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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, 1998 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:
Name of each
Title of each class: 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, 1999, was approximately $57,150,292.
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 1, 1999, was 9,685,492 shares of common stock, $1.00 par
value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 1999 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, risk
bearing entities and insurance underwriters and managers:
Insurance Companies and Lloyd's Corporate Capital Vehicle:
New York Marine And General Insurance Company - ("New York Marine")
Gotham Insurance Company - ("Gotham")
MMO UK, Ltd.
Insurance Underwriters and Managers:
Mutual Marine Office, Inc. - ("MMO")
Pacific Mutual Marine Office, Inc. - ("PMMO")
Mutual Marine Office of the Midwest, Inc. - ("Midwest")
MMO Underwriting Agency, Ltd.
all of which are collectively referred to hereinafter as the "Company."
The Company's insurance company subsidiaries, New York Marine and Gotham,
each maintain an A.M. Best insurance rating of A+.
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 (collectively referred to as "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 pro-rated among
pool members in accordance with their pool participation percentages.
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 commenced
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 (collectively referred to as "Syndicate 1265").
The Company has approximately 119 employees of whom 22 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 and Year 2000 compliance. 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.
Such statements are made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These 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, plans for Year 2000 compliance, 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.
2
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.
The Company participation in the business underwritten for the pools by
the Manager has increased over the years and, since January 1, 1997, the Company
has had a 100% participation in all lines of business produced by the pools.
Two former pool members, Utica Mutual Insurance Company and Arkwright
Mutual Insurance Company withdrew from the pools and retained liability for
their effective pool participation for all loss reserves, including IBNR and
unearned premium reserves, incurred on policies effective prior to their
withdrawal from the pools.
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.
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.
Investment Policy
The Company follows an investment policy which is reviewed quarterly and
revised periodically. For the years ended December 31, 1998 and 1997, the yield
on the Company's investment portfolio (computed on the basis of average monthly
cost of investment and statutory investment income) was 5.4% and 5.7%,
respectively. At December 31, 1998, the weighted average maturity of fixed
maturity investments was 6.4 years.
The investment policy for New York Marine as of December 31, 1998, 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 Aa3/AA- or MIG 2 or better, tax-exempts
rated Aa3 or 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 A1/AA- or Aa3/A+ rating not to exceed
$500,000 in any one institution.
3
2. Bond Funds
A) Tax-exempt securities and obligations of private corporations
rated A3/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 A3/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 A3/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 Groupama Asset Management. Gotham has its
fixed income portfolio managed by JPMIM and its equity portfolio managed by
Rorer Asset Management. The Company's U.K. operations have investments managed
by Aberdeen Asset Managers Ltd. See "Subsidiaries".
As of December 31, 1998, The Company's invested assets were invested as
follows:
(In thousands)
New York Marine Gotham Syndicate 1265
--------------- ------ --------------
Bonds Rated A- or better .. $271,501 $ 77,901 $4,001
Bonds Rated below A- ...... -0- -0- -0-
Equities .................. $ 56,295 $ 17,123 -0-
4
Lines of Insurance
The Company writes ocean marine, inland marine, aircraft and non-marine
liability lines of insurance. These lines of business are considered, for
operational purposes, as the Company's main segments for analyzing underwriting
income. 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. 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
including business from Syndicate 1265. Insurance premiums written on a calendar
year basis may be attributable to various policy years. Thus, some of the
calendar year premiums 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, which set forth calendar year premiums, do reflect
the size and mix of business produced by the Managers for the years so
indicated.
Year Ended December 31,
-------------------------------------------------------
Gross Premiums Written by
Line of Business 1998(a) 1997 1996
- - ---------------------- --------- --------- --------
(In thousands)
Ocean marine ......... $ 78,768 60% $ 72,995 59% $ 87,519 56%
Inland marine ........ 1,321 1% 1,117 1% 1,651 1%
Aircraft ............. 36,594 28% 45,853 37% 61,067 39%
Other liability ...... 3,176 2% 3,897 3% 5,309 4%
Other.(b) ............ 12,337 9% 207 -- 358 --
--------- --- --------- --- --------- ---
Total ................ $ 132,196 100% $ 124,069 100% $ 155,904 100%
========= === ========= === ========= ===
Year Ended December 31,
-------------------------------------------------------
Net Premiums Written by
Line of Business 1998(a) 1997 1996
- - ---------------------- ---------- --------- --------
(In thousands)
Ocean marine ......... $ 58,800 82% $ 49,666 79% $ 58,771 59%
Inland marine ........ (355) -- (217) -- (2,087) (2%)
Aircraft ............. (551) -- 9,568 15% 37,682 38%
Other liability ...... 2,977 4% 3,864 6% 5,325 5%
Other.(b) ............ 10,587 14% 207 -- 374 --
--------- --- --------- --- --------- ---
Total ................ $ 71,954 100% $ 63,088 100% $ 100,065 100%
========= === ========= === ========= ===
(a) Includes gross ocean marine premiums written and net ocean marine premiums
written from Syndicate 1265 of $17,817 and $16,832, respectively. This
represents approximately 23% and 29% of ocean marine premiums on a gross
and net basis, respectively.
(b) In 1998, includes a one-time assumption of miscellaneous casualty premiums
of $12,313 and $10,563 on a gross and net basis, respectively.
5
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.
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.
6
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, 1998, were Arkwright, Lloyd's and Utica
Mutual, with aggregate net recoverables of $36 million, $19 million and $13
million, respectively. The 1998 A.M. Best ratings for Arkwright and Utica Mutual
are each rated 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, 1995, 1994 and 1993, Lloyd's reported gains
for each of those years. 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, 1998, the Company's net exposure to reinsurers, other
than Arkwright, Lloyd's and Utica Mutual, was approximately $109 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 $4.4 million.
Operating Ratios
Premium to Surplus Ratio. The following table shows, for the periods
indicated, the Company's consolidated domestic insurance company's statutory
ratios of net premiums written (gross premiums less premiums ceded) to
policyholders' surplus:
Year Ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in thousands)
Net premiums written .... $ 45,333 $ 62,221 $ 90,513 $ 97,817 $100,907
Policyholders' surplus .. 196,745 181,844 160,929 148,785 133,813
-------- -------- -------- -------- --------
Ratio ................... 23 to 1 .34 to 1 .56 to 1 .66 to 1 .75 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
premiums written to surplus ratio should be no greater than 3 to 1. The Company
is well within those guidelines. Syndicate 1265 maintained a capacity to write
approximately a U.S. dollar equivalent of $24.9 million in 1998.
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,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Loss Ratio ............. 50.4% 58.7% 62.6% 69.0% 80.2%
Expense Ratio .......... 37.3% 31.7% 31.9% 30.3% 28.5%
----- ----- ----- ----- -----
Combined Ratio ......... 87.7% 90.4% 94.5% 99.3% 108.7%
The ratios set forth above have been calculated on a statutory basis which
reflect the operating results of NYMAGIC's two domestic insurance company
subsidiaries, New York Marine and Gotham.
7
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,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Loss Ratio ............. 66.4% 58.0% 61.2% 67.4% 78.1%
Expense Ratio .......... 27.1% 31.5% 32.3% 31.9% 34.4%
----- ----- ----- ----- -----
Combined Ratio ......... 93.5% 89.5% 93.5% 99.3% 112.5%
The ratios set forth above have been calculated on a GAAP basis which
reflect the operating results of NYMAGIC's insurance company subsidiaries, New
York Marine, Gotham and Syndicate 1265's operations.
The GAAP loss ratio differs from the statutory loss ratio mainly as a
result of including the operations of Syndicate 1265 which commenced in 1998, an
assumption of premium transaction which was commuted in 1998, amortization of
the deferred income in connection with the assumption of loss reserves from
Pennsylvania National and Lumber Mutual, reserves for uncollectible reinsurance
recoverables and an adjustment for certain management commissions charged as
unallocated loss adjustment expenses. 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. In 1998, two assumption of premium transactions had the effect
of reducing the expense ratio for GAAP purposes. In 1998, the expense ratio also
includes amounts from Syndicate 1265's operations.
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 percentage.
8
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, 1998 and 1997, the Company's gross, ceded and net loss and loss adjustment
expense reserves for Asbestos/Pollution policies amounted to $24.3 million,
$15.3 million and $9.0 million, and $25.0 million, $16.0 million and $9.0
million, respectively. As of December 31, 1998, the Company had approximately
400 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 develop adversely. However, the Company believes that, in
aggregate, the unpaid loss and loss adjustment expense reserves as of December
31, 1998, 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:
1998 1997 1996
------- ------- -------
(In thousands)
------------------------------
Asbestos
Case Reserves at beginning of period .......... $ 1,067 $ 1,103 $ 1,307
Incurred loss and loss adjustment expenses .... (27) 52 (186)
Payments ...................................... (238) (88) (18)
------- ------- -------
Case Reserves at end of period ................ $ 802 $ 1,067 $ 1,103
======= ======= =======
1998 1997 1996
------- ------- -------
(In thousands)
------------------------------
Pollution
Case Reserves at beginning of period .......... $ 1,417 $ 2,323 $ 2,141
Incurred loss and loss adjustment expenses .... 351 (486) 975
Payments ...................................... (613) (420) (793)
------- ------- -------
Case Reserves at end of period ................ $ 1,155 $ 1,417 $ 2,323
======= ======= =======
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:
1998 1997 1996
------- ------- -------
(In thousands)
------------------------------
Asbestos/Pollution
Unpaid loss and loss adjustment expenses
(Including IBNR) at beginning of period ...... $ 9,029 $ 8,500 $ 7,041
Incurred loss and loss adjustment expenses .... 839 1,037 2,270
Payments ...................................... (851) (508) (811)
------- ------- -------
Unpaid loss and loss adjustment expenses
(Including IBNR) at end of period ............ $ 9,017 $ 9,029 $ 8,500
======= ======= =======
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:
1998 1997 1996
------- ------- -------
(In thousands)
------------------------------
Total loss and loss adjustment expense
payments for the year ended December 31, ..... $58,983 $55,483 $61,524
Asbestos/Pollution loss and loss
adjustment expense payments for the
year ended December 31, ...................... 851 508 811
9
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. 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, 1998, 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.
