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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 June 30, 2003
-------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period Ended
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Commission file number 1-11238
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NYMAGIC, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3534162
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(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
--------------- -------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--------------- -------------
On August 1, 2003 there were 9,706,498 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 2003 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 which 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,
the uncertainty surrounding the loss amounts related to the attacks of
September 11, 2001, the occurrence of wars and acts of terrorism, net loss
retention, the effect of competition, the ability to collect reinsurance
receivables, the availability and cost of reinsurance, the ability to pay
dividends, regulatory changes, and changes in the ratings assigned to the
Company by rating agencies. These risks could cause actual results for the
2003 year and beyond to differ materially from those expressed in any
forward-looking statements made. The Company undertakes no obligation to
update publicly or revise any forward-looking statements made.
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, adequacy of
Asbestos/Environmental reserves, collectability of receivables from Equitas
and other events and estimates concerning the effects of litigation or other
disputes, as well as assumptions underlying any of the foregoing and are
generally expressed with words such as "believes," "estimates," "expects,"
"anticipates," "plans," "projects," "predicts," "forecasts," "goals,"
"potential," "intend," "could," "should," "may," "will" 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
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2003 and December 31, 2002 2
Consolidated Statements of Income
Six months ended June 30, 2003 and 3
June 30, 2002
Consolidated Statements of Income
Three months ended June 30, 2003 and 4
June 30, 2002
Consolidated Statements of Cash Flows 5
Six months ended June 30, 2003 and
June 30, 2002
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Item 4. Controls and Procedures 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NYMAGIC, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, December 31,
2003 2002
---- ----
ASSETS
Investments:
Fixed maturities:
Available for sale at fair value
(amortized cost $77,423,862 and $29,923,407) $ 78,184,205 $ 30,480,249
Trading (cost $40,373,199 and $0) 40,397,660 ----
Equity securities available for sale at fair value
(cost $0 and $4,728,485) ---- 4,728,485
Limited partnership hedge funds at equity
(cost $62,500,000 and $37,500,000) 66,951,239 38,477,219
Short-term investments (at cost which approximates fair value) 281,622,700 355,803,960
------------ ------------
Total investments 467,155,804 429,489,913
------------ ------------
Cash 491,398 980,109
Accrued investment income 1,802,944 391,949
Premiums and other receivables, net 17,806,970 35,690,128
Reinsurance receivables, net 309,973,187 326,422,340
Deferred policy acquisition costs 7,359,822 7,708,186
Prepaid reinsurance premiums 11,239,426 6,397,405
Deferred income taxes 11,344,781 12,000,806
Property, improvements and equipment, net 1,893,620 731,406
Other assets 3,827,796 4,194,725
------------ ------------
Total assets $832,895,748 $824,006,967
============ ============
LIABILITIES
Unpaid losses and loss adjustment expenses $519,351,365 $516,002,310
Reserve for unearned premiums 48,411,833 45,399,375
Ceded reinsurance payable 19,957,252 19,718,427
Notes payable ---- 6,219,953
Other liabilities 10,536,575 15,714,152
Dividends payable 582,390 ----
------------ ------------
Total liabilities 598,839,415 603,054,217
------------ ------------
SHAREHOLDERS' EQUITY
Common stock 15,216,790 15,158,324
Paid-in capital 34,363,963 30,206,370
Accumulated other comprehensive income 494,223 361,947
Retained earnings 229,086,984 224,364,808
------------ ------------
279,161,960 270,091,449
Treasury stock, at cost,
5,510,292 and 5,855,826 shares (45,105,627) (49,138,699)
------------ ------------
Total shareholders' equity 234,056,333 220,952,750
------------ ------------
Total liabilities and shareholders' equity $832,895,748 $824,006,967
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
-2-
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Six months ended June 30,
-------------------------
2003 2002
---- ----
Revenues:
Net premiums earned $48,553,302 $57,243,831
Net investment income 5,488,787 7,890,705
Net realized investment losses (22,813) (2,771,393)
Commission and other income 1,754,719 1,375,400
----------- -----------
Total revenues 55,773,995 63,738,543
----------- -----------
Expenses:
Net losses and loss adjustment expenses incurred 27,521,951 37,122,775
Policy acquisition expenses 9,669,719 9,303,364
General and administrative expenses 9,565,922 10,631,959
----------- -----------
Total expenses 46,757,592 57,058,098
----------- -----------
Income before income taxes 9,016,403 6,680,445
----------- -----------
