New York - 37,000 square feet Chicago - 3,500 square feet San Francisco - 4,050 square feet London - 1,450 square feet
The Company's principal executive offices are approximately 37,000 sq. ft. in size and are located in New York City. In 1993 the Company moved into its location at 330 Madison Avenue, New York, New York, which was renovated and is in excellent condition. The lease for the Company's principal executive offices expires December 30, 2003. The minimum annual rent under the lease is $1,184,000 from 1999 until the expiration of the lease. The lease included an initial cash payment by the lessor to the Company of $1,853,000 of which the benefit was deferred and amortized over the lease term.
Dividends declared per share $ .40 $ .40 $ .40 $ .40 $ .40 ====== ======== ======== ======== ========
BALANCE SHEET DATA AT PERIOD END: Year Ended December 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (In thousands)
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 participates in pools of insurance covering ocean marine, inland marine, aircraft and non-marine liability insurance managed by MMO and affiliates. The Company's participation in the other liability and inland marine pools increased to 100% effective July 1, 1994, and its participation in the ocean marine and aviation pools increased to 90% at the same time. Effective January 1, 1997, the Company's participation in the ocean marine and aviation pools increased to 100%. These lines of businesses are considered, for operational purposes, as the Company's main segments for purposes of analyzing underwriting income.
Year Ended December 31, NYMAGIC Net Premiums Written ---------------------------------- Line of Business 1998(a) 1997 1996 - - ---------------------- ----------------- ----------------- ----------------- (In thousands) Ocean marine ......... $ 59,231 81% $ 48,658 78% $ 54,093 60% Inland marine ........ (350) -- 146 -- (1,658) (2%) Aircraft ............. 82 -- 9,354 15% 32,482 36% Other liability ...... 2,969 4% 3,856 6% 5,238 6% Other (b) ............ 10,796 15% 207 1% 358 -- --------- ---- --------- ---- --------- ---- Total ................ $ 72,728 100% $ 62,221 100% $ 90,513 100% ========= ==== ========= ==== ========= ====
(a) Includes net ocean marine premiums written and earned from Syndicate 1265 of $16,832 and $14,832, respectively.
(b) In 1998, includes a one-time assumption of miscellaneous casualty net written and earned premiums of $10,563, respectively.
The aviation segment of business was most affected by the competitive market, with gross writings down by 20%, and coupled with the purchase of additional reinsurance protection resulted in premiums earned decreasing to $2.0 million in 1998 compared with $32.6 million in 1997. Obtaining additional reinsurance protection is consistent with the Company's strategy of minimizing risk and preserving capital as the underwriting climate for gross premiums remains soft. In addition, large aviation gross losses resulted in additional reinsurance reinstatement costs of approximately $3.7 million that further contributed to the decline in premiums. The Company expects this underwriting environment to remain competitive in 1999.
The other liability loss ratio for this segment increased to 96% from 91% in 1997. The assumption of miscellaneous net casualty premiums in 1998 was subsequently commuted in the fourth quarter of 1998 at a loss ratio of 77%. Excluding this business, the loss ratio would have been approximately 152%. Adverse development from prior year losses contributed to the increase.
Policy acquisition costs as a percentage of net premiums earned for the year ended December 31, 1998 were 13.3% as compared with 18.9% of the prior year. The reduction in the ratio is due to the two transactions involving an assumption of premiums in 1998. Excluding the effect of such business, the ratio would have been approximately 19.7% for 1998. This ratio approximates the ocean marine line of business ratio as those premiums represent a larger percentage of total premiums in 1998 than in 1997.
The Company's effective tax rate at December 31,1998 was 19.1% as compared to 25.6% in 1997. Taxable income was greater in 1997 as a result of larger underwriting profits and realized investment gains. The decrease in the effective rate was also due to increased tax-exempt income as a percentage of pre-tax income in 1998.
Losses and loss adjustment expenses as a percentage of premiums earned were 58.0% in 1997 as compared to 61.2% in 1996. Improved net loss experience in the other liability and inland lines contributed to the overall decline in the loss ratios. In addition, despite an increase in the frequency of losses in the aviation line, this loss ratio actually improved from the prior year as a result of lower retention levels on losses and favorable loss development on prior year reserves. An increase in severity losses in the ocean marine line contributed to its higher loss ratio in 1997.