Year Ended December 31,
----------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ----
(Dollars in thousands)
Estimated Liability
for Net Unpaid Losses and
Loss Adjustment Expenses. 116,089 138,920 156,533 170,744 203,735 208,366
Cumulative Amount of Net Liability
Paid As a Percentage of
Estimate Through:
1 Year Later 17% 17% 18% 19% 20% 22%
2 Years Later 27% 32% 36% 37% 37% 37%
3 Years Later 39% 46% 49% 52% 48% 49%
4 Years Later 49% 57% 62% 61% 58% 57%
5 Years Later 55% 66% 69% 69% 64% 64%
6 Years Later 61% 72% 75% 74% 70%
7 Years Later 65% 75% 78% 78%
8 Years Later 68% 77% 81%
9 Years Later 69% 79%
10 Years Later 71%
Net Liability Reestimated including
Cumulative Net Paid Losses and
Loss Adjustment Expenses As
a Percentage of Estimate As of:
1 Year Later 96% 96% 100% 99% 99% 99%
2 Years Later 90% 98% 100% 99% 97% 96%
3 Years Later 89% 96% 98% 99% 95% 95%
4 Years Later 86% 94% 98% 97% 95% 93%
5 Years Later 83% 91% 96% 98% 94% 94%
6 Years Later 80% 90% 96% 96% 95%
7 Years Later 79% 91% 95% 97%
8 Years Later 80% 90% 97%
9 Years Later 80% 92%
10 Years Later 82%
Net Cumulative Redundancy 20,764 11,786 5,201 4,714 10,883 12,128
Gross Unpaid Losses an Loss Adjustment Expenses $407,321
Reinsurance Recoverable on Unpaid Losses and
Loss Adjustment Expenses 198,955
Reserve Re-estimated Gross 374,966
Reserve Re-estimated Reinsurance Recoverable 181,142
Gross Cumulative Redundancy 32,355
Year Ended December 31,
---------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Dollars in thousands)
Estimated Liability
for Net Unpaid Losses and
Loss Adjustment Expenses... 212,377 229,916 227,370 222,335 213,589
Cumulative Amount of Net Liability
Paid As a Percentage of
Estimate Through:
1 Year Later 20% 20% 17% 19%
2 Years Later 34% 32% 30%
3 Years Later 44% 42%
4 Years Later 53%
5 Years Later
6 Years Later
7 Years Later
8 Years Later
9 Years Later
10 Years Later
Net Liability Reestimated including
Cumulative Net Paid Losses and
Loss Adjustment Expenses As
a Percentage of Estimate As of:
1 Year Later 97% 94% 90% 91%
2 Years Later 95% 87% 87%
3 Years Later 91% 86%
4 Years Later 91%
5 Years Later
6 Years Later
7 Years Later
8 Years Later
9 Years Later
10 Years Later
Net Cumulative Redundancy 19,336 32,607 28,868 19,466
Gross Unpaid Losses an Loss Adjustment Expenses $435,072 $417,795 $411,837 $388,402 $401,584
Reinsurance Recoverable on Unpaid Losses and
Loss Adjustment Expenses 222,695 187,879 184,467 166,066 187,995
Reserve Re-estimated Gross 398,105 384,859 360,676 385,896
Reserve Re-estimated Reinsurance Recoverable 205,873 185,912 155,180 183,026
Gross Cumulative Redundancy 36,966 32,936 51,161 2,506
The following table provides a reconciliation of the consolidated
liability for losses and loss adjustment expenses at the beginning and end of
1998, 1997 and 1996:
Year ended December 31,
---------------------------------
1998 1997 1996
------- ------- -------
(In thousands)
Net liability for losses and loss adjustment
expenses at beginning of year ............ $ 222,335 $ 227,370 $ 229,916
Provision for losses and loss adjustment
expenses occurring in current year ....... 69,703 72,322 71,731
Decrease in estimated losses and loss
adjustment expenses for claims occurring
in prior years (1) ....................... (19,466) (21,874) (12,753)
Deferred income-loss portfolio
assumption(2) ............................ 275 320 381
Total losses and loss adjustment expenses
incurred ................................. 50,512 50,768 59,359
--------- --------- ---------
Less:
Losses and loss adjustment expense payments
for claims occurring during:
current year ......................... 17,407 17,029 15,012
prior years .......................... 41,576 38,454 46,512
58,983 55,483 61,524
Plus:
Deferred income-loss portfolio assumption(2) (275) (320) (381)
--------- --------- ---------
Net liability for losses and loss adjustment
expenses at year end ..................... 213,589 222,335 227,370
--------- --------- ---------
Ceded unpaid losses and loss adjustment
expenses ................................. 187,995 166,067 184,467
--------- --------- ---------
Gross unpaid losses and loss adjustment
expenses at year end ..................... $ 401,584 $ 388,402 $ 411,837
========= ========= =========
(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, the Company's Syndicate 1265, 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 for the domestic insurance companies and based on generally accepted
accounting principles as of December 31, 1998, 1997 and 1996:
Year ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
(In thousands)
Liability for losses and loss adjustment expenses
reported based on statutory accounting principles .................................. $ 193,680 $ 217,016 $ 222,953
Liability for losses and loss adjustment expenses assumed
from Lumber Mutual and Pennsylvania National ....................................... 4,529 4,469 4,508
(excludes $4,636, $5,580 and $6,653 at December 31, 1998, 1997 and 1996,
accounted for in the statutory liability for losses and loss adjustment
expenses)
UK operations ........................................................................ 13,504 -- --
Other, net ........................................................................... 1,876 850 (91)
--------- --------- ---------
Net liability for losses and loss adjustment expenses reported
based on generally accepted accounting principles .................................. 213,589 222,335 227,370
Ceded liability for unpaid losses and loss adjustment expenses ....................... 187,995 166,067 184,467
--------- --------- ---------
Gross liability for unpaid losses and loss adjustment expenses ....................... $ 401,584 $ 388,402 $ 411,837
========= ========= =========
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 domestic 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's project to codify statutory accounting principles, which will
ultimately change currently prescribed statutory accounting principles, was
approved by the NAIC in March 1998. The approval included a provision for
commissioner discretion in determining appropriate statutory accounting for
insurers in their state. The NAIC indicated that codification will become
effective on January 1, 2001. The Company is examining how implementation will
affect its statutory financial statements.
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.
12
Syndicate 1265 operates in a highly regulated environment within the
overall Lloyd's of London market. Lloyd's of London maintains regulatory
departments that review the management and operation of all agencies and
syndicates to ensure that business is conducted in accordance with Lloyd's
standards. Syndicates are required to maintain trust funds for insurance
transactions with strict guidelines on withdrawals from such funds. Annual
solvency tests are conducted whereby syndicates must maintain minimum capital
requirements in accordance with ratios prescribed by Lloyd's.
The domestic 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.
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 domestic 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, 1998
domestic insurance companies' surplus was approximately $19,675,000.
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 domestic 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, 1998, 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, 1998, New York Marine had aggregate recoverables
due from Gotham of approximately $33 million or 18% of New York Marine's
statutory surplus. Gotham had aggregate recoverables due from New York Marine as
of December 31, 1998, of approximately $31 million or 53% 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, 1998, 1997 and 1996.
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.
13
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 commenced
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.
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.
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 intensified from
1995 through 1998 as 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 119 persons, of whom 22 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
London - 1,450 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 $1,184,000
from 1999 until the expiration of the lease. The lease included an initial 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.
1998 1997
--------------- ---------------
High Low High Low
First Quarter........... $30.06 $24.38 $21.13 $18.00
Second Quarter ......... 34.25 27.00 20.88 18.38
Third Quarter .......... 28.63 21.75 26.06 20.63
Fourth Quarter ......... 25.25 19.75 29.81 25.50
As of March 1, 1999, there were 83 shareholders of record. However,
management believes there are in excess of 2,500 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,
1998 and 1997. 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,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Revenues:
Net premiums earned ...... $ 76,023 $ 87,537 $ 97,036 $103,461 $ 79,255
Net investment income .... 20,803 21,325 21,270 21,659 18,854
Commission income ........ 591 1,439 1,981 3,438 2,052
Realized investment gains 8,615 10,425 4,589 4,111 2,992
Other income ............. 396 293 690 661 420
-------- -------- -------- -------- --------
Total revenues ........... $106,428 $121,019 $125,566 $133,330 $103,573
======== ======== ======== ======== ========
Expenses:
Losses and loss adjustment
expenses incurred ...... $ 50,512 $ 50,768 $ 59,359 $ 69,716 $ 61,900
Policy acquisition expenses 10,107 16,583 18,828 21,017 14,260
General and administrative
expenses ............... 21,531 16,763 16,168 16,236 16,742
Interest expense ......... 1,374 1,450 1,035 438 495
-------- -------- -------- -------- --------
Total expenses ........... $ 83,524 $ 85,564 $ 95,390 $107,407 $ 93,397
======== ======== ======== ======== ========
15
Selected Financial Data (continued)
Year Ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Income before income taxes 22,904 35,455 30,176 25,923 10,176
-------- -------- -------- -------- --------
Income taxes
Current ................ 5,250 8,962 7,495 5,393 2,306
Deferred ............... (869) 125 56 410 (1,827)
-------- -------- -------- -------- --------
Total income taxes ....... 4,381 9,087 7,551 5,803 479
-------- -------- -------- -------- --------
Net income ............... $ 18,523 $ 26,368 $ 22,625 $ 20,120 $ 9,697
======== ======== ======== ======== ========
BASIC EARNINGS PER SHARE(1):
Weighted average shares
outstanding ............ 9,679 9,849 10,499 11,299 11,379
Basic earnings per share . $ 1.91 $ 2.68 $ 2.15 $ 1.78 $ .85
====== ======== ======== ======== ========
DILUTED EARNINGS PER SHARE(1):
Weighted average shares
outstanding ............ 9,705 9,872 10,524 11,341 11,392
Diluted earnings per share $ 1.91 $ 2.67 $ 2.15 $ 1.77 $ .85
====== ======== ======== ======== ========
Dividends declared per share $ .40 $ .40 $ .40 $ .40 $ .40
====== ======== ======== ======== ========
BALANCE SHEET DATA
AT PERIOD END:
Year Ended December 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands)
Total investments ........ $443,022 $438,591 $409,209 $403,306 $341,643
Total assets ............. 730,320 707,903 714,949 722,250 730,744
Unpaid losses and loss
adjustment expenses ... 401,584 388,402 411,837 417,795 435,072
Notes payable ............ 17,458 22,458 20,438 12,727 7,020
Total shareholders' equity $228,180 $206,519 $188,852 $182,717 $164,313
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."
- - ----------
(1) Earnings per share data prior to 1997 have been restated as required under
Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
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 other liability and inland marine
pools 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
pools increased to 100%. These lines of businesses are considered, for
operational purposes, as the Company's main segments for purposes of analyzing
underwriting income.
Year Ended December 31,
NYMAGIC Net Premiums Written ----------------------------------
Line of Business 1998(a) 1997 1996
- - ---------------------- ----------------- ----------------- -----------------
(In thousands)
Ocean marine ......... $ 59,231 81% $ 48,658 78% $ 54,093 60%
Inland marine ........ (350) -- 146 -- (1,658) (2%)
Aircraft ............. 82 -- 9,354 15% 32,482 36%
Other liability ...... 2,969 4% 3,856 6% 5,238 6%
Other (b) ............ 10,796 15% 207 1% 358 --
--------- ---- --------- ---- --------- ----
Total ................ $ 72,728 100% $ 62,221 100% $ 90,513 100%
========= ==== ========= ==== ========= ====
Year Ended December 31,
NYMAGIC Net Premiums Earned ---------------------------------
Line of Business 1998(a) 1997 1996
- - ---------------------- ----------------- ----------------- -----------------
(In thousands)
Ocean marine ......... $ 60,219 79% $ 49,984 57% $ 52,483 54%
Inland marine ........ (393) -- 443 1% 2,408 3%
Aircraft ............. 2,005 3% 32,566 37% 35,416 36%
Other liability ...... 3,393 4% 4,328 5% 6,355 7%
Other (b) ............ 10,799 14% 216 -- 374 --
--------- ---- --------- ---- --------- ----
Total ................ $ 76,023 100% $ 87,537 100% $ 97,036 100%
========= ==== ========= ==== ========= ====
(a) Includes net ocean marine premiums written and earned from Syndicate 1265
of $16,832 and $14,832, respectively.
