Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

The Navigators Group Inc. (NASDAQ:NAVG)

Q1 2009 Earnings Call

May 1, 2009; 8:30 am ET

Executives

Stan Galanski - Chief Executive Officer

Frank McDonnell - Chief Financial Officer

Analysts

Dean Evans - KBW

Vinay Misquith - Credit Suisse

Paul Newsome - Sandler O’Neill Partners

Amit Kumar - FPKCCW

Operator

Good day ladies and gentlemen and welcome to the first quarter 2009, The Navigators Group Incorporated earnings conference call. My name is Ann and I will be your coordinator for today’s call. (Operator Instructions)

As a reminder this conference is being recorded for replay purposes. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session following the presentation. Before we begin, the company has asked me to read the following statement.

We remind everyone that today’s call includes forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements concern future business conditions, expectations and the outlook for the company, based on currently available information that involves risks and uncertainties.

The company’s actual results could differ materially from those anticipated in the forward-looking statements. We refer you to the company’s most recent form 10-K for a description of the important factors that may affect the company’s business. The forward-looking statements made on this call and any transcript of this call are only made as of this date and the company undertakes no obligation to publicly update the forward-looking statements to reflect subsequent events or circumstances, except as required by law.

I would now like to introduce Mr. Stan Galanski, Chief Executive Officer and Mr. Frank McDonnell, Chief Financial Officer; please proceed.

Stan Galanski

Thank you. Good morning. This is Stan Galanski. I’d like to welcome you to the first quarter earnings call of The Navigators Group Inc. Wednesday afternoon we announced quarterly net income of $12 million for the first quarter of 2009. Our quarterly earnings were adversely impacted by an $8 million net realized capital loss. Our operating earnings in the quarter were $20 million.

While there’s a challenging economic environment in which to operate, we are very pleased to continue to report profitable underwriting results. Our combined loss and expense ratio for the first quarter was 92.8%, up about 3 points from the first quarter of 2008. Our net loss ratio for the quarter was 60.8%, up 4 points from the 2008 first quarter.

We benefited from reserve releases from prior underwriting years, but at a lower level than in the first quarter of 2008. Given the relatively soft market conditions of the past few years and the current dynamic economic environment, we believe it is appropriate to take a cautious approach when evaluating loss emergence on third-party liability business.

Our expense ratio was down slightly from the first quarter of 2008, despite a number of investments and intellectual capital made during the fourth quarter and the first quarter of this year, that are obviously not yet contributing to the extent we expect them to over time.

Our gross written premium was down 4% for the quarter, largely as a result of reduced premium volume in our western states construction liability segment. We achieved strong premium growth in director’s and officers’ liability and in our insurance company marine operation.

Net written premium was up 7% for the quarter, impacted by our decision to reduce the amount of quota share reinsurance on our marine business in 2009. We had nearly $43 million of cash flow during the first quarter and our booked value increased 3.4% from year end.

I’d like to comment briefly on the format of our reporting. While our two major segments continue to be the insurance companies and our Lloyd’s Operations, you will notice this quarter that our results are broken down into three major classes of businesses; marine, property/casualty and professional liability, each within the insurance companies and our operations at Lloyd’s. This is a change in the way we are presented, which better reflects how we manage the business today.

Within property/casualty is the business that we formerly referred to as Navigator Specialty, consisting of our primary and excess casualty business, which includes our construction liability book. Also included in property/casualty is our NavTech operation which we formed in January to combine our offshore energy, onshore energy, engineering and other technical property business into one underwriting unit and finally NavTech, our U.S. middle market property/casualty unit is also included within the PC sector.

Offshore energy business is no longer reported as marine and this is reflected is both the current and the prior year results. As far as color commentary and our results in the market, I’d like to begin with marine. The marine business underwritten in our insurance company, both in the U.S. and in London was up 4% for the quarter with most of the growth coming from our marine liability product line.

Marine renewal rate range for the quarter was also up 4%. The loss ratio for the first quarter was a bit higher than expected as a result of a handful of large losses, although to a lesser extent that we experienced in the first quarter of 2008. We don’t believe this represents any long term trend or change in our expected loss patterns for marine.

