NAVIGATORS INSURANCE COMPANY NAVIGATORS SPECIALTY INSURANCE COMPANY A A New York, New York A Printed September 19, 2017 www.ambest.com Page 1 of 18
. Best s Rating Report NAVIGATORS INSURANCE COMPANY New York, NY 400 Atlantic Street, 8th Floor, Stamford, CT 06901 Web: www.navg.com Tel: 203-905-6090 Fax: 203-658-1821 AMB#: 001825 NAIC#: 42307 Ultimate Parent#: 058430 FEIN#: 13-3138390 BEST S CREDIT RATING Best s Financial Strength Rating: A Outlook: Positive Best s Financial Size Category: XII RATING RATIONALE Rating nale: The ratings reflect Navigators Insurance Group s leading position as a global provider of insurance to the marine sector, the group s well-diversified book of business, its modest net windstorm exposure, management s conservative approach to risk management, underwriting and claims handling in addition to the group s solid level of capitalization and historical profitability. These positive factors are somewhat offset by the group s underwriting results in a few recent years (2011 2012) that were not in line with the group s historical profit levels, and its below average net investment yields and net investment ratio, driven by its conservative investment portfolio. The outlooks reflect A.M. Best s expectation that the group will continue to maintain its solid level of capitalization and operating performance, generating overall profitable results throughout market cycles. The positive rating factors are derived from the group s historically favorable operating performance which, together with capital-raising initiatives, has supported growth and enhanced overall capitalization. The strong operating performance, as evidenced by positive returns on both revenue and surplus, has been driven by periods of underwriting profitability and consistent investment earnings. The group remains committed to underwriting excellence in terms of risk selection, contract terms and conditions and pricing discipline. This underwriting focus has produced loss ratios that have outperformed the average posted by its industry peers. Such discipline and expertise, which have been critical to profitability in the severity-driven ocean marine, casualty and energy lines, are a reflection of the strong risk management culture that remains a part of the Navigators Insurance Group. In addition, financial flexibility is afforded through the publicly traded parent, The Navigators Group Inc. (NASDAQ: NAVG), demonstrated by a $50 million capital contribution in 2013. Despite the group s strong overall underwriting performance, underwriting results were below average in 2011 and 2012 due to a combination of large industry-wide losses, reinstatement premiums, adverse loss development on certain lines and run-off operations. Increased loss ratios among specific products have led the group to discontinue or re-underwrite certain lines. As such, the group is susceptible to execution risk as it seeks to balance its overall underwriting risk with non-marine-related products. Due to the company s more conservative investment philosophy, the lower interest rate environment has resulted in a less favorable trend in investment returns. While close to 17% of Navigators gross premium writings are in the marine sector, diversification of risk is achieved as its remaining premiums are spread across a diverse product line, including general liability coverage for small general and artisan contractors, professional liability, and specialty coverages. The group has expanded its geographic spread of risk through opening regional offices in select cities and over the last five years introduced the following new assumed reinsurance products: Accident and Health, Agriculture, Latin American Property and Surety, and Professional Liability. Positive rating action could occur if there were a sustained favorable trend in operating results relative to industry peers while maintaining strong risk-adjusted capitalization. Negative rating actions could occur if there were a sustained deterioration in underwriting and operating results over a period of several years, an occurrence of a sudden large or catastrophic loss event that materially hinders risk-adjusted capitalization or if there were any material deviation from the company s submitted financial projections. FIVE-YEAR RATING HISTORY Date Best s FSR Date Best s FSR 08/11/17 A 06/04/14 A 07/21/16 A 06/07/13 A 06/03/15 A KEY FINANCIAL INDICATORS ($000) Statutory Data Direct Premiums Written Net Premiums Written Pre-tax Operating Income Net Income Total Admitted Assets Policyholders Surplus 2012 477,241 622,956 6,174 25,230 2,102,437 682,881 2013 522,095 680,008 60,803 56,605 2,215,013 804,073 2014 512,674 752,773 88,843 72,411 2,454,030 893,946 2015 502,628 757,117 75,838 58,683 2,568,520 950,266 2016 558,520 844,987 103,631 80,698 2,808,119 1,026,819 Printed September 19, 2017 www.ambest.com Page 2 of 18
Profitability Leverage Liquidity Comb. Inv. Yield (%) Pre-tax ROR (%) NA Inv Lev NPW to PHS Net Lev. Overall Liq. (%) Oper. Cash flow (%) 2012 103.4 2.4 1.1 14.8 0.9 3.0 150.4 110.2 2013 95.4 2.4 9.5 18.0 0.8 2.6 158.6 115.3 2014 92.5 2.6 12.6 14.2 0.8 2.6 158.8 128.9 2015 95.8 2.6 10.5 13.0 0.8 2.5 159.9 127.2 2016 93.4 2.8 13.0 20.5 0.8 2.5 158.6 128.1 5-Yr 95.8 2.6 9.8 (*) Within several financial tables of this report, this company is compared against the Commercial Casualty Composite. (*) Data reflected within all tables of this report has been compiled from the company-filed statutory statement. BUSINESS PROFILE companies as opposed to Fortune 1000 companies. The group restructured its D&O program by introducing a credit scoring function into its underwriting process. Beginning in 2011, this program was quota-shared with other insuring participants. In 2010, the group began reinsuring both accident and health coverages as well as multi-peril crop insurance. Latin America property reinsurance was added in 2011, professional liability reinsurance in 2012, and an international property reinsurance treaty in 2014. In recent years, the group has also opened a number of regional offices (e.g., Pittsburgh and Philadelphia) to market its existing products. TOTAL PREMIUM COMPOSITION & GROWTH ANALYSIS Reinsurance Reinsurance DPW Prem