FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2000
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 (IRS Employer
incorporation or organization) Identification No.)
One Penn Plaza, New York, New York 10119
Address of principal executive offices) (Zip Code)
(212) 244-2333
(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 X No
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the
latest practicable date.
On November 1, 2000, there were 8,414,356 shares of $0.10 par value common stock outstanding.
1
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I. FINANCIAL INFORMATION:
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 ..................................... 3
Consolidated Statements of Income
Three Months Ended September 30, 2000 and 1999 ................................ 4
Nine Months Ended September 30, 2000 and 1999 ................................. 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999.................................. 6
Notes to Interim Consolidated Financial Statements .................................... 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................................... 11
Part II. OTHER INFORMATION ................................................................. 16
2
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2000 1999
(Unaudited)
ASSETS
Investments and cash:
Fixed maturities, available-for-sale, at fair value
(amortized cost: 2000, $230,088; 1999, $227,875)............................ $228,086 $222,555
Equity securities, available-for-sale, at fair value (cost: 2000, $5,838;
1999, $11,105).............................................................. 6,743 11,840
Short-term investments, at cost which approximates fair value................. 13,797 6,747
Cash.......................................................................... 4,741 5,546
Total investments and cash............................................. 253,367 246,688
Premiums in course of collection................................................ 99,791 90,857
Accrued investment income....................................................... 3,188 3,250
Prepaid reinsurance premiums.................................................... 32,366 24,765
Reinsurance receivable on paid and unpaid losses and loss adjustment expenses... 198,300 229,111
Federal income tax recoverable.................................................. 1,229 2,016
Net deferred Federal and foreign income tax benefit............................. 11,369 13,227
Deferred policy acquisition costs............................................... 11,944 5,878
Goodwill ....................................................................... 5,321 5,805
Other assets.................................................................... 6,568 9,727
Total assets........................................................... $623,443 $631,324
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for losses and loss adjustment expenses ............................. $348,060 $391,094
Unearned premium.............................................................. 81,382 55,003
Reinsurance balances payable.................................................. 22,802 24,799
Notes payable to banks........................................................ 25,000 24,000
Net deferred state and local income tax....................................... 397 374
Accounts payable and other liabilities........................................ 8,247 5,689
Total liabilities...................................................... 485,888 500,959
Stockholders' equity:
Preferred stock, $.10 par value, authorized 1,000,000 shares, none issued .... - -
Common stock, $.10 par value, authorized 10,000,000 shares, issued and
outstanding 8,414,356 in 2000 and 8,406,970 in 1999......................... 846 846
Additional paid-in capital.................................................... 39,413 39,447
Treasury stock held at cost (shares: 41,314 in 2000 and 48,700 in 1999)....... (594) (700)
Accumulated other comprehensive income (loss)................................. (500) (2,918)
Retained earnings............................................................. 98,390 93,690
Total stockholders' equity............................................. 137,555 130,365
Total liabilities and stockholders' equity............................. $623,443 $ 631,324
======= =======
See accompanying notes to interim consolidated financial statements.
3
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except net income per share)
Three Months Ended
September 30,
2000 1999
(Unaudited)
Revenues:
Net earned premium................................................... $ 18,340 $15,258
Commission income.................................................... 880 (460)
Net investment income................................................ 4,714 4,003
Net realized capital gains (losses).................................. 46 (14)
Other income........................................................ 144 83
Total revenues................................................ 24,124 18,870
Operating expenses:
Net losses and loss adjustment expenses incurred..................... 12,571 16,502
Commission expense................................................... 3,491 3,099
Other operating expenses............................................. 5,742 6,375
Interest expense..................................................... 448 354
Total operating expenses....................................... 22,252 26,330
Income (loss) before income tax expense................................. 1,872 (7,460)
Income tax expense (benefit):
Current.............................................................. (46) (320)
Deferred............................................................ 308 (2,332)
Total income tax expense (benefit)............................ 262 (2,652)
Net income (loss)....................................................... $ 1,610 $ (4,808)
======== =======
Net income (loss) per common share:
Basic................................................................ $ 0.19 $ (0.57)
Diluted.............................................................. $ 0.19 $ (0.57)
Average common shares outstanding:
Basic................................................................ 8,414 8,407
Diluted ............................................................. 8,414 8,410
See accompanying notes to interim consolidated financial statements.
4
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except net income per share)
Nine Months Ended
September 30,
2000 1999
(Unaudited)
Revenues:
Net earned premium.................................................... $60,148 $52,022
Commission income..................................................... 2,172 228
Net investment income................................................. 13,553 11,909
Net realized capital gains............................................ 118 777
Other income......................................................... 343 315
Total revenues................................................. 76,334 65,251
Operating expenses:
Net losses and loss adjustment expenses incurred...................... 38,488 37,479
Commission expense.................................................... 12,062 10,863
Other operating expenses.............................................. 17,703 18,091
Interest expense...................................................... 1,284 1,087
Total operating expenses....................................... 69,537 67,520
Income (loss) before income tax expense................................. 6,797 (2,269)
Income tax expense (benefit):
Current............................................................... 1,513 372
Deferred.............................................................. 584 (1,878)
Total income tax expense (benefit) ............................ 2,097 (1,506)
Net income (loss)....................................................... $ 4,700 $ (763)
======== =======
Net income (loss) per common share:
Basic................................................................. $ 0.56 $ (0.09)
Diluted............................................................... $ 0.56 $ (0.09)
Average common shares outstanding:
Basic ................................................................ 8,413 8,423
Diluted ............................................................. 8,413 8,425
See accompanying notes to interim consolidated financial statements.
