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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 Quarter Ended June 30, 1995
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Commission file number 0-15886
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The Navigators Group, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3138397
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
123 William Street, New York, New York 10038
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(Address of principal executive offices) (Zip Code)
(212) 406-2900
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(Registrant's telephone number, including area code)
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
On August 11, 1995 there were 8,151,401 shares of common stock, $0.10 par value
issued and outstanding.
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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES INDEX
Page No.
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Part I. FINANCIAL INFORMATION:
Balance Sheets
June 30, 1995 and December 31, 1994 . . . . . . . . . . . . . . 1
Statements of Income
Three Months Ended June 30, 1995 and
Three Months Ended June 30, 1994 . . . . . . . . . . . . . . . . 2
Six Months Ended June 30, 1995 and
Six Months Ended June 30, 1994 . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows
Six Months Ended June 30, 1995 and
Six Months Ended June 30, 1994 . . . . . . . . . . . . . . . . . 4
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 7
Part II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1995 Dec. 31, 1994
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(Unaudited)
ASSETS
Investments:
Fixed maturities, available for sale, at fair value (amortized cost: 1995,
$191,317,753; 1994, $179,313,149) $193,991,867 $174,579,590
Equity securities, available for sale, at fair value (cost: 1995,
$5,200,227; 1994, $4,595,463) 6,664,400 5,763,444
Short-term investments, at cost which approximates market 11,161,116 19,643,813
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Sub-total investments 211,817,383 199,986,847
Investment in affiliated company 2,399,815 2,386,258
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Total investments 214,217,198 202,373,105
Cash 1,478,357 730,047
Premiums in course of collection 16,787,740 24,608,943
Commissions receivable 5,800,368 5,126,953
Accrued investment income 3,082,305 2,949,340
Prepaid reinsurance premiums 5,632,667 12,224,772
Reinsurance receivable on paid and unpaid losses
and loss adjustment expenses 178,370,467 199,888,216
Federal income tax recoverable 5,824,949 6,406,340
Deferred federal income tax benefit 10,755,640 13,413,513
Deferred policy acquisition costs 2,746,899 2,910,422
Other assets 3,611,595 3,399,430
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Total assets $448,308,185 $474,031,081
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for loss and loss adjustment expenses $301,058,329 $314,898,083
Unearned premiums 26,437,164 35,721,013
Reinsurance balances payable 6,061,446 11,002,226
Loans payable to banks 21,000,000 25,500,000
Deferred state & local income taxes 1,074,050 1,221,459
Notes payable to shareholders 942,034 2,608,072
Accounts payable and other liabilities 4,029,354 5,556,994
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Total liabilities 360,602,377 396,507,847
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Commitments and contingencies -- --
Stockholders' equity:
Preferred Stock, $.10 par value, authorized
1,000,000 shares, no shares issued -- --
Common Stock, $.10 par value
Authorized 10,000,000 shares
Issued and outstanding 8,151,401 in 1995 and 8,151,401 in 1994 815,140 815,140
Additional paid-in capital 34,983,877 34,983,877
Net unrealized gains (losses) on securities available for sale (net of
income taxes (benefits) of $1,407,017 in 1995 and $(1,212,296) in 1994) 2,731,270 (2,353,281)
Foreign currency translation adjustment 171,702 105,033
Retained earnings 49,003,819 43,972,465
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Total stockholders' equity 87,705,808 77,523,234
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Total liabilities and stockholders' equity $448,308,185 $474,031,081
=========== ===========
See accompanying notes to interim consolidated financial statements.
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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
June 30
1995 1994
(Unaudited)
Revenues:
Net premiums earned $20,933,858 $22,440,458
Commission income 2,879,776 2,861,573
Net investment income 3,441,732 3,327,237
Net realized capital gains 376,517 14,427
Other income 272,641 18,973
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Total revenues 27,904,524 28,662,668
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Operating expenses:
Losses and loss adjustment
expenses incurred 14,484,860 15,492,840
Commissions 3,405,961 4,485,863
Other operating expenses 5,618,018 5,957,057
Interest expense 533,662 516,162
Merger expenses -- 5,679,697
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Total operating expenses 24,042,501 32,131,619
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Operating income (loss) before income taxes 3,862,023 (3,468,951)
Income tax expense:
Current 895,746 1,226,462
Deferred (39,347) 16,499
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Total income tax expense 856,399 1,242,961
Net income (loss) $ 3,005,624 $(4,711,912)
========== ==========
Per share data:
Average common and common equivalent
shares outstanding 8,176,309 8,208,929
Net income (loss) $ 0.37 $ (0.57)
========== ==========
See accompanying notes to interim consolidated financial statements.
