o Net income of $17.1 million or $1.74 per diluted share o Gross premium growth in core lines (ocean marine, inland marine/fire and other liability) of 20% over 2002 o Combined ratio of 98.1% o Net investment income growth of 42% over 2002 o Net loss reserve redundancy reported on prior year loss reserves of $1.4 million o Total cash and invested assets of $520 million, up from $430 million at year end 2002 o Total shareholders' equity of $244 million, up from $221 million at year end o Total reinsurance receivables of $281 million, down from $326 million at year end 2002 o Raised $8.4 million through the sale of investment units to Conning Capital Partners VI, L.P. o Reinstated shareholder dividend at 6 cents per quarter o Paid off bank loan o Formed business relationship with Southern Marine & Aviation, an insurance agency to write a primary marine cargo program o Strong cash collections from reinsurance receivables o Implemented revised investment strategy o Completed secondary stock offering of 2,150,000 shares of common stock by certain shareholders (from which the Company received no proceeds)
Net income for the year ended December 31, 2003 was $17.1 million or $1.74 per diluted share, as compared to $28.7 million, or $3.08 per diluted share, for the year ended December 31, 2002. The decrease in net income in 2003 compared to 2002 was primarily attributable to realized investment gains and tax benefits resulting from the withdrawal from London operations in 2002 as described below.
A reconciliation of net income excluding realized investment gains after taxes and tax benefits attributable to the Company's withdrawal from its London operations to net income prepared in accordance with generally accepted accounting principles for the years ended December 31, 2003 and 2002, respectively, is set forth below:
(1) Net income excluding realized investment gains and tax benefits on the withdrawal from London operations is a non-GAAP financial measure and should be considered in addition to, but not as a substitute for, net income prepared in accordance with generally accepted accounting principles as a measure of profitability. Because realized investment gains in 2002, which resulted primarily from the liquidation of the Company's fixed income portfolio, and tax benefits on the withdrawal from London operations in 2002 were non-recurring in nature, management believes that net income excluding realized investment gains and tax benefits on the withdrawal from London operations provides useful information regarding trends in the Company's results of operations.
Gross premiums written, net premiums written and net premiums earned for the year ended December 31, 2003 declined by 6%, 8% and 15%, respectively, when compared to the same period of 2002 as a result of the Company's previously announced decisions to cease writing aircraft business and to withdraw from operations in London. However, gross premiums written, net premiums written and net premiums earned from the Company's core segments (ocean marine, inland marine/fire and other liability) increased by 20%, 14% and 31%, respectively, in 2003 over the same period of 2002.
Other liability gross premiums written rose by 105% for the year ended December 31, 2003 when compared to 2002 due to production increases from existing classes and new classes (commercial automobile liability and excess workers compensation) and higher premium rates on policy renewals. Average rate increases achieved in 2003 were approximately 10% to 20%. Although additional production was achieved in the contractor's liability class, policy count was reduced to mitigate exposure in certain classes of errors and omission policies. New sources of production include underwriting a programmed book of commercial automobile liability insurance, which contributed $3.3 million in gross premiums written in 2003. In addition, gross premiums written in 2003 also include $6.2 million of excess workers compensation insurance focusing on smaller companies in the New York area. Net premiums written and net premiums earned grew by 131% and 134%, respectively over the prior year due to the premium rate and production increases as well as higher net loss retention levels in the contractor's liability and errors and omission classes. The Company cannot assure that rates will continue to increase in 2004 at the levels achieved in 2003.
Net losses and loss adjustment expenses incurred as a percentage of net premiums earned (the loss ratio) for the year ended December 31, 2003 was 57.8% compared to 64.7% for the year ended December 31, 2002. The Company recorded lower loss ratios in 2003 in both the ocean marine and other liability lines of business, which largely reflected the absence of any catastrophe losses and the beneficial impact of increased rates in those lines of business. Net losses incurred from catastrophes in 2002 were $3 million and $0 in 2003.