5
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
2000 1999
(Unaudited)
Operating activities:
Net income (loss)....................................................... $ 4,700 $ (763)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation & amortization............................................ 850 894
Net deferred income tax ............................................. 584 (1,878)
Net realized capital (gains)......................................... (118) (777)
Changes in assets and liabilities, net of acquisitions:
Reinsurance receivable on paid and unpaid
losses and loss adjustment expenses............................... 30,811 (27,184)
Reserve for losses and loss adjustment expenses...................... (43,034) 28,479
Prepaid reinsurance premiums......................................... (7,601) (3,374)
Unearned premium..................................................... 26,379 6,917
Premiums in course of collection..................................... (8,934) (4,260)
Commissions receivable............................................... 3,815 5,708
Deferred policy acquisition costs.................................... (6,066) (576)
Accrued investment income............................................ 62 41
Reinsurance balances payable......................................... (1,997) 8,457
Federal and foreign income tax....................................... 787 (2,011)
Other................................................................ 8 (1,422)
Net cash provided by operating activities......................... 246 8,251
Investing activities:
Fixed maturities, available-for-sale
Redemptions and maturities........................................... 9,088 19,595
Sales................................................................ 27,947 39,287
Purchases............................................................ (39,273) (51,187)
Equity securities, available-for-sale
Sales................................................................ 7,637 2,804
Purchases............................................................ (2,391) (7,197)
Sale of other investments............................................... - 1,145
Payable for securities purchased........................................ 3,804 (430)
Net (purchases) of short-term investments............................... (7,050) (9,618)
Payment for purchase of Anfield, net of cash acquired of $68............ - (2,591)
Purchase of property and equipment...................................... (1,813) (523)
Net cash (used in) investing activities........................... (2,051) (8,715)
Financing activities:
Purchase of treasury stock.............................................. - (700)
Proceeds from bank loan................................................. 3,000 1,500
Repayment of bank loan.................................................. (2,000) -
Proceeds from exercise of stock options................................. - 44
Net cash provided by financing activities......................... 1,000 844
Increase (decrease) in cash................................................. (805) 380
Cash at beginning of year................................................... 5,546 2,807
Cash at end of period...................................................... $ 4,741 $ 3,187
======== ========
Supplemental schedule of non-cash investing and financing activities:
Federal, state and local income tax paid............................... $ 636 $ 1,650
Interest paid.......................................................... 870 976
Issuance of stock to Directors......................................... 72 72
Fair value of assets acquired.......................................... - 3,915
Liabilities assumed in an acquisition.................................. - 1,256
See accompanying notes to interim consolidated financial statements.
6
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Unaudited)
(1) Accounting Policies
The interim financial statements are unaudited but reflect all adjustments which, in the opinion of
management, are necessary to provide a fair statement of the results of The Navigators Group, Inc.
and its subsidiaries (the "Company") for the interim periods presented. All such adjustments are of
a normal recurring nature. The results of operations for any interim period are not necessarily
indicative of results for the full year. These financial statements should be read in conjunction
with the financial statements and notes contained in the Company's 1999 Annual Report on Form 10-K.
Certain amounts for prior years have been reclassified to conform to the current year's
presentation.
(2) Reinsurance Ceded
The Company's ceded earned premiums were $20,817,000 and $19,587,000 for the three months ended
September 30, 2000 and 1999, respectively, and were $58,172,000 and $53,795,000 for the nine months
ended September 30, 2000 and 1999, respectively. The Company's ceded incurred losses were
$12,178,000 and $39,810,000 for the three months ended September 30, 2000 and 1999, respectively,
and were $43,271,000 and $92,146,000 for the nine months ended September 30, 2000 and 1999,
respectively.
(3) Acquisition of Anfield Insurance Services, Inc.
In April 1999, the Company purchased 100% of Anfield Insurance Services, Inc. ("Anfield"), an
insurance agency located in San Francisco, California. The purchase price of approximately
$2,700,000 was funded through a bank loan and working capital. Goodwill of $2,300,000 was recorded
in connection with the transaction and is being amortized over 20 years.
(4) Segments of an Enterprise
The Company's subsidiaries are primarily engaged in the writing and management of property and
casualty insurance. The Company's segments include the Insurance Companies, the Somerset Companies
and the Lloyd's Operations, each of which is managed separately. The Insurance Companies consist of
Navigators Insurance Company and NIC Insurance Company and are primarily engaged in underwriting
marine insurance and related lines of business, and a contractors' general liability program. The
Somerset Companies are underwriting management companies which produce, manage and underwrite
insurance and reinsurance for both affiliated and non-affiliated companies. The Lloyd's Operations
consist primarily of a Lloyd's managing agency and two Lloyd's corporate members which underwrite
marine and related lines of business at Lloyd's of London. All segments are evaluated based on their
underwriting or operating results calculated on the basis of accounting principles generally
accepted in the United States of America ("GAAP").
The Insurance Companies and the Lloyd's Operations are measured taking into account net premiums
earned, incurred losses and loss expenses, commission expense and other underwriting expenses. The
Somerset Companies' results include commission income less other operating expenses. Each segment
also maintains their own investments, on which they earn income and realize capital gains or losses.
Other operations include intersegment income and expense in the form of affiliated commissions,
income and expense from corporate operations, and consolidating adjustments.
7
Financial data by segment for the periods indicated were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
(In thousands)
Revenue, excluding net investment income
and net realized capital gains:
Insurance Companies.......................... $ 9,767 $ 9,173 $ 33,638 $ 32,267
Somerset Companies........................... 3,322 (153) 8,437 3,900
Lloyd's Operations........................... 8,647 6,311 26,714 20,251
Other operations............................. (2,372) (450) (6,126) (3,853)
Total...................................... $ 19,364 $ 14,881 $ 62,663 $ 52,565
======== ======== ======== ========
Income (loss) before income taxes:
Insurance Companies.......................... $ 3,453 $ (1,662) $ 14,335 $ 7,672
Somerset Companies........................... (500) (3,677) (2,863) (7,184)
Lloyd's Operations........................... (193) (1,996) (1,718) (2,033)
Other operations............................. (888) (125) (2,957) (724)
Total...................................... $ 1,872 $ (7,460) $ 6,797 $ (2,269)
======== ======== ======== ========
Income tax expense (benefit):
Insurance Companies.......................... $ 874 $ (1,405) $ 3,930 $ 1,050
Somerset Companies........................... (191) (1,264) (831) (2,379)
Lloyd's Operations........................... - 221 - 221
Other operations............................. (421) (204) (1,002) (398)
Total...................................... $ 262 $ (2,652) $ 2,097 $ (1,506)
======== ======== ======== ========
Net income (loss):
Insurance Companies.......................... $ 2,579 $ (257) $ 10,405 $ 6,622
Somerset Companies........................... (309) (2,413) (2,032) (4,805)
Lloyd's Operations........................... (193) (2,217) (1,718) (2,254)
Other operations............................. (467) 79 (1,955) (326)
Total...................................... $ 1,610 $ (4,808) $ 4,700 $ (763)
======== ======== ======== ========
(5) Comprehensive Income
Comprehensive income encompasses all changes in stockholders' equity (except those arising from
transactions with owners) including net income, net unrealized capital gains or losses on available
for sale securities, and foreign currency translation adjustments.
