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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2005
--------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to
-------------------------- ----------------------
Commission file number 1-11238
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NYMAGIC, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-3534162
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
919 Third Avenue, New York, New York 10022
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(Address of principal executive offices, including zip code)
(212) 551-0600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------------ ----------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
------------ -----
On May 1, 2005 there were 8,709,363 shares of the registrant's common stock,
$1.00 par value, outstanding.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements concerning the
Company's operations, economic performance and financial condition, including,
in particular, the likelihood of the Company's success in developing and
expanding its business. Any forward-looking statements concerning the Company's
operations, economic performance and financial condition contained herein,
including statements related to the outlook for the Company's performance in
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.
NYMAGIC, INC.
INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2005 and December 31, 2004 2
Consolidated Statements of Income
Three months ended March 31, 2005 and 3
March 31, 2004
Consolidated Statements of Cash Flows 4
Three months ended March 31, 2005 and
March 31, 2004
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 19
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits 20
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NYMAGIC, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
2005 2004
----------- ------------
ASSETS
Investments:
Fixed maturities:
Available for sale at fair value
(amortized cost $139,356,912 and $111,590,805)............ $138,463,220 $112,732,900
Trading at fair value (cost $66,014,910 and $17,310,386).... 66,193,358 17,767,675
Limited partnerships at equity
(cost $172,311,048 and $171,439,098)......................... 194,678,713 190,477,346
Short-term investments......................................... 213,488,473 298,039,167
Cash............................................................ 12,272,355 11,855,146
----------- -----------
Total cash and investments.............................. 625,096,119 630,872,234
----------- -----------
Accrued investment income....................................... 3,399,950 2,659,731
Receivable for securities sold.................................. 1,109,686 5,067,411
Premiums and other receivables, net............................. 35,990,645 42,598,519
Reinsurance receivables on unpaid losses, net................... 251,547,754 247,782,012
Reinsurance receivables on paid losses, net..................... 8,523,899 14,512,616
Deferred policy acquisition costs............................... 12,667,545 13,055,297
Prepaid reinsurance premiums ................................... 22,785,863 21,378,157
Deferred income taxes .......................................... 8,132,175 7,528,757
Property, improvements and equipment, net ...................... 5,719,855 5,117,609
Other assets.................................................... 6,167,083 6,521,354
----------- -----------
Total assets............................................ $981,140,574 $997,093,697
=========== ===========
LIABILITIES
Unpaid losses and loss adjustment expenses...................... $511,624,781 $503,261,138
Reserve for unearned premiums................................... 84,365,317 83,088,394
Ceded reinsurance payable....................................... 25,630,403 25,462,841
Notes payable................................................... 100,000,000 100,000,000
Dividends payable............................................... 521,302 586,866
Other liabilities............................................... 25,984,144 26,576,866
----------- -----------
Total liabilities....................................... 748,125,947 738,976,105
----------- -----------
SHAREHOLDERS' EQUITY
Common stock.................................................... 15,335,740 15,335,740
Paid-in capital................................................. 37,292,596 36,781,911
Accumulated other comprehensive income.......................... (567,319) 742,364
Retained earnings............................................... 254,214,611 251,418,750
----------- -----------
306,275,628 304,278,765
Treasury stock, at cost, 6,647,377 and 5,554,642 shares......... (73,261,001) (46,161,173)
----------- -----------
Total shareholders' equity.............................. 233,014,627 258,117,592
----------- -----------
Total liabilities and shareholders' equity.............. $981,140,574 $997,093,697
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended March 31,
----------------------------
2005 2004
---- ----
Revenues:
Net premiums earned $35,526,554 $24,854,317
Net investment income 6,603,530 4,754,134
Net realized investment gains (losses) 376 (40,768)
Commission and other income 11,463 1,877,381
------ ----------
Total revenues 42,141,923 31,445,064
------------ ----------
Expenses:
Net losses and loss adjustment expenses incurred 20,508,142 15,905,513
Policy acquisition expenses 7,616,402 5,619,906
General and administrative expenses 7,231,501 5,290,155
Interest expense 1,667,490 372,238
------------ ----------
Total expenses 37,023,535 27,187,812
---------- ----------
Income before income taxes 5,118,388 4,257,252
--------- ---------
Income taxes:
Current 1,699,429 1,004,653
Deferred 101,796 483,859
------- ----------
Total income tax expense 1,801,225 1,488,512
----------- ---------
Net income $ 3,317,163 $ 2,768,740
=========== ===========
Weighted average shares of common stock outstanding-basic 8,761,212 9,724,748
Basic earnings per share $ .38 $ .28
=========== ===========
Weighted average shares of common stock outstanding-diluted 8,905,342 9,945,349