(b) In 1998, includes a one-time assumption of miscellaneous casualty net
written and earned premiums of $10,563, respectively.
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.
17
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.
1998 as Compared to 1997
Net income decreased to $18.5 million for the year ended December 31,
1998, from $26.4 million for the prior year. Diluted earnings per share
decreased to $1.91 in 1998 as compared to $2.67 in 1997. Operating income, which
excludes realized investment gains, was $12.9 million in 1998 compared to $19.6
million in 1997. Operating earnings per share on a diluted basis was $1.33 in
1998 compared with $1.98 in 1997.
The Company's net premiums earned decreased to $76.0 million in 1998 as
compared to $87.5 million in 1997. Premiums earned in 1998 reflect very
competitive markets across all lines of business, premiums from Syndicate 1265
and the effects of two transactions involving the assumption of premiums.
Ocean marine earned premiums for this segment increased by 20% in 1998
compared to 1997. The increase resulted from a reinsurance transaction involving
a one-time assumption of approximately $14.2 million of premiums that emanated
from Syndicate 1265, which commenced operations in the current year. Syndicate
1265 contributed an additional $3.6 million in gross direct ocean marine
writings in 1998. The domestic insurance companies reported a 9% decrease in
earned premiums as competition remained intense and adversely affected premium
rates. The outlook for 1999 indicates that pricing pressures will remain intact
as the over capacity within this market still exists. Syndicate 1265 will also
continue to write at a cautious pace.
Other liability and other premiums earned for this segment were $14.0
million in 1998 compared to $4.3 million in 1997. The increase resulted from the
second reinsurance transaction in 1998 that included a one-time assumption of
approximately $10.5 million of miscellaneous casualty net premiums. Excluding
the effect of this transaction, premiums earned would have decreased
approximately 22% in 1998 as a result of the soft casualty market which led to a
decline in premium production. The Company expects the casualty market to remain
competitive in 1999 with premiums likely to decline further.
The aviation segment of business was most affected by the competitive
market, with gross writings down by 20%, and coupled with the purchase of
additional reinsurance protection resulted in premiums earned decreasing to $2.0
million in 1998 compared with $32.6 million in 1997. Obtaining additional
reinsurance protection is consistent with the Company's strategy of minimizing
risk and preserving capital as the underwriting climate for gross premiums
remains soft. In addition, large aviation gross losses resulted in additional
reinsurance reinstatement costs of approximately $3.7 million that further
contributed to the decline in premiums. The Company expects this underwriting
environment to remain competitive in 1999.
Inland marine gross premium writings for this segment increased 15% to
$1.3 million in 1998 due in large part to writing policies that are ancillary to
its ocean marine risks. Earned premiums were negative due to reinsurance costs
for catastrophe protection, reinstatement costs, and quota share reinsurance
which collectively amounted to approximately $1.6 million. This underwriting
strategy is expected to remain in place for 1999.
Losses and loss adjustment expenses incurred as a percentage of net
premiums earned were 66.4% for the year ended December 31, 1998 as compared to
58.0% for the prior year.
The ocean marine loss ratio for Syndicate 1265's assumption of premiums in
1998 was approximately 94% and had the effect of increasing the overall loss
ratio significantly. Absent such business, the ocean marine loss ratio for this
segment would have been approximately 54% as compared to 57% for the prior year.
The domestic insurance companies recorded favorable net loss experience in the
Company's core ocean marine line largely due to lower retention levels per loss.
18
The other liability loss ratio for this segment increased to 96% from 91%
in 1997. The assumption of miscellaneous net casualty premiums in 1998 was
subsequently commuted in the fourth quarter of 1998 at a loss ratio of 77%.
Excluding this business, the loss ratio would have been approximately 152%.
Adverse development from prior year losses contributed to the increase.
An improvement in the frequency of losses and favorable net loss
development contributed to a lower loss ratio in the aviation line in 1998.
Policy acquisition costs as a percentage of net premiums earned for the
year ended December 31, 1998 were 13.3% as compared with 18.9% of the prior
year. The reduction in the ratio is due to the two transactions involving an
assumption of premiums in 1998. Excluding the effect of such business, the ratio
would have been approximately 19.7% for 1998. This ratio approximates the ocean
marine line of business ratio as those premiums represent a larger percentage of
total premiums in 1998 than in 1997.
Net investment income in 1998 decreased by 2% to $20.8 million from $21.3
million in 1997 as a result of a decrease in investment yield in the Company's
fixed maturity portfolio caused by additional purchases of tax-exempt securities
and lower overall interest rates. Although investment yield was lower in 1998,
Syndicate 1265's operations contributed to a larger average invested asset base
during the current year.
Commission income in 1998 was $591,448 as compared to $1,438,606 for the
same period of 1997. The prior year included larger profit commissions from
reinsurance transactions in the aviation and ocean marine lines of business.
General and administrative expenses increased by 28% in 1998 over 1997.
The increase included operating expenses from Syndicate 1265. Also, certain
one-time expenses were incurred in connection with the assumption of premiums
and the formation of Syndicate 1265. Lastly, contributing to the overall
increase were expenses associated with two employee benefit plans adopted by the
Board of Directors in 1998.
Interest expense decreased 5% for the year ended December 31,1998 to $1.4
million primarily as a result of a decrease in average loan principal
outstanding.
The Company was able to realize investment gains of $8.6 million in 1998
mainly as a result of the sale of appreciated equity securities in 1998.
The Company's effective tax rate at December 31,1998 was 19.1% as compared
to 25.6% in 1997. Taxable income was greater in 1997 as a result of larger
underwriting profits and realized investment gains. The decrease in the
effective rate was also due to increased tax-exempt income as a percentage of
pre-tax income in 1998.
Reinsurance receivables at December 31, 1998 were $199.7 million or 14%
greater than the prior year's amount. Large gross aviation losses, which were
ceded under various reinsurance agreements, accounted for the increase.
Accumulated other comprehensive income, which includes unrealized
appreciation of investments and foreign currency translation adjustments, at
December 31, 1998 was $19.4 million as compared to $12.9 million as of December
31, 1997. Increases in unrealized appreciation of both fixed and equity
securities accounted for most of the increase.
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.
19
Ocean marine premiums earned fell by 5% in 1997 mainly due to falling
premium rates as competition remained intense during 1997. All classes within
the ocean marine line experienced declines except for the energy class which saw
increases in production. In 1997, the Company wrote additional marine liability
accounts with assureds that have smaller amounts of exposure. Also, net premium
writings did not decline at the same rate as gross premiums primarily due to
cheaper reinsurance costs.
Although net premiums earned in the aviation line 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 1997. During this soft
underwriting cycle, the Company sought 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.
Other liability earned premiums decreased by 32%. The casualty market has
been severely competitive for many years. Consequently, the Company continued to
underwrite this line very selectively.
Premiums earned did benefit, however, from the Company's increased pool
participation in the Mutual Marine Office, Inc. ocean marine and aviation pools
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
its higher loss ratio in 1997.
Policy acquisition costs as a percentage of net premiums earned for the
year ended December 31, 1997 were 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.
Commission income for the year ended December 31, 1997 was $1.4 million as
compared to $2.0 million 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 pools 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 $1.4 million for the year ended December
31,1997 from $1.0 million 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 $10.4 million in 1997
mainly as a result of the sale of appreciated equity securities.
Net income increased by 17% to $26.4 million for the year ended December
31, 1997, from $22.6 million for the prior year. Diluted earnings per share
increased to $2.67 in 1997 as compared to $2.15 in 1996.
Accumulated other comprehensive income as of December 31, 1997 included
gross unrealized gains and losses on equity securities of $12.3 million and $0.9
million respectively, and gross unrealized gains on fixed
20
maturities available for sale of $8.6 million. Unrealized gains were recorded in
fixed and equity securities resulting from decreases in interest rates and a
strong stock market in 1997, respectively.
Notes payable increased to $22.4 million 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 $24.4 million 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 prompted prepaid reinsurance premiums, as well as
ceded reinsurance payable balances, to increase accordingly.
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, 1998, the Company's assets included approximately $17.8
million 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 1997 and 1996 cash inflows increased as premium
rates were higher in the ocean marine and aviation lines. Cash was used in
operating activities in 1998 as further declines in premium rates and increases
in ceded reinsurance premiums negatively affected cash from operations. The
Company's maturing book of casualty business also adversely affected cash flows.
Investing and financing activities increased further as a result of the
Company entering into a $10,000,000 revolving credit agreement which increased
to $25,000,000 in 1996 with the same bank. 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 facility was reduced in 1997 from a
$10,000,000 amount available in 1996. The use of this credit facility will
assist the Company as a source of short-term liquidity. In 1998 and 1996,
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 1998 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, 1998, the Company had repurchased a total of
2,116,442 shares of common stock at a total cost of approximately $38,583,101 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 domestic 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. Dividends can be paid from Syndicate 1265 to the extent
solvency margins are maintained and after the closing of a calendar year, which
occurs three years following each calendar year.
Impact of Year 2000
The Company's computer systems and electronic devices which are based on
software programs which process dates with two digits rather than four to define
the applicable year may assume that all years occur only in the 20th century.
This could cause a system failure or miscalculation causing disruptions of
operations controlled by such systems or devices, including, among other things,
an inability to process transactions, send invoices, engage in actuarial
analyses, compute and track payment schedules, control equipment or engage in
similar normal business activities. The Company's exposure to this potential
phenomenon is concentrated principally in its legacy hardware system, insurance
business operations software, financial applications software (accounts payable,
general ledger and other packages), business relations, and potential
underwriting losses arising from claims by insureds under the Company's
insurance policies for relief for losses resulting from the Year 2000
phenomenon.
The following discussion is based on management's best estimates, which
were derived using numerous assumptions of future events, including, without
limitation, the continuing availability of basic utilities and other resources,
the availability of trained personnel at reasonable cost, and the ability of
third parties to replace or upgrade noncompliant software and hardware at
reasonable cost. There can be no guarantee that these assumptions will prove
accurate, and, accordingly, actual results may materially differ from those
anticipated.
Readiness and Compliance Plan
The Company separated its Year 2000 compliance plan into three major
phases: (1) Information Technology; (2) Compliance by Vendors and Business
Relations; and (3) Potential Underwriting Losses. These three phases are
considered the most critical components of the Year 2000 efforts for the
Company.
Information Technology
In 1996, the Company commenced overhauling its existing legacy mainframe
computer hardware and software systems in order to improve employee productivity
and financial reporting. The Company extended the project to cover Year 2000
concerns.