8
The following table summarizes comprehensive income for the three months ended September 30, 2000 and 1999:
September 30,
2000 1999
(In thousands)
Net income (loss)....................................................... $ 1,610 $ (4,808)
Other comprehensive income, net of tax:
Net unrealized gains (losses) on securities available for sale:
Unrealized holding gain (loss) arising during period
(net of tax expense (benefit) of $913 for 2000 and
$(944) for 1999)................................................ 1,695 (1,754)
Less: reclassification adjustment for gains (losses) included in
net income (net of tax (benefit) of $(9) for
2000 and $(5) for 1999) ........................................ 55 (9)
Net unrealized gains (losses) on securities ............... 1,640 (1,745)
Foreign currency translation gain (loss) adjustment, net of tax
expense (benefit) of $11 for 2000 and $(184) for 1999........... 19 (342)
Other comprehensive income (loss) .................... 1,659 (2,087)
Comprehensive income (loss)................................. $ 3,269 $ (6,895)
====== ======
The following table summarizes comprehensive income for the nine months ended September 30, 2000 and 1999:
September 30,
2000 1999
(In thousands)
Net income (loss)....................................................... $ 4,700 $ (763)
Other comprehensive income, net of tax:
Net unrealized gains (losses) on securities available for sale:
Unrealized holding gain (loss) arising during period
(net of tax expense (benefit) of $1,287 for 2000 and
$(3,394) for 1999) ............................................ 2,390 (6,304)
Less: reclassification adjustment for gains included in
net income (net of tax expense (benefit) of $(4) for 2000
and $228 for 1999)............................................. 122 549
Net unrealized gains (losses) on securities................ 2,268 (6,853)
Foreign currency translation gain (loss) adjustment, net of tax
expense (benefit) of $81 for 2000 and $(153) for 1999.......... 150 (285)
Other comprehensive income (loss)....................... 2,418 (7,138)
Comprehensive income (loss)............................... $ 7,118 $ (7,901)
====== ========
9
The following table summarizes the components of accumulated other comprehensive income:
September 30, December 31,
2000 1999
(In thousands)
Net unrealized (losses) on securities available-for-sale (net of
tax (benefit) of $(384) in 2000 and $(1,605) in 1999)................ $ (713) $ (2,980)
Foreign currency translation adjustment (net of tax expense of
$115 in 2000 and $34 in 1999)........................................ 213 62
Accumulated other comprehensive income (loss)........................... $ (500) $ (2,918)
====== ========
(6) Future Application of Accounting Standards
The Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June
1998 and establishes accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure those instruments at
fair value. SFAS No. 133, as amended by SFAS No. 137, Deferral of the Effective Date of SFAS No.
133, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Earlier
application is encouraged, but it is permitted only as of the beginning of any fiscal quarter that
begins after issuance of this statement. SFAS No. 133 should not be applied retroactively to
financial statements of prior periods. In June 2000, the FASB issued SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133, which
amends certain accounting and reporting standards of SFAS No. 133. The adoption of these statements
is not expected to have a material effect on the Company's results of operations or financial
condition.
(7) Lloyd's Participation
In the aggregate, the Company directly and indirectly controls 75.6% of Lloyd's Syndicate 1221's
capacity for the 2000 underwriting year. Since the controlled capacity exceeds 75%, Lloyd's
Mandatory Byelaw (No. 5 of 1999) requires the Company to make a mandatory offer to noncontrolled
participants for their capacity in the form of an Announced Auction Offer made at the Lloyd's year
2000 capacity auctions. The Company directly controls 64.5% of Syndicate 1221's capacity.
The minimum price that the Company is obliged to offer is 1.8 pence per(pound)1 of capacity, being
the highest price paid for capacity during the last 12 months. Whether or not, or to what extent the
offer is accepted by the offerees is to some extent dependent on the price offered. As such, it is
unlikely that the acceptance will result in a cost that is material to the Company. For the purposes
of guidance, each 10% of capacity accepting at 1.8 pence per(pound)1 of capacity will result in a
cost to the Company of approximately $200,000. If the Company were to exceed the 90% control
threshold as a result of the offer, Lloyd's Major Syndicate Transactions Byelaw (No. 18 of 1997)
allows for a Minority Buy-out to be effected. In such a transaction, the remaining participants are
required to give up their capacity in return for compensation which must be at least equal to the
offer price preceding the buy-out.
At September 30, 2000, the Company acquired an additional(pound)7.4 million of capacity in Syndicate
1221 at 1.8 pence per(pound)1 through the auction process bringing its estimated aggregate direct
and indirect control of capacity for the 2001 underwriting year to 87.9%. Based on the 87.9%, the
Company will directly control approximately 67.2% of Syndicate 1221's capacity for the 2001
underwriting year.
10
THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements
Some of the statements in this Form 10-Q are "forward-looking statements" (as defined in the Private
Securities Litigation Act of 1995). We derive forward-looking statements from information which we
currently have and from assumptions which we make. We cannot assure that results which we anticipate will
be achieved, since results may differ materially because of both known and unknown risks and
uncertainties which we face. Factors which could cause actual results to differ materially from our
forward looking statements include, but are not limited to:
- the effects of domestic and foreign economic conditions and conditions which affect the market
for property and casualty insurance;
- domestic and foreign laws, rules and regulations which apply to insurance companies;
- the effects of competition from banks, other insurers and the trend toward self-insurance;
- risks which we face in entering new markets and diversifying the products and services we
offer;
- weather-related events and other catastrophes affecting our insureds;
- our ability to obtain rate increases and to retain business;
- Year 2000; and
- other risks which we identify in future filings with the Securities and Exchange Commission,
although we may not update forward-looking statements to reflect actual results or changes in assumptions
or other factors that could affect these statements.
General
The accompanying consolidated financial statements consisting of the accounts of The Navigators
Group, Inc., a Delaware holding company, and its sixteen wholly owned subsidiaries, are prepared on a
GAAP basis. Unless the context otherwise requires, the term "Company" as used herein means The Navigators
Group, Inc. and its subsidiaries. All significant intercompany transactions and balances are eliminated.
The Company's two insurance subsidiaries are Navigators Insurance Company ("Navigators Insurance"),
which includes a United Kingdom Branch ("UK Branch"), and NIC Insurance Company ("NIC"). Navigators
Insurance is the Company's largest insurance subsidiary and has been active since 1983. It specializes
principally in underwriting marine insurance and related lines of business, and a contractors' general
liability program. NIC, a wholly owned subsidiary of Navigators Insurance, began operations in 1990. It
underwrites a small book of surplus lines insurance in certain states which is 100% reinsured by
Navigators Insurance. Navigators Insurance and NIC are collectively referred to herein as the "Insurance
Companies".
