I went into the
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20142016
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to. _____.
Commission File number 0-15886
The Navigators Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware | ||
13-3138397 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
400 Atlantic Street, Stamford, Connecticut | 06901 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (203) 905-6090
Securities registered pursuant to section 12(b) of the Act:
Title of each class: | Name of each exchange on which registered: | |
Common Stock, $.10 Par Value | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨☐ No x☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨☐ No x☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer | ☒ | Non-accelerated filer | ☐ | |||
Accelerated filer | ☐ | Smaller reporting company | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
The aggregate market value of voting stock held by non-affiliates as of June 30, 20142016 was $723,657,575$1,014,101,687 (Last business day of The Company’s most recently completed second fiscal quarter).
The number of common shares outstanding as of January 31, 201527, 2017 was 14,289,97029,155,547 (Last practical business day for the count of shares outstanding).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s 2014definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 25, 2017 are incorporated by reference in Part III, Items 10, 11, 12, 13 and 14 of thisForm 10-K.10‑K.
Description | Page Number | |||||||
3 | ||||||||
Item 1. | 3 | |||||||
3 | ||||||||
3 | ||||||||
4 | ||||||||
6 | ||||||||
6 | ||||||||
6 | ||||||||
9 | ||||||||
9 | ||||||||
11 | ||||||||
Item 1A. | 11 | |||||||
Item 1B. | 20 | |||||||
Item 2. | 20 | |||||||
Item 3. | 21 | |||||||
Item 4. | 21 | |||||||
Item 5. | 21 | |||||||
Item 6. | 24 | |||||||
Item 7. |
| 25 | ||||||
25 | ||||||||
25 | ||||||||
27 | ||||||||
31 | ||||||||
32 | ||||||||
37 | ||||||||
41 | ||||||||
43 | ||||||||
46 | ||||||||
49 | ||||||||
52 | ||||||||
53 | ||||||||
Item 7A. | ||||||||
Quantitative and Qualitative Disclosures about Market Risk | 57 | |||||||
Item 8. | 58 | |||||||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 59 | ||||||
Item 9A. | 59 | |||||||
Item 9B. | 62 | |||||||
Item 10. | 62 | |||||||
Item 11. | 62 | |||||||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 62 | ||||||
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 62 | ||||||
Item 14. | 62 | |||||||
Item 15. | ||||||||
62 | ||||||||
64 | ||||||||
F-1 |
NOTE ON FORWARD-LOOKINGFORWARD-LOOKING STATEMENTS
Some of the statements in this Annual Report on Form 10-K are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in or incorporated by reference in this Annual Report are forward-looking statements. Whenever used in this report, the words “estimate,” “expect,” “believe,” “may,” “will,” “intend,” “continue” or similar expressions or their negative are intended to identify such forward-looking statements. Forward-looking statements are derived from information that we currently have and assumptions that we make. We cannot assure you that anticipated results will be achieved, since actual results may differ materially because of both known and unknown risks and uncertainties which we face. Factors that could cause actual results to differ materially from our forward-looking statements include, but are not limited to, the factors described in Part I, Item 1A, “Risk Factors”Risk Factors of this report. In light ofDue to these known risks, any unknown risks, uncertainties and assumptions, any forward-looking eventsstatements discussed in this report may not occur. Youoccur and actual results may differ materially, you are therefore cautioned not to place undue reliance on any forward-looking statements, which speak only as of their respective dates.them. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
The discussion and analysis of our financial condition and results of operations contained herein should be read in conjunction with our Consolidated Financial Statements and accompanying notes which appear elsewhere in this report. They contain forward-looking statements that involve risks and uncertainties. Please refer to the above “Note on Forward-Looking Statements” for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed above and elsewhere in this report.
The accompanying consolidated financial statements, consisting ofUnless the results ofcontext requires otherwise, the terms “we,” “us,” “our,” or “our Company” are used to mean The Navigators Group, Inc., a Delaware holding company established in 1982, and its subsidiaries are prepared on the basis of United States (“U.S.”) generally accepted accounting principles (“GAAP” or “U.S. GAAP”). All significant intercompany transactions and balances have been eliminated. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported revenues and expenses during the reporting periods.subsidiaries. The term “the Company” as used herein is used to mean The Navigators Group, Inc. and its subsidiaries, unless the context otherwise requires. The terms “Parent” or “Parent Company” areis used to mean The Navigators Group, Inc. without its subsidiaries. Certain amounts for the prior year have been reclassified to conform to the current year’s presentation.
The Company is
We are an international insurance company focusing on specialty products within the overall property and casualty insurance market. The Company’swith a long-standing area of specialization isin Marine insurance. The Company hasOur Property and Casualty (“P&C”) insurance business primarily offers general liability coverage and umbrella & excess liability coverage to commercial enterprises through our Primary and Excess Casualty divisions. We have also developed niches in Professional Liability insurance, and Property Casualty lines of insurance, such as Primary and Excess casualty coverages offered to commercial enterprises and Assumed Reinsurance.
The Company classifies its business into one Corporate segmentthrough our Directors & Officers (“Corporate”D&O”) and two underwriting segments, the Insurance Companies segment (“Insurance Companies”) and the Lloyd’s Operations segment (“Lloyd’s Operations”) which are separately managed by business line divisions. The Insurance Companies are primarily engaged in underwriting Marine insurance, Primary Casualty insurance with a concentration in contractors’ general liability products, Excess Casualty insurance with a concentration in commercial umbrella products, Assumed Reinsurance, Management Liability insurance and Errors & Omissions (“E&O”) insurance. This segment is comprised ofdivisions. Beginning in 2010, we added reinsurance products through our Global Reinsurance (“GlobalRe”) business.
We operate through various wholly-owned subsidiaries, including Navigators Insurance Company (“NIC”), which includes ainclusive of our United Kingdom Branch (“UK”) branch (“UKU.K. Branch”), and Navigators Specialty Insurance Company (“NSIC”), both of which underwrites business on an excessare U.S. insurance companies, and surplus lines basis. All of the business underwritten by NSIC is fully reinsured by NIC pursuant toNavigators Underwriting Agency Ltd., a 100% quota share reinsurance agreement.
The Lloyd’s Operations are primarily engaged in underwriting Marine insurance; Energy & Engineering insurance with a concentration in offshore energy products and onshore energy construction products, Assumed Reinsurance, Management Liability insurance and E&O insurance at Lloyd’s of London (“Lloyd’s”) throughmanaging agency that manages Lloyd’s Syndicate 1221 (“Syndicate 1221”the Syndicate”) in the United Kingdom (“U.K.”). The Corporate segment consists of the Parent Company’s investment income, interest expense and related income tax.
Revenue is primarily comprised of premiums and investment income. The Company derives premiums predominantly from business written by wholly-owned underwriting management companies, Navigators Management Company (“NMC”) and Navigators Management (UK) Ltd. (“NMUK”) that manage and service insurance and reinsurance business written by the Insurance Companies. The Company’s products are distributed through multiple channels, utilizing global, national and regional retail and wholesale insurance brokers.
Navigators Underwriting Agency Ltd. (“NUAL”) is a Lloyd’s underwriting agency that manages Syndicate 1221. TheOur Company controls 100% of Syndicate 1221’sthe Syndicate’s stamp capacity throughcapacity.
In May 2016, our Company received authorization from the wholly-owned subsidiary,U.K. Prudential Regulation Authority (“PRA”) and the U.K. Financial Conduct Authority (“FCA”) for a new U.K. based insurance company, Navigators Corporate Underwriters Ltd.International Insurance Company Ltd (“NCUL”NIIC”), which is referred to as a corporate namewholly-owned direct subsidiary of our Parent Company, and has been fully capitalized in compliance with the Lloyd’s market. In addition, the Company has also established underwriting agencies in Antwerp, Belgium; Stockholm, Sweden; and Copenhagen, Denmark; as well as branchesterms of the appointed representative, Navigators Underwriting Ltd.authorization from the PRA and FCA.
We report our results of operations consistent with the manner in which our Chief Operating Decision Maker reviews the business to assess performance of our four reporting segments: U.S. Insurance, International Insurance (“NUL”Int’l Insurance”), in the European Economic Area (“EEA”), in Milan, Italy; Rotterdam,GlobalRe and Corporate. The Netherlands;U.S. Insurance and Paris, France, which underwrite risks pursuant to binding authorities with NUAL into Syndicate 1221. The Company has also established a presence in BrazilInt’l Insurance reporting segments are each comprised of three operating segments: Marine, P&C and China through contractual arrangements with local affiliates of Lloyd’s.Professional Liability.
For additional information on our segment presentation and for financial information concerning our operations by segment, refer tosee Segment Results included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 3,2, Segment Information, in the Notes to the Consolidated Financial Statements, included herein.
While the Company’s management takes into consideration a wide range of factors in planning the business strategy and evaluating results of operations, there are certain factors that management believes are fundamental to understanding how the Company is managed. First, underwriting profit is consistently emphasized as a primary goal, above premium growth. Underwriting profit is a non-GAAP financial measure of performance and underwriting profitability, which is derived from net earned premium less the sum of net losses and Loss Adjustment Expenses (“LAE”), commission expenses, other operating expenses and other underwriting income or loss. Management’s assessment of the trends and potential growth in underwriting profit is the dominant factor in its decisions with respect to whether or not to expand a business line, enter into a new niche, product or territory or, conversely, to contract capacity in any business line. In addition, management focuses on controlling the costs of the operations. Management believes that careful monitoring of the costs of existing operations and assessment of costs of potential growth opportunities are important to the profitability. Access to capital also has a significant impact on management’s outlook for the operations. The Insurance Companies’ operations and ability to grow their business and take advantage of market opportunities are constrained by regulatory capital requirements and rating agency assessments of capital adequacy. Similarly, the ability to grow the Lloyd’s Operations is subject to capital and operating requirements of Lloyd’s and the U.K. regulatory authorities.
Management’s decisions are also greatly influenced by access to specialized underwriting and claims expertise in the Company’s lines of business. The Company has chosen to operate in specialty niches with certain common characteristics, which provides it with the opportunity to use its technical underwriting expertise in order to realize underwriting profit. As a result, the Company has focused on underserved markets for businesses characterized by higher severity and lower frequency of loss where it believes its intellectual capital and financial strength bring meaningful value. In contrast, the Company has avoided niches that it believes have a high frequency of loss activity and/or is subject to a high level of regulatory requirements, such as Workers Compensation and Personal Automobile insurance, because the Company does not believe, its technical underwriting expertise is of as much value in these types of businesses. Examples of niches that have the characteristics the Company looks for include Bluewater Hull which provides coverage for physical damage to highly valued cruise ships, and Directors and Officers Liability insurance (“D&O”) which covers litigation exposure of a corporation’s directors and officers. These types of exposures require substantial technical expertise. The Company attempts to mitigate the financial impact of severe claims on their results through conservative and detailed underwriting, prudent use of reinsurance and a balanced portfolio of risks.
MarineStatements.
The following table presents Net earned premiums by segment:
Years Ended December 31, |
| 2016 Net Premiums |
|
| % of |
|
| 2015 Net Premiums |
|
| % of |
|
| 2014 Net Premiums |
|
| % of |
| ||||||
amounts in millions |
| Earned |
|
| Total |
|
| Earned |
|
| Total |
|
| Earned |
|
| Total |
| ||||||
U.S. Insurance |
| $ | 629 |
|
|
| 57.2 | % |
| $ | 556 |
|
|
| 56.5 | % |
| $ | 504 |
|
|
| 53.8 | % |
Int'l Insurance |
|
| 307 |
|
|
| 27.9 | % |
|
| 260 |
|
|
| 26.4 | % |
|
| 244 |
|
|
| 26.1 | % |
GlobalRe |
|
| 164 |
|
|
| 14.9 | % |
|
| 168 |
|
|
| 17.1 | % |
|
| 188 |
|
|
| 20.1 | % |
Total |
| $ | 1,100 |
|
|
| 100.0 | % |
| $ | 984 |
|
|
| 100.0 | % |
| $ | 936 |
|
|
| 100.0 | % |
Our Company distributes insurance related products through international, national, regional and retail insurance brokers. Our on-going operations are organized into distinct divisions, each offering specialized products and services targeted at a specific niche customer segment.
Our U.S. Insurance, Int’l Insurance and GlobalRe reporting segments are considered our three underwriting segments. The U.S. Insurance and Int’l Insurance reporting segments are further comprised of three operating segments:
Marine – Our Company has been providing high-quality insurance protection for global marine clients since 1974. The Company offersWe offer insurance for companies engaged in the diverse aspects of shipping, global trade and worldwide transportation.
P&C – Our P&C operating segment brings a unique, specialist orientation to both Excess & Surplus products and to the standard commercial middle market for targeted industries and exposures.
Professional Liability – Our Professional Liability operating segment provides niche insurance solutions for numerous Professional Liability and Management Liability risks.
Our underwriting segments and operating segments noted above are further comprised of business divisions and/or products.
A summary of our U.S. Insurance – U.S. Marine operating segment by product is as follows:
U.S. Marine Products |
Cargo – We offer all-risk coverage for manufacturing, importers, exporters and freight forwarders with available coverage enhancements including but not limited to: domestic and international inland transit, warehouse storage and exhibition coverage. |
Craft– We offer coverage for physical damage and third party liability coverage for tugs, barges, port/harbor vessels and other miscellaneous commercial watercraft. |
Hull – We offer physical damage coverage for owner/operators of ocean-going commercial vessels including: bulk, dry, tank, passenger and other various vessel types. |
Inland Marine – Products include builders risk including renovation and repair, installation floaters, contractors’ equipment and numerous other inland marine coverages. Tailored products and services for truckers, warehousing and inland shippers, including coverage for commercial transit and legal liability may also be offered. |
Marine Liability – Products include coverage for liability to third parties for bodily injury or property damage stemming from marine-related operations, including but not limited to terminals, marinas and stevedoring. We focus on the associated marine liability exposures of multi-national corporations as well as small to medium sized marine operations. |
Other products offered: Customs Bonds, Fishing Vessels, Transport, War and Other Marine. |
A summary of our U.S. Insurance – U.S. P&C operating segment by business line divisionsdivision and primary products within thosethese divisions by underwriting segment:
Insurance Companiesare as follows:
U.S. P&C Products by Division | ||||
Excess Casualty – We provide Commercial Retail Excess Casualty and Specialty Wholesale Excess Casualty products for specialties such as manufacturing and wholesale distribution, commercial and residential construction and construction projects. | ||||
Primary Casualty– Our Company’s Primary Casualty division provides general liability coverage solutions on a non-admitted basis through selected wholesale brokers. | ||||
Environmental – We underwrite on a primary or excess basis coverage in three main sectors: contractors pollution liability for a wide range of general and trade contractors; site pollution liability for environmental exposures associated with real estate ownership, operation and ownership transfer; and integrated casualty which is a combination of general liability and pollution liability for product manufacturers and distributors, coupled with professional liability, for environmental consultants and contractors. | ||||
Other P&C – Products offered in this division include but are not limited to: Auto, Life Sciences, Property, Energy & | ||||
Lloyd’s Operations
The Insurance Companies’ Marine business consists of a number of different product lines. The largest is Marine Liability, which protects businesses from liability to third parties for bodily injury or property damage stemming from their marine-related operations, such as terminals, marinas and stevedoring. The Insurance Companies also underwrite insurance for Harbor Craft and other small craft such as fishing vessels, providing physical damage and third party liability coverage as well as Customs Bonds. The U.K. Branch underwrites Primary Marine Protection & Indemnity business, which complements the Marine Liability business, which is generally written above the primary layer on an excess basis. The Insurance Companies also underwrite Cargo insurance, which provides coverage for physical damage to goods in the course of transit, whether by water, air or land, as well as Bluewater Hull, which provides coverage to the owners of ocean-going vessels against physical damage. In addition, the Insurance Companies write Inland Marine products including builders’ risk, contractors’ tools and equipment, fine arts, computer equipment and warehouse legal liability.
The Insurance Companies’ Marine business is written from offices located in major insurance or port locations in New York, Seattle, San Francisco, Houston, Chicago, Miami and London.
The Lloyd’s Operations Marine business primarily consists of Cargo, Marine Liability, Transport and Specie. Other key product lines include Marine Energy Liability, Assumed Marine Reinsurance of other marine insurers on an excess-of-loss basis, Bluewater Hull and War.
The Lloyd’s Operations Cargo insurance business is one of the largest products and provides coverage for cargo in transit covering all types of manufacturers, importers and exporters. The largest component part of the Marine Liability account is written on an excess basis with terms that are common with the rest of the Lloyd’s market. Within the Marine Liability account the Company writes a large book of Shipowners’ Liability risks and Charterers’ Liability risks both directly and as reinsurance of various primary providers. The Lloyd’s Operations Transport account predominantly comprises worldwide Property and Liability exposures in respect of ports and terminals and services ancillary to the transportation of marine cargo, such as stevedoring, warehousing, wharfingering and logistics. The Lloyd’s Operations Specie account includes cash in transit, jeweler’s block, fine art, precious metals and securities.
The Energy Liability account is predominantly made up of worldwide upstream Energy Liabilities. The Marine Assumed Reinsurance business is fundamentally Cargo based and contains very little International Hull business and Energy exposure in the Gulf of Mexico and the North Sea. The Hull product line covers a general spread of worldwide Hull business along with shipowners’ interests including loss of hire, increased value, mortgagees’ interest and ship construction. The Lloyd’s Operations War product line includes war physical damage, loss of hire, loss of charter hire, piracy, confiscation and drug seizure.
The Lloyd’s Operations Marine business is written from offices located in London, and in Continental Europe in Antwerp, Stockholm, Rotterdam, Milan and Paris.
Property Casualty
The Property Casualty business focuses on specialty products within the overall Property and Casualty insurance and reinsurance market. A summary of theour U.S. Insurance – U.S. Professional Liability operating segment by business line divisionsdivision and primary products within thosethese divisions by underwriting segment, is as follows.
Insurance Companiesfollows:
U.S. Professional Liability Products by Division |
D&O – We provide D&O insurance to companies for losses resulting from claims alleging breaches of fiduciary duty including stockholder claims, employment related matters and other claims alleging various wrongful acts. |
E&O – We underwrite Professional Liability insurance for the following risk types within our E&O division: Architects & Engineers (“A&E”), Accountants, Miscellaneous Professional Liability, Real Estate E&O and Other E&O. |
Other Professional Liability – includes run-off lines of business. |
A summary of our Int’l Insurance – Int’l Marine operating segment by product is as follows:
Int’l Marine Products |
Cargo - We offer all-risk coverage for manufacturing, importers, exporters and freight forwarders with available coverage enhancements including but not limited to domestic and international inland transit, warehouse storage and exhibition coverage. Marine Liability– Products include coverage for liability to third parties for bodily injury or property damage stemming from marine-related operations. We focus on the associated marine liability exposures of multi-national corporations as well as small to medium sized marine operations. |
Protection & Indemnity (“P&I”)– We offer fixed-cost P&I coverage for small to medium sized vessels. We protect shipowners, managers and time charterers against liabilities arising out of and/or in connection with the operation of their vessels. |
Specie – We offer specie and fine art insurance coverage as well as writing banks and cash in transit risks. |
Transport – We provide comprehensive insurance for a full range of operations in the global ports, terminal operators and logistics sector. |
Other products offered: Craft, Energy Liability, Hull, War and Other Marine. |
A summary of our Int’l Insurance – Int’l P&C operating segment by business division and primary products within these divisions is as follows:
Int’l P&C Products by Division |
Energy & Engineering Onshore Energy – Our insurance offerings include coverage for physical loss or damage to refineries and process plants in the oil, gas and petrochemical industries, with coverage for principal perils including fire, explosion, machinery breakdown and, in some cases, natural perils such as earthquakes and/or flooding. We focus on owners and investors in refineries, gas processing, and other hydrocarbon processing industries, typically those with mid-sized asset schedules. Offshore Energy – Policies can cover physical damage to fixed and mobile rigs, land rigs and associated equipment and pipelines plus the risks encountered during the drilling and production phases of wells (both on and offshore) and any subsequent re-drill required, along with any consequential seepage and pollution from these incidents. We focus on small to very large companies involved in the exploration and production of hydrocarbons in all areas of the world and those investing in windfarms. Other products offered: Other Energy & Engineering, which includes power station insurance. |
Environmental – We underwrite monoline environmental impairment liability on primary and excess follow form policies. This includes coverage for site-based exposures and contractor’s pollution on an annual and single project basis. The same core coverage can also be embedded into other products, including general liability and E&O. |
General Liability – We offer primary and excess public, products and pollution liability coverage for a range of industries, including manufacturing, construction, mining, utilities and services. |
Property – We provide property insurance coverage for commercial businesses with a focus on standard middle market for targeted industries and exposures for both North American and International risks. |
Other P&C – Products offered in this division include: Life Sciences, Political Violence & Terrorism (“PV&T”) and Other P&C which includes run-off lines of business. |
A summary of our Int’l Insurance – Int’l Professional Liability operating segment by business division and primary products within these divisions is as follows:
Int’l Professional Liability Products by Division | ||
D&O – We underwrite D&O insurance for public and private companies for losses resulting from alleged breaches of fiduciary duty including stockholder claims, employment related matters and other claims alleging various wrongful acts. | ||
E&O – We underwrite Professional Liability insurance for the following risk types within our E&O division: A&E, Accountants, Miscellaneous Professional Liability, and Other E&O which includes professional liability insurance for lawyers. | ||
Other Professional Liability – We offer a Warranties and Indemnity coverage product which provides coverage for a breach of a warranty or indemnity in a purchase agreement in a merger or acquisition. |
A summary of our GlobalRe reporting segment by business products is as follows:
GlobalRe Products | ||||
Accident & Health (“A&H”) – We underwrite quota share and excess of loss reinsurance covering healthcare benefits, including employer stop loss, fully insured, limited medical benefits, dental benefits, and prescription drug benefits. | ||||
Marine – We underwrite international ocean marine quota share and excess of loss reinsurance covering Cargo, Hull, Specie and Liability portfolios. | ||||
P&C – We underwrite quota share, excess of loss and | ||||
Professional Liability – We underwrite quota share and excess of loss reinsurance covering professional and management liability portfolios. | ||||
Other | ||||
Lloyd’s Operations
The Insurance Companies’ business consistsOur Company faces competition from both domestic and foreign insurers, many of Assumed Reinsurance, Primary Casualty, Excess Casualty, Environmental Casualty, Other Property & Casualtywhom have longer operating histories and Energy & Engineering Divisions.
The Specialty Assumed Reinsurance business is written by NavRe, an underwriting unit managed by NMC. The specialty products on which the unit currently writes are proportionalgreater financial, marketing and excess-of-loss treaty reinsurance covering medical health care exposures, Agriculture exposures primarily in North America, Property, Casualty, Surety and Financial treaty exposures in Central and South America and the Caribbean as well as Professional Liability exposuresmanagement resources. Competition in the U.S.
The Primary Casualty Division underwrites General Liabilitytypes of insurance policies forin which our Company is engaged is based on many factors, including the perceived overall financial strength ratings as assigned by independent rating agencies, pricing, other terms and conditions of products and services offered, business experience, business infrastructure, global presence, marketing and distribution arrangements, agency and broker relationships, quality of customer service (including speed of claims payments), product differentiation and quality, operating efficiencies and underwriting. Furthermore, insureds tend to favor large, financially strong insurers, and our Company faces the risk that we will lose market share to these larger insurers. Another competitive factor in whatthe industry is termed the Excess and Surplus lines market, which generally consistsentrance of businesses with more complex liability exposures, including contractors, manufacturers, real estate ownersunderwriting organizations and other service businesses. Since 1995,financial services providers, such as banks and brokerage firms, into the Insurance Companies have specialized in providing General Liability insurance business. These efforts pose new challenges to both residentialinsurance companies and commercial contractors, including coverage to both individual businesses and on a project or wrap-up basis that collectively insures all contractorsagents from financial services companies traditionally not involved on a designated construction project. In addition, the Insurance Companies insure other liability to third parties emanating from their premises and operations and products manufactured or distributed. The Company’s underwriters and claims professionals have significant experience in underwriting and settling claims in these niches that serves as the principle competitive advantage and allows for better underwriting results than those achieved by the U.S. insurance industry in the aggregate.insurance business. We strive to offer superior service, which we believe has differentiated us from our competitors. Our Company pursues a specialist strategy and focuses on market opportunities where we can compete effectively based on service levels and product design, while still achieving an adequate level of profitability. Our Company has grown, in part, from the leveraging of cross-marketing opportunities with our other operations to take advantage of our organization's global presence.
The Excess Casualty division provides Commercial Umbrella and Excess Casualty insurance coverage. Commercial Umbrella policies provide additional limitsEmployees
As of coverageDecember 31, 2016, we had 683 full-time employees of which 510 were located in excess of a businesses’ General Liability and Automobile Liability policies. Excess policies also provide additional limits of liability, but generally provide limits in excess of the Primary policy and Commercial Umbrella policy, and in many instances attaching in excess of other Excess Liability layers. Areas of specialty include manufacturing and wholesale distribution, commercial construction, residential construction, construction project and wrap-up covers, business services, hospitality and real estate and niche programs.
The Environmental Casualty division provides highly specialized liability coverage to a wide variety of businesses and property owners in three broad product segments: Contractors Pollution Liability; Site Pollution Liability for owners and operators of real estate; and Integrated General and Pollution Liability for manufacturers, distributors, and environmental service providers. The division also writes Transactional Site Pollution policies that support the transfer of environmental liabilities between parties to real estate transactions. Environmental Liability policies can cover both first and/or third party legal liability arising out of pollution events or conditions that are generally excluded under Standard Liability and Property insurance policies.
Additional liability insurance is underwritten for select industry niches, including the Life Sciences, or Biotechnology, Medical Device and Environmental businesses. Other Property Casualty products underwritten include Commercial Automobile, which protects a business for third-party liability emanating from automobiles as well as physical damage to owned vehicles; Commercial Property insurance; and an exporter’s policy that provides coverage for third party liability for suits brought outside of the United States, along151 in the United Kingdom, 6 in The Netherlands, 5 in Italy, 4 in Sweden, 3 in France, 2 in Belgium and 2 in Denmark.
Loss reserves are estimates of what the insurer or reinsurer expects to pay on claims, based on facts and circumstances then known. It is possible that the ultimate liability may exceed or be less than such estimates. In setting the loss reserve estimates, our Company reviews statistical data covering several years, analyzes patterns by line of business and considers several factors including trends in claims frequency and severity, changes in operations, emerging economic and social trends, inflation and changes in the regulatory
and litigation environment. We also consult with other coverage targeted towardexperienced claims professionals. Based on our analysis, we make a best estimate of our ultimate liability. During the needsloss settlement period, which, in some cases, may last several years, additional facts regarding individual claims may become known and, accordingly, it often becomes necessary to refine and adjust the estimates of international business ownersliability on a claim upward or downward. Such estimates are regularly reviewed and travelers. In 2012updated and 2013,any resulting adjustments are included in our current period’s earnings. Even then, the Company wrote a limited amount of Commercial Surety Bonds, but discontinued that business because of increased levels of competition that made it difficultultimate liability may exceed or be less than our revised estimates. Our reserving process is intended to achieve scale without sacrificing underwriting discipline.
The Energy & Engineering business is written by Navigators Technical Risk (“NavTech”), underwriting unitprovide implicit recognition of the Insurance Companies. The Offshore Energy insurance principally focuses onimpact of inflation and other factors affecting loss payments by taking into account changes in historical payment patterns and perceived probable trends. There is generally no precise method for the oil and gas, chemical and petrochemical industries, with coverage primarily for property damage and business interruption.
The Lloyd’s Operations Property Casualty business consists of Energy & Engineering written through NavTech, as well as Assumed Reinsurance and Casualty business.
The NavTech underwriting unit writes Offshore Energy, Onshore Energy, Engineering and Construction as well as D&F Property business. The Offshore Energy product lines includes coverage for property and activities such as offshore exploration and production assets, offshore construction projects, operators extra expenses and business interruption.
The Onshore Energy and Engineering business is written through a Lloyd’s consortium led by Navigators. The Onshore Energy portfolio comprises first party insurance damage to refineries and process plants in the oil, gas and petrochemical industries. The Engineering business comprises coverage of construction projects and operational power plants and facilities as well as business interruption insurance. Additionally, D&F Property is written through the NavTech underwriting unit with its core product being Fire and Natural Catastrophe Perils coverage for light commercial business.
The Assumed Reinsurance product lines include Property, Casualty and Surety treaty business focused in Argentina and Brazil. In addition, the Lloyd’s Operations writes Property Treaty business consisting of a portfolio of excess-of-loss contracts excluding exposure in the U.S., Caribbean and Latin America to avoid competition with the Insurance Companies.
In 2015, the Lloyd’s Operations plan to start writing Casualty insurance, which will include General Liability, Environmental Liability and Life Sciences (Product Liability and Clinical Trials business insurance), through the Lloyd’s Operations. The portfolio will cover a broad range of industries with a focus on low to medium hazard sectors, including general manufacturing, retail, and services. The Company intends to limit the exposure to high risk sectors such as transportation, automotive, and mining/utilities.
Professional Liability
A summarysubsequent evaluation of the business line divisions and products within those divisions, by underwriting segment, is as follows:
Insurance Companies
Lloyd’s Operations
The Insurance Companies Management Liability business consists of D&O Liability and related products for publicly traded corporations, privately held companies and not-for-profit organizations. Policies written for U.S. publicly traded companies are largely provided on an excess basis, while the majorityadequacy of the U.S. private company and not-for-profit D&Oconsideration given to inflation, or to any other specific factor, because the eventual strengthening or release of reserves is primary insurance. The E&O business is written on a primary and excess basis to a broad rangeaffected by many factors, some of non-medical professional service providers, ranging from accountants to real estate appraisers. During 2013, the Insurance Companies decided to significantly reduce the underwriting of U.S. law firms, for which they had focused on smaller law firms, as a result of increased competition that precluded them from attaining terms and conditions consistent with profitable underwriting results. Management Liability and Professional Liability policies are generally written on a claims-made basis, for which the claim must be reported during the policy period or a defined extended reporting period following expiration of the policy.interdependent.
The Lloyd’s Operations Management Liability book comprises primary and excess D&O targeting predominantly commercial companies outside of the U.S. The Lloyd’s Operations E&O portfolio is comprised of worldwide commercial E&O business targeting regulated professions and written on either a primary or an excess basis. The focus of this business is on companies domiciled outside of the U.S.
TheOur Company maintains reserves for unpaid losses and unpaid LAEloss adjustment expenses (“LAE”) for all lines of business. Loss reserves consist of both reserves for reported claims, known as case reserves, and reserves for losses that have occurred but have not yet been reported, known as incurred but not reported (“IBNR”) losses. Case reserves are established when notice of a claim is first received. Reserves for such reported claims are established on a case-by-case basis by evaluating several factors, includingIn the type of risk involved, knowledge of the circumstances surrounding such claim, severity of injury or damage, the potential for ultimate exposure, experience with the insured and the broker on the linenormal course of business, our Company cedes a portion of our premium to reinsurers through treaty and the policy provisions relatingfacultative reinsurance agreements. Although reinsurance does not discharge our Company from liability to the type of claim. Reserves for IBNR are determinedour policyholders, our Company participates in part on the basis of statistical informationreinsurance agreements to limit our loss exposure and in part on the basis of industry experience. To the extent that reserves are strengthened or released, the amount of such strengthening or release is treated as a charge or credit to earnings in the period in which the strengthening or release is identified. These reserves are intended to cover the probable ultimate cost of settling all losses incurred and unpaid, including those incurred but not reported. The determination of reserves for losses and LAE is dependent upon the receipt of information from insureds, brokers and agents.protect us against catastrophic losses.
There is a lag between the time premiums are written and related losses and LAE are incurred, and the time such events are reported to us. The loss reserves include amounts related to short tail and long tail classes of business. Short tail business refers to claims that are generally reported quickly upon occurrence of an event and involve little or no litigation, making estimation of loss reserves less complex. The long tail business includes theour Marine Liability Casualtyproduct as well as various other insurance products in our P&C and Professional Liability insurance products.operating segments. For the long tail lines, significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the reporting of the loss and the settlement of the claim. Generally, the longer the time span between the incidence of a loss and the settlement of the claim, the more likely the ultimate settlement amount will vary from the original estimate. Refer to theCasualty and Professional Liability section below for additional information.
Loss reserves are estimates of what the insurer or reinsurer expects to pay on claims, based on facts and circumstances then known. It is possible that the ultimate liability may exceed or be less than such estimates. In setting the loss reserve estimates, the Company reviews statistical data covering several years, analyzes patterns by line of business and considers several factors including trends in claims frequency and severity, changes in operations, emerging economic and social trends, inflation and changes in the regulatory and litigation environment. The Company also consults with experienced claims professionals. Based on this review, the Company makes a best estimate of its ultimate liability. During the loss settlement period, which, in some cases, may last several years, additional facts regarding individual claims may become known and, accordingly, it often becomes necessary to refine and adjust the estimates of liability on a claim upward or downward. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current period’s earnings. Even then, the ultimate liability may exceed or be less than the revised estimates. The reserving process is intended to provide implicit recognition of the impact of inflation and other factors affecting loss payments by taking into account changes in historical payment patterns and perceived probable trends. There is generally no precise method for the subsequent evaluation of the adequacy of the consideration given to inflation, or to any other specific factor, because the eventual strengthening or release of reserves is affected by many factors, some of which are interdependent.
Another factor related to reserve development is that the estimate of ultimate losses is based on the ratio of ultimate losses to ultimate premiums. For all the segments a certain, relatively stable, percentage of premium is reported after the close of the fiscal year. These amounts relate to the timing of the inception date of policies, lags in reporting of premium, premium audits, endorsements and cancellations. Losses are projected to an ultimate level. The ratio of ultimate loss to ultimate premium is then applied to the booked earned premium to match revenue with expense for GAAP purposes.
As part of the risk management process, the Company purchases reinsurance to limit the liability on individual risks and to protect against catastrophic loss. The Company purchases both quota share reinsurance and excess-of-loss reinsurance in order to limit the net retention per risk and event. Net retention represents the risk that the Company keeps for its own account. Once the initial reserve is established and the net retention is exceeded, any adverse development will directly affect the gross loss reserve, but would generally have no impact on the net retained loss unless the aggregate limits available under the impacted excess-of-loss reinsurance treaty are exhausted. Reinstatement premiums triggered under the excess-of-loss reinsurance by such additional loss development could have a potential impact on the net premiums during the period in which such additional loss development is recognized. Generally, the limits of exposure are known with greater certainty when estimating the net loss versus the gross loss. This situation tends to create greater volatility in the strengthening and releases of the gross reserves as compared to the net reserves.
The following table summarizes the reserve activity for losses and LAE for the years ended December 31, 2014, 2013 and 2012:
Year Ended December 31, | ||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||
Net reserves for losses and LAE at beginning of year | $ | 1,222,633 | $ | 1,216,909 | $ | 1,237,234 | ||||||
Provision for losses and LAE for claims occurring in the current year | 601,041 | 520,227 | 542,724 | |||||||||
Increase (decrease) in estimated losses and LAE for claims occurring in prior years | (55,812 | ) | (1,266 | ) | (45,291 | ) | ||||||
|
|
|
|
|
| |||||||
Incurred losses and LAE | 545,229 | 518,961 | 497,433 | |||||||||
Losses and LAE paid for claims occurring during: | ||||||||||||
Current year | (164,199 | ) | (147,758 | ) | (110,373 | ) | ||||||
Prior years | (295,527 | ) | (365,479 | ) | (407,385 | ) | ||||||
|
|
|
|
|
| |||||||
Losses and LAE payments | (459,726 | ) | (513,237 | ) | (517,758 | ) | ||||||
|
|
|
|
|
| |||||||
Net reserves for losses and LAE at end of year | 1,308,136 | 1,222,633 | 1,216,909 | |||||||||
Reinsurance recoverables on unpaid losses and LAE | 851,498 | 822,438 | 880,139 | |||||||||
|
|
|
|
|
| |||||||
Gross reserves for losses and LAE at end of year | $ | 2,159,634 | $ | 2,045,071 | $ | 2,097,048 | ||||||
|
|
|
|
|
|
The following table presents the development of theour loss and LAE reserves for 20042006 through 2014. The line “Net2016. Net reserves for losses and LAE”LAE reflects theour net reserves at the balance sheet date for each of the indicated years and represents theour estimated amount of losses and LAE arising in all prior years that are unpaid at the balance sheet date. The “ReservesReserves for losses and LAE re-estimated” lines ofre-estimated in the table reflect theour re-estimated amount of theour previously recorded reserves based on experience as of the end of each succeeding year. TheOur reserve estimates may change as more information becomes known about the frequency and severity of claims for individual years. TheOur net and gross cumulative redundancy (deficiency) lines ofin the table reflect thereflects our cumulative amounts developed as of successive years with respect to the aforementioned reserve liability. TheOur cumulative redundancy (deficiency) represents the aggregate change in the estimates over all prior years.
The table calculates losses and LAE reported and recorded for all prior years starting with the year in which the loss was incurred. For example, assuming that a loss occurred in 20042006 but was not reported until 2005,2007, the amount of such loss will appear as a deficiency in both 20042006 and 2005.2007. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future strengthening or releases based on the table.
A significant portion of theour favorable or adverse development on the gross reserves has been ceded to the excess-of-loss reinsurance treaties. As a result of these reinsurance arrangements, theour gross losses and related reserve strengthening and releases tend to be more sensitive to favorable or adverse developments such as those described above than theour net losses and related reserve strengthening and releases.
The gross loss reserves include estimated losses related to the 2008 Hurricanes Ike and Gustav and the 2012 Superstorm Sandy totaling approximately 0.6% and 1.6% of gross loss reserves as of December 31, 2014 and 2013, respectively. In addition, 2.3% and 3.4% of the gross loss reserves as of December 31, 2014 and 2013, respectively, include estimated losses related to the Deepwater Horizon loss event. When recording these losses, the Company assesses the reinsurance coverage, potential reinsurance recoverable and the recoverability of those balances.
Refer to “Management’s Discussion of Financial Condition and Results of Operations - Results of Operations - Expenses - Net Losses and Loss Adjustment Expenses” and Note 5,Reserves for Losses and Loss Adjustment Expenses, in the Notes to Consolidated Financial Statements, both of which are included herein, for additional information regarding Hurricanes Ike and Gustav, Superstorm Sandy and the asbestos exposure.
In thousands Net reserves for losses and LAE Reserves for losses and LAE re-estimated as of: One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later Net cumulative redundancy (deficiency) Net cumulative paid as of: One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later Gross liability-end of year Reinsurance recoverable Net liability-end of year Gross re-estimated latest Re-estimated recoverable latest Net re-estimated latest Gross cumulative redundancy (deficiency) Year Ended December 31, 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 $ 463,788 $ 578,976 $ 696,116 $ 847,303 $ 999,871 $ 1,112,934 $ 1,142,542 $ 1,237,234 $ 1,216,909 $ 1,222,633 $ 1,308,136 460,007 561,762 649,107 796,557 990,930 1,099,132 1,144,687 1,191,943 1,215,643 1,166,821 457,769 523,541 589,044 776,845 971,048 1,065,382 1,068,344 1,189,651 1,142,545 432,988 481,532 555,448 767,600 943,231 1,037,233 1,084,728 1,167,745 401,380 461,563 559,368 749,905 925,756 1,027,551 1,072,849 391,766 469,195 539,327 745,489 921,597 1,029,215 401,071 451,807 538,086 736,776 925,518 387,613 449,395 530,856 737,514 389,520 444,632 526,515 386,991 440,561 383,626 80,162 138,415 169,601 109,789 74,353 83,719 69,693 69,489 74,364 55,812 96,981 133,337 142,938 180,459 263,523 314,565 309,063 407,385 365,479 295,527 180,121 219,125 233,211 322,892 460,058 517,125 552,881 620,955 550,747 238,673 264,663 300,328 441,267 591,226 682,051 695,054 752,315 262,425 302,273 359,592 526,226 688,452 773,261 785,046 283,538 337,559 401,102 583,434 745,765 828,269 305,214 356,710 427,282 620,507 785,211 318,539 372,278 451,118 645,951 328,842 385,902 462,648 340,956 392,468 343,444 966,117 1,557,991 1,607,555 1,648,764 1,853,664 1,920,286 1,985,838 2,082,679 2,097,048 2,045,071 2,159,634 502,329 979,015 911,439 801,461 853,793 807,352 843,296 845,445 880,139 822,438 851,498 463,788 578,976 696,116 847,303 999,871 1,112,934 1,142,542 1,237,234 1,216,909 1,222,633 1,308,136 849,169 1,323,498 1,315,366 1,473,307 1,690,517 1,753,963 1,817,727 1,939,296 1,950,611 1,963,267 465,543 882,937 788,851 735,793 764,999 724,748 744,878 771,551 808,066 796,446 383,626 440,561 526,515 737,514 925,518 1,029,215 1,072,849 1,167,745 1,142,545 1,166,821 116,948 234,493 292,189 175,457 163,147 166,323 168,111 143,383 146,437 81,804
The following tables identify the approximate gross and net cumulative redundancy (deficiency) as of each year-end balance sheet date for the Insurance Companies and Lloyd’s Operations contained in the preceding ten year table:
Gross Cumulative Redundancy (Deficiency) | ||||||||||||||||||||||||
Consolidated | Insurance Companies | Lloyd’s Operations | ||||||||||||||||||||||
In thousands | Grand Total | Excluding Asbestos | Total | Asbestos | All Other (1) | Total | ||||||||||||||||||
2013 | 81,804 | 85,057 | 51,675 | (3,253 | ) | 54,928 | 30,129 | |||||||||||||||||
2012 | 146,437 | 149,690 | 70,915 | (3,253 | ) | 74,168 | 75,522 | |||||||||||||||||
2011 | 143,383 | 146,638 | (9,140 | ) | (3,255 | ) | (5,885 | ) | 152,523 | |||||||||||||||
2010 | 168,111 | 171,494 | 17,903 | (3,383 | ) | 21,286 | 150,208 | |||||||||||||||||
2009 | 166,323 | 170,739 | 18,646 | (4,416 | ) | 23,062 | 147,677 | |||||||||||||||||
2008 | 163,147 | 168,492 | 32,848 | (5,345 | ) | 38,193 | 130,299 | |||||||||||||||||
2007 | 175,457 | 181,598 | 56,033 | (6,141 | ) | 62,174 | 119,424 | |||||||||||||||||
2006 | 292,189 | 297,550 | 130,326 | (5,361 | ) | 135,687 | 161,863 | |||||||||||||||||
2005 | 234,493 | 240,100 | 111,649 | (5,607 | ) | 117,256 | 122,844 | |||||||||||||||||
2004 | 116,948 | 105,146 | 87,885 | 11,802 | 76,083 | 29,063 |
Net Cumulative Redundancy (Deficiency) | ||||||||||||||||||||||||
Consolidated | Insurance Companies | Lloyd’s Operations | ||||||||||||||||||||||
In thousands | Grand Total | Excluding Asbestos | Total | Asbestos | All Other (1) | Total | ||||||||||||||||||
2013 | 55,812 | 54,497 | 30,312 | 1,315 | 28,997 | 25,500 | ||||||||||||||||||
2012 | 74,364 | 73,049 | 10,614 | 1,315 | 9,299 | 63,750 | ||||||||||||||||||
2011 | 69,489 | 68,174 | (54,102 | ) | 1,315 | (55,417 | ) | 123,591 | ||||||||||||||||
2010 | 69,693 | 67,027 | (31,676 | ) | 2,666 | (34,342 | ) | 101,369 | ||||||||||||||||
2009 | 83,719 | 81,344 | (12,327 | ) | 2,375 | (14,702 | ) | 96,046 | ||||||||||||||||
2008 | 74,353 | 71,954 | 6,434 | 2,399 | 4,035 | 67,919 | ||||||||||||||||||
2007 | 109,789 | 107,653 | 43,461 | 2,136 | 41,325 | 66,328 | ||||||||||||||||||
2006 | 169,601 | 169,243 | 98,092 | 358 | 97,734 | 71,509 | ||||||||||||||||||
2005 | 138,415 | 138,287 | 91,227 | 128 | 91,099 | 47,188 | ||||||||||||||||||
2004 | 80,162 | 80,563 | 54,044 | (401 | ) | 54,445 | 26,118 |
|
| Years Ended December 31, |
| |||||||||||||||||||||||||||||||||||||||||
amounts in thousands |
| 2006 |
|
| 2007 |
|
| 2008 |
|
| 2009 |
|
| 2010 |
|
| 2011 |
|
| 2012 |
|
| 2013 |
|
| 2014 |
|
| 2015 |
|
| 2016 |
| |||||||||||
Net reserves for losses and LAE |
| $ | 696,116 |
|
| $ | 847,303 |
|
| $ | 999,871 |
|
| $ | 1,112,934 |
|
| $ | 1,142,542 |
|
| $ | 1,237,234 |
|
| $ | 1,216,909 |
|
| $ | 1,222,633 |
|
| $ | 1,308,136 |
|
| $ | 1,393,126 |
|
| $ | 1,510,451 |
|
Reserves for losses and LAE re-estimated as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
| 649,107 |
|
|
| 796,557 |
|
|
| 990,930 |
|
|
| 1,099,132 |
|
|
| 1,144,687 |
|
|
| 1,191,943 |
|
|
| 1,215,643 |
|
|
| 1,166,821 |
|
|
| 1,243,467 |
|
|
| 1,364,598 |
|
|
|
|
|
Two years later |
|
| 589,044 |
|
|
| 776,845 |
|
|
| 971,048 |
|
|
| 1,065,382 |
|
|
| 1,068,344 |
|
|
| 1,189,651 |
|
|
| 1,142,545 |
|
|
| 1,144,854 |
|
|
| 1,262,367 |
|
|
|
|
|
|
|
|
|
Three years later |
|
| 555,448 |
|
|
| 767,600 |
|
|
| 943,231 |
|
|
| 1,037,233 |
|
|
| 1,084,728 |
|
|
| 1,167,745 |
|
|
| 1,165,959 |
|
|
| 1,196,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
| 559,368 |
|
|
| 749,905 |
|
|
| 925,756 |
|
|
| 1,027,551 |
|
|
| 1,072,849 |
|
|
| 1,193,950 |
|
|
| 1,196,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
| 539,327 |
|
|
| 745,489 |
|
|
| 921,597 |
|
|
| 1,029,215 |
|
|
| 1,097,862 |
|
|
| 1,192,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
| 538,086 |
|
|
| 736,776 |
|
|
| 925,518 |
|
|
| 1,041,778 |
|
|
| 1,098,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
| 530,856 |
|
|
| 737,514 |
|
|
| 935,511 |
|
|
| 1,046,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
| 526,515 |
|
|
| 742,079 |
|
|
| 943,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
| 526,457 |
|
|
| 741,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later |
|
| 523,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cumulative redundancy (deficiency) |
| $ | 172,606 |
|
| $ | 105,713 |
|
| $ | 56,421 |
|
| $ | 66,281 |
|
| $ | 43,997 |
|
| $ | 45,046 |
|
| $ | 20,752 |
|
| $ | 26,414 |
|
| $ | 45,769 |
|
| $ | 28,528 |
|
|
|
|
|
Net cumulative paid as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later |
|
| 142,938 |
|
|
| 180,459 |
|
|
| 263,523 |
|
|
| 314,565 |
|
|
| 309,063 |
|
|
| 407,385 |
|
|
| 365,479 |
|
|
| 295,527 |
|
|
| 320,863 |
|
|
| 412,544 |
|
|
|
|
|
Two years later |
|
| 233,211 |
|
|
| 322,892 |
|
|
| 460,058 |
|
|
| 517,125 |
|
|
| 552,881 |
|
|
| 620,955 |
|
|
| 550,747 |
|
|
| 512,709 |
|
|
| 620,514 |
|
|
|
|
|
|
|
|
|
Three years later |
|
| 300,328 |
|
|
| 441,267 |
|
|
| 591,226 |
|
|
| 682,051 |
|
|
| 695,054 |
|
|
| 752,315 |
|
|
| 703,511 |
|
|
| 736,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later |
|
| 359,592 |
|
|
| 526,226 |
|
|
| 688,452 |
|
|
| 773,261 |
|
|
| 785,046 |
|
|
| 862,722 |
|
|
| 856,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later |
|
| 401,102 |
|
|
| 583,434 |
|
|
| 745,765 |
|
|
| 828,269 |
|
|
| 868,850 |
|
|
| 949,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later |
|
| 427,282 |
|
|
| 620,507 |
|
|
| 785,211 |
|
|
| 872,685 |
|
|
| 930,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later |
|
| 451,118 |
|
|
| 645,951 |
|
|
| 819,146 |
|
|
| 920,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later |
|
| 462,648 |
|
|
| 663,914 |
|
|
| 855,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later |
|
| 471,597 |
|
|
| 679,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later |
|
| 479,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| �� |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability-end of year |
|
| 1,607,555 |
|
|
| 1,648,764 |
|
|
| 1,853,664 |
|
|
| 1,920,286 |
|
|
| 1,985,838 |
|
|
| 2,082,679 |
|
|
| 2,097,048 |
|
|
| 2,045,071 |
|
|
| 2,159,634 |
|
|
| 2,202,644 |
|
|
| 2,289,727 |
|
Reinsurance recoverable |
|
| 911,439 |
|
|
| 801,461 |
|
|
| 853,793 |
|
|
| 807,352 |
|
|
| 843,296 |
|
|
| 845,445 |
|
|
| 880,139 |
|
|
| 822,438 |
|
|
| 851,498 |
|
|
| 809,518 |
|
|
| 779,276 |
|
Net liability-end of year |
| $ | 696,116 |
|
| $ | 847,303 |
|
| $ | 999,871 |
|
| $ | 1,112,934 |
|
| $ | 1,142,542 |
|
| $ | 1,237,234 |
|
| $ | 1,216,909 |
|
| $ | 1,222,633 |
|
| $ | 1,308,136 |
|
| $ | 1,393,126 |
|
| $ | 1,510,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross re-estimated latest |
|
| 1,309,542 |
|
|
| 1,483,286 |
|
|
| 1,723,600 |
|
|
| 1,785,871 |
|
|
| 1,873,118 |
|
|
| 2,014,643 |
|
|
| 2,026,929 |
|
|
| 1,997,842 |
|
|
| 2,062,431 |
|
|
| 2,148,128 |
|
|
|
|
|
Re-estimated recoverable latest |
|
| 786,032 |
|
|
| 741,696 |
|
|
| 780,150 |
|
|
| 739,218 |
|
|
| 774,573 |
|
|
| 822,455 |
|
|
| 830,772 |
|
|
| 801,623 |
|
|
| 800,064 |
|
|
| 783,530 |
|
|
|
|
|
Net re-estimated latest |
| $ | 523,510 |
|
| $ | 741,590 |
|
| $ | 943,450 |
|
| $ | 1,046,653 |
|
| $ | 1,098,545 |
|
| $ | 1,192,188 |
|
| $ | 1,196,157 |
|
| $ | 1,196,219 |
|
| $ | 1,262,367 |
|
| $ | 1,364,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross cumulative redundancy (deficiency) |
| $ | 298,013 |
|
| $ | 165,478 |
|
| $ | 130,064 |
|
| $ | 134,415 |
|
| $ | 112,720 |
|
| $ | 68,036 |
|
| $ | 70,119 |
|
| $ | 47,229 |
|
| $ | 97,203 |
|
| $ | 54,516 |
|
|
|
|
|
(1) - Contains cumulative loss development for all active and run-off lines of business exclusive of asbestos losses.
Property Casualty
The majority of the Property Casualty business involves General Liability and Umbrella & Excess Liability policies, which generate third party, liability claims that are long tail in nature. A significant portion of the General Liability reserves relate to construction risks. The balance is related to coverage for Energy & Engineering related businesses (both Onshore and Offshore), Assumed Reinsurance, and Professional Liability insurance. The Assumed Reinsurance business includes the Agriculture, A&H, LatAm Property and Professional Liability lines.
Professional Liability
The Professional Liability business generates third party claims, which are also longer tail in nature. The Professional Liability policies mainly provide coverage on a claims-made basis, whereby coverage is generally provided for those claims that are made during the policy period. The substantial majority of the claims-made policies provide coverage for one year periods. The Company has also issued a limited number of multi-year claims-made Professional Liability policies known as “project policies” or “tail coverage” that provide for insurance protection for wrongful acts prior to the run-off date. Such multi-year policies provide insurance protection for several years.
The Professional Liability 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 because anticipated loss experience in this area is less predictable due to the small number of claims and/or erratic claim severity patterns. The Company believes that it has made a reasonable estimate of the required loss reserves for Professional Liability. The expected ultimate losses may be adjusted up or down as the accident years mature.
Additional information regarding the loss and loss adjustment expenses incurred and loss reserves can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Expenses - Net Losses and Loss Adjustment Expenses” and Note 5,Reserves for Losses and Loss Adjustment Expenses, in the Notes to Consolidated Financial Statements, both of which are included herein.
The Company has exposure to losses caused by hurricanes, earthquakes, and other natural and man-made catastrophic events. The frequency and severity of catastrophic events is unpredictable. The extent of covered losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. The Company continually assesses the concentration of underwriting exposures in catastrophe exposed areas globally and manages this exposure through individual risk selection and through the purchase of reinsurance. The Company also uses modeling and concentration management tools that allow better monitoring and better control of the accumulations of potential losses from catastrophe events. Despite these efforts, there remains uncertainty about the characteristics, timing and extent of insured losses given the unpredictable nature of catastrophes. The occurrence of one or more catastrophic events could have a material adverse effect on the results of operations, financial condition and/or liquidity.
The Company has significant natural catastrophe exposures throughout the world. The Company estimates that the largest exposure to loss from a single natural catastrophe event comes from a hurricane on the east coast of the United States. As of December 31, 2014, the Company estimates that the probable maximum pre-tax gross and net loss exposure from such a hurricane event would be approximately $97.0 million and $38.3 million, respectively, including the cost of reinsurance reinstatement premiums (“RRPs”).
Like all catastrophe exposure estimates, the foregoing estimate of the probable maximum loss is inherently uncertain. This estimate is highly dependent upon numerous assumptions and subjective underwriting judgments. Examples of significant assumptions and judgments related to such an estimate include the intensity, depth and location of the earthquake, the various types of the insured risks exposed to the event at the time the event occurs and the estimated costs or damages incurred for each insured risk. The composition of the portfolio also makes such estimates challenging due to the non-static nature of the exposures covered under the policies in lines of business such as Cargo and Hull. There can be no assurances that the gross and net loss amounts that the Company could incur in such an event or in any natural catastrophe event would not be materially higher than the estimates discussed above given the significant uncertainties with respect to such an estimate. Moreover, the portfolio of insured risks changes dynamically over time and there can be no assurance that the probable maximum loss will not change materially over time.
The occurrence of large loss events could reduce the reinsurance coverage that is available to the Company and could weaken the financial condition of the reinsurers, which could have a material adverse effect on its results of operations. Although the reinsurance agreements make the reinsurers liable to the Company to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate the obligation to pay claims to policyholders, as the Company is required to pay the losses if a reinsurer fails to meet its obligations under the reinsurance agreement.
Superstorm Sandy and Hurricanes Gustav and Ike
Superstorm Sandy, which occurred in the fourth quarter 2012 and Hurricanes Gustav and Ike, which occurred in the third quarter 2008 generated substantial losses in the Marine, Inland Marine and Energy lines of business. The total estimated net loss for Superstorm Sandy in the fourth quarter of 2014 was $20.0 million, inclusive of $8.5 million in reinsurance reinstatement premiums. Gross of reinsurance the loss related to Superstorm Sandy was $66.7 million. There were no significant hurricane losses in 2014, 2013, 2011, 2010, 2009 or 2007 that impacted the Marine, Inland Marine and Energy lines of business.
The Company monitors the development of paid and reported claims activities in relation to the estimate of ultimate losses established for Superstorm Sandy and Hurricanes Gustav and Ike. Management believes that should any adverse loss development for gross claims occur from the aforementioned Superstorm and Hurricanes, it would be contained within the reinsurance program. The actual losses from such loss events may differ materially from the 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 purposes of the estimates, the Company assumed would not be exposed and inflation in repair costs due to the limited availability of labor and materials. If the actual losses from the aforementioned losses are materially greater than the estimated losses, the business, results of operations and financial condition could be materially adversely affected.
Refer to “Management’s Discussion of Financial Condition and Results of Operations - Results of Operations and Overview - Operating Expenses - Net Losses and Loss Adjustment Expenses Incurred” and Note 5, Reserves for Losses and Loss Adjustment Expenses, in the Notes to Consolidated Financial Statements, both of which are included herein, for additional information regarding Superstorm Sandy and the aforementioned hurricanes.
The Company utilizes reinsurance principally to reduce the exposure on individual risks, to protect against catastrophic losses and to stabilize loss ratios and underwriting results. The Company is protected by various treaty and facultative reinsurance agreements. The reinsurance is placed either directly by the Company or through reinsurance intermediaries. The reinsurance intermediaries are compensated by the reinsurers.
The Company’s ceded earned premiums were $440.7 million, $456.0 million and $396.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. Ceded earned premium is impacted by written RRPs, which are fully earned when written. The Company incurred $8.4 million, $3.0 million and $26.9 million of ceded RRPs for the years ended December 31, 2014, 2013, and 2012, respectively. The RRPs for 2014, 2013 and 2012 are primarily related to large losses from the Company’s Marine business. In 2014, $3.9 million of the large loss is due to the sinking of a vessel in South Korean waters, and $1.6 million is due to additional loss activity on the grounding of the cruise ship Cost Concordia. The total RRPs recorded in 2012 included $11.1 million also from the grounding of the cruise ship Costa Concordia off the coast of Italy as well as $8.3 million in connection with the Company’s loss on Superstorm Sandy.
Normalized for RRPs, the Company’s ceded earned premiums were $432.3 million, $453.0 million and $369.7 million for the years ended December 31, 2014, 2013 and 2012, respectively. The decrease in normalized ceded earned premiums from 2013 to 2014 is primarily due to key changes to the reinsurance programs and mix of business primarily driven by a change in the Insurance Companies Property Casualty Reinsurance program supporting certain casualty risks. The increase in ceded earned premium from 2012 to 2013 is primarily due to growth in the Excess Casualty and Offshore Energy and Liability business.
The Company’s ceded incurred losses were $230.2 million, $188.7 million and $262.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. The increase in ceded incurred losses from 2013 to 2014 is due to growth in the Insurance Companies Primary Casualty and Excess Casualty divisions, coupled with unfavorable emergence on construction defect losses from prior years. Also contributing to the increase is large loss activity in the Insurance Companies Offshore Energy business and unfavorable development on the Professional Liability division’s runoff business. Offsetting these increases is favorable prior year emergence in the Insurance Companies Marine division across all products, and a decrease in the percentage of business ceded in 2014. The decrease in ceded incurred losses from 2012 to 2013 is primarily due to a decrease in large loss activity during the 2013 year.
Although reinsurance makes the reinsurer liable to the Company to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate the obligation to pay claims to the policyholders. Accordingly, the Company bears credit risk with respect to the reinsurers. Specifically, the reinsurers may not pay claims made by the Company on a timely basis, or they may not pay some or all of these claims. Either of these events would increase the costs and could have a material adverse effect on the business.
The Company has established a reserve for uncollectible reinsurance in the amount of $11.3 million as of December 31, 2014 and 2013, which was determined by considering reinsurer specific default risk as indicated by their financial strength ratings as well as additional default risk for Asbestos and Environmental related recoverables. Actual uncollectible reinsurance could potentially differ from the estimate.
The exposure to credit risk from any one reinsurer is managed through diversification by reinsuring with a number of different reinsurers, principally in the United States and European reinsurance markets. When reinsurance is placed, the standards of acceptability generally require that a reinsurer must have a rating from A.M. Best Company (“A.M. Best”) and/or Standard & Poor’s (“S&P”) of “A” or better, or an equivalent financial strength if not rated, plus at least $500 million in policyholders’ surplus. The Reinsurance Security Committee, which is included within the Enterprise Risk Management Finance and Credit Sub-Committee, monitors the financial strength of the reinsurers and the related reinsurance recoverables and periodically reviews the list of acceptable reinsurers.
The credit quality distribution of the Company’s reinsurance recoverables of $1.1 billion as of December 31, 2014 for ceded paid and unpaid losses and LAE and ceded unearned premiums based on insurer financial strength ratings from A.M. Best or S&P were as follows:
In thousands | Rating | Carrying Value(2) | Percent of Total | |||||||
A.M. Best Rating description(1): | ||||||||||
Superior | A++, A+ | $ | 575,205 | 50 | % | |||||
Excellent | A, A- | 547,314 | 48 | % | ||||||
Very good | B++, B+ | 8,483 | 1 | % | ||||||
Fair | B, B- | — | 0 | % | ||||||
Not rated | NR | 9,694 | 1 | % | ||||||
|
|
|
| |||||||
Total | $ | 1,140,696 | 100 | % | ||||||
|
|
|
|
The Company holds collateral of $202.0 million, which consists of $152.8 million in ceded balances payable, $43.1 million in letters of credit and $6.1 million of funds held and trust account balances, all of which are held by the Insurance Companies and Lloyd’s Operations. In total, the collateral represents 17.7% of the carrying value of the reinsurance recoverables. Collateral of $5.2 million or 53.6% of the carrying value is held for NR rated reinsurance recoverables.
The following table lists the 20 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses and LAE and ceded unearned premium (constituting 75.7% of the total recoverable), together with the reinsurance recoverable and collateral held as of December 31, 2014, and the reinsurers’ ratings from A.M. Best and S&P:
In thousands | Unearned Premium | Paid/Unpaid Losses | Total(1) | Collateral Held | A.M. Best | S&P | ||||||||||||||
National Indemnity Company | $ | 25,202 | $ | 117,562 | $ | 142,764 | $ | 22,069 | A++ | AA+ | ||||||||||
Everest Reinsurance Company | 21,573 | 75,063 | 96,636 | 7,326 | A+ | A+ | ||||||||||||||
Swiss Reinsurance America Corporation | 22,815 | 73,305 | 96,120 | 14,587 | A+ | AA- | ||||||||||||||
Transatlantic Reinsurance Company | 11,916 | 74,072 | 85,988 | 4,038 | A | A+ | ||||||||||||||
Munich Reinsurance America Inc. | 11,366 | 58,768 | 70,134 | 5,539 | A+ | AA- | ||||||||||||||
Allied World Reinsurance | 9,048 | 37,088 | 46,136 | 1,666 | A | A | ||||||||||||||
Lloyd’s Syndicate #2003 | 4,399 | 35,123 | 39,522 | 5,191 | A | A+ | ||||||||||||||
Partner Reinsurance Europe | 10,986 | 25,409 | 36,395 | 16,052 | A+ | A+ | ||||||||||||||
Employers Mutual Casualty Company | 11,928 | 21,851 | 33,779 | 10,935 | A | NR | ||||||||||||||
Scor Global P&C SE | 10,190 | 17,572 | 27,762 | 5,558 | A | A+ | ||||||||||||||
Ace Property and Casualty Insurance Company | 11,165 | 12,741 | 23,906 | 2,907 | A++ | AA | ||||||||||||||
Tower Insurance Company | — | 21,509 | 21,509 | 2,455 | A- | NR | ||||||||||||||
Aspen Insurance UK Ltd. | 8,928 | 11,227 | 20,155 | 4,869 | A | A | ||||||||||||||
Ironshore Indemnity Inc. | 6,234 | 13,395 | 19,629 | 8,645 | A | NR | ||||||||||||||
Validus Reinsurance Ltd. | 2,020 | 16,873 | 18,893 | 10,975 | A | A | ||||||||||||||
Atlantic Specialty Insurance | 2,542 | 15,812 | 18,354 | — | A | A- | ||||||||||||||
QBE Reinsurance Corp | 2,636 | 15,539 | 18,175 | — | A | A+ | ||||||||||||||
National Union Fire Ins. | 8,067 | 8,459 | 16,526 | 6,158 | A | A+ | ||||||||||||||
Endurance Reinsurance Corporation | 5,695 | 9,936 | 15,631 | 1,337 | A | A | ||||||||||||||
Odyssey American Reinsurance Corporation | 3,506 | 11,650 | 15,156 | 1,604 | A | A- | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Top 20 | $ | 190,216 | $ | 672,954 | $ | 863,170 | $ | 131,911 | ||||||||||||
Others | 47,635 | 229,891 | 277,526 | 70,065 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 237,851 | $ | 902,845 | $ | 1,140,696 | $ | 201,976 | ||||||||||||
|
|
|
|
|
|
|
|
(1) - Net of reserve for uncollectible reinsurance of approximately $11.3 million.
Approximately 21% of the collateral held consists of letters of credit obtained from reinsurers in accordance with New York Insurance Regulation Nos. 20 and 133. Regulation 20 requires collateral to be held by the ceding company from reinsurers not licensed in New York State in order for the ceding company to take credit for the reinsurance recoverables on its statutory balance sheet. The specific requirements governing the letters of credit are contained in Regulation 133 and include a clean and unconditional letter of credit and an “evergreen” clause which prevents the expiration of the letter of credit without due notice to the Company. Only banks considered qualified by the National Association of Insurance Commissioners (“NAIC”) may be deemed acceptable issuers of letters of credit. In addition, based on the credit assessment of the reinsurer, there are certain instances where the Company requires collateral from a reinsurer even if the reinsurer is licensed in New York State, generally applying the requirements of Regulation No. 133. The contractual terms of the letters of credit require that access to the collateral is unrestricted. In the event that the counterparty to the collateral would be deemed not qualified by the NAIC, the reinsurer would be required by agreement to replace such collateral with acceptable security under the reinsurance agreement. There is no assurance, however, that the reinsurer would be able to replace the counterparty bank in the event such counterparty bank becomes unqualified and the reinsurer experiences significant financial deterioration. Under such circumstances, the Company could incur a substantial loss from uncollectible reinsurance from such reinsurer. In November 2010, Regulation No. 20 was amended to provide the New York Superintendent of Financial Services (the “New York Superintendent”) discretion to allow a reduction in collateral that qualifying reinsurers must post in order for New York domestic ceding insurers such as NIC and NSIC to receive full financial statement credit. The “collateral required” percentages range from 0% – 100%, are based upon the New York Superintendent’s evaluation of a number of factors, including the reinsurer’s financial strength ratings, and apply to contracts entered into, renewed or having an anniversary date on or after January 1, 2011. In November 2011, the NAIC adopted similar amendments to its Credit for Reinsurance Model Act that would apply to certain non-U.S. reinsurers. States will have the option to retain a 100% funding requirement if they so choose and it remains to be seen whether and when states will amend their credit for reinsurance laws and regulations in accordance with such model act.
The objective of theour investment policy, guidelines and strategy is to maximize total investment return in the context of preserving and enhancing shareholderstockholder value and the statutory surplus of the Insurance Companies. Secondarily, the Company seeksour regulated insurance companies. As part of our overall investment strategy, we seek to optimize after-taxbuild a tax efficient investment income.portfolio.
TheOur investments are managed by outside professional fixed-income and equity portfolio managers. The Company seeksWe seek to achieve theour investment objectives by investing in cash equivalents and money market funds, municipal bonds, U.S. Governmentsovereign bonds, U.S. Governmentgovernment agency guaranteed and non-guaranteed securities, corporate bonds, mortgage-backed and asset-backed securities, and common and preferred stocks.stocks, and exchange traded funds. The Finance Committee of our Board of Directors approves our overall group asset allocation targets and investment policy to ensure that they are consistent with our overall goals, strategies and objectives.
The investment guidelines require that the amount of the consolidated fixed-income portfolio rated below “A-” but no lower than “BBB-” by S&P or below “A3” but no lower than “Baa3” by Moody’s Investors Service (“Moody’s”) shall not exceed 10% of the total investment portfolio. Fixed-income securities rated below “BBB-” by S&P or “Baa3” by Moody’s combined with any other investments not specifically permitted under the investment guidelines, cannot exceed 2% of the total investment portfolio. Investments in equity securities that are actively traded on major U.S. stock exchanges cannot exceed 10% of the total investment portfolio. Finally, the investment guidelines prohibit investments in derivatives other than as a hedge against foreign currency exposures or the writing of covered call options on the equity portfolio.
The Insurance Companies’Our regulated insurance companies’ investments are subject to the oversight of their respective Boards of Directors and the Finance Committee of theour Parent Company’s Board of Directors. TheOur investment portfolio and the performance of the investment managers are reviewed quarterly. TheseOur investments within NIC and NSIC must comply with the insurance laws of New York State, the domiciliary state of NIC and NSIC. These laws prescribe the type, quality and concentration of investments which may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, structured securities, preferred stocks, common stocks, real estate mortgages and real estate. The U.K. Branch’s
Our investments supporting our Int’l Insurance business must also comply with the regulations set forth by the Prudential Regulation Authority (“PRA”)PRA in the U.K.
The Our investments supporting business at Lloyd’s Operations investmentsand NIIC are subject to the direction and control of the BoardBoards of Directors and the Investment CommitteeCommittees of NUAL,Navigators Underwriting Agency Ltd. (“NUAL”) and NIIC, as well as theour Parent Company’s Board of Directors and Finance Committee. These investments must comply with the rules and regulations imposed by Lloyd’s and the PRA.
The table set forth below reflects the total investment balances, net investment income earned thereon and the related average yield for the last three calendar years:
Year Ended December 31, | ||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||
Invested Assets and Cash: | ||||||||||||
Insurance Companies | $ | 2,195,924 | $ | 1,954,429 | $ | 1,899,309 | ||||||
Lloyd’s Operations | 523,531 | 519,481 | 507,919 | |||||||||
Parent Company | 101,031 | 100,676 | 15,026 | |||||||||
|
|
|
|
|
| |||||||
Consolidated | $ | 2,820,486 | $ | 2,574,586 | $ | 2,422,254 | ||||||
|
|
|
|
|
| |||||||
Net Investment Income: | ||||||||||||
Insurance Companies | $ | 56,714 | $ | 49,083 | $ | 46,549 | ||||||
Lloyd’s Operations | 7,378 | 7,160 | 7,551 | |||||||||
Parent Company | 76 | 8 | 148 | |||||||||
|
|
|
|
|
| |||||||
Consolidated | $ | 64,168 | $ | 56,251 | $ | 54,248 | ||||||
|
|
|
|
|
| |||||||
Average Yield (amortized cost basis): | ||||||||||||
Insurance Companies | 2.8 | % | 2.7 | % | 2.6 | % | ||||||
Lloyd’s Operations | 1.4 | % | 1.4 | % | 1.3 | % | ||||||
Parent Company | 0.1 | % | 0.0 | % | 1.7 | % | ||||||
Consolidated | 2.3 | % | 2.4 | % | 2.4 | % |
As of December 31, 2014, the average quality of the investment portfolio was rated “AA” by S&P and “Aa” by Moody’s. All of the Company’s mortgage-backed and asset-backed securities were rated investment grade by S&P and by Moody’s except for 57 securities with a fair value approximating $9.1 million. There were no collateralized debt obligations (“CDO’s”), asset-backed commercial paper or credit default swaps in the investment portfolio. As of December 31, 2014, 2013 and 2012, all fixed-maturity and equity securities held by the Company were classified as available-for-sale.
Refer to “Management’sManagement’s Discussion of Financial Condition and Results of Operations - Investments”Investments and Note 4,3, Investments,, in the Notes to Consolidated Financial Statements, both of which are included herein, for additional information regarding investments.
United States
TheOur Company is subject to regulation under thevarious insurance statutes, including holding company statutes of various states and applicable regulatory authorities in the United States. These regulations vary but generally require insurance holding companies, and insurers that are subsidiaries of holding companies, to register and file reports concerning their capital structure, ownership, financial condition and general business operations. Such regulations also generally require prior regulatory agency approval of changes in control of an insurer and of certain transactions within the holding company structure. The regulatory agencies have statutory authorization to enforce their laws and regulations through various administrative orders and enforcement proceedings.
NICState insurance regulations are intended primarily for the protection of policyholders rather than stockholders. The state insurance departments monitor compliance with regulations through periodic reporting procedures and examinations. The quarterly and annual financial reports to the state insurance regulators utilize statutory accounting principles, which are different from generally accepted accounting principles (“GAAP”) that we use in our reports to stockholders. Statutory accounting principles, in keeping with the intent to assure the protection of policyholders, are generally based on a solvency concept, while GAAP is licensed to engage in the insurance and reinsurance business in 50 states, the District of Columbia and Puerto Rico. NSIC is licensed to engage in the insurance and reinsurance business in the State of New York and is an approved surplus lines insurer or meets the financial requirements where there is notbased on a formal approval process in all other states and the District of Columbia.going-concern concept.
The Statestate insurance regulators utilize risk-based capital measurements, developed by the National Association of New York DepartmentInsurance Commissioners (“NAIC”), to identify insurance companies that potentially are inadequately capitalized. The NAIC’s risk-based capital model is intended to establish minimum capital thresholds that vary with the size and mix of Financial Services (the “New York Department”)an insurance company’s business and assets. It is the principaldesigned to identify companies with capital levels that may require regulatory agency. New Yorkattention. At December 31, 2016, each of our domestic insurance law provides that no corporation or other person may acquire controlcompanies’ total adjusted capital was significantly in excess of the Company, and thus indirectauthorized control of the Insurance Companies, unless it has given notice to the Insurance Companies and obtained prior written approval from the New York Superintendent for such acquisition. Any purchaser of 10% or more of the outstanding shares of the Parent Company’s common stock would be presumed to have acquired control of the Company, unless such presumption is rebutted.
Under New York insurance law, NIC and NSIC may only pay dividends out of their statutory earned surplus. Generally, the maximum amount of dividends NIC and NSIC may pay without regulatory approval in any twelve-month period is the lesser of adjusted net investment income or 10% of statutory surplus. For a discussion of the current dividend capacity, refer to “Management’s Discussion of Financial Condition and Results of Operations—Capital Resources” in Item 7 of this report.
As part of its general regulatory oversight process, the New York Department conducts detailed examinations of the books, records and accounts of New York insurance companies every three to five years. NIC and NSIC were examined for the years 2005 through 2009 by the New York Department in 2011. The New York Department commenced an examination of the years 2010 through 2014 on February 13, 2015.
Under insolvency or guaranty laws in most states in which NIC and NSIC operate, insurers doing business in those states can be assessed up to prescribed limits for policyholder losses of insolvent insurance companies. Neither NIC nor NSIC was subject to any material assessments under state insolvency or guaranty laws in the last three years.level risk-based capital.
The NAIC has developed a set of financial relationships or tests known as the Insurance Regulatory Information System (“IRIS”), was developed by the NAIC and is intended primarily to assist state insurance departmentsregulators in executing their statutory mandates to overseemonitoring the financial condition of U.S. insurance companies operating in their respective states.and identifying companies that require special attention or action by insurance regulatory authorities. Generally, regulators will begin to investigate or monitor an insurance company if its IRIS identifies thirteen industry ratios and specifies “usual values”fall outside usual ranges for each ratio. Departure from the usual values on four or more of the ratiosratios. If an insurance company has insufficient capital, regulators may act to reduce the amount of insurance it can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer’s business. As of December 31, 2014, the results for NIC and NSIC were within the usual values for all IRIS ratios except for one. The one ratio outside of the usual values was related to the investment yield. The investment yield of NIC for the year ended December 31, 2014, was 2.6% and the investment yield of NSIC for the year ended December 31, 2014, was 3.0%, both of which were equal to or below the expected 3-6.5% range due to a persistent low rate environment.
State insurance departments have adopted a methodology developed by the NAIC for assessing the adequacy of statutory surplus of Property and Casualty insurers which includes a risk-based capital formula that attempts to measure statutory capital and surplus needs based on the risks in a company’s mix of products and investment portfolio. The formula is designed to allow state insurance regulators to identify weakly capitalized companies. Under the formula, a company determines its “risk-based capital” by taking into account certain risks related to the insurer’s assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer’s liabilities (including underwriting risks related to the nature and experience of its insurance business). The risk-based capital rules provide for different levels of regulatory attention depending on the ratio of a company’s total adjusted capital to its “authorized control level” of risk-based capital.issue. Based on calculations made by NIC and NSIC, their risk-based capital levels exceed the level that would trigger regulatory attention or company actionour most recent statutory filings (calculated as of December 31, 2014.2016), none of our U.S. insurance companies are subject to regulatory scrutiny based on these ratios.
BothIn 2012, the NAIC and the New York Department have increased their focus on risks within an insurer’s holding company system that may pose enterprise risk to the insurer. “Enterprise risk” is defined as any activity, circumstance, event or series of events involving one or more affiliates of an insurer that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or the liquidity of the insurer or its insurance holding company system as a whole. The New York Department requires the establishment and maintenance of an enterprise risk management (“ERM”) function by New York domestic insurers, while the Model Insurance Holding Company System Regulatory Act and Regulations, as adopted by the NAIC, includes a requirement for the ultimate controlling person to file an enterprise risk report.
The NAIC has also adopted the Risk Management and Own Risk and Solvency Assessment (“ORSA”) Model Act, (the “Model Act”), requiring insurerswhich, following enactment at the state level became effective in 2015. ORSA requires U.S. insurance companies and their groups to maintainregularly, but no less than annually: 1) conduct an assessment of the adequacy of its risk management framework and current and estimated future solvency position, 2) internally document the process and results of such assessment and 3) provide a framework for identifying, assessing, monitoring, managing and reporting on the “material and relevant risks” associatedconfidential, high level summary of such assessment to certain state regulatory authorities. This year we filed our ORSA report with the insurer’s or insurance group’s business plans. The Model ActNew York State Department of Financial Services on December 1, 2016, and we believe we have a robust Enterprise Risk Management framework in place that is effective asin meeting the ORSA requirements.
The U.S. state insurance regulations also regulate the payment of January 1, 2015.dividends and other distributions by insurance companies to their stockholders. Generally, insurance companies are limited by these regulations in the payment of dividends above a specified level. Dividends in excess of those thresholds are “extraordinary dividends” and are subject to prior regulatory approval. While New York only requires approval of extraordinary dividends, some states require prior regulatory approval for all dividends.
Because we are an insurance holding company, we are subject to the insurance holding company system regulatory requirements of a number of states. Under the Model Act, insurers will bethese regulations, we are required to submit an Own Riskreport information regarding our capital structure, financial condition and Solvency Assessment (“ORSA”) Summary Reportmanagement. We are also required to their lead regulator at least annually.provide prior notice to, or seek the prior approval of, the Department of Financial Services of certain agreements and transactions between our affiliated companies. These agreements and transactions must satisfy certain regulatory requirements.
In addition to regulations applicable to insurance agents generally, NMC is subject to managing general agents’ actsGovernment intervention has also occurred in its state of domicile and in certain other jurisdictions where it does business.
In 2002, in response to the tightening of supply in certain insurance and reinsurance markets resulting from, amongin relation to terrorism coverage in the U.S. (and through industry initiatives in other things, the September 11, 2001 terrorist attacks, thecountries). The U.S. Terrorism Risk Insurance Act or TRIA,(TRIA), which was enacted. TRIA was intendedenacted in 2002 to ensure the availability of insurance coverage for “acts of terrorism” (as defined)certain terrorist acts in the United States of America committed by or on behalf of foreign persons or interests. This law established a federal program through the end of 2005 to help the commercial Property and Casualty insurance industry cover claims related to future losses resulting from acts of terrorism and requires insurers to offer coverageU.S., was extended in 2015 for acts of terrorism in all commercial Property and Casualty policies. As a result, the Company is prohibited from adding certain terrorism exclusions to those policies written by insurers in the group that write business in the U.S. On December 22, 2005, the Terrorism Risk Insurance Extension Act of 2005, or TRIEA, was enacted. TRIEA extended TRIAsix years, through December 31, 20072020, and made several changes in the program, including increasing the deductible for each insurerapplies to 17.5% and 20%certain of direct earned premiums in 2006 and 2007, respectively. In addition, for losses in excess of an insurer’s deductible, TRIEA increased the Insurance Companies’ share of the excess losses to an additional 10% and 15% in 2006 and 2007, respectively, with the balance to be covered by the Federal government up to an aggregate cap of insured losses of $25 billion in 2006 and $27.5 billion in 2007. Also, TRIEA established a new program trigger under which Federal compensation will become available only if aggregate insured losses sustained by all insurers exceed $50 million from a certified act of terrorism occurring after March 31, 2006 and $100 million for certified acts occurring on or after January 1, 2007. On December 26, 2007, the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) was enacted. TRIPRA, among other provisions, extended for seven years the program established under TRIA, as amended. On January 12, 2015, TRIPRA was reauthorized until December 31, 2020, retroactive to January 1, 2015. In the new TRIPRA, the program trigger will be increased in phases starting in 2016 from $100 million to $200 million of annual aggregate insured losses, the insurer co-share will be increased from 15 to 20 percent over the next five years,our product offerings.
United Kingdom
Our U.K. branch, NIIC and the cap on the mandatory recoupment of insured losses will be increased from $27.5 billion to $37.5 billion by two billion per year until 2019. In addition, TRIPRA calls for several government studies and reports which will require information reporting by insurers. The imposition of these TRIA deductibles could have an adverse effect on the results of operations. Potential future changes to TRIA could also adversely affect the Company by causing the reinsurers to increase prices or withdraw from certain markets where terrorism coverage is required. As a result of TRIA, the Company is required to offer coverage for certain terrorism risks that it may normally exclude. Occasionally in the Marine business, such coverage falls outside of the normal reinsurance program. In such cases, the only reinsurance would be the protection afforded by TRIA. Additionally, the doubling of the program trigger could limit the ability to obtain reimbursement for losses under the program, and the increase in the co-insurance to 20% could increase the exposure to terrorism risk that will not be reimbursed by the government.
The Lloyd’s OperationsSyndicate are subject to regulation in the United States in addition to being regulated in the United Kingdom. The Lloyd’s market is licensed to engage in insurance business in Illinois, Kentucky and the U.S. Virgin Islands and operates as an eligible Excess and Surplus lines insurer in all states and territories except Kentucky and the U.S. Virgin Islands. Lloyd’s is also an accredited reinsurer in all states and territories of the United States. Lloyd’s maintains various trust funds in the state of New York to protect its U.S. business and is therefore subject to regulation by the New York Department, which acts as the domiciliary department for Lloyd’s U.S. trust funds. There are deposit trust funds in other states to support Lloyd’s reinsurance and Excess and Surplus lines insurance business.
From time to time, various regulatory and legislative changes have been proposed in the insurance and reinsurance industry. Among the proposals that have in the past been or are at present being considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures (some of which have been enacted) to conform portions of their insurance laws and regulations to various model acts adopted by the NAIC. The Company is unable to predict whether any of these laws and regulations will be adopted, the form in which any such laws and regulations would be adopted, or the effect, if any, these developments would have on its operations and financial condition.
United Kingdom
The United Kingdom subsidiaries and the Lloyd’s Operations are subject to regulation by the Prudential Regulation Authority (“PRA”)PRA (for prudential issues) and the Financial Conduct Authority (“FCA”)FCA (for conduct of business issues), the successors to the FSA, as established by the Financial Services and Markets Act 2012.. The Lloyd’s Operations areSyndicate is also subject to supervision by the Council of Lloyd’s. The PRA and FCA have been granted broad authorization and intervention powers as they relate to the operations of all insurers, including Lloyd’s syndicates, operating in the United Kingdom.U.K. Lloyd’s is regulated by the PRA and FCA and is required to implement certain rules prescribed by them, which it does by the powers it has under the Lloyd’s Act 1982 relating to the operation of the Lloyd’s market. Lloyd’s prescribes, in respect of its managing agents and corporate members, certain minimum standards relating to their management and control, solvency and various other requirements. The PRA and FCA also monitor Lloyd’s managing agents’ compliance with thethose systems and controls. If it appears to the PRA and and/or the FCA that either Lloyd’s is not fulfilling its regulatory responsibilities, or that managing agents are not complying with the applicable regulatory rules and guidance, the PRA and and/or FCA may intervene at their discretion.
The Company participates in the Lloyd’s market through the ownership of NUAL and NCUL. NUAL is the managing agent for Syndicate 1221. The Company has controlled 100% of Syndicate 1221’s stamp capacity for the 2014, 2013 and 2012 underwriting years (“UWY”) through its wholly-owned subsidiary, NCUL, which is referred to as a corporate name in the Lloyd’s market. By entering into a membership agreement with Lloyd’s, NCUL undertakes to comply with all Lloyd’s by-laws and regulations as well as the provisions of the Lloyd’s Acts and the Financial Services and Markets Act that are applicable to it. The operation of Syndicate 1221, as well as NCUL and their respective directors, is subject to the Lloyd’s supervisory regime.
Underwriting capacity of a member of Lloyd’s must be supported by providing a deposit (referred to as “Funds at Lloyd’s”) in the form of cash, securities or letters of credit in an amount determined by Lloyd’s equal to a specified percentage of the member’s underwriting capacity. The amount of such deposit is calculated by each member through the completion of an annual capital adequacy exercise. The results of this exercise are submitted to Lloyd’s for approval. Lloyd’s then advises the member of the amount of deposit that is required. The consent of the Council of Lloyd’s may be required when a managing agent of a syndicate proposes to increase underwriting capacity for the following UWY.
The Council of Lloyd’s has wide discretionary powers to regulate members’ underwriting at Lloyd’s. It may, for instance, change the basis on which syndicate expenses are allocated or vary the required amount of capital to be held by a corporate member of Lloyd’s in support of its business (“Funds at Lloyd’sLloyd’s”) ratio or the investment criteria applicable to the provision of Funds at Lloyd’s. Exercising any of these powers might affect the return on an investment of the corporate member in a given UWY.underwriting year (“UWY”). Further, it should be noted that the annual business plans of a syndicate are subject to the review and approval of the Lloyd’s Franchise Board. The Lloyd’s Franchise Board was formally constituted on January 1, 2003. The Franchise Board is responsible for setting risk management and profitability targets for the Lloyd’s market and operates a business planning and monitoring process for all syndicates.
Corporate members continue to have insurance obligations even after all their UWYs have been closed by reinsurance to close. In order to continue to fulfill these obligations, corporate members are required to stay in existence; accordingly, there continues to be an administrative and financial burden for corporate members between the time their memberships have ceased and the time their insurance obligations are extinguished, including the completion of financial accounts in accordance with the Companies Act 2006.
If a member of Lloyd’s is unable to pay its debts to policyholders, such debts may be payable by the Lloyd’s Central Fund, which acts similarly to state guaranty funds in the United States. If Lloyd’s determines that the Central Fund needs to be increased, it has the power to assess premium levies on current Lloyd’s members. The Council of Lloyd’s also has discretion to call or assess up to 3% of a member’s underwriting capacity in any one year as a Central Fund contribution.contribution in the event a member of Lloyd’s is unable to pay its debts to policyholders.
AThe U.K. branch, NIIC and the Syndicate are required to meet the requirements of the European UnionUnion’s (“the E.U.”) directive coveringnew financial services regulatory regime known as “Solvency II,” which is built on a risk-based approach to setting capital requirements for insurers. Solvency II established a revised set of the E.U.-wide capital adequacy,requirements and risk management and regulatory reporting for insurers, known as Solvency II, was adopted by the European Parliament in April 2009. Solvency II will introduce a new system of regulation for insurers operating in the E.U. (including the United Kingdom) and presents a number of risks to the Company. Although Solvency II was originally stated to have becomestandards, which became effective by October 31, 2012, implementation has been delayed several times. During November 2013, a vote was held in the European Parliament to amend and finalize the dates for implementation and transposition of the Solvency II Directive. The Parliament approved transposition being set for March 31, 2015 and implementation foron January 1, 2016. Over the last few years, theour Company has undertaken a significant amount of work to ensure that it meets the new requirements and this work will continue into 2015. Work has, and will continue, to focus on the capital structure, technical provisions, solvency calculations, governance, disclosure and risk management. There is also a risk that if theof Solvency II requirements are not met on an on-going basis they may impact the capital requirements for NIC’s U.K. Branch and Syndicate 1221. These new regulations have the potential to adversely affect the profitability of NIC, NUAL and Syndicate 1221, and to restrict their ability to carry on their businesses as currently conducted. An outstanding issue is the question about how Solvency II will be implemented is whether the new regulations will apply to NIC’s U.K. Branch or to all of its operations, both withinaffected entities. However, there are some aspects of Solvency II concerning compliance with supervisory reporting and outside of the United Kingdom and the other E.U. countriesdisclosure requirements that have yet to be finalized, where obligations come into effect in which it operates. If the regulations are applied2017. Our Company will continue its efforts to NIC in its entirety, NIC could be subject to even more onerous requirements under the new regulations. Work is ongoing in this area to find a solution that aligns to the Company’s longer term strategy.
The Property and Casualty insurance and reinsurance industry is highly competitive. The Company faces competition from both domestic and foreign insurers, many of whom have longer operating histories and greater financial, marketing and management resources. Competition in the types of insurance which the Company is engaged in is based on many factors, including the perceived overall financial strength ratings as assigned by independent rating agencies, pricing, other terms and conditions of products and services offered, business experience, business infrastructure, global presence, marketing and distribution arrangements, agency and broker relationships, quality of customer service (including speed of claims payments), product differentiation and quality, operating efficiencies and underwriting. Furthermore, insureds tend to favor large, financially strong insurers, and the Company faces the riskensure that it will lose market share to higher rated insurers.meets such requirements.
Another competitive factor in the industry is the entrance of other underwriting organizations and other financial services providers such as banks and brokerage firms into the insurance business. These efforts pose new challenges to insurance companies and agents from financial services companies traditionally not involved in the insurance business.
As of December 31, 2014, the Company had 651 full-time employees of which 494 were located in the United States, 132 in the United Kingdom, 7 in The Netherlands, 5 in Italy, 5 in Sweden, 3 in France, 2 in Belgium, 2 in Denmark, and 1 in Brazil.
Available InformationInformation
This report and all other filings made by the Company with the Securities Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available to the public by the SEC. All filings can be read and copied at the SEC Public Reference Room, located at 100 F Street, NE, Washington, DC 20549. Information pertaining to the operation of the Public Reference Room can be obtained by calling 1-800-SEC-0330. The Company is an electronic filer with the SEC, so all reports, proxy and information statements, and other information can be found at the SECOur corporate website www.sec.gov. The website address is http://www.navg.com. Through the website at http://www.navg.com/Pages/sec-filings.aspx, the Company makesWe make available free of charge, its annual report on Form 10-K, quarterlythrough the Investor Relations section of our corporate website, the following reports on Form 10-Q, current reports on Form 8-K, and all(and related amendments to those reportsas filed with the SEC) as soon as reasonably practicable after such material ismaterials are electronically filed with, or furnished to, the SEC.SEC:
Annual Reports on Form 10-K
Quarterly Reports on Form 10-Q
Current Reports on Form 8-K
Proxy Statements on Schedule 14A, as well as other filings with the SEC
Also available through our website are our corporate governance guidelines, corporate code of ethics and conduct, and charters for the committees of our Board of Directors. The annualinformation found on our website is not part of this or any other report to stockholders, press releases and recordings of the earnings release conference calls are also available on the website. Any referencefiled with or furnished to the Company’s website in this report shall not constitute an incorporation by reference of any materials available on its website.
You should carefully consider eachFactors that could have a material impact on our results of theoperations or financial condition are outlined below. Additional risks and uncertainties described below and elsewhere in this Annual Report on Form 10-K, as well as any amendments or updates reflected in subsequent filings with the SEC. The Company believes these risks and uncertainties, individually or in the aggregate, could cause the actual results to differ materially from expected and historical results and could materially and adversely affect the business operations. Further, additional risks and uncertainties not presently known to the Companyus or that the Companywhich we currently deems immaterialdeem insignificant may also impair our business or results of operations as they become known facts or as facts and circumstances change. Any of the risks described below could result in a material adverse effect on our results and business operations.of operations or financial condition.
The continuing volatility in the financial markets and the risk of another recession could have a material adverse effect on theour results of operations and financial condition.
The financial market experienced significant volatility worldwide commencing in the third quarter of 2008. Although the U.S., European and other foreign governments have taken various actions to try to stabilize the financial markets, it is unclear whether those actions will continue to be effective. Therefore, the financial market volatility and the resulting negative economic impact could continue.
Although theour Company continues to monitor market conditions, itwe cannot predict future market conditions or their impact on theour stock price or investment portfolio. Depending on market conditions, theour Company could incur future realized and unrealized losses, which could have a material adverse effect on theour results of operations and financial condition of theour Company. These economic conditions have had an adverse impact on the availability and cost of credit resources generally, which could negatively affect the ability to obtain letters of credit utilized by the Lloyd’s Operationsus to support business written through Lloyd’s.