Gross written premium for our marine business at Lloyd’s was down about 12% in the first quarter of 2008, due to a combination of factors, including the foreign exchange rate, timing differences for policies that were extended beyond the close of the quarter and reduced estimated exposures for cargo commodities such as bulk oil.

Renewal rates on our marine business at Lloyd’s were up and were generally consistent with that of the insurance companies. Marine net written premium was up 35% for the insurance companies and 2% at Lloyd’s, reflecting our decision to buy less quota share reinsurance in 2009. So, despite a quarter that was although the heavy on the loss side, we continue to feel very good about the current state of the marine business and pricing is heading in the right direction.

While gross written premium was down 16% for the property/casualty business of the insurance company, we’re very pleased with the quality of the portfolio and with the underwriting results, a 74.5% combined ratio for the quarter. From a premium perspective, the largest segment of this business is our western states construction liability book, which was down about 40% as a result of the downturn in residential construction activity.

Rates continue to be soft in construction liability and for the primary excess and surplus lines casualty business overall, as E&S underwriters face the triple threat of business moving to the standard markets, competition from startups and reduced exposures from the economic downturn. Our philosophy has been pretty consistent, but in an environment like that, it’s better to wait for improved market conditions and our underwriters have that message. Loss emergence continues to be favorable in this segment.

The second largest component of our property/casualty business is NavTech, which is the first party energy and engineering business. The headline story in this unit is the offshore energy portfolio and particularly the Gulf of Mexico windstorm market, which I would describe as a goldilocks market; too hard for the buyer who appear to be rejecting the pricing and coverage terms offered by the market, but too soft for us, particularly in some of the high potential loss coverage’s like (Inaudible).

There was a lot of fanfare around a $500 million wind facility created by one of the brokers earlier this year, but at the end of the day, there was not ample interest among the buyers. While we remain prepared to use our capacity for Gulf of Mexico windstorm, we won’t do so unless we were able to secure the terms necessary to achieve an appropriate underwriting profit.

Aside from Gulf of Mexico wind, pricing on the energy business continues to improve with renewal rates up an average of 7.5%. Excess casualty had another solid quarter with profitable underwriting results and premiums down slightly from the first quarter of 2008. We had positive renewal rate change during the quarter, following several consecutive quarters of price reductions and we think this bodes well for the balance of 2009.

During the quarter, we opened Nav Pac operations in Orange County and Charlotte, both led by underwriting manager, who have over 20 years with a single carrier in their respective local marketplace. This initiative is an important part of our strategy to expand our distribution systems and to more effectively cross sell our products.

One of the highlights of cross-selling has been the environmental casualty business. Our Chicago-based team, who joined us in the fourth quarter, is now operational and working closely with casualty underwriters in our other regional offices.

We achieved exceptionally strong growth in D&O during the quarter, both in the insurance companies and at Lloyd’s. The D&O market is changing dramatically, as agents, brokers and policy holders re-evaluate the security and restructure the placements of their programs at renewal.

We’ve invested in expanding our D&O underwriting team in the U.S. and London and are well positioned to capitalize on those opportunities that are risk appetite. That risk appetite continues to be focused on small-to-mid market public companies and private companies and not on Fortune 500 or financial institution business.

Renewal rates were about flat for the first quarter in the insurance companies and up 5% at Lloyd’s. Keep in mind that because of our very modest exposure to financial institution business, we hear there are more substantial pricing increases in that sector, but we continue to avoid it.

While our D&O business continues to run very well, we had a disappointing quarter in Lawyer’s Professional Liability, both in the U.S. and in our Lloyd’s operation, where we experienced a higher than expected level of large loss activity. As a result, we’re taking a cautious view of reserves and taking another look at the composition and performance of that book, to make sure it is headed in the direction of profitable underwriting results.

We experienced good growth in miscellaneous professional liability, underwritten by the team we added in the fourth quarter of 2008, who are also now responsible for our strategy for lawyers. We’re encouraged that renewal rates on lawyers were up 6% for the quarter in the U.S. and we expect that the industry needs to keep pushing rates up in this niche product line.