Five of the Company's subsidiaries are underwriting management companies: Somerset Marine, Inc.,
Somerset Insurance Services of Texas, Inc., Somerset Insurance Services of California, Inc., Somerset
Insurance Services of Washington, Inc. and Somerset Marine (UK) Limited ("Somerset UK") (collectively,
the "Somerset Companies"). The Somerset Companies produce, manage and underwrite insurance and
reinsurance for Navigators Insurance, NIC and four unaffiliated insurance companies.
11
The Somerset Companies specialize in writing marine and related lines of business. The marine
business is written through a pool of insurance companies, Navigators Insurance having the largest
participation in the pool. The Somerset Companies derive their revenue from commissions, service fees and
cost reimbursement arrangements from their parent company, Navigators Insurance, and the unaffiliated
insurers. Commissions are earned both on a fixed percentage of premiums and on underwriting profits on
business placed with the insurance companies participating in the pool.
Navigators Holdings (UK) Limited is a holding company for the Company's UK subsidiaries. Somerset UK
produces business for the UK Branch of Navigators Insurance and four unaffiliated insurance companies.
Navigators Corporate Underwriters Limited ("NCUL") is admitted to do business at Lloyd's of London as a
corporate member with limited liability. The Company owns Mander, Thomas & Cooper (Underwriting
Agencies) Limited ("MTC"), a Lloyd's marine underwriting managing agency which manages Lloyd's Syndicate
1221, and MTC's wholly owned subsidiary, Millennium Underwriting Limited ("Millennium"), a Lloyd's
corporate member with limited liability. The premium recorded by NCUL and Millennium is the result of
their participation in Syndicate 1221. In August 1999, MTC formed Pennine Underwriting Limited, an
underwriting managing agency located in Northern England, which underwrites cargo and engineering
business for Lloyd's Syndicate 1221.
In April 1999, the Company acquired Anfield, an insurance agency located in San Francisco,
California, which specializes primarily in underwriting general liability insurance coverage for small artisan and
general contractors on the West Coast. Anfield writes business exclusively for the Insurance Companies.
The Company's revenue is primarily comprised of premiums, commissions and investment income. The
Insurance Companies, managed by Somerset Marine, Inc., derive the majority of their premium from business
written by the Somerset Companies and Anfield. The Lloyd's Operations derive their premium from business
written by MTC.
Property and casualty insurance premiums historically have been cyclical in nature and, accordingly,
during a "hard market" demand for property and casualty insurance exceeds supply, or capacity, and as a
result, premiums and commissions may increase. On the downturn of the property and casualty cycle, supply
exceeds demand, and as a result, premiums and commissions may decrease.
Results of Operations
The third quarter 1999 results include a pretax charge against earnings of approximately $6.5
million resulting in an after tax charge of approximately $4.2 million or $0.50 per diluted share. The
charge is the result of nonrecoverable reinsurance from New Cap Reinsurance Corporation Limited ("New Cap
Re"), which participated in the Company's 1997 and 1998 reinsurance program and has been put under the
control of an Administrator for possible liquidation.
Revenues. Gross written premium for the first nine months of 2000 increased 29% to $145,775,000
from $112,667,000 for the first nine months of 1999.
12
The following table sets forth the Company's gross written premium by segment and line of business,
and ceded and net written premium by segment for the periods indicated:
Nine Months Ended September 30,
2000 1999
(Dollars in thousands)
Lloyd's Operations:
Marine.......................................... $ 57,160 39% $ 32,109 28%
Engineering and Construction.................... 855 1 - -
Onshore Energy.................................. 475 - - -
Gross Written Premium....................... 58,490 40 32,109 28
Ceded Written Premium....................... (19,330) (9,645)
Net Written Premium......................... 39,160 22,464
Insurance Companies:
Marine.......................................... 65,562 45 65,353 58
Program Insurance............................... 19,702 14 13,142 12
Other........................................... 2,021 1 2,063 2
Gross Written Premium....................... 87,285 60 80,558 72
Ceded Written Premium....................... (46,443) (47,527)
Net Written Premium......................... 40,842 33,031
Total Gross Written Premium............... 145,775 100% 112,667 100%
=== ===
Total Ceded Written Premium............... (65,773) (57,172)
Total Net Written Premium................. $ 80,002 $ 55,495
========= =========
Lloyd's Operations' Gross Written Premium
The Lloyd's premium is generated as the result of NCUL and Millennium providing capacity to Lloyd's
Syndicate 1221 managed by MTC. Lloyd's Syndicate 1221 has capacity of(pound)66.3 million (converts to
$102.1 million) for the 2000 underwriting year and had capacity of(pound)67.0 million (converts to $105.9
million) in 1999. The Lloyd's marine business has been subject to continued pricing competition resulting
in less premium per risk relative to certain prior years. As a result, the Company has been writing less
premium than the capacity available. Lloyd's presents its results on an underwriting year basis,
generally closing each underwriting year after three years. The Company makes estimates for each year and
timely accrues the expected results.
In the aggregate, the Company directly and indirectly controls 75.6% of Syndicate 1221's capacity
for the 2000 underwriting year. Since the controlled capacity exceeds 75%, Lloyd's Mandatory Byelaw (No.
5 of 1999) requires the Company to make a mandatory offer to noncontrolled participants for their
capacity. The offer took the form of an Announced Auction Offer to be made at the Lloyd's year 2000
capacity auctions. The Company directly controls 64.5% of Syndicate 1221's capacity.
The Company provides letters of credit to Lloyd's to support its Syndicate 1221 capacity. If the
amount of capacity controlled increases, the Company will be required to supply additional letters of
credit or other collateral acceptable to Lloyd's, or to reduce the capacity of Syndicate 1221.
13
Marine Premium. In 2000, marine premium increased from 1999 due to the capacity directly
provided to Syndicate 1221 by NCUL and Millennium in the aggregate increasing from 52.5% in 1999 to 64.5%
in 2000 on a larger premium base.
Engineering and Construction Premium. In mid 1999, the Robertson Consortium managed by MTC
began writing engineering and construction business consisting of coverage for construction projects
including machinery, equipment and loss of use due to delays. Previously, the engineering and
construction business was written by Somerset Asia Pacific Limited in Australia and Somerset UK,
wholly-owned subsidiaries of the Company, for Navigators Insurance. The Australia office was closed in
1999.
Onshore Energy Premium. In mid 1999, the Robertson Consortium began writing onshore energy
business which principally focuses on the oil and gas, chemical and petrochemical, and power generation
industries with coverages primarily for property damage and machinery breakdown. The business was
previously written by Navigators Insurance.
Insurance Companies' Gross Written Premium
Marine Premium. Marine gross written premium stayed relatively unchanged when comparing the
first nine months of 2000 to the first nine months of 1999. Navigators Insurance's participation in the
marine pools was 75% in 1999 and 2000.
Program Insurance Premium. The program insurance, principally written by Anfield, consists
primarily of general liability insurance for contractors and a small amount of commercial multi-peril
insurance for restaurants and taverns. The 50% increase in the premium, when comparing the first nine
months of 2000 and 1999, resulted from increases in the business written by Anfield.
Ceded Premium. In the ordinary course of business, the Company reinsures certain insurance risks
with unaffiliated insurance companies for the purpose of limiting its maximum loss exposure, protecting
against catastrophic losses, and maintaining desired ratios of net premiums written to statutory surplus.
The relationship of ceded to written premium varies based upon the types of business written and whether
the business is written by the Insurance Companies or the Lloyd's Operations. The Company wrote a larger
percentage of Lloyd's premium which generally carries a higher retention rate.
Net Written Premium. Net written premium increased 44% when comparing the first nine months of
2000 to the first nine months of 1999 primarily due to the increases in the marine business written by
the Lloyd's Operations and the business written by Anfield.
Net Earned Premium. Net earned premium increased 16% for the first nine months of 2000 to
$60,148,000 as compared to $52,022,000 for the first nine months of 1999. Net earned premium for the
three months ended September 30, 2000 and 1999 was $18,340,000 and $15,258,000, respectively.
Commission Income. Commission income generated by the Somerset Companies increased to $2,172,000
for the first nine months of 2000 from $228,000 for the first nine months of 1999 and also increased to
$880,000 from $(460,000) for the three months ended September 30, 2000 compared to the same period in
1999. The increase was primarily due to the Company's normal review of the estimates used to calculate
the commission income resulting in a reduction to those estimates in 1999 due to the extremely
competitive rate environment, and to the improvement in the 2000 loss ratios which generate the
commission income.
Net Investment Income. Net investment income increased 14% to $13,553,000 for the first nine
months of 2000 from $11,909,000 for the corresponding period in 1999 and increased 18% to $4,714,000 for
the three months ended September 30, 2000 from $4,003,000 during the corresponding period in 1999. These
increases are primarily due to higher interest rates on the Insurance Companies investments and the
Company's increased participation in the Lloyd's operations which earn income on investments held by
Lloyd's Syndicate 1221 in which the Company participates. Such investments represent funds due to the
Company from Syndicate 1221.
14
Net Realized Capital Gains. Pre-tax results included $118,000 of realized capital gains for the
first nine months of 2000 compared to $777,000 for the same period last year. On an after tax basis, the
realized capital gains were $.01 per share in 2000 and $0.06 per share in 1999. Pre-tax results for the
three months ended September 30, 2000 and 1999 included realized capital gains of $46,000 and realized
capital losses of $14,000, respectively. On an after tax basis, the realized capital gains were $0.01 per
share for the three months ended September 30, 2000. The realized capital losses had no effect on
earnings per share for the three months ended September 30, 1999.
Operating Expenses.
Net Loss and Loss Adjustment Expenses Incurred. The ratio of net loss and loss adjustment
expenses incurred to net earned premium was 64.0% and 72.0% for the first nine months of 2000 and 1999,
respectively. This decrease was primarily due to losses resulting from the New Cap Re uncollectible
reinsurance in 1999. The loss ratios were 68.5% and 108.2% for the three months ended September 30, 2000
and 1999, respectively. The New Cap Re losses represent 11.5% and 39.3% of the loss ratio for the nine
and three months ended September 30, 1999, respectively. In addition, the first six months of 2000 were
adversely effected by higher loss ratios in the Lloyd's Operations.
Commission Expense. Commission expense as a percentage of net earned premium was 20.1% and
20.9% for the first nine months of 2000 and 1999, respectively, and 19.0% and 20.3% for the three months
ended September 30, 2000 and 1999, respectively.
Other Operating Expenses. Other operating expenses decreased 2% to $17,703,000 during the
first nine months of 2000 from $18,091,000 during the corresponding period of 1999 primarily due to lower
costs in the Company's foreign operations partially offset by the acquisition of Anfield on April 2,
1999. Other operating expenses decreased 10% for the three months ended September 30, 2000 compared to
the same period in 1999 primarily due to lower costs in the Company's foreign operations.
Interest Expense. Interest expense was $1,284,000 during the first nine months of 2000
compared to $1,087,000 during the corresponding period of 1999. This increase was due to higher interest
rates.
Income Taxes. The effective tax rate was 30.9% for the nine months ended September 30, 2000. This
rate differed from the Federal statutory income tax rate due to tax-exempt interest income, partially
offset by a valuation allowance recorded on the Company's foreign operations. The Company had a tax
benefit of $1,506,000 on a pretax loss of $2,269,000 for the nine months ended September 30, 1999. The
effective tax benefit rate of 66.4% is primarily the result of tax exempt investment income along with
the pretax loss.
Net Income. The Company had net income of $4,700,000 for the first nine months of 2000 compared to
a net loss of $763,000 for the same period last year. On a diluted per share basis, this represented net
income per share of $0.56 and net loss per share of $0.09 for the first nine months of 2000 and 1999,
respectively. The Company had net income of $1,610,000 or $0.19 per diluted share for the three months
ended September 30, 2000 compared to a net loss of $4,808,000 or $0.57 per diluted share for the same
period in 1999.
15
Liquidity and Capital Resources
Cash flow from operations was $246,000 and $8,251,000 for the first nine months of 2000 and 1999,
respectively. Invested assets and cash increased to $253,367,000 at September 30, 2000 from $246,688,000
at December 31, 1999.
The Company's bank credit facility, as amended, provides for a $27 million revolving line of credit
facility, which reduces each quarter by amounts ranging between $1,000,000 to $2,250,000 beginning
January 1, 2000 until it terminates on November 19, 2004, and a $55 million letter of credit facility. At
September 30, 2000, $25,000,000 in loans were outstanding under the revolving line of credit facility at
an interest rate of 8.2%. The letter of credit facility is utilized primarily by NCUL and Millennium to
participate in Lloyd's syndicate 1221 managed by MTC. At September 30, 2000, letters of credit with an
aggregate face amount of $45,965,000 were issued under the letter of credit facility.