Diluted earnings per share $ .37 $ .28
=========== ===========
Dividends declared per share $ .06 $ .06
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended March 31,
----------------------------
2005 2004
---- ----
Cash flows from operating activities:
Net income $ 3,317,163 $ 2,768,740
----------- -----------
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for deferred taxes 101,796 483,859
Net realized investment (gains) losses (376) 40,768
Equity in earnings of limited partnerships (3,721,899) (2,660,471)
Net bond amortization 7,153 295,488
Depreciation and other, net 166,209 85,018
Changes in:
Premiums and other receivables 6,607,874 (2,244,493)
Reinsurance receivables, paid and unpaid, net 2,222,975 (3,278,432)
Ceded reinsurance payable 167,562 4,058,667
Accrued investment income (740,219) 131,665
Deferred policy acquisition costs 387,752 (1,448,870)
Prepaid reinsurance premiums (1,407,706) 2,138,496
Other assets, net 354,271 9,172
Unpaid losses and loss adjustment expenses 8,363,643 4,585,211
Reserve for unearned premiums 1,276,923 2,279,576
Other liabilities (592,722) (3,484,035)
Trading portfolio activities ( 48,425,683) 4,525,843
----------- ---------
Total adjustments (35,232,447) 5,517,462
------------ ---------
Net cash (used in) provided by operating activities (31,915,284) 8,286,202
------------ ---------
Cash flows from investing activities:
Fixed maturities, available for sale, acquired (32,485,585) (8,898,561)
Limited partnerships acquired (3,700,000) (39,250,000)
Fixed maturities, available for sale, sold 4,499,468 8,448,374
Limited partnerships sold 3,220,532 10,512,874
Net (purchase) sale of short-term investments 84,784,817 (59,129,884)
Payable or receivable for securities not yet settled 3,957,725 (8,321,250)
Acquisition of property, improvements and equipment, net (768,455) (486,995)
--------- -----------
Net cash provided by (used in) investing activities 59,508,502 (97,125,442)
---------- ------------
Cash flows from financing activities:
Proceeds from stock issuance and other 510,685 8,723
Cash dividends paid to shareholders (586,866) (583,305)
Net purchase of treasury stock (27,099,828) ----
Proceeds from borrowings ---- 97,949,210
---- ----------
Net cash (used in) provided by financing activities (27,176,009) 97,374,628
----------- ----------
Net increase in cash 417,209 8,535,388
Cash at beginning of period 11,855,146 1,940,541
---------- ----------
Cash at end of period $ 12,272,355 $10,475,929
============ ==========
Supplemental disclosures:
Interest paid $ 3,250,000 $ 0
Federal income tax paid $ 0 $ 1,800,000
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
1) The interim consolidated financial statements are unaudited but, in the
opinion of management, reflect all material adjustments necessary for a fair
presentation of results for such periods. Adjustments to financial
statements consist of normal recurring items. The results of operations for
any interim period are not necessarily indicative of results for the full
year. These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2004.
2) The Company's subsidiaries include two insurance companies and three
insurance agencies. These subsidiaries underwrite commercial insurance in
three major lines of business. The Company considers ocean marine, inland
marine/fire and other liability as appropriate segments for purposes of
evaluating the Company's overall performance. A final segment includes the
runoff operations in the aircraft business and MMO London. The Company
ceased writing any new policies covering aircraft risks subsequent to March
31, 2002. MMO London includes the operations of MMO EU, Ltd. and MMO UK,
Ltd., its limited liability corporate capital vehicle. Since January 1,
2002, MMO UK, Ltd. has not provided capacity to any Lloyd's syndicate.
The 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.
The financial information by segment is as follows:
Three Months Ended March 31,
----------------------------------------------------
2005 2004
------------------------- ------------------------
(in thousands)
Income Income
Revenues (Loss) Revenues (Loss)
------------ ---------- ----------- ----------
Ocean marine $ 21,820 $ 5,722 $ 17,863 $ 3,036
Inland marine/fire 1,462 737 1,140 354
Other liability 12,204 820 6,007 0
Runoff lines (Aircraft) 44 126 (156) (62)
---------- --------- ---------- --------
Subtotal 35,530 7,405 24,854 3,328
Net investment income 6,604 6,604 4,754 4,754
Net realized investment losses --- --- (41) (41)
Other income 8 8 1,878 1,878
General and administrative expenses --- (7,232) --- (5,290)
Interest expense --- (1,667) --- (372)
Income tax expense --- (1,801) --- (1,488)
---------- --------- ---------- --------
Total $ 42,142 $ 3,317 $ 31,445 $ 2,769
========== ========= ========== ========
-5-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
3) The Company's comparative comprehensive income is as follows:
Three months ended
March 31,
---------------
2005 2004
---- ----
(in thousands)
Net income $3,317 $2,769
Other comprehensive income (loss), net of tax:
Unrealized (loss) gains on securities, net of
deferred tax benefit (expense) of
$705 and $(279) (1,310) 518
Less: reclassification adjustment for
losses realized in net income, net of
tax benefit (expense) of $0 and $14 0 (26)
------ ----
Other comprehensive income (loss) (1,310) 544
------ ---
Total comprehensive income $2,007 $3,313
===== =====
4) The Company maintains three stock-based compensation plans for employees,
directors and consultants. Awards under the Company's plans vest over periods
ranging from three to five years. Effective January 1, 2003, the Company adopted
the fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), prospectively to all awards granted,
modified or settled after January 1, 2003. Therefore, the cost related to
stock-based compensation included in the determination of net income for 2005
and 2004 is less than that which would have been recognized if the fair value
based method had been applied to all awards since the original effective date of
SFAS 123, which includes awards issued after December 15, 1994.