Income taxes:
Current 2,544,648 1,939,463
Deferred 584,799 34,667
----------- -----------
Total income tax expense 3,129,447 1,974,130
----------- -----------
Net income $ 5,886,956 $ 4,706,315
=========== ===========
Weighted average shares of common stock outstanding-basic 9,638,918 9,273,310
Basic earnings per share $ .61 $ .51
=========== ===========
Weighted average shares of common stock outstanding-diluted 9,746,326 9,292,383
Diluted earnings per share $ .60 $ .51
=========== ===========
Dividends declared per share $ .12 $ .00
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
-3-
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended June 30,
---------------------------
2003 2002
---- ----
Revenues:
Net premiums earned $26,856,742 $30,107,258
Net investment income 3,982,277 3,943,115
Net realized investment gains (losses) 9,793 (2,184,255)
Commission and other income 1,356,381 1,217,841
----------- -----------
Total revenues 32,205,193 33,083,959
----------- -----------
Expenses:
Net losses and loss adjustment expenses incurred 15,509,085 19,410,603
Policy acquisition expenses 5,487,395 4,647,673
General and administrative expenses 5,134,040 6,122,156
----------- -----------
Total expenses 26,130,520 30,180,432
----------- -----------
Income before income taxes 6,074,673 2,903,527
----------- -----------
Income taxes:
Current 1,758,677 1,560,909
Deferred 347,533 (695,342)
----------- -----------
Total income tax expense 2,106,210 865,567
----------- -----------
Net income $ 3,968,463 $ 2,037,960
=========== ===========
Weighted average shares of common stock outstanding-basic 9,706,498 9,276,112
Basic earnings per share $ .41 $ .22
=========== ===========
Weighted average shares of common stock outstanding-diluted 9,831,959 9,296,407
Diluted earnings per share $ .40 $ .22
=========== ===========
Dividends declared per share $ .06 $ .00
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
-4-
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six months ended June 30,
-------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 5,886,956 $ 4,706,315
------------ ------------
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for deferred taxes 584,799 34,667
Net realized investment losses 22,813 2,771,393
Equity in earnings of limited partnership hedge funds (3,474,016) ---
Net bond amortization 102,159 861,200
Depreciation and other, net 174,108 202,375
Trading portfolio activities (40,397,660) ----
Changes in:
Premiums and other receivables 17,883,158 2,544,054
Reinsurance receivables 16,449,153 11,002,550
Ceded reinsurance payable 238,825 (471,330)
Accrued investment income (1,410,995) (775,222)
Deferred policy acquisition costs 348,364 (38,172)
Prepaid reinsurance premiums (4,842,021) 7,043,125
Other assets 366,929 1,148,082
Unpaid losses and loss adjustment expenses 3,349,055 (3,496,463)
Reserve for unearned premiums 3,012,458 (6,339,545)
Other liabilities (5,177,577) 5,893,583
Other ----- (196,563)
------------ ------------
Total adjustments (12,770,448) 20,183,734
------------ ------------
Net cash (used in) provided by operating activities (6,883,492) 24,890,049
------------ ------------
Cash flows from investing activities:
Fixed maturities acquired (103,983,707) (115,513,731)
Equity securities acquired ---- (9,053,126)
Limited partnership hedge funds acquired (28,750,000) ----
Fixed maturities matured ----- 4,771,241
Fixed maturities sold 56,063,018 50,860,611
Equity securities sold 4,658,759 8,664,371
Limited partnership hedge funds sold 3,674,803 ---
Net sale of short-term investments 74,621,442 34,462,870
Acquisition of property, improvements and equipment (1,336,322) (19,865)
------------ ------------
Net cash provided by (used in) investing activities 4,947,993 (25,827,629)
------------ ------------
Cash flows from financing activities:
Proceeds from stock issuance and other 1,001,304 134,863
Net sale of treasury stock 7,247,827 ----
Cash dividends paid (582,390) ----
Loan principal repayments (6,219,953) (1,250,000)
------------ ------------
Net cash provided by (used in) financing activities 1,446,788 (1,115,137)
------------ ------------
Net decrease in cash (488,711) (2,052,717)
Cash at beginning of period 980,109 2,881,077
------------ ------------
Cash at end of period $ 491,398 $ 828,360
============ ============
Supplemental disclosures:
Interest paid $ 25,652 $ 94,201
Federal income tax payment $ 148,652 $ 0
The accompanying notes are an integral part of these consolidated financial statements.
-5-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
June 2003 and 2002
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, 2002.
2) The Company's subsidiaries include two insurance companies and three insurance agencies. These
subsidiaries underwrite commercial insurance in four major lines of business. The Company considers
ocean marine, inland marine/fire, other liability, and aircraft as appropriate segments for purposes
of evaluating the Company's overall performance; however, the Company ceased writing any new policies
covering aircraft risks as of March 31, 2002. The fifth segment, MMO London, includes the operations
of MMO UK, Ltd. ("MMO UK"), a corporate member of Lloyd's of London, and its holding company MMO EU,
Ltd. ("MMO EU"). Since January 1, 2002 MMO UK has not provided capacity to any Lloyd's syndicate.