In June, 1998, the Company replaced its computer hardware system with
client-server architecture which is Year 2000 compliant. The Company also
successfully upgraded its insurance business operations software so that such
software now functions with the new Year 2000 compliant operating system. The
upgraded operations software was modified subsequently to be Year 2000
compliant. The Company is currently testing and evaluating the Year 2000
compliant version of its insurance business operations software. Based upon the
status of its testing, which is currently on schedule, the Company expects the
testing of its business operations software to be completed by June 30, 1999.
22
The Company expects that its remaining software (which includes financial
applications for accounts payable, general ledger and other packages) will be
Year 2000 compliant by June 30, 1999. The Company has identified Year 2000
compliant systems and is evaluating and testing data to insure compliance of the
remaining software systems. The Company is approximately 25% complete with
respect to this phase of its Year 2000 evaluation efforts and is currently on
schedule with its compliance plans. In the event such systems cannot be upgraded
or remedied, the Company would purchase and/or license replacement software
which is Year 2000 compliant.
Compliance by Vendors and Business Relations
In connection with the Company's Year 2000 plan, the Company is in the
process of communicating with its various business relationships and vendors to
determine the extent of their Year 2000 compliance. The Company mailed
questionnaires to approximately 300 companies which the Company considers to
have an important relationship with the Company. To date, the Company received
responses from approximately 200 of such companies indicating that they are in
the process of becoming Year 2000 compliant before January 1, 2000. In 1999, the
Company selected the 10 largest producers for the Company, which accounts for
approximately 64% of the Company's gross writings for the domestic insurance
companies as of December 31, 1998, and requested additional information to
evidence their Year 2000 Compliance. Also, the Company is soliciting the
non-responding companies to determine the extent of their compliance. The
Company is current with its timetable on this phase of its compliance plan and
believes that it will complete analyzing the Year 2000 compliance of its
business relationships by July 1999. In the event that a business relationship
does not respond to the Company or does not demonstrate that its own systems are
Year 2000 compliant, then such business relationships may need to be terminated
which may result in a material and adverse effect on the Company's business,
assets, prospects, liquidity and financial condition.
Potential Underwriting Losses
Property/casualty insurance companies may have an underwriting exposure
related to the Year 2000 phenomenon. Although the Company has not received any
claims for coverage from insureds based on losses resulting from Year 2000
issues, there can be no assurance that insureds will be free from losses of this
type or that the Company will be free from claims made under the Company's
insurance policies. If any claims are made, coverage, if any, will depend on the
facts and circumstances of the claim and the provisions of the subject insurance
policy. The Company, in certain instances, has been able to include Year 2000
exclusions in its policy forms. Also, the Company is requesting information from
certain insureds as to the extent of their Year 2000 compliance. The Company
will continue to monitor policies throughout the 1999 year as a result of
compliance under this phase of its Year 2000 evaluation efforts. At this time,
the Company is unable to determine whether the adverse impact and/or extent of
underwriting losses, if any, in connection with the foregoing circumstances
would be material to the Company.
Cost of Year 2000 Compliance
The Company estimates, based on its evaluations and actions taken to date,
that the aggregate cost of its information technology project, including the
cost of achieving Year 2000 compliance, will be approximately $1,400,000 of
which approximately $1,100,000 has been expended through December 31, 1998.
These costs (excluding internal personnel expenses) are comprised of outside
consulting service costs for evaluation and upgrade of systems, acquisition
costs for new equipment and componentry, and licensing and purchase fees for new
and upgraded software. This process has not had a material impact on the status
of other internal technology projects.
Contingency Plan; Actual Results May Differ
The Company is in the beginning stages of developing a contingency plan in
the event that its insurance business operation software is not placed into use.
This plan, which has not been finalized, includes a combination of purchasing
personal computers and utilizing manual systems. The contingency plan also
addresses Year 2000 issues relating to environmental concerns. This includes
telephone and security systems, copiers, electrical availability, etc.
23
Actual results may differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate suitable cost efficient replacements (or upgrades to) computer hardware
and software which are Year 2000 compliant, and the ability to correct all
relevant computer codes and similar uncertainties. There can be no assurance
that the Company will be immune from underwriting losses arising from Year 2000;
and such losses may result in a material and adverse effect on the Company's
business, assets, liquidity and financial condition.
Market risk
Market risk includes the potential for future losses due to reasonably
possible changes in the fair value of financial instruments which relates mainly
to the Company's investment portfolio. Those risks associated with the
investment portfolio include the effects of exposure to adverse changes in
interest rates, credit quality, equity prices and foreign exchange rates.
The largest market risk to the Company relates to interest rate risk.
Interest rate risk includes the changes in the fair value of fixed maturities
based upon changes in interest rates. This risk is considered when developing
our benchmarks for evaluating our portfolio. Such benchmarks are tied into the
overall duration of the Company's loss reserves. Through the matching of cash
flows from future maturing investments and the ultimate payout pattern of loss
reserves, the Company can minimize the effect of interest rate risk.
The following tabular presentation outlines the expected cash flows of
fixed maturities available for sale for each of the next five years and the
aggregate cash flows expected for the remaining years thereafter based upon
maturity dates. Fixed maturities include taxable and tax-exempt securities with
applicable weighted average interest rates. Taxables also include mortgage
backed securities that have prepayment features which may cause actual cash
flows to differ from those based on maturity date.
Future cash flows of expected principal amounts
(in millions)
Total Total
There- Amortized Fair
Fixed maturities 1999 2000 2001 2002 2003 after Cost Value
- - ---------------- ---- ---- ---- ---- ---------- ---- -----
Tax-exempt ............. $ 15 $ 11 $ 15 $ 18 $ 32 $161 $252 $260
Average interest rate 5.9% 6.5% 6.0% 5.7% 5.8% 6.2% -- --
Taxables ............... 15 3 16 -- 9 48 91 93
Average interest rate 7.0% 7.8% 6.8% -- 5.4% 7.1% -- --
---- ---- ---- ---- ---------- ---- -----
Total .................. $ 30 $ 14 $ 31 $ 18 $ 41 $209 $343 $353
Credit quality risk includes the risk of default by issuers of debt
securities. The Company's investment guidelines are conservatively designed and
prevent the investment in securities below an A rating. Overall, the Company has
maintained fixed maturities with an average credit quality rating of AA as of
December 31, 1998. The Company's exposure to credit risk is considered minimal.
Foreign currency risk includes exposure to changes in foreign exchange
rates on the market value and interest income of foreign denominated
investments. Syndicate 1265 operations maintain an equivalent of $2.9 million in
investments in British Pounds Sterling to the extent business is derived from
transactions in such currency. The investment of cash flows from business
written in Pounds Sterling in securities of the same foreign currency, will
ultimately mitigate the risk associated with changes in foreign exchange rates.
Equity risk includes the potential loss from changes in the fair value of
equity securities. The Company's equity securities are traded on major stock
exchanges and are highly liquid. These securities are limited by investment
guidelines to 25% of statutory surplus in order to minimize the impact of large
changes in the stock market.
The Company monitors market risks on a regular basis through meetings with
investment advisors, examining the existing portfolio and reviewing potential
changes in investment guidelines. The overall effect of
24
which is to allow management to make informed decisions concerning the impact
that market risks have on the portfolio.
Effect of recent accounting pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", ("SFAS 133") was issued by the
Financial Accounting Standards Board in June 1998. SFAS 133 requires derivatives
to be recorded on the balance sheet at fair value. Derivatives not considered as
hedges must be recorded at fair value with adjustments recorded in the income
statement. For derivatives that qualify as a hedge, changes in the fair value of
the derivative are offset against changes in the fair value of the hedged assets
or liabilities and are recognized in the income statement or in other
comprehensive income depending on the nature of the hedge. SFAS 133 is effective
for years beginning after June 15, 1999.
The Company uses derivatives, in the form of an interest rate swap, for
hedging purposes as part of its interest rate management. The Company has not
yet determined the effect of SFAS 133 on its financial statements.
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.
25
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 1999 Annual Meeting of Shareholders.
Item 11. Executive Compensation.
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 1999 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain
Beneficial Owners and Management.
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 1999 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions.
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 1999 Annual Meeting of Shareholders.
PART IV
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 31.
2. Financial Statement Schedules
The list of financial statement schedules appears in the
accompanying index on page 31.
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.)
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
26
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.)
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.)
10.9 Employment Agreement between Vincent T. Papa and the
Company.
21. Subsidiaries of the Registrant.
27
23. Consent of KPMG LLP.
27. Financial Data Schedule
28. Schedule P as of December 31, 1998.
(b) Reports on Form 8-K
None.
28
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/ Sergio B. Tobia
------------------------
Sergio B. Tobia
Chairman of the Board
Date: March 31, 1999
------------------------
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
- - ---- ----- ----
Director March __, 1999
- - ----------------------------
John N. Blackman, Jr.
Director March __, 1999
- - ----------------------------
Mark W. Blackman
/s/ Thomas J. Condon Director March 31, 1999
- - ----------------------------
Thomas J. Condon
/s/ Jean H. Goulding Director March 31, 1999
- - ----------------------------
Jean H. Goulding
/s/ John Kean, Jr. Director March 31, 1999
- - ----------------------------
John Kean, Jr.
