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Announcement:

Moody's affirms its ratings on The Navigators Group; outlook stable

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 market.

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 Equities 3.6%).

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 A3; and

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 at www.moodys.com/insurance.

New York
Kevin Lee
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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