10-Q 1 navg-10q_20180930.htm 10-Q navg-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2018

or

Transitional 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)

 

(IRS Employer

Identification No.)

 

 

400 Atlantic Street, Stamford, Connecticut

 

06901

(Address of principal executive offices)

 

(Zip Code)

(203) 905-6090

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

 

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of common shares outstanding as of October 30, 2018 was 29,777,883.

 

 

 

 


 

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

INDEX

Contents

 

PART I. FINANCIAL INFORMATION

3

Item 1.      Financial Statements

3

Consolidated Balance Sheets – September 30, 2018 (Unaudited) and December 31, 2017

3

Consolidated Statements of Income (Loss) (Unaudited) – Three and Nine Months Ended September 30, 2018 and 2017

4

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Three and Nine Months Ended September 30, 2018 and 2017

5

Consolidated Statement of Stockholders’ Equity (Unaudited) –Nine Months Ended September 30, 2018

6

Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 30, 2018 and 2017

7

Notes to Interim Consolidated Financial Statements (Unaudited)

8

Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

Item 3.      Quantitative and Qualitative Disclosures about Market Risk

62

Item 4.      Controls and Procedures

62

PART II. OTHER INFORMATION

63

Item 1.      Legal Proceedings

63

Item 1A.   Risk Factors

63

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

64

Item 3.      Defaults Upon Senior Securities

64

Item 4.      Mine Safety Disclosures

64

Item 5.      Other Information

64

Item 6.      Exhibits

65

Signatures

66

 

 

 

2


 

PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

amounts in thousands, except per share amounts

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Fixed Maturities, available-for-sale, at fair value (amortized cost: 2018: $3,027,835;

   2017: $3,027,408)

 

$

2,989,473

 

 

$

3,057,054

 

Equity Securities, at fair value (cost: 2018: $359,400; 2017: $224,159)

 

 

371,680

 

 

 

235,981

 

Other Invested Assets

 

 

42,489

 

 

 

30,488

 

Short-Term Investments, available-for-sale, at fair value (amortized cost: 2018: $7,268;

   2017: $6,477)

 

 

7,264

 

 

 

6,480

 

Total Investments

 

$

3,410,906

 

 

$

3,330,003

 

Cash and Cash Equivalents

 

 

219,980

 

 

 

102,735

 

Restricted Cash and Cash Equivalents

 

 

61,644

 

 

 

56,229

 

Premiums Receivable

 

 

392,392

 

 

 

351,393

 

Prepaid Reinsurance Premiums

 

 

235,642

 

 

 

228,569

 

Reinsurance Recoverable on Paid Losses

 

 

102,829

 

 

 

72,494

 

Reinsurance Recoverable on Unpaid Losses and Loss Adjustment Expenses

 

 

780,215

 

 

 

809,765

 

Deferred Policy Acquisition Costs

 

 

161,419

 

 

 

135,249

 

Accrued Investment Income

 

 

21,981

 

 

 

19,480

 

Goodwill and Other Intangible Assets

 

 

28,140

 

 

 

6,596

 

Current Income Tax Receivable, Net

 

 

25,429

 

 

 

16,667

 

Deferred Income Tax, Net

 

 

26,377

 

 

 

22,271

 

Other Assets

 

 

81,373

 

 

 

73,171

 

Total Assets

 

$

5,548,327

 

 

$

5,224,622

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Reserves for Losses and Loss Adjustment Expenses

 

$

2,633,835

 

 

$

2,515,145

 

Unearned Premiums

 

 

1,128,762

 

 

 

987,681

 

Reinsurance Balances Payable

 

 

147,129

 

 

 

136,192

 

Senior Notes

 

 

264,009

 

 

 

263,885

 

Payable for Investments Purchased

 

 

16,968

 

 

 

 

Accounts Payable and Other Liabilities

 

 

125,796

 

 

 

95,754

 

Total Liabilities

 

$

4,316,499

 

 

$

3,998,657

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Preferred Stock ($.10 par value per share, authorized 1,000 shares, none issued)

 

$

 

 

$

 

Common Stock ($.10 par value per share, authorized 50,000 shares, issued

   36,795 shares for 2018 and 36,530 shares for 2017)

 

 

3,677

 

 

 

3,650

 

Additional Paid-In Capital

 

 

379,212

 

 

 

376,868

 

Treasury Stock, at cost (7,023 shares for 2018 and 2017)

 

 

(155,801

)

 

 

(155,801

)

Retained Earnings

 

 

1,047,673

 

 

 

981,380

 

Accumulated Other Comprehensive Income (Loss)

 

 

(42,933

)

 

 

19,868

 

Total Stockholders' Equity

 

$

1,231,828

 

 

$

1,225,965

 

Total Liabilities and Stockholders' Equity

 

$

5,548,327

 

 

$

5,224,622

 

 

See accompanying Notes to Interim Consolidated Financial Statements.

3


 

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited)

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

amounts in thousands, except per share amounts

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Gross Written Premiums

 

$

455,943

 

 

$

402,038

 

 

$

1,448,403

 

 

$

1,304,522

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Written Premiums

 

 

352,412

 

 

 

296,016

 

 

 

1,124,966

 

 

 

966,461

 

Change in Unearned Premiums

 

 

(5,374

)

 

 

5,339

 

 

 

(124,286

)

 

 

(85,140

)

Net Earned Premiums

 

$

347,038

 

 

$

301,355

 

 

$

1,000,680

 

 

$

881,321

 

Net Investment Income

 

 

25,651

 

 

 

22,598

 

 

 

73,954

 

 

 

66,311

 

Net Realized and Unrealized Gains (Losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Other-Than-Temporary Impairment Losses

 

 

(15

)

 

 

(957

)

 

 

(71

)

 

 

(2,005

)

Portion of Loss Recognized in Other Comprehensive

   Income

 

 

15

 

 

 

(15

)

 

 

71

 

 

 

(60

)

Net Other-Than-Temporary Impairment Losses Recognized

   in Earnings

 

 

 

 

 

(972

)

 

 

 

 

 

(2,065

)

Net Realized Gains on Investments Sold

 

 

253

 

 

 

5,190

 

 

 

3,210

 

 

 

7,933

 

Net Unrealized Gains on Equity Securities

 

 

2,310

 

 

 

 

 

 

457

 

 

 

 

Total Net Realized and Unrealized Gains

 

 

2,563

 

 

 

4,218

 

 

 

3,667

 

 

 

5,868

 

Other Income (Loss)

 

 

1,724

 

 

 

(1,699

)

 

 

4,235

 

 

 

(1,042

)

Total Revenues

 

$

376,976

 

 

$

326,472

 

 

$

1,082,536

 

 

$

952,458

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Losses and Loss Adjustment Expenses

 

$

240,900

 

 

$

276,171

 

 

$

623,378

 

 

$

622,881

 

Commission Expenses

 

 

57,999

 

 

 

45,509

 

 

 

165,344

 

 

 

141,526

 

Other Operating Expenses

 

 

67,584

 

 

 

45,773

 

 

 

198,692

 

 

 

165,077

 

Merger Transaction Costs

 

 

2,439

 

 

 

 

 

 

2,439

 

 

 

 

Interest Expense

 

 

3,891

 

 

 

3,862

 

 

 

11,619

 

 

 

11,584

 

Total Expenses

 

$

372,813

 

 

$

371,315

 

 

$

1,001,472

 

 

$

941,068

 

Income (Loss) Before Income Taxes

 

$

4,163

 

 

$

(44,843

)

 

$

81,064

 

 

$

11,390

 

Income Tax Expense (Benefit)

 

 

(462

)

 

 

(16,864

)

 

 

13,457

 

 

 

(2,243

)

Net Income (Loss)

 

$

4,625

 

 

$

(27,979

)

 

$

67,607

 

 

$

13,633

 

Net Income (Loss) per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

 

$

(0.95

)

 

$

2.28

 

 

$

0.46

 

Diluted

 

$

0.15

 

 

$

(0.95

)

 

$

2.24

 

 

$

0.45

 

Average Common Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

29,768

 

 

 

29,500

 

 

 

29,699

 

 

 

29,419

 

Diluted

 

 

30,184

 

 

 

29,500

 

 

 

30,160

 

 

 

30,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Interim Consolidated Financial Statements.

 

 

4


 

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

 

 

 

Three Months Ended September 30,

 

amounts in thousands

 

2018

 

 

2017

 

Net Income (Loss)

 

$

4,625

 

 

$

(27,979

)

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

Change in Net Unrealized Gains (Losses) on Available-For-Sale Investments:

 

 

 

 

 

 

 

 

Unrealized Gains (Losses) on Investments arising during the period, net

   of Deferred Tax of $1,821 and $(5,197) in 2018 and 2017, respectively

 

 

(6,844

)

 

 

9,653

 

Reclassification adjustment for Net Realized Gains (Losses) included

   in Net Income net of Deferred Tax of $(84) and $881 in 2018 and

   2017, respectively

 

 

318

 

 

 

(1,636

)

Change in Net Unrealized Gains (Losses) on Investments

 

$

(6,526

)

 

$

8,017

 

Change in Other-Than-Temporary Impairments

 

 

 

 

 

 

 

 

Non Credit Other-Than-Temporary Impairments arising during the period,

   net of Deferred Tax of $3 and $(6) in 2018 and 2017, respectively

 

 

(12

)

 

 

9

 

Reclassification Adjustment for Other-Than-Temporary Impairment Credit

   Losses Recognized in Net Income net of Deferred Tax of $0 and $(193) in 2018

   and 2017, respectively

 

 

 

 

 

358

 

Change in Other-Than-Temporary Impairments

 

$

(12

)

 

$

367

 

Change in Foreign Currency Translation Gains (Losses), net of Deferred

   Tax of $73 and $(691) in 2018 and 2017, respectively

 

 

(768

)

 

 

1,284

 

Other Comprehensive Income (Loss)

 

$

(7,306

)

 

$

9,668

 

Comprehensive Loss

 

$

(2,681

)

 

$

(18,311

)

 

 

 

Nine Months Ended September 30,

 

amounts in thousands

 

2018

 

 

2017

 

Net Income

 

$

67,607

 

 

$

13,633

 

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 $13,543 and $(19,884) in 2018 and 2017, respectively

 

 

(50,706

)

 

 

36,928

 

Reclassification adjustment for Net Realized Gains (Losses) included

   in Net Income net of Deferred Tax of $992 and $(72) in 2018 and

   2017, respectively

 

 

(2,699

)

 

 

134

 

Change in Net Unrealized Gains (Losses) on Investments

 

$

(53,405

)

 

$

37,062

 

Change in Other-Than-Temporary Impairments

 

 

 

 

 

 

 

 

Non Credit Other-Than-Temporary Impairments arising during the period,

   net of Deferred Tax of $20 and $(21) in 2018 and 2017, respectively

 

 

(56

)

 

 

39

 

Reclassification Adjustment for Other-Than-Temporary Impairment Credit

   Losses Recognized in Net Income net of Deferred Tax of $0 and $(410) in

   2018 and 2017, respectively

 

 

 

 

 

761

 

Change in Other-Than-Temporary Impairments

 

$

(56

)

 

$

800

 

Change in Foreign Currency Translation Gains (Losses), net of Deferred

   Tax of $2,516 and $(971) in 2018 and 2017, respectively

 

 

(4,420

)

 

 

1,803

 

Other Comprehensive Income (Loss)

 

$

(57,881

)

 

$

39,665

 

Comprehensive Income

 

$

9,726

 

 

$

53,298

 

 

See accompanying Notes to Interim Consolidated Financial Statements

 

 

 

5


 

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Treasury Stock

 

 

Retained

 

 

Comprehensive

 

 

Stockholders'

 

amounts in thousands

 

Shares

 

 

Amount

 

 

Capital

 

 

Shares

 

 

Amount

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

Balance, December 31, 2017

 

 

36,530

 

 

$

3,650

 

 

$

376,868

 

 

 

7,023

 

 

$

(155,801

)

 

$

981,380

 

 

$

19,868

 

 

$

1,225,965

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

67,607

 

 

 

 

 

 

67,607

 

Dividends Declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,234

)

 

 

 

 

 

(6,234

)

Changes in Other Comprehensive Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Net Unrealized Loss on Available-For-Sale

   Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(53,405

)

 

 

(53,405

)

Change in Net Non-Credit Other-Than-

   Temporary Impairment Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(56

)

 

 

(56

)

Change in Foreign Currency Translation

   Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,420

)

 

 

(4,420

)

Total Other Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(57,881

)

 

 

(57,881

)

Cumulative Effect of Adoption of ASU 2016-01 at

   January 1st, Net of Tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,748

 

 

 

(7,748

)

 

 

 

Cumulative Effect of Adoption of ASU 2018-02 at

   January 1st, Net of Tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,828

)

 

 

2,828

 

 

 

 

Shares Issued (1)

 

 

265

 

 

 

27

 

 

 

(5,069

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,042

)

Share-Based Compensation

 

 

 

 

 

 

 

 

7,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,413

 

Balance, September 30, 2018

 

 

36,795

 

 

$

3,677

 

 

$

379,212

 

 

 

7,023

 

 

$

(155,801

)

 

$

1,047,673

 

 

$

(42,933

)

 

$

1,231,828

 

 

(1) -

Includes shares issued under the Second Amended and Restated 2005 Stock Incentive Plan to Directors and the Employee Stock Purchase Plan.

 

See accompanying Notes to Interim Consolidated Financial Statements.

 

 

 

6


 

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

 

Nine Months Ended September 30,

 

amounts in thousands

 

2018

 

 

2017

 

Operating Activities:

 

 

 

 

 

 

 

 

Net Income

 

$

67,607

 

 

$

13,633

 

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

 

 

 

 

 

 

 

 

Depreciation & Amortization

 

 

2,782

 

 

 

3,586

 

Share-Based Compensation

 

 

7,413

 

 

 

8,360

 

Deferred Income Taxes

 

 

(862

)

 

 

(13,920

)

Total Net Realized and Unrealized Gains

 

 

(3,667

)

 

 

(5,868

)

Changes in Assets and Liabilities:

 

 

 

 

 

 

 

 

Reinsurance Recoverable on Paid and Unpaid Losses and Loss Adjustment Expenses

 

 

16,668

 

 

 

(40,786

)

Reserves for Losses and Loss Adjustment Expenses

 

 

86,851

 

 

 

251,971

 

Prepaid Reinsurance Premiums

 

 

(4,482

)

 

 

(17,797

)

Unearned Premiums

 

 

130,270

 

 

 

103,174

 

Premiums Receivable

 

 

(39,969

)

 

 

(48,985

)

Deferred Policy Acquisition Costs

 

 

(26,254

)

 

 

(14,965

)

Accrued Investment Income

 

 

(2,513

)

 

 

(3,105

)

Reinsurance Balances Payable

 

 

11,036

 

 

 

19,058

 

Current Income Tax Receivable, Net

 

 

(5,665

)

 

 

(25,073

)

Other

 

 

27,874

 

 

 

(6,532

)

Net Cash Provided by Operating Activities

 

$

267,089

 

 

$

222,751

 

Investing Activities:

 

 

 

 

 

 

 

 

Fixed Maturities

 

 

 

 

 

 

 

 

Redemptions and Maturities

 

$

341,632

 

 

$

233,384

 

Sales

 

 

345,828

 

 

 

192,417

 

Purchases

 

 

(696,869

)

 

 

(560,018

)

Equity Securities

 

 

 

 

 

 

 

 

Sales

 

 

33,288

 

 

 

59,673

 

Purchases

 

 

(122,083

)

 

 

(61,562

)

Net Sales and Purchases of Other Invested Assets

 

 

(12,930

)

 

 

(13,853

)

Net Sales, Maturities and Purchases of Short-Term Investments

 

 

(827

)

 

 

(552

)

Net Change in Unsettled Security Transactions

 

 

14,706

 

 

 

21,761

 

Purchase of Subsidiaries, Net of Acquired Cash

 

 

(22,383

)

 

 

 

Net Purchase of Property and Equipment

 

 

(7,482

)

 

 

(2,649

)

Net Cash Used in Investing Activities

 

$

(127,120

)

 

$

(131,399

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from Employee Stock Purchase Plan

 

$

1,508

 

 

$

2,289

 

Payment of Employee Tax Withholding on Stock Compensation

 

 

(8,067

)

 

 

(13,835

)

Dividends Paid

 

 

(6,234

)

 

 

(4,862

)

Net Cash Used in Financing Activities

 

$

(12,793

)

 

$

(16,408

)

Effect of Exchange Rate on Unrestricted and Restricted Cash and Cash Equivalents

 

$

(4,516

)

 

$

2,885

 

Change in Unrestricted and Restricted Cash and Cash Equivalents

 

$

122,660

 

 

$

77,829

 

Unrestricted and Restricted Cash and Cash Equivalents at Beginning of Year

 

 

158,964

 

 

 

172,846

 

Unrestricted and Restricted Cash and Cash Equivalents at End of Period

 

$

281,624

 

 

$

250,675

 

Supplemental Information:

 

 

 

 

 

 

 

 

Income Taxes Paid, Net

 

$

22,935

 

 

$

39,877

 

Interest Paid

 

$

7,619

 

 

$

7,619

 

Issuance of Stock to Directors

 

$

783

 

 

$

578

 

 

See accompanying Notes to Interim Consolidated Financial Statements.

7


 

THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES

Notes to Interim Consolidated Financial Statements (Unaudited)

 

 

NOTE 1. ORGANIZATION & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

Organization

We are an international insurance company with a long-standing area of specialization in Marine insurance. We also offer Property and Casualty (“P&C”) insurance, primarily 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 Directors & Officers (“D&O”) and Errors & Omissions (“E&O”) divisions, as well as assumed reinsurance products.

We operate through various wholly-owned insurance and service companies. Our subsidiaries domiciled in the United States (“U.S.”) include two insurance companies, Navigators Insurance Company (“NIC”) and Navigators Specialty Insurance Company (“NSIC”), as well as our U.S. underwriting agency, Navigators Management Company (“NMC”). NIC includes a branch in the United Kingdom (“U.K”). We also have operations domiciled in the U.K., Hong Kong and Europe. Navigators International Insurance Company Ltd. (“NIIC”), Navigators Management (U.K.) Ltd. (“NMUK”) and Navigators Underwriting Ltd. (“NUL”) are domiciled in the U.K. and NUL includes European branches. Navigators Underwriting Agency Ltd. (“NUAL”), a Lloyd’s of London (“Lloyd’s”) underwriting agency, manages and provides the capital, through Navigators Corporate Underwriters Ltd. (“NCUL”), for our Lloyd’s Syndicate 1221 (the “Syndicate”), and is also domiciled in the U.K. We control 100% of the Syndicate’s stamp capacity.

On June 7, 2018, we acquired 100% ownership interest in Bracht, Deckers & Mackelbert NV, an insurance underwriting agency organized under the laws of Belgium (“BDM”) and Assurances Continentales – Continentale Verzekeringen NV, an insurance company licensed under the laws of Belgium (“ASCO”). The acquisition was accounted for in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations.” Refer to Note 2. Merger and Business Combinations and Note 6. Goodwill and Intangible Assets for further information regarding the acquisition.

On August 22, 2018, our Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with The Hartford Financial Services Group, Inc. (“The Hartford”). The Merger Agreement provides that, subject to the terms and conditions set forth therein, our Company will merge with an existing subsidiary of The Hartford, with our Company surviving as a wholly owned subsidiary of The Hartford (the “Merger”). Refer to Note 2. Merger and Business Combinations for further information.

 

Basis of Presentation

The Consolidated Balance Sheet at September 30, 2018 and the Consolidated Statements of Income (Loss), Comprehensive Income (Loss), Stockholders’ Equity and Cash Flows for the periods ended September 30, 2018 and 2017 are unaudited. The Balance Sheet at December 31, 2017 is derived from our audited Financial Statements. The accompanying Interim Consolidated Financial Statements reflect all adjustments, which, in the opinion of management, are necessary to fairly present the results of our Company for the interim periods presented on the basis of U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. All significant intercompany transactions and balances have been eliminated in consolidation. The preparation of these 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 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 Interim Consolidated Financial Statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017. Certain amounts for the prior period have been reclassified to conform with the current period presentation.

Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law and the new legislation contained several key tax provisions that affected us, including a one-time mandatory Deemed Repatriation Transition Tax (the “Transition Tax”) on accumulated foreign earnings and a reduction of the corporate income tax rate to 21% effective January 1, 2018, among others. We were required to recognize the effect of the tax law changes in the period of enactment, such as determining the Transition Tax, re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), Income Tax Accounting Implications of the Tax Act, which allowed us to record provisional amounts during a measurement period not to extend beyond one

8


 

year of the enactment date. During the fourth quarter of 2017, we made a reasonable estimate of the effects on our deferred tax balances and recognized provisional tax amounts of $2.6 million related to the Transition Tax. As of September 30, 2018, we have finalized the calculation of the Transition Tax which resulted in a decrease in the provisional amount of $1.3 million and has been reflected as a discrete item in our Effective Tax Rate calculation. We will continue to evaluate the estimated effects on our deferred tax balances during the measurement period.

The interim income tax provision has been computed based on our estimated annual Effective Tax Rate, which represents our best estimate on a year to date basis for the interim period. As a result, the tax provision for a given quarter equals the difference between the provision recorded cumulatively year to date less the amount recorded cumulatively as of the end of the prior interim period. Our Effective Tax Rate for the quarter differs from the federal tax rate of 21% primarily due to tax-exempt investment income, the dividends received deduction, Transition Tax benefit, and an excess tax benefit related to the vesting of stock compensation at fair market value.

 

Short-Term Investments Reclassifications

Cash and overseas deposits that were misclassified within Short-Term Investments were reclassified representing an immaterial correction. Cash of $20.5 million as of December 31, 2017 was reclassified from Short-Term Investments to Cash and Cash Equivalents. Overseas deposits of $28.8 million as of December 31, 2017 were reclassified from Short-Term Investments to Other Invested Assets. The reclassification of cash within Short-Term Investments to Cash and Cash Equivalents impacted the Statement of Cash Flows for the nine months ended September 30, 2017 by decreasing Net Cash Used in Investing Activities by $9.2 million.

New Accounting Standards Adopted in 2018

Revenue From Contracts With Customers

Effective January 1, 2018, our Company adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This guidance affects any contracts with customers to transfer goods or services or for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts are not in scope of the new guidance). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Our Company generates an insignificant amount of fee income that is within the scope of this guidance and was not materially impacted by the adoption of this guidance. The adoption of this guidance did not have a material impact on our results of operations, financial condition or liquidity.

 

Classification and Measurement of Financial Instruments

Effective January 1, 2018, our Company adopted ASU 2016-01 “Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities”. This guidance requires equity investments (except those accounted for under the equity method of accounting, investments that are consolidated or those that meet a practicability exception) to be measured at fair value with changes in fair value recognized in net income, simplifies the impairment assessment of equity investments without readily determinable values by requiring a qualitative assessment to identify impairment, eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost, requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liabilities in accordance with the fair value option, requires the separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and clarifies that the reporting organization should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the organization’s other deferred tax assets.

As of January 1, 2018, the adoption of this guidance resulted in a $7.7 million net after-tax increase to Retained Earnings with a corresponding decrease to Accumulated Other Comprehensive Income (Loss), resulting in no change to our Total Stockholders’ Equity. This adjustment reflects the cumulative effect adjustment to reclassify Net Unrealized Gain on Investments in Accumulated Other Comprehensive Income (Loss) for available-for-sale Equity Securities to Retained Earnings upon adoption. Upon the adoption of this guidance, Equity Securities have been measured at fair value with changes in fair value recognized in Net Income through Net Unrealized Gains (Losses) on Equity Securities. The other aspects of this guidance only impacted disclosure or did not apply to our Company and therefore did not impact our results of operations, financial condition or liquidity.

 

9


 

Cash Flows

Effective January 1, 2018, our Company adopted ASU 2016-15, “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments” which addresses diversity in practice in how eight specific cash receipts and cash payments should be presented and classified on the statement of cash flows. The adoption of this guidance did not impact our results of operations, financial condition or liquidity.

 

Effective January 1, 2018, our Company adopted ASU 2016-18, “Statement of Cash Flows (Topic 230) – Restricted Cash” which addresses diversity in practice in the classification and presentation of changes in restricted cash on the statement of cash flows. This guidance requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. Transfers between cash and cash equivalents and restricted cash and restricted cash equivalents will no longer be presented on the statement of cash flows. To assist in meeting the requirements of this guidance to provide a reconciliation from the Statement of Cash Flows to the Balance Sheet, upon adoption of this guidance our Company added new accounts titled “Cash and Cash Equivalents” and “Restricted Cash and Cash Equivalents” and reclassified amounts previously held in Short-Term Investments to these accounts for all periods presented. This resulted in the reclassification of $71.3 million of restricted and unrestricted cash and cash equivalent balances as of December 31, 2017. This guidance was adopted on a retrospective basis. Prior to the adoption of this guidance, restricted and unrestricted cash and cash equivalent balances included in the Short-Term Investments account had been presented as a cash flow provided by (used in) investing activities. Consequently, the Statement of Cash Flows for the nine months ended September 30, 2017 includes a revision to decrease “Net Cash Used in Investing Activities” by $76.8 million.

 

Income Taxes

Effective January 1, 2018, our Company adopted ASU 2016-16, “Income Taxes (Topic 740) – Intra-Entity Transfers of Assets Other than Inventory” that requires companies to account for the income tax effects of intercompany transfers of assets other than inventory when the transfer occurs. The adoption of this guidance did not impact our results of operations, financial condition or liquidity.

 

Definition of a Business

Effective January 1, 2018, our Company adopted ASU 2017-01, “Clarifying the Definition of a Business” that provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance will be applied to transactions prospectively. The adoption of this guidance did not impact our results of operations, financial condition or liquidity.

 

Tax Reform Reclassification from Other Comprehensive Income

Effective January 1, 2018, our Company early adopted ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” that permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings. The total impact of the remeasurement and other adjustments was reflected in 2017 income from continuing operations, regardless of where deferred taxes were originally recorded. As of January 1, 2018, the adoption of this guidance resulted in a one-time reclassification of $2.8 million, decreasing Retained Earnings and increasing Accumulated Other Comprehensive Income (Loss) primarily from the remeasurement of deferred tax assets and liabilities associated with unrealized gains and losses on investments and currency translation adjustments using the 21% corporate tax rate.

 

Recently Issued Accounting Standards Not Yet Adopted

Fair Value Measurement Disclosure

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”, which eliminates, adds, and modifies certain disclosure requirements for fair value measurements. The guidance eliminates the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for the timing of transfers between levels of the fair value hierarchy, and the valuation processes for Level 3 fair value measurements. The guidance adds the requirement to disclose changes in unrealized gains and losses included in other comprehensive income for the period and to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance modifies disclosures around the use of the practical expedient to measure the fair value of certain investments at their net asset values and modifies the requirement to disclose information as of the reporting date about the measurement uncertainty of Level 3 fair value measurement. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for the entire standard or only the provisions that eliminate or modify requirements. This guidance will be adopted on a prospective and retrospective basis, where applicable and as required. As this new guidance is disclosure-related only, adoption will not impact our results of operations, financial condition or liquidity.

