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, 2000 derived from the Company's audited consolidated financial statements. See the Consolidated Financial Statements of the Company including notes thereto included herein.
2000 1999 1998 1997 1996 (In thousands, except book value and net income per share data) Operating Information: Net earned premium.................. $ 97,240 $ 89,442 $ 91,203 $ 85,002 $ 78,731 Net investment income............... 18,447 15,985 15,209 14,435 13,614 Total revenues...................... 120,084 105,624 115,120 108,217 102,788 Income (loss) before income taxes.............. 10,338 (5,392) 15,153 17,184 20,874 Net income (loss)................... 7,032 (3,652) 11,489 12,546 16,752
Net income (loss) per share: Basic............................ $ 0.84 $ (0.43) $ 1.37 $ 1.51 $ 2.04 Diluted.......................... $ 0.84 $ (0.43) $ 1.36 $ 1.50 $ 2.02 Average common shares: Basic............................ 8,414 8,419 8,414 8,296 8,197 Diluted ........................ 8,414 8,419 8,459 8,385 8,286 Balance Sheet Information (at end of period): Total investments & cash............ $ 251,185 $246,688 $257,232 $258,572 $240,720 Total assets........................ 614,975 631,324 592,086 501,207 457,095 Loss and LAE reserves............... 357,674 391,094 342,444 278,432 269,601 Notes payable....................... 22,000 24,000 23,500 20,942 17,942 Stockholders' equity................ 143,480 130,365 143,266 131,242 115,542 Book value per share................ $ 17.05 $ 15.51 $ 16.96 $ 15.68 $ 14.03
Revenues. Gross written premium decreased from $172.2 million in 1998 to $167.1 million in 1999 and increased to $188.4 million in 2000. 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:
Insurance Companies: Marine............................... 81,664 44 82,086 49 64,043 37 Program Insurance.................... 28,360 15 18,581 11 15,684 9 Aviation............................. 191 - 180 - 23,405 14 Onshore Energy....................... 82 - 812 - 11,418 7 Engineering and Construction......... 452 - (77) - 9,976 6 Other................................ 119 - 183 - 1,048 - -------- -- -------- -- -------- -- Gross Written Premium.............. 110,868 59 101,765 60 125,574 73 -- -- -- Ceded Written Premium.............. (59,075) (60,778) (76,288) -------- -------- -------- Net Written Premium................ 51,793 40,987 49,286 -------- -------- --------
Total Gross Written Premium..... 188,425 100% 167,112 100% 172,211 100% === === ===
Lloyd's Syndicate 1221 had capacity of(pound)66.3 million ($96.0 million) in 2000,(pound)67.0 million ($105.9 million) in 1999 and(pound)66.9 million ($111.1 million) in 1998. 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.
Onshore Energy. In 1999, the Robertson Consortium 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. Previously, the onshore energy business was written for Navigators Insurance.
The offer was made at 1.8 pence per(pound)1 of capacity which is the minimum price that the Company was obliged to offer, being the highest price paid for capacity during the prior 12 months. If the Company were to exceed the 90% control threshold, Lloyd's Major Syndicate Transactions Byelaw (No. 18 of 1997) allows for a Minority Buy-out to be effected. In such a transaction the remaining participants are required to give up their capacity in return for compensation which must be at least equal to the offer price preceding the buy-out. Syndicate 1221's capacity for 2001 will be approximately(pound)66.3 million of which the Company will directly control 67.4% and indirectly control 20.7%.
The Company provides letters of credit to Lloyd's to support its Syndicate 1221 capacity. If the amount of capacity controlled increases, the Company will be required to supply additional letters of credit or other collateral acceptable to Lloyd's, or reduce the capacity of Syndicate 1221.
Marine Premium. Marine gross written premium remained relatively unchanged from 1999 to 2000. Written premium increased 28.2% from 1998 to 1999 primarily due to Navigators Insurance increasing its participation in the marine pool. Navigators Insurance's participation in the marine pool was 75% in 2000 and 1999 and 60% in 1998.
Program Insurance Premium. The program insurance, currently written by Anfield, consists primarily of general liability insurance for contractors and a small amount of commercial multi-peril insurance for restaurants and taverns. The premium increased 52.6% from 1999 to 2000 and 18.5% from 1998 to 1999 due to the expansion of these programs.
Onshore Energy Premium. In 1996, Navigators Insurance began to underwrite onshore energy insurance which principally focused on the oil and gas, chemical and petrochemical, and power generation industries with coverages primarily for property damage. Beginning in 1999, the onshore energy business was written through the Company's facilities at Lloyd's.
