UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 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.
NYMAGIC, INC.
(Exact name of registrant as specified in its charter)
New York 13-3534162
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
919 Third Avenue, New York, NY 10022
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(Address of principal executive offices) (Zip Code)
The registrant's telephone number, including area code: (212) 551-0600
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Common Stock, $1.00 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No__
MARKET VALUE
------------
The aggregate market value of the outstanding common stock held by
non-affiliates of the registrant, as of June 30, 2004, the last business day of
the registrant's most recently completed second fiscal quarter, was
approximately $163,004,942, based on the closing price of the stock on the New
York Stock Exchange on that date.
OUTSTANDING STOCK
-----------------
As of March 1, 2005, there were 8,688,363 outstanding shares of common stock,
$1.00 par value.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Part III incorporates information by reference from the registrant's definitive
proxy statement to be filed with the Commission within 120 days after the close
of the registrant's fiscal year.
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NYMAGIC, INC.
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PART I
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PAGE
Forward-looking Statements ii.
Item 1. Business 1
Item 2. Properties 25
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
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PART II
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Item 5. Market for the Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities 27
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of Financial 29
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 42
Item 8. Financial Statements and Supplementary Data 43
Item 9. Changes in and Disagreements with Accountants on Accounting 43
and Financial Disclosure
Item 9A. Controls and Procedures 43
Item 9B. Other Information 44
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PART III
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Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 45
Item 13. Certain Relationships and Related Transactions 45
Item 14. Principal Accounting Fees and Services 45
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PART IV
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Item 15. Exhibits, Financial Statement Schedules 46
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Signatures 49
Index to Consolidated Financial Statements F-1
i
FORWARD - LOOKING STATEMENTS
This report contains certain forward-looking statements concerning the Company's
operations, economic performance and financial condition, including, in
particular, the likelihood of the Company's success in developing and expanding
its business. Any forward-looking statements concerning the Company's
operations, economic performance and financial condition contained herein,
including statements related to the outlook for the Company's performance in
2005 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 possibility that the outcome of any
litigation or arbitration proceeding is unfavorable, 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
2005 year and beyond to differ materially from those expressed in any
forward-looking statements made. The Company undertakes no obligation to update
publicly or revise any forward-looking statements made.
ii
Part I
Item 1. Business
General
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 also consolidates its interest
in a limited partnership hedge fund:
Insurance Companies and Lloyd's Corporate Capital Vehicle:
- ----------------------------------------------------------
New York Marine And General Insurance Company ("New York Marine"), Gotham
Insurance Company ("Gotham"), MMO UK, Ltd. ("MMO UK") and MMO EU, Ltd. ("MMO
EU"). MMO UK and MMO EU have been inactive since 2002.
Insurance Underwriters and Managers:
- ------------------------------------
Mutual Marine Office, Inc. ("MMO"), Pacific Mutual Marine Office, Inc. ("PMMO")
and Mutual Marine Office of the Midwest, Inc. ("Midwest").
Consolidated Investment Interests:
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Mariner Tiptree (CDO) Fund I, L.P. ("Tiptree").
New York Marine and Gotham each currently holds a financial strength rating of A
("Excellent") from A.M. Best Company. This is the third highest of fifteen
rating levels in A.M. Best's classification system. MMO UK, as a corporate
member of Lloyd's of London ("Lloyd's"), is not separately rated. Lloyd's is
also currently rated A ("Excellent"). Many of the Company's insureds rely on
ratings issued by rating agencies. Any adverse change in the rating assigned to
New York Marine and Gotham by a rating agency could adversely impact our ability
to write premiums. MMO UK has not provided capacity, which is the ability to
underwrite a certain amount of business, to any Lloyd's syndicate since 2002.
The Company has specialized in underwriting ocean marine, inland marine, other
liability and aircraft insurance through insurance pools managed by MMO, PMMO,
and Midwest (collectively referred to as "MMO and affiliates") since 1964.
However, the Company has ceased writing any new policies covering aircraft risks
subsequent to March 31, 2002. The Company decided to exit the commercial
aviation insurance business because it is highly competitive, had generated
underwriting losses for most years during the 1990's, and because it is highly
dependent on the purchase of substantial amounts of reinsurance, which became
increasingly expensive after the events of September 11, 2001. This decision has
enabled the Company to concentrate on its core lines of business, which include
ocean marine, inland marine/fire and other liability.
In addition to managing the insurance pools as discussed below, the Company
participates in the risks underwritten for the pools through New York Marine and
Gotham. All premiums, losses and expenses are pro-rated among pool members in
accordance with their pool participation percentages.
In 1997, the Company formed MMO EU as a holding company for MMO UK, which
operated as a limited liability corporate vehicle to provide capacity for
syndicates within Lloyd's. Lloyd's consists of a number of syndicates whose
purpose is to serve as risk taking entities. Syndicates maintain a certain
amount of capacity, depending upon the level of capital provided by the
syndicate's investors. This capacity is then allocated to investors in the
syndicate based upon their ratio of capital provided to the syndicate.
In 1997, the Company acquired ownership of a Lloyd's managing agency, which was
subsequently renamed MMO Underwriting Agency, Ltd., and commenced underwriting
in 1998 for the Company's wholly owned subsidiary MMO UK, which in 2000 provided
100%, or $29.8 million, of the capacity for Lloyd's Syndicate 1265, which
primarily wrote marine insurance. In 2000, the Company sold MMO Underwriting
Agency Ltd. in exchange for a minority interest in Cathedral Capital PLC, which
manages Lloyd's Syndicate 2010, and Lloyd's Syndicate 1265 was placed into
runoff. "Runoff" is a term used to refer to an insurer that has ceased writing
new insurance policies but that continues to exist for the purpose of paying
claims on policies that it has already written. In 2001, its last active year of
underwriting, MMO UK provided approximately 11.2%, or $13.6 million, of the
capacity for Lloyd's
1
Syndicate 2010 which primarily writes assumed property and aviation insurance.
In 2001, the Company initiated a withdrawal from its London operations which was
subsequently completed in 2002. MMO EU, MMO UK, Lloyd's Syndicate 1265 and
Lloyd's Syndicate 2010 are collectively hereinafter referred to as "MMO London."
MMO UK has not provided capacity to any Lloyd's syndicate since 2002. In
February 2003, the Company sold its minority interest in Cathedral Capital PLC
for approximately $2.8 million. This sale had no material effect on the
Company's results of operations.
In 2003, the Company obtained a 100% interest in a limited partnership hedge
fund, (Tiptree), that invests in Collateralized Debt Obligations (CDO)
securities, Credit Related Structured Product (CRS) securities and other
structured product securities that are structured, managed or advised by a
Mariner affiliated company. See "Relationship with Mariner Partners Inc."
The Pools
MMO, located in New York, PMMO, located in San Francisco, and Midwest, located
in Chicago (the "Manager" or the "Managers"), manage the insurance pools in
which the Company participates.
The Managers accept, on behalf of the pools, insurance risks brought to the
pools by brokers and others. All premiums, losses and expenses are pro-rated
among the pool members in accordance with their percentage participation in the
pools. Originally, the members of the pools were insurance companies that were
not affiliated with the Managers. New York Marine and Gotham joined the pools in
1972 and 1987, respectively. Subsequent to their initial entry in the pools, New
York Marine and Gotham steadily increased their participation, while the
unaffiliated insurance companies reduced their participation or withdrew from
the pools entirely. Since 1997, the only pool members are New York Marine and
Gotham, who together write 100% of the business produced by the pools.
Assets and liabilities resulting from the insurance pools are allocated to the
members of the insurance pools based upon the pro rata participation of each
member in each pool in accordance with the terms of the management agreement
entered into by and between the pool participants and the Managers.
Pursuant to the pool management agreements, the pool members have agreed not to
accept ocean marine insurance, other than ocean marine reinsurance, in the
United States, its territories and possessions and the Dominion of Canada unless
received through the Managers or written by the pool member on its own behalf
and have authorized the Managers to accept risks on behalf of the pool members
and to effect all transactions in connection with such risks, including the
issuance of policies and endorsements and the adjustment of claims. As
compensation for its services, the Managers receive a fee of 5.5% of gross
premiums written by the pools and a contingent commission of 10% on net
underwriting profits, subject to adjustment. The management commission charged
by MMO has been eliminated in consolidation with respect to the New York Marine
and Gotham share. Since the 1997 policy year, all management commissions charged
by MMO have been eliminated in consolidation.
As part of its compensation, the Manager also receives profit commissions on
pool business ceded to reinsurers under various reinsurance agreements. Profit
commissions on business ceded to reinsurers are calculated on an earned premium
basis using inception to date underwriting results for the various reinsurance
treaties. Adjustments to commissions, resulting from revisions in coverage or
audit premium adjustments, are recorded in the period when realized and billed.
Subject to review by the reinsurers, the Managers calculate the profitability of
all profit commission agreements placed with various reinsurance companies.
Two former pool members, Utica Mutual Insurance Company ("Utica Mutual") and
Arkwright Mutual Insurance Company ("Arkwright"), which is currently part of the
FM Global Group, withdrew from the pools in 1994 and 1996, respectively, and
retained the liability for their effective pool participation for all loss
reserves, including losses incurred but not reported ("IBNR") and unearned
premium reserves attributable to policies effective prior to their withdrawal
from the pools.
On May 28, 2003, an arbitration proceeding against Utica Mutual was completed
and it was ordered to pay MMO approximately $7.8 million, which represented
Utica Mutual's funding requirement to the pools and had no impact on the
Company's results of operations. In addition, the Company was awarded interest
of approximately $1 million on a pre-tax basis which was reflected in results of
operations in 2003. Following the award, these amounts were paid in full. This
award confirmed that, as a pool member, Utica Mutual is required to fund gross
losses paid by MMO, acting as managing agent.
2
The Company is not aware of any facts that could result in any possible defaults
by either Arkwright or Utica Mutual with respect to their pool obligations,
which might impact liquidity or results of operations of the Company, but there
can be no assurance that such events will not occur.
Segments
The Company's domestic insurance companies are New York Marine and Gotham. New
York Marine and Gotham underwrite insurance business by accepting risks
generally through insurance brokers. The domestic insurance companies engage in
business in all 50 states and also accept business risks in such worldwide
regions as Europe, Asia, and Latin America. See "Regulation." The Company's
domestic insurance agencies are MMO, PMMO and Midwest. These agencies underwrite
all the business for the domestic insurance companies.
The Company considers the four lines of business underwritten by its domestic
insurance/agency companies plus business derived from MMO London as appropriate
segments to report its business operations. The Company's overall performance is
evaluated through its five main business segments.
The domestic insurance/agency companies underwrite in four different segments:
ocean marine, inland marine/fire, non-marine liability and aircraft lines of
insurance.
Ocean marine insurance is written on a direct and assumed reinsurance basis and
covers a broad range of classes as follows:
Hull and Machinery Insurance: Provides coverage for loss of or damage to
commercial watercraft.
Hull and Machinery War Risk Insurance: Provides coverage for loss of or damage
to commercial watercraft as a result of war, strikes, riots, and civil
commotions.
Cargo Insurance: Provides coverage for loss of or damage to goods in transit or
temporary storage.
Cargo War Risk Insurance: Provides coverage for loss of or damage to goods in
transit as a result of war, which can be extended to include strikes, riots and
civil commotions.
Protection and Indemnity: Provides primary and excess coverage for liabilities
arising out of the operation of owned watercraft, including liability to crew
and cargo.
Charters' Legal Liability: Provides coverage for liabilities arising out of the
operation of leased or chartered watercraft.
Shoreline Marine Liability Exposures: Provides coverage for ship builders, ship
repairers, wharf owners, stevedores and terminal operators for liabilities
arising out of their operations.
Marine Contractor's Liability: Provides coverage for liabilities arising out of
onshore and offshore services provided to the marine and energy industries.
Maritime Employers Liability (Jones Act): Provides coverage for claims arising
out of injuries to employees associated with maritime trades who may fall under
the Jones Act.
Marine Umbrella (Bumbershoot) Liability: Provides coverage in excess of primary
policy limits for marine insureds.
Onshore and Offshore Oil and Gas Exploration and Production Exposures: Provides
coverage for physical damage to drilling rigs and platforms, associated
liabilities and control of well exposures.
Energy Umbrella (Bumbershoot) Liability: Provides coverage in excess of primary
policy limits for exploration and production facilities as well as commercial
general liability and automobile liability.
Petroleum and Bulk Liquid Cargo: Provides coverage for loss and damage to
petroleum and liquid bulk cargo.
3
Inland marine/fire insurance traditionally covers property while being
transported, or property of a movable, or "floating" nature and includes the
following:
Contractor's Equipment: Provides coverage for physical damage to various types
of fixed and mobile equipment used in the contracting and service industries.
Motor Truck Cargo: Provides coverage for cargo carried aboard trucks.
Transit Floaters: Provides coverage for physical damage to property while being
transported on various conveyances and while in storage.
Commercial Property: Provides primary property coverage for owners and operators
of commercial, residential and mercantile properties.
Surety: Provides commercial and contract bonds to small contractors located in
the Southeastern and Midwestern regions of the United States.
Inland marine also includes excess and surplus lines property coverage on unique
or hard to place commercial property risks that do not fit into standard
commercial lines coverages. Excess and surplus lines property risks are written
primarily through Gotham.
Non-marine liability insurance is written on a direct and assumed reinsurance
basis and includes:
Professional Liability including:
Accountants Professional Liability: Provides primary liability coverage for the
errors and omissions of small to medium-sized accounting firms.
Lawyers Professional Liability: Provides primary liability coverage for law
firms with an emphasis on intellectual property and specialty firms.
Miscellaneous Professional Errors & Omissions: Includes primary and excess
liability coverage for non-medical professionals written on a claims-made basis.
The book includes liability for music producers, web site designers, information
technology consultants, title agents, home inspectors and other design and
consulting firms.
Casualty including:
Contractors Liability: Provides primary liability coverage for commercial and
high-end residential contractors.
Commercial and Habitational Liability: Provides primary liability coverage for
commercial property owners and lessors of habitational properties.
Products Liability: Provides primary liability coverage for manufacturers and
distributors of commercial and consumer products.
Other Lines including:
Workers Compensation: Provides reinsurance for self-insured workers compensation
trusts in New York State and California.
Commercial Automobile: Provides physical damage and liability insurance for
commercial mid-sized trucking fleets located primarily in New York State.
Directors and Officers Liability: Provides coverage for directors and officers
of companies on a primary basis for companies with assets under $100 million and
on an excess basis for companies with assets under $300 million.
Employment Practices Liability: Provides primary liability insurance to small
and medium-sized businesses for employment-related claims brought by employees.
4
Since January 1, 2001, the Company has entered into a number of new specialty
lines of business identified above including professional liability, commercial
real estate, employment practices liability, surety, excess workers'
compensation and commercial automobile insurance. The Company continues to look
for appropriate opportunities to diversify its business portfolio by offering
new lines of insurance in which management believes the Company has sufficient
underwriting and claims expertise. However, because of the Company's limited
history in these new lines, it may impact management's ability to successfully
develop these new lines or appropriately price and reserve for the ultimate loss
associated with these new lines. Due to the Company's limited history in these
lines, management may have less experience managing the development and growth
of such lines than some of our competitors. Additionally, there is a risk that
the lines of business into which the Company expands will not perform at the
level it anticipates.
Aircraft insurance provides insurance primarily for commercial aircraft and
includes hull and engine insurance, liability insurance as well as products
liability insurance. Coverage is written on a direct and assumed reinsurance
basis. The Company ceased writing any new policies covering aircraft insurance
as of March 31, 2002.
MMO London, the fifth business segment, consists of insurance participation in
Lloyd's. Lloyd's provided worldwide venues for MMO London to underwrite
insurance. MMO London has not provided capacity to any Lloyd's syndicate since
January 1, 2002. Business obtained by MMO London through Syndicate 1265 included
ocean marine insurance. Business obtained through Syndicate 2010 included treaty
reinsurance of property and aircraft insurance.
The following tables set forth the Company's gross and net written premiums,
after reinsurance ceded, including business from MMO London.
Gross Premiums Written by
Segment Year Ended December 31,
- -------------------------- ---------------------------------------------------
2004 2003 2002
---------------------------------------------------
(Dollars in thousands)
Ocean marine ....................... $104,726 57% $ 94,649 66% $ 89,301 59%
Inland marine/Fire ................. 16,878 9% 16,515 12% 13,311 9%
Other liability .................... 61,688 34% 28,468 20% 13,874 9%
---------------------------------------------------
Subtotal ...... 183,292 100% 139,632 98% 116,486 77%
Aircraft ........................... 342 -- 3,565 2% 35,874 23%
MMO London ......................... -- -- -- -- 157 --
---------------------------------------------------
Total .............................. $183,634 100% $143,197 100% $152,517 100%
===================================================
NYMAGIC Net Premiums Written
By Segment Year Ended December 31,
- ----------------------- ----------------------------------------------------
2004 2003 2002
----------------------------------------------------
(Dollars in thousands)
Ocean marine ....................... $ 82,689 60% $ 67,744 69% $ 70,839 67%
Inland marine/Fire ................. 5,255 4% 4,833 5% 2,975 3%
Other liability .................... 49,190 36% 22,961 23% 9,960 9%
----------------------------------------------------
Subtotal ........................ 137,134 100% 95,538 97% 83,774 79%
Aircraft ........................... (6) -- 2,769 3% 22,366 21%
MMO London ......................... -- -- -- -- 302 --
----------------------------------------------------
Total .............................. $137,128 100% $98,307 100% $106,442 100%
====================================================
5
Reinsurance Ceded
Ceded premiums written to reinsurers in 2004, 2003 and 2002 amounted to $46.5
million, $44.9 million and $46.1 million, respectively.
A reinsurance transaction takes place when an insurance company transfers
(cedes) a portion or all of its liability on insurance written by it to another
insurer. The reinsurer assumes the liability in return for a portion or all of
the premium. The ceding of reinsurance does not legally discharge the insurer
from its direct liability to the insured under the policies including, but not
limited to, payment of valid claims under the policies. The Company, through the
pools, cedes the greater part of its reinsurance through annual reinsurance
agreements (treaties) with other insurance companies. These treaties, which
cover entire lines or classes of insurance, allow the Company to automatically
reinsure risks without having to cede liability on a policy by policy
(facultative) basis, although facultative reinsurance is utilized on occasion.
Generally, the Managers place reinsurance with companies which initially have an
A.M. Best rating of A- (Excellent) or greater or which have sufficient financial
strength, in management's opinion, to warrant being used for reinsurance
protections. The Managers also examine financial statements of reinsurers and
review such statements for financial soundness and historical experience. In
addition, the Company, through the pools, withholds funds and may obtain letters
of credit under reinsurance treaties in order to collateralize the obligations
of reinsurers. The Company monitors the financial status of all reinsurers on a
regular basis.
The Company, through the pools, attempts to limit its exposure from losses on
any one occurrence through the use of various excess of loss, quota share and
facultative reinsurance arrangements and endeavors to minimize the risk of
default by any one reinsurer by reinsuring risks with many different reinsurers.
The Company utilizes many separate reinsurance treaties each year, generally
with a range of 1 to 15 reinsurers participating on each treaty. Some reinsurers
participate on multiple treaties. The Company also utilizes quota share
reinsurance treaties in which the reinsurers participate on a set proportional
basis in both the premiums and losses. Additionally, the Company utilizes excess
of loss reinsurance treaties in which the reinsurers, in exchange for a minimum
premium, subject to upward adjustment based upon premium volume, agree to pay
for that part of each loss in excess of an agreed upon amount. The Company's
retention of exposure, net of these treaties, varies among its different classes
of business and from year to year, depending on several factors, including the
pricing environment on both the direct and ceded books of business and the
availability of reinsurance.
Until January 1, 2004, the Company generally obtained reinsurance for each line
of business to reduce its exposure to a maximum of $2 million for any one risk
or occurrence. From time to time, however, the Company has retained liability in
excess of $2 million for or any one insured or any one occurrence. Such
instances generally reflected a business decision regarding the cost and/or the
availability of reinsurance.
In the final year in which the Company wrote aviation insurance, April 1, 2001
to April 1, 2002, the Company wrote some policies with a net loss retention of
up to $3 million for any one aircraft or any one occurrence. However, the
Company did not experience any losses for which it was required to retain losses
in excess of $2 million.
For 2002, the Company's net retention per loss in the ocean marine line was
limited to $2 million per risk. Individual losses arising out of a common
occurrence could result in aggregate retained losses of $3 million, and one such
occurrence did result in a net retention of $3 million to the Company.
In August 2003, the Company entered into a cargo program with retained liability
of up to $2.5 million for any one occurrence, and in 2004 the Company
experienced a loss which equaled its net retention of $2.5 million.
In 2004, the Company increased its exposure in the ocean marine line to a net
loss retention of up to $4 million for any one occurrence. In 2005, the Company
reduced its exposure in the ocean marine line to a net loss retention of $3
million for any one occurrence. With regard to its other lines, the Company
endeavors to limit its exposure to a maximum of $2 million on any one risk.
The Company attempts to limit its exposure from catastrophes through the
purchase of general excess of loss reinsurance, which provides coverage in the
event that multiple insureds incur losses arising from the same occurrence.
These coverages require the Company to pay a minimum premium, subject to upward
adjustment based
6
upon premium volume. The treaties, which extend in general for a twelve-month
period, obligate the reinsurers to pay for the portion of the Company's
aggregate losses (net of specific reinsurance) that fall within each treaty's
coverage.
In the event of a loss, the Company may be obligated to pay additional
reinstatement premiums under its excess of loss reinsurance treaties up to the
amount of the original premium paid under such treaties. Every effort is made to
purchase sufficient reinsurance coverage to protect the Company against the
cumulative impact of several losses arising from a single occurrence, but there
is no guarantee that such reinsurance coverage will prove sufficient.
The Company reinsures risks with several domestic and foreign reinsurers as well
as syndicates of Lloyd's. The Company's largest unsecured reinsurance
receivables as of December 31, 2004 were from the following reinsurers:
Reinsurer Amounts A.M. Best Rating
- --------------------------------- ---------- ----------------
(in millions)
Lloyd's Syndicates $ 55.5 A (Excellent)
Swiss Reinsurance America Corp. 12.0 A+ (Superior)
FM Global (Arkwright) 7.7 A+ (Superior)
Lloyd's (Equitas) 7.2 NR-3 (Rating Procedure Inapplicable)
Folksamerica Reinsurance Company 7.0 A (Excellent)
GE Reinsurance Corp. 4.2 A (Excellent)
Liberty Mutual Insurance Company 3.4 A (Excellent)
Utica Mutual Insurance Company 3.1 A- (Excellent)
Hartford Fire Insurance Company 3.1 A+ (Superior)
---
Total $103.2
The reinsurance contracts with the above listed companies are generally entered
into annually and provide coverage for claims occurring while the relevant
agreement was in effect, even if claims are made in later years. The contracts
with Arkwright and Utica Mutual were entered into with respect to their
participation in the pools.
Lloyd's maintains a trust fund, which was established for the benefit of all
United States ceding companies. For the three most recent years for which
Lloyd's has reported results, 2001, 2000, and 1999, losses were reported for all
three years. Lloyd's is expected to report a profit for 2003 and 2002. Lloyd's
receivables represent amounts due from approximately 100 different Lloyd's
syndicates.
Equitas, a Lloyd's company established to settle claims for underwriting years
1992 and prior, maintains policyholders' surplus at March 31, 2004 of
approximately 460 million Pounds Sterling (US $840 million). However, given the
uncertainty surrounding the adequacy of surplus and sufficiency of assets in
Equitas to meet its ultimate obligations, there is a reasonable possibility that
the Company's collection efforts relating to reinsurance receivables from
Equitas may be adversely affected in the future.
At December 31, 2004, the Company's reinsurance receivables from reinsurers
other than those listed above were approximately $155 million, including amounts
recoverable for paid losses, case loss reserves, IBNR losses and unearned
premiums, and net of ceded balances payable. This amount is recoverable
collectively from approximately 600 reinsurers or syndicates, no single one of
whom was liable to the Company for an unsecured amount in excess of
approximately $3 million.
Approximately 87% of the Company's total reinsurance receivables as of December
31, 2004 are fully collateralized by letters of credit and or funds withheld, or
reside with entities rated "A-" or higher, or are subject to offsetting
balances.
The only reinsurer that has received funds from the Company in the past three
years and failed to honor its obligations to us is Lloyd's, but we subsequently
recovered all paid loss balances currently due from Lloyd's through an
arbitration proceeding. However, some of the reinsurers to which we previously
ceded premiums are contesting coverage issues and their obligations to reinsure
claims we paid on liability policies written during the period 1978 to 1985. The
paid balances due from these companies collectively amount to approximately $1.0
million as of December 31, 2004. We are vigorously enforcing collection of these
reinsurance receivables through arbitration
7
proceedings and/or commutation, but the unfavorable resolution of these
arbitration proceedings and commutation negotiations could be material to our
results of operations. The estimated amounts due from financially impaired
reinsurers are included in our reserves for doubtful accounts on reinsurance
receivables of $12.4 million and $12.8 million as of December 31, 2004 and
December 31, 2003, respectively.
Reserves
The applicable insurance laws under which the Company operates require that
reserves be maintained for the payment of losses and loss adjustment expenses
with respect to both reported and IBNR losses under its insurance policies. IBNR
losses are those losses, based upon historical experience and other relevant
data, that the Company estimates will be reported or ultimately develop under
policies issued by the Company.
Case loss reserves are determined by evaluating reported claims on the basis of
the type of loss involved, knowledge of the circumstances surrounding the claim
and the policy provisions relating to the type of loss. IBNR losses are
estimated on the basis of statistical information with respect to the probable
number and nature of losses, which have not yet been reported. The Company's
IBNR is based upon a review of its historical reported loss development
patterns. The establishment of reserves (and the increase in reserves) has the
effect of reducing income while the reduction of reserves increases income.
The loss settlement period for payment of insurance claims may be many years,
and during this period it often becomes necessary to adjust the estimate of
liability on a claim either upward or downward. The classes of marine, aircraft
and non-marine liability insurance written by the Company include liability
classes which historically have had longer periods of time between occurrence of
an insurable event, reporting of the claim to the Company and final settlement.
In such cases, the Company is forced to estimate reserves with the possibility
of making several adjustments to reserves during this time period. Other classes
of insurance, such as property and claims-made non-marine liability classes,
historically have had shorter periods of time between occurrence of an insurable
event, reporting of the claim to the Company and final settlement. The reserves
with respect to such classes are less likely to be readjusted.
Prior to 1997, when the Company began to write 100% of the business produced by
the pools, the Company, from time to time, increased its participation in the
pools. The effect of each such increase was prospective in nature and does not
affect the loss reserves set forth herein for the years prior to the effective
date of any such change in participation percentage.
The Company is required to maintain reserves to cover our estimated ultimate
liability of losses and loss adjustment expenses for both reported and
unreported claims incurred. These reserves are what management estimates the
settlement and administration of claims will cost, based on our assumptions and
facts and circumstances known to the Company. Because of the uncertainties that
surround estimating loss reserves and loss adjustment expenses, the Company
cannot be certain that ultimate losses will not exceed these estimates of losses
and loss adjustment reserves. The low frequency and high severity of the risks
we insure make it difficult to assess the adequacy of our loss reserves. The
level of catastrophe losses has fluctuated in the past and may fluctuate in the
future. For example, after tax losses resulting from catastrophes in 2004, 2003
and 2002 amounted to $2.9 million, $0 and $2 million respectively. If our
reserves are insufficient to cover our actual losses and loss adjustment
expenses, we would have to augment our reserves and incur a charge to our
earnings. These charges could be material.
Unpaid losses and loss adjustment expenses for each segment on a gross and net
of reinsurance basis as of December 31, 2004 were as follows:
Gross Net
-------- --------
(in thousands)
Ocean marine $198,655 $123,346
Inland marine/fire 21,801 7,216
Other liability 126,023 79,278
Aircraft 156,782 45,639
------- ------
Total $503,261 $255,479
-------- --------
In 2001, the Company recorded losses of $154.9 million and $8.0 million on a
gross and net of reinsurance basis,
8
respectively, in its aircraft line of business as a result of the terrorist
attacks of September 11, 2001 on the World Trade Center, the Pentagon and the
hijacked airliner that crashed in Pennsylvania (collectively, the "WTC attack").
Additional reinsurance costs were also incurred on the WTC attack and amounted
to $5.0 million. Since 2001, reinsurance recoverables related to the WTC attack
have decreased and the net liability has increased as a result of the
commutation of certain reinsurance recoverables. The ultimate gross and net
liability for unpaid losses resulting from the WTC attack represent the
estimated ultimate costs of all incurred claims and claim adjustment expenses.
Since the gross liability and related reinsurance recoverables are based on
estimates, the ultimate liability may change from the amount provided currently,
depending upon revisions in gross loss estimates and the interpretation as to
the number of occurrences as defined in the aircraft ceded reinsurance treaties.
For example, in September 2004 the Company became aware of additional
information that allowed us to reduce loss reserves relating to the terrorist
attacks of September 11, 2001 on the Pentagon and the hijacked airliner that
crashed in Pennsylvania. This amounted to a reduction of $16.3 million and $8.3
million in gross and net loss reserves, respectively, to the Company.
Asbestos and Environmental Reserves
Our insurance subsidiaries are required to record an adequate level of reserves
necessary to provide for all known and unknown losses on insurance business
written. Our insurance subsidiaries have not had difficulties in maintaining
reserves in recent years at aggregate levels which management believes to be
adequate based on management's best estimates, but the loss reserving process is
subject to many uncertainties as further described herein.
The difficulty in estimating our reserves is increased because the Company's
loss reserves include reserves for potential asbestos and environmental
liabilities. Asbestos and environmental liabilities are difficult to estimate
for many reasons, including the long waiting periods between exposure and
manifestation of any bodily injury or property damage, difficulty in identifying
the source of the asbestos or environmental contamination, long reporting delays
and difficulty in properly allocating liability for the asbestos or
environmental damage. Legal tactics and judicial and legislative developments
affecting the scope of insurers' liability, which can be difficult to predict,
also contribute to uncertainties in estimating reserves for asbestos and
environmental liabilities.
The Company participated in the issuance of both umbrella casualty insurance for
various Fortune 1000 companies and ocean marine liability insurance for various
oil companies during the period from 1978 to 1985. Depending on the calendar
year, the insurance pools' net retained liability per occurrence after
applicable reinsurance ranged from $250,000 to $2,000,000. The Company's
effective pool participation on such risks varied from 11% in 1978 to 59% in
1985. Ocean marine and non-marine policies issued during the past three years
also provide some coverage for environmental risks.
At December 31, 2004, the Company's gross, ceded and net loss and loss
adjustment expense reserves for all asbestos/environmental policies amounted to
$70.7 million, $57.9 million and $12.8 million, as compared to $77.3 million,
$65.5 million and $11.8 million at December 31, 2003.
The Company believes that the uncertainty surrounding asbestos/environmental
exposures, including issues as to insureds' liabilities, ascertainment of loss
date, definitions of occurrence, scope of coverage, policy limits and
application and interpretation of policy terms, including exclusions renders it
difficult to determine the ultimate loss for asbestos/environmental related
claims. Given the uncertainty in this area, losses from asbestos/environmental
related claims may develop adversely and, accordingly, management is unable to
predict accurately the range of possible loss that could arise from
asbestos/environmental related claims. However, the Company's net unpaid loss
and loss adjustment expense reserves in the aggregate, as of December 31, 2004,
represent management's best estimate.
