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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 2004
--------------------------------------------------
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
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NYMAGIC, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3534162
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
919 Third Avenue, New York, New York 10022
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(Address of principal executive offices, including zip code)
(212) 551-0600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---------------- ----------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
---------------- ----------------
On April 1, 2004 there were 9,724,748 shares of the registrant's common
stock, $1.00 par value, outstanding.
Forward-Looking Statements
This report contains certain forward-looking statements concerning the
Company's operations, economic performance and financial condition, including,
in particular, the likelihood of the Company's success in developing and
expanding its business. Any forward-looking statements concerning the Company's
operations, economic performance and financial condition contained herein,
including statements related to the outlook for the Company's performance in
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.
NYMAGIC, INC.
INDEX
Page No.
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003 2
Consolidated Statements of Income
Three months ended March 31, 2004 and 3
March 31, 2003
Consolidated Statements of Cash Flows 4
Three months ended March 31, 2004 and
March 31, 2003
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
Part II. Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NYMAGIC, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
------------- ----------------
2004 2003
---- ----
ASSETS
Investments:
Fixed maturities:
Available for sale at fair value
(amortized cost $92,708,900 and $92,594,971)............................................... $ 94,421,488 $ 93,470,691
Trading at fair value (cost $56,465,334 and $61,423,212)..................................... 57,211,107 61,736,951
Limited partnerships at equity
(cost $125,000,000 and $96,250,000) .......................................................... 136,832,016 105,434,419
Short-term investments.......................................................................... 316,189,559 257,059,675
Cash ............................................................................................ 10,475,929 1,940,541
----------- -----------
Total cash and investments............................................................... 615,130,099 519,642,277
----------- -----------
Accrued investment income......................................................................... 1,967,976 2,099,641
Premiums and other receivables, net .............................................................. 26,226,403 23,981,910
Reinsurance receivables on unpaid losses, net .................................................... 278,624,101 276,618,865
Reinsurance receivables on paid losses, net ...................................................... 5,502,893 4,229,697
Deferred policy acquisition costs................................................................. 9,694,470 8,245,600
Prepaid reinsurance premiums...................................................................... 18,767,560 20,906,056
Deferred income taxes ............................................................................ 10,995,959 11,772,721
Property, improvements and equipment, net ........................................................ 4,339,580 3,937,603
Other assets ..................................................................................... 5,732,333 3,690,715
----------- -----------
Total assets ............................................................................ $976,981,374 $875,125,085
============ ============
LIABILITIES
Unpaid losses and loss adjustment expenses ....................................................... $523,514,769 $518,929,558
Reserve for unearned premiums .................................................................... 64,100,859 61,821,283
Ceded reinsurance payable ........................................................................ 29,871,562 25,812,895
Notes payable..................................................................................... 100,000,000 --
Dividends payable ................................................................................ 583,484 583,305
Payable for securities not yet settled ........................................................... -- 8,321,250
Other liabilities ................................................................................ 11,881,659 15,365,694
----------- -----------
Total liabilities ....................................................................... 729,952,333 630,833,985
----------- -----------
SHAREHOLDERS' EQUITY
Common stock ..................................................................................... 15,279,390 15,279,390
Paid-in capital .................................................................................. 35,485,289 35,476,566
Accumulated other comprehensive income ........................................................... 1,113,182 569,220
Retained earnings ................................................................................ 241,312,353 239,127,097