 

10


 

Implementation Costs in a Cloud Computing Arrangement

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”, which requires companies to follow the internal-use software guidance in ASC 350-40 (Intangibles - Goodwill and Other - Internal-Use Software) to determine which implementation costs to capitalize as an asset and which costs to expense. Capitalized implementation costs will be amortized over the term of the service arrangement, beginning when the service arrangement or a component of the arrangement is ready for its intended use. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. This guidance will be applied prospectively. The adoption of this guidance is not expected to materially impact our results of operations, financial condition or liquidity.

Significant Accounting Policies

There were no notable changes in our significant accounting policies subsequent to our Annual Report on Form 10-K for the year ended December 31, 2017, with the exception of changes related to the adoption of ASU 2016-01 and ASU 2016-18 impacting the following accounting policies:

 

Cash and Cash Equivalents and Restricted Cash and Cash Equivalents

Cash includes cash on hand and demand deposits with banks. Cash Equivalents include highly liquid investments with original maturities of three months or less including money-market funds. Restricted Cash and Cash Equivalents primarily relates to funds that are held to support regulatory and contractual obligations.

 

Investments

Fixed Maturities held by our Company were carried at fair value and classified as available-for-sale. Available-for-sale securities are debt 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 Maturities include bonds, mortgage-backed and asset-backed securities, and redeemable preferred stocks.

Upon adoption of ASU 2016-01 on January 1, 2018, Equity Securities held by our Company were carried at fair value with any changes in fair value recognized in Net Income through the Net Unrealized Gains (Losses) on Equity Securities account. Prior to the adoption of ASU 2016-01, Equity Securities were carried at fair value and classified as available-for-sale. For our policy on Equity Securities classified as available-for-sale, refer to Note 1 within our Annual Report on Form 10-K for the year ended December 31, 2017. Equity Securities consist of common stock, exchange traded funds, mutual 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 and overseas deposits which are carried at fair value.

For our investments 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.

Overseas deposits include private funds held by the Syndicate and invested according to local regulatory requirements. The compositions of the overseas deposits vary and the deposits are based on the portfolio level reporting that is provided by Lloyd’s. The fair values of these overseas deposits were measured using the net asset value practical expedient and therefore have not been categorized within the fair value hierarchy. Changes in the fair value of the overseas deposits are recorded in Net Investment Income.

Short-Term Investments are carried at fair value. Short-Term Investments have maturities greater than three months but less than one year from the purchase date.

All prices for our Fixed Maturities, Equity Securities and Short-Term Investments are classified as Level 1, Level 2 or Level 3 under the fair value hierarchy, as defined in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 820 (“ASC 820”).

Premiums and discounts on Fixed Maturities are amortized into interest income over the life of the security using 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

11


 

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 Net Investment Income for the current 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 Maturities portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of securities.

Our Company reviews the magnitude of a security’s unrealized loss compared to its cost/amortized cost and the length of time that the security has been impaired to determine if an unrealized loss is other-than-temporary. If warranted as a result of conditions relating to a particular security, our Company will 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 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.

Our Company assesses the underlying fundamentals of each issuer to determine if there is a change in the amount or timing of expected cash flows. Management compares the amortized cost basis to the present value of the revised cash flows using the historical book yield to determine the credit loss portion of impairment 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 Other than Temporary Impairment (“OTTI”) losses within AOCI.

Specifically for structured Fixed Maturities, our Company analyzes projections provided by our 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-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. 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 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 are actual delinquency rates, default probability, severity and prepayment assumptions.

Projected losses are a function of both loss severity and probability of default, which differ based on property type, vintage and the stress of the collateral.

For our policy on evaluating Equity Securities for impairment prior to the adoption of ASU 2016-01 on January 1, 2018, refer to Note 1 within our Annual Report on Form 10-K for the year ended December 31, 2017.

 

NOTE 2. MERGER AND BUSINESS COMBINATIONS

 

The Hartford

On August 22, 2018, our Company entered into the Merger Agreement with The Hartford, where subject to the terms and conditions set forth therein, our Company will merge with an existing subsidiary of The Hartford, with our Company surviving as a wholly owned subsidiary of The Hartford. Pursuant to the Merger Agreement, at the effective time of the Merger, holders of the Company’s common shares will be entitled to receive consideration of $70.00 in cash per common share (the “Merger Consideration”). The Merger is expected to close in the first half of 2019, subject to the receipt of regulatory approvals and other customary closing conditions.

12


 

 

The Merger Agreement contains various covenants of our Company and The Hartford. These covenants include interim operating covenants that, subject to certain exceptions, (i) require the Company to (1) conduct its business in all material respects in the ordinary course of business consistent with past practice, (2) use reasonable best efforts to preserve substantially intact, consistent with past practice, the Company’s business organization and (3) preserve, consistent with past practice, existing relations and goodwill with customers, producers, reinsurance providers, governmental authorities and other persons with whom the Company or its subsidiaries have significant business relationships, and (ii) restrict the Company’s ability to take certain actions prior to the effective time of the Merger without The Hartford’s consent (such consent, in certain cases, not to be unreasonably withheld, conditioned or delayed), which include, subject to certain exceptions, issuing additional common shares, incurring additional indebtedness, selling or purchasing material assets, making unbudgeted capital expenditures, making loans or investments (or disposing of investments) not permitted by the Company’s investment guidelines, increasing compensation other than in ordinary course, making material changes to accounting, underwriting, or reserving practices, making material tax elections, settling material litigation, or entering into, modifying or terminating material contracts.

 

BDM and ASCO

During the second quarter of 2018, our Company established a wholly owned subsidiary, Navigators Holdings (Europe) NV, which on June 7, 2018 (the “acquisition date”), acquired a 100% ownership interest in BDM, ASCO, and a wholly-owned subsidiary of ASCO, Canal Re S.A., a reinsurance company licensed under the laws of the Grand Duchy of Luxembourg (“Canal Re”). The acquisition of all three of these entities will be referred to as the “Acquisition” and the group of companies will be referred to as the Navigators Insurance Company Europe Group (the “NICE Group”). The Acquisition was undertaken as part of our Company’s strategy of expanding to more brokers and insureds across Europe and reinforces our Company’s presence in the European Union’s single market. We anticipate that this will enable our Company to better serve its European clients after Brexit, and will also provide an opportunity to reach a wider European audience.

 

Our Company paid a purchase price of EUR 35.0 million in cash at the acquisition date (which was approximately $40.5 million based on the exchange rate as of the acquisition date). Additionally, our Company will be reimbursed up to EUR 5.0 million (which is approximately $5.8 million based on the exchange rate as of the acquisition date) in the event of adverse development of claims incurred prior to December 31, 2016 as measured on December 31, 2019. This reimbursement was valued at $nil as of the acquisition date and September 30, 2018.

 

The purchase price was allocated to the assets acquired and liabilities assumed of the NICE Group, based on estimated fair values as of the acquisition date and our Company recognized goodwill of $12.7 million.

 

Our Company identified finite lived intangible assets of $6.5 million, including customer relationships, the value of business acquired (“VOBA”), broker networks, and a trade name. These finite lived intangible assets will be amortized over a weighted average period of 9 years.

 

Our Company identified indefinite lived intangible assets of $2.5 million, related to ASCO’s European licenses.

 

13


 

The fair value of the assets acquired and liabilities assumed and the allocation of the purchase price on the acquisition date are summarized in the table below:

 

amounts in thousands

 

 

 

 

Consideration paid

 

$

40,492

 

 

 

 

 

 

Assets

 

 

 

 

Investments

 

 

45,182

 

Cash and Cash Equivalents

 

 

18,109

 

Prepaid Reinsurance Premiums

 

 

2,701

 

Reinsurance Recoverables on Paid Losses

 

 

1,311

 

Reinsurance Recoverables on Unpaid Losses and LAE

 

 

15,769

 

Other Assets

 

 

19,943

 

 

 

 

 

 

Fair Value of Identifiable Intangible Assets

 

 

9,000

 

 

 

 

 

 

    Total Assets Acquired

 

$

112,015

 

 

 

 

 

 

Liabilities

 

 

 

 

Reserves for Losses and LAE

 

 

31,928

 

Unearned Premiums

 

 

11,139

 

Deferred Income Tax

 

 

8,947

 

Accounts Payable and Other Liabilities

 

 

32,212

 

    Total Liabilities Assumed

 

$

84,226

 

 

 

 

 

 

Goodwill

 

$

12,703

 

 

Significant Fair Value Adjustments were as follows:

 

Fair Value of Finite and Indefinite-Lived Intangibles – To establish the fair value of identifiable intangible assets related to customer relationships, licenses, value of business acquired, broker networks, and trade name.

 

Fair Value of Property – To adjust the carrying value of real estate property to reflect fair value.

 

Fair Value of Software – To establish the fair value of internal use software systems.

 

Deferred Income Tax – To reflect the deferred tax impact on the fair value adjustments.

 

Goodwill – To establish the fair value of goodwill related to the Acquisition.

During the three months ended September 30, 2018, as part of our business combination accounting within the measurement period, the Company recorded an adjustment to the fair value of the customer relationships intangible asset. As a result, the Fair Value of Identifiable Intangible Assets decreased by $1.4 million and Goodwill increased by $1.4 million from the amounts initially recorded at June 30, 2018. Refer to Note 6. Goodwill and Intangible Assets for further information.

The business combination accounting is subject to change if additional information that existed as of the balance sheet date, but was not available, later becomes available within the measurement period, which cannot exceed twelve months from the acquisition date. The acquisition date fair values of the assets acquired and liabilities assumed, including Reserves for Losses and LAE, Deferred Income Tax and Identifiable Intangible Assets, as well as the related estimated useful lives, are provisional and may be subject to adjustments, which may impact the amounts recorded for assets acquired and liabilities assumed as well as the goodwill.

 

Since the acquisition date, total NICE Group Revenues and Net Income (Loss) of $6.6 million and $(0.1) million, respectively, have been included in our Company’s Consolidated Statements of Income (Loss).

 

14


 

NOTE 3. 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”), Global Reinsurance (“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. The underwriting results of the acquired business from the NICE Group are included in the Int’l Insurance reporting segment, with no new operating segments resulting from the acquisition.

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 measures of underwriting profitability. Underwriting Profit (Loss) is calculated from Net Earned Premiums less the sum of Net Losses and Loss Adjustment Expenses (“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. We do not allocate our assets by underwriting segment as we evaluate the underwriting results of these segments separately from the results of our investments portfolio.

Financial data by segment for the three and nine months ended September 30, 2018 and 2017 was as follows:

 

 

 

Three Months Ended September 30, 2018

 

 

 

U.S.

 

 

Int'l

 

 

 

 

 

 

 

 

 

 

 

 

 

amounts in thousands

 

Insurance

 

 

Insurance

 

 

GlobalRe

 

 

Corporate (1)

 

 

Total

 

Gross written premiums

 

$

280,183

 

 

$

117,376

 

 

$

58,384

 

 

$

 

 

$

455,943

 

Ceded written premiums

 

 

(72,615

)

 

 

(29,020

)

 

 

(1,896

)

 

 

 

 

 

(103,531

)

Net written premiums

 

$

207,568

 

 

$

88,356

 

 

$

56,488

 

 

$

 

 

$

352,412

 

Retention Ratio

 

 

74.1

%

 

 

75.3

%

 

 

96.8

%

 

 

 

 

 

77.3

%

Net Earned Premiums

 

$

188,504

 

 

$

95,226

 

 

$

63,308

 

 

$

 

 

$

347,038

 

Net Losses and LAE

 

 

(141,182

)

 

 

(60,275

)

 

 

(39,443

)

 

 

 

 

 

(240,900

)

Commission Expenses

 

 

(22,247

)

 

 

(22,547

)

 

 

(13,282

)

 

 

77

 

 

 

(57,999

)

Other Operating Expenses

 

 

(36,826

)

 

 

(24,441

)

 

 

(6,317

)

 

 

 

 

 

(67,584

)

Other Underwriting Income (Expense)

 

 

65

 

 

 

945

 

 

 

20

 

 

 

(77

)

 

 

953

 

Underwriting Profit (Loss)

 

$

(11,686

)

 

$

(11,092

)

 

$

4,286

 

 

$

 

 

$

(18,492

)

Net Investment Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25,651

 

 

 

25,651

 

Total Net Realized and Unrealized Gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,563

 

 

 

2,563

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,891

)

 

 

(3,891

)

Other Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

771

 

 

 

771

 

Merger Transaction Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,439

)

 

 

(2,439

)

Income (Loss) Before Income Taxes

 

$

(11,686

)

 

$

(11,092

)

 

$

4,286

 

 

$

22,655

 

 

$

4,163

 

Income Tax Benefit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

462

 

 

 

462

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,625

 

Losses and LAE Ratio

 

 

74.9

%

 

 

63.3

%

 

 

62.3

%

 

 

 

 

 

 

69.4

%

Commission Expense Ratio

 

 

11.8

%

 

 

23.7

%

 

 

21.0

%

 

 

 

 

 

 

16.7

%

Other Operating Expense Ratio (2)

 

 

19.5

%

 

 

24.6

%

 

 

9.9

%

 

 

 

 

 

 

19.2

%

Combined Ratio

 

 

106.2

%

 

 

111.6

%

 

 

93.2

%

 

 

 

 

 

 

105.3

%

 

(1) -

Includes Corporate segment intercompany eliminations.

(2) -

Includes Other Operating Expenses and Other Underwriting Income (Expense).

15


 

 

 

 

Three Months Ended September 30, 2017

 

 

 

U.S.

 

 

Int'l

 

 

 

 

 

 

 

 

 

 

 

 

 

amounts in thousands

 

Insurance

 

 

Insurance

 

 

GlobalRe

 

 

Corporate (1)

 

 

Total

 

Gross written premiums

 

$

235,052

 

 

$

113,601

 

 

$

53,385

 

 

$

 

 

$

402,038

 

Ceded written premiums

 

 

(64,328

)

 

 

(38,966

)

 

 

(2,728

)

 

 

 

 

 

(106,022

)

Net written premiums

 

$

170,724

 

 

$

74,635

 

 

$

50,657

 

 

$

 

 

$

296,016

 

Retention Ratio

 

 

72.6

%

 

 

65.7

%

 

 

94.9

%

 

 

 

 

 

73.6

%

Net Earned Premiums

 

$

169,150

 

 

$

84,407

 

 

$

47,798

 

 

$

 

 

$

301,355

 

Net Losses and LAE

 

 

(135,340

)

 

 

(81,713

)

 

 

(59,118

)

 

 

 

 

 

(276,171

)

Commission Expenses

 

 

(18,286

)

 

 

(16,201

)

 

 

(11,233

)

 

 

211

 

 

 

(45,509

)

Other Operating Expenses

 

 

(25,375

)

 

 

(16,388

)

 

 

(4,010

)

 

 

 

 

 

(45,773

)

Other Underwriting Income (Expense)

 

 

125

 

 

 

 

 

 

94

 

 

 

(211

)

 

 

8

 

Underwriting Loss

 

$

(9,726

)

 

$

(29,895

)

 

$

(26,469

)

 

$

 

 

$

(66,090

)

Net Investment Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,598

 

 

 

22,598

 

Total Net Realized and Unrealized Gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,218

 

 

 

4,218

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,862

)

 

 

(3,862

)

Other Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,707

)

 

 

(1,707

)

Income (Loss) Before Income Taxes

 

$

(9,726

)

 

$

(29,895

)

 

$

(26,469

)

 

$

21,247

 

 

$

(44,843

)

Income Tax Benefit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,864

 

 

 

16,864

 

Net Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(27,979

)

Losses and LAE Ratio

 

 

80.0

%

 

 

96.8

%

 

 

123.7

%

 

 

 

 

 

 

91.6

%

Commission Expense Ratio

 

 

10.8

%

 

 

19.2

%

 

 

23.5

%

 

 

 

 

 

 

15.1

%

Other Operating Expense Ratio (2)

 

 

14.9

%

 

 

19.4

%

 

 

8.2

%

 

 

 

 

 

 

15.2

%

Combined Ratio

 

 

105.7

%

 

 

135.4

%

 

 

155.4

%

 

 

 

 

 

 

121.9

%

 

(1) -

Includes Corporate segment intercompany eliminations.

(2) -

Includes Other Operating Expenses and Other Underwriting Income (Expense).

 

 

 

Nine Months Ended September 30, 2018

 

 

 

U.S.

 

 

Int'l

 

 

 

 

 

 

 

 

 

 

 

 

 

amounts in thousands

 

Insurance

 

 

Insurance

 

 

GlobalRe

 

 

Corporate (1)

 

 

Total

 

Gross written premiums

 

$

808,589

 

 

$

377,771

 

 

$

262,043

 

 

$

 

 

$

1,448,403

 

Ceded written premiums

 

 

(215,340

)

 

 

(97,790

)

 

 

(10,307

)

 

 

 

 

 

(323,437

)

Net written premiums

 

$

593,249

 

 

$

279,981

 

 

$

251,736

 

 

$

 

 

$

1,124,966

 

Retention Ratio

 

 

73.4

%

 

 

74.1

%

 

 

96.1

%

 

 

 

 

 

77.7

%

Net Earned Premiums

 

$

541,163

 

 

$

280,507

 

 

$

179,010

 

 

$

 

 

$

1,000,680

 

Net Losses and LAE

 

 

(363,489

)

 

 

(158,422

)

 

 

(101,467

)

 

 

 

 

 

(623,378

)

Commission Expenses

 

 

(63,490

)

 

 

(62,166

)

 

 

(40,198

)

 

 

510

 

 

 

(165,344

)

Other Operating Expenses

 

 

(112,264

)

 

 

(68,270

)

 

 

(18,158

)

 

 

 

 

 

(198,692

)

Other Underwriting Income (Expense)

 

 

234

 

 

 

945

 

 

 

294

 

 

 

(510

)

 

 

963

 

Underwriting Profit (Loss)

 

$

2,154

 

 

$

(7,406

)

 

$

19,481

 

 

$

 

 

$

14,229

 

Net Investment Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

73,954

 

 

 

73,954

 

Total Net Realized and Unrealized Gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,667

 

 

 

3,667

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,619

)

 

 

(11,619

)

Other Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,272

 

 

 

3,272

 

Merger Transaction Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,439

)

 

 

(2,439

)

Income (Loss) Before Income Taxes

 

$

2,154

 

 

$

(7,406

)

 

$

19,481

 

 

$

66,835

 

 

$

81,064

 

Income Tax Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,457

)

 

 

(13,457

)

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

67,607

 

Losses and LAE Ratio

 

 

67.2

%

 

 

56.5

%

 

 

56.7

%

 

 

 

 

 

 

62.3

%

Commission Expense Ratio

 

 

11.7

%

 

 

22.2

%

 

 

22.5

%

 

 

 

 

 

 

16.5

%

Other Operating Expense Ratio (2)

 

 

20.7

%

 

 

23.9

%

 

 

9.9

%

 

 

 

 

 

 

19.8

%

Combined Ratio

 

 

99.6

%

 

 

102.6

%

 

 

89.1

%

 

 

 

 

 

 

98.6

%

 

(1) -

Includes Corporate segment intercompany eliminations.

(2) -

Includes Other Operating Expenses and Other Underwriting Income (Expense).

16


 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

U.S.

 

 

Int'l

 

 

 

 

 

 

 

 

 

 

 

 

 

amounts in thousands

 

Insurance

 

 

Insurance

 

 

GlobalRe

 

 

Corporate (1)

 

 

Total

 

Gross written premiums

 

$

729,843

 

 

$

386,654

 

 

$

188,025

 

 

$

 

 

$

1,304,522

 

Ceded written premiums

 

 

(199,672

)

 

 

(129,368

)

 

 

(9,021

)

 

 

 

 

 

(338,061

)

Net written premiums

 

$

530,171

 

 

$

257,286

 

 

$

179,004

 

 

$

 

 

$

966,461

 

Retention Ratio

 

 

72.6

%

 

 

66.5

%

 

 

95.2

%

 

 

 

 

 

74.1

%

Net Earned Premiums

 

$

500,241

 

 

$

250,593

 

 

$

130,487

 

 

$

 

 

$

881,321

 

Net Losses and LAE

 

 

(339,436

)

 

 

(176,513

)

 

 

(106,932

)

 

 

 

 

 

(622,881

)

Commission Expenses

 

 

(59,130

)

 

 

(54,435

)

 

 

(28,695

)

 

 

734

 

 

 

(141,526

)

Other Operating Expenses

 

 

(91,987

)

 

 

(58,687

)

 

 

(14,403

)

 

 

 

 

 

(165,077

)

Other Underwriting Income (Expense)

 

 

335

 

 

 

 

 

 

439

 

 

 

(734

)

 

 

40

 

Underwriting Profit (Loss)

 

$

10,023

 

 

$

(39,042

)

 

$

(19,104

)

 

$

 

 

$

(48,123

)

Net Investment Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

66,311

 

 

 

66,311

 

Total Net Realized and Unrealized Gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,868

 

 

 

5,868

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,584

)

 

 

(11,584

)

Other Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,082

)

 

 

(1,082

)

Income (Loss) Before Income Taxes

 

$

10,023

 

 

$

(39,042

)

 

$

(19,104

)

 

$

59,513

 

 

$

11,390

 

Income Tax Benefit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,243

 

 

 

2,243

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,633

 

Losses and LAE Ratio

 

 

67.9

%

 

 

70.4

%

 

 

81.9

%

 

 

 

 

 

 

70.7

%

Commission Expense Ratio

 

 

11.8

%

 

 

21.7

%

 

 

22.0

%

 

 

 

 

 

 

16.1

%

Other Operating Expense Ratio (2)

 

 

18.3

%

 

 

23.5

%

 

 

10.7

%

 

 

 

 

 

 

18.7

%

Combined Ratio

 

 

98.0

%

 

 

115.6

%

 

 

114.6

%

 

 

 

 

 

 

105.5

%

 

(1) -

Includes Corporate segment intercompany eliminations.

(2) -

Includes Other Operating Expenses and Other Underwriting Income (Expense).

 

 

17


 

 

Revenue by operating segment for the three and nine months ended September 30, 2018 and 2017 was as follows:

 

 

 

Three Months Ended September 30, 2018

 

 

Three Months Ended September 30, 2017

 

 

% Change

 

amounts in thousands

 

Gross

Written

Premiums

 

 

Ceded

Written

Premiums

 

 

Net Written

Premiums

 

 

Net Earned

Premiums

 

 

Gross

Written

Premiums

 

 

Ceded

Written

Premiums

 

 

Net Written

Premiums

 

 

Net Earned

Premiums

 

 

Gross

Written

Premiums

 

 

Ceded

Written

Premiums

 

 

Net Written

Premiums

 

 

Net Earned

Premiums

 

U.S. Insurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marine

 

$

31,681

 

 

$

(14,442

)

 

$

17,239

 

 

$

20,401

 

 

$

36,403

 

 

$

(18,859

)

 

$

17,544

 

 

$

20,129

 

 

 

(13.0

%)

 

 

(23.4

%)

 

 

(1.7

%)

 

 

1.4

%

P&C

 

 

212,911

 

 

 

(52,993

)

 

 

159,918

 

 

 

141,650

 

 

 

166,097

 

 

 

(39,952

)

 

 

126,145

 

 

 

125,931

 

 

 

28.2

%

 

 

32.6

%

 

 

26.8

%

 

 

12.5

%

Professional Liability

 

 

35,591

 

 

 

(5,180

)

 

 

30,411

 

 

 

26,453

 

 

 

32,552

 

 

 

(5,517

)

 

 

27,035

 

 

 

23,090

 

 

 

9.3

%

 

 

(6.1

%)

 

 

12.5

%

 

 

14.6

%

Total

 

$

280,183

 

 

$

(72,615

)

 

$

207,568

 

 

$

188,504

 

 

$

235,052

 

 

$

(64,328

)

 

$

170,724

 

 

$

169,150

 

 

 

19.2

%

 

 

12.9

%

 

 

21.6

%

 

 

11.4

%

Int'l Insurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marine

 

$

32,486

 

 

$

(4,965

)

 

$

27,521

 

 

$

38,866

 

 

$

41,689

 

 

$

(9,948

)

 

$

31,741

 

 

$

39,038

 

 

 

(22.1

%)

 

 

(50.1

%)

 

 

(13.3

%)

 

 

(0.4

%)

P&C

 

 

41,898

 

 

 

(13,727

)

 

 

28,171

 

 

 

29,616

 

 

 

37,415

 

 

 

(19,772

)

 

 

17,643

 

 

 

21,775

 

 

 

12.0

%

 

 

(30.6

%)

 

 

59.7

%

 

 

36.0

%

Professional Liability

 

 

42,992

 

 

 

(10,328

)

 

 

32,664

 

 

 

26,744

 

 

 

34,497

 

 

 

(9,246

)

 

 

25,251

 

 

 

23,594

 

 

 

24.6

%

 

 

11.7

%

 

 

29.4

%

 

 

13.3

%

Total

 

$

117,376

 

 

$

(29,020

)

 

$

88,356

 

 

$

95,226

 

 

$

113,601

 

 

$

(38,966

)

 

$

74,635

 

 

$

84,407

 

 

 

3.3

%

 

 

(25.5

%)

 

 

18.4

%

 

 

12.8

%

GlobalRe

$

58,384

 

 

$

(1,896

)

 

$

56,488

 

 

$

63,308

 

 

$

53,385

 

 

$

(2,728

)

 

$

50,657

 

 

$

47,798

 

 

 

9.4

%

 

 

(30.5

%)

 

 

11.5

%

 

 

32.4

%

Total

 

$

455,943

 

 

$

(103,531

)

 

$

352,412

 

 

$

347,038

 

 

$

402,038

 

 

$

(106,022

)

 

$

296,016

 

 

$

301,355

 

 

 

13.4

%

 

 

(2.3

%)

 

 

19.1

%

 

 

15.2

%

 

 

 

 

Nine Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2017

 

 

% Change

 

amounts in thousands

 

Gross

Written

Premiums

 

 

Ceded

Written

Premiums

 

 

Net Written

Premiums

 

 

Net Earned

Premiums

 

 

Gross

Written

Premiums

 

 

Ceded

Written

Premiums

 

 

Net Written

Premiums

 

 

Net Earned

Premiums

 

 

Gross

Written

Premiums

 

 

Ceded

Written

Premiums

 

 

Net Written

Premiums

 

 

Net Earned

Premiums

 

U.S. Insurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marine

 

$

112,235

 

 

$

(48,840

)

 

$

63,395

 

 

$

62,670

 

 

$

119,040

 

 

$

(55,830

)

 

$

63,210

 

 

$

64,635

 

 

 

(5.7

%)

 

 

(12.5

%)

 

 

0.3

%

 

 

(3.0

%)

P&C

 

 

599,088

 

 

 

(152,740

)

 

 

446,348

 

 

 

401,870

 

 

 

524,223

 

 

 

(129,297

)

 

 

394,926

 

 

 

366,280

 

 

 

14.3

%

 

 

18.1

%

 

 

13.0

%

 

 

9.7

%

Professional Liability

 

 

97,266

 

 

 

(13,760

)

 

 

83,506

 

 

 

76,623

 

 

 

86,580

 

 

 

(14,545

)

 

 

72,035

 

 

 

69,326

 

 

 

12.3

%

 

 

(5.4

%)

 

 

15.9

%

 

 

10.5

%

Total

 

$

808,589

 

 

$

(215,340

)

 

$

593,249

 

 

$

541,163

 

 

$

729,843

 

 

$

(199,672

)

 

$

530,171

 

 

$

500,241

 

 

 

10.8

%

 

 

7.8

%

 

 

11.9

%

 

 

8.2

%

Int'l Insurance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marine

 

$

129,678

 

 

$

(24,542

)

 

$

105,136

 

 

$

115,342

 

 

$

160,119

 

 

$

(33,410

)

 

$

126,709

 

 

$

116,058

 

 

 

(19.0

%)

 

 

(26.5

%)

 

 

(17.0

%)

 

 

(0.6

%)

P&C

 

 

122,437

 

 

 

(45,099

)

 

 

77,338

 

 

 

75,100

 

 

 

124,446

 

 

 

(69,780

)

 

 

54,666

 

 

 

67,292

 

 

 

(1.6

%)

 

 

(35.4

%)

 

 

41.5

%

 

 

11.6

%

Professional Liability

 

 

125,656

 

 

 

(28,149

)

 

 

97,507

 

 

 

90,065

 

 

 

102,089

 

 

 

(26,178

)

 

 

75,911

 

 

 

67,243

 

 

 

23.1

%

 

 

7.5

%

 

 

28.4

%

 

 

33.9

%

Total

 

$

377,771

 

 

$

(97,790

)

 

$

279,981

 

 

$

280,507

 

 

$

386,654

 

 

$

(129,368

)

 

$

257,286

 

 

$

250,593

 

 

 

(2.3

%)

 

 

(24.4

%)

 

 

8.8

%

 

 

11.9

%

GlobalRe

$

262,043

 

 

$

(10,307

)

 

$

251,736

 

 

$

179,010

 

 

$

188,025

 

 

$

(9,021

)

 

$

179,004

 

 

$

130,487

 

 

 

39.4

%

 

 

14.3

%

 

 

40.6

%

 

 

37.2

%

Total

 

$

1,448,403

 

 

$

(323,437

)

 

$

1,124,966

 

 

$

1,000,680

 

 

$

1,304,522

 

 

$

(338,061

)

 

$

966,461

 

 

$

881,321

 

 

 

11.0

%

 

 

(4.3

%)

 

 

16.4

%

 

 

13.5

%

 

 

18


 

NOTE 4.  INVESTMENTS

The following tables set forth our Company’s Available-For-Sale Investments as of September 30, 2018 and December 31, 2017 and include Other-Than-Temporary-Impairment (“OTTI”) securities recognized within Accumulated Other Comprehensive Income (“AOCI”):

 

 

 

September 30, 2018

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Cost or

 

 

 

Fair

 

 

Unrealized

 

 

Unrealized

 

 

Amortized

 

amounts in thousands

 

Value

 

 

Gains

 

 

(Losses)

 

 

Cost

 

Fixed Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Bonds, Agency Bonds and Foreign

   Government Bonds

 

$

245,285

 

 

$

1,031

 

 

$

(3,879

)

 

$

248,133

 

States, Municipalities and Political Subdivisions

 

 

631,514

 

 

 

7,569

 

 

 

(7,534

)

 

 

631,479

 

Mortgage-Backed and Asset-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Residential Mortgage-Backed Securities

 

 

344,016

 

 

 

874

 

 

 

(17,219

)

 

 

360,361

 

Residential Mortgage Obligations

 

 

124,191

 

 

 

521

 

 

 

(493

)

 

 

124,163

 

Asset-Backed Securities

 

 

540,566

 

 

 

554

 

 

 

(4,033

)

 

 

544,045

 

Commercial Mortgage-Backed Securities

 

 

186,251

 

 

 

696

 

 

 

(3,126

)

 

 

188,681

 

Subtotal

 

$

1,195,024

 

 

$

2,645

 

 

$

(24,871

)

 

$

1,217,250

 

Corporate Exposures (1)

 

 

917,650

 

 

 

4,191

 

 

 

(17,514

)

 

 

930,973

 

Total Fixed Maturities

 

$

2,989,473

 

 

$

15,436

 

 

$

(53,798

)

 

$

3,027,835

 

Short-Term Investments

 

 

7,264

 

 

 

 

 

 

(4

)

 

 

7,268

 

Total Available-For-Sale Investments

 

$

2,996,737

 

 

$

15,436

 

 

$

(53,802

)

 

$

3,035,103

 

 

(1) -

Corporate Exposures consist of investments in corporate bonds, hybrid bonds and redeemable preferred stocks.

