The Company's principal executive offices are approximately 37,000 sq. ft. in size and are located in New York City. The lease for the Company's principal executive offices expires December 30, 2003. The minimum annual rent under the lease is $1,184,000 until the expiration of the lease. The lease included an initial cash payment by the lessor to the Company of $1,853,000, the benefit of which was deferred and is being amortized over the lease term.
MMO London wrote a book of ocean marine insurance through its participation in Syndicate 1265 and a book of assumed property and aircraft reinsurance through its participation in Syndicate 2010. Effective January 1, 2002 and subsequent, MMO London will no longer provide capacity to any Lloyd's syndicate.
The Company reported net earnings of $28.7 million, or $3.08 per diluted share, as compared to net losses of $13.1 million, or $1.42 per diluted share, for the years ended December 31, 2002 and 2001, respectively.
In 2002, the Company completed the withdrawal from its London operations, which resulted in a benefit of $9.3 million, or $.99 per diluted share, resulting primarily from the realization of certain tax benefits. Also in 2002, the Company recorded a charge of $1.0 million after taxes, or $.11 per diluted share, related to the reorganization of the Company's management structure.
Results for the year 2001 include after-tax losses of approximately $9.0 million, or $.98 per diluted share, resulting from the September 11, 2001 terrorist attacks on the World Trade Center, the Pentagon and the hijacked airliner which crashed in Pennsylvania (collectively hereinafter referred to as the "WTC 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.
Net investment income for the year ended December 31, 2002 decreased by 9% to $15.8 million from $17.4 million for the same period of 2001. The decrease reflected lower investment yields as well as larger positions in tax-exempt securities in 2002, despite a larger investment asset base in 2002. Income derived from hedge fund investments approximated $1.0 million 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 the same period of 2001. The Company incurred 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 the sale of the Company's common stock portfolio and sale of lower rated fixed maturities.
The 2002 income tax provision reflects approximately $9.3 million of tax benefits realized from the completion of the Company's withdrawal from its London operations. Excluding this benefit, income taxes as a percentage of income before taxes were 31.5% in 2002.
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 run-off segments (aircraft and MMO London) have also decreased since the prior year.
Reinsurance receivables, net decreased to $326.4 million as of December 31, 2002 from $361.7 million for the same period of 2001. The decrease is largely attributable to smaller loss recoveries from run-off segments (aircraft and MMO London) and to the commutation of certain reinsurance receivable balances.
The Company reported net losses of $13.1 million, or $1.42 per diluted share, and net losses of $5.5 million, or $.60 per diluted share, for the years ended December 31, 2001 and 2000, respectively. The results from operations were adversely affected by net losses from MMO London of $9.9 million, or $1.07 per diluted share and $15.4 million, or $1.66 per diluted share, for the years ended December 31, 2001 and 2000, respectively. Results for the year ended December 31, 2001 include after-tax losses of approximately $9.0 million, or $.98 per diluted share, resulting from the WTC attack.
Net premiums earned grew by approximately 12% for the year ended December 31, 2001, when compared to the same period of the prior year. Net premiums earned for the year ended December 31, 2001 were adversely affected by reinstatement reinsurance premiums of approximately $5.0 million as a result of losses sustained from the WTC attack.
Other liability - net premiums earned in the other liability line declined in 2001 due to the non-renewal of assumed auto liability business in 2001. However, net premiums written increased, primarily due to additional premium volume through expansion opportunities and firmer pricing. Contributing to the growth in 2001 was approximately $700,000 in net premiums written from policies covering errors and omissions/professional liability risks.
The loss ratio was 103.9% for the year ended December 31, 2001 as compared to 90.2% for the prior year. Net losses and loss adjustment expenses incurred were $87.9 million and $68.1 million for the years ended December 31, 2001 and 2000, respectively. The domestic insurance companies reported higher losses in 2001 as a result of larger severity losses arising from higher net retention levels per loss in the aircraft line of business, including WTC attack losses of approximately $6.6 million. The ultimate net liability resulting from the WTC attack may change from the amount provided, depending upon revisions in gross loss estimates and the interpretation as to the number of occurrences as defined in the aircraft ceded reinsurance treaties. In addition, net losses incurred for 2001 reflected charges for insolvent or financially impaired reinsurers of $10.8 million as compared to $1.0 million in 2000.
Net losses and loss adjustment expenses incurred from MMO London were $18.5 million (130.8% loss ratio) and $36.3 million (139.5% loss ratio) for the years ended December 31, 2001 and 2000, respectively. WTC attack losses of approximately $1.4 million also arose from MMO London operations. The decline in losses incurred in 2001 is consistent with the decline in premiums in MMO London from the prior year.
The Company's combined ratio was 142.9% in 2001 as compared to 140.1% in 2000. Excluding losses from the WTC attack, the combined ratio would have been 127.6% in 2001.