The financial information by segment is as follows:
Six Months Ended June 30,
------------------------------------------------------------------
2003 2002
------------------------------------------------------------------
(in thousands)
Income Income
Revenues (Loss) Revenues (Loss)
------------------------------------------------------------------
Ocean marine $37,457 $10,881 $27,459 $5,293
Inland marine/Fire 1,865 107 910 111
Aircraft 1,662 735 24,646 8,507
Other liability 7,674 (257) 2,645 (1,741)
MMO London --- --- 2,886 (51)
- ----------------------------------------------------------------------------------------------------------
Subtotal 48,658 11,466 58,546 12,119
Net investment income 5,489 5,489 7,891 7,891
Net realized investment losses (23) (23) (2,771) (2,771)
Other income 1,650 1,650 73 73
General and administrative expenses --- (9,566) --- (10,632)
Income tax expense --- (3,129) --- (1,974)
- ----------------------------------------------------------------------------------------------------------
Total $55,774 $5,887 $63,739 $4,706
-------------------------------------------------------------------------------------------------
Three Months Ended June 30,
------------------------------------------------------------------
2003 2002
------------------------------------------------------------------
(in thousands)
Income Income
Revenues (Loss) Revenues (Loss)
------------------------------------------------------------------
Ocean marine $21,952 $6,206 $15,657 $2,642
Inland marine/Fire 976 132 447 39
Other liability 3,868 (298) 1,281 (178)
Aircraft 227 (15) 13,337 4,803
MMO London --- --- 606 (37)
- -------------------------------------------------------------------------------------------------------------
Subtotal 27,023 6,025 31,328 7,269
Net investment income 3,982 3,982 3,943 3,943
Net realized investment losses 10 10 (2,184) (2,184)
Other income 1,190 1,190 (3) (3)
General and administrative expenses --- (5,133) --- (6,122)
Income tax expense --- (2,106) --- (865)
- ----------------------------------------------------------------------------------------------------------
Total $32,205 $3,968 $33,084 $2,038
-------------------------------------------------------------------------------------------------
-6-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
June 30, 2003 and 2002
3) The Company's comparative comprehensive income is as follows:
Six months ended Three months ended
June 30, June 30,
-------------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands)
Net income $5,887 $4,706 $3,968 $2,038
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities, net of
deferred tax benefit (expense) of
$(63), $177, $108 and $(811) 117 (328) (201) 1,506
Less: reclassification adjustment for
gains (losses) realized in net income, net of
deferred tax benefit (expense) of
$8, $970, $(3) and $764 (15) (1,801) 6 (1,420)
Foreign currency translation adjustment --- (197) --- (230)
-------- ------- ------ ------
Other comprehensive income (loss) 132 1,276 (207) 2,696
-------- ------- ------ ------
Total comprehensive income $6,019 $5,982 $3,761 $4,734
======== ======= ====== ======
4) The Company accounts for the grants of stock options under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") including the disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), and Statement of
Financial Accounting Standards No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure" ("SFAS
148"). Under APB 25, the Company records the difference, if any, between the exercise price of the Company's stock
options and the market price of the underlying stock on the date of grant, as an expense over the vesting period of
the option.
The following table illustrates the effect on net income and earnings per share if the company had applied the
fair value recognition provisions of SFAS 123:
Six months ended June 30, Three months ended June 30,
--------------------------------------------------------------
2003 2002 2003 2002
----- ---- ---- ----
(in thousands except per share data)
Net income, as reported $5,887 $4,706 $3,968 $2,038
Add: Stock based employee
compensation expense included in
reported net income, net of related
tax effects 4 7 2 4
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method for
all awards, net of related tax effects (179) (43) (89) (22)
------- ------- ------- -------
Pro forma net income $5,712 $4,670 $3,881 $2,020
======= ======= ======= =======
Earnings per share:
Basic EPS - as reported $.61 $.51 $.41 $.22
Basic EPS - pro forma $.59 $.50 $.40 $.22
Diluted EPS - as reported $.60 $.51 $.40 $.22
Diluted EPS - pro forma $.59 $.50 $.39 $.22
-7-
5) Related party transaction: On July 1, 2003 the Company invested $10 million
in a limited partnership hedge fund which is managed by Mariner Partners Inc.
("Mariner"), a wholly owned subsidiary of Mariner Investment Group, Inc. (a
professional asset management company of which William J. Michaelcheck, a
Director of the Company, is Chairman, Chief Executive Officer and majority
shareholder). The Company entered into an investment management agreement
with Mariner effective October 1, 2002. Under the terms of the agreement,
Mariner manages the Company's domestic insurance subsidiaries' investment
portfolios. Pursuant to a voting agreement between Mariner and certain of the
Company's shareholders, Mariner, with the approval of two of the three
participating shareholders, is authorized to vote all of the common shares
covered by the voting agreement, which is approximately 56% of the Company
issued and outstanding shares of common stock as of June 30, 2003. Investment
fees incurred under the investment agreement with Mariner were $719,335 for
the six months ended June 30, 2003. Of the $67 million invested in limited
partnership hedge funds as of June 30, 2003, none were invested in funds
managed directly by Mariner.
6) Securities lending
The Company engages in a securities lending agreement with Bear, Stearns
Securities Corp. (the "borrower") whereby certain securities from its
portfolio are loaned to the borrower for short periods of time. The agreement
sets forth the terms and conditions under which the Company may from time to
time lend to the borrower, against a pledge of restricted collateral,
securities held in custody for the Company by Custodial Trust Company,
an affiliate of the borrower. The Company generally receives restricted
collateral from the borrower, equal to at least the market value of the loaned
securities plus accrued interest. The loaned securities remain a recorded
asset of the Company. At June 30, 2003 the Company loaned securities with a
fair value of $3,734,208 and held collateral of $3,851,759. There were no loan
positions outstanding as of December 31, 2002.
7) Trading portfolio
The Company established a trading portfolio for certain of its fixed maturity
investments in the second quarter of 2003. The trading securities are likely
to be held for periods of less than six months. These investments are marked
to market with the change recognized in net investment income during the
current period. The trading portfolio at June 30, 2003 consisted of
collateralized debt obligations (CDOs). All CDOs were either new issues or
private placements. The fair value of such securities is determined by pricing
models that consider, among other assumptions, the present value of the
underlying CDO's cash flows. The difference between the cost and fair value of
trading account securities was recorded in net investment income and amounted
to $24,461 at June 30, 2003.
