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 ocean marine, inland marine and aviation business produced by the pools increased to 81.47% effective January 1, 1994. The Company's participation in the other liability and inland marine pool 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 pool increased to 100%.
Unlike many types of property and casualty insurance, ocean marine, inland marine, aviation and other liability premium rates are not strictly regulated by governmental authorities. Consequently, the Company is able to adjust premium rates quickly in response to competition, varying degrees of risk and other factors. In addition, the Company, by virtue of its underwriting flexibility, is able to emphasize specific lines of business in response to advantageous premium rates and the anticipation of positive underwriting results.
The Company's net premiums earned decreased by 10% in 1997 as compared to 1996. The decrease in premiums earned occurred in all major lines of business.
Inland marine premiums recorded the largest percentage decline at 82% in 1997. The Company decided in the prior year to withdraw from writing property risks of the larger assureds with multiple locations after years of unprofitable results brought about mainly by large catastrophe losses. In 1997, the Company concentrated on writing risks that are ancillary to its ocean marine risks. This strategy is expected to remain in place for 1998.
Ocean marine premiums earned fell by 5% in 1997 mainly due to falling premium rates as competition remained intense during the year. All classes within the ocean marine line experienced declines except for the energy class which saw increases in production. Net premium writings did not decline at the same rate as gross premiums primarily due to lower reinsurance costs. Competition should remain intense in 1998. The Company has been writing additional marine liability accounts with assureds that have smaller amounts of exposure. This area of growth may offset expected rate reductions. A source of additional growth in 1998 in this line will be from premiums written through our recently acquired agency and syndicate in Lloyd's of London.
General and administrative expenses increased by 4% in 1997 primarily as a result of increased personnel and administrative costs to further strengthen support services.
The Company was able to realize investment gains of $10,425,133 in 1997 mainly as a result of the sale of appreciated equity securities.
Net income increased by 17% to $26,367,740 for the year ended December 31, 1997, from $22,624,618 for the prior year. Diluted earnings per share increased to $2.67 in 1997 as compared to $2.15 in 1996.
Prepaid reinsurance premiums increased 131% to $24,414,620 at December 31, 1997 however the reserve for unearned premiums decreased in 1997 by 17%. The decline in gross writings in 1997 is consistent with the change in the reserve for unearned premiums. The Company, however, reduced its net retention per loss in the aviation line which caused prepaid reinsurance premiums, as well as ceded reinsurance payable balances, to increase accordingly.
The Company's net premiums earned decreased by 6% in 1996 as compared to 1995. The decline primarily relates to the inland marine and other liability lines of business.
The other liability earned premiums decreased 21% as compared to the prior year. Due to the fierce competition in this line, casualty market rates had remained soft.
The ocean marine line recorded the largest growth in written and earned premiums among the Company's various lines of business in 1996. An 11% and 9% increase over the prior year's written and earned premium, respectively, was achieved by additional production in the hull and cargo classes of business coupled with changes in the ocean marine reinsurance program. Gross premiums were down slightly as rate reductions in various marine classes outweighed the additional production in the hull and cargo classes. Rates in the ocean marine line softened as competition intensified. Reinsurance changes in the Company's hull, cargo and energy classes enabled those classes to retain more premium income without sustaining much additional exposure.
Losses and loss adjustment expenses as a percentage of premiums earned were 61.2% in 1996 as compared to 67.4% in 1995. Improved net loss experience in the Company's core ocean and aviation lines contributed to the overall decline.
The other liability line deteriorated in 1996 from adverse loss development in both the umbrella and the non-marine liability occurrence classes.
Policy acquisition costs as a percentage of net premiums earned for the year ended December 31, 1996 was 19.4% as compared to 20.3% for the prior year. The inland marine line had the largest acquisition ratio among the Company's various lines of business. Reductions in inland premium writings in 1996 had the effect of decreasing policy acquisition costs and the overall ratio.
Interest expense increased by 137% in 1996 primarily as a result of an increase in loan principal outstanding.
Realized investment gains for the year ended December 31, 1996 amounted to $4,589,133 and resulted primarily from the sale of appreciated equity securities.
Notes payable increased to $20,438,413 as of December 31, 1996 and resulted from loans obtained to repurchase the Company's common stock.
Prepaid reinsurance premiums and reserve for unearned premiums decreased in 1996 by 38% and 16%, respectively. The decline in gross writings in 1996 is consistent with the change in the reserve for unearned premiums. Also, as the Company retained additional premium with modifications in its reinsurance program, further reductions in ceded premiums occurred in 1996 which is consistent with the change in prepaid reinsurance premiums.
Investing and financing activities increased further as a result of the Company borrowing $25,000,000 from a bank in 1990. This amount was invested in its principal insurance subsidiary, New York Marine, to further bolster its surplus in order to support larger participation interests in the insurance pools. Repayments of the loan started in 1991 and continued through 1995. In 1994, the Company entered into a $10,000,000 revolving credit agreement which increased to $25,000,000 in 1996 with the same bank. The Company borrowed approximately $9,000,000 in 1995 to repurchase 540,000 shares of the Company's Common Stock. 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 has an unsecured credit facility with a bank that allows for a maximum credit of $5,000,000. This was reduced in 1997 from a $10,000,000 facility available in 1996. The use of this credit facility will assist the Company as a source of short-term liquidity. In 1996 and 1995, amounts were borrowed to assist the insurance pools managed by the Company in the payment of gross losses . The amounts borrowed under the line of credit were fully repaid after collecting recoverables due from reinsurers on such losses.
The Company adheres to investment guidelines set by the Finance Committee of the Board of Directors. The investment guidelines are conservatively 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.
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, 1997, the Company had repurchased a total of 2,115,728 shares of common stock at a total cost of approximately $38,562,528 at market prices ranging from $16.50 to $26.88 per share.
NYMAGIC's principal source of cash flow is dividends from its insurance company subsidiaries which is used to fund operating expenses, including interest expense, loan repayments and payment of dividends to shareholders. The Company's 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 an impact on the Company's ability to meet current cash obligations or materially limit the current payment of dividends to the Company's shareholders.
The Company is in the process of communicating with its various business relationships to determine the extent of their Year 2000 compliance. The results of this process will serve to reduce the Company's overall exposure to the Year 2000 problem.
The Company is also in the process of evaluating the insurance risk in connection with the potential for losses arising from Year 2000 failures. Losses resulting from Year 2000 failures may be determined to be covered under insurance contracts depending upon contract wording and specific circumstances. However, the extent of such losses , which the Company may incur, cannot be determined currently.