We conduct operations through our Insurance Companies and our Lloyd’s Operations segments. The Insurance Companies segment consists of Navigators Insurance Company, which includes a United Kingdom Branch (the “U.K. Branch”), and Navigators Specialty Insurance Company, which underwrites specialty and professional liability insurance on an excess and surplus lines basis. All of the insurance business written by Navigators Specialty Insurance Company is fully reinsured by Navigators Insurance Company pursuant to a 100% quota share reinsurance agreement. Our Lloyd’s Operations segment includes Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s of London (“Lloyd’s”) underwriting agency which manages Lloyd’s Syndicate 1221 (“Syndicate 1221”). Our Lloyd’s Operations primarily underwrite marine and related lines of business along with offshore energy, professional liability insurance and construction coverages for onshore energy business at Lloyd’s through Syndicate 1221. We controlled 100% of Syndicate 1221’s stamp capacity for the 2011, 2010 and 2009 underwriting years through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd. which is referred to as a corporate name in the Lloyd’s market. We have also established underwriting agencies in Antwerp, Belgium, Stockholm, Sweden, and Copenhagen, Denmark, which underwrite risks pursuant to binding authorities with NUAL into Syndicate 1221.
Bornheutter-Ferguson method: The Bornheutter-Ferguson method calculates the IBNR loss reserves as the product of the earned premium, an expected ultimate loss ratio, and a loss development factor that represents the expected percentage of the ultimate losses that have been incurred but not yet reported. The loss development factor equals one hundred percent less the expected percentage of losses that have thus far been reported, which is generally calculated as an average of the percentage of losses reported for comparable reporting periods of prior underwriting years. The expected ultimate loss ratio is generally determined in the same manner as in the loss ratio method.
Loss development method: The loss development method, also known as the chainladder or the link-ratio method, develops the IBNR loss reserves by multiplying the paid or reported losses by a loss development factor to estimate the ultimate losses, then subtracting the reported losses, consisting of paid losses and case loss reserves, to determine the IBNR loss reserves. The loss development factor is the reciprocal of the expected percentage of losses that have thus far been reported, which is generally calculated as an average of the percentage of losses reported for comparable reporting periods of prior underwriting years.
Property Casualty: The reserves for property and casualty are established separately by product with the major product being contractors’ liability insurance. Other products include offshore energy, commercial middle markets, primary casualty, excess casualty and specialty reinsurance. Our actuaries generally utilize two key assumptions in this line of business: first, that our historical loss development patterns are reasonable predictors of future loss patterns and second, that our claims personnel’s assessment of our claims exposures and our underwriters’ assessment of our expected losses are reliable indicators of our loss exposure. However, this line of business includes a number of newer products where there is insufficient Company historical experience to project loss reserves and/or loss development is sparse or erratic, which makes extrapolation techniques for those products extremely difficult to apply, and in those circumstances we typically rely more on industry data and our underwriters’ input in setting assumptions for our IBNR loss reserves as opposed to historical loss development patterns. In addition, as discussed in more detail below with respect to construction defect reserves, our actuaries may take other market trends or events into account in setting IBNR loss reserves.
We have extensive history in the contractors’ liability business upon which to perform actuarial analyses and we use the key assumption noted above relating to our own historical experience as a reliable indicator of the future for this product. However, there is inherent uncertainty in the loss reserve estimation process for this line of business given both the long-tail nature of the liability claims and the continuing underwriting and coverage changes, claims handling and reserve changes, and legislative changes that have occurred over a several year period. Such factors are judgmentally taken into account in this line of business in specific periods. The underwriting and coverage changes include the migration to a non-admitted business from admitted business in 2003, which allowed us to exclude certain exposures previously permitted (for example, exposure to construction work performed prior to the policy inception), withdrawals from certain contractor classes previously underwritten and expansion into new states beginning in 2005. Claims changes include bringing the claim handling in-house in 1999 and changes in case reserving practices in 2003, 2006 and 2011.
Offshore energy provides physical damage coverage to offshore oil platforms along with offshore operations related to oil exploration and production. The significant offshore energy claims are generally caused by fire or storms, and thus tend to be large, infrequent, quickly reported, but occasionally not quickly settled because the damage is often extensive but not always immediately known.