Assumed Prem Ceded ($000) (% Chg) ($000) (% Chg) ($000) (% Chg) 2012 477,241 0.2 444,084 42.3 298,369 21.3 2013 522,095 9.4 480,180 8.1 322,267 8.0 2014 512,674-1.8 532,780 11.0 292,680-9.2 2015 502,628-2.0 531,910-0.2 277,420-5.2 2016 558,520 11.1 540,979 1.7 254,512-8.3 Navigators Insurance Group (Navigators), through its lead operating unit, Navigators Insurance Company, specializes in underwriting marine and energy, specialty lines and professional liability business. Navigators Specialty Insurance Company underwrites property/casualty business on a non-admitted basis for those types of risks requiring greater flexibility in rating or policy terms and conditions. The group s multi-channel distribution platform utilizes global, national and regional brokers as well as wholesalers. Navigators has a long-standing reputation for expertise in the marine and energy sector, which includes property and excess liability coverages for marine-related business, offshore energy risks, related transportation and cargo exposures as well as a modest amount of business written in other facets of the marine and energy field. Specialty operations have underwritten general liability coverages for small general and artisan contractors since 1995, mostly in California, and represent a post-montrose book of business with tight terms and conditions in place to limit or avoid significant construction defect claims. Coverages are generally written on a non-admitted basis and have included construction wrap-up products since 2005. Challenging economic conditions in recent years have driven a reduction in the size of this book. Excess casualty risks are diversified among a large number of industry groups. The remaining portion of the specialty gross premiums includes primary casualty and commercial middle market accounts. The group also enters specialty niche lines, which management believes can produce profitable underwriting results. The group also writes professional director and officer coverages for a variety of market niches, including lawyers, architects and a variety of public and private companies. This coverage is largely offered to small and mid-size 5-Yr CAGR 3.2 11.6 0.7 NPW NPE ($000) (% Chg) ($000) (% Chg) 2012 622,956 14.9 571,439 20.9 2013 680,008 9.2 639,338 11.9 2014 752,773 10.7 704,574 10.2 2015 757,117 0.6 722,750 2.6 2016 844,987 11.6 798,151 10.4 5-Yr CAGR 9.3 11.1 Territory: The company is licensed in the District of Columbia, Puerto Rico and all states. It also operates on a surplus lines or non-admitted basis in U.S. Virgin Islands. This company is also licensed in the United Kingdom. Printed September 19, 2017 www.ambest.com Page 3 of 18
2016 BY-LINE BUSINESS ($000) Reinsurance Reinsurance DPW Prem Assumed Prem Ceded Product Line ($000) (%) ($000) (%) ($000) (%) Oth Liab Occur 219,755 39.3 322,743 59.7 116,900 45.9 Oth Liab CM 103,651 18.6 55,033 10.2 37,507 14.7 Ocean Marine 168,082 30.1 23,735 4.4 78,851 31.0 Group A & H 53,814 9.9 Comm l Auto Liab 33,565 6.0 4,819 1.9 Surety 6,646 1.2 20,498 3.8 1,311 0.5 Inland Marine 16,170 2.9 510 0.1 7,265 2.9 All Other 10,652 1.9 64,645 11.9 7,858 3.1 Total 558,520 100.0 540,979 100.0 254,512 100.0 Business NPW Retention Product Line ($000) (%) (%) Oth Liab Occur 425,598 50.4 78.5 Oth Liab CM 121,177 14.3 76.4 Ocean Marine 112,965 13.4 58.9 Group A & H 53,814 6.4 100.0 Comm l Auto Liab 28,746 3.4 85.6 Surety 25,833 3.1 95.2 Inland Marine 9,415 1.1 56.4 All Other 67,439 8.0 89.6 Total 844,987 100.0 76.9 BY-LINE RESERVES ($000) Product Line 2016 2015 2014 2013 2012 Oth Liab Occur 746,812 640,381 500,868 389,023 348,583 Oth Liab CM 127,001 125,269 154,219 158,424 143,594 Ocean Marine 171,459 197,740 220,896 240,897 276,861 Group A & H 35,564 44,928 41,830 34,723 32,306 Comm l Auto Liab 14,122 5,920 3,122 2,942 3,110 Surety 14,239 9,363 6,313 5,960 2,961 Inland Marine 5,517 5,077 6,225 10,159 13,818 All Other 43,528 38,958 59,448 60,490 64,965 Total 1,158,242 1,067,636 992,921 902,619 886,198 GEOGRAPHIC BREAKDOWN BY DIRECT PREMIUM WRITINGS ($000) 2016 2015 2014 2013 2012 New York 123,177 125,834 102,884 93,054 59,905 Aggregate Alien 55,679 32,794 73,207 83,253 94,419 California 49,449 47,217 51,227 57,650 60,256 Texas 38,606 35,818 36,976 39,518 33,219 New Jersey 28,302 22,915 16,965 14,385 13,063 Washington 27,261 28,513 26,851 27,033 23,546 Illinois 22,704 17,275 13,677 13,587 11,073 Florida 21,121 12,311 14,292 14,146 16,608 Pennsylvania 18,555 16,109 15,310 13,352 13,015 Ohio 11,989 10,341 11,213 9,557 7,324 All Other 161,675 153,502 150,072 156,560 144,812 Total 558,520 502,628 512,674 522,095 477,241 RISK MANAGEMENT Navigators has a formalized, documented enterprise risk management (ERM) program in place, and its risk management approach is well suited to the group s overall risk profile. Navigators has established an enterprise risk management steering committee composed of its most senior management team including its CEO, CFO and CRO. Reporting to that committee are four sub-committees consisting of underwriting and claims, operational risk, finance and credit risk, and compliance and governance risk. Each committee is managed by a member of the steering committee. The group has mapped out its key risks each of which are assigned to sub-committees for monitoring and mitigation with the board having ultimate oversight. Risks are evaluated across a diagram that tracks the potential impact relative to the group s degree of control. The group s investment portfolio remains conservative, and liquidity measures are strong. A well-diversified book of specialized coverages help to mitigate against concentration risk. A relatively high dependence on reinsurance is maintained as the group writes high gross limits, consistent with that of typical commercial marine and energy insurers. Following the group s Katrina loss in 2005, management made a decision to limit its Gulf Coast wind exposure, effectively reducing its gross catastrophe exposure from this book of business. This strategy was tested in 2008 with both Hurricane Ike and Hurricane Gustav with the group incurring $69 million in gross losses. However, pre-tax net losses (including reinstatement premiums from both catastrophes) were $21 million, or approximately 3% of surplus. Since 2009, the group has further reduced its net Gulf Coast exposure, issuing total net limits of less than $10 million. A significant portion of the group s reinsurance program is placed with foreign reinsurers, primarily in the London market. The majority of reinsurance balances with unauthorized carriers is covered by letters of credit, which helps to mitigate associated credit risk exposure. Printed September 19, 2017 www.ambest.com Page 4 of 18
