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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-11238.
NYMAGIC, INC.
(Exact name of registrant as specified in its charter)
New York 13-3534162
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
330 Madison Avenue, New York, NY 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 551-0600
---------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock, $1.00 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant, as of March 1, 1998, was approximately $113,652,570.
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 1, 1998, was 9,676,806 shares of common stock, $1.00 par
value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders are incorporated by reference in Part III.
1
Part I
Item 1. Business.
General
NYMAGIC, INC., a New York corporation (the "Company" or "NYMAGIC"), is a
holding company which owns and operates the following insurance companies and
insurance underwriters and managers:
Insurance Companies:
New York Marine And General Insurance Company - ("New York Marine")
Gotham Insurance Company - ("Gotham")
The Company's insurance company subsidiaries, New York Marine and Gotham, each
maintain an A.M. Best insurance rating of A+.
Other:
Mutual Marine Office, Inc. - ("MMO")
Pacific Mutual Marine Office, Inc. - ("PMMO")
Mutual Marine Office of the Midwest, Inc. - ("Midwest")
MMO Underwriting Agency, Ltd.
MMO UK, Ltd.
MMO EU, Ltd.
all of which are collectively referred to hereinafter as the "Company."
NYMAGIC, through its subsidiaries, specializes in underwriting ocean
marine, inland marine, aviation and other liability insurance through insurance
pools managed by MMO, PMMO, and Midwest ("MMO and affiliates") since 1964. MMO
and affiliates were acquired by NYMAGIC in January 1991. In addition to managing
the insurance pools, NYMAGIC participates in the risks underwritten for the
pools through two insurance company subsidiaries, New York Marine and Gotham.
All premiums, losses and expenses are prorated among pool members in accordance
with their pool participation percentages. Effective January 1, 1994, the
Company increased to 81.47% its participation in the ocean marine, inland marine
and aviation business produced by the pools. Effective April 1, 1994, the
Company increased to 90.00% its participation in the inland marine business
produced by the pools and effective July 1, 1994, the Company increased to
90.00% its participation in the ocean marine and aviation business produced by
the pools and to 100% its participation in the other liability and inland marine
business produced by the pools. Effective January 1, 1997, the Company increased
to 100% its participation in the ocean marine and aviation business produced by
the pools. Substantially all of the Company's premiums for the last three years
have resulted from participation in the insurance pools managed by MMO and
affiliates.
On December 31, 1997, the Company acquired ownership of Highgate Managing
Agencies, Ltd. which subsequently changed its name to MMO Underwriting Agency,
Ltd. MMO Underwriting Agency Ltd. is a Lloyd's managing agency which will
commence underwriting in 1998 for the company's wholly owned subsidiary MMO UK,
Ltd. which is a Lloyd's corporate capital vehicle providing 100% of the capital
for Syndicate 1265.
The Company has approximately 115 employees of whom 19 are underwriters.
This report contains certain forward-looking statements concerning the
Company's operations, economic performance and financial condition, including,
in particular the likelihood of the Company's success in developing and
expanding its business. These statements are based upon a number of assumptions
and estimates which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. Some of these assumptions
inevitably will not materialize, and unanticipated events will occur which will
affect the Company's results.
2
Such statements may include, but are not limited to, projections of premium
revenue, investment income, other revenue, losses, expenses, earnings, cash
flows, plans for future operations, common stockholders' equity, investments,
capital plans, dividends, plans relating to products or services of and
estimates concerning the effects of litigation or other disputes, as well as
assumptions of any of the foregoing and are generally expressed with words such
as "believes," "estimates", "expects," "anticipates," "plans," "projects,"
"forecasts," "goals", "could have," "may have" and similar expressions.
The Pools
MMO, located in New York, PMMO, located in San Francisco and Midwest,
located in Chicago (the "Manager" or the "Managers"), manage the insurance pools
in which the Company participates.
The Manager accepts, on behalf of the pools, insurance risks brought to the
pools by brokers and others. All premiums, losses and expenses are prorated
among the pool members in accordance with their percentage participations in the
pools. Pursuant to the pool management agreements, the pool members have agreed
not to accept ocean marine insurance (other than ocean marine reinsurance)
unless received through the Manager and have authorized the Manager to accept
risks on behalf of the pool members and to effect all transactions in connection
with such risks, including the issuance of policies and endorsements and the
adjustment of claims. As compensation for its services, the Manager receives a
fee of 5.5% of gross premiums written by the pools and a contingent commission
of 10% on net underwriting profits, subject to adjustment.
Inception to date underwriting results for various reinsurance treaties are
used to calculate reinsurance contingent commissions on an earned basis in the
period in which the related profit commission is billed. Adjustments to
commissions, resulting from revisions in coverage, retroactive or audit
adjustments, are recorded in the period when realized. Subject to review by the
reinsurers, the Managers determine the profitability of all contingent
commission agreements placed with various reinsurance companies.
New York Marine was substituted for another member of the pools in
existence in 1979, and Pennsylvania National Mutual Casualty Insurance Company
("Pennsylvania National") was admitted to each of the pools in 1981. Arkwright
Mutual Insurance Company ("Arkwright") increased its participation in the pools
effective December 31, 1985, by assuming the percentage participation of
Employers Mutual Casualty Company ("Employers") and Mutual Fire, Marine and
Inland Insurance Company ("Mutual Fire"), both of which withdrew from the pools
effective December 31, 1985. In addition, the Arkwright-Boston Insurance Company
transferred its entire interest in the pools to its affiliate, Arkwright,
effective December 31, 1985.
In the case of Employers and Arkwright-Boston Insurance Company, all loss
and unearned premium reserves as of December 31, 1985, were transferred to
Arkwright and any loss run-off related to such reserves are to be fully absorbed
by Arkwright. In the case of Mutual Fire, all loss and unearned premium reserves
incurred through policy year 1985 were assumed by all members of the pools in
proportion to their respective interests in the pools at the time such reserves
were incurred.
Mutual Fire was a member of the pools from 1964 through 1985, with a
participation percentage of 3.71% at the time of its withdrawal from the pools.
In 1986, Mutual Fire was placed under the supervision of the Pennsylvania
Department of Insurance and it has ceased to meet its obligations under the pool
agreements. Under the terms of the pool agreements, if any member is unable to
meet its obligations with respect to business written by the pools while it was
a member, the remaining pool members must assume their pro-rata share of the
defaulting member's obligations.
Effective December 31, 1990, Lumber Mutual Insurance Company ("Lumber")
ceased to participate in the pools and its 6.82% participation was assumed by
New York Marine as to policies incepting on or after January 1, 1991. In the
case of Lumber, all loss and unearned premium reserves incurred through policy
year 1990 were transferred to New York Marine. Effective December 31, 1991,
Pennsylvania National ceased to participate in the pools and its participation
was assumed by New York Marine as to policies incepting on or after January 1,
1992. In the case of Pennsylvania National, all loss and unearned premium
reserves incurred through policy year 1991 were transferred to New York Marine.
3
Effective January 1, 1994, the Company increased to 81.47% its
participation in the ocean marine, inland marine and aviation business produced
by the pools. The Company's participation in the other liability business
produced by the pools remained at 91.47%.
Effective April 1, 1994, the Company increased to 90.00% its participation
in the inland marine business produced by the pools.
Effective July 1, 1994, the Company increased to 90.00% its participation
in the ocean marine and aviation business produced by the pools and to 100% its
participation in the other liability and inland marine business produced by the
pools.
The Company's increase in pool participations effective July 1, 1994,
followed the assumption of Utica Mutual Insurance Company's ("Utica Mutual")
pool share and Utica Mutual's withdrawal from the pools. In the case of Utica
Mutual, all loss reserves, including incurred but not reported ("IBNR") and
unearned premium reserves, incurred on policies effective prior to its
withdrawal from the pools, remain as obligations of Utica Mutual.
Effective January 1, 1997, the Company increased to 100% its participation
in the ocean marine and aviation business produced by the pools, following the
assumption of Arkwright's pool share and Arkwright's withdrawal from the the
pools. In the case of Arkwright Mutual, all loss reserves, including IBNR and
unearned premium reserves, incurred on policies effective prior to its
withdrawal from the pools, remain as obligations of Arkwright Mutual.
The Company is not aware of any uncertainties with respect to any possible
defaults by either Arkwright or Utica Mutual with respect to their pool
obligations which might impact liquidity or results of operations.
The pool managed by MMO, the largest when measured by premiums written, was
formed in 1964. The pools managed by PMMO and Midwest were formed in 1975 and
1980, respectively. Effective January 1, 1997, each pool is composed of the
following members:
Inland Marine,
Ocean Marine, Other Liability
Pool Member Aviation Pools Pools
- ----------- -------------- ---------------
New York Marine And General
Insurance Company 100.00% 100%
Assets and liabilities resulting from the insurance pools are allocated to
the members of the insurance pools based upon the pro-rata participation of each
member of each pool which is set forth in the management agreement entered into
by and between the pool participants and the Managers. The allocation of
premiums and losses is not subject to the Managers' discretion and the Managers
do not believe there exist any conflicts of interest in connection with this
aspect of the pools.
Investment Policy
The Company follows an investment policy which is reviewed quarterly and
revised periodically. For the years ended December 31, 1997 and 1996, the yield
on the Company's investment portfolio (computed on the basis of average monthly
cost of investment and statutory investment income) was 5.7% and 5.8%,
respectively. At December 31, 1997, the weighted average maturity of fixed
maturity investments was 6.3 years.
The investment policy for New York Marine as of December 31, 1997, was as
follows:
1. Liquid Funds - Minimum 7-1/2% of Investable Funds. In cash,
certificates of deposit, prime bankers acceptances, prime commercial
paper, tax-exempts rated AA/AA or MIG 2 or better, tax-exempts rated
AA by one service and unrated by the other, not to exceed $5,000,000
par value in any one institution; obligations of the U.S. Government
and its agencies due one year or less; tax-exempt notes with a split
A/AA or AA/A rating not to exceed $500,000 in any one institution.
4
2. Bond Funds
A) Tax-exempt securities and obligations of private corporations rated A
or better by each service which provides a rating, not to exceed
$5,000,000 maturity value per issuing entity; maturities not to exceed
December 31 of the 20th year from the purchase date, to include:
1) Pollution - control bonds guaranteed by industrial corporations
rated A or better.
2) Pre-refunded bonds.
3) Housing issues sponsored by the U.S. Government and its agencies
secured by underlying mortgage securities with maturities not in
excess of 30 years and average maturities not in excess of 20
years.
B) Preferred stocks with sinking funds, rated A/A or better, limited to
$500,000 par value per issuer for new issues; to $500,000 purchase
price for outstanding issues.
C) Obligations of the U.S. Government and its agencies.
3. A) Equities (including convertible securities) - Not more than 25% of
policyholders' surplus, and investment in any one institution is not
to exceed five percent (5%) of policyholders' surplus at the time of
purchase as last reported to the New York State Insurance Department.
B) Subsidiaries - the Company's investments in subsidiary companies are
excluded from the requirements of the Company's Investment Program.
The investment policy of Gotham is similar to that of New York Marine
except that Gotham is limited to $2,000,000 maturity value for its bond
investments and $1,000,000 for short-term investments.
The investments of the Company's subsidiaries must also conform to the
requirements contained in the New York State Insurance Law and Regulations.
The Company's investments are monitored by the Finance Committee of the
Board of Directors. New York Marine's fixed income portfolio is managed by J.P.
Morgan Investment Management, Inc. ("JPMIM"). New York Marine's equity portfolio
is managed by JPMIM and, in part, by Sorema Asset Management. Gotham has its
fixed income portfolio managed by JPMIM and its equity portfolio managed by
Rorer Asset Management. See "Subsidiaries".
As of December 31, 1997, New York Marine's invested assets were invested as
follows:
Bonds Rated A or better $288,087
Bonds Rated below A -0-
Equities $ 45,879
As of December 31, 1997, Gotham's invested assets were invested as follows:
Bonds Rated A or better $ 73,163
Bonds Rated below A -0-
Equities $ 13,380
5
Lines of Insurance
The Company writes ocean marine, inland marine, aircraft and non-marine
liability lines of insurance. Ocean marine insurance covers a broad range of
classes, including marine hull, primary and excess marine liabilities, drilling
rig, marine cargo, war risks and assumed reinsurance. Inland marine insurance
includes, among other things, differences in condition ("DIC"), excess property
packages, miscellaneous property insurance and assumed reinsurance. DIC
insurance covers those perils not included with a fire and extended coverage
policy, including burglary, collapse, flood, volcano and earthquake. In 1995, a
decision was made to reduce the Company's exposure to natural catastrophes
through the inland marine line. This resulted in a reduction in the gross and
net inland marine premiums written in subsequent years. Aircraft insurance
includes hull and engine insurance as well as liability insurance. Non-marine
liability insurance includes, among other things, umbrella (excess casualty)
insurance, and excess and surplus line risks written primarily through Gotham.
The following tables set forth the pools' gross and net written premiums.
Insurance premiums written on a calendar year basis may be attributable to
various policy years. Thus, some of the 1997 premium written may arise from
policies incepting in 1996 and prior when the Company had a different
participation in the pools. Therefore, the Company's gross and net written
premiums cannot be obtained by multiplying the amounts below by the Company's
percentage participation in each year. However, the tables below do reflect the
size and mix of business produced by the Managers for the years so indicated.
Gross Premium Written by
Line of Business Year Ended December 31,
- ------------------------- ----------------------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Ocean marine .. $ 72,995 59% $ 87,519 56% $ 93,892 50%
Inland marine . 1,117 1% 1,651 1% 14,380 8%
Aircraft ...... 45,853 37% 61,067 39% 70,707 38%
Other liability 3,897 3% 5,309 4% 7,111 4%
Other ......... 207 -- 358 -- 290 --
--------- ----- --------- ---- --------- ----
Total ......... $ 124,069 100% $ 155,904 100% $ 186,380 100%
Net Premium Written by
Line of Business Year Ended December 31,
- ------------------------- ----------------------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Ocean marine .. $ 49,666 79% $ 58,771 59% $ 55,749 52%
Inland marine . (217) -- (2,087) (2%) 1,227 1%
Aircraft ...... 9,568 15% 37,682 38% 42,339 40%
Other liability 3,864 6% 5,325 5% 6,954 7%
Other ......... 207 -- 374 -- 290 --
--------- ----- --------- ---- --------- ----
Total ......... $ 63,088 100% $ 100,065 100% $ 106,559 100%
Reinsurance Ceded
A reinsurance transaction takes place when an insurance company transfers
(cedes) a portion or all of its exposure on insurance written by it to another
insurer. The reinsurer assumes the exposure in return for a portion or all of
the premium. The ceding of reinsurance does not legally discharge the insurer
from its primary liability for the full amount of the policies, and the ceding
company is required to pay the loss if the assuming company fails to meet its
obligations under the reinsurance agreement. The Company, through the pools,
cedes the greater part of its reinsurance through annual reinsurance agreements
(treaties) with other insurance companies. These treaties, which are drawn by
lines or classes of insurance, allow the Company to automatically reinsure risks
without having to cede insurance on a risk by risk (facultative) basis, although
facultative reinsurance is utilized on occasion.
6
Generally, the Managers place reinsurance with companies which have an A.M.
Best rating greater than B+ or which have sufficient financial strength, in
management's opinion, to warrant being used for reinsurance protections. The
Managers also examine financial statements of reinsurers and review such
statements for profitability, reasonable leverage and adequate surplus. In
addition, the Company, through the pools, withholds funds and may obtain letters
of credit under reinsurance treaties. The Company continues to monitor the
financial status of all reinsurers on an annual basis, as well as the timely
receipt of cash, to assess the ability of reinsurers to pay reinsurance claims.
The Company, through the pools, attempts to limit its exposure from losses
on any one occurrence through the use of various excess of loss, quota share and
facultative reinsurance arrangements and to minimize the risk of default by a
reinsurer by reinsuring risks with many different reinsurers. The Company
utilizes many separate reinsurance treaties each year with a range of 8 to 20
reinsurers participating on each treaty. Many reinsurers participate on multiple
treaties. The Company utilizes quota share reinsurance treaties in which the
reinsurers participate on a set proportional basis in both the premiums and
losses. Additionally, the Company utilizes excess of loss reinsurance treaties
in which the reinsurers, in exchange for a minimum premium, subject to upward
adjustment based upon premium volume, agree to pay for that part of each loss in
excess of an agreed upon amount. The Company's retention of exposure, net of
these treaties, varies between its different classes of business and from year
to year, depending on several factors including the pricing environment on both
the direct and ceded book of business and the availability of reinsurance. In
general, reinsurance is obtained for each line of business when necessary to
reduce the Company's exposure to a maximum of $2 million for any one insured on
any one occurrence. The Company can and does, from time to time, carry a maximum
exposure in excess of $2 million for any one insured on any one occurrence. Such
instances, when they occur, generally reflect a business decision regarding the
cost of further reductions in the Company's exposure and/or the availability of
reinsurance.
The Company attempts to limit its exposure from catastrophes through the
purchase of general excess of loss reinsurance which provides coverage in the
event that multiple insureds incur losses arising from the same occurrence.
These coverages require the Company to pay a minimum premium, subject to upward
adjustment based upon premium volume. The treaties, which extend, in general,
for a twelve month period, obligate the reinsurers to pay for the portion of the
Company's aggregate losses (net of specific reinsurance) which fall within each
treaty's layer or exposure. The Company's retention on any one catastrophic
occurrence, after it obtains the benefit of its excess of loss reinsurance, has
not exceeded $4 million during the past three years. In the event of a
catastrophe loss, the Company would incur additional reinstatement premium
charges for its excess of loss reinsurance, to the extent that such treaties
incur a portion of the loss and in an amount not greater than the original cost
of the reinsurance.