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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended
June 30
1995 1994
(Unaudited)
Revenues:
Net premiums earned $38,651,948 $46,464,942
Commission income 5,473,946 5,502,290
Net investment income 6,854,102 6,372,662
Net realized capital gains 314,370 256,256
Other income 489,764 51,948
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Total revenues 51,784,130 58,648,098
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Operating expenses:
Losses and loss adjustment
expenses incurred 27,597,166 62,096,112
Commissions 5,866,116 8,327,892
Other operating expenses 11,132,653 11,024,516
Interest expense 1,073,585 602,060
Merger Expenses -- 5,679,697
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Total operating expenses 45,669,520 87,730,277
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Operating income (loss) before income taxes 6,114,610 (29,082,179)
Income tax expense:
Current 1,204,075 (4,818,740)
Deferred (120,817) (7,615,475)
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Total income tax expense 1,083,258 (12,434,215)
Net income (loss) $ 5,031,352 $(16,647,964)
========== ===========
Per share data:
Average common and common equivalent
shares outstanding 8,191,127 8,221,034
Net income (loss) $ 0.61 $ (2.03)
========== ===========
See accompanying notes to interim consolidated financial statements.
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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30
1995 1994
(Unaudited)
Operating activities:
Net income $ 5,031,352 $(16,647,964)
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation & amortization 345,763 247,171
Reinsurance receivable on paid
and unpaid losses and loss
adjustment expenses 21,517,749 (63,876,499)
Reserve for losses and loss
adjustment expenses (13,839,754) 85,591,226
Prepaid reinsurance premiums 6,592,105 5,645,807
Unearned premiums (9,283,849) (6,375,953)
Premiums in course of collection 7,821,203 6,437,122
Commissions receivable (673,415) 655,719
Advance to insurance companies -- (2,216,675)
Deferred policy acquisition costs 163,523 (100,116)
Accrued investment income (132,965) 5,085
Reinsurance balances payable (4,940,780) (1,089,990)
Deposits with reinsurers -- 907,500
Funds due reinsurers -- 152,761
Federal income taxes recoverable 581,391 (5,694,428)
Deferred federal income taxes 38,560 (7,587,789)
Net realized losses (gains) on investments (314,370) (256,256)
Other (1,837,061) 3,987,820
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Net cash provided by operating activities $ 11,069,452 $ (215,459)
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Investing activities:
Fixed maturities available for sale at fair value:
Redemptions and maturities $ 4,653,409 $ 8,082,307
Sales 40,416,123 9,550,346
Purchases (57,195,991) (25,025,018)
Equity securities:
Sales 978,664 3,025,869
Purchases (1,415,835) (661,726)
Payable for securities purchased 52,526 90,592
Net sale (purchases) of short-term investments 8,482,697 (10,441,811)
Purchase of property and equipment (126,697) (415,029)
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Net cash used in investing activities $ (4,155,104) $(15,794,470)
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Financing activities:
Proceeds from bank loans $ 1,000,000 $ 23,000,000
Repayment of bank loans (5,500,000) (4,270,000)
Notes payable to shareholders (1,666,038) 5,280,263
Distribution to shareholders -- (16,323,003)
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Net cash provided by financing activities (6,166,038) 7,687,260
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Increase (decrease) in cash 748,310 (8,322,669)
Cash at beginning of period 730,047 13,371,089
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Cash at end of period $ 1,478,357 $ 5,048,420
=========== ===========
See accompanying notes to interim consolidated financial statements.
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THE NAVIGATORS GROUP, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(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
thereto contained in the Company's Form 10-K for the year ended
December 31, 1994.
(2) Acquisition of the Somerset Companies
On June 30, 1994, the stockholders of the Company approved eight
substantially identical agreements of merger providing for the
acquisition by the Company of eight affiliated underwriting agencies,
Somerset Marine, Inc., Somerset of Georgia, Inc., Somerset Insurance
Services of Texas, Inc., Somerset Insurance Services of California,
Inc., Somerset Insurance Services of Washington, Inc., Somerset
Property, Inc., Somerset Re Management, Inc. and Navigators Management
Corporation, collectively known as the Somerset Companies.
The Company issued 2,875,000 shares of its common stock for all the
outstanding common stock of the Somerset Companies. The mergers were
accounted for under a method of accounting similar to "pooling of
interests."
