OPERATING DATA Year Ended December 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (In thousands, except per share amounts) Revenues: Net premiums earned ...... $ 76,023 $ 87,537 $ 97,036 $103,461 $ 79,255 Net investment income .... 20,803 21,325 21,270 21,659 18,854 Commission income ........ 591 1,439 1,981 3,438 2,052 Realized investment gains 8,615 10,425 4,589 4,111 2,992 Other income ............. 396 293 690 661 420 -------- -------- -------- -------- -------- Total revenues ........... $106,428 $121,019 $125,566 $133,330 $103,573 ======== ======== ======== ======== ========
Expenses: Losses and loss adjustment expenses incurred ...... $ 50,512 $ 50,768 $ 59,359 $ 69,716 $ 61,900 Policy acquisition expenses 10,107 16,583 18,828 21,017 14,260 General and administrative expenses ............... 21,531 16,763 16,168 16,236 16,742 Interest expense ......... 1,374 1,450 1,035 438 495 -------- -------- -------- -------- -------- Total expenses ........... $ 83,524 $ 85,564 $ 95,390 $107,407 $ 93,397 ======== ======== ======== ======== ========
Year Ended December 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (In thousands, except per share amounts)
Income before income taxes 22,904 35,455 30,176 25,923 10,176 -------- -------- -------- -------- -------- Income taxes Current ................ 5,250 8,962 7,495 5,393 2,306 Deferred ............... (869) 125 56 410 (1,827) -------- -------- -------- -------- -------- Total income taxes ....... 4,381 9,087 7,551 5,803 479 -------- -------- -------- -------- -------- Net income ............... $ 18,523 $ 26,368 $ 22,625 $ 20,120 $ 9,697 ======== ======== ======== ======== ========
Weighted average shares outstanding ............ 9,705 9,872 10,524 11,341 11,392 Diluted earnings per share $ 1.91 $ 2.67 $ 2.15 $ 1.77 $ .85 ====== ======== ======== ======== ========
Total investments ........ $443,022 $438,591 $409,209 $403,306 $341,643 Total assets ............. 730,320 707,903 714,949 722,250 730,744 Unpaid losses and loss adjustment expenses ... 401,584 388,402 411,837 417,795 435,072 Notes payable ............ 17,458 22,458 20,438 12,727 7,020 Total shareholders' equity $228,180 $206,519 $188,852 $182,717 $164,313
Year Ended December 31, NYMAGIC Net Premiums Earned --------------------------------- Line of Business 1998(a) 1997 1996 - - ---------------------- ----------------- ----------------- ----------------- (In thousands) Ocean marine ......... $ 60,219 79% $ 49,984 57% $ 52,483 54% Inland marine ........ (393) -- 443 1% 2,408 3% Aircraft ............. 2,005 3% 32,566 37% 35,416 36% Other liability ...... 3,393 4% 4,328 5% 6,355 7% Other (b) ............ 10,799 14% 216 -- 374 -- --------- ---- --------- ---- --------- ---- Total ................ $ 76,023 100% $ 87,537 100% $ 97,036 100% ========= ==== ========= ==== ========= ====
The Company's net premiums earned decreased to $76.0 million in 1998 as compared to $87.5 million in 1997. Premiums earned in 1998 reflect very competitive markets across all lines of business, premiums from Syndicate 1265 and the effects of two transactions involving the assumption of premiums.
Ocean marine earned premiums for this segment increased by 20% in 1998 compared to 1997. The increase resulted from a reinsurance transaction involving a one-time assumption of approximately $14.2 million of premiums that emanated from Syndicate 1265, which commenced operations in the current year. Syndicate 1265 contributed an additional $3.6 million in gross direct ocean marine writings in 1998. The domestic insurance companies reported a 9% decrease in earned premiums as competition remained intense and adversely affected premium rates. The outlook for 1999 indicates that pricing pressures will remain intact as the over capacity within this market still exists. Syndicate 1265 will also continue to write at a cautious pace.
Other liability and other premiums earned for this segment were $14.0 million in 1998 compared to $4.3 million in 1997. The increase resulted from the second reinsurance transaction in 1998 that included a one-time assumption of approximately $10.5 million of miscellaneous casualty net premiums. Excluding the effect of this transaction, premiums earned would have decreased approximately 22% in 1998 as a result of the soft casualty market which led to a decline in premium production. The Company expects the casualty market to remain competitive in 1999 with premiums likely to decline further.
Inland marine gross premium writings for this segment increased 15% to $1.3 million in 1998 due in large part to writing policies that are ancillary to its ocean marine risks. Earned premiums were negative due to reinsurance costs for catastrophe protection, reinstatement costs, and quota share reinsurance which collectively amounted to approximately $1.6 million. This underwriting strategy is expected to remain in place for 1999.