OPERATING PERFORMANCE Operating Results: Navigators generated pre-tax operating income in each of the last five years resulting from consistent investment income, and in the last four years, underwriting profits. Even with underwriting results in 2012 that were not consistent with the group s historical performance levels, return measures remained positive. Significant improvement was observed in the last four years, with double digit pre-tax return on revenue measures posted in those years. Realized gains over the last four years helped to enhance total returns and offset years with underwriting shortfalls. PROFITABILITY ANALYSIS ($000) Company Pre-tax After-tax Operating Operating Net Total Income Income Income Return 2012 6,174 831 25,230 24,771 2013 60,803 42,867 56,605 65,251 2014 88,843 63,483 72,411 78,086 2015 75,838 52,286 58,683 56,233 2016 103,631 72,815 80,698 82,787 5-Yr Total 335,289 232,281 293,626 307,130 Costa Concordia. Further, 2012 was impacted by adverse development in specific lines of business. The group reported elevated expenses ratios in 2015 and 2016, which drove the group s 5-year average to be elevated compared to the average for its industry composite. The increased expense ratio in 2015 was due to increased salaries and compensation costs as the group added employees as well as a significant increase in the charge for restricted stock units held by certain employees, as the company s stock price increased from $71.93 at the end of 2014 to $85.71 at the end of 2015. The elevated expense ratio is 2016 was due to mix of business and changes in the group s proportional reinsurance coverage that resulted in an increase in net commission expense ratio, which is slightly offset by increased net earned premium and by steps taken to control operating expenses. Given the adverse loss reserve development within its specialty liability line of business in several of the last five years, management discontinued writing specific niches (including its small lawyers segment), restricted available coverages, increased attachment points and formalized a multi-variant rating platform to improve its pricing accuracy. In light of storm losses experienced prior to 2009, the group imposed policy restrictions on its marine policies, including lower policy limits and limiting its business interruption coverages and significantly restricted its available Gulf of Mexico net wind aggregates. UNDERWRITING EXPERIENCE Net Undrw Loss s Expense s Ind Income Pure ($000) Loss LAE Loss LAE & Net Other Total Div. Comb. Comm. Exp. Exp. Pol. Comb. 2012-35,391 55.1 17.9 73.0 13.4 17.1 30.5 103.4 105.4 2013 16,778 53.7 11.2 65.0 12.6 17.9 30.5 95.4 97.7 2014 37,704 48.2 13.5 61.7 12.1 18.8 30.9 92.5 98.2 2015 18,697 48.1 14.3 62.4 12.4 21.0 33.4 95.8 99.2 2016 37,540 47.3 13.2 60.5 14.6 18.3 32.9 93.4 101.8 Company Industry Composite Pre-tax Return Operating Pre-tax Return Operating ROR (%) on PHS (%) (%) ROR (%) on PHS (%) (%) 2012 1.1 3.7 96.1 9.2 8.1 90.2 2013 9.5 8.8 88.4 18.5 13.3 81.6 5-Yr Total/Avg 75,328 50.1 13.9 64.1 13.0 18.7 31.7 95.8 100.4 2014 12.6 9.2 85.0 15.2 11.9 84.4 2015 10.5 6.1 87.8 14.6 6.6 85.2 BY-LINE LOSS RATIO 2016 13.0 8.4 85.0 12.1 8.1 88.1 Product Line 2016 2015 2014 2013 2012 5-Yr Avg 5-Yr Avg 9.8 7.4 88.1 13.9 9.6 85.9 Oth Liab Occur 49.7 49.0 51.9 50.5 41.5 49.2 Underwriting Results: The group s five- and ten-year average combined ratios outperform its commercial casualty peers. These results are largely due to the group s disciplined underwriting approach, which has led to profitable or near break-even underwriting results in most years. While the group s loss and loss adjustment expense (LAE) ratio is well below its peer composite, its underwriting expense ratio remains modestly elevated relative to that group. The group s underwriting results modestly deteriorated in 2012, with significant improvement in the last four years. Loss ratio improvement was reported across the majority of the group s business segments in the last four years. Underwriting results in the last three years benefited from favorable prior year loss reserve development. In 2012, results were impacted by industry-wide events, including the U.S. drought, Superstorm Sandy and Oth Liab CM Ocean Marine Group A & H Comm l Auto Liab Surety Inland Marine All Other Total 42.6 39.3 59.0 57.0 26.0 40.9 45.3 47.3 25.0 49.5 70.8 47.8 34.4 24.4 37.8 48.1 29.2 35.5 71.7 76.0 25.8-0.9 61.6 48.2 50.5 33.4 91.0 279.6 73.7 49.6 57.6 53.7 36.4 56.1 71.2-99.9 35.9 88.0 86.7 55.1 37.6 42.8 73.1 64.5 33.7 52.5 59.9 50.1 Printed September 19, 2017 www.ambest.com Page 5 of 18
DIRECT LOSS RATIO BY STATE 2016 2015 2014 2013 2012 5-Yr Avg New York 50.5 45.0 42.1 53.9 63.2 49.4 Aggregate Alien 38.5 5.2 57.7 10.3 86.0 45.7 California 72.6 53.6 27.1 50.5 46.1 49.3 Texas 50.7 16.6 36.4 44.0 49.2 39.1 New Jersey 45.6 45.0 54.1 53.6 40.9 47.7 Washington 82.0 72.5 35.1 54.9 34.1 56.5 Illinois 50.0 24.7 27.2 76.8 24.3 41.4 Florida 24.6 79.4 39.5 47.4 23.2 40.5 Pennsylvania 73.3 11.7 31.2 22.4 41.4 37.5 Ohio 43.0 18.3 38.7 32.8 38.4 34.1 All Other 50.3 46.3 48.0 63.0 50.4 51.6 Total 52.2 40.9 43.5 47.1 56.0 48.0 Investment Results: Navigators portfolio has produced a five-year average yield on invested assets that falls below that of the commercial casualty composite. Due to the depressed interest rate environment experienced in recent years, management has cut back on the duration of its assets, staying short term while rates remain low. The investment strategy remains focused on high-quality, liquid assets. Over the longer term, Navigators strategy has produced favorable levels of investment income on an annual basis with varying levels of realized capital gains generated over the years from its equity