o Total cash and invested assets of $631 million, up from $520 million at year end 2003
The property and casualty industry historically has been highly cyclical. Rates for property and casualty insurance are influenced primarily by factors that are outside of our control, including competition and the amount of available capital and surplus in the industry. For example,
Total revenues for the year ended December 31, 2004 were $142.9 million compared with $120.8 million for the year ended December 31, 2003 primarily reflecting increases in net premiums earned.
Net realized investment gains after taxes were $440,000, or $.04 per diluted share, and $357,000, or $.04 per diluted share, for the years ended December 31, 2004 and 2003, respectively. These amounts reflect the sale of fixed income investments.
Gross premiums written, net premiums written and net premiums earned for the year ended December 31, 2004 increased by 28%, 39% and 21%, respectively, when compared to the same period of 2003 reflecting growth in all of our core segments of business.
Ocean marine gross premiums written grew by 11% during 2004 when compared to the prior year. The 2004 year premiums reflect an increase in cargo premium production as a result of our agreement with Southern Marine & Aviation, a leading provider of insurance for bulk petroleum cargo shipments, which commenced underwriting for the Company in the fourth quarter of 2003. Gross premiums in 2004 also reflect a leveling to slight decline in premium rates across all classes with the largest rate decreases occurring in the drill rig class. The leveling of premium rates follows a few years of rate increases. Net premiums written increased by 22% in 2004 when compared to 2003 reflecting increased gross premiums as well as higher net retentions per loss. The Company's net loss retention increased to a maximum of $4 million for any one risk or any one occurrence effective on policies written during 2004 compared with $2 million for any one risk or any one occurrence effective on policies written during 2003. Partially offsetting the reduction in ceded written premiums in 2004 were $1.6 million in reinsurance reinstatement costs incurred as a result of the Hurricane Ivan catastrophe loss. There were no reinsurance reinstatement costs incurred on catastrophe losses in 2003. Net premiums earned grew by 4% in 2004 when compared to 2003 reflecting growth in premium production partially offset by reinsurance reinstatement costs. The Company cannot assure that ocean marine rates will not further decrease in 2005.
Inland marine/fire gross premiums written increased by 2% for the year ended December 31, 2004 when compared to 2003. The increase in premium writings reflect additional production from policies covering inland marine, fire,
Other liability gross premiums written rose by 117% for the year ended December 31, 2004 when compared to 2003 primarily due to premium volume increases from existing classes and new classes of business. The growth in gross premiums written from existing classes of business was derived from the professional liability class, which rose from $6.0 million in 2003 to $22.6 million in 2004 as well as additional production in the contractor's liability class. As the Company commenced underwriting excess workers compensation and commercial auto insurance in the latter half of 2003, volume increases from each of these classes of business were also achieved in 2004. Gross premiums written in 2004 and 2003 for excess workers compensation were $14.5 million and $6.2 million, respectively, and $6.9 million in commercial auto for 2004 as compared to $3.3 million in 2003. Premium rates in the professional liability class were flat in 2004; however, premium rates in some of the Company's other casualty classes have decreased by as much as 15% in 2004 when compared to the same period in 2003. The leveling of premium rates follows a few years of significant rate increases. Net premiums written and net premiums earned grew by 114% and 117%, respectively, over the prior year due to production increases achieved in 2004. The Company cannot assure that other liability rates will not further decrease in 2005.
Aircraft premiums decreased substantially in 2004 as a result of the Company having ceased writing new aircraft policies subsequent to March 31, 2002. Net premiums written and net premiums earned decreased in 2003 for the same reason.
Net losses and loss adjustment expenses incurred as a percentage of net premiums earned (the loss ratio) for the year ended December 31, 2004 was 57.2% compared to 57.8% for the year ended December 31, 2003. The Company recorded lower loss ratios in 2004 primarily due to a reduction in net loss reserves in the aircraft line of business of $8.3 million, or 7.1% of the loss ratio, relating 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. Offsetting this benefit were net catastrophe losses in the ocean marine line in 2004 arising from Hurricane Ivan that increased losses incurred by $2.8 million and reduced net premiums earned by $1.6 million due to reinsurance reinstatement costs. There were no catastrophe losses reported in 2003. A few large current accident year losses occurring in the ocean marine line of business also contributed to a higher loss ratio in the ocean marine line in 2004. The inland marine/fire loss ratios for 2004 were lower than 2003, reflecting a lower frequency of claims and favorable loss development. The other liability loss ratio also improved in 2004 when compared to the loss ratio in 2003 primarily due to the growth in professional liability writings and excess liability lines of business, which largely reflected the beneficial impact of firmer rates in those classes of business.
