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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended September 30, 2002
--------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period Ended
-------------------------------------------------
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 (IRS Employer
incorporation or organization) Identification No.)
330 Madison Avenue, New York, New York 10017
- --------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(212) 551-0600
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(Registrant's telephone number, including area code)
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 [ ]
On October 1, 2002 there were 9,276,398 shares of the Registrant's common
stock, $1.00 par value, outstanding.
FORWARD-LOOKING STATEMENTS
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. Any forward-looking statements concerning the Company's
operations, economic performance and financial condition contained herein,
including statements related to the outlook for the Company's performance in
2002 and beyond, are made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements are based upon a
number of assumptions and estimates which inherently are subject to
uncertainties and contingencies, many of which are beyond the control of the
Company. Some of these assumptions may not materialize and unanticipated events
may occur that could cause actual results to differ materially from such
statements. These include, but are not limited to, the cyclical nature of the
insurance and reinsurance industry, premium rates, the estimation of loss
reserves and loss reserve development, actual loss experience, the uncertainty
surrounding the loss amounts related to the attacks of September 11, 2001, net
loss retention, the effect of competition, the ability to collect reinsurance
receivables and the timing of such collections, the availability and cost of
reinsurance, changes in the ratings assigned to the Company by rating agencies,
and legislative, regulatory or judicial developments. These risks could cause
actual results to differ materially from those expressed in any forward-looking
statements. The Company undertakes no obligation to update publicly or revise
any forward-looking statements unless required by law.
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 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. We undertake no obligation to update
forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any further
disclosures we make in our reports to the Securities and Exchange Commission
including, but not limited to, the Company's 10-K, 10-Q and 8-K reports.
NYMAGIC, INC.
INDEX
Part I. Financial Information Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2002 and December 31, 2001 2
Consolidated Statements of Income
Nine months ended September 30, 2002 and
September 30, 2001 3
Consolidated Statements of Income
Three months ended September 30, 2002 and
September 30, 2001 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 2002 and
September 30, 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
Item 4. Controls and Procedures 14
Part II. Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NYMAGIC, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
----------------------------------
2002 2001
---- ----
ASSETS
Investments:
Fixed maturities available for sale at fair value
(amortized cost $298,201,867 and $250,861,503) $313,974,314 $254,485,045
Equity securities available for sale at fair value
(cost $12,104,366 and $38,930,182) 11,886,271 46,257,871
Short-term investments (at cost which approximates fair value) 98,367,785 65,423,833
------------ ------------
Total investments 424,228,370 366,166,749
------------ ------------
Cash 739,452 2,881,077
Accrued investment income 3,681,057 4,247,031
Premiums and other receivables, net 49,864,385 74,893,585
Reinsurance receivables, net 340,721,256 361,748,784
Deferred policy acquisition costs 8,678,463 8,167,663
Prepaid reinsurance premiums 8,085,489 18,786,075
Deferred income taxes 10,025,417 12,787,627
Property, improvements and equipment, net 807,444 1,091,449
Other assets 3,693,583 6,226,696
------------ ------------
Total assets $850,524,916 $856,996,736
============ ============
LIABILITIES
Unpaid losses and loss adjustment expenses $522,246,410 $534,189,062
Reserve for unearned premiums 54,066,520 65,070,990
Ceded reinsurance payable 28,250,572 27,393,696
Notes payable 11,232,793 7,911,253
Other liabilities 24,830,071 23,159,868
------------ ------------
Total liabilities 640,626,366 657,724,869
------------ ------------
SHAREHOLDERS' EQUITY
Common stock 15,132,224 15,123,658
Paid-in capital 29,828,711 29,702,414
Accumulated other comprehensive income 10,293,073 7,930,180
Retained earnings 203,783,241 195,654,314
------------ ------------