(3) Reinsurance Ceded
The Company's ceded earned premiums were $18,803,311 and $29,705,134
for the three months ended June 30, 1995 and 1994, respectively, and
were $39,843,239 and $58,733,344 for the six months ended June 30,
1995 and 1994, respectively. The Company's ceded losses were
$17,350,103 and $26,699,643 for the three months ended June 30, 1995
and 1994, respectively, and were $36,704,896 and $117,861,553 for the
six months ended June 30, 1995 and 1994, respectively.
(4) Commitments and Contingencies
In February 1995, the Insurance Commissioner of the State of
California, in accordance with voter referendum "Proposition 103,"
provided the Company with an initial notification of a rollback of
premium rates. In addition, the Company is a defendant in various
legal actions arising from the normal
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course of its business. Management does not believe that the outcome
of these actions will result in a material adverse effect to the
Company.
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THE NAVIGATORS GROUP, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL
The Company is a holding company with 12 wholly owned
subsidiaries.
Two of the Company's subsidiaries, Navigators Insurance
Company and NIC Insurance Company ("NIC"), specialize principally in
underwriting marine, aviation and property (including inland marine) insurance
and certain lines of specialty reinsurance and non-marine insurance.
Navigators Insurance Company has been active since 1983. NIC is a wholly owned
subsidiary of Navigators, was licensed in 1989 and began operations during
1990. Navigators Insurance Company and NIC are collectively referred to herein
as "Navigators."
Eight of the Company's subsidiaries, Somerset Marine, Inc.,
Somerset of Georgia, Inc., Somerset Insurance Services of Texas, Inc., Somerset
Insurance Services of California, Inc., Somerset Insurance Services of
Washington, Inc., Somerset Property, Inc., Somerset Re Management, Inc. and
Navigators Management Corporation (collectively, the "Somerset Companies"), are
a group of underwriting management companies which produce, manage and
underwrite insurance and reinsurance for Navigators and nine other unrelated
insurance companies. The other subsidiaries of the Company are Somerset
Casualty Agency, Inc. and Somerset Marine Aviation Property Managers Inc.,
which are both inactive.
The Somerset Companies were acquired by the Company pursuant
to mergers that were approved by the stockholders of the Company at a special
meeting held June 30, 1994. The Company accounted for the transfer of the
Somerset Companies' assets and liabilities at historical cost under a method of
accounting similar to "pooling of interests" and, accordingly, has reported
results of operations as if the Company and the Somerset Companies had been
combined as of January 1, 1994.
The Company's revenue is primarily comprised of premiums,
commissions and investment income. Navigators derives substantially all of its
business from direct participation in, or by reinsuring certain members of,
insurance pools managed by the Somerset Companies. The insurance business and
operations of Navigators are managed by one of the Somerset Companies,
Navigators Management Corporation.
The Somerset Companies specialize principally in four lines of
business: marine, aviation and property (including inland marine) insurance and
certain lines of specialty reinsurance and non-marine insurance. They
underwrite this business through four syndicates of insurance companies,
Navigators having the largest participation in each of the four syndicates.
The Somerset
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Companies derive their revenue from commissions, investment income and service
fees from Navigators and other insurers. Commissions are earned both on a
fixed percentage of premiums and on underwriting profits on business placed
with the participating insurance companies within the four syndicates.
Property and casualty insurance premiums are 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
increase. On the downturn of the property and casualty cycle, supply exceeds
demand, and as a result, premiums and commissions decrease.
Navigators and the Somerset Companies earn investment income
on cash balances and invested assets. The Somerset Companies also earn
investment income on fiduciary funds. Such fiduciary funds are invested,
subject to applicable insurance regulations, primarily in short-term
instruments.
RESULTS OF OPERATIONS
General. The 1994 results of operations of the Company were
dominated by the Northridge, California earthquake, which occurred on January
17, 1994. The Company's pre-tax loss in 1994 from the Northridge Earthquake
totalled $39,265,000.
As a result of this loss, management has restructured the
Company by withdrawing from the large commercial and industrial property
business which produced most of the earthquake loss, emphasizing its core ocean
marine business, and developing its inland marine business as well as a new
non-marine program book of business.
The results of the second quarter of 1995 reflect this
restructuring in that premiums have been reduced while the continuing book of
business has produced profits.
However, the results also reflect the continued deterioration
of losses from the Northridge Earthquake. During the six months ended June 30,
1995, the total gross losses on direct property claims arising from the
Northridge Earthquake increased $16,738,000 from $125,361,000 to $142,099,000.