The Company reinsures risks with several domestic and foreign reinsurers as
well as syndicates including Lloyd's of London ("Lloyd's"). The Company's
largest reinsurers as of December 31, 1997, were Arkwright, Lloyd's and Utica
Mutual, with aggregate net recoverables of $38 million, $15 million and $14
million, respectively. The 1997 A.M. Best ratings for Arkwright and Utica Mutual
are A+ and A, respectively. Lloyd's of London maintains a trust fund which was
established for the benefit of all United States ceding companies. In 1995, as
part of a reconstruction process, the trust fund was expanded to include certain
obligations on a gross basis. In 1996, Equitas was formed to handle the run-off
of years 1992 and prior for Lloyd's. For the three most recent years for which
Lloyd's has reported results, 1994, 1993 and 1992, Lloyd's reported gains for
1994 and 1993 of 1.75 billion pounds and 2.25 billion pounds, respectively, and
losses of 1.02 billion pounds for 1992. The Company has not experienced
difficulties in collecting amounts due from Lloyd's and the timing of cash
receipts has not materially affected the Company's liquidity. However, given the
uncertainty surrounding the sufficiency of assets in Equitas to meet its
ultimate obligations, there is a reasonable possibility that the Company's
collection efforts relating to its Lloyd's recoverables might be adversely
affected in the future. At December 31, 1997, the Company's net exposure to
reinsurers, other than Arkwright, Lloyd's and Utica Mutual, was approximately
$94 million, including amounts recoverable for paid losses, outstanding losses,
IBNR and unearned premium reserves. This amount is recoverable collectively from
approximately 800 reinsurers or syndicates, no single one of which was liable to
the Company for an unsecured amount in excess of approximately $3.0 million.
7
Operating Ratios
Premium to Surplus Ratio. The following table shows, for the periods
indicated, the Company's consolidated statutory ratios of net premiums written
(gross premiums less premiums ceded) to policyholders' surplus:
Year Ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in thousands)
Net premiums written .... $ 62,221 $ 90,513 $ 97,817 $100,907 $ 79,034
Policyholders' surplus... 181,844 160,929 148,785 133,813 131,375
-------- -------- -------- -------- --------
Ratio ................... .34 to 1 .56 to 1 .66 to 1 .75 to 1 .60 to 1
While there are no statutory requirements applicable to the Company which
establish permissible premium to surplus ratios, guidelines established by the
National Association of Insurance Commissioners provide that the statutory net
premium written to surplus ratio should be no greater than 3 to 1. The Company
is well within those guidelines.
Combined Loss and Expense Ratios. The underwriting experience of the
Company is indicated by its "combined ratio," which is the sum of (l) the ratio
of losses and loss adjustment expenses incurred to net premiums earned (the
"loss ratio") and (2) the ratio of policy acquisition costs and other
underwriting expenses to net premiums written (the "expense ratio"). The
Company's consolidated loss ratios, expense ratios and combined ratios, on a
statutory basis, are shown in the following table:
Year Ended December 31,
----------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
Loss Ratio ........... 58.7% 62.6% 69.0% 80.2% 80.3%
Expense Ratio ........ 31.7% 31.9% 30.3% 28.5% 26.6%
------ ------ ------ ------ -----
Combined Ratio ....... 90.4% 94.5% 99.3% 108.7% 106.9%
The ratios set forth above have been calculated on a statutory basis which
reflect the operating results of NYMAGIC's two insurance company subsidiaries,
New York Marine and Gotham.
GAAP Combined Loss and Expense Ratios. The underwriting experience of the
Company is indicated by its "combined ratio," which is the sum of (1) the ratio
of losses and loss adjustment expenses incurred to net premiums earned (the
"loss ratio") and (2) the ratio of policy acquisition costs and other
underwriting expenses to net premiums earned (the "expense ratio").
The Company's consolidated loss ratios, expense ratios and combined ratios,
on a GAAP basis, are shown in the following table:
Year Ended December 31,
----------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
Loss Ratio ........... 58.0% 61.2% 67.4% 78.1% 77.8%
Expense Ratio ........ 31.5% 32.3% 31.9% 34.4% 28.2%
------ ------ ------ ------ -----
Combined Ratio ....... 89.5% 93.5% 99.3% 112.5% 106.0%
The ratios set forth above have been calculated on a GAAP basis which
reflect the operating results of NYMAGIC's two insurance company subsidiaries,
New York Marine and Gotham.
The GAAP loss ratio differs from the statutory loss ratio mainly as a
result of accruals for salvage and subrogation in year 1993, amortization of the
deferred income in connection with the assumption of loss reserves from
Pennsylvania National and Lumber Mutual, and, in 1993 and subsequent, an accrual
on a statutory basis for unallocated loss adjustment expenses which are based on
management commissions charged by the pool and, therefore, eliminated on a GAAP
consolidated basis. The GAAP expense ratio differs from the statutory expense
ratio primarily as a result of amortization of deferred policy acquisition costs
for GAAP and receivable write-offs which are reflected in income for GAAP.
8
Reserves
The applicable insurance laws under which the Company operates require that
reserves be maintained for the payment of losses and loss adjustment expenses
with respect to both reported and IBNR claims under its insurance policies. IBNR
claims are those losses, based upon historical experience and other relevant
data, that the Company estimates will be reported or ultimately develop on risks
undertaken by the Company. The Company maintains a conservative policy in
establishing reserves, especially in the year the policy is written. Case loss
reserves are determined by evaluating reported claims on the basis of the type
of loss involved, knowledge of the circumstances surrounding the claim, and the
policy provisions relating to the type of loss. IBNR claims are estimated on the
basis of statistical information with respect to the probable number and nature
of claims arising from occurrences which have not yet been reported. The
establishment of reserves acts to reduce income while the downward adjustment or
reduction of reserves increases income.
The loss settlement period on insurance claims may be many years and during
this period it often becomes necessary to adjust the estimate of liability on a
claim either upward or downward. Among the classes of marine, aviation and
non-marine liability insurance written by the Company are liability classes
which historically have had long lead times between occurrence of an insurable
event, reporting of the claim to the Company and final settlement. In such
cases, the Company is forced to estimate reserves over long periods of time,
with the possibility of several adjustments. Other classes of insurance, such as
property and claims-made non-marine liability classes, historically have had
shorter lead times between occurrence of an insurable event, reporting of the
claim to the Company and final settlement. The reserves with respect to such
classes are less likely to be readjusted.
The Company, from time to time, has increased its participation in the
pools. The effect of each such increase is prospective in nature and does not
affect the loss reserves herein set forth for the years prior to the effective
date of any such change in participation percent.
The insurance pools participated in the issuance of umbrella casualty
insurance for various Fortune 1000 companies in the period from 1978 to 1983.
Depending on the accident year, the insurance pools' maximum retention per
occurrence ranged from $250,000 to $500,000. The Company's effective pool
participation on such risks varied from 11% in 1978 to 30% in 1983. At December
31, 1997 and 1996, the Company's gross, ceded and net loss and loss adjustment
expense reserves for Asbestos/Pollution policies amounted to $25.0 million,
$16.0 million and $9.0 million, and $23.5 million, $15.0 million and $8.5
million, respectively. As of December 31, 1997, the Company had approximately
430 policies which had at least one claim relating to Asbestos/Pollution
exposures. The Company believes that the uncertainty surrounding
Asbestos/Pollution exposures, including issues as to insureds' liabilities,
ascertainment of loss date, definitions of occurrence, scope of coverage, policy
limits and application and interpretation of policy terms, including exclusions,
all affect the estimation of ultimate losses. Under such circumstances, it is
difficult to determine the ultimate loss for Asbestos/Pollution related claims.
Given the uncertainty in this area, losses from Asbestos/Pollution related
claims are likely to adversely impact the Company's results from operations in
future years and may vary materially from such reserves reported as of December
31, 1997. However, the Company believes that, in aggregate, the unpaid loss and
loss adjustment expense reserves as of December 31, 1997, allow for an adequate
provision and that the ultimate resolution of the Asbestos/Pollution claims will
not have a material impact on the Company's financial position.
The following table sets forth NYMAGIC's net case reserve experience
for Asbestos/Pollution policies for each of the past three years:
1997 1996 1995
(In Thousands)
------------------------------
Asbestos
- --------
Case Reserves at beginning of period $ 1,103 $ 1,307 $ 1,367
Incurred loss and loss adjustment expenses 52 (186) 7
Payments (88) (18) (67)
------- ------- -------
Case Reserves at end of period $ 1,067 $ 1,103 $ 1,307
======= ======= =======
9
1997 1996 1995
(In Thousands)
------------------------------
Pollution
- ---------
Case Reserves at beginning of period $ 2,323 $ 2,141 $ 1,977
Incurred loss and loss adjustment expenses (486) 975 642
Payments (420) (793) (478)
------- ------- -------
Case Reserves at end of period $ 1,417 $ 2,323 $ 2,141
======= ======= =======
The following table sets forth NYMAGIC's net loss and loss adjustment expense
experience for Asbestos/Pollution policies for each of the past three years.
1997 1996 1995
(In Thousands)
------------------------------
Asbestos/Pollution
- ------------------
Unpaid loss and loss adjustment expenses
(Including IBNR) at beginning of period $ 8,500 $ 7,041 $ 6,150
Incurred loss and loss adjustment expenses 1,037 2,270 1,436
Payments (508) (811) (545)
------- ------- -------
Unpaid loss and loss adjustment expenses
(Including IBNR) at end of period $ 9,029 $ 8,500 $ 7,041
======= ======= =======
The loss and loss adjustment payments related to the Company's
Asbestos/Pollution exposures have not been material in relation to the Company's
total loss and loss adjustment expense payments as shown in the table below:
1997 1996 1995
(In Thousands)
--------------------------
Total loss and loss adjustment expense
payments for the year ended December 31, $55,483 $61,524 $51,719
Asbestos/Pollution loss and loss adjustment
expense payments for the year ended December 31, 508 811 545
The insurance pools have written primary insurance relating to products
liability since 1985. The insurance pools' maximum loss per risk is generally
limited to $1,000,000 and the Company's participation percentage ranges from 59%
to 100% based upon policy year. The Company believes that, based upon the
maximum amount per risk and the Company's conservative reserving posture, the
reserves currently established are adequate to cover the ultimate resolution of
all product liability claims.
The following table shows changes in reserves in subsequent years (the
development) from the prior loss estimates based upon experience as of the end
of each succeeding year. The estimate is increased or decreased as more
information becomes known about the frequency and severity of losses for
individual years. A redundancy means the original estimate of the Company's
consolidated liability was higher than the current estimate; a deficiency means
that the current estimate is higher than the original estimate.
The first line of the table presents, for each of the last ten years, the
estimated liability for unpaid losses and loss adjustment expenses at the end of
the year, including the reserve for incurred but not reported losses. These
reserves include reserves assumed from Pennsylvania National and Lumber pursuant
to the assumption of their pool obligations. The first section of the table
shows, by year, the cumulative amounts of losses and loss adjustment expenses
paid as of the end of each succeeding year, expressed as a percentage of the
estimated liability for such amounts.
The second section sets forth the re-estimates in later years of incurred
losses, including payments, as a percentage of the estimate for the years
indicated. The cumulative redundancy represents as of December 31, 1997, the
aggregate change in the estimates over all prior years. The redundancies have
been reflected in income over the periods shown.
10
The Company makes no specific provision for inflation in connection with
reserve estimates, but does each year consider the adjustment of outstanding
case reserves and current inflationary indices in determining the adequacy of
the overall loss reserve. The Company monitors historical loss payments to
determine the sufficiency of this provision.
The following table provides a reconciliation of the consolidated liability
for losses and loss adjustment expenses at the beginning and end of 1997, 1996
and 1995:
Year ended December 31,
-----------------------------------------------------
1997 1996 1995
--------- --------- ---------
(In Thousands)
Net liability for losses and loss adjustment
expenses at beginning of year .................................. $ 227,370 $ 229,916 $ 212,377
--------- --------- ---------
Provision for losses and loss adjustment
expenses occurring in current year ............................. 72,322 71,731 75,618
Decrease in estimated losses and loss
adjustment expenses for claims occurring
in prior years (1) ............................................. (21,874) (12,753) (6,360)
Deferred income-loss portfolio
assumption(2) .................................................. 320 381 458
--------- --------- ---------
Total losses and loss adjustment expenses
incurred ....................................................... 50,768 59,359 69,716
--------- --------- ---------
Less:
Losses and loss adjustment expense payments
for claims occurring during:
current year ............................................... 17,029 15,012 10,043
prior years ................................................ 38,454 46,512 41,676
--------- --------- ---------
55,483 61,524 51,719
Plus:
Deferred income-loss portfolio assumption(2) ..................... (320) (381) (458)
--------- --------- ---------
Net liability for losses and loss adjustment
expenses at year end ........................................... 222,335 227,370 229,916
--------- --------- ---------
Ceded unpaid losses and loss adjustment
expenses ....................................................... 166,067 184,467 187,879
--------- --------- ---------
Gross unpaid losses and loss adjustment
expenses at year end ........................................... $ 388,402 $ 411,837 $ 417,795
========= ========= =========
(1) The adjustment to the consolidated liability for losses and loss
adjustment expenses for losses occurring in prior years reflects the net effect
of the resolution of losses for other than full reserve value and subsequent
readjustments of loss values.
(2) Deferred income-loss portfolio assumption represents the difference
between cash received and unpaid loss reserves assumed as a result of the buyout
of Pennsylvania National's and Lumber's net pool obligations which was initially
capitalized and will be amortized over the payout period of the related losses.
The principal differences between the consolidated liability for unpaid
losses and loss adjustment expenses as reported in the Annual Statement filed
with state insurance departments in accordance with statutory accounting
principles and the liability based on generally accepted accounting principles
shown in the above tables is due to the reserve for the Company's pro rata share
of the pool obligations of Mutual Fire, a former pool member, the assumption of
Pennsylvania National's and Lumber's loss reserves arising from their former
participation in the MMO insurance pools and unpaid unallocated loss adjustment
expenses based upon management commissions payable to the Managers which are
eliminated on a consolidated basis. The loss reserves shown in the above tables
reflect in each year salvage and subrogation accruals of approximately 1% to 6%.
The estimated accrual for salvage and subrogation is based on the line of
business and historical salvage and subrogation recovery data. In neither
statutory nor generally accepted accounting principles are loss and loss
adjustment expense reserves discounted.
11
The following table sets forth the reconciliation of the consolidated net
liability for losses and loss adjustment expenses based on statutory accounting
principles and based on generally accepted accounting principles as of December
31, 1997, 1996 and 1995:
Year ended December 31,
--------------------------------------
1997 1996 1995
--------- --------- ---------
(In Thousands)
Liability for losses and loss adjustment expenses
reported based on statutory accounting principles ..................................... $ 217,016 $ 222,953 $ 225,260
Liability for losses and loss adjustment expenses assumed
from Lumber Mutual and Pennsylvania National .......................................... 4,469 4,508 4,615
(excludes $5,580, $6,653 and $8,173 at
December 31, 1997, 1996 and 1995, accounted for in the statutory liability for
losses and loss adjustment expenses.)
Other, net .............................................................................. 850 (91) 41
--------- --------- ---------
Net liability for losses and loss adjustment expenses reported
based on generally accepted accounting principles ..................................... 222,335 227,370 229,916
Ceded liability for unpaid losses and loss adjustment expenses .......................... 166,067 184,467 187,879
--------- --------- ---------
Gross liability for unpaid losses and loss adjustment expenses .......................... $ 388,402 $ 411,837 $ 417,795
========= ========= =========
Regulation
The Company is regulated by the insurance regulatory agencies of the states
in which it is authorized to do business. New York Marine is licensed to engage
in the insurance business in all states.
Gotham is permitted to write excess and surplus lines insurance on a
non-admitted basis in all of the states except Arkansas, Massachusetts, Nevada,
New Jersey, New Hampshire and Vermont. Gotham is licensed to engage in the
insurance business in the state of New York and, as such, cannot write excess
and surplus business in that state.
Many aspects of the Company's insurance business are subject to regulation.
For example, minimum capitalization must be maintained; certain forms of
policies must be approved before they may be offered; reserves must be
established in relation to the amounts of premiums earned and losses incurred;
and, in some cases, schedules of premium rates must be approved.
The insurance company subsidiaries also file statutory financial statements
with each state in the format requested by the National Association of Insurance
Commissioners (the "NAIC"). The NAIC provides accounting guidelines for
companies to report and provides minimum solvency standards for all companies in
the form of risk-based capital requirements. The Company believes that the
surplus of each of the insurance companies are above the minimum amount required
by the NAIC.
The NAIC is engaged in a project to codify statutory accounting principles
which will ultimately become the only source of prescribed statutory accounting
principles. When the project is completed, it will likely change currently
prescribed statutory accounting principles and may result in changes in the
accounting policies the Company uses to prepare its statutory financial
statements as filed with the various states.
The Company is subject to an examination by the Insurance Department of the
State of New York. The insurance companies' most recent examination was for the
year ended December 31, 1995. There were no significant adjustments which
resulted from that examination.
The insurance company subsidiaries are limited under New York law in the
amount of dividends they can pay to the parent company, NYMAGIC, without prior
approval of the New York State Insurance Department.
12
NYMAGIC's principal source of income is dividends from its subsidiaries, which
is used for payment of operating expenses, including interest expense, loan
repayments and payment of dividends to NYMAGIC's shareholders. The maximum
amount of dividends that may be paid to NYMAGIC by the insurance company
subsidiaries is limited to the lesser of 10% of statutory surplus or 100% of net
investment income, as defined under New York insurance law. The maximum amount
which could be paid to the Company out of December 31, 1997, surplus was
approximately $18,184,000.