8) Limited partnership hedge funds include investments in limited partnerships
and limited liability companies. The equity method of accounting is used to
account for the Company's limited partnership hedge fund investments. Under
the equity method, the Company records all changes in the underlying value of
the limited partnership hedge fund to net investment income in results of
operations.
Hedge fund investments are subject to various economic and market risks. The
risks associated with hedge fund investments may be substantially greater than
the risks associated with fixed income investments. Consequently, our hedge
fund portfolio may be more volatile and the risk of loss greater than that
associated with fixed income investments. As the Company invests a greater
percentage of its investment portfolio in limited partnership hedge funds,
there may also be a greater volatility associated with the Company's
investment income. The Company has revised its investment policy and now
limits the amount of hedge fund investments to the greater of 30% of invested
assets or 50% of policyholders' surplus.
The Company also seeks to mitigate market risk associated with its investment
in hedge funds by maintaining a diversified portfolio of hedge fund
investments. Diversification is achieved through the use of several investment
managers employing a variety of different investment strategies in the
underlying characteristics of their hedge fund. The Company is dependent upon
these managers to obtain market prices for the underlying investments of the
hedge funds. Some of these investments may be difficult to value and may
differ from reported amounts. Furthermore, because the hedge funds in which we
invest sometimes impose limitations (some as long as 90 days) on the timing of
withdrawals from the funds, our inability to withdraw our investment quickly
from a particular hedge fund that is performing poorly could result in losses
and may affect liquidity in the hedge fund investments.
-8-
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 insurance companies, risk bearing
entities and insurance underwriters and managers.
The Company's two insurance subsidiaries, New York Marine And General
Insurance Company ("New York Marine") and Gotham Insurance Company ("Gotham"),
each maintains a rating of A (Excellent) from A.M. Best Company, Inc. This is
the third highest of fifteen rating levels in A.M. Best's classification
system. The Company's insureds rely on ratings issued by rating agencies. Any
adverse change in the ratings assigned to New York Marine or Gotham may
adversely impact their ability to write premiums.
The Company specializes in underwriting ocean marine, inland
marine/fire and other liability insurance through insurance pools managed by
the Company's insurance underwriters and managers, Mutual Marine Office, Inc.,
Pacific Mutual Marine Office, Inc. and Mutual Marine Office of the Midwest,
Inc (collectively referred to as "MMO"). The original members of the pools
were insurance companies that were not affiliated with the Company. Several
years later, New York Marine and Gotham joined the pools. Over the years, New
York Marine and Gotham steadily increased their participation in the pools,
while the unaffiliated insurance companies reduced their participation or
withdrew from the pools entirely. Since January 1, 1997, New York Marine and
Gotham have been the only members of the pools and we therefore now write 100%
of all of the business produced by the pools.
In prior years, the Company issued policies covering aircraft
insurance; however, the Company has ceased writing any new policies covering
aircraft risks as of March 31, 2002. The Company decided to exit the
commercial aviation insurance business because it is highly competitive and
had generated underwriting losses for most years during the 1990s and because
it is highly dependent on the purchase of substantial amounts of reinsurance,
which became increasingly expensive after the events of September 11, 2001.
This decision has enabled the Company to concentrate on its core lines of
business, which include ocean marine, inland marine/fire and other liability.
From 1998 to 2001, the Company provided capacity, or the ability to
underwrite a certain amount of business, to certain syndicates within Lloyd's
of London through MMO UK a wholly owned limited liability corporate capital
vehicle. Since January 1, 2002, MMO UK has not provided capacity to any
Lloyd's syndicate. Business obtained through MMO UK is hereinafter referred to
as "MMO London".
-9-
Results of Operations
Net income for the second quarter ended June 30, 2003 totaled $4.0
million, or $.40 per diluted share, compared with $2.0 million, or $.22 per
diluted share, for the second quarter of 2002. Net income for the six months
ended June 30, 2003 totaled $5.9 million, or $.60 per diluted share, compared
with $4.7 million, or $.51 per diluted share, for the six months ended June
30, 2002.
Net realized investment gains after taxes in the second quarter of 2003
were $6,000, or $.00 per diluted share, compared with net realized investment
losses after taxes of $1.4 million, or $.15 per diluted share for the same
period in 2002. Net realized investment losses after taxes for the six months
ended June 30, 2003 were $15,000, or $.00 per diluted share, compared with
$1.8 million, or $.19 per diluted share, for the same period in 2002. The sale
of fixed maturities and write-downs from other than temporary declines in the
fair value of securities contributed to realized investment losses during the
first six months of 2002.
As described in more detail in the table below, gross premiums written,
net premiums written and earned for the six months ended June 30, 2003
declined by 19%, 19% and 15% respectively, when compared to the same period of
2002 as a result of the Company's previously announced decisions to cease
writing aircraft business and to withdraw from operations in London. However,
gross premiums written, net premiums written and net premiums earned from the
Company's core segments (ocean marine, inland marine/fire and other liability)
increased by 19%, 12% and 52%, respectively, in the first six months of 2003
over the same period of the prior year.
