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The Navigators Group Inc. (NASDAQ:NAVG)

Q4 2007 Earnings Call

February 14, 2008 8:30 am ET

Executives

Stanley Galanski - President and Chief Executive Officer.

Paul Malvasio - Executive Vice President and Chief Financial Officer

Analyst

Charles Gate - Credit Suisse

Scott Heleniak - Ferris Baker Watts

Ron Bobman - Capital Returns

Bean Evans - KBW

Operator

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2007 The Navigators Group Incorporated Earnings Conference Call. My name is Shaquana and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Mr. Stanley Galanski, President and CEO. Please proceed sir.

Stanley Galanski – President and Chief Executive Officer

Thank you. I would like to welcome you to our fourth quarter and year end 2007 earnings teleconference of The Navigators Group Inc. Before I begin I need to do the safe harbor wording which is a new assignment for me today, so bear with me.

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 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 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 the subsequent events or circumstances except as required by law.

Alright. Again, welcome Paul Malvasio, our Executive Vice President and Chief Financial Officer who is here with me today as well.

Yesterday afternoon we announced record quarterly net income of $26,540,000 million for the fourth quarter of 2007, and record in the net income for the full year of $95,620,000. We are proud of the results produced by our veteran team’s specialist. The combined loss and expense ratio for the group was $87.7% for the fourth quarter and 87.5% for the year.

We continue to benefit from favorable loss emergence patterns across all of our business units. While we benefitted from reserve releases from prior underwriting years, our net case reserves were up more than 18% from year end 2006, and net IBNR reserves increased by more than 23%.

Our underwriters understand that our top priority is always underwriting profit, not premium growth, and then our emphasis is on maintaining underwriting discipline as market condition softened.

During the quarter, we did not hesitate to walk away from business that did not need our pricing standards. This was particularly evident in our marine and energy business at Lloyd's, which was down for the quarter and full year from 2006 levels. Having said that, as a company we were able to grow our gross written premium 6% during the quarter compared to the fourth quarter of last year, and for the 12 months gross written premiums increased to 10%.

While our top line performance is better on a percentage basis for most of our peers, it was consistent with our own expectations and largely the result of the ongoing development of product lines launched over the last few years in Navigator Specialty and Navigators Pro, but we believe continue to represent profitable growth opportunities.

Our net written premium growth far exceeded our gross written premium growth consistent with the strategy we implemented several years back of retaining more business net as policyholder surplus has grown.

Net written premium was up 18% for the quarter and 24% for the year. And for each business unit, the level of growth in net premiums exceeded that of gross. From the standpoint of cost management, in 2007 we started to control the rate of expense growth below that of premium growth.

During the fourth quarter, our non-commission operating expenses increased to 12% compared to net written premium growth of 18%. Looking ahead we’ve recognized the expense management will continue to be a strategic priority in 2008 and beyond. Investment income was up 23% for the quarter and 24% for the year with cash flow for the year exceeding $284 million. We are proud of these results and what our hardworking underwriting claims and corporate service employees were able to accomplish in 2007. I would like to comment about the performance and market condition in each of our businesses. Marine and Energy Insurance is the foundation of Navigators and between the business produced by our insurance companies and our Lloyd's syndicate, accounted for about 46% of gross written premium for 2007.

The Marine Energy gross return premium of Navigator's Insurance Company was about flat for the year, while net written premium was up about 7%. REITs were about flat for our Marine and Energy renewal business in 2007 with bluewater hull and craft experiencing renewal price increases, while offshore energy renewal rates were down about 2.5% for the year. By line of business, we were able to achieve modest growth in the cargo, protection and indemnity and bluewater hull products, offsetting reduced premium volume in offshore energy and transport. I want to call your attention to our performance in bluewater hull for which we achieved renewal rate increases and grew our buck in an environment where we believe the international market is experiencing rate decreases of about 10%.

The net combined ratio of the Navigator Insurance Company's Marine and Energy business was 87.5% up about 3% from 2006, but still a great performance. Our Marine and Energy business at Lloyd's Syndicate 12/21/07 produced the combined ratio of 87% for 2007, 2.5 points better than in 2006. The Lloyd's Marine Market became increasingly competitive throughout 2007 and gross written premium for our Marine and Energy business at Lloyd's was down about 8% for the year.

