UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2008
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number 1-11238.
NYMAGIC, INC.
(Exact name of registrant as specified in its charter)
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New York
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13-3534162
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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919 Third Avenue, New York, NY
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10022
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(Address of principal executive offices)
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(Zip Code)
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The registrants telephone number, including area code: (212) 551-0600
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class:
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Name of each exchange on which registered:
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Common Stock, $1.00 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. :
Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act. :
Yes
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No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. : Yes
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No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large Accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller
reporting company)
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Smaller reporting company
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Indicate by check mark the registrant is a shell company (as defined in Rule 12b-2 of the Act). :
Yes
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No
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MARKET VALUE
The aggregate market value of the outstanding common stock held by non-affiliates of the
registrant, as of June 30, 2008, the last business day of the registrants most recently completed
second fiscal quarter, was approximately $162,962,755, based on the closing price of the stock on
the New York Stock Exchange on that date.
OUTSTANDING STOCK
As of March 2, 2009, there were 8,408,238 outstanding shares of common stock, $1.00 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the registrants definitive proxy statement
relating to its 2009 Annual Meeting of Shareholders to be filed with the Commission within 120 days
after the close of the registrants fiscal year.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements concerning the Companys operations,
economic performance and financial condition, including, in particular, the likelihood of the
Companys success in developing and expanding its business. Any forward-looking statements
concerning the Companys operations, economic performance and financial condition contained herein,
including statements related to the outlook for the Companys performance in 2009 and beyond, are
made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These statements are based upon a number of assumptions and estimates which inherently are subject
to uncertainties and contingencies, many of which are beyond the control of the Company. Some of
these assumptions may not materialize and unanticipated events may occur which could cause actual
results to differ materially from such statements. These include, but are not limited to, the
cyclical nature of the insurance and reinsurance industry, premium rates, investment results, hedge
fund results, the estimation of loss reserves and loss reserve development, uncertainties
associated with asbestos and environmental claims, including difficulties with assessing latent
injuries and the impact of litigation settlements, bankruptcies and potential legislation, the
uncertainty surrounding the loss amounts related to the attacks of September 11, 2001, and
hurricanes Katrina, Rita and Ike, the occurrence and effects of wars and acts of terrorism, net
loss retention, the effect of competition, the ability to collect reinsurance receivables and the
timing of such collections, the availability and cost of reinsurance, the possibility that the
outcome of any litigation or arbitration proceeding is unfavorable, the ability to pay dividends,
regulatory changes, changes in the ratings assigned to the Company by rating agencies, failure to
retain key personnel, the possibility that our relationship with Mariner Partners, Inc. could
terminate or change, and the fact that ownership of our common stock is concentrated among a few
major stockholders and is subject to the voting agreement, as well as assumptions underlying any of
the foregoing and are generally expressed with words such as intends, intend, intended,
believes, estimates, expects, anticipates, plans, projects, forecasts, goals,
could have, may have and similar expressions. These risks could cause actual results for the
2009 year and beyond to differ materially from those expressed in any forward-looking statements.
The Company undertakes no obligation to update publicly or revise any forward-looking statements.
ii
Part I
Item 1. Business General
NYMAGIC, INC., a New York corporation (the Company or NYMAGIC), is a holding company which owns
and operates insurance companies, risk bearing entities and insurance underwriters and managers.
Insurance Companies and Lloyds Corporate Capital Vehicle:
New York Marine and General Insurance Company (New York Marine), Gotham Insurance Company
(Gotham), Southwest Marine and General Insurance Company, which was formerly known as Arizona
Marine And General Insurance Company (Southwest Marine), MMO UK, Ltd. (MMO UK) and MMO EU, Ltd.
(MMO EU). Both MMO UK and MMO EU have been inactive since 2002. MMO UK was sold in 2005 and MMO
EU was liquidated in February 2007.
Insurance Underwriters and Managers:
Mutual Marine Office, Inc. (MMO), Pacific Mutual Marine Office, Inc. (PMMO), which was closed
in 2007 and Mutual Marine Office of the Midwest, Inc. (Midwest).
Investment Interests:
Altrion Capital, L.P. (Altrion), formerly known as Tricadia CDO Fund, L.P. (Tricadia) and
Mariner Tiptree (CDO) Fund I, L.P. (Tiptree). See Investment Management Arrangement for a
complete discussion of the Companys investment in Altrion.
New York Marine and Gotham each currently holds a financial strength rating of A (Excellent) and
Southwest Marine currently holds a financial strength rating of A- (Excellent) and an issuer
credit rating of a- from A.M. Best Company. These are the third and fourth highest of fifteen
rating levels in A.M. Bests classification system. Many of the Companys insureds rely on ratings
issued by rating agencies. Any adverse change in the rating assigned to New York Marine, Gotham and
Southwest Marine by a rating agency could adversely impact our ability to write premiums. The
Company has specialized in underwriting ocean marine, inland marine, other liability and aircraft
insurance through insurance pools managed by MMO, PMMO, and Midwest (collectively referred to as
MMO and affiliates) since 1964. However, the Company has not written any new policies covering
aircraft risks since March 31, 2002. The Company decided to exit the commercial aviation insurance
business because it is highly competitive, had generated underwriting losses for most years during
the 1990s, and because it is highly dependent on the purchase of substantial amounts of
reinsurance, which became increasingly expensive after the events of September 11, 2001. This
decision has enabled the Company to concentrate on its core lines of business, which include ocean
marine, inland marine/fire and other liability.
In addition to managing the insurance pools as discussed below, the Company participates in the
risks underwritten for the pools through New York Marine and Gotham. All premiums, losses and
expenses are pro-rated among pool members in accordance with their pool participation percentages.
In 1997, the Company formed MMO EU as a holding company for MMO UK, which operated as a limited
liability corporate vehicle to provide capacity for syndicates within Lloyds. In 2005 the Company
sold MMO UK and MMO EU was liquidated in February 2007. In 1997, the Company acquired ownership of
a Lloyds managing agency, which was subsequently renamed MMO Underwriting Agency, Ltd., and
commenced underwriting in 1998 for the Companys wholly owned subsidiary MMO UK. In 2000, MMO UK
provided 100%, of the capacity for Lloyds Syndicate 1265, which primarily wrote marine insurance.
The Company sold MMO Underwriting Agency Ltd. in 2000, in exchange for a minority interest in
Cathedral Capital PLC, and Lloyds Syndicate 1265 was subsequently placed into runoff. Runoff is
a term used to refer to an insurer that has ceased writing new insurance policies but that
continues to exist for the purpose of paying claims on policies that it has already written. In
2003, the Company sold its minority interest in Cathedral Capital PLC. There have been no
underwriting activities from these operations for the years ended 2008, 2007 and 2006.
The Pools
MMO, located in New York, PMMO, located in San Francisco, and Midwest, located in Chicago (the
Manager or the Managers), manage the insurance pools in which the Company participates. In May
2007, the Company closed the PMMO office and its management activities were taken over by MMO and
Midwest.
1
The Managers accept, on behalf of the pools, insurance risks brought to the pools by brokers and
others. All premiums, losses and expenses are pro-rated among the pool members in accordance with
their percentage participation in the pools. Originally, the members of the pools were insurance
companies that were not affiliated with the Managers. New York Marine and Gotham joined the pools
in 1972 and 1987, respectively. Subsequent to their initial entry in the pools, New York Marine and
Gotham steadily increased their participation, while the unaffiliated insurance companies reduced
their participation or withdrew from the pools entirely. Since 1997, the only pool members are New
York Marine, and Gotham who together write 100% of the business produced by the pools. Since 2007,
Southwest Marine has been a member in the pool and retains 100% of its direct writings. Southwest
Marine also reinsures business written by New York Marine and Gotham effective for policies
attaching on or after January 1, 2007 through a 5% quota share treaty.
Assets and liabilities resulting from the insurance pools are allocated to the members of the
insurance pools based upon the pro-rata participation of each member in each pool in accordance
with the terms of the management agreement entered into by and between the pool participants and
the Managers.
Pursuant to the pool management agreements, the pool members have agreed not to accept ocean marine
insurance, other than ocean marine reinsurance, in the United States, its territories and
possessions and the Dominion of Canada unless received through the Managers or written by the pool
member on its own behalf and have authorized the Managers to accept risks on behalf of the pool
members and to effect all transactions in connection with such risks, including the issuance of
policies and endorsements and the adjustment of claims. As compensation for its services, the
Managers receive a fee of 5.5% of gross premiums written by the pools and a contingent commission
of 10% on net underwriting profits, subject to adjustment. Since the 1997 policy year, all
management commissions charged by MMO have been eliminated in consolidation.
As part of its compensation, the Managers also receive profit commissions on pool business ceded to
reinsurers under various reinsurance agreements. Profit commissions on business ceded to reinsurers
are calculated on an earned premium basis, using inception to date underwriting results for the
various reinsurance treaties. Adjustments to commissions, resulting from revisions in coverage or
audit premium adjustments, are recorded in the period when realized. Subject to review by the
reinsurers, the Managers calculate the profitability of all profit commission agreements placed
with various reinsurance companies.
Two former pool members, Utica Mutual Insurance Company (Utica Mutual) and Arkwright Mutual
Insurance Company (Arkwright), which is currently part of the FM Global Group, withdrew from the
pools in 1994 and 1996, respectively, and retained the liability for their effective pool
participation for all loss reserves, including losses incurred but not reported (IBNR) and
unearned premium reserves attributable to policies effective prior to their withdrawal from the
pools.
The Company is not aware of any facts that could result in any possible defaults by either
Arkwright or Utica Mutual with respect to their pool obligations, which might impact liquidity or
results of operations of the Company, but there can be no assurance that such events will not
occur.
Segments
The Companys domestic insurance companies are New York Marine, Gotham and Southwest Marine. New
York Marine and Gotham underwrite insurance business by accepting risks generally through insurance
brokers. They engage in business in all 50 states and also accept business risks in such worldwide
regions as Europe, Asia, and Latin America. Southwest Marine, which is currently licensed to engage
in the insurance business in twenty-two states, including Arizona, primarily writes surety
business, as well as excess and surplus lines policies in New York. See Regulation. The Companys
domestic insurance agencies are MMO, PMMO and Midwest. These agencies underwrite all the business
for the domestic insurance companies.
The Company considers the four lines of business underwritten by its domestic insurance/agency
companies as appropriate segments to report its business operations. They are ocean marine, inland
marine/fire, other liability and aircraft. The Companys overall performance is evaluated through
these business segments. For additional segment disclosure information, see note 16 of Notes to
Consolidated Financial Statements.
Ocean marine insurance
is written on a direct and assumed reinsurance basis and covers a broad
range of classes as follows:
Hull and Machinery Insurance
: Provides coverage for loss of or damage to commercial
watercraft.
Hull and Machinery War Risk Insurance
: Provides coverage for loss of or damage to
commercial watercraft as a result of war, strikes, riots, and civil commotions.
Cargo Insurance
: Provides coverage for loss of or damage to goods in transit or temporary
storage.
Cargo War Risk Insurance
: Provides coverage for loss of or damage to goods in transit as a
result of war, which can be extended to include strikes, riots and civil commotions.
Protection and Indemnity
: Provides primary and excess coverage for liabilities arising out
of the operation of owned watercraft, including liability to crew and cargo.
2
Charters Legal Liability
: Provides coverage for liabilities arising out of the operation
of leased or chartered watercraft.
Shoreline Marine Liability Exposures
: Provides coverage for ship builders, ship repairers,
wharf owners, stevedores and terminal operators for liabilities arising out of their operations.
Marine Contractors Liability
: Provides coverage for liabilities arising out of onshore and
offshore services provided to the marine and energy industries.
Maritime Employers Liability (Jones Act)
: Provides coverage for claims arising out of
injuries to employees associated with maritime trades who may fall under the Jones Act.
Marine Umbrella (Bumbershoot) Liability
: Provides coverage in excess of primary policy
limits for marine insureds.
Onshore and Offshore Oil and Gas Exploration and Production Exposures
: Provides coverage
for physical damage to drilling rigs and platforms, associated liabilities and control of well
exposures.
Energy Umbrella (Bumbershoot) Liability
: Provides coverage in excess of primary policy
limits for exploration and production facilities as well as commercial general liability and
automobile liability.
Petroleum and Bulk Liquid Cargo
: Provides coverage for loss and damage to petroleum and
liquid bulk cargo.
Inland marine/Fire insurance
traditionally covers property while being transported, or property of
a movable, or floating, nature and includes the following:
Contractors Equipment
: Provides coverage for physical damage to various types of fixed and
mobile equipment used in the contracting and service industries.
Motor Truck Cargo
: Provides coverage for cargo carried aboard trucks.
Transit Floaters
: Provides coverage for physical damage to property while being transported
on various conveyances and while in storage.
Commercial Property
: Provides primary property coverage for owners and operators of
commercial, residential and mercantile properties.
Surety
: Provides contract bonds for small construction risks and commercial bonds for
various industries.
Inland marine also includes excess and surplus lines property coverage on unique or hard to place
commercial property risks that do not fit into standard commercial lines coverages. Excess and
surplus lines property risks are written through Gotham and Southwest Marine.
Non-marine liability insurance
is written on a direct and assumed reinsurance basis and includes:
Professional Liability including:
Accountants Professional Liability
: Provides primary liability coverage for the errors and
omissions of small to medium-sized accounting firms.
Lawyers Professional Liability
: Provides primary liability coverage for small law firms,
including those with an emphasis on intellectual property and specialty firms.
Miscellaneous Professional Errors & Omissions
: Includes primary and excess liability
coverage for non-medical professionals written on a claims-made basis. The book includes liability
for music producers, patent holders, web site designers, information technology consultants,
insurance agents and brokers, real estate agents, title agents, home inspectors and other design,
engineering and consulting firms.
Casualty including:
Contractors Liability
: Provides primary liability coverage for commercial and high-end
residential contractors.
Commercial and Habitational Liability
: Provides primary liability coverage for commercial
property owners and lessors of habitational properties.
Products Liability
: Provides primary liability coverage for manufacturers and distributors
of commercial and consumer products.
Other Lines including:
Excess Workers Compensation
: Provides excess liability coverage for self-insured workers
compensation trusts and other qualified self-insurers.
Commercial Automobile
: Provides physical damage and liability insurance for commercial
mid-sized trucking fleets located primarily in New York State.
Employment Practices Liability
: Provides primary liability insurance to small and
medium-sized businesses for employment-related claims brought by employees.
3
The Company has entered into a number of new specialty lines of business identified above,
including professional liability, commercial real estate, employment practices liability, surety,
excess workers compensation and commercial automobile insurance. The Company continues to look for
appropriate opportunities to diversify its business portfolio by offering new lines of insurance in
which management believes the
Company has sufficient underwriting and claims expertise. However, because of the Companys limited
history in these new lines, it may impact managements ability to successfully develop these new
lines or appropriately price and reserve for the ultimate loss associated with these new lines. Due
to the Companys limited history in these lines, management may have less experience managing the
development and growth of such lines than some of our competitors. Additionally, there is a risk
that the lines of business into which the Company expands will not perform at the level it
anticipates.
Aircraft insurance
provides insurance primarily for commercial aircraft and includes hull and
engine insurance, liability insurance as well as products liability insurance. Coverage is written
on a direct and assumed reinsurance basis. The Company ceased writing any new policies covering
aircraft insurance as of March 31, 2002.
The following tables set forth the Companys gross and net written premiums, after reinsurance
ceded.
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NYMAGIC Gross Premiums Written
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Year ended December 31,
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By Segment
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2008
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2007
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2006
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(Dollars in thousands)
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Ocean marine
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$
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82,751
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38
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%
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$
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98,689
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43
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%
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$
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104,876
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43
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%
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Inland marine/Fire
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16,128
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7
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%
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18,625
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8
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%
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21,595
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9
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%
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Other liability
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118,378
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55
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%
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110,986
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49
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%
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114,754
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48
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%
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Subtotal
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217,257
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100
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%
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228,300
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100
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%
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241,225
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100
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%
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Run off lines (Aircraft)
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(3
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)
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88
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84
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Total
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$
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217,254
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100
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%
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$
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228,388
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100
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%
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$
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241,309
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100
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%
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NYMAGIC Net Premiums Written
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Year ended December 31,
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By Segment
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2008
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2007
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2006
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(Dollars in thousands)
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Ocean marine
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$
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59,200
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36
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%
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$
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68,192
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41
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%
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$
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75,243
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49
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%
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Inland marine/Fire
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4,538
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3
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%
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6,935
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4
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%
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7,097
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4
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%
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Other liability
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101,424
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61
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%
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92,618
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55
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%
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72,231
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47
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%
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Subtotal
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165,162
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100
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%
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167,745
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100
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%
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154,571
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100
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%
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Run off lines (Aircraft)
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222
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108
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289
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Total
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$
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165,384
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100
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%
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$
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167,853
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100
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%
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$
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154,860
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100
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%
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Reinsurance Ceded
Ceded premiums written to reinsurers in 2008, 2007 and 2006 amounted to $51.9 million, $60.5
million and $86.4 million, respectively.
A reinsurance transaction takes place when an insurance company transfers (cedes) a portion or all
of its liability on insurance written by it to another insurer. The reinsurer assumes the liability
in return for a portion or the entire premium. The ceding of reinsurance does not legally discharge
the insurer from its direct liability to the insured under the policies including, but not limited
to, payment of valid claims under the policies.
The Company, through the pools, cedes the greater part of its reinsurance through annual
reinsurance agreements (treaties) with other insurance companies. These treaties, which cover
entire lines or classes of insurance, allow the Company to automatically reinsure risks without
having to cede liability on a policy by policy (facultative) basis, although facultative
reinsurance is utilized on occasion.
4
Generally, the Managers place reinsurance with companies which initially have an A.M. Best rating
of A- (Excellent) or greater or which have sufficient financial strength, in managements opinion,
to warrant being used for reinsurance protection. The Managers also examine financial statements of
reinsurers and review such statements for financial soundness and historical experience. In
addition, the Company, through the pools, may withhold funds and/or obtain letters of credit under
reinsurance treaties in order to collateralize the obligations of reinsurers. The Company monitors
the financial status of all reinsurers on a regular basis. The Company holds letters credit as
collateral for reinsurance obligations due to the Company from reinsurers. These letters of credit
are from major banks including Citibank, Bank of America and JP Morgan Chase. While the banking
industry has experienced significant turmoil over the past year, the Company has not experienced
any difficulties in receiving cash from acting upon the draw downs on such letters of credit.
The Company attempts to limit its exposure from losses on any one occurrence through the use of
various excess of loss, quota share and facultative reinsurance arrangements and endeavors to
minimize the risk of default by any one reinsurer by reinsuring risks with many reinsurers. The
Company utilizes many separate reinsurance treaties each year, generally with a range of 1 to 15
reinsurers participating on each treaty. Some reinsurers participate on multiple treaties. The
Company utilizes both quota share (i.e., proportional) and excess of loss (i.e., non-proportional)
reinsurance arrangements. In a quota share reinsurance contract, the reinsurers participate on a
set proportional basis in both the premiums and losses. Conversely, in an excess of loss
reinsurance arrangement, the reinsurers, in exchange for a pre-determined provisional premium,
subject to upward adjustment based upon premium volume, agree to pay for that part of each loss in
excess of an agreed upon amount. The Companys retention of exposure, net of these treaties, varies
among its different classes of business and from year to year, depending on several factors,
including the pricing environment on both the direct and ceded books of business and the
availability of reinsurance.
The Company has made certain changes in reinsurance strategies over the past few years. In 2006,
the Company increased its exposure in the ocean marine line to a net loss retention of $5 million
on any one risk. In 2007 and 2008 the Company maintained its net loss retention of $5 million per
risk in the ocean marine line; however, the Company could absorb an additional amount up to $5
million depending upon the gross loss to the Company in excess of $5 million. However, in 2008 the
Companys net retention could be as low as $1 million for certain classes within ocean marine. The
decisions to vary net retention levels in the ocean marine line were based upon the availability
and cost of reinsurance in the ocean marine market.
In the wake of substantial losses arising from hurricanes Katrina and Rita in 2005, the excess of
loss reinsurance market for the marine and energy line of business significantly contracted in 2006
and 2007, resulting in increases in both reinsurance costs and net loss retentions ($5 million per
risk). This compared to a net loss retention of $3 million per risk in 2005. As a result of the
increasing cost of reinsurance, the Company excluded energy business with exposures in the Gulf of
Mexico from its ocean marine reinsurance program for 2006 and 2007. However, the Company purchased
quota share reinsurance protection in each of those years for 80% of this portion of its energy
business to reduce the potential impact of future catastrophe losses to the Company. In 2008, the
Companys energy business net retention after quota share reinsurance was subject to inclusion in
the excess of loss program. The Company also monitored its overall concentration of rig exposures
in the Gulf of Mexico, which resulted in a reduction in policy count in subsequent years when
compared to 2005.
Effective January 1, 2009, the Company maintained its $5 million net retention per risk in the
ocean marine line when compared to 2008, including maintaining the Companys net retention as low
as $1 million for certain classes within ocean marine, but eliminated an additional loss amount up
to $5 million depending upon the gross loss to the Company in excess of $5 million. In addition,
catastrophe losses are limited to $2 million plus reinstatement reinsurance costs. While the quota
share reinsurance protection for energy business remains in effect for 2009, energy business was
also included within the ocean marine reinsurance program.
Prior to 2006, the Company wrote excess workers compensation insurance on behalf of certain
self-insured workers compensation trusts. Specifically, the Company wrote a $500,000 layer in
excess of each trusts self insured retention of $500,000. The gross premiums written for years
prior to 2006 were reinsured under a 50% quota share reinsurance treaty. Beginning in 2006, the
Company provided gross statutory limits on the renewals of its existing in force excess workers
compensation policies to these trusts. Accordingly, the reinsurance structure was changed to
accommodate the increase in gross limits. A general excess of loss treaty was secured in order to
protect the Company up to $3 million on any one risk. The resulting net retention was then subject
to a 70% quota share reinsurance treaty. In 2007, the Company increased its net retention to $5
million per occurrence covering two or more lives and eliminated the 70% quota share treaty. The
net retention of $5 million per occurrence covering two or more lives was maintained in 2008 with
coverage up to $50 million. As a result of these changes in underwriting and reinsurance
structures, the gross, ceded and net premiums written changed substantially in this class of
business in 2008 and 2007 when compared to 2006.
In 2007 the Company completed novation agreements with CRM Holdings, Ltd. and certain of its
affiliates (CRM). In these transactions, CRM assumed the Companys rights and obligations with
respect to all but one of the excess workers compensation policies and associated reinsurance
agreements that the Company had written in conjunction with CRM during the past several years. As a
result of these transactions, the Company remitted a total of $10.1 million to CRM and reduced its
existing net unpaid loss reserves by $16.6 million. The transactions reduced gross unpaid loss
reserves and reinsurance receivables on unpaid losses by $41.5 million and $24.9 million,
respectively.
5
With respect to the casualty and professional liability lines, the Companys maximum retention net
of reinsurance is generally limited to $2,000,000 per insured for any one claim or occurrence. With
regard to the property, inland marine and commercial automobile lines, the Companys maximum
retention net of reinsurance is generally limited to $500,000 per insured for any one occurrence.
The Company attempts to limit its exposure from catastrophes through the purchase of general excess
of loss reinsurance, which provides coverage in the event that multiple insureds incur losses
arising from the same occurrence. These coverages require the Company to pay a minimum premium,
subject to upward adjustment based upon premium volume. These reinsurance treaties, which extend,
in general, for a twelve-month period, obligate the reinsurers to pay for the portion of the
Companys aggregate losses (net of specific reinsurance) that fall within each treatys coverage.
In the event of a loss, the Company may be obligated to pay additional reinstatement premiums under
its excess of loss reinsurance treaties. This amount may be in excess of the original premium paid
under such treaties. Every effort is made to purchase sufficient reinsurance coverage, including
adequate reinstatements of the underlying reinsurance layers, to protect the Company against the
cumulative impact of several losses arising from a single occurrence, but there is no guarantee
that such reinsurance coverage will prove sufficient.
In 2008 the Company incurred gross losses of approximately $23.7 million in connection with
Hurricanes Gustav and Ike, but because of the availability of its reinsurance the Company incurred
only $5.0 million in net losses. In addition, the Company incurred approximately $1.6 million in
reinsurance reinstatement premium costs in connection with these losses. The Company reinsures
risks with several domestic and foreign reinsurers as well as syndicates of Lloyds. The Companys
largest unsecured reinsurance receivables as of December 31, 2008 were from the following
reinsurers:
|
|
|
|
|
|
|
Reinsurer
|
|
Amounts
|
|
|
A.M. Best Rating
|
|
|
(In millions)
|
|
|
|
Lloyds Syndicates (1)
|
|
$
|
57.2
|
|
|
A (Excellent)
|
Swiss Reinsurance America Corporation
|
|
|
15.0
|
|
|
A (Excellent)
|
Transatlantic Reinsurance Company
|
|
|
7.9
|
|
|
A (Excellent)
|
Platinum Underwriters Reinsurance Company
|
|
|
7.3
|
|
|
A (Excellent)
|
FM Global (Arkwright)
|
|
|
4.3
|
|
|
A+ (Superior)
|
XL Reinsurance America Inc.
|
|
|
4.2
|
|
|
A (Excellent)
|
Munich Reinsurance America
|
|
|
4.0
|
|
|
A+ (Superior)
|
White Mountains Reinsurance Company of
America
|
|
|
3.9
|
|
|
A- (Excellent)
|
General Reinsurance Corporation
|
|
|
3.8
|
|
|
A++ (Superior)
|
Liberty Mutual Insurance Company
|
|
|
3.7
|
|
|
A (Excellent)
|
Berkley Insurance Company
|
|
|
2.9
|
|
|
A+ (Superior)
|
Allianz Global Corporate & Specialty
|
|
|
2.4
|
|
|
A+ (Superior)
|
Everest Reinsurance
|
|
|
2.0
|
|
|
A+ (Superior)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
118.6
|
|
|
|
|
|
|
(1)
|
|
Lloyds maintains a trust fund, which was established for the benefit of all United States
ceding companies. Lloyds receivables represent amounts due from approximately 100 different
Lloyds syndicates.
|
The reinsurance contracts with the above listed companies are generally entered into annually and
provide coverage for claims occurring while the relevant agreement was in effect, even if claims
are made in later years. The contract with Arkwright was entered into with respect to their
participation in the pools.