NYMAGIC Gross Premiums Written
by Segment Six months ended June 30, Three months ended June 30,
- ---------------- ------------------------------------------------------------------------
2003 2002 Change 2003 2002 Change
-----------------------------------------------------------------------
(Dollars in thousands)
Ocean marine ...............$48,708 $41,886 16% $26,610 $23,007 16%
Inland marine/fire............7,188 5,018 43% 3,462 2,344 48%
Other liability...............7,964 6,901 15% 3,703 3,737 (1%)
-----------------------------------------------------------------------
Subtotal............... 63,860 53,805 19% 33,775 29,088 16%
Aircraft..................... 2,709 28,149 (90%) 1,158 11,063 (90%)
MMO London................... --- 319 (100%) --- (491) (100%)
-----------------------------------------------------------------------
Total.......................$66,569 $82,273 (19%) $34,933 $39,660 (12%)
=======================================================================
NYMAGIC Net Premiums Written
by Segment Six months ended June 30, Three months ended June 30,
- ---------------- ------------------------------------------------------------------------
2003 2002 Change 2003 2002 Change
-----------------------------------------------------------------------
(Dollars in thousands)
Ocean marine ...............$35,678 $33,430 7% $19,774 $19,852 --%
Inland marine/fire............2,123 971 119% 1,041 433 140%
Other liability.............. 7,318 5,874 25% 3,611 3,115 16%
-----------------------------------------------------------------------
Subtotal 45,119 40,275 12% 24,426 23,400 4%
Aircraft..................... 1,605 17,559 (91%) 208 8,208 (97%)
MMO London................... --- 113 (100%) --- (263) (100%)
-----------------------------------------------------------------------
Total.......................$46,724 $57,947 (19%) $24,634 $31,345 (21%)
=======================================================================
-10-
NYMAGIC Net Premiums Earned
by Segment Six months ended June 30, Three months ended June 30,
- ---------------- ------------------------------------------------------------------------
2003 2002 Change 2003 2002 Change
-----------------------------------------------------------------------
(Dollars in thousands)
Ocean marine ...............$37,278 $27,158 37% $21,785 15,438 41%
Inland marine/fire............1,866 910 105% 976 447 118%
Other liability...............7,674 2,646 190% 3,869 1,282 202%
-----------------------------------------------------------------------
Subtotal 46,818 30,714 52% 26,630 17,167 55%
Aircraft.................. 1,735 23,643 (93%) 227 12,335 (98%)
MMO London .................. ---- 2,887 (100%) -- 605 (100%)
-----------------------------------------------------------------------
Total.......................$48,553 $57,244 (15%) $26,857 $30,107 (11%)
=======================================================================
Premiums for each segment are as follows:
o Ocean marine net premiums written and net premiums earned grew by 7% and 37%, respectively, during
the first six months of 2003 when compared to the same period of the prior year. Increases in net
premiums written primarily reflect higher ocean marine rates of approximately 10% overall with the
largest rate increases occurring in the marine liability and hull classes. Contributing to the
overall increase was additional production in the marine liability class notwithstanding the
decrease in policy count in the hull class. Net premiums earned reflect the substantial rate
increases and production increases achieved in the prior year, particularly in the drill rig class.
The Company believes that net ocean marine premiums will increase throughout 2003, although there
can be no assurance that this will occur, and rate increases obtained are expected to be
substantially lower in 2003 than they were in 2002.
The gross writings by class in the ocean marine segment are as follows:
Six months ended June 30, Three months ended June 30,
-----------------------------------------------------------------------
2003 2002 Change 2003 2002 Change
-----------------------------------------------------------------------
(Dollars in thousands)
Ocean marine liability ...........$20,672 $15,759 31% 11,074 8,952 24%
Drill rig..................... 8,650 9,292 (7%) 4,999 6,080 (18%)
Hull.............................. 9,490 8,764 8% 4,653 4,846 (4%)
War............................... 3,799 3,866 (2%) 1,694 1,654 2%
Cargo..................... 3,245 3,254 --- 1,802 995 81%
Other marine...................... 2,852 951 200% 2,388 480 398%
-----------------------------------------------------------------------
Total.............................$48,708 $41,886 16% $26,610 $23,007 16%
=======================================================================
o Inland marine/fire net premiums written and earned increased by 119% and 105%, respectively, for
the six months ended June 30, 2003 when compared to the same period of last year, largely due to the
growth in the Company's underwriting program insuring excess and surplus lines property risks,
improved pricing and higher net loss retention levels. Premiums are expected to increase in 2003
primarily due to improved pricing and higher net retention levels, although there is no assurance that
they will do so.
-11-
o Other liability net premiums written and earned rose by 25% and 190%,
respectively, for the six months ended June 30, 2003 when compared to
the same period of 2002 due to higher net loss retention levels and
larger premium rates on policy renewals. Average rate increases
achieved in 2003 were approximately 15%. Although additional
production was achieved in the contractor's liability class, policy
count was reduced to mitigate exposure in certain classes of errors
and omission policies. Net premiums in the other liability line are
expected to increase in 2003 due to firm premium rates and higher net
loss retentions, although increases in premiums written are expected
to be substantially lower in 2003 than they were in 2002.
o Aircraft premiums have decreased substantially in 2003 as a result of
the Company having ceased writing new aircraft policies subsequent to
March 31, 2002.
o MMO London premiums earned have decreased substantially in 2003 as
the Company has not provided capacity (the ability to write premiums)
to any Lloyd's syndicate for the 2002 underwriting year and
subsequent years.