259,037,249 248,410,566
Treasury stock, at cost,
5,855,826 and 5,855,826 shares (49,138,699) (49,138,699)
------------ ------------
Total shareholders' equity 209,898,550 199,271,867
------------ ------------
Total liabilities and shareholders' equity $850,524,916 $856,996,736
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
2002 2001
---- ----
Revenues:
Net premiums earned $ 84,989,873 $ 50,788,496
Net investment income 11,790,742 13,438,781
Net realized investment gains (losses) (3,898,489) 1,276,769
Commission and other income 1,458,932 3,454,655
------------ ------------
Total revenues 94,341,058 68,958,701
------------ ------------
Expenses:
Net losses and loss adjustment expenses incurred 54,297,843 60,942,679
Policy acquisition expenses 13,533,120 11,181,822
General and administrative expenses 14,527,377 12,999,250
Interest expense 426,476 359,685
------------ ------------
Total expenses 82,784,816 85,483,436
------------ ------------
Income (loss) before income taxes 11,556,242 (16,524,735)
------------ ------------
Income taxes:
Current 2,318,868 (1,911,539)
Deferred 1,108,447 958,578
------------ ------------
Total income taxes 3,427,315 (952,961)
------------ ------------
Net income (loss) $ 8,128,927 $(15,571,774)
============ ============
Weighted average shares of common stock outstanding-basic 9,274,350 9,221,726
Basic earnings (loss) per share $ .88 $ (1.69)
============ =============
Weighted average shares of common stock outstanding-diluted 9,288,443 9,221,726
Diluted earnings (loss) per share $ .88 $ (1.69)
============ =============
Dividends declared per share $ .00 $ .30
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2002 2001
---- ----
REVENUES:
Net premiums earned $27,746,042 $13,783,074
Net investment income 3,900,037 4,112,844
Net realized investment gains (losses) (1,127,096) 658,318
Commission and other income 83,532 239,851
----------- -----------
Total revenues 30,602,515 18,794,087
----------- -----------
EXPENSES:
Net losses and loss adjustment expenses incurred 17,175,068 31,447,339
Policy acquisition expenses 4,229,756 3,250,038
General and administrative expenses 4,173,516 4,454,085
Interest expense 148,378 71,243
----------- ------------
Total expenses 25,726,718 39,222,705
----------- ------------
Income (loss) before income taxes 4,875,797 (20,428,618)
----------- ------------
Income taxes:
Current 379,405 (2,972,123)
Deferred 1,073,780 (98,950)
----------- ------------
Total income taxes 1,453,185 (3,071,073)
----------- ------------
Net income (loss) $ 3,422,612 $(17,357,545)
=========== ============
Weighted average shares of common stock outstanding-basic 9,276,398 9,260,066
Basic earnings (loss) per share $ .37 $ (1.87)
=========== ============
Weighted average shares of common stock outstanding-diluted 9,280,532 9,260,066
Diluted earnings (loss) per share $ .37 $ (1.87)
=========== ============
Dividends declared per share $ .00 $ .10
=========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income (loss) $ 8,128,927 $ (15,571,774)
------------ -------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for deferred taxes 1,108,447 958,578
Net realized investment losses (gains) 3,898,489 (1,276,769)
Net bond amortization 1,350,268 532,843
Depreciation and other, net 303,870 317,897
Changes in:
Premiums and other receivables 25,029,200 10,488,102
Reinsurance receivables 21,027,528 (145,470,195)
Ceded reinsurance payable 856,876 (6,420,906)
Accrued investment income 565,974 1,659,043
Deferred policy acquisition costs (510,800) (1,478,951)
Prepaid reinsurance premiums 10,700,586 2,874,547
Other assets 2,533,113 (6,275,182)
Unpaid losses and loss adjustment expenses (11,942,652) 152,844,915
Reserve for unearned premiums (11,004,470) (11,067,359)
Other liabilities 1,670,203 2,505,533
Other (708,380) 106,911
------------- -------------
Total adjustments 44,878,252 299,007
------------ -------------
Net cash provided by (used in) operating activities 53,007,179 (15,272,767)
------------ -------------
Cash flows from investing activities:
Fixed maturities acquired (120,723,918) (194,254,115)
Equity securities acquired (10,396,157) (17,086,884)
Fixed maturities matured 5,279,820 12,282,382
Fixed maturities sold 66,097,863 210,499,189
Equity securities sold 34,091,876 21,158,297
Net purchase of short-term investments (32,934,826) (11,974,081)
Acquisition of property, improvements and equipment (19,865) (360,670)
------------ -------------
Net cash provided by (used in) investing activities (58,605,207) 20,264,118
------------ -------------
Cash flows from financing activities:
Proceeds from stock issuance and other 134,863 1,680,885
Cash dividends paid to stockholders -- (2,761,436)
Net sale of common stock -- 66,011
Proceeds from borrowings 9,071,540 --
Loan principal repayments (5,750,000) (3,750,000)