At December 31, 2008, the Companys reinsurance receivables from reinsurers other than those listed
above were approximately $119.2 million, including amounts recoverable for paid losses, case loss
reserves, IBNR losses and unearned premiums, and net of ceded balances payable. This amount is
recoverable collectively from approximately 500 reinsurers or syndicates, no single one of whom was
liable to the Company for an unsecured amount in excess of approximately $2 million.
Approximately 93% of the Companys total reinsurance receivables as of December 31, 2008 are fully
collateralized by letters of credit and or funds withheld, or reside with entities rated A- or
higher by A.M. Best Company, or are subject to offsetting balances.
6
In the second quarter of 2008, the Company settled disputed reinsurance receivable balances with
Equitas, a Lloyds of London company established to settle claims for underwriting years 1992 and
prior, that resulted in a write-off of $9.4 million. Certain other reinsurers to which we
previously ceded premiums are contesting coverage issues and their obligations to reinsure claims
we paid on liability policies written during the period 1978 to 1985. The paid balances due from
these companies collectively amount to approximately $1.5 million as of December 31, 2008. These
reinsurers may also contest coverage on loss reserves ceded to them that will be paid in future
periods. We are vigorously enforcing collection of these reinsurance receivables through
arbitration proceedings and/or commutation, but an unfavorable resolution of these arbitration
proceedings and commutation negotiations could be material to our results of operations. The
Company maintains an estimate for amounts due from financially impaired reinsurers in our reserves
for doubtful accounts on reinsurance receivables of $21.4 million and $14.1 million as of December
31, 2008 and December 31, 2007, respectively. There can be no assurance that this reserve will be
adequate to provide for the ultimate loss from such reinsurers.
Ceded reinsurance activities had an impact on the Companys financial position as follows:
|
1.
|
|
As of December 31, 2008 and 2007, the Company reported total ceded
reinsurance payable of $23.8 million and $27.1 million, respectively.
|
|
|
2.
|
|
As of December 31, 2008 and 2007, the Company reported total
reinsurance receivables on paid losses of $28.4 million and $38.8
million, respectively.
|
|
|
3.
|
|
As of December 31, 2008 and 2007, the Company reported total
reinsurance receivables on unpaid losses of $213.9 million and $250.1
million, respectively.
|
|
|
4.
|
|
As of December 31, 2008 and 2007, the Company reported prepaid
reinsurance premiums of $19.2 million and $21.7 million, respectively.
|
Reinsurance receivables on paid losses decreased in 2008 primarily due to the collection of ceded
reinsurance recoverables on gross payments of hurricane Katrina and Rita losses, and the write off
of disputed receivable balances with a reinsurer. Reinsurance receivables on unpaid losses
decreased in 2008 primarily due to the payment of gross ocean marine losses and asbestos and
environmental losses that were substantially reinsured and the subsequent reevaluation of reserves
for doubtful accounts which reduced reinsurance recoverables by $3.0 million.
Ceded reinsurance payable decreased mainly as a result of the payment of reinsurance reinstatement
premiums on hurricane losses.
Prepaid reinsurance premiums decreased mainly as a result of lower ceded premiums written, in the
excess workers compensation class as a result of the change in reinsurance structure and in the
ocean marine line due to lower cargo premiums.
Ceded reinsurance activities had an impact on the Companys results from operations as follows:
|
1.
|
|
For the years ended December 31, 2008, 2007 and 2006 the Company
reported total ceded premiums earned of $54.4 million, $68.4 million
and $79.1 million, respectively.
|
|
|
2.
|
|
For the years ended December 31, 2008, 2007 and 2006 the Company
reported ceded incurred losses and loss adjustment expenses of $27.0
million, $31.1 million and $63.3 million, respectively.
|
Ceded premiums earned decreased in 2008 when compared to 2007 primarily as a result of lower excess
of loss and quota share reinsurance in the ocean marine and other liability lines of business.
Ceded premiums earned decreased in 2007 when compared to 2006 primarily as a result of the
elimination of the 70% quota share treaty covering excess workers compensation risks at the end of
2006.
Ceded incurred losses and loss adjustment expenses decreased in 2008 and 2007 when compared to 2006
as a result of the elimination of the 70% quota share treaty covering excess workers compensation
risks at the end of 2006. 2007 benefited from less than anticipated development of prior year
losses as a result of the closing of novation agreements for certain excess workers compensation
policies. 2006 included additional loss development of $20 million resulting from hurricanes Rita
and Katrina.
Ceded reinsurance activities had an impact on the Companys cash flows as follows:
|
1.
|
|
The Company made reinsurance premium payments of $55.1 million, $78.3
million and $77.4 million for the years ended December 31, 2008, 2007
and 2006, respectively.
|
|
|
2.
|
|
The Company received reinsurance collections on paid losses of $65.8
million, $75.9 million and $57.2 million for the years ended December
31, 2008, 2007 and 2006, respectively.
|
7
The increase in reinsurance premium payments in 2007 and 2006 relative to 2008 reflected
reinsurance payments made under the excess workers compensation 70% quota share treaty and 80%
energy quota share treaty as well as larger reinsurance reinstatement premium payments from
hurricanes Katrina and Rita.
Cash collections of reinsurance recoverables increased in 2008 and 2007 relative to 2006 primarily
due to hurricane losses.
Reserves
We maintain reserves for the future payment of losses and loss adjustment expenses with respect to
both case (reported) and IBNR (incurred but not reported) losses under insurance policies issued by
the Company. IBNR losses are those losses, based upon historical experience, industry loss data and
underwriter expectations, that the Company estimates will be reported under these policies. Case
loss reserves are determined by evaluating reported claims on the basis of the type of loss
involved, knowledge of the circumstances surrounding the claim and the policy provisions relating
to the type of loss. Case reserves can be difficult to estimate depending upon the class of
business, claim complexity, judicial interpretations and legislative changes that affect the
estimation process. Case reserves are reviewed periodically and monitored on a regular basis, which
may result in changes (favorable or unfavorable) to the initial estimate until the claim is
ultimately paid and settled.
The Company considers a variety of factors in its estimate of loss reserves. These elements include
the length of the reporting tail (i.e. occurrence versus claims made coverage), the nature of the
risk insured (i.e. property versus liability), the level of net retention per loss, large case
reserve estimates or shock (large) losses, the emergence of identifiable trends in the statistical
analysis of paid and incurred loss data, and the level of catastrophe losses incurred during the
period.
We evaluate loss reserves in three categories:
1) Classes of business where we have sufficient and adequate historical loss data.
Where we believe we have adequate historical loss data for a sufficient number of years to enable
us to project losses we estimate IBNR using our best estimate after a review and evaluation of
ultimate losses under four methods: the paid loss method, the incurred loss method and the
Bornheutter-Ferguson methods (paid and incurred). This category includes some classes that have
short tail business (hull, cargo, rig, and inland marine/fire, non marine liability-claims made
basis) and other classes with long tail business (ocean marine liability, other liability, aviation
liability). Each method uses different assumptions and no one method is considered better than the
others in all circumstances. The paid method is based upon the historical development of paid
losses to arrive at the ultimate loss. The incurred method focuses on the historical development of
incurred losses to arrive at the ultimate loss. The Bornheutter-Ferguson methods (paid and
incurred) focus on the historical development of paid and incurred losses, in addition to the level
of premiums earned, to arrive at the ultimate loss.
2) New specialty classes of business where we lack historical data.
In new classes of business in which we believe we lack historical loss data, we estimate IBNR using
our best estimate after considering industry loss ratios, underwriting expectations, internal and
external actuarial evaluations and anticipated loss ratios based upon known experience. Industry
loss ratios are considered from published sources such as those produced by the A.M. Best Company,
a leading supplier of industry data. Underwriting expectations are considered based upon the
specific underwriters review and assessment of the anticipated loss ratio of the business written.
Internal actuarial evaluations are considered if such evaluations are available. Anticipated loss
ratios based upon known experience are considered if the new business written has similar
characteristics to business currently written. For example, loss estimates used for general
contractors liability (more recently written business) may be based upon those used for
subcontractors liability (historically written business). This category includes some short tail
classes of business (surety) and other classes of long tail business (excess workers compensation
and commercial auto liability).
Since January 1, 2001, the Company has entered into a number of new specialty classes of business
including excess workers compensation, professional liability, commercial automobile and
employment practices liability insurance as well as surety. The Company has limited history in
these new classes, and accordingly there may be a higher degree of variability in our ability to
estimate the ultimate losses associated with these new classes. Consequently, we are more likely to
recognize unfavorable development as a trend, and increase estimates of ultimate losses, and less
likely to recognize favorable development as a trend, until we have confirmed the trend in light of
the uncertainty surrounding actual reporting, case reserve estimates and settlement tails.
8
3) Asbestos and environmental liabilities.
The Company establishes reserves (case and IBNR) for asbestos and environmental liabilities after
evaluating information on specific claims including plaintiffs, defendants and policyholders, as
well as judicial precedent and legislative developments. The appropriateness of these estimated
reserves is then evaluated through an analysis of the reserves under the following reserving
methodologies: (i) ground up analysis, which reviews the Companys potential exposures based upon
actual policies issued; (ii) industry survival ratios; and (iii) market share statistics per loss
settlement. The first, a specific ground up analysis, reviews potential exposures based upon actual
policies issued by the Company that are known to have exposure to asbestos related losses. We may
not have received specific reported losses from some of these assureds due to the high attachment
point of the policies issued, but, given the Companys experience with asbestos claims, and the
fact that the evaluation of asbestos loss exposure is conducted by attorneys and consultants who
are experts in the asbestos arena, we believe our estimate of these reserves is adequate. The
second methodology evaluates this reserve using industry survival ratios (loss payments expected
over a certain number of years) and the third methodology utilizes market share statistics per loss
settlement (comparing favorably or unfavorably with the industry on settlements of known assureds).
Asbestos and environmental policies have unique loss development characteristics, and they add a
challenging dimension to establishing loss reserves. We have identified the following as unique
development characteristics of asbestos and environmental liabilities: the long waiting periods
between exposure and manifestation of any bodily injury or property damage, the difficulty in
identifying the source of the asbestos or environmental contamination, and the long reporting
delays and difficulty in allocating liability for the asbestos or environmental damage. In
addition, we believe that judicial and legislative developments affecting the scope of insurers
liability, which can be difficult to predict, also contribute to uncertainties in estimating
reserves for asbestos and environmental liability as does the increasing trend in the number of
companies seeking bankruptcy protection as a result of asbestos-related liabilities that impact the
Company by significantly accelerating and increasing its loss payments.
Under these methodologies for evaluating loss reserves, an ultimate loss is obtained which is then
reduced by incurred losses (paid losses plus case reserves) to derive an IBNR amount that is used
for the financial statements.
Reserves estimated in accordance with the methods above are then summarized in the appropriate
segment classification (ocean marine, inland marine/fire, other liability and the runoff aircraft
business).
Our long tail business is primarily in ocean marine liability, aircraft and non-marine liability
insurance. These classes historically have extended periods of time between the occurrence of an
insurable event, reporting the claim to the Company and final settlement. In such cases, we
estimate reserves, with the possibility of making several adjustments, because of emerging
differences in actual versus expected loss development, which may result from shock losses (large
losses), changes in loss payout patterns and material adjustments to case reserves due to adverse
or favorable judicial or arbitral results during this time period.
By contrast, other classes of insurance that we write, such as property, which includes certain
ocean marine classes (hull and cargo) and our inland marine/fire segment, and claims-made
non-marine liability, historically have had shorter periods of time between the occurrence of an
insurable event, reporting of the claim to the Company and final settlement. The reserves for these
shorter tail classes are estimated as described above, but these reserves are less likely to be
readjusted, as losses are settled quickly and result in less variability from expected loss
development, shock or large losses, changes in loss payout patterns and material adjustments to
case reserves.
As the Company increases its production in its other liability line of business, its reported loss
reserves from period to period may vary depending upon the long tail, short tail and product mix
within this segment. Our professional liability class, for example, is written on a claims-made
basis, but other sources of new production such as excess workers compensation are derived from
liability classes written on an occurrence basis. Therefore, the overall level of loss reserves
reported by the Company at the end of any reporting period may vary as a function of the level of
writings achieved in each of these classes.
In estimating loss reserves, we gather statistical information by each class, which has its own
unique loss characteristics, including loss development patterns consistent with long tail or short
tail business. Accordingly, any differences inherent in long tail versus short tail lines are
accounted for in the loss development factors used to estimate IBNR. We consider the development
characteristics of shock losses, changes in loss payout trends and loss development adjustments and
amounts of net retention to be equally relevant to both our long and short tail businesses.
The procedures we use for determining loss reserves on an interim basis are similar to the
procedures we use on an annual basis. Case reserves are established in a consistent manner as at
year end and IBNR at each interim period is determined after we consider actual loss development
versus expected loss development for each business segment in evaluating the prior years loss
development. Any favorable or adverse trends in loss development are compared with the prior
year-end established loss reserves. Any shock losses, changes in loss payout patterns or material
adjustments to case reserves are evaluated to ascertain whether the previously established
provision for IBNR was adequate to support the loss development from these additional changes and
changes to reserves are made as appropriate.
In addition, internal actuaries review reserves for several significant classes of business at
year-end, and we develop internally specific loss development factors for our various classes of
business annually at year-end based upon a review of paid and incurred loss activity during the
year. Management collaborates with the Companys internal actuary in an effort to determine its
best estimate of reserves.
9
The key assumptions that materially affect the estimate of the reserve for loss and loss adjustment
expenses are, net loss retention, large severity or shock losses, loss reporting tail, frequency of
losses, loss estimates for new classes of business, loss estimates for asbestos and environmental
reserves and catastrophe losses. These assumptions affect loss estimates as follows:
Net Loss Retention:
Our level of net loss retention was $5 million per risk in 2006, 2007 and 2008 in the ocean marine
line business. This level of loss retention compares to $3 million in 2005, $4 million in 2004 and
$2 million in 2003. The net loss retention in all other segments generally remained the same in
2008, 2007 and 2006 with the exception of excess workers compensation, which increased from
approximately $900,000 in 2006 to $5 million in 2007 and 2008. The Company recognized favorable
loss development in the ocean marine segment in 2008, 2007 and 2006 due in part to the net loss
retention increasing in the ocean marine line over the past several years, and the actual loss
emergence for the estimated higher net loss retention in those prior accident years was less than
we had previously anticipated.
Shock Losses:
A large part of our business is characterized by claims that are of low frequency, but high
severity. Estimates of such reserves are sensitive to a few key assumptions made by our claims
department. All significant losses are subject to review by our Senior Vice President of Claims and
in certain cases the Chief Underwriting Officer and Chief Executive Officer. As such, the estimates
for these claims require substantial judgment.
Our level of shock losses or large severity losses (excluding catastrophe losses) decreased in 2008
when compared to 2007 in the ocean marine segment. This was primarily the result of a $2.5 million
cargo loss in 2007. Severity losses also decreased in the inland marine/fire segment in 2008 and
2007 when compared to 2006 and contributed to lower loss ratios in 2008 and 2007 when compared to
2006.
During 2007 two large claims occurring in the 2006 accident year contributed $3.0 million of
adverse development in the professional liability class.
Loss Reporting Tail:
Policies written on an occurrence basis have a longer loss reporting tail than policies written on
a claims made basis. Claims may be reported to the Company after the policy period for those
policies written on an occurrence basis, provided that such claims occurred within the policy term.
The time between the occurrence of a claim and the reporting of the claim to the Company could be
significant and makes the estimation of the ultimate loss more uncertain. Writing new classes of
occurrence based policies has created additional uncertainties in the reserve estimation process.
Our assumptions for the loss reporting tail in the other liability line changed with respect to
contractors liability in 2005. We reached this conclusion after we re-evaluated its loss
development factors based upon paid and incurred loss development. As a result, we 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 we had originally estimated. The shorter
loss reporting tail was the result of a change in the mix of our liability business by
deemphasizing policies covering elevator contractor liability and subcontractor liability and
focusing more on policies covering general contractors and owner developers. As a result of this
change in product mix, we determined that reserves previously established under loss development
patterns established for our older book of business were not developing in accordance with the loss
emergence from the more recent general contractors book. Consequently, we concluded in 2005, that
the loss reporting tail would be shorter than we had previously anticipated, and this resulted in
approximately $1.2 million in favorable loss development in 2005. While there was no significant
loss experience noted in 2006 as a result of this assumption, we did see favorable loss development
in 2007 and 2008 as a result of the emergence of this shorter loss reporting tail.
Frequency of Losses:
The level of frequency of losses in the inland marine/fire segment decreased in 2008 when compared
to 2007 and 2006. The number of losses reported in the most recent accident year in the inland
marine/fire segment was 79 in 2008, 140 in 2007 and 139 in 2006.
10
Loss Estimates:
Our loss estimates for new classes of business, including excess workers compensation and
professional liability, were derived by employing industry loss ratios, internal actuarial
evaluations, as well as by evaluating each class based upon discussions with underwriters. The
excess workers compensation class recorded $6.2 million in favorable net loss development in 2007
as a result of the novation of substantially all of our 2006 and prior policy year writings written
by one of our former agents. The professional liability class was adversely affected by a few shock
losses in the 2006 accident year that contributed to adverse development in 2007.
Our other liability line of business changed substantially in 2002 primarily due to the mix of
business written. In 2008 and 2007, the Company recorded favorable loss development in accident
years subsequent to 2002 due in part to the level of paid and reported loss activities and as a
result lowered the original loss estimates for the 2003 through 2006 accident years. While the
initial paid and incurred results indicate the potential for favorable development, if such trends
continue in subsequent periods for accident years 2002 and thereafter, we may have additional
favorable development to report for those periods. However, we cannot be certain that such
favorable trends will continue, and accordingly, our estimate does not yet anticipate the potential
for further favorable loss reserve development. We cannot estimate the
quantitative impact of this potential favorable or unfavorable development until a subsequent
evaluation of loss development in future quarters is made by comparing actual versus expected
results.
The assumptions we used in estimating asbestos and environmental liabilities in 2008 and 2007 have
remained consistent with 2006. We considered a specific ground up analysis, which reviewed our
potential exposure based upon actual policies issued, industry survival ratios and market share
statistics per loss settlement. While net losses incurred were $3.2 million in 2008, there were no
major changes in net losses noted in 2007 to 2006. Gross incurred losses and loss adjustment
expenses amounted to $10.4 million and $5.9 million and $9.9 million in 2008, 2007 and 2006,
respectively.
Catastrophe Losses:
Catastrophe losses may be difficult to estimate due to the inability of the insured and claims
adjusters to provide an adequate assessment of the overall loss. The difficulties of establishing
reserves include the inability to access insureds premises and certain legal issues surrounding
the estimation of the insured loss.
The Company recorded total losses of $6.6 million from hurricanes Ike and Gustav in 2008. This
resulted in $5.0 million in net losses incurred and $1.6 million in reinsurance reinstatement
costs. Other than as specifically described above with respect to the change in business mix in the
other liability line, we have not identified any key assumptions as of December 31, 2008 that are
premised on future emergence that are inconsistent with our historical loss reserve development
patterns.
Uncertainty in Reserve Estimates
The Company believes that the uncertainty surrounding asbestos/environmental exposures, including
issues as to insureds liabilities, ascertainment of loss date, definitions of occurrence, scope of
coverage, policy limits and application and interpretation of policy terms, including exclusions,
the ingenuity of the plaintiffs bar, legislative initiatives and unpredictable judicial results
creates significant variability in determining the ultimate loss for asbestos/environmental related
claims. Given the uncertainty in this area, losses from asbestos/environmental related claims may
develop adversely and accordingly, management is unable to estimate reasonably likely changes in
assumptions that could arise from asbestos/environmental related claims. Accordingly, the Companys
net unpaid loss and loss adjustment expense reserves in the aggregate, as of December 31, 2008,
represent managements best estimate of the losses that arose from asbestos and environmental
claims. See Asbestos and Environmental Reserves.
In our second category of reserves, we estimate losses for excess workers compensation, surety and
commercial automobile liability. Since we do not believe we have either the historical experience,
or sufficient information about these lines, to quantify the impact of changes in the assumptions
we have made in evaluating reserves for losses in this area, we are unable to estimate what the
effect would be of any reasonably likely changes in assumptions on these lines of business.
Therefore, we provide our best estimate of loss reserves in this category as well.
Our first category of reserves comprises estimates for losses in those classes of business that the
company has historically written in the ocean marine segment, inland marine/ fire classes,
contractors liability class and more recently, the professional liability classes. Losses
occurring in these segments are generally characterized by low frequency and high severity, and
enjoy the benefit of our multi-tiered reinsurance program. The factors that have caused prior
differences in actual versus estimated loss reserves include: changes in net loss retention,
changes in loss reporting tail, the level of shock losses, changes in frequency of losses and
catastrophe loss estimates. We believe that changes in such factors could occur in future periods
as well; however, we are uncertain as to the magnitude of such changes currently.
Accordingly, even though we have adequate historical loss data to evaluate reserves in this area,
we are unable to quantify changes in the assumptions we make in estimating these reserves, because
they are subject to numerous and interactive variables, and we do not believe that the resultant
product would either reflect all reasonably possible outcomes or lend itself to a meaningful
presentation. Instead, we calculate the Companys loss reserves on the basis of managements best
estimate after a review of all historical data.
11
For example, a change in the net loss retention by itself could result in a significant upward or
downward adjustment of our reserve estimate. But, a change in the net loss retention assumption
cannot be considered in isolation; it must be analyzed in light of its interplay with other
assumptions including for instance, changes in the frequency of losses and changes in the level of
shock losses and their effect on our reinsurance program. While the initial change to the level of
net loss retention may result in a potential reserve adjustment, such change may at the same time
be influenced by an increase in the frequency of losses. This would depend upon our ability to
recover from our reinsurance program, which is a function of whether or not our losses can be
aggregated. The combination of the changes in these assumptions may also trigger the exhaustion of
one layer of reinsurance and the implication of another layer of reinsurance, with the concomitant
result that there would be no change to, or an upward or downward adjustment to our loss reserve
estimate. Similarly, we may vary our estimates of catastrophe
losses or shock losses, but, because of the interplay between these losses and our reinsurance
program, we may not change our estimate of net reserves. While anticipating larger catastrophe
losses may have a significant impact on the gross loss reserve level, the effect of that change in
assumption at the net level may be negligible, because of the applicability of reinsurance. This
was evident in our experience with losses associated with hurricanes Katrina and Rita in 2005.
While our combined gross and net loss reserve estimates as of December 31, 2005 were approximately
$70.8 million and $6.6 million, respectively, the Company could suffer significant adverse gross
loss development in periods after 2005 without making a material adjustment to the net loss reserve
level as a result of the operation of the Companys reinsurance program. Approximately $16 million
and $20 million of adverse gross loss development occurred during 2007 and 2006, respectively, for
which we determined no adjustment to the net loss level was necessary. There was no significant
gross loss development on hurricanes Rita and Katrina in 2008.
Unpaid losses and loss adjustment expenses for each segment on a gross and net of reinsurance basis
as of December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Net
|
|
|
|
(In thousands)
|
|
Ocean marine
|
|
$
|
169,478
|
|
|
$
|
101,830
|
|
Inland marine/Fire
|
|
|
21,057
|
|
|
|
8,971
|
|
Other liability
|
|
|
239,026
|
|
|
|
197,658
|
|
Aircraft
|
|
|
119,189
|
|
|
|
26,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
548,750
|
|
|
$
|
334,843
|
|
|
|
|
|
|
|
|
In 2001, the Company recorded losses in its aircraft line of business as a result of the terrorist
attacks of September 11, 2001 on the World Trade Center, the Pentagon and the hijacked airliner
that crashed in Pennsylvania (collectively, the WTC Attack). At the time, because of the amount
of the potential liability to our insureds (United Airlines and American Airlines) caused by the
WTC Attack, we established reserves based upon our estimate of our insureds policy limits for
gross and net liability losses. In 2004 we determined that a reduction in the loss reserves
relating to the terrorist attacks of September 11, 2001 on the Pentagon and the hijacked airliner
that crashed in Pennsylvania was warranted, because a significant number of claims that could have
been made against our insureds were waived by prospective claimants when they opted to participate
in the September 11th Victim Compensation Fund of 2001 (the Fund), and the statutes of
limitations for wrongful death in New York and for bodily injury and property damage, generally,
had expired, the latter on September 11, 2004. Our analysis of claims against our insureds,
undertaken in conjunction with the industrys lead underwriters in London, indicated that, because
such a significant number of claims potentially emanating from the attack on the Pentagon and the
crash in Shanksville had been filed with the Fund, or were time barred as a result of the
expiration of relevant statutes of limitations, those same claims would not be made against our
insureds. Therefore, we concluded that our insureds liability and our ultimate insured loss would
be substantially reduced. Consequently, we re-estimated our insureds potential liability for the
terrorist attacks of September 11, 2001 on the Pentagon and the hijacked airliner that crashed in
Pennsylvania, and we reduced in 2004 our gross and net loss reserves by $16.3 million and $8.3
million, respectively.