Net losses and loss adjustment expenses incurred as a percentage of net
premiums earned (the loss ratio) were 57.7% for the three months ended June
30, 2003 as compared to 64.5% for the same period of 2002. For the six months
ended June 30, 2003, the loss ratio was 56.7% compared to 64.9% for the same
period of the prior year. The Company recorded lower loss ratios in 2003 for
both the ocean marine and other liability lines of business, which largely
reflected the beneficial impact of increased rates in those lines and the
absence of any catastrophe losses.
During the first six months of 2003, there were no significant changes
reported in the development of prior year's net loss reserves. The comparable
period of 2002 was affected by net adverse development of $3.7 million
resulting from reserves for uncollectible reinsurance.
Policy acquisition costs as a percentage of net premiums earned for the
three months ended June 30, 2003 were 20.4% as compared with 15.4% for the
same period of the prior year. The same ratio was 19.9% for the six months
ended June 30, 2003 as compared with 16.3% for the same period in 2002.
Premiums earned in the first six months of the prior year reflected larger
amounts of aircraft premiums which have a lower acquisition cost ratio than
other lines of business. A large part of the aircraft premium written in 2002
reflected premium surcharges for terrorism coverage, which were recorded with
a nominal processing charge.
General and administrative expenses decreased by 10% to $9.6 million for
the six months ended June 30, 2003 from $10.6 million for the same period of
the prior year. The prior year's amount included $1.5 million in charges
resulting from the reorganization of the Company's management structure and
consisted primarily of severance payments to three of the Company's former
executive officers. All expenses related to the reorganization were paid prior
to June 30, 2003.
-12-
Net investment income for the three months ended June 30, 2003 increased
by 1% to $4.0 million from $3.9 million in the same period of the prior year.
Net investment income for the six months ended June 30, 2003 decreased by 30%
to $5.5 million from $7.9 million in the same period of the prior year. The
increase in the second quarter of 2003 reflects approximately $3.0 million
derived from investments in limited partnership hedge funds. The decrease in
the first six months 2003 reflects a lower investment yield on the investment
portfolio in 2003 as a result of a substantial position held by the Company in
short-term investments. The relatively large level of short-term investments
held was a direct result of the sale of a substantial amount of fixed maturity
and equity security investments at the end of 2002. These sales were made in
an effort to reposition the investment portfolio and the reinvestment of funds
under the Company's investment strategy, which is expected to be fully
implemented before year end 2003. Income derived from limited partnership
hedge fund investments approximated $3.5 million for the six months ended June
30, 2003. The equity method of accounting is used to account for the Company's
limited partnership hedge fund investments. Under the equity method, the
Company records all changes in the underlying value of the limited partnership
hedge fund to results of operations. The Company started to invest in hedge
funds in the fourth quarter of 2002. As of June 30, 2003 the Company's
investment in limited partnership hedge funds amounted to approximately $67.0
million.
Commission and other income increased to $1.4 million for the three
months ended June 30, 2003 from $1.2 million for the same period in the prior
year. Commission and other income increased to $1.8 million for the six months
ended June 30, 2003 from $1.4 million for the same period in the prior year.
The 2003 amounts reflect other income received from arbitration settlements.
In the second quarter of 2003, an arbitration procedure was completed against
a former pool member, Utica Mutual Insurance Company ("Utica"), which resulted
in a payment to MMO of approximately $7.8 million. This amount represented
Utica's funding requirement to the MMO pools. In addition, MMO was awarded
interest of approximately $1 million on a pre-tax basis. In 2002, larger
profit commissions were earned based upon the ceded results of aviation
reinsurance treaties.
Net realized investment gains were $10,000 for the three months ended
June 30, 2003 as compared to net realized investment losses of $2.2 million
for the same period of the prior year. Net realized investment losses were
$23,000 for the six months ended June 30, 2003 as compared to $2.8 million for
the same period of 2002. The sale of fixed maturities contributed to realized
investment losses during the first six months of 2002. Write-downs from other
than temporary declines in the fair value of securities amounted to $0 and
$1.2 million for the six months ended June 30, 2003 and 2002, respectively.
Total income taxes as a percentage of income before taxes increased to
34.7% during the first six months of 2003 from 29.6% for the same period of
2002. The increase in the percentage is principally the result of decreases in
tax exempt income in the current year.
Premiums and other receivables, net decreased to $17.8 million as of June
30, 2003 from $35.7 million as of December 31, 2002 as a result of smaller
balances due from the pool managed by MMO. Favorable cash flows were recorded
at MMO due in part to the previously mentioned arbitration settlement and
smaller investment balances held.
Reinsurance receivables, net decreased to $310.0 million as of June 30,
2003 from $326.4 million as of December 31, 2002 due mainly to incoming cash
flows from reinsurance receivables on paid losses.
Other liabilities decreased to $10.5 million as of June 30, 2003 from
$15.7 million as of December 31, 2002 as a result of a decline in funds held
on behalf of reinsurers.
-13-
Liquidity and Capital Resources
Cash and total investments increased from $430.5 million at December
31, 2002 to $467.6 million at June 30, 2003, which included $282.1 million in
cash and short-term investments. The amount of short-term investments held is
a direct result of the sale of a substantial amount of fixed maturity and
equity security investments at the end of 2002. These sales were made in an
effort to reposition the investment portfolio. The reinvestment of funds under
the Company's investment strategy is expected to be fully implemented by the
end of 2003.
