events between our Insurance Companies and Lloyd’s operations and the result was to increase the Insurance Companies loss incurred by $1.5 million and decrease the Lloyd’s loss incurred by $3.4 million. A summary of our losses incurred and reserves is as follows:
The increase in net loss reserves in all active lines of business is generally a reflection of the growth in 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.
The increase in gross incurred losses on the Company’s 2007 and 2006 balance sheets primarily relates to incurred losses for events occurring in those years less loss payments. Gross loss reserves and related reinsurance recoverable amounts related to losses from the 2005 Hurricanes were $141.8 million and $137.3 million at December 31, 2007, respectively, compared to $319.2 million and $309.2 million at December 31, 2006.
The substantial majority of the specialty loss reserves are for the contractors liability business, which insures mostly general
and artisan contractors. Contractor liability claims are categorized into two claim types: construction defect and other general liability. Other general liability claims typically derive from workplace accidents or from negligence alleged by third parties, and take a long time to report and settle. Construction defect claims involve the discovery of damage to buildings that was caused by latent construction defects. These claims take a very long time to report and to settle compared to other general liability claims. Since construction defect claims report much later than other contractor liability claims, they are analyzed separately in the annual loss reserve study.
Most recently, in setting the IBNR loss reserves for construction defect claims, the Company’s actuaries have begun to consider a new qualitative factor based on their evolving concern with the recent decline in home values caused by the sub-prime home mortgage crisis and its possible impact on the frequency and severity of construction defect claims. As a result, the Company’s actuaries acknowledge this uncertainty and anticipate claims arising from alleged construction defects contributing to housing value declines on policies written on newly constructed homes in our portfolio. We believe our reserves remain adequate to address such potential exposure, but we can give no assurances with respect thereto.
Other: Loss reserves for other include inland marine business and European property business written by the U.K. Branch. Both businesses were started in 2006. The Company has limited loss history and relies primarily on assumptions based on underwriters’ input and industry experience. Also included are loss reserves for aviation, property and assumed reinsurance business
Prior year reserve redundancies of $47.0 million, $17.2 million and $3.8 million net of reinsurance were recorded in 2007, 2006 and 2005, respectively, as discussed below. The relevant factors that may have a significant impact on the establishment and adjustment of loss and LAE reserves can vary by line of business and from period to period
In 2007, the Insurance Companies recorded approximately $0.6 million of net prior year savings from run-off business, principally resulting from a review of open claims files in the aviation business that was discontinued in 1999.
The Lloyd’s Operations recorded $13.2 million of net prior year savings, which included $3.4 million due to a review of the 2005 Hurricanes Katrina and Rita loss estimates, a release of approximately $2.0 million following a review of open claim files for the years 1998 to 2001, a $4.6 million reduction in our 2004 underwriting year estimates for the liability book due to favorable loss trends, and the remaining $3.2 million was mostly for offshore energy and liability business on business underwritten during 2002.
The Insurance Companies recorded $6.1 million of net prior years’ savings for specialty business of which $18.6 million was for favorable loss trends for construction liability business written in 2005 and 2004 offset by net prior years’ reserve deficiencies of $12.5 million principally for business written from 2003 to 2000 which was mostly for construction defect claims emergence in those years.
As discussed above, the Company establishes reserves for the professional liability business using ultimate loss ratios based on industry experience. During 2006 the Insurance Companies further reduced the net reserves for such claims made policies compared to year-end 2005, by $1.2 million mostly related to the 2004 year. The reductions were to recognize the low level of open claim counts and continued favorable development compared to expectations at the time the reserves were initially established.
As discussed above, the Company establishes reserves for the professional liability business using ultimate loss ratios based on industry experience. During 2005, the Insurance Companies further reduced the reserves for such claims-made policies compared to year-end 2004, by approximately $3.0 million mostly all related to the 2003 and 2002 underwriting years. The reductions were to recognize the low level of claim counts and continued favorable development compared to expectations at the time the reserves were initially established.
The Insurance Companies recorded $1.6 million of net prior years’ savings from business assumed from the Lloyd’s Operations principally related to the 2003 underwriting year where loss reserves reductions were related to the reductions in premium estimates.
The Insurance Companies recorded net prior years’ reserve deficiencies of $0.9 million for specialty business due to a limited amount of adverse development for a line of business discontinued in 2005 and construction business offset by favorable development in specialty business written in the mid-west.
relatively small contribution to the overall IBNR loss reserve amount at December 31, 2007. 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 2000.
For the selected alternative expected loss ratios, our actuaries observed the range of ultimate loss ratios recorded for the underwriting years 2000 to 2006 for each major line of business at December 31, 2007. After evaluating the range of ultimate loss ratio variances for each underwriting year, our actuaries judgmentally selected a range of reasonably likely variations from the ultimate loss ratios recorded for each line of business for each underwriting year out of the range of reasonably possible variations for each underwriting year.
