The Company's principal executive offices are approximately 28,000 square feet in size and are located at 919 Third Avenue, New York, New York 10022. 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.
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's results of operations are derived from participation in pools of insurance covering ocean marine, inland marine, aircraft and other liability insurance managed by MMO and affiliates. Since January 1, 1997, the Company's participation in the pools has been increased to 100%. The Company has ceased writing any new policies covering aircraft insurance for periods subsequent to March 31, 2002.
MMO London wrote a book of ocean marine insurance through its participation in Lloyd's Syndicate 1265 and a book of assumed property and aircraft reinsurance through its participation in Lloyd's Syndicate 2010. Since January 1, 2002, MMO London has not provided capacity to any Lloyd's syndicate.
Prevailing policy terms and conditions in the property and casualty insurance market are also highly cyclical. Changes in terms and conditions unfavorable to insurers, which tend to be correlated with declining rates, could further reduce our net income. Even as rates rise, the average percentage rate increases can fluctuate greatly and be difficult to predict.
Year Ended December 31, 2003 as Compared to Year Ended December 31, 2002
Net income for the year ended December 31, 2003 was $16.7 million, or $1.70 per diluted share, excluding realized investment gains after taxes of $357,000, or $0.04 per diluted share. Net income for the year ended December 31, 2002 was $13.9 million, or $1.50 per diluted share, after excluding realized investment gains after taxes of $5.5 million, or $0.59 per diluted share, and $9.3 million, or $0.99 per diluted share, resulting from a non-recurring tax benefit attributable to the Company's withdrawal from its London operation in 2002.
Total revenues for the year ended December 31, 2003 were $120.8 million compared with $139.5 million for the year ended December 31, 2002 reflecting a decline in net premiums earned from lines of business in runoff.
Net realized investment gains after taxes were $357,000, or $.04 per diluted share, and $5.5 million, or $.59 per diluted share, in the years ended December 31, 2003 and 2002, respectively. The prior year amounts reflected the sale of substantially all of the Company's fixed income investments.
Ocean marine gross premiums written grew by 6% during 2003 when compared to the prior year. 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 are currently experiencing 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 its premium is earned over the related policy period. 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 include cargo premiums from our recent agreement with Southern Marine & Aviation, a leading provider of insurance for bulk petroleum cargo shipments. Net premiums written decreased by 4% and reflected larger amounts of ceded reinsurance premium as a result of the business mix within the various classes of ocean marine insurance. Ceded reinsurance premiums are earned over the policy terms of its related gross premium. Net premiums earned grew by 18% in 2003 compared to 2002 reflecting premium rate increases as well as increased production in the marine liability classes. The Company cannot assure that rates will continue to increase in 2004 at the levels achieved in 2003.
Inland marine/fire gross premiums written increased by 24% for the year ended December 31, 2003 when compared to the prior year, 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.
Aircraft gross written premiums decreased 90% in 2003 from $35.9 million to $3.5 million as a result of the Company having ceased writing new aircraft policies subsequent to March 31, 2002. We expect aircraft premiums to be negligible in 2004. Net premiums written and net premiums earned decreased in 2003 for the same reasons.
The Company's combined ratio (the loss ratio plus the ratio of policy acquisition costs and general and administrative expenses divided by premiums earned) was 98.1% for the 2003 year compared with 97.5% for 2002.
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. The prior year amounts 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.
Total income taxes increased to $9.1 million in 2003 from $(444,000) for 2002. The amount for the prior year included $9.3 million in tax benefits attributable to the Company's withdrawal from its London operations.
Premiums and other receivables, net decreased to $24.0 million as of December 31, 2003 from $35.7 million as of December 31, 2002 as a result of smaller balances due from the pool managed by MMO. Favorable cash flows were recorded at MMO due in part to the previously mentioned arbitration settlement and as a result of smaller investment balances held on behalf of its pool members.
Reinsurance receivables on paid and unpaid losses, net, decreased to $4.2 million and $276.6 million, respectively, as of December 31, 2003 from $19.4 million and $307.0 million, respectively, as of December 31, 2002 due mainly to collections of reinsurance receivables on paid losses and the commutation of certain
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 offset by declines 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 each increased from the prior year end balances primarily due to increases in both ceded and gross writings in the ocean marine and other liability lines of business.
Other liabilities increased to $23.7 million as of December 31, 2003 from $15.7 million for the same period of 2002 as a result of securities purchased but not yet settled.
Results for the year 2001 include after-tax losses of approximately $9.0 million, or $.98 per diluted share, resulting from the World Trade Center attack. In addition, the Company's 2001 results from operations were adversely affected by net losses from MMO London of $9.9 million, or $1.07 per diluted share.