Cash flows used in operating activities were $6.9 million for the six
months ended June 30, 2003 as compared to cash flows provided from operating
activities of $24.9 million for the same period in 2002. The 2003 amount
reflects uses of cash flows of $40.4 million for trading portfolio activities
and reflects cash flows received from a reduction in both reinsurance, premium
and other receivables during the same period. Cash flows provided by investing
activities in 2003 were then used to establish the Company's trading
portfolio. The prior year operating activities reflected significant cash
flows from aircraft premiums as a result of premium surcharges for terrorism
coverage. A substantial portion of such cash flows provided from operating
activities was then used in investing activities to purchase fixed maturities.
In 2002, the Company entered into a credit agreement with an
unaffiliated company. The interest rate on the loan and the loan balance were
3.9% and $6.2 million, respectively, as of December 31, 2002. On February 7,
2003, the Company repaid its entire loan balance outstanding to the bank
following the sale of equity to Conning Capital Partners VI, L.P. ("Conning")
on January 31, 2003. In this transaction, Conning acquired 400,000 investment
units from the Company, each unit consisting of one share of the Company's
common stock and an option to purchase an additional share of common stock
from the Company. Conning paid $21.00 per unit resulting in $8.4 million in
proceeds to the Company. The option exercise price was based on a formula
contained in the Option Certificate (which was attached as an exhibit to the
Company's current report on Form 8-K filed on February 4, 2003). The Company
used common stock held in treasury to effect the transaction with Conning.
The Company also repurchased 54,466 shares of its common stock in
2003 in order to effect common stock option exercises by employees. There were
no common stock repurchases made at any time during 2002.
On March 12, 2003, the Company declared a dividend of six (6) cents per
share to shareholders of record on March 31, 2003, payable on April 8, 2003.
On June 12, 2003, the Company declared a dividend of six (6) cents per share
to shareholders of record on June 30, 2003, payable on July 8, 2003. The
Company did not declare or pay a dividend at any time during 2002.
During the first quarter of 2003, the Company granted options to purchase
20,000 shares of the Company's common stock to certain Directors, who are not
officers of the Company, The exercise prices of the stock options were equal
to the closing prices of the Company's stock on the New York Stock Exchange on
the dates of the underlying stock grants.
During the second quarter of 2003, the Company's wholly owned insurance
subsidiary, New York Marine And General Insurance Company, requested and
received approval from the State of New York Insurance Department to pay an
extraordinary dividend of $5,000,000 to the Company.
-14-
Investments
The following table summarizes our investments at June 30, 2003 and December
31, 2002 at fair value:
June 30, 2003 December 31, 2002
------------- -----------------
($000's, except percentages)
Amount Percent Amount Percent
-------------------------------------------------
Fixed maturities:
United States treasury securities $ 9,151 2.0% $ 9,414 2.2%
Collateralized debt obligations 40,398 8.6 0 0.0
Municipal securities 17,356 3.7 21,066 4.9
Other corporate securities 51,677 11.1 0 0.0
------------------------------------------------
Total fixed maturities 118,582 25.4 30,480 7.1
Short-term investments 281,623 60.3 355,804 82.8
------------------------------------------------
Total fixed maturities and short-term investments 400,205 85.7 386,284 89.9
Hedge funds 66,951 14.3 38,477 9.0
Equities 0 0.0 4,729 1.1
------------------------------------------------
Total investment portfolio $467,156 100.0% $429,490 100.0%
======== ====== ======== ======
At June 30, 2003, 75.2% of the fair value of our fixed maturities and
short-term investment portfolio was in obligations rated "Aa2" or better by
Moody's or its equivalent S&P rating.
Unpaid losses and loss adjustment expenses
Unpaid losses and loss adjustment expenses for each segment as of June 30,
2003 were as follows:
Gross Net
----------------------
(in $000's)
Ocean Marine $188,882 $103,821
Inland marine/fire 29,364 6,787
Other liability 83,434 50,819
Aircraft 217,671 48,819
- ---------------------------------------------------------------
Total $519,351 $210,246
The process of establishing reserves for claims involves uncertainties
and requires the use of informed estimates and judgments. Our estimates and
judgments may be revised as claims develop and as additional experience and
other data become available and are reviewed, as new or improved methodologies
are developed or as current laws change. There were no significant changes in
assumptions made in the evaluation of loss reserves during 2003.
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, 2002.
-15-
As the Company invests more in limited partnership hedge funds in 2003
(14.3% of total investments as of June 30, 2003), the equity method of
accounting for its limited partnership investments is now also considered a
critical accounting policy. Under the equity method, the Company records all
changes in the underlying value of the limited partnership to net investment
income in results of operations.
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 and hedge fund investments. 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. Hedge fund risk includes the potential loss from the diminution in
the value of the underlying investment of the hedge fund.
Hedge fund investments are subject to various economic and market
risks. The risks associated with hedge fund investments may be substantially
greater than the risks associated with fixed income investments. Consequently,
our hedge fund portfolio may be more volatile and the risk of loss greater
than that associated with fixed income investments. As the Company invests a
greater percentage of its investment portfolio in limited partnership hedge
funds, there may also be a greater volatility associated with the Company's
investment income. The Company has revised its investment policy and now
limits the amount of hedge fund investments to the greater of 30% of invested
assets or 50% of policyholders' surplus.