The Company decreased net loss reserves by approximately $1.4 million in 2003 from the 2002 year end reserve amount of $209 million. The benefit resulted from the favorable development of ocean marine reserves offset by the adverse development of aviation reserves attributable to accident years 1997 to 2000 and additional net loss development in its umbrella (other liability) losses of approximately $1.0 million. The year end 2002 results were affected by net adverse development of $4.4 million resulting in part from provisions made for insolvent, financially impaired and commuted reinsurers, and $2.2 million of adverse development from the Company's other liability line reflecting additional umbrella exposures.
Net investment income for the year ended December 31, 2003 increased by 42% to $22.4 million from $15.8 million in the year ended December 31, 2002. The increase in 2003 reflects the implementation of our revised investment strategy, including income derived from trading portfolio activities and limited partnerships, partially offset by a lower investment yield on the fixed income portfolio in 2003 as a result of a larger position held by the Company in short-term investments. Net investment income for 2003 reflects approximately $9.4 million derived from trading portfolio activities, which commenced in 2003. The Company's trading portfolio is marked to market with the change recognized in net investment income during the current period. Any realized gains or losses resulting from the sales of trading securities are also recognized in net investment income. Net Investment income derived from limited partnership hedge fund investments approximated $7.7 million in 2003 as compared to approximately $900,000. in 2002. The Company initially invested in hedge funds in the fourth quarter of 2002. The equity method of accounting is used to account for the Company's limited partnership hedge fund investments. Under the equity method, the Company records all changes in the underlying value of the limited partnership hedge fund to results of operations. As a result of the accounting treatment of its limited partnerships and trading portfolio, the Company's investment income results may be more volatile. The Company's investments in limited partnership hedge funds amounted to approximately $105 million and its trading account amounted to $62 million as of December 31, 2003.
Commission and other income decreased to $1.5 million for the year ended December 31, 2003 from $1.7 million for the prior year. The 2003 amounts consisted primarily of income received from arbitration settlements, offset by returns of reinsurance profit contingent commissions. In the second quarter of 2003, an arbitration procedure was completed against a former pool member, Utica Mutual, which resulted in a payment to MMO of approximately $7.8 million. This amount represented Utica Mutual's funding requirement to the MMO pools. In addition, MMO was awarded interest of approximately $1 million on a pre-tax basis. In 2002, larger profit commissions were earned based upon the ceded results of aircraft reinsurance treaties.
Year Ended December 31, 2002 as Compared to Year Ended December 31, 2001
The Company reported net income of $28.7 million, or $3.08 per diluted share, as compared to net losses of $13.1 million, or $1.42 per diluted share, for the years ended December 31, 2002 and 2001, respectively.
A reconciliation of net income (loss) excluding realized investment gains after taxes and tax benefits attributable to the Company's withdrawal from its London operations to net income prepared in accordance with generally acceptable accounting principles for the years ended December 31, 2002 and 2001, respectively, is set forth below.
(1) Net income (loss) excluding realized investment gains and tax benefits on the withdrawal from London operations is a non-GAAP financial measure and should be considered in addition to, but not as a substitute for, net income prepared in accordance with generally accepted accounting principles as a measure of profitability. Because realized investment gains in 2002, which resulted primarily from the liquidation of the Company's fixed income portfolio, and tax benefits on the withdrawal from London operations in 2002 were non-recurring in nature, management believes that net income (loss) excluding realized investment gains and tax benefits on the withdrawal from London operations provides useful information regarding trends in the Company's results of operations.
Net realized investment gains after taxes of $5.5 million, or $.59 per diluted share, and $1.9 million, or $.20 per diluted share, were reported for the years ended December 31, 2002 and 2001, respectively.
Net premiums earned for the year ended December 31, 2002 grew by 34%, when compared to the same period of the prior year. Net premiums earned from the Company's core lines of business for the year ended December 31, 2002 grew by 69% when compared to 2001. The increases were achieved primarily as a result of rate increases.