------------ -------------
Net cash provided by (used in) financing activities 3,456,403 (4,764,540)
------------ -------------
Net increase (decrease) in cash (2,141,625) 226,811
Cash at beginning of period 2,881,077 552,322
------------ ------------
Cash at end of period $ 739,452 $ 779,133
============ ============
Supplemental disclosures:
Interest paid $ 242,579 $ 300,755
Income taxes paid -- 1,807,605
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2001
1) The interim consolidated financial statements are unaudited but, in the
opinion of management, reflect all material adjustments necessary for a
fair presentation of results for such periods. Adjustments to financial
statements consist of normal recurring items. The results of operations for
any interim period are not necessarily indicative of results for the full
year. These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
2) The Company's subsidiaries include two domestic insurance companies, three
domestic agency subsidiaries, and MMO London, which includes the operations
of MMO EU, Ltd. and MMO UK Ltd.
The financial information by segment is as follows:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Revenues, excluding net investment income and
net realized investment gains (losses):
Domestic Insurance Companies/Agencies $82,190 $43,809 $26,516 $ 9,836
MMO London 4,259 10,434 1,314 4,187
Other (includes corporate operations and
consolidating adjustments) -- -- -- --
------- ------- ------- -------
Total $86,449 $54,243 $27,830 $14,023
======= ======= ======= =======
-6-
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2001
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Net investment income:
Domestic Insurance Companies/Agencies $ 11,377 $ 12,784 $ 3,755 $ 4,002
MMO London 378 633 134 107
Other (includes corporate operations and
consolidating adjustments) 36 22 11 4
--------- --------- --------- --------
Total $ 11,791 $ 13,439 $ 3,900 $ 4,113
========= ======== ======== ========
Net realized investment gains (losses):
Domestic Insurance Companies/Agencies $ (3,449) $ 1,130 $ (1,128) $ 642
MMO London (449) 141 1 16
Other (includes corporate operations and
consolidating adjustments) -- 6 -- --
--------- --------- --------- --------
Total $ (3,898) $ 1,277 $ (1,127) $ 658
========== ========= ========= ========
Income (loss) before tax expense:
Domestic Insurance Companies/Agencies $ 13,965 $ (8,881) $ 5,474 $ (16,275)
MMO London (599) (6,232) (98) (3,642)
Other (includes corporate operations and
consolidating adjustments) (1,810) (1,412) (500) (512)
---------- -------- --------- ---------
Total $ 11,556 $ (16,525) $ 4,876 $ (20,429)
========= ======== ======== =========
Income tax expense (benefit):
Domestic Insurance Companies/Agencies $ 3,498 $ (3,433) $ 1,602 $ (5,754)
MMO London (92) 2,990 27 2,890
Other (includes corporate operations and
consolidating adjustments) 21 (510) (176) (207)
--------- --------- --------- ---------
Total $ 3,427 $ (953) $ 1,453 $ (3,071)
========= ======== ========= =========
Net income (loss):
Domestic Insurance Companies/Agencies $ 10,467 $ (5,448) $ 3,872 $ (10,521)
MMO London (507) (9,222) (125) (6,532)
Other (includes corporate operations and
consolidating adjustments) (1,831) (902) (324) (305)
--------- -------- --------- ---------
Total $ 8,129 $ (15,572) $ 3,423 $ (17,358)
========= ======== ========= =========
-7-
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2001
3) The Company's comparative comprehensive income is as follows:
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Net income (loss) $ 8,129 $ (15,572) $ 3,423 $ (17,358)
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities, net of
deferred tax benefit (expense) of
$(289), $1,032 and $(466), $(76) 537 (1,917) 865 142
Less: reclassification adjustment for
gains (losses) realized in net income, net of
tax benefit (expense) of
$1,364, $(447) and $394, $(230) (2,534) 830 (733) 428
Foreign currency translation adjustment (708) 107 (511) (32)
--------- ---------- ---------- ----------
Other comprehensive income (loss) 2,363 (2,640) 1,087 (318)
--------- ---------- ---------- ----------
Total comprehensive income (loss) $ 10,492 $ (18,212) $ 4,510 $ (17,676)
======== ========== ========= ==========
4) Note payable. On June 27, 2002, the Company entered into a credit
agreement with a bank. The agreement combined the Company's existing
credit agreements together with a facility to fund future cash draw
downs on the Company's issued letter of credit (approximately $6.6
million at September 30, 2002). The interest rate on the loan is fixed,
at the Company's option, for a period of one to six months. The
interest rate is equal to the bank's Adjusted London Interbank Offered
Rate at the time of the interest rate adjustment period plus 2.5%.