portfolio. Net investment income has increased in each of the last five years, primarily due to the growth in invested assets driven by strong operating cash flows. This was partially offset by spread widening and lower investment yields. In recent years, the group s total return has benefited from realized gains and generally positive changes in its unrealized gain position. INVESTMENT GAINS ($000) Company Net Realized Unrealized Inv Capital Capital Year Income Gains Gains 2012 42,073 24,399-459 2013 44,890 13,738 8,647 2014 52,805 8,927 5,676 2015 57,833 6,397-2,450 2016 66,687 7,883 2,089 5-Yr Total 264,287 61,345 13,504 Company Industry Composite Pre-tax Invest Inv Inc Inv Return on Total Inv Inc Inv Growth Yield Inv Assets Return Growth Yield Year (%) (%) (%) (%) (%) (%) 2012-14.9 2.4 3.8 4.3-1.8 4.1 2013 6.7 2.4 3.2 4.1 8.0 4.4 2014 17.6 2.6 3.1 3.5-11.6 3.8 2015 9.5 2.6 2.9 2.8 1.6 3.8 2016 15.3 2.8 3.1 3.3-1.0 3.8 5-Yr Avg 7.0 2.6 3.2 3.6-1.1 4.0 BALANCE SHEET STRENGTH Capitalization: Navigators risk-adjusted capitalization is solid, as measured by Best s Capital Adequacy (BCAR), and supportive of its current rating. With the increases in surplus over several years, underwriting leverage has declined to levels currently in line with averages for the commercial casualty composite. Favorable levels of risk-adjusted capitalization have been sustained even as net premiums written have grown. Navigators has internally generated capital over the last five years, and in 2013 received a $50 million capital contribution from its parent company. The group has significantly reduced its Gulf Coast wind exposure by lowering its gross limits and ceding the majority of risk to third-party reinsurers. While individual insureds could purchase net limits of over $200 million at year-end 2008, net offered limits have been significantly reduced. Current maximum available limits on such policies are (on a gross basis) less than $10 million for both property damage and business interruption on a combined basis. Further, the group offers business interruption coverage only on a limited basis. The group s catastrophe exposure is largely credit related, as its net exposure has been significantly reduced. Consolidated financial leverage is currently 18.4% (debt-to-total-capital), and interest coverage ratios more than support the group s current rating level. In addition to modest debt service, profits from the domestic insurance companies have been utilized to further the group s expansion overseas, primarily in London. Current BCAR: 284.2 Printed September 19, 2017 www.ambest.com Page 6 of 18
CAPITAL GENERATION ANALYSIS ($000) Source of Surplus Growth Pre-tax Realized Unrealized Operating Capital Income Capital Year Income Gains Taxes Gains 2012 6,174 24,399 5,343-459 2013 60,803 13,738 17,936 8,647 2014 88,843 8,927 25,360 5,676 2015 75,838 6,397 23,553-2,450 2016 103,631 7,883 30,816 2,089 5-Yr Total 335,289 61,345 103,008 13,504 Source of Surplus Growth Net Change % Chg Contrib. Other in in Year Capital Changes PHS PHS 2012-15,000 10,948 20,719 3.1 2013 50,000 5,940 121,192 17.7 2014 11,787 89,873 11.2 2015 87 56,320 6.3 2016-5,000-1,234 76,553 8.1 5-Yr Total 30,000 27,528 364,657 9.2 QUALITY OF SURPLUS ($000) Surplus Other Contributed Unassigned Year Notes Debt Capital Surplus 2012 366,122 316,759 2013 416,122 387,951 2014 416,122 477,824 2015 416,122 534,144 2016 416,122 610,697 Year-End Conditional Adjusted Year PHS Reserves PHS 2012 682,881 21,678 704,559 2013 804,073 14,622 818,695 2014 893,946 15,070 909,016 2015 950,266 12,271 962,537 2016 1,026,819 10,339 1,037,158 LEVERAGE ANALYSIS Company Industry Composite Res. Res. NPW to PHS to PHS Net Lev. Gross Lev. NPW to PHS to PHS Net Lev. Gross Lev. 2012 0.9 1.3 3.0 4.6 0.7 1.4 2.8 3.7 2013 0.8 1.1 2.6 4.0 0.7 1.4 2.7 3.6 2014 0.8 1.1 2.6 3.8 0.7 1.4 2.8 3.6 2015 0.8 1.1 2.5 3.6 0.7 1.4 2.9 3.7 2016 0.8 1.1 2.5 3.6 0.7 1.4 2.9 3.8 CEDED REINSURANCE ANALYSIS ($000) Company Bus. Reins. Ceded Ret. Recov. to Reins. to (%) PHS (%) PHS (%) Industry Composite Bus. Reins. Ceded Ret. Recov. to Reins. to (%) PHS (%) PHS (%) Ceded Reins. Total 2012 1,147,557 67.6 124.4 168.0 80.4 60.7 85.2 2013 1,134,657 67.8 101.0 141.1 78.8 57.5 82.8 2014 1,128,771 72.0 93.5 126.3 80.2 56.2 81.3 2015 1,074,529 73.2 83.9 113.1 77.8 58.8 86.9 2016 1,034,149 76.9 75.9 100.7 76.2 64.8 94.5 2016 REINSURANCE RECOVERABLES ($000) Paid & Unpaid Losses IBNR Unearned Premiums Other Recov* Total Reins Recov US Insurers... 147,036 365,588 109,136 3,785 625,545 Pools/Associations... 4-1 4 Other Non-US... 59,554 63,222 34,435-3,122 154,089 Total (ex US Affils)... 206,594 428,810 143,571 662 779,638 Grand Total... 206,595 428,808 143,572 663 779,638 * Includes Commissions less Funds Withheld Loss Reserves: In 2016, results were favorably impacted by $18.5 million (or 2.3 points of loss ratio) of net prior year favorable development. Reserves developed favorably across the group s Marine, NavRe, NavTech, Excess Casualty and Environmental divisions due to favorable ongoing performance. This was partially offset by prior year reserve strengthening in the Primary Casualty and D&O divisions, mostly due to unfavorable development of large claims. In 2015, results were favorably impacted by $31.0 million (or 4.3 points of loss ratio) of net prior year favorable development. Reserves developed favorable across all the group s lines of business, led by the Marine business ($28.9 million of favorable development). In 2014, results were favorably impacted by $30 million (or 4 points of loss ratio) of net prior year favorable development. Marine business had favorable loss emergence due to a lesser amount of large losses and improved underwriting across all product lines. Marine releases were offset by strengthening in primary casualty reserves related to pre-2010 California construction defect. In 2013 results were unfavorably impacted by approximately $13 million (or 2 points of loss ratio) of net prior year adverse development. Most notably, reserve strengthening occurred for Accident and Health treaty business, General Liability for general and artisan contractors, and Professional Liability from D&O and E&O divisions. This strengthening was offset by reserve releases for Energy & Engineering and Marine Liability. Printed September 19, 2017 www.ambest.com Page 7 of 18
