The Company’s principal executive offices are approximately 38,000 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 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 commenced 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.
Total cash and invested assets of $664.9 million at year end 2006
Formed business relationships with various program managers to produce additional property and casualty insurance premiums
The Company records premiums written in the year policies are issued and earns such premiums on a monthly pro rata basis over the terms of the respective policies. The following tables present the Company’s gross premiums written, net premiums written and net premiums earned for each of the past three years.
Net income for the year ended December 31, 2006 was $29.9 million or $3.25 per diluted share, as compared to $9.7 million, or $1.09 per diluted share, for the year ended December 31, 2005. Net income for 2005 was adversely affected by after-tax losses of $13.9 million from hurricanes Katrina and Rita. Partially offsetting this decrease was an increase in net investment income.
Gross premiums written, net premiums written and net premiums earned for the year ended December 31, 2006 increased by 20%, 16% and 13%, respectively, when compared to 2005.
Other liability gross premiums written, net premiums written and net premiums earned for the year ended December 31, 2006 rose by 65%, 32% and 18%, respectively, when compared to 2005. In prior years, the Company issued excess workers’ compensation insurance policies on behalf of certain self-insured workers’ compensation trusts. Specifically, in 2005 the Company wrote a $500,000 layer in excess of each trust’s self insured retention of $500,000 and the gross premiums written were reinsured under a 50% quota share reinsurance treaty. In 2006, the Company provided gross statutory limits on the renewals of its existing inforce book of excess workers’ compensation policies to these trusts. In addition, the Company expanded the number of trusts it issued policies to under an agreement with another agent. Accordingly, the reinsurance structure was changed in 2006 to accommodate the increase in gross limits. A general excess of loss treaty was secured in order to protect the Company on any one risk. The resulting net retention was then subject to a 70% quota share reinsurance treaty. As a result of the change in underwriting and reinsurance structures, the gross, ceded and net premiums written increased substantially in this class of business in 2006 when compared to 2005. Gross and net premiums written in the excess workers’ compensation class increased to $41.7 million and $11.5 million, respectively, in 2006 from $6.3 million and $3.1 million, respectively, in 2005. Volume increases from existing classes (professional liability and contractors’ liability) were also achieved in 2006 when compared to 2005. Premium rates in these classes during 2006 were flat to down slightly when compared to 2005.
achieved in 2006 coupled with a comparable excess of loss reinsurance program; however, the Company will not maintain the 70% quota share reinsurance agreement that was in effect during 2006.
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
As of December 31, 2006 and 2005 investments in limited partnerships amounted to approximately $182.3 million and $139.6 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 2006 and 2005 reflected approximately $16.5 million and $17.6 million, respectively, derived from limited partnership hedge fund investments.
Premiums and other receivables, net increased to $29.3 million as of December 31, 2006 from $25.3 million as of December 31, 2005 primarily as a result of an increase in gross premiums written in the excess workers’ compensation class.
Reserve for unearned premiums increased to $93.6 million as of December 31, 2006 from $83.2 million as of December 31, 2005 primarily as a result of the increase in gross premiums written in the other liability line of business.
Total revenues for the year ended December 31, 2005 were $171.3 million compared with $142.9 million for the year ended December 31, 2004 primarily reflecting increases in both net premiums earned and net investment income.
Other liability gross premiums written, net premiums written and net premiums earned for the year ended December 31, 2005 rose by 12%, 11% and 58%, respectively, when compared to 2004 mainly as a result of premium volume increases from existing classes (professional liability and contractors’ liability) and partially from new classes (commercial automobile liability). Gross premiums written from the professional liability and other non-marine liability classes, including contractors’ liability, grew from $22.6 million and $14.4 million, respectively, in 2004 to $33.2 million and $16.8 million, respectively, in 2005. Offsetting the increase in gross and net premiums written in 2005 was a reduction in gross and net excess workers compensation premiums of $8.0 million and $4.0 million, respectively, relating to policies written during the fourth quarter of 2004 with sixteen-month terms. Premium rates were level to down slightly during 2005 when compared to 2004. Net premiums earned in 2005 also reflected the volume increases achieved over the prior year.
The Company decreased net loss reserves by approximately $13 million in 2005 from the 2004-year end net unpaid loss reserve amount of $255 million as a result of favorable loss reserve development. This compared to $15 million of favorable loss reserve development recorded in 2004.