/s/ James A. Lambert Director, General Counsel, March 31, 1999
- - ---------------------------- Chief Operating Officer
James A. Lambert and Secretary
29
Name Title Date
- - ---- ----- ----
/s/ Charles A. Mitchell Director and Vice President March 31, 1999
- - ----------------------------
Charles A. Mitchell
/s/ Michael S. Shaffet Director March 31, 1999
- - ----------------------------
Michael S. Shaffet
/s/ William R. Scarbrough Director March 31, 1999
- - ----------------------------
William R. Scarbrough
/s/ Richard T. Soper Director March 31, 1999
- - ----------------------------
Richard T. Soper
/s/ William A. Thorne Director March 31, 1999
- - ----------------------------
William A. Thorne
/s/ Sergio B. Tobia Chairman of the Board and March 31, 1999
- - ---------------------------- Director
Sergio B. Tobia
/s/ Louise B. Tollefson Director March 31, 1999
- - ----------------------------
Louise B. Tollefson
/s/ Thomas J. Iacopelli Principal Accounting Officer March 31, 1999
- - ---------------------------- and Chief Financial Officer
Thomas J. Iacopelli
/s/ Vincent T. Papa President and Chief March 31, 1999
- - ---------------------------- Executive Officer
Vincent T. Papa
30
NYMAGIC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report .............................................. 32
Consolidated Balance Sheets ............................................... 33
Consolidated Statements of Income ......................................... 34
Consolidated Statements of Shareholders' Equity ........................... 35
Consolidated Statements of Cash Flows ..................................... 36
Notes to Consolidated Financial Statements ................................ 37
Financial Statement Schedule II ........................................... 58
Financial Statement Schedule V ............................................ 60
Financial Statement Schedule VI ........................................... 61
31
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998 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 LLP
New York, New York
February 16, 1999
32
NYMAGIC, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------------
1998 1997
------------- -------------
ASSETS
Investments:
Fixed maturities available for sale at
fair value (amortized cost
$342,583,525 and $352,696,745) ............. $ 353,403,303 $ 361,249,758
Equity securities at fair value
(cost $54,368,172 and $47,925,798) ........ 73,418,473 59,258,608
Short-term investments ....................... 16,200,606 18,082,540
------------- -------------
Total investments ......................... 443,022,382 438,590,906
------------- -------------
Cash ......................................... 1,583,390 1,042,310
Accrued investment income .................... 6,189,866 6,322,370
Premiums and other receivables, net .......... 41,422,913 40,635,164
Reinsurance receivables ...................... 199,730,802 175,657,952
Deferred policy acquisition costs ............ 4,277,430 5,567,488
Prepaid reinsurance premiums ................. 19,393,546 24,414,620
Deferred income taxes ........................ 5,811,741 8,436,768
Property, improvements & equipment, net ...... 2,341,021 2,365,653
Other assets ................................. 6,547,403 4,869,609
------------- -------------
Total assets .............................. $ 730,320,494 $ 707,902,840
============= =============
LIABILITIES
Unpaid losses and loss adjustment expenses ... $ 401,584,146 $ 388,401,548
Reserve for unearned premiums ................ 46,878,550 55,188,281
Ceded reinsurance payable .................... 23,795,992 27,307,129
Notes payable ................................ 17,458,413 22,458,413
Other liabilities ............................ 11,454,977 7,062,095
Dividends payable ............................ 968,549 966,031
------------- -------------
Total liabilities ........................ 502,140,627 501,383,497
------------- -------------
SHAREHOLDERS' EQUITY
Common stock ................................. 15,017,892 14,991,992
Paid-in capital .............................. 28,029,410 27,529,877
Accumulated other comprehensive income ....... 19,436,591 12,931,785
Retained earnings ............................ 208,198,204 193,547,346
------------- -------------
270,682,097 249,001,000
Treasury stock, at cost, 5,332,400
and 5,331,686 shares ....................... (42,502,230) (42,481,657)
------------- -------------
Total shareholders' equity ............... 228,179,867 206,519,343
------------- -------------
Total liabilities and shareholders' equity $ 730,320,494 $ 707,902,840
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
33
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
--------------------------------------------------------------
1998 1997 1996
------------- ------------ ------------
Revenue:
Net premiums earned .................................... $ 76,022,663 $ 87,536,906 $ 97,036,021
Commission income ...................................... 591,448 1,438,606 1,980,632
Net investment income .................................. 20,803,433 21,325,065 21,270,194
Realized investment gains .............................. 8,615,058 10,425,133 4,589,133
Other income ........................................... 395,560 292,918 689,641
------------- ------------ ------------
Total revenues ....................................... 106,428,162 121,018,628 125,565,621
------------- ------------ ------------
Expenses:
Losses and loss adjustment expenses
incurred .............................................. 50,512,063 50,768,248 59,358,857
Policy acquisition expenses ............................ 10,107,327 16,582,623 18,827,794
General and administrative expenses .................... 21,531,287 16,763,699 16,168,162
Interest expense ....................................... 1,373,408 1,449,770 1,035,058
------------- ------------ ------------
Total expenses ....................................... 83,524,085 85,564,340 95,389,871
------------- ------------ ------------
Income before income taxes ............................... 22,904,077 35,454,288 30,175,750
------------- ------------ ------------
Income tax provision:
Current ................................................ 5,250,123 8,962,799 7,494,593
Deferred ............................................... (869,462) 123,749 56,539
------------- ------------ ------------
Total income taxes ................................... 4,380,661 9,086,548 7,551,132
------------- ------------ ------------
Net income ............................................. $ 18,523,416 $ 26,367,740 $ 22,624,618
============= ============ ============
Weighted average number of shares of
common stock outstanding-basic ......................... 9,678,802 9,848,959 10,499,366
============= ============ ============
Basic earnings per share ................................. $ 1.91 $ 2.68 $ 2.15
============= ============ ============
Weighted average number of shares of
common stock outstanding-diluted ....................... 9,705,433 9,871,586 10,523,996
============= ============ ============
Diluted earnings per share ............................... $ 1.91 $ 2.67 $ 2.15
============= ============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
34
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Year ended December 31,
---------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ---------------------------
Retained earnings:
Balance, beginning of period ........... $193,547,346 $171,089,462 $152,646,915
Net income ............................. 18,523,416 $ 18,523,416 26,367,740 $ 26,367,740 22,624,618 $ 22,624,618
------------ ------------ ------------
Dividends declared ..................... (3,872,558) (3,909,856) (4,182,071)
------------ ------------ ------------
Balance, end of period .......... 208,198,204 193,547,346 171,089,462
============ ============ ============
Accumulated other comprehensive income:
Balance, beginning of period ........... 12,931,785 8,150,910 9,865,486
Unrealized gain (loss) on securities,
net of reclassification adjustment .. 6,489,767 4,774,875 (1,714,576)
Foreign currency translation adjustments 15,039 6,000
------------ ------------ ------------
Other comprehensive income (loss) ...... 6,504,806 6,504,806 4,780,875 4,780,875 (1,714,576) (1,714,576)
------------ ------------ ------------ ------------ ------------ ------------
Comprehensive income ................... $ 25,028,222 $ 31,148,615 $ 20,910,042
============ ============ ============
Balance, end of period .......... 19,436,591 12,931,785 8,150,910
============ ============ ============
Common stock:
Balance, beginning of period ........... 14,991,992 14,911,992 14,749,192
Shares issued .......................... 25,900 80,000 162,800
------------ ------------ ------------
Balance, end of period .......... 15,017,892 14,991,992 14,911,992
============ ============ ============
Paid-in capital:
Balance, beginning of period ........... 27,529,877 26,258,259 23,933,587
Shares issued .......................... 499,533 1,271,618 2,324,672
------------ ------------ ------------
Balance, end of period .......... 28,029,410 27,529,877 26,258,259
============ ============ ============
Treasury stock:
Balance, beginning of period ........... (42,481,657) (31,558,897) (18,478,576)
Net repurchase of common stock ......... (20,573) (10,922,760) (13,080,321)
------------ ------------ ------------
Balance, end of period .......... $(42,502,230) $(42,481,657) $(31,558,897)
============ ============ ============
Number of Shares
----------------
Common stock, par value $1 each:
Issued, beginning of period ............ 14,991,992 14,911,992 14,749,192
Shares Issued .......................... 25,900 80,000 162,800
------------ ------------ ------------
Issued, end of period .................. 15,017,892 14,991,992 14,911,992
============ ============ ============
Common stock, authorized shares,
par value $1 each ...................... 30,000,000 30,000,000 30,000,000
============ ============ ============
Common stock, shares outstanding ....... 9,685,492 9,660,306 10,143,052
============ ============ ============
Dividends declared per share ........... $ .40 $ .40 $ .40
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
35
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------------------------------------------
1998 1997 1996
------------ ------------- -------------
Cash flows from operating activities:
Net income ................................................. $ 18,523,416 $ 26,367,740 $ 22,624,618
------------ ------------- -------------
Adjustments to reconcile net income to
net cash (used in) provided by operating
activities:
Provision for deferred taxes .............................. (869,462) 123,749 56,539
Realized investment gains ................................. (8,615,058) (10,425,133) (4,589,133)
Net bond amortization ..................................... 2,220,565 1,895,355 1,933,151
Depreciation and other, net ............................... 733,950 582,126 442,945
Changes in:
Premiums and other receivables ............................ (787,749) 22,404,229 6,641,818
Reinsurance receivables ................................... (24,072,850) 22,330,121 (592,384)
Ceded reinsurance payable ................................. (3,511,137) 7,553,186 3,327,596
Accrued investment income ................................. 132,504 (362,173) 150,205
Deferred policy acquisition costs ......................... 1,290,058 5,336,753 756,662
Prepaid reinsurance premiums .............................. 5,021,074 (13,852,407) 6,394,228
Other assets .............................................. (1,677,794) (1,523,783) 80,157
Unpaid losses and loss adjustment
expenses ................................................ 13,182,598 (23,435,433) (5,957,544)
Reserve for unearned premiums ............................. (8,309,731) (11,463,652) (12,917,022)
Foreign currency translation adjustments .................. 15,039 6,000 --
Other liabilities ......................................... 4,392,882 660,632 (5,546,174)
------------ ------------- -------------
Total adjustments ..................................... (20,855,111) (170,430) (9,818,956)
------------ ------------- -------------
Net cash (used in) provided by operating
activities ................................................. (2,331,695) 26,197,310 12,805,662
------------ ------------- -------------
Cash flows from investing activities:
Fixed maturities acquired ................................. (77,604,001) (205,891,607) (231,515,433)
Equity securities acquired ................................ (51,440,490) (50,578,073) (37,880,911)
Net sale of short-term investments ........................ 1,890,059 178,516 22,458,421
Fixed maturities matured .................................. 34,682,127 25,059,072 36,302,944
Fixed maturities sold ..................................... 51,905,388 167,867,245 171,112,392
Equity securities sold .................................... 52,514,190 49,858,725 33,637,805
Acquisition of property & equipment, net .................. (709,318) (840,692) (276,494)
------------ ------------- -------------
Net cash provided by (used in) investing
activities ................................................. 11,237,955 (14,346,814) (6,161,276)
------------ ------------- -------------
Cash flows from financing activities:
Proceeds from stock issuance .............................. 525,433 1,351,618 2,487,472
Cash dividends paid to stockholders ....................... (3,870,040) (3,958,130) (4,236,947)
Net repurchase of common stock ............................ (20,573) (10,922,760) (13,080,321)
Proceeds from borrowings .................................. 5,000,000 9,520,000 14,211,472
Loan principal payments ................................... (10,000,000) (7,500,000) (6,500,000)
------------ ------------- -------------
Net cash used in financing activities ....................... (8,365,180) (11,509,272) (7,118,324)
------------ ------------- -------------
Net increase (decrease) in cash ............................. 541,080 341,224 (473,938)
Cash at beginning of year ................................. 1,042,310 701,086 1,175,024
------------ ------------- -------------
Cash at end of year ....................................... $ 1,583,390 $ 1,042,310 $ 701,086
============ ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
36
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.
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. 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 and
results of operations of MMO EU, MMO UK and MMO UA (collectively referred to as
"Syndicate 1265") are included in the consolidated financial statements.
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.
The preparation of financial statements 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.
37
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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 accumulated other
comprehensive income in shareholders' equity.
Derivatives
In 1998, an interest rate agreement was entered into for purposes of
hedging interest rate risk on the Company's existing note payable. Cash flows as
a result of the hedge are recorded as adjustments to interest expense.
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
$650,000 and $700,000 as of December 31, 1998 and 1997, 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.
The Company accounts for all reinsurance recoverables and prepaid
reinsurance premiums as assets.
38
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Depreciation
Property, equipment and leasehold improvements are depreciated using both
straightline and accelerated methods over their useful lives.