----------- -----------
293,190,214 290,452,273
Treasury stock, at cost, 5,554,642 and 5,554,642 shares .......................................... (46,161,173) (46,161,173)
----------- -----------
Total shareholders' equity............................................................... 247,029,041 244,291,100
----------- -----------
Total liabilities and shareholders' equity .............................................. $976,981,374 $875,125,085
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended March 31,
----------------------------
2004 2003
---- ----
Revenues:
Net premiums earned $ 24,854,317 $ 21,696,560
Net investment income 4,754,134 1,506,510
Net realized investment losses (40,768) (32,606)
Commission and other income 1,877,381 398,338
--------- -------
Total revenues 31,445,064 23,568,802
---------- ----------
Expenses:
Net losses and loss adjustment expenses incurred 15,905,513 12,012,866
Policy acquisition expenses 5,619,906 4,182,324
General and administrative expenses 5,290,155 4,406,230
Interest expense 372,238 25,652
---------- ----------
Total expenses 27,187,812 20,627,072
---------- ----------
Income before income taxes 4,257,252 2,941,730
--------- ---------
Income taxes:
Current 1,004,653 785,971
Deferred 483,859 237,266
------- -------
Total income tax expense 1,488,512 1,023,237
--------- ---------
Net income $ 2,768,740 $ 1,918,493
============ ============
Weighted average shares of common stock outstanding-basic 9,724,748 9,570,587
Basic earnings per share $ .28 $ .20
============ ============
Weighted average shares of common stock outstanding-diluted 9,945,349 9,659,942
Diluted earnings per share $ .28 $ .20
============ ============
Dividends declared per share $ .06 $ .06
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended March 31,
----------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 2,768,740 $ 1,918,493
----------- ------------
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for deferred taxes 483,859 237,266
Net realized investment losses 40,768 32,606
Equity in earnings of limited partnerships (2,660,471) (433,177)
Net bond amortization 295,488 18,319
Depreciation and other, net 85,018 81,103
Changes in:
Premiums and other receivables (2,244,493) 592,157
Reinsurance receivables, paid and unpaid, net (3,278,432) 1,298,609
Ceded reinsurance payable 4,058,667 (1,884,770)
Accrued investment income 131,665 (568,355)
Deferred policy acquisition costs (1,448,870) 27,560
Prepaid reinsurance premiums 2,138,496 (984,485)
Other assets, net 9,172 834,623
Unpaid losses and loss adjustment expenses 4,585,211 (189,633)
Reserve for unearned premiums 2,279,576 1,377,827
Other liabilities (3,484,035) (127,373)
Trading portfolio activities 4,525,843 ----
--------- ---------
Total adjustments 5,517,462 312,277
---------- ---------
Net cash provided by operating activities 8,286,202 2,230,770
--------- ---------
Cash flows from investing activities:
Fixed maturities, available for sale, acquired (8,898,561) (49,562,500)
Limited partnerships acquired (39,250,000) (7,500,000)
Fixed maturities, available for sale, sold 8,448,374 3,850,885
Equity securities sold ---- 4,658,759
Limited partnerships sold 10,512,874 ----
Net (purchase) sale of short-term investments (59,129,884) 43,784,287
Payable for securities not yet settled (8,321,250) ----
Acquisition of property, improvements and equipment, net (486,995) (66,916)
----------- ----------
Net cash used in investing activities (97,125,442) (4,835,485)
----------- ----------
Cash flows from financing activities:
Proceeds from stock issuance and other 8,723 62,559
Cash dividends paid to shareholders (583,305) ----
Net sale of treasury stock ---- 8,400,000
Proceeds from borrowings 97,949,210 ----
Loan principal repayments ---- (6,219,953)
---------- ---------
Net cash provided by financing activities 97,374,628 2,242,606
---------- ---------
Net increase (decrease) in cash 8,535,388 (362,109)
Cash at beginning of period 1,940,541 980,109
--------- -------
Cash at end of period $10,475,929 $ 618,000
=========== ============
Supplemental disclosures:
Interest paid $ 0 $ 25,652
Federal income tax paid (received) $ 1,800,000 $ (1,360,160)
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
March 31, 2004 and 2003
1) The interim consolidated financial statements are unaudited but, in the
opinion of management, reflect all material adjustments necessary for a fair
presentation of results for such periods. Adjustments to financial statements
consist of normal recurring items. The results of operations for any interim
period are not necessarily indicative of results for the full year. These
financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2003.
2) The Company's subsidiaries include two insurance companies and three
insurance agencies. These subsidiaries underwrite commercial insurance in
three major lines of business. The Company considers ocean marine, inland
marine/fire and other liability as appropriate segments for purposes of
evaluating the Company's overall performance. The last segment includes the
runoff operations in the aircraft business and MMO London. The Company ceased
writing any new policies covering aircraft risks subsequent to March 31,
2002. MMO London includes the operations of MMO EU, Ltd. and MMO UK, Ltd.,
its limited liability corporate capital vehicle. Since January 1, 2002, MMO
UK, Ltd. has not provided capacity to any Lloyd's syndicate.
The financial information by segment is as follows:
Three Months Ended March 31,
---------------------------------------------------------
2004 2003
----------------------- -----------------------
(in thousands)
Income Income
Revenues (Loss) Revenues (Loss)
----------- -------------- ---------------- ----------
Ocean marine $17,863 $3,036 $15,506 $4,674
Inland marine/Fire 1,140 354 889 (25)
Other liability 6,007 0 3,806 41
Runoff operations (156) (62) 1,435 750
----------- -------------- ---------------- ----------
Subtotal 24,854 3,328 21,636 5,440
Net investment income 4,754 4,754 1,506 1,506
Net realized investment losses (41) (41) (33) (33)
Other income 1,878 1,878 460 460
General and administrative expenses --- (5,290) --- (4,406)
Interest expense --- (372) --- (26)
Income tax expense --- (1,488) --- (1,023)
----------- -------------- ---------------- ----------
Total $31,445 $2,769 $23,569 $1,918
----------- -------------- ---------------- ----------
-5-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
March 31, 2004 and 2003
3) The Company's comparative comprehensive income is as follows:
Three months ended
March 31,
--------------------
2004 2003
---- ----
(in thousands)
Net income $2,769 $1,918
Other comprehensive income (loss), net of tax:
Unrealized gains on securities, net of
deferred tax expense of $(279) and $(171) 518 318
Less: reclassification adjustment for
losses realized in net income, net of
tax benefits of $14 and $11 (26) (21)
---- ----
Other comprehensive income 544 339
-------- ---
Total comprehensive income $3,313 $2,257
====== ======
4) The Company maintains two stock-based employee compensation plans. Awards
under the Company's plans vest over periods ranging from three to five years.
Effective January 1, 2003 the Company adopted the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation
("SFAS 123"), prospectively to all employee awards granted, modified or settled
after January 1, 2003. Therefore, the cost related to stock-based employee
compensation included in the determination of net income for 2004 and 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.
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:
Three months ended
------------------
March 31, 2004 March 31, 2003
-------------- --------------
(in thousands, except per share data)
Net income, as reported $2,769 $1,918
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects 7 2
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method for all
awards, net of related tax effects (86) (89)
--- ---
Pro forma net income $2,690 $1,831
------ ------
-6-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
March 31, 2004 and 2003
Earnings per share:
Basic EPS - as reported $.28 $.20
Basic EPS - pro forma $.28 $.19
Diluted EPS - as reported $.28 $.20
Diluted EPS - pro forma $.27 $.19
5) 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.
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 did not result in the consolidation of any VIEs.
6) 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 ability 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.
7) Certain accounts in the prior year's financial statements have been
reclassified to conform to the 2004 presentation.
-7-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Description of Business
NYMAGIC, INC., a New York corporation (the "Company" or "NYMAGIC"), is a
holding company which owns and operates insurance companies, risk bearing
entities and insurance underwriters and managers.
The Company's two insurance subsidiaries, New York Marine And General
Insurance Company ("New York Marine") and Gotham Insurance Company ("Gotham"),
each maintains a rating of "A" (Excellent) from A.M. Best Company. This is the
third highest of fifteen rating levels in A.M. Best's classification system. The
Company's insureds rely on ratings issued by rating agencies. Any adverse change
in the ratings assigned to New York Marine or Gotham may adversely impact their
ability to write premiums.
The Company specializes in underwriting ocean marine, inland marine/fire
and other liability insurance through insurance pools managed by the Company's
insurance underwriters and managers, Mutual Marine Office, Inc., Pacific Mutual
Marine Office, Inc. and Mutual Marine Office of the Midwest, Inc. (collectively
referred to as "MMO"). The original members of the pools were insurance
companies that were not affiliated with the Company. Several years later, New
York Marine and Gotham joined the pools. Over the years, New York Marine and
Gotham steadily increased their participation in the pools, while the
unaffiliated insurance companies reduced their participation or withdrew from
the pools entirely. Since January 1, 1997, New York Marine and Gotham have been
the only members of the pools, and therefore we now write 100% of all of the
business produced by the pools.
In prior years, the Company issued policies covering aircraft insurance;
however, the Company ceased writing any new policies covering aircraft risks as
of March 31, 2002. The Company decided to exit the commercial aviation insurance
business because it is highly competitive, generated underwriting losses for
most years during the 1990s and is highly dependent on the purchase of
substantial amounts of reinsurance, which became increasingly expensive after
the events of September 11, 2001. This decision has enabled the Company to
concentrate on its core lines of business, which include ocean marine, inland
marine/fire and other liability.
From 1998 to 2001, the Company provided capacity, or the ability to
underwrite a certain amount of business, to certain syndicates within Lloyd's of
London ("Lloyd's") through MMO UK, a wholly owned limited liability corporate
capital vehicle. Lloyd's is currently rated "A-" (Excellent), which is the
fourth highest rating level in A.M. Best's classification system. MMO UK, Ltd.,
as a corporate member of Lloyd's, is not separately rated. Since January 1,
2002, MMO UK has not provided capacity to any Lloyd's syndicate. Business
obtained through MMO UK is hereinafter referred to as "MMO London."
-8-
Results of Operations
Net income for the three months ended March 31, 2004, was $2.8 million, or
$.28 per share on a diluted basis, compared with $1.9 million, or $.20 per
diluted share, for the first quarter of 2003. The increase in earnings in 2004
was attributable to improved investment income and commission and other income
received from litigation and arbitration settlements offset in part by a higher
loss ratio.
Net realized investment losses after taxes were $26,000, or $.00 per diluted
share, for the first quarter of 2004, as compared with net realized investment
losses after taxes of $21,000, or $.00 per diluted share, for the same period of
the prior year.
The Company's gross premiums written, net premiums written and net premiums
earned increased by 20%, 33% and 15%, respectively, for the three months ended
March 31, 2004, when compared to the same period of 2003.
Gross Premiums Written
by Line of Business Three months ended March 31,
------------------- ---------------------------
2004 2003 Change
----------- ------------ --------
(Dollars in thousands)
Ocean marine .................. $ 26,985 $ 22,098 22%
Inland marine/fire ............ 3,229 3,726 (13%)
Other liability ............... 7,717 4,261 81%
---------- ----------- --------
Subtotal ...................... 37,931 30,085 26%
Runoff lines (Aircraft) ....... (24) 1,551 NM
---------- ----------- --------
Total ......................... $ 37,907 $ 31,636 20%
========== =========== ========
Net Premiums Written
by Line of Business Three months ended March 31,
------------------- ---------------------------
2004 2003 Change
----------- ------------ --------
(Dollars in thousands)
Ocean marine .................. $ 21,673 $ 15,904 36%
Inland marine/fire ............ 1,020 1,082 (6%)
Other liability ............... 6,686 3,707 80%
--------- ----------- --------
Subtotal ...................... 29,379 20,693 42%
Runoff lines (Aircraft) ....... (107) 1,397 NM
--------- ----------- --------
Total ......................... $ 29,272 $ 22,090 33%
========= =========== ========
Net Premiums Earned
by Line of Business Three months ended March 31,
------------------- ---------------------------
2004 2003 Change
----------- ------------ --------
(Dollars in thousands)
Ocean marine .................... $ 17,864 $ 15,494 15%
Inland marine/fire .............. 1,140 889 28%
Other liability ................. 6,007 3,806 58%
--------- ------------ --------
Subtotal ........................ 25,011 20,189 24%
Runoff lines (Aircraft) ......... (157) 1,508 NM
--------- ------------ --------
Total ........................... $ 24,854 $ 21,697 15%
========= ============ ========
-9-
Premiums for each segment are as follows:
o Ocean marine gross premiums written, net premiums written and net
premiums earned grew by 22%, 36% and 15%, respectively, during the first
three months of 2004 when compared to the same period of the prior year.
Current year premiums reflect an increase in cargo premium production as
a result of our agreement with Southern Marine & Aviation, a leading
provider of insurance for bulk petroleum cargo shipments, which
commenced in the fourth quarter of 2003. Gross premiums in 2004 also
reflect a leveling to slight decline in premium rates across all classes
with the largest rate decreases occurring in the drill rig class. Net
premiums written reflect higher net retentions per loss as a result of
increasing the Company's net exposure to $4 million for any one risk or
any one occurrence effective on policies incepting on or after January
1, 2004 compared with $2 million for any one risk or any one occurrence
effective on policies incepting on or after January 1, 2003.
o Inland marine/fire gross and net premiums written for the three months
ended March 31, 2004 declined by 13% and 6%, respectively, when compared
to the same period of 2003. Inland marine/fire net premiums earned for
the three months ended March 31, 2004 increased by 28% over the same
period of 2003. Both gross and net writings in 2004 reflect mildly lower
market rates as well as a slight decrease in production. Net premiums
earned for the first quarter of 2004 reflected the earnings of volume
increases achieved towards the end of 2003 from an underwriting program
insuring excess and surplus lines property risks.
o Other liability gross premiums written rose by 81% for the three months
ended March 31, 2004 when compared to the same period in 2003 due to
premium volume increases from existing classes (professional liability)
and new classes (commercial automobile liability and excess workers
compensation). Premium rates were level to down 15% in the first quarter
of 2004 when compared to the same period in 2003. Net premiums written
and net premiums earned grew by 80% and 58% for the three months ended
March 31, 2004, respectively, when compared to the same period in 2003
primarily due to growth in premium volume.
o Aircraft premiums have decreased substantially in 2004 as a result of
the Company having ceased writing new aircraft policies subsequent to
March 31, 2002.
Net losses and loss adjustment expenses incurred as a percentage of net
premiums earned (the loss ratio) was 64.0% for the three months ended March 31,
2004 as compared to 55.4% for the same period of 2003. The higher loss ratio in
2004 is primarily the result of a large ocean marine liability loss occurring in
the current accident year that contributed approximately 8% to the overall loss
ratio. There were no significant changes reported relating to the development of
prior year loss reserves during the first quarters of 2004 and 2003,
respectively.
Policy acquisition costs as a percentage of net premiums earned (the
acquisition cost ratio) for the three months ended March 31, 2004 was 22.6% as
compared with 19.3% for the same period of the prior year. Increases were
recorded in the ocean marine line of business as a result of higher acquisition
costs associated with new sources of cargo premium production. In addition,
premiums earned in the prior year's first quarter reflected larger amounts of
aircraft premiums, which generally have a lower acquisition cost ratio than
other lines of business.
-10-
General and administrative expenses as a percentage of net premiums earned
for the three months ended March 31, 2004 were 21.3% as compared with 20.3% for
the same period of the prior year. The increase in 2004 was largely attributable
to an increase in employee related expenses to service the growth in the
Company's business operations.
The Company's combined ratio (the loss ratio, the acquisition cost ratio and
general and administrative expenses divided by premiums earned) was 107.9% for
the first quarter of 2004 as compared with 95.0% for the same period of 2003.
Interest expense increased to $372,000 for the three months ended March 31,
2004 as compared to $26,000 for the same period of 2003 principally as a result
of the Company's issuance of the $100 million of 6.5% senior notes on March 11,
2004.
Net investment income for the three months ended March 31, 2004 increased by
216% to $4.8 million from $1.5 million in the same period of the prior year. The
increase reflects a higher investment yield on the investment portfolio held in
2004 as a result of income derived from limited partnerships and trading
portfolio activities. In addition, a larger invested asset base derived from
favorable cash flow over the past year and proceeds received from our $100
million 6.5% senior notes issued on March 11, 2004 contributed to the overall
increase. As of March 31, 2004 investments in limited partnerships and the fixed
maturities-trading portfolio amounted to approximately $136.8 million and $57.2
million, respectively, as compared to $46.4 million and $0 as of March 31, 2003,
respectively. Net investment income from each major category of investments is
as follows:
Three months ended March 31,
----------------------------
2004 2003
---- ----
(in millions)
Fixed maturities, available for sale .........................$ 0.9 $ 0.4
Fixed maturities, trading securities ......................... 1.0 --
Short-term investments ....................................... 0.5 0.8
Equity in earnings of limited partnerships ................... 2.4 0.3
-------------- -----------
Net investment income....................................$ 4.8 $ 1.5
============== ===========
Commission and other income increased to $1.9 million for the three months
ended March 31, 2004 from $400,000 for the same period in the prior year
primarily as a result of other income received from litigation and arbitration
settlements in 2004.
Net realized investment losses were $41,000 for the three months ended March
31, 2004 as compared to net realized investment losses of $33,000 for the same
period in the prior year. The sale of fixed maturities led to realized
investment losses in the prior year. Write-downs from other-than-temporary
declines in the fair value of securities amounted to $104,000 and $0 for the
three months ended March 31, 2004 and 2003, respectively.
Total income taxes as a percentage of income before taxes were 35.0% in the
first quarter of 2004 as compared to 34.8% in the same period of 2003.
-11-
Liquidity and Capital Resources
Cash and total investments increased from $519.6 million at December 31,
2003 to $615.1 million at March 31, 2004, principally as a result of the receipt
of net proceeds from the issuance of $100 million of 6.5% senior notes.
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 senior 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 ability 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.
Cash flows provided by operating activities were $8.3 million for the
three months ended March 31, 2004. Trading portfolio activities of $4.5 million
contributed to cash flows during the three months ended March 31, 2004. As the
Company's trading portfolio balance may fluctuate significantly from period to
period, cash flows from operating activities may also be significantly impacted
by such trading activities. Cash flows provided by operating activities were
$2.2 million for the same period in 2003.
Cash flows used in investing activities were $97.1 million for the three
months ended March 31, 2004 and reflected additional net purchases of limited
partnerships and short term investments as well as the use of $8.3 million in
cash flows relating to securities purchased but not yet settled at December 31,
2003. Cash flows used in investing activities were $4.8 million for the same
period in 2003 and reflected additional net purchases of fixed maturities
available for sale, however, offset by reductions in short term investments.
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.
During the first quarter of 2004, the Company's insurance subsidiary, 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, which
amount was also paid to the Company in the first quarter of 2004.
During the first quarter of 2004, the Company granted options to a new
Director to purchase 10,000 shares of the Company's common stock. The exercise
price of the stock option was equal to the closing price of the Company's stock
on the New York Stock Exchange on the date of the underlying stock grant.
There were no repurchases of common stock made during the first quarter of
2004.
-12-
Ceded reinsurance payable increased to $29.9 million at March 31, 2004 from
$25.8 million at December 31, 2003 as a result of the timing of reinsurance
payments.
Other assets increased to $5.7 million as of March 31, 2004 from $3.7 million
as of December 31, 2003 primarily as a result of deferred bond issuance costs
incurred on the Company's 6.5% senior notes.
Investments
The following table summarizes our investments at March 31, 2004 and December
31, 2003 at fair value:
March 31, 2004 December 31, 2003
-------------- -----------------
(Dollars in thousands, except percentages)
Amount Percent Amount Percent
-------------------- ---------------------
Fixed maturities available for sale:
U. S. treasury securities $ 9,340 1.5% $ 9,185 1.8%
Municipalities 14,551 2.4% 17,352 3.3%
Corporate bonds 70,531 11.5% 66,934 12.9%
--------- --------- ----------- --------
Subtotal 94,422 15.4% 93,471 18.0%
Fixed maturities held for trading:
Collateralized debt obligations 57,211 9.3% 61,737 11.9%
--------- --------- ----------- --------
Total fixed maturities 151,633 24.7% 155,208 29.9%
Cash & short-term investments 326,665 53.1% 259,000 49.8%
--------- --------- ----------- --------
Total fixed maturities and short-term investments 478,298 77.8% 414,208 79.7%
Limited partnership hedge funds 136,832 22.2% 105,434 20.3%
--------- --------- ----------- --------
Total cash & investment portfolio $615,130 100.0% $519,642 100.0%
========= ========= =========== ========
As of March 31, 2004, 93% of the fair value of our fixed maturities and
short-term investment portfolio was in obligations rated "Baa3" or better by
Moody's or its equivalent Standard & Poor's rating.
Unpaid losses and loss adjustment expenses
Unpaid losses and loss adjustment expenses for each segment were as follows:
March 31, 2004 December 31, 2003
------------------- -------------------
Gross Net Gross Net
------------------- -------------------
(in thousands) (in thousands)
Ocean marine $206,080 $112,108 $199,406 $109,035
Inland marine/fire 26,585 7,348 26,483 7,142
Other liability 100,887 58,578 96,555 55,741
Runoff lines (Aircraft) 189,963 66,857 196,486 70,393
-------- -------- -------- --------
Total $523,515 $244,891 $518,930 $242,311
-------- -------- -------- --------
-13-
During 2001, the Company recorded losses of $154.9 million and $8.0 million,
respectively, on a gross and net of reinsurance basis 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 in 2001 and amounted to $5.0 million. The ultimate gross and net
liability for unpaid losses resulting from the WTC attack represent the
estimated ultimate costs of all incurred claims and claim adjustment expenses.
Since the gross liability and related reinsurance recoverables are based on
estimates, the ultimate liability may change from the amount provided currently
depending upon revisions in gross loss estimates and the interpretation as to
the number of occurrences involved in the WTC attack as defined in the aircraft
ceded reinsurance treaties. As of March 31, 2004, there have been no significant
changes in the gross incurred loss relating to the WTC attack. However, since
2001, reinsurance recoverables have decreased and net liability has increased
relative to the WTC attack as a result of the commutation of certain reinsurance
recoverables.
The process of establishing reserves for claims involves uncertainties and
requires the use of informed estimates and judgments. Our estimates and
judgments may be revised as claims develop and as additional experience and
other data become available and are reviewed, as new or improved methodologies
are developed or as current laws change. There were no significant changes in
assumptions made in the evaluation of loss reserves during 2004.
Critical Accounting Policies
Management considers certain accounting policies to be critical with respect
to the understanding of the Company's financial statements. Such policies
require significant management judgment and the resulting estimates have a
material effect on reported results and will vary to the extent that future
events affect such estimates and cause them to differ from the estimates
provided currently. These critical accounting policies include unpaid losses and
loss adjustment expenses, allowance for doubtful accounts, accounting for
limited partnerships and trading portfolio, stock option expense and impairment
of investments as described in the Company's Annual Report on Form 10-K for the
year ended December 31, 2003.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The investment portfolio has exposure to market risks which include the
effect on the portfolio of adverse changes in interest rates, credit quality,
hedge fund values, and collateralized debt obligations (CDO) values. Interest
rate risk includes the changes in the fair value of fixed maturities based upon
changes in interest rates. Credit quality risk includes the risk of default by
issuers of debt securities. Hedge fund risk includes the potential loss from the
diminution in the value of the underlying investment of the hedge fund. CDO risk
includes exposure to the private placement market including its lack of
liquidity and volatility in changes in market prices. There have been no
material changes to the Company's exposure to market risks during the three
months ended March 31, 2004 as compared to those disclosed in the Company's
financial statements for the year ended December 31, 2003.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company's
management, with the participation of the Company's Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures as defined in Rule 13a-15
under the Securities Exchange Act of 1934. Based upon that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in allowing timely
decisions regarding disclosure.
-14-
PART II - OTHER INFORMATION
Item 1. - 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 2. - Changes in Securities and Use of Proceeds
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 senior 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 ability 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.
Item 3. - Defaults Upon Senior Securities
None
Item 4. - Submission of Matters to a Vote of Security Holders
None
Item 5. - Other Information
None
-15-
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
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.
(b) Reports on Form 8-K
During the fiscal quarter ended March 31, 2004, the Registrant filed the
following Current Reports on Form 8-K:
(1) Current Report on Form 8-K, as filed with the Commission on February
23, 2004 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 fourth quarter and year ended
December 31, 2003.
(2) Current Report on Form 8-K, as filed with the Commission on February
26, 2004 reporting under Item 5 "Other Events" the Company's issuance
of two press releases announcing (i) the appointment of David E.
Hoffman as a new director, the Company's plans to restructure its board
of directors at the Company's next shareholders meeting, the promotion
of A. George Kallop to Chief Operating Officer, and the declaration of
a $0.06 per share dividend; and, (ii) the Company's proposed private
placement of senior notes.
(3) Current Report on Form 8-K, as filed with the Commission on February
26, 2004 reporting under Item 9 "Regulation FD Disclosure" certain
information concerning the Company.
(4) Current Report on Form 8-K, as filed with the Commission on March 8,
2004 reporting under Item 5 "Other Events" the Company's issuance of a
press release announcing the pricing of its offering of $100,000,000
aggregate principal amount of 6.50% senior notes due 2014.
(5) Current Report on Form 8-K, as filed with the Commission on March 12,
2004 reporting under Item 5 "Other Events" the Company's issuance of a
press release announcing the completion of its previously announced
offering of $100,000,000 aggregate principal amount of 6.50% senior
notes due 2014.
-16-
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NYMAGIC, INC.
-------------
(Registrant)
Date: May 10, 2004 /s/ George R. Trumbull, III
--------------- -----------------------------------
George R. Trumbull, III
Chairman and Chief Executive Officer
Date: May 10, 2004 /s/ Thomas J. Iacopelli
--------------- -----------------------------------
Thomas J. Iacopelli
Chief Financial Officer
-17-