Our commercial middle markets or Nav Pac business consists of general liability, auto liability and property exposures for a variety of commercial middle market businesses, principally hospitality, manufacturing and garages. Commencing in 2007, our actuaries are segmenting and analyzing the components of the loss development for this business among the property, liability and auto exposures which had been previously combined. As mentioned in Part I, on January 14, 2011, we announced that we entered into a transaction for the sale of the renewal rights for our middle market commercial package and commercial automobile businesses underwritten through our Nav Pac division. This transaction did not include our Life sciences and exporters package liability products.
Primary casualty insurance provides primary general liability coverage principally to corporations in the construction and manufacturing sector. Excess casualty insurance is purchased by corporations which seek higher limits of liability than are provided in their primary casualty policies. Our specialty reinsurance provides proportional and excess-of-loss treaty reinsurance covering medical health care exposures, property treaty exposures in Central and South America and the Caribbean and agriculture exposures in the U.S. and Canada. Neither of the product lines has a significant amount of loss activity reported to date. Because we have limited historical experience in these products, the IBNR loss reserves for these products are primarily established using the loss ratio method primarily based on our underwriters’ input and industry loss experience.
The losses for D&O business are generally very large and infrequent, and often involve securities class actions. D&O claims report reasonably quickly, but may take several years to settle. Our loss estimates are based on expected losses, an assessment of the characteristics of reported losses at the claim level, evaluation of loss trends, industry data, and the legal, regulatory and current risk environment. Significant judgment is involved because anticipated loss experience in this area is less predictable due to the small number of claims and/or erratic claim severity patterns. As time passes for a given underwriting year, we place additional weight on assumptions relating to our actual experience and claims outstanding. The expected ultimate losses may be adjusted up or down as the underwriting years mature. The E&O IBNR loss reserve process is similar to the process for D&O, with the exception of a particular book of business of the U.K. Branch written from 2004 through 2006. For the U.K Branch E&O business, we assume the claims, while similar in nature to the claims in the U.S. E&O business, are larger, more frequent and have a longer loss development pattern. The IBNR loss reserves for the U.K. Branch E&O business are determined judgmentally after reviewing recent loss activity relative to the remaining in-force policy count and the loss activity for similar insureds.
Lloyd’s Operations: Reserves for the Company’s Lloyd’s Operations are reviewed separately for the marine and professional liability lines by product. The major marine products are marine liability, offshore energy, cargo, specie and marine reinsurance, and the major products for professional liability are international D&O and international E&O.
The marine liability, offshore energy and cargo products and related loss exposures are similar in nature to that described for marine business above. Specie insurance provides property coverage for chattel, such as jewelry, fine art and cash in transit. Claims tend to be from theft or damage, quick to report and, in most cases, quick to settle. Marine reinsurance is a diversified global book of reinsurance, the majority of which consists of excess-of-loss reinsurance policies for which claims activity tends to be large and infrequent with loss development somewhat longer than for such products written on a direct basis. Marine reinsurance reinsures liability, cargo, hull and offshore energy exposures that are similar in nature to the marine business described above.
For the selected alternative expected loss ratios, our actuaries observed the range of ultimate loss ratios recorded for the underwriting years 2003 to 2011 for each major line of business as of December 31, 2011.
The reasonably likely ranges of potential deviation in the loss ratios for each line of business for the 2003 to 2011 underwriting years expressed in loss ratio points are as follows:
The total Company range amounts below were determined by combining the simulated results for each line of business into one analysis which estimates a company-wide range reflecting the fact that the individual lines of business are not perfectly correlated. This calculation reflects the reduced volatility benefit from a diversified portfolio of loss exposures. Such amounts may not be representative of the actual aggregate favorable or unfavorable loss development amounts that may occur over time.
(1)-Calculated using average diluted shares of 15,183,285 for the year ended December 31, 2011.
Reinsurance recoverables are established for the portion of the loss reserves 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 Recoverables” section and Note 6, Reinsurance, to our consolidated financial statements, both included herein.
Substantially all of our business is placed through agents and brokers. Since the majority of our gross written premiums are primary or direct, as opposed to assumed, the delays in reporting assumed premiums generally do not have a significant effect on our financial statements, as 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.
