The Navigators Group, Inc. (NASDAQ:NAVG)
Q4 2013 Results Earnings Conference Call
February 14, 2014, 08:30 AM ET
Stanley A. Galanski - PRESIDENT and Chief Executive Officer
Ciro M. DeFalco - Senior Vice President and Chief Financial Officer
Good day, ladies and gentlemen, and welcome to the Navigators Group, Inc. Q4 2013 Earnings Conference Call. (Operator Instructions). As a reminder this conference call is being recorded.
Your hosts for today's conference are Stan Galanski, President and Chief Executive Officer; and Ciro DeFalco, Chief Financial Officer.
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 forms 10-K and 10-Q for the description of 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 will now like to hand the call over to Stan Galanski. You may begin.
Stanley A. Galanski
Good morning thank you. Happy Valentine's Day and welcome to the fourth quarter earnings conference call for The Navigators Group Inc.
We are very pleased to have reported profitable underwriting results and very solid operating results for the fourth quarter of 2013 and the full year. The combined loss and expense ratio for the fourth quarter is 94%, a six point improvement from 100.2% combined ratio for the fourth quarter of 2012. And for the full year the combined ratio is 94.8% down from 99.3% in 2012. For both the fourth quarter and the full year of 2013 we produced profitable underwriting results, both in our insurance companies and at our Lloyd's operations.
Fourth quarter 2013 net income was $14.3 million, down from $28 million for the fourth quarter of 2012. However operating earnings for the quarter were $16.1 million, an increase of 89% over the fourth quarter of 2012. During the quarter we incurred one-time after tax expense of $11.6 million in call premium for the early retirement of 7% senior notes due to expire in 2016.
While this adversely impacted net income it reflects an improved cost of capital for the company as during the quarter we issued new 10 year notes at 5.75% coupon. For the full year net income was $63.5 million, which was about flat with 2012. In a few minutes Sierra will take you through a more detailed review of our financial performance.
We continued to achieve modest premium growth during the quarter with gross written premium up 3.6% over the fourth quarter of 2012 and up 6.5% for the full year. Net written premium was up 5.2% for the fourth quarter and 6.5% for the full year.
Turning to our business units; our global marine business amounted to 26% of the gross written premium for 2013 and produced very solid underwriting results with a combined ratio of 81.2% for the fourth quarter of 2013 and 91.6% for the full year. This was a major improvement from the fourth quarter of 2012, which was adversely impacted by super storm Sandy. We're also pleased to report that our incurred loss activity for Sandy has remained below our expectations and below the originally announced estimate.
The Marine business of our insurance companies produced a combined ratio of 87.3% for 2013, down from 116.4% last year. This was the lowest combined ratio for that unit since 2006. Our U.S. Marine team continues to achieve minor renewal rate increases which averaged just under 2% for the fourth quarter compared to 4.6% on a full year basis.
Turning to our Lloyd's Marine business, the combined ratio was a healthy 95.8% for 2013. Lloyd's Marine market is challenged not only with excess capacity from traditional competitors but with an increasing number of broker controlled facilities that has been spun off. This has put added pressure on pricing which was slightly above flat for most Marine classes during the quarter with an exception of specie which had an average renewal rate increase of 3.5% and excess-of-loss pre-reinsurance which averaged a 5% rate increase during the quarter.
We are recognized as market leaders at Lloyd in our key Marine classes, most notably Marine liability, cargo, specie and transport. We will continue to emphasize the value of our technical acumen and underwriting and claims leadership capabilities against what we believe are efforts to commoditize the underwriting process through these broker facilities which are by no means new to those veterans of the Lloyd's market who have seen the underwriting results that have eventually led to the demise of such facilities in the past.
Property casualty insurance represented 60% of our gross written premium and 57% of our net written premium in 2013. Navigators Specialty, our excess and surplus lines unit that underwrites primary casualty, excess casualty and professional liability for the U.S wholesale broker market is the largest unit within that group and had another strong quarter with gross written premium growth of 10% for primary casualty and 9% for excess casualty.
Navigators Specialty produced a combined a ratio of 98% for 2013. This unit achieved average renewal rate increases of 5% on the excess casualty business and 2% on our primary casualty business during the fourth quarter. New business production remains strong as the flow of business into the wholesale market continued, resulting from the re-underwriting of the casualty portfolios at numerous insurers.
