Net losses and loss adjustment expenses incurred..................$ 87,901 $ 68,063 $ 36,853 $ 50,512 $ 50,768 Policy acquisition expenses. 16,083 18,178 11,077 10,107 16,583 General and administrative expenses.................. 16,952 19,439 19,327 21,531 16,763 Interest expense............ 395 712 1,058 1,374 1,450 -------- -------- -------- -------- -------- TOTAL EXPENSES..............$121,331 $106,392 $ 68,315 $ 83,524 $ 85,564 -------- -------- -------- -------- --------
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 2001 2000 1999 1998 1997 -------- ------- -------- -------- ------- (In thousands, except per share amounts)
Income (loss) before income taxes.................... (12,839) (5,659) 21,179 22,904 35,455 -------- -------- -------- -------- -------- Income taxes Current................... 798 1,276 3,189 5,250 8,962 Deferred.................. (498) (1,433) 1,577 (869) 125 -------- -------- -------- -------- -------- Total income taxes.......... 300 (157) 4,766 4,381 9,087 -------- -------- -------- -------- --------
Weighted average shares outstanding............... 9,232 9,244 9,687 9,705 9,872 Diluted earnings (loss) per share.................$ (1.42) $ (.60) $ 1.69 $ 1.91 $ 2.67 ======== ======== ======== ======== ======== Dividends declared per share.....................$ .30 $ .40 $ .40 $ .40 $ .40 ======== ======== ======== ======== ========
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."
The Company's results of operations are derived from its two main segments which consist of the domestic insurance companies/agencies and MMO London. The Company's domestic insurance companies participate in pools of insurance covering ocean marine, inland marine, aircraft and non-marine liability insurance managed by MMO and affiliates. Effective January 1, 1997 and subsequent, the Company's participation in the pools increased to 100%. MMO London wrote a book of ocean marine insurance through its participation in Syndicate 1265 and a book of assumed property and aircraft reinsurance through its participation in Syndicate 2010. In 2002, MMO UK will not be providing capacity to any Lloyd's syndicate.
The Company records premiums written in the year policies are issued and
earns such premiums written on a monthly pro rata basis over the terms of the respective policies. The following tables present the Company's premiums written and premiums earned on a net basis after ceded reinsurance for each of the past three years.
NYMAGIC NET PREMIUMS WRITTEN BY LINE OF BUSINESS YEAR ENDED DECEMBER 31, - ---------------------------- --------------------------------------------- 2001 2000 1999 --------------------------------------------- (Dollars in thousands)
(b) Includes net premiums written from MMO London of $7,816 for 2001.
(c) Includes net premiums earned from MMO London of $9,197, $26,399 and $13,614 for 2001, 2000 and 1999, respectively.
(d) Includes net premiums earned from MMO London of $4,939 for 2001.
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 the 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 increases.
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 both brokerage commissions and premium taxes both of which are primarily based on a percentage of premiums written. Such 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.
The domestic insurance companies/agencies segment reported a 44% increase in net premiums earned in 2001. Net premiums earned by line of business within this segment are listed as follows:
Ocean marine - net premiums earned and net premiums written in this line grew by 19% and 41%, respectively, in 2001 and reflect firmer marine rates and additional production mainly in the rig, hull and cargo classes. Net premiums in the ocean marine class are expected to rise further in 2002 as premium rates remain firm.
Net losses and losses adjustment expenses incurred from MMO London were $18.5 million (130.8% loss ratio) and $36.3 million (139.5% loss ratio) for the years ended December 31, 2001 and 2000, respectively. WTC attack losses of approximately $1.4 million also arose from MMO London operations. The decline in losses incurred in 2001 is consistent with the decline in premiums in MMO London from the prior year.
Policy acquisition costs as a percentage of net premiums earned was 19.0% for the year ended December 31, 2001 as compared with 24.1% for the same period in 2000. The decrease was attributable to a lower aircraft expense ratio as much of the premium surcharges enacted by the Federal Government were recorded with a nominal processing charge. The prior year ratio also reflected a higher ratio for MMO London resulting from the recognition of larger premium deficiencies.
Net investment income was down 4% for year ended December 31, 2001 when compared to the same period of the prior year. The decrease generally reflects a lower interest rate environment and a reduction in overall invested assets during the year.
General and administrative expenses decreased by 13% for the year ended December 31, 2001 when compared to the same period of the prior year of 2000. The decrease is attributable to lower operating expenses in the current year derived from MMO London.
The Company reported a net loss for the year ended December 31, 2000 of $5.5 million, or $.60 per diluted share as compared with net income of $16.4 million, or $1.69 per diluted share, for the year ended December 31, 1999.
The Company reported an operating loss, which excludes the effects of realized investment gains after taxes, for the year ended December 31, 2000, of $8.9 million or $.96 per diluted share compared with operating income of $8.3 million, or $.86 per diluted share, for the year ended December 31, 1999. The decline in operating income in 2000 principally reflects the underwriting losses attributable to MMO London including costs associated with managing the unpaid losses of Syndicate 1265 which ceased underwriting in the third quarter of 2000. Results from operations were reduced by such losses for the year ended December 31, 2000 by $1.67 per diluted share. This compares with losses of $.10 per diluted share from MMO London in the prior year. The exchange of the Company's Lloyd's agency for a minority interest in Cathedral Capital PLC, in the fourth quarter of 2000, resulted in an after tax gain of approximately $450,000 or $.05 per diluted share.
