Navigators Strengthens Asbestos Reserves; Best, S&P Comment

The Navigators Group, Inc. announced that it expects to record a net pre-tax charge of approximately $31.6 million for incurred losses related to asbestos exposures, after expected reinsurance recoveries million of approximately $46 million.

The Company said it therefore “expects to record an after-tax charge of approximately $20.5 million or $1.68 per share in the 2003 fourth quarter or $2.12 for the 2003 full year. The action was taken following a review of asbestos-related exposures, and the news in late January that “an asbestos claim would likely have to be settled for a significantly greater amount than previously anticipated.”

The bulletin noted that as a result, “the Company retained a leading independent consulting firm in this area to identify its potential exposure to asbestos claims from policies written directly as well as those reinsured to Navigators Insurance Company from prior members of the Company’s insurance pools. The Company’s increased reserves relate primarily to policies underwritten by Navigators Agencies in the late 1970’s and first half of the 1980’s on behalf of members of the pool, consisting of excess liability on marine related business and aviation products liability, including policies subsequently assumed by Navigators Insurance Company pursuant to reinsurance arrangements with pool members who exited the pool. Following the Company’s and the independent consulting firm’s recent review, the Company determined to increase its gross reserves for asbestos exposure to $78.5 million (approximately $32 million net of reinsurance recoverables) at December 31, 2003.”

CEO Stan Galanski commented, “We are extremely disappointed with the need to strengthen our asbestos reserves, given both the traditional strength of our loss reserves and the strong underwriting results being produced by our current business units. Based upon the review of our potential asbestos claim exposure, we believe that we have established a prudent level of loss reserves for asbestos liabilities, taking into account current industry trends and evolving theories of liability. We will monitor our asbestos exposures, status of litigation and reserve adequacy in this area as well as the progress towards federal legislation relating to asbestos liability, which we believe would be very beneficial to all parties.”

He also noted that “While our fourth quarter and full year 2003 results will be adversely affected by this action, it is not a reflection of the underlying strength of our core business and will not impact our strategy of pursuing profitable growth based on specialized underwriting expertise.”

Navigators said it still expects to “report positive net income despite a fourth quarter loss.” The Company plans to release its 2003 fourth quarter and full year results on March 9, 2004. It held a conference call on Friday, February 13, 2004 to discuss the reserve strengthening.

The rating agencies reacted promptly to the news. While it affirmed its ‘A’ counterparty credit and financial strength ratings on Navigators, Standard & Poor’s announced that it has revised its outlook to negative from stable because of concerns about reserve adequacy, following the announcement. A.M. Best, however issued a bulletin, which both affirmed Navigators financial strength rating of “A” (Excellent), and maintained its stable outlook on the company’s ratings.

S&P noted that “the impact on statutory basis is expected to be about $17 million. Navigators has a strong business position and is a leading writer in the marine insurance market. The company has grown its premiums aggressively in the last two years, which explains most of the decline in the capital adequacy ratio to 141 percent in 2002 from 209 percent in 2001. However, Navigators increased its capital base by $95.3 million (secondary offering) in the fourth quarter of 2003 via a contribution from the holding company, Navigators Group Inc. It indicated that it had changed the outlook to negative to reflect concerns that the company’s “balance sheet might not be as strong as Standard & Poor’s previously projected because of the aggressive top-line growth and the reserve uncertainty.”

Best also noted that the impact was moderated by the $95 million capital contribution, and indicated that although it was “originally intended to enhance the group’s ability to capitalize on current insurance market opportunities, it has allowed for the absorption of this loss reserve charge. Management also prudently utilized a portion of the proceeds to pay off all existing debt at the parent holding company during the fourth quarter 2003, eliminating bank covenants that could potentially have led to additional pressure from the loss reserve charge.”

Topics Reinsurance