The following table illustrates the effect on net income and earnings
per share if the fair value based method had been applied to all outstanding and
unvested awards in each period. 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 $565,841 and $(31,800) for the three months ended March 31, 2005 and
2004, respectively.
-6-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
Three months ended
------------------
March 31, 2005 March 31, 2004
-------------- --------------
(in thousands, except per share data)
Net income, as reported $3,317 $2,769
Add: Stock-based compensation
expense included in reported
net income, net of related
tax effects 7 7
Deduct: Total stock-based compensation
expense determined under the fair
value based method for all awards,
net of related tax effects (84) (86)
--- ----
Pro forma net income $3,240 $2,690
------ ------
Earnings per share:
Basic EPS - as reported $.38 $.28
Basic EPS - pro forma $.37 $.28
Diluted EPS - as reported $.37 $.28
Diluted EPS - pro forma $.36 $.27
5) 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.
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 effective for the Company on January 1,
2006 and 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.
-7-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
6) 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, or approximately $27.1
million. 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 the Company, 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 January 7, 2005.
7) The Company previously entered into reinsurance contracts with a
reinsurer that is now in liquidation. On October 23, 2003, the Company was
served with a Notice to Defend and a Complaint by the Insurance Commissioner of
the Commonwealth of Pennsylvania, who is the liquidator of this reinsurer,
alleging that approximately $3 million in reinsurance claims paid to the Company
in 2000 and 2001 by the reinsurer are voidable preferences and are therefore
subject to recovery by the liquidator. The 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 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 filed a Motion to Dismiss the Complaint
on April 4, 2005. The Company believes that the complaint is wholly without
merit, and will defend it vigorously.
-8-
NYMAGIC, INC.
Notes to Consolidated Financial Statements
March 31, 2005 and 2004
8) The Company's investments are monitored by management and the Finance
Committee of the Board of Directors. The Company entered into an investment
management agreement with Mariner Partners, Inc. ("Mariner") effective October
1, 2002, which 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. Investment fees
incurred under the agreement with Mariner were $859,286 for the three months
ended March 31, 2005 and $592,216 for the three months ended March 31, 2004. On
April 1, 2005, the Company paid Mr. Shaw $83,000 in cash and granted him 4,500
shares of common stock with a value of $107,415 for his consulting contributions
to the Company in 2004. Additionally, on April 6, 2005 the Company and Mr. Shaw
entered into a consulting agreement pursuant to which Mr. Shaw provides certain
consulting services to the Company in consideration of $100,000 annually, plus a
bonus to be awarded upon the recommendation of the Chief Executive Officer and
at the sole discretion of the Human Resources Committee. During the three months
ended March 31, 2004, Mr. Shaw received cash compensation of $83,000 for his
contributions to the Company in 2003.
In 2003, the Company acquired 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. 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 CDOs held by the Company. Investment expenses incurred under this
agreement for the three months ended March 31, 2005 and March 31, 2004 amounted
to ($106,044), due to a reduction in fair value of the CDOs during the first
quarter 2005, and $389,559, respectively. These amounts were based upon the fair
value of those securities held and sold for the three months ended March 31,
2005 and 2004, 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 for the three months ended March 31, 2005 and
2004, respectively. The Company cannot withdraw funds from this limited
partnership for a minimum period of three years from its initial investment in
2003 without the consent of the hedge fund manager.
As of March 31, 2005 the Company held $6.7 million in limited
partnership interests in hedge funds, which are directly managed by Mariner.
Investment income, net of investment fees, from each major category of
investments is as follows:
Three months ended March 31,
----------------------------
2005 2004
---- ----
(in millions)
Fixed maturities, available for sale...............$ 1.3 1.0
Fixed maturities, trading securities............... 0.5 1.6
Short-term investments............................. 1.9 0.5
Equity in earnings of limited partnerships......... 3.7 2.7
----------- ---------
Total investment income.................... 7.4 5.8
Investment expenses................................ (0.8) (1.0)
----------- ---------
Net investment income......................$ 6.6 4.8
=========== =========
-9-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Description of Business
NYMAGIC, INC., a New York corporation (the "Company" or "NYMAGIC"), is a
holding company which owns and operates insurance companies, risk bearing
entities, investment interests and insurance underwriters and managers.