LOSS & ALAE RESERVE DEVELOP.: CALENDAR YEAR ($000) Calendar Year Orig. Loss Reserves Developed Reserves Thru Latest Year End Develop. to Orig. (%) Develop. to PHS (%) Develop. to NPE (%) Unpaid Reserves @Latest Year End Unpaid Res. to Develop. (%) 2011 805,627 874,691 8.6 10.4 185.1 133,584 15.3 2012 818,304 862,582 5.4 6.5 150.9 187,428 21.7 2013 841,062 851,184 1.2 1.3 133.1 269,145 31.6 2014 927,766 905,513-2.4-2.5 128.5 411,636 45.5 2015 996,245 974,876-2.1-2.2 134.9 675,937 69.3 2016 1,081,401 1,081,401 135.5 1,081,401 100.0 LOSS & ALAE RESERVE DEVELOP.: ACCIDENT YEAR ($000) Accident Year Orig. Loss Reserves Developed Reserves Thru Latest Year End Develop. to Orig. (%) Unpaid Reserves @Latest Year End Acc. Yr Loss Acc. Yr Comb. 2011 268,275 303,360 13.1 37,481 79.3 111.3 2012 314,620 273,113-13.2 53,844 67.1 97.6 2013 300,509 265,394-11.7 81,717 59.5 90.0 2014 353,231 274,703-22.2 142,491 56.1 86.9 2015 391,967 334,681-14.6 264,301 59.8 93.2 2016 405,464 405,464 405,464 61.1 94.0 ASBESTOS & ENVIRONMENTAL (A&E) RESERVE ANALYSIS Company Industry Composite Year Net A&E Reserve ($000) Reserve Retention (%) Net IBNR Mix (%) Survival (3 yr) Comb. Impact (1 yr) Comb. Impact (3 yr) Survival (3 yr) Comb. Impact (1 yr) Comb. Impact (3 yr) 2012 15,979 58.2 21.7 XX 0.0 XX XX 1.4 XX 2013 12,010 63.2 28.8 XX 0.1 XX XX 1.5 XX 2014 11,995 63.6 28.8 11.2-0.3-0.1 7.4 1.0 1.3 2015 11,715 63.4 29.5 19.7-0.2-0.1 7.6 1.6 1.4 2016 11,645 63.3 29.7-11.3 0.0-0.2 6.3 1.4 1.3 Liquidity: The group maintains a very sound liquidity position with quick, current and overall liquidity ratios above industry averages. Positive underwriting and operating cash flows have been produced in each of the past five years, enhancing the group s invested asset and liquidity position. The group s asset portfolio, though largely invested in government, corporate and municipal bonds, includes sufficient allocation to cash and short-term securities to supply sound liquidity. LIQUIDITY ANALYSIS Company Industry Composite Gross Gross Quick Current Overall Agents Bal. Quick Current Overall Agents Bal. Liq. (%) Liq. (%) Liq. (%) to PHS (%) Liq. (%) Liq. (%) Liq. (%) to PHS (%) 2012 43.7 120.1 150.4 10.0 22.6 106.1 147.0 10.4 2013 30.2 127.6 158.6 5.5 24.0 109.0 148.2 10.2 2014 23.7 128.8 158.8 6.5 24.0 108.2 148.1 10.2 2015 24.8 135.6 159.9 1.4 21.6 104.4 146.2 10.9 2016 24.8 135.1 158.6 3.6 21.0 103.7 145.5 11.8 CASH FLOW ANALYSIS ($000) Company Industry Composite Underw Oper Net Underw Oper Underw Oper Cash Cash Cash Cash Cash Cash Cash Year Flow Flow Flow Flow (%) Flow (%) Flow (%) Flow (%) 2012 20,624 60,816-31,689 103.5 110.2 99.6 113.6 2013 79,738 95,906 38,308 113.5 115.3 101.7 114.6 2014 145,797 176,933-71,046 125.1 128.9 102.9 113.8 2015 154,033 188,232 10,113 123.4 127.2 101.0 111.9 2016 160,181 200,450-13,547 123.6 128.1 103.0 113.3 5-Yr Total 560,373 722,336-67,862 INVESTMENT LEVERAGE ANALYSIS (% OF PHS) Industry Company Composite Class 3-6 Bonds Real Estate/ Mtg. Other Invested Assets Common Stocks Non-Affil. Inv. Lev. Affil. Inv. Class 3-6 Bonds Common Stocks 2012 0.0 14.8 14.8 18.8 6.1 10.3 2013 0.1 17.9 18.0 16.3 6.7 14.5 2014 14.2 14.2 15.0 7.2 16.1 2015 0.9 12.1 13.0 14.4 8.1 14.6 2016 6.5 14.1 20.5 13.6 10.5 13.5 INVESTMENTS - SECURITIES Current Year Distribution of Bonds By Maturity Years Yrs-Avg 0-1 1-5 5-10 10-20 20+ Maturity Government 2.1 3.4 0.7 0.2 0.0 3 Gov t Agencies & Muni 5.1 15.8 17.2 5.5 2.1 7 Industrial & Misc 5.2 26.0 10.0 1.1 1.2 5 Hybrid Securities 2.2 1.1 1.0 9 Total 12.3 47.4 29.1 6.8 4.4 6 Printed September 19, 2017 www.ambest.com Page 8 of 18
2016 2015 2014 2013 2012 Bonds (000) 1,969,415 1,779,093 1,726,741 1,505,614 1,486,405 US Government 3.7 4.9 8.2 12.4 26.1 Foreign Government 1.3 1.2 1.3 0.9 0.5 Foreign - All Other 6.4 6.9 6.6 10.1 11.2 State/Special Revenue - US 46.4 45.8 47.0 45.9 36.8 Industrial & Misc - US 42.1 41.3 36.9 30.7 25.5 Private Issues 20.3 18.2 16.1 13.4 12.5 Public Issues 79.7 81.8 83.9 86.6 87.5 Bond Quality (%) 2016 2015 2014 2013 2012 Class 1 87.0 89.2 94.6 94.3 94.0 Class 2 9.7 10.3 5.4 5.7 6.0 Class 3 3.3 0.5 0.1 0.0 INVESTMENTS - EQUITIES 2016 2015 2014 2013 2012 Stocks (000) 495,399 454,892 330,899 273,656 228,182 Unaffiliated Common 29.2 25.3 38.4 52.6 44.4 Affiliated Common 28.1 29.9 40.2 47.4 55.6 Unaffiliated Preferred 42.8 44.8 21.4 INVESTMENTS - MORTGAGE LOANS & REAL ESTATE 2016 2015 2014 2013 2012 Mortgage Loans & Real Estate (000) 1,012 1,090 1,122 1,153 1,185 Property Occupied by Co 100.0 100.0 100.0 100.0 100.0 INVESTMENTS - OTHER INVESTED ASSETS 2016 2015 2014 2013 2012 Other Inv Assets (000) 62,346 75,875 65,772 136,804 102,800 Cash 98.5 90.8 100.0 93.5 76.8 Short-Term 1.5 9.2 6.5 19.0 All Other 0.0 0.0 0.0 0.0 4.2 HISTORY The company was incorporated under the laws of New York on July 16, 1981. Active underwriting operations began on March 10, 1983. At December 31, 2016, paid-in capital of $416.1 million consisted of 100 shares of common stock at a par value of $50,000 per share and $411.1 million of contributed surplus. All authorized shares are outstanding. MANAGEMENT The Navigators Group, Inc., the ultimate Parent company of Navigators Insurance Company & Navigators Specialty Insurance Company, is a publicly owned holding company which trades on the NASDAQ stock exchange under the symbol NAVG. Approximately 20% of the stock is owned by Terence N. Deeks and family. The affairs of the company are under the direction of Navigators Management Company, Inc., which is reimbursed for its expenses. Terence N. Deeks served as chairman of the board of The Navigators Group, Inc., from its roots in 1974 until May 2013, when Mr. Deeks retired from the chairman role. Mr. Deeks continues to serve as a director. Robert V. Mendelsohn was appointed chairman of the board upon Mr. Deeks retirement. Mr. Mendelsohn has served on the board since 2010 and has extensive insurance industry experience. He formerly served as chief executive of Royal & Sun Alliance Insurance Group, plc in London and as chief executive officer of Royal Insurance Group, Inc., president and chief operating officer of W.R. Berkley Corp. and chairman