In addition, financial market volatility or an economic downturn could have a material adverse effect on the insureds, agents, claimants, reinsurers, vendors and competitors. Certain of the actions of the U.S., European and other foreign governments have taken or may take in response to the financial market volatility have impacted, or may impact, certain Property and Casualty insurance carriers. The U.S., European and other foreign governments continue to take active steps to implement measures to stabilize the financial markets and stimulate the economy, and it is possible that theseany measures taken by U.S. or foreign governments to stimulate or stabilize the economy could further affect the Property and Casualty insurance industry and its competitive landscape.
TheOur Company’s business is concentrated in Marine, Property, CasualtyP&C and Professional Liability insurance as well as reinsurance, and if market conditions change adversely, or theour Company experiences large losses in these lines, it could have a material adverse effect on theour business.
As a result of theour strategy to focus on specialty products in niches where theour Company has underwriting and claims handling expertise and to decrease theour business in areas where pricing does not afford what it considers to be acceptable returns, theour business is concentrated in the Marine, Property, CasualtyP&C and Professional Liability lines of business.business, as well as reinsurance. If theour results of operations from any of these lines are less favorable for any reason, including lower demand for theour products on terms and conditions that theour Company finds appropriate, flat or decreased rates for theour products or increased competition, the impact of a reduction could have a material adverse effect on theour business.
Our Company’s efforts to expand in targeted international markets, may not be successful and may expose us to additional risks which could cause a material adverse effect on our business, financial position and results of operations.
A number of our Company’s planned business initiatives involve expanding existing products in targeted international markets. To develop new markets, our Company may need to make substantial capital and operating expenditures, which may negatively impact our results in the near term. In addition, the demand in new markets may not meet our Company’s expectations. This, in turn, could lead to losses in excess of expectations. Moreover, to the extent our Company is able to expand in new international markets, our Company may be exposed to certain additional risks including but not limited to:
Difficulties in staffing and managing foreign operations;
Burdens of complying with additional foreign laws and regulations;
Political and economic instability;
Differing employment practices and laws and labor disruptions;
The imposition of government controls;
A legal system subject to undue influence or corruption; and
A business culture in which illegal sales practices may be prevalent.
The occurrence of any of these risks could negatively affect our Company’s international business and consequently our financial position and results of operations.
Our Company is exposed to cyclicality in theour business that may cause material fluctuations in theour results.
The property and casualtyP&C insurance business generally, and the Marinemarine insurance business specifically, have historically been characterized by periods of intense price competition due to excess underwriting capacity as well as periods when shortages of underwriting capacity have permittedallowed for attractive premium levels. TheOur Company has reduced business during periods of severe competition and price declines and has grown when pricing allowed an acceptable return. The cyclical trends in the Property and CasualtyP&C insurance and reinsurance industries and the profitability of these industries can also be significantly affected by volatile and unpredictable developments, including what the Company believes to be a trend of natural and man-made disasters, fluctuations in interest rates, changes in the investment environment that affect market prices of investments and inflationary pressures that may tend to affect the size of losses experienced by insureds. TheOur Company cannot predict with accuracy whether market conditions will remain constant, improve or deteriorate. TheOur Company expects that the business will continue to experience the effects of this cyclicality, which, over the course of time, could result in material fluctuations in premium volume, revenues or expenses.
Catastrophe losses could materially reduce our profitability.
Our Company is exposed to claims arising out of catastrophes, particularly in our U.S. and Int’l Marine operating segments, our Energy and Engineering division within our U.S. and Int’l P&C operating segments and our GlobalRe reporting segment. Our Company has experienced, and will experience in the future, catastrophe losses, which may materially reduce profitability or harm the financial condition of our Company. Catastrophes can be caused by various natural events, including, but not limited to, hurricanes, windstorms, earthquakes, tornadoes, floods, hail, severe winter weather and fires. Catastrophes can also be man-made, such as war, explosions or terrorism, or caused by unfortunate events such as an oil rig disaster or the grounding of a cruise ship. In addition, changing climate conditions could result in an increase in the frequency or severity of natural catastrophes, which could increase exposure to such losses. The incidence and severity of catastrophes are inherently unpredictable. Although our Company will attempt to manage exposure to such events, the frequency and severity of catastrophic events could exceed estimates, which could have a material adverse effect on the financial condition of our Company.
Intense competition for products could harm the ability of our Company to maintain or increase profitability and premium volume.
The P&C insurance industry is highly competitive. Our Company faces competition from both domestic and foreign insurers, many of whom have longer operating histories and greater financial, marketing and management resources. Competition in the types of insurance in which our Company is engaged is based on many factors, including the perceived overall financial strength, pricing and other terms and conditions of products and services offered, business experience, marketing and distribution arrangements, agency and broker relationships, levels of customer service (including speed of claims payments), product differentiation and quality, operating efficiencies and underwriting. In addition, insurance industry participants may seek to consolidate through mergers and acquisitions. Continued consolidation within the insurance industry will increase the already competitive underwriting environment, as our
Company would likely experience more robust competition from larger competitors. Furthermore, insureds tend to favor large, financially strong insurers, and our Company faces the risk that it will lose market share to larger or higher rated insurers. Our Company may not be successfulhave difficulty in its diversification efforts, which could adversely affect its results.
Over the past decade, the Company has diversified the business from being an Ocean Marine specialistcontinuing to underwriting in a targeted numbercompete successfully on any of specialties, including numerous third-party liability productsthese bases in the Casualty and Professional Liability niches. Thefuture. If competition limits the ability to produce profitable underwritingwrite new business at adequate rates, the ability to transact business would be materially and adversely affected and our results and grow those businesses is highly dependent upon the quality of the underwriting and claims professionals and the extent of their expertise and quality of their individual risk-taking decisions. In addition, the results canoperations would be impacted by change in the competitive, regulatory and economic environment impacting those specific products.adversely affected.
TheOur Company may incur additional losses if its lossour losses and LAE reserves are insufficient.
TheOur Company maintains loss reserves to cover therepresenting our estimated ultimate unpaid liability for losses and LAE with respect to reported and unreported claims incurred as of the end of each accounting period. Reserves do not represent an exact calculation of liability, but instead represent estimates, generally utilizingOur Company utilizes actuarial projection techniques and judgment at a given accounting date. These reservein determining our estimated reserves. Our estimates are expectations of what the ultimate settlement and administration of claims will cost based on the assessmentrequire analysis of facts and circumstances then known, review of historical settlement patterns, estimates of trends in claims severity, frequency, legal theories of liability and other factors. Both internal and external events, including changes in claims handling procedures, economic inflation, legal trends and legislative changes, may affect theour reserve estimation process. Many of these items are not directly quantifiable, particularly on a prospective basis. Additionally, there may be significant lags between the occurrence of the insured event and the time it is actually reported to the Company. TheOur Company continually refines our reserve estimates in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. Adjustments to reserves are reflected in the results of the periods in which the estimates are changed. Because establishment of reserves is an inherently uncertain process involving estimates, our currently established reserves may not be sufficient. If our estimated reserves are insufficient, theour Company will incur additional charges to earnings, which could have a material adverse effect on our future results of operations, financial position or cash flows.
TheOur loss reserves include amounts related to short tail and long tail classes of business. Short tail business means that claims are generally reported quickly upon occurrence of an event, making estimation of loss reserves less complex. For the long tail lines, significant periods of time, ranging up to several years or more, may elapse between the occurrence of the loss, the reporting of the loss and the settlement of the claim. The longer the time span between the incidence of a loss and the settlement of the claim, the more likely the ultimate settlement amount will vary. The longer tail business includes General Liability, including construction defect claims, as well as historical claims for asbestos exposures through the Marine business and claims relating to the run-off businesses. The Professional Liability business, though long tail with respect to settlement period, is produced on a claims-made basis (which means that the policy in-force at the time the claim is filed, rather than the policy in-force at the time the loss occurred, provides coverage) and is therefore, the Company believes, less likely to result in a significant time lag between the occurrence of the loss and the reporting of the loss. There can be no assurance however, that theour Company will not suffer substantial adverse prior period development in the business in the future.
In addition, reinsurance reserves are subject to greater uncertainty than insurance reserves primarily because a reinsurer relies on the original underwriting decisions made by ceding companies. As a result, in relation to the reinsurance business, the Company is subject to the risk that the ceding companies may not have adequately evaluated the risks reinsured by the Company and the premiums ceded may not adequately compensate the Company for the risks it assumes. In addition, reinsurance reserves may be less reliable than insurance reserves because there is generally a longer lapse of time from the occurrence of the event to the reporting of the loss or benefit to the reinsurer to the ultimate resolution or settlement of the loss.
The effects of emerging claim and coverage issues on theour business are uncertain.
As industry practices and legislative, regulatory, judicial, social, financial, and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect the business by either extending coverage beyond the underwriting intent or by increasing the frequency and severity of claims. In some instances, these changes may not become apparent until sometime after theour Company has issued insurance or reinsurance contracts that are affected by the changes.impacted. As a result, the full extent of liability under the insurance or reinsurance contracts may not be known for many years after a contactcontract is issued.
In addition to losslosses and LAE reserves, preparation of our financial statements requires theour Company to make estimates and judgments.
In addition to loss reserves discussed above, theour consolidated financial statements contain accounting estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. On an ongoing basis, theour Company evaluates theour estimates based on historical experience and other assumptions that theour Company believes to be reasonable under the circumstances.reasonable. Any significant change in theseour estimates could adversely affect itsour results of operations and/or financial condition. TheOur accounting estimates that are viewed by our management as critical are those in connection with reserves for losses and loss adjustment expenses,LAE, reinsurance recoverables, written and unearned premiums, the recoverability of deferred tax assets and impairment of invested assets.
TheOur Company may not have access to adequate reinsurance to protect itus against losses.
TheOur Company purchases reinsurance by transferring part of theour risk it has assumed to a reinsurance company in exchange for part of the premium it receives in connection with the risk. The availability and cost of reinsurance are subject to prevailing market conditions both in terms of price and available capacity, which can affect theour business volume and profitability. The reinsuranceReinsurance programs are generally subject to renewal on an annual basis. If theour Company were unable to renew the expiring facilities or to obtain new reinsurance facilities, either theour net exposures would increase, which could increase the costs, or, if theincrease. If our Company was unwilling to bear an increase in net exposures, itwe would have to reduce the level of itsour underwriting commitments, especially catastrophe exposed risks, which would reduce revenues and possibly net income.
TheOur reinsurance operations are largely dependent upon ceding companies’ evaluation of risk.
TheOur Company, like other companies that write reinsurance, generally does not evaluate separately each of the assumed individual insurance risks assumed under itsour reinsurance contracts. As such, theour Company is largely dependent upon the ceding companiescompanies’ original underwriting decisions. TheOur Company is subject to the risk that the ceding companies may not have adequately or accurately evaluated the risks that
they have insured, and it has reinsured, and that the premiums ceded may not adequately compensate it for the risks it assumes. If the reserves are insufficient to cover the unpaid losses and LAE arising from the reinsurance business, theour Company would have to strengthen the reserves and incur charges to itsour earnings, which could adversely affect future results of operations, financial position or cash flows.
Reinsurers may not pay on losses in a timely fashion, or at all, which may increase costs.
Although reinsurance makes the reinsurer liable to theour Company to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate theour Company’s obligation to pay claims to theour policyholders. Accordingly, theour Company bears credit risk with respect to itsour reinsurers. Specifically, the reinsurers may not pay claims made by theour Company on a timely basis, or they may not pay some or all of these claims. Either of these events would increase theour Company’s costs and could have a material adverse effect on theour business.
Intense competition for products could harm the ability of the Company to maintain or increase profitability and premium volume.
The Property and Casualty insurance industry is highly competitive. The Company faces competition from both domestic and foreign insurers, many of whom have longer operating histories and greater financial, marketing and management resources. Competition in the types of insurance in which the Company is engaged is based on many factors, including the perceived overall financial strength, pricing and other terms and conditions of products and services offered, business experience, marketing and distribution arrangements, agency and broker relationships, levels of customer service (including speed of claims payments), product differentiation and quality, operating efficiencies and underwriting. In addition, insurance industry participants may seek to consolidate through mergers and acquisitions. Continued consolidation within the insurance industry will further enhance the already competitive underwriting environment, as the Company would likely experience more robust competition from larger competitors. Furthermore, insureds tend to favor large, financially strong insurers, and the Company faces the risk that it will lose market share to larger or higher rated insurers. The Company may have difficulty in continuing to compete successfully on any of these bases in the future. If competition limits the ability to write new business at adequate rates, the ability to transact business would be materially and adversely affected and the results of operations would be adversely affected.
The Company may be unable to attract and retain qualified employees.
The Company depends on the ability to attract and retain qualified executive officers, experienced underwriters, claims professionals and other skilled employees who are knowledgeable about the Specialty lines of business. If the quality of the executive officers, underwriting or claims team and other personnel decreases, the Company may be unable to maintain the current competitive position in the specialty markets in which the Company operates and be unable to expand the operations into new specialty markets.
Increases in interest rates may cause theour Company to experience losses.
Because of the unpredictable nature of losses that may arise under insurance policies, theour Company may require substantial liquidity at any time. The investment portfolio, which consists largely of fixed-income investments,fixed maturities, is theour Company’s principal source of liquidity. The market value of the fixed-income investmentsfixed maturities is subject to fluctuation depending on changes in prevailing interest rates and various other factors. TheOur Company does not hedge the investment portfolio against interest rate risk. Interest rates are at or are close to historic lows. Increases in interest rates during periods when theour Company must sell fixed-incomefixed maturities securities to satisfy liquidity needs may result in substantial realized investment losses.
TheOur investment portfolio is subject to certain risks that could adversely affect the results of operations, financial condition or cash flows.
Although theour investment policy guidelines emphasize total investment return in the context of preserving and enhancing shareholderstockholder value and statutory surplus of the insurance subsidiaries, theour investments are subject to market-wide risks and fluctuations, as well as to risks inherent in particular types of securities. Due to these risks, theour Company may not be able to realize itsour investment objectives. In addition, theour Company may be forced to liquidate investments at times and prices that are not optimal, which could have an adverse effect on our results of operations. Investment losses could significantly decrease theour asset base, thereby adversely affecting theour ability to conduct business and pay claims.
TheOur Company is exposed to significant capital market risks related to changes in interest rates, credit spreads, equity prices and foreign exchange rates, which may adversely affect itsour results of operations, financial condition or cash flows.
The Company is exposed to significant capital markets risk related to changes in interest rates, credit spreads, equity prices and foreign currency exchange rates. If significant, declinesDeclines in equity prices, changes in interest rates, changes in credit spreads and the strengthening or weakening of foreign currencies against the U.S. dollar, individually or in tandem,together, could have a material adverse effect on theour consolidated results of operations, financial condition or cash flows.
TheOur exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. TheOur investment portfolio contains interest rate sensitive instruments, such as fixed income securities,maturities and certain preferred stock classified as equity for financial reporting purposes, which may be adversely affected by changes in interest rates from governmental monetary policies, domestic and international economic and political conditions and other factors beyond the control of theour Company. A rise in interest rates would reduce the fair value of theour investment portfolio. It would also provide us the opportunity to earn higher rates of return on funds reinvested. Conversely, a decline in interest rates would increase the fair value of theour investment portfolio. TheOur Company would then presumably earn lower rates of return on assets reinvested. TheOur Company may be forced to liquidate investments prior to maturity at a loss in order to cover liabilities. Although theour Company takes measures to manage the economic risks of investing in a changing interest rate environment, itwe may not be able to mitigate the interest rate risk of itsour assets relative to itsour liabilities.
Included in the fixed income securitiesmaturities are asset-backed and mortgage-backed securities. Changes in interest rates can expose theour Company to prepayment risks on these investments.changes in the timing of expected cash flows. In periods of declining interest rates, mortgage prepayments generally increase and mortgage-backed securities are prepaid more quickly, requiring theour Company to reinvest the proceeds at the then current rates. In periods of rising interest rates, the likelihood of mortgage prepayment decreases and mortgage-backed securities are prepaid at a slower rate, limiting our Company’s ability to capitalize on the higher interest rates because its investments remain invested in mortgage-backed securities for a longer period of time.
The fixed incomematurities portfolio is invested in high quality, investment-grade securities. However,Our Company has limits on the Company is generally permitted to hold up to 2%amount of the total investment portfolio in below investment-grade, high yield fixed income securities.securities that it can hold in its investment portfolio. These securities whichmay pay a
higher rate of interest, and also may have a higher degree of credit or default risk. These securities may also be less liquid in times of economic weakness or market disruptions. While theour Company has put in place procedures to monitor the credit risk and liquidity of theour invested assets, it is possible that, in periods of economic weakness, theour Company may experience default losses in the portfolio. This may result in a reduction of net income, capital and cash flows.
TheOur Company invests a portion of theour portfolio in common stock or preferred stocks.stock. The value of these assets fluctuates with the equity markets. In times of economic weakness, the market value and liquidity of these assets may decline, and may impact our net income, capital and cash flows.
The functional currency of theour Company’s principal insurance and reinsurance subsidiaries is the U.S. dollar. Exchange rate fluctuations relative to the functional currency may materially impact theour financial position, as theour Company conducts business in several non-U.S. currencies. The principal currencies creating foreign currency exchange risk for our operations are the GBP and the CAD. In addition, locally-required capital levels are invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations regardless of currency fluctuations. One currency in the NavRe Latin American division can be considered hyperinflationary (or subject to a monthly inflation rate greater than 50 percent, as many economists generally define such term). However, the balances in that currency are immaterial.
Despite mitigation efforts, an increase in interest rates or a change in foreign exchange rates could have a material adverse effect on theour results of operations, financial position and cash flows.
Capital may not be available to theour Company in the future or may only be available on unfavorable terms.
The capital needs of theour business are dependent on several factors, including the ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover theour losses. If the current capital becomes insufficient for itsour future plans, theour Company may need to raise additional capital through the issuance of stock or debt. Otherwise, in the case of insufficient capital, theour Company may need to limit itsour growth. The terms of equity or debt offering could be unfavorable, for example, causing dilution to the current shareholdersstockholders or such securities may have rights, preferences and privileges that are senior to existing securities. If theour Company was in a situation of having inadequate capital and if it waswe were not able to obtain additional capital, theour business, results of operations and financial condition could be adversely affected to a material extent.
A downgrade in theour ratings could adversely impact the competitive positions of theour operating businesses or negatively affect the ability to implement theour business strategy successfully.
Ratings are a critical factor in establishing the competitive position of insurance companies. The Insurance CompaniesNIC and NSIC are rated by A.M. Best and S&P, and NIIC is rated by S&P. A.M. Best’s and S&P’s ratings reflect their opinions of an insurance company’s financial strength, operating performance, strategic position and ability to meet itsour obligations to policyholders, and are not evaluations directed to investors. The ratings are subject to periodic review by A.M. Best and S&P. Because these ratings have become an increasingly important factor in establishing the competitive position of insurance companies, if these ratings are reduced, theour competitive position in the industry, and therefore the business, could be adversely affected in a material manner. A significant downgrade could result in a substantial loss of business as policyholders might move to other companies with higher ratings. In addition, a significant downgrade could subject theour Company to higher borrowing costs and theour ability to access the capital markets could be negatively impacted. If theour Company were to be downgraded below an “A-”, itwe would be required to provide additional collateral under the letter of credit facility with ING Bank, N.V., London Branch, as Administrative Agent and Letter of Credit Agent. Further, a downgrade below BBB- by S&P would subject theour Company to higher interest rates payable on the 5.75% Senior Notes due October 15, 2023 (“5.75% Senior Notes”).2023. Refer to Note 8,Credit Facilities, and Note 9,Senior Notes7, Debt, in the Notes to Consolidated Financial Statements for additional information regarding such credit facility and 5.75% Senior Notes due October 15, 2023, respectively.
There can be no assurance that theour current ratings will continue for any given period of time. For a further discussion of theour ratings, refer to “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations – Ratings”Ratings included herein.
Continued or increased premium levies by Lloyd’s for the Lloyd’s Central Fund and cash calls for trust fund deposits or a significant downgrade of Lloyd’s A.M. Best rating could materially and adversely affect theour Company.
The Lloyd’s Central Fund protects Lloyd’s policyholders against the failure of a member of Lloyd’s to meet its obligations. The Lloyd’s Central Fund is a mechanism which in effect mutualizes unpaid liabilities among all members, whether individual or corporate. The fundLloyd’s Central Fund is available to back Lloyd’s policies issued after 1992. Lloyd’s requires members to contribute to the Lloyd’s Central Fund, normally in the form of an annual contribution, although a special contribution may be levied. The Council of Lloyd’s has discretion to call up to 3% of underwriting capacity in any one year.
Policies issued before 1993 have been reinsured by Equitas Insurance Limited (“Equitas”), an independent insurance company authorized by the Financial Services Authority.Authority, the predecessor to the PRA and the FCA. However, if Equitas were to fail or otherwise
be unable to meet all of its obligations, Lloyd’s may take the view that it is appropriate to apply the Lloyd’s Central Fund to discharge those liabilities Equitas failed to meet. In that case, the Council of Lloyd’s may resolve to impose a special or additional levy on the existing members, including Lloyd’s corporate members, to satisfy those liabilities.
Additionally, Lloyd’s insurance and reinsurance business is subject to local regulation, and regulators in the United States require Lloyd’s to maintain certain minimum deposits in trust funds as protection for policyholders in the United States. These deposits may be used to cover liabilities in the event of a major claim arising in the United States and Lloyd’s may require theour Company to satisfy cash calls to meet claims payment obligations and maintain minimum trust fund amounts.
Any premium levy or cash call would increase the expenses of NCUL,Navigators Corporate Underwriters, Ltd. (“NCUL”), the corporate member, without providing compensating revenues, and could have a material adverse effect on theour results.
TheOur Company believes that in the event that Lloyd’s rating is downgraded, the downgrade could have a material adverse effect on theour ability to underwrite business through the Lloyd’s Operations and therefore on theour financial condition or results of operations.
The market price of our Parent Company common stock may be volatile.
There has been significant volatility in the market for equity securities. The price of our Parent Company common stock may not remain at or exceed current levels. In addition to the other risk factors detailed herein, the following factors may have an adverse impact on the market price of our Parent Company common stock:
Actual or anticipated variations in the quarterly results of operations, including the result of catastrophes;
Changes in market valuations of companies in the insurance and reinsurance industry;
Changes in expectations of future financial performance or changes in estimates of securities analysts;
Issuances of common shares or other securities in the future;
A downgrade in the credit ratings;
The addition or departure of key personnel; and
Announcements by our Company or our competitors of acquisitions, investments or strategic alliances.
Stock markets in the United States often experience price and volume fluctuations. Market fluctuations, as well as general political and economic conditions such as a recession or interest rate or currency rate fluctuations, could adversely affect the market price of our Parent Company common stock.
There is a risk that our Company may be directly or indirectly exposed to recent uncertainties with regard to European sovereign debt holdings.
Our Company is protected by various treaty and facultative reinsurance agreements. Our exposure to credit risk from any one reinsurer is managed through diversification by reinsuring with a number of different reinsurers, principally in the United States and European reinsurance markets. Consequently, our Company may be indirectly exposed to recent uncertainties with regard to European sovereign debt holdings through certain of our reinsurers. Refer to Note 6, Ceded Reinsurance, in the Notes to Consolidated Financial Statements for a table of the 10 largest reinsurers by the amount of reinsurance recoverable for ceded losses and LAE and ceded unearned premium along with their rating from two rating agencies.
In addition, our Company invests in non-sovereign fixed maturities where the issuer is located in the Euro Area, an economic and monetary union of certain member states within the European Union that have adopted the Euro as their common currency. As of December 31, 2016, the fair value of such securities was $106.6 million, with an amortized cost of $106.8 million, representing 3.6% of our total fixed maturities and equity portfolio. Of this amount, approximately 26.3% represent securities issued by financial institutions domiciled or operating in the Euro area. Our largest exposure is the Netherlands with a total of $39.1 million followed by France with a total of $31.3 million. Globally our Company has no direct exposure to Greece, Portugal, Italy or Spain within the Euro area as of December 31, 2016.
Nonetheless, the failure of the European Union member states to successfully resolve a fiscal or political crisis could result in the devaluation of the Euro, the abandonment of the Euro by one or more members of the European Union or the dissolution of the European Union and it is impossible to predict all of the consequences that this could have on the global economy in general or more
specifically on our business. Any or all of these events could have a material adverse effect on the results of operations, liquidity and financial condition of our Company.
Our businesses are heavily regulated, and changes in regulation may reduce theour profitability and limit growth.
The insurance subsidiariesNIC and NSIC are subject to extensive regulation and supervision in the jurisdictions in which theywe conduct business. This regulation is generally designed to protect the interests of policyholders, as opposed to insurers and their stockholders and other investors, and relates to authorization for lines of business, capital and surplus requirements, investment limitations, underwriting limitations, transactions with affiliates, dividend limitations, changes in control, premium rates and a variety of other financial and non-financial components of an insurance company’s business.
Virtually all states require insurers licensed to do business in that state to bear a portion of the loss suffered by some insureds as the result of impaired or insolvent insurance companies through the operation of guaranty funds. The effect of these arrangements could reduce our profitability in any given period or limit theour ability to grow theour business.
In recent years, the state insurance regulatory framework has come under increased federal scrutiny, and some state legislatures have considered or enacted laws that may alter or increase state authority to regulate insurance companies and insurance holding companies. Further, the NAIC and state insurance regulators are re-examining existing laws and regulations, specifically focusing on
modifications to holding company regulations, interpretations of existing laws and the development of new laws. Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act, which became effective on July 21, 2010, established a Federal Insurance Office to, among other responsibilities; identify issues or gaps in the regulation of insurers that could contribute to a systemic crisis in the insurance industry or the United States financial system. Any proposed or future legislation or NAIC initiatives may be more restrictive than current regulatory requirements or may result in higher costs.
In response to the September 11, 2001 terrorist attacks, the United States Congress has enacted legislation designed to ensure, among other things, the availability of insurance coverage for terrorist acts, including the requirement that insurers provide such coverage in certain circumstances. Refer to “Business - Business – Regulation – United States”States included herein for a discussion of the TRIA, TRIEA and TRIPRA legislation.
ExtensiveIn addition, as a result of the 2016 U.S. presidential election, a number of new legislative and fiscal initiatives may be introduced. Any of those initiatives could cause changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, development and investment in the countries where the Company currently operates, which could adversely affect our business.
Our subsidiaries are subject to the laws and regulations of each country in which they operate, with some jurisdictions imposing comprehensive regulatory regime for financial servicesrequirements and others imposing fewer requirements. Our business in the United Kingdom have been enacted.U.K. is also heavily regulated and must comply with the requirements of the PRA, FCA, Lloyd’s and those imposed upon the Lloyd’s market by overseas regulators where the Syndicate conducts business. Refer to “BusinessBusiness – Regulation – United Kingdom”Kingdom included herein for a discussion of such proposals.regulations in that jurisdiction.
The E.U. Directive on Solvency II may affect how theour Company manages theour business, subject theour Company to higher capital requirements and cause itus to incur additional costs to conduct theour business in the E.U. (including the United Kingdom) and possibly elsewhere.U.K.).
An E.U. directive covering the capital adequacy, risk management and regulatory reporting for insurers, known as Solvency II, was adopted by the European Parliament in April 2009.2009 and became effective on January 1, 2016. Solvency II will introducehas introduced a new system of regulation for insurers operating in the E.U. (including the United Kingdom) and presentspresented a number of risks to us. Although Solvency II was originally stated to have become effective by October 31, 2012, implementation has been delayed several times. On January 31, 2014, EIOPA set up the timeline for the delivery of the Solvency II Implementing Technical Standards and Guidelines. It was stated that the overall goal was to deliver the regulatory and supervisory framework for the technical implementation of the Solvency II regime from the first day of application, January 1, 2016. Over the last few years, theour Company has undertaken a significant amount of work to ensure that it meets the new requirements and this work will continue into 2015.for all of the affected entities. There is also a risk that if the Solvency II requirements are not met and maintained on an on-going basis, theythe regulator may impactincrease the capital requirements for the U.K. Branch of NIC, NIIC and Syndicate 1221.the Syndicate. These new regulations have the potential to adversely affect the profitability of NIC, NIIC, NUAL and the Syndicate, 1221, and to restrict their ability to carry on their businesses as currently conducted. An outstanding issue is the question about how Solvency II will be implemented and whether the new regulations will apply to NIC’s U.K. Branch or to all of its operations, both within and outside of the United Kingdom and the other E.U. countries in which it operates. If the regulations are applied to NIC in its entirety, the Company could be subject to even more onerous requirements under the new regulations. Work is ongoing in this area to find a solution that aligns to the Company’s longer term strategy, but there is no assurance that such a solution can be found.
The inability of theour subsidiaries to pay dividends to theour Parent Company in sufficient amounts would harm theour ability to meet obligations.
TheOur Parent Company is a holding company and relies primarily on dividends from itsour subsidiaries to meet itsour obligations for payment of interest and principal on outstanding debt obligations and corporate expenses. The ability of theour insurance subsidiaries to pay dividends to theour Parent Company in the future will depend on their statutory surplus, on earnings and on regulatory restrictions. For a discussion of theour insurance subsidiaries’ current dividend-paying ability, please refer to “Management’sManagement’s Discussion and Analysis
of Financial Condition and Results of Operations—Operations – Capital Resources”Resources, included herein. TheOur Parent Company, as an insurance holding company, and the underwritingour insurance subsidiaries are subject to regulation by some states. Such regulation generally provides that transactions between companies within the consolidated group must be fair and equitable. Transfers of assets among affiliated companies, certain dividend payments from underwriting subsidiaries and certain material transactions between companies within the consolidated group may be subject to prior notice to, or prior approval by, state regulatory authorities. The underwritingOur insurance subsidiaries are also subject to licensing and supervision by government regulatory agencies in the jurisdictions in which theywe do business. These regulations may set standards of solvency that must be met and maintained, such as the nature of and limitations on investments, the nature of and limitations on dividends to policyholders and stockholders and the nature and extent of required participation in insurance guaranty funds. These regulations may affect theour subsidiaries’ ability to provide theour Parent Company with dividends.
Catastrophe losses could materially reduce profitability.
The Company is exposed to claims arising out of catastrophes, particularly in the Marine insurance line of business, the NavTech and NavRe businesses. The Company has experienced, and will experience in the future, catastrophe losses, which may materially reduce profitability or harm the financial condition of the Company. Catastrophes can be caused by various natural events, including, but not limited to, hurricanes, windstorms, earthquakes, tornadoes, floods, hail, severe winter weather and fires. Catastrophes can also be man-made, such as war, explosions or the World Trade Center attack, or caused by unfortunate events such as the Deepwater Horizon oil rig disaster or the grounding of the cruise ship Costa Concordia. In addition, changing climate conditions could result in an increase in the frequency or severity of natural catastrophes, which could increase exposure to such losses. The incidence and severity
of catastrophes are inherently unpredictable. Although the Company will attempt to manage exposure to such events, the frequency and severity of catastrophic events could exceed estimates, which could have a material adverse effect on the financial condition of the Company.
The market price of Navigators common stock may be volatile.
There has been significant volatility in the market for equity securities. The price of Navigators common stock may not remain at or exceed current levels. In addition to the other risk factors detailed herein, the following factors may have an adverse impact on the market price of Navigators common stock:
Stock markets in the United States often experience price and volume fluctuations. Market fluctuations, as well as general political and economic conditions such as a recession or interest rate or currency rate fluctuations, could adversely affect the market price of Navigators common stock.
There is a risk that the Company may be directly or indirectly exposed to recent uncertainties with regard to European sovereign debt holdings.
The Company is protected by various treaty and facultative reinsurance agreements. The exposure to credit risk from any one reinsurer is managed through diversification by reinsuring with a number of different reinsurers, principally in the United States and European reinsurance markets. Consequently, the Company may be indirectly exposed to recent uncertainties with regard to European sovereign debt holdings through certain of its reinsurers. A table of the 20 largest reinsurers by the amount of reinsurance recoverable for ceded losses and LAE and ceded unearned premium is presented in “Business” along with their rating from two rating agencies. The 20 largest reinsurers from the United States and Europe represent 75.7% of the Reinsurance Recoverables at December 31, 2014.
In addition, the Company invests in non-sovereign fixed maturities where the issuer is located in the Euro Area, an economic and monetary union of certain member states within the European Union that have adopted the Euro as their common currency. As of December 31, 2014, the fair value of such securities was $97.6 million, with an amortized cost of $97.6 million representing 3.8% of the total fixed income and equity portfolio. The largest exposure is in France with a total of $40.1 million followed by The Netherlands with a total of $39.6 million. The Company has no direct material exposure to Greece, Portugal, Italy, Spain, Ukraine or Russia as of December 31, 2014.
Nonetheless, the failure of the European Union member states to successfully resolve a fiscal or political crisis could result in the devaluation of the Euro, the abandonment of the Euro by one or more members of the European Union or the dissolution of the European Union and it is impossible to predict all of the consequences that this could have on the global economy in general or more specifically on the business. Any or all of these events could have a material adverse effect on the results of operations, liquidity and financial condition of the Company.
The determination of the impairments taken on theour investments is subjective and could materially impact theour financial position or results of operations.
The determination of the impairments taken on theour investments varies by investment type and is based upon the periodic evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates itsour evaluations regularly and reflects impairments in operations as such evaluations are revised. TheOur Company cannot be certain that it haswe have accurately assessed the level of impairments taken in itsour financial statements. Furthermore, additional impairments may need to be taken in the future, which could materially impact itsour financial position or results of operations. Historical trends may not be indicative of future impairments.
If the Company experiences difficulties with information technology and telecommunications systems and/or data security, the ability to conduct the business might be adversely affected.
The Company relies heavily on the successful, uninterrupted functioning of the information technology (“IT”) and telecommunications systems. The business and continued expansion is highly dependent upon the ability to perform, in an efficient
and uninterrupted fashion, necessary business functions, such as pricing, quoting and processing policies, paying claims, performing actuarial and other modeling functions. A failure of the IT and telecommunication systems or the termination of third-party software licenses the Company relies on in order to maintain such systems could materially impact the ability to write and process business, provide customer service, pay claims in a timely manner or perform other necessary actuarial, legal, financial and other business functions. Computer viruses, hackers and other external hazards, as well as internal exposures such as potentially dishonest employees, could expose the IT and data systems to security breaches that may result in liability to the Company, cause the data to be corrupted and cause the Company to commit resources, management time and money to prevent or correct security breaches. If the Company does not maintain adequate IT and telecommunications systems, it could experience adverse consequences, including inadequate information on which to base critical decisions, the loss of existing customers, difficulty in attracting new customers, litigation exposures, damage to business reputation and increased administrative expenses. As a result, the Company could experience financial losses and ability of the Company to conduct business might be adversely affected.
Compliance by the Marine business with the legal and regulatory requirements to which theywe are subject is evolving and unpredictable. In addition, compliance with new sanctions and embargo laws could have a material adverse effect on theour business.
The MarineAll of our business like the other business lines,written is required to comply with a wide variety of laws and regulations, including economic sanctions and embargo laws and regulations, applicable to insurance or reinsurance companies, both in the jurisdictions in which they arethe business is organized and where they sellthe business sells their insurance and reinsurance products, and that implicate the conduct of insureds. The insurance industry, in particular as it relates to international insurance and reinsurance companies, has become subject to increased scrutiny in many jurisdictions, including the United States, various states within the United States, the E.U., and various countries within the E.U., and the United Kingdom. For example, in 2012, President Obama signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012 (the “Act”) which created new sanctions and strengthened existing sanctions against Iran. Among other things, the Act intensifies existing sanctions regarding the provision of goods, services, infrastructure or technology to Iran’s petroleum or petrochemical sector, and included provisions relating to persons that engage in certain insurance or re-insurance activities.
Increased regulatory focus on theour Company such as in connection with the matters discussed above, may result in costly compliance burdens and/or may otherwise increase costs, which could materially and adversely impact our financial performance. The introduction of new or expanded economic sanctions applicable to Marinemarine insurance could also force theour Company to exit certain geographic areas or product lines, which could have an adverse impact on our profitability.
Although theour Company intends to maintain compliance with all applicable sanctions and embargo laws and regulations, and have established protocols, policies and procedures reasonably tailored to ensure compliance with all applicable embargo laws and regulations, there can be no assurance that theour Company will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in fines, penalties or other sanctions that could severely impact theour ability to access U.S. capital markets and conduct theour business, and could result in some investors deciding, or being required, to divest their interest, or not to invest, in theour Company. In addition, certain institutional investors may have investment policies or restrictions that prevent them from holding securities of companies that have contracts with countries identified by the U.S. government as state sponsors of terrorism. The determination by these investors not to invest in, or to divest from, investing in the common stock of theour Company may adversely affect the price at which theour common stock trades.
Moreover, theour non-U.S. subsidiaries, such as the Lloyd’s Operations,NUAL and NIIC, may be subject to different sanctions and embargo laws and regulations. The reputation and the market for the securities of theour Company may be adversely affected if the Lloyd’s Operationsany such subsidiary engages in certain activities, even though such activities are lawful under applicable sanctions and embargo laws and regulations.
Our Company could be adversely affected if we do not maintain effective operating procedures and controls.
Our Company engages in a large number of complex insurance and investment activities on a daily basis. We continually work to enhance our operating procedures and internal controls to effectively support our business and ensure that we are able to assess and monitor operational risks that can result from, among other things, errors, failure to document transactions properly or to obtain proper internal authorization, failure to comply with regulatory requirements, information technology failures, external events or fraud. However, a control system, no matter how well designed and operated, has inherent limitations and can provide only reasonable assurance that the control system's objectives will be met. If our operating procedures and controls are not effective or if we
experience difficulties in their implementation, it could lead to financial loss, unanticipated risk exposure (including underwriting, credit and investment risk) or damage to our Company’s reputation.
Our Company may be unable to attract and retain qualified employees.
Our Company depends on the ability to attract and retain qualified executive officers, experienced underwriters, claims professionals and other skilled employees who are knowledgeable about our Company’s lines of business. If the quality of our executive officers, underwriting or claims team and other personnel decreases, our Company may be unable to maintain the current competitive position in the specialty markets in which our Company operates and be unable to expand our operations into new specialty markets.
If our Company experiences difficulties with the efficient functioning of information technology and telecommunications systems, the ability to conduct our business might be adversely affected.
Our Company relies heavily on the successful, uninterrupted functioning of our information technology (“IT”) and telecommunications systems. Our business and continued expansion is highly dependent upon the ability to perform, in an efficient and uninterrupted fashion, necessary business functions, such as pricing, quoting and processing policies, paying claims, performing actuarial and other modeling functions. A failure of our IT and telecommunication systems or the termination of third-party software licenses our Company relies on in order to maintain such systems could materially impact our ability to write and process business, provide customer service, pay claims in a timely manner or perform other necessary actuarial, legal, financial and other business functions. If our Company does not maintain adequate IT and telecommunications systems, we could experience adverse consequences, including inadequate information on which to base critical decisions, the loss of existing customers, difficulty in attracting new customers, litigation exposures, damage to business reputation and increased administrative expenses. As a result, our Company could experience financial losses and the ability of our Company to conduct business might be adversely affected.
Our Company is dependent upon the security of our information technology systems, and a breach of the security of such systems could result in an impairment of our ability to conduct business effectively.
Our Company retains confidential and proprietary information on our IT systems and relies on sophisticated technologies to maintain the security of that information. While, to date, our Company has not experienced a material breach of cybersecurity, any administrative and technical controls and other preventive actions we take to reduce the risk of cyber-incidents and protect our IT systems may be insufficient to prevent physical and electronic break-ins, cyber-attacks or other security breaches to our IT systems. The failure to maintain the security, confidentiality or privacy of sensitive data could harm our Company’s reputation, subject us to legal claims, lead to a loss of customers and revenues and otherwise adversely affect our business and financial results. While our Company maintains cyber liability insurance that provides both third-party liability and first party liability coverages, our insurance may not be sufficient to protect us against all losses.
The withdrawal of the U.K. from the E.U. could have a material adverse effect on our business, business opportunities, results of operations, financial condition and cash flows.
Following the referendum vote that took place in June 2016 in favor of leaving the European Union, the U.K. government is expected to trigger the relevant withdrawal provision of the E.U. Treaty as early as the end of the first quarter of 2017 with formal negotiations on the terms of the U.K.’s withdrawal from the E.U. commencing shortly thereafter. Our international operations are based in the U.K., and we have offices in the E.U. Our U.K. operations are able to conduct business throughout the E.U. as a result of the U.K.’s membership in the E.U. Continuing access to the E.U. market will depend on general trade and services agreements made by the U.K. with the E.U. either during a transitional period or permanently or on specific arrangements made by our U.K. entities and Lloyd’s itself to retain access to the E.U. market. The consequence of making such specific arrangements may include an increase in our cost of doing business. In addition, the overall U.K. withdrawal could, among other outcomes, cause significant volatility in global stock markets, currency exchange rate fluctuations and asset valuations, and disrupt the U.K. market and the E.U. markets in which we operate, by increasing restrictions on the trade and free movement of goods, services and people between the U.K. and the E.U. The withdrawal could also lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. The consequences of a withdrawal in the long term are unknown and not quantifiable at this time. However, given the lack of comparable precedent, any of these effects of a withdrawal, among others, could materially adversely affect our business, business opportunities, results of operations, financial condition and cash flows.
The payment of dividends is at the discretion of our Board of Directors, and the reduction or elimination of dividends could cause a decline in the price of our common stock.
We are not obligated to pay dividends on our Common stock. Any determinations by the Board of Directors to declare and pay cash dividends on our Company’s Common stock will be based primarily upon our Company’s financial condition, results of operations, business requirements, regulatory and legal constraints and any other factors the Board of Directors deems relevant. Several of these factors will be subject to general economic, financial, competitive, legislative and regulatory factors beyond our Company’s control. Any reduction or elimination of dividends could cause our Company’s stock price to decline.
Investment in new insurance ventures or acquisitions may not be successful and presents risks not originally contemplated.
Our Company has invested, and in the future may invest, in new insurance ventures or acquisitions. We cannot assure you that we will be able to identify suitable insurance ventures or acquisition targets, that such transactions will be financed and completed on acceptable terms or that our future insurance ventures or acquisitions will be successful. Even if we do find suitable targets, such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, greater than expected liabilities and expenses, inadequate return of capital, failure to properly integrate operations and retain employees and unidentified issues not discovered in our Company’s due diligence.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
Our executive and administrative office is located at 400 Atlantic Street, Stamford, CT. The lease for this space expires in October 2023. The underwriting operations areWe operate in various locations with non-cancelable operating leases including:
U.S.
Farmington, CT,
Houston, TX,
Tampa, FL.
International
• | Hong Kong(1) |
Stockholm, Sweden and
• | Zurich, Switzerland(1). |
(1) - Office leases are in force at December 21, 2016, however, service operations will not commence until 2017.
In the ordinary course of conducting business, theour subsidiaries are involved in various legal proceedings, either indirectly as insurers for parties or directly as defendants. Most of the these proceedings consist of claims litigation involving theour subsidiaries as either (a) liability insurers defending or providing indemnity for third party claims brought against insureds or (b) insurers defending first party coverage claims brought against them. Theus. Our Company accounts for such activity through the establishment of unpaid losslosses and loss adjustmentLAE reserves. TheOur Company’s management believes that theour ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and cost of defense, will not be material to the consolidated financial condition, results of operations, or cash flows of theour Company.
TheOur subsidiaries are also occasionally involved with other legal actions, some of which assert claims for substantial amounts. These actions include claims asserting extra contractual obligations, such as claims involving allegations of bad faith in the handling of claims or the underwriting of policies. In general, theour Company believes theywe have valid defenses to these cases. TheOur Company’s management expects that the ultimate liability, if any, with respect to such extra-contractual matters will not be material to itsour consolidated financial position. Nonetheless, given the large or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of litigation, an adverse outcome in such matters could, from time to time, have a material adverse outcome on theour consolidated results of operations or cash flows in a particular fiscal quarter or year.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUE PURCHASES OF EQUITY SECURITIES
Market Information
TheOur Parent Company’s common stock is traded over-the-counter on NASDAQ under the symbol NAVG. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.
The following table reflects the high, low and closing trade prices as reported during the four quarters of 2016 and 2015, without retroactive effect of the stock split:
|
| 2016 |
|
| 2015 |
| ||||||||||||||||||
|
| High |
|
| Low |
|
| Close |
|
| High |
|
| Low |
|
| Close |
| ||||||
First Quarter |
| $ | 87.61 |
|
| $ | 79.56 |
|
| $ | 83.87 |
|
| $ | 79.06 |
|
| $ | 68.39 |
|
| $ | 77.84 |
|
Second Quarter |
|
| 94.91 |
|
|
| 81.07 |
|
|
| 91.97 |
|
|
| 79.61 |
|
|
| 76.69 |
|
|
| 77.56 |
|
Third Quarter |
|
| 97.63 |
|
|
| 87.97 |
|
|
| 96.92 |
|
|
| 79.60 |
|
|
| 74.00 |
|
|
| 77.98 |
|
Fourth Quarter |
|
| 118.20 |
|
|
| 91.65 |
|
|
| 117.75 |
|
|
| 88.28 |
|
|
| 77.72 |
|
|
| 85.79 |
|
On December 6, 2016, our Board of Directors declared a two-for-one stock split of The Navigators Group, Inc. Common stock, to be effected in the form of a stock dividend. Stockholders of record at the close of business on December 30, 2016 received one additional share of Common stock for every share of Common stock held. The additional shares of Common stock were issued on January 20, 2017.
The following table reflects the high, low and closing trade prices with retroactive effect of the stock split for the four quarters of 20142016 and 2013 were as follows:2015:
2014 | 2013 | |||||||||||||||||||||||
High | Low | Close | High | Low | Close | |||||||||||||||||||
First Quarter | 63.59 | 58.41 | 61.39 | 59.5 | 51.72 | 58.75 | ||||||||||||||||||
Second Quarter | 67.05 | 55.26 | 67.05 | 62.02 | 54.13 | 57.04 | ||||||||||||||||||
Third Quarter | 67.25 | 60.8 | 61.5 | 61.5 | 53.58 | 57.77 | ||||||||||||||||||
Fourth Quarter | 73.72 | 61.5 | 73.34 | 67.56 | 54.28 | 63.16 |
|
| 2016 |
|
| 2015 |
| ||||||||||||||||||
|
| High |
|
| Low |
|
| Close |
|
| High |
|
| Low |
|
| Close |
| ||||||
First Quarter |
| $ | 43.81 |
|
| $ | 39.78 |
|
| $ | 41.94 |
|
| $ | 39.53 |
|
| $ | 34.20 |
|
| $ | 38.92 |
|
Second Quarter |
|
| 47.46 |
|
|
| 40.54 |
|
|
| 45.99 |
|
|
| 39.81 |
|
|
| 38.35 |
|
|
| 38.78 |
|
Third Quarter |
|
| 48.82 |
|
|
| 43.99 |
|
|
| 48.46 |
|
|
| 39.80 |
|
|
| 37.00 |
|
|
| 38.99 |
|
Fourth Quarter |
|
| 59.10 |
|
|
| 45.83 |
|
|
| 58.88 |
|
|
| 44.14 |
|
|
| 38.86 |
|
|
| 42.90 |
|
Information provided to theour Company by the transfer agent and proxy solicitor indicates that there are approximately 471377 holders of record as of January 20, 2017 and 4,0594,989 beneficial holders of theour common stock, as of January 20, 2015.February 1, 2017.
Five Year Stock Performance Graph
The Five Year Stock Performance Graph and related Cumulative Indexed Returns table, as presented below, reflects the cumulative return on theour Company’s common stock, the Standard & Poor’s 500 Index (“S&P 500 Index”) and the S&P Property and Casualty Insurance Index (the “Insurance Index”) assuming an original investment in each of $100 on December 31, 20092011 (the “Base Period”) and reinvestment of dividends to the extent declared. Cumulative returns for each year subsequent to 20092011 are measured as a change from this Base Period.
The comparison of five year cumulative returns among theour Company, the companies listed in the S&P 500 Index and the Insurance Index are as follows:
| Cumulative Indexed Returns |
| |||||||||||||||||||||||||||||||||||||||||
Cumulative Indexed Returns Year Ended December 31, |
| Years Ended December 31, |
| ||||||||||||||||||||||||||||||||||||||||
Base Period |
| Base Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Company / Index | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
| ||||||||||||||||||||||||
The Navigators Group, Inc. | 100.00 | 106.88 | 99.05 | 105.58 | 130.58 | 151.63 |
|
| 100.00 |
|
| 107.11 |
|
| 132.47 |
|
| 153.82 |
|
| 179.93 |
|
| 247.53 |
| ||||||||||||||||||
S&P 500 Index | 100.00 | 115.06 | 117.49 | 136.29 | 180.43 | 205.11 |
|
| 100.00 |
| 115.88 |
| 153.01 |
| 173.69 |
| 176.07 |
| 196.78 |
| |||||||||||||||||||||||
Insurance Index | 100.00 | 109.23 | 108.95 | 130.86 | 180.96 | 209.44 |
|
| 100.00 |
| 120.00 |
| 165.76 |
| 191.30 |
| 209.15 |
| 241.56 |
|
The following Annual Return Percentage table reflects the annual return on the
Dividends
On July 15, September 30, and December 29, 2016, our Company paid dividends of $0.09 per share to stockholders of record of our Company’s common stock the S&P 500 Indexas of June 20, August 19, and the Insurance Index including reinvestment of dividends to the extent declared.
Annual Return Percentage Year Ended December 31, | ||||||||||||||||||||
Company / Index | 2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||||||
The Navigators Group, Inc. | 6.88 | -7.33 | 6.60 | 23.67 | 16.12 | |||||||||||||||
S&P 500 Index | 15.06 | 2.11 | 16.00 | 32.39 | 13.68 | |||||||||||||||
Insurance Index | 9.23 | -0.26 | 20.11 | 38.29 | 15.74 |
DividendsNovember 18, 2016, respectively.
The Company has not paid or declareddeclaration and amount of any cash dividends on the common stock. While there presently is no intention to pay cash dividends on the common stock, future declarations, if any, aredividend will be at the discretion of the Board of Directors, and the amountswill depend upon many factors, including financial condition, results of such dividends will be dependent upon, amongoperations, business requirements, regulatory and legal constraints and any other factors the resultsBoard of operations and cash flow, financial condition and business needs, restrictive covenants under its credit facilities, the capital and surplus requirements of the subsidiaries and applicable government regulations.Directors deems relevant.
Refer to Note 13, Dividends and Statutory Financial Information,10, Stockholders’ Equity, in the Notes to Consolidated Financial Statements for additional information regarding dividends, including dividend restrictions and net assets available for dividend distribution.
Recent Sales of Unregistered Securities
None
Use of Proceeds from Public Offering of Debt Securities
None
Purchases of Equity Securities by the Issuer
None
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data including consolidated financial information of theour Company for each of the last five calendar years, derived from theour Company’s audited Consolidated Financial Statements. The table should be read in conjunction with Item 7, “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations”,Operations, and Item 8, “FinancialFinancial Statements and Supplementary Data”,Data, included herein.
| Years Ended December 31, |
| ||||||||||||||||||||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||
In thousands, except share and per share amounts | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||||||||||||||||||||||
Operating Information: | ||||||||||||||||||||||||||||||||||||||||
in thousands, except share and per share amounts |
| 2016 |
|
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2012 |
| |||||||||||||||||||||||||
Operating information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Gross written premiums | $ | 1,432,353 | $ | 1,370,517 | $ | 1,286,465 | $ | 1,108,216 | $ | 987,201 |
| $ | 1,568,911 |
|
| $ | 1,453,502 |
|
| $ | 1,432,353 |
|
| $ | 1,370,517 |
|
| $ | 1,286,465 |
| ||||||||||
Net written premiums | 1,000,138 | 887,922 | 833,655 | 753,798 | 653,938 | |||||||||||||||||||||||||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Net earned premiums | 935,895 | 841,939 | 781,964 | 691,645 | 659,931 |
| $ | 1,100,345 |
|
| $ | 984,087 |
|
| $ | 935,895 |
|
| $ | 841,939 |
|
| $ | 781,964 |
| |||||||||||||||
Net investment income | 64,168 | 56,251 | 54,248 | 63,500 | 71,662 |
|
| 79,451 |
|
|
| 68,718 |
|
|
| 64,168 |
|
|
| 56,251 |
|
|
| 54,248 |
| |||||||||||||||
Net other-than-temporary impairment losses | — | (2,393 | ) | (858 | ) | (1,985 | ) | (1,080 | ) | |||||||||||||||||||||||||||||||
Net other-than-temporary impairment losses recognized in earnings |
|
| (150 | ) |
|
| (1,698 | ) |
|
| — |
|
|
| (2,393 | ) |
|
| (858 | ) | ||||||||||||||||||||
Net realized gains (losses) | 12,812 | 22,939 | 41,074 | 11,996 | 41,319 |
|
| 9,186 |
|
|
| 8,373 |
|
|
| 12,812 |
|
|
| 22,939 |
|
|
| 41,074 |
| |||||||||||||||
Other income (loss) |
|
| 8,701 |
|
|
| (491 | ) |
|
| 10,656 |
|
|
| (1,172 | ) |
|
| 1,488 |
| ||||||||||||||||||||
Total revenues | 1,023,531 | 917,564 | 877,916 | 766,385 | 776,975 |
| $ | 1,197,533 |
|
| $ | 1,058,989 |
|
| $ | 1,023,531 |
|
| $ | 917,564 |
|
| $ | 877,916 |
| |||||||||||||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Net losses and loss adjustment expenses |
| $ | 665,448 |
|
| $ | 572,598 |
|
| $ | 545,229 |
|
| $ | 518,961 |
|
| $ | 497,433 |
| ||||||||||||||||||||
Commission expenses |
|
| 165,045 |
|
|
| 129,977 |
|
|
| 125,528 |
|
|
| 113,494 |
|
|
| 121,470 |
| ||||||||||||||||||||
Other operating expenses |
|
| 234,096 |
|
|
| 223,516 |
|
|
| 196,825 |
|
|
| 164,434 |
|
|
| 159,079 |
| ||||||||||||||||||||
Call premium on Senior notes |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 17,895 |
|
|
| — |
| ||||||||||||||||||||
Interest expense |
|
| 15,435 |
|
|
| 15,424 |
|
|
| 15,413 |
|
|
| 10,507 |
|
|
| 8,198 |
| ||||||||||||||||||||
Total expenses |
| $ | 1,080,024 |
|
| $ | 941,515 |
|
| $ | 882,995 |
|
| $ | 825,291 |
|
| $ | 786,180 |
| ||||||||||||||||||||
Income (loss) before income taxes | 140,536 | 92,273 | 91,736 | 32,734 | 98,829 |
|
| 117,509 |
|
|
| 117,474 |
|
|
| 140,536 |
|
|
| 92,273 |
|
|
| 91,736 |
| |||||||||||||||
Income tax expense (benefit) |
|
| 34,783 |
|
|
| 36,417 |
|
|
| 45,207 |
|
|
| 28,807 |
|
|
| 27,974 |
| ||||||||||||||||||||
Net income (loss) | 95,329 | 63,466 | 63,762 | 25,597 | 69,578 |
| $ | 82,726 |
|
| $ | 81,057 |
|
| $ | 95,329 |
|
| $ | 63,466 |
|
| $ | 63,762 |
| |||||||||||||||
Net income per share: | ||||||||||||||||||||||||||||||||||||||||
Net income per share:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Basic | $ | 6.69 | $ | 4.49 | $ | 4.54 | $ | 1.71 | $ | 4.33 |
| $ | 2.85 |
|
| $ | 2.82 |
|
| $ | 3.34 |
|
| $ | 2.25 |
|
| $ | 2.27 |
| ||||||||||
Diluted | $ | 6.51 | $ | 4.42 | $ | 4.45 | $ | 1.69 | $ | 4.24 |
| $ | 2.75 |
|
| $ | 2.73 |
|
| $ | 3.25 |
|
| $ | 2.21 |
|
| $ | 2.23 |
| ||||||||||
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Basic | 14,259,768 | 14,133,925 | 14,052,311 | 14,980,429 | 16,064,770 |
|
| 29,073,803 |
|
|
| 28,785,044 |
|
|
| 28,519,536 |
|
|
| 28,267,851 |
|
|
| 28,104,623 |
| |||||||||||||||
Diluted | 14,646,369 | 14,345,553 | 14,327,820 | 15,183,285 | 16,415,266 |
|
| 30,031,609 |
|
|
| 29,651,490 |
|
|
| 29,292,738 |
|
|
| 28,691,106 |
|
|
| 28,655,640 |
| |||||||||||||||
Combined loss and expense ratio(1): | ||||||||||||||||||||||||||||||||||||||||
Combined loss and expense ratio (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Loss ratio | 58.3 | % | 61.6 | % | 63.6 | % | 69.0 | % | 63.8 | % |
|
| 60.5 | % |
|
| 58.2 | % |
|
| 58.3 | % |
|
| 61.6 | % |
|
| 63.6 | % | ||||||||||
Expense ratio | 34.3 | % | 33.2 | % | 35.7 | % | 35.7 | % | 36.9 | % |
|
| 36.2 | % |
|
| 35.9 | % |
|
| 34.3 | % |
|
| 33.2 | % |
|
| 35.7 | % | ||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Total | 92.6 | % | 94.8 | % | 99.3 | % | 104.7 | % | 100.7 | % |
|
| 96.7 | % |
|
| 94.1 | % |
|
| 92.6 | % |
|
| 94.8 | % |
|
| 99.3 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Balance sheet information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Total investments and cash | $ | 2,820,486 | $ | 2,574,586 | $ | 2,422,254 | $ | 2,233,498 | $ | 2,154,328 | ||||||||||||||||||||||||||||||
Total investments |
| $ | 3,130,523 |
|
| $ | 2,937,226 |
|
| $ | 2,729,735 |
|
| $ | 2,488,077 |
|
| $ | 2,376,918 |
| ||||||||||||||||||||
Total assets | 4,464,176 | 4,169,452 | 4,007,670 | 3,670,007 | 3,531,459 |
|
| 4,814,037 |
|
|
| 4,584,012 |
|
|
| 4,476,185 |
|
|
| 4,169,452 |
|
|
| 4,007,670 |
| |||||||||||||||
Gross losses and LAE reserves | 2,159,634 | 2,045,071 | 2,097,048 | 2,082,679 | 1,985,838 |
|
| 2,289,727 |
|
|
| 2,202,644 |
|
|
| 2,159,634 |
|
|
| 2,045,071 |
|
|
| 2,097,048 |
| |||||||||||||||
Net losses and LAE reserves | 1,308,136 | 1,222,633 | 1,216,909 | 1,237,234 | 1,142,542 |
|
| 1,510,451 |
|
|
| 1,393,126 |
|
|
| 1,308,136 |
|
|
| 1,222,633 |
|
|
| 1,216,909 |
| |||||||||||||||
Senior Notes | 263,440 | 263,308 | 114,424 | 114,276 | 114,138 | |||||||||||||||||||||||||||||||||||
Stockholders’ equity | 1,027,224 | 902,212 | 879,485 | 803,435 | 829,354 | |||||||||||||||||||||||||||||||||||
Senior notes |
|
| 263,728 |
|
|
| 263,580 |
|
|
| 263,440 |
|
|
| 263,308 |
|
|
| 114,424 |
| ||||||||||||||||||||
Stockholders' equity |
|
| 1,178,188 |
|
|
| 1,096,148 |
|
|
| 1,027,224 |
|
|
| 902,212 |
|
|
| 879,485 |
| ||||||||||||||||||||
Common shares outstanding | 14,281,466 | 14,198,496 | 14,046,666 | 13,956,235 | 15,743,511 |
|
| 29,124,139 |
|
|
| 28,861,778 |
|
|
| 28,562,932 |
|
|
| 28,396,992 |
|
|
| 28,093,332 |
| |||||||||||||||
Book value per share(2) | $ | 71.93 | $ | 63.54 | $ | 62.61 | $ | 57.57 | $ | 52.68 | ||||||||||||||||||||||||||||||
Statutory surplus of Navigators Insurance Company | $ | 893,946 | $ | 804,073 | $ | 682,881 | $ | 662,162 | $ | 686,919 | ||||||||||||||||||||||||||||||
Book value per share (3) |
| $ | 40.45 |
|
| $ | 37.98 |
|
| $ | 35.96 |
|
| $ | 31.77 |
|
| $ | 31.31 |
|
(1) - We completed a two-for-one stock split on January 20, 2017. All share and per share data has been retroactively restated on a post-split basis.
(2) - Calculated based on earned premiums.
(2)(3) - Calculated as stockholders’ equity divided by actual shares outstanding as of the date indicated.indicated.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
U.S. GAAP and Non-GAAP Financial Performance Metrics
Throughout this Annual Report, we present our operations in the way we believe will be most meaningful, useful and transparent to anyone using this financial information to evaluate our performance. In addition to the GAAP presentation of Net income, we show certain non-GAAP financial measures that we believe are valuable in managing our business and drawing comparisons to our peers. These measures are Underwriting profit (loss), Combined ratio, Net operating earnings, Net losses and LAE reserves and Book value and Book value per share.
The following is a list of GAAP and non-GAAP measures found throughout this report with their definitions, relationships to GAAP measures and explanations of their importance to our operations:
Underwriting Profit (Loss)
Underwriting profit (loss) represents one measure of the pretax profitability of our insurance operations and is derived by subtracting Net losses and LAE, Commission expenses, Other operating expenses and Other underwriting income (expense) from Net earned premiums. This information is available in total and by segment in Note 2 – Segment Information in the Notes to Consolidated Financial Statements. The nearest comparable GAAP measure is Income before income taxes which, in addition to Underwriting profit (loss), includes Net investment income, Other than temporary impairment (“OTTI”) loss, Net realized gains (losses) on investments, Interest expense and Other income (loss).
Combined Ratio
The Combined ratio is a common insurance industry measure of profitability for any underwriting operation and is calculated in two components. First, the loss ratio is Net losses and LAE divided by Net earned premiums. The second component, the expense ratio, reflects the sum of Commission expenses, insurance operating expenses and Other underwriting income (expense), divided by Net earned premiums. All items included in these components of the Combined ratio are presented in our GAAP Consolidated Financial Statements. The sum of the loss and expense ratios is the Combined ratio. The difference between the Combined ratio and 100 percent reflects the rate of Underwriting profit (loss). For example, a Combined ratio of 85 percent implies that for every $100 of premium we earn, we record $15 of Underwriting profit.
Net Operating Earnings
Net operating earnings is calculated as Net income before after-tax Net realized gains (losses), after-tax OTTI losses recognized in earnings, and after-tax net realized and unrealized foreign exchange gains (losses) resulting from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency) and translation adjustments (translation of foreign currency denominated assets and liabilities into U.S. Dollars (“USD”).
Reserve for losses and LAE
Reserve for losses and LAE, as shown in the liabilities section of our Consolidated Balance Sheets, represents the total obligations to claimants for both estimates of known claims and estimates for IBNR claims. The related asset item, Reinsurance balances recoverable on unpaid losses and LAE, is the estimate of both known claims and IBNR that we expect to recover from reinsurers. The net of these two items is generally referred to as Net losses and LAE reserves and is commonly used in our disclosures regarding the process of establishing these various estimated amounts.
Book Value and Book Value Per Share
Book value is equivalent to Stockholders’ equity and book value per share is calculated by dividing Stockholders’ equity by the number of outstanding shares at the end of the interim period.
The discussion and analysis of our financial condition and results of operations contained herein should be read in conjunction with our consolidated financial statements and accompanying notes which appear elsewhere in this Form 10-K. It contains forward-lookingforward-
looking statements that involve risks and uncertainties. Please refer to “Note on Forward Looking Statements”Forward-Looking Statements and “Risk Factors”Risk Factors for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those described below and elsewhere in this Form 10-K.
TheUnless the context requires otherwise, the terms “we,” “us,” “our,” or “our Company” as used herein are used to mean The Navigators Group, Inc., a Delaware holding company established in 1982, and its subsidiaries, unless the context otherwise requires.subsidiaries. The terms “Parent” orterm “Parent Company” areis used to mean The Navigators Group, Inc. without itsour subsidiaries. Our Company is
On December 6, 2016, our Board of Directors declared a two-for-one stock split of The Navigators Group, Inc. Common stock, to be effected in the form of a stock dividend. Stockholders of record at the close of business on December 30, 2016 received one additional share of Common stock for every share of Common stock held. The additional shares of Common stock were issued on January 20, 2017. All disclosures of shares and per share data have been retroactively adjusted to reflect the stock split for all periods presented.
We are an international insurance company focusing on specialty products within the overall property and casualty insurance market. Ourwith a long-standing area of specialization isin Marine insurance. Our P&C insurance business primarily offers General Liability coverage and Umbrella & Excess Liability coverage to commercial enterprises through our Primary and Excess Casualty divisions. We have also developed niches in Professional Liability insurance, through our D&O and Property Casualty linesE&O divisions. Beginning in 2010, we added reinsurance products through our GlobalRe reporting segment.
In May 2016, our Company received authorization from the PRA and the FCA for a new U.K. based insurance company, NIIC, which is a wholly-owned direct subsidiary of insurance, such as Primaryour Parent Company. Our Company has been fully capitalized in compliance with the terms of the authorization from the PRA and Excess casualty coverages offeredhas been granted a financial strength rating of “A” by Standard & Poor’s. In light of the result of the U.K. referendum held on June 23, 2016 in favor of the U.K. leaving the E.U., the operational and start up plans for NIIC were re-evaluated. It is now anticipated that NIIC will begin writing business in the first quarter of 2017 and through the course of 2017 will write business both in the U.K. and through our European branches. While the precise timing and nature of the U.K’s exit from membership of the E.U. remains uncertain, we have developed contingency plans in order to commercial enterprisesmaintain the required regulatory approvals and Assumed Reinsurance.licenses in the countries of the E.U. in which we wish to do business.
As a result of the U.K. referendum vote in favor of exiting the E.U., for the twelve months ended December 31, 2016, the Great British pound (“GBP”) exchange rate experienced a significant decline in value against the USD. As a result, we have recorded realized and unrealized foreign exchange gains in Other income primarily due to a net GBP monetary liability in our foreign, U.S. functional currency subsidiaries. Additionally, we recorded a foreign currency translation loss in accumulated other comprehensive income (“AOCI”), primarily due to our GBP portfolio investments in NIIC, a GBP functional currency subsidiary. These assets are also the principal driver of the foreign exchange effect in our cash accounts.
Financial Highlights for the Year Ended December 31, 2014- Selected Indicators
|
| Years Ended December 31, |
| |||||||||
amounts in thousands, except per share amounts |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||
Results of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
| $ | 1,100,345 |
|
| $ | 984,087 |
|
| $ | 935,895 |
|
Net investment income |
|
| 79,451 |
|
|
| 68,718 |
|
|
| 64,168 |
|
Underwriting profit (loss) |
|
| 35,892 |
|
|
| 58,118 |
|
|
| 68,908 |
|
Net income |
|
| 82,726 |
|
|
| 81,057 |
|
|
| 95,329 |
|
Net income per diluted share(1) |
| $ | 2.75 |
|
| $ | 2.73 |
|
| $ | 3.25 |
|
|
| December 31, |
| |||||
amounts in thousands, except per share amounts |
| 2016 |
|
| 2015 |
| ||
Balance sheet data: |
|
|
|
|
|
|
|
|
Total assets |
| $ | 4,814,037 |
|
| $ | 4,584,012 |
|
Total stockholders' equity |
|
| 1,178,188 |
|
|
| 1,096,148 |
|
Book value per share(1) |
| $ | 40.45 |
|
| $ | 37.98 |
|
(1) - We completed a two-for-one stock split on January 20, 2017. All per share data has been retroactively restated on a post-split basis.
We classify its business into one Corporate segment (“Corporate”) and two underwriting segments, the Insurance Companies segment (“Insurance Companies”) and the Lloyd’s Operations segment (“Lloyd’s Operations”) which are separately managed by business line divisions. The Insurance Companies are primarily engaged in underwriting Marine insurance, Primary Casualty insurance with a concentration in contractors’ general liability products, Excess Casualty insurance with a concentration in commercial umbrella products, Assumed Reinsurance, Management Liability insurance and Errors & Omissions (“E&O”) insurance. This segment is comprised of Navigators Insurance Company (“NIC”), which includes a United Kingdom (“UK”) branch (“UK Branch”), and Navigators Specialty Insurance Company (“NSIC”), which underwrites business on an excess and surplus lines basis. All of the business underwritten by NSIC is fully reinsured by NIC pursuant to a 100% quota share reinsurance agreement.
The Lloyd’s Operations are primarily engaged in underwriting Marine insurance; Energy & Engineering insurance with a concentration in offshore energy products and onshore energy construction products, Assumed Reinsurance, Management Liability insurance and E&O insurance at Lloyd’s of London (“Lloyd’s”) through Lloyd’s Syndicate 1221 (“Syndicate 1221”). The Corporate segment consists of the Parent Company’s investment income, interest expense and related income tax.
Our revenue is primarily comprised of premiums and investment income. We derive ourCash flow is generated from premiums predominantly from business written by wholly-owned underwriting management companies, Navigators Management Company (“NMC”)collected and Navigators Management (UK) Ltd. (“NMUK”) that manageinvestment income received less paid losses and service insuranceloss expenses, Commission expenses and administrative expenses as well as the timing of reinsurance business written by the Insurance Companies.receipts and payments. Our products are distributed through multiple channels, utilizing global, national and regional retail and wholesale insurance brokers.
Navigators
We report our results of operations consistent with the manner in which our Chief Operating Decision Maker reviews the business to assess performance by our four reportable segments: U.S. Insurance, Int’l Insurance, GlobalRe and Corporate.
The following table presents a summary of our consolidated financial results for the years ended December 31, 2016, 2015 and 2014:
|
| Years Ended December 31, |
|
| Percentage Change |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 vs. |
|
| 2015 vs. |
| ||
amounts in thousands, except per share amounts |
| 2016 |
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| |||||
Gross written premiums |
| $ | 1,568,911 |
|
| $ | 1,453,502 |
|
| $ | 1,432,353 |
|
|
| 7.9 | % |
|
| 1.5 | % |
Ceded written premiums |
|
| (382,687 | ) |
|
| (409,642 | ) |
|
| (432,215 | ) |
|
| (6.6 | %) |
|
| (5.2 | %) |
Net written premiums |
|
| 1,186,224 |
|
|
| 1,043,860 |
|
|
| 1,000,138 |
|
|
| 13.6 | % |
|
| 4.4 | % |
Net earned premiums |
| $ | 1,100,345 |
|
| $ | 984,087 |
|
| $ | 935,895 |
|
|
| 11.8 | % |
|
| 5.1 | % |
Net losses and LAE |
|
| (665,448 | ) |
|
| (572,598 | ) |
|
| (545,229 | ) |
|
| 16.2 | % |
|
| 5.0 | % |
Commission expenses |
|
| (165,045 | ) |
|
| (129,977 | ) |
|
| (125,528 | ) |
|
| 27.0 | % |
|
| 3.5 | % |
Other operating expenses |
|
| (234,096 | ) |
|
| (223,516 | ) |
|
| (196,825 | ) |
|
| 4.7 | % |
|
| 13.6 | % |
Other underwriting income (expense) |
|
| 136 |
|
|
| 122 |
|
|
| 595 |
|
|
| 11.5 | % |
|
| (79.5 | %) |
Underwriting profit (loss) |
| $ | 35,892 |
|
| $ | 58,118 |
|
| $ | 68,908 |
|
|
| (38.2 | %) |
|
| (15.7 | %) |
Net investment income |
|
| 79,451 |
|
|
| 68,718 |
|
|
| 64,168 |
|
|
| 15.6 | % |
|
| 7.1 | % |
Net realized gains (losses) |
|
| 9,036 |
|
|
| 6,675 |
|
|
| 12,812 |
|
|
| 35.4 | % |
|
| (47.9 | %) |
Interest expense |
|
| (15,435 | ) |
|
| (15,424 | ) |
|
| (15,413 | ) |
|
| 0.1 | % |
|
| 0.1 | % |
Other income (loss) |
|
| 8,565 |
|
|
| (613 | ) |
|
| 10,061 |
|
| NM |
|
| NM |
| ||
Income (loss) before income taxes |
| $ | 117,509 |
|
| $ | 117,474 |
|
| $ | 140,536 |
|
|
| 0.0 | % |
|
| (16.4 | %) |
Income tax (expense) benefit |
|
| (34,783 | ) |
|
| (36,417 | ) |
|
| (45,207 | ) |
|
| (4.5 | %) |
|
| (19.4 | %) |
Net income (loss) |
| $ | 82,726 |
|
| $ | 81,057 |
|
| $ | 95,329 |
|
|
| 2.1 | % |
|
| (15.0 | %) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share(1) |
| $ | 2.75 |
|
| $ | 2.73 |
|
| $ | 3.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
| 29.6 | % |
|
| 31.0 | % |
|
| 32.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE ratio |
|
| 60.5 | % |
|
| 58.2 | % |
|
| 58.3 | % |
|
|
|
|
|
|
|
|
Commission expense ratio |
|
| 15.0 | % |
|
| 13.2 | % |
|
| 13.4 | % |
|
|
|
|
|
|
|
|
Other operating expense ratio (2) |
|
| 21.2 | % |
|
| 22.7 | % |
|
| 20.9 | % |
|
|
|
|
|
|
|
|
Combined ratio |
|
| 96.7 | % |
|
| 94.1 | % |
|
| 92.6 | % |
|
|
|
|
|
|
|
|
(1) - We completed a two-for-one stock split on January 20, 2017. All per share data has been retroactively restated on a post-split basis.
(2) - Includes Other operating expenses and Other underwriting income (expense).
NM - Percentage change not meaningful
The following table calculates our net operating earnings for the years ended December 31, 2016, 2015 and 2014:
|
| Years Ended December 31, |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||
|
| 2016 |
|
| 2015 |
|
| 2014 |
|
| Percentage Change |
| ||||||||||||||||||||||||||||||||
amounts in thousands, except per share amounts |
| Pre-Tax |
|
| Tax |
|
| After-Tax |
|
| Pre-Tax |
|
| Tax |
|
| After-Tax |
|
| Pre-Tax |
|
| Tax |
|
| After-Tax |
|
| 2016 vs. 2015 |
|
| 2015 vs. 2014 |
| |||||||||||
Net income |
| $ | 117,509 |
|
| $ | (34,783 | ) |
| $ | 82,726 |
|
| $ | 117,474 |
|
| $ | (36,417 | ) |
| $ | 81,057 |
|
| $ | 140,536 |
|
| $ | (45,207 | ) |
| $ | 95,329 |
|
|
| 2.1 | % |
|
| (15.0 | %) |
Adjustments to Net income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized losses (gains) |
|
| (9,036 | ) |
|
| 3,163 |
|
|
| (5,873 | ) |
|
| (6,675 | ) |
|
| 2,336 |
|
|
| (4,339 | ) |
|
| (12,812 | ) |
|
| 4,485 |
|
|
| (8,327 | ) |
|
| 35.4 | % |
|
| (47.9 | %) |
FX losses (gains) |
|
| (8,626 | ) |
|
| 3,019 |
|
|
| (5,607 | ) |
|
| 622 |
|
|
| (218 | ) |
|
| 404 |
|
|
| (10,061 | ) |
|
| 3,527 |
|
|
| (6,534 | ) |
| NM |
|
| NM |
| ||
Net operating earnings |
| $ | 99,847 |
|
| $ | (28,601 | ) |
| $ | 71,246 |
|
| $ | 111,421 |
|
| $ | (34,299 | ) |
| $ | 77,122 |
|
| $ | 117,663 |
|
| $ | (37,195 | ) |
| $ | 80,468 |
|
|
| (7.6 | %) |
|
| (4.2 | %) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating earnings per common share:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
| $ | 2.45 |
|
|
|
|
|
|
|
|
|
| $ | 2.68 |
|
|
|
|
|
|
|
|
|
| $ | 2.82 |
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
| $ | 2.37 |
|
|
|
|
|
|
|
|
|
| $ | 2.60 |
|
|
|
|
|
|
|
|
|
| $ | 2.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) - We completed a two-for-one stock split on January 20, 2017. All per share data has been retroactively restated on a post-split basis
NM - Percentage change not meaningful
Underwriting Agency Ltd.Profit (Loss)
Underwriting profit was $35.9 million for the year ended December 31, 2016, which decreased by $22.2 million from the same period in 2015, driven by $26.8 million of catastrophic events (“NUAL”CAT”) plus related reinsurance reinstatement premiums (“RRPs”) of $1.8 million, $35.7 million of net additional current accident year (“AY”) reserve development due to large loss activity in our Int’l Insurance segment, and an increase in Other operating expense as we continue to invest in our European expansion and GlobalRe reporting segment. These items were partially offset by $28.5 million of favorable loss emergence on prior AY’s and increased production.
Underwriting profit was $58.1 million for the year ended December 31, 2015, which decreased by $10.8 million from the same period in 2014, mostly driven by Hurricane Joaquin CAT losses, which resulted in a $10.0 million net loss and $4.0 million of related RRPs, partially offset by increased production and favorable loss emergence on prior accident years (“AY”). Additionally, operating expenses increased due to our European expansion.
For additional information on the drivers of Underwriting profit see the U.S. Insurance, Int’l Insurance and GlobalRe reporting segment results sections included herein.
A major component of our Underwriting profit (loss) is due to Net losses and LAE. The following table presents the impact of changes in reserves and RRPs on our Net losses and LAE ratio for the years ended December 31, 2016, 2015, and 2014:
|
| Years Ended December 31, |
| |||||||||
|
| 2016 |
|
| 2015 |
|
| 2014 |
| |||
Net losses and LAE ratio, reported |
|
| 60.5 | % |
|
| 58.2 | % |
|
| 58.3 | % |
RRPs |
|
| -0.1 | % |
|
| 0.0 | % |
|
| -0.3 | % |
Additional net current AY release/(development) |
|
| -5.7 | % |
|
| -4.9 | % |
|
| -2.7 | % |
Net prior AY reserve release/(strengthening) |
|
| 2.6 | % |
|
| 6.6 | % |
|
| 5.9 | % |
Net losses and LAE ratio, adjusted |
|
| 57.3 | % |
|
| 59.9 | % |
|
| 61.2 | % |
For the year ended December 31, 2016, we recorded $28.5 million of net prior AY reserve releases including $25.0 million, $2.2 million and $1.3 million of reserve releases from our Int’l Insurance, GlobalRe and U.S. Insurance reporting segments, respectively, all due to favorable loss emergence. This was offset by $62.5 million of additional net current AY reserve development, of which $26.8 million was due to CAT losses, including $11.7 million related to the Alberta Wildfires, $7.1 million due to Hurricane Matthew, $3.8 million due to the Ecuador earthquake and $3.3 million due to the Taiwan earthquake. Additionally, we incurred $35.7 million of non-CAT net current AY development, mostly due to large losses in our Int’l Insurance Marine and Int’l Insurance P&C operating segments, and $2.0 million of net RRPs primarily related to the CATs noted above.
For the year ended December 31, 2015, we recorded $64.7 million of net prior AY reserve releases including $29.3 million, $26.2 million and $9.1 million of reserve releases from our U.S. Insurance, Int’l Insurance and GlobalRe reporting segments, respectively, all due to favorable loss emergence. This was partially offset by $48.5 million of additional net current AY reserve development related to large loss activity and $0.6 million of RRPs.
For the year ended December 31, 2014, we recorded $55.8 million of net prior AY reserve releases primarily driven by $38.3 million, $15.4 million and $2.1 million of reserve releases from our Int’l Insurance, U.S. Insurance and GlobalRe reporting segments, respectively, all due to favorable loss emergence. This was partially offset by $16.8 million of additional net current AY reserve development related to large loss activity and $4.4 million of RRPs.
Net Investment Income
Our Net investment income was derived from the following sources:
|
| Years Ended December 31, |
|
| Percentage Change |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 vs. |
|
| 2015 vs. |
| ||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| |||||
Fixed maturities |
| $ | 67,772 |
|
| $ | 61,572 |
|
| $ | 57,219 |
|
|
| 10.1 | % |
|
| 7.6 | % |
Equity securities |
|
| 14,271 |
|
|
| 9,813 |
|
|
| 9,036 |
|
|
| 45.4 | % |
|
| 8.6 | % |
Short-term investments |
|
| 727 |
|
|
| 683 |
|
|
| 911 |
|
|
| 6.4 | % |
|
| (25.0 | %) |
Total investment income |
| $ | 82,770 |
|
| $ | 72,068 |
|
| $ | 67,166 |
|
|
| 14.8 | % |
|
| 7.3 | % |
Investment expenses |
|
| (3,319 | ) |
|
| (3,350 | ) |
|
| (2,998 | ) |
|
| (0.9 | %) |
|
| 11.7 | % |
Net investment income |
| $ | 79,451 |
|
| $ | 68,718 |
|
| $ | 64,168 |
|
|
| 15.6 | % |
|
| 7.1 | % |
The increase in total Net investment income for all years presented as compared to the prior years was primarily due to growth of invested assets coupled with an increase in pretax yields, which was driven in part by an increased allocation to higher yielding preferred stocks. The annualized pre-tax yields, excluding Net realized gains and losses and OTTI losses recognized in earnings, on a Lloyd’s underwriting agency that manages Syndicate 1221. We control 100%consolidated basis were 2.6%, 2.4% and 2.3%, respectively, for the years ended December 31, 2016, 2015 and 2014.
As part of Syndicate 1221’s stamp capacity through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd. (“NCUL”)overall investment strategy, we seek to build a tax efficient investment portfolio by maintaining an allocation to tax exempt municipal bonds. The tax-exempt portion of our investment portfolio was approximately 17.1% of the fixed maturities investment portfolio as of December 31, 2016. Additionally, substantially all of our equity portfolio is invested in tax efficient securities which qualify for the dividends received deduction. The tax equivalent yields for the years ended December 31, 2016, 2015 and 2014 on a consolidated basis were 2.9%, 2.7% and 2.5%, respectively.
OTTI Losses Recognized in Earnings
Our Company had one credit related OTTI loss of $0.2 million from our Fixed maturities portfolio during the year ended December 31, 2016. Our Company had three credit related OTTI losses totaling $1.7 million from our equity portfolio during the year ended December 31, 2015, which is referred to as a corporate namewere for certain common stocks in the Lloyd’s market. In addition, weenergy sector and aerospace industry that were impacted by global economic events. Our Company did not have also established underwriting agenciesany credit related OTTI losses for the year ended December 31, 2014.
Net Realized Gains and Losses
Net realized gains and losses, excluding OTTI losses recognized in Antwerp, Belgium; Stockholm, Sweden;earnings, for the periods indicated were as follows:
|
| Years Ended December 31, |
|
| Percentage Change |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 vs. |
|
| 2015 vs. |
| ||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| |||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
| $ | 5,681 |
|
| $ | 4,756 |
|
| $ | 8,326 |
|
|
| 19.4 | % |
|
| (42.9 | %) |
Losses |
|
| (4,271 | ) |
|
| (5,926 | ) |
|
| (2,610 | ) |
|
| (27.9 | %) |
|
| 127.0 | % |
Fixed maturities, net |
| $ | 1,410 |
|
| $ | (1,170 | ) |
| $ | 5,716 |
|
| NM |
|
| NM |
| ||
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
| $ | 890 |
|
| $ | 130 |
|
| $ | — |
|
| NM |
|
| NM |
| ||
Losses |
|
| (1,552 | ) |
|
| (383 | ) |
|
| — |
|
| NM |
|
| NM |
| ||
Short-term, net |
| $ | (662 | ) |
|
| (253 | ) |
| $ | — |
|
| NM |
|
| NM |
| ||
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains |
| $ | 9,096 |
|
| $ | 14,331 |
|
| $ | 9,447 |
|
|
| (36.5 | %) |
|
| 51.7 | % |
Losses |
|
| (658 | ) |
|
| (4,535 | ) |
|
| (2,351 | ) |
|
| (85.5 | %) |
|
| 92.9 | % |
Equity securities, net |
| $ | 8,438 |
|
| $ | 9,796 |
|
| $ | 7,096 |
|
|
| (13.9 | %) |
|
| 38.0 | % |
Net realized gains |
| $ | 9,186 |
|
| $ | 8,373 |
|
| $ | 12,812 |
|
|
| 9.7 | % |
|
| (34.6 | %) |
NM - Percentage change not meaningful
Net realized gains and Copenhagen, Denmark,losses are generated as well as branchespart of the appointed representative, Navigators Underwriting Ltd. (“NUL”),normal ongoing management of our investment portfolio. Net realized gains of $9.2 million for the year ended December 31, 2016 are primarily due to the sale of equity securities. Realized losses of $4.3 million and $1.6 million for the year ended December 31, 2016 in the European Economic Areafixed maturities and short term portfolios, respectively, are primarily due to the foreign exchange losses in our Canadian Dollar (“EEA”CAD”), and GBP portfolios. Net realized gains of $8.4 million for the year ended December 31, 2015 are primarily due to the sale of equity securities. Realized losses of $5.9 million in Milan, Italy; Rotterdam; The Netherlands,fixed maturities are primarily due to foreign exchange loss on the sale and Paris,
Other Income (Loss)
France, which underwrite risks pursuant to binding authoritiesOther income (loss) for the years ended December 31, 2016, 2015 and 2014 was $8.6 million, ($0.6) million and $10.1 million, respectively. Other income (loss) primarily consists of realized and unrealized foreign exchange gains and losses mostly driven by the strengthening of the USD against the GBP and CAD. 2016 included $10.2 million of unrealized foreign exchange gain and ($1.6) million of realized foreign exchange loss. 2015 included $0.3 million of realized foreign exchange gain and ($0.9) million of unrealized foreign exchange loss. 2014 was impacted by a $10.0 million foreign currency translation gain in connection with NUAL intoa change in the functional currency of the Syndicate 1221. We have also established a presencethat took place in Brazil and China through contractual arrangements with local affiliatesthe first quarter of Lloyd’s.
For financial information by segment, refer to2014. See Note 3,Segment Information,1 – Organizations & Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements, included herein.herein for additional information regarding the foreign currency adjustment.
While management takes into consideration a wide rangeIncome Taxes
We recorded an effective tax rate of factors in planning29.6%, 31.0% and 32.2% for December 31, 2016, 2015 and 2014, respectively. Our effective tax rate for each of the years differs from the federal tax rate of 35.0% principally due to tax-exempt investment income and dividends received deduction.
The following tables summarize our business strategyConsolidated Financial Results by reporting segment for the years ended December 31, 2016, 2015 and evaluating results of operations, there are certain factors that management believes are fundamental to understanding how we are managed. First, underwriting profit is consistently emphasized as a primary goal, above premium growth. Underwriting profit is a non-GAAP financial measure of performance and underwriting profitability, which is derived from net earned premium less the sum of net losses and Loss Adjustment Expenses (“LAE”), commission expenses, other2014:
|
| Year Ended December 31, 2016 |
| |||||||||||||||||||
|
| U.S. |
|
| Int'l |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
amounts in thousands |
| Insurance |
|
| Insurance |
|
| GlobalRe |
|
| Corporate (1) |
|
|
|
| Total |
| |||||
Net earned premiums |
| $ | 629,308 |
|
| $ | 307,416 |
|
| $ | 163,621 |
|
| $ | — |
|
|
|
| $ | 1,100,345 |
|
Net losses and LAE |
|
| (397,860 | ) |
|
| (178,284 | ) |
|
| (89,304 | ) |
|
| — |
|
|
|
|
| (665,448 | ) |
Commission expenses |
|
| (70,812 | ) |
|
| (61,703 | ) |
|
| (34,008 | ) |
|
| 1,478 |
|
|
|
|
| (165,045 | ) |
Other operating expenses |
|
| (128,108 | ) |
|
| (86,395 | ) |
|
| (19,593 | ) |
|
| — |
|
|
|
|
| (234,096 | ) |
Other underwriting income (expense) |
|
| 1,092 |
|
|
| — |
|
|
| 522 |
|
|
| (1,478 | ) |
|
|
|
| 136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
| $ | 33,620 |
|
| $ | (18,966 | ) |
| $ | 21,238 |
|
| $ | — |
|
|
|
| $ | 35,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 79,451 |
|
|
|
|
| 79,451 |
|
Net realized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 9,036 |
|
|
|
|
| 9,036 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (15,435 | ) |
|
|
|
| (15,435 | ) |
Other income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8,565 |
|
|
|
|
| 8,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
| $ | 33,620 |
|
| $ | (18,966 | ) |
| $ | 21,238 |
|
| $ | 81,617 |
|
|
|
| $ | 117,509 |
|
Income tax (expense) benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (34,783 | ) |
|
|
|
| (34,783 | ) |
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 82,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE ratio |
|
| 63.2 | % |
|
| 58.0 | % |
|
| 54.6 | % |
|
|
|
|
|
|
|
| 60.5 | % |
Commission expense ratio |
|
| 11.3 | % |
|
| 20.1 | % |
|
| 20.8 | % |
|
|
|
|
|
|
|
| 15.0 | % |
Other operating expense ratio (2) |
|
| 20.2 | % |
|
| 28.1 | % |
|
| 11.6 | % |
|
|
|
|
|
|
|
| 21.2 | % |
Combined ratio |
|
| 94.7 | % |
|
| 106.2 | % |
|
| 87.0 | % |
|
|
|
|
|
|
|
| 96.7 | % |
(1) - Includes Corporate segment intercompany eliminations.
(2) - Includes Other operating expenses and otherOther underwriting income or loss. Management’s assessment(expense).
|
| Year Ended December 31, 2015 |
| |||||||||||||||||
|
| U.S. |
|
| Int'l |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
amounts in thousands |
| Insurance |
|
| Insurance |
|
| GlobalRe |
|
| Corporate (1) |
|
| Total |
| |||||
Net earned premiums |
| $ | 555,836 |
|
| $ | 259,960 |
|
| $ | 168,291 |
|
| $ | — |
|
| $ | 984,087 |
|
Net losses and LAE |
|
| (343,497 | ) |
|
| (134,702 | ) |
|
| (94,399 | ) |
|
| — |
|
|
| (572,598 | ) |
Commission expenses |
|
| (56,319 | ) |
|
| (43,676 | ) |
|
| (32,240 | ) |
|
| 2,258 |
|
|
| (129,977 | ) |
Other operating expenses |
|
| (131,407 | ) |
|
| (75,867 | ) |
|
| (16,242 | ) |
|
| — |
|
|
| (223,516 | ) |
Other underwriting income (expense) |
|
| 1,690 |
|
|
| — |
|
|
| 690 |
|
|
| (2,258 | ) |
|
| 122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
| $ | 26,303 |
|
| $ | 5,715 |
|
| $ | 26,100 |
|
| $ | — |
|
| $ | 58,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 68,718 |
|
|
| 68,718 |
|
Net realized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6,675 |
|
|
| 6,675 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (15,424 | ) |
|
| (15,424 | ) |
Other income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (613 | ) |
|
| (613 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
| $ | 26,303 |
|
| $ | 5,715 |
|
| $ | 26,100 |
|
| $ | 59,356 |
|
| $ | 117,474 |
|
Income tax (expense) benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (36,417 | ) |
|
| (36,417 | ) |
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 81,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE ratio |
|
| 61.8 | % |
|
| 51.8 | % |
|
| 56.1 | % |
|
|
|
|
|
| 58.2 | % |
Commission expense ratio |
|
| 10.1 | % |
|
| 16.8 | % |
|
| 19.2 | % |
|
|
|
|
|
| 13.2 | % |
Other operating expense ratio (2) |
|
| 23.4 | % |
|
| 29.2 | % |
|
| 9.2 | % |
|
|
|
|
|
| 22.7 | % |
Combined ratio |
|
| 95.3 | % |
|
| 97.8 | % |
|
| 84.5 | % |
|
|
|
|
|
| 94.1 | % |
(1) - Includes Corporate segment intercompany eliminations.