The Company provides for IBNR on Asbestos & Environmental liabilities after
considering various reserving methodologies. One methodology considers a
specific ground up analysis which reviews the potential exposure based upon
actual policies issued by MMO. Other methodologies include industry survival
ratios and market share statistics per loss settlement.
9
The following table sets forth the Company's net loss and loss adjustment
expense experience for asbestos/environmental policies for each of the past
three years:
Year ended December 31,
-----------------------------------
2004 2003 2002
-----------------------------------
(In thousands)
Asbestos/Environmental
- ----------------------
Net unpaid losses and loss adjustment expenses
(including IBNR) at beginning of period $11,797 $12,696 $11,492
Net incurred losses and loss adjustment expenses 4,264 753 2,195
Net paid loss settlements (3,196) (1,501) (880)
Net loss adjustment expense payments
(cost of administering claims) (106) (151) (111)
-----------------------------------
Net unpaid losses and loss adjustment expenses
(including IBNR) at end of period $12,759 $11,797 $12,696
===================================
The following sets forth a reconciliation of the number of claims relating to
asbestos/environmental policies for each of the past three years:
Year ended December 31,
-----------------------------------
2004 2003 2002
-----------------------------------
Number of claims pending at beginning of period 453 490 409
Number of claims reported 71 54 186
Number of claims settled/dismissed or otherwise resolved (49) (91) (105)
------------------------------------
Number of claims pending at end of period 475 453 490
====================================
Claims reported involve a large number of relatively small individual claims of
a similar type. Additional asbestos claims continue to be reported to the
Company, including claims brought by individuals who do not appear to be
impaired by asbestos exposure. There is also an increasing trend in the number
of companies seeking bankruptcy protection as a result of asbestos-related
liabilities. These bankruptcy proceedings may impact the Company by
significantly accelerating and increasing loss payments made by the Company. As
a result of these trends, there is a high degree of uncertainty with respect to
future exposure from asbestos claims.
Other Reserves
The insurance pools have written coverage for products liability as part of
other liability insurance policies issued since 1985. The insurance pools'
maximum loss per risk is generally limited to $1,000,000 and the Company's
participation percentage ranges from 59% to 100% based upon policy year. The
Company believes that its reserves with respect to such policies are adequate to
cover the ultimate resolution of all such products liability claims.
Loss Reserve Table
The following table shows changes in the Company's reserves in subsequent years
from prior years' reserves. Each year the Company's estimated reserves increase
or decrease as more information becomes known about the frequency and severity
of losses for past years. As indicated in the chart, a "redundancy" means the
original estimate of the Company's consolidated liability was higher than the
current estimate, while a "deficiency" means that the
10
original estimate was lower than the current estimate.
The first line of the table presents, for each of the last ten years, the
estimated liability for net unpaid losses and loss adjustment expenses at the
end of the year, including IBNR losses. The estimated liability for net unpaid
losses and loss adjustment expenses is determined quarterly and at the end of
each calendar year. Below this first line, the first section of the table shows,
by year, the cumulative amounts of net loss and loss adjustment expenses paid as
of the end of each succeeding year, expressed as a percentage of the original
estimated net liability for such amounts.
The second section sets forth the re-estimates in later years of net incurred
losses, including net payments, as a percentage of the original estimated net
liability for net unpaid losses and loss adjustment expenses for the years
indicated. Percentages less than 100% represent a redundancy, while percentages
greater than 100% represent a deficiency. The net cumulative redundancy
(deficiency) represents, as of December 31, 2004, the aggregate change in the
estimates over all prior years. The changes in re-estimates have been reflected
in results from operations over the periods shown.
The third section sets forth the cumulative redundancy (deficiency) of unpaid
losses and loss adjustment expenses on a gross basis, which represents the
aggregate change in the estimates of such losses over all prior years starting
with the 1994 calendar year.
The Company calculates its loss reserves on the basis of management's best
estimate. In 9 out of the past 10 years, the Company has recorded redundancies
in its net loss reserve position. The Company's considered view, in light of
this history, is that management is highly sensitive to the nuances of the
Company's lines of business and that establishing net loss reserves based upon
management's best estimate is a more reliable method of calculating net loss
reserves than providing a range of net loss reserves and gives the Company
greater assurance that its net loss reserves are appropriate. In addition, the
Company believes that its history of establishing adequate net loss reserves
compares favorably with industry experience.
The Company considers a variety of factors in its estimate of loss reserves.
These elements include, but are not necessarily limited to, the level of
catastrophe losses incurred during the period, the length of the reporting tail
(i.e. occurrence versus claims made coverage), the nature of the risk insured
(i.e. property versus liability), the level of net retention per loss and the
emergence of identifiable trends in the statistical analysis of paid and
incurred loss data. Case loss reserves are determined by evaluating reported
claims on the basis of the type of loss involved, knowledge of the circumstances
surrounding the claim and the policy provisions relating to the type of loss.
IBNR losses are estimated on the basis of statistical information with respect
to the probable number and nature of losses which have not yet been reported to
the Company. The Company utilizes many different types of actuarial methods in
calculating IBNR including an evaluation of IBNR by the use of historical paid
loss and incurred data utilizing the Bornheutter-Ferguson method.
Since January 1, 2001, the Company has entered into a number of new specialty
lines of business including professional liability, commercial real estate,
employment practices liability, surety, excess workers' compensation and
commercial automobile insurance. Because of the Company's limited history in
these new lines, it may impact management's ability to appropriately reserve for
the ultimate loss associated with these new lines. Management considers many
factors when estimating the ultimate loss ratios for these various classes,
including industry loss ratios and anticipated loss ratios based upon known
experience.
11
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
December 31 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
Estimated Liability for Net Unpaid Losses and Loss Adjustment Expenses
212,377 229,916 227,370 222,335 213,589 196,865 199,685 210,953 208,979 242,311 255,479
Cumulative Amount of Net Losses and Loss Adjustment Expenses Paid as a Percentage of Original Estimate:
1 Year Later 20% 20% 17% 19% 20% 24% 28% 30% 8% 18%
2 Years Later 34% 32% 30% 32% 35% 39% 56% 30% 24%
3 Years Later 44% 42% 42% 43% 43% 53% 64% 41%
4 Years Later 53% 51% 51% 49% 51% 58% 70%
5 Years Later 62% 58% 56% 54% 55% 63%
6 Years Later 68% 62% 58% 57% 59%
7 Years Later 72% 64% 61% 61%
8 Years Later 73% 66% 64%
9 Years Later 75% 69%
10 Years Later 78%
Net Liability Re-estimated including Cumulative Net Paid Losses and Loss Adjustment Expenses as a percentage of Original
Estimate:
1 Year Later 97% 94% 90% 91% 94% 96% 105% 102% 99% 94%
2 Years Later 95% 87% 87% 87% 87% 94% 108% 101% 94%
3 Years Later 91% 86% 85% 83% 84% 95% 104% 96%
4 Years Later 91% 86% 83% 81% 85% 91% 103%
5 Years Later 92% 85% 82% 81% 82% 92%
6 Years Later 93% 84% 82% 80% 83%
7 Years Later 92% 84% 80% 81%
8 Years Later 92% 83% 83%
9 Years Later 91% 86%
10 Years Later 94%
Net Cumulative 12,646 33,289 39,708 41,820 37,136 16,662 (5,319) 7,707 12,337 14,960
Redundancy/(Deficiency)
Gross Unpaid 435,072 417,795 411,837 388,402 401,584 425,469 411,267 534,189 516,002 518,930 503,261
Losses and Loss Adjustment Expenses
Reinsurance 222,695 187,879 184,467 166,067 187,995 228,604 211,582 323,236 307,023 276,619 247,782
Recoverable on Unpaid Losses and Loss Adjustment Expenses
Reserve 458,050 431,942 395,190 412,127 439,214 454,620 460,990 568,473 504,810 492,964
Re-estimated Gross
Reserve 258,319 235,315 207,528 231,611 262,762 274,417 255,986 365,227 308,168 265,614
Re-estimated Reinsurance Recoverable
Gross Cumulative (22,978) (14,147) 16,647 (23,725) (37,630) (29,151) (49,723) (34,285) 11,192 25,966
Redundancy (Deficiency)
The net loss reserve deficiency reported for the 2000 calendar year reflects
adverse development from the Company's operations in MMO London due to higher
than expected claim frequencies and the emergence of longer than expected loss
development patterns. Also contributing to the increase were provisions made for
insolvent or financially impaired reinsurers and adverse development from the
Company's other liability line reflecting umbrella exposures. The 2000 reported
deficiency was partially offset by favorable development in the ocean marine
line of business.
Gross loss reserve deficiencies were reported in most years. Even though gross
deficiencies were reported in those years, the Company reported redundancies in
net loss reserves in all but one year. Much of the gross loss reserve
deficiencies was brought about by adverse development from MMO London and
adverse gross loss development in its umbrella (other liability) losses as a
result of the additional development of asbestos losses. Asbestos and
environmental liabilities are difficult to estimate for many reasons, including
the long waiting periods between exposure and manifestation of any bodily injury
or property damage, difficulty in identifying the source of the asbestos or
environmental contamination, long reporting delays and difficulty in properly
allocating liability for the damage. Legal tactics and judicial and legislative
developments affecting the scope of insurers' liability, which can be difficult
to predict, also contribute to uncertainties in estimating reserves for asbestos
and environmental liabilities. However, much of this gross loss reserve
deficiency in the other liability line resulted in smaller net deficiencies due
to a substantial amount of the gross loss reserve being reinsured. The smaller
net deficiencies were more than offset by redundancies in the Company's ocean
marine line. In addition, a few large severity losses in the Company's core
lines also contributed to adverse gross loss development. Much of these losses
was also reinsured
12
resulting in an insignificant impact on net development.
The improved development of net incurred losses for the 2001 year reflect
reductions made in the 2004 calendar year in gross and net reserves of
approximately $16.3 million and $8.3 million, respectively, as a result of
reductions in loss reserves relating to the terrorist attacks of September 11,
2001 on the Pentagon and the hijacked airliner that crashed in Pennsylvania.
The following table provides a reconciliation of the Company's consolidated
liability for losses and loss adjustment expenses at the beginning and end of
2004, 2003 and 2002:
Year ended December 31,
---------------------------------------
2004 2003 2002
---------------------------------------
(In thousands)
Net liability for losses and loss adjustment
expenses at beginning of year ................ $ 242,311 $ 208,979 $ 210,953
--------- --------- ---------
Provision for losses and loss adjustment
expenses occurring in current year ........... 81,518 57,125 68,952
Increase (decrease) in estimated losses and loss
adjustment expenses for claims occurring
in prior years(1) ........................... (14,960) (1,410) 4,389
Deferred income-loss portfolio
assumption(2) ................................ -- -- 15
--------- --------- ---------
Net loss and loss adjustment expenses
incurred ..................................... 66,558 55,715 73,356
--------- --------- ---------
Less:
Losses and loss adjustment expense payments
for claims occurring during:
Current year ............................. 10,287 5,241 11,950
Prior years .............................. 43,103 17,142 63,365
------ ------ ------
53,390 22,383 75,315
Add:
Deferred income-loss portfolio assumption(2) ... -- -- (15)
--------- --------- ---------
Net liability for losses and loss adjustment
expenses at year end ......................... 255,479 242,311 208,979
--------- --------- ---------
Ceded unpaid losses and loss adjustment
expenses at year end ......................... 247,782 276,619 307,023
--------- --------- ---------
Gross unpaid losses and loss adjustment
expenses at year end ......................... $ 503,261 $ 518,930 $ 516,002
========= ========= =========
(1) The adjustment to the consolidated liability for losses and
loss adjustment expenses for losses occurring in prior years reflects the
net effect of the resolution of losses for other than full reserve value
and subsequent readjustments of loss values. The $15 million decrease in
2004 reflects favorable loss development in the aviation line, mainly in
reserves for the terrorist attacks of September 11, 2001 on the Pentagon
and the hijacked airliner that crashed in Pennsylvania, and in the ocean
marine line of business due to a lower than expected emergence of losses
in the 1998-2001 accident years. The decrease in 2003 of $1.4 million
reflects favorable loss development arising from the ocean marine line of
business, partially offset by adverse development in the aviation line for
accident years 1997-2000. The increase in 2002 of $4.4 million reflects
provisions made for insolvent, financially impaired and commuted
reinsurers, and adverse development from the Company's other liability
line reflecting umbrella exposures. The 2002 amount was partially offset
by favorable development in the ocean marine line of business.
(2) Deferred income-loss portfolio assumption represents the
difference between cash received and unpaid loss reserves assumed as a
result of the Company's assumption of net pool obligations from two former
pool members, which was initially capitalized and was amortized over the
payout period of the related losses.
The principal differences between the consolidated liability for unpaid losses
and loss adjustment expenses as reported in the Annual Statement filed with
state insurance departments in accordance with statutory accounting principles
and the liability based on generally accepted accounting principles shown in the
above tables are due to the Company's assumption of loss reserves arising from
former participants in the insurance pools, and reserves for uncollectible
reinsurance. The loss reserves shown in the above tables reflect in each year
salvage and subrogation accruals of approximately 1% to 6% of case reserves and
IBNR estimate. The estimated accrual for salvage and subrogation is based on the
line of business and historical salvage and subrogation recovery data. Under
neither
13
statutory nor generally accepted accounting principles are loss and loss
adjustment expense reserves discounted to present value.
The following table sets forth the reconciliation of the consolidated net
liability for losses and loss adjustment expenses based on statutory accounting
principles for the domestic insurance companies to the consolidated amounts
based on accounting principles generally accepted in the United States of
America ("GAAP") as of December 31, 2004, 2003 and 2002:
Year ended December 31,
----------------------------------
2004 2003 2002
----------------------------------
(In thousands)
Net liability for losses and loss adjustment expenses
reported based on statutory accounting principles .......... $240,376 $228,760 $195,948
Liability for losses and loss adjustment expenses assumed
from two former pool members ............................... 9,786 4,371 4,826
(excludes $3,096, $3,117 and $3,351 at December 31, 2004,
2003 and 2002, accounted for in the statutory liability for
losses and loss adjustment expenses)
Other, net ................................................... 5,317 9,180 8,205
----- ----- ------
Net liability for losses and loss adjustment expenses reported
based on GAAP .............................................. 255,479 242,311 208,979
Ceded liability for unpaid losses and loss adjustment expenses 247,782 276,619 307,023
-------- -------- --------
Gross liability for unpaid losses and loss adjustment expenses $503,261 $518,930 $516,002
======== ======== ========
Regulation
The Company's domestic insurance companies are regulated by the insurance
regulatory agencies of the states in which they are authorized to do business.
New York Marine is licensed to engage in the insurance business in all states.
Gotham is permitted to write excess and surplus lines insurance on a
non-admitted basis in all of the states except Arkansas, New Hampshire and
Vermont. Gotham is licensed to engage in the insurance business in the state of
New York and, as such, cannot write excess and surplus business in that state.
Many aspects of the Company's insurance business are subject to regulation. For
example, minimum capitalization must be maintained; certain forms of policies
must be approved before they may be offered; reserves must be established in
relation to the amounts of premiums earned and losses incurred; and, in some
cases, schedules of premium rates must be approved. In addition, state
legislatures and state insurance regulators continually re-examine existing laws
and regulations and may impose changes that materially adversely affect the
Company's business.
The domestic insurance company subsidiaries also file statutory financial
statements with each state in the format specified by the NAIC. The NAIC
provides accounting guidelines for companies to file statutory financial
statements and provides minimum solvency standards for all companies in the form
of risk-based capital requirements. The policyholders' surplus (the statutory
equivalent of net worth) of each of the domestic insurance companies is above
the minimum amount required by the NAIC.
The NAIC's project to codify statutory accounting principles was approved by the
NAIC in 1998. The purpose of codification was to provide a comprehensive basis
of accounting for reporting to state insurance departments. The approval of
codified accounting rules included a provision for the state insurance
commissioners to modify such accounting rules by practices prescribed or
permitted for insurers in their state. The domestic insurance companies are
domiciled in the State of New York, however, there were no differences in 2004
or in 2003 between prescribed accounting practices and those approved by the
NAIC. Codification became effective on January 1, 2001 and did not have a
material impact on the domestic insurance companies' policyholders' surplus.
The insurance industry recently has been the focus of certain investigations
regarding insurance broker and agent compensation arrangements and other
practices. The Attorney General of New York State as well as other regulators
have made investigations into such broker and agent contingent commission and
other sales practice arrangements. Although the Company has not been notified
that it is, nor does it have any reason to believe that it is a target of
14
these investigations, we did review our existing arrangements with our brokers
and reinsurers and found that we did not engage in any conduct that we believe
is the subject of these investigations.
New York Marine and Gotham are subject to examination by the Insurance
Department of the State of New York. The insurance companies' most recent
examination was for the year ended December 31, 2000. There were no significant
adjustments which resulted from that examination.
MMO London operated in a highly regulated environment within the overall Lloyd's
market. Lloyd's maintains regulatory departments that review the management and
operation of all agencies and syndicates to ensure that business is conducted in
accordance with Lloyd's standards. Syndicates are required to maintain trust
funds for insurance transactions, with strict guidelines on withdrawals from
such funds. Annual solvency tests are conducted to ensure that syndicates
maintain minimum capital requirements in accordance with ratios prescribed by
Lloyd's.
The following table shows, for the periods indicated, the Company's consolidated
domestic insurance companies' statutory ratios of net premiums written (gross
premiums less premiums ceded) to policyholders' surplus:
Year ended December 31,
------------------------------------------------------------------------
2004 2003 2002 2001 2000
-----------------------------------------------------------------------
(Dollars in thousands)
Net premiums written...... $ 137,128 $ 98,307 $106,140 $ 78,438 $ 61,584
Policyholders' surplus.... 181,633 186,325 180,394 152,061 184,688
-------- -------- -------- -------- --------
Ratio .................... .75 to 1 .53 to 1 .59 to 1 .52 to 1 .33 to 1
While there are no statutory requirements applicable to the Company which
establish permissible premium to surplus ratios, guidelines established by the
NAIC provide that the statutory net premiums written to surplus ratio should be
no greater than 3 to 1. The Company is well within those guidelines.
NYMAGIC's principal source of income is dividends from its subsidiaries, which
are used for payment of operating expenses, including interest expense, loan
repayments and payment of dividends to NYMAGIC's shareholders. The maximum
amount of dividends that may be paid to NYMAGIC by the domestic insurance
company subsidiaries is limited to the lesser of 10% of policyholders' surplus
or 100% of adjusted net investment income, as defined under New York Insurance
Law. Within this limitation, the maximum amount which could be paid to the
Company out of the domestic insurance companies' surplus was approximately $14.7
million as of December 31, 2004.
The Company's subsidiaries have paid dividends to the Company of $15.5 million,
$9.6 million and $12.4 million for the years ended December 31, 2004, 2003 and
2002, respectively. Included within these amounts were extraordinary dividends
of $15 million and $5 million for 2004 and 2003, respectively.
Each of New York Marine and Gotham is required to invest an amount equal to the
greater of its minimum capital or its minimum policyholder surplus in
obligations of the United States, obligations of the State of New York or its
political subdivisions, obligations of other states and obligations secured by
first mortgage loans. Sixty percent of that amount is required to be invested in
obligations of the United States or obligations of the State of New York or its
political subdivisions. In addition, each of New York Marine and Gotham is
required to invest an amount equal to 50% of the aggregate amount of its
unearned premium, loss and loss adjustment expense reserves in the following
categories: cash, government obligations, obligations of U.S. institutions,
preferred or guaranteed shares of U.S. institutions, loans secured by real
property, real property, certain permitted foreign investments and development
bank obligations. Investments in the foregoing categories are also subject to
detailed quantitative and qualitative limitations applicable to individual
categories and to an overall limitation that no more than 10% of each insurance
company's assets may be invested in any one institution. After each of New York
Marine and Gotham invests an amount equal to 50% of its unearned premium, loss
and loss adjustment reserves in the foregoing investments, each of New York
Marine and Gotham may invest in equity and partnership interests, securities
issued by registered investment companies and other otherwise impermissible
investments, subject to applicable laws and regulatory requirements.
15
Several states have established guaranty funds which serve to provide the
assured with payments due under policies issued by insurance companies that have
become insolvent. Insurance companies that are authorized to write in states are
assessed a fee, normally based on direct writings in a particular state, to
cover any payments made or to be made by guaranty funds. New York Marine and
Gotham are subject to such assessments in the various states. The amounts paid
for such assessments were approximately $185,000, $121,000 and $98,000 for the
years ended December 31, 2004, 2003 and 2002, respectively.
The Terrorism Risk Insurance Act of 2002 ("TRIA") became effective on November
26, 2002. TRIA applies to all licensed and surplus lines insurers doing business
in the United States, including Lloyd's and foreign insurers, who are writing
commercial property or casualty insurance. Under TRIA, the federal government
will provide the insurance industry with assistance in the event there is a loss
from certain acts of terrorism. The program terminates on December 31, 2005.
Each insurer has an insurer deductible under TRIA, which is based upon the prior
year's direct commercial earned premiums. For 2004, that deductible was 10% of
direct commercial earned premiums in 2003. The insurer deductible percentage is
15% in 2005. For losses exceeding the insurer deductible, the federal government
will reimburse the insurer for 90% of insured losses, while the insurer retains
10%. The Company's insurer deductible under TRIA would have been approximately
$11 million in 2004, and would be $21 million in 2005.
The TRIA will assist the Company to mitigate our exposure in the event of loss
from an act of terrorism. In addition, part of the insurer deductible might be
satisfied by recoveries under the Company's existing reinsurance program, and
the Company has purchased additional reinsurance to further minimize its loss
from an act of terrorism. In January 2005 the Company obtained reinsurance
protection for a one year period covering a limit of $12,000,000 in excess of
the first $4,000,000 retained losses to the Company arising from terrorist acts.
Investment Policy
The Company follows an investment policy, which is reviewed quarterly and
revised periodically by management and is approved by the Finance Committee of
the Board of Directors. The investments of the Company's subsidiaries conform to
the requirements of the New York State Insurance Law and Regulations as well as
the National Association of Insurance Commissioners (the "NAIC"). The Company
recognizes that an important component of its financial results is the return on
invested assets. As such, management establishes the appropriate mix of
traditional fixed income securities and other investments (including equity and
equity-type investments; e.g. hedge funds) to maximize rates of return while
minimizing undue reliance on low quality securities. Overall investment
objectives are to (i) seek competitive after-tax income and total return as
appropriate, while being cognizant of the impact certain investment decisions
may have on the Company's shareholders' equity, (ii) maintain, in aggregate,
medium to high investment grade fixed income asset quality, (iii) ensure
adequate liquidity and marketability to accommodate operating needs, (iv)
maintain fixed income maturity distribution commensurate with the Company's
business objectives and (v) provide portfolio flexibility for changing business
and investment climates. The Company's investment strategy incorporates
guidelines (listed below) for asset quality standards, asset allocations among
investment types and issuers, and other relevant criteria for the investment
portfolio. In addition, invested asset cash flows, from both current income and
investment maturities, are structured after considering the amount and timing of
projected liabilities for losses and loss adjustment expenses under New York
Marine and Gotham's insurance policies using actuarial models.
The investment policy for the Company as of December 31, 2004 was as follows:
Liquidity Portfolio: The Company may invest, without limitation, in liquid
instruments. Investments in the Liquidity Portfolio may include, but are not
necessarily limited to, cash, direct obligations of the U.S. Government,
repurchase agreements, obligations of government instrumentalities, obligations
of government sponsored agencies, certificates of deposit, prime bankers
acceptances, prime commercial paper, corporate obligations and tax-exempt
obligations rated Aa3/AA- or MIG2 or better. The liquidity portfolio shall
consist of obligations with one year's duration or less at the time of purchase
and will be of sufficient size to accompany the Company's expected cash outlays
for the immediate six-month period.
Fixed Income Portfolio: Obligations of the U.S. Government, its
instrumentalities and government-sponsored agencies will not be restricted as to
amount or maturity. Asset backed securities, corporate obligations, tax-exempt
securities and preferred stock investments with sinking funds will not be
restricted as to maturity. At least 50% of the fixed income and liquidity
portfolio, collectively, shall be rated at minimum Baa2 by Moody's or BBB by
S&P.
16
Equity and Equity-Type Securities (Hedge Funds): Investments in this category
(including convertible securities) may be made without limitation. With respect
to Hedge Fund investments, no more than 10% of assets allocated to hedge funds
shall be invested in any single fund without the prior approval of the Finance
Committee of the Board of Directors. Similarly, no more than 40% of assets
allocated to hedge funds shall be concentrated in any one strategy without the
prior approval of the Finance Committee of the Board of Directors.
The investment policy for New York Marine as of December 31, 2004 was as
follows:
Liquidity Portfolio: At least $20,000,000 will be maintained in liquid funds.
Investments in the liquidity portfolio shall be limited to cash, direct
obligations of the U.S. Government, repurchase agreements, obligations of
government instrumentalities, obligations of government sponsored agencies,
certificates of deposit, prime bankers acceptances, prime commercial paper,
corporate obligations and tax-exempt obligations rated Aa3/AA- or MIG2 or better
by Standard & Poor's ("S&P") or Moody's. No investment in the liquidity
portfolio will exceed one year's duration from the time of purchase. No
investment in the liquidity portfolio will exceed 5% of policyholders' surplus
at the time of purchase as last reported to the New York State Insurance
Department except for direct obligations of the U.S. Government or its
instrumentalities or repurchase agreements collateralized by direct obligations
of the U.S. Government or its instrumentalities in which case there will be no
limit.
Fixed Income Portfolio: Obligations of the U.S. Government, its
instrumentalities, and government sponsored agencies will not be restricted as
to amount or maturity. At least 75% of the corporate and tax-exempt investments
in the fixed income portfolio will be restricted to those obligations rated, at
a minimum, Baa3 by Moody's or BBB- by S&P. For purposes of this calculation, the
liquidity portfolio also will be included. Concentration will not exceed 5% of
policyholder's surplus at the time of purchase as last reported to the New York
State Insurance Department. For those securities with fixed interest rates,
maturities will not exceed 30 years from date of purchase. At least 75% of the
investments in asset backed securities shall similarly be rated, at a minimum,
Baa3 by Moody's or BBB- by S&P. Individual issues will be restricted to 5% of
policyholder's surplus at the time of purchase as last reported to the New York
State Insurance Department. For those securities with fixed interest rates,
maturities will not exceed 30 years from date of purchase. At least 75% of
preferred stock investments with sinking funds will, at a minimum, be rated Baa3
by Moody's or BBB- by S&P. Individual issues will be limited to 5% of
policyholder's surplus.
Equity and Equity-Type Securities (Hedge Funds): Investments in this category
(including convertible securities) will not exceed in aggregate 50% of
policyholders' surplus or 30% of total investments whichever is greater. Equity
investments in any one issuer will not exceed 5% of policyholders' surplus at
the time of purchase as last reported to the New York State Insurance
Department. Investments in any individual hedge fund will not exceed 5% of
policyholders' surplus. For the purposes of this 5% limitation, in the event
that an individual hedge fund is comprised of a pool (basket) of separate and
distinct hedge funds, then this 5% limitation will apply to the individual funds
within the pool (or basket).
Subsidiaries
- ------------
New York Marine's investments in subsidiary companies are excluded from the
requirements of New York Marine's investment policy.
The investment policy of Gotham is identical to that of New York Marine, except
that at least $5,000,000 will be maintained in the liquidity portfolio.
17
The following sets forth the allocation of our investment portfolio as of the
dates indicated:
December 31, 2004 Percent December 31, 2003 Percent
----------------- ------- ----------------- -------
Fixed Maturities Available for Sale (Fair Value):
- ------------------------------------
U.S. Treasury Securities $ 10,018,470 1.59% $ 9,184,916 1.77%
Municipalities 7,652,500 1.21% 17,352,350 3.34%
Corporate Bonds 95,061,930 15.07% 66,933,425 12.88%
- ----------------------------------------------- --------------------------------------------------------------------
Subtotal $ 112,732,900 17.87% $ 93,470,691 17.99%
Trading Securities (Fair Value):
- ------------------
Collateralized Debt Obligations 17,767,675 2.82% 61,736,951 11.88%
- ----------------------------------------------- --------------------------------------------------------------------
Total Fixed Maturities and Trading Portfolio $ 130,500,575 20.69% $ 155,207,642 29.87%
Cash & Short-term Investments (at Cost) 309,894,313 49.12% 259,000,216 49.84%
- ----------------------------------------------- --------------------------------------------------------------------
Total Fixed Maturities, Cash and Short-term Investments $ 440,394,888 69.81% 414,207,858 79.71%
Limited Partnership Hedge Funds (at Equity) 190,477,346 30.19% 105,434,419 20.29%
- --------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio 630,872,234 100.00% $ 519,642,277 100.00%
Relationship with Mariner Partners, Inc.
The Company's investments are monitored by management and the Finance Committee
of the Board of Directors. The Company entered into an investment management
agreement with Mariner Partners, Inc. ("Mariner") effective October 1, 2002 that
was amended and restated on December 6, 2002. As described in more detail under
"Mariner Investment Management Agreement," under the terms of the agreement,
Mariner manages the Company's and its domestic insurance subsidiaries'
investment portfolios. Fees to be paid to Mariner are based on a percentage of
the investment portfolio as follows: .20% of liquid assets, .30% of fixed
maturity investments and 1.25% of hedge fund (limited partnership) investments.
William J. Michaelcheck, a Director of the Company, is Chairman, Chief Executive
Officer and owns a majority of the stock of Mariner. George R. Trumbull,
Chairman, Chief Executive Officer and a Director of the Company, A. George
Kallop, Executive Vice President and Chief Operating Officer, and William D.
Shaw, Jr., Vice Chairman and a Director of the Company, are also associated with
Mariner.
Mariner also entered into a voting agreement with Mark W. Blackman, Blackman
Investments, LLC (now Lionshead Investments, LLC) and certain trusts and
foundations affiliated with Louise B. Tollefson, of which Robert G. Simses, a
director of the Company, is trustee, on February 20, 2002. As described in more
detail under "Voting Agreement," Mariner, with the approval of two of the three
voting agreement participating shareholders, is generally authorized to vote all
of the common shares covered by the voting agreement, which constituted
approximately 27% of the Company's issued and outstanding shares of common stock
as of March 1, 2005.
The voting agreement also gives Mariner the right to purchase up to 1,800,000
shares of the Company's common stock from the voting agreement participating
shareholders. The option exercise price per share is based on the date the
option is exercised. At the time the voting agreement was signed, the option
exercise price was $19.00, with the exercise price increasing $0.25 per share
every three months, subject to deduction for dividends paid. The exercise price
of the option as of March 1, 2005 was $21.52. Generally, Mariner's option will
expire 30 days after the termination of the voting agreement, which is scheduled
to terminate on February 15, 2007, if not terminated earlier.
Voting Agreement
On February 20, 2002, shareholders who are affiliated with the
Blackman/Tollefson family entered into a voting agreement with Mariner which
affected approximately 27% of the voting power of NYMAGIC as of March 1, 2005.