Insurance companies are being regulated more strictly by the various states
in recent years. Many states have also increased regulation of surplus lines
insurance thereby requiring stricter standards for authorization. Several states
have established guaranty funds which serve to provide the assured with payment
due under policies issued by insurance companies that have become insolvent.
Insurance companies that are authorized to write in states are assessed a fee,
normally based on direct writings in a particular state, to cover any payments
drawn from insolvency funds. The Company is subject to such assessments in the
various states.
Subsidiaries
NYMAGIC's largest insurance company subsidiary is New York Marine And
General Insurance Company which was formed in 1972. NYMAGIC was formed in 1989
to serve as a holding company for the subsidiary insurance companies. Prior
thereto, New York Marine And General Insurance Company was the parent company
and shares of its common stock, $1.00 par value, were traded publicly. NYMAGIC
became the holding company, and New York Marine its subsidiary, effective
October 2, 1989, following regulatory and shareholder approval.
NYMAGIC's other insurance company subsidiary, Gotham Insurance Company, was
organized in 1986 as a means of expanding into the excess and surplus lines
marketplace. New York Marine and Gotham entered into a Reinsurance Agreement,
effective January 1, 1987, under terms of which Gotham will cede 100% of its
gross direct writings to New York Marine and assume 15% of New York Marine's
total retained business, beginning with the 1987 policy year. Accordingly, for
policy year 1987 and subsequent, Gotham's underwriting statistics are similar to
New York Marine's. As of December 31, 1997, 75% and 25% of Gotham's common stock
is owned by New York Marine and NYMAGIC, respectively.
Gotham does not assume or cede business to or from other insurance
companies. As of December 31, 1997, New York Marine had aggregate recoverables
due from Gotham of approximately $35 million or 21% of New York Marine's
statutory surplus. Gotham had aggregate recoverables due from New York Marine as
of December 31, 1997, of approximately $31 million or 59% of Gotham's statutory
surplus.
New York Marine's and Gotham's combined net income on a GAAP basis
represented substantially all of the consolidated net income of the Company for
each of the years ended December 31, 1997, 1996 and 1995.
Mutual Marine Office, Inc. was acquired in 1991 and was formed in 1964 to
underwrite a book of ocean marine insurance. MMO's activities expanded over the
years and it now underwrites a book of ocean marine, inland marine, aviation and
other liability insurance.
Mutual Marine Office of the Midwest, Inc. was acquired in 1991 and was
formed in 1978 to underwrite a varied book of business located in the Midwest
region.
Pacific Mutual Marine Office, Inc. was acquired in 1991 and was formed in
1975 to underwrite a varied book of business in the West Coast region.
13
Competition
The insurance industry is highly competitive and the companies, both
domestic and foreign, against which the Company competes are often larger with
greater capital resources than the Company and the pools. The principal methods
of competition are pricing and responsiveness to the individual insured's
coverage requirements. The competitive nature of the business reached a peak in
1990 after several major catastrophes forced the withdrawal of several insurance
companies from various markets. As a result, the aviation, ocean and inland
marine market hardened in 1991 and remained favorable through 1994. However, in
1995 through 1997 competition intensified and rates softened in the aviation and
ocean marine lines. Competition remains intense as a result of excess capacity
in the casualty market. Accordingly, the Company is not planning to renew those
policies which would result in an underwriting loss.
The Company believes it can successfully compete against other companies in
the insurance market due to its philosophy of underwriting quality insurance,
its reputation as a conservative well-capitalized insurer and its willingness to
forego unprofitable business.
Employees
The Company currently employs approximately 115 persons, of whom 19 are
insurance underwriters.
Item 2. Properties.
The Company does not own, directly or indirectly, any real estate. The
Company leases office space for day to day operations in the following cities:
New York - 37,000 square feet
Chicago - 3,500 square feet
San Francisco - 4,050 square feet
The Company's principal executive offices are approximately 37,000 sq. ft.
in size and are located in New York City. In 1993 the Company moved into its
location at 330 Madison Avenue, New York, New York, which was renovated and is
in excellent condition. The lease for the Company's principal executive offices
expires December 30, 2003. The minimum annual rent under the lease is $1,074,000
in 1998 and $1,184,000 from 1999 until the expiration of the lease. The lease
included a cash payment by the lessor to the Company of $1,853,000 of which the
benefit was deferred and amortized over the lease term.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
14
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
The Company's common stock trades on the New York Stock Exchange (NYSE
Symbol: NYM). The following table sets forth representative high and low closing
prices for the periods indicated.
1997 1996
------------------ -------------------
High Low High Low
---- --- ---- ---
First Quarter .............. $21.13 $18.00 $22.00 $16.38
Second Quarter ............. 20.88 18.38 19.88 18.38
Third Quarter .............. 26.06 20.63 19.13 17.00
Fourth Quarter ............. 29.81 25.50 19.00 17.25
As of March 1, 1998, there were 83 shareholders of record. However,
management believes there are in excess of 2500 beneficial owners of NYMAGIC's
common stock.
Dividend Policy
A cash dividend of ten (10) cents per share was declared and paid to
shareholders of record as of March 31, June 30, September 30, and December 31,
1997 and 1996. For a description of restrictions on the ability of the Company's
insurance subsidiaries to transfer funds to the Company in the form of
dividends, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
Item 6. Selected Financial Data.
OPERATING DATA Year Ended December 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Revenues:
Net premiums earned ........................... $ 87,537 $ 97,036 $103,461 $ 79,255 $ 65,276
Net investment income ......................... 21,325 21,270 21,659 18,854 17,746
Commission income ............................. 1,439 1,981 3,438 2,052 2,498
Realized investment gains ..................... 10,425 4,589 4,111 2,992 6,458
Other income .................................. 293 690 661 420 275
-------- -------- -------- -------- --------
Total revenues ................................ $121,019 $125,566 $133,330 $103,573 $ 92,253
-------- -------- -------- -------- --------
Expenses:
Losses and loss adjustment
expenses incurred ........................... $ 50,768 $ 59,359 $ 69,716 $ 61,900 $ 50,816
Policy acquisition expenses ................... 16,583 18,828 21,017 14,260 10,429
General and administrative
expenses .................................... 16,763 16,168 16,236 16,742 14,749
Interest expense .............................. 1,450 1,035 438 495 661
-------- -------- -------- -------- --------
Total expenses ................................ $ 85,564 $ 95,390 $107,407 $ 93,397 $ 76,655
-------- -------- -------- -------- --------
15
Selected Financial Data (continued)
Year Ended December 31,
-------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Income before income taxes 35,455 30,176 25,923 10,176 15,598
-------- -------- -------- -------- --------
Income taxes
Current ..................................... 8,962 7,495 5,393 2,306 2,236
Deferred ...................................... 125 56 410 (1,827) (66)
-------- -------- -------- -------- --------
Total income taxes ............................ 9,087 7,551 5,803 479 2,170
-------- -------- -------- -------- --------
Income before
cumulative effect ........................... 26,368 22,625 20,120 9,697 13,428
Cumulative effect of change
in accounting for income taxes .............. -- -- -- -- 1,221(3)
-------- -------- -------- -------- --------
Net income .................................... $ 26,368 $ 22,625 $ 20,120 $ 9,697 $ 14,649
======== ======== ======== ======== ========
Weighted average shares
outstanding - basic ......................... 9,849 10,499 11,299 11,379 11,411
Weighted average shares
outstanding - diluted ....................... 9,872 10,524 11,341 11,392 11,449
BASIC EARNINGS PER SHARE(4):
Income before
cumulative effect ........................... $ 2.68 $ 2.15 $ 1.78 $ .85 $ 1.17
Cumulative effect of change
in accounting for income taxes .............. -- -- -- -- .11(3)
-------- -------- -------- -------- --------
Basic earnings per share ...................... $ 2.68 $ 2.15 $ 1.78 $ .85 $ 1.28
======== ======== ======== ======== ========
DILUTED EARNINGS PER SHARE(4):
Income before
cumulative effect ........................... $ 2.67 $ 2.15 $ 1.77 $ .85 $ 1.17
Cumulative effect of change
in accounting for income taxes .............. -- -- -- -- .11(3)
-------- -------- -------- -------- --------
Diluted earnings per share .................... $ 2.67 $ 2.15 $ 1.77 $ .85 $ 1.28
======== ======== ======== ======== ========
Dividends declared ............................ $ .40 $ .40 $ .40 $ .40 $ .40
======== ======== ======== ======== ========
BALANCE SHEET DATA
AT PERIOD END:
Year Ended December 31,
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Total investments ...................... $438,591(2) $409,209(2) $403,306(2) $341,643(2) $334,722
Total assets (1) ....................... 707,903 714,949 722,250 730,744 680,100
Unpaid losses and loss
adjustment expenses(1) .............. 388,402 411,837 417,795 435,072 407,321
Notes payable .......................... 22,458 20,438 12,727 7,020 10,294
Total shareholders' equity ............. $206,519 $188,852 $182,717 $164,313 $166,482
- ----------
(1) Includes reserve liabilities reported gross of reinsurance credits pursuant
to Statement of Financial Accounting Standards No. 113.
(2) Fixed maturities available for sale are carried at fair value pursuant to
Statement of Financial Accounting Standards No. 115.
(3) Reflects the cumulative effect of calculating deferred taxes under
Statement of Accounting Standards No. 109 "Accounting for Income Taxes."
(4) Earnings per share data prior to 1997 have been restated as required under
Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
For a description of factors that materially affect the comparability of
the information reflected in the Selected Financial Data, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" below.
16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Results of Operations
The Company participates in pools of insurance covering ocean marine,
inland marine, aircraft and non-marine liability insurance managed by MMO and
affiliates. The Company's participation in the ocean marine, inland marine and
aviation business produced by the pools increased to 81.47% effective January 1,
1994. The Company's participation in the other liability and inland marine pool
increased to 100% effective July 1, 1994, and its participation in the ocean
marine and aviation pools increased to 90% at the same time. Effective January
1, 1997, the Company's participation in the ocean marine and aviation pool
increased to 100%.
NYMAGIC Net Premiums Written
by Line of Business Year Ended December 31,
----------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
Ocean Marine .................. $ 48,658 78% $ 54,093 60% $ 48,944 50%
Inland Marine ................. 146 -- (1,658) (2%) 2,803 3%
Aircraft ...................... 9,354 15% 32,482 36% 38,962 40%
Other liability ............... 3,856 6% 5,238 6% 6,818 7%
Other ......................... 207 1% 358 -- 290 --
-------- --- -------- --- -------- ---
Total ......................... $ 62,221 100% $ 90,513 100% $ 97,817 100%
======== === ======== === ======== ===
NYMAGIC Net Premiums Earned
by Line of Business Year Ended December 31,
----------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
Ocean Marine .................... $ 49,984 57% $ 52,483 54% $ 48,110 47%
Inland Marine ................... 443 1% 2,408 3% 11,563 11%
Aircraft ........................ 32,566 37% 35,416 36% 35,496 34%
Other liability ................. 4,328 5% 6,355 7% 8,022 8%
Other ........................... 216 -- 374 -- 270 --
-------- --- -------- --- -------- ---
Total ........................... $ 87,537 100% $ 97,036 100% $103,461 100%
======== === ======== === ======== ===
- ----------
Unlike many types of property and casualty insurance, ocean marine, inland
marine, aviation and other liability premium rates are not strictly regulated by
governmental authorities. Consequently, the Company is able to adjust premium
rates quickly in response to competition, varying degrees of risk and other
factors. In addition, the Company, by virtue of its underwriting flexibility, is
able to emphasize specific lines of business in response to advantageous premium
rates and the anticipation of positive underwriting results.
The Company's general and administrative expenses consist primarily of
compensation expense, employee benefits and rental expense for office
facilities. The Company's policy acquisition costs include both brokerage
commissions and premium taxes which are primarily based on a percentage of
premiums written. Such costs have generally changed in proportion with changes
in premium volume. Losses and loss adjustment expenses incurred in connection
with insurance claims in any particular year depend upon a variety of factors
including the rate of inflation, accident or claim frequency, the occurrence of
natural catastrophes and the number of policies written.
The Company estimates reserves each year based upon, and in conformity
with, the factors discussed under "Business-Reserves". The Company maintains a
conservative policy for establishing reserves, especially in the year a policy
is written. Changes in estimates of reserves are reflected in operating results
in the year in which the change occurs.
17
1997 as Compared to 1996
The Company's net premiums earned decreased by 10% in 1997 as compared to
1996. The decrease in premiums earned occurred in all major lines of business.
Inland marine premiums recorded the largest percentage decline at 82% in
1997. The Company decided in the prior year to withdraw from writing property
risks of the larger assureds with multiple locations after years of unprofitable
results brought about mainly by large catastrophe losses. In 1997, the Company
concentrated on writing risks that are ancillary to its ocean marine risks. This
strategy is expected to remain in place for 1998.
Ocean marine premiums earned fell by 5% in 1997 mainly due to falling
premium rates as competition remained intense during the year. All classes
within the ocean marine line experienced declines except for the energy class
which saw increases in production. Net premium writings did not decline at the
same rate as gross premiums primarily due to lower reinsurance costs.
Competition should remain intense in 1998. The Company has been writing
additional marine liability accounts with assureds that have smaller amounts of
exposure. This area of growth may offset expected rate reductions. A source of
additional growth in 1998 in this line will be from premiums written through our
recently acquired agency and syndicate in Lloyd's of London.
Although net premiums earned in the aviation decreased by only 8%, gross
written and net written premiums decreased by 25% and 71%, respectively. A
softening of rates in the aviation line, resulting from excess industry
capacity, initially started in 1996 and continued into 1997 and accounted for a
reduction in gross aviation premiums written in the current year. During soft
underwriting cycles, the Company seeks to reduce overall retention levels in
order to avoid the negative impact of any one loss on net income. As a
consequence of purchasing additional reinsurance, net writings fell at a greater
percentage. The Company expects this environment to remain competitive in 1998.
Other liability earned premiums decreased by 32%. The casualty market has
been severely competitive for many years. Consequently, the Company continues to
underwrite this line very selectively. The Company expects the casualty market
to remain competitive in1998 with premiums likely to further decline.
Premiums earned did benefit, however, from the Company's increased pool
participation in the Mutual Marine Office, Inc. ocean marine and aviation pool
from 90% to 100% effective for policies incepting on or after January 1, 1997.
Losses and loss adjustment expenses as a percentage of premiums earned were
58.0% in 1997 as compared to 61.2% in 1996. Improved net loss experience in the
other liability and inland lines contributed to the overall decline in the loss
ratios. In addition, despite an increase in the frequency of losses in the
aviation line, this loss ratio actually improved from the prior year as a result
of lower retention levels on losses and favorable loss development on prior year
reserves. An increase in severity losses in the ocean marine line contributed to
a higher loss ratio in the current year.
Policy acquisition costs as a percentage of net premiums earned for the
year ended December 31, 1997 was 18.9% as compared to 19.4% for the prior year.
The Company saw an improvement in the acquisition ratio in the aviation line as
a result of obtaining ceding override commissions on reinsurance placed. This
had the effect of reducing overall net commissions at a greater rate than the
decline in premiums.
Net investment income for the year ended December 31, 1997 was flat as
compared to the same period of 1996 as a result of a decrease in the investment
yield in the Company's fixed maturity portfolio. The investment income generated
from a larger invested asset base was offset by a decrease in investment yield
in the Company's fixed maturity portfolio as a result of additional purchases of
tax-exempt securities and lower interest rates overall.
18
Commission and other income for the year ended December 31, 1997 was
$1,438,606 as compared to $1,980,632 for the same period of 1996. Commission
income includes management and contingent commissions charged by Mutual Marine
Office, Inc. for operating the insurance pools. As gross writings decreased and
the Company increased its MMO pool participation in the ocean marine and
aviation pool from 90% to 100% effective for policies incepting on or after
January 1, 1997, management commission income from a non-affiliated member of
the insurance pools declined.
General and administrative expenses increased by 4% in 1997 primarily as a
result of increased personnel and administrative costs to further strengthen
support services.
Interest expense increased to $1,449,770 for the year ended December
31,1997 from $1,035,058 for the same period of the prior year primarily as a
result of an increase in average loan principal outstanding.
The Company was able to realize investment gains of $10,425,133 in 1997
mainly as a result of the sale of appreciated equity securities.
Net income increased by 17% to $26,367,740 for the year ended December 31,
1997, from $22,624,618 for the prior year. Diluted earnings per share increased
to $2.67 in 1997 as compared to $2.15 in 1996.
Unrealized appreciation of investments as of December 31, 1997 included
gross unrealized gains and losses on equity securities of $12,276,631 and
$943,821 respectively, and gross unrealized gains and losses on fixed maturities
available for sale of $8,601,011 and $47,998, respectively. Unrealized gains
were recorded in fixed and equity securities resulting from decreases in
interest rates and a strong stock market in 1997, respectively.
Premiums and other receivables, net decreased to $40,635,164 as of December
31, 1997. Declines in premium writings contributed to the overall decline.
Ceded reinsurance payable increased to $27,307,129 at December 31, 1997 as
a result of lowering the Company's retention level in the aviation line of
business.
Notes payable increased to $22,458,413 as of December 31, 1997 and resulted
from loans obtained to repurchase the Company's common stock. This also
contributed to the increase in treasury stock, at cost, in 1997.
Prepaid reinsurance premiums increased 131% to $24,414,620 at December 31,
1997 however the reserve for unearned premiums decreased in 1997 by 17%. The
decline in gross writings in 1997 is consistent with the change in the reserve
for unearned premiums. The Company, however, reduced its net retention per loss
in the aviation line which caused prepaid reinsurance premiums, as well as ceded
reinsurance payable balances, to increase accordingly.
1996 as Compared to 1995
The Company's net premiums earned decreased by 6% in 1996 as compared to
1995. The decline primarily relates to the inland marine and other liability
lines of business.