The Company also seeks to mitigate market risk associated with its
investment in hedge funds by maintaining a diversified portfolio of hedge fund
investments. Diversification is achieved through the use of several investment
managers employing a variety of different investment strategies in the
underlying characteristics of the hedge fund. However, the Company is
dependent upon these managers to obtain market prices for the underlying
investments of the hedge funds. Some of these investments may be difficult to
value and may differ from reported amounts. Furthermore, because the hedge
funds in which we invest sometimes impose limitations (some as long as 90
days) on the timing of withdrawals from the funds, our inability to withdraw
our investment quickly from a particular hedge fund that is performing poorly
could result in losses and may affect liquidity in the hedge fund investments.
As of June 30, 2003 the Company invested approximately $43.6 million
in fixed maturities that are below investment grade securities with a
concentration in investments rated BB by Standard and Poor's. The Company
seeks to mitigate market risk associated with such investments by maintaining
a diversified portfolio of such securities that limit the concentration in any
one issuer. The largest single investment made by the Company in such
securities amounted to 6% of the total amount invested in below investment
grade securities.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company's
management, with the participation of the Company's Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the design and
operation of its disclosure controls and procedures as defined in Rule 13a-15
under the Securities Exchange Act of 1934. 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. The Company's management, with the
participation of the Chief Executive Officer and Chief Financial Officer, also
conducted an evaluation of the Company's internal control over financial
reporting to determine whether any changes occurred during the quarter covered
by this report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Based on that evaluation, there has been no such change during the quarter
covered by this report.
-16-
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
The Company held its Annual Meeting of Shareholders on May 29, 2003.
The following matters were voted upon by the Company's shareholders:
1. Directors. The following persons were elected as Directors of the Board
of Directors, each to hold office until the next Annual Meeting of
Shareholders to be held in 2004.
Total votes for Total votes withheld
each Director for each Director
------------- -----------------
John R. Anderson 8,795,518 10,874
Glenn J. Angiolillo 8,795,518 10,874
John T. Baily 8,795,518 10,874
John N. Blackman, Jr. 7,916,668 889,724
Mark W. Blackman 7,911,168 895,224
A. George Kallop 8,795,518 10,874
William J. Michaelcheck 7,911,168 895,224
William D. Shaw Jr. 7,980,447 825,945
Robert G. Simses 8,688,237 118,155
George R. Trumbull, III 8,795,518 10,874
Glenn R. Yanoff 8,087,728 718,664
David W. Young 8,688,237 118,155
2) Election of Independent Public Accountants. KPMG LLP were elected as the
Company's independent public accountants for the current fiscal year of
the Company.
FOR AGAINST ABSTAIN
--- ------- -------
8,801,662 4,630 100
Item 5. - Other Information
On May 22, 2003, George R. Trumbull, III, Chairman and Chief
Executive Officer of the Company was appointed Chairman of Select Re, a
Bermuda reinsurance company, which is not affiliated with the Company. The
Company and Select Re do not transact any amount of business with each other.
-17-
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
9.1 Voting Agreement among Mariner Partners, Inc. and certain
stockholders of the Company dated as of February 20, 2002, as amended
March 1, 2002 (incorporated by reference to Exhibit 99.1 to the Schedule
13D filed by Mariner Partners, Inc and the other reporting persons named
therein on March 4, 2002)
9.2 Amendment No. 2 dated as of January 27, 2003 to Voting Agreement
among Mariner Partners, Inc. and certain stockholders of the Company
(incorporated by reference to Exhibit 99.2 to the Schedule 13D/A filed by
Mariner Partners, Inc and the other reporting persons named therein on
April 10, 2003)
9.3 Amendment No. 3 dated as of March 12, 2003, to Voting Agreement
among Mariner Partners, Inc. and certain stockholders of the Company
(incorporated by reference to Exhibit 99.3 to the Schedule 13D/A filed by
Mariner Partners, Inc. and the other reporting persons named therein on
April 10, 2003.)
10.1 Resolutions of the Board of Directors of the Company's subsidiary,
New York Marine and General Insurance Company, adopted July 18, 2002,
committing not to pay dividends to the Company without the consent of the
New York State Department of Insurance prior to July 31, 2004.
10.2 Resolutions of the Board of Directors of the Company's subsidiary,
Gotham Insurance Company, adopted July 18, 2002, committing not to pay
dividends to the Company without the consent of the New York State
Department of Insurance prior to July 31, 2004.
10.3 Agreement and General Release dated June 27, 2002 between the
Company's former Chairman and CEO, Robert W. Bailey, and the Company,
setting forth the terms of Mr. Bailey's separation from the Company.
10.4 Form of Release between Mr. Davis and the Company dated July 17,
2002 in which Mr. Davis releases the Company from certain claims.
10.5 Agreement and General Release dated August 26, 2002 between the
Company's former Vice President and General Counsel, Paula-Jane Seidman,
setting forth the terms of Ms. Seidman's separation from the Company.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
A current report on Form 8-K was filed on May 16, 2003, under Items 9 and
12, incorporating by reference the Company's press release setting forth our
first-quarter 2003 financial results.
A current report on Form 8-K was filed on June 13, 2003, under Items 9
and 12, incorporating by reference the Company's press release concerning the
declaration of a dividend.
-18-
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: August 14, 2003 /s/ George R. Trumbull III
---------------------- ---------------------------
George R. Trumbull III
Chairman and Chief Executive Officer
Date: August 14, 2003 /s/ Thomas J. Iacopelli
---------------------- -----------------------
Thomas J. Iacopelli
Chief Financial Officer
-19-