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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, 2003
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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.
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(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.)
919 Third Avenue, New York, New York 10022
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(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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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On November 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 and
effects 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, failure to
retain key personnel and the possibility that our relationship with Mariner
could terminate or change and the fact that ownership of our common stock is
consolidated among a few major shareholders, and is subject to the voting
agreement. 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
September 30, 2003 and December 31, 2002 2
Consolidated Statements of Income
Nine months ended September 30, 2003 and 3
September 30, 2002
Consolidated Statements of Income
Three months ended September 30, 2003 and 4
September 30, 2002
Consolidated Statements of Cash Flows 5
Nine months ended September 30, 2003 and
September 30, 2002
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NYMAGIC, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
------------------------------------
2003 2002
---- ----
ASSETS
Investments:
Fixed maturities:
Available for sale at fair value
(amortized cost $90,076,386 and $29,923,407) $90,842,504 $30,480,249
Trading at fair value (cost $115,277,722 and $0) 118,809,059 ---
Equity securities available for sale at fair value
(cost $0 and $4,728,485) --- 4,728,485
Limited partnership hedge funds at equity
(cost $77,500,000 and $37,500,000) 83,153,168 38,477,219
Short-term investments (at cost which approximates fair value) 157,698,490 355,803,960
------------ ------------
Total investments 450,503,221 429,489,913
------------ ------------
Cash 3,214,242 980,109
Accrued investment income 2,321,289 391,949
Premiums and other receivables, net 18,047,509 35,690,128
Receivable for securities sold 52,454,281 ---
Reinsurance receivables on unpaid losses, net 285,259,434 307,023,114
Reinsurance receivables on paid losses, net 1,683,735 19,399,226
Deferred policy acquisition costs 7,561,972 7,708,186
Prepaid reinsurance premiums 13,082,073 6,397,405
Deferred income taxes 10,932,983 12,000,806
Property, improvements and equipment, net 2,932,751 731,406
Other assets 3,454,973 4,194,725
------------ ------------
Total assets $851,448,463 $824,006,967
============ ============
LIABILITIES
Unpaid losses and loss adjustment expenses $524,305,847 $516,002,310
Reserve for unearned premiums 51,295,662 45,399,375
Ceded reinsurance payable 21,662,061 19,718,427
Notes payable --- 6,219,953
Other liabilities 13,533,960 15,714,152
Dividends payable 582,390 ---
----------- -----------
Total liabilities 611,379,920 603,054,217
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SHAREHOLDERS' EQUITY
Common stock 15,261,140 15,158,324
Paid-in capital 35,044,853 30,206,370
Accumulated other comprehensive income 497,977 361,947
Retained earnings 235,425,746 224,364,808
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286,229,716 270,091,449
Treasury stock, at cost,
5,554,642 and 5,855,826 shares (46,161,173) (49,138,699)
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Total shareholders' equity 240,068,543 220,952,750
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Total liabilities and shareholders' equity $851,448,463 $824,006,967
============= =============
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,
-------------------------------
2003 2002
---- ----
Revenues:
Net premiums earned $69,946,951 $84,989,873
Net investment income 15,324,212 11,790,742
Net realized investment gains (losses) 531,520 (3,898,489)
Commission and other income 1,767,008 1,458,932
------------ -----------
Total revenues 87,569,691 94,341,058
------------ -----------
Expenses:
Net losses and loss adjustment expenses incurred 40,274,744 54,297,843
Policy acquisition expenses 13,436,684 13,533,120
General and administrative expenses 14,205,613 14,953,853
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Total expenses 67,917,041 82,784,816
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Income before income taxes 19,652,650 11,556,242
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Income taxes:
Current 5,849,966 2,318,868
Deferred 994,576 1,108,447