The inland marine line recorded the largest decline in earned premiums at
79%. This was consistent with the Company's plan in 1996 to withdraw from
writing the larger multi-location assureds. After several years of unprofitable
results caused by large catastrophe losses and expensive reinsurance, the
Company limited its 1996 writings to those that were ancillary to its ocean
marine risks. Negative premiums written for 1996 occurred as a consequence of
purchasing reinsurance to cover the run-off of the prior year's catastrophe
oriented business which was in force in 1996.
The other liability earned premiums decreased 21% as compared to the prior
year. Due to the fierce competition in this line, casualty market rates had
remained soft.
19
The ocean marine line recorded the largest growth in written and earned
premiums among the Company's various lines of business in 1996. An 11% and 9%
increase over the prior year's written and earned premium, respectively, was
achieved by additional production in the hull and cargo classes of business
coupled with changes in the ocean marine reinsurance program. Gross premiums
were down slightly as rate reductions in various marine classes outweighed the
additional production in the hull and cargo classes. Rates in the ocean marine
line softened as competition intensified. Reinsurance changes in the Company's
hull, cargo and energy classes enabled those classes to retain more premium
income without sustaining much additional exposure.
Although net earned premiums in the aviation line remained flat when
compared to 1995, gross and net writings decreased 14% and 16%, respectively.
1995 was a peak year for aviation rates after insurers suffered several years of
losses. As industry gross losses improved in 1995, competition intensified and
rates subsequently softened. As a casualty of this competitive rate environment,
certain accounts were not renewed in 1996 and thereby contributed to the overall
decline.
Losses and loss adjustment expenses as a percentage of premiums earned were
61.2% in 1996 as compared to 67.4% in 1995. Improved net loss experience in the
Company's core ocean and aviation lines contributed to the overall decline.
Although the inland loss ratio in 1996 was adversely affected by severe
weather experienced during the 1995-1996 winter season, such ratio improved when
compared to the prior year. The 1995 year included large property catastrophe
losses from various hurricanes.
The other liability line deteriorated in 1996 from adverse loss development
in both the umbrella and the non-marine liability occurrence classes.
Commission income, consisting primarily of reinsurance profit commissions
and insurance pool profit and management commissions charged to members of the
insurance pools other than New York Marine, decreased by 42% in 1996. Larger
reinsurance contingent commissions were recorded in 1995 as a result of greater
profitability in various marine war classes of business. Also, management
commission from a non-affiliated member of the insurance pools decreased overall
in proportion to the decline in the pool's gross writings in 1996.
Net investment income for the year ended December 31, 1996, decreased by 2%
from the prior year. Investment yields decreased on the Company's fixed maturity
portfolio due to both market conditions and a greater investment in tax-exempt
securities which was applied against a larger investment asset base.
Policy acquisition costs as a percentage of net premiums earned for the
year ended December 31, 1996 was 19.4% as compared to 20.3% for the prior year.
The inland marine line had the largest acquisition ratio among the Company's
various lines of business. Reductions in inland premium writings in 1996 had the
effect of decreasing policy acquisition costs and the overall ratio.
Interest expense increased by 137% in 1996 primarily as a result of an
increase in loan principal outstanding.
General and administrative expenses remained flat as compared with the
prior year as a result of continuing efforts to contain personnel costs and cost
effective reductions in administrative expenses.
Realized investment gains for the year ended December 31, 1996 amounted to
$4,589,133 and resulted primarily from the sale of appreciated equity
securities.
Net income increased by 12% to $22,624,618 for the year ended December 31,
1996, from $20,119,862 for the prior year. Net income per share increased to
$2.15 in 1996 as compared to $1.77 in 1995.
20
Unrealized appreciation of investments as of December 31, 1996 included
gross unrealized gains and losses on equity securities of $8,754,704 and
$567,677 respectively, and gross unrealized gains and losses on fixed maturities
held for sale of $5,537,330 and $1,184,493, respectively. Declines in unrealized
gains were recorded in the Company's fixed maturities resulting from increases
in interest rates in 1996.
Notes payable increased to $20,438,413 as of December 31, 1996 and resulted
from loans obtained to repurchase the Company's common stock.
Prepaid reinsurance premiums and reserve for unearned premiums decreased in
1996 by 38% and 16%, respectively. The decline in gross writings in 1996 is
consistent with the change in the reserve for unearned premiums. Also, as the
Company retained additional premium with modifications in its reinsurance
program, further reductions in ceded premiums occurred in 1996 which is
consistent with the change in prepaid reinsurance premiums.
Liquidity and Capital Resources
The Company monitors cash and short-term investments in order to have an
adequate level of funds available to satisfy claims and expenses as they become
due. As of December 31, 1997, the Company's assets included approximately
$19,125,000 in cash and short-term investments. The primary sources of the
Company's liquidity are funds generated from insurance premiums, investment
income and maturing or liquidating investments.
Historically, cash provided by operating activities was used in investing
and financing activities. In 1996 and 1995 cash outflows increased on prior year
loss payments as a result of catastrophe losses from the inland marine line and
the Company's maturing book of casualty business. Such payments were not as
large in 1997, however, increased payments were recorded in the aviation line.
As premiums declined in 1997 and 1996, so did cash collected from premiums
written.
Investing and financing activities increased further as a result of the
Company borrowing $25,000,000 from a bank in 1990. This amount was invested in
its principal insurance subsidiary, New York Marine, to further bolster its
surplus in order to support larger participation interests in the insurance
pools. Repayments of the loan started in 1991 and continued through 1995. In
1994, the Company entered into a $10,000,000 revolving credit agreement which
increased to $25,000,000 in 1996 with the same bank. The Company borrowed
approximately $9,000,000 in 1995 to repurchase 540,000 shares of the Company's
Common Stock. Additional borrowings of approximately $9,520,000 and $9,200,000
were made in 1997 and 1996, respectively, to repurchase the Company's Common
Stock. Repayments were made quarterly generally at $1,250,000 per quarter.
The Company has an unsecured credit facility with a bank that allows for a
maximum credit of $5,000,000. This was reduced in 1997 from a $10,000,000
facility available in 1996. The use of this credit facility will assist the
Company as a source of short-term liquidity. In 1996 and 1995, amounts were
borrowed to assist the insurance pools managed by the Company in the payment of
gross losses . The amounts borrowed under the line of credit were fully repaid
after collecting recoverables due from reinsurers on such losses.
The Company adheres to investment guidelines set by the Finance Committee
of the Board of Directors. The investment guidelines are conservatively designed
to provide the Company with adequate capital growth and sufficient liquidity to
meet existing obligations. Such guidelines consider many factors including
anticipated tax position and regulatory requirements.
The Company's largest investments are in bonds from various states and
municipalities. Such securities receive favorable tax treatment under existing
tax laws. Our investment position is monitored regularly as the Company has been
affected by the alternative minimum tax. As net earnings were affected by
several catastrophe losses in the mid 1990's, the Company further bolstered its
taxable investment position. As the Company's tax position changed with improved
earnings in 1995, additional investments were made in tax-exempt securities
through 1997 to improve after tax investment yield.
21
Under the Common Stock Repurchase Plan, the Company may purchase up to
$55,000,000 of the Company's issued and outstanding shares of common stock on
the open market. As of December 31, 1997, the Company had repurchased a total of
2,115,728 shares of common stock at a total cost of approximately $38,562,528 at
market prices ranging from $16.50 to $26.88 per share.
NYMAGIC's principal source of cash flow is dividends from its insurance
company subsidiaries which is used to fund operating expenses, including
interest expense, loan repayments and payment of dividends to shareholders. The
Company's insurance company subsidiaries are limited by statute in the amount of
dividends that may be declared or paid during a year. The limitation restricts
dividends paid or declared to the lower of 10% of policyholders' surplus or 100%
of net investment income as defined under New York insurance law. The
limitations on dividends from the insurance company subsidiaries are not
expected to have an impact on the Company's ability to meet current cash
obligations or materially limit the current payment of dividends to the
Company's shareholders.
The Company is currently modifying its existing computer operating systems
in order to be Year 2000 compliant. This problem arises from computers
recognizing only the last two digits of the year and may result in errors in
processing information. The Company expects to complete all modifications to
existing systems in 1998. The cost of this modification is not expected to be
material to the financial statements, liquidity and capital resources of the
Company.
The Company is in the process of communicating with its various business
relationships to determine the extent of their Year 2000 compliance. The results
of this process will serve to reduce the Company's overall exposure to the Year
2000 problem.
The Company is also in the process of evaluating the insurance risk in
connection with the potential for losses arising from Year 2000 failures. Losses
resulting from Year 2000 failures may be determined to be covered under
insurance contracts depending upon contract wording and specific circumstances.
However, the extent of such losses , which the Company may incur, cannot be
determined currently.
Effect of recent accounting pronouncements
The FASB issued SFAS No. 130, "Reporting Comprehensive Income," ("SFAS
130"), in June 1997 which establishes standards for the reporting and
presentation of comprehensive income and its components. Comprehensive income
encompasses all changes in shareholders' equity, except those arising from
transactions with owners, and includes net income, net unrealized capital gains
or losses on available for sale securities and foreign currency translation
adjustments. SFAS 130 is effective for fiscal years beginning after December 15,
1997, with earlier application permitted. The Company is currently evaluating
the presentation alternatives permitted by the statement.
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," ("SFAS 131"), in June 1997 which establishes standards
for the reporting of information relating to operating segments in annual
financial statements, as well as disclosure of selected information in interim
financial reports. Operating segments are defined as components of a company for
which separate financial information is available and is used by management to
allocate resources and assess performance.
22
The statement supersedes SFAS 14, "Financial Reporting for Segments of a
Business Enterprise," which requires reporting segment information by industry
and geographic area. This statement is effective for year-end 1998 financial
statements and interim financial information will be required beginning in 1999.
The Company is currently evaluating the segment information disclosure pursuant
to SFAS 131.
Inflation
Periods of inflation have prompted the pools, and consequently the Company,
to react quickly to actual or potential imbalances between costs, including
claim expenses, and premium rates. These imbalances have been corrected mainly
through improved underwriting controls, responsive management information
systems and frequent review of premium rates and loss experience.
Inflation also affects the final settlement costs of claims which may not
be paid for several years. The longer a claim takes to settle, the more
significant the impact of inflation on final settlement costs. The Company
periodically reviews outstanding claims and adjusts reserves for the pools based
on a number of factors, including inflation.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements required in response to this item are
included as part of Item 14(a) of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
23
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item is incorporated by reference herein
from the "Compensation and Other Information" section of the Company's Proxy
Statement for the 1998 Annual Meeting of Shareholders, except for information
with respect to Directors and Executive Officers which is set forth below.
NYMAGIC's charter and by-laws provide for a Board of Directors consisting
of not fewer than thirteen nor more than nineteen Directors divided into three
classes as nearly equal as possible. NYMAGIC presently has thirteen Directors.
The three year terms of classes III, I and II expire in the years 1998, 1999,
and 2000 respectively. References to the Company include, as the context
requires, NYMAGIC and its predecessor, New York Marine And General Insurance
Company. The Executive Officers and Directors of the Company are as follows:
Class of
Name Age Directors Position(s)
---- --- --------- -----------
Mark W. Blackman(1) 46 II President, Chief Executive
Officer and Director
John N. Blackman, Jr. (1)(2) 51 I Chairman of the Board, Director
Thomas J. Condon (2) 53 I Director
Jean H. Goulding 56 III Director
John Kean, Jr. (4) 73 III Director
James A. Lambert (1) 42 III General Counsel, Chief Operating
Officer, Secretary and Director
Charles A. Mitchell 49 II Vice-President, Director
William R. Scarbrough(3) 69 II Director
Michael S. Shaffet (3) 62 I Director
Richard T. Soper(1)(3 ) 72 II Director
William A. Thorne (1)(2)(4) 72 I Director
Sergio B. Tobia (4) 59 I Director
Louise B. Tollefson (4) 74 II Director
Thomas J. Iacopelli 37 Chief Financial Officer
- ----------
(1) Member of Executive Committee.
(2) Member of Finance Committee.
(3) Member of Audit Committee.
(4) Member of Stock Option & Compensation Committee.
Mark W. Blackman has been a Director since 1979 and was appointed President
in 1988. Mr. Blackman has been employed by the Company or its subsidiaries since
1977. Mr. Blackman is the son of Louise B. Tollefson and brother of John N.
Blackman, Jr.
John N. Blackman, Jr. has been a Director since 1975 and was appointed
Chairman of the Board in 1988. Mr. Blackman has been employed by MMO and
affiliates since 1973 and in December, 1988 became Chairman of the Board of MMO,
PMMO, and Midwest. Mr. Blackman is the son of Louise B. Tollefson and brother of
Mark W. Blackman.
Thomas J. Condon was elected to the Board of Directors in June 1987. He is
a Vice-President - Investments and Investment Advisor with A.G. Edwards & Sons,
Inc. which he joined in September 1993. Mr. Condon formerly served as Senior
Vice President at Peoples Westchester Savings Bank from 1981 through September
1993.
Jean H. Goulding has been a Director since 1976. Ms. Goulding was employed
by the Company or its subsidiaries from 1965 to 1992 and served as Executive
Vice President-Underwriting from 1988 until her retirement in 1992.
24
John Kean, Jr. has been a Director since 1991. Until his retirement in
1991, Mr. Kean was a Senior Vice President and Director of Guy Carpenter & Co.,
Inc.
James A. Lambert has been a Director since 1986. Mr. Lambert was appointed
Chief Operating Officer in 1989 and has served as General Counsel and Secretary
since 1986.
Charles A. Mitchell has been a Director and Vice President since 1981. He
has been employed by the Company or its subsidiaries since 1976.
William R. Scarbrough became a Director in June, 1995. Until his retirement
in 1993, Mr. Scarbrough was a Vice President and Director of Wm. H. McGee & Co,
Inc.
Michael S. Shaffet has been a Director since September 1990. Mr. Shaffet is
the Treasurer and Chief Financial Officer of M. Fabrikant & Sons, Inc. Prior to
assuming that position in 1989, he was a partner in Berman, Shaffet & Schain,
the accountants for MMO and affiliates.
Richard T. Soper has been a Director since 1972. Mr. Soper is Vice Chairman
of Argent Marine Operations, Inc. Prior to assuming that position in 1990, Mr.
Soper served from 1986 as Chairman and President of the American Bureau of
Shipping. From 1978 to 1986, he was Executive Vice President of Sea Land
Service, Inc. and from 1983 to 1986, served as Chairman of the Board of Intersea
Operations, Ltd., Inc.
William A. Thorne has been a Director since 1972. Mr. Thorne has been
employed by Hydrocarbon Products Company, Inc. as its Treasurer and has been its
Chairman of the Board since March 1983.
Sergio B. Tobia has been a Director since 1981. Mr. Tobia was a Senior Vice
President and Director of Sorema North America Reinsurance Co. from 1989 until
his retirement in 1996.
Louise B. Tollefson has been a Director since 1986. Mrs. Tollefson owns
approximately 18.0% of the Company's Common Stock and is the mother of John N.
Blackman, Jr. and Mark W. Blackman.
Thomas J. Iacopelli joined the Company in 1985 as its Assistant Controller.
In 1987, Mr. Iacopelli was appointed Controller of the Company and in 1989 he
was appointed Chief Financial Officer of the Company. Prior to joining the
Company, Mr. Iacopelli was employed by the accounting and consulting firm of
Coopers & Lybrand. Mr. Iacopelli is a Certified Public Accountant.
The Board of Directors, as well as its Audit, Finance and Stock Option and
Compensation Committees meet on a quarterly basis. In 1997, all Directors
attended at least 75% of the meetings of the Board and the Committees on which
they sit.
Item 11. Executive Compensation.
The information set forth under "Compensation and Other Information" in the
Company's Proxy Statement for the Annual Meeting of Shareholders is incorporated
herein by reference.
Stock Option Plans
In 1986, the Company's Board of Directors and Shareholders approved the
Company's 1986 Stock Option Plan (the "1986 Plan"), to provide a means whereby
the Company, through the grant of non-qualified stock options to key officers,
may attract and retain persons of ability as officers. The 1986 Plan authorizes
the issuance of options to purchase up to 500,000 shares of the Company's common
stock at not less than 95 percent of the fair market value at the date of grant.
The 1986 Plan is administered by a committee appointed by the Board of Directors
of the Company.
On January 12, 1987 and October 21, 1987, options for the purchase of 6,000
and 75,500 common shares, respectively, were granted to officers of the Company,
with an exercise price of $14.50 and $13.78, respectively. The market value of
the common stock on each of these days was $15.25 and $14.50, respectively.
25
On January 14, 1988, options for the purchase of 69,000 common shares were
granted to officers of the Company, with an exercise price of $13.78. The market
value of the common stock on that day was $14.50.
On June 14, 1989, and September 13, 1989, options for the purchase of 2,000
and 1,000 common shares, respectively, were granted to an officer of the Company
with an exercise price of $17.10 and $18.41, respectively. The market value of
the common stock on each of these days was $18.00 and $19.38, respectively.
On June 13, 1991, options for the purchase of 58,500 common shares,
respectively, were granted to officers of the Company with an exercise price of
$25.48. The market value of the common stock on the date of the grant was
$26.82.
In 1991, the Company's Board of Directors and Shareholders approved the
Company's 1991 Stock Option Plan (the "1991 Plan").
On September 2, 1992, options for the purchase of 172,500 common shares
were granted to officers and employees of the Company with an exercise price of
$22.33. The market value of the common stock on that day was $23.50.
In December, 1993, options for the purchase of 116,000 common shares were
granted to officers and employees of the Company with an exercise price of
$22.92. The market value of the common stock on the date of the grant was $24.13
per share.
