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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 1-11238.
NYMAGIC, INC.
(Exact name of registrant as specified in its charter)
New York 13-3534162
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
919 Third Avenue, New York, NY 10022
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 551-0600
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock, $1.00 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act ). Yes X No__
MARKET VALUE
------------
The aggregate market value of the outstanding common stock held by
non-affiliates of the registrant, as of June 30, 2003, the last business day of
the registrant's most recently completed second fiscal quarter, was
approximately $80,657,069, based on the closing price of the stock on the New
York Stock Exchange on that date.
OUTSTANDING STOCK
-----------------
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 1, 2004, was 9,724,748 shares of common stock, $1.00 par
value.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Part III incorporates information by reference from the registrant's definitive
proxy statement to be filed with the Commission within 120 days after the close
of the registrant's fiscal year.
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NYMAGIC, INC.
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PART I
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PAGE
Forward-looking Statements ii.
Item 1. Business 1
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
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PART II
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Item 5. Market for the Registrant's Common Equity and Related Stockholder 24
Matters
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial Condition and 26
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants on Accounting 39
and Financial Disclosure
Item 9A. Controls and Procedures 39
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PART III
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Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and Management 40
Item 13. Certain Relationships and Related Transactions 40
Item 14. Principal Accounting Fees and Services 40
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PART IV
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Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 41
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Signatures 46
Index to Consolidated Financial Statements F-1
i
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 2004 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, investment results, the
estimation of loss reserves and loss reserve development, uncertainties
associated with asbestos and environmental claims, including difficulties with
assessing latent injuries and the impact of litigation settlements, bankruptcies
and potential legislation, 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 and the timing of such collections, the
availability and cost of reinsurance, the ability to pay dividends, regulatory
changes, changes in the ratings assigned to the Company by rating agencies,
failure to retain key personnel, the possibility that our relationship with
Mariner Partners, Inc. could terminate or change, and the fact that ownership of
our common stock is concentrated among a few major stockholders and is subject
to the voting agreement, as well as assumptions underlying any of the foregoing
and are generally expressed with words such as "intends," "intend," "intended,"
"believes," "estimates," "expects," "anticipates," "plans," "projects,"
"forecasts," "goals," "could have," "may have" and similar expressions. These
risks could cause actual results for the 2004 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.
ii
Part I
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Item 1. Business
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General
NYMAGIC, INC., a New York corporation (the "Company" or "NYMAGIC"),
is a holding company which owns and operates the following insurance companies,
risk bearing entities and insurance underwriters and managers:
Insurance Companies and Lloyd's Corporate Capital Vehicle:
---------------------------------------------------------
New York Marine And General Insurance Company ("New York Marine")
Gotham Insurance Company ("Gotham")
MMO UK, Ltd. ("MMO UK")
MMO EU, Ltd. ("MMO EU")
Insurance Underwriters and Managers:
-----------------------------------
Mutual Marine Office, Inc. ("MMO")
Pacific Mutual Marine Office, Inc. ("PMMO")
Mutual Marine Office of the Midwest, Inc. ("Midwest")
New York Marine and Gotham each currently holds a financial strength
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. MMO UK, as a
corporate member of Lloyd's of London ("Lloyd's"), is not separately rated.
Lloyd's is currently rated A- ("Excellent"), which is the fourth highest rating
level in A.M. Best's classification system. Many of the Company's insureds rely
on ratings issued by rating agencies. Any adverse change in the rating assigned
to New York Marine and Gotham by a rating agency could adversely impact our
ability to write premiums. MMO UK has not provided capacity, which is the
ability to underwrite a certain amount of business, to any Lloyd's syndicate
since 2002.
The Company has specialized in underwriting ocean marine, inland
marine, aircraft and other liability insurance through insurance pools managed
by MMO, PMMO, and Midwest (collectively referred to as "MMO and affiliates")
since 1964. However, the Company has ceased writing any new policies covering
aircraft risks subsequent to March 31, 2002. The Company decided to exit the
commercial aviation insurance business because it is highly competitive, had
generated underwriting losses for most years during the 1990's, 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.
In addition to managing the insurance pools as discussed below, the
Company participates in the risks underwritten for the pools through New York
Marine and Gotham. All premiums, losses and expenses are pro-rated among pool
members in accordance with their pool participation percentages.
In 1997, the Company formed MMO EU as a holding company for MMO UK,
which operated as a limited liability corporate vehicle to provide capacity, or
the ability to underwrite a certain amount of business, for syndicates within
Lloyd's. Lloyd's consists of a number of syndicates whose purpose is to serve as
risk taking entities. Syndicates maintain a certain amount of capacity, which is
the ability to write premiums, depending upon the level of capital provided by
the syndicate's investors. This capacity is then allocated to investors in the
syndicate based upon their ratio of capital provided to the syndicate.
In 1997, the Company acquired ownership of a Lloyd's managing agency,
which was subsequently renamed MMO Underwriting Agency, Ltd, and commenced
underwriting in 1998 for the Company's wholly owned subsidiary MMO UK, which in
2000, provided 100%, or $29.8 million, of the capacity for Lloyd's Syndicate
1265, which primarily wrote marine insurance. In 2000, the Company sold MMO
Underwriting Agency Ltd. in exchange for a minority interest in Cathedral
Capital PLC, which manages Lloyd's Syndicate 2010, and Lloyd's Syndicate 1265
was placed into runoff. "Runoff" is a term used to refer to an insurer that has
ceased writing new insurance policies but that continues to exist for the
purpose of paying claims on policies that it has already written. In 2001, its
last active year of underwriting, MMO UK provided approximately 11.2%, or $13.6
million, of the capacity for Lloyd's Syndicate 2010 which primarily writes
assumed property and aviation insurance. In 2001, the Company initiated a
withdrawal from its London operations which was subsequently completed in 2002.
MMO EU, MMO UK, Lloyd's Syndicate 1265 and Lloyd's Syndicate 2010 are
collectively hereinafter referred to as "MMO London".
1
MMO UK has not provided capacity to any Lloyd's syndicate since 2002.
In February 2003, the Company sold its minority interest in Cathedral Capital
PLC for approximately $2.8 million. This sale had no material effect on the
Company's results of operations.
The Pools
MMO, located in New York, PMMO, located in San Francisco, and
Midwest, located in Chicago (the "Manager" or the "Managers"), manage the
insurance pools in which the Company participates.
The Managers accept, on behalf of the pools, insurance risks brought
to the pools by brokers and others. All premiums, losses and expenses are
pro-rated among the pool members in accordance with their percentage
participation in the pools. Originally, the members of the pools were insurance
companies that were not affiliated with the Managers. New York Marine and Gotham
joined the pools in 1972 and 1987, respectively. Subsequent to their initial
entry in the pools, New York Marine and Gotham steadily increased their
participation, while the unaffiliated insurance companies reduced their
participation or withdrew from the pools entirely. Since 1997, the only pool
members are New York Marine and Gotham, who together write 100% of the business
produced by the pools.
Assets and liabilities resulting from the insurance pools are
allocated to the members of the insurance pools based upon the pro rata
participation of each member in each pool which is set forth in the management
agreement entered into by and between the pool participants and the Managers.
Pursuant to the pool management agreements, the pool members have
agreed not to accept ocean marine insurance, other than ocean marine
reinsurance, in the United States, its territories and possessions and the
Dominion of Canada unless received through the Managers or written by the pool
member on its own behalf and have authorized the Managers to accept risks on
behalf of the pool members and to effect all transactions in connection with
such risks, including the issuance of policies and endorsements and the
adjustment of claims. As compensation for its services, the Managers receive a
fee of 5.5% of gross premiums written by the pools and a contingent commission
of 10% on net underwriting profits, subject to adjustment.
As part of its compensation, the Manager also receives profit
commissions on pool business ceded to reinsurers under various reinsurance
agreements. Profit commissions on business ceded to reinsurers are calculated on
an earned premium basis using inception to date underwriting results for the
various reinsurance treaties. Adjustments to commissions, resulting from
revisions in coverage, retroactive premium or audit adjustments, are recorded in
the period when realized and billed. Subject to review by the reinsurers, the
Managers calculate the profitability of all profit commission agreements placed
with various reinsurance companies.
Two former pool members, Utica Mutual Insurance Company ("Utica
Mutual") and Arkwright Mutual Insurance Company ("Arkwright"), which is
currently part of the FM Global Group, withdrew from the pools in 1994 and 1996,
respectively, and retained liability for their effective pool participation for
all loss reserves, including losses incurred but not reported ("IBNR") and
unearned premium reserves attributable to policies effective prior to their
withdrawal from the pools.
On May 28, 2003, an arbitration procedure was completed and Utica
Mutual was ordered to pay MMO approximately $7.8 million, which represented
Utica Mutual's funding requirement to the pools and had no impact on the
Company's results of operations. In addition, the Company was awarded interest
of approximately $1 million on a pre-tax basis, which was reflected in the 2003
results of operations as other income. Following the award, these amounts were
paid in full. This award confirmed that, as a pool member, Utica Mutual is
required to fund gross losses paid by MMO, acting as managing agent.
The Company is not aware of any facts that could result in any
possible defaults by either Arkwright or Utica Mutual with respect to their pool
obligations, which might impact liquidity or results of operations of the
Company, but there can be no assurance that such events will not occur.
2
Segments
The domestic insurance companies consist of New York Marine and
Gotham. New York Marine and Gotham underwrite insurance business by accepting
risks generally through insurance brokers. The domestic insurance companies
engage in business in all 50 states and also accept business risks in such
worldwide regions as Europe, Asia, and Latin America. See "Regulation". The
domestic insurance agencies consist of MMO, PMMO and Midwest. These agencies
underwrite all the business for the domestic insurance companies.
The Company considers the four lines of business underwritten by its
domestic insurance/agency companies plus business derived from MMO London as
appropriate segments to report its business operations. The Company's overall
performance is evaluated through its five main business segments.
The domestic insurance/agency companies underwrite in four different
segments: ocean marine, inland marine/fire, aircraft and non-marine liability
lines of insurance.
Ocean marine insurance is written on a direct and assumed reinsurance
basis and covers a broad range of classes as follows:
Hull and Machinery Insurance: Provides coverage for loss of or damage
to commercial watercraft.
Cargo Insurance: Provides coverage for loss of or damage to goods in
transit.
Hull and Machinery War Risk Insurance: Provides coverage for loss of
or damage to commercial vessels as a result of war, strikes, riots,
and civil commotions.
Cargo War Risk Insurance: Provides coverage for loss of or damage to
goods in transit as a result of war, which can be extended to include
strikes, riots and civil commotions.
Protection and Indemnity: Provides primary and excess coverage for
liabilities arising out of the operation of owned watercraft,
including liability to crew and cargo.
Charters' Legal Liability: Provides coverage for liabilities arising
out of the operation of leased or chartered watercraft.
Shoreline Marine Liability Exposures: Provides coverage for ship
builders, ship repairers, wharf owners, stevedores and terminal
operators for liabilities arising out of their operations.
Marine Contractor's Liability: Provides coverage for liabilities
arising out of onshore and offshore services provided to the marine
and energy industries.
Maritime Employers Liability (Jones Act): Provides coverage for
claims arising out of injuries to employees associated with maritime
trades who may fall under the Jones Act.
Marine Umbrella (Bumbershoot) Liability: Provides coverage in excess
of primary policy limits for marine insureds.
Onshore and Offshore Oil and Gas Exploration and Production
Exposures: Provides coverage for physical damage to drilling rigs and
platforms, associated liabilities and control of well exposures.
Energy Umbrella (Bumbershoot) Liability: Provides coverage in excess
of primary policy limits for exploration and production facilities.
In August 2003, the Company entered into an agreement with Southern
Marine & Aviation, Inc., an insurance agency, to write a primary marine cargo
program. The program managed by Southern Marine & Aviation will focus on the
underwriting of petroleum and bulk liquid accounts.
We also write inland marine/fire insurance, which traditionally
includes property while being transported, or property of a movable, or
"floating" nature. Inland marine, among other things, includes insurance for
motor truck cargo and transit shipments, equipment floaters and miscellaneous
property floaters. Inland marine also includes
3
excess & surplus lines property coverage on unique or hard to place commercial
property risks that do not fit into standard commercial lines coverages. Excess
and surplus lines property risks are written primarily through Gotham.
In addition, we write other or non-marine liability insurance on a
direct and assumed reinsurance basis and includes, among other things, coverage
for manufacturers and contractors risks, building owners and commercial stores,
products liability exposures, employment practices liability, surety, excess
workers compensation, miscellaneous errors and omissions/professional
liabilities including coverage to professional consultants, professional service
providers and testing labs and other casualty excess and surplus line risks
written primarily through Gotham. The Company also writes commercial automobile
liability insurance covering mid-sized trucking fleets in the New York area.
Aircraft insurance provides insurance primarily for commercial
aircrafts and includes hull and engine insurance, liability insurance as well as
products liability insurance. Coverage is written on a direct and assumed
reinsurance basis. The Company has ceased writing any new policies covering
aircraft insurance subsequent to March 31, 2002.
MMO London, the fifth business segment, consists of insurance
participation in Lloyd's. Lloyd's provides worldwide venues for MMO London to
underwrite insurance. MMO London has not provided capacity to any Lloyd's
syndicate since January 1, 2002. Business obtained by MMO London through
Syndicate 1265 included ocean marine insurance. Business obtained through
Syndicate 2010 included treaty reinsurance of property and aircraft insurance.
The following tables set forth the Company's gross and net written
premiums, after reinsurance ceded, including business from MMO London.
Gross Premiums Written by
Segment Year Ended December 31,
- ----------------- ---------------------------------------------------------------
2003 2002 2001
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(Dollars in thousands)
Ocean marine ................ $ 94,649 66% $ 89,301 59% $ 63,691 43%
Inland marine/Fire .......... 16,515 12% 13,311 9% 6,284 4%
Other liability ............. 28,468 20% 13,874 9% 5,551 4%
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Subtotal 139,632 98% 116,486 77% 75,526 51%
Aircraft .................... 3,565 2% 35,874 23% 50,485 34%
MMO London .................. -- -- 157 -- 21,632 15%
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Total ....................... $143,197 100% $152,517 100% $147,643 100%
===============================================================
Net Premiums Written by
Segment Year Ended December 31,
- ----------------- ---------------------------------------------------------------
2003 2002 2001
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(Dollars in thousands)
Ocean marine ................ $ 67,744 69% $70,839 67% $ 45,849 51%
Inland marine/Fire .......... 4,833 5% 2,975 3% 1,349 1%
Other liability ............. 22,961 23% 9,960 9% 4,684 5%
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Subtotal 95,538 97% 83,774 79% 51,882 57%
Aircraft .................... 2,769 3% 22,366 21% 26,556 30%
MMO London .................. -- -- 302 -- 11,254 13%
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Total ....................... $ 98,307 100% $106,442 100% $ 89,692 100%
===============================================================
Reinsurance Ceded
Ceded premiums written to reinsurers in 2003, 2002 and 2001 amounted
to $44.9 million, $46.1 million and $58.0 million, respectively.
A reinsurance transaction takes place when an insurance company
transfers (cedes) a portion or all of its liability on insurance written by it
to another insurer. The reinsurer assumes the liability in return for a portion
or all
4
of the premium. The ceding of reinsurance does not legally discharge the insurer
from its direct liability to the insured under the policies including, but not
limited to, payment of valid claims under the policies. The Company, through the
pools, cedes the greater part of its reinsurance through annual reinsurance
agreements (treaties) with other insurance companies. These treaties, which
cover entire lines or classes of insurance, allow the Company to automatically
reinsure risks without having to cede liability on a policy by policy
(facultative) basis, although facultative reinsurance is utilized on occasion.
Generally, the Managers place reinsurance with companies which
initially have an A.M. Best rating of A- (Excellent) or greater or which have
sufficient financial strength, in management's opinion, to warrant being used
for reinsurance protections. The Managers also examine financial statements of
reinsurers and review such statements for financial soundness and historical
experience. In addition, the Company, through the pools, withholds funds and may
obtain letters of credit under reinsurance treaties in order to collateralize
the obligations of reinsurers. The Company continues to monitor the financial
status of all reinsurers on a regular basis, as well as the timely receipt of
cash, to assess the ability of reinsurers to pay reinsurance claims.
The Company, through the pools, attempts to limit its exposure from
losses on any one occurrence through the use of various excess of loss, quota
share and facultative reinsurance arrangements and endeavors to minimize the
risk of default by any one reinsurer by reinsuring risks with many different
reinsurers. The Company utilizes many separate reinsurance treaties each year,
generally with a range of 5 to 15 reinsurers participating on each treaty. Many
reinsurers participate on multiple treaties. The Company utilizes quota share
reinsurance treaties in which the reinsurers participate on a set proportional
basis in both the premiums and losses. Additionally, the Company utilizes excess
of loss reinsurance treaties in which the reinsurers, in exchange for a minimum
premium, subject to upward adjustment based upon premium volume, agree to pay
for that part of each loss in excess of an agreed upon amount. The Company's
retention of exposure, net of these treaties, varies among its different classes
of business and from year to year, depending on several factors, including the
pricing environment on both the direct and ceded books of business and the
availability of reinsurance.
Until January 1, 2004, the Company generally obtained reinsurance for
each line of business to reduce our exposure to a maximum of $2 million for any
one risk or occurrence. From time to time, however, the Company has retained
liability in excess of $2 million for or any one insured or any one occurrence.
Such instances generally reflected a business decision regarding the cost and/or
the availability of reinsurance. During the past two years, there have been
three instances in which the Company's net loss retention has exceeded $2
million. For 2002, the Company's net retention per loss in the ocean marine line
was limited to $2 million per risk, but some losses could aggregate resulting in
a net retention of $3 million, and one such aggregation did result in a net
retention of $3 million to the Company. In August 2003, the Company entered into
a program in which it may underwrite cargo insurance with retained liability of
up to $2.5 million for any one insured or any one occurrence; however, the
Company has not experienced any losses on this program in excess of $2 million.
In the final year in which the Company wrote aviation insurance, April 1, 2001
to April 1, 2002, the Company wrote some policies with a net loss retention of
up to $3 million for any one aircraft or any one occurrence. However, the
Company did not experience any losses for which it was required to retain losses
in excess of $2 million. In 2004, the Company increased its exposure in the
ocean marine line to a net loss retention of up to $4 million for any one
occurrence and the Company endeavors to reinsure our other lines to reduce our
exposure to a maximum of $2 million on any one risk.
The Company attempts to limit its exposure from catastrophes through
the purchase of general excess of loss reinsurance, which provides coverage in
the event that multiple insureds incur losses arising from the same occurrence.
These coverages require the Company to pay a minimum premium, subject to upward
adjustment based upon premium volume. The treaties, which extend in general for
a twelve month period, obligate the reinsurers to pay for the portion of the
Company's aggregate losses (net of specific reinsurance) which fall within each
treaty's coverage. In the event of a loss, the Company may be obligated to pay
additional reinstatement premiums under its excess of loss reinsurance treaties,
to the extent that such treaties cover a portion of the loss and in an amount
not greater than the original premium paid under such treaties. The Company also
writes hull and cargo war risks. In the event there are losses from such
policies arising from one occurrence, the aggregation of such losses would be
covered under the Company's reinsurance program, which reduced the Company's
exposure to a loss of $2 million per occurrence in 2003. The Company increased
its aggregate exposure to a loss of $4 million per occurrence in 2004. Every
effort is made to purchase sufficient reinsurance coverage to protect the
Company against the cumulative impact of several losses arising from a single
occurrence, but there is no guarantee that such reinsurance coverage will prove
sufficient.
5
The Company reinsures risks with several domestic and foreign
reinsurers as well as syndicates of Lloyd's. The Company's largest unsecured
reinsurance receivables as of December 31, 2003 were from the following
reinsurers:
Reinsurer Amounts A.M. Best Rating
---------------------------------- ------------ ----------------
(in millions)
Lloyd's Syndicates $ 51.5 A- (Excellent)
Swiss Reinsurance America Corp. 10.8 A+ (Superior)
Lloyd's (Equitas) 9.7 NR-3 (Rating Procedure Inapplicable)
Hartford Fire Insurance Company 7.6 A+ (Superior)
FM Global (Arkwright) 6.5 A+ (Superior)
Folksamerica Reinsurance Company 5.9 A (Excellent)
Liberty Mutual Insurance Company 4.5 A (Excellent)
GE Reinsurance Corp. 3.8 A (Excellent)
Transatlantic Reinsurance Company 3.2 A++ (Superior)
Utica Mutual Insurance Company 3.0 A- (Excellent)
---
Total $106.5
The reinsurance contracts with the above listed companies are
generally entered into annually and provide coverage for claims occurring while
the relevant agreement was in effect, even if claims are made in later years.
The contracts with Arkwright and Utica Mutual were entered into with respect to
their participation in the MMO pools.
Lloyd's maintains a trust fund, which was established for the benefit
of all United States ceding companies. For the three most recent years for which
Lloyd's has reported results, 2000, 1999, and 1998, losses were reported for all
three years. Lloyd's is expected to report a profit for 2002 and a loss for
2001. Lloyd's receivables represent amounts due from 118 different Lloyd's
syndicates.
Equitas, a Lloyd's company established to settle claims for
underwriting years 1992 and prior, maintains policyholders' surplus at March 31,
2003 of approximately 527 million Pounds Sterling (US $830 million). However,
given the uncertainty surrounding the adequacy of surplus and sufficiency of
assets in Equitas to meet its ultimate obligations, there is a reasonable
possibility that the Company's collection efforts relating to reinsurance
receivables from Equitas may be adversely affected in the future.
At December 31, 2003, the Company's reinsurance receivables from
reinsurers other than those listed above were approximately $161 million,
including amounts recoverable for paid losses, case loss reserves, IBNR losses
and unearned premiums, and net of ceded balances payable. This amount is
recoverable collectively from approximately 570 reinsurers or syndicates, no
single one of whom was liable to the Company for an unsecured amount in excess
of approximately $3 million.
Approximately 90% of the Company's total reinsurance receivables as
of December 31, 2003 are fully collateralized by letters of credit and or funds
withheld, or reside with entities rated "A-" or higher, or are subject to
offsetting balances.
The only reinsurer that has received funds from the Company in the
past three years and failed to honor its obligations to us is Lloyd's, but we
subsequently recovered all paid loss balances currently due from Lloyd's through
an arbitration proceeding. However, some of the reinsurers to which we
previously ceded premiums are contesting coverage issues and their obligations
to reinsure claims we paid on liability policies written during the period 1978
to 1985. We are vigorously enforcing collection of these reinsurance receivables
through arbitration proceedings and/or commutation, but the unfavorable
resolution of these arbitration proceedings and commutation negotiations could
be material to our results of operations. The estimated amounts due from
financially impaired reinsurers are included in our reserves for doubtful
accounts on reinsurance receivables of $12.8 million and $13.3 million as of
December 31, 2003 and 2002, respectively.
Reserves
The applicable insurance laws under which the Company operates
require that reserves be maintained for the payment of losses and loss
adjustment expenses with respect to both reported and IBNR losses under its
insurance policies. IBNR losses are those losses, based upon historical
experience and other relevant data, that the Company estimates will be reported
or ultimately develop under policies issued by the Company.
6
Case loss reserves are determined by evaluating reported claims on the basis of
the type of loss involved, knowledge of the circumstances surrounding the claim
and the policy provisions relating to the type of loss. IBNR losses are
estimated on the basis of statistical information with respect to the probable
number and nature of losses, which have not yet been reported. The Company's
IBNR is based upon a review of its historical reported loss development
patterns. The establishment of reserves (and the increase in reserves) has the
effect of reducing income while the reduction of reserves increases income.
The loss settlement period for payment of insurance claims may be
many years, and during this period it often becomes necessary to adjust the
estimate of liability on a claim either upward or downward. The classes of
marine, aircraft and non-marine liability insurance written by the Company
include liability classes which historically have had longer periods of time
between occurrence of an insurable event, reporting of the claim to the Company
and final settlement. In such cases, the Company is forced to estimate reserves
with the possibility of making several adjustments to reserves during this time
period. Other classes of insurance, such as property and claims-made non-marine
liability classes, historically have had shorter periods of time between
occurrence of an insurable event, reporting of the claim to the Company and
final settlement. The reserves with respect to such classes are less likely to
be readjusted.
Prior to 1997, when the Company began to write 100% of the business
produced by the pools, the Company, from time to time, increased its
participation in the pools. The effect of each such increase was prospective in
nature and does not affect the loss reserves set forth herein for the years
prior to the effective date of any such change in participation percentage.
The Company is required to maintain reserves to cover our estimated
ultimate liability of losses and loss adjustment expenses for both reported and
unreported claims incurred. These reserves are what management estimates the
settlement and administration of claims will cost, based on our assumptions and
facts and circumstances known to the Company. Because of the uncertainties that
surround estimating loss reserves and loss adjustment expenses, the Company
cannot be certain that ultimate losses will not exceed these estimates of losses
and loss adjustment reserves. The low frequency and high severity of the risks
we insure make it difficult to assess the adequacy of our loss reserves. The
level of catastrophe losses has fluctuated in the past and may fluctuate in the
future. For example, after tax losses resulting from catastrophes in 2003, 2002
and 2001 amounted to $0, $2.0 million and $9.0 million, respectively. If our
reserves are insufficient to cover our actual losses and loss adjustment
expenses, we would have to augment our reserves and incur a charge to our
earnings. These charges could be material.
Unpaid losses and loss adjustment expenses for each segment on a
gross and net of reinsurance basis as of December 31, 2003 were as follows:
Gross Net
-------- ---
(in thousands)
Ocean marine $199,406 $109,035
Inland marine/fire 26,483 7,142
Other liability 96,555 55,741
Aircraft 196,486 70,393
------- ------
Total $518,930 $242,311
-------- --------
In 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 on
the World Trade Center, the Pentagon and the hijacked airliner that crashed in
Pennsylvania (collectively, the "WTC attack"). Additional reinsurance costs were
also incurred on the WTC attack 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.
7
Asbestos and Environmental Reserves
Our insurance subsidiaries are required to record an adequate level
of reserves necessary to provide for all known and unknown losses on insurance
business written. Our insurance subsidiaries have not had difficulties in
maintaining reserves in recent years at aggregate levels which management
believes to be adequate based on management's best estimates, but the loss
reserving process is subject to many uncertainties as further described herein.
The difficulty in estimating our reserves is increased because the
Company's loss reserves include reserves for potential asbestos and
environmental liabilities. Asbestos and environmental liabilities are difficult
to estimate for many reasons, including the long waiting periods between
exposure and manifestation of any bodily injury or property damage, difficulty
in identifying the source of the asbestos or environmental contamination, long
reporting delays and difficulty in properly allocating liability for the
asbestos or environmental damage. Legal tactics and judicial and legislative
developments affecting the scope of insurers' liability, which can be difficult
to predict, also contribute to uncertainties in estimating reserves for asbestos
and environmental liabilities.
The Company participated in the issuance of both umbrella casualty
insurance for various Fortune 1000 companies and ocean marine liability
insurance for various oil companies during the period from 1978 to 1985.
Depending on the calendar year, the insurance pools' net retained liability per
occurrence after applicable reinsurance ranged from $250,000 to $2,000,000. The
Company's effective pool participation on such risks varied from 11% in 1978 to
59% in 1985. Ocean marine and non-marine policies issued during the past three
years also provide some coverage for environmental risks.
At December 31, 2003 and 2002, the Company's gross, ceded and net
loss and loss adjustment expense reserves for all asbestos/environmental
policies amounted to $77.3 million, $65.5 million and $11.8 million, and $67.7
million, $55.0 million and $12.7 million, respectively. The increase in gross
reserves during 2003 is attributable to case reserves on a few policies.
The Company believes that the uncertainty surrounding
asbestos/environmental exposures, including issues as to insureds' liabilities,
ascertainment of loss date, definitions of occurrence, scope of coverage, policy
limits and application and interpretation of policy terms, including exclusions
renders it difficult to determine the ultimate loss for asbestos/environmental
related claims. Given the uncertainty in this area, losses from
asbestos/environmental related claims may develop adversely and, accordingly,
management is unable to estimate the range of possible loss that could arise
from asbestos/environmental related claims. However, the Company's net unpaid
loss and loss adjustment expense reserves in the aggregate, as of December 31,
2003, represent management's best estimate.