We are market leaders at Lloyd's for the cargo and specie product lines, both of which experienced strong price competition in the second half of the year. As a result, our cargo business is down about 11% for the year and specie down nearly 20%. In turns of pricing trends in the market, renewal rates at Lloyd's were down between 3.5% and 7.5% for our Marine product lines. With the exception of the excessive loss reinsurance account, where the market remain reasonably firm and rates were up about 4%.

There are two other important aspects to our business at Lloyd's. First, is the non-marine business underwritten in London, which includes engineering, construction, and power plant operational risk, onshore energy, property insurance for low valued niche properties in the U.K. and Professional Indemnity. The global property market has significant capacity and this is what direct competition for .technical property risk such as power generation and onshore energy, where renewal levels were down 4.4% and 7% respectively. The way our underwriting results continue to be very good partly due to our technical approach to risk assessment.

The U.K. property books struggled in 2007 with loss of activity emanating from the mid year UK floods, as well as relatively high attritional loss levels. We are hopeful that this will translate into meaningful rate increases for that business in 2008.

Finally, the international professional indemnity book at Lloyd's experienced solid growth in 2007, despite a slight softening in renewal rate levels in the 3% to 4% range. We remained optimistic about the international D&O and professional liability market.

The second and increasingly important aspect of our Lloyd's business is our ability to utilize the Lloyd's licensees to underwrite business outside of London. In addition to our existing offices in Manchester and Antwerp, we now have established cover holder status for several of our non-London based underwriters, which allows our Miami office to underwrite Latin American business, our New York based D&O underwrites to entertain Canadian risks, and our Chicago based primary casualty team to underwrite New York construction and liquor liability risks on Lloyd's paper.

We are pleased with the progress made in 2007 toward utilizing Lloyd's as our preferred vehicle for international business expansion. Navigator specialty had a terrific year with combined ratio of 82.9% producing over $41 million of pre-tax underwriting profit. Navigator specialty gross return premium was up 22% for the year. The gross low to 1% during the fourth quarter, as a result of both softening market conditions and the overall construction industry slowdown.

Net written premium growth was 18% for the quarter and 35% for the year as a result again of our increased net retention of this business. The volume at California construction business underwritten in our San Francisco office declined in 2007 with rates down about 11% for the year. However, we continue to experience strong growth in the small artisan contractor segment of the book, which is truly a small account portfolio and where rates were relatively flat.

Our excess casualty business are about better than we had expected with renewal rates down about 4.5% for the year. We continue to buildup this unit and what was its third full year of operation, and we are able achieve 10% growth in excess casualty.

Our primary casualty unit launched in mid 2006 had strong growth finishing the year with over $50 million business consistent with our expectations. Both of these units are still in the early stages of development and are relatively small players and well is a large and fragmented US casualty market. While the construction and home sale downturn is in the new state, we continue to find opportunities to right construction ramp up policies on terms that we found attractive.

Our personal umbrella business continued to perform well and was up about 8.5% for the year. One of the strategic priorities, now to get specialty has been to become one of the top 20 excess and surplus life insurers in the United States. Based upon the 2006 data, we were the 21st largest ENS Company in the United States and expect to crack the top 20 when the 2007 industry results were known.

Navigators Pro had another solid underwriting year, producing a combined ratio of 94.7% for the insurance companies. Despite softening market conditions, Navigators Pro continued to expand its book of directors and officers liability and professional liability both in the United States and internationally. While gross written premium in the insurance companies increased 7% during 2007, Navigator Pro experienced strong growth at Lloyds, up 58% from 2006.

International D&O now represents about 20% of the D&O portion of the book, and we expect this growth trend to continue. Globalization and the expansion of individual stock ownership have contributed to an increased profile for shareholder rights issue and heightened attention on the duties of directors and officers to investors. Because of this, the International D&O market is growing, as many companies become buyers of D&O coverage for the first time. We expect this trend to continue in Europe, Canada, and Australia. We will rewritten D&O coverage for listed Chinese companies during 2007.

At the beginning of 2007, attention was focused on the fact that new class action securities filings were 10 year low. That trend was reversed during the year as a result of dozens of new filings of prime lending losses and the related construction industry slow down. There has been much speculation about how significant these losses will be for the industry and it is still too early to tell what the impact will be on the market in 2008. Pricing for directors and officers liability continue to soften in 2007 following a trend at the began in 2004.