In September, 1994, options for the purchase of 12,500 common shares were
granted to an officer of the Company with an exercise price of $17.34. The
market value of the common stock on the date of the grant was $18.25 per share.
In December, 1994, options for the purchase of 68,500 common shares were
granted to officers and employees of the Company with an exercise price of
$15.56. The market value of the common stock on the date of the grant was $16.38
per share.
In December, 1995, options for the purchase of 210,500 common shares were
granted to officers and employees of the Company with an exercise price of
$15.79. The market value of the common stock on the date of the grant was
$16.625 per share. The grant of these options was made in connection with the
surrender by the option holders of options of equal amounts which had previously
been granted at higher exercise prices.
In September, 1996, options for the purchase of 10,000 common shares were
granted to officers and employees of the Company with an exercise price of
$17.58. The market value of the common stock on the date of the grant was $18.50
per share.
In December, 1996, options for the purchase of 10,000 common shares were
granted to officers and employees of the Company with an exercise price of
$17.22. The market value of the common stock on the date of the grant was $18.12
per share.
Retirement Plans
The Company maintains two retirement plans for the benefit of employees.
Both plans provide for 100% vesting upon completion of three years of service.
The Money Purchase Plan provides for a yearly contribution equal to 7-1/2% of an
employee's cash compensation, for each year of service during which the employee
has completed 1000 hours of service and is employed on the last day of the plan
year. The Profit Sharing Plan does not provide for any specified level of
contribution but any contribution made is subject to the restrictions set forth
above for the Money Purchase Plan. For the most recent plan year, a contribution
equal to 7-1/2% of cash compensation, was made to all eligible participants in
the Profit Sharing Plan.
26
Item 12. Security Ownership of Certain
Beneficial Owners and Management.
The following table sets forth information as of March 1, 1998, with
respect to beneficial ownership of NYMAGIC Common Stock by beneficial owners
known by the Company to own more than 5% of such stock, directors and nominees,
each officer named in the Summary Compensation Table in the Company's 1998 Proxy
Statement, and all directors and officers as a group. Except as described in the
notes below, all owners listed have power to vote and dispose of the shares held
by them.
Percent of
Amount and Nature Common Stock
Name of Ownership Outstanding
---- -- --------- -----------
Dimensional Fund Advisors, Inc. 619,800(5) 6.38%
1299 Ocean Avenue - 7th Floor
Santa Monica, CA 90401
T. Rowe Price Associates, Inc. 1,012,000(6) 10.42%
100 East Pratt Street
Baltimore, Maryland 21202
John N. Blackman, Jr 2,010,996(1) 20.70%
Mark W. Blackman 1,962,674(2) 20.20%
Judith Cohen 4,000(3) *
Thomas J. Condon 606 *
Jean H. Goulding 22,106 *
John Kean, Jr 506 *
James A. Lambert 18,055(3) *
Charles A. Mitchell 7,700(3) *
Robert Palmer 7,000(3) *
William R. Scarbrough 606 *
Michael S. Shaffet 1,906(4) *
Richard T. Soper 506 *
William A. Thorne 32,906(4) *
Sergio B. Tobia 3,726 *
Louise B. Tollefson 3,506 *
Howard S. Tuthill, Trustee 1,911,211(7) 19.68%
--------- -----
All directors and officers as a
group (15 persons) 5,988,010(8) 61.65%
- ----------
* Less than 1% of issued and outstanding Common Stock.
(1) Mr. Blackman is also the Trustee of trusts for the benefit of his minor
children which own, in total, 92,822 shares of the Company's Common Stock, which
shares are included herein.
(2) Trusts for the benefit of Mr. Blackman's children own, in total, 54,876
shares of the Company's Common Stock, which shares are included herein.
(3) Of the shares shown as beneficially owned by the following individuals,
the amount listed next to each name include shares with respect to which options
are currently exercisable by that person: Mr. Mitchell - 7,000; Mr. Lambert -
17,055; Mrs. Cohen - 4,000; and Mr. Palmer - 7,000.
(4) Of the shares shown as beneficially owned by Mr. Thorne, 16,706 shares
are held by him individually and 16,200 shares are held by Mr. Thorne and his
wife as joint tenants. Of the shares shown as beneficially owned by Mr. Shaffet,
400 are held individually by his wife.
(5) Dimensional Fund Advisors, Inc. ("Dimensional"), a registered
investment advsior, is deemed to have beneficial ownership of 619,800 shares of
NYMAGIC, INC. stock as of December 31, 1997, all of which shares are held in
portfolios of DFA Investment Dimensions Group, Inc., a registered open-end
investment company, or in series of the DFA Investment Trust Company, a Delaware
business trust, or the DFA Group Trust and DFA Participation Group Trust,
investment vehicles for qualified employee benefit plans, all of which
Dimensional Fund Advisors, Inc. serves as investment manager. Dimensional
disclaims beneficial ownership of all such shares.
27
(6) T. Rowe Price Associates, Inc. has filed a report on Schedule 13G
disclosing beneficial ownership of 1,012,000 shares in total. T. Rowe Price
Associates, Inc. beneficially owns 512,000 and T. Rowe Price Small Cap Value
Fund, Inc. owns 500,000.
(7) Howard S. Tuthill, as Trustee of the Louise B. Tollefson Florida
Intangible Tax Trust, has filed a report on Schedule 13D disclosing ownership of
1,911,211 shares of Common Stock in connection with certain aspects of estate
and tax planning for Louise B. Tollefson.
(8) Of the 5,988,010 shares indicated as beneficially owned by all
directors and officers as a group, 35,055 shares with respect to which options
are currently exercisable. See "Compensation and Other Information-Stock Option
Plans". These shares are included in the total number of outstanding shares for
the purpose of determining the percentage of Common Stock beneficially owned by
all directors and officers as a group.
Item 13. Certain Relationships and Related Transactions.
The Company made annual charitable donations to the John N. Blackman, Sr.
Foundation (the "Foundation") in the amount of approximately $480,000 in each of
1997, 1996 and 1995. The Foundation was established by Mr. John N. Blackman,
Sr., the founder of the Company, shortly before his death in 1988. The
Foundation supports numerous charities with a primary emphasis on those
charities assisting the indigent, disabled or disadvantaged. The Foundation is
managed by Mr. John N. Blackman, Jr., Mr. Mark W. Blackman and Mr. James A.
Lambert, all of whom donate their time and receive no form of remuneration from
the Foundation.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements
The list of financial statements appears in the accompanying
index on page 34.
2. Financial Statement Schedules
The list of financial statement schedules appears in the
accompanying index on page 34.
3. Exhibits
3.1. Charter. (Incorporated by reference to Exhibit 3-1 to the
Registrant's Registration Statement No. 33-27665).
3.3. By-laws.
4.0. Specimen Certificate of common stock (Incorporated by
reference to Exhibit 4 to the Registrant's Registration Statement No.
33-27665).
10.2. Restated Management Agreement dated as of January 1, 1986,
by and among Mutual Marine Office, Inc. and Arkwright-Boston
Manufacturers Mutual Insurance Company, Utica Mutual Insurance
Company, Lumber Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company (Incorporated
by reference to Exhibit 10.2 of the Registrant's Annual Report Form
1O-K for the fiscal year ended December 31, 1986.)
10.2.2. Amendment to Restated Management Agreement, dated as
of December 30, 1988, and among Mutual Marine Office, Inc. and
Arkwright Mutual Insurance Company, Utica Mutual Insurance
Company, Lumber Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company.
(Incorporated by reference to Exhibit 10.2.2. of the Registrant's
Report on Form 8-K dated January 6, 1989.)
28
10.2.3. Amendment to Restated Management Agreement, dated as
of December 31, 1990, and among Mutual Marine Office, Inc. and
Arkwright Mutual Insurance Company, Utica Mutual Insurance
Company, the Registrant and Pennsylvania National Mutual Casualty
Insurance Company. (Incorporated by reference to Exhibit 10.2.3.
of the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.)
10.4. Restated Management Agreement dated as of January 1, 1986,
by and among Mutual Inland Marine Office, Inc. and Arkwright-Boston
Manufacturers Mutual Insurance Company, Utica Mutual Insurance
Company, Lumber Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company (Incorporated
by reference to Exhibit 10.4 of the Registrant's Annual Report Form
10-K for the fiscal year ended December 31, 1986.)
10.4.2. Amendment to Restated Management Agreement, dated as
of December 30, 1988, and among Mutual Inland Marine Office, Inc.
and Arkwright Mutual Insurance Company, Utica Mutual Insurance
Company, Lumber Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company
(Incorporated by reference to Exhibit 10.4.2 of the Registrant's
Report on Form 8-K, dated January 6, 1989.)
10.4.3. Amendment to Restated Management Agreement, dated as
of December 31, 1990, by and among Mutual Inland Marine Office,
Inc. and Arkwright Mutual Insurance Company, Utica Mutual
Insurance Company, the Registrant and Pennsylvania National
Mutual Casualty Insurance Company. (Incorporated by reference to
Exhibit 10.4.3. of the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992.)
10.6. Restated Management Agreement dated as of January 1, 1986,
by and among Mutual Marine Office of the Midwest, Inc. and
Arkwright-Boston Manufacturers Mutual Insurance Company, Utica Mutual
Insurance Company, Lumber Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company. (Incorporated
by reference to Exhibit 10.6 of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1986.)
10.6.2. Amendment to Restated Management Agreement dated as
of December 30, 1988, by and among Mutual Marine Office of the
Midwest, Inc. and Arkwright Mutual Insurance Company, Utica
Mutual Insurance Company, Lumber Mutual Insurance Company, the
Registrant and Pennsylvania National Mutual Casualty Insurance
Company. (Incorporated by reference to Exhibit 10.6.2 of the
Registrant's Report on Form 8-K, dated January 6, 1989.)
10.6.3. Amendment to Restated Management Agreement dated as
of December 31, 1990, by and among Mutual Marine Office of the
Midwest, Inc. and Arkwright Mutual Insurance Company, Utica
Mutual Insurance Company, the Registrant and Pennsylvania
National Mutual Casualty Insurance Company. (Incorporated by
reference to Exhibit 10.6.3. of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992.)
10.8. Restated Management Agreement dated as of January 1, 1986,
by and among Pacific Mutual Marine Office, Inc. and Arkwright-Boston
Manufacturers Mutual Insurance Company, Lumber Mutual Insurance
Company, Utica Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company. (Incorporated
by reference to Exhibit 10.8 of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1986.)
10.8.2. Amendment to Restated Management Agreement dated as
of December 30, 1988, by and among Pacific Mutual Marine Office,
Inc. and Arkwright Mutual Insurance Company, Lumber Mutual
Insurance Company, Utica Mutual Insurance Company, the Registrant
and Pennsylvania National Mutual Casualty Insurance Company.
(Incorporated by reference to Exhibit 10.8.2 of the Registrant's
Report on Form 8-K, dated January 6, 1989.)
29
10.8.3. Amendment to Restated Management Agreement dated as
of December 31, 1990, by and among Pacific Mutual Marine Office,
Inc. and Arkwright Mutual Insurance Company, Utica Mutual
Insurance Company, the Registrant and Pennsylvania National
Mutual Casualty Insurance Company. (Incorporated by reference to
Exhibit 10.8.3. of the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992.)
21. Subsidiaries of the Registrant.
23. Consent of KPMG Peat Marwick LLP.
28. Schedule P as of December 31, 1997.
(b) Reports on Form 8-K
None.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NYMAGIC, INC.
(Registrant)
By: /s/ Mark W. Blackman
-----------------------------
Mark W. Blackman
Chief Executive Officer
Date: March 11, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Name Title Date
- ---- ----- ----
/s/ John N. Blackman, Jr. Chairman of the Board March 11, 1998
- ------------------------- and Director
John N. Blackman, Jr.
/s/ Mark W. Blackman President, Chief Executive March 11, 1998
- ------------------------- Officer and Director
Mark W. Blackman
/s/ Thomas J. Condon Director March 11, 1998
- -------------------------
Thomas J. Condon
/s/ Jean H. Goulding Director March 11, 1998
- -------------------------
Jean H. Goulding
/s/ John Kean, Jr. Director March 11, 1998
- -------------------------
John Kean, Jr.
/s/ James A. Lambert Director, General Counsel, March 11, 1998
- ------------------------- Chief Operating Officer
James A. Lambert and Secretary
31
Name Title Date
- ---- ----- ----
/s/ Charles A. Mitchell Director and Vice President March 11, 1998
- -------------------------
Charles A. Mitchell
/s/ Michael S. Shaffet Director March 11, 1998
- -------------------------
Michael S. Shaffet
/s/ William R. Scarbrough Director March 11, 1998
- -------------------------
William R. Scarbrough
/s/ Richard T. Soper Director March 11, 1998
- -------------------------
Richard T. Soper
/s/ William A. Thorne Director March 11, 1998
- -------------------------
William A. Thorne
/s/ Sergio B. Tobia Director March 11, 1998
- -------------------------
Sergio B. Tobia
/s/ Louise B. Tollefson Director March 11, 1998
- -------------------------
Louise B. Tollefson
/s/ Thomas J. Iacopelli Principal Accounting Officer March 11, 1998
- ------------------------- and Chief Financial Officer
Thomas J. Iacopelli
32
NYMAGIC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report .............................................. 35
Consolidated Balance Sheets ............................................... 36
Consolidated Statements of Income ......................................... 37
Consolidated Statements of Shareholders' Equity ........................... 38
Consolidated Statements of Cash Flows ..................................... 39
Notes to Consolidated Financial Statements ................................ 40
Financial Statement Schedule II ........................................... 59
Financial Statement Schedule V ............................................ 61
Financial Statement Schedule VI ........................................... 62
34
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
NYMAGIC, INC.:
We have audited the accompanying consolidated balance sheets of NYMAGIC,
INC. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement schedules as listed in the accompanying index. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
NYMAGIC, INC. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
New York, New York
February 17, 1998
35
NYMAGIC, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------------
1997 1996
------------- -------------
ASSETS
Investments:
Fixed maturities available for sale at fair value
(amortized cost $352,696,745 and $341,130,292) ..................................... $ 361,249,758 $ 345,483,129
Equity securities at fair value
(cost $47,925,798 and $37,161,709) ................................................. 59,258,608 45,348,736
Short-term investments ............................................................... 18,082,540 18,377,180
------------- -------------
Total investments .................................................................. 438,590,906 409,209,045
------------- -------------
Cash ................................................................................. 1,042,310 701,086
Accrued investment income ............................................................ 6,322,370 5,960,197
Premiums and other receivables, net .................................................. 40,635,164 63,039,393
Reinsurance receivables .............................................................. 175,657,952 197,988,073
Deferred policy acquisition costs .................................................... 5,567,488 10,904,241
Prepaid reinsurance premiums ......................................................... 24,414,620 10,562,213
Deferred income taxes ................................................................ 8,436,768 11,131,603
Property, improvements & equipment, net .............................................. 2,365,653 2,107,087
Other assets ......................................................................... 4,869,609 3,345,826
------------- -------------
Total assets ....................................................................... $ 707,902,840 $ 714,948,764
============= =============
LIABILITIES
Unpaid losses and loss adjustment expenses ........................................... $ 388,401,548 $ 411,836,981
Reserve for unearned premiums ........................................................ 55,188,281 66,651,933
Ceded reinsurance payable ............................................................ 27,307,129 19,753,943
Notes payable ........................................................................ 22,458,413 20,438,413
Other liabilities .................................................................... 7,062,095 6,401,463
Dividends payable .................................................................... 966,031 1,014,305
------------- -------------
Total liabilities .................................................................. 501,383,497 526,097,038
------------- -------------
SHAREHOLDERS' EQUITY
Common stock ......................................................................... 14,991,992 14,911,992
Paid-in capital ...................................................................... 27,529,877 26,258,259
Unrealized appreciation of investments
(net of deferred income taxes) ..................................................... 12,925,785 8,150,910
Foreign currency adjustment .......................................................... 6,000 --
Retained earnings .................................................................... 193,547,346 171,089,462
------------- -------------
249,001,000 220,410,623
Treasury stock, at cost, 5,331,686 and 4,768,940
shares ............................................................................... (42,481,657) (31,558,897)
------------- -------------
Total shareholders' equity ......................................................... 206,519,343 188,851,726
------------- -------------
Total liabilities and shareholders' equity ......................................... $ 707,902,840 $ 714,948,764
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
36
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------
Revenue:
Net premiums earned ..................................... $ 87,536,906 $ 97,036,021 $103,461,499
Commission income ....................................... 1,438,606 1,980,632 3,438,418
Net investment income ................................... 21,325,065 21,270,194 21,658,931
Realized investment gains ............................... 10,425,133 4,589,133 4,110,515
Other income ............................................ 292,918 689,641 660,924
------------ ------------ ------------
Total revenues ........................................ 121,018,628 125,565,621 133,330,287
Expenses:
Losses and loss adjustment expenses
incurred ............................................... 50,768,248 59,358,857 69,716,186
Policy acquisition expenses ............................. 16,582,623 18,827,794 21,017,503
General and administrative expenses ..................... 16,763,699 16,168,162 16,236,323
Interest expense ........................................ 1,449,770 1,035,058 437,653
------------ ------------ ------------
Total expenses ........................................ 85,564,340 95,389,871 107,407,665
------------ ------------ ------------
Income before income taxes ................................. 35,454,288 30,175,750 25,922,622
------------ ------------ ------------
Income tax provision:
Current ................................................. 8,962,799 7,494,593 5,392,637
Deferred ................................................ 123,749 56,539 410,123
------------ ------------ ------------
Total income taxes .................................... 9,086,548 7,551,132 5,802,760
------------ ------------ ------------
Net income .............................................. $ 26,367,740 $ 22,624,618 $ 20,119,862
============ ============ ============
Weighted average number of shares of
common stock outstanding-basic ............................ 9,848,959 10,499,366 11,298,746
============ ============ ============
Basic earnings per share ................................... $2.68 $2.15 $1.78
============ ============ ============
Weighted average number of shares of
common stock outstanding-diluted ........................ 9,871,586 10,523,996 11,341,370
============ ============ ============
Diluted earnings per share ................................. $2.67 $2.15 $1.77
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
37
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Year ended December 31,
-----------------------------------------------------
1997 1996 1995