The ocean marine loss ratio for Syndicate 1265's assumption of premiums in 1998 was approximately 94% and had the effect of increasing the overall loss ratio significantly. Absent such business, the ocean marine loss ratio for this segment would have been approximately 54% as compared to 57% for the prior year. The domestic insurance companies recorded favorable net loss experience in the Company's core ocean marine line largely due to lower retention levels per loss.
Net investment income in 1998 decreased by 2% to $20.8 million from $21.3 million in 1997 as a result of a decrease in investment yield in the Company's fixed maturity portfolio caused by additional purchases of tax-exempt securities and lower overall interest rates. Although investment yield was lower in 1998, Syndicate 1265's operations contributed to a larger average invested asset base during the current year.
Commission income in 1998 was $591,448 as compared to $1,438,606 for the same period of 1997. The prior year included larger profit commissions from reinsurance transactions in the aviation and ocean marine lines of business.
Reinsurance receivables at December 31, 1998 were $199.7 million or 14% greater than the prior year's amount. Large gross aviation losses, which were ceded under various reinsurance agreements, accounted for the increase.
Accumulated other comprehensive income, which includes unrealized appreciation of investments and foreign currency translation adjustments, at December 31, 1998 was $19.4 million as compared to $12.9 million as of December 31, 1997. Increases in unrealized appreciation of both fixed and equity securities accounted for most of the increase.
Inland marine premiums recorded the largest percentage decline at 82% in 1997. The Company decided in the prior year to withdraw from writing property risks of the larger assureds with multiple locations after years of unprofitable results brought about mainly by large catastrophe losses. In 1997, the Company concentrated on writing risks that are ancillary to its ocean marine risks.
Ocean marine premiums earned fell by 5% in 1997 mainly due to falling premium rates as competition remained intense during 1997. All classes within the ocean marine line experienced declines except for the energy class which saw increases in production. In 1997, the Company wrote additional marine liability accounts with assureds that have smaller amounts of exposure. Also, net premium writings did not decline at the same rate as gross premiums primarily due to cheaper reinsurance costs.
Although net premiums earned in the aviation line decreased by only 8%, gross written and net written premiums decreased by 25% and 71%, respectively. A softening of rates in the aviation line, resulting from excess industry capacity, initially started in 1996 and continued into 1997 and accounted for a reduction in gross aviation premiums written in 1997. During this soft underwriting cycle, the Company sought to reduce overall retention levels in order to avoid the negative impact of any one loss on net income. As a consequence of purchasing additional reinsurance, net writings fell at a greater percentage.
Other liability earned premiums decreased by 32%. The casualty market has been severely competitive for many years. Consequently, the Company continued to underwrite this line very selectively.
Premiums earned did benefit, however, from the Company's increased pool participation in the Mutual Marine Office, Inc. ocean marine and aviation pools from 90% to 100% effective for policies incepting on or after January 1, 1997.
Interest expense increased to $1.4 million for the year ended December 31,1997 from $1.0 million for the same period of the prior year primarily as a result of an increase in average loan principal outstanding.
Accumulated other comprehensive income as of December 31, 1997 included gross unrealized gains and losses on equity securities of $12.3 million and $0.9 million respectively, and gross unrealized gains on fixed
Prepaid reinsurance premiums increased 131% to $24.4 million at December 31, 1997 however the reserve for unearned premiums decreased in 1997 by 17%. The decline in gross writings in 1997 is consistent with the change in the reserve for unearned premiums. The Company, however, reduced its net retention per loss in the aviation line which prompted prepaid reinsurance premiums, as well as ceded reinsurance payable balances, to increase accordingly.
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, 1998, the Company's assets included approximately $17.8 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.
Historically, cash provided by operating activities was used in investing and financing activities. In 1997 and 1996 cash inflows increased as premium rates were higher in the ocean marine and aviation lines. Cash was used in operating activities in 1998 as further declines in premium rates and increases in ceded reinsurance premiums negatively affected cash from operations. The Company's maturing book of casualty business also adversely affected cash flows.
NYMAGIC's principal source of cash flow is dividends from its insurance company subsidiaries which is used to fund operating expenses, including interest expense, loan repayments and payment of 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 an impact on the Company's ability to meet current cash obligations or materially limit the current payment of dividends to the Company's shareholders. Dividends can be paid from Syndicate 1265 to the extent solvency margins are maintained and after the closing of a calendar year, which occurs three years following each calendar year.