of the American Insurance Association. Stanley A. Galanski serves as president and CEO of The Navigators Group, Inc. and as president, CEO and chairman of Navigators Insurance Company. Mr. Galanski has been active in the insurance industry since 1980. Officers: Chairman, President and Chief Executive Officer, Stanley A. Galanski; Executive Vice President and Chief Financial Officer, Ciro M. DeFalco; Senior Vice President and Chief Underwriting Officer, H. Clay Bassett, Jr.; Senior Vice President and Chief Risk Officer, Diane L. Coogan-Pushner; Senior Vice President and Chief Administrative Officer, R. Scott Eisdorfer; Senior Vice President, Secretary and General Counsel, Emily B. Miner; Senior Vice President and Chief Actuary, Mark A. Yunque; Senior Vice President and Controller, Carole V. Kirk (Group); Vice President and Treasurer, Ellen K. Dion; Vice Presidents, Marina S. Barg (Claims), Glen M. Bronstein (Claims), Joann L. DeBlasis (Underwriting - Reinsurance), George R. Iacono (Finance, Operations), Paul C. Kluga (Reinsurance), Sherry J. Little (Regulatory Compliance), Michael J. McKenna (Underwriting - Reinsurance), Paul T. McNamara (Claims), Daniel P. Reale (IT), William C. Redington, Jr. (Underwriting - Reinsurance), Ruth E. Roberts (Claims), Jeff L. Saunders (Underwriting), Ivan F. Vega Neathery (Underwriting - Reinsurance), Daniel R. Westcott (Underwriting - Reinsurance). Directors: H. Clay Bassett, Jr., Michael J. Casella, Ciro M. DeFalco, R. Scott Eisdorfer, Stanley A. Galanski (Chairman), Noel Higgitt, Christopher A. Johnson, Russell J. Johnson, Denise M. Lowsley, Michael J. McKenna, Emily B. Miner, Gregory D. Olson, Jeff L. Saunders, Vincent C. Tizzio, Mark A. Yunque. REGULATORY An examination of the financial condition was made as of December 31, 2014, by the insurance department of New York. The 2016 annual independent audit of the company was conducted by KPMG, LLP. The annual statement of Printed September 19, 2017 www.ambest.com Page 9 of 18
actuarial opinion is provided by Carl X. Ashenbrenner, FCAS, MAAA, Milliman. REINSURANCE Navigators Insurance Co. maintains proportional and non-proportional reinsurance with U.S. domestic reinsurers, Lloyd s of London, and other international companies. The marine and offshore energy excess of loss program attaches at $10 million and $7.5 million respectively for risk/non-cat occurrence events and $10 million per occurrence for all catastrophe losses. Quota share marine treaties are in place for primary liability, offshore energy, cargo, craft, transport, inland marine and war business at various cessions. The company maintains catastrophe reinsurance to protect against all catastrophic events emanating from the marine and non-gulf of Mexico offshore energy portfolios within an acceptable range of expected outcomes on a PML basis. The Gulf of Mexico offshore energy windstorm exposures are currently contained within their retention. Navigators other lines of business are reinsured on either a quota-share or excess of loss basis. Primary casualty business is reinsured above the company s $2 million retention on an excess of loss basis. The excess casualty, environmental and life science lines of business are subject to a hybrid quota share and excess of loss program. A variable quota share and excess of loss treaty is in place for the D&O business, and the E&O program is protected by an excess of loss with a $2 million retention. The surety business is protected by an excess of loss with a $1 million retention. The property business is reinsured with a combination of per risk excess of loss basis above a $1.5 million retention and a catastrophe excess of loss. Maximum retention under the inland marine excess of loss program is $2.0 million BALANCE SHEET ADMITTED ASSETS ($000) YE 2016 YE 2015 16% 15% Bonds... 1,969,415 1,779,093 70.1 69.3 Preferred stock... 211,846 203,880 7.5 7.9 Common stock... 144,535 114,976 5.1 4.5 Cash and short-term invest... 62,322 75,869 2.2 3.0 Other non-affil inv asset... 25 6 0.0 0.0 Investments in affiliates... 139,017 136,036 5.0 5.3 Real estate, offices... 1,012 1,090 0.0 0.0 Total invested assets... 2,528,172 2,310,950 90.0 90.0 Premium balances... 127,454 113,286 4.5 4.4 Accrued interest... 13,620 12,947 0.5 0.5 All other assets... 138,873 131,337 4.9 5.1 Total assets... 2,808,119 2,568,520 100.0 100.0 LIABILITIES & SURPLUS ($000) YE 2016 YE 2015 16% 15% Loss & LAE reserves... 1,158,242 1,067,636 41.2 41.6 Unearned premiums... 496,638 449,801 17.7 17.5 Conditional reserve funds... 10,339 12,271 0.4 0.5 All other liabilities... 116,082 88,547 4.1 3.4 Total liabilities... 1,781,300 1,618,254 63.4 63.0 Capital & assigned surplus... 416,122 416,122 14.8 16.2 Unassigned surplus... 610,697 534,144 21.7 20.8 Total policyholders surplus... 1,026,819 950,266 36.6 37.0 Total liabilities & surplus... 2,808,119 2,568,520 100.0 100.0 SUMMARY OF 2016 OPERATIONS ($000) Funds Provided from Statement of Income 2016 Operations 2016 Premiums earned... 798,151 Premiums collected... 838,516 Benefit & loss-related pmts Losses incurred... 377,302 307,416 LAE incurred... 105,530 Undrw expenses incurred LAE & undrw expenses paid 277,779 370,919 Net underwriting income 37,540 Undrw cash flow... 160,181 Net investment income... 66,687 Investment income... 76,413 Other income/expense... -596 Other income/expense... -596 Pre-tax cash operations Pre-tax oper income... 103,631 235,998 Realized capital gains... 7,883 Income taxes incurred... 30,816 Income taxes pd (recov)... 35,548 Net income... 80,698 Net oper cash flow... 200,450 Printed September 19, 2017 www.ambest.com Page 10 of 18