Other liability - net premiums earned rose by 140% during 2002 when compared to 2001 due to new production opportunities arising from policies covering errors and omissions/professional liability risks, additional production in existing classes and larger premium rates on policy renewals. The other liability line reflected average rate increases of 30% to 40% in 2002 and volume increases of approximately 75% principally as a result of writing errors/omissions insurance for a full year in 2002 as compared to half a year in 2001.
Aircraft - premiums earned grew 35% for the year ended December 31, 2002 when compared to 2001, despite a reduction in policy count, primarily as a result of rate increases. Contributing to the overall increase were premium surcharges for terrorism coverage written after September 11, 2001. The Company recorded approximately $28 million in gross premiums written from such premium surcharges in 2002. The prior year net premiums were adversely affected by reinstatement reinsurance costs of $5.0 million incurred as a result of the WTC attack.
The loss ratio was 64.7% for the year ended December 31, 2002 as compared to 103.9% for the year ended December 31, 2001. The Company reported higher loss ratios in 2001 as a result of losses sustained from the WTC attack and larger severity losses arising from higher net loss retentions in the aircraft segment of business. Underwriting losses from MMO London also contributed to higher overall loss ratios in the prior year. In addition, the prior year loss ratio reflected larger charges for insolvent or financially impaired reinsurers of $10.8 million as compared to $5.1 million in calendar year 2002. A significant portion of such charges pertained to the 1998 to 2001 accident years in the aircraft segment of business and contributed to the adverse re-estimation of net loss reserves.
Policy acquisition costs as a percentage of net premiums earned for the year ended December 31, 2002 were 16.7% as compared with 19.0% for the prior year. The decrease in the percentage was primarily attributable to the aircraft expense ratio, which reflected a lower ratio as premium surcharges were recorded with a nominal processing charge.
General and administrative expenses increased by 8% to $18.4 million for the year ended December 31, 2002 when compared to $17.0 million for 2001. The increase is principally attributable to $1.5 million in charges resulting from the reorganization of the Company's management structure in 2002.
Net realized investment gains were $8.5 million for the year ended December 31, 2002 as compared to net realized investment gains of $2.9 million for 2001. The Company realized investment gains on the sale of a substantial portion of its fixed maturities portfolio in 2002 in an effort to reposition the portfolio. However, such investment gains in 2002 were partially offset by realized investment losses on both the sale of the Company's common stock portfolio and sale of lower rated fixed maturities.
Premiums and other receivables, net, decreased to $35.7 million at the end of 2002 from $74.9 million at the end of 2001. The decrease was largely attributable to smaller balances due from the pool managed by MMO as a result of favorable cash flows and smaller investment balances held by the pool. Premium receivables from runoff segments (aircraft and MMO London) have also decreased since the prior year.
Prepaid reinsurance premiums of $6.4 million and reserve of unearned premiums of $45.4 million as of December 31, 2002 each decreased from the 2001 year end balances primarily due to reductions in the amount of inforce premiums from the aircraft and MMO London segments.
Accumulated other comprehensive income decreased to $.4 million as of December 31, 2002 from $7.9 million as of December 31, 2001. The change principally reflects the sale of a substantial amount of the fixed maturity and equity security portfolios in 2002.
The change in unpaid losses and loss adjustment expenses and reinsurance receivables in 2001 was largely attributable to gross losses of $154.9 million and reinsurance receivables of $146.9 million, respectively, incurred from the World Trade Center attack. The change in unpaid losses and loss adjustment expenses and reinsurance receivables in 2002 was largely attributable to smaller loss payments and recoveries from segments (aircraft and MMO London) of the Company that are no longer actively underwritten and to the commutation of certain reinsurance receivable balances.
The change in premium and other receivables in 2001 was attributable to larger amounts due from the pools managed by MMO as a result of larger investment balances held by the pool. Premium receivables from segments (aircraft and MMO London) where the Company is no longer actively underwriting have also decreased since 2001.
Cash flows provided by operating activities were $22.1 million for the year ended December 31, 2003. 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 securities with fixed maturities. As the Company commenced its trading portfolio in 2003, any amounts purchased by the Company would be reflected as a use 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 2002. Paid losses were also lower in 2003, reflecting lower amounts paid from runoff lines (aircraft and MMO London) and the commutation of certain loss reserves.
Cash flows from operating activities in 2002 and 2001 amounted to $65.4 million and $1.8 million, respectively, 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.