Principal repayments are to be paid quarterly in equal installments of
$2,000,000, except for a payment of $2,500,000 which was made on
September 30, 2002, until all letter of credit and existing loan
obligations are repaid. Following any fiscal year in which the Company
earns more than $10 million, an additional repayment is required equal
to 25% of net income between $10 million and $15 million, and 50% of
net income in excess of $15 million. Any loan balance outstanding on
March 31, 2005 must be fully paid. The Company has the option to prepay
amounts in excess of the required repayments.
The credit agreement requires the Company to maintain a
minimum net worth of $175,000,000 plus 50% of net income earned during
each year on a cumulative basis. In addition, other significant
covenants include limitations on total indebtedness, investment
purchases, stock repurchases, dividends to shareholders, pledging and
sales of assets and minimum levels of net income. The Company's
domestic insurance subsidiaries are also required to maintain a minimum
amount of statutory surplus, and its ratios of gross and net premiums
written to surplus and ratio of total liabilities to surplus are
subject to certain limitations. In connection with the credit
agreement, the Company entered into a pledge agreement with the same
bank which requires the Company to pledge the common stock of its two
domestic insurance company subsidiaries to the bank and which becomes
automatically effective in the event that either of their A.M. Best
ratings falls below A-.
-8-
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2001
5) The Company entered into an investment management agreement with
Mariner Partners, Inc. ("Mariner") effective October 1, 2002. Under the
terms of the agreement, on the effective date, Mariner will manage the
Company's domestic insurance subsidiaries' investment portfolios. Fees
to be paid to Mariner are based on a percentage of the investment
portfolio as follows: .20% of liquid assets, .30% of bond funds and
1.25% of hedge fund investments. William J. Michaelcheck, a Director of
the Company, is Chairman, Chief Executive Officer and 90% stockholder
of Mariner. George R. Trumbull, Chairman, Chief Executive Officer and a
Director of the Company, A. George Kallop, Executive Vice President and
a Director of the Company, and William D. Shaw, Jr., Vice Chairman and
a Director of the Company, are also associated with Mariner.
6) The Company granted 463,000 non-qualified stock options to employees
and Directors in the third quarter of 2002 under the NYMAGIC, INC. 2002
Nonqualified Stock Option Plan, which was approved by the Company's
shareholders on May 22, 2002. All options were granted with an exercise
price of $14.47 per share, which was the closing price of the Company's
common stock on the New York Stock Exchange on the option grant date.