The following is a discussion and analysis of our consolidated and segment results of operations for the years ended December 31, 2011, 2010 and 2009. In presenting our financial results, we discuss our performance with reference to operating earnings, book value per share, underwriting profit or loss, and the combined ratio, all of which are non-GAAP financial measures of performance and/or underwriting profitability. Operating earnings is calculated as net income less after-tax net realized gains (losses) and net other-than-temporary impairment losses recognized in earnings. Book value per share is calculated by dividing shareholders’ equity by the number of outstanding shares at any period end. Underwriting profit or loss is calculated from net earned premiums, less the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses and other income (expense) by net earned premiums. A combined ratio of less than 100% indicates an underwriting profit and over 100% indicates an underwriting loss. We consider such measures, which may be defined differently by other companies, to be important in the understanding of our overall results of operations by highlighting the underlying profitability of our insurance business.
Net income for the year ended December 31, 2011 was $25.6 million or $1.69 per diluted share compared to net income of $69.6 million or $4.24 per diluted share for the year ended December 31, 2010. Operating earnings for the year ended December 31, 2011 were $19.1 million or $1.26 per diluted share compared to $43.4 million or $2.65 per diluted for the comparable period in 2010. In comparison to net income, operating earnings excludes after-tax net realized gains of $7.8 million and $26.9 million and after-tax other-than-temporary impairment losses of $1.3 million and $0.7 million for the years ended December 31, 2011 and 2010, respectively. The decrease in our operating earnings was largely attributable to unfavorable underwriting results related to large loss activity from our energy business and significant current year loss emergence from our Professional Liability division, and to a lesser extent a decrease in net investment income.
Our book value per share as of December 31, 2011 was $57.57, increasing 9% from $52.68 as of December 31, 2010. The increase in book value per share primarily resulted from an improvement in the value of our consolidated investment portfolio as well as the repurchase of 1,979,107 shares of our common stock at an aggregate purchase price of $90.9 million and an average share price of $45.91 during 2011, which represented 3% of the increase. Primarily because of the share repurchases, our consolidated stockholders’ equity decreased 3% to $803.4 million as of December 31, 2011 compared to $829.4 million as of December 31, 2010.
Cash flow from operations was $118.3 million, $118.2 million and $103.9 million for the years ended December 31, 2011, 2010 and 2009, respectively. The increase in cash flow from operations was due to improved collections on reinsurance recoverables as well as premium receivables.
The combined ratio for the year ended December 31, 2011 was 104.7% compared to 100.7% for the comparable period in 2010. Our pre-tax underwriting loss increased by $27.7 million to $32.6 million for the year ended December 31, 2011 compared to a $4.9 million loss for the same period in 2010. The increase in pre-tax underwriting loss includes the following adverse activity:
Current accident year loss emergence of approximately $11.0 million related to our Professional Liability business, of which approximately $8.0 million was specific to our D&O liability insurance for both publicly and privately held corporations. The remaining $3.0 million of emergence was specific to our small lawyers and miscellaneous professional liability coverages.
An increase in our reinsurance reinstatement premium accrual of $5.2 million. This accrual was driven by the recognition of the effect of a shift in our Marine reinsurance protections to an excess of loss program from a quota share program. As a result of this shift and the increased frequency of severity losses in recent periods, a greater portion of our IBNR was attributable to marine and energy losses that are or will be ceded to our Marine Excess-of-Loss Reinsurance program and such cession will trigger additional reinstatement premiums.
The combined ratio for the year ended December 31, 2010 was 100.7% compared to 97.2% for the comparable period in 2009. Our pre-tax underwriting profit declined by $24.4 million to a $4.9 million underwriting loss for the year ended December 31, 2010 compared to $19.5 million of underwriting profit for the same period in 2009. The decrease in pre-tax underwriting profit was primarily attributable to large loss activity, namely Deepwater Horizon and West Atlas, as well as reduced rates across all lines due to the soft market conditions, partially offset by net prior period redundancies.
Gross written premiums increased $121.0 million, or 12.3%, to $1.11 billion for the year ended December 31, 2011 compared to $987.2 million for the same period in 2010. The increase in gross written premiums were primarily attributed growth in our Property Casualty business, which includes $101.5 million related to our newly established Nav Re division which writes Accident & Health, Agriculture and Latin American reinsurance lines of business. The increase within Property Casualty is also attributable to growth of $34.2 million and $22.1 million Excess and Primary Casualty business, respectively, resulting from strong production, partially offset by the run-off of our middle market commercial package business. The increase in gross written premiums was offset by a $22.2 million decrease in our Professional Liability business attributable to our Directors and Officer Liability lines. This decrease reflects a change in our underwriting strategy that focuses on a planned shift toward underwriting excess layers.
