OPERATING DATA Year Ended December 31, ---------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (In thousands, except per share amounts) Revenues:
Net premiums earned ..... $ 75,448 $ 56,155 $ 76,023 $ 87,537 $ 97,036 Net investment income ... 18,076 18,642 20,803 21,325 21,270 Commission income ....... 903 1,956 591 1,439 1,981 Realized investment gains 5,247 12,504 8,615 10,425 4,589 Other income ............ 1,059 237 396 293 690 -------- -------- -------- -------- --------
The Company's general and administrative expenses consist primarily of compensation expense, employee benefits and rental expense for office facilities. The Company's policy acquisition costs include both brokerage commissions and premium taxes which are primarily based on a percentage of premiums written. Such costs have generally changed in proportion to changes in premium volume. Losses and loss adjustment expenses incurred in connection with insurance claims in any particular year depend upon a variety of factors including the rate of inflation, accident or claim frequency, the occurrence of natural catastrophes and the number of policies written.
Ocean marine premiums earned derived from the domestic insurance companies decreased 7% in 2000 when compared to 1999. However, net writings increased 4% in 2000 when compared to the prior year due, in large part, to a firming of marine rates in 2000 which created opportunities to produce additional writings particularly in the hull and cargo marine classes. The Company expects gross and net writings to increase in 2001 as rates continue to firm across the various classes within the ocean marine line.
Other liability premiums earned increased 28% in 2000. The growth in premiums is attributable to writing a new class of assumed auto liability business in 2000. The Company expects other liability premiums to increase in 2001 as opportunities exist for additional production in the excess and surplus lines markets as pricing continues to firm.
Inland marine premiums increased mainly due to additional production in 2000. The Company expects inland marine writings to further increase in 2001 due to additional production opportunities in the excess and surplus lines markets.
Policy acquisition expenses as a percentage of net premiums earned for the year ended December 31, 2000 was 24.1% as compared with 19.7% for the same period in 1999. The increase in the ratio in 2000 is primarily attributable to higher acquisition costs on UK derived business and larger acquisition expenses in the current year's aviation line which do not reflect the benefit of ceded override commissions for business incepting in 2000.
General and administrative expenses were flat in 2000 when compared to the prior year. The prior year's amounts included larger expenses incurred in connection with employee benefit plans; however, the current year expenses reflect a $1.1 million litigation settlement.
Aviation gross premium written grew 22% in 1999 to $44.6 million as a result of rate increases obtained in 1999 on accounts with poor loss records as well as increases in overall line size per account. As the underwriting climate for gross premiums remained soft in 1999 in the aviation line, the Company maintained an adequate level of reinsurance to protect its exposure to any one loss. As a result, after excess of loss and quota share reinsurance, the Company's net writings amounted to $5.3 million in 1999.
The other liability line decreased 26% in 1999, excluding one-time items, when compared to 1998 due to the effects of competitive pricing as well as a decline in premium production
Commission income increased substantially in 1999 when compared to 1998 and reflected larger profit commissions on the reinsurance of the Company's ocean marine and aviation lines of business.
Interest expense decreased to $1,058,000 for the year ended December 31, 1999 from $1,373,000 for the prior year primarily as a result of a decrease in loan principal outstanding.
Net investment income for the year ended December 31, 1999 decreased by 10% from the level of net investment income achieved in 1998. Contributing to the decline were lower overall investment yields and a reduction in invested assets brought about by the payments of a large number of losses on a gross basis in the aviation and other liability lines of business.
Total investments decreased to $396.7 million at December 31, 1999 primarily due to reductions in unrealized gains on investments as a result of rising interest rates and reductions in the investment portfolio to fund payments of aviation and other liability losses on a gross basis. These payments contributed to cash flow used in operations in 1999 of $33.6 million. Reinsurance is maintained at an adequate level to prevent any one loss from significantly affecting net income. However, timing differences between the payment of gross losses by the Company and cash collections received from reinsurers may adversely impact cash flow in any one period.
Accumulated other comprehensive income decreased to $9.9 million from $19.4 million in 1998 and principally reflects the adverse impact of higher interest rates in 1999 on the market value of the Company's fixed income portfolio.
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, 2000, the Company's assets included approximately $33.4 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.
In 1998, the Company entered into an interest rate swap agreement (the "agreement") with a bank for purposes of hedging its interest rate risk on its existing bank loan. The agreement requires the Company to pay interest to the bank at a rate of 6.50% on the original notional amount outstanding of $22,500,000, which is subsequently adjusted quarterly by notional reductions of $1,250,000. The bank is required to pay the Company, on the same notional amounts outstanding, an amount equal to the three month US Dollar London Interbank Offered Rate plus .65% which is reset on a quarterly basis. The interest expense (benefit) recorded under the agreement was ($67,626) in 2000, $91,462 in 1999 and $44,719 in 1998.
The Company maintains a position of investments in bonds from various states and municipalities. Such securities receive favorable tax treatment under existing tax laws. The investment position is monitored regularly, and as a result, the Company reduced its investment in such securities in the most recent year after consideration of the alternative minimum tax.
NYMAGIC's principal source of cash flow is dividends from its insurance company subsidiaries which is then used to fund various operating expenses, including interest expense, loan repayments and the 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 a material 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 through MMO London to the extent solvency margins are maintained and after the closing of an underwriting year, which occurs three years following the beginning of a calendar year. The Company does not expect to receive a dividend from the closing of the 1998, 1999 and 2000 underwriting years.
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133", ("SFAS 137") was issued by the FASB in 1999 and deferred the effective date of SFAS 133 to fiscal years beginning after June 15, 2000.