S&P Affirms Navigators ‘A’ ratings; Revises Outlook to Stable

February 3, 2006

Standard & Poor’s Ratings Services announced that it has revised the outlook to stable from negative and affirmed its “A” counterparty credit and financial strength ratings on Navigators Insurance Co. and its core subsidiary, NIC Insurance Co. (collectively Navigators). S&P also affirmed its ‘BBB’ counterparty credit rating on the parent, The Navigators Group Inc., and revised its outlook to stable.

“The ratings on Navigators reflect its strong competitive position in the marine insurance market, very strong capitalization supported by strong earnings and capital infusions, strong operating performance, and strong financial flexibility,” S&P said. “Partially offsetting these positive factors are the company’s extensive reliance on reinsurance, a significant exposure to catastrophe risk, and the implementation risk of its diversification strategy.”

S&P explained the new stable outlook as reflecting “the healthy and improving underwriting and operating performance in two consecutive active hurricane seasons.” It said: “Navigators has demonstrated adequate risk management and effective use of reinsurance. It has also settled all its major asbestos claims within amounts previously reserved.”

The rating agency also said that in its opinion, “after a very active 2005 hurricane season, Navigators will profit from rate increases in its overall marine segment in 2006, especially in its offshore energy business that was significantly affected by Hurricanes Katrina and Rita.”

“These strong rate increases will translate into a strong operating performance in 2006 with a 10 percent-15 percent ROR and 90 percent-95 percent combined ratio (excluding an above normal catastrophe season),” observed S&P credit analyst Taoufik Gharib. “In the non-marine business, the company will focus its growth on products with strong rate increases and de-emphasize or shrink the business volume of those with less attractive margins.”

For 2006 S&P said it “expects Navigators’ gross premiums written to grow 15 percent-20 percent. Navigators’ capitalization is expected to remain very strong in 2005, at a higher level than required by the rating level, and should further strengthen from anticipated strong earnings in 2006. These positive factors should provide a capital cushion for both the severity risk associated with the company’s core marine insurance business and somewhat lessen its credit risk exposure. However, the extensive use of reinsurance and a significant increase in its cost could lower Navigators’ operating margins in the short and mid-term.”

Lastly, S&P warned that, “in the event that Navigators’ financial position weakens because of an adverse development in Katrina/Rita losses, unexpected reserve charge, or a significant reinsurance recoverability issue, the outlook and/or the rating could be revised downward.”

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