In 2002, the Company entered into a credit agreement with an unaffiliated company. The agreement combined the Company's existing credit agreements together with a facility to fund future cash draw downs on the letters of credit issued on behalf of the Company to fund losses in MMO London. During 2002, the remaining balance of the letters of credit issued on behalf of the Company was fully drawn down (approximately $15.7 million) and such payments were funded entirely under the credit agreement. Approximately $17.4 million of the loan balance was repaid in 2002 from cash derived from operating activities. On February 7, 2003, the Company repaid its entire outstanding loan balance to the bank following the sale of equity to Conning Capital Partners VI, L.P. ("Conning") on January 31, 2003. In this transaction, Conning acquired 400,000 investment units from the Company, each unit consisting of one share of the Company's common stock and an option to purchase an additional share of common stock from the Company. Conning paid $21.00 per unit resulting in $8.4 million in proceeds to the Company. The option exercise price is based on a formula contained in the Option Certificate (which was attached as an exhibit to the Company's current report on Form 8-K filed on February 4, 2003). The Company used common stock held in treasury to effect the transaction with Conning. As of December 31, 2003, there were no outstanding balances open on letter of credit agreements.
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 issued 400,000 treasury shares in conjunction with the equity sale to Conning Capital Partners VI, L.P. During 2001, the Company issued 4,540 treasury shares in connection with the compensation of its Directors.
The following table outlines the aggregate minimum annual rental payments payable by the Company under various operating leases for office facilities as of December 31, 2003:
During 2003 and first quarter of 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.
On March 12, 2003, the Company declared a dividend of six (6) cents per share to shareholders of record on March 31, 2003, payable on April 8, 2003. On June 12, 2003, the Company declared a dividend of six (6) cents per share to shareholders of record on June 30, 2003, payable on July 8, 2003. On September 17, 2003, the Company declared a dividend of six (6) cents per share to shareholders of record on September 30, 2003, payable on October 7, 2003. On December 17, 2003, the Company declared a dividend of six (6) cents per share to shareholders of record on December 31, 2003, payable on January 8, 2004. On February 26, 2004, the Company declared a dividend of six (6) cents per share to shareholders of record on March 31, 2004, payable on April 6, 2004. The Company did not declare or pay a dividend at any time during 2002.
On March 11, 2004, the Company issued $100,000,000 in 6.5% Senior Notes due March 15, 2014 and received proceeds of $98,763,000 net of underwriting discount but before other transaction expenses. The Notes provide for semi-annual interest payments and are to be repaid in full on March 15, 2014. The indenture relating to the Senior Notes provides that the Company and its restricted subsidiaries may not incur indebtedness unless the total indebtedness of the Company and its restricted subsidiaries, calculated on a pro forma basis after such issuance, would not exceed 50% of our total consolidated capitalization (defined as the aggregate amount of our shareholders' equity as shown on our most recent quarterly or annual consolidated balance sheet plus the aggregate amount of indebtedness of the Company and its restricted subsidiaries). The indenture also provides that the Company and its restricted subsidiaries will not pay dividends or make other payments or distributions on the Company's stock or the stock of any restricted subsidiary (excluding payments by any restricted subsidiary to the Company), purchase or redeem the Company's stock or make certain payments on subordinated indebtedness unless, after making any such payment, the total indebtedness of the Company and its restricted subsidiaries would not exceed 50% of our total consolidated capitalization (as defined above). In addition, the indenture contains certain other covenants that restrict our and our restricted subsidiaries' ability to, among other things, incur liens on any shares of capital stock or evidences of indebtedness issued by any of our restricted subsidiaries or issue or dispose of voting stock of any of our restricted subsidiaries. The Company intends to use the net proceeds from the sale of the Senior Notes for working capital and other general corporate purposes, and, potentially, for acquisitions. The Company has no agreement with respect to any acquisition, although we assess opportunities on an ongoing basis and from time to time have discussions with other companies about potential transactions.
Under the terms of a registration rights agreement, NYMAGIC has agreed to file a registration statement under the Securities Act of 1933, as amended, with the Securities and Exchange Commission to permit the exchange of the Senior Notes for registered notes having terms substantially identical to those of the Senior Notes (except that the registered notes will not be subject to restrictions on ownership and transfer) or the registered resale of the Senior Notes.
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 and impairment of investments.
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 $518.9 million and $516.0 million at December 31, 2003 and 2002, respectively. Unpaid losses and loss adjustment expenses, net of reinsurance amounted to $242.3 million and $209.0 million at December 31, 2003 and 2002, respectively. Both the gross and net unpaid loss reserve estimates as of December 31, 2002 have been reasonably estimated as reserve changes of less than one percent were reported in 2003 on their respective balances. 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.
The allowance for doubtful accounts is based on management's review of amounts due from insolvent or financially impaired companies. Allowances are estimated for both premium receivables and reinsurance receivables. Management continually reviews and updates such estimates for any changes in the financial status of companies. For a further discussion concerning reinsurance receivables see "Reinsurance Ceded." The allowance for doubtful accounts on reinsurance receivables amounted to $12.8 million and $13.3 million at December 31, 2003 and 2002, respectively. The allowance for doubtful accounts on premiums and other receivables amounted to $450,000 as of December 31, 2003 and 2002, respectively.