------------- ------------- -------------
Common stock, authorized shares,
par value $1 each ..................................................... 30,000,000 30,000,000 30,000,000
============= ============= =============
Balance, beginning of period .......................................... $ 14,911,992 $ 14,749,192 $ 14,747,292
Shares issued ......................................................... 80,000 162,800 1,900
------------- ------------- -------------
Balance, end of period ........................................ 14,991,992 14,911,992 14,749,192
------------- ------------- -------------
Paid-in capital:
Balance, beginning of period .......................................... 26,258,259 23,933,587 23,736,024
Shares issued ......................................................... 1,271,618 2,324,672 197,563
------------- ------------- -------------
Balance, end of period ........................................ 27,529,877 26,258,259 23,933,587
------------- ------------- -------------
Unrealized appreciation (depreciation) of investments:
Balance, beginning of period .......................................... 8,150,910 9,865,486 (4,132,749)
Net change during period .............................................. 7,345,961 (2,637,810) 21,439,413
Applicable deferred income taxes on the
change ................................................................ (2,571,086) 923,234 (7,441,178)
------------- ------------- -------------
Balance, end of period ........................................ 12,925,785 8,150,910 9,865,486
------------- ------------- -------------
Retained earnings:
Balance, beginning of period .......................................... 171,089,462 152,646,915 137,000,454
Net income ............................................................ 26,367,740 22,624,618 20,119,862
Dividends declared .................................................... (3,909,856) (4,182,071) (4,473,401)
------------- ------------- -------------
Balance, end of period ........................................... 193,547,346 171,089,462 152,646,915
------------- ------------- -------------
Treasury stock:
Balance, beginning of period .......................................... (31,558,897) (18,478,576) (7,037,640)
Net repurchase of common stock ........................................ (10,922,760) (13,080,321) (11,440,936)
------------- ------------- -------------
Balance, end of period ........................................ $ (42,481,657) $ (31,558,897) $ (18,478,576)
============= ============= =============
Number of Shares
Common stock, par value $1 each:
Issued, beginning of period ......................................... 14,911,992 14,749,192 14,747,292
Shares Issued ....................................................... 80,000 162,800 1,900
------------- ------------- -------------
Issued, end of period ............................................... 14,991,992 14,911,992 14,749,192
============= ============= =============
Common stock, shares outstanding .................................... 9,660,306 10,143,052 10,691,812
============= ============= =============
Dividends declared per share ........................................ $.40 .40 $.40
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
38
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------
Cash flows from operating activities:
Net income ................................................. $ 26,367,740 $ 22,624,618 $ 20,119,862
------------- ------------- -------------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for deferred taxes ............................ 123,749 56,539 410,123
Realized investment gains ............................... (10,425,133) (4,589,133) (4,110,515)
Net bond amortization ................................... 1,895,355 1,933,151 1,492,577
Depreciation and other, net ............................. 582,126 442,945 520,011
Changes in:
Premiums and other receivables .......................... 22,404,229 6,641,818 13,545,283
Reinsurance receivables ................................. 22,330,121 (592,384) 41,589,294
Ceded reinsurance payable ............................... 7,553,186 3,327,596 (8,331,820)
Accrued investment income ............................... (362,173) 150,205 (359,831)
Deferred policy acquisition costs ....................... 5,336,753 756,662 1,797,197
Prepaid reinsurance premiums ............................ (13,852,407) 6,394,228 6,202,940
Other assets ............................................ (1,523,783) 80,157 (59,531)
Unpaid losses and loss adjustment
expenses .............................................. (23,435,433) (5,957,544) (17,277,135)
Reserve for unearned premiums ........................... (11,463,652) (12,917,022) (11,847,234)
Foreign currency adjustment ............................. 6,000 -- --
Other liabilities ....................................... 660,632 (5,546,174) 4,920,993
------------- ------------- -------------
Total adjustments ................................... (170,430) (9,818,956) 28,492,352
------------- ------------- -------------
Net cash provided by operating activities .................. 26,197,310 12,805,662 48,612,214
------------- ------------- -------------
Cash flows from investing activities:
Fixed maturities acquired ............................... (205,891,607) (231,515,433) (272,053,730)
Equity securities acquired .............................. (50,578,073) (37,880,911) (21,224,924)
Short-term investments sold or matured .................. 239,532,269 631,722,760 835,378,875
Short-term investments acquired ......................... (239,353,753) (609,264,339) (844,049,317)
Fixed maturities matured ................................ 25,059,072 36,302,944 33,726,487
Fixed maturities sold ................................... 167,867,245 171,112,392 209,230,556
Equity securities sold .................................. 49,858,725 33,637,805 21,385,913
Acquisition of property & equipment, net ................ (840,692) (276,494) (121,852)
------------- ------------- -------------
Net cash used in investing activities ...................... (14,346,814) (6,161,276) (37,727,992)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from stock issuance ............................ 1,351,618 2,487,472 199,463
Cash dividends paid to stockholders ..................... (3,958,130) (4,236,947) (4,542,123)
Net repurchase of common stock .......................... (10,922,760) (13,080,321) (11,440,936)
Proceeds from borrowings ................................ 9,520,000 14,211,472 15,118,449
Loan principal payments ................................. (7,500,000) (6,500,000) (9,411,764)
------------- ------------- -------------
Net cash used in financing activities ................... (11,509,272) (7,118,324) (10,076,911)
Net increase (decrease) in cash ............................ 341,224 (473,938) 807,311
Cash at beginning of year ............................... 701,086 1,175,024 367,713
------------- ------------- -------------
Cash at end of year ..................................... $ 1,042,310 $ 701,086 $ 1,175,024
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
39
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary Of Significant Accounting Policies:
Nature of Operations
NYMAGIC, through its subsidiaries, specializes in underwriting ocean
marine, inland marine, aviation and other liability insurance through insurance
pools managed by Mutual Marine Office, Inc. - ("MMO"), Pacific Mutual Marine
Office, Inc. - ("PMMO"), and Mutual Marine Office of the Midwest, Inc. -
("Midwest"). MMO, located in New York, PMMO located in San Francisco, and
Midwest, located in Chicago, manage the insurance pools in which the Company's
insurance subsidiaries, New York Marine and General Insurance Company - ("New
York Marine") and Gotham Insurance Company ("Gotham"), participate. All
premiums, losses and expenses are prorated among pool members in accordance with
their pool participation percentages. Effective July 1, 1994, the Company
increased to 90.00% its participation in the ocean marine and aviation business
produced by the pools and to 100% its participation in the other liability and
inland marine business produced by the pools. Effective January 1, 1997, the
Company increased to 100% its participation in the ocean marine and aviation
business produced by the pools. Substantially all of the Company's premiums for
the last three years have resulted from participation in the insurance pools
managed by MMO and affiliates.
On December 31, 1997, the Company acquired 100% of the stock of Highgate
Managing Agency, a Lloyd's of London underwriting agent for a nominal amount and
renamed the Company MMO Underwriting Agency Ltd (MMO UA). The acquisition was
accounted for under the purchase method of accounting. Pro forma results of
operations have been omitted from the statements of income as such amounts are
considered immaterial. In 1997 , The Company formed MMO EU Ltd, a holding
company, and MMO UK LTD, a Lloyd's of London corporate vehicle for Lloyd's
Syndicate 1265. The assets and liabilities of MMO EU, MMO UK and MMO UA are
included in the consolidated balance sheet.
Basis of Reporting
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles which differ in certain material
respects from the accounting principles prescribed or permitted by state
insurance regulatory authorities for the Company's two insurance subsidiaries.
The principal differences recorded under generally accepted accounting
principles are deferred policy acquisition costs, an allowance for doubtful
accounts, fixed maturities held for sale are carried at fair value and deferred
income taxes.
Generally accepted accounting principles also require management to make
estimates that affect the reported amounts of assets, liabilities, revenues and
expenses. Actual amounts could differ from those amounts previously estimated.
Consolidation
The consolidated financial statements include the accounts of the Company,
two insurance subsidiaries, New York Marine and Gotham, three agency
subsidiaries collectively referred to as ("MMO") and the Company's UK
operations. Gotham is owned 25% by the Company and 75% by New York Marine. All
other subsidiaries are wholly owned. All intercompany accounts and transactions
have been eliminated in consolidation.
40
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments
Fixed maturities held for sale are carried at fair value and include those
bonds where the Company's intent to carry such investments to maturity may be
affected in future periods by changes in market interest rates or tax position.
Equity securities (common stocks and non-redeemable preferred stocks) are
carried at fair value. Short-term investments are carried at cost which
approximates fair value. Fair value is based upon quotes obtained from
independent sources.
Realized investment gains and losses (determined on the basis of specific
identified cost), also include any declines in value which are considered to be
other than temporary. Unrealized appreciation or depreciation of investments,
net of related deferred income taxes, is reflected in shareholders' equity.
In November, 1995, the Financial Accounting Standards Board ("FASB") issued
a report entitled "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities," which allowed companies to
reassess the classifications of all securities held and permitted transfers
among classifications, prior to December 31, 1995, without tainting the
securities' previous classification. Accordingly, the Company transferred the
entire fixed maturities held for investment portfolio at December 1, 1995 at a
fair value of $89.6 million into the available for sale account. The effect of
the transfer at December 1, 1995 was to increase shareholders' equity by $2.7
million without an effect on net income.
Premium and policy acquisition cost recognition
Premiums and policy acquisition costs are reflected in income and expense
on a monthly pro rata basis over the terms of the respective policies.
Accordingly, unearned premium reserves are established for the portion of
premiums written applicable to unexpired policies in force, and acquisition
costs, consisting mainly of net brokerage commissions and premium taxes,
relating to these unearned premiums are deferred to the extent recoverable. The
Company has provided an allowance for uncollectible premium receivables of
$700,000 and $750,000 as of December 31, 1997 and 1996, respectively. The
determination of acquisition costs to be deferred considers historical and
current loss and loss adjustment expense experience. Consideration is also given
to anticipated investment income in measuring the carrying value of deferred
policy acquisition costs.
Revenue recognition
Management commission income on policies written by the MMO insurance pools
is recognized primarily as of the effective date of the policies issued.
Adjustments to the policies, resulting principally from changes in coverage and
audit adjustments, are recorded in the period reported.
Contingent profit commission revenue derived from the reinsurance
transactions of the insurance pools is recognized when such amount becomes
billable to the respective reinsurers.
Reinsurance
The Company's insurance subsidiaries participate in various reinsurance
agreements on both an assumed and ceded basis through the MMO insurance pools.
The Company uses various types of reinsurance including quota-share, excess of
loss and facultative agreements to spread the risk of loss among several
reinsurers and to limit its exposure from losses on any one occurrence. Any
recoverable due from reinsurers is recorded in the period in which the related
gross liability is established.
41
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The Company accounts for reinsurance in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 113, "Accounting and Reporting for
Reinsurance of Short and Long Duration Contracts" (SFAS 113). SFAS 113 defines
the requirements for a contract to be considered reinsurance and requires assets
and liabilities relating to reinsurance contracts to be reported gross of
reinsurance.
Depreciation
Property, equipment and leasehold improvements are depreciated using both
straightline and accelerated methods over their useful lives.
Income Taxes
The Company provides deferred income taxes on temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities in accordance with SFAS No. 109 "Accounting for Income Taxes."
Fair Values of Financial Instruments
The fair value of the Company's fixed maturity investments is disclosed in
Note 2. The Company's other financial instruments include short-term
receivables, notes payable and other payables which are recorded at the
underlying transaction value and approximate fair value.
Goodwill
The excess of purchase price over the fair value of net assets acquired is
amortized to income on a straight -line basis over five years.
Foreign currency translation
The assets and liabilities of the Company's UK operations, expressed in
Pounds Sterling, are translated to U.S. dollars at exchange rates in effect at
the balance sheet date and the resulting adjustments are recorded as a separate
component of Shareholders' Equity.
Incurred losses
Unpaid losses are based on individual case estimates for losses reported. A
provision is also included, based on past experience, for losses incurred but
not reported, salvage and subrogation recoveries and for loss adjustment
expenses. The method of making such estimates and for establishing the resulting
reserves is continually reviewed and updated and any changes resulting therefrom
are reflected in operating results currently.
42
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Basic and diluted earnings per share
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
("SFAS 128"), which specifies the computation, presentation and disclosure
requirements of earnings per share (EPS) for companies with publicly owned
common stock or potential common stock and supersedes the accounting
requirements of APB Opinion No. 15, "Earnings Per Share." The Company's stock
options are considered potential common stock under SFAS 128. SFAS 128 also
requires the dual presentation of "basic EPS" and "diluted EPS."
SFAS 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Accordingly, all prior period EPS data
reported herein has been restated to conform with SFAS 128.
Basic EPS is calculated by dividing net income by the weighted average
number of common shares outstanding during the year. Diluted EPS is calculated
by dividing net income by the weighted average number of common shares
outstanding during the year and the dilutive effect of assumed stock option
exercises. See Note 11 for a reconciliation of the shares outstanding in
determining basic and diluted EPS.
Reclassification
Certain accounts in the prior year's financial statements have been
reclassified to conform to their 1997 presentation.
Effects of recent accounting pronouncements
The FASB issued SFAS No. 130, "Reporting Comprehensive Income," ("SFAS
130"), in June 1997 which establishes standards for the reporting and
presentation of comprehensive income and its components. Comprehensive income
encompasses all changes in shareholders' equity, except those arising from
transactions with owners, and includes net income, net unrealized capital gains
or losses on available for sale securities and foreign currency translation
adjustments. SFAS 130 is effective for fiscal years beginning after December 15,
1997, with earlier application permitted. The Company is currently evaluating
the presentation alternatives permitted by the statement.
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," ("SFAS 131"), in June 1997 which establishes standards
for the reporting of information relating to operating segments in annual
financial statements, as well as disclosure of selected information in interim
financial reports. Operating segments are defined as components of a company for
which separate financial information is available and is used by management to
allocate resources and assess performance. The statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," which requires
reporting segment information by industry and geographic area. This statement is
effective for year-end 1998 financial statements, and interim financial
information will be required beginning in 1999. The Company is currently
evaluating the segment information disclosure pursuant to SFAS 131.
43
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(2) Investments:
A summary of investment components at December 31, 1997 consists of the
following:
Amount at which
Fair shown in the
Type of Investment Cost Value balance sheet
- ------------------ ------------ ------------ -------------
Fixed maturities available for sale:
Bonds:
United States Government and
government agencies and
authorities .......................................... $101,491,865 $102,945,945 $102,945,945
States, municipalities and
political subdivisions ............................... 219,788,108 226,044,611 226,044,611
Public utilities ..................................... 18,003,038 18,522,005 18,522,005
All other corporate bonds ................................ 13,413,734 13,737,197 13,737,197
------------ ------------ ------------
Total fixed maturities
available for sale ................................. 352,696,745 361,249,758 361,249,758
------------ ------------ ------------
Equity securities:
Common stocks:
Public utilities ........................................... 2,673,124 3,203,122 3,203,122
Banks, trusts and insurance
companies ................................................ 4,036,308 4,819,806 4,819,806
Industrial, miscellaneous and
all other ................................................ 41,069,366 51,043,305 51,043,305
Non-redeemable preferred stock ............................. 147,000 192,375 192,375
------------ ------------ ------------
Total equity securities .................................. 47,925,798 59,258,608 59,258,608
------------ ------------ ------------
Short term investments ..................................... 18,082,540 18,082,540 18,082,540
------------ ------------ ------------
Total investments ........................................ $418,705,083 $438,590,906 $438,590,906
============ ============ ============
Unrealized depreciation or appreciation of investments (before applicable
income taxes) at December 31, 1997 and 1996 included gross unrealized gains on
equity securities of $12,276,631 and $8,754,704, respectively; and gross
unrealized losses on equity securities of $943,821 and $567,677, respectively;
and gross unrealized gains on fixed maturities available for sale of $8,601,011
and $5,537,330 at December 31, 1997 and 1996, respectively; and gross unrealized
losses on fixed maturities available for sale of $47,998 and $1,184,493 as of
December 31, 1997 and 1996, respectively.
Included in investments at December 31, 1997 are bonds on deposit with
various regulatory authorities as required by law with a fair value of
$8,870,200.
There were no non-income producing fixed maturity investments for each of
the years ended December 31, 1997, 1996 and 1995.
All mortgage backed securities available as of December 31, 1997 and 1996
are obligations of various U.S. Government agencies and consist of GNMA, FHLMC
or FNMA pass through securities. These securities are readily marketable.