In light of the magnitude of the potential losses to our insureds resulting from the WTC Attack, we
did not reduce reserves for these losses until we had a high degree of certainty that a substantial
amount of these claims were waived by victims participation in the Fund, or were time barred by
the expiry of statutes of limitations, and we did not reach that level of certainty until September
2004, when the last of the significant statute of limitations, that applicable to bodily injury and
property damage, expired.
In 2006 the Company recorded adverse loss development of approximately $850,000 in the aircraft
line of business resulting primarily from losses assumed from the World Trade Center attack which
were partially offset by a reduction in reserves relating to the loss sustained at the Pentagon
after re-estimating the reserve based upon lower than expected settlements of claims paid during
the year. There were no material changes in loss estimates for the WTC Attack in 2007 or 2008.
Overall, the aviation line of business has experienced adverse development in 2008, 2007 and 2006
largely related to the unfavorable settlement of large losses and the impact of uncollectible
reinsurance.
12
Asbestos and Environmental Reserves
Our insurance subsidiaries are required to record an adequate level of reserves necessary to
provide for all known and unknown losses on insurance business written. Our insurance subsidiaries
have not had difficulties in maintaining reserves in recent years at aggregate levels which
management believes to be adequate based on managements best estimates, but the loss reserving
process is subject to many uncertainties as further described herein.
The difficulty in estimating our reserves is increased because the Companys loss reserves include
reserves for potential asbestos and environmental liabilities. Asbestos and environmental
liabilities are difficult to estimate for many reasons, including the long waiting periods between
exposure and manifestation of any bodily injury or property damage, difficulty in identifying the
source of the asbestos or environmental contamination, long reporting delays and difficulty in
properly allocating liability for the asbestos or environmental damage. Legal tactics and judicial
and legislative developments affecting the scope of insurers liability, which can be difficult to
predict, also contribute to uncertainties in estimating reserves for asbestos and environmental
liabilities.
The Company participated in the issuance of both umbrella casualty insurance for various Fortune
1000 companies and ocean marine liability insurance for various oil companies during the period
from 1978 to 1985. Depending on the calendar year, the insurance pools net retained liability per
occurrence after applicable reinsurance ranged from $250,000 to $2,000,000. Subsequent to this
period, the pools substantially reduced their umbrella writings and coverage was provided to
smaller assureds. The Companys effective pool participation on such risks varied from 11% in 1978
to 59% in 1985. Ocean marine and non-marine policies issued during the past three years also
provide some coverage for environmental risks.
At December 31, 2008, the Companys gross, ceded and net loss and loss adjustment expense reserves
for all asbestos/environmental policies amounted to $48.8 million, $37.3 million and $11.5 million,
respectively, as compared to $52.4 million, $41.5 million and $10.9 million at December 31, 2007,
respectively.
The Company believes that the uncertainty surrounding asbestos/environmental exposures, including
issues as to insureds liabilities, ascertainment of loss date, definitions of occurrence, scope of
coverage, policy limits and application and interpretation of policy terms, including exclusions
renders it difficult to determine the ultimate loss for asbestos/environmental related claims.
Given the uncertainty in this area, losses from asbestos/environmental related claims may develop
adversely and accordingly, management is unable to reasonably predict the range of possible losses
that could arise from asbestos/environmental related claims. Accordingly, the Companys net unpaid
loss and loss adjustment expense reserves in the aggregate, as of December 31, 2008, represent
managements best estimate of the losses that arise from asbestos and environmental claims.
The following table sets forth the Companys net loss and loss adjustment expense experience for
asbestos/environmental policies for each of the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
Asbestos/Environmental
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and loss adjustment expenses (including IBNR) at
the beginning of the period
|
|
$
|
10,864
|
|
|
$
|
12,222
|
|
|
$
|
12,960
|
|
Net incurred losses and loss adjustment expenses
|
|
|
3,200
|
|
|
|
(43
|
)
|
|
|
576
|
|
Net paid loss settlements
|
|
|
(2,212
|
)
|
|
|
(766
|
)
|
|
|
(945
|
)
|
Net loss adjustment expenses payments (cost of administering claims)
|
|
|
(317
|
)
|
|
|
(549
|
)
|
|
|
(369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and loss adjustment expenses (including IBNR) at
end of period
|
|
$
|
11,535
|
|
|
$
|
10,864
|
|
|
$
|
12,222
|
|
|
|
|
|
|
|
|
|
|
|
13
The following sets forth a reconciliation of the number of claims relating to
asbestos/environmental policies for each of the past three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Number of claims pending at beginning of period
|
|
|
384
|
|
|
|
401
|
|
|
|
469
|
|
Number of claims reported
|
|
|
88
|
|
|
|
74
|
|
|
|
80
|
|
Number of claims settled/dismissed or otherwise resolved
|
|
|
(105
|
)
|
|
|
(91
|
)
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of claims pending at end of period
|
|
|
367
|
|
|
|
384
|
|
|
|
401
|
|
|
|
|
|
|
|
|
|
|
|
Claims reported involve a large number of relatively small individual claims of a similar type.
Additional asbestos claims continue to be reported to the Company by assureds as a result of claims
brought by individuals who do not appear to be impaired by asbestos exposure. There is also an
increasing trend in the number of companies seeking bankruptcy protection as a result of
asbestos-related liabilities. These bankruptcy proceedings may impact the Company by significantly
accelerating and increasing loss payments made by the Company. As a result of these trends, there
is a high degree of uncertainty with respect to future exposure from asbestos claims, which may be
material to the Company.
Other Reserves
The insurance pools have written coverage for products liability as part of other liability
insurance policies issued since 1985. The insurance pools maximum loss per risk is generally
limited to $1,000,000 and the Companys participation percentage ranges from 59% to 100% based upon
policy year. The Company believes that its reserves with respect to such policies are adequate to
cover the ultimate resolution of all such products liability claims.
Loss Reserve Table
The following table shows changes in the Companys reserves in subsequent years from prior years
reserves. Each year the Companys estimated reserves increase or decrease as more information
becomes known about the frequency and severity of losses for past years. As indicated in the chart,
a redundancy means the original estimate of the Companys consolidated liability was higher than
the current estimate, while a deficiency means that the original estimate was lower than the
current estimate.
The first line of the table presents, for each of the last ten years, the estimated liability for
net unpaid losses and loss adjustment expenses at the end of the year, including IBNR losses. The
estimated liability for net unpaid losses and loss adjustment expenses is determined quarterly and
at the end of each calendar year.
Below this first line, the first triangle shows, by year, the cumulative amounts of net loss and
loss adjustment expenses paid as of the end of each succeeding year, expressed as a percentage of
the original estimated net liability for such amounts.
The second triangle sets forth the re-estimates in later years of net incurred losses, including
net payments, as a percentage of the original estimated net liability for net unpaid losses and
loss adjustment expenses for the years indicated. Percentages less than 100% represent a
redundancy, while percentages greater than 100% represent a deficiency.
The net cumulative redundancy (deficiency) represents, as of December 31, 2008, the aggregate
change in the estimates over all prior years. The changes in re-estimates have been reflected in
results from operations over the periods shown.
The gross cumulative redundancy (deficiency) of unpaid losses and loss adjustment expenses
represents the aggregate change in the estimates of such losses over all prior years starting with
the 1998 calendar year.
14
The Company calculates its loss reserves on the basis of managements best estimate and does not
calculate a range of loss reserve estimates. In six out of the past ten years, the Company has
recorded redundancies in its net loss reserve position. The Companys considered view, in light of
this history, is that management is highly sensitive to the nuances of the Companys lines of
business and that establishing net loss reserves based upon managements best estimate gives the
Company greater assurance that its net loss reserves are appropriate. It is the Companys position
that calculating a range of loss reserve estimates may not reflect all the volatility between
existing loss reserves and the ultimate settlement amount. The low frequency and high severity of
many of the risks we insure coupled with the protracted settlement period make it difficult to
assess the overall adequacy of our loss reserves. Based upon the foregoing, the Company believes
that its history of establishing adequate net loss reserves using its best estimate compares
favorably with industry experience.
The Company considers a variety of factors in its estimate of loss reserves. These elements
include, but are not necessarily limited to, the level of catastrophe losses incurred during the
period, the length of the reporting tail (i.e. occurrence versus claims made coverage), the nature
of the risk insured (i.e. property versus liability), the level of net retention per loss and the
emergence of identifiable trends in the statistical analysis of paid and incurred loss data. Case
loss reserves are determined by evaluating reported claims on the basis of the type of loss
involved, knowledge of the circumstances surrounding the claim and the policy provisions relating
to the type of loss. IBNR losses are estimated on the basis of statistical information with respect
to the probable number and nature of losses, which have not yet been reported to the Company. The
Company uses various actuarial methods in calculating IBNR including an evaluation of IBNR by the
use of historical paid loss and incurred data utilizing the Bornheutter-Ferguson method.
Since January 1, 2001, the Company has entered into a number of new specialty lines of business
including professional liability, commercial real estate, employment practices liability, surety,
excess workers compensation and commercial automobile insurance. Because of the Companys limited
history in these new lines, it may impact managements ability to appropriately reserve for the
ultimate loss associated with these new lines. As such, the Company is more likely to react quickly
to unfavorable trends, and less likely to respond quickly to favorable development until subsequent
confirmation of the favorable loss trend. Management considers many factors when estimating the
ultimate loss ratios for these various classes, including industry loss ratios and anticipated loss
ratios based upon known experience.
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
Estimated Liability for
Net Unpaid Losses and
Loss Adjustment Expenses
|
|
|
213,589
|
|
|
|
196,865
|
|
|
|
199,685
|
|
|
|
210,953
|
|
|
|
208,979
|
|
|
|
242,311
|
|
|
|
255,479
|
|
|
|
289,217
|
|
|
|
292,941
|
|
|
|
306,405
|
|
|
|
334,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Amount of Net
Losses and Loss Adjustment
Expenses Paid as a
Percentage of Original
Estimate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year Later
|
|
|
20
|
%
|
|
|
24
|
%
|
|
|
28
|
%
|
|
|
30
|
%
|
|
|
8
|
%
|
|
|
18
|
%
|
|
|
17
|
%
|
|
|
25
|
%
|
|
|
22
|
%
|
|
|
23
|
%
|
|
|
|
|
2 Years Later
|
|
|
35
|
%
|
|
|
39
|
%
|
|
|
56
|
%
|
|
|
30
|
%
|
|
|
24
|
%
|
|
|
27
|
%
|
|
|
33
|
%
|
|
|
38
|
%
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
3 Years Later
|
|
|
43
|
%
|
|
|
53
|
%
|
|
|
64
|
%
|
|
|
41
|
%
|
|
|
32
|
%
|
|
|
38
|
%
|
|
|
45
|
%
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
4 Years Later
|
|
|
51
|
%
|
|
|
58
|
%
|
|
|
70
|
%
|
|
|
47
|
%
|
|
|
43
|
%
|
|
|
49
|
%
|
|
|
57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 Years Later
|
|
|
55
|
%
|
|
|
63
|
%
|
|
|
72
|
%
|
|
|
55
|
%
|
|
|
53
|
%
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 Years Later
|
|
|
59
|
%
|
|
|
64
|
%
|
|
|
79
|
%
|
|
|
62
|
%
|
|
|
65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 Years Later
|
|
|
60
|
%
|
|
|
70
|
%
|
|
|
84
|
%
|
|
|
73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 Years Later
|
|
|
65
|
%
|
|
|
74
|
%
|
|
|
93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 Years Later
|
|
|
68
|
%
|
|
|
82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 Years Later
|
|
|
75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Liability Re-estimated
including Cumulative Net
Paid Losses and Loss
Adjustment Expenses as a
Percentage of Original
Estimate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year Later
|
|
|
94
|
%
|
|
|
96
|
%
|
|
|
105
|
%
|
|
|
102
|
%
|
|
|
99
|
%
|
|
|
94
|
%
|
|
|
95
|
%
|
|
|
97
|
%
|
|
|
95
|
%
|
|
|
101
|
%
|
|
|
|
|
2 Years Later
|
|
|
87
|
%
|
|
|
94
|
%
|
|
|
108
|
%
|
|
|
101
|
%
|
|
|
94
|
%
|
|
|
89
|
%
|
|
|
90
|
%
|
|
|
91
|
%
|
|
|
96
|
%
|
|
|
|
|
|
|
|
|
3 Years Later
|
|
|
84
|
%
|
|
|
95
|
%
|
|
|
104
|
%
|
|
|
96
|
%
|
|
|
90
|
%
|
|
|
86
|
%
|
|
|
88
|
%
|
|
|
94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
4 Years Later
|
|
|
85
|
%
|
|
|
91
|
%
|
|
|
103
|
%
|
|
|
94
|
%
|
|
|
88
|
%
|
|
|
86
|
%
|
|
|
94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 Years Later
|
|
|
82
|
%
|
|
|
92
|
%
|
|
|
102
|
%
|
|
|
92
|
%
|
|
|
90
|
%
|
|
|
94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 Years Later
|
|
|
83
|
%
|
|
|
90
|
%
|
|
|
102
|
%
|
|
|
94
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 Years Later
|
|
|
82
|
%
|
|
|
90
|
%
|
|
|
103
|
%
|
|
|
104
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 Years Later
|
|
|
82
|
%
|
|
|
91
|
%
|
|
|
114
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 Years Later
|
|
|
82
|
%
|
|
|
101
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 Years Later
|
|
|
91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cumulative Redundancy
(Deficiency)
|
|
|
19,304
|
|
|
|
(1,753
|
)
|
|
|
(27,050
|
)
|
|
|
(7,748
|
)
|
|
|
17
|
|
|
|
14,841
|
|
|
|
15,423
|
|
|
|
16,814
|
|
|
|
13,045
|
|
|
|
(2,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unpaid Losses and
Loss Adjustment Expenses
|
|
|
401,584
|
|
|
|
425,469
|
|
|
|
411,267
|
|
|
|
534,189
|
|
|
|
516,002
|
|
|
|
518,930
|
|
|
|
503,261
|
|
|
|
588,865
|
|
|
|
579,179
|
|
|
|
556,535
|
|
|
|
548,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Recoverable
on Unpaid Losses and Loss
Adjustment Expenses
|
|
|
187,995
|
|
|
|
228,604
|
|
|
|
211,582
|
|
|
|
323,236
|
|
|
|
307,023
|
|
|
|
276,619
|
|
|
|
247,782
|
|
|
|
299,648
|
|
|
|
286,238
|
|
|
|
250,130
|
|
|
|
213,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve Re-estimated Gross
|
|
|
467,711
|
|
|
|
481,504
|
|
|
|
492,667
|
|
|
|
591,467
|
|
|
|
524,751
|
|
|
|
499,950
|
|
|
|
482,702
|
|
|
|
600,690
|
|
|
|
554,917
|
|
|
|
549,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve Re-estimated
Reinsurance Recoverable
|
|
|
273,426
|
|
|
|
282,886
|
|
|
|
265,932
|
|
|
|
372,766
|
|
|
|
315,789
|
|
|
|
272,480
|
|
|
|
242,646
|
|
|
|
328,287
|
|
|
|
275,021
|
|
|
|
240,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Cumulative
Redundancy/(Deficiency)
|
|
|
(66,127
|
)
|
|
|
(56,035
|
)
|
|
|
(81,400
|
)
|
|
|
(57,278
|
)
|
|
|
(8,749
|
)
|
|
|
18,979
|
|
|
|
20,559
|
|
|
|
(11,825
|
)
|
|
|
24,261
|
|
|
|
7,155
|
|
|
|
|
|
The net loss reserve deficiency reported for the 1999, 2000, 2001 and 2007 calendar years is
primarily attributable to the unfavorable resolution of a dispute in calendar year 2008 over
reinsurance receivables with a reinsurer as well as a reevaluation of the provision for doubtful
reinsurance receivables that resulted in total losses of $12.4 million. The net loss reserve
deficiency reported for the 2000 calendar year also reflects adverse development from the Companys
operations in Lloyds that ended in 2001 due to higher than expected claim frequencies and the
emergence of longer than expected loss development patterns.
16
Gross loss reserve deficiencies were reported in six out of ten years. Even though gross loss
reserve deficiencies were reported in those years, the Company reported redundancies in net loss
reserves in three of those six years. The gross loss reserve deficiencies were brought about in
1998-2001 by adverse loss development from operations in London and adverse gross loss development
in our umbrella (other liability) business as a result of additional development of asbestos
losses occurring from the 1970s and 1980s. Asbestos and environmental liabilities are difficult to
estimate for many reasons, including the long waiting periods between exposure and manifestation of
any bodily injury or property damage, difficulty in identifying the source of the asbestos or
environmental contamination, long reporting delays and difficulty in properly allocating liability
for the damage. Legal tactics and judicial and legislative developments affecting the scope of
insurers liability, which can be difficult to predict, also contribute to uncertainties in
estimating reserves for asbestos and environmental liabilities. However, much of this gross loss
reserve deficiency in the other liability line resulted in smaller net deficiencies due to a
substantial amount of the gross loss reserve being reinsured. The smaller net deficiencies were
more than offset by redundancies occurring in the Companys ocean marine line. In addition during
1998-2000, a few large severity losses in the Companys core lines also contributed to adverse
gross loss development. These losses were also substantially reinsured and thereby resulted in an
insignificant impact on net loss development. The adverse gross loss development in 2005 is largely
attributable to additional gross loss development on hurricanes Katrina and Rita as a result of our
insureds reassessment of the impact of these hurricane losses. All of the gross development from
hurricanes Katrina and Rita is reinsured and results in an insignificant impact on net development.
The following table provides a reconciliation of the Companys consolidated liability for losses
and loss adjustment expenses at the beginning and end of 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
Net liability for losses and loss adjustment expenses at beginning of year
|
|
$
|
306,405
|
|
|
$
|
292,941
|
|
|
$
|
289,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for losses and loss adjustment expenses occurring in current year
|
|
|
107,275
|
|
|
|
103,664
|
|
|
|
93,803
|
|
Increase (decrease) in estimated losses and loss adjustment expenses for
claims occurring in prior years (1)
|
|
|
2,683
|
|
|
|
(13,820
|
)
|
|
|
(7,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expenses incurred
|
|
|
109,958
|
|
|
|
89,844
|
|
|
|
86,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expense payments for claims occurring during:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
9,887
|
|
|
|
12,136
|
|
|
|
9,641
|
|
Prior years
|
|
|
71,633
|
|
|
|
64,244
|
|
|
|
72,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,520
|
|
|
|
76,380
|
|
|
|
82,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability for losses and loss adjustment expenses at end of year
|
|
|
334,843
|
|
|
|
306,405
|
|
|
|
292,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded unpaid losses and loss adjustment expenses at end of year
|
|
|
213,907
|
|
|
|
250,130
|
|
|
|
286,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and loss adjustment expenses at end of year
|
|
$
|
548,750
|
|
|
$
|
556,535
|
|
|
$
|
579,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The adjustment to the consolidated liability for losses and loss
adjustment expenses for losses occurring in prior years reflects the
net effect of the resolution of losses for other than full reserve
value and subsequent readjustments of loss values.
|
17
The adverse loss reserve development of $2.7 million in 2008 resulted primarily
from the resolution of a dispute over reinsurance receivables with a reinsurer
and the reevaluation of the reserve for doubtful reinsurance receivables that
contributed $12.4 million of adverse development in 2008 for both the other
liability and ocean marine lines of business for accident years prior to 1999.
Further contributing to adverse loss development was
$3.2 million from asbestos and environmental losses in the other
liability line for accident years prior to 1999. Partially offsetting this adverse development in the other liability line was
favorable development in the contractors class as a result of lower than
anticipated incurred loss development of approximately
$3.6 million in the 2004-2006 accident years. The
ocean marine line also reported favorable development of
approximately $14.0 million in the 2004-2006 accident
years largely as a result of lower reported and paid loss trends. The inland
marine/fire segment also reported favorable loss development partially due to
larger than expected reinsurance recoveries in accident years 2005-2006.
Contributing to the adverse development in 2008 was approximately $3.5 million
in adverse development from the runoff aviation class relating to accident
years prior to 2002 as a result of settlements of larger severity losses
including provisions for uncollectible reinsurance.
The $13.8 million decrease in 2007 was largely caused by favorable development
in the 2003-2005 accident years for the ocean marine line, which generally
resulted from favorable loss trends in the risk class. Another factor
contributing to the decrease was $6.2 million recorded on the novation of
excess workers compensation policies in the other liability line for accident
years 2004-2006,which was partially offset by adverse development of $3.0
million in the professional liability class as a result of two large claims in
the 2006 accident year. The inland marine/fire segment also reported favorable
loss development partially due to lower reported severity losses. The favorable
development in 2007 was partially offset by approximately $3.3 million in
adverse development from the runoff aviation class.
The $7.7 million decrease in 2006 primarily reflected favorable development in
the 2005 and 2004 accident years for the ocean marine line of business due in
part to lower settlements of case reserve estimates, higher than expected
receipts of salvage and subrogation recoveries and lower emergence of actual
versus expected losses. Partially offsetting this benefit was adverse
development in the 2005 and 2004 accident years in both of the commercial auto
and surety classes as a result of higher than initially anticipated loss
ratios. The Companys first full year of writing commercial auto and surety
premiums was 2004.
The principal differences between the consolidated liability for unpaid losses and loss adjustment
expenses as reported in the Annual Statement filed with state insurance departments in accordance
with statutory accounting principles and the liability based on generally accepted accounting
principles shown in the above tables are due to the Companys assumption of loss reserves arising
from former participants in the insurance pools, and reserves for uncollectible reinsurance. The
loss reserves shown in the above tables reflect in each year salvage and subrogation accruals of
approximately 1% to 6% of case reserves and IBNR. The estimated accrual for salvage and subrogation
is based on the line of business and historical salvage and subrogation recovery data. Under
neither statutory nor generally accepted accounting principles are loss and loss adjustment expense
reserves discounted to present value.
18
The following table sets forth the reconciliation of the consolidated net liability for losses and
loss adjustment expenses based on statutory accounting principles for the domestic insurance
companies to the consolidated amounts based on accounting principles generally accepted in the
United States of America (GAAP) as of December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
Net liability for losses and loss adjustment expenses reported based on
statutory accounting principles
|
|
$
|
306,673
|
|
|
$
|
289,912
|
|
|
$
|
275,296
|
|
Liability for losses and loss adjustment expenses assumed from two former
pool members (excludes $0, $3,370 and $3,379 at December 31, 2008, 2007 and
2006, accounted for in the statutory liability for losses and loss
adjustment expenses)
|
|
|
13,014
|
|
|
|
7,667
|
|
|
|
9,438
|
|
Other, net
|
|
|
15,156
|
|
|
|
8,826
|
|
|
|
8,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability for losses and loss adjustment expenses reported based on GAAP
|
|
|
334,843
|
|
|
|
306,405
|
|
|
|
292,941
|
|
Ceded liability for unpaid losses and loss adjustment expenses
|
|
|
213,907
|
|
|
|
250,130
|
|
|
|
286,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability for unpaid losses and loss adjustment expenses
|
|
$
|
548,750
|
|
|
$
|
556,535
|
|
|
$
|
579,179
|
|
|
|
|
|
|
|
|
|
|
|
Regulation
The Companys domestic insurance companies are regulated by the insurance regulatory agencies of
the states in which they are authorized to do business. New York Marine is licensed to engage in
the insurance business in all states. Gotham is permitted to write excess and surplus lines
insurance on a non-admitted basis in all states other than New York. Gotham is licensed to engage
in the insurance business in the State of New York and, as such, cannot write excess and surplus
business in that state. Southwest Marine is licensed to engage in the insurance business in Arizona
as well to engage in surety business in twenty-two additional states and it is authorized to write
excess and surplus lines insurance in New York.
Many aspects of the Companys insurance business are subject to regulation. For example, minimum
capitalization must be maintained; certain forms of policies must be approved before they may be
offered; reserves must be established in relation to the amounts of premiums earned and losses
incurred; and, in some cases, schedules of premium rates must be approved. In addition, state
legislatures and state insurance regulators continually re-examine existing laws and regulations
and may impose changes that materially adversely affect the Companys business.
The domestic insurance company subsidiaries also file statutory financial statements with each
state in the format specified by the NAIC. The NAIC provides accounting guidelines for companies to
file statutory financial statements and provides minimum solvency standards for all companies in
the form of risk-based capital requirements. The authorized control level of Risk Based Capital for
New York Marine, Gotham and Southwest were $35.9 million, $4.7 million and $1.2 million at December
31, 2008, respectively. The policyholders surplus (the statutory equivalent of net worth) of each
of the domestic insurance companies is above the minimum amount required by the NAIC.
The NAICs project to codify statutory accounting principles was approved by the NAIC in 1998. The
purpose of codification was to provide a comprehensive basis of accounting for reporting to state
insurance departments. The approval of codified accounting rules included a provision for the state
insurance commissioners to modify such accounting rules by practices prescribed or permitted for
insurers in their state. However, there were no differences reported in the statutory financial
statements for the years ended 2008, 2007 and 2006 between the prescribed state accounting
practices and those approved by the NAIC.
The insurance industry recently has been the focus of certain investigations regarding insurance
broker and agent compensation arrangements and other practices. The Attorney General of New York
State as well as other regulators have made investigations into such broker and agent contingent
commission and other sales practice arrangements. Although the Company has not been notified that
it is, nor does it have any reason to believe that it is a target of these investigations, we did
review our existing arrangements with our brokers and reinsurers and found that we did not engage
in any conduct that we believe is the subject of these investigations.
19
New York Marine and Gotham are subject to examination by the Insurance Department of the State of
New York. The examinations of New York insurance companies normally occur every three to five
years. Their most recent report on examinations were for the year ended December 31, 2005. There
were no significant adjustments which resulted from those examinations. Southwest Marine is subject
to examination by the Arizona Department of Insurance, but because it was only recently authorized
to engage in the insurance business in Arizona it has not yet been examined.