The Company's two insurance subsidiaries, New York Marine And General
Insurance Company ("New York Marine") and Gotham Insurance Company ("Gotham"),
each maintains a rating of "A" (Excellent) from A.M. Best Company. This is the
third highest of fifteen rating levels in A.M. Best's classification system. The
Company's insureds rely on ratings issued by rating agencies. Any adverse change
in the ratings assigned to New York Marine or Gotham may adversely impact their
ability to write premiums.
The Company specializes in underwriting ocean marine, inland marine/fire
and other liability insurance through insurance pools managed by the Company's
insurance underwriters and managers, Mutual Marine Office, Inc., Pacific Mutual
Marine Office, Inc. and Mutual Marine Office of the Midwest, Inc. (collectively
referred to as "MMO"). The original members of the pools were insurance
companies that were not affiliated with the Company. Several years later, New
York Marine and Gotham joined the pools. Over the years, New York Marine and
Gotham steadily increased their participation in the pools, while the
unaffiliated insurance companies reduced their participation or withdrew from
the pools entirely. Since January 1, 1997, New York Marine and Gotham have been
the only members of the pools, and therefore we now write 100% of all of the
business produced by the pools.
In prior years, the Company issued policies covering aircraft insurance;
however, the Company ceased writing any new policies covering aircraft risks as
of March 31, 2002. The Company decided to exit the commercial aviation insurance
business because it is highly competitive, generated underwriting losses during
the 1990s and is highly dependent on the purchase of substantial amounts of
reinsurance, which became increasingly expensive after the events of September
11, 2001. This decision has enabled the Company to concentrate on its core lines
of business, which include ocean marine, inland marine/fire and other liability.
From 1998 to 2001, the Company provided capacity, or the ability to
underwrite a certain amount of business, to certain syndicates within Lloyd's of
London ("Lloyd's") through MMO UK, a wholly owned limited liability corporate
capital vehicle. Lloyd's is currently rated "A" (Excellent). MMO UK, Ltd., as a
corporate member of Lloyd's, is not separately rated. Since January 1, 2002, MMO
UK has not provided capacity to any Lloyd's syndicate.
Results of Operations
Net income for the three months ended March 31, 2005, was $3.3 million, or
$.37 per share on a diluted basis, compared with $2.8 million, or $.28 per
diluted share, for the first quarter of 2004. The increase in earnings in 2005
was attributable to improved investment income and a lower combined ratio offset
in part by lower commission and other income and higher interest expense.
Net realized investment gains after taxes were $244, or $.00 per diluted
share, for the first quarter of 2005, as compared with net realized investment
losses after taxes of $26,000, or $.00 per diluted share, for the same period of
the prior year.
-10-
The Company's gross premiums written, net premiums written and net premiums
earned increased by 29%, 21% and 43%, respectively, for the three months ended
March 31, 2005, when compared to the same period of 2004.
Gross Premiums Written
by Line of Business Three months ended March 31,
------------------- ----------------------------
2005 2004 Change
---- ---- ------
(Dollars in thousands)
Ocean marine .................... $28,365 $26,985 5%
Inland marine/fire............... 5,354 3,229 66%
Other liability.................. 15,201 7,717 97%
------ ----- ---
Subtotal 48,920 37,931 29%
Runoff lines (Aircraft).......... 87 (24) NM
------ ---- ---
Total............................ $49,007 $37,907 29%
====== ======= ===
Net Premiums Written
by Line of Business Three months ended March 31,
------------------- ----------------------------
2005 2004 Change
---- ---- ------
(Dollars in thousands)
Ocean marine .................... $22,225 $21,673 3%
Inland marine/fire............... 1,698 1,020 66%
Other liability.................. 11,427 6,686 71%
------ ----- ---
Subtotal 35,350 29,379 20%
Runoff lines (Aircraft).......... 47 (107) NM
------ ------ ---
Total............................ $35,397 $29,272 21%
====== ======= ===
Net Premiums Earned
by Line of Business Three months ended March 31,
------------------- ----------------------------
2005 2004 Change
---- ---- ------
(Dollars in thousands)
Ocean marine .................... $21,816 $17,864 22%
Inland marine/fire............... 1,461 1,140 28%
Other liability.................. 12,204 6,007 103%
------ ----- ----
Subtotal 35,481 25,011 42%
Runoff lines (Aircraft).......... 46 (157) NM
------ ------ ---
Total............................ $35,527 $24,854 43%
====== ======= ===
Premiums for each segment were as follows:
o Ocean marine gross premiums written, net premiums written and net premiums
earned grew by 5%, 3% and 22%, respectively, during the first three months
of 2005 when compared to the same period of the prior year. Current year
premiums primarily reflect an increase in marine liability production.