As of September 30, 2000, the Company's consolidated stockholders' equity was $137,555,000 compared
to $130,365,000 at December 31, 1999. The increase was primarily due to the net income for the nine
months ended September 30, 2000 and, to a lesser extent, decreases in the unrealized losses in the
investment portfolio.
Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the information concerning market risk as stated in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
Stock Repurchase Program
On January 6, 1999, the Company announced a stock repurchase program for up to $3,000,000 of its
common stock. At June 30, 2000 and 1999, the Company had repurchased 48,700 shares of stock at a cost of
$700,000. During the first quarter of 2000, the Company issued 7,386 of those repurchased shares to the
non-employee Directors as part of the Directors' annual compensation amounting in the aggregate to
$72,000.
Part II - Other Information
Item 1. Legal Proceedings:
The Company is not a party to or the subject of any material pending legal proceedings
which depart from the ordinary routine litigation incident to the kinds of business
conducted by the Company, except for an assessment on Navigators Insurance by the
Institute of London Underwriters ("ILU"). In late 1998, the ILU advised its forty-one
members, including Navigators Insurance, that they were each being assessed
approximately(pound)900,000 to pay for anticipated operating deficits arising from the
ILU's long term lease of the building occupied by the ILU in London. This matter is
currently not in litigation and Navigators Insurance continues to oppose the assessment as
inequitable and inappropriate. Discussions with the ILU are ongoing and the Company's
ultimate liability, if any, is not possible to forecast at the present time.
Item 2. Changes in Securities:
None.
Item 3. Defaults Upon Senior Securities:
None.
Item 4. Submissions of Matters to a Vote of Securities Holders:
None.
16
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit No. Description of Exhibit
10.16 Amendment No. 1 dated March 28, 2000 to the Amended and Restated Credit
Agreement dated December 21, 1998, among The Navigators Group, Inc. and the
Lenders
10.17 Amendment No. 2 dated September 20, 2000 to the Amended and Restated Credit
Agreement dated December 21, 1998, among The Navigators Group, Inc. and the
Lenders
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the nine months ended September 30, 2000.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
The Navigators Group, Inc.
(Registrant)
Dated: November 13, 2000 /s / Bradley D. Wiley
Bradley D. Wiley
Senior Vice President, Chief Financial
Officer and Secretary
18
INDEX OF EXHIBITS
Exhibit No. Description of Exhibit
10.16 Amendment No. 1 dated March 28, 2000 to the Amended and Restated Credit Agreement
dated December 21, 1998, among The Navigators Group, Inc. and the Lenders
10.17 Amendment No. 2 dated September 20, 2000 to the Amended and Restated Credit Agreement
dated December 21, 1998, among The Navigators Group, Inc. and the Lenders
27.1 Financial Data Schedule
19
Exhibit 10.16
AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT
This Amendment and Waiver (this "Amendment") is entered into as of March 28, 2000, by and among The Navigators Group, Inc.,
a Delaware corporation (the "Borrower"), Bank One, NA (formerly known as The First National Bank of Chicago), individually and as
agent ("Agent"), and the other financial institutions signatory hereto.
RECITALS
A. The Borrower, the Agent and the Lenders are party to that certain Amended and Restated Credit agreement dated as of
December 21, 1998 (as previously amended, the "Credit Agreement"). Unless otherwise specified herein, capitalized terms used in this
Amendment shall have the meanings ascribed to them by the Credit Agreement.
B. The Borrower, the Agent and the undersigned Lenders wish to amend the Credit Agreement and waive certain provisions
thereof on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual execution hereof and other good and valuable consideration, the parties
hereto agree as follows:
1. Amendment to Credit Agreement. Upon the "Effective Date" (as defined below), Section 7.24.2 of the Credit Agreement shall
be amended in its entirety to read as follows:
7.24.2 Minimum Statutory Surplus. The Borrower will cause the Significant Insurance Subsidiaries to
maintain an aggregate Statutory Surplus of not less than (i) $110,272,875 in the Fiscal Quarters ending on March 31,
2000, June 30, 2000, September 30, 2000 and December 31, 2000, and (ii) at all times thereafter, the sum of
(a) $106,883,000, plus (b) 50% of the positive aggregate Statutory Net Income, if any, earned by the Significant
Insurance Subsidiaries in each Fiscal Quarter beginning with the Fiscal Quarter ended September 30, 1998, plus
(c) 75% of the Net Available Proceeds of any equity issuance (including any capital contribution to surplus of any
Significant Insurance Subsidiary in respect of which no additional shares are issued) by any Significant Insurance
Subsidiary after the Closing Date.
2. Consent and Waiver. The Lenders hereby waive any breach of Section 8.3 of the Credit Agreement arising solely out of the
failure of the Borrower to comply with Section 7.24.2 of the Credit Agreement during the Fiscal Quarter ended December 31, 1999.
3. Representations and Warranties of the Borrower. The Borrower represents and warrants that:
(a) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary
corporate action and that this Amendment is a legal, valid and binding obligation of the Borrower enforceable against the
Borrower in accordance with its terms, except as the enforcement thereof may be subject to the effect of any applicable
bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors' rights generally;
1
(b) Each of the representations and warranties contained in the Credit Agreement is true and correct in all material respects on
and as of the date hereof as if made on the date hereof, except to the extent any such representation or warranty is stated
to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct on and
as of such earlier date;
(c) After giving effect to this Amendment, no Default or Unmatured Default has occurred and is continuing.
4. Effective Date. Sections 1 and 2 of this Amendment shall become effective upon (a) the execution and delivery hereof by the
Borrower, the Agent and all the Lenders and (b) the receipt by the Agent of the fees set forth in that certain Fee Letter dated
March, 2000 (the "Fee Letter"), among the Arranger, the Agent and the Borrower. The date upon which such event has occurred is the
"Effective Date". In the event the Effective Date has not occurred on or before April 1, 2000, Sections 1 and 2 hereof shall not
become operative and shall be of no force or effect.
5. Reference to and Effect Upon the Credit Agreement.
(a) Except as specifically amended above, the Credit Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
(b) The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of
the Agent or any Lender under the Credit Agreement or any Loan Document, nor constitute a waiver of any provision of the
Credit Agreement or any Loan Document, except as specifically set forth herein. Upon the effectiveness of this Amendment,
each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of similar import shall
mean and be a reference to the Credit Agreement as amended hereby.
6. Costs and Expenses.
(a) The Borrower hereby affirms its obligation under Section 10.7 of the Credit Agreement to reimburse the Agent for all
reasonable costs, internal charges and out-of-pocket expenses paid or incurred by the Agent in connection with the
preparation, negotiation, execution and delivery of this Amendment, including but not limited to the attorneys' fees and
time charges of attorneys for the Agent with respect thereto.