The following table shows, for the periods indicated, the Companys consolidated domestic insurance
companies statutory ratios of net premiums written (gross premiums less premiums ceded) to
policyholders surplus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
Net premiums written
|
|
$
|
165,384
|
|
|
$
|
167,853
|
|
|
$
|
154,860
|
|
|
$
|
133,892
|
|
|
$
|
137,128
|
|
Policyholders surplus
|
|
|
189,383
|
|
|
|
207,233
|
|
|
|
197,289
|
|
|
|
186,848
|
|
|
|
181,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
|
|
|
.87 to 1
|
|
|
|
.81 to 1
|
|
|
|
.78 to 1
|
|
|
|
.72 to 1
|
|
|
|
.75 to 1
|
|
While there are no statutory requirements applicable to the Company which establish permissible
premium to surplus ratios, guidelines established by the NAIC provide that the statutory net
premiums written to surplus ratio should be no greater than 3 to 1. The Company is well within
those guidelines.
NYMAGICs principal source of income is dividends from its subsidiaries, which are used for payment
of operating expenses, including interest expense, loan repayments and payment of dividends to
NYMAGICs shareholders. The maximum amount of dividends that may be paid to NYMAGIC by the domestic
insurance company subsidiaries is regulated by the states in which the Companys insurance
subsidiaries are domiciled. Within these limitations, the maximum amount which could be paid to the
Company out of the domestic insurance companies surplus to the holding company was approximately
$18.6 million as of December 31, 2008. There were no dividends declared by the insurance
subsidiaries in 2008 and the Company does not expect to receive dividends from its insurance
subsidiaries in 2009.
The Companys subsidiaries have paid dividends to the Company of $6.8 million, $14.5 million and
$13.2 million for the years ended December 31, 2008, 2007 and 2006, respectively. There were no
extraordinary dividends paid during this period. During 2008, the Company also made capital
contributions of $32.5 million to its insurance subsidiary New York Marine and purchased $6.1
million in overdue receivables from New York Marine.
The
statutory guidance for evaluating impairment on mortgage-backed securities has been modified
effective January 1, 2009. Under the prior guidance, impairment was recognized by a review of cash
flows on an undiscounted basis and no impairment has been recognized by the Company as of December
31, 2008. This compares to $40.7 million in cumulative impairment charges recorded under a GAAP
basis as of December 31, 2008. In 2009, the statutory guidance for impairment will be evaluated
utilizing a review of discounted cash flows. While the Company does not anticipate that the
evaluation in 2009 will result in any impairment charges, if there are impairment charges they
could be material to statutory surplus.
Each of New York Marine and Gotham is required to invest an amount equal to the greater of its
minimum capital or its minimum policyholder surplus in obligations of the United States,
obligations of the State of New York or its political subdivisions, obligations of other states and
obligations secured by first mortgage loans. Sixty percent of that amount is required to be
invested in obligations of the United States or obligations of the State of New York or its
political subdivisions. In addition, each of New York Marine and Gotham is required to invest an
amount equal to 50% of the aggregate amount of its unearned premium, loss and loss adjustment
expense reserves in the following categories: cash, government obligations, obligations of U.S.
institutions, preferred or guaranteed shares of U.S. institutions, loans secured by real property,
real property, certain permitted foreign investments and development bank obligations. Investments
in the foregoing categories are also subject to detailed quantitative and qualitative limitations
applicable to individual categories and to an overall limitation that no more than 10% of each
insurance companys assets may be invested in any one institution. After each of New York Marine
and Gotham invests an amount equal to 50% of its unearned premium, loss and loss adjustment
reserves in the foregoing investments, each of New York Marine and Gotham may invest in equity and
partnership interests, securities issued by registered investment companies and other otherwise
impermissible investments, subject to applicable laws and regulatory requirements. Southwest Marine
is also subject to certain investment limitations imposed by the state of Arizona, but invests in
U.S. Treasury securities and high-grade short-term securities.
Several states have established guaranty funds which serve to provide the assured with payments due
under policies issued by insurance companies that have become insolvent. Insurance companies that
are authorized to write in these states are assessed a fee, normally based on direct writings in a
particular state, to cover any payments made or to be made by guaranty funds. The Companys
insurance subsidiaries are subject to such assessments in the various states. The amounts paid for
such assessments were approximately $31,000, $230,000 and $330,000 for the years ended December 31,
2008, 2007 and 2006, respectively.
20
The Terrorism Risk Insurance Act of 2002 (TRIA) became effective on November 26, 2002 and has
been extended through December 31, 2014. TRIA applies to all licensed and surplus lines insurers
doing business in the United States, including Lloyds and foreign insurers, who are writing
commercial property or casualty insurance. Under TRIA, insurers are required to offer terrorism
insurance for most domestic property, casualty, workers compensation, inland marine and ocean
marine and energy risks, as well as U.S. Flag vessels and aircraft on a worldwide basis. In return,
the federal government will provide the insurance industry with assistance in the event there is a
loss from certain acts of terrorism.
Each insurer has an insurer deductible under TRIA, which is based upon the prior years direct
commercial earned premiums that are subject to the Act. The professional liability, commercial
automobile, surety and reinsurance lines are not subject to the act. For 2008, that deductible was
20% of direct commercial earned premiums in 2007. For the years 2009 through 2014, the insurers
deductible is 20% of the prior years direct earned premium and the federal government will
reimburse the insurer for 85% of insured losses that exceed the deductible. The Companys insurer
deductible under TRIA was approximately $32 million in 2008, $24 million in 2007 and $25 million in
2006.
TRIA will assist the Company to mitigate exposure in the event of loss from an act of terrorism. In
addition, part of the insurer deductible might be satisfied by recoveries under the Companys
existing reinsurance program. The Company could further minimize its potential loss from an act of
terrorism by purchasing reinsurance protection, but elected not to purchase such reinsurance for
2006, 2007 or 2008.
Investment Policy
The Company follows an investment policy, which is reviewed quarterly and revised periodically by
management and is approved by the Finance Committee of the Board of Directors. The investments of
the Companys subsidiaries conform to the requirements of the applicable state insurance laws and
regulations, as well as the National Association of Insurance Commissioners (the NAIC) (See
Regulations). The Company recognizes that an important component of its financial results is the
return on invested assets. As such, management establishes the appropriate mix of traditional fixed
income securities and other investments (including equity and equity-type investments; e.g. hedge
funds) to maximize rates of return while minimizing undue reliance on low quality securities.
Overall investment objectives are to (i) seek competitive after-tax income and total return, while
being cognizant of the impact certain investment decisions may have on the Companys shareholders
equity, (ii) maintain, in aggregate, medium to high investment grade fixed income asset quality,
(iii) ensure adequate liquidity and marketability to accommodate operating needs, (iv) maintain
fixed income maturity distribution commensurate with the Companys business objectives and (v)
provide portfolio flexibility for changing business and investment climates. The Companys
investment strategy incorporates guidelines (listed below) for asset quality standards, asset
allocations among investment types and issuers, and other relevant criteria for the investment
portfolio. In addition, invested asset cash flows, from both current income and investment
maturities, are structured after considering the amount and timing of projected liabilities for
losses and loss adjustment expenses under the Companys insurance subsidiaries insurance policies
using actuarial models.
The investment policy for NYMAGIC as of December 31, 2008 was as follows:
Liquidity Portfolio:
The Company may invest, without limitation, in liquid instruments. Investments
in the Liquidity Portfolio may include, but are not necessarily limited to, cash, direct
obligations of the U.S. Government, repurchase agreements, obligations of government
instrumentalities, obligations of government sponsored agencies, certificates of deposit, prime
bankers acceptances, prime commercial paper, corporate obligations and tax-exempt obligations rated
Aa3/AA- or MIG2 or better. The liquidity portfolio shall consist of obligations with one years
duration or less at the time of purchase and will be of sufficient size to accommodate the
Companys expected cash outlays for the immediate six-month period.
Fixed Income Portfolio:
Obligations of the U.S. Government, its instrumentalities and
government-sponsored agencies will not be restricted as to amount or maturity. Asset backed
securities, corporate obligations, tax-exempt securities and preferred stock investments with
sinking funds will not be restricted as to maturity. At least 50% of the fixed income and liquidity
portfolio, collectively, shall be rated at minimum Baa2 by Moodys or BBB by S&P.
Equity and Alternative Investments (Hedge Funds):
Investments in this category (including
convertible securities) may be made without limitation. With respect to Hedge Fund investments, no
more than 10% of assets allocated to hedge funds shall be invested in any single fund without the
prior approval of the Finance Committee of the Board of Directors. Similarly, no more than 40% of
assets allocated to hedge funds shall be concentrated in any one strategy without the prior
approval of the Finance Committee of the Board of Directors.
21
The investment policy for New York Marine as of December 31, 2008 was as follows:
Liquidity Portfolio:
At least $20,000,000 will be maintained in liquid funds. Investments in the
liquidity portfolio shall be limited to cash, direct obligations of the U.S. Government, repurchase
agreements, obligations of government instrumentalities, obligations of government
sponsored agencies, certificates of deposit, prime bankers acceptances, prime commercial paper,
corporate obligations and tax-exempt obligations rated Aa3/AA- or MIG2 or better by Standard &
Poors (S&P) or Moodys. No investment in the liquidity portfolio will exceed a duration of one
year from the time of purchase. No investment in the liquidity portfolio will exceed 5% of
policyholders surplus at the time of purchase as last reported to the New York State Insurance
Department except for direct obligations of the U.S. Government or its instrumentalities or
repurchase agreements collateralized by direct obligations of the U.S. Government or its
instrumentalities in which case there will be no limit.
Fixed Income Portfolio:
Obligations of the U.S. Government, its instrumentalities, and government
sponsored agencies will not be restricted as to amount or maturity. At least 75% of the corporate
and tax-exempt investments in the fixed income portfolio will be restricted to those obligations
rated, at a minimum, Baa3 by Moodys or BBB- by S&P. For purposes of this calculation, the
liquidity portfolio also will be included. Concentration will not exceed 5% of policyholders
surplus at the time of purchase as last reported to the New York State Insurance Department.
However, individual investments in floating rate super senior mortgages rated AAA by S&P, will not
exceed 15% of policyholders surplus and collectively will not exceed 50% of total invested assets.
For those securities with fixed interest rates, maturities will not exceed 30 years from date of
purchase. At least 75% of the investments in asset backed securities shall similarly be rated, at a
minimum, Baa3 by Moodys or BBB- by S&P. At the time of purchase, individual issues will be
restricted to 5% of policyholders surplus as last reported to the New York State Insurance
Department. For those securities with fixed interest rates, maturities will not exceed 30 years
from date of purchase. At least 75% of preferred stock investments with sinking funds will, at a
minimum, be rated Baa3 by Moodys or BBB- by S&P. Individual issues will be limited to 5% of
policyholders surplus. All individual issues of Fannie Mae and Freddie Mac preferred stocks shall
not exceed 10% of policyholders surplus. Prior notice to the Company is required in the event of a
planned sale of a security in a loss position that exceeds 10% of its cost.
Equity and Alternative Investments (Hedge Funds):
Investments in this category (including
convertible securities) will not exceed in aggregate 50% of policyholders surplus or 30% of total
investments whichever is greater. Equity investments in any one issuer will not exceed 5% of
policyholders surplus at the time of purchase as last reported to the New York State Insurance
Department. Investments in any individual hedge fund will not exceed 5% of policyholders surplus.
For the purposes of this 5% limitation, in the event that an individual hedge fund is comprised of
a pool (basket) of separate and distinct hedge funds, then this 5% limitation will apply to the
individual funds within the pool (or basket).
Subsidiaries
New York Marines investments in subsidiary companies are excluded from the requirements of New
York Marines investment policy.
The investment policy of Gotham is identical to that of New York Marine, except that at least
$5,000,000 will be maintained in the liquidity portfolio. The investment policy for Southwest
Marine is that it is authorized to invest only in investment grade publicly traded securities.
22
The following sets forth the allocation of our investment portfolio as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
S&P
|
|
|
|
|
|
|
|
|
|
S&P
|
|
|
|
|
|
December 31, 2008
|
|
|
Rating
|
|
Percent
|
|
|
December 31, 2007
|
|
|
Rating
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities held to maturity (amortized
cost):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
61,246,212
|
|
|
AAA
|
|
|
11.20
|
%
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities held to maturity
|
|
$
|
61,246,212
|
|
|
|
|
|
11.20
|
%
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities available for sale (fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
40,783,969
|
|
|
AAA
|
|
|
7.46
|
%
|
|
$
|
14,335,541
|
|
|
AAA
|
|
|
2.04
|
%
|
Municipal obligations
|
|
|
90,483,461
|
|
|
AA+
|
|
|
16.54
|
%
|
|
|
7,810,318
|
|
|
A1
|
|
|
1.11
|
%
|
Corporate securities
|
|
|
13,710,996
|
|
|
A+
|
|
|
2.51
|
%
|
|
|
5,853,942
|
|
|
BB+
|
|
|
0.83
|
%
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
134,890,799
|
|
|
AAA
|
|
|
19.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities available for sale
|
|
$
|
144,978,426
|
|
|
AAA
|
|
|
26.51
|
%
|
|
$
|
162,890,600
|
|
|
AAA
|
|
|
23.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities trading (fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal obligations
|
|
$
|
17,399,090
|
|
|
AA+
|
|
|
3.18
|
%
|
|
$
|
70,243,560
|
|
|
AA+
|
|
|
10.02
|
%
|
Commercial middle market debt
|
|
|
|
|
|
|
|
|
|
|
|
|
8,293,725
|
|
|
B+
|
|
|
1.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities trading
|
|
$
|
17,399,090
|
|
|
AA+
|
|
|
3.18
|
%
|
|
$
|
78,537,285
|
|
|
AA+
|
|
|
11.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
223,623,728
|
|
|
AAA
|
|
|
40.89
|
%
|
|
$
|
241,427,885
|
|
|
AA+
|
|
|
34.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities trading (fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
$
|
11,822,620
|
|
|
A-
|
|
|
2.16
|
%
|
|
$
|
66,325,265
|
|
|
AA-
|
|
|
9.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
$
|
11,822,620
|
|
|
A-
|
|
|
2.16
|
%
|
|
$
|
66,325,265
|
|
|
AA-
|
|
|
9.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments (approximating fair value)
|
|
|
110,249,779
|
|
|
AAA
|
|
|
20.16
|
%
|
|
|
165,000
|
|
|
AAA
|
|
|
0.02
|
%
|
Cash
|
|
|
75,672,102
|
|
|
|
|
|
13.83
|
%
|
|
|
204,913,343
|
|
|
|
|
|
29.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, equity securities, cash
and short-term investments
|
|
$
|
421,368,229
|
|
|
|
|
|
77.04
|
%
|
|
$
|
512,831,493
|
|
|
|
|
|
73.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans (fair value)
|
|
|
2,690,317
|
|
|
B-
|
|
|
0.49
|
%
|
|
|
|
|
|
|
|
|
|
|
Limited partnership hedge funds (equity)
|
|
|
122,927,697
|
|
|
|
|
|
22.47
|
%
|
|
|
188,295,547
|
|
|
|
|
|
26.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio
|
|
$
|
546,986,243
|
|
|
|
|
|
100.00
|
%
|
|
$
|
701,127,040
|
|
|
|
|
|
100.00
|
%
|
23
Details
of the mortgage-backed securities portfolio as of December 31,
2008 are presented below based on publicly available information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
FICO
|
|
|
D60+
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan to
|
|
|
Credit
|
|
|
Delinquency
|
|
|
Support
|
|
|
S&P
|
|
|
Moodys
|
Security description
|
|
Issue date
|
|
|
Amortized cost
|
|
|
Fair value
|
|
|
Value % (1)
|
|
|
Score (2)
|
|
|
Rate (3)
|
|
|
Level (4)
|
|
|
Rating
|
|
|
Rating
|
AHMA 2006-3
|
|
|
7/2006
|
|
|
$
|
12,213,748
|
|
|
$
|
8,511,737
|
|
|
|
85.9
|
|
|
|
704
|
|
|
|
31.6
|
|
|
|
45.2
|
|
|
AAA
|
|
Aaa
|
CWALT 2005-69
|
|
|
11/2005
|
|
|
|
7,900,234
|
|
|
|
6,051,403
|
|
|
|
82.0
|
|
|
|
697
|
|
|
|
39.7
|
|
|
|
49.4
|
|
|
AAA
|
|
Aaa
|
CWALT 2005-76
|
|
|
12/2005
|
|
|
|
7,865,446
|
|
|
|
5,944,599
|
|
|
|
82.8
|
|
|
|
700
|
|
|
|
41.5
|
|
|
|
50.5
|
|
|
AAA
|
|
Aaa
|
RALI 2005-QO3
|
|
|
10/2005
|
|
|
|
7,921,593
|
|
|
|
5,528,142
|
|
|
|
82.1
|
|
|
|
704
|
|
|
|
35.3
|
|
|
|
48.8
|
|
|
AAA
|
|
Aaa
|
WaMu 2005-AR17
|
|
|
12/2005
|
|
|
|
6,746,777
|
|
|
|
4,639,000
|
|
|
|
75.4
|
|
|
|
714
|
|
|
|
19.7
|
|
|
|
47.2
|
|
|
AAA
|
|
Aaa
|
WaMu 2006-AR9
|
|
|
7/2006
|
|
|
|
9,170,145
|
|
|
|
6,229,337
|
|
|
|
75.8
|
|
|
|
730
|
|
|
|
21.4
|
|
|
|
27.1
|
|
|
AAA
|
|
Aaa
|
WaMu 2006-AR13
|
|
|
9/2006
|
|
|
|
9,428,269
|
|
|
|
5,425,214
|
|
|
|
76.5
|
|
|
|
728
|
|
|
|
19.2
|
|
|
|
27.8
|
|
|
AAA
|
|
Aaa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
61,246,212
|
|
|
$
|
42,329,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1)
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|
The dollar-weighted average amortized loan-to-original value of the underlying loans at February 25 2009.
|
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(2)
|
|
Average FICO of remaining borrowers in the loan pool at February 25, 2009.
|
|
(3)
|
|
The sum of the percentage of loans that are grouped within the 60 days delinquent, 90 days delinquent, foreclosure and real
estate owned categories at February 25, 2009.
|
|
(4)
|
|
The current credit support provided by subordinate ranking tranches within the overall security structure at February 25, 2009.
|
The Company has investments in residential mortgage-backed securities (RMBS) amounting to $61.2
million at December 31, 2008. These securities are classified as held to maturity after the Company
transferred these holdings from the available for sale portfolio effective October 1, 2008. The
adjusted cost basis of these securities is based on a determination of the Fair Value of these
securities on the date they were transferred.
The Fair Value of each RMBS investment is determined under SFAS 157. Fair Value is determined
by estimating the price at which an asset might be sold on the measurement date. There has been a
considerable amount of turmoil in the U.S. housing market in 2007 and 2008, which has led to market
declines in such securities. Because the pricing of these investments is complex and has many
variables affecting price including, projected delinquency rates, projected severity rates,
estimated loan to value ratios, vintage year, subordination levels, projected prepayment speeds,
expected rates of return required by prospective purchasers, etc., the estimated price of such
securities will differ among brokers depending on these facts and assumptions. While many of the
inputs utilized in pricing are observable, many other inputs are unobservable and will vary
depending upon the broker. During periods of market dislocation, such as the current market
conditions, it is increasingly difficult to value such investments because trading becomes less
frequent and/or market data becomes less observable. As a result, valuations may include inputs and
assumptions that are less observable or require greater estimation and judgment as well as
valuation methods that are more complex. For example, assumptions regarding projected delinquency
and severity rates have become increasingly pessimistic due to market uncertainty connected with
these types of investments and requirements for high expected returns using pessimistic assumptions
as required by the limited number of prospective purchasers of such securities in the present
market. This has resulted in lower estimated quotes of estimated market prices. These inputs are
used in pricing models to assist the broker in estimating a current price for these investments.
Accordingly, the market price or Fair Value may not be reflective of the intrinsic value of a
security or indicative of the ultimate expected receipt of future cash flows. The Fair Value of
such securities at December 31, 2008 was $42.3 million.
24
The Company performs a cash flow analysis for each of these securities, which attempts to estimate
the likelihood of any future impairment. While the Company does not believe there are any
other-than-temporary impairments (OTTI) currently, future estimates may change
depending upon the actual housing statistics reported for each security to the Company. This may
result in future charges based upon revised estimates for delinquency rates, severity or prepayment
patterns. These changes in estimates may be material. These securities are collateralized by pools
of Alt-A mortgages, and receive priority payments from these pools. The Companys securities
rank senior to subordinated tranches of debt collateralized by each respective pool of mortgages.
The Company has collected all applicable interest and principal repayments on such securities to
date. As of February 25, 2009 the levels of subordination ranged from 27% to 51% of the total debt
outstanding for each pool. Delinquencies within the underlying mortgage pools (defined as payments
60+ days past due plus foreclosures plus real estate owned) ranged from 19.2% to 41.5% of total
amounts outstanding. In March 2008, delinquencies ranged from 3.4% to 21.2%. Delinquency rates are
not the same as severity rates, or actual loss, but are an indication of the potential for losses
of some degree in future periods. In each case, current pool subordination levels by individual
security remain in excess of current pool delinquency rates.
The Company has both the ability and the intent to hold such securities until maturity. Prior
to the transfer to the held to maturity classification, the Company incurred cumulative write-downs
from OTTI declines in the Fair Value of these securities after any recapture, amounting to $40.7
million through September 30, 2008. The collection of principal repayments on these securities
through December 31, 2008 resulted in $2.1 million in realized investment gains as a result of the
recapture of previous write-downs of investment balances. The Company sold two of its RMBS
investments in September 2008 resulting in cumulative realized investment losses of $11.0 million.
The net realized loss included previous OTTI declines in Fair Value of $9.7 million through the
dates of sale.
These RMBS investments, as of December 31, 2008 were rated AAA/Aaa by S&P/Moodys. As of March 9,
2009, these securities are rated AAA or AAA- by S&P and Caa1 to A1 by Moodys. On March 9, 2009
S&P announced that 9,430 tranches of mortgage securities had been placed on Credit Watch for
potential downgrades. The tranches of securities owned by the Company were not included in this
list, however, other junior tranches of securities within the RMBS owned by the Company were
included in the list. While the Companys securities were not
included in that S & P Credit Watch
listing, there is the possibility that they may be downgraded in the future.
Relationship with Mariner Partners, Inc.
The Companys investments are monitored by management and the Finance Committee of the Board of
Directors. The Company entered into an investment management agreement with Mariner Partners, Inc.
(Mariner) effective October 1, 2002 that was amended and restated on December 6, 2002. Mariner is
an investment management company founded by William J. Michaelcheck, a member of our Board of
Directors. Mr. Michaelcheck is the beneficial owner of a substantial amount of the stock of
Mariner. One of Mariners wholly-owned subsidiaries, Mariner Investment Group, Inc., which we refer
to as the Mariner Group, was founded in 1992 and, together with its affiliates, provides investment
management services to investment funds, reinsurance companies and a limited number of
institutional managed accounts. The Mariner Group has been a registered investment adviser since
May 2003. As described in more detail under Mariner Investment Management Agreement, under the
terms of the agreement, Mariner manages the Companys, New York Marines and Gothams investment
portfolios. Fees to be paid to Mariner are based on a percentage of the investment portfolio as
follows: .20% of liquid assets, .30% of fixed maturity investments and 1.25% of hedge fund (limited
partnership) investments. Southwest Marine entered into an investment management agreement, the
substantive terms of which are identical to those set forth above, with the Mariner Group,
effective March 1, 2007. In addition to Mr. Michaelcheck, George R. Trumbull, a director of the
Company, A. George Kallop, President and Chief Executive Officer and a director of the Company, and
William D. Shaw, Jr., Vice Chairman and a director of the Company, are also associated with
Mariner.
Mariner also entered into a voting agreement with Mark W. Blackman, Blackman Investments, LLC (now
Lionshead Investments, LLC) and certain trusts and foundations affiliated with Louise B. Tollefson,
of which Robert G. Simses, Chairman, and a director of the Company, is trustee, on February 20,
2002. As described in more detail under Voting Agreement, Mariner, with the approval of two of
the three voting agreement participating shareholders, is generally authorized to vote all of the
common shares covered by the voting agreement, which constituted approximately 16.06% of the
Companys issued and outstanding shares of common stock as of March 2, 2009.
The voting agreement also gives Mariner the right to purchase up to 1,350,000 shares of the
Companys common stock from the voting agreement participating shareholders. The option exercise
price per share is based on the date the option is exercised. At the time the voting agreement was
signed, the option exercise price was $19.00, with the exercise price increasing $0.25 per share
every three months, subject to deduction for dividends paid. The exercise price of the option as of
March 2, 2009 was $24.34. Generally, Mariners option will expire 30 days after the termination of
the voting agreement, which is scheduled to terminate on December 31, 2010, if not terminated
earlier.
25
Voting Agreement
On February 20, 2002, shareholders who are affiliated with the Blackman/Tollefson family entered
into a voting agreement with Mariner, which affected approximately 16.06% of the voting power of
NYMAGIC as of March 2, 2009.
The shares subject to the voting agreement were originally held by John N. Blackman, Sr., who
founded the Company in 1972 and died in 1988. The shareholders who are parties to the voting
agreement are either heirs of Mr. Blackman, whom we refer to as our founder, or entities
established or controlled by them. Three of those shareholders are designated in the voting
agreement as participating shareholders and have the specific rights described below. The
participating shareholders are as follows:
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|
|
Mark W. Blackman, a son of our founder and Louise B. Tollefson, is a
participating shareholder in his individual capacity. He was a member
of our Board of Directors from 1979 until May 2004 and served as our
President from 1988 to 1998. He has been our Chief Underwriting
Officer since June 2002 and our Executive Vice President since
September 2005. Mr. Blackman was re-appointed to our Board of
Directors on March 6, 2009.