Gross premiums in 2005 also reflect a leveling to slight decline in premium
rates across all classes of ocean marine premiums when compared to the same
period in 2004. Net premiums written in 2005 reflect slightly higher ceded
premiums as a result of lower net retentions per loss. The Company
decreased its net exposure to $3 million for any one risk or any one
occurrence effective on policies incepting on or after January 1, 2005
compared with $4 million for any one risk or any one occurrence effective
on policies incepting on or after January 1, 2004. Net premiums earned in
2005 reflect the volume increases achieved in the prior year.
o Inland marine/fire gross premiums written, net premiums written and net
premiums earned for the three months ended March 31, 2005 increased by 66%,
66% and 28%, respectively, when
-11-
compared to the same period of 2004. Both gross and net writings in 2005
reflect growth in existing classes and new sources of production. The
increase in premiums reflects additional production from policies covering
inland marine, fire, and motor truck cargo and new production sources in
the surety class. Gross premiums written in 2005 reflect mildly lower
market rates when compared to 2004.
o Other liability gross premiums written, net premiums written and net
premiums earned for the three months ended March 31, 2005 rose by 97%, 71%
and 103%, respectively, when compared to the same period in 2004 as a
result of premium volume increases from existing classes (professional
liability) and new classes (commercial automobile liability and excess
workers compensation). Premium rates were level to down slightly in the
first quarter of 2005 when compared to the same period in 2004.
Net losses and loss adjustment expenses incurred as a percentage of net
premiums earned (the loss ratio) were 57.7% for the three months ended March 31,
2005 as compared to 64.0% for the same period of 2004. The lower loss ratio in
2005 is primarily the result of an improved ocean marine loss ratio due to lower
severity losses occurring in the current accident year. The three months ended
March 31, 2004 included a loss in the ocean marine line that contributed
approximately 8% to the overall loss ratio. There were no significant changes
reported relating to the development of prior year loss reserves during the
first quarters of 2005 and 2004, respectively.
Policy acquisition costs as a percentage of net premiums earned (the
acquisition cost ratio) for the three months ended March 31, 2005 were 21.4% as
compared with 22.6% for the same period of the prior year. Decreases in the
acquisition cost ratio were recorded in ocean marine as a result of slightly
lower brokerage expenses and inland marine/fire due to higher commissions on
premiums ceded. Partially offsetting these reductions were increases in the
other liability ratio reflecting higher acquisition costs relating to increases
in the professional liability class of business.
General and administrative expenses as a percentage of net premiums earned
for the three months ended March 31, 2005 were 20.4% as compared with 21.3% for
the same period of the prior year. The decrease in 2005 reflects the lower rate
of additional expenses incurred to service the growth in the Company's business
operations.
The Company's combined ratio (the loss ratio, the acquisition cost ratio and
general and administrative expenses divided by premiums earned) was 99.5% for
the first quarter of 2005 as compared with 107.9% for the same period of 2004.
Interest expense increased to $1,667,000 for the three months ended
March 31, 2005 as compared to $372,000 for the same period of 2004 principally
as a result of 2005 reflecting a full quarter of interest expense from the
Company's issuance of $100 million of its 6.5% senior notes on March 11, 2004.
Net investment income for the three months ended March 31, 2005
increased by 39% to $6.6 million from $4.8 million in the same period of the
prior year. The increase reflects a higher investment yield on the investment
portfolio held in 2005 on both the limited partnership and short term
portfolios, offset in part by lower income derived from trading portfolio
activities. In addition, a larger invested asset base derived from favorable
cash flow over the past year and the proceeds received from our $100 million
6.5% senior notes issued on March 11, 2004 contributed to the overall increase.
Investment income, net of investment fees, from each major category of
investments was as follows:
-12-
Three months ended March 31,
----------------------------
2005 2004
---- ----
(in millions)
-------------
Fixed maturities, available for sale.............. $ 1.3 1.0
Fixed maturities, trading securities.............. 0.5 1.6
Short-term investments............................ 1.9 0.5
Equity in earnings of limited partnerships........ 3.7 2.7
------ ------
Total investment income................... 7.4 5.8
Investment expenses............................... (0.8) (1.0)
------ ------
Net investment income..................... $ 6.6 4.8
====== ======
As of March 31, 2005 and 2004 investments in limited partnerships amounted
to approximately $194.7 million and $136.8 million, respectively. 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 March 31, 2005 and 2004 investments in the trading portfolio amounted
to approximately $66.2 million and $57.2 million, respectively. Net investment
income for three months ended March 31, 2005 and 2004 reflects approximately $.5
million and $1.6 million, respectively, derived from trading portfolio
activities before expenses. These activities primarily include the trading of
CDOs. 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. If
the Company invests a greater percentage of its investment portfolio in limited
partnership hedge funds, or if the fair value 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 decreased to $11,000 for the three months ended
March 31, 2005 from $1.9 million for the same period in the prior year primarily
as a result of significant other income received from litigation and arbitration
settlements in 2004.
