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29 Oct 2008
Moody's affirms its ratings on The Navigators Group; outlook stable
$125 million of senior notes affirmed.
New York, October 29, 2008 -- Moody's Investors Service has affirmed the ratings of The Navigators
Group, Inc. (NASDAQ: NAVG) with a stable outlook (senior
debt at Baa3; insurance financial strength of operating subsidiaries
at A3). For third quarter 2008, the company reported net
income of $1 million, down 96% from the prior year
quarter due to Hurricanes Gustav and Ike ($18.3 million
after-tax loss) and -- to a lesser extent --
investment-related losses ($5.5 million pre-tax
net realized capital losses). Notwithstanding hurricane losses,
Moody's believes that Navigators maintains sufficient capital,
good liquidity, and a fairly conservative investment portfolio --
characteristics that are supportive of its ratings.
According to Moody's, the rating affirmation reflects Navigators'
profitable track record and strong market position in marine and energy
insurance. The preponderance of Navigators' natural catastrophe
exposure derives from insuring offshore energy platforms, principally
in the Gulf of Mexico. Whereas offshore energy business only represents
about one-tenth of Navigator's gross written premiums,
it has been the company's most volatile business, placing
the greatest demand on capital. Based on an analysis of Navigator's
aggregate first event limits for offshore energy exposures in the Gulf
(as of August 2008), Moody's believes that these exposures
are managed prudently through the use of reinsurance, both with
respect to earnings volatility and capital protection. Absent reinsurance,
however, a large event would impair earnings and capital significantly
and diminish Navigators' franchise value in the offshore energy
Moody's noted that Navigators possesses good liquidity and a fairly
conservative investment portfolio. The insurance subsidiaries provide
ample liquidity as premiums are received -- and invested
-- in advance of when claims are paid out. Moreover,
as of September 30, 2008, the holding company maintained $47
million of cash (vs. $8.8 million in annual interest
expense), had access to $42 million of dividends from subsidiaries
without regulatory approval, and maintained a $20 million
unused credit line (expires March 2009). No debt maturities are
due until 2016 ($125 million senior notes). In addition
to operating cash flows, invested assets provide sufficient liquidity,
as cash, cash equivalents, and Treasuries total $539
million, which is about 2.8 times all claim payouts last
year. Cash, Treasuries, Municipals and Agency MBS make
up nearly three-quarters of cash and investments (i.e.,
Cash/Short-Terms/Treasuries 28.4%, Municipals
31.3%, Agency MBS 14.8%, Non-Agency
CMOs 4.1%, Non-Agency ABS 2.2%,
CMBS 5.4%, Corporates 10.1%, and
These strengths, however, are tempered by the company's
modest scale and heavy dependence on reinsurance. The latter is
partly mitigated by consistency in its reinsurance panel over the years,
long standing relationships with certain reinsurers, and collateral
requirements on a portion of reinsurance recoverables. Other credit
challenges include litigiousness in the construction industry for general
liability insurance, vagaries of lawsuits for director and officers'
liability insurance, and a lack of sufficient proprietary loss information
for pricing more recent products like primary and excess casualty insurance.
Moreover, there is a need to maintain funding sources to facilitate
its participation in Lloyd's Syndicate 1221. Current funding
is provided by letters of credit available under a $180 million
credit facility, which expires on March 31, 2009. As
of September 30, 2008, $95m of the available letters
of credit were being utilized.
The rating agency cited several factors that could lead to positive pressure
on the ratings including: 1) reduction of catastrophe exposure,
before effect of reinsurance, 2) sustained financial leverage below
25% (roughly 29% at September 30, 2008, including
operating lease commitments and letters of credit issued under the aforementioned
facility), 3) sustained gross underwriting leverage (gross written
premiums and gross loss reserves as a percent of equity) below 4 times
(4.1x at prior year end). Conversely, adjusted financial
leverage above 35%, EBIT coverage of fixed charges below
4 times, and erosion of book value by more than 10% over
a twelve month period could lead to a downgrade of the ratings.
The last rating action on Navigators occurred on April 7, 2006 when
Moody's assigned first-time debt and insurance financial
strength ratings to Navigators and its subsidiaries.
The following ratings have been affirmed with a stable outlook:
The Navigators Group, Inc. -- senior unsecured
notes at Baa3;
Navigators Insurance Company - insurance financial strength at
Navigators Specialty Insurance Company -- insurance financial
strength at A3.
The Navigators Group, Inc., based in New York,
is engaged, through its subsidiaries in underwriting marine insurance
and related lines and other specialty property and casualty insurance
in the United States and Europe. For the first nine months of 2008,
Navigators reported gross premiums written of $819 million,
net premiums written of $502 million and net income of $42
million. At September 30, 2008, Navigators had shareholders'
equity of $656 million.
Moody's insurance financial strength ratings are opinions of the ability
of insurance companies and reinsurers to repay punctually senior policyholder
claims and obligations. For more information, visit our website
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
Financial Institutions Group
Moody's Investors Service
No Related Data.
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