Income Taxes
The Company and its subsidiaries file a consolidated Federal tax return.
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 based upon enacted tax rates. The effect of a change in tax rates is
recognized in income in the period of change.
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, recorded 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 in accumulated
other comprehensive income in shareholders' equity. Revenues and expenses are
translated to U.S. dollars using the average exchange rates for the year.
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.
39
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Basic and diluted earnings per share
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 12 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 the 1998 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. The Company adopted SFAS 130 in 1998 and has disclosed information
pertaining to SFAS 130 in the consolidated statements of shareholders' equity
and in Note 11.
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. Information pertaining to the
various segments is reported pursuant to SFAS 131 in Note 14.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities ", ("SFAS 133") was issued by the
Financial Accounting Standards Board in June 1998. SFAS 133 requires derivatives
to be recorded on the balance sheet at fair value. Derivatives not considered as
hedges must be recorded at fair value with adjustments recorded in the income
statement. For derivatives that qualify as a hedge, changes in the fair value of
the derivative are offset against changes in the fair value of the hedged assets
or liabilities and are recognized in the income statement or in other
comprehensive income depending on the nature of the hedge. SFAS 133 is effective
for years beginning after June 15, 1999.
The Company uses derivatives, in the form of an interest rate swap, for
hedging purposes as part of its interest rate management. Management is
assessing the impact of SFAS 133 on the Company's consolidated financial
position and results of operation.
40
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(2) Investments:
A summary of investment components at December 31, 1998 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 .................. $ 55,934,951 $ 57,451,902 $ 57,451,902
States, municipalities and
political subdivisions ......... 252,371,231 260,408,800 260,408,800
Public utilities ............... 15,456,885 16,223,000 16,223,000
All other corporate bonds ...... 18,820,458 19,319,601 19,319,601
------------ ------------ ------------
Total fixed maturities
available for sale ........... 342,583,525 353,403,303 353,403,303
------------ ------------ ------------
Equity securities:
Common stocks:
Public utilities ................... 3,273,626 4,161,364 4,161,364
Banks, trusts and insurance
companies ........................ 6,708,311 7,354,216 7,354,216
Industrial, miscellaneous and
all other ........................ 44,386,235 61,902,893 61,902,893
------------ ------------ ------------
Total equity securities .......... 54,368,172 73,418,473 73,418,473
------------ ------------ ------------
Short term investments ............. 16,200,606 16,200,606 16,200,606
------------ ------------ ------------
Total investments ................ $413,152,303 $443,022,382 $443,022,382
============ ============ ============
Unrealized depreciation or appreciation of investments (before applicable
income taxes) at December 31, 1998 and 1997 included gross unrealized gains on
equity securities of $19,915,191 and $12,276,631, respectively; and gross
unrealized losses on equity securities of $864,890 and $943,821, respectively;
and gross unrealized gains on fixed maturities available for sale of $10,841,711
and $8,601,011 at December 31, 1998 and 1997, respectively; and gross unrealized
losses on fixed maturities available for sale of $21,933 and $47,998 as of
December 31, 1998 and 1997, respectively.
Included in investments at December 31, 1998 are bonds on deposit with
various regulatory authorities as required by law with a fair value of
$9,037,650.
There were no non-income producing fixed maturity investments for each of
the years ended December 31, 1998, 1997 and 1996.
All mortgage backed securities available as of December 31, 1998 and 1997
are obligations of various U.S. Government agencies and consist of GNMA, FHLMC
or FNMA pass through securities. These securities are readily marketable.
41
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The gross unrealized gains and losses on debt securities as of December 31,
1998 and 1997 are as follows:
1998
-------------------------------------------------------------------------
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 ....................... $ 55,934,951 $ 1,521,904 $ (4,953) $ 57,451,902
Obligations of states and
political subdivisions .......................... 252,371,231 8,054,549 (16,980) 260,408,800
Corporate securities .............................. 34,277,343 1,265,258 -- 35,542,601
------------ ------------ ------------ ------------
Totals ................................... $342,583,525 $ 10,841,711 $ (21,933) $353,403,303
============ ============ ============ ============
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
============ ============ ============ ============
42
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The amortized cost and fair value of debt securities at December 31, 1998,
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 ................ $ 30,081,115 $ 30,301,713
Due after one year
through five years ..................... 102,721,452 106,139,463
Due after five years
through ten years ...................... 102,072,965 105,988,562
Due after ten years .................... 72,345,669 74,705,248
------------ ------------
307,221,201 317,134,986
Mortgage backed securities ............. 35,362,324 36,268,317
------------ ------------
Totals ............................... $342,583,525 $353,403,303
============ ============
The investment portfolio has exposure to market risks which includes the
effect of adverse changes in interest rates, credit quality, equity prices and
foreign exchange rates on the portfolio. Interest rate risk includes the changes
in the fair value of fixed maturities based upon changes in interest rates.
Credit quality risk includes the risk of default by issuers of debt securities.
Foreign currency risk includes exposure to changes in foreign exchange rates on
the market value and interest income of foreign denominated investments. Equity
risk includes the potential loss from changes in the fair value of equity
securities.
43
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Proceeds from sales of investments in debt securities during 1998, 1997 and
1996 were $51,905,388, $167,867,245 and $171,112,392, respectively. Gross gains
of $1,105,100, $1,365,460 and $1,121,305 and gross losses of $ 14,246, $ 868,944
and $ 1,437,369 were realized on the those sales in 1998, 1997 and 1996,
respectively.
Realized and unrealized investment appreciation (depreciation) on fixed
maturities and equity securities for the years ended December 31, 1998, 1997 and
1996 are as follows:
Year ended December 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
Realized gains (losses) on sale
of investments
Fixed maturities ............. $ 1,090,854 $ 496,516 $ (316,064)
Equity securities ............ 7,516,080 10,044,741 4,931,909
Short-term investments ....... 8,124 (116,124) (26,712)
------------ ------------ ------------
Realized investments gains ... 8,615,058 10,425,133 4,589,133
Less: applicable income taxes (3,015,270) (3,648,797) (1,606,197)
------------ ------------ ------------
Net realized investment gains .. $ 5,599,788 $ 6,776,336 $ 2,982,936
============ ============ ============
Change in unrealized investment
appreciation (depreciation)
of securities:
Fixed maturities ............. $ 2,266,766 $ 4,200,177 $ (5,017,118)
Equity securities ............ 7,717,489 3,145,784 2,379,308
------------ ------------ ------------
Unrealized investment
gains (losses) ............. 9,984,255 7,345,961 (2,637,810)
Less: applicable deferred
income taxes .......... (3,494,488) (2,571,086) 923,234
------------ ------------ ------------
Net unrealized investment
gains (losses) ............. $ 6,489,767 $ 4,774,875 $ (1,714,576)
============ ============ ============
Net investment income from each major category of investments for the years
indicated is as follows:
Year ended December 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
Fixed maturities ............... $ 18,740,628 $ 20,192,031 $ 19,938,840
Short-term investments ......... 2,021,670 1,089,128 1,316,992
Equity securities .............. 846,610 814,341 734,939
------------ ------------ ------------
Total investment income ...... 21,608,908 22,095,500 21,990,771
Investment expenses ............ (805,475) (770,435) (720,577)
------------ ------------ ------------
Net investment income ........ $ 20,803,433 $ 21,325,065 $ 21,270,194
============ ============ ============
44
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 pools.
A summary of the pools' underwriting accounts as of December 31, 1998 and
1997 is as follows:
December 31,
-----------------------------
1998 1997
-----------------------------
Cash and short-term investments ............ $ 5,264,642 $ 3,276,115
Premiums receivable ........................ 36,384,613 41,537,562
Reinsurance and other recoverables ......... 27,525,077 23,942,068
----------- -----------
Total Assets ............................... $69,174,332 $68,755,745
=========== ===========
Due to insurance pool members .............. $29,705,029 $27,251,208
Reinsurance payable ........................ 26,500,070 31,984,380
Funds withheld from reinsurers ............. 6,447,912 5,043,576
Other liabilities .......................... 6,521,321 4,476,581
----------- -----------
Total Liabilities .......................... $69,174,332 $68,755,745
=========== ===========
A portion of the pools' underwriting accounts above have been included in
the Company's insurance subsidiaries operations based upon their pro-rata
participation in the MMO insurance pools.
45
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(4) Insurance Operations:
Reinsurance Transactions
Approximately 45%, 50% and 42% of the Company's insurance subsidiaries'
direct and assumed gross premiums written for the years ended December 31, 1998,
1997 and 1996, 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, 1998, were Arkwright Mutual
Insurance Company ("Arkwright"), Lloyd's of London ("Lloyd's") and Utica Mutual
Insurance Company ("Utica Mutual"), with aggregate recoverables of $36 million,
$19 million and $13 million, respectively. The 1998 A.M. Best ratings for
Arkwright and Utica Mutual are each rated 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, 1998, no single one of
which was liable to the Company for an unsecured amount in excess of
approximately $4.4 million.
Funds withheld and letters of credit obtained under various reinsurance
treaties amounted to approximately $89 million as of December 31, 1998.
Reinsurance receivables as of December 31, 1998 and 1997 included an allowance
for uncollectible reinsurance recoverables of $6,823,000 and $5,785,000
respectively.
In 1998, the Company entered into a reinsurance transaction involving the
assumption of approximately $14.2 million in ocean marine premiums that emanated
from the Company's Syndicate 1265. In addition, a second reinsurance transaction
involving the assumption of approximately $10.5 million in miscellaneous
casualty net premiums was written by the Company's domestic insurance company
subsidiary in 1998. The second transaction was subsequently commuted in the
fourth quarter of 1998 resulting in total payments of approximately $8.1
million.
46
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, 1998 $ 85,489,133 $ 59,408,755 $ 46,647,604 $ 72,727,982
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
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, 1998 $ 93,908,920 $64,431,374 $46,545,117 $76,022,663 61%
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%
Losses and loss adjustment expenses incurred are net of ceded reinsurance
recoveries amounting to $83,487,279, $26,912,355, and $62,516,373 for the years
ended December 31, 1998, 1997, and 1996, 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 1998, 1997 and 1996:
Year ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(in thousands)
Net liability for losses and loss adjustment
expenses at beginning of year ........................................ $ 222,335 $ 227,370 $ 229,916
--------- --------- ---------
Provision for losses and loss adjustment
expenses occurring in current year .................................... 69,703 72,322 71,731
Decrease in estimated losses and loss
adjustment expenses for claims occurring
in prior years (1) ................................................... (19,466) (21,874) (12,753)
Deferred income-loss portfolio
assumption(2) ........................................................ 275 320 381
--------- --------- ---------
Total losses and loss adjustment expenses incurred ..................... 50,512 50,768 59,359
--------- --------- ---------
Less:
Losses and loss adjustment expense payments for claims occurring during:
current year ..................................................... 17,407 17,029 15,012
prior years ...................................................... 41,576 38,454 46,512
--------- --------- ---------
58,983 55,483 61,524
Add:
Deferred income-loss portfolio assumption (2) .......................... (275) (320) (381)
--------- --------- ---------
Net Liability for losses and loss adjustment
expenses at year end ................................................. 213,589 222,335 227,370
--------- --------- ---------
Ceded unpaid loss and loss adjustment
expenses .............................................................. 187,995 166,067 184,467
--------- --------- ---------
Gross unpaid losses and loss adjustment
expenses at year end ................................................. $ 401,584 $ 388,402 $ 411,837
========= ========= =========
47
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. The decrease in estimated losses is attributable
to the ocean marine and aviation lines of business as a result of favorable
payout trends in part due to lower retention levels per loss.