There was no compensation expense recorded in the third quarter of 2002
in connection with the issuance of these options. All options vest
ratably over a four year period and expire ten years after the grant
date. The plan authorizes the issuance of options to purchase up to
500,000 shares of the Company's common stock at a price not less than
95 percent of the fair market value of the Company's common stock at
the date of grant.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DESCRIPTION OF BUSINESS
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. - ("MMO UK")
MMO EU, Ltd. - ("MMO EU")
INSURANCE UNDERWRITERS AND MANAGERS:
-----------------------------------
Mutual Marine Office, Inc. - ("MMO")
Pacific Mutual Marine Office, Inc. - ("PMMO")
Mutual Marine Office of the Midwest, Inc. - ("Midwest")
New York Marine and Gotham each maintains an A.M. Best rating of A. The
Company's insureds rely on ratings issued by rating agencies. Any adverse change
in the rating assigned to the Company may adversely impact its ability to write
premiums and may have consequences under the pledge agreement described in
connection with the discussion of the Company's credit agreement in Note 4 to
the Company's Consolidated Financial Statements, September 30, 2002 and 2001.
The Company specializes in underwriting ocean marine, inland marine and
other liability insurance through insurance pools managed by MMO, PMMO, and
Midwest (collectively referred to as "MMO and affiliates") since 1964. The
Company initially announced in a press release, dated March 14, 2002, that it
would withdraw from writing any new policies covering aircraft, effective on or
after March 31, 2002, and since that date the Company has not written any such
policies.
In addition to managing the insurance pools, the Company participates
in the risks underwritten for the pools through New York Marine and Gotham. All
premiums, losses and expenses are prorated among pool members in accordance with
their pool participation percentages.
In 1997, the Company formed MMO EU as a holding company for MMO UK,
which operates as a limited liability corporate capital vehicle to provide
capacity, or the ability to underwrite a certain amount of business, for
syndicates within Lloyd's of London. In 1997, the Company acquired ownership of
a company, which was subsequently renamed MMO Underwriting Agency, Ltd. and
commenced underwriting in 1998 as a Lloyd's managing agency for MMO UK, which
provided 100% of the capacity for Lloyd's Syndicate 1265. In 2000, the Company
sold MMO Underwriting Agency Ltd. in exchange for a minority interest in
Cathedral Capital PLC and Lloyd's Syndicate 1265 was placed into runoff. In
2001, MMO UK provided approximately $13.6 million, or 11.2%, of the capacity for
Lloyd's Syndicate 2010, which is managed by Cathedral Capital. In 2002, MMO UK
will not be providing capacity to any Lloyd's syndicate. MMO EU, MMO UK, Lloyd's
Syndicate 1265 and Lloyd's Syndicate 2010 are collectively hereinafter referred
to as "MMO London".
-10-
RESULTS OF OPERATIONS
Net income for the third quarter ended September 30, 2002 totaled $3.4
million, or $.37 per diluted share, compared with a net loss of $17.4 million,
or $1.87 per diluted share, for the third quarter of 2001. Net income for the
nine months ended September 30, 2002 totaled $8.1 million, or $.88 per diluted
share, compared with a net loss of $15.6 million, or $1.69 per diluted share,
for the nine months ended September 30, 2001. Included in the net loss for the
third quarter of 2001 were after tax losses of $9.0 million, or $.98 per diluted
share, resulting from the World Trade Center terrorist attack.
Net realized investment losses after taxes in the third quarter of 2002
were $733,000, or $.08 per diluted share, compared with net realized investment
gains after taxes of $428,000, or $.05 per diluted share for the same period in
2001. Net realized investment losses after taxes for the nine months ended
September 30, 2002 were $2.5 million, or $.27 per diluted share, compared with
net realized investment gains after taxes of $830,000, or $.09 per diluted
share, for the same period in 2001. Net realized investment losses in the third
quarter of 2002 and the nine months ended September 30, 2002 reflected the
overall downturn in the equities markets during those periods.
One time non-recurring charges for the nine months ended September 30,
2002, previously recorded in the second quarter ended June 30, 2002, were $1.0
million after taxes, or $.11 per share, related to the reorganization of the
Company's management structure. The third quarter of 2001, and the nine months
ended September 30, 2001, included non-recurring charges for write downs of
deferred tax assets of $2.9 million, or $.31 per diluted share, resulting from
the discontinuance of underwriting in the Company's London operations.
As described in more detail in the table below, net premiums earned for
the nine months and three months ended September 30, 2002 grew by 67% and 101%,
respectively, when compared to the same periods of the prior year.