The following table sets forth the Company's net loss and loss
adjustment expense experience for asbestos/environmental policies for each of
the past three years:
Year ended December 31,
-----------------------
2003 2002 2001
---------------------------------
(In thousands)
Asbestos/Environmental
- ----------------------
Net unpaid losses and loss adjustment expenses
(including IBNR) at beginning of period $12,696 $11,492 $12,357
Net incurred losses and loss adjustment expenses 753 2,195 567
Net paid loss settlements (1,501) (880) (996)
Net loss adjustment expense payments
(cost of administering claims) (151) (111) (436)
----------------------------------
Net unpaid losses and loss adjustment expenses
(including IBNR) at end of period $11,797 $12,696 $11,492
==================================
8
The following table sets forth a reconciliation of the number of
claims relating to asbestos/environmental policies for each of the past three
years:
Year ended December 31,
-----------------------
2003 2002 2001
-------------------------------
Number of claims pending at beginning of period 490 409 418
Number of claims reported 54 186 95
Number of claims settled/dismissed or otherwise resolved (91) (105) (104)
--------------------------------
Number of claims pending at end of period 453 490 409
================================
Claims reported involve a large number of relatively small individual
claims of a similar type. Additional asbestos claims continue to be reported to
the Company, including claims brought by individuals who do not appear to be
impaired by asbestos exposure. There is also an increasing trend in the number
of companies seeking bankruptcy protection as a result of asbestos-related
liabilities. These bankruptcy proceedings may impact the Company by
significantly accelerating and increasing loss payments made by the Company. As
a result of these trends, there is a high degree of uncertainty with respect to
future exposure from asbestos claims.
Other Reserves
The insurance pools have written coverage for products liability as
part of other liability insurance policies issued since 1985. The insurance
pools' maximum loss per risk is generally limited to $1,000,000 and the
Company's participation percentage ranges from 59% to 100% based upon policy
year. The Company believes that its reserves with respect to such policies are
adequate to cover the ultimate resolution of all such products liability claims.
The following table shows changes in the Company's reserves in
subsequent years from prior years' reserves. Each year the Company's estimated
reserves increase or decrease as more information becomes known about the
frequency and severity of losses for past years. As indicated in the chart, a
"redundancy" means the original estimate of the Company's consolidated liability
was higher than the current estimate, while a "deficiency" means that the
original estimate was lower than the current estimate.
The first line of the table presents, for each of the last ten years,
the estimated liability for net unpaid losses and loss adjustment expenses at
the end of the year, including IBNR losses. The estimated liability for net
unpaid losses and loss adjustment expenses is determined at the end of each
calendar year. Below this first line, the first section of the table shows, by
year, the cumulative amounts of net loss and loss adjustment expenses paid as of
the end of each succeeding year, expressed as a percentage of the original
estimated net liability for such amounts.
The second section sets forth the re-estimates in later years of net
incurred losses, including net payments, as a percentage of the original
estimated net liability for net unpaid losses and loss adjustment expenses for
the years indicated. Percentages less than 100% represent a redundancy, while
percentages greater than 100% represent a deficiency. The net cumulative
redundancy (deficiency) represents, as of December 31, 2003, the aggregate
change in the estimates over all prior years. The changes in re-estimates have
been reflected in results from operations over the periods shown.
The third section sets forth the cumulative redundancy (deficiency)
of unpaid losses and loss adjustment expenses on a gross basis, which represents
the aggregate change in the estimates of such losses over all prior years
starting with the 1993 calendar year.
The Company calculates its loss reserves on the basis of management's
best estimate. In 8 out of the past 10 years, the Company has recorded
redundancies in its net loss reserve position. The Company's considered view, in
light of this history, is that management is highly sensitive to the nuances of
the Company's lines of business and that establishing net loss reserves based
upon management's best estimate is a more reliable method of calculating net
loss reserves than providing a range of net loss reserves and gives the Company
greater assurance that its net loss reserves are appropriate. In addition, the
Company believes that its history of establishing adequate net loss reserves
compares favorably with industry experience.
9
The Company considers a variety of factors in its estimate of loss
reserves. These elements include, but are not necessarily limited to, the level
of catastrophe losses incurred during the period, the length of the reporting
tail (i.e. occurrence versus claims made coverage), the nature of the risk
insured (i.e. property versus liability), the level of net retention per loss
and the emergence of identifiable trends in the statistical analysis of paid and
incurred loss data. Case loss reserves are determined by evaluating reported
claims on the basis of the type of loss involved, knowledge of the circumstances
surrounding the claim and the policy provisions relating to the type of loss.
IBNR losses are estimated on the basis of statistical information with respect
to the probable number and nature of losses which have not yet been reported to
the Company. The Company utilizes many different types of actuarial methods in
calculating IBNR. This includes an evaluation of IBNR by the use of historical
paid loss and incurred data utilizing the Bornheutter-Ferguson method.
Year Ended December 31,
----------------------------------------------------------------------------------------------------------------
Year Ended 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
December 31 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Estimated Liability for Net Unpaid Losses and Loss Adjustment Expenses
208,366 212,377 229,916 227,370 222,335 213,589 196,865 199,685 210,953 208,979 242,311
Cumulative Amount of Net Losses and Loss Adjustment Expenses Paid as a Percentage of Original Estimate:
1 Year Later 22% 20% 20% 17% 19% 20% 24% 28% 30% 8%
2 Years Later 37% 34% 32% 30% 32% 35% 39% 56% 30%
3 Years Later 49% 44% 42% 42% 43% 43% 53% 64%
4 Years Later 57% 53% 51% 51% 49% 51% 58%
5 Years Later 64% 62% 58% 56% 54% 55%
6 Years Later 71% 68% 62% 58% 57%
7 Years Later 76% 72% 64% 61%
8 Years Later 77% 73% 66%
9 Years Later 78% 75%
10 Years Later 80%
Net Liability Re-estimated including Cumulative Net Paid Losses and Loss Adjustment Expenses as a percentage of Original Estimate:
1 Year Later 99% 97% 94% 90% 91% 94% 96% 105% 102% 99%
2 Years Later 96% 95% 87% 87% 87% 87% 94% 108% 101%
3 Years Later 95% 91% 86% 85% 83% 84% 95% 104%
4 Years Later 93% 91% 86% 83% 81% 85% 91%
5 Years Later 94% 92% 85% 82% 81% 82%
6 Years Later 95% 93% 84% 82% 80%
7 Years Later 95% 92% 84% 80%
8 Years Later 94% 92% 83%
9 Years Later 95% 91%
10 Years Later 94%
Cumulative 11,822 18,660 38,968 44,579 45,324 38,859 17,066 (8,850) (2,111) 1,410
Redundancy/(Deficiency)
Gross Unpaid 407,321 435,072 417,795 411,837 388,402 401,584 425,469 411,267 534,189 516,002 518,930
Losses and Loss Adjustment Expenses
Reinsurance 198,955 222,695 187,879 184,467 166,067 187,995 228,604 211,582 323,236 307,023 276,619
Recoverable on Unpaid Losses and Loss Adjustment Expenses
Reserve 411,366 445,758 419,901 385,006 403,816 433,241 449,567 458,366 576,835 519,449
Re-estimated Gross
Reserve 214,822 252,040 228,953 202,215 226,805 258,511 269,767 249,831 363,771 311,879
Re-estimated Reinsurance Recoverable
Gross Cumulative (4,045) (10,686) (2,106) 26,831 (15,414) (31,657) (24,098) (47,099) (42,646) (3,447)
Redundancy (Deficiency)
The net loss reserve deficiency reported for the 2001 and 2000
calendar years reflects adverse development from the Company's operations in MMO
London due to higher than expected claim frequencies and the emergence of longer
than expected loss development patterns. Also contributing to each year's
increase were provisions made for insolvent or financially impaired reinsurers
and adverse development from the Company's other liability line reflecting
umbrella exposures. Both of the 2001 and 2000 reported deficiencies were
partially offset by favorable development in the ocean marine line of business.
10
Gross loss reserve deficiencies were reported in most years. Even
though gross deficiencies were reported in those years, the Company reported
redundancies in net loss reserves in most of those years. Much of the gross loss
reserve deficiencies were brought about by adverse development from MMO London
and adverse gross loss development in its umbrella (other liability) losses as a
result of the additional development of asbestos losses. Asbestos and
environmental liabilities are difficult to estimate for many reasons, including
the long waiting periods between exposure and manifestation of any bodily injury
or property damage, difficulty in identifying the source of the asbestos or
environmental contamination, long reporting delays and difficulty in properly
allocating liability developments, which can be difficult to predict, also
contribute to uncertainties in estimating reserves for asbestos and
environmental liabilities. However, much of this gross loss reserve deficiency
in the other liability line resulted in smaller net deficiencies due to a
substantial amount of the gross loss reserve being reinsured. The smaller net
deficiencies were more than offset by redundancies in the Company's ocean marine
line. In addition, a few large severity losses in the Company's core lines also
contributed to adverse gross loss development. Much of these losses were also
reinsured resulting in an insignificant impact on net development.
The following table provides a reconciliation of the Company's
consolidated liability for losses and loss adjustment expenses at the beginning
and end of 2003, 2002 and 2001:
Year ended December 31,
------------------------------------
2003 2002 2001
---------------------------------
(In thousands)
Net liability for losses and loss adjustment
expenses at beginning of year ................ $ 208,979 $ 210,953 $ 199,685
--------- --------- ---------
Provision for losses and loss adjustment
expenses occurring in current year ........... 57,125 68,952 78,221
Increase (decrease) in estimated losses and loss
adjustment expenses for claims occurring
in prior years (1) ........................... (1,410) 4,389 9,604
Deferred income-loss portfolio
assumption(2) ................................ -- 15 76
--------- --------- ---------
Net loss and loss adjustment expenses
incurred ..................................... 55,715 73,356 87,901
------ ------ ------
Less:
Losses and loss adjustment expense payments
for claims occurring during:
Current year ............................. 5,241 11,950 20,354
Prior years .............................. 17,142 63,365 56,203
------ ------ ------
22,383 75,315 76,557
Add:
Deferred income-loss portfolio assumption(2) ... -- (15) (76)
--------- --------- ---------
Net liability for losses and loss adjustment
expenses at year end ......................... 242,311 208,979 210,953
--------- --------- ---------
Ceded unpaid losses and loss adjustment
expenses at year end ......................... 276,619 307,023 323,236
--------- --------- ---------
Gross unpaid losses and loss adjustment
expenses at year end ......................... $ 518,930 $ 516,002 $ 534,189
========= ========= =========
(1) The adjustment to the consolidated liability for losses and loss adjustment expenses
for losses occurring in prior years reflects the net effect of the resolution of losses for
other than full reserve value and subsequent readjustments of loss values. The decrease in 2003
of $1.4 million reflects favorable loss development arising from the ocean marine line of
business, partially offset by adverse development in the aviation line for accident years
1997-2000. The increase in 2002 of $4.4 million reflects provisions made for insolvent,
financially impaired and commuted reinsurers, and adverse development from the Company's other
liability line reflecting umbrella exposures. The 2001 year reflects $9.6 million of adverse
development from the Company's operations in MMO London due to higher than expected claim
frequencies and the emergence of longer than expected loss development patterns. Also
contributing to the 2001 increase were provisions made for insolvent or financially impaired
reinsurers. Both of the 2002 and 2001 amounts were partially offset by favorable development in
the ocean marine line of business.
(2) Deferred income-loss portfolio assumption represents the difference between cash
received and unpaid loss reserves assumed as a result of the Company's assumption of net pool
obligations from two former pool members, which was initially capitalized and is being amortized
over the payout period of the related losses.
The principal differences between the consolidated liability for
unpaid losses and loss adjustment expenses as reported in the Annual Statement
filed with state insurance departments in accordance with statutory accounting
principles and the liability based on generally accepted accounting principles
shown in the above tables are due to the Company's assumption of loss reserves
arising from former participants in the MMO insurance pools, the Company's
reserves for MMO London and reserves for uncollectible reinsurance. The loss
reserves shown in the above tables reflect in each year salvage and subrogation
accruals of approximately 1% to 6%. The estimated accrual for salvage and
subrogation is based on the line of business and historical salvage and
subrogation recovery data. Under neither statutory nor generally accepted
accounting principles are loss and loss adjustment expense reserves discounted
to present value.
The following table sets forth the reconciliation of the consolidated
net liability for losses and loss adjustment expenses based on statutory
accounting principles for the domestic insurance companies to the consolidated
amounts based on accounting principles generally accepted in the United States
of America ("GAAP") as of December 31, 2003, 2002 and 2001:
11
Year ended December 31,
----------------------
2003 2002 2001
------------------------------
(In thousands)
Net liability for losses and loss adjustment expenses
reported based on statutory accounting principles .......... $228,760 $195,948 $156,203
Liability for losses and loss adjustment expenses assumed
from two former pool members ............................... 4,371 4,826 5,360
(excludes $3,117, $3,351 and $2,402 at December 31, 2003,
2002 and 2001, accounted for in the statutory liability for
losses and loss adjustment expenses)
MMO London ................................................... -- -- 36,823
Other, net ................................................... 9,180 8,205 12,567
----- ----- ------
Net liability for losses and loss adjustment expenses reported
based on GAAP .............................................. 242,311 208,979 210,953
Ceded liability for unpaid losses and loss adjustment expenses 276,619 307,023 323,236
-------- -------- --------
Gross liability for unpaid losses and loss adjustment expenses $518,930 $516,002 $534,189
======== ======== ========
Regulation
The Company's domestic insurance companies are regulated by the
insurance regulatory agencies of the states in which they are authorized to do
business. New York Marine is licensed to engage in the insurance business in all
states.
Gotham is permitted to write excess and surplus lines insurance on a
non-admitted basis in all of the states except Arkansas, Massachusetts, Nevada,
New Hampshire and Vermont. Gotham is licensed to engage in the insurance
business in the state of New York and, as such, cannot write excess and surplus
business in that state.
Many aspects of the Company's insurance business are subject to
regulation. For example, minimum capitalization must be maintained; certain
forms of policies must be approved before they may be offered; reserves must be
established in relation to the amounts of premiums earned and losses incurred;
and, in some cases, schedules of premium rates must be approved. In addition,
state legislatures and state insurance regulators continually re-examine
existing laws and regulations and may impose changes that materially adversely
affect the Company's business.
The domestic insurance company subsidiaries also file statutory
financial statements with each state in the format specified by the NAIC. The
NAIC provides accounting guidelines for companies to file statutory financial
statements and provides minimum solvency standards for all companies in the form
of risk-based capital requirements. The policyholders' surplus (the statutory
equivalent of net worth) of each of the domestic insurance companies is above
the minimum amount required by the NAIC.
The NAIC's project to codify statutory accounting principles was
approved by the NAIC in 1998. The purpose of codification was to provide a
comprehensive basis of accounting for reporting to state insurance departments.
The approval of codified accounting rules included a provision for the state
insurance commissioners to modify such accounting rules by practices prescribed
or permitted for insurers in their state. The domestic insurance companies are
domiciled in the State of New York, however, there were no differences in 2003
or in 2002 between prescribed accounting practices and those approved by the
NAIC. Codification became effective on January 1, 2001 and did not have a
material impact on the domestic insurance companies' policyholders' surplus.
New York Marine and Gotham are subject to examination by the
Insurance Department of the State of New York. The insurance companies' most
recent examination was for the year ended December 31, 2000. There were no
significant adjustments which resulted from that examination.
MMO London operated in a highly regulated environment within the
overall Lloyd's market. Lloyd's maintains regulatory departments that review the
management and operation of all agencies and syndicates to ensure that business
is conducted in accordance with Lloyd's standards. Syndicates are required to
maintain trust funds for insurance transactions, with strict guidelines on
withdrawals from such funds. Annual solvency tests are conducted to ensure that
syndicates maintain minimum capital requirements in accordance with ratios
prescribed by Lloyd's.
12
The following table shows, for the periods indicated, the Company's
consolidated domestic insurance companies' statutory ratios of net premiums
written (gross premiums less premiums ceded) to policyholders' surplus:
Year Ended December 31,
--------------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------------------------------------------------------------------------
(Dollars in thousands)
Net premiums written...... $ 98,307 $106,140 $ 78,438 $ 61,584 $ 38,741
Policyholders' surplus.... 186,325 180,394 152,061 184,688 200,899
-------- -------- -------- -------- --------
Ratio .................... .53 to 1 .59 to 1 .52 to 1 .33 to 1 .19 to 1
While there are no statutory requirements applicable to the Company, which
establish permissible premium to surplus ratios, guidelines established by the
NAIC provide that the statutory net premiums written to surplus ratio should be
no greater than 3 to 1. The Company is well within those guidelines.
NYMAGIC's principal source of income is dividends from its
subsidiaries, which are used for payment of operating expenses, including
interest expense, loan repayments and payment of dividends to NYMAGIC's
shareholders. The maximum amount of dividends that may be paid to NYMAGIC by the
domestic insurance company subsidiaries is limited to the lesser of 10% of
policyholders' surplus or 100% of adjusted net investment income, as defined
under New York Insurance Law. Within this limitation, the maximum amount which
could be paid to the Company out of the domestic insurance companies' surplus
was approximately $15,900,000 as of December 31, 2003.
The Company's subsidiaries have paid dividends to the Company of $9.6
million, $13.1 million and $12.5 million for the years ended December 31, 2003,
2002 and 2001, respectively. During the first quarter of 2004, New York Marine
requested and received approval from the State of New York Insurance Department
to pay an extraordinary dividend of $15,000,000 to the Company.
Each of New York Marine and Gotham is required to invest an amount
equal to the greater of its minimum capital or its minimum policyholder surplus
in obligations of the United States, obligations of the State of New York or its
political subdivisions, obligations of other states and obligations secured by
first mortgage loans. Sixty percent of that amount is required to be invested in
obligations of the United States or obligations of the State of New York or its
political subdivisions. In addition, each of New York Marine and Gotham is
required to invest an amount equal to 50% of the aggregate amount of its
unearned premium, loss and loss adjustment expense reserves in the following
categories: cash, government obligations, obligations of U.S. institutions,
preferred or guaranteed shares of U.S. institutions, loans secured by real
property, real property, certain permitted foreign investments and development
bank obligations. Investments in the foregoing categories are also subject to
detailed quantitative and qualitative limitations applicable to individual
categories and to an overall limitation that no more than 10% of each insurance
company's assets may be invested in any one institution. After each of New York
Marine and Gotham invests an amount equal to 50% of its unearned premium, loss
and loss adjustment reserves in the foregoing investments, each of New York
Marine and Gotham may invest in equity and partnership interests, securities
issued by registered investment companies and other otherwise impermissible
investments, subject to applicable laws and regulatory requirements.
Several states have established guaranty funds which serve to provide
the assured with payments due under policies issued by insurance companies that
have become insolvent. Insurance companies that are authorized to write in
states are assessed a fee, normally based on direct writings in a particular
state, to cover any payments made or to be made by guaranty funds. New York
Marine and Gotham are subject to such assessments in the various states. The
amounts paid for such assessments were approximately $121,000, $98,000, and
$48,000 for the years ended 2003, 2002, and 2001, respectively.
The Terrorism Risk Insurance Act of 2002 ("TRIA") became effective on
November 26, 2002. TRIA applies to all licensed and surplus lines insurers doing
business in the United States, including Lloyd's and foreign insurers, who are
writing commercial property or casualty insurance. Under TRIA, the federal
government will provide the insurance industry with assistance in the event
there is a loss from certain acts of terrorism. The program terminates on
December 31, 2005. Each insurer has an insurer deductible under TRIA, which is
based upon the prior year's direct commercial earned premiums. For 2003, that
deductible was 7% of direct commercial earned premiums in 2002. The insurer
deductible percentage is 10% in 2004 and 15% in 2005. For losses exceeding the
insurer deductible, the federal government will reimburse the insurer for 90% of
insured losses, while the insurer retains 10%. The Company's insurer deductible
under TRIA would have been approximately $8 million in 2003, and would be $11
million in 2004.
13
The TRIA will assist the Company to mitigate our exposure in the
event of loss from an act of terrorism. In addition, part of the insurer
deductible might be satisfied by recoveries under the Company's existing
reinsurance program, and the Company has purchased additional reinsurance to
further minimize its loss from an act of terrorism. Effective January 1, 2004
the Company has obtained reinsurance protection for a one year period covering a
limit of $8,000,000 in excess of the first $2,500,000 retained losses to the
Company arising from terrorist acts.
Investment Policy
The Company follows an investment policy, which is reviewed quarterly
and revised periodically by management and is approved by the Finance Committee
of the Board of Directors. The investments of the Company's subsidiaries conform
to the requirements of the New York State Insurance Law and Regulations as well
as the National Association of Insurance Commissioners (the "NAIC"). The Company
recognizes that an important component of its financial results is the return on
invested assets. As such, management will establish the appropriate mix of
traditional fixed income securities and other investments (including equity and
equity-type investments; e.g. hedge funds) to maximize rates of return while
minimizing undue reliance on low quality securities. Overall investment
objectives are to (i) seek competitive after-tax income and total return as
appropriate, (ii) maintain, in aggregate, medium to high investment grade fixed
income asset quality, (iii) ensure adequate liquidity and marketability to
accommodate operating needs, (iv) maintain fixed income maturity distribution
commensurate with the Company's business objectives and (v) provide portfolio
flexibility for changing business and investment climates. The Company's
investment strategy incorporates guidelines (listed below) for asset quality
standards, asset allocations among investment types and issuers, and other
relevant criteria for the investment portfolio. In addition, invested asset cash
flows, from both current income and investment maturities, are structured after
considering the amount and timing of projected liabilities for losses and loss
adjustment expenses under New York Marine and Gotham's insurance policies using
actuarial models.
The investment policy for New York Marine as of December 31, 2003 was
as follows:
1. Liquidity Portfolio: At least $20,000,000 will be maintained in
liquid funds. Investments in the liquidity portfolio shall be limited
to cash, direct obligations of the U.S. Government, repurchase
agreements, obligations of government instrumentalities, obligations
of government sponsored agencies, certificates of deposit, prime
bankers acceptances, prime commercial paper, corporate obligations
and tax-exempt obligations rated Aa3/AA- or MIG2 or better by
Standard & Poor's ("S&P") or Moody's. No investment in the liquidity
portfolio will exceed one year's duration from the time of purchase.
No investment in the liquidity portfolio will exceed 5% of
policyholders' surplus at the time of purchase as last reported to
the New York State Insurance Department except for direct obligations
of the U.S. Government or its instrumentalities or repurchase
agreements collateralized by direct obligations of the U.S.
Government or its instrumentalities in which case there will be no
limit.
2. Fixed Income Portfolio: Obligations of the U.S. Government, its
instrumentalities, and government sponsored agencies will not be
restricted as to amount or maturity. At least 75% of the corporate
and tax-exempt investments in the fixed income portfolio will be
restricted to those obligations rated, at a minimum, Baa3 by Moody's
or BBB- by S&P. For purposes of this calculation, the liquidity
portfolio also will be included. Concentration will not exceed 5% of
policyholder's surplus at the time of purchase as last reported to
the New York State Insurance Department. For those securities with
fixed interest rates, maturities will not exceed 30 years from date
of purchase. At least 75% of the investments in asset backed
securities shall similarly be rated, at a minimum, Baa3 by Moody's or
BBB- by S&P. Individual issues will be restricted to 5% of
policyholder's surplus at the time of purchase as last reported to
the New York State Insurance Department. For those securities with
fixed interest rates, maturities will not exceed 30 years from date
of purchase. At least 75% of preferred stock investments with sinking
funds will, at a minimum, be rated Baa3 by Moody's or BBB- by S&P.
Individual issues will be limited to 5% of policyholder's surplus.
3. Equity and Equity-Type Securities (Hedge Funds): Investments in this
category (including convertible securities) will not exceed in
aggregate 50% of policyholders' surplus or 30% of total investments
whichever is greater. Equity investments in any one issuer will not
exceed 5% of policyholders' surplus at the time of purchase as last
reported to the New York State Insurance Department. Investments in
any individual hedge fund will not exceed 5% of policyholders'
surplus. For the purposes of this 5% limitation, in the event that an
individual hedge fund is comprised of a pool (basket) of separate and
distinct hedge funds, then this 5% limitation will apply to the
individual funds within the pool (or basket).
14
Subsidiaries
------------
New York Marine's investments in subsidiary companies are excluded
from the requirements of New York Marine's investment policy.
The investment policy of Gotham is identical to that of New York
Marine, except that at least $5,000,000 will be maintained in the liquidity
portfolio.
The following sets forth the allocation of our investment portfolio
as of the dates indicated:
December 31, 2003 Percent December 31, 2002 Percent
----------------- ------- ----------------- -------
Fixed Maturities Available for Sale:
- ------------------------------------
U.S. Treasury Securities $ 9,184,916 1.77% $ 9,413,908 2.19%
Municipalities 17,352,350 3.35% 21,066,341 4.91%
Corporate Bonds 66,933,425 12.93% --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal $ 93,470,691 18.05% $ 30,480,249 7.10%
Trading Securities:
- ------------------
Collateralized Debt Obligations 61,736,951 11.93% --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities and Trading Portfolio $ 155,207,642 29.98% $ 30,480,249 7.10%
Short-term Investments 257,059,675 49.65% 355,803,960 82.84%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities and Short-term Investments $ 412,267,317 79.63% 386,284,209 89.94%
Limited Partnership Hedge Funds 105,434,419 20.37% 38,477,219 8.96%
Industrial & Misc. Common Stocks --- --- 4,728,485 1.10%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio $ 517,701,736 100.00% $ 429,489,913 100.00%
Relationship with Mariner Partners, Inc.
The Company's investments are monitored by management and the Finance
Committee of the Board of Directors. The Company entered into an investment
management agreement with Mariner Partners, Inc. ("Mariner") effective October
1, 2002 that was amended and restated on December 6, 2002. As described in more
detail under "Mariner Investment Management Agreement", under the terms of the
agreement, Mariner manages the Company's domestic insurance subsidiaries'
investment portfolios. Fees to be paid to Mariner are based on a percentage of
the investment portfolio as follows: .20% of liquid assets, .30% of fixed
maturity investments and 1.25% of hedge fund (limited partnership) investments.
William J. Michaelcheck, a Director of the Company, is Chairman, Chief Executive
Officer and owns a majority of the stock of Mariner. George R. Trumbull,
Chairman, Chief Executive Officer and a Director of the Company, A. George
Kallop, Executive Vice President and Chief Operating Officer, and William D.
Shaw, Jr., Vice Chairman and a Director of the Company, are also associated with
Mariner.
Mariner also entered into a voting agreement with Mark W. Blackman,
Blackman Investments, LLC and certain trusts and foundations affiliated with
Louise B. Tollefson, of which Robert G. Simses, a director of the Company, is
trustee, on February 20, 2002. As described in more detail under "Voting
Agreement," Mariner, with the approval of two of the three voting agreement
participating shareholders, is generally authorized to vote all of the common
shares covered by the voting agreement, which constituted approximately 33% of
the Company's issued and outstanding shares of common stock as of March 1,
2004.
15
The voting agreement also gives Mariner the right to purchase up to
1,800,000 shares of the Company's common stock from the voting agreement
participating shareholders. The option exercise price per share is based on the
date the option is exercised. At the time the voting agreement was signed, the
option exercise price was $19.00, with the exercise price increasing $0.25 per
share every three months, subject to deduction for dividends paid. The exercise
price of the option as of March 1, 2004 was $20.76. Generally, Mariner's option
will expire 30 days after the termination of the voting agreement, which is
scheduled to terminate on February 15, 2007, if not terminated earlier.
Voting Agreement
On February 20, 2002, shareholders who are affiliated with the
Blackman/Tollefson family entered into a voting agreement with Mariner which
affected approximately 33% of the voting power of NYMAGIC as of March 1, 2004.
Mariner is an investment management company founded by William J.