(2) - Includes Other operating expenses and Other underwriting income (expense).
|
| Year Ended December 31, 2014 |
| |||||||||||||||||
|
| U.S. |
|
| Int'l |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
amounts in thousands |
| Insurance |
|
| Insurance |
|
| GlobalRe |
|
| Corporate (1) |
|
| Total |
| |||||
Net earned premiums |
| $ | 504,289 |
|
| $ | 243,485 |
|
| $ | 188,121 |
|
| $ | — |
|
| $ | 935,895 |
|
Net losses and LAE |
|
| (311,839 | ) |
|
| (115,079 | ) |
|
| (118,311 | ) |
|
| — |
|
|
| (545,229 | ) |
Commission expenses |
|
| (49,840 | ) |
|
| (44,426 | ) |
|
| (33,429 | ) |
|
| 2,167 |
|
|
| (125,528 | ) |
Other operating expenses |
|
| (115,817 | ) |
|
| (65,275 | ) |
|
| (15,733 | ) |
|
| — |
|
|
| (196,825 | ) |
Other underwriting income (expense) |
|
| 2,241 |
|
|
| 32 |
|
|
| 489 |
|
|
| (2,167 | ) |
|
| 595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
| $ | 29,034 |
|
| $ | 18,737 |
|
| $ | 21,137 |
|
| $ | — |
|
| $ | 68,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 64,168 |
|
|
| 64,168 |
|
Net realized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 12,812 |
|
|
| 12,812 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (15,413 | ) |
|
| (15,413 | ) |
Other income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 10,061 |
|
|
| 10,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
| $ | 29,034 |
|
| $ | 18,737 |
|
| $ | 21,137 |
|
| $ | 71,628 |
|
| $ | 140,536 |
|
Income tax (expense) benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (45,207 | ) |
|
| (45,207 | ) |
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 95,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE ratio |
|
| 61.8 | % |
|
| 47.3 | % |
|
| 62.9 | % |
|
|
|
|
|
| 58.3 | % |
Commission expense ratio |
|
| 9.9 | % |
|
| 18.2 | % |
|
| 17.8 | % |
|
|
|
|
|
| 13.4 | % |
Other operating expense ratio (2) |
|
| 22.5 | % |
|
| 26.8 | % |
|
| 8.1 | % |
|
|
|
|
|
| 20.9 | % |
Combined ratio |
|
| 94.2 | % |
|
| 92.3 | % |
|
| 88.8 | % |
|
|
|
|
|
| 92.6 | % |
(1) - Includes Corporate segment intercompany eliminations.
(2) - Includes Other operating expenses and Other underwriting income (expense).
The following tables summarize our financial results by operating segment for our U.S. Insurance reporting segment for the years ended December 31, 2016, 2015 and 2014:
U.S. Insurance |
| ||||||||||||||||
|
| Year Ended December 31, 2016 |
|
|
|
|
| ||||||||||
amounts in thousands |
| Marine |
| P&C |
| Professional Liability |
| Total |
|
| % Change 2016 vs. 2015 |
| |||||
Gross written premiums |
| $ | 169,405 |
| $ | 631,562 |
| $ | 118,428 |
| $ | 919,395 |
|
|
| 6.2 | % |
Ceded written premiums |
|
| (70,858 | ) |
| (135,888 | ) |
| (29,081 | ) |
| (235,827 | ) |
|
| (12.3 | %) |
Net written premiums |
|
| 98,547 |
|
| 495,674 |
|
| 89,347 |
|
| 683,568 |
|
|
| 14.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
| $ | 100,132 |
| $ | 453,673 |
| $ | 75,503 |
| $ | 629,308 |
|
|
| 13.2 | % |
Net losses and LAE |
|
| (50,087 | ) |
| (295,877 | ) |
| (51,896 | ) |
| (397,860 | ) |
|
| 15.8 | % |
Commission expenses |
|
| (8,469 | ) |
| (52,483 | ) |
| (9,860 | ) |
| (70,812 | ) |
|
| 25.7 | % |
Other operating expenses |
|
| (27,559 | ) |
| (81,469 | ) |
| (19,080 | ) |
| (128,108 | ) |
|
| (2.5 | %) |
Other underwriting income (expense) |
|
| 465 |
|
| 582 |
|
| 45 |
|
| 1,092 |
|
|
| (35.4 | %) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
| $ | 14,482 |
| $ | 24,426 |
| $ | (5,288 | ) | $ | 33,620 |
|
|
| 27.8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE ratio |
|
| 50.0 | % |
| 65.2 | % |
| 68.7 | % |
| 63.2 | % |
|
|
|
|
Commission expense ratio |
|
| 8.5 | % |
| 11.6 | % |
| 13.1 | % |
| 11.3 | % |
|
|
|
|
Other operating expense ratio (1) |
|
| 27.0 | % |
| 17.8 | % |
| 25.2 | % |
| 20.2 | % |
|
|
|
|
Combined ratio |
|
| 85.5 | % |
| 94.6 | % |
| 107.0 | % |
| 94.7 | % |
|
|
|
|
(1) - Includes Other operating expenses and Other underwriting income (expense).
U.S. Insurance |
| ||||||||||||||||
|
| Year Ended December 31, 2015 |
|
|
|
|
| ||||||||||
amounts in thousands |
| Marine |
| P&C |
| Professional Liability |
| Total |
|
| % Change 2015 vs. 2014 |
| |||||
Gross written premiums |
| $ | 158,124 |
| $ | 596,673 |
| $ | 110,984 |
| $ | 865,781 |
|
|
| 7.3 | % |
Ceded written premiums |
|
| (61,916 | ) |
| (152,168 | ) |
| (54,691 | ) |
| (268,775 | ) |
|
| 5.4 | % |
Net written premiums |
|
| 96,208 |
|
| 444,505 |
|
| 56,293 |
|
| 597,006 |
|
|
| 8.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
| $ | 96,082 |
| $ | 401,408 |
| $ | 58,346 |
| $ | 555,836 |
|
|
| 10.2 | % |
Net losses and LAE |
|
| (43,553 | ) |
| (266,806 | ) |
| (33,138 | ) |
| (343,497 | ) |
|
| 10.2 | % |
Commission expenses |
|
| (11,606 | ) |
| (39,931 | ) |
| (4,782 | ) |
| (56,319 | ) |
|
| 13.0 | % |
Other operating expenses |
|
| (27,082 | ) |
| (81,866 | ) |
| (22,459 | ) |
| (131,407 | ) |
|
| 13.5 | % |
Other underwriting income (expense) |
|
| 489 |
|
| 1,122 |
|
| 79 |
|
| 1,690 |
|
|
| (24.6 | %) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
| $ | 14,330 |
| $ | 13,927 |
| $ | (1,954 | ) | $ | 26,303 |
|
|
| (9.4 | %) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE ratio |
|
| 45.3 | % |
| 66.5 | % |
| 56.8 | % |
| 61.8 | % |
|
|
|
|
Commission expense ratio |
|
| 12.1 | % |
| 9.9 | % |
| 8.2 | % |
| 10.1 | % |
|
|
|
|
Other operating expense ratio (1) |
|
| 27.7 | % |
| 20.1 | % |
| 38.3 | % |
| 23.4 | % |
|
|
|
|
Combined ratio |
|
| 85.1 | % |
| 96.5 | % |
| 103.3 | % |
| 95.3 | % |
|
|
|
|
(1) - Includes Other operating expenses and Other underwriting income (expense).
U.S. Insurance |
| ||||||||||||
|
| Year Ended December 31, 2014 |
| ||||||||||
amounts in thousands |
| Marine |
| P&C |
| Professional Liability |
| Total |
| ||||
Gross written premiums |
| $ | 154,233 |
| $ | 543,045 |
| $ | 109,830 |
| $ | 807,108 |
|
Ceded written premiums |
|
| (46,685 | ) |
| (169,953 | ) |
| (38,345 | ) |
| (254,983 | ) |
Net written premiums |
|
| 107,548 |
|
| 373,092 |
|
| 71,485 |
|
| 552,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
| $ | 105,650 |
| $ | 314,833 |
| $ | 83,806 |
| $ | 504,289 |
|
Net losses and LAE |
|
| (42,057 | ) |
| (220,263 | ) |
| (49,519 | ) |
| (311,839 | ) |
Commission expenses |
|
| (13,025 | ) |
| (25,497 | ) |
| (11,318 | ) |
| (49,840 | ) |
Other operating expenses |
|
| (24,205 | ) |
| (70,903 | ) |
| (20,709 | ) |
| (115,817 | ) |
Other underwriting income (expense) |
|
| 839 |
|
| 1,263 |
|
| 139 |
|
| 2,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
| $ | 27,202 |
| $ | (567 | ) | $ | 2,399 |
| $ | 29,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE ratio |
|
| 39.8 | % |
| 70.0 | % |
| 59.1 | % |
| 61.8 | % |
Commission expense ratio |
|
| 12.3 | % |
| 8.1 | % |
| 13.5 | % |
| 9.9 | % |
Other operating expense ratio (1) |
|
| 22.2 | % |
| 22.1 | % |
| 24.5 | % |
| 22.5 | % |
Combined ratio |
|
| 74.3 | % |
| 100.2 | % |
| 97.1 | % |
| 94.2 | % |
(1) - Includes Other operating expenses and Other underwriting income (expense).
Gross Written Premiums
Gross written premiums increased $53.6 million for the year ended December 31, 2016 compared to the same period in 2015 due to strong growth across all of our trendsoperating segments. Our P&C operating segment increased $34.9 million driven by new business production from our Auto and potentialProperty products of $20.9 million and $13.3 million, respectively. In addition, our Marine and Professional Liability operating segments increased $11.3 million and $7.4 million, respectively, as compared to the same period in 2015, driven by new business production in our Craft, Cargo and Fishing Vessel products, as well as increased renewal premiums in our E&O and D&O divisions despite a difficult rate environment.
For the year ended December 31, 2016, average renewal rates decreased 0.1% as compared to the same period in 2015, driven by a 0.5% decrease from our Marine operating segment.
Gross written premiums increased $58.7 million for the year ended December 31, 2015 compared to the same period in 2014 due to strong new business production and improving market conditions in our P&C operating segment, which increased $53.6 million. Our
Excess Casualty and Primary Casualty divisions increased $23.5 million and $15.9 million, respectively, as a result of continued improvement within the construction market. In addition, our Environmental division increased $8.5 million due to strong new business production.
For the year ended December 31, 2015, average renewal rates decreased 1.3% as compared to the same period in 2014, with decreases in our Marine, P&C and Professional Liability operating segments of 0.7%, 1.5% and 1.4%, respectively. This was offset by new business production achieved through our continued investment in our underwriting teams in addition to improved market conditions across key businesses.
Ceded Written Premiums
Ceded written premiums decreased $32.9 million for the year ended December 31, 2016 compared to the same period in 2015, mostly due to the reduction in proportional reinsurance coverage that supports our Excess Casualty and Environmental risks within our P&C operating segment, the nonrenewal of our E&O proportional reinsurance treaty in the fourth quarter of 2015 within our Professional Liability segment, and the year over year effect of RRPs. For the year ended December 31, 2016, RRPs decreased $4.6 million to $0.8 million as compared to $5.4 million in the prior year, primarily due to the reduction in large loss activity within our Marine operating segment. These items were partially offset by increases in our proportional reinsurance coverage within our Marine operating segment.
Ceded written premiums increased $13.8 million for the year ended December 31, 2015 compared to the same period in 2014, mostly due to growth in underwriting profit is the dominant factor in its decisions with respect to whether or not to expand a business line, enter into a new niche, product or territory or, conversely, to contract capacity in any business line. In addition, management focuses on controlling the costs of our operations. Management believes that careful monitoringGross written premiums. The impact of the costsimplementation of existing operationsadditional proportional reinsurance programs in Marine and assessmentProfessional Liability operating segments, during the second half of costs of potential growth opportunities are important to our profitability. Access to capital also has a significant impact on management’s outlook for our operations. The Insurance Companies’ operations and ability to grow their business and take advantage of market opportunities are constrained by regulatory capital requirements and rating agency assessments of capital adequacy. Similarly, the ability to grow our Lloyd’s Operations is subject to capital and operating requirements of Lloyd’s2014 and the U.K. regulatory authorities.first quarter of 2015, were almost completely offset by a reduction in proportional reinsurance, in the second half of 2015, that primarily supports Excess Casualty and Environmental casualty risks within our P&C operating segment.
Management’s decisions
For the year ended December 31, 2015, RRPs of $5.4 million increased $3.6 million as compared to prior year of $1.8 million, primarily due to large loss activity within our Marine operating segment.
Net Earned Premiums
Net earned premiums increased $73.5 million for the year ended December 31, 2016 compared to the same period in 2015, due to growth in Gross written premiums, a reduced level of proportional reinsurance within our P&C and Professional Liability operating segments, and a $4.6 million decrease in RRPs from 2015.
Net earned premiums increased $51.5 million for the year ended December 31, 2015 compared to the same period in 2014, primarily due to growth in Gross written premiums and a reduced level of proportional reinsurance that supports certain casualty risks in the second half of 2015 within our P&C operating segment. This was partially offset by decreases in Net earned premium in both our Marine and Professional Liability operating segments, which were impacted by the implementation of additional reinsurance programs in the second half of 2014 and first quarter of 2015, as well as, a $3.6 million increase in RRPs from 2014.
Net Losses and LAE
The Net losses and LAE reserves as of December 31, 2016, 2015 and 2014 are also greatly influencedas follows:
|
| U.S. Insurance |
| ||||||||||
|
| Year Ended December 31, 2016 |
| ||||||||||
amounts in thousands |
| Marine |
| P&C |
| Professional Liability |
| Total |
| ||||
Case reserves |
| $ | 56,701 |
| $ | 201,368 |
| $ | 24,555 |
| $ | 282,624 |
|
IBNR reserves |
|
| 54,259 |
|
| 603,509 |
|
| 70,559 |
|
| 728,327 |
|
Total |
| $ | 110,960 |
| $ | 804,877 |
| $ | 95,114 |
| $ | 1,010,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. Insurance |
| ||||||||||
|
| Year Ended December 31, 2015 |
| ||||||||||
amounts in thousands |
| Marine |
| P&C |
| Professional Liability |
| Total |
| ||||
Case reserves |
| $ | 68,677 |
| $ | 170,988 |
| $ | 42,546 |
| $ | 282,211 |
|
IBNR reserves |
|
| 55,408 |
|
| 514,777 |
|
| 60,528 |
|
| 630,713 |
|
Total |
| $ | 124,085 |
| $ | 685,765 |
| $ | 103,074 |
| $ | 912,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. Insurance |
| ||||||||||
|
| Year Ended December 31, 2014 |
| ||||||||||
amounts in thousands |
| Marine |
| P&C |
| Professional Liability |
| Total |
| ||||
Case reserves |
| $ | 74,699 |
| $ | 144,334 |
| $ | 56,501 |
| $ | 275,534 |
|
IBNR reserves |
|
| 64,390 |
|
| 391,643 |
|
| 85,369 |
|
| 541,402 |
|
Total |
| $ | 139,089 |
| $ | 535,977 |
| $ | 141,870 |
| $ | 816,936 |
|
The following tables present the impact of reserve development and RRPs on our Net losses and LAE ratio for the years ended December 31, 2016, 2015 and 2014:
|
| U.S. Insurance |
| |||||||||||||
|
| Year Ended December 31, 2016 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
| Professional |
|
|
|
|
| |
|
| Marine |
|
| P&C |
|
| Liability |
|
| Total |
| ||||
Net losses and LAE ratio, reported |
|
| 50.0 | % |
|
| 65.2 | % |
|
| 68.7 | % |
|
| 63.2 | % |
RRPs |
|
| -0.4 | % |
|
| 0.0 | % |
|
| 0.0 | % |
|
| -0.1 | % |
Additional net current AY release/(development) |
|
| -1.1 | % |
|
| -0.4 | % |
|
| 0.0 | % |
|
| -0.5 | % |
Net prior AY reserve release/(strengthening) |
|
| 10.0 | % |
|
| -0.6 | % |
|
| -7.9 | % |
|
| 0.2 | % |
Net losses and LAE ratio, adjusted |
|
| 58.5 | % |
|
| 64.2 | % |
|
| 60.8 | % |
|
| 62.8 | % |
|
| U.S. Insurance |
| |||||||||||||
|
| Year Ended December 31, 2015 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
| Professional |
|
|
|
|
| |
|
| Marine |
|
| P&C |
|
| Liability |
|
| Total |
| ||||
Net losses and LAE ratio, reported |
|
| 45.3 | % |
|
| 66.5 | % |
|
| 56.8 | % |
|
| 61.8 | % |
RRPs |
|
| -1.9 | % |
|
| -0.2 | % |
|
| 0.0 | % |
|
| -0.6 | % |
Additional net current AY release/(development) |
|
| -10.0 | % |
|
| -1.2 | % |
|
| 0.0 | % |
|
| -2.7 | % |
Net prior AY reserve release/(strengthening) |
|
| 24.8 | % |
|
| 0.2 | % |
|
| 6.5 | % |
|
| 5.2 | % |
Net losses and LAE ratio, adjusted |
|
| 58.2 | % |
|
| 65.3 | % |
|
| 63.3 | % |
|
| 63.7 | % |
|
| U.S. Insurance |
| |||||||||||||
|
| Year Ended December 31, 2014 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
| Professional |
|
|
|
|
| |
|
| Marine |
|
| P&C |
|
| Liability |
|
| Total |
| ||||
Net losses and LAE ratio, reported |
|
| 39.8 | % |
|
| 70.0 | % |
|
| 59.1 | % |
|
| 61.8 | % |
RRPs |
|
| -0.9 | % |
|
| 0.1 | % |
|
| 0.0 | % |
|
| -0.2 | % |
Additional net current AY release/(development) |
|
| -5.5 | % |
|
| -0.1 | % |
|
| 0.0 | % |
|
| -1.2 | % |
Net prior AY reserve release/(strengthening) |
|
| 26.9 | % |
|
| -5.4 | % |
|
| 4.1 | % |
|
| 3.0 | % |
Net losses and LAE ratio, adjusted |
|
| 60.3 | % |
|
| 64.6 | % |
|
| 63.2 | % |
|
| 63.4 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016, our U.S. Insurance reporting segment recorded $1.3 million of net prior AY reserve releases driven by access to specialized underwriting and claims expertise$10.1 million of reserve releases in our linesMarine operating segment, mostly due to a decline in large loss activity, partially offset by $2.8 million and $6.0 million of business. We have chosennet prior AY reserve strengthening in our P&C and Professional Liability operating segments, mostly due to operateunfavorable development on large claims within our Primary Casualty and D&O divisions, and a $1.2 million
increase in specialty nichesour Professional Liability reserve for uncollectible reinsurance. The loss ratio was also unfavorably impacted by $2.9 million of net current AY loss from our Marine and P&C operating segments as well as $0.8 million of RRPs, which were primarily within our Marine operating segment.
For the year ended December 31, 2015, our U.S. Insurance reporting segment recorded $29.3 million of net prior AY reserve releases driven by $24.8 million, $3.8 million and $0.7 million of reserve releases from our Marine, Professional Liability and P&C operating segments, respectively, mostly due to a decline in large loss activity. The favorable prior AY reserve releases were partially offset by a $10.0 million current AY loss related to Hurricane Joaquin. The loss ratio was also unfavorably impacted by $5.4 million of RRPs, which were primarily within our Marine operating segment.
For the year ended December 31, 2014, our U.S. Insurance reporting segment recorded $15.4 million of net prior AY reserve releases primarily driven by $29.0 million and $3.5 million of reserve releases from our Marine and Professional Liability operating segments, respectively. Marine was favorably impacted by a decline in large loss activity and Professional Liability benefited from $4.5 million favorable loss emergence within D&O due to a cash settlement of a contract dispute with certain common characteristics, which provide us witha former third party administrator, partially offset by unfavorable loss emergence from our E&O division. The aforementioned releases were partially offset by $17.1 million of prior AY reserve strengthening in our P&C operating segment, primarily related to unfavorable loss activity in our Primary Casualty division. The loss ratio was also unfavorably impacted by $1.8 million of RRPs, primarily within our Marine operating segment.
The changes in Net losses and LAE ratio, as adjusted, are primarily due to the opportunitymix of business earned.
Commission Expenses
The Commission expense ratio increased 1.2 percentage points for the year ended December 31, 2016 compared to usethe same period in 2015, primarily due to less ceded proportional reinsurance and related ceding commission benefit within our technical underwriting expertiseProfessional Liability and P&C operating segments, partially offset by the implementation of new proportional reinsurance programs within our Marine operating segment.
The Commission expense ratio increased 0.2 percentage points for the year ended December 31, 2015 compared to the same period in order2014, primarily due to realize underwriting profit. Asless ceded proportional reinsurance and related ceding commission benefit within our P&C operating segment as a result we have focused on underserved markets for businesses characterizedof the change in the proportional reinsurance program previously discussed partially offset by higher severitya decrease in commission expense ratio in the Professional Liability operating segment, and lower frequency of loss where we believe our intellectual capital and financial strength bring meaningful value. In contrast, we have avoided niches that we believe have a high frequency of loss activity and/or are subject to a high levellesser extent, our Marine operating segment, due to the implementation of regulatory requirements, such as Workers Compensation and Personal Automobile insurance, because we do not believe; our technical underwriting expertise is of as much value in these types of businesses. Examples of niches that have the characteristics we look for include Bluewater Hull which provides coverage for physical damage to highly valued cruise ships, and Directors and Officers Liability insurance (“D&O”) which covers litigation exposure of a corporation’s directors and officers. These types of exposures require substantial technical expertise. We attempt to mitigate the financial impact of severe claims on our results through conservative and detailed underwriting, prudent use ofnew proportional reinsurance and a balanced portfolio of risks.programs.
For additional information, regardingrefer to Ceded written premiums discussion above.
Other Operating Expenses
Other operating expenses decreased $3.3 million for the year ended December 31, 2016 compared to the same period in 2015 due to decreases in non-recurring project specific information technology and professional fee expenditures.
Other operating expenses increased $15.6 million for the year ended December 31, 2015 compared to the same period in 2014, primarily driven by continued investment in our underwriting teams, support staff and infrastructure as well as an increase in our professional service fees and information technology expenses to support business growth and initiatives.
The following tables summarize our financial results by operating segment for our Int’l Insurance reporting segment for the years ended December 31, 2016, 2015 and 2014:
Int'l Insurance |
| ||||||||||||||||
|
| Year Ended December 31, 2016 |
|
|
|
|
| ||||||||||
amounts in thousands |
| Marine |
| P&C |
| Professional Liability |
| Total |
|
| % Change 2016 vs. 2015 |
| |||||
Gross written premiums |
| $ | 183,228 |
| $ | 181,094 |
| $ | 120,149 |
| $ | 484,471 |
|
|
| 17.6 | % |
Ceded written premiums |
|
| (40,092 | ) |
| (69,606 | ) |
| (28,806 | ) |
| (138,504 | ) |
|
| 3.4 | % |
Net written premiums |
|
| 143,136 |
|
| 111,488 |
|
| 91,343 |
|
| 345,967 |
|
|
| 24.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
| $ | 141,593 |
| $ | 89,455 |
| $ | 76,368 |
| $ | 307,416 |
|
|
| 18.3 | % |
Net losses and LAE |
|
| (67,051 | ) |
| (68,995 | ) |
| (42,238 | ) |
| (178,284 | ) |
|
| 32.4 | % |
Commission expenses |
|
| (34,018 | ) |
| (14,529 | ) |
| (13,156 | ) |
| (61,703 | ) |
|
| 41.3 | % |
Other operating expenses |
|
| (33,170 | ) |
| (34,075 | ) |
| (19,150 | ) |
| (86,395 | ) |
|
| 13.9 | % |
Other underwriting income (expense) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| NM |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
| $ | 7,354 |
| $ | (28,144 | ) | $ | 1,824 |
| $ | (18,966 | ) |
| NM |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE ratio |
|
| 47.4 | % |
| 77.1 | % |
| 55.3 | % |
| 58.0 | % |
|
|
|
|
Commission expense ratio |
|
| 24.0 | % |
| 16.2 | % |
| 17.2 | % |
| 20.1 | % |
|
|
|
|
Other operating expense ratio (1) |
|
| 23.4 | % |
| 38.2 | % |
| 25.1 | % |
| 28.1 | % |
|
|
|
|
Combined ratio |
|
| 94.8 | % |
| 131.5 | % |
| 97.6 | % |
| 106.2 | % |
|
|
|
|
NM - Percentage change not meaningful
(1) - Includes Other operating expenses and Other underwriting income (expense).
Int'l Insurance |
| ||||||||||||||||
|
| Year Ended December 31, 2015 |
|
|
|
|
| ||||||||||
amounts in thousands |
| Marine |
| P&C |
| Professional Liability |
| Total |
|
| % Change 2015 vs. 2014 |
| |||||
Gross written premiums |
| $ | 183,707 |
| $ | 130,729 |
| $ | 97,511 |
| $ | 411,947 |
|
|
| (3.0 | %) |
Ceded written premiums |
|
| (36,515 | ) |
| (67,722 | ) |
| (29,768 | ) |
| (134,005 | ) |
|
| (22.1 | %) |
Net written premiums |
|
| 147,192 |
|
| 63,007 |
|
| 67,743 |
|
| 277,942 |
|
|
| 9.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
| $ | 149,256 |
| $ | 55,320 |
| $ | 55,384 |
| $ | 259,960 |
|
|
| 6.8 | % |
Net losses and LAE |
|
| (79,737 | ) |
| (20,478 | ) |
| (34,487 | ) |
| (134,702 | ) |
|
| 17.1 | % |
Commission expenses |
|
| (32,187 | ) |
| (4,999 | ) |
| (6,490 | ) |
| (43,676 | ) |
|
| (1.7 | %) |
Other operating expenses |
|
| (30,419 | ) |
| (26,294 | ) |
| (19,154 | ) |
| (75,867 | ) |
|
| 16.2 | % |
Other underwriting income (expense) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| NM |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
| $ | 6,913 |
| $ | 3,549 |
| $ | (4,747 | ) | $ | 5,715 |
|
|
| (69.5 | %) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE ratio |
|
| 53.4 | % |
| 37.0 | % |
| 62.3 | % |
| 51.8 | % |
|
|
|
|
Commission expense ratio |
|
| 21.6 | % |
| 9.0 | % |
| 11.7 | % |
| 16.8 | % |
|
|
|
|
Other operating expense ratio (1) |
|
| 20.4 | % |
| 47.6 | % |
| 34.6 | % |
| 29.2 | % |
|
|
|
|
Combined ratio |
|
| 95.4 | % |
| 93.6 | % |
| 108.6 | % |
| 97.8 | % |
|
|
|
|
NM - Percentage change not meaningful
(1) - Includes Other operating expenses and Other underwriting income (expense).
Int'l Insurance |
| ||||||||||||
|
| Year Ended December 31, 2014 |
| ||||||||||
amounts in thousands |
| Marine |
| P&C |
| Professional Liability |
| Total |
| ||||
Gross written premiums |
| $ | 190,787 |
| $ | 158,139 |
| $ | 75,978 |
| $ | 424,904 |
|
Ceded written premiums |
|
| (47,805 | ) |
| (98,087 | ) |
| (26,029 | ) |
| (171,921 | ) |
Net written premiums |
|
| 142,982 |
|
| 60,052 |
|
| 49,949 |
|
| 252,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
| $ | 141,097 |
| $ | 62,520 |
| $ | 39,868 |
| $ | 243,485 |
|
Net losses and LAE |
|
| (71,986 | ) |
| (23,317 | ) |
| (19,776 | ) |
| (115,079 | ) |
Commission expenses |
|
| (37,660 | ) |
| (5,295 | ) |
| (1,471 | ) |
| (44,426 | ) |
Other operating expenses |
|
| (28,222 | ) |
| (22,156 | ) |
| (14,897 | ) |
| (65,275 | ) |
Other underwriting income (expense) |
|
| 16 |
|
| 9 |
|
| 7 |
|
| 32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
| $ | 3,245 |
| $ | 11,761 |
| $ | 3,731 |
| $ | 18,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE ratio |
|
| 51.0 | % |
| 37.3 | % |
| 49.6 | % |
| 47.3 | % |
Commission expense ratio |
|
| 26.8 | % |
| 8.5 | % |
| 3.7 | % |
| 18.2 | % |
Other operating expense ratio (1) |
|
| 20.0 | % |
| 35.4 | % |
| 37.4 | % |
| 26.8 | % |
|
|
| 97.8 | % |
| 81.2 | % |
| 90.7 | % |
| 92.3 | % |
(1) - Includes Other operating expenses and Other underwriting income (expense).
Gross Written Premiums
Gross written premiums increased $72.5 million for the year ended December 31, 2016 compared to the same period in 2015, primarily due to increases in our P&C and Professional Liability operating segments of $50.4 million and $22.6 million, respectively. Our P&C operating segment benefitted from $24.6 million growth in our Property division, mostly driven by our expanded coverage for international exposures, as well as growth of $10.9 million and $6.9 million from our Energy & Engineering and Casualty divisions, and the commencement of the PV&T product in 2016. The increase in our Professional Liability operating segment was due to new business production across all divisions.
For the year ended December 31, 2016 average renewal premium rates decreased 4.1%, due to decreases of 1.6%, 8.0%, and 3.5% in our Marine, P&C and Professional Liability operating segments, respectively. The impact of this has been offset by new business production and the commencement of the PV&T product.
Gross written premiums decreased $13.0 million for the year ended December 31, 2015 compared to the same period in 2014, primarily due to decreases in our P&C and Marine operating segments of $27.6 million and $6.9 million, respectively. Our P&C operating segment was impacted by severe market conditions in our Energy & Engineering division and decreased $54.7 million as compared to the same period in 2014, partially offset by growth in our Property division of $21.7 million from new business production. The decrease in our Marine operating segment is due to declines in rates coupled with lower renewal activity. The decline in Gross written premiums was partially offset by an increase of $21.3 million in our Professional Liability operating segment, driven by new business production in our E&O division.
For the year ended December 31, 2015 average renewal premium rates decreased 5.4%, due to decreases of 2.3%, 9.9%, and 4.6% in our Marine, P&C and Professional Liability operating segments, respectively.
Ceded Written Premiums
Ceded written premiums increased $4.5 million for the year ended December 31, 2016 compared to the same period in 2015, driven by our Marine and P&C operating segments of $3.6 million and $1.9 million, respectively, mostly due to the year on year effect of RRPs. For the year ended December 31, 2016, RRPs of $2.9 million were incurred, compared to a release of $4.0 million in RRPs in 2015 resulting in a $6.9 million increase. This was partially offset by decreases in proportional reinsurance coverages in our P&C and Professional Liability operating segments.
Ceded written premiums decreased $37.9 million for the year ended December 31, 2015 compared to the same period in 2014, driven by decreases in our P&C and Marine operating segments of $30.4 million and $11.3 million, respectively. The decrease in both operating segments is primarily driven by an overall decline in Gross written premiums which attract proportional reinsurance as well as a reduction in proportional reinsurance programs. The decrease was partially offset by an increase of $3.7 million in our Professional Liability operating segment due to higher Gross written premiums with attached proportional reinsurance.
For the year ended December 31, 2015, RRPs releases of $4.0 million decreased by $10.6 million as compared to the same period in 2014 when RRPs of $6.6 million were incurred. 2015 benefited from RRP releases of $4.0 million, which included releases due to reductions in Superstorm Sandy related losses.
Net Earned Premiums
Net earned premiums increased $47.5 million for the year ended December 31, 2016 as compared to the same period in 2015. This was driven by growth in our P&C operating segment of $34.1 million, mostly due to increased production from our Property division related to expanded coverage for international exposures, and the newly formed PV&T product. In addition our Professional Liability operating segment increased $21.0 million, mostly in our Financial Institutions product. These increases were partially offset by a decrease in our Marine operating segment and increased RRPs expense of $2.9 million in 2016 compared to a release of $4.0 million in 2015, which are fully earned when written.
Net earned premiums increased $16.5 million for the year ended December 31, 2015 as compared to the same period in 2014. This was driven by increases in our Professional Liability operating segment of $15.5 million due to growth in new business in our E&O division and increases in our Marine operating segment of $8.2 million, due to a $9.7 million decrease in RRPs. These increases were partially offset by a decrease in our P&C operating segment due to the decreases in Gross written premiums.
Net Losses and LAE
The Net losses and LAE reserves as of December 31, 2016, 2015 and 2014 are as follows:
|
| Int'l Insurance |
|
| ||||||||||
|
| Year Ended December 31, 2016 |
|
| ||||||||||
amounts in thousands |
| Marine |
| P&C |
| Professional Liability |
| Total |
|
| ||||
Case reserves |
| $ | 163,124 |
| $ | 66,496 |
| $ | 30,106 |
| $ | 259,726 |
|
|
IBNR reserves |
|
| 36,118 |
|
| 18,192 |
|
| 70,103 |
|
| 124,413 |
|
|
Total |
| $ | 199,242 |
| $ | 84,688 |
| $ | 100,209 |
| $ | 384,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Int'l Insurance |
|
| ||||||||||
|
| Year Ended December 31, 2015 |
|
| ||||||||||
amounts in thousands |
| Marine |
| P&C |
| Professional Liability |
| Total |
|
| ||||
Case reserves |
| $ | 167,157 |
| $ | 40,313 |
| $ | 19,583 |
| $ | 227,053 |
|
|
IBNR reserves |
|
| 61,409 |
|
| 19,735 |
|
| 63,229 |
|
| 144,373 |
|
|
Total |
| $ | 228,566 |
| $ | 60,048 |
| $ | 82,812 |
| $ | 371,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Int'l Insurance |
|
| ||||||||||
|
| Year Ended December 31, 2014 |
|
| ||||||||||
amounts in thousands |
| Marine |
| P&C |
| Professional Liability |
| Total |
|
| ||||
Case reserves |
| $ | 168,575 |
| $ | 41,695 |
| $ | 12,466 |
| $ | 222,736 |
|
|
IBNR reserves |
|
| 75,673 |
|
| 21,391 |
|
| 49,712 |
|
| 146,776 |
|
|
Total |
| $ | 244,248 |
| $ | 63,086 |
| $ | 62,178 |
| $ | 369,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present the impact of changes in reserves and RRPs on our Net losses and LAE ratio for the years ended December 31, 2016, 2015 and 2014:
|
| Int'l Insurance |
| |||||||||||||
|
| Year Ended December 31, 2016 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
| Professional |
|
|
|
|
| |
|
| Marine |
|
| P&C |
|
| Liability |
|
| Total |
| ||||
Net losses and LAE ratio, reported |
|
| 47.4 | % |
|
| 77.1 | % |
|
| 55.3 | % |
|
| 58.0 | % |
RRPs |
|
| -0.2 | % |
|
| -2.0 | % |
|
| 0.0 | % |
|
| -0.5 | % |
Additional net current AY release/(development) |
|
| -13.2 | % |
|
| -40.3 | % |
|
| 0.3 | % |
|
| -17.9 | % |
Net prior AY reserve release/(strengthening) |
|
| 15.5 | % |
|
| 7.7 | % |
|
| -5.4 | % |
|
| 8.1 | % |
Net losses and LAE ratio, adjusted |
|
| 49.5 | % |
|
| 42.5 | % |
|
| 50.2 | % |
|
| 47.7 | % |
|
| Int'l Insurance |
| |||||||||||||
|
| Year Ended December 31, 2015 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
| Professional |
|
|
|
|
| |
|
| Marine |
|
| P&C |
|
| Liability |
|
| Total |
| ||||
Net losses and LAE ratio, reported |
|
| 53.4 | % |
|
| 37.0 | % |
|
| 62.3 | % |
|
| 51.8 | % |
RRPs |
|
| 1.3 | % |
|
| 0.3 | % |
|
| 0.0 | % |
|
| 0.8 | % |
Additional net current AY release/(development) |
|
| -16.0 | % |
|
| -12.6 | % |
|
| 0.0 | % |
|
| -11.8 | % |
Net prior AY reserve release/(strengthening) |
|
| 15.0 | % |
|
| 15.4 | % |
|
| -7.5 | % |
|
| 10.2 | % |
Net losses and LAE ratio, adjusted |
|
| 53.7 | % |
|
| 40.1 | % |
|
| 54.8 | % |
|
| 51.0 | % |
|
| Int'l Insurance |
| |||||||||||||
|
| Year Ended December 31, 2014 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
| Professional |
|
|
|
|
| |
|
| Marine |
|
| P&C |
|
| Liability |
|
| Total |
| ||||
Net losses and LAE ratio, reported |
|
| 51.0 | % |
|
| 37.3 | % |
|
| 49.6 | % |
|
| 47.3 | % |
RRPs |
|
| -2.1 | % |
|
| -0.3 | % |
|
| 0.0 | % |
|
| -1.2 | % |
Additional net current AY release/(development) |
|
| -13.6 | % |
|
| 1.2 | % |
|
| 0.0 | % |
|
| -7.7 | % |
Net prior AY reserve release/(strengthening) |
|
| 21.5 | % |
|
| 6.1 | % |
|
| 6.9 | % |
|
| 15.3 | % |
Net losses and LAE ratio, adjusted |
|
| 56.8 | % |
|
| 44.3 | % |
|
| 56.5 | % |
|
| 53.7 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016, our Int’l Insurance reporting segment recorded $25.0 million of net prior AY reserve releases, driven by our Marine and P&C operating segments of $22.1 million and $7.1 million, respectively, related to favorable loss emergence. These releases were partially offset by $4.1 million of net prior AY reserve strengthening within our Professional Liability operating segment due to an increase in our reserve for uncollectible reinsurance. Additional net current AY reserve development of $55.7 million was mostly comprised of unfavorable loss emergence driven by a large Cargo loss in our Marine operating segment and large Offshore Energy losses in our P&C operating segment, as well as $17.4 million of CAT losses including $7.1 million due to Hurricane Matthew, $6.9 million related to the Alberta Wildfires, and $2.3 million due to the Taiwan Earthquake, predominantly from our Property business.
For the year ended December 31, 2015, our Int’l Insurance reporting segment recorded $26.2 million of prior AY reserve releases, driven by our Marine and P&C operating segments of $21.9 million and $8.5 million, respectively, related to favorable loss emergence. These releases were partially offset by $4.2 million of prior AY reserve strengthening within our Professional Liability operating segment due to a large loss. Current AY reserve development of $30.2 million was driven by our Marine and P&C operating segments of $23.3 million and $6.9 million, respectively, arising from large loss activity.
For the year ended December 31, 2014, our Int’l Insurance reporting segment recorded $38.3 million of net prior AY reserve releases primarily driven by our Marine operating segment of $31.7 million, our P&C operating segment of $3.8 million and our Professional Liability operating segment of $2.7 million, due to favorable loss emergence from prior years. These releases were partially offset by $19.2 million of current AY reserve strengthening within our Marine operating segment due to large loss activity in the current AY.
The changes in Net losses and LAE ratio, as adjusted, are primarily due to the mix of business earned driven by the repositioning of certain Hull and Cargo products in our Marine operating segment and certain E&O products within our Professional Liability operating segment.
Commission Expenses
The commission expense ratio for the year ended December 31, 2016 increased 3.3 percentage points as compared to the same period in 2015, mostly due to the mix of business earned, driven by a greater proportion of Property and E&O products, which carry higher gross commission rates, less proportional reinsurance, and additional RRP’s.
The commission expense ratio for the year ended December 31, 2015 decreased 1.4 percentage points as compared to the same period in 2014, primarily driven by a favorable reduction in profit commission accrual of $0.9 million in our Marine operating segment as well as a $9.7 million decrease in RRPs as compared to the same period in 2014. These decreases were partially offset by overall growth in our Professional Liability operating segment which carries proportional reinsurance coverage that does not attract commission over-riders, as well as mix of business within our P&C operating segment principally by growth in our Property division which does not carry a proportional reinsurance program.
Other Operating Expenses
For the year ended December 31, 2016, Other operating expenses increased $10.5 million as compared to the same period in 2015, due to the growth of our P&C business, specifically our International Property and PV&T businesses. We also incurred higher Lloyd’s charges due to increased volumes of European business attracting higher foreign levies. Increased costs also arose relating to additional support staff, costs associated with authorization of NIIC and related startup of operations, offset by favorable foreign exchange rates applied to GBP expenses incurred.
For the year ended December 31, 2015, Other operating expenses increased $10.6 million as compared to the same period in 2014, due to continued investment in new underwriting initiatives in continental Europe including new underwriting teams and additional support staff. Higher temporary employment expenses and professional fees were also incurred due to increased regulatory requirements, offset by favorable foreign exchange rates applied to GBP expenses incurred.
The following table summarizes our financial results for our GlobalRe reporting segment for the years ended December 31, 2016, 2015 and 2014:
|
| GlobalRe |
|
|
|
|
|
|
|
|
| |||||||
|
| Years Ended December 31, |
|
| % Change |
|
| % Change |
| |||||||||
amounts in thousands |
| 2016 |
| 2015 |
| 2014 |
|
| 2016 vs 2015 |
|
| 2015 vs.2014 |
| |||||
Gross written premiums |
| $ | 165,045 |
| $ | 175,774 |
| $ | 200,341 |
|
|
| (6.1 | %) |
|
| (12.3 | %) |
Ceded written premiums |
|
| (8,356 | ) |
| (6,862 | ) |
| (5,311 | ) |
|
| 21.8 | % |
|
| 29.2 | % |
Net written premiums |
|
| 156,689 |
|
| 168,912 |
|
| 195,030 |
|
|
| (7.2 | %) |
|
| (13.4 | %) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums |
| $ | 163,621 |
| $ | 168,291 |
| $ | 188,121 |
|
|
| (2.8 | %) |
|
| (10.5 | %) |
Net losses and LAE |
|
| (89,304 | ) |
| (94,399 | ) |
| (118,311 | ) |
|
| (5.4 | %) |
|
| (20.2 | %) |
Commission expenses |
|
| (34,008 | ) |
| (32,240 | ) |
| (33,429 | ) |
|
| 5.5 | % |
|
| (3.6 | %) |
Other operating expenses |
|
| (19,593 | ) |
| (16,242 | ) |
| (15,733 | ) |
|
| 20.6 | % |
|
| 3.2 | % |
Other underwriting income (expense) |
|
| 522 |
|
| 690 |
|
| 489 |
|
|
| (24.4 | %) |
|
| 41.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
| $ | 21,238 |
| $ | 26,100 |
| $ | 21,137 |
|
|
| (18.6 | %) |
|
| 23.5 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE ratio |
|
| 54.6 | % |
| 56.1 | % |
| 62.9 | % |
|
|
|
|
|
|
|
|
Commission expense ratio |
|
| 20.8 | % |
| 19.2 | % |
| 17.8 | % |
|
|
|
|
|
|
|
|
Other operating expense ratio (1) |
|
| 11.6 | % |
| 9.2 | % |
| 8.1 | % |
|
|
|
|
|
|
|
|
Combined ratio |
|
| 87.0 | % |
| 84.5 | % |
| 88.8 | % |
|
|
|
|
|
|
|
|
(1) - Includes Other operating expenses and Other underwriting income (expense).
Gross Written Premiums
Gross written premiums decreased $10.7 million for the year ended December 31, 2016 compared to the same period in 2015, primarily due to the nonrenewal of a significant excess of loss treaty within our A&H product and to a lesser extent rate reductions in our Marine product. The decline in Gross written premiums was partially offset by new premiums in our P&C, Professional Liability and Agriculture products and to a lesser extent an increase in assumed RRPs in our P&C and Marine products.
Gross written premiums decreased $24.6 million for the year ended December 31, 2015 compared to the same period in 2014, primarily due to the nonrenewal of a significant multiple peril crop quota share treaty within our Agriculture product and to a lesser extent nonrenewals in our Marine product and lower assumed RRPs in our P&C and Marine products. The decline in Gross written premiums was partially offset by an increase in renewal premiums in our A&H and P&C products.
Ceded Written Premiums
Ceded written premiums increased $1.5 million for the year ended December 31, 2016 compared to the same period in 2015, primarily due to an increase in ceded RRPs in our Marine product and an increase in excess of loss costs in our P&C product.
Ceded written premiums increased $1.6 million for the year ended December 31, 2015 compared to the same period in 2014, primarily due to two additional retrocessional treaties written in 2015 for our Surety product, as well as increased renewal cost for a retrocessional treaty, which covers our P&C product.
Net Earned Premiums
Net earned premiums decreased $4.7 million for the year ended December 31, 2016 compared to the same period in 2015, primarily due to significant non-renewals in our A&H products, and to a lesser extent, rate reductions in our Marine product. This decline was partially offset by a change in estimated earnings in our Surety product, growth in our P&C, Agriculture and Professional Liability products, as well as an increase in assumed RRPs in our P&C product.
Net earned premiums decreased $19.8 million for the year ended December 31, 2015 compared to the same period in 2014, primarily due to the nonrenewal of business in our Agriculture and Marine products and less assumed RRPs than in prior year. The decline in Net earned premium was partially offset by growth in our A&H and P&C products.
Net Losses and LAE
The Net losses and LAE reserves as of December 31, 2016, 2015 and 2014 are as follows:
|
| GlobalRe |
| |||||||
|
| Years Ended December 31, |
| |||||||
amounts in thousands |
| 2016 |
| 2015 |
| 2014 |
| |||
Case reserves |
| $ | 47,505 |
| $ | 32,160 |
| $ | 31,108 |
|
IBNR reserves |
|
| 67,856 |
|
| 76,616 |
|
| 90,580 |
|
Total |
| $ | 115,361 |
| $ | 108,776 |
| $ | 121,688 |
|
The following table presents the changes in reserves and RRPs on our Net losses and LAE ratio for the years ended December 31, 2016, 2015 and 2014:
|
| GlobalRe |
| |||||||||
|
| Years Ended December 31, |
| |||||||||
|
| 2016 |
|
| 2015 |
|
| 2014 |
| |||
Net losses and LAE ratio, reported |
|
| 54.6 | % |
|
| 56.1 | % |
|
| 62.9 | % |
RRPs |
|
| 0.6 | % |
|
| 0.3 | % |
|
| 1.4 | % |
Additional net current AY release/(development) |
|
| -2.4 | % |
|
| -2.0 | % |
|
| 0.0 | % |
Net prior AY reserve release/(strengthening) |
|
| 1.3 | % |
|
| 5.5 | % |
|
| 1.2 | % |
Net losses and LAE ratio, adjusted |
|
| 54.1 | % |
|
| 59.9 | % |
|
| 65.5 | % |
For the year ended December 31, 2016, our GlobalRe reporting segment recorded additional net current AY reserve development of $3.9 million, of which $9.3 million was due to CAT losses including $5.1 million related to the Alberta Wildfires, $2.7 million due to the Ecuador Earthquake and $0.9 million due to the Taiwan Earthquake, partially offset by $5.4 million of favorable loss emergence on the current AY, mostly driven by our A&H product. In addition, we recorded $2.2 million of net prior AY reserve release driven by favorable loss emergence mostly from our A&H product and $1.6 million of net RRP benefit primarily from our P&C and Marine products.
For the year ended December 31, 2015, our GlobalRe reporting segment recorded $9.1 million of net prior AY reserve releases primarily driven by $5.2 million, $2.8 million and $2.0 million of reserve releases from our Marine, P&C and A&H products, respectively, due to lower than expected loss activity. In addition, $0.8 million of RRPs received reduced our Net losses and LAE ratio, primarily driven by our Marine product. The prior AY reserve releases were partially offset by $2.8 million current year strengthening in our Marine product, related to two large losses in 2015.
For the year ended December 31, 2014, our GlobalRe reporting segment recorded $2.1 million of net prior AY reserve releases primarily driven by $2.0 million of reserve releases from our Marine product, due to lower than expected loss activity. In addition, $4.0 million of RRPs received reduced our Net losses and LAE ratio, primarily driven by our Marine and P&C products. The prior AY reserve releases were partially offset by reserve prior AY strengthening in our A&H and Agriculture products.
The changes in Net losses and LAE ratio, as adjusted, are primarily due to mix of business earned, driven by less Net earned premium within our A&H product, which attracted higher ultimate loss ratios, partially offset by our P&C product.
Commission Expenses
The Commission expense ratio increased 1.6 percentage points for the year ended December 31, 2016 compared to the same period in 2015, resulting from an increase in earned premium for our P&C, Agriculture and Professional Liability products that attract higher commission rates, as well as additional profit commission expenses in our A&H and P&C products.
The Commission expense ratio increased 1.4 percentage points for the year ended December 31, 2015 compared to the same period in 2014, resulting from an increase in profit commission expenses in our A&H and P&C products.
Other Operating Expenses
Other operating expenses increased $3.4 million for the year ended December 31, 2016 compared to the same period in 2015, due to growth in our underwriting teams and support staff, as well as increases in the allocation of corporate overhead.
Other operating expenses increased $0.5 million for the year ended December 31, 2015, compared to the same period in 2014, due to continued investment in our underwriting teams and support staff, as well as an increase in our professional service fees and information technology expenses to support business growth and initiatives.
Capital Resources and Liquidity
Our capital resources consist of funds deployed or available to be deployed to support our business referoperations. As of December 31, 2016 and 2015, our capital resources were as follows:
|
| Years Ended December 31, |
| |||||
amounts in thousands |
| 2016 |
|
| 2015 |
| ||
Senior notes |
| $ | 263,728 |
|
| $ | 263,580 |
|
Stockholders' equity |
|
| 1,178,188 |
|
|
| 1,096,148 |
|
Total capitalization |
| $ | 1,441,916 |
|
| $ | 1,359,728 |
|
|
|
|
|
|
|
|
|
|
Ratio of debt to total capitalization |
|
| 18.3 | % |
|
| 19.4 | % |
As part of our capital management program, we may seek to “Business – Overview”raise additional capital or may seek to return capital to our stockholders through share repurchases, cash dividends or other methods (or a combination of such methods). Any such determination will be at the discretion of our Parent Company’s Board of Directors and will be dependent upon our profits, financial requirements and other factors, including legal restrictions, rating agency requirements, credit facility limitations and such other factors as our Board of Directors deems relevant.
We primarily rely upon dividends from our subsidiaries to meet our Parent Company’s obligations. Our Parent Company’s cash obligations primarily consist of semi-annual (April and October) interest payments of $7.6 million on the Senior notes.
Navigators Insurance Company may pay dividends to our Parent Company out of our statutory earned surplus pursuant to statutory restrictions imposed under the New York insurance law. As of December 31, 2016, the maximum amount available for the payment of dividends by Navigators Insurance Company in 2017 without prior regulatory approval is $102.7 million.
Navigators Corporate Underwriters, Ltd., included herein.our wholly-owned corporate member at Lloyd’s, may pay dividends to our Parent Company up to the extent of available profits that have been distributed from the Syndicate. As of December 31, 2016, that amount was $3.0 million (£2.4 million).
Senior Notes and Credit Facility
On October 4, 2013, we completed a public debt offering for $265.0 million of 5.75% Senior notes and received net proceeds of $263.3 million. The effective interest rate related to the net proceeds received from the 5.75% Senior notes is approximately 5.86%. Interest is payable on the 5.75% Senior notes each April 15 and October 15.
On November 4, 2016, NUAL entered into a credit facility for 14.0 million Australian Dollars with Barclays Bank PLC. Interest is payable under this facility at a rate of 1.25% per annum. The facility may be cancelled by either party after providing written notice. This credit facility contains customary covenants for facilities of this type, including a restriction on future encumbrances that are outside the ordinary course of business, and a requirement to maintain at least £75.0 million of Funds at Lloyd’s. As of December 31, 2016, letters of credit with an aggregate face amount of 14.0 million Australian Dollars were outstanding under the credit facility, and our Company was in compliance with all covenants.
On November 7, 2016, we entered into a credit facility agreement with ING Bank N.V., London Branch, individually and as Administrative Agent and a syndicate of lenders (the “Club Facility”), which is secured by all the common stock of NIC and requires us to maintain at least forty percent of the outstanding amounts under such facility as Funds at Lloyd’s. The Club Facility has two tranches with one tranche extending a $140.0 million commitment and the other tranche extending a £60.0 million commitment. In addition, in order to support the increased underwriting capacity of the Syndicate for the 2017 UWY, we amended that certain $25.0 million credit facility with ING Bank N.V., London Branch dated November 20, 2015, on November 7, 2016 to extend the term for an additional two years (the “Bilateral Facility”). Both of these facilities, as well as the November 4, 2016 facility, are used to fund underwriting obligations at Lloyd’s for the 2017 UWY, as well as open prior UWYs.
The Bilateral Facility is a non-committed facility which has an applicable fee rate ranging from 0.85% to 1.20% per annum based upon our Company’s S&P rating. For the Club Facility the applicable fee rate payable ranges from 0.95% to 1.60% per annum based on a tiered schedule that is based on our then-current financial strength ratings issued by S&P and A.M. Best and the amount of our own collateral utilized to fund our participation in the Syndicate. If any letters of credit remain outstanding under these facilities after December 31, 2018, we would be required to post additional collateral to secure the remaining letters of credit. As of December 31, 2016, letters of credit with an aggregate face amount of $125.0 million and £60.0 million were outstanding under the Club Facility and we had an aggregate of $1.1 million of cash collateral posted. As of December 31, 2016 there were no letters of credit outstanding under the Bilateral Facility.
The Bilateral and Club Facilities contain 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. These credit facilities also provide 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 our Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting our Company and our subsidiaries, the occurrence of certain material judgments, or a change in control of our Company. As of December 31, 2016, our Company was in compliance with all covenants.
Shelf Registration
We generally maintain the ability to issue certain classes of debt and equity securities via a universal shelf registration statement filed with the SEC, which is renewed every three years. The shelf registration provides us the means to access the debt and equity markets relatively quickly. Our current shelf registration was filed on April 14, 2015 with the SEC and expires in 2018. This report is not an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state.
Consolidated Cash Flows
We believe that the cash flow generated by the operating activities of our subsidiaries will provide sufficient funds for us to meet our liquidity needs over the next twelve months. Beyond the next twelve months, our cash flow available may be influenced by a variety of factors, including general economic conditions and conditions in the insurance and reinsurance markets, as well as fluctuations from year to year in claims experience.
We believe that we have adequately managed our cash flow requirements related to reinsurance recoveries from their positive cash flows and the use of available short-term funds when applicable. However, there can be no assurances that we will be able to continue to adequately manage such recoveries in the future or that collection disputes or reinsurer insolvencies will not arise that could materially increase the collection time lags or result in recoverable write-offs causing additional incurred losses and liquidity constraints to our Company. The payment of gross claims and related collections from reinsurers with respect to large losses could significantly impact our liquidity needs. However, in general, we expect to collect our paid reinsurance recoverables under the terms described above.
Net cash provided by operating activities was $224.2 million for the year ended December 31, 2016 compared to $227.6 million for the same period in 2015. The decrease in cash flow from operations was due to increased claims and operating expense payments which marginally exceeded higher premium collections and investment income driven by overall growth in our business.
Net cash used in investing activities was $211.4 million for the year ended December 31, 2016 compared to $249.9 million for the comparable period in 2015. The decrease in cash used in investing activities reflects higher net investment purchases in 2015 as compared with 2016 as we deployed excess cash held at December 31, 2014 into our investment portfolio.
Net cash used in financing activities was $2.1 million for the year ended December 31, 2016 compared with net cash provided by financing activities of $1.4 million for the same period in 2015. The fluctuation in cash used in financing activities is the result of instituting a quarterly cash dividend paid on our Company’s Common stock in the third quarter.
Our ability to underwrite business is dependent upon the financial strength of the Insurance CompaniesNIC, NSIC and Lloyd’s Operations.business. Financial strength ratings represent the opinions of the rating agencies on the financial strength of a company and its capacity to meet the obligations of insurance policies. Independent ratings are important to our competitive position in the insurance markets. The rating agencies consider many factors in determining the financial strength rating of an insurance company, including the relative level of statutory surplus necessary to support the business operations of our Company. These ratings are based upon factors relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Such ratings are not recommendations to buy, sell or hold securities. We could be adversely impacted by a downgrade in the Insurance Companies’ or Lloyd’s Operationsour financial strength ratings, including a possible reduction in demand for our products, higher borrowing costs and our ability to access the capital markets.
The Insurance Companies,U.S. insurance companies, NIC and NSIC, utilize the financial strength ratings from A.M. Best and S&P for underwriting purposes. NIC and NSIC are both rated “A” (Excellent – stable outlook) by A.M. Best and “A” (Strong - stable outlook) by S&P. The Syndicate 1221 utilizes the ratings from A.M. Best and S&P for underwriting purposes, which apply to all Lloyd’s syndicates. Lloyd’s is rated “A” (Excellent – positive outlook) by A.M. Best and A+ (Strong – stable outlook) by S&P.
In May 2016, our Company received authorization from the PRA and the FCA for a new U.K. based insurance company, NIIC, which we expect to begin writing business in the first quarter of 2017. NIIC utilizes the financial strength rating from S&P for underwriting purposes, and is rated “A” (Strong – stable outlook) by S&P.
Debt ratings apply to short-term and long-term debt as well as preferred stock. These ratings are assessments of the likelihood that we will make timely payments of the principal and interest for our senior debt. It is possible that, in the future, one or more of the rating agencies may reduce our existing debt ratings. If one or more of our debt ratings were downgraded, we could incur higher borrowing costs and our ability to access the capital markets could be impacted.
We utilize the senior debt ratings from S&P. Our senior debt is rated BBB (Adequate) by S&P.
Off –Balance Sheet Transactions
We have no material off-balance sheet transactions with the exception of our letter of credit facilities.
Contractual Obligations
The following table sets forth the best estimate of our known contractual obligations with respect to the items indicated as of December 31, 2016:
|
| Payments Due by Period |
| |||||||||||||||||
amounts in thousands |
| Total |
|
| Less than 1 Year |
|
| 1-3 Years |
|
| 3-5 Years |
|
| Thereafter |
| |||||
Reserves for losses and LAE (1) |
| $ | 2,289,727 |
|
| $ | 722,151 |
|
| $ | 834,649 |
|
| $ | 406,027 |
|
| $ | 326,900 |
|
5.75% Senior notes (2) |
|
| 368,489 |
|
|
| 15,238 |
|
|
| 30,475 |
|
|
| 30,475 |
|
|
| 292,301 |
|
Operating leases (3) |
|
| 88,870 |
|
|
| 13,024 |
|
|
| 20,950 |
|
|
| 16,629 |
|
|
| 38,267 |
|
Total |
| $ | 2,747,086 |
|
| $ | 750,413 |
|
| $ | 886,074 |
|
| $ | 453,131 |
|
| $ | 657,468 |
|
(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 $779.3 million. See “Business – Loss Reserves” included herein. |
(2) | Includes interest payments. |
(3) | Obligation includes rent and rent items. Rent items are estimates based on the lease agreement due to uncontrollable fluctuations of actual costs. |
Our investment portfolio is invested primarily in publicly traded, investment grade, fixed income securities with an average credit quality of AA-/Aa3 as rated by S&P or Moody’s Investors Service (“Moody’s”). As of December 31, 2016, our portfolio had a duration of 3.7 years. Management periodically projects cash flow of the investment portfolio and other sources in order to maintain the appropriate levels of liquidity in an effort to ensure our ability to satisfy claims. As of December 31, 2016 and December 31, 2015, all fixed maturities and equity securities held by us were classified as available-for-sale.
Our portfolio is externally managed by independent, professional investment managers and is broadly diversified across geographies, sectors, and issuers. The primary objectives are to maximize total investment return in the context of preserving and enhancing stockholder value and the statutory surplus of our regulated insurance companies. As part of our overall investment strategy, we seek to build a tax efficient investment portfolio by maintaining an allocation to tax exempt municipal bonds. As of December 31, 2016, the tax-exempt portion of our fixed maturities portfolio was approximately 17.1%. Additionally, substantially all of our equity portfolio is invested in tax efficient securities which qualify for the dividends received deduction. Our investments are subject to the oversight of the respective insurance companies’ Boards of Directors and the Finance Committee of the Parent Company’s Board of Directors.
We are a specialty insurance company and periods of moderate economic recession or inflation tend not to have a significant direct effect on underwriting operations. They do, however, impact our investment portfolio. A decrease in interest rates will tend to decrease our yield and have a positive effect on the fair value of our invested assets. An increase in interest rates will tend to increase our yield and have a negative effect on the fair value of our invested assets.
The following table summarizes the composition of our available- for- sale investments at fair value:
|
| Fair Value as of December 31, |
|
|
|
|
| |||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| % Change |
| |||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bonds, agency bonds and foreign government bonds |
| $ | 273,776 |
|
| $ | 252,882 |
|
|
| 8.3 | % |
States, municipalities and political subdivisions |
|
| 547,415 |
|
|
| 576,859 |
|
|
| (5.1 | %) |
Mortgage-backed and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
| 487,364 |
|
|
| 379,269 |
|
|
| 28.5 | % |
Residential mortgage obligations |
|
| 20,530 |
|
|
| 30,465 |
|
|
| (32.6 | %) |
Asset-backed securities |
|
| 314,601 |
|
|
| 225,012 |
|
|
| 39.8 | % |
Commercial mortgage-backed securities |
|
| 154,139 |
|
|
| 189,713 |
|
|
| (18.8 | %) |
Subtotal |
| $ | 976,634 |
|
| $ | 824,459 |
|
|
| 18.5 | % |
Corporate bonds |
|
| 838,057 |
|
|
| 760,010 |
|
|
| 10.3 | % |
Total fixed maturities |
| $ | 2,635,882 |
|
| $ | 2,414,210 |
|
|
| 9.2 | % |
Equity securities |
|
| 349,142 |
|
|
| 305,271 |
|
|
| 14.4 | % |
Short-term investments |
|
| 143,539 |
|
|
| 217,745 |
|
|
| (34.1 | %) |
Total investments |
| $ | 3,128,563 |
|
| $ | 2,937,226 |
|
|
| 6.5 | % |
Invested assets increased from December 31, 2015 due to strong operating cash flows. Operating cash flows were primarily directed to Asset-backed securities and Agency mortgage-backed securities as we look to manage duration given the prospects for higher interest rates in the future. Additionally, a portion of our operating cash flows were invested in tax efficient common and preferred equity securities to compensate for lower yields in fixed maturities. The decrease in short term investments is due to the capitalization of NIIC and the subsequent redeployment of funds into our Fixed maturities portfolio.
The following table sets forth the amount of our Fixed maturities as of December 31, 2016 by S&P credit rating or, if an S&P rating is not available, the equivalent Moody’s rating. The total rating is the weighted average quality rating for the fixed maturities portfolio as a whole.
|
|
|
| December 31, 2016 |
| |||||
amounts in thousands |
| Rating |
| Fair Value |
|
| Amortized Cost |
| ||
Rating description: |
|
|
|
|
|
|
|
|
|
|
Extremely strong |
| AAA |
| $ | 415,047 |
|
| $ | 415,872 |
|
Very strong |
| AA |
|
| 1,121,058 |
|
|
| 1,116,649 |
|
Strong |
| A |
|
| 697,713 |
|
|
| 697,418 |
|
Adequate |
| BBB |
|
| 323,334 |
|
|
| 320,316 |
|
Speculative |
| BB & Below |
|
| 78,730 |
|
|
| 77,970 |
|
Total |
| AA- |
| $ | 2,635,882 |
|
| $ | 2,628,225 |
|
The following table sets forth the composition of the non-government guaranteed fixed maturities categorized by asset class and 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, 2016 |
| |||||||||||||||||||||||||
amounts in thousands |
| AAA |
|
| AA |
|
| A |
|
| BBB |
|
| BB and below |
|
| Fair Value |
|
| Amortized Cost |
| |||||||
Municipal bonds |
| $ | 41,218 |
|
| $ | 359,515 |
|
| $ | 129,726 |
|
| $ | 16,956 |
|
| $ | — |
|
| $ | 547,415 |
|
| $ | 539,909 |
|
Agency residential mortgage-backed |
|
| — |
|
|
| 487,364 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 487,364 |
|
|
| 489,933 |
|
Residential mortgage-backed |
|
| 13,538 |
|
|
| — |
|
|
| 81 |
|
|
| 1,243 |
|
|
| 5,668 |
|
|
| 20,530 |
|
|
| 20,132 |
|
Asset-backed |
|
| 149,375 |
|
|
| 29,798 |
|
|
| 115,217 |
|
|
| 20,211 |
|
|
| — |
|
|
| 314,601 |
|
|
| 314,955 |
|
Commercial mortgage-backed |
|
| 95,800 |
|
|
| 42,066 |
|
|
| 16,273 |
|
|
| — |
|
|
| — |
|
|
| 154,139 |
|
|
| 153,184 |
|
Corporate bonds |
|
| 10,308 |
|
|
| 65,263 |
|
|
| 404,500 |
|
|
| 284,924 |
|
|
| 73,062 |
|
|
| 838,057 |
|
|
| 833,400 |
|
Total |
| $ | 310,239 |
|
| $ | 984,006 |
|
| $ | 665,797 |
|
| $ | 323,334 |
|
| $ | 78,730 |
|
| $ | 2,362,106 |
|
| $ | 2,351,513 |
|
The following table sets forth our U.S. Treasury bonds, agency bonds and foreign government bonds, as well as our state, municipality and political subdivision bond holdings by type:
|
| As of December 31, 2016 |
| |||||
amounts in thousands |
| Fair Value |
|
| Amortized Cost |
| ||
U.S. Treasury bonds, agency bonds and foreign government bonds: |
|
|
|
|
|
|
|
|
U.S. Treasury bonds |
| $ | 47,704 |
|
| $ | 46,922 |
|
Agency bonds |
|
| 79,297 |
|
|
| 78,709 |
|
Foreign government bonds |
|
| 146,775 |
|
|
| 151,081 |
|
Total U.S. Treasury bonds, agency bonds and foreign government bonds |
| $ | 273,776 |
|
| $ | 276,712 |
|
|
|
|
|
|
|
|
|
|
States, municipalities and political subdivisions: |
|
|
|
|
|
|
|
|
General obligation |
| $ | 139,686 |
|
| $ | 138,642 |
|
Prerefunded |
|
| 25,822 |
|
|
| 25,050 |
|
Revenue |
|
| 284,889 |
|
|
| 279,068 |
|
Taxable |
|
| 97,018 |
|
|
| 97,149 |
|
Total States, municipalities and political subdivisions |
| $ | 547,415 |
|
| $ | 539,909 |
|
As of December 31, 2016, we own $48.2 million of municipal securities, which are credit enhanced by various financial guarantors which have an average underlying credit rating of AA-.
The following table sets forth our agency mortgage-backed securities (“AMBS”) issued by the Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) and the quality category (prime, Alternative A-paper (“Alt-A”) and subprime) for residential mortgage -backed securities (“RMBS”) as of December 31, 2016:
|
| As of December 31, 2016 |
| |||||
amounts in thousands |
| Fair Value |
|
| Amortized Cost |
| ||
AMBS: |
|
|
|
|
|
|
|
|
GNMA |
| $ | 55,331 |
|
| $ | 54,259 |
|
FNMA |
|
| 307,958 |
|
|
| 310,750 |
|
FHLMC |
|
| 124,075 |
|
|
| 124,924 |
|
Total agency mortgage-backed securities |
| $ | 487,364 |
|
| $ | 489,933 |
|
|
|
|
|
|
|
|
|
|
RMBS: |
|
|
|
|
|
|
|
|
Prime |
| $ | 5,852 |
|
| $ | 5,552 |
|
Alt-A and subprime |
|
| 1,140 |
|
|
| 1,064 |
|
Non-U.S. RMBS |
|
| 13,538 |
|
|
| 13,516 |
|
Total residential mortgage-backed securities |
| $ | 20,530 |
|
| $ | 20,132 |
|
We analyze our mortgage-backed securities by credit quality of the underlying collateral distinguishing between the securities issued by FNMA, FHLMC and GNMA, which are federal government sponsored entities, and non-FNMA and non-FHLMC securities broken out by prime, Alt-A and subprime collateral. The securities issued by FNMA and FHLMC are the obligations of each respective entity. The U.S. Department of the Treasury has agreed to provide support to FNMA and FHLMC under a Preferred Stock Purchase Agreement by committing to make quarterly payments to these enterprises, if needed, to maintain a zero net worth.
Prime collateral consists of mortgages or other collateral from the most creditworthy borrowers. Alt-A collateral consists of mortgages or other collateral from borrowers, which have a risk potential greater than prime but less than subprime. The subprime collateral consists of mortgages or other collateral from borrowers with low credit ratings. Such subprime and Alt-A categories are as defined by S&P.
Details of the collateral of our asset-backed securities portfolio as of December 31, 2016 are presented below:
|
| As of December 31, 2016 |
| |||||
amounts in thousands |
| Fair Value |
|
| Amortized Cost |
| ||
Auto loans |
| $ | 37,685 |
|
| $ | 37,772 |
|
Credit cards |
|
| 30,307 |
|
|
| 30,289 |
|
Collateralized loan obligations |
|
| 99,589 |
|
|
| 99,829 |
|
Time share |
|
| 48,565 |
|
|
| 48,983 |
|
Aircraft |
|
| 21,335 |
|
|
| 21,182 |
|
Consumer Loans |
|
| 35,634 |
|
|
| 35,542 |
|
Other |
|
| 41,486 |
|
|
| 41,358 |
|
Total |
| $ | 314,601 |
|
| $ | 314,955 |
|
We hold non-sovereign securities where the issuer is located in the Euro Area, an economic and monetary union of certain member states within the European Union that have adopted the Euro as their common currency. As of December 31, 2016, the fair value of such securities was $106.6 million, with an amortized cost of $106.8 million, representing 3.6% of our total fixed maturities and equity portfolio. Of this amount, approximately 26.3% represent securities issued by financial institutions domiciled or operating in the Euro Area. Our largest exposure is in the Netherlands with a total of $39.1 million followed by France with a total of $31.3 million. We have no direct exposure to Greece, Portugal, Italy or Spain within the Euro Area as of December 31, 2016.
The following table summarizes the gross unrealized investment losses as of December 31, 2016 by length of time where the fair value was less than 80.0% of amortized cost:
|
| As of December 31, 2016 |
| |||||||||
|
| Fixed |
|
| Equity |
|
|
|
|
| ||
amounts in thousands |
| Maturities |
|
| Securities |
|
| Total |
| |||
Less than twelve months |
| $ | — |
|
| $ | — |
|
| $ | — |
|
Twelve months or longer |
|
| 1,476 |
|
|
| — |
|
|
| 1,476 |
|
Total |
| $ | 1,476 |
|
| $ | — |
|
| $ | 1,476 |
|
The twelve months or longer unrealized loss of $1.5 million is due to unfavorable foreign exchange movement in our Canadian portfolio.
During the year ended December 31, 2016, we recognized one credit related OTTI loss of $0.2 million in our Fixed maturities portfolio. During the year ended December 31, 2015, we recognized three credit related OTTI losses of $1.7 million for certain common stocks in the energy sector and aerospace industry. Our Company did not have credit related OTTI losses for the year ended December 31, 2014.
The fair value of our investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, equity prices, foreign exchange rates and credit spreads. We do not have the intent to sell nor is it more likely than not that we will have to sell Fixed maturities in unrealized loss positions that are not other-than-temporarily impaired before recovery. For structured securities, default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. We do not intend to sell any of these securities and it is more likely than not that, we will not be required to sell these securities before the recovery of the amortized cost basis. For Equity securities, we also consider our intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. We may realize investment losses to the extent our liquidity needs require the disposition of Fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments. Significant changes in the factors we consider when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the Consolidated Financial Statements.
Reserves for losses and LAE for loss events
Our Company monitors the development of paid and reported claims activities in relation to the estimate of ultimate losses established for loss events. Actual losses from such loss events may differ materially from the estimated losses generally due to the receipt of additional information from insureds or brokers, inflation in repair costs due to the limited availability of labor and materials or the attribution of losses to coverages, which our Company assumed we would not have exposure to.
Asbestos Liability
Our exposure to asbestos liability principally stems from our Marine Liability product insurance written on an occurrence basis during the mid-1980s. In general, our participation on such risks is in the excess layers, which requires the underlying coverage to be exhausted prior to coverage being triggered in our layer. In many instances, we are one of many insurers who participate in the defense and ultimate settlement of these claims, and we are generally a minor participant in the overall insurance coverage and settlement.
The reserves for asbestos exposures as of December 31, 2016 are for: (i) one large settled claim for excess insurance policy limits exposed to a class action suit against an insured involved in the manufacturing or distribution of asbestos products being paid over several years and (ii) attritional asbestos claims that could be expected to occur over time. Substantially all of our asbestos liability reserves are included in our U.S. Marine operating segment loss reserves.
There can be no assurances that material loss development may not arise in the future from existing asbestos claims or new claims given the evolving and complex legal environment that may directly affect the outcome of the asbestos exposures of our insureds.
The following tables set forth our gross and net losses and LAE reserves, incurred losses and LAE, and payments for our asbestos exposures for the periods indicated:
|
| Years Ended December 31, |
| |||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||
Gross of Reinsurance |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning gross reserves |
| $ | 15,256 |
|
| $ | 15,370 |
|
| $ | 15,519 |
|
Plus: Incurred losses & LAE |
|
| 90 |
|
|
| (43 | ) |
|
| 527 |
|
Less: Calendar year payments |
|
| 133 |
|
|
| 71 |
|
|
| 676 |
|
Ending gross reserves |
| $ | 15,213 |
|
| $ | 15,256 |
|
| $ | 15,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
| $ | 12,948 |
|
| $ | 12,991 |
|
| $ | 13,105 |
|
Gross IBNR loss reserves |
|
| 2,265 |
|
|
| 2,265 |
|
|
| 2,265 |
|
Ending gross reserves |
| $ | 15,213 |
|
| $ | 15,256 |
|
| $ | 15,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning net reserves |
| $ | 10,200 |
|
| $ | 10,291 |
|
| $ | 10,314 |
|
Plus: Incurred losses & LAE |
|
| 65 |
|
|
| (1,092 | ) |
|
| (2,068 | ) |
Less: Calendar year payments |
|
| 62 |
|
|
| (1,001 | ) |
|
| (2,045 | ) |
Ending net reserves |
| $ | 10,203 |
|
| $ | 10,200 |
|
| $ | 10,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net case loss reserves |
| $ | 8,143 |
|
| $ | 8,140 |
|
| $ | 8,231 |
|
Net IBNR loss reserves |
|
| 2,060 |
|
|
| 2,060 |
|
|
| 2,060 |
|
Ending net reserves |
| $ | 10,203 |
|
| $ | 10,200 |
|
| $ | 10,291 |
|
Our Company has exposure to losses caused by hurricanes, earthquakes, and other natural and man-made catastrophic events. The frequency and severity of catastrophic events is unpredictable. The extent of covered losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. We continually assess the concentration of underwriting exposures in catastrophe-exposed areas globally and manage this exposure through individual risk selection and through the purchase of reinsurance. Our Company also uses modeling and concentration management tools that allow better monitoring and better control of the accumulations of potential losses from catastrophe events. Despite these efforts, there remains uncertainty about the characteristics, timing and extent of insured losses given the unpredictable nature of catastrophes. The occurrence of one or more catastrophic events could have a material adverse effect on our results of operations, financial condition and/or liquidity.
Our Company has significant natural catastrophe exposures throughout the world. We estimate that the largest exposure to loss from a single natural catastrophe event comes from a hurricane on the east coast of the U.S. As of December 31, 2016, our Company estimates that the probable maximum pre-tax gross and net loss exposure from such a hurricane event would be approximately $140.0 million and $46.1 million, respectively, including the cost of RRPs.
Like all catastrophe exposure estimates, the foregoing estimate of the probable maximum loss is inherently uncertain. This estimate is highly dependent upon numerous assumptions and subjective underwriting judgments. Examples of significant assumptions and judgments related to such an estimate include the intensity, depth and location of a hurricane, the various types of the insured risks exposed to the event at the time the event occurs and the estimated costs or damages incurred for each insured risk. The composition of the portfolio also makes such estimates challenging due to the non-static nature of the exposures covered under the policies in products such as Cargo and Hull. There can be no assurances that the gross and net loss amounts that our Company could incur in such an event or in any natural catastrophe event would not be materially higher than the estimates discussed above given the significant uncertainties with respect to such an estimate. Moreover, the portfolio of insured risks changes dynamically over time and there can be no assurance that the probable maximum loss will not change materially over time.
The occurrence of large loss events could reduce the reinsurance coverage that is available to our Company and could weaken the financial condition of the reinsurers, which could have a material adverse effect on our results of operations. Although the reinsurance agreements make the reinsurers liable to our Company to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate the obligation to pay claims to policyholders, as our Company is required to pay the losses if a reinsurer fails to meet its obligations under the reinsurance agreement.
Our Company utilizes reinsurance principally to reduce the exposure on individual risks, to protect against catastrophic losses and to stabilize loss ratios and underwriting results. Our Company is protected by various treaty and facultative reinsurance agreements. The
reinsurance is placed either directly by our Company or through reinsurance intermediaries. The reinsurance intermediaries are compensated by the reinsurers.
Alberta Wildfires, Hurricanes Joaquin, Gustav and Ike, and Superstorm Sandy
The following natural disasters generated substantial losses within our U.S. and Int’l Marine operating segments and our Energy & Engineering divisions within our U.S. and Int’l P&C operating segments: the Alberta Wildfires, which occurred in the second quarter of 2016, Hurricane Joaquin, which occurred in the fourth quarter of 2015, Superstorm Sandy, which occurred in the fourth quarter of 2012 and Hurricanes Gustav and Ike, which occurred in the third quarter of 2008. As of December 31, 2016, the net reserves for Hurricane Gustav and Ike and Superstorm Sandy are, in total, $64 thousand. Management believes that should any adverse loss development for gross claims occur from the aforementioned wildfires, hurricanes and Superstorm Sandy, it would be contained within the reinsurance program.
Alberta Wildfires
The following table sets forth our gross and net losses and LAE reserves, incurred losses and LAE, and payments for Alberta Wildfires for the year ended December 31, 2016 in USD equivalent:
|
| Year Ended December 31, |
| |
amounts in thousands |
| 2016 |
| |
Gross of Reinsurance |
|
|
|
|
Beginning gross reserves |
| $ | — |
|
Plus: Incurred losses & LAE |
|
| 19,347 |
|
Less: Calendar year payments |
|
| 5,109 |
|
Less: Foreign currency exchange impact |
|
| 577 |
|
Ending gross reserves |
| $ | 13,661 |
|
|
|
|
|
|
Gross case loss reserves |
| $ | 8,503 |
|
Gross IBNR loss reserves |
|
| 5,158 |
|
Ending gross reserves |
| $ | 13,661 |
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
Beginning net reserves |
| $ | — |
|
Plus: Incurred losses & LAE |
|
| 11,682 |
|
Less: Calendar year payments |
|
| 4,119 |
|
Less: Foreign currency exchange impact |
|
| 300 |
|
Ending net reserves |
| $ | 7,263 |
|
|
|
|
|
|
Net case loss reserves |
| $ | 5,008 |
|
Net IBNR loss reserves |
|
| 2,255 |
|
Ending net reserves |
| $ | 7,263 |
|
The Alberta Wildfires impacted the second quarter of 2016 with a total estimated net loss for the year of $11.7 million and $1.8 million in additional RRPs.
Hurricane Joaquin
The following table sets forth our gross and net losses and LAE reserves, incurred losses and LAE, and payments for Hurricane Joaquin for the years ended December 31, 2016 and 2015:
|
| Years Ended December 31, |
| ||||
amounts in thousands |
| 2016 |
| 2015 |
| ||
Gross of Reinsurance |
|
|
|
|
|
|
|
Beginning gross reserves |
| $ | 22,735 |
| $ | — |
|
Plus: Incurred losses & LAE |
|
| — |
|
| 31,749 |
|
Less: Calendar year payments |
|
| 21,249 |
|
| 9,014 |
|
Ending gross reserves |
| $ | 1,486 |
| $ | 22,735 |
|
|
|
|
|
|
|
|
|
Gross case loss reserves |
| $ | 572 |
| $ | 3,113 |
|
Gross IBNR loss reserves |
|
| 914 |
|
| 19,622 |
|
Ending gross reserves |
| $ | 1,486 |
| $ | 22,735 |
|
|
|
|
|
|
|
|
|
Net of Reinsurance |
|
|
|
|
|
|
|
Beginning net reserves |
| $ | 1,933 |
| $ | — |
|
Plus: Incurred losses & LAE |
|
| — |
|
| 10,000 |
|
Less: Calendar year payments |
|
| 1,933 |
|
| 8,067 |
|
Ending net reserves |
| $ | — |
| $ | 1,933 |
|
|
|
|
|
|
|
|
|
Net case loss reserves |
| $ | — |
| $ | 1,933 |
|
Net IBNR loss reserves |
|
| — |
|
| — |
|
Ending net reserves |
| $ | — |
| $ | 1,933 |
|
Hurricane Joaquin impacted the fourth quarter of 2015 with a total estimated net loss of $10.0 million and $4.0 million in additional RRPs. At December 31, 2016 the RRP was reduced to $2.6 million.
Reinsurance recoverable includes the balances due to us from reinsurance companies for paid and unpaid losses and loss expenses, based on contracts in force, and are presented net of a reserve for uncollectible reinsurance which is determined based upon a review of the financial condition of the reinsurers and other factors. We determine the reinsurance recoverable on unpaid losses and loss expenses using actuarial estimates, as well as a determination of our ability to cede unpaid losses and loss expenses under existing reinsurance contracts. Although reinsurance makes the reinsurer liable to our Company to the extent the risk is transferred or ceded to the reinsurer, ceded reinsurance arrangements do not eliminate the obligation to pay claims to the policyholders. Accordingly, our Company bears credit risk with respect to the reinsurers. Specifically, the reinsurers may not pay claims made by our Company on a timely basis, or they may not pay some or all of these claims. Either of these events would increase the costs and could have a material adverse effect on our business.
The exposure to credit risk from any one reinsurer is actively managed through diversification by reinsuring with a number of different reinsurers, principally in the United States and European reinsurance markets. When reinsurance is placed, the standards of acceptability require a reinsurer rating from A.M. Best and/or S&P of “A” or better, or an equivalent financial strength if not rated, plus at least $500 million in policyholders’ surplus. The Reinsurance Security Committee, which is included within the Enterprise Risk Management Finance and Credit Sub-Committee, monitors the financial strength of the reinsurers and the related reinsurance recoverables and periodically reviews the list of acceptable reinsurers.
Our Company has established a reserve for uncollectible reinsurance in the amount of $12.1 million and $6.9 million as of December 31, 2016 and 2015, respectively. Our reserve is determined by considering reinsurer specific default risk as indicated by their financial strength ratings, as well as additional default risk for asbestos and environmental related recoverables or an individual impairment assessment for certain reinsurers that exhibit additional default risk. Actual uncollectible reinsurance could potentially differ from the estimate. The increase in our reserves for uncollectible reinsurance as compared to 2015 is driven primarily by one of our reinsurers having been placed under supervision of a conservator by the State of California. We will continue to monitor the conservation process and assess our potential exposure.
Refer to Note 6, Ceded Reinsurance, in the Notes to Consolidated Financial Statements for additional information.
We prepare our financial statements in accordance with GAAP, which requires the use of estimates and assumptions. Our consolidated financial statements include amounts that, either by their nature or due to requirements of GAAP, are determined using best estimates and assumptions. Management has discussed and reviewed the development, selection, and disclosure of critical accounting estimates with our Company’s Audit Committee. While we believe that the amounts included in our consolidated financial statements reflect our best judgment, actual amounts could ultimately materially differ from those currently presented.
We believe the items that require the most subjective and complex estimates involve the reporting of:
Valuation of invested assets.
Reserves for losses and LAE represent an estimate of the expected cost of the ultimate settlement and administration of losses, based on facts and circumstances then known less the amount paid to date. ActuarialOur actuaries calculate indicated IBNR loss reserves by UWY for major product groupings using standard actuarial methodologies, which are employedprojection or extrapolation techniques, including: (a) the loss ratio method, (b) the loss development method, (c) the Bornhuetter-Ferguson method and (d) the frequency/severity method. Each of these methodologies is generally applicable to assistboth long tail and short tail lines of business depending on a variety of circumstances. Informed subjective judgments as to our ultimate exposure to losses are an integral component of our loss reserving process due to numerous factors that contribute to the inherent uncertainty in the process of establishing such estimatesloss reserves, including:
Inflationary pressures (medical and include judgmentseconomic) that affect the size of losses;
Judicial, regulatory, legislative, and legal decisions that affect insurers’ liabilities;
Changes in the frequency and severity of losses;
Changes in the underlying loss exposures of our policies; and
Changes in our claims handling procedures.
A review of the emergence of actual losses relative to estimatesexpectations for each line of future claims severitybusiness generally derived from the quarterly and/or semi-annual in depth reserve analyses is conducted to determine whether the assumptions used in the reserving process continue to form a reasonable basis for the projection of liabilities for each product line. As time passes, estimated loss reserves for an UWY will be based more on historical loss activity and frequency, length of time to develop to ultimate, judicial theories of liability and other third party factors, which are often beyond our control. No assurance can be given that actual claims made and related payments will not be in excess of the amounts reserved.loss development patterns rather than on assumptions based on underwriters' input, pricing assumptions or industry experience. During the loss settlement period, it often becomes necessary to refine and adjust the estimates of liability on a claim either upward or downward. Even after such adjustments, ultimate liability may exceed or be less than the revised estimates.
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 process of establishing loss reserves is complex and imprecise, as it must take into account many variables that are subject to the outcome of future events. As a result, informed subjective judgments as to our ultimate exposure to losses are an integral component of our loss reserving process.
Our actuaries calculate indicated incurred but not reported (“IBNR”) loss reserves for each line of business by underwriting year (“UWY”) by major product groupings using standard actuarial methodologies, which are projection or extrapolation techniques: the loss ratio method, the loss development method and the Bornheutter-Ferguson method. In general the loss ratio method is used to calculate the IBNR for only the most recent UWYs in the absence of any statistical data upon which to estimate ultimate losses while the Bornheutter-Ferguson method is used to calculate the IBNR for recent years where a statistical basis exists for that computation with the loss development method used for more mature UWYs. When appropriate such methodologies are supplemented by the frequency/severity method, which are used to analyze and better comprehend loss development patterns and trends in the data when making selections and judgments. Each of these methodologies, which are described below, are generally applicable to both long tail and short tail lines of business depending on a variety of circumstances. In utilizing these methodologies to develop our IBNR loss reserves, a key objective of management in making their final selections is to deliberate with our actuaries to identify aberrations and systemic changes occurring within historical experience and accurately adjust for them. This process requires the substantial use of informed judgment and is inherently uncertain as itNo assurance can be influenced by numerous factors including:
amounts reserved.
For non-statistical claim events, i.e., where historical patterns are not available for applicable, expert judgment by claims professionals with input from underwriting and management are used. Such instances relate to the IBNR loss reserve processes for our Hurricane losses and our asbestos exposures.
A brief summary of each actuarial method discussed above follows:
Loss ratio method
This method is based on the assumption that ultimate losses vary proportionately with premiums. Pursuant to the loss ratio method, IBNR loss reserves are calculated by multiplying the earned premium by an expected ultimate loss ratio to estimate the ultimate losses for each UWY, then subtracting the reported losses, consisting of paid losses and case loss reserves, to determine the IBNR loss reserve amount. The ultimate loss ratios applied are our Company’s best estimates for each UWY and are generally determined after evaluating a number of factors which include: information derived by underwriters and actuaries in the initial pricing of theour business, the ultimate loss ratios established in the prior accounting period and the related judgments applied, the ultimate loss ratios of previous UWYs, premium rate changes, underwriting and coverage changes, changes in terms and conditions, legislative changes, exposure trends, loss development trends, claim frequency and severity trends, paid claims activity, remaining open case reserves and industry data where deemed appropriate. Such factors are also evaluated when selecting ultimate loss ratios and/or loss development factors in the methods described below.
Bornheutter-FergusonBornhuetter-Ferguson method
The Bornheutter-FergusonBornhuetter-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 UWY.UWYs. 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 chainladderchain ladder 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 UWYs.
Frequency/severity method
The frequency/severity method calculates the IBNR loss reserves by separately projecting claim count and average cost per claim data on either a paid or incurred basis. It estimates the expected ultimate losses as the product of the ultimate number of claims that are expected to be reported and the expected average amount of these claims.
Actuarial loss studies are conducted by our Company’s actuaries at various times throughout the year for major lines of business employing the methodologies as described above. Additionally, a review of the emergence of actual losses relative to expectations for each line of business generally derived from the quarterly and/or semi-annual in depth reserve analyses is conducted to determine whether the assumptions used in the reserving process continue to form a reasonable basis for the projection of liabilities for each product line. Such reviews may result in maintaining or revising assumptions regarding future loss development based on various quantitative and qualitative considerations. If actual loss activity differs from expectations, an upward or downward adjustment to loss reserves may occur. As time passes, estimated loss reserves for an UWY will be based more on historical loss activity and loss development patterns rather than on assumptions based on underwriters’ input, pricing assumptions or industry experience.
The following discusses the method used for calculating the IBNR for each line of business and key assumptions used in applying the actuarial methods described.
The period between the date of loss occurrence and the final payment date of the ensuing claim(s) is referred to as the “claim-tail.“claim tail.” Short-tailShort tail business generally describes Product linesproducts for which losses are typically known and paid shortly after the loss actually occurs. For example, a personal accident where no other parties were involved tends to be a short process. The ambiguity associated with our estimate of ultimate losses for any particular accident period diminishes quickly as actual loss experience develops. Long-tailLong tail business definesare lines of business for which specific losses may not be known or reported for a longer period and claims can take significant time to settle. For long-taillong tail lines such as General Liability,general liability, the time lag for reporting claims is greater than it is in short-tailshort tail lines. Facts and information are frequently not complete at the time case reserves are established, and because there is a higher risk for additional litigation, final settlement amounts are unknown. Each of our business segmentlines is analyzed individually, with development characteristics for each short-tailshort tail and long-taillong tail line of business identified and applied accordingly.
Marine
Generally, twoThe following discusses the method used for calculating the IBNR for each line of business and key assumptions are used by our actuaries in setting IBNR loss reserves for major products in this lineapplying the actuarial methods described.
Application of business. The first assumption is that our historical experience regarding paid and reported losses for each product where we have sufficient history can be relied on to predict future loss activity. The second assumption is that our underwriters’ assessments as to potential loss exposures are reliable indicators of the level of our expected loss activity. The specific loss reserves for Marine are then analyzed separately by product based on such assumptions, except where noted below, with the major products including Marine Liability, Cargo, Protection and Indemnity (“P&I”), Transport and Bluewater Hull.Actuarial Methods
The claims emergence patterns for various Marine Product lines vary substantially. Our largest Marine Product line is Marine Liability, which has one of the longer loss development patterns. Marine Liability protects an insured’s business from Liability to third parties stemming from their marine-related operations, such as terminal operations, stevedoring and marina operations. Since Marine Liability claims generally involve a dispute as to the extent and amount of legal liability that our insured has to a third party, these claims tend to take a longer time to develop and settle. Other Marine Product lines have considerably shorter periods in which losses develop and settle. Ocean Cargo insurance, for example, provides physical damage coverage to goods in the course of transit by water, air or land. By their nature, Cargo claims tend to be reported quickly as losses typically result from an obvious peril such as fire, theft or weather. Similarly, Bluewater Hull insurance provides coverage against physical damage to ocean-going vessels. Such claims for physical damage generally are discovered, reported and settled quickly. Relatively short tailed Marine lines with a third party liability component include P&I Insurance, which provides coverage for third party liability as well as injury to crew for vessel operators, and Transport insurance, which provides both property and third party liability on a primary basis to business such as port authorities, marine terminal operators and others engaged in infrastructure of international transportation. Our Company currently has extensive experience for all of these products and thus the IBNR loss reserves for all of the Marine Products are determined using the key assumptions and actuarial methodologies described above. Prior to 2007, however, as discussed below in the sensitivity analysis, our Company did not have sufficient experience in the Transport product line and instead used its Hull and Liability products loss development experience as a key assumption in setting the IBNR loss reserves for its Transport product.
Property Casualty
The reserves for P&CReserves are established separately for each major Product line, such as Offshore Energy, Excess Casualty, and Accident and Health (“A&H”), reinsurance. Within Primary Casualty, the reserves are established separately for construction and non-construction risks.product. Our actuaries generally assume that historical loss development patterns are reasonable predictors of future loss patterns and deployapply a variety of traditional actuarial techniques to develop a reasonable expectation of ultimate losses. However, there are a number of products for which our Company has insufficient experience so as to generate credible actuarial projections. In those instances, we typically evaluate overall industry experience, rely on the input of underwriting, and claims executives in setting assumptions for our IBNR reserves. We also attempt to make reasonable provisions for the impact of economic, legal and competitive trends in projecting future loss development.
A substantial portionOur actuarial IBNR estimation approach is based on the nature of our Primary Casualty loss reserves are for liability policies issued to contractors, manythe data generated by the lines of which are operating in California and other western states which have experienced significant amounts of litigation involving allegations of construction defect. Accordingly, Contractor Liability claims are categorized into two claim types: construction defect and other general liability. Other general liability claims typically derive from worksite accidents or from negligence alleged by third parties, and frequently takebusiness being reviewed. Each business line can be characterized as either a long time to report and settle. construction defect claims involve the discovery of damage to buildings that was caused by latent construction defects. These claims take a very long time to report and to settle compared to other general liability claims. Since construction defect claims report much later than other Contractor Liability claims, they are analyzed separately in our quarterly actuarial loss studies.