(b) The Borrower hereby agrees that on the Effective Date, the Borrower shall pay the Arranger, the Agent and the Lenders the
amendment fees set forth in the Fee Letter, which fees shall be deemed fully earned and non-refundable on the date hereof.
7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO
CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF ILLINOIS BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
2
8. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute
a part of this Amendment for any other purposes.
9. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed
an original but all such counterparts shall constitute one and the same instrument.
3
Exhibit 10.17
AMENDMENT NO. 2 TO AMENDED AND RESTATED CREDIT AGREEMENT
This Amendment (this "Amendment") is entered into as of September 20, 2000, by and among The Navigators
Group, Inc., a Delaware corporation (the "Borrower"), Bank One, NA (formerly known as The First National Bank of
Chicago), individually and as agent ("Agent"), and the other financial institutions signatory hereto.
RECITALS
A. The Borrower, the Agent and the Lenders are party to that certain Amended and Restated Credit
Agreement dated as of December 21, 1998, as amended by Amendment No. 1 to Amended and Restated Credit Agreement
dated as of March 28, 2000 (as so amended, the "Credit Agreement"). Unless otherwise specified herein,
capitalized terms used in this Amendment shall have the meanings ascribed to them by the Credit Agreement.
B. The Borrower, the Agent and the undersigned Lenders wish to amend the Credit Agreement on the
terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual execution hereof and other good and valuable
consideration, the parties hereto agree as follows:
1. Amendments to Credit Agreement. Upon the "Effective Date" (as defined below), the Credit Agreement
shall be amended as follows:
(a) The definition of "Letter of Credit Termination Date" in Article I of the Credit Agreement shall be
amended to read as follows:
"Letter of Credit Termination Date" means November 19, 2002 or any later date as may
be specified as the Letter of Credit Termination Date in accordance with Section 3.10 or any
earlier date on which the Letter of Credit Commitment is reduced to zero or otherwise
terminated pursuant to the terms hereof.
(b) The definition of "Revolving Credit Termination Date" in Article I of the Credit Agreement shall be
amended to read as follows:
"Revolving Credit Termination Date" means November 19, 2004 or any earlier date on
which the Aggregate Revolving Credit Commitment is reduced to zero or otherwise terminated
pursuant to the terms hereof.
(c) Section 2.7(a) of the Credit Agreement shall be amended and restated in its entirety to read as follows:
1
(a) The Aggregate Revolving Credit Commitment shall be automatically and
permanently reduced by the following amounts on the following dates (such reductions to take
place regardless of any prior reductions of the Aggregate Revolving Credit Commitment pursuant
to Section 2.7(b) but to be reduced in order of maturity by the amount of any prior reductions
of the Aggregate Revolving Credit Commitment pursuant to Section 2.4(b)):
Date Reduction Amount
July 1, 2000 $1,000,000
October 1, 2000 $1,000,000
January 1, 2001 $1,000,000
April 1, 2001 $1,000,000
July 1, 2001 $1,000,000
October 1, 2001 $1,000,000
January 1, 2002 $1,500,000
April 1, 2002 $1,500,000
July 1, 2002 $1,500,000
October 1, 2002 $1,500,000
January 1, 2003 $2,250,000
April 1, 2003 $2,250,000
July 1, 2003 $2,250,000
October 1, 2003 $2,250,000
January 1, 2004 $1,750,000
April 1, 2004 $1,750,000
July 1, 2004 $1,750,000
Revolving Credit Termination Date $1,750,000
(d) Section 7.1(c) of the Credit Agreement shall be amended in its entirety to read as follows:
(c) As soon as available and in any event (i) within seventy (70) days after the
close of each Fiscal Year of each Insurance Subsidiary, the Annual Statement of such Insurance
Subsidiary for such Fiscal Year as filed with the insurance commissioner (or similar authority)
in such Insurance Subsidiary's state of domicile, together with (ii) within seventy (70) days
after the close of each Fiscal Year of each Insurance Subsidiary, the opinion thereof of the
chief financial officer of the Borrower stating that such Annual Statement presents the
financial condition and results of operations of such Insurance Subsidiary in accordance with
SAP, (iii) on or prior to each June 1 after the close of each Fiscal Year of each Insurance
Subsidiary, the opinion of a firm of certified public accountants reasonably satisfactory to
the Required Lenders, who shall have examined such Annual Statement and whose opinion shall not
be qualified as to the scope of audit or as to the status of such Insurance Subsidiary as a
going concern, and (iv) within one hundred twenty (120) days after the close of each Fiscal
Year of each Insurance Subsidiary, a written review of and favorable opinion of KPMG Peat
Marwick or another firm of certified public accountants reasonably satisfactory to the Required
Lenders on the methodology and assumptions used to calculate the Loss Reserves of such
Insurance Subsidiary at the end of such Fiscal Year (as shown on the Annual Statement of such
Insurance Subsidiary prepared in accordance with SAP).
2
(e) Section 7.10 of the Credit Agreement shall be amended in its entirety to read as follows:
7.10 Dividends and Stock Repurchases. The Borrower will not, nor will it permit
any Subsidiary to, declare or pay any dividends or make any distributions on its capital stock
(other than dividends payable in its own capital stock) or redeem, repurchase or otherwise
acquire or retire any of its capital stock or any options or other rights in respect thereof at
any time outstanding, except that (a) any Subsidiary may declare and pay dividends or make
distributions to the Borrower or to a Wholly-Owned Subsidiary of the Borrower and (b) the
Borrower may repurchase capital stock in an aggregate amount not to exceed $3,000,000 in any
Fiscal Year; provided, however, that the Borrower may not repurchase any capital stock unless
(i) the aggregate Statutory Surplus of all Significant Insurance Subsidiaries, as reflected in
the most recent annual or quarterly financial statements of the Borrower delivered pursuant to
Section 7.1(a) or (b), is equal to or greater than $120,000,000 and (ii) the Aggregate
Revolving Credit Commitment is equal to or less than $23,000,000.
(f) Section 7.24.1 of the Credit Agreement shall be amended in its entirety to read as follows:
7.24.1. Minimum Consolidated Tangible Net Worth. The Borrower will at all times
maintain Consolidated Tangible Net Worth of not less than the sum of (a) $110,729,000, plus
(b) 75% of the cumulative positive Consolidated Net Income, if any, earned from July 1, 1998 to
the date of calculation, plus (c) 75% of the Net Available Proceeds of any equity issuance
(including any capital contribution to surplus of the Borrower in respect of which no
additional shares are issued) by the Borrower after the Closing Date.