Mariner is an investment management company founded by William J. Michaelcheck,
a member of our Board of Directors. Mr. Michaelcheck is the majority shareholder
of Mariner. One of Mariner's wholly-owned subsidiaries, Mariner Investment
Group, Inc., which we refer to as the Mariner Group, was founded in 1992 and,
together with its affiliates, provides investment management services to
investment funds, reinsurance companies and a limited number of institutional
managed accounts. The Mariner Group has been a registered investment adviser
since May 2003.
18
The shares subject to the voting agreement were originally held by John N.
Blackman, Sr., who founded the Company in 1972 and died in 1988. The
shareholders who are parties to the voting agreement are either heirs of Mr.
Blackman, whom we refer to as our founder, or entities established or controlled
by them. Three of those shareholders are designated in the voting agreement as
"participating shareholders" and have the specific rights described below. The
participating shareholders are as follows:
o Mark W. Blackman, a son of our founder and Louise B. Tollefson, is a
participating shareholder in his individual capacity. He was a member
of our Board of Directors from 1979 until May 2004 and served as our
President from 1988 to 1998. He has been our Chief Underwriting Officer
since June 2002.
o John N. Blackman, Jr., a son of our founder and Louise B. Tollefson,
acts as a participating shareholder in his dual capacity as controlling
member of Lionshead Investments LLC and co-trustee of the Blackman
Charitable Remainder Trust dated April 1, 2001. He was a member of our
Board of Directors from 1975 until May 2004 and served as Chairman of
the Board from 1988 to 1998.
o Robert G. Simses acts as a participating shareholder in his capacity
as sole trustee of the Louise B. Tollefson 2000 Florida Intangible Tax
Trust dated December 12, 2000, sole trustee of the Louise B. Blackman
Tollefson Family Foundation dated March 24, 1998, co-trustee of the
Louise B. Tollefson Charitable Lead Annuity Trust dated March 30, 2000
and co-trustee of the Bennett H. Tollefson Charitable Lead Unitrust
dated March 30, 2000. We refer to these trusts and foundations as the
Tollefson trusts. The settlor of most of these trusts, Louise B.
Tollefson, is the former wife of our founder and was a member of our
Board of Directors from 1986 to 2001. Mr. Simses has been a member of
our Board of Directors since 2001. He is also Managing Partner of the
law firm of Simses & Associates and President and Chief Operating
Officer of The William H. Pitt Foundation Inc.
Voting Rights of Mariner
The participating shareholders retained significant voting rights over their
shares under the voting agreement. Mariner may only vote the shares that are
subject to the voting agreement with the written approval of two of the three
participating shareholders. If two of the three participating shareholders fail
to approve any vote by Mariner on any matter, then Mariner is not permitted to
vote on that matter and generally the participating shareholders are also not
permitted to vote on that matter. However, if one of the following types of
matters is under consideration and two of the three participating shareholders
fail to approve the vote by Mariner, the participating shareholders are entitled
to vote their shares instead of Mariner:
o the merger or consolidation of NYMAGIC into or with another corporation;
o the sale by NYMAGIC of all or substantially all of its assets;
o the dissolution and/or liquidation of NYMAGIC; or
o any recapitalization or stock offering of NYMAGIC.
Nomination of Directors
Prior to the amendment to the voting agreement dated February 24, 2004 (the
"2004 Amendment") the voting agreement provided for our Board of Directors to
consist of twelve directors. The 2004 Amendment increased the size of the Board
to thirteen members and David E. Hoffman was elected to the newly created Board
position on February 26, 2004. As contemplated by the 2004 Amendment, the size
of the Board was reduced to nine prior to the 2004 annual meeting of
shareholders. See "Amendments to the Voting Agreement."
o Prior to the 2004 Amendment, Mariner was entitled to nominate four
candidates. Following the 2004 Amendment, Mariner is entitled to
nominate three candidates for election to the Board. The three current
directors who were nominated by Mariner are William J. Michaelcheck,
George R. Trumbull, III, who serves as our Chairman and Chief Executive
Officer, and William D. Shaw, Jr., who serves as our Vice Chairman.
o Prior to the 2004 Amendment, each participating shareholder was
entitled to nominate two candidates. Following the 2004 Amendment,
each of Robert G. Simses, Mark W. Blackman and John N. Blackman,
19
Jr. is entitled to nominate one candidate for election to the Board,
provided that the candidates nominated by Mark W. Blackman and John N.
Blackman, Jr. shall qualify as independent directors under the rules
of the New York Stock Exchange and all other applicable laws and
regulations. The three current directors nominated by Mark W.
Blackman, John N. Blackman, Jr., and Robert J. Simses are Glenn
Angiolillo, John R. Anderson and Robert G. Simses, respectively.
o Prior to the 2004 Amendment, our Chief Executive Officer was entitled
to nominate two candidates. Following the 2004 Amendment, our Chief
Executive Officer is entitled to nominate three candidates for election
to the Board, all of whom shall qualify as independent directors under
the rules of the New York Stock Exchange and all other applicable laws
and regulations. The three current directors who were nominated by Mr.
Trumbull are David W. Young, John T. Baily and David E. Hoffman.
On February 17, 2005, John R. Anderson, Glenn Angiolillo, John T. Baily, David
E. Hoffman, William J. Michaelcheck, William D. Shaw, Jr., Robert G. Simses,
George R. Trumbull, III, and David W. Young were nominated for election to the
Board at the next annual meeting of shareholders.
If any participating shareholder does not nominate a candidate for election to
the Board, then, in addition to its other rights, Mariner, instead of that
participating shareholder, may nominate a number of candidates equal to the
number not nominated by the participating shareholders. In addition, the
participating shareholders have agreed, consistent with their fiduciary duties,
to cause their nominees to the Board to vote for one of the Mariner-nominated
directors, as designated by Mariner, as Chairman of each meeting.
Election of Directors
Provided that the candidates of the participating shareholders would not be
legally disqualified from serving as directors of NYMAGIC, Mariner is required
to vote all shares that are subject to the voting agreement in favor of the
election of those candidates, or any successor or replacement candidates,
nominated by the participating shareholders. Mariner is not permitted to vote
the shares subject to the voting agreement to remove any director nominated by a
participating shareholder without the consent of that participating shareholder.
In accordance with the general voting provisions discussed above under the
heading "Voting Rights of Mariner," Mariner is permitted to vote the shares
subject to the voting agreement to elect its own candidates only with the
written approval of two of the three participating shareholders. In connection
with the election of directors at the annual meeting of shareholders in 2004,
all three of the participating shareholders approved the voting of those shares
to elect the three candidates nominated by Mariner.
Termination Provisions
The voting agreement will terminate upon the earliest to occur of the following
dates:
o February 15, 2007;
o the merger or consolidation of NYMAGIC into another corporation, the
sale of all or substantially all its assets or its dissolution and/or
its liquidation;
o immediately upon the resignation of Mariner; or
o upon written notice of such termination to Mariner from all of the
participating shareholders.
Mariner Stock Option
The voting agreement also gives Mariner the right to purchase at any time and
from time to time up to 1,800,000 shares of our common stock from the
participating shareholders in the amounts set forth below opposite each
participating shareholder's name:
o Mark W. Blackman 450,000 shares
o Lionshead Investments, LLC 450,000 shares
o Robert G. Simses, as trustee of the Tollefson trusts 900,000 shares
20
In the event Mariner exercises this option, Mr. Simses will have the sole right
to determine the number of shares to be provided by any one of the Tollefson
trusts.
The option exercise price per share is based on the date the option is
exercised. At the time the voting agreement was signed, the option exercise
price was $19.00, with the exercise price increasing $0.25 per share every three
months. The initial exercise price of $19.00 was approximately equal to the
mid-point of the market price of our common stock and the book value of our
common stock during the period in which the voting agreement was negotiated. The
final exercise price, for exercises between February 15, 2007 and March 17,
2007, is $24.00 per share. The exercise price will be adjusted by deducting the
cumulative amount of dividends paid by us in respect of each share of its common
stock from January 31, 2003 through the date Mariner exercises its option. This
option was granted with the intention of aligning Mariner's interests with the
interests of all of our shareholders. The exercise price of the option as of
March 1, 2005 was $21.52 per share.
Generally, Mariner's option will expire 30 days after the termination of the
voting agreement. However, if the voting agreement is terminated prior to
February 15, 2007 by unanimous written notice from the participating
shareholders, then the option will continue in full force and effect until the
close of business on February 15, 2007, unless the termination was due to gross
negligence or willful misconduct by Mariner that causes or is reasonably likely
to cause direct, substantial and provable damage to NYMAGIC, in which case the
option will terminate concurrently with the termination of the voting agreement.
Transferability of the Option
The option granted to Mariner is not transferable except in the following
instances, with the assignee agreeing to be bound to the voting agreement:
o Mariner is permitted to assign the option, in whole or in part, to any
one or more of William J. Michaelcheck, William D. Shaw, Jr., George
R. Trumbull and A. George Kallop or any other individual employed by
or acting as a consultant for Mariner in connection with NYMAGIC.
o With the written consent of at least two participating shareholders,
Mariner or any assignee as described above is permitted to assign the
option, in whole or in part, to any one or more other persons.
On April 4, 2002, Mariner entered into an agreement with each of William D.
Shaw, Jr., the Company's Vice Chairman, and A. George Kallop, the Company's
Executive Vice President and Chief Operating Officer, whereby Mariner agreed to
hold a portion of the option covering 315,000 shares of NYMAGIC as nominee for
each of Mr. Shaw and Mr. Kallop. Effective January 1, 2005, Mr. Shaw waived his
interest in the option covering 315,000 shares of NYMAGIC and became a
shareholder of Mariner.
Consideration to Mariner
Mariner did not pay any cash consideration to the participating shareholders,
nor did the participating shareholders pay any cash consideration to Mariner, in
connection with the voting agreement. Mariner's sole compensation for entering
into the voting agreement, as opposed to the investment management arrangement
discussed below, is the option to purchase NYMAGIC shares from the participating
shareholders. To date, Mariner has not exercised this option, but should it
elect to do so, it would pay the option exercise price to the participating
shareholders at that time.
Transferability of NYMAGIC Shares
The participating shareholders retain the right to transfer any of the shares
covered by the voting agreement, provided that two conditions are satisfied.
First, the participating shareholders must at all times retain the number of
shares necessary to enable Mariner to exercise its option. Second, except for
250,000 shares of each participating shareholder, the transferred shares must
remain subject to the voting agreement. Mariner waived the requirement that
assignees be bound by the voting agreement with respect to 2,150,000 shares sold
pursuant to a public offering in December 2003, and 1,092,735 shares purchased
by the Company in January 2005.
21
Background of and Reasons for the Voting Agreement
The participating shareholders entered into the voting agreement with Mariner in
February 2002 because they were dissatisfied with the recent financial
performance of NYMAGIC and with the high turnover in its senior management, as
evidenced by the succession of four Chief Executive Officers and three Chairmen
of the Board over a four-year period. The voting agreement was intended to
permit Mariner to coordinate the voting of the participating shareholders for
Mariner's recommended actions, subject to receiving the consent of two out of
three of them on each matter voted upon. The goal of this voting arrangement was
to secure a new, unified management team for NYMAGIC.
The first of the participating shareholders to have discussions with the Mariner
Group about a potential role for the Mariner Group in relation to NYMAGIC was
Mr. Simses, who was acquainted with the Mariner Group. In October 2001, Mr.
Simses spoke with Mr. Shaw about an investment that the Tollefson trusts were
contemplating in several hedge funds managed by the Mariner Group. In the course
of that discussion, Mr. Simses expressed his disappointment with the recent
financial performance of NYMAGIC and the high level of executive turnover, and
Mr. Shaw suggested that the Mariner Group could offer its expertise in
investment and financial management and its contacts in the investment and
financial community to assist in finding new leadership and turning the company
around. Mr. Simses communicated this suggestion to Bennett H. Tollefson, a
co-trustee of some of the Tollefson trusts and husband of Louise B. Tollefson.
At the request of Mr. Simses, acting on behalf of Mrs. Tollefson, Mark W.
Blackman met with members of the Mariner Group's management in November 2001 to
discuss possible structural arrangements for the Mariner Group to become
involved in the management of NYMAGIC. In December 2001, John N. Blackman, Jr.
joined these conversations and the basic structure of the voting agreement was
developed. On February 20, 2002, the voting agreement was signed.
Management Changes Following Signing of the Voting Agreement
On March 4, 2002, Mr. Michaelcheck sent a letter to Robert W. Bailey, who was
then NYMAGIC's Chairman and Chief Executive Officer, enclosing a copy of the
voting agreement, stating that the participating shareholders intended to bring
about a change in the composition of NYMAGIC's Board of Directors and requesting
a meeting with Mr. Bailey to discuss these matters. In March 2002, Mr.
Michaelcheck and Mr. Trumbull met with Mr. Bailey to discuss Mariner's plans for
the Company. In the following weeks, Mr. Bailey and the incumbent Board
cooperated with Mariner and the participating shareholders in effecting a smooth
transition in leadership. Among other things, the Board agreed to nominate for
election as directors at the annual meeting those candidates who were
recommended by Mariner and the participating shareholders, as well as Mr.
Bailey, the then current Chairman and Chief Executive Officer. This was purely
voluntary on the part of the incumbent Board, since, for the regulatory reasons
discussed below, Mariner did not yet have the ability to exercise the voting
rights and board nomination rights provided in the voting agreement. Before
nominating Mr. Angiolillo and the four Mariner candidates, the incumbent Board
conducted an independent review of the backgrounds of those candidates in order
to satisfy itself as to their qualifications. The remaining five candidates
recommended by the participating shareholders were already members of the Board,
as was Mr. Bailey. The new Board consisting of eleven directors was elected by
the NYMAGIC shareholders at the annual meeting on May 22, 2002. Following the
election of the new Board of Directors, Mr. Trumbull was appointed Chairman, Mr.
Shaw was appointed Vice Chairman and Mr. Kallop was appointed Executive Vice
President. On June 30, 2002, upon the retirement of Mr. Bailey, Mr. Trumbull
succeeded him as Chief Executive Officer. Also in June 2002, Mr. Mark W.
Blackman rejoined the Company and was subsequently appointed Chief Underwriting
Officer.
Regulatory Considerations
During the period of management changes in May and June 2002, Mariner's voting
rights, board nomination rights and right to acquire through exercise of the
option 10% or more of the voting stock of NYMAGIC were not yet effective. The
reason for this delayed effectiveness is that, for purposes of the New York
insurance holding company statute, the exercise of any of those rights would
have constituted "control" of NYMAGIC and its subsidiaries, New York Marine and
Gotham. Under the provisions of the holding company statute which govern
acquisitions of control, Mariner and its majority owner, William J.
Michaelcheck, were required to obtain the approval of the New York
Superintendent of Insurance before any of the above control rights could go into
effect. Accordingly, on April 1, 2002, Mariner and Mr. Michaelcheck filed an
application for approval of acquisition of control with the New York
Superintendent of Insurance.
As a condition of obtaining that approval, on July 8, 2002, Mariner and
Mr. Michaelcheck furnished a commitment
22
letter to the New York State Insurance Department, which, among other matters,
provided that until July 31, 2004, Mariner and Mr. Michaelcheck would prevent
New York Marine and Gotham from paying any dividends without the prior written
consent of the department. New York Marine and Gotham adopted board of
directors' resolutions containing a comparable commitment not to pay dividends
prior to July 31, 2004 without the prior written consent of the department, and
NYMAGIC submitted those resolutions to the department in conjunction with
Mariner's application. Following receipt of the commitment letter and New York
Marine and Gotham board resolutions, and completion of the department's review
of the application, the Superintendent of Insurance granted approval for the
acquisition of control on July 31, 2002. Since that time, Mariner has had the
full ability to exercise the share voting rights, board nomination rights and
option rights provided in the voting agreement.
Amendments to the Voting Agreement
The voting agreement provides that it may be amended or extended by the
unanimous written consent of the participating shareholders and Mariner. The
voting agreement was amended on January 27, 2003 to extend the duration of the
agreement from February 15, 2005 to February 15, 2007 in order to provide
Mariner with additional time to improve the performance of NYMAGIC, and in order
to allow for the appointment of an eleventh director and David W. Young was
chosen for this newly created Board position. Mr. Young is affiliated with
Conning Capital Partners VI, L.P., which owns 500,000 shares of our common stock
and options to purchase an additional 500,000 shares of our common stock and
which we refer to as Conning. The voting agreement was further amended on March
12, 2003 to allow for the appointment of a twelfth director and John T. Baily
was chosen for this newly created Board position. In addition, as discussed
under "Transferability of NYMAGIC Shares," a limited waiver was agreed with
respect to certain transferability restrictions.
Following the sale of common stock in December 2003 by certain shareholders that
are parties to the voting agreement, the Company was no longer a "controlled
company" as defined in the New York Stock Exchange Listed Company Manual.
Accordingly, the Company was required to have a majority of independent
directors by December 16, 2004. In order to permit the Company to comply with
this requirement certain provisions of the voting agreement relating to the
nomination of directors and the size of the Board of Directors were amended on
February 24, 2004 as described in "Nomination of Directors" above.
Mariner Investment Management Arrangement
In addition to the voting agreement, Mariner entered into an investment
management agreement with NYMAGIC, New York Marine and Gotham effective October
1, 2002. This investment management agreement was amended and restated on
December 6, 2002. Under the terms of the investment management agreement,
Mariner manages the Company's investment portfolios. Mariner may purchase, sell,
redeem, invest, reinvest or otherwise trade securities on behalf of the Company.
Mariner may, among other things, exercise conversion or subscription rights,
vote proxies, select broker dealers and value securities and assets of the
Company. Under the terms of the investment management agreement the Company's
investments have been reallocated into the following three categories:
o the liquidity portfolio (cash management);
o the fixed-income portfolio (fixed-income investments); and
o the hedge fund and equity portfolio (alternative investment vehicles
and common and preferred equities).
The investment management agreement does not have a specific duration period and
may be terminated by either party on 30 days' prior written notice.
Fees to be paid to Mariner under the investment management agreement are based
on a percentage of the investment portfolio as follows: 0.20% of liquid assets,
0.30% of fixed maturity investments and 1.25% of hedge fund (limited
partnership) investments. We incurred Mariner investment expenses of $3,165,030,
$1,753,021 and $317,514 pursuant to this agreement in 2004, 2003 and 2002,
respectively. Assuming this agreement remains in effect, the Company anticipates
incurring Mariner investment expenses of approximately $3.8 million pursuant to
this agreement in 2005. In the event that assets in the hedge fund and equity
portfolio are invested in alternative investment vehicles managed by Mariner or
any of its affiliates, the 1.25% advisory fee is waived with respect to those
investments, although any fees imposed by the investment vehicles themselves are
nonetheless payable. In 2003, the Company entered into a limited partnership
hedge fund (Tiptree) managed by a Mariner affiliated company. In 2003, the
Company made an investment of $11.0 million, representing a 100% interest in
Tiptree, which is consolidated in the financial statements. An additional
investment of $4.65 million was made in Tiptree in
23
2004. The Company is committed to providing an additional $4.35 million in
capital to Tiptree. Tiptree invests in collateralized debt obligations. Under
the provisions of the agreement, the Mariner affiliated company is entitled to
50% of the net profit realized upon the sale of certain collateralized debt
obligations held by the Company. Investment expenses incurred and payable under
the Tiptree agreement at December 31, 2004 amounted to $1,459,255 and were based
upon the fair value of those securities held and sold during 2004. The Tiptree
agreement also provides for other fees payable to the manager based upon the
operations of the hedge fund. There were no other fees incurred through December
31, 2004. The Company cannot withdraw funds from Tiptree for a minimum period of
three years without the consent of the hedge fund manager.
William J. Michaelcheck, a Director of the Company, is Chairman and Chief
Executive Officer of Mariner and owns a majority of the stock of Mariner. George
R. Trumbull, Chairman, Chief Executive Officer and a Director of the Company, A.
George Kallop, Executive Vice President and Chief Operating Officer of the
Company, and William D. Shaw, Jr., Vice Chairman and a Director of the Company,
are also associated with Mariner. Currently, Mr. Shaw is a shareholder of
Mariner and Messrs. Trumbull and Kallop have contractual relationships with
Mariner relating to consulting services. As noted above, pursuant to the voting
agreement, Mariner, together with the participating shareholders (Mark W.
Blackman, John N. Blackman, Jr. and Robert G. Simses), controlled the vote of
approximately 27% of NYMAGIC's outstanding voting securities as of March 1,
2005.
The Company believes that the terms of the investment management agreement are
no less favorable to NYMAGIC and its subsidiaries than the terms that would be
obtained from an unaffiliated investment manager for the services provided. The
investment management fees paid to Mariner were arrived at through negotiations
between the Company and Mariner. All then current directors participated in the
discussion of the investment management agreement. In accordance with the
Company's conflict of interest policy, the investment management agreement was
approved by an independent committee of the Company's board of directors, which
consisted of all directors who were neither Mariner affiliates nor participating
shareholders under the voting agreement. Thereafter, the investment management
agreement was approved by the entire board of directors. Under the provisions of
the New York insurance holding company statute, because of the control
relationship between Mariner and New York Marine and Gotham, the investment
management agreement was submitted for review by the New York State Insurance
Department, which examined, among other things, whether its terms were fair and
equitable and whether the fees for services were reasonable. Upon completion of
that review, the investment management agreement was found to be
non-objectionable by the department.
Subsidiaries
NYMAGIC was formed in 1989 to serve as a holding company for the subsidiary
insurance companies. NYMAGIC's largest insurance company subsidiary is New York
Marine which was formed in 1972. NYMAGIC's other domestic insurance company
subsidiary, Gotham, was organized in 1986 as a means of expanding into the
excess and surplus lines marketplace. New York Marine and Gotham entered into a
Reinsurance Agreement, effective January 1, 1987, under the terms of which
Gotham cedes 100% of its gross direct business to New York Marine and assumes
15% of New York Marine's total retained business, beginning with the 1987 policy
year. Accordingly, for policy year 1987 and subsequent, Gotham's underwriting
statistics are similar to New York Marine's. As of December 31, 2004, 75% and
25% of Gotham's common stock is owned by New York Marine and NYMAGIC,
respectively.
Gotham does not assume or cede business to or from other insurance companies. As
of December 31, 2004, New York Marine had aggregate receivables due from Gotham
of approximately $38 million, or 23% of New York Marine's policyholders'
surplus. Gotham had aggregate reinsurance receivables due from New York Marine,
as of December 31, 2004, of approximately $38 million, or 65% of Gotham's
policyholders' surplus.
MMO was formed in 1964 to underwrite a book of ocean marine insurance and was
acquired in 1991 by NYMAGIC. MMO's activities expanded over the years and it now
underwrites a book of ocean marine, inland marine and other liability insurance.
Midwest was formed in 1978 to underwrite a varied book of business located in
the Midwest region and was acquired in 1991 by NYMAGIC.
PMMO was formed in 1975 to underwrite a varied book of business located in the
West Coast region and was acquired in 1991 by NYMAGIC.
24
MMO UK was formed in 1997 as a Lloyd's limited liability corporate capital
vehicle and was placed into runoff in 2002.
MMO EU was formed in 1997 as a holding company for MMO UK.
Tiptree, the limited partnership hedge fund in which the Company has a 100%
interest, was formed in 2003 as a limited partnership to invest in CDOs.
Competition
The insurance industry is highly competitive and the companies, both domestic
and foreign, against which the Company competes, are often larger and could have
greater capital resources than the Company and the pools. The Company's
principal methods of competition are pricing and responsiveness to the
individual insured's coverage requirements.
We compete in the United States and international markets with domestic and
international insurance companies. In the area of our primary focus, ocean
marine liability, there are approximately 50 insurance companies writing almost
$2.5 billion in annual premiums for ocean, drill rig, hull, war, cargo and other
marine liability. Our main competitors and their respective shares of this
market, as determined by Best's Aggregates and Averages, 2004 Edition (which
used 2003 data), are: American International Group, Inc., 10.3%; CNA Insurance
Cos., 10.1%; Ace INA Group, 9.5%; White Mountains Insurance Group, 5.7%; Allianz
of America, Inc., 5.7%; Chubb Group of Insurance Companies, 5.6%; St. Paul
Companies, 5.3%, and, Navigators Insurance Group, 5.0%. Our market share is
approximately 2.8%. We also write opportunistic excess and surplus property and
casualty insurance programs for professional liability, commercial real estate,
employment practices liability, surety, excess worker's compensation and
commercial automobiles, but given the magnitude of these markets our market
share is insignificant.
The Company believes it can successfully compete against other companies in the
insurance market due to its philosophy of underwriting quality insurance, its
reputation as a conservative well-capitalized insurer and its willingness to
forego unprofitable business.
Employees
The Company currently employs 119 persons, of whom 25 are insurance
underwriters. None of our employees is covered by a collective bargaining
agreement and management considers the relationship with our employees to be
good.
Code of Conduct and Corporate Goverance Documents
The Company maintains a separate, independent, as defined under the New York
Stock Exchange rules, Audit Committee of four directors who have been appointed
by the Board of Directors: Messrs. Glenn Angiolillo, John T. Baily (chairman and
financial expert), David E. Hoffman and David W. Young.
The Company has adopted a code of ethics for Senior Executive and Financial
Officers as well as a code of Business Conduct and Ethics for Directors,
Officers and Employees, copies of which are available free of charge, upon
request directed to General Counsel, NYMAGIC, INC., 919 Third Avenue, New York,
NY 10022.
The Company's Corporate Governance Guidelines and the charters of the Audit,
Human Resources and Nominating/Corporate Governance Committees of the Company's
Board of Directors and the Company's Code of Business Conduct and Ethics for
Directors, Officers and Employees are available on the Company's Internet web
site www.nymagic.com and are available in print to any shareholder who requests
them.
Item 2. Properties
The Company does not own, directly or indirectly, any real estate. The Company
subleases office space for day to day operations in the following cities:
New York - 28,000 square feet
Chicago - 3,500 square feet
San Francisco - 2,000 square feet
25
The Company's principal executive offices are approximately 28,000 square feet
in size and are located at 919 Third Avenue, New York, New York 10022. The
sublease commenced on March 1, 2003 and expires on July 30, 2016. The minimum
monthly rental payments of $102,794 commenced in March 2004 and end in 2016 and
will amount to $15.3 million of total rental payments over the term of the
sublease.
Item 3. Legal Proceedings
The Company previously entered into reinsurance contracts with a reinsurer that
is now in liquidation. On October 23, 2003, the Company was served with a Notice
to Defend and a Complaint by the Insurance Commissioner of the Commonwealth of
Pennsylvania, who is the liquidator of this reinsurer, alleging that
approximately $3 million in reinsurance claims paid to the Company in 2000 and
2001 by the reinsurer are voidable preferences and are therefore subject to
recovery by the liquidator. The Company has filed Preliminary Objections to
Plaintiff's Complaint, denying that the payments are voidable preferences and
asserting affirmative defenses. On February 18, 2004, the Plaintiff filed
Preliminary Objections to our Preliminary Objections and an Answer and
Memorandum of Law in opposition to our Preliminary Objections. No trial date has
been set for this matter, but we intend to defend ourselves vigorously in
connection with this lawsuit. The Company believes it has strong defenses
against these claims; however, there can be no assurance as to the outcome of
this litigation.
On February 8, 2005 the Company and the individual members of its Board of
Directors were served with a purported shareholder derivative action lawsuit
brought in New York Supreme Court, Queens County, relating to the Company's
purchase on January 7, 2005 of approximately 1.1 million shares of its common
stock from certain members, or trusts controlled by certain members, of the
family of John N. Blackman, the Company's founder. The complaint, which was
brought by one of our shareholders, Linda Parnes, who together with Alan Russell
Kahn, owns 100 shares of the Company's common stock, alleges that the Board of
Directors breached their fiduciary duty, wasted corporate assets and abused
their control over the Company by paying an excessive price for the shares. The
plaintiff is seeking damages against members of the Board of Directors and
rescission of the purchase. The Company's answer to the complaint is required to
be filed by April 1, 2005. The Company believes that the complaint is wholly
without merit, and will defend it vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
The Company did not submit any matters to a vote of security holders during the
fourth quarter of 2004.
26
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
- --------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
- -------------------------------------
The Company's common stock trades on the New York Stock Exchange (NYSE Symbol:
NYM). The following table sets forth high and low sales prices of the common
stock for the periods indicated as reported on the New York Stock Exchange
composite transaction tape.
2004 2003
----------------------- ---------------------
High Low High Low
---- --- ---- ---
First Quarter .............. $ 28.85 $ 23.99 $ 20.22 $ 18.00
Second Quarter ............. 27.98 23.45 23.50 18.20
Third Quarter .............. 26.50 20.93 26.53 19.80
Fourth Quarter ............. 25.86 19.53 27.84 22.60
As of March 1, 2005, there were 62 shareholders of record. However, management
believes there were approximately 719 beneficial owners of NYMAGIC's common
stock as of November 23, 2004.
Dividend Policy
The Company did not declare a dividend at any time during 2002. The Company
declared a dividend of six cents per share to shareholders of record in March,
June, September and December in each of 2003 and 2004. For a description of
restrictions on the ability of the Company's insurance subsidiaries to transfer
funds to the Company in the form of dividends, see "Business - Regulation" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
27
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data, which was
derived from our historical consolidated financial statements included in our
annual reports on Form 10-K for the years then ended. You should read the
following together with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and the notes thereto included in "Item 8. Financial Statements and
Supplementary Data."