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 thisor short tailed line of business given bothor, if it is a new business line, the long-tail naturelength of the liability claimstail would not necessarily be immediately relevant and it would be treated only as a new business line.
Short tailed lines of business have the continuing underwritingleast uncertainty of the three groups. For short tailed lines of business there is typically a mature or close to mature dataset from which to select patterns and coverage changes, claims handlingestimates. Thus, the actuaries would generally apply a combination of loss development method and reserve changes,Bornhuetter-Ferguson methods that rely on internal historical patterns and legislative changes that have occurred overlosses.
For long tailed lines of business the uncertainty is greater. Due to the amount of time it takes a several year period. Such factors are judgmentally taken into account in thislong tailed segment to mature, there is uncertainty with regards to how any line of business or year will settle as well as uncertainty with regards to the path it will take to settle. Additionally, due to their long tailed nature, many of the lines of business that are not new but are long tailed may not have a mature historical dataset from which to derive credible estimates for reserving. For these segments, while standard actuarial reserving methods would usually be applied, the loss development method would generally only be applied in specific periods. Thethe more mature years where the expectation is that they are close to ultimate. Where internal data on long tailed lines lacks sufficient credibility, overall industry experience would be evaluated and the input of underwriting and coverage changes includeclaims executives in setting assumptions would be considered.
For new business 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 toassumption is that internal historical data would not be available and the policy inception), withdrawals from certain contractor classes previously underwrittenactuaries will typically evaluate based on overall industry experience, 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. During 2010 and 2011, we also significantly increased our claims staff and improved our claims procedures, which has allowed our Company to respond more quickly to reported construction defect claims. Our Company is closely monitoring the impact of these effectsrely on the adequacyinput of our caseunderwriting, and claims executives in setting assumptions for IBNR loss reserves. After analysis of the factors above, Management believes that our reserves remain adequate to address our exposure to construction defect losses, but given the uncertainties noted above,Early on, unless there is a risk that our reserves for construction defect losses may ultimately provecredible industry pattern or internal complementary line of business pattern, the loss ratio method would be applied and patterns would only be applied as the business begins to mature. If there is a credible complementary or industry pattern Bornhuetter-Ferguson methods might be inadequate, perhaps inapplied initially as well, particularly if it is a material manner.
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 and not always immediately known.
Primary Casualty insurance provides Primary General Liability coverage principally to corporations in the construction, real estate and manufacturing sector. Excess Casualty insurance is purchased by corporations, which seek higher limitsshort tailed line of liability than are provided in their Primary Casualty policies.
Assumed Reinsurance provides proportional and excess-of-loss treaty coverage for several niche lines: A&H, Agriculture, Latin America (“LatAm”), and Professional Liability. The A&H reinsurance line primarily provides reinsurance coverage for individual medical claims that occur with small frequency. The Agriculture reinsurance line primarily provides reinsurance coverage related to crop insurance schemes, most of which are sponsored by governmental bodies in the United States (“U.S.”) and Canada. The LatAm line primarily provides reinsurance coverage for individual risk and catastrophic Property exposures, Liability exposures, and Surety Bonds in Central and South America and the Spanish-speaking Caribbean. The Professional Liability line primarily provides reinsurance coverage for exposure related to medical malpractice and other miscellaneous Professional Liability policies.
Professional Liabilitybusiness.
The Professional Liability policies mainly provide coverage on a claims-made basis mostly for a one-year period. Thedata distribution as of December 31, 2016 as measured by net case reserves for Professional Liability are analyzed separately by product. The major products are Management Liability and Errors and Omissions (“E&O”), Insurance. For Management Liability, we evaluate and set loss reserves separately for Primary policies and Excess policies for U.S. corporations.outstanding is as follows:
| Short Tailed |
|
| Long Tailed |
|
| New Business |
|
| Total |
| ||||
U.S. Insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
| 63.7 | % |
|
| 36.3 | % |
|
| 0.0 | % |
|
| 100.0 | % |
P&C |
| 8.0 | % |
|
| 90.9 | % |
|
| 1.1 | % |
|
| 100.0 | % |
Professional Liability |
| 0.0 | % |
|
| 100.0 | % |
|
| 0.0 | % |
|
| 100.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Int'l Insurance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
| 55.8 | % |
|
| 43.9 | % |
|
| 0.3 | % |
|
| 100.0 | % |
P&C |
| 72.5 | % |
|
| 5.5 | % |
|
| 22.0 | % |
|
| 100.0 | % |
Professional Liability |
| 0.0 | % |
|
| 96.1 | % |
|
| 3.9 | % |
|
| 100.0 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GlobalRe |
| 81.4 | % |
|
| 2.9 | % |
|
| 15.7 | % |
|
| 100.0 | % |
Sensitivity Analysis
The losses for Management Liability business are generally very severe and infrequent, and with some cases, involving securities class actions. Management Liability claims report reasonably quickly, but take years to settle. In addition,following table provides a sensitivity analysis of our potential liability to pay a covered claim depends upon whether we have issued a Primary policy, in which case the cost of defense is a large component of the ultimate loss, or an excess policy at a higher attachment point, in which case our policy is not impacted until the covered claim has exceeded the coverage available in the other policies that our policy is in excess-of-loss. 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 UWY, 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 UWYs mature.
Lloyd’s Operations
Net Reserves for our Company’s Lloyd’s Operations are reviewed separately for the Marine, P&C,Losses and Professional Liability lines by product. The major Marine Products are Marine Liability, Transport, Marine Energy Liability, Cargo, Specie and Marine Reinsurance. The major P&C Products are Offshore Energy, Engineering, Onshore Energy, Operational Engineering and Direct and Facultative Property. The major products for Professional Liability are International Management Liability 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 jewelry, fine art, vault and cash in transit risks. Claims tend to be from theft or damage, quick to report and, in most cases, quick to settle. Marine reinsurance is a diversified global bookLAE as 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.
The process for establishing the IBNR loss reserves for the Marine and Professional Liability lines of the Lloyd’s Operations, and the assumptions used as part of this process, are similar in nature to the process employed by the Insurance Companies.
The Lloyd’s Operations products also include Property coverages for engineering and construction projects and Onshore Energy business, which are substantially reinsured. Losses from engineering and construction projects tend to result from loss of use due to construction delays while losses from Onshore Energy business are usually caused by fires or explosions. Large losses tend to be catastrophic in nature and are heavily reinsured. IBNR loss reserves for attritional losses are established based on the Syndicate’s extensive loss experience.
Sensitivity AnalysisDecember 31, 2016:
Reasonably Likely Range of Deviation | ||||||||||||||||||||
In thousands, except per share amounts | Total Net Loss Reserve | Strengthening Amount | % | Release Amount | % | |||||||||||||||
Insurance Companies: | ||||||||||||||||||||
Marine | $ | 194,743 | $ | 18,373 | 9.4 | % | $ | 20,287 | -10.4 | % | ||||||||||
Property Casualty | 655,320 | 73,014 | 11.1 | % | 82,168 | -12.5 | % | |||||||||||||
Professional Liability | 142,858 | 25,680 | 18.0 | % | 31,308 | -21.9 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total Insurance Companies(1) | 992,921 | 90,033 | 9.1 | % | 99,011 | -10.0 | % | |||||||||||||
Lloyd’s Operations: | ||||||||||||||||||||
Marine | 214,461 | 12,749 | 5.9 | % | 13,554 | -6.3 | % | |||||||||||||
Property Casualty | 39,563 | 2,787 | 7.0 | % | 2,998 | -7.6 | % | |||||||||||||
Professional Liability | 61,191 | 7,058 | 11.5 | % | 7,978 | -13.0 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total Lloyd’s Operations(1) | 315,215 | 17,996 | 5.7 | % | 19,086 | -6.1 | % | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Subtotal | 1,308,136 | 108,029 | 118,097 | |||||||||||||||||
Portfolio Effect(1) | — | (20,285 | ) | (24,044 | ) | |||||||||||||||
|
|
|
|
|
| |||||||||||||||
Total | $ | 1,308,136 | $ | 87,744 | 6.7 | % | $ | 94,053 | -7.2 | % | ||||||||||
|
|
|
|
|
| |||||||||||||||
Increase (decrease) to net income | ||||||||||||||||||||
Amount | $ | 57,034 | $ | (61,134 | ) | |||||||||||||||
Per Share(2) | $ | 3.89 | $ | (4.17 | ) |
|
|
|
|
|
| Reasonably Likely Range of Deviation |
| |||||||||||||
|
| Total Net |
|
| Strengthening |
|
|
|
|
|
| Release |
|
|
|
|
| |||
amounts in thousands, except per share amounts |
| Loss Reserve |
|
| Amount |
|
| % |
|
| Amount |
|
| % |
| |||||
U.S. Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
| $ | 110,960 |
|
| $ | 8,273 |
|
|
| 7.5 | % |
| $ | 7,699 |
|
|
| 6.9 | % |
P&C |
|
| 804,877 |
|
|
| 53,658 |
|
|
| 6.7 | % |
|
| 50,305 |
|
|
| 6.2 | % |
Professional Liability |
|
| 95,114 |
|
|
| 16,077 |
|
|
| 16.9 | % |
|
| 13,752 |
|
|
| 14.5 | % |
Portfolio Effect (1) |
|
|
|
|
|
| (16,345 | ) |
|
|
|
|
|
| (13,638 | ) |
|
|
|
|
Total U.S. Insurance |
| $ | 1,010,951 |
|
| $ | 61,663 |
|
|
| 6.1 | % |
| $ | 58,118 |
|
|
| 5.7 | % |
Int'l Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
| $ | 199,242 |
|
| $ | 22,277 |
|
|
| 11.2 | % |
|
| 20,037 |
|
|
| 10.1 | % |
P&C |
|
| 84,688 |
|
|
| 8,451 |
|
|
| 10.0 | % |
|
| 7,685 |
|
|
| 9.1 | % |
Professional Liability |
|
| 100,209 |
|
|
| 25,938 |
|
|
| 25.9 | % |
|
| 20,604 |
|
|
| 20.6 | % |
Portfolio Effect (1) |
|
|
|
|
|
| (21,638 | ) |
|
|
|
|
|
| (16,225 | ) |
|
|
|
|
Total Int'l Insurance |
| $ | 384,139 |
|
| $ | 35,028 |
|
|
| 9.1 | % |
| $ | 32,101 |
|
|
| 8.4 | % |
GlobalRe |
|
| 115,361 |
|
|
| 26,946 |
|
|
| 23.4 | % |
|
| 21,844 |
|
|
| 18.9 | % |
Subtotal |
| $ | 1,510,451 |
|
| $ | 123,637 |
|
|
|
|
|
| $ | 112,063 |
|
|
|
|
|
Portfolio Effect (1) |
|
| — |
|
|
| (49,239 | ) |
|
|
|
|
|
| (41,158 | ) |
|
|
|
|
Total |
| $ | 1,510,451 |
|
| $ | 74,398 |
|
|
| 4.9 | % |
| $ | 70,905 |
|
|
| 4.7 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) to net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
|
|
| $ | (48,359 | ) |
|
|
|
|
| $ | 46,088 |
|
|
|
|
|
Per Share (2) |
|
|
|
|
| $ | (1.61 | ) |
|
|
|
|
| $ | 1.53 |
|
|
|
|
|
(1) -– The totals for each segment are adjusted for portfolio effect. The portfolio effect is the reduction in risk which arises out of diversification in the portfolio.
(2) - Calculated using average diluted shares of 14,646,36930,031,609 for the year ended December 31, 2014.2016. We completed a two-for-one stock split on January 20, 2017. All share and per share data has been retroactively restated on a post-split basis.
A range of reasonable estimates has been developed based on the historical volatility of held reserves versus current estimates for the purposes of this sensitivity analysis. The history indicates that our held reserves tend to be 9.7%6.6% redundant with a standard deviation of 10.3%7.1%. We have ignored the historical conservatism and built a range around the current held amounts. Our Company’s lines of business, the market pricing adequacy and our Company’s underwriting strategies have changed dynamically over the past eleventen years. There is thus a significant risk that the potential volatility of the current reserve estimates could differ in a material manner from the historical trends.
Actual emergence will vary and may exceed the historical variation. The actual losses may not emerge as expected which would cause the ranges to expand or contract from year to year. The impact from the shift on ranges will be greater for lines with longer emergence patterns. The individual lines will also have
greater variance than the range for the entire book of business. The statistical variation is expected to have a somewhat higher range of deterioration than savings. The history in itself is only a rough estimate of the potential volatility. The ranges have been refined by reserve segment in three categories – Marine, Property Casualty and Professional Liability. These groupings give a sense of the volatility by sub-group but are not intended to be rigorous estimates even if such were possible. The computation of each range represents the central 50%50.0% of outcomes. The specific movement ofwithin our reporting segments in an individual year may not fall within this range. There is a significant risk that the potential volatility of the current reserve estimates could differ in a material manner from the historical trends. The total reserve variability is not equal to the sum of the segment variability due to the benefit of diversification.
Reinsurance Recoverables
We are required to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement. 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. We are required to pay losses even if a reinsurer fails to meet its obligations under the applicable reinsurance agreement. 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. Additional information regarding our reinsurance recoverables can be found in the “Business - Reinsurance Recoverables” section and Note 6,Reinsurance, in the notes to the consolidated financial statements, both included herein.
Written and Unearned Premium
Substantially all of our business is placed through agents and brokers. Written premium is recorded based on the insurance policies that have been reported to us and the policies that have been written by agents but not yet reported to us. We estimate the amount of written premium not yet reported based on judgments relative to current and historical trends of the business being written. An unearned premium reserve is established to reflect the unexpired portion of each policy at the financial reporting date. Assumed and ceded reinsurance reinstatement premiumsRRPs are written and fully earned in the period in which the loss event, which caused the reinstatement premium, occurred.
A portion of our premium is estimated for unreported premium, mostly for theour Marine businessand Energy & Engineering products written by our U.K. Branch and Lloyd’s OperationsInt’l Insurance reporting segment, as well as theour A&H product and our LatAm reinsurance business within our P&C and Surety products written by NavRe. We generally do not experience any significant backlog in processing premiums.our GlobalRe reporting segment. Such premium estimates are generally based on submission data received from brokers and agents and recorded when the insurance policy or reinsurance contract is written or bound. 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.
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 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.
Additional information regarding our written and unearned premium can be found in Note 1,Organization and Summary of Significant Accounting Policies, and Note 6,Reinsurance, in the Notes to Consolidated Financial Statements, both included herein.
The Recoverability of Deferred Tax Assets
We apply the asset and liability method of accounting for income taxes wherebyrecognize deferred tax assets and liabilities, are recognized for the future tax consequences attributable towhich primarily result from temporary differences between the financial statement carrying amounts recorded in our Consolidated Financial Statements and the tax basis of existingour assets and liabilities and their respective tax basis. In assessingliabilities. At each balance sheet date, we assess the realization ofneed to establish a valuation allowance that reduces deferred tax assets management considers whetherwhen it is more likely than not that all, or some portion, of the deferred tax assets will not be realized. These reviews include, among other factors, the nature and amountThe valuation allowance is based on all available information including projections of thefuture taxable income from each tax-paying component in each tax jurisdiction, principally derived from available tax planning strategies. Projections of future taxable income incorporate several assumptions of future business and expense items,operations that are apt to differ from actual experience. We regularly review our deferred tax assets for recoverability, taking into consideration our history of earnings, expectations for future earnings, taxable income in carryback years and the expected timing of when assets will be used or liabilities will be required to be reported, as well as the reliabilityreversals of historical profitability of businesses expected to provide future earnings. After review, if management determines that the realization of the tax asset does not meet theexisting temporary differences. When we believe it is more likely than not criterion an offsetting valuation allowance is recorded, which reduces net earnings and thethat a deferred tax asset inwill not be realized, we establish a valuation allowance for that period. Additional information regarding our deferred tax assets can be found in Note 1, Organization and Summaryasset. Our valuation allowance as of Significant Accounting Policies, and Note 7,Income Taxes, in the Notes to Consolidated Financial Statements, both included herein.December 31, 2016 is $0.7 million.
Impairment of Investment Securities
Management regularly reviews our fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments.
For fixed maturity securities, we consider our intent to sell a security and whether it is more likely than not that, we will be required to sell a security before the anticipated recovery as part of the process of evaluating whether a security’s unrealized loss represents an other-than-temporary decline. For structured securities, we assess whether the amortized cost basis of a fixed maturity security will be recovered by comparing the present value of cash flows expected to be collected to the current book value. Any shortfalls of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered the credit loss portion of net other-than-temporary impairment (“OTTI”) losses and is recognized in earnings. All non-credit losses are recognized as changes in OTTI losses within Other Comprehensive Income (“OCI”).
For equity securities, in general, our Company focuses its attention on those securities with a fair value less than 80% of their cost for six or more consecutive months. If warranted as the result of conditions relating to a particular security, our Company will focus on a significant decline in fair value regardless of the time period involved. Factors considered in evaluating potential impairment include, but are not limited to, the current fair value as compared to cost of the security, the length of time the investment has been below cost and by how much the investment is below cost. If these securities are deemed to be other-than-temporarily impaired, the cost is written down to fair value with the loss recognized in earnings.
For equity securities, our Company also considers its intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. For fixed maturity securities, our Company considers its intent to sell a security and whether it is more likely than not that our Company will be required to sell a security before the anticipated recovery as part of the process of evaluating whether a security’s unrealized loss represents an other-than-temporary decline. Our Company’s ability to hold such securities is supported by sufficient cash flow from its operations and from maturities within its investment portfolio in order to meet its claims payment and other disbursement obligations arising from its underwriting operations without selling such investments. With respect to securities where the decline in value is determined to be temporary and the security’s value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are made within the context of overall risk monitoring, changing information and market conditions.
The day to day management of our investment portfolio is outsourcedthe largest component of consolidated assets and a multiple of stockholder’s equity. OTTI could be material to third party investment managers. While these investment managers may, at a given point in time, believe that the preferred course of action is to hold securities with unrealized losses that are considered temporary until such losses are recovered, the dynamic nature of the portfolio management may result in a subsequent decision to sell the securityour financial condition and realize the loss based upon a change in the market and other factors described above. Investment managers are required to notify management of rating agency downgrades of securities in their portfolios as well as any potential investment valuation issues at the end of each quarter. Investment managers are also required to notify management, and receive approval, prior to the execution of a transaction or series of related transactions that may result in a realized loss above a certain threshold. Additionally, management monitors the execution of a transaction or series of related transactions that may result in any realized loss up until a certain period beyond the close of a quarterly accounting period.
The following is a discussion and analysis of our consolidated and segment results of operations for the years ended December 31, 2014, 2013 and 2012. Our financial results are presented on the basis of U.S. GAAP. However, in presenting our financial results, we discuss our performance with reference to net 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. Net operating earnings are calculated as net income less after-tax net realized gains (losses), after-tax net OTTI losses recognized in earnings, after-tax foreign exchange gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency) and translation adjustments (translation of foreign currency denominated assets and liabilities into the entity’s functional currency). Book value per share is calculated by dividing stockholders’ 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 underwriting income (expense). The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses and other underwriting income (expense) by net earned premiums. A combined ratio of less than 100% indicates an underwriting profit and greater than 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.
Summary of Consolidated Results
The following table presents a summary of our consolidated financial results for the years ended December 31, 2014, 2013 and 2012:
Year Ended December 31, | Percentage Change | |||||||||||||||||||
In thousands, except for per share amounts | 2014 | 2013 | 2012 | 2014 vs. 2013 | 2013 vs. 2012 | |||||||||||||||
Gross written premiums | $ | 1,432,353 | $ | 1,370,517 | $ | 1,286,465 | 4.5 | % | 6.5 | % | ||||||||||
Net written premiums | 1,000,138 | 887,922 | 833,655 | 12.6 | % | 6.5 | % | |||||||||||||
Total revenues | 1,023,531 | 917,564 | 877,916 | 11.5 | % | 4.5 | % | |||||||||||||
Total expenses | 882,995 | 825,291 | 786,180 | 7.0 | % | 5.0 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Pre-tax income (loss) | $ | 140,536 | $ | 92,273 | $ | 91,736 | 52.3 | % | 0.6 | % | ||||||||||
Provision (benefit) for income taxes | 45,207 | 28,807 | 27,974 | 56.9 | % | 3.0 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income (loss) | $ | 95,329 | $ | 63,466 | $ | 63,762 | 50.2 | % | -0.5 | % | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income (loss) per common share: | ||||||||||||||||||||
Basic | $ | 6.69 | $ | 4.49 | $ | 4.54 | ||||||||||||||
Diluted | $ | 6.51 | $ | 4.42 | $ | 4.45 |
Net income for the year ended December 31, 2014 was $95.3 million or $6.51 per diluted share compared to $63.5 million or $4.42 per diluted share for the year ended December 31, 2013. The increase over prior year is generally attributable to underwriting growth,
favorable loss emergence from prior accident years, the prior year effect of the non-recurring call premium expense on the 5.75% Senior Notes and the current year effect of the change in functional currency of the Lloyd’s Operations. These positive effects were offset by additional tax expense and interest expense over prior year.
Net income for the year ended December 31, 2013 was $63.5 million or $4.42 per diluted share compared to $63.8 million or $4.45 per diluted share for the year ended December 31, 2012.
Cash flow from operations was $222.5 million, $136.9 million and $96.7 million for the years ended December 31, 2014, 2013 and 2012. The increase in cash flow from operations for 2014 is largely attributable to a reduction in net losses paid, and to a lesser extent, a decrease in tax payments due to the use of prior year overpayments in the current year, partially offset by higher operating expenses resulting from increased headcount associated with growth in our business. The increase in cash flow from operations for 2013 is largely attributable to the growth of our business as well as improved collections on premiums receivable.
The following table presents our net operating earnings for the years ended December 31, 2014, 2013 and 2012:
In thousands, except per share amounts | Twelve Months Ended December 31, | Percentage Change | ||||||||||||||||||
2014 | 2013 | 2012 | 2014 vs. 2013 | 2013 vs. 2012 | ||||||||||||||||
Net income | $ | 95,329 | $ | 63,466 | $ | 63,762 | 50.2 | % | -0.5 | % | ||||||||||
Less: after-tax realized (gains) losses | (8,327 | ) | (14,910 | ) | (26,698 | ) | -44.2 | % | -44.2 | % | ||||||||||
Plus: after-tax Call Premium on Senior Notes | — | 11,632 | — | NM | NM | |||||||||||||||
Less: after-tax other (income) expense | (6,534 | ) | — | — | NM | NM | ||||||||||||||
Add: after-tax OTTI | — | 1,557 | 561 | NM | NM | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net operating earnings | $ | 80,468 | $ | 61,745 | $ | 37,625 | 30.3 | % | 64.1 | % | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net operating earnings per common share: | ||||||||||||||||||||
Basic | 5.64 | 4.37 | 2.68 | |||||||||||||||||
Diluted | 5.49 | 4.30 | 2.63 |
NM - Percentage change not meaningful
Net operating earnings for the year ended December 31, 2014 were $80.5 million or $5.49 per diluted share compared to $61.7 million or $4.30 per diluted share for the comparable period in 2013. The increase was largely attributable to stronger underwriting results from both our Insurance Companies and Lloyd’s Operations, inclusive of net favorable prior period reserve releases.
Net operating earnings for the year ended December 31, 2013 were $61.7 million or $4.30 per diluted share compared to $37.6 million or $2.63 per diluted share for the comparable period in 2012. The increase in our net operating earnings was largely attributable to stronger underwriting results.
Our book value per share as of December 31, 2014 was $71.93, increasing 13.2% from $63.54 as of December 31, 2013. The growth in our book value per share is primarily driven by $95.3 million of net income for the year ended December 31, 2014, and to a lesser extent, a $23.2 million after tax-increase in unrealized gains on our investment portfolio in connection with our investment in longer dated fixed income securities. Our consolidated stockholders’ equity increased 13.9% to $1.03 billion as of December 31, 2014 compared to $902.2 million as of December 31, 2013.
The following table presents our consolidated underwriting results and provides a reconciliation of our underwriting profit or loss to GAAP net income or loss for the years ended December 31, 2014, 2013 and 2012:
Year Ended December 31, | Percentage Change | |||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | 2014 vs. 2013 | 2013 vs. 2012 | |||||||||||||||
Gross written premiums | $ | 1,432,353 | $ | 1,370,517 | $ | 1,286,465 | 4.5 | % | 6.5 | % | ||||||||||
Net written premiums | 1,000,138 | 887,922 | 833,655 | 12.6 | % | 6.5 | % | |||||||||||||
Net earned premiums | 935,895 | 841,939 | 781,964 | 11.2 | % | 7.7 | % | |||||||||||||
Net losses and loss adjustment expenses | (545,229 | ) | (518,961 | ) | (497,433 | ) | 5.1 | % | 4.3 | % | ||||||||||
Commission expenses | (125,528 | ) | (113,494 | ) | (121,470 | ) | 10.6 | % | -6.6 | % | ||||||||||
Other operating expenses | (196,825 | ) | (164,434 | ) | (159,079 | ) | 19.7 | % | 3.4 | % | ||||||||||
Other underwriting income (expenses) | 595 | (1,172 | ) | 1,488 | NM | NM | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Underwriting profit (loss) | $ | 68,908 | $ | 43,878 | $ | 5,470 | 57.0 | % | NM | |||||||||||
Net investment income | 64,168 | 56,251 | 54,248 | 14.1 | % | 3.7 | % | |||||||||||||
Net other-than-temporary impairment losses recognized in earnings | — | (2,393 | ) | (858 | ) | NM | NM | |||||||||||||
Net realized gains (losses) | 12,812 | 22,939 | 41,074 | -44.1 | % | -44.2 | % | |||||||||||||
Other income (expense) | 10,061 | — | — | NM | NM | |||||||||||||||
Call premium on Senior Notes | — | (17,895 | ) | — | NM | NM | ||||||||||||||
Interest expense | (15,413 | ) | (10,507 | ) | (8,198 | ) | 46.7 | % | 28.2 | % | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income (loss) before income taxes | $ | 140,536 | $ | 92,273 | $ | 91,736 | 52.3 | % | 0.6 | % | ||||||||||
Income tax expense | 45,207 | 28,807 | 27,974 | 56.9 | % | 3.0 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income | $ | 95,329 | $ | 63,466 | $ | 63,762 | 50.2 | % | -0.5 | % | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Losses and loss adjustment expenses ratio | 58.3 | % | 61.6 | % | 63.6 | % | ||||||||||||||
Commission expense ratio | 13.4 | % | 13.5 | % | 15.5 | % | ||||||||||||||
Other operating expense ratio(1) | 20.9 | % | 19.7 | % | 20.2 | % | ||||||||||||||
|
|
|
|
|
| |||||||||||||||
Combined ratio | 92.6 | % | 94.8 | % | 99.3 | % | ||||||||||||||
|
|
|
|
|
|
(1) - Includes Other operating expenses & Other underwriting income (expense)
NM - Percentage change not meaningful
Our 2014 net pre-tax underwriting profit of $68.9 million is $25.0 million greater than prior year of $43.9 million. The combined ratio for the year ended December 31, 2014 was 92.6% compared to 94.8% in 2013. The increase in net profit is due to strong underwriting results from our Insurance Companies and Lloyd’s Operations.
For the year ended December 31, 2014, our Insurance Companies reported an underwriting profit of $49.1 million, primarily driven by our Marine business, which reported $30.8 million of underwriting profit due to favorable loss emergence from prior accident years across all core product lines. In addition, our Property Casualty business reported an underwriting profit of $16.1 million, which includes $13.5 million of underwriting profit from our Excess Casualty division due in part to strong production attributable to the expansion of those underwriting teams and the continued dislocation of certain competitors, as well as $13.0 million of underwriting profit from our Assumed Reinsurance division mostly driven by growth and a lack of current accident year catastrophe activity from our LatAm P&C Products, and to a lesser extent, growth from our A&H product lines as we are starting to experience favorable loss trends from both those product lines. Partially offsetting the aforementioned underwriting profits is an $11.4 million underwriting loss from our Primary Casualty division in connection with net prior year reserve strengthening specific to Construction Liability issued to contractors operating in California and other western states. Our Professional Liability business reported an underwriting profit of $2.2 million primarily due in part to a recovery of prior period losses coming from a cash settlement of a contract dispute with a former third part administrator, partially offset by unfavorable loss emergence from our small lawyers product line, which is now in runoff.
For the year ended December 31, 2014, our Lloyd’s Operations reported an underwriting profit of $19.8 million which includes an underwriting profit of $9.6 million from our Lloyd’s Operations Property Casualty business driven by our Energy & Engineering division due to favorable current accident year loss trends, and to a lesser extent, prior year reserve releases from our Onshore Energy Product line. In addition, our Lloyd’s Operations Marine business reported an underwriting profit of $6.3 million driven by prior year reserve releases, which were offset by an $8.9 million Marine Liability loss, net of reinsurance and RRPs of $3.9 million, which involved the sinking of a vessel in South Korean waters. Our Lloyd’s Operations also includes an underwriting profit of $4.0 million from Professional Liability driven by favorable loss emergence.
Our 2013 pre-tax underwriting profit increased $38.4 million to a $43.9 million underwriting profit for December 31, 2013 compared to $5.5 million for the same period in 2012. The combined ratio for the year ended December 31, 2013 was 94.8%, compared to 99.3% for the year ended December 31, 2011. These increases were driven by strong underwriting results described below.
Our pre-tax underwriting profit for 2013 was driven by the mix of business and favorable loss trends of our Insurance Companies and our Lloyd’s Operations. Our Insurance Companies reported an underwriting profit of $25.6 million inclusive of $13.6 million and $16.3 million of underwriting profit from our Energy & Engineering and Marine divisions, respectively, in connection with favorable loss emergence from UWYs 2011 and prior. In addition, our Excess Casualty division produced an underwriting profit of $6.1 million as a result of continued strong production attributable to the expansion of those underwriting teams and the continued dislocation of certain competitors, partially offset by an underwriting loss of $5.8 million from our Management Liability division due to net reserve strengthening from UWYs 2010 and prior, and an underwriting loss of $3.4 million from businesses in run-off. Our Lloyd’s Operations reported an underwriting profit of $18.2 million due to continued favorable loss emergence from all businesses from UWYs 2011 and prior, partially offset by large current accident year losses from our Lloyd’s Operations Marine and Lloyd’s Operations Energy & Engineering divisions.
The combined ratio for the year ended December 31, 2012 was 99.3%. Our pre-tax underwriting profit for 2012 was affected by various significant events and adjustments during the year. A net loss of $20.4 million, inclusive of $8.3 million in RRPs, related to Superstorm Sandy was recorded in 2012. Gross of reinsurance our loss related to Superstorm Sandy was approximately $66.7 million. Refer to subsection “Net Losses and Loss Adjustment Expenses” within this section of the MD&A for additional disclosure related to Superstorm Sandy. Current accident year loss emergence of $14.5 million was recorded in our Agriculture product line and was driven by significant drought related crop losses across the U.S. Net losses of $13.9 million were also recorded, inclusive of $11.1 million in RRPs, related to several large losses from our Marine business, including the grounding of the cruise ship Costa Concordia off the coast of Italy. Net reserve releases of $47.2 million from our Lloyd’s Operations across all businesses and all divisions, most notably Lloyd’s Operations Marine. In addition to the above, the increase in our pre-tax underwriting profit in 2012 was affected by the mix of business and loss trends.
Revenues
The following table sets forth our gross written premiums, net written premiums and net earned premiums by segment and line of business for the years ended December 31, 2014, 2013, and 2012:
Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||||||||||||||||||||||||||
In thousands | Gross Written Premiums | % | Net Written Premiums | Net Earned Premiums | Gross Written Premiums | % | Net Written Premiums | Net Earned Premiums | Gross Written Premiums | % | Net Written Premiums | Net Earned Premiums | ||||||||||||||||||||||||||||||||||||
Insurance Companies: | ||||||||||||||||||||||||||||||||||||||||||||||||
Marine | $ | 177,363 | 12 | % | $ | 123,617 | $ | 123,203 | $ | 171,822 | 13 | % | $ | 119,837 | $ | 129,276 | $ | 200,095 | 16 | % | $ | 133,210 | $ | 142,181 | ||||||||||||||||||||||||
Property Casualty | 755,059 | 53 | % | 554,844 | 496,209 | 700,087 | 51 | % | 462,942 | 409,480 | 590,741 | 46 | % | 390,168 | 332,782 | |||||||||||||||||||||||||||||||||
Professional Liability | 113,032 | 8 | % | 74,312 | 85,162 | 130,366 | 10 | % | 97,229 | 100,582 | 130,489 | 10 | % | 99,578 | 96,476 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Insurance Companies | 1,045,454 | 73 | % | 752,773 | 704,574 | 1,002,275 | 74 | % | 680,008 | 639,338 | 921,325 | 72 | % | 622,956 | 571,439 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Lloyd’s Operations: | ||||||||||||||||||||||||||||||||||||||||||||||||
Marine | 188,107 | 13 | % | 144,327 | 141,471 | 181,046 | 13 | % | 134,627 | 138,690 | 194,423 | 15 | % | 143,600 | 136,898 | |||||||||||||||||||||||||||||||||
Property Casualty | 126,016 | 9 | % | 55,917 | 51,338 | 129,522 | 9 | % | 42,334 | 37,722 | 127,028 | 10 | % | 43,824 | 52,951 | |||||||||||||||||||||||||||||||||
Professional Liability | 72,776 | 5 | % | 47,121 | 38,512 | 57,674 | 4 | % | 30,953 | 26,189 | 43,689 | 3 | % | 23,275 | 20,676 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Lloyd’s Operations | 386,899 | 27 | % | 247,365 | 231,321 | 368,242 | 26 | % | 207,914 | 202,601 | 365,140 | 28 | % | 210,699 | 210,525 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total | $ | 1,432,353 | 100 | % | $ | 1,000,138 | $ | 935,895 | $ | 1,370,517 | 100 | % | $ | 887,922 | $ | 841,939 | $ | 1,286,465 | 100 | % | $ | 833,655 | $ | 781,964 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
Gross written premiums increased $61.8 million, or 4.5%, to $1.43 billion for the year ended December 31, 2014 compared to $1.37 billion for the same period in 2013. The overall increase is primarily driven by growth from our Insurance Companies, most notably from the Property Casualty businesses, which includes a $41.8 million increase from our Primary Casualty division, driven by strong production from the continued improvement of the overall construction market, as well as a $17.5 million increase in our Excess Casualty division due to improved market conditions and the dislocation of certain competitors, and a $13.1 million increase from our Environmental division due to our continued investment in those underwriting teams, all of which are partially offset by a $11.3 million decrease from our Energy & Engineering division due to difficult market conditions and an unfavorable rating environment, and a net $6.3 million decrease from our Assumed Reinsurance division as a result of a reduction in renewal premiums from our A&H and Agriculture products. The overall increase from our Insurance Company Property Casualty business was partially offset by a $17.3 million decrease from our Insurance Companies Professional Liability business due to a reduction in our E&O division resulting from our decision to exit the small lawyers professional liability product line, as well as a decrease in our real estate agents and accountants liability product lines as a result of certain program terminations, partially offset by an increase from our Management Liability division due to an increase in subject premium on renewals. To a lesser extent, the overall increase in gross written premiums is also driven by a $15.1 million increase from our Lloyd’s Operations that is primarily driven by the continued expansion of our Lloyd’s Operations E&O division, a portion of which is due to our European expansion into new offices in Italy, the Netherlands and France.
Gross written premiums increased $84.1 million, or 6.5%, to $1.37 billion for the year ended December 31, 2013 compared to $1.29 billion for the same period in 2012. The increase in gross written premiums is primarily attributed to growth within our Insurance Companies Property Casualty business, specifically from our Excess Casualty and Primary Casualty divisions as a result of strong production attributable to an expansion of our underwriting teams and continued dislocation among certain competitors. In addition, we have experienced growth in Lloyd’s Operations Professional Liability business as a result of strong new business production. The aforementioned increases were partially offset by a decrease in our Insurance Companies Marine business in connection with the re-underwriting of our Inland Marine product line and certain non-renewals from our Blue Water Hull product line, as well as a decrease in our Lloyd’s Operations Marine business due to non-renewals from our Cargo and Transport product lines.
Average premium renewal rates decreased 0.1% for the year ended December 31, 2014 driven by a 1.9% decrease for our Lloyd’s Operations, primarily due to 5.9% and 4.2% decreases in Lloyd’s Operations Energy & Engineering and Lloyd’s Operations Professional Liability, respectively, partially offset by a 1.7% increase in our Lloyd’s Operations Marine division. The aforementioned decreases were partially offset by a 0.6% increase from our Insurance Companies driven by Insurance Company Marine, which reported an increase of 1.9%, and Property Casualty, which realized a net increase of 0.8% consisting of a 3.3% increase from our Excess Casualty division, partially offset by a 7.3% decrease from our Insurance Company Energy & Engineering. The Insurance Companies Professional Liability realized a decrease of 2.0%, consisting of 4.0% and 0.5% decreases for the Management Liability and E&O divisions, respectively.
Average renewal premium rates for our Insurance Companies segment for the year ended December 31, 2013 increased as compared to the same period in 2012 across substantially all of our businesses within each segment. Our Insurance Companies Marine business has realized a 4.7%, 8.5% and 6.2% increase in rates for the Marine Liability, Inland Marine and Craft divisions, respectively. Within our Insurance Companies Property Casualty business, we have realized a 4.6% increase in rates for the Excess Casualty division and a 2.5% increase in the Primary Casualty division, partially offset by a 2.7% decrease from our Energy & Engineering division. Our Insurance Companies Professional Liability business has experienced an overall increase in its renewal rates of 3.4%, consisting of 5.0% and 2.7% for the Management Liability and E&O divisions, respectively. For the year, ended December 31, 2013, average renewal premium rates for our Lloyd’s Operations segment include increases for Marine and Property Casualty of approximately 3.4% and 1.6%, respectively. Our Lloyd’s Operations Professional Liability business experienced an average decrease of 1.7%.
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 adjusted for changes in exposures 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.
Ceded Written Premiums
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 gross 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.
Our ceded reinsurance program includes contracts for proportional reinsurance, per risk and whole account excess-of-loss reinsurance for both P&C risks and property catastrophe excess-of-loss reinsurance. In recent years, we have increased our utilization of excess-of-loss reinsurance for Marine, Property and certain Casualty risks. Our excess-of-loss reinsurance contracts generally provide for a specific amount of coverage in excess of an attachment point and sometimes provides for reinstatement of the coverage to the extent the limit has been exhausted for payment of additional premium. The number of ceded reinsurance reinstatements (“RRP”) available varies by contract, and we record an estimate of the expected RRPs for losses ceded to excess-of-loss agreements where this feature applies.
We incurred $8.4 million, $3.0 million and $26.9 million of ceded RRPs for the years ended December 31, 2014, 2013, and 2012, respectively. The RRPs for 2014, 2013 and 2012 are primarily related to large losses from our Marine business. In 2014, $3.9 million of the large loss is due to the sinking of a vessel in South Korean waters, and $1.6 million is due to additional loss activity on the grounding of the cruise ship Cost Concordia. The total RRPs recorded in 2012 included $11.1 million also from the grounding of the cruise ship Costa Concordia off the coast of Italy as well as $8.3 million in connection with our loss on Superstorm Sandy.
The following table sets forth our ceded written premiums by segment and major line of business for the calendar years ended December 31, 2014, 2013 and 2012:
Year Ended December 31, | ||||||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||
In thousands | Ceded Written Premiums | % of Gross Written Premiums | Ceded Written Premiums | % of Gross Written Premiums | Ceded Written Premiums | % of Gross Written Premiums | ||||||||||||||||||
Insurance Companies: | ||||||||||||||||||||||||
Marine | $ | 53,746 | 30 | % | $ | 51,985 | 30 | % | $ | 66,885 | 33 | % | ||||||||||||
Property Casualty | 200,215 | 27 | % | 237,145 | 34 | % | 200,573 | 34 | % | |||||||||||||||
Professional Liability | 38,720 | 34 | % | 33,137 | 25 | % | 30,911 | 24 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Insurance Companies | 292,681 | 28 | % | 322,267 | 32 | % | 298,369 | 32 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Lloyd’s Operations: | ||||||||||||||||||||||||
Marine | 43,780 | 23 | % | 46,419 | 26 | % | 50,823 | 26 | % | |||||||||||||||
Property Casualty | 70,099 | 56 | % | 87,188 | 67 | % | 83,204 | 66 | % | |||||||||||||||
Professional Liability | 25,655 | 35 | % | 26,721 | 46 | % | 20,414 | 47 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Lloyd’s Operations | 139,534 | 36 | % | 160,328 | 44 | % | 154,441 | 42 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 432,215 | 30 | % | $ | 482,595 | 35 | % | $ | 452,810 | 35 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Overall, the percentage of total ceded written premiums to total gross written premiums for the year ended December 31, 2014 has decreased by 5% compared to the year ended December 31, 2013. This decrease is indicative of key changes to our reinsurance programs and mix of business.
Our Insurance Companies’ decrease in ceded written premium is driven by the Property Casualty line, due to a change in the reinsurance program supporting certain Casualty risks. Effective in the first quarter 2014, our Company entered into a treaty that combined a reduced level of proportional reinsurance with an additional excess-of-loss cover. Additionally, we decreased the Energy & Engineering Offshore Energy quota share program from 62% to 55%. The increase in the percentage ceded for our Insurance Companies Professional Liability business is due to additional contracts for proportional reinsurance, signed in the fourth quarter of 2013 and 2014. The treaty signed in the fourth quarter of 2013 allowed us to cede 100% of our small lawyers’ Professional Liability E&O business to the carrier that has assumed the renewal rights, indicative of our decision to exit this business. This treaty expired on March 31, 2014. In the fourth quarter of 2014, in addition to our Professional Liability excess-of-loss treaty, a new treaty was signed that allows us to ceded a 60% quota share and additional excess-of-loss on various Professional Liability lines of business.
The decrease in the percentage of total ceded written premium for our Lloyd’s Operations is driven by changes in the mix of business as well as changes to our quota share reinsurance programs. The decrease in the Lloyd’s Operations Property Casualty line is due to growth in the Assumed Reinsurance division, which includes new business from our LatAm and Property Treaty product lines, which is not ceded. The decrease in the Lloyd’s Operations Professional Liability business is driven by increased growth from our Lloyd’s Operations E&O division, which is not attached to any proportional reinsurance, as well a reduction in the use of proportional reinsurance for Lloyd’s Operations D&O division. In Lloyd’s Operations Marine, the ceded premium ratio has decreased against prior year due to a reduction in the use of proportional reinsurance for certain product lines.
The percentage of total ceded written premiums to total gross written premiums for the year ended December 31, 2013 and 2012 has remained constant at 35%. The decrease in percentage for Insurance Companies Marine is driven by a reduction in RRPs in connection with a reduction in large loss activity, partially offset by increase in ceded written premiums related to a true up of certain estimated Minimum and Deposit premium adjustments in the year. The Insurance Companies Professional Liability business percentage increased in 2013 due to an additional proportional contract covering this business. The increase in the percentage for the Lloyd’s Operations Property Casualty business is driven by an increased use of proportional reinsurance to support our offshore energy business for 2013.
Net Written Premiums
Net written premiums increased 12.6% for the year ended December 31, 2014 compared to the same period in 2013. The increase is due to mix of business, inclusive of certain changes in our reinsurance program that have increased our retention as well as growth in gross written premiums primarily driven by our Insurance Companies Property Casualty business, as described above. Together these changes have resulted in growth in net written premium, which outpaces the growth in gross written premium.
Net written premiums increased 6.5% for the year ended December 31, 2013 compared to the same period in 2012. The increase is due to the mix of our Insurance Companies Property Casualty business and is specifically driven by the continued growth of our Excess Casualty and Primary Casualty divisions and more RRPs recorded in 2012 in connection with several losses from our Marine businesses. The aforementioned increases are partially offset by a decrease in our Marine business in connection with the re-underwriting of our Inland Marine division.
Net Earned Premiums
Net earned premiums increased 11.2% for the year ended December 31, 2014 compared to the same period in 2013. The increase in net earned premiums is due to increased retention resulting from changes in our reinsurance programs as well as the recent growth of our business primarily driven by our Insurance Companies’ Property Casualty business.
Net earned premiums increased 7.7% for the year ended December 31, 2013 compared to the same period in 2012, driven by earnings from the continued growth of our Insurance Companies Excess Casualty, Primary Casualty, and our Assumed Reinsurance divisions, which includes the A&H product lines that are recognized in earnings over a longer exposure period than our other lines of business. In addition, the increases are also attributable to the RRPs recorded in 2012, and are partially offset by a decrease from the re-underwriting of our Inland Marine product lines, as described above.
Net Investment Income
Our net investment income was derived from the following sources:
Year Ended December 31, | Percentage Change | |||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | 2014 vs. 2013 | 2013 vs. 2012 | |||||||||||||||
Fixed maturities | $ | 57,219 | $ | 53,898 | $ | 58,995 | 6.2 | % | -8.6 | % | ||||||||||
Equity securities | 9,036 | 4,835 | 3,945 | 86.9 | % | 22.6 | % | |||||||||||||
Short-term investments | 911 | 774 | 1,694 | 17.7 | % | -54.3 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total investment income | $ | 67,166 | $ | 59,507 | $ | 64,634 | 12.9 | % | -7.9 | % | ||||||||||
Investment expenses | (2,998 | ) | (3,256 | ) | (10,386 | ) | -7.9 | % | -68.7 | % | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net investment income | $ | 64,168 | $ | 56,251 | $ | 54,248 | 14.1 | % | 3.7 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
The increase in total investment income before investment expenses for all years presented was primarily due to growth of invested assets. The increase for 2014 is also driven by a $1.6 million one-time special dividend received in the first quarter from our equity portfolio. The annualized pre-tax investment yield, excluding net realized gains and losses and net OTTI losses recognized in earnings, was 2.3% for the year ended December 31, 2014 and 2.4% for the years ended December 31, 2013 and 2012, respectively.
The 2.4% annualized pre-tax yields for the year ended December 31, 2012, included investment expenses of $4.5 of interest expense related to the settlement of a dispute with Equitas over foregone interest on amounts that were due on certain reinsurance contracts. In the dispute Equitas alleged that we failed to make timely payments to them under certain reinsurance agreements in connection with subrogation recoveries received by us with respect to several catastrophe losses that occurred in the late 1980’s and early 1990’s. In addition, investment expenses for the year ended December 31, 2012 includes a $2.8 million investment performance fee. Excluding the impact of the aforementioned interest expense and investment performance fee, the annualized pre-tax yield for the year ended December 31, 2012 would have been 2.7%, reflective of the general decline in market yield.
The portfolio duration was 3.8 years for the year ended December 31, 2014 and was 3.7 and 3.6 years for each of the years ended December 31, 2013 and 2012, respectively.
Other-Than-Temporary Impairment Losses Recognized In Earnings
Our net OTTI losses recognized in earnings for the periods indicated were as follows:
Year Ended December 31, | Percentage Change | |||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | 2014 vs. 2013 | 2013 vs. 2012 | |||||||||||||||
Fixed maturities | $ | — | $ | (1,821 | ) | $ | (11 | ) | NM | NM | ||||||||||
Equity securities | — | (572 | ) | (847 | ) | NM | -32.5 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
OTTI recognized in earnings | $ | — | $ | (2,393 | ) | $ | (858 | ) | NM | NM | ||||||||||
|
|
|
|
|
|
|
|
|
|
NM - Percentage change not meaningful
Our Company did not have any OTTI losses for the year ended December 31, 2014.
Net OTTI losses for the year ended December 31, 2013 consisted of $1.8 million for one municipal bond and $0.6 million for three equity 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, 2012 primarily consists of $0.8 million for three equity securities, which were previously impaired.
Net Realized Gains and Losses
Realized gains and losses, excluding net OTTI losses recognized in earnings, for the periods indicated, were as follows:
Year Ended December 31, | Percentage Change | |||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | 2014 vs. 2013 | 2013 vs. 2012 | |||||||||||||||
Fixed maturities: | ||||||||||||||||||||
Gains | $ | 8,326 | $ | 8,539 | $ | 28,789 | -2.5 | % | -70.3 | % | ||||||||||
Losses | (2,610 | ) | (2,797 | ) | (1,915 | ) | -6.7 | % | 46.1 | % | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Fixed maturities, net | $ | 5,716 | $ | 5,742 | $ | 26,874 | -0.5 | % | -78.6 | % | ||||||||||
Equity securities: | ||||||||||||||||||||
Gains | $ | 9,447 | $ | 17,955 | $ | 14,673 | -47.4 | % | 22.4 | % | ||||||||||
Losses | (2,351 | ) | (758 | ) | (473 | ) | NM | 60.3 | % | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Equity securities, net | $ | 7,096 | $ | 17,197 | $ | 14,200 | -58.7 | % | 21.1 | % | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net realized gains (losses) | $ | 12,812 | $ | 22,939 | $ | 41,074 | -44.1 | % | -44.2 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
NM - Percentage change not meaningful
Net realized gains and losses are generated as part of the normal ongoing management of our investment portfolio. Net realized gains of $12.8 million for the year ended December 31, 2014 are primarily due to the sale of corporate bonds and equity securities. Net realized gains of $22.9 million for the year ended December 31, 2013 are primarily due to the sale of equities. Net realized gains of $41.1 million for the year ended December 31, 2012 are primarily due to the sale of municipal bonds and equity securities in anticipation of continued market uncertainty, the proceeds of which were reinvested in U.S. Government Treasury bonds and equities.
Other Income/Expense
Other Income or other expense is comprised of unrealized and realized foreign exchange gains and losses, commission income, and inspection fees. Total Other Income for the year ended December 31, 2014 was $10.7 million compared to total other expense of $1.2 million and total Other Income of $1.5 million for the years ended December 31, 2013 and 2012, respectively. The increase in Other Income for the year ended December 31, 2014 is primarily driven by a $10.0 million foreign currency transaction gain recorded in the first quarter in connection with a change in the functional currency of our Lloyd’s Operations. Refer to Footnote 1,Organization & Summary of Significant Accounting Policies, included herein, for further details on foreign currency remeasurement and translation.
Expenses
Net Losses and LAE
The ratio of net losses and LAE to net earned premiums (“loss ratios”) for the years ended December 31, 2014, 2013 and 2012 is presented in the following table:
Year Ended December 31, | ||||||||||||
Net Loss and LAE Ratio | 2014 | 2013 | 2012 | |||||||||
Net Loss and LAE Payments | 48.6 | % | 61.0 | % | 66.2 | % | ||||||
Change in reserves | 15.6 | % | 0.7 | % | 3.2 | % | ||||||
|
|
|
|
|
| |||||||
Subtotal - current year loss ratio | 64.2 | % | 61.7 | % | 69.4 | % | ||||||
|
|
|
|
|
| |||||||
Prior year loss development (release) | -5.9 | % | -0.1 | % | -5.8 | % | ||||||
|
|
|
|
|
| |||||||
Net loss and LAE ratio | 58.3 | % | 61.6 | % | 63.6 | % | ||||||
|
|
|
|
|
|
The net loss and LAE ratio for the year ended December 31, 2014 decreased 3.3 percentage points to 58.3% from 61.6% for the year ended December 31, 2013. The decrease in the loss ratio reflects an increase in prior year reserve releases as a result of favorable loss emergence from both our Insurance Companies and Lloyd’s Operations, partially offset by an increase in the current accident year driven by mix of business in medium and long-tail lines, current accident year losses and loss trends. The increase in current accident year loss activity from our Marine business is driven by several losses from our Craft and Marine Liability product lines, inclusive of a $5.0 million net loss involving the sinking of a vessel in South Korean waters, partially offset by a reduction in current accident year loss activity from our Property Casualty business.
The net loss and LAE ratio for the year ended December 31, 2013 decreased 2.0 percentage points to 61.6% from 63.6% for the year ended December 31, 2012. The decrease in the loss ratio reflects an improvement in the current accident year driven by mix of business, loss trends, and a reduction in large loss events as compared to the same period in 2012.
The changes in the net loss and LAE ratios by reportable segment and line of business, as presented above, are primarily driven by prior year reserve strengthening or releases, as discussed below, and to a lesser extent changes in our mix of business and loss trends.
The segment and line of business breakdown of the net loss and LAE ratios for the years ended December 31, 2014, 2013 and 2012 are as follows:
Year Ended December 31, | ||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||
Insurance Companies: | ||||||||||||
Marine | 37.5 | % | 48.4 | % | 77.4 | % | ||||||
Property Casualty | 68.1 | % | 68.5 | % | 70.8 | % | ||||||
Professional Liability | 59.0 | % | 71.8 | % | 73.8 | % | ||||||
|
|
|
|
|
| |||||||
Insurance Companies | 61.7 | % | 65.0 | % | 73.0 | % | ||||||
|
|
|
|
|
| |||||||
Lloyd’s Operations: | ||||||||||||
Marine | 52.7 | % | 55.1 | % | 37.3 | % | ||||||
Property Casualty | 33.6 | % | 36.7 | % | 44.7 | % | ||||||
Professional Liability | 49.4 | % | 50.6 | % | 26.8 | % | ||||||
|
|
|
|
|
| |||||||
Lloyd’s Operations | 47.9 | % | 51.1 | % | 38.2 | % | ||||||
|
|
|
|
|
|
Prior Year Reserve Strengthening (Releases)
The relevant factors that may have a significant impact on the establishment and adjustment of losses and LAE reserves can vary by line of business and from period to period. As part of our regular review of prior reserves, management, in consultation with our actuaries, may determine, based on their judgment that certain assumptions made in the reserving process in prior year periods may need to be revised to reflect various factors, likely including the availability of additional information. Based on their reserve analyses, management may make corresponding reserve adjustments.
The segment and line of business breakdowns of prior period net reserve movements for the years ended December 31, 2014, 2013 and 2012 are as follows:
Year Ended December 31, | ||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||
Insurance Companies: | ||||||||||||
Marine | $ | (41,388 | ) | $ | (15,227 | ) | $ | (10,010 | ) | |||
Property Casualty | 14,612 | 18,466 | 4,293 | |||||||||
Professional Liability | (3,536 | ) | 10,191 | 7,613 | ||||||||
|
|
|
|
|
| |||||||
Insurance Companies | $ | (30,312 | ) | $ | 13,430 | $ | 1,896 | |||||
|
|
|
|
|
| |||||||
Lloyd’s Operations: | ||||||||||||
Marine | $ | (21,336 | ) | $ | (2,998 | ) | $ | (30,735 | ) | |||
Property Casualty | (1,500 | ) | (14,574 | ) | (6,890 | ) | ||||||
Professional Liability | (2,664 | ) | 2,876 | (9,562 | ) | |||||||
|
|
|
|
|
| |||||||
Lloyd’s Operations | $ | (25,500 | ) | $ | (14,696 | ) | $ | (47,187 | ) | |||
|
|
|
|
|
| |||||||
| ||||||||||||
|
|
|
|
|
| |||||||
Total strengthening (releases) | $ | (55,812 | ) | $ | (1,266 | ) | $ | (45,291 | ) | |||
|
|
|
|
|
|
The following is a discussion of relevant factors related to the $55.8 million prior period net reserve releases recorded for the year ended December 31, 2014:
The Insurance Companies recorded $30.3 million of net prior year reserve releases, primarily driven by our Marine business, in connection with $41.4 million of net favorable loss emergence due to a lesser amount of large losses and improved underwriting over the past couple of years across all core product lines, inclusive of $13.4 million from Marine Liability, $7.2 million from Craft/Fishing vessels, $6.4 million from P&I, $4.7 million from Inland Marine, $1.1 million from Bluewater Hull and $0.7 million from Cargo.
The Insurance Companies’ Marine reserve releases were partially offset by $14.6 million of net reserve strengthening from our Property Casualty business which is driven by $23.2 million of prior year reserve strengthening from our Primary Casualty division resulting entirely from unfavorable activity on pre-2010 California construction defect Liability claims, partially offset by $6.1 million of reserve releases due to favorable loss emergence from our Excess Casualty division.
The Insurance Companies’ Professional Liability business recorded $3.5 million of net prior year reserve releases primarily driven by $4.5 million of favorable loss emergence from our Management Liability division due to a cash settlement of a contract dispute with a former third party administrator, partially offset by unfavorable loss emergence from our E&O division due to our small lawyers’ product lines, which are in runoff.
The Lloyds Operations recorded $25.5 million of net prior year reserve releases primarily driven by $21.3 million of Marine releases in connection with favorable loss emergence across all core product lines, inclusive of $11.0 million from Marine Liability, $3.7 million from Specie, $1.3 million from Transport, $1.0 million from Cargo, $2.3 million from Energy Liability and $2.0 million from Marine Assumed.
The Lloyd’s Operations Property Casualty line recorded prior year releases of $1.5 million due to favorable loss emergence on our Onshore Energy book. Additionally, the Professional Liability business reserve releases on older UWYs was due to favorable loss emergence on both our E&O book by $1.0 million and Excess D&O by $1.7 million.
The following is a discussion of relevant factors related to the $1.3 million prior period net reserve releases recorded for the year ended December 31, 2013:
The Insurance Companies recorded $13.4 million of net strengthening primarily driven by our Property Casualty and Professional Liability businesses. Within the Property Casualty business, we reported net prior period reserve strengthening of $18.5 million, which includes $13.2 million of net strengthening from our Assumed Reinsurance division mostly attributable to our excess-of-loss A&H treaty lines in connection with UWYs 2012 and 2011, $10.4 million of strengthening from our Primary Casualty division related to our general liability coverage for general and artisan contractors, and a total of $2.1 million of strengthening for business in run-off. The aforementioned net prior period reserve strengthening was partially offset by $8.0 million of net prior period reserve releases from our Energy & Engineering division in connection with favorable emergence on our Offshore Energy lines written by our UK Branch.
Our Insurance Companies Professional Liability business reported net prior period reserve strengthening of $10.2 million largely attributable to $6.1 million reserve strengthening from our Management Liability division related to specific large claims for UWYs 2010 and prior, and $4.4 million reserve strengthening from our E&O division related to specific large claims from our insurance agents, miscellaneous Professional Liability, and small lawyer lines from UWYs 2011 and prior.
The aforementioned net prior period reserve strengthening from our Insurance Companies Property Casualty and Professional Liability were partially offset by $15.2 million of net reserve releases from our Insurance Companies Marine business in connection with favorable emergence from our Marine Liability lines for UWYs 2012 and prior.
Our Lloyd’s Operations recorded $14.7 million of net reserve releases driven by our Property Casualty and Marine businesses partially offset by strengthening in our Professional Liability business. Within our Property Casualty business we reported net prior period reserve releases of $14.6 million primarily from our Energy & Engineering division. Within our Marine business we reported prior period reserve releases of $3.0 million driven by our Marine Liability business. Within our Professional Liability business we reported strengthening of $2.9 million, inclusive of $6.1 million of strengthening in our E&O division partially offset by $3.2 million of favorable emergence from our Lloyd’s Management Liability division.
The following is a discussion of relevant factors related to the $45.3 million prior period net reserve releases recorded for the year ended December 31, 2012:
The Insurance Companies recorded $1.9 million net strengthening. The Marine business had $10.0 million of net reserve releases, which were primarily driven by:
The Marine reserve releases were partially offset by net strengthening of $7.6 million from the small lawyer and accountants lines within our Professional Liability business. This strengthening was primarily driven by several large losses that caused the actual claims emergence for these lines to exceed the expected losses. We also incurred net reserve strengthening of $4.3 million within our Property Casualty segment, which were primarily attributable to two large hemophiliac claims from UWY 2011 arising from our A&H product lines.
Our Lloyd’s Operations recorded $47.2 million of net prior period reserve releases across all businesses and divisions. In connection with our Company’s implementation of the Solvency II technical provisions in its Lloyd’s Operations, our Company’s actuaries undertook a comprehensive review during 2012 of the historical claims emergence patterns for all lines of business underwritten through Syndicate 1221. As a result of this review, our Company updated the loss emergence patterns used to project ultimate losses for all such lines of business, aligning these loss emergence factors with the historical median. This caused a reduction in ultimate loss estimates for all Lloyd’s Operations segments other than certain lines of business in Property Casualty segment, which increased. The Lloyd’s Operation also experienced significant reserve redundancies in several large claims. The amount of reserve redundancies attributable to these settlements was $5.0 million, consisting of $4.1 million from the Marine business and $0.9 million from Professional Liability business. A summary of the resulting prior period redundancies for each business within our Lloyd’s Operations by prior UWY is set forth below:
In thousands | Marine | Property Casualty | Professional Liability | Total | ||||||||||||
2010 | $ | 3,492 | $ | 378 | $ | 1,157 | $ | 5,027 | ||||||||
2009 | 14,792 | 4,170 | 6,072 | 25,034 | ||||||||||||
2008 and Prior | 12,451 | 2,342 | 2,333 | 17,126 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Strengthening | $ | 30,735 | $ | 6,890 | $ | 9,562 | $ | 47,187 | ||||||||
|
|
|
|
|
|
|
|
Superstorm Sandy
During 2012, we recorded gross and net loss estimates of $66.7 million and $12.1 million, respectively, exclusive of $8.3 million for the cost of excess-of-loss reinstatement premiums related to the fourth quarter 2012 Superstorm Sandy. Our Superstorm Sandy pre-tax net loss, inclusive of RRPs, was approximately $20.4 million, which increased our combined ratio by 2.6 points.
The following table sets forth our gross and net loss and LAE reserves, incurred loss and LAE, and payments for Superstorm Sandy for the periods indicated:
Year Ended December 31, | ||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||
Gross of Reinsurance | ||||||||||||
Beginning gross reserves | $ | 29,880 | $ | 62,847 | $ | — | ||||||
Incurred loss & LAE | 3 | 21 | 66,674 | |||||||||
Calendar year payments | 4,287 | 32,988 | 3,827 | |||||||||
|
|
|
|
|
| |||||||
Ending gross reserves | $ | 25,596 | $ | 29,880 | $ | 62,847 | ||||||
|
|
|
|
|
| |||||||
Gross case loss reserves | $ | 4,217 | $ | 6,757 | $ | 26,294 | ||||||
Gross IBNR loss reserves | 21,379 | 23,123 | 36,553 | |||||||||
|
|
|
|
|
| |||||||
Ending gross reserves | $ | 25,596 | $ | 29,880 | $ | 62,847 | ||||||
|
|
|
|
|
| |||||||
Net of Reinsurance | ||||||||||||
Beginning net reserves | $ | 458 | $ | 8,628 | $ | — | ||||||
Incurred loss & LAE | (193 | ) | (450 | ) | 12,087 | |||||||
Calendar year payments | 49 | 7,720 | 3,459 | |||||||||
|
|
|
|
|
| |||||||
Ending net reserves | $ | 216 | $ | 458 | $ | 8,628 | ||||||
|
|
|
|
|
| |||||||
Net case loss reserves | $ | 138 | $ | 338 | $ | 7,455 | ||||||
Net IBNR loss reserves | 78 | 120 | 1,173 | |||||||||
|
|
|
|
|
| |||||||
Ending net reserves | $ | 216 | $ | 458 | $ | 8,628 | ||||||
|
|
|
|
|
|
The decrease in incurred losses and LAE, net of reinsurance, for the year ended December 31, 2014 was primarily driven by a required reallocation of Superstorm Sandy losses for UWYs 2011 and 2012. Due to different reinsurance programs for the respective UWYs, this resulted in a benefit to the 2012 UWY, recognized in 2014 calendar year.
Hurricanes Gustav and Ike
The following table sets forth our gross and net loss and LAE reserves, incurred loss and LAE, and payments for the 2008 Hurricanes Gustav and Ike for the periods indicated:
Year Ended December 31, | ||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||
Gross of Reinsurance | ||||||||||||
Beginning gross reserves | $ | 3,327 | $ | 15,777 | $ | 31,170 | ||||||
Incurred loss & LAE | 6,285 | (11,260 | ) | (12,551 | ) | |||||||
Calendar year payments | 1,975 | 1,190 | 2,842 | |||||||||
|
|
|
|
|
| |||||||
Ending gross reserves | $ | 7,637 | $ | 3,327 | $ | 15,777 | ||||||
|
|
|
|
|
| |||||||
Gross case loss reserves | $ | 7,634 | $ | 2,821 | $ | 2,404 | ||||||
Gross IBNR loss reserves | 3 | 506 | 13,373 | |||||||||
|
|
|
|
|
| |||||||
Ending gross reserves | $ | 7,637 | $ | 3,327 | $ | 15,777 | ||||||
|
|
|
|
|
| |||||||
Net of Reinsurance | ||||||||||||
Beginning net reserves | $ | 432 | $ | 844 | $ | 1,150 | ||||||
Incurred loss & LAE | (135 | ) | (413 | ) | (58 | ) | ||||||
Calendar year payments | (7 | ) | (1 | ) | 248 | |||||||
|
|
|
|
|
| |||||||
Ending net reserves | $ | 304 | $ | 432 | $ | 844 | ||||||
|
|
|
|
|
| |||||||
Net case loss reserves | $ | 302 | $ | 404 | $ | 344 | ||||||
Net IBNR loss reserves | 2 | 28 | 500 | |||||||||
|
|
|
|
|
| |||||||
Ending net reserves | $ | 304 | $ | 432 | $ | 844 | ||||||
|
|
|
|
|
|
The decrease in incurred losses and LAE, net of reinsurance, for the year ended December 31, 2014 was primarily driven by a required reallocation of Hurricane Ike losses for UWYs 2007 and 2008. Due to different reinsurance programs for the respective UWYs, this resulted in a benefit due to the 2008 UWY, recognized in the 2014 calendar year.
Asbestos Liability
Our exposure to Asbestos Liability principally stems from Marine Liability insurance written on an occurrence basis during the mid-1980s. In general, our participation on such risks is in the excess layers, which requires the underlying coverage to be exhausted prior to coverage being triggered in our layer. In many instances, we are one of many insurers who participate in the defense and ultimate settlement of these claims, and we are generally a minor participant in the overall insurance coverage and settlement.
The reserves for asbestos exposures as of December 31, 2014 are for: (i) one large settled claim for Excess insurance policy limits exposed to a class action suit against an insured involved in the manufacturing or distribution of asbestos products being paid over several years and (ii) attritional asbestos claims that could be expected to occur over time. Substantially all of our Asbestos Liability reserves are included in our Marine loss reserves. For the year ended December 31, 2014, the Company recognized a benefit of $2.1 million as a result of settlements with third party administrators on ceded paid losses previously written off in prior years due to bankruptcy or insolvency of the reinsurer.
There can be no assurances that material loss development may not arise in the future from existing asbestos claims or new claims given the evolving and complex legal environment that may directly affect the outcome of the asbestos exposures of our insureds.
The following tables set forth our gross and net loss and LAE reserves, incurred loss and LAE, and payments for our asbestos exposures for the periods indicated:
Year Ended December 31, | ||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||
Gross of Reinsurance | ||||||||||||
Beginning gross reserves | $ | 15,519 | $ | 24,223 | $ | 19,830 | ||||||
Incurred loss & LAE | 527 | 3,040 | 5,032 | |||||||||
Calendar year payments | 676 | 11,744 | 639 | |||||||||
|
|
|
|
|
| |||||||
Ending gross reserves | $ | 15,370 | $ | 15,519 | $ | 24,223 | ||||||
|
|
|
|
|
| |||||||
Gross case loss reserves | $ | 13,105 | $ | 13,254 | $ | 21,958 | ||||||
Gross IBNR loss reserves | 2,265 | 2,265 | 2,265 | |||||||||
|
|
|
|
|
| |||||||
Ending gross reserves | $ | 15,370 | $ | 15,519 | $ | 24,223 | ||||||
|
|
|
|
|
| |||||||
Net of Reinsurance | ||||||||||||
Beginning net reserves | $ | 10,314 | $ | 14,477 | $ | 15,089 | ||||||
Incurred loss & LAE | (2,068 | ) | 724 | (317 | ) | |||||||
Calendar year payments | (2,045 | ) | 4,887 | 295 | ||||||||
|
|
|
|
|
| |||||||
Ending net reserves | $ | 10,291 | $ | 10,314 | $ | 14,477 | ||||||
|
|
|
|
|
| |||||||
Net case loss reserves | $ | 8,231 | $ | 8,254 | $ | 12,417 | ||||||
Net IBNR loss reserves | 2,060 | 2,060 | 2,060 | |||||||||
|
|
|
|
|
| |||||||
Ending net reserves | $ | 10,291 | $ | 10,314 | $ | 14,477 | ||||||
|
|
|
|
|
|
Commission Expenses
Commission expenses paid to brokers and agents are generally based on a percentage of gross written premiums and are partially offset by ceding commissions we may receive on ceded written premiums. Commissions are generally deferred and earned in line with premium earned. The percentage of commission expenses to net earned premiums (“commission expense ratio”) for the years ended December 31, 2014, 2013 and 2012 was 13.4%, 13.5% and 15.5%, respectively. The slight decrease in commission ratio for the year ended December 31, 2014 compared to the same period in 2013 is attributed to the changes in the mix of business. The decrease in commission expense for the year ended December 31, 2013 compared to the same period in 2012 is attributed to the changes in the mix of business, mostly driven by an increase in the ceding commission on the quota share program for our Offshore Energy product lines, and to a lesser extent RRPs recorded in 2012 in connection with loss events from our Marine business, which reduce net earned premium without any commission expense relief.
Other Operating Expenses
Other operating expenses increased to $196.8 million for the year ended December 31, 2014 compared to $164.4 million for the same period during 2013. The increase is primarily due to continued investment in new underwriting teams and expansion of existing support departments closely aligned with business growth, an increase in incentive compensation driven by stronger underwriting results, and the expansion of our European operation. To a lesser extent, other operating expenses have been adversely affected by exchange rate movement when converting expenses denominated in British pounds to U.S. dollars.
Other operating expenses increased to $164.4 million for the year ended December 31, 2013 compared to $159.1 million for the same period during 2012. The increase is primarily due to continued investments in new underwriting teams closely aligned with business growth and an increase in incentive compensation.
Call Premium on Senior Notes
In the fourth quarter of 2013 we incurred a charge of $17.9 million for the payment of a call premium in connection with the redemption of our 7.0% Senior Notes due May 1, 2016 (“7.0% Senior Notes”).
Interest Expense
2014 interest expense relates to our 5.75% Senior Notes due October 15, 2023 (“5.75% Senior Notes”). Interest expense increased to $15.4 million for the year ended December 31, 2014 from $10.5 and $8.2 million for the years ended December 31, 2013 and 2012, respectively, primarily due to the completion of our October 4, 2013 public debt offering of $265 million principal amount of 5.75% Senior Notes and the subsequent redemption of the $115 million aggregate principal amount of our 7% Senior Notes due May 1, 2016. The effective interest rate related to the 5.75% Senior Notes and 7.0% Senior Notes, based on the proceeds net of discount and all issuance costs, approximates 5.86% and 7.17%, respectively.
Income Taxes
We recorded income tax expense of $45.2 million, $28.8 million and $28.0 million for the years ended December 31, 2014, 2013 and 2012 respectively. The effective tax rates were 32.2%, 31.2% and 30.5% for the years ended December 31, 2014, 2013 and 2012, respectively. The increase in the effective tax rate from 2013 to 2014 is due to the decrease in percentage of tax-exempt interest to pre-tax income. While tax-exempt interest increased from 2013 of $3.8 million to $4.8 million in 2014, the related percentage of pre-tax income in 2013 was 4.2% whereas in 2014 it was only 3.4%. The increase in effective tax rate from 2012 to 2013 is due to a smaller percentage of tax-exempt interest earned during 2013. The effective tax rate on net investment income was 27.4%, 27.8% and 26.8% for the years ended December 31, 2014, 2013 and 2012 respectively.
As of December 31, 2014, the net deferred federal, foreign, state and local tax liability was $1.5 million, compared to a net deferred tax asset of $23.8 million as of December 31, 2013 with the change primarily due to the Lloyd’s year of account reclass to deferred from current of $9.2 million liability and the increase in tax on unrealized gains on equities and fixed maturities (including foreign exchange) of $9.4 million.
The net deferred tax asset is $23.8 million as of December 31, 2013 as compared to $3.2 million as of December 31, 2012, with the change primarily due to the increase in unrealized losses on investments and the increase in the deferred tax asset for unearned premium reserve, in line with the growth of our business. Refer to Footnote 7,Income Taxes, included herein, for further detail on the IRS and Lloyd’s tax agreement and Subpart F tax regulation.
We had net state and local deferred tax assets amounting to potential future tax benefits of $0.8 million and $0.6 million as of December 31, 2014 and 2013, respectively. Included in the deferred tax assets are state and local net operating loss carry-forwards of $0.0 million as of December 31, 2014 and $0.1 million for December 31, 2013. 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, 2014 expire from 2024 to 2032. 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.
Our Company has not provided for U.S. income taxes on approximately $22.6 million of undistributed earnings of its non-U.S. subsidiaries since it is intended that those earnings will be reinvested indefinitely in those subsidiaries. If a future determination is made that those earnings no longer are intended to be reinvested indefinitely in those subsidiaries, U.S. income taxes of approximately $2.3 million, assuming all foreign tax credits are realized, would be included in the tax provision at that time and would be payable if those earnings were distributed to our Company.
Our Company evaluates the performance of each underwriting segment based on their underwriting and GAAP results. Underwriting results are measured based on underwriting profit or loss and the related combined ratio, which are both non-GAAP measures of underwriting profitability. 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 underwriting income (expense) by net earned premiums. A combined ratio of less than 100% indicates an underwriting profit and greater than 100% indicates an underwriting loss. Each segment 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 its investment portfolios.
The following is a discussion of the financial results for each of our two underwriting segments.
Insurance Companies
The Insurance Companies consist of NIC, including its U.K. Branch, and its wholly-owned subsidiary, NSIC. They are primarily engaged in underwriting Marine insurance and related lines of business, specialty insurance lines of business, including Contractors’ General Liability insurance, Commercial Umbrella and Primary and Excess Casualty businesses, Specialty Assumed reinsurance business, and Professional Liability insurance. NSIC underwrites Specialty and Professional Liability insurance on an excess and surplus lines basis. NSIC is 100% reinsured by NIC.
The following table sets forth the results of operations for the Insurance Companies for the years ended December 31, 2014, 2013 and 2012:
Year Ended December 31, | Percentage Change | |||||||||||||||||||
2014 vs. | 2013 vs. | |||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | 2013 | 2012 | |||||||||||||||
Gross written premiums | $ | 1,045,454 | $ | 1,002,275 | $ | 921,325 | 4.3 | % | 8.8 | % | ||||||||||
Net written premiums | 752,773 | 680,008 | 622,956 | 10.7 | % | 9.2 | % | |||||||||||||
Net earned premiums | 704,574 | 639,338 | 571,439 | 10.2 | % | 11.9 | % | |||||||||||||
Net losses and loss adjustment expenses | (434,396 | ) | (415,413 | ) | (417,082 | ) | 4.6 | % | -0.4 | % | ||||||||||
Commission expenses | (85,137 | ) | (81,132 | ) | (81,370 | ) | 4.9 | % | -0.3 | % | ||||||||||
Other operating expenses | (138,675 | ) | (119,920 | ) | (113,625 | ) | 15.6 | % | 5.5 | % | ||||||||||
Other underwriting income (expense) | 2,727 | 2,764 | 3,790 | -1.3 | % | -27.1 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Underwriting profit (loss) | $ | 49,093 | $ | 25,637 | $ | (36,848 | ) | 91.5 | % | NM | ||||||||||
Net investment income | 56,714 | 49,083 | 46,549 | 15.5 | % | 5.4 | % | |||||||||||||
Net realized gains (losses) | 12,715 | 20,600 | 36,468 | -38.3 | % | -43.5 | % | |||||||||||||
Other income (expense) | (2,182 | ) | — | — | NM | NM | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income (loss) before income taxes | $ | 116,340 | $ | 95,320 | $ | 46,169 | 22.1 | % | 106.5 | % | ||||||||||
Income tax expense (benefit) | 36,609 | 29,965 | 12,686 | 22.2 | % | 136.2 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income (loss) | $ | 79,731 | $ | 65,355 | $ | 33,483 | 22.0 | % | 95.2 | % | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Losses and loss adjustment expenses ratio | 61.7 | % | 65.0 | % | 73.0 | % | ||||||||||||||
Commission expense ratio | 12.1 | % | 12.7 | % | 14.2 | % | ||||||||||||||
Other operating expense ratio(1) | 19.2 | % | 18.3 | % | 19.2 | % | ||||||||||||||
|
|
|
|
|
| |||||||||||||||
Combined ratio | 93.0 | % | 96.0 | % | 106.4 | % | ||||||||||||||
|
|
|
|
|
|
(1) - Includes Other operating expenses & Other underwriting income (expense)
NM - Percentage change not meaningful
Our Insurance Companies reported net income of $79.7 million, $65.4 million and $33.5 million for the years ended December 31, 2014, 2013 and 2012, respectively. The increase in net income for the year ended December 31, 2014 as compared to the same period in 2013 is due to stronger underwriting results, as well as increases in net investment income due to growth in our investment portfolio driven by strong operating cash flows, partially offset by a decrease in net realized gains, a foreign exchange loss and additional tax expense. The increase in net income for the year ended December 31, 2013 as compared to the same period in 2012 was due to an improvement in underwriting results.
The following tables reflect the net underwriting result by major line of business in the calendar years ended December 2014, 2013, and 2012:
($ in thousands) | ||||||||||||||||||||||||||||
Twelve Months Ended December 31, 2014 | ||||||||||||||||||||||||||||
Net Earned Premiums | Losses and LAE Incurred | Underwriting Expenses | Underwriting Profit (Loss) | Loss Ratio | Expense Ratio | Combined Ratio | ||||||||||||||||||||||
Insurance Companies: | ||||||||||||||||||||||||||||
Marine | $ | 123,203 | $ | 46,169 | $ | 46,226 | $ | 30,808 | 37.5 | % | 37.5 | % | 75.0 | % | ||||||||||||||
Property Casualty | 496,209 | 337,961 | 142,131 | 16,117 | 68.1 | % | 28.7 | % | 96.8 | % | ||||||||||||||||||
Professional Liability | 85,162 | 50,266 | 32,728 | 2,168 | 59.0 | % | 38.5 | % | 97.5 | % | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Insurance Companies | $ | 704,574 | $ | 434,396 | $ | 221,085 | $ | 49,093 | 61.7 | % | 31.3 | % | 93.0 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Twelve Months Ended December 31, 2013 | ||||||||||||||||||||||||||||
Net Earned Premiums | Losses and LAE Incurred | Underwriting Expenses | Underwriting Profit (Loss) | Loss Ratio | Expense Ratio | Combined Ratio | ||||||||||||||||||||||
Insurance Companies: | ||||||||||||||||||||||||||||
Marine | $ | 129,276 | $ | 62,617 | $ | 50,206 | $ | 16,453 | 48.4 | % | 38.9 | % | 87.3 | % | ||||||||||||||
Property Casualty | 409,480 | 280,530 | 114,660 | 14,290 | 68.5 | % | 28.0 | % | 96.5 | % | ||||||||||||||||||
Professional Liability | 100,582 | 72,266 | 33,422 | (5,106 | ) | 71.8 | % | 33.3 | % | 105.1 | % | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Insurance Companies | $ | 639,338 | $ | 415,413 | $ | 198,288 | $ | 25,637 | 65.0 | % | 31.0 | % | 96.0 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Twelve Months Ended December 31, 2012 | ||||||||||||||||||||||||||||
Net Earned Premiums | Losses and LAE Incurred | Underwriting Expenses | Underwriting Profit (Loss) | Loss Ratio | Expense Ratio | Combined Ratio | ||||||||||||||||||||||
Insurance Companies: | ||||||||||||||||||||||||||||
Marine | $ | 142,181 | $ | 110,119 | $ | 55,419 | $ | (23,357 | ) | 77.4 | % | 39.0 | % | 116.4 | % | |||||||||||||
Property Casualty | 332,782 | 235,740 | 100,770 | (3,728 | ) | 70.8 | % | 30.3 | % | 101.1 | % | |||||||||||||||||
Professional Liability | 96,476 | 71,223 | 35,016 | (9,763 | ) | 73.8 | % | 36.3 | % | 110.1 | % | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Insurance Companies | $ | 571,439 | $ | 417,082 | $ | 191,205 | $ | (36,848 | ) | 73.0 | % | 33.4 | % | 106.4 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Insurance Companies combined ratio for the year ended December 31, 2014 was 93.0% compared to 96.0% for the same period in 2013. Our Insurance Companies pre-tax underwriting results increased by $23.5 million to an underwriting profit of $49.1 million compared to an underwriting profit of $25.6 million for the same period in 2013.
Our Insurance Companies reported an underwriting profit of $49.1 million for the year ended December 31, 2014, mostly driven by our Marine business due to favorable loss emergence from prior accident years across all core product lines. In addition, our Property Casualty division includes $13.5 million of underwriting profit from our Excess Casualty division due in part to strong production attributable to the expansion of those underwriting teams and the continued dislocation of certain competitors, as well as $13.0 million of underwriting profit from our Assumed Reinsurance division mostly driven by growth and a lack of current accident year catastrophe activity from our LatAm Property & Casualty products, and to a lesser extent, profit from our A&H product lines as we are starting to experience favorable loss trends from those products lines. Also included within our Property Casualty results is $2.4 million of underwriting profit from our Energy & Engineering division due to favorable loss emergence from prior accident years, partially offset by an $11.4 million underwriting loss from our Primary Casualty division, mostly driven by reserve strengthening specific to Construction Liability policies issued to contractors operating in California and other western states. Our Professional Liability business reported an underwriting profit of $2.2 million due in part to a recovery of prior period losses coming from a cash settlement of a contract dispute with a former third part administrator, partially offset by unfavorable loss emergence from our small lawyers product line, which is now in runoff.
Our Insurance Companies combined ratio for the year ended December 31, 2013 was 96.0% compared to 106.4% for the same period in 2012. For the year ended December 31, 2013, our Insurance Companies reported an underwriting profit of $25.6 million inclusive of $13.6 million and $16.3 million of underwriting profit from our Energy & Engineering and Marine businesses, respectively, in connection with favorable loss emergence from UWY’s 2011 and prior. In addition, our Excess Casualty division produced an underwriting profit of $6.1 million as a result of continued strong production attributable to the expansion of those underwriting teams and the continued dislocation of certain competitors, partially offset by an underwriting loss of $5.8 million from our Management Liability division due to net prior period reserve strengthening from UWYs 2010 and prior, and an underwriting loss of $3.4 million from businesses inrun-off.
Our Insurance Companies combined ratio for the year ended December 31, 2012 was 106.4% compared to 106.5% for the same period in 2011. For the year ended December 31, 2012, our Insurance Companies reported an underwriting loss of $36.8 million, which includes the following:
Insurance Companies Gross Written Premiums
Marine Premiums. The gross written premiums for our Marine business for the years ended December 31, 2014, 2013 and 2012 consisted of the following:
Year Ended December 31, | Percentage Change | |||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | 2014 vs. 2013 | 2013 vs. 2012 | |||||||||||||||
Marine Liability | $ | 65,740 | $ | 62,534 | $ | 64,429 | 5.1 | % | -2.9 | % | ||||||||||
Craft/Fishing Vessels | 37,866 | 32,320 | 25,018 | 17.2 | % | 29.2 | % | |||||||||||||
Cargo | 20,178 | 21,162 | 25,840 | -4.7 | % | -18.1 | % | |||||||||||||
Protection & Indemnity | 14,462 | 16,442 | 17,767 | -12.0 | % | -7.5 | % | |||||||||||||
Bluewater Hull | 12,544 | 12,609 | 18,134 | -0.5 | % | -30.5 | % | |||||||||||||
Inland Marine | 12,210 | 14,727 | 33,982 | -17.1 | % | -56.7 | % | |||||||||||||
Other Marine | 14,363 | 12,028 | 14,925 | 19.4 | % | -19.4 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Marine | $ | 177,363 | $ | 171,822 | $ | 200,095 | 3.2 | % | -14.1 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
Insurance Companies Marine gross written premiums for the year ended December 31, 2014 increased $5.5 million, or 3.2% compared to the same period in 2013 primarily due to new business growth in our Craft/Fishing Vessels and Marine Liability product lines, partially offset by decreases in Inland Marine due to a reduction in renewal premium driven by competitive pricing as well as certain policy cancellations in the P&I product line.
The Insurance Companies Marine business experienced a 1.9% increase in renewal rates for the year ended December 31, 2014.
The Insurance Companies Marine gross written premiums for the year ended December 31, 2013 decreased 14.1% compared to the same period in 2012 primarily due to the re-underwriting of our Inland Marine product line, as well as a reduction in the Bluewater Hull product line due to less business written due to pricing on certain accounts and vessel types that do not meet our underwriting standard. In addition, the decrease in Cargo was related to non-renewed business that did not meet the current underwriting criteria. The aforementioned decreases were slightly offset by growth in Craft and Fishing Vessels products due to strong new business production.
The Insurance Companies Marine business experienced a 4.1% increase in renewal rates for the year ended December 31, 2013.
Property Casualty Premiums. The gross written premiums for our Property Casualty business for the years ended December 31, 2014, 2013 and 2012 consisted of the following:
Year Ended December 31, | Percentage Change | |||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | 2014 vs. 2013 | 2013 vs. 2012 | |||||||||||||||
Excess Casualty | $ | 276,339 | $ | 258,791 | $ | 194,306 | 6.8 | % | 33.2 | % | ||||||||||
Primary Casualty | 180,302 | 138,551 | 111,595 | 30.1 | % | 24.2 | % | |||||||||||||
Assumed Reinsurance | 169,112 | 175,409 | 181,025 | -3.6 | % | -3.1 | % | |||||||||||||
Energy & Engineering | 57,838 | 69,171 | 61,109 | -16.4 | % | 13.2 | % | |||||||||||||
Environmental Liability | 44,066 | 31,010 | 25,815 | 42.1 | % | 20.1 | % | |||||||||||||
Other Property & Casualty | 27,402 | 27,155 | 16,891 | 0.9 | % | 60.8 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Property Casualty | $ | 755,059 | $ | 700,087 | $ | 590,741 | 7.9 | % | 18.5 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
The Insurance Companies Property Casualty gross written premiums for the year ended December 31, 2014 increased $55.0 million, or 7.9% compared to the same period in 2013, primarily driven by our Primary Casualty division, which increased $41.8 million, or 30.1%, due to strong production across all product lines from an improvement in the overall construction market. In addition, there were increases from our Excess Casualty division due to improved market conditions and dislocation of certain competitors, as well as from our Environmental division due to our continued investments in those underwriting teams. The aforementioned increases were partially offset by a net decrease from our Assumed Reinsurance division as a result of reduction in renewal premiums from our A&H product line and Agriculture products that was partially offset by an increase from our LatAm product lines driven by new business growth and an increase in line shares on certain renewals. In addition, we reported a decrease in premium from our Energy & Engineering division due to difficult market conditions and an unfavorable rate environment.
The Insurance Companies Property Casualty business experienced an overall renewal rate increase of 0.8% for the year ended December 31, 2014, mostly driven by a 3.3% increase from our Excess Casualty division, partially offset by a 7.3% decrease in rates from our Energy & Engineering division.
The Insurance Companies Property Casualty gross written premiums for the year ended December 31, 2013 increased 18.5% compared to the same period in 2012. The increases were primarily driven by the growth from our Excess Casualty and Primary Casualty divisions as a result of strong production attributable to an expansion of our underwriting teams and continued dislocation among certain competitors, partially offset by a decrease in our Assumed Reinsurance division attributable to the non-renewal of certain policies from our A&H product line.
Professional Liability Premiums. The gross written premiums for our Professional Liability business for the years ended December 31, 2014, 2013 and 2012 consisted of the following:
Year Ended December 31, | Percentage Change | |||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | 2014 vs. 2013 | 2013 vs. 2012 | |||||||||||||||
Errors & Omissions | $ | 67,130 | $ | 86,001 | $ | 87,221 | -21.9 | % | -1.4 | % | ||||||||||
Management Liability | 45,902 | 44,365 | 43,268 | 3.5 | % | 2.5 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Professional Liability | $ | 113,032 | $ | 130,366 | $ | 130,489 | -13.3 | % | -0.1 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
The Insurance Companies Professional Liability gross written premiums for the year ended December 31, 2014 decreased $17.3 million, or 13.3% compared to the same period in 2013, primarily driven by a reduction in our E&O division due to our decision to exit the small lawyers professional liability product line in the fourth quarter of 2013, as well as a decrease in our real estate agents and accountants liability product lines as a result of certain program terminations, partially offset by an increase from our Management Liability division due to an increase in subject premium on renewals.
The Insurance Companies Professional Liability business experienced an overall renewal rate decrease of 2.0% for the year ended December 31, 2014, inclusive of a 4.0% decrease from our Management Liability division and a 0.5% decrease from our E&O division.
The Insurance Companies Professional Liability gross written premiums for the years ended December 31, 2013 and 2012 are consistent at approximately $130 million. In the fourth quarter of 2013, we made the decision to exit the small lawyers product line that had contributed gross written premiums of $16.3 million and $19.1 million, in 2013 and 2012, respectively.
Insurance Companies Commission Expenses. The commission expense ratio for the years ended December 31, 2014, 2013 and 2012 was 12.1%, 12.7%, and 14.2%, respectively. The changes in the commission expense ratio are primarily driven by mix of business; however, the net commission expense for 2014 includes a $0.8 million estimated profit commission related to our proportional reinsurance program on Offshore Energy product lines. The net commission expense ratio for 2012 is impacted by RRPs, as previously discussed.
Insurance Companies Other Operating Expenses. Other operating expenses for the Insurance Companies were $138.7 million for the year ended December 31, 2014 compared to $119.9 million for the same period in 2013. The increase in operating expenses is due to continued investments in new underwriting teams and support staff closely aligned with business growth and an increase in incentive compensation driven by stronger underwriting results.
Other operating expenses for the Insurance Companies increased to $119.9 million for the year ended December 31, 2013 from $113.6 million for the same period in 2012 primarily due to an increase in allocated expenses from NMC and NMUK, which is driven by continued investments in new underwriting teams, closely aligned with business growth and an increase in incentive compensation.
Lloyd’s Operations
Our Lloyd’s Operations are primarily engaged in underwriting Marine and related lines of business along with Offshore Energy, construction coverages for Onshore Energy business and Professional Liability insurance at Lloyd’s through Syndicate 1221. Our Lloyd’s Operations segment includes NUAL, a Lloyd’s underwriting agency, which manages Syndicate 1221.
The following table sets forth the results of operations of the Lloyd’s Operations for the years ended December 31, 2014, 2013 and 2012:
Year Ended December 31, | Percentage Change | |||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | 2014 vs. 2013 | 2013 vs. 2012 | |||||||||||||||
Gross written premiums | $ | 386,899 | $ | 368,242 | $ | 365,140 | 5.1 | % | 0.8 | % | ||||||||||
Net written premiums | 247,365 | 207,914 | 210,699 | 19.0 | % | -1.3 | % | |||||||||||||
Net earned premiums | 231,321 | 202,601 | 210,525 | 14.2 | % | -3.8 | % | |||||||||||||
Net losses and loss adjustment expenses | (110,833 | ) | (103,548 | ) | (80,351 | ) | 7.0 | % | 28.9 | % | ||||||||||
Commission expenses | (42,558 | ) | (34,710 | ) | (42,449 | ) | 22.6 | % | -18.2 | % | ||||||||||
Other operating expenses | (58,150 | ) | (44,514 | ) | (45,454 | ) | 30.6 | % | -2.1 | % | ||||||||||
Other underwriting income (expense) | 35 | (1,588 | ) | 47 | NM | NM | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Underwriting profit (loss) | $ | 19,815 | $ | 18,241 | $ | 42,318 | 8.6 | % | -56.9 | % | ||||||||||
Net investment income | 7,378 | 7,160 | 7,551 | 3.0 | % | -5.2 | % | |||||||||||||
Net realized gains (losses) | 97 | (58 | ) | 3,555 | NM | NM | ||||||||||||||
Other income (expense) | 12,243 | — | — | NM | NM | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income (loss) before income taxes | $ | 39,533 | $ | 25,343 | $ | 53,424 | 56.0 | % | -52.6 | % | ||||||||||
Income tax expense (benefit) | 13,885 | 8,728 | 18,620 | 59.1 | % | -53.1 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income (loss) | $ | 25,648 | $ | 16,615 | $ | 34,804 | 54.4 | % | -52.3 | % | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Losses and loss adjustment expenses ratio | 47.9 | % | 51.1 | % | 38.2 | % | ||||||||||||||
Commission expense ratio | 18.4 | % | 17.1 | % | 20.2 | % | ||||||||||||||
Other operating expense ratio(1) | 25.1 | % | 22.8 | % | 21.5 | % | ||||||||||||||
|
|
|
|
|
| |||||||||||||||
Combined ratio | 91.4 | % | 91.0 | % | 79.9 | % | ||||||||||||||
|
|
|
|
|
|
(1) - Includes Other operating expenses & Other underwriting income (expense)
NM - Percentage change not meaningful.