Michaelcheck, a member of our Board of Directors. Mr. Michaelcheck is the
majority shareholder of Mariner. One of Mariner's wholly-owned subsidiaries,
Mariner Investment Group, Inc., which we refer to as the Mariner Group, was
founded in 1992 and, together with its affiliates, provides investment
management services to investment funds, reinsurance companies and a limited
number of institutional managed accounts. The Mariner Group has been a
registered investment adviser since May 2003.
The shares subject to the voting agreement were originally held by
John N. Blackman, Sr., who founded the Company in 1972 and died in 1988. The
shareholders who are parties to the voting agreement are either heirs of Mr.
Blackman, whom we refer to as our founder, or entities established or controlled
by them. Three of those shareholders are designated in the voting agreement as
"participating shareholders" and have the specific rights described below. The
participating shareholders are as follows:
o Mark W. Blackman, a son of our founder and Louise B. Tollefson, is
a participating shareholder in his individual capacity. He has
been a member of our Board of Directors since 1979 and served as
our President from 1988 to 1998. He has been our Chief
Underwriting Officer since June 2002.
o John N. Blackman, Jr., a son of our founder and Louise B.
Tollefson, acts as a participating shareholder in his dual
capacity as controlling member of Blackman Investments LLC and
co-trustee of the Blackman Charitable Remainder Trust dated April
1, 2001. He has been a member of our Board of Directors since 1975
and served as Chairman of the Board from 1988 to 1998.
o Robert G. Simses acts as a participating shareholder in his
capacity as sole trustee of the Louise B. Tollefson 2000 Florida
Intangible Tax Trust dated December 12, 2000, sole trustee of the
Louise B. Blackman Tollefson Family Foundation dated March 24,
1998, co-trustee of the Louise B. Tollefson Charitable Lead
Annuity Trust dated March 30, 2000 and co-trustee of the Bennett
H. Tollefson Charitable Lead Unitrust dated March 30, 2000. We
refer to these trusts and foundations as the Tollefson trusts. The
settlor of most of these trusts, Louise B. Tollefson, is the
former wife of our founder and was a member of our Board of
Directors from 1986 to 2001. Mr. Simses has been a member of our
Board of Directors since 2001. He is also Managing Partner of the
law firm of Simses & Associates and President and Chief Operating
Officer of The William H. Pitt Foundation Inc.
Voting Rights of Mariner
The participating shareholders retained significant voting rights
over their shares under the voting agreement. Mariner may only vote the shares
that are subject to the voting agreement with the written approval of two of the
three participating shareholders. If two of the three participating shareholders
fail to approve any vote by Mariner on any matter, then Mariner is not permitted
to vote on that matter and generally the participating shareholders are also not
permitted to vote on that matter. However, if one of the following types of
matters is under consideration and two of the three participating shareholders
fail to approve the vote by Mariner, the participating shareholders are entitled
to vote their shares instead of Mariner:
o the merger or consolidation of NYMAGIC into or with another
corporation,
o the sale by NYMAGIC of all or substantially all of its assets,
o the dissolution and/or liquidation of NYMAGIC, or
16
o any recapitalization or stock offering of NYMAGIC.
Nomination of Directors
Prior to the amendment to the voting agreement dated February 24,
2004 (the "2004 Amendment") the voting agreement provided for our Board of
Directors to consist of twelve directors. The 2004 Amendment increased the size
of the Board to thirteen members and David E. Hoffman was elected to the newly
created Board position on February 26, 2004. The 2004 Amendment also provides
that, on or before the 2004 annual meeting of shareholders of the Company,
Mariner and the participating shareholders agree to use their reasonable efforts
to cause the Company to take such action as is necessary to reduce the number of
currently authorized directors to nine. See "Amendments to the Voting
Agreement." Certain information relating to nomination of candidates to the
Board is as follows:
o Prior to the 2004 Amendment, Mariner was entitled to nominate four
candidates. The four current directors who were nominated by
Mariner are William J. Michaelcheck, George R. Trumbull III, who
serves as our Chairman and Chief Executive Officer, A. George
Kallop, who serves as our Executive Vice President and Chief
Operating Officer, and William D. Shaw, Jr., who serves as our
Vice Chairman. Following the 2004 Amendment, Mariner is entitled
to nominate three candidates for election to the Board.
o Prior to the 2004 Amendment, each participating shareholder was
entitled to nominate two candidates. The two current directors who
were nominated by John N. Blackman, Jr. are John N. Blackman, Jr.
and John R. Anderson. The two current directors who were nominated
by Mark W. Blackman are Mark W. Blackman and Glenn R. Yanoff. The
two current directors who were nominated by Robert G. Simses are
Robert G. Simses and Glenn Angiolillo. Following the 2004
Amendment, each of Robert G. Simses, Mark W. Blackman and John N.
Blackman, Jr. is entitled to nominate one candidate for election
to the Board, provided that the candidates nominated by Mark W.
Blackman and John N. Blackman, Jr. shall qualify as independent
directors under the rules of the New York Stock Exchange and all
other applicable laws and regulations.
o Prior to the 2004 Amendment, our Chief Executive Officer was
entitled to nominate two candidates. The two current directors who
were nominated by Mr. Trumbull are David W. Young and John T.
Baily. Following the 2004 Amendment, our Chief Executive Officer
is entitled to nominate three candidates for election to the
Board, all of whom shall qualify as independent directors under
the rules of the New York Stock Exchange and all other applicable
laws and regulations.
On February 26, 2004, John R. Anderson, Glenn Angiolillo, John T.
Baily, David E. Hoffman, William J. Michaelcheck, William D. Shaw, Jr., Robert
G. Simses, George R. Trumbull III, and David W. Young were nominated for
election to the Board at the next annual meeting of shareholders.
If any participating shareholder does not nominate a candidate for
election to the Board, then, in addition to its other rights, Mariner, instead
of that participating shareholder, may nominate a number of candidates equal to
the number not nominated by the participating shareholders. In addition, the
participating shareholders have agreed, consistent with their fiduciary duties,
to cause their nominees to the Board to vote for one of the Mariner-nominated
directors, as designated by Mariner, as Chairman of each meeting.
Election of Directors
Provided that the candidates of the participating shareholders would
not be legally disqualified from serving as directors of NYMAGIC, Mariner is
required to vote all shares that are subject to the voting agreement in favor of
the election of those candidates, or any successor or replacement candidates,
nominated by the participating shareholders. Mariner is not permitted to vote
the shares subject to the voting agreement to remove any director nominated by a
participating shareholder without the consent of that participating shareholder.
In accordance with the general voting provisions discussed above under the
heading "Voting Rights of Mariner," Mariner is permitted to vote the shares
subject to the voting agreement to elect its own candidates only with the
written approval of two of the three participating shareholders. In connection
with the election of directors at the annual meeting of shareholders in 2003,
all three of the participating shareholders approved the voting of those shares
to elect the four candidates nominated by Mariner.
17
Termination Provisions
The voting agreement will terminate upon the earliest to occur of the
following dates:
o February 15, 2007;
o the merger or consolidation of NYMAGIC into another corporation,
the sale of all or substantially all its assets or its dissolution
and/or its liquidation;
o immediately upon the resignation of Mariner; or
o upon written notice of such termination to Mariner from all of the
participating shareholders.
Mariner Stock Option
The voting agreement also gives Mariner the right to purchase at any
time and from time to time up to 1,800,000 shares of our common stock from the
participating shareholders in the amounts set forth below opposite each
participating shareholder's name:
o Mark W. Blackman 450,000 shares
o Blackman Investments, LLC 450,000 shares
o Robert G. Simses, as trustee of the Tollefson trusts 900,000 shares
In the event Mariner exercises this option, Mr. Simses will have the sole right
to determine the number of shares to be provided by any one of the Tollefson
trusts.
The option exercise price per share is based on the date the option
is exercised. At the time the voting agreement was signed, the option exercise
price was $19.00, with the exercise price increasing $0.25 per share every three
months. The initial exercise price of $19.00 was approximately equal to the
mid-point of the market price of our common stock and the book value of our
common stock, during the period in which the voting agreement was negotiated.
The final exercise price, for exercises between February 15, 2007 and March 17,
2007, is $24.00 per share. The exercise price will be adjusted by deducting the
cumulative amount of dividends paid by us in respect of each share of its common
stock from January 31, 2003 through the date Mariner exercises its option. This
option was granted with the intention of aligning Mariner's interests with the
interests of all of our shareholders. The exercise price of the option as of
March 1, 2004 was $20.76 per share.
Generally, Mariner's option will expire 30 days after the
termination of the voting agreement. However, if the voting agreement is
terminated prior to February 15, 2007 by unanimous written notice from the
participating shareholders, then the option will continue in full force and
effect until the close of business on February 15, 2007, unless the termination
was due to gross negligence or willful misconduct by Mariner that causes or is
reasonably likely to cause direct, substantial and provable damage to NYMAGIC,
in which case the option will terminate concurrently with the termination of the
voting agreement.
Transferability of the Option
The option granted to Mariner is not transferable except in the
following instances, with the assignee agreeing to be bound to the voting
agreement:
o Mariner is permitted to assign the option, in whole or in part, to
any one or more of William J. Michaelcheck, William D. Shaw, Jr.,
George R. Trumbull and A. George Kallop or any other individual
employed by or acting as a consultant for Mariner in connection
with NYMAGIC.
o With the written consent of at least two participating
shareholders, Mariner or any assignee as described above is
permitted to assign the option, in whole or in part, to any one or
more other persons.
18
On April 4, 2002, Mariner entered into an agreement with each of
William D. Shaw, Jr., the Company's Vice Chairman, and A. George Kallop, the
Company's Executive Vice President and Chief Operating Officer, whereby Mariner
agreed to hold a portion of the option covering 315,000 shares of NYMAGIC as
nominee for each of Mr. Shaw and Mr. Kallop.
Consideration to Mariner
Mariner did not pay any cash consideration to the participating
shareholders, nor did the participating shareholders pay any cash consideration
to Mariner, in connection with the voting agreement. Mariner's sole compensation
for entering into the voting agreement, as opposed to the investment management
arrangement discussed below, is the option to purchase NYMAGIC shares from the
participating shareholders. To date, Mariner has not exercised this option, but
should it elect to do so, it would pay the option exercise price to the
participating shareholders at that time.
Transferability of NYMAGIC Shares
The participating shareholders retain the right to transfer any of
the shares covered by the voting agreement, provided that two conditions are
satisfied. First, the participating shareholders must at all times retain the
number of shares necessary to enable Mariner to exercise its option. Second,
except for 250,000 shares of each participating shareholder, the transferred
shares must remain subject to the voting agreement. The participating
shareholders waived the requirement that assignees be bound by the voting
agreement with respect to 2,150,000 shares sold pursuant to a public offering in
December 2003.
Background of and Reasons for the Voting Agreement
The participating shareholders entered into the voting agreement with
Mariner in February 2002 because they were dissatisfied with the recent
financial performance of NYMAGIC and with the high turnover in its senior
management, as evidenced by the succession of four Chief Executive Officers and
three Chairmen of the Board over a four-year period. The voting agreement was
intended to permit Mariner to coordinate the voting of the participating
shareholders for Mariner's recommended actions, subject to receiving the consent
of two out of three of them on each matter voted upon. The goal of this voting
arrangement was to secure a new, unified management team for NYMAGIC.
The first of the participating shareholders to have discussions with
the Mariner Group about a potential role for the Mariner Group in relation to
NYMAGIC was Mr. Simses, who was acquainted with the Mariner Group. In October
2001, Mr. Simses spoke with Mr. Shaw about an investment that the Tollefson
trusts were contemplating in several hedge funds managed by the Mariner Group.
In the course of that discussion, Mr. Simses expressed his disappointment with
the recent financial performance of NYMAGIC and the high level of executive
turnover, and Mr. Shaw suggested that the Mariner Group could offer its
expertise in investment and financial management and its contacts in the
investment and financial community to assist in finding new leadership and
turning the company around. Mr. Simses communicated this suggestion to Bennett
H. Tollefson, a co-trustee of some of the Tollefson trusts and husband of Louise
B. Tollefson. At the request of Mr. Simses, acting on behalf of Mrs. Tollefson,
Mark W. Blackman met with members of the Mariner Group's management in November
2001 to discuss possible structural arrangements for the Mariner Group to become
involved in the management of NYMAGIC. In December 2001, John N. Blackman, Jr.
joined these conversations and the basic structure of the voting agreement was
developed. On February 20, 2002, the voting agreement was signed.
Management Changes Following Signing of the Voting Agreement
On March 4, 2002, Mr. Michaelcheck sent a letter to Robert W. Bailey,
who was then NYMAGIC's Chairman and Chief Executive Officer, enclosing a copy of
the voting agreement, stating that the participating shareholders intended to
bring about a change in the composition of NYMAGIC's Board of Directors and
requesting a meeting with Mr. Bailey to discuss these matters. In March 2002,
Mr. Michaelcheck and Mr. Trumbull met with Mr. Bailey to discuss Mariner's plans
for the Company. In the following weeks, Mr. Bailey and the incumbent Board
cooperated with Mariner and the participating shareholders in effecting a smooth
transition in leadership. Among other things, the Board agreed to nominate for
election as directors at the annual meeting those candidates who were
recommended by Mariner and the participating shareholders, as well as Mr.
Bailey, the then current Chairman and Chief Executive Officer. This was purely
voluntary on the part of the incumbent Board, since, for the regulatory reasons
discussed below, Mariner did not yet have the ability to exercise the voting
rights and board nomination rights provided in the voting agreement. Before
nominating Mr. Angiolillo and the four Mariner candidates, the incumbent Board
conducted an independent review of the backgrounds of those
19
candidates in order to satisfy itself as to their qualifications. The remaining
five candidates recommended by the participating shareholders were already
members of the Board, as was Mr. Bailey. The new Board consisting of eleven
directors was elected by the NYMAGIC shareholders at the annual meeting on May
22, 2002. Following the election of the new Board of Directors, Mr. Trumbull was
appointed Chairman, Mr. Shaw was appointed Vice Chairman and Mr. Kallop was
appointed Executive Vice President. On June 30, 2002, upon the retirement of Mr.
Bailey, Mr. Trumbull succeeded him as Chief Executive Officer. Also in June
2002, Mr. Mark W. Blackman rejoined the Company and was subsequently appointed
Chief Underwriting Officer.
Regulatory Considerations
During the period of management changes in May and June 2002,
Mariner's voting rights, board nomination rights and right to acquire through
exercise of the option 10% or more of the voting stock of NYMAGIC were not yet
effective. The reason for this delayed effectiveness is that, for purposes of
the New York insurance holding company statute, the exercise of any of those
rights would have constituted "control" of NYMAGIC and its subsidiaries, New
York Marine and Gotham. Under the provisions of the holding company statute
which govern acquisitions of control, Mariner and its majority owner, William J.
Michaelcheck, were required to obtain the approval of the New York
Superintendent of Insurance before any of the above control rights could go into
effect. Accordingly, on April 1, 2002, Mariner and Mr. Michaelcheck filed an
application for approval of acquisition of control with the New York
Superintendent of Insurance.
As a condition of obtaining that approval, on July 8, 2002, Mariner
and Mr. Michaelcheck furnished a commitment letter to the New York State
Insurance Department, which, among other matters, provided that until July 31,
2004, Mariner and Mr. Michaelcheck will prevent New York Marine and Gotham from
paying any dividends without the prior written consent of the department. New
York Marine and Gotham adopted board of directors' resolutions containing a
comparable commitment not to pay dividends prior to July 31, 2004 without the
prior written consent of the department, and NYMAGIC submitted those resolutions
to the department in conjunction with Mariner's application. Following receipt
of the commitment letter and New York Marine and Gotham board resolutions, and
completion of the department's review of the application, the Superintendent of
Insurance granted approval for the acquisition of control on July 31, 2002.
Since that time, Mariner has had the full ability to exercise the share voting
rights, board nomination rights and option rights provided in the voting
agreement.
Amendments to the Voting Agreement
The voting agreement provides that it may be amended or extended by
the unanimous written consent of the participating shareholders and Mariner. The
voting agreement was amended on January 27, 2003 to extend the duration of the
agreement from February 15, 2005 to February 15, 2007 in order to provide
Mariner with additional time to improve the performance of NYMAGIC, and in order
to allow for the appointment of an eleventh director and David W. Young was
chosen for this newly created Board position. Mr. Young is affiliated with
Conning Capital Partners VI, L.P., which owns 500,000 shares of our common stock
and options to purchase an additional 500,000 shares of our common stock and
which we refer to as Conning. The voting agreement was further amended on March
12, 2003 to allow for the appointment of a twelfth director and John T. Baily
was chosen for this newly created Board position. In addition, as discussed
under "Transferability of NYMAGIC Shares," a limited waiver was agreed with
respect to certain transferability restrictions.
Following the sale of common stock in December 2003 by certain
shareholders that are parties to the voting agreement, the Company was no longer
a "controlled company" as defined in the New York Stock Exchange Listed Company
Manual. Accordingly, the Company is required to have a majority of independent
directors by December 16, 2004. In order to permit the Company to comply with
this requirement certain provisions of the voting agreement relating to the
nomination of directors and the size of the Board of Directors were amended on
February 24, 2004 as described in "Nomination of Directors" above.
20
Mariner Investment Management Arrangement
In addition to the voting agreement, Mariner entered into an
investment management agreement with NYMAGIC, New York Marine and Gotham
effective October 1, 2002. This investment management agreement was amended and
restated on December 6, 2002. Under the terms of the investment management
agreement, Mariner manages the Company's investment portfolios. Mariner may
purchase, sell, redeem, invest, reinvest or otherwise trade securities on behalf
of the Company. Mariner may, among other things, exercise conversion or
subscription rights, vote proxies, select broker dealers and value securities
and assets of the Company. Under the terms of the investment management
agreement the Company's investments have been reallocated into the following
three categories:
o the liquidity portfolio (cash management);
o the fixed-income portfolio (fixed-income investments); and
o the hedge fund and equity portfolio (alternative investment
vehicles and common and preferred equities).
The investment management agreement does not have a specific duration
period and may be terminated by either party on 30 days' prior written notice.
Fees to be paid to Mariner under the investment management agreement
are based on a percentage of the investment portfolio as follows: 0.20% of
liquid assets, 0.30% of fixed maturity investments and 1.25% of hedge fund
(limited partnership) investments. We incurred Mariner investment expenses of
$317,514 pursuant to this agreement in 2002. For the year ended December 31,
2003, the Company incurred Mariner investment expenses of $1,753,021 pursuant to
this agreement. Assuming this agreement remains in effect, the Company
anticipates incurring Mariner investment expenses of approximately $2.6 million
pursuant to this agreement in 2004. In the event that assets in the hedge fund
and equity portfolio are invested in alternative investment vehicles managed by
Mariner or any of its affiliates, the 1.25% advisory fee is waived with respect
to those investments, although any fees imposed by the investment vehicles
themselves are nonetheless payable. In 2003, the Company entered into a limited
partnership hedge fund agreement with a Mariner affiliated company. In 2003, the
Company made an investment of $11.0 million, representing a 100% interest, into
this limited partnership hedge fund, which is consolidated in the financial
statements. This hedge fund invests in collateralized debt obligations. Under
the provisions of the agreement, the Mariner affiliated company is entitled to
50% of the net profit realized upon the sale of certain collateralized debt
obligations held by the Company. Investment expenses incurred and payable under
this agreement at December 31, 2003 amounted to $3,176,643 and were based upon
the fair value of those securities held and sold during 2003. 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 December
31, 2003. The Company cannot withdraw funds from this limited partnership for a
minimum period of three years without the consent of the hedge fund manager.
William J. Michaelcheck, a Director of the Company, is Chairman and
Chief Executive Officer of Mariner and owns a majority of the stock of Mariner.
George R. Trumbull, Chairman, Chief Executive Officer and a Director of the
Company, A. George Kallop, Executive Vice President, Chief Operating Officer and
a Director of the Company, and William D. Shaw, Jr., Vice Chairman and a
Director of the Company, are also associated with Mariner. Currently, Mr.
Trumbull is in the process of becoming a shareholder of Mariner. Messrs. Kallop
and Shaw have contractual relationships with Mariner, with Mr. Kallop's contract
relating to consulting services and Mr. Shaw's contract relating to investment
services. As noted above, pursuant to the voting agreement, Mariner, together
with the participating shareholders (Mark W. Blackman, John N. Blackman, Jr. and
Robert G. Simses), controlled the vote of approximately 33% of NYMAGIC's
outstanding voting securities as of March 1, 2004.
The Company believes that the terms of the investment management
agreement are no less favorable to NYMAGIC and its subsidiaries than the terms
that would be obtained from an unaffiliated investment manager for the services
provided. The investment management fees paid to Mariner were arrived at through
negotiations between the Company and Mariner. All then current directors
participated in the discussion of the investment management agreement. In
accordance with the Company's conflict of interest policy, the investment
management agreement was approved by an independent committee of the Company's
board of directors, which consisted of all directors who were neither Mariner
affiliates nor participating shareholders under the voting agreement.
Thereafter, the investment management agreement was approved by the entire board
of directors. Under the provisions of the New York insurance holding company
statute, because of the control relationship between Mariner and New York Marine
and Gotham, the investment management agreement was submitted for review by the
New York State Insurance Department, which examined, among other things, whether
its terms were fair and equitable and whether the fees for services were
reasonable. Upon completion of that review, the investment management agreement
was found to be non-objectionable by the department.
21
Subsidiaries
NYMAGIC was formed in 1989 to serve as a holding company for the
subsidiary insurance companies. NYMAGIC's largest insurance company subsidiary
is New York Marine which was formed in 1972. NYMAGIC's other domestic insurance
company subsidiary, Gotham, was organized in 1986 as a means of expanding into
the excess and surplus lines marketplace. New York Marine and Gotham entered
into a Reinsurance Agreement, effective January 1, 1987, under the terms of
which Gotham cedes 100% of its gross direct business to New York Marine and
assumes 15% of New York Marine's total retained business, beginning with the
1987 policy year. Accordingly, for policy year 1987 and subsequent, Gotham's
underwriting statistics are similar to New York Marine's. As of December 31,
2003, 75% and 25% of Gotham's common stock is owned by New York Marine and
NYMAGIC, respectively.
Gotham does not assume or cede business to or from other insurance
companies. As of December 31, 2003, New York Marine had aggregate receivables
due from Gotham of approximately $31 million, or 18% of New York Marine's
policyholders' surplus. Gotham had aggregate reinsurance receivables due from
New York Marine, as of December 31, 2003, of approximately $28 million, or 49%
of Gotham's policyholders' surplus.
MMO was formed in 1964 to underwrite a book of ocean marine insurance
and was acquired in 1991 by NYMAGIC. MMO's activities expanded over the years
and it now underwrites a book of ocean marine, inland marine and other liability
insurance.
Midwest was formed in 1978 to underwrite a varied book of business
located in the Midwest region and was acquired in 1991 by NYMAGIC.
PMMO was formed in 1975 to underwrite a varied book of business
located in the West Coast region and was acquired in 1991 by NYMAGIC.
MMO UK was formed in 1997 as a Lloyd's limited liability corporate
capital vehicle and was placed into runoff in 2002.
MMO EU was formed in 1997 as a holding company for MMO UK.
Competition
The insurance industry is highly competitive and the companies, both
domestic and foreign, against which the Company competes, are often larger and
could have greater capital resources than the Company and the pools. The
Company's principal methods of competition are pricing and responsiveness to the
individual insured's coverage requirements.
We compete in the United States and international markets with
domestic and international insurance companies. In the area of our primary
focus, ocean marine liability, there are approximately 50 insurance companies
writing more than $2 billion in annual premiums for ocean, drill rig, hull, war,
cargo and other marine liability. Our main competitors and their respective
shares of this market, as determined by Best's Aggregates and Averages, 2003
Edition (which used 2002 data), are: CNA Insurance Cos., 10.1%; American
International Group, Inc., 9.0%; Ace INA Group, 8.1%; St. Paul Companies, 5.5%;
Navigators Insurance Group, 3.8%; and XL America Group, 1.1%. Our market share
is approximately 3.0%. We also write opportunistic excess and surplus property
and casualty insurance programs for professional liability, commercial real
estate, employment practices liability, surety, excess worker's compensation and
commercial automobiles, but given the magnitude of these markets our market
share is insignificant.
The Company believes it can successfully compete against other
companies in the insurance market due to its philosophy of underwriting quality
insurance, its reputation as a conservative well-capitalized insurer and its
willingness to forego unprofitable business.
Employees
The Company currently employs 112 persons, of whom 23 are insurance
underwriters.
22
Code of Conduct and Corporate Goverance Documents
The Company maintains a separate, independent, as defined under the
New York Stock Exchange rules, Audit Committee of four directors who have been
appointed by the Board of Directors: Messrs. Glenn J. Angiolillo, John R.
Anderson, John T. Baily (chairman and financial expert) and David W. Young.
The Company has adopted a code of ethics for Senior Executive and
Financial Officers as well as a code of Business Conduct and Ethics for
Directors, Officers and Employees, copies of which are available free of charge,
upon request directed to General Counsel, NYMAGIC, INC., 919 Third Avenue, New
York, NY 10022.
The Company's Corporate Governance Guidelines and the charters of the
Audit, Human Resources and Nominating/Corporate Governance Committees of the
Company's Board of Directors and the Company's Code of Business Conduct and
Ethics for Directors, Officers and Employees are available on the Company's
Internet web site www.nymagic.com and are available in print to any shareholder
who requests them.
- --------------------------------------------------------------------------------
Item 2. Properties
- --------------------------------------------------------------------------------
The Company does not own, directly or indirectly, any real estate.
The Company subleases office space for day to day operations in the following
cities:
New York - 28,000 square feet
Chicago - 3,500 square feet
San Francisco - 2,000 square feet
The Company's principal executive offices are approximately 28,000
square feet in size and are located at 919 Third Avenue, New York, New York
10022. The sublease commenced on March 1, 2003 and expires on July 30, 2016. The
minimum monthly rental payments of $102,794 commenced in March 2004 and end in
2016 and will amount to $15.3 million of total rental payments over the term of
the sublease.
- --------------------------------------------------------------------------------
Item 3. Legal Proceedings
- --------------------------------------------------------------------------------
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 has filed Preliminary
Objections to Plaintiff's Complaint, denying that the payments are voidable
preferences and asserting affirmative defenses. On February 18, 2004, the
Plaintiff filed Preliminary Objections to our Preliminary Objections and an
Answer and Memorandum of Law in opposition to our Preliminary Objections. 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 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
The Company did not submit any matters to a vote of security holders
during the fourth quarter of 2003.
23
PART II
- --------------------------------------------------------------------------------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- --------------------------------------------------------------------------------
The Company's common stock trades on the New York Stock Exchange
(NYSE Symbol: NYM). The following table sets forth high and low closing prices
of the common stock for the periods indicated as reported on the New York Stock
Exchange composite transaction tape.
2003 2002
----------------------- ----------------------
High Low High Low
---- --- ---- ---
First Quarter .............. $ 20.22 $ 18.10 $ 20.61 $ 15.63
Second Quarter ............. 23.45 18.50 22.01 15.14
Third Quarter .............. 25.92 19.85 15.36 13.85
Fourth Quarter ............. 27.42 23.20 20.89 14.61
As of February 27, 2004, there were 67 shareholders of record.
However, management believes there were approximately 661 beneficial owners of
NYMAGIC's common stock as of February 27, 2004.
Dividend Policy
A cash dividend of ten (10) cents per share was declared and paid to
shareholders of record in March, June and September of 2001. The Company did not
declare a dividend in December of 2001 or at any time during 2002. The Company
declared a dividend of six (6) cents per share to shareholders of record in
March, June, September and December of 2003. For a description of restrictions
on the ability of the Company's insurance subsidiaries to transfer funds to the
Company in the form of dividends, see "Business - Regulation" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources".
24
- --------------------------------------------------------------------------------
Item 6. Selected Financial Data
- --------------------------------------------------------------------------------
OPERATING DATA Year Ended December 31,
-------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Revenues:
Net premiums earned .......................... $ 96,394 $ 113,457 $ 84,633 $ 75,448 $ 56,155
Net investment income ........................ 22,394 15,821 17,388 18,076 18,642
Commission income ............................ (230) 1,549 3,312 903 1,956
Net realized investment gains ................ 550 8,456 2,874 5,247 12,504
Other income ................................. 1,688 186 285 1,059 237
--------- --------- --------- --------- ---------
Total revenues ............................... $ 120,796 $ 139,469 $ 108,492 $ 100,733 $ 89,494
========= ========= ========= ========= =========
Expenses:
Net losses and loss adjustment
expenses incurred .......................... $ 55,715 $ 73,356 $ 87,901 $ 68,063 $ 36,853
Policy acquisition expenses .................. 19,430 18,899 16,083 18,178 11,077
General and administrative expenses .......... 19,428 18,373 16,952 19,439 19,327
Interest expense ............................. 26 575 395 712 1,058
--------- --------- --------- --------- ---------
Total expenses ............................... $ 94,599 $ 111,203 $ 121,331 $ 106,392 $ 68,315
========= ========= ========= ========= =========
Income (loss) before income taxes ............... $ 26,197 $ 28,266 $(12,839) $ (5,659) $ 21,179
-------- -------- -------- -------- --------
Income taxes expense (benefit)
Current ....................................... 8,987 (4,869) 798 1,276 3,189
Deferred ...................................... 117 4,425 (498) (1,433) 1,577
-------- -------- -------- -------- --------
Total income taxes .............................. 9,104 (444) 300 (157) 4,766
-------- -------- -------- -------- --------
Net income (loss) ............................... $ 17,093 $ 28,710 $(13,139) $ (5,502) $ 16,413
======== ======== ======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE:
Weighted average shares outstanding ............. 9,673 9,277 9,232 9,244 9,687
Basic earnings (loss) per share ................ $ 1.77 $ 3.09 $ (1.42) $ (.60) $ 1.69
======== ======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE:
Weighted average shares outstanding ............. 9,828 9,309 9,232 9,244 9,687
Diluted earnings (loss) per share ............... $ 1.74 $ 3.08 $ (1.42) $ (.60) $ 1.69
======== ======== ======== ======== ========
Dividends declared per share .................... $ .24 $ .00 $ .30 $ .40 $ .40
======== ======== ======== ======== ========
BALANCE SHEET DATA:
December 31,
----------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In thousands)
Total investments ....................................... $517,702 $429,490 $366,167 $371,291 $396,710
Total assets ............................................ 875,125 824,007 856,997 720,329 764,304
Unpaid losses and loss adjustment expenses .............. 518,930 516,002 534,189 411,267 425,469
Notes payable ........................................... -- 6,220 7,911 7,458 12,458
Total shareholders' equity .............................. $244,291 $220,953 $199,272 $216,290 $231,142
Book value per share .................................... $ 24.47 $ 23.54 $ 21.46 $ 23.62 $ 23.88
For a description of factors that materially affect the comparability
of the information reflected in the Selected Financial Data, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
25
- --------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Executive Overview and Highlights-2003 year
o Net income of $17.1 million or $1.74 per diluted share
o Gross premium growth in core lines (ocean marine, inland marine/fire and
other liability) of 20% over 2002
o Combined ratio of 98.1%
o Net investment income growth of 42% over 2002
o Net loss reserve redundancy reported on prior year loss reserves of $1.4
million
o Total cash and invested assets of $520 million, up from $430 million at year
end 2002
o Total shareholders' equity of $244 million, up from $221 million at year end
2002
o Total reinsurance receivables of $281 million, down from $326 million at year
end 2002
o Raised $8.4 million through the sale of investment units to Conning Capital
Partners VI, L.P.
o Reinstated shareholder dividend at 6 cents per quarter
o Paid off bank loan
o Formed business relationship with Southern Marine & Aviation, an insurance
agency to write a primary marine cargo program
o Strong cash collections from reinsurance receivables
o Implemented revised investment strategy
o Completed secondary stock offering of 2,150,000 shares of common stock by
certain shareholders (from which the Company received no proceeds)
Results of Operations
The Company's results of operations are derived from participation in
pools of insurance covering ocean marine, inland marine, aircraft and other
liability insurance managed by MMO and affiliates. Since January 1, 1997, the
Company's participation in the pools has been increased to 100%. The Company has
ceased writing any new policies covering aircraft insurance for periods
subsequent to March 31, 2002.
MMO London wrote a book of ocean marine insurance through its
participation in Lloyd's Syndicate 1265 and a book of assumed property and
aircraft reinsurance through its participation in Lloyd's Syndicate 2010. Since
January 1, 2002, MMO London has not provided capacity to any Lloyd's syndicate.
The Company records premiums written in the year policies are issued
and earns such premiums on a monthly pro rata basis over the terms of the
respective policies. The following tables present the Company's gross premiums
written, net premiums written and net premiums earned for each of the past three
years.
Gross Premiums Written by
Segment Year Ended December 31,
- ----------------- --------------------------------------------------
2003 2002 2001
--------------------------------------------------
(Dollars in thousands)
Ocean marine ....................... $ 94,649 66% $ 89,301 59% $ 63,691 43%
Inland marine/Fire ................. 16,515 12% 13,311 9% 6,284 4%
Other liability .................... 28,468 20% 13,874 9% 5,551 4%
-----------------------------------------------------
Subtotal ...... 139,632 98% 116,486 77% 75,526 51%
Aircraft ........................... 3,565 2% 35,874 23% 50,485 34%
MMO London ......................... -- -- 157 -- 21,632 15%
-----------------------------------------------------
Total .............................. $143,197 100% $152,517 100% $147,643 100%
====================================================
26
NYMAGIC Net Premiums Written
By Segment Year Ended December 31,
- ----------------- --------------------------------------------------
2003 2002 2001
--------------------------------------------------
(Dollars in thousands)
Ocean marine ....................... $ 67,744 69% $ 70,839 67% $ 45,849 51%
Inland marine/Fire ................. 4,833 5% 2,975 3% 1,349 1%
Other liability .................... 22,961 23% 9,960 9% 4,684 5%
-----------------------------------------------------
Subtotal ........................ 95,538 97% 83,774 79% 51,882 57%
Aircraft ........................... 2,769 3% 22,366 21% 26,556 30%
MMO London ......................... -- -- 302 -- 11,254 13%
-----------------------------------------------------
Total .............................. $ 98,307 100% $106,442 100% $ 89,692 100%
====================================================
NYMAGIC Net Premiums Earned
By Segment Year Ended December 31,
- ----------------- --------------------------------------------------
2003 2002 2001
--------------------------------------------------
(Dollars in thousands)
Ocean marine ....................... $ 73,096 76% $ 61,887 54% $ 38,671 46%
Inland marine/Fire ................. 4,234 4% 2,371 2% 644 1%
Other liability .................... 16,126 17% 6,883 6% 2,864 3%
-----------------------------------------------------
Subtotal ........................ 93,456 97% 71,141 62% 42,179 50%
Aircraft ........................... 2,938 3% 38,157 34% 28,318 33%
MMO London ......................... -- -- 4,159 4% 14,136 17%
-----------------------------------------------------
Total .............................. $ 96,394 100% $113,457 100% $ 84,633 100%
====================================================
Unlike many types of property and casualty insurance, ocean marine,
inland marine, aircraft and other liability premium rates are not strictly
regulated by governmental authorities. Consequently, the Company is able to
adjust premium rates quickly in response to competition, varying degrees of risk
and other factors. In addition, the Company, by virtue of its underwriting
flexibility, is able to emphasize specific lines of business in response to
advantageous premium rates and its anticipation of positive underwriting
results. However, the insurance industry is highly competitive and the companies
against which the Company competes may seek to limit any market premium rate.
The property and casualty industry historically has been highly
cyclical. Rates for property and casualty insurance are influenced primarily by
factors that are outside of our control, including competition and the amount of
available capital and surplus in the industry. For example, the substantial
losses in the insurance industry arising from the events of September 11, 2001
caused rates in the insurance industry to rise. However, new capital has since
flowed into the insurance industry. To the extent that more capital is
available, there may be downward pressure on premium rates as a result of
increased supply. These factors affecting rates for the industry in general
impact the rates we are able to charge. Any significant decrease in the rates
for property and casualty insurance could reduce our net income. While rates
impact our net income, there is not necessarily a direct correlation between the
level of rate increases or decreases and net income because other factors, such
as the amount of catastrophe losses and the amount of expenses, also affect net
income.
Prevailing policy terms and conditions in the property and casualty
insurance market are also highly cyclical. Changes in terms and conditions
unfavorable to insurers, which tend to be correlated with declining rates, could
further reduce our net income. Even as rates rise, the average percentage rate
increases can fluctuate greatly and be difficult to predict.
The Company's general and administrative expenses consist primarily
of compensation expense, employee benefits and rental expense for office
facilities. The Company's policy acquisition costs include brokerage commissions
and premium taxes both of which are primarily based on a percentage of premiums
written. Acquisition costs have generally changed in proportion to changes in
premium volume. Losses and loss adjustment expenses incurred in connection with
insurance claims in any particular year depend upon a variety of factors
including the rate of inflation, accident or claim frequency, the occurrence of
natural catastrophes and the number of policies written.
27
The Company estimates reserves each year based upon, and in
conformity with, the factors discussed under "Business-Reserves". Changes in
estimates of reserves are reflected in operating results in the year in which
the change occurs.
Year Ended December 31, 2003 as Compared to Year Ended December 31, 2002
Net income for the year ended December 31, 2003 was $17.1 million or
$1.74 per diluted share, as compared to $28.7 million, or $3.08 per diluted
share, for the year ended December 31, 2002. The decrease in net income in 2003
compared to 2002 was primarily attributable to realized investment gains and tax
benefits resulting from the withdrawal from London operations in 2002 as
described below.
Net income for the year ended December 31, 2003 was $16.7 million, or
$1.70 per diluted share, excluding realized investment gains after taxes of
$357,000, or $0.04 per diluted share. Net income for the year ended December 31,
2002 was $13.9 million, or $1.50 per diluted share, after excluding realized
investment gains after taxes of $5.5 million, or $0.59 per diluted share, and
$9.3 million, or $0.99 per diluted share, resulting from a non-recurring tax
benefit attributable to the Company's withdrawal from its London operation in
2002.
A reconciliation of net income excluding realized investment gains
after taxes and tax benefits attributable to the Company's withdrawal from its
London operations to net income prepared in accordance with generally accepted
accounting principles for the years ended December 31, 2003 and 2002,
respectively, is set forth below:
Year Ended
December 31,
-----------------------
2003 2002
----------- ---------
(in millions)
Net income, excluding realized investment gains and $16.7 $13.9
tax benefits on the withdrawal from London operations (1)
Realized investment gains after taxes .4 5.5
Tax benefits on the withdrawal from London operations --- 9.3
----------- ---------
Net income $17.1 $28.7
(1) Net income excluding realized investment gains and tax benefits
on the withdrawal from London operations is a non-GAAP financial measure and
should be considered in addition to, but not as a substitute for, net income
prepared in accordance with generally accepted accounting principles as a
measure of profitability. Because realized investment gains in 2002, which
resulted primarily from the liquidation of the Company's fixed income portfolio,
and tax benefits on the withdrawal from London operations in 2002 were
non-recurring in nature, management believes that net income excluding realized
investment gains and tax benefits on the withdrawal from London operations
provides useful information regarding trends in the Company's results of
operations.
Total revenues for the year ended December 31, 2003 were $120.8
million compared with $139.5 million for the year ended December 31, 2002
reflecting a decline in net premiums earned from lines of business in runoff.
Net realized investment gains after taxes were $357,000, or $.04 per
diluted share, and $5.5 million, or $.59 per diluted share, in the years ended
December 31, 2003 and 2002, respectively. The prior year amounts reflected the
sale of substantially all of the Company's fixed income investments.
Gross premiums written, net premiums written and net premiums earned
for the year ended December 31, 2003 declined by 6%, 8% 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 20%, 14% and 31%, respectively, in
2003 over the same period of 2002.
28
Premiums for each segment are discussed below:
Ocean marine gross premiums written grew by 6% during 2003 when
compared to the prior year. The increase reflected higher ocean marine rates
with the largest rate increases, approximately 5% to 15%, occurring in the
marine liability and hull classes and additional production was achieved in the
marine liability class. Other marine classes are currently experiencing a
leveling in rates. Partially offsetting the overall increase were decreases in
policy count in the drill rig class partly as a result of some one-time
builder's risk policies written in 2002, which were not renewed in 2003.
Builder's risk policies may have policy terms greater than one year and
accordingly its premium is earned over the related policy period. In addition,
we did not renew certain cargo policies in order to reduce concentrations of
risk. However, commencing in the fourth quarter of 2003, gross premiums include
cargo premiums from our recent agreement with Southern Marine & Aviation, a
leading provider of insurance for bulk petroleum cargo shipments. Net premiums
written decreased by 4% and reflected larger amounts of ceded reinsurance
premium as a result of the business mix within the various classes of ocean
marine insurance. Ceded reinsurance premiums are earned over the policy terms of
its related gross premium. Net premiums earned grew by 18% in 2003 compared to
2002 reflecting premium rate increases as well as increased production in the
marine liability classes. The Company cannot assure that rates will continue to
increase in 2004 at the levels achieved in 2003.
Inland marine/fire gross premiums written increased by 24% for the
year ended December 31, 2003 when compared to the prior year, largely due to the
growth in the Company's underwriting program insuring excess and surplus lines
property risks and improved pricing. Both net premiums written and net premiums
earned increased 62% and 79%, respectively over the comparable 2002 amounts
reflecting increases in production, pricing and higher net loss retention
levels.
Other liability gross premiums written rose by 105% for the year
ended December 31, 2003 when compared to 2002 due to production increases from
existing classes and new classes (commercial automobile liability and excess
workers compensation) and higher premium rates on policy renewals. Average rate
increases achieved in 2003 were approximately 10% to 20%. 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.
New sources of production include underwriting a programmed book of commercial
automobile liability insurance, which contributed $3.3 million in gross premiums
written in 2003. In addition, gross premiums written in 2003 also include $6.2
million of excess workers compensation insurance focusing on smaller companies
in the New York area. Net premiums written and net premiums earned grew by 131%
and 134%, respectively over the prior year due to the premium rate and
production increases as well as higher net loss retention levels in the
contractor's liability and errors and omission classes. The Company cannot
assure that rates will continue to increase in 2004 at the levels achieved in
2003.
Aircraft gross written premiums decreased 90% in 2003 from $35.9
million to $3.5 million as a result of the Company having ceased writing new
aircraft policies subsequent to March 31, 2002. We expect aircraft premiums to
be negligible in 2004. Net premiums written and net premiums earned decreased in
2003 for the same reasons.
MMO London premiums earned were zero in 2003, down from $4.2 million
in 2002, because the Company did not provide capacity to any Lloyd's syndicate
for the 2002 and subsequent underwriting years.
Net losses and loss adjustment expenses incurred as a percentage of
net premiums earned (the loss ratio) for the year ended December 31, 2003 was
57.8% compared to 64.7% for the year ended December 31, 2002. The Company
recorded lower loss ratios in 2003 in both the ocean marine and other liability
lines of business, which largely reflected the absence of any catastrophe losses
and the beneficial impact of increased rates in those lines of business. Net
losses incurred from catastrophes in 2002 were $3 million and $0 in 2003.
The Company decreased net loss reserves by approximately $1.4 million
in 2003 from the 2002 year end reserve amount of $209 million. The benefit
resulted from the favorable development of ocean marine reserves offset by the
adverse development of aviation reserves attributable to accident years 1997 to
2000 and additional net loss development in its umbrella (other liability)
losses of approximately $1.0 million. The year end 2002 results were affected by
net adverse development of $4.4 million resulting in part from provisions made
for insolvent, financially impaired and commuted reinsurers, and $2.2 million of
adverse development from the Company's other liability line reflecting
additional umbrella exposures.
29
Policy acquisition costs as a percentage of net premiums earned for
the year ended December 31, 2003 were 20.2% as compared with 16.7% for the year
ended December 31, 2002. Net premiums earned in the prior year reflected larger
amounts of aircraft premiums, which have a lower acquisition cost ratio than
other lines of business. Accordingly, a large part of the aircraft premium
written in 2002 reflected premium surcharges for terrorism coverage, which were
recorded with a nominal processing charge. Premiums earned in 2003 included
amounts from new sources of production, including commercial auto and cargo
premiums, which have higher acquisition costs than other classes of business.
General, administrative and interest expenses increased by 3% to
$19.5 million for the year ended December 31, 2003 from $18.9 million for the
year ended December 31, 2002. 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 which became effective prior
to the expiration on December 31, 2003 of the lease for the Company's prior
office location resulting in higher rent while both leases were in effect. The
Company also incurred costs with respect to the implementation of computer
systems.
The Company's combined ratio (the loss ratio plus the ratio of policy
acquisition costs and general and administrative expenses divided by premiums
earned) was 98.1% for the 2003 year compared with 97.5% for 2002.
Net investment income for the year ended December 31, 2003 increased
by 42% to $22.4 million from $15.8 million in the year ended December 31, 2002.
The increase in 2003 reflects the implementation of our revised investment
strategy, including income derived from trading portfolio activities and limited
partnerships, partially offset by a lower investment yield on the fixed income
portfolio in 2003 as a result of a larger position held by the Company in
short-term investments. Net investment income for 2003 reflects approximately
$9.4 million derived from trading portfolio activities, which commenced in 2003.
The Company's trading portfolio is 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 trading securities are also recognized in net
investment income. Net Investment income derived from limited partnership hedge
fund investments approximated $7.7 million in 2003 as compared to approximately
$900,000. in 2002. The Company initially invested in hedge funds in the fourth
quarter of 2002. 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. As a result of the accounting
treatment of its limited partnerships and trading portfolio, the Company's
investment income results may be more volatile. The Company's investments in
limited partnership hedge funds amounted to approximately $105 million and its
trading account amounted to $62 million as of December 31, 2003.
Commission and other income decreased to $1.5 million for the year
ended December 31, 2003 from $1.7 million for the prior year. The 2003 amounts
consisted primarily of income received from arbitration settlements, offset by
returns of reinsurance profit contingent commissions. In the second quarter of
2003, an arbitration procedure was completed against a former pool member, Utica
Mutual, which resulted in a payment to MMO of approximately $7.8 million. This
amount represented Utica Mutual'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 aircraft reinsurance treaties.
Net realized investment gains were $550,000 for the year ended
December 31, 2003 as compared to $8.5 million for the year ended December 31,
2002. The prior year amounts reflected the sale of substantially all of the
Company's fixed income investments. Write-downs from other-than-temporary
declines in the fair value of securities amounted to $0 and $1.5 million for the
years ended December 31, 2003 and 2002, respectively.
Total income taxes increased to $9.1 million in 2003 from $(444,000)
for 2002. The amount for the prior year included $9.3 million in tax benefits
attributable to the Company's withdrawal from its London operations.
Premiums and other receivables, net decreased to $24.0 million as of
December 31, 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
$4.2 million and $276.6 million, respectively, as of December 31, 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
30
receivables.
Unpaid losses and loss adjustment expenses increased to $518.9
million at December 31, 2003 from $516.0 million at December 31, 2002. The
increase of $2.9 million was primarily attributable to increases in the ocean
marine and other liability lines as a result of increased writings offset by
declines in the aircraft line of business.
Prepaid reinsurance premiums of $20.9 million and reserve of unearned
premiums of $61.8 million as of December 31, 2003 each increased from the prior
year end balances primarily due to increases in both ceded and gross writings in
the ocean marine and other liability lines of business.
Other liabilities increased to $23.7 million as of December 31, 2003
from $15.7 million for the same period of 2002 as a result of securities
purchased but not yet settled.
Ceded reinsurance payable increased to $25.8 million at December 31,
2003 from $19.7 million at December 31, 2002 as a result of the timing of
reinsurance payments.
Year Ended December 31, 2002 as Compared to Year Ended December 31, 2001
The Company reported net income of $28.7 million, or $3.08 per
diluted share, as compared to net losses of $13.1 million, or $1.42 per diluted
share, for the years ended December 31, 2002 and 2001, respectively.
A reconciliation of net income (loss) excluding realized investment
gains after taxes and tax benefits attributable to the Company's withdrawal from
its London operations to net income prepared in accordance with generally
acceptable accounting principles for the years ended December 31, 2002 and 2001,
respectively, is set forth below.
Year Ended
December 31,
-----------------------
2002 2001
-------- ---------
(in millions)
Net income (loss), excluding realized investment gains and $13.9 $(15.0)
tax benefits on the withdrawal from London operations (1)
Realized investment gains after taxes 5.5 1.9
Tax benefits on the withdrawal from London operations 9.3 ---
-------- ---------
Net income (loss) $28.7 $(13.1)
(1) Net income (loss) excluding realized investment gains and tax
benefits on the withdrawal from London operations is a non-GAAP financial
measure and should be considered in addition to, but not as a substitute for,
net income prepared in accordance with generally accepted accounting principles
as a measure of profitability. Because realized investment gains in 2002, which
resulted primarily from the liquidation of the Company's fixed income portfolio,
and tax benefits on the withdrawal from London operations in 2002 were
non-recurring in nature, management believes that net income (loss) excluding
realized investment gains and tax benefits on the withdrawal from London
operations provides useful information regarding trends in the Company's results
of operations.
Net realized investment gains after taxes of $5.5 million, or $.59
per diluted share, and $1.9 million, or $.20 per diluted share, were reported
for the years ended December 31, 2002 and 2001, respectively.
In 2002, the Company completed the withdrawal from its London
operations, which resulted in a benefit of $9.3 million, or $.99 per diluted
share, resulting primarily from the realization of certain tax benefits. Also in
2002, the Company recorded a charge of $1.0 million after taxes, or $.11 per
diluted share, related to the reorganization of the Company's management
structure.
Results for the year 2001 include after-tax losses of approximately
$9.0 million, or $.98 per diluted share, resulting from the World Trade Center
attack. In addition, the Company's 2001 results from operations were adversely
affected by net losses from MMO London of $9.9 million, or $1.07 per diluted
share.
31
Net premiums earned for the year ended December 31, 2002 grew by 34%,
when compared to the same period of the prior year. Net premiums earned from the
Company's core lines of business for the year ended December 31, 2002 grew by
69% when compared to 2001. The increases were achieved primarily as a result of
rate increases.
Net premiums earned for each segment are discussed below:
Ocean marine - net premiums earned grew by 60% during 2002 when
compared to 2001 and reflect higher ocean marine rates across the various ocean
marine classes, particularly in the rig class, and additional production within
the various marine classes of business. The ocean marine line reflected average
rate increases of 20% to 30% in 2002.
Other liability - net premiums earned rose by 140% during 2002 when
compared to 2001 due to new production opportunities arising from policies
covering errors and omissions/professional liability risks, additional
production in existing classes and larger premium rates on policy renewals. The
other liability line reflected average rate increases of 30% to 40% in 2002 and
volume increases of approximately 75% principally as a result of writing
errors/omissions insurance for a full year in 2002 as compared to half a year in
2001.
Inland marine/fire - net premiums earned increased 268% for the year
ended December 31, 2002 when compared to 2001, largely due to an underwriting
program insuring excess and surplus lines property risks and improved pricing.
The underwriting program commenced in July of 2001. The inland marine/fire line
recorded average rate increases of 20% to 25% in 2002.
Aircraft - premiums earned grew 35% for the year ended December 31,
2002 when compared to 2001, despite a reduction in policy count, primarily as a
result of rate increases. Contributing to the overall increase were premium
surcharges for terrorism coverage written after September 11, 2001. The Company
recorded approximately $28 million in gross premiums written from such premium
surcharges in 2002. The prior year net premiums were adversely affected by
reinstatement reinsurance costs of $5.0 million incurred as a result of the WTC
attack.
MMO London - premiums earned for the year ended December 31, 2002
were down by 71% to $4.2 million from $14.1 million in the prior year and
reflected reduced capacity for premium writings at Lloyd's.
The loss ratio was 64.7% for the year ended December 31, 2002 as
compared to 103.9% for the year ended December 31, 2001. The Company reported
higher loss ratios in 2001 as a result of losses sustained from the WTC attack
and larger severity losses arising from higher net loss retentions in the
aircraft segment of business. Underwriting losses from MMO London also
contributed to higher overall loss ratios in the prior year. In addition, the
prior year loss ratio reflected larger charges for insolvent or financially
impaired reinsurers of $10.8 million as compared to $5.1 million in calendar
year 2002. A significant portion of such charges pertained to the 1998 to 2001
accident years in the aircraft segment of business and contributed to the
adverse re-estimation of net loss reserves.
The Company reported lower overall loss ratios in 2002 as a result of
a decrease in the frequency and severity of losses in the aircraft line when
compared to 2001. However, the Company recorded catastrophe losses of $3
million, which adversely affected the ocean marine line in 2002. This compared
to catastrophe losses of $9.0 million in 2001 in the aircraft line. The Company
increased net loss reserves by $4.4 million in 2002 as compared to $9.6 million
in 2001. The Company also increased net loss reserves for umbrella (other
liability) losses by approximately $2.2 million in 2002 as a result of the
additional development of asbestos losses with respect to a few insureds. This
compared to a $.6 million increase in net reserves for umbrella losses in 2001.
The 2002 and 2001 results were each affected by adverse development from ocean
marine business written by MMO London. The quality of the book written by MMO
London was originally anticipated to be similar to that written by the MMO
companies. However, the loss experience revealed a lower quality book of
business resulting from higher than expected claim frequencies and a longer than
expected loss development pattern which caused the Company to increase reserves
substantially in 2001 and to a lesser extent in 2002. The adverse development
recorded in 2002 and 2001 was partially offset by favorable development in the
ocean marine line of business.
Policy acquisition costs as a percentage of net premiums earned for
the year ended December 31, 2002 were 16.7% as compared with 19.0% for the prior
year. The decrease in the percentage was primarily attributable to the aircraft
expense ratio, which reflected a lower ratio as premium surcharges were recorded
with a nominal processing charge.
The Company's combined ratio improved to 97.5% for the 2002 year
compared with 142.9% for 2001. Excluding losses from the WTC attack, the
combined ratio would have been 127.6% in 2001.
32
Net investment income for the year ended December 31, 2002 decreased
by 9% to $15.8 million from $17.4 million for the same period of 2001. The
decrease reflected lower investment yields as well as larger positions in
tax-exempt securities in 2002, despite a larger investment asset base in 2002.
Income derived from hedge fund investments approximated $1.0 million in 2002
compared to no similar amount in 2001.
Commission and other income, collectively, decreased to $1.7 million
for the year ended December 31, 2002 from $3.6 million for the prior year. In
2001, larger profit commissions were earned based upon the ceded results of
aircraft reinsurance treaties.
General and administrative expenses increased by 8% to $18.4 million
for the year ended December 31, 2002 when compared to $17.0 million for 2001.
The increase is principally attributable to $1.5 million in charges resulting
from the reorganization of the Company's management structure in 2002.
Interest expense increased to $575,000 in 2002 from $395,000 in 2001
due to a larger amount of loan principal outstanding during the
year.
Net realized investment gains were $8.5 million for the year ended
December 31, 2002 as compared to net realized investment gains of $2.9 million
for 2001. The Company realized investment gains on the sale of a substantial
portion of its fixed maturities portfolio in 2002 in an effort to reposition the
portfolio. However, such investment gains in 2002 were partially offset by
realized investment losses on both the sale of the Company's common stock
portfolio and sale of lower rated fixed maturities.
The 2002 income tax provision reflects approximately $9.3 million of
tax benefits realized from the completion of the Company's withdrawal from its
London operations. Excluding this benefit, income taxes as a percentage of
income before taxes were 31.5% in 2002.
Premiums and other receivables, net, decreased to $35.7 million at
the end of 2002 from $74.9 million at the end of 2001. The decrease was largely
attributable to smaller balances due from the pool managed by MMO as a result of
favorable cash flows and smaller investment balances held by the pool. Premium
receivables from runoff segments (aircraft and MMO London) have also decreased
since the prior year.
Reinsurance receivables on paid and unpaid losses, net, decreased to
$326.4 million as of December 31, 2002 from $361.7 million for the same period
of 2001. The decrease is largely attributable to smaller loss recoveries from
runoff segments (aircraft and MMO London) and to the commutation of certain
reinsurance receivable balances.
Prepaid reinsurance premiums of $6.4 million and reserve of unearned
premiums of $45.4 million as of December 31, 2002 each decreased from the 2001
year end balances primarily due to reductions in the amount of inforce premiums
from the aircraft and MMO London segments.
Accumulated other comprehensive income decreased to $.4 million as of
December 31, 2002 from $7.9 million as of December 31, 2001. The change
principally reflects the sale of a substantial amount of the fixed maturity and
equity security portfolios in 2002.
The change in unpaid losses and loss adjustment expenses and
reinsurance receivables in 2001 was largely attributable to gross losses of
$154.9 million and reinsurance receivables of $146.9 million, respectively,
incurred from the World Trade Center attack. The change in unpaid losses and
loss adjustment expenses and reinsurance receivables in 2002 was largely
attributable to smaller loss payments and recoveries from segments (aircraft and
MMO London) of the Company that are no longer actively underwritten and to the
commutation of certain reinsurance receivable balances.
The change in other liabilities in 2001 was a result of increases in
funds held from reinsurers in order to collateralize their obligations to the
Company as required by provisions of various reinsurance treaties. Funds
obtained from reinsurers are invested by MMO for the benefit of the Company in
the insurance pools managed by MMO.
The change in premium and other receivables in 2001 was attributable
to larger amounts due from the pools managed by MMO as a result of larger
investment balances held by the pool. Premium receivables from segments
(aircraft and MMO London) where the Company is no longer actively underwriting
have also decreased since 2001.
Liquidity and Capital Resources
The Company monitors cash and short-term investments in order to have
an adequate level of funds available to satisfy claims and expenses as they
become due. As of December 31, 2003, the Company's assets included approximately
$259 million in cash and short-term investments. The amount of short-term
investments held is a direct result of the Company's concern over the prospects
of rising interest rates in the near future.
The primary sources of the Company's liquidity are funds generated
from insurance premiums, investment income and maturing or liquidating
investments.
33
Cash flows provided by operating activities were $22.1 million for
the year ended December 31, 2003. Cash of $61.7 million was used in 2003 to
establish the Company's trading portfolio, whose trading activities included
collateralized debt obligations and certain other securities with fixed
maturities. As the Company commenced its trading portfolio in 2003, any amounts
purchased by the Company would be reflected as a use of cash from operating
activities. In addition, cash flows in 2003 reflected larger amounts received
from collections of both reinsurance and premium and other receivables than in
2002. Paid losses were also lower in 2003, reflecting lower amounts paid from
runoff lines (aircraft and MMO London) and the commutation of certain loss
reserves.
Cash flows from operating activities in 2002 and 2001 amounted to
$65.4 million and $1.8 million, respectively, resulting primarily from increases
in premiums. Cash flows in 2002 reflected significant amounts received 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. Further
increasing cash flows in 2002 was the commutation of ceded loss reserves that
contributed approximately $19.3 million to cash flows. The Company's loss
payments on asbestos/environmental business, however, adversely affected cash
flows during the past three years.
Financing activities occurred in 2001 as a result of borrowings under
the Company's revolving credit agreement and unsecured credit facility. The
Company borrowed approximately $5.5 million in 2001 to assist in the payment of
gross losses of the Company. The loan amounts resulted from draw downs on
existing letters of credit provided to support the Company's U.K. operations.
Repayments under the Company's prior loan facility were made at $1,250,000 per
quarter in 2001.
In 2002, the Company entered into a credit agreement with an
unaffiliated company. The agreement combined the Company's existing credit
agreements together with a facility to fund future cash draw downs on the
letters of credit issued on behalf of the Company to fund losses in MMO London.
During 2002, the remaining balance of the letters of credit issued on behalf of
the Company was fully drawn down (approximately $15.7 million) and such payments
were funded entirely under the credit agreement. Approximately $17.4 million of
the loan balance was repaid in 2002 from cash derived from operating activities.
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. As of
December 31, 2003, there were no outstanding balances open on letter of credit
agreements.
Under the Common Stock Repurchase Plan, the Company may purchase up
to $55,000,000 of the Company's issued and outstanding shares of common stock on
the open market. The Company repurchased 98,816 shares of its common stock in
2003. During 2003, the Company issued 400,000 treasury shares in conjunction
with the equity sale to Conning Capital Partners VI, L.P. During 2001, the
Company issued 4,540 treasury shares in connection with the compensation of its
Directors.
The following table outlines the aggregate minimum annual rental
payments payable by the Company under various operating leases for office
facilities as of December 31, 2003:
2004 2005 2006 2007 2008 Thereafter
---- ---- ---- ----- ---- ----------
(in millions)
Operating leases $1.1 $1.3 $1.3 $1.2 $1.2 $ 9.4
On December 30, 2002, the Company signed a sublease at 919 Third
Avenue, New York, NY 10022 for which it received landlord's consent dated
January 31, 2003, for approximately 28,000 square feet for its principal offices
in New York. The sublease commenced on March 1, 2003 and expires on July 30,
2016. The minimum monthly rental payments of $102,794 commenced in March 2004
and end in 2016 and will amount to $15.3 million of total rental payments over
the term of the sublease.
As discussed below, on March 11, 2004, the Company issued
$100,000,000 in the aggregate principal amount of 6.50% Senior Notes. The
principal of the Senior Notes is payable in full on March 15, 2014. Interest is
payable semi-annually on March 15 and September 15 of each year, beginning
September 15, 2004.
34
Specific related party transactions and their impact on results of
operations are disclosed in Note 16 of the Company's financial statements.
The Company adheres to investment guidelines set by management and
approved by the Finance Committee of the Board of Directors. See "Investment
Policy".
NYMAGIC's principal source of cash flow is dividends from its
insurance company subsidiaries, which are then used to fund various operating
expenses, including interest expense, loan repayments and the payment of any
dividends to shareholders. The Company's domestic insurance company subsidiaries
are limited by statute in the amount of dividends that may be declared or paid
during a year. The limitation restricts dividends paid or declared to the lower
of 10% of policyholders' surplus or 100% of adjusted net investment income as
defined under New York Insurance Law. Within this limitation, the maximum amount
which could be paid to the Company out of the domestic insurance companies'
surplus was approximately $15,900,000 as of December 31, 2003. In connection
with the application for approval of acquisition of control of NYMAGIC, INC.,
filed by Mariner and William J. Michaelcheck with the New York State Insurance
Department (the "Department") pursuant to Section 1506 of the New York Insurance
Law, New York Marine and Gotham agreed for a period of two years from July 31,
2002, the date of the acquisition of such control, not to pay any dividends
without the consent of the Department. The limitations on dividends from the
insurance company subsidiaries are not expected to have a material impact on the
Company's ability to meet current cash obligations.
During 2003 and first quarter of 2004, New York Marine requested and
received approval from the State of New York Insurance Department to pay
extraordinary dividends of $5,000,000 and $15,000,000, respectively, to the
Company.
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, 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. On
December 17, 2003, the Company declared a dividend of six (6) cents per share to
shareholders of record on December 31, 2003, payable on January 8, 2004. On
February 26, 2004, the Company declared a dividend of six (6) cents per share to
shareholders of record on March 31, 2004, payable on April 6, 2004. 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.
On March 11, 2004, the Company issued $100,000,000 in 6.5% Senior
Notes due March 15, 2014 and received proceeds of $98,763,000 net of
underwriting discount but before other transaction expenses. The Notes provide
for semi-annual interest payments and are to be repaid in full on March 15,
2014. The indenture relating to the Senior Notes provides that the Company and
its restricted subsidiaries may not incur indebtedness unless the total
indebtedness of the Company and its restricted subsidiaries, calculated on a pro
forma basis after such issuance, would not exceed 50% of our total consolidated
capitalization (defined as the aggregate amount of our shareholders' equity as
shown on our most recent quarterly or annual consolidated balance sheet plus the
aggregate amount of indebtedness of the Company and its restricted
subsidiaries). The indenture also provides that the Company and its restricted
subsidiaries will not pay dividends or make other payments or distributions on
the Company's stock or the stock of any restricted subsidiary (excluding
payments by any restricted subsidiary to the Company), purchase or redeem the
Company's stock or make certain payments on subordinated indebtedness unless,
after making any such payment, the total indebtedness of the Company and its
restricted subsidiaries would not exceed 50% of our total consolidated
capitalization (as defined above). In addition, the indenture contains certain
other covenants that restrict our and our restricted subsidiaries' ability to,
among other things, incur liens on any shares of capital stock or evidences of
indebtedness issued by any of our restricted subsidiaries or issue or dispose of
voting stock of any of our restricted subsidiaries. The Company intends to use
the net proceeds from the sale of the Senior Notes for working capital and other
general corporate purposes, and, potentially, for acquisitions. The Company has
no agreement with respect to any acquisition, although we assess opportunities
on an ongoing basis and from time to time have discussions with other companies
about potential transactions.
Under the terms of a registration rights agreement, NYMAGIC has
agreed to file a registration statement under the Securities Act of 1933, as
amended, with the Securities and Exchange Commission to permit the exchange of
the Senior Notes for registered notes having terms substantially identical to
those of the Senior Notes (except that the registered notes will not be subject
to restrictions on ownership and transfer) or the registered resale of the
Senior Notes.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
35
Critical accounting policies
The Company discloses significant accounting policies in the notes to
its financial statements. Management considers certain accounting policies to be
critical for 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.
Unpaid losses and loss adjustment expenses are based on individual
case estimates for losses reported. A provision is also included, based on
actuarial estimates utilizing historical trends in the frequency and severity of
paid and reported claims, for losses incurred but not reported, salvage and
subrogation recoveries and for loss adjustment expenses. Unpaid losses with
respect to asbestos/environmental risks are difficult for management to estimate
and require considerable judgment due to the uncertainty regarding the
significant issues surrounding such claims. For a further discussion concerning
asbestos/environmental reserves see "Reserves." Unpaid losses and loss
adjustment expenses amounted to $518.9 million and $516.0 million at December
31, 2003 and 2002, respectively. Unpaid losses and loss adjustment expenses, net
of reinsurance amounted to $242.3 million and $209.0 million at December 31,
2003 and 2002, respectively. Both the gross and net unpaid loss reserve
estimates as of December 31, 2002 have been reasonably estimated as reserve
changes of less than one percent were reported in 2003 on their respective
balances. Management continually reviews and updates the estimates for unpaid
losses and any changes resulting therefrom are reflected in operating results
currently. The potential for future adverse or favorable loss development is
highly uncertain and subject to a variety of factors including, but not limited
to, court decisions, legislative actions and inflation.
The allowance for doubtful accounts is based on management's review
of amounts due from insolvent or financially impaired companies. Allowances are
estimated for both premium receivables and reinsurance receivables. Management
continually reviews and updates such estimates for any changes in the financial
status of companies. For a further discussion concerning reinsurance receivables
see "Reinsurance Ceded." The allowance for doubtful accounts on reinsurance
receivables amounted to $12.8 million and $13.3 million at December 31, 2003 and
2002, respectively. The allowance for doubtful accounts on premiums and other
receivables amounted to $450,000 as of December 31, 2003 and 2002, respectively.
Impairment of investments, included in realized investment gains or
losses, results from declines in the fair value of investments which are
considered by management to be other-than-temporary. Management reviews
investments for impairment based upon specific criteria that include the
duration and extent of declines in fair value of the security below its cost or
amortized cost. Procedures utilized for analyzing other-than-temporary declines
in the value of fixed income investments include the following: 1) identifying
those fixed income securities with fair values declines of greater than 10% at
the end of each reporting period and held for 6 months or more; 2) determining
if such fixed income investments have had any rating agency downgrades; 3)
recording an impairment if one of the following situations is true: a) the fair
value decline is greater than 20%, b) the fixed income security has been
downgraded more than two levels by a major rating agency, or c) the fair value
decline is greater than 10% and the security has been downgraded one level by a
major rating agency. Procedures utilized for analyzing other-than-temporary
declines in the value of equity securities include recording writedowns on those
equity securities with fair value declines of greater than 20% at the end of
each reporting period and held for 6 months or more. The Company will consider
the effect of rising interest rates in determining other-than-temporary declines
in the value of fixed income investments. Approximately $0 and $1.5 million were
charged to results from operations in 2003 and 2002, respectively, resulting
from fair value declines considered to be other-than-temporary. Gross unrealized
gains and losses on fixed maturity investments amounted to approximately $1.2
million and $.3 million, respectively, at December 31, 2003. As of December 31,
2003, there were no unrealized losses greater than one year from the date of
purchase on fixed income securities. There were no unrealized gains or losses on
equity securities at December 31, 2003 and 2002, respectively.
The Company utilizes the equity method of accounting to account for
its limited partnership hedge fund investments. 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. Net investment income derived
from investments in limited partnerships amounted to $7.7 million and
approximately $900,000 for the years ended December 31, 2003 and 2002,
respectively. See Item 7A "Quantitative and Qualitative Disclosures About Market
Risk" with respect to market risks associated with investments in limited
partnership hedge funds.
36
The Company maintained a trading portfolio at December 31, 2003
consisting of collaterallized debt obligations (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. The Company recorded $9.4 million in net trading portfolio
income for the year ended December 31, 2003. See Item 7A "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 Note 13 to the Company's
Consolidated Financial Statements for a discussion on the effect of adopting
SFAS 123.
Effect of recent accounting pronouncements
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51"
("FIN 46"), which requires an enterprise to assess whether consolidation of an
entity is appropriate based upon its interests in a variable interest entity
("VIE"). A VIE is an entity in which the equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The initial determination of
whether an entity is a VIE shall be made on the date at which an enterprise
becomes involved with the entity. An enterprise shall consolidate a VIE if it
has a variable interest that will absorb a majority of the VIEs expected losses
if they occur, receive a majority of the entity's expected residual returns if
they occur or both. FIN 46 was effective immediately for new VIEs established or
purchased subsequent to January 31, 2003.
In December 2003, the FASB issued a revised version of FIN 46 ("FIN
46R"), which incorporates a number of modifications and changes made to the
original version. FIN 46R replaces the previously issued FIN 46 and, subject to
certain special provisions, is effective no later than the end of the first
reporting period that ends after December 15, 2003 for entities considered to be
special-purpose entities and no later than the end of the first reporting period
that ends after March 15, 2004 for all other VIEs. Early adoption is permitted.
The adoption of FIN 46R is not expected to result in the consolidation of any
VIEs.
Effective December 31, 2003, the Company adopted the disclosure
requirements of Emerging Issues Task Force ("EITF") Issue No. 03-01, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments". Under the consensus, disclosures are required for unrealized
losses on fixed maturity and equity securities accounted for under SFAS No. 115,
"Accounting for Certain Investment in Debt and Equity Securities", and SFAS No.
124, "Accounting for Certain Investments Held by Not-for-Profit Organizations",
that are classified as either available-for-sale or held-to-maturity. The
disclosure requirements include quantitative information regarding the aggregate
amount of unrealized losses and the associated fair value of the investments in
an unrealized loss position, segregated into time periods for which the
investments have been in an unrealized loss position. The EITF also requires
certain qualitative disclosures about the unrealized holdings in order to
provide additional information that the Company considered in concluding that
the unrealized losses were not other-than-temporary.
(For further discussion, see disclosures in Note 2.)
Statement of Financial Accounting Standards No. 148, "Accounting for
Stock Based Compensation - Transition and Disclosure" ("SFAS 148"), was issued
by the Financial Accounting Standards Board ("FASB") in December 2002. SFAS 148
provides alternative methods of transition for a company that voluntarily
changes its method of accounting for stock based employee compensation to the
fair value method. SFAS 148 also requires additional disclosures in both annual
and interim financial statements about the method of accounting for stock based
employee compensation and its effect on reported results. SFAS 148 is effective
for interim periods beginning after December 15, 2002. The Company has adopted
the appropriate disclosures under SFAS 148.
Impact of Inflation
Periods of inflation have prompted the pools, and consequently the
Company, to react quickly to actual or potential imbalances between costs,
including claim expenses, and premium rates. These imbalances have been
corrected mainly through improved underwriting controls, responsive management
information systems and frequent review of premium rates and loss experience.
37
Inflation also affects the final settlement costs of claims, which
may not be paid for several years. The longer a claim takes to settle, the more
significant the impact of inflation on final settlement costs. The Company
periodically reviews outstanding claims and adjusts reserves for the pools based
on a number of factors, including inflation.
- --------------------------------------------------------------------------------
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------------------
Market risk includes the potential for future losses due to changes
in the fair value of financial instruments, which relates mainly to the
Company's investment portfolio. Those risks associated with the investment
portfolio include the effects of exposure to adverse changes in interest rates,
credit quality and hedge fund and equity investments.
The largest market risk to the Company is interest rate risk.
Interest rate risk includes the changes in the fair value of fixed maturities
based upon changes in interest rates. The Company considers interest rate risk
and the overall duration of the Company's loss reserves in evaluating the
Company's investment portfolio.
The following tabular presentation outlines the expected cash flows
of fixed maturities available for sale for each of the next five years and the
aggregate cash flows expected for the remaining years thereafter based upon
maturity dates. Fixed maturities include taxable and tax-exempt securities with
applicable weighted average interest rates.
Future cash flows of expected principal amounts
-----------------------------------------------
(Dollars in millions)
Total Total
There- Amortized Fair
Fixed maturities 2004 2005 2006 2007 2008 after Cost Value
- ---------------- ---- ---- ---- ---- ---- ----- ---- -----
Tax-exempts $ 17 --- --- --- --- --- $17 $17
Average interest rate .9% --- --- --- --- --- --- ---
Taxables $ 7 $16 $24 $6 $15 $8 $76 $76
Average interest rate 7.9% 7.4% 6.4% 6.1% 5.8% 6.7% --- ---
---------------------------------------------------------------------------------------------
Total $ 24 $16 $24 $6 $15 $8 $93 $93
Credit quality risk includes the risk of default by issuers of debt
securities. As of December 31, 2003, 88% of the fair value of the Company's
fixed income and short term investment portfolios were considered investment
grade. As of December 31, 2003, the Company invested approximately $51.5 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 18% of the total amount invested in below investment grade
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 many 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. The hedge funds in which we invest
usually impose limitations on the timing of withdrawals from the hedge funds
(most are within 90 days), and may affect our liquidity. With respect to an
investment in a limited partnership managed by a Mariner affiliated Company and
consolidated in the Company's financial statements, the Company cannot withdraw
funds for a minimum period of three years without the consent of the hedge fund
manager.
38
The Company invests in CDOs, which are private placements. The fair
value of each security is provided by securities dealers. 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 million at December
31, 2003. The largest single investment made by the Company in such securities
amounted to 15% of the total amount invested in CDO securities.
The Company monitors market risks on a regular basis through meetings
with Mariner, examining the existing portfolio and reviewing potential changes
in investment guidelines, the overall effect of which is to allow management to
make informed decisions concerning the impact that market risks have on the
portfolio.
- --------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
- --------------------------------------------------------------------------------
Interested persons can obtain access to the Company's 10-K, 10-Q and
8-K reports on its Internet web site, www.nymagic.com, as soon as reasonably
practicable after they are filed or furnished to the SEC.
The consolidated financial statements required by this item and the
report of the independent accountants therein required by Item 15(a) of this
report commence on page F-2. See accompanying Index to the Consolidated
Financial Statements on page F-1.
- --------------------------------------------------------------------------------
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
None.
- --------------------------------------------------------------------------------
Item 9A. Controls and Procedures
- --------------------------------------------------------------------------------
Evaluation of Disclosure 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.
Changes in Internal Controls
There have been no significant changes in our "internal control over
financial reporting" (as defined in rule 13a-15(f)) that occurred during the
period covered by this report that has materially affected or is reasonably
likely to materially affect our internal control over financial reporting.
39
PART III
- --------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant
- --------------------------------------------------------------------------------
The information required by this Item is incorporated by reference
herein from the sections captioned "Election of Directors," "Nominees for
Directors," "Executive Officers of the Company" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in NYMAGIC's Proxy Statement for the 2004 Annual
Meeting of Shareholders to be filed within 120 days after December 31, 2003.
- --------------------------------------------------------------------------------
Item 11. Executive Compensation
- --------------------------------------------------------------------------------
The information required by this Item is incorporated by reference
herein from the sections captioned "Compensation of Directors" and "Compensation
of Executive Officers" in NYMAGIC's Proxy Statement for the 2004 Annual Meeting
of Shareholders to be filed within 120 days after December 31, 2003.
- --------------------------------------------------------------------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------------
The information required by this Item is incorporated by reference
herein from the sections captioned "Security Ownership of Certain Beneficial
Owners," "Security Ownership of Management," "Changes in Control" and "Equity
Compensation Plans" in NYMAGIC's Proxy Statement for the 2004 Annual Meeting of
Shareholders to be filed within 120 days after December 31, 2003.
- --------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------------------------------
The information required by this Item is incorporated by reference
herein from the section captioned "Certain Relationships and Related
Transactions" in NYMAGIC's Proxy Statement for the 2004 Annual Meeting of
Shareholders to be filed within 120 days after December 31, 2003.
- --------------------------------------------------------------------------------
Item 14. Principal Accounting Fees and Services
- --------------------------------------------------------------------------------
The information required by Item 9(e) of Schedule 14A is incorporated
herein by reference to the Company's definitive proxy statement to be filed not
later than April 29, 2004 with the Securities and Exchange Commission pursuant
to Regulation 14A of the Exchange Act.
40
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------------
(a) 1. Financial Statements
The list of financial statements appears in the accompanying index on page F-1.
2. Financial Statement Schedules
The list of financial statement schedules appears in the accompanying index on page F-1.
3. Exhibits
3.1 Charter of NYMAGIC, INC. (Filed as Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed on December
16, 2003 (Commission File No. 1-11238) and incorporated herein by reference).
3.2 Amended and Restated By-Laws. (Filed as Exhibit 3.3 of the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 (Commission File No. 1-11238) and incorporated herein by reference).
4.0 Specimen Certificate of common stock (Filed as Exhibit 4.0 of Amendment No. 2 to the Registrant's Registration
Statement No. 33-27665) and incorporated herein by reference).
10.1 Restated Management Agreement dated as of January 1, 1986, by and among Mutual Marine Office, Inc. and
Arkwright-Boston Manufacturers Mutual Insurance Company, Utica Mutual Insurance Company, Lumber Mutual Insurance
Company, the Registrant and Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit 10.2 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986 (Commission File No. 2-88552)
and incorporated herein by reference).
10.2 Amendment No. 2 to the Restated Management Agreement, dated as of December 30, 1988, by and among Mutual Marine
Office, Inc. and Arkwright Mutual Insurance Company, Utica Mutual Insurance Company, Lumber Mutual Insurance
Company, the Registrant and Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit 10.2.2. of
the Registrant's Current Report on Form 8-K dated January 6, 1989 (Commission File No. 2-88552) and incorporated
herein by reference).
10.3 Amendment No. 3 to the Restated Management Agreement, dated as of December 31, 1990 by and among Mutual Marine
Office, Inc. and Arkwright Mutual Insurance Company, Utica Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit 10.2.3. of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1990 (Commission File No. 3-27665) and incorporated
herein by reference).
10.4. Restated Management Agreement dated as of January 1, 1986, by and among Mutual Inland Marine Office, Inc. and
Arkwright-Boston Manufacturers Mutual Insurance Company, Utica Mutual Insurance Company, Lumber Mutual Insurance
Company, the Registrant and Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit 10.4 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986 (Commission File No. 2-88552)
and incorporated herein by reference).
10.5 Amendment No. 2 to the Restated Management Agreement, dated as of December 30, 1988, by and among Mutual Inland
Marine Office, Inc. and Arkwright Mutual Insurance Company, Utica Mutual Insurance Company, Lumber Mutual
Insurance Company, the Registrant and Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit
10.4.2 of the Registrant's Current Report on Form 8-K, dated January 6, 1989 (Commission File No. 2-88552) and
incorporated herein by reference).
41
10.6 Amendment No. 3 to the Restated Management Agreement, dated as of December 31, 1990, by and among Mutual Inland
Marine Office, Inc. and Arkwright Mutual Insurance Company, Utica Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit 10.4.3. of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1990 (Commission File No. 3-27665) and incorporated
herein by reference).
10.7 Restated Management Agreement dated as of January 1, 1986, by and among Mutual Marine Office of the Midwest, Inc.
and Arkwright-Boston Manufacturers Mutual Insurance Company, Utica Mutual Insurance Company, Lumber Mutual
Insurance Company, the Registrant and Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit
10.6 of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986 (Commission File
No. 2-88552) and incorporated herein by reference).
10.8 Amendment No. 2 to the Restated Management Agreement dated as of December 30, 1988, by and among Mutual Marine
Office of the Midwest, Inc. and Arkwright Mutual Insurance Company, Utica Mutual Insurance Company, Lumber Mutual
Insurance Company, the Registrant and Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit
10.6.2 of the Registrant's Current Report on Form 8-K, dated January 6, 1989 (Commission File No. 2-88552) and
incorporated herein by reference).
10.9 Amendment No. 3 to the Restated Management Agreement dated as of December 31, 1990, by and among Mutual Marine
Office of the Midwest, Inc. and Arkwright Mutual Insurance Company, Utica Mutual Insurance Company, the
Registrant and Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit 10.6.3. of the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (Commission File No. 3-27665)
and incorporated herein by reference).
10.10 Restated Management Agreement dated as of January 1, 1986, by and among Pacific Mutual Marine Office, Inc. and
Arkwright-Boston Manufacturers Mutual Insurance Company, Lumber Mutual Insurance Company, Utica Mutual Insurance
Company, the Registrant and Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit 10.8 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986 (Commission File No. 2-88552)
and incorporated herein by reference).
10.11 Amendment No. 2 to the Restated Management Agreement dated as of December 30, 1988, by and among Pacific Mutual
Marine Office, Inc. and Arkwright Mutual Insurance Company, Lumber Mutual Insurance Company, Utica Mutual
Insurance Company, the Registrant and Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit
10.8.2 of the Registrant's Current Report on Form 8-K, dated January 6, 1989 (Commission File No. 2-88552) and
incorporated herein by reference).
10.12 Amendment to Restated Management Agreement dated as of December 31, 1990, by and among Pacific Mutual Marine
Office, Inc. and Arkwright Mutual Insurance Company, Utica Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit 10.8.3. of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992 (Commission File No. 1-11238) and incorporated
herein by reference).
10.13 1991 Stock Option Plan (Filed as Exhibit A to the Registrant's Proxy Statement for its 1991 Annual Meeting of
Shareholders (Commission File No. 1-11238) and incorporated herein by reference).
10.14 Form of Indemnification Agreement (Filed as Exhibit 10.10 of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 (Commission File No. 1-11238) and incorporated herein by reference).
10.15 1999 NYMAGIC, INC. Phantom Stock Plan (Filed as Exhibit 10.11 of the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999 (Commission File No. 1-11238) and incorporated herein by reference).
42
10.16 Severance Agreement dated as of December 31, 2001 by and between NYMAGIC, INC. and Thomas J. Iacopelli (Filed as
Exhibit 10.2 of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (Commission File
No. 1-11238) and incorporated herein by reference).
10.17 Severance Agreement dated as of July 9, 2002 by and between NYMAGIC, INC. and Paul Hart. *
10.18 NYMAGIC, INC. 2002 Nonqualified Stock Option Plan (Filed as Exhibit 10.2 of Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2002 (Commission File No. 1-11238) and incorporated herein by
reference).
10.19 Voting Agreement among Mariner Partners, Inc. and certain stockholders of the Company dated as of February 20,
2002, as amended March 1, 2002 (Filed as Exhibit 99.1 to the Schedule 13D filed by Mariner Partners, Inc. and the
other reporting persons named therein on March 4, 2002 (Commission File No. 5-40907) and incorporated herein by
reference).
10.20 Amendment No. 2 dated as of January 27, 2003 to Voting Agreement among Mariner Partners, Inc. and certain
stockholders of the Company (Filed as Exhibit 99.2 to the Schedule 13D/A filed by Mariner Partners, Inc. and the
other reporting persons named therein on April 10, 2003 (Commission File No. 5-40907) and incorporated herein by
reference).
10.21 Amendment No. 3 dated as of March 12, 2003, to Voting Agreement among Mariner Partners, Inc. and certain
stockholders of the Company (Filed as Exhibit 99.3 to the Schedule 13D/A filed by Mariner Partners, Inc. and the
other reporting person named therein on April 10, 2003 (Commission File No. 5-40907) and incorporated herein by
reference).
10.22 Amendment No. 4 dated as of February 24, 2004 to Voting Agreement among Mariner Partners, Inc. and certain
stockholders of the Company. *
10.23 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 (Filed as Exhibit 10.1 to Registrant's original Form 10-Q for the
quarter ended June 30, 2003 (Commission File No. 1-11238) and incorporated herein by reference).
10.25 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 (Filed as Exhibit 10.2 to Registrant's original Form 10-Q for the quarter ended
June 30, 2003 (Commission File No. 1-11238) and incorporated herein by reference).
10.26 Amended and Restated Investment Management Agreement between Mariner Partners, Inc. and NYMAGIC, Inc. and New
York Marine And General Insurance Company and Gotham Insurance Company, dated as of December 6, 2002 (Filed as
Exhibit 10.6 of Registrant's amended Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
(Commission File No. 1-11238) and incorporated herein by reference).
10.27 Limited Partnership Agreement of Mariner Tiptree (CDO) Fund I, L.P. dated as of May 1, 2003 (Filed as Exhibit
10.1 of Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (Commission File No.
1-11238) and incorporated herein by reference).
10.28 Securities Purchase Agreement dated as of January 31, 2003 by and between NYMAGIC, Inc. and Conning Capital
Partners VI, L.P. (Filed as Exhibit 99.1 of Registrant's Current Report on Form 8-K dated January 31, 2003
(Commission File No. 1-11238) and incorporated herein by reference).
10.29 Registration Rights Agreement dated as of January 31, 2003 by and between NYMAGIC, Inc. and Conning Capital
Partners VI, L.P. (Filed as Exhibit 99.2 of Registrant's Current Report on Form 8-K dated January 31, 2003
(Commission File No. 1-11238) and incorporated herein by reference).
43
10.30 Option Certificate dated as of January 31, 2003 by and between NYMAGIC, INC. and Conning Capital Partners VI,
L.P. (Filed as Exhibit 99.3 of Registrant's Current Report on Form 8-K dated January 31, 2003 (Commission File
No. 1-11238) and incorporated herein by reference).
10.31 Registration Rights Agreement dated as of March 11, 2004 by and among NYMAGIC, INC. and Keefe, Bruyette and
Woods, Inc. and the other initial purchasers referred to therein. *
10.32 Indenture dated as of March 11, 2004 by and between NYMAGIC, INC. and Wilmington Trust Company, as trustee
related to the Company's 6.50% Senior Notes due 2014. *
10.33 First Supplemental Indenture dated as of March 11, 2004 by and between NYMAGIC, INC. and Wilmington Trust
Company, as trustee. *
10.34 Sublease dated as of December 12, 2002 by and between BNP Paribas and New York Marine And General Insurance
Company (Filed as Exhibit 10.20 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
2002 (Commission File No. 1-11238) and incorporated herein by reference).
21.1 Subsidiaries of the Registrant. *
23.1 Consent of KPMG LLP. *
31.1 Certification of George R. Trumbull, III, Chief Executive Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. *
31.2 Certification of Thomas J. Iacopelli, Chief Financial Officer, as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002. *
32.1 Certification of George R. Trumbull, III, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
32.2 Certification of Thomas J. Iacopelli, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
------------------
* Filed herewith.
(b) Reports on Form 8-K
During the fiscal quarter ended December 31, 2003, the Registrant filed the following Current Reports on Form 8-K:
(1) Current Report on Form 8-K, as filed with the Commission on November 10, 2003 reporting under Item 12 "Results of
Operations and Financial Condition" the Company's issuance of a press release reporting the Company's financial
results for its fiscal quarter ended September 30, 2003.
(2) Current Report on Form 8-K, as filed with the Commission on November 25, 2003 reporting under Item 9 "Regulation
FD Disclosure" the Company's issuance of a press release announcing the Company's secondary offering of common
shares by a group of selling shareholders.
(3) Current Report on Form 8-K, as filed with the Commission on December 12, 2003 reporting (i) under Item 5 "Other
Events" that the Company and certain selling shareholders executed an Underwriting Agreement and (ii) Item 9
"Regulation FD Disclosure" the Company's issuance of a press release announcing the pricing of the Company's
secondary offering.
(4) Current Report on Form 8-K, as filed with the Commission on December 16, 2003 updating under Item 5 "Other
Events" the certificate of incorporation as on file with the Commission to include charter amendments.
44
(5) Current Report on Form 8-K, as filed with the Commission on December 18, 2003 reporting under Item 9 "Regulation
FD Disclosure" the Company's issuance of a press release announcing that it had declared a dividend to
shareholders of six cents per share, payable on January 7, 2004 to shareholders of record on December 31, 2003.
(6) Current Report on Form 8-K, as filed with the Commission on December 23, 2003 reporting under Item 9 "Regulation
FD Disclosure" the Company's issuance of a press release announcing that, pursuant to an Underwriting Agreement
dated December 11, 2003, the underwriters have exercised and closed their over-allotment option with respect to
the Company's secondary offering.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NYMAGIC, INC.
(Registrant)
By: /s/ George R. Trumbull, III
---------------------------
George R. Trumbull, III
Chief Executive Officer
Date: March 12, 2004
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Name Title Date
- ---- ----- ----
/s/ John R. Anderson Director March 12, 2004
- --------------------
John R. Anderson
/s/ Glenn J. Angiolillo Director March 12, 2004
- -----------------------
Glenn J. Angiolillo
/s/ John T. Baily Director March 12, 2004
- -----------------
John T. Baily
/s/ John N. Blackman, Jr. Director March 12, 2004
- -------------------------
John N. Blackman, Jr.
/s/ Mark W. Blackman Director March 12, 2004
- --------------------
Mark W. Blackman
/s/ David E. Hoffman Director March 12, 2004
- --------------------
David E. Hoffman
/s/ A. George Kallop Director March 12, 2004
- --------------------
A. George Kallop
/s/ William J. Michaelcheck Director March 12, 2004
- ---------------------------
William J. Michaelcheck
/s/ William D. Shaw, Jr. Director March 12, 2004
- ------------------------
William D. Shaw, Jr.
/s/ Robert G. Simses Director March 12, 2004
- --------------------
Robert G. Simses
/s/ George R. Trumbull, III Director, Chairman and March 12, 2004
- --------------------------- Chief Executive Officer
George R. Trumbull, III
/s/ Glenn R. Yanoff Director March 12, 2004
- -------------------
Glenn R. Yanoff
/s/ David W. Young Director March 12, 2004
- ------------------
David W. Young
/s/ Thomas J. Iacopelli Principal Accounting Officer March 12, 2004
- ----------------------- and Chief Financial Officer
Thomas J. Iacopelli
46
NYMAGIC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report........................ F-2
Consolidated Balance Sheets......................... F-3
Consolidated Statements of Income................... F-4
Consolidated Statements of Shareholders' Equity..... F-5
Consolidated Statements of Cash Flows............... F-6
Notes to Consolidated Financial Statements.......... F-7
Financial Statement Schedule II..................... F-27
Financial Statement Schedule III.................... F-29
Financial Statement Schedule V...................... F-30
Financial Statement Schedule VI..................... F-31
F-1
INDEPENDENT AUDITORS' REPORT
- ----------------------------
The Board of Directors and Shareholders
NYMAGIC, INC.:
We have audited the accompanying consolidated balance sheets of NYMAGIC, INC.
and subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 2003. In connection with our audits
of the consolidated financial statements, we have also audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
NYMAGIC, INC. and subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG LLP
New York, New York
February 17, 2004, except as to Note 18, which is as of March 11, 2004
F-2
NYMAGIC, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
- -------------------------------------------------------------------------------------------------
2003 2002
-------------------------------
ASSETS
Investments:
Fixed maturities:
Available for sale at fair value
(amortized cost $ 92,594,971 and $29,923,407) $ 93,470,691 $ 30,480,249
Trading at fair value (cost $61,423,212 and $0) ..... 61,736,951 --
Equity securities available for sale at fair value
(cost $0 and $4,728,485) .............................. -- 4,728,485
Limited partnerships at equity
(cost $96,250,000 and $37,500,000) .................... 105,434,419 38,477,219
Short-term investments .................................... 257,059,675 355,803,960
----------- -----------
Total investments ............................ 517,701,736 429,489,913
----------- -----------
Cash ........................................................ 1,940,541 980,109
Accrued investment income ................................... 2,099,641 391,949
Premiums and other receivables, net ......................... 23,981,910 35,690,128
Reinsurance receivables on unpaid losses, net ............... 276,618,865 307,023,114
Reinsurance receivables on paid losses, net ................. 4,229,697 19,399,226
Deferred policy acquisition costs ........................... 8,245,600 7,708,186
Prepaid reinsurance premiums ................................ 20,906,056 6,397,405
Deferred income taxes ....................................... 11,772,721 12,000,806
Property, improvements and equipment, net ................... 3,937,603 731,406
Other assets ................................................ 3,690,715 4,194,725
--------- ---------
Total assets ................................. $ 875,125,085 $ 824,006,967
============= =============
LIABILITIES
Unpaid losses and loss adjustment expenses .................. $ 518,929,558 $ 516,002,310
Reserve for unearned premiums ............................... 61,821,283 45,399,375
Ceded reinsurance payable ................................... 25,812,895 19,718,427
Notes payable ............................................... -- 6,219,953
Dividends payable ........................................... 583,305 --
Other liabilities ........................................... 23,686,944 15,714,152
---------- ----------
Total liabilities ............................ 630,833,985 603,054,217
----------- -----------
SHAREHOLDERS' EQUITY
Common stock ................................................ 15,279,390 15,158,324
Paid-in capital ............................................. 35,476,566 30,206,370
Accumulated other comprehensive income ...................... 569,220 361,947
Retained earnings ........................................... 239,127,097 224,364,808
----------- -----------
290,452,273 270,091,449
Treasury stock, at cost, 5,554,642 and 5,855,826 shares ..... (46,161,173) (49,138,699)
----------- -----------
Total shareholders' equity ................... 244,291,100 220,952,750
----------- -----------
Total liabilities and shareholders' equity $ 875,125,085 $ 824,006,967
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
------------------------------------------------
2003 2002 2001
------------------------------------------------
Revenues:
Net premiums earned ............................ $ 96,393,950 $ 113,457,453 $ 84,632,597
Commission income .............................. (229,772) 1,548,418 3,312,449
Net investment income .......................... 22,393,704 15,820,734 17,387,510
Net realized investment gains .................. 549,988 8,456,003 2,874,573
Other income ................................... 1,687,779 186,470 284,926
----------------------------------------------
Total revenues ................................. 120,795,649 139,469,078 108,492,055
----------------------------------------------
Expenses:
Net losses and loss adjustment expenses incurred 55,715,314 73,356,338 87,900,636
Policy acquisition expenses .................... 19,430,211 18,898,550 16,083,412
General and administrative expenses ............ 19,427,784 18,372,827 16,952,636
Interest expense ............................... 25,652 575,295 394,717
----------------------------------------------
Total expenses ................................. 94,598,961 111,203,010 121,331,401
----------------------------------------------
Income (loss) before income taxes .............. 26,196,688 28,266,068 (12,839,346)
Income tax provision:
Current ........................................ 8,987,448 (4,869,283) 798,389
Deferred ....................................... 116,476 4,424,857 (498,742)
----------------------------------------------
Total income tax expense (benefit) ............. 9,103,924 (444,426) 299,647
----------------------------------------------
Net income (loss) .............................. $ 17,092,764 $ 28,710,494 $ (13,138,993)
==============================================
Weighted average number of shares of
common stock outstanding-basic .............. 9,673,323 9,277,340 9,231,698
----------------------------------------------
Basic earnings (loss) per share ................ $1.77 $3.09 $(1.42)
----------------------------------------------
Weighted average number of shares of
common stock outstanding-diluted ............ 9,827,676 9,308,510 9,231,698
----------------------------------------------
Diluted earnings (loss) per share .............. $1.74 $3.08 $(1.42)
----------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Year ended December 31,
-----------------------------------------------
2003 2002 2001
------------- ------------- -------------
Common stock:
Balance, beginning of year ..................... $ 15,158,324 $ 15,123,658 $ 15,018,392
Shares issued .................................. 121,066 34,666 105,266
------------- ------------- -------------
Balance, end of year ....................... 15,279,390 15,158,324 15,123,658
============= ============= =============
Paid-in capital:
Balance, beginning of year ..................... $ 30,206,370 $ 29,702,414 $ 27,992,916
Shares issued and other ........................ 5,270,196 503,956 1,709,498
------------- ------------- -------------
Balance, end of year ....................... 35,476,566 30,206,370 29,702,414
============= ============= =============
Accumulated other comprehensive income:
Balance, beginning of year ..................... $ 361,947 $ 7,930,180 $ 10,918,088
Unrealized gain (loss) on securities,
net of reclassification adjustment ....... 207,273 (6,756,353) (3,314,447)
Foreign currency translation adjustments ....... -- (811,880) 326,539
------------- ------------- -------------
Other comprehensive income (loss) .............. 207,273 (7,568,233) (2,987,908)
------- ---------- ----------
Balance, end of year ....................... 569,220 361,947 7,930,180
======= ========== ==========
Retained earnings:
Balance, beginning of year ..................... $ 224,364,808 $ 195,654,314 $ 211,565,023
Net income (loss) .............................. 17,092,764 28,710,494 (13,138,993)
Dividends declared ............................. (2,330,475) -- (2,771,716)
------------- ------------- -------------
Balance, end of year ....................... 239,127,097 224,364,808 195,654,314
============= ============= =============
Treasury stock, at cost:
Balance, beginning of year ..................... (49,138,699) $ (49,138,699) $ (49,204,710)
Net sale of common stock ....................... 2,977,526 -- 66,011
------------- ------------- -------------
Balance, end of year ....................... (46,161,173) (49,138,699) (49,138,699)
============= ============= =============
Total Shareholders' Equity ........................ 244,291,100 220,952,750 199,271,867
============= ============= =============
Comprehensive income:
Net income (loss) .............................. $ 17,092,764 $ 28,710,494 $ (13,138,993)
Other comprehensive income (loss) .............. 207,273 (7,568,233) (2,987,908)
------------- ------------- -------------
Comprehensive income (loss) ................ 17,300,037 21,142,261 (16,126,901)
============= ============= =============
Number of Shares
----------------
Common stock, par value $1 each:
Issued, beginning of year ...................... 15,158,324 15,123,658 15,018,392
Shares Issued .................................. 121,066 34,666 105,266
-----------------------------------------------
Issued, end of year ........................ 15,279,390 15,158,324 15,123,658
-----------------------------------------------
Common stock, authorized shares,
par value $1 each .............................. 30,000,000 30,000,000 30,000,000
-----------------------------------------------
Common stock, shares outstanding, end of year ..... 9,724,748 9,302,498 9,267,832
-----------------------------------------------
Dividends declared per share ...................... $.24 $.00 $.30
-----------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
NYMAGIC, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------------------------
2003 2002 2001
-----------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 17,092,764 $ 28,710,494 $ (13,138,993)
------------- ------------- -------------
Adjustments to reconcile net income (loss) to
net cash provided by
operating activities:
Provision for deferred taxes 116,476 4,424,857 (498,742)
Net realized investment gains (549,988) (8,456,003) (2,874,573)
Equity in earnings of limited partnerships (8,548,971) (977,220) --
Net bond amortization 710,214 1,825,473 710,443
Depreciation and other, net 518,475 410,781 427,799
Changes in:
Premiums and other receivables 11,708,218 39,203,457 (20,908,841)
Reinsurance receivables paid and unpaid, net 45,573,778 35,326,444 (113,700,613)
Ceded reinsurance payable 6,094,468 (7,675,269) 12,350,000
Accrued investment income (1,707,692) 3,855,082 357,154
Deferred policy acquisition costs (537,414) 459,477 (2,813,174)
Prepaid reinsurance premiums (14,508,651) 12,388,670 424,283
Other assets 504,010 2,031,971 (672,705)
Unpaid losses and loss adjustment expenses 2,927,248 (18,186,752) 122,922,093
Reserve for unearned premiums 16,421,908 (19,671,615) 4,635,216
Foreign currency translation adjustments -- (811,880) 326,539
Other liabilities 7,972,792 (7,445,716) 14,241,029
Trading portfolio activities (61,736,951) -- --
------------- ------------- -------------
Total adjustments 4,957,920 36,701,757 14,925,908
------------- ------------- -------------
Net cash provided by operating activities 22,050,684 65,412,251 1,786,915
------------- ------------- -------------
Cash flows from investing activities:
Fixed maturities acquired (132,310,120) (121,264,193) (244,020,478)
Equity securities acquired -- (47,958,228) (22,390,406)
Limited partnerships acquired (72,500,000) -- --
Net sale (purchase) of short-term investments 99,632,096 (290,365,000) (32,577,834)
Fixed maturities matured 3,820,000 7,401,141 18,947,896
Fixed maturities sold 64,840,423 344,255,556 254,449,145
Equity securities sold 4,658,759 41,820,921 27,781,388
Limited partnerships sold 14,091,597 -- --
Acquisition of property & equipment, net (3,724,672) (50,738) (293,967)
------------- ------------- -------------
Net cash provided by (used in) investing activities (21,491,917) (66,160,541) 1,895,744
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from stock issuance and other 2,176,507 538,622 1,814,764
Cash dividends paid to stockholders (1,747,170) -- (3,687,519)
Net sale of treasury shares 6,192,281 -- 66,011
Proceeds from borrowings -- 15,719,953 5,452,840
Loan principal payments (6,219,953) (17,411,253) (5,000,000)
------------- ------------- -------------
Net cash provided by (used in) financing activities 401,665 (1,152,678) (1,353,904)
------------- ------------- -------------
Net increase (decrease) in cash 960,432 (1,900,968) 2,328,755
Cash at beginning of year 980,109 2,881,077 552,322
------------- ------------- -------------
Cash at end of year $ 1,940,541 $ 980,109 $ 2,881,077
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary Of Significant Accounting Policies:
Nature of operations
NYMAGIC, INC. (the "Company" or "NYMAGIC"), through its subsidiaries,
has specialized in underwriting ocean marine, inland marine/fire, aircraft and
other liability insurance through insurance pools managed by Mutual Marine
Office, Inc. ("MMO"), Pacific Mutual Marine Office, Inc. ("PMMO"), and Mutual
Marine Office of the Midwest, Inc. ("Midwest"). MMO, located in New York, PMMO
located in San Francisco, and Midwest, located in Chicago, manage the insurance
pools in which the Company's insurance subsidiaries, New York Marine And General
Insurance Company ("New York Marine") and Gotham Insurance Company ("Gotham"),
participate. All premiums, losses and expenses are prorated among pool members
in accordance with their pool participation percentages. Effective January 1,
1997 and subsequent, the Company increased to 100% its participation in the
business produced by the pools.
In 1997, the Company formed MMO EU as a holding company for MMO UK,
which operated as a limited liability corporate vehicle to provide capacity, or
the ability to underwrite a certain amount of business, for syndicates within
Lloyd's of London (Lloyd's). In 1997, the Company acquired ownership of a
Lloyd's managing agency, which was subsequently renamed MMO Underwriting Agency,
Ltd. MMO Underwriting Agency Ltd. commenced underwriting in 1998 for the
Company's wholly owned subsidiary MMO UK, which provided 100%, or $29.8 million,
of the capacity for Syndicate 1265. In 2000, the Company sold MMO Underwriting
Agency Ltd. in exchange for a minority interest in Cathedral Capital PLC and
Syndicate 1265 was placed into runoff. In 2001, MMO UK provided approximately
11.2%, or $13.6 million, of the capacity for Syndicate 2010, which is managed by
Cathedral Capital. In 2002, the Company completed the withdrawal from its London
operations and since 2002, MMO UK has not provided capacity to any Lloyd's
syndicate. Accordingly, the consolidated financial statements reflect the
interests from the syndicate operations up to the time of the Company's
withdrawal in November 2002. In January 2003, the Company sold its minority
interest in Cathedral Capital PLC for approximately $2.8 million. This sale had
no material impact on the Company's results of operations.
MMO EU and MMO UK, including its participation interest in Syndicates
1265 and 2010, are collectively referred to as "MMO London".
Basis of reporting
The consolidated financial statements have been prepared on the basis
of accounting principles generally accepted in the United States of America
("GAAP"), which differ in certain material respects from the accounting
principles prescribed or permitted by state insurance regulatory authorities for
the Company's two domestic insurance subsidiaries. The principal differences
recorded under GAAP are deferred policy acquisition costs, an allowance for
doubtful accounts, limitations on deferred income taxes, and fixed maturities
held for sale are carried at fair value.
The preparation of financial statements requires management to make
estimates that affect the reported amounts of assets, liabilities, revenues and
expenses. Actual amounts could differ from those amounts previously estimated.
Consolidation
The consolidated financial statements include the accounts of the
Company, two insurance subsidiaries, New York Marine and Gotham, and three
agency subsidiaries. MMO London's financial statements were included in the
consolidated financial statements until November 2002, the date of the Company's
withdrawal from its London operations. Gotham is owned 25% by the Company and
75% by New York Marine. Gotham is consolidated in the financial statements as it
is a 100% indirect subsidiary of NYMAGIC, INC. All other subsidiaries are wholly
owned by NYMAGIC. During 2003, the Company obtained a 100% interest in a limited
partnership whose financial statements were included in the consolidated
financial statements. All intercompany accounts and transactions have been
eliminated in consolidation.
F-7
Investments
Fixed maturities held for sale are carried at fair value and include
those bonds where the Company's intent to carry such investments to maturity may
be affected in future periods by changes in market interest rates or tax
position. Unrealized gains or losses on fixed maturities held for sale are
reflected in accumulated other comprehensive income. Fixed maturities held for
trading are carried at fair value. Trading securities 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.
Equity securities (common stocks and non-redeemable preferred stocks)
are carried at fair value. Unrealized gains or losses on equity securities are
reflected in accumulated other comprehensive income.
Short-term investments are carried at cost, which approximates fair
value.
Investments in limited partnerships are reported under the equity
method, which includes the cost of the investment and the subsequent
proportional share of any partnership earnings or losses. Under the equity
method, the partnership earnings or losses are recorded as investment income.
The Company's investments in limited partnership hedge funds include interests
in limited partnerships and limited liability companies.
Realized investment gains and losses (determined on the basis of
first in first out) also include any declines in value which are considered to
be other-than-temporary. Management reviews investments for impairment based
upon specific criteria that include the duration and extent of declines in fair
value of the security below its cost or amortized cost. Unrealized appreciation
or depreciation of investments, net of related deferred income taxes, is
reflected in accumulated other comprehensive income in shareholders' equity.
Derivatives
The Company maintained an interest rate agreement, which expired in
2002, that was entered into for purposes of hedging interest rate risk on the
Company's note payable. Cash flows as a result of the hedge were recorded as
adjustments to interest expense. The fair value of the cash flow derivative was
recorded in other liabilities. Changes in the fair value of the derivative were
recorded to results of operations. The Company did not maintain any derivative
positions as of December 31, 2003 and 2002, respectively.
Premium and policy acquisition cost recognition
Premiums and policy acquisition costs are reflected in income and
expense on a monthly pro rata basis over the terms of the respective policies.
Accordingly, unearned premium reserves are established for the portion of
premiums written applicable to unexpired policies in force, and acquisition
costs, consisting mainly of net brokerage commissions and premium taxes relating
to these unearned premiums, are deferred to the extent recoverable. The Company
has provided an allowance for uncollectible premium receivables of $450,000 for
each of the years ended December 31, 2003 and 2002, respectively. The
determination of acquisition costs to be deferred considers historical and
current loss and loss adjustment expense experience. In measuring the carrying
value of deferred policy acquisition costs consideration is also given to
anticipated investment income using interest rates of 3% and 3% in 2003 and
2002, respectively.
Revenue recognition
Management commission income on policies written by the MMO insurance
pools is recognized primarily as of the effective date of the policies issued.
Adjustments to the policies, resulting principally from changes in coverage and
audit adjustments, are recorded in the period reported.
Contingent profit commission revenue derived from the reinsurance
transactions of the insurance pools is recognized when such amount becomes
earned as provided in the treaties to the respective reinsurers. The contingent
profit commission becomes due shortly after the treaty expires.
F-8
Reinsurance
The Company's insurance subsidiaries participate in various
reinsurance agreements on both an assumed and ceded basis. The Company uses
various types of reinsurance, including quota share, excess of loss and
facultative agreements, to spread the risk of loss among several reinsurers and
to limit its exposure from losses on any one occurrence. Any recoverable due
from reinsurers is recorded in the period in which the related gross liability
is established.
The Company accounts for all reinsurance receivables and prepaid
reinsurance premiums as assets.
Depreciation
Property, equipment and leasehold improvements are depreciated over
their estimated useful lives.
Income taxes
The Company and its subsidiaries file a consolidated Federal tax
return. The Company provides deferred income taxes on temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities based upon enacted tax rates. The effect of a change in tax
rates is recognized in income in the period of change.
Fair values of financial instruments
The fair value of the Company's investments is disclosed in Note 2
including the fair values of privately placed securities. The fair value of
fixed maturities, equity securities and short-term investments are based upon
quotes obtained from independent sources. The Company's other financial
instruments include short-term receivables, notes payable and other payables
which are recorded at the underlying transaction value and approximate fair
value.
Foreign currency translation
The assets and liabilities of the Company's U.K. operations, recorded
in Pounds Sterling, are translated to U.S. dollars at exchange rates in effect
at the balance sheet date and the resulting adjustments are recorded in
accumulated other comprehensive income in shareholders' equity. Revenues and
expenses are translated to U.S. dollars using the average exchange rates for the
year.
Incurred losses
Unpaid losses are based on individual case estimates for losses
reported. A provision is also included, based on past experience, for IBNR,
salvage and subrogation recoveries and for loss adjustment expenses. The method
of making such estimates and for establishing the resulting reserves is
continually reviewed and updated and any changes resulting therefrom are
reflected in operating results currently.
Stock options
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.
F-9
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:
Year Ended December 31
----------------------
2003 2002 2001
---- ---- ----
(in thousands except per share data)
Net income, as reported $17,093 $28,710 $(13,139)
Add: Stock based employee
compensation expense included in
reported net income, net of related
tax effects 19 15 15
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method for all
awards, net of related tax effects (358) (162) (65)
----- ----- -----
Pro forma net income $16,754 $28,563 $(13,189)
====== ======= =========
Earnings per share:
Basic EPS - as reported $1.77 $3.09 $(1.42)
Basic EPS - pro forma $1.73 $3.08 $(1.43)
Diluted EPS - as reported $1.74 $3.08 $(1.42)
Diluted EPS - pro forma $1.70 $3.07 $(1.43)
Basic and diluted earnings per share
Basic EPS is calculated by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted EPS is
calculated by dividing net income by the weighted average number of common
shares outstanding during the year and the dilutive effect of assumed stock
option exercises. See Note 12 for a reconciliation of the shares outstanding in
determining basic and diluted EPS.
Reclassification
Certain accounts in the prior year's financial statements have been
reclassified to conform to the 2003 presentation.
Effects of recent accounting pronouncements
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51"
("FIN 46"), which requires an enterprise to assess whether consolidation of an
entity is appropriate based upon its interests in a variable interest entity
("VIE"). A VIE is an entity in which the equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The initial determination of
whether an entity is a VIE shall be made on the date at which an enterprise
becomes involved with the entity. An enterprise shall consolidate a VIE if it
has a variable interest that will absorb a majority of the VIEs expected losses
if they occur, receive a majority of the entity's expected residual returns if
they occur or both. FIN 46 was effective immediately for new VIEs established or
purchased subsequent to January 31, 2003.
In December 2003, the FASB issued a revised version of FIN 46 ("FIN
46R"), which incorporates a number of modifications and changes made to the
original version. FIN 46R replaces the previously issued FIN 46 and, subject to
certain special provisions, is effective no later than the end of the first
reporting period that ends after December 15, 2003 for entities considered to be
special-purpose entities and no later than the end of the first reporting period
that ends after March 15, 2004 for all other VIEs. Early adoption is permitted.
The adoption of FIN 46R is not expected to result in the consolidation of any
VIEs.
F-10
Effective December 31, 2003, the Company adopted the disclosure
requirements of Emerging Issues Task Force ("EITF") Issue No. 03-01, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments". Under the consensus, disclosures are required for unrealized
losses on fixed maturity and equity securities accounted for under SFAS No. 115,
"Accounting for Certain Investment in Debt and Equity Securities", and SFAS No.
124, "Accounting for Certain Investments Held by Not-for-Profit Organizations",
that are classified as either available-for-sale or held-to-maturity. The
disclosure requirements include quantitative information regarding the aggregate
amount of unrealized losses and the associated fair value of the investments in
an unrealized loss position, segregated into time periods for which the
investments have been in an unrealized loss position. The EITF also requires
certain qualitative disclosures about the unrealized holdings in order to
provide additional information that the Company considered in concluding that
the unrealized losses were not other-than-temporary. (For further discussion,
see disclosures in Note 2.)
Statement of Financial Accounting Standards No. 148, "Accounting for
Stock Based Compensation - Transition and Disclosure" ("SFAS 148"), was issued
by the Financial Accounting Standards Board ("FASB") in December 2002. SFAS 148
provides alternative methods of transition for a company that voluntarily
changes its method of accounting for stock based employee compensation to the
fair value method. SFAS 148 also requires additional disclosures in both annual
and interim financial statements about the method of accounting for stock based
employee compensation and its effect on reported results. SFAS 148 is effective
for interim periods beginning after December 15, 2002. The Company has adopted
the appropriate disclosures under SFAS 148.
(2) Investments:
A summary of investment components at December 31, 2003 and December
31, 2002 at fair value consists of the following:
December 31, 2003 Percent December 31, 2002 Percent
----------------- ------- ----------------- -------
Fixed Maturities Available for Sale:
- ------------------------------------
U.S. Treasury Securities $ 9,184,916 1.77% $ 9,413,908 2.19%
Municipalities 17,352,350 3.35% 21,066,341 4.91%
Corporate Bonds 66,933,425 12.93% --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal $ 93,470,691 18.05% $ 30,480,249 7.10%
Trading Securities:
- -------------------
Collateralized Debt Obligations 61,736,951 11.93% --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities and Trading Portfolio $ 155,207,642 29.98% $ 30,480,249 7.10%
Short-term Investments 257,059,675 49.65% 355,803,960 82.84%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities and Short-term Investments $ 412,267,317 79.63% 386,284,209 89.94%
Limited Partnership Hedge Funds 105,434,419 20.37% 38,477,219 8.96%
Industrial & Misc. Common Stocks --- --- 4,728,485 1.10%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio $ 517,701,736 100.00% $ 429,489,913 100.00%
There was no unrealized depreciation or appreciation of investments
(before applicable income taxes) at December 31, 2003 and 2002 on equity
securities; gross unrealized gains on fixed maturities available for sale were
$1,215,206 and $556,842 at December 31, 2003 and 2002, respectively; and gross
unrealized losses on fixed maturities available for sale were $339,486 and $0 at
December 31, 2003 and 2002, respectively.
Included in investments at December 31, 2003 are securities required
to be held by the Company or are on deposit with various regulatory authorities
as required by law with a fair value of $9,772,266.
There were no non-income producing fixed maturity investments for
each of the years ended December 31, 2003 and 2002.
F-11
The Company held no mortgage backed securities at December 31, 2003
or at December 31, 2002.
The gross unrealized gains and losses on fixed maturities available
for sale at December 31, 2003 and 2002 are as follows:
2003
-------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------------
Fixed maturities available for sale:
U.S, Treasury Securities .................. $ 8,920,553 $ 303,408 $ (39,045) $ 9,184,916
Municipalities ............................ 17,338,395 13,955 -- 17,352,350
Corporate Bonds ........................... 66,336,023 897,843 (300,441) 66,933,425
-------------------------------------------------------------------------------
Totals .................................... $92,594,971 $ 1,215,206 $ (339,486) $93,470,691
-------------------------------------------------------------------------------
2002
-------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------------
Fixed maturities available for sale:
U.S, Treasury Securities .................. $ 8,953,187 $ 460,721 $ -- $ 9,413,908
Municipalities ............................ 20,970,220 96,121 -- 21,066,341
-------------------------------------------------------------------------------
Totals .................................... $29,923,407 $ 556,842 $ -- $30,480,249
-------------------------------------------------------------------------------
As disclosed in the following table, all unrealized losses are less
than 12 months, and in conjunction with the Company's investment impairment
policy, the Company believes the unrealized losses to be not
other-than-temporary.
2003
-------------------------------------------------------------------------------------------
Description of Securities Less than 12 months 12 months or longer Total
-------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
-------------------------------------------------------------------------------------------
U.S. Treasury Securities $ 3,008,134 $ (39,045) $ -- $ -- $ 3,008,134 $ (39,045)
Corporate Bonds 20,349,966 (300,441) -- -- 20,349,966 (300,441)
-------------------------------------------------------------------------------------------
Total temporarily impaired $23,358,100 $ (339,486) $ -- $ -- $23,358,100 $ (339,486)
securities
The amortized cost and fair value of debt securities at December 31,
2003 by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities, because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Fixed maturities available for sale
-------------------------------------------------
Amortized Fair
Cost Value
-------------------------------------------------
Due in one year or less................. $24,215,802 $24,259,962
Due after one year through five years.. 61,797,433 62,515,714
Due after five years through ten years.. 5,546,566 5,665,125
Due after ten years.......................... 1,035,170 1,029,890
-------------------------------------------------
Totals...................................... $92,594,971 $93,470,691
-------------------------------------------------
F-12
The investment portfolio has exposure to market risks, which include
the effect of adverse changes in interest rates, credit quality and hedge fund
and equity values on the portfolio. Interest rate risk includes the changes in
the fair value of fixed maturities based upon changes in interest rates. Credit
quality risk includes the risk of default by issuers of debt securities. Hedge
fund and equity investment risks include the potential loss from the diminution
in the value of the underlying investment of the hedge fund and the potential
loss from changes in the fair value of equity securities.
Proceeds from sales of investments in debt securities held for sale
during 2003, 2002 and 2001 were $64,840,423, $344,255,556 and $254,449,145,
respectively. Gross gains of $131,601, $13,308,860 and $6,164,126 and gross
losses of $399,524, $2,028,978 and $506,789 were realized on those sales in
2003, 2002 and 2001, respectively.
Realized gains (losses) and unrealized investment appreciation
(depreciation) on fixed maturities and equity securities for the years ended
December 31, 2003, 2002 and 2001 are as follows:
Year ended December 31,
-----------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------
Realized gains (losses) of investments
Fixed maturities ...................................... $ (267,923) $ 11,279,882 $ 5,657,337
Equity securities ..................................... (69,900) (2,839,006) (2,794,608)
Short-term investments ................................ 887,811 15,127 11,844
-----------------------------------------------------------
Net realized investment gains ......................... 549,988 8,456,003 2,874,573
Less: applicable income taxes ......................... (192,496) (2,959,601) (1,006,101)
-----------------------------------------------------------
Net realized investment gains after taxes ..................... $ 357,492 $ 5,496,402 $ 1,868,472
===========================================================
The Company recorded declines in values of investments considered to be
other-than-temporary of $0, $1,520,210, and $4,369,240 for the years ended
December 31, 2003, 2002 and 2001.
Year ended December 31,
-----------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------
Change in unrealized investment appreciation
(depreciation) of securities:
Fixed maturities ......................................... $ 318,878 $ (3,066,700) $ (550,940)
Equity securities ........................................ -- (7,327,689) (4,548,209)
-----------------------------------------------------------
Net unrealized investment gains (losses) ................. 318,878 (10,394,389) (5,099,149)
Less: applicable deferred income taxes .................. (111,605) 3,638,036 1,784,702
-----------------------------------------------------------
Net unrealized investment gains (losses) after taxes ............. $ 207,273 $ (6,756,353) $ (3,314,447)
===========================================================
Net investment income from each major category of investments for the
years indicated is as follows:
Year ended December 31,
-----------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------
Fixed maturities available for sale ........................... $ 4,176,273 $ 14,410,878 $ 15,734,345
Trading securities ............................................ 12,909,671 -- --
Short-term investments ........................................ 1,879,098 931,168 1,571,226
Equity securities ............................................. -- 496,194 846,854
Equity in earnings of limited partnerships .................... 8,548,971 977,220 --
-----------------------------------------------------------
Total investment income ............................ 27,514,013 16,815,460 18,152,425
Investment expenses ........................................... (5,120,309) (994,726) (764,915)
-----------------------------------------------------------
Net investment income .............................. $ 22,393,704 $ 15,820,734 $ 17,387,510
===========================================================
Net investment income for trading securities includes $313,739 of net
unrealized gains as of December 31, 2003.
F-13
The Company held $105. 4 million of limited partnership hedge funds at December
31, 2003, accounted for under the equity method, as follows:
Amount Ownership %
------ -----------
Airline Recovery Partners, LLC $ 5,286,212 19.52
Amici Qualified Associates, LP 5,431,716 3.18
Asuka Japanese Equity Long/Short Fund LP 2,575,391 6.29
Caspian Capital Partners, LP(1) 2,657,419 0.73
Chatham Asset Partners High Yield Fund 2,606,064 2.50
d. Quant Fund, LLC 2,520,021 0.55
Dolphin Domestic Fund II, LP 1,300,484 5.65
Dolphin Limited Partnership - A 5,016,245 6.11
Havens Partners, LP 5,101,156 6.52
Mackay Shield Long/ Short Fund (QP), LP 6,068,638 4.83
Mariner Partners, LP(1) 10,351,000 2.37
Maystone Continuum Fund, LP 4,997,294 44.23
Midway Market Neutral Fund LLC 6,562,365 7.21
MV Partners Fund I L.P. 5,128,737 2.02
Parkcentral Global, L.P. 4,386,892 2.41
Relative Value International Fund, L.P. 7,585,371 20.19
RH Capital Associates Number One, LP 6,312,684 1.74
SV Tiger Precious L.P. 3,905,929 6.04
Triage Capital Management, L.P. 7,629,263 3.55
Wexford Spectrum Fund I, L.P. 10,011,538 4.06
----------
Total limited partnership hedge funds $105,434,419
===========
(1) These limited partnership hedge funds are directly managed by
Mariner.
The fair values for our investments in hedge funds and other privately
held equity securities generally are established on the basis of the valuations
provided monthly by the managers of such investments. These valuations generally
are determined based upon the valuation criteria established by the governing
documents of such investments or utilized in the normal course of such manager's
business. Such valuations may differ significantly from the values that would
have been used had readily available markets existed and the differences could
be material.
The hedge funds in which we invest usually impose limitations on the
timing of withdrawals from the hedge funds (most are within 90 days), and may
affect our liquidity. With respect to an investment in a limited partnership
managed by a Mariner affiliated Company and consolidated in the Company's
financial statements, the Company cannot withdraw funds for a minimum period of
three years without the consent of the hedge fund manager.
The Company invests in collateralized debt obligations (CDOs), which
are private placements. The fair value of each CDO is provided by securities
dealers. 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.
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 December 31,
2003, the Company had loaned securities with a fair value of $6,760,722 and held
collateral related to these loaned securities of $6,962,206. There were no loan
positions outstanding as of December 31, 2002.
(3) Fiduciary Funds:
The Company's insurance agency subsidiaries maintain separate
underwriting accounts, which record all of the underlying insurance
transactions of the insurance pools, which they manage. These transactions
primarily include collecting premiums from the insureds, collecting paid
receivables from reinsurers, paying claims as losses become payable,
paying reinsurance premiums to reinsurers and remitting net account
balances to member insurance companies in the pools which MMO manages.
Unremitted amounts to members of the insurance pools are held in a
fiduciary capacity and interest income earned on such funds inures to the
benefit of the members of the insurance pools based on their pro rata
participation in the pools.
F-14
A summary of the pools' underwriting accounts as of December 31, 2003
and 2002 is as follows:
(Unaudited)
-----------
December 31,
------------
2003 2002
----------------------------------
Cash and short-term investments .......................................... $ 18,651,338 $29,620,563
Premiums receivable ...................................................... 21,662,214 19,607,502
Reinsurance and other receivables ........................................ 20,172,248 47,407,546
----------------------------------
Total assets ............................................................. $ 60,485,800 $96,635,611
==================================
Due to insurance pool members ............................................ 10,894,676 48,084,755
Reinsurance payable ...................................................... 26,587,878 20,718,543
Funds withheld from reinsurers ........................................... 20,729,319 23,220,776
Other liabilities ........................................................ 2,273,927 4,611,537
----------------------------------
Total liabilities ........................................................ $ 60,485,800 $96,635,611
==================================
A portion of the pools' underwriting accounts above have been
included in the Company's insurance subsidiaries operations based upon their pro
rata participation in the MMO insurance pools.
(4) Insurance Operations:
Reinsurance transactions
Approximately 31%, 30% and 39% of the Company's insurance
subsidiaries' direct and assumed gross premiums written for the years ended
December 31, 2003, 2002 and 2001, respectively, have been reinsured by the pools
with other companies on both a treaty and a facultative basis.
Two former pool members, Utica Mutual and Arkwright, currently part
of the FM Global Group, withdrew from the pools in 1994 and 1996, respectively,
and retained liability for their effective pool participation for all loss
reserves, including IBNR and unearned premium reserves attributable to policies
effective prior to their withdrawal from the pools.
In the event that all or any of the pool companies might be unable to
meet their obligations to the pools, the remaining companies would be liable for
such defaulted amounts on a pro rata pool participation basis.
On May 28, 2003, an arbitration procedure was completed and Utica
Mutual was ordered to pay MMO approximately $7.8 million, which represented
Utica Mutual's funding requirement to the pools and had no impact on the
Company's results of operations. In addition, the Company was awarded interest
of approximately $1 million on a pre-tax basis which was reflected in results of
operations in 2003. Following the award, these amounts were paid in full. This
award confirmed that, as a pool member, Utica Mutual is required to fund gross
losses paid by MMO, acting as managing agent.
The Company is not aware of any uncertainties that could result in
any possible defaults by either Arkwright or Utica Mutual with respect to their
pool obligations, which might impact liquidity or results of operations of the
Company, but there can be no assurance that such events will not occur in the
future.
A contingent liability exists with respect to reinsurance ceded since
such transactions generally do not relieve the Company of its primary obligation
to the policyholder, so that such reinsurance ceded would become a liability of
the Company's insurance subsidiaries in the event that any reinsurer might be
unable to meet the obligations assumed under the reinsurance agreements. As
established by the pools, all reinsurers must meet certain minimum standards of
financial condition.
F-15
The Company's largest unsecured reinsurance receivables at December 31, 2003
were from the following reinsurers:
Reinsurer Amounts A.M. Best Rating
--------------------------------- ---------- ----------------
(in millions)
Lloyd's Syndicates $ 51.5 A- (Excellent)
Swiss Reinsurance America Corp. 10.8 A+ (Superior)
Lloyd's (Equitas) 9.7 NR-3 (Rating Procedure Inapplicable)
Hartford Fire Insurance Company 7.6 A+ (Superior)
FM Global (Arkwright) 6.5 A+ (Superior)
Folksamerica Reinsurance Company 5.9 A (Excellent)
Liberty Mutual Insurance Company 4.5 A (Excellent)
GE Reinsurance Corp. 3.8 A (Excellent)
Transatlantic Reinsurance Company 3.2 A++ (Superior)
Utica Mutual Insurance Company 3.0 A- (Excellent)
---
Total $106.5
The Company has experienced difficulties in collecting amounts due
from Lloyd's but has subsequently recovered all paid loss balances currently due
through an arbitration proceeding. Lloyd's receivables represent amounts due
from 118 different Lloyd's syndicates. However, given the uncertainty
surrounding the sufficiency of assets in Equitas to meet its ultimate
obligations, there is a reasonable possibility that the Company's collection
efforts relating to its Equitas receivables may be adversely affected in the
future.
The Company's exposure to reinsurers, other than those indicated
above, includes reinsurance receivables from approximately 570 reinsurers or
syndicates, and as of December 31, 2003, no single one was liable to the Company
for an unsecured amount in excess of approximately $3 million.
Funds withheld of approximately $7.6 million and letters of credit of
approximately $137.0 million as of December 31, 2003 were obtained as collateral
for reinsurance receivables as provided under various reinsurance treaties.
Reinsurance receivables as of December 31, 2003 and 2002 included an allowance
for uncollectible reinsurance receivables of $12.8 million and $13.3 million,
respectively. Uncollectible reinsurance resulted in charges to operations of
approximately $1.0 million, $5.2 million, and $10.8 million in 2003, 2002, and
2001, respectively.
Reinsurance ceded and assumed relating to premiums written were as
follows:
Gross Ceded Assumed Percentage
(direct) to other from other of assumed
Year Ended amount companies companies Net amount to net
-----------------------------------------------------------------------------------------------------------------------
December 31, 2003 $123,520,550 $44,889,948 $19,676,603 $98,307,205 20%
December 31, 2002 113,988,866 46,074,907 38,528,136 106,442,095 36%
December 31, 2001 110,458,558 57,950,842 37,184,381 89,692,097 41%
Reinsurance ceded and assumed relating to premiums earned were as follows:
Gross Ceded Assumed Percentage
(direct) to other from other of assumed
Year Ended amount companies companies Net amount to net
-----------------------------------------------------------------------------------------------------------------------
December 31, 2003 $111,876,648 $30,381,297 $14,898,599 $96,393,950 15%
December 31, 2002 119,181,201 58,437,148 52,713,400 113,457,453 46%
December 31, 2001 102,264,906 58,375,125 40,742,816 84,632,597 48%
Losses and loss adjustment expenses incurred are net of ceded
reinsurance recoveries of $27,564,318, $60,574,707 and $196,709,032 for the
years ended December 31, 2003, 2002 and 2001, respectively.
F-16
Unpaid losses
Unpaid losses are based on individual case estimates for losses
reported and include a provision for losses incurred but not reported and for
loss adjustment expenses. The following table provides a reconciliation of the
Company's consolidated liability for losses and loss adjustment expenses at the
beginning and end of 2003, 2002 and 2001:
Year ended December 31,
--------------------------------------
2003 2002 2001
---------------------------------------------
(In thousands)
Net liability for losses and loss adjustment
expenses at beginning of year ..................................... $ 208,979 $ 210,953 $ 199,685
--------- --------- ---------
Provision for losses and loss adjustment
expenses occurring in current year ................................ 57,125 68,952 78,221
Increase (decrease) in estimated losses and loss
adjustment expenses for claims occurring
in prior years (1) ................................................ (1,410) 4,389 9,604
Deferred income-loss portfolio
assumption(2) ..................................................... -- 15 76
--------- --------- ---------
Net loss and loss adjustment expenses
Incurred .......................................................... 55,715 73,356 87,901
--------- --------- ---------
Less:
Net losses and loss adjustment expense payments
for claims occurring during:
Current year .................................................. 5,241 11,950 20,354
Prior years ................................................... 17,142 63,365 56,203
--------- --------- ---------
22,383 75,315 76,557
Add:
Deferred income-loss portfolio assumption(2) ........................ -- (15) (76)
--------- --------- ---------
Net liability for losses and loss adjustment
expenses at year end .............................................. 242,311 208,979 210,953
--------- --------- ---------
Ceded unpaid losses and loss adjustment
expenses at year end .............................................. 276,619 307,023 323,236
--------- --------- ---------
Gross unpaid losses and loss adjustment
expenses at year end .............................................. $ 518,930 $ 516,002 $ 534,189
========= ========= =========
(1) The adjustment to the consolidated liability for losses and loss
adjustment expenses for losses occurring in prior years reflects the net effect
of the resolution of losses for other than full reserve value and subsequent
readjustments of loss values. The decrease in 2003 of $1.4 million reflects
favorable loss development arising from the ocean marine line of business,
partially offset by adverse development in the aviation line for accident years
1997-2000. The increase in 2002 of $4.4 million reflects provisions made for
insolvent, financially impaired and commuted reinsurers, and adverse development
from the Company's other liability line reflecting umbrella exposures. The 2001
year reflects $9.6 million of adverse development from the Company's operations
in London due to higher than expected claim frequencies and the emergence of
longer than expected loss development patterns. Also contributing to the 2001
increase were provisions made for insolvent or financially impaired reinsurers.
Both of the 2002 and 2001 amounts were partially offset by favorable development
in the ocean marine line of business.
(2) Deferred income-loss portfolio assumption represents the
difference between cash received and unpaid loss reserves assumed as a result of
the Company's assumption of net pool obligations from two former pool members,
which was initially capitalized and is being amortized over the payout period of
the related losses.
F-17
The insurance pools participated in both the issuance of umbrella
casualty insurance for various Fortune 1000 companies and the issuance of ocean
marine liability insurance for various oil companies during the period from 1978
to 1985. Depending on the accident year, the insurance pools' net retention per
occurrence after applicable reinsurance ranged from $250,000 to $2,000,000. The
Company's effective pool participation on such risks varied from 11% in 1978 to
59% in 1985. Subsequent to this period, the pools substantially reduced their
umbrella writings and coverage was provided to smaller insureds. In addition,
ocean marine and non-marine policies issued during the past three years provide
coverage for certain environmental risks.
At December 31, 2003 and 2002, the Company's gross, ceded and net
loss and loss adjustment expense reserves for all asbestos/environmental
policies amounted to $77.3 million, $65.5 million and $11.8 million, and $67.7
million, $55.0 million and $12.7 million, respectively. As of December 31, 2003
and 2002, the Company had approximately 330 and 360 policies, respectively,
under which there was at least one claim outstanding relating to
asbestos/environmental exposures. The increase in gross reserves during 2003 is
attributable to case reserves on a few policies. The Company believes that the
uncertainty surrounding asbestos/environmental exposures, including issues as to
insureds' liabilities, ascertainment of loss date, definitions of occurrence,
scope of coverage, policy limits and application and interpretation of policy
terms, including exclusions, all affect the estimation of ultimate losses. Under
such circumstances, it is difficult to determine the ultimate loss for
asbestos/environmental related claims. Given the uncertainty in this area,
losses from asbestos/environmental related claims may develop adversely and,
accordingly, management is unable to estimate the range of possible loss that
could arise from asbestos/environmental related claims. However, the Company's
net unpaid loss and loss adjustment expense reserves, in the aggregate, as of
December 31, 2003, represent management's best estimate.
The Company sustained losses in its aircraft line of business as a
result of the terrorist attacks of September 11, 2001 (collectively, the "WTC
attack"). The Company recorded incurred losses from the WTC attack of $154.9
million and $8.0 million on a gross and net of reinsurance basis. Additional
reinsurance costs were also incurred as a result of the WTC attack and amounted
to $5.0 million. The ultimate net liability for unpaid losses resulting from the
WTC attack 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. However, the
Company's net liability provided for the WTC attack represents management's best
estimate based upon a review of all known information.
Salvage and subrogation
Estimates of salvage and subrogation recoveries on paid and unpaid
losses have been recorded as a reduction of unpaid losses amounting to
$6,480,163 and $6,219,128 at December 31, 2003 and 2002, respectively.
Deferred policy acquisition costs
Deferrable acquisition costs amortized to income amounted to
$19,430,211, $18,898,550 and $16,083,412 for the years ended December 31, 2003,
2002 and 2001, respectively.
(5) Property, Improvements and Equipment, Net:
Property, improvements and equipment, net at December 31, 2003 and
2002 include the following:
2003 2002
----------------------------------
Office furniture and equipment ..................................... $ 1,905,366 $ 845,080
Computer equipment ................................................. 1,784,002 1,076,583
Leasehold improvements ............................................. 4,292,659 2,335,692
----------------------------------
7,982,027 4,257,355
Less: accumulated depreciation and amortization ................... (4,044,424) (3,525,949)
----------------------------------
Property, improvements and equipment, net ................... $ 3,937,603 $ 731,406
==================================
Depreciation and amortization and other expenses for the years ended
December 31, 2003, 2002, and 2001 amounted to $518,475, $410,781 and $427,799,
respectively.
F-18
(6) Income Taxes:
The components of deferred tax assets and liabilities as of December
31, 2003 and 2002 are as follows:
December 31,
---------------------------------
2003 2002
---------------------------------
Deferred Tax Assets:
Loss reserves .................................................. $12,017,630 $11,066,847
Unearned premiums .............................................. 2,864,066 2,730,138
Loss carryforwards ............................................. 2,990,941 2,363,081
Bad debt reserve ............................................... 910,000 1,592,500
Other .......................................................... 343,555 328,752
---------------------------------
Deferred tax assets ............................................ 19,126,192 18,081,318
---------------------------------
Less: Valuation allowance ...................................... 2,990,941 2,363,081
---------------------------------
Total deferred tax assets ...................................... 16,135,251 15,718,237
---------------------------------
Deferred Tax Liabilities:
Deferred policy acquisition costs .............................. 2,885,960 2,697,865
Unrealized appreciation of investments ......................... 306,503 194,894
Deferred investment income ..................................... 213,677 --
Accrued salvage and subrogation ................................ 284,174 271,913
Other .......................................................... 672,216 552,759
---------------------------------
Total deferred tax liabilities ................................. 4,362,530 3,717,431
---------------------------------
Net deferred tax assets ........................................ $11,772,721 $12,000,806
===================================
The last year to which the loss carryforwards can be carried forward
against future tax liabilities is the year 2023.
The Company's valuation allowance account with respect to the
deferred tax asset and the change in the account is as follows:
2003 2002 2001
------------------------------------------------------
Balance, beginning of year ................... $ 2,363,081 $ 11,050,489 $ 5,859,015
Change in valuation allowance ................ 627,860 (8,687,408) 5,191,474
------------------------------------------------------
Balance, end of year ......................... $ 2,990,941 $ 2,363,081 $ 11,050,489
=======================================================
The change in the valuation account relates primarily to loss
carryforwards.
The Company believes that the total deferred tax asset, net of the
recorded valuation allowance account, as of December 31, 2003 will more likely
than not be fully realized.
Income tax provisions differ from the amounts computed by applying
the Federal statutory rate to income before income taxes as follows:
Year ended December 31,
------------------------------
2003 2002 2001
---- ----- ----
Income taxes at the Federal statutory rate .... 35.0% 35.0% (35.0)%
Tax exempt interest ........................... (0.3) (4.7) (6.2)
Valuation allowance ........................... 2.4 (32.6) 41.5
State taxes ................................... (2.4) (0.3) (0.4)
Other, net .................................... 0.1 1.0 2.4
---- ---- ----
Income tax provisions .............. 34.8% (1.6)% 2.3%
==== ==== ====
Federal income tax paid (received) amounted to $6,248,652
$(4,849,204) and $1,807,605 for the years ended December 31, 2003, 2002 and
2001, respectively.
At December 31, 2003 the federal income tax payable included in other
liabilities amounted to $1,258,717. At December 31, 2002 the federal income tax
recoverable included in other assets amounted $1,110,059.
F-19
Reduction of income taxes paid as a result of the deduction triggered
by employee exercise of stock options for the years ended December 31, 2003,
2002 and 2001 amounted to $331,737, $83,436 and $170,559, respectively. The
benefit received was recorded in paid-in capital.
(7) Statutory Income and Surplus:
The Company's domestic insurance subsidiaries are limited, based on
the lesser of 10% of policyholders' surplus or 100% of adjusted net investment
income, as defined under New York Insurance Law, in the amount of dividends they
could pay without regulatory approval. Within this limitation, the maximum
amount which may be paid to the Company out of the domestic insurance companies'
surplus was approximately $15,900,000 as of December 31, 2003. In connection
with the application for approval of acquisition of control of NYMAGIC, INC.,
filed by Mariner Partners, Inc. ("Mariner") and William J. Michaelcheck, a
Director of the Company and a majority shareholder of Mariner, with the New York
State Insurance Department (the "Department") pursuant to Section 1506 of the
New York Insurance Law, New York Marine and Gotham agreed for a period of two
years from July 31, 2002, the date of the acquisition of such control, not to
pay any dividends without the consent of the Department. During 2003 and first
quarter of 2004, New York Marine requested and received approval from the State
of New York Insurance Department to pay extraordinary dividends of $5,000,000
and $15,000,000, respectively, to the Company.
Combined statutory net income, surplus and dividends declared by the
Company's domestic insurance subsidiaries were as follows for the periods
indicated:
Combined Combined Dividends
Statutory Statutory Declared
Year Ended Net Income Surplus To Parent
---------- ---------- ------- ---------
December 31, 2003 $ 13,689,000 $ 186,325,000 $ 9,575,000
December 31, 2002 $ 16,412,000 $ 180,394,000 $ 12,361,000
December 31, 2001 $ 3,238,000 $ 152,061,000 $ 12,550,000
The National Association of Insurance Commissioners (the "NAIC")
project to codify statutory accounting principles was approved by the NAIC in
1998. The purpose of codification was to provide a comprehensive basis of
accounting for reporting to state insurance departments. Codification became
effective on January 1, 2001 and did not have a material effect on the domestic
insurance companies' statutory surplus.
The approval of codified accounting rules included a provision for
the state insurance commissioners to modify such accounting rules by practices
prescribed or permitted for insurers in their state. The domestic insurance
companies are domiciled in the State of New York, however, there were no
differences in 2003 or in 2002 between prescribed accounting practices and those
approved by the NAIC.
(8) Employee Retirement Plans:
The Company maintained two retirement plans for the benefit of
employees. Both plans provided for 100% vesting upon completion of two years of
service. The Money Purchase Plan provided for a contribution equal to 7.5% of an
employee's cash compensation, including bonuses, for each year of service during
which the employee completed 1000 hours of service and was employed on the last
day of the plan year. The Profit Sharing Plan did not require any specific
contribution, but any contribution made was subject to the restrictions set
forth above for the Money Purchase Plan. In 2003, the Company combined the above
two retirement plans into the Profit Sharing Plan and Trust. The new plan
provides for an annual mandatory contribution of 7.5% of compensation for each
year of service during which the employee has completed 11 months of service and
is employed on the last day of the plan year. An additional discretionary annual
contribution of up to 7.5% of compensation may also be made by the Company. The
new plan provides for 100% vesting upon completion of one year of service.
Employee retirement plan expenses for the years ended December 31, 2003, 2002
and 2001 amounted to $901,343, $1,167,436, and $800,962, respectively.
F-20
(9) Debt:
On June 27, 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. This balance was
subsequently repaid on February 7, 2003. There were no outstanding loan balances
as of December 31, 2003. See Note 18.
Interest paid amounted to $34,327, $608,148 and $356,676 for the
years ended December 31, 2003, 2002 and 2001, respectively.
In 1998, the Company entered into an interest rate swap agreement
(the "agreement") with an unaffiliated bank for purposes of hedging its interest
rate risk on its bank loan. The agreement required the Company to pay interest
to the bank at a rate of 6.50% on the original notional amount outstanding of
$22,500,000, which was subsequently adjusted quarterly by notional reductions of
$1,250,000 through June 30, 2002, which was the expiration date of the
agreement. The bank was required to pay the Company, on the same notional
amounts outstanding, an amount equal to the three month US Dollar London
Interbank Offered Rate plus .65% which was reset on a quarterly basis. The
interest expense recorded under the agreement was $36,132 in 2002 and $65,789 in
2001.
(10) Commitments:
The Company maintains various operating leases to occupy office
space. The lease terms expire on various dates through July, 2016.
The aggregate minimum annual rental payments under various operating
leases for office facilities as of December 31, 2003 are as follows:
Amount
------
2004............................ 1,074,384
2005............................ 1,278,383
2006............................ 1,252,221
2007............................ 1,233,531
2008............................ 1,233,531
Thereafter...................... 9,354,278
-----------
Total........................... $15,426,328
The operating leases also include provisions for additional payments
based on certain annual cost increases. Rent expenses for the years ended
December 31, 2003, 2002, and 2001 amounted to $1,993,278, $1,102,755, and
$1,060,103, respectively.
On December 30, 2002, the Company signed a sublease, for which it
received landlord's consent dated January 31, 2003, for approximately 28,000
square feet for its principal offices in New York. The sublease commenced on
March 1, 2003 and expires on July 30, 2016. The minimum monthly rental payments
of $102,794 commenced in 2004 and end in 2016 and will amount to $15.3 million
of total rental payments over the term of the sublease. The new offices are
located at 919 Third Avenue, New York, New York 10022.
F-21
(11) Comprehensive Income:
The Company's comparative comprehensive income is as follows:
Year ended December 31,
-----------------------------------------
2003 2002 2001
-----------------------------------------
Net income (loss) $ 17,092,764 $ 28,710,494 $(13,138,993)
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities,
net of deferred tax benefit (expense) of
$(304,104), $678,435, and 778,602 564,765 (1,259,951) (1,445,975)
Less: reclassification adjustment for gains realized
in net income, net of tax expense of
$(192,496), $(2,959,601), and $(1,006,101), 357,492 5,496,402 1,868,472
Foreign currency translation adjustment -- (811,880) 326,539
-----------------------------------------
Other comprehensive income (loss) 207,273 (7,568,233) (2,987,908)
-----------------------------------------
Total comprehensive income (loss) $ 17,300,037 $ 21,142,261 $(16,126,901)
===========================================
The Company recorded unrealized holding gains on securities, net of
deferred taxes, of $569,220 and $361,947 as of December 31, 2003 and 2002,
respectively.
(12) Common Stock Repurchase Plan and Shareholders' Equity:
The Company has a common stock repurchase plan which authorizes the
repurchase of up to $55,000,000, at prevailing market prices, of the Company's
issued and outstanding shares of common stock on the open market. As of December
31, 2003, the Company had repurchased a total of 2,338,684 shares of common
stock under this plan at a total cost of $42,242,044 at market prices ranging
from $12.38 to $28.81 per share.
In connection with the acquisition of MMO in 1991, the Company also
acquired 3,215,958 shares of its own common stock held by MMO and recorded such
shares as treasury stock at MMO's original cost of $3,919,129.
A reconciliation of basic and diluted earnings (loss) per share for
each of the years ended December 31, 2003, 2002 and 2001 is as follows:
2003 2002 2001
---------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Net Shares Per Net Shares Per Net Shares Per
Income Outstanding Share Income Outstanding Share (Loss) Outstanding Share
---------------------------------------------------------------------------------------------------------------
(In thousands except for per share data)
Basic EPS $17,093 9,673 $1.77 $28,710 9,277 $3.09 $(13,139) 9,232 $(1.42)
Effect of Dilutive Securities:
Stock Options ----- 155 $(.03) ----- 32 $(.01) --- --- ---
---------------------------------------------------------------------------------------------------------------
Diluted EPS $17,093 9,828 $1.74 $28,710 9,309 $3.08 $(13,139) 9,232 $(1.42)
=============================================================================================================
(13) Stock Plans:
The Company has two stock option plans, the first approved by
shareholders in 1991, the second in 2002. Each plan provides a means whereby the
Company, through the grant of non-qualified stock options to key employees, may
attract and retain persons of ability to exert their best efforts on behalf of
the Company. Both the 2002 and 1991 plans authorize the issuance of options to
purchase up to 500,000 shares of the Company's common stock at not less than 95
percent of the fair market value at the date of grant. Options are exercisable
over the period specified in each option agreement and expire at a maximum term
of ten years.
F-22
A summary of activity under the stock option plans for the years
ended December 31, 2003, 2002, and 2001 follow:
2003 2002 2001
------------------------------------------------------------------------------------------------------------
Number Option Number Option Number Option
Shares Under of Price of Price of Price
Option Shares Per Share Shares Per Share Shares Per Share
------ ------ --------- ------ --------- ------ ---------
Outstanding,
beginning of year 622,568 $12.05-$20.25 223,234 $12.00-$20.25 318,500 $12.00-$20.25
Granted 20,000 $18.69 463,000 $ 14.47 10,000 $17.67
Exercised (121,066) $12.05-$20.25 (34,666) $12.00-$17.22 (105,266) $12.00-$20.25
Forfeited (802) $12.05-$14.47 (29,000) $12.00-$14.47 --- ---
---- ------- -------- -------------
Outstanding,
end of year 520,700 $12.59-$20.25 622,568 $12.05-$20.25 223,234 $12.00-$20.25
======= ======= =======
Exercisable,
end of year 156,550 $12.59-$20.25 141,567 $12.05-$20.25 140,566 $12.00-$20.25
======= ======= =======
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.
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:
Year Ended December 31
----------------------
2003 2002 2001
---- ---- ----
(in thousands except per share data)
Net income, as reported $ 17,093 $ 28,710 $ (13,139)
Add: Stock based employee
compensation expense included in
reported net income, net of related
tax effects 19 15 15
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method for all
awards, net of related tax effects (358) (162) (65)
---------- ---------- ----------
Pro forma net income $ 16,754 $ 28,563 $ (13,189)
========== ========== ==========
Earnings per share:
Basic EPS - as reported $1.77 $3.09 $(1.42)
Basic EPS - pro forma $1.73 $3.08 $(1.43)
Diluted EPS - as reported $1.74 $3.08 $(1.42)
Diluted EPS - pro forma $1.70 $3.07 $(1.43)
F-23
In determining the pro forma effects on net income, the fair value of
options granted in 2003, 2002, 2001, 2000, 1999, 1998 and 1996 were estimated at
the grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions in 2003, 2002, 2001, 2000, 1999, 1998 and 1996,
respectively: dividend yield of 1%, 0%, 0%, 3.0%, 3.0%, 1.9% and 2.2%; expected
volatility of 31%, 31%, 25%, 25%, 25%, 28% and 25%; the 2003 and 2002 grants
have expected lives of 4 years with the remaining grants at 5 years each and a
risk-free interest rate of 2.20%, 2.90%, 4.42%, 4.75%, 6.48%, 4.56% and 6.00%.
There were no options granted in 1997.
The full impact of calculating compensation expense for stock options
under SFAS 123 is not reflected in the pro forma net income amounts presented
above because options granted prior to January 1, 1995 are not considered in the
determination of the compensation expense.
In 1999, the Company established the NYMAGIC, Inc. Phantom Stock Plan
(the "Plan"). The purpose of the Plan is to build and retain a capable
experienced long-term management team and key personnel to promote the success
of the Company. Each share of phantom stock granted under the Plan constitutes a
right to receive in cash the appreciation in the fair market value of one share
of the Company's stock, as determined on the date of exercise of such share of
phantom stock over the measurement value of such phantom stock. In 1999, 100,000
shares of phantom stock were granted to employees with a five-year vesting
schedule. There have been no grants of phantom stock by the Company since 1999.
For the years 2003, 2002 and 2001, a total of 60,000 shares were exercised at
market prices ranging from $18 to $26.28 per share. Accordingly, the Company
recorded an expense of $455,450, $368,100 and $319,175 in 2003, 2002 and 2001,
respectively.
The Company sold 400,000 investment units to Conning Capital Partners
VI, L.P. ("Conning") on January 31, 2003. Each unit consisted 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).
(14) Segment Information:
The Company's subsidiaries include two domestic insurance companies
and three domestic 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 has ceased
writing any new policies covering aircraft risks subsequent to March 31, 2002.
In addition, the Company also considers MMO London as an appropriate segment.
However, in 2002 and 2003, MMO UK did not provide capacity to any Lloyd's
syndicate following the Company's withdrawal from its London operations.
The Company evaluates revenues and income or loss by the
aforementioned segments. Revenues include premiums earned and commission income.
Income or loss includes premiums earned and commission income less the sum of
losses incurred and policy acquisition costs.
Investment income represents a material component of the Company's
revenues and income. The Company does not maintain its investment portfolio by
segment because management does not consider revenues and income by segment as
being derived from the investment portfolio. Accordingly, an allocation of
identifiable assets, investment income and realized investment gains is not
considered practicable. As such, other income, general and administrative
expenses, interest expense, and income taxes are also not considered by
management for purposes of providing segment information. The financial
information by segment is as follows:
Year Ended December 31,
-----------------------
2003 2002 2001
---------------------------------------------------------------------------------------------
Segments (in thousands)
Income Income Income
Revenues (Loss) Revenues (Loss) Revenues (Loss)
--------------------------------------------------------------------------------------------
Ocean marine $73,371 $ 19,372 $ 62,434 $ 10,078 $ 38,905 $ 5,192
Inland marine/Fire 3,802 282 2,371 387 644 485
Other liability 16,126 (1,116) 6,883 (4,577) 2,864 (2,418)
Aircraft 2,865 2,481 39,159 16,957 31,396 (12,230)
MMO London --- --- 4,159 (94) 14,136 (7,068)
-------------------------------------------------------------------------------------------------------------------
Subtotal 96,164 21,019 115,006 22,751 87,945 (16,039)
F-24
Year Ended December 31,
-----------------------
2003 2002 2001
---------------------------------------------------------------------------------------------
Segments (continued) (in thousands)
Income Income Income
Revenues (Loss) Revenues (Loss) Revenues (Loss)
--------------------------------------------------------------------------------------------
Other income 1,688 1,688 186 186 285 285
Net investment income 22,394 22,394 15,821 15,821 17,388 17,388
Net realized investment gains 550 550 8,456 8,456 2,874 2,874
General and administrative expenses --- (19,428) --- (18,373) --- (16,952)
Interest expense --- (26) --- (575) --- (395)
Income tax benefit (expense) --- (9,104) --- 444 --- (300)
--------------------------------------------------------------------------------------------------------
Total $120,796 $17,093 $ 139,469 $ 28,710 $108,492 $(13,139)
- -----------------------------------------------------------------------------------------------------------------------------------
The Company's gross written premiums cover risks in the following geographic
locations:
2003 2002 2001
----------------------------------------------
(In thousands)
United States $ 119,749 $ 97,855 $ 80,945
Europe 16,836 29,796 41,334
Asia 3,994 13,511 15,803
Latin America 1,203 2,669 2,646
Other 1,415 8,686 6,915
---------------------------------------------
Total Gross Written Premiums $ 143,197 $ 152,517 $ 147,643
=============================================
(15) Quarterly Financial Data (unaudited):
The quarterly financial data for 2003 and 2002 are as follows:
Three Months Ended
----------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
2003 2003 2003 2003
----------------------------------------
(in thousands, except per share data)
Total revenues ............ $23,568 $32,205 $31,796 $33,226
Income before income taxes $ 2,941 $ 6,075 $10,636 $ 6,544
Net income ................ $ 1,918 $ 3,968 $ 6,921 $ 4,285
Basic earnings per share . $ .20 $ .41 $ .71 $ .44
Diluted earnings per share $ .20 $ .40 $ .70 $ .43
Three Months Ended
----------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
2002 2002 2002 2002
----------------------------------------
(in thousands, except per share data)
Total revenues ........... $30,655 $33,084 $30,603 $45,128
Income before income taxes $ 3,777 $ 2,904 $ 4,876 $16,710
Net income ............... $ 2,668 $ 2,038 $ 3,423 $20,582
Basic earnings per share . $ .29 $ .22 $ .37 $ 2.22
Diluted earnings per share $ .29 $ .22 $ .37 $ 2.20
F-25
(16) Related Party Transactions:
The Company had gross premiums of $9.4 million in 2003, $3.6 million
in 2002, and $1.6 million in 2001 written through I. Arthur Yanoff & Co, Ltd.
and Yanoff South Inc., insurance brokerages at which Glenn R. Yanoff, a Director
of the Company, is a vice president and insurance underwriter. In connection
with the placement of such business, gross commission expenses of $1,526,000,
$532,000, and $299,000 in 2003, 2002, and 2001, respectively, were incurred by
the Company on these transactions.
The Company entered into an investment management agreement with
Mariner effective October 1, 2002 and was amended and restated on December 6,
2002. Under the terms of the agreement, Mariner manages the Company's investment
portfolio. Fees to be paid to Mariner are based on a percentage of the
investment portfolio as follows: .20% of liquid assets, .30% of fixed maturity
investments and 1.25% of limited partnership (hedge fund) investments. William
J. Michaelcheck, a Director of the Company, is Chairman, Chief Executive Officer
and majority shareholder of Mariner. George R. Trumbull, Chairman, Chief
Executive Officer and a Director of the Company, A. George Kallop, Executive
Vice President and Chief Operating Officer and a Director of the Company, and
William D. Shaw, Jr., Vice Chairman and a Director of the Company, are also
associated with Mariner. Investment fees incurred under the agreement with
Mariner were $1,753,021 in 2003 and $317,514 in 2002. The Company made a payment
of $100,000 in 2002 to William D. Shaw, Jr. for investment advisory services.
In 2003, the Company entered into a limited partnership hedge fund
agreement with a Mariner affiliated company. In 2003, the Company made an
investment of $11.0 million, representing a 100% interest, into this limited
partnership hedge fund, which is consolidated in the financial statements. This
hedge fund invests in collateralized debt obligations. Under the provisions of
the agreement, the Mariner affiliated company is entitled to 50% of the net
profit realized upon the sale of certain collateralized debt obligations held by
the Company. Investment expenses incurred and payable under this agreement at
December 31, 2003 amounted to $3,176,643 and were based upon the fair value of
those securities held and sold during 2003. 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 December 31, 2003. The
Company cannot withdraw funds from this limited partnership for a minimum period
of three years without the consent of the hedge fund manager.
As of December 31, 2003 the Company held $13.0 million in limited
partnership interests in hedge funds which are directly managed by Mariner.
(17) Legal Proceedings:
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 has filed Preliminary
Objections to Plaintiff's Complaint, denying that the payments are voidable
preferences and asserting affirmative defenses. On February 18, 2004, the
Plaintiff filed Preliminary Objections to our Preliminary Objections and an
Answer and Memorandum of Law in opposition to our Preliminary Objections. 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.
(18) Subsequent event:
On March 11, 2004, the Company issued $100,000,000 in 6.5% Senior
Notes due March 15, 2014. The Notes provide for semi-annual interest payments
and are to be repaid in full on March 15, 2014. The indenture contains certain
covenants that restrict our and our restricted subsidiaries' ability to, among
other things, incur indebtedness, make restricted payments, incur liens on any
shares of capital stock or evidences of indebtedness issued by any of our
restricted subsidiaries or issue or dispose of voting stock of any of our
restricted subsidiaries.
F-26
FINANCIAL STATEMENT SCHEDULES
SCHEDULE II-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NYMAGIC, INC.
Balance Sheets
(Parent Company)
December 31,
------------------------------
2003 2002
------------------------------
Assets:
Cash ............................................................ $ 1,118,342 $ 482,436
Investments ..................................................... 10,351,000 2,862,970
Investment in subsidiaries ...................................... 221,687,262 211,053,200
Due from subsidiaries and MMO insurance pools ................... 11,900,167 14,565,984
Other assets .................................................... 3,364,910 3,048,287
------------- -------------
Total assets .............................. $ 248,421,681 $ 232,012,877
============= =============
Liabilities:
Notes payable ................................................... $ -- $ 10,869,953
Dividend payable ................................................ 583,305 --
Other liabilities ............................................... 3,547,276 190,174
------------- -------------
Total liabilities ......................... 4,130,581 11,060,127
------------- -------------
Shareholders' equity:
Common stock .................................................... 15,279,390 15,158,324
Paid-in capital ................................................. 35,476,566 30,206,370
Accumulated other comprehensive income .......................... 569,220 361,947
Retained earnings ............................................... 239,127,097 224,364,808
Treasury stock .................................................. (46,161,173) (49,138,699)
------------- -------------
Total shareholders' equity ................ 244,291,100 220,952,750
------------ -------------
Total liabilities and shareholders' equity $ 248,421,681 $ 232,012,877
============= =============
Statements of Income
(Parent Company)
Year Ended December 31,
-----------------------------------------------
2003 2002 2001
-----------------------------------------------
Revenues:
Cash dividends from subsidiary ........................ $ 9,575,000 $ 12,361,252 $ 12,550,000
Net investment and other income (loss) ................ (2,883,359) (154,681) 34,093
-----------------------------------------------
6,691,641 12,206,571 12,584,093
-----------------------------------------------
Expenses:
Operating expenses .................................... 1,206,769 2,037,610 1,797,523
Income tax benefit .................................... (1,181,099) (9,418,711) (861,278)
-----------------------------------------------
25,670 (7,381,101) 936,245
-----------------------------------------------
Income before equity income ........................... 6,665,971 19,587,672 11,647,848
Equity in undistributed earnings (loss) of subsidiaries 10,426,793 9,122,822 (24,786,841)
-----------------------------------------------
Net income (loss) ..................................... $ 17,092,764 $ 28,710,494 $(13,138,993)
===============================================
F-27
SCHEDULE II-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NYMAGIC, INC.
Statements of Cash Flows
(Parent Company)
Year Ended December 31,
---------------------------------------------
2003 2002 2001
---------------------------------------------
Cash flows from operating activities:
Net income (loss) ............................................. $ 17,092,764 $ 28,710,494 $(13,138,993)
---------------------------------------------
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Equity in undistributed (earnings) loss of subsidiaries (10,426,793) (9,122,822) 24,786,841
Equity in earnings of limited partnerships ............ (351,000) -- --
Increase in other assets .............................. (316,623) (137,005) (227,797)
Decrease (increase) in due from subsidiaries .......... 2,665,817 (7,390,764) (2,484,879)
(Decrease) Increase in other liabilities .............. 3,357,102 (110,524) (1,157,300)
---------------------------------------------
Net cash provided by operating activities ..................... 12,021,267 11,949,379 7,777,872
---------------------------------------------
Cash flows from investing activities:
Net sale (purchase) of other investments ....... 2,862,974 (2,374,196) 3,547,143
Limited partnerships acquired .................. (10,000,000) -- --
Investment in subsidiaries ..................... -- -- (4,357,847)
---------------------------------------------
Net cash used in investing activities ......................... (7,137,026) (2,374,196) (810,704)
---------------------------------------------
Cash flows from financing activities:
Proceeds from stock issuance and other ................ 2,176,507 538,622 1,814,764
Cash dividends paid to stockholders ................... (1,747,170) -- (3,687,519)
Net sale of treasury shares ........................... 6,192,281 -- 66,011
Proceeds from borrowings .............................. -- 15,719,953 5,452,840
Loan principal payments ............................... (6,219,953) (17,411,253) (5,000,000)
Net amount loaned to subsidiary ....................... (4,650,000) (8,107,642) (5,452,840)
---------------------------------------------
Net cash used in financing activities ......................... (4,248,335) (9,260,320) (6,806,744)
---------------------------------------------
Net increase in cash .......................................... 635,906 314,863 160,424
Cash at beginning of period ................................... 482,436 167,573 7,149
---------------------------------------------
Cash at end of period ......................................... $ 1,118,342 $ 482,436 $ 167,573
=============================================
The condensed financial information of NYMAGIC, INC. for the years ended
December 31, 2003, 2002 and 2001 should be read in conjunction with the
consolidated financial statements of NYMAGIC, INC. and subsidiaries and notes
thereto.
F-28
NYMAGIC, INC.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
--------------------------------------------------
(In thousands)
Column A Column B Column C Column D Column E Column F
- ----------------------------------------------------------------------------------------------------------------------------------
DEFERRED FUTURE POLICY
POLICY BENEFITS, LOSSES, OTHER POLICY
ACQUISITION CLAIMS AND UNEARNED CLAIMS AND BENEFITS PREMIUM
COST LOSS EXPENSES PREMIUMS PAYABLE REVENUE
SEGMENTS (caption 7) (caption 13-a-1) (caption 13-a-2) (caption 13-a-3) (caption 1)
- ------------------------------------------------------------------------------------------------------------------------------------
2003 Ocean marine $ 73,096
Inland marine/Fire 4,234
Other liability 16,126
Aircraft 2,938
MMO London ---
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 8,246 $518,930 $ 61,821 ----- $96,394
2002 Ocean marine $ 61,887
Inland marine/Fire 2,371
Other liability 6,883
Aircraft 38,157
MMO London 4,159
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 7,708 $516,002 $ 45,399 ----- $113,457
2001 Ocean marine $ 38,671
Inland marine/Fire 644
Other liability 2,864
Aircraft 28,318
MMO London 14,136
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 8,168 $534,189 $ 65,071 ----- $ 84,633
Column A Column G Column H Column I Column J Column K
- -------------------------------------------------------------------------------------------------------------------------------
BENEFITS,
NET CLAIMS, LOSSES AMORTIZATION OF
INVESTMENT AND SETTLEMENT DEFERRED OTHER
INCOME EXPENSES POLICY OPERATING PREMIUMS
SEGMENTS (caption 2) (caption 4) ACQUISITION COSTS EXPENSES WRITTEN
- ------------------------------------------------------------------------------------------------------------------------------------
2003 Ocean marine $ 38,468 $ 15,531 $ 67,744
Inland marine/Fire 3,355 165 4,833
Other liability 13,727 3,515 22,961
Aircraft 165 219 2,769
MMO London --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 22,394 $ 55,715 $ 19,430 $ 19,428 $ 98,307
2002 Ocean marine $ 39,427 $ 12,929 $ 70,839
Inland marine/Fire 2,111 (127) 2,975
Other liability 9,783 1,677 9,960
Aircraft 18,018 4,184 22,366
MMO London 4,017 236 302
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 15,821 $ 73,356 $ 18,899 $ 18,373 $106,442
2001 Ocean marine $ 25,442 $ 8,271 $ 45,849
Inland marine/Fire 148 11 1,349
Other liability 4,667 615 4,684
Aircraft 39,150 4,476 26,556
MMO London 18,494 2,710 11,254
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 17,388 $ 87,901 $ 16,083 $ 16,952 $ 89,692
F-29
NYMAGIC, INC.
SCHEDULE V-VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------
DESCRIPTION Balance at Balance at
beginning close of
of period Additions Deductions period
- ------------------------------------------------------------------------------------------------
December 31, 2003:
Allowance for
doubtful accounts..... $13,725,505 $1,001,825 $(1,453,808) $13,273,522
December 31, 2002:
Allowance for
doubtful accounts..... $18,056,400 $5,293,114 $(9,624,009) $13,725,505
December 31, 2001:
Allowance for
doubtful accounts..... $ 8,112,257 $11,027,039 $(1,082,896) $18,056,400
The allowance for doubtful accounts on reinsurance receivables amounted to
$12,823,522, $13,275,505 and $17,606,400 at December 31, 2003, 2002 and 2001
respectively. The allowance for doubtful accounts on premiums and other
receivables amounted to $450,000 at December 31, 2003, 2002 and 2001.
F-30
NYMAGIC, INC.
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
----------------------------------------------------------------------------------------
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
DEFERRED RESERVE FOR
AFFILIATION POLICY UNPAID CLAIMS UNEARNED NET NET
WITH ACQUISITION AND CLAIMS PREMIUM EARNED INVESTMENT
REGISTRANT COSTS EXPENSES DISCOUNT RESERVE PREMIUMS INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003
CONSOLIDATED SUBSIDIARIES $8,246 $518,930 ------ $61,821 $96,394 $25,558
DECEMBER 31, 2002
CONSOLIDATED SUBSIDIARIES 7,708 516,002 ------ 45,399 113,457 15,876
DECEMBER 31, 2001
CONSOLIDATED SUBSIDIARIES 8,168 534,189 ------ 65,071 84,633 17,359
- ---------------------------------------------------------------------------------------------------------------------------
CLAIMS AND CLAIMS
EXPENSES INCURRED AMORTIZATION
RELATED TO OF DEFERRED
AFFILIATION ----------------------------- POLICY PAID CLAIMS
WITH CURRENT PRIOR ACQUISITION AND CLAIMS PREMIUMS
REGISTRANT YEAR YEARS COSTS EXPENSES WRITTEN
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003
CONSOLIDATED SUBSIDIARIES $57,125 $(1,410) $19,430 $22,383 $98,307
DECEMBER 31, 2002
CONSOLIDATED SUBSIDIARIES 68,952 4,389 18,899 75,315 106,442
DECEMBER 31, 2001
CONSOLIDATED SUBSIDIARIES 78,221 9,604 16,083 76,557 89,692
F-31