The Company decreased net loss reserves by approximately $15 million in 2004 from the 2003 year end net unpaid loss reserve amount of $242 million. This benefit primarily resulted from the favorable development of aircraft loss reserves, which was largely attributable to the 2001 accident year. Both ocean marine and inland marine/fire also recorded favorable loss development as a result of a lower than expected emergence of losses. The favorable 2004 results were affected by net adverse loss development of $1.2 million resulting in part from provisions made for insolvent, financially impaired and commuted reinsurers, as compared to $1.0 million in 2003. The 2004 results also reflect $4.3 million of adverse development from the Company's other liability line reflecting reserve strengthening relating to a few specific umbrella exposures stemming from Asbestos losses, as compared to $750,000 in 2003.
Policy acquisition costs as a percentage of net premiums earned (the acquisition cost ratio) for the year ended December 31, 2004 were 21.6% as compared with 20.2% for the year ended December 31, 2003. The acquisition cost ratio for 2004 reflects an increase in the ocean marine ratio as a result of higher acquisition costs associated with new sources of cargo premium production and an increase in the other liability class reflecting higher acquisition costs relating to increases in the professional liability class of business. In addition, premiums earned in 2003 reflected larger amounts of aircraft premiums, which generally have a lower acquisition cost ratio than other lines of business.
Net investment income for the year ended December 31, 2004 increased by 6% to $23.7 million from $22.4 million for the year ended December 31, 2003. Although the Company maintained a larger invested asset base in 2004 than it did in 2003 as a result of favorable cash flow from operations and the proceeds received from the $100 million of 6.5% senior notes issued on March 11, 2004, investment yields declined in 2004 as a result of lower income from limited partnerships.
Years ended December 31, ------------------------ 2004 2003 ---- ---- (in millions) -------------
As of December 31, 2004 and 2003 investments in the trading portfolio amounted to approximately $17.8 million and $61.7 million, respectively. Net investment income for 2004 and 2003 reflects approximately $13.4 million and $12.9 million, respectively, derived from trading portfolio activities. These activities include the trading of collateralized debt obligations (CDOs) and 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.
Interest expense was $5.4 million for the year ended December 31, 2004 compared to $26,000 for 2003 as a result of interest expense arising from the Company's issuance of $100 million of 6.5% Senior Notes on March 11, 2004.
Reinsurance receivables on paid and unpaid losses, net, amounted to $14.5 million and $247.8 million, respectively, as of
December 31, 2004 as compared to $4.2 million and $276.6 million, respectively, as of December 31, 2003. Paid recoverables increased in 2004 primarily due to a large loss payment made at year end. Unpaid recoverables decreased in 2004 primarily due to declines in recoverables in the runoff line of aircraft business.
Reserve for unearned premiums of $83.1 million as of December 31, 2004 increased by 34% over the balance as of December 31, 2003. The percentage increase is comparable to the increase in gross premiums written from the Company's core lines of business.
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 of $9.3 million, or $0.99 per diluted share, resulting from the withdrawal from London operations in 2002.
Ocean marine gross premiums written grew by 6% during 2003 when compared to 2002. The increase reflected higher ocean marine rates with the largest rate increases, approximately 5% to 15%, occurring in the marine liability and hull classes and additional production was achieved in the marine liability class. Other marine classes experienced a leveling in rates. Partially offsetting the overall increase were decreases in policy count in the drill rig class partly as a result of some one-time builder's risk policies written in 2002, which were not renewed in 2003. Builder's risk policies may have policy terms greater than one year and accordingly their premiums are earned over the related policy periods. In addition, we did not renew certain cargo policies in order to reduce concentrations of risk. However, commencing in the fourth quarter of 2003, gross premiums included approximately $6.5 million of cargo premiums from our agreement with Southern Marine & Aviation, a leading provider of insurance for bulk petroleum cargo shipments. Net premiums written decreased by 4% reflecting larger amounts of ceded reinsurance premium as a result of higher costs as well as the business mix within the various classes of ocean marine insurance. Net premiums earned grew by 18% in 2003 compared to 2002 reflecting premium rate increases as well as increased
Inland marine/fire gross premiums written increased by 24% for the year ended December 31, 2003 when compared to 2002, largely due to the growth in the Company's underwriting program insuring excess and surplus lines property risks and improved pricing. Both net premiums written and net premiums earned increased 62% and 79%, respectively, over the comparable 2002 amounts reflecting increases in production, pricing and higher net loss retention levels.
The Company decreased net loss reserves by approximately $1.4 million in 2003 from the 2002 year end reserve amount of $209 million. This 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 2003 results were affected by net adverse development of $1.0 million resulting in part from provisions made for insolvent, financially impaired and commuted reinsurers, as compared to $5.2 million in 2002. The 2003 results include $753,000 of adverse development from the Company's other liability line reflecting additional umbrella exposures, as compared to $2.2 million in 2002.