Ocean marine - net premiums earned grew by 60% during 2002 when compared to 2001 and reflect higher ocean marine rates across the various ocean marine classes, particularly in the rig class, and additional production within the various marine classes of business. The ocean marine line reflected average rate increases of 20% to 30% in 2002.
Inland marine/fire - net premiums earned increased 268% for the year ended December 31, 2002 when compared to 2001, largely due to an underwriting program insuring excess and surplus lines property risks and improved pricing. The underwriting program commenced in July of 2001. The inland marine/fire line recorded average rate increases of 20% to 25% in 2002.
MMO London - premiums earned for the year ended December 31, 2002 were down by 71% to $4.2 million from $14.1 million in the prior year and reflected reduced capacity for premium writings at Lloyd's.
The Company reported lower overall loss ratios in 2002 as a result of a decrease in the frequency and severity of losses in the aircraft line when compared to 2001. However, the Company recorded catastrophe losses of $3 million, which adversely affected the ocean marine line in 2002. This compared to catastrophe losses of $9.0 million in 2001 in the aircraft line. The Company increased net loss reserves by $4.4 million in 2002 as compared to $9.6 million in 2001. The Company also increased net loss reserves for umbrella (other liability) losses by approximately $2.2 million in 2002 as a result of the additional development of asbestos losses with respect to a few insureds. This compared to a $.6 million increase in net reserves for umbrella losses in 2001. The 2002 and 2001 results were each affected by adverse development from ocean marine business written by MMO London. The quality of the book written by MMO London was originally anticipated to be similar to that written by the MMO companies. However, the loss experience revealed a lower quality book of business resulting from higher than expected claim frequencies and a longer than expected loss development pattern which caused the Company to increase reserves substantially in 2001 and to a lesser extent in 2002. The adverse development recorded in 2002 and 2001 was partially offset by favorable development in the ocean marine line of business.
The Company's combined ratio improved to 97.5% for the 2002 year compared with 142.9% for 2001. Excluding losses from the WTC attack, the combined ratio would have been 127.6% in 2001.
Net investment income for the year ended December 31, 2002 decreased by 9% to $15.8 million from $17.4 million for the same period of 2001. The decrease reflected lower investment yields as well as larger positions in tax-exempt securities in 2002, despite a larger investment asset base in 2002. Income derived from hedge fund investments approximated $1.0 million in 2002 compared to no similar amount in 2001.
Commission and other income, collectively, decreased to $1.7 million for the year ended December 31, 2002 from $3.6 million for the prior year. In 2001, larger profit commissions were earned based upon the ceded results of aircraft reinsurance treaties.
Interest expense increased to $575,000 in 2002 from $395,000 in 2001 due to a larger amount of loan principal outstanding during the year.
Reinsurance receivables on paid and unpaid losses, net, decreased to $326.4 million as of December 31, 2002 from $361.7 million for the same period of 2001. The decrease is largely attributable to smaller loss recoveries from runoff segments (aircraft and MMO London) and to the commutation of certain reinsurance receivable balances.
The change in other liabilities in 2001 was a result of increases in funds held from reinsurers in order to collateralize their obligations to the Company as required by provisions of various reinsurance treaties. Funds obtained from reinsurers are invested by MMO for the benefit of the Company in the insurance pools managed by MMO.
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, 2003, the Company's assets included approximately $259 million in cash and short-term investments. The amount of short-term investments held is a direct result of the Company's concern over the prospects of rising interest rates in the near future.
Financing activities occurred in 2001 as a result of borrowings under the Company's revolving credit agreement and unsecured credit facility. The Company borrowed approximately $5.5 million in 2001 to assist in the payment of gross losses of the Company. The loan amounts resulted from draw downs on existing letters of credit provided to support the Company's U.K. operations. Repayments under the Company's prior loan facility were made at $1,250,000 per quarter in 2001.