The Company's computer systems and electronic devices which are based on software programs which process dates with two digits rather than four to define the applicable year may assume that all years occur only in the 20th century. This could cause a system failure or miscalculation causing disruptions of operations controlled by such systems or devices, including, among other things, an inability to process transactions, send invoices, engage in actuarial analyses, compute and track payment schedules, control equipment or engage in similar normal business activities. The Company's exposure to this potential phenomenon is concentrated principally in its legacy hardware system, insurance business operations software, financial applications software (accounts payable, general ledger and other packages), business relations, and potential underwriting losses arising from claims by insureds under the Company's insurance policies for relief for losses resulting from the Year 2000 phenomenon.
The following discussion is based on management's best estimates, which were derived using numerous assumptions of future events, including, without limitation, the continuing availability of basic utilities and other resources, the availability of trained personnel at reasonable cost, and the ability of third parties to replace or upgrade noncompliant software and hardware at reasonable cost. There can be no guarantee that these assumptions will prove accurate, and, accordingly, actual results may materially differ from those anticipated.
The Company separated its Year 2000 compliance plan into three major phases: (1) Information Technology; (2) Compliance by Vendors and Business Relations; and (3) Potential Underwriting Losses. These three phases are considered the most critical components of the Year 2000 efforts for the Company.
In June, 1998, the Company replaced its computer hardware system with client-server architecture which is Year 2000 compliant. The Company also successfully upgraded its insurance business operations software so that such software now functions with the new Year 2000 compliant operating system. The upgraded operations software was modified subsequently to be Year 2000 compliant. The Company is currently testing and evaluating the Year 2000 compliant version of its insurance business operations software. Based upon the status of its testing, which is currently on schedule, the Company expects the testing of its business operations software to be completed by June 30, 1999.
Property/casualty insurance companies may have an underwriting exposure related to the Year 2000 phenomenon. Although the Company has not received any claims for coverage from insureds based on losses resulting from Year 2000 issues, there can be no assurance that insureds will be free from losses of this type or that the Company will be free from claims made under the Company's insurance policies. If any claims are made, coverage, if any, will depend on the facts and circumstances of the claim and the provisions of the subject insurance policy. The Company, in certain instances, has been able to include Year 2000 exclusions in its policy forms. Also, the Company is requesting information from certain insureds as to the extent of their Year 2000 compliance. The Company will continue to monitor policies throughout the 1999 year as a result of compliance under this phase of its Year 2000 evaluation efforts. At this time, the Company is unable to determine whether the adverse impact and/or extent of underwriting losses, if any, in connection with the foregoing circumstances would be material to the Company.
Actual results may differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate suitable cost efficient replacements (or upgrades to) computer hardware and software which are Year 2000 compliant, and the ability to correct all relevant computer codes and similar uncertainties. There can be no assurance that the Company will be immune from underwriting losses arising from Year 2000; and such losses may result in a material and adverse effect on the Company's business, assets, liquidity and financial condition.
Market risk includes the potential for future losses due to reasonably possible changes in the fair value of financial instruments which relates mainly to the Company's investment portfolio. Those risks associated with the investment portfolio include the effects of exposure to adverse changes in interest rates, credit quality, equity prices and foreign exchange rates.
The following tabular presentation outlines the expected cash flows of fixed maturities available for sale for each of the next five years and the aggregate cash flows expected for the remaining years thereafter based upon maturity dates. Fixed maturities include taxable and tax-exempt securities with applicable weighted average interest rates. Taxables also include mortgage backed securities that have prepayment features which may cause actual cash flows to differ from those based on maturity date.
Future cash flows of expected principal amounts (in millions) Total Total There- Amortized Fair Fixed maturities 1999 2000 2001 2002 2003 after Cost Value - - ---------------- ---- ---- ---- ---- ---------- ---- -----
Tax-exempt ............. $ 15 $ 11 $ 15 $ 18 $ 32 $161 $252 $260 Average interest rate 5.9% 6.5% 6.0% 5.7% 5.8% 6.2% -- --
Credit quality risk includes the risk of default by issuers of debt securities. The Company's investment guidelines are conservatively designed and prevent the investment in securities below an A rating. Overall, the Company has maintained fixed maturities with an average credit quality rating of AA as of December 31, 1998. The Company's exposure to credit risk is considered minimal.
Foreign currency risk includes exposure to changes in foreign exchange rates on the market value and interest income of foreign denominated investments. Syndicate 1265 operations maintain an equivalent of $2.9 million in investments in British Pounds Sterling to the extent business is derived from transactions in such currency. The investment of cash flows from business written in Pounds Sterling in securities of the same foreign currency, will ultimately mitigate the risk associated with changes in foreign exchange rates.