 

 

 

December 31, 2017

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

Cost or

 

 

 

Fair

 

 

Unrealized

 

 

Unrealized

 

 

Amortized

 

amounts in thousands

 

Value

 

 

Gains

 

 

(Losses)

 

 

Cost

 

Fixed Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Bonds, Agency Bonds and Foreign

   Government Bonds

 

$

393,563

 

 

$

2,081

 

 

$

(2,014

)

 

$

393,496

 

States, Municipalities and Political Subdivisions

 

 

814,632

 

 

 

20,136

 

 

 

(1,423

)

 

 

795,919

 

Mortgage-Backed and Asset-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Residential Mortgage-Backed Securities

 

 

407,619

 

 

 

2,352

 

 

 

(5,414

)

 

 

410,681

 

Residential Mortgage Obligations

 

 

54,104

 

 

 

606

 

 

 

(79

)

 

 

53,577

 

Asset-Backed Securities

 

 

328,753

 

 

 

2,138

 

 

 

(663

)

 

 

327,278

 

Commercial Mortgage-Backed Securities

 

 

160,904

 

 

 

2,354

 

 

 

(1,182

)

 

 

159,732

 

Subtotal

 

$

951,380

 

 

$

7,450

 

 

$

(7,338

)

 

$

951,268

 

Corporate Exposures (1)

 

 

897,479

 

 

 

14,491

 

 

 

(3,737

)

 

 

886,725

 

Total Fixed Maturities

 

$

3,057,054

 

 

$

44,158

 

 

$

(14,512

)

 

$

3,027,408

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stocks

 

$

52,439

 

 

$

7,423

 

 

$

(112

)

 

$

45,128

 

Preferred Stocks

 

 

183,542

 

 

 

6,071

 

 

 

(1,560

)

 

 

179,031

 

Total Equity Securities

 

$

235,981

 

 

$

13,494

 

 

$

(1,672

)

 

$

224,159

 

Short-Term Investments

 

 

6,480

 

 

 

3

 

 

 

 

 

 

6,477

 

Total Available-For-Sale Investments

 

$

3,299,515

 

 

$

57,655

 

 

$

(16,184

)

 

$

3,258,044

 

 

(1) -

Corporate Exposures consist of investments in corporate bonds, hybrid bonds and redeemable preferred stocks.

 

 

19


 

The following table sets forth our Company’s Equity Securities at fair value as of September 30, 2018:

 

 

 

As of September 30, 2018

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Unrealized

 

 

Cost

 

amounts in thousands

 

Value

 

 

Gains

 

 

(Losses)

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Common Stocks

 

$

190,722

 

 

$

15,573

 

 

$

(116

)

 

$

175,265

 

  Preferred Stocks

 

 

180,958

 

 

 

1,901

 

 

 

(5,078

)

 

 

184,135

 

Total Equity Securities

 

$

371,680

 

 

$

17,474

 

 

$

(5,194

)

 

$

359,400

 

 

Our Company made 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 were initially recorded at cost and subsequently adjusted based on our Company’s proportionate share of the net income or loss of the investments. Our initial purchase price for these investments was $2.0 million with a current carrying value of $1.8 million at September 30, 2018 and $1.7 million at December 31, 2017, as reflected on our Consolidated Balance Sheet.  

 

Other Invested Assets also includes overseas deposits with a fair value of $40.7 million at September 30, 2018 and $28.8 million at December 31, 2017.  The overseas deposits consist of investments in private funds which are managed centrally by The Corporation of Lloyds in support of all Lloyd’s market participants. The funds consist of fixed income securities, bank deposits, and cash invested in local markets which are intended to fulfill regulatory deposit requirements in worldwide jurisdictions. Our Company’s ability to withdraw from the funds is restricted by an annual and quarterly funding and release process managed by Lloyd’s in conjunction with Syndicate 1221’s capital requirements in various jurisdictions.

As of September 30, 2018 and December 31, 2017, our Company did not have a concentration of greater than 5% of invested assets in a single non-government backed issuer.

As of September 30, 2018 and December 31, 2017, Fixed Maturities for which Non-Credit OTTI was previously recognized and included in AOCI were in a Net Unrealized Gain position of $0.4 million and $0.5 million, respectively.

The fair value of our Company’s Fixed Maturities investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, 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, 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. Our Company 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 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 September 30, 2018 are shown in the following table:

 

 

 

September 30, 2018

 

 

 

Fair

 

 

Amortized

 

amounts in thousands

 

Value

 

 

Cost

 

Due in one year or less

 

$

179,367

 

 

$

180,246

 

Due after one year through five years

 

 

715,620

 

 

 

725,231

 

Due after five years through ten years

 

 

345,661

 

 

 

348,557

 

Due after ten years

 

 

553,801

 

 

 

556,551

 

Mortgage-Backed and Asset-Backed Securities

 

 

1,195,024

 

 

 

1,217,250

 

Total

 

$

2,989,473

 

 

$

3,027,835

 

 

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 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. Due to the periodic repayment of principal, our Mortgage-Backed and Asset-Backed Securities are estimated to have an effective maturity of approximately 5.3 years.

20


 

The following tables summarize all Available-For-Sale securities in a gross unrealized loss position as of September 30, 2018 and December 31, 2017, showing the aggregate fair value and gross unrealized loss by the length of time those securities have continuously been in a gross unrealized loss position:

 

 

 

September 30, 2018

 

 

 

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

 

$

130,366

 

 

$

(2,559

)

 

$

73,266

 

 

$

(1,320

)

 

$

203,632

 

 

$

(3,879

)

States, Municipalities and Political Subdivisions

 

 

267,333

 

 

 

(4,895

)

 

 

58,882

 

 

 

(2,639

)

 

 

326,215

 

 

 

(7,534

)

Mortgage-Backed and Asset-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Residential Mortgage-Backed

   Securities

 

 

72,698

 

 

 

(2,537

)

 

 

242,433

 

 

 

(14,682

)

 

 

315,131

 

 

 

(17,219

)

Residential Mortgage Obligations

 

 

43,108

 

 

 

(297

)

 

 

6,501

 

 

 

(196

)

 

 

49,609

 

 

 

(493

)

Asset-Backed Securities

 

 

364,764

 

 

 

(3,178

)

 

 

38,290

 

 

 

(855

)

 

 

403,054

 

 

 

(4,033

)

Commercial Mortgage-Backed Securities

 

 

56,209

 

 

 

(706

)

 

 

31,868

 

 

 

(2,420

)

 

 

88,077

 

 

 

(3,126

)

Subtotal

 

$

536,779

 

 

$

(6,718

)

 

$

319,092

 

 

$

(18,153

)

 

$

855,871

 

 

$

(24,871

)

Corporate Exposures (1)

 

 

614,332

 

 

 

(12,034

)

 

 

148,254

 

 

 

(5,480

)

 

 

762,586

 

 

 

(17,514

)

Total Fixed Maturities

 

$

1,548,810

 

 

$

(26,206

)

 

$

599,494

 

 

$

(27,592

)

 

$

2,148,304

 

 

$

(53,798

)

 

(1) -

Corporate Exposures consist of investments in corporate bonds, hybrid bonds and redeemable preferred stocks.

 

 

 

December 31, 2017

 

 

 

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

 

$

273,672

 

 

$

(1,502

)

 

$

54,484

 

 

$

(512

)

 

$

328,156

 

 

$

(2,014

)

States, Municipalities and Political Subdivisions

 

 

74,097

 

 

 

(503

)

 

 

45,085

 

 

 

(920

)

 

 

119,182

 

 

 

(1,423

)

Mortgage-Backed and Asset-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Residential Mortgage-Backed

   Securities

 

 

87,496

 

 

 

(346

)

 

 

236,745

 

 

 

(5,068

)

 

 

324,241

 

 

 

(5,414

)

Residential Mortgage Obligations

 

 

12,418

 

 

 

(62

)

 

 

546

 

 

 

(17

)

 

 

12,964

 

 

 

(79

)

Asset-Backed Securities

 

 

85,877

 

 

 

(468

)

 

 

24,733

 

 

 

(195

)

 

 

110,610

 

 

 

(663

)

Commercial Mortgage-Backed Securities

 

 

20,482

 

 

 

(95

)

 

 

22,903

 

 

 

(1,087

)

 

 

43,385

 

 

 

(1,182

)

Subtotal

 

$

206,273

 

 

$

(971

)

 

$

284,927

 

 

$

(6,367

)

 

$

491,200

 

 

$

(7,338

)

Corporate Exposures (1)

 

 

295,433

 

 

 

(1,690

)

 

 

121,410

 

 

 

(2,047

)

 

 

416,843

 

 

 

(3,737

)

Total Fixed Maturities

 

$

849,475

 

 

$

(4,666

)

 

$

505,906

 

 

$

(9,846

)

 

$

1,355,381

 

 

$

(14,512

)

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stocks

 

$

11,245

 

 

$

(81

)

 

$

1,770

 

 

$

(31

)

 

$

13,015

 

 

$

(112

)

Preferred Stocks

 

 

50,861

 

 

 

(1,524

)

 

 

662

 

 

 

(36

)

 

 

51,523

 

 

 

(1,560

)

Total Equity Securities

 

$

62,106

 

 

$

(1,605

)

 

$

2,432

 

 

$

(67

)

 

$

64,538

 

 

$

(1,672

)

Total Fixed Maturities and Equity Securities

 

$

911,581

 

 

$

(6,271

)

 

$

508,338

 

 

$

(9,913

)

 

$

1,419,919

 

 

$

(16,184

)

 

 

(1) -

Corporate Exposures consist of investments in corporate bonds, hybrid bonds and redeemable preferred stocks.

Our Company analyzes impaired securities quarterly to determine if any impairments are other-than-temporary.  The above securities with unrealized losses are deemed to be temporarily impaired based on our evaluation.

 

21


 

As of September 30, 2018, there were 830 Fixed Maturities in an unrealized loss position. As of December 31, 2017, there were 454 Fixed Maturities and 22 Equity Securities  in an unrealized loss position. As of September 30, 2018, the gross unrealized loss for the greater than 12 months category consists primarily of Agency Residential Mortgage-Backed Securities and Corporate Exposures principally due to an increase in interest rates. The gross unrealized loss for the less than 12 months category for the period ended September 30, 2018 consists primarily of Corporate Exposures due to an increase in interest rates.  As of December 31, 2017, the gross unrealized loss for the greater than 12 month category consists primarily of Agency Residential Mortgage-Backed Securities and Corporate Exposures and is mostly due to an increase in interest rates since the time of purchase.  The gross unrealized loss for the less than 12 months category for the period ended December 31, 2017 consists primarily of Corporate Bonds and Preferred Stocks, which are reported in Equity Securities due to an increase in interest rates since time of purchase, as well as Foreign Government Bonds due to an unfavorable exchange rate movement in our Canadian portfolio.

As of September 30, 2018 and December 31, 2017, the largest unrealized loss by a non-government backed issuer in the investment portfolio was $1.4 million and $0.7 million, respectively.

Our Company’s ability to hold securities is supported by sufficient cash flow from our operations and from maturities within our investment portfolio in order to meet our claims payments and other disbursement obligations arising from our 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.  

Upon adoption of ASU 2016-01 as of January 1, 2018, changes in the fair value of Equity Securities are recognized through Net Income. Our Company did not have any credit related OTTI losses during the three and nine months ended September 30, 2018. Our Company had two credit related OTTI losses totaling $1.0 million in the equity portfolio during the three months ended September 30, 2017.  Our Company had four credit related OTTI losses totaling $2.1 million in the equity portfolio during the nine months ended September 30, 2017.    

As of September 30, 2018 and 2017, the cumulative amounts related to our Company’s credit loss portion of the OTTI losses on Fixed Maturities was $2.4 million.  There were no changes to the cumulative amounts of our Company’s credit loss portion of OTTI for the three and nine months ended September 30, 2018 and 2017

 

 

 

Our Company’s Net Investment Income was derived from the following sources:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

amounts in thousands

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Fixed Maturities

 

$

22,733

 

 

$

19,491

 

 

$

65,504

 

 

$

57,019

 

Equity Securities

 

 

3,052

 

 

 

3,774

 

 

 

9,138

 

 

 

11,337

 

Short-Term Investments, Cash & Cash Equivalents

 

 

509

 

 

 

84

 

 

 

1,151

 

 

 

254

 

Other Invested Assets

 

 

159

 

 

 

166

 

 

 

486

 

 

 

408

 

Total Investment Income

 

$

26,453

 

 

$

23,515

 

 

$

76,279

 

 

$

69,018

 

Investment Expenses

 

 

(802

)

 

 

(917

)

 

 

(2,325

)

 

 

(2,707

)

Net Investment Income

 

$

25,651

 

 

$

22,598

 

 

$

73,954

 

 

$

66,311

 

 

22


 

Realized Gains and Losses on Investments Sold, excluding net OTTI losses recognized in earnings, for the periods indicated, were as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

amounts in thousands

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Fixed Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

 

$

331

 

 

$

2,589

 

 

$

3,678

 

 

$

3,401

 

Losses

 

 

(369

)

 

 

(900

)

 

 

(1,125

)

 

 

(3,114

)

Fixed Maturities, Net

 

$

(38

)

 

$

1,689

 

 

$

2,553

 

 

$

287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-Term Investments, Cash & Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

 

$

107

 

 

$

758

 

 

$

189

 

 

$

984

 

Losses

 

 

(71

)

 

 

(14

)

 

 

(266

)

 

 

(139

)

Short-Term, Net

 

$

36

 

 

$

744

 

 

$

(77

)

 

$

845

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Invested Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

 

$

9

 

 

$

9

 

 

$

78

 

 

$

30

 

Losses

 

 

(50

)

 

 

(97

)

 

 

(136

)

 

 

(232

)

Other Invested Assets, Net

 

$

(41

)

 

$

(88

)

 

$

(58

)

 

$

(202

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

 

$

347

 

 

$

2,863

 

 

$

1,102

 

 

$

7,249

 

Losses

 

 

(51

)

 

 

(18

)

 

 

(310

)

 

 

(246

)

Equity Securities, Net

 

$

296

 

 

$

2,845

 

 

$

792

 

 

$

7,003

 

Net Realized Gains on Investments Sold

 

$

253

 

 

$

5,190

 

 

$

3,210

 

 

$

7,933

 

 

 

The following table presents the portion of Net Unrealized Gains (Losses) recognized during the three and nine months ended September 30, 2018, that relates to Equity Securities held as of September 30, 2018:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

amounts in thousands

 

2018

 

 

2018

 

Equity Securities:

 

 

 

 

 

 

 

 

Total Net Realized and Unrealized Gains recognized during the period

 

$

2,606

 

 

$

1,249

 

Less: Net Realized Gains on Investments Sold recognized during the period

 

 

296

 

 

 

792

 

Net Unrealized Gains recognized during the period

 

$

2,310

 

 

$

457

 

 

NOTE 5. FAIR VALUE MEASUREMENT

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 equities and fixed income securities traded on an exchange. U.S. Treasury securities are reported as Level 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 Level 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.

23


 

The following tables present, for each of the fair value hierarchy levels as defined by the accounting guidance for fair value measurements described above, 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 “Senior Notes”) carried at amortized cost as of September 30, 2018 and December 31, 2017:

 

 

 

September 30, 2018

 

amounts in thousands

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Fixed Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Bonds, Agency Bonds and Foreign

   Government Bonds

 

$

45,093

 

 

$

200,192

 

 

$

 

 

$

245,285

 

States, Municipalities and Political Subdivisions

 

 

 

 

 

631,514

 

 

 

 

 

 

631,514

 

Mortgage-Backed and Asset-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Residential Mortgage-Backed Securities

 

 

 

 

 

344,016

 

 

 

 

 

 

344,016

 

Residential Mortgage Obligations

 

 

 

 

 

124,191

 

 

 

 

 

 

124,191

 

Asset-Backed Securities

 

 

 

 

 

540,566

 

 

 

 

 

 

540,566

 

Commercial Mortgage-Backed Securities

 

 

 

 

 

186,251

 

 

 

 

 

 

186,251

 

Subtotal

 

$

 

 

$

1,195,024

 

 

$

 

 

$

1,195,024

 

Corporate Exposures

 

 

 

 

 

917,650

 

 

 

 

 

 

917,650

 

Total Fixed Maturities

 

$

45,093

 

 

$

2,944,380

 

 

$

 

 

$

2,989,473

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stocks

 

$

40,416

 

 

$

150,306

 

 

$

 

 

$

190,722

 

Preferred Stocks

 

 

 

 

 

180,958

 

 

 

 

 

 

180,958

 

Total Equity Securities

 

$

40,416

 

 

$

331,264

 

 

$

 

 

$

371,680

 

Short-Term Investments

 

 

 

 

 

7,264

 

 

 

 

 

 

7,264

 

Total Assets Measured at Fair Value

 

$

85,509

 

 

$

3,282,908

 

 

$

 

 

$

3,368,417

 

Senior Notes

 

$

 

 

$

274,348

 

 

$

 

 

$

274,348

 

Total Liabilities Measured at Fair Value

 

$

 

 

$

274,348

 

 

$

 

 

$

274,348

 

 

 

 

December 31, 2017

 

amounts in thousands

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Fixed Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Bonds, Agency Bonds and Foreign

   Government Bonds

 

$

178,251

 

 

$

215,312

 

 

$

 

 

$

393,563

 

States, Municipalities and Political Subdivisions

 

 

 

 

 

814,632

 

 

 

 

 

 

814,632

 

Mortgage-Backed and Asset-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Residential Mortgage-Backed Securities

 

 

 

 

 

407,619

 

 

 

 

 

 

407,619

 

Residential Mortgage Obligations

 

 

 

 

 

54,104

 

 

 

 

 

 

54,104

 

Asset-Backed Securities

 

 

 

 

 

328,753

 

 

 

 

 

 

328,753

 

Commercial Mortgage-Backed Securities

 

 

 

 

 

160,904

 

 

 

 

 

 

160,904

 

Subtotal

 

$

 

 

$

951,380

 

 

$

 

 

$

951,380

 

Corporate Exposures

 

 

 

 

 

897,479

 

 

 

 

 

 

897,479

 

Total Fixed Maturities

 

$

178,251

 

 

$

2,878,803

 

 

$

 

 

$

3,057,054

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stocks

 

$

52,439

 

 

$

 

 

$

 

 

$

52,439

 

Preferred Stocks

 

 

 

 

 

183,542

 

 

 

 

 

 

183,542

 

Total Equity Securities

 

$

52,439

 

 

$

183,542

 

 

$

 

 

$

235,981

 

Short-Term Investments

 

 

6,480

 

 

 

 

 

 

 

 

 

6,480

 

Total Assets Measured at Fair Value

 

$

237,170

 

 

$

3,062,345

 

 

$

 

 

$

3,299,515

 

Senior Notes

 

$

 

 

$

277,951

 

 

$

 

 

$

277,951

 

Total Liabilities Measured at Fair Value

 

$

 

 

$

277,951

 

 

$

 

 

$

277,951

 

 

Other financial assets and liabilities including Cash, Premium Receivable, Reinsurance Recoverable and Reinsurance Balances Payable are carried at cost, which approximates fair value. Our Company has overseas deposits in Other Invested Assets of $40.7 million and $28.8 million at September 30, 2018 and December 2017, respectively, which is measured at fair value using the net asset value (“NAV”) as a practical expedient.

24


 

Our Company did not have any transfers between Level 1 and Level 2 classifications for the three and nine months ended September 30, 2018 and 2017. 

As of September 30, 2018, our Company did not have any Level 3 assets.

 

NOTE 6. GOODWILL AND INTANGIBLE ASSETS

 

Goodwill

 

The following table shows an analysis of goodwill by reporting segment:

 

 

 

Nine Months Ended September 30, 2018

 

 

 

U.S.

 

 

Int'l

 

 

 

 

 

amounts in thousands

 

Insurance

 

 

Insurance

 

 

Total

 

Goodwill at Beginning of the Period

 

$

1,978

 

 

$

2,482

 

 

$

4,460

 

Goodwill Acquired

 

 

 

 

 

12,703

 

 

 

12,703

 

Foreign Currency Translation Adjustment

 

 

 

 

 

81

 

 

 

81

 

Goodwill at End of the Period

 

$

1,978

 

 

$

15,266

 

 

$

17,244

 

 

The Goodwill Acquired primarily relates to expected synergies from combining operations of the NICE Group and is not expected to be deductible for tax purposes. Included in the Goodwill Acquired is an increase of $1.4 million from the amount initially recorded at June 30, 2018, as a result of a measurement period adjustment to the fair value of the ASCO customer relationships intangible asset. See the “Intangibles” section below for further information.

 

Intangibles

 

The gross carrying value and weighted average amortization period of intangible assets by type at September 30, 2018 was as follows:

 

 

 

As of September 30, 2018

amounts in thousands

 

Gross Carrying

Amount

 

 

Accumulated

Amortization

 

 

Weighted Average

Amortization

Period

Finite-Lived Assets

 

 

 

 

 

 

 

 

 

 

ASCO Customer Relationships

 

$

3,383

 

 

$

(85

)

 

10 years

ASCO VOBA

 

 

1,711

 

 

 

(107

)

 

4 years

BDM Broker Networks

 

 

1,012

 

 

 

(17

)

 

15 years

BDM Trade Name

 

 

498

 

 

 

(124

)

 

1 year

Total

 

$

6,604

 

 

$

(333

)

 

 

Indefinite-Lived Assets

 

 

 

 

 

 

 

 

 

 

ASCO European Licenses

 

$

2,489

 

 

indefinite

 

 

 

NUAL Lloyd's Syndicate Capacity

 

 

2,136

 

 

indefinite

 

 

 

Total

 

$

4,625

 

 

 

 

 

 

 

 

During the three months ended September 30, 2018, as part of our business combination accounting within the measurement period, the Company recorded an adjustment to the fair value of the ASCO customer relationships intangible asset. The adjustment resulted from additional analysis of the duration of customer contracts, which decreased the useful life of the intangible asset from 15 to 10 years. As a result, the fair value of the intangible asset decreased by $1.4 million from the amount initially recorded at June 30, 2018.

 

The amortization of the Finite-Lived Assets was recognized within Other Operating Expenses on our Consolidated Statements of Income (Loss) with the exception of the amortization of the VOBA asset, which was recognized within Commission Expenses.

 

25


 

The estimated remaining amortization expense for the finite-lived intangible assets is as follows:

 

amounts in thousands

 

Total

 

2018

 

$

333

 

2019

 

 

1,082

 

2020

 

 

834

 

2021

 

 

834

 

2022

 

 

620

 

2023 and thereafter

 

 

2,568

 

Total

 

$

6,271

 

 

NOTE 7. LOSS RESERVES

We establish reserves for the estimated unpaid ultimate liability for losses and LAE under the terms of our policies and agreements. The determination of Reserves for Losses and LAE is partially dependent upon the receipt of information from agents and brokers. Reserves include estimates for both claims that have been reported and for those that have been incurred but not reported (“IBNR”), and include estimates of expenses associated with processing and settling these claims. Reserves are recorded in Reserves for Losses and LAE in the Consolidated Balance Sheets. Our estimates and judgements may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed, or as laws change. Frequency/severity analyses are also performed for certain books of business. To the extent that reserves are found deficient or redundant, a strengthening or release is recognized as a charge or credit to earnings.