Ultimate Parent: The Navigators Group, Inc. NAVIGATORS SPECIALTY INSURANCE COMPANY New York, NY 400 Atlantic Street, 8th Floor, Stamford, CT 06901 Web: www.navg.com Tel: 203-905-6090 Fax: 203-658-1821 AMB#: 010761 NAIC#: 36056 Ultimate Parent#: 058430 FEIN#: 13-3536448 BEST S CREDIT RATING Best s Financial Strength Rating: A Outlook: Positive Best s Financial Size Category: XII The company s rating reflects its reinsurance agreement with Navigators Insurance Company (AMB# 001825) as a member of the Navigators RATING RATIONALE Rating nale: The ratings reflect Navigators Insurance Group s leading position as a global provider of insurance to the marine sector, the group s well-diversified book of business, its modest net windstorm exposure, management s conservative approach to risk management, underwriting and claims handling in addition to the group s solid level of capitalization and historical profitability. These positive factors are somewhat offset by the group s underwriting results in a few recent years (2011 2012) that were not in line with the group s historical profit levels, and its below average net investment yields and net investment ratio, driven by its conservative investment portfolio. The outlooks reflect A.M. Best s expectation that the group will continue to maintain its solid level of capitalization and operating performance, generating overall profitable results throughout market cycles. The positive rating factors are derived from the group s historically favorable operating performance which, together with capital-raising initiatives, has supported growth and enhanced overall capitalization. The strong operating performance, as evidenced by positive returns on both revenue and surplus, has been driven by periods of underwriting profitability and consistent investment earnings. The group remains committed to underwriting excellence in terms of risk selection, contract terms and conditions and pricing discipline. This underwriting focus has produced loss ratios that have outperformed the average posted by its industry peers. Such discipline and expertise, which have been critical to profitability in the severity-driven ocean marine, casualty and energy lines, are a reflection of the strong risk management culture that remains a part of the Navigators Insurance Group. In addition, financial flexibility is afforded through the publicly traded parent, The Navigators Group Inc. (NASDAQ: NAVG), demonstrated by a $50 million capital contribution in 2013. Despite the group s strong overall underwriting performance, underwriting results were below average in 2011 and 2012 due to a combination of large industry-wide losses, reinstatement premiums, adverse loss development on certain lines and run-off operations. Increased loss ratios among specific products have led the group to discontinue or re-underwrite certain lines. As such, the group is susceptible to execution risk as it seeks to balance its overall underwriting risk with non-marine-related products. Due to the company s more conservative investment philosophy, the lower interest rate environment has resulted in a less favorable trend in investment returns. While close to 17% of Navigators gross premium writings are in the marine sector, diversification of risk is achieved as its remaining premiums are spread across a diverse product line, including general liability coverage for small general and artisan contractors, professional liability, and specialty coverages. The group has expanded its geographic spread of risk through opening regional offices in select cities and over the last five years introduced the following new assumed reinsurance products: Accident and Health, Agriculture, Latin American Property and Surety, and Professional Liability. Positive rating action could occur if there were a sustained favorable trend in operating results relative to industry peers while maintaining strong risk-adjusted capitalization. Negative rating actions could occur if there were a sustained deterioration in underwriting and operating results over a period of several years, an occurrence of a sudden large or catastrophic loss event that materially hinders risk-adjusted capitalization or if there were any material deviation from the company s submitted financial projections. FIVE-YEAR RATING HISTORY Date Best s FSR Date Best s FSR 08/11/17 A 06/04/14 A 07/21/16 A 06/07/13 A 06/03/15 A KEY FINANCIAL INDICATORS ($000) Statutory Data Direct Premiums Written Net Premiums Written Pre-tax Operating Income Net Income Total Admitted Assets Policyholders Surplus 2012 207,586 4,439 3,334 149,822 126,885 2013 254,619 4,153 2,819 155,360 129,702 2014 316,194 3,953 3,266 160,676 132,969 2015 357,343 4,011 3,051 165,666 136,036 2016 383,427 3,929 3,037 169,410 139,017 Printed September 19, 2017 www.ambest.com Page 11 of 18
Profitability Leverage Liquidity Comb. Inv. Yield (%) Pre-tax ROR (%) NA Inv Lev NPW to PHS Net Lev. Overall Liq. (%) Oper. Cash flow (%) 2012 3.6 0.2 653.2 999.9 2013 3.2 0.2 605.5 183.4 2014 3.0 0.2 579.9 352.3 2015 3.0 0.2 559.1 305.7 2016 2.9 1.9 0.2 557.4 340.6 5-Yr 3.1 (*) Within several financial tables of this report, this company is compared against the Surplus Lines Composite. (*) Data reflected within all tables of this report has been compiled from the company-filed statutory statement. BUSINESS PROFILE Navigators Insurance Group (Navigators), through its lead operating unit, Navigators Insurance Company, specializes in underwriting marine and energy, specialty lines and professional liability business. Navigators Specialty Insurance Company underwrites property/casualty business on a non-admitted basis for those types of risks requiring greater flexibility in rating or policy terms and conditions. The group s multi-channel distribution platform utilizes global, national and regional brokers as well as wholesalers. Navigators has a long-standing reputation for expertise in the marine and energy sector, which includes property and excess liability coverages for marine-related business, offshore energy risks, related transportation and cargo exposures as well as a modest amount of business written in other facets of the marine and energy field. Specialty operations have underwritten general liability coverages for small general and artisan contractors since 1995, mostly in California, and represent a post-montrose book of business with tight terms and conditions in place to limit or avoid significant construction defect claims. Coverages are generally written on a non-admitted basis and have included construction wrap-up products since 2005. Challenging economic conditions in recent years have driven a reduction in the size of this book. Excess casualty risks are diversified among a large number of industry groups. The remaining portion of the specialty gross premiums