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, 2005 derived from the Company's audited consolidated financial statements. See the Consolidated Financial Statements of the Company including notes thereto included herein.
We are an international insurance holding company focusing on specialty products for niches within the overall property/casualty insurance market. Our largest product line and most long-standing area of specialization is ocean marine insurance. We have also developed specialty niches in professional liability insurance, and in specialty liability insurance primarily consisting of contractors' liability coverages. We conduct operations through the Insurance Companies, the Navigators Agencies and our Lloyd's Operations. The Insurance Companies consist of Navigators Insurance Company, which includes a United Kingdom Branch, and NIC Insurance Company which writes excess and surplus lines. The Navigators Agencies consist of five wholly-owned insurance underwriting agencies which produce business for the Insurance Companies and unaffiliated insurers. Our Lloyd's Operations include NUAL, a Lloyd's marine underwriting agency which manages Lloyd's Syndicate 1221. We participate in the capacity of Syndicate 1221 through two wholly-owned Lloyd's corporate members.
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Our business is cyclical and influenced by many factors. These factors include price competition, the availability and cost of reinsurance, economic conditions, interest rates, weather-related events and other catastrophes including natural and man-made disasters (for example hurricanes and terrorism), state regulations, court decisions and changes in the law. The incidence and severity of catastrophes are inherently unpredictable. Although we will attempt to manage our exposure to such events, the frequency and severity of catastrophic events could exceed our estimates, which could have a material adverse effect on our financial condition. Additionally, because our insurance products must be priced, and premiums charged, before costs have fully developed, our liabilities are required to be estimated and recorded in recognition of future loss and settlement obligations. Due to the inherent uncertainty in estimating these liabilities, we cannot assure you that our actual liabilities will not exceed our recorded amounts.
The occurrence of additional large loss events could reduce the reinsurance coverage that is available to us and could further weaken the financial condition of our reinsurers, which could have a material adverse effect on our results of operations. Although the reinsurance agreements make the reinsurers liable to us to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our 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. Hurricanes Katrina and Rita increased our reinsurance recoverables significantly, which increased our credit risk.
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On September 24, 2005, Hurricane Rita struck Texas and Louisiana, causing significant destruction in those areas. Our estimate of after-tax net losses, inclusive of expected reinsurance recoveries and related reinsurance reinstatement premiums, is approximately $9.0 million or $0.65 per share for the 2005 year. Our estimate of net losses related to Hurricane Rita was developed from a combination of preliminary claims notifications received from brokers and insureds, portfolio modeling based upon the storm track of Hurricane Rita 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. Based upon management's current estimate of ultimate loss, we believe that the Company's gross claims are contained within our reinsurance program. Our actual losses from Hurricane Rita may ultimately differ materially from our estimated losses as a result of, among other things, the receipt of additional information from insureds or brokers, the attribution of losses to coverages that for the purpose of our estimates we assumed would not be exposed and inflation in repair costs due to the limited availability of labor and materials. If our actual losses from Hurricane Rita are materially greater than our estimated losses, our business, results of operations and financial condition could be materially adversely affected.
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The Company has completed its own internal review with respect to such contingent commission arrangements and the anti-competitive sales practices discussed above. In this internal inquiry, the Company did not find any evidence that it has engaged in the bid-rigging and price-fixing activities that are at the core of the industry investigations into these anti-competitive practices. The Company is supportive of industry efforts to encourage transparency in the disclosure of contingent commissions paid to brokers by insurers.
The reinsurance industry has also become the subject of increasing scrutiny with respect to the alleged improper use of reinsurance agreements to manipulate financial reporting results. The New York State Attorney General and other state and federal regulators have commenced investigations and other proceedings related to reinsurance agreements in which the insurance risk transferred between the ceding company and reinsurer may have been insufficient to properly account for such transactions as reinsurance in financial statements filed with insurance regulatory authorities and the SEC. Such transactions may include separate or "side" agreements that reduce, limit or mitigate the indemnification against loss or liability relating to the insurance risk transferred to the reinsurer in a reinsurance agreement.
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Reinsurance Recoverables. Reinsurance recoverables are established for the portion of the reserves for losses and LAE that are ceded to reinsurers. Reinsurance recoverables are determined based upon the terms and conditions of reinsurance contracts which could be subject to interpretations that differ from our own based on judicial theories of liability. In addition, we bear credit risk with respect to our reinsurers which can be significant considering that certain of the reserves remain outstanding for an extended period of time. We are required to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement. Additional information regarding our reinsurance recoverables can be found in the "Business-Reinsurance Ceded" section and Note 7 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 (90% direct in 2005, 89% in 2004 and 88% in 2003) 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 periods. 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.
A portion of the Company's premium is estimated for unreported premium, mostly for the marine business written by our U.K. Branch and Lloyd's Operations. We generally do not experience any significant backlog in processing premiums. Of the $779.6 million of gross written premium recorded in 2005, $89 million or 11% was estimated. The estimated premium was 15% of the gross written premium in both 2004 and 2003. Such premium estimates are generally based on submission data received from brokers and agents and recorded when the insurance policy or reinsurance contract is bound and written. The
estimates are regularly reviewed and updated taking into account the premium received to date versus the estimate and the age of the estimate. To the extent that the actual premium varies from the estimates, the difference, along with the related loss reserves and underwriting expenses, is recorded in current operations.
Deferred Tax Assets. We apply the asset and liability method of accounting for income taxes whereby deferred assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. Additional information regarding our deferred tax assets can be found in Notes 1 and 5 to our consolidated audited financial statements, both included herein.
Translation of Foreign Currencies. Financial statements of subsidiaries expressed in foreign currencies are translated into U.S. dollars in accordance with SFAS No. 52 Foreign Currency Translation issued by the FASB. Under SFAS 52, functional currency assets and liabilities are translated into U.S. dollars using period end rates of exchange and the related translation adjustments are recorded as a separate component of accumulated other comprehensive income. Functional currencies are generally the currencies of the local operating environment. Statement of income amounts expressed in functional currencies are translated using average exchange rates. Gains and losses resulting from foreign currency transactions are recorded in other income (expense) in the Company's Consolidated Statements of Income.
The following is a discussion and analysis of our consolidated and segment results of operations for the years ended December 31, 2005, 2004 and 2003. All earnings per share data is presented on a per diluted share basis.
Net income for 2005, 2004 and 2003 was $23.6 million or $1.73 per share, $34.9 million or $2.74 per share and $7.7 million or $0.80 per share, respectively. The 2005 year was adversely impacted by Hurricanes Katrina and Rita and the 2003 year was adversely impacted by reserve strengthening from prior years. When excluding the storm losses in 2005 and prior year reserve strengthening for asbestos in 2003, underwriting profitability during such periods, as measured by the Company's combined ratios, has also improved for the 2005, 2004 and 2003 business written. This improvement in underwriting profitability reflects increasing premium rates as a result of favorable market conditions beginning in late 2000 and continuing to a lesser extent through 2004, and then leveling off in 2005 except for marine offshore energy rates which increased in the 2005 fourth quarter as a result of Hurricanes Katrina and Rita. We experienced premium growth as measured by net earned premium in 2005, 2004 and 2003 of 8.9%, 12.0% and 25.0%, respectively, due to the combination of increased premium rates and business expansion.
The 2004 underwriting results benefited from the improved market conditions as reflected in increased premium rates coupled with the recording of a net redundancy of prior year loss reserve of $3.8 million which reduced the 2004 combined ratio of 90.1% by 1.2 loss ratio points.
Navigators Insurance Company increased its gross and net asbestos reserves for losses by $77.6 million and $31.6 million, respectively, in the fourth quarter of 2003. As a result, gross and net incurred losses increased by the amount of the respective reserve increase. The reserve action was the result of a review of asbestos-related exposures conducted by the Company and an independent consulting firm. Following such review, the Company increased its gross and net loss reserves for asbestos exposure to $78.5 million and $32.1 million, respectively, at December 31, 2003.
Revenues. Gross written premium increased to $779.6 million or 12.0% in 2005 from $696.1 million in 2004, and by 14.8% from $606.5 million in 2003. The growth in gross premiums over the three year period reflects a combination of business expansion in both new and existing lines of business coupled with premium rate changes on renewal policies. The premium rate increases or decreases as noted below for marine, specialty and professional liability are calculated primarily by comparing premium amounts on policies that have renewed. The premiums are judgmentally adjusted for exposure factors when deemed significant and sometimes represent an aggregation of several lines of business. The rate change calculations provide an indicated pricing trend and are not meant to be a precise analysis of the numerous factors that affect premium rates or the adequacy of such rates to cover all underwriting costs and generate an underwriting profit. The calculation can also be affected quarter by quarter depending on the particular policies and the number of policies that renew during that period. Due to market conditions, these rate changes may or may not apply to new business which may be more competitively priced
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compared to renewal business. The following table sets forth our gross and net written premium and net earned premium by segment and line of business for the periods indicated:
Professional Liability Premium. Our insurance company subsidiaries write professional liability insurance, of which 54% represents directors and officers liability insurance ("D&O") for privately held and publicly traded corporations, 36% represents professional liability coverage in lawyers and other professionals and 10% represents professional liability coverage for architects and engineers. In 2002, the professional liability business was expanded to include errors and omissions insurance and employment practices liability coverages. Commencing in October 2004, our U.K. Branch began writing professional liability coverages for U.K. solicitors and, in 2005, we began writing professional liability coverages for architects and engineers. The professional liability premium increased 22.4% to $86.9 million in 2005 from $71.0 million and 34.0% in 2004 compared to $53.0 million in 2003 reflecting growth and the expansion of this business for all lines. Renewal premium rates for this business were relatively level in 2005 after decreasing approximately 3.2% in 2004 compared to increases of approximately 28% in 2003. D&O rates decreased approximately 2.3% in 2005 and 9.5% in 2004. These premium rate decreases were reflective of softening market conditions which may continue into 2006.
Assumed from Lloyd's Operations. Gross written premium assumed from our Lloyd's Syndicate 1221 through quota share treaties consisted of marine and energy business of $(1.5) million in 2005, $26.0 million in 2004 and $33.0 million in 2003. In 2005, the negative premium represents the reversal of prior year premium accruals. The 2004 gross written premium includes $22.2 million of gross and net written and earned premium, representing Navigators Insurance Company's share of reinsurance to close premiums recorded by our Lloyd's Syndicate 1221 as a result of the transfer of assets and liabilities from the participants of the 2002 underwriting year to the 2003 underwriting year of Syndicate 1221. The RITC had no effect on the 2005 gross written premium.
The 2005 decrease of 10.2% in gross written premium resulted from the RITC transaction recorded in 2004. Excluding the RITC recorded in 2004, the 2005 marine gross written premium increased 7.5%. Substantially all of the 21.5% increase in 2004 gross written premium represents premiums recorded as RITC premium representing the transfer of assets and liabilities from the participants of the 2002 underwriting year to the 2003 underwriting year in which Navigators had increased its participation to 97.4% from 68.1%. The RITC transaction is recorded as additional written and earned premium, losses incurred, loss reserves and receivables all in the same amount, net or gross of applicable ceded reinsurance amounts. There are no gains or losses recorded on the transaction. The RITC amounts were $7,000 in 2005, $38.1 million in 2004 and $0.5 million in 2003.
The generally improved pricing environment since 2002 resulted in the Syndicate 1221 increasing its stamp capacity in 2004 and 2003 to take advantage of favorable market conditions as reflected in higher average renewal premium rates averaging 0.6% in 2004 and 15% in 2003. The stamp capacity for 2005 was reduced to £135 million ($246 million), reflective of unused stamp capacity in 2004 coupled with anticipated declining market conditions in 2005. The 2006 stamp capacity has been reduced to £112.5 million ($193 million) which could be increased by the Company during the 2006 calendar year based on opportunities in the market place subject to approval by Lloyd's.
The average renewal premium rate increased approximately 2.8% in 2005. The 2005 fourth quarter had average renewal premium increases of approximately 12.2% primarily due to increases in the offshore energy business resulting from losses caused by Hurricanes Katrina and Rita.
Professional Liability Premium. Syndicate 1221 commenced writing international D&O business during the 2005 second quarter and produced $6.6 million of international D&O gross written premium in 2005.
Excluding the effects of ceded reinstatement premiums on both 2005 and 2004, the ratios of ceded written premium to gross written premium were 49.3% and 54.8%, respectively. The percentage decrease in 2005 is principally due to three factors: the March 31, 2005 cancellation of a quota share reinsurance agreement for the specialty business, Navigators Insurance Company's increased participation in the marine pool to 85% in 2005 compared to 80% in 2004 and 2003; and a gross and ceded reduced RITC transaction amount in 2005 compared to 2004.
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The decrease in ceded premium to 31.0% in 2005 compared to 46.7% in 2004 for our Navigators Specialty operations resulted from cancellation of the specialty quota share agreement as of March 31, 2005 while the increase to 46.7% for 2004 specialty business ceded premium, compared to 34.5% in 2003, is principally due to the purchase of the quota share treaty in 2004 coupled with rate increases for an excess of loss reinsurance treaty. The cancellation of the quota share agreement on the specialty business resulted in a reduction of approximately $14.5 million in ceded written and unearned premium and an increase in net written premium in the 2005 first quarter. This amount was retained by the Company and is being earned over a 12 to 15 month period. The 2004 net written premium is net of approximately $24.9 million of ceded written premium related to this quota share agreement.
Net Investment Income. Net investment income increased 38.3%, 37.1% and 8.3% in 2005, 2004 and 2003, respectively, due to the increase in invested assets resulting from positive cash flow from operations and net proceeds from common stock offerings of $123.8 million and $110.8 million received in October 2005 and October 2003, respectively. See the "Business-Investments" section included herein for additional information regarding our net investment income.
Net Losses and Loss Adjustment Expenses Incurred. The ratios of net loss and loss adjustment expenses incurred to net earned premium (loss ratios) were 69.6%, 60.5% and 76.0% in 2005, 2004 and 2003, respectively. The 2005 loss ratio of 69.6% includes 9.2 loss ratio points related to Hurricanes Katrina and Rita. The 2005 loss ratio was favorably impacted by 1.1 loss ratio points resulting from the $3.8 million net redundancy of prior year loss reserves. The 2004 loss ratio increased by 1.6 loss ratio points as a result of $2.9 million of net losses and $2.2 million of net reinstatement premiums from Hurricane Ivan. The 2004 loss ratio was favorably impacted by 1.2 loss ratio points resulting from the $3.8 million net redundancy of prior year loss reserves. The loss ratio in 2003 was adversely impacted by the asbestos losses recorded in the fourth quarter of 2003 which accounted for 11.4 loss ratio points of the 2003 loss ratio and, to a lesser extent, the adverse development in the California contractors' liability portion of the specialty business which accounted for 10 loss ratio points and by 1.4 loss ratio points for loss activity related to run-off lines of business. The improvements in the premium rates since 2001 have benefited the loss ratios each year. We do not discount any of our loss reserves.
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IBNR loss reserves are calculated by the Company's actuaries using several standard actuarial methodologies, including the paid and incurred loss development and the paid and incurred Bornheutter-Ferguson loss methods. Additional analyses, such as frequency/severity analyses, are performed for certain books of business.
While an annual loss reserve study is conducted for each line of business, the timing of such studies varies throughout the year. Additionally, a review of the emergence of actual losses relative to expectations for each line of business is conducted each quarter. A separate analysis is also performed annually and updated quarterly of our asbestos and environmental liability exposures. Any adjustments that result from this review are recorded in the quarter in which they are identified.
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As underwriting years age, for each subsequent quarter and following years, our actuaries, with management, continue to update and refine their estimates of selected ultimate loss ratios for each line of business, by underwriting year, using the actuarial methods referred to above and incorporating relevant factors that generally include actual loss development, recent claims activity, number and dollar amount of open claims, risk characteristics of the particular line of business, the potential effects of changes in underwriting and claims procedures, historic performance relative to expectations and the relationship of the IBNR reserve levels across underwriting years and between similar lines of business. The output of this process results in refinements to the ultimate loss ratios. Such refinements to the ultimate loss ratios for the prior underwriting years generate prior year redundancies or deficiencies recorded in the year such refinements are made, as discussed below.
Prior year reserve deficiencies (redundancies) of ($3.8) million, ($3.8) million and $58.6 million were recorded in 2005, 2004 and 2003, 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.
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The Company recorded a net prior year reserve deficiency of $900,000 for specialty business due to a limited amount of adverse development for a line of business discontinued in 2005 and California construction business offset by favorable development in specialty business written in the mid-west.
The Lloyd's Operations recorded $1.2 million of prior year savings mostly due to the favorable settlement of one large marine claim.