The recovery of the U.S. economy and particularly the construction segment is providing us with increased opportunities to underwrite both traditional general liability policies for contractors as well as wrap-up policies for specific projects. We are pleased with the progress in repositioning our U.S. professional liability portfolio following our decision to exit the small law firm professional liability business taken earlier in 2013.
As a result of that decision U.S professional liability gross written premium for the quarter was about flat with 2012 and we achieved average renewal increases of 2% for the quarter. We also recently added a property capability to Navigators Specialty targeting quota share participation on small and medium-sized risks.
The second largest business unit within property casualty is NavTech, which underwrites first-party energy, engineering and power generation business. On a global basis NavTech had another very solid year in 2013 with a combined ratio of 59.6% for the quarter and 68% for the full year. Capacity remains abundant for offshore energy risk and given the relatively modest level of industry losses renewal rates were pressured were down about 5% in the fourth quarter.
Pricing pressure continued into January with offshore energy renewal rates anecdotally down about 10% in January, a trend that we expect will continue barring any new major loss activity. Excess capacity also adversely impacted pricing in the downstream energy market in the quarter as our renewal rates were down about 2% despite several industry large losses around the globe during the second half of the year.
Our underwriting philosophy in NavTech is that profit comes from a combination of strong risk engineering capabilities, disciplined technical underwriting, achieving appropriate terms and conditions and lastly pricing.
As a result of competitive pressures our global NavTech premiums were down 18% for the fourth quarter and 9% for the full year. While we generally view rate levels as remaining adequate this varies greatly from risk to risk and we encourage our underwriters to remain highly disciplined, selective in a softening global energy property market.
Navigator Re is the third largest unit within property casually, generating $178 million of gross written premium for the year with the combined ratio of 99.9%. Our Latin American treaty portfolio had another very solid year generating a 70% combined ratio. Our crop reinsurance portfolio also performed well with a combined ratio of 93.4%, a significant improvement from the loss produced in 2012 as a result of last year's prolonged drought.
We believe our results were appreciatively better than of the overall crop market partly due to the geographic weighting of our portfolio. The Accident and Health treaty business generated an underwriting loss for the quarter as a result of higher than expected large loss activity really limited to large accounts that have already had corrective action taken.
Beginning January 1st we added an international property treaty product in our Lloyds syndicate which expands our non-U.S. international property capability beyond Latin America and specifically into Europe, Africa and Asia. While we're approaching that business with a modest volume size and a conservative risk appetite we anticipate it will contribute to a positive profit for Navigators Re in 2014.
Also within the property casualty segment is the [entity] we refer to as commercial which consist of the newer specialty products introduced over the last five years that are distributed on an open brokerage basis for both U.S. retailers and wholesalers.
These products include excess casualty, environmental liability, life science liability, commercial auto and an exporter's package. This unit achieved strong double-digit premium growth producing $100 million of gross written premium and it's now approaching our expectations of the scale needed to achieve profitable and sustainable profitable and sustainable underwriting results going forward.
Turning to Navigators Pro we achieved profitable underwriting results in the fourth quarter from Navigators Pro both in the U.S. insurance company and at Lloyds. Navigators Pro at Lloyds had a terrific year producing $57.6 million of gross written premium, up 32% over the full year 2012 with a combined ratio of 82.5%.
This portfolio was underwritten at Lloyds as well as in our Stockholm and Copenhagen branches all of which produced solid results and growth. However it is increasingly challenging because the lack of severity perceived in the market and that's attracted a number of new competitors.
Renewal rates were down about 2.5% for international D&O with international E&O renewal rates averaging about flat. Our team has worked hard and very effectively to develop the very well balanced portfolio of primary SME business as well as large CapEx D&O along with both primary and international E&O.
We're pleased to report that Navigators Pro's U.S. D&O business produced an underwritting profit for the quarter with a combined ratio of 93.3%. That was that's unit best results since the first quarter of 2010. Loss emergence for the quarter was favorable which we believe reflects the successful repositioning of our portfolio over the past three years.
For the quarter renewal rates increased an average of 2% overall and 6% on our primary business. Our strategy has been and continues to be to limit the amount of exposure we have to U.S. primary public company D&O in our portfolio while carefully managing the attachment points and the limits exposed to excess business.