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John N. Blackman, Jr., a son of our founder and Louise B. Tollefson,
acts as a participating shareholder in his dual capacity as
controlling member of Lionshead Investments LLC and co-trustee of the
Blackman Charitable Remainder Trust dated April 1, 2001. He was a
member of our Board of Directors from 1975 until May 2004 and served
as Chairman of the Board from 1988 to 1998.
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|
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|
Robert G. Simses acts as a participating shareholder in his capacity
as sole trustee of the Louise B. Tollefson 2000 Florida Intangible Tax
Trust dated December 12, 2000 and the Louise B. Blackman Tollefson
Family Foundation dated March 24, 1998. We refer to these trusts and
foundations as the Tollefson trusts. The settlor of these trusts,
Louise B. Tollefson, is the former wife of our founder and was a
member of our Board of Directors from 1986 to 2001. Mr. Simses has
been a member of our Board of Directors since 2001 and has been
Chairman since 2008. He is also Managing Partner of the law firm of
Simses & Associates and President and Chief Operating Officer of The
William H. Pitt Foundation Inc. Mr. Simses serves on the board of
directors of Tiptree Financial, a limited partnership in which
Tricadia Capital, which is associated with Mariner, is the general
partner.
|
Amendments to the Voting Agreement
The voting agreement provides that it may be amended or extended by the unanimous written consent
of the participating shareholders and Mariner. The voting agreement was amended on January 27, 2003
to extend the duration of the agreement from February 15, 2005 to February 15, 2007 in order to
provide Mariner with additional time to improve the performance of NYMAGIC, and in order to allow
for the appointment of an eleventh director and David W. Young was chosen for this newly created
Board position. Mr. Young is affiliated with Conning Capital Partners VI, L.P., which owns 600,000
shares of our common stock and options to purchase an additional 300,000 shares of our common stock
and which we refer to as Conning. The voting agreement was further amended on March 12, 2003 to
allow for the appointment of a twelfth director and John T. Baily was chosen for this newly created
Board position. In addition, as discussed under Transferability of NYMAGIC Shares, a limited
waiver was agreed with respect to certain transferability restrictions.
Following the sale of common stock in December 2003 by certain shareholders that are parties to the
voting agreement, the Company was no longer a controlled company as defined in the New York Stock
Exchange Listed Company Manual. Accordingly, the Company was required to have a majority of
independent directors by December 16, 2004. In order to permit the Company to comply with this
requirement certain provisions of the voting agreement relating to the nomination of directors and
the size of the Board of Directors were amended on February 24, 2004. On October 12, 2005 the
voting agreement was amended and restated to (i) limit the number of shares subject to the voting
agreement; (ii) reduce the number of shares subject to Mariners option from 1,800,000 to
1,350,000, (iii) extend the termination date of the voting agreement from February 15, 2007 to
December 31, 2010; and, (iv) to adjust the rights of the parties to nominate candidates to the
Board of Directors. The voting agreement was further amended and restated on October 15, 2008 in
order to conform its embedded option with the provisions of Section 409A of the IRS Code.
26
Voting Rights of Mariner
The participating shareholders retained significant voting rights over their shares under the
amended and restated voting agreement. Mariner may only vote the shares that are subject to the
amended and restated voting agreement with the written approval of two of the three participating
shareholders. If two of the three participating shareholders fail to approve any vote by Mariner on
any matter, then Mariner is not permitted to vote on that matter and generally the participating
shareholders are also not permitted to vote on that matter. However, if one of the following types
of matters is under consideration and two of the three participating shareholders fail to approve
the vote by Mariner, the participating shareholders are entitled to vote their shares instead of
Mariner:
|
|
|
the merger or consolidation of NYMAGIC into or with another corporation;
|
|
|
|
|
the sale by NYMAGIC of all or substantially all of its assets;
|
|
|
|
|
the dissolution and/or liquidation of NYMAGIC; or
|
|
|
|
|
any recapitalization or stock offering of NYMAGIC.
|
Election of Directors
Provided that the candidates of the participating shareholders would not be legally disqualified
from serving as directors of NYMAGIC, Mariner is required to vote all shares that are subject to
the amended and restated voting agreement in favor of the election of those candidates, or any
successor or replacement candidates, nominated by the participating shareholders. Mariner is not
permitted to vote the shares subject to the amended and restated voting agreement to remove any
director nominated by a participating shareholder without the consent of that participating
shareholder. In accordance with the general voting provisions discussed above under the heading
Voting Rights of Mariner, Mariner is permitted to vote the shares subject to the amended and
restated voting agreement to elect its own candidates only with the written approval of two of the
three participating shareholders. In connection with the election of directors at the annual
meeting of shareholders in 2008, all three of the participating shareholders approved the voting of
those shares to elect the three candidates nominated by Mariner.
Nomination of Directors
Prior to the amendment and restatement of the voting agreement dated October 12, 2005, the voting
agreement provided for our Board of Directors to consist of nine directors. Pursuant to an action
taken by our Board of Directors on September 14, 2005 without reference to the voting agreement,
the size of the Board was increased in number from nine to 11, and Messrs. A. George Kallop, our
President and Chief Executive Officer, who served on our Board of Directors from 2002 to May 2004,
and Glenn R. Yanoff, who served on our Board of Directors from 1999 to May 2004, were elected to
the Board. Mr. Yanoff, now an Executive Vice President of the Company, resigned from our Board of
Directors in 2008.
27
On March 24, 2008, John R. Anderson, Glenn Angiolillo, Ronald J. Artinian, John T. Baily, A. George
Kallop, David E. Hoffman, William J. Michaelcheck, William D. Shaw, Jr., Robert G. Simses, George
R. Trumbull, III and David W. Young were nominated for election to the Board at the next annual
meeting of shareholders.
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|
|
Prior to the 2005 amendment and restatement of the voting agreement,
Mariner was entitled to nominate three candidates to the Board.
Following the amendment and restatement of the voting agreement,
Mariner is entitled to nominate four candidates for election to the
Board. The four current directors who were nominated by Mariner are
William J. Michaelcheck, George R. Trumbull, III, William D. Shaw,
Jr., who serves as our Vice Chairman and A. George Kallop, the
President and Chief Executive Officer of the Company.
|
|
|
|
|
Prior to the 2005 amendment and restatement of the voting agreement,
each participating shareholder was entitled to nominate one candidate
to the Board. Following the 2005 amendment and restatement of the
voting agreement, each of Mark W. Blackman and Lionshead Investments,
LLC is entitled to nominate one candidate for election to the Board
and Robert G. Simses is entitled to nominate two candidates to the
Board, provided that the candidates nominated by Mark W. Blackman and
Lionshead Investments, LLC and one of the candidates nominated by Mr.
Simses shall qualify as independent directors under the rules of the
New York Stock Exchange and all other applicable laws and regulations.
The two current directors nominated by Mark W. Blackman and Lionshead
Investments, LLC are Glenn Angiolillo and John R. Anderson, and the
two current directors nominated by Robert G. Simses are Robert G.
Simses and Ronald J. Artinian.
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|
Prior to the 2005 amendment and restatement of the voting agreement,
our Chief Executive Officer was entitled to nominate three candidates
to the Board. Following the 2005 amendment and restatement of the
voting agreement, our Chief Executive Officer is entitled to nominate
three candidates for election to the Board, all of whom shall qualify
as independent directors under the rules of the New York Stock
Exchange and all other applicable laws and regulations. The three
current directors who were nominated by Mr. Kallop are David W. Young,
John T. Baily and David E. Hoffman.
|
If any participating shareholder does not nominate a candidate for election to the Board, then, in
addition to its other rights, Mariner, instead of that participating shareholder, may nominate a
number of candidates equal to the number not nominated by the participating shareholders. In
addition, the participating shareholders have agreed, consistent with their fiduciary duties, to
cause their nominees to the Board to vote for one of the Mariner-nominated directors, as designated
by Mariner, as Chairman of each meeting.
Termination Provisions
The amended and restated voting agreement will terminate upon the earliest to occur of the
following dates:
|
|
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December 31, 2010;
|
|
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|
|
the merger or consolidation of NYMAGIC into another corporation, the sale of all or
substantially all its assets or its dissolution and/or its liquidation;
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|
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immediately upon the resignation of Mariner as an advisor to NYMAGIC, INC.; or
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upon written notice of such termination to Mariner from all of the participating shareholders.
|
28
Mariner Stock Option
The amended and restated voting agreement also gives Mariner the right to purchase at any time and
from time to time up to an aggregate of 1,350,000 shares of our common stock from the participating
shareholders in the amounts set forth below opposite each participating shareholders name:
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Mark W. Blackman
|
|
225,000 shares
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Lionshead Investments, LLC
|
|
225,000 shares
|
|
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|
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Robert G. Simses, as trustee of the Tollefson trusts
|
|
900,000 shares
|
In the event Mariner exercises this option, Mr. Simses will have the sole right to determine the
number of shares to be provided by either one of the Tollefson trusts.
The option exercise price per share is based on the date the option is exercised. At the time the
voting agreement was signed, the option exercise price was $19.00, with the exercise price
increasing $0.25 per share every three months. The initial exercise price of $19.00 was
approximately equal to the mid-point of the market price of our common stock and the book value of
our common stock during the period in which the voting agreement was negotiated. The final exercise
price, for exercises between November 15, 2010 and December 31, 2010 is $27.75 per share. The
exercise price will be adjusted by deducting the cumulative amount of dividends paid by us in
respect of each share of its common stock from January 31, 2003 through the date Mariner exercises
its option. This option was granted with the intention of aligning Mariners interests with the
interests of all of our shareholders. The exercise price of the option as of March 2, 2009 was
$24.34 per share.
Generally, Mariners option will expire 30 days after the termination of the amended and restated
voting agreement. However, if the amended and restated voting agreement is terminated prior to
December 31, 2010 by unanimous written notice from the participating shareholders, then the option
will continue in full force and effect until the close of business on December 31, 2010.
Transferability of the Option
The option granted to Mariner is not transferable except in the following instances, with the
assignee agreeing to be bound to the voting agreement:
|
|
|
Mariner is permitted to assign the option, in whole or in part, to any
one or more of William J. Michaelcheck, William D. Shaw, Jr., George
R. Trumbull and A. George Kallop or any other individual employed by
or acting as a consultant for Mariner in connection with NYMAGIC.
|
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|
|
With the written consent of at least two participating shareholders,
Mariner or any assignee as described above is permitted to assign the
option, in whole or in part, to any one or more other persons.
|
On April 4, 2002, Mariner entered into an agreement with each of William D. Shaw, Jr., the
Companys Vice Chairman, and A. George Kallop, the Companys President and Chief Executive Officer,
whereby Mariner agreed to hold a portion of the option covering 315,000 shares of NYMAGIC as
nominee for each of Mr. Shaw and Mr. Kallop. Effective January 1, 2005, Mr. Shaw waived his
interest in the option covering 315,000 shares of NYMAGIC and became a shareholder of Mariner. On
April 12, 2005, Mariner and George R. Trumbull entered into an agreement pursuant to which Mariner
agreed to hold a portion of the option covering 450,000 shares of NYMAGIC as nominee for Mr.
Trumbull, and on October 12, 2005 they amended the agreement by reducing the number of option
shares to 337,500. On October 12, 2005 Mariner and Mr. Kallop amended their agreement by reducing
the number of option shares to 236,250.
Consideration to Mariner
Mariner did not pay any cash consideration to the participating shareholders, nor did the
participating shareholders pay any cash consideration to Mariner, in connection with the voting
agreement or the amended and restated voting agreement. Mariners sole compensation for entering
into the voting agreement, as opposed to the investment management arrangement discussed below, is
the option to purchase NYMAGIC shares from the participating shareholders. To date, Mariner has not
exercised this option, but should it elect to do so, it would pay the option exercise price to the
participating shareholders at that time.
Transferability of NYMAGIC Shares
The participating shareholders retain the right to transfer any of the shares covered by the
amended and restated voting agreement, provided that the transferred shares remain subject to the
amended and restated voting agreement. Mariner waived the requirement that assignees be bound by
the voting agreement with respect to 2,150,000 shares sold pursuant to a public offering in
December 2003, and 1,092,735 shares purchased by the Company in January 2005.
29
Mariner Investment Management Arrangement
In addition to the voting agreement, Mariner entered into an investment management agreement with
NYMAGIC, New York Marine and Gotham effective October 1, 2002, which was amended and restated on
December 6, 2002. Under the terms of the investment management agreement, Mariner manages the
Companys, New York Marines and Gothams investment portfolios. Mariner may purchase, sell,
redeem, invest, reinvest or otherwise trade securities on behalf of the Company. Mariner may, among
other things, exercise conversion or subscription rights, vote proxies, select broker dealers and
value securities and assets of the Company. Under the terms of the investment management agreement
the Companys investments have been reallocated into the following three categories:
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the liquidity portfolio (cash management);
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|
the fixed-income portfolio (fixed-income investments); and,
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the hedge fund and equity portfolio (alternative investment vehicles and common and preferred equities).
|
Southwest Marine entered into an investment management agreement with the Mariner Group effective
March 1, 2007, which is virtually identical to the investment management agreement between the
Company and Mariner.
The investment management agreements do not have a specific duration period and may be terminated
by either party on 30 days prior written notice. Fees to be paid to Mariner under the investment
management agreements are based on a percentage of the investment portfolio as follows: 0.20% of
liquid assets, 0.30% of fixed maturity investments and 1.25% of hedge fund (limited partnership)
investments.
The Company incurred Mariner investment expenses of $2,894,022, $2,951,404 and $2,887,985 pursuant
to the investment management agreements in 2008, 2007 and 2006, respectively. Assuming these
agreements are in effect in 2009, the Company would not anticipate any significant change in
investment expenses. In the event that assets in the hedge fund and equity portfolio are invested
in alternative investment vehicles managed by Mariner or any of its affiliates, the 1.25% advisory
fee is waived with respect to those investments, although any fees imposed by the investment
vehicles themselves are nonetheless payable.
In 2003, the Company acquired a 100% interest in a limited partnership hedge fund, Mariner Tiptree
(CDO) Fund I, L.P. (Tiptree), subsequently known as Tricadia CDO Fund, L.P. (Tricadia) and
since June 2008 known as Altrion Capital, L.P. (Altrion). Altrion was originally established to
invest in collateralized debt obligation (CDO) securities, commercial loan obligation (CLO)
securities, credit related structured (CRS) securities and other structured products, as well as
commercial loans, that are arranged, managed or advised by a Mariner affiliated company. See
Relationship with Mariner Partners, Inc. Under the provisions of the limited partnership
agreement, the Mariner affiliated company was entitled to 50% of the net profit realized upon the
sale of certain collateralized debt obligations held by the Company. The investment in Altrion was
previously consolidated in the Companys financial statements. On August 18, 2006, the Company
entered into an Amended and Restated Limited Partnership Agreement, effective August 1, 2006, with
Tricadia Capital, LLC (Tricadia Capital), the general partner, and the limited partners named
therein (the Amended Agreement), to amend and restate the existing Limited Partnership Agreement
of Mariner Tiptree (CDO) Fund I, L.P. entered into in 2003 (the Original Agreement). The Amended
Agreement changed the name of the partnership, amended and restated in its entirety the Original
Agreement and provides for the continuation of the partnership under applicable law upon the terms
and conditions of the Amended Agreement. The Amended Agreement, among other items, substantially
changed the fee income structure, as well as provides for the potential conversion of limited
partnership interests to equity interests. The fee income was changed in the Amended Agreement from
50% of the fee received by the investment manager in connection with the management of CDOs in
Altrion to a percentage of fees equal to the pro-rata portion of the CDO equity interest held by
Altrion, but in any event, no less than 12.5%. The Amended Agreement also provides for an
additional CDO fee to be determined based upon the management fees earned by the investment
manager. These changes resulted in a reduction in the variability of Altrion thereby lowering or
decreasing its expected losses as well as represented a change in the entitys governing documents
or contractual arrangements that changed the characteristics of Altrions equity investment at
risk. As a result of these substantive changes to the Original Agreement, the Company concluded
that it is no longer the party most closely associated with Altrion and deconsolidated Altrion from
its financial statements as of August 1, 2006 and has since included Altrion as a limited
partnership investment at equity in the financial statements. Approximately $6.9 million in uses
of cash flows in 2006 resulted from the effect of deconsolidation of the Altrion limited
partnership investment. The deconsolidation had no impact on the Companys Statement of Income for
the year ended December 31, 2006.
In 2003, the Company made an investment of $11.0 million in Altrion. Additional investments of
$4.65 million, $2.7 million and $6.25 million were made in 2004, in 2005 and on April 27, 2007,
respectively. The Company was previously committed to providing an additional $15.4 million, or a
total of approximately $40 million, in capital to Altrion by August 1, 2008. Altrion, however,
waived its right to require the Company to contribute its additional capital commitment of $15.4
million and accordingly, the Companys obligation to make such capital contribution has expired. In
addition, the Company withdrew $10 million of its capital from Altrion during July 2008.
Withdrawals require one years prior written notice to the hedge fund manager. The Company has
submitted a redemption notice to Altrion. The Company is uncertain as to whether cash and/or
securities will be received as payment of the redemption proceeds.
30
As a result of the turmoil in the U.S. housing industry in 2007 and 2008 and its effect on
mortgage-backed securities and illiquid securities, Altrion has not assembled any CDO or CLO assets
as market conditions have precluded any such activity. Altrion also has an investment in Tiptree
Financial Partners LP (Tiptree Financial), which was formed in 2008 to trade CLOs, but because of
market conditions a substantial portion of Tiptree Financials invested assets were as of December
31, 2008 and currently remain in cash.
Investment expenses incurred and payable under the Tiptree agreement at December 31, 2008 and
December 31, 2007 amounted to $844,387 and $(812,646), respectively, and were based upon the fair
value of those securities held and sold during 2008 and 2007, respectively. This agreement also
provides for other fees payable to the manager based upon the operations of the hedge fund. There
were no other fees incurred through December 31, 2008.
William J. Michaelcheck, a director of the Company, is the Chairman of Mariner and is the
beneficial owner of a substantial amount of the stock of Mariner. George R. Trumbull, a director of
the Company, A. George Kallop, President and Chief Executive Officer and a director of the Company,
and William D. Shaw, Jr., Vice Chairman and a director of the Company, are also associated with
Mariner. Currently, Mr. Shaw is a shareholder of Mariner and Messrs. Trumbull and Kallop have
contractual relationships with Mariner relating to consulting services. The Company had a
consulting agreement with William D. Shaw, Jr. pursuant to which it paid him $100,000 in 2008 for
consulting services relating to the Companys managing its relations with the investment community
and other managerial advice and counsel. As noted above, pursuant to the amended and restated
voting agreement, Mariner controlled the vote of approximately 16.06% of NYMAGICs outstanding
voting securities as of March 2, 2009.
The Company believes that the terms of the investment management agreements are no less favorable
to NYMAGIC and its subsidiaries than the terms that would be obtained from an unaffiliated
investment manager for the services provided. The investment management fees paid to Mariner were
arrived at through negotiations between the Company and Mariner. All then current directors
participated in the discussion of the 2002 investment management agreement. In accordance with the
Companys conflict of interest policy, the investment management agreement was approved by an
independent committee of the Companys Board of Directors, which consisted of all directors who
were neither Mariner affiliates nor participating shareholders under the voting agreement.
Thereafter, the investment management agreement was approved by the entire Board of Directors.
Under the provisions of the New York insurance holding company statute, because of the control
relationship between Mariner and New York Marine and Gotham, the investment management agreement
was submitted for review by the New York State Insurance Department, which examined, among other
things, whether its terms were fair and equitable and whether the fees for services were
reasonable. Upon completion of that review, the investment management agreement was found to be
non-objectionable by the Department. Similarly, the investment management agreement between
Southwest Marine and the Mariner Group was approved by an Independent Committee of the Board of
Directors and was found by the Arizona Department of Insurance to be non-objectionable.
Subsidiaries
NYMAGIC was formed in 1989 to serve as a holding company for the subsidiary insurance companies.
NYMAGICs largest insurance company subsidiary is New York Marine, which was formed in 1972. Gotham
was organized in 1986 as a means of expanding into the excess and surplus lines marketplace in
states other than New York and Southwest Marine was organized in 2005 as a means of expanding into
excess and surplus lines in New York. New York Marine and Gotham entered into a Reinsurance
Agreement, effective January 1, 1987, under the terms of which Gotham cedes 100% of its gross
direct business to New York Marine and assumes 15% of New York Marines total retained business,
beginning with the 1987 policy year. Accordingly, for policy year 1987 and subsequent, Gothams
underwriting statistics are similar to New York Marines. As of December 31, 2008, 75% and 25% of
Gothams common stock is owned by New York Marine and NYMAGIC, respectively. Southwest Marine and
New York Marine entered into a reinsurance agreement effective January 1, 2007, under the terms of
which, New York Marine cedes 5% of its gross direct business to Southwest Marine. Southwest Marine
retains 100% of its direct writings. New York Marine owns 100% of Southwest Marines common stock.
Gotham does not assume or cede business to or from other insurance companies. As of December 31,
2008, New York Marine had aggregate receivables due from Gotham of approximately $48 million, or
27% of New York Marines policyholders surplus, and aggregate receivables due from Southwest
Marine of approximately $7 million, or 4% of New York Marines policyholders surplus. Gotham had
aggregate reinsurance receivables due from New York Marine, as of December 31, 2008, of
approximately $71 million, or 127% of Gothams policyholders surplus.
MMO was formed in 1964 to underwrite a book of ocean marine insurance and was acquired in 1991 by
NYMAGIC. MMOs activities expanded over the years and it now underwrites a book of ocean marine,
inland marine and other liability insurance.
Midwest was formed in 1978 to underwrite a varied book of business located in the Midwest region
and was acquired in 1991 by NYMAGIC.
PMMO was formed in 1975 to underwrite a varied book of business located in the West Coast region
and was acquired in 1991 by NYMAGIC; PMMOs principal office was closed in 2007 and its operations
have been absorbed by MMO.
MMO UK was formed in 1997 as a Lloyds limited liability corporate capital vehicle, was placed into
runoff in 2002 and was sold in 2005.
MMO EU was formed in 1997 as a holding company for MMO UK and was liquidated in February 2007.
31
The Company has been a 100% limited partner in Altrion, a limited partnership that invests in CDO
securities, CRS securities and other structured product securities, but because the limited
partnership agreement was amended and restated in 2006 the Company ceased consolidating this
investment as of August 1, 2006 as a result of an amended agreement that provides for substantial
changes in the source of revenues and the potential conversion of limited partnership interests to
equity interests. The Company includes this investment in limited partnerships at equity.
Competition
The insurance industry is highly competitive and the companies, both domestic and foreign, against
which the Company competes, are often larger and could have greater capital resources than the
Company and the pools. The Companys principal methods of competition are pricing and
responsiveness to the individual insureds coverage requirements.
We compete in the United States and international markets with domestic and international insurance
companies. In the area of our primary focus, ocean marine liability, there are approximately 50
insurance companies writing almost $3.1 billion in annual premiums for ocean, drill rig, hull, war,
cargo and other marine liability. The Company and our main competitors collective share of this
market, as determined by Bests Aggregates and Averages, 2008 Edition (which used 2007 data), is
83.3%. The three companies with the largest market shares are: American International Group,
14.0%; Travelers Insurance Companies, 9.6%; ACE INA Group, 8.6%. Our market share is approximately
2.2%.
With regard to the Companys other lines of business, the magnitude of the market is such that our
market share is insignificant. Within the overall property, casualty and professional liability
insurance markets, the Company seeks to take advantage of attractive niche opportunities. Much of
this business is written on a surplus lines basis, which gives the company considerable flexibility
in terms of forms and rates. While the Company is a significant writer of excess workers
compensation business, overall excess workers compensation writings are a small fraction of
overall workers compensation writings.
The Company believes it can successfully compete against other companies in the insurance market
due to its philosophy of underwriting quality insurance, its reputation as a conservative
well-capitalized insurer and its willingness to forego unprofitable business.
Employees
The Company currently employs 159 persons. None of our employees is covered by a collective
bargaining agreement and management considers the relationship with our employees to be good.
Code of Conduct and Corporate Governance Documents
The Company maintains a separate, independent, as defined under the New York Stock Exchange rules,
Audit Committee of five directors who have been appointed by the Board of Directors: Messrs. Glenn
Angiolillo, Ronald J. Artinian, John T. Baily (Chairman and financial expert), David E. Hoffman and
David W. Young.
The Company has adopted a Code of Ethics for Senior Executive and Financial Officers as well as a
code of Business Conduct and Ethics for Directors, Officers and Employees, copies of which are
available free of charge, upon request directed to Corporate Secretary, NYMAGIC, INC., 919 Third
Avenue, New York, NY 10022.
The Companys Corporate Governance Guidelines and the charters of the Audit, Human Resources and
Nominating/Corporate Governance Committees of the Companys Board of Directors and the Companys
Code of Ethics for Senior Executive and Financial Officers as well as its Code of Business Conduct
and Ethics for Directors, Officers and Employees are available on the Companys Internet web site
www.nymagic.com and are available in print to any shareholder upon request to the Corporate
Secretary, NYMAGIC, INC. 919 Third Avenue, 10th Floor, New York, NY 10022.
Available Information
We maintain an Internet site at www.nymagic.com. Our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as the annual
report to stockholders and other information, are available free of charge on this site. The
Internet site and the information contained therein or connected thereto are not incorporated by
reference into this
Form 10-K.