The $15 million of favorable loss development recorded in 2004 primarily resulted from the favorable development of aircraft loss reserves, which was largely attributable to the 2001 accident year. This amounted to $8.3 million, or 7.1% of the overall loss ratio, and related to the events occurring on September 11, 2001. Specifically, the loss reserves relating to the terrorist attacks of September 11, 2001 on the Pentagon and the hijacked airliner that crashed in Pennsylvania were reduced as a result of lower than expected losses. Additional favorable development occurred in the ocean marine line for the 1998-2001 accident years. Partially offsetting these favorable developments in 2004 were losses incurred of $4.3 million from the Company’s other liability line reflecting reserve strengthening relating to a few specific umbrella exposures stemming from asbestos losses.
General and administrative expenses increased by 16.9% to $27.2 million for the year ended December 31, 2005 from $23.2 million for the year ended December 31, 2004. The increase in 2005 was largely attributable to an increase in employee related expenses to service the growth in the Company’s business operations. Also contributing to the increase in 2005 were higher administrative expenses resulting from professional fees and the implementation of computer systems.
Net investment income for the year ended December 31, 2005 increased by 52% to $36.1 million from $23.7 million for the year ended December 31, 2004. The increase achieved in the 2005 year reflected a higher investment yield from the limited partnership, fixed maturity available for sale and short-term investment portfolios. The limited partnership portfolio reflected higher returns from its various economic strategies, with the largest returns from equity fund investments. The fixed maturity available for sale and short-term investment portfolios increased due to higher investment yields. Further contributing to the overall increase in investment income was a larger invested asset base derived from favorable cash flows over the past year and the proceeds received from our $100 million 6.5% senior notes issued on March 11, 2004. Partially offsetting the increase in net investment income in 2005 was lower overall income derived from trading portfolio activities. The 2004 year included $5.5 million in trading activities of US Treasury securities as compared to $0 in 2005. Notwithstanding this decrease in trading portfolio income, investment income derived from the Tiptree investment increased in 2005 to $3.7 million from $1.5 million in 2004. The increase in Tiptree income was attributable to greater amounts of interest income and fees earned on increased CDO activities.
Total income tax expense as a percentage of income before taxes for year ended December 31, 2005 was 34.0% as compared to 35.3% for 2004. The decrease in the percentage primarily related to lower taxes incurred from investments in hedge funds due to larger amounts of tax-preferred income derived from equity hedge fund investments.
Cash flows provided by financing activities were $1.1 million for the year ended December 31, 2006 and $96.7 million for the year ended December 31, 2004 as compared to cash flows used in financing activities of $27.3 million for the year ended December 31, 2005. Cash flows in 2004 were favorably impacted by $97.7 million in net proceeds received for the issuance of debt. Contributing to the use of cash flows in financing activities during 2005 was the repurchase of the Company’s 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 the Company’s 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, of which 2,470,262 shares were beneficially owned by the Company’s founder’s family, and of these shares 1,800,000 shares were subject to the option of Mariner Partners, Inc., and 100,000 shares are subject to the option of Conning Capital Partners. Subsequently, as a result of the amendment and restatement of the voting agreement, the number of the founder’s family’s shares subject to the option was reduced from 1,800,000 to 1,350,000.
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. 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.
During 2004, New York Marine requested and received approval from the State of New York Insurance Department to pay extraordinary dividends of $15,000,000 to the Company. New York Marine and Gotham collectively paid ordinary dividends of $500,000, $8,500,000 and $13,225,000 in 2004, 2005 and 2006, respectively.
In 2003, the Company acquired an interest in substantially all of a limited partnership hedge fund, (now known as Tricadia), 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 Tricadia. Additional investments of $4.65 million, $2.7 million and $0 were made in 2004, 2005 and 2006, respectively. The Company is committed to providing an additional $16.7 million, or a total of approximately $35 million, in capital to Tricadia.
The Company has no off-balance sheet arrangements other than as disclosed herein.
The following table presents the Company’s contractual obligations as of December 31, 2006:
The Company discloses significant accounting policies in the notes to its financial statements. Management considers certain accounting policies to be critical for the understanding of the Company’s financial statements. Such policies require significant management judgment and the resulting estimates have a material effect on reported results and will vary to the extent that future events affect such estimates and cause them to differ from the estimates provided currently. These critical accounting policies include unpaid losses and loss adjustment expenses, allowance for doubtful accounts, impairment of investments, limited partnerships and trading portfolios, reinstatement reinsurance premiums and stock compensation.
The consolidated financial statements required by this item and the reports 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.