The Company’s principal executive offices are approximately 69,000 square feet in size and are located at 919 Third Avenue, New York, New York 10022. The Company entered into a sublease for approximately 28,000 square feet of this space, which commenced on March 1, 2003 and expires on July 30, 2016. In April 2005, the Company signed an amendment to the sublease, for approximately 10,000 square feet of additional space. The amended sublease expires on July 30, 2016. The minimum monthly rental payments of $141,276 under the amended sublease include the rent paid by the Company for the original sublease. Rent payments under the amended sublease commenced in 2005 and end in 2016, with payments amounting to $20.8 million, collectively, over the term of the agreement. In June 2007, the Company leased an additional 30,615 square feet at the principal executive location in New York City. The lease provides for minimum monthly rental payments of $197,722 beginning in 2008 and $210,478 beginning in 2013. The lease expires on July 30, 2016.
Favorable net loss reserve development reported on prior year loss reserves of $13.8 million
Total cash and invested assets of $701.1 million at year end 2007
Net income for the year ended December 31, 2007 was $13.4 million or $1.46 per diluted share, as compared to $29.9 million or $3.25 per diluted share, for the year ended December 31, 2006. Net income for 2007 was adversely affected by lower investment income, increases in realized investment losses and after-tax losses of $3.4 million or $.39 per share, resulting from the write-off of inefficient computer software and after tax losses of $1.1 million or $.13 per share resulting from expenses relating to an investment in an asset management company that was not consummated.
Total revenues for the year ended December 31, 2007 were $190.4 million, down 5%, compared with $200.5 million for the year ended December 31, 2006 primarily reflecting decreases in net investment income, increases in realized investment losses and the write-off of computer software.
Policy acquisition costs as a percentage of net premiums earned (the acquisition cost ratio) for the years ended December 31, 2007 and 2006 were 22.7% and 20.6%, respectively. The other liability acquisition cost ratio was lower in 2006 as a result of override commissions obtained from the quota share reinsurance agreement in the excess workers’ compensation class, which was not renewed in 2007. The ocean marine acquisition cost ratio in 2007 was adversely impacted by reinstatements incurred on a large cargo loss that lowered net premiums earned without any corresponding reduction in acquisition costs.
Net investment income for the year ended December 31, 2007 decreased by 26% to $35.5 million from $47.9 million in 2006. The decrease in 2007 when compared to 2006 reflected lower trading portfolio and limited partnership hedge fund income which was partially offset by increases in the fixed maturities available for sale and the short-term investment portfolios. The higher trading portfolio income in 2006 reflected a greater trading volume of securities (including $7.0 million from investments in U.S. Treasuries, as compared to none for 2007) and income from our Tricadia investment. The investment income from Tricadia amounted to $4.7 million for the year ended December 31, 2006 including trading portfolio income of $2.9 million and, as a result of the deconsolidation of Tricadia effective August 1, limited partnership hedge fund portfolio income of $1.8 million. This compared to $7.9 million of income from Tricadia in 2007, which was included in limited partnership hedge fund portfolio income. Income from Tricadia increased in 2007 when compared to 2006 as a result of greater interest income earned from the warehousing of CDO/CLO debt securities and middle market commercial debt, as well as larger fee income earned for servicing such securities. Limited partnership hedge fund income in 2007, excluding income from Tricadia, decreased from the prior year as a result of lower yields on the limited partnership hedge fund portfolio, which amounted to 3.4% in 2007 as compared to 10.0% in 2006.
As of December 31, 2007 and 2006 investments in limited partnerships amounted to approximately $188.3 million and $182.3 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 funds to results of operations. Net investment income for 2007 and 2006 reflected approximately $13.0 million and $16.5 million, respectively, derived from limited partnership hedge fund investments.
As of December 31, 2007 and 2006 investments in trading portfolios amounted to approximately $144.9 million and $0, respectively. Net investment income for 2007 and 2006 reflected approximately $2.3 million and $15.8 million, respectively, derived from trading portfolio activities. These activities include the trading of collateralized debt obligations (CDOs), collateralized loan obligations (CLOs), commercial middle market debt, municipal bonds, preferred stocks and US 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. The ending balance in the trading portfolio can vary substantially from period to period due to the level of trading activity.
These decreases were primarily due to the closing of novation agreements for certain excess workers’ compensation policies that resulted in a decreases of $41.5 million and $24.9 million in unpaid losses and loss adjustment expenses, and reinsurance receivables on unpaid losses, respectively.
Ceded reinsurance payable decreased to $27.1 million at December 31, 2007 from $44.8 million at December 31, 2006 and prepaid reinsurance premiums decreased to $21.7 million at December 31, 2007 from $29.6 million at December 31, 2006 mainly as a result of the payment of quota share reinsurance premiums, as well as lower ceded premiums written, in the excess workers’ compensation class.
Deferred income taxes at December 31, 2007 increased to $14.4 million from $10.8 million at December 31, 2006 primarily due to deferred tax benefits provided on investment losses incurred during the year.
Net realized investment losses after taxes for the year ended December 31, 2006 were $262,000, or $.03 per diluted share, compared with $523,000, or $.06 per diluted share, for 2005.