Such sensitivity analysis was performed in the aggregate for all products in each line of business. The use of aggregate data was considered more stable and reliable compared to a product-by-product analysis. We cannot assure you, however, that such use of aggregate data will provide a more accurate range of the actual variations in loss development. The sensitivity analysis uses loss ratios and loss development patterns for the 2000 to 2007 underwriting years, which are believed to be more representative compared to years prior to 2000 given the Company’s evolving mix of business, product changes and other factors. There can be no assurances, however, that the use of such recent history is more predictive of actual development as compared to employing longer periods of history. In addition, while the net loss reserves include the net loss reserves for asbestos exposures, such amounts were excluded from the sensitivity analysis given the nature of how such reserves are established by the Company. While we believe such net reserves are adequate, we cannot assure you that material loss development may not arise in the future from asbestos losses given the complex nature of such exposures.
A significant factor influencing the results of the sensitivity analysis has been the generally favorable loss trends experienced in the most recent three calendar years as evidenced by the recording of net prior year savings across each line of business. Future loss activity may in fact deviate substantially from recent experience by becoming less favorable or, in fact, unfavorable. In such event, future loss activity could lead to smaller than reasonably likely loss reserve savings or larger than reasonably likely loss reserve deficiencies as identified below.
Interest Expense. The 2007 and 2006 interest expense reflects interest on our senior notes issued in April 2006. There was no debt outstanding in 2005.
We have not provided for U.S. deferred income taxes on the undistributed earnings of approximately $45.5 million of our non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the foreign subsidiary. However, in the future, if such earnings were distributed to the Company, taxes of approximately $3.2 million would be payable on such undistributed earnings and would be reflected in the tax provision for the year in which these earnings are no longer intended to be permanently reinvested in the foreign subsidiary assuming all foreign tax credits are realized.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of SFAS 109, Accounting for Income Taxes. FIN 48, which became effective in 2007, established the threshold for recognizing the benefits of tax-return positions in the financial statements as more-likely-than-not to be sustained by the taxing authorities, and prescribes a measurement methodology for those positions meeting the recognition threshold. The Company’s adoption of FIN 48 at January 1, 2007 did not have a material effect on its financial condition or results of operations.
The Company’s subsidiaries are primarily engaged in the underwriting and management of property and casualty insurance.
The Company classifies its business into two underwriting segments consisting of the Insurance Companies and the Lloyd’s Operations, which are separately managed, and a Corporate segment. Segment data for each of the two underwriting segments include allocations of revenues and expenses of the Navigators Agencies’ and Parent Company’s expenses and related income tax amounts previously reported separately.
We evaluate the performance of each segment based on its underwriting and net income results. The Insurance Companies’ and the Lloyd’s Operations’ results are measured by taking into account net earned premium, net losses and loss adjustment expenses, commission expense, other operating expenses and commission income and other income (expense). The Corporate segment consists of the Parent Company’s investment income, interest expense and the related tax effect. Each segment also maintains its own investments, on which it earns income and realizes capital gains or losses. Our underwriting performance is evaluated separately from the performance of our investment portfolios.
Following are the financial results of the Company’s two underwriting segments.
The Insurance Companies consist of Navigators Insurance Company, including its U.K. Branch, and its wholly-owned subsidiary, Navigators Specialty Insurance Company. Navigators Insurance Company is our largest insurance subsidiary and has been active since 1983. It is primarily engaged in underwriting marine insurance and related lines of business, professional liability insurance and specialty lines of business including contractors’ general liability insurance, commercial and personal umbrella and excess casualty businesses. Navigators Specialty Insurance Company which began operations in 1990, underwrites specialty and professional liability insurance on an excess and surplus lines basis fully reinsured by Navigators Insurance Company. The Navigators Agencies produce business for the Insurance Companies.
Following are the results of operations for the Insurance Companies for each of the years in the three-year period ended December 31, 2007:
Includes other operating expenses and commission income and other income (expense).
Following are the underwriting results of the Insurance Companies for each of the years in the three-year period ended December 31, 2007:
The 2007 underwriting results were favorably impacted by approximately $33.8 million or 7.6 loss ratio points for net prior year savings across all of our lines of business due to favorable loss development trends.
The 2005 underwriting results were favorably impacted by approximately $2.6 million or 1.1 loss ratio points for net prior year savings of which $3.0 million was for professional liability business, $1.6 million for business assumed from our Lloyd’s Operations and $0.8 million for run-off business, partially offset by deficiencies of $1.9 million for marine business and $0.9 million for specialty business.
The pre-tax net loss to the Insurance Companies as the result of losses caused by Hurricanes Katrina and Rita of approximately $16.6 million, including $9.1 million of reinstatement costs, increased the Insurance Companies 2005 combined ratio by 6.9 ratio points.
A summary of our losses incurred and reserves for the 2005 Hurricanes Katrina and Rita is as follows:
The approximate annualized pre-tax yields on the Insurance Companies’ investment portfolio approximated 4.5%, 4.6% and 4.3% for 2007, 2006 and 2005, respectively. The increase in the 2007 investment income compared to 2006 was primarily due to the investment of new funds from cash flow. The increase in the 2006 investment income compared to 2005 was primarily due to the investment of new funds from cash flow, increase in the portfolio’s yield and the Company’s $100 million statutory surplus contribution from the net proceeds of our April debt offering, in an environment of gradually increasing interest rates. The portfolio’s duration was 4.8 years and 4.4 years at December 31, 2007 and 2006, respectively.