44
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The gross unrealized gains and losses on debt securities as of December 31,
1997 and 1996 are as follows:
1997
-------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Fixed maturities available for sale:
US Treasury securities and
obligations of US government
corporations and agencies ....................... $101,491,865 $ 1,483,761 $ (29,681) $102,945,945
Obligations of states and
political subdivisions .......................... 219,788,108 6,257,453 (950) 226,044,611
Corporate securities .............................. 31,416,772 859,797 (17,367) 32,259,202
------------ ------------ ------------ ------------
Totals ........................................ $352,696,745 $ 8,601,011 $ (47,998) 361,249,758
============ ============ ============ ============
1996
-------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Fixed maturities available for sale:
US Treasury securities and
obligations of US government
corporations and agencies ....................... $ 91,871,356 $ 314,995 $ (634,327) $ 91,552,024
Obligations of states and
political subdivisions .......................... 188,150,708 4,458,433 (299,641) 192,309,500
Corporate securities .............................. 61,108,228 763,902 (250,525) 61,621,605
------------ ------------ ------------ ------------
Totals ........................................ $341,130,292 $ 5,537,330 $ (1,184,493) $345,483,129
============ ============ ============ ============
45
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The amortized cost and fair value of debt securities at December 31, 1997,
by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Fixed maturities available
for sale
--------------------------------
Amortized Fair
Cost Value
------------ ------------
Due in one year or less ................ $ 24,563,680 $ 24,653,035
Due after one year
through five years ..................... 102,214,605 104,868,192
Due after five years
through ten years ...................... 115,972,146 119,296,900
Due after ten years .................... 69,636,609 71,192,336
------------ ------------
312,387,040 320,010,463
Mortgage backed securities ............. 40,309,705 41,239,295
------------ ------------
Totals ............................... $352,696,745 $361,249,758
============ ============
46
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Proceeds from sales of investments in debt securities during 1997, 1996 and
1995 were $167,867,245, $171,112,392 and $209,230,556, respectively. Gross gains
of $1,365,460, $1,121,305 and $2,324,039 and gross losses of $ 868,944,
$1,437,369 and $ 1,330,386 were realized on the those sales in 1997, 1996 and
1995, respectively.
Realized and unrealized investment appreciation (depreciation) on fixed
maturities and equity securities for the years ended December 31, 1997, 1996 and
1995 are as follows:
Year ended December 31,
----------------------------------------------------------
1997 1996 1995
----------------------------------------------------------
Realized gains (losses) on sale
of investments
Fixed maturities ............................................ $ 496,516 $ (316,064) $ 993,653
Equity securities ........................................... 10,044,741 4,931,909 3,089,104
Short-term investments ...................................... (116,124) (26,712) 27,758
------------ ------------ ------------
Realized investments gains .................................. 10,425,133 4,589,133 4,110,515
Less: applicable income taxes ............................... (3,648,797) (1,606,197) (1,438,680)
------------ ------------ ------------
Net realized investment gains ................................. $ 6,776,336 $ 2,982,936 $ 2,671,835
============ ============ ============
Change in unrealized investment appreciation
(depreciation) of securities:
Fixed maturities ............................................ $ 4,200,177 $ (5,017,118) $ 15,368,821
Equity securities ........................................... 3,145,784 2,379,308 5,059,901
------------ ------------ ------------
Unrealized investment gains (losses) ........................ 7,345,961 (2,637,810) 20,428,722
Less: applicable deferred income taxes ..................... (2,571,086) 923,234 (7,150,053)
------------ ------------ ------------
Net unrealized investment gains (losses) .................... $ 4,774,875 $ (1,714,576) $ 13,278,669
============ ============ ============
Net investment income from each major category of investments for the years
indicated is as follows:
Year ended December 31,
----------------------------------------------------------
1997 1996 1995
----------------------------------------------------------
Fixed maturities ............................................... $ 20,192,031 $ 19,938,840 $ 19,933,777
Short-term investments ......................................... 1,089,128 1,316,992 1,779,497
Equity securities .............................................. 814,341 734,939 678,038
------------ ------------ ------------
Total investment income ...................................... 22,095,500 21,990,771 22,391,312
Investment expenses ............................................ (770,435) (720,577) (732,381)
------------ ------------ ------------
Net investment income ........................................ $ 21,325,065 $ 21,270,194 $ 21,658,931
============ ============ ============
47
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(3) Fiduciary Funds:
The Company's insurance agency subsidiaries maintain separate underwriting
accounts which record all the underlying insurance transactions of the insurance
pools which they manage. These transactions primarily include collecting
premiums from the insured, collecting paid recoverables from reinsurers, paying
claims as losses become payable, paying reinsurance premiums to reinsurers and
remitting net account balances to member insurance companies in the pools which
MMO manages. Unremitted amounts to members of the insurance pools are held in a
fiduciary capacity and interest income earned on such funds inure to the benefit
of the members of the insurance pools based on their pro-rata participation in
the pool.
A summary of the underwriting accounts as of December 31, 1997 and 1996 is
as follows:
December 31,
-----------------------------
1997 1996
----------- -----------
Cash and short-term investments ............ $ 3,276,115 $ 3,554,109
Premiums receivable ........................ 41,537,562 50,372,575
Reinsurance and other recoverables ......... 23,942,068 34,366,554
----------- -----------
Total Assets ............................... $68,755,745 $88,293,238
=========== ===========
Due to insurance pool members .............. $27,251,208 $57,991,694
Reinsurance payable ........................ 31,984,380 22,815,569
Funds withheld from reinsurers ............. 5,043,576 2,756,157
Other liabilities .......................... 4,476,581 4,729,818
----------- -----------
Total Liabilities .......................... $68,755,745 $88,293,238
=========== ===========
The underwriting accounts above are not included in the accompanying
consolidated balance sheets.
48
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(4) Insurance Operations:
Reinsurance Transactions
Approximately 50%, 42% and 47% of the Company's insurance subsidiaries'
direct and assumed gross premiums written for the years ended December 31, 1997,
1996 and 1995, respectively, have been reinsured by the pools with other
companies on both a treaty and a facultative basis.
In the event that all or any of the pool companies might be unable to meet
their obligations to the pools, the remaining companies would be liable for such
defaulted amounts on a pro rata pool participation basis. A contingent liability
also exists with respect to reinsurance ceded since such transactions generally
do not relieve the Company of its primary obligation to the policyholder and
such reinsurance ceded would become a liability of the Company's insurance
subsidiaries in the event that any reinsurer might be unable to meet the
obligations assumed under the reinsurance agreements. All reinsurers must meet
certain minimum standards of financial condition as established by the pools.
The Company's largest reinsurers at December 31, 1997, were Arkwright Mutual
Insurance Company ("Arkwright"), Lloyd's of London ("Lloyd's") and Utica Mutual
Insurance Company ("Utica Mutual"), with aggregate recoverables of $38 million,
$15 million and $14 million, respectively. The 1997 A.M. Best ratings for
Arkwright and Utica Mutual are A+ and A, respectively. Lloyd's of London
maintains a trust fund which was established for the benefit of all United
States ceding companies. Lloyd's has reported substantial losses in recent
years; however, the Company has not experienced difficulty in collecting amounts
due from Lloyd's and the settlement of recoverables due the Company has not
materially impacted its liquidity. In 1996 Equitas was formed to handle the
run-off of years 1992 and prior for Lloyd's. However, given the uncertainty
surrounding the sufficiency of assets in Equitas to meet its ultimate
obligations, there is a reasonable possibility that the Company's collection
efforts relating to its Lloyd's recoverables might be adversely affected in the
future. The Company's exposure to reinsurers, other than Arkwright, Lloyds and
Utica Mutual include reinsurance recoverables collectively from approximately
800 reinsurers or syndicates, and as of December 31, 1997, no single one of
which was liable to the Company for an unsecured amount in excess of
approximately $3.0 million.
Funds withheld and letters of credit obtained under various reinsurance
treaties amounted to approximately $62 million as of December 31, 1997.
Reinsurance receivables as of December 31, 1997 and 1996 included an allowance
for uncollectible reinsurance recoverables of $5,785,000 and $4,075,000
respectively.
49
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Reinsurance ceded and assumed relating to premiums written were as follows:
Gross Ceded Assumed
(direct) to other from other
Year Ended amount companies companies Net amount
- ---------- ------ --------- --------- ----------
December 31, 1997 $89,396,181 $61,728,408 $34,553,074 $62,220,847
December 31, 1996 113,566,184 64,752,583 41,699,626 90,513,227
December 31, 1995 150,647,712 87,527,861 34,697,354 97,817,205
Reinsurance ceded and assumed relating to premiums earned were as
follows:
Gross Ceded Assumed Percentage
(direct) to other from other of assumed
Year Ended amount companies companies Net amount to net
- ---------- ------ --------- --------- ---------- ----------
December 31, 1997 $97,920,323 $47,875,999 $37,492,582 $87,536,906 43%
December 31, 1996 128,483,112 71,146,813 39,699,722 97,036,021 41
December 31, 1995 164,713,618 93,730,801 32,478,682 103,461,499 31
Losses and loss adjustment expenses incurred are net of ceded reinsurance
recoveries amounting to $26,912,355, $62,516,373 and $22,138,211 for the years
ended December 31, 1997, 1996 and 1995, respectively.
Unpaid Losses
Unpaid losses are based on individual case estimates for losses reported
and include a provision for losses incurred but not reported and for loss
adjustment expenses. The following table provides a reconciliation of the
consolidated liability for losses and loss adjustment expenses at the beginning
and end of 1997, 1996 and 1995:
Year ended December 31,
-------------------------------------------------
1997 1996 1995
--------- --------- ---------
Net liability for losses and loss adjustment (in thousands)
expenses at beginning of year ........................................ $ 227,370 $ 229,916 $ 212,377
--------- --------- ---------
Provision for losses and loss adjustment
expenses occurring in current year .................................... 72,322 71,731 75,618
Decrease in estimated losses and loss
adjustment expenses for claims occurring
in prior years (1) ................................................... (21,874) (12,753) (6,360)
Deferred income-loss portfolio
assumption(2) ........................................................ 320 381 458
--------- --------- ---------
Total losses and loss adjustment expenses incurred ..................... 50,768 59,359 69,716
--------- --------- ---------
Less:
Losses and loss adjustment expense payments
for claims occurring during:
current year ........................................................ 17,029 15,012 10,043
prior years ......................................................... 38,454 46,512 41,676
--------- --------- ---------
55,483 61,524 51,719
Add:
Deferred income-loss portfolio assumption (2) .......................... (320) (381) (458)
--------- --------- ---------
Net Liability for losses and loss adjustment
expenses at year end ................................................. 222,335 227,370 229,916
--------- --------- ---------
Ceded unpaid loss and loss adjustment
expenses .............................................................. 166,067 184,467 187,879
--------- --------- ---------
Gross unpaid losses and loss adjustment
expenses at year end ................................................. $ 388,402 $ 411,837 $ 417,795
========= ========= =========
50
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(1)The adjustment to the consolidated liability for losses and loss
adjustment expenses for losses occurring in prior years reflects the net effect
of the resolution of losses for other than full reserve value and subsequent
readjustments of loss values.
(2)Deferred income loss portfolio assumption represents the difference
between cash received and unpaid loss reserves assumed as a result of the buyout
of Pennsylvania National's and Lumber Mutual's net pool obligations which was
initially capitalized and will be amortized over the payout period of the
related losses.
The insurance pools participated in the issuance of umbrella casualty
insurance for various Fortune 1000 companies in the period from 1978 to 1983.
Depending on the accident year, the insurance pools' maximum retention per
occurrence ranged from $250,000 to $500,000. The Company's effective pool
participation on such risks varied from 11% in 1978 to 30% in 1983. At December
31, 1997 and 1996, the Company's gross, ceded and net loss and loss adjustment
expense reserves for Asbestos/Pollution policies amounted to $25.0 million,
$16.0 million and $9.0 million, and $23.5 million, $15.0 million and $8.5
million, respectively. Net paid losses resulting from Asbestos/Pollution losses
during 1997, 1996 and 1995 amounted to $508,000, $811,000 and $545,000,
respectively. As of December 31, 1997, the Company had approximately 430
policies which had at least one claim relating to Asbestos/Pollution exposures.
Unpaid losses and loss adjustment expenses are recorded for reported claims
regarding Asbestos/Pollution exposures, including the cost of litigation
expenses, when sufficient information is present to indicate the involvement of
a specific insurance policy and the Company can reasonably estimate this
liability. The Company believes that the uncertainty surrounding
Asbestos/Pollution exposures, including issues as to insureds' liabilities,
ascertainment of loss date, definitions of occurrence, scope of coverage, policy
limits and application and interpretation of policy terms, including exclusions,
all affect the estimation of ultimate losses. Under such circumstances, it is
difficult to determine the ultimate loss for Asbestos/Pollution related claims.
Given the uncertainty in this area, losses from Asbestos/Pollution related
claims are likely to adversely impact the Company's results from operations in
future years and may vary materially from such reserves reported as of December
31, 1997. However, the Company believes that, in aggregate, the unpaid loss and
loss adjustment expense reserves as of December 31, 1997, allow for an adequate
provision and that the ultimate resolution of the Asbestos/Pollution claims will
not have a material impact on the Company's financial position.
Salvage and Subrogation
Estimates of salvage and subrogation recoveries on paid and unpaid losses
have been recorded as a reduction of unpaid losses amounting to $6,833,720 and
$6,888,733 at December 31, 1997 and 1996, respectively.
Deferred Policy Acquisition Costs
Deferrable acquisition costs amortized to income amounted to $16,582,623,
$18,827,794, and $21,017,503 for the years ended December 31, 1997, 1996 and
1995, respectively.
51
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(5) Property, Improvements and Equipment, Net:
Property improvements and equipment, net at December 31, 1997 and 1996
include the following.
1997 1996
----------- -----------
Office furniture and equipment ............... $ 1,452,923 $ 1,335,519
Computer equipment ........................... 1,916,493 1,346,960
Leasehold improvements ....................... 2,409,683 2,255,928
----------- -----------
5,779,099 4,938,407
Less: accumulated depreciation
and amortization ......................... (3,413,446) (2,831,320)
----------- -----------
Property, improvements and equipment, net .... $ 2,365,653 $ 2,107,087
=========== ===========
Depreciation and amortization expense for the years ended December 31,
1997, 1996 and 1995 amounted to $582,126, $442,945 and $520,011, respectively.
(6) Income Taxes:
The components of deferred tax assets and liabilities as of December 31,
1997 and 1996 are as follows:
December 31,
---------------------------
1997 1996
---------------------------
Deferred Tax Assets:
Loss reserve discounting ....................... $13,549,308 $14,390,810
Unearned premiums .............................. 2,154,156 3,926,280
State and local income tax carryforward ........ 423,300 68,748
Deferred rent liability ........................ 410,237 446,258
Bad debt reserve ............................... 2,269,750 1,688,750
Other .......................................... 319,945 331,643
----------- -----------
Total deferred tax assets ...................... 19,126,696 20,852,489
----------- -----------
52
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Deferred Tax Liabilities:
December 31,
--------------------------
1997 1996
--------------------------
Deferred policy acquisition costs .............. 1,948,621 3,816,484
Unrealized appreciation of investments ......... 6,960,037 4,388,952
Deferred income-loss portfolio assumption ...... 240,279 352,409
Discount on accrued salvage and subrogation .... 374,378 376,987
Other .......................................... 1,166,612 786,054
----------- -----------
Total deferred tax liabilities ................. 10,689,927 9,720,886
----------- -----------
Net deferred tax assets ........................ $ 8,436,769 $11,131,603
=========== ===========
The state and local income tax carryforward of $423,300 as of December 31,
1997 can be carried forward against future state and local tax liabilities until
the year 2012.
The Company has no valuation allowance and believes that total deferred tax
assets at December 31, 1997 will more likely than not be fully realized.
Income tax provisions differ from the amounts computed by applying the
Federal statutory rate to income before income taxes as follows:
Year ended December 31
------------------------
1997 1996 1995
---- ---- ----
Income taxes at the Federal statutory rate ....... 35.0% 35.0% 35.0%
Tax exempt interest .............................. (12.5) (12.8) (15.2)
State income taxes ............................... (0.5) 0.2 1.3
Net bond amortization ............................ 1.9 1.8 1.7
Investment income proration ...................... 1.7 1.7 2.1
Effect of change in tax rates .................... -- -- (1.7)
Other, net ....................................... -- (0.9) (0.8)
---- ---- ----
Income tax provisions ............................ 25.6% 25.0% 22.4%
==== ==== ====
53
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Federal income tax payments amounted to $9,335,632, $7,339,913 and
$4,332,559 for the years ended December 31, 1997, 1996 and 1995, respectively.
Federal income taxes payable at December 31, 1997 and 1996 included in
other liabilities amounted to $386,970 and $640,336, respectively.
(7) Statutory Income and Surplus:
The Company's insurance subsidiaries are limited, based on the lesser of
10% of statutory basis surplus or 100% of net investment income, as defined
under New York Insurance Law, in the amount of dividends they could pay without
regulatory approval. The maximum amount which may be paid to the holding company
out of December 31, 1997 surplus is approximately $18,184,000.
Consolidated statutory net income and surplus of the Company's insurance
subsidiaries were as follows for the periods indicated:
Consolidated Consolidated
Statutory Statutory
net income surplus
------------ ------------
December 31, 1997 $ 36,758,000 $181,844,000
December 31, 1996 26,542,000 160,929,000
December 31, 1995 20,476,000 148,785,000
54
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(8) Employee Retirement Plans:
The Company maintains two retirement plans for the benefit of employees.
Both plans provide for 100% vesting upon completion of three years of service.
The Money Purchase Plan provides for a contribution equal to 7-1/2% of an
employee's cash compensation, including bonuses, for each year of service during
which the employee has completed 1000 hours of service and is employed on the
last day of the plan year. The Profit Sharing plan does not require any specific
contribution but any contribution made is subject to the restrictions set forth
above for the Money Purchase Plan. Contribution and related administration
expenses for the years ended December 31, 1997, 1996 and 1995 amounted to
$978,997, $991,469 and $1,038,633, respectively.
(9) Debt:
In 1994 the Company and a bank entered into a $10,000,000 credit agreement
which was subsequently amended in 1996 to $25,000,000. The interest rate on the
loan is fixed, at the Company's option, for a period of one to six months. The
Company has elected to pay interest at an effective rate of approximately 6.62%
on the outstanding principal balance of the loan at December 31, 1997 of
$22,458,413. The interest rate was equal to the bank's Adjusted London Interbank
Offered Rate at the time of the interest rate adjustment period, plus .65 of 1%.