Commission income rose to $3.3 million for the year ended December 31, 2001 from approximately $900,000 for the year ended December 31, 2000. The increase in 2001 principally reflects larger profit commissions based upon the ceded results of reinsurance treaties.
Other income decreased in 2001 to $285,000 from $1.1 million in 2000. The amount in 2000 reflected a gain of $700,000 resulting from the sale of the Company's Lloyd's agency.
General and administrative expenses decreased by 13% to $17.0 million for the year ended December 31, 2001 from $19.4 million for the same period of 2000. The decrease is attributable to lower operating expenses in 2001 derived from MMO London.
Premium and other receivables, net increased to $74.9 million as of December 31, 2001 from $54.0 million as of the prior year. The increase was attributable to larger amounts due from the pools managed by MMO as a result of larger investment balances held by the pool.
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, 2002, the Company's assets included approximately $357 million in cash and short-term investments. The relatively large increase in the level of short-term investments is a direct result of the sale of a substantial amount of fixed maturity investments at the end of 2002. Although such sales were made in an effort to reposition the investment portfolio, the reinvestment of funds under the proposed investment strategy may take several months in 2003 to be fully implemented.
In 2002, the Company entered into a credit agreement with a bank. The agreement combined the Company's existing credit agreements together with a facility to fund future cash draw downs on the Company's issued letter of credit to fund losses in MMO London. During 2002, the remaining balance of the Company's issued letters of credit was fully drawn down (approximately $15.7 million) and such payments were funded entirely under the credit agreement. The interest rate on the loan is fixed, at the Company's option, for a period of one to six months. The interest rate is equal to the bank's Adjusted London Interbank Offered Rate at the time of the interest rate adjustment period plus 2.5%. Principal repayments are to be paid quarterly in equal installments of $2,000,000, except for a payment of $2,500,000 which was made on September 30, 2002, until all loan obligations are repaid. Following any fiscal year in which the Company earns more than $10 million, an additional repayment is required equal to 25% of net income between $10 million and $15 million, and 50% of net income in excess of $15 million. The Company has the option to prepay amounts in excess of the required repayments. The remaining loan balance as of December 31, 2002 was $6.2 million.
On February 7, 2003, the Company repaid its entire loan balance outstanding to the bank following the sale of equity to 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 exercise price for the option is based on a formula contained in the Securities Purchase Agreement between Conning and the Company.
The Company adheres to investment guidelines set by management and approved by the Finance Committee of the Board of Directors. The investment guidelines are designed to provide the Company with adequate capital growth and sufficient liquidity to meet existing obligations. Such guidelines consider many factors including anticipated tax position and regulatory requirements.
The Company maintains a position of investments in bonds from various states and municipalities. Such securities receive favorable tax treatment under existing tax laws. This investment position is monitored regularly, and as a result, the Company may change its investment in such securities from year to year after consideration of the alternative minimum tax.
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. During 2000, the Company repurchased 529,400 shares of common stock, under the Company's Common Stock Repurchase Plan, for a total cost of approximately $6.9 million. During 2001 and 2000, the Company issued 4,540 and 9,074 treasury shares, respectively, in connection with the compensation of its Directors. As of December 31, 2002, the Company had repurchased, net of treasury shares issued, a total of 2,639,868 shares of common stock at a total cost of approximately $45,219,570 at market prices ranging from $12.38 to $28.81 per share.
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 $17,400,000 as of December 31, 2002. In connection with the application for approval of acquisition of control of NYMAGIC, INC., filed by Mariner and William J. Michaelcheck with the New York State Insurance Department (the "Department") pursuant to Section 1506 of the New York Insurance Law, New York Marine and Gotham agreed for a period of two years from July 31, 2002, the date of the acquisition of such control, not to pay any dividends without the consent of the Department. The limitations on dividends from the insurance company subsidiaries are not expected to have a material impact on the Company's ability to meet current cash obligations.
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". 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. Unpaid losses and loss adjustment expenses amounted to $516.0 million and $534.2 million at December 31, 2002 and 2001, respectively.
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 $13.3 million and $17.6 million at December 31, 2002 and 2001, respectively. The allowance for doubtful accounts on premiums and other receivables amounted to $450,000 at December 31, 2002 and 2001.
Statement of Financial Accounting Standards No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure" ("SFAS 148"), was issued by the Financial Accounting Standards Board ("FASB") in December 2002. SFAS 148 provides alternative methods of transition for a company that voluntarily changes its method of accounting for stock based employee compensation to the fair value method. SFAS 148 also requires additional disclosures in both annual and interim financial statements about the method of accounting for stock based employee compensation and its effect on reported results. SFAS 148 is effective for interim periods beginning after December 15, 2002. The Company has adopted the appropriate disclosures under SFAS 148.