Net Earned Premium. Net earned premium increased 8.7% from 1999 to 2000 primarily due to the increase in the written premium. The 1.9% decrease from 1998 to 1999 was primarily due to higher unearned premium in the Lloyd's Operations and a smaller reinsurance to close premium in 1999 which is recorded as fully earned premium.
Net Losses and Loss Adjustment Expenses Incurred. The ratio of net loss and loss adjustment expenses incurred to net earned premium was 64.8%, 78.2%, and 68.3% in 2000, 1999, and 1998, respectively. 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 increase in the 1999 loss ratio compared to 1998 was primarily due to unrecoverable reinsurance from New Cap Re and higher loss ratios on the Lloyd's premium, partially offset by the decrease in the reinsurance to close premium in 1999 of $15.5 million compared to $19.7 million in 1998. 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 loss reserves were not discounted.
Commission Expense. Commission expense as a percentage of net earned premium was 20.6%, 16.5% and 13.0% for 2000, 1999, and 1998, respectively. The same ratios without the reinsurance to close premium were 22.5%, 19.9% and 16.6% in 2000, 1999 and 1998, respectively. 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. The increase in the 1999 commission expense ratio compared to 1998 was also primarily due to increased commissions at Lloyd's.
Other Operating Expenses. The change in other operating expenses from 1999 to 2000 was minimal. Other operating expenses increased 2.5% from 1998 to 1999 primarily due to the acquisition of Anfield on April 2, 1999 and increased expenses in the Lloyd's Operations due to the Company's increased participation in its Lloyd's syndicate, partially offset by reduced expenses from the closing of the Somerset Asia Pacific Limited office in Australia from which the company incurred a foreign exchange loss of $346,000.
Interest Expense. The increase in interest expense from 1999 to 2000 was primarily due to higher interest rates charged on the loan balance.
Net Income (Loss). The Company had net income of $7.0 million in 2000 compared to a net (loss) of ($3.7) million in 1999 and net income of $11.5 million in 1998. The loss in 1999 was primarily due to unrecoverable reinsurance, price competition, higher loss ratios in the Lloyd's Operations and expenses related to the foreign expansion in London.
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 Company's fixed maturity investment portfolio primarily consists of investment grade bonds. The portfolio has an average maturity of approximately seven years. Management continually monitors the composition and cash flow of the investment portfolio in order to maintain the appropriate levels of liquidity. This ensures the Company's ability to satisfy claims.
On December 21, 1998, the Company entered into a new bank credit facility which replaced the prior facility. The new credit facility, as amended on September 20, 2000, provides a $26 million revolving line of credit at an interest rate of either, at the Company's election, the base commercial lending rate of one of the banks or at LIBOR plus 1.25% on the used portion of the line of credit. The commitment fee on the unused portion of the line of credit is 0.25%. The line of credit facility reduces each quarter by amounts between $1.0 million and $2.25 million beginning January 1, 2000 until it terminates on November 19, 2004. At December 31, 2000 and 1999, $22 million and $24 million in loans were outstanding, respectively, under the revolving line of credit facility at an interest rate of 7.6% and 7.1%, respectively. The credit facility also provides for a $55 million letter of credit facility which is utilized primarily by NCUL and Millennium to participate in Lloyd's Syndicate 1221 managed by MTC. The cost of the letters of credit is 1.3% for the used portion and 0.25% for the unused portion of the letter of credit facility. At December 31, 2000 and 1999, letters of credit with an aggregate face amount of $46.6 million and $42.2 million, respectively, were issued under the letter of credit facility. In 2000, $78,500 of these letters of credit were drawn upon.
Total stockholders' equity was $143.5 million at December 31, 2000, a 10.1% increase for the year as the result of the Company's net income in 2000 and the unrealized gain in the investment portfolio.
The Company is a specialty insurance company and periods of moderate economic recession or inflation tend not to have a significant direct affect on the Company's underwriting operations. They do, however, impact the Company's investment portfolio. A decrease in interest rates will tend to decrease the Company's yield and have a positive effect on the fair value of its invested assets. An increase in interest rates will tend to increase the Company's yield and have a negative effect on the fair value of its invested assets.
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, and other relevant market rate or price changes. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are traded. The following is a discussion of the Company's primary market risk exposures and how those exposures are currently managed as of December 31, 2000. The Company's market risk sensitive instruments are entered into for purposes other than trading.
For invested assets, modified duration modeling is used to calculate changes in fair values. Durations on invested assets are adjusted for call, put and interest rate reset features. Duration on tax exempt securities is adjusted for the fact that the yield on such securities is less sensitive to changes in interest rates compared to Treasury securities. Invested asset portfolio durations are calculated on a market value weighted basis, including accrued investment income, using holdings as of December 31, 2000.
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 2000, is not material.