NYMAGIC NET PREMIUMS WRITTEN
BY LINE OF BUSINESS NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
- ---------------------------- ------------------------------------------------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------------------------------------------
(Dollars in thousands)
Ocean marine (a).................... $52,495 62% $33,448 79% $18,734 70% $13,161 85%
Inland marine/fire.................. 1,751 2 511 1 780 3 234 2
Aircraft............................ 21,824 26 (1,726) (4) 4,265 16 1,258 8
Other liability..................... 8,606 10 3,276 8 2,733 10 (140) (1)
Other (b)........................... 10 -- 7,087 16 227 1 884 6
-------------------------------------------------------------------------------------------
Total............................... $84,686 100% $42,596 100% $26,739 100% $15,397 100%
===========================================================================================
NYMAGIC NET PREMIUMS EARNED
BY LINE OF BUSINESS NINE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
- ---------------------------- ------------------------------------------------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------------------------------------------
(Dollars in thousands)
Ocean marine (c).................... $44,280 52% $34,192 67% $16,225 59% $11,936 87%
Inland marine/fire.................. 1,521 2 314 1 611 2 121 1
Aircraft............................ 32,837 39 11,073 22 9,193 33 306 2
Other liability..................... 3,725 4 2,177 4 1,080 4 152 1
Other (d)........................... 2,627 3 3,032 6 637 2 1,268 9
-------------------------------------------------------------------------------------------
Total............................... $84,990 100% $50,788 100% $27,746 100% $13,783 100%
===========================================================================================
-11-
(a) Includes net premiums written from MMO London of $369 and $568 for the
nine months ended September 30, 2002 and 2001, respectively; and $(57)
and $2,233 for the three months ended September 30, 2002 and 2001,
respectively.
(b) Includes net premiums written from MMO London of $(67) and $6,928, for
the nine months ended September 30, 2002 and 2001, respectively; and
$245 and $884 for the three months ended September 30, 2002 and 2001,
respectively.
(c) Includes net premiums earned from MMO London of $1,617 and $7,320 for
the nine months ended September 30, 2002 and 2001, respectively; and
$619 and $2,868 for the three months ended September 30, 2002 and 2001,
respectively.
(d) Includes net premiums earned from MMO London of $2,542 and $2,894 for
the nine months ended September 30, 2002 and 2001, respectively; and
$654 and $1,246 for the three months ended September 30, 2002 and 2001,
respectively.
The domestic insurance companies/agencies segment reported an increase
of 99% in premiums earned for the nine months ended September 30, 2002 to $80.8
million as compared to $40.6 million for the same period of the prior year,
primarily as a result of rate increases across all lines of business and new
production opportunities. The following is a discussion of the changes in net
premiums earned for each line of business within this segment.
o Ocean marine net premiums earned grew by 59% during the first
nine months of 2002 when compared to the same period of the
prior year and reflect higher ocean marine rates across the
various ocean marine classes, particularly in the rig class,
and additional production in the hull and marine liability
classes. The Company believes ocean marine premiums will
continue to grow throughout the year as the pricing
environment is expected to remain strong.
o Despite a reduction in policy count from the same period of
the prior year, aircraft net premiums earned grew 197% for the
nine months ended September 30, 2002 when compared to the same
period of 2001 primarily as a result of rate increases.
Contributing to the overall increase were premium surcharges
for terrorism coverage written after September 11, 2001. The
Company recorded approximately $27.7 million in gross premiums
written from such premium surcharges in 2002. The prior year
net premiums were adversely affected by reinstatement
reinsurance costs of $5.0 million incurred as a result of the
World Trade Center attack. Net premiums written are expected
to decline in subsequent periods in the aircraft line as the
Company has not written any new policies covering aircraft
since March 31, 2002.
o Other liability net premiums earned rose by 71% for the nine
months ended September 30, 2002 when compared to the same
period of 2001 due to new production opportunities arising
from policies covering errors and omissions/professional
liability risks, additional production in existing classes and
larger premium rates on policy renewals. The prior year's
amount reflected premiums earned from an assumed auto
liability reinsurance treaty which was not renewed.
o Inland marine/fire premiums earned increased 384% for the nine
months ended September 30, 2002 when compared to the same
period of last year largely due to an underwriting program
insuring excess and surplus lines property risks and improved
pricing.