OPERATING DATA Year Ended December 31,
--------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Revenues:
Net premiums earned.......................... $ 116,333 $ 96,394 $ 113,457 $ 84,633 $ 75,448
Net investment income........................ 23,679 22,394 15,821 17,388 18,076
Commission income............................ 461 (230) 1,549 3,312 903
Net realized investment gains................ 678 550 8,456 2,874 5,247
Other income................................. 1,790 1,688 186 285 1,059
-------- --------- --------- -------- ---------
Total revenues............................... $ 142,941 $ 120,796 $ 139,469 $ 108,492 $ 100,733
======== ========= ========= ========= =========
Expenses:
Net losses and loss adjustment
expenses incurred.......................... $ 66,558 $ 55,715 $ 73,356 $ 87,901 $ 68,063
Policy acquisition expenses.................. 25,166 19,430 18,899 16,083 18,178
General and administrative expenses.......... 23,247 19,428 18,373 16,952 19,439
Interest expense............................. 5,353 26 575 395 712
-------- --------- --------- --------- ---------
Total expenses............................... $ 120,324 $ 94,599 $ 111,203 $ 121,331 $ 106,392
======== ========= ========= ========= =========
Income (loss) before income taxes............ $ 22,617 $ 26,197 $ 28,266 $ (12,839) $ (5,659)
-------- -------- -------- -------- --------
Income taxes expense (benefit)
Current.................................... 3,835 8,987 (4,869) 798 1,276
Deferred................................... 4,151 117 4,425 (498) (1,433)
-------- -------- -------- -------- ---------
Total income taxes........................... 7,986 9,104 (444) 300 (157)
-------- -------- -------- -------- ---------
Net income (loss)............................ $ 14,631 $ 17,093 $ 28,710 $ (13,139) $ (5,502)
======== ======== ======== ======== =========
BASIC EARNINGS (LOSS) PER SHARE:
Weighted average shares outstanding.......... 9,736 9,673 9,277 9,232 9,244
Basic earnings (loss) per share.............. 1.50 $ 1.77 $ 3.09 $ (1.42) $ (.60)
======== ======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE:
Weighted average shares outstanding.......... 9,916 9,828 9,309 9,232 9,244
Diluted earnings (loss) per share............ $ 1.48 $ 1.74 $ 3.08 $ (1.42) $ (.60)
======== ======== ======== ========= =========
Dividends declared per share................. $ .24 $ .24 $ .00 $ .30 $ .40
======== ========= ======== ========= =========
BALANCE SHEET DATA:
Year Ended December 31,
--------------------------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Total cash and investments........................$ 630,872 $519,642 $430,470 $369,048 $371,844
Total assets................................... 997,094 875,125 824,007 856,997 720,329
Unpaid losses and loss adjustment expenses..... 503,261 518,930 516,002 534,189 411,267
Notes payable.................................. 100,000 -- 6,220 7,911 7,458
Total shareholders' equity..................... 258,118 244,291 220,953 199,272 216,290
Book value per share...........................$ 25.91 $ 24.47 $ 23.54 $ 21.46 $ 23.62
28
For a description of factors that materially affect the comparability of the
information reflected in the Selected Financial Data, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Executive Overview and Highlights-2004 year
o Net income of $14.6 million or $1.48 per diluted share
o Gross premium growth in core lines (ocean marine, inland marine/fire
and other liability) of 31% over 2003
o Combined ratio of 98.8%
o Net investment income growth of 6% over 2003
o Favorable net loss reserve development reported on prior year loss
reserves of $15 million
o Total cash and invested assets of $631 million, up from $520 million
at year end 2003
o Total shareholders' equity of $258 million, up from $244 million at
year end 2003
o Total reinsurance receivables of $262 million, down from $281 million
at year end 2003
o Raised $100 million through the sale of 6.5% Senior Notes
o Formed business relationships with various program managers to produce
additional property and casualty insurance premiums
Results of Operations
The Company's results of operations are derived from participation in pools of
insurance covering ocean marine, inland marine, aircraft and other liability
insurance managed by MMO and affiliates. Since January 1, 1997, the Company's
participation in the pools has been increased to 100%. The Company formerly
wrote aircraft business, but has ceased writing any new policies covering
aircraft insurance for periods subsequent to March 31, 2002.
MMO London wrote a book of ocean marine insurance through its participation in
Lloyd's Syndicate 1265 and a book of assumed property and aircraft reinsurance
through its participation in Lloyd's Syndicate 2010. Since January 1, 2002, MMO
London has not provided capacity to any Lloyd's syndicate.
The Company records premiums written in the year policies are issued and earns
such premiums on a monthly pro rata basis over the terms of the respective
policies. The following tables present the Company's gross premiums written, net
premiums written and net premiums earned for each of the past three years.
29
NYMAGIC Gross Premiums Written by
Segment Year Ended December 31,
- ------------------------ -------------------------------------------------
2004 2003 2002
-------------------------------------------------
(Dollars in thousands)
Ocean marine ....................... $104,726 57% $ 94,649 66% $ 89,301 59%
Inland marine/Fire ................. 16,878 9% 16,515 12% 13,311 9%
Other liability .................... 61,688 34% 28,468 20% 13,874 9%
---------------------------------------------------
Subtotal ...... 183,292 100% 139,632 98% 116,486 77%
Aircraft ........................... 342 -- 3,565 2% 35,874 23%
MMO London ......................... -- -- -- -- 157 --
---------------------------------------------------
Total .............................. $183,634 100% $143,197 100% $152,517 100%
===================================================
NYMAGIC Net Premiums Written
By Segment Year Ended December 31,
- ------------------------- --------------------------------------------------
2004 2003 2002
--------------------------------------------------
(Dollars in thousands)
Ocean marine ....................... $ 82,689 60% $ 67,744 69% $ 70,839 67%
Inland marine/Fire ................. 5,255 4% 4,833 5% 2,975 3%
Other liability .................... 49,190 36% 22,961 23% 9,960 9%
----------------------------------------------------
Subtotal ........................ 137,134 100% 95,538 97% 83,774 79%
Aircraft ........................... (6) -- 2,769 3% 22,366 21%
MMO London ......................... -- -- -- -- 302 --
----------------------------------------------------
Total .............................. $137,128 100% $98,307 100% $106,442 100%
====================================================
NYMAGIC Net Premiums Earned
By Segment Year Ended December 31,
- ----------------------- --------------------------------------------------
2004 2003 2002
--------------------------------------------------
(Dollars in thousands)
Ocean marine ....................... $ 76,361 66% $ 73,096 76% $ 61,887 54%
Inland marine/Fire ................. 4,919 4% 4,234 4% 2,371 2%
Other liability .................... 35,056 30% 16,126 17% 6,883 6%
----------------------------------------------------
Subtotal ........................ 116,336 100% 93,456 97% 71,141 62%
Aircraft ........................... (3) -- 2,938 3% 38,157 34%
MMO London ......................... -- -- -- -- 4,159 4%
----------------------------------------------------
Total .............................. $116,333 100% $96,394 100% $113,457 100%
====================================================
Unlike many types of property and casualty insurance, ocean marine, inland
marine, aircraft and other liability premium rates are not strictly regulated by
governmental authorities. Consequently, the Company is able to adjust premium
rates quickly in response to competition, varying degrees of risk and other
factors. In addition, the Company, by virtue of its underwriting flexibility, is
able to emphasize specific lines of business in response to advantageous premium
rates and its anticipation of positive underwriting results. However, the
insurance industry is highly competitive and the companies against which the
Company competes may seek to limit any market premium rate.
The property and casualty industry historically has been highly cyclical. Rates
for property and casualty insurance are influenced primarily by factors that are
outside of our control, including competition and the amount of available
capital and surplus in the industry. For example,
30
the substantial losses in the insurance industry arising from the events of
September 11, 2001 caused rates in the insurance industry to rise. However, new
capital has since flowed into the insurance industry. To the extent that more
capital is available, there may be downward pressure on premium rates as a
result of increased supply. These factors affecting rates for the industry in
general impact the rates we are able to charge. Any significant decrease in the
rates for property and casualty insurance could reduce our net income. While
rates impact our net income, there is not necessarily a direct correlation
between the level of rate increases or decreases and net income because other
factors, such as the amount of catastrophe losses and the amount of expenses,
also affect net income.
Prevailing policy terms and conditions in the property and casualty insurance
market are also highly cyclical. Changes in terms and conditions unfavorable to
insurers, which tend to be correlated with declining rates, could further reduce
our net income. Even as rates rise, the average percentage rate increases can
fluctuate greatly and be difficult to predict.
The Company's general and administrative expenses consist primarily of
compensation expense, employee benefits and rental expense for office
facilities. The Company's policy acquisition costs include brokerage commissions
and premium taxes both of which are primarily based on a percentage of premiums
written. Acquisition costs have generally changed in proportion to changes in
premium volume. Losses and loss adjustment expenses incurred in connection with
insurance claims in any particular year depend upon a variety of factors
including the rate of inflation, accident or claim frequency, the occurrence of
natural catastrophes and the number of policies written.
The Company estimates reserves each year based upon, and in conformity with, the
factors discussed under "Business-Reserves." Changes in estimates of reserves
are reflected in operating results in the year in which the change occurs.
Year Ended December 31, 2004 as Compared to Year Ended December 31, 2003
Net income for the year ended December 31, 2004 was $14.6 million or $1.48 per
diluted share, as compared to $17.1 million, or $1.74 per diluted share, for the
year ended December 31, 2003. The decrease in net income in 2004 compared to
2003 was primarily attributable to lower investment yields, primarily from
limited partnerships, an increase in interest expense arising from the Company's
issuance of $100 million of 6.5% senior notes on March 11, 2004 and the expenses
incurred by the Company in connection with compliance with section 404 of the
Sarbanes-Oxley Act.
Total revenues for the year ended December 31, 2004 were $142.9 million compared
with $120.8 million for the year ended December 31, 2003 primarily reflecting
increases in net premiums earned.
Net realized investment gains after taxes were $440,000, or $.04 per diluted
share, and $357,000, or $.04 per diluted share, for the years ended December 31,
2004 and 2003, respectively. These amounts reflect the sale of fixed income
investments.
Gross premiums written, net premiums written and net premiums earned for the
year ended December 31, 2004 increased by 28%, 39% and 21%, respectively, when
compared to the same period of 2003 reflecting growth in all of our core
segments of business.
Premiums for each segment are discussed below:
Ocean marine gross premiums written grew by 11% during 2004 when compared to the
prior year. The 2004 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 for the Company 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. The leveling of premium rates follows a few years of rate increases. Net
premiums written increased by 22% in 2004 when compared to 2003 reflecting
increased gross premiums as well as higher net retentions per loss. The
Company's net loss retention increased to a maximum of $4 million for any one
risk or any one occurrence effective on policies written during 2004 compared
with $2 million for any one risk or any one occurrence effective on policies
written during 2003. Partially offsetting the reduction in ceded written
premiums in 2004 were $1.6 million in reinsurance reinstatement costs incurred
as a result of the Hurricane Ivan catastrophe loss. There were no reinsurance
reinstatement costs incurred on catastrophe losses in 2003. Net premiums earned
grew by 4% in 2004 when compared to 2003 reflecting growth in premium production
partially offset by reinsurance reinstatement costs. The Company cannot assure
that ocean marine rates will not further decrease in 2005.
Inland marine/fire gross premiums written increased by 2% for the year ended
December 31, 2004 when compared to 2003. The increase in premium writings
reflect additional production from policies covering inland marine, fire,
31
and motor truck cargo and new production sources in the surety class. Gross
premiums written in 2004 reflect mildly lower market rates. Both net premiums
written and net premiums earned increased 9% and 16%, respectively, over the
comparable 2003 amounts primarily reflecting higher net loss retention levels.
Other liability gross premiums written rose by 117% for the year ended December
31, 2004 when compared to 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 $6.0 million in 2003 to $22.6 million in 2004
as well as additional production in the contractor's liability class. As the
Company commenced underwriting excess workers compensation and commercial auto
insurance in the latter half of 2003, volume increases from each of these
classes of business were also achieved in 2004. Gross premiums written in 2004
and 2003 for excess workers compensation were $14.5 million and $6.2 million,
respectively, and $6.9 million in commercial auto for 2004 as compared to $3.3
million in 2003. Premium rates in the professional liability class were flat 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 114% and 117%,
respectively, over the prior year due to production increases achieved in 2004.
The Company cannot assure that other liability rates will not further decrease
in 2005.
Aircraft premiums decreased substantially in 2004 as a result of the Company
having ceased writing new aircraft policies subsequent to March 31, 2002. Net
premiums written and net premiums earned decreased in 2003 for the same reason.
Net losses and loss adjustment expenses incurred as a percentage of net premiums
earned (the loss ratio) for the year ended December 31, 2004 was 57.2% compared
to 57.8% for the year ended December 31, 2003. The Company recorded lower loss
ratios in 2004 primarily due to a reduction in net loss reserves in the aircraft
line of business of $8.3 million, or 7.1% of the loss ratio, relating to the
events occurring on September 11, 2001. Specifically, the loss reserves relating
to the terrorist attacks of September 11, 2001 on the Pentagon and the hijacked
airliner that crashed in Pennsylvania were reduced as a result of lower than
expected losses. Offsetting this benefit were net catastrophe losses in the
ocean marine line in 2004 arising from Hurricane Ivan that increased losses
incurred by $2.8 million and reduced net premiums earned by $1.6 million due to
reinsurance reinstatement costs. There were no catastrophe losses reported in
2003. A few large current accident year losses occurring in the ocean marine
line of business also contributed to a higher loss ratio in the ocean marine
line in 2004. The inland marine/fire loss ratios for 2004 were lower than 2003,
reflecting a lower frequency of claims and favorable loss development. The other
liability loss ratio also improved in 2004 when compared to the loss ratio in
2003 primarily due to the growth in professional liability writings and excess
liability lines of business, which largely reflected the beneficial impact of
firmer rates in those classes of business.
The Company decreased net loss reserves by approximately $15 million in 2004
from the 2003 year end net unpaid loss reserve amount of $242 million. This
benefit primarily resulted from the favorable development of aircraft loss
reserves, which was largely attributable to the 2001 accident year. Both ocean
marine and inland marine/fire also recorded favorable loss development as a
result of a lower than expected emergence of losses. The favorable 2004 results
were affected by net adverse loss development of $1.2 million resulting in part
from provisions made for insolvent, financially impaired and commuted
reinsurers, as compared to $1.0 million in 2003. The 2004 results also reflect
$4.3 million of adverse development from the Company's other liability line
reflecting reserve strengthening relating to a few specific umbrella exposures
stemming from Asbestos losses, as compared to $750,000 in 2003.
Policy acquisition costs as a percentage of net premiums earned (the acquisition
cost ratio) for the year ended December 31, 2004 were 21.6% as compared with
20.2% for the year ended December 31, 2003. The acquisition cost ratio for 2004
reflects an increase in the ocean marine ratio as a result of higher acquisition
costs associated with new sources of cargo premium production and an increase in
the other liability class reflecting higher acquisition costs relating to
increases in the professional liability class of business. In addition, premiums
earned in 2003 reflected larger amounts of aircraft premiums, which generally
have a lower acquisition cost ratio than other lines of business.
General and administrative expenses increased by 19.7% to $23.2 million for the
year ended December 31, 2004 from $19.4 million for the year ended December 31,
2003. The increase in 2004 was largely attributable to an increase in employee
related expenses to service the growth in the Company's business operations.
Contributing to the increase in 2004 were higher administrative expenses
resulting from the implementation of computer systems and Sarbanes-Oxley related
expenses.
32
The Company's combined ratio (the loss ratio plus the ratio of policy
acquisition costs and general and administrative expenses divided by premiums
earned) was 98.8% for the 2004 year compared with 98.1% for 2003.
Net investment income for the year ended December 31, 2004 increased by 6% to
$23.7 million from $22.4 million for the year ended December 31, 2003. Although
the Company maintained a larger invested asset base in 2004 than it did in 2003
as a result of favorable cash flow from operations and the proceeds received
from the $100 million of 6.5% senior notes issued on March 11, 2004, investment
yields declined in 2004 as a result of lower income from limited partnerships.
Investment income, net of investment fees, from each major category of
investments is as follows:
Years ended December 31,
------------------------
2004 2003
---- ----
(in millions)
-------------
Fixed maturities, available for sale................. $ 4.4 $ 4.2
Fixed maturities, trading securities................. 13.4 12.9
Short-term investments............................... 3.0 1.9
Equity in earnings of limited partnerships........... 7.7 8.5
---------------
Total investment income...................... 28.5 27.5
Investment expenses.................................. (4.8) (5.1)
---------------
Net investment income................................ $ 23.7 $ 22.4
==================
As of December 31, 2004 and 2003 investments in limited partnerships amounted to
approximately $190.5 million and $105.4 million, respectively. A significant
portion of the proceeds received from the $100 million of 6.5% senior notes were
invested in limited partnerships. The equity method of accounting is used to
account for the Company's limited partnership hedge fund investments. Under the
equity method, the Company records all changes in the underlying value of the
limited partnership hedge fund to results of operations.
As of December 31, 2004 and 2003 investments in the trading portfolio amounted
to approximately $17.8 million and $61.7 million, respectively. Net investment
income for 2004 and 2003 reflects approximately $13.4 million and $12.9 million,
respectively, derived from trading portfolio activities. These activities
include the trading of collateralized debt obligations (CDOs) and treasury
notes. The Company's trading portfolio is marked to market with the change
recognized in net investment income during the current period. Any realized
gains or losses resulting from the sales of trading securities are also
recognized in net investment income.
As a result of the accounting treatment of its limited partnerships and trading
portfolio, the Company's investment income results may be volatile. As the
Company invests a greater percentage of its investment portfolio in limited
partnership hedge funds and if the amount of trading securities held varies
significantly during different periods, there may also be a greater volatility
associated with the Company's investment income.
Commission and other income increased to $2.3 million for the year ended
December 31, 2004 from $1.5 million for 2003 primarily as a result of other
income received from litigation and arbitration settlements. The 2003 amounts
consisted primarily of lesser amounts of income received from arbitration
settlements. Larger amounts were also recorded in 2004 from reinsurance profit
commissions on ocean marine business.
Net realized investment gains were $678,000 for the year ended December 31, 2004
as compared to $550,000 for the year ended December 31, 2003. These amounts
reflect the sale of fixed income investments. Write-downs from
other-than-temporary declines in the fair value of securities amounted to
$124,000 and $0 for the years ended December 31, 2004 and 2003, respectively.
Interest expense was $5.4 million for the year ended December 31, 2004 compared
to $26,000 for 2003 as a result of interest expense arising from the Company's
issuance of $100 million of 6.5% Senior Notes on March 11, 2004.
Total income tax expense as a percentage of income before taxes for year ended
December 31, 2004 was 35.3% as compared to 34.8% for the same period of 2003.
The increase in the percentage primarily relates to higher state and local taxes
in 2004 at the holding company level.
Premiums and other receivables, net increased to $42.6 million as of December
31, 2004 from $24.0 million as of December 31, 2003 due to increases in gross
premiums written and larger balances due from the pool managed by MMO.
Reinsurance receivables on paid and unpaid losses, net, amounted to $14.5
million and $247.8 million, respectively, as of
33
December 31, 2004 as compared to $4.2 million and $276.6 million, respectively,
as of December 31, 2003. Paid recoverables increased in 2004 primarily due to a
large loss payment made at year end. Unpaid recoverables decreased in 2004
primarily due to declines in recoverables in the runoff line of aircraft
business.
Other assets increased to $6.5 million as of December 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.
Unpaid losses and loss adjustment expenses decreased to $503.3 million at
December 31, 2004 from $518.9 million at December 31, 2003. The decrease was
primarily attributable to declines in loss reserves in the runoff aircraft line
of business largely as a result of the reduction in reserves for the terrorist
attacks on September 11, 2001 on the Pentagon and the hijacked airliner that
crashed in Pennsylvania. Partially offsetting this decrease were increases in
loss reserves in the Company's ocean marine and other liability lines of
business due to increased production in 2004.
Reserve for unearned premiums of $83.1 million as of December 31, 2004 increased
by 34% over the balance as of December 31, 2003. The percentage increase is
comparable to the increase in gross premiums written from the Company's core
lines of business.
Other liabilities increased to $26.6 million as of December 31, 2004 from $15.4
million for 2003 due in large part to increases in funds received from
reinsurers and interest expense payable on the Company's 6.5% senior notes.
Year Ended December 31, 2003 as Compared to Year Ended December 31, 2002
Net income for the year ended December 31, 2003 was $17.1 million or $1.74 per
diluted share, as compared to $28.7 million, or $3.08 per diluted share, for the
year ended December 31, 2002. The decrease in net income in 2003 compared to
2002 was primarily attributable to realized investment gains and tax benefits of
$9.3 million, or $0.99 per diluted share, resulting from the withdrawal from
London operations in 2002.
Total revenues for the year ended December 31, 2003 were $120.8 million compared
with $139.5 million for the year ended December 31, 2002 reflecting a decline in
net premiums earned from lines of business in runoff.
Net realized investment gains after taxes were $357,000, or $.04 per diluted
share, and $5.5 million, or $.59 per diluted share, in the years ended December
31, 2003 and 2002, respectively. The 2002 amounts reflected the sale of
substantially all of the Company's fixed income investments.
Gross premiums written, net premiums written and net premiums earned for the
year ended December 31, 2003 declined by 6%, 8% and 15%, respectively, when
compared to the year ended December 31, 2002 as a result of the Company's
decisions to cease writing aircraft business and to withdraw from operations in
London. However, gross premiums written, net premiums written and net premiums
earned from the Company's core segments (ocean marine, inland marine/fire and
other liability) increased by 20%, 14% and 31%, respectively, in 2003 over 2002.
Premiums for each segment are discussed below:
Ocean marine gross premiums written grew by 6% during 2003 when compared to
2002. The increase reflected higher ocean marine rates with the largest rate
increases, approximately 5% to 15%, occurring in the marine liability and hull
classes and additional production was achieved in the marine liability class.
Other marine classes experienced a leveling in rates. Partially offsetting the
overall increase were decreases in policy count in the drill rig class partly as
a result of some one-time builder's risk policies written in 2002, which were
not renewed in 2003. Builder's risk policies may have policy terms greater than
one year and accordingly their premiums are earned over the related policy
periods. In addition, we did not renew certain cargo policies in order to reduce
concentrations of risk. However, commencing in the fourth quarter of 2003, gross
premiums included approximately $6.5 million of cargo premiums from our
agreement with Southern Marine & Aviation, a leading provider of insurance for
bulk petroleum cargo shipments. Net premiums written decreased by 4% reflecting
larger amounts of ceded reinsurance premium as a result of higher costs as well
as the business mix within the various classes of ocean marine insurance. Net
premiums earned grew by 18% in 2003 compared to 2002 reflecting premium rate
increases as well as increased
34
production in the marine liability classes.
Inland marine/fire gross premiums written increased by 24% for the year ended
December 31, 2003 when compared to 2002, largely due to the growth in the
Company's underwriting program insuring excess and surplus lines property risks
and improved pricing. Both net premiums written and net premiums earned
increased 62% and 79%, respectively, over the comparable 2002 amounts reflecting
increases in production, pricing and higher net loss retention levels.
Other liability gross premiums written rose by 105% for the year ended December
31, 2003 when compared to 2002 due to production increases from existing classes
and new classes (commercial automobile liability and excess workers
compensation) and higher premium rates on policy renewals. Average rate
increases achieved in 2003 were approximately 10% to 20%. Although additional
production was achieved in the contractors' liability class, policy count was
reduced in the professional liability classes to mitigate exposure in certain
classes of errors and omission policies. New sources of production include
underwriting a programmed book of commercial automobile liability insurance
written primarily in New York area, which contributed $3.3 million in gross
premiums written in 2003. In addition, gross premiums written in 2003 also
include $6.2 million of excess workers' compensation insurance, which focuses on
smaller companies in the New York area. Net premiums written and net premiums
earned grew by 131% and 134%, respectively over the prior year due to the
premium rate and production increases as well as higher net loss retention
levels in the contractors' liability and errors and omission classes.
Aircraft gross written premiums decreased 90% in 2003 from $35.9 million to $3.5
million as a result of the Company having ceased writing new aircraft policies
subsequent to March 31, 2002. Net premiums written and net premiums earned
decreased in 2003 for the same reasons.
MMO London premiums earned were zero in 2003, down from $4.2 million in 2002,
because the Company did not provide capacity to any Lloyd's syndicate for the
2002 and subsequent underwriting years.
Net losses and loss adjustment expenses incurred as a percentage of net premiums
earned (the loss ratio) for the year ended December 31, 2003 was 57.8% compared
to 64.7% for the year ended December 31, 2002. The Company recorded lower loss
ratios in 2003 in both the ocean marine and other liability lines of business,
which largely reflected the absence of any catastrophe losses and the beneficial
impact of increased rates in those lines of business. Net losses incurred from
catastrophes in 2002 were $3 million and $0 in 2003.
The Company decreased net loss reserves by approximately $1.4 million in 2003
from the 2002 year end reserve amount of $209 million. This benefit resulted
from the favorable development of ocean marine reserves offset by the adverse
development of aviation reserves attributable to accident years 1997 to 2000 and
additional net loss development in its umbrella (other liability) losses of
approximately $1.0 million. The year end 2003 results were affected by net
adverse development of $1.0 million resulting in part from provisions made for
insolvent, financially impaired and commuted reinsurers, as compared to $5.2
million in 2002. The 2003 results include $753,000 of adverse development from
the Company's other liability line reflecting additional umbrella exposures, as
compared to $2.2 million in 2002.
Policy acquisition costs as a percentage of net premiums earned for the year
ended December 31, 2003 were 20.2% as compared with 16.7% for the year ended
December 31, 2002. Net premiums earned in the prior year reflected larger
amounts of aircraft premiums, which have a lower acquisition cost ratio than
other lines of business. Accordingly, a large part of the aircraft premium
written in 2002 reflected premium surcharges for terrorism coverage, which were
recorded with a nominal processing charge. Premiums earned in 2003 included
amounts from new sources of production, including commercial auto and cargo
premiums, which have higher acquisition costs than other classes of business.
General, administrative and interest expenses increased by 3% to $19.5 million
for the year ended December 31, 2003 from $18.9 million for the year ended
December 31, 2002. The prior year's amount included $1.5 million in charges
resulting from the reorganization of the Company's management structure and
consisted primarily of severance payments to three of the Company's former
executive officers. All expenses related to the reorganization were paid prior
to June 30, 2003. Increases in expenses for 2003 were partly attributable to the
Company's new lease for its principal office space which became effective prior
to the expiration on December 31, 2003 of the lease for the Company's prior
office location resulting in higher rent while both leases were in effect. The
Company also incurred costs with respect to the implementation of computer
systems.
35
The Company's combined ratio (the loss ratio plus the ratio of policy
acquisition costs and general and administrative expenses divided by premiums
earned) was 98.1% for the 2003 year compared with 97.5% for 2002.
Net investment income for the year ended December 31, 2003 increased by 42% to
$22.4 million from $15.8 million in the year ended December 31, 2002. The
increase in 2003 reflects the implementation of our revised investment strategy,
including income derived from trading portfolio activities and limited
partnerships, partially offset by a lower investment yield on the fixed income
portfolio in 2003 as a result of a larger position held by the Company in
short-term investments. Net investment income for 2003 reflects approximately
$12.9 million derived from trading portfolio activities, which commenced in
2003. The Company's trading portfolio is marked to market with the change
recognized in net investment income during the current period. Any realized
gains or losses resulting from the sales of trading securities are also
recognized in net investment income. Net investment income derived from limited
partnership hedge fund investments approximated $8.5 million in 2003 as compared
to approximately $1.0 million in 2002. The Company initially invested in hedge
funds in the fourth quarter of 2002. The equity method of accounting is used to
account for the Company's limited partnership hedge fund investments. Under the
equity method, the Company records all changes in the underlying value of the
limited partnership hedge fund to results of operations. The Company's
investments in limited partnership hedge funds amounted to approximately $105
million and its trading account amounted to $62 million as of December 31, 2003.
Investment income, net of investment fees, from each major category of
investments is as follows:
Years ended December 31,
------------------------
2003 2002
---- ----
(in millions)
-------------
Fixed maturities, available for sale................. $ 4.2 $ 14.4
Fixed maturities, trading securities................. 12.9 ---
Short-term investments............................... 1.9 .9
Equity securities.................................... --- .5
Equity in earnings of limited partnerships........... 8.5 1.0
---------------
Total investment income...................... 27.5 16.8
Investment expenses.................................. (5.1) (1.0)
---------------
Net investment income................................ $ 22.4 $ 15.8
==================
Commission and other income decreased to $1.5 million for the year ended
December 31, 2003 from $1.7 million for 2002. The 2003 amounts consisted
primarily of income received from arbitration settlements, offset by returns of
reinsurance profit contingent commissions. In the second quarter of 2003, an
arbitration procedure was completed against a former pool member, Utica Mutual,
which resulted in a payment to MMO of approximately $7.8 million. This amount
represented Utica Mutual's funding requirement to the MMO pools. In addition,
MMO was awarded interest of approximately $1 million on a pre-tax basis. In
2002, larger profit commissions were earned based upon the ceded results of
aircraft reinsurance treaties.
Net realized investment gains were $550,000 for the year ended December 31, 2003
as compared to $8.5 million for the year ended December 31, 2002. Net realized
investment gains in 2002 reflected the sale of substantially all of the
Company's fixed income investments. Write-downs from other-than-temporary
declines in the fair value of securities amounted to $0 and $1.5 million for the
years ended December 31, 2003 and 2002, respectively.
Total income taxes increased to $9.1 million in 2003 from $(444,000) for 2002.
The amount for the prior year included $9.3 million in tax benefits attributable
to the Company's withdrawal from its London operations.
Premiums and other receivables, net decreased to $24.0 million as of December
31, 2003 from $35.7 million as of December 31, 2002 as a result of smaller
balances due from the pool managed by MMO. Favorable cash flows were recorded at
MMO due in part to the previously mentioned arbitration settlement and as a
result of smaller investment balances held on behalf of its pool members.
Reinsurance receivables on paid and unpaid losses, net, decreased to $4.2
million and $276.6 million, respectively, as of December 31, 2003 from $19.4
million and $307.0 million, respectively, as of December 31, 2002 due mainly to
collections of reinsurance receivables on paid losses and the commutation of
certain receivables.
Unpaid losses and loss adjustment expenses increased to $518.9 million at
December 31, 2003 from $516.0 million
36
at December 31, 2002. The increase of $2.9 million was primarily attributable to
increases in the ocean marine and other liability lines as a result of increased
writings; however, offset by declines in unpaid losses in the aircraft line of
business.
Prepaid reinsurance premiums of $20.9 million and reserve of unearned premiums
of $61.8 million as of December 31, 2003 increased from $ 6.4 million and $ 45.4
million, respectively in the 2002 year end balances primarily due to increases
in both ceded and gross writings in the ocean marine and other liability lines
of business.
Ceded reinsurance payable increased to $25.8 million at December 31, 2003 from
$19.7 million at December 31, 2002 as a result of the timing of reinsurance
payments.
Liquidity and Capital Resources
The Company monitors cash and short-term investments in order to have an
adequate level of funds available to satisfy claims and expenses as they become
due. As of December 31, 2004, the Company's assets included approximately $310
million in cash and short-term investments. The amount of short-term investments
held is a direct result of the Company's concern over the prospects of rising
interest rates in the near future. In February 2005, the Company purchased
approximately $237 million in treasury notes with a one year maturity date.
The primary sources of the Company's liquidity are funds generated from
insurance premiums, investment income and maturing or liquidating investments.
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
used part of the net proceeds from the sale of the senior notes to purchase from
certain of its shareholders a total of 1,092,735 shares of common stock at
$24.80 per share. The Company is using the remaining net proceeds for working
capital and other general corporate purposes. The Company may also deploy the
net proceeds for acquisitions, although the Company has no agreement with
respect to any acquisition. We do, however, 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 $66.3 million and $12.1 million
for the year ended December 31, 2004 and 2003, respectively. Sources of cash
flows of $44.0 million in 2004 resulted from decreases in the Company's trading
portfolio. Cash of $61.7 million was used in 2003 to establish the Company's
trading portfolio, whose trading activities included collateralized debt
obligations and certain other fixed maturity securities. As the Company
commenced its trading portfolio in 2003, any securities purchased by the Company
would be reflected as a use of cash from operating activities and any securities
sold would be reflected as a source of cash from operating activities. In
addition, cash flows in 2003 reflected larger amounts received from collections
of both reinsurance and premium and other receivables than in 2004. Paid losses
were lower in 2003 than in 2004, reflecting the commutation of approximately
$27.5 million of certain ceded loss reserves.
Cash flows from operating activities in 2002 amounted to $66.2 million resulting
primarily from increases in premiums. Cash flows in 2002 reflected significant
amounts received from aircraft premiums as a result of premium surcharges for
terrorism coverage. A substantial portion of such cash flows provided from
operating activities was
37
then used in investing activities to purchase fixed maturities. Further
increasing cash flows in 2002 was the commutation of ceded loss reserves that
contributed approximately $19.3 million to cash flows. The Company's loss
payments on asbestos/environmental business, however, adversely affected cash
flows during the past three years.