For the full year 2013 6% our U.S. public company D&O policy were primary and for our excess policies our average attachment point was $67 million and our average limit for all of our public policies was $9 million.
Looking ahead we put strategies in place in 2013 to enhance our performance over the intermediate term. This included the successful capital raise that I mentioned earlier in the fourth quarter which provides us with ample capital to take advantage of growth opportunities in our current portfolio as well as new business. The most immediate of these opportunities is to modestly and incrementally increase the amount of business we retain net of reinsurance in major profitable product lines such as marine, offshore energy and excess casualty.
We were pleased with placement of our major treaty renewals in January 1st which were principally those for our global marine and energy business which we believe will allow us to retain a bit more premium net without meaningfully changing our total risk or aggregate retentions and while maintaining the stability of the expected outcomes of our portfolio.
With that I will turn the call over to Ciro DeFalco for a review of our financial performance.
Ciro M. DeFalco
Thanks, Stan. Good morning, everyone.
Our fourth quarter net income of $40.3 million or $1 per share reported yesterday after the market closed, includes $60.1 million of net operating earnings or $1.13 per share, the core premium on senior notes after tax of $11.6 million or minus $0.80 per share, net realized gains after tax of $10.1 million or $0.70 per share, and OTTI losses after-tax of $300,000 or minus $0.02 per share. The fourth quarter's combined ratio of 94% includes a reported loss in LAE ratio of 59.7% and an all-in expense ratio of 34.3%, split between net commission expenses of 14% and other operating expenses of 20.3%.
The quarterly consolidated results include $13.2 million of underwriting profit with $5.3 million generated by our U.S. insurance company and $7.9 million from our Lloyd’s Syndicates [inaudible]. Net investment income of $14.3 million was up $200,000 in the quarter and up over $600,000 or 4.7% compared to the same period last year. Net realized gains of $15.8 million pretax or $10.1 million after tax resulted from the sales of certain common stocks as we look to increase our after tax income by reinvesting and closing in equities with higher tax equivalent yields.
OTTI losses in the quarter of $500,000 pretax or $300,000 after-tax relates to one equity security. Our overall portfolio's unrealized gain position decreased $15.1 million or $9.8 million after-tax in the quarter, as interest rates rose and combined with the realization of gains related to the sales of common equities previously noted. The investment portfolio value as of December 31, 2013, was up $151 million to $2.57 billion with an annualized book yield of 2.32%, down marginally from 2.39% in the third quarter of this year, and exactly flat for the same period last year.
Our investment portfolio has maintained its AA average credit quality with the duration of 3.7 years which is up a tick from 3.6 years for the same period last year.
GAAP shareholders' equity at December 31, 2013, was $902 million, up modestly from $900 million at September 30, 2013 and $879 million at December 31, 2012. Growth in quarterly GAAP book value was driven by underwriting profit across the group, net investment income and net realized gains was largely offset by the fourth quarter core premium of $11.6 million after tax and a decrease in net unrealized of $9.8 million after tax.
Year-over-year growth in GAAP book value of $23 million was hampered by the previously mentioned core premium and the decrease in our net unrealized gain position of $43.8 million after tax. Book value per share decreased by $0.07 or minus 0.1% in the quarter to $[63.59] primarily reflecting the $0.81 per share impact from the core premium.
On a year-over-year basis, book value per share increased by $0.93 or 1.5% also reflecting the $0.81, the negative $0.81 per share from the core premium and more specifically the minus $3.08 per share impact from the decrease in unrealized gain position of our investment portfolio. Finally, our net cash flow from operations was a positive $7 million for the quarter following nearly $90 million third quarter cash flow and $136.7 million for the year.
And with that I will turn it back to you for opening the call for questions.
(Operator Instructions). I am showing no questions at this time.
Stanley A. Galanski
Well I'll then just wrap up the call by saying the only time this has happened to me in the 10 years that we have done these earnings telephone calls there was a technical problem and we found out that people were unable to ask their questions. So hopefully that's not the case. If we find that out, we will get another chance to schedule and open it up for analyst questions. If not I'll just have to hope that Ciro and I just answered them all in our commentary. Thanks for your interest in the company. And have a good weekend. Thank you everybody.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may, all, disconnect. Have a great day everyone.
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: firstname.lastname@example.org. Thank you!