Our Lloyd’s Operations reported net income of $25.6 million, $16.6 million and $34.8 million for the years ended December 31, 2014, 2013 and 2012, respectively. The increase in net income for the year ended December 31, 2014 compared to the same period in 2013 was largely attributable to an increase in Other Income primarily due to a one-time $10.1 million pre-tax foreign exchange gain in connection with a change in the functional currency of our Lloyd’s Operations. To a lesser extent, the increase in net income was driven by increased underwriting profits in our Property Casualty business. The decrease in net income for the year ended December 31, 2013 as compared to the same period in 2012 was largely attributable to weaker underwriting results due to only $14.7 million of net prior period reserve redundancies in 2013 compared to $47.2 million in 2012, and to a lesser extent a decrease in net realized gains on investments.
The following tables reflect the net underwriting result by major line of business for the calendar years ended December 2014, 2013, and 2012.
($ in thousands) | ||||||||||||||||||||||||||||
Twelve Months Ended December 31, 2014 | ||||||||||||||||||||||||||||
Net Earned Premiums | Losses and LAE Incurred | Underwriting Expenses | Underwriting Profit (Loss) | Loss Ratio | Expense Ratio | Combined Ratio | ||||||||||||||||||||||
Lloyd’s Operations: | ||||||||||||||||||||||||||||
Marine | $ | 141,471 | $ | 74,569 | $ | 60,633 | $ | 6,269 | 52.7 | % | 42.9 | % | 95.6 | % | ||||||||||||||
Property Casualty | 51,338 | 17,235 | 24,517 | 9,586 | 33.6 | % | 47.7 | % | 81.3 | % | ||||||||||||||||||
Professional Liability | 38,512 | 19,029 | 15,523 | 3,960 | 49.4 | % | 40.3 | % | 89.7 | % | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Lloyd’s Operations | $ | 231,321 | $ | 110,833 | $ | 100,673 | $ | 19,815 | 47.9 | % | 43.5 | % | 91.4 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Twelve Months Ended December 31, 2013 | ||||||||||||||||||||||||||||
Net Earned Premiums | Losses and LAE Incurred | Underwriting Expenses | Underwriting Profit (Loss) | Loss Ratio | Expense Ratio | Combined Ratio | ||||||||||||||||||||||
Lloyd’s Operations: | ||||||||||||||||||||||||||||
Marine | $ | 138,690 | $ | 76,454 | $ | 56,377 | $ | 5,859 | 55.1 | % | 40.7 | % | 95.8 | % | ||||||||||||||
Property Casualty | 37,722 | 13,852 | 16,066 | 7,804 | 36.7 | % | 42.6 | % | 79.3 | % | ||||||||||||||||||
Professional Liability | 26,189 | 13,242 | 8,369 | 4,578 | 50.6 | % | 31.9 | % | 82.5 | % | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Lloyd’s Operations | $ | 202,601 | $ | 103,548 | $ | 80,812 | $ | 18,241 | 51.1 | % | 39.9 | % | 91.0 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Twelve Months Ended December 31, 2012 | ||||||||||||||||||||||||||||
Net Earned Premiums | Losses and LAE Incurred | Underwriting Expenses | Underwriting Profit (Loss) | Loss Ratio | Expense Ratio | Combined Ratio | ||||||||||||||||||||||
Lloyd’s Operations: | ||||||||||||||||||||||||||||
Marine | $ | 136,898 | $ | 51,116 | $ | 59,110 | $ | 26,672 | 37.3 | % | 43.2 | % | 80.5 | % | ||||||||||||||
Property Casualty | 52,951 | 23,689 | 20,030 | 9,232 | 44.7 | % | 37.9 | % | 82.6 | % | ||||||||||||||||||
Professional Liability | 20,676 | 5,546 | 8,716 | 6,414 | 26.8 | % | 42.2 | % | 69.0 | % | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total Lloyd’s Operations | $ | 210,525 | $ | 80,351 | $ | 87,856 | $ | 42,318 | 38.2 | % | 41.7 | % | 79.9 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Lloyd’s Operations combined ratio for the year ended December 31, 2014 was 91.4% compared to 91.0% for the same period in 2013. Our Lloyd’s Operations underwriting results increased by $1.6 million to $19.8 million underwriting profit for the year ended December 31, 2014 compared to $18.2 million in 2013. Our Lloyd’s Operations underwriting profit for the twelve months ended December 31, 2014 includes an underwriting profit of $9.6 million from our Property Casualty division driven by favorable current accident year loss trends, and to a lesser extent, prior year reserve releases from our Onshore Energy product line. Our Lloyd’s Operations also includes an underwriting profit of $4.0 million from our Professional Liability division driven by favorable loss emergence. In addition, our Marine division reported an underwriting profit of $6.3 million driven by prior year reserve releases of $21.3 million, which were offset by current year reserve strengthening of $18.2 million, inclusive of a $5.0 million net loss and related RRPs of $3.9 million resulting from the sinking of a vessel in South Korean waters.
Our Lloyd’s Operations combined ratio for the year ended December 31, 2013 was 91.0% compared to 79.9% for the same period in 2012. Our Lloyd’s Operations underwriting results decreased by $24.1 million to $18.2 million underwriting profit for the year ended December 31, 2013 compared to $42.3 million in 2012. Our Lloyd’s Operations pre-tax underwriting profit for the twelve months ended December 31, 2013 includes $14.7 million of net prior period reserve releases in connection with continued favorable emergence from our Property Casualty division, specifically Energy & Engineering and Marine divisions as well as a $1.6 million foreign exchange loss on the re-measurement of certain deposits required by Lloyd’s.
Our Lloyd’s Operations underwriting profit for the year ended December 31, 2013 included $14.1 million of net prior period reserve releases in connection with continued favorable emergence from our D&O, Energy & Engineering and Marine divisions, partially offset by large current accident year losses from our Marine and Energy & Engineering divisions, as well as a $1.1 million foreign exchange loss on the remeasurement of certain deposits required by Lloyd’s.
Our Lloyd’s Operations combined ratio for the year ended December 31, 2012 was 79.9% compared to 100.8% for the same period in 2011. Our Lloyd’s Operations underwriting results increased by $44.0 million to a $42.3 million underwriting profit for the year ended December 31, 2012 compared to a $1.7 million underwriting loss for the same period in 2011. Our Lloyd’s Operations pre-tax underwriting profit in 2012 includes:
Lloyd’s Operations Gross Written Premiums
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 £215 million ($336.9 million) in 2014, £195 million ($323.7 million) in 2013, £184 million ($300 million) in 2012.
Marine Premiums.The gross written premiums for our Marine business for the years ended December 31, 2014, 2013 and 2012 consisted of the following:
Year Ended December 31, | Percentage Change | |||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | 2014 vs. 2013 | 2013 vs. 2012 | |||||||||||||||
Cargo | $ | 53,513 | $ | 52,469 | $ | 57,787 | 2.0 | % | -9.2 | % | ||||||||||
Marine Liability | 41,263 | 39,831 | 39,417 | 3.6 | % | 1.1 | % | |||||||||||||
Transport | 24,329 | 20,871 | 22,912 | 16.6 | % | -8.9 | % | |||||||||||||
Specie | 20,114 | 21,395 | 21,772 | -6.0 | % | -1.7 | % | |||||||||||||
Marine Excess-of-Loss Reinsurance | 17,476 | 15,328 | 15,309 | 14.0 | % | 0.1 | % | |||||||||||||
Energy Liability | 16,929 | 16,259 | 18,747 | 4.1 | % | -13.3 | % | |||||||||||||
Bluewater Hull | 11,116 | 5,754 | 6,959 | 93.2 | % | -17.3 | % | |||||||||||||
War | 3,367 | 9,139 | 11,520 | -63.2 | % | -20.7 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Marine | $ | 188,107 | $ | 181,046 | $ | 194,423 | 3.9 | % | -6.9 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
Our Lloyd’s Operations Marine gross written premiums for the year ended December 31, 2014 increased 3.9% compared to the same period in 2013. The lines with the greatest increase on 2013 are Transport, Assumed Marine excess-of-loss and Bluewater Hull. Marine excess-of-loss Assumed Reinsurance Product line includes $2.7 million of Assumed RRPs recognized year to date accounting for the difference. Transport has seen strong growth on new business. Bluewater Hull is inclusive of $3.4 million of new business generated from our new European offices, which commenced operation in September 2014. The total premium generated from these new offices for Marine classes was $3.8 million. War premium has decreased significantly due to less business written in high risk areas.
Our Lloyd’s Operations Marine gross written premiums for the year ended December 31, 2013 decreased 6.9% compared to the same period in 2012. The decrease is driven by reduction in renewals across the division, particularly on Cargo. The Lloyd’s Operations Marine business experienced average renewal rate increases of 3.4% for the year ended December 31, 2013.
Property Casualty Premiums. The gross written premiums for our Property Casualty business for the years ended December 31, 2014, 2013 and 2012 consisted of the following:
Year Ended December 31, | Percentage Change | |||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | 2014 vs. 2013 | 2013 vs. 2012 | |||||||||||||||
Energy & Engineering: | ||||||||||||||||||||
Offshore Energy | $ | 54,288 | $ | 54,605 | $ | 53,915 | -0.6 | % | 1.3 | % | ||||||||||
Engineering and Construction | 22,310 | 30,159 | 36,178 | -26.0 | % | -16.6 | % | |||||||||||||
Onshore Energy | 23,185 | 30,787 | 30,658 | -24.7 | % | 0.4 | % | |||||||||||||
Direct and Facultative Property | 10,958 | 9,140 | — | 19.9 | % | NM | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Energy & Engineering | 110,741 | 124,691 | 120,751 | -11.2 | % | 3.3 | % | |||||||||||||
Assumed Reinsurance | 13,757 | 2,298 | — | NM | NM | |||||||||||||||
Other Property Casualty | 1,518 | 2,533 | 6,277 | -40.1 | % | -59.6 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Property Casualty | $ | 126,016 | $ | 129,522 | $ | 127,028 | -2.7 | % | 2.0 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
NM - Percentage change not meaningful
Our Lloyd’s Operations Property Casualty gross written premiums for the year ended December 31, 2014 decreased 2.7% compared to the same period in 2013. Tough market conditions and an unfavorable rating environment have led to reduced premium in our Offshore Energy, Onshore Energy and Engineering and Construction lines for the year ended December 31, 2014. This has been offset by an increase in new business growth, specifically from our Assumed Reinsurance product lines, which have increased from $2.3 million in 2013 after commencing writing business in Syndicate 1221 in the fourth quarter of 2013 to $13.8 million in 2014 following a full year of writing. Other Property Casualty includes our Life Science product line, which during 2014 has largely consisted of a renewal book of business.
Our Lloyd’s Operations Property Casualty gross written premiums for the year ended December 31, 2013 increased 2.0% compared to the same period in 2012. The increase is primarily due to new business growth from our Direct and Facultative Property lines that we began writing in 2013, partially offset by Engineering and Construction and runoff business. The Lloyd’s Operations Property Casualty business achieved increases of 1.2% on renewal rates for the year ended December 31, 2013.
Professional Liability Premiums. The gross written premiums for our Professional Liability business for the years ended December 31, 2014, 2013 and 2012 consisted of the following:
Year Ended December 31, | Percentage Change | |||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | 2014 vs. 2013 | 2013 vs. 2012 | |||||||||||||||
Management Liability | $ | 48,569 | $ | 41,989 | $ | 32,036 | 15.7 | % | 31.1 | % | ||||||||||
Errors & Omissions | 24,207 | 15,685 | 11,653 | 54.3 | % | 34.6 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Professional Liability | $ | 72,776 | $ | 57,674 | $ | 43,689 | 26.2 | % | 32.0 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
Our Lloyd’s Operations Professional Liability gross written premiums for the year ended December 31, 2014 increased 26.2% compared to the same period in 2013 as a result of strong new business growth, partially offset by decreases in renewal rates of 4.2% for the year ended December 31, 2014. Gross written premium increased within Management Liability as we continue to grow our D&O portfolio, while our E&O portfolio has grown across all targeted professions. Both products also benefited from a strategy to increase distribution channels in the UK, Continental Europe, and Australia. The premium numbers are inclusive of $1.0 million of new business generated out of our new European offices, which came into operation in September 2014.
Our Lloyd’s Operations Professional Liability gross written premiums for the year ended December 31, 2013 increased 32.0% compared to the same period in 2012 as a result of new business growth, partially offset by decreases in renewal rates of 1.7% for the year ended December 31, 2013.
Lloyd’s Operations Commission Expenses.The commission expenses ratios for the year ended December 31, 2014 was 18.4%, compared to 17.1% for the same period in 2013. The increase in the commission expense ratio for the year ended December 31, 2014 is driven by a reduction in our proportional reinsurance premiums, which generate ceding commission.
Lloyd’s Operations Other Operating Expenses.Lloyd’s Operations other operating expenses was $58.1 million for the year ended December 31, 2014 compared to $44.5 million for the same period in 2013, primarily due to an increase in employee costs associated with growth initiatives for our business as well as an increase in certain information technology charges assessed by Lloyd’s. One of the initiatives in the year was the opening of 3 new European offices in Rotterdam, The Netherlands, Paris, France and Milan, Italy and accounted for $2.4 million of the increase with additional headcount, office costs and professional fees. New staff in the London office accounted for about an additional $3.0 million of expenses over 2013. Staff expenses are also higher than last year by $1.4 million due to increased incentive compensation in 2014. Costs charged by Lloyd’s Operations were $0.5 million higher than the prior year and IT costs were $2.5 million higher than the prior year. Other operating expenses for the year ended December 31, 2014 were also affected by approximately $2.1 million due to adverse exchange rate movement between the British Pound and the U.S. Dollar which resulted in British Pound denominated expenses to increase more when expressed in U.S. Dollar terms.
Off –Balance Sheet Transactions
We have no material off-balance sheet transactions with the exception of our letter of credit facilities. For a discussion of our letter of credit facilities, refer to “Capital Resources”.
Tabular Disclosure of Contractual Obligations
The following table sets forth the best estimate of our known contractual obligations with respect to the items indicated as of December 31, 2014:
Payments Due by Period | ||||||||||||||||||||
In thousands | Total | Less than 1 Year | 1-3 Years | 3-5 Years | Thereafter | |||||||||||||||
Reserves for losses and LAE(1) | $ | 2,159,634 | $ | 750,294 | $ | 752,712 | $ | 358,012 | $ | 298,616 | ||||||||||
5.75% Senior Notes(2) | 398,966 | 15,238 | 30,476 | 30,476 | 322,776 | |||||||||||||||
Operating Leases(3) | 52,397 | 11,245 | 17,176 | 11,165 | 12,811 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 2,610,997 | $ | 776,777 | $ | 800,364 | $ | 399,653 | $ | 634,203 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The State of Connecticut awarded our Company up to $11.5 million ($8.0 million in loans and $3.5 million in grants) as an incentive to move its corporate headquarters to Stamford Connecticut. The loan is non-interest bearing, has a term of 10 years and is subject to forgiveness under conditions of the agreement with the State. The amount of the assistance to be received is dependent on our Company reaching certain milestones for creation of new jobs over a five-year period, and the funds are to be used to offset certain equipment purchases, facility costs, training of employees and other eligible project-related costs. Our Company completed the move to Stamford in September 2013 and received $7.5 million for reaching the first job milestone. Earning of the grant and forgiveness of the loan is subject to certain conditions, including maintaining the required jobs for an extended period of time. As of December 31, 2014, the length of time commitment has not been met, however, our Company expects to meet all the conditions to keep the amount of assistance received to date, therefore this contractual obligation has been excluded from the table above. Accordingly, our Company is recognizing the assistance received over the period in which our Company recognizes the expenses for which the assistance is intended to compensate, and is recognized as a reduction of such expenses. During the year ended December 31, 2014, our Company recognized $1.1 million of the assistance and has deferred revenue of $6.1 million, which is included in other liabilities.
Overview. We monitor our capital adequacy to support our business on a regular basis. The future capital requirements of our business will depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. Our ability to underwrite is largely dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. In particular, we require (1) sufficient capital to maintain our financial strength ratings, as issued by various ratings agencies, at a level considered necessary by management to enable our Insurance Companies to compete, (2) sufficient capital to enable our Insurance Companies to meet the capital adequacy tests performed by statutory agencies in the U.S. and the U.K. and (3) letters of credit and other forms of collateral that are necessary to support the business plan of our Lloyd’s Operations.
Our capital resources consist of funds deployed or available to be deployed to support our business operations. As of December 31, 2014 and 2013, our capital resources were as follows:
December 31, | ||||||||
In thousands | 2014 | 2013 | ||||||
Senior Notes | $ | 263,440 | $ | 263,308 | ||||
Stockholders’ equity | 1,027,224 | 902,212 | ||||||
|
|
|
| |||||
Total capitalization | $ | 1,290,664 | $ | 1,165,520 | ||||
|
|
|
| |||||
Ratio of debt to total capitalization | 20.4 | % | 22.6 | % |
Share Repurchase. As part of our capital management program, we may seek to raise additional capital or may seek to return capital to our stockholders through share repurchases, cash dividends or other methods (or a combination of such methods). Any such determination will be at the discretion of the Parent Company’s Board of Directors and will be dependent upon our profits, financial requirements and other factors, including legal restrictions, rating agency requirements, credit facility limitations and such other factors as our Board of Directors deems relevant.
Shelf Registration.In July 2012, we filed a universal shelf registration statement with the SEC. This registration statement, which expires in July 2015, allows for the future possible offer and sale by our Company of up to $500 million in the aggregate of various types of securities including common stock, preferred stock, debt securities, depositary shares, warrants, units or stock purchase contracts and stock purchase units. The shelf registration statement enables us to efficiently access the public equity or debt markets in order to meet future capital needs, if necessary. This report is not an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state.
Statutory Dividend Capacity.We primarily rely upon dividends from our subsidiaries to meet our Parent Company’s obligations. The Parent Company’s cash obligations primarily consist of semi-annual interest payments on the senior debt, which are currently $7.6 million. Going forward, the interest payments may be made from funds currently at the Parent Company or dividends from its subsidiaries.
NIC may pay dividends to the Parent Company out of its statutory earned surplus pursuant to statutory restrictions imposed under the New York insurance law. As of December 31, 2014, the maximum amount available for the payment of dividends by NIC in 2015 without prior regulatory approval is $89.4 million. NIC did not pay any dividends to the Parent Company in 2014 and 2013, but, did pay $15.0 million of dividends in 2012.
NCUL may pay dividends to the Parent Company up to the extent of available profits that have been distributed from Syndicate 1221, and as of December 31, 2014 and 2013 that amount was $9.9 million (£6.3 million) and $11.6 million (£7.0 million), respectively.
Refer to Note 13, Dividends and Statutory Financial Information,3, Investments, in the Notes to Consolidated Financial Statements for additional information regarding dividends, including dividend restrictions and net assets available for dividend distribution.
Valuation of Investments
Parent Company Balance Sheet. Condensed Parent Company balance sheetsFair value is defined as of December 31, 2014 and 2013 are shownthe price in the table below:
December 31, | ||||||||
In thousands | 2014 | 2013 | ||||||
Cash and investments | $ | 101,032 | $ | 100,676 | ||||
Investments in subsidiaries | 1,163,822 | 1,040,214 | ||||||
Goodwill and other intangible assets | 2,534 | 2,534 | ||||||
Other assets | 27,531 | 26,538 | ||||||
|
|
|
| |||||
Total assets | $ | 1,294,919 | $ | 1,169,962 | ||||
|
|
|
| |||||
Senior Notes | $ | 263,440 | $ | 263,308 | ||||
Accounts payable and other liabilities | 1,081 | 802 | ||||||
Accrued interest payable | 3,174 | 3,640 | ||||||
|
|
|
| |||||
Total liabilities | $ | 267,695 | $ | 267,750 | ||||
|
|
|
| |||||
Stockholders’ equity | $ | 1,027,224 | $ | 902,212 | ||||
|
|
|
| |||||
Total liabilities and stockholders’ equity | $ | 1,294,919 | $ | 1,169,962 | ||||
|
|
|
|
Senior Notes and Credit Facility. On October 4, 2013, we completed a public debt offering of $265 million principal amount of the 5.75% Senior Notes andmarket that would be received net proceeds of $263 million. We used the proceeds of the 5.75% Senior Notes for general corporate purposes including the redemption of our 7.0% Senior Notes. We incurred a charge of $17.9 million for the payment of call premium in connection with the redemption of the 7.0% Senior Notes. The effective interest rate relatedan asset to the net proceeds received from the 5.75% Senior Notes is approximately 5.86%. Interest is payablefacilitate an orderly transaction between market participants on the 5.75% Senior Notes each April 15 and October 15.
On November 6, 2014, NUAL entered into a credit facility for $8.0 million Australian Dollars with Barclays Bank PLC to fund our participation in Syndicate 1221. The facility is used to fund Australian underwriting obligations for the 2014 and prior UWYs. The facility contains customary covenants for facilities of this type, including a restriction on future encumbrances that are outside the ordinary course of business, and a requirement to maintain at least £75 million of Funds at Lloyd’s. Interest is payable on the facility at a rate of 2% per annum above a floating rate tied to the average mid-rate for Australian bills of exchange administered by the Australian Financial Markets Association. The facility may be cancelled by either party after providing written notice. As of December 31, 2014, we were in compliance with all covenants.
On November 24, 2014, our Company entered into a $175 million credit facility agreement with ING Bank N.V., London Branch, individually and as Administrative Agent, and a syndicate of lenders. The new credit facility amended and restated a $165 million letter of credit facility entered into by the parties on November 21, 2012. The credit facility, which is denominated in U.S. dollars, is utilized to fund participation in Syndicate 1221 through letters of credit for the 2016 and 2015 UWYs, as well as open prior years. The letters of credit issued under the facility can be denominated in British pounds and their aggregate face amount will fluctuate based on exchange rates. If any letters of credit remain outstanding under the facility after December 31, 2016, our Company would be required to post additional collateral to secure the remaining letters of credit. As of December 31, 2014, letters of credit with an aggregate face amount of $149.4 million were outstanding under the credit facility and our Company had $1.0 million of cash collateral posted.
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 our Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting our Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of our Company. The letter of credit facility is secured by a pledge of the stock of certain insurance subsidiaries of our 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.measurement date. We were in compliance with all covenants under the credit facility as of December 31, 2014.
The applicable fee rate payable under the credit facility is based on a tiered schedule that is based on our Company’s then-current financial strength ratings issued by S&P and A.M. Best, and the amount of our Company’s own collateral utilized to fund its participation in Syndicate 1221.
Reinsurance.Time lags do occur in the normal course of business between the time gross loss reserves are paid by our Company and the time such gross paid losses are billed and collected from reinsurers. Reinsurance recoverable amounts related to gross loss reserves as of December 31, 2014 are anticipated to be billed and collected over the next several years as the gross loss reserves are paid by our 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 within 30-45 days. 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 $0.5 million to $1.0 million) as set forth in the pro rata treaty. For the Insurance Companies, cash calls must generally be paid within 7-15 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 the same time period.
Generally, for excess-of-loss reinsurers we pay quarterly deposit premiums based on the estimated subject premiums over the contract period (usually one year) that are subsequently adjusted based on actual premiums determined after the expiration of the applicable reinsurance treaty. Paid losses subject to excess-of-loss recoveries are generally billed as they occur and are usually settled by reinsurers within 30 calendar days for the Insurance Companies and 30 business days for the Lloyd’s Operations.
We sometimes withhold funds from reinsurers and may apply ceded loss billings against such funds in accordance with the applicable reinsurance agreements.
Consolidated Cash Flows
Cash flow from operations was $222.5 million, $136.9 million and $96.7 million for the years ended December 31, 2014, 2013 and 2012. The increase in cash flow from operations for 2014 is largely attributable to a reduction in net losses paid, and to a lesser extent, a decrease in tax payments due to utilization of prior year tax overpayments, partially, offset by higher operating expenses resulting from increased headcount associated with growth in our business. The increase in cash flow from operations for 2013 is largely attributable to the growth of our business as well as improved collections on premiums receivable.
Net cash used in investing activities was $219.5 million and $229.9 million for the years ended December 31, 2014 and 2013, respectively, as compared to net cash used in investing activities of $179.8 million for the same period in 2012. Fluctuations in cash provided by, or used in, investing activities is primarily due to changes in operating cash flows and the associated ongoing management of our investment portfolio.
Net cash provided by financing activities was $1.2 million and $134.2 million for the years ended December 31, 2014 and 2013, respectively, compared to net cash provided by financing activities of $1.1 million for the year ended December 31, 2012. The decrease in cash flows from financing for 2014 compared to 2013 relates to a reduction in proceeds from exercise of stock options. The increase in cash flows from financing for 2013 compared to 2012 is due to net proceeds of $130.8 million received from our public debt offering of the 5.75% Senior Notes.
We believe that the cash flow generated by the operating activities of our subsidiaries will provide sufficient funds for us to meet our liquidity needs over the next twelve months. Beyond the next twelve months, cash flow available to us may be influenced by a variety of factors, including general economic conditions and conditions in the insurance and reinsurance markets, as well as fluctuations from year to year in claims experience.
We believe that we have adequately managed our cash flow requirements related to reinsurance recoveries from their positive cash flows and the use of available short-term funds when applicable. However, there can be no assurances that we will be able to continue to adequately manage such recoveries in the future or that collection disputes or reinsurer insolvencies will not arise that could materially increase the collection time lags or result in recoverable write-offs causing additional incurred losses and liquidity constraints to our Company. The payment of gross claims and related collections from reinsurers with respect to large losses could significantly impact our liquidity needs. However, in general, we expect to collect our paid reinsurance recoverables under the terms described above.
Investments
As of December 31, 2014, the weighted average rating of our fixed maturities was “AA” by S&P and “Aa” by Moody’s. The entire fixed maturity investment portfolio, except for investments with a fair value of $15.3 million, consists of investment grade bonds. As of December 31, 2014, our portfolio had a duration of 3.8 years. Management periodically projects cash flow of the investment portfolio and other sources in order to maintain the appropriate levels of liquidity in an effort to ensure our ability to satisfy claims. As of December 31, 2014 and 2013, all fixed maturities and equity securities held by us were classified as available-for-sale.
The following tables set forth our Company’s cash and investments as of December 31, 2014 and 2013. The tables below include OTTI securities recognized within AOCI.
December 31, 2014 | ||||||||||||||||
In thousands | Fair Value | Gross Unrealized Gains | Gross Unrealized Losses | Amortized Cost | ||||||||||||
Fixed maturities: | ||||||||||||||||
U.S. Treasury bonds, agency bonds and foreign government bonds | $ | 397,923 | $ | 3,431 | $ | (5,965 | ) | $ | 400,457 | |||||||
States, municipalities and political subdivisions | 541,007 | 19,204 | (558 | ) | 522,361 | |||||||||||
Mortgage-backed and asset-backed securities: | ||||||||||||||||
Agency mortgage-backed securities | 364,622 | 8,476 | (998 | ) | 357,144 | |||||||||||
Residential mortgage obligations | 34,087 | 1,153 | (138 | ) | 33,072 | |||||||||||
Asset-backed securities | 206,413 | 380 | (964 | ) | 206,997 | |||||||||||
Commercial mortgage-backed securities | 206,318 | 6,630 | (98 | ) | 199,786 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Subtotal | $ | 811,440 | $ | 16,639 | $ | (2,198 | ) | $ | 796,999 | |||||||
Corporate bonds | 615,564 | 13,048 | (1,626 | ) | 604,142 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed maturities | $ | 2,365,934 | $ | 52,322 | $ | (10,347 | ) | $ | 2,323,959 | |||||||
Equity securities - common stocks | 127,183 | 28,520 | (1,254 | ) | 99,917 | |||||||||||
Equity securities - preferred stocks | 57,112 | 2,236 | (50 | ) | 54,926 | |||||||||||
Short-term investments | 179,506 | — | (21 | ) | 179,527 | |||||||||||
Cash | 90,751 | — | — | 90,751 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,820,486 | $ | 83,078 | $ | (11,672 | ) | $ | 2,749,080 | |||||||
|
|
|
|
|
|
|
|
December 31, 2013 | ||||||||||||||||
In thousands | Fair Value | Gross Unrealized Gains | Gross Unrealized Losses | Amortized Cost | ||||||||||||
Fixed maturities: | ||||||||||||||||
U.S. Treasury bonds, agency bonds and foreign government bonds | $ | 441,685 | $ | 2,854 | $ | (8,855 | ) | $ | 447,686 | |||||||
States, municipalities and political subdivisions | 460,422 | 9,298 | (13,651 | ) | 464,775 | |||||||||||
Mortgage-backed and asset-backed securities: | ||||||||||||||||
Agency mortgage-backed securities | 301,274 | 6,779 | (6,016 | ) | 300,511 | |||||||||||
Residential mortgage obligations | 41,755 | 1,212 | (161 | ) | 40,704 | |||||||||||
Asset-backed securities | 125,133 | 653 | (480 | ) | 124,960 | |||||||||||
Commercial mortgage-backed securities | 172,750 | 7,656 | (374 | ) | 165,468 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Subtotal | $ | 640,912 | $ | 16,300 | $ | (7,031 | ) | $ | 631,643 | |||||||
Corporate bonds | 504,854 | 15,402 | (3,443 | ) | 492,895 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed maturities | $ | 2,047,873 | $ | 43,854 | $ | (32,980 | ) | $ | 2,036,999 | |||||||
Equity securities - common stocks | 143,954 | 25,700 | (550 | ) | 118,804 | |||||||||||
Short-term investments | 296,250 | — | — | 296,250 | ||||||||||||
Cash | 86,509 | — | — | 86,509 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,574,586 | $ | 69,554 | $ | (33,530 | ) | $ | 2,538,562 | |||||||
|
|
|
|
|
|
|
|
As of December 31, 2014 and 2013, debt securities for which non-credit OTTI was previously recognized and included in other comprehensive income are now in an unrealized gains position of $0.7 million and $0.5 million, respectively.
The fair value of our investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, equity prices, foreign exchange rates and credit spreads. We do not have the intent to sell nor is it more likely than not that we will have to sell fixed maturities in unrealized loss positions that are not other-than-temporarily impaired before recovery. For structured securities, default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. We do not intend to sell any of these securities and it is more likely than not that, we will not be required to sell these securities before the recovery of the amortized cost basis. For equity securities, our Company also considers its intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. We may realize investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments. Significant changes in the factors we consider when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.
Invested assets increased in 2014 from the prior comparable periods for 2013 and 2012 primarily due to positive cash flows from operations. The annualized pre-tax yield, excluding net realized gains and losses and net OTTI losses recognized in earnings, was 2.3%, 2.4% and 2.4% for the years ended December 31, 2014, 2013 and 2012, respectively. The 2.4% annualized pre-tax yield for the years ended December 31, 2012 includes investment expenses of $4.5 million of interest expense related to the settlement of a dispute with Equitas over foregone interest on amounts that were due on certain reinsurance contracts. In the dispute Equitas alleged that we failed to make timely payments to them under certain reinsurance agreements in connection with subrogation recoveries received by us with respect to several catastrophe losses that occurred in the late 1980’s and early 1990’s. In addition, investment expenses for the year ended December 31, 2012 includes a $2.8 million investment performance fee. Excluding the impact of the aforementioned interest expense and investment performance fee, the annualized pre-tax yield for the year ended December 31, 2012 would have been 2.7%, reflective of the general decline in market yields.
The tax equivalent yields for the years ended December 31, 2014, 2013 and 2012 on a consolidated basis were 2.5%, 2.5% and 2.6%, respectively. The portfolio duration was 3.8 years and 3.7 years for the years ended December 31, 2014 and 2013, respectively. Since the beginning of 2014, the tax-exempt portion of our investment portfolio has increased by $86.3 million to approximately 21.0% of the fixed maturities investment portfolio as of December 31, 2014 compared to approximately 20.1% at December 31, 2013.
We are a specialty insurance company and periods of moderate economic recession or inflation tend not to have a significant direct effect on our underwriting operations. They do, however, impact our investment portfolio. A decrease in interest rates will tend to decrease our yield and have a positive effect ondetermine the fair value of our invested assets. An increase in interest rates will tend to increase our yieldcertain financial instruments based on their underlying
characteristics and have a negative effect on the fair value of our invested assets.
The contractual maturity dates for fixed maturity securities categorized by the number of years until maturity as of December 31, 2014 are shownrelevant transactions in the following table:marketplace. GAAP guidance requires an entity to maximize the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Refer to Note 4, Fair Value, in the Notes to Consolidated Financial Statements for additional information.
December 31, 2014 | ||||||||
Amortized | ||||||||
In thousands | Fair Value | Cost | ||||||
Due in one year or less | $ | 63,670 | $ | 65,643 | ||||
Due after one year through five years | 765,084 | 758,064 | ||||||
Due after five years through ten years | 356,929 | 348,195 | ||||||
Due after ten years | 368,811 | 355,058 | ||||||
Mortgage- and asset-backed securities | 811,440 | 796,999 | ||||||
|
|
|
| |||||
Total | $ | 2,365,934 | $ | 2,323,959 | ||||
|
|
|
|
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 4.4 years.
The following table sets forth the amount and percentage of our fixed maturities as of December 31, 2014 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.
December 31, 2014 | ||||||||||
Percent | ||||||||||
In thousands | Rating | Fair Value | of Total | |||||||
Rating description: | ||||||||||
Extremely strong | AAA | $ | 462,603 | 20 | % | |||||
Very strong | AA | 1,090,505 | 45 | % | ||||||
Strong | A | 612,131 | 26 | % | ||||||
Adequate | BBB | 185,372 | 8 | % | ||||||
Speculative | BB & Below | 14,852 | 1 | % | ||||||
Not rated | NR | 471 | 0 | % | ||||||
|
|
|
| |||||||
Total | AA | $ | 2,365,934 | 100 | % | |||||
|
|
|
|
The following table sets forth our U.S. Treasury bonds, agency bonds, and foreign government bonds as of December 31, 2014 and 2013:ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
December 31, 2014 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Fair | Unrealized | Unrealized | Amortized | |||||||||||||
In thousands | Value | Gains | (Losses) | Cost | ||||||||||||
U.S. Treasury bonds | $ | 146,905 | $ | 1,931 | $ | (942 | ) | $ | 145,916 | |||||||
Agency bonds | 157,543 | 1,416 | (181 | ) | 156,308 | |||||||||||
Foreign government bonds | 93,475 | 84 | (4,842 | ) | 98,233 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 397,923 | $ | 3,431 | $ | (5,965 | ) | $ | 400,457 | |||||||
|
|
|
|
|
|
|
| |||||||||
December 31, 2013 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Fair | Unrealized | Unrealized | Amortized | |||||||||||||
In thousands | Value | Gains | (Losses) | Cost | ||||||||||||
U.S. Treasury bonds | $ | 395,762 | $ | 1,982 | $ | (8,636 | ) | $ | 402,416 | |||||||
Agency bonds | 42,544 | 796 | (186 | ) | 41,934 | |||||||||||
Foreign government bonds | 3,379 | 76 | (33 | ) | 3,336 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 441,685 | $ | 2,854 | $ | (8,855 | ) | $ | 447,686 | |||||||
|
|
|
|
|
|
|
|
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, 2014. The securities that are not rated in the table below are primarily state bonds.
In thousands | December 31, 2014 | |||||||||||||
Equivalent S&P Rating | Equivalent Moody’s Rating | Fair Value | Amortized Cost | Net Unrealized Gain (Loss) | ||||||||||
AAA/AA/A | Aaa/Aa/A | $ | 531,161 | $ | 512,916 | $ | 18,245 | |||||||
BBB | Baa | 9,375 | 8,975 | 400 | ||||||||||
BB | Ba | — | — | — | ||||||||||
B | B | — | — | — | ||||||||||
CCC or lower | Caa or lower | — | — | — | ||||||||||
NR | NR | 471 | 470 | 1 | ||||||||||
|
|
|
|
|
| |||||||||
Total | $ | 541,007 | $ | 522,361 | $ | 18,646 | ||||||||
|
|
|
|
|
|
The following table sets forth the municipal bond holdings by sectors as of December 31, 2014 and 2013:
December 31, 2014 | December 31, 2013 | |||||||||||||||
Fair | Percent | Fair | Percent | |||||||||||||
In thousands | Value | of Total | Value | of Total | ||||||||||||
Municipal Sector: | ||||||||||||||||
General obligation | $ | 156,289 | 29 | % | $ | 125,063 | 27 | % | ||||||||
Prerefunded | 17,595 | 3 | % | 15,835 | 3 | % | ||||||||||
Revenue | 323,349 | 60 | % | 270,016 | 59 | % | ||||||||||
Taxable | 43,774 | 8 | % | 49,508 | 11 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 541,007 | 100 | % | $ | 460,422 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
We own $77.2 million of municipal securities, which are credit enhanced by various financial guarantors. As of December 31, 2014, the average underlying credit rating for these securities is A+. There has been no material adverse impact to our investment portfolio or results of operations as a result of downgrades of the credit ratings for several of the financial guarantors.
We analyze our mortgage-backed and asset-backed securities by credit quality of the underlying collateral distinguishing between the securities issued by the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Government National Mortgage Association (“GNMA”) which are Federal government sponsored entities, and the non-FNMA and non-FHLMC securities broken out by prime, Alternative A-paper (“Alt-A”) and subprime collateral. The securities issued by FNMA and FHLMC are the obligations of each respective entity. The U.S. Department of the Treasury has agreed to provide support to FNMA and FHLMC under the Preferred Stock Purchase Agreement by committing to make quarterly payments to these enterprises, if needed, to maintain a zero net worth.
Prime collateral consists of mortgages or other collateral from the most creditworthy borrowers. Alt-A collateral consists of mortgages or other collateral from borrowers, which have a risk potential that is greater than prime but less than subprime. The subprime collateral consists of mortgages or other collateral from borrowers with low credit ratings. Such subprime and Alt-A categories are as defined by S&P.
The following table sets forth our agency mortgage-backed securities and residential mortgage-backed securities (“RMBS”) by those issued by GNMA, FNMA, and FHLMC, and the quality category (prime, Alt-A and subprime) for all other such investments as of December 31, 2014:
December 31, 2014 | ||||||||||||||||
In thousands | Fair Value | Gross Unrealized Gains | Gross Unrealized Losses | Amortized Cost | ||||||||||||
Agency mortgage-backed securities: | ||||||||||||||||
GNMA | $ | 83,452 | $ | 2,865 | $ | (772 | ) | $ | 81,359 | |||||||
FNMA | 216,133 | 4,059 | (162 | ) | 212,236 | |||||||||||
FHLMC | 65,037 | 1,552 | (64 | ) | 63,549 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total agency mortgage-backed securities | $ | 364,622 | $ | 8,476 | $ | (998 | ) | $ | 357,144 | |||||||
|
|
|
|
|
|
|
| |||||||||
Residential mortgage-backed securities: | ||||||||||||||||
Prime | $ | 13,457 | $ | 548 | $ | (117 | ) | $ | 13,026 | |||||||
Alt-A | 1,738 | 116 | (21 | ) | 1,643 | |||||||||||
Subprime | 390 | 14 | — | 376 | ||||||||||||
Non-US RMBS | 18,502 | 475 | — | 18,027 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total residential mortgage-backed securities | $ | 34,087 | $ | 1,153 | $ | (138 | ) | $ | 33,072 | |||||||
|
|
|
|
|
|
|
|
The following table sets forth the composition of the investments categorized as RMBS 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, 2014:
In thousands | December 31, 2014 | |||||||||||||
Equivalent S&P Rating | Equivalent Moody’s | Fair Value | Amortized Cost | Net Unrealized Gain (Loss) | ||||||||||
AAA/AA/A | Aaa/Aa/A | $ | 23,233 | $ | 22,770 | $ | 463 | |||||||
BBB | Baa | 1,709 | 1,722 | (13 | ) | |||||||||
BB | Ba | 1,419 | 1,447 | (28 | ) | |||||||||
B | B | 1,431 | 1,410 | 21 | ||||||||||
CCC or lower | Caa or lower | 6,295 | 5,723 | 572 | ||||||||||
NR | NR | — | — | — | ||||||||||
|
|
|
|
|
| |||||||||
Total | $ | 34,087 | $ | 33,072 | $ | 1,015 | ||||||||
|
|
|
|
|
|
Details of the collateral of our asset-backed securities portfolio as of December 31, 2014 are presented below:
Amortized | Unrealized | |||||||||||||||||||||||||||||||||||
In thousands | AAA | AA | A | BBB | �� | BB | CCC | Fair Value | Cost | Gain (Loss) | ||||||||||||||||||||||||||
Auto loans | $ | 20,526 | $ | 9,638 | $ | 4,513 | $ | — | $ | — | $ | — | $ | 34,677 | $ | 34,628 | $ | 49 | ||||||||||||||||||
Credit cards | 49,967 | — | 5,982 | — | — | — | 55,949 | 55,907 | 42 | |||||||||||||||||||||||||||
Collateralized loan obligations | 69,141 | 6,696 | 75,837 | 76,597 | (760 | ) | ||||||||||||||||||||||||||||||
Time Share | — | — | 21,652 | — | — | — | 21,652 | 21,622 | 30 | |||||||||||||||||||||||||||
Student Loans | 825 | — | — | — | — | 825 | 803 | 22 | ||||||||||||||||||||||||||||
Miscellaneous | 6,678 | — | 10,795 | — | — | — | 17,473 | 17,440 | 33 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total | $ | 147,137 | $ | 16,334 | $ | 42,942 | $ | — | $ | — | $ | — | $ | 206,413 | $ | 206,997 | $ | (584 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the composition of the investments categorized as commercial mortgage-backed securities 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, 2014:
In thousands | December 31, 2014 | |||||||||||||
Equivalent S&P Rating | Equivalent | Fair Value | Amortized Cost | Net Unrealized Gain (Loss) | ||||||||||
AAA/AA/A | Aaa/Aa/A | $ | 206,318 | $ | 199,786 | $ | 6,532 | |||||||
BBB | Baa | — | — | — | ||||||||||
BB | Ba | — | — | — | ||||||||||
B | B | — | — | — | ||||||||||
CCC or lower | Caa or lower | — | — | — | ||||||||||
NR | NR | — | — | — | ||||||||||
|
|
|
|
|
| |||||||||
Total | $ | 206,318 | $ | 199,786 | $ | 6,532 | ||||||||
|
|
|
|
|
|
The following table sets forth the composition of the investments categorized as corporate bonds 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, 2014:
In thousands | December 31, 2014 | |||||||||||||
Equivalent S&P Rating | Equivalent | Fair Value | Amortized Cost | Net Unrealized Gain (Loss) | ||||||||||
AAA/AA/A | Aaa/Aa/A | $ | 435,571 | $ | 428,906 | $ | 6,665 | |||||||
BBB | Baa | 174,287 | 169,712 | 4,575 | ||||||||||
BB | Ba | 5,706 | 5,524 | 182 | ||||||||||
B | B | — | — | — | ||||||||||
CCC or lower | Caa or lower | — | — | — | ||||||||||
NR | NR | — | — | — | ||||||||||
|
|
|
|
|
| |||||||||
Total | $ | 615,564 | $ | 604,142 | $ | 11,422 | ||||||||
|
|
|
|
|
|
Our company holds non-sovereign securities, where the issuer is located in the Euro Area, an economic and monetary union of certain member states within the European Union that have adopted the Euro as their common currency. As of December 31, 2014, the fair value of such securities was $97.6 million, with an amortized cost of $97.6 million representing 3.8% of our total fixed income and equity portfolio. Our largest exposure is in France with a total of $40.1 million followed by The Netherlands with a total of $39.6 million. We have no direct material exposure to Greece, Portugal, Italy, Spain, Ukraine or Russia as of December 31, 2014.
The following table summarizes all securities in a gross unrealized loss position as of December 31, 2014 and 2013, showing the aggregate fair value and gross unrealized loss by the length of time those securities had continuously been in a gross unrealized loss position as well as the number of securities:
December 31, 2014 | December 31, 2013 | |||||||||||||||||||||||
In thousands, except # of securities | Number of Securities | Fair Value | Gross Unrealized Loss | Number of Securities | Fair Value | Gross Unrealized Loss | ||||||||||||||||||
Fixed maturities: | ||||||||||||||||||||||||
U.S. Treasury bonds, agency bonds, and foreign government bonds | ||||||||||||||||||||||||
0-6 months | 19 | $ | 87,915 | $ | 1,061 | 27 | $ | 136,360 | $ | 1,096 | ||||||||||||||
7-12 months | — | — | — | 26 | 149,370 | 7,759 | ||||||||||||||||||
> 12 months | 31 | 117,683 | 4,904 | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 50 | $ | 205,598 | $ | 5,965 | 53 | $ | 285,730 | $ | 8,855 | ||||||||||||||
States, municipalities and political subdivisions | ||||||||||||||||||||||||
0-6 months | 13 | $ | 14,242 | $ | 41 | 28 | $ | 40,132 | $ | 297 | ||||||||||||||
7-12 months | 2 | 2,107 | 19 | 104 | 205,152 | 12,100 | ||||||||||||||||||
> 12 months | 17 | 37,340 | 498 | 6 | 12,357 | 1,254 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 32 | $ | 53,689 | $ | 558 | 138 | $ | 257,641 | $ | 13,651 | ||||||||||||||
Agency mortgage-backed securities | ||||||||||||||||||||||||
0-6 months | 4 | $ | 14,743 | $ | 52 | 39 | $ | 39,458 | $ | 434 | ||||||||||||||
7-12 months | 2 | 4,138 | 28 | 64 | 77,860 | 3,768 | ||||||||||||||||||
> 12 months | 46 | 58,301 | 918 | 9 | 22,784 | 1,814 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 52 | $ | 77,182 | $ | 998 | 112 | $ | 140,102 | $ | 6,016 | ||||||||||||||
Residential mortgage obligations | ||||||||||||||||||||||||
0-6 months | 6 | $ | 4,966 | $ | 43 | 3 | $ | 431 | $ | 2 | ||||||||||||||
7-12 months | 2 | 659 | 7 | 7 | 950 | 29 | ||||||||||||||||||
> 12 months | 14 | 1,728 | 88 | 15 | 2,467 | 130 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 22 | $ | 7,353 | $ | 138 | 25 | $ | 3,848 | $ | 161 | ||||||||||||||
Asset-backed securities | ||||||||||||||||||||||||
0-6 months | 19 | $ | 96,123 | $ | 354 | 14 | $ | 75,887 | $ | 479 | ||||||||||||||
7-12 months | 3 | 14,152 | 185 | 1 | 203 | 1 | ||||||||||||||||||
> 12 months | 3 | 34,530 | 425 | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 25 | $ | 144,805 | $ | 964 | 15 | $ | 76,090 | $ | 480 | ||||||||||||||
Commercial mortgage-backed securities | ||||||||||||||||||||||||
0-6 months | 4 | $ | 18,665 | $ | 65 | 4 | $ | 6,712 | $ | 31 | ||||||||||||||
7-12 months | 1 | 1,076 | 6 | 2 | 15,098 | 322 | ||||||||||||||||||
> 12 months | 3 | 1,391 | 27 | 4 | 774 | 21 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 8 | $ | 21,132 | $ | 98 | 10 | $ | 22,584 | $ | 374 | ||||||||||||||
Corporate bonds | ||||||||||||||||||||||||
0-6 months | 52 | $ | 179,390 | $ | 797 | 34 | $ | 93,591 | $ | 717 | ||||||||||||||
7-12 months | 4 | 11,071 | 74 | 18 | 55,021 | 2,726 | ||||||||||||||||||
> 12 months | 14 | 31,126 | 755 | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 70 | $ | 221,587 | $ | 1,626 | 52 | $ | 148,612 | $ | 3,443 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total fixed maturities | 259 | $ | 731,346 | $ | 10,347 | 405 | $ | 934,607 | $ | 32,980 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Equity securities - common stocks | ||||||||||||||||||||||||
0-6 months | 6 | $ | 9,152 | $ | 761 | 5 | $ | 7,387 | $ | 422 | ||||||||||||||
7-12 months | 1 | 3,887 | 486 | 2 | 3,538 | 128 | ||||||||||||||||||
> 12 months | 1 | 238 | 7 | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
8 | $ | 13,277 | $ | 1,254 | 7 | $ | 10,925 | $ | 550 | |||||||||||||||
Equity securities - preferred stocks | ||||||||||||||||||||||||
0-6 months | 7 | $ | 6,651 | $ | 50 | — | $ | — | $ | — | ||||||||||||||
7-12 months | — | — | — | — | — | — | ||||||||||||||||||
> 12 months | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
7 | $ | 6,651 | $ | 50 | — | $ | — | $ | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total equity securities | 15 | $ | 19,928 | $ | 1,304 | 7 | $ | 10,925 | $ | 550 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
We analyze the unrealized losses quarterly to determine if any are other-than-temporary. The above unrealized losses have been determined to be temporary based on our policies.
In the above, table the gross unrealized loss for the greater than 12 months category consists primarily of Treasury and agency bonds, due to an increase in interest rates and unfavorable foreign exchange movement.
To determine whether the unrealized loss on structured securities is other-than-temporary, we analyze the projections provided by our investment managers with respect to 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 is expected ultimately to incur 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.
Prepayment assumptions associated with the mortgage-backed and asset-backed securities are reviewed on a periodic basis. When changes in prepayment assumptions are deemed necessary as the result of actual prepayments differing from anticipated prepayments, securities are revalued based upon the new prepayment assumptions utilizing the retrospective accounting method.
As of December 31, 2014 and 2013, the largest unrealized loss by a non-government backed issuer in the investment portfolio was $0.5 million and $1.1 million, respectively.
The following table sets forth the composition of the investments categorized as fixed maturities securities in our investment portfolio with gross unrealized losses by generally equivalent S&P and Moody’s ratings (not all of the securities are rated by S&P and Moody’s) as of December 31, 2014:
December 31, 2014 | ||||||||||||||||||
In thousands | Gross Unrealized Loss | Fair Value | ||||||||||||||||
Equivalent S&P Rating | Equivalent | Amount | Percent of Total | Amount | Percent of Total | |||||||||||||
AAA/AA/A | Aaa/Aa/A | $ | 9,811 | 95 | % | $ | 691,175 | 95 | % | |||||||||
BBB | Baa | 464 | 5 | % | 38,179 | 5 | % | |||||||||||
BB | Ba | 40 | 0 | % | 809 | 0 | % | |||||||||||
B | B | 14 | 0 | % | 442 | 0 | % | |||||||||||
CCC or lower | Caa or lower | 18 | 0 | % | 741 | 0 | % | |||||||||||
NR | NR | — | 0 | % | — | 0 | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 10,347 | 100 | % | $ | 731,346 | 100 | % | ||||||||||
|
|
|
|
|
|
|
|
As of December 31, 2014, the gross unrealized losses in the table above were related to fixed maturities 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 $0.07 million, which is rated below investment grade or not rated. 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 contractual maturity for fixed maturities categorized by the number of years until maturity, with a gross unrealized loss as of December 31, 2014 is presented in the following table:
December 31, 2014 | ||||||||||||||||
Gross Unrealized Losses | Fair Value | |||||||||||||||
Percent | Percent | |||||||||||||||
In thousands | Amount | of Total | Amount | of Total | ||||||||||||
Due in one year or less | $ | 2,638 | 25 | % | $ | 21,919 | 3 | % | ||||||||
Due after one year through five years | 3,791 | 37 | % | 334,046 | 46 | % | ||||||||||
Due after five years through ten years | 1,562 | 15 | % | 103,376 | 14 | % | ||||||||||
Due after ten years | 158 | 2 | % | 21,533 | 3 | % | ||||||||||
Mortgage- and asset-backed securities | 2,198 | 21 | % | 250,472 | 34 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 10,347 | 100 | % | $ | 731,346 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
As of December 31, 2014, there were no investments with a fair value that was less than 80% of amortized cost.
The following table below summarizes our activity related to OTTI losses for the periods indicated:
Year Ended December 31, | ||||||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||
In thousands, except # of securities | Number of Securities | Amount | Number of Securities | Amount | Number of Securities | Amount | ||||||||||||||||||
Total OTTI losses: | ||||||||||||||||||||||||
Corporate and other bonds | — | $ | — | 1 | $ | 1,822 | — | $ | — | |||||||||||||||
Commercial mortgage-backed securities | — | — | — | — | — | — | ||||||||||||||||||
Residential mortgage-backed securities | 31 | (137 | ) | — | — | 1 | 55 | |||||||||||||||||
Asset-backed securities | — | — | — | — | — | — | ||||||||||||||||||
Equities | — | — | 3 | 571 | 3 | 847 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | 31 | $ | (137 | ) | 4 | $ | 2,393 | 4 | $ | 902 | ||||||||||||||
Less: Portion of loss in accumulated other comprehensive income (loss): | ||||||||||||||||||||||||
Corporate and other bonds | $ | — | $ | — | $ | — | ||||||||||||||||||
Commercial mortgage-backed securities | — | — | — | |||||||||||||||||||||
Residential mortgage-backed securities | (137 | ) | — | 44 | ||||||||||||||||||||
Asset-backed securities | — | — | — | |||||||||||||||||||||
Equities | — | — | — | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | $ | (137 | ) | $ | — | $ | 44 | |||||||||||||||||
Impairment losses recognized in earnings: | ||||||||||||||||||||||||
Corporate and other bonds | $ | — | $ | 1,822 | $ | — | ||||||||||||||||||
Commercial mortgage-backed securities | — | — | — | |||||||||||||||||||||
Residential mortgage-backed securities | — | — | 11 | |||||||||||||||||||||
Asset-backed securities | — | — | — | |||||||||||||||||||||
Equities | — | 571 | 847 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | $ | — | $ | 2,393 | $ | 858 | ||||||||||||||||||
|
|
|
|
|
|
We did not have OTTI losses during the year ended December 31, 2014. During the year ended December 31, 2013, we recognized OTTI losses of $2.4 million related to three equity securities and one municipal bond. During the year ended December 31, 2012, we recognized OTTI losses of $0.9 million related to one non-agency mortgage-backed security and three equity securities. 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.
Market Sensitive Instruments and Risk Management
Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. We are exposed to potential loss to various market risks, including changes in interest rates, equity prices and foreign currency exchange rates. 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 our primary market risk exposures and how those exposures have been managed through December 31, 2014.2016. Our market risk sensitive instruments are entered into for purposes other than trading and speculation.
The carrying value of our investment portfolio as of December 31, 20142016 was $2.8$3.1 billion of which 83.9%84.3% was invested in fixed maturity securities. The primary market risk to our investment portfolio is interest rate risk associated with investments in fixed maturity securities. We do not have any commodity risk exposure.make direct investments in commodities.
For fixed maturity securities, short-term liquidity needs and the potential liquidity needs of theour business are key factors in managing theour portfolio. TheOur portfolio duration relative to theour liabilities’ duration is primarily managed through investment transactions.
There were no significant changes regarding theour investment portfolio in our primary market risk exposures or in how those exposures were managed for the year ended December 31, 2014.2016. We do not currently anticipate significant changes in our primary market risk exposures or in how those exposures are managed in future reporting periods based upon what is known or expected to be in effect in future reporting periods.
Interest Rate Risk Sensitivity Analysis
Sensitivity analysisInterest rate risk is defined as the measurement of potential loss in fair values or cash flows of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates and other market rates or prices over a selected time.rates. In our sensitivity analysis model, a hypothetical change in marketinterest rates is selected that is expected to reflect reasonably possible near-term changes in those rates. “Near-term” means a period of time going forward up to one year from the date of theour Consolidated Financial Statements. Actual results may differ from the hypothetical change in marketinterest rates assumed in this disclosure, especially since this sensitivity analysis does not reflect the results of any actions that would be taken by us to mitigate such hypothetical losses in fair value.
In this sensitivity analysis model, we use fair values to measure our potential loss. The sensitivity analysis model includes fixed maturities.loss on Fixed maturities and interest rate sensitive preferred stocks, which are classified as equity securities for financial reporting purposes. The primary market risk to our market-sensitive instruments is interest rate risk. The sensitivity analysis model uses a 50 and 100 basis points change in interest rates to measure the hypothetical change in fair value of financial instruments included in the model. Changes in interest rates will have an immediate effect on our comprehensive income and stockholders’ equity but will not ordinarily have an immediate effect on our net income. As interest rates rise, the market value of our interest rate sensitive securities will decrease. Conversely, as interest rates fall, the market value of our interest rate sensitive securities will increase.
For invested assets,interest rate sensitive securities, modified duration modeling is used to calculate changes in fair values. Durations on invested assetsinterest rate sensitive securities are adjusted for call, put and interest rate reset features. Duration on tax-exempt securities is adjusted for the fact that the prices on such securities are less sensitive to changes in interest rates compared to treasury securities. Invested asset portfolio durations areAverage duration is calculated on a market value weighted basis using holdings as of December 31, 2014.2016.
The following table summarizes the effect that an immediate, parallel shift in the interest rate yield curve would have had on our portfoliointerest rate sensitive securities as of December 31, 20142016 and 2013.2015:
| Interest Rate Shift in Basis Points |
| ||||||||||||||||||||||||||||||||||||||
Interest Rate Shift in Basis Points | ||||||||||||||||||||||||||||||||||||||||
In thousands | -100 | -50 | 0 | +50 | +100 | |||||||||||||||||||||||||||||||||||
December 31, 2014: | ||||||||||||||||||||||||||||||||||||||||
amounts in thousands |
| -100 |
|
| -50 |
|
| 0 |
|
| +50 |
|
| +100 |
| |||||||||||||||||||||||||
December 31, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Total market value | $ | 2,434,073 | $ | 2,403,789 | $ | 2,365,934 | $ | 2,320,035 | $ | 2,274,609 |
| $ | 2,929,824 |
|
| $ | 2,877,919 |
|
| $ | 2,820,936 |
|
| $ | 2,763,389 |
|
| $ | 2,705,842 |
| ||||||||||
Market value change from base | 2.88 | % | 1.60 | % | -1.94 | % | -3.86 | % |
|
| 3.9 | % |
|
| 2.0 | % |
|
|
|
|
|
| -2.0 | % |
|
| -4.1 | % | ||||||||||||
Change in unrealized value | $ | 68,139 | $ | 37,855 | $ | — | $ | (45,899 | ) | $ | (91,325 | ) |
| $ | 108,888 |
|
| $ | 56,983 |
|
| $ | — |
|
| $ | (57,547 | ) |
| $ | (115,094 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
December 31, 2013: | ||||||||||||||||||||||||||||||||||||||||
December 31, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Total market value | $ | 2,134,293 | $ | 2,090,878 | $ | 2,047,873 | $ | 2,005,687 | $ | 1,964,729 |
| $ | 2,688,968 |
|
| $ | 2,644,887 |
|
| $ | 2,593,026 |
|
| $ | 2,538,572 |
|
| $ | 2,486,712 |
| ||||||||||
Market value change from base | 4.22 | % | 2.10 | % | -2.06 | % | -4.06 | % |
|
| 3.7 | % |
|
| 2.0 | % |
|
|
|
|
|
| -2.1 | % |
|
| -4.1 | % | ||||||||||||
Change in unrealized value | $ | 86,420 | $ | 43,005 | $ | — | $ | (42,186 | ) | $ | (83,144 | ) |
| $ | 95,942 |
|
| $ | 51,861 |
|
| $ | — |
|
| $ | (54,454 | ) |
| $ | (106,314 | ) |
Common Equity Price Risk
Our portfolio of common equity securities currently valued at $184.3$164.1 million, which we carry on our balance sheetBalance Sheet at fair value, has exposure to price risk. This risk is defined as the potential loss in fair value resulting from adverse changes in stock prices. Our U.S. equity portfolio is benchmarked to the S&P 500 index and changes in that index may approximate the impact on our portfolio.
Foreign Currency Exchange Rate Risk
As a global company, we transact business in multiple currencies. Many of our non-U.S. subsidiaries maintain assets and liabilities in local currencies and write business in currencies that differ from their functional currency. Therefore, foreign currency exchange risk is generally limited to net assets denominated in foreign currencies. Foreign currency exchange rate gains and losses are recognized in our consolidated Statements of Income when net monetary assets or liabilities are denominated in foreign currencies that differ from the functional currency of those subsidiaries. Net monetary assets or liabilities include, but are not limited to, cash and cash equivalents, premiums receivable, reinsurance recoverable and claims payable. While unrealized foreign exchange gains and losses on net monetary balances are reported in earnings, the offsetting unrealized gains and losses on invested assets are recorded as a separate component of stockholders' equity, to the extent that the asset currency does not match that entity's functional currency. We are exposed tomanage our foreign currency exchange rate risk primarily through asset-liability matching. However, locally-required capital levels are invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations and may not always be matched by related to foreign-denominated cash, cash equivalents and marketable securities (“foreign funds”), premiums receivable, reinsurance recoverables on paid and unpaid losses and loss adjustment expenses as well as reserves for losses and loss adjustment expenses. liabilities.
The principal currencies creating foreign currency exchange risk for our Operationsoperations are the British pound, the EuroGBP and the Canadian dollar. We manage itsCAD. The following table shows the foreign currency exchange rate risk primarily through asset-liability matching.
Based on the primary foreign-denominateddenominated net asset position, with elimination of intercompany balances, within our Lloyd’s Operations as ofin USD equivalent at December 31, 2014, an assumed 5%,2016 and 2015, and the expected dollar change in fair value that would occur if exchange rates changed 10% and 15% negative currency movement would resultfrom exchange rates in changes as follows:effect at those times:
December 31, 2014 | ||||||||||||||||
Negative Currency Movement of | ||||||||||||||||
In millions | USD Equivalent | 5% | 10% | 15% | ||||||||||||
Cash, cash equivalents and marketable securities at fair value | $ | 104.6 | $ | (2.2 | ) | $ | (4.3 | ) | $ | (6.5 | ) | |||||
Premiums receivable | $ | 34.0 | $ | (1.6 | ) | $ | (3.1 | ) | $ | (4.7 | ) | |||||
Reinsurance recoverables on paid, unpaid losses and LAE | $ | 55.9 | $ | (2.1 | ) | $ | (4.3 | ) | $ | (6.4 | ) | |||||
Reserves for losses and loss adjustment expenses | $ | 143.4 | $ | 5.7 | $ | 11.5 | $ | 17.2 | ||||||||
Total | (0.2 | ) | (0.2 | ) | (0.4 | ) |
|
| At Years Ended December 31, |
| |||||||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015(1) |
| ||||
Original Currency |
| Value of Net Assets in USD |
|
| 10% depreciation of all foreign currency exchange rates against the USD |
| ||||||||||
GBP |
| $ | (10,630 | ) |
| $ | (61,834 | ) |
| $ | (1,063 | ) |
| $ | (6,183 | ) |
CAD |
|
| 67,992 |
|
|
| 43,800 |
|
|
| 6,799 |
|
|
| 4,380 |
|
Total (1) |
| $ | 57,362 |
|
| $ | (18,034 | ) |
| $ | 5,736 |
|
| $ | (1,803 | ) |
(1) Amount excludes additional currencies where the value of net assets in USD equivalent is |
The
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements required in response to this section are submitted as part of Item 15(a) of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such, term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Management’s Report on Internal Control Over Financial Reporting
(a) | Management’s report on internal control over financial reporting |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on theInternal Control – Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under such framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2014.2016 was effective.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
TheOur Company’s independent registered public accounting firm, KPMG LLP, has audited the effectiveness of our Company’s internal control over financial reporting as of December 31, 2014,2016, as stated in their report in item (b) below.
(b) | Attestation report of the registered public accounting firm |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Navigators Group, Inc.
We have audited The Navigators Group Inc.’s internal control over financial reporting as of December 31, 2014,2016, based on criteria established inInternal Control – Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission. The Navigators Group Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement’s Report on Internal Control overOver Financial Reporting.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, The Navigators Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014,2016, based on criteria established inInternal Control – Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Navigators Group, Inc. and subsidiaries as of December 31, 20142016 and 2013,2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014,2016, and our report dated February 17, 20152017 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP |
New York, New York
February 17, 20152017
(c) | Changes in internal control over financial reporting |
(1) In 2016, to align with a more automated process, we implemented a new tax system which added automation to our tax provision and compliance processes. This implementation involved changes to our procedures and enhanced controls, which management believes are appropriate for the new system.
There have been no further changes during our fourth fiscal quarter in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
None
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning our directors and executive officers is contained under “Election of Directors” in our 2015definitive Proxy Statementfor the Annual Meeting of Stockholders to be held on May 25, 2017 (our “Proxy Statement”), which information is incorporated herein by reference. Information concerning the Audit Committee and the Audit Committee’s financial expert of theour Company is contained under “Board of Directors and Committees” in our 2015 Proxy Statement, which information is incorporated herein by reference. Information concerning compliance with Section 16(a) is contained under “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement.
We have adopted a Code of Ethics for our Chief Executive Officer and Senior Financial Officers, which is applicable to our Chief Executive Officer, Chief Financial Officer, Treasurer, Controller and all other persons performing similar functions. A copy of such Code is available on our website at www.navg.com under the Corporate Governance link. Any amendments to, or waivers of, such Code which apply to any of the financial professionals listed above will be disclosed on our website under the same link promptly following the date of such amendment or waiver.
Information concerning change to security holder procedures for recommending board of director nominees is contained under “Board Skills and Director Nominations” in our Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation will be contained under “Compensation Discussion and Analysis” in our 2015 Proxy Statement, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning the security ownership of the directors and officers of theour Company is contained under “Election of Directors” and “Compensation Discussion and Analysis” in our 2015 Proxy Statement, which information is incorporated herein by reference. Information concerning securities that are available to be issued under our equity compensation plans is contained under “Equity Compensation Plan Information” in our 2015 Proxy Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning relationships and related transactions of our directors and officers is contained under “Related Party Transactions” in our 2015 Proxy Statement, which information is incorporated herein by reference.reference. Information concerning director independence is contained under “Board of Directors and Committees” in our 2015 Proxy Statement, which information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning the principal accountant’s fees and services for theour Company is contained under “Independent Registered Public Accounting Firm” in theour Company’s 2015 Proxy Statement, which information is incorporated herein by reference.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
a.Financial Statements and Schedules
a. | Financial Statements and Schedules: The financial statements and schedules that are listed in the accompanying Index to Consolidated Financial Statements and Schedules on page F-1. |
b. | Exhibits: The exhibits that are listed in the accompanying Index to Exhibits on the page, which immediately follows page S-8. The exhibits include the management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10‑K by Item 601(a)(10)(iii) of Regulation S‑K. |
b.Exhibits: The exhibits that are listed in the accompanying Index to Exhibits on the page, which immediately follows page S-8. The exhibits include the management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form10-K by Item 601(a)(10)(iii) of RegulationS-K.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theour Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
The Navigators Group, Inc. | ||||||
(Company) | ||||||
Dated: February 17, | By: | /s/ Ciro M. DeFalco | ||||
Ciro M. DeFalco | ||||||
Senior Vice President and Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theour Company and in the capacities and on the dates indicated.
Name | Title | Date | ||||
/s/ ROBERT V. MENDELSOHN | Chairman | February 17, | ||||
Robert V. Mendelsohn | ||||||
/s/ STANLEY A. GALANSKI | President and Chief Executive Officer (Principal Executive Officer) | February 17, | ||||
Stanley A. Galanski | ||||||
/s/ CIRO M. DEFALCO | Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | February 17, | ||||
Ciro M. DeFalco | ||||||
/s/ SAUL L. BASCH | Director | February 17, | ||||
Saul L. Basch | ||||||
/s/ H.J. MERVYN BLAKENEY | Director | February 17, | ||||
H.J. Mervyn Blakeney | ||||||
/s/ TERENCE N. DEEKS | Director | February 17, | ||||
Terence N. Deeks | ||||||
/s/ MERYL HARTZBAND | Director | February 17, 2017 | ||||
Meryl Hartzband | ||||||
/s/ GEOFFREY E. JOHNSON | Director | February 17, | ||||
Geoffrey E. Johnson | ||||||
| ||||||
/s/ DAVID M. PLATTER | Director | February 17, | ||||
David M. Platter | ||||||
/s/ PATRICIA H. ROBERTS | Director | February 17, | ||||
Patricia H. Roberts | ||||||
/s/ JANICE C. TOMLINSON | Director | February 17, | ||||
Janice C. Tomlinson | ||||||
/s/ MARC M. TRACT | Director | February 17, | ||||
Marc M. Tract |
INDEX TO CONSOLIDATED FINANCIALFINANCIAL STATEMENTS AND SCHEDULES
Page | |||||
F-2 | |||||
Consolidated Balance Sheets as of December 31, | F-3 | ||||
F-4 | |||||
F-5 | |||||
F-6 | |||||
F-7 | |||||
F-8 | |||||||
SCHEDULES: | |||||||
Schedule I | Summary of Consolidated Investments-Other Than Investment in Related Parties | S-1 | |||||
Schedule II | S-2 | ||||||
Schedule III | S-5 | ||||||
Schedule IV | S-6 | ||||||
Schedule V | S-7 | ||||||
Schedule VI | Supplementary Information Concerning | S-8 | |||||
Index to Exhibits |
Report of Independent RegisteredRegistered Public Accounting Firm
The Board of Directors and Stockholders
The Navigators Group, Inc.
We have audited the accompanying consolidated balance sheets of The Navigators Group, Inc. and subsidiaries as of December 31, 20142016 and 2013,2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in thethree-year three‑year period ended December 31, 2014.2016. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedules I to VI. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Navigators Group, Inc. and subsidiaries as of December 31, 20142016 and 2013,2015, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2014,2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Navigators Group, Inc.’s internal control over financial reporting as of December 31, 2014,2016, based on criteria established inInternal Control – Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 17, 20152017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/KPMG LLP |
New York, New York
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
(In thousands, except share and
.
|
| December 31, |
| |||||
amounts in thousands, except share amounts |
| 2016 |
|
| 2015 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale, at fair value (amortized cost: 2016: $2,628,225; 2015: $2,400,245) |
| $ | 2,635,882 |
|
| $ | 2,414,210 |
|
Equity securities, available-for-sale, at fair value (cost: 2016: $327,911; 2015: $281,943) |
|
| 349,142 |
|
|
| 305,271 |
|
Other invested assets |
|
| 1,960 |
|
|
| — |
|
Short-term investments, at fair value (amortized cost: 2016: $143,451; 2015: $217,743) |
|
| 143,539 |
|
|
| 217,745 |
|
Total investments |
| $ | 3,130,523 |
|
| $ | 2,937,226 |
|
Cash |
|
| 64,643 |
|
|
| 69,901 |
|
Premiums receivable |
|
| 306,686 |
|
|
| 276,616 |
|
Prepaid reinsurance premiums |
|
| 213,377 |
|
|
| 232,588 |
|
Reinsurance recoverable on paid losses |
|
| 82,582 |
|
|
| 49,506 |
|
Reinsurance recoverable on unpaid losses and loss adjustment expenses |
|
| 779,276 |
|
|
| 809,518 |
|
Deferred policy acquisition costs |
|
| 119,660 |
|
|
| 91,983 |
|
Accrued investment income |
|
| 17,315 |
|
|
| 16,001 |
|
Goodwill and other intangible assets |
|
| 6,451 |
|
|
| 6,807 |
|
Current income tax receivable, net |
|
| 20,556 |
|
|
| 22,323 |
|
Deferred income tax, net |
|
| 20,938 |
|
|
| 3,900 |
|
Other assets |
|
| 52,030 |
|
|
| 67,643 |
|
Total assets |
| $ | 4,814,037 |
|
| $ | 4,584,012 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Reserves for losses and loss adjustment expenses |
| $ | 2,289,727 |
|
| $ | 2,202,644 |
|
Unearned premiums |
|
| 887,344 |
|
|
| 820,676 |
|
Reinsurance balances payable |
|
| 108,980 |
|
|
| 107,411 |
|
Senior notes |
|
| 263,728 |
|
|
| 263,580 |
|
Accounts payable and other liabilities |
|
| 86,070 |
|
|
| 93,553 |
|
Total liabilities |
| $ | 3,635,849 |
|
| $ | 3,487,864 |
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:(1) |
|
|
|
|
|
|
|
|
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued |
| $ | — |
|
| $ | — |
|
Common stock, $.10 par value, authorized 50,000,000 shares, issued 36,146,899 shares for 2016 and 35,884,538 shares for 2015 |
|
| 3,612 |
|
|
| 3,586 |
|
Additional paid-in capital |
|
| 373,983 |
|
|
| 356,036 |
|
Treasury stock, at cost (7,022,760 shares for 2016 and 2015) |
|
| (155,801 | ) |
|
| (155,801 | ) |
Retained earnings |
|
| 947,519 |
|
|
| 868,723 |
|
Accumulated other comprehensive income |
|
| 8,875 |
|
|
| 23,604 |
|
Total stockholders' equity |
| $ | 1,178,188 |
|
| $ | 1,096,148 |
|
Total liabilities and stockholders' equity |
| $ | 4,814,037 |
|
| $ | 4,584,012 |
|
(1) - We completed a two-for-one stock split on January 20, 2017. All per share amounts)data has been retroactively restated on a post-split basis.
December 31, | ||||||||
2014 | 2013 | |||||||
ASSETS | ||||||||
Investments and cash: | ||||||||
Fixed maturities, available-for-sale, at fair value (amortized cost: 2014, $2,323,959; 2013, $2,036,999) | $ | 2,365,934 | $ | 2,047,873 | ||||
Equity securities, available-for-sale, at fair value (cost: 2014, $154,843; 2013, $118,804) | 184,295 | 143,954 | ||||||
Short-term investments, at fair value (amortized cost: 2014: $179,527; 2013: $296,250) | 179,506 | 296,250 | ||||||
Cash | 90,751 | 86,509 | ||||||
|
|
|
| |||||
Total investments and cash | $ | 2,820,486 | $ | 2,574,586 | ||||
|
|
|
| |||||
Premiums receivable | 342,479 | 325,025 | ||||||
Prepaid reinsurance premiums | 237,851 | 247,822 | ||||||
Reinsurance recoverable on paid losses | 51,347 | 38,384 | ||||||
Reinsurance recoverable on unpaid losses and loss adjustment expenses | 851,498 | 822,438 | ||||||
Deferred policy acquisition costs | 79,452 | 67,007 | ||||||
Accrued investment income | 14,791 | 13,866 | ||||||
Goodwill and other intangible assets | 7,013 | 7,177 | ||||||
Current income tax receivable, net | 14,549 | 14,299 | ||||||
Deferred income tax, net | — | 23,806 | ||||||
Receivable for investments sold | 326 | 3 | ||||||
Other assets | 44,384 | 35,039 | ||||||
|
|
|
| |||||
Total assets | $ | 4,464,176 | $ | 4,169,452 | ||||
|
|
|
| |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities: | ||||||||
Reserves for losses and loss adjustment expenses | $ | 2,159,634 | $ | 2,045,071 | ||||
Unearned premiums | 766,167 | 714,606 | ||||||
Reinsurance balances payable | 152,774 | 167,252 | ||||||
Senior Notes | 263,440 | 263,308 | ||||||
Deferred income tax, net | 1,467 | — | ||||||
Payable for investments purchased | 134 | 7,624 | ||||||
Accounts payable and other liabilities | 93,336 | 69,379 | ||||||
|
|
|
| |||||
Total liabilities | $ | 3,436,952 | $ | 3,267,240 | ||||
|
|
|
| |||||
Stockholders’ equity: | ||||||||
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued | $ | — | $ | — | ||||
Common stock, $.10 par value, authorized 50,000,000 shares, issued 17,792,846 shares for 2014 and 17,709,876 shares for 2013 | 1,778 | 1,770 | ||||||
Additional paid-in capital | 347,022 | 335,546 | ||||||
Treasury stock, at cost (3,511,380 shares for 2014 and 2013) | (155,801 | ) | (155,801 | ) | ||||
Retained earnings | 787,666 | 692,337 | ||||||
Accumulated other comprehensive income | 46,559 | 28,360 | ||||||
|
|
|
| |||||
Total stockholders’ equity | $ | 1,027,224 | $ | 902,212 | ||||
|
|
|
| |||||
Total liabilities and stockholders’ equity | $ | 4,464,176 | $ | 4,169,452 | ||||
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except
|
| Years Ended December 31, |
| |||||||||
amounts in thousands, except share and per share amounts |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||
Gross written premiums |
| $ | 1,568,911 |
|
| $ | 1,453,502 |
|
| $ | 1,432,353 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums |
| $ | 1,186,224 |
|
| $ | 1,043,860 |
|
| $ | 1,000,138 |
|
Change in unearned premiums |
|
| (85,879 | ) |
|
| (59,773 | ) |
|
| (64,243 | ) |
Net earned premiums |
|
| 1,100,345 |
|
|
| 984,087 |
|
|
| 935,895 |
|
Net investment income |
|
| 79,451 |
|
|
| 68,718 |
|
|
| 64,168 |
|
Total other-than-temporary impairment losses |
|
| (227 | ) |
|
| (1,870 | ) |
|
| 137 |
|
Portion of loss recognized in other comprehensive income (before tax) |
|
| 77 |
|
|
| 172 |
|
|
| (137 | ) |
Net other-than-temporary impairment losses recognized in earnings |
|
| (150 | ) |
|
| (1,698 | ) |
|
| — |
|
Net realized gains (losses) |
|
| 9,186 |
|
|
| 8,373 |
|
|
| 12,812 |
|
Other income (expense) |
|
| 8,701 |
|
|
| (491 | ) |
|
| 10,656 |
|
Total revenues |
| $ | 1,197,533 |
|
| $ | 1,058,989 |
|
| $ | 1,023,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses |
| $ | 665,448 |
|
| $ | 572,598 |
|
| $ | 545,229 |
|
Commission expenses |
|
| 165,045 |
|
|
| 129,977 |
|
|
| 125,528 |
|
Other operating expenses |
|
| 234,096 |
|
|
| 223,516 |
|
|
| 196,825 |
|
Interest expense |
|
| 15,435 |
|
|
| 15,424 |
|
|
| 15,413 |
|
Total expenses |
| $ | 1,080,024 |
|
| $ | 941,515 |
|
| $ | 882,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
| 117,509 |
|
|
| 117,474 |
|
|
| 140,536 |
|
Income tax expense (benefit) |
|
| 34,783 |
|
|
| 36,417 |
|
|
| 45,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 82,726 |
|
| $ | 81,057 |
|
| $ | 95,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 2.85 |
|
| $ | 2.82 |
|
| $ | 3.34 |
|
Diluted |
| $ | 2.75 |
|
| $ | 2.73 |
|
| $ | 3.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 29,073,803 |
|
|
| 28,785,044 |
|
|
| 28,519,536 |
|
Diluted |
|
| 30,031,609 |
|
|
| 29,651,490 |
|
|
| 29,292,738 |
|
(1) - We completed a two-for-one stock split on January 20, 2017. All share and per share amounts)data has been retroactively restated on a post-split basis.
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Gross written premiums | $ | 1,432,353 | $ | 1,370,517 | $ | 1,286,465 | ||||||
|
|
|
|
|
| |||||||
Revenues: | ||||||||||||
Net written premiums | $ | 1,000,138 | $ | 887,922 | $ | 833,655 | ||||||
Change in unearned premiums | (64,243 | ) | (45,983 | ) | (51,691 | ) | ||||||
|
|
|
|
|
| |||||||
Net earned premiums | 935,895 | 841,939 | 781,964 | |||||||||
Net investment income | 64,168 | 56,251 | 54,248 | |||||||||
Total other-than-temporary impairment losses | 137 | (2,393 | ) | (902 | ) | |||||||
Portion of loss recognized in other comprehensive income (before tax) | (137 | ) | — | 44 | ||||||||
|
|
|
|
|
| |||||||
Net other-than-temporary impairment losses recognized in earnings | — | (2,393 | ) | (858 | ) | |||||||
Net realized gains (losses) | 12,812 | 22,939 | 41,074 | |||||||||
Other income (expense) | 10,656 | (1,172 | ) | 1,488 | ||||||||
|
|
|
|
|
| |||||||
Total revenues | $ | 1,023,531 | $ | 917,564 | $ | 877,916 | ||||||
|
|
|
|
|
| |||||||
Expenses: | ||||||||||||
Net losses and loss adjustment expenses | $ | 545,229 | $ | 518,961 | $ | 497,433 | ||||||
Commission expenses | 125,528 | 113,494 | 121,470 | |||||||||
Other operating expenses | 196,825 | 164,434 | 159,079 | |||||||||
Call premium on Senior Notes | — | 17,895 | — | |||||||||
Interest expense | 15,413 | 10,507 | 8,198 | |||||||||
|
|
|
|
|
| |||||||
Total expenses | $ | 882,995 | $ | 825,291 | $ | 786,180 | ||||||
|
|
|
|
|
| |||||||
Income before income taxes | $ | 140,536 | $ | 92,273 | $ | 91,736 | ||||||
|
|
|
|
|
| |||||||
Income tax expense (benefit) | $ | 45,207 | $ | 28,807 | $ | 27,974 | ||||||
|
|
|
|
|
| |||||||
Net income | $ | 95,329 | $ | 63,466 | $ | 63,762 | ||||||
|
|
|
|
|
| |||||||
Net income per common share: | ||||||||||||
Basic | $ | 6.69 | $ | 4.49 | $ | 4.54 | ||||||
Diluted | $ | 6.51 | $ | 4.42 | $ | 4.45 | ||||||
Average common shares outstanding: | ||||||||||||
Basic | 14,259,768 | 14,133,925 | 14,052,311 | |||||||||
Diluted | 14,646,369 | 14,345,553 | 14,327,820 |
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
|
| Years Ended December 31, |
| |||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||
Net income |
| $ | 82,726 |
|
| $ | 81,057 |
|
| $ | 95,329 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on investments arising during the period, net of deferred tax of $3,730, $2,624, and $(14,925) in 2016, 2015 and 2014 respectively |
| $ | (6,927 | ) |
| $ | (5,331 | ) |
| $ | 28,252 |
|
Reclassification adjustment for net realized (gains) losses included in net income net of deferred tax of $(846), $9,185, and $2,776 in 2016, 2015 and 2014 respectively |
|
| 1,572 |
|
|
| (17,058 | ) |
|
| (5,156 | ) |
Change in net unrealized gains (losses on investments) |
| $ | (5,355 | ) |
| $ | (22,389 | ) |
| $ | 23,096 |
|
Change in other-than-temporary impairments: |
|
|
|
|
|
|
|
|
|
|
|
|
Non credit other-than-temporary impairments arising during the period, net of deferred tax of $27, $60, and $(48) in 2016, 2015 and 2014 respectively |
| $ | (50 | ) |
| $ | (112 | ) |
| $ | 89 |
|
Reclassification adjustment for other-than-temporary impairment credit losses recognized in net income net of deferred tax of $0, $(90), and $0 in 2016, 2015 and 2014 respectively |
|
| — |
|
|
| 168 |
|
|
| — |
|
Change in other-than-temporary impairments |
| $ | (50 | ) |
| $ | 56 |
|
| $ | 89 |
|
Change in foreign currency translation gains (losses), net of deferred tax of $5,017, $351, and $2,800 in 2016, 2015 and 2014 respectively |
| $ | (9,324 | ) |
| $ | (622 | ) |
| $ | (4,986 | ) |
Other comprehensive income (loss) |
| $ | (14,729 | ) |
| $ | (22,955 | ) |
| $ | 18,199 |
|
Comprehensive income (loss) |
| $ | 67,997 |
|
| $ | 58,102 |
|
| $ | 113,528 |
|
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Net income | $ | 95,329 | $ | 63,466 | $ | 63,762 | ||||||
|
|
|
|
|
| |||||||
Other comprehensive income (loss): | ||||||||||||
Change in net unrealized gains (losses) on investments: | ||||||||||||
Unrealized gains (losses) on investments arising during the period, net of deferred tax of $14,925, $17,521 and $13,136 in 2014, 2013 and 2012 respectively | $ | 28,252 | $ | (32,546 | ) | $ | 24,350 | |||||
Reclassification adjustment for net realized (gains) losses included in net income net of deferred tax of $2,776, $6,218 and $10,314 in 2014, 2013 and 2012 respectively | (5,156 | ) | (11,548 | ) | (19,154 | ) | ||||||
|
|
|
|
|
| |||||||
Change in net unrealized gains (losses on investments) | $ | 23,096 | $ | (44,094 | ) | $ | 5,196 | |||||
Change in other-than-temporary impairments: | ||||||||||||
Non credit other-than-temporary impairments arising during the period, net of deferred tax of $48, $174 and $612 in 2014, 2013 and 2012 respectively | $ | 89 | $ | 320 | $ | 1,135 | ||||||
Reclassification adjustment for non credit other-than-temporary impairment losses recognized in net income net of deferred tax of $0, $0 and $16 in 2014, 2013 and 2012 respectively | — | — | (29 | ) | ||||||||
|
|
|
|
|
| |||||||
Change in other-than-temporary impairments | $ | 89 | $ | 320 | $ | 1,106 | ||||||
Change in foreign currency translation gains (losses), net of deferred tax of $2,800, $1,650, and $521 in 2014, 2013 and 2012 respectively | $ | (4,986 | ) | $ | (3,074 | ) | $ | (1,342 | ) | |||
|
|
|
|
|
| |||||||
Other comprehensive income (loss) | $ | 18,199 | $ | (46,848 | ) | $ | 4,960 | |||||
|
|
|
|
|
| |||||||
Comprehensive income (loss) | $ | 113,528 | $ | 16,618 | $ | 68,722 | ||||||
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’STOCKHOLDERS' EQUITY
(In thousands, except
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated Other |
|
| Total |
| |||
|
| Common Stock |
|
| Paid-in |
|
| Treasury Stock |
|
| Retained |
|
| Comprehensive |
|
| Stockholders' |
| ||||||||||||||
amounts in thousands, except share amounts |
| Shares |
|
| Amount |
|
| Capital |
|
| Shares |
|
| Amount |
|
| Earnings |
|
| Income (Loss) |
|
| Equity |
| ||||||||
Balance, December 31, 2013 |
|
| 35,419,752 |
|
| $ | 3,540 |
|
| $ | 333,776 |
|
|
| 7,022,760 |
|
| $ | (155,801 | ) |
| $ | 692,337 |
|
| $ | 28,360 |
|
| $ | 902,212 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 95,329 |
|
|
| — |
|
|
| 95,329 |
|
Changes in comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain (loss) on investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 23,096 |
|
|
| 23,096 |
|
Change in net non-credit other-than-temporary impairment losses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 89 |
|
|
| 89 |
|
Change in foreign currency translation gain (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,986 | ) |
|
| (4,986 | ) |
Total comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 18,199 |
|
|
| 18,199 |
|
Shares issued(1) |
|
| 165,940 |
|
|
| 16 |
|
|
| (39 | ) |
|
| — |
|
|
| — |
|
|
|
|
|
|
| — |
|
|
| (23 | ) |
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 11,507 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 11,507 |
|
Balance, December 31, 2014 |
|
| 35,585,692 |
|
| $ | 3,556 |
|
| $ | 345,244 |
|
|
| 7,022,760 |
|
| $ | (155,801 | ) |
| $ | 787,666 |
|
| $ | 46,559 |
|
| $ | 1,027,224 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 81,057 |
|
|
| — |
|
|
| 81,057 |
|
Changes in comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gain (loss) on investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (22,389 | ) |
|
| (22,389 | ) |
Change in net non-credit other-than-temporary impairment losses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 56 |
|
|
| 56 |
|
Change in foreign currency translation gain (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (622 | ) |
|
| (622 | ) |
Total comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (22,955 | ) |
|
| (22,955 | ) |
Shares issued(1) |
|
| 298,846 |
|
|
| 30 |
|
|
| (4,205 | ) |
|
| — |
|
|
| — |
|
|
|
|
|
|
| — |
|
|
| (4,175 | ) |
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 14,997 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14,997 |
|
Balance, December 31, 2015 |
|
| 35,884,538 |
|
| $ | 3,586 |
|
| $ | 356,036 |
|
|
| 7,022,760 |
|
| $ | (155,801 | ) |
| $ | 868,723 |
|
| $ | 23,604 |
|
| $ | 1,096,148 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 82,726 |
|
|
| — |
|
|
| 82,726 |
|
Dividends paid |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,930 | ) |
|
| — |
|
|
| (3,930 | ) |
Changes in comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
Change in net unrealized gain (loss) on investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,355 | ) |
|
| (5,355 | ) |
Change in net non-credit other-than-temporary impairment losses |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (50 | ) |
|
| (50 | ) |
Change in foreign currency translation gain (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (9,324 | ) |
|
| (9,324 | ) |
Total comprehensive income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (14,729 | ) |
|
| (14,729 | ) |
Shares issued(1) |
|
| 262,361 |
|
|
| 26 |
|
|
| 323 |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
| — |
|
|
| 349 |
|
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 17,624 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 17,624 |
|
Balance, December 31, 2016 |
|
| 36,146,899 |
|
| $ | 3,612 |
|
| $ | 373,983 |
|
|
| 7,022,760 |
|
| $ | (155,801 | ) |
| $ | 947,519 |
|
| $ | 8,875 |
|
| $ | 1,178,188 |
|
(1) Includes shares issued under the stock plan, to directors and ESPP
We completed a two-for-one stock split on January 20, 2017. All share amounts)data has been retroactively restated on a post-split basis.
Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||
Common Stock | Treasury Stock | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
Balance, December 31, 2011 | 17,467,615 | $ | 1,746 | $ | 322,133 | 3,511,380 | $ | (155,801 | ) | $ | 565,109 | $ | 70,248 | $ | 803,435 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Net income | — | — | — | — | — | 63,762 | — | 63,762 | ||||||||||||||||||||||||
Changes in comprehensive income: | ||||||||||||||||||||||||||||||||
Change in net unrealized gain (loss) on investments | — | — | — | — | — | — | 5,196 | 5,196 | ||||||||||||||||||||||||
Change in net non-credit other- than-temporary impairment losses | — | — | — | — | — | — | 1,106 | 1,106 | ||||||||||||||||||||||||
Change in foreign currency translation gain (loss) | — | — | — | — | — | — | (1,342 | ) | (1,342 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | 4,960 | 4,960 | ||||||||||||||||||||||||
Shares issued under stock plan | 90,431 | 9 | (61 | ) | — | — | — | — | (52 | ) | ||||||||||||||||||||||
Share-based compensation | — | — | 7,380 | — | — | — | — | 7,380 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Balance, December 31, 2012 | 17,558,046 | $ | 1,755 | $ | 329,452 | 3,511,380 | $ | (155,801 | ) | $ | 628,871 | $ | 75,208 | $ | 879,485 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Net income | — | — | — | — | — | 63,466 | — | 63,466 | ||||||||||||||||||||||||
Changes in comprehensive income: | ||||||||||||||||||||||||||||||||
Change in net unrealized gain (loss) on investments | — | — | — | — | — | — | (44,094 | ) | (44,094 | ) | ||||||||||||||||||||||
Change in net non-credit other-than-temporary impairment losses | — | — | — | — | — | — | 320 | 320 | ||||||||||||||||||||||||
Change in foreign currency translation gain (loss) | — | — | — | — | — | — | (3,074 | ) | (3,074 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | (46,848 | ) | (46,848 | ) | ||||||||||||||||||||||
Shares issued under stock plan | 151,830 | 15 | 2,725 | — | — | — | — | 2,740 | ||||||||||||||||||||||||
Share-based compensation | — | — | 3,369 | — | — | — | — | 3,369 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Balance, December 31, 2013 | 17,709,876 | $ | 1,770 | $ | 335,546 | 3,511,380 | $ | (155,801 | ) | $ | 692,337 | $ | 28,360 | $ | 902,212 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Net income | — | — | — | — | — | 95,329 | — | 95,329 | ||||||||||||||||||||||||
Changes in comprehensive income: | ||||||||||||||||||||||||||||||||
Change in net unrealized gain (loss) on investments | — | — | — | — | — | — | 23,096 | 23,096 | ||||||||||||||||||||||||
Change in net non-credit other-than-temporary impairment losses | — | — | — | — | — | — | 89 | 89 | ||||||||||||||||||||||||
Change in foreign currency translation gain (loss) | — | — | — | — | — | — | (4,986 | ) | (4,986 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | 18,199 | 18,199 | ||||||||||||||||||||||||
Shares issued under stock plan | 82,970 | 8 | (31 | ) | — | — | — | — | (23 | ) | ||||||||||||||||||||||
Share-based compensation | — | — | 11,507 | — | — | — | — | 11,507 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Balance, December 31, 2014 | 17,792,846 | $ | 1,778 | $ | 347,022 | 3,511,380 | $ | (155,801 | ) | $ | 787,666 | $ | 46,559 | $ | 1,027,224 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| Years Ended December 31, |
| |||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 82,726 |
|
| $ | 81,057 |
|
| $ | 95,329 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation & amortization |
|
| 5,429 |
|
|
| 5,386 |
|
|
| 4,915 |
|
Share-based compensation |
|
| 17,624 |
|
|
| 14,997 |
|
|
| 11,507 |
|
Deferred income taxes |
|
| (5,755 | ) |
|
| 7,004 |
|
|
| 16,881 |
|
Net realized (gains) losses |
|
| (9,186 | ) |
|
| (8,373 | ) |
|
| (12,812 | ) |
Net other-than-temporary losses recognized in earnings |
|
| 150 |
|
|
| 1,698 |
|
|
| — |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses |
|
| (2,835 | ) |
|
| 43,822 |
|
|
| (42,024 | ) |
Reserves for losses and loss adjustment expenses |
|
| 87,083 |
|
|
| 43,010 |
|
|
| 114,563 |
|
Prepaid reinsurance premiums |
|
| 19,211 |
|
|
| 5,264 |
|
|
| 10,344 |
|
Unearned premiums |
|
| 66,668 |
|
|
| 54,509 |
|
|
| 52,380 |
|
Premiums receivable |
|
| (30,070 | ) |
|
| 65,863 |
|
|
| (17,455 | ) |
Deferred policy acquisition costs |
|
| (27,677 | ) |
|
| (12,531 | ) |
|
| (12,445 | ) |
Accrued investment income |
|
| (1,314 | ) |
|
| (1,210 | ) |
|
| (925 | ) |
Reinsurance balances payable |
|
| 1,568 |
|
|
| (45,124 | ) |
|
| (14,716 | ) |
Current income taxes |
|
| (1,988 | ) |
|
| (8,072 | ) |
|
| (582 | ) |
Other |
|
| 22,593 |
|
|
| (19,676 | ) |
|
| 17,532 |
|
Net cash provided by (used in) operating activities |
| $ | 224,227 |
|
| $ | 227,624 |
|
| $ | 222,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
Redemptions and maturities |
| $ | 275,706 |
|
| $ | 180,876 |
|
| $ | 210,674 |
|
Sales |
|
| 446,666 |
|
|
| 376,522 |
|
|
| 362,136 |
|
Purchases |
|
| (962,419 | ) |
|
| (648,059 | ) |
|
| (864,902 | ) |
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
| 54,798 |
|
|
| 96,405 |
|
|
| 54,900 |
|
Purchases |
|
| (92,329 | ) |
|
| (215,405 | ) |
|
| (83,845 | ) |
Change in payable for securities |
|
| (1,517 | ) |
|
| 1,851 |
|
|
| (7,814 | ) |
Purchase of other invested assets |
|
| (1,960 | ) |
|
| — |
|
|
| — |
|
Net change in short-term investments |
|
| 73,541 |
|
|
| (38,468 | ) |
|
| 117,740 |
|
Purchase of property and equipment |
|
| (3,918 | ) |
|
| (3,577 | ) |
|
| (8,359 | ) |
Net cash provided by (used in) investing activities |
| $ | (211,432 | ) |
| $ | (249,855 | ) |
| $ | (219,470 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds of stock issued from employee stock purchase plan |
|
| 1,840 |
|
|
| 1,352 |
|
|
| 1,067 |
|
Proceeds of stock issued from exercise of stock options |
|
| — |
|
|
| 29 |
|
|
| 153 |
|
Dividends paid |
|
| (3,930 | ) |
|
| — |
|
|
| — |
|
Net cash provided by (used in) financing activities |
| $ | (2,090 | ) |
| $ | 1,381 |
|
| $ | 1,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash |
|
| (15,963 | ) |
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash |
| $ | (5,258 | ) |
| $ | (20,850 | ) |
| $ | 4,242 |
|
Cash at beginning of year |
|
| 69,901 |
|
|
| 90,751 |
|
|
| 86,509 |
|
Cash at end of period |
| $ | 64,643 |
|
| $ | 69,901 |
|
| $ | 90,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash information: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net |
| $ | 34,830 |
|
| $ | 35,447 |
|
| $ | 27,066 |
|
Interest paid |
| $ | 15,238 |
|
| $ | 15,238 |
|
| $ | 15,703 |
|
Issuance of stock to directors |
| $ | 633 |
|
| $ | 563 |
|
| $ | 438 |
|
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Operating activities: | ||||||||||||
Net income | $ | 95,329 | $ | 63,466 | $ | 63,762 | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||
Depreciation & amortization | 4,915 | 4,518 | 5,931 | |||||||||
Deferred income taxes | 16,881 | 4,658 | (11,414 | ) | ||||||||
Net realized (gains) losses | (12,812 | ) | (22,939 | ) | (41,074 | ) | ||||||
Net other-than-temporary losses recognized in earnings | — | 2,393 | 858 | |||||||||
Call premium on redemption of Senior Notes | — | 17,895 | — | |||||||||
Changes in assets and liabilities: | ||||||||||||
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses | (42,024 | ) | 68,599 | (40,185 | ) | |||||||
Reserves for losses and loss adjustment expenses | 114,563 | (51,977 | ) | 14,369 | ||||||||
Prepaid reinsurance premiums | 10,344 | (26,807 | ) | (56,853 | ) | |||||||
Unearned premiums | 52,380 | 72,199 | 109,778 | |||||||||
Premiums receivable | (17,455 | ) | (4,843 | ) | (64,457 | ) | ||||||
Deferred policy acquisition costs | (12,445 | ) | (6,002 | ) | 2,979 | |||||||
Accrued investment income | (925 | ) | (1,279 | ) | 1,905 | |||||||
Reinsurance balances payable | (14,716 | ) | 1,439 | 57,114 | ||||||||
Current income taxes | (582 | ) | (16,432 | ) | 17,523 | |||||||
Other | 29,039 | 31,987 | 36,503 | |||||||||
|
|
|
|
|
| |||||||
Net cash provided by (used in) operating activities | $ | 222,492 | $ | 136,875 | $ | 96,739 | ||||||
|
|
|
|
|
| |||||||
Investing activities: | ||||||||||||
Fixed maturities | ||||||||||||
Redemptions and maturities | $ | 210,674 | $ | 237,627 | $ | 188,282 | ||||||
Sales | 362,136 | 648,335 | 1,319,404 | |||||||||
Purchases | (864,902 | ) | (899,930 | ) | (1,711,080 | ) | ||||||
Equity securities | ||||||||||||
Sales | 54,900 | 72,113 | 39,503 | |||||||||
Purchases | (83,845 | ) | (89,288 | ) | (37,587 | ) | ||||||
Change in payable for securities | (7,814 | ) | (46,414 | ) | 56,543 | |||||||
Net change in short-term investments | 117,740 | (142,214 | ) | (31,568 | ) | |||||||
Purchase of property and equipment | (8,359 | ) | (10,088 | ) | (3,336 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash provided by (used in) investing activities | $ | (219,470 | ) | $ | (229,859 | ) | $ | (179,839 | ) | |||
|
|
|
|
|
| |||||||
Financing activities: | ||||||||||||
Net Proceeds from Debt Offering | — | $ | 263,278 | — | ||||||||
Redemption of 7.0% Senior Notes Due May 1, 2016 | — | (132,437 | ) | — | ||||||||
Proceeds of stock issued from employee stock purchase plan | 1,067 | 821 | 672 | |||||||||
Proceeds of stock issued from exercise of stock options | 153 | 2,495 | 404 | |||||||||
|
|
|
|
|
| |||||||
Net cash provided by (used in) financing activities | $ | 1,220 | $ | 134,157 | $ | 1,076 | ||||||
|
|
|
|
|
| |||||||
Increase (decrease) in cash | 4,242 | 41,173 | (82,024 | ) | ||||||||
Cash at beginning of year | 86,509 | 45,336 | 127,360 | |||||||||
|
|
|
|
|
| |||||||
Cash at end of period | $ | 90,751 | $ | 86,509 | $ | 45,336 | ||||||
|
|
|
|
|
| |||||||
Supplemental cash information: | ||||||||||||
Income taxes paid, net | $ | 27,066 | $ | 41,094 | $ | 19,602 | ||||||
Interest paid | $ | 15,703 | $ | 8,050 | $ | 8,050 | ||||||
Issuance of stock to directors | $ | 438 | $ | 400 | $ | 242 |
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial StatementsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OrganizationNOTE 1. ORGANIZATION & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Consolidated Financial Statements, consisting of the resultsconsolidated financial statements of The Navigators Group, Inc., a Delaware holding company established in 1982, and its subsidiaries arehave been prepared onin conformity with accounting principles generally accepted in the basis of United States (“U.S.”) generally accepted accounting principlesof America (“GAAP” or “U.S. GAAP”). All significant intercompany transactions and balances have been eliminated.eliminated in consolidation. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosuresdisclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported revenues and expenses during the reporting periods. The results of operations for any interim period are not necessarily indicative of results for the full year. The terms “we,” “us,” “our” or “our Company” as used herein are used to mean The Navigators Group, Inc. and its subsidiaries, unless the context otherwise requires. The terms “Parent” or “Parent Company” are used to mean The Navigators Group, Inc. without its subsidiaries. Certain amounts for the prior year have been reclassified to conform towith the current year’speriod presentation. Unless the context requires otherwise, the terms “we,” “us,” “our,” or “our Company” are used to mean The Navigators Group, Inc., a Delaware holding company established in 1982, and its subsidiaries. The term “Parent Company” is used to mean The Navigators Group, Inc. without its subsidiaries.
Our Company isOrganization
We are an international insurance company focusing on specialty products within the overall property and casualty insurance market. Ourwith a long-standing area of specialization isin Marine insurance. Our Property and Casualty (“P&C”) insurance business primarily offers general liability coverage and umbrella & excess liability coverage to commercial enterprises through our U.S. and Int’l Insurance reporting segments. We have also developed niches in Professional Liability insurance, and Property Casualty lines of insurance, such as Primary and Excess casualty coverages offered to commercial enterprises and Assumed Reinsurance.
We classify its business into one Corporate segmentthrough our Directors & Officers (“Corporate”D&O”) and two underwriting segments, the Insurance Companies segment (“Insurance Companies”) and the Lloyd’s Operations segment (“Lloyd’s Operations”) which are separately managed by business line divisions. The Insurance Companies are primarily engaged in underwriting Marine insurance, Primary Casualty insurance with a concentration in contractors’ general liability products, Excess Casualty insurance with a concentration in commercial umbrella products, Assumed Reinsurance, Management Liability insurance and Errors & Omissions (“E&O”) insurance. This segment is comprised ofdivisions. We also provide reinsurance products through our Global Reinsurance (“GlobalRe”) business.
We operate through various wholly-owned subsidiaries, including Navigators Insurance Company (“NIC”), which includes ainclusive of its United Kingdom Branch (“UK”) branch (“UKU.K. Branch”), and Navigators Specialty Insurance Company (“NSIC”), both of which underwrites business on an excessare U.S. insurance companies, and surplus lines basis. All of the business underwritten by NSIC is fully reinsured by NIC pursuant toNavigators Underwriting Agency Ltd. (“NUAL”), a 100% quota share reinsurance agreement.
The Lloyd’s Operations are primarily engaged in underwriting Marine insurance; Energy & Engineering insurance with a concentration in offshore energy products and onshore energy construction products, Assumed Reinsurance, Management Liability insurance and E&O insurance at Lloyd’s of London (“Lloyd’s”) throughunderwriting agency that manages Lloyd’s Syndicate 1221 (“Syndicate 1221”the Syndicate”) in the U.K. and is the underwriting company of Navigators Holdings (U.K.) Ltd. (“NHUK”). The Corporate segment consistsOur Company controls 100% of the Parent Company’s investment income, interest expense and related income tax.Syndicate’s stamp capacity.
Our revenue is primarily comprised of premiums and investment income. We deriveIn May 2016, our premiums predominantlyCompany received authorization from business written by wholly-owned underwriting management companies, Navigators Management Companythe Prudential Regulation Authority (“NMC”PRA”) and the Financial Conduct Authority (“FCA”) for a new U.K. based insurance company, Navigators Management (UK) Ltd.International Insurance Company Ltd (“NMUK”) that manage and service insurance and reinsurance business written by the Insurance Companies. Our products are distributed through multiple channels, utilizing global, national and regional retail and wholesale insurance brokers.
Navigators Underwriting Agency Ltd. (“NUAL”) is a Lloyd’s underwriting agency that manages Syndicate 1221. We control 100% of Syndicate 1221’s stamp capacity through our wholly-owned subsidiary, Navigators Corporate Underwriters Ltd. (“NCUL”NIIC”), which is referred to as a corporate namewholly-owned direct subsidiary of our Parent Company, and has been fully capitalized in compliance with the Lloyd’s market. In addition, we have also established underwriting agencies in Antwerp, Belgium; Stockholm, Sweden; and Copenhagen, Denmark, as well as branchesterms of the appointed representative, Navigators Underwriting Ltd. (“NUL”), inauthorization from the European Economic Area (“EEA”), in Milan, Italy; Rotterdam, The Netherlands; and Paris, France, which underwrite risks pursuant to binding authorities with NUAL into Syndicate 1221. We have also established a presence in Brazil and China through contractual arrangements with local affiliates of Lloyd’s.PRA.
For financial information by segment, refer to Note 3,Segment Information, in the Notes to Consolidated Financial Statements, included herein.
Significant Accounting Policies
Cash
Cash includes cash on hand and demand deposits with banks, excluding such amounts held by the Syndicate 1221 included as Funds at Lloyd’s.Lloyd’s (“FAL”), which are classified as short term investments.
Investments
As of December 31, 20142016 and 2013,2015, all fixed maturity and equity securities held by our Company were carried at fair value and classified as available-for-sale. Available-for-sale securities are debt and equity securities not classified as either held-to-maturity securities or trading securities and are reported at fair value, with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income (“AOCI”) as a separate component of stockholders’ equity. Fixed maturity securities include bonds, mortgage-backed and asset-backed securities. Equity securities consist of common stock, exchange traded funds and preferred stock.
Other invested assets consist of investments our Company made in certain strategic companies which are accounted for using the equity method of accounting. In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on our Company’s proportionate share of the net income or loss of the companies. Changes in the carrying value of such investments are recorded in Other income. In applying the equity method, we use the most recently available financial information provided by the companies which is generally three months prior to the end of the reporting period.
Short-term investments are carried at fair value. Short-term investments mature within one year from the purchase date.
All prices for our fixed maturities, equity securities and short-term investments valuedare classified as Level 1, Level 2 or Level 3 inunder the fair value hierarchy, as defined in the Financial AccountsAccounting Standards Board (“FASB”) Accounting Standards Codification 820 (“ASC 820”), Fair Value Measurements, are received from independent pricing services utilized by one of our outside investment managers whom we employ to assist us with investment accounting services. This manager utilizes a pricing committee, which approves the use of one or more independent pricing service vendors. The pricing committee consists of five or more members of the investment management firm, one from senior management and one from the accounting group with the remainder from the asset class specialists and client strategists. The pricing source of each security is determined in accordance with the pricing source procedures approved by the pricing committee. The investment manager uses supporting documentation received from the independent pricing service vendor detailing the inputs, models and processes used in the independent pricing service vendors’ evaluation process to determine the appropriate fair value hierarchy. Any pricing where the input is believed to be unobservable is deemed to be a Level 3 price. Management has reviewed this process by which the manager determines the prices and has obtained alternative pricing to validate a sample of the prices and assess their reasonableness..
Premiums and discounts on fixed maturity securities are amortized into interest income over the life of the security underusing the interest method. For mortgage-backed and asset-backed securities, anticipated prepayments and expected maturities are utilized in applying the interest rate method. An effective yield is calculated based on projected principal cash flows at the time of original purchase. The effective yield is used to amortize the purchase price of the security over the security’s expected life. Book values are adjusted to reflect the amortization of premium or accretion of discount on a monthly basis. The projected principal cash flows are based on certain prepayment assumptions, which are generated using a prepayment model. The prepayment model uses a number of factors to estimate prepayment activity including the current levels of interest rates (refinancing incentive), time of year (seasonality), economic activity (including housing turnover) and term and age of the underlying collateral (burnout, seasoning). Prepayment assumptions associated with the mortgage-backed and asset-backed securities are reviewed on a periodic basis. When changes in prepayment assumptions are deemed necessary as the result of actual prepayments differing from anticipated prepayments, securities are revalued based upon the new prepayment assumptions utilizing the retrospective adjustment method, whereby the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The investment in such securities is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the security. Such adjustments, if any, are included in netNet investment income for the current period being reported.period.
Realized gains and losses on sales of investments are recognized when the related trades are executed and are determined on the basis of the specific identification method.
Impairment of Invested Assets
Management regularly reviews our fixed maturity and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of securities.
For fixed maturity securities, we consider our intent to sell a security and whether it is more likely than not that, we will be required to sell a security before
Our Company reviews the anticipated recovery as partmagnitude of the process of evaluating whether a security’s unrealized loss represents an other-than-temporary decline. For fixed maturity securities that have a fair value below compared to its cost/amortized cost and the length of time that we intendthe security has been impaired to sell or for which it is more likely than not that we would be required to sell,determine if an other than temporary impairment (“OTTI”)unrealized loss is recognized in earnings by writing suchother-than-temporary. If warranted as a result of conditions relating to a particular security, down to fair value. For fixed maturity securities we do not intend to sell or for which it is more likely than not our Company would not be requiredwill also review securities with declines in fair value resulting from a headline news event involving the issuer, a headline news event involving the asset class, the advice of our external asset managers, or economic events that may impact the issuer to sell,determine if an unrealized loss is other-than-temporary. The depth of analysis performed is dependent upon the nature and magnitude of the indicators of other-than-temporary impairment present in regards to each impaired security.
For Equity securities, our Company performs a declinefundamental analysis of the issuer, including an evaluation of the mean analysts’ target price, to assess the likelihood of recovery of our cost basis in value below amortized cost is only recognized to the extentsecurity. Management also assesses the present valuelikelihood of future cash flows, expecteddividends and increases to be collected is less thandividends, all of which affect the amortized cost of the security. Such shortfall in the present value of future cash flows is considered the credit losssecurities eligible for our equity strategy and is recognized as an OTTI loss in earnings, with the non-credit portion of the impairment (i.e. the difference between the present value of future cash flows and fair value of the security) recognized as OTTI losses in other comprehensive income (“OCI”).
In evaluating OTTI of equity securities, we considertherefore our intent to hold the securities as part ofsecurity. If an equity security is deemed to be other-than temporarily-impaired, the process of evaluating whether a decline incost is written down to fair value below cost represents an other than temporary decline in value. For equity securities in an unrealizedwith the loss position that we do not intent to hold or that we do not expect to recover their value within a reasonable period of time, a net OTTI loss is recognized in earnings by writing such security down toearnings.
For Fixed maturities, our Company assesses the fair value.
Syndicate 1221
Syndicate 1221 reports the amount of premiums, claims, and expenses recorded in an underwriting account for a particular year over a three year period. Traditionally, three years have been necessary to report substantially all premiums associated with an underwriting year and to report most of the related claims, although claims may remain unsettled after the underwriting year is closed. Syndicate 1221 typically closes an underwriting year by reinsuring outstanding claims in that underwriting year with the next underwriting year. Only profits from closed underwriting years of account are distributed to NCUL. Profits from open underwriting years of account are not available and therefore not distributed to NCUL until the end of the three year period.
Our Company’s financial statements include all of the assets, liabilities, revenues and expenses of Syndicate1221. Adjustments are recorded to recognize underwriting results as incurred in the specific year and not over a three year period. Syndicate 1221 is not a separate legal entity. Refer to Note 10,Lloyd’s Syndicate 1221, for additional information.
Foreign Currency Remeasurement and Translation
The functional currency in each of our operations is generally the currency of the local operating environment, except for our Lloyd’s Operations which is the U.S. dollar. Transactions in currencies other than an operation’s functional currency are remeasured into the functional currency and the resulting foreign exchange gains and losses are reflected in net Other Income (Expense) in the Consolidated Statements of Income. 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 AOCI. Statement of income amounts expressed in functional currencies are translated using average exchange rates.
During the first quarter, Syndicate 1221 revised its foreign exchange accounting methodology from reporting its financial position and results using three functional currencies (GBP, USD and CAD) to one functional currency (USD). The USD was chosen as the single functional currency as the majority of the Syndicate’s insurance business has been and continues to be transacted in USD. This cumulative change in re-measurement has resulted in an immaterial correction of $10.0 million ($6.6 million, after-tax) reducing Accumulated Other Comprehensive Income in the consolidated balance sheet, offset by a gain in Other Income in the consolidated statement of income. The impact of the correction is not material to the previously issued annual financial statements for 2013 and 2012.
Premium Revenues
Written premium is recorded based on the insurance policies that have been reported to us and the policies that have been written by agents but not yet reported to us. We estimate the amount of written premium not yet reported based on judgments relative to current and historical trends of the business being written. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results. An unearned premium reserve is established to reflect the unexpired portionunderlying fundamentals of each policy at the financial reporting date.
Substantially all of our business is placed through agents and brokers. We record estimates for both unreported direct and assumed premiums. 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 or over the period of risk if the period of risk differs significantly from the contract period.
A portion of our premium is estimated for unreported premium, mostly for the Marine business written by our U.K. Branch and Lloyd’s Operations as well as the Accident & Health (“A&H”) and Latin American & Caribbean Property Casualty and Surety Reinsurance business written by NavRe. Such premium estimates are generally based on submission data received from brokers and agents and recorded when the insurance policy or reinsurance contract is written or bound. 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.
Reinsurance Ceded
In the normal course of business, reinsurance is purchased by us from insurers or reinsurers to reduce the amount of loss arising from claims. In order to determine the proper accounting for the reinsurance, management analyzes the reinsurance agreements to determine whether the reinsurance should be classified as prospective or retroactive based upon the terms of the reinsurance agreement and whether the reinsurer has assumed significant insurance risk to the extent that the reinsurer may realize a significant loss from the transaction.
Prospective reinsurance is reinsurance in which an assuming company agrees to reimburse the ceding company for losses that may be incurred as a result of future insurable events covered under contracts subject to the reinsurance. Retroactive reinsurance is reinsurance in which an assuming company agrees to reimburse a ceding company for liabilities incurred as a result of past insurable events covered under contracts subject to the reinsurance.
Ceded reinsurance premiums and any related ceding commission and ceded losses are reflected as reductions of the respective income or expense accounts over the terms of the reinsurance contracts. Prepaid reinsurance premiums represent the portion of premiums ceded to reinsurers applicable to the unexpired terms of the reinsurance contracts in force. Reinsurance reinstatement premiums are recognized in the same period as the loss event that gave rise to the reinstatement premiums. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Unearned premiums ceded and estimates of amounts recoverable from reinsurers on paid and unpaid losses are reflected as assets. Provisions are made for estimated unrecoverable reinsurance.
Deferred Policy Acquisition Costs
Costs of acquiring business are deferred and amortized ratably over the period that the related premiums are recognized as revenue. Such costs (e.g., commission expense, other underwriting expenses and premium taxes) are limited to the incremental direct costs related to the successful acquisition of new or renewal business. The method of computing deferred policy acquisition costs limits the deferral to their estimated net realizable value based on the related unearned premiums and takes into account anticipated losses and loss adjustment expenses, commission expense and operating expenses based on historical and current experience as well as anticipated investment income.
Reserves for Losses and Loss Adjustment Expenses
Unpaid losses and loss adjustment expenses are determined on an individual basis for claims reported on direct business for insureds, from reports received from ceding insurers for insurance assumed from such insurers and on estimates based on Company and industry experience for incurred but not reported (“IBNR”) claims and loss adjustment expenses. Indicated IBNR loss reserves are calculated by our 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. The provision for unpaid losses and loss adjustment expenses has been established to cover the estimated unpaid cost of claims incurred. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results. Management believes that the liability it has recognized for unpaid losses and loss adjustment expenses is a reasonable estimate of the ultimate unpaid claims incurred, however, such provisions are necessarily based on estimates and, accordingly, no representation is made that the ultimate liability will not differ materially from the amounts recorded in the accompanying consolidated financial statements. Losses and loss adjustment expenses are recorded on an undiscounted basis.
Earnings per Share
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the basic earnings per share adjusted for the potential dilution that would occur if all issued stock options were exercised and all stock grants were fully vested.
Depreciation and Amortization
Depreciation of furniture and fixtures, electronic data processing equipment and computer software is provided over the estimated useful lives of the respective assets, ranging from three to seven years, using the straight-line method. Amortization of leasehold improvements is provided over the shorter of the useful lives of those improvements or the contractual terms of the leases using the straight-line method.
Goodwill and Other Intangible Assets
Goodwill represents the excess-of-cost of acquiring a business enterprise over the fair value of the net assets acquired. Our Company has also recorded indefinite lived intangible assets related to the acquisition of the remaining non-controlled stamp capacity of Lloyd’s Syndicate 1221. Goodwill and indefinite lived intangible assets are reported at carrying value and are tested for impairment at least annually, and when permitted by the applicable accounting guidance, qualitative factors are assessed to determine whether it is necessary to calculate an asset’s fair value when testing an asset with an indefinite life for impairment. Goodwill and indefinite lived intangible assets are considered impaired if the estimated fair value is less than its carrying value and any impairment loss is measured as the difference between the implied fair value and the carrying value. This Company did not recognize an impairment on goodwill or the indefinite lived intangible assets for any of the years ended December 31, 2014, 2013 and 2012.
As of December 31, 2014, the carrying value of goodwill and indefinite lived intangible assets was $7.0 million, consisting of $2.5 million and $2.4 million of goodwill assigned to NMC and our Lloyd’s Operations, respectively, and $2.1 million of indefinite lived intangible assets assigned to our Lloyd’s Operations. As of December 31, 2013, the carrying value of goodwill and indefinite lived intangible assets was $7.2 million, consisting of $2.5 million and $2.4 million of goodwill assigned to NMC and our Lloyd’s Operations, respectively, and $2.3 million of indefinite lived intangible assets assigned to our Lloyd’s Operations. Changes in the carrying value of the goodwill and indefinite lived intangible assets are due to fluctuations in currency exchange rates between the U.S. dollar and the British pound.
Income Taxes
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. These reviews include, among other factors, the nature and amount of the taxable income and expense items, the expected timing of when assets will be used or liabilities will be required to be reported, as well as the reliability of historical profitability of businesses expected to provide future earnings. After review, if management determines that the realization of the tax asset does not meet the more likely than not criterion an offsetting valuation allowance is recorded, which reduces net earnings and the deferred tax asset in that period. Additional information regarding our deferred tax assets can be found in Note 7,Income Taxes, in the Notes to Consolidated Financial Statements, included herein.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The accounting estimates that are viewed by management as critical are those in connection with reserves for losses and loss adjustment expenses, reinsurance recoverables, written and unearned premiums, the recoverability of deferred tax assets, and impairment of invested assets.
The following is a reconciliation of the basic and diluted EPS computations for the years ended December 31, 2014, 2013 and 2012:
Year Ended December 31, | ||||||||||||
In thousands, except share and per share amounts | 2014 | 2013 | 2012 | |||||||||
Net income | $ | 95,329 | $ | 63,466 | $ | 63,762 | ||||||
Basic weighted average shares | 14,259,768 | 14,133,925 | 14,052,311 | |||||||||
Effect of common stock equivalents: | ||||||||||||
Assumed exercise of stock options and vesting of stock grants | 386,601 | 211,628 | 275,509 | |||||||||
|
|
|
|
|
| |||||||
Diluted weighted average shares | 14,646,369 | 14,345,553 | 14,327,820 | |||||||||
Net income per common share: | ||||||||||||
Basic | $ | 6.69 | $ | 4.49 | $ | 4.54 | ||||||
|
|
|
|
|
| |||||||
Diluted | $ | 6.51 | $ | 4.42 | $ | 4.45 | ||||||
|
|
|
|
|
|
We classify our business into one corporate segment and two underwriting segments, Insurance Companies and Lloyd’s Operations. Management takes into consideration a wide range of factors in planning the business strategy of the Company and evaluating the results of its operations. The performance of each underwriting segment is based on their underwriting and GAAP results. Underwriting results are measured based on underwriting profit or loss and the related combined ratio, which are both non-GAAP measures of underwriting profitability. 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 or expense. The combined ratio is derived by dividing the sum of net losses and LAE, commission expenses, other operating expenses and other underwriting (expense) by net earned premiums. A combined ratio of less than 100% indicates an underwriting profit and greater than 100% indicates an underwriting loss. Each segment maintains its own investments on which it earns income and realizes capital gains or losses. Each segment’s underwriting performance is evaluated separately from the performance of its investment portfolio. The Corporate segment’s results consist of the Parent Company’s investment income, interest expense and related income taxes.
Access to capital also has a significant impact on management’s outlook for the operations. The Insurance Companies’ operations and ability to grow their business and take advantage of market opportunities are constrained by regulatory capital requirements and rating agency assessments of capital adequacy. Similarly, the ability to grow the Lloyd’s Operations is subject to capital and operating requirements of the Lloyd’s and UK regulatory authorities.
The accounting policies used to prepare the segment reporting data for the Company’s segments are the same as those described in theSummary of Significant Accounting Policies in Footnote 1.
Financial data by segment for the years ended December 31, 2014, 2013, and 2012 were as follows:
Year Ended December 31, 2014 | ||||||||||||||||
In thousands | Insurance Companies | Lloyd’s Operations | Corporate(1) | Total | ||||||||||||
Gross written premiums | $ | 1,045,454 | $ | 386,899 | $ | — | $ | 1,432,353 | ||||||||
Net written premiums | 752,773 | 247,365 | — | 1,000,138 | ||||||||||||
Net earned premiums | 704,574 | 231,321 | — | 935,895 | ||||||||||||
Net losses and loss adjustment expenses | (434,396 | ) | (110,833 | ) | — | (545,229 | ) | |||||||||
Commission expenses | (85,137 | ) | (42,558 | ) | 2,167 | (125,528 | ) | |||||||||
Other operating expenses | (138,675 | ) | (58,150 | ) | — | (196,825 | ) | |||||||||
Other underwriting income (expense) | 2,727 | 35 | (2,167 | ) | 595 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Underwriting profit (loss) | $ | 49,093 | $ | 19,815 | $ | — | $ | 68,908 | ||||||||
Net investment income | 56,714 | 7,378 | 76 | 64,168 | ||||||||||||
Net realized gains (losses) | 12,715 | 97 | — | 12,812 | ||||||||||||
Call premium on Senior Notes | — | — | — | — | ||||||||||||
Interest expense | — | — | (15,413 | ) | (15,413 | ) | ||||||||||
Other income (expense) | (2,182 | ) | 12,243 | — | 10,061 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Income (loss) before income taxes | $ | 116,340 | $ | 39,533 | $ | (15,337 | ) | $ | 140,536 | |||||||
Income tax expense (benefit) | 36,609 | 13,885 | (5,287 | ) | 45,207 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) | $ | 79,731 | $ | 25,648 | $ | (10,050 | ) | $ | 95,329 | |||||||
|
|
|
|
|
|
|
| |||||||||
Identifiable assets | $ | 3,344,084 | $ | 957,795 | $ | 162,297 | $ | 4,464,176 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Losses and loss adjustment expenses ratio | 61.7 | % | 47.9 | % | 58.3 | % | ||||||||||
Commission expense ratio | 12.1 | % | 18.4 | % | 13.4 | % | ||||||||||
Other operating expense ratio(2) | 19.2 | % | 25.1 | % | 20.9 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Combined ratio | 93.0 | % | 91.4 | % | 92.6 | % | ||||||||||
|
|
|
|
|
|
|
|
(1) - Includes Corporate segment intercompany eliminations.
(2) - Includes Other operating expenses and Other underwriting income (expenses).
In thousands Gross written premiums Net written premiums Net earned premiums Net losses and loss adjustment expenses Commission expenses Other operating expenses Other income (expense) Underwriting profit (loss) Net investment income Net realized gains (losses) Call premium on Senior Notes Interest expense Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Identifiable assets Losses and loss adjustment expenses ratio Commission expense ratio Other operating expense ratio(2) Combined ratio Year Ended December 31, 2013 Insurance
Companies Lloyd’s
Operations Corporate(1) Total $ 1,002,275 $ 368,242 $ — $ 1,370,517 680,008 207,914 — 887,922 639,338 202,601 — 841,939 (415,413 ) (103,548 ) — (518,961 ) (81,132 ) (34,710 ) 2,348 (113,494 ) (119,920 ) (44,514 ) — (164,434 ) 2,764 (1,588 ) (2,348 ) (1,172 ) $ 25,637 $ 18,241 $ — $ 43,878 49,083 7,160 8 56,251 20,600 (58 ) 4 20,546 — — (17,895 ) (17,895 ) — — (10,507 ) (10,507 ) $ 95,320 $ 25,343 $ (28,390 ) $ 92,273 29,965 8,728 (9,886 ) 28,807 $ 65,355 $ 16,615 $ (18,504 ) $ 63,466 $ 3,077,437 $ 930,567 $ 161,448 $ 4,169,452 65.0 % 51.1 % 61.6 % 12.7 % 17.1 % 13.5 % 18.3 % 22.8 % 19.7 % 96.0 % 91.0 % 94.8 %
(1) - Includes Corporate segment intercompany eliminations.
(2) - Includes Other operating expenses and Other income.
In thousands Gross written premiums Net written premiums Net earned premiums Net losses and loss adjustment expenses Commission expenses Other operating expenses Other income (expense) Underwriting profit (loss) Net investment income Net realized gains (losses) Interest expense Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Identifiable assets Losses and loss adjustment expenses ratio Commission expense ratio Other operating expense ratio(2) Combined ratio Year Ended December 31, 2012 Insurance
Companies Lloyd’s
Operations Corporate(1) Total $ 921,325 $ 365,140 $ — $ 1,286,465 622,956 210,699 — 833,655 571,439 210,525 — 781,964 (417,082 ) (80,351 ) — (497,433 ) (81,370 ) (42,449 ) 2,349 (121,470 ) (113,625 ) (45,454 ) — (159,079 ) 3,790 47 (2,349 ) 1,488 $ (36,848 ) $ 42,318 $ — $ 5,470 46,549 7,551 148 54,248 36,468 3,555 193 40,216 — — (8,198 ) (8,198 ) $ 46,169 $ 53,424 $ (7,857 ) $ 91,736 12,686 18,620 (3,332 ) 27,974 $ 33,483 $ 34,804 $ (4,525 ) $ 63,762 $ 3,036,489 $ 928,448 $ 42,733 $ 4,007,670 73.0 % 38.2 % 63.6 % 14.2 % 20.2 % 15.5 % 19.2 % 21.5 % 20.2 % 106.4 % 79.9 % 99.3 %
(1) - Includes Corporate segment intercompany eliminations.
(2) - Includes Other operating expenses and Other income.
The following tables provide additional financial data by segment for the years ended December 31, 2014, 2013 and 2012:
Year Ended December 31, 2014 | ||||||||||||
In thousands | Insurance Companies | Lloyd’s Operations | Total | |||||||||
Gross written premiums: | ||||||||||||
Marine | $ | 177,363 | $ | 188,107 | $ | 365,470 | ||||||
Property casualty | 755,059 | 126,016 | 881,075 | |||||||||
Professional liability | 113,032 | 72,776 | 185,808 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 1,045,454 | $ | 386,899 | $ | 1,432,353 | ||||||
|
|
|
|
|
| |||||||
Net written premiums: | ||||||||||||
Marine | $ | 123,617 | $ | 144,327 | $ | 267,944 | ||||||
Property casualty | 554,844 | 55,917 | 610,761 | |||||||||
Professional liability | 74,312 | 47,121 | 121,433 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 752,773 | $ | 247,365 | $ | 1,000,138 | ||||||
|
|
|
|
|
| |||||||
Net earned premiums: | ||||||||||||
Marine | $ | 123,203 | $ | 141,471 | $ | 264,674 | ||||||
Property casualty | 496,209 | 51,338 | 547,547 | |||||||||
Professional liability | 85,162 | 38,512 | 123,674 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 704,574 | $ | 231,321 | $ | 935,895 | ||||||
|
|
|
|
|
|
Year Ended December 31, 2013 | ||||||||||||
In thousands | Insurance Companies | Lloyd’s Operations | Total | |||||||||
Gross written premiums: | ||||||||||||
Marine | $ | 171,822 | $ | 181,046 | $ | 352,868 | ||||||
Property casualty | 700,087 | 129,522 | 829,609 | |||||||||
Professional liability | 130,366 | 57,674 | 188,040 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 1,002,275 | $ | 368,242 | $ | 1,370,517 | ||||||
|
|
|
|
|
| |||||||
Net written premiums: | ||||||||||||
Marine | $ | 119,837 | $ | 134,627 | $ | 254,464 | ||||||
Property casualty | 462,942 | 42,334 | 505,276 | |||||||||
Professional liability | 97,229 | 30,953 | 128,182 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 680,008 | $ | 207,914 | $ | 887,922 | ||||||
|
|
|
|
|
| |||||||
Net earned premiums: | ||||||||||||
Marine | $ | 129,276 | $ | 138,690 | $ | 267,966 | ||||||
Property casualty | 409,480 | 37,722 | 447,202 | |||||||||
Professional liability | 100,582 | 26,189 | 126,771 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 639,338 | $ | 202,601 | $ | 841,939 | ||||||
|
|
|
|
|
|
In thousands Gross written premiums: Marine Property casualty Professional liability Total Net written premiums: Marine Property casualty Professional liability Total Net earned premiums: Marine Property casualty Professional liability Total Year Ended December 31, 2012 Insurance
Companies Lloyd’s
Operations Total $ 200,095 $ 194,423 $ 394,518 590,741 127,028 717,769 130,489 43,689 174,178 $ 921,325 $ 365,140 $ 1,286,465 $ 133,210 $ 143,600 $ 276,810 390,168 43,824 433,992 99,578 23,275 122,853 $ 622,956 $ 210,699 $ 833,655 $ 142,181 $ 136,898 $ 279,079 332,782 52,951 385,733 96,476 20,676 117,152 $ 571,439 $ 210,525 $ 781,964
The Insurance Companies net earned premiums include $37.7 million, $44.6 million and $63.9 million of net earned premiums from the U.K. Branch for 2014, 2013 and 2012, respectively.
The following tables set forth our Company’s cash and investments as of December 31, 2014 and 2013. The tables below include OTTI securities recognized within AOCI.
December 31, 2014 | ||||||||||||||||
In thousands | Fair Value | Gross Unrealized Gains | Gross Unrealized Losses | Amortized Cost | ||||||||||||
Fixed maturities: | ||||||||||||||||
U.S. Treasury bonds, agency bonds and foreign government bonds | $ | 397,923 | $ | 3,431 | $ | (5,965 | ) | $ | 400,457 | |||||||
States, municipalities and political subdivisions | 541,007 | 19,204 | (558 | ) | 522,361 | |||||||||||
Mortgage-backed and asset-backed securities: | ||||||||||||||||
Agency mortgage-backed securities | 364,622 | 8,476 | (998 | ) | 357,144 | |||||||||||
Residential mortgage obligations | 34,087 | 1,153 | (138 | ) | 33,072 | |||||||||||
Asset-backed securities | 206,413 | 380 | (964 | ) | 206,997 | |||||||||||
Commercial mortgage-backed securities | 206,318 | 6,630 | (98 | ) | 199,786 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Subtotal | $ | 811,440 | $ | 16,639 | $ | (2,198 | ) | $ | 796,999 | |||||||
Corporate bonds | 615,564 | 13,048 | (1,626 | ) | 604,142 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed maturities | $ | 2,365,934 | $ | 52,322 | $ | (10,347 | ) | $ | 2,323,959 | |||||||
Equity securities - common stocks | 127,183 | 28,520 | (1,254 | ) | 99,917 | |||||||||||
Equity securities - preferred stocks | 57,112 | 2,236 | (50 | ) | 54,926 | |||||||||||
Short-term investments | 179,506 | — | (21 | ) | 179,527 | |||||||||||
Cash | 90,751 | — | — | 90,751 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,820,486 | $ | 83,078 | $ | (11,672 | ) | $ | 2,749,080 | |||||||
|
|
|
|
|
|
|
|
December 31, 2013 | ||||||||||||||||
In thousands | Fair Value | Gross Unrealized Gains | Gross Unrealized Losses | Amortized Cost | ||||||||||||
Fixed maturities: | ||||||||||||||||
U.S. Treasury bonds, agency bonds and foreign government bonds | $ | 441,685 | $ | 2,854 | $ | (8,855 | ) | $ | 447,686 | |||||||
States, municipalities and political subdivisions | 460,422 | 9,298 | (13,651 | ) | 464,775 | |||||||||||
Mortgage-backed and asset-backed securities: | ||||||||||||||||
Agency mortgage-backed securities | 301,274 | 6,779 | (6,016 | ) | 300,511 | |||||||||||
Residential mortgage obligations | 41,755 | 1,212 | (161 | ) | 40,704 | |||||||||||
Asset-backed securities | 125,133 | 653 | (480 | ) | 124,960 | |||||||||||
Commercial mortgage-backed securities | 172,750 | 7,656 | (374 | ) | 165,468 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Subtotal | $ | 640,912 | $ | 16,300 | $ | (7,031 | ) | $ | 631,643 | |||||||
Corporate bonds | 504,854 | 15,402 | (3,443 | ) | 492,895 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed maturities | $ | 2,047,873 | $ | 43,854 | $ | (32,980 | ) | $ | 2,036,999 | |||||||
Equity securities - common stocks | 143,954 | 25,700 | (550 | ) | 118,804 | |||||||||||
Short-term investments | 296,250 | — | — | 296,250 | ||||||||||||
Cash | 86,509 | — | — | 86,509 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,574,586 | $ | 69,554 | $ | (33,530 | ) | $ | 2,538,562 | |||||||
|
|
|
|
|
|
|
|
As of December 31, 2014 and 2013, fixed maturities for which non-credit OTTI was previously recognized and included in accumulated other comprehensive income are now in an unrealized gains position of $0.7 million and $0.5 million, respectively.
The fair value of our Company’s investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, equity prices, foreign exchange rates and credit spreads. Our Company does not have the intent to sell nor is it more likely than not that it will have to sell fixed maturities in unrealized loss positions that are not other-than-temporarily impaired before recovery. For structured securities, default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. Our Company does not intend to sell any of these securities and it is more likely than not that, our Company will not be required to sell these securities before the recovery of the amortized cost basis. For equity securities, our Company also considers its intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. Our Company may realize investment losses to the extent its liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate, liquidity or credit spread environments. Significant changes in the factors our Company considers when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the consolidated financial statements.
The contractual maturity dates for fixed maturities categorized by the number of years until maturity as of December 31, 2014 are shown in the following table:
December 31, 2014 | ||||||||
In thousands | Fair Value | Amortized Cost | ||||||
Due in one year or less | $ | 63,670 | $ | 65,643 | ||||
Due after one year through five years | 765,084 | 758,064 | ||||||
Due after five years through ten years | 356,929 | 348,195 | ||||||
Due after ten years | 368,811 | 355,058 | ||||||
Mortgage- and asset-backed securities | 811,440 | 796,999 | ||||||
|
|
|
| |||||
Total | $ | 2,365,934 | $ | 2,323,959 | ||||
|
|
|
|
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 mortgage-backed and asset-backed securities are estimated to have an effective maturity of approximately 4.4 years.
The following table shows the amount and percentage of our Company’s fixed maturities as of December 31, 2014 by Standard & Poor’s (“S&P”) credit rating or, if an S&P rating is not available, the equivalent Moody’s Investor Services (“Moody’s”) rating. The table includes fixed maturities at fair value, and the total rating is the weighted average quality rating.
December 31, 2014 | ||||||||||
In thousands | Rating | Fair Value | Percent of Total | |||||||
Rating description: | ||||||||||
Extremely strong | AAA | $ | 462,603 | 20 | % | |||||
Very strong | AA | 1,090,505 | 45 | % | ||||||
Strong | A | 612,131 | 26 | % | ||||||
Adequate | BBB | 185,372 | 8 | % | ||||||
Speculative | BB & Below | 14,852 | 1 | % | ||||||
Not rated | NR | 471 | 0 | % | ||||||
|
|
|
| |||||||
Total | AA | $ | 2,365,934 | 100 | % | |||||
|
|
|
|
The following table summarizes all securities in a gross unrealized loss position as of December 31, 2014 and 2013, showing the aggregate fair value and gross unrealized loss by the length of time those securities had continuously been in a gross unrealized loss position as well as the relevant number of securities.
December 31, 2014 | December 31, 2013 | |||||||||||||||||||||||
In thousands, except # of securities | Number of Securities | Fair Value | Gross Unrealized Loss | Number of Securities | Fair Value | Gross Unrealized Loss | ||||||||||||||||||
Fixed maturities: | ||||||||||||||||||||||||
U.S. Treasury bonds, agency bonds, and foreign government bonds | ||||||||||||||||||||||||
0-6 months | 19 | $ | 87,915 | $ | 1,061 | 27 | $ | 136,360 | $ | 1,096 | ||||||||||||||
7-12 months | — | — | — | 26 | 149,370 | 7,759 | ||||||||||||||||||
> 12 months | 31 | 117,683 | 4,904 | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 50 | $ | 205,598 | $ | 5,965 | 53 | $ | 285,730 | $ | 8,855 | ||||||||||||||
States, municipalities and political subdivisions | ||||||||||||||||||||||||
0-6 months | 13 | $ | 14,242 | $ | 41 | 28 | $ | 40,132 | $ | 297 | ||||||||||||||
7-12 months | 2 | 2,107 | 19 | 104 | 205,152 | 12,100 | ||||||||||||||||||
> 12 months | 17 | 37,340 | 498 | 6 | 12,357 | 1,254 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 32 | $ | 53,689 | $ | 558 | 138 | $ | 257,641 | $ | 13,651 | ||||||||||||||
Agency mortgage-backed securities | ||||||||||||||||||||||||
0-6 months | 4 | $ | 14,743 | $ | 52 | 39 | $ | 39,458 | $ | 434 | ||||||||||||||
7-12 months | 2 | 4,138 | 28 | 64 | 77,860 | 3,768 | ||||||||||||||||||
> 12 months | 46 | 58,301 | 918 | 9 | 22,784 | 1,814 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 52 | $ | 77,182 | $ | 998 | 112 | $ | 140,102 | $ | 6,016 | ||||||||||||||
Residential mortgage obligations | ||||||||||||||||||||||||
0-6 months | 6 | $ | 4,966 | $ | 43 | 3 | $ | 431 | $ | 2 | ||||||||||||||
7-12 months | 2 | 659 | 7 | 7 | 950 | 29 | ||||||||||||||||||
> 12 months | 14 | 1,728 | 88 | 15 | 2,467 | 130 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 22 | $ | 7,353 | $ | 138 | 25 | $ | 3,848 | $ | 161 | ||||||||||||||
Asset-backed securities | ||||||||||||||||||||||||
0-6 months | 19 | $ | 96,123 | $ | 354 | 14 | $ | 75,887 | $ | 479 | ||||||||||||||
7-12 months | 3 | 14,152 | 185 | 1 | 203 | 1 | ||||||||||||||||||
> 12 months | 3 | 34,530 | 425 | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 25 | $ | 144,805 | $ | 964 | 15 | $ | 76,090 | $ | 480 | ||||||||||||||
Commercial mortgage-backed securities | ||||||||||||||||||||||||
0-6 months | 4 | $ | 18,665 | $ | 65 | 4 | $ | 6,712 | $ | 31 | ||||||||||||||
7-12 months | 1 | 1,076 | 6 | 2 | 15,098 | 322 | ||||||||||||||||||
> 12 months | 3 | 1,391 | 27 | 4 | 774 | 21 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 8 | $ | 21,132 | $ | 98 | 10 | $ | 22,584 | $ | 374 | ||||||||||||||
Corporate bonds | ||||||||||||||||||||||||
0-6 months | 52 | $ | 179,390 | $ | 797 | 34 | $ | 93,591 | $ | 717 | ||||||||||||||
7-12 months | 4 | 11,071 | 74 | 18 | 55,021 | 2,726 | ||||||||||||||||||
> 12 months | 14 | 31,126 | 755 | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Subtotal | 70 | $ | 221,587 | $ | 1,626 | 52 | $ | 148,612 | $ | 3,443 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total fixed maturities | 259 | $ | 731,346 | $ | 10,347 | 405 | $ | 934,607 | $ | 32,980 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Equity securities - common stocks | ||||||||||||||||||||||||
0-6 months | 6 | $ | 9,152 | $ | 761 | 5 | $ | 7,387 | $ | 422 | ||||||||||||||
7-12 months | 1 | 3,887 | 486 | 2 | 3,538 | 128 | ||||||||||||||||||
> 12 months | 1 | 238 | 7 | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
8 | $ | 13,277 | $ | 1,254 | 7 | $ | 10,925 | $ | 550 | |||||||||||||||
Equity securities - preferred stocks | ||||||||||||||||||||||||
0-6 months | 7 | $ | 6,651 | $ | 50 | — | $ | — | $ | — | ||||||||||||||
7-12 months | — | — | — | — | — | — | ||||||||||||||||||
> 12 months | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
7 | $ | 6,651 | $ | 50 | — | $ | — | $ | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total equity securities | 15 | $ | 19,928 | $ | 1,304 | 7 | $ | 10,925 | $ | 550 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2014 and 2013, the largest unrealized loss by a non-government backed issuer in the investment portfolio was $0.5 million and $1.1 million, respectively.
Our Company analyzes impaired securities quarterly to determine if any are other-than-temporary. The above securities with unrealized losses have been determined to be temporarily impaired based on our evaluation.
For fixed maturities, when assessing whetherthere is a change in the amount or timing of expected cash flows. Management compares the amortized cost basis of the security will be recovered, our Company compares the present value of cash flows expected to be collected in relation to the current book value. Any shortfalls of the present value of the revised cash flows expectedusing the historical book yield to be collected to the amortized cost basis is considereddetermine the credit loss portion of OTTI losses andimpairment which is recognized in earnings. All non-credit losses where we have the intent and ability to hold the security until recovery are recognized as changes in OTTI losses within AOCI.
To determine whether the unrealized loss onSpecifically for structured securities is other-than-temporary,Fixed maturities, our Company analyzes the projections provided by itsour investment managers with respect to an expected principal loss under a range of scenarios and utilizes 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 is expected ultimately to incur 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 evenbreak-even default rate is also calculated. A comparison of the break evenbreak-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, credit impairment is recognized.recognized in earnings. 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.
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. Defaultdefault, which differ based on property type, vintage and the stress of the collateral.
Foreign Currency Remeasurement and Translation
The functional currency of each of our operations is generally the currency of the local operating environment, except for our Lloyd’s business which is United States Dollar (“USD”). Transactions in currencies other than an operation’s functional currency are remeasured into the functional currency and the resulting foreign exchange gains and losses are reflected in net Other income (expense) in the Consolidated Statements of Income. Functional currency assets and liabilities of foreign operations are translated into USD using period end rates of exchange and the related translation adjustments are recorded as a separate component of AOCI. Consolidated Statements of Income amounts expressed in functional currencies are translated using average exchange rates.
During the first quarter of 2014, the Syndicate revised its foreign exchange accounting methodology from reporting its financial position and results using three functional currencies British Pound Sterling (“GBP”), U.S. Dollars (“USD”) and Canadian Dollars (“CAD”) to one functional currency, the USD. The USD was chosen as the single functional currency as the majority of the Syndicate’s insurance business has been and continues to be transacted in USD. This cumulative change in remeasurement resulted in a 2014 immaterial correction of $10.0 million ($6.6 million after-tax) in AOCI, on the Consolidated Balance Sheets, offset by a gain in Other income in the Consolidated Statements of Income.
Premium Revenues
Written premium is based on the insurance policies that have been reported to us and the policies that have been written by agents but not yet reported to us. We estimate the amount of written premium not yet reported based on judgments relative to current and historical trends of the business being written. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results. An Unearned premium reserve is established to reflect the unexpired portion of each policy at the financial reporting date.
Substantially all of our business is placed through agents and brokers. We record estimates for both unreported direct and assumed premiums. We also record the ceded portion of the estimated Gross written premiums and related acquisition costs. These estimates are mostly for our Marine and Energy & Engineering products written by our International Insurance (“Int’l Insurance”) reporting segment as well as our Accident & Health (“A&H”) and Latin American (“LatAm”) business written by our GlobalRe reporting segment. Such premium estimates are generally based on submission data received from brokers and agents and recorded when the insurance policy or reinsurance contract is written or bound.
The earned gross, ceded and net premiums are calculated based on our earning methodology, which is generally pro-rata over the policy period or over the period of risk if the period of risk differs significantly from the contract period.
Reinsurance Ceded
In the normal course of business, we purchase reinsurance from insurers or reinsurers to reduce the amount of loss arising from claims. Management analyzes the reinsurance agreements to determine whether the reinsurance should be classified as prospective or retroactive based upon the terms of the reinsurance agreement and whether the reinsurer has assumed significant insurance risk to the extent that the reinsurer may realize a significant loss from the transaction.
Prospective reinsurance is reinsurance in which an assuming company agrees to reimburse the ceding company for losses that may be incurred as a result of future insurable events covered under contracts subject to the reinsurance. Retroactive reinsurance is reinsurance in which an assuming company agrees to reimburse a ceding company for liabilities incurred as a result of past insurable events covered under contracts subject to the reinsurance.
Ceded reinsurance premiums net of ceding commissions and ceded losses are reflected as reductions of the respective income or expense accounts over the terms of the reinsurance contracts. Prepaid reinsurance premiums represent the portion of premiums ceded to reinsurers applicable to the unexpired terms of the reinsurance contracts in force. Reinsurance reinstatement premiums (“RRPs”) are recognized in the same period as the loss event that gave rise to the reinstatement premiums. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Ceded Unearned premiums and estimates of amounts recoverable from reinsurers on paid and unpaid losses are reflected as assets. Provisions are made for estimated unrecoverable reinsurance.
Deferred Policy Acquisition Costs
Costs of acquiring business are deferred and amortized over the period that the related premiums are recognized as revenue. Such costs (e.g., Commission expenses, Other underwriting expenses and Premium taxes) are limited to the incremental direct costs related to the successful acquisition of new or renewal business. The method of computing deferred policy acquisition costs limits the
deferral to their estimated net realizable value based on the related Unearned premiums and takes into account anticipated losses, loss adjustment expense (“LAE”), Commission expenses and Operating expenses based on historical and current experience, as well as anticipated investment income.
Reserves for Losses and Loss Adjustment Expenses
Unpaid losses and LAE are determined on: (a) individual claims reported on direct business for insureds, (b) from reports received from ceding insurers for assumed business and (c) on estimates based on Company and industry experience for incurred but not reported (“IBNR”) claims and LAE. Indicated IBNR reserves for losses and LAE are calculated by our actuaries using several standard actuarial methodologies, including the paid and incurred loss development and the paid and incurred Bornheutter-Ferguson loss methods. Frequency/severity analyses are performed for certain books of business. The Reserve for losses and LAE has been established to cover the estimated unpaid cost of claims incurred. Such estimates are regularly compared to indicated reserves and updated and any resulting adjustments are included in the current year’s results. Management believes that the liability recognized for unpaid losses and LAE is a reasonable estimate of the ultimate unpaid claims incurred, however, no representation is made that the ultimate liability will not differ materially from the amounts recorded in the accompanying Consolidated Financial Statements. Losses and LAE are recorded on an undiscounted basis.
Earnings per Share
Basic earnings per share (“EPS”) is computed by dividing Net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the basic EPS adjusted for the potential dilution that would occur if all issued stock options were exercised and all stock grants were fully vested.
Depreciation and Amortization
Depreciation of furniture and fixtures, electronic data processing equipment and computer software is provided over the estimated useful lives of the respective assets, ranging from three to seven years, using the straight-line method. Amortization of leasehold improvements are provided over the shorter of the useful lives of those improvements or the contractual terms of the leases, ranging from five to ten years, using the straight-line method.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of acquiring a business enterprise over the fair value of the net assets acquired. Our Company’s recorded indefinite lived intangible assets represent acquired stamp capacity in the Syndicate. Goodwill and indefinite lived intangible assets are reported at carrying value and are tested for impairment at least annually, and when permitted by the applicable accounting guidance, qualitative factors are assessed to determine whether it is necessary to calculate an asset’s fair value when testing an asset with an indefinite life for impairment. Goodwill and indefinite lived intangible assets are considered impaired if the estimated fair value is less than its carrying value and any impairment loss is measured as the difference between the implied fair value and the carrying value. Our Company did not recognize an impairment of goodwill or the indefinite lived intangible assets for any of the years ended December 31, 2016, 2015 and 2014.
As of December 31, 2016, the carrying value of goodwill and indefinite lived intangible assets was $6.5 million, which is $0.3 million less than the carrying value as of December 31, 2015, $6.8 million. Changes in the carrying value of the goodwill and indefinite lived intangible assets are due to amortization and fluctuations in currency exchange rates between the USD and the GBP.
Income Taxes
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Future realization of the tax benefit of an existing deferred tax asset ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback/carryforward period available under the tax law. In determining whether a valuation allowance is needed, management considers the timing of the reversal of each deferred tax asset as well as expected future levels of taxable income, amounts of taxable income in carryback years, and tax planning strategies. Additional information regarding our deferred tax assets can be found in Note 9, Income Taxes.
Current and Pending Accounting Pronouncements
As of January 1, 2016, we adopted the following accounting pronouncements, which did not have a material effect, singly or in the aggregate, on our Consolidated Financial Statements:
Accounting Standards Update 2015-03 – Interest – Imputation of Interest (Subtopic 835-30) – Simplifying the Presentation of Debt Issuance Costs, which is effective for fiscal years beginning after December 15, 2015. The new pronouncement was issued to simplify presentation of debt issuance costs.
Accounting Standards Update 2015-05 – Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which is effective for fiscal years beginning after December 15, 2015. The new pronouncement was issued to provide guidance to customers about whether a cloud computing arrangement includes a software license.
Accounting Standards Update 2015-07 – Fair Value Measurement – (Topic 820) Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its equivalent) (a consensus of the Emerging Issues Task Force), which is effective for fiscal years beginning after December 15, 2015. The new pronouncement was issued to ensure that all investments categorized in the fair value hierarchy are classified using a consistent approach.
The Financial Accounting Standards Board has issued the following new pronouncements that may have an impact on our Company and we are assessing the future impact of these updates on our Consolidated Financial Statements:
Accounting Standards Update 2016-01 – Financial Instruments (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities, which will be effective for fiscal years beginning after December 15, 2017. The new pronouncement was issued to make targeted improvements to the presentation of financial instruments. We expect the adoption of this pronouncement to have limited impact to our financial statements.
Accounting Standards Update 2016-02 – Leases (Topic 842) – Amends the recognition of a right-to-use asset and lease liability on the statement of financial position of those leases previously classified as operating leases under the previous guidance, which will be effective for fiscal years beginning after December 15, 2018. The new pronouncement was issued to improve transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. We expect the adoption of this pronouncement to result in limited changes to our total assets and total liabilities.
Accounting Standards Update 2016-09 – Compensation – Stock Compensation – (Topic 718) – Improvements to Employee Share-Based Accounting, which will be effective for fiscal years beginning after December 15, 2016. The new pronouncement was issued to simplify employee share-based accounting. We expect the adoption of this pronouncement to simplify our reporting but not have a material effect to our financial statements.
Accounting Standards Update 2016-13 – Financial Instruments – Credit Losses (Topic 326) – amends the measurement of credit losses on financial instruments not accounted for at fair value including loans, debt securities, reinsurance receivables and any other financial assets, which will be effective for the fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We expect the adoption of this pronouncement to have limited impact to our financial statements.
Accounting Standards Update 2016-15 – Statements of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments amends how certain cash receipts and cash payments are presented in the statement of cash flows to reduce existing diversity in practice. We expect that the adoption of this pronouncement will not have a material effect on our financial statements.
Accounting Standards Update 2016-16 - Income Taxes (Topic 740) - Amends current guidance by eliminating the exception for an intra-entity transfer of an asset other than inventory. Under the new standard, an entity should recognize the income tax consequences when the transfer occurs. The guidance prescribed is effective beginning fiscal year 2018, including interim periods. We expect that the adoption of this pronouncement will not have a material effect on our financial statements.
Accounting Standards Update 2016-17 - Consolidation (Topic 810) - Amends the consolidation guidance concerning the evaluation of interests in variable interest entities. The accounting standards update requires a reporting entity to include interests held by related parties under common control proportionally when assessing whether it holds a variable interest in a VIE. The prescribed guidance is effective beginning in fiscal year 2017, including interim periods. We expect that the adoption of this pronouncement will not have a material effect on our financial statements.
Accounting Standards Updated 2016-18 - Statement of Cash Flows (Topic 230) - Requires that amounts generally described as restricted cash and cash equivalents be included within total cash and cash equivalents in the Statement of
Cash Flows. The guidance prescribed is effective beginning in fiscal year 2018, including interim periods. We expect the adoption of this pronouncement to have limited impact to our financial statements. |
There were no additional accounting pronouncements that are expected to have an impact on the Consolidated Financial Statements upon adoption.
NOTE 2. SEGMENT INFORMATION
We report our results of operations consistent with the manner in which our Chief Operating Decision Maker reviews the business to assess performance through our reporting segments: U.S. Insurance, International Insurance (“Int’l Insurance”), GlobalRe and Corporate.
We classify our business into three underwriting segments: U.S. Insurance, Int’l Insurance and GlobalRe. Both the U.S. Insurance and Int’l Insurance reporting segments are each comprised of three operating segments: Marine, P&C and Professional Liability.
We evaluate the performance of each of the underwriting segments based on underwriting results. Underwriting results are measured based on Underwriting profit or loss and the related Combined ratio, which are both non-GAAP measures of underwriting profitability. Underwriting profit (loss) is calculated from Net earned premiums less the sum of Net losses and LAE, Commission expenses, Other operating expenses and Other underwriting income (expense). The Combined ratio is derived by dividing the sum of Net losses and LAE, Commission expenses, Other operating expenses and Other underwriting income (expense) by Net earned premiums. A Combined ratio of less than 100% indicates an underwriting profit and greater than 100% indicates an underwriting loss. Our underwriting performance is evaluated separately from the rest of our operations. The performance of our investment portfolios, our liquidity and capital resource needs, our foreign currency exposure and our tax planning strategies are evaluated on a consolidated basis within our Corporate segment.
The following tables set forth the financial data by segment for the years ended December 31, 2016, 2015 and 2014:
|
| Year Ended December 31, 2016 |
| |||||||||||||||||
|
| U.S. |
|
| Int'l |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
amounts in thousands |
| Insurance |
|
| Insurance |
|
| GlobalRe |
|
| Corporate (1) |
|
| Total |
| |||||
Net earned premiums |
| $ | 629,308 |
|
| $ | 307,416 |
|
| $ | 163,621 |
|
| $ | — |
|
| $ | 1,100,345 |
|
Net losses and LAE |
|
| (397,860 | ) |
|
| (178,284 | ) |
|
| (89,304 | ) |
|
| — |
|
|
| (665,448 | ) |
Commission expenses |
|
| (70,812 | ) |
|
| (61,703 | ) |
|
| (34,008 | ) |
|
| 1,478 |
|
|
| (165,045 | ) |
Other operating expenses |
|
| (128,108 | ) |
|
| (86,395 | ) |
|
| (19,593 | ) |
|
| — |
|
|
| (234,096 | ) |
Other underwriting income (expense) |
|
| 1,092 |
|
|
| — |
|
|
| 522 |
|
|
| (1,478 | ) |
|
| 136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
| $ | 33,620 |
|
| $ | (18,966 | ) |
| $ | 21,238 |
|
| $ | — |
|
| $ | 35,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 79,451 |
|
|
| 79,451 |
|
Net realized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 9,036 |
|
|
| 9,036 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (15,435 | ) |
|
| (15,435 | ) |
Other income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8,565 |
|
|
| 8,565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
| $ | 33,620 |
|
| $ | (18,966 | ) |
| $ | 21,238 |
|
| $ | 81,617 |
|
| $ | 117,509 |
|
Income tax (expense) benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (34,783 | ) |
|
| (34,783 | ) |
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 82,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE ratio |
|
| 63.2 | % |
|
| 58.0 | % |
|
| 54.6 | % |
|
|
|
|
|
| 60.5 | % |
Commission expense ratio |
|
| 11.3 | % |
|
| 20.1 | % |
|
| 20.8 | % |
|
|
|
|
|
| 15.0 | % |
Other operating expense ratio (2) |
|
| 20.2 | % |
|
| 28.1 | % |
|
| 11.6 | % |
|
|
|
|
|
| 21.2 | % |
Combined ratio |
|
| 94.7 | % |
|
| 106.2 | % |
|
| 87.0 | % |
|
|
|
|
|
| 96.7 | % |
(1) - Includes Corporate segment intercompany eliminations.
(2) - Includes Other operating expenses and Other underwriting income (expense).
|
| Year Ended December 31, 2015 |
| |||||||||||||||||
|
| U.S. |
|
| Int'l |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
amounts in thousands |
| Insurance |
|
| Insurance |
|
| GlobalRe |
|
| Corporate (1) |
|
| Total |
| |||||
Net earned premiums |
| $ | 555,836 |
|
| $ | 259,960 |
|
| $ | 168,291 |
|
| $ | — |
|
| $ | 984,087 |
|
Net losses and LAE |
|
| (343,497 | ) |
|
| (134,702 | ) |
|
| (94,399 | ) |
|
| — |
|
|
| (572,598 | ) |
Commission expenses |
|
| (56,319 | ) |
|
| (43,676 | ) |
|
| (32,240 | ) |
|
| 2,258 |
|
|
| (129,977 | ) |
Other operating expenses |
|
| (131,407 | ) |
|
| (75,867 | ) |
|
| (16,242 | ) |
|
| — |
|
|
| (223,516 | ) |
Other underwriting income (expense) |
|
| 1,690 |
|
|
| — |
|
|
| 690 |
|
|
| (2,258 | ) |
|
| 122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
| $ | 26,303 |
|
| $ | 5,715 |
|
| $ | 26,100 |
|
| $ | — |
|
| $ | 58,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 68,718 |
|
|
| 68,718 |
|
Net realized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6,675 |
|
|
| 6,675 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (15,424 | ) |
|
| (15,424 | ) |
Other income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (613 | ) |
|
| (613 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
| $ | 26,303 |
|
| $ | 5,715 |
|
| $ | 26,100 |
|
| $ | 59,356 |
|
| $ | 117,474 |
|
Income tax (expense) benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (36,417 | ) |
|
| (36,417 | ) |
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 81,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE ratio |
|
| 61.8 | % |
|
| 51.8 | % |
|
| 56.1 | % |
|
|
|
|
|
| 58.2 | % |
Commission expense ratio |
|
| 10.1 | % |
|
| 16.8 | % |
|
| 19.2 | % |
|
|
|
|
|
| 13.2 | % |
Other operating expense ratio (2) |
|
| 23.4 | % |
|
| 29.2 | % |
|
| 9.2 | % |
|
|
|
|
|
| 22.7 | % |
Combined ratio |
|
| 95.3 | % |
|
| 97.8 | % |
|
| 84.5 | % |
|
|
|
|
|
| 94.1 | % |
(1) - Includes Corporate segment intercompany eliminations.
(2) - Includes Other operating expenses and Other underwriting income (expense).
|
| Year Ended December 31, 2014 |
| |||||||||||||||||
|
| U.S. |
|
| Int'l |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
amounts in thousands |
| Insurance |
|
| Insurance |
|
| GlobalRe |
|
| Corporate (1) |
|
| Total |
| |||||
Net earned premiums |
| $ | 504,289 |
|
| $ | 243,485 |
|
| $ | 188,121 |
|
| $ | — |
|
| $ | 935,895 |
|
Net losses and LAE |
|
| (311,839 | ) |
|
| (115,079 | ) |
|
| (118,311 | ) |
|
| — |
|
|
| (545,229 | ) |
Commission expenses |
|
| (49,840 | ) |
|
| (44,426 | ) |
|
| (33,429 | ) |
|
| 2,167 |
|
|
| (125,528 | ) |
Other operating expenses |
|
| (115,817 | ) |
|
| (65,275 | ) |
|
| (15,733 | ) |
|
| — |
|
|
| (196,825 | ) |
Other underwriting income (expense) |
|
| 2,241 |
|
|
| 32 |
|
|
| 489 |
|
|
| (2,167 | ) |
|
| 595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting profit (loss) |
| $ | 29,034 |
|
| $ | 18,737 |
|
| $ | 21,137 |
|
| $ | — |
|
| $ | 68,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 64,168 |
|
|
| 64,168 |
|
Net realized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 12,812 |
|
|
| 12,812 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (15,413 | ) |
|
| (15,413 | ) |
Other income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 10,061 |
|
|
| 10,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
| $ | 29,034 |
|
| $ | 18,737 |
|
| $ | 21,137 |
|
| $ | 71,628 |
|
| $ | 140,536 |
|
Income tax (expense) benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (45,207 | ) |
|
| (45,207 | ) |
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 95,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE ratio |
|
| 61.8 | % |
|
| 47.3 | % |
|
| 62.9 | % |
|
|
|
|
|
| 58.3 | % |
Commission expense ratio |
|
| 9.9 | % |
|
| 18.2 | % |
|
| 17.8 | % |
|
|
|
|
|
| 13.4 | % |
Other operating expense ratio (2) |
|
| 22.5 | % |
|
| 26.8 | % |
|
| 8.1 | % |
|
|
|
|
|
| 20.9 | % |
Combined ratio |
|
| 94.2 | % |
|
| 92.3 | % |
|
| 88.8 | % |
|
|
|
|
|
| 92.6 | % |
(1) - Includes Corporate segment intercompany eliminations.
(2) - Includes Other operating expenses and Other underwriting income (expense).
The following tables provide additional financial data by operating segment for the years ended December 31, 2016, 2015 and 2014:
|
| Year Ended December 31, 2016 |
| |||||||||||||
amounts in thousands |
| Gross written premiums |
|
| Ceded written premiums |
|
| Net written premiums |
|
| Net earned premiums |
| ||||
U.S. Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
| $ | 169,405 |
|
| $ | (70,858 | ) |
| $ | 98,547 |
|
| $ | 100,132 |
|
P&C |
|
| 631,562 |
|
|
| (135,888 | ) |
|
| 495,674 |
|
|
| 453,673 |
|
Professional Liability |
|
| 118,428 |
|
|
| (29,081 | ) |
|
| 89,347 |
|
|
| 75,503 |
|
Total |
| $ | 919,395 |
|
| $ | (235,827 | ) |
| $ | 683,568 |
|
| $ | 629,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Int'l Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
| $ | 183,228 |
|
| $ | (40,092 | ) |
| $ | 143,136 |
|
| $ | 141,593 |
|
P&C |
|
| 181,094 |
|
|
| (69,606 | ) |
|
| 111,488 |
|
|
| 89,455 |
|
Professional Liability |
|
| 120,149 |
|
|
| (28,806 | ) |
|
| 91,343 |
|
|
| 76,368 |
|
Total |
| $ | 484,471 |
|
| $ | (138,504 | ) |
| $ | 345,967 |
|
| $ | 307,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GlobalRe | $ | 165,045 |
|
| $ | (8,356 | ) |
| $ | 156,689 |
|
| $ | 163,621 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 1,568,911 |
|
| $ | (382,687 | ) |
| $ | 1,186,224 |
|
| $ | 1,100,345 |
|
|
| Year Ended December 31, 2015 |
| |||||||||||||
amounts in thousands |
| Gross written premiums |
|
| Ceded written premiums |
|
| Net written premiums |
|
| Net earned premiums |
| ||||
U.S. Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
| $ | 158,124 |
|
| $ | (61,916 | ) |
| $ | 96,208 |
|
| $ | 96,082 |
|
P&C |
|
| 596,673 |
|
|
| (152,168 | ) |
|
| 444,505 |
|
|
| 401,408 |
|
Professional Liability |
|
| 110,984 |
|
|
| (54,691 | ) |
|
| 56,293 |
|
|
| 58,346 |
|
Total |
| $ | 865,781 |
|
| $ | (268,775 | ) |
| $ | 597,006 |
|
| $ | 555,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Int'l Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
| $ | 183,707 |
|
| $ | (36,515 | ) |
| $ | 147,192 |
|
| $ | 149,256 |
|
P&C |
|
| 130,729 |
|
|
| (67,722 | ) |
|
| 63,007 |
|
|
| 55,320 |
|
Professional Liability |
|
| 97,511 |
|
|
| (29,768 | ) |
|
| 67,743 |
|
|
| 55,384 |
|
Total |
| $ | 411,947 |
|
| $ | (134,005 | ) |
| $ | 277,942 |
|
| $ | 259,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GlobalRe | $ | 175,774 |
|
| $ | (6,862 | ) |
| $ | 168,912 |
|
| $ | 168,291 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 1,453,502 |
|
| $ | (409,642 | ) |
| $ | 1,043,860 |
|
| $ | 984,087 |
|
|
| Year Ended December 31, 2014 |
| |||||||||||||
amounts in thousands |
| Gross written premiums |
|
| Ceded written premiums |
|
| Net written premiums |
|
| Net earned premiums |
| ||||
U.S. Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
| $ | 154,233 |
|
| $ | (46,685 | ) |
| $ | 107,548 |
|
| $ | 105,650 |
|
P&C |
|
| 543,045 |
|
|
| (169,953 | ) |
|
| 373,092 |
|
|
| 314,833 |
|
Professional Liability |
|
| 109,830 |
|
|
| (38,345 | ) |
|
| 71,485 |
|
|
| 83,806 |
|
Total |
| $ | 807,108 |
|
| $ | (254,983 | ) |
| $ | 552,125 |
|
| $ | 504,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Int'l Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
| $ | 190,787 |
|
| $ | (47,805 | ) |
| $ | 142,982 |
|
| $ | 141,097 |
|
P&C |
|
| 158,139 |
|
|
| (98,087 | ) |
|
| 60,052 |
|
|
| 62,520 |
|
Professional Liability |
|
| 75,978 |
|
|
| (26,029 | ) |
|
| 49,949 |
|
|
| 39,868 |
|
Total |
| $ | 424,904 |
|
| $ | (171,921 | ) |
| $ | 252,983 |
|
| $ | 243,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GlobalRe | $ | 200,341 |
|
| $ | (5,311 | ) |
| $ | 195,030 |
|
| $ | 188,121 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 1,432,353 |
|
| $ | (432,215 | ) |
| $ | 1,000,138 |
|
| $ | 935,895 |
|
The assets of the Company are reviewed in total by management for purposes of decision making.
NOTE 3. INVESTMENTS
The following tables set forth our Company’s available- for- sale investments as of December 31, 2016 and 2015 and include OTTI securities recognized within AOCI:
|
| December 31, 2016 |
| |||||||||||||
|
|
|
|
|
| Gross |
|
| Gross |
|
|
|
|
| ||
|
|
|
|
|
| Unrealized |
|
| Unrealized |
|
| Amortized |
| |||
amounts in thousands |
| Fair Value |
|
| Gains |
|
| Losses |
|
| Cost |
| ||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bonds, agency bonds and foreign government bonds |
| $ | 273,776 |
|
| $ | 2,192 |
|
| $ | (5,128 | ) |
| $ | 276,712 |
|
States, municipalities and political subdivisions |
|
| 547,415 |
|
|
| 11,542 |
|
|
| (4,036 | ) |
|
| 539,909 |
|
Mortgage-backed and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
| 487,364 |
|
|
| 4,016 |
|
|
| (6,585 | ) |
|
| 489,933 |
|
Residential mortgage obligations |
|
| 20,530 |
|
|
| 453 |
|
|
| (55 | ) |
|
| 20,132 |
|
Asset-backed securities |
|
| 314,601 |
|
|
| 824 |
|
|
| (1,178 | ) |
|
| 314,955 |
|
Commercial mortgage-backed securities |
|
| 154,139 |
|
|
| 2,859 |
|
|
| (1,904 | ) |
|
| 153,184 |
|
Subtotal |
| $ | 976,634 |
|
| $ | 8,152 |
|
| $ | (9,722 | ) |
| $ | 978,204 |
|
Corporate bonds |
|
| 838,057 |
|
|
| 10,185 |
|
|
| (5,528 | ) |
|
| 833,400 |
|
Total fixed maturities |
| $ | 2,635,882 |
|
| $ | 32,071 |
|
| $ | (24,414 | ) |
| $ | 2,628,225 |
|
Equity securities |
|
| 349,142 |
|
|
| 27,016 |
|
|
| (5,785 | ) |
|
| 327,911 |
|
Short-term investments |
|
| 143,539 |
|
|
| 88 |
|
|
| — |
|
|
| 143,451 |
|
Total investments |
| $ | 3,128,563 |
|
| $ | 59,175 |
|
| $ | (30,199 | ) |
| $ | 3,099,587 |
|
|
| December 31, 2015 |
| |||||||||||||
|
|
|
|
|
| Gross |
|
| Gross |
|
|
|
|
| ||
|
|
|
|
|
| Unrealized |
|
| Unrealized |
|
| Amortized |
| |||
amounts in thousands |
| Fair Value |
|
| Gains |
|
| Losses |
|
| Cost |
| ||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bonds, agency bonds and foreign government bonds |
| $ | 252,882 |
|
| $ | 2,273 |
|
| $ | (9,214 | ) |
| $ | 259,823 |
|
States, municipalities and political subdivisions |
|
| 576,859 |
|
|
| 21,233 |
|
|
| (781 | ) |
|
| 556,407 |
|
Mortgage-backed and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
| 379,269 |
|
|
| 5,573 |
|
|
| (2,082 | ) |
|
| 375,778 |
|
Residential mortgage obligations |
|
| 30,465 |
|
|
| 694 |
|
|
| (82 | ) |
|
| 29,853 |
|
Asset-backed securities |
|
| 225,012 |
|
|
| 85 |
|
|
| (1,624 | ) |
|
| 226,551 |
|
Commercial mortgage-backed securities |
|
| 189,713 |
|
|
| 3,119 |
|
|
| (1,864 | ) |
|
| 188,458 |
|
Subtotal |
| $ | 824,459 |
|
| $ | 9,471 |
|
| $ | (5,652 | ) |
| $ | 820,640 |
|
Corporate bonds |
|
| 760,010 |
|
|
| 7,373 |
|
|
| (10,738 | ) |
|
| 763,375 |
|
Total fixed maturities |
| $ | 2,414,210 |
|
| $ | 40,350 |
|
| $ | (26,385 | ) |
| $ | 2,400,245 |
|
Equity securities |
|
| 305,271 |
|
|
| 26,341 |
|
|
| (3,013 | ) |
|
| 281,943 |
|
Short-term investments |
|
| 217,745 |
|
|
| 2 |
|
|
| — |
|
|
| 217,743 |
|
Total investments |
| $ | 2,937,226 |
|
| $ | 66,693 |
|
| $ | (29,398 | ) |
| $ | 2,899,931 |
|
During 2016 our Company made strategic investments in certain companies which are reported as Other invested assets on the Consolidated Balance Sheet and accounted for using the equity method. In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on our Company’s proportionate share of the net income or loss of the companies. Our initial purchase price of $2.0 million is reflected in our December 31, 2016 Consolidated Balance Sheet at $2.0 million.
As of December 31, 2016 and 2015, our Company did not have a concentration of greater than 5% of invested assets in a single non-U.S. government-backed issuer.
As of December 31, 2016 and 2015, fixed maturities for which non-credit OTTI was previously recognized and included in AOCI are now in a net unrealized net gains position of $0.4 million and $0.5 million, respectively.
The fair value of our Company’s investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, equity prices, foreign exchange rates and credit spreads. Our Company does not have the intent to sell nor is it more likely than not that it will have to sell fixed maturities in unrealized loss positions that are not other-than-temporarily impaired before recovery. For structured securities, default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. Our Company does not intend to sell, any of these securities and it is more likely than not that itour Company will not be required to sell, these securities before the recovery of the amortized cost basis.
For equityEquity securities, our Company also considers our intent to hold securities as part of the process of evaluating whether a decline in fair value represents an other-than-temporary decline in value. Our Company may realize investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in general,unfavorable interest rate, liquidity or credit spread environments. Significant changes in the factors our Company focuses its attentionconsiders when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the Consolidated Financial Statements.
The contractual maturity dates for Fixed maturities categorized by the number of years until maturity as of December 31, 2016 are shown in the following table:
|
| December 31, 2016 |
| |||||
|
|
|
|
|
| Amortized |
| |
amounts in thousands |
| Fair Value |
|
| Cost |
| ||
Due in one year or less |
| $ | 133,644 |
|
| $ | 134,931 |
|
Due after one year through five years |
|
| 778,875 |
|
|
| 778,511 |
|
Due after five years through ten years |
|
| 295,742 |
|
|
| 291,811 |
|
Due after ten years |
|
| 450,987 |
|
|
| 444,768 |
|
Mortgage-backed and asset-backed securities |
|
| 976,634 |
|
|
| 978,204 |
|
Total |
| $ | 2,635,882 |
|
| $ | 2,628,225 |
|
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. Prepayment assumptions associated with the mortgage-backed and asset-backed securities are reviewed on those securities with a fair value less than 80% of their cost for six or more consecutive months. If warrantedperiodic basis. When changes in prepayment assumptions are deemed necessary as the result of conditions relatingactual prepayments differing from anticipated prepayments, securities are revalued based upon the new prepayment assumptions utilizing the retrospective accounting method. Due to the periodic repayment of principal, the mortgage-backed and asset-backed securities are estimated to have an effective maturity of approximately 4.9 years.
The following tables summarize all securities in a particular security, our Company will focus on a significant decline ingross unrealized loss position as of December 31, 2016 and 2015, showing the aggregate fair value regardless of the time period involved. Factors considered in evaluating potential impairment include, but are not limited to, the current fair value as compared to cost of the security,and gross unrealized loss by the length of time those securities have continuously been in a gross unrealized loss position:
|
| December 31, 2016 |
| |||||||||||||||||||||
|
| Less than 12 months |
|
| Greater than 12 months |
|
| Total |
| |||||||||||||||
|
|
|
|
|
| Gross |
|
|
|
|
|
| Gross |
|
|
|
|
|
| Gross |
| |||
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
| ||||||
amounts in thousands |
| Value |
|
| (Losses) |
|
| Value |
|
| (Losses) |
|
| Value |
|
| (Losses) |
| ||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bonds, agency bonds and foreign government bonds |
| $ | 150,891 |
|
| $ | (2,570 | ) |
| $ | 16,819 |
|
| $ | (2,558 | ) |
| $ | 167,710 |
|
| $ | (5,128 | ) |
States, municipalities and political subdivisions |
|
| 137,731 |
|
|
| (3,111 | ) |
|
| 13,255 |
|
|
| (925 | ) |
|
| 150,986 |
|
|
| (4,036 | ) |
Mortgage-backed and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
| 349,119 |
|
|
| (6,155 | ) |
|
| 12,401 |
|
|
| (430 | ) |
|
| 361,520 |
|
|
| (6,585 | ) |
Residential mortgage obligations |
|
| 953 |
|
|
| (18 | ) |
|
| 926 |
|
|
| (37 | ) |
|
| 1,879 |
|
|
| (55 | ) |
Asset-backed securities |
|
| 95,514 |
|
|
| (970 | ) |
|
| 48,093 |
|
|
| (208 | ) |
|
| 143,607 |
|
|
| (1,178 | ) |
Commercial mortgage-backed securities |
|
| 51,932 |
|
|
| (1,164 | ) |
|
| 7,910 |
|
|
| (740 | ) |
|
| 59,842 |
|
|
| (1,904 | ) |
Subtotal |
| $ | 497,518 |
|
| $ | (8,307 | ) |
| $ | 69,330 |
|
| $ | (1,415 | ) |
| $ | 566,848 |
|
| $ | (9,722 | ) |
Corporate bonds |
|
| 325,733 |
|
|
| (5,086 | ) |
|
| 26,005 |
|
|
| (442 | ) |
|
| 351,738 |
|
|
| (5,528 | ) |
Total fixed maturities |
| $ | 1,111,873 |
|
| $ | (19,074 | ) |
| $ | 125,409 |
|
| $ | (5,340 | ) |
| $ | 1,237,282 |
|
| $ | (24,414 | ) |
Equity securities |
|
| 145,014 |
|
|
| (5,419 | ) |
|
| 1,994 |
|
|
| (366 | ) |
|
| 147,008 |
|
|
| (5,785 | ) |
Total fixed maturities and equity securities |
| $ | 1,256,887 |
|
| $ | (24,493 | ) |
| $ | 127,403 |
|
| $ | (5,706 | ) |
| $ | 1,384,290 |
|
| $ | (30,199 | ) |
|
| December 31, 2015 |
| |||||||||||||||||||||
|
| Less than 12 months |
|
| Greater than 12 months |
|
| Total |
| |||||||||||||||
|
|
|
|
|
| Gross |
|
|
|
|
|
| Gross |
|
|
|
|
|
| Gross |
| |||
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
|
| Unrealized |
| ||||||
amounts in thousands |
| Value |
|
| (Losses) |
|
| Value |
|
| (Losses) |
|
| Value |
|
| (Losses) |
| ||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bonds, agency bonds and foreign government bonds |
| $ | 142,233 |
|
| $ | (3,032 | ) |
| $ | 22,230 |
|
| $ | (6,182 | ) |
| $ | 164,463 |
|
| $ | (9,214 | ) |
States, municipalities and political subdivisions |
|
| 50,577 |
|
|
| (549 | ) |
|
| 4,808 |
|
|
| (232 | ) |
|
| 55,385 |
|
|
| (781 | ) |
Mortgage-backed and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
| 164,817 |
|
|
| (1,315 | ) |
|
| 29,862 |
|
|
| (767 | ) |
|
| 194,679 |
|
|
| (2,082 | ) |
Residential mortgage obligations |
|
| 3,910 |
|
|
| (5 | ) |
|
| 1,684 |
|
|
| (77 | ) |
|
| 5,594 |
|
|
| (82 | ) |
Asset-backed securities |
|
| 112,479 |
|
|
| (663 | ) |
|
| 81,477 |
|
|
| (961 | ) |
|
| 193,956 |
|
|
| (1,624 | ) |
Commercial mortgage-backed securities |
|
| 83,024 |
|
|
| (1,826 | ) |
|
| 3,065 |
|
|
| (38 | ) |
|
| 86,089 |
|
|
| (1,864 | ) |
Subtotal |
| $ | 364,230 |
|
| $ | (3,809 | ) |
| $ | 116,088 |
|
| $ | (1,843 | ) |
| $ | 480,318 |
|
| $ | (5,652 | ) |
Corporate bonds |
|
| 395,399 |
|
|
| (10,114 | ) |
|
| 13,849 |
|
|
| (624 | ) |
|
| 409,248 |
|
|
| (10,738 | ) |
Total fixed maturities |
| $ | 952,439 |
|
| $ | (17,504 | ) |
| $ | 156,975 |
|
| $ | (8,881 | ) |
| $ | 1,109,414 |
|
| $ | (26,385 | ) |
Equity securities |
|
| 58,531 |
|
|
| (3,013 | ) |
|
| — |
|
|
| — |
|
|
| 58,531 |
|
|
| (3,013 | ) |
Total fixed maturities and equity securities |
| $ | 1,010,970 |
|
| $ | (20,517 | ) |
| $ | 156,975 |
|
| $ | (8,881 | ) |
| $ | 1,167,945 |
|
| $ | (29,398 | ) |
Our Company analyzes impaired securities quarterly to determine if any impairments are other-than-temporary. The above securities with unrealized losses have been determined to be temporarily impaired based on our evaluation.
At December 31, 2016, there were 413 Fixed maturities and 75 Equity securities in an unrealized loss position. In the above table, the gross unrealized loss for the greater than 12 months category consists primarily of agency and foreign government bonds and is mostly
due to an unfavorable foreign exchange movement in our Canadian portfolio. To a lesser extent the gross unrealized loss for the greater than 12 months category is driven by unrealized losses on our longer dated municipal securities which were impacted by rising interest rates and credit spreads widening. The gross unrealized loss for the less than 12 months category consists primarily of agency mortgage backed securities, corporate bonds and preferred stocks, which are reported in equity securities, due to an increase in interest rates. At December 31, 2015, there were 368 fixed maturities and 57 equity securities in an unrealized loss position. In the above table, the gross unrealized loss for the greater than 12 months category consists primarily of agency and foreign government bonds mostly due to an unfavorable foreign exchange movement in our Canadian portfolio. The gross unrealized loss for the less than 12 months category consists primarily of corporate bonds in the energy sector which have been impacted by recent declines in oil prices. To a lesser extent, losses on equity securities in the less than 12 month category were impacted by volatility in the equity markets coupled with the timing of the purchases of certain equity securities.
As of December 31, 2016 and 2015, the largest unrealized loss by a non-government backed issuer in the investment has been below costportfolio was $1.0 million and by how much the investment is below cost. If an equity security is deemed to be other-than-temporarily impaired, the cost is written down to fair value with the loss recognized in earnings.$2.6 million, respectively.
Our Company’s ability to hold securities is supported by sufficient cash flow from itsour operations and from maturities within itsour investment portfolio in order to meet itsour claims paymentpayments and other disbursement obligations arising from itsour underwriting operations without selling such investments. With respect to securities where the decline in value is determined to be temporary and the security’ssecurity's value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are made within the context of overall risk monitoring, changing information and market conditions.
As ofOur Company had one credit related OTTI loss totaling $0.2 million during the year ended December 31, 2014, there were no securities with a fair value that was less than 80% of amortized cost.
The table below summarizes2016 from our Company’s activityfixed maturities portfolio. Our Company had three credit related to OTTI losses fortotaling $1.7 million during the periods indicated:year ended December 31, 2015 from our equity portfolio. Our Company did not have any credit related OTTI losses during the year ended December 31, 2014.
Year Ended December 31, | ||||||||||||||||||||||||
2014 | 2013 | 2012 | ||||||||||||||||||||||
In thousands, except # of securities | Number of Securities | Amount | Number of Securities | Amount | Number of Securities | Amount | ||||||||||||||||||
Total OTTI losses: | ||||||||||||||||||||||||
Corporate and other bonds | — | $ | — | 1 | $ | 1,822 | — | $ | — | |||||||||||||||
Commercial mortgage-backed securities | — | — | — | — | — | — | ||||||||||||||||||
Residential mortgage-backed securities | 31 | (137 | ) | — | — | 1 | 55 | |||||||||||||||||
Asset-backed securities | — | — | — | — | — | — | ||||||||||||||||||
Equities | — | — | 3 | 571 | 3 | 847 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | 31 | $ | (137 | ) | 4 | $ | 2,393 | 4 | $ | 902 | ||||||||||||||
Less: Portion of loss in accumulated other comprehensive income (loss): | ||||||||||||||||||||||||
Corporate and other bonds | $ | — | $ | — | $ | — | ||||||||||||||||||
Commercial mortgage-backed securities | — | — | — | |||||||||||||||||||||
Residential mortgage-backed securities | (137 | ) | — | 44 | ||||||||||||||||||||
Asset-backed securities | — | — | — | |||||||||||||||||||||
Equities | — | — | — | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | $ | (137 | ) | $ | — | $ | 44 | |||||||||||||||||
Impairment losses recognized in earnings: | ||||||||||||||||||||||||
Corporate and other bonds | $ | — | $ | 1,822 | $ | — | ||||||||||||||||||
Commercial mortgage-backed securities | — | — | — | |||||||||||||||||||||
Residential mortgage-backed securities | — | — | 11 | |||||||||||||||||||||
Asset-backed securities | — | — | — | |||||||||||||||||||||
Equities | — | 571 | 847 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | $ | — | $ | 2,393 | $ | 858 | ||||||||||||||||||
|
|
|
|
|
|
The following table summarizes the cumulative amounts related to our Company’s credit loss portion of the OTTI losses on fixed maturities for the years ended December 31, 2014, 20132016, 2015 and 2012. Our Company does not intend to sell and it is more likely than not that it will not be required to sell, the securities prior to recovery of the amortized cost basis and for which the non-credit loss portion is included in AOCI.2014.
|
| Years Ended December 31, |
| |||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||
Beginning balance |
| $ | 2,361 |
|
| $ | 2,361 |
|
| $ | 5,154 |
|
Additions for credit loss impairments recognized in the current period on securities not previously impaired |
|
| 150 |
|
|
| — |
|
|
| — |
|
Additions for credit loss impairments recognized in the current period on securities previously impaired |
|
| — |
|
|
| — |
|
|
| — |
|
Reductions for credit loss impairments previously recognized on securities sold during the period |
|
| (150 | ) |
|
| — |
|
|
| (2,793 | ) |
Ending balance |
| $ | 2,361 |
|
| $ | 2,361 |
|
| $ | 2,361 |
|
Year Ended December 31, | ||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||
Beginning balance | $ | 5,154 | $ | 3,332 | $ | 3,321 | ||||||
Additions for credit loss impairments recognized in the current period on securities not previously impaired | — | 1,822 | — | |||||||||
Additions for credit loss impairments recognized in the current period on securities previously impaired | — | — | 11 | |||||||||
Reductions for credit loss impairments previously recognized on securities sold during the period | (2,793 | ) | — | — | ||||||||
|
|
|
|
|
| |||||||
Ending balance | $ | 2,361 | $ | 5,154 | $ | 3,332 | ||||||
|
|
|
|
|
|
The contractual maturity dates for fixed maturities categorized by the number of years until maturity, with a gross unrealized loss as of December 31, 2014 is presented in the following table:
December 31, 2014 | ||||||||||||||||
Gross Unrealized Losses | Fair Value | |||||||||||||||
In thousands | Amount | Percent of Total | Amount | Percent of Total | ||||||||||||
Due in one year or less | $ | 2,638 | 25 | % | $ | 21,919 | 3 | % | ||||||||
Due after one year through five years | 3,791 | 37 | % | 334,046 | 46 | % | ||||||||||
Due after five years through ten years | 1,562 | 15 | % | 103,376 | 14 | % | ||||||||||
Due after ten years | 158 | 2 | % | 21,533 | 3 | % | ||||||||||
Mortgage- and asset-backed securities | 2,198 | 21 | % | 250,472 | 34 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 10,347 | 100 | % | $ | 731,346 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
Our Company’s netNet investment income was derived from the following sources:
Year Ended December 31, | ||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||
Fixed maturities | $ | 57,219 | $ | 53,898 | $ | 58,995 | ||||||
Equity securities | 9,036 | 4,835 | 3,945 | |||||||||
Short-term investments | 911 | 774 | 1,694 | |||||||||
|
|
|
|
|
| |||||||
Total investment income | 67,166 | 59,507 | 64,634 | |||||||||
Investment expenses | (2,998 | ) | (3,256 | ) | (10,386 | ) | ||||||
|
|
|
|
|
| |||||||
Net investment income | $ | 64,168 | $ | 56,251 | $ | 54,248 | ||||||
|
|
|
|
|
|
Investment expenses for the year ended December 31, 2012 include $4.5 million of interest expense related to the settlement of a dispute with Equitas over foregone interest on amounts that were due on certain reinsurance contracts. In the dispute Equitas alleged that we failed to make timely payments to them under certain reinsurance agreements in connection with subrogation recoveries received by our Company with respect to several catastrophe losses that occurred in the late 1980’s and early 1990’s. In addition, investment expenses for the year ended December 31, 2012 includes a $2.8 million investment performance fee.