The following table summarizes our Company’s Reserves for Losses and LAE activity for the nine months ended September 30, 2018 and 2017:

 

 

 

For the Nine Months Ended September 30,

 

amounts in thousands

 

2018

 

 

2017

 

Net Reserves for Losses and LAE at Beginning of Year

 

$

1,705,380

 

 

$

1,510,451

 

Acquired Net Reserves

 

 

16,159

 

 

 

 

Provision for Losses and LAE for Claims Occurring in the Current Year

 

 

603,564

 

 

 

578,272

 

Increase (Decrease) in Estimated Losses and LAE for Claims Occurring in Prior Years

 

 

19,814

 

 

 

44,609

 

Incurred Losses and LAE

 

$

623,378

 

 

$

622,881

 

Losses and LAE Paid for Claims Occurring During:

 

 

 

 

 

 

 

 

Current Year

 

 

(65,445

)

 

 

(75,707

)

Prior Years

 

 

(420,870

)

 

 

(358,684

)

Losses and LAE Payments

 

$

(486,315

)

 

$

(434,391

)

Foreign Currency Adjustment

 

 

(4,982

)

 

 

11,688

 

Net Reserves for Losses and LAE at End of Period

 

 

1,853,620

 

 

 

1,710,629

 

Reinsurance Recoverables on Unpaid Losses and LAE

 

 

780,215

 

 

 

847,505

 

Gross Reserves for Losses and LAE at End of Period

 

$

2,633,835

 

 

$

2,558,134

 

 

For the nine months ended September 30, 2018, our Incurred Losses and LAE increased $0.5 million as compared to the same period in 2017, with an increase due to growth in Net Earned Premium over the prior year largely offset by a higher level of catastrophe losses and prior year reserve strengthening in 2017.

 

The nine months ended September 30, 2018 recognized total net catastrophe losses of $12.6 million, which included losses from Typhoon Jebi and Hurricane Florence. This compared to total net catastrophe losses of $77.9 million for the same period in 2017, which included losses from Hurricanes Harvey, Irma, and Maria (the “Hurricane events”) and the Puebla, Mexico Earthquake.

 

The nine months ended September 30, 2018 recognized $19.8 million of net prior AY reserve strengthening primarily driven by our Primary Casualty division within the U.S. Insurance P&C operating segment due to significant loss development within our Premises product. This compares to $44.6 million of net prior accident year reserve strengthening for the same period in 2017 primarily related to loss development in our Int’l Insurance reporting segment, large loss activity in our U.S. D&O division, strengthening of our U.S. casualty business and the settlement of a large claim in our GlobalRe reporting segment.

For the nine months ended September 30, 2018, our Losses and LAE Payments increased $51.9 million as compared to the same period in 2017, primarily due to increased claim payments associated with growth in our business and the catastrophe activity occurring in the third quarter of 2017.

26


 

Our September 30, 2018 Net Reserves for Losses and LAE includes estimated amounts for numerous catastrophe events. We caution that the magnitude and complexity of losses arising from these events inherently increases the level of uncertainty and therefore the level of management judgment involved in arriving at our estimated Net Reserves for Losses and LAE. As a result, our actual losses for these events may ultimately differ materially from our current estimates.

 

NOTE 8. CEDED REINSURANCE

As of September 30, 2018, the credit quality distribution of our Company’s reinsurance recoverable of $1.1 billion for ceded paid losses, ceded unpaid losses and LAE, and ceded unearned premiums based on insurer financial strength ratings from A.M. Best or S&P was not significantly different from the credit quality distribution as of December 31, 2017.

Our allowance for uncollectible reinsurance was $12.6 million as of September 30, 2018 and December 31, 2017.

As of September 30, 2018, the list of our 10 largest reinsurers measured by the amount of reinsurance recoverable for ceded losses and LAE and ceded unearned premium, together with the reinsurance recoverable and collateral, was similar to the list as of December 31, 2017.

NOTE 9. DEBT

During the first quarter of 2018, the Company reclassified certain overseas deposits from Short-Term Investments to Other Invested Assets. Refer to Note 1. Organization & Summary of Significant Accounting Policies. Although the nature of the investments did not change, this reclassification caused the Company to exceed a covenant of our Club Facility that sets a limitation on other investments as a percentage of total investments. During the second quarter of 2018, our Company received a waiver of compliance with respect to this covenant, which was subsequently amended to increase the percentage of other investments permitted. As of September 30, 2018, our Company was in compliance with all covenants for our Club Facility, Senior Notes, Australian Facility and Bilateral Facility.

NOTE 10. COMMITMENTS AND CONTINGENCIES

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 September 30, 2018, our Company has received all of the award and earned a loan forgiveness credit of $7.0 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 $0.3 million and $1.0 million of the incentive for the three and nine months ended September 30, 2018, respectively. As of September 30, 2018 and December 31, 2017, our Company has deferred revenue of $5.0 million and $4.4 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”). The Guarantee will 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 will 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 has confirmed that NIIC will 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.

On August 22, 2018, our Company entered into a Merger Agreement with The Hartford. In accordance with the terms of the Merger Agreement, our Company would be obligated to pay The Hartford a $68.25 million termination fee if the Merger Agreement is terminated for certain reasons outlined in the Merger Agreement. Our Company is obligated to reimburse the Hartford for its transaction-related expenses, up to $7.0 million, if the Merger Agreement is terminated due to our Company’s stockholders failing to adopt the Merger Agreement, provided that any such transaction-related expenses reimbursed by our Company would be credited toward any termination fee.

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.

 

27


 

NOTE 11. STOCK-BASED COMPENSATION

Stock-based compensation granted under our Company’s stock plans is expensed in tranches over the vesting period. Non-performance based grants generally vest equally over a three or four-year period. Performance units generally cliff vest three years after they are granted. Each performance unit and restricted stock unit represents a contingent right to receive one share of Common Stock as of the vesting date. Such Common Stock may be subject to forfeiture for the payment of any required tax withholding.

 

The activity related to our Company's restricted stock unit awards was as follows:

 

 

 

Nine Months Ended September 30, 2018

 

 

 

Number of Awards

 

 

Weighted Average

Grant Date Fair

Value (1)

 

Nonvested at the beginning of the period

 

 

159,539

 

 

$

41.60

 

Granted

 

 

24,593

 

 

$

50.01

 

Vested (2)

 

 

(76,168

)

 

$

35.23

 

Forfeited

 

 

(7,000

)

 

$

38.00

 

Nonvested at the end of the period

 

 

100,964

 

 

$

48.70

 

 

(1)

Fair value is based on the closing price of our common shares on the NASDAQ on the grant date.

(2)

This amount represents the gross number of shares vested before any share forfeiture to pay required tax withholdings. For the nine months ended September 30, 2018 share awards of 29,954 were withheld for tax payments at a weighted average vest date fair value of $56.83.

 

The activity related to our Company's performance-based equity awards was as follows:

 

 

 

Nine Months Ended September 30, 2018

 

 

 

Number of Awards

 

 

Weighted Average

Grant Date Fair

Value (1)

 

Nonvested at the beginning of the period

 

 

966,361

 

 

$

43.39

 

Granted

 

 

247,554

 

 

$

54.15

 

Performance Adjustment

 

 

(59,833

)

 

$

37.25

 

Vested (2)

 

 

(274,299

)

 

$

37.25

 

Forfeited

 

 

(34,250

)

 

$

46.00

 

Nonvested at the end of the period

 

 

845,533

 

 

$

48.86

 

 

(1)

Fair value is based on the closing price of our common shares on the NASDAQ on the grant date.

(2)

This amount represents the gross number of shares vested before any share forfeiture to pay required tax withholdings. For the nine months ended September 30, 2018 share awards of 117,005 were withheld for tax payments at a weighted average vest date fair value of $55.65.

 

Awards that remain outstanding at the time of the Merger will be treated as follows in accordance with the Merger Agreement:

 

Each performance unit award granted prior to January 1, 2017, and each tranche of a restricted stock unit award that vests prior to January 1, 2020, that was granted prior to January 1, 2019, and that is payable in shares (together, the “2019 Vesting Company Awards”) will be converted into the right to receive an amount in cash equal to the product of (x) the Merger Consideration multiplied by (y) the number of restricted stock units in the applicable tranche or, in the case of performance unit awards, the target number of shares, in each case subject to the 2019 Vesting Company Award immediately prior to the Merger.

 

Each performance unit award granted on or after January 1, 2017 and prior to January 1, 2019, and each tranche of a restricted stock unit award that vests on or after January 1, 2020, that was granted prior to January 1, 2019, and that is payable in shares (together, the “2020 Vesting Company Awards”) will be canceled and converted into the right to receive a cash payment equal to the product of (x) the Merger Consideration multiplied by (y) the number of restricted stock units in the applicable tranche or, in the case of performance units, the target number of shares, in each case subject to the 2020 Vesting Company Award immediately prior to the Merger; provided that the right to a cash payment with respect to a 2020 Vesting Company Award shall be subject to the same vesting and payment schedules as the 2020 Vesting Company Award it replaces (other than performance-based vesting conditions).

28


 

NOTE 12. STOCKHOLDERS’ EQUITY

On August 9, 2018 our Board of Directors declared a cash dividend of $0.07 per share that was paid on September 21, 2018. During the three months ended September 30, 2017, a dividend of $0.06 per share was declared and paid.

During the nine months ended September 30, 2018 and 2017, dividends of $0.21 and $0.165 per share were declared and paid, respectively.

The declaration and amount of any future dividend will be at the discretion of the Board of Directors, and will depend upon many factors, including financial condition, results of operations, business requirements, regulatory and legal constraints and other factors the Board of Directors deems relevant.

NOTE 13. SUBSEQUENT EVENTS

 

On November 7, 2018, we amended and restated the Club Facility (the “Restated Club Facility”). The Restated Club Facility has two tranches with one tranche extending a $165.0 million commitment and the other tranche extending a £60.0 million commitment. The Restated Club Facility will be used to support the Company’s capacity at its Lloyd’s of London operations for the 2019 and 2020 underwriting years of accounts, as well as prior open years.

 

On November 7, 2018, our Board of Directors declared a cash dividend on our Company’s Common Stock of $0.07 per share, payable on December 21, 2018 to stockholders of record on November 30, 2018.

 

 

29


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

Some of the statements in this Quarterly Report on Form 10-Q 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 Quarterly 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, and are subject to a number of risks and uncertainties, including those described in the “Risk Factors” section of our 2017 Annual Report on Form 10-K and Part II, Item 1A “Risk Factors,” included in this Form 10-Q. We operate in a competitive environment, with new risks emerging from time to time. 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.

In light of these risks, uncertainties and assumptions, any forward-looking events discussed in this Form 10-Q may not occur, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of their respective dates.

U.S. GAAP and Non-GAAP Financial Performance Metrics

Throughout this Quarterly 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 presentation of Net Income (Loss), Book Value, Book Value per Share, Net Losses and LAE Reserves and Combined Ratio, we show certain non-GAAP financial measures as defined in Regulation G that we believe are valuable in managing our business and drawing comparisons to our peers. These non-GAAP measures are Net Operating Earnings (Loss) and Underwriting Profit (Loss).

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:

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.

Net Losses and LAE Reserves

Reserves for Losses and LAE, as shown in the liabilities section of our Consolidated Balance Sheets, represents the total gross obligations to claimants for both estimates of known claims and estimates for IBNR claims. The related asset item, Reinsurance 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.

Combined Ratio

The Combined Ratio is a common insurance industry measure of profitability for any underwriting operation and is calculated in three components. First, the Loss Ratio is represented by Net Losses and LAE divided by Net Earned Premiums. The second component is the Commission Expense Ratio, which is Commission Expenses divided by Net Earned Premiums. The third component is the Other Operating Expense Ratio, which reflects the sum of Other 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, Commission Expense and Other Operating Expense Ratios is the Combined Ratio. The difference between the Combined Ratio and 100% reflects the rate of Underwriting Profit (Loss). For example, a Combined Ratio of 85% implies that for every $100 of premium we earn, we record $15 of Underwriting Profit.

Net Operating Earnings (Loss)

Net Operating Earnings (Loss) is a “non-GAAP financial measure” as defined in Regulation G. Net Operating Earnings (Loss) is comprised of Net Income (Loss) excluding After-Tax adjustments, including: Total Net Realized and Unrealized Gains (Losses), Foreign Exchange Gains (Losses), the Net Gain on Disposition of Product Line, and Merger Transaction Costs recognized in our Consolidated Statements of Income (Loss). We believe that this presentation reflects the underlying fundamentals of our business.

30


 

A reconciliation of Net Income (Loss) (the nearest GAAP financial measure) to Net Operating Earnings (Loss) can be found in Item 2, Results of Operations. We believe this presentation enhances the understanding of our results of operations by highlighting the underlying profitability of our business and enables investors and other users of our financial information to analyze underlying business performance in a manner similar to management. We also believe this measure follows industry practice and, therefore facilitates comparison of our performance with our peer group.

Underwriting Profit (Loss)

Underwriting Profit (Loss) represents one measure of the pre-tax profitability of our insurance operations and is derived by subtracting the following from Net Earned Premiums: Net Losses and LAE Incurred, Commission Expenses, Other Operating Expenses and Other Underwriting Income (Expense). This information is available in total and by segment in Note 3 – Segment Information in the Interim Consolidated Financial Statements. The nearest comparable GAAP measure is Income (Loss) Before Income Taxes which, in addition to Net Underwriting Profit (Loss), includes Net Investment Income, Total Net Realized and Unrealized Gains (Losses) recognized in our Consolidated Statements of Income (Loss), Interest Expense, Other Income (Loss), and Merger Transaction Costs. While this measure is presented in the footnotes to the Interim Consolidated Financial Statements, it is considered a “non-GAAP financial measure” as defined in Regulation G when presented elsewhere on a consolidated basis.

A reconciliation of total Net Underwriting Profit (Loss) and its components to Income (Loss) Before Income Taxes (the nearest GAAP financial measure) can be found in Item 1, Note 3 – Segment Information to the Interim Consolidated Financial Statements and in Item 2, Segment Results. We believe that presentation of Net Underwriting Profit (Loss) provides investors with an enhanced understanding of our results of operations, by highlighting the underlying pre-tax profitability of our underwriting activities.

Overview

The discussion and analysis of our financial condition and results of operations contained herein should be read in conjunction with our 2017 Annual Report on Form 10-K in its entirety as well as the statements under “Forward-Looking Statements” and the Interim Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for a complete description of events, trends, uncertainties, risks and critical accounting estimates affecting us.

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.

We are an international insurance company with a long-standing area of specialization in Marine insurance. We also offer P&C insurance, primarily 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 E&O divisions, as well as assumed reinsurance products.

On February 7, 2018, certain wholly owned subsidiaries of our Company entered into a Renewal Rights Agreement with Thomas Miller Specialty Underwriting Agency Limited and Thomas Miller & Co Limited (collectively “Thomas Miller”), pursuant to which Thomas Miller agreed to acquire the renewal rights to our Company’s fixed-premium protection and indemnity business. During the first quarter of 2018, our Company recorded a gain from this transaction. Our Company agreed to continue to underwrite such business from February 8, 2018 through an end date of August 31, 2018, which was originally June 30, 2018, while all transitional arrangements are put in place, and ceded 100% of such business through a quota share agreement. After August 31, 2018 this business renewed through Thomas Miller. Our Company remains responsible for all losses incurred on such business written prior to February 8, 2018, and our Company continues to participate in the protection and indemnity market primarily through reinsurance of mutual clubs via our Lloyd’s of London (“Lloyd’s”) syndicate, Syndicate 1221.

 

During the second quarter of 2018, our Company established a wholly owned subsidiary, Navigators Holding (Europe) NV, which on June 7, 2018 (the “acquisition date”), acquired a 100% ownership interest in Bracht, Deckers & Mackelbert NV, an insurance underwriting agency organized under the laws of Belgium (“BDM”), Assurances Continentales – Continentale Verzekeringen NV, an insurance company licensed under the laws of Belgium (“ASCO”), and a wholly-owned subsidiary of ASCO, Canal Re S.A., a reinsurance company licensed under the laws of the Grand Duchy of Luxembourg (“Canal Re”). The acquisition of all three of these entities will be referred to as the “Acquisition” and the group of companies will be referred to as the Navigators Insurance Company Europe Group (the “NICE Group”). The Acquisition was undertaken as part of the Company’s strategy of expanding to more brokers and insureds across Europe and reinforces the Company’s presence in the European Union’s single market. We anticipate that this will enable the Company to better serve its European clients after Brexit, and will also provide opportunity to reach a wider European audience. The underwriting results of the acquired business from the NICE Group are included in the Int’l Insurance reporting segment, with no new operating segments resulting from the acquisition.

 

31


 

On August 22, 2018, our Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with The Hartford Financial Services Group, Inc. (“The Hartford”). The Merger Agreement provides that, subject to the terms and conditions set forth therein, our Company will merge with an existing subsidiary of the Hartford, with our Company surviving as a wholly owned subsidiary of The Hartford (the “Merger”). Pursuant to the Merger Agreement, at the effective time of the Merger, holders of the Company’s common shares will be entitled to receive consideration of $70.00 in cash per common share. The Merger is expected to close in the first half of 2019, subject to the receipt of regulatory approvals and other customary closing conditions.

 

Financial Highlights – Selected Indicators

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

amounts in thousands, except per share amounts

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

Results of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Earned Premiums

 

$

347,038

 

 

$

301,355

 

 

$

1,000,680

 

 

$

881,321

 

Net Investment Income

 

 

25,651

 

 

 

22,598

 

 

 

73,954

 

 

 

66,311

 

Underwriting Profit (Loss)

 

 

(18,492

)

 

 

(66,090

)

 

 

14,229

 

 

 

(48,123

)

Net Income (Loss)

 

 

4,625

 

 

 

(27,979

)

 

 

67,607

 

 

 

13,633

 

Net Income (Loss) per Diluted Share

 

$

0.15

 

 

$

(0.95

)

 

$

2.24

 

 

$

0.45

 

Net Cash provided by Operating Activities

 

$

184,368

 

 

$

149,847

 

 

$

267,089

 

 

$

222,751

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amounts in thousands, except per share amounts

 

As of September 30, 2018

 

 

As of December 31, 2017

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

Total Assets

 

$

5,548,327

 

 

$

5,224,622

 

Total Shareholders' Equity

 

$

1,231,828

 

 

$

1,225,965

 

Book Value per Share

 

$

41.38

 

 

$

41.55

 

 

Our revenue is primarily comprised of premiums and investment income. Cash flow is generated from premiums collected and investment income received less paid losses and loss expenses, commission and administrative expenses as well as the timing of reinsurance receipts and payments. Our products are distributed through multiple channels, utilizing global, national and regional retail and wholesale insurance brokers.

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 reportable segments: U.S. Insurance, Int’l Insurance, GlobalRe and Corporate.

 

 

32


 

Results of Operations

The following table presents a summary of our consolidated financial results for the three and nine months ended September 30, 2018 and 2017:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

% Change

 

amounts in thousands, except per share amounts

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

QTD

 

 

YTD

 

Gross Written Premiums

 

$

455,943

 

 

$

402,038

 

 

$

1,448,403

 

 

$

1,304,522

 

 

 

13.4

%

 

 

11.0

%

Ceded Written Premiums

 

 

(103,531

)

 

 

(106,022

)

 

 

(323,437

)

 

 

(338,061

)

 

 

(2.3

%)

 

 

(4.3

%)

Net Written Premiums

 

 

352,412

 

 

 

296,016

 

 

 

1,124,966

 

 

 

966,461

 

 

 

19.1

%

 

 

16.4

%

Net Earned Premiums

 

 

347,038

 

 

 

301,355

 

 

 

1,000,680

 

 

 

881,321

 

 

 

15.2

%

 

 

13.5

%

Net Losses and LAE

 

 

(240,900

)

 

 

(276,171

)

 

 

(623,378

)

 

 

(622,881

)

 

 

(12.8

%)

 

 

0.1

%

Commission Expenses

 

 

(57,999

)

 

 

(45,509

)

 

 

(165,344

)

 

 

(141,526

)

 

 

27.4

%

 

 

16.8

%

Other Operating Expenses

 

 

(67,584

)

 

 

(45,773

)

 

 

(198,692

)

 

 

(165,077

)

 

 

47.6

%

 

 

20.4

%

Other Underwriting Income

 

 

953

 

 

 

8

 

 

 

963

 

 

 

40

 

 

NM

 

 

NM

 

Underwriting Profit (Loss)

 

$

(18,492

)

 

$

(66,090

)

 

$

14,229

 

 

$

(48,123

)

 

 

(72.0

%)

 

NM

 

Net Investment Income

 

 

25,651

 

 

 

22,598

 

 

 

73,954

 

 

 

66,311

 

 

 

13.5

%

 

 

11.5

%

Total Net Realized and Unrealized Gains

 

 

2,563

 

 

 

4,218

 

 

 

3,667

 

 

 

5,868

 

 

 

(39.2

%)

 

 

(37.5

%)

Interest Expense

 

 

(3,891

)

 

 

(3,862

)

 

 

(11,619

)

 

 

(11,584

)

 

 

0.8

%

 

 

0.3

%

Other Income (Loss)

 

 

771

 

 

 

(1,707

)

 

 

3,272

 

 

 

(1,082

)

 

NM

 

 

NM

 

Merger Transaction Costs

 

 

(2,439

)

 

 

 

 

 

(2,439

)

 

 

 

 

NM

 

 

NM

 

Income (Loss) Before Income Taxes

 

$

4,163

 

 

$

(44,843

)

 

$

81,064

 

 

$

11,390

 

 

NM

 

 

NM

 

Income Tax (Expense) Benefit

 

 

462

 

 

 

16,864

 

 

 

(13,457

)

 

 

2,243

 

 

 

(97.3

%)

 

NM

 

Net Income (Loss)

 

$

4,625

 

 

$

(27,979

)

 

$

67,607

 

 

$

13,633

 

 

NM

 

 

NM

 

Net Income (Loss) per Basic Share

 

$

0.16

 

 

$

(0.95

)

 

$

2.28

 

 

$

0.46

 

 

 

 

 

 

 

 

 

Net Income (Loss) per Diluted Share

 

$

0.15

 

 

$

(0.95

)

 

$

2.24

 

 

$

0.45

 

 

 

 

 

 

 

 

 

Effective Tax Rate

 

 

(11.1

%)

 

 

37.6

%

 

 

16.6

%

 

 

(19.7

%)

 

 

 

 

 

 

 

 

Losses and LAE Ratio

 

 

69.4

%

 

 

91.6

%

 

 

62.3

%

 

 

70.7

%

 

 

 

 

 

 

 

 

Commission Expense Ratio

 

 

16.7

%

 

 

15.1

%

 

 

16.5

%

 

 

16.1

%

 

 

 

 

 

 

 

 

Other Operating Expense Ratio (1)

 

 

19.2

%

 

 

15.2

%

 

 

19.8

%

 

 

18.7

%

 

 

 

 

 

 

 

 

Combined Ratio

 

 

105.3

%

 

 

121.9

%

 

 

98.6

%

 

 

105.5

%

 

 

 

 

 

 

 

 

 

(1) -

Includes Other Operating Expenses and Other Underwriting Income.

NM -

Percentage change not meaningful

 

33


 

The following tables calculate our Net Operating Earnings (Loss) for the three and nine months ended September 30, 2018 and 2017:

 

 

 

Three Months Ended September 30, 2018

 

 

Three Months Ended September 30, 2017

 

 

% Change

 

amounts in thousands, except per share amounts

 

Pre-Tax

 

 

Tax (1)

 

 

After-Tax

 

 

Pre-Tax

 

 

Tax (1)

 

 

After-Tax

 

 

QTD

 

Net Income (Loss)

 

$

4,163

 

 

$

462

 

 

$

4,625

 

 

$

(44,843

)

 

$

16,864

 

 

$

(27,979

)

 

NM

 

Adjustments to Net Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Net Realized and Unrealized Gains

 

 

(2,563

)

 

 

538

 

 

 

(2,025

)

 

 

(4,218

)

 

 

1,477

 

 

 

(2,741

)

 

 

(26.1

%)

FX Losses (Gains)

 

 

(706

)

 

 

148

 

 

 

(558

)

 

 

1,675

 

 

 

(586

)

 

 

1,089

 

 

NM

 

Merger Transaction Costs

 

 

2,439

 

 

 

(302

)

 

 

2,137

 

 

 

 

 

 

 

 

 

 

 

NM

 

Net Operating Earnings (Loss)

 

$

3,333

 

 

$

846

 

 

$

4,179

 

 

$

(47,386

)

 

$

17,755

 

 

$

(29,631

)

 

NM

 

Average Common Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

29,768

 

 

 

 

 

 

 

 

 

 

 

29,500

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

30,184

 

 

 

 

 

 

 

 

 

 

 

29,500

 

 

 

 

 

Net Operating Earnings (Loss) per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

$

0.14

 

 

 

 

 

 

 

 

 

 

$

(1.00

)

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

$

0.14

 

 

 

 

 

 

 

 

 

 

$

(1.00

)

 

 

 

 

 

(1) -

Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of any other relevant factors.

NM -

Percentage change not meaningful

 

 

 

Nine Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2017

 

 

% Change

 

amounts in thousands, except per share amounts

 

Pre-Tax

 

 

Tax (1)

 

 

After-Tax

 

 

Pre-Tax

 

 

Tax (1)

 

 

After-Tax

 

 

YTD

 

Net Income

 

$

81,064

 

 

$

(13,457

)

 

$

67,607

 

 

$

11,390

 

 

$

2,243

 

 

$

13,633

 

 

NM

 

Adjustments to Net Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Net Realized and Unrealized Gains

 

 

(3,667

)

 

 

770

 

 

 

(2,897

)

 

 

(5,868

)

 

 

2,055

 

 

 

(3,813

)

 

 

(24.0

%)

FX Losses (Gains)

 

 

(1,770

)

 

 

371

 

 

 

(1,399

)

 

 

1,015

 

 

 

(355

)

 

 

660

 

 

NM

 

Net Gain on Disposition of Product Line

 

 

(948

)

 

 

199

 

 

 

(749

)

 

 

 

 

 

 

 

 

 

 

NM

 

Merger Transaction Costs

 

 

2,439

 

 

 

(302

)

 

 

2,137

 

 

 

 

 

 

 

 

 

 

 

NM

 

Net Operating Earnings

 

$

77,118

 

 

$

(12,419

)

 

$

64,699

 

 

$

6,537

 

 

$

3,943

 

 

$

10,480

 

 

NM

 

Average Common Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

29,699

 

 

 

 

 

 

 

 

 

 

 

29,419

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

30,160

 

 

 

 

 

 

 

 

 

 

 

30,006

 

 

 

 

 

Net Operating Earnings per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

$

2.18

 

 

 

 

 

 

 

 

 

 

$

0.36

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

$

2.15

 

 

 

 

 

 

 

 

 

 

$

0.35

 

 

 

 

 

 

 

(1) -

Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of any other relevant factors.

NM -

Percentage change not meaningful

 

Underwriting Profit (Loss)

Quarter to Date Variance

The Company’s Underwriting Loss of $18.5 million for the three months ended September 30, 2018, decreased by $47.6 million, compared to an Underwriting Loss of $66.1 million for the three months ended September 30, 2017.