Principal repayments are paid quarterly in equal installments of $1,250,000 and
end on June 30, 2002. The Company has the option to prepay amounts in excess of
the required repayments. At the Company's option, the interest rate may be based
on either (a) the higher of the bank's prime rate or the applicable Federal
Funds Rate, plus 1/2 of 1% or (b) the bank's adjusted certificate of deposit
rate, plus .775 of 1%.
The bank loan agreement requires the Company to maintain a minimum net
worth of $125,000,000 plus 50% of net profits earned during each year on a
cumulative basis. In addition, other significant covenants include limitations
on total indebtedness, investment purchases, pledging and sales of assets and
requires the Company's insurance subsidiaries to maintain a certain statutory
surplus, gross and net premiums written to surplus ratios and total liabilities
to surplus ratio. The Company was in compliance with all financial covenants as
stipulated in the bank loan agreement as of December 31, 1997. The credit
agreement provides for a facility fee of .15 of 1% on the outstanding balance.
The Company has an unsecured credit facility with the same bank that allows
the Company to borrow up to $5,000,000. Interest is based on the bank's
international short-term lending rate. The credit facility provides for a
commitment fee of 1/8 of 1% on the average unused available credit balance. No
amounts were outstanding under this credit facility as of December 31, 1997 and
1996, respectively.
Interest paid amounted to $1,464,240, $1,020,737 and $437,653 for the years
ended December 31, 1997, 1996 and 1995.
55
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(10) Commitments:
The Company maintains various non-cancelable operating leases to occupy
office space. The lease terms expire on various dates through December 30, 2003.
The aggregate minimum annual rental payments under various operating leases
for office facilities as of December 31, 1997 are as follows:
Amount
----------
1998 ................................................ $1,139,247
1999 ................................................ 1,205,122
2000 ................................................ 1,184,832
2001 ................................................ 1,184,832
2002 ................................................ 1,184,832
thereafter .......................................... 1,184,832
----------
Total ............................................... $7,083,697
==========
The operating leases also include provisions for additional payments based
on certain annual cost increases. Rent expense for the years ended December 31,
1997, 1996 and 1995 amounted to $1,049,119, $1,001,295 and $1,017,380.
As of December 31, 1997, the Company is not involved in any litigation
which would require disclosure in the financial statements or would have a
material effect on the Company's financial statements.
In connection with the formation of MMO UK LTD, in 1997, as corporate
capital for Lloyd's Syndicate 1265, the Company obtained an unsecured letter of
credit from a bank in pounds sterling with a US dollar equivalent of
approximately $17,160,000 as of December 31, 1997.
56
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(11) Common Stock Repurchase Plan and Shareholders' Equity:
The Company has a common stock repurchase plan which authorizes the
repurchase of up to $55,000,000, at prevailing market prices, of the Company's
issued and outstanding shares of common stock on the open market. As of December
31, 1997, the Company had repurchased a total of 2,115,728 shares of common
stock under this plan at a total cost of $38,562,528 at market prices ranging
from $16.50 to $26.88 per share.
In connection with the acquisition of MMO in 1991, the Company also
acquired 3,215,958 shares of its own common stock available by MMO and recorded
such shares as treasury stock at MMO's original cost of $3,919,129.
A reconciliation of basic and diluted EPS for each of the years ended
December 31, 1997, 1996 and 1995 is as follows:
(In Thousands except for per share amounts)
1997 1996 1995
----------------------------- ----------------------------- ------------------------------
Net Net Net
Income Shares Per Share Income Shares Per Share Income Shares Per Share
------- ------ --------- ------ ------ --------- ------ ------ ---------
Basic EPS: $26,368 9,849 $2.68 $22,625 10,499 $2.15 $20,120 11,299 $1.78
Effect of
Dilutive Securities:
Stock Options -- 23 .01 -- 25 -- -- 42 .01
------- ------- ----- ------- ------- ----- ------- ------- -----
Diluted EPS $26,368 9,872 $2.67 $22,625 10,524 $2.15 $20,120 11,341 $1.77
======= ======= ===== ======= ======= ===== ======= ======= =====
(12) Stock Option Plans:
The Company has two stock option plans.
The first plan, approved by shareholders in 1986, and the second plan,
approved by shareholders in 1991, provide a means whereby the Company, through
the grant of non-qualified stock options to key officers, may attract and retain
persons of ability as officers to exert their best efforts on behalf of the
Company. Each plan authorizes the issuance of options to purchase up to 500,000
shares of the Company's common stock at not less than 95 percent of the fair
market value at the date of grant. Options are exercisable over a period as
determined in each option agreement and expire at a maximum term of ten years.
57
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
A summary of activity under the stock option plans for the years ended
December 31, 1997 1996 and 1995 follows:
1997 1996 1995
----------------------------------------------------------------------------------------------------
Number Option Number Option Number Option
Shares Under of Price of Price of Price
Option Shares Per Share Shares Per Share Shares Per Share
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding,
beginning of
year 373,200 $13.78-$22.92 528,500 $13.00-$22.92 623,400 $13.00-$23.87
Granted -- -- 20,000 $17.22-$17.58 210,500 $15.79
Exercised (79,900) $13.78-$15.79 (162,800) $13.00-$15.56 (1,900) $13.00-$13.78
(Forfeited) (50,200) $15.56-$22.92 (12,500) $15.79-$22.33 (303,500) $22.92-$23.87
------- -------- --------
Outstanding,
end of year 243,100 $13.78-$22.92 373,200 $13.78-$22.92 528,500 $13.00-$22.92
======= ======== ========
Exercisable,
end of year 95,356 $13.78-$22.92 135,389 $13.78-$22.92 240,533 $13.00-$22.92
======= ======== ========
In 1995, 210,500 options granted in prior years with option prices ranging
from $22.33 to $23.87 were repriced at $15.79. The effect on net income for the
year ended December 31, 1995 was immaterial.
The Company has elected to measure compensation expense for employee stock
options under APB No. 25 as permitted by SFAS 123, "Accounting for Stock Based
Compensation." Under, SFAS 123, the Company is required to disclose the pro
forma effects on net income of applying a fair value method of measuring
compensation expense.
The pro forma effect on the years ended December 31, 1997, 1996 and 1995 is
as follows:
1997 1996 1995
---- ---- ----
Net income - as reported $26,367,740 $22,624,618 $22,119,862
Net income - pro forma $26,261,229 $22,513,184 $20,114,511
Diluted EPS - as reported $2.67 $2.15 $1.77
Diluted EPS - pro forma $2.66 $2.14 $1.77
In determining the pro forma effect on net income, the fair value of
options granted in 1996 and 1995 was estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions in 1996 and 1995, respectively; dividend yield of 2.2% and 2.4%;
expected volatility of 25% and 28%; expected lives of 5 years for each year and
a risk-free interest rate of 6% and 5.38%. There were no options granted in
1997.
The full impact of calculating compensation expense for stock options under
SFAS 123 is not reflected in the pro forma net income amounts presented above
because options granted prior to January 1, 1995 are not considered in the
determination of the compensation expense.
58
FINANCIAL STATEMENT SCHEDULES
SCHEDULE II-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NYMAGIC, INC.
Balance Sheets
(Parent Company)
December 31,
-----------------------------------------
1997 1996
-----------------------------------------
Assets:
Cash ...................................................... $ 205,516 $ 17,000
Short term investments .................................... 6,000,000 5,000,000
Investment in subsidiaries ................................ 218,563,990 201,367,648
Due from subsidiaries ..................................... 2,666,372 2,227,007
Other assets .............................................. 2,663,530 1,829,191
------------- -------------
Total assets .......................................... $ 230,099,408 $ 210,440,846
============= =============
Liabilities:
Notes payable ............................................. $ 22,458,413 $ 20,438,413
Dividends payable ......................................... 966,031 1,014,305
Other liabilities ......................................... 155,621 136,402
------------- -------------
Total Liabilities ....................................... 23,580,065 21,589,120
------------- -------------
Shareholders' equity:
Common stock .............................................. 14,991,992 14,911,992
Paid in capital ........................................... 27,529,877 26,258,259
Unrealized appreciation of
investments (net of deferred income taxes) .............. 12,925,785 8,150,910
Foreign currency adjustment ............................... 6,000 --
Retained earnings ......................................... 193,547,346 171,089,462
Treasury stock ............................................ (42,481,657) (31,558,897)
------------- -------------
Total shareholders' equity ............................ 206,519,343 188,851,726
------------- -------------
Total liabilities and shareholders' equity ............ $ 230,099,408 $ 210,440,846
============= =============
Statements of Income
(Parent Company)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
Revenues:
Cash dividends from subsidiary .................. $ 17,850,262 $ 12,950,071 $ 12,357,008
Net investment income ........................... 21,070 676 --
------------ ------------ ------------
17,871,332 12,950,747 12,357,008
------------ ------------ ------------
Expenses:
Operating expenses .............................. 2,197,039 1,552,852 2,604,577
Income tax benefit .............................. (754,480) (561,073) (955,981)
------------ ------------ ------------
1,442,559 991,779 1,648,596
------------ ------------ ------------
Income before equity income ..................... 16,428,773 11,958,968 10,708,412
Equity in undistributed earnings
of subsidiaries ................................. 9,938,967 10,665,650 9,411,450
------------ ------------ ------------
Net income ...................................... $ 26,367,740 $ 22,624,618 $ 20,119,862
============ ============ ============
59
SCHEDULE II-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NYMAGIC, INC.
Statements of Cash Flows
(Parent Company)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income ....................................................... $ 26,367,740 $ 22,624,618 $ 20,119,862
------------ ------------ ------------
Adjustments to reconcile net income
to cash provided by operating activities:
Equity in undistributed earnings of
subsidiaries ................................................ (9,938,967) (10,665,650) (9,411,450)
Increase in other assets ...................................... (834,339) (359,403) (222,715)
(Increase)decrease in due from subsidiaries ................... (439,365) 527,868 (429,902)
(Decrease) Increase in other liabilities ...................... 19,219 (11,312) 6,586
------------ ------------ ------------
Net cash provided by operating activities ........................ 15,174,288 12,116,121 10,062,381
------------ ------------ ------------
Cash flows from investing activities:
Short term investments acquired ............................... (13,800,000) (5,000,000) --
Short term investments matured ................................ 12,800,000 -- --
Investment in subsidiaries .................................... (2,476,500) -- --
------------ ------------ ------------
Net cash used in investing activities ......................... (3,476,500) (5,000,000) --
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from stock options exercised ......................... 1,351,618 2,487,472 199,463
Cash dividends paid to stockholders ........................... (3,958,130) (4,236,947) (4,542,123)
Repurchase of common stock .................................... (10,922,760) (13,080,321) (11,440,936)
Proceeds from borrowings ...................................... 9,520,000 14,211,472 15,118,449
Loan principal payments ....................................... (7,500,000) (6,500,000) (9,411,764)
------------ ------------ ------------
Net cash used in
financing activities .......................................... (11,509,272) (7,118,324) (10,076,911)
------------ ------------ ------------
Net increase (decrease) in cash .................................. 188,516 (2,203) (14,530)
Cash at beginning of period ...................................... 17,000 19,203 33,733
------------ ------------ ------------
Cash at end of period ............................................ $ 205,516 $ 17,000 $ 19,203
============ ============ ============
60
NYMAGIC, INC.
SCHEDULE V-VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------------------------------------------------------
DESCRIPTION Balance at Balance
beginning close of
of period Additions Deductions period
- --------------------------------------------------------------------------------
December 31, 1997:
Allowance for
doubtful accounts... $4,825,000 $1,930,261 $(270,261) $6,485,000
December 31, 1996:
Allowance for
doubtful accounts..... 3,025,000 2,155,271 (355,271) 4,825,000
61
NYMAGIC, INC.
SCHEDULE VI - SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE
OPERATIONS.
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
CLAIMS AND CLAIMS
EXPENSES INCURRED AMORTIZATION
DEFERRED RESERVE FOR RELATED TO OF DEFERRED
AFFILIATION POLICY UNPAID CLAIMS UNEARNED NET NET --------------------- POLICY
WITH ACQUISITION AND CLAIMS PREMIUM EARNED INVESTMENT CURRENT PRIOR ACQUISITION
REGISTRANT COSTS EXPENSES DISCOUNT RESERVE PREMIUMS INCOME YEAR YEAR COSTS
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 $ 5,567 $388,402 -- $55,188 $ 87,537 $21,325 $72,322 ($21,874) $16,583
CONSOLIDATED
SUBSIDIARIES
DECEMBER 31, 1996 10,904 411,837 -- 66,652 97,036 21,270 71,731 (12,753) 18,828
CONSOLIDATED
SUBSIDIARIES
DECEMBER 31, 1995 11,661 417,795 -- 79,569 103,461 21,659 75,618 (6,360) 21,018
CONSOLIDATED
SUBSIDIARIES
- ----------------------------------------------
AFFILIATION PAID CLAIMS
WITH AND CLAIMS PREMIUMS
REGISTRANT EXPENSES WRITTEN
- ----------------------------------------------
DECEMBER 31, 1997 $55,483 $62,221
CONSOLIDATED
SUBSIDIARIES
DECEMBER 31, 1996 61,524 90,513
CONSOLIDATED
SUBSIDIARIES
DECEMBER 31, 1995 51,719 97,817
CONSOLIDATED
SUBSIDIARIES
62
NYMAGIC, INC.
FORM 10-K
For Fiscal Year Ended December 31, 1997
Exhibit Index
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
3.1 Charter Incorporated herein by reference
3.3 By-laws
4.0 Specimen Certificate of Common Stock Incorporated herein by reference
10.2 Restated Management Agreement dated as of Incorporated herein by reference
January 1, 1986, by and among Mutual
Marine Office, Inc. and Arkwright-Boston
Manufacturers Mutual Insurance Company,
Utica Mutual Insurance Company, Lumber
Mutual Insurance Company, the Registrant
and Pennsylvania National Mutual Casualty
Insurance Company
10.2.2 Amendment to Restated Management Incorporated herein by reference
Agreement, dated as of December 30, 1988,
and among Mutual Marine Office, Inc. and
Arkwright Mutual Insurance Company, Utica
Mutual Insurance Company, Lumber Mutual
Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty
Insurance Company
10.2.3 Amendment to Restated Management Incorporated herein by reference
Agreement, dated as of December 31, 1990,
and among Mutual Marine Office, Inc. and
Arkwright Mutual Insurance Company, Utica
Mutual Insurance Company, the Registrant
and Pennsylvania National Mutual Casualty
Insurance Company
10.4 Restated Management Agreement dated as of Incorporated herein by reference
January 1, 1986, by and among Mutual
Inland Marine Office, Inc. and
Arkwright-Boston Manufacturers Mutual
Insurance Company, Utica Mutual Insurance
Company, Lumber Mutual Insurance Company,
the Registrant and Pennsylvania National
Mutual Casualty Insurance Company
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
10.4.2 Amendment to Restated Management Incorporated herein by reference
Agreement, dated as of December 30, 1988,
and among Mutual Inland Marine Office,
Inc. and Arkwright Mutual Insurance
Company, Utica Mutual Insurance Company,
Lumber Mutual Insurance Company, the
Registrant and Pennsylvania National
Mutual Casualty Insurance Company
10.4.3 Amendment to Restated Management Incorporated herein by reference
Agreement, dated as of December 31, 1990,
by and among Mutual Inland Marine Office,
Inc. and Arkwright Mutual Insurance
Company, Utica Mutual Insurance Company,
the Registrant and Pennsylvania National
Mutual Casualty Insurance Company
10.6 Restated Management Agreement dated as of Incorporated herein by reference
January 1, 1986, by and among Mutual
Marine Office of the Midwest, Inc. and
Arkwright-Boston Manufacturers Mutual
Insurance Company, Utica Mutual Insurance
Company, Lumber Mutual Insurance
10.6.2 Amendment to Restated Management Incorporated herein by reference
Agreement dated as of December 30, 1988,
by and among Mutual Marine Office of the
Midwest, Inc. and Arkwright Mutual
Insurance Company, Utica Mutual Insurance
Company, Lumber Mutual Insurance Company,
the Registrant and Pennsylvania National
Mutual Casualty Insurance Company
10.6.3 Amendment to Restated Management Incorporated herein by reference
Agreement dated as of December 31, 1990,
by and among Mutual Marine Office of the
Midwest, Inc. and Arkwright Mutual
Insurance Company, Utica Mutual Insurance
Company, the Registrant and Pennsylvania
National Mutual Casualty Insurance
Company
10.8 Restated Management Agreement dated as of Incorporated herein by reference
January 1, 1986, by and among Pacific
Mutual Marine Office, Inc. and
Arkwright-Boston Manufacturers Mutual
Insurance Company, Lumber Mutual
Insurance Company, Utica Mutual Insurance
Company, the Registrant and Pennsylvania
National Mutual Casualty Insurance
Company
Exhibit Sequentially
Number Description Numbered Page
- ------ ----------- -------------
10.8.2 Amendment to Restated Management Incorporated herein by reference
Agreement dated as of December 30, 1988,
by and among Pacific Mutual Marine
Office, Inc. and Arkwright Mutual
Insurance Company, Lumber Mutual
Insurance Company, Utica Mutual Insurance
Company, the Registrant and Pennsylvania
National Mutual Casualty Insurance
Company.
10.8.3 Amendment to Restated Management Incorporated herein by reference
Agreement dated as of December 31, 1990,
by and among Pacific Mutual Marine
Office, Inc. and Arkwright Mutual
Insurance Company, Utica Mutual Insurance
Company, the Registrant and Pennsylvania
National Mutual Casualty Insurance
Company
21 Subsidiaries of the Registrant.
23 Consent of KPMG Peat Marwick LLP.
28 Schedule P as of December 31, 1997.