We all know there is plenty of challenge to go around in the current climate, but we’re up to that challenge. We chose as the theme for our 2008 Annual Report, risk and opportunity and we’re working very hard to identify and execute on the best opportunities to grow shareholder value.

In general, we’re encouraged that pricing is headed in the right direction, although more is needed. We’re very pleased with the quality of the underwriters that we’ve added to our team as we’ve expanded it, which continued in the first quarter. We have a couple of areas where we’re watching loss activity, to make sure that we’ve a good handle on the exposures and the needed rate levels and are confident that we have the underwriting expertise to get it right.

We’re pleased to achieve growth in book value during the quarter with the success we’ve had in capitalizing on the changing D&O market, as well as with the growth in our U.S. Marine and Nav Pac business and that our expenses while up over the first quarter of 2008, we’re actually below our plan for the quarter.

With that I’ll turn it over to Frank McDonnell to provide a review of our financial performance.

Frank McDonnell

Thank you, Stan. We reported strong operating results for the first quarter. Operating income was $1.19 per share, the combined ratio was 92.8. Prior accident year reserve releases is a $5.8 million recognized in the first quarter, lowering the reported combined ratio by 3.5 points.

When compared to the first quarter of 2008, results also benefited by $2 million from the impact of foreign exchange on the expenses of our London based operations. Investment income was $18.7 million, slightly lower than the first quarter of 2008, the dramatic decline in short term interest rates offset the favorable impact of the $137 million increase in invested assets.

First quarter 2009 net income was $12 million or $0.71 per share. Net realized capital losses after tax were $8 million, of which $7 million were impairment charges, most of which relate to equity securities.

During the quarter, our reported net unrealized investment loss position improved by $9 million. Adjusted for realized losses and amounts reclassified to other than temporary impairments, the net unrealized loss position deteriorated by $3 million, improved valuations from municipals and residential mortgages were more than offset by declines in equities and treasuries.

Total investments increased $34 million during the quarter. The average credit rating of our fixed income portfolio is still AA. The duration is approximately 4.3 years. The liquidity of our fixed income investment portfolio improved during the quarter. At March 31, the reported net unrealized investment losses were less than 1% of the cost basis of the investments. Also over 75% of our fixed income investments were trading at or above book value.

We have more than $220 million of cash in short term investments and we continue to generate strong cash flow. Operating cash flow was $43 million in the first quarter of 2009. There are no significant changes in our net loss reserves during the first quarter. The hurricane losses continue to be well contained within our marine excess of loss range reinsurance program. Incurred by not reported losses were 63% of our net loss reserves at December 31 and at March 31.

As I mentioned earlier, during the quarter we reported $5.8 million of net favorable prior period accident year loss development. Reserve releases resulting from better than expected loss emergence in specialty and NavTech were partially offset by large loss activity in the lawyer’s professional liability and marine liability lines.

We have entered into a new letter of credit agreement. The facility will continue to be used primarily to support the capacity at our Lloyd’s syndicate. Since the third quarter of 2008, we had been holding more funds short due to market illiquidity, potential hurricane loss payments and the pending renewal of over credit facility. This resulted in a reduced amount of investment income in the first quarter.

Market liquidity has improved a letter of credit facility is in place and we have ample liquidity. We are now in the process of redeploying these short term investments. In early April we repurchased $10 million of our outstanding 7% senior notes on the open market, which reduced our debt service expense by $700,000 annually. We recognized a $2.9 million gain on the transaction which will be included in our second quarter results.

In summary, Navigator continues to perform well in a very challenging environment. During the first quarter, we reported an underwriting profit generated positive cash flow, maintained a strong reserve position, maintained a very solid capital position, amended and extended our credit facility and grew book value per share by 3.4%.

So now we’ll open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Dean Evans with KBW. Please proceed.

Dean Evans - KBW

Yes, I was wondering if you could give some more detail on the lawyer’s professional up-tick in losses.

Frank McDonnell

Well Dean, not a whole lot to report. I mean it’s a relatively modest book to us and we have some expectation of what a normal level of large lose activity and let’s just define that as over $0.5 million gross. SO, if we’ll see a little bit more, we’ll react to that, but we don’t have a big SEC related book or anything like that. I mean I don’t want to give you the wrong impression that its D&O related or something like that. It kind of losses you see in the lawyers’ business, but we had a higher percentage than normal.