The change in net unrealized gains and losses, inclusive of the change in the non-credit portion of OTTI losses, consisted of:
|
| Years Ended December 31, |
| |||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||
Fixed maturities |
| $ | 67,772 |
|
| $ | 61,572 |
|
| $ | 57,219 |
|
Equity securities |
|
| 14,271 |
|
|
| 9,813 |
|
|
| 9,036 |
|
Short-term investments |
|
| 727 |
|
|
| 683 |
|
|
| 911 |
|
Total investment income |
| $ | 82,770 |
|
| $ | 72,068 |
|
| $ | 67,166 |
|
Investment expenses |
|
| (3,319 | ) |
|
| (3,350 | ) |
|
| (2,998 | ) |
Net investment income |
| $ | 79,451 |
|
| $ | 68,718 |
|
| $ | 64,168 |
|
Year Ended December 31, | ||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||
Fixed maturities | $ | 31,080 | $ | (76,194 | ) | $ | 15,709 | |||||
Equity securities | 4,302 | 8,857 | (5,989 | ) | ||||||||
|
|
|
|
|
| |||||||
Gross unrealized gains (losses) | 35,382 | (67,337 | ) | 9,720 | ||||||||
Deferred income tax | 12,197 | (23,565 | ) | 3,418 | ||||||||
|
|
|
|
|
| |||||||
Change in net unrealized gains (losses), net | $ | 23,185 | $ | (43,772 | ) | $ | 6,302 | |||||
|
|
|
|
|
|
Realized gains and losses, excluding net OTTI losses recognized in earnings, for the periods indicated, were as follows:
| Years Ended December 31, |
| ||||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||||||||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||||||||||||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Gains | $ | 8,326 | $ | 8,539 | $ | 28,789 |
| $ | 5,681 |
|
| $ | 4,756 |
|
| $ | 8,326 |
| ||||||
Losses | (2,610 | ) | (2,797 | ) | (1,915 | ) |
|
| (4,271 | ) |
|
| (5,926 | ) |
|
| (2,610 | ) | ||||||
|
|
| ||||||||||||||||||||||
Fixed maturities, net | $ | 5,716 | $ | 5,742 | $ | 26,874 |
| $ | 1,410 |
|
| $ | (1,170 | ) |
| $ | 5,716 |
| ||||||
Short-term: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Gains |
| $ | 890 |
|
| $ | 130 |
|
| $ | — |
| ||||||||||||
Losses |
|
| (1,552 | ) |
|
| (383 | ) |
|
| — |
| ||||||||||||
Short-term, net |
| $ | (662 | ) |
| $ | (253 | ) |
| $ | — |
| ||||||||||||
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Gains | $ | 9,447 | $ | 17,955 | $ | 14,673 |
| $ | 9,096 |
|
| $ | 14,331 |
|
| $ | 9,447 |
| ||||||
Losses | (2,351 | ) | (758 | ) | (473 | ) |
|
| (658 | ) |
|
| (4,535 | ) |
|
| (2,351 | ) | ||||||
|
|
| ||||||||||||||||||||||
Equity securities, net | $ | 7,096 | $ | 17,197 | $ | 14,200 |
| $ | 8,438 |
|
| $ | 9,796 |
|
| $ | 7,096 |
| ||||||
|
|
| ||||||||||||||||||||||
Net realized gains (losses) | $ | 12,812 | $ | 22,939 | $ | 41,074 |
| $ | 9,186 |
|
| $ | 8,373 |
|
| $ | 12,812 |
| ||||||
|
|
|
NOTE 4. FAIR VALUE MEASUREMENT
Fair value measurements are received from independent pricing service vendors, utilized by our outside investment manager whom we employ to assist us with investment accounting services. This manager utilizes a pricing committee, which oversees the use of one or more independent pricing service vendors. The following tables present,pricing committee consists of five or more members of the investment management firm, one from senior management and one from the accounting group, with the remainder representing asset class specialists and client strategists. The pricing source for each ofsecurity is determined in accordance with the pricing source procedures approved by the pricing committee. The investment manager receives supporting documentation from the independent pricing service vendor detailing the inputs, models and processes used in the vendors’ evaluation process to determine the appropriate fair value hierarchy levels as definedhierarchy. It is ultimately our responsibility to determine whether the values obtained from these service providers are representative of fair value.
To validate the techniques or models used by the accounting guidance for fair value measurements and described below,pricing sources, our Company’s fixed maturities and equity securities by asset class that are measured at fair value on a recurring basis as of December 31, 2014 and 2013:review process includes, but is not limited to:
December 31, 2014 | ||||||||||||||||
In thousands | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Fixed maturities: | ||||||||||||||||
U.S. Treasury bonds, agency bonds and foreign government bonds | $ | 146,904 | $ | 251,019 | $ | — | $ | 397,923 | ||||||||
States, municipalities and political subdivisions | — | 541,007 | — | 541,007 | ||||||||||||
Mortgage-backed and asset-backed securities: | — | |||||||||||||||
Agency mortgage-backed securities | — | 364,622 | — | 364,622 | ||||||||||||
Residential mortgage obligations | — | 34,087 | — | 34,087 | ||||||||||||
Asset-backed securities | — | 206,413 | — | 206,413 | ||||||||||||
Commercial mortgage-backed securities | — | 206,318 | — | 206,318 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Subtotal | $ | — | $ | 811,440 | $ | — | $ | 811,440 | ||||||||
Corporate bonds | — | 615,564 | — | 615,564 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed maturities | $ | 146,904 | $ | 2,219,030 | $ | — | $ | 2,365,934 | ||||||||
Equity securities - common stocks | 127,183 | — | 127,183 | |||||||||||||
Equity securities - preferred stocks | — | 57,112 | — | 57,112 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 274,087 | $ | 2,276,142 | $ | — | $ | 2,550,229 | ||||||||
|
|
|
|
|
|
|
|
In thousands Fixed maturities: U.S. Treasury bonds, agency bonds and foreign government bonds States, municipalities and political subdivisions Mortgage-backed and asset-backed securities: Agency mortgage-backed securities Residential mortgage obligations Asset-backed securities Commercial mortgage-backed securities Subtotal Corporate bonds Total fixed maturities Equity securities - common stocks Total December 31, 2013 Level 1 Level 2 Level 3 Total $ 242,379 $ 199,306 $ — $ 441,685 — 460,422 — 460,422 — — 301,274 — 301,274 — 41,755 — 41,755 — 125,133 — 125,133 — 172,750 — 172,750 $ — $ 640,912 $ — $ 640,912 — 500,447 4,407 504,854 $ 242,379 $ 1,801,087 $ 4,407 $ 2,047,873 143,954 — — 143,954 $ 386,333 $ 1,801,087 $ 4,407 $ 2,191,827
(i) | A review of the validity of the fair market valuation of individual securities deemed as outliers (i.e., vendor price differed significantly from other vendor prices), securities with significant price movements from previous months, securities with stale prices and securities with negative yields. |
(ii) | A comparison of the count of securities priced by certain vendors for significant movements in vendor CUSIP counts. |
(iii) | A review of the results of back-testing, including the comparison of executed prices to the historical fair value estimates from the pricing service and documentation to support trades above certain variance thresholds. |
(iv) | A review of the Statement on Standards for Attestation Engagements (“SSAE”) No.16 report of our outside investment managers for any exceptions. |
(v) | Management also periodically independently prices the portfolio using alternative pricing vendors and investigates variances outside of the established thresholds. |
The fair value of our financial instruments is determined based on the following fair value hierarchy:
Level 1 – Quoted prices for identical instruments in active markets. Examples are listed equity and fixed income securities traded on an exchange. U.S. Treasury securities are reported as levelLevel 1 and are valued based on unadjusted quoted prices for identical assets in active markets that our Company can access.
Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Examples are asset-backed and mortgage-backed securities that are similar to other asset-backed or mortgage-backed securities observed in the market. U.S. government agency securities are reported as levelLevel 2 and are valued using yields and spreads that are observable in active markets.
Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. An example would be a private placement with minimal liquidity.
The following tables present, for each of the fair value hierarchy levels as defined by the accounting guidance for fair value measurements and described below, our Company’s fixed maturities and equity securities by asset class that are measured at fair value on a recurring basis, as well as the fair value of the 5.75% Senior notes due October 15, 2023 (the “5.75% Senior notes”) carried at amortized cost as of December 31, 2016 and 2015:
|
| December 31, 2016 |
| |||||||||||||
amounts in thousands |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bonds, agency bonds and foreign government bonds |
| $ | 47,704 |
|
| $ | 226,072 |
|
| $ | — |
|
| $ | 273,776 |
|
States, municipalities and political subdivisions |
|
| — |
|
|
| 547,415 |
|
|
| — |
|
|
| 547,415 |
|
Mortgage-backed and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
| — |
|
|
| 487,364 |
|
|
| — |
|
|
| 487,364 |
|
Residential mortgage obligations |
|
| — |
|
|
| 20,530 |
|
|
| — |
|
|
| 20,530 |
|
Asset-backed securities |
|
| — |
|
|
| 314,601 |
|
|
| — |
|
|
| 314,601 |
|
Commercial mortgage-backed securities |
|
| — |
|
|
| 154,139 |
|
|
| — |
|
|
| 154,139 |
|
Subtotal |
| $ | — |
|
| $ | 976,634 |
|
| $ | — |
|
| $ | 976,634 |
|
Corporate bonds |
|
| — |
|
|
| 838,057 |
|
|
| — |
|
|
| 838,057 |
|
Total fixed maturities |
| $ | 47,704 |
|
| $ | 2,588,178 |
|
| $ | — |
|
| $ | 2,635,882 |
|
Equity securities |
|
| 164,088 |
|
|
| 185,054 |
|
|
| — |
|
|
| 349,142 |
|
Short-term investments |
|
| 143,539 |
|
|
| — |
|
|
| — |
|
|
| 143,539 |
|
Total assets measured at fair value |
| $ | 355,331 |
|
| $ | 2,773,232 |
|
| $ | — |
|
| $ | 3,128,563 |
|
Senior notes |
| $ | — |
|
| $ | 280,316 |
|
| $ | — |
|
| $ | 280,316 |
|
Total liabilities measured at fair value |
| $ | — |
|
| $ | 280,316 |
|
| $ | — |
|
| $ | 280,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2015 |
| |||||||||||||
amounts in thousands |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bonds, agency bonds and foreign government bonds |
| $ | 67,394 |
|
| $ | 185,488 |
|
| $ | — |
|
| $ | 252,882 |
|
States, municipalities and political subdivisions |
|
| — |
|
|
| 576,859 |
|
|
| — |
|
|
| 576,859 |
|
Mortgage-backed and asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
| — |
|
|
| 379,269 |
|
|
| — |
|
|
| 379,269 |
|
Residential mortgage obligations |
|
| — |
|
|
| 30,465 |
|
|
| — |
|
|
| 30,465 |
|
Asset-backed securities |
|
| — |
|
|
| 225,012 |
|
|
| — |
|
|
| 225,012 |
|
Commercial mortgage-backed securities |
|
| — |
|
|
| 189,713 |
|
|
| — |
|
|
| 189,713 |
|
Subtotal |
| $ | — |
|
| $ | 824,459 |
|
| $ | — |
|
| $ | 824,459 |
|
Corporate bonds |
|
| — |
|
|
| 760,010 |
|
|
| — |
|
|
| 760,010 |
|
Total fixed maturities |
| $ | 67,394 |
|
| $ | 2,346,816 |
|
| $ | — |
|
| $ | 2,414,210 |
|
Equity securities |
|
| 126,455 |
|
|
| 178,816 |
|
|
| — |
|
|
| 305,271 |
|
Short-term investments |
|
| 217,745 |
|
|
| — |
|
|
| — |
|
|
| 217,745 |
|
Total assets measured at fair value |
| $ | 411,594 |
|
| $ | 2,525,632 |
|
| $ | — |
|
| $ | 2,937,226 |
|
Senior notes |
| $ | — |
|
| $ | 282,486 |
|
| $ | — |
|
| $ | 282,486 |
|
Total liabilities measured at fair value |
| $ | — |
|
| $ | 282,486 |
|
| $ | — |
|
| $ | 282,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other financial assets and liabilities including cash, premium receivables, reinsurance recoverables and reinsurance balance payables are carried at cost, which approximates fair value.
Our Company did not have any significant transfers between the Level 1 and Level 2 classifications for the years ended December 31, 20142016 and 2013.2015.
Our Company did not have any Level 3 assets for the year endedAs of December 31, 2014.
During 2014, one security was transferred from Level 3 to Level 2 as our Company was able to obtain a price from a vendor, in which all significant inputs to the model are observable in active markets.
The following tables present a reconciliation of the beginning2016 and ending balances for all investments measured at fair value using Level 3 inputs for the years ended December 31, 2014 and 2013. For the year ended December 31, 2012,2015, our Company did not have any Level 3 assets.
Year Ended December 31, 2014 | ||||||||||||||||||||||||||||||||||||
In thousands | Beginning Balance | Realized Gains (Losses) | Unrealized Gains (Losses) | Purchase | Sales | Settlements | Transfers into Level 3 | Transfers out of Level 3 | Ending | |||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Corporate Bond | $ | 4,407 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (4,407 | ) | $ | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total assets | $ | 4,407 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (4,407 | ) | $ | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013 | ||||||||||||||||||||||||||||||||||||
In thousands | Beginning Balance | Realized Gains (Losses) | Unrealized Gains (Losses) | Purchase | Sales | Settlements | Transfers into Level 3 | Transfers out of Level 3 | Ending | |||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||||||||||||||
Mortgage | $ | — | $ | — | $ | (42 | ) | $ | 4,660 | $ | (211 | ) | $ | — | $ | — | $ | — | $ | 4,407 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Total assets | $ | — | $ | — | $ | (42 | ) | $ | 4,660 | $ | (211 | ) | $ | — | $ | — | $ | — | $ | 4,407 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5. RESERVES FOR LOSSES AND LAE
In 2013 the Level 3 security was valued using unobservable inputs based on a proxy of a security of similar duration in which market quotations are available.
As of December 31, 2014 and 2013, our Company’s restricted net assets in support of the underwriting activities of the Insurance Companies and Lloyd’s Operations were $523.4 million and $520.9 million, respectively, consisting of fixed maturities, short term investments and cash. Refer to Note 13,Dividends and Statutory Financial Information, for additional information on the nature and type of restricted net assets.
As of December 31, 2014 and 2013, our Company did not have a concentration of greater than 5% of invested assets in a single non-U.S. government-backed issuer.
Insurance companies and Lloyd’s syndicates are required to maintainWe establish reserves for the estimated unpaid ultimate liability for losses and unpaid loss adjustment expenses for all linesLAE under the terms of business. These reserves are intended to cover the probable ultimate cost of settling all losses incurredour policies and unpaid, including those incurred but not reported.agreements. The determination of reserves for losses and LAE for the Insurance Companies and the Lloyd’s Operations is partially dependent upon the receipt of information from the agents and brokers, which produce the insurance businessbrokers. Reserves include estimates for us. Generally, there is a lag between the time premiumsboth claims that have been reported and for IBNR, and include estimates of expenses associated with processing and settling these claims. Reserves are written and relatedrecorded in Reserves for losses and loss adjustment expenses are incurred,LAE in the Consolidated Balance Sheets. Our estimates and the time such events are reported to the agents and brokers and, subsequently, the Insurance Companies and the Lloyd’s Operations.
Case reserves are established by our Insurance Companies and Syndicate 1221 for reported claims when notice of the claim is first received. Reserves for such reported claims are established on a case-by-case basis by evaluating several factors, including the type of risk involved, knowledge of the circumstances surrounding such claim, severity of injury or damage, the potential for ultimate exposure, experience with the line of business, and the policy provisions relating to the type of claim. Reserves for IBNR are determined in part on the basis of statistical information, in part on industryjudgments may be revised as additional experience and in part on the judgment of our senior corporate officers. Indicated reservesother data become available and are calculated by our actuaries using several standard actuarialreviewed, as new or improved methodologies including the paid and incurred loss development and the paid and incurred Bornheutter-Ferguson loss methods. Additional analyses, suchare developed, or as frequency/laws change. Frequency/severity analyses are also performed for certain books of business.
Total loss reserves are estimates of what the insurer or reinsurer expects to pay on claims, based on facts and circumstances then known. It is possible that the ultimate liability may exceed or be less than such estimates. In setting our loss reserve estimates, we review statistical data covering several years, analyze patterns by line of business and consider several factors including trends in claims frequency and severity, changes in operations, emerging economic and social trends, inflation and changes in the regulatory and litigation environment. Using the aforementioned actuarial methods and different underlying assumptions, our actuaries produce a number of point estimates for each class of business. After reviewing the appropriateness of the underlying assumptions, management selects the carried reserve for each class of business. 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. During the loss settlement period, which, in some cases, may last several years, additional facts regarding individual claims may become known and, accordingly, it often becomes necessary to refine and adjust the estimates of liability on a claim upward or downward. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s income statement. Even then, the ultimate liability may exceed or be less than the revised estimates. The reserving process is intended to provide implicit recognition of the impact of inflation and other factors affecting loss payments by taking into account changes in historical payment patterns and perceived probable trends. There is generally no precise method for the subsequent evaluation of the adequacy of the consideration given to inflation, or to any other specific factor, because the eventual strengthening or release of reserves is affected by many factors, some of which are interdependent. To the extent that reserves are strengthenedfound deficient or released, the amount of suchredundant, a strengthening or release is treatedrecognized as a charge or credit to earnings in the period in which the strengthening or release is recognized.earnings.
The following table summarizes activity for our Company’s reservesReserves for losses and LAE activity for the years ended December 31, 2014, 20132016, 2015 and 2012:2014:
| Years Ended December 31, |
| ||||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||||||||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||||||||||||||
Net reserves for losses and LAE at beginning of year | $ | 1,222,633 | $ | 1,216,909 | $ | 1,237,234 |
| $ | 1,393,126 |
|
| $ | 1,308,136 |
|
| $ | 1,222,633 |
| ||||||
Provision for losses and LAE for claims occurring in the current year | 601,041 | 520,227 | 542,724 |
|
| 693,976 |
|
|
| 637,267 |
|
|
| 601,041 |
| |||||||||
Increase (decrease) in estimated losses and LAE for claims occurring in prior years | (55,812 | ) | (1,266 | ) | (45,291 | ) |
|
| (28,528 | ) |
|
| (64,669 | ) |
|
| (55,812 | ) | ||||||
|
|
| ||||||||||||||||||||||
Incurred losses and LAE | 545,229 | 518,961 | 497,433 |
| $ | 665,448 |
|
| $ | 572,598 |
|
| $ | 545,229 |
| |||||||||
Losses and LAE paid for claims occurring during: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Current year | (164,199 | ) | (147,758 | ) | (110,373 | ) |
|
| (119,485 | ) |
|
| (159,802 | ) |
|
| (158,806 | ) | ||||||
Prior years | (295,527 | ) | (365,479 | ) | (407,385 | ) |
|
| (412,544 | ) |
|
| (320,863 | ) |
|
| (295,527 | ) | ||||||
|
|
| ||||||||||||||||||||||
Losses and LAE payments | (459,726 | ) | (513,237 | ) | (517,758 | ) |
| $ | (532,029 | ) |
| $ | (480,665 | ) |
| $ | (454,333 | ) | ||||||
|
|
| ||||||||||||||||||||||
Foreign Currency Adjustment |
|
| (16,094 | ) |
|
| (6,943 | ) |
|
| (5,393 | ) | ||||||||||||
Net reserves for losses and LAE at end of year | 1,308,136 | 1,222,633 | 1,216,909 |
|
| 1,510,451 |
|
|
| 1,393,126 |
|
|
| 1,308,136 |
| |||||||||
Reinsurance recoverables on unpaid losses and LAE | 851,498 | 822,438 | 880,139 |
|
| 779,276 |
|
|
| 809,518 |
|
|
| 851,498 |
| |||||||||
|
|
| ||||||||||||||||||||||
Gross reserves for losses and LAE at end of year | $ | 2,159,634 | $ | 2,045,071 | $ | 2,097,048 |
| $ | 2,289,727 |
|
| $ | 2,202,644 |
|
| $ | 2,159,634 |
| ||||||
|
|
|
The segmentreporting and line of businessoperating segments breakdowns of prior period net reserve strengthening (releases) for the years ended December 31, 2014, 20132016, 2015 and 20122014 are as follows:
Year Ended December 31, | ||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||
Insurance Companies: | ||||||||||||
Marine | $ | (41,388 | ) | $ | (15,227 | ) | $ | (10,010 | ) | |||
Property Casualty | 14,612 | 18,466 | 4,293 | |||||||||
Professional Liability | (3,536 | ) | 10,191 | 7,613 | ||||||||
|
|
|
|
|
| |||||||
Insurance Companies | $ | (30,312 | ) | $ | 13,430 | $ | 1,896 | |||||
|
|
|
|
|
| |||||||
Lloyd’s Operations: | ||||||||||||
Marine | $ | (21,336 | ) | $ | (2,998 | ) | $ | (30,735 | ) | |||
Property Casualty | (1,500 | ) | (14,574 | ) | (6,890 | ) | ||||||
Professional Liability | (2,664 | ) | 2,876 | (9,562 | ) | |||||||
|
|
|
|
|
| |||||||
Lloyd’s Operations | $ | (25,500 | ) | $ | (14,696 | ) | $ | (47,187 | ) | |||
|
|
|
|
|
| |||||||
|
|
|
|
|
| |||||||
Total strengthening (releases) | $ | (55,812 | ) | $ | (1,266 | ) | $ | (45,291 | ) | |||
|
|
|
|
|
|
|
| Years Ended December 31, |
| |||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||
U.S. Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
| $ | (10,122 | ) |
| $ | (24,825 | ) |
| $ | (29,047 | ) |
P&C |
|
| 2,790 |
|
|
| (706 | ) |
|
| 17,081 |
|
Professional Liability |
|
| 5,984 |
|
|
| (3,788 | ) |
|
| (3,454 | ) |
Total |
| $ | (1,348 | ) |
| $ | (29,319 | ) |
| $ | (15,420 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Int'l Insurance |
|
|
|
|
|
|
|
|
|
|
|
|
Marine |
|
| (22,068 | ) |
|
| (21,914 | ) |
|
| (31,677 | ) |
P&C |
|
| (7,051 | ) |
|
| (8,458 | ) |
|
| (3,829 | ) |
Professional Liability |
|
| 4,100 |
|
|
| 4,156 |
|
|
| (2,746 | ) |
Total |
| $ | (25,019 | ) |
| $ | (26,216 | ) |
| $ | (38,252 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
GlobalRe | $ | (2,161 | ) |
| $ | (9,134 | ) |
| $ | (2,140 | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total strengthening (releases) |
| $ | (28,528 | ) |
| $ | (64,669 | ) |
| $ | (55,812 | ) |
The following is a discussion of the relevant factors related to the prior period net reserve releases of $28.5 million recorded for the year ended December 31, 2016:
U.S. Insurance reporting segment recorded prior period net reserve releases of $1.3 million. The drivers are as follows:
Marine operating segment recorded prior period net reserve releases of $10.1 million driven by favorable claims development in the Craft, Marine Liability, Customs Bonds and Inland Marine products.
P&C operating segment recorded prior period net reserve strengthening of $2.8 million driven by large loss activity within our Primary Casualty division, partially offset by ongoing favorable performance within our Excess Casualty, Environmental and Other P&C divisions.
Professional Liability operating segment recorded prior period net reserve strengthening of $6.0 million driven by unfavorable development on a few large D&O claims.
Int’l Insurance reporting segment recorded prior period net reserve releases of $25.0 million. The drivers are as follows:
Marine operating segment recorded prior period net reserve releases of $22.1 million due to favorable claims development predominately from our Marine Liability product.
P&C operating segment recorded prior period net reserve releases of $7.1 million primarily due to favorable claims development in our Energy & Engineering division, partially offset by large loss activity within our Property division.
Professional Liability operating segment recorded prior period net reserve strengthening of $4.1 million primarily due to a decline in expected recoveries from a large reinsurer resulting in an increase in bad debt reserve within our D&O division.
GlobalRe reporting segment recorded prior period net reserve releases of $2.2 million primarily driven by favorable loss development in our A&H, P&C and Professional Liability products, partially offset by large loss activity in our Marine product.
The following is a discussion of the relevant factors related to the prior period net reserve releases of $64.7 million recorded for the year ended December 31, 2015:
U.S. Insurance reporting segment recorded prior period net reserve releases of $29.3 million. The drivers are as follows:
Marine operating segment recorded prior period net reserve releases of $24.8 million driven by favorable claims development in the Marine Liability, Inland Marine and Cargo products.
P&C operating segment recorded prior period net reserve releases of $0.7 million driven by ongoing favorable performance within our Excess Casualty, Environmental and Other P&C divisions, mostly offset by large loss activity within our Primary Casualty division.
Professional Liability operating segment recorded prior period net reserve releases of $3.8 million driven by favorable emergence in our E&O division, partially offset by unfavorable development in several large D&O claims
Int’l Insurance reporting segment recorded prior period net reserve releases of $26.2 million. The drivers are as follows:
Marine operating segment recorded prior period net reserve releases of $21.9 million driven primarily due to favorable claims development on the Marine Liability, Protection and Indemnity and Specie products.
P&C operating segment recorded prior period net reserve releases of $8.5 million due to favorable claims development on the Offshore Energy product within the Energy & Engineering division.
Professional Liability operating segment recorded prior period net reserve strengthening of $4.2 million driven by adverse development in our D&O division related to two large losses, partially offset by favorable claims development on our E&O division.
GlobalRe reporting segment recorded prior period net reserve releases of $9.1 million primarily driven by favorable loss development in our Marine, P&C and A&H products.
The following is a discussion of relevant factors related to the $55.8 million prior period net reserve releases of $55.8 million recorded for the year ended December 31, 2014:
TheU.S. Insurance Companiesreporting segment recorded $30.3 million ofprior period net prior year reserve releases primarilyof $15.4 million. The drivers of these prior period net reserve releases by operating segment are as follows.
Marine operating segment recorded prior period net reserve releases of $29.0 million driven by favorable claims development on our Marine business, in connection with $41.4 million of net favorable loss emergence due to a lesser amount of large losses and improved underwriting over the past couple of years across all core product lines, inclusive of $13.4 million from Marine Liability, $7.2 million from Craft/Craft, Fishing vessels, $6.4 million from P&I, $4.7 million fromVessels, Inland Marine, $1.1 million from Bluewater Hull and $0.7 million from Cargo.Cargo products.
The Insurance Companies’ Marine reserve releases were partially offset by $14.6 million ofP&C operating segment recorded prior period net reserve strengthening from our Property Casualty business which isof $17.1 million driven by $23.2 million of prior year reserve strengthening from our Primary Casualty division resulting entirely from unfavorable activity on pre-2010 California construction defect liability claims in our Primary Casualty division, partially offset by $6.1 million of reserve releases due to favorable loss emergence from our Excess Casualty division.
The Insurance Companies’ Professional Liability businessoperating segment recorded prior period net reserve releases of $3.5 million of net prior year reserve releasesdriven primarily driven by $4.5 million of favorable loss emergence from our Management LiabilityD&O division due to a cash settlement of a contract dispute with a former third party administrator, partially offset by unfavorable loss emergence from our Errors and Omissions (“E&O”) division due to our small lawyers’ product lines, which are in runoff.administrator.
The Lloyds OperationsInt’l Insurance reporting segment recorded $25.5 million ofprior period net prior year reserve releases primarilyof $38.3 million. The drivers are as follows:
Marine operating segment recorded prior period net reserve releases of $31.7 million driven by $21.3 million of Marine releases in connection with favorable loss emergence across all core product lines, inclusive of $11.0 million from Marine Liability, $3.7 million from Specie, $1.3 million from Transport, $1.0 million from Cargo, $2.3 million from Energy Liability and $2.0 million from Marine Assumed.various products.
The Lloyd’s Operations Property Casualty lineP&C operating segment recorded prior yearperiod net reserve releases of $1.5$3.8 million driven primarily by favorable claims development in our Energy & Engineering division.
Professional Liability operating segment recorded prior period net reserve releases of $2.7 million due to favorable loss emergence on our Onshore Energy book. Additionally, the Professional Liability business reserve releases on older underwriting years (“UWYs”) was due to favorable loss emergence on bothin our E&O book by $1.0 million and Excess D&O by $1.7 million.divisions.
The following is a discussion of relevant factors related to the $1.3 millionGlobalRe reporting segment recorded prior period net reserve releases recordedof $2.1 million driven by favorable claim development in our Marine product.
Supplemental tables related to Short Duration Contracts
Effectively all property and casualty insurance contracts are described as “Short Duration Contracts” as opposed to life insurance, by the Securities and Exchange Commission. Our Company only issues short duration contracts. Below are two tables with reserve data for each reporting and operating segment. These tables are presented net of reinsurance. The first table reflects incurred claims development as of December 31, 2016, as well as the cumulative claims frequency and the total of Incurred But Not Reported (“IBNR”) liabilities and expected development on reported claims included within the net incurred claims amounts. The second table reflects the cumulative paid claims development as of December 31, 2016. The conversion of all non USD currencies amounts, for all Accident Years (“AY”), is in USD as of December 31, 2016.
Records for Syndicate 1221 are not available by AY for reporting periods prior to 2012 since data was compiled only on a year-of- account basis prior to 2012, and as such the tables below for our Int’l Insurance reporting segment begin with the 2012 reporting year. Our GlobalRe Segment reserve tables do not have data prior to 2010, as we began writing assumed reinsurance in that year.
Claims frequency is based on claims posted in our Company’s data system as reported. Generally, for most direct insurance and excess-of-loss assumed reinsurance, one claim count is posted for each claim. For assumed bordereau business and business written on binders, one claim count is posted for each bordereau received, which could account for multiple claims. Additionally, if the insured is covered for multiple years, a claim may be initially established in all potentially impacted policy years until the appropriate policy year is determined.
The information about incurred claims development and cumulative paid claims and Allocated Loss Adjustment Expense (“ALAE”), net of reinsurance, for the yearyears ended December 31, 2013:2007 through 2015, is presented as unaudited supplementary information.
The Insurance Companies recorded $13.4 million
Note that asbestos reserves are included in the U.S. Marine operating segment in years prior to 2007.
IBNR values shown in the following tables are the difference between the case reserves for reported losses and the estimated future payments for claims arising from the specific accident period. Our Company has always applied prudent claim reserving practices. For a number of net strengthening primarily driven bysegments, this has resulted in case reserves for more mature accident years exceeding the future payments consistently. IBNR estimates will be negative where our Property Casualty and Professional Liability businesses. Withinhistory indicates such favorable future emergence is the Property Casualty business, we reported net prior period reserve strengthening of $18.5 million, which includes $13.2 million of net strengthening from our Assumed Reinsurance division mostly attributable to our excess-of-loss A&H treaty lines in connection with UWYs 2012 and 2011, $10.4 million of strengthening from our Primary Casualty division related to our general liability coverage for general and artisan contractors, and a total of $2.1 million of strengthening for business in run-off. The aforementioned net prior period reserve strengthening was partially offset by $8.0 million of net prior period reserve releases from our Energy & Engineering division in connection with favorable emergence on our Offshore Energy lines written by our UK Branch.
Our Insurance Companies Professional Liability business reported net prior period reserve strengthening of $10.2 million largely attributable to $6.1 million reserve strengthening from our Management Liability division related to specific large claims for UWYs 2010 and prior, and $4.4 million reserve strengthening from our E&O division related to specific large claims from our insurance agents, miscellaneous Professional Liability, and small lawyer lines from UWYs 2011 and prior.
The aforementioned net prior period reserve strengthening from our Insurance Companies Property Casualty and Professional Liability were partially offset by $15.2 million of net reserve releases from our Insurance Companies Marine business in connection with favorable emergence from our Marine Liability lines for UWYs 2012 and prior.
Our Lloyd’s Operations recorded $14.7 million of net reserve releases driven by our Property Casualty and Marine businesses partially offset by strengthening in our Professional Liability business. Within our Lloyd’s Operations Property Casualty business, we reported net prior period reserve releases of $14.6 million primarily from our Energy & Engineering division. Within our Lloyd’s Operations Marine business, we reported prior period reserve releases of $3.0 million driven by our Marine Liability product. Within our Lloyd’s Operations Professional Liability business, we reported strengthening of $2.9 million, inclusive of $6.1 million of strengthening in our E&O division partially offset by $3.2 million of favorable emergence from our Management Liability division.
The following is a discussion of relevant factors related to the $45.3 million prior period net reserve releases recorded for the year ended December 31, 2012:
The Insurance Companies recorded $1.9 million net strengthening. The Marine business had $10.0 million of net reserve releases, which were primarily driven by:best estimate.
| U.S. Marine |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
| Loss and ALAE, Net of Reinsurance |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
amounts in thousands | For the Years Ended December 31, |
|
| As of December 31, 2016 |
| ||||||||||||||||||||||||||||||||
AY | 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
|
| Total IBNR |
| # of Reported Claims |
| ||||||||||||
2007 | $ | 52,974 |
| $ | 60,645 |
| $ | 61,216 |
| $ | 59,148 |
| $ | 65,020 |
| $ | 66,090 |
| $ | 66,024 |
| $ | 65,909 |
| $ | 66,297 |
| $ | 66,846 |
|
| $ | 60 |
|
| 2,737 |
|
2008 |
|
|
|
| 56,923 |
|
| 67,710 |
|
| 72,580 |
|
| 73,970 |
|
| 73,731 |
|
| 68,703 |
|
| 68,873 |
|
| 67,024 |
|
| 67,238 |
|
|
| 348 |
|
| 3,202 |
|
2009 |
|
|
|
|
|
|
| 63,769 |
|
| 60,813 |
|
| 57,266 |
|
| 51,804 |
|
| 49,762 |
|
| 50,905 |
|
| 53,091 |
|
| 52,169 |
|
|
| (186 | ) |
| 2,404 |
|
2010 |
|
|
|
|
|
|
|
|
|
| 66,336 |
|
| 66,187 |
|
| 63,172 |
|
| 57,063 |
|
| 54,815 |
|
| 59,143 |
|
| 58,557 |
|
|
| (263 | ) |
| 2,164 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| 71,575 |
|
| 72,232 |
|
| 70,019 |
|
| 65,514 |
|
| 64,196 |
|
| 62,571 |
|
|
| 1,204 |
|
| 2,012 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 87,905 |
|
| 91,118 |
|
| 73,940 |
|
| 70,421 |
|
| 71,868 |
|
|
| (7 | ) |
| 1,968 |
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 65,132 |
|
| 61,289 |
|
| 55,494 |
|
| 58,148 |
|
|
| (619 | ) |
| 1,910 |
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 67,610 |
|
| 49,889 |
|
| 48,355 |
|
|
| 1,509 |
|
| 1,962 |
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 64,575 |
|
| 54,121 |
|
|
| 13,317 |
|
| 2,155 |
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 56,209 |
|
|
| 32,884 |
|
| 1,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 596,082 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. Marine |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
| Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
amounts in thousands | For the Years Ended December 31, |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
AY | 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
|
|
|
|
|
|
|
| ||||||||||
2007 | $ | 9,294 |
| $ | 28,937 |
| $ | 40,256 |
| $ | 49,214 |
| $ | 58,772 |
| $ | 62,002 |
| $ | 62,767 |
| $ | 63,384 |
| $ | 64,450 |
| $ | 64,570 |
|
|
|
|
|
|
|
|
2008 |
|
|
|
| 7,554 |
|
| 36,499 |
|
| 54,408 |
|
| 56,695 |
|
| 62,633 |
|
| 62,989 |
|
| 63,316 |
|
| 63,429 |
|
| 64,317 |
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
| 12,975 |
|
| 30,012 |
|
| 36,593 |
|
| 42,846 |
|
| 44,760 |
|
| 47,347 |
|
| 48,209 |
|
| 50,888 |
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
| 17,211 |
|
| 33,821 |
|
| 41,941 |
|
| 45,032 |
|
| 50,271 |
|
| 54,044 |
|
| 57,254 |
|
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| 16,007 |
|
| 41,322 |
|
| 50,841 |
|
| 54,471 |
|
| 59,224 |
|
| 60,198 |
|
|
|
|
|
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 27,546 |
|
| 47,639 |
|
| 56,040 |
|
| 62,104 |
|
| 68,556 |
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 19,565 |
|
| 38,487 |
|
| 44,606 |
|
| 50,410 |
|
|
|
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 15,702 |
|
| 29,916 |
|
| 41,609 |
|
|
|
|
|
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 17,169 |
|
| 32,439 |
|
|
|
|
|
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 12,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 502,906 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net reserves < 2007 |
|
| 13,112 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Net reserves |
| $ | 106,288 |
|
|
|
|
|
|
|
|
| U.S. Marine |
|
|
| ||||||||||||||||||||||||||||
| Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance |
|
|
| ||||||||||||||||||||||||||||
Years | 1 |
| 2 |
| 3 |
| 4 |
| 5 |
| 6 |
| 7 |
| 8 |
| 9 |
| 10 |
|
|
| ||||||||||
U.S. Marine |
| 26.4 | % |
| 32.4 | % |
| 16.5 | % |
| 8.3 | % |
| 8.7 | % |
| 3.7 | % |
| 2.2 | % |
| 2.1 | % |
| 1.5 | % |
| 0.2 | % |
|
|
| U.S. P&C |
|
|
|
| ||||||||||||||||||||||||||||||||
| Loss and ALAE, Net of Reinsurance |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
amounts in thousands | For the Years Ended December 31, |
|
| As of December 31, 2016 |
| ||||||||||||||||||||||||||||||||
AY | 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
|
| Total IBNR |
| # of Reported Claims |
| ||||||||||||
2007 | $ | 139,377 |
| $ | 139,570 |
| $ | 140,551 |
| $ | 130,501 |
| $ | 133,050 |
| $ | 128,087 |
| $ | 134,310 |
| $ | 139,870 |
| $ | 145,472 |
| $ | 148,609 |
|
| $ | 3,753 |
|
| 11,703 |
|
2008 |
|
|
|
| 158,337 |
|
| 158,336 |
|
| 144,164 |
|
| 140,818 |
|
| 141,332 |
|
| 143,219 |
|
| 147,434 |
|
| 152,416 |
|
| 157,519 |
|
|
| 3,971 |
|
| 10,818 |
|
2009 |
|
|
|
|
|
|
| 133,394 |
|
| 135,984 |
|
| 136,700 |
|
| 142,416 |
|
| 149,975 |
|
| 155,156 |
|
| 155,682 |
|
| 159,110 |
|
|
| 7,717 |
|
| 8,434 |
|
2010 |
|
|
|
|
|
|
|
|
|
| 101,527 |
|
| 100,529 |
|
| 98,675 |
|
| 104,709 |
|
| 107,602 |
|
| 109,323 |
|
| 112,080 |
|
|
| 10,106 |
|
| 7,804 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| 86,056 |
|
| 85,238 |
|
| 92,266 |
|
| 95,292 |
|
| 95,958 |
|
| 105,149 |
|
|
| 15,964 |
|
| 6,346 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 111,479 |
|
| 96,618 |
|
| 98,060 |
|
| 103,716 |
|
| 111,746 |
|
|
| 24,895 |
|
| 4,481 |
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 141,728 |
|
| 130,314 |
|
| 133,068 |
|
| 141,817 |
|
|
| 29,961 |
|
| 3,533 |
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 193,897 |
|
| 164,364 |
|
| 152,447 |
|
|
| 76,085 |
|
| 3,356 |
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 251,752 |
|
| 224,532 |
|
|
| 134,029 |
|
| 3,123 |
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 274,692 |
|
|
| 258,449 |
|
| 2,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 1,587,701 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. P&C |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
| Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
amounts in thousands | For the Years Ended December 31, |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
AY | 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
|
|
|
|
|
|
|
| ||||||||||
2007 | $ | 7,127 |
| $ | 24,521 |
| $ | 49,616 |
| $ | 72,462 |
| $ | 92,840 |
| $ | 104,841 |
| $ | 114,160 |
| $ | 122,568 |
| $ | 130,279 |
| $ | 136,896 |
|
|
|
|
|
|
|
|
2008 |
|
|
|
| 12,178 |
|
| 36,713 |
|
| 58,491 |
|
| 82,028 |
|
| 103,804 |
|
| 115,526 |
|
| 123,945 |
|
| 133,064 |
|
| 146,463 |
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
| 14,619 |
|
| 36,641 |
|
| 59,933 |
|
| 92,033 |
|
| 119,360 |
|
| 132,695 |
|
| 138,227 |
|
| 145,407 |
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
| 12,682 |
|
| 27,542 |
|
| 49,109 |
|
| 69,027 |
|
| 81,262 |
|
| 89,873 |
|
| 94,766 |
|
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| 3,925 |
|
| 19,548 |
|
| 35,551 |
|
| 51,868 |
|
| 63,800 |
|
| 75,806 |
|
|
|
|
|
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 10,013 |
|
| 23,019 |
|
| 33,477 |
|
| 51,980 |
|
| 72,495 |
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7,317 |
|
| 21,500 |
|
| 49,562 |
|
| 85,719 |
|
|
|
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 5,272 |
|
| 13,762 |
|
| 45,324 |
|
|
|
|
|
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3,641 |
|
| 24,291 |
|
|
|
|
|
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 834,873 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net reserves < 2007 |
|
| 16,571 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Net reserves |
| $ | 769,399 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. P&C |
|
|
| ||||||||||||||||||||||||||||
| Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance |
|
|
| ||||||||||||||||||||||||||||
Years | 1 |
| 2 |
| 3 |
| 4 |
| 5 |
| 6 |
| 7 |
| 8 |
| 9 |
| 10 |
|
|
| ||||||||||
U.S. P&C |
| 5.9 | % |
| 11.7 | % |
| 16.2 | % |
| 18.0 | % |
| 14.2 | % |
| 8.6 | % |
| 4.9 | % |
| 5.3 | % |
| 6.8 | % |
| 4.5 | % |
|
|
| U.S. Professional Liability |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
| Loss and ALAE, Net of Reinsurance |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
amounts in thousands | For the Years Ended December 31, |
|
| As of December 31, 2016 |
| ||||||||||||||||||||||||||||||||
AY | 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
|
| Total IBNR |
| # of Reported Claims |
| ||||||||||||
2007 | $ | 38,000 |
| $ | 38,553 |
| $ | 55,491 |
| $ | 57,643 |
| $ | 62,630 |
| $ | 61,935 |
| $ | 60,445 |
| $ | 60,447 |
| $ | 59,936 |
| $ | 59,574 |
|
| $ | (70 | ) |
| 634 |
|
2008 |
|
|
|
| 34,346 |
|
| 38,449 |
|
| 39,130 |
|
| 35,844 |
|
| 37,603 |
|
| 37,939 |
|
| 37,497 |
|
| 37,620 |
|
| 41,766 |
|
|
| (382 | ) |
| 770 |
|
2009 |
|
|
|
|
|
|
| 47,473 |
|
| 53,273 |
|
| 61,023 |
|
| 58,600 |
|
| 60,789 |
|
| 58,487 |
|
| 58,660 |
|
| 58,143 |
|
|
| (563 | ) |
| 1,370 |
|
2010 |
|
|
|
|
|
|
|
|
|
| 52,302 |
|
| 64,020 |
|
| 68,375 |
|
| 75,619 |
|
| 74,535 |
|
| 86,787 |
|
| 85,348 |
|
|
| 83 |
|
| 1,429 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| 58,116 |
|
| 62,087 |
|
| 70,240 |
|
| 73,028 |
|
| 79,181 |
|
| 79,136 |
|
|
| 622 |
|
| 1,724 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 61,196 |
|
| 54,480 |
|
| 57,097 |
|
| 55,917 |
|
| 58,344 |
|
|
| 3,214 |
|
| 2,180 |
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 60,899 |
|
| 54,982 |
|
| 49,104 |
|
| 48,298 |
|
|
| 4,989 |
|
| 2,226 |
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 50,020 |
|
| 35,870 |
|
| 39,826 |
|
|
| 6,504 |
|
| 2,278 |
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 31,659 |
|
| 30,764 |
|
|
| 15,870 |
|
| 1,709 |
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 41,672 |
|
|
| 36,356 |
|
| 1,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 542,871 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. Professional Liability |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
| Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
amounts in thousands | For the Years Ended December 31, |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
AY | 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
|
|
|
|
|
|
|
| ||||||||||
2007 | $ | 1,861 |
| $ | 10,365 |
| $ | 32,621 |
| $ | 47,980 |
| $ | 52,941 |
| $ | 58,515 |
| $ | 59,280 |
| $ | 59,332 |
| $ | 59,565 |
| $ | 59,570 |
|
|
|
|
|
|
|
|
2008 |
|
|
|
| 1,880 |
|
| 15,288 |
|
| 25,042 |
|
| 30,581 |
|
| 34,902 |
|
| 35,206 |
|
| 35,598 |
|
| 37,175 |
|
| 42,056 |
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
| 3,837 |
|
| 21,742 |
|
| 41,675 |
|
| 51,642 |
|
| 55,378 |
|
| 53,859 |
|
| 57,744 |
|
| 58,095 |
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
| 2,981 |
|
| 23,147 |
|
| 46,868 |
|
| 54,019 |
|
| 59,765 |
|
| 82,013 |
|
| 84,511 |
|
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| 3,204 |
|
| 23,878 |
|
| 43,551 |
|
| 59,576 |
|
| 65,710 |
|
| 75,641 |
|
|
|
|
|
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3,855 |
|
| 22,635 |
|
| 35,681 |
|
| 44,028 |
|
| 49,675 |
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 4,677 |
|
| 22,167 |
|
| 32,904 |
|
| 38,876 |
|
|
|
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,304 |
|
| 14,371 |
|
| 29,392 |
|
|
|
|
|
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,257 |
|
| 11,249 |
|
|
|
|
|
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| �� |
|
|
|
|
|
| Total |
| $ | 451,448 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net reserves < 2007 |
|
| (386 | ) |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Net reserves |
| $ | 91,037 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. Professional Liability |
|
|
| ||||||||||||||||||||||||||||
| Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance |
|
|
| ||||||||||||||||||||||||||||
Years | 1 |
| 2 |
| 3 |
| 4 |
| 5 |
| 6 |
| 7 |
| 8 |
| 9 |
| 10 |
|
|
| ||||||||||
U.S. Professional Liability |
| 5.7 | % |
| 28.3 | % |
| 28.7 | % |
| 15.9 | % |
| 8.2 | % |
| 9.2 | % |
| 3.0 | % |
| 1.5 | % |
| 6.0 | % |
| 0.0 | % |
|
|
| Int'l Marine |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
| Loss and ALAE, Net of Reinsurance |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
amounts in thousands | For the Years Ended December 31, |
|
| As of December 31, 2016 |
| ||||||||||||||||||||||||||||||||
AY | 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
|
| Total IBNR |
| # of Reported Claims |
| ||||||||||||
2007 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 70,633 |
| $ | 67,148 |
| $ | 66,951 |
| $ | 66,883 |
| $ | 66,239 |
|
| $ | (35 | ) |
| 5,585 |
|
2008 |
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| 88,720 |
|
| 85,285 |
|
| 84,131 |
|
| 84,191 |
|
| 82,752 |
|
|
| 98 |
|
| 5,809 |
|
2009 |
|
|
|
|
|
|
| — |
|
| — |
|
| — |
|
| 89,057 |
|
| 86,914 |
|
| 84,497 |
|
| 82,096 |
|
| 79,526 |
|
|
| 111 |
|
| 4,969 |
|
2010 |
|
|
|
|
|
|
|
|
|
| — |
|
| — |
|
| 123,719 |
|
| 119,021 |
|
| 114,188 |
|
| 111,468 |
|
| 108,405 |
|
|
| 282 |
|
| 5,317 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
| 91,347 |
|
| 86,795 |
|
| 78,872 |
|
| 75,873 |
|
| 70,751 |
|
|
| 25 |
|
| 4,824 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 93,696 |
|
| 115,935 |
|
| 99,683 |
|
| 94,886 |
|
| 90,523 |
|
|
| (216 | ) |
| 5,201 |
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 68,587 |
|
| 82,313 |
|
| 80,713 |
|
| 77,239 |
|
|
| 747 |
|
| 5,075 |
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 85,512 |
|
| 105,072 |
|
| 107,789 |
|
|
| (1,500 | ) |
| 4,928 |
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 70,675 |
|
| 91,371 |
|
|
| 5,194 |
|
| 6,967 |
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 84,156 |
|
|
| 26,285 |
|
| 5,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 858,751 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Int'l Marine |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
| Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
amounts in thousands | For the Years Ended December 31, |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
AY | 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
|
|
|
|
|
|
|
| ||||||||||
2007 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 59,831 |
| $ | 60,702 |
| $ | 61,956 |
| $ | 62,729 |
| $ | 63,281 |
|
|
|
|
|
|
|
|
2008 |
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| 69,959 |
|
| 72,309 |
|
| 73,746 |
|
| 77,535 |
|
| 78,683 |
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
| — |
|
| — |
|
| — |
|
| 64,058 |
|
| 68,085 |
|
| 70,834 |
|
| 74,311 |
|
| 75,006 |
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
| — |
|
| — |
|
| 74,920 |
|
| 87,186 |
|
| 93,167 |
|
| 97,132 |
|
| 99,416 |
|
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
| 43,740 |
|
| 56,569 |
|
| 60,879 |
|
| 65,580 |
|
| 66,538 |
|
|
|
|
|
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 22,777 |
|
| 52,968 |
|
| 68,498 |
|
| 76,572 |
|
| 79,205 |
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 21,703 |
|
| 42,953 |
|
| 54,826 |
|
| 60,828 |
|
|
|
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 24,445 |
|
| 50,168 |
|
| 73,921 |
|
|
|
|
|
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 22,323 |
|
| 52,356 |
|
|
|
|
|
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 22,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 671,426 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net reserves < 2007 |
|
| 9,207 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Net reserves |
| $ | 196,532 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Int'l Marine |
|
|
| ||||||||||||||||||||||||||||
| Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance |
|
|
| ||||||||||||||||||||||||||||
Years | 1 |
| 2 |
| 3 |
| 4 |
| 5 |
| 6 |
| 7 |
| 8 |
| 9 |
| 10 |
|
|
| ||||||||||
Int'l Marine |
| 24.5 | % |
| 28.1 | % |
| 18.2 | % |
| 7.6 | % |
| 5.0 | % |
| 2.8 | % |
| 2.7 | % |
| 2.4 | % |
| 1.3 | % |
| 0.8 | % |
|
|
| Int'l P&C |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
| Loss and ALAE, Net of Reinsurance |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
amounts in thousands | For the Years Ended December 31, |
|
| As of December 31, 2016 |
| ||||||||||||||||||||||||||||||||
AY | 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
|
| Total IBNR |
| # of Reported Claims |
| ||||||||||||
2007 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 26,084 |
| $ | 25,817 |
| $ | 25,740 |
| $ | 25,855 |
| $ | 25,778 |
|
| $ | (60 | ) |
| 584 |
|
2008 |
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| 39,504 |
|
| 37,884 |
|
| 37,867 |
|
| 37,296 |
|
| 36,729 |
|
|
| (75 | ) |
| 891 |
|
2009 |
|
|
|
|
|
|
| — |
|
| — |
|
| — |
|
| 26,499 |
|
| 25,804 |
|
| 25,910 |
|
| 25,418 |
|
| 25,113 |
|
|
| 13 |
|
| 743 |
|
2010 |
|
|
|
|
|
|
|
|
|
| — |
|
| — |
|
| 39,082 |
|
| 39,409 |
|
| 39,050 |
|
| 39,031 |
|
| 38,198 |
|
|
| 58 |
|
| 836 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
| 57,463 |
|
| 53,654 |
|
| 52,093 |
|
| 52,666 |
|
| 52,202 |
|
|
| (198 | ) |
| 833 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 34,479 |
|
| 30,643 |
|
| 30,347 |
|
| 28,626 |
|
| 27,828 |
|
|
| (353 | ) |
| 877 |
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 29,496 |
|
| 33,720 |
|
| 31,050 |
|
| 29,684 |
|
|
| (308 | ) |
| 1,229 |
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 20,234 |
|
| 16,987 |
|
| 17,006 |
|
|
| 173 |
|
| 1,167 |
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 26,414 |
|
| 30,932 |
|
|
| 2,106 |
|
| 1,678 |
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 75,571 |
|
|
| 13,006 |
|
| 2,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 359,041 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Int'l P&C |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
| Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
amounts in thousands | For the Years Ended December 31, |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
AY | 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
|
|
|
|
|
|
|
| ||||||||||
2007 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 23,885 |
| $ | 24,681 |
| $ | 25,150 |
| $ | 25,292 |
| $ | 25,289 |
|
|
|
|
|
|
|
|
2008 |
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| 34,084 |
|
| 35,161 |
|
| 35,463 |
|
| 35,975 |
|
| 35,826 |
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
| — |
|
| — |
|
| — |
|
| 23,371 |
|
| 24,257 |
|
| 24,713 |
|
| 24,286 |
|
| 24,369 |
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
| — |
|
| — |
|
| 32,156 |
|
| 36,499 |
|
| 39,017 |
|
| 36,509 | �� |
| 36,601 |
|
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
| 33,316 |
|
| 42,280 |
|
| 45,125 |
|
| 47,591 |
|
| 48,502 |
|
|
|
|
|
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 7,884 |
|
| 15,648 |
|
| 20,850 |
|
| 24,871 |
|
| 26,049 |
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6,829 |
|
| 17,613 |
|
| 24,735 |
|
| 27,180 |
|
|
|
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3,813 |
|
| 8,458 |
|
| 12,304 |
|
|
|
|
|
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6,739 |
|
| 18,096 |
|
|
|
|
|
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 24,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 278,471 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net reserves < 2007 |
|
| 619 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Net reserves |
| $ | 81,189 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Int'l P&C |
|
|
| ||||||||||||||||||||||||||||
| Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance |
|
|
| ||||||||||||||||||||||||||||
Years | 1 |
| 2 |
| 3 |
| 4 |
| 5 |
| 6 |
| 7 |
| 8 |
| 9 |
| 10 |
|
|
| ||||||||||
Int'l P&C |
| 25.4 | % |
| 33.5 | % |
| 21.8 | % |
| 9.4 | % |
| 5.2 | % |
| -1.0 | % |
| -0.2 | % |
| 1.2 | % |
| 0.1 | % |
| 0.0 | % |
|
|
| Int'l Professional Liability |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
| Loss and ALAE, Net of Reinsurance |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
amounts in thousands | For the Years Ended December 31, |
|
| As of December 31, 2016 |
| ||||||||||||||||||||||||||||||||
AY | 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
|
| Total IBNR |
| # of Reported Claims |
| ||||||||||||
2007 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 12,901 |
| $ | 12,587 |
| $ | 12,445 |
| $ | 12,378 |
| $ | 12,381 |
|
| $ | (64 | ) |
| 235 |
|
2008 |
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| 15,511 |
|
| 15,302 |
|
| 14,816 |
|
| 14,010 |
|
| 14,023 |
|
|
| (175 | ) |
| 365 |
|
2009 |
|
|
|
|
|
|
| — |
|
| — |
|
| — |
|
| 14,809 |
|
| 15,367 |
|
| 14,972 |
|
| 16,289 |
|
| 15,780 |
|
|
| 629 |
|
| 445 |
|
2010 |
|
|
|
|
|
|
|
|
|
| — |
|
| — |
|
| 18,603 |
|
| 16,159 |
|
| 15,661 |
|
| 17,451 |
|
| 15,619 |
|
|
| 1,409 |
|
| 653 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
| 9,686 |
|
| 7,648 |
|
| 7,125 |
|
| 7,050 |
|
| 6,835 |
|
|
| 356 |
|
| 681 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8,204 |
|
| 9,753 |
|
| 9,106 |
|
| 11,175 |
|
| 16,891 |
|
|
| 490 |
|
| 718 |
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 15,096 |
|
| 17,628 |
|
| 16,272 |
|
| 15,402 |
|
|
| 4,255 |
|
| 1,053 |
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 18,835 |
|
| 24,070 |
|
| 23,457 |
|
|
| 12,421 |
|
| 1,276 |
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 22,760 |
|
| 30,104 |
|
|
| 17,379 |
|
| 1,939 |
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 36,006 |
|
|
| 31,814 |
|
| 2,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 186,498 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Int'l Professional Liability |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
| Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
amounts in thousands | For the Years Ended December 31, |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
AY | 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
|
|
|
|
|
|
|
| ||||||||||
2007 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 11,293 |
| $ | 11,704 |
| $ | 12,269 |
| $ | 12,277 |
| $ | 12,382 |
|
|
|
|
|
|
|
|
2008 |
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| 12,150 |
|
| 13,306 |
|
| 13,702 |
|
| 13,732 |
|
| 14,019 |
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
| — |
|
| — |
|
| — |
|
| 8,805 |
|
| 10,716 |
|
| 12,783 |
|
| 13,803 |
|
| 14,118 |
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
| — |
|
| — |
|
| 5,801 |
|
| 7,169 |
|
| 10,460 |
|
| 12,632 |
|
| 13,366 |
|
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
| 1,197 |
|
| 2,002 |
|
| 2,950 |
|
| 4,007 |
|
| 4,576 |
|
|
|
|
|
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,133 |
|
| 3,219 |
|
| 4,253 |
|
| 5,483 |
|
| 7,365 |
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 725 |
|
| 2,196 |
|
| 2,952 |
|
| 9,230 |
|
|
|
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,368 |
|
| 2,421 |
|
| 5,068 |
|
|
|
|
|
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3,355 |
|
| 5,765 |
|
|
|
|
|
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 87,901 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net reserves < 2007 |
|
| 92 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Net reserves |
| $ | 98,689 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Int'l Professional Liability |
|
|
| ||||||||||||||||||||||||||||
| Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance |
|
|
| ||||||||||||||||||||||||||||
Years | 1 |
| 2 |
| 3 |
| 4 |
| 5 |
| 6 |
| 7 |
| 8 |
| 9 |
| 10 |
|
|
| ||||||||||
Int'l Professional |
| 7.5 | % |
| 7.3 | % |
| 7.4 | % |
| 20.6 | % |
| 15.9 | % |
| 11.8 | % |
| 4.7 | % |
| 2.3 | % |
| 1.1 | % |
| 0.8 | % |
|
|
| GlobalRe |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
| Loss and ALAE, Net of Reinsurance |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
amounts in thousands | For the Years Ended December 31, |
|
| As of December 31, 2016 |
| ||||||||||||||||||||||||||||||||
AY | 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
|
| Total IBNR |
| # of Reported Claims |
| ||||||||||||
2007 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 6,215 |
| $ | 6,190 |
| $ | 6,173 |
| $ | 5,889 |
| $ | 5,883 |
|
| $ | (141 | ) |
| 254 |
|
2008 |
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| 13,863 |
|
| 14,024 |
|
| 13,530 |
|
| 13,304 |
|
| 13,298 |
|
|
| 672 |
|
| 294 |
|
2009 |
|
|
|
|
|
|
| 4,970 |
|
| 3,734 |
|
| 3,752 |
|
| 11,186 |
|
| 11,380 |
|
| 10,745 |
|
| 10,390 |
|
| 10,475 |
|
|
| 204 |
|
| 202 |
|
2010 |
|
|
|
|
|
|
|
|
|
| 3,743 |
|
| 3,500 |
|
| 13,455 |
|
| 13,661 |
|
| 12,899 |
|
| 11,597 |
|
| 12,330 |
|
|
| (1,000 | ) |
| 195 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| 39,678 |
|
| 50,832 |
|
| 74,131 |
|
| 73,511 |
|
| 73,042 |
|
| 72,667 |
|
|
| (461 | ) |
| 766 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 108,790 |
|
| 103,183 |
|
| 94,766 |
|
| 89,053 |
|
| 114,728 |
|
|
| 531 |
|
| 1,419 |
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 112,735 |
|
| 119,012 |
|
| 101,703 |
|
| 104,913 |
|
|
| 3,973 |
|
| 1,185 |
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 120,479 |
|
| 141,108 |
|
| 121,535 |
|
|
| 9,825 |
|
| 920 |
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 99,874 |
|
| 91,098 |
|
|
| 11,623 |
|
| 680 |
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 88,192 |
|
|
| 38,785 |
|
| 335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 635,119 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| GlobalRe |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
| Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
amounts in thousands | For the Years Ended December 31, |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||
AY | 2007 |
| 2008 |
| 2009 |
| 2010 |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
|
|
|
|
|
|
|
| ||||||||||
2007 | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 5,225 |
| $ | 5,275 |
| $ | 5,345 |
| $ | 5,357 |
| $ | 5,350 |
|
|
|
|
|
|
|
|
2008 |
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| 11,629 |
|
| 11,650 |
|
| 11,510 |
|
| 11,488 |
|
| 11,546 |
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
| — |
|
| 3,734 |
|
| 3,752 |
|
| 8,620 |
|
| 8,853 |
|
| 8,974 |
|
| 9,932 |
|
| 10,045 |
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
| 0 |
|
| 3,490 |
|
| 9,875 |
|
| 10,213 |
|
| 10,387 |
|
| 11,009 |
|
| 11,062 |
|
|
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
| 4,160 |
|
| 43,342 |
|
| 71,010 |
|
| 71,677 |
|
| 71,954 |
|
| 72,094 |
|
|
|
|
|
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 37,644 |
|
| 77,077 |
|
| 83,183 |
|
| 84,533 |
|
| 111,681 |
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 53,375 |
|
| 82,558 |
|
| 90,567 |
|
| 98,271 |
|
|
|
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 66,249 |
|
| 119,136 |
|
| 105,505 |
|
|
|
|
|
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 41,620 |
|
| 64,316 |
|
|
|
|
|
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 36,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 526,123 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net reserves < 2007 |
|
| 2,598 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Net reserves |
| $ | 111,594 |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| GlobalRe |
|
|
| ||||||||||||||||||||||||||||
| Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance |
|
|
| ||||||||||||||||||||||||||||
Years | 1 |
| 2 |
| 3 |
| 4 |
| 5 |
| 6 |
| 7 |
| 8 |
| 9 |
| 10 |
|
|
| ||||||||||
GlobalRe |
| 47.1 | % |
| 32.1 | % |
| 0.6 | % |
| 3.1 | % |
| 8.5 | % |
| 2.1 | % |
| 2.8 | % |
| 0.7 | % |
| 0.3 | % |
| -0.1 | % |
|
|
The reconciliation of $3.4 million duethe net incurred and paid claims development tables to the favorable settlement of several large losses; and
The Marine reserve releases were partially offset by net strengthening of $7.6 million from the small lawyer and accountants lines within our Professional Liability business. This strengthening was primarily driven by several large losses that caused the actual claims emergence for these lines to exceed the expected losses. We also incurred net reserve strengthening of $4.3 million within our Property Casualty segment, which were primarily attributable to two large hemophiliac claims from UWY 2011 arising from our A&H product lines.
Our Lloyd’s Operations recorded $47.2 million of net prior period reserve releases across all businesses and divisions. In connection with our Company’s implementation of the Solvency II technical provisions in its Lloyd’s Operations, our Company’s actuaries undertook a comprehensive review during 2012 of the historical claims emergence patterns for all lines of business underwritten through Syndicate 1221. As a result of this review, our Company updated the loss emergence patterns used to project ultimate losses
for all such lines of business, aligning these loss emergence factors with the historical median. This caused a reduction in ultimate loss estimates for all Lloyd’s Operations segments other than certain lines of business in Property Casualty segment, which increased. The Lloyd’s Operations also experienced significant reserve redundancies in several large claims. The amount of reserve redundancies attributable to these settlements was $5.0 million, consisting of $4.1 million from the Marine business and $0.9 million from Professional Liability business. A summary of the resulting prior period redundancies for each business within our Lloyd’s Operations by prior UWY is set forth below:
In thousands | Marine | Property Casualty | Professional Liability | Total | ||||||||||||
2010 | $ | 3,492 | $ | 378 | $ | 1,157 | $ | 5,027 | ||||||||
2009 | 14,792 | 4,170 | 6,072 | 25,034 | ||||||||||||
2008 and Prior | 12,451 | 2,342 | 2,333 | 17,126 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Redundancy | $ | 30,735 | $ | 6,890 | $ | 9,562 | $ | 47,187 | ||||||||
|
|
|
|
|
|
|
|
Management believes that the reservesReserve for losses and loss adjustment expenses are adequate to coverLAE in the ultimate costconsolidated statement of losses and loss adjustment expenses on reported and unreported claims. We continue to review our reserves on a regular basis.financial position is as follows:
|
| Carried Reserves Reconciliation |
| |||||||||
amounts in thousands |
| For the Year Ended December 31, 2016 |
| |||||||||
|
| Total Net reserves |
|
| Reinsurance recoverables on unpaid claims |
|
| Total Gross reserves |
| |||
U.S. Marine |
| $ | 106,288 |
|
| $ | 83,988 |
|
| $ | 190,276 |
|
U.S. P&C |
|
| 769,399 |
|
|
| 409,648 |
|
|
| 1,179,047 |
|
U.S. Professional Liability |
|
| 91,037 |
|
|
| 59,938 |
|
|
| 150,975 |
|
Int'l Marine |
|
| 196,532 |
|
|
| 88,900 |
|
|
| 285,432 |
|
Int'l P&C |
|
| 81,189 |
|
|
| 79,548 |
|
|
| 160,737 |
|
Int'l Professional Liability |
|
| 98,689 |
|
|
| 52,518 |
|
|
| 151,207 |
|
GlobalRe |
|
| 111,594 |
|
|
| 4,736 |
|
|
| 116,330 |
|
Liabilities for unpaid claims and claim adjustment expenses |
| $ | 1,454,728 |
|
|
| 779,276 |
|
| $ | 2,234,004 |
|
Unallocated claims adjustment expenses |
|
|
|
|
|
|
|
|
|
| 55,444 |
|
Other |
|
|
|
|
|
|
|
|
|
| 279 |
|
Total gross liability for unpaid claims and claim adjustment expense |
|
|
|
|
|
|
|
|
| $ | 2,289,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6. CEDED REINSURANCE
We utilize reinsurance principally to reduce our exposure on individual risks, to protect against catastrophic losses and to stabilize loss ratios and net underwriting results. Although reinsurance makes the reinsurerReinsurers are liable to us to the extent the risk is transferred or ceded to the reinsurer,them. However, ceded reinsurance arrangements do not eliminate our obligation to pay claims to our policyholders. Accordingly, we bear credit risk with respect to our reinsurers.
Our Company’s ceded earned premiums were $440.7 million, $456.0 million and $396.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Our Company’s ceded incurred losses were $230.2 million, $188.7 million and $262.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.
We have established a reserve for uncollectible reinsurance in the amount of $11.3 million as of December 31, 2014 and 2013, which was determined by considering reinsurer specific default risk as indicated by their financial strength ratings as well as additional default risk for Asbestos and Environmental related recoverables. Actual uncollectible reinsurance could exceed or be less than our estimate.
We are protected by various treaty and facultative reinsurance agreements. Our exposure to credit risk from any one reinsurer is managed through diversification by reinsuring with a number of different reinsurers, principally in the United StatesU.S. and European reinsurance markets. To meet our standards of acceptability, when the reinsurance is placed, aA reinsurer generally must have a rating from A.M. Best Company (“A.M. Best”) and/or S&P of “A” or better, or an equivalent financial strength if not rated, plus at least $500 million in policyholders’ surplus.surplus to meet our standards of acceptability. Our Reinsurance Security Committee, which is part of our Enterprise Risk Management Finance and Credit Sub-Committee of our Board of Directors, monitors the financial strength of our reinsurers and the related reinsurance receivablesrecoverables and periodically reviews the list of acceptable reinsurers. The reinsurance is placed either directly by us or through reinsurance intermediaries. The reinsurance intermediaries are compensated by the reinsurers.
The credit quality distribution of our Company’s reinsurance recoverables of $1.1 billion as of December 31, 2014 for ceded paid and unpaid losses and LAE and ceded unearned premiums based on insurer financial strength ratings from A.M. Best or S&P were as follows:
In thousands | Rating | Carrying Value(2) | Percent of Total | |||||||
A.M. Best Rating description(1): | ||||||||||
Superior | A++, A+ | $ | 575,205 | 50 | % | |||||
Excellent | A, A- | 547,314 | 48 | % | ||||||
Very good | B++, B+ | 8,483 | 1 | % | ||||||
Fair | B, B- | — | 0 | % | ||||||
Not rated | NR | 9,694 | 1 | % | ||||||
|
|
|
| |||||||
Total | $ | 1,140,696 | 100 | % | ||||||
|
|
|
|
Our Company holds collateral of $202.0 million, which consists of $152.8 million in ceded balances payable, $43.1 million in letters of credit and $6.1 million of funds held and trust account balances, all of which are held by our Insurance Companies and Lloyd’s Operations. In total, the collateral represents 17.7% of the carrying value of the reinsurance recoverables. Collateral of $5.2 million or 53.6% of the carrying value is held for NR rated reinsurance recoverables.
The following table lists our Company’s 2010 largest reinsurers measured by the amount of total reinsurance recoverable for ceded losses and LAE and ceded unearned premium (constituting 75.7% of the total recoverable), together with the reinsurance recoverable and collateralrecoverables as of December 31, 2014,2016, and the reinsurers’ ratings from A.M. Best orand S&P:
In thousands | Unearned Premium | Paid/Unpaid Losses | Total(1) | Collateral Held | A.M. Best | S&P | ||||||||||||||
National Indemnity Company | $ | 25,202 | $ | 117,562 | $ | 142,764 | $ | 22,069 | A++ | AA+ | ||||||||||
Everest Reinsurance Company | 21,573 | 75,063 | 96,636 | 7,326 | A+ | A+ | ||||||||||||||
Swiss Reinsurance America Corporation | 22,815 | 73,305 | 96,120 | 14,587 | A+ | AA- | ||||||||||||||
Transatlantic Reinsurance Company | 11,916 | 74,072 | 85,988 | 4,038 | A | A+ | ||||||||||||||
Munich Reinsurance America Inc. | 11,366 | 58,768 | 70,134 | 5,539 | A+ | AA- | ||||||||||||||
Allied World Reinsurance | 9,048 | 37,088 | 46,136 | 1,666 | A | A | ||||||||||||||
Lloyd’s Syndicate #2003 | 4,399 | 35,123 | 39,522 | 5,191 | A | A+ | ||||||||||||||
Partner Reinsurance Europe | 10,986 | 25,409 | 36,395 | 16,052 | A+ | A+ | ||||||||||||||
Employers Mutual Casualty Company | 11,928 | 21,851 | 33,779 | 10,935 | A | NR | ||||||||||||||
Scor Global P&C SE | 10,190 | 17,572 | 27,762 | 5,558 | A | A+ | ||||||||||||||
Ace Property and Casualty Insurance Company | 11,165 | 12,741 | 23,906 | 2,907 | A++ | AA | ||||||||||||||
Tower Insurance Company | — | 21,509 | 21,509 | 2,455 | A- | NR | ||||||||||||||
Aspen Insurance UK Ltd. | 8,928 | 11,227 | 20,155 | 4,869 | A | A | ||||||||||||||
Ironshore Indemnity Inc. | 6,234 | 13,395 | 19,629 | 8,645 | A | �� | NR | |||||||||||||
Validus Reinsurance Ltd. | 2,020 | 16,873 | 18,893 | 10,975 | A | A | ||||||||||||||
Atlantic Specialty Insurance | 2,542 | 15,812 | 18,354 | — | A | A- | ||||||||||||||
QBE Reinsurance Corp | 2,636 | 15,539 | 18,175 | — | A | A+ | ||||||||||||||
National Union Fire Ins. | 8,067 | 8,459 | 16,526 | 6,158 | A | A+ | ||||||||||||||
Endurance Reinsurance Corporation | 5,695 | 9,936 | 15,631 | 1,337 | A | A | ||||||||||||||
Odyssey American Reinsurance Corporation | 3,506 | 11,650 | 15,156 | 1,604 | A | A- | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Top 20 | $ | 190,216 | $ | 672,954 | $ | 863,170 | $ | 131,911 | ||||||||||||
Others | 47,635 | 229,891 | 277,526 | 70,065 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 237,851 | $ | 902,845 | $ | 1,140,696 | $ | 201,976 | ||||||||||||
|
|
|
|
|
|
|
|
|
| Reinsurance Recoverables |
|
|
|
|
|
|
|
|
| |||||||||
|
| Unearned |
|
| Paid/Unpaid |
|
|
|
|
|
| Collateral |
|
|
|
|
| |||
amounts in thousands |
| Premium |
|
| Losses (1) |
|
| Total |
|
| Held |
|
| A.M. Best |
| S&P | ||||
Everest Reinsurance Company |
| $ | 25,321 |
|
| $ | 82,154 |
|
| $ | 107,475 |
|
| $ | 6,571 |
|
| A+ |
| A+ |
National Indemnity Company |
|
| 7,467 |
|
|
| 98,759 |
|
|
| 106,226 |
|
|
| 3,183 |
|
| A++ |
| AA+ |
Swiss Reinsurance America Corporation |
|
| 22,442 |
|
|
| 77,199 |
|
|
| 99,641 |
|
|
| 6,440 |
|
| A+ |
| AA- |
Transatlantic Reinsurance Company |
|
| 7,669 |
|
|
| 53,347 |
|
|
| 61,016 |
|
|
| 2,494 |
|
| A+ |
| A+ |
Munich Reinsurance America Inc. |
|
| 8,959 |
|
|
| 50,612 |
|
|
| 59,571 |
|
|
| 3,477 |
|
| A+ |
| AA- |
Allied World Reinsurance |
|
| 6,319 |
|
|
| 35,931 |
|
|
| 42,250 |
|
|
| 1,575 |
|
| A |
| A |
Employers Mutual Casualty Company |
|
| 8,856 |
|
|
| 32,687 |
|
|
| 41,543 |
|
|
| 5,551 |
|
| A |
| NR |
Aspen Insurance UK Ltd. |
|
| 11,281 |
|
|
| 22,737 |
|
|
| 34,018 |
|
|
| 5,452 |
|
| A |
| A |
Ace Property and Casualty Insurance Company |
|
| 10,192 |
|
|
| 22,352 |
|
|
| 32,544 |
|
|
| 2,722 |
|
| A++ |
| AA |
Partner Reinsurance Europe |
|
| 6,868 |
|
|
| 20,681 |
|
|
| 27,549 |
|
|
| 25,045 |
|
| A |
| A+ |
Top 10 |
| $ | 115,374 |
|
| $ | 496,459 |
|
| $ | 611,833 |
|
| $ | 62,510 |
|
|
|
|
|
All Others |
|
| 98,003 |
|
|
| 365,399 |
|
|
| 463,402 |
|
|
| 89,198 |
|
|
|
|
|
Total |
| $ | 213,377 |
|
| $ | 861,858 |
|
| $ | 1,075,235 |
|
| $ | 151,708 |
|
|
|
|
|
(1) - Net of reserve for uncollectible reinsurance of approximately $11.3$12.1 million.
Approximately 21%Our Company holds reserves for uncollectible reinsurance in the amounts of $12.1 million and $6.9 million as of December 31, 2016 and 2015, respectively. This reserve is determined by reinsurer specific default risk as indicated by their financial strength ratings as
well as additional default risk for asbestos and environmental related recoverables. Actual uncollectible reinsurance could exceed or be less than our reserve balance. The increase in our reserves for uncollectible reinsurance as compared to 2015 is driven primarily by one of our reinsurers having been placed under supervision of a conservator by the State of California. We will continue to monitor the conservation process and assess our potential exposure.
Our Company holds collateral heldof $151.7 million, which consists of $109.0 million in ceded balances payable, $39.7 million in letters of credit obtained from reinsurers in accordance with New York Insurance Regulation Nos. 20 and 133. Regulation 20 requires collateral$3.0 million of funds held. NIC and NSIC are required to be held by the ceding companycollateralize reinsurance obligations due to us from reinsurers not licensed in New York State in order for the ceding company to take credit for the reinsurance recoverables on its statutory balance sheet. The specific requirements governing the lettersauthorized by their respective states of credit are contained in Regulation 133 and include a clean and unconditional letter of credit and an “evergreen” clause which prevents the expiration of the letter of credit without due notice to our Company. Only banks considered qualified by the National Association of Insurance Commissioners (“NAIC”) may be deemed acceptable issuers of letters. In addition, based on our credit assessment of the reinsurer, there are certain instances where we require collateral from a reinsurer even if the reinsurer is licensed in New York State, generally applying the requirements of Regulation No. 133. The contractual terms of the letters of credit require that access to the collateral is unrestricted. In the event that the counterparty to our collateral would be deemed not qualified by the NAIC, the reinsurer would be required by agreement to replace such collateral with acceptable security under the reinsurance agreement. There is no assurance, however, that the reinsurer would be able to replace the counterparty bank in the event such counterparty bank becomes unqualified and the reinsurer experiences significant financial deterioration. Under such circumstances, we could incur a substantial loss from uncollectible reinsurance from such reinsurer. In November 2010, Regulation No. 20 was amended to provide the New York Superintendent of Financial Services (the “New York Superintendent”) discretion to allow a reduction in collateral that qualifying reinsurers must post in order for New York domestic ceding insurers such as Navigators Insurance Company and Navigators Specialty Insurance Company to receive full financial statement credit. The “collateral required” percentages range from 0% – 100%, are based upon the New York Superintendent’s evaluation of a number of factors, including the reinsurer’s financial strength ratings, and apply to contracts entered into, renewed or having an anniversary date on or after January 1, 2011. In November 2011, the NAIC adopted similar amendments to its Credit for Reinsurance Model Act that would apply to certain non-U.S. reinsurers. States will have the option to retain a 100% funding requirement if they so choose and it remains to be seen whether and when states will amend their credit for reinsurance laws and regulations in accordance with such model act.
As of December 31, 2014, the reinsurance recoverables for paid and unpaid losses due from reinsurers in connection with all catastrophic losses was $43.3 million. Included in this figure is $25.4 million for Superstorm Sandy and $7.3 million for the 2008 Hurricanes. As of December 31, 2013, the reinsurance recoverables for paid and unpaid losses due from reinsurers in connection with all catastrophic losses was $46.5 million. Included in this figure is $30.7 million for Superstorm Sandy and $3.3 million for the 2008 Hurricanes.domicile.
The following table summarizes the components of Net Written Premium:written premium:
| Years Ended December 31, |
| ||||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||||||||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||||||||||||||
Direct | $ | 1,184,538 | $ | 1,127,331 | $ | 1,034,658 |
| $ | 1,403,865 |
|
| $ | 1,277,728 |
|
| $ | 1,232,012 |
| ||||||
Assumed | 247,815 | 243,187 | 251,807 |
|
| 165,046 |
|
|
| 175,774 |
|
|
| 200,341 |
| |||||||||
Ceded | (432,215 | ) | (482,596 | ) | (452,810 | ) |
|
| (382,687 | ) |
|
| (409,642 | ) |
|
| (432,215 | ) | ||||||
|
|
| ||||||||||||||||||||||
Net Written Premiums | $ | 1,000,138 | $ | 887,922 | $ | 833,655 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Net written premiums |
| $ | 1,186,224 |
|
| $ | 1,043,860 |
|
| $ | 1,000,138 |
|
The following table summarizes the components of Net Earned Premium:earned premium:
| Years Ended December 31, |
| ||||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||||||||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||||||||||||||
Direct | $ | 1,133,336 | $ | 1,069,677 | $ | 972,844 |
| $ | 1,330,265 |
|
| $ | 1,223,840 |
|
| $ | 1,183,120 |
| ||||||
Assumed | 243,215 | 228,247 | 205,759 |
|
| 171,978 |
|
|
| 175,153 |
|
|
| 193,431 |
| |||||||||
Ceded | (440,656 | ) | (455,985 | ) | (396,639 | ) |
|
| (401,898 | ) |
|
| (414,906 | ) |
|
| (440,656 | ) | ||||||
|
|
| ||||||||||||||||||||||
Net Earned Premiums | $ | 935,895 | $ | 841,939 | $ | 781,964 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Net earned premiums |
| $ | 1,100,345 |
|
| $ | 984,087 |
|
| $ | 935,895 |
|
The following table summarizes the components of Net Losseslosses and LAE incurred:
| Years Ended December 31, |
| ||||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||||||||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||||||||||||||
Direct | $ | 631,730 | $ | 552,381 | $ | 608,945 |
| $ | 795,414 |
|
| $ | 703,361 |
|
| $ | 657,059 |
| ||||||
Assumed | 143,681 | 155,313 | 151,137 |
|
| 87,995 |
|
|
| 97,947 |
|
|
| 118,352 |
| |||||||||
Ceded | (230,182 | ) | (188,733 | ) | (262,649 | ) |
|
| (217,961 | ) |
|
| (228,710 | ) |
|
| (230,182 | ) | ||||||
|
|
| ||||||||||||||||||||||
Net Losses and LAE | $ | 545,229 | $ | 518,961 | $ | 497,433 | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Net losses and LAE |
| $ | 665,448 |
|
| $ | 572,598 |
|
| $ | 545,229 |
|
NOTE 7. DEBT
Credit Facilities
On November 4, 2016, NUAL entered into a credit facility for 14.0 million Australian Dollars with Barclays Bank PLC. Interest is payable under this facility at a rate of 1.25% per annum. The facility may be cancelled by either party after providing written notice. This credit facility contains customary covenants for facilities of this type, including a restriction on future encumbrances that are outside the ordinary course of business, and a requirement to maintain at least £75.0 million of Funds at Lloyd’s. As of December 31, 2016, letters of credit with an aggregate face amount of 14.0 million Australian Dollars were outstanding under the credit facility, and our Company was in compliance with all covenants.
On November 7, 2016, we entered into a credit facility agreement with ING Bank N.V., London Branch, individually and as Administrative Agent and a syndicate of lenders (the “Club Facility”), which is secured by all the common stock of NIC and requires us to maintain at least forty percent of the outstanding amounts under such facility as Funds at Lloyd’s. The Club Facility has two tranches with one tranche extending a $140.0 million commitment and the other tranche extending a £60.0 million commitment. In addition, in order to support the increased underwriting capacity of the Syndicate for the 2017 UWY, we amended that certain $25.0 million credit facility with ING Bank N.V., London Branch, dated November 20, 2015, on November 7, 2016, to extend the term for an additional two years (the “Bilateral Facility”). Both of these facilities, as well as the November 4, 2016 facility, are used to fund underwriting obligations at Lloyd’s for the 2017 UWY, as well as open prior UWYs.
The Bilateral Facility is a non-committed facility which has an applicable fee rate ranging from 0.85% to 1.20% per annum based upon the Company’s S&P rating. For the Club Facility the applicable fee rate payable ranges from 0.95% to 1.60% per annum based
on a tiered schedule that is based on our then-current financial strength ratings issued by S&P and A.M. Best and the amount of our own collateral utilized to fund our participation in the Syndicate. If any letters of credit remain outstanding under these facilities after December 31, 2018, we would be required to post additional collateral to secure the remaining letters of credit. As of December 31, 2016, letters of credit with an aggregate face amount of $125.0 million and £60.0 million were outstanding under the Club Facility and we had an aggregate of $1.1 million of cash collateral posted. As of December 31, 2016 there were no letters of credit outstanding under the Bilateral Facility.
The Bilateral and Club Facilities contain 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. These credit facilities also provide 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 our Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting our Company and our subsidiaries, the occurrence of certain material judgments, or a change in control of our Company. As of December 31, 2016, our Company was in compliance with all covenants.
Senior notes
On October 4, 2013, our Company completed a public debt offering of $265.0 million principal amount of the 5.75% Senior notes and received net proceeds of $263.3 million. Our Company used a portion of the proceeds for the redemption of the 7.0% Senior notes due May 1, 2016 (“7.0% Senior notes”), as well as a $17.9 million call premium in connection with the redemption of the 7.0% Senior notes. The unamortized discount as of December 31, 2016 and 2015 was $1.3 million and $1.4 million, respectively.
The interest rate payable on the 5.75% Senior notes is subject to a tiered adjustment based on defined changes in our Company’s debt ratings. Our Company may redeem the 5.75% Senior notes in whole at any time or in part from time to time at a make-whole redemption price. The 5.75% Senior notes are our Company’s only senior unsecured obligation and will rank equally with future senior unsecured indebtedness.
The terms of the 5.75% Senior notes contain various restrictive business and financial covenants, including a restriction on indebtedness, and other restrictions typical for debt obligations of this type, including limitations on mergers, liens and dispositions of the Common stock of certain subsidiaries. As of December 31, 2016, our Company was in compliance with all such covenants.
NOTE 8. COMMITMENT AND CONTINGENCIES
Future minimum annual rental commitments as of December 31, 2016 under various non-cancellable operating leases for our office facilities, which expire at various dates through 2030, are as follows:
Rental Commitments for Years Ended December 31, |
| |||
amounts in thousands |
|
|
|
|
2017 |
| $ | 13,024 |
|
2018 |
|
| 11,843 |
|
2019 |
|
| 9,107 |
|
2020 |
|
| 8,945 |
|
2021 |
|
| 7,684 |
|
2022-2030 |
|
| 38,267 |
|
Total minimum operating lease payments |
| $ | 88,870 |
|
We are also liable for additional payments to the landlords for certain annual cost increases. Rent expense for the years ended December 31, 2016, 2015 and 2014 was $13.2 million, $12.9 million and $13.2 million, respectively.
In 2013, the State of Connecticut (“the State”) awarded our Company up to $11.5 million ($8.0 million in loans and $3.5 million in grants) to move our corporate headquarters to Stamford, Connecticut. The loan is non-interest bearing, has a term of 10 years and is subject to forgiveness based on our compliance with certain conditions set forth in the agreement with the State. The amount of the loan to be received is dependent on our Company reaching certain milestones for creation of new jobs over a five-year period, and the funds are to be used to offset certain equipment purchases, facility costs, training of employees and other eligible project-related costs. As of December 31, 2016, our Company received $9.0 million of the award ($7.0 million in loans and $2.0 million of the grant) and earned a loan forgiveness credit of $6.0 million with the State. Our Company is recognizing the amount of loan and grants received over the period in which offsetting expenses are recognized. Our Company recognized $1.4 million, $1.4 million and $1.1 million for the years ended December 31, 2016, 2015 and 2014. As of December 31, 2016 and December 31, 2015, our Company has
deferred revenue of $4.8 million and $6.3 million, respectively, which is included in Other liabilities on the Consolidated Balance Sheets.
On February 16, 2017, our Company entered into a Guarantee, pursuant to which it guaranteed all of the liabilities and obligations of NIIC (the “Guarantee”), to facilitate the issuance of a financial strength rating to NIIC by A.M. Best. The Guarantee would remain effective until all of such liabilities and obligations are discharged, and in the event that our Company does not meet its obligations under the Guarantee, any person who is covered by an insurance policy, certificate of coverage or reinsurance contract issued by NIIC would be a third party beneficiary under the Guarantee. Our Company’s obligations under the Guarantee may be terminated by providing twelve months prior written notice to NIIC. However the obligations of our Company under the Guarantee terminate immediately in the event that (i) the majority of the outstanding voting capital stock in NIIC is sold to any non-affiliated entity; (ii) A.M. Best confirms that NIIC would receive the same financial strength rating as NIC or NSIC, without the benefit of the Guarantee; or (iii) NIIC withdraws its request to be rated by A.M. Best, provided that NIIC has not been downgraded within the prior twelve months.
In the ordinary course of conducting business, our Parent Company’s subsidiaries are involved in various legal proceedings. Most of these proceedings consist of claims litigation involving our Parent Company’s subsidiaries as either: (a) liability insurers defending or providing indemnity for third party claims brought against insureds or (b) insurers defending first party coverage claims brought against them. In general, our Company believes we have valid defenses to these cases. Our Company’s management believes that the ultimate liability, if any, with respect to these legal proceedings, after consideration of provisions made for potential losses and cost of defense, will not be material to our Company’s Consolidated Balance Sheets, Statements of Income and Statements of Cash Flows.
NOTE 9. INCOME TAXES
Our Company is subject to the tax laws and regulations of the United States (“U.S.”) and the foreign countries in which it operates. Our Company files a consolidated U.S. Federal tax return, which includes all domestic subsidiaries and the U.K. Branch. The income from the foreign operations is designated as either U.S. connected income or non-U.S. connected income. Lloyd’s is required to pay U.S. income tax on U.S. connected income written by Lloyd’s syndicates. Lloyd’s and the Internal Revenue Service (“IRS”) have entered into an agreement whereby the amount of tax due on U.S. connected income is calculated by Lloyd’s and remitted directly to the IRS. These amounts are then charged to the corporate member in proportion to its participation in the relevant syndicates. Our Company’s corporate member is subject to this agreement and receives U.K. tax credits in the U.K. for any U.S. income tax incurred up to the U.K. income tax charged on the U.S. connected income. The non-U.S. connected insurance income would generally constitute taxable income under the Subpart F income section of the U.S. Internal Revenue Code (“Subpart F”) since less than 50% of Syndicate 1221’sthe Syndicate’s premiums are derived within the U.K. and would therefore be subject to U.S. taxation when the Lloyd’s year of account closes. Taxes are accrued at a 35% rate on our Company’s foreign source insurance income and foreign tax credits, where available, are utilized to offset U.S. tax as permitted. Our Company’s effective tax rate for the Syndicate 1221 taxable income could substantially exceed 35% to the extent our Company is unable to offset U.S. taxes paid under Subpart F tax regulations with U.K. tax credits on future underwriting year distributions. U.S. taxes are not accrued on the earnings of our Company’s foreign agencies as these earnings are subject to the active financing exception and are not includable as Subpart F income. Certain provisions of Subpart F expired for years after December 31, 2014; therefore, these earnings will be taxable in the U.S. at the 35% tax rate beginning January 1, 2015.
