S&P Affirms Navigators ‘A’ Rating

July 9, 2004

Standard & Poor’s Ratings Services announced that it has affirmed its ‘A’ counterparty credit and financial strength ratings on Navigators Insurance Co. and NIC Insurance Co. (collectively referred to as Navigators), with a negative outlook.

“The ratings on Navigators reflect its strong competitive position in the marine insurance market, very strong capitalization, strong and improving operating performance, and good financial flexibility,” said S&P. “Offsetting these positive factors are the company’s implementation risk of its diversification strategy, extensive use of reinsurance, and asbestos adverse loss-reserve developments.”

The rating agency explained that it was maintaining its negative outlook, “even though Navigators is expected to grow its gross premiums written at a less aggressive rate of 10%-15% in 2004 compared with prior years,” as it reflects “the short track record of Navigators in the new lines of business such as general liability, surety, directors and officers (D&O), and errors and omissions (E&O).”

S&P also noted that “the diversification strategy initiated in 2001 outside the marine insurance, which is Navigators’ longstanding area of specialization, has not been tested yet in a difficult cycle.”

The report indicated, however, that despite the “softening of the overall pricing environment ” for P/C insurance, S&P “expects that Navigators will continue to benefit from moderate rate increases and generate a strong operating performance in 2004 with a 10 percent-15 percent ROR and a 90 percent-95 percent combined ratio.

“In 2004, Navigators’ capitalization is expected to remain very strong above the rating level and should further strengthen from expected strong earnings. These positive factors should provide a capital cushion for both the severity risk associated with the company’s core marine insurance business and any potential reserve deficiency.”

A summary of the “Major Rating Factors” noted by S&P is as follows:
— Strong competitive position. Navigators was the eighth largest ocean marine insurer in the U.S. with a 5 percent market share, based on its $152 million of direct premiums written.
— Very strong capitalization. Capital adequacy ratio improved in 2003 to 172 percent from 141 percent in 2002, mostly due to the capital contribution of $95 million from its parent in October 2003 due to a successful secondary equity offering.
— Strong and improving operating performance. Hit by the need to strengthen reserves in 2003, Navigators has dramatically improved its operating results to $12 million pretax operating income from $3 million in Q1 2004.
— Good financial flexibility. The company has access to both the equity and debt markets through its publicly traded parent company as shown by the holding company’s successful raising of $111 million from the secondary public common stock offering in October 2003.
— Implementation risk of the diversification strategy. To implement its diversification strategy, the company is relying on its experienced management team, which is willing to shrink the top line growth if rates and conditions are not favorable.
— Extensive use of reinsurance. Navigators’ net reinsurance recoverables increased by 62 percent to $330 million in 2003 from $203 million in 2002 as the company continued to grow its business and reduce its retentions.
— Adverse loss-reserve developments. The loss and loss adjustment expense reserves increased 63% to $270 million in 2003 from $166 million in 2002.

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