S&P Changes Outlook on Navigators to Negative; Affirms Ratings

May 12, 2011

Standard & Poor’s Ratings Services has revised its outlook on New York-based Navigators Group Inc. and its insurance units to negative from stable. S&P also affirmed its ‘BBB’ counterparty credit rating on Navigators Group Inc. and its ‘A’ counterparty credit and financial strength ratings on operating companies Navigators Insurance Co. and Navigators Specialty Insurance Co. (collectively referred to as Navigators).

“We revised the outlook to negative following the company’s release of its first-quarter 2011 results yesterday,” explained credit analyst Tracy Dolin. S&P’s bulletin said that, based on its calculations, “Navigator’s combined ratio increased to 117.8 percent in the first quarter of 2011 compared with 99.8 percent in the same period in 2010. Although one quarter of relatively weak performance does not indicate a definitive trend, we have doubts that the company will meet our published expectations for full-year 2011. Notably, we stated that the ratings could come under pressure if the company’s full-year 2011 combined ratio is 105 percent or higher, including unusual losses.”

The affirmation of the ratings on Navigators Group and its core operating subsidiaries reflects their “strong competitive position in the marine insurance market and strong capitalization,” said S&P.

As partial offsetting factors the rating agency cited “a business model that relies heavily on reinsurance capacity and a track record of aggressively entering new products and regions on an organic basis. In addition, the expense ratio is rising because the company is making investments in personnel and is reducing ceding commissions as it raises its retention.”

S&P said it expects Navigator’s operating performance in 2011 “to generate an ROR of about 8 percent, a combined ratio of about 100 percent excluding unusual losses, and a 105 percent combined ratio including unusual losses. We don’t expect a significant deviation between accident-year and calendar-year performance.

“Navigators’ capital adequacy likely will remain strong in 2011. This should provide a cushion for the severity risk associated with the group’s core marine insurance business and somewhat lessen its credit risk exposure from its reinsurers. We expect financial leverage and fixed-charge coverage to remain in line with the current rating level.

“Navigator’s growth and business mix likely will remain opportunistic and fluctuate with changes in market conditions. Accordingly, we expect gross writings in Navigator’s newly established NAV Re segment to somewhat offset the premiums that it lost when it sold its middle-market property/casualty business to Tower Group Inc. as a renewal rights transaction in first-quarter 2011.”

S&P added that on an “organic gross premiums written basis, we expect growth to be flat to marginally down in 2011 as Navigators maintains underwriting discipline in the face of competitive pricing. On a net basis, we expect the company to retain more business on its books, given its balance-sheet strength.”

S&P warned that it “could lower the rating by one notch over the next 12-24 months, subject to its financial performance and our further review of its prospective operating fundamentals and overall market conditions. In particular, we would consider a one-notch downgrade if the company does not meet our stated expectations, especially because of underperformance in its less-volatile lines of business, if its financial position weakens because of significant adverse reserve development; if the company aggressively expands their writings in businesses that produce unsatisfactory risk adjusted returns; if its financial position weakens because of significant adverse reserve development; or a material reinsurance recoverability issue arises.

“If the company meets or exceeds our expectations in a sustainable manner, we would likely revise the outlook to stable,” the report concluded.

Source: Standard & Poor’s

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