Net premiums earned increased by 34% for the year ended December 31, 2000 when compared to the prior year. The increase in 2000 is largely attributable to premiums emanating from the participation in Syndicate 1265 through MMO London. Net premiums earned from MMO London grew to $26.4 million in 2000 as compared to $13.6 million in 1999 and much of the increase is attributable to a transaction involving a one-time assumption of approximately $7.4 million of ocean marine and casualty premiums. The Company placed Syndicate 1265 into run-off in the third quarter of 2000.
Net premiums earned from domestic insurance companies increased by 15% in 2000 due mainly to growth in the aircraft line of business. Aircraft net premiums earned grew 142% for the year as a result of the effect of higher retention levels in 2000 due to the non-renewal of a reinsurance treaty that ceded 75% of gross premiums written in 1999. Rate increases on aircraft policies further contributed to the growth in 2000 premiums earned. However, the increase in aircraft net premiums written was offset by a reduction in policy count and reduction in participation percentage on policies.
Ocean marine premiums earned, derived from the domestic insurance companies, decreased 7% in 2000 when compared to 1999. However, net writings increased 4% in 2000 when compared to the prior year due, in large part, to increasing marine rates in 2000. The level of premium rates attained in 2000 enabled the Company to write additional policies particularly in the hull and cargo marine classes.
The loss ratio was 90.2% for the year ended December 31, 2000 as compared to 65.6% for the prior year. The increase resulted from a significant frequency of larger than anticipated losses derived from the underwriting operations of MMO London which resulted in a loss ratio of 137.4% for year ended December 31, 2000. The loss ratio from the domestic insurance companies increased in 2000 to 64.8% from 61.7% in the prior year primarily due to increases in both the frequency and severity of losses in the aircraft line of business. The Company's domestic insurance companies recorded favorable net loss experience in the ocean marine line comparable to the prior year period.
Policy acquisition expenses as a percentage of net premiums earned for the year ended December 31, 2000 was 24.1% as compared with 19.7% for the same period in 1999. The increase in the ratio in 2000 is primarily attributable to higher acquisition costs on UK derived business and larger acquisition expenses in the aircraft line in 2000 which do not reflect the benefit of ceding commissions on ceded reinsurance business incepting in 2000.
Commission income was approximately $900,000 for the year ended December 31, 2000 as compared to $2.0 million in the prior year. 1999 reflected larger reinsurance contingent commissions derived from the profitability of certain ceded reinsurance agreements in the aircraft and ocean marine lines.
Other income increased substantially for the year ended December 31, 2000 as compared to the prior year. The increase was attributable to the exchange of the Company's Lloyd's agency for a minority interest in Cathedral Capital PLC which resulted in a pre-tax gain of approximately $700,000.
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, 2001, the Company's assets included approximately $68 million in cash and short-term investments. The primary sources of the Company's liquidity are funds generated from insurance premiums, investment income and maturing or liquidating investments.
Cash flows from operating activities in 2001 amounted to $1.8 million and represents improved cash flow than in the prior two years. Cash flows of $15.1 million and $33.6 million were used in operating activities during 2000 and 1999 as declines in premium rates, increases in ceded reinsurance premium costs and increases in severity claim payments on a gross basis negatively affected cash flows from operations. The Company's loss payments of Asbestos/Environmental business also adversely affected cash flows during the past three years. The cash flows used in operating activities during 2000 and 1999 were made available by investing activities and, in particular, through the sale or maturity of fixed income securities or short-term investments. Cash flows are expected to be adversely affected in the future as a result of future declines in aircraft premiums as the Company does not expect to underwrite any new or renewal policies on a direct basis subsequent to March 31, 2002.
Financing activities occurred, in prior years, as a result of borrowings under the Company's revolving credit agreement and unsecured credit facility. Repayments under the Company's existing loan were made at $1,250,000 per quarter over the past three years through December 31, 2001. The Company borrowed approximately $5.5 million in 2001 to assist in the payment of gross losses of the Company. The loan amount results from draw downs during 2001 on existing letters of credit provided to support the operations of MMO London. As of December 31, 2001, the balance of the letter of credit was 10.1 million Pounds Sterling, or $14.7 million. This amount may be subject to future draw downs to fund the payment of losses that result from the runoff of unpaid losses from MMO London.
There were no related party transactions which had a material effect on the Company's financial position, cash flows, liquidity or results of operations. Specific related party transactions are disclosed in NOTE 16 of the Company's financial statements.
The following table outlines the major contractual obligations of the Company and the years in which they become due.
NYMAGIC's principal source of cash flow is dividends from its insurance company subsidiaries which is 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 net investment income as defined under New York Insurance Law. The limitations on dividends from the insurance company subsidiaries are not expected to have a material impact on the Company's ability to meet current cash. Dividends can be paid from Syndicate 1265 through MMO London to the extent solvency margins are maintained and after the closing of an underwriting year, which occurs three years following the beginning of a calendar year. The Company does not expect to receive a dividend from the closing of any underwriting years.
The Company discloses significant accounting policies in the footnotes of its financial statements. 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 and impairment of investments.
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". 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. Unpaid losses amounted to $534. 2 million and $411.3 million at December 31, 2001 and 2000, respectively.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", ("SFAS 142") was issued by the FASB in June 2001 and changes the accounting for goodwill and other intangible assets effective January 1, 2002. Goodwill and certain intangible assets will be required to be tested for impairment at least annually. The adoption of SFAS 142 will not have a material effect on the Company's financial statements.