The Company does not own, directly or indirectly, any real estate. The Company subleases office space for day to day operations in the following cities:
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 $622 million at year end 2005
Total shareholders’ equity of $239 million, or $26.44 per diluted share
Total after tax impact of hurricanes Katrina and Rita to the Company were $13.9 million or a reduction in earnings per diluted share of $1.55
Net income for the year ended December 31, 2005 was $9.7 million or $1.09 per diluted share, as compared to $14.6 million, or $1.48 per diluted share, for the year ended December 31, 2004. The decrease in net income for 2005 was primarily attributable to 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 and net premiums earned for the year ended December 31, 2005 increased by 9%, and 16%, respectively, when compared to the same period of 2004. Net premiums written in 2005 decreased by 2% when compared to 2004. Reinstatement premiums of $14.8 million relating to hurricanes Rita and Katrina adversely affected net premiums written and net premiums earned for the year ended December 31, 2005 as compared to $1.6 million in reinstatement premiums resulting from Hurricane Ivan which affected net premiums written and net premiums earned for the year ended December 31, 2004.
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.
Aircraft premiums were nominal in 2005 and 2004 as a result of the Company having ceased writing new aircraft policies subsequent to March 31, 2002.
The favorable loss reserve benefit recorded in 2005 was due in large part from the ocean marine line of business, particularly in the 2001-2003 accident years. As the Company’s net loss retention increased substantially in the ocean marine line during the 2001-2003 accident years, actual loss emergence has been less than previously anticipated. The other liability line also reported favorable development in years prior to 2002 resulting from a lower than expected emergence of losses attributable to a shorter loss reporting tail than originally estimated. Additional favorable development of aircraft loss reserves occurred, which was largely attributable to the 2001 accident year. The favorable loss development in 2005 was partially offset by adverse net loss development resulting from provisions made for insolvent, financially impaired reinsurers and commuted reinsurance contracts, partly as a result of an increase in ceded incurred losses relating to a few specific asbestos claims.
Policy acquisition costs as a percentage of net premiums earned (the acquisition cost ratio) for the year ended December 31, 2005 were 22.7% as compared with 21.6% for the year ended December 31, 2004. The increase in the 2005 ratio is primarily due to a higher ocean marine ratio resulting from the impact of reinsurance reinstatement costs arising from hurricanes Katrina and Rita. While the other liability acquisition cost ratio in 2005 was comparable to the 2004 ratio, the inland marine/fire line acquisition cost ratio was lower in 2005 than 2004 reflecting slightly lower commissions.
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.
Commission and other income decreased to $1.5 million for the year ended December 31, 2005 from $2.3 million for 2004. The decrease is attributable to significant other income received from litigation and arbitration settlements in 2004. The 2005 amounts primarily reflected a gain from the sale of MMO UK as well as profit commissions earned on the favorable development of ceded reinsurance in the runoff aircraft line of business.
Interest expense was $6.7 million for the year ended December 31, 2005 compared to $5.4 million for 2004 principally as a result of 2005 reflecting a full year of interest expense from the Company’s issuance of $100 million of its 6.5% senior notes on March 11, 2004.
Other liabilities increased to $33.8 million as of December 31, 2005 from $26.6 million at December 31, 2004 due in large part to funds owed to the MMO pool companies.
Year Ended December 31, 2004 as Compared to Year Ended December 31, 2003
Net income for the year ended December 31, 2004 was $14.6 million or $1.48 per diluted share, as compared to $17.1 million, or $1.74 per diluted share, for the year ended December 31, 2003. The decrease in net income in 2004 compared to 2003 was primarily attributable to lower investment yields, primarily from limited partnerships, an increase in interest expense arising from the Company’s issuance of $100 million of 6.5% senior notes on March 11, 2004 and the expenses incurred by the Company in connection with compliance with section 404 of the Sarbanes-Oxley Act.
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 reflected the sale of fixed income investments.
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 2004 for the same reason.
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 reflected $4.3 million of adverse development from the Company’s other liability line reflecting reserve strengthening relating to a few specific umbrella exposures for asbestos losses, as compared to $750,000 in 2003.
General and administrative expenses increased by 19.7% to $23.2 million for the year ended December 31, 2004 from $19.4 million for the year ended December 31, 2003. The increase in 2004 was largely attributable to an increase in employee related expenses to service the growth in the Company’s business operations. Contributing to the increase in 2004 were higher administrative expenses resulting from the implementation of computer systems and Sarbanes-Oxley related expenses.
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 98.8% for the 2004 year compared with 98.1% for 2003.
Net realized investment gains were $678,000 for the year ended December 31, 2004 as compared to $550,000 for the year ended December 31, 2003. These amounts reflected the sale of fixed income investments. Write-downs from other-than-temporary declines in the fair value of securities amounted to $124,000 and $0 for the years ended December 31, 2004 and 2003, respectively.
Premiums and other receivables, net increased to $42.6 million as of December 31, 2004 from $24.0 million as of December 31, 2003 due to increases in gross premiums written and larger balances due from the pool managed by MMO.
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.
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, 2005, the Company’s assets included approximately $104.5 million in cash and short-term investments. In addition, the fixed maturities available for sale includes approximately $175 million in high investment grade floating rate mortgage backed securities. Cash and total investments decreased from $630.9 million at December 31, 2004 to $622.4 million at December 31, 2005, principally as a result of a repurchase of common stock offset by net inflows of cash.
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 on January 7, 2005.
In 2002, the Company entered into a credit agreement with an unaffiliated company. The agreement combined the Company’s then 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, 2005 and 2004, there were no outstanding balances open on letter of credit agreements.
Specific related party transactions and their impact on results of operations are disclosed in Note 16 of the Company’s financial statements.
During 2004, the Company granted options to a new director to purchase 10,000 shares of the Company’s common stock. During 2003, the Company granted options to purchase 20,000 shares of the Company’s common stock to certain directors of the Company, who are not officers of the Company. There were no stock options granted in 2005. The exercise prices of these stock options are equal to the closing prices of the Company’s stock on the New York Stock Exchange on the dates of the underlying stock grants.
In 2004 the Company granted 14,100 shares of common stock to certain officers and directors of the Company under the NYMAGIC, INC. Amended and Restated 2004 Long-Term Incentive Plan (the “LTIP”), for a total compensation expense of approximately $369,000. In 2005 the Company granted 21,000 shares of common stock to certain officers and directors of the Company and 122,000 restricted share units of the Company’s Common Stock to certain officers and members of the management of the Company under LTIP for a total compensation expense of approximately $674,911. The Company also granted 8,557 deferred share units to certain directors in 2004 under the LTIP for a total expense of approximately $185,000, and in 2005 the Company granted an additional 8,679 deferred share units under the LTIP to certain
directors for a total expense of $184,000. Restricted share units and deferred share units become shares of common stock when the restrictions applicable to them lapse.
The following table presents the Company’s contractual obligations as of December 31, 2005:
Represents an estimated payout based upon historical paid loss development patterns.
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 $16.7 million and $12.4 million at December 31, 2005 and 2004, respectively. The allowance for doubtful accounts on premiums and other receivables amounted to $300,000 and $450,000 as of December 31, 2005 and 2004, respectively.
The Company utilizes the equity method of accounting to account for its limited partnership hedge fund investments. Under the equity method, the Company records all changes in the underlying value of the limited partnership to net investment income in results of operations. Net investment income before investment fees derived from investments in limited partnerships amounted to $17.6 million and $7.7 million for the years ended December 31, 2005 and 2004, respectively. See