32
Item 1A. Risk Factors.
The Companys business involves various risks and uncertainties, including, but not limited to
those discussed in this section. This information should be considered carefully, together with the
other information contained in this report including the consolidated financial statements and the
related notes. If any of the following events actually occur, the Companys business, results of
operations and financial condition could be adversely affected.
Our inability to assess underwriting risk accurately could reduce our net income.
Our underwriting success is dependent on our ability to assess accurately the risks associated with
the businesses on which the risk is retained. We rely on the extensive experience of our
underwriting staff in assessing these risks and the failure to retain or hire similarly experienced
personnel could adversely affect our ability to accurately make those determinations. If we fail to
assess accurately the risks we retain, we may fail to establish appropriate premium rates and our
reserves may be inadequate to cover our losses, which could reduce our net income. The underwriting
process is further complicated by our exposure to unpredictable developments, including
weather-related and other natural catastrophes, as well as war and acts of terrorism.
Exposure to catastrophe or severity losses in loss reserves.
We are required to maintain reserves to cover our estimated ultimate liability of losses and loss
adjustment expenses for both reported and unreported claims incurred. These reserves are only
estimates of what we think the settlement and administration of claims will cost based on our
assumptions and facts and circumstances known to us. The low frequency and high severity of many of
the risks we insure coupled with the protracted settlement period make it difficult to assess the
overall adequacy of our loss reserves. Because of the uncertainties that surround estimating loss
reserves and loss adjustment expenses, we cannot be certain that ultimate losses will not exceed
these estimates of losses and loss adjustment reserves. The level of catastrophe losses has
fluctuated in the past and may fluctuate in the future. In 2005 the Company incurred significant
catastrophe losses from hurricanes Katrina and Rita. In 2008 the Company incurred significant
catastrophe losses from hurricanes Gustav and Ike. After tax losses resulting from catastrophes in
2008, 2007 and 2006 amounted to $4.3 million, $0 and $0.7 million, respectively. If our reserves
were insufficient to cover our actual losses and loss adjustment expenses, we would have to augment
our reserves and incur a charge to our earnings. These charges could be material.
Decreases in rates or changes in terms for property and casualty insurance could reduce our net
income.
We write property and casualty insurance. The property and casualty industry historically has been
highly cyclical. Rates for property and casualty insurance are influenced primarily by factors that
are outside of our control, including competition and the amount of available capital and surplus
in the industry. For example, the substantial losses in the insurance industry arising from the
events of September 11, 2001 caused rates in the insurance industry to rise. However, new capital
has since flowed into the insurance industry. To the extent that more capital is available, there
may be downward pressure on premium rates as a result of increased supply. These factors affecting
rates for the industry in general impact the rates we are able to charge. Any significant decrease
in the rates for property and casualty insurance could reduce our net income. While rates impact
our net income, there is not necessarily a direct correlation between the level of rate increases
or decreases and net income because other factors, such as the amount of catastrophe losses and the
amount of expenses, also affect net income. Even as rates rise, the percentage average rate
increases can fluctuate greatly and be difficult to predict. 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.
If rating agencies downgrade their ratings of our insurance company subsidiaries, our future
prospects for growth and profitability could be significantly and adversely affected.
New York Marine and Gotham each currently holds an A (Excellent) and Southwest Marine holds an A-
(Excellent) financial strength rating from A.M. Best Company. These are the third and fourth
highest of fifteen rating levels within A.M. Bests classification system. Financial strength
ratings are used by insureds, insurance brokers and reinsurers as an important means of assessing
the financial strength and quality of insurers. Any downgrade or withdrawal of our subsidiaries
ratings might adversely affect our ability to market our insurance products or might increase our
reinsurance costs and would have a significant and adverse effect on our future prospects for
growth and profitability.
Our reinsurers may not satisfy their obligations to us.
We are subject to credit risk with respect to our reinsurers because the transfer of risk to a
reinsurer does not relieve us of our liability to the insured and the credit risk of our reinsurers
may be negatively impacted by the current volatile investment environment. In addition, reinsurers
may be unwilling to pay us even though they are able to do so. The failure of one or more of our
reinsurers to honor their obligations to us or to delay payment would impact our cash flow and
reduce our net income and could cause us to incur a significant loss. We previously entered into
reinsurance contracts with a reinsurer that is now in liquidation and is seeking $2 million from
us. Should the Company be unsuccessful in its defenses, this could reduce net income.
33
If we are unable to purchase reinsurance and transfer risk to reinsurers or if the cost of
reinsurance increases, our net income could be reduced or we could incur a loss.
We attempt to limit our risk of loss by purchasing reinsurance to transfer a significant portion of
the risks we assume. The availability and cost of reinsurance is subject to market conditions,
which are outside of our control. As a result, we may not be able to successfully purchase
reinsurance and transfer risk through reinsurance arrangements. A lack of available reinsurance
might adversely affect the marketing of our programs and/or force us to retain all or a part of the
risk that cannot be reinsured. If we were required to retain these risks and ultimately pay claims
with respect to these risks, our net income could be reduced or we could incur a loss. Our existing
reinsurance program may prove to have insufficient reinstatement protection to protect the Company
from catastrophes or large severity losses and our net income could be reduced or we could incur a
loss.
Our business is concentrated in ocean marine, excess and surplus lines property, casualty and
professional liability, and excess workers compensation lines of insurance, and if market
conditions change adversely or we experience large losses in these lines, it could have a material
adverse effect on our business.
As a result of our strategy to focus on specialty products in niches where we believe that we have
underwriting and claims expertise and to decline business where pricing does not afford what we
consider to be acceptable returns, our business is concentrated in ocean marine, excess and surplus
lines property, casualty and professional liability, and excess workers compensation lines of
insurance. If our results of operations from any of these specialty lines are less favorable for
any reason, including lower demand for our products on terms and conditions that we find
appropriate, flat or decreased rates for our products or increased competition, the reduction could
have a material adverse effect on our business.
If we are not successful in developing our new specialty lines, we could experience losses.
Since January 1, 2001, we have entered into a number of new specialty lines of business including
professional liability, commercial real estate, employment practices liability, commercial
automobile insurance and workers compensation excess liability. We continue to look for
appropriate opportunities to diversify our business portfolio by offering new lines of insurance in
which we believe we have sufficient underwriting and claims expertise. However, because of our
limited history in these new lines, there is limited operating history and financial information
available to help us estimate sufficient reserve amounts for these lines and to help you evaluate
whether we will be able to successfully develop these new lines or appropriately price and reserve
for the likely ultimate losses and expenses associated with these new lines. Due to our limited
history in these lines, we may have less experience managing their development and growth than some
of our competitors. Additionally, there is a risk that the lines of business into which we expand
will not perform at the level we anticipate.
Our industry is highly competitive and we may not be able to compete successfully in the future.
Our industry is highly competitive and has experienced severe price competition over the last
several years. The majority of our main competitors have greater financial, marketing and
management resources than we do, have been operating for longer than we have and have established
long-term and continuing business relationships throughout the industry, which can be a significant
competitive advantage. Much of our business is placed through insurance brokers. If insurance
brokers were to decide to place more insurance business with competitors that have greater capital
than we do, our business could be materially adversely affected. In addition, if we face further
competition in the future, we may not be able to compete successfully.
Competition in the types of insurance in which we are engaged is based on many factors, including
our perceived overall financial strength, pricing and other terms and conditions of products and
services offered, business experience, marketing and distribution arrangements, agency and broker
relationships, levels of customer service (including speed of claims payments), product
differentiation and quality, operating efficiencies and underwriting. Furthermore, insureds tend to
favor large, financially strong insurers, and we face the risk that we will lose market share to
larger and higher rated insurers.
We may have difficulty in continuing to compete successfully on any of these bases in the future.
If competition limits our ability to write new business at adequate rates, our ability to transact
business would be materially and adversely affected and our results of operations would be
adversely affected.
34
We are dependent on our key personnel.
Our success has been, and will continue to be, dependent on our ability to retain the services of
our existing key executive officers and to attract and retain additional qualified personnel in the
future. We consider our key officers to be George Kallop, our President and Chief Executive
Officer, George Sutcliffe, our Senior Vice President-Claims, Paul Hart, our Senior Vice President,
General Counsel and Secretary, Thomas Iacopelli, our Executive Vice President, Chief Financial
Officer and Treasurer, Mark Blackman, our Executive Vice President and Chief Underwriting Officer,
Craig Lowenthal, our Senior Vice President and Chief Information Officer and David Hamel, our
Senior Vice President and Corporate Controller. In addition, our underwriting staff is critical to
our success in the production of business. While we do not consider any of our key executive
officers or underwriters to be irreplaceable, the loss of the services of any of our key executive
officers or underwriters or the inability to hire and retain other highly qualified personnel in
the future could adversely affect our ability to conduct our business, for example, by causing
disruptions and delays as workload is shifted to existing or new employees.
If Mariner terminates its relationship with us, our business could be adversely affected.
Mariner is party to a voting agreement and an investment management agreement, each described in
more detail under Voting Agreement and Mariner Investment Management Arrangement. Four of our
directors and one of our executive officers are affiliated with Mariner. The voting agreement
terminates immediately upon Mariners resignation as an advisor to us. Mariner also has the right
to terminate the investment management agreement upon 30 days prior written notice. If Mariner
were to terminate its relationship with the Company, the disruption to our management could
adversely affect our business.
The value of our investment portfolio and the investment income we receive from that portfolio
could decline as a result of market fluctuations and economic conditions.
Our investment portfolio consists of fixed income securities including mortgage-backed securities,
short-term U.S. government-backed fixed income securities and a diversified portfolio of hedge
funds. Both the fair market value of these assets and the investment income from these assets
fluctuate depending on general economic and market conditions.
For example, the fair market value of our fixed income securities increases or decreases in an
inverse relationship with fluctuations in interest rates. The fair market value of our fixed income
securities can also decrease as a result of any downturn in the business cycle that causes the
credit quality of those securities to deteriorate. Similarly, hedge fund investments are subject to
various economic and market risks. The risks associated with our hedge fund investments may be
substantially greater than the risks associated with fixed income investments. Consequently, our
hedge fund portfolio may be more volatile and the risk of loss greater than that associated with
fixed income investments. Furthermore, because the hedge funds in which we invest sometimes impose
limitations on the timing of withdrawals from the funds, our inability to withdraw our investment
quickly from a particular hedge fund that is performing poorly could result in losses and may
affect our liquidity. All of our hedge fund investments have timing limitations. Most hedge funds
require a 90-day notice period in order to withdraw funds. Some hedge funds may require a
withdrawal only at the end of their fiscal year. We may also be subject to withdrawal fees in the
event the hedge fund is sold within a minimum holding period, which may be up to one year. Many
hedge funds have invoked gated provisions that allow the fund to disperse redemption proceeds to
investors over an extended period. The Company is subject to such restrictions which may delay the
receipt of hedge fund proceeds.
The Company has investments in residential mortgage-backed securities (RMBS) amounting to $61.2
million at December 31, 2008. These securities are classified as held to maturity after the Company
transferred these holdings from the available for sale portfolio effective October 1, 2008. The
adjusted cost basis of these securities is based on a determination
of the Fair Value of these
securities on the date they were transferred.
The Fair Value of each RMBS investment is determined under SFAS 157. Fair Value is
determined by estimating the price at which an asset might be sold on the measurement date. There
has been a considerable amount of turmoil in the U.S. housing market in 2007 and 2008, which has
led to market declines in such securities. Because the pricing of these investments is complex and
has many variables affecting price including, projected delinquency rates, projected severity
rates, estimated loan to value ratios, vintage year, subordination levels, projected prepayment
speeds, expected rates of return required by prospective purchasers, etc., the estimated price of
such securities will differ among brokers depending on these facts and assumptions. While many of
the inputs utilized in pricing are observable, many other inputs are unobservable and will vary
depending upon the broker. During periods of market dislocation, such as the current market
conditions, it is increasingly difficult to value such investments because trading becomes less
frequent and/or market data becomes less observable. As a result, valuations may include inputs and
assumptions that are less observable or require greater estimation and judgment as well as
valuation methods that are more complex. For example, assumptions regarding projected delinquency
and severity rates have become increasingly pessimistic due to market uncertainty connected with
these types of investments and requirements for high expected returns using pessimistic assumptions
as required by the limited number of prospective purchasers of such securities in the present
market. This has resulted in lower estimated quotes of estimated market prices. These inputs are
used in pricing models to assist the broker in estimating a current price for these investments.
Accordingly, the market price or Fair Value may not be reflective of the intrinsic value of a
security or indicative of the ultimate expected receipt of future cash flows. The Fair Value of
such securities at December 31, 2008 was $42.3 million.
35
The Company performs a cash flow analysis for each of these securities, which attempts to estimate
the likelihood of any future impairment. While the Company does not believe there are any
other-than-temporary impairment (OTTI) impairments currently, future estimates may change
depending upon the actual housing statistics reported for each security to the Company. This may
result in future charges based upon revised estimates for delinquency rates, severity or prepayment
patterns. These changes in estimates may be material. These securities are collateralized by pools
of Alt-A mortgages, and receive priority payments from these pools. The Companys securities
rank senior to subordinated tranches of debt collateralized by each respective pool of mortgages.
The Company has collected all applicable interest and principal repayments on such securities to
date. As of February 25, 2009 the levels of subordination ranged from 27% to 51% of the total debt
outstanding for each pool. Delinquencies within the underlying mortgage pools (defined as payments
60+ days past due plus foreclosures plus real estate owned) ranged from 19.2% to 41.5% of total
amounts outstanding. In March 2008, delinquencies ranged from 3.4% to 21.2%. Delinquency rates are
not the same as severity rates, or actual loss, but are an indication of the potential for losses
of some degree in future periods. In each case, current pool subordination levels by individual
security remain in excess of current pool delinquency rates.
The Company has both the ability and the intent to hold such securities until maturity. Prior
to the transfer to the held to maturity classification, the Company incurred cumulative write-downs
from OTTI declines in the Fair Value of these securities after any recapture, amounting to $40.7
million through September 30, 2008. The collection of principal repayments on these securities
through December 31, 2008 resulted in $2.1 million in realized investment gains as a result of the
recapture of previous write-downs of investment balances. The Company sold two of its RMBS
investments in September 2008 resulting in cumulative realized investment losses of $11.0 million.
The net realized loss included previous OTTI declines in Fair Value of $9.7 million through the
dates of sale.
These RMBS investments, as of December 31, 2008 were rated AAA/Aaa by S&P/Moodys. As of March 9,
2009, these securities are rated AAA or AAA- by S&P and Caa1 to A1 by Moodys. On March 9, 2009
S&P announced that 9,430 tranches of mortgage securities had been placed on Credit Watch for
potential downgrades. The tranches of securities owned by the Company were not included in this
list, however, other junior tranches of securities within the RMBS owned by the Company were
included in the list. While the Companys securities were not
included in that S & P Credit Watch
listing, there is the possibility that they may be downgraded in the future.
The statutory guidance for evaluating impairment on mortgage-backed securities has been modified
effective January 1, 2009. Under the prior guidance, impairment was recognized by a review of cash
flows on an undiscounted basis and no impairment has been recognized by the Company as of December
31, 2008. In 2009, the statutory guidance for impairment will be evaluated utilizing a review of
discounted cash flows. While the Company does not anticipate that the evaluation in 2009 will
result in any impairment charges, if there are impairment charges they could be material to
statutory surplus.
Our deferred tax asset may required additional valuation allowance.
The Companys deferred tax assets of $35.5 million at December 31, 2008 is net of a valuation
allowance that includes $17.5 million provided for the uncertainty that the Company can fully
utilize all deferred taxes that arose from capital losses incurred. To the extent that the Company
generates future capital gains to offset these losses, it may recover some or all of this amount.
There is no assurance that the Company will be able to generate capital gains in future periods.
Federal capital loss carryforwards can be carried forward from 2009 to 2013. As a result of such
expiration dates, the Company may not be able to fully utilize all amounts by such dates.
To the extent that unrealized losses increase in future periods, we may be limited in the ability
to provide for any income tax benefit. Accordingly, our valuation allowance may increase to account
for the unrecoverability of capital losses.
Insurance laws and regulations restrict our ability to operate.
We are subject to extensive regulation under U.S. state insurance laws. Specifically, New York
Marine and Gotham are subject to the laws and regulations of the State of New York and to the
regulation and supervision of the New York State Department of Insurance. Southwest Marine is
subject to the laws and regulations of the State of Arizona and to the regulation and supervision
of the Arizona Department of Insurance. In addition, each of New York Marine, Gotham and Southwest
Marine is subject to the regulation and supervision of the insurance department of each state in
which it is admitted to do business. Insurance laws and regulations typically govern most aspects
of an insurance companys operations.
In addition, state legislatures and state insurance regulators continually reexamine existing laws
and regulations and may impose changes that could materially adversely affect our business.
36
Computer system risks.
We rely on our computer equipment, software and technical personnel to accumulate data in order to
quote new and existing business, record loss reserves, pay claims and maintain historical
statistical information. Any disruption of this process would affect many aspects of our business.
Computer risks include hardware failures, software defects, incompatibility of related systems,
improper inputs from technical and operational personnel, and functional obsolescence due to the
rapid advance of technology and the expanding needs of our business to remain competitive. Risks
also include the costs of testing and implementing new systems to take advantage of new technology
and charging off unamortized expenses related to software and equipment that has no further useful
life. For example, during 2007 we incurred $3.4 million in after tax charges from the write-off of
computer equipment and software after determining that such software did not have the necessary
functionality to effectively conduct our business operations and no longer possessed any future
service potential. We are currently scheduled to implement a new computer system in 2009, but in
the event that such system does not operate as intended, we could suffer from the inability to
quote business or pay claims in a timely manner. The Company has capitalized $3.1 million in
computer software expenses in 2008. The Company anticipates
additional capital expenses, in the range of $3-$5 million, to implement a new computer system in 2009. In the event that such systems are not
deemed to be adequate to conduct the Companys business, the Company may incur substantial write
off charges.
Failure to comply with insurance laws and regulations could have a material adverse effect on our
business.
While we endeavor to comply with all applicable insurance laws and regulations, we cannot assure
you that we have or can maintain all required licenses and approvals or that our business fully
complies with the wide variety of applicable laws and regulations or the relevant authoritys
interpretation of the laws and regulations. Each of New York Marine, Gotham and Southwest Marine
must maintain a license in each state in which it intends to issue insurance policies or contracts
on an admitted basis. Regulatory authorities have relatively broad discretion to grant, renew or
revoke licenses and approvals. If we do not have the requisite licenses and approvals or do not
comply with applicable regulatory requirements, the insurance regulatory authorities could preclude
or temporarily suspend us from carrying on some or all of our activities or monetarily penalize us.
These types of actions could have a material adverse effect on our business, including preventing
New York Marine, Gotham or Southwest Marine from writing insurance on an admitted basis in a state
that revokes or suspends its license.
Our holding company structure involves significant risks.
NYMAGIC is a holding company whose most significant assets consist of the stock of its operating
subsidiaries and investments in various financial instruments. Thus, our ability to pay our
debts, pay dividends on our common stock, make additional capital contributions to our insurance
subsidiaries, and meet other holding company obligations may be dependent on the earnings and cash
flows of our subsidiaries, the ability of the subsidiaries to pay dividends or to advance or repay
funds to us, and the amount and liquidity of the investments held in the holding company. This
ability is subject to general economic, financial, competitive, regulatory and other factors beyond
our control. On March 6, 2009, the Company declared a dividend of $.04 to shareholders of record on
March 31, 2009, payable on April 7, 2009. The reduction in dividend amount from prior quarters
reflected the Companys cautious economic outlook. As discussed above, payment of dividends and
advances and repayments from our operating subsidiaries are regulated by the state insurance laws
and regulatory restrictions. Accordingly, our operating subsidiaries may not be able to pay
dividends or advance or repay funds to us in the future, which could impair our ability to pay our
debts, pay dividends on our common stock, make additional capital contributions to our insurance
subsidiaries, and meet other holding company obligations. There were no dividends declared by the
insurance subsidiaries in 2008 and the Company may not receive dividends from its insurance
subsidiaries in 2009.
Because of the concentration of the ownership of, and the thin trading in, our common stock, you
may have difficulties in selling shares of our common stock.
Currently, the ownership of our stock is highly concentrated. Historically, the trading market in
our common stock has been thin. As reported by Bloomberg, L.P., in 2006, 2007 and 2008 our average
monthly trading volumes were 425,167, 1,377,719 and 816,576 shares, respectively. In 2006, we had
two days on which none of our shares traded; there were no such non-trading days in 2007 or 2008.
We cannot assure you that the trading market for our common stock will become more active on a
sustained basis. Therefore, you may have difficulties in selling shares of our common stock.
Trading in our common stock has the potential to be volatile.
The stock market has from time to time experienced extreme price and volume fluctuations that have
been unrelated to the operating performance of particular companies. The market price of our common
stock may be significantly affected by quarterly variations in our results of operations, changes
in financial estimates by securities analysts or failures by us to meet such estimates, litigation
involving us, general trends in the insurance industry, actions by governmental agencies, national
economic and stock market conditions, industry reports and other factors, many of which are beyond
our control.
The thin trading in our stock has the potential to contribute to the volatility of our stock price.
When few shares trade on any given day, any one trade, even if it is a relatively small trade, may
have a strong impact on our market price, causing our share price to rise or fall.
37
Because part of our outstanding stock is subject to a voting agreement, our other shareholders have
limited ability to impact voting decisions.
Several of our shareholders, together with some of their affiliates, have entered into a voting
agreement with Mariner, which will last until December 31, 2010, unless terminated earlier. This
voting agreement authorizes Mariner, with the approval of any two of three participating
shareholders under the voting agreement, to vote all the shares covered by the agreement. Among
other matters, the voting agreement addresses the composition of our board of directors. The shares
covered by the voting agreement currently represent approximately 16.06% of our outstanding shares
of common stock as of March 2, 2009. As a result, to the extent that Mariner votes those shares in
accordance with the voting agreement, Mariner and the participating shareholders could
significantly influence most matters on which our shareholders have the right to vote. This means
that other shareholders might be less able to impact voting decisions than they would have if they
made a comparable investment in a company that did not have a concentrated block of shares subject
to a voting agreement.
The voting agreement and the concentration of our stock ownership in the hands of a few
shareholders could impede a change of control and could make it more difficult to effect a change
in our management.
Because approximately 16.06% of our currently outstanding stock is subject to the voting agreement,
it may be difficult for anyone to effect a change of control that is not approved by the parties to
the voting agreement. Even if the participating shareholders were to terminate the voting
agreement, their collective share ownership would still be substantial, so that they could choose
to vote in a similar fashion on a change of control and have a significant impact on the outcome of
the voting. And, even without taking into account the voting agreement, the participating
shareholders and our directors and executive officers beneficially own approximately 42.22% of our
issued and outstanding common stock as of March 2, 2009. The voting agreement and the concentration
of our stock ownership could impede a change of control of NYMAGIC that is not approved by the
participating shareholders and which may be beneficial to shareholders who are not parties to the
voting agreement. In addition, because the voting agreement, together with the concentration of
ownership, results in the major shareholders determining the composition of our Board of Directors,
it also may be more difficult for other shareholders to attempt to cause current management to be
removed or replaced.
38
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company does not own, directly or indirectly, any real estate. The Company leases office space
for day-to-day operations in the following cities:
New York metro area 70,751 square feet
Chicago 3,500 square feet
San Francisco 2,000 square feet
The Companys principal executive offices are approximately 69,000 square feet in size and are
located at 919 Third Avenue, New York, New York 10022. The Company entered into a sublease for
approximately 28,000 square feet of this space, which commenced on March 1, 2003 and expires on
July 30, 2016. In April 2005, the Company signed an amendment to the sublease, for approximately
10,000 square feet of additional space. The amended sublease expires on July 30, 2016. The minimum
monthly rental payments of $141,276 under the amended sublease include the rent paid by the Company
for the original sublease. Rent payments under the amended sublease commenced in 2005 and end in
2016, with payments amounting to $20.8 million, collectively, over the term of the agreement. In
June 2007, the Company leased an additional 30,615 square feet at the principal executive location
in New York City. The lease provides for minimum monthly rental payments of $197,722 beginning in
2008 and $210,478 beginning in 2013. The lease expires on July 30, 2016. In 2008, the Company
entered into a lease for 2,136 square feet for the office space for its newly formed MMO Agencies,
an underwriting division of the Company. The office is located in Long Island, New York. Rent
payments under the lease end in 2013, with payments amounting to approximately $370,000,
collectively, over the term of the agreement. The lease expires in May 2013.
Item 3. Legal Proceedings
The Company previously entered into reinsurance contracts with a reinsurer that is now in
liquidation. On October 23, 2003, the Company was served with a Notice to Defend and a Complaint by
the Insurance Commissioner of the Commonwealth of Pennsylvania, who is the liquidator of this
reinsurer, alleging that approximately $3 million in reinsurance claims paid to the Company in 2000
and 2001 by the reinsurer are voidable preferences and are therefore subject to recovery by the
liquidator. The liquidator subsequently revised the claim to approximately $2 million. The Company
filed Preliminary Objections to Plaintiffs Complaint, denying that the payments are voidable
preferences and asserting affirmative defenses. These Preliminary Objections were overruled on
May 24, 2005 and the Company filed its Answer in the proceedings on June 15, 2005. On December 7,
2006 the liquidator filed a motion of summary judgment to which the Company responded on
December 19, 2006 by moving for a stay, pending the resolution of a similar case currently pending
before the Supreme Court of the Commonwealth of Pennsylvania. As of March 1, 2009, the Supreme
Court of the Commonwealth of Pennsylvania issued a ruling in the similar case that supports the
Companys position, but there has been no ruling on the Companys position, and no trial date has
been set for this matter. The Company intends to defend itself vigorously in connection with this
lawsuit, and the Company believes it has strong defenses against these claims; however, there can
be no assurance as to the outcome of this litigation.