The decrease in the Underwriting Loss was significantly impacted by a lower Net Current AY Losses and LAE Ratio largely due to a lower level of catastrophe losses with $11.8 million of net catastrophe losses net of RRPs in 2018 related to Typhoon Jebi and Hurricane Florence compared to $75.1 million of net catastrophe losses inclusive of net RRPs in 2017 related to Hurricanes Harvey, Irma, and Maria (the “Hurricane events”) and the Puebla, Mexico Earthquake. Also contributing to the decrease in Underwriting Loss was a $13.0 million decrease in Net Prior Accident Year Reserve Strengthening and the impact of growth in Net Earned Premiums across all of our reporting segments.

These decreases in the Underwriting Loss were partially offset by an increase in Other Operating Expenses primarily due to reductions to performance-based incentive compensation during 2017 combined with an increase in 2018 in employee expenses, professional service fees and information technology costs associated with new business initiatives and expansion of our global platform. Also partially offsetting the decreases to Underwriting Loss was an increase in the Commission Expense Ratio primarily driven by our Int’l Insurance reporting segment.

Year to Date Variance

Underwriting Profit was $14.2 million for the nine months ended September 30, 2018, increasing $62.4 million, from an Underwriting Loss of $48.1 million for the nine months ended September 30, 2017.

34


 

This increase to Underwriting Profit was largely attributable to a lower Net Current AY Losses and LAE Ratio primarily due to a lower level of catastrophe losses primarily related to the same events as noted in the quarter to date variance. Also contributing to the increase was a $24.8 million decrease in Net Prior Accident Year Reserve Strengthening and the impact of growth in Net Earned Premiums across all of our reporting segments.

These increases contributing to an Underwriting Profit from an Underwriting Loss were partially offset by an increase in Other Operating Expenses attributable to the same drivers as the quarter to date variance. Also partially offsetting the increases to Underwriting Profit was an increase in the Commission Expense Ratio primarily driven by our GlobalRe and Int’l Insurance reporting segments.

For more detail on Underwriting Profit (Loss), 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 Net Losses and LAE. The following table presents the current and prior accident year (“AY”) changes in our Net Losses and LAE Ratio for the three and nine months ended September 30, 2018 and 2017:

 

 

 

Three Months Ended September 30,

 

 

Point

 

 

 

2018

 

 

2017

 

 

Change

 

Net Losses and LAE Ratio

 

 

69.4

%

 

 

91.6

%

 

 

(22.2

)

Net Prior AY Reserve (Release)/Strengthening

 

 

4.7

%

 

 

9.8

%

 

 

(5.1

)

Net Current AY Losses and LAE Ratio

 

 

64.7

%

 

 

81.8

%

 

 

(17.1

)

 

 

 

Nine Months Ended September 30,

 

 

Point

 

 

 

2018

 

 

2017

 

 

Change

 

Net Losses and LAE Ratio

 

 

62.3

%

 

 

70.7

%

 

 

(8.4

)

Net Prior AY Reserve (Release)/Strengthening

 

 

2.0

%

 

 

5.1

%

 

 

(3.1

)

Net Current AY Losses and LAE Ratio

 

 

60.3

%

 

 

65.6

%

 

 

(5.3

)

 

Quarter to Date Variance

 

For the three months ended September 30, 2018, our Reported Net Losses and LAE Ratio decreased 22.2 points as compared to the same period in 2017 driven by:

Prior Year Reserve Development

For the three months ended September 30, 2018, our Net Prior AY Losses and LAE Ratio decreased 5.1 points as compared to the same period in 2017 driven by:

 

The three months ended September 30, 2018 recognized $16.5 million of Net Prior AY Reserve Strengthening, primarily attributable to the Premises line within our U.S. P&C operating segment.

 

The three months ended September 30, 2017 recognized $29.5 million of Net Prior AY Reserve Strengthening. This strengthening was primarily related to our Professional Liability and P&C operating segments within our U.S. Insurance reporting segment and our Marine, P&C and Professional Liability operating segments within our Int’l Insurance reporting segment.

Changes in the Current Accident Year Loss Ratio

For the three months ended September 30, 2018, our Net Current AY losses and LAE Ratio decreased 17.1 points as compared to the same period in 2017 primarily driven by a reduced level of catastrophe losses.

Year to Date Variance

 

For the nine months ended September 30, 2018, our Reported Net Losses and LAE Ratio decreased 8.4 points as compared to the same period in 2017 driven by:

35


 

Prior Year Reserve Development

For the nine months ended September 30, 2018, our Net Prior AY Losses and LAE Ratio decreased 3.1 points as compared to the same period in 2017 driven by:

 

The nine months ended September 30, 2018 recognized $19.8 million of Net Prior AY Reserve Strengthening. This strengthening was attributable to unfavorable net non-catastrophe related loss emergence within our Int’l Insurance reporting segment and the Premises line within our U.S. P&C operating segment, partially offset by net catastrophe loss releases primarily related to the Hurricane events and the Puebla, Mexico Earthquake that occurred in the third quarter of 2017.

 

The nine months ended September 30, 2017 recognized $44.6 million of Net Prior AY Reserve Strengthening attributable to strengthening of our Professional Liability and P&C operating segments within our U.S. Insurance reporting segment, strengthening our Marine, P&C and Professional Liability operating segments within our Int’l Insurance reporting segment and the settlement of a large Accident and Health (“A&H”) claim in our GlobalRe reporting segment.

Changes in the Current Accident Year Loss Ratio

For the nine months ended September 30, 2018, our Net Current AY losses and LAE Ratio decreased 5.3 points as compared to the same period in 2017 attributable to the same drivers as the quarter to date variance.

Net Investment Income

Our Net Investment Income was derived from the following sources:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

amounts in thousands

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Fixed Maturities

 

$

22,733

 

 

$

19,491

 

 

$

65,504

 

 

$

57,019

 

Equity Securities

 

 

3,052

 

 

 

3,774

 

 

 

9,138

 

 

 

11,337

 

Short-Term Investments, Cash & Cash Equivalents

 

 

509

 

 

 

84

 

 

 

1,151

 

 

 

254

 

Other Invested Assets

 

 

159

 

 

 

166

 

 

 

486

 

 

 

408

 

Total Investment Income

 

$

26,453

 

 

$

23,515

 

 

$

76,279

 

 

$

69,018

 

Investment Expenses

 

 

(802

)

 

 

(917

)

 

 

(2,325

)

 

 

(2,707

)

Net Investment Income

 

$

25,651

 

 

$

22,598

 

 

$

73,954

 

 

$

66,311

 

Quarter and Year to Date Variance

The increase in Net Investment Income for the three and nine months ended September 30, 2018 as compared to the same period in the prior year was due to an increase in yields and growth of invested assets in the Fixed Maturities portfolio. The annualized pre-tax yield, excluding Total Net Realized and Unrealized Gains and Losses recognized in our Results of Operations, for the three months ended September 30, 2018 was 2.8% compared to 2.7% for the same period in 2017. The annualized pre-tax yield, excluding Total Net Realized and Unrealized Gains and Losses recognized in our Results of Operations, for the nine months ended September 30, 2018 was 2.8%, compared to 2.7% for the same period in 2017.

As part of our overall investment strategy, we seek to build a tax efficient investment portfolio by maintaining an allocation of tax- exempt municipal bonds. The tax-exempt portion of our Fixed Maturities portfolio was 16.6% at September 30, 2018 as compared to 20.2% at September 30, 2017. Additionally, substantially all of our equity portfolio is invested in tax efficient securities which qualify for the dividends received deduction. The tax equivalent yield for the three months ended September 30, 2018 and 2017 was 3.0% and 3.1%, respectively. The tax equivalent yield for the nine months ended September 30, 2018 and 2017 was 3.0% and 3.1%, respectively. The decrease in the tax equivalent yield is due to the Tax Cuts and Jobs Act enacted on December 22, 2017 (the “Tax Act”), which resulted in lower tax benefits associated with the tax exempt portions of our investment portfolio.

OTTI Losses Recognized in Earnings

Quarter and Year to Date Variance

Our Company had no credit related OTTI losses during the three months ended September 30, 2018 and had two credit related OTTI losses totaling $1.0 million in our equity portfolio during the three months ended September 30, 2017. Our Company had no credit related OTTI losses during the nine months ended September 30, 2018. Our Company had four credit related OTTI losses totaling $2.1 million in our equity portfolio during the nine months ended September 30, 2017. Upon the adoption of ASU 2016-01 as of January 1, 2018, changes in the fair value of Equity Securities are now recognized in Net Income.

 

36


 

Net Realized Gains and Losses on Investments Sold

Net Realized Gains and Losses on Investments Sold, excluding OTTI Losses Recognized in Earnings, for the periods indicated were as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

amounts in thousands

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Fixed Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

 

$

331

 

 

$

2,589

 

 

$

3,678

 

 

$

3,401

 

Losses

 

 

(369

)

 

 

(900

)

 

 

(1,125

)

 

 

(3,114

)

Fixed Maturities, Net

 

$

(38

)

 

$

1,689

 

 

$

2,553

 

 

$

287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-Term Investments, Cash & Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

 

$

107

 

 

$

758

 

 

$

189

 

 

$

984

 

Losses

 

 

(71

)

 

 

(14

)

 

 

(266

)

 

 

(139

)

Short-Term, Net

 

$

36

 

 

$

744

 

 

$

(77

)

 

$

845

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Invested Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

 

$

9

 

 

$

9

 

 

$

78

 

 

$

30

 

Losses

 

 

(50

)

 

 

(97

)

 

 

(136

)

 

 

(232

)

Other Invested Assets, Net

 

$

(41

)

 

$

(88

)

 

$

(58

)

 

$

(202

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

 

$

347

 

 

$

2,863

 

 

$

1,102

 

 

$

7,249

 

Losses

 

 

(51

)

 

 

(18

)

 

 

(310

)

 

 

(246

)

Equity Securities, Net

 

$

296

 

 

$

2,845

 

 

$

792

 

 

$

7,003

 

Net Realized Gains on Investments Sold

 

$

253

 

 

$

5,190

 

 

$

3,210

 

 

$

7,933

 

Quarter and Year to Date Variance

 

Net Realized Gains and Losses are generated as part of the normal ongoing management of our investment portfolio. Net Realized Gains of $0.3 million and $3.2 million for the three and nine months ended September 30, 2018, respectively, are due to the sale of Municipal bonds as we re-evaluate this asset class in light of the tax changes enacted as part of the Tax Act in 2017. Additionally, the sale of Corporate bonds and Preferred Stocks within our Equity portfolio also contributed to the Net Realized Gains. Net Realized Gains of $5.1 million and $7.9 million for the three and nine months ended September 30, 2017, respectively, are primarily due to the sale of Common Equity Securities, partially offset by foreign currency losses on our Canadian denominated Foreign Government Bonds.

Net Unrealized Gains and Losses on Investments at Fair Value through Net Income

Quarter and Year to Date Variance

For the three and nine months ended September 30, 2018, our Company had $2.3 and $0.5 million of net unrealized gains, respectively, on our Equity Securities, which were recognized in Net Income pursuant to ASU 2016-01, which we adopted effective January 1, 2018.

Interest Expense

Quarter and Year to Date Variance

Interest Expense was $3.9 million and $11.6 million for the three and nine months ended September 30, 2018, respectively, relating to our $265.0 million principal amount of the Senior Notes. The effective interest rate related to the Senior Notes, based on the proceeds net of discount and all issuance costs, is approximately 5.86%.

37


 

Other Income (Loss)

Quarter to Date Variance

Other Income (Loss) for the three months ended September 30, 2018 was $1.7 million compared to $(1.7) million for the same period in 2017. The income for the three months ended September 30, 2018 was attributable to managing agent fee income and net realized and unrealized foreign exchange gains driven by the re-measurement of net insurance related liabilities impacted by the strengthening of the U.S. Dollar against the Great British pound and Euro. The loss for the three months ended September 30, 2017 was attributable to net realized and unrealized foreign exchange losses driven by the re-measurement of net insurance related liabilities impacted by the weakening of the U.S. Dollar against the Great British pound.

Year to Date Variance

Other Income (Loss) for the nine months ended September 30, 2018 was $4.2 million compared to $(1.0) million for the same period in 2017. The Other Income for the nine months ended September 30, 2018 was attributable to net realized and unrealized foreign exchange gains driven by the re-measurement of net insurance related liabilities impacted by the strengthening of the U.S. Dollar against the Great British pound and Euro, revenue from the sale of renewal rights for our Company’s fixed-premium protection and indemnity business during the first quarter, and managing agent fee income. The loss for the nine months ended September 30, 2017 was attributable to net realized and unrealized foreign exchange losses driven by the re-measurement of net insurance related liabilities impacted by the weakening of the U.S. Dollar against the Great British pound.

Merger Transaction Costs

Merger Transaction Costs for the three and nine months ended September 30, 2018 were $2.4 million. These costs represent expenses incurred that are associated with the Merger and are unrelated to our ongoing operations.

Income Taxes

The income tax provision has been computed based on our estimated interim annual Effective Tax Rate incorporating discrete items. Our Effective Tax Rate for the quarter and year-to-date differs from the federal tax rate of 21% primarily due to tax-exempt investment income, the dividends received deduction, Transition Tax benefit, and an excess tax benefit related to the vesting of stock compensation at fair market value. During the three and nine months ended September 30, 2018, the tax rates were impacted by the lowered statutory tax rate from 35% in 2017 to 21% in 2018 under the Tax Act and changes to pre-tax income.

Quarter to Date Variance

We recorded an Effective Tax Rate of (11.1)% for the three months ended September 30, 2018 compared to 37.6% for the same period in 2017. The tax benefit for the three months ended September 30, 2018 was the result of a lower level of pretax earnings driven by an underwriting loss during the third quarter of 2018 and a consistent level of permanent tax adjustments. This compares to the third quarter of 2017 which incurred large catastrophe losses driving a pretax loss resulting in a tax benefit.

Year to Date Variance

We recorded an Effective Tax Rate of 16.6% for the nine months ended September 30, 2018 compared to (19.7%) for the same period in 2017. The tax benefit for the nine months ended September 30, 2017 was the result of a lower level of pretax earnings driven by catastrophe losses incurred during 2017 and a consistent level of permanent tax adjustments.

38


 

Segment Results

The following tables summarize our Consolidated Financial Results by reporting segment for the three and nine months ended September 30, 2018 and 2017:

 

 

 

Three Months Ended September 30, 2018

 

 

 

U.S.

 

 

Int'l

 

 

 

 

 

 

 

 

 

 

 

 

 

amounts in thousands

 

Insurance

 

 

Insurance

 

 

GlobalRe

 

 

Corporate (1)

 

 

Total

 

Gross written premiums

 

$

280,183

 

 

$

117,376

 

 

$

58,384

 

 

$

 

 

$

455,943

 

Ceded written premiums

 

 

(72,615

)

 

 

(29,020

)

 

 

(1,896

)

 

 

 

 

 

(103,531

)

Net written premiums

 

$

207,568

 

 

$

88,356

 

 

$

56,488

 

 

$

 

 

$

352,412

 

Retention Ratio

 

 

74.1

%

 

 

75.3

%

 

 

96.8

%

 

 

 

 

 

77.3

%

Net Earned Premiums

 

$

188,504

 

 

$

95,226

 

 

$

63,308

 

 

$

 

 

$

347,038

 

Net Losses and LAE

 

 

(141,182

)

 

 

(60,275

)

 

 

(39,443

)

 

 

 

 

 

(240,900

)

Commission Expenses

 

 

(22,247

)

 

 

(22,547

)

 

 

(13,282

)

 

 

77

 

 

 

(57,999

)

Other Operating Expenses

 

 

(36,826

)

 

 

(24,441

)

 

 

(6,317

)

 

 

 

 

 

(67,584

)

Other Underwriting Income (Expense)

 

 

65

 

 

 

945

 

 

 

20

 

 

 

(77

)

 

 

953

 

Underwriting Profit (Loss)

 

$

(11,686

)

 

$

(11,092

)

 

$

4,286

 

 

$

 

 

$

(18,492

)

Net Investment Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25,651

 

 

 

25,651

 

Total Net Realized and Unrealized Gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,563

 

 

 

2,563

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,891

)

 

 

(3,891

)

Other Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

771

 

 

 

771

 

Merger Transaction Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,439

)

 

 

(2,439

)

Income (Loss) Before Income Taxes

 

$

(11,686

)

 

$

(11,092

)

 

$

4,286

 

 

$

22,655

 

 

$

4,163

 

Income Tax Benefit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

462

 

 

 

462

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,625

 

Losses and LAE Ratio

 

 

74.9

%

 

 

63.3

%

 

 

62.3

%

 

 

 

 

 

 

69.4

%

Commission Expense Ratio

 

 

11.8

%

 

 

23.7

%

 

 

21.0

%

 

 

 

 

 

 

16.7

%

Other Operating Expense Ratio (2)

 

 

19.5

%

 

 

24.6

%

 

 

9.9

%

 

 

 

 

 

 

19.2

%

Combined Ratio

 

 

106.2

%

 

 

111.6

%

 

 

93.2

%

 

 

 

 

 

 

105.3

%

 

(1) -

Includes Corporate segment intercompany eliminations.

(2) -

Includes Other Operating Expenses and Other Underwriting Income (Expense).

39


 

 

 

 

Three Months Ended September 30, 2017

 

 

 

U.S.

 

 

Int'l

 

 

 

 

 

 

 

 

 

 

 

 

 

amounts in thousands

 

Insurance

 

 

Insurance

 

 

GlobalRe

 

 

Corporate (1)

 

 

Total

 

Gross written premiums

 

$

235,052

 

 

$

113,601

 

 

$

53,385

 

 

$

 

 

$

402,038

 

Ceded written premiums

 

 

(64,328

)

 

 

(38,966

)

 

 

(2,728

)

 

 

 

 

 

(106,022

)

Net written premiums

 

$

170,724

 

 

$

74,635

 

 

$

50,657

 

 

$

 

 

$

296,016

 

Retention Ratio

 

 

72.6

%

 

 

65.7

%

 

 

94.9

%

 

 

 

 

 

73.6

%

Net Earned Premiums

 

$

169,150

 

 

$

84,407

 

 

$

47,798

 

 

$

 

 

$

301,355

 

Net Losses and LAE

 

 

(135,340

)

 

 

(81,713

)

 

 

(59,118

)

 

 

 

 

 

(276,171

)

Commission Expenses

 

 

(18,286

)

 

 

(16,201

)

 

 

(11,233

)

 

 

211

 

 

 

(45,509

)

Other Operating Expenses

 

 

(25,375

)

 

 

(16,388

)

 

 

(4,010

)

 

 

 

 

 

(45,773

)

Other Underwriting Income (Expense)

 

 

125

 

 

 

 

 

 

94

 

 

 

(211

)

 

 

8

 

Underwriting Loss

 

 

(9,726

)

 

 

(29,895

)

 

 

(26,469

)

 

$

 

 

 

(66,090

)

Net Investment Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22,598

 

 

 

22,598

 

Total Net Realized and Unrealized Gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,218

 

 

 

4,218

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,862

)

 

 

(3,862

)

Other Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,707

)

 

 

(1,707

)

Income (Loss) Before Income Taxes

 

$

(9,726

)

 

$

(29,895

)

 

$

(26,469

)

 

$

21,247

 

 

$

(44,843

)

Income Tax Benefit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,864

 

 

 

16,864

 

Net Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(27,979

)

Losses and LAE Ratio

 

 

80.0

%

 

 

96.8

%

 

 

123.7

%

 

 

 

 

 

 

91.6

%

Commission Expense Ratio

 

 

10.8

%

 

 

19.2

%

 

 

23.5

%

 

 

 

 

 

 

15.1

%

Other Operating Expense Ratio (2)

 

 

14.9

%

 

 

19.4

%

 

 

8.2

%

 

 

 

 

 

 

15.2

%

Combined Ratio

 

 

105.7

%

 

 

135.4

%

 

 

155.4

%

 

 

 

 

 

 

121.9

%

 

(1) -

Includes Corporate segment intercompany eliminations.

(2) -

Includes Other Operating Expenses and Other Underwriting Income (Expense).

 

 

 

Nine Months Ended September 30, 2018

 

 

 

U.S.

 

 

Int'l

 

 

 

 

 

 

 

 

 

 

 

 

 

amounts in thousands

 

Insurance

 

 

Insurance

 

 

GlobalRe

 

 

Corporate (1)

 

 

Total

 

Gross written premiums

 

$

808,589

 

 

$

377,771

 

 

$

262,043

 

 

$

 

 

$

1,448,403

 

Ceded written premiums

 

 

(215,340

)

 

 

(97,790

)

 

 

(10,307

)

 

 

 

 

 

(323,437

)

Net written premiums

 

$

593,249

 

 

$

279,981

 

 

$

251,736

 

 

$

 

 

$

1,124,966

 

Retention Ratio

 

 

73.4

%

 

 

74.1

%

 

 

96.1

%

 

 

 

 

 

77.7

%

Net Earned Premiums

 

$

541,163

 

 

$

280,507

 

 

$

179,010

 

 

$

 

 

$

1,000,680

 

Net Losses and LAE

 

 

(363,489

)

 

 

(158,422

)

 

 

(101,467

)

 

 

 

 

 

(623,378

)

Commission Expenses

 

 

(63,490

)

 

 

(62,166

)

 

 

(40,198

)

 

 

510

 

 

 

(165,344

)

Other Operating Expenses

 

 

(112,264

)

 

 

(68,270

)

 

 

(18,158

)

 

 

 

 

 

(198,692

)

Other Underwriting Income (Expense)

 

 

234

 

 

 

945

 

 

 

294

 

 

 

(510

)

 

 

963

 

Underwriting Profit (Loss)

 

$

2,154

 

 

$

(7,406

)

 

$

19,481

 

 

$

 

 

$

14,229

 

Net Investment Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

73,954

 

 

 

73,954

 

Total Net Realized and Unrealized Gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,667

 

 

 

3,667

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,619

)

 

 

(11,619

)

Other Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,272

 

 

 

3,272

 

Merger Transaction Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,439

)

 

 

(2,439

)

Income (Loss) Before Income Taxes

 

$

2,154

 

 

$

(7,406

)

 

$

19,481

 

 

$

66,835

 

 

$

81,064

 

Income Tax Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,457

)

 

 

(13,457

)

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

67,607

 

Losses and LAE Ratio

 

 

67.2

%

 

 

56.5

%

 

 

56.7

%

 

 

 

 

 

 

62.3

%

Commission Expense Ratio

 

 

11.7

%

 

 

22.2

%

 

 

22.5

%

 

 

 

 

 

 

16.5

%

Other Operating Expense Ratio (2)

 

 

20.7

%

 

 

23.9

%

 

 

9.9

%

 

 

 

 

 

 

19.8

%

Combined Ratio

 

 

99.6

%

 

 

102.6

%

 

 

89.1

%

 

 

 

 

 

 

98.6

%

 

(1) -

Includes Corporate segment intercompany eliminations.

(2) -

Includes Other Operating Expenses and Other Underwriting Income (Expense).

40


 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

U.S.

 

 

Int'l

 

 

 

 

 

 

 

 

 

 

 

 

 

amounts in thousands

 

Insurance

 

 

Insurance

 

 

GlobalRe

 

 

Corporate (1)

 

 

Total

 

Gross written premiums

 

$

729,843

 

 

$

386,654

 

 

$

188,025

 

 

$

 

 

$

1,304,522

 

Ceded written premiums

 

 

(199,672

)

 

 

(129,368

)

 

 

(9,021

)

 

 

 

 

 

(338,061

)

Net written premiums

 

$

530,171

 

 

$

257,286

 

 

$

179,004

 

 

$

 

 

$

966,461

 

Retention Ratio

 

 

72.6

%

 

 

66.5

%

 

 

95.2

%

 

 

 

 

 

74.1

%

Net Earned Premiums

 

$

500,241

 

 

$

250,593

 

 

$

130,487

 

 

$

 

 

$

881,321

 

Net Losses and LAE

 

 

(339,436

)

 

 

(176,513

)

 

 

(106,932

)

 

 

 

 

 

(622,881

)

Commission Expenses

 

 

(59,130

)

 

 

(54,435

)

 

 

(28,695

)

 

 

734

 

 

 

(141,526

)

Other Operating Expenses

 

 

(91,987

)

 

 

(58,687

)

 

 

(14,403

)

 

 

 

 

 

(165,077

)

Other Underwriting Income (Expense)

 

 

335

 

 

 

 

 

 

439

 

 

 

(734

)

 

 

40

 

Underwriting Profit (Loss)

 

$

10,023

 

 

$

(39,042

)

 

$

(19,104

)

 

$

 

 

$

(48,123

)

Net Investment Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

66,311

 

 

 

66,311

 

Total Net Realized and Unrealized Gains

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,868

 

 

 

5,868

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,584

)

 

 

(11,584

)

Other Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,082

)

 

 

(1,082

)

Income (Loss) Before Income Taxes

 

$

10,023

 

 

$

(39,042

)

 

$

(19,104

)

 

$

59,513

 

 

$

11,390

 

Income Tax Benefit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,243

 

 

 

2,243

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

13,633

 

Losses and LAE Ratio

 

 

67.9

%

 

 

70.4

%

 

 

81.9

%

 

 

 

 

 

 

70.7

%

Commission Expense Ratio

 

 

11.8

%

 

 

21.7

%

 

 

22.0

%

 

 

 

 

 

 

16.1

%

Other Operating Expense Ratio (2)

 

 

18.3

%

 

 

23.5

%

 

 

10.7

%

 

 

 

 

 

 

18.7

%

Combined Ratio

 

 

98.0

%

 

 

115.6

%

 

 

114.6

%

 

 

 

 

 

 

105.5

%

 

(1) -

Includes Corporate segment intercompany eliminations.

(2) -

Includes Other Operating Expenses and Other Underwriting Income (Expense).

 

U.S. Insurance

The following tables summarize our Underwriting Profit (Loss) by operating segment for our U.S. Insurance reporting segment for the three and nine months ended September 30, 2018 and 2017:

 

 

 

U.S. Insurance

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

 

 

 

amounts in thousands

 

Marine

 

 

P&C

 

 

Professional

Liability

 

 

Total

 

 

% Change

Total

 

Gross Written Premiums

 

$

31,681

 

 

$

212,911

 

 

$

35,591

 

 

$

280,183

 

 

 

19.2

%

Ceded Written Premiums

 

 

(14,442

)

 

 

(52,993

)

 

 

(5,180

)

 

 

(72,615

)

 

 

12.9

%

Net Written Premiums

 

$

17,239

 

 

$

159,918

 

 

$

30,411

 

 

$

207,568

 

 

 

21.6

%

Retention Ratio

 

 

54.4

%

 

 

75.1

%

 

 

85.4

%

 

 

74.1

%

 

 

 

 

Net Earned Premiums

 

$

20,401

 

 

$

141,650

 

 

$

26,453

 

 

$

188,504

 

 

 

11.4

%

Net Losses and LAE

 

 

(11,939

)

 

 

(112,993

)

 

 

(16,250

)

 

 

(141,182

)

 

 

4.3

%

Commission Expenses

 

 

(915

)

 

 

(16,597

)

 

 

(4,735

)

 

 

(22,247

)

 

 

21.7

%

Other Operating Expenses

 

 

(6,394

)

 

 

(25,202

)

 

 

(5,230

)

 

 

(36,826

)

 

 

45.1

%

Other Underwriting Income

 

 

49

 

 

 

12

 

 

 

4

 

 

 

65

 

 

 

(48.0

%)

Underwriting Profit (Loss)

 

$

1,202

 

 

$

(13,130

)

 

$

242

 

 

$

(11,686

)

 

 

20.2

%

Losses and LAE Ratio

 

 

58.5

%

 

 

79.8

%

 

 

61.4

%

 

 

74.9

%

 

 

 

 

Commission Expense Ratio

 

 

4.5

%

 

 

11.7

%

 

 

17.9

%

 

 

11.8

%

 

 

 

 

Other Operating Expense Ratio (1)

 

 

31.1

%

 

 

17.8

%

 

 

19.8

%

 

 

19.5

%

 

 

 

 

Combined Ratio

 

 

94.1

%

 

 

109.3

%

 

 

99.1

%

 

 

106.2

%

 

 

 

 

 

(1) -

Includes Other Operating Expenses and Other Underwriting Income (Expense).