At this point, we believe great levels were about where they were when we entered this business back in 2001, which of course appeared attract to do us then. We know price change on our D&O is down about 8% during 2007 and we anticipate further reductions in 2008. While Navigators is not completely escaped exposure to subprime claims, our market share in the mortgage lending and construction segments is as you might expect very limited. This is due enlarge part II strategy to avoid these segments introduced early in 2007 as a first signs of a housing slowdown appear, along with our overall risk appetite, for the small to mid cap portion of the market and particularly to the technology related businesses.

In our earnings release, we included information on the eight claims notices that had reported to us and that we consider related to subprime exposure. These notices are all on excess policies issued by these companies and none are at Lloyds, where we believe we have no subprime professional liability exposure. The average net limit exposed for these eight claims is $4.5 million, and we believe our IBNR reserves are sufficient for the limit amount of exposure we have for this business. There have been no additional notices received since year-end.

In addition to the limited exposure that we have to this business, I want to highlight the types of exposures that we do not have in our management and professional liability business. We do not underwrite errors and omissions coverage for investment banks, money center banks, mortgage insurers, mortgage brokers, mortgage bankers, residential real estate appraisers, home inspectors, title agents, title insurers, or law firms engaged in the securitization of financial instruments such as mortgage backed assets. Since the formation of the Navigators Pro in 2001, we have avoided these classes and have avoided exposures that we believe could present contagion risk to our profitable directors and officers’ liability business.

Errors and omissions insurance represented about 38% of Navigators Pro worldwide portfolio in 2007. Our largest niche within these segments is Lloyds professional liability, where we focus on law firms with the 150 or fewer attorneys, and by the way we tend to avoid those that have SEC work in their practices. We had carved out a sub specialty for smaller law firms with 10 or fewer attorneys for which we have introduced an internet based policy rate quote and issuance system that allows us to compete for this business on the basis of service and price.

During 2007, we exceeded the market for UK solicitors, which we found to be unprofitable and excessively price competitive. It just did not make sense to continue to commit capital to a niche to show little hope of reasonable underwriting profit in the near term.

Summarizing the year, the combined ratio of 87.5% was our best annual combined ratio since 1993 and second best since going public in 1986. While the internet and trade press are full of articles depicting the rapid softening of the market and the insurance brokers are out there all dropping the market down. As specialty player we find that each of our units and each of our products really operates in a unique competitive climate. While rate reductions have become the norm, we believe that most of our products continue to present a reasonable likelihood of profitable underwriting results. Where this is not the case for a market niche such as UK solicitors we will niche our capacity from the market.

Clearly, this is the case on individual risks across all of our business unit where underwriters make these decisions daily. While we will continue to emphasize underwriting and pricing discipline, the investment we made in diversifying our product over the past five years, allowed us to generate more than $1 billion of gross written premium in 2007 for the first time in our company’s history. We will continue to bring company in high touch hands on manner, and we will react accordingly the changes in the market place during 2008 that might cause us to alter our appetite for risk, as we maintain our fundamental focus on producing underwriting profit. And with that Paul Malvasio will take you through on financial performance.

Paul Malvasio – Executive Vice President and Chief Financial Officer

Thank you, Stan. I will briefly comment on some of our financial data. The net premium written increases of 18% and 24% for the 2007 fourth quarter and year reflects the growth in our gross written premium combined with retaining more of the business we write net. This is demonstrated by the dividing net written premium by gross written premium for our retention ratio, which approximated 60% for the year 2007 versus 54% for all of 2006. The prior period savings for the 2007 fourth quarter and year were $17.4 million and $47 million, which reduced a combined net loss by 10.8 and 7.8. The $47 million for the year mainly consist of the following; approximately $24 million for marine and energy, $11 million of that was in the insurance company and $13 million was at Lloyd’s, $12 million from the construction liability business within specialty, and $10 million from the professional liability book. More details on our reserves and prior savings will be contained in our form 10-K, which we expect to file by sometime later next week.

Turning to the balance sheet, approximately 66% of the $847 million of our net loss reserves at the year-end were for incredible net reported losses compared to 65% at the end of 2006. Invested assets at December 31st approximated $1.8 billion. The average quality of our fixed-income portfolio was AA with the duration of approximately 4.3 years.

Comparable mortgage-backed and asset-backed securities are rated AAA by S&P and Moody's. The company does not own any collateralized debt obligations or CDOs, collateralized loan obligations or CLOs, or asset-backed commercial paper. And we also don't own any auction rate securities in our investment portfolio.

At December 31st, we had three mortgage-backed securities approximating 452,000 subprime loans. These securities are also rated AAA by S&P and Moody's and have an effective maturity of less than one year. The company believes that such amounts are fully collectible.

At year end, we also had approximately $288 million or 16% of our fixed maturities portfolio which contained investment securities which were credit-enhanced by financial guarantors. Such securities duly have received a financial guarantors' credit rating by either S&P or Moody's. The average underlying credit quality of such credit enhanced securities are AA-. We have additional investment portfolio details contained in the supplement to our press release for your information.

At year end, our reinsurance receivables on paid and unpaid losses on our balance sheet approximated $819 million which declined by $124 million or 12% compared to 2006, as we continually retained more of our business net and recovered 2005 hurricane loss payments from reinsurers. Approximately 96% of our recoverable balances of A rated carriers and the company holds substantial amount of collateral for the other reinsurers.

Earnings per share increased 29% to $1.55 per share for the 2007 fourth quarter compared to $1.22 for 2006. Book value increased 20% for the year 2007 and was $662.1 million or $39.24 per share at December 31st. Statutory surplus approximated $579 million.

On October 29, 2007, the Board of Directors adopted a stock repurchase program of up to $30 million of the company's common stock through the end of 2008. No stock repurchases have occurred yet under this program.

With that, I would like to turn it back to Stan or open it for questions.

Stanley Galanski – President and Chief Executive Officer

Yup, we'll go ahead and open it up for questions, if you would.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of Charles Gate with Credit Suisse. Please proceed.

Charles Gate

Good morning.

Stanley Galanski

Good morning Charles.

Charles Gate

Hey you guys have probably the best disclosure with regard to your D&O liability of most any company that I believe has reported. So, congratulations and that extends over to your assets disclosure as well. A real good job, nice job.

Terence Deeks

Well thanks and thank you Paul Malvasio for putting that together.

Charles Gate

Okay, two questions initially. The first question, I see that the year combined ratio rose 7.6 percentage points to 99.1. What does that reflect?

Paul Malvasio

You need to break that down. If I go up to the full year, we know we had some storm losses in Europe that hit the property book both in the syndicate and the insurance company. We also had some attritional losses hit us during the year. We have had some startup loss in our Inland marine business, and we had some losses in the D&O Book that were not subprime, I think Stan mentioned the fact that we exited the UK Solicitors Book. So those sort of ended up impacting the full year results. And as we thought, we think we are just putting up what we think are prudent reserves given the level of activity in the market.

Stanley Galanski

Yeah think Charles, as a larger portion of our book over the last couple of years on an accident year basis or an underwriting year basis is migrated toward causality business, we tend to take what we think is prudent or conservative view of that business in its early stages of development.

Charles Gate

What's an attritional loss?

Stanley Galanski

I don't use the term attritional loss to report it, the non-cads losses that we would expect to normally occur. So there is a level of loss activity which would be your expected level which I think of as being attritional. Okay, on top of that you might add a load in your pricing or in the way you are thinking actually about your business for large losses or in the property book cads and things like that. So attrition should be made of what you think as the day-to-day losses, and in some years those are higher than in other years.

Charles Gate

Okay.

Paul Malvasio

Let me go back to the point that Stan made, in some of the newer books of business and actually even in the marine business where we see the lengthening detail of more liability business, we will tend to put up high rising odds for those longer tail businesses.

Charles Gate

My second question, I see the big growth in the specialty business and I realize that it is down from what it was earlier in the year, but I see that it was 18% in the quarter. Could you elaborate on where that growth is coming from? I realize one of you said part of that is from small artisans, but I'm not sure what a small artisan is?

Stanley Galanski

Okay, well let's take a look to that. As I mentioned the construction business that is our kind of core book especially going back to 1995 that we've underwritten out of our San Francisco office was actually down for the year, okay. And that business generally has been the luxury homebuilders; we now do some construction wrap business there in larger artisans or trade contractors.

The smaller artisan book, which we do primarily to rule the internet are truly the small accounts, Joe Smith, DBA, Joe's Painting type of exposures. They are very, sole proprietor, limited number of employees, relatively small premium and generally are not those that are engaged in large real estate development. They fit more the repair and remodel. That has been a very much a growing business for us over the last three years. And candidly it's less impacted by new constructions, since a lot of those types of contractors are doing work on existing constructions, and we believe it does not have the same CV exposure. So that's one component okay, that kind of balances out and you know, as resource to have a bit of growth in the construction segment as that mix is kind of changed. But I think the major contributors to get to your question is to be the growth of our primary casualty unit which we added hubbed in Chicago mid-year last year, and which is now, I guess, has been in business for 20 months or so, and is beginning to reach what we would expected it would reach.

Charles, for us, it is a lot about distribution because up until the time we started that unit, we were not doing business with wholesale insurance brokers for casualty, east of the Rockies. So with that, we have dramatically expanded our distribution. It is still relatively small compared to what some of the big units, casualty underwriters would do. But for us it has been a big part of doing business with more people, east of the Rockies; we simply didn't have the manpower or the physical presence to reach out to in the past, as well as the ongoing development of our excess casualty business.

So I think if you say what factors influence that, those will be the three factors. What we -- I think we try to do strategically across the business is to make sure there were many different products and business units out there and to make sure that none of our underwriters felt pressure to hit some kind of a budgeted number. That's just not the way we operate.

Charles Gate

Do you look at your growth in this business though versus in specialty line that baroquely (inaudible) like yourselves, superior underwriters; both those companies are reporting lower sales. So your sales growth would in part reflect this expansion of coverages, and it would also reflect your expansion in geographic area?

Stanley Galanski

I think it is very difficult to compare us to some of the established leaders in the units business. Both of the companies you mentioned, we have a high degree of respect for. But in some ways doing different businesses we are. For example, we're not in trucking business, never had been and don't have any plans to be in it. I suspect from what I know of that business that’s it's become very, very competitive over the last 18 months. So it’s a different market dynamic there. But I think secondarily is it – I think they probably have much more established distribution systems and much more established books of business.

From our standpoint you know, we're still building that distribution and I think that’s probably the difference. Having said that, I think you all understand that we turn away much more business in relate Charles, I mean, we're not in the old processing business here, but again for us it's been really I think doing more business simply with more people because we simply didn't have the manpower or the physical ability to do that in the past.

Charles Gate

Once again nice job on disclosure.

Stanley Galanski

Yeah. Thank you.

Operator

(Operator Instructions). And your next question comes from the line of Scott Heleniak with Ferris Baker Watts. Please proceed.

Scott Heleniak

Hi good morning.

Stanley Galanski

Good morning Scott.

Scott Heleniak

Just a couple quick things here. Can you talk about the claim trends in California construction business if you're seeing a change at all during the year because of the housing slowdown? Any uptick in claims or is it still kind of the same in that?

Stanley Galanski

We've not seen a change in claims yet. We look at the California construction, particularly the construction defect activity which is something we very much focus on in a lot of ways. In terms of what average cost of loss are, as to what our cost is to defend a claim, the time to handle it and as well as the frequency of those claims is the percentage of our in force count. And we draw that down pretty deep and look at it separately to say on residential general contractors versus our artisans and so on. And what I would tell you as things got dramatically better in the 2003 year. You could almost try underwriting it. You could almost draw a line and see at the various stages of development in those years.

Now there's a lots of factors that one might speculate and attribute that to. I'm more of the black sworn guy, I can't tell you exactly why it happened, but we monitor that it did happen. And, no, we've not seen any real change in that. Nor do we really expect that necessarily construction business claims would emanate from that slowdown in construction.

Scott Heleniak

Okay. And then the international D&O book you talked that about being 20%. Can you talk about how quick you can wrap that up and maybe where you see that in a couple of years as a percent of the D&O book?

Stanley Galanski

Well we already do mention the way of forward looking our business. But I would tell you we like the prospects for international D&O. We think, in general, that I think the -- lets just say Europe and Asia are, Europe maybe where the US D&O business was 15 years ago or so, and Asia maybe a little further behind in that. But there is certainly an increased awareness as I mention of the duties of directors, increasing contemplation of things like securities class actions in Europe, and all of that is creating a higher level of awareness of the product, and thankfully the brokers are doing good job of bringing that to the attention of clients as well.

Globalization is a big factor there. So you have some markets that have been showing more rapidly than others. But in general, I think, we feel very good about that. We have the ability as I mentioned to underwrite D&O obviously out of London, and we do some of that business out of our New York operation of Navigators Pro as well. And, again we see that as a good opportunity.