In the second quarter of 2008, the Company settled disputed reinsurance receivable balances with
Equitas, a Lloyds of London company established to settle claims for underwriting years 1992 and
prior, which resulted in a charge to results of operations on a pre-tax basis of $9.4 million.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matters to a vote of security holders during the fourth quarter of
2008.
39
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
The Companys common stock trades on the New York Stock Exchange (NYSE Symbol: NYM). The following
table sets forth high and low sales prices of the common stock for the periods indicated as
reported on the New York Stock Exchange composite transaction tape.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
First Quarter
|
|
$
|
28.50
|
|
|
$
|
20.00
|
|
|
$
|
42.22
|
|
|
$
|
35.60
|
|
Second Quarter
|
|
|
24.49
|
|
|
|
19.15
|
|
|
|
44.95
|
|
|
|
39.15
|
|
Third Quarter
|
|
|
29.35
|
|
|
|
15.45
|
|
|
|
42.02
|
|
|
|
25.56
|
|
Fourth Quarter
|
|
|
26.95
|
|
|
|
11.04
|
|
|
|
31.59
|
|
|
|
19.66
|
|
As of March 2, 2009, there were 53 shareholders of record. However, management believes there were
approximately 1,500 beneficial owners of NYMAGICs common stock as of February 28, 2009.
Dividend Policy
The Company declared a dividend of six cents per share to shareholders of record in March 2006, and
a dividend of eight cents per share to shareholders of record in June, September and December of
2006, March, June, September and December of 2007 and March, June, September and December of 2008.
On March 6, 2009, the Company declared a dividend of $.04 to shareholders of record on March 31,
2009, payable on April 7, 2009. The reduction in dividend amount from prior quarters reflected the
Companys cautious economic outlook. For a description of restrictions on the ability of the
Companys insurance subsidiaries to transfer funds to the Company in the form of dividends, see
Business Regulation and Managements Discussion and Analysis of Financial Condition and
Results of Operations Liquidity and Capital Resources.
Stock Repurchase
The Company makes open market repurchases of its common stock, from time to time, when those
purchases are deemed to be advantageous to the Companys financial position. 368,900 shares were
purchased during the year ended December 31, 2008, and as of December 31, 2008, the Company held
7,333,977 common shares in its treasury. Under the Companys Common Stock Repurchase Plan, the
Company may repurchase up to $75 million of the Companys issued and outstanding shares of common
stock on the open market. As of December 31, 2008, the Company has repurchased a total of 3,457,298
shares of common stock under the plan at a total cost of 62,855,338 at market prices ranging from
$12.38 to $28.81 per share.
40
The following table sets forth purchases made under the Companys Common Stock Repurchase Plan
during the year and three-month periods ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Dollar Value of
|
|
|
|
|
|
|
|
Average
|
|
|
Purchased as
|
|
|
Shares that may
|
|
|
|
Total Number
|
|
|
Price
|
|
|
Part of Publicly
|
|
|
yet be Purchased
|
|
|
|
of Shares
|
|
|
Paid Per
|
|
|
Announced
|
|
|
Under the
|
|
Period:
|
|
Purchased
|
|
|
Share
|
|
|
Program
|
|
|
Program (1) (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1 January 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
February 1 February 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 1 March 31, 2008
|
|
|
20,300
|
|
|
|
22.97
|
|
|
|
20,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total first quarter
|
|
|
20,300
|
|
|
$
|
22.97
|
|
|
|
20,300
|
|
|
$
|
19,331,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1 April 30, 2008
|
|
|
29,900
|
|
|
$
|
22.73
|
|
|
|
29,900
|
|
|
|
|
|
May 1 May 31, 2008
|
|
|
40,900
|
|
|
|
22.19
|
|
|
|
40,900
|
|
|
|
|
|
June 1 June 30, 2008
|
|
|
137,100
|
|
|
|
21.04
|
|
|
|
137,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total second quarter
|
|
|
207,900
|
|
|
$
|
21.51
|
|
|
|
207,900
|
|
|
$
|
14,859,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1 July 31, 2008
|
|
|
108,700
|
|
|
$
|
18.99
|
|
|
|
108,700
|
|
|
|
|
|
August 1 August 31, 2008
|
|
|
23,400
|
|
|
|
19.71
|
|
|
|
23,400
|
|
|
|
|
|
September 1 September 30, 2008
|
|
|
8,600
|
|
|
|
22.03
|
|
|
|
8,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total third quarter
|
|
|
140,700
|
|
|
$
|
19.30
|
|
|
|
140,700
|
|
|
$
|
12,144,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1 October 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
November 1 November 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1 December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fourth quarter
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
12,144,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
|
368,900
|
|
|
$
|
20.75
|
|
|
|
368,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Balance as of end of quarter indicated.
|
|
(2)
|
|
Balance as of end of quarter indicated Amounts are shown gross of treasury stock reissued.
|
41
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data, which was derived from our
historical consolidated financial statements included in our annual reports on Form 10-K for the
years then ended. You should read the following together with Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations and the consolidated financial
statements and the notes thereto included in Item 8. Financial Statements and Supplementary Data.
OPERATING DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
167,073
|
|
|
$
|
166,096
|
|
|
$
|
151,834
|
|
|
$
|
134,557
|
|
|
$
|
116,333
|
|
Net investment (loss) income
|
|
|
(63,503
|
)
|
|
|
35,489
|
|
|
|
47,897
|
|
|
|
36,060
|
|
|
|
23,679
|
|
Commission income
|
|
|
154
|
|
|
|
414
|
|
|
|
542
|
|
|
|
1,198
|
|
|
|
461
|
|
Net realized investment (losses) gains
|
|
|
(47,665
|
)
|
|
|
(6,903
|
)
|
|
|
(403
|
)
|
|
|
(805
|
)
|
|
|
678
|
|
Other income (loss), net
|
|
|
122
|
|
|
|
(4,659
|
)
|
|
|
597
|
|
|
|
334
|
|
|
|
1,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
56,181
|
|
|
$
|
190,437
|
|
|
$
|
200,467
|
|
|
$
|
171,344
|
|
|
$
|
142,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment
expenses incurred
|
|
$
|
109,958
|
|
|
$
|
89,844
|
|
|
$
|
86,136
|
|
|
$
|
92,290
|
|
|
$
|
66,558
|
|
Policy acquisition expenses
|
|
|
38,670
|
|
|
|
37,695
|
|
|
|
31,336
|
|
|
|
30,491
|
|
|
|
25,166
|
|
General and administrative expenses
|
|
|
38,612
|
|
|
|
36,018
|
|
|
|
31,402
|
|
|
|
27,183
|
|
|
|
23,247
|
|
Interest expense
|
|
|
6,716
|
|
|
|
6,726
|
|
|
|
6,712
|
|
|
|
6,679
|
|
|
|
5,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
193,956
|
|
|
$
|
170,283
|
|
|
$
|
155,586
|
|
|
$
|
156,643
|
|
|
$
|
120,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
$
|
(137,775
|
)
|
|
$
|
20,154
|
|
|
$
|
44,881
|
|
|
$
|
14,701
|
|
|
$
|
22,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (benefit) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(14,026
|
)
|
|
|
10,509
|
|
|
|
16,777
|
|
|
|
6,152
|
|
|
|
3,835
|
|
Deferred
|
|
|
(19,414
|
)
|
|
|
(3,727
|
)
|
|
|
(1,746
|
)
|
|
|
(1,152
|
)
|
|
|
4,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,440
|
)
|
|
|
6,782
|
|
|
|
15,031
|
|
|
|
5,000
|
|
|
|
7,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(104,335
|
)
|
|
$
|
13,372
|
|
|
$
|
29,850
|
|
|
$
|
9,701
|
|
|
$
|
14,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC (LOSS) EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
8,534
|
|
|
|
8,896
|
|
|
|
8,807
|
|
|
|
8,734
|
|
|
|
9,736
|
|
Basic (loss) earnings per share
|
|
$
|
(12.23
|
)
|
|
$
|
1.50
|
|
|
$
|
3.39
|
|
|
$
|
1.11
|
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED (LOSS) EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
8,534
|
|
|
|
9,190
|
|
|
|
9,177
|
|
|
|
8,918
|
|
|
|
9,916
|
|
Diluted (loss) earnings per share
|
|
$
|
(12.23
|
)
|
|
$
|
1.46
|
|
|
$
|
3.25
|
|
|
$
|
1.09
|
|
|
$
|
1.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
.32
|
|
|
$
|
.32
|
|
|
$
|
.30
|
|
|
$
|
.24
|
|
|
$
|
.24
|
|
42
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
Total cash and investments
|
|
$
|
546,986
|
|
|
$
|
701,127
|
|
|
$
|
664,872
|
|
|
$
|
622,404
|
|
|
$
|
630,872
|
|
Total assets
|
|
|
946,476
|
|
|
|
1,107,977
|
|
|
|
1,119,296
|
|
|
|
1,090,419
|
|
|
|
997,094
|
|
Unpaid losses and loss
adjustment expenses
|
|
|
548,750
|
|
|
|
556,535
|
|
|
|
579,179
|
|
|
|
588,865
|
|
|
|
503,261
|
|
Notes payable
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
100,000
|
|
Total shareholders equity
|
|
|
164,073
|
|
|
|
279,446
|
|
|
|
270,700
|
|
|
|
239,284
|
|
|
|
258,118
|
|
Book value per share
|
|
$
|
19.11
|
|
|
$
|
31.56
|
|
|
$
|
29.14
|
|
|
$
|
26.44
|
|
|
$
|
25.91
|
|
For a description of factors that materially affect the comparability of the information reflected
in the Selected Financial Data, see Managements Discussion and Analysis of Financial Condition
and Results of Operations.
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview and Highlights-2008 year
|
|
|
Net loss of $(104.3) million or $(12.23) per diluted share
|
|
|
|
|
Total shareholders equity of $164.1 million, or $19.11 per diluted share
|
|
|
|
|
Net premiums written down 1% from 2007
|
|
|
|
|
Adverse net loss reserve development reported on prior year loss reserves of $2.7 million
|
|
|
|
|
Loss ratio of 65.8%
|
|
|
|
|
Net investment loss of $(63.5) million
|
|
|
|
|
Realized investment losses of $(47.7) million
|
|
|
|
|
Total cash and invested assets of $547.0 million at year end 2008
|
|
|
|
|
A.M. Best Rating of A (excellent) for New York Marine and Gotham
|
Results of Operations
The Companys 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 Companys participation in the pools has been increased to 100%. The
Company formerly wrote aircraft business, but has ceased writing any new policies covering aircraft
insurance for periods subsequent to March 31, 2002.
The Company records premiums written in the year policies are issued and earns such premiums on a
monthly pro-rata basis over the terms of the respective policies. The following tables present the
Companys gross premiums written, net premiums written and net premiums earned for each of the past
three years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYMAGIC Gross Premiums Written
|
|
Year ended December 31,
|
|
By Segment
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Ocean Marine
|
|
$
|
82,751
|
|
|
|
38
|
%
|
|
$
|
98,689
|
|
|
|
43
|
%
|
|
$
|
104,876
|
|
|
|
43
|
%
|
Inland Marine/Fire
|
|
|
16,128
|
|
|
|
7
|
%
|
|
|
18,625
|
|
|
|
8
|
%
|
|
|
21,595
|
|
|
|
9
|
%
|
Other Liability
|
|
|
118,378
|
|
|
|
55
|
%
|
|
|
110,986
|
|
|
|
49
|
%
|
|
|
114,754
|
|
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
217,257
|
|
|
|
100
|
%
|
|
|
228,300
|
|
|
|
100
|
%
|
|
|
241,225
|
|
|
|
100
|
%
|
Run off lines (Aircraft)
|
|
|
(3
|
)
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
217,254
|
|
|
|
100
|
%
|
|
$
|
228,388
|
|
|
|
100
|
%
|
|
$
|
241,309
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYMAGIC Net Premiums Written
|
|
Year ended December 31,
|
|
By Segment
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Ocean Marine
|
|
$
|
59,200
|
|
|
|
36
|
%
|
|
$
|
68,192
|
|
|
|
41
|
%
|
|
$
|
75,243
|
|
|
|
49
|
%
|
Inland Marine/Fire
|
|
|
4,538
|
|
|
|
3
|
%
|
|
|
6,935
|
|
|
|
4
|
%
|
|
|
7,097
|
|
|
|
4
|
%
|
Other Liability
|
|
|
101,424
|
|
|
|
61
|
%
|
|
|
92,618
|
|
|
|
55
|
%
|
|
|
72,231
|
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
165,162
|
|
|
|
100
|
%
|
|
|
167,745
|
|
|
|
100
|
%
|
|
|
154,571
|
|
|
|
100
|
%
|
Run off lines (Aircraft)
|
|
|
222
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
165,384
|
|
|
|
100
|
%
|
|
$
|
167,853
|
|
|
|
100
|
%
|
|
$
|
154,860
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYMAGIC Net Premiums Earned
|
|
Year ended December 31,
|
|
By Segment
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Ocean Marine
|
|
$
|
64,713
|
|
|
|
39
|
%
|
|
$
|
71,637
|
|
|
|
43
|
%
|
|
$
|
78,350
|
|
|
|
52
|
%
|
Inland Marine/Fire
|
|
|
5,710
|
|
|
|
3
|
%
|
|
|
6,978
|
|
|
|
4
|
%
|
|
|
7,793
|
|
|
|
5
|
%
|
Other Liability
|
|
|
96,428
|
|
|
|
58
|
%
|
|
|
87,373
|
|
|
|
53
|
%
|
|
|
65,402
|
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
166,851
|
|
|
|
100
|
%
|
|
|
165,988
|
|
|
|
100
|
%
|
|
|
151,545
|
|
|
|
100
|
%
|
Run off lines (Aircraft)
|
|
|
222
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
167,073
|
|
|
|
100
|
%
|
|
$
|
166,096
|
|
|
|
100
|
%
|
|
$
|
151,834
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unlike many types of commercial insurance, ocean marine and inland marine premium rates and
coverage terms are not strictly regulated by governmental authorities. In addition, much of the
Companys property, casualty and professional liability writings are written on a surplus lines
basis or in the New York Free Trade Zone. With respect to these lines, the Company is able to
adjust premium rates and coverage terms 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 its anticipation
of positive underwriting results. However, the insurance industry is highly competitive and the
companies against which the Company competes may seek to limit any market premium rate.
The property and casualty industry historically has been highly cyclical. Rates for property and
casualty insurance are influenced primarily by factors that are outside of our control, including
competition and the amount of available capital and surplus in the industry. For example, the
substantial losses in the insurance industry arising from the events of September 11, 2001 caused
rates in the insurance industry to rise. However, new capital has since flowed into the insurance
industry. To the extent that more capital is available, there may be downward pressure on premium
rates as a result of increased supply. These factors affecting rates for the industry in general
impact the rates we are able to charge. Any significant decrease in the rates for property and
casualty insurance could reduce our net income. While rates impact our net income, there is not
necessarily a direct correlation between the level of rate increases or decreases and net income
because other factors, such as the amount of catastrophe losses and the amount of expenses, also
affect net income.
Prevailing policy terms and conditions in the property and casualty insurance market are also
highly cyclical. Changes in coverage terms 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.
The Companys general and administrative expenses consist primarily of compensation expense,
employee benefits, professional fees and rental expense for office facilities. The Companys policy
acquisition costs include brokerage commissions and premium taxes both of which are primarily based
on a percentage of premiums written. Acquisition 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.
The Company estimates reserves each year based upon, and in conformity with, the factors discussed
under Business-Reserves. Changes in estimates of reserves are reflected in operating results in
the year in which the change occurs.
44
Year Ended December 31, 2008 as Compared to Year Ended December 31, 2007
The Company reported a net loss for the year ended December 31, 2008 of $(104.3) million, or
$(12.23) per diluted share, as compared to net income of $13.4 million or $1.46 per diluted share,
for the year ended December 31, 2007. The decrease in results of operations for the year ended
December 31, 2008 when compared to the same period in 2007 was primarily attributable to pre-tax
losses from other-than-temporary write-downs of $46.0 million resulting substantially from super
senior residential mortgage-backed securities, losses of $42.3 million from the trading portfolio,
losses of $26.3 million from the limited partnership portfolio, hurricane losses from hurricanes
Gustav and Ike of $6.6 million, deferred tax valuation allowance increase of $17.6 million for
capital loss carryforwards and $12.4 million in reevaluations of the provision for reinsurance
receivable balances.
Total revenues for the year ended December 31, 2008 were $56.2 million, down 70%, compared with
$190.4 million for the year ended December 31, 2007 primarily reflecting decreases in net
investment income and increases in realized investment losses.
Net realized investment losses for the year ended December 31, 2008 were $47.7 million compared
with $6.9 million for 2007. The realized investment losses in 2008 primarily relate to write-downs
in the Companys investments in residential mortgage-backed securities that consist of Alt A
mortgages.
Shareholders equity decreased to $164.1 million as of December 31, 2008 from $279.4 million as of
December 31, 2007. The decrease was primarily attributable to the net loss for the period.
Gross premiums written of $217.3 million and net premiums written of $165.4 million decreased by 5%
and 1% for the year ended December 31, 2008, respectively, compared to the same period of 2007.
However, net premiums earned increased by 1% for the year ended December 31, 2008 over the same
period of 2007.
Premiums for each segment are discussed below:
An analysis of gross premiums written for the ocean marine segment is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
Marine liability
|
|
$
|
41,421
|
|
|
$
|
41,826
|
|
|
|
(1
|
%)
|
Energy
|
|
|
11,396
|
|
|
|
12,959
|
|
|
|
(12
|
%)
|
Hull
|
|
|
7,224
|
|
|
|
9,154
|
|
|
|
(21
|
%)
|
Cargo
|
|
|
15,387
|
|
|
|
25,686
|
|
|
|
(40
|
%)
|
War
|
|
|
5,130
|
|
|
|
6,515
|
|
|
|
(21
|
%)
|
Other marine
|
|
|
2,193
|
|
|
|
2,549
|
|
|
|
(13
|
%)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
82,751
|
|
|
$
|
98,689
|
|
|
|
(16
|
%)
|
|
|
|
|
|
|
|
|
|
|
Ocean marine gross premiums written in 2008 decreased by 16%, primarily reflecting decreases in
volume in the cargo and hull classes. The decrease in cargo production resulted primarily from the
termination of a relationship with Southern Marine and Aviation, one of the Companys agents
writing cargo business. The decrease in hull premiums reflected the non-renewal of certain
unprofitable accounts resulting from a continued effort to improve profitability in this class.
Rates in the various classes of marine business declined slightly when compared to the prior years
comparable period.
Ocean marine net premiums written and net premiums earned for the year ended December 31, 2008 each
decreased by 13% and 10%, respectively, when compared to 2007. Larger net premium retention levels
in 2008 resulted from lower excess of loss reinsurance costs and lower reinsurance reinstatement
costs. Losses from hurricane Ike resulted in incurring reinsurance reinstatement costs of $1.6
million in 2008 as compared with $2.3 million of reinsurance reinstatement costs arising from a
cargo loss in 2007. Net earned premiums in 2008 largely reflected the decline in gross premiums
written, which was partially offset by lower reinsurance costs in 2008 when compared to 2007.
Effective January 1, 2009, the Company maintained its $5 million per risk net loss retention in the
ocean marine line that was in existence during 2008. In addition, the Companys net retention could
be as low as $1 million for certain classes within ocean marine. The 80% quota share reinsurance
protection for energy business, which commenced in 2006, also remains in effect for 2009 and the
net retention from energy business is subject to inclusion within the ocean marine reinsurance
program.
45
An analysis of gross premiums written for the inland marine/fire segment is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
Fire and inland marine
|
|
$
|
14,706
|
|
|
$
|
16,581
|
|
|
|
(11
|
%)
|
Surety
|
|
|
1,422
|
|
|
|
2,044
|
|
|
|
(30
|
%)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,128
|
|
|
$
|
18,625
|
|
|
|
(13
|
%)
|
|
|
|
|
|
|
|
|
|
|
Inland marine/fire gross premiums written, net premiums written and net premiums earned for the
year ended December 31, 2008 decreased by 13%, 35% and 18%, respectively, when compared to 2007.
Gross premiums written in 2008 reflect declines in production in certain property risks and surety
business and also reflect mildly lower market rates when compared to the prior year. Net premiums
written reflected additional reinsurance costs as a result of a change in mix of gross property
writings as well as lower surety writings, which are written on a net basis without reinsurance
costs. Net premiums earned reflected the decreases in property earned premiums, which were
partially offset by the earnings in 2008 of larger surety business production in 2007.
An analysis of gross premiums written for the other liability segment is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
Automobile liability
|
|
$
|
7,312
|
|
|
$
|
8,349
|
|
|
|
(12
|
%)
|
Professional liability
|
|
|
50,443
|
|
|
|
49,491
|
|
|
|
2
|
%
|
General casualty
|
|
|
24,585
|
|
|
|
20,652
|
|
|
|
19
|
%
|
Excess Workers Compensation
|
|
|
36,038
|
|
|
|
32,494
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
118,378
|
|
|
$
|
110,986
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
Other liability gross premiums written increased by 7% for the year ended December 31, 2008 when
compared to 2007. Net premiums written and net premiums earned for the year ended December 31, 2008
each rose by 10%, respectively, when compared to 2007. The increase in premiums is primarily due to
an increase in production of excess workers compensation, professional liability and contractors
liability writings.
Professional liability writings increased 2% in 2008 when compared to 2007 primarily due to
production increases that were partially offset by a softening of premium rates.
General liability premiums from the recently formed MMO Agencies contributed approximately $2.7
million in gross premiums written during 2008. Volume increases from the contractors liability
class were also achieved in the first nine months of 2008 when compared to the same period in 2007
and contributed to the overall growth in general casualty premiums in 2008.
The Company writes excess workers compensation insurance on behalf of certain self-insured
workers compensation trusts. Gross and net premiums written in the excess workers compensation
class increased to $36.0 million and $31.9 million, respectively, in 2008 from $32.5 million and
$26.4 million, respectively, in the same period of 2007. The increase in gross premiums in 2008
largely reflected production increases. Increases in net premiums written and net premiums earned
in 2008 reflected the increased gross premium production. Net premiums written in 2007 reflected
larger reinsurance cessions primarily as a result of quota share reinsurance, which was not renewed
at the end of 2006.
Aircraft premiums were nominal in 2008 and 2007 as a result of the Company having ceased writing
new aircraft policies subsequent to March 31, 2002.
46
Net losses and loss adjustment expenses incurred as a percentage of net premiums earned (the loss
ratio) were 65.8% for the year ended December 31, 2008 as compared to 54.1% for 2007. The larger
loss ratios in 2008 were primarily attributable to losses incurred from hurricanes Gustav and Ike
amounting to $6.6 million (including $1.6 million of reinstatement costs), which added 4.0% to the
2008 loss ratio and the resolution of a dispute in 2008 over reinsurance receivables with a
reinsurer including a reevaluation of the provision for doubtful reinsurance receivables that
resulted in additional losses of $12.4 million, and added 7.4% to the 2008 loss ratio. The decision
to resolve the dispute regarding non-core reinsurance receivables and adjust our allowance for
other potentially uncollectible non-core reinsurance receivables was related to reinsurance
cessions made under a number of reinsurance contracts written from 1978 to 1986. The Companys loss
ratio in 2007 benefited from the novation of substantially all of the excess workers compensation
policies written in conjunction with a prior producer. The novation reduced the overall loss ratio
by 3.7% in 2007. Also contributing to a higher loss ratio in the other liability segment in 2008
was a change in premium mix in the other liability class. Excess workers compensation premiums
have a higher loss ratio than other classes of other liability business and resulted in an overall
increase in the other liability loss ratio. The inland marine/fire loss ratio decreased in 2008,
reflecting lower severity losses and lower frequency of losses in the fire and the surety classes.
The Company increased net loss reserves by approximately $2.7 million in 2008 from the 2007
year-end net unpaid loss reserve amount of $306.4 million as a result of adverse loss reserve
development. This is compared to $13.8 million of favorable loss reserve development recorded in
2007.
The adverse loss reserve development of $2.7 million in 2008 resulted primarily from the resolution
of the dispute over reinsurance receivables with a reinsurer and the reevaluation of the reserve
for doubtful reinsurance receivables that contributed $12.4 million of adverse development in 2008
for both the other liability and ocean marine lines of business for accident years prior to 1999.
Further contributing to adverse loss development was
$3.2 million from asbestos and environmental losses in the other
liability line for accident years prior to 1999. Partially offsetting this adverse development in the other liability line was favorable development
in the contractors class as a result of lower than anticipated
incurred loss development of approximately $3.6 million in the
2004-2006 accident years. The ocean marine line also reported
favorable development of approximately $14.0 million in
the 2004-2006 accident years largely as a result of lower reported and paid loss trends. The inland
marine/fire segment also reported favorable loss development partially due to larger than expected
reinsurance recoveries in accident years 2005-2006. Contributing to the overall adverse development
in 2008 was approximately $3.5 million in adverse development from the runoff aviation class
relating to accident years prior to 2002.
The Company reported favorable development of prior year loss reserves of $13.8 million in 2007.
This favorable loss reserve development included $6.2 million recorded on the novation of excess
workers compensation policies in the other liability line for accident years 2004-2006. Partially
offsetting this benefit in the other liability line was adverse development of $3.0 million in the
professional liability class as a result of two large claims in the 2006 accident year. The ocean
marine line reported favorable development in the 2003-2005 accident years largely as a result of
favorable loss trends. The inland marine/fire segment also reported favorable loss development
partially due to lower emergence of severity losses. The favorable development in 2007 was
partially offset by approximately $3.3 million in adverse development from the runoff aviation
class.