41


 

 

 

 

 

U.S. Insurance

 

 

 

Three Months Ended September 30, 2017

 

amounts in thousands

 

Marine

 

 

P&C

 

 

Professional

Liability

 

 

Total

 

Gross Written Premiums

 

$

36,403

 

 

$

166,097

 

 

$

32,552

 

 

$

235,052

 

Ceded Written Premiums

 

 

(18,859

)

 

 

(39,952

)

 

 

(5,517

)

 

 

(64,328

)

Net Written Premiums

 

$

17,544

 

 

$

126,145

 

 

$

27,035

 

 

$

170,724

 

Retention Ratio

 

 

48.2

%

 

 

75.9

%

 

 

83.1

%

 

 

72.6

%

Net Earned Premiums

 

$

20,129

 

 

$

125,931

 

 

$

23,090

 

 

$

169,150

 

Net Losses and LAE

 

 

(18,325

)

 

 

(89,568

)

 

 

(27,447

)

 

 

(135,340

)

Commission Expenses

 

 

(967

)

 

 

(13,515

)

 

 

(3,804

)

 

 

(18,286

)

Other Operating Expenses

 

 

(4,661

)

 

 

(16,897

)

 

 

(3,817

)

 

 

(25,375

)

Other Underwriting Income

 

 

105

 

 

 

18

 

 

 

2

 

 

 

125

 

Underwriting Profit (Loss)

 

$

(3,719

)

 

$

5,969

 

 

$

(11,976

)

 

$

(9,726

)

Losses and LAE Ratio

 

 

91.0

%

 

 

71.1

%

 

 

118.9

%

 

 

80.0

%

Commission Expense Ratio

 

 

4.8

%

 

 

10.7

%

 

 

16.5

%

 

 

10.8

%

Other Operating Expense Ratio (1)

 

 

22.7

%

 

 

13.5

%

 

 

16.5

%

 

 

14.9

%

Combined Ratio

 

 

118.5

%

 

 

95.3

%

 

 

151.9

%

 

 

105.7

%

 

(1) -

Includes Other Operating Expenses and Other Underwriting Income (Expense).

 

 

 

U.S. Insurance

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

amounts in thousands

 

Marine

 

 

P&C

 

 

Professional

Liability

 

 

Total

 

 

% Change

Total

 

Gross Written Premiums

 

$

112,235

 

 

$

599,088

 

 

$

97,266

 

 

$

808,589

 

 

 

10.8

%

Ceded Written Premiums

 

 

(48,840

)

 

 

(152,740

)

 

 

(13,760

)

 

 

(215,340

)

 

 

7.8

%

Net Written Premiums

 

$

63,395

 

 

$

446,348

 

 

$

83,506

 

 

$

593,249

 

 

 

11.9

%

Retention Ratio

 

 

56.5

%

 

 

74.5

%

 

 

85.9

%

 

 

73.4

%

 

 

 

 

Net Earned Premiums

 

$

62,670

 

 

$

401,870

 

 

$

76,623

 

 

$

541,163

 

 

 

8.2

%

Net Losses and LAE

 

 

(37,208

)

 

 

(280,103

)

 

 

(46,178

)

 

 

(363,489

)

 

 

7.1

%

Commission Expenses

 

 

(3,103

)

 

 

(46,853

)

 

 

(13,534

)

 

 

(63,490

)

 

 

7.4

%

Other Operating Expenses

 

 

(19,603

)

 

 

(77,057

)

 

 

(15,604

)

 

 

(112,264

)

 

 

22.0

%

Other Underwriting Income

 

 

179

 

 

 

40

 

 

 

15

 

 

 

234

 

 

 

(30.2

%)

Underwriting Profit (Loss)

 

$

2,935

 

 

$

(2,103

)

 

$

1,322

 

 

$

2,154

 

 

 

(78.5

%)

Losses and LAE Ratio

 

 

59.4

%

 

 

69.7

%

 

 

60.3

%

 

 

67.2

%

 

 

 

 

Commission Expense Ratio

 

 

5.0

%

 

 

11.7

%

 

 

17.7

%

 

 

11.7

%

 

 

 

 

Other Operating Expense Ratio (1)

 

 

30.9

%

 

 

19.1

%

 

 

20.3

%

 

 

20.7

%

 

 

 

 

Combined Ratio

 

 

95.3

%

 

 

100.5

%

 

 

98.3

%

 

 

99.6

%

 

 

 

 

 

(1) -

Includes Other Operating Expenses and Other Underwriting Income (Expense).

 

42


 

 

 

 

U.S. Insurance

 

 

 

Nine Months Ended September 30, 2017

 

amounts in thousands

 

Marine

 

 

P&C

 

 

Professional

Liability

 

 

Total

 

Gross Written Premiums

 

$

119,040

 

 

$

524,223

 

 

$

86,580

 

 

$

729,843

 

Ceded Written Premiums

 

 

(55,830

)

 

 

(129,297

)

 

 

(14,545

)

 

 

(199,672

)

Net Written Premiums

 

$

63,210

 

 

$

394,926

 

 

$

72,035

 

 

$

530,171

 

Retention Ratio

 

 

53.1

%

 

 

75.3

%

 

 

83.2

%

 

 

72.6

%

Net Earned Premiums

 

$

64,635

 

 

$

366,280

 

 

$

69,326

 

 

$

500,241

 

Net Losses and LAE

 

 

(44,867

)

 

 

(239,175

)

 

 

(55,394

)

 

 

(339,436

)

Commission Expenses

 

 

(4,014

)

 

 

(44,113

)

 

 

(11,003

)

 

 

(59,130

)

Other Operating Expenses

 

 

(18,280

)

 

 

(60,356

)

 

 

(13,351

)

 

 

(91,987

)

Other Underwriting Income

 

 

270

 

 

 

45

 

 

 

20

 

 

 

335

 

Underwriting Profit (Loss)

 

$

(2,256

)

 

$

22,681

 

 

$

(10,402

)

 

$

10,023

 

Losses and LAE Ratio

 

 

69.4

%

 

 

65.3

%

 

 

79.9

%

 

 

67.9

%

Commission Expense Ratio

 

 

6.2

%

 

 

12.0

%

 

 

15.9

%

 

 

11.8

%

Other Operating Expense Ratio (1)

 

 

27.9

%

 

 

16.5

%

 

 

19.2

%

 

 

18.3

%

Combined Ratio

 

 

103.5

%

 

 

93.8

%

 

 

115.0

%

 

 

98.0

%

 

(1) -

Includes Other Operating Expenses and Other Underwriting Income (Expense).

 

Gross Written Premiums

Quarter to Date Variance

Gross Written Premiums increased $45.1 million for the three months ended September 30, 2018 as compared to the same period in 2017, driven by a $46.8 million and $3.0 million increase in our P&C and Professional Liability operating segments, respectively, partially offset by a decrease in our Marine operating segment of $4.7 million.

The decrease in our Marine operating segment was primarily driven by decreases in our Craft and Marine Liability products due to a decreased level of renewals including the nonrenewal of an underperforming program within our Craft product. These decreases were partially offset by an increase in our Inland Marine and Cargo products driven by new business and an increased level of renewals.

The increase in our P&C operating segment was driven by increases across all divisions. Our Excess Casualty division increased by $26.4 million and was mostly driven by new business related to construction project policies, an increased level of renewals, and improved rates. New business production and an increased level of renewals drove increases in our Auto, Primary Casualty and Environmental divisions, as well as the Property product within our Other P&C division.

The increase in our Professional Liability operating segment was primarily due to an increased level of renewals, new business and improved rates.

Average renewal premium rates for our U.S. Insurance reporting segment for the three months ended September 30, 2018 increased 1.6% compared to the same period in 2017, driven by increases of 2.1% and 1.2% within our P&C and Professional Liability operating segments, respectively, partially offset by a decrease of (0.4)% within our Marine operating segment.

Year to Date Variance

Gross Written Premiums increased $78.8 million for the nine months ended September 30, 2018 as compared to the same period in 2017, driven by increases of $74.9 million and $10.7 million in our P&C and Professional Liability operating segments, respectively, partially offset by a decrease in our Marine operating segment of $6.8 million.

The decrease in our Marine operating segment was driven by a decrease in our Craft product, partially offset by increases in our Inland Marine and Cargo products attributable to the same drivers as the quarter to date variances.

The increase in our P&C operating segment was driven by increases across all divisions attributable to the same drivers as the quarter to date increases. The increase in our Excess Casualty division was partially offset by two large non-recurring construction projects coverage accounts written in the first quarter of 2017, and the increase in our Primary Casualty division was partially offset by the nonrenewal of underperforming accounts during the first half of the year.

43


 

The increase in our Professional Liability operating segment was attributable to the same drivers as the quarter to date variance.

Average renewal premium rates for our U.S. Insurance reporting segment for the nine months ended September 30, 2018 increased 2.3% compared to the same period in 2017, driven by increases of 2.8%, 1.6% and 1.0% within our P&C, Professional Liability and Marine operating segments, respectively.

Ceded Written Premiums

Quarter and Year to Date Variances

Ceded Written Premiums were $72.6 million, resulting in a retention ratio of 74.1% of Net Written Premiums to Gross Written Premiums, and $215.3 million, resulting in a retention ratio of 73.4%, for the three and nine months ended September 30, 2018, respectively. This compared to Ceded Written Premiums of $64.3 million, resulting in a retention ratio of 72.6%, and $199.7 million, resulting in a retention ratio of 72.6%, for the three and nine months ended September 30, 2017, respectively. The increase in the retention ratio for both periods was driven by our Marine and Professional Liability operating segments, partially offset by a decrease in the retention ratio for our P&C operating segment.

The increase in our Marine operating segment’s retention ratio was primarily driven by a reduction in proportional reinsurance in our Craft product related to business that was not renewed which had proportional cessions, as well as the impact of ceded RRPs in the prior year related to Hurricanes Irma and Harvey.

The decrease in our P&C operating segment’s retention ratio was primarily the result of changes in the mix of business within this operating segment with proportionately more premium written in our Excess Casualty division, which has a lower retention ratio.

The increase in our Professional Liability operating segment’s retention ratio was primarily the result of changes in the mix of business with an increase in premiums not subject to proportional reinsurance coverage within our D&O division.

Net Earned Premiums

Quarter and Year to Date Variances

Net Earned Premiums increased $19.4 million and $40.9 million for the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017 mainly driven by growth in our P&C and Professional Liability operating segments, as well as the impact of ceded RRPs in the prior year related to Hurricanes Irma and Harvey. These increases were partially offset by a reduction in the amount of premiums written in our Marine operating segment.

Net Losses and LAE

The Net Losses and LAE reserves as of September 30, 2018 and December 31, 2017 were as follows:

 

 

 

U.S. Insurance

 

 

 

As of September 30, 2018

 

 

 

As of December 31, 2017

 

 

 

 

 

 

amounts in thousands

 

Marine

 

 

P&C

 

 

Professional

Liability

 

 

Total

 

 

 

Marine

 

 

P&C

 

 

Professional

Liability

 

 

Total

 

 

 

Total %

Change

 

Case Reserves

 

$

55,476

 

 

$

217,004

 

 

$

36,075

 

 

$

308,555

 

 

 

$

58,301

 

 

$

192,291

 

 

$

26,774

 

 

$

277,366

 

 

 

 

11.2

%

IBNR Reserves

 

 

48,904

 

 

 

783,350

 

 

 

89,358

 

 

 

921,612

 

 

 

 

45,393

 

 

 

700,264

 

 

 

86,649

 

 

 

832,306

 

 

 

 

10.7

%

Total

 

$

104,380

 

 

$

1,000,354

 

 

$

125,433

 

 

$

1,230,167

 

 

 

$

103,694

 

 

$

892,555

 

 

$

113,423

 

 

$

1,109,672

 

 

 

 

10.9

%

 

The following tables present the current and prior accident year changes in our Net Losses and LAE Ratio for the three and nine months ended September 30, 2018 and 2017:

 

 

 

U.S. Insurance

 

 

 

Three Months Ended September 30, 2018

 

 

 

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional

 

 

 

 

 

 

 

Point

 

 

 

Marine

 

 

P&C

 

 

Liability

 

 

Total

 

 

 

Marine

 

 

P&C

 

 

Liability

 

 

Total

 

 

 

Change

 

Net Losses and LAE Ratio

 

 

58.5

%

 

 

79.8

%

 

 

61.4

%

 

 

74.9

%

 

 

 

91.0

%

 

 

71.1

%

 

 

118.9

%

 

 

80.0

%

 

 

 

(5.1

)

  Net Prior AY Reserve

   (Release)/Strengthening

 

 

(10.4

%)

 

 

12.4

%

 

 

4.6

%

 

 

8.8

%

 

 

 

(0.6

%)

 

 

3.8

%

 

 

59.5

%

 

 

10.9

%

 

 

 

(2.1

)

Net Current AY Losses and LAE

   Ratio

 

 

68.9

%

 

 

67.4

%

 

 

56.8

%

 

 

66.1

%

 

 

 

91.7

%

 

 

67.3

%

 

 

59.4

%

 

 

69.1

%

 

 

 

(3.0

)

 

44


 

 

 

U.S. Insurance

 

 

 

Nine Months Ended September 30, 2018

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional

 

 

 

 

 

 

 

Point

 

 

 

Marine

 

 

P&C

 

 

Liability

 

 

Total

 

 

 

Marine

 

 

P&C

 

 

Liability

 

 

Total

 

 

 

Change

 

Net Losses and LAE Ratio

 

 

59.4

%

 

 

69.7

%

 

 

60.3

%

 

 

67.2

%

 

 

 

69.4

%

 

 

65.3

%

 

 

79.9

%

 

 

67.9

%

 

 

 

(0.7

)

  Net Prior AY Reserve

   (Release)/Strengthening

 

 

(3.5

%)

 

 

4.7

%

 

 

3.4

%

 

 

3.6

%

 

 

 

1.2

%

 

 

1.0

%

 

 

19.8

%

 

 

3.6

%

 

 

 

0.0

 

Net Current AY Losses and LAE

   Ratio

 

 

62.9

%

 

 

65.0

%

 

 

56.9

%

 

 

63.6

%

 

 

 

68.2

%

 

 

64.3

%

 

 

60.1

%

 

 

64.3

%

 

 

 

(0.7

)

 

Quarter to Date Variance

 

For the three months ended September 30, 2018, our Net Losses and LAE Ratio decreased 5.1 points as compared to the same period in 2017 driven by:

Prior Year Reserve Development

For the three months ended September 30, 2018, our Net Prior AY Losses and LAE Ratio decreased 2.1 points as compared to the same period in 2017 primarily driven by:

 

Our Marine operating segment recognized $2.1 million of Net Prior AY Reserve Releases, of which $1.9 million was due to better than expected loss emergence in our Cargo and Craft products and $0.2 million was due to a net catastrophe loss release related to the Hurricane events that occurred in the third quarter of 2017. This compares to $0.1 million of Net Prior AY Reserve Releases for the same period in 2017.

 

Our Professional Liability operating segment recognized $1.2 million of Net Prior AY Reserve Strengthening primarily due to large loss activity within our D&O division. This compares to $13.7 million of Net Prior AY Reserve Strengthening for the same period in 2017 mostly related to large loss activity within our D&O division.

The above decrease in our Net Prior AY Loss and LAE Ratio was partially offset by:

 

 

Our P&C operating segment recognized $17.6 million of Net Prior AY Reserve Strengthening primarily related to our Primary Casualty division with $19.3 million of loss development in our Premises line. Additional strengthening in our Auto division and development on the Q3 2017 Hurricane events, were offset by Net Prior AY Reserve Releases on our Excess Casualty and Environmental divisions due to better than expected loss emergence. This compares to $4.8 million of Net Prior AY Reserve strengthening primarily related to strengthening of our casualty business.

Changes in the Current Accident Year Loss Ratio

For the three months ended September 30, 2018, our Net Current AY Losses and LAE Ratio decreased 3.0 points as compared to the same period in 2017, primarily driven by reduced catastrophe losses. For the three months ended September 30, 2018, we recognized $2.0 million of net catastrophe losses related to Hurricane Florence and Typhoon Jebi. This compared to $10.1 million of net catastrophe losses inclusive of ceded RRPs for the three months ended September 30, 2017, related to the Hurricane events.

After adjusting for these net catastrophe losses inclusive of ceded RRPs, our Net Current AY Losses and LAE Ratio increased 1.6 points as compared to the same period in 2017 primarily due to:

 

increased attritional loss activity within our Property product; and

 

unfavorable performance within certain key products within the P&C and Marine operating segments.

These increases in the Net Current AY Losses and LAE Ratio were partially offset by:

 

No large loss activity for the three months ended September 30, 2018, compared to a large loss of $4.0 million in our Hull product within our Marine operating segment for the three months ended September 30, 2017.

 

favorable performance within our Professional Liability operating segment; and

 

changes in product mix.

45


 

Year to Date Variance

 

For the nine months ended September 30, 2018, our Net Losses and LAE Ratio decreased 0.7 points as compared to the same period in 2017 driven by:

Prior Year Reserve Development

For the nine months ended September 30, 2018, our Net Prior AY Losses and LAE Ratio remained consistent as compared to the same period in 2017 primarily driven by:

 

Our Marine operating segment recognized $2.2 million of Net Prior AY Reserve Releases including $1.1 million of loss releases due to better than expected loss emergence in our Marine Liability, Cargo, and Craft products, as well as $1.1 million of net catastrophe loss release related to the Hurricane events that occurred in the third quarter of 2017. This compares to $0.8 million of Net Prior AY Reserve Strengthening for the same period in 2017.

 

Our Professional Liability operating segment recognized $2.6 million of Net Prior AY Reserve Strengthening related to worse than expected loss emergence within our E&O and D&O divisions. This compares to $13.7 million of Net Prior AY Reserve Strengthening for the same period in 2017 mostly related to large loss activity within our D&O division.

The above increases in our Net Prior AY Loss and LAE Ratio were partially offset by:

 

Our P&C operating segment recognized $18.8 million of Net Prior AY Reserve Strengthening related to the same drivers as the quarter to date variance.

Changes in the Current Accident Year Loss Ratio

For the nine months ended September 30, 2018, our Net Current AY Losses and LAE Ratio decreased 0.7 points as compared to the same period in 2017, attributable to the same drivers as the quarter to date variance.

Commission Expenses

Quarter to Date Variances

Our Commission Expense Ratio for the three months ended September 30, 2018 increased 1.0 point as compared to the same period in 2017, driven by our Professional Liability and P&C operating segments. Our Marine operating segment’s Commission Expense Ratio was relatively consistent period over period decreasing 0.3 points.

Our P&C operating segment’s Commission Expense Ratio increased primarily due to increased enhanced commission expense.

Our Professional Liability operating segment’s Commission Expense Ratio increased due to the reduction in proportional reinsurance and the related ceding commission benefits primarily within our D&O division.

Year to Date Variances

Our Commission Expense Ratio for the nine months ended September 30, 2018 decreased 0.1 points as compared to the same period in 2017, mostly driven by our Marine and P&C operating segments, partially offset by an increase in our Professional Liability operating segment.

Our Marine operating segment’s Commission Expense Ratio decreased due to lower gross commission rates on certain product lines, changes in the mix of business, and greater ceded profit commission income.

Our P&C operating segment’s Commission Expense Ratio decreased primarily due to changes in the mix of business with an increase in Property business which generates greater ceding commission income related to a large proportional reinsurance program.

Our Professional Liability operating segment’s Commission Expense Ratio increase was attributable to the same drivers as the quarter to date variance.

Other Operating Expenses

Quarter and Year to Date Variances

Other Operating Expenses for the three and nine months ended September 30, 2018 increased $11.5 million and $20.3 million, respectively, as compared to the same periods in 2017, primarily due to a reduction in performance-based incentive compensation that occurred in the prior 2017 periods, an increase in costs associated with new business initiatives, including applicable support and information technology expenses, and higher professional service fees.

 

46


 

Int’l Insurance

The following tables summarize our Underwriting Profit (Loss) by operating segment for our Int’l Insurance reporting segment for the three and nine months ended September 30, 2018 and 2017: 

 

 

 

Int'l Insurance

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

 

 

 

amounts in thousands

 

Marine

 

 

P&C

 

 

Professional

Liability

 

 

Total

 

 

% Change

Total

 

Gross Written Premiums

 

$

32,486

 

 

$

41,898

 

 

$

42,992

 

 

$

117,376

 

 

 

3.3

%

Ceded Written Premiums

 

 

(4,965

)

 

 

(13,727

)

 

 

(10,328

)

 

 

(29,020

)

 

 

(25.5

%)

Net Written Premiums

 

$

27,521

 

 

$

28,171

 

 

$

32,664

 

 

$

88,356

 

 

 

18.4

%

Retention Ratio

 

 

84.7

%

 

 

67.2

%

 

 

76.0

%

 

 

75.3

%

 

 

 

 

Net Earned Premiums

 

$

38,866

 

 

$

29,616

 

 

$

26,744

 

 

$

95,226

 

 

 

12.8

%

Net Losses and LAE

 

 

(27,873

)

 

 

(12,728

)

 

 

(19,674

)

 

 

(60,275

)

 

 

(26.2

%)

Commission Expenses

 

 

(8,889

)

 

 

(6,465

)

 

 

(7,193

)

 

 

(22,547

)

 

 

39.2

%

Other Operating Expenses

 

 

(8,200

)

 

 

(9,705

)

 

 

(6,536

)

 

 

(24,441

)

 

 

49.1

%

Other Underwriting Income

 

 

640

 

 

 

305

 

 

 

 

 

 

945

 

 

NM

 

Underwriting Profit (Loss)

 

$

(5,456

)

 

$

1,023

 

 

$

(6,659

)

 

$

(11,092

)

 

 

(62.9

%)

Losses and LAE Ratio

 

 

71.7

%

 

 

43.0

%

 

 

73.6

%

 

 

63.3

%

 

 

 

 

Commission Expense Ratio

 

 

22.9

%

 

 

21.8

%

 

 

26.9

%

 

 

23.7

%

 

 

 

 

Other Operating Expense Ratio (1)

 

 

19.4

%

 

 

31.7

%

 

 

24.4

%

 

 

24.6

%

 

 

 

 

Combined Ratio

 

 

114.0

%

 

 

96.5

%

 

 

124.9

%

 

 

111.6

%

 

 

 

 

 

(1) -

Includes Other Operating Expenses and Other Underwriting Income (Expense).

NM –

Percentage change not meaningful

 

 

 

Int'l Insurance

 

 

 

Three Months Ended September 30, 2017

 

amounts in thousands

 

Marine

 

 

P&C

 

 

Professional

Liability

 

 

Total

 

Gross Written Premiums

 

$

41,689

 

 

$

37,415

 

 

$

34,497

 

 

$

113,601

 

Ceded Written Premiums

 

 

(9,948

)

 

 

(19,772

)

 

 

(9,246

)

 

 

(38,966

)

Net Written Premiums

 

$

31,741

 

 

$

17,643

 

 

$

25,251

 

 

$

74,635

 

Retention Ratio

 

 

76.1

%

 

 

47.2

%

 

 

73.2

%

 

 

65.7

%

Net Earned Premiums

 

$

39,038

 

 

$

21,775

 

 

$

23,594

 

 

$

84,407

 

Net Losses and LAE

 

 

(39,457

)

 

 

(29,918

)

 

 

(12,338

)

 

 

(81,713

)

Commission Expenses

 

 

(8,532

)

 

 

(2,666

)

 

 

(5,003

)

 

 

(16,201

)

Other Operating Expenses

 

 

(6,788

)

 

 

(5,614

)

 

 

(3,986

)

 

 

(16,388

)

Underwriting Profit (Loss)

 

$

(15,739

)

 

$

(16,423

)

 

$

2,267

 

 

$

(29,895

)

Losses and LAE Ratio

 

 

101.1

%

 

 

137.4

%

 

 

52.3

%

 

 

96.8

%

Commission Expense Ratio

 

 

21.9

%

 

 

12.2

%

 

 

21.2

%

 

 

19.2

%

Other Operating Expense Ratio

 

 

17.3

%

 

 

25.8

%

 

 

16.9

%

 

 

19.4

%

Combined Ratio

 

 

140.3

%

 

 

175.4

%

 

 

90.4

%

 

 

135.4

%

47


 

 

 

 

Int'l Insurance

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

amounts in thousands

 

Marine

 

 

P&C

 

 

Professional

Liability

 

 

Total

 

 

% Change

Total

 

Gross Written Premiums

 

$

129,678

 

 

$

122,437

 

 

$

125,656

 

 

$

377,771

 

 

 

(2.3

%)

Ceded Written Premiums

 

 

(24,542

)

 

 

(45,099

)

 

 

(28,149

)

 

 

(97,790

)

 

 

(24.4

%)

Net Written Premiums

 

$

105,136

 

 

$

77,338

 

 

$

97,507

 

 

$

279,981

 

 

 

8.8

%

Retention Ratio

 

 

81.1

%

 

 

63.2

%

 

 

77.6

%

 

 

74.1

%

 

 

 

 

Net Earned Premiums

 

$

115,342

 

 

$

75,100

 

 

$

90,065

 

 

$

280,507

 

 

 

11.9

%

Net Losses and LAE

 

 

(77,606

)

 

 

(28,245

)

 

 

(52,571

)

 

 

(158,422

)

 

 

(10.2

%)

Commission Expenses

 

 

(27,563

)

 

 

(12,014

)

 

 

(22,589

)

 

 

(62,166

)

 

 

14.2

%

Other Operating Expenses

 

 

(22,942

)

 

 

(26,087

)

 

 

(19,241

)

 

 

(68,270

)

 

 

16.3

%

Other Underwriting Income

 

 

640

 

 

 

305

 

 

 

 

 

 

945

 

 

NM

 

Underwriting Profit (Loss)

 

$

(12,129

)

 

$

9,059

 

 

$

(4,336

)

 

$

(7,406

)

 

 

(81.0

%)

Losses and LAE Ratio

 

 

67.3

%

 

 

37.6

%

 

 

58.4

%

 

 

56.5

%

 

 

 

 

Commission Expense Ratio

 

 

23.9

%

 

 

16.0

%

 

 

25.1

%

 

 

22.2

%

 

 

 

 

Other Operating Expense Ratio (1)

 

 

19.3

%

 

 

34.3

%

 

 

21.3

%

 

 

23.9

%

 

 

 

 

Combined Ratio

 

 

110.5

%

 

 

87.9

%

 

 

104.8

%

 

 

102.6

%

 

 

 

 

 

(1) -

Includes Other Operating Expenses and Other Underwriting Income (Expense).