In 2002, the Company entered into a credit agreement with an unaffiliated
company. The agreement combined the Company's then existing credit agreements
together with a facility to fund future cash draw downs on the letters of credit
issued on behalf of the Company to fund losses in MMO London. During 2002, the
remaining balance of the letters of credit issued on behalf of the Company was
fully drawn down (approximately $15.7 million) and such payments were funded
entirely under the credit agreement. Approximately $17.4 million of the loan
balance was repaid in 2002 from cash derived from operating activities. On
February 7, 2003, the Company repaid its entire outstanding loan balance to the
bank following the sale of equity to Conning Capital Partners VI, L.P.
("Conning") on January 31, 2003. In this transaction, Conning acquired 400,000
investment units from the Company, each unit consisting of one share of the
Company's common stock and an option to purchase an additional share of common
stock from the Company. Conning paid $21.00 per unit resulting in $8.4 million
in proceeds to the Company. The option exercise price is based on a formula
contained in the Option Certificate (which was attached as an exhibit to the
Company's current report on Form 8-K filed on February 4, 2003). The Company
used common stock held in treasury to effect the transaction with Conning. As of
December 31, 2004, there were no outstanding balances open on letter of credit
agreements.
Under the Common Stock Repurchase Plan, the Company may purchase up to
$55,000,000 of the Company's issued and outstanding shares of common stock on
the open market. The Company repurchased 98,816 shares of its common stock in
2003. During 2003, the Company also issued 400,000 treasury shares in
conjunction with the equity sale to Conning Capital Partners VI, L.P. There were
no repurchases of common stock during 2004 and 2002.
In a transaction separate from its common stock repurchase plan, on January 7,
2005 the Company purchased from certain of its shareholders a total of 1,092,735
shares of common stock at $24.80 per share. The selling shareholders were Mark
W. Blackman, a son of the Company's founder who served on our board of directors
from 1979 until May 2004 and who is currently the Company's Chief Underwriting
Officer (54,530 shares), his wife (50,000 shares), and two trusts for the
benefit of their children (110,000 shares); Lionshead Investments, LLC, a
company controlled by John N. Blackman, Jr., also a son of the Company's founder
who served on our board of directors from 1975 until May 2004 (495,030 shares),
two of his children (67,664 shares), a trust for the benefit of a third child
(25,158 shares), and a family trust (25,000 shares); and, two trusts and a
foundation established by Louise B. Tollefson, the former wife of the Company's
founder (265,353 shares). Robert G. Simses, a director of NYMAGIC INC., is a
trustee of the last mentioned entities.
As a result of the share purchase, the Company's outstanding shares were reduced
from 9,781,098 shares to 8,688,363 shares, of which 2,470,262 shares are
beneficially owned by the Company's founder's family, and of these shares
1,800,000 shares are subject to the option of Mariner Partners, Inc., and
100,000 shares are subject to the option of Conning Capital Partners.
On December 30, 2002, the Company signed a sublease at 919 Third Avenue, New
York, NY 10022 for which it received landlord's consent dated January 31, 2003,
for approximately 28,000 square feet for its principal offices in New York. The
sublease commenced on March 1, 2003 and expires on July 30, 2016. The minimum
monthly rental payments of $102,794 commenced in March 2004 and end in 2016 and
will amount to $15.3 million of total rental payments over the term of the
sublease.
Specific related party transactions and their impact on results of operations
are disclosed in Note 16 of the Company's financial statements.
The Company adheres to investment guidelines set by management and approved by
the Finance Committee of the Board of Directors. See "Investment Policy."
NYMAGIC's principal source of cash flow is dividends from its insurance company
subsidiaries, which are then used to fund various operating expenses, including
interest expense, loan repayments and the payment of any dividends to
shareholders. The Company's domestic insurance company subsidiaries are limited
by statute in the amount of dividends that may be declared or paid during a
year. The limitation restricts dividends paid or declared to the lower of 10% of
policyholders' surplus or 100% of adjusted net investment income as defined
under New York Insurance Law. Within this limitation, the maximum amount which
could be paid to the Company out of the domestic insurance companies' surplus
was approximately $14.7 million as of December 31, 2004. In connection with the
application for approval of acquisition of control of NYMAGIC, INC., filed by
Mariner and William J.
38
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
did not have a material impact on the Company's ability to meet current cash
obligations during this two year period.
During 2003 and 2004, New York Marine requested and received approval from the
State of New York Insurance Department to pay extraordinary dividends of
$5,000,000 and $15,000,000, respectively, to the Company. New York Marine and
Gotham collectively paid ordinary dividends of $4,575,000 and $500,000 in 2003
and 2004, respectively.
On February 26, 2004, the Company declared a dividend of six 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 cents per share to shareholders of
record on June 30, 2004, payable on July 6, 2004. On September 15, 2004, the
Company declared a dividend of six cents per share to shareholders of record on
September 30, 2004, payable on October 6, 2004. On December 2, 2004, the Company
declared a dividend of six cents per share to shareholders of record on December
31, 2004, payable on January 6, 2005. On March 12, 2003, the Company declared a
dividend of six cents per share to shareholders of record on March 31, 2003,
payable on April 8, 2003. On June 12, 2003, the Company declared a dividend of
six cents per share to shareholders of record on June 30, 2003, payable on July
8, 2003. On September 17, 2003, the Company declared a dividend of six cents per
share to shareholders of record on December 31, 2003, payable on October 7,
2003. On December 17, 2003, the Company declared a dividend of six cents per
share to shareholders of record on December 31, 2003, payable on January 8,
2004. The Company did not declare or pay a dividend at any time during 2002.
During 2004, the Company granted options to a new director to purchase 10,000
shares of the Company's common stock. During 2003, the Company granted options
to purchase 20,000 shares of the Company's common stock to certain directors of
the Company, who are not officers of the Company. During 2002, the Company
granted options to directors, officers and employees to purchase a total of
463,000 shares of the Company's common stock. The exercise prices of these stock
options are equal to the closing prices of the Company's stock on the New York
Stock Exchange on the dates of the underlying stock grants.
Under the Amended and Restated 2004 Long-Term Incentive Plan, the Company
granted 14,100 shares of common stock to certain officers and directors of the
Company in 2004 for a total compensation expense of approximately $369,000. The
Company also granted 8,557 deferred share units to certain directors in 2004 for
a total expense of approximately $185,000.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements other than disclosed herein.
Contractual Obligations
The following table presents the Company's contractual obligations as of
December 31, 2004:
Payments Due by Period
Total Less Than 1-3 Years 3-5 Years More Than
1 Year 5 Years
(in thousands)
Long-term debt obligations $ 100,000 --- --- --- $ 100,000
Interest on debt obligations 61,750 6,500 13,000 13,000 29,250
Losses and loss expenses(1) 503,261 113,133 148,864 67,027 174,237
Operating lease obligations 14,602 1,299 2,586 2,567 8,150
Funding commitment(2) 4,350 4,350 -- -- --
-------- -------- ------- ------ -------
Total $ 683,963 125,282 164,450 82,594 311,637
========= ======== ======= ======= =======
(1) Represents an estimated payout based upon historical paid loss
development patterns.
(2) Commitment to provide capital to Tiptree.
39
Critical accounting policies
The Company discloses significant accounting policies in the notes to its
financial statements. Management considers certain accounting policies to be
critical for the understanding of the Company's financial statements. Such
policies require significant management judgment and the resulting estimates
have a material effect on reported results and will vary to the extent that
future events affect such estimates and cause them to differ from the estimates
provided currently. These critical accounting policies include unpaid losses and
loss adjustment expenses, allowance for doubtful accounts, impairment of
investments and stock compensation.
Unpaid losses and loss adjustment expenses are based on individual case
estimates for losses reported. A provision is also included, based on actuarial
estimates utilizing historical trends in the frequency and severity of paid and
reported claims, for losses incurred but not reported, salvage and subrogation
recoveries and for loss adjustment expenses. Unpaid losses with respect to
asbestos/environmental risks are difficult for management to estimate and
require considerable judgment due to the uncertainty regarding the significant
issues surrounding such claims. For a further discussion concerning
asbestos/environmental reserves see "Reserves." Unpaid losses and loss
adjustment expenses amounted to $503.3 million and $518.9 million at December
31, 2004 and 2003, respectively. Unpaid losses and loss adjustment expenses, net
of reinsurance amounted to $255.5 million and $242.3 million at December 31,
2004 and 2003, respectively. Management believes that both the gross and net
unpaid loss reserve estimates as of December 31, 2004 have been reasonably
estimated as reserves originally reported as of December 31, 2003 and 2002 have
been considered adequate based upon loss development through December 31, 2004.
Management continually reviews and updates the estimates for unpaid losses and
any changes resulting therefrom are reflected in operating results currently.
The potential for future adverse or favorable loss development is highly
uncertain and subject to a variety of factors including, but not limited to,
court decisions, legislative actions and inflation.
The allowance for doubtful accounts is based on management's review of amounts
due from insolvent or financially impaired companies. Allowances are estimated
for both premium receivables and reinsurance receivables. Management continually
reviews and updates such estimates for any changes in the financial status of
companies. For a further discussion concerning reinsurance receivables see
"Reinsurance Ceded." The allowance for doubtful accounts on reinsurance
receivables amounted to $12.4 million and $12.8 million at December 31, 2004 and
2003, respectively. The allowance for doubtful accounts on premiums and other
receivables amounted to $450,000 as of December 31, 2004 and 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 at least 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. As a result of this review, 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 at least 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. In addition to subjecting its securities to the
objective tests of percent declines in fair value and downgrades by major rating
agencies, when it determines whether declines in the fair value of its
securities are other than temporary, the Company also considers the facts and
circumstances that may have caused the declines in the value of such securities.
As to any specific security, it may consider general market conditions, changes
in interest rates, adverse changes in the regulatory environment of the issuer,
the duration for which the Company expects to hold the security and the length
of any forecasted recovery. Approximately $124,000 and $0 were charged to
results from operations for 2004 and 2003, respectively, resulting from fair
value declines considered to be other-than-temporary. Gross unrealized gains and
losses on fixed maturity investments available for sale amounted to
approximately $1.6 million and $.4 million, respectively, at December 31, 2004.
As of December 31, 2004, there were unrealized losses greater than one year from
the date of purchase on fixed income securities available for sale amounting to
$233,780. There were no unrealized gains or losses on equity securities at
December 31, 2004 and 2003, respectively.
The Company utilizes the equity method of accounting to account for its limited
partnership hedge fund
40
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 before investment fees derived from
investments in limited partnerships amounted to $7.7 million and $8.5 million
for the years ended December 31, 2004 and 2003, respectively. See Item 7A
"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 December 31, 2004 primarily
consisting of collateralized debt obligations (CDOs), although certain other
types of investments were included by the Company within the trading portfolio
during 2004. 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 $13.4 million and $12.9 million in net
trading portfolio income before investment fees for the years ended December 31,
2004 and 2003, respectively. See Item 7A "Quantitative and Qualitative
Disclosures About Market Risk" with respect to market risks associated with
investments in CDOs.
Effective January 1, 2003, the Company adopted the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
("SFAS 123"), prospectively to all employee awards granted, modified, or settled
after January 1, 2003. Stock compensation expense recorded in 2004 and 2003
amounted to $589,000 and $17,000, respectively.
Effect of recent accounting pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"), which
requires an enterprise to assess whether consolidation of an entity is
appropriate based upon its interests in a variable interest entity ("VIE"). A
VIE is an entity in which the equity investors do not have the characteristics
of a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. The initial determination of whether an entity is a
VIE shall be made on the date at which an enterprise becomes involved with the
entity. An enterprise shall consolidate a VIE if it has a variable interest that
will absorb a majority of the VIEs expected losses if they occur, receive a
majority of the entity's expected residual returns if they occur, or both. FIN
46 was effective immediately for new VIEs established or purchased subsequent to
January 31, 2003.
In December 2003, the FASB issued a revised version of FIN 46 ("FIN 46R"), which
incorporates a number of modifications and changes made to the original version.
FIN 46R replaces the previously issued FIN 46 and, subject to certain special
provisions, was effective no later than the end of the first reporting period
that ended 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. 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 provided 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 was effective for
reporting periods beginning after June 15, 2004. In September 2004, the guidance
contained within some of the paragraphs in EITF 03-1 were delayed by FSP EITF
Issue 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments," until new guidance is issued. The Company believes the adoption of
this guidance will not have a material impact on results of operations or
financial condition. (For further discussion, see disclosures in Note 2.)
Statement of Financial Accounting Standards No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure" ("SFAS 148"), was issued by the
Financial Accounting Standards Board ("FASB") in December 2002. SFAS 148
provides alternative methods of transition for a company that voluntarily
changes its method of accounting for stock based employee compensation to the
fair value method. SFAS 148 also requires additional disclosures in both annual
and interim financial statements about the method of accounting for stock based
employee compensation and its effect on reported results. SFAS 148 is effective
for interim periods beginning after December 15, 2002. The Company has adopted
the appropriate disclosures under SFAS 148.
Effective December 2004, the FASB issued SFAS 123 (revised 2004), Share Based
Payment. This Statement is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. This Statement supersedes APB
41
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS 123 (revised 2004) is not likely to have a
material impact on the Company's results of operations or financial condition
since the Company previously adopted the fair value recognition provisions of
SFAS 123.
Impact of Inflation
Periods of inflation have prompted the pools, and consequently the Company, to
react quickly to actual or potential imbalances between costs, including claim
expenses, and premium rates. These imbalances have been corrected mainly through
improved underwriting controls, responsive management information systems and
frequent review of premium rates and loss experience.
Inflation also affects the final settlement costs of claims, which may not be
paid for several years. The longer a claim takes to settle, the more significant
the impact of inflation on final settlement costs. The Company periodically
reviews outstanding claims and adjusts reserves for the pools based on a number
of factors, including inflation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Market risk includes the potential for future losses due to changes in the fair
value of financial instruments, which relates mainly to the Company's investment
portfolio. Those risks associated with the investment portfolio include the
effects of exposure to adverse changes in interest rates, credit quality, hedge
fund and CDO investments.
The largest market risk to the Company is interest rate risk. Interest rate risk
includes the changes in the fair value of fixed maturities based upon changes in
interest rates. The Company considers interest rate risk and the overall
duration of the Company's loss reserves in evaluating the Company's investment
portfolio.
The following tabular presentation outlines the expected cash flows of fixed
maturities available for sale for each of the next five years and the aggregate
cash flows expected for the remaining years thereafter based upon maturity
dates. Fixed maturities include taxable and tax-exempt securities with
applicable weighted average interest rates.
Future cash flows of expected principal amounts
-----------------------------------------------
(Dollars in millions)
Total Total
There- Amortized Fair
Fixed maturities 2005 2006 2007 2008 2009 after Cost Value
- ------------------ ---- ---- ---- ---- ---- ----- ---- -----
Tax-exempts $ 8 --- --- --- --- --- $ 8 $ 8
Average interest rate 2.2% --- --- --- --- --- --- ---
Taxables $ 13 $26 $17 $24 $13 $11 $104 $105
Average interest rate 7.0% 6.6% 6.1% 5.6% 4.8% 5.5% --- ---
------------------------------------------------------------------------------------------
Total $ 21 $26 $17 $24 $13 $11 $112 $113
Credit quality risk includes the risk of default by issuers of debt securities.
As of December 31, 2004, 92% of the fair value of the Company's fixed income and
short term investment portfolios were considered investment grade. As of
December 31, 2004, the Company invested approximately $34.6 million in fixed
maturities that are below investment grade, with a concentration in investments
rated "BB+" by Standard and Poor's. The Company seeks to mitigate market risk
associated with such investments by maintaining a diversified portfolio of such
securities that limits the concentration of investment in any one issuer. The
largest single investment made by the Company in such securities amounted to 5%
of the total amount invested in below investment grade securities.
Hedge fund risk includes the potential loss from the diminution in the value of
the underlying investment of the hedge fund. Hedge fund investments are subject
to various economic and market risks. The risks associated with hedge fund
investments may be substantially greater than the risks associated with fixed
income investments. Consequently, our hedge fund portfolio may be more volatile,
and the risk of loss greater, than that associated with fixed income
investments. As the Company invests a greater percentage of its investment
portfolio in limited partnership hedge funds, there may also be a greater
volatility associated with the Company's investment income. Each of the
insurance company subsidiaries has revised its investment policy and now limits
the amount of hedge fund investments to the greater of 30% of invested assets or
50% of policyholders' surplus.
The Company also seeks to mitigate market risk associated with its investments
in hedge funds by maintaining a
42
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 Tiptree, the Company
cannot withdraw funds for a minimum period of three years without the consent of
the hedge fund manager.
The Company invests in CDOs, which are private placements. The fair value of
each security is provided by securities dealers. The markets for these types of
securities can be illiquid and, therefore, the price obtained from dealers on
these securities is subject to change, depending upon the underlying market
conditions of these securities, including the potential for downgrades or
defaults on the underlying collateral of the security. The Company seeks to
mitigate market risk associated with such investments by maintaining a
diversified portfolio of such securities that limits the concentration of
investment in any one issuer. The excess of fair value over the cost of the CDOs
was recorded in net investment income and amounted to $457,000 at December 31,
2004. The largest single investment made by the Company in such securities
amounted to $6.7 million. The total amount invested in CDOs as of December 31,
2004 was $17.8 million.
The Company maintains an investment in a limited partnership hedge fund,
(Tiptree), that invests in CDOs, Credit Related Structured Product (CRS)
securities and other structured product securities that are structured, managed
or advised by a Mariner affiliated company. This investment is consolidated in
the Company's financial statements. CDOs and CRSs are purchased by various
broker dealers. Such purchases are then repackaged and sold to investors within
a relatively short time period, normally within a few months. Tiptree earns a
fee for servicing these arrangements and provides a margin account as collateral
to secure the credit risk of the purchases made by the dealers under these
agreements. Tiptree has provided $7.5 million in cash as of December 31, 2004 to
secure any purchases made by the dealers. Tiptree does not share in the gains or
losses on investments held by the dealer. Management expects that only under a
remote circumstance would the margin account by drawn by the dealer to secure
losses. Many of the securities purchased are investment grade floating rate
securities and large unrealized losses are not normally expected to occur. The
Company seeks to mitigate market risk associated with such investments by
concentrating on investment grade, floating rate securities with the risk of
loss being limited to the cash held in the margin accounts.
The Company monitors market risks on a regular basis through meetings with
Mariner, examining the existing portfolio and reviewing potential changes in
investment guidelines, the overall effect of which is to allow management to
make informed decisions concerning the impact that market risks have on the
Company's investments.
Item 8. Financial Statements and Supplementary Data
Interested persons can obtain access to the Company's annual reports on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K on its
corporate web site, www.nymagic.com, as soon as reasonably practicable after
they are filed or furnished to the SEC.
The consolidated financial statements required by this item and the report of
the independent accountants therein required by Item 15(a) of this report
commence on page F-2. See accompanying Index to the Consolidated Financial
Statements on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our
"disclosure controls and procedures" (as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934, as amended, as of the end of the period covered
by this annual report on Form 10-K was made under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer. Based upon this evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures (a)
43
are effective to ensure that information required to be disclosed by us in
reports filed or submitted under the Securities Exchange Act 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 Exchange Act is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
Management's Report on Internal Control over Financial Reporting, which appears
on page F-2, is incorporated herein by reference.
Changes in Internal Controls
There have been no significant changes in our "internal control over financial
reporting" (as defined in rule 13a-15(f)) that occurred during the period
covered by this report that has materially affected or is reasonably likely to
materially affect our internal control over financial reporting.
Item 9B. Other Information
None.
44
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated herein by reference from
the sections captioned "Election of Directors," "Nominees for Directors,"
"Executive Officers of the Company" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in NYMAGIC's definitive proxy statement for the 2005
Annual Meeting of Shareholders to be filed within 120 days after December 31,
2004.
On June 8, 2004 we filed with the New York Stock Exchange ("NYSE") the Annual
CEO Certification regarding the Company's compliance with the NYSE's Corporate
Governance listing standards as required by Section 303A-12(a) of the NYSE
Listed Company Manual. In addition, the Company has filed as exhibits to this
annual report and to the annual report on Form 10-K for the year ended December
31, 2003, the applicable certifications of its Chief Executive Officer and its
Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of
2002, regarding the quality of the Company's public disclosures.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference from
the sections captioned "Compensation of Directors" and "Compensation of
Executive Officers" in NYMAGIC's definitive proxy statement for the 2005 Annual
Meeting of Shareholders to be filed within 120 days after December 31, 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated herein by reference from
the sections captioned "Security Ownership of Certain Beneficial Owners,"
"Security Ownership of Management," "Changes in Control" and "Equity
Compensation Plans" in NYMAGIC's definitive proxy statement for the 2005 Annual
Meeting of Shareholders to be filed within 120 days after December 31, 2004.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by reference from
the section captioned "Certain Relationships and Related Transactions" in
NYMAGIC's Proxy Statement for the 2005 Annual Meeting of Shareholders to be
filed within 120 days after December 31, 2004.
Item 14. Principal Accounting Fees and Services
The information required by Item 9(e) of Schedule 14A is incorporated herein by
reference to the Company's definitive proxy statement to be filed not later than
April 30, 2005 with the Securities and Exchange Commission pursuant to
Regulation 14A of the Exchange Act.
45
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) 1. Financial Statements
The list of financial statements appears in the accompanying index
on page F-1.
2. Financial Statement Schedules
The list of financial statement schedules appears in the
accompanying index on page F-1.
3. Exhibits
3.1 Charter of NYMAGIC, INC. (Filed as Exhibit 99.1 to the Registrant's
Current Report on Form 8-K filed on December 16, 2003 (Commission
File No. 1-11238) and incorporated herein by reference).
3.2 Amended and Restated By-Laws. (Filed as Exhibit 3.3 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (Commission File No. 1-11238) and incorporated
herein by reference).
4.0 Specimen Certificate of common stock (Filed as Exhibit 4.0 of
Amendment No. 2 to the Registrant's Registration Statement No.
33-27665) and incorporated herein by reference).
+10.1 Restated Management Agreement dated as of January 1, 1986, by and
among Mutual Marine Office, Inc. and Arkwright-Boston Manufacturers
Mutual Insurance Company, Utica Mutual Insurance Company, Lumber
Mutual Insurance Company, the Registrant and Pennsylvania National
Mutual Casualty Insurance Company (Filed as Exhibit 10.2 of the the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1986 (Commission File No. 2- 88552)and incorporated
herein by reference).
+10.2 Amendment No. 2 to the Restated Management Agreement, dated as of
December 30, 1988, by and among Mutual Marine Office, Inc. and
Arkwright Mutual Insurance Company, Utica Mutual Insurance Company,
Lumber Mutual Insurance Company, the Registrant and Pennsylvania
National Mutual Casualty Insurance Company (Filed as Exhibit
10.2.2. of the Registrant's Current Report on Form 8-K dated
January 6, 1989 (Commission File No. 2-88552) and incorporated
herein by reference).
+10.3 Amendment No. 3 to the Restated Management Agreement, dated as of
December 31, 1990 by and among Mutual Marine Office, Inc. and
Arkwright Mutual Insurance Company, Utica Mutual Insurance Company,
the Registrant and Pennsylvania National Mutual Casualty Insurance
Company (Filed as Exhibit 10.2.3. of the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1990
(Commission File No. 3-27665) and incorporated herein by
reference).
+10.4 Restated Management Agreement dated as of January 1, 1986, by and
among Mutual Inland Marine Office, Inc. and Arkwright-Boston
Manufacturers Mutual Insurance Company, Utica Mutual Insurance
Company, Lumber Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company (Filed as
Exhibit 10.4 of the the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1986 (Commission File No. 2-
88552)and incorporated herein by reference).
+10.5 Amendment No. 2 to the Restated Management Agreement, dated as of
December 30, 1988, by and among Mutual Inland Marine Office, Inc.
and Arkwright Mutual Insurance Company, Utica Mutual Insurance
Company, Lumber Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company (Filed as
Exhibit 10.4.2 of the Registrant's Current Report on Form 8-K,
dated January 6, 1989 (Commission File No. 2-88552) and
incorporated herein by reference).
+10.6 Amendment No. 3 to the Restated Management Agreement, dated as of
December 31, 1990, by and among Mutual Inland Marine Office, Inc.
and Arkwright Mutual Insurance Company, Utica Mutual Insurance
Company, the Registrant and Pennsylvania National Mutual Casualty
Insurance Company (Filed as Exhibit 10.4.3. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1990 (Commission File No. 3-27665) and incorporated herein by
reference).
+10.7 Restated Management Agreement dated as of January 1, 1986, by and
among Mutual Marine Office of the Midwest, Inc. and
Arkwright-Boston Manufacturers Mutual Insurance Company, Utica
Mutual Insurance Company, Lumber Mutual Insurance Company, the
Registrant and Pennsylvania National Mutual Casualty Insurance
Company (Filed as Exhibit 10.6 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1986 (Commission
File No. 2-88552) and incorporated herein by reference).
+10.8 Amendment No. 2 to the Restated Management Agreement dated as of
December 30, 1988, by and among Mutual Marine Office of the
Midwest, Inc. and Arkwright Mutual Insurance Company, Utica Mutual
Insurance Company, Lumber Mutual Insurance Company, the Registrant
and Pennsylvania National Mutual Casualty Insurance Company (Filed
as Exhibit 10.6.2 of the Registrant's Current Report on Form 8-K,
dated January 6, 1989 (Commission File No. 2-88552) and
incorporated herein by reference).
+10.9 Amendment No. 3 to the Restated Management Agreement dated as of
December 31, 1990, by and among Mutual Marine Office of the
Midwest, Inc. and Arkwright Mutual Insurance Company, Utica Mutual
Insurance Company, the Registrant and Pennsylvania National Mutual
Casualty Insurance Company (Filed as Exhibit 10.6.3. of the the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990 (Commission File No. 3- 27665) and incorporated
herein by reference).
46
+10.10 Restated Management Agreement dated as of January 1, 1986, by and
among Pacific Mutual Marine Office, Inc. and Arkwright-Boston
Manufacturers Mutual Insurance Company, Lumber Mutual Insurance
Company, Utica Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company (Filed as
Exhibit 10.8 of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986 (Commission File No. 2-
88552)and incorporated herein by reference).
+10.11 Amendment No. 2 to the Restated Management Agreement dated as of
December 30, 1988, by and among Pacific Mutual Marine Office, Inc.
and Arkwright Mutual Insurance Company, Lumber Mutual Insurance
Company, Utica Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company (Filed as
Exhibit 10.8.2 of the Registrant's Current Report on Form 8-K,
dated January 6, 1989 (Commission File No. 2-88552) and
incorporated herein by reference).
+10.12 Amendment to Restated Management Agreement dated as of December 31,
1990, by and among Pacific Mutual Marine Office, Inc. and Arkwright
Mutual Insurance Company, Utica Mutual Insurance Company, the
Registrant and Pennsylvania National Mutual Casualty Insurance
Company (Filed as Exhibit 10.8.3. of the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1992
(Commission File No. 1-11238) and incorporated herein by
reference).
+10.13 1991 Stock Option Plan (Filed as Exhibit A to the Registrant's
Proxy Statement for its 1991 Annual Meeting of Shareholders
(Commission File No. 1-11238) and incorporated herein by
reference).
10.14 Form of Indemnification Agreement (Filed as Exhibit 10.10 of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (Commission File No. 1-11238) and incorporated
herein by reference).
+10.15 1999 NYMAGIC, INC. Phantom Stock Plan (Filed as Exhibit 10.11 of
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 (Commission File No. 1-11238) and
incorporated herein by reference).
+10.16 Severance Agreement dated as of December 31, 2001 by and between
NYMAGIC, INC. and Thomas J. Iacopelli (Filed as Exhibit 10.2 of the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002 (Commission File No. 1-11238) and incorporated herein
by reference).
+10.17 Severance Agreement dated as of July 9, 2002 by and between
NYMAGIC, INC. and Paul Hart. Filed as Exhibit 10.17 of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2003 (Commission File No. 1- 11238) and incorporated herein by
reference.
+10.18 NYMAGIC, INC. 2002 Nonqualified Stock Option Plan (Filed as Exhibit
10.2 of the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002 (Commission File No. 1-11238) and
incorporated herein by reference).
*+10.19 NYMAGIC, INC. Amended and Restated 2004 Long-Term Incentive Plan.
+10.20 NYMAGIC, INC. Employee Stock Purchase Plan (Filed as Appendix C to
the Registrant's Proxy Statement for its 2004 Annual Meeting of
Stockholders (Commission File No. 1-11238) and incorporated herein
by reference).
*+10.21 Forms of Election for Deferred Compensation Program.
10.22 Voting Agreement among Mariner Partners, Inc. and certain
stockholders of the Company dated as of February 20, 2002, as
amended March 1, 2002 (Filed as Exhibit 99.1 to the Schedule 13D
filed by Mariner Partners, Inc. and the other reporting persons
named therein on March 4, 2002 (Commission File No. 5-40907) and
incorporated herein by reference).
10.23 Amendment No. 2 dated as of January 27, 2003 to Voting Agreement
among Mariner Partners, Inc. and certain stockholders of the
Company (Filed as Exhibit 99.2 to the Schedule 13D/A filed by
Mariner Partners, Inc. and the other reporting persons named
therein on April 10, 2003 (Commission File No. 5-40907) and
incorporated herein by reference).
10.24 Amendment No. 3 dated as of March 12, 2003 to Voting Agreement
among Mariner Partners, Inc. and certain stockholders of the
Company (Filed as Exhibit 99.3 to the Schedule 13D/A filed by
Mariner Partners, Inc. and the other reporting person named therein
on April 10, 2003 (Commission File No. 5-40907) and incorporated
herein by reference).
10.25 Amendment No. 4 dated as of February 24, 2004 to Voting Agreement
among Mariner Partners, Inc. and certain stockholders of the
Company. (Filed as Exhibit 10.22 of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2003 (Commission File
No. 1-11238) and incorporated herein by reference).
10.26 Resolutions of the Board of Directors of the Company's subsidiary,
New York Marine And General Insurance Company, adopted July 18,
2002, committing not to pay dividends to the Company without the
consent of the New York State Department of Insurance prior to July
31, 2004 (Filed as Exhibit 10.1 to the Registrant's original Form
10-Q for the quarter ended June 30, 2003 (Commission File No.
1-11238) and incorporated herein by reference).
10.27 Resolutions of the Board of Directors of the Company's subsidiary,
Gotham Insurance Company, adopted July 18, 2002, committing not to
pay dividends to the Company without the consent of the New York
State Department of Insurance prior to July 31, 2004 (Filed as
Exhibit 10.2 to the Registrant's original Form 10-Q for the quarter
ended June 30, 2003 (Commission File No. 1-11238) and incorporated
herein by reference).
10.28 Amended and Restated Investment Management Agreement between
Mariner Partners, Inc. and NYMAGIC, Inc. and New York Marine And
General Insurance Company and Gotham Insurance Company, dated as of
December 6, 2002 (Filed as Exhibit 10.6 of the Registrant's amended
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003
(Commission File No. 1-11238) and incorporated herein by
reference).
47
10.29 Limited Partnership Agreement of Mariner Tiptree (CDO) Fund I, L.P.
dated as of May 1, 2003 (Filed as Exhibit 10.1 of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 20, 2004
(Commission File No. 1-11238) and incorporated herein by
reference).