During the three months ended June 30, 1995, the total gross losses on direct
property claims arising from the Northridge Earthquake increased $10,668,000
from $131,431,000 to $142,099,000. The net loss to the Company from this
increase was $6,221,000 in the six months ended June 30, 1995 and $3,641,000 in
the three months ended June 30, 1995, which includes $912,000 of additional
recoveries on losses reported in prior periods. There can be no assurance
given that additional losses will not be reported or adjustments made to
existing reserves.
Revenues. Gross written premium for the first six months of
1995 decreased by 30% to $69,212,000 from $98,822,000 for the first six months
of 1994.
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The following table sets forth Navigators' gross written
premium by line of business and net written premium in the aggregate:
Six Months Ended June 30,
-------------------------
1995 1994
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(Dollars in thousands)
--------------------
Marine $28,568 41% $33,464 34%
Aviation 24,227 35% 25,925 26%
Property and Inland
Marine 5,566 8% 26,599 27%
Specialty Reinsurance
and Non-Marine
Insurance 10,851 16% 12,834 13%
------- -- ------ --
Total Gross Premium Written $69,212 100% $98,822 100%
====== ==== ====== ====
Ceded Premium Written (33,336) (52,837)
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Total Net Premium Written 35,876 45,985
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Marine Premium. Gross marine premium written decreased 15%
when comparing the first six months of 1995 to the first six months of 1994.
Management believes this decrease is due to the timing of certain policies and
does not reflect the actual condition of its marine business. It anticipates
that the total amount of marine business written in 1995 will be similar to the
amount written in 1994.
Aviation Premium. Gross aviation premium written decreased 7%
from the first six months of 1994 to the first six months of 1995. Following
an evaluation of its aviation business, management has decided to reduce its
participation in airline and aircraft product business, two segments of its
aviation business. The Company expects aviation premium to be substantially
less for the 1995 year than it was in 1994.
Property Premium. Gross property and inland marine premium
written decreased 79% from the first six months of 1994 to the first six months
of 1995. In 1994, this business consisted primarily of large commercial and
industrial risks with a relatively small amount of inland marine risks. In
late 1994, Navigators decided to cease writing large commercial and industrial
property risks, which is essentially a property catastrophe book of business,
and to concentrate on the inland marine risks and, therefore, 1995 gross
written premium is primarily inland marine.
Specialty Reinsurance and Non-Marine Insurance Premium. Gross
specialty reinsurance and non-marine insurance premium
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written decreased 15% from the first six months of 1994 to the first six months
of 1995. The decrease was due primarily to management's decision to cease
writing proportional reinsurance. Management is now developing non-marine
program business to augment its reinsurance book.
Ceded Premium. The decrease in ceded premium corresponds with
the decrease in gross writings along with reinstatement premiums incurred
during the first six months of 1994 due primarily to the Northridge Earthquake.
Total Premium. Net earned premium for the first six months of
1995 was $38,652,000 as compared to $46,465,000 for the first six months of
1994. Net earned premium generally follows the pattern of written premium.
Commission income, based on gross premiums earned and net
underwriting profits, remained substantially level during the first six months
of 1995 at approximately $5,474,000 compared to approximately $5,502,000 during
the corresponding period in 1994.
Investment income increased 8% to approximately $6,854,000
during the first six months of 1995 from approximately $6,373,000 during the
corresponding period in 1994. This increase is due primarily to the increased
amount of invested assets.
Included in pre-tax net income were $314,000 in realized
capital gains for the first six months of 1995 and $256,000 in realized capital
gains for the same period last year. On an after tax basis these represent
realized gains of $0.03 and $0.02 per share for the respective periods.
Expenses. The ratio of loss and loss adjustment expenses
incurred to net premiums earned was 71.4% and 133.6% during the first six
months of 1995 and 1994, respectively. The 1994 loss ratio includes losses
from the Northridge Earthquake which at that time totalled $29,448,000. The
decrease is due primarily to a return to more normal experience in comparison
to the losses from the Northridge Earthquake, various airline losses and
reinsurance costs in 1994.
Commission expense as a percentage of net premiums earned were
15.2% and 17.9% during the first six months of 1995 and 1994, respectively.
This decrease is reflective of increased reinstatement premium payments to
reinsurers in 1994 as a result of the Northridge Earthquake.