The components of current and deferred income tax expense (benefit) are as follows:
| Years Ended December 31, |
| ||||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||||||||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||||||||||||||
Current income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Federal and foreign | $ | 27,290 | $ | 23,703 | $ | 39,242 |
| $ | 39,900 |
|
| $ | 27,937 |
|
| $ | 27,290 |
| ||||||
State and local | 1,036 | 446 | 146 |
|
| 638 |
|
|
| 1,476 |
|
|
| 1,036 |
| |||||||||
|
|
| ||||||||||||||||||||||
Subtotal | 28,326 | 24,149 | 39,388 |
| $ | 40,538 |
|
| $ | 29,413 |
|
| $ | 28,326 |
| |||||||||
|
|
| ||||||||||||||||||||||
Deferred income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Federal and foreign | 16,881 | 4,658 | (11,414 | ) |
| $ | (5,755 | ) |
| $ | 7,004 |
|
| $ | 16,881 |
| ||||||||
State and local | — | — | — |
|
| — |
|
|
| — |
|
|
| — |
| |||||||||
|
|
| ||||||||||||||||||||||
Subtotal | 16,881 | 4,658 | (11,414 | ) |
| $ | (5,755 | ) |
| $ | 7,004 |
|
| $ | 16,881 |
| ||||||||
|
|
| ||||||||||||||||||||||
Total income tax expense (benefit) | $ | 45,207 | $ | 28,807 | $ | 27,974 |
| $ | 34,783 |
|
| $ | 36,417 |
|
| $ | 45,207 |
| ||||||
|
|
|
A reconciliation of total income taxes applicable topre-tax pre‑tax operating income and the amounts computed by applying the federal statutory income tax rate to thepre-tax pre‑tax operating income were as follows:
| Years Ended December 31, |
| ||||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||||||||||||||||||||||||||||||||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||||||||||||||||||||||||||||||||||||||
Computed expected tax expense | $ | 49,187 | 35.0 | % | $ | 32,299 | 35.0 | % | $ | 32,109 | 35.0 | % |
| $ | 41,128 |
|
|
| 35.0 | % |
| $ | 41,116 |
|
|
| 35.0 | % |
| $ | 49,187 |
|
|
| 35.0 | % | ||||||||||||
Tax-exempt interest | (4,771 | ) | -3.4 | % | (3,839 | ) | -4.2 | % | (4,443 | ) | -4.8 | % |
|
| (4,559 | ) |
|
| -3.9 | % |
|
| (4,987 | ) |
|
| -4.2 | % |
|
| (4,771 | ) |
|
| -3.4 | % | ||||||||||||
Dividends received deduction | (1,257 | ) | -0.9 | % | (897 | ) | -1.0 | % | (799 | ) | -0.9 | % |
|
| (3,812 | ) |
|
| -3.2 | % |
|
| (2,086 | ) |
|
| -1.8 | % |
|
| (1,257 | ) |
|
| -0.9 | % | ||||||||||||
Proration of DRD and Tax-exempt interest | 904 | 0.6 | % | 710 | 0.8 | % | 786 | 0.9 | % |
|
| 1,256 |
|
|
| 1.1 | % |
|
| 1,061 |
|
|
| 0.9 | % |
|
| 904 |
|
|
| 0.6 | % | |||||||||||||||
Current state and local income taxes, net of federal income tax deduction | 674 | 0.5 | % | 290 | 0.3 | % | 95 | 0.1 | % |
|
| 415 |
|
|
| 0.4 | % |
|
| 959 |
|
|
| 0.8 | % |
|
| 674 |
|
|
| 0.5 | % | |||||||||||||||
Other | 470 | 0.3 | % | 244 | 0.3 | % | 226 | 0.2 | % |
|
| 355 |
|
|
| 0.2 | % |
|
| 354 |
|
|
| 0.3 | % |
|
| 470 |
|
|
| 0.4 | % | |||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Actual tax expense and rate | $ | 45,207 | 32.2 | % | $ | 28,807 | 31.2 | % | $ | 27,974 | 30.5 | % |
| $ | 34,783 |
|
|
| 29.6 | % |
| $ | 36,417 |
|
|
| 31.0 | % |
| $ | 45,207 |
|
|
| 32.2 | % | ||||||||||||
|
|
|
|
|
|
The tax effects of cumulative temporary differences that give rise to federal, foreign, state and local deferred tax assets and deferred tax liabilities were as follows:
| December 31, |
| ||||||||||||||
December 31, | ||||||||||||||||
In thousands | 2014 | 2013 | ||||||||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
| ||||||||||
Deferred tax assets: |
|
|
|
|
|
|
|
| ||||||||
Loss reserve discount | $ | 24,820 | $ | 27,822 |
| $ | 25,420 |
|
| $ | 25,353 |
| ||||
Unearned premiums | 29,080 | 25,706 |
|
| 33,886 |
|
|
| 31,486 |
| ||||||
Compensation related | 10,586 | 6,782 |
|
| 15,288 |
|
|
| 11,175 |
| ||||||
State and local net deferred tax assets | 777 | 555 |
|
| 699 |
|
|
| 721 |
| ||||||
Net currency translation adjustments |
|
| 5,363 |
|
|
| 346 |
| ||||||||
Other | 1,834 | 3,889 |
|
| 3,618 |
|
|
| 3,969 |
| ||||||
|
| |||||||||||||||
Total gross deferred tax assets | 67,097 | 64,754 |
|
| 84,274 |
|
|
| 73,050 |
| ||||||
Less: Valuation allowance | (777 | ) | (555 | ) |
|
| (699 | ) |
|
| (721 | ) | ||||
|
| |||||||||||||||
Total deferred tax assets | $ | 66,320 | $ | 64,199 |
| $ | 83,575 |
|
| $ | 72,329 |
| ||||
|
| |||||||||||||||
Deferred tax liabilities: |
|
|
|
|
|
|
|
| ||||||||
Net unrealized gains/losses on securities | (24,832 | ) | (9,119 | ) |
| $ | (10,142 | ) |
| $ | (13,053 | ) | ||||
Deferred acquisition costs | (22,120 | ) | (19,258 | ) |
|
| (29,401 | ) |
|
| (24,037 | ) | ||||
Lloyd’s year of account deferral | (13,578 | ) | (4,381 | ) | ||||||||||||
Lloyd's year of account deferral |
|
| (15,471 | ) |
|
| (24,466 | ) | ||||||||
Net unrealized foreign exchange | (4,470 | ) | (3,516 | ) |
|
| (3,575 | ) |
|
| (4,164 | ) | ||||
Other | (2,787 | ) | (4,119 | ) |
|
| (4,048 | ) |
|
| (2,709 | ) | ||||
|
| |||||||||||||||
Total deferred tax liabilities | $ | (67,787 | ) | $ | (40,393 | ) |
| $ | (62,637 | ) |
| $ | (68,429 | ) | ||
|
| |||||||||||||||
Net deferred income tax asset (liability) | $ | (1,467 | ) | $ | 23,806 |
| $ | 20,938 |
|
| $ | 3,900 |
| |||
|
|
Our Company has not provided for U.S. income taxes on approximately $22.6$156.6 million of undistributed earnings of itsour non-U.S. subsidiaries since it is intended that those earnings will be reinvested indefinitely in those subsidiaries. If a future determination is made that those earnings no longer are intended to be reinvested indefinitely in those subsidiaries, U.S. income taxes of approximately $2.3$2.7 million, assuming all foreign tax credits are realized, would be included in the tax provision at that time and would be payable if those earnings were distributed to our Company.
Unrecognized tax benefits are differences between tax positions taken in the tax returns and benefits recognized in the financial statements. Our Company has no unrecognized tax benefits as of December 31, 20142016, 2015 and 2013.2014. Our Company did not incur any interest or penalties related to unrecognized tax benefits for the years ended December 31, 20142016, 2015 and 2013.2014. Our Company is not currently is under examination by the IRS for taxable years 2010, 2011, and 2012 andIRS; however is generally is subject to U.S. Federal, state or local or foreign tax examinations by tax authorities for 2009 and subsequent years.
Our Company recorded income tax expense of $45.2 million for the year ended December 31, 2014 compared to $28.8 million for the same period in 2013, resulting in an effective tax rate of 32.2% for the year ended December 31, 2014 and 31.2% for the comparable periods in 2013.
Our Company had state and local deferred tax assets amounting to potential future tax benefits of $0.8 million and $0.6$0.7 million as of December 31, 20142016 and 2013, respectively.2015. Included in the deferred tax assets are minimal state and local net operating loss carry-forwards of $0.0 million as of December 31, 2014 and $0.1 million for December 31, 2013.carry-forwards. A valuation allowance was established for the full amount of these potential future tax benefits due to the uncertainty associated with their realization. Our Company’s state and local tax carry-forwards as of December 31, 20142016 expire from 20242026 to 2032.2034.
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. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, tax planning strategies and anticipated future taxable income in making this assessment and believes it is more likely than not that our Company will realize the benefits of its deductible differences as of December 31, 2014,2016, net of any valuation allowance.
On November 6, 2014 NUAL entered into a credit facility for $8.0 million Australian Dollars with Barclays Bank PLC to fund its participation in Syndicate 1221. The facility is used to fund Australian underwriting obligations for the 2014 and prior underwriting years. The facility contains customary covenants for facilities of this type, including a restriction on future encumbrances that are outside the ordinary course of business, and a requirement to maintain at least £75 million of Funds at Lloyd’s. Interest is payable on the facility at a rate of 2% per annum above a floating rate tied to the average mid-rate for Australian bills of exchange administered by the Australian Financial Markets Association. The facility may be cancelled by either party after providing written notice. As of December 31, 2014, our Company was in compliance with all covenants.
On November 24, 2014, our Company entered into a $175 million credit facility agreement with ING Bank N.V., London Branch, individually and as Administrative Agent, and a syndicate of lenders. The new credit facility amended and restated a $165 million letter of credit facility entered into by the parties on November 22, 2012. The credit facility, which is denominated in U.S. dollars, is utilized to fund participation in Syndicate 1221 through letters of credit for the 2015 and 2016 underwriting years, as well as open prior years. The letters of credit issued under the facility can be denominated in British pounds and their aggregate face amount will fluctuate based on exchange rates. If any letters of credit remain outstanding under the facility after December 31, 2016, our Company would be required to post additional collateral to secure the remaining letters of credit. As of December 31, 2014, letters of credit with an aggregate face amount of $149.4 million were outstanding under the credit facility and our Company had $1.0 million of cash collateral posted.
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 our Company being false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting our Company and its subsidiaries, the occurrence of certain material judgments, or a change in control of our Company. The letter of credit facility is secured by a pledge of the stock of certain insurance subsidiaries of our Company. To the extent, the aggregate face amount issued under the credit facility exceeds the commitment amount; our Company is required to post collateral with the lead bank of the consortium. Our Company was in compliance with all covenants under the credit facility as of December 31, 2014 and our Company had $1.0 million of cash collateral posted.
The applicable fee rate payable under the credit facility are based on a tiered schedule that is based on our Company’s then-current financial strength ratings issued by S&P and A.M. Best and the amount of our Company’s own collateral utilized to fund its participation in Syndicate 1221.
On October 4, 2013, our Company completed a public debt offering of $265 million principal amount of 5.75% Senior Notes (“5.75% Senior Notes”) and received net proceeds of $263 million. The Principal amount of the 5.75% Senior Notes is payable in one single installment on October 15, 2023. Our Company used a portion of the proceeds of the 5.75% Senior Notes for the redemption of the 7.0% Senior Notes due May 1, 2016 (“7.0% Senior Notes”). Our Company incurred a charge of $17.9 million for the payment of call premium in connection with the redemption of the 7.0% Senior Notes. The 5.75% Senior Notes Liability as of December 31, 2014 and 2013 was $263.4 million and $263.3 million, respectively. The unamortized discount as of December 31, 2014 and 2013 was $1.6 million and $1.7 million, respectively.
The fair value of the 5.75% Senior Notes was $285.7 million and $277.6 million as of December 31, 2014 and December 31, 2013, respectively. The fair values were determined using quoted prices for similar instruments in active markets and is classified as Level 2 within the fair value hierarchy as defined by the accounting guidance for fair value measurements.
Interest is payable on the 5.75% Senior Notes each April 15 and October 15. The effective interest rate related to the 5.75% Senior Notes, based on the proceeds net of discount and all issuance costs, approximates 5.86%. Interest expense on the 5.75% was $15.4 million for the year ended December 31, 2014. Interest expense on the 5.75% Senior Notes and 7.0% Senior Notes totaled $10.5 million for the year ended December 31, 2013. Interest expense on the 7.0% Senior Notes was $8.2 million for the year ended December 31, 2012.
The interest rate payable on the 5.75% Senior Note is subject to a tiered adjustment based on defined changes in our Company’s debt ratings. Our Company may redeem the 5.75% Senior Notes in whole at any time or in part from time to time at a make-whole redemption price. The 5.75% Senior Notes are our Company’s only senior unsecured obligation and will rank equally with future senior unsecured indebtedness.
The terms of the 5.75%, Senior Notes contain various restrictive business and financial covenants, including a restriction on indebtedness, and other restrictions typical for debt obligations of this type, including limitations on mergers, liens and dispositions of the common stock of certain subsidiaries. As of December 31, 2014, our Company was in compliance with all such covenants.
The Lloyd’s Operations included in the consolidated financial statements represents its participation in Syndicate 1221. Syndicate 1221’s stamp capacity is £215 million ($336.9 million) for the 2014 underwriting year compared to £195 million ($323.7 million) for the 2013 underwriting year. Stamp capacity is a measure of the amount of premiums 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 is expressed net of commission (as is standard at Lloyd’s). The Syndicate 1221 premiums recorded in our Company’s financial statements are gross of commission. Our Company controlled 100% of Syndicate 1221’s stamp capacity for the 2014, 2013 and 2012 underwriting years through its wholly-owned Lloyd’s corporate member.NOTE 10. STOCKHOLDERS’ EQUITY
During the first quarter, Syndicate 1221 revised its foreign exchange accounting methodology from reporting its financial position and results using three functional currencies (GBP, USD and CAD) to one functional currency (USD). The USD was chosen as the single functional currency as the majority of the Syndicate’s insurance business has been and continues to be transacted in USD. This cumulative change in re-measurement has resulted in an immaterial correction of $10.0 million ($6.6 million, after-tax) reducing Accumulated Other Comprehensive Income in the consolidated balance sheet, offset by a gain in Other Income in the consolidated statement of income. The impact of the correction is not material to the previously issued annual financial statements for 2013 and 2012.
Our Company provides letters of credit and posts cash to Lloyd’s to support its participation in Syndicate 1221’s stamp capacity. If Syndicate 1221 increases its stamp capacity and our Company participates in the additional stamp capacity, or if Lloyd’s changes the capital requirements, our Company may be required to supply additional collateral acceptable to Lloyd’s. If our Company is unwilling or unable to provide additional acceptable collateral, our Company will be required to reduce its participation in the stamp capacity of Syndicate 1221. Refer to Note 8,Credit Facilities, for additional information.
Future minimum annual rental commitments as of December 31, 2014 under various non-cancellable operating leases for our office facilities, which expire at various dates through 2023, are as follows:
Year Ended | ||||
In thousands | December 31, | |||
2015 | $ | 11,245 | ||
2016 | 9,234 | |||
2017 | 7,942 | |||
2018 | 6,907 | |||
2019 | 4,258 | |||
Thereafter | 12,811 | |||
|
| |||
Total minimum operating lease payments | $ | 52,397 | ||
|
|
We are also liable for additional payments to the landlords for certain annual cost increases. Rent expense for the years ended December 31, 2014, 2013 and 2012 was $13.2 million, $11.5 million and $10.5 million, respectively.
The State of Connecticut (“the State”) awarded our Company up to $11.5 million ($8.0 million in loans and $3.5 million in grants) as an incentive to move its corporate headquarters to Stamford Connecticut. The loan is non-interest bearing, has a term of 10 years and is subject to forgiveness under conditions of the agreement with the State. The amount of the assistance to be received is dependent on our Company reaching certain milestones for creation of new jobs over a five-year period, and the funds are to be used to offset certain equipment purchases, facility costs, training of employees and other eligible project-related costs. Our Company completed the move to Stamford in September 2013 and received $7.5 million for reaching the first job milestone. Earning of the grant and forgiveness of the loan is subject to certain conditions, including maintaining the required jobs for an extended period of time. As of December 31, 2014, the length of time commitment has not been met, however, our Company expects to meet all the conditions to keep the amount of assistance received to date, and accordingly, is recognizing the assistance received over the period in which our Company recognizes the expenses for which the assistance is intended to compensate, and is recognized as a reduction of such expenses. For the years ended December 31, 2014 and 2013, our Company recognized $1.1 million and $0.3 million of the assistance and as of December 31, 2014 has deferred revenue of $6.1 million, which is included in other liabilities.
In the ordinary course of conducting business, our Company’s subsidiaries are involved in various legal proceedings, either indirectly as insurers for parties or directly as defendants. Most of these proceedings consist of claims litigation involving our Company’s subsidiaries as either: (a) liability insurers defending or providing indemnity for third party claims brought against insureds or (b) insurers defending first party coverage claims brought against them. Our Company accounts for such activity through the establishment of unpaid loss and loss adjustment reserves. Our Company’s management believes that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and cost of defense, will not be material to our Company’s consolidated financial condition, results of operations, or cash flows.
Our Company’s subsidiaries are also occasionally involved with other legal actions, some of which assert claims for substantial amounts. These actions include claims asserting extra contractual obligations, such as claims involving allegations of bad faith in the handling of claims or the underwriting of policies. In general, our Company believes it has valid defenses to these cases. Our Company’s management expects that the ultimate liability, if any, with respect to future extra-contractual matters will not be material to its consolidated financial position. Nonetheless, given the large or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of litigation, an adverse outcome in such matters could, from time to time, have a material adverse outcome on our Company’s consolidated results of operations or cash flows in a particular fiscal quarter or year.
Our authorized share capital consists of 50,000,000 common shares with a par value of $0.10 per share and 1,000,000 preferred shares with a par value of $0.10 per share. Our Company has not issued any preferred shares as of December 31, 2014.2016.
The following table represents changes in our Company’s issued and outstanding common shares for the periods indicated:indicated. We completed a two-for-one stock split on January 20, 2017. All share and per share data has been retroactively restated on a post-split basis.
| Years Ended December 31, |
| ||||||||||||||||||||||
Year Ended December 31, | ||||||||||||||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||||||||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||||||||||||||
Beginning balance | 14,198 | 14,047 | 13,956 |
|
| 28,862 |
|
|
| 28,562 |
|
|
| 28,396 |
| |||||||||
Vested stock grants | 59 | 50 | 60 |
|
| 220 |
|
|
| 254 |
|
|
| 118 |
| |||||||||
Employee stock purchase plan | 19 | 17 | 16 |
|
| 42 |
|
|
| 42 |
|
|
| 38 |
| |||||||||
Stock options exercised | 5 | 84 | 15 |
|
| — |
|
|
| 4 |
|
|
| 10 |
| |||||||||
Treasury shares purchased | — | — | — | |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
Ending balance | 14,281 | 14,198 | 14,047 |
|
| 29,124 |
|
|
| 28,862 |
|
|
| 28,562 |
| |||||||||
|
|
|
On July 15, September 30, and December 29, 2016, our Company paid dividends of $0.045 per share to stockholders of record of our Company’s Common stock as of June 20, August 19, and November 18, 2016, respectively.
The Parent Company has not paid or declareddeclaration and amount of any cash dividends on common stock. There are no regulatory restrictions on the ability of the Parent Company to pay dividends. While there is no intention to pay cash dividends on the common stock, future declarations, if any, aredividend will be at the discretion of ourthe Board of Directors. The amounts of such dividendsDirectors, and will be dependent,depend upon other factors such as, our Company’s financial condition, results of operations, business requirements, regulatory and cash flow, financial conditionlegal constraints and business needs, restrictive covenantsany other factors the Board of Directors deems relevant. Refer to Footnote 16 – Subsequent Events.
NIC may pay dividends to our Parent Company out of its statutory earned surplus pursuant to statutory restrictions imposed under the New York insurance law. As of December 31, 2016, the maximum amount available for the payment of dividends by NIC without prior regulatory approval is $102.7 million. NIC paid a dividend to our credit facility and senior notesParent Company of $5.0 million in 2016. NIC did not pay any dividends to our Parent Company in 2015.
NCUL may pay dividends to our Parent Company up to the extent of available profits that require us to maintain certain consolidated tangible net worth,have been distributed from the Syndicate. The Syndicate’s capital and surplus requirementsas filed with Lloyd’s consists of undistributed profits on closed and open UWYs. In connection with the business plan approved in November 2015, NCUL posted all of the available undistributed profits on closed years of $141.9 million to support a portion of the FAL requirement and therefore that amount is not available for distribution to NCUL, which ultimately is not available to our subsidiaries, and applicable insurance regulations that limitParent Company in the amountform of dividends that may be paid by our regulated insurance subsidiaries. Refera dividend. As of December 31, 2016, NCUL has the ability to Note 8,Credit Facilities, for additional informationpay up to $3.0 million, consisting of distributed profits on closed UWYs from the restrictionsSyndicate, to the Parent Company in the form of our credit facilities that limit the amount of dividends that may be paid by our subsidiaries.dividends.
The amount and nature of net assets that are restricted from payment of dividends as of December 31, 20142016 and 20132015 are presented in the following table:
As of December 31, | ||||||||
In thousands | 2014 | 2013 | ||||||
Restricted Net Assets: | ||||||||
Insurance Companies: | ||||||||
Fixed maturities at fair value (amortized cost: 2014, $10,086; 2013, $9,730) | $ | 11,732 | $ | 11,105 | ||||
Short term investments, at cost which approximates fair value | 290 | 290 | ||||||
Cash | 1,212 | 1,210 | ||||||
|
|
|
| |||||
Total Insurance Companies(1) | $ | 13,234 | $ | 12,605 | ||||
Lloyd’s Operations: | ||||||||
Fixed maturities at fair value (amortized cost: 2014, $445,504; 2013, $398,930) | 447,679 | 398,808 | ||||||
Short term investments, at cost which approximates fair value | 61,549 | 108,485 | ||||||
Cash | 963 | 988 | ||||||
|
|
|
| |||||
Total Lloyd’s Operations(2) | $ | 510,191 | $ | 508,281 | ||||
|
|
|
| |||||
Total Restricted Net Assets | $ | 523,425 | $ | 520,886 | ||||
|
|
|
|
|
| As of December 31, |
| |||||
amounts in thousands |
| 2016 |
|
| 2015 |
| ||
Restricted net assets: |
|
|
|
|
|
|
|
|
NIC and NSIC: |
|
|
|
|
|
|
|
|
Fixed maturities at fair value (amortized cost: 2016, $9,820; 2015, $9,950) |
| $ | 10,690 |
|
| $ | 11,277 |
|
Short term investments, at fair value |
|
| 290 |
|
|
| 290 |
|
Cash |
|
| 7,168 |
|
|
| 6,208 |
|
Total NIC and NSIC (1) |
| $ | 18,148 |
|
| $ | 17,775 |
|
NHUK: |
|
|
|
|
|
|
|
|
Fixed maturities at fair value (amortized cost: 2016, $457,225; 2015, $458,558) |
| $ | 452,053 |
|
| $ | 448,666 |
|
Short term investments, at fair value |
|
| 63,729 |
|
|
| 71,320 |
|
Cash |
|
| — |
|
|
| 3,262 |
|
Total NHUK (2) |
| $ | 515,782 |
|
| $ | 523,248 |
|
Total Restricted Net Assets |
| $ | 533,930 |
|
| $ | 541,023 |
|
(1) - The restricted net assets for the Insurance CompaniesNIC and NSIC primarily consist of fixed maturities on deposit with various state insurance departments. The cash as of December 31, 20142016 and 2013,2015, as presented in the table above, was on deposit with a U.K. bank to comply with the regulatory requirements of the Prudential Regulation Authority for the underwriting activities of the U.K. Branch.
(2) - The restricted net assets for the Lloyd’s OperationsNHUK consists of fixed maturities and cash held in trust for the benefit of syndicate policyholders and short term investments primarily consisting of overseas deposits in various countries with Lloyd’sLloyd's to support underwriting activities in those countries.
In addition to our Company’s restricted net assets provided in the table above, there are regulatory limitations on the payment of dividends by our subsidiaries, discussed below, and our Company’s letter of credit facility with ING Bank N.V., London Branch, as administrative agent,
NOTE 11. EARNINGS PER SHARE
The following is secured by alla reconciliation of the common stock of NIC.
Insurance Companies
NIC may pay dividends tobasic and diluted EPS computations for the Parent Company out of its statutory earned surplus pursuant to statutory restrictions imposed under the New York insurance law. As ofyears ended December 31, 2014, the maximum amount available for the payment of dividends by NIC in2016, 2015 without prior regulatory approval is $89.4 million. NIC did not pay any dividends to the Parent Company in 2014 or 2013. In 2012, NIC paid $15.0 million in dividends to the Parent Company.and 2014:
|
| Years Ended December 31, |
| |||||||||
amounts in thousands, except share and per share amounts |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||
Net income |
| $ | 82,726 |
|
| $ | 81,057 |
|
| $ | 95,329 |
|
Basic weighted average shares(1) |
|
| 29,073,803 |
|
|
| 28,785,044 |
|
|
| 28,519,536 |
|
Effect of common stock equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
Assumed exercise of stock options and vesting of stock grants |
|
| 957,806 |
|
|
| 866,446 |
|
|
| 773,202 |
|
Diluted weighted average shares |
|
| 30,031,609 |
|
|
| 29,651,490 |
|
|
| 29,292,738 |
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 2.85 |
|
| $ | 2.82 |
|
| $ | 3.34 |
|
Diluted |
| $ | 2.75 |
|
| $ | 2.73 |
|
| $ | 3.25 |
|
(1) - We completed a two-for-one stock split on January 20, 2017. All share and per share data has been retroactively restated on a post-split basis.
NOTE 12. STATUTORY FINANCIAL INFORMATION
The Insurance Companies’following table presents statutory netNet income as filed with the regulatory authorities for 2014, 2013 and 2012 was $75.7 million, $59.4 million and $28.6 million, respectively. The statutory capital and surplus as filedin accordance with statutory accounting practices:
|
| Years Ended December 31, |
| |||||||||
amounts in millions |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||
NIC & NSIC: |
|
|
|
|
|
|
|
|
|
|
|
|
Statutory net income |
| $ | 84.2 |
|
| $ | 60.8 |
|
| $ | 75.7 |
|
Statutory capital and surplus |
| $ | 1,027.3 |
|
| $ | 949.1 |
|
| $ | 893.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Syndicate: |
|
|
|
|
|
|
|
|
|
|
|
|
Syndicate's net income |
| $ | 46.3 |
|
| $ | 41.0 |
|
| $ | 33.8 |
|
Syndicate's capital and surplus |
| $ | 180.7 |
|
| $ | 177.5 |
|
| $ | 140.1 |
|
Our insurance subsidiaries file financial statements prepared in accordance with statutory accounting practices prescribed or permitted by domestic and foreign insurance regulatory authorities. The differences between statutory financial statements and financial statements prepared in accordance with U.S. GAAP vary between domestic and foreign jurisdictions.
For NIC and NSIC, the regulatory authorities was $893.9 million and $804.1 million asNational Association of December 31, 2014 and 2013, respectively.
The NAICInsurance Commissioners (“NAIC”) has codified Statutory Accounting Practices and Procedures (“SAP”) for insurance enterprises. We prepare our statutory basis financial statements in accordance with the most recently updated NAIC SAP manual subject to any deviations prescribed or permitted by the New York Insurance Commissioner. The following table represents some of the significant differences between SAP and GAAP, as they relate to our operations, are as follows: (1) acquisition and commission costs are expensed when incurred, while under GAAP these costs are deferred and amortized as the related premium is earned; (2) bonds are stated at amortized cost, while under GAAP bonds are classified as available-for-sale and reported at fair value, with unrealized gains and losses recognized in other comprehensive income as a separate
component of stockholders’ equity; (3) certain deferred tax assets are not permitted to be included in statutory surplus, while under GAAP deferred taxes are provided to reflect all temporary differences between the carrying values and tax basis of assets and liabilities; (4) unearned premiums and loss reserves are reflected net of ceded amounts, while under GAAP the unearned premiums and loss reserves are reflected gross of ceded amounts; (5) agents’ balances over ninety days due are excluded from the balance sheet, and uncollateralized amounts due from unauthorized reinsurers are deducted from surplus, while under GAAP they are restored to the balance sheet, subject to the usual tests regarding recoverability.
The NAIC has adopted Risked Based Capital (“RBC”) requirements to elevate the adequacy of statutory capital and surplus in relation to risks associated with: (1) asset risk; (2) insurance risk; (3) interest rate and equity market risk; and (4) business risk. The RBC formula is designated as an early warning tool for the states to identify possible undercapitalized companies for the purpose of initiating regulatory action. In the course of operations, we periodically monitor the RBC level of NIC. As of December 31, 2014 and 2013, NIC exceeded our company action RBC levels. The RBC ratio of NIC was 314.8% and 304.2% of our company action level as of December 31, 2014 and 2013, respectively.
As part of its general regulatory oversight process, the New York State Department of Finance conducts detailed examinations of the books, records and accounts of New York insurance companies every three to five years. In 2011, the New York State Department of Finance conducted an examination of NIC and NSIC for the years 2005 through 2009. Our Company has received notice that the New York Department intends to commence an examination of the years 2010 through 2014 on February 17, 2015.
The U.K. Branch is required to maintain certain capital requirements under U.K. regulations and is subject to examination by the U.K. Prudential Regulation Authority (PRA).
Lloyd’s Operations
Lloyd’s sets the corporate member’s required capital annually based on Syndicate 1221’s business plans, rating environment, reserving environment and input arising from Lloyd’s discussions with regulatory and rating agencies. The capital requirement of Syndicate 1221, known as Funds at Lloyd’s (the “FAL”), is currently calculated using the internal Lloyd’s risk-based capital model. The FAL may comprise cash, investments and undrawn letters of credit provided by various banks. As of December 31, 2014 and 2013, the FAL requirement set by Lloyd’s for Syndicate 1221 was $268.1 million (£171.1 million) and $279.3 million (£168.3 million), respectively, based on its business plans, approved in November 2014 and November 2013, respectively.
The valuation of the assets and letters of credit posted for FAL for Syndicate 1221 as of December 31, 2014 and 2013 was $290.1 million (£185.1 million) and $280.2 million (£168.8 million), respectively.
We prepare our Lloyd’s financial statements in accordance with U.K. GAAP basis. The significant differences between U.K. GAAP and U.S. GAAP as they relate to our operations, are as follows: (1) investments are recorded at fair value with unrealized gains and losses being recorded in income while under U.S. GAAP the changes in unrealized gains and losses are recorded through AOCI as a separate component of stockholders’ equity; (2) realized foreign exchange on inter-currency conversions are recorded through the income statement, while under U.S. GAAP foreign exchange translation is recorded through AOCI as a separate component of stockholders’ equity; (3) Lloyd’s membership costs are not deferred for U.K. GAAP, while under U.S. GAAP a prepaid asset is established and amortized over each year of account.operations:
Differences | SAP | U.S. GAAP |
Acquisition and Commission Costs | Expensed when incurred | Costs are generally deferred |
Bonds | Generally stated at amortized cost | Stated at fair value |
Deferred tax assets | Certain temporary differences are not admitted | All temporary differences recognized |
Receivables over 90 days outstanding and other intangible assets | Not recognized | Generally recognized (subject to valuation allowances) |
Unearned premiums and loss reserves | Net of ceded amounts | Gross of ceded amounts |
The primary source of income for NCUL, a corporate member of Lloyd’s and controller of 100% of Syndicate 1221’s stamp capacity, is generated through Syndicate 1221. Syndicate 1221 is subject to oversight by the Council of Lloyd’s. Lloyd’s as a whole is authorized and regulated by the PRA. Syndicate 1221’s income as filed with Lloyd’s for 2014, 2013 and 2012 was $33.8 million, $21.0 million and $54.9 million, respectively.Our other international businesses are also regulated by the PRA. The Syndicate’s capital and surplus as filed with Lloyd’s was $140.1 million (£89.4 million) and $124.2 million (£74.8 million) as of December 31, 2014 and 2013, respectively. The difference between our Syndicate’s capital and surplus and the FAL primarily consists of letters of credit and cash held by our corporate member.
NCUL may pay dividends to the Parent Company up to the extent of available profits that have been distributed from Syndicate 1221. The Syndicate’s capital and surplus as filed with Lloyd’s consists of undistributed profits on closed and open years of account. In connection with the business plan approved in November 2014, NCUL posted allfollowing table represents some of the available undistributed profits on closed years of $139.9 million (£89.3 million)significant differences between U.K. GAAP and U.S. GAAP as they relate to support a portion of the FAL requirement and therefore that amount is not available for distribution to NCUL, which ultimately is not available to the Parent in the form of a dividend. As of December 31, 2014, NCUL has the ability to pay dividends of up to $9.9 million (£6.3 million), consisting of previously distributed profits from Syndicate 1221, to the Parent in the form of dividends.our operations:
Differences | U.K. GAAP | U.S. GAAP |
Unrealized gains/losses | Recognized in income | Recognized in AOCI |
Foreign exchange gains/losses on translation | Recognized in income | Recognized in AOCI |
Lloyd’s membership costs | Expensed when incurred | Amortized over each UWY |
Refer to Note 1,Organization and Summary of Significant Accounting Policies, for additional disclosure on the accounting treatment for the Syndicate 1221 as it relates to closed and open yearsUWYs.
For NIC and NSIC, aggregate minimum required statutory capital and surplus is based on the greater of account.
At our May 2005 Annual Meeting,As of December 31, 2016 and 2015, all insurance subsidiaries individually exceed the stockholders approvedminimum required statutory capital and surplus requirements and all U.S. domestic insurance subsidiaries individually exceeded risk-based capital minimum requirements.
NOTE 13. STOCK-BASED COMPENSATION
As of December 31, 2016, there were 2,000,000 available restricted shares in the Second Amended and Restated 2005 Stock Incentive Plan. The 2005 Stock Incentive Plan authorizes the issuance in the aggregate of 1,000,000 incentive stock options, non-incentive stock options, restricted shares and stock appreciation rights for our common stock. Upon the approval of the 2005 Amended and Restated Stock Incentive Plan, no further awards are being issued under any of our other stock plans or the stock appreciation rights plan. All stock options issued under the 2005 Amended and Restated Stock Incentive Plan are exercisable upon vesting for one share of our common stock and are granted at exercise prices no less than the fair market value of our common stock on the date of grant.
In April 2009, the stockholders approved an amendment to the 2005 Stock Incentive Plan increasing the available number of restricted shares from 1,000,000 to 1,500,000. In April 2013, the stockholders further amended and restated the 2005 Stock Incentive Plan increasing the available number of restricted shares from 1,500,000 to 2,000,000. As of December 31, 2014, 1,523,2282016, 1,531,058 of such awards were issued leaving 476,772468,942 awards available to be issued in subsequent periods.
Stock-based compensation granted under our Company’s stock plans is expensed in tranches over the vesting period. Options and non-performance based grants generally vest equally over a three or four year period and the options have a maximum term of ten years. Certain non-performance based grants vest over five years with one-third vesting in each of the third, fourth and fifth years. Our Company’s performance based share grants generally consist of three types of awards. The restricted stockperformance units issued in 20142016, 2015 and after2014 will cliff vest on the third anniversary of the date of the grant with 100% dependent onin an amount as determined by the rate of cumulative annual growth in tangible book value for the three years immediately prior to the vesting date, with actual shares that vest ranging between 150% to 50% of that portion of the original award. The
Unvested restricted stock units issued between 2011 – 2013 will cliff vest on the third anniversary of the date of grant, with 50% vesting in full, and 50% dependent on the rate of compound annual growth in book value per share for the three years immediately prior to the vesting date, with actual shares that vest ranging between 150% to 0% of that portion of the original award. The performance based restricted stock units issued prior to 2011 generally vest over five years with one-third vesting in each of the third, fourth and fifth years, with 100% dependent on the rolling three-year average return on equity based on the three years prior to the year in which the vesting occurs, with actual shares that vest ranging between 150% to 0% of the original award.
The amounts charged to expense for stock-based compensation for the years ended December 31, 2014, 2013 and 2012 are presented in the following table:
Year Ended December 31, | ||||||||||||
In thousands | 2014 | 2013 | 2012 | |||||||||
Restricted stock units | $ | 11,507 | $ | 3,369 | $ | 7,380 | ||||||
Directors restricted stock grants(1) | 420 | 413 | 390 | |||||||||
Employee stock purchase plan | 194 | 132 | 82 | |||||||||
|
|
|
|
|
| |||||||
Total stock-based compensation | $ | 12,121 | $ | 3,914 | $ | 7,852 | ||||||
|
|
|
|
|
|
Unvested restricted stock units outstanding as of December 31, 2014, 20132016, 2015 and 2012,2014, and changes during the years ended on those dates, are presented in the following table:
December 31, |
| December 31, |
| |||||||||||||||||||||
2014 | 2013 | 2012 |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||||||||||||
Beginning balance | 626,812 | 587,629 | 526,972 |
|
| 1,393,030 |
|
|
| 1,437,784 |
|
|
| 1,253,624 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Granted - Performance | 228,607 | 114,463 | 97,145 |
|
| 404,946 |
|
|
| 370,100 |
|
|
| 457,214 |
| |||||||||
Granted - Non Performance | 59,523 | 155,463 | 146,915 |
|
| 84,000 |
|
|
| 64,316 |
|
|
| 119,046 |
| |||||||||
|
|
| ||||||||||||||||||||||
Total Granted | 288,130 | 269,926 | 244,060 |
|
| 488,946 |
|
|
| 434,416 |
|
|
| 576,260 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Vested - Performance Earned | — | (15,714 | ) | — | ||||||||||||||||||||
Vested - Performance Unearned | (93,453 | ) | (57,585 | ) | (46,998 | ) | ||||||||||||||||||
Vested - Performance |
|
| (285,208 | ) |
|
| (136,160 | ) |
|
| (186,906 | ) | ||||||||||||
Vested - Non Performance | (90,263 | ) | (60,183 | ) | (91,323 | ) |
|
| (55,000 | ) |
|
| (271,200 | ) |
|
| (180,526 | ) | ||||||
|
|
| ||||||||||||||||||||||
Total Vested | (183,716 | ) | (133,482 | ) | (138,321 | ) |
|
| (340,208 | ) |
|
| (407,360 | ) |
|
| (367,432 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Forfeited | (12,334 | ) | (97,261 | ) | (45,082 | ) |
|
| (167,604 | ) |
|
| (71,810 | ) |
|
| (24,668 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Ending balance | 718,892 | 626,812 | 587,629 |
|
| 1,374,164 |
|
|
| 1,393,030 |
|
|
| 1,437,784 |
| |||||||||
|
|
|
As included in the table above, there were 15,714 performance based shares that vested during the year ended December 31, 2013. There were no performance based shares that vested during the years ended December 31, 2014 and 2012.
The fair value of total vested shares for the years ended December 31, 2014, 2013 and 2012 was $5.1 million, $3.5 million and $4.6 million, respectively.
The weighted average grant date fair value per share of all RSUs granted during the years ended December 31, 2014, 2013 and 2012 was $60.75, $55.36 and $48.21, respectively.
As of December 31, 20142016 and 2013,2015, the total unrecognized compensation expense, net of estimated forfeitures, related to unvested RSUsstock units was $16.3$22.3 million and $10.6$17.3 million, respectively, which is expected to be recognized as expense over weighted average periods of 2.31.8 years and 2.22.0 years, respectively. The aggregate fair value of all unvested RSUsrestricted stock units as of December 31, 20142016 and 20132015 was $46.1$87.2 million and $39.6$55.2 million, respectively. The aggregate fair value will not change after the stock split, as shares will be doubled and the price per share will be halved.
Stock options outstanding as of December 31, 2014, 20132016, 2015 and 20122014 are as follows:
| December 31, |
| ||||||||||||||||||||||||||||||||||||||||||||||
December 31, |
| 2016 (1) |
|
| 2015 |
|
| 2014 |
| |||||||||||||||||||||||||||||||||||||||
2014 | 2013 | 2012 |
|
|
|
|
| Average |
|
|
|
|
|
| Average |
|
|
|
|
|
| Average |
| |||||||||||||||||||||||||
# of Shares | Average Exercise Price | # of Shares | Average Exercise Price | # of Shares | Average Exercise Price |
| # of Shares |
|
| Exercise Price |
|
| # of Shares |
|
| Exercise Price |
|
| # of Shares |
|
| Exercise Price |
| |||||||||||||||||||||||||
Beginning balance | 6,750 | $ | 30.65 | 90,250 | $ | 29.94 | 105,250 | $ | 29.50 |
|
| — |
|
| $ | — |
|
|
| 1,500 |
|
| $ | 36.03 |
|
|
| 6,750 |
|
| $ | 30.65 |
| |||||||||||||||
Granted | — | — | — | — | — | — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||
Exercised | (5,250 | ) | $ | 29.11 | (83,500 | ) | $ | 29.88 | (15,000 | ) | $ | 26.90 |
|
| — |
|
| $ | — |
|
|
| (1,500 | ) |
| $ | 36.03 |
|
|
| (5,250 | ) |
| $ | 29.11 |
| ||||||||||||
Expired or forfeited | — | — | — | — | — | $ | — |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||
Ending balance | 1,500 | $ | 36.03 | 6,750 | $ | 30.65 | 90,250 | $ | 29.94 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
|
| 1,500 |
|
| $ | 36.03 |
| |||||||||||||||
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||
Number of options exercisable | 1,500 | $ | 36.03 | 6,750 | $ | 30.65 | 90,250 | $ | 29.94 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
|
| 1,500 |
|
| $ | 36.03 |
| |||||||||||||||
|
|
|
The following table summarizes information about(1) – Our company has not recently issued stock options outstanding as of December 31, 2014:and does not currently have any options outstanding.
Price Range | Outstanding Options | Average Remaining Contract Life | Average Exercise Price | Average Aggregate Intrinsic Value | Exercisable Options | Average Exercise Price | Average Aggregate Intrinsic Value | |||||||||||||||||||||
$31 to $37 | 1,500 | 0.7 | $ | 36.03 | $ | 27.13 | 1,500 | $ | 36.03 | $ | 27.13 | |||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
Total | 1,500 | 0.7 | 1,500 | |||||||||||||||||||||||||
|
|
|
|
We offer an Employee Stock Purchase Plan (the “ESPP”) to all of our eligible employees. Employees are offered the opportunity to purchase our Company’s commonCommon stock at 90% of fair market value at the lower of the price at the beginning or the end of each six month offering period. EmployeesEach employee can invest up to 10% of their base compensation through payroll withholding towards the purchase of our common stock subject to the lesser of 1,000 common stock shares or total market value of $25,000. There will be 9,509were 41,224 shares purchased in 20152016 from funds withheld during the July 1, 20142015 to December 31, 20142015 and January 1, 2016 to June 30, 2016 offering period.periods. There were 19,38641,714 shares purchased in 20142015 in the aggregate from funds withheld during the offering periods of July 1, 20132014 to December 31, 20132014 and January 1, 20142015 to June 30, 2014.2015. We expense both the value of the 10% discount and the “look-back” option, which provides for the more favorable price at either the beginning or end of the offering period.
NOTE 14. RETIREMENT PLANS
We have a 401(k) Plan for all U.S. eligible employees. Each eligible employee can contribute a portion of their salary, limited by certain Federal regulations. Beginning in 2008, we matched 100% of employeeThe expense recorded for all contributions on eligible compensation, up to a maximum of 4% each pay period; our contribution vests immediately. Eligible compensation consisted of gross base salary and annual bonus. In addition, we have the discretion of contributing up to 4% of eligible compensation to each eligible employee’s 401(k) plan irrespective of the employees’ contribution amount, which also vests immediately. Our Company will make a discretionary matching contribution of 3% or $1.6 millionPlan for the year ended December 31, 2014. Our Company made a discretionary2016 was $7.4 million, consisting of $4.2 million for the retirement savings contributions and $3.2 million for the non-discretionary matching contribution of 2% or $0.8 millioncontributions. The expense recorded for all contributions to the 401(k) Plan for the year ended December 31, 2013. There2015 was no discretionary matching contributions$6.3 million, consisting of $3.8 million for the year ended 2012.
We sponsored a standalone retirement savings defined contribution plan covering substantially all of our Company’s U.S. employees through December 31, 2011. The standalone retirement savings defined contribution plan was merged intocontributions and $2.5 million for the 401(k) Plan effective January 1, 2012. Company contributions were equal to 7.5% of each eligible employee’s eligible compensation up to the amount permitted by certain Federal regulations. For 2014, 2013 and 2012 eligible compensation consisted solely of gross base salary. Our Company’s contributions vest at 20% per year for six years with vesting beginning in an employee’s second year of service. For any employee hired prior to January 1, 2008, vesting is calculated based on hours of service and vesting commences on January 1 following an employee’s first full year of service. For employees hired after January 1, 2008, vesting is calculated based on elapsed time and vesting commences on the employees anniversary date.
non-discretionary matching contributions. The expense recorded for all contributions to the 401(k) Plan for the year ended December 31, 2014 was $7.5 million, consisting of $3.8 million for the retirement savings contributions, $2.1 million for the non-discretionary matching contributions and $1.6 million for the discretionary matching contribution. The expense recorded for all contributions to the 401(k) Plan for the year ended December 31, 2013 was $5.1 million, consisting of $2.7 million for the retirement savings contributions, $1.6 million for the non-discretionary matching contributions, and $0.8 million for the discretionary matching contribution. The expense recorded for all contributions to the 401(k) Plan for the year ended December 31, 2012 was $4.6 million, consisting of $2.5 million for the retirement savings contributions and $2.1 million for the non-discretionary matching contributions.
Our Company sponsors a defined contribution plan for all of our Company’s U.K. employees under U.K. regulations. Contributions, which are fully vested when made, are equal to 15%15.0% of each eligible employee’s gross base salary for all U.K. employees hired prior to November 2014 and 12%12.0% for all employees hired after November 2014. All U.K. employees are eligible on their date of hire. The expense recorded for the U.K. defined contribution plan was $2.6$2.9 million, $2.2$2.9 million and $1.9$2.6 million for the years ended December 31, 2016, 2015 and 2014, 2013respectively.
Our Company sponsors defined contribution plans for employees in several of our other European offices, outside of the U.K., under each countries’ regulations. Contributions, which are fully vested when made, range by European office between 2.1% and 2012,26.0% of each eligible employee’s gross base salary. The expense recorded for the other European offices defined contribution plans was $0.5 million, $0.5 million and $0.2 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Such expenses are included in Other operating expenses.
NOTE 15. CONDENSED (Unaudited) QUARTERLY FINANCIAL DATA
The following is a summary of quarterly financial data for the periods indicated:
| March 31, |
|
| June 30, |
|
| September 30, |
|
| December 31, |
| |||||||||||||||||||||
In thousands, except per share amounts | March 31, 2014 | June 30, 2014 | September 30, 2014 | December 31, 2014 | ||||||||||||||||||||||||||||
amounts in thousands, except per share amounts |
| 2016 |
|
| 2016 |
|
| 2016 |
|
| 2016 |
| ||||||||||||||||||||
Gross written premiums | $ | 422,790 | $ | 348,795 | $ | 327,469 | $ | 333,299 |
| $ | 413,877 |
|
| $ | 412,565 |
|
| $ | 374,930 |
|
| $ | 367,539 |
| ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net written premiums | $ | 311,850 | $ | 231,864 | $ | 228,417 | $ | 228,007 |
| $ | 319,820 |
|
| $ | 306,535 |
|
| $ | 277,001 |
|
| $ | 282,868 |
| ||||||||
Change in unearned premiums | (86,578 | ) | (780 | ) | 16,950 | 6,165 |
|
| (55,462 | ) |
|
| (38,543 | ) |
|
| 7,009 |
|
|
| 1,117 |
| ||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net earned premiums | 225,272 | 231,084 | 245,367 | 234,172 |
| $ | 264,358 |
|
| $ | 267,992 |
|
| $ | 284,010 |
|
| $ | 283,985 |
| ||||||||||||
Net investment income | 16,610 | 15,648 | 15,839 | 16,071 |
|
| 19,594 |
|
|
| 19,875 |
|
|
| 19,875 |
|
|
| 20,107 |
| ||||||||||||
Total other-than-temporary impairment losses | — | 158 | (21 | ) |
|
| (109 | ) |
|
| (162 | ) |
|
| 23 |
|
|
| 21 |
| ||||||||||||
Portion of loss recognized in other comprehensive income (before tax) | — | — | (158 | ) | 21 |
|
| 109 |
|
|
| 12 |
|
|
| (23 | ) |
|
| (21 | ) | |||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net other-than-temporary impairment losses recognized in earnings | — | — | — |
|
| — |
|
|
| (150 | ) |
|
| — |
|
|
| — |
| |||||||||||||
Net realized gains (losses) | 833 | 4,473 | 6,718 | 788 |
|
| 1,597 |
|
|
| 1,960 |
|
|
| 1,586 |
|
|
| 4,043 |
| ||||||||||||
Other income (expense) | 10,399 | (1,665 | ) | 1,336 | 586 |
|
| 2,549 |
|
|
| 4,430 |
|
|
| (183 | ) |
|
| 1,905 |
| |||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total revenues | $ | 253,114 | $ | 249,540 | $ | 269,260 | $ | 251,617 |
| $ | 288,098 |
|
| $ | 294,107 |
|
| $ | 305,288 |
|
| $ | 310,040 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net losses and loss adjustment expenses | $ | 135,067 | $ | 140,220 | $ | 135,284 | $ | 134,658 | ||||||||||||||||||||||||
Net losses and LAE |
| $ | 152,956 |
|
| $ | 167,206 |
|
| $ | 172,793 |
|
| $ | 172,493 |
| ||||||||||||||||
Commission expenses | 25,727 | 32,150 | 33,943 | 33,708 |
|
| 37,554 |
|
|
| 40,726 |
|
|
| 42,611 |
|
|
| 44,154 |
| ||||||||||||
Other operating expenses | 47,146 | 47,992 | 50,388 | 51,299 |
|
| 60,809 |
|
|
| 59,074 |
|
|
| 56,137 |
|
|
| 58,076 |
| ||||||||||||
Call premium on Senior Notes | — | — | — | |||||||||||||||||||||||||||||
Interest expense | 3,852 | 4,319 | 3,388 | 3,854 |
|
| 3,858 |
|
|
| 3,858 |
|
|
| 3,859 |
|
|
| 3,860 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total expenses | $ | 211,792 | $ | 224,681 | $ | 223,003 | $ | 223,519 |
| $ | 255,177 |
|
| $ | 270,864 |
|
| $ | 275,400 |
|
| $ | 278,583 |
| ||||||||
Income before income taxes | 41,322 | 24,859 | 46,257 | 28,098 |
|
| 32,921 |
|
|
| 23,243 |
|
|
| 29,888 |
|
|
| 31,457 |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Income tax expense | $ | 13,354 | $ | 7,998 | $ | 15,032 | $ | 8,823 |
| $ | 9,989 |
|
| $ | 7,053 |
|
| $ | 7,875 |
|
| $ | 9,866 |
| ||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net income | $ | 27,968 | $ | 16,861 | $ | 31,225 | $ | 19,275 |
| $ | 22,932 |
|
| $ | 16,190 |
|
| $ | 22,013 |
|
| $ | 21,591 |
| ||||||||
|
|
|
| |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Comprehensive income (loss) | $ | 32,920 | $ | 32,965 | $ | 20,628 | $ | 27,015 |
| $ | 45,721 |
|
| $ | 35,228 |
|
| $ | 18,760 |
|
| $ | (31,712 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Combined ratio | 92.2 | % | 95.3 | % | 89.5 | % | 93.8 | % |
|
| 95.1 | % |
|
| 99.6 | % |
|
| 95.6 | % |
|
| 96.7 | % | ||||||||
Net income (loss) per share: | ||||||||||||||||||||||||||||||||
Net income per share:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Basic | $ | 1.96 | $ | 1.18 | $ | 2.19 | $ | 1.35 |
| $ | 0.79 |
|
| $ | 0.56 |
|
| $ | 0.76 |
|
| $ | 0.74 |
| ||||||||
Diluted | $ | 1.94 | $ | 1.17 | $ | 2.14 | $ | 1.31 |
| $ | 0.77 |
|
| $ | 0.54 |
|
| $ | 0.73 |
|
| $ | 0.71 |
|
In thousands, except per share amounts Gross written premiums Revenues: Net written premiums Change in unearned premiums Net earned premiums Net investment income Total other-than-temporary impairment losses Portion of loss recognized in other comprehensive income (before tax) Net other-than-temporary impairment losses recognized in earnings Net realized gains Other income (expense) Total revenues Expenses: Net losses and loss adjustment expenses Commission expenses Other operating expenses Call premium on Senior Notes Interest expense Total expenses Income before income taxes Income tax expense Net income Comprehensive income Combined ratio Net income per share: Basic Diluted(1) - We completed a two-for-one stock split on January 20, 2017. All share and per share data has been retroactively restated on a post-split basis. March 31,
2013 June 30,
2013 September 30,
2013 December 31,
2013 $ 393,222 $ 332,128 $ 312,076 $ 333,091 $ 269,452 $ 198,469 $ 196,556 $ 223,445 (67,124 ) 7,345 17,339 (3,543 ) 202,328 205,814 213,895 219,902 13,657 14,246 14,094 14,254 (42 ) — (1,821 ) (530 ) — — — — (42 ) — (1,821 ) (530 ) 4,814 3,345 (988 ) 15,768 618 (915 ) (210 ) (665 ) $ 221,375 $ 222,490 $ 224,970 $ 248,729 $ 131,342 $ 131,148 $ 125,086 $ 131,385 26,555 28,391 27,685 30,863 40,874 40,678 39,056 43,826 — — — 17,895 2,051 2,052 2,053 4,351 $ 200,822 $ 202,269 $ 193,880 $ 228,320 20,553 20,221 31,090 20,409 $ 6,643 $ 6,284 $ 9,804 $ 6,076 $ 13,910 $ 13,937 $ 21,286 $ 14,333 $ 14,785 $ (24,829 ) $ 25,462 $ 1,200 97.9 % 97.7 % 89.8 % 94.0 % $ 0.99 $ 0.99 $ 1.50 $ 1.01 $ 0.97 $ 0.97 $ 1.48 $ 1.00
|
| March 31, |
|
| June 30, |
|
| September 30, |
|
| December 31, |
| ||||
amounts in thousands, except per share amounts |
| 2015 |
|
| 2015 |
|
| 2015 |
|
| 2015 |
| ||||
Gross written premiums |
| $ | 396,460 |
|
| $ | 379,471 |
|
| $ | 354,062 |
|
| $ | 323,509 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums |
| $ | 288,958 |
|
| $ | 258,244 |
|
| $ | 251,939 |
|
| $ | 244,719 |
|
Change in unearned premiums |
|
| (52,826 | ) |
|
| (15,916 | ) |
|
| 2,143 |
|
|
| 6,826 |
|
Net earned premiums |
| $ | 236,132 |
|
| $ | 242,328 |
|
| $ | 254,082 |
|
| $ | 251,545 |
|
Net investment income |
|
| 16,253 |
|
|
| 16,595 |
|
|
| 17,371 |
|
|
| 18,499 |
|
Total other-than-temporary impairment losses |
|
| — |
|
|
| (423 | ) |
|
| (1,298 | ) |
|
| (123 | ) |
Portion of loss recognized in other comprehensive income (before tax) |
|
| — |
|
|
| — |
|
|
| 23 |
|
|
| 123 |
|
Net other-than-temporary impairment losses recognized in earnings |
|
| — |
|
|
| (423 | ) |
|
| (1,275 | ) |
|
| — |
|
Net realized gains |
|
| 5,596 |
|
|
| 4,339 |
|
|
| 518 |
|
|
| (2,080 | ) |
Other income (expense) |
|
| 2,242 |
|
|
| (4,362 | ) |
|
| (2,518 | ) |
|
| 4,147 |
|
Total revenues |
| $ | 260,223 |
|
| $ | 258,477 |
|
| $ | 268,178 |
|
| $ | 272,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and LAE |
| $ | 130,198 |
|
| $ | 141,973 |
|
| $ | 146,546 |
|
| $ | 153,881 |
|
Commission expenses |
|
| 32,905 |
|
|
| 31,480 |
|
|
| 34,253 |
|
|
| 31,339 |
|
Other operating expenses |
|
| 54,909 |
|
|
| 52,789 |
|
|
| 56,599 |
|
|
| 59,219 |
|
Interest expense |
|
| 3,855 |
|
|
| 3,856 |
|
|
| 3,856 |
|
|
| 3,857 |
|
Total expenses |
| $ | 221,867 |
|
| $ | 230,098 |
|
| $ | 241,254 |
|
| $ | 248,296 |
|
Income before income taxes |
|
| 38,356 |
|
|
| 28,379 |
|
|
| 26,924 |
|
|
| 23,815 |
|
Income tax expense |
| $ | 12,427 |
|
| $ | 9,195 |
|
| $ | 8,723 |
|
| $ | 6,072 |
|
Net income |
| $ | 25,929 |
|
| $ | 19,184 |
|
| $ | 18,201 |
|
| $ | 17,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
| $ | 27,052 |
|
| $ | (3,789 | ) |
| $ | 18,849 |
|
| $ | 15,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
| 92.3 | % |
|
| 93.4 | % |
|
| 93.4 | % |
|
| 97.2 | % |
Net income per share:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.90 |
|
| $ | 0.67 |
|
| $ | 0.63 |
|
| $ | 0.62 |
|
Diluted |
| $ | 0.89 |
|
| $ | 0.65 |
|
| $ | 0.61 |
|
| $ | 0.59 |
|
(1) - We completed a two-for-one stock split on January 20, 2017. All per share data has been retroactively restated on a post-split basis.
NOTE 16. SUBSEQUENT EVENTS
On December 6, 2016, our Board of Directors declared a two-for-one stock split of The Navigators Group, Inc. Common stock, to be effected in the form of a stock dividend. Stockholders of record at the close of business on December 30, 2016 received one additional share of Common stock for every share of Common stock held. The additional shares of Common stock were issued on January 20, 2017. All disclosures of shares and per share data have been retroactively adjusted to reflect the stock split for all periods presented. In addition, on February 16, 2017, our Board of Directors declared a cash dividend on The Navigators Group, Inc. Common stock of $0.045 per share, payable on March 24, 2017 to stockholders of record on March 3, 2017.
Effective January 1, 2017, we entered into a reinsurance arrangement to cede 100% of the unearned premium as of such date on the North American exposures of our Property business underwritten at Lloyd’s to Vibe Syndicate Management Limited (“Vibe”). All losses occurring after the effective date on this business will be covered by Vibe. Also, effective January 1, 2017, the Parent Company sold its insurance agency operations in Sweden and Denmark to Ryan Specialty Group, LLC (“RSG”). The transaction represents a 100% acquisition of its Sweden and Denmark corporations, NUAL AB and Navigators A/S, respectively. This transaction also included the transfer of the operating lease for the Stockholm office to RSG. We do not expect these transactions to have a material effect on our financial statements.
On February 16, 2017, our Company entered into that certain Guarantee, pursuant to which it guaranteed all of the liabilities and obligations of NIIC. The Guarantee would remain effective until all of such liabilities and obligations are discharged, and in the event that our Company does not meets its obligations under the Guarantee, any person who is covered by an insurance policy, certificate of coverage or reinsurance contract issued by NIIC would be a third party beneficiary under the Guarantee. Refer to Note 8, Commitment and Contingencies, in the Notes to Consolidated Financial Statements, for additional information on the Guarantee.
SCHEDULE I
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Summary of Consolidated Investments-Other ThanInvestments -
Other than Investments in Related Parties
December 31, 2014
|
| December 31, 2016 |
| |||||||||||||
|
|
|
|
|
| Gross |
|
| Gross |
|
|
|
|
| ||
|
|
|
|
|
| Unrealized |
|
| Unrealized |
|
| Amortized |
| |||
amounts in thousands |
| Fair Value(1) |
|
| Gains |
|
| Losses |
|
| Cost |
| ||||
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury bonds, agency bonds and foreign government bonds |
| $ | 273,776 |
|
| $ | 2,192 |
|
| $ | (5,128 | ) |
| $ | 276,712 |
|
States, municipalities and political subdivisions |
|
| 547,415 |
|
|
| 11,542 |
|
|
| (4,036 | ) |
|
| 539,909 |
|
Mortgage-backed and asset-backed securities: |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Agency mortgage-backed securities |
|
| 487,364 |
|
|
| 4,016 |
|
|
| (6,585 | ) |
|
| 489,933 |
|
Residential mortgage obligations |
|
| 20,530 |
|
|
| 453 |
|
|
| (55 | ) |
|
| 20,132 |
|
Asset-backed securities |
|
| 314,601 |
|
|
| 824 |
|
|
| (1,178 | ) |
|
| 314,955 |
|
Commercial mortgage-backed securities |
|
| 154,139 |
|
|
| 2,859 |
|
|
| (1,904 | ) |
|
| 153,184 |
|
Subtotal |
| $ | 976,634 |
|
| $ | 8,152 |
|
| $ | (9,722 | ) |
| $ | 978,204 |
|
Corporate bonds |
|
| 838,057 |
|
|
| 10,185 |
|
|
| (5,528 | ) |
|
| 833,400 |
|
Total fixed maturities |
| $ | 2,635,882 |
|
| $ | 32,071 |
|
| $ | (24,414 | ) |
| $ | 2,628,225 |
|
Equity securities |
|
| 349,142 |
|
|
| 27,016 |
|
|
| (5,785 | ) |
|
| 327,911 |
|
Other invested assets |
|
| 1,960 |
|
|
| — |
|
|
| — |
|
|
| 1,960 |
|
Short-term investments |
|
| 143,539 |
|
|
| 88 |
|
|
| — |
|
|
| 143,451 |
|
Total investments |
| $ | 3,130,523 |
|
| $ | 59,175 |
|
| $ | (30,199 | ) |
| $ | 3,101,547 |
|
December 31, 2014 | ||||||||||||||||
In thousands | Fair Value | Gross Unrealized Gains | Gross Unrealized Losses | Amortized Cost | ||||||||||||
Fixed maturities: | ||||||||||||||||
U.S. Treasury bonds, agency bonds and foreign government bonds | $ | 397,923 | $ | 3,431 | $ | (5,965 | ) | $ | 400,457 | |||||||
States, municipalities and political subdivisions | 541,007 | 19,204 | (558 | ) | 522,361 | |||||||||||
Mortgage-backed and asset-backed securities: | ||||||||||||||||
Agency mortgage-backed securities | 364,622 | 8,476 | (998 | ) | 357,144 | |||||||||||
Residential mortgage obligations | 34,087 | 1,153 | (138 | ) | 33,072 | |||||||||||
Asset-backed securities | 206,413 | 380 | (964 | ) | 206,997 | |||||||||||
Commercial mortgage-backed securities | 206,318 | 6,630 | (98 | ) | 199,786 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Subtotal | $ | 811,440 | $ | 16,639 | $ | (2,198 | ) | $ | 796,999 | |||||||
Corporate bonds | 615,564 | 13,048 | (1,626 | ) | 604,142 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed maturities | $ | 2,365,934 | $ | 52,322 | $ | (10,347 | ) | $ | 2,323,959 | |||||||
Equity securities - common stocks | 127,183 | 28,520 | (1,254 | ) | 99,917 | |||||||||||
Equity securities - preferred stocks | 57,112 | 2,236 | (50 | ) | 54,926 | |||||||||||
Short-term investments | 179,506 | — | (21 | ) | 179,527 | |||||||||||
Cash | 90,751 | — | — | 90,751 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 2,820,486 | $ | 83,078 | $ | (11,672 | ) | $ | 2,749,080 | |||||||
|
|
|
|
|
|
|
|
(1) Other invested assets are accounted for using the equity method of accounting. All other investments are shown at fair value.
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Condensed Financial Information of Registrant
The Navigators Group, Inc.
Balance Sheets
(Parent Company)
(In thousands, except
|
| December 31, |
| |||||
amounts in thousands except share amounts |
| 2016 |
|
| 2015 |
| ||
ASSETS |
|
|
|
|
|
|
|
|
Investments |
| $ | 1,660 |
|
| $ | 89,586 |
|
Cash |
|
| 11,003 |
|
|
| 6,417 |
|
Investments in subsidiaries |
|
| 1,381,652 |
|
|
| 1,232,012 |
|
Goodwill and other intangible assets |
|
| 2,534 |
|
|
| 2,534 |
|
Other assets |
|
| 49,588 |
|
|
| 33,647 |
|
Total assets |
| $ | 1,446,437 |
|
| $ | 1,364,196 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Senior notes |
| $ | 263,728 |
|
| $ | 263,580 |
|
Accounts payable and other liabilities |
|
| 1,347 |
|
|
| 1,294 |
|
Accrued interest payable |
|
| 3,174 |
|
|
| 3,174 |
|
Total liabilities |
| $ | 268,249 |
|
| $ | 268,048 |
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity:(1) |
|
|
|
|
|
|
|
|
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued |
| $ | — |
|
| $ | — |
|
Common stock, $.10 par value, authorized 50,000,000 shares, issued 36,146,899 shares for 2016 and 35,884,538 shares for 2015 |
|
| 3,612 |
|
|
| 3,586 |
|
Additional paid-in capital |
|
| 373,983 |
|
|
| 356,036 |
|
Treasury stock, at cost (7,022,760 shares for 2016 and 2015) |
|
| (155,801 | ) |
|
| (155,801 | ) |
Retained earnings |
|
| 947,519 |
|
|
| 868,723 |
|
Accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities available-for-sale, net of tax |
|
| 8,882 |
|
|
| 23,611 |
|
Foreign currency translation adjustment, net of tax |
|
| (7 | ) |
|
| (7 | ) |
Total stockholders' equity |
| $ | 1,178,188 |
|
| $ | 1,096,148 |
|
Total liabilities and stockholders' equity |
| $ | 1,446,437 |
|
| $ | 1,364,196 |
|
(1) - We completed a two-for-one stock split on January 20, 2017. All share amounts)and per share data has been retroactively restated on a post-split basis.
December 31, | ||||||||
2014 | 2013 | |||||||
ASSETS | ||||||||
Cash and investments | $ | 101,032 | $ | 100,676 | ||||
Investments in subsidiaries | 1,163,822 | 1,040,214 | ||||||
Goodwill and other intangible assets | 2,534 | 2,534 | ||||||
Other assets | 27,531 | 26,538 | ||||||
|
|
|
| |||||
Total assets | $ | 1,294,919 | $ | 1,169,962 | ||||
|
|
|
| |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Liabilities: | ||||||||
Senior Notes | $ | 263,440 | $ | 263,308 | ||||
Accounts payable and other liabilities | 1,081 | 802 | ||||||
Accrued interest payable | 3,174 | 3,640 | ||||||
|
|
|
| |||||
Total liabilities | $ | 267,695 | $ | 267,750 | ||||
|
|
|
| |||||
Stockholders’ Equity: | ||||||||
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued | $ | — | $ | — | ||||
Common stock, $.10 par value, authorized 50,000,000 shares, issued 17,792,846 shares for 2014 and 17,709,876 shares for 2013 | 1,778 | 1,770 | ||||||
Additional paid-in capital | 347,022 | 335,546 | ||||||
Treasury stock, at cost (3,511,380 shares for 2014 and 2013) | (155,801 | ) | (155,801 | ) | ||||
Retained earnings | 787,666 | 692,337 | ||||||
Accumulated other comprehensive income: | ||||||||
Net unrealized gains (losses) on securities available-for-sale, net of tax | 46,573 | 23,387 | ||||||
Foreign currency translation adjustment, net of tax | (14 | ) | 4,973 | |||||
|
|
|
| |||||
Total stockholders’ equity | $ | 1,027,224 | $ | 902,212 | ||||
|
|
|
| |||||
Total liabilities and stockholders’ equity | $ | 1,294,919 | $ | 1,169,962 | ||||
|
|
|
|
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Condensed Financial Information of Registrant (Continued)
The Navigators Group, Inc.
Statements of Income
(Parent Company)
(In thousands)
|
| Years Ended December 31, |
| |||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
| $ | 53 |
|
| $ | 147 |
|
| $ | 76 |
|
Total revenues |
| $ | 53 |
|
| $ | 147 |
|
| $ | 76 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 15,435 |
|
|
| 15,424 |
|
|
| 15,413 |
|
Other (income) expense |
|
| 22 |
|
|
| — |
|
|
| — |
|
Total expenses |
| $ | 15,457 |
|
| $ | 15,424 |
|
| $ | 15,413 |
|
Income (loss) before income tax benefit |
| $ | (15,404 | ) |
| $ | (15,277 | ) |
| $ | (15,337 | ) |
Income tax benefit |
|
| (8,009 | ) |
|
| (5,472 | ) |
|
| (5,287 | ) |
Income (loss) before equity in undistributed net income of wholly owned subsidiaries |
| $ | (7,395 | ) |
| $ | (9,805 | ) |
| $ | (10,050 | ) |
Equity in undistributed net income of wholly-owned subsidiaries |
|
| 90,121 |
|
|
| 90,862 |
|
|
| 105,379 |
|
Net income |
| $ | 82,726 |
|
| $ | 81,057 |
|
| $ | 95,329 |
|
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Revenues: | ||||||||||||
Net investment income | $ | 76 | $ | 13 | $ | 341 | ||||||
Dividends received from wholly-owned subsidiaries | — | — | 15,000 | |||||||||
|
|
|
|
|
| |||||||
Total revenues | $ | 76 | $ | 13 | $ | 15,341 | ||||||
|
|
|
|
|
| |||||||
Expenses: | ||||||||||||
Call premium on Senior Notes | $ | — | $ | 17,895 | $ | — | ||||||
Interest expense | 15,413 | 10,507 | 8,198 | |||||||||
Other (income) expense | — | 2 | 1,749 | |||||||||
|
|
|
|
|
| |||||||
Total expenses | $ | 15,413 | $ | 28,404 | $ | 9,947 | ||||||
|
|
|
|
|
| |||||||
Income (loss) before income tax benefit | $ | (15,337 | ) | $ | (28,391 | ) | $ | 5,394 | ||||
Income tax benefit | (5,287 | ) | (9,886 | ) | (3,332 | ) | ||||||
|
|
|
|
|
| |||||||
Income (loss) before equity in undistributed net income of wholly owned subsidiaries | $ | (10,050 | ) | $ | (18,505 | ) | $ | 8,726 | ||||
Equity in undistributed net income of wholly-owned subsidiaries | 105,379 | 81,971 | 55,036 | |||||||||
|
|
|
|
|
| |||||||
Net income | $ | 95,329 | $ | 63,466 | $ | 63,762 | ||||||
|
|
|
|
|
|
SCHEDULE II
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Condensed Financial Information of Registrant (Continued)
The Navigators Group, Inc.
Statements of Cash Flows
(Parent Company)
(In thousands)
|
| Years Ended December 31, |
| |||||||||
amounts in thousands |
| 2016 |
|
| 2015 |
|
| 2014 |
| |||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 82,726 |
|
| $ | 81,057 |
|
| $ | 95,329 |
|
Adjustments to reconcile net income to net cash provided by (used in) operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net income of wholly-owned subsidiaries |
|
| (90,121 | ) |
|
| (90,862 | ) |
|
| (105,379 | ) |
Dividends received from subsidiaries |
|
| 5,000 |
|
|
| — |
|
|
| — |
|
Other |
|
| 379 |
|
|
| 3,373 |
|
|
| 9,211 |
|
Net cash provided by (used in) operating activities |
| $ | (2,016 | ) |
| $ | (6,432 | ) |
| $ | (839 | ) |
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
| $ | — |
|
| $ | 1,250 |
|
| $ | 3,200 |
|
Purchases |
|
| — |
|
|
| — |
|
|
| — |
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
| — |
|
|
| — |
|
|
| — |
|
Purchases |
|
| — |
|
|
| — |
|
|
| — |
|
Net (increase) decrease in short-term investments |
|
| 87,942 |
|
|
| 3,918 |
|
|
| (3,424 | ) |
Net cash provided by (used in) investing activities |
| $ | 87,942 |
|
| $ | 5,168 |
|
| $ | (224 | ) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution to subsidiary |
| $ | (79,250 | ) |
| $ | — |
|
| $ | — |
|
Proceeds of stock issued from employee stock purchase plan |
|
| 1,840 |
|
|
| 1,352 |
|
|
| 1,067 |
|
Proceeds of stock issued from exercise of stock options |
|
| — |
|
|
| 29 |
|
|
| 153 |
|
Dividends paid |
|
| (3,930 | ) |
|
| — |
|
|
| — |
|
Net cash provided by (used in) financing activities |
| $ | (81,340 | ) |
| $ | 1,381 |
|
| $ | 1,220 |
|
Increase (decrease) in cash |
| $ | 4,586 |
|
| $ | 117 |
|
| $ | 157 |
|
Cash at beginning of year |
|
| 6,417 |
|
|
| 6,300 |
|
|
| 6,143 |
|
Cash at end of year |
| $ | 11,003 |
|
| $ | 6,417 |
|
| $ | 6,300 |
|
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Operating activities: | ||||||||||||
Net income | $ | 95,329 | $ | 63,466 | $ | 63,762 | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operations: | ||||||||||||
Equity in undistributed net income of wholly-owned subsidiaries | (105,379 | ) | (81,971 | ) | (70,036 | ) | ||||||
Dividends received from subsidiaries | — | — | 15,000 | |||||||||
Call premium on redemption of Senior Notes | — | 17,895 | — | |||||||||
Other | 9,211 | 2,098 | (3,265 | ) | ||||||||
|
|
|
|
|
| |||||||
Net cash provided by (used in) operating activities | $ | (839 | ) | $ | 1,488 | $ | 5,461 | |||||
|
|
|
|
|
| |||||||
Investing activities: | ||||||||||||
Fixed maturities, available-for-sale | ||||||||||||
Sales | $ | 3,200 | $ | 8,754 | $ | 7,986 | ||||||
Purchases | — | (1,249 | ) | (14,700 | ) | |||||||
Equity securities | ||||||||||||
Sales | — | — | — | |||||||||
Purchases | — | — | — | |||||||||
Net increase in short-term investments | (3,424 | ) | (89,988 | ) | (167 | ) | ||||||
|
|
|
|
|
| |||||||
Net cash provided by (used in) investing activities | $ | (224 | ) | $ | (82,483 | ) | $ | (6,881 | ) | |||
|
|
|
|
|
| |||||||
Financing activities: | ||||||||||||
Capital contribution to subsidiary | $ | — | $ | (50,000 | ) | $ | — | |||||
Net Proceeds from Debt Offering | — | 263,278 | — | |||||||||
Redemption of 7.0% Senior Notes Due May 1, 2016 | — | (132,437 | ) | — | ||||||||
Purchase of treasury stock | — | — | — | |||||||||
Proceeds of stock issued from employee stock purchase plan | 1,067 | 821 | 672 | |||||||||
Proceeds of stock issued from exercise of stock options | 153 | 2,495 | 404 | |||||||||
|
|
|
|
|
| |||||||
Net cash provided by (used in) financing activities | $ | 1,220 | $ | 84,157 | $ | 1,076 | ||||||
|
|
|
|
|
| |||||||
Increase (decrease) in cash | $ | 157 | $ | 3,162 | $ | (344 | ) | |||||
Cash at beginning of year | 6,143 | 2,981 | 3,325 | |||||||||
|
|
|
|
|
| |||||||
Cash at end of year | $ | 6,300 | $ | 6,143 | $ | 2,981 | ||||||
|
|
|
|
|
|
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
In thousands | Deferred policy acquisition costs | Reserve for losses and loss adjustment expenses | Unearned Premiums | Other policy claims and benefits payable | Net earned premiums | Net investment income(1) | Losses and loss adjustment expenses incurred | Amortization of deferred policy acquisition costs(2) | Other operating expenses (1) | Net written premiums | ||||||||||||||||||||||||||||||
Year ended December 31, 2014 | ||||||||||||||||||||||||||||||||||||||||
Insurance Companies | $ | 63,200 | $ | 1,645,984 | $ | 579,331 | $ | — | $ | 704,574 | $ | 56,714 | $ | 434,396 | $ | 85,137 | $ | 138,675 | $ | 752,773 | ||||||||||||||||||||
Lloyd’s Operations | 16,252 | 513,650 | 186,836 | — | 231,321 | 7,378 | 110,833 | 42,558 | 58,150 | 247,365 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
$ | 79,452 | $ | 2,159,634 | $ | 766,167 | $ | — | $ | 935,895 | $ | 64,092 | 545,229 | $ | 127,695 | 196,825 | 1,000,138 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Year ended December 31, 2013 | ||||||||||||||||||||||||||||||||||||||||
Insurance Companies | $ | 54,984 | $ | 1,523,175 | $ | 536,303 | $ | — | $ | 639,338 | $ | 49,083 | $ | 415,413 | $ | 81,132 | $ | 119,920 | $ | 680,008 | ||||||||||||||||||||
Lloyd’s Operations | 12,023 | 521,896 | 178,303 | — | 202,601 | 7,160 | 103,548 | 34,710 | 44,514 | 207,914 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
$ | 67,007 | $ | 2,045,071 | $ | 714,606 | $ | — | $ | 841,939 | $ | 56,243 | $ | 518,961 | $ | 115,842 | $ | 164,434 | $ | 887,922 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Year ended December 31, 2012 | ||||||||||||||||||||||||||||||||||||||||
Insurance Companies | $ | 48,294 | $ | 1,567,045 | $ | 470,425 | $ | — | $ | 571,439 | $ | 46,549 | $ | 417,082 | $ | 81,370 | $ | 113,625 | $ | 622,956 | ||||||||||||||||||||
Lloyd’s Operations | 12,711 | 530,003 | 171,982 | — | 210,525 | 7,551 | 80,351 | 42,449 | 45,454 | 210,699 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
$ | 61,005 | $ | 2,097,048 | $ | 642,407 | $ | — | $ | 781,964 | $ | 54,100 | $ | 497,433 | $ | 123,819 | $ | 159,079 | $ | 833,655 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary Insurance Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amortization |
|
|
|
|
|
|
|
|
| |
|
|
| Deferred |
|
|
|
|
|
|
|
|
|
| Other policy |
|
|
|
|
|
|
|
|
|
|
|
|
|
| of deferred |
|
|
|
|
|
|
|
|
| |||
|
|
| policy |
|
| Reserve |
|
|
|
|
|
| claims and |
|
| Net |
|
| Net |
|
| Losses |
|
| policy |
|
| Other |
|
| Net |
| |||||||||
|
|
| acquisition |
|
| for losses |
|
| Unearned |
|
| benefits |
|
| earned |
|
| investment |
|
| and LAE |
|
| acquisition |
|
| operating |
|
| written |
| ||||||||||
amounts in thousands |
|
| costs |
|
| and LAE |
|
| premiums |
|
| payable |
|
| premiums |
|
| income (1) |
|
| incurred |
|
| costs (2) |
|
| expenses (1) |
|
| premiums |
| ||||||||||
Year ended December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NIC, NSIC and Navigators Management Company, Inc. |
|
| $ | 83,060 |
|
| $ | 1,753,630 |
|
| $ | 640,210 |
|
| $ | — |
|
| $ | 798,151 |
|
| $ | 71,044 |
|
| $ | 482,789 |
|
| $ | 108,809 |
|
| $ | 162,387 |
|
| $ | 844,987 |
|
NHUK |
|
|
| 36,600 |
|
|
| 536,097 |
|
|
| 247,134 |
|
|
| — |
|
|
| 302,194 |
|
|
| 8,344 |
|
|
| 182,659 |
|
|
| 56,236 |
|
|
| 68,152 |
|
|
| 341,237 |
|
NIIC |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 25 |
|
|
| — |
|
|
| — |
|
|
| 44 |
|
|
| — |
|
|
|
| $ | 119,660 |
|
| $ | 2,289,727 |
|
| $ | 887,344 |
|
| $ | — |
|
| $ | 1,100,345 |
|
| $ | 79,413 |
|
| $ | 665,448 |
|
| $ | 165,045 |
|
| $ | 230,583 |
|
| $ | 1,186,224 |
|
Year ended December 31, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NIC, NSIC and Navigators Management Company, Inc. |
|
| $ | 67,144 |
|
| $ | 1,692,886 |
|
| $ | 607,062 |
|
| $ | — |
|
| $ | 722,749 |
|
| $ | 61,863 |
|
| $ | 451,296 |
|
| $ | 88,597 |
|
| $ | 153,194 |
|
| $ | 757,117 |
|
NHUK |
|
|
| 24,839 |
|
|
| 509,758 |
|
|
| 213,614 |
|
|
| — |
|
|
| 261,338 |
|
|
| 6,708 |
|
|
| 121,302 |
|
|
| 41,380 |
|
|
| 67,449 |
|
|
| 286,743 |
|
|
|
| $ | 91,983 |
|
| $ | 2,202,644 |
|
| $ | 820,676 |
|
| $ | — |
|
| $ | 984,087 |
|
| $ | 68,571 |
|
| $ | 572,598 |
|
| $ | 129,977 |
|
| $ | 220,643 |
|
| $ | 1,043,860 |
|
Year ended December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NIC, NSIC and Navigators Management Company, Inc. |
|
| $ | 63,200 |
|
| $ | 1,645,984 |
|
| $ | 579,331 |
|
| $ | — |
|
| $ | 704,574 |
|
| $ | 56,714 |
|
| $ | 434,396 |
|
| $ | 85,137 |
|
| $ | 138,675 |
|
| $ | 752,773 |
|
NHUK |
|
|
| 16,252 |
|
|
| 513,650 |
|
|
| 186,836 |
|
|
| — |
|
|
| 231,321 |
|
|
| 7,378 |
|
|
| 110,833 |
|
|
| 42,558 |
|
|
| 58,150 |
|
|
| 247,365 |
|
|
|
| $ | 79,452 |
|
| $ | 2,159,634 |
|
| $ | 766,167 |
|
| $ | — |
|
| $ | 935,895 |
|
| $ | 64,092 |
|
| $ | 545,229 |
|
| $ | 127,695 |
|
| $ | 196,825 |
|
| $ | 1,000,138 |
|
(1) - Net investment income and Other operating expenses reflect only such amounts attributable to the Company’sour Company's insurance operations.
(2) - Amortization of deferred policy acquisition costs reflects only such amounts attributable to the Company’sour Company's insurance operations. A portion of these costs is eliminated in consolidation.
SCHEDULE IV
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
In thousands | Direct Amount | Ceded to other companies | Assumed from other companies | Net amount | Percentage of amount assumed to net | |||||||||||||||
Year ended December 31, 2014 | ||||||||||||||||||||
Property-Casualty | $ | 1,184,538 | $ | 432,214 | $ | 247,814 | $ | 1,000,138 | 25 | % | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Year ended December 31, 2013 | ||||||||||||||||||||
Property-Casualty | $ | 1,127,331 | $ | 482,596 | $ | 243,187 | $ | 887,922 | 27 | % | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Year ended December 31, 2012 | ||||||||||||||||||||
Property-Casualty | $ | 1,034,658 | $ | 452,810 | $ | 251,807 | $ | 833,655 | 30 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Ceded to |
|
| Assumed |
|
|
|
|
|
| Percentage |
| |||
|
| Direct |
|
| other |
|
| from other |
|
| Net |
|
| of amount |
| |||||
amounts in thousands |
| Amount |
|
| companies |
|
| companies |
|
| amount |
|
| assumed to net |
| |||||
Year ended December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P&C |
| $ | 1,403,865 |
|
| $ | 382,687 |
|
| $ | 165,046 |
|
| $ | 1,186,224 |
|
|
| 14 | % |
Year ended December 31, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P&C |
| $ | 1,277,728 |
|
| $ | 409,642 |
|
| $ | 175,774 |
|
| $ | 1,043,860 |
|
|
| 17 | % |
Year ended December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
P&C |
| $ | 1,232,012 |
|
| $ | 432,215 |
|
| $ | 200,341 |
|
| $ | 1,000,138 |
|
|
| 20 | % |
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
| Balance at |
|
| Charged (Credited) to |
|
| Charged to |
|
| Deductions |
|
| Balance at |
| ||||||||||||||||||||||||||
In thousands | Balance at January 1, 2014 | Charged (Credited) to Costs and Expenses | Charged to Other Accounts | Deductions (Describe) | Balance at December 31, 2014 | |||||||||||||||||||||||||||||||||||
Description: | ||||||||||||||||||||||||||||||||||||||||
amounts in thousands |
| January 1 |
|
| Costs and Expenses |
|
| Other Accounts |
|
| (Describe) |
|
| December 31 |
| |||||||||||||||||||||||||
Year ended December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Allowance for uncollectable reinsurance | $ | 11,332 | $ | — | $ | — | $ | — | $ | 11,332 |
| $ | 6,921 |
|
| $ | 5,157 |
|
| $ | — |
|
| $ | — |
|
| $ | 12,078 |
| ||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Valuation allowance in deferred taxes | $ | 554 | $ | 222 | $ | — | $ | — | $ | 776 |
| $ | 721 |
|
| $ | (22 | ) |
| $ | — |
|
| $ | — |
|
| $ | 699 |
| ||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
Year ended December 31, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Allowance for uncollectable reinsurance |
| $ | 11,332 |
|
| $ | (4,411 | ) |
| $ | — |
|
| $ | — |
|
| $ | 6,921 |
| ||||||||||||||||||||
Valuation allowance in deferred taxes |
| $ | 776 |
|
| $ | (55 | ) |
| $ | — |
|
| $ | — |
|
| $ | 721 |
| ||||||||||||||||||||
Year ended December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Allowance for uncollectable reinsurance |
| $ | 11,332 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 11,332 |
| ||||||||||||||||||||
Valuation allowance in deferred taxes |
| $ | 554 |
|
| $ | 222 |
|
| $ | — |
|
| $ | — |
|
| $ | 776 |
|
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Supplementary Information Concerning Property-CasualtyP&C Insurance Operations
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Losses and LAE |
|
| Amortization |
|
|
|
|
|
|
|
|
| |||||
|
| Deferred policy |
|
| Reserve |
|
|
|
|
|
| Net |
|
| Net |
|
| expenses incurred related to |
|
| of deferred policy |
|
| Other |
|
| Net |
| |||||||||||
amounts in thousands |
| acquisition |
|
| for losses |
|
| Unearned |
|
| earned |
|
| investment |
|
| Current |
| Prior |
|
| acquisition |
|
| operating |
|
| written |
| ||||||||||
Affiliation with Registrant |
| costs |
|
| and LAE |
|
| premiums |
|
| premiums |
|
| income (1) |
|
| year |
| years |
|
| costs (2) |
|
| expenses (1) |
|
| premiums |
| ||||||||||
Consolidated Subsidiaries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016 |
| $ | 119,660 |
|
| $ | 2,289,727 |
|
| $ | 887,344 |
|
| $ | 1,100,345 |
|
| $ | 79,413 |
|
| $ | 693,976 |
| $ | (28,528 | ) |
| $ | 165,045 |
|
| $ | 230,583 |
|
| $ | 1,186,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2015 |
| $ | 91,983 |
|
| $ | 2,202,644 |
|
| $ | 820,676 |
|
| $ | 984,087 |
|
| $ | 68,571 |
|
| $ | 637,267 |
| $ | (64,669 | ) |
| $ | 129,977 |
|
| $ | 220,643 |
|
| $ | 1,043,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2014 |
| $ | 79,452 |
|
| $ | 2,159,634 |
|
| $ | 766,167 |
|
| $ | 935,895 |
|
| $ | 64,092 |
|
| $ | 601,041 |
| $ | (55,812 | ) |
| $ | 127,695 |
|
| $ | 196,825 |
|
| $ | 1,000,138 |
|
Affiliation with | Deferred policy acquisition costs | Reserve for losses and loss adjustment expenses | Discount, if any, deducted | Unearned premiums | Net earned premiums | Net investment income(1) |
Losses and loss adjustment | Amortization of deferred Policy acquisition costs(2) | Other operating expenses (1) | Net written premiums | ||||||||||||||||||||||||||||||||||
Current year | Prior years | |||||||||||||||||||||||||||||||||||||||||||
Consolidated Subsidiaries: | ||||||||||||||||||||||||||||||||||||||||||||
Year ended December 31, 2014 | $ | 79,452 | $ | 2,159,634 | $ | — | $ | 766,167 | $ | 935,895 | $ | 64,092 | $ | 601,041 | $ | (55,812 | ) | $ | 127,695 | $ | 196,825 | $ | 1,000,138 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Year ended December 31, 2013 | $ | 67,007 | $ | 2,045,071 | $ | — | $ | 714,606 | $ | 841,939 | $ | 56,243 | $ | 520,227 | $ | (1,266 | ) | $ | 115,842 | $ | 164,434 | $ | 887,922 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Year ended December 31, 2012 | $ | 61,005 | $ | 2,097,048 | $ | — | $ | 642,407 | $ | 781,964 | $ | 54,100 | $ | 542,724 | $ | (45,291 | ) | $ | 123,819 | $ | 159,079 | $ | 833,655 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) - Net investment income and Other operating expenses reflect only such amounts attributable to the Company’sour Company's insurance operations.
(2) - Amortization of deferred policy acquisition costs reflects only such amounts attributable to the Company’sour Company's insurance operations. A portion of these costs is eliminated in consolidation.
Exhibit No. | Description of Exhibit | Previously filed and Incorporated Herein by Reference to: | ||
3-1 | ||||
Restated Certificate of Incorporation | Form S-8 filed July 26, 2002 (File No. 333-97183) | |||
3-2 | Certificate of Amendment to the Restated Certificate of Incorporation | Form S-8 filed July 26, 2002 (File No. 333-97183) | ||
3-3 | By-laws, as amended | Form S-1 (File No. 33-5667) | ||
3-4 | Certificate of Amendment to the Restated Certificate of Incorporation | Form 10-Q for June 30, 2006 | ||
4-1 | Specimen of Common Stock certificate, par value $0.10 per share | Form S-8 filed June 20, 2003 (File No. 333-106317) | ||
4-2 | Second Supplemental Indenture, dated as of October 4, 2013, between the Company and The Bank of New York Mellon | Form 8-K filed October 4, 2013 | ||
10-1* | Stock Option Plan | Form S-1 (File No. 33-5667) | ||
10-2* | Non-Qualified Stock Option Plan | Form S-4 (File No. 33-75918) | ||
10-3 | Employment Agreement with Stanley A. Galanski effective March 26, 2001 | Form 10-Q for March 31, 2001 | ||
10-4 | Employment Agreement with R. Scott Eisdorfer dated September 1, 1999 | Form 10-K for December 31, 2002 | ||
10-5* | 2002 Stock Incentive Plan | Proxy Statement filed May 30, 2002 | ||
10-6* | Employee Stock Purchase Plan | Proxy Statement filed May 29, 2003 | ||
10-7* | Executive Performance Incentive Plan | Proxy Statement filed April 4, 2008 | ||
10-8 | Form of Indemnity Agreement by the Company and the Selling Stockholders (as defined therein) | Amendment No. 2 to Form S-3 dated October 1, 2003 (File No.333-108424) | ||
10-16* | Second Amended and Restated 2005 Stock Incentive Plan | Proxy Statement filed April 12, 2013 | ||
10-17 | Third Amended and Restated Funds at | Form 8-K for November 8, 2016 | ||
10-18 | Employment Agreement with Stephen R. Coward dated December 9, 2010 | Form 10-K for December 31, 2013 | ||
10-19 | Employment Agreement with Colin Sprott dated July 10, 2013 | Form 10-K for December 31, 2013 | ||
10-20* | Non-Qualified Deferred Compensation Plan | Form 10-Q for March 31, 2015 | ||
10-21 | Guarantee, dated February 16, 2017, entered into by the Company | ** | ||
11-1 | Statement re Computation of Per Share Earnings | ** | ||
21-1 | Subsidiaries of Registrant | ** | ||
23-1 | Consent of Independent Registered Public Accounting Firm | ** | ||
31-1 | Certification of CEO per Section 302 of the Sarbanes-Oxley Act | ** | ||
31-2 | Certification of CFO per Section 302 of the Sarbanes-Oxley Act | ** | ||
32-1 | Certification of CEO per Section 906 of the Sarbanes-Oxley Act (This exhibit is intended to be furnished in accordance with regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference). | ** |
32-2 | ||||
Certification of CFO per Section 906 of the Sarbanes-Oxley Act (This exhibit is intended to be furnished in accordance with regulation S-K item 601(b)(32)(ii) and shall not be deemed to be filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference). | ** | |||
101.INS | XBRL Instance Document | ** | ||
101.SCH | XBRL Taxonomy Extension Scheme | ** | ||
101.CAL | XBRL Taxonomy Extension Calculation Database | ** | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase | ** | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | ** | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase | ** |
* | Compensatory Plan |
** | Included herein |