On December 30, 2002, the Company signed a sublease at 919 Third Avenue, New York, NY 10022 for which it received landlord's consent dated January 31, 2003, for approximately 28,000 square feet for its principal offices in New York. The sublease commenced on March 1, 2003 and expires on July 30, 2016. The minimum monthly rental payments of $102,794 commenced in March 2004 and end in 2016 and will amount to $15.3 million of total rental payments over the term of the sublease.
As discussed below, on March 11, 2004, the Company issued $100,000,000 in the aggregate principal amount of 6.50% Senior Notes. The principal of the Senior Notes is payable in full on March 15, 2014. Interest is payable semi-annually on March 15 and September 15 of each year, beginning September 15, 2004.
The Company adheres to investment guidelines set by management and approved by the Finance Committee of the Board of Directors. See "Investment Policy".
NYMAGIC's principal source of cash flow is dividends from its insurance company subsidiaries, which are then used to fund various operating expenses, including interest expense, loan repayments and the payment of any dividends to shareholders. The Company's domestic insurance company subsidiaries are limited by statute in the amount of dividends that may be declared or paid during a year. The limitation restricts dividends paid or declared to the lower of 10% of policyholders' surplus or 100% of adjusted net investment income as defined under New York Insurance Law. Within this limitation, the maximum amount which could be paid to the Company out of the domestic insurance companies' surplus was approximately $15,900,000 as of December 31, 2003. In connection with the application for approval of acquisition of control of NYMAGIC, INC., filed by Mariner and William J. Michaelcheck with the New York State Insurance Department (the "Department") pursuant to Section 1506 of the New York Insurance Law, New York Marine and Gotham agreed for a period of two years from July 31, 2002, the date of the acquisition of such control, not to pay any dividends without the consent of the Department. The limitations on dividends from the insurance company subsidiaries are not expected to have a material impact on the Company's ability to meet current cash obligations.
During the first quarter of 2003, the Company granted options to purchase 20,000 shares of the Company's common stock to certain directors of the Company, who are not officers of the Company. The exercise prices of these stock options are equal to the closing prices of the Company's stock on the New York Stock Exchange on the dates of the underlying stock grants.
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. Procedures utilized for analyzing other-than-temporary declines in the value of fixed income investments include the following: 1) identifying those fixed income securities with fair values declines of greater than 10% at the end of each reporting period and held for 6 months or more; 2) determining if such fixed income investments have had any rating agency downgrades; 3) recording an impairment if one of the following situations is true: a) the fair value decline is greater than 20%, b) the fixed income security has been downgraded more than two levels by a major rating agency, or c) the fair value decline is greater than 10% and the security has been downgraded one level by a major rating agency. Procedures utilized for analyzing other-than-temporary declines in the value of equity securities include recording writedowns on those equity securities with fair value declines of greater than 20% at the end of each reporting period and held for 6 months or more. The Company will consider the effect of rising interest rates in determining other-than-temporary declines in the value of fixed income investments. Approximately $0 and $1.5 million were charged to results from operations in 2003 and 2002, respectively, resulting from fair value declines considered to be other-than-temporary. Gross unrealized gains and losses on fixed maturity investments amounted to approximately $1.2 million and $.3 million, respectively, at December 31, 2003. As of December 31, 2003, there were no unrealized losses greater than one year from the date of purchase on fixed income securities. There were no unrealized gains or losses on equity securities at December 31, 2003 and 2002, respectively.
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 $7.7 million and approximately $900,000 for the years ended December 31, 2003 and 2002, respectively. See
Interested persons can obtain access to the Company's 10-K, 10-Q and 8-K reports on its Internet web site, www.nymagic.com, as soon as reasonably practicable after they are filed or furnished to the SEC.
The consolidated financial statements required by this item and the report of the independent accountants therein required by Item 15(a) of this report commence on page . See accompanying Index to the Consolidated Financial Statements on page.