NM –

Percentage change not meaningful

 

 

 

Int'l Insurance

 

 

 

Nine Months Ended September 30, 2017

 

amounts in thousands

 

Marine

 

 

P&C

 

 

Professional

Liability

 

 

Total

 

Gross Written Premiums

 

$

160,119

 

 

$

124,446

 

 

$

102,089

 

 

$

386,654

 

Ceded Written Premiums

 

 

(33,410

)

 

 

(69,780

)

 

 

(26,178

)

 

 

(129,368

)

Net Written Premiums

 

$

126,709

 

 

$

54,666

 

 

$

75,911

 

 

$

257,286

 

Retention Ratio

 

 

79.1

%

 

 

43.9

%

 

 

74.4

%

 

 

66.5

%

Net Earned Premiums

 

$

116,058

 

 

$

67,292

 

 

$

67,243

 

 

$

250,593

 

Net Losses and LAE

 

 

(83,906

)

 

 

(54,654

)

 

 

(37,953

)

 

 

(176,513

)

Commission Expenses

 

 

(27,590

)

 

 

(10,985

)

 

 

(15,860

)

 

 

(54,435

)

Other Operating Expenses

 

 

(24,454

)

 

 

(19,983

)

 

 

(14,250

)

 

 

(58,687

)

Underwriting Loss

 

$

(19,892

)

 

$

(18,330

)

 

$

(820

)

 

$

(39,042

)

Losses and LAE Ratio

 

 

72.3

%

 

 

81.2

%

 

 

56.4

%

 

 

70.4

%

Commission Expense Ratio

 

 

23.8

%

 

 

16.3

%

 

 

23.6

%

 

 

21.7

%

Other Operating Expense Ratio

 

 

21.0

%

 

 

29.7

%

 

 

21.2

%

 

 

23.5

%

Combined Ratio

 

 

117.1

%

 

 

127.2

%

 

 

101.2

%

 

 

115.6

%

 

Gross Written Premiums

Quarter to Date Variance

Gross Written Premiums increased $3.8 million for the three months ended September 30, 2018 compared to the same period in 2017, driven by an $8.5 million and $4.5 million increase in our Professional Liability and P&C operating segments, respectively, partially offset by a decrease in our Marine operating segment of $9.2 million.

The decrease in our Marine operating segment was driven by decreases in our Protection and Indemnity, Cargo, and Hull products, partially offset by additional premium of $1.3 million from the NICE Group business acquired in the second quarter. The decrease in our Protection and Indemnity product was primarily related to our decision to sell the renewal rights to our fixed-premium protection and indemnity business. The decrease in our Cargo product was related to non-renewals and remedial actions on certain accounts. The decrease in our Hull product was primarily related to non-renewals resulting from strategic decisions to not renew certain business and declinature of unacceptable terms and conditions.

48


 

The increase in our P&C operating segment was driven by additional premium of $5.3 million from the NICE Group business acquired in the second quarter, as well as an increase in our General Liability division due to new business. This increase was offset by decreases in our Property division due to strategic actions taken to exit our International and North American Property businesses in 2017 and our Energy and Engineering division due to renewal timing and the reduction of our line on a large account.

The increase in our Professional Liability operating segment was primarily driven by rate improvement and growth in new business within our D&O division, as well as across all divisions within this operating segment.

Average renewal premium rates for our Int’l Insurance reporting segment for the three months ended September 30, 2018 increased 2.1% compared to the same period in 2017, driven by increases of 5.0%, 2.5% and 0.4% in our P&C, Marine, and Professional Liability operating segments, respectively.

Year to Date Variance

Gross Written Premiums decreased $8.9 million for the nine months ended September 30, 2018 compared to the same period in 2017, driven by decreases in our Marine and P&C operating segments of $30.5 million and $2.0 million, respectively, partially offset by an increase in our Professional Liability operating segment of $23.6 million.

The decrease in our Marine operating segment was due to decreases in our Protection & Indemnity, Transport, Hull, Marine Liability, and Cargo products, partially offset by additional premium from the NICE Group business acquired in the second quarter. The decreases in our Protection & Indemnity, and Cargo products were attributable to the same drivers as the quarter to date variances. The decrease in our Transport and Marine Liability product was primarily driven by declined renewals of several large binding authorities. The decrease in our Hull product was primarily related to the timing of certain construction driven contracts and non-renewals.

The decrease in our P&C operating segment was driven by a decrease in our Property division due to the same driver as the quarter to date variance. This decrease was partially offset by increases in our General Liability, Political Violence and Terrorism, and Energy & Engineering divisions due to new and renewal business, as well as additional premium from the NICE Group business acquired in the second quarter.

The increase in our Professional Liability operating segment was attributable to the same drivers as the quarter to date variance.

Average renewal premium rates for our Int’l Insurance reporting segment for the nine months ended September 30, 2018 increased 2.6% compared to the same period in 2017, driven by increases of 4.6%, 2.6% and 0.7% in our P&C, Marine and Professional Liability operating segments, respectively.

Ceded Written Premiums

Quarter and Year to Date Variance

Ceded Written Premiums were $29.0 million, resulting in a retention ratio of 75.3% of Net Written Premiums to Gross Written Premiums, and $97.8 million, resulting in a retention ratio of 74.1%, for the three and nine months ended September 30, 2018, respectively. This compares to Ceded Written Premiums of $39.0 million, resulting in a retention ratio of 65.7%, and $129.4 million, resulting in a retention ratio of 66.5%, for the three and nine months ended September 30, 2017, respectively. The increase in the retention ratio was driven by all three operating segments.

The Marine operating segment’s increase was driven by our Transport division due to a reduction in quota share reinsurance and the Cargo division due to reduced reinsurance costs, as well as the impact of ceded RRPs in the prior year related to Hurricanes Irma and Harvey. For the year to date variance, these increases were partially offset by a decrease in the Protection & Indemnity division due to our renewal rights agreement with Thomas Miller Specialty in 2018 that included a 100% cession of our business.

The P&C operating segment’s increase was driven by 2017 strategic actions to exit our Property division, thereby ceding 100% of our North American business, which is now in the latter stages of run-off, as well as an increase in our Energy & Engineering division’s retention ratio due to a reduction in quota share reinsurance. The increase in the retention ratio was also impacted by the higher level of ceded RRPs in the prior year related to the Hurricane events.

The increase in our Professional Liability operating segment’s retention ratio was primarily attributable to a reduction in quota share reinsurance.

49


 

Net Earned Premiums

Quarter and Year to Date Variances

Net Earned Premiums increased $10.8 million and $29.9 million for the three and nine months ended September 30, 2018, as compared to the same periods in 2017. The increase was driven by growth in our Professional Liability and P&C operating segments, partially offset by a decrease in our Marine operating segment.

The decrease in our Marine operating segment’s Net Earned Premium was due to decreased production, including the impact of our renewal rights agreement with Thomas Miller Specialty, offset by the impact of a higher level of ceded RRPs in the prior year related to Hurricanes Irma and Harvey as well as additional earned premium of $1.1 million from the NICE Group business acquired in the second quarter.

The increase in our P&C operating segment’s Net Earned Premium was due to growth in most divisions, the impact of a higher level of ceded RRPs related to the Hurricane events, and additional earned premium of $4.3 million from the NICE Group business acquired in the second quarter. These increases to Net Earned Premiums were partially offset by our Property division, where we took strategic actions to exit our International and North American Property businesses in 2017.

The increase in our Professional Liability operating segment’s Net Earned Premium was driven by growth across all divisions.

 

Net Losses and LAE

The Net Losses and LAE Reserves as of September 30, 2018 and December 31, 2017 were as follows:

 

 

 

Int'l Insurance

 

 

 

As of September 30, 2018

 

 

 

As of December 31, 2017

 

 

 

 

 

 

amounts in thousands

 

Marine

 

 

P&C

 

 

Professional

Liability

 

 

Total

 

 

 

Marine

 

 

P&C

 

 

Professional

Liability

 

 

Total

 

 

 

Total %

Change

 

Case Reserves

 

$

174,517

 

 

$

59,152

 

 

$

42,193

 

 

$

275,862

 

 

 

$

181,369

 

 

$

66,412

 

 

$

31,463

 

 

$

279,244

 

 

 

 

(1.2

%)

IBNR Reserves

 

 

38,034

 

 

 

31,539

 

 

 

107,591

 

 

 

177,164

 

 

 

 

39,949

 

 

 

37,067

 

 

 

87,211

 

 

 

164,227

 

 

 

 

7.9

%

Total

 

$

212,551

 

 

$

90,691

 

 

$

149,784

 

 

$

453,026

 

 

 

$

221,318

 

 

$

103,479

 

 

$

118,674

 

 

$

443,471

 

 

 

 

2.2

%

 

The following tables present the current and prior accident year changes in our Net Losses and LAE Ratio for the three and nine months ended September 30, 2018 and 2017:

 

 

 

Int'l Insurance

 

 

 

Three Months Ended September 30, 2018

 

 

 

Three Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional

 

 

 

 

 

 

 

Point

 

 

 

Marine

 

 

P&C

 

 

Liability

 

 

Total

 

 

 

Marine

 

 

P&C

 

 

Liability

 

 

Total

 

 

 

Change

 

Net Losses and LAE Ratio

 

 

71.7

%

 

 

43.0

%

 

 

73.6

%

 

 

63.3

%

 

 

 

101.1

%

 

 

137.4

%

 

 

52.3

%

 

 

96.8

%

 

 

 

(33.5

)

Net Prior AY Reserve

   (Release)/Strengthening

 

 

0.4

%

 

 

(9.6

%)

 

 

16.9

%

 

 

1.9

%

 

 

 

18.1

%

 

 

9.1

%

 

 

7.0

%

 

 

12.7

%

 

 

 

(10.8

)

Net Current AY Losses and LAE

   Ratio

 

 

71.3

%

 

 

52.6

%

 

 

56.7

%

 

 

61.4

%

 

 

 

83.0

%

 

 

128.3

%

 

 

45.3

%

 

 

84.1

%

 

 

 

(22.7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Int'l Insurance

 

 

 

Nine Months Ended September 30, 2018

 

 

 

Nine Months Ended September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional

 

 

 

 

 

 

 

Point

 

 

 

Marine

 

 

P&C

 

 

Liability

 

 

Total

 

 

 

Marine

 

 

P&C

 

 

Liability

 

 

Total

 

 

 

Change

 

Net Losses and LAE Ratio

 

 

67.3

%

 

 

37.6

%

 

 

58.4

%

 

 

56.5

%

 

 

 

72.3

%

 

 

81.2

%

 

 

56.4

%

 

 

70.4

%

 

 

 

(13.9

)

Net Prior AY Reserve

   (Release)/Strengthening

 

 

6.2

%

 

 

(10.8

%)

 

 

4.0

%

 

 

0.9

%

 

 

 

8.8

%

 

 

8.2

%

 

 

9.5

%

 

 

8.8

%

 

 

 

(7.9

)

Net Current AY Losses and LAE

   Ratio

 

 

61.1

%

 

 

48.4

%

 

 

54.4

%

 

 

55.6

%

 

 

 

63.5

%

 

 

73.0

%

 

 

46.9

%

 

 

61.6

%

 

 

 

(6.0

)

50


 

 

Quarter to Date Variance

 

For the three months ended September 30, 2018, our Reported Net Losses and LAE Ratio decreased 33.5 points as compared to the same period in 2017 driven by:

Prior Year Reserve Development

For the three months ended September 30, 2018, our Net Prior AY Losses and LAE Ratio decreased 10.8 points as compared to the same period in 2017 primarily driven by:

 

Our Marine operating segment for the three months ended September 30, 2018 recognized $0.2 million of Net Prior AY Reserve Strengthening compared to $7.1 million of Net Prior AY Reserve Strengthening for the same period in 2017 due to adverse loss development related to our Cargo, Protection & Indemnity and Specie products in that period.

 

Our P&C operating segment for the three months ended September 30, 2018 recognized $2.9 million of Net Prior AY Reserve Releases related to $3.2 million of net non-catastrophe loss release from better than expected loss emergence in our Political Violence & Terrorism, Property, General Liability, and Energy & Engineering divisions, partially offset by $0.4 million of net catastrophe loss strengthening primarily related to the Hurricane events and the Puebla, Mexico Earthquake that occurred in the third quarter of 2017. This compares to $2.0 million of Net Prior AY Reserve Strengthening for the same period in 2017 related to adverse loss development in our Property product.

The above decreases in our Net Prior AY Loss and LAE Ratio were partially offset by:

 

 

Our Professional Liability operating segment for the three months ended September 30, 2018 recognized $4.5 million of Net Prior AY Reserve Strengthening primarily related to adverse development on a large loss in our D&O product. This compares to $1.7 million of Net Prior AY Reserve Strengthening for the same period in 2017 primarily related to a large loss in our E&O product.

Changes in the Current Accident Year Loss Ratio

For the three months ended September 30, 2018, our Net Current AY Losses and LAE Ratio decreased 22.7 points as compared to the same period in 2017, with the reduced level of catastrophe activity being the primary driver. During the three months ended September 30, 2018, we recognized $2.9 million of net catastrophe losses related to Hurricane Florence, compared to $31.7 million inclusive of ceded RRPs for the same period in 2017 related to the Hurricane events and the Puebla, Mexico Earthquake.

After adjusting for these net catastrophe losses inclusive of ceded RRPs, our Net Current AY Losses and LAE Ratio increased 9.6 points as compared to the same period in 2017 primarily due to

 

an increase in large loss activity in our Marine and Professional Liability operating segments for the three months ended September 30, 2018 compared to the same period in 2017;

 

unfavorable performance within certain key products within the Marine and Professional Liability operating segments; and

 

changes in the mix of business.

Year to Date Variance

 

For the nine months ended September 30, 2018, our Reported Net Losses and LAE Ratio decreased 13.9 points as compared to the same period in 2017 driven by:

Prior Year Reserve Development

For the nine months ended September 30, 2018, our Net Prior AY Losses and LAE Ratio decreased 7.9 points as compared to the same period in 2017 primarily driven by:

 

Our Marine operating segment for the nine months ended September 30, 2018 recognized $7.1 million of Net Prior AY Reserve Strengthening, including $9.3 million of net non-catastrophe reserve strengthening with adverse development in the Cargo, Transport, and Hull products due to worse than expected loss emergence, partially offset by favorable development in the Marine Liability and Energy Liability products. Partially offsetting the net non-catastrophe reserve strengthening was $2.2 million of net catastrophe loss release primarily related to the Hurricane events that occurred in the third quarter of 2017. This compares to $10.2 million of Net Prior AY Reserve Strengthening for the same period in 2017 due to adverse loss development primarily related to our Cargo, Specie and Protection & Indemnity products.

51


 

 

Our P&C operating segment for the nine months ended September 30, 2018 recognized $8.1 million of Net Prior AY Reserve Releases resulting from $5.4 million of net catastrophe loss release primarily related to the third quarter 2017 Hurricane events and the Puebla, Mexico Earthquake and $2.7 million of net non-catastrophe related reserve release with better than expected loss emergence in our Political Violence & Terrorism and General Liability divisions, partially offset by unfavorable loss emergence on the runoff of our Property division’s business and worse than expected loss emergence within our Offshore Energy division. This compares to $5.5 million of Net Prior AY Reserve Strengthening for the same period in 2017 related to loss development in our Property division primarily resulting from late reported claims, partially offset by releases related to better than expected loss emergence within our Offshore Energy business.

 

Our Professional Liability operating segment for the nine months ended September 30, 2018 recognized $3.6 million of Net Prior AY Reserve Strengthening primarily related to adverse development on a large loss in our D&O division, partially offset by better than expected loss emergence within our E&O division and Financial Institutions business within our D&O division. This compares to $6.4 million of Net Prior AY Reserve Strengthening for the same period in 2017 related to large loss development on our D&O and E&O business.

Changes in the Current Accident Year Loss Ratio

For the nine months ended September 30, 2018, our Net Current AY Losses and LAE Ratio decreased 6.0 points as compared to the same period in 2017, attributable to the same drivers as the quarter to date variance.

Commission Expenses

Quarter and Year to Date Variances

Our Commission Expense Ratio for the three months ended September 30, 2018 increased 4.5 points as compared to the same period in 2017 and remained relatively consistent for the nine months ended September 30, 2018 as compared to the same period in 2017.

The increase for the quarter was primarily driven by our P&C operating segment, due to a favorable adjustment to a prior underwriting year gross commission estimate in 2017 combined with the impact of reduced quota share cessions within our Energy and Engineering division.

Our Professional Liability operating segment also contributed to the increase due to higher gross commissions earning through the current year related to higher proportions of binder business as well as higher profit commissions in the current quarter.

Partially offsetting these increases was the impact of ceded RRPs related to the Hurricane events on the 2017 Commission Expense Ratio.

Other Operating Expenses

Quarter and Year to Date Variances

Other Operating Expenses for the three and nine months ended September 30, 2018 increased $8.1 million and $9.6 million, respectively, as compared to the same periods in 2017 primarily due to a reduction in performance-based incentive compensation that occurred in the prior 2017 periods, as well as increased professional fees and expenses related to the NICE Group in the current year.

Other Underwriting Income

Quarter and Year to Date Variances

Other Underwriting Income for the three and nine months ended September 30, 2018 increased $0.9 million, as compared to the same periods in 2017 primarily due to managing agent fee income related to the NICE Group.

 

 

52


 

GlobalRe

The following tables summarize our Underwriting Profit for our GlobalRe reporting segment for the three and nine months ended September 30, 2018 and 2017:

 

 

 

GlobalRe

 

 

 

Three Months Ended September 30,

 

 

 

 

 

amounts in thousands

 

2018

 

 

2017

 

 

% Change

 

Gross Written Premiums

 

$

58,384

 

 

$

53,385

 

 

 

9.4

%

Ceded Written Premiums

 

 

(1,896

)

 

 

(2,728

)

 

 

(30.5

%)

Net Written Premiums

 

$

56,488

 

 

$

50,657

 

 

 

11.5

%

Retention Ratio

 

 

96.8

%

 

 

94.9

%

 

 

 

 

Net Earned Premiums

 

$

63,308

 

 

$

47,798

 

 

 

32.4

%

Net Losses and LAE

 

 

(39,443

)

 

 

(59,118

)

 

 

(33.3

%)

Commission Expenses

 

 

(13,282

)

 

 

(11,233

)

 

 

18.2

%

Other Operating Expenses

 

 

(6,317

)

 

 

(4,010

)

 

 

57.5

%

Other Underwriting Income

 

 

20

 

 

 

94

 

 

 

(78.7

%)

Underwriting Profit (Loss)

 

$

4,286

 

 

$

(26,469

)

 

NM

 

Losses and LAE Ratio

 

 

62.3

%

 

 

123.7

%

 

 

 

 

Commission Expense Ratio

 

 

21.0

%

 

 

23.5

%

 

 

 

 

Other Operating Expense Ratio (1)

 

 

9.9

%

 

 

8.2

%

 

 

 

 

Combined Ratio

 

 

93.2

%

 

 

155.4

%

 

 

 

 

 

(1) -

Includes Other Operating Expenses and Other Underwriting Income.

NM -

Percentage change not meaningful

 

 

 

GlobalRe

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

amounts in thousands

 

2018

 

 

2017

 

 

% Change

 

Gross Written Premiums

 

$

262,043

 

 

$

188,025

 

 

 

39.4

%

Ceded Written Premiums

 

 

(10,307

)

 

 

(9,021

)

 

 

14.3

%

Net Written Premiums

 

$

251,736

 

 

$

179,004

 

 

 

40.6

%

Retention Ratio

 

 

96.1

%

 

 

95.2

%

 

 

 

 

Net Earned Premiums

 

$

179,010

 

 

$

130,487

 

 

 

37.2

%

Net Losses and LAE

 

 

(101,467

)

 

 

(106,932

)

 

 

(5.1

%)

Commission Expenses

 

 

(40,198

)

 

 

(28,695

)

 

 

40.1

%

Other Operating Expenses

 

 

(18,158

)

 

 

(14,403

)

 

 

26.1

%

Other Underwriting Income

 

 

294

 

 

 

439

 

 

 

(33.0

%)

Underwriting Profit (Loss)

 

$

19,481

 

 

$

(19,104

)

 

NM

 

Losses and LAE Ratio

 

 

56.7

%

 

 

81.9

%

 

 

 

 

Commission Expense Ratio

 

 

22.5

%

 

 

22.0

%

 

 

 

 

Other Operating Expense Ratio (1)

 

 

9.9

%

 

 

10.7

%

 

 

 

 

Combined Ratio

 

 

89.1

%

 

 

114.6

%

 

 

 

 

 

(1) -

Includes Other Operating Expenses and Other Underwriting Income.

NM -

Percentage change not meaningful

 

Gross Written Premiums

Quarter to Date Variance

Gross Written Premiums increased $5.0 million for the three months ended September 30, 2018, compared to the same period in 2017, primarily due to increases in our P&C, Accident & Health and Specialty Casualty products, partially offset by decreases in our Agriculture and Surety products. The increases in our P&C and Specialty Casualty products were primarily due to increased new and renewal business. The increase in our Accident & Health product was mainly driven by increased premium estimates, partially offset by a decrease in new and renewal business. The decreases in our Agriculture and Surety products were due to the timing of renewals and decreased premium estimates, respectively.

53


 

Year to Date Variance

Gross Written Premiums increased $74.0 million for the nine months ended September 30, 2018, compared to the same period in 2017, primarily due to new business and increased renewals in our Accident & Health, P&C, Specialty Casualty, and Surety products, partially offset by a decrease in our Agriculture product. In addition to new business and increased renewals, our Accident & Health and P&C products were also impacted by increased premium estimates. Timing, largely related to inception date changes on two contracts, also contributed to the increase in our Specialty Casualty product. The decrease in our Agriculture product was due to timing of renewals.

Ceded Written Premiums

Quarter to Date Variances

Ceded Written Premiums were $1.9 million, resulting in a retention ratio of 96.8% of Net Written Premiums to Gross Written Premiums, for the three months ended September 30, 2018, compared to Ceded Written Premiums of $2.7 million, resulting in a retention ratio of 94.9%, for the same period in 2017. The increase in the retention ratio was primarily driven by the prior year impact of ceded RRPs resulting from Hurricane Maria, partially offset by additional ceded coverage purchased on our P&C products during the quarter and increased ceded premium estimates in our Surety product.

Year to Date Variances

Ceded Written Premiums were $10.3 million, resulting in a retention ratio of 96.1%, for the nine months ended September 30, 2018, compared to Ceded Written Premiums of $9.0 million, resulting in a retention ratio of 95.2%, for the same period in 2017. The increase in the retention ratio was impacted by the same drivers as the quarter to date variance, as well as the impact of changes in the mix of business with proportionately more Accident & Health and Specialty Casualty premium, which had 100% retention.

Net Earned Premiums

Quarter and Year to Date Variances

Net Earned Premiums for the three and nine months ended September 30, 2018 increased $15.5 million and $48.5 million, respectively, as compared to the same periods in 2017, primarily due to growth in our Accident & Health, P&C, and Specialty Casualty products, partially offset by lower net inward RRPs compared to prior year.

Net Losses and LAE

The Net Losses and LAE Reserves as of September 30, 2018 and December 31, 2017 were as follows:

 

 

 

GlobalRe

 

 

 

As of

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

 

 

amounts in thousands

 

2018

 

 

2017

 

 

% Change

 

Case Reserves

 

$

55,752

 

 

$

58,962

 

 

 

(5.4

%)

IBNR Reserves

 

 

114,675

 

 

 

93,275

 

 

 

22.9

%

Total

 

$

170,427

 

 

$

152,237

 

 

 

11.9

%

 

The following tables present the current and prior accident year changes in our Net Losses and LAE Ratio for the three and nine months ended September 30, 2018 and 2017:

 

 

 

GlobalRe

 

 

 

Three Months Ended September 30,

 

 

Point

 

 

 

2018

 

 

2017

 

 

Change

 

Net Losses and LAE Ratio

 

 

62.3

%

 

 

123.7

%

 

 

(61.4

)

Net Prior AY Reserve (Release)/Strengthening

 

 

(3.1

%)

 

 

0.8

%

 

 

(3.9

)

Net Current AY Losses and LAE Ratio

 

 

65.4

%

 

 

122.9

%

 

 

(57.5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54


 

 

 

GlobalRe

 

 

 

Nine Months Ended September 30,

 

 

Point

 

 

 

2018

 

 

2017

 

 

Change

 

Net Losses and LAE Ratio

 

 

56.7

%

 

 

81.9

%

 

 

(25.2

)

Net Prior AY Reserve (Release)/Strengthening

 

 

(1.2

%)

 

 

3.3

%

 

 

(4.5

)

Net Current AY Losses and LAE Ratio

 

 

57.9

%

 

 

78.6

%

 

 

(20.7

)

 

Quarter to Date Variance

 

For the three months ended September 30, 2018, our Reported Net Losses and LAE Ratio decreased 61.4 points as compared to the same period in 2017 driven by:

Prior Year Reserve Development

For the three months ended September 30, 2018, our Net Prior AY Losses and LAE Ratio decreased 3.9 points as compared to the same period in 2017. Our GlobalRe operating segment for the three months ended September 30, 2018 recognized $2.0 million of Net Prior AY Reserve Release, including $0.9 million of net catastrophe loss release related to Hurricanes Irma and Harvey, and the Puebla, Mexico Earthquake, compounded by an additional $1.1 million of reserve releases related to net favorable loss emergence across our A&H, Surety, and Specialty Casualty products, partially offset by strengthening in our P&C product. This compares to $0.4 million of Net Prior AY Reserve Strengthening for the same period in 2017 mostly related to our P&C product.

Changes in the Current Accident Year Loss Ratio

For the three months ended September 30, 2018, our Net Current AY Losses and LAE Ratio decreased 57.5 points as compared to the same period in 2017, primarily driven by a decrease in catastrophe losses. During the three months ended September 30, 2018, we recognized $6.9 million of net catastrophe losses net of assumed RRPs related to Typhoon Jebi and Hurricane Florence. This compared to $33.3 million of net catastrophe losses net of RRPs ($4.3 million of assumed RRPs, partially offset by $1.8 million of ceded RRPs) from the Hurricane events, and the Puebla, Mexico Earthquake.

After adjusting for these net catastrophe losses net of RRPs, our Net Current AY Losses and LAE Ratio increased 3.4 points as compared to the same period in 2017 primarily due to changes in the mix of business with an increase in Net Earned Premiums related to our Accident & Health and Specialty Casualty products, which carries a higher loss ratio.

Year to Date Variance

 

For the nine months ended September 30, 2018, our Reported Net Losses and LAE Ratio decreased 25.2 points as compared to the same period in 2017 driven by:

Prior Year Reserve Development

For the nine months ended September 30, 2018, our Net Prior AY Losses and LAE Ratio decreased 4.5 points as compared to the same period in 2017. Our GlobalRe reporting segment for the nine months ended September 30, 2018 recognized $2.1 million of Net Prior AY Reserve Release. This release was primarily related to net favorable loss emergence in our Accident & Health, Surety, and Specialty Casualty products, partially offset by unfavorable loss emergence in our P&C product. This compares to $4.3 million of Net Prior AY Reserve Strengthening for the same period in 2017 mostly related to the settlement of a large Accident & Health claim.

Changes in the Current Accident Year Loss Ratio

For the nine months ended September 30, 2018, our Net Current AY Losses and LAE Ratio decreased 20.7 points as compared to the same period in 2017, primarily driven by the same decrease in catastrophe losses as the quarter to date variance.