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Total income tax expense 6,844,542 3,427,315
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Net income $ 12,808,108 $ 8,128,927
============ ===========
Weighted average shares of common stock outstanding-basic 9,661,692 9,274,350
Basic earnings per share $ 1.33 $ .88
============ ===========
Weighted average shares of common stock outstanding-diluted 9,788,880 9,288,443
Diluted earnings per share $ 1.31 $ .88
============ ===========
Dividends declared per share $ .18 $ .00
============ ===========
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,
--------------------------------
2003 2002
---- ----
Revenues:
Net premiums earned $21,393,649 $27,746,042
Net investment income 9,835,425 3,900,037
Net realized investment gains (losses) 554,333 (1,127,096)
Commission and other income 12,289 83,532
------------ -----------
Total revenues 31,795,696 30,602,515
------------ -----------
Expenses:
Net losses and loss adjustment expenses incurred 12,752,793 17,175,068
Policy acquisition expenses 3,766,965 4,229,756
General and administrative expenses 4,639,691 4,321,894
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Total expenses 21,159,449 25,726,718
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Income before income taxes 10,636,247 4,875,797
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Income taxes:
Current 3,305,318 379,405
Deferred 409,777 1,073,780
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Total income tax expense 3,715,095 1,453,185
------------ -----------
Net income $ 6,921,152 $ 3,422,612
============ ===========
Weighted average shares of common stock outstanding-basic 9,706,498 9,276,398
Basic earnings per share $ .71 $ .37
============ ===========
Weighted average shares of common stock outstanding-diluted 9,873,245 9,280,532
Diluted earnings per share $ .70 $ .37
============ ===========
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)
Nine months ended September 30,
-------------------------------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 12,808,108 $ 8,128,927
------------ ------------
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for deferred taxes 994,576 1,108,447
Net realized investment (gains) losses (531,520) 3,898,489
Equity in earnings of limited partnership hedge funds (4,901,198) ---
Net bond amortization 425,165 1,350,268
Depreciation and other, net 302,075 303,870
Trading portfolio activities (115,893,055) ---
Changes in:
Premiums and other receivables 17,642,619 25,029,200
Reinsurance receivables paid and unpaid 39,479,171 21,027,528
Ceded reinsurance payable 1,943,634 856,876
Accrued investment income (1,929,340) 565,974
Deferred policy acquisition costs 146,214 (510,800)
Prepaid reinsurance premiums (6,684,668) 10,700,586
Receivable for securities sold (52,454,281) ---
Other assets 739,752 2,533,113
Unpaid losses and loss adjustment expenses 8,303,537 (11,942,652)
Reserve for unearned premiums 5,896,287 (11,004,470)
Other liabilities (2,180,192) 1,670,203
Other --- (708,380)
------------ ----------
Total adjustments (108,701,224) 44,878,252
------------ ----------
Net cash (used in) provided by operating activities (95,893,116) 53,007,179
------------ ----------
Cash flows from investing activities:
Fixed maturities acquired (126,201,135) (120,723,918)
Equity securities acquired --- (10,396,157)
Limited partnership hedge funds acquired (53,750,000) ---
Fixed maturities matured 2,810,000 5,279,820
Fixed maturities sold 59,610,423 66,097,863
Equity securities sold 4,658,759 34,091,876
Limited partnership hedge funds sold 13,975,249 ---
Net sale (purchase) of short-term investments 198,993,281 (32,934,826)
Acquisition of property, improvements and equipment (2,503,420) (19,865)
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Net cash provided by (used in) investing activities 97,593,157 (58,605,207)
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Cash flows from financing activities:
Proceeds from stock issuance and other 1,726,544 134,863
Net sale of treasury stock 6,192,281 ---
Cash dividends paid (1,164,780) ---
Proceeds from borrowing --- 9,071,540
Loan principal repayments (6,219,953) (5,750,000)
------------ -----------
Net cash provided by financing activities 534,092 3,456,403
------------ -----------
Net increase (decrease) in cash 2,234,133 (2,141,625)
Cash at beginning of period 980,109 2,881,077
------------ -----------
Cash at end of period $ 3,214,242 $ 739,452
============ ===========
Supplemental disclosures:
Interest paid $ 25,652 $ 242,579
Federal income tax payment $ 2,248,652 $ 0
The accompanying notes are an integral part of these consolidated financial statements.
-5-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
September 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 is MMO London, which includes the
operations of MMO UK, Ltd. ("MMO UK"), a corporate member of Lloyd's of
London ("Lloyd's"), 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:
Nine Months Ended September 30,
------------------------------------------------------------------
2003 2002
------------------------------------------------------------------
(in thousands)
Income Income
Revenues (Loss) Revenues (Loss)
------------------------------------------------------------------
Ocean marine $52,912 $14,799 $43,075 $8,110
Inland marine/fire 2,942 570 1,521 134
Other liability 11,512 (666) 3,725 (2,380)
Aircraft 2,688 1,639 33,839 12,649
MMO London --- --- 4,159 (25)
- ----------------------------------------------------------------------------------------------------------
Subtotal 70,054 16,342 86,319 18,488
Net investment income 15,324 15,324 11,791 11,791
Net realized investment gains (losses) 532 532 (3,899) (3,899)
Other income 1,660 1,660 130 130
General and administrative expenses --- (14,205) --- (14,954)
Income tax expense --- (6,845) --- (3,427)
- ----------------------------------------------------------------------------------------------------------
Total $87,570 $12,808 $94,341 $8,129
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-6-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
September 2003 and 2002
Three Months Ended September 30,
------------------------------------------------------------------
2003 2002
------------------------------------------------------------------
(in thousands)
Income Income
Revenues (Loss) Revenues (Loss)
------------------------------------------------------------------
Ocean marine $15,455 $3,918 $15,616 $2,817
Inland marine/fire 1,077 463 611 23
Other liability 3,838 (409) 1,080 (639)
Aircraft 1,026 904 9,193 4,142
MMO London --- --- 1,273 26
- ----------------------------------------------------------------------------------------------------------
Subtotal 21,396 4,876 27,773 6,369
Net investment income 9,835 9,835 3,900 3,900
Net realized investment gains (losses) 554 554 (1,127) (1,127)
Other income 11 11 57 56
General and administrative expenses --- (4,640) --- (4,322)
Income tax expense --- (3,715) --- (1,453)
- ----------------------------------------------------------------------------------------------------------
Total $31,796 $6,921 $30,603 $3,423
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-7-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
September 2003 and 2002
3) The Company's comparative comprehensive income is as follows:
Nine months ended Three months ended
September 30, September 30,
-----------------------------------------------
2003 2002 2003 2002
---- ---- ----- ----
(in thousands)
Net income $12,808 $8,129 $6,921 $3,423
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
deferred tax expense of
$(259), $(289), $(196) and $(466) 481 537 364 865
Less: reclassification adjustment for
gains (losses) realized in net income, net of
deferred tax (expense) benefit of
$(186), $1,364, $(194) and $394 345 (2,534) 360 (733)
Foreign currency translation adjustment --- (708) --- (511)
------- ------- ------ ------
Other comprehensive income 136 2,363 4 1,087
------- ------- ------ ------
Total comprehensive income $12,944 $10,492 $6,925 $4,510
======= ======= ====== ======
4) As of September 30, 2003, the Company has two stock-based employee
compensation plans. Awards under the Company's plans vest over periods ranging
from three to five years. Effective January 1, 2003 the Company adopted the fair
value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), prospectively to all employee awards
granted, modified or settled after January 1, 2003. Therefore, the cost related
to stock-based employee compensation included in the determination of net income
for 2003 is less than that which would have been recognized if the fair value
based method had been applied to all awards since the original effective date of
SFAS 123, which includes awards issued after December 15, 1994. Prior to 2003,
the Company accounted for those plans under the recognition and measurement
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25"), and related Interpretations. Under APB 25, the Company recorded 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 adoption of SFAS 123 did not have a
significant impact on the Company's results of operations, financial condition
or liquidity.
-8-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
September 2003 and 2002
The following table illustrates the effect on net income and earnings
per share if the fair value based method had been applied to all outstanding and
unvested awards in each period:
Nine months ended Three months ended
----------------- ------------------
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
(in thousands except per share data)
Net income, as reported $12,808 $8,129 $6,921 $3,423
Add: Stock based employee
compensation expense included in
reported net income, net of related
tax effects 14 11 10 4
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method for all
awards, net of related tax effects (268) (66) (89) (22)
------- ------ ------ ------
Pro forma net income $12,554 $8,074 $6,842 $3,405
======= ====== ====== ======
Earnings per share:
Basic EPS - as reported $1.33 $.88 $.71 $.37
Basic EPS - pro forma $1.30 $.87 $.70 $.37
Diluted EPS - as reported $1.31 $.88 $.70 $.37
Diluted EPS - pro forma $1.28 $.87 $.69 $.37
5) Related party transactions
As of September 30, 2003 the Company invested $12.7 million in limited
partnership hedge funds which are managed by Mariner Partners Inc. ("Mariner"),
an investment management company of which William J. Michaelcheck, a Director of
the Company, is Chairman and Chief Executive Officer. Mr. Michaelcheck owns a
majority of the stock of Mariner. The Company entered into an investment
management agreement with Mariner effective October 1, 2002, which was amended
and restated on December 6, 2002. Under the terms of the agreement, Mariner
manages the Company's 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's issued and outstanding shares of common stock as of
September 30, 2003. Investment fees incurred under the investment agreement with
Mariner were $1,229,335 for the nine months ended September 30, 2003.
-9-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
September 2003 and 2002
The Company entered into a limited partnership agreement with a Mariner
affiliated company relating to a hedge fund. This hedge fund invests in
collateralized debt obligations("CDOs"). Under the provisions of the
agreement, the Mariner affiliated company is entitled to 50% of the net profit
realized upon the sale of certain CDOs held by the Company outside the limited
partnership. Based upon the fair value of those securities at September 30,
2003, amounts that the Company would owe to the Mariner affiliated company
under this agreement if such securities were sold would be $1.8 million. The
partnership agreement also provides for other fees payable to the manager
based upon the operations of the hedge fund. There were no other fees incurred
through September 30, 2003. On October 23, 2003, the Company made an
investment of $7.0 million into this limited partnership hedge fund. The
Company cannot withdraw funds from this limited partnership for a minimum
period of three years without the consent of the hedge fund manager.
6) Securities lending
The Company maintains 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 receives restricted collateral from the borrower generally
equal to at least the fair value of the loaned securities plus accrued interest.
The loaned securities remain a recorded asset of the Company. At September 30,
2003, the Company had loaned securities with a fair value of $5,162,688 and held
collateral related to these loaned securities of $5,316,733. There were no loan
positions outstanding as of December 31, 2002.
7) Trading portfolio
The Company maintains a trading portfolio for certain of its fixed maturity
investments, which it established during the second quarter of 2003. The
trading securities are likely to be held for short periods of time. These
investments are marked to market with the change recognized in net investment
income during the current period. The trading portfolio at September 30, 2003
consisted of CDOs, although other types of investments were included by the
Company within the trading portfolio during 2003. All CDOs were either new
issues or private placements. The fair value of each CDO is provided by
dealers and is determined by pricing models that consider, among other
assumptions, the present value of the underlying CDO's cash flows. Alternative
assumptions about recovery rates, however, could lead to different cash flows
which could materially effect valuation levels. The markets for these types of
securities can be illiquid and, therefore, the price obtained from dealers in
these securities is subject to change depending upon the underlying market
conditions of these securities, including the potential for downgrades or
defaults on the underlying collateral of the security. The excess of fair
value over the cost of the trading account securities was recorded in net
investment income and amounted to $3.5 million at September 30, 2003.
8) Limited partnership hedge funds
The Company's investments in limited partnership hedge funds include interests
in limited partnerships and limited liability companies. The equity method of
-10-
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. Each of the insurance company subsidiaries 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 investments
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 determining the
underlying characteristics of their hedge funds. 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 actual
values may differ from reported amounts. Furthermore, because the hedge funds in
which we invest sometimes impose limitations on the timing of withdrawals from
the hedge funds (most are within 90 days), 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.
-11-
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. 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 therefore we 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,
generated underwriting losses for most years during the 1990s and 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
through MMO UK, a wholly owned limited liability corporate capital vehicle.
Lloyd's is currently rated "A-" (Excellent), which is the fourth highest
rating level in A.M. Best's classification system. MMO UK, Ltd., as a
corporate member of Lloyd's, is not separately rated. Since January 1, 2002,
MMO UK has not provided capacity to any Lloyd's syndicate.
-12-
Results of Operations
Total revenues for the third quarter ended September 30, 2003 totaled
$31.8 million compared with $30.6 million for the third quarter of 2002. Total
revenues for the nine months ended September 30, 2003 totaled $87.6 million
compared with $94.3 million for the nine months ended September 30, 2002.
Net income for the third quarter ended September 30, 2003 totaled $6.9
million, or $.70 per diluted share, compared with $3.4 million, or $.37 per
diluted share, for the third quarter of 2002. Net income for the nine months
ended September 30, 2003 totaled $12.8 million, or $1.31 per diluted share,
compared with $8.1 million, or $.88 per diluted share, for the nine months
ended September 30, 2002. Increases in net income resulted primarily from
increases in net investment income and premiums earned in the Company's core
segments of business.
Net realized investment gains after taxes in the third quarter of 2003
were $360,000, or $.04 per diluted share, compared with net realized investment
losses after taxes of $733,000, or $.08 per diluted share, for the same period
in 2002. Net realized investment gains after taxes for the nine months ended
September 30, 2003 were $345,000, or $.04 per diluted share, compared with net
realized investment losses after taxes of $2.5 million, or $.27 per diluted
share, for the same period in 2002. The sale of equity securities and
write-downs from other than temporary declines in the fair value of securities
contributed to realized investment losses during the first nine months of 2002.
As described in more detail in the table below, gross premiums written,
net premiums written and net premiums earned for the nine months ended
September 30, 2003 each declined by 18% 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 11%, 6% and 40%, respectively, in the first nine months of 2003
over the same period of 2002. In addition, gross premiums written and net
premiums written from the Company's core segments decreased by 2% and 4%,
respectively, in the three months ended September 30, 2003 from the same
period of 2002. Howerver, net premiums earned from the Company's core
segments during the same period increased by 18% over the same period in
2002.
NYMAGIC Gross Premiums Written
by Segment Nine months ended September 30, Three months ended September 30,
- -------------------------- -------------------------------------------------------------------------
2003 2002 Change 2003 2002 Change
-------------------------------------------------------------------------
(Dollars in thousands)
Ocean marine ............. $68,792 $ 64,812 6% $20,084 $22,926 (12%)
Inland marine/fire........ 10,392 8,824 18% 3,204 3,806 (16%)
Other liability........... 15,795 11,941 32% 7,831 5,040 55%
-------------------------------------------------------------------------
Subtotal 94,979 85,577 11% 31,119 31,772 (2%)
Aircraft.................. 3,441 34,663 (90%) 732 6,514 (89%)
MMO London................ --- 157 (100%) --- (162) (100%)
-------------------------------------------------------------------------
Total..................... $98,420 $120,397 (18%) $31,851 $38,124 (16%)
=========================================================================
NYMAGIC Net Premiums Written
by Segment Nine months ended September 30, Three months ended September 30,
- -------------------------- -------------------------------------------------------------------------
2003 2002 Change 2003 2002 Change
-------------------------------------------------------------------------
(Dollars in thousands)
Ocean marine ............. $49,431 $52,203 (5%) $13,753 $18,773 (27%)
Inland marine/fire........ 2,971 1,751 70% 848 780 9%
Other liability........... 14,145 8,606 64% 6,827 2,732 150%
-------------------------------------------------------------------------
Subtotal 66,547 62,560 6% 21,428 22,285 (4%)
Aircraft.................. 2,612 21,824 (88%) 1,007 4,265 (76%)
MMO London................ --- 302 (100%) --- 189 (100%)
-------------------------------------------------------------------------
Total..................... $69,159 $84,686 (18%) $22,435 $26,739 (16%)
=========================================================================
-13-
NYMAGIC Net Premiums Earned
by Segment Nine months ended September 30, Three months ended September 30,
- -------------------------- -------------------------------------------------------------------------
2003 2002 Change 2003 2002 Change
-------------------------------------------------------------------------
(Dollars in thousands)
Ocean marine ............. $52,732 $42,748 23% $15,454 $15,590 (1%)
Inland marine/fire........ 2,942 1,521 93% 1,077 611 76%
Other liability........... 11,512 3,725 209% 3,837 1,079 256%
-------------------------------------------------------------------------
Subtotal 67,186 47,994 40% 20,368 17,280 18%
Aircraft.................. 2,761 32,837 (92%) 1,026 9,193 (89%)
MMO London ............... ---- 4,159 (100%) -- 1,273 (100%)
-------------------------------------------------------------------------
Total..................... $69,947 $84,990 (18%) $21,394 $27,746 (23%)
=========================================================================
Premiums for each segment are as follows:
o Ocean marine gross premiums written and net premiums earned grew by 6%
and 23%, respectively, during the first nine months of 2003 when
compared to the same period of the prior year. These increases primarily
reflect higher ocean marine rates with the largest rate increases
occurring in the marine liability and hull classes. Other marine classes
are currently experiencing a leveling of rates. Although additional
production was achieved in the marine liability class, decreases in
policy count occurred in the drill rig and hull classes.
Ocean marine gross premiums written and net premiums earned declined by
12% and 1%, respectively, for the three months ended September 30, 2003
when compared to the same period of the prior year. These decreases
reflect a reduced policy count in the drill rig and hull classes. This
reduction is due partly as a result of some one-time builder's risk
policies written in 2002, which were not renewed in 2003, and because we
did not renew certain hull policies that we did not consider to be
profitable underwriting risks. In addition we did not renew certain
cargo policies in order to reduce concentrations of risk.
The gross writings by class in the ocean marine segment are as follows:
Nine months ended September 30, Three months ended September 30,
-------------------------------------------------------------------------
2003 2002 Change 2003 2002 Change
-------------------------------------------------------------------------
(Dollars in thousands)
Ocean marine liability ... $31,679 $24,368 30% $11,007 $8,609 28%
Drill rig................. 12,916 17,068 (24%) 4,266 7,776 (45%)
Hull...................... 12,153 12,191 --% 2,663 3,427 (22%)
War....................... 4,517 4,890 (8%) 718 1,024 (30%)
Cargo..................... 4,339 4,585 (5%) 1,094 1,331 (18%)
Other marine.............. 3,188 1,710 86% 336 759 (56%)
------------------------------------------------------------------------
Total..................... $68,792 $64,812 6% $20,084 $22,926 (12%)
========================================================================
-14-
o Inland marine/fire gross premiums written and net premiums earned
increased by 18% and 93%, respectively, for the nine months ended
September 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.
Inland marine/fire gross premiums written decreased by 16% for the three
months ended September 30, 2003 when compared to the same period of last
year as a result of the Company's non-renewal of certain policies that it
did not consider profitable accounts. Inland marine/fire net premiums
earned increased by 76% for the three months ended September 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 that occurred earlier in the year, improved pricing and
higher net loss retention levels.
o Other liability gross premiums written and net premiums earned rose by
32% and 209%, respectively, for the nine months ended September 30,
2003 when compared to the same period of 2002 due to production
increases from new classes, 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.
Other liability gross premiums written and net premiums earned rose by
55% and 256%, respectively, for the three months ended September 30,
2003 when compared to the same period of 2002. During the third quarter
of 2003, the Company commenced underwriting a programmed book of
commercial automobile liability insurance, which contributed $1.3
million in gross premiums written in the third quarter of 2003. These
policies are focused on mid-sized trucking fleets in the New York
Metropolitan area.
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 because
the Company has not provided capacity (the ability to write premiums)
to any Lloyd's syndicate for the 2002 underwriting year and subsequent
years.
The Company's loss ratio (defined as net losses and loss adjustment
expenses incurred as a percentage of net premiums earned) was 59.6% for the
three months ended September 30, 2003 as compared to 61.9% for the same period
of 2002. For the nine months ended September 30, 2003, the loss ratio was
57.6% compared to 63.9% for the same period of 2002. 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 of business and the absence of any catastrophe losses.
During the first nine months of 2003, there were no significant changes
reported in the development of the prior year's net loss reserves. The
comparable period of 2002 was affected by net adverse development of $4.5
million resulting from reserves for uncollectible reinsurance.
Policy acquisition costs as a percentage of net premiums earned for the
three months ended September 30, 2003 were 17.6% as compared with 15.2% for the
same period of 2002. The same ratio was 19.2% for the nine months ended
September 30, 2003 as compared with 15.9% for the same period in 2002. Premiums
earned in the first nine 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.
-15-
General and administrative expenses decreased by 5% to $14.2 million
for the nine months ended September 30, 2003 from $15.0 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. Increases in expenses for 2003 were partly attributable to the
Company's new lease for its principal office space. Since June 30, 2003, we
have reallocated our investment porfolio, in accordance with our previously
announced policy, to decrease our reliance on short-term U.S. government-backed
securities and to increase our investments in other fixed income securities and
hedge funds.
Since June 30, 2003, we have reallocated our investment portfolio, in
accordance with our previously announced policy, to decrease our reliance on
short-term U.S. government-backed securities and to increase our investments
in other fixed income securities and hedge funds. Net investment income for
the three months ended September 30, 2003 increased by 152% to $9.8 million
from $3.9 million in the same period of the prior year. Net investment income
for the nine months ended September 30, 2003 increased by 30% to $15.3 million
from $11.8 million in the same period of the prior year. The increase in the
third quarter of 2003 reflects approximately $6.3 million derived from trading
portfolio activities. The increase in the first nine months of 2003 reflects
income derived from trading portfolio activities partially offset by a lower
investment yield on the investment portfolio in 2003 as a result of a larger
position held by the Company in short-term investments. Income derived from
limited partnership hedge fund investments approximated $4.9 million for the
nine months ended September 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
September 30, 2003, the Company's investments in limited partnership hedge
funds amounted to approximately $83.2 million.
Commission and other income increased to $1.8 million for the nine
months ended September 30, 2003 from $1.5 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 $554,000 for the three months ended
September 30, 2003 as compared to net realized investment losses of $1.1 million
for the same period of the prior year. Net realized investment gains were
$532,000 for the nine months ended September 30, 2003 as compared to net
realized investment losses of $3.9 million for the same period of 2002. The sale
of equity securities contributed to realized investment losses during the first
nine months of 2002. Write-downs from other than temporary declines in the fair
value of securities amounted to $0 and $1.5 million for the nine months ended
September 30, 2003 and 2002, respectively.
Total income taxes as a percentage of income before taxes increased to
34.8% during the first nine months of 2003 from 29.7% 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 $18.0 million as of
September 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 as a result of smaller investment balances held on behalf of its pool
members.
Reinsurance receivables on paid and unpaid losses, net decreased to
$1.7 million and $285.3 million, respectively, as of September 30, 2003 from
$19.4 million and $307.0 million, respectively, as of December 31, 2002 due
mainly to collections of reinsurance receivables on paid losses and the
commutation of certain receivables.
-16-
Receivables for securities sold were $52.0 million as of September 30,
2003 and resulted from the sales of fixed maturities not yet settled by
September 30, 2003.
Unpaid losses and loss adjustment expenses increased to $524.3
million at September 30, 2003 from $516.0 million at December 31, 2002. The
increase of $8.3 million was primarily attributable to increases in the ocean
marine and other liability lines as a result of increased writings.
Prepaid reinsurance premiums of $13.1 million and reserve for unearned
premiums of $51.3 million as of September 30, 2003 each recorded increases from
the prior year end balances primarily due to increases in both ceded and gross
writings in the ocean marine line of business.
Liquidity and Capital Resources
Cash, total investments and receivables for securities sold increased
by $75.7 million from $430.5 million at December 31, 2002 to $506.2 million at
September 30, 2003, which included $160.9 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 conjunction with implementing our
revised investment strategy, which was completed in the third quarter of 2003.
However, certain sales of other fixed maturities were made prior to September
30, 2003, which were invested on a short-term basis.
Cash flows used in operating activities were $95.9 million for the nine
months ended September 30, 2003 as compared to cash flows provided from
operating activities of $53.0 million for the same period in 2002. As the
Company has designated certain securities as part of its trading portfolio in
2003, any amounts purchased by the Company in its trading portfolio at
September 30, 2003 would be reflected as a use of cash flows from operating
activities. Accordingly, the cash flows in 2003 reflect uses of $115.9 million
for trading portfolio activities. In addition, cash flows in 2003 reflect
amounts received from reductions in both reinsurance and premium and other
receivables during the same period. Cash flows provided by investing
activities in 2003 were used to establish the Company's trading portfolio,
whose trading activities include CDOs and certain other fixed maturities. The
prior year's 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 outstanding loan balance 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 is 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 repurchased 98,816 shares of its common stock in 2003.
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. On September
-17-
17, 2003, the Company declared a dividend of six (6) cents per share to
shareholders of record on September 30, 2003, payable on October 7, 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 of the
Company, who are not officers of the Company. The exercise prices of these stock
options are 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, New York Marine requested and
received approval from the State of New York Insurance Department to pay an
extraordinary dividend of $5,000,000 to the Company.
Investments
The following table summarizes our investments at September 30, 2003
and December 31, 2002 at fair value:
September 30, 2003 December 31, 2002
--------------------------------------------
(Dollars in thousands, except percentages)
Amount Percent Amount Percent
Fixed maturities:
U. S. treasury securities $ 9,320 2.1% $ 9,414 2.2%
Collateralized debt obligations 118,809 26.4% --- ---
Municipalities 17,350 3.9% 21,066 4.9%
Corporate bonds 64,173 14.2% --- ---
---------------------------------------------
Total fixed maturities 209,652 46.6% 30,480 7.1%
Short-term investments 157,698 35.0% 355,804 82.8%
----------------------------------------------
Total fixed maturities and short-term investments 367,350 81.6% 386,284 89.9%
Limited partnership hedge funds 83,153 18.4% 38,477 9.0%
Industrial & misc. common stocks --- --- 4,729 1.1%
-----------------------------------------------
Total investment portfolio $450,503 100.0% $429,490 100.0%
======== ====== ======== ======
At September 30, 2003, 87.3% of the fair value of our fixed maturities
and short-term investment portfolio was in obligations rated "Baa3" or better
by Moody's or its equivalent Standard & Poor's rating.
Unpaid losses and loss adjustment expenses
Unpaid losses and loss adjustment expenses for each segment as of
September 30, 2003 were as follows:
Gross Net
----------------------
(in thousands)
Ocean marine $203,697 $106,694
Inland marine/fire 27,990 7,117
Other liability 83,311 52,785
Aircraft 209,308 72,450
- -----------------------------------------------------------
Total $524,306 $239,046
-18-
During 2001, the Company recorded losses of $154.9 million and $8.0
million on a gross and net of reinsurance basis, respectively, in its aircraft
line of business as a result of the terrorist attacks of September 11, 2001
(the "WTC attack"). Additional reinsurance costs were also incurred in 2001
and amounted to $5.0 million. The ultimate gross and net liability for unpaid
losses resulting from the WTC attack represent the estimated ultimate costs of
all incurred claims and claim adjustment expenses. Since the gross liability
and related reinsurance recoverables are based on estimates, the ultimate
liability may change from the amount provided currently, depending upon
revisions in gross loss estimates and the interpretation as to the number of
occurrences as defined in the aircraft ceded reinsurance treaties. Since 2001,
reinsurance recoverables related to the WTC attack have decreased and the net
liability has increased as a result of the commutation of certain reinsurance
recoverables.
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.
As the Company invests more in limited partnership hedge funds in 2003
(18.4% of total investments as of September 30, 2003 compared to 9.0% as of
December 31, 2002), 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. See Item
3. Quantitative and Qualitative Disclosures About Market Risk with respect to
market risks associated with investments in limited partnership hedge funds.
The Company also considers the accounting for its trading portfolio as
a critical accounting policy. The trading portfolio at September 30, 2003
consisted of CDOs, although other types of investments were included by the
Company within the trading portfolio during 2003. These investments are marked
to market with the change recognized in net investment income during the
current period. Any realized gains or losses resulting from the sales of such
securities are also recognized in net investment income. See Item 3.
Quantitative and Qualitative Disclosures About Market Risk with respect to
market risks associated with investments in CDOs.
Effective January 1, 2003, the Company adopted the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, ("SFAS 123"), prospectively to all employee awards granted,
modified, or settled after January 1, 2003. See footnote 4 to the Company's
September 30, 2003 Consolidated Financial Statements for a discussion on
adopting SFAS 123.
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
-19-
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. Each of the insurance company subsidiaries 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
investments 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 determining
the underlying characteristics of their hedge funds. 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 actual
values may differ from reported amounts. Furthermore, because the hedge funds in
which we invest sometimes impose limitations on the timing of withdrawals from
the hedge funds (most are within 90 days), 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 September 30, 2003, the Company invested approximately $46.7
million in fixed maturities that are below investment grade, 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 limits the concentration of
investment 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.
The Company invests in CDOs, which are either new issues or private
placements. The fair value of each security is provided by dealers and is
determined by pricing models that consider, among other assumptions, the
present value of the underlying CDO's cash flows. Alternative assumptions
about recovery rates, however, could lead to different cash flows, which could
materially effect valuation levels. The markets for these types of securities
can be illiquid and, therefore, the price obtained from dealers on these
securities is subject to change, depending upon the underlying market
conditions of these securities, including the potential for downgrades or
defaults on the underlying collateral of the security. The Company seeks to
mitigate market risk associated with such investments by maintaining a
diversified portfolio of such securities that limits the concentration of
investment in any one issuer. The excess of fair value over the cost of the
CDOs was recorded in net investment income and amounted to $3.5 million at
September 30, 2003. The largest single investment made by the Company in such
securities amounted to 6% of the total amount invested in CDO 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 the Company's 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.
-20-
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.
The Company previously entered into reinsurance contracts with a
reinsurer that is now in liquidation. On October 23, 2003, the Company was
served with a Notice to Defend and a Complaint by the Insurance Commissioner of
the Commonwealth of Pennsylvania, who is the liquidator of this reinsurer,
alleging that approximately $3 million in reinsurance claims paid to the
Company in 2000 and 2001 by the reinsurer are voidable preferences and are
therefore subject to recovery by the liquidator. The Company intends to answer
the complaint, denying that the payments are voidable preferences and asserting
affirmative defenses. No trial date has been set for this matter, but we
intend to defend ourselves vigorously in connection with this lawsuit.
The Company believes it has strong defenses against these claims; however,
there can be no assurance as to the outcome of this litigation.
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
On November 3, 2003, the Company's previously filed S-3 Registration
Statement under the Securities Act of 1933, pursuant to which it registered
4,950,000 shares on behalf of the selling shareholders named in the Registration
Statement, became effective.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Limited Partnership Agreement of Mariner Tiptree (CDO) Fund I, L.P.,
dated as of May 1, 2003
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
-21-
(b) Reports on Form 8-K
A current report on Form 8-K was filed on August 15, 2003, under Items
9 and 12, incorporating by reference the Company's press release setting forth
our second-quarter 2003 financial results.
A current report on Form 8-K was filed on September 22, 2003, under
Items 9 and 12, incorporating by reference the Company's press release
concerning the declaration of a dividend.
A current report on Form 8-K was filed on November 10, 2003, under
Items 9 and 12, incorporating by reference the Company's press release setting
forth our third-quarter 2003 financial results.
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 12, 2003 /s/ George R. Trumbull, III
----------------------- ----------------------------------
George R. Trumbull, III
Chairman and Chief Executive Officer
Date: November 12, 2003 /s/ Thomas J. Iacopelli
----------------------- ----------------------------------
Thomas J. Iacopelli
Chief Financial Officer
-22-