Premiums earned from MMO London for the nine months ended September 30,
2002 were down by 59% to $4.2 million from $10.2 million in the prior year's
comparable period and reflected reduced capacity for premium writings at
Lloyd's. Premiums earned are expected to further decrease in MMO London during
2002 when compared to 2001 as the Company will not be providing capacity (the
ability to write premiums) to any Lloyd's syndicate for the 2002 underwriting
year.
Net losses and loss adjustment expenses incurred as a percentage of net
premiums earned (the loss ratio) were 61.9% for the three months ended September
30, 2002 as compared to 228.2% for the same period of 2001. For the nine months
ended September 30, 2002, the loss ratio was 63.9% as compared to 120.0% for the
same period of the prior year. The domestic insurance companies reported higher
loss ratios in 2001 as a result of losses sustained from the attack on the World
Trade Center and larger severity losses arising from higher net loss retentions
in the aircraft line of business. The domestic insurance companies reported
lower overall loss ratios in 2002 as a result of a decrease in the frequency and
severity of losses in the aircraft line. In addition,
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losses from the underwriting operations of MMO London, including losses from the
attack on the World Trade Center, contributed to higher overall loss ratios in
the prior year.
Policy acquisition costs as a percentage of net premiums earned for the
three months ended September 30, 2002 were 15.2% as compared with 23.6% for the
same period of the prior year. The same ratio was 15.9% for the nine months
ended September 30, 2002 as compared with 22.0% for the same period in 2001. The
decrease was primarily attributable to a lower aircraft expense ratio in the
Company's domestic insurance subsidiaries as the premium surcharges in 2002 were
recorded with a nominal processing charge.
Net investment income for the three months and nine months ended
September 30, 2002 decreased by 5% and 12%, respectively, as compared to the
same periods of the prior year. The decreases reflect lower investment yields as
well as larger positions in tax exempt securities in 2002.
Commission and other income decreased to $1.5 million for the nine
months ended September 30, 2002 from $3.5 million for the same period in the
prior year. In 2001, larger profit commissions were earned based upon the ceded
results of aviation reinsurance treaties.
General and administrative expenses increased by 12% to $14.5 million
for the nine months ended September 30, 2002 when compared to $13 million for
the same period in 2001. The increase is principally attributable to $1.5
million in one-time charges resulting from the reorganization of the Company's
management structure in the second quarter of 2002.
Net realized investment losses were $1.1 million for the three months
ended September 30, 2002 as compared to net realized investment gains of
$658,000 for the same period in the prior year. Net realized investment losses
were $3.9 million for the nine months ended September 30, 2002 as compared to
net realized investment gains of $1.3 million for the same period of 2001. The
Company incurred realized investment losses on the sale of its equity securities
and fixed maturities in the first nine months of 2002, while it realized
investment gains on the sale of its fixed maturities in the prior year's
comparable period.
Total income taxes for the nine months ended September 30, 2001 reflect
increases in the valuation account for deferred income taxes of $2.9 million
with respect to loss carryforwards resulting from the discontinuance of
underwriting in the Company's London operations. The current year income tax
amounts reflect the benefits from increases in tax exempt income in the current
year.
Premiums and other receivables, net decreased to $49.9 million as of
September 30, 2002 from $74.9 million as of December 31, 2001. The decrease
results from improved cash flows at the MMO pool level in 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash and total investments increased from $369.0 million at December
31, 2001 to $425.0 million at September 30, 2002, which included $99.1 million
in cash and short-term investments. The increase in investments is due in large
part to net cash provided by operating activities of $53.0 million during the
first nine months of 2002 and reflects increases in net premiums written and
declines in net loss payments.