After adjusting for these net catastrophe losses net of RRPs, our Net Current AY Losses and LAE Ratio increased 1.6 points as compared to the same period in 2017 primarily due to changes in the mix of business with an increase in Net Earned Premiums related to our Accident & Health and Specialty Casualty products, which carries a higher loss ratio. Partially offsetting this increase in the ratio was $3.4 million of other weather-related losses that were incurred during the nine months ended September 30, 2017.

55


 

Commission Expenses

Quarter to Date Variances

Our Commission Expense Ratio for the three months ended September 30, 2018 decreased 2.5 points compared to the same period in 2017. The decrease was primarily due to lower profit commission expense particularly in our Accident & Health, Surety, and Agriculture products, partially offset by changes in the mix of business with more proportional Accident & Health and Specialty Casualty premium earned with higher Commission Expense Ratios.

Year to Date Variances

Our Commission Expense Ratio for the nine months ended September 30, 2018 increased 0.5 points compared to the same period in 2017. The increase was primarily due to changes in the mix of business with more proportional Accident & Health and Specialty Casualty premium earned with higher Commission Expense Ratios, partially offset by increased profit commission income compared to prior year.

Other Operating Expenses and Other Underwriting Income

Quarter and Year to Date Variances

Other Operating Expenses for the three and nine months ended September 30, 2018 increased $2.4 million and $3.9 million, respectively, as compared to the same periods in 2017, primarily due to increases in employee expenses and indirect expenses. The Other Operating Expense Ratio increased 1.7 points and decreased 0.8 points for the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017. An increase in Net Earned Premiums offset the increase in Other Operating Expenses for the nine months ended driving the decrease in this ratio compared to the same period in 2017.

 

Capital Resources and Liquidity

Capital Resources

Our capital resources consist of funds deployed or available to be deployed to support our business operations. As of September 30, 2018 and December 31, 2017, our capital resources were as follows:

 

 

 

As of

 

amounts in thousands

 

September 30, 2018

 

 

December 31, 2017

 

Senior Notes

 

$

264,009

 

 

$

263,885

 

Stockholders' Equity

 

 

1,231,828

 

 

 

1,225,965

 

Total Capitalization

 

$

1,495,837

 

 

$

1,489,850

 

Ratio of Debt to Total Capitalization

 

 

17.6

%

 

 

17.7

%

 

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 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, which mostly consist of semi-annual (April and October) interest payments of $7.6 million on the Senior Notes. During 2018, NIC paid dividends of $77.0 million to our Parent Company, related to the acquisition and subsequent funding of the NICE Group. As described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2017, we continue to believe that the dividend capacity of our subsidiaries will provide our Parent Company with sufficient liquidity for the foreseeable future.

Senior Notes and Credit Facility

As of September 30, 2018, letters of credit with an aggregate face amount of 24.0 million Australian Dollars were outstanding under the credit facility with Barclays Bank PLC that we entered into on November 4, 2016 and amended on October 30, 2017 (the “Australian Facility”).

As of September 30, 2018, letters of credit with an aggregate face amount of $140.0 million and £60.0 million were outstanding under the credit facility with ING Bank N.V., London Branch, individually and as administrative agent for a syndicate of lenders, that we entered into on November 7, 2016 (the “Club Facility”), and we had an aggregate of $1.2 million of cash collateral posted.

56


 

As of September 30, 2018, letters of credit with an aggregate face amount of $25.0 million were outstanding under the credit facility with ING Bank N.V., London Branch, that we entered into on November 20, 2015 and amended on November 7, 2016 (the “Bilateral Facility”).

During the first quarter of 2018, the Company reclassified certain overseas deposits from Short-Term Investments to Other Invested Assets. Refer to Note 1. Organization & Summary of Significant Accounting Policies in the Notes to Interim Consolidated Financial Statements. Although the nature of the investments did not change, this reclassification caused the Company to exceed a covenant of our Club Facility that sets a limitation on other investments as a percentage of total investments. During the second quarter of 2018, our Company received a waiver of compliance with respect to this covenant, which was subsequently amended to increase the percentage of other investments permitted. As of September 30, 2018, our Company was in compliance with all covenants for our Club Facility, Senior Notes, Australian Facility and Bilateral Facility.

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, which was filed on April 13, 2018 with the SEC, expires in 2021. 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, 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.

Net Cash Provided by Operating Activities was $267.1 million for the nine months ended September 30, 2018 compared to $222.8 million for the same period in 2017. Operating cash flow increased from the prior year due to additional premium collections resulting from the growth of our business, higher investment income collected as a result of the growth in assets under management, and lower federal tax payments due to the Tax Cuts and Jobs Act enacted on December 22, 2017. To a lesser extent operating cash flows were impacted by increased claim and reinsurance payments as well as higher operating expense payments, all of which are associated with the growth of our business.

Net Cash Used in Investing Activities was $127.1 million for the nine months ended September 30, 2018 compared to $131.4 million for the same period in 2017. The decrease in cash used in investing activities is due in part to a temporary increase in cash and cash equivalents at September 30, 2018 as we await investment opportunities and hold cash equivalents for unsettled trades at the end of the quarter. Additionally, investing cash flows for the nine months ended September 30, 2018 were impacted by cash acquired resulting from the Acquisition as discussed in Note 2. Merger and Business Combinations. The cash inflow from the sale of Fixed Maturities to fund the Acquisition was offset by the cash outflow to purchase the subsidiaries.

Net Cash Used in Financing Activities was $12.8 million for the nine months ended September 30, 2018 compared to $16.4 million for the same period in 2017. The decrease in cash used in financing activities is primarily related to reduced tax withholding payments on vested stock compensation in 2018 as compared with 2017.

 

Investments

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. As of September 30, 2018, our portfolio had a duration of 3.4 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.

57


 

As of September 30, 2018 and December 31, 2017, all Fixed Maturities Securities were classified as Available-For-Sale. Upon adoption of the FASB’s ASU 2016-01 as of January 1, 2018, our Equity Securities have been measured at fair value with changes in fair value recognized through Net Income. Prior to the adoption of ASU 2016-01, our Equity Securities were classified as Available-For-Sale with change in fair value recognized through Accumulated Other Comprehensive Income.

The 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. The tax-exempt portion of our Fixed Maturities portfolio at September 30, 2018 was 16.6% compared to 22.4% at December 31, 2017. Additionally, substantially all of our equity portfolio is invested in tax efficient securities which qualify for the dividends received deduction. The investments are subject to the oversight of the respective insurance companies’ Boards of Directors and the Finance Committee of our 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 investments at fair value:

 

 

 

Fair Value as of

 

 

 

 

 

amounts in thousands

 

September 30, 2018

 

 

December 31, 2017

 

 

% Change

 

Fixed Maturities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Bonds, Agency Bonds and

   Foreign Government Bonds

 

$

245,285

 

 

$

393,563

 

 

 

(37.7

%)

States, Municipalities and Political Subdivisions

 

 

631,514

 

 

 

814,632

 

 

 

(22.5

%)

Mortgage-Backed and Asset-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Agency Residential Mortgage-Backed Securities

 

 

344,016

 

 

 

407,619

 

 

 

(15.6

%)

Residential Mortgage Obligations

 

 

124,191

 

 

 

54,104

 

 

 

129.5

%

Asset-Backed Securities

 

 

540,566

 

 

 

328,753

 

 

 

64.4

%

Commercial Mortgage-Backed Securities

 

 

186,251

 

 

 

160,904

 

 

 

15.8

%

Subtotal

 

$

1,195,024

 

 

$

951,380

 

 

 

25.6

%

Corporate Exposures

 

 

917,650

 

 

 

897,479

 

 

 

2.2

%

Total Fixed Maturities

 

$

2,989,473

 

 

$

3,057,054

 

 

 

(2.2

%)

Equity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Common Stocks

 

$

190,722

 

 

$

52,439

 

 

 

263.7

%

Preferred Stocks

 

 

180,958

 

 

 

183,542

 

 

 

(1.4

%)

Total Equity Securities

 

$

371,680

 

 

$

235,981

 

 

 

57.5

%

Short-Term Investments

 

 

7,264

 

 

 

6,480

 

 

 

12.1

%

Total Investments

 

$

3,368,417

 

 

$

3,299,515

 

 

 

2.1

%

 

Fixed Maturities decreased from December 31, 2017 due to an increase in interest rates, which resulted in unrealized losses across all Fixed Maturity asset classes. To a lesser extent, proceeds from the sale of Treasury bonds were used to fund the Acquisition as well as reinvested into equity mutual funds tracking broad market indices. The increase in common stocks is due to the equity portfolio of the NICE Group, which was acquired as part of the purchase of these entities, as well as the purchase of passively managed equity mutual funds. Furthermore, certain short dated municipal securities were sold due to technical market factors with proceeds reinvested in cash equivalents. The Company increased their allocation to Residential Mortgage Obligations and Asset Backed Securities as we continue to add newly issued floating rate securities to provide a measure of protection against rising interest rates.

58


 

The following table sets forth the amount of our Fixed Maturities as of September 30, 2018 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.

 

 

 

 

 

As of September 30, 2018

 

amounts in thousands

 

Rating

 

Fair Value

 

 

Amortized Cost

 

Rating Description:

 

 

 

 

 

 

 

 

 

 

Extremely Strong

 

AAA

 

$

564,627

 

 

$

569,813

 

Very Strong

 

AA

 

 

1,189,688

 

 

 

1,210,000

 

Strong

 

A

 

 

719,993

 

 

 

728,922

 

Adequate

 

BBB

 

 

403,753

 

 

 

406,330

 

Speculative

 

BB & Below

 

 

110,545

 

 

 

112,046

 

Not Rated

 

NR

 

 

867

 

 

 

724

 

Total

 

AA-

 

$

2,989,473

 

 

$

3,027,835

 

 

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 September 30, 2018:

 

 

 

As of September 30, 2018

 

amounts in thousands

 

AAA

 

 

AA

 

 

A

 

 

BBB

 

 

BB and below

 

 

Not Rated

 

 

Fair Value

 

 

Amortized

Cost

 

Municipal Bonds

 

$

65,162

 

 

$

397,460

 

 

$

153,483

 

 

$

15,409

 

 

$

 

 

$

 

 

$

631,514

 

 

$

631,479

 

Agency Residential Mortgage-Backed

 

 

 

 

 

344,016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

344,016

 

 

 

360,361

 

Residential Mortgage-Backed

 

 

75,893

 

 

 

5,356

 

 

 

314

 

 

 

39,001

 

 

 

2,760

 

 

 

867

 

 

 

124,191

 

 

 

124,163

 

Asset-Backed

 

 

219,744

 

 

 

209,609

 

 

 

84,542

 

 

 

26,671

 

 

 

 

 

 

 

 

540,566

 

 

 

544,045

 

Commercial Mortgage-Backed

 

 

109,137

 

 

 

50,035

 

 

 

27,079

 

 

 

 

 

 

 

 

 

 

 

 

186,251

 

 

 

188,681

 

Corporate Exposures

 

 

6,613

 

 

 

55,410

 

 

 

425,169

 

 

 

322,674

 

 

 

107,784

 

 

 

 

 

 

917,650

 

 

 

930,973

 

Total

 

$

476,549

 

 

$

1,061,886

 

 

$

690,587

 

 

$

403,755

 

 

$

110,544

 

 

$

867

 

 

$

2,744,188

 

 

$

2,779,702

 

 

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 September 30, 2018

 

amounts in thousands

 

Fair Value

 

 

Amortized Cost

 

U.S. Treasury Bonds, Agency Bonds and Foreign Government Bonds:

 

 

 

 

 

 

 

 

U.S. Treasury Bonds

 

$

45,093

 

 

$

45,203

 

Agency Bonds

 

 

71,738

 

 

 

72,561

 

Foreign Government Bonds

 

 

128,454

 

 

 

130,369

 

Total U.S. Treasury Bonds, Agency Bonds and Foreign Government Bonds

 

$

245,285

 

 

$

248,133

 

States, Municipalities and Political Subdivisions:

 

 

 

 

 

 

 

 

General Obligation

 

$

121,606

 

 

$

121,569

 

Prerefunded

 

 

44,785

 

 

 

43,705

 

Revenue

 

 

331,400

 

 

 

329,984

 

Taxable

 

 

133,723

 

 

 

136,221

 

Total States, Municipalities and Political Subdivisions

 

$

631,514

 

 

$

631,479

 

 

As of September 30, 2018, we own $26.3 million of municipal securities, which are credit enhanced by various financial guarantors that have an average underlying credit rating of A.

59


 

The following table sets forth our Agency Residential Mortgage-Backed Securities (“ARMBS”) 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 Other Non-Agency) for Residential Mortgage-Backed Securities (“RMBS”) as of September 30, 2018:

 

 

 

As of September 30, 2018

 

amounts in thousands

 

Fair Value

 

 

Amortized Cost

 

ARMBS:

 

 

 

 

 

 

 

 

GNMA

 

$

36,273

 

 

$

37,171

 

FNMA

 

 

215,720

 

 

 

226,906

 

FHLMC

 

 

92,023

 

 

 

96,284

 

Total Agency Residential Mortgage-Backed Securities

 

$

344,016

 

 

$

360,361

 

RMBS:

 

 

 

 

 

 

 

 

Prime

 

$

47,571

 

 

$

47,331

 

Alt-A

 

 

728

 

 

 

651

 

Other Non-Agency

 

 

75,892

 

 

 

76,181

 

Total Residential Mortgage-Backed Securities

 

$

124,191

 

 

$

124,163

 

 

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-agency backed securities broken out by Prime, Alt-A, and Other Non-Agency 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. We have no exposure to subprime RMBS at September 30, 2018. Prime, subprime and Alt-A categories are as defined by S&P.

Details of the collateral of our Asset-Backed Securities portfolio as of September 30, 2018 are presented below:

 

 

 

As of September 30, 2018

 

amounts in thousands

 

Fair Value

 

 

Amortized Cost

 

Auto Loans

 

$

47,745

 

 

$

48,374

 

Single Family Rentals

 

 

88,463

 

 

 

89,186

 

Consumer Loans

 

 

50,072

 

 

 

50,659

 

Credit Cards

 

 

23,126

 

 

 

23,229

 

Collateralized Loan Obligations

 

 

245,537

 

 

 

246,399

 

Time Share

 

 

24,271

 

 

 

24,814

 

Miscellaneous

 

 

61,352

 

 

 

61,384

 

Total Asset-Backed Securities

 

$

540,566

 

 

$

544,045

 

 

Details of our Corporate Exposures portfolio as of September 30, 2018 are presented below:

 

 

 

As of September 30, 2018

 

amounts in thousands

 

Fair Value

 

 

Amortized Cost

 

Corporate Exposures:

 

 

 

 

 

 

 

 

Corporate Bonds

 

$

720,967

 

 

$

731,004

 

Hybrid Bonds

 

 

154,749

 

 

 

158,122

 

Redeemable Preferred Stocks

 

 

41,934

 

 

 

41,847

 

Total Corporate Exposures

 

$

917,650

 

 

$

930,973

 

 

As of September 30, 2018, the fair value of securities issued in foreign countries was $367.0 million, with an amortized cost of $371.8 million, representing 11.0% of our total Fixed Maturities and Equity Securities. Our largest exposure is Canada with a total of $145.8 million followed by Luxembourg with a total of $41.4 million.

Our Company did not have gross unrealized investment losses where the fair value was less than 80% of amortized cost as of September 30, 2018.

 

60


 

Our Company did not have any credit related OTTI losses during the three and nine months ended September 30, 2018. Our Company had two credit related OTTI losses totaling $1.0 million in the equity portfolio during the three months ended September 30, 2017. Our Company had four credit related OTTI losses totaling $2.1 million in the equity portfolio during the nine months ended September 30, 2017.

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. Upon adoption of ASU-2016-01 as of January 1, 2018, the changes in the fair value of Equity Securities is recognized through Net Income. 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.

 

Critical Accounting Estimates

Our Company’s Annual Report on Form 10-K for the year ended December 31, 2017 discloses our critical accounting estimates (refer to Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates).

We believe the items that require the most subjective and complex estimates involve the reporting of:

 

Reserves for Losses and LAE (including losses that have occurred but were not reported to us by the financial reporting date);

 

Reinsurance Recoverables, including a provision for uncollectible reinsurance;

 

Written and Unearned Premiums;

 

The recoverability of Deferred Tax Assets;

 

The impairment of investment securities;

 

Valuation of invested assets; and

 

Valuation of Goodwill and Intangible Assets.

We believe that the critical accounting estimates discussion in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2017 continues to describe the significant estimates and judgements included in the preparation of our Consolidated Financial Statements, with the exception of the valuation of Goodwill and Intangible Assets which was added as a critical accounting estimate this year as a result of the Acquisition and is described below:

Valuation of Goodwill and Intangible Assets

Goodwill on our Company’s Consolidated Balance Sheets represents the excess of purchase price over the fair value of net assets acquired from our acquisitions. Intangible assets other than goodwill have also been identified as part of our acquisitions when determining the fair value of assets acquired.

Intangible assets other than goodwill included in our Company’s Consolidated Balance Sheets include assets related to customer relationships, the value of business acquired, broker networks, a trade name, licenses, and Lloyd’s syndicate capacity. The valuation of these assets used valuation methods appropriate for determining the market value of each asset. These valuation methodologies used various assumptions which included discount rates, the cost of capital, and forecasting among others.

Goodwill is not amortized, but instead it is assessed for impairment at the reporting unit level on an annual basis or more frequently if indicators of impairment exist.

In performing this impairment assessment, our Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test.

Intangible assets with a finite life are amortized over the estimated useful life of the asset and intangible assets with an indefinite useful life are not amortized. Finite-lived intangibles are reviewed for impairment when indicators of impairment are present and indefinite-lived intangibles are assessed for impairment on an annual basis or more frequently if indicators of impairment exist.

61


 

Similar to goodwill, in performing the impairment assessment of intangible assets, the Company may first assess qualitative factors to determine whether it is more likely than not that an intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test.

If goodwill or intangible assets are impaired, they are written down to their fair value with a corresponding expense reflected in the Consolidated Statements of Income in the period in which the determination is made.

As at September 30, 2018 neither the Company’s initial valuation nor its subsequent valuations have indicated any impairment of the Company’s goodwill and intangible assets of $17.2 million and $10.9 million, respectively. For further details, refer to Note 6 - Goodwill and Intangible Assets in the Interim Consolidated Financial Statements.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Refer to Item 7A included in our Company’s 2017 Annual Report on Form 10-K. There have been no material changes to this item since December 31, 2017.

Item 4. Controls and Procedures

 

(a)

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the end of such period our Company’s disclosure controls and procedures are effective in identifying, on a timely basis, material information required to be disclosed in our reports filed or submitted under the Exchange Act.

 

On June 7, 2018 we acquired Bracht, Deckers & Mackelbert NV (“BDM”), a specialty underwriting agency, and its affiliated insurance company, Assurances Continentales – Continentale Verzekeringen NV (“ASCO”). SEC guidance permits management to omit an assessment of an acquired business’ internal control over financial reporting from management’s assessment of internal control over financial reporting for a period not to exceed one year from the date of the acquisition. Accordingly, we have not yet included BDM and ASCO in our assessment of the effectiveness of our disclosure controls and procedures and internal control over financial reporting as of September 30, 2018. For the three months ended September 30, 2018, BDM and ASCO accounted for $6.6 million of our total revenue, and as of September 30, 2018 had total assets of $156.1 million.

 

 

(b)

There have been no changes during our third fiscal quarter in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our Company’s internal control over financial reporting. As described above, our management excluded an assessment of the internal controls over financial reporting of BDM and ASCO from its assessment of the effectiveness of our internal control over financial reporting as of September 30, 2018. The Company has begun integrating BDM and ASCO into its existing control procedures, which may lead us to modify certain internal controls in future periods.

 

We have continued certain transformation initiatives to automate, centralize and simplify our business processes and systems. These are long-term initiatives that we believe will enhance our internal control over financial reporting due to increased automation and integration of related processes. These initiatives have not materially affected our internal control over financial reporting, however, we will continue to monitor and evaluate the effectiveness of our internal control over financial reporting throughout the transformation.

 

(c)

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

62


 

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of conducting business, our 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 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 us. Our Company accounts for such activity through the establishment of unpaid losses and LAE reserves. Our Company’s management believes that our 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 our Company.

Our 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 we have valid defenses to these cases. Our Company’s management expects that the ultimate liability, if any, with respect to such extra-contractual matters will not be material to our 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 consolidated results of operations or cash flows in a particular fiscal quarter or year.

 

 

Item 1A. Risk Factors

There have been no material changes from the risk factors as previously disclosed in our Company’s 2017 Annual Report on Form 10-K, with the exception of the following additional risk factors related to the Merger:

Completion of the Merger is subject to the conditions contained in the Merger Agreement and if these conditions are not satisfied or waived, the Merger will not be completed.

Our and The Hartford’s obligations to complete the Merger are subject to the satisfaction or waiver of a number of conditions, including, among others, the approval of the Merger by our stockholders and the receipt of certain regulatory approvals. Many of the conditions to the closing of the Merger are not within our or The Hartford’s control, and we cannot predict when or if these conditions will be satisfied or waived. For example, regulators may impose conditions on the completion of the Merger or require changes to the terms of the Merger. Such conditions or changes could have the effect of delaying completion of the Merger or imposing additional costs to consummate the Merger. If any of these conditions are not satisfied or waived prior to May 1, 2019, which may be extended, under certain circumstances, to July 1, 2019, it is possible that the Merger Agreement will be terminated and the Merger will not be completed. There can be no assurance that the conditions to the closing of the Merger will be satisfied or waived or that the Merger will be completed.

The Company will be subject to business uncertainties while the Merger is pending, which could result in an adverse effect on our revenues and operating results.

While completion of the Merger is pending, we are subject to some uncertainty about our future. As a result of this uncertainty, the perceptions of brokers, insurers, cedents and other third parties of the Company may be negatively impacted, which in turn could affect our ability to compete for or write new business or obtain renewals in the marketplace. If this business represents a significant portion of our anticipated revenue, our results of operations could be substantially below expectations.

In addition, uncertainty about the effect of the Merger on the Company's employees may have an adverse effect on its operating results. Our ability to attract, retain or motivate key personnel may be impaired by these uncertainties, and could cause brokers, insurers, cedents and others that deal with the Company to seek to change existing business relationships with the Company. Employee retention may be particularly challenging while completion of the Merger is pending. If key employees of the Company depart, the Company’s business could be seriously harmed.

Lawsuits filed against us or our directors challenging the Merger may have an adverse impact on our business, results of operations or financial position.

Transactions like the Merger are frequently the subject of litigation or other legal proceedings, including actions alleging that our board of directors breached their respective fiduciary duties by entering into the Merger Agreement, by failing to obtain a greater value in the transaction for our stockholders or otherwise. In connection with the proposed Merger, one putative class action lawsuit has been filed on behalf of our stockholders in the United States District Court for the District of Delaware, alleging, among other things, that the defendants failed to make adequate disclosures in the Company’s proxy statement for the special meeting of stockholders relating to the Merger. There can be no assurance that additional lawsuits will not be brought in connection with the Merger.

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We believe that the allegations in the aforementioned lawsuit are without merit. We intend to defend against this lawsuit and any other litigation or proceedings brought against us or our board of directors in connection with the Merger, but may not be successful in doing so. Any adverse outcome in such matters, as well as the costs and efforts of a defense even if successful, could have an adverse effect on our business, results of operations or financial position. Further, one of the conditions to the completion of the Merger is that no injunction, judgment or ruling by any court or other tribunal of competent jurisdiction will be in effect that enjoins, restrains or otherwise prohibits the consummation of the Merger. In the event that a plaintiff is successful in obtaining an injunction, judgment or ruling prohibiting the consummation of the Merger, the Merger may not be completed within the expected timeframe or at all.

Expenses related to the proposed Merger are significant and could adversely affect the Company's operating results.

If the Merger Agreement is terminated, our stock price may be adversely affected as a result of the fact that we have incurred and will continue to incur significant expenses related to the Merger, the intended benefits of which will not be realized if the Merger is not completed. If the Merger Agreement is terminated under certain circumstances, we may be obligated to pay The Hartford a termination fee of $68.25 million or transaction-related expenses not to exceed $7.0 million.

The Merger Agreement subjects us to restrictions on our business activities.

The Merger Agreement subjects us to restrictions on our business activities and obligates us to generally operate our business in the ordinary course in all material respects. These restrictions could have an adverse effect on our results of operations, cash flows and financial position to the extent that in the absence of the restrictions, our business decisions and operations would otherwise depart from our ordinary course of business.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

 

 

64


 

Item 6. Exhibits

 

Exhibit No.

 

Description of Exhibit

 

 

 

 

 

 

 

   2-1

 

Agreement and Plan of Merger, dated as of August 22, 2018 by and among The Navigators Group, Inc., The Hartford Financial Services Group, Inc., and Renato Acquisition Co (filed with the Securities and Exchange Commission on August 22, 2018 as Exhibit 2-1 to our Current Report on Form 8-K and incorporated herein by reference).+

 

 

 

 

 

 

 

   3-1

 

Amended and Restated By-Laws of The Navigators Group, Inc., as amended and restated on August 21, 2018 (filed with the Securities and Exchange Commission on August 22, 2018 as Exhibit 3-1 to our Current Report on Form 8-K and incorporated herein by reference).

 

 

 

 

 

 

 

  10-1

 

Employment Agreement, dated August 21 2018, by and among The Navigators Group, Inc., Navigators Management Company, Inc. and Stanley A. Galanski (filed with the Securities and Exchange Commission on August 22, 2018 as Exhibit 10-1 to our Current Report on Form 8-K and incorporated herein by reference).**

 

 

 

 

 

 

 

  10-2

 

Employment Agreement, dated August 21, 2018, by and among The Navigators Group, Inc., Navigators Management Company, Inc. and Ciro M. DeFalco (filed with the Securities and Exchange Commission on August 22, 2018 as Exhibit 10-2 to our Current Report on Form 8-K and incorporated herein by reference).**

 

 

 

 

 

 

 

  10-3

 

Form of President’s Award Agreement (filed with the Securities and Exchange Commission on August 22, 2018 as Exhibit 10-3 to our Current Report on Form 8-K and incorporated herein by reference).**

 

 

 

 

 

 

 

  10-4

 

Fourth Amended and Restated Funds at Lloyd's Letter of Credit Agreement, dated November 7, 2018, by and among The Navigators Group, Inc., the lenders party thereto, and ING Bank N.V., London Branch, as Administrative Agent and Letter of Credit Agent (filed with the Securities and Exchange Commission on November 7, 2018 as Exhibit 10-1 to our Current Report on Form 8-K and incorporated herein by reference)**

 

 

 

 

 

 

 

  11-1

 

Computation of Per Share Earnings (Loss) *

 

 

 

 

  

 

 

  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  *

 

 

 

*

Included herein

**

Management contract or compensatory plan or arrangement

+

Schedules and exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish a supplemental copy of any omitted exhibit or schedule to the SEC upon request.

 

 

65


 

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

The Navigators Group, Inc.

 

 

           (Company)

 

 

 

 

Dated:  November 8, 2018

 

By: 

/s/ Ciro M. DeFalco

 

 

 

Ciro M. DeFalco

 

 

 

Executive Vice President and Chief Financial Officer

 

 

66