Other operating expenses increased 1% to approximately
$11,133,000 during the first six months of 1995 from approximately $11,025,000
during the corresponding period in 1994. Severance charges as a result of a
reduction in staff accounted for $820,000 of the operating expenses for the
first six months of 1995. These severance charges were offset by a
commensurate decrease in salary expenses and a decrease in guaranty fund
assessments.
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Interest expense reflected during the first six months of 1995
is attributable to revolving credit loans and a term loan provided for by a
credit agreement entered into on August 5, 1994. The term loan's principal was
reduced from $22,500,000 at December 31, 1994 to $20,000,000 at June 30, 1995.
The revolving credit loans were reduced by $2,000,000 from $3,000,000 at
December 31, 1994 to $1,000,000 at June 30, 1995.
The effective tax rate was a 17.7% expense and a 42.8% benefit
for the six months ended June 30, 1995 and 1994, respectively. For 1995, the
effective rate is less than the statutory federal, state and local rates due
primarily to tax-free investment income earned.
For the first six months of 1995, the Company had after tax
income of $5,031,000 compared to an after tax loss of $16,648,000 for the same
period last year, primarily due to a return to normal experience in comparison
to the losses from the Northridge Earthquake. On a per share basis, this
represents net income of $0.61 and a net loss of $2.03 for the first six
months of 1995 and 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations was $11,069,000 and
$(215,000) for the first six months of 1995 and 1994, respectively.
Investment assets grew at the rate of 6% during the first six
months of 1995 to $214,217,000 at June 30, 1995. Investment income during the
six months was $6,854,000, an increase of 8%, reflecting increased assets.
The Company has entered into a credit agreement dated as of
August 5, 1994. Pursuant to the credit agreement, the Company may borrow,
subject to certain conditions, up to an aggregate of $5,000,000 in revolving
credit loans. As of June 30, 1995, the Company had outstanding $1,000,000 in
revolving credit loans.
As of June 30, 1995, the Company's consolidated stockholders'
equity was $87,706,000, an increase from $77,523,000 as of December 31, 1994.
As of August 4, 1995, the Company has paid approximately
$91,727,000 of claims related to the Northridge Earthquake, of which
approximately $70,412,000 is subject to indemnification by reinsurers. To date
the Company has experienced no significant difficulties collecting reinsured
losses.
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THE NAVIGATORS GROUP, INC. & SUBSIDIARIES
Part II - Other Information
Item 1. Legal Proceedings:
Neither the Company nor any of its subsidiaries is a party to, nor is
the property thereof the subject of, any pending legal proceedings
which depart from the ordinary routine litigation incident to the kinds
of business conducted by the Company and its subsidiaries or, if such
proceedings constitute other than routine litigation, in which there is
a reasonable possibility of an adverse decision which could have any
material adverse effect upon the financial condition of the Company.
In February 1995, the Insurance Commissioner of the State of
California, in accordance with voter referendum "Proposition 103,"
provided the Company with an initial notification of a rollback of
premium rates. Management does not believe that the outcome of this
action will result in a material adverse effect to the Company.
Item 2. Changes in Securities:
None.
Item 3. Defaults Upon Senior Securities:
None.
Item 4. Submissions of Matters to a Vote of Securities Holders:
On June 28, 1995, the stockholders voted for the following matters at
the annual stockholder meeting.
(a) The election of eight (8) directors to serve until the 1995
Annual Meeting of Stockholders or until their respective
successors have been duly elected and qualified. The results
of the voting were as follows (there were no broker
non-votes):
Name For Withheld
---- --- --------
Terence N. Deeks 6,269,175 23,905
Robert M. DeMichele 6,269,175 23,905
Leandro S. Galban, Jr. 6,269,175 23,905
John F. Knight 6,269,175 23,905
Robert Lepowsky 6,269,175 23,905
Marc M. Tract 6,106,875 186,205
Marion A. Woodbury 6,269,175 23,905
Robert F. Wright 6,269,175 23,905
(b) The ratification of the appointment of KPMG Peat Marwick LLP
as the independent auditors of the Company. The stockholders
cast 6,284,480 votes for
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and 350 votes against ratification. There were 8,250
abstentions and no broker non-votes.
Item 5. Other Information:
None.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit No. Description of Exhibit
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the six
months ended June 30, 1995.
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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)
August 11, 1995 /s/ W. ALLEN BARNETT
--------------- ----------------------------------
(Date) W. Allen Barnett, Senior Vice
President, Chief Financial Officer
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INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit No. Description of Exhibit Page
----------- ---------------------- ------------
27.1 Financial Data Schedule
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