Policy acquisition costs as a percentage of net premiums earned (the acquisition cost ratio) for
the years ended December 31, 2008 and 2007 were 23.1% and 22.7%, respectively. The slightly higher
2008 ratio is due in part to a change in premium mix in the other liability segment whose
underlying classes of business have higher acquisition cost ratios than other lines of business. In
addition, slight increases occurred in the other liability acquisition cost ratios in 2008 when
compared to 2007 as the prior years ratio was lower as a result of override commissions received
from the quota share reinsurance agreement in the excess workers compensation class. Partially
offsetting the overall increase was a decrease in the ocean marine acquisition cost ratio primarily
resulting from lower brokerage costs as a result of the termination of a relationship with one of
the Companys agents writing cargo business in 2007.
General and administrative expenses increased by 7% for the year ended December 31, 2008 when
compared to 2007. Larger expenses were incurred in 2008 to service the growth in the Companys
business operations, including increased staffing, consulting costs and additional office space.
Net investment loss for the year ended December 31, 2008 was $(63.5) million as compared to net
investment income of $35.5 million in 2007. The decrease in 2008 primarily reflected trading
portfolio losses and lower income from limited partnerships. Trading portfolio losses of
$(42.3) million were recorded in 2008 and resulted primarily from the fair value changes in the
underlying securities. This included municipal obligations of $(3.0) million, preferred stocks of
$(31.5) million, economic hedged positions of $(1.1) million and exchange traded funds of $(6.7)
million. Limited partnership income in 2008, excluding income from Altrion, decreased from the
prior years comparable period as a result of lower returns amounting to (24.6)% as compared to
3.4% for the same period in 2007. Most of our hedge fund strategies reported lower returns in 2008
than the prior years comparable period. Income from Altrion was $1.2 million and $7.9 million for
the year ended December 31, 2008 and 2007, respectively. Income from Altrion was greater in 2007 as
a result of interest income received from the warehousing of CDO and CLO debt securities. There
were no such activities in 2008. The reduction in investment income from fixed maturities available
for sale and short-term investments resulted from maintaining lower average balances during 2008 in
such investments.
47
Investment (loss) income, net of investment fees, from each major category of investments is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In millions)
|
|
Fixed maturities held to maturity
|
|
$
|
0.8
|
|
|
$
|
|
|
Fixed maturities available for sale
|
|
|
7.4
|
|
|
|
13.9
|
|
Trading securities
|
|
|
(42.3
|
)
|
|
|
2.3
|
|
Commercial loans
|
|
|
(1.5
|
)
|
|
|
|
|
Equity in (loss) earnings of limited partnerships
|
|
|
(26.8
|
)
|
|
|
13.0
|
|
Short-term investments
|
|
|
3.0
|
|
|
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment (loss) income
|
|
|
(59.4
|
)
|
|
|
37.9
|
|
Investment expenses
|
|
|
(4.1
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
$
|
(63.5
|
)
|
|
$
|
35.5
|
|
|
|
|
|
|
|
|
As of December 31, 2008 and 2007 investments in limited partnerships amounted to approximately
$122.9 million and $188.3 million, respectively. The equity method of accounting is used to account
for the Companys limited partnership hedge fund investments. Under the equity method, the Company
records all changes in the underlying value of the limited partnership hedge funds to results of
operations. Net investment (loss) income for 2008 and 2007 reflected approximately $(26.8) million
and $13.0 million, respectively, derived from limited partnership hedge fund investments.
As of December 31, 2008 and 2007 investments included in the trading and commercial loan portfolios
amounted to approximately $31.9 million and $144.9 million, respectively. Net investment (loss)
income for 2008 and 2007 reflected approximately $(43.8) million and $2.3 million, respectively,
derived from trading and commercial loan portfolio activities. These activities include the trading
of collateralized debt obligations (CDOs), collateralized loan obligations (CLOs), commercial
middle market debt, municipal bonds, preferred stocks and exchange traded funds. The Companys
trading portfolio is marked to market with the change recognized in net investment income during
the current period. Any realized gains or losses resulting from the sales of trading securities are
also recognized in net investment income. The ending balance in the trading portfolio can vary
substantially from period to period due to the level of trading activity. There were no CDO or CLO
securities held in the trading portfolio by the Company at December 31, 2008.
The Companys investment income results may be volatile depending upon the level of limited
partnerships, commercial loans and trading portfolio investments held. If the Company invests a
greater percentage of its investment portfolio in limited partnership hedge funds, and/or if the
fair value of trading and/or commercial loan investments held varies significantly during different
periods, there may also be a greater volatility associated with the Companys investment income.
The Company will account for future purchases of fixed income and equity securities as part of its
held to maturity or available for sale portfolio, and not its trading portfolio. This decision to
include such securities in the held to maturity or available for sale portfolio was based upon our
intent to hold and not trade such securities.
Commission and other income (loss) increased to $0.3 million for the year ended December 31, 2008
from $(4.2) million for the same period in the prior year. The Companys write-off of $5.3 million
relating to its computer systems in 2007 accounted for most of the change. Commission income in
2007 reflected a greater profit commission than in 2008 derived from ceded reinsurance in the ocean
marine class of business.
48
Net realized investment losses were $(47.7) million for the year ended December 31, 2008 as
compared to $(6.9) million for the year ended December 31, 2007. These amounts result from the sale
of fixed income investments as well as write-downs from other-than-temporary declines in the fair
value of securities, which amounted to $46.2 million and $6.7 million for the years ended
December 31, 2008 and 2007, respectively. The write-downs in 2008 and 2007 primarily relate to the
Companys investments in super senior residential mortgage-backed securities. The Company has
collected all applicable interest and principal repayments on such securities to date. The Company
collected $8.5 million in principal repayments on these securities in 2008, which resulted in $1.2
million in realized investment gains as a result of the recapture of previous write-downs of
investment balances. The decision to write down such securities in 2008 was based upon the
likelihood that the securities may not be held until the fair value decline is recovered.
Contributing to managements decision was the uncertainty of the duration of declines in the
residential mortgage-backed market. However, on October 1, 2008, management reconsidered the
classification of these securities as a result of our desire to hold such securities for their
duration. Accordingly, the Company transferred these holdings to the held to maturity
classification using the fair value of these securities on such date as its adjusted cost basis.
The Company has both the intent and the ability to hold such securities until maturity.
Interest expense was $6.7 million for each of the years ended December 31, 2008 and 2007,
respectively, and resulted primarily from the Companys $100 million 6.5% senior notes.
Total income tax (benefit) expense amounted to $(33.4) million and $6.8 million, respectively, for
the year ended December 31, 2008 and 2007. The Companys effective tax rate was 24.3% and 33.7% for
the year ended December 31, 2008 and 2007. The change in the effective tax rate is largely
attributable to the deferred tax valuation allowance increase of $18.5 million resulting in large
part from capital loss carryforwards.
Deferred income taxes at December 31, 2008 increased to $35.5 million from $14.4 million at
December 31, 2007, primarily due to deferred tax benefits provided on declines in the fair value of
investments. Management believes the Companys total deferred tax assets, net of the recorded
valuation allowance account, as of December 31, 2008 will more-likely-than-not be fully realized.
Reserves for unearned premiums decreased to $83.4 million as of December 31, 2008 from
$87.6 million as of December 31, 2007 primarily as a result of the decline in gross premiums
written.
Unpaid losses and loss adjustment expenses decreased to $548.7 million at December 31, 2008 from
$556.5 million at December 31, 2007. The decrease was largely the result of the payments of gross
ocean marine losses and asbestos and environmental losses that were substantially reinsured.
Reinsurance receivables on unpaid balances, net at December 31, 2008, decreased to $213.9 million
from $250.1 million at December 31, 2007, and reinsurance receivables on paid balances, net at
December 31, 2008, decreased to $28.4 million from $38.8 million at December 31, 2007 largely as a
result of the payment of gross ocean marine losses and asbestos and environmental losses that were
substantially reinsured, the collection of ceded hurricane loss payments, the write off of disputed
receivable balances with a reinsurer, and the subsequent reevaluation of reserves for doubtful
accounts.
Ceded reinsurance payable decreased to $23.8 million at December 31, 2008 from $27.1 million at
December 31, 2007 mainly as a result of the payment of reinsurance reinstatement premiums on
hurricane losses.
Other assets increased to $23.9 million at December 31, 2008 from $10.2 million at December 31,
2007, primarily as a result of federal income taxes recoverable.
Property, improvements and equipments, net increased to $10.0 million at December 31, 2008 from
$4.8 million at December 31, 2007, primarily due to as a result of capitalized expenditures
relating to information technology infrastructure initiatives and capital improvements on leased
office space.
49
Year Ended December 31, 2007 as Compared to Year Ended December 31, 2006
Net income for the year ended December 31, 2007 was $13.4 million or $1.46 per diluted share, as
compared to $29.9 million or $3.25 per diluted share, for the year ended December 31, 2006. Net
income for 2007 was adversely affected by lower investment income, increases in realized investment
losses and after-tax losses of $(3.4) million or $(.39) per share, resulting from the write-off of
inefficient computer software and after tax losses of $(1.1) million or $(.13) per share resulting
from expenses relating to an investment in an asset management company that was not consummated.
Total revenues for the year ended December 31, 2007 were $190.4 million, down 5%, compared with
$200.5 million for the year ended December 31, 2006 primarily reflecting decreases in net
investment income, increases in realized investment losses and the write-off of computer software.
Net realized investment losses after taxes for the year ended December 31, 2007 were
$(4.5) million, or $(.49) per diluted share, compared with $(262,000), or $(.03) per diluted share,
for 2006. The realized investment losses in 2007 primarily related to write-downs to the Companys
investments in residential mortgage-backed securities.
Gross premiums written of $228.4 million decreased by 5% for the year ended December 31, 2007
compared to the same period of 2006. However, net premiums written of $167.9 million increased by
8% for the year ended December 31, 2007 over the same period of 2006, and net premiums earned of
$166.1 million for the year ended of 2007 increased by 9% compared with the same period in 2006.
Premiums for each segment are discussed below:
Ocean marine gross premiums written in 2007 decreased by 6%, primarily reflecting volume decreases
in hull premium as a result of not renewing certain unprofitable accounts and declines in
production of marine liability business. Rates in the various classes of marine business were
generally flat to slightly declining when compared to 2006.
Ocean marine net premiums written and net premiums earned for year ended December 31, 2007 each
decreased by 9% when compared to 2006. Net written and earned premiums in 2007 reflected higher
excess of loss reinsurance costs primarily as a result of $2.3 million in reinstatement reinsurance
costs incurred on a cargo loss in 2007, and lower amounts of earned premium in the energy class due
to additional ceded premiums earned.
Effective January 1, 2007, the Company maintained its $5 million per risk and $6 million per
occurrence net loss retention in the ocean marine line that was in existence during 2006; however,
the Company could incur an additional loss amount, as large as $5 million, depending upon the gross
loss to the Company in excess of $5 million. The 80% quota share reinsurance protection for the
Companys energy business, which commenced in 2006, also remained in effect for 2007. The Company
terminated its relationship with one of its agents writing cargo business in 2007. Inland
marine/fire gross premiums written, net premiums written and net premiums earned for the year ended
December 31, 2007 decreased by 14%, 2% and 10%, respectively, when compared to 2006. Premiums in
2007 reflected mildly lower market rates when compared to 2006 as well as declines in production in
certain property risks.
Other liability gross premiums written decreased by 3% for the year ended December 31, 2007 when
compared to 2006. Net premiums written and net premiums earned for the year ended December 31, 2007
rose by 28% and 34%, respectively, when compared to 2006. The Company writes excess workers
compensation insurance on behalf of certain self-insured workers compensation trusts. In 2006, the
Company provided gross statutory limits on the renewals of its then existing in force book of
excess workers compensation policies to these trusts. The reinsurance structure that was in effect
in 2006 included a general excess of loss treaty in order to protect the Company on any one risk or
occurrence and the resulting net retention was then subject to a 70% quota share reinsurance
treaty. The Company terminated its relationship with its former primary source of excess workers
compensation premium effective December 31, 2006. However, the Companys alternative source of
excess workers compensation production issued substantially all of the Companys excess workers
compensation premiums in 2007. These policies also provide excess workers compensation insurance
on behalf of self-insured workers compensation trusts. Moreover, the Company maintains a general
excess of loss treaty in order to protect the Company on any one risk or occurrence; however, the
70% quota share reinsurance agreement was terminated at the end of 2006.
As a result of the changes in gross underwriting and reinsurance structures, gross premiums written
decreased in the excess workers compensation class, while net premiums written and net premiums
earned increased in this class during 2007 when compared to 2006. Gross premiums written in the
excess workers compensation class decreased to $32.5 million in 2007 from $41.7 million for the
same period of 2006. Net premiums written, however, increased to $26.4 million in 2007 from
$11.5 million in 2006 and net premiums earned increased to $23.4 million in 2007 from $11.6 million
in 2006. Volume increases in the professional liability class were also achieved in 2007 when
compared to 2006. Premium rates in these classes during in 2007 were flat to slightly declining
when compared to 2006.
Aircraft premiums were nominal in 2007 and 2006 as a result of the Company having ceased writing
new aircraft policies subsequent to March 31, 2002.
50
Net losses and loss adjustment expenses incurred as a percentage of net premiums earned (the loss
ratio) were 54.1% for the year ended December 31, 2007 as compared to 56.7% for 2006. The Company
reported lower loss ratios in the other liability line of business in 2007 when compared to 2006
primarily as a result of the novation of substantially all of the excess workers compensation
policies written in conjunction with our prior producer of those policies. The novation reduced the
overall loss ratio by 3.7 percentage points in 2007. The ocean marine loss ratio was down slightly
in 2007 when compared to 2006 as a result of favorable loss reserve development that was off set
partially by a large cargo claim. The inland marine/fire loss ratio decreased in 2007, reflecting
lower severity losses in the fire and the surety classes.
The Company decreased net loss reserves by approximately $13.8 million in 2007 from the 2006-year
end net unpaid loss reserve amount of $293 million as a result of favorable loss reserve
development. This compared to $7.7 million of favorable loss reserve development recorded in 2006.
The favorable development of $13.8 million in 2007 included $6.2 million recorded on the novation
of excess workers compensation policies in the other liability line for accident years 2004-2006.
Partially offsetting this benefit in the other liability line was adverse development of $3.0
million in the professional liability class as a result of two large claims in the 2006 accident
year. The ocean marine line reported favorable development in the 2003-2005 accident years largely
as a result of favorable loss trends. The inland marine/fire segment also reported favorable loss
development partially due to lower emergence of severity losses. The favorable development in 2007
was partially offset by approximately $3.3 million in adverse development from the runoff aviation
class.
The Company reported favorable development of prior year loss reserves of $7.7 million in 2006
primarily as a result of favorable reported loss trends arising from the ocean marine line of
business in the 2005 and 2004 accident years due in part to lower settlements of case reserve
estimates, higher than expected receipts of salvage and subrogation recoveries and a lower
emergence of actual versus expected losses. Partially offsetting this benefit was adverse
development in the 2005 and 2004 accident years in the commercial auto class as a result of higher
than initially anticipated loss ratios. 2004 was the first full year of writing commercial auto
premium. The Company also reported overall favorable development in its other liability line as a
result of shorter than expected loss development tail on its contractors class. The inland
marine/fire segment also reported adverse loss development partially due to higher than expected
loss ratios in one of the Companys program businesses, which was not renewed in 2006, as well as a
higher than initially expected loss ratio in its surety class due to a large shock loss.
Policy acquisition costs as a percentage of net premiums earned (the acquisition cost ratio) for
the years ended December 31, 2007 and 2006 were 22.7% and 20.6%, respectively. The other liability
acquisition cost ratio was lower in 2006 as a result of override commissions obtained from the
quota share reinsurance agreement in the excess workers compensation class, which was not renewed
in 2007. The ocean marine acquisition cost ratio in 2007 was adversely impacted by reinstatements
incurred on a large cargo loss that lowered net premiums earned without any corresponding reduction
in acquisition costs.
General and administrative expenses increased by 15% for the year ended December 31, 2007 when
compared to 2006. Expenses in 2007 include approximately $1.8 million resulting from the evaluation
and negotiation of an investment in an asset management company that was not consummated. Larger
expenses were incurred in 2007 to service the growth in the Companys business operations,
including higher personnel expense and rent expense on additional office space.
Net investment income for the year ended December 31, 2007 decreased by 26% to $35.5 million from
$47.9 million in 2006. The decrease in 2007 when compared to 2006 reflected lower trading portfolio
and limited partnership hedge fund income which was partially offset by increases in the fixed
maturities available for sale and the short-term investment portfolios. The higher trading
portfolio income in 2006 reflected a greater trading volume of securities (including $7.0 million
from investments in U.S. Treasuries, as compared to none for 2007) and income from our Altrion
investment. The investment income from Altrion amounted to $4.7 million for the year ended
December 31, 2006 including trading portfolio income of $2.9 million and, as a result of the
deconsolidation of Altrion effective August 1, limited partnership hedge fund portfolio income of
$1.8 million. This compared to $7.9 million of income from Altrion in 2007, which was included in
limited partnership hedge fund portfolio income. Income from Altrion increased in 2007 when
compared to 2006 as a result of greater interest income earned from the warehousing of CDO/CLO debt
securities and middle market commercial debt, as well as larger fee income earned for servicing
such securities. Limited partnership hedge fund income in 2007, excluding income from Altrion,
decreased from the prior year as a result of lower yields on the limited partnership hedge fund
portfolio, which amounted to 3.4% in 2007 as compared to 10.0% in 2006.
51
Investment income, net of investment fees, from each major category of investments is as follows:
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
Fixed maturities, available for sale
|
|
$
|
13.9
|
|
|
$
|
11.8
|
|
Trading securities
|
|
|
2.3
|
|
|
|
15.8
|
|
Equity in earnings of limited partnerships
|
|
|
13.0
|
|
|
|
16.5
|
|
Short-term investments
|
|
|
8.7
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
37.9
|
|
|
|
51.9
|
|
Investment expenses
|
|
|
(2.4
|
)
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
35.5
|
|
|
$
|
47.9
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and 2006 investments in limited partnerships amounted to approximately
$188.3 million and $182.3 million, respectively. The equity method of accounting is used to account
for the Companys limited partnership hedge fund investments. Under the equity method, the Company
records all changes in the underlying value of the limited partnership hedge funds to results of
operations. Net investment income for 2007 and 2006 reflected approximately $13.0 million and $16.5
million, respectively, derived from limited partnership hedge fund investments.
As of December 31, 2007 and 2006 investments in trading portfolios amounted to approximately
$144.9 million and $0, respectively. Net investment income for 2007 and 2006 reflected
approximately $2.3 million and $15.8 million, respectively, derived from trading portfolio
activities. These activities include the trading of collateralized debt obligations (CDOs),
collateralized loan obligations (CLOs), commercial middle market debt, municipal bonds, preferred
stocks and US Treasury notes. The Companys trading portfolio was marked to market with the change
recognized in net investment income during this period. Any realized gains or losses resulting from
the sales of trading securities are also recognized in net investment income. The ending balance in
the trading portfolio can vary substantially from period to period due to the level of trading
activity.
As a result of the accounting treatment of its limited partnerships and trading portfolio, the
Companys investment income results may be volatile. If the level or fair value of investments held
in limited partnership hedge funds or trading securities change substantially, there may also be a
greater volatility associated with the Companys investment income.
Commission and other (loss) income decreased to $(4.2) million for the year ended December 31, 2007
from $1.1 million for the same period in the prior year. The Companys write-off of $5.3 million
relating to its computer systems in 2007 accounted for most of the decrease. The Company determined
that certain computer equipment and software was inefficient and no longer possessed any future
service potential, and accounted for it as an abandoned asset under the guidance of Statement of
Financial Accounting Standard No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets.
Commission income in 2007 and 2006 each reflected profit commissions derived from ceded
reinsurance in the ocean marine class of business.
Net realized investment losses were $(6.9) million for the year ended December 31, 2007 as compared
to $(403,000) for the year ended December 31, 2006. These amounts result from the sale of fixed
income investments as well as write-downs from other-than-temporary declines in the fair value of
securities, which amounted to $6.7 million and $371,000 for the years ended December 31, 2007 and
2006, respectively. The write-downs in 2007 primarily relate to the Companys investments in super
senior residential mortgage-backed securities. The decision to write down such securities was based
upon our belief that we would not hold such securities until the fair value decline was recovered.
Interest expense was $6.7 million for each of the years ended December 31, 2007 and 2006,
respectively, and resulted primarily from the Companys $100 million 6.5% senior notes.
Total income tax expense as a percentage of income before taxes for year ended December 31, 2007
was 33.7% as compared to 33.5% for 2006. The percentage for the 2006-year includes a $500,000
reduction in taxes resulting from the resolution of tax uncertainties for the Companys former
subsidiary, MMO UK, which was sold in 2005. The 2007-year includes larger benefits resulting from
greater investments in municipal bonds and preferred stocks.
Reserve for unearned premiums decreased to $87.6 million as of December 31, 2007 from $93.6 million
as of December 31, 2006 primarily as a result of the decrease in gross premiums written in the
ocean marine line of business and the excess workers compensation class.
52
Unpaid losses and loss adjustment expenses decreased to $556.5 million at December 31, 2007 from
$579.2 million at December 31, 2006. Reinsurance receivables on unpaid losses, net decreased to
$250.1 million at December 31, 2007 from $286.2 million at December 31, 2006. These decreases were
primarily due to the closing of novation agreements for certain excess workers compensation
policies that resulted in a decreases of $41.5 million and $24.9 million in unpaid losses and loss
adjustment expenses, and reinsurance receivables on unpaid losses, respectively.
Ceded reinsurance payable decreased to $27.1 million at December 31, 2007 from $44.8 million at
December 31, 2006 and prepaid reinsurance premiums decreased to $21.7 million at December 31, 2007
from $29.6 million at December 31, 2006 mainly as a result of the payment of quota share
reinsurance premiums, as well as lower ceded premiums written, in the excess workers compensation
class.
Other assets increased to $10.2 million at December 31, 2007 from $6.9 million at December 31, 2006
primarily as a result of federal income taxes recoverable.
Property, improvements and equipments, net decreased to $4.8 million at December 31, 2007 from $9.9
million at December 31, 2006 primarily due to the write off of $5.3 million in functionally
inadequate computer software.
Deferred income taxes at December 31, 2007 increased to $14.4 million from $10.8 million at
December 31, 2006 primarily due to deferred tax benefits provided on investment losses incurred
during the year.
Reinsurance receivables on paid losses, net decreased to $38.8 million at December 31, 2007 from
$47.5 million at December 31, 2006 primarily as a result of collections of hurricane losses in the
ocean marine line.
Liquidity and Capital Resources
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, 2008, the Companys
assets included approximately $185.9 million in cash and short-term investments. Fixed maturities
held to maturity are comprised of $61.2 million in floating rate residential mortgage-backed
securities. Cash and total investments decreased from $701.1 million at December 31, 2007 to
$547.0 million at December 31, 2008, principally as a result of the fair value decline of the
Companys investments. Receivables for securities sold amounted to $25.4 million and $22.9 million
as of December 31, 2008 and 2007, respectively. Payable for securities purchased amounted to $0 and
$28.7 at December 31, 2008 and 2007, respectively. The level of cash and short-term investments of
$185.9 million at December 31, 2008 reflected the Companys high liquidity position.
The primary sources of the Companys liquidity are funds generated from insurance premiums,
investment income and maturing or liquidating investments.
In 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
senior notes provide for semi-annual interest payments and are to be repaid in full on March 15,
2014. On July 1, 2004 the Company completed the exchange of registered 6.5% senior notes for the
unregistered senior notes issued on March 11, 2004, as required by the registration rights
agreement with the purchasers of the senior notes. 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 Companys stock
or the stock of any restricted subsidiary (excluding payments by any restricted subsidiary to the
Company), purchase or redeem the Companys 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 ability 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 used part of the net proceeds
from the sale of the senior notes to purchase from certain of its shareholders in 2005 a total of
1,092,735 shares of common stock at $24.80 per share. The Company used the remaining net proceeds
for working capital and other general corporate purposes.
53
Cash flows provided by operating activities were $57.6 million for the year ended December 31,
2008. This compared to cash flows used in operating activities of $106.4 million for the year ended
December 31, 2007 and cash flows provided by operating activities of $110.6 million for the year
ended December 31, 2006. Cash flows from operating activities are significantly impacted by changes
in the Companys trading and commercial loan portfolios. Any securities purchased by the Company in
its trading and commercial loan portfolios would be reflected as a use of cash from operating
activities and any securities sold from its trading portfolio would be reflected as a source of
cash from operating activities. Trading portfolio activities include the purchase and sale of
preferred stocks, municipal bonds, CDO/CLO securities and exchange traded funds. Commercial loan
activities include the purchase and sale of middle market loans made to commercial companies.
Trading and commercial loan portfolio activities of $84.2 million and $109.8 million favorably
affected cash flows for the years ended December 31, 2008 and December 31, 2006, respectively,
while trading and commercial loan portfolio activities adversely affected cash flows for the year
ended December 31, 2007 by $116.2 million. As the Companys trading and commercial loan portfolio
balances may fluctuate significantly from period to period, cash flows from operating activities
may also be significantly impacted by such trading activities.
For the year ended December 31, 2008, cash flows from operating activities excluding adjustments
for trading and commercial loan activities were unfavorable and for the years ended December 31,
2007 and 2006, cash flows from operations excluding adjustments for trading and commercial loan
activities were favorable. Cash flows were adversely impacted in 2008, principally as a result of
lower investment income; were favorably impacted