includes primary casualty and commercial middle market accounts. The group also enters specialty niche lines, which management believes can produce profitable underwriting results. The group also writes professional director and officer coverages for a variety of market niches, including lawyers, architects and a variety of public and private companies. This coverage is largely offered to small and mid-size companies as opposed to Fortune 1000 companies. The group restructured its D&O program by introducing a credit scoring function into its underwriting process. Beginning in 2011, this program was quota-shared with other insuring participants. In 2010, the group began reinsuring both accident and health coverages as well as multi-peril crop insurance. Latin America property reinsurance was added in 2011, professional liability reinsurance in 2012, and an international property reinsurance treaty in 2014. In recent years, the group has also opened a number of regional offices (e.g., Pittsburgh and Philadelphia) to market its existing products. TOTAL PREMIUM COMPOSITION & GROWTH ANALYSIS Reinsurance Reinsurance DPW Prem Assumed Prem Ceded ($000) (% Chg) ($000) (% Chg) ($000) (% Chg) 2012 207,586 38.1 207,586 38.1 2013 254,619 22.7 254,619 22.7 2014 316,194 24.2 316,194 24.2 2015 357,343 13.0 357,343 13.0 2016 383,427 7.3 383,427 7.3 5-Yr CAGR 20.6 20.6 NPW NPE ($000) (% Chg) ($000) (% Chg) 2012 2013 2014 2015 2016 Territory: The company is licensed in New York. It also operates on a surplus lines or non-admitted basis in the District of Columbia, AL, AK, AZ, AR, CA, CO, CT, DE, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NJ, NM, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VT, VA, WA, WV, WI and WY. 2016 BY-LINE BUSINESS ($000) Reinsurance Reinsurance DPW Prem Assumed Prem Ceded Product Line ($000) (%) ($000) (%) ($000) (%) Oth Liab Occur 322,743 84.2 322,743 84.2 Oth Liab CM 44,723 11.7 44,723 11.7 Com l MultiPeril 13,084 3.4 13,084 3.4 All Other 2,876 0.8 2,876 0.8 Total 383,427 100.0 383,427 100.0 Printed September 19, 2017 www.ambest.com Page 12 of 18
Business NPW Retention Product Line ($000) (%) (%) Oth Liab Occur Oth Liab CM Com l MultiPeril All Other Total GEOGRAPHIC BREAKDOWN BY DIRECT PREMIUM WRITINGS ($000) 2016 2015 2014 2013 2012 California 97,184 98,556 82,708 74,139 66,725 Texas 46,206 38,625 34,682 24,206 17,972 New Jersey 21,904 19,061 16,379 8,808 7,795 Illinois 19,220 19,248 20,774 17,274 12,721 Florida 18,865 20,015 13,996 12,078 12,297 Pennsylvania 14,708 14,216 11,031 8,750 7,130 Washington 14,375 13,778 9,919 6,104 5,818 Georgia 10,666 9,716 7,205 5,166 3,235 Massachusetts 9,401 14,002 8,177 5,162 4,347 Arizona 9,379 8,970 8,416 6,055 6,032 All Other 121,519 101,156 102,907 86,877 63,515 Total 383,427 357,343 316,194 254,619 207,586 RISK MANAGEMENT Navigators has a formalized, documented enterprise risk management (ERM) program in place, and its risk management approach is well suited to the group s overall risk profile. Navigators has established an enterprise risk management steering committee composed of its most senior management team including its CEO, CFO and CRO. Reporting to that committee are four sub-committees consisting of underwriting and claims, operational risk, finance and credit risk, and compliance and governance risk. Each committee is managed by a member of the steering committee. The group has mapped out its key risks each of which are assigned to sub-committees for monitoring and mitigation with the board having ultimate oversight. Risks are evaluated across a diagram that tracks the potential impact relative to the group s degree of control. The group s investment portfolio remains conservative, and liquidity measures are strong. A well-diversified book of specialized coverages help to mitigate against concentration risk. A relatively high dependence on reinsurance is maintained as the group writes high gross limits, consistent with that of typical commercial marine and energy insurers. Following the group s Katrina loss in 2005, management made a decision to limit its Gulf Coast wind exposure, effectively reducing its gross catastrophe exposure from this book of business. This strategy was tested in 2008 with both Hurricane Ike and Hurricane Gustav with the group incurring $69 million in gross losses. However, pre-tax net losses (including reinstatement premiums from both catastrophes) were $21 million, or approximately 3% of surplus. Since 2009, the group has further reduced its net Gulf Coast exposure, issuing total net limits of less than $10 million. A significant portion of the group s reinsurance program is placed with foreign reinsurers, primarily in the London market. The majority of reinsurance balances with unauthorized carriers is covered by letters of credit, which helps to mitigate associated credit risk exposure. OPERATING PERFORMANCE Operating Results: Navigators generated pre-tax operating income in each of the last five years resulting from consistent investment income, and in the last four years, underwriting profits. Even with underwriting results in 2012 that were not consistent with the group s historical performance levels, return measures remained positive. Significant improvement was observed in the last four years, with double digit pre-tax return on revenue measures posted in those years. Realized gains over the last four years helped to enhance total returns and offset years with underwriting shortfalls. PROFITABILITY ANALYSIS ($000) Company Pre-tax After-tax Operating Operating Net Total Income Income Income Return 2012 4,439 2,758 3,334 3,342 2013 4,153 2,704 2,819 2,821 2014 3,953 2,569 3,266 3,266 2015 4,011 2,855 3,051 3,051 2016 3,929 2,773 3,037 3,009 5-Yr Total 20,486 13,659 15,509 15,490 Company Industry Composite Pre-tax Return Operating Pre-tax Return Operating ROR (%) on PHS (%) (%) ROR (%) on PHS (%) (%) 2012 2.7 22.8 9.6 76.2 2013 2.2 41.3 14.7 59.5 2014 2.5 30.4 11.8 68.4 2015 2.3 29.5 5.2 69.4 2016 2.2 20.9 7.0 77.6 5-Yr Avg 2.4 28.5 9.6 70.6 Underwriting Results: The group s five- and ten-year average combined ratios outperform its commercial casualty peers. These results are largely due Printed September 19, 2017 www.ambest.com Page 13 of 18