Policy acquisition costs as a percentage of net premiums earned for the year ended December 31, 1997 were 18.9% as compared to 19.4% for the prior year. The Company saw an improvement in the acquisition ratio in the aviation line as a result of obtaining ceding override commissions on reinsurance placed. This had the effect of reducing overall net commissions at a greater rate than the decline in premiums.
Commission income for the year ended December 31, 1997 was $1.4 million as compared to $2.0 million for the same period of 1996. Commission income includes management and contingent commissions charged by Mutual Marine Office, Inc. for operating the insurance pools. As gross writings decreased and the Company increased its MMO pool participation in the ocean marine and aviation pools from 90% to 100% effective for policies incepting on or after January 1, 1997, management commission income from a non-affiliated member of the insurance pools declined.
The Company was able to realize investment gains of $10.4 million in 1997 mainly as a result of the sale of appreciated equity securities.
Net income increased by 17% to $26.4 million for the year ended December 31, 1997, from $22.6 million for the prior year. Diluted earnings per share increased to $2.67 in 1997 as compared to $2.15 in 1996.
maturities available for sale of $8.6 million. Unrealized gains were recorded in fixed and equity securities resulting from decreases in interest rates and a strong stock market in 1997, respectively.
Notes payable increased to $22.4 million as of December 31, 1997 and resulted from loans obtained to repurchase the Company's common stock. This also contributed to the increase in treasury stock, at cost, in 1997.
Investing and financing activities increased further as a result of the Company entering into a $10,000,000 revolving credit agreement which increased to $25,000,000 in 1996 with the same bank. Additional borrowings of approximately $9,520,000 and $9,200,000 were made in 1997 and 1996, respectively, to repurchase the Company's Common Stock. Repayments were made quarterly generally at $1,250,000 per quarter.
The Company's largest investments are in bonds from various states and municipalities. Such securities receive favorable tax treatment under existing tax laws. Our investment position is monitored regularly as the Company has been affected by the alternative minimum tax. As net earnings were affected by several catastrophe losses in the mid 1990's the Company further bolstered its taxable investment position. As the Company's tax position changed with improved earnings in 1995, additional investments were made in tax-exempt securities through 1998 to improve after tax investment yield.
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. As of December 31, 1998, the Company had repurchased a total of 2,116,442 shares of common stock at a total cost of approximately $38,583,101 at market prices ranging from $16.50 to $26.88 per share.
In 1996, the Company commenced overhauling its existing legacy mainframe computer hardware and software systems in order to improve employee productivity and financial reporting. The Company extended the project to cover Year 2000 concerns.
The Company estimates, based on its evaluations and actions taken to date, that the aggregate cost of its information technology project, including the cost of achieving Year 2000 compliance, will be approximately $1,400,000 of which approximately $1,100,000 has been expended through December 31, 1998. These costs (excluding internal personnel expenses) are comprised of outside consulting service costs for evaluation and upgrade of systems, acquisition costs for new equipment and componentry, and licensing and purchase fees for new and upgraded software. This process has not had a material impact on the status of other internal technology projects.
The largest market risk to the Company relates to interest rate risk. Interest rate risk includes the changes in the fair value of fixed maturities based upon changes in interest rates. This risk is considered when developing our benchmarks for evaluating our portfolio. Such benchmarks are tied into the overall duration of the Company's loss reserves. Through the matching of cash flows from future maturing investments and the ultimate payout pattern of loss reserves, the Company can minimize the effect of interest rate risk.
Equity risk includes the potential loss from changes in the fair value of equity securities. The Company's equity securities are traded on major stock exchanges and are highly liquid. These securities are limited by investment guidelines to 25% of statutory surplus in order to minimize the impact of large changes in the stock market.
The Company monitors market risks on a regular basis through meetings with investment advisors, examining the existing portfolio and reviewing potential changes in investment guidelines. The overall effect of
which is to allow management to make informed decisions concerning the impact that market risks have on the portfolio.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", ("SFAS 133") was issued by the Financial Accounting Standards Board in June 1998. SFAS 133 requires derivatives to be recorded on the balance sheet at fair value. Derivatives not considered as hedges must be recorded at fair value with adjustments recorded in the income statement. For derivatives that qualify as a hedge, changes in the fair value of the derivative are offset against changes in the fair value of the hedged assets or liabilities and are recognized in the income statement or in other comprehensive income depending on the nature of the hedge. SFAS 133 is effective for years beginning after June 15, 1999.