Dean Evans - KBW

What was the total amount of higher losses there, dollar wise?

Frank McDonnell

Within the lawyers’ businesses, the total amount was $4.6 million.

Dean Evans - KBW

And that was prior year additions correct?

Frank McDonnell

Correct.

Dean Evans - KBW

How about on marine side? You mentioned a few larger losses there. What were they as far as dollar terms and kind of I guess a quick description of them?

Frank McDonnell

There were a handful of larger losses. The net impact was $1.5 million of that versus development. Again, it was a handful; there was one loss in particular, where an anchor hit a gas line. So, basically the total of these losses were about $1.5 million over our expectation for the quarter.

Stan Galanski

Dean, with marine liability, particularly when you providing some the excess marine, it’s really a short loss type of product. You just can’t determine (a) number one, when those losses will happen and then (b) when they’ll settle. So, why don’t we involve the recreational marine type of thing, other than some of the commercial stuff, but it is the business that we are in.

Frank McDonnell

Dean, I would just add that this is the first time we’ve broken NavTech out from marine. NavTech had favorable development to more than offset the $1.5. So, the net of the two is actually $2.5 million of favorable development in the period.

Dean Evans - KBW

Okay, on the lawyers’ losses I guess real quickly, again, what were the accident years related to those?

Frank McDonnell

‘05, ‘06, and then it caused us to rethink our loss ratio for ‘07 and ‘08.

Dean Evans - KBW

Great, thank you very much.

Operator

(Operator Instructions) and the next question comes from the line Vinay Misquith with Credit Suisse. Please proceed.

Stan Galanski

Operator, we seem to have lost you, but hopefully we’ll be able to hear the questions.

Vinay Misquith - Credit Suisse

Hi, good morning.

Stan Galanski

We’ve got you. Good.

Vinay Misquith - Credit Suisse

Okay hi, on the D&O business that you’re getting, I’m curious what you’re seeing in terms of pricing away. Your business is obviously coming from another carrier. What price increases if any, are you getting from the other carrier that the client is moving from?

Stan Galanski

Well, I think what’s going on in the D&O business is that agents, brokers, policyholders are looking at how they structure their program and the rate levels are going to vary differently on the attachment points, whether you are writing primary or access. Generally, there’s not one insurance company that provides the full limits of the program, even on the small-to-mid cap. They’re frequently shared among different carriers.

So, you can imagine, generally there’s a flight to quality on that business. I think it’s easier to talk about renewal price change with a higher degree of certainty than speculating on what somebody paid last year at another company at a various layer, because that’s tough for us to always tell, but I would say, our renewal price change in the U.S. for our sector of business was about flat.

Now, in the U.K., at our Lloyd's Operation, we write a really non-U.S. account. It’s a group of international companies that may have some exposure to the U.S. but they’re not U.S. publicly listed companies. That business enjoyed a 5% renewal price change.

Vinay Misquith - Credit Suisse

Fair enough. In terms of the business that you are getting from competitors, could you comment on whether it’s from distressed players or it’s just from normal competitors?

Stan Galanski

To be honest with you, we don’t capture that information. We’ve got seasoned underwriting teams, they make their calls, but I think you can make a pretty safe assumption of what’s causing lineared interest in alternative D&O facilities.

Vinay Misquith - Credit Suisse

Sure, fair enough, and another question on the energy; I found your comments really interesting. Do you really think that customers would buy it and actually buy offshore energy and insurance in the next few months or will they just self-insure?

Stan Galanski

I could only speculate on that. There are certainly products out there; another major energy underwriter unveiled a product within the last week. Certainly, we are more of a following market on the offshore energy business and particularly, for Gulf of Mexico wind.

Certainly there’s some business being taken up, but I think if you went around and polled the underwriters in the business, I would think they would tell you they’re getting less order than they think. In some cases, the customer may just be waiting to see if terms get better overtime. I could really only speculate on what’s driving customer behavior there.

Vinay Misquith - Credit Suisse

Sure.