Gross written premiums decreased 5.5% to $987.2 million for the year ended December 31, 2010 compared to $1.04 billion for the same period in 2009. The decreases in gross written premiums were primarily attributable to our Marine and Property Casualty businesses. The decline in Marine gross written premiums is attributed to significant competition in this line of business coupled with excess capacity. Property Casualty gross written premiums declined primarily due to weak economic conditions that had reduced demand for construction liability insurance.
Our Marine division saw increases in the average renewal premium rates in our U.S. Marine, U.K. Branch Marine and Lloyd’s lines of approximately 0.1%, and 2.4%, respectively, for the year ended December 31, 2010 compared to the same period in 2009. For our Property Casualty division, we experienced an average renewal premium rate increase in our NavTech line of approximately 3.6% for the year ended December 31, 2010 compared to the same period in 2009, which was offset by declines in our Primary and Excess Casualty lines of 0.5% and 3.1%, respectively. The Insurance Companies and Lloyd’s Professional Liability division overall experienced approximately 3.0% decrease in average renewal premium rates for the year ended December 31, 2010 compared to 2009.
The average premium rate increases or decreases as noted above for the Marine, Property Casualty and Professional Liability businesses 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 that generally would be more competitively priced compared to renewal business. The calculation does not reflect the rate on business that we are unwilling or unable to renew due to loss experience or competition.
In the ordinary course of business, we reinsure certain insurance risks with unaffiliated insurance companies for the purpose of limiting our maximum loss exposure, protecting against catastrophic losses, and maintaining desired ratios of net premiums written to statutory surplus. The relationship of ceded to written premium varies based upon the types of business written and whether the business is written by the Insurance Companies or the Lloyd’s Operations.
The following table sets forth our ceded written premiums by segment and major line of business for the years ended December 31, 2011, 2010 and 2009:
Net written premiums increased 15.3% for the year ended December 31, 2011 compared to the same period in 2010. The increase is due to the impact of higher gross written premiums for the year ended December 31, 2011, and to a lesser extent lower premium cessions, as discussed above. Net written premiums decreased 6.7% for the year ended December 30, 2010 compared to the same period in 2009 due to the reduction in gross written premiums partially offset by the decline in ceded written premiums discussed above.
Net earned premiums increased 4.8% for the year ended December 31, 2011 compared to the same period in 2010 primarily as a result of significant ceded reinstatement premiums associated with large losses in 2010. As noted above, we recorded approximately $22.5 million in reinstatement premiums associated with large losses in 2010 compared to $8.2 million in 2011. The impact of reinstatement premiums was partially offset by a change in the mix of business in 2011 written by Nav Re, specifically the Accident and Health lines, which are recognized in earnings over a longer exposure period that our other lines of business. Net earned premiums decreased 3.4% for the year ended December 31, 2010 compared to the same period in 2009 primarily due to the changes reflected in written premiums discussed above.
Investment expenses for the year ended December 31, 2011 of $7.6 million included $4.7 million accrual of estimated interest expense reflecting the summary judgment order entered against the Company in its dispute with Resolute in which the Court awarded $4.7 million in interest to Resolute on previously paid balances that were allegedly overdue under certain reinsurance agreements. The Company is appealing the Court’s ruling. For information on the Equitas legal proceedings refer to Note 12, Commitments and Contingencies, in the Notes to Consolidated Financial Statements, included herein. Excluding the impact of the Resolute interest award, investment expenses for the year ended December 31, 2011, 2010 and 2009 were relative to the increased fair value of total invested assets through December 31, 2011.
Our net other-than-temporary impairment (“OTTI”) losses recognized in earnings for the periods indicated were as follows:
Net OTTI losses for the year ended December 31, 2011 consisted of $1.0 million of additional impairments for residential mortgage-backed securities that were previously impaired and $0.9 million for two securities for which fair value was less than 80% of amortized cost for at least six months.
Net OTTI losses for the year ended December 31, 2009 of $8.8 million primarily related to additional impairments on a total of 56 equity securities that were previously impaired in 2008, as well as impairments on non-agency mortgage and asset backed securities and corporate bonds.
The significant inputs used to measure the amount of credit loss recognized in earnings were actual delinquency rates, default probability assumptions, severity assumptions and prepayment assumptions. Projected losses are a function of both loss severity and probability of default. 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.
We generate realized gains and losses as part of the normal ongoing management of our investment portfolio. Net realized gains for the year ended December 31, 2011 primarily included the sale of corporate bonds and equity mutual funds. Net realized gains for the year ended December 31, 2010 included the sale of the majority of our general obligation municipal bond obligations, the proceeds of which were reinvested in corporate bonds and agency mortgage-backed securities.
The following is a discussion of relevant factors impacting our $2.1 million net reserve deficiency for the year ended December 31, 2011:
Our Insurance Companies Property Casualty business experienced $6.8 million of favorable development overall which was driven by favorable development of $8.4 million from Offshore Energy across several accident years and was partially offset by adverse development from runoff Liquor Liability in accident years 2008 and 2009.
$2.9 million of favorable development on our offshore energy (NavTech) book due to favorable claims trends across a number of prior underwriting years.
$1.8 million of favorable development on the Somerset Re run-off book of business where we concluded the IBNR was no longer required and $1.5 million on our Agriculture reinsurance book where the reported activity was lower than our initial estimate for the 2009 treaty year.
$1.7 million for New York construction liability due to unfavorable loss emergence.
The Insurance Companies recorded $13.6 million of net prior year unfavorable development for professional liability:
The directors and officers liability book of business had $15.7 million of adverse development, which was primarily attributable to a severity study of our open claims completed during the fourth quarter. This study showed our IBNR to be significantly deficient if current trends continued and we raised our loss estimates for underwriting years 2002 to 2009. This was partially offset by $1.4 million of favorable development on a run-off lawyers book of business written from London where we saw favorable settlements of outstanding claims and $0.7 million of favorable development on other lawyers business mostly due to a favorable claim reserve settlement.
The Insurance Companies recorded $20.7 million of net prior year unfavorable development for professional liability:
The directors and officers liability book of business had $12.4 million of adverse development, which was primarily attributable to the unexpected development of previously reported claims in the 2006 and prior underwriting years. This loss activity was inconsistent with the loss emergence trends that we observed in calendar years 2007 and 2008 and it caused us to increase our ultimate loss projections in the 2006 and prior underwriting years, as well as those in the more current underwriting years.
The following tables set forth our gross and net loss and LAE reserves, incurred loss and LAE, and payments for the 2005 Hurricanes Katrina and Rita for the periods indicated:
The reserves for asbestos exposures as of December 31, 2011 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 (two other large settled claims were fully paid in 2007); (ii) other insureds not directly involved in the manufacturing or distribution of asbestos products, but that have more than incidental asbestos exposure for their purchase or use of products that contained asbestos; and (iii) attritional asbestos claims that could be expected to occur over time. Substantially all of our asbestos liability reserves are included in our marine loss reserves.
We believe that there are no remaining known claims where we would suffer a material loss as a result of excess policy limits being exposed to class action suits for insureds involved in the manufacturing or distribution of asbestos products.
We recorded income tax expense of $7.1 million, $29.3 million and $23.7 million for the years ended December 31, 2011, 2010 and 2009 respectively. The effective tax rates were 21.8%, 29.6% and 27.3% for the years ended December 31, 2011, 2010 and 2009, respectively. The effective tax rate on net investment income was 27.6%, 27.0% and 25.0% for the years ended December 31, 2011, 2010 and 2009 respectively. As of December 31, 2011, the net deferred federal, foreign, state and local tax liabilities were $6.3 million, compared to net deferred tax assets of $15.1 million as of December 31, 2010 with the change primarily due to the increase in the deferred tax liability for net unrealized gains on securities. Refer to Footnote 7, Income Taxes, included herein, for further detail on the temporary differences that give rise to federal, foreign, state and local deferred tax assets or liabilities.
We had net state and local deferred tax assets amounting to potential future tax benefits of $0.2 million and $2.2 million as of December 31, 2011 and 2010, respectively. Included in the deferred tax assets are state and local net operating loss carry-forwards of $0.2 million and $1.4 million as of December 31, 2011 and 2010, respectively. A valuation allowance was established for the full amount of these potential future tax benefits due to uncertainty associated with their realization. Our state and local tax carry-forwards as of December 31, 2011 expire from 2024 to 2030.
We classify our 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 the operating expenses of the wholly-owned underwriting management companies and The Navigator’s Group, Inc.’s (the “Parent Company’s”) operating expenses and related income tax amounts. The Corporate segment consists of the Parent Company’s investment income, interest expense and the related tax effect.
We evaluate the performance of each segment based on its underwriting and GAAP results. The Insurance Companies’ and the Lloyd’s Operations’ results are measured by taking into account net earned premium, net loss and loss adjustment expenses, commission expenses, other operating expenses 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.
The Insurance Companies consist of Navigators Insurance, including its U.K. Branch, and its wholly-owned subsidiary, Navigators Specialty. They are 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 umbrella and primary and excess casualty businesses. Navigators Specialty underwrites specialty and professional liability insurance on an excess and surplus lines basis. Navigators Specialty is 100% reinsured by Navigators Insurance.
Our Insurance Companies reported net income of $27.2 million, $66.3 million and $57.6 million for the years ended December 31, 2011, 2010 and 2009, respectively. The decrease in net income for the year ended December 31, 2011 as compared to the same period in 2010 was largely attributable to an increase in our underwriting loss and a reduction in net realized gains. The increase in net income for the year ended December 31, 2010 as compared to the same period in 2009 was primarily as a result of significant net realized gains partially offset by unfavorable underwriting results.
Large current accident year energy losses with a net adverse impact of $16.1 million, inclusive of $5.5 million in reinsurance reinstatement premiums, related to drilling operations in the North Sea, Gulf of Mexico and Russia
Current accident year loss emergence of approximately $11.0 million related to our Professional Liability business, of which approximately $8.0 million was specific to our Directors and Officers liability insurance for both publicly and privately held corporations. The remaining $3.0 million of emergence was specific to our small lawyers and miscellaneous professional liability coverages.
Marine Premiums. The gross written premiums for the years ended December 31, 2011, 2010 and 2009 consisted of the following:
The Insurance Companies’ Marine gross written premiums for the year ended December 31, 2011 increased 2.4% to $228.5 million compared to 2010 primarily due to Inland Marine which increased by 10.5% as a result of new business and a 7.3% increase on renewal rates, and the P&I product which increased by 17.3%, benefiting from reduced competition as a major competitor had stopped writing P&I business. The Transport business also grew from prior year by 11.5% due to an unexpected increase in global trade in 2011. The increases were offset by the reduction of our Customs Bonds business, reported within Other in the table above, which decreased 39.8% from prior year due to the termination of an agency agreement as well as the current economy’s impact on the shipping industry. The 2011 Insurance Company Marine average renewal rate increased 1.3% from prior year.
The Insurance Companies’ Marine gross written premiums for the year ended December 31, 2010 decreased 7.6% compared to 2009 due to reductions in our P&I, Marine Liability, Transport and Cargo businesses. The competition in this sector remains significant and excess capacity continued to exist. The weak economy had also led to reduced exposure bases which reduced premiums. In addition, the average Marine renewal premium rates during 2009 increased approximately 2% from prior year.
The Insurance Companies’ Property Casualty gross written premiums for the year ended December 31, 2010 decreased 11.3% to $312.7 million when compared to 2009 due primarily to the run-off of our personal umbrella line as well as continuing weak economic conditions that have reduced demand for construction liability insurance. Our Offshore energy line increased by 10.1% due to greater demand as well as an improved pricing environment resulting from the Deepwater Horizon incident. Finally, our commercial umbrella business line experienced growth in 2010 due to the investments we made in 2008 and 2009 in new underwriters. Our Offshore energy line saw average renewal rate increases of approximately 4%, whereas our contractors’ liability and Excess Casualty saw average renewal rate decreases of approximately 5% and 3%, respectively. Our Primary Casualty line saw a slight average renewal rate decline from 2009.
The Insurance Companies’ Professional Liability gross written premiums for the year ended December 31, 2011 decreased by 11.7% to $114.6 million compared to prior year primarily due to the reduction in our D&O business as we have implemented a revised underwriting strategy exiting areas that have been identified as having greater volatility and shifted our public company book by underwriting higher excess layers. Our Noodle business, reported within Other in the table above, decreased by 97.4% from the prior year due to the termination of the agency relationship in 2010. The decreases were offset by the E&O business, which increased 37.6% from the prior year due to the success of the Real Estate product which was established in the third quarter of 2011 and wrote $8.9 million in gross written premium for the year ended December 31, 2011. The average 2011 Professional Liability renewal rate declined 1.4% from prior year.