3
(g) Section 7.24.2 of the Credit Agreement shall be amended in its entirety to read as follows:
7.24.2 Minimum Statutory Surplus. The Borrower will cause the Significant Insurance
Subsidiaries to maintain an aggregate Statutory Surplus of not less than (i) $110,272,875 in
each Fiscal Quarter ending on or before December 31, 2001, and (ii) at all times thereafter,
the sum of (a) $110,272,875, plus (b) 50% of the cumulative positive aggregate Statutory Net
Income, if any, earned by the Significant Insurance Subsidiaries from January 1, 2002 to the
date of calculation, plus (c) 75% of the Net Available Proceeds of any equity issuance
(including any capital contribution to surplus of any Significant Insurance Subsidiary in
respect of which no additional shares are issued) by any Significant Insurance Subsidiary after
the Closing Date.
(h) Section 9.2 of the Credit Agreement shall be amended in its entirety to read as follows:
9.2. Amendments. Subject to the provisions of this Article IX, the Required
Lenders (or the Agent with the consent of the Required Lenders) and the Borrower may enter into
agreements supplemental hereto for the purpose of adding or modifying any provisions to the
Facility Documents or changing in any manner the rights of the Lenders or the Borrower
hereunder or waiving any Default hereunder; provided, however, that no such supplemental
agreement shall, without the consent of each Lender:
(a) Extend the final maturity of any Revolving Credit Loan or forgive all
or any portion of the principal amount thereof, or reduce the rate or extend the time of
payment of interest or fees hereunder;
(b) Reduce the percentage specified in the definition of Required Lenders;
(c) Reduce the amount of or extend the date for the mandatory payments
and commitment and facility reductions required under Section 2.1(b) or 2.7, or increase the
amount of the Revolving Credit Commitment or Letter of Credit Participation Amount of any
Lender hereunder;
(d) Extend the Revolving Credit Termination Date or the Letter of Credit
Termination Date, permit any Letter of Credit to have an expiry date beyond the fifth
anniversary of its effective date, permit the amendment or extension of any Letter of Credit
or, except as otherwise set forth in Section 3.1(b), permit the renewal of any Letter of Credit;
(e) Release any guarantor of any Obligations or, except as provided in
the Pledge Agreement, release all or substantially all of the collateral for the Obligations;
(f) Permit any assignment by the Borrower of its Obligations or its
rights hereunder; or
(g) Permit any amendment of the Reinsurance Guidelines;
provided, further, that no such supplemental agreement shall, without the consent of the
Required Lenders (which shall, in any event, include Brown Brothers), amend Section 7.11, 7.12,
or 7.24, clauses (a) through (f) of Section 7.14 or this Section 9.2. No amendment of any
provision of this Agreement relating to the Agent shall be effective without the written
consent of the Agent. The Agent may waive payment of the fee required under Section 13.3.2
without obtaining the consent of any other party to this Agreement.
(i) The Pricing Schedule to the Credit Agreement is hereby amended by adding the following new paragraph at
the end thereof:
4
Notwithstanding anything to the contrary contained in this Pricing Schedule, unless
(a) the aggregate Statutory Surplus of all Significant Insurance Subsidiaries, as reflected in
the most recent annual or quarterly financial statements of the Borrower delivered pursuant to
Section 7.1(a) or (b), is equal to or greater than $120,000,000 and (b) the Aggregate Revolving
Credit Commitment is equal to or less than $23,000,000, Level IV Status shall exist.
(j) Schedule 1 of the Credit Agreement is hereby deleted in its entirety and replaced with Schedule 1
attached hereto and made a part hereof.
2. Representations and Warranties of the Borrower. The Borrower represents and warrants that:
(a) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by
all necessary corporate action and that this Amendment is a legal, valid and binding obligation of the Borrower
enforceable against the Borrower in accordance with its terms, except as the enforcement thereof may be subject
to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting
creditors' rights generally;
(b) Each of the representations and warranties contained in the Credit Agreement is true and correct in all
material respects on and as of the date hereof as if made on the date hereof, except to the extent any such
representation or warranty is stated to relate solely to an earlier date, in which case such representation or
warranty shall have been true and correct on and as of such earlier date;
(c) After giving effect to this Amendment, no Default or Unmatured Default has occurred and is continuing.
3. Effective Date. Section 1 of this Amendment shall become effective upon (a) the execution and delivery
hereof by the Borrower, the Agent and all the Lenders, and (b) receipt by the Agent for the benefit of the
Lenders of an amendment fee in the amount of $124,500 (the "Amendment Fee").
4. Reduction of Letter of Credit Commitment. If, on the Effective Date, the aggregate amount of the Letter
of Credit Obligations exceed the Letter of Credit Commitment, as amended hereby, then on the Effective Date the
Borrower shall deposit cash or Cash Collateral Investments in the amount of such excess into the Letter of Credit
Cash Collateral Account.
5. Reference to and Effect Upon the Credit Agreement.
(a) Except as specifically amended above, the Credit Agreement and the other Loan Documents shall remain in
full force and effect and are hereby ratified and confirmed.
(b) The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right,
power or remedy of the Agent or any Lender under the Credit Agreement or any Loan Document, nor constitute a
waiver of any provision of the Credit Agreement or any Loan Document, except as specifically set forth herein.
Upon the effectiveness of this Amendment, each reference in the Credit Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of similar import shall mean and be a reference to the Credit Agreement
as amended hereby.
5
6. Costs and Expenses.
(a) The Borrower hereby affirms its obligation under Section 10.7 of the Credit Agreement to reimburse the
Agent for all reasonable costs, internal charges and out-of-pocket expenses paid or incurred by the Agent in
connection with the preparation, negotiation, execution and delivery of this Amendment, including but not limited
to the attorneys' fees and time charges of attorneys for the Agent with respect thereto.
(b) The Borrower hereby agrees that on the Effective Date, the Borrower shall pay the Arranger, the Agent
and the Lenders the Amendment Fee, which Amendment fee shall be deemed fully earned and non-refundable on the
date hereof.
7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS
(AS OPPOSED TO CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF ILLINOIS BUT GIVING EFFECT TO FEDERAL LAWS
APPLICABLE TO NATIONAL BANKS.
8. Headings. Section headings in this Amendment are included herein for convenience of reference only and
shall not constitute a part of this Amendment for any other purposes.
9. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so
executed shall be deemed an original but all such counterparts shall constitute one and the same instrument.
6
