A.M. Best Reports Navigators Insurance Group’s Rating Stays Unchanged

A.M. Best Co. has commented that the financial strength rating of A (Excellent) of Navigators Insurance Group (New York, N.Y.) remains unchanged following Navigators’ announcement that it will strengthen loss reserves for asbestos exposures in the fourth-quarter of 2003 by $31.6 million pre-tax, after reinsurance recoveries of $46 million. The outlook on the rating is stable.

The net asbestos reserve charge taken in the fourth quarter was based upon a review of asbestos-related exposures. Management was notified in late January that an asbestos claim would likely have to be settled for a significantly greater amount than previously anticipated.

As a result of the unexpected adverse development on this individual claim, the group retained an independent consulting firm to evaluate its potential exposure to asbestos claims from policies written directly by its insurance subsidiaries as well as those reinsured to Navigators Insurance Company from prior members of the group’s insurance pools. The group’s increased reserves relate primarily to policies underwritten by Navigators Agencies in the late 1970’s and first half of the 1980’s on behalf of members of the pool, consisting of excess liability on marine-related business and aviation products liability, including policies subsequently assumed by Navigators Insurance Company pursuant to reinsurance arrangements with pool members who exited the pool.

While consolidated operating earnings and statutory policyholders’ surplus of the group were adversely impacted by this reserve charge, the impact to surplus was moderated by a $95 million capital contribution from the parent company following its equity issuance in the fourth quarter of 2003.

Although the capital contribution was originally intended to enhance the group’s ability to capitalize on current insurance market opportunities, it has allowed for the absorption of this loss reserve charge. Management also prudently utilized a portion of the proceeds to pay off all existing debt at the parent holding company during the fourth quarter 2003, eliminating bank covenants that could potentially have led to additional pressure from the loss reserve charge.

While the loss reserve charge certainly has an impact on overall earnings, the company’s capitalization continues to support its rating level, as well as the favorable earnings generation on the group’s core books of business.

Prospectively, A.M. Best will monitor the effect of the group’s near-term operating plans on its capitalization. A.M. Best intends to meet with management in the next several months as part of its normal rating process to discuss its business plan, growth opportunities and the outlook on capitalization.