The Insurance Companies’ professional liability gross written premiums decreased 5.3% to $129.8 million in 2010 compared to 2009. The decline in the D&O gross written premiums was driven by the soft market conditions. The D&O market rates have declined to a level that made it difficult to write new business and a challenge to retain renewal policies while maintaining our pricing discipline in adherence to our underwriting guidelines. Average 2010 renewal premium rates for professional liability decreased approximately 4% in 2010 compared to 2009.
The following table sets forth the results of operations of the Lloyd’s Operations for the years ended December 31, 2011, 2010 and 2009:
Our Lloyd’s Operations reported net income of $3.4 million, $7.7 million and $8.7 million for the years ended December 31, 2011, 2010 and 2009, respectively. The decrease in net income for the year ended December 31, 2011 as compared to the same period in 2010 was largely attributable to adverse underwriting activity and current year net realized losses. The decrease in net income for the year ended December 31, 2010 as compared to the same period in 2009 was primarily as a result adverse underwriting activity, specifically due to large losses such as Deepwater Horizon, partially offset by net realized gains.
In addition to the net adverse impacts noted above, the decrease in our Lloyd’s Operations pre-tax underwriting profit in 2011 over 2010 was affected by mix of business and loss trends, partially offset by $9.4 million of net adverse activity recorded in 2010 related to the Deepwater Horizon and West Atlas loses.
Our Lloyd’s Operations combined ratio for the year ended December 31, 2010 was 99.8% compared to 96.0% for the comparable period in 2009. Our Lloyd’s Operations pre-tax underwriting profit declined by $7.9 million to a $0.4 million underwriting profit compared to $8.3 million for the same period in 2009. The decrease in pre-tax underwriting profit was primarily attributable to large loss activity, namely Deepwater Horizon and West Atlas, partially offset by net prior period redundancies.
We have controlled 100% of Syndicate 1221’s stamp capacity since 2006. Stamp capacity is a measure of the amount of premium a Lloyd’s syndicate is authorized to write based on a business plan approved by the Council of Lloyd’s. Syndicate 1221’s stamp capacity was £175 million ($271 million) in 2011, £168 million ($264 million) in 2010, £124 million ($194 million) in 2009.
Property Casualty Premiums. The gross written premiums for the years ended December 31, 2011, 2010 and 2009 consisted of the following:
The 2010 Lloyd’s Operations Property Casualty gross written premiums of $94.8 million increased 21.3% compared to 2009 due to increases in our offshore energy, onshore energy and engineering and construction lines. The significant increase in our offshore energy lines was due to an increase in demand as well as an improved pricing environment as a result of the Deepwater Horizon incident. We began writing Bloodstock (animal mortality) business during 2009 by participating in a facility originated by another Lloyd’s syndicate. Average premium renewal rates in our NavTech lines increased approximately 1% and 10% in 2010 and 2009 compared to the previous years, respectively.
Professional Liability Premiums. The gross written premiums for the years ended December 31, 2011, 2010 and 2009 consisted of the following:
The 2010 Lloyd’s Operations professional liability gross written premiums increased 0.3% compared to the same period in 2009. We added a team at Lloyd’s at the end of 2008 to write excess D&O business. During 2008 and 2009 we began writing professional liability business from our offices in Stockholm, Sweden and Copenhagen, Denmark, respectively.
(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 amount in the above table excludes reinsurance recoveries of $845.4 million. See “Business-Loss Reserves” included herein.
We primarily rely upon dividends from our subsidiaries to meet our Parent Company’s obligations. Since the issuance of the senior debt in April 2006, the Parent Company’s cash obligations primarily consist of semi-annual interest payments which are now $4.0 million. Going forward, the interest payments and any share repurchases may be made from funds currently at the Parent Company or dividends from its subsidiaries. The dividends have historically been paid by Navigators Insurance Company. Based on the December 31, 2011 surplus of Navigators Insurance Company, the approximate maximum amount available for the payment of dividends by Navigators Insurance Company during 2012 without prior regulatory approval is $59.2 million. During 2011 Navigators Insurance Company declared and paid $45.0 million of dividends to the Parent Company.
This credit facility contains customary covenants for facilities of this type, including restrictions on indebtedness and liens, limitations on mergers, dividends and the sale of assets, and requirements as to maintaining certain consolidated tangible net worth, statutory surplus and other financial ratios. The credit facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, any representation or warranty made by the Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting the Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of the Company. The letter of credit facility is secured by a pledge of the stock of certain insurance subsidiaries of the Company. To the extent the aggregate face amount issued under the credit facility exceeds the commitment amount, we are required to post collateral with the lead bank of the consortium. We were in compliance with all covenants under the credit facility as of December 31, 2011.