During 2004 the Insurance Companies increased loss reserves for marine business for underwriting years 2002 and 2001 principally to recognize the increase in marine liability business written for those years which have a longer loss development pattern compared to the mix of marine business written in previous years. Commencing in 2004, loss reserves for marine business were evaluated by product line. Prior to 2004, such loss reserves were established in the aggregate for all marine products. This refinement was the principal factor for the $4.8 million prior year deficiency recorded in 2004 for marine business.
mitigate loss development as underwriting years for marine business age and mature and losses become fully developed. The combined effects of such items were the principal factors for the $4 million of prior year loss reserve deficiencies recorded in 2003 for marine business.
We do not calculate a range of loss reserve estimates. We believe that ranges may not be a true reflection of the potential volatility between carried loss reserves and the ultimate settlement amount of losses incurred prior to the balance sheet date. The numerous factors that contribute to the inherent uncertainty in the process of establishing loss reserves include: interpreting loss development activity, emerging economic and social trends, inflation, changes in the regulatory and judicial environment and changes in our operations, including changes in underwriting standards and claims handling procedures.
The Company records as gross reserves the amount of losses to which it reasonably expects to have exposure and as net reserves that amount less what it reasonably expects to recover in reinsurance. We review the loss reserves for each line of business we write as part of our overall analysis of loss reserves, taking into consideration the variety of trends that impact the ultimate settlement of claims in each particular line of business. The following sensitivity analysis with respect to possible
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Specialty reserves are established using the Company's own experience and an industry based tail factor. Estimates of ultimate liability could be redundant or deficient if the Company's own experience is not sufficiently predictive or if the industry tail factor is not representative of our future loss development. A key assumption is the choice of tail factor for the construction liability book of business. This is dominated by construction defect exposure, which has undergone significant recent changes in the underwriting, claims handling, legislation and liability environment. If the construction tail (after 10 years) is double our current expectations, then the gross and net losses would increase by approximately $24.8 million and $21.0 million, respectively, compared to construction liability reserves established at December 31, 2005.
Commission Expense. Commission expense paid to brokers and agents is generally based on a percentage of the gross written premium and is reduced by ceding commissions the Company may receive on the ceded written premium. Commissions are generally deferred and recorded as deferred policy acquisition costs to the extent that they relate to unearned premium. Commission expense as a percentage of net earned premium was 12.6% in 2005, 12.6% in 2004 and 14.5% in 2003.
Other Operating Expenses. The 14.7% and 26.8% increases in other operating expenses when comparing 2005 to 2004 and comparing 2004 to 2003, respectively, are attributable primarily to employee related expenses resulting from expansion of the business coupled with the 2005 and 2004 costs incurred to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Included in 2005, 2004 and 2003 were $1,152,000, $992,000 and $761,000, respectively, recorded for employee stock option expense. The Company adopted the fair value method of accounting for stock-based employee compensation as of January 1, 2003.
We have not provided for U.S. deferred income taxes on the undistributed earnings of approximately $7.6 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 $0.5 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.
Included in 2003 were tax benefits related to the reversal of a tax valuation allowance related to the Company's foreign operations of $5,284,000. Additional information regarding our tax valuation allowance can be found in Note 5 to our consolidated audited financial statements, included herein.
The Company had net state and local operating loss carryforwards amounting to potential future tax benefits of $5,009,000 and $4,493,000 at December 31, 2005 and 2004, respectively. A valuation allowance was established for the full amount of these potential future tax benefits due to the uncertainty associated with their realization. The Company's state and local tax carryforwards at December 31, 2005 expire from 2020 to 2025.
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Our two insurance companies are Navigators Insurance Company, which includes a United Kingdom branch, and NIC Insurance Company. Navigators Insurance Company is our largest insurance subsidiary and has been active since 1983. It specializes principally in underwriting marine insurance and related lines of business, specialty liability insurance and professional liability insurance. NIC Insurance Company, a wholly owned subsidiary of Navigators Insurance Company, began operations in 1990. It underwrites similar types of business but on a non-admitted or surplus lines basis and is fully reinsured by Navigators Insurance Company. The Navigators Agencies produce business for our insurance company subsidiaries.