Years ended December 31, ------------------------ 2003 2002 ---- ---- (in millions) -------------
Fixed maturities, available for sale................. $ 4.2 $ 14.4 Fixed maturities, trading securities................. 12.9 --- Short-term investments............................... 1.9 .9 Equity securities.................................... --- .5 Equity in earnings of limited partnerships........... 8.5 1.0 --------------- Total investment income...................... 27.5 16.8 Investment expenses.................................. (5.1) (1.0) --------------- Net investment income................................ $ 22.4 $ 15.8 ==================
Net realized investment gains were $550,000 for the year ended December 31, 2003 as compared to $8.5 million for the year ended December 31, 2002. Net realized investment gains in 2002 reflected the sale of substantially all of the Company's fixed income investments. Write-downs from other-than-temporary declines in the fair value of securities amounted to $0 and $1.5 million for the years ended December 31, 2003 and 2002, respectively.
Unpaid losses and loss adjustment expenses increased to $518.9 million at December 31, 2003 from $516.0 million
at December 31, 2002. The increase of $2.9 million was primarily attributable to increases in the ocean marine and other liability lines as a result of increased writings; however, offset by declines in unpaid losses in the aircraft line of business.
Prepaid reinsurance premiums of $20.9 million and reserve of unearned premiums of $61.8 million as of December 31, 2003 increased from $ 6.4 million and $ 45.4 million, respectively in the 2002 year end balances primarily due to increases in both ceded and gross writings in the ocean marine and other liability lines of business.
Cash flows provided by operating activities were $66.3 million and $12.1 million for the year ended December 31, 2004 and 2003, respectively. Sources of cash flows of $44.0 million in 2004 resulted from decreases in the Company's trading portfolio. Cash of $61.7 million was used in 2003 to establish the Company's trading portfolio, whose trading activities included collateralized debt obligations and certain other fixed maturity securities. As the Company commenced its trading portfolio in 2003, any securities purchased by the Company would be reflected as a use of cash from operating activities and any securities sold would be reflected as a source of cash from operating activities. In addition, cash flows in 2003 reflected larger amounts received from collections of both reinsurance and premium and other receivables than in 2004. Paid losses were lower in 2003 than in 2004, reflecting the commutation of approximately $27.5 million of certain ceded loss reserves.
Cash flows from operating activities in 2002 amounted to $66.2 million resulting primarily from increases in premiums. Cash flows in 2002 reflected significant amounts received from aircraft premiums as a result of premium surcharges for terrorism coverage. A substantial portion of such cash flows provided from operating activities was
then used in investing activities to purchase fixed maturities. Further increasing cash flows in 2002 was the commutation of ceded loss reserves that contributed approximately $19.3 million to cash flows. The Company's loss payments on asbestos/environmental business, however, adversely affected cash flows during the past three years.
Under the Common Stock Repurchase Plan, the Company may purchase up to $55,000,000 of the Company's issued and outstanding shares of common stock on the open market. The Company repurchased 98,816 shares of its common stock in 2003. During 2003, the Company also issued 400,000 treasury shares in conjunction with the equity sale to Conning Capital Partners VI, L.P. There were no repurchases of common stock during 2004 and 2002.
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 are beneficially owned by the Company's founder's family, and of these shares 1,800,000 shares are subject to the option of Mariner Partners, Inc., and 100,000 shares are subject to the option of Conning Capital Partners.
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 $14.7 million as of December 31, 2004. In connection with the application for approval of acquisition of control of NYMAGIC, INC., filed by Mariner and William J.
During 2003 and 2004, New York Marine requested and received approval from the State of New York Insurance Department to pay extraordinary dividends of $5,000,000 and $15,000,000, respectively, to the Company. New York Marine and Gotham collectively paid ordinary dividends of $4,575,000 and $500,000 in 2003 and 2004, respectively.
The following table presents the Company's contractual obligations as of December 31, 2004:
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 and stock compensation.
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 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. For a further discussion concerning asbestos/environmental reserves see "Reserves." Unpaid losses and loss adjustment expenses amounted to $503.3 million and $518.9 million at December 31, 2004 and 2003, respectively. Unpaid losses and loss adjustment expenses, net of reinsurance amounted to $255.5 million and $242.3 million at December 31, 2004 and 2003, respectively. Management believes that both the gross and net unpaid loss reserve estimates as of December 31, 2004 have been reasonably estimated as reserves originally reported as of December 31, 2003 and 2002 have been considered adequate based upon loss development through December 31, 2004. 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.
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 $124,000 and $0 were charged to results from operations for 2004 and 2003, 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 $1.6 million and $.4 million, respectively, at December 31, 2004. As of December 31, 2004, there were unrealized losses greater than one year from the date of purchase on fixed income securities available for sale amounting to $233,780. There were no unrealized gains or losses on equity securities at December 31, 2004 and 2003, respectively.
The Company utilizes the equity method of accounting to account for its limited partnership hedge fund
Interested persons can obtain access to the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K on its corporate web site, www.nymagic.com, as soon as reasonably practicable after they are filed or furnished to the SEC.