Time lags do occur in the normal course of business between the time gross loss reserves are paid by the Company and the time such gross paid losses are billed and collected from reinsurers. Reinsurance recoverable amounts related to those gross loss reserves as of December 31, 2011 are anticipated to be billed and collected over the next several years as the gross loss reserves are paid by the Company.
Generally, for pro rata or quota share reinsurers, we issue quarterly settlement statements for premiums less commissions and paid loss activity, which are expected to be settled by the end of the subsequent quarter. We have 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 have historically on average been paid within 45 calendar days.
Net cash provided by investing activities was $66.0 million for the year ended December 31, 2011 primarily due to the sale of securities from the ongoing management of our investment portfolio. For the years ended December 31, 2010 and 2009 we reported net cash used by investing activities of $36.5 million and $92.8 million, respectively. The decrease in net cash used in investing activities is primarily related to the repurchase of the Parent Company’s common stock under our share repurchase program.
The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity as of December 31, 2011 are shown in the following table:
Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Due to the periodic repayment of principal, the aggregate amount of mortgage-backed and asset-backed securities is estimated to have an effective maturity of approximately 3.6 years.
The following table shows the amount and percentage of our fixed maturities as of December 31, 2011 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody’s rating. The table includes fixed maturities at fair value, and the total rating is the weighted average quality rating.
The following table sets forth our U.S. Treasury bonds, Agency bonds, and Foreign government bonds as of December 31, 2011 and 2010:
The following table sets forth the composition of the investments categorized as states, municipalities and political subdivisions in our portfolio by generally equivalent S&P and Moody’s ratings (not all securities in our portfolio are rated by both S&P and Moody’s) as of December 31, 2011. The securities that are not rated in the table below are primarily state bonds.
The following table sets forth the municipal bond holdings by sectors as of December 31, 2011 and 2010:
The following table sets forth our agency mortgage-backed securities and residential mortgage obligations by those issued by the Government National Mortgage Association (“GNMA”), FNMA, and FHLMC, and the quality category (prime, Alt-A and subprime) for all other such investments as of December 31, 2011:
Details of the collateral of our asset-backed securities portfolio as of December 31, 2011 are presented below:
The company holds securities of $64.9 million at fair value and $65.6 million at amortized cost primarily in non-sovereign fixed maturities in the European Union. This represents 3.3% of our total fixed income and equity portfolio. Our largest exposure is in France with a total of $28.8 million followed by the Netherlands with a total of $26.6 million. We have no exposure to Greece, Portugal, Italy or Spain.
To determine whether the unrealized loss on structured securities is other-than-temporary, we project an expected principal loss under a range of scenarios and utilize the most likely outcomes. The analysis relies on actual collateral performance measures such as default rate, prepayment rate and loss severity. These assumptions are applied throughout the remaining term of the deal, incorporating the transaction structure and priority of payments, to generate loss adjusted cash flows. Results of the analysis will indicate whether the security ultimately incurs a loss or whether there is a material impact on yield due to either a projected loss or a change in cash flow timing. A break even default rate is also calculated. A comparison of the break even default rate to the actual default rate provides an indication of the level of cushion or coverage to the first dollar principal loss. The analysis applies the stated assumptions throughout the remaining term of the transaction to forecast cash flows, which are then applied through the transaction structure to determine whether there is a loss to the security. For securities in which a tranche loss is present, and the net present value of loss adjusted cash flows is less than book value, an impairment is recognized. The output data also includes a number of additional metrics such as average life remaining, original and current credit support, over 60 day delinquency and security rating.
As of December 31, 2011, the largest single unrealized loss by issuer in the fixed maturities was $1.4 million.
As of December 31, 2011, the gross unrealized losses in the table directly above were related to fixed maturity securities that are rated investment grade, which is defined as a security having an S&P rating of “BBB-” or higher, or a Moody’s rating of “Baa3” or higher, except for $2.3 million which is rated below investment grade. Unrealized losses on investment grade securities principally relate to changes in interest rates or changes in sector-related credit spreads since the securities were acquired.
The following table summarizes the gross unrealized investment losses by length of time where the fair value is less than 80% of amortized cost as of December 31, 2011.
The table below summarizes our activity related to OTTI losses for the periods indicated: