Back to Top NAVIGATORS INSURANCE COMPANY NAVIGATORS SPECIALTY INSURANCE COMPANY. New York, New York

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1 NAVIGATORS INSURANCE COMPANY NAVIGATORS SPECIALTY INSURANCE COMPANY A A New York, New York A Back Top 2012 A.M. Best Company, Oldwick, NJ Printed September 5, Page 1 of 11

2 Back Top Ultimate Parent: The Navigars Group, Inc NAVIGATORS INSURANCE COMPANY New York, NY Reckson Executive Park, 6 International Drive, Rye Brook, NY Web: Tel: Fax: AMB#: NAIC#: Ultimate Parent#: FEIN#: BEST S CREDIT RATING Best s Financial Strength Rating: A Outlook: Stable Best s Financial Size Category: X RATING RATIONALE Rating nale: The ratings reflect Navigars Insurance Group s leading position as a global provider of insurance the marine secr, the group s well-diversified book of business, its modest net windsrm exposure, management s conservative approach risk management, underwriting and claims handling in addition the group s solid level of capitalization and hisrical profitability. These positive facrs are somewhat offset by the group s declining underwriting results most recently, its elevated, although declining, ceded reinsurance leverage and growth in relatively new lines of business, some of which have proved unprofitable. The outlooks reflect A.M. Best s expectation that the group will continue maintain its solid level of capitalization and operating performance, generating overall profitable results throughout market cycles. The positive rating facrs are derived from the group s hisrically favorable operating performance which, gether with capital-raising initiatives, has supported growth and enhanced overall capitalization. The strong operating performance, as evidenced by excellent returns on both revenue and surplus, has been driven by underwriting profitability produced by the group s highly tenured underwriting staff and its specialty expertise built up as one of the largest marine insurers in the world. The group remains committed underwriting excellence in terms of risk selection, contract terms and conditions and pricing discipline; all have been hallmarks in the generation of loss ratios that have outperformed the average posted by its industry peers. Such discipline and expertise, which have been critical profitability in the severity-driven ocean marine, casualty and energy lines, are a reflection of the strong risk management culture that has always been a part of the Navigars Insurance Despite the group s strong overall underwriting performance, underwriting results have declined in the past two years due a combination of recent large industry-wide losses in the energy segment, reinstatement premiums, adverse loss development on certain lines and run-off operations. Increased loss ratios among specific products have led the group either discontinue certain lines or re-underwrite select diversification lines. As such, the group is susceptible execution risk as it seeks balance its overall portfolio risk with non-marine-related products. The group s high ceded leverage is emblematic of its risk management approach wherein the majority of its Gulf Coast wind exposure and portions of its new business are ceded. Following large Gulf Coast srm losses, the group has significantly pared back its gross limits in recent years, effectively mitigating this exposure on a net basis. Somewhat mitigating the elevated ceded reinsurance leverage is the relatively high credit quality of Navigars reinsurers as well as the presence of letters of credit provided by some reinsurers. In addition, financial flexibility is afforded through the publicly traded parent, The Navigars Group Inc. (NASDAQ: NAVG). While over 30% of Navigars gross premium writings are still in the marine secr, diversification of risk is achieved as its remaining premiums are spread across a diverse product line, including general liability coverage for small general and artisan contracrs, professional liability, and specialty coverages. The group has expanded its geographic spread of risk through opening regional offices in select cities and introduced the following new products: accident and health, Latin American property, and professional Liability reinsurance. A.M. Best believes Navigars Insurance Group is well positioned at the current rating level. However, the ratings/outlooks may come under negative pressure if an unfavorable earnings trend develops and its capital begins erode. FIVE-YEAR RATING HISTORY Date Best s FSR Date Best s FSR 06/19/12 A 05/27/09 A 06/21/11 A 03/28/08 A 06/22/10 A KEY FINANCIAL INDICATORS ($000) Statury Data Direct Written Written Operating Admitted Assets Policyholders Surplus , ,019 98,519 64,914 1,594, , , ,689 97,669 31,952 1,687, , , ,673 70,365 42,938 1,789, , , ,355 56,468 81,095 1,823, , , ,391 6,110 12,964 1,903, ,162 Profitability Leverage Liquidity ROR NA Inv Lev NPW Overall Liq. Oper. Cashflow Yr (*) Data reflected within all tables of this report has been compiled from the company-filed statury statement. Within several financial tables of this report, this company is compared against the Commercial Casualty Composite. BUSINESS PROFILE Navigars Insurance Group (Navigars), through its lead operating unit, Navigars Insurance Company, specializes in underwriting marine and energy, specialty lines and professional liability business. Navigars Specialty Insurance Company underwrites property/casualty business on a non-admitted basis for those types of risks requiring greater flexibility in rating or policy terms and conditions. The group s multi-channel distribution platform utilizes global, national and regional brokers as well as wholesalers. Navigars has a long-standing reputation for expertise in the marine and energy secr, which includes property and excess liability coverages for marine-related business, offshore energy risks, related transportation and cargo exposures as well as a modest amount of business written in other facets of the marine and energy field. Specialty operations have underwritten general liability coverages for small general and artisan contracrs since 1995, mostly in California, and represent a post-montrose book of business with tight terms and conditions in place limit or avoid significant construction defect claims. Coverages are generally written on a non-admitted basis and have included construction wrap-up products since This book has shrunk in recent years on declining economic conditions. Excess casualty risks are diversified among a large number of industry groups. The remaining portion of the specialty gross premiums includes primary casualty and commercial middle market accounts. The group also enters specialty niche lines, which management believes can produce profitable underwriting results. The group also writes professional direcr and officer coverages a variety of market niches, including lawyers, architects and a variety of public and private companies. This coverage is largely offered small and mid-size companies as opposed Fortune 1000 companies. The group also restructured its D&O program by introducing a credit scoring function in its underwriting process. Beginning in 2011, this program was quota-shared with three other insuring participants. In 2010, Navigars sold its middle market 2012 A.M. Best Company, Oldwick, NJ Printed September 5, Page 2 of 11

3 Back Top commercial book renewal rights and placed its personal umbrella book in run-off. In 2010, the group began reinsuring both accident and health coverages as well as multi-peril crop insurance and added Latin America property reinsurance in 2011 and professional liability reinsurance in In recent years, the group has also opened a number of regional offices (e.g., Pittsburgh) market its existing products BUSINESS PRODUCTION AND PROFITABILITY ($000) % of NPW Pure Loss Loss & LAE Res. Written Product Line Direct Ocean Marine , , ,150 Oth Liab Occur , , ,641 Oth Liab CM... 86,356 80, ,454 Group A & H... 59, ,665 Inland Marine... 28,881 29, ,638 Allied Lines... 29, ,453 Reins-Casualty... 16, ,859 Surety... 13,517 6, ,608 All Other... 13,270-9, ,762 s , , ,229 Geographical breakdown of direct premium writings ($000): Aggregate Alien, $127,632 (26.8%); California, $75,712 (15.9%); New York, $41,027 (8.6%); Texas, $26,947 (5.7%); Washingn, $20,296 (4.3%); other jurisdictions, $184,738 (38.8%). RISK MANAGEMENT Navigars has established an enterprise risk management steering committee composed of its most senior management team including its CEO, CFO and CRO. Reporting that committee are four sub-committees consisting of underwriting and claims, operational risk, finance and credit risk and compliance and governance risk. Each committee is managed by a member of the steering committee. The group has mapped out its key risks each of which are assigned sub-committees for moniring and mitigation with the board having ultimate oversight. Risks are evaluated across a diagram that tracks the potential impact relative the group s degree of control. Significant dependence on reinsurance is maintained as the group writes high gross limits, consistent with that of typical commercial marine and energy insurers. Following the group s Katrina loss in 2005, management made a decision limit its Gulf Coast wind exposure, effectively reducing its gross catastrophe exposure from this book of business. This strategy was tested in 2008 with both Hurricane Ike and Hurricane Gustav with the group incurring $114 million in gross losses. However, pre-tax net losses (including reinstatement premiums from both catastrophes) were $29 million, or approximately 1% of surplus. Since 2009, the group has further reduced its net Gulf Coast exposure, issuing tal net limits of less than $10 million. A significant portion of the group s reinsurance program is placed with foreign reinsurers, primarily in the London market. The majority of reinsurance balances with unauthorized carriers is covered by letters of credit, which partially mitigate associated credit risk exposure. OPERATING PERFORMANCE Operating Results: Navigars generated strong pre-tax operating performance measures over a five-year period resulting from both underwriting profits and investment income. Although underwriting results have fallen in the last few years, return measures remained positive throughout the period. Realized gains in 2010 and 2011 enhanced tal returns in those years, while the realized losses in 2008 and 2009 lowered tal returns. PROFITABILITY ANALYSIS Company Industry Composite Return Return ROR on Oper. ROR on Oper Yr Underwriting Results: The group s five- and ten-year average combined ratios have outperformed its commercial casualty peers. Such results are largely due the group s disciplined underwriting approach leading profitable or near break-even underwriting results in most years. While the group s loss and loss adjustment expense (LAE) ratio is well below its peer composite, its underwriting expense ratio remains elevated relative its peer group. The group s underwriting results deteriorated in 2010 and The increased underwriting loss in 2011 resulted from a combination of several large losses in the group s marine business (including related reinstatement premium expenses), adverse development of loss reserves (particularly those related its D&O business for underwriting years 2006 through 2009) which impacted both pure losses and the loss adjustment expense ratio, and an increase in underwriting expenses (although it is noted that underwriting expenses increased by a lower percentage than net written premiums, resulting in a decline in the group s expense ratio). In 2010, issues with the D&O program and losses related the Deepwater Horizon incident, as well as declining premiums contributed the underwriting loss. Underwriting results fell in 2009 as reserve redundancies declined significantly from the prior year, primarily as a result of adverse development of the D&O product. While overall development of loss reserves has been favorable in the 2009 through 2011 period, the amount of favorable development has been significantly reduced from the earlier years of the five-year period. Given the development within its specialty liability line over the past two years, management has discontinued writing specific niches, restricted available coverages, increased attachment points and/or formalized a multi-variant rating platform improve its pricing accuracy. Despite hurricane losses in 2008, the combined ratio remained below 100. In light of those srm losses, the group imposed policy restrictions on its marine policies, including lower policy limits and limiting its business interruption coverages and significantly restricted its available Gulf of Mexico net wind aggregates. UNDERWRITING EXPERIENCE Undrw Loss s Expense s ($000) Pure Loss LAE Loss & LAE Comm. Other Exp. Exp. Div. Pol , , , , Yr Investment Results: Over the long term, the group s conservative investment strategy has produced a five-year average yield on invested assets that is a few basis points below that of the commercial casualty composite. Due the depressed interest rate environment experienced in recent years, management has cut back on the duration of its assets, staying short term while rates remain low. By keeping maturities short, management expects take advantage of rising rates in the future. Navigars high-quality, actively managed investment portfolio is spread across U.S. Treasury securities, municipal, mortgage- and asset-backed bonds and corporate issues. The employed strategy has produced favorable levels of investment income on an annual basis with modest realized capital gains (with the exception of 2008 and 2009) generated over the years from its small equity portfolio. As yields continued fall in 2010 and 2011, Navigars net investment income shrank somewhat although the group s increased equity holdings led a slight increase in earned dividends. In recent years, the group s tal return has benefitted from realized gains and generally positive 2012 A.M. Best Company, Oldwick, NJ Printed September 5, Page 3 of 11

4 Back Top changes in its unrealized gain position. The group incurred significant realized losses on its common sck portfolio in 2008, which was impacted by impairment losses recorded for accounting purposes. Although the group continued incur realized capital losses on its equity portfolio in 2009, unrealized capital gains on its sck portfolio contributed surplus growth on the year. INVESTMENT INCOME ANALYSIS ($000) Industry Company Composite Realized Unrealized Inc. Return Inc ,269 1,431-2, ,684-35, ,768-9,930 13, ,692 31,600 8, ,417 10,847 3, Yr INVESTMENT PORTFOLIO ANALYSIS 2011 Assets % of Invested Assets Annual Asset Class ($000) % Change Long-Term Bonds... 1,333, Scks... 95, Affiliated Investments , Other Inv Assets , ,696, BOND PORTFOLIO ANALYSIS % of Mkt. Val Avg. Class Class Stmt Maturity Bonds Val (Yrs) Mort. Secur. Mort. Secur. (% of ) Asset Class Governments States, Terr. & Poss Special Revenue Corporates All Bonds BALANCE SHEET STRENGTH ization: Navigars risk-adjusted capitalization is solid, as measured by Best s Adequacy (BCAR), and more than supports its current rating. With the significant increase in surplus, underwriting leverage has remained in line with the commercial casualty composite and favorable levels of risk-adjusted capitalization have been sustained even as net premiums written grew substantially in The group has significantly reduced its Gulf Coast wind exposure by lowering its gross limits and ceding the majority of risk third-party reinsurers. While the sum of net limits reached over $200 million at year-end 2008, net offered limits were significantly reduced during Current maximum available limits on such policies are (on a gross basis) less than $10 million for both property damage and business interruption on a combined basis. Further, the company offers business interruption coverage only on a limited basis. limits are less than $10 million in tal. As such, the group s catastrophe exposure is largely credit related. Navigars has internally generated capital over the last five years. Surplus growth over this period has largely followed strong pre-tax earnings. gains helped grow surplus in 2010, although modest tal realized losses over the past five years reduced tal after-tax earnings and slightly reduced surplus growth during the period. losses in 2009 were more than set off by a large deferred tax gain. In addition modest debt service, profits from the domestic insurance companies have been utilized further the group s expansion overseas, primarily in London. From a group perspective, the standard is provide dividends that are less than or equal 50% of net statury income. Hisrically, significant surplus growth has been derived from capital contributions from the publicly traded parent, The Navigars Group, Inc. (Navigars Inc.). In September 2005, a $250 million multipurpose shelf registration was filed with and approved by the SEC. This shelf was refreshed in 2009 under nearly identical terms. The shelf includes the option issue debt securities, common and preferred shares as well as depositary shares. In the fourth quarter of 2005, Navigars Inc. drew down on a portion of its initial shelf through an equity offering that led a $120 million contribution its domestic insurance subsidiary. In April of 2006, the parent again accessed its shelf and issued a $125 million debt offering of which $100 million was contributed Navigars Insurance Company. A portion of the $125 million senior notes were retired early at a gain and the remaining $114 million of senior notes mature on May 1, 2016, and pay interest at a rate of 7% annually. Further, consolidated financial leverage is a very low 13.5% (debt--tal-capital), and interest coverage ratios more than support the group s current rating level. As a result, the group has strong financial flexibility. The Company renewed its existing $500 million shelf registration in June CAPITAL GENERATION ANALYSIS ($000) Source of Surplus Operating Contrib. Other, of Tax Change in , ,000-35,139 54, ,669-34,996-20,000-40,175 2, ,365 3,977-25,000 15,312 64, ,468 40,399-40,000-15,767 41, ,110 13,927-45, , Yr 329,130 22, ,000-75, ,974 QUALITY OF SURPLUS ($000) Year- End % of Dividend Requirements Cap. Sck/ Sckholder Div. To Div. To Contrib. Unassigned POI Inc. Cap. Other Surplus Divs , , , , , , , , , , Underwriting Leverage: underwriting leverage remains at a reasonable level, reflecting its peer group norms. While ceded leverage is somewhat elevated as a result of the extensive utilization of reinsurance mitigate exposure certain high limit risks, credit risk is mitigated through the use of a diversified group of highly rated reinsurers and letters of credit received from foreign reinsurers. While overall premiums and liabilities, both net and gross, have grown over a five-year period, surplus growth has generally kept pace with these increases. premium leverage increased in 2011 as premium grew strongly. LEVERAGE ANALYSIS Company Industry Composite Res. Res. NPW NPW Current BCAR: A.M. Best Company, Oldwick, NJ Printed September 5, Page 4 of 11

5 Back Top PREMIUM COMPOSITION & GROWTH ANALYSIS DPW GPW NPW NPE ($000) (% Chg) ($000) (% Chg) ($000) (% Chg) ($000) (% Chg) , , , , , , , , , , , , , , , , , , , , YrCAGR Yr Chg Loss : While overall development has remained favorable, select lines of business have developed adversely. In most recent years, the level of favorable development was markedly less than what had been incurred in more recent years, primarily as a result of adverse development incurred on Navigars specialty liability lines of business. Favorable development of prior year net reserves as recorded in the group s annual statury filing taled $3.7 million in LOSS & ALAE RESERVE DEVELOP.: CALENDAR YEAR ($000) Orig. Loss Developed Thru 11 Develop. Orig. Develop. Develop. NPE Unpaid Res. Develop. Calendar Year , , , , , , , , , , , , , , , , , , LOSS & ALAE RESERVE DEVELOP.: ACCIDENT YEAR ($000) Accident Year Orig. Loss Developed Thru 11 Develop. Orig. Acc. Yr Loss Acc. Yr , , , , , , , , , , , , , , , , , , ASBESTOS & ENVIRONMENTAL (A&E) RESERVE ANALYSIS Company Industry Composite Year A&E Reserve ($000) Reserve Retention IBNR Mix Survival (3 yr) Impact (1 yr) Impact (3 yr) Survival (3 yr) Impact (1 yr) Impact (3 yr) , , , , , CEDED REINSURANCE ANALYSIS ($000) Company Bus. Reins. Ceded Ret. Recov. Reins. Industry Composite Bus. Reins. Ceded Ret. Recov. Reins. Ceded Reins ,034, ,065, ,005, ,004, ,021, REINSURANCE RECOVERABLES ($000) Paid & Unpaid Losses IBNR Unearned Other Recov* Reins Recov Foreign Affiliates US Insurers , ,712 92,240-1, ,570 Pools/Associations Other Non-US... 86,362 72,482 17,308-1, ,194 (ex US Affils) , , ,548-3, ,971 Grand , , ,548-3, ,970 * Includes Commissions less Funds Withheld INVESTMENT LEVERAGE ANALYSIS (% OF ) Industry Company Composite Class Real Other Non-Affil. Class 3-6 Estate/ Invested Common Affil. 3-6 Common Bonds Mtg. Assets Scks Bonds Scks Liquidity: The group maintains a very sound liquidity position with quick and current liquidity ratios above industry averages. Positive underwriting and operating cash flows have been produced over the past five years, enhancing the group s invested asset and liquidity position. Loss payments have increased since 2009 leading a sharp drop in operating cash flows. Nonetheless, operating cash flow remained positive, although at reduced levels. Paid losses have increased under increased srm loss activity from hurricanes Ike and Gustav and increased losses on its liability lines. The group s asset portfolio, though largely invested in government, corporate and municipal bonds, allocates enough in cash and short-term securities supply sound liquidity. LIQUIDITY ANALYSIS Company Industry Composite Quick Liq. Current Liq. Overall Liq. Agents Bal. Quick Liq. Current Liq. Overall Liq. Agents Bal CASH FLOW ANALYSIS ($000) Company Oper. Underw Oper. Cash Cash Cash Cash Flow Flow Flow Flow Underw Cash Flow Industry Composite Underw Oper. Cash Cash Flow Flow , ,990-21, , ,366 6, ,096 82,539-36, ,543 74,158 22, ,333 86,601 75, HISTORY The company was incorporated under the laws of New York on July 16, Active underwriting operations began on March 10, At December 31, 2011, paid-in capital of $366.1 million consisted of 100 shares of common sck at a par value of $50,000 per share and $361.1 million of contributed surplus. All authorized shares are outstanding A.M. Best Company, Oldwick, NJ Printed September 5, Page 5 of 11

6 MANAGEMENT All outstanding capital sck is held by The Navigars Group, Inc., a publicly traded holding company (NASDAQ: NAVG), approximately 20% of which is owned by Terence N. Deeks and family. The affairs of the company are under the direction of Navigars Management Company, Inc., which is reimbursed for its expenses. Terence N. Deeks serves as Chairman of the Board of The Navigars Group, Inc. Mr. Deeks has been active in the insurance industry in various executive capacities since the mid-1950s. Stanley A. Galanski serves as President and CEO of The Navigars Group, Inc. and as President, CEO and Chairman of Navigars Insurance Company. Mr. Galanski has been active in the insurance industry since Officers: Chairman, President and Chief Executive Officer, Stanley A. Galanski; Senior Vice President and Chief Financial Officer, Ciro M. DeFalco; Senior Vice President and Chief Underwriting Officer, H. Clay Bassett, Jr.; Senior Vice President and Chief Administrative Officer, R. Scott Eisdorfer; Senior Vice President and Chief Actuary, Mark Yunque; Senior Vice President and General Counsel, Bruce J. Byrnes; Vice President and Chief Risk Officer, Jennifer Yang; Vice Presidents, Joann L. DeBlasis (Underwriting - Reinsurance), Rachel K. Ehrlich (Claims), Paul C. Kluga (Reinsurance), Sherry J. Little (Regulary Compliance), Michael J. McKenna (Reinsurance), Daniel P. Reale (IT), Jeff L. Saunders (Underwriting), Linda M. Soughan (Claims), Ivan F. Vega Neathery (Underwriting - Reinsurance); Secretary, Emily B. Miner. Direcrs: H. Clay Bassett, Jr., Bruce J. Byrnes, Michael L. Civisca, Stephen R. Coward, Ciro M. DeFalco, Chrispher C. Duca, Richard S. Eisdorfer, Stanley A. Galanski (Chairman), Paul V. Hennessy, Noel Higgitt, Chrispher A. Johnson, Russell J. Johnson, Gregory D. Olson, Jeff L. Saunders. REGULATORY An examination of the financial condition was made as of December 31, 2009, by the insurance department of New York. The 2011 annual independent audit of the company was conducted by KPMG, LLP. The annual statement of actuarial opinion is provided by Claus S. Metzner, FSA, FCAS, MAAA, Milliman USA. Terriry: The company is licensed in the District of Columbia, Puer Rico and all states. It also operates on a surplus lines or non-admitted basis in U.S. Virgin Islands. This company is also licensed in the United Kingdom. REINSURANCE Navigars Insurance maintains proportional and non-proportional reinsurance with U.S. domestic reinsurers, Lloyd s of London, and other international companies. Quota share marine treaties are in place for primary liability, offshore energy, transport, and war business. Excess of loss contracts provide up $50 million on a net retained line basis protect per risk on marine and offshore energy business. The marine and offshore energy excess of loss program attaches at $5 million per risk and occurrence and $10 million per occurrence for catastrophe losses. The company maintains catastrophe layers protect against all catastrophic events emanating from the marine and non Gulf of Mexico offshore energy portfolios within an acceptable range of expected outcomes on a PML basis. The Gulf of Mexico offshore energy windsrm exposures are currently contained within our retention. Navigars other lines of business are reinsured on either a quota-share or excess of loss basis. Primary casualty business is reinsured above the company s $2 million retention on an excess of loss basis. The excess casualty program is subject a variable quota share. A quota share is in place for the D&O business, and the E&O program is protected by an excess of loss with a $2.2 million retention. Maximum retentions under the inland marine excess of loss program are $2.0 million. BALANCE SHEET ADMITTED ASSETS ($000) 12/31/11 12/31/10 11% 10% Bonds... 1,333,144 1,379, Common sck... 95,849 87, Cash & short-term invest ,183 54, Other non-affil inv asset... 1,363 13, Investments in affiliates , , Real estate, offices... 1,217 1, invested assets... 1,685,260 1,656, Premium balances ,031 79, Accrued interest... 11,326 12, All other assets... 76,287 74, assets... 1,903,904 1,823, LIABILITIES & SURPLUS ($000) 12/31/11 12/31/10 11% 10% Loss & LAE reserves , , Unearned premiums , , Conditional reserve funds... 19,106 28, All other liabilities... 75,360 94, liabilities... 1,241,743 1,136, & assigned surplus , , Unassigned surplus , , policyholders surplus , , liabilities & surplus... 1,903,904 1,823, SUMMARY OF 2011 OPERATIONS ($000) Funds Provided from Statement of 12/31/11 Operations 12/31/11 earned ,463 collected ,908 Losses incurred ,157 Benefit & loss-related pmts 176,782 LAE incurred ,469 Undrw expenses incurred 173,614 LAE & undrw expenses paid 257,793 underwriting income -42,776 Undrw cash flow... 39,333 investment income... 49,417 Investment income... 58,784 Other income/expense Other income/expense cash operations oper income... 6,110 97,585 Realized capital gains... 10,847 taxes incurred... 3,993 taxes pd (recov)... 10,984 income... 12,964 oper cash flow... 86,601 Back Top 2012 A.M. Best Company, Oldwick, NJ Printed September 5, Page 6 of 11

7 Back Top Ultimate Parent: The Navigars Group, Inc NAVIGATORS SPECIALTY INSURANCE COMPANY New York, NY Reckson Executive Park, 6 International Drive, Rye Brook, NY Web: Tel: Fax: AMB#: NAIC#: Ultimate Parent#: FEIN#: BEST S CREDIT RATING Best s Financial Strength Rating: A Outlook: Stable Best s Financial Size Category: X The company s rating reflects its reinsurance agreement with Navigars Insurance Company as a member of the Navigars Insurance RATING RATIONALE Rating nale: The ratings reflect Navigars Insurance Group s leading position as a global provider of insurance the marine secr, the group s well-diversified book of business, its modest net windsrm exposure, management s conservative approach risk management, underwriting and claims handling in addition the group s solid level of capitalization and hisrical profitability. These positive facrs are somewhat offset by the group s declining underwriting results most recently, its elevated, although declining, ceded reinsurance leverage and growth in relatively new lines of business, some of which have proved unprofitable. The outlooks reflect A.M. Best s expectation that the group will continue maintain its solid level of capitalization and operating performance, generating overall profitable results throughout market cycles. The positive rating facrs are derived from the group s hisrically favorable operating performance which, gether with capital-raising initiatives, has supported growth and enhanced overall capitalization. The strong operating performance, as evidenced by excellent returns on both revenue and surplus, has been driven by underwriting profitability produced by the group s highly tenured underwriting staff and its specialty expertise built up as one of the largest marine insurers in the world. The group remains committed underwriting excellence in terms of risk selection, contract terms and conditions and pricing discipline; all have been hallmarks in the generation of loss ratios that have outperformed the average posted by its industry peers. Such discipline and expertise, which have been critical profitability in the severity-driven ocean marine, casualty and energy lines, are a reflection of the strong risk management culture that has always been a part of the Navigars Insurance Despite the group s strong overall underwriting performance, underwriting results have declined in the past two years due a combination of recent large industry-wide losses in the energy segment, reinstatement premiums, adverse loss development on certain lines and run-off operations. Increased loss ratios among specific products have led the group either discontinue certain lines or re-underwrite select diversification lines. As such, the group is susceptible execution risk as it seeks balance its overall portfolio risk with non-marine-related products. The group s high ceded leverage is emblematic of its risk management approach wherein the majority of its Gulf Coast wind exposure and portions of its new business are ceded. Following large Gulf Coast srm losses, the group has significantly pared back its gross limits in recent years, effectively mitigating this exposure on a net basis. Somewhat mitigating the elevated ceded reinsurance leverage is the relatively high credit quality of Navigars reinsurers as well as the presence of letters of credit provided by some reinsurers. In addition, financial flexibility is afforded through the publicly traded parent, The Navigars Group Inc. (NASDAQ: NAVG). While over 30% of Navigars gross premium writings are still in the marine secr, diversification of risk is achieved as its remaining premiums are spread across a diverse product line, including general liability coverage for small general and artisan contracrs, professional liability, and specialty coverages. The group has expanded its geographic spread of risk through opening regional offices in select cities and introduced the following new products: accident and health, Latin American property, and professional Liability reinsurance. A.M. Best believes Navigars Insurance Group is well positioned at the current rating level. However, the ratings/outlooks may come under negative pressure if an unfavorable earnings trend develops and its capital begins erode. FIVE-YEAR RATING HISTORY Date Best s FSR Date Best s FSR 06/19/12 A 05/27/09 A 06/21/11 A 03/28/08 A 06/22/10 A KEY FINANCIAL INDICATORS ($000) Statury Data Direct Written Written Operating Admitted Assets Policyholders Surplus ,005 5,493 3, , , ,141 5,585 2, , , ,617 5,364 1, , , ,273 4,843 4, , , ,358 4,795 3, , ,504 Profitability Leverage Liquidity ROR NA Inv Lev NPW Overall Liq. Oper. Cashflow Yr 4.6 (*) Data reflected within all tables of this report has been compiled from the company-filed statury statement. Within several financial tables of this report, this company is compared against the Surplus Lines Composite. BUSINESS PROFILE Navigars Insurance Group (Navigars), through its lead operating unit, Navigars Insurance Company, specializes in underwriting marine and energy, specialty lines and professional liability business. Navigars Specialty Insurance Company underwrites property/casualty business on a non-admitted basis for those types of risks requiring greater flexibility in rating or policy terms and conditions. The group s multi-channel distribution platform utilizes global, national and regional brokers as well as wholesalers. Navigars has a long-standing reputation for expertise in the marine and energy secr, which includes property and excess liability coverages for marine-related business, offshore energy risks, related transportation and cargo exposures as well as a modest amount of business written in other facets of the marine and energy field. Specialty operations have underwritten general liability coverages for small general and artisan contracrs since 1995, mostly in California, and represent a post-montrose book of business with tight terms and conditions in place limit or avoid significant construction defect claims. Coverages are generally written on a non-admitted basis and have included construction wrap-up products since This book has shrunk in recent years on declining economic conditions A.M. Best Company, Oldwick, NJ Printed September 5, Page 7 of 11

8 Back Top Excess casualty risks are diversified among a large number of industry groups. The remaining portion of the specialty gross premiums includes primary casualty and commercial middle market accounts. The group also enters specialty niche lines, which management believes can produce profitable underwriting results. The group also writes professional direcr and officer coverages a variety of market niches, including lawyers, architects and a variety of public and private companies. This coverage is largely offered small and mid-size companies as opposed Fortune 1000 companies. The group also restructured its D&O program by introducing a credit scoring function in its underwriting process. Beginning in 2011, this program was quota-shared with three other insuring participants. In 2010, Navigars sold its middle market commercial book renewal rights and placed its personal umbrella book in run-off. In 2010, the group began reinsuring both accident and health coverages as well as multi-peril crop insurance and added Latin America property reinsurance in 2011 and professional liability reinsurance in In recent years, the group has also opened a number of regional offices (e.g., Pittsburgh) market its existing products. Direct Premium Writings By Product Lines: Direct written at the last year end taled ($000) $150,358, and were distributed as follows: Oth Liab Occur, $108,852; Oth Liab CM, $36,001; Inland Marine, $4,239; All Other, $1,266. Geographical breakdown of direct premium writings ($000): California, $57,528 (38.3%); Texas, $9,588 (6.4%); Illinois, $8,230 (5.5%); Florida, $8,202 (5.5%); Washingn, $5,864 (3.9%); other jurisdictions, $60,945 (40.5%). RISK MANAGEMENT Navigars has established an enterprise risk management steering committee composed of its most senior management team including its CEO, CFO and CRO. Reporting that committee are four sub-committees consisting of underwriting and claims, operational risk, finance and credit risk and compliance and governance risk. Each committee is managed by a member of the steering committee. The group has mapped out its key risks each of which are assigned sub-committees for moniring and mitigation with the board having ultimate oversight. Risks are evaluated across a diagram that tracks the potential impact relative the group s degree of control. Significant dependence on reinsurance is maintained as the group writes high gross limits, consistent with that of typical commercial marine and energy insurers. Following the group s Katrina loss in 2005, management made a decision limit its Gulf Coast wind exposure, effectively reducing its gross catastrophe exposure from this book of business. This strategy was tested in 2008 with both Hurricane Ike and Hurricane Gustav with the group incurring $114 million in gross losses. However, pre-tax net losses (including reinstatement premiums from both catastrophes) were $29 million, or approximately 1% of surplus. Since 2009, the group has further reduced its net Gulf Coast exposure, issuing tal net limits of less than $10 million. A significant portion of the group s reinsurance program is placed with foreign reinsurers, primarily in the London market. The majority of reinsurance balances with unauthorized carriers is covered by letters of credit, which partially mitigate associated credit risk exposure. OPERATING PERFORMANCE Operating Results: Navigars generated strong pre-tax operating performance measures over a five-year period resulting from both underwriting profits and investment income. Although underwriting results have fallen in the last few years, return measures remained positive throughout the period. Realized gains in 2010 and 2011 enhanced tal returns in those years, while the realized losses in 2008 and 2009 lowered tal returns. PROFITABILITY ANALYSIS Company Industry Composite Return Return ROR on Oper. ROR on Oper Yr Underwriting Results: The group s five- and ten-year average combined ratios have outperformed its commercial casualty peers. Such results are largely due the group s disciplined underwriting approach leading profitable or near break-even underwriting results in most years. While the group s loss and loss adjustment expense (LAE) ratio is well below its peer composite, its underwriting expense ratio remains elevated relative its peer group. The group s underwriting results deteriorated in 2010 and The increased underwriting loss in 2011 resulted from a combination of several large losses in the group s marine business (including related reinstatement premium expenses), adverse development of loss reserves (particularly those related its D&O business for underwriting years 2006 through 2009) which impacted both pure losses and the loss adjustment expense ratio, and an increase in underwriting expenses (although it is noted that underwriting expenses increased by a lower percentage than net written premiums, resulting in a decline in the group s expense ratio). In 2010, issues with the D&O program and losses related the Deepwater Horizon incident, as well as declining premiums contributed the underwriting loss. Underwriting results fell in 2009 as reserve redundancies declined significantly from the prior year, primarily as a result of adverse development of the D&O product. While overall development of loss reserves has been favorable in the 2009 through 2011 period, the amount of favorable development has been significantly reduced from the earlier years of the five-year period. Given the development within its specialty liability line over the past two years, management has discontinued writing specific niches, restricted available coverages, increased attachment points and/or formalized a multi-variant rating platform improve its pricing accuracy. Despite hurricane losses in 2008, the combined ratio remained below 100. In light of those srm losses, the group imposed policy restrictions on its marine policies, including lower policy limits and limiting its business interruption coverages and significantly restricted its available Gulf of Mexico net wind aggregates. Investment Results: Over the long term, the group s conservative investment strategy has produced a five-year average yield on invested assets that is a few basis points below that of the commercial casualty composite. Due the depressed interest rate environment experienced in recent years, management has cut back on the duration of its assets, staying short term while rates remain low. By keeping maturities short, management expects take advantage of rising rates in the future. Navigars high-quality, actively managed investment portfolio is spread across U.S. Treasury securities, municipal, mortgage- and asset-backed bonds and corporate issues. The employed strategy has produced favorable levels of investment income on an annual basis with modest realized capital gains (with the exception of 2008 and 2009) generated over the years from its small equity portfolio. As yields continued fall in 2010 and 2011, Navigars net investment income shrank somewhat although the group s increased equity holdings led a slight increase in earned dividends. In recent years, the group s tal return has benefitted from realized gains and generally positive changes in its unrealized gain position. The group incurred significant realized losses on its common sck portfolio in 2008, which was impacted by impairment losses recorded for accounting purposes. Although the group continued incur realized capital losses on its equity portfolio in 2009, unrealized capital gains on its sck portfolio contributed surplus growth on the year A.M. Best Company, Oldwick, NJ Printed September 5, Page 8 of 11

9 Back Top INVESTMENT INCOME ANALYSIS ($000) Company Realized Unrealized Inc. Return Industry Composite Inc , ,585-1, ,364-1, ,843 1, , Yr INVESTMENT PORTFOLIO ANALYSIS 2011 Assets % of Invested Assets Annual Asset Class ($000) % Change Long-Term Bonds , Other Inv Assets... 2, , BOND PORTFOLIO ANALYSIS % of Mkt. Val Avg. Class Class Stmt Maturity Bonds Val (Yrs) Mort. Secur. Mort. Secur. (% of ) Asset Class Governments Special Revenue Corporates All Bonds BALANCE SHEET STRENGTH ization: Navigars risk-adjusted capitalization is solid, as measured by Best s Adequacy (BCAR), and more than supports its current rating. With the significant increase in surplus, underwriting leverage has remained in line with the commercial casualty composite and favorable levels of risk-adjusted capitalization have been sustained even as net premiums written grew substantially in The group has significantly reduced its Gulf Coast wind exposure by lowering its gross limits and ceding the majority of risk third-party reinsurers. While the sum of net limits reached over $200 million at year-end 2008, net offered limits were significantly reduced during Current maximum available limits on such policies are (on a gross basis) less than $10 million for both property damage and business interruption on a combined basis. Further, the company offers business interruption coverage only on a limited basis. limits are less than $10 million in tal. As such, the group s catastrophe exposure is largely credit related. Navigars has internally generated capital over the last five years. Surplus growth over this period has largely followed strong pre-tax earnings. gains helped grow surplus in 2010, although modest tal realized losses over the past five years reduced tal after-tax earnings and slightly reduced surplus growth during the period. losses in 2009 were more than set off by a large deferred tax gain. In addition modest debt service, profits from the domestic insurance companies have been utilized further the group s expansion overseas, primarily in London. From a group perspective, the standard is provide dividends that are less than or equal 50% of net statury income. Hisrically, significant surplus growth has been derived from capital contributions from the publicly traded parent, The Navigars Group, Inc. (Navigars Inc.). In September 2005, a $250 million multipurpose shelf registration was filed with and approved by the SEC. This shelf was refreshed in 2009 under nearly identical terms. The shelf includes the option issue debt securities, common and preferred shares as well as depositary shares. In the fourth quarter of 2005, Navigars Inc. drew down on a portion of its initial shelf through an equity offering that led a $120 million contribution its domestic insurance subsidiary. In April of 2006, the parent again accessed its shelf and issued a $125 million debt offering of which $100 million was contributed Navigars Insurance Company. A portion of the $125 million senior notes were retired early at a gain and the remaining $114 million of senior notes mature on May 1, 2016, and pay interest at a rate of 7% annually. Further, consolidated financial leverage is a very low 13.5% (debt--tal-capital), and interest coverage ratios more than support the group s current rating level. As a result, the group has strong financial flexibility. The Company renewed its existing $500 million shelf registration in June CAPITAL GENERATION ANALYSIS ($000) Source of Surplus Operating Contrib. Other, of Tax Change in , ,822 3, ,585-1,768-1,706 2, ,364-2, , ,843 1,569-2,547 3, , ,622 3, Yr 26,081-2,253-7,096 16,731 QUALITY OF SURPLUS ($000) Year- End % of Dividend Requirements Cap. Sck/ Sckholder Div. To Div. To Contrib. Unassigned POI Inc. Cap. Other Surplus Divs , , , , , Underwriting Leverage: underwriting leverage remains at a reasonable level, reflecting its peer group norms. While ceded leverage is somewhat elevated as a result of the extensive utilization of reinsurance mitigate exposure certain high limit risks, credit risk is mitigated through the use of a diversified group of highly rated reinsurers and letters of credit received from foreign reinsurers. While overall premiums and liabilities, both net and gross, have grown over a five-year period, surplus growth has generally kept pace with these increases. premium leverage increased in 2011 as premium grew strongly. LEVERAGE ANALYSIS Company Industry Composite Res. Res. NPW NPW Current BCAR: PREMIUM COMPOSITION & GROWTH ANALYSIS DPW GPW NPW NPE ($000) (% Chg) ($000) (% Chg) ($000) (% Chg) ($000) (% Chg) , , , , , , , , , , YrCAGR Yr Chg Loss : While overall development has remained favorable, select lines of business have developed adversely. In most recent years, the level of favorable development was markedly less than what had been incurred in more recent years, primarily as a result of adverse development incurred on Navigars specialty liability lines of business. Favorable development of prior year net reserves as recorded in the group s annual statury filing taled $3.7 million in A.M. Best Company, Oldwick, NJ Printed September 5, Page 9 of 11

10 Back Top 2011 REINSURANCE RECOVERABLES ($000) Paid & Unpaid Losses IBNR Unearned Other Recov* Reins Recov US Affiliates , ,737 81, ,684 Grand , ,737 81, ,684 * Includes Commissions less Funds Withheld Liquidity: The group maintains a very sound liquidity position with quick and current liquidity ratios above industry averages. Positive underwriting and operating cash flows have been produced over the past five years, enhancing the group s invested asset and liquidity position. Loss payments have increased since 2009 leading a sharp drop in operating cash flows. Nonetheless, operating cash flow remained positive, although at reduced levels. Paid losses have increased under increased srm loss activity from hurricanes Ike and Gustav and increased losses on its liability lines. The group s asset portfolio, though largely invested in government, corporate and municipal bonds, allocates enough in cash and short-term securities supply sound liquidity. LIQUIDITY ANALYSIS Company Industry Composite Quick Current Overall Agents Bal. Quick Current Overall Agents Bal. Liq. Liq. Liq. Liq. Liq. Liq CASH FLOW ANALYSIS ($000) Company Oper. Underw Oper. Cash Cash Cash Cash Flow Flow Flow Flow Underw Cash Flow Industry Composite Underw Oper. Cash Cash Flow Flow , ,304 4, ,878-5, , , HISTORY The company was incorporated under the laws of New York on December 1, 1988 as Pilot Insurance Company and began business on Ocber 17, Active underwriting operations commenced in 1990 and, effective January 23, 1990, the company was renamed NIC Insurance Company. The current name was adopted on January 4, At December 31, 2011, paid-in capital of $91.0 million consisted of 250 shares of common sck at $20,000 par and $86.0 million of contributed surplus. All authorized shares are outstanding. MANAGEMENT All outstanding capital sck of Navigars Specialty Insurance Company is owned by Navigars Insurance Company, which in turn is owned by The Navigars Group, Inc., a publicly traded holding company (NASDAQ:NAVG), approximately 20% of which is owned by Terence N. Deeks and family. The affairs of the Company are under the direction of Navigars Management Company, Inc. which is reimbursed for its services. Management is directed by the same executives who direct the affairs of the parent company and The Navigars Group, Inc. Officers: Chairman, President and Chief Executive Officer, Stanley A. Galanski; Senior Vice President and Chief Financial Officer, Ciro M. DeFalco; Senior Vice President and Chief Underwriting Officer, H. Clay Bassett, Jr.; Senior Vice President and Chief Administrative Officer, R. Scott Eisdorfer; Senior Vice President and Chief Actuary, Mark Yunque; Senior Vice President and General Counsel, Bruce J. Byrnes; Vice President and Chief Risk Officer, Jennifer Yang; Vice Presidents, Rachel K. Ehrlich (Claims), Paul C. Kluga (Reinsurance), Sherry J. Little (Regulary Compliance), Michael J. McKenna (Reinsurance), Daniel P. Reale (IT), Jeff L. Saunders (Underwriting), Linda M. Soughan (Claims); Secretary, Emily B. Miner. Direcrs: H. Clay Bassett, Jr., Bruce J. Byrnes, Michael L. Civisca, Stephen R. Coward, Ciro M. DeFalco, Chrispher C. Duca, R. Scott Eisdorfer, Stanley A. Galanski (Chairman), Paul V. Hennessy, Noel Higgitt, Chrispher A. Johnson, Russell J. Johnson, Gregory D. Olson, Jeff L. Saunders. REGULATORY An examination of the financial condition was made as of December 31, 2009, by the insurance department of New York. The 2011 annual independent audit of the company was conducted by KPMG, LLP. The annual statement of actuarial opinion is provided by Claus S. Metzner, FSA, FCAS, MAAA, Milliman USA. Terriry: The company is licensed in New York. It also operates on a surplus lines or non-admitted basis in the District of Columbia, AL, AK, AZ, AR, CA, CO, CT, DE, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NJ, NM, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VT, VA, WA, WV, WI and WY. REINSURANCE Business is all ceded Navigars Insurance Company. BALANCE SHEET ADMITTED ASSETS ($000) 12/31/11 12/31/10 11% 10% Bonds , , Cash & short-term invest Other non-affil inv asset... 1,220 1, invested assets , , Premium balances... 16,358 10, Accrued interest All other assets assets , , LIABILITIES & SURPLUS ($000) 12/31/11 12/31/10 11% 10% All other liabilities... 18,483 11, liabilities... 18,483 11, & assigned surplus... 91,000 91, Unassigned surplus... 32,504 29, policyholders surplus , , liabilities & surplus , , SUMMARY OF 2011 OPERATIONS ($000) Funds Provided from Statement of 12/31/11 Operations 12/31/11 investment income... 4,795 Investment income... 5,260 cash operations oper income... 4,795 5,260 Realized capital gains taxes incurred... 1,496 taxes pd (recov)... 1,616 income... 3,355 oper cash flow... 3, A.M. Best Company, Oldwick, NJ Printed September 5, Page 10 of 11

11 Why is this Best s Rating Report important you? Back Top A Rating Report from the A.M. Best Company represents an independent opinion from the leading provider of insurer ratings of a company's financial strength and ability meet its obligations policyholders. The A.M. Best Company is the oldest, most experienced rating agency in the world and has been reporting on the financial condition of insurance companies since The Best's Financial Strength Rating opinion addresses the relative ability of an insurer meet its ongoing insurance obligations. The rating is not assigned specific insurance policies or contracts and does not address any other risk, including, but not limited, an insurer's claims-payment policies or procedures; the ability of an insurer dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. A Best's Financial Strength Rating is not a recommendation purchase, hold or terminate any insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. The company information appearing in this pamphlet is an extract from the complete company report prepared by the A.M. Best Company. A Best's Financial Strength Rating is assigned after a comprehensive quantitative and qualitative evaluation of a company's balance sheet strength, operating performance and business profile. Best's Financial Strength Ratings are assigned according the following scale: Secure Best's Financial Strength Ratings A++ and A Superior A and A Excellent B++ and B Good Vulnerable Best's Financial Strength Ratings B and B Fair C++ and C Marginal C and C Weak D Poor E Under Regulary Supervision F In Liquidation S Rating Suspended For the latest Best's Financial Strength Ratings and AMB Credit Reports visit the A.M. Best web site at You may also obtain AMB Credit Reports by calling our Cusmer Service department at , ext To expedite your request, please provide the company's identification number (AMB #) A.M. Best Company, Oldwick, NJ Printed September 5, Page 11 of 11