Following are the results of operations of the Lloyd’s Operations for each of the years in the three-year period ended December 31, 2007:
The Lloyd’s Operations have been experiencing business expansion coupled with improving underwriting results as a result of the generally favorable market conditions for marine and energy business from late 2001 through 2003, and continuing to a lesser extent in 2004. Premium rate increases occurred in 2005 and continued into 2006 following Hurricanes Katrina and Rita, particularly in the offshore energy business, while the rates in 2007 decreased 1.2% for marine and energy business and decreased 3.4% in our professional liability business.
For a discussion of our letter of credit facility, see “-Liquidity and Capital Resources” included herein.
The following table sets forth our known contractual obligations with respect to the items indicated at December 31, 2007:
The amounts determined are estimates which are subject to a high degree of variation and uncertainty, and are not subject to any specific payment schedule since the timing of these obligations are not set contractually. The amounts in the above table exclude reinsurance recoveries of $801 million. See “Business-Loss Reserves” included herein.
For a discussion of our investments, see ”Description of Business-Investments” included herein.
The approximate pre-tax yields of the investment portfolio, excluding net realized capital gains and losses, were 4.4% for both 2007 and 2006, and 3.8% for 2005.
At December 31, 2007, the weighted average rating of our fixed maturity investments was “AA” by Standard & Poor’s and “Aa” by Moody’s. We believe that we have limited exposure to credit risk since the fixed maturity investment portfolio, except for $0.3 million consists of investment-grade bonds. At December 31, 2007, our investment portfolio had an average maturity of 5.5 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 to ensure our ability to satisfy claims. Impairment losses of $0.7 million were recorded in 2007. No impairment losses were incurred in 2006 or 2005. As of December 31, 2007 and 2006, all fixed maturity securities and equity securities held by us were classified as available-for-sale.
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, 2007. We were in compliance with all covenants at December 31, 2007.
reinsurers. Such recoverable amounts are anticipated to be billed and collected over the next several years as gross losses are paid by the Company.
Generally, for pro rata or quota share reinsurers, including pool participants, the Company issues quarterly settlement statements for premiums less commissions and paid loss activity, which are expected to be settled by the end of the subsequent quarter. The Company has the ability to issue “cash calls” requiring such reinsurers to pay losses whenever paid loss activity for a claim ceded to a particular reinsurance treaty exceeds a predetermined amount (generally $1.0 million) as set forth in the pro-rata treaty. For the Insurance Companies, cash calls must generally be paid within 30 calendar days. There is generally no specific settlement period for the Lloyd’s Operations cash call provisions, but such billings are usually paid within 45 calendar days.
Generally, for excess of loss reinsurers the Company pays monthly or quarterly deposit premiums based on the estimated subject premiums over the contract period (usually one year) which are subsequently adjusted based on actual premiums determined after the expiration of the applicable reinsurance treaty. Paid losses subject to excess of loss recoveries are generally billed as they occur and are usually settled by reinsurers within 30 calendar days for the Insurance Companies and 30 business days for the Lloyd’s Operations.
At December 31, 2007, ceded asbestos paid and unpaid losses recoverable were $10.5 million of which $6.2 million was due from Equitas. The Company generally experiences significant collection delays for a large portion of reinsurance recoverable amounts for asbestos losses given that certain reinsurers are in run-off or otherwise no longer active in the reinsurance business. Such circumstances are considered in the Company’s ongoing assessment of such reinsurance recoverables.
The Company believes that it has adequately managed its cash flow requirements related to reinsurance recoveries from its positive cash flows and the use of available short-term funds when applicable. However, there can be no assurances that the Company will be able to continue to adequately manage such recoveries in the future or that collection disputes or reinsurer insolvencies will not arise that could materially increase the collection time lags or result in recoverable write-offs causing additional incurred losses and liquidity constraints to the Company. The payment of gross claims and related collections from reinsurers with respect to Hurricanes Katrina and Rita could significantly impact the Company’s liquidity needs. However, we expect to continue to pay the losses from the 2005 Hurricanes over a period of years from cash flow and, if needed, short-term investments and expect to collect our paid reinsurance recoverables generally under the terms described above.
The increases in stockholders’ equity in 2007 and 2006 were principally due to net income of $95.6 million in 2007 and $72.6 million in 2006. The Company completed its public offering of senior debt on April 17, 2006 and received net proceeds of $123.5 million of which $100 million was contributed to the capital and surplus of Navigators Insurance Company.
We are a specialty insurance company and periods of moderate economic recession or inflation tend not to have a significant direct effect on our underwriting operations. They do, however, impact our investment portfolio. A decrease in interest rates will tend to decrease our yield and have a positive effect on the fair value of our