(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, 1998 and 1997, the Company's gross, ceded and net loss and loss adjustment
expense reserves for Asbestos/Pollution policies amounted to $24.3 million,
$15.3 million and $9.0 million, and $25.0 million, $16.0 million and $9.0
million, respectively. Net paid losses resulting from Asbestos/Pollution losses
during 1998, 1997 and 1996 amounted to $851,000, $508,000 and $811,000,
respectively. As of December 31, 1998, the Company had approximately 400
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, 1998. However, the Company believes that, in aggregate, the unpaid loss and
loss adjustment expense reserves as of December 31, 1998, 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 $6,354,281 and
$6,833,720 at December 31, 1998 and 1997, respectively.
Deferred Policy Acquisition Costs
Deferrable acquisition costs amortized to income amounted to $10,107,327,
$16,582,623 and $18,827,794 for the years ended December 31, 1998, 1997 and
1996, respectively.
48
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(5) Property, Improvements and Equipment, Net:
Property improvements and equipment, net at December 31, 1998 and 1997
include the following.
1998 1997
----------- -----------
Office furniture and equipment ............... $ 1,492,011 $ 1,452,923
Computer equipment ........................... 2,373,363 1,726,591
Leasehold improvements ....................... 2,433,141 2,409,683
----------- -----------
6,298,515 5,589,197
Less: accumulated depreciation
and amortization ................. (3,957,494) (3,223,544)
----------- -----------
Property, improvements and equipment, net .... $ 2,341,021 $ 2,365,653
=========== ===========
Depreciation and amortization expense for the years ended December 31,
1998, 1997 and 1996 amounted to $733,950, $582,126 and $442,945, respectively.
(6) Income Taxes:
The components of deferred tax assets and liabilities as of December 31,
1998 and 1997 are as follows:
December 31,
---------------------------
1998 1997
----------- -----------
Deferred Tax Assets:
Loss reserve discounting ....................... $13,128,970 $13,549,308
Unearned premiums .............................. 1,923,950 2,154,156
Equity securities write-down ................... 764,692 198,901
State and local income tax carryforward ........ 1,826,839 423,300
Deferred rent liability ........................ 374,215 410,237
Bad debt reserve ............................... 2,615,459 2,269,750
Other .......................................... 272,841 121,044
----------- -----------
Deferred tax assets ............................ 20,906,966 19,126,696
----------- -----------
Less: Valuation allowance ...................... 1,187,445 --
----------- -----------
Total deferred tax assets ...................... 19,719,521 19,126,696
----------- -----------
49
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Deferred Tax Liabilities:
December 31,
---------------------------
1998 1997
----------- -----------
Deferred policy acquisition costs .............. $ 1,497,101 $ 1,948,621
Unrealized appreciation of investments ......... 10,454,527 6,960,037
Deferred income-loss portfolio assumption ...... 144,167 240,279
Discount on accrued salvage and subrogation .... 348,111 374,378
Other .......................................... 1,463,874 1,166,613
----------- -----------
Total deferred tax liabilities ................. 13,907,780 10,689,928
----------- -----------
Net deferred tax assets ........................ $ 5,811,741 $ 8,436,768
=========== ===========
The last year for which the state and local income tax carryforward of
$1,826,839 as of December 31, 1998 can be carried forward against future state
and local tax liabilities is the year 2018.
The Company's valuation allowance account with respect to the deferred tax
asset and the change in the account is as follows:
1998 1997 1996
---------- ---------- ----------
Balance, beginning of year ......... $ -- $ 516,716 $ 712,706
Change in valuation allowance ...... 1,187,445 (516,716) (195,990)
---------- ---------- ----------
Balance, end of year ............... $1,187,445 $ -- $ 516,716
========== ========== ==========
The Company believes that the total deferred tax asset net of the recorded
valuation allowance account as of December 31, 1998 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,
----------------------------
1998 1997 1996
------ ------ ------
Income taxes at the Federal statutory rate .... 35.0% 35.0% 35.0%
Tax exempt interest ........................... (21.7) (12.5) (12.8)
Valuation allowance ........................... 5.2 (1.5) (0.7)
State taxes ................................... (3.9) (0.5) 0.2
Net bond amortization ......................... 3.3 1.9 1.8
Investment income proration ................... 2.9 1.7 1.7
Other, net .................................... (1.7) 1.5 (0.2)
------ ------ ------
Income tax provisions ......................... 19.1% 25.6% 25.0%
====== ====== ======
50
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
Federal income tax payments amounted to $5,328,181, $9,335,632 and
$7,339,913 for the years ended December 31, 1998, 1997 and 1996, respectively.
Federal income taxes recoverable at December 31, 1998 included in other
assets amounted to $181,667. Federal income tax payable at December 31, 1997
included in other liabilities amounted to $386,970.
(7) Statutory Income and Surplus:
The Company's domestic 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, 1998 surplus is approximately $19,675,000.
Consolidated statutory net income, surplus and dividends paid of the
Company's domestic insurance subsidiaries were as follows for the periods
indicated:
Consolidated Consolidated Dividends
Statutory Statutory Paid
net income surplus To Parent
------------ ------------ ------------
December 31, 1998 ........ $ 30,223,000 $196,745,000 $ 18,367,000
December 31, 1997 ........ 36,758,000 181,844,000 17,850,262
December 31, 1996 ........ 26,542,000 160,929,000 12,950,071
51
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 two 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, 1998, 1997 and 1996 amounted to
$1,017,551, $978,997 and $991,469, respectively.
In 1998, management approved two employee benefit plans for bonuses and
severance payments which resulted in expenses of $3,533,432 in 1998.
(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 5.9%
on the outstanding principal balance of the loan at December 31, 1998 of
$17,458,413. 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%, (b) the bank's adjusted certificate of deposit rate,
plus .775 of 1%, or (c) the bank's adjusted London Interbank offered rate, plus
.65 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, 1998. 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, 1998 and
1997, respectively.
Interest paid amounted to $1,347,653, $1,464,240 and $1,020,737 for the
years ended December 31, 1998, 1997 and 1996.
In 1998, the Company entered into an interest rate swap agreement (the
"agreement") with a bank for purposes of hedging its interest rate risk on its
existing bank loan. The agreement requires the Company to pay interest to the
bank at a rate of 6.50% on the original notional amount outstanding of
$22,500,000 which is subsequently adjusted quarterly by notional reductions of
$1,250,000. The bank is required to pay the Company, on the same notional
amounts outstanding, an amount equal to the three month US Dollar London
Interbank Offered Rate plus .65% which is reset on a quarterly basis. Interest
expense recorded under the agreement was $44,719 in 1998.
52
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, 1998 are as follows:
Amount
----------
1999 ................................................. $1,318,118
2000 ................................................. 1,297,828
2001 ................................................. 1,297,828
2002 ................................................. 1,297,828
thereafter ........................................... 1,297,828
----------
Total ................................................ $6,509,430
==========
The operating leases also include provisions for additional payments based
on certain annual cost increases. Rent expense for the years ended December 31,
1998, 1997 and 1996 amounted to $1,131,951, $1,049,119 and $1,001,295.
As of December 31, 1998, 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 $19,090,000 as of December 31, 1998.
53
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(11) Comprehensive Income:
The accumulated balances for each classification of other comprehensive
income are as follows:
Total
Unrealized Accumulated
Gains Other
Foreign (Losses) on Comprehensive
Currency Securities Income
------------ ------------ ------------
Beginning balance, January 1, 1996 $ -- $ 9,865,486 $ 9,865,486
Current period change ............ -- (1,714,576) (1,714,576)
------------ ------------ ------------
Ending balance, December 31, 1996 -- 8,150,910 8,150,910
============ ============ ============
Beginning balance, January 1, 1997 -- 8,150,910 8,150,910
Current period change ............ 6,000 4,774,875 4,780,875
------------ ------------ ------------
Ending balance, December 31, 1997 6,000 12,925,785 12,931,785
============ ============ ============
Beginning balance, January 1, 1998 6,000 12,925,785 12,931,785
Current period change ............ 15,039 6,489,767 6,504,806
------------ ------------ ------------
Ending balance, December 31, 1998 $ 21,039 $ 19,415,552 $ 19,436,591
============ ============ ============
The related tax effects allocated to each component of other comprehensive
income are as follows:
Year ended December 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
Foreign currency translation adjustments:
Before-tax amount ................................. $ 15,039 $ 6,000 $ --
Tax (expense) benefit ............................. -- -- --
------------ ------------ ------------
Net-of-tax amount ................................. 15,039 6,000 --
------------ ------------ ------------
Unrealized gains (losses) on securities:
Holding gains arising during period:
Before-tax amount ................................. 18,599,313 17,771,094 1,951,323
Tax (expense) ..................................... (6,509,758) (6,219,883) (682,963)
------------ ------------ ------------
Net-of-tax amount ................................. 12,089,555 11,551,211 1,268,360
------------ ------------ ------------
Less: reclassification adjustment for realized gains:
Before-tax amount ................................. 8,615,058 10,425,133 4,589,133
Tax (expense) ..................................... (3,015,270) (3,648,797) (1,606,197)
------------ ------------ ------------
Net-of-tax amount ................................. 5,599,788 6,776,336 2,982,936
------------ ------------ ------------
Net unrealized gains (losses):
Before-tax amount ................................. 9,984,255 7,345,961 (2,637,810)
Tax (expense) benefit ............................. (3,494,488) (2,571,086) 923,234
------------ ------------ ------------
Net-of-tax amount ................................. 6,489,767 4,774,875 (1,714,576)
------------ ------------ ------------
Other comprehensive income (loss):
Before-tax amount ................................. 9,999,294 7,351,961 (2,637,810)
Tax (expense) benefit ............................. (3,494,488) (2,571,086) 923,234
------------ ------------ ------------
Net-of-tax amount ................................. $ 6,504,806 $ 4,780,875 $ (1,714,576)
============ ============ ============
54
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(12) 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, 1998, the Company had repurchased a total of 2,116,442 shares of common
stock under this plan at a total cost of $38,583,101 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, 1998, 1997 and 1996 is as follows:
(In thousands except for per share amounts)
1998 1997 1996
------------------------------- ------------------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Net Shares Per Net Shares Per Net Share Per
Income Outstanding Share Income Outstanding Share Income Outstanding Share
------ ----------- ----- ------ ----------- ----- ------ ----------- -----
Basic EPS: ......... $18,523 9,679 $1.91 $26,368 9,849 $2.68 $22,625 10,499 $2.15
Effect of
Dilutive Securities:
Stock Options ...... -- 26 -- -- 23 (.01) -- 25 --
------- ------- ----- ------- ------- ----- ------- ------- -----
Diluted EPS ........ $18,523 9,705 $1.91 $26,368 9,872 $2.67 $22,625 10,524 $2.15
======= ======= ===== ======= ======= ===== ======= ======= =====
(13) Stock Option Plans:
The Company has a stock option plan, which was approved by shareholders in
1991, and provides 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. The
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.