Net realized investment gains were $376 for the three months ended March 31,
2005 as compared to net realized investment losses of $41,000 for the same
period in the prior year. Write-downs from other-than-temporary declines in the
fair value of securities amounted to $35,000 and $104,000 for the three months
ended March 31, 2005 and 2004, respectively.
Total income taxes as a percentage of income before taxes were 35.2% in the
first quarter of 2005 as compared to 35.0% in the same period of 2004.
Liquidity and Capital Resources
Cash and total investments decreased from $630.9 million at December 31,
2004 to $625.1 million at March 31, 2005, principally as a result of a
repurchase of common stock.
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, or approximately $27.1
million. 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 January 7, 2005.
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.
-13-
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 on January 7, 2005. 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 used in operating activities were $31.9 million for the three
months ended March 31, 2005 as compared to cash flows provided by operating
activities of $8.3 million for the same period of 2004. Trading portfolio
activities of $48.4 million adversely affected cash flows for the three months
ended March 31, 2005. This compared to $4.5 million of trading portfolio
activities that contributed to cash flows during the three months ended March
31, 2004. As the Company's trading portfolio balance may fluctuate significantly
from period to period, cash flows from operating activities may also be
significantly impacted by such trading activities.
Cash flows provided by investing activities were $59.5 million for the
three months ended March 31, 2005 and resulted primarily from the sale of
short-term investments. Cash flows used in investing activities were $97.1
million for the three months ended March 31, 2004 and reflected additional net
purchases of limited partnerships and short-term investments, as well as the use
of $8.3 million in cash flows relating to securities purchased but not yet
settled at December 31, 2003.
On February 22, 2005, the Company declared a dividend of six (6) cents per
share to shareholders of record on March 31, 2005, payable on April 6, 2005. On
February 26, 2004, the Company declared a dividend of six (6) cents per share to
shareholders of record on March 31, 2004, payable on April 6, 2004.
During the first quarter of 2004, the Company's insurance subsidiary, New
York Marine requested and received approval from the State of New York Insurance
Department to pay an extraordinary dividend of $15,000,000 to the Company, which
amount was also paid to the Company in the first quarter of 2004. Ordinary
dividends of $4,000,000 were paid by New York Marine to the Company during the
first quarter of 2005.
During the first quarter of 2004, the Company granted options to a new
Director to purchase 10,000 shares of the Company's common stock. The exercise
price of the stock option was equal to the closing price of the Company's stock
on the New York Stock Exchange on the date of the underlying stock grant. There
were no stock option grants made during the first quarter of 2005.
-14-
Under the Amended and Restated 2004 Long-Term Incentive Plan, the Company
granted a total of 21,000 shares of common stock as unrestricted share awards to
certain officers and directors of the Company in April 2005 for a total
compensation expense of $496,584.
Premiums and other receivables, net decreased to $36.0 million as of March
31, 2005 from $42.6 million as of December 31, 2004 primarily due to favorable
cash collections.
Unpaid losses and loss adjustment expenses increased to $511.6 million at
March 31, 2005 from $503.3 million at December 31, 2004 mainly as a result of a
large severity loss occurring in the inland marine/fire line of business that
was substantially reinsured and increases in reserves in the professional
liability class as a result of the growth in premiums earned.
Investments
The following table summarizes our investments at March 31, 2005 and December
31, 2004 at fair value:
March 31, 2005 December 31, 2004
-------------------- -----------------
Amount Percent Amount Percent
---------- ------- ------ -------
(Dollars in thousands, excepts percentages)
Fixed maturities available for sale:
U.S. treasury securities $ 9,877 1.6% 10,018 1.6%
Municipalities 7,645 1.2% 7,653 1.2%
Corporate bonds 120,941 19.4% 95,062 15.1%
----------- ----- ------- -----
Subtotal $ 138,463 22.2% 112,733 17.9%
Trading securities (fair value):
Collateralized debt obligations 66,193 10.6% 17,768 2.8%
----------- ----- ------- -----
Total fixed maturities and trading portfolio $ 204,656 32.8% 130,501 20.7%
Cash & short-term investments (at cost) 225,761 36.1% 309,894 49.1%
----------- ----- ------- -----
Total fixed maturities, cash & short-term $ 430,417 68.9% 440,395 69.8%
investments
Limited partnership hedge funds (at equity) 194,679 31.1% 190,477 30.2%
----------- ----- ------- -----
Total investment portfolio $ 625,096 100.0% 630,872 100.0%
=========== ===== ======= =====
As of March 31, 2005, 90% of the fair value of our fixed maturities and
short-term investment portfolio was in obligations rated "Baa3" or better by
Moody's or its equivalent Standard & Poor's rating.
Unpaid losses and loss adjustment expenses
Unpaid losses and loss adjustment expenses for each segment were as follows:
March 31, 2005 December 31, 2004
----------------------- -----------------------
Gross Net Gross Net
---------- ----------- ---------- -----------
(in thousands) (in thousands)
Ocean marine $ 196,574 $ 122,834 $ 198,655 $ 123,346
Inland marine/fire 28,120 7,441 21,801 7,216
Other liability 130,982 84,908 126,023 79,278
Runoff lines (Aircraft) 155,949 44,894 156,782 45,639
---------- ----------- ---------- -----------
Total $ 511,625 $ 260,077 $ 503,261 $ 255,479
========== =========== ========== ===========
-15-
During 2001, the Company recorded losses 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"). The ultimate gross and net liability for unpaid
losses resulting from the WTC attack represent the estimated ultimate costs of
all incurred claims and claim adjustment expenses. Since the gross liability and
related reinsurance recoverables are based on estimates, the ultimate liability
may change from the amount provided currently depending upon revisions in gross
loss estimates and the interpretation as to the number of occurrences involved
in the WTC attack as defined in the aircraft ceded reinsurance treaties. 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. However, since December 31, 2004,
there have been no significant changes in the gross or net incurred loss
relating to the WTC attack.
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, historically have had shorter periods of time between occurrence of
an insurable event, reporting of the claim to the Company and final settlement.
The reserves with respect to such classes are less likely to be readjusted. As
the Company increases its production in the other liability line of business,
there may be changes in the level of loss reserves that the Company carries
depending upon the ultimate payout pattern of these losses. Our professional
liability class is written on a claims-made basis and other sources of new
production are derived from liability classes written on an occurrence basis.
Therefore, depending on the level of writings achieved in each of these classes,
the overall level of loss reserves carried may vary at the end of any reporting
period.
The process of establishing reserves for claims involves uncertainties and
requires the use of informed estimates and judgments. Our estimates and
judgments may be revised as claims develop and as additional experience and
other data become available and are reviewed, as new or improved methodologies
are developed or as current laws change. There were no significant changes in
assumptions made in the evaluation of loss reserves during 2005.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements other than disclosed
herein.
Critical Accounting Policies
Management considers certain accounting policies to be critical with respect
to the understanding of the Company's financial statements. Such policies
require significant management judgment and the resulting estimates have a
material effect on reported results and will vary to the extent that future
events affect such estimates and cause them to differ from the estimates
provided currently. These critical accounting policies include unpaid losses and
loss adjustment expenses, allowance for doubtful accounts, accounting for
limited partnerships and trading portfolio, stock option expense and impairment
of investments.
Unpaid losses and loss adjustment expenses are based on individual case
estimates for losses reported. A provision is also included, based on actuarial
estimates utilizing historical trends in the
-16-
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. Unpaid losses and loss
adjustment expenses amounted to $511.6 million and $503.3 million at March 31,
2005 and December 31, 2004, respectively. Unpaid losses and loss adjustment
expenses, net of reinsurance amounted to $260.1 million and $255.5 million at
March 31, 2005 and December 31, 2004, respectively. Management continually
reviews and updates the estimates for unpaid losses, and any changes resulting
therefrom are reflected in operating results currently. The potential for future
adverse or favorable loss development is highly uncertain and subject to a
variety of factors including, but not limited to, court decisions, legislative
actions and inflation.
The allowance for doubtful accounts is based on management's review of
amounts due from insolvent or financially impaired companies. Allowances are
estimated for both premium receivables and reinsurance receivables. Management
continually reviews and updates such estimates for any changes in the financial
status of companies. The allowance for doubtful accounts on both premiums and
reinsurance receivables amounted to $11.9 million and $12.8 million at March 31,
2005 and December 31, 2004, 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 $35,000 and $104,000 were charged to
results from operations for the three months ended March 31, 2005 and 2004,
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 $0.7 million and $1.6
million, respectively, at March 31, 2005.
The Company utilizes the equity method of accounting to account for its
limited partnership hedge fund investments. Under the equity method, the Company
records all changes in the underlying value of the limited partnership to net
investment income in results of operations. Net investment income derived from
investments in limited partnerships amounted to $3.7 million and $2.7 million
for the three months ended March 31, 2005 and 2004, respectively. See Item 3
"Quantitative and Qualitative Disclosures About Market Risk" with respect to
market risks associated with investments in limited partnership hedge funds.
-17-
The Company maintained a trading portfolio at March 31, 2005 consisting of
CDOs. These investments are marked to market with the change recognized in net
investment income during the current period. Any realized gains or losses
resulting from the sales of such securities are also recognized in net
investment income. The Company recorded $.5 million and $1.6 million in net
trading portfolio income before expenses for the three months ended March 31,
2005 and 2004, respectively. See Item 3 "Quantitative and Qualitative
Disclosures About Market Risk" with respect to market risks associated with
investments in CDOs.
Effective January 1, 2003, the Company adopted the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
("SFAS 123"), prospectively to all stock-based awards granted, modified, or
settled after January 1, 2003. Stock option expense amounted to $9,344 and
$8,723 for the three months ended March 31, 2005 and 2004, respectively.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The investment portfolio has exposure to market risks, which include the
effect on the portfolio of adverse changes in interest rates, credit quality,
hedge fund values, and CDO values. Interest rate risk includes the changes in
the fair value of fixed maturities based upon changes in interest rates. Credit
quality risk includes the risk of default by issuers of debt securities. Hedge
fund risk includes the potential loss from the diminution in the value of the
underlying investment of the hedge fund. CDO risk includes exposure to the
private placement market including its lack of liquidity and volatility in
changes in market prices. The only significant change to the Company's exposure
to market risks during the three months ended March 31, 2005 as compared to
those disclosed in the Company's financial statements for the year ended
December 31, 2004 related to the level of investments in CDO securities. The
investment in CDO securities amounted to $66.2 million and $17.8 million as of
March 31, 2005 and December 31, 2004, respectively.
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 largest single investment made by the Company
in such securities amounted to $5.0 million as of March 31, 2005.
The Company maintains an investment in a limited partnership hedge fund,
(Tiptree), that invests in CDOs, 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 until the arrangement is
completed. Tiptree has provided $9.5 million in cash as of March 31, 2005 to
secure 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
remote circumstances 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.
-18-
Item 4. 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(e) under the
Securities Exchange Act of 1934, as amended) as of the end of the period covered
by this report 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) 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.
Changes in Internal Controls
There have been no significant changes in our "internal control over
financial reporting" (as defined in Rule 13a-15(f) under the Securities Exchange
Act) that occurred during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
The Company previously entered into reinsurance contracts with a
reinsurer that is now in liquidation. On October 23, 2003, the Company was
served with a Notice to Defend and a Complaint by the Insurance Commissioner of
the Commonwealth of Pennsylvania, who is the liquidator of this reinsurer,
alleging that approximately $3 million in reinsurance claims paid to the Company
in 2000 and 2001 by the reinsurer are voidable preferences and are therefore
subject to recovery by the liquidator. The 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 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 filed a Motion to Dismiss the Complaint
on April 4, 2005. The Company believes that the complaint is wholly without
merit, and will defend it vigorously.
-19-
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. - Defaults Upon Senior Securities
None
Item 4. - Submission of Matters to a Vote of Security Holders
None
Item 5. - Other Information
None
Item 6. - Exhibits
3.1 Charter of NYMAGIC, INC. (filed as Exhibit 99.1 to the Company's
Current Report on Form 8-K filed on December 16, 2003 (File No.
1-11238) and incorporated herein by reference).
3.2 Amended and Restated By-Laws (Filed as Exhibit 3.3 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (File No. 1-11238) and incorporated herein by
reference).
*10.1 Form of Unrestricted Share Award Agreement.
10.2 Summary of Executive Compensation Arrangements (Filed as Item
1.01 to the Company's Current Reports on Form 8-K (File No.
1-14788) filed on April 6, 2005 and April 8, 2005 and
incorporated herein by reference).
10.3 Consulting Agreement, dated as of April 6, 2005, by and between
the Company and William D. Shaw, Jr. (Filed as Exhibit 10.1 to
the Company's Current Report on Form 8-K filed on April 6, 2005
(File No. 1-11238) and incorporated herein by reference).
10.4 Stock Purchase Agreement, dated as of January 7, 2005 by and
among the Company and the sellers named therein (Filed as Exhibit
10.1 to the Company's Current Report on Form 8-K filed on January
10, 2005 (File No. 1-11238) and incorporated herein by
reference).
*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.
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* Filed herewith
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NYMAGIC, INC.
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(Registrant)
Date: May 9, 2005 /s/ George R. Trumbull, III
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George R. Trumbull, III
Chairman and Chief Executive
Officer
Date: May 9, 2005 /s/ Thomas J. Iacopelli
------------------ -----------------------
Thomas J. Iacopelli
Chief Financial Officer
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