Scott Heleniak

Okay. And then one last question, the reinsurance recoverables, how much of the loss that you have is related to KRW. Do you have that number or? Its not that I could…

Paul Malvasio

Actually where will I put it. It's about a $160 million.

Scott Heleniak

Okay, fair enough.

Paul Malvasio

It will be identified in the K. I know its down well over a $150 million for the year.

Stanley Galanski

That’s going reasonably well and obliviously as those claims finally got paid and then we collect the reinsurance contributed a cash flow number for the year.

Paul Malvasio

Actually it’s a 168, I found it.

Scott Heleniak

You found it. Okay, alright thank you.

Stanley Galanski

You bet.

Operator

(Operator Instructions). You have a follow-up question from the line of Charles Gates with Credit Suisse. Please proceed.

Charles Gates

Where would you next to have round up review of reserves for asbestos in environmental viability? Or what was the timing of the last one?

Paul Malvasio

Again, we monitored very quarter and generally this is done at the end of the year. Again just to be clear and this is all spelled out in the K. Right now we are sitting here with, again if you go back to 2003, we discover we had four claims that had class action exposure where they manufactured or distributed asbestos. Of those four, they were all settled. One settled below are cashing point, so whatever reserves we had went away, and the other three again were settled with, this was all pretty much done in 2005, total have been fully paid, and the third one is being paid over several year period. And that is with the bulk of that was put up back at the end of 2003. The remaining were attritional losses where we had a very small percentage of some aviation type product exposure where – there is really nothing that happened over the last three or four years and you had a small handful of excess claims where the attachment points were well above any sort of loss exposure. And so, we really sat here for last four years seeing no real change in what we did back in 2003 and so, but we did monitored every quarter obviously we have an outset acre that comes in once a year and looks at all those stuff and so far we’re fine.

Charles Gate

My second question is the reason why you don’t pay a dividend basic how the stock is held. There is so much of it, for example, is held by Mr. Dixon and his family?

Stanley Galanski

I think tradition (Inaudible).

Paul Malvasio

Well, not, I mean, obviously the board does -- we look at capital management more broadly than just the chairman, but all our shareholders would think is in their best interest, and at this point, discussions have come up from time to time on dividend and so on and so forth, and the decision was made back in October that a better way to go at this point is to go out and potentially do a buyback depending on market conditions. But that is something that is periodically reviewed by the board.

Charles Gate

Ah! I guess my final question, if somebody asked me where construction wrap program was? (Inaudible). It’s got nothing to do with music.

Unidentified Company Representative

Well, it’s nothing about new to give on that one that one.

Charles Gate

Okay.

Unidentified Company Representative

Construction rap is a very simple concept. The one that we think is pretty attractive. When you normally insure a contractor on what is now come to have been reported to as a practice policy, you insure that contractor for any job that they happened to do, right, so they are working on one site, they are working on another site, you have got all of that. And think of the construction wrap is just kind of the inverse of that. What the insure is insuring is a project it could be the construction of a condominium and a resort town or something like that and it is going to take place over X number of months, it might take place over 18 months or 20 months okay. But it is insuring all of the contractors under that project under one limit, okay, and one policy with common terms. So there is a policy that would respond in the event of alligations of covered BI or PD okay. So whether that’s injury to a third party, who happened to get hurt on the work place or work related to the construction itself from a property down the stand point , one policy, once there is a limit. From our experience that is defense within limit, okay, so it really eliminates the costliness of the portioning liability. Now there is a lot that goes into a construction wrap up beyond the insurance policy that gets down to what I call, you know, signing up and enrolling those contractors into it and the engineering that goes, so I am giving you a very simple explanation, but what it really is, is taking all of those contractors on the job and putting them into a combined policy and then of course, there are excess markets through right excess limits above it to provide additional coverage. So it really quantifies the risk into that project as opposed to insuring an individual contractor.

Charles Gate

My final question, how is that business influenced by the Montrose decision back in California?

Stanley Galanski

If you are asking about the construction wrap, that is for the reason it exists because it really simplifies and avoids multiple policy use and any confusion as to who would be liable, it combines it all into a policy. I mean, construction wraps -- story has been going on for years, I mean, if you look at the, Ted Williams tunnel up there in Boston, which goes back number of years, that’s a little bit difference of a wrap, because that actually included the worker’s compensation in it. As you know, we are not worker’s compensation carriers. We are not involved in those type of things. I would say, indirectly it really emanates from Montrose just probably other CD related issues that rule out of California.