Following are the results of operations for the Insurance Companies for each of the years in the three-year period ended December 31, 2005:
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The Lloyd's Operations consist of NUAL, a Lloyd's of London underwriting agency which manages Lloyd's Syndicate 1221, Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. Both Millennium Underwriting Ltd. and Navigators Corporate Underwriters Ltd. are Lloyd's corporate members with limited liability and provide capacity to Lloyd's Syndicate 1221. NUAL owns Navigators Underwriting Limited, an underwriting managing agency with its principal office in Manchester, England, which underwrites cargo and engineering business for Lloyd's Syndicate 1221. The Lloyd's Operations and Navigators Management (UK) Limited, a Navigators Agency which produces business for the UK Branch of Navigators Insurance Company, are subsidiaries of Navigators Holdings (UK) Limited located in the United Kingdom.
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. The average renewal premium rate increased approximately 2.8% in 2005. The 2005 fourth quarter had average renewal premium increases of approximately 12.2% primarily due to increases in the offshore energy business premium resulting from losses caused by Hurricanes Katrina and Rita.
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The table below illustrates the Company's participation for each year of account in the Lloyd's Syndicate 1221:
The pre-tax yields on funds at Lloyd's approximated 2.4%, 1.7% and 2.0% for 2005, 2004 and 2003, respectively. Generally, funds invested at Lloyd's have been invested with a relatively short average duration, which is reflected in the yield, in order to meet liquidity needs. The increase in the Lloyd's Operations' 2005 yield compared to 2004 is reflective of the gradual increase in
In 2005 and 2004, the Lloyd's Operations was taxed at a 35% rate as previously discussed under "Results of Operations and Overview-Income Taxes". The provision for income tax expense for 2003 reflects the reversal of a previously established deferred tax asset valuation allowance. The valuation allowance was reversed up until the third quarter of 2003 only to the extent of taxable profits. The remaining valuation allowance was completely reversed in the 2003 fourth quarter since it was determined that it was more likely than not that the remaining deferred tax asset resulting from net operating loss carryforwards would be realized.
Each of the Navigators Agencies underwrites marine and related lines of business for Navigators Insurance Company and three other unaffiliated insurance companies comprising a marine insurance pool. Marine insurance policies are issued by Navigators Insurance Company with the business shared with other pool members. Navigators Insurance Company had an 85% participation in the pool for the 2005 underwriting year and an 80% participation for the 2004 and 2003 underwriting years. Commencing with the 2006 underwriting year, the marine pool was eliminated and, therefore, all of the marine business generated by the Navigators Agencies will be exclusively for Navigators Insurance Company. See "Business-Marine Insurance", for further discussion.
Navigators Specialty, a division of a Navigators Agency, produces business exclusively for the Insurance Companies. It specializes in underwriting general liability insurance coverage for small general and artisan contractors and other targeted commercial risks, with the majority of its business located in California. Navigators Specialty also writes commercial multiple peril, excess casualty, commercial automobile and personal umbrella insurance. In December 2004, a group of experienced underwriters was hired to expand our excess casualty business, particularly the commercial excess and umbrella liability business.
Navigators Pro, a division of a Navigators Agency, specializes in underwriting professional liability insurance and began producing directors and officers liability insurance exclusively for the Insurance Companies in the fourth quarter of 2001. In late 2002, Navigators Pro introduced additional products to complement its directors and officers liability coverage. The products include employment practices liability, lawyers professional liability and miscellaneous professional liability coverages. In 2004, Navigators Pro began writing professional liability coverage for U.K. solicitors in our U.K. Branch. In 2005, it commenced writing professional liability coverages for architects and engineers.
Commission income generally consists of intersegment management fees and profit commissions received from insurance premiums of the Insurance Companies for marine, specialty and professional liability business as well as business from unaffiliated insurance companies in the marine pool. Commission income increased in 2005 compared to 2004 and in 2004 compared to 2003 due to the increased premium revenues coupled with the recording of profit commission income. The 2003 commission income of the Navigators Agencies was reduced by $5.7 million of intersegment profit commission as a result of the $32.5 million of incurred losses recorded by the Insurance Companies for asbestos losses.
Other income generally represents fee revenues earned for services on behalf of third parties.
For a discussion of our letter of credit facility, see "-Liquidity and Capital Resources" included herein.
(1)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 $979 million. See "Business-Loss Reserves" included herein.
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 15 business days for the Insurance Companies and 30 business days for the Lloyd's Operations.