In June, 2002, the Company entered into a credit agreement with a bank
that combined its existing credit agreements together with a facility to fund
future cash draw downs on the Company's issued letter of credit, which totaled
approximately $17.8 million at September 30, 2002. Principal repayments are to
be paid quarterly in equal installments of $2,000,000, except for a payment of
$2,500,000 which was made on September 30, 2002, until all letter of credit and
existing loan obligations are paid. The Company may be required to make
additional prepayments to the bank until all obligations to the bank are
completed, in the event that the Company's net income exceeds certain levels.
For a more complete description of the credit agreement, see Note 4 to the
Company's Consolidated Financial Statements September 30, 2002 and 2001.
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The Company borrowed $9.1 million in 2002 under this credit facility to
assist in funding the operations of MMO London.
The Company sold a majority of its equity security portfolio in the
third quarter of 2002. It is anticipated that further sales of the equity
securities portfolio will be made in the fourth quarter of 2002. The cash
proceeds from such sales will likely be reinvested in fixed maturities and
limited partnership investment hedge funds in the fourth quarter of 2002.
There have been no repurchases of the Company's common stock during
2002.
The Company adheres to investment guidelines as prescribed by the
finance committee of the Board of Directors. The Company believes that such
guidelines have been designed to provide the Company with adequate capital
protection and sufficient liquidity to meet existing obligations. The Company
anticipates that its cash and cash equivalents as of September 30, 2002 should
be sufficient to meet its liquidity requirements as of that date for the
foreseeable future.
CRITICAL ACCOUNTING POLICIES
Management considers certain accounting policies to be critical with
respect to the understanding of the Company's financial statements. Such
policies require significant management judgment and the resulting estimates
have a material effect on reported results and will vary to the extent that
future events affect such estimates and cause them to differ from the estimates
provided currently. These critical accounting policies include unpaid losses and
loss adjustment expenses, allowance for doubtful accounts and impairment of
investments as described in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The investment portfolio has exposure to market risks which include the
effect on the portfolio of adverse changes in interest rates, credit quality,
equity prices and foreign exchange rates. 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. Equity risk includes the potential loss from changes in the fair
value of equity securities. Foreign currency risk includes exposure to changes
in foreign exchange rates on the market value and interest income of foreign
denominated investments. With the exception of changes in the market value of
the Company's equity securities and fixed maturities, there have been no
material changes to the Company's exposure to market risks during the nine
months ended September 30, 2002, as compared to those disclosed in the Company's
financial statements for the year ended December 31, 2001.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company evaluated the effectiveness of the design and operation of its
disclosure controls and procedures as defined in Rule 13a-14 under the
Securities Exchange Act of 1934 within 90 days of the date of this quarterly
report. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in allowing timely decisions regarding disclosure.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
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PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings other
than litigation all of which, collectively, is not expected to have a
material adverse effect on the business, financial condition or
results of operations of the Company.
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. - OTHER INFORMATION
None
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Investment Management Agreement with Mariner Partners, Inc.
dated October 1, 2002
10.2 NYMAGIC, INC. 2002 Nonqualified Stock Option Plan
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on August 15, 2002. The filing
included a press release, issued on August 14, 2002, concerning the
second quarter of 2002 financial results and other recent events.
-15-
SIGNATURES
Pursuant to the requirements 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)
Date: NOVEMBER 14, 2002 /S/ GEORGE R. TRUMBULL
------------------------ --------------------------
George R. Trumbull
Chairman and Chief Executive Officer
Date: NOVEMBER 14, 2002 /S/ THOMAS J. IACOPELLI
------------------------ --------------------------
Thomas J. Iacopelli
Chief Financial Officer and Treasurer
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CERTIFICATION
I, George R. Trumbull, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NYMAGIC, INC.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within these entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 12, 2002 /S/ GEORGE R. TRUMBULL
-----------------------------------
George R. Trumbull
Chairman and Chief Executive Officer
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CERTIFICATION
I, Thomas J. Iacopelli, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NYMAGIC, INC.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within these entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors:
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 12, 2002 /S/ THOMAS J. IACOPELLI
--------------------------------------------
Thomas J. Iacopelli, Chief Financial Officer
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