Charles Gate

Thank you, guys.

Stanley Galanski

You bet.

Operator

Your next question comes from the line of Ron Bobman with Capital Returns. Please proceed.

Ron Bobman

Hi Stan, hi Paul, nice job again. Really nice job.

Stanley Galanski

Thanks.

Ron Bobman

Good reading Stan early on.

Unidentified Company Representative

Working on that, lawyers are pretty good in writing up things.

Ron Bobman

Surprisingly, telling you (Inaudible). I had a question – a couple of points, during the prepared remarks you talked about number of claims obviously, one in the area of subprime credit type exposure. I am told by some people sort of some carriers are being notified of incidences by their insured. So, when you chose the word claim, can I use that interchangeably with the number of incidences they maybe have been notified of?

Stanley Galanski

Yes, I think I used the word notices and you say that an incident or whatever terms you want to use, but does it necessarily mean a covered loss or anything that will necessarily result in a case reserve, it is being put on notice, okay.

Ron Bobman

Okay.

Stanley Galanski

You remember in D&O stuff, and I would say, yeah, when you are in the liability business you get many, many incidents reported to you. Someone turn into covered claims and others -- the last years the incidence is being reported, as just the nature of being the claims business.

Ron Bobman

Understood, that actually sort of relates to my follow on question. A lot of the economic loss associated with credit crisis is largely sort of bad business practices. Hey, we bought too many of these bonds and the value dropped and now we got an economic kick to our balance sheet or income statement and so, I would think that normal sort of whatever business practice human practice would be, “hey lets submit a claim to our carrier and it would happens basically you know, whether we can collect something down the road, and then, of course, you got sort of probably at the other end of the spectrum, more bonafide understood covered losses that unfortunately yield a payment by a carrier, and I know, you’ve got a tiny number of claims, but all carriers and even small set of claims that you receive sort of run that spectrum from or it doesn’t look like it a covered loss on one end of the book and the other end booking surely its or its likely to be a covered loss?

Stanley Galanski

I think it is very difficult to speculate on that, what I would say is, I agree with your observations on the claims notice where an incident reported. You know, I think every policy is specific about the time period that report a claim. D&O and most professional liability policies are written on a claims made basis, and the claim must be reported within the time specified by the policy, for us, that’s generally the policy period or 30 days following it. So, as to what constitutes a noticed by the insured, you had to really get down to the policy language and that would influence people to report or not report whether it’s a situation that could give raise to a claim on one hand versus the other extreme being served with a notice of a lawsuit. So, know again that’s just kind of a nature of a business.

Ron Bobman

Okay, thanks a lot. Hope it continues. All the good luck.

Stanley Galanski

Thank you.

Operator

Your next question comes from line of Bean Evans with KBW. Please proceed.

Bean Evans

Yeah. First I would like to – the second Charlie’s comment, I think that the disclosure on the D&O, the subprime exposure was great very helpful. My second question is kind of quick. I was wondering if you guys could give the reserved development in the quarter broken down by segment and really where it came from?

Paul Malvasio

For the quarter?

Bean Evans

Yeah.

Paul Malvasio

In random we had $17 million at the quarter. It is about $8 million coming out of marine, about $3 million out of our professional liability, about a million dollars as specialty, and roughly $6 million out of Lloyd’s.

Bean Evans

Okay great. Could you give the – by any chance, kind of breakdown of the action years of what the development was for?

Paul Malvasio

You know, it really depends on the lines of businesses you would have to go line-by-line, for example, if you look at the marine business, a fair amount and they yet see to serve in the 10-K, it was fair pretty much in 2003 to 2006. The professional liability is two-third -- and I am giving the yield now. The professional liability is 2004 and mostly 2005, well that it was in 2006 also. And the speciality, once again it has started in 2000 to pretty much 2006.

Bean Evans

Okay, great. Thank you.

Paul Malvasio

And Lloyd’s I would say is concentrated in 2004 and 2005, with some hit in 2002.

Operator

At this time there are no further questions. I would now like to turn the call back over to Mr. Galanski for closing remark.

Stanley Galanski

Okay. Well, thank you all very much for joining us today. We appreciate you taking the time and your interest in the company, and wish you happy Valentines Day. Thanks.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a good day.

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Source: The Navigators Group Inc. Q4 2007 Earnings Call Transcript
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