The excess of loss reinsurance market for the marine and energy line of business significantly contracted in 2006, resulting in increases in both reinsurance costs and net loss retentions ($5 million per risk and $6 million per occurrence) to the Company effective January 1, 2006. This compared to a net loss retention of $3 million per risk or occurrence in 2005. As a result of the tightening in the reinsurance market, the Company excluded energy business with exposures in the Gulf of Mexico from its ocean marine reinsurance program for 2006 and opted instead to enter into an 80% quota share reinsurance agreement for this portion of its energy business to reduce the potential impact of catastrophe losses to the Company. The quota share agreement and larger costs of excess of loss reinsurance accounted for a substantial portion of ocean marine ceded written premium in 2006.
Inland marine/fire gross premiums written and net premiums written for the year ended December 31, 2006 decreased by 14% and 16%, respectively, when compared to 2005. Net premiums earned for the year ended December 31, 2006 increased by 6% when compared to 2005. Gross and net writings in 2006 reflect mildly lower market rates when compared to 2005, and declines in production in certain property risks, which were partially offset by increased production in the motor truck cargo class. The increase in net premiums earned in 2006 reflected volume increases achieved in the prior year.
The Company terminated its relationship with its former primary source of workers’ compensation premium effective December 31, 2006.
Aircraft premiums were nominal in 2006 and 2005 as a result of the Company having ceased writing new aircraft policies subsequent to March 31, 2002.
Net investment income for the year ended December 31, 2006 increased by 33% to $47.9 million from $36.1 million in 2005. The increase achieved in 2006 reflected larger trading portfolio income and higher investment yields on both the fixed maturities available for sale and the short-term investment portfolio, which was partially offset by lower returns from the limited partnership hedge fund portfolio. The investment income from Tricadia, formerly known as Tiptree, amounted to $4.7 million for the year ended December 31, 2006 and included trading portfolio income of $2.9 million and as a result of the deconsolidation of Tricadia effective August 1, limited partnership hedge fund portfolio income of $1.8 million. This compared to $3.7 million of trading portfolio income for Tricadia during 2005. Trading portfolio income in 2006 also included $7.0 million from investments in U.S. Treasuries, as compared to none in 2005.
Commission and other income decreased to $1.1 million for the year ended December 31, 2006 from $1.5 million for the same period in the prior year. In 2005, the Company reported a gain from the sale of MMO UK as well as profit commissions earned on the favorable development of ceded reinsurance in the aircraft class of business. The Company reported larger profit commissions derived from ceded reinsurance in the ocean marine class of business in 2006 when compared to 2005.
Unpaid losses and loss adjustment expenses decreased to $579.2 million at December 31, 2006 from $588.9 million at December 31, 2005. Reinsurance receivables on unpaid losses, net decreased to $286.2 million at December 31, 2006 from $299.6 million at December 31, 2005. These decreases were primarily the result of payments of hurricane losses in the ocean marine line and asbestos losses, partially offset by increases in both loss reserves and reinsurance receivables in the professional liability and excess workers compensation classes as a result of the growth in premiums earned.
In 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 in 2005 a total of 1,092,735 shares of common stock at $24.80 per share. The Company used 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.
Under the Common Stock Repurchase Plan, the Company may purchase up to $55 million of the Company’s issued and outstanding shares of common stock on the open market. This plan was subsequently amended in March of 2008 to increase the limit to $75 million.
In 2002, the Company signed a sublease at 919 Third Avenue, New York, NY 10022 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. In April 2005, the Company signed an amendment to the sublease, for approximately 10,000 square feet of additional space. The sublease expires on July 30, 2016. The minimum monthly rental payments of $141,276 under the amended sublease include the rent paid by the Company for the original sublease. Such payments began in 2005 and end in 2016. They will amount to $20.8 million of total rental payments, collectively, over the term of the amended sublease.
In May 2007, the Company signed a lease for additional office space for its headquarters located on the 11th floor of 919 Third Avenue in New York City. The lease term provides for lease payments on two sections (Space A and Space B) of the 11th floor. The lease term for Space A commenced on September 1, 2007 and ends on July 30, 2016. Minimum monthly payments of $85,818 commenced on January 1, 2008 and will increase to $91,355 on the commencement of the sixth lease year. Total minimum lease rental payments over the term for Space A will amount to $9.4 million. The lease term for Space B commences on April 30, 2008, and will end on July 30, 2016. Minimum monthly payments of $111,904 will increase to $119,123 on the commencement of the sixth lease year following the initial payment under the Space B lease. Total minimum lease rental payments over the term for Space B will be at least equal to $11.7 million. In connection with Space A and Space B, the landlord will reimburse the Company up to $332,200 and $433,175, respectively, in qualified renovations.
The commitment to provide capital to Tricadia at the manager’s discretion is $15.4 million. Currently, Tricadia is not assembling any CDO assets as market conditions preclude any meaningful activity. Tricadia also has an investment in Tiptree Financial Partners LP who maintains trading activities in their CLO operations. It is uncertain whether such funds will be drawn to fund the operations of Tricadia or Tiptree Financial Partners LP.
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 before investment fees derived from investments in limited partnerships amounted to $13.0 million and $16.5 million for the years ended December 31, 2007 and 2006, respectively. See