10.30 Securities Purchase Agreement dated as of January 31, 2003 by and
between NYMAGIC, Inc. and Conning Capital Partners VI, L.P. (Filed
as Exhibit 99.1 of the Registrant's Current Report on Form 8-K
dated January 31, 2003 (Commission File No. 1-11238) and
incorporated herein by reference).
10.31 Registration Rights Agreement dated as of January 31, 2003 by and
between NYMAGIC, Inc. and Conning Capital Partners VI, L.P. (Filed
as Exhibit 99.2 of the Registrant's Current Report on Form 8-K
dated January 31, 2003 (Commission File No. 1-11238) and
incorporated herein by reference).
10.32 Option Certificate dated as of January 31, 2003 by and between
NYMAGIC, INC. and Conning Capital Partners VI, L.P. (Filed as
Exhibit 99.3 of the Registrant's Current Report on Form 8-K dated
January 31, 2003 (Commission File No. 1-11238) and incorporated
herein by reference).
10.33 Registration Rights Agreement dated as of March 11, 2004 by and
among NYMAGIC, INC. and Keefe, Bruyette and Woods, Inc. and the
other initial purchasers referred to therein. (Filed as Exhibit
10.31 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2003 (Commission File No. 1-11238) and
incorporated herein by reference).
10.34 Indenture dated as of March 11, 2004 by and between NYMAGIC, INC.
and Wilmington Trust Company, as trustee related to the Company's
6.50% Senior Notes due 2014. (Filed as Exhibit 10.32 of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2003 (Commission File No. 1-11238) and incorporated herein by
reference).
10.35 First Supplemental Indenture dated as of March 11, 2004 by and
between NYMAGIC, INC. and Wilmington Trust Company, as trustee.
(Filed as Exhibit 10.33 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 2003 (Commission File No.
1-11238) and incorporated herein by reference).
10.36 Sublease dated as of December 12, 2002 by and between BNP Paribas
and New York Marine And General Insurance Company (Filed as Exhibit
10.20 of the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002 (Commission File No. 1-11238) and
incorporated herein by reference).
10.37 Stock Purchase Agreement, dated as of January 7, 2005, by and among
the Company and the sellers named therein (Filed as Exhibit 10.1 of
the Registrant's Current Report on Form 8-K dated January 10, 2005
(Commission File No. 1-11238) and incorporated herein by
reference).
*21.1 Subsidiaries of the Registrant.
*23.1 Consent of KPMG LLP.
*31.1 Certification of George R. Trumbull, III, Chief Executive Officer,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
*31.2 Certification of Thomas J. Iacopelli, Chief Financial Officer, as
adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
*32.1 Certification of George R. Trumbull, III, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
*32.2 Certification of Thomas J. Iacopelli, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
------------------
* Filed herewith.
+ Represents a management contract or compensatory plan or arrangement.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NYMAGIC, INC.
(Registrant)
By: /s/ George R. Trumbull, III
---------------------------
George R. Trumbull, III
Chief Executive Officer
Date: March 16, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Name Title Date
- ---- ----- ----
/s/ John R. Anderson Director March 16, 2005
- --------------------
John R. Anderson
/s/ Glenn J. Angiolillo Director March 16, 2005
- -----------------------
Glenn J. Angiolillo
/s/ John T. Baily Director March 16, 2005
- -----------------
John T. Baily
/s/ David E. Hoffman Director March 16, 2005
- --------------------
David E. Hoffman
/s/ William J. Michaelcheck Director March 16, 2005
- ---------------------------
William J. Michaelcheck
/s/ William D. Shaw, Jr. Director March 16, 2005
- ------------------------
William D. Shaw, Jr.
/s/ Robert G. Simses Director March 16, 2005
- --------------------
Robert G. Simses
/s/ George R. Trumbull, III Director, Chairman and March 16, 2005
- --------------------------- Chief Executive Officer
George R. Trumbull, III
/s/ David W. Young Director March 16, 2005
- ------------------
David W. Young
/s/ Thomas J. Iacopelli Principal Accounting Officer March 16, 2005
- ----------------------- and Chief Financial Officer
Thomas J. Iacopelli
49
NYMAGIC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management's Report on Internal
Control Over Financial Reporting.................. F-2
Report of Independent Registered Public Accounting
Firm... ................................ ......... F-3
Report of Independent Registered Public Accounting
Firm................ ............................. F-4
Consolidated Balance Sheets......................... F-5
Consolidated Statements of Income................... F-6
Consolidated Statements of Shareholders' Equity..... F-7
Consolidated Statements of Cash Flows............... F-8
Notes to Consolidated Financial Statements.......... F-9
Financial Statement Schedule II..................... F-32
Financial Statement Schedule III.................... F-34
Financial Statement Schedule V...................... F-35
Financial Statement Schedule VI..................... F-36
F-1
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal
control over financial reporting, and for performing an assessment of the
effectiveness of internal control over financial reporting as of December 31,
2004. Internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. The Company's system of internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
Management performed an assessment of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004 based upon
criteria in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO"). Based on our
assessment, management determined that the Company's internal control over
financial reporting was effective as of December 31, 2004 based on the criteria
in Internal Control-Integrated Framework issued by COSO.
Our management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 has been audited by
KPMG, LLP, an independent registered public accounting firm, as stated in their
report which appears herein.
Dated: March 16, 2005
George R. Trumbull, Thomas J. Iacopelli,
Chairman and Chief Financial Officer
Chief Executive Officer
F-2
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Shareholders
NYMAGIC, INC.:
We have audited the accompanying consolidated balance sheets of NYMAGIC, INC.
and subsidiaries as of December 31, 2004 and 2003, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three-year period ended December 31, 2004. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
NYMAGIC, INC. and subsidiaries as of December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles. Also in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of NYMAGIC, INC.
and subsidiaries' internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 16, 2005 expressed an unqualified opinion on
management's assessment of, and the effective operation of, internal control
over financial reporting.
/s/ KPMG LLP
New York, New York
March 16, 2005
F-3
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Shareholders
NYMAGIC, INC.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that NYMAGIC,
INC maintained effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). NYMAGIC, INC.'s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of NYMAGIC, INC.'s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that NYMAGIC, INC. maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Also, in our opinion, NYMAGIC, INC.
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
NYMAGIC, INC. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 2004, and our report
dated March 16, 2005, expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG LLP
New York, New York
March 16, 2005
F-4
NYMAGIC, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------
2004 2003
-------------------------------
ASSETS
Investments:
Fixed maturities:
Available for sale at fair value
(amortized cost $ 111,590,805 and $92,594,971) $ 112,732,900 $ 93,470,691
Trading at fair value (cost $17,310,386 and $61,423,212) 17,767,675 61,736,951
Limited partnerships at equity
(cost $171,439,098 and $96,250,000) .................... 190,477,346 105,434,419
Short-term investments .................................... 298,039,167 257,059,675
Cash 11,855,146 1,940,541
----------- -----------
Total cash and investments ................... 630,872,234 519,642,277
----------- -----------
Accrued investment income ................................... 2,659,731 2,099,641
Receivable for securities sold .............................. 5,067,411 --
Premiums and other receivables, net ......................... 42,598,519 23,981,910
Reinsurance receivables on unpaid losses, net ............... 247,782,012 276,618,865
Reinsurance receivables on paid losses, net ................. 14,512,616 4,229,697
Deferred policy acquisition costs ........................... 13,055,297 8,245,600
Prepaid reinsurance premiums ................................ 21,378,157 20,906,056
Deferred income taxes ....................................... 7,528,757 11,772,721
Property, improvements and equipment, net ................... 5,117,609 3,937,603
Other assets ................................................ 6,521,354 3,690,715
--------- ---------
Total assets ................................. $ 997,093,697 $ 875,125,085
============= =============
LIABILITIES
Unpaid losses and loss adjustment expenses .................. $ 503,261,138 $ 518,929,558
Reserve for unearned premiums ............................... 83,088,394 61,821,283
Ceded reinsurance payable ................................... 25,462,841 25,812,895
Notes payable ............................................... 100,000,000 --
Dividends payable ........................................... 586,866 583,305
Payable for securities not yet settled ...................... -- 8,321,250
Other liabilities ........................................... 26,576,866 15,365,694
---------- ----------
Total liabilities ............................ 738,976,105 630,833,985
----------- -----------
SHAREHOLDERS' EQUITY
Common stock ................................................ 15,335,740 15,279,390
Paid-in capital ............................................. 36,781,911 35,476,566
Accumulated other comprehensive income ...................... 742,364 569,220
Retained earnings ........................................... 251,418,750 239,127,097
----------- -----------
304,278,765 290,452,273
Treasury stock, at cost, 5,554,642 shares ................... (46,161,173) (46,161,173)
----------- -----------
Total shareholders' equity ................... 258,117,592 244,291,100
----------- -----------
Total liabilities and shareholders' equity $ 997,093,697 $ 875,125,085
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
------------------------------------------------
2004 2003 2002
------------------------------------------------
Revenues:
Net premiums earned ............................ $ 116,333,254 $ 96,393,950 $ 113,457,453
Net investment income .......................... 23,678,954 22,393,704 15,820,734
Net realized investment gains .................. 677,589 549,988 8,456,003
Commission and other income .................... 2,250,902 1,458,007 1,734,888
----------------------------------------------
Total revenues ................................. 142,940,699 120,795,649 139,469,078
----------------------------------------------
Expenses:
Net losses and loss adjustment expenses incurred 66,558,048 55,715,314 73,356,338
Policy acquisition expenses .................... 25,166,397 19,430,211 18,898,550
General and administrative expenses ............ 23,246,665 19,427,784 18,372,827
Interest expense ............................... 5,352,775 25,652 575,295
----------------------------------------------
Total expenses ................................. 120,323,885 94,598,961 111,203,010
----------------------------------------------
Income before income taxes ..................... 22,616,814 26,196,688 28,266,068
Income tax provision:
Current ........................................ 3,835,416 8,987,448 (4,869,283)
Deferred ....................................... 4,150,733 116,476 4,424,857
----------------------------------------------
Total income tax expense (benefit) ............. 7,986,149 9,103,924 (444,426)
----------------------------------------------
Net income...................................... $ 14,630,665 $ 17,092,764 $ 28,710,494
==============================================
Weighted average number of shares of
common stock outstanding-basic .............. 9,736,490 9,673,323 9,277,340
----------------------------------------------
Basic earnings per share ....................... $ 1.50 $ 1.77 $ 3.09
----------------------------------------------
Weighted average number of shares of
common stock outstanding-diluted ............ 9,916,188 9,827,676 9,308,510
----------------------------------------------
Diluted earnings per share ..................... $ 1.48 $ 1.74 $ 3.08
----------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Year ended December 31,
-----------------------------------------------
2004 2003 2002
------------- ------------- -------------
Common stock:
Balance, beginning of year ..................... $ 15,279,390 $ 15,158,324 $ 15,123,658
Shares issued .................................. 56,350 121,066 34,666
------------- ------------- -------------
Balance, end of year ....................... 15,335,740 15,279,390 15,158,324
============= ============= =============
Paid-in capital:
Balance, beginning of year ..................... $ 35,476,566 $ 30,206,370 $ 29,702,414
Shares issued and other ........................ 1,305,345 5,270,196 503,956
------------- ------------- -------------
Balance, end of year........................ 36,781,911 35,476,566 30,206,370
============= ============= =============
Accumulated other comprehensive income:
Balance, beginning of year ..................... $ 569,220 $ 361,947 $ 7,930,180
Unrealized gain (loss) on securities,
net of reclassification adjustment ....... 173,144 207,273 (6,756,353)
Foreign currency translation adjustments ....... -- -- (811,880)
--------- ---------- -----------
Other comprehensive income (loss) .............. 173,144 207,273 (7,568,233)
--------- ---------- -----------
Balance, end of year........................ 742,364 569,220 361,947
========= ========== ===========
Retained earnings:
Balance, beginning of year ..................... $ 239,127,097 $ 224,364,808 $ 195,654,314
Net income ..................................... 14,630,665 17,092,764 28,710,494
Dividends declared ............................. (2,339,012) (2,330,475) --
------------- ------------- -------------
Balance, end of year........................ 251,418,750 239,127,097 224,364,808
============= ============= =============
Treasury stock, at cost:
Balance, beginning of year ..................... (46,161,173) $ (49,138,699) $ (49,138,699)
Net sale of common stock ....................... -- 2,977,526 --
------------- ------------- -------------
Balance, end of year........................ (46,161,173) (46,161,173) (49,138,699)
============= ============= =============
Total Shareholders' Equity ........................ 258,117,592 244,291,100 220,952,750
============= ============= =============
Comprehensive income:
Net income ............................... ..... $ 14,630,665 $ 17,092,764 $ 28,710,494
Other comprehensive income (loss) ........ ...... 173,144 207,273 (7,568,233)
------------- ------------- -------------
Comprehensive income .................. ..... 14,803,809 17,300,037 21,142,261
============= ============= =============
Number of Shares
----------------
Common stock, par value $1 each:
Issued, beginning of year ...................... 15,279,390 15,158,324 15,123,658
Shares Issued .................................. 56,350 121,066 34,666
-----------------------------------------------
Issued, end of year ........................ 15,335,740 15,279,390 15,158,324
-----------------------------------------------
Common stock, authorized shares,
par value $1 each .............................. 30,000,000 30,000,000 30,000,000
-----------------------------------------------
Common stock, shares outstanding, end of year ..... 9,781,098 9,724,748 9,302,498
-----------------------------------------------
Dividends declared per share ...................... $.24 $.24 $.00
-----------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
NYMAGIC, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------------------------
2004 2003 2002
-----------------------------------------------
Cash flows from operating activities:
Net income $ 14,630,665 $ 17,092,764 $ 28,710,494
------------- ------------- -------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for deferred taxes 4,150,733 116,476 4,424,857
Net realized investment gains (677,589) (549,988) (8,456,003)
Equity in earnings of limited partnerships (7,704,358) (8,548,971) (977,220)
Net bond amortization 1,266,282 710,214 1,825,473
Depreciation and other, net 664,681 518,475 410,781
Changes in:
Premiums and other receivables (18,616,609) 11,708,218 39,203,457
Reinsurance receivables paid and unpaid, net 18,553,934 45,573,778 35,326,444
Ceded reinsurance payable (350,054) 6,094,468 (7,675,269)
Accrued investment income (560,090) (1,707,692) 3,855,082
Deferred policy acquisition costs (4,809,697) (537,414) 459,477
Prepaid reinsurance premiums (472,101) (14,508,651) 12,388,670
Other assets (536,067) (1,141,142) 2,807,971
Unpaid losses and loss adjustment expenses (15,668,420) 2,927,248 (18,186,752)
Reserve for unearned premiums 21,267,111 16,421,908 (19,671,615)
Foreign currency translation adjustments -- -- (811,880)
Other liabilities 11,211,172 (348,458) (7,445,716)
Trading portfolio activities 43,969,274 (61,736,951) --
------------- ------------- -------------
Total adjustments 51,688,202 (5,008,482) 37,477,757
------------- ------------- -------------
Net cash provided by operating activities 66,318,867 12,084,282 66,188,251
------------- ------------- -------------
Cash flows from investing activities:
Fixed maturities acquired (80,380,360) (132,310,120) (121,264,193)
Equity securities acquired -- -- (47,958,228)
Limited partnerships acquired (156,400,000) (72,500,000) --
Fixed maturities sold 55,017,140 64,840,423 344,255,556
Net sale (purchase) of short-term investments (40,975,796) 99,632,096 (290,365,000)
Fixed maturities matured 5,775,000 3,820,000 7,401,141
Equity securities sold -- 4,658,759 41,820,921
Limited partnerships sold 79,061,430 14,091,597 --
Receivable for securities not yet settled (5,067,411) 1,645,152 (776,000)
Payable for securities not yet settled (8,321,250) 8,321,250 --
Acquisition of property & equipment, net (1,844,687) (3,724,672) (50,738)
------------- ------------- -------------
Net cash used in investing activities (153,135,934) (11,525,515) (66,936,541)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from stock issuance and other 1,361,695 2,176,507 538,622
Cash dividends paid to stockholders (2,335,451) (1,747,170) --
Net sale of treasury shares -- 6,192,281 --
Proceeds from borrowings 97,705,428 -- 15,719,953
Loan principal payments -- (6,219,953) (17,411,253)
------------- ------------- -------------
Net cash provided by (used in) financing activities 96,731,672 401,665 (1,152,678)
------------- ------------- -------------
Net increase (decrease) in cash 9,914,605 960,432 (1,900,968)
Cash at beginning of year 1,940,541 980,109 2,881,077
------------- ------------- -------------
Cash at end of year $ 11,855,146 $ 1,940,541 $ 980,109
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary Of Significant Accounting Policies:
Nature of operations
NYMAGIC, INC. (the "Company" or "NYMAGIC"), through its subsidiaries, has
specialized in underwriting ocean marine, inland marine/fire, other liability
and aircraft insurance through insurance pools managed by Mutual Marine Office,
Inc. ("MMO"), Pacific Mutual Marine Office, Inc. ("PMMO"), and Mutual Marine
Office of the Midwest, Inc. ("Midwest"). MMO, located in New York, PMMO located
in San Francisco, and Midwest, located in Chicago, manage the insurance pools in
which the Company's insurance subsidiaries, New York Marine And General
Insurance Company ("New York Marine") and Gotham Insurance Company ("Gotham"),
participate. All premiums, losses and expenses are prorated among pool members
in accordance with their pool participation percentages. Effective January 1,
1997 and subsequent, the Company increased to 100% its participation in the
business produced by the pools.
In 1997, the Company formed MMO EU as a holding company for MMO UK, which
operated as a limited liability corporate vehicle to provide capacity, or the
ability to underwrite a certain amount of business, for syndicates within
Lloyd's of London (Lloyd's). In 1997, the Company acquired ownership of a
Lloyd's managing agency, which was subsequently renamed MMO Underwriting Agency,
Ltd. MMO Underwriting Agency Ltd. commenced underwriting in 1998 for the
Company's wholly owned subsidiary MMO UK, which provided 100%, or $29.8 million,
of the capacity for Syndicate 1265. In 2000, the Company sold MMO Underwriting
Agency Ltd. in exchange for a minority interest in Cathedral Capital PLC and
Syndicate 1265 was placed into runoff. "Runoff" is a term used to refer to an
insurer that has ceased writing new insurance policies but that continues to
exist for the purpose of paying claims on policies that it has already written.
In 2001, MMO UK provided approximately 11.2%, or $13.6 million, of the capacity
for Syndicate 2010, which is managed by Cathedral Capital. In 2002, the Company
completed the withdrawal from its London operations and since 2002, MMO UK has
not provided capacity to any Lloyd's syndicate. Accordingly, the consolidated
financial statements reflect the interests from the syndicate operations up to
the time of the Company's withdrawal in November 2002. In January 2003, the
Company sold its minority interest in Cathedral Capital PLC for approximately
$2.8 million. This sale had no material impact on the Company's results of
operations.
MMO EU and MMO UK, including its participation interest in Syndicates 1265 and
2010, are collectively referred to as "MMO London."
The Company maintains a 100% interest in a limited partnership hedge fund,
Mariner Tiptree (CDO) Fund I, L.P. ("Tiptree"), that invests in CDO securities,
Credit Related Structured Product (CRS) securities and other structured product
securities that are structured, managed or advised by a Mariner affiliated
Company. See Note 16 "Related Party Transactions"
Basis of reporting
The consolidated financial statements have been prepared on the basis of
accounting principles generally accepted in the United States of America
("GAAP"), which differ in certain material respects from the accounting
principles prescribed or permitted by state insurance regulatory authorities for
the Company's two domestic insurance subsidiaries. The principal differences
recorded under GAAP are deferred policy acquisition costs, an allowance for
doubtful accounts, limitations on deferred income taxes, and fixed maturities
held for sale are carried at fair value.
The preparation of financial statements requires management to make estimates
that affect the reported amounts of assets, liabilities, revenues and expenses.
Actual amounts could differ from those amounts previously estimated.
Consolidation
The consolidated financial statements include the accounts of the Company, two
insurance subsidiaries, New York Marine and Gotham, and three agency
subsidiaries. MMO London's financial statements were included in the
consolidated financial statements until November 2002, the date of the Company's
withdrawal from its London
F-9
operations. Gotham is owned 25% by the Company and 75% by New York Marine.
Gotham is consolidated in the financial statements as it is a 100% indirect
subsidiary of NYMAGIC, INC. All other subsidiaries are wholly owned by NYMAGIC.
During 2003, the Company obtained a 100% interest in Tiptree whose financial
statements are included in the consolidated financial statements. All
intercompany accounts and transactions have been eliminated in consolidation.
Investments
Fixed maturities held for sale are carried at fair value and include those bonds
where the Company's intent to carry such investments to maturity may be affected
in future periods by changes in market interest rates or tax position.
Unrealized gains or losses on fixed maturities held for sale are reflected in
accumulated other comprehensive income. Fixed maturities held for trading are
carried at fair value. Trading securities are marked to market with the change
recognized in net investment income during the current period. Any realized
gains or losses resulting from the sales of such securities are also recognized
in net investment income.
Equity securities (common stocks and non-redeemable preferred stocks) are
carried at fair value. Unrealized gains or losses on equity securities are
reflected in accumulated other comprehensive income.
Short-term investments are carried at cost, which approximates fair value.
Investments in limited partnerships are reported under the equity method, which
includes the cost of the investment and the subsequent proportional share of any
partnership earnings or losses. Under the equity method, the partnership
earnings or losses are recorded as investment income. The Company's investments
in limited partnership hedge funds include interests in limited partnerships and
limited liability companies.
Realized investment gains and losses (determined on the basis of first in first
out) also include any declines in value which are considered to be
other-than-temporary. Management reviews investments for impairment based upon
quantitative and qualitative criteria that include downgrades in rating agency
levels for securities, the duration and extent of declines in fair value of the
security below its cost or amortized cost, interest rate trends, the Company's
intent to hold the security, market conditions, and the regulatory environment
for the security's issuer. Unrealized appreciation or depreciation of
investments, net of related deferred income taxes, is reflected in accumulated
other comprehensive income in shareholders' equity.
Derivatives
The Company maintained an interest rate agreement, which expired in 2002, that
was entered into for purposes of hedging interest rate risk on the Company's
note payable. Cash flows as a result of the hedge were recorded as adjustments
to interest expense. The fair value of the cash flow derivative was recorded in
other liabilities. Changes in the fair value of the derivative were recorded to
results of operations. The Company entered into a rate lock agreement that was
used to effectively hedge the Company's interest rate on its senior notes. Upon
settlement, the cost of the rate lock agreement was included in bond issuance
costs.
Premium and policy acquisition cost recognition
Premiums and policy acquisition costs are reflected in income and expense on a
monthly pro rata basis over the terms of the respective policies. Accordingly,
unearned premium reserves are established for the portion of premiums written
applicable to unexpired policies in force, and acquisition costs, consisting
mainly of net brokerage commissions and premium taxes relating to these unearned
premiums, are deferred to the extent recoverable. The Company has provided an
allowance for uncollectible premium receivables of $450,000 for each of the
periods ended December 31, 2004 and December 31, 2003. The determination of
acquisition costs to be deferred considers historical and current loss and loss
adjustment expense experience. In measuring the carrying value of deferred
policy acquisition costs consideration is also given to anticipated investment
income using interest rates of 4% and 3% in 2004 and 2003, respectively.
Revenue recognition
Management commission income on policies written by the MMO insurance pools is
recognized primarily as of the effective date of the policies issued.
Adjustments to the policies, resulting principally from changes in coverage and
audit adjustments, are recorded in the period reported.
F-10
Profit commission revenue derived from the reinsurance transactions of the
insurance pools is recognized when such amount becomes earned as provided in the
treaties to the respective reinsurers. The profit commission becomes due shortly
after the treaty expires.
Reinsurance
The Company's insurance subsidiaries participate in various reinsurance
agreements on both an assumed and ceded basis. The Company uses various types of
reinsurance, including quota share, excess of loss and facultative agreements,
to spread the risk of loss among several reinsurers and to limit its exposure
from losses on any one occurrence. Any recoverable due from reinsurers is
recorded in the period in which the related gross liability is established.
The Company accounts for all reinsurance receivables and prepaid reinsurance
premiums as assets.
Depreciation
Property, equipment and leasehold improvements are depreciated over their
estimated useful lives, which is approximately 3 to 12 years. External costs
incurred in developing or obtaining software are capitalized and amortized over
their useful lives.
Income taxes
The Company and its subsidiaries file a consolidated Federal tax return. The
Company provides deferred income taxes on temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities based upon enacted tax rates. The effect of a change in tax rates is
recognized in income in the period of change. The Company provides for a
valuation allowance on certain deferred tax assets.
Fair values of financial instruments
The fair value of the Company's investments is disclosed in Note 2 including the
fair values of privately placed securities. The fair values of fixed maturities,
equity securities and short-term investments are based upon quotes obtained from
independent sources. The Company's other financial instruments include
short-term receivables and other payables which are recorded at the underlying
transaction value and approximate fair value. See Note 9 for the fair value of
the Company's senior notes.
Incurred losses
Unpaid losses are based on individual case estimates for losses reported. A
provision is also included, based on past experience, for IBNR, salvage and
subrogation recoveries and for loss adjustment expenses. The method of making
such estimates and for establishing the resulting reserves is continually
reviewed and updated and any changes resulting therefrom are reflected in
operating results currently.
Debt issuance costs
Debt issuance costs associated with the $100 million 6.5% Senior Note due March
15, 2014 are being amortized over the term of the senior debt using the interest
method.
Stock options
Effective January 1, 2003 the Company adopted the fair value method of
accounting under 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 the year ended December 31, 2004 and the year ended December 31, 2003 is
less than that which would have been recognized if the fair value based method
had been applied to all awards since the original effective date of SFAS 123,
which includes awards issued after December 15, 1994. Prior to 2003, the Company
accounted for those plans under the recognition and measurement provisions of
APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and
related Interpretations. Under APB 25, the Company recorded the difference, if
any, between the exercise price of the Company's stock options and the market
price of the underlying stock on the date of grant as an expense over the
vesting period of the option. The adoption
F-11
of SFAS 123 did not have a significant impact on the Company's results of
operations, financial condition or liquidity.
The following table illustrates the effect on net income and earnings per share
if the fair value based method had been applied to all outstanding and unvested
awards in each period. The table includes only the effect of stock options on
net income and earnings per share as all other stock compensation awards have
been accounted for under SFAS 123. The amounts for all other awards issued were
$522,729, $455,450 and $368,100 for 2004, 2003 and 2002, respectively.
Year Ended December 31,
--------------------------------
2004 2003 2002
---- ---- ----
(in thousands except per share data)
Net income, as reported $ 14,631 $17,093 $28,710
Add: Stock based employee
compensation expense included in
reported net income, net of related
tax effects 30 19 15
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method for all
awards, net of related tax effects (354) (358) (162)
------- -------- --------
Pro forma net income $ 14,307 $16,754 $28,563
======= ======== ========
Earnings per share:
Basic EPS - as reported $1.50 $1.77 $3.09
Basic EPS - pro forma $1.47 $1.73 $3.08
Diluted EPS - as reported $1.48 $1.74 $3.08
Diluted EPS - pro forma $1.44 $1.70 $3.07
Basic and diluted earnings per share
Basic EPS is calculated by dividing net income by the weighted average number of
common shares outstanding during the year. Diluted EPS is calculated by dividing
net income by the weighted average number of common shares outstanding during
the year and the dilutive effect of assumed stock option exercises. See Note 12
for a reconciliation of the shares outstanding in determining basic and diluted
EPS.
Reclassification
Certain accounts in the prior year's financial statements have been reclassified
to conform to the 2004 presentation.
Effects of recent accounting pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"), which
requires an enterprise to assess whether consolidation of an entity is
appropriate based upon its interests in a variable interest entity ("VIE"). A
VIE is an entity in which the equity investors do not have the characteristics
of a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. The initial determination of whether an entity is a
VIE shall be made on the date at which an enterprise becomes involved with the
entity. An enterprise shall consolidate a VIE if it has a variable interest that
will absorb a majority of the VIEs expected losses if they occur, receive a
majority of the entity's expected residual returns if they occur or both. FIN
F-12
46 was effective immediately for new VIEs established or purchased subsequent to
January 31, 2003.
In December 2003, the FASB issued a revised version of FIN 46 ("FIN 46R"), which
incorporates a number of modifications and changes made to the original version.
FIN 46R replaces the previously issued FIN 46 and, subject to certain special
provisions, was effective no later than the end of the first reporting period
that ended after December 15, 2003 for entities considered to be special-purpose
entities and no later than the end of the first reporting period that ended
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 provided 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 was effective for
reporting periods beginning after June 15, 2004. In September 2004, the guidance
contained within some of the paragraphs in EITF 03-1 were delayed by FSP EITF
Issue 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments," until new guidance is issued. The Company believes the adoption of
this guidance will not have a material impact on results of operations or
financial condition.
(For further discussion, see disclosures in Note 2.)
Statement of Financial Accounting Standards No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure" ("SFAS 148"), was issued by the
Financial Accounting Standards Board ("FASB") in December 2002. SFAS 148
provides alternative methods of transition for a company that voluntarily
changes its method of accounting for stock based employee compensation to the
fair value method. SFAS 148 also requires additional disclosures in both annual
and interim financial statements about the method of accounting for stock based
employee compensation and its effect on reported results. SFAS 148 is effective
for interim periods beginning after December 15, 2002. The Company has adopted
the appropriate disclosures under SFAS 148.
Effective December 2004, the FASB issued SFAS 123 (revised 2004), Share Based
Payment. This Statement is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. This Statement supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS 123 (revised 2004) is not likely to have a material impact on the
Company's results of operations or financial condition since the Company
previously adopted the fair value recognition provisions of SFAS 123.
(2) Investments:
A summary of investment components at December 31, 2004 and December 31, 2003 at
fair value consists of the following:
December 31, 2004 Percent December 31, 2003 Percent
----------------- ------- ----------------- -------
Fixed Maturities Available for Sale (Fair Value):
- ------------------------------------
U.S. Treasury Securities $ 10,018,470 1.59% $ 9,184,916 1.77%
Municipalities 7,652,500 1.21% 17,352,350 3.34%
Corporate Bonds 95,061,930 15.07% 66,933,425 12.88%
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal $ 112,732,900 17.87% $ 93,470,691 17.99%
Trading Securities (Fair Value):
- ------------------
Collateralized Debt Obligations 17,767,675 2.82% 61,736,951 11.88%
- -----------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities and Trading Portfolio $ 130,500,575 20.69% $ 155,207,642 29.87%
Cash & Short-term Investments (at Cost) 309,894,313 49.12% 259,000,216 49.84%
- -----------------------------------------------------------------------------------------------------------------------------
Total Fixed Maturities, Cash and Short-term Investments $ 440,394,888 69.81% 414,207,858 79.71%
Limited Partnership Hedge Funds (at Equity) 190,477,346 30.19% 105,434,419 20.29%
- -----------------------------------------------------------------------------------------------------------------------------
Total Investment Portfolio $ 630,872,234 100.00% $ 519,642,277 100.00%
Gross unrealized gains on fixed maturities available for sale were $1,560,532
and $1,215,206 at December 31, 2004
F-13
and December 31, 2003, respectively; and gross unrealized losses on fixed
maturities available for sale were $418,437 and $339,486 at December 31, 2004
and December 31, 2003, respectively.
Included in investments at December 31, 2004 are securities required to be held
by the Company or those that are on deposit with various regulatory authorities
as required by law with a fair value of $10,053,470.
There were no non-income producing fixed maturity investments for each of the
years ended December 31, 2004 and December 31, 2003.
The Company held no mortgage backed securities at December 31, 2004 or at
December 31, 2003.
The gross unrealized gains and losses on fixed maturities available for sale at
December 31, 2004 and December 31, 2003 are as follows:
2004
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------
Fixed maturities available for sale:
U.S. Treasury Securities .................. $ 9,982,560 $ 104,633 $ (68,723) $10,018,470
Municipalities ............................ 7,636,491 16,009 -- 7,652,500
Corporate Bonds ........................... 93,971,754 1,439,890 (349,714) 95,061,930
--------------------------------------------------------------------------
Totals .................................... $ 111,590,805 $ 1,560,532 $ (418,437) $112,732,900
--------------------------------------------------------------------------
2003
--------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------------------------
Fixed maturities available for sale:
U.S. Treasury Securities .................. $ 8,920,553 $ 303,408 $ (39,045) $ 9,184,916
Municipalities ............................ 17,338,395 13,955 -- 17,352,350
Corporate Bonds ........................... 66,336,023 897,843 (300,441) 66,933,425
--------------------------------------------------------------------------
Totals .................................... $ 92,594,971 $ 1,215,206 $(339,486) $ 93,470,691
--------------------------------------------------------------------------
The following table summarizes all securities in an unrealized loss position at
December 31, 2004 disclosing the aggregate fair value and gross unrealized loss
for less than as well as more than 12 months, and in conjunction with the
Company's investment impairment policy, the Company believes the unrealized
losses to be not other-than-temporary.
2004
-------------------------------------------------------------------------------------------
Description of Securities Less than 12 months 12 months or longer Total
-------------------------------------------------------------------------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
-------------------------------------------------------------------------------------------
U.S. Treasury Securities $ 1,126,031 $ (8,952) $ 2,979,900 $ (59,771) $ 4,105,931 $ (68,723)
Corporate Bonds 20,784,945 (175,705) 24,041,381 (174,009) 44,826,326 (349,714)
-------------------------------------------------------------------------------------------
Total temporarily impaired $21,910,976 $ (184,657) $27,021,281 $ (233,780) $48,932,257 $ (418,437)
securities
F-14
The amortized cost and fair value of debt securities at December 31, 2004 by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities, because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Fixed maturities available for sale
-------------------------------------------------
Amortized Fair
Cost Value
-------------------------------------------------
Due in one year or less................. $ 12,877,931 $ 12,865,419
Due after one year through five years.. 79,880,514 80,898,587
Due after five years through ten years.. 9,302,178 9,428,590
Due after ten years.......................... 9,530,182 9,540,304
-------------------------------------------------
Totals...................................... $ 111,590,805 $112,732,900
-------------------------------------------------
The investment portfolio has exposure to market risks, which include the effect
of adverse changes in interest rates, credit quality, hedge fund and
collateralized debt obligations (CDO) values on the portfolio. Interest rate
risk includes the changes in the fair value of fixed maturities based upon
changes in interest rates. Credit quality risk includes the risk of default by
issuers of debt securities. Hedge fund and CDO risks include the potential loss
from the diminution in the value of the underlying investment of the hedge fund
and the potential loss from changes in the fair value of CDO securities.
Proceeds from sales of investments in debt securities held for sale for the
years ended December 31, 2004, 2003 and 2002 were $55,017,140, $64,840,423 and
$344,255,556, respectively. Gross gains of $995,789, $131,601 and $13,308,860
and gross losses of $322,415, $399,524 and $2,028,978 were realized on those
sales for the years ended December 31, 2004, 2003 and 2002, respectively.
Realized gains (losses) and unrealized investment appreciation (depreciation) on
fixed maturities and equity securities for the years ended December 31, 2004,
2003 and 2002 are as follows:
Year ended December 31,
------------------------------------------------------------
2004 2003 2002
------------------------------------------------------------
Realized gains (losses) of investments
Fixed maturities ...................................... $ 673,374 $ (267,923) $ 11,279,882
Equity securities ..................................... -- (69,900) (2,839,006)
Short-term investments ................................ 4,215 887,811 15,127
------------------------------------------------------------
Net realized investment gains ......................... 677,589 549,988 8,456,003
Less: applicable income taxes ......................... (237,156) (192,496) (2,959,601)
------------------------------------------------------------
Net realized investment gains after taxes ..................... $ 440,433 $ 357,492 $ 5,496,402
============================================================
The Company recorded declines in values of investments considered to be
other-than-temporary of $124,487, $0, and $1,520,210 for the years ended
December 31, 2004, 2003 and 2002.
Year ended December 31,
------------------------------------------------------------
2004 2003 2002
------------------------------------------------------------
Change in unrealized investment appreciation
(depreciation) of securities:
Fixed maturities ......................................... $ 266,375 $ 318,878 $(3,066,700)
Equity securities ........................................ -- -- (7,327,689)
------------------------------------------------------------
Net unrealized investment gains (losses) ................. 266,375 318,878 (10,394,389)
Less: applicable deferred income taxes .................. (93,231) (111,605) 3,638,036
------------------------------------------------------------
Net unrealized investment gains (losses) after taxes ............. $ 173,144 $ 207,273 $ (6,756,353)
============================================================
F-15
Net investment income from each major category of investments for the years
indicated is as follows:
Year ended December 31,
----------------------------------------------------------
2004 2003 2002
----------------------------------------------------------
Fixed maturities available for sale ........................... $ 4,375,898 $ 4,176,273 $ 14,410,878
Trading securities ............................................ 13,420,243 12,909,671 --
Short-term investments ........................................ 2,999,993 1,879,098 931,168
Equity securities ............................................. -- -- 496,194
Equity in earnings of limited partnerships .................... 7,704,357 8,548,971 977,220
----------------------------------------------------------
Total investment income ............................ 28,500,491 27,514,013 16,815,460
Investment expenses ........................................... (4,821,537) (5,120,309) (994,726)
----------------------------------------------------------
Net investment income .............................. $ 23,678,954 $ 22,393,704 $ 15,820,734
==========================================================
Net investment income for trading securities includes $143,550 of net unrealized
gains as of December 31, 2004.
In addition to its investment in Tiptree, the Company held $190.5 million of
limited partnership hedge funds at December 31, 2004, accounted for under the
equity method, as follows:
Amount Ownership %
------ -----------
Airline Recovery Partners, LLC $ 5,662,367 9.81
Amici Qualified Associates, LP 9,648,541 3.19
Artesian Credit Arbitrage Total Return Fund 15,301,671 10.24
Asuka Japanese Equity Long/Short Fund LP 5,134,823 9.26
Boldwater Credit Opportunities Fund I, LP 10,079,885 10.05
Brencourt Arbitrage, L.P. 7,888,550 8.93
Caspian Capital Partners, LP(1) 2,941,201 0.68
Dolphin Domestic Fund II, LP 2,899,562 5.43
Dolphin Limited Partnership - A 14,311,825 14.32
Havens Partners, LP 8,292,995 8.20
Mariner Voyager LP(1) 2,415,388 2.07
Midway Market Neutral Fund LLC 11,898,231 9.20
MV Partners Fund I, L.P. - Tranche B 2,876,870 2.01
Newsmith Credit Fund, LP 8,812,806 16.02
Nippon Partners, L.P. 7,645,241 6.49
Parkcentral Global, L.P. 9,610,895 2.66
P.A.W. Partners, L.P. 8,634,056 3.24
Relative Value International Fund, L.P. 10,999,131 16.42
RH Capital Associates Number One, LP 7,101,026 1.67
SLS Investors 7,811,732 4.01
Triage Capital Management, L.P. 8,193,178 3.59
Wexford Spectrum Fund I, L.P. 22,317,372 5.95
----------
Total limited partnership hedge funds $190,477,346
===========
(1) Limited partnership hedge fund directly managed by Mariner.
The fair values for our investments in hedge funds and other privately held
equity securities generally are established on the basis of the valuations
provided monthly by the managers of such investments. These valuations generally
are determined based upon the valuation criteria established by the governing
documents of such investments or utilized in the normal course of such manager's
business. Such valuations may differ significantly from the values that would
have been used had readily available markets existed and the differences could
be material.
The hedge funds in which we invest usually impose limitations on the timing of
withdrawals from the hedge funds (most are within 90 days), and may affect our
liquidity. With respect to the Company's $15.7 million investment in
F-16
the Tiptree limited partnership hedge fund managed by a Mariner affiliated
Company and consolidated in the Company's financial statements, the Company
cannot withdraw funds for a minimum period of three years without the consent of
the hedge fund manager.
The Company invests in collateralized debt obligations (CDOs), which are private
placements. The fair value of each CDO is provided by securities dealers. The
markets for these types of securities can be illiquid and, therefore, the price
obtained from dealers in these securities is subject to change depending upon
the underlying market conditions of these securities, including the potential
for downgrades or defaults on the underlying collateral of the security.
Margin Account
The Company maintains an investment in a limited partnership hedge fund,
(Tiptree), that invests in CDOs, Credit Related Structured Product (CRS)
securities and other structured product securities that are structured, managed
or advised by a Mariner affiliated company. This investment is consolidated in
the Company's financial statements. CDOs and CRSs are purchased by various
broker dealers. Such purchases are then repackaged and sold to investors within
a relatively short time period, normally within a few months. Tiptree earns a
fee for servicing these arrangements and provides a margin account as collateral
to secure the credit risk of the purchases made by the dealers under these
agreements. Tiptree does not share in the gains or losses on investments held by
the dealer. Management expects that only under a remote circumstance would the
margin account be drawn by the dealer to secure losses. Many of the securities
purchased are investment grade floating rate securities and large unrealized
losses are not normally expected to occur. The Company seeks to mitigate market
risk associated with such investments by concentrating on investment grade,
floating rate securities with the risk of loss being limited to the cash held in
the margin accounts. As of December 31, 2004, Tiptree has provided $7.5 million
in cash as collateral to secure any purchases made by the dealers. This amount
is included in the consolidated cash balance of $11,855,146.
Securities lending
The Company maintains a securities lending agreement with Bear, Stearns
Securities Corp. (the "Borrower") whereby certain securities from its portfolio
are loaned to the Borrower for short periods of time. The agreement sets forth
the terms and conditions under which the Company may, from time to time, lend to
the Borrower, against a pledge of restricted collateral, securities held in
custody for the Company by Custodial Trust Company, an affiliate of the
Borrower. The Company receives restricted collateral from the Borrower generally
equal to at least the fair value of the loaned securities plus accrued interest.
The loaned securities remain a recorded asset of the Company. At December 31,
2004 and December 31, 2003, the Company had loaned securities with a fair value
of $3,266,890 and $6,760,722, respectively and held collateral related to these
loaned securities of $3,367,297 and $6,962,206, respectively.
(3) Fiduciary Funds:
The Company's insurance agency subsidiaries maintain separate underwriting
accounts, which record all of the underlying insurance transactions of the
insurance pools, which they manage. These transactions primarily include
collecting premiums from the insureds, collecting paid receivables from
reinsurers, paying claims as losses become payable, paying reinsurance premiums
to reinsurers and remitting net account balances to member insurance companies
in the pools which MMO manages. Unremitted amounts to members of the insurance
pools are held in a fiduciary capacity and interest income earned on such funds
inures to the benefit of the members of the insurance pools based on their pro
rata participation in the pools.
F-17
A summary of the pools' underwriting accounts as of December 31, 2004 and
December 31, 2003 is as follows:
(Unaudited)
-----------
2004 2003
--------------------------------------
Cash and short-term investments ........................................... $ 21,238,135 $18,651,338
Premiums receivable ...................................................... 28,929,441 21,662,214
Reinsurance and other receivables ........................................ 48,902,946 20,172,248
---------------------------------
Total assets ............................................................. $ 99,070,522 $60,485,800
=================================
Due to insurance pool members ............................................ 46,349,940 10,894,676
Reinsurance payable ...................................................... 26,000,228 26,587,878
Funds withheld from reinsurers ........................................... 24,590,399 20,729,319
Other liabilities ........................................................ 2,129,955 2,273,927
---------------------------------
Total liabilities ........................................................ $ 99,070,522 $60,485,800
=================================
A portion of the pools' underwriting accounts above have been included in the
Company's insurance subsidiaries operations based upon their pro rata
participation in the MMO insurance pools.
(4) Insurance Operations:
Reinsurance transactions
Approximately 25%, 31% and 30% of the Company's insurance subsidiaries' direct
and assumed gross premiums written for the years ended December 31, 2004, 2003
and 2002, respectively, have been reinsured by the pools with other companies on
both a treaty and a facultative basis.
Two former pool members, Utica Mutual and Arkwright, currently part of the FM
Global Group, withdrew from the pools in 1994 and 1996, respectively, and
retained liability for their effective pool participation for all loss reserves,
including IBNR and unearned premium reserves attributable to policies effective
prior to their withdrawal from the pools.
In the event that all or any of the pool companies might be unable to meet their
obligations to the pools, the remaining companies would be liable for such
defaulted amounts on a pro rata pool participation basis.
On May 28, 2003, an arbitration proceeding against Utica Mutual was completed
and it was ordered to pay MMO approximately $7.8 million, which represented
Utica Mutual's funding requirement to the pools and had no impact on the
Company's results of operations. In addition, the Company was awarded interest
of approximately $1 million on a pre-tax basis which was reflected in results of
operations in 2003. Following the award, these amounts were paid in full. This
award confirmed that, as a pool member, Utica Mutual is required to fund gross
losses paid by MMO, acting as managing agent.
The Company is not aware of any uncertainties that could result in any possible
defaults by either Arkwright or Utica Mutual with respect to their pool
obligations, which might impact liquidity or results of operations of the
Company, but there can be no assurance that such events will not occur in the
future.
A contingent liability exists with respect to reinsurance ceded since such
transactions generally do not relieve the Company of its primary obligation to
the policyholder, so that such reinsurance ceded would become a liability of the
Company's insurance subsidiaries in the event that any reinsurer might be unable
to meet the obligations assumed under the reinsurance agreements. As established
by the pools, all reinsurers must meet certain minimum standards of financial
condition.
F-18
The Company's largest unsecured reinsurance receivables at December 31, 2004
were from the following reinsurers:
Reinsurer Amounts A.M. Best Rating
- --------------------------------- ---------- ----------------
(in millions)
Lloyd's Syndicates $ 55.5 A (Excellent)
Swiss Reinsurance America Corp. 12.0 A+ (Superior)
FM Global (Arkwright) 7.7 A+ (Superior)
Lloyd's (Equitas) 7.2 NR-3 (Rating Procedure Inapplicable)
Folksamerica Reinsurance Company 7.0 A (Excellent)
GE Reinsurance Corp. 4.2 A (Excellent)
Liberty Mutual Insurance Company 3.4 A (Excellent)
Utica Mutual Insurance Company 3.1 A- (Excellent)
Hartford Fire Insurance Company 3.1 A+ (Superior)
---
Total $103.2
The reinsurance contracts with the above listed companies are generally entered
into annually and provide coverage for claims occurring while the relevant
agreement was in effect, even if claims are made in later years. The contracts
with Arkwright and Utica Mutual were entered into with respect to their
participation in the pools.
Lloyd's maintains a trust fund, which was established for the benefit of all
United States ceding companies. For the three most recent years for which
Lloyd's has reported results, 2001, 2000, and 1999, losses were reported for all
three years. Lloyd's is expected to report a profit for 2003 and 2002. Lloyd's
receivables represent amounts due from approximately 100 different Lloyd's
syndicates.
Equitas, a Lloyd's company established to settle claims for underwriting years
1992 and prior, maintains policyholders' surplus at March 31, 2004 of
approximately 460 million Pounds Sterling (US $840 million). However, given the
uncertainty surrounding the adequacy of surplus and sufficiency of assets in
Equitas to meet its ultimate obligations, there is a reasonable possibility that
the Company's collection efforts relating to reinsurance receivables from
Equitas may be adversely affected in the future.
The Company's exposure to reinsurers, other than those indicated above, includes
reinsurance receivables from approximately 600 reinsurers or syndicates, and as
of December 31, 2004, no single one was liable to the Company for an unsecured
amount in excess of approximately $3 million.
Funds withheld of approximately $15.6 million and letters of credit of
approximately $131.1 million as of December 31, 2004 were obtained as collateral
for reinsurance receivables as provided under various reinsurance treaties.
Reinsurance receivables as of December 31, 2004 and 2003 included an allowance
for uncollectible reinsurance receivables of $12.4 million and $12.8 million,
respectively. Uncollectible reinsurance resulted in charges to operations of
approximately $1.2 million, $1.0 million and $5.2 million in 2004, 2003 and
2002, respectively.
Reinsurance ceded and assumed relating to premiums written were as follows:
Gross Ceded Assumed Percentage
(direct) to other from other of assumed
Year Ended amount companies companies Net amount to net
- --------------------------------------------------------------------------------------------------------------------
December 31, 2004 $159,407,233 $46,505,810 $24,226,839 $137,128,262 18%
December 31, 2003 123,520,550 44,889,948 19,676,603 98,307,205 20%
December 31, 2002 113,988,866 46,074,907 38,528,136 106,442,095 36%
Reinsurance ceded and assumed relating to premiums earned were as follows:
Gross Ceded Assumed Percentage
(direct) to other from other of assumed
Year Ended amount companies companies Net amount to net
- ---------------------------------------------------------------------------------------------------------------------
December 31, 2004 $142,738,099 $46,033,709 $19,628,864 $116,333,254 17%
December 31, 2003 111,876,648 30,381,297 14,898,599 96,393,950 15%
December 31, 2002 119,181,201 58,437,148 52,713,400 113,457,453 46%
F-19
Losses and loss adjustment expenses incurred are net of ceded reinsurance
recoveries of $18,416,068, $27,564,318 and $60,574,707 for the years ended
December 31, 2004, 2003 and 2002, respectively.
Unpaid losses
Unpaid losses are based on individual case estimates for losses reported and
include a provision for losses incurred but not reported and for loss adjustment
expenses. The following table provides a reconciliation of the Company's
consolidated liability for losses and loss adjustment expenses for the years
ended December 31, 2004, 2003 and 2002:
Year ended December 31,
-----------------------------------
2004 2003 2002
-----------------------------------
(In thousands)
Net liability for losses and loss adjustment
expenses at beginning of year ................ $ 242,311 $ 208,979 $ 210,953
--------- --------- ---------
Provision for losses and loss adjustment
expenses occurring in current year ........... 81,518 57,125 68,952
Increase (decrease) in estimated losses and loss
adjustment expenses for claims occurring
in prior years(1) ........................... (14,960) (1,410) 4,389
Deferred income-loss portfolio
assumption(2) ................................ -- -- 15
--------- --------- ---------
Net loss and loss adjustment expenses
incurred ..................................... 66,558 55,715 73,356
--------- --------- ---------
Less:
Losses and loss adjustment expense payments
for claims occurring during:
Current year ............................. 10,287 5,241 11,950
Prior years .............................. 43,103 17,142 63,365
------ ------ ------
53,390 22,383 75,315
Add:
Deferred income-loss portfolio assumption (2) ... -- -- (15)
--------- --------- ---------
Net liability for losses and loss adjustment
expenses at year end ......................... 255,479 242,311 208,979
--------- --------- ---------
Ceded unpaid losses and loss adjustment
expenses at year end ......................... 247,782 276,619 307,023
--------- --------- ---------
Gross unpaid losses and loss adjustment
expenses at year end ......................... $ 503,261 $ 518,930 $ 516,002
========= ========= =========
(1) The adjustment to the consolidated liability for losses and
loss adjustment expenses for losses occurring in prior years reflects the
net effect of the resolution of losses for other than full reserve value
and subsequent readjustments of loss values. The $15 million decrease in
2004 reflects favorable loss development in the aviation line, mainly in
reserve adjustments of $8.3 million for the terrorist attacks of September
11, 2001 on the Pentagon and the hijacked airliner that crashed in
Pennsylvania, and in the ocean marine line of business due to a lower than
expected emergence of losses in the 1998-2001 accident years. The decrease
in 2003 of $1.4 million reflects favorable loss development arising from
the ocean marine line of business, partially offset by adverse development
in the aviation line for accident years 1997-2000. The increase in 2002 of
$4.4 million reflects provisions made for insolvent, financially impaired
and commuted reinsurers, and adverse development from the Company's other
liability line reflecting umbrella exposures. The 2002 amount was
partially offset by favorable development in the ocean marine line of
business.
(2) Deferred income-loss portfolio assumption represents the
difference between cash received and unpaid loss reserves assumed as a
result of the Company's assumption of net pool obligations from two former
pool members, which was initially capitalized and was amortized over the
payout period of the related losses.
The insurance pools participated in both the issuance of umbrella casualty
insurance for various Fortune 1000 companies and the issuance of ocean marine
liability insurance for various oil companies during the period from 1978 to
1985. Depending on the accident year, the insurance pools' net retention per
occurrence after applicable reinsurance ranged from $250,000 to $2,000,000. The
Company's effective pool participation on such risks varied
F-20
from 11% in 1978 to 59% in 1985. Subsequent to this period, the pools
substantially reduced their umbrella writings and coverage was provided to
smaller insureds. In addition, ocean marine and non-marine policies issued
during the past three years provide coverage for certain environmental risks.
At December 31, 2004 and December 31, 2003, the Company's gross, ceded and net
loss and loss adjustment expense reserves for all asbestos/environmental
policies amounted to $70.7 million, $57.9 million and $12.8 million, and $77.3
million, $65.5 million and $11.8 million, respectively. As of December 31, 2004
and December 31, 2003, the Company had approximately 340 and 330 policies,
respectively, under which there was at least one claim outstanding relating to
asbestos/environmental exposures. The Company believes that the uncertainty
surrounding asbestos/environmental exposures, including issues as to insureds'
liabilities, ascertainment of loss date, definitions of occurrence, scope of
coverage, policy limits and application and interpretation of policy terms,
including exclusions, all affect the estimation of ultimate losses. Under such
circumstances, it is difficult to determine the ultimate loss for
asbestos/environmental related claims. Given the uncertainty in this area,
losses from asbestos/environmental related claims may develop adversely and,
accordingly, management is unable to estimate the range of possible loss that
could arise from asbestos/environmental related claims. However, the Company's
net unpaid loss and loss adjustment expense reserves, in the aggregate, as of
December 31, 2004, represent management's best estimate.
In 2001, the Company recorded losses of $154.9 million and $8.0 million on a
gross and net of reinsurance basis, respectively, in its aircraft line of
business as a result of the terrorist attacks of September 11, 2001 on the World
Trade Center, the Pentagon and the hijacked airliner that crashed in
Pennsylvania (collectively, the "WTC attack"). Additional reinsurance costs were
also incurred on the WTC attack and amounted to $5.0 million. Since 2001,
reinsurance recoverables related to the WTC attack have decreased and the net
liability has increased as a result of the commutation of certain reinsurance
recoverables. The ultimate gross and net liability for unpaid losses resulting
from the WTC attack represent the estimated ultimate costs of all incurred
claims and claim adjustment expenses. Since the gross liability and related
reinsurance recoverables are based on estimates, the ultimate liability may
change from the amount provided currently, depending upon revisions in gross
loss estimates and the interpretation as to the number of occurrences as defined
in the aircraft ceded reinsurance treaties. For example, in September 2004 the
Company became aware of additional information that allowed us to reduce loss
reserves relating to the terrorist attacks of September 11, 2001 on the Pentagon
and the hijacked airliner that crashed in Pennsylvania. This amounted to a
reduction of $16.3 million and $8.3 million in gross and net loss reserves,
respectively, to the Company.
Salvage and subrogation
Estimates of salvage and subrogation recoveries on paid and unpaid losses have
been recorded as a reduction of unpaid losses amounting to $7,112,142 and
$6,480,163 at December 31, 2004 and December 31, 2003, respectively.
Deferred policy acquisition costs
Deferrable acquisition costs amortized to income amounted to $25,166,397,
$19,430,211 and $18,898,550 for the years ended December 31, 2004, 2003 and
2002, respectively.
(5) Property, Improvements and Equipment, Net:
Property, improvements and equipment, net at December 31, 2004 and December 31,
2003 include the following:
2004 2003
----------------------------------
Office furniture and equipment ..................................... $ 1,335,844 $ 1,905,366
Computer equipment ................................................. 500,139 1,029,816
Computer software .................................................. 2,482,235 754,186
Leasehold improvements ............................................. 2,254,787 4,292,659
----------------------------------
6,573,005 7,982,027
Less: accumulated depreciation and amortization ................... (1,455,396) (4,044,424)
----------------------------------
Property, improvements and equipment, net ................... $ 5,117,609 $ 3,937,603
==================================
F-21
Depreciation and amortization and other expenses for the years ended December
31, 2004, 2003 and 2002 amounted to $703,224, $518,475 and $410,781,
respectively.
(6) Income Taxes:
The components of deferred tax assets and liabilities as of December 31, 2004
and December 31, 2003 are as follows:
December 31, 2004 December 31, 2003
----------------------------------------
Deferred Tax Assets:
Loss reserves .................................................. $12,808,891 $12,017,630
Unearned premiums .............................................. 4,319,717 2,864,066
Loss carryforwards ............................................. 3,286,180 2,990,941
Bad debt reserve ............................................... 182,972 910,000
Other .......................................................... 271,849 343,555
---------------------------------
Deferred tax assets ............................................ 20,869,609 19,126,192
---------------------------------
Less: Valuation allowance ...................................... 3,790,355 3,495,116
---------------------------------
Total deferred tax assets ...................................... 17,079,254 15,631,076
---------------------------------
Deferred Tax Liabilities:
Deferred policy acquisition costs .............................. 4,569,354 2,885,960
Unrealized appreciation of investments ......................... 399,734 306,503
Deferred investment income ..................................... 3,780,199 213,677
Accrued salvage and subrogation ................................ 296,773 284,174
Other .......................................................... 504,437 168,041
---------------------------------
Total deferred tax liabilities ................................. 9,550,497 3,858,355
---------------------------------
Net deferred tax assets ........................................ $ 7,528,757 $11,772,721
===================================
The last year to which the loss carryforwards can be carried forward against
future tax liabilities is the year 2024.
The Company's valuation allowance account with respect to the deferred tax asset
and the change in the account is as follows:
December 31, 2004 December 31, 2003 December 31, 2002
----------------------------------------------------------
Balance, beginning of year ................... $ 3,495,116 $ 2,363,081 $ 11,050,489
Change in valuation allowance ................ 295,239 1,132,035 (8,687,408)
----------------------------------------------------------
Balance, end of period ....................... $ 3,790,355 $ 3,495,116 $ 2,363,081
===========================================================
The change in the valuation account relates primarily to loss carryforwards.
The Company believes that the total deferred tax asset, net of the recorded
valuation allowance account, as of December 31, 2004 will more likely than not
be fully realized.
F-22
Income tax provisions differ from the amounts computed by applying the Federal
statutory rate to income before income taxes as follows:
Year ended December 31,
------------------------------
2004 2003 2002
---- ----- ----
Income taxes at the Federal statutory rate .... 35.0% 35.0% 35.0%
Tax exempt interest ........................... (0.2) (0.3) (4.7)
Valuation allowance ........................... 1.3 4.3 (32.6)
State taxes ................................... (0.9) (2.4) (0.3)
Other, net .................................... 0.1 (1.8) 1.0
---- ---- ----
Income tax provisions .............. 35.3% 34.8% (1.6)%
==== ==== ====
Federal income tax paid (received) amounted to $5,263,512, $6,248,652 and
$(4,849,204) for the years ended December 31, 2004, 2003 and 2002, respectively.
At December 31, 2004, the federal income tax recoverable included in other
assets amounted to $460,289. At December 31, 2003 the federal income tax payable
included in other liabilities amounted to $1,258,717.
Reduction of income taxes paid as a result of the deduction triggered by
employee exercise of stock options for the years ended December 31, 2004, 2003
and 2002 amounted to $139,819, $331,737 and $83,436, respectively. The benefit
received was recorded in paid-in capital.
(7) Statutory Income and Surplus:
The Company's domestic insurance subsidiaries are limited, based on the lesser
of 10% of policyholders' surplus or 100% of adjusted net investment income, as
defined under New York Insurance Law, in the amount of ordinary dividends they
may pay without regulatory approval. Within this limitation, the maximum amount
which could be paid to the Company out of the domestic insurance companies'
surplus was approximately $14.7 million as of December 31, 2004. In connection
with the application for approval of acquisition of control of NYMAGIC, INC.,
filed by Mariner Partners, Inc. ("Mariner") and William J. Michaelcheck, a
Director of the Company and a majority shareholder of Mariner, with the New York
State Insurance Department (the "Department") pursuant to Section 1506 of the
New York Insurance Law, New York Marine and Gotham agreed for a period of two
years from July 31, 2002, the date of the acquisition of such control, not to
pay any dividends without the consent of the Department. During 2003 and first
quarter of 2004, New York Marine requested and received approval from the State
of New York Insurance Department to pay extraordinary dividends of $5,000,000
and $15,000,000, respectively, to the Company.
Combined statutory net income, surplus and dividends declared by the Company's
domestic insurance subsidiaries were as follows for the periods indicated:
Combined Combined Dividends
Statutory Statutory Declared
Year Ended Net Income Surplus To Parent
- ---------- ------------ ------------ -----------
December 31, 2004 $ 5,363,000 $ 181,633,000 $ 15,500,000
December 31, 2003 $ 13,689,000 $ 186,325,000 $ 9,575,000
December 31, 2002 $ 16,412,000 $ 180,394,000 $ 12,361,000
The National Association of Insurance Commissioners (the "NAIC") provided a
comprehensive basis of accounting for reporting to state insurance departments.
Included in the codified accounting rules was a provision for the state
insurance commissioners to modify such accounting rules by practices prescribed
or permitted for insurers in their state. The domestic insurance companies are
domiciled in the State of New York, however, there were no
F-23
differences for the years ended December 31, 2004 and 2003, respectively,
between prescribed accounting practices and those approved by the NAIC.
(8) Employee Retirement Plans:
The Company maintains a retirement plan for the benefit of our employees in the
form of a Profit Sharing Plan and Trust, which resulted from the merger of our
Profit Sharing Plan and Money Purchase Plan in 2003. The Profit Sharing Plan and
Trust provides for an annual mandatory contribution of 7.5% of compensation for
each year of service during which the employee has completed 11 months of
service and is employed on the last day of the plan year. An additional
discretionary annual contribution of up to 7.5% of compensation may also be made
by the Company. The plan provides for 100% vesting upon completion of one year
of service. Employee retirement plan expenses for the years ended December 31,
2004, 2003 and 2002 amounted to $966,008, $901,343 and $1,167,436, respectively.
(9) Debt:
On March 11, 2004, the Company issued $100,000,000 in 6.5% Senior Notes due
March 15, 2014. The Notes provide for semi-annual interest payments and are to
be repaid in full on March 15, 2014. The indenture contains certain covenants
that restrict our and our restricted subsidiaries' ability to, among other
things, incur indebtedness, make restricted payments, incur liens on any shares
of capital stock or evidences of indebtedness issued by any of our restricted
subsidiaries or issue or dispose of voting stock of any of our restricted
subsidiaries.
The fair value of the senior debt at December 31, 2004 was a price equal to
96.5% of the par value.
Interest paid amounted to $3,322,738, $34,327 and $608,148 for the years ended
December 31, 2004, 2003 and 2002, respectively.
(10) Commitments:
The Company maintains various operating leases to occupy office space. The lease
terms expire on various dates through July 2016.
The aggregate minimum annual rental payments under various operating leases for
office facilities as of December 31, 2004 are as follows:
Amount
------
2005............................ 1,299,180
2006............................ 1,302,134
2007............................ 1,283,444
2008............................ 1,283,444
2009............................ 1,283,444
Thereafter...................... 8,149,862
-----------
Total........................... $14,601,508
The operating leases also include provisions for additional payments based on
certain annual cost increases. Rent expenses for the years ended December 31,
2004, 2003 and 2002 amounted to $1,306,695, $1,993,278, and $1,102,755,
respectively.
On December 30, 2002, the Company signed a sublease, for which it received
landlord's consent dated January 31, 2003, for approximately 28,000 square feet
for its principal offices in New York. The sublease commenced on March 1, 2003
and expires on July 30, 2016. The minimum monthly rental payments of $102,794
commenced in 2004 and end in 2016 and will amount to $15.3 million of total
rental payments over the term of the sublease. The new offices are located at
919 Third Avenue, New York, New York 10022.
Additionally, the Company made a first amendment to a lease dated May 4, 2004
for its office in Chicago. The
F-24
minimum monthly rental payments of $4,159 will commence in 2005 and end in 2010.
(11) Comprehensive Income:
The Company's comparative comprehensive income is as follows:
Years ended December 31,
-----------------------------------------
2004 2003 2002
-----------------------------------------
Net income $14,630,665 $17,092,764 $28,710,494
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities,
net of deferred tax benefit (expense) of
$(330,387), $(304,104), and $678,435 613,577 564,765 (1,259,951)
Less: reclassification adjustment for gains realized
in net income, net of tax expense of
$(237,156),$(192,496), and $(2,959,601) 440,433 357,492 5,496,402
Foreign currency translation adjustment -- -- (811,880)
-----------------------------------------
Other comprehensive income (loss) 173,144 207,273 (7,568,233)
-----------------------------------------
Total comprehensive income $14,803,809 $17,300,037 $21,142,261
===========================================
The Company recorded unrealized holding gains on securities, net of deferred
taxes, of $742,364 and $569,220 as of December 31, 2004 and December 31, 2003,
respectively.
(12) Common Stock Repurchase Plan and Shareholders' Equity:
The Company has a common stock repurchase plan which authorizes the repurchase
of up to $55,000,000, at prevailing market prices, of the Company's issued and
outstanding shares of common stock on the open market. As of December 31, 2004,
the Company had repurchased a total of 2,338,684 shares of common stock under
this plan at a total cost of $42,242,044 at market prices ranging from $12.38 to
$28.81 per share. There were no repurchases made during 2004.
In connection with the acquisition of MMO in 1991, the Company also acquired
3,215,958 shares of its own common stock held by MMO and recorded such shares as
treasury stock at MMO's original cost of $3,919,129.
A reconciliation of basic and diluted earnings per share for each of the years
ended December 31, 2004, 2003 and 2002 is as follows:
December 31, 2004 December 31, 2003 December 31, 2002
---------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Net Shares Per Net Shares Per Net Shares Per
Income Outstanding Share Income Outstanding Share Income Outstanding Share
---------------------------------------------------------------------------------------------------------------
(In thousands except for per share data)
Basic EPS $14,631 9,736 $1.50 $17,093 9,673 $1.77 $28,710 9,277 $3.09
Effect of Dilutive Securities:
Stock Options -- 180 $(.02) -- 155 $(.03) -- 32 $(.01)
---------------------------------------------------------------------------------------------------------------
Diluted EPS $14,631 9,916 $1.48 $17,093 9,828 $1.74 $28,710 9,309 $3.08
===============================================================================================================
F-25
(13) Stock Plans:
The Company has three stock plans, the first approved by shareholders in 1991,
the second in 2002 and the third in 2004. Each of these plans provides a means
whereby the Company, through the grant of non-qualified stock options to key
employees, may attract and retain persons of ability to exert their best efforts
on behalf of the Company. Both the 2002 and 1991 plans authorize the issuance of
options to purchase up to 500,000 shares of the Company's common stock at not
less than 95 percent of the fair market value at the date of grant. The 2004
plan authorizes the issuance of options to purchase shares of common stock,
share appreciation rights, restricted and unrestricted share awards as well as
deferred share units and performance awards. Options are exercisable over the
period specified in each option agreement and expire at a maximum term of ten
years covering up to 450,000 shares of the Company's common stock in the
aggregate. The Company granted 14,100 shares of common stock to certain officers
and directors of the Company in 2004 having a total compensation value of
$369,279. The Company granted 8,557 of deferred share units to certain officers
and directors of the Company in 2004 for a total compensation value of $185,250.
Deferred share units become shares of common stock issued upon the departure of
the officer/director from the Company.
The Company also adopted an Employee Stock Purchase Plan (the "ESPP") in 2004.
The ESPP allows 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 is 85% (or
more if the Board of Directors or the committee administering the plan 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 December 31, 2004.
A summary of stock option activity under the stock plans for the years ended
December 31, 2004, 2003 and 2002 is as follows:
December 31, 2004 December 31, 2003 December 31,2002
------------------------------------------------------------------------------------------------------------
Number Option Number Option Number Option
Shares Under of Price of Price of Price
Option Shares Per Share Shares Per Share Shares Per Share
------ ------ --------- ------ --------- ------ ---------
Outstanding,
beginning of year 520,700 $12.59-$20.25 622,568 $12.05-$20.25 223,234 $12.00-$20.25
Granted 10,000 $26.00 20,000 $18.69 463,000 $ 14.47
Exercised (42,250) $14.47-$15.79 (121,066) $12.05-$20.25 (34,666) $12.00-$17.22
Forfeited (19,950) $14.47-$15.56 (802) $12.05-$14.47 (29,000) $12.00-$14.47
---- ------- -------- -------------
Outstanding,
End of period 468,500 $12.59-$26.00 520,700 $12.59-$20.25 622,568 $12.05-$20.25
======= ======= ========
Exercisable,
End of period 226,175 $12.59-$20.25 156,550 $12.59-$20.25 141,567 $12.05-$20.25
======= ======= =======
Effective January 1, 2003 the Company adopted the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation
("SFAS 123"), prospectively to all employee awards granted, modified or settled
after January 1, 2003. Therefore, the cost related to stock-based employee
compensation included in the determination of net income for 2003 is less than
that which would have been recognized if the fair value based method had been
applied to all awards since the original effective date of SFAS 123, which
includes awards issued after December 15, 1994. Prior to 2003, the Company
accounted for those plans under the recognition and measurement provisions of
APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and
related Interpretations. Under APB 25, the Company recorded the difference, if
any, between the exercise price of the Company's stock options and the market
price of the underlying stock on the date of grant as an expense over the
vesting period of the option. The adoption of SFAS 123 did not have a
significant impact on the Company's results of operations, financial condition
or liquidity.
F-26
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. The table includes only the effect of stock options on
net income and earnings per share as all other stock compensation awards have
been accounted for under SFAS 123. The amounts for all other awards issued were
$522,729, $455,450 and $368,100 for 2004, 2003 and 2002, respectively.
Year ended December 31,
-------------------------------------
2004 2003 2002
---- ---- ----
(in thousands except per share data)
Net income, as reported $ 14,631 $ 17,093 $ 28,710
Add: Stock based employee
compensation expense included in
reported net income, net of related
tax effects 30 19 15
Deduct: Total stock-based employee
compensation expense determined
under the fair value based method for all
awards, net of related tax effects (354) (358) (162)
---------- ---------- ----------
Pro forma net income $ 14,307 $ 16,754 $ 28,563
========== ========== ==========
Earnings per share:
Basic EPS - as reported $1.50 $1.77 $3.09
Basic EPS - pro forma $1.47 $1.73 $3.08
Diluted EPS - as reported $1.48 $1.74 $3.08
Diluted EPS - pro forma $1.44 $1.70 $3.07
In determining the pro forma effects on net income, the fair value of options
granted in 2004, 2003, 2002, 2001, 2000, 1999 and 1998 were estimated at the
grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions in 2004, 2003, 2002, 2001, 2000, 1999 and 1998,
respectively: dividend yield of 1%, 1%, 0%, 0%, 3.0%, 3.0% and 1.9%; expected
volatility of 31%, 31%, 31%, 25%, 25%, 25% and 28%; the 2004, 2003 and 2002
grants have expected lives of 4 years with the remaining grants at 5 years each
and a risk-free interest rate of 2.65%, 2.20%, 2.90%, 4.42%, 4.75%, 6.48% and
4.56%. The fair value of options granted in 2004, 2003 and 2002 amounted to
$63,611, $85,895 and $1,819,507, respectively.
The full impact of calculating compensation expense for stock options under SFAS
123 is not reflected in the pro forma net income amounts presented above because
options granted prior to January 1, 1995 are not considered in the determination
of the compensation expense.
In 1999, the Company established the NYMAGIC, Inc. Phantom Stock Plan (the
"Plan"). The purpose of the Plan is to build and retain a capable experienced
long-term management team and key personnel to promote the success of the
Company. Each share of phantom stock granted under the Plan constitutes a right
to receive in cash the appreciation in the fair market value of one share of the
Company's stock, as determined on the date of exercise of such share of phantom
stock over the measurement value of such phantom stock. In 1999, 100,000 shares
of phantom stock were granted to employees with a five-year vesting schedule.
There have been no grants of phantom stock by the Company since 1999. For the
years ended December 31, 2004, 2003 and 2002 a total of 35,000 shares were
exercised at market prices ranging from $18 to $26.28 per share. Accordingly,
the Company recorded an expense (benefit) of ($31,800), $455,450 and $368,100
for the years ended December 31, 2004, 2003 and 2002, respectively.
The Company sold 400,000 investment units to Conning Capital Partners VI, L.P.
("Conning") on January 31, 2003. Each unit consisted of one share of the
Company's common stock and an option to purchase an additional share of
F-27
common stock from the Company. Conning paid $21.00 per unit resulting in $8.4
million in proceeds to the Company. The option exercise price is based on a
formula contained in the Option Certificate (which was attached as an exhibit to
the Company's current report on Form 8-K filed on February 4, 2003). There were
no options exercised during 2004 and 2003.
(14) Segment Information:
The Company's subsidiaries include two domestic insurance companies and three
domestic agencies. These subsidiaries underwrite commercial insurance in four
major lines of business. The Company considers ocean marine, inland marine/fire,
other liability, and aircraft as appropriate segments for purposes of evaluating
the Company's overall performance; however, the Company has ceased writing any
new policies covering aircraft risks subsequent to March 31, 2002. In addition,
the Company also considers MMO London as an appropriate segment. However, since
the Company's withdrawal from its London operations in 2002, MMO UK has not
provided capacity to any Lloyd's syndicate.
The Company evaluates revenues and income or loss by the aforementioned
segments. Revenues include premiums earned and commission income. Income or loss
includes premiums earned and commission income less the sum of losses incurred
and policy acquisition costs.
Investment income represents a material component of the Company's revenues and
income. The Company does not maintain its investment portfolio by segment
because management does not consider revenues and income by segment as being
derived from the investment portfolio. Accordingly, an allocation of
identifiable assets, investment income and realized investment gains is not
considered practicable. As such, other income, general and administrative
expenses, interest expense, and income taxes are also not considered by
management for purposes of providing segment information. The financial
information by segment is as follows:
Year ended December 31,
-------------------------------------------------------------------------------------------------------------
2004 2003 2002
-------------------------------------------------------------------------------------------------------------
Segments (in thousands)
Income Income Income
Revenues (Loss) Revenues (Loss) Revenues (Loss)
-------------------------------------------------------------------------------------------------------------
Ocean marine $ 76,779 $ 11,912 $ 73,371 $ 19,372 $ 62,434 $ 10,078
Inland marine/Fire 4,891 1,901 3,802 282 2,371 387
Other liability 35,056 (916) 16,126 (1,116) 6,883 (4,577)
Aircraft 68 12,173 2,865 2,481 39,159 16,957
MMO London --- --- --- --- 4,159 (94)
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 116,794 25,070 96,164 21,019 115,006 22,751
----------------------------------------------------------------------------------------------
Other income 1,790 1,790 1,688 1,688 186 186
Net investment income 23,679 23,679 22,394 22,394 15,821 15,821
Net realized investment gains 678 678 550 550 8,456 8,456
General and administrative expenses --- (23,247) --- (19,428) --- (18,373)
Interest expense --- (5,353) --- (26) --- (575)
Income tax benefit (expense) --- (7,986) --- (9,104) --- 444
---------------------------------------------------------------------------------------------------
Total $ 142,941 $ 14,631 $120,796 $ 17,093 $139,469 $ 28,710
- ------------------------------------------------------------------------------------------------------------------------------------
F-28
The Company's gross written premiums cover risks in the following geographic
locations:
2004 2003 2002
----------------------------------------------
(In thousands)
United States $ 165,388 $ 119,749 $ 97,855
Europe 12,489 16,836 29,796
Asia 2,430 3,994 13,511
Latin America 991 1,203 2,669
Other 2,336 1,415 8,686
---------------------------------------------
Total Gross Written Premiums $ 183,634 $ 143,197 $ 152,517
=============================================
(15) Quarterly Financial Data (unaudited):
The quarterly financial data for 2004 and 2003 are as follows:
Three Months Ended
----------------------------------------
March 31, June 30, Sept. 30, Dec.31,
2004 2004 2004 2004
----------------------------------------
(in thousands, except per share data)
Total revenues ............ $31,445 $32,318 $35,349 $43,829
Income before income taxes $ 4,257 $ 1,314 $ 7,724 $ 9,322
Net income ................ $ 2,769 $ 858 $ 4,981 $ 6,023
Basic earnings per share . $ .28 $ .09 $ .51 $ .62
Diluted earnings per share $ .28 $ .09 $ .50 $ .61
Three Months Ended
----------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
2003 2003 2003 2003
----------------------------------------
(in thousands, except per share data)
Total revenues ............ $23,568 $32,205 $31,796 $33,226
Income before income taxes $ 2,941 $ 6,075 $10,636 $ 6,544
Net income ................ $ 1,918 $ 3,968 $ 6,921 $ 4,285
Basic earnings per share . $ .20 $ .41 $ .71 $ .44
Diluted earnings per share $ .20 $ .40 $ .70 $ .43
F-29
(16) Related Party Transactions:
The Company had gross premiums of $13.8 million in 2004, $9.4 million in 2003
and $3.6 million in 2002 written through I. Arthur Yanoff & Co, Ltd. and Yanoff
South Inc., insurance brokerages at which Glenn R. Yanoff, a director of
theCompany from June 1999 until May 2004 and currently a director of the
Company's insurance subsidiaries, is a vice president and insurance underwriter.
In connection with the placement of such business, gross commission expenses of
$2,363,000, $1,526,000, and $532,000 in 2004, 2003 and 2002, respectively, were
incurred by the Company on these transactions.
The Company entered into an investment management agreement with Mariner
effective October 1, 2002 and was amended and restated on December 6, 2002.
Under the terms of the agreement, Mariner manages the Company's investment
portfolio. Fees to be paid to Mariner are based on a percentage of the
investment portfolio as follows: .20% of liquid assets, .30% of fixed maturity
investments and 1.25% of limited partnership (hedge fund) investments. William
J. Michaelcheck, a Director of the Company, is Chairman, Chief Executive Officer
and majority shareholder of Mariner. George R. Trumbull, Chairman, Chief
Executive Officer and a Director of the Company, A. George Kallop, Executive
Vice President and Chief Operating Officer of the Company, and William D. Shaw,
Jr., Vice Chairman and a Director of the Company, are also associated with
Mariner. Effective December 31, 2004, Mr. Trumbull, who had previously been a
shareholder of Mariner, ceased to be a shareholder of Mariner. Currently, he has
a consulting agreement with Mariner. Effective January 1, 2005, Mr. Shaw, who
previously had a contractual relationship with Mariner relating to investing
services, and on whose behalf Mariner agreed to hold as nominee a portion of the
option covering 315,000 shares of NYMAGIC, terminated his contractual
relationship with Mariner, waived his interest in the option covering 315,000
shares of NYMAGIC and became a shareholder of Mariner. Mr. Kallop has a
consulting agreement with Mariner and Mariner holds on his behalf as nominee a
portion of the option covering 315,000 shares of NYMAGIC. Investment fees
incurred under the agreement with Mariner were $3,165,030 for the period ended
December 31, 2004 and $1,753,021 for the period ended December 31, 2003. The
Company made a payment of $83,000 and granted 3,900 shares of common stock in
the amount of $102,141 for the period ended December 31, 2004 to William D.
Shaw, Jr. for his management contributions to the company.
In 2003, the Company obtained a 100% interest in a limited partnership hedge
fund, (Tiptree), that invests in CDO securities, Credit Related Structured
Product (CRS) securities and other structured product securities that are
structured, managed or advised by a Mariner affiliated Company. In 2003 the
Company made an investment of $11.0 million in Tiptree. An additional investment
of $4.65 million was made in 2004. The Company is committed to providing an
additional $4.35 million in capital to Tiptree. Under the provisions of the
limited partnership agreement, the Mariner affiliated company is entitled to 50%
of the net profit realized upon the sale of certain collateralized debt
obligations held by the Company. Investment expenses incurred and payable under
this agreement at December 31, 2004 and December 31, 2003 amounted to $1,459,255
and $3,176,643 respectively, and were based upon the fair value of those
securities held and sold for the years ended December 31, 2004 and 2003,
respectively. The limited partnership agreement also provides for other fees
payable to the manager based upon the operations of the hedge fund. There were
no other fees incurred through December 31, 2004. The Company cannot withdraw
funds from this limited partnership for a minimum period of three years without
the consent of the hedge fund manager.
As of December 31, 2004 the Company held $5.4 million in limited partnership
interests in hedge funds which are directly managed by Mariner.
(17) Legal Proceedings:
The Company previously entered into reinsurance contracts with a reinsurer that
is now in liquidation. On October 23, 2003, the Company was served with a Notice
to Defend and a Complaint by the Insurance Commissioner of the Commonwealth of
Pennsylvania, who is the liquidator of this reinsurer, alleging that
approximately $3 million in reinsurance claims paid to the Company in 2000 and
2001 by the reinsurer are voidable preferences and are therefore subject to
recovery by the liquidator. The Company has filed Preliminary Objections to
Plaintiff's Complaint, denying that the payments are voidable preferences and
asserting affirmative defenses. On February 18, 2004, the Plaintiff filed
Preliminary Objections to our Preliminary Objections and an Answer and
Memorandum of Law in opposition to our Preliminary Objections. No trial date has
been set for this matter, but we intend to defend ourselves vigorously in
connection with this lawsuit. The Company believes it has strong defenses
against these claims; however, there can be no assurance as to the outcome of
this litigation.
F-30
(18) Subsequent events:
In a transaction separate from its common stock repurchase plan, on January 7,
2005 the Company purchased from certain of its shareholders a total of 1,092,735
shares of Common Stock at $24.80 per share. The selling shareholders were Mark
W. Blackman, a son of the Company's founder who served on our board of directors
from 1979 until May 2004 and who is currently the Company's Chief Underwriting
Officer (54,530 shares), his wife (50,000 shares), and two trusts for the
benefit of their children (110,000 shares); Lionshead Investments, LLC, a
company controlled by John N. Blackman, Jr., also a son of the Company's founder
who served on our board of directors from 1975 until May 2004 (495,030 shares),
two of his children (67,664 shares), a trust for the benefit of a third child
(25,158 shares), and a family trust (25,000 shares); and, two trusts and a
foundation established by Louise B. Tollefson, the former wife of the Company's
founder (265,353 shares). Robert G. Simses, a director of NYMAGIC INC., is a
trustee of the last mentioned entities. As a result of the share purchase, the
Company's outstanding shares were reduced from 9,781,098 shares to 8,688,363
shares.
On February 8, 2005 the Company and the individual members of its Board of
Directors were served with a purported shareholder derivative action lawsuit
brought in New York Supreme Court, Queens County, relating to the Company's
purchase on January 7, 2005 of approximately 1.1 million shares of its common
stock from certain members of or trusts controlled by certain members of the
family of John N. Blackman, the Company's founder. The complaint which was
brought by one of our shareholders Linda Parnes, who together with Alan Russell
Kahn, owns 100 shares of the Company's common stock, alleges that the Board of
Directors breached their fiduciary duty, wasted corporate assets and abused
their control over the Company by paying an excessive price for the shares. The
plaintiff is seeking damages against members of the Board of Directors and
rescission of the purchase. The Company's answer to the complaint is required to
be filed by April 1, 2005. The Company believes that the complaint is wholly
without merit, and will defend it vigorously.
F-31
FINANCIAL STATEMENT SCHEDULES
SCHEDULE II-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NYMAGIC, INC.
Balance Sheets
(Parent Company)
December 31, December 31,
2004 2003
------------------------------
Assets:
Cash ............................................................ $ 311,241 $ 1,118,342
Investments ..................................................... 113,976,557 10,351,000
----------- ----------
Total cash and investments ................................. 114,287,798 11,469,342
Investment in subsidiaries ...................................... 224,027,350 221,687,262
Due from subsidiaries ........................................... 15,093,556 11,900,167
Receivable for securities ....................................... 2,628,019 --
Other assets .................................................... 5,873,783 3,364,910
------------- -------------
Total assets .............................. $ 361,910,506 $ 248,421,681
============= =============
Liabilities:
Notes payable ................................................... $ 100,000,000 $ --
Dividend payable ................................................ 586,866 583,305
Other liabilities ............................................... 3,206,048 3,547,276
------------- -------------
Total liabilities ......................... 103,792,914 4,130,581
------------- -------------
Shareholders' equity:
Common stock .................................................... 15,335,740 15,279,390
Paid-in capital ................................................. 36,781,911 35,476,566
Accumulated other comprehensive income .......................... 742,364 569,220
Retained earnings ............................................... 251,418,750 239,127,097
Treasury stock .................................................. (46,161,173) (46,161,173)
------------- -------------
Total shareholders' equity ................ 258,117,592 244,291,100
------------ -------------
Total liabilities and shareholders' equity $ 361,910,506 $ 248,421,681
============= =============
Statements of Income
(Parent Company)
Year ended December 31,
2004 2003 2002
---------------------------------------
Revenues:
Cash dividends from subsidiary ................... $ 15,500,000 $ 9,575,000 $ 12,361,252
Net investment and other income (loss) ........... 1,785,226 (2,883,359) (154,681)
---------- ---------- ----------
17,285,226 6,691,641 12,206,571
---------- ---------- ----------
Expenses:
General and administrative expenses .............. 2,405,211 1,181,117 1,464,889
Interest expense ................................. 5,351,525 25,652 572,721
Income tax benefit ............................... (2,935,225) (1,181,099) (9,418,711)
---------- ---------- ----------
4,821,511 25,670 (7,381,101)
---------- ---------- ----------
Income before equity income ...................... 12,463,715 6,665,971 19,587,672
Equity in undistributed earnings of subsidiaries.. 2,166,950 10,426,793 9,122,822
---------- ---------- ----------
Net income ....................................... $ 14,630,665 $ 17,092,764 $ 28,710,494
========== ========== ==========
F-32
SCHEDULE II-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NYMAGIC, INC.
Statements of Cash Flows
(Parent Company)
Year ended December 31,
2004 2003 2002
---------------------------------------------
Cash flows from operating activities:
Net income ....................................... ............ $ 14,630,665 $ 17,092,764 $ 28,710,494
---------------------------------------------
Adjustments to reconcile net income
to cash provided by operating activities:
Equity in undistributed (earnings) loss of subsidiaries (2,166,950) (10,426,793) (9,122,822)
Equity in earnings of limited partnerships ............ (5,113,176) (351,000) --
Increase in other assets .............................. (214,300) (316,623) (137,005)
Decrease (increase) in due from subsidiaries .......... (3,193,389) 2,665,817 (7,390,764)
(Decrease) Increase in other liabilities .............. (341,229) 3,357,102 (110,524)
----------- ----------- ----------
Net cash provided by operating activities ..................... 3,601,621 12,021,267 11,949,379
---------- ---------- ----------
Cash flows from investing activities:
Net sale (purchase) of other investments ............. (35,695,316) 2,862,974 (2,374,196)
Limited partnerships acquired .............. ......... (62,817,059) (10,000,000) --
Receivable for securities ............................ (2,628,019) -- --
------------- ----------- ----------
Net cash used in investing activities ......................... (101,140,394) (7,137,026) (2,374,196)
------------ ---------- ----------
Cash flows from financing activities:
Proceeds from stock issuance and other ................ 1,361,695 2,176,507 538,622
Cash dividends paid to stockholders ................... (2,335,451) (1,747,170) --
Net sale of treasury shares ........................... -- 6,192,281 --
Proceeds from borrowings .............................. 97,705,428 -- 15,719,953
Loan principal payments ............................... -- (6,219,953) (17,411,253)
Net amount loaned to subsidiary ....................... -- (4,650,000) (8,107,642)
---------- ---------- -----------
Net cash used in financing activities ......................... 96,731,672 (4,248,335) (9,260,320)
---------- ---------- ----------
Net increase (decrease) in cash ............................... (807,101) 635,906 314,863
Cash at beginning of period ................................... 1,118,342 482,436 167,573
--------- --------- ---------
Cash at end of period ......................................... $ 311,241 $ 1,118,342 $ 482,436
======= ========= =======
The condensed financial information of NYMAGIC, INC. for the years ended
December 31, 2004, 2003 and 2002 should be read in conjunction with the
consolidated financial statements of NYMAGIC, INC. and subsidiaries and notes
thereto.
F-33
NYMAGIC, INC.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
--------------------------------------------------
(In thousands)
Column A Column B Column C Column D Column E Column F
- ----------------------------------------------------------------------------------------------------------------------------------
DEFERRED FUTURE POLICY
POLICY BENEFITS, LOSSES, OTHER POLICY
ACQUISITION CLAIMS AND UNEARNED CLAIMS AND BENEFITS PREMIUM
COST LOSS EXPENSES PREMIUMS REVENUE REVENUE
SEGMENTS (caption 7) (caption 13-a-1) (caption 13-a-2) (caption 13-a-3) (caption 1)
- ------------------------------------------------------------------------------------------------------------------------------------
2004 Ocean marine $ 76,361
Inland marine/Fire 4,919
Other liability 35,056
Aircraft (3)
MMO London ---
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 13,055 $503,261 $ 83,088 ----- $ 116,333
2003 Ocean marine $ 73,096
Inland marine/Fire 4,234
Other liability 16,126
Aircraft 2,938
MMO London ---
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 8,246 $518,930 $ 61,821 ----- $ 96,394
2002 Ocean marine $ 61,887
Inland marine/Fire 2,371
Other liability 6,883
Aircraft 38,157
MMO London 4,159
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 7,708 $516,002 $ 45,399 ----- $ 113,457
- ------------------------------------------------------------------------------------------------------------------------------------
Column A Column G Column H Column I Column J Column K
- ----------------------------------------------------------------------------------------------------------------------------------
BENEFITS
NET CLAIMS, LOSSES, AMORTIZATION OF
INVESTMENT AND SETTLEMENT DEFERRED OTHER
INCOME EXPENSES POLICY OPERATING PREMIUMS
SEGMENTS (caption 2) (caption 4) ACQUISITION COSTS EXPENSES WRITTEN
- ------------------------------------------------------------------------------------------------------------------------------------
2004 Ocean marine $ 47,544 $ 17,323 $ 82,689
Inland marine/Fire 2,360 630 5,255
Other liability 28,829 7,143 49,190
Aircraft (12,175) 70 (6)
MMO London --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 23,679 $ 66,558 $ 25,166 $23,247 $ 137,128
2003 Ocean marine $ 38,468 $ 15,531 $ 67,744
Inland marine/Fire 3,355 165 4,833
Other liability 13,727 3,515 22,961
Aircraft 165 219 2,769
MMO London --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 22,394 $ 55,715 $ 19,430 $19,428 $ 98,307
2002 Ocean marine $ 39,427 $ 12,929 $ 70,839
Inland marine/Fire 2,111 (127) 2,975
Other liability 9,783 1,677 9,960
Aircraft 18,018 4,184 22,366
MMO London 4,017 236 302
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 15,821 $ 73,356 $ 18,899 $18,373 $ 106,442
F-34
NYMAGIC, INC.
SCHEDULE V-VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------
DESCRIPTION Balance at Balance at
beginning close of
of period Additions Deductions period
- ------------------------------------------------------------------------------------------------
December 31, 2004:
Allowance for
doubtful accounts..... $13,273,522 $1,379,926 $(1,815,441) $12,838,007
December 31, 2003:
Allowance for
doubtful accounts..... $13,725,505 $1,001,825 $(1,453,808) $13,273,522
December 31, 2002:
Allowance for
doubtful accounts..... $18,056,400 $5,293,114 $(9,624,009) $13,725,505
The allowance for doubtful accounts on reinsurance receivables amounted to
$12,388,007, $12,823,522 and $13,275,505 at December 31, 2004, December 31, 2003
and December 31, 2002 respectively. The allowance for doubtful accounts on
premiums and other receivables amounted to $450,000 at December 31, 2004,
December 31, 2003 and December 31, 2002.
F-35
NYMAGIC, INC.
SCHEDULE VI - SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
----------------------------------------------------------------------------------------
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
DEFERRED RESERVE FOR
AFFILIATION POLICY UNPAID CLAIMS UNEARNED NET NET
WITH ACQUISITION AND CLAIMS PREMIUM EARNED INVESTMENT
REGISTRANT COSTS EXPENSES DISCOUNT RESERVE PREMIUMS INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2004
CONSOLIDATED SUBSIDIARIES $13,055 $503,261 ------ $83,088 $116,333 $21,894
DECEMBER 31, 2003
CONSOLIDATED SUBSIDIARIES 8,246 $518,930 ------ $61,821 $ 96,394 $25,558
DECEMBER 31, 2002
CONSOLIDATED SUBSIDIARIES 7,708 516,002 ------ 45,399 113,457 15,876
- --------------------------------------------------------------------------------------------------------------------------
CLAIMS AND CLAIMS
EXPENSES INCURRED AMORTIZATION
RELATED TO OF DEFERRED
AFFILIATION ----------------------------- POLICY PAID CLAIMS
WITH CURRENT PRIOR ACQUISITION AND CLAIMS PREMIUMS
REGISTRANT YEAR YEARS COSTS EXPENSES WRITTEN
- ---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2004
CONSOLIDATED SUBSIDIARIES $81,518 $(14,960) $25,166 $53,390 $137,128
DECEMBER 31, 2003
CONSOLIDATED SUBSIDIARIES 57,125 $ (1,410) $19,430 $22,383 $ 98,307
DECEMBER 31, 2002
CONSOLIDATED SUBSIDIARIES 68,952 4,389 18,899 75,315 106,442
F-36