55
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
A summary of activity under the stock option plans for the years ended
December 31, 1998, 1997 and 1996 follows:
1998 1997 1996
----------------------------------------------------------------------------------------
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 243,100 $13.78-$22.92 373,200 $13.78-$22.92 528,500 $13.00-$22.92
Granted 30,000 $20.25 -- -- -- 20,000 $17.22-$17.58
Exercised (25,900) $13.78-$15.79 (80,000) $13.78-$15.79 (162,800) $13.00-$15.56
(Forfeited) (19,000) $15.56-$15.79 (50,100) $15.56-$22.92 (12,500) $15.79-$22.33
-------- -------- --------
Outstanding,
end of year 228,200 $13.78-$22.92 243,100 $13.78-$22.92 373,200 $13.78-$22.92
======== ======== ========
Exercisable,
end of year 115,367 $13.78-$22.92 95,356 $13.78-$22.92 135,389 $13.78-$22.92
======== ======== ========
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, 1998, 1997 and 1996 is
as follows:
1998 1997 1996
----------- ----------- -----------
Net income - as reported .... $18,523,416 $26,367,740 $22,624,618
Net income - pro forma ...... $18,414,657 $26,261,229 $22,513,184
Diluted EPS - as reported ... $ 1.91 $ 2.67 $ 2.15
Diluted EPS - pro forma ..... $ 1.90 $ 2.66 $ 2.14
In determining the pro forma effect on net income, the fair value of
options granted in 1998, 1996 and 1995 was estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions in 1998, 1996 and 1995, respectively; dividend yield of 1.9%, 2.2%
and 2.4%; expected volatility of 28%, 25% and 28%; expected lives of 5 years for
each year and a risk-free interest rate of 4.56%, 6.00% 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.
56
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
(14) Segment Information:
The insurance company and agency subsidiaries underwrite commercial
insurance in four major lines of business. The Company considers ocean marine,
aviation, other liability and inland marine as appropriate segments for purposes
of evaluating the Company's overall performance. The Company evaluates revenues
and income or loss by line of business. Revenues include premiums earned and
commission income. Income or loss includes premiums earned and commission income
less the sum of losses incurred, policy acquisition costs and other expenses.
Investment income represents a material component of the Company's revenues
and income. The Company does not maintain its investment portfolio by segment
because management does not consider revenues and income by segment as being
derived from the investment portfolio. Accordingly, an allocation of
identifiable assets, investment income and realized investment gains is not
considered practicable. As such, other income, interest expense, certain
corporate expenses and income taxes are not considered by management for
purposes of providing segment information.
The financial information by segment is as follows:
1998 1997 1996
------------------------- ------------------------ ------------------------
(in thousands)
Income Income Income
Revenue (Loss) Revenue (Loss) Revenue (Loss)
--------- --------- --------- --------- --------- ---------
Segments
- - --------
Ocean marine(a) ...................... $ 60,621 $ 980 $ 51,012 $ 3,782 $ 54,230 $ 12,136
Aviation ............................. 2,242 (4,092) 32,976 1,892 35,689 (594)
Other liability ...................... 14,144 (736) 4,545 (797) 6,722 (5,383)
Inland marine ........................ (393) 854 443 794 2,376 (848)
--------- --------- --------- --------- --------- ---------
Subtotal ............................. 76,614 (2,994) 88,976 5,671 99,017 5,311
Other income ......................... 396 396 293 293 690 690
Net investment income ................ 20,803 20,803 21,325 21,325 21,270 21,270
Realized investment gains ............ 8,615 8,615 10,425 10,425 4,589 4,589
Corporate expenses ................... -- (2,543) -- (809) -- (649)
Interest expense ..................... -- (1,373) -- (1,450) -- (1,035)
Income taxes ......................... -- (4,381) -- (9,087) -- (7,551)
--------- --------- --------- --------- --------- ---------
Total ................................ $ 106,428 $ 18,523 $ 121,019 $ 26,368 $ 125,566 $ 22,625
========= ========= ========= ========= ========= =========
(a) 1998 includes approximately $14,838 in revenues and $(2,692) in loss from
the Company's Syndicate 1265.
57
FINANCIAL STATEMENT SCHEDULES
SCHEDULE II-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NYMAGIC, INC.
Balance Sheets
(Parent Company)
December 31,
-----------------------------------------
1998 1997
------------- -------------
Assets:
Cash ....................................................................... $ 47,116 $ 205,516
Short term investments ..................................................... -- 6,000,000
Investment in subsidiaries ................................................. 229,680,280 218,563,990
Due from subsidiaries and MMO insurance pools .............................. 14,664,300 2,666,372
Other assets ............................................................... 2,471,346 2,663,530
------------- -------------
Total assets ...................................................... $ 246,863,042 $ 230,099,408
============= =============
Liabilities:
Notes payable .............................................................. $ 17,458,413 $ 22,458,413
Dividends payable .......................................................... 968,549 966,031
Other liabilities .......................................................... 256,213 155,621
------------- -------------
Total Liabilities ...................................................... 18,683,175 23,580,065
------------- -------------
Shareholders' equity:
Common stock ............................................................... $ 15,017,892 $ 14,991,992
Paid in capital ............................................................ 28,029,410 27,529,877
Accumulated other comprehensive income ..................................... 19,436,591 12,931,785
Retained earnings .......................................................... 208,198,204 193,547,346
Treasury stock ............................................................. (42,502,230) (42,481,657)
------------- -------------
Total shareholders' equity ........................................ 228,179,867 206,519,343
------------- -------------
Total liabilities and shareholders' equity ........................ $ 246,863,042 $ 230,099,408
============= =============
Statements of Income
(Parent Company)
Year Ended December 31,
----------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Revenues:
Cash dividends from subsidiary ....................... $ 18,367,000 $ 17,850,262 $ 12,950,071
Net investment income ................................ 74,122 21,070 676
------------ ------------ ------------
18,441,122 17,871,332 12,950,747
------------ ------------ ------------
Expenses:
Operating expenses ................................... 5,200,857 2,197,039 1,552,852
Income tax benefit ................................... (1,661,488) (754,480) (561,073)
------------ ------------ ------------
3,539,369 1,442,559 991,779
------------ ------------ ------------
Income before equity income .......................... 14,901,753 16,428,773 11,958,968
Equity in undistributed earnings
of subsidiaries ...................................... 3,621,663 9,938,967 10,665,650
------------ ------------ ------------
Net income ........................................... $ 18,523,416 $ 26,367,740 $ 22,624,618
============ ============ ============
58
SCHEDULE II-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NYMAGIC, INC.
Statements of Cash Flows
(Parent Company)
Year Ended December 31,
----------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Net income .................................................... $ 18,523,416 $ 26,367,740 $ 22,624,618
------------ ------------ ------------
Adjustments to reconcile net income
to cash provided by operating activities:
Equity in undistributed earnings of
subsidiaries ......................................... (3,621,663) (9,938,967) (10,665,650)
Decrease (increase) in other assets ....................... 192,184 (834,339) (359,403)
(Increase)decrease in due from subsidiaries ............... (11,997,928) (439,365) 527,868
(Decrease) increase in other liabilities .................. 100,592 19,219 (11,312)
------------ ------------ ------------
Net cash provided by operating activities ..................... 3,196,601 15,174,288 12,116,121
------------ ------------ ------------
Cash flows from investing activities:
Short term investments acquired ........................... (2,870,000) (13,800,000) (5,000,000)
Short term investments matured ............................ 8,870,000 12,800,000 --
Investment in subsidiaries ................................ (989,821) (2,476,500) --
------------ ------------ ------------
Net cash provided by (used in) investing
activities ........................................... 5,010,179 (3,476,500) (5,000,000)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from stock options exercised ..................... 525,433 1,351,618 2,487,472
Cash dividends paid to stockholders ....................... (3,870,040) (3,958,130) (4,236,947)
Repurchase of common stock ................................ (20,573) (10,922,760) (13,080,321)
Proceeds from borrowings .................................. 5,000,000 9,520,000 14,211,472
Loan principal payments ................................... (10,000,000) (7,500,000) (6,500,000)
------------ ------------ ------------
Net cash used in financing activities ..................... (8,365,180) (11,509,272) (7,118,324)
------------ ------------ ------------
Net increase (decrease) in cash ............................... (158,400) 188,516 (2,203)
Cash at beginning of period ................................... 205,516 17,000 19,203
------------ ------------ ------------
Cash at end of period ......................................... $ 47,116 $ 205,516 $ 17,000
============ ============ ============
The condensed financial information of NYMAGIC, INC. for the years ended
December 31, 1998, 1997 and 1996 should be read in conjunction with the
consolidated financial statements of NYMAGIC, INC. and subsidiaries and notes
thereto.
59
NYMAGIC, INC.
SCHEDULE V-VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - ------------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION Balance at Balance
beginning close of
of period Additions Deductions period
- - ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1998:
Allowance for
doubtful accounts .................... $6,485,000 $1,456,160 $ (468,421) $7,472,739
December 31, 1997:
Allowance for
doubtful accounts .................... 4,825,000 1,930,261 (270,261) 6,485,000
60
NYMAGIC, INC.
SCHEDULE VI - SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS.
(In Thousands)
- - ------------------------------------------------------------------------------------------------------------------------------------
RESERVE AMORTIZA-
FOR CLAIMS AND CLAIMS TION OF
DEFERRED UNPAID EXPENSES INCURRED DEFFERED PAID
POLICY CLAIMS RELATED TO POLICY CLAIMS
AFFILIATION ACQUISI- AND UNEARNED NET NET ----------------- ACQUISI- AND
WITH TION CLAIMS PREMIUM EARNED INVESTMENT CURRENT PRIOR TION CLAIMS PREMIUMS
REGISTRANT COSTS EXPENSES DISCOUNT RESERVE PREMIUMS INCOME YEAR YEAR COSTS EXPENSES WRITTEN
- - ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 ....... $ 4,277 $401,584 -- $ 46,879 $ 76,023 $ 20,803 $ 69,703 ($19,466) $ 10,107 $ 58,984 $ 72,728
CONSOLIDATED SUBSIDIARIES
DECEMBER 31, 1997 ....... 5,567 388,402 -- 55,188 87,537 21,325 72,322 (21,874) 16,583 55,483 62,221
CONSOLIDATED SUBSIDIARIES
DECEMBER 31, 1996 ....... 10,904 411,837 -- 66,652 97,036 21,270 71,731 (12,753) 18,828 61,524 90,513
CONSOLIDATED SUBSIDIARIES
61