Stan Galanski

But I will tell you from our standpoint, if we don’t write the business, that’s okay. If we can’t get our terms, we are content to keep the capacity on the sidelines and simply reduce our exposure to the Gulf of Mexico wind. That’s a perfectly acceptable result for Navigators.

Vinay Misquith - Credit Suisse

Sure and your reinsurance program has moved from up or rather to an excessive loss. So, have you already paid for more reinsurance upfront and then will you be able to get credit from that few lawyer exposures going forward?

Stan Galanski

Well, we don’t go into the details to how we structure and price our reinsurance business, but I would tell you that our Gulf of Mexico wind facility is a separate facility and it’s not a minimum in deposit facility, so that’s not an issue to us.

Vinay Misquith - Credit Suisse

Fair enough. Last question on the construction business, I thought it was interesting, you’re seeing that pricing is still coming down in that business. Can’t you comment on loss cost trends? There was an issue with I think a Chinese made wallboard, so just curious if you’re seeing higher loss content in that business?

Stan Galanski

Okay. I’ll give you the two answers is that; number one, our loss emergence patterns continue to be at or better than what we expect them to be. So we have had no deterioration in our western states construction loss emergence patterns. We have not had claims reported to us from Chinese Drywall. It is my personal understanding that most of that exposure appears to be in the state of Florida. I don’t know that that’s absolutely correct, but we certainly follow that issue, but we have had no claims activity emanating from Chinese Drywall.

Vinay Misquith - Credit Suisse

Okay. Thank you.

Operator

The next question comes from the line of Paul Newsome with Sandler O’Neill Partners. Please proceed.

Paul Newsome - Sandler O’Neill Partners

Good morning. A related question to one that was asked right before; we’ve heard rumors that people are getting a lot more careful about who they write in excess of on programs, and I was wondering if you could confirm or deny that and if it is happening, if you’re one of those folks.

Stan Galanski

I don’t think we really have any comment on that. I mean I think we’ve always maintained a list of what’s acceptable security and I don’t think you would see us writing over, B security on our excess casualty or D&O business, but I think Paul what you’re referring to, that’s not really a factor for us and we don’t view that as a competitive tool the way we compete.

Paul Newsome - Sandler O’Neill Partners

Fair enough. Thanks.

Operator

(Operator Instructions) The next question comes from the line of Amit Kumar with FPKCCW. Please proceed.

Amit Kumar - FPKCCW

Thanks and good morning. Just one question, you mentioned intellectual capital in your opening remarks, could you sort of give us, some sort of a time line, when you expect those to start delivering and is there some sort of a premium expectation or perhaps you can give a number as to how much were these guys responsible for in their previous slides?

Stan Galanski

We really avoid that for a number of reasons, Amit. Number one is, we really don’t beat up our underwriters for production. We really send a message tone, which is ‘write the business on your terms and if you can’t get it, don’t worry about that.’ We don’t have them on or if you’re not making your budget by six months or nine months, we don’t want them to panic, because that tends to make underwriters do very counterproductive things like write under-priced business.

Now I’d say in general, what we’ve recruited into the company over the last, let’s just say six months, is expansion and strengthening of our non-D&O professional liability team and we’ve added our environmental casualty team in Chicago; we’ve added our excess D&O team in London and I’ll tell you, we’re very pleased with all three of those groups.

Beyond that what we’ve done is really strengthened existing businesses by adding more people in more locations, and our time horizon for that is generally a patient one. We want them to come in. Some will contribute more quickly than others, but I can tell you there are none of them that are below expectations that we have any disappointment in at this point in time.

Our culture very much emphasizes “get it right,” and to put expectations on them just doesn’t work with the way they work. That’s not to say they don’t have a premium budget and a business plan, but we really give them room to make the right decisions.

Amit Kumar - FPKCCW

Okay, that’s all for now. Thanks so much.

Operator

Ladies and gentlemen, this concludes the question-and-answer session. I would now like to turn the call over to Mr. Stan Galanski for closing remarks.

Stan Galanski

That concludes it for us. We appreciate you joining us today and we’ll talk to you next quarter. Thanks so much.

Frank McDonnell

Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The Navigators Group Inc. Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts