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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended June 30, 2004
-------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition Period From to
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Commission file number 1-11238
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NYMAGIC, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3534162
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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 August 1, 2004 there were 9,738,848 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
June 30, 2004 and December 31, 2003 2
Consolidated Statements of Income
Six months ended June 30, 2004 and 3
June 30, 2003
Consolidated Statements of Income
Three months ended June 30, 2004 and 4
June 30, 2003
Consolidated Statements of Cash Flows 5
Six months ended June 30, 2004 and
June 30, 2003
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
Part II. Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NYMAGIC, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
-------- ------------
2004 2003
(unaudited) ----
ASSETS
Investments:
Fixed maturities:
Available for sale at fair value
(amortized cost $115,637,751 and $92,594,971) ......... $ 115,945,376 $ 93,470,691
Trading at fair value (cost $150,252,673 and $61,423,212) 153,184,406 61,736,951
Limited partnerships at equity
(cost $198,245,000 and $96,250,000) ...................... 207,159,645 105,434,419
Short-term investments ..................................... 132,082,122 257,059,675
Cash ....................................................... 10,787,886 1,940,541
---------- ---------
Total cash and investments .......................... 619,159,435 519,642,277
----------- -----------
Accrued investment income .................................... 4,006,896 2,099,641
Premiums and other receivables, net .......................... 24,029,452 23,981,910
Reinsurance receivables on unpaid losses, net ................ 265,170,777 276,618,865
Reinsurance receivables on paid losses, net .................. 11,155,240 4,229,697
Deferred policy acquisition costs ............................ 10,684,351 8,245,600
Prepaid reinsurance premiums ................................. 18,296,957 20,906,056
Deferred income taxes ........................................ 11,072,913 11,772,721
Property, improvements and equipment, net .................... 4,256,545 3,937,603
Other assets ................................................. 7,945,883 3,690,715
--------- ---------
Total assets ........................................ $ 975,778,449 $ 875,125,085
============= =============
LIABILITIES
Unpaid losses and loss adjustment expenses ................... $ 514,409,815 $ 518,929,558
Reserve for unearned premiums ................................ 68,712,287 61,821,283
Ceded reinsurance payable .................................... 19,304,752 25,812,895
Notes payable ................................................ 100,000,000 ---
Dividends payable ............................................ 584,331 583,305
Payable for securities not yet settled ....................... 6,775,710 8,321,250
Other liabilities ............................................ 19,224,182 15,365,694
---------- ----------
Total liabilities ................................... 729,011,077 630,833,985
----------- -----------
SHAREHOLDERS' EQUITY
Common stock ................................................. 15,293,490 15,279,390
Paid-in capital .............................................. 35,849,191 35,476,566
Accumulated other comprehensive income ....................... 199,956 569,220
Retained earnings ............................................ 241,585,908 239,127,097
----------- -----------
292,928,545 290,452,273
Treasury stock, at cost, 5,554,642 and 5,554,642 shares ...... (46,161,173) (46,161,173)
----------- -----------
Total shareholders' equity .......................... 246,767,372 244,291,100
----------- -----------
Total liabilities and shareholders' equity .......... $ 975,778,449 $ 875,125,085
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Six months ended June 30,
-------------------------
2004 2003
---- ----
Revenues:
Net premiums earned $ 54,418,642 $ 48,553,302
Net investment income 7,398,033 5,488,787
Net realized investment losses (1,366) (22,813)
Commission and other income 1,947,197 1,754,719
--------- ---------
Total revenues 63,762,506 55,773,995
---------- ----------
Expenses:
Net losses and loss adjustment expenses incurred 33,326,300 27,521,951
Policy acquisition expenses 11,545,216 9,669,719
General and administrative expenses 11,307,399 9,540,270
Interest expense 2,012,614 25,652
--------- ------
Total expenses 58,191,529 46,757,592
---------- ----------
Income before income taxes 5,570,977 9,016,403
--------- ---------
Income taxes:
Current 1,045,709 2,544,648
Deferred 898,642 584,799
------- -------
Total income tax expense 1,944,351 3,129,447
--------- ---------
Net income $ 3,626,626 $ 5,886,956
============ ============
Weighted average shares of common stock outstanding-basic 9,727,537 9,638,918
Basic earnings per share $ .37 $ .61
============ ============
Weighted average shares of common stock outstanding-diluted 9,944,789 9,746,326
Diluted earnings per share $ .36 $ .60
============ ============
Dividends declared per share $ .12 $ .12
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended June 30,
---------------------------
2004 2003
---- ----
Revenues:
Net premiums earned $29,564,325 $26,856,742
Net investment income 2,643,899 3,982,277
Net realized investment gains 39,402 9,793
Commission and other income 69,816 1,356,381
------ ---------
Total revenues 32,317,442 32,205,193
---------- ----------
Expenses:
Net losses and loss adjustment expenses incurred 17,420,787 15,509,085
Policy acquisition expenses 5,925,310 5,487,395
General and administrative expenses 6,017,244 5,134,040
Interest expense 1,640,376 ---
---------- ----------
Total expenses 31,003,717 26,130,520
---------- ----------
Income before income taxes 1,313,725 6,074,673
--------- ---------
Income taxes:
Current 41,056 1,758,677
Deferred 414,783 347,533
------- -------
Total income tax expense 455,839 2,106,210
------- ---------
Net income $ 857,886 $ 3,968,463
=========== ===========
Weighted average shares of common stock outstanding-basic 9,730,326 9,706,498
Basic earnings per share $ .09 $ .41
=========== ===========
Weighted average shares of common stock outstanding-diluted 9,944,209 9,831,959
Diluted earnings per share $ .09 $ .40
=========== ===========
Dividends declared per share $ .06 $ .06
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six months ended June 30,
-------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 3,626,626 $ 5,886,956
----------- ------------
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for deferred income taxes 898,642 584,799
Net realized investment losses 1,366 22,813
Equity in earnings of limited partnerships (224,485) (3,474,016)
Net bond amortization 597,138 102,159
Depreciation and other, net 301,516 174,108
Changes in:
Premiums and other receivables (47,542) 17,883,158
Reinsurance receivables, paid and unpaid, net 4,522,545 16,449,153
Ceded reinsurance payable (6,508,143) 238,825
Accrued investment income (1,907,255) (1,410,995)
Deferred policy acquisition costs (2,438,751) 348,364
Prepaid reinsurance premiums 2,609,099 (4,842,021)
Other assets, net (2,170,711) 366,929
Unpaid losses and loss adjustment expenses (4,519,743) 3,349,055
Reserve for unearned premiums 6,891,004 3,012,458
Other liabilities 3,858,488 (5,177,577)
Trading portfolio activities (91,447,457) (40,397,660)
----------- -----------
Total adjustments (89,584,289) (12,770,448)
----------- -----------
Net cash used in operating activities (85,957,663) (6,883,492)
----------- -----------
Cash flows from investing activities:
Fixed maturities, available for sale, acquired (50,771,052) (103,983,707)
Limited partnerships acquired (113,350,000) (28,750,000)
Fixed maturities, available for sale, sold 27,125,550 56,063,018
Equity securities sold ---- 4,658,759
Limited partnerships sold 11,849,259 3,674,803
Net sale of short-term investments 124,981,770 74,621,442
Payable for securities not yet settled (1,545,540) ----
Acquisition of property, improvements and equipment, net (620,458) (1,336,322)
----------- -----------
Net cash (used in) provided by investing activities (2,330,471) 4,947,993
----------- -----------
Cash flows from financing activities:
Proceeds from stock issuance and other 386,725 1,001,304
Cash dividends paid to shareholders (1,166,789) (582,390)
Net sale of treasury stock ---- 7,247,827
Proceeds from borrowings 97,915,543 -----
Loan principal repayments ---- (6,219,953)
----------- -----------
Net cash provided by financing activities 97,135,479 1,446,788
----------- -----------
Net increase (decrease) in cash 8,847,345 (488,711)
Cash at beginning of period 1,940,541 980,109
----------- -----------
Cash at end of period $ 10,787,886 $ 491,398
============= ===========
Supplemental disclosures:
Interest paid $ 0 $ 25,652
Federal income tax paid $ 4,161,220 $ 148,652
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
June 30, 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. In addition, the runoff
operations in the aircraft business and MMO London are also considered a
segment. 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:
Six Months Ended June 30,
-------------------------------------------------------------
2004 2003
-----------------------------------------------------------------
(in thousands)
Income Income
Revenues (Loss) Revenues (Loss)
-----------------------------------------------------------------
Ocean marine $38,513 $8,711 $37,457 $10,881
Inland marine/fire 2,325 521 1,865 107
Other liability 13,752 (257) 7,674 (257)
Runoff operations (Aircraft) 32 775 1,662 735
---------------------------------------------------------------------------------------------------------
Subtotal 54,622 9,750 48,658 11,466
Net investment income 7,398 7,398 5,489 5,489
Net realized investment losses (1) (1) (23) (23)
Other income 1,744 1,744 1,650 1,650
General and administrative expenses --- (11,307) --- (9,540)
Interest expense --- (2,013) --- (26)
Income tax expense --- (1,944) --- (3,129)
---------------------------------------------------------------------------------------------------------
Total $63,763 $3,627 $55,774 $5,887
------------------------------------------------------------------------------------------------
-6-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
Three Months Ended June 30,
-------------------------------------------------------------
2004 2003
-----------------------------------------------------------------
(in thousands)
Income Income
Revenues (Loss) Revenues (Loss)
-----------------------------------------------------------------
Ocean marine $20,650 $5,675 $21,952 $6,206
Inland marine/fire 1,185 167 976 132
Other liability 7,745 (257) 3,868 (298)
Runoff operations (Aircraft) 188 837 227 (15)
---------------------------------------------------------------------------------------------------------
Subtotal 29,768 6,422 27,023 6,025
Net investment income 2,644 2,644 3,982 3,982
Net realized investment gains 40 40 10 10
Other income (expense) (134) (134) 1,190 1,190
General and administrative expenses --- (6,017) --- (5,133)
Interest expense --- (1,641) --- ---
Income tax expense --- (456) --- (2,106)
---------------------------------------------------------------------------------------------------------
Total $32,318 $858 $32,205 $3,968
------------------------------------------------------------------------------------------------
3) The Company's comparative comprehensive income is as follows:
Six months ended Three months ended
June 30, June 30,
-------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
(in thousands)
Net income $ 3,627 $ 5,887 $ 858 $ 3,968
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities, net of
deferred tax benefit (expense) of
$199, $(63), $478 and $108 (370) 117 (887) (201)
Less: reclassification adjustment for
gains (losses) realized in net income, net of
deferred tax benefit (expense) of
$0, $8, $(14) and $(3) (1) (15) 26 6
------ ----- ----- ------
Other comprehensive income (loss) (369) 132 (913) (207)
----------- --------- -------- ---------
Total comprehensive income (loss) $ 3,258 $ 6,019 $ (55) $ 3,761
======= ======= ===== =======
-7-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
4) The Company maintains four 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:
Six months ended June 30, Three months ended June 30,
-----------------------------------------------------------
2004 2003 2004 2003
---- ---- ---- ----
(in thousands except per share data)
Net income, as reported $ 3,627 $ 5,887 $ 858 $ 3,968
Add: Stock based employee
compensation expense included in
reported net income, net of related
tax effects 15 4 8 2
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method for all
awards, net of related tax effects (173) (179) (87) (89)
---- ---- --- ---
Pro forma net income $ 3,469 $ 5,712 $ 779 $ 3,881
========= ========= ======= =========
Earnings per share:
Basic EPS - as reported $.37 $.61 $.09 $.41
Basic EPS - pro forma $.36 $.59 $.08 $.40
Diluted EPS - as reported $.36 $.60 $.09 $.40
Diluted EPS - pro forma $.35 $.59 $.08 $.39
On May 26, 2004, shareholders approved the NYMAGIC, INC. 2004 Long-Term
Incentive Plan (the "2004 Plan") and the NYMAGIC, INC. Employee Stock Purchase
Plan (the "ESPP").
The 2004 Plan provides for the granting to directors, officers,
employees and consultants of the Company and its subsidiaries of common stock,
options to purchase shares of common stock (both incentive stock options, or
ISOs, and non-ISOs, though only employees may receive ISOs), stock appreciation
rights, restricted stock units, deferred shares and performance units. A maximum
of 450,000 shares of common stock may be made the subject of grants under the
2004 Plan. The Company granted 14,100 shares of common stock to certain officers
and directors of the Company in the second quarter of 2004 for a total
compensation expense of approximately $369,000.
-8-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
June 30, 2004 and 2003
The ESPP will allow eligible employees of the Company and its
designated affiliates to purchase, through payroll deductions, shares of common
stock of the Company. The ESPP is designed to retain and motivate the employees
of the Company and its designated affiliates by encouraging them to acquire
ownership in the Company on a tax-favored basis. The price per common share sold
under the ESPP will be 85% (or more if the Board of Directors or the Committee
so provides) of the closing price of the Company's shares on the New York Stock
Exchange on the day the Common Stock is offered. The Company has reserved 50,000
shares for issuance under the ESPP. There were no shares issued under the ESPP
as of June 30, 2004.
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.
In March 2004, the Emerging Issues Task Force (EITF) of the FASB reached
a consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment
and its Application to Certain Investments". This consensus provides recognition
and measurement guidance for determining when an investment is
other-than-temporarily impaired, specifically, when the investor has the ability
and intent to hold an investment until recovery. This guidance is effective for
reporting periods beginning after June 15, 2004. The Company does not believe
the adoption of this guidance will have a material impact on its results or
financial condition.
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) 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 proceeding was brought in the
Commonwealth Court of Pennsylvania. 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.
8) 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. Under the terms of
the agreement, Mariner manages the Company's investment portfolios. Fees paid to
Mariner are based on a percentage of the investment portfolio as follows: .20%
of liquid assets, .30% of fixed maturity
-9-
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. We
incurred Mariner investment expenses of $1.5 million and $0.7 million pursuant
to this agreement as of June 30, 2004 and 2003, respectively. There were no
other fees incurred through June 30, 2004 and 2003, respectively.
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. The partnership agreement also provides for other fees payable to
the manager based upon the operations of the hedge fund. The Company cannot
withdraw funds from this limited partnership for a minimum period of three years
without the consent of the hedge fund manager. We incurred investment expenses
of $0.5 million and $0 pursuant to these agreements as of June 30, 2004 and
2003, respectively. There were no other fees incurred through June 30, 2004 and
2003, respectively.
Investment income, net of investment fees, from each major category of
investments is as follows:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
(in millions)
Fixed maturities, available for sale................$ 1.0 $ 0.5 $ 1.9 $ 0.9
Fixed maturities, trading securities................ 4.4 0.3 5.5 0.3
Short-term investments.............................. 0.3 0.4 0.8 1.2
Equity in earnings (losses) of limited partnerships. (3.1) 2.8 (0.8) 3.1
----------------------------------------------------------
Net investment income.......................$ 2.6 $ 4.0 $ 7.4 $ 5.5
==========================================================
9) Certain accounts in the prior year's financial statements have been
reclassified to conform to the 2004 presentation.
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
-10-
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."
Results of Operations
Net income for the second quarter ended June 30, 2004 totaled $858,000, or
$.09 per diluted share, compared with $4.0 million, or $.40 per diluted share,
for the second quarter of 2003. The decrease in net income for the second
quarter of 2004 was attributable to a decline in investment income derived from
limited partnership hedge funds and an increase in interest expense arising from
the Company's issuance of $100 million of 6.5% senior notes on March 11, 2004.
In addition, net income for the second quarter of 2003 benefited from other
income attributable to an arbitration settlement.
Net income for the six months ended June 30, 2004 totaled $3.6 million, or
$.36 per diluted share, compared with $5.9 million, or $.60 per diluted share,
for the six months ended June 30, 2003. The decline in net income for the six
months ended June 30, 2004 is attributable to a higher combined ratio, a decline
in investment income derived from limited partnership hedge funds and an
increase in interest expense.
Net realized investment gains after taxes in the second quarter of 2004
were $26,000, or $.00 per diluted share, compared with $6,000, or $.00 per
diluted share, for the same period in 2003. Net realized investment losses after
taxes for the six months ended June 30, 2004 were $1,000, or $.00 per diluted
share, compared with $15,000, or $.00 per diluted share, for the same period in
2003.
Shareholders' equity increased to $246.8 million as of June 30, 2004
compared to $244.3 million as of December 31, 2003. The increase was primarily
attributable to net income partially offset by dividends declared.
The Company's gross premiums written, net premiums written and net premiums
earned increased by 23%, 37% and 12%, respectively, for the six months ended
June 30, 2004, when compared to the same period of 2003. The Company's gross
premiums written, net premiums written and net premiums earned increased by 26%,
41% and 10%, respectively, for the three months ended June 30, 2004, when
compared to the same period of 2003.
-11-
NYMAGIC Gross Premiums Written
by Segment Six months ended June 30, Three months ended June 30,
---------- ---------------------------------------------------------------
2004 2003 Change 2004 2003 Change
---------------------------------------------------------
(Dollars in thousands)
Ocean marine ............... $55,813 $48,708 15% $28,828 $26,610 8%
Inland marine/fire.......... 7,100 7,188 (1%) 3,871 3,462 12%
Other liability 18,871 7,964 137% 11,154 3,703 201%
------ ------ ----- ------ ------ ----
Subtotal.................... 81,784 63,860 28% 43,853 33,775 30%
Runoff lines (Aircraft). 255 2,709 (91%) 279 1,158 (76%)
------ ------ ----- ------ ------ ----
Total....................... $82,039 $66,569 23% $44,132 $34,933 26%
====== ====== ===== ====== ====== ====
NYMAGIC Net Premiums Written
by Segment Six months ended June 30, Three months ended June 30,
---------- ---------------------------------------------------------------
2004 2003 Change 2004 2003 Change
---------------------------------------------------------
(Dollars in thousands)
Ocean marine ............... $45,795 $35,678 28% $24,122 $19,774 22%
Inland marine/fire.......... 2,302 2,123 8% 1,282 1,041 23%
Other liability 15,831 7,318 116% 9,145 3,611 153%
------ ------ ---- ------ ------ -----
Subtotal 63,928 45,119 42% 34,549 24,426 41%
Runoff lines (Aircraft) (9) 1,605 NM 98 208 (53%)
------ ------ ---- ------ ------ -----
Total....................... $63,919 $ 46,724 37% $34,647 $24,634 41%
====== ====== ==== ====== ====== =====
NYMAGIC Net Premiums Earned
by Segment Six months ended June 30, Three months ended June 30,
---------- ---------------------------------------------------------------
2004 2003 Change 2004 2003 Change
---------------------------------------------------------
(Dollars in thousands)
Ocean marine................ $38,383 $37,278 3% $20,519 21,785 (6%)
Inland marine/fire.......... 2,325 1,866 25% 1,185 976 21%
Other liability............. 13,752 7,674 79% 7,745 3,869 100%
------ ------ ---- ------ ------ ----
Subtotal................... 54,460 46,818 16% 29,449 26,630 11%
Run-off lines (Aircraft).... (41) 1,735 NM 116 227 (49%)
------ ------ ---- ------ ------ ----
Total....................... $54,419 $48,553 12% $29,565 $26,857 10%
====== ====== ==== ====== ====== ====
Premiums for each segment are as follows:
o Ocean marine gross premiums written, net premiums written and net
premiums earned grew by 15%, 28% and 3%, respectively, during the
first six 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 underwriting in the fourth quarter of
2003. Production increases were achieved in most of the other
classes of ocean marine business as a result of favorable pricing.
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. The
-12-
leveling of premium rates follows a few years of rate increases. 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.
Ocean marine gross premiums written and net premiums written grew by
8% and 22%, respectively, and net premiums earned decreased by 6%
during the second quarter of 2004 when compared to the same period
of the prior year. The current quarter reflects an increase in cargo
premium production from Southern Marine & Aviation, reduced ceded
premiums written due to increases in net loss retention and flat to
declining rates on premium renewals.
o Inland marine/fire gross premiums written for the six months ended
June 30, 2004 declined by 1%, however, net premiums written and net
premiums earned increased by 8% and 25%, respectively, when compared
to the same period of 2003. Gross premiums written in 2004 reflect
mildly lower market rates. Net premiums written in 2004 reflect
slightly higher retention levels. The increase in net premiums
earned reflected the earnings of premium increases achieved toward
the end of 2003 from an underwriting program insuring excess and
surplus lines property risks.
Inland marine/fire gross premiums written, net premiums written and
net premiums earned grew by 12%, 23% and 21%, respectively, during
the second quarter of 2004 when compared to the same period of the
prior year. The increases reflect additional production from
policies covering inland marine/motor truck cargo and new production
sources in the surety class. Contributing to net premiums earned for
the second quarter of 2004 were the earnings of premium increases
achieved toward the end of 2003 from an underwriting program
insuring excess and surplus lines property risks.
o Other liability gross premiums written rose by 137% for the six
months ended June 30, 2004 when compared to the same period in 2003
primarily due to premium volume increases from existing classes and
new classes of business. The growth in gross premiums written from
existing classes of business was derived from the professional
liability class, which rose from $3.1 million in 2003 to $5.4
million in 2004. Volume increases from new classes of business in
2004 include gross premiums written of $3.0 million in commercial
automobile liability and $4.7 million in excess workers
compensation. Premium rates in the professional liability class have
increased slightly in 2004; however, premium rates in some of the
Company's other casualty classes have decreased by as much as 15% in
2004 when compared to the same period in 2003. The leveling of
premium rates follows a few years of significant rate increases. Net
premiums written and net premiums earned grew by 116% and 79% for
the six months ended June 30, 2004, respectively, when compared to
the same period in 2003 primarily due to growth in premium volume.
Net premiums written increased in 2004 to a lesser extent than the
increase in gross premiums written for the same period as a result
of additional quota share and excess of loss reinsurance on the new
classes of business written.
Other liability gross premiums written, net premiums written and net
premiums earned grew by 201%, 153% and 100%, respectively, during
the second quarter of 2004 when compared to the same period of the
prior year. Contributing to gross premiums written were volume
increases from existing classes and new classes of business. The
growth in gross premiums written from existing classes of business
were derived from the professional liability class, which rose from
$1.8 million in 2003 to $3.9 million in 2004. Volume increases from
new classes of business in 2004 include gross premiums written of
$1.6 million in commercial automobile liability and $3.4 million in
excess workers compensation. Net premiums written increased in 2004
to a lesser extent than the increase in gross premiums written for
the same period as a result of additional quota share and excess of
loss reinsurance on the new classes of business written.
-13-
o Runoff lines (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) were 58.9% for the three months ended June 30,
2004 as compared to 57.7% for the same period of 2003. For the six months ended
June 30, 2004, the loss ratio was 61.2% compared to 56.7% for the same period of
the prior year. Contributing to the higher loss ratio for the six months and
second quarter ended June 30, 2004 were larger current accident year severity
losses occurring in the ocean marine line of business. The inland marine/fire
loss ratios for the second quarter and six months ended June 30, 2004 were lower
than the same periods in 2003, reflecting a lower frequency of claims. There
were no significant changes in the other liability loss ratio in 2004 when
compared to the ratio in 2003. Although the aviation line experienced some
favorable development in 2004, there were no significant changes reported
overall with respect to the development of prior year net loss reserves during
the first six months of 2004 and 2003, respectively.
Policy acquisition costs as a percentage of net premiums earned (the
acquisition cost ratio) for the three months ended June 30, 2004 were 20.0% as
compared with 20.4% for the same period of the prior year. The same ratio was
21.2% for the six months ended June 30, 2004 as compared with 19.9% for the same
period in 2003. The decrease in the second quarter ratio in 2004 reflects lower
acquisition costs from new production sources in the other liability line. The
acquisition cost ratio for the six months ended June 30, 2004 reflects an
increase in the ocean marine line of business as a result of higher acquisition
costs associated with new sources of cargo premium production. Partially
offsetting this increase were lower commission rates on existing business and
the favorable impact of lower excess of loss reinsurance costs on the overall
ratio. In addition, premiums earned in the six months ended June 30, 2003
reflected larger amounts of aircraft premiums, which generally have a lower
acquisition cost ratio than other lines of business.
General and administrative expenses as a percentage of net premiums earned
for the three months ended June 30, 2004 were 20.4% as compared with 19.1% for
the same period of 2003. General and administrative expenses as a percentage of
net premiums earned for the six months ended June 30, 2004 were 20.8% as
compared with 19.6% 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 99.3%
for the three months ended June 30, 2004 as compared with 97.3% for the same
period of 2003. The Company's combined ratio was 103.2% for the six months ended
June 30, 2004 as compared with 96.2% for the same period of 2003.
Interest expense increased to $1.6 million for the three months ended June
30, 2004 as compared to $0 for the same period of 2003. Interest expense
increased to $2.0 million for the six months ended June 30, 2004 as compared to
$26,000 for the same period of 2003. The increase in interest expense in 2004 is
due to 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 June 30, 2004 decreased by
34% to $2.6 million from $4.0 million in the same period of 2003. The Company
maintained a larger invested asset base in 2004 derived from favorable cash flow
from operations over the past year coupled with the proceeds received from our
$100 million 6.5% senior notes issued on March 11, 2004, a significant portion
of which were invested in limited partnership hedge funds. The decrease in the
second quarter net investment income reflects net losses of $3.1 million from
limited partnerships; however, this decrease was offset by larger income derived
from trading portfolio activities. The equity method of accounting is used to
account for the Company's limited partnership hedge fund investments. Under the
equity method, the Company records all changes in the underlying value of the
limited partnership hedge fund to net investment
-14-
income in results of operations. Trading portfolio investments are marked to
market with the change recognized in net investment income during the current
period.
Net investment income for the six months ended June 30, 2004 increased by
35% to $7.4 million from $5.5 million in the same period of the prior year. The
increase reflects larger income derived from trading portfolio activities;
however, the increase was offset by declines in income from limited
partnerships. Contributing to net investment income was a larger invested asset
base derived from favorable cash flow from operations over the past year coupled
with the proceeds received from our $100 million 6.5% senior notes issued on
March 11, 2004. As of June 30, 2004 investments in limited partnerships and the
fixed maturities-trading portfolio amounted to approximately $207.2 million and
$153.2 million, respectively, as compared to $67.0 million and $40.4 million as
of June 30, 2003, respectively.
Investment income, net of investment fees, from each major category of
investments is as follows:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
(in millions)
Fixed maturities, available for sale ............... $ 1.0 $0.5 $1.9 $0.9
Fixed maturities, trading securities ............... 4.4 0.3 5.5 0.3
Short-term investments ............................. 0.3 0.4 0.8 1.2
Equity in earnings (losses) of limited partnerships (3.1) 2.8 (0.8) 3.1
------------------------------------------------
Net investment income .............................. $ 2.6 $4.0 $7.4 $5.5
================================================
Commission and other income decreased to $70,000 for the three months ended
June 30, 2004 from $1.4 million for the same period in the prior year. 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.
Commission and other income increased to $1.9 million for the six months
ended June 30, 2004 from $1.8 million for the same period in the prior year
primarily as a result of other income received from litigation and arbitration
settlements.
Net realized investment gains were $40,000 for the second quarter ended
June 30, 2004 as compared to $10,000 for the same period of 2003. Net realized
investment losses were $1,000 for the six months ended June 30, 2004 as compared
to $23,000 for the same period of 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 six months ended June 30, 2004 and 2003, respectively.
Total income taxes as a percentage of income before taxes were 34.7% for
each of the second quarters ended June 30, 2004 and 2003. Total income taxes as
a percentage of income before taxes were 34.9% for the six months ended June 30,
2004 as compared to 34.7% for the same period of 2003.
Liquidity and Capital Resources
-15-
Cash and total investments increased from $519.6 million at December 31,
2003 to $619.2 million at June 30, 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. On
July 1, 2004 the Company completed the exchange of registered 6.5% senior notes
for the unregistered senior notes issued on March 11, 2004, as required by the
registration rights agreement with the purchasers of the senior notes. 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 used in operating activities were $86.0 million for the six
months ended June 30, 2004 as compared to $6.9 million for the same period in
2003. Any increases in the Company's trading portfolio are considered uses of
cash flows from operations. Accordingly, the cash flows for the six months ended
June 30, 2004 and 2003 reflect uses of $91.4 million and $40.4 million,
respectively, for trading portfolio activities. 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. Excluding trading portfolio activities, the Company recorded cash
flows from operating activities in 2004 and 2003 primarily as a result of
favorable cash flows from underwriting operations.
Cash flows used in investing activities were $2.3 million for the six
months ended June 30, 2004 as compared with cash flows provided by investing
activities of $4.9 million for the same period in 2003. Each period reflected
additional net purchases of limited partnerships and fixed maturities available
for sale; however, these amounts were offset by reductions in short term
investments. Contributing to the use of cash flows in 2004 was $1.5 million
relating to securities purchased but not yet settled.
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. On
May 28, 2004, the Company declared a dividend of six (6) cents per share to
shareholders of record on June 30, 2004, payable on July 6, 2004.
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. In connection with the application for approval of
acquisition of control of NYMAGIC, INC., filed by Mariner Partners, Inc.
("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
-16-
impact on the Company's ability to meet current cash obligations as cash flow
provided by operating activities will assist the Company in providing adequate
funds to meet our short term liquidity requirements.
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.
Under the 2004 Long-Term Incentive Plan, the Company granted 14,100 shares
of common stock to certain officers and directors of the Company in the second
quarter of 2004 for a total compensation expense of approximately $369,000.
There were no repurchases of common stock made during the first six months
of 2004.
Ceded reinsurance payable decreased to $19.3 million at June 30, 2004 from
$25.8 million at December 31, 2003 as a result of decreases in ceded premiums
written and the timing of reinsurance payments.
Other assets increased to $7.9 million as of June 30, 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 as well as a federal income
tax recoverable of $1.9 million.
Investments
The following table summarizes our investments at June 30, 2004 and December 31,
2003 at fair value:
June 30, 2004 December 31, 2003
------------- -----------------
(Dollars in thousands, except percentages)
Fair Value Percent Fair Value Percent
-----------------------------------------
Fixed maturities available for sale:
U. S. treasury securities $ 9,063 1.5% $ 9,185 1.8%
Municipalities 14,532 2.3% 17,352 3.3%
Corporate bonds 92,350 14.9% 66,934 12.9%
-----------------------------------------
Subtotal 115,945 18.7% 93,471 18.0%
-----------------------------------------
Fixed maturities held for trading:
U. S. treasury securities 100,844 16.3% -- --
Collateralized debt obligations 52,340 8.4% 61,737 11.9%
-----------------------------------------
Subtotal 153,184 24.7% 61,737 11.9%
-----------------------------------------
Total fixed maturities 269,129 43.4% 155,208 29.9%
Cash & short-term investments 142,870 23.1% 259,000 49.8%
-----------------------------------------
-17-
Total fixed maturities and short-term investments 411,999 66.5% 414,208 79.7%
Limited partnership hedge funds 207,160 33.5% 105,434 20.3%
---------------------------------------
Total cash & investment portfolio $619,159 100.0% $519,642 100.0%
=======================================
As of June 30, 2004, 86% of the fair value of our fixed maturities and
short-term investment portfolio was in obligations rated "Baa3" or better by
Moody's or the equivalent Standard & Poor's rating.
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. Under the terms of
the agreement, Mariner manages the Company's investment portfolios. Fees 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. We incurred Mariner investment expenses of
$1.5 million and $0.7 million pursuant to this agreement as of June 30, 2004 and
2003, respectively. There were no other fees incurred through June 30, 2004 and
2003, respectively.
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. The partnership agreement also provides for other fees payable to
the manager based upon the operations of the hedge fund. The Company cannot
withdraw funds from this limited partnership for a minimum period of three years
without the consent of the hedge fund manager. We incurred investment expenses
of $0.5 million and $0 pursuant to these agreements as of June 30, 2004 and
2003, respectively. There were no other fees incurred through June 30, 2004 and
2003, respectively.
Unpaid losses and loss adjustment expenses
Unpaid losses and loss adjustment expenses for each segment were as
follows:
June 30, 2004 December 31, 2003
------------- -----------------
Gross Net Gross Net
--------------- ------------------
(in thousands) (in thousands)
Ocean marine $199,377 $113,872 $199,406 $109,035
Inland marine/fire 23,991 7,566 26,483 7,142
Other liability 107,460 64,092 96,555 55,741
Runoff lines (Aircraft) 183,582 63,709 196,486 70,393
----------------------------------------
Total $514,410 $249,239 $518,930 $242,311
-------- -------- -------- --------
-18-
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 June 30, 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 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. As the Company increases its production in the other liability
line of business, there may be changes in the level of loss reserves that the
Company carries depending upon the ultimate payout pattern of these losses. Our
professional liability class is written on a claims-made basis and other sources
of new production are derived from liability classes written on an occurrence
basis. Therefore, depending on the level on writings achieved in each of these
classes, the overall level of loss reserves carried may vary at the end of any
reporting period.
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.
Off-Balance Sheet Arrangements
None
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.
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
-19-
asbestos/environmental risks are difficult for management to estimate and
require considerable judgment due to the uncertainty regarding the significant
issues surrounding such claims. Unpaid losses and loss adjustment expenses
amounted to $514.4 million and $518.9 million at June 30, 2004 and December 31,
2003, respectively. Unpaid losses and loss adjustment expenses, net of
reinsurance amounted to $249.2 million and $242.3 million at June 30, 2004 and
December 31, 2003, respectively. 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. The allowance for doubtful accounts on both premiums and
reinsurance receivables amounted to $12.6 million and $13.3 million at June 30,
2004 and December 31, 2003, 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. The
Company performs a qualitative and quantitative review of all securities in a
loss position in order to determine if any impairment is considered to be
other-than-temporary. With respect to fixed income investments, declines in fair
value of less than 10% are normally considered to be temporary, unless the fixed
income security has been downgraded more than two levels by a major rating
agency. Additionally, the Company reviews those securities held for six months
or more, with fair value declines of greater than 10% at the end of each
reporting period. The Company also reviews all securities with any rating agency
declines during the reporting period. The Company will record an impairment
charge to earnings if the fair value decline is greater than 20%, if the fixed
income security has been downgraded more than two levels by a major rating
agency, or if the fair value decline is greater than 10% and the security has
been downgraded one level by a major rating agency. This review includes
considering the effect of rising interest rates and the Company's intent and
ability to hold impaired securities in the foreseeable future to recoup any
losses. Approximately $104,000 and $0 were charged to results from operations
for the six months ended June 30, 2004 and 2003, 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 $.9 million, respectively, at June 30, 2004. As of June 30, 2004,
there were unrealized losses greater than one year from the date of purchase on
fixed income securities amounting to $247,000.
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 (loss) derived
from investments in limited partnerships amounted to ($810,000) and $3.1 million
for the six months ended June 30, 2004 and 2003, respectively. See Item 3
"Quantitative and Qualitative Disclosures About Market Risk" with respect to
market risks associated with investments in limited partnership hedge funds.
The Company maintained a trading portfolio at June 30, 2004 consisting of
collateralized debt obligations (CDOs), and US Treasury notes. 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 $5.5 million and $0.3 million in net trading portfolio income for the
six months ended June 30, 2004 and 2003, respectively. See Item 3 "Quantitative
and Qualitative Disclosures About Market Risk" with respect to market risks
associated with investments in CDOs.
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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. Stock option expense amounted to $23,000 and $6,000 for
the six months ended June 30, 2004 and 2003, respectively.
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. The only significant
change to the Company's exposure to market risks during the six months ended
June 30, 2004 as compared to those disclosed in the Company's financial
statements for the year ended December 31, 2003 related to the level of
investments in hedge funds. The investment in hedge funds amounted to $207.2
million and $105.4 million as of June 30, 2004 and December 31, 2003,
respectively.
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 limits the amount of hedge
fund investments to the greater of 30% of invested assets or 50% of
policyholders' surplus. Except for certain minimum liquidity requirements, there
is currently no restriction as to the level of hedge fund investments at the
holding company as of June 30, 2004.
The Company does seek 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.
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(e)
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 (a) are effective to ensure that
information required to be disclosed by us in reports filed or submitted under
the Securities Exchange Act of 1934 is timely recorded, processed, summarized
and reported and (b) include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us in reports
filed or submitted under the Securities and Exchange Act of 1934 is accumulated
and communicated to our management, including its Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
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There have been no significant changes in our "internal control over
financial reporting" (as defined in rule 13a-15(f) under the Securities and
Exchange Act of 1934) 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.
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 proceeding was brought in the Commonwealth Court
of Pennsylvania. 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. On
July 1, 2004 the Company completed the exchange of registered 6.5% senior notes
for the unregistered senior notes issued on March 11, 2004, as required by the
registration rights agreement with the purchasers of the senior notes. 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.
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Item 3. - Defaults Upon Senior Securities
None
Item 4. - Submission of Matters to a Vote of Security Holders
The Company held its 2004 annual meeting of shareholders on May 26, 2004.
The following matters were voted upon by the Company's shareholders:
1) Directors. The following persons were elected as Directors of the Board of
Directors, each to hold office until the next annual meeting of
shareholders to be held in 2005.
Total votes for Total votes withheld
each Director for each Director
------------- -----------------
John R. Anderson 9,177,907 213,879
Glenn J. Angiolillo 9,252,061 139,725
John T. Baily 9,277,061 114,725
David E. Hoffman 9,207,507 184,279
William J. Michaelcheck 9,203,806 187,980
William D. Shaw Jr. 9,203,806 187,980
Robert G. Simses 9,098,782 293,004
George R. Trumbull, III 7,690,484 1,701,302
David W. Young 9,178,607 213,179
2) Election of Independent Public Accountants. KPMG LLP were elected as the
Company's independent public accountants for the fiscal year ending
December 31, 2004 of the Company.
FOR AGAINST ABSTAIN
--- ------- -------
9,351,720 39,966 100
3) Long-Term Incentive Plan. The NYMAGIC, INC. 2004 Long-Term Incentive Plan
was adopted and approved.
FOR AGAINST ABSTAIN BROKER NONVOTES
--- ------- ------- ----------------
4,350,729 2,043,080 950,300 2,380,639
4) Employee Stock Purchase Plan. The NYMAGIC, INC. Employee Stock Purchase
Plan was adopted and approved.
FOR AGAINST ABSTAIN BROKER NONVOTES
--- ------- ------- ----------------
7,301,320 42,489 300 2,380,639
Item 5. - Other Information
None
Item 6. - Exhibits and Reports on Form 8-K
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(a) Exhibits
10.1 Limited Partnership Agreement of Mariner Tiptree (CDO) Fund I,
L.P.
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
None
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NYMAGIC, INC.
-------------
(Registrant)
Date: August 9, 2004 /s/ George R. Trumbull, III
------------------ --------------------------------
George R. Trumbull, III
Chairman and Chief Executive Officer
Date: August 9, 2004 /s/ Thomas J. Iacopelli
------------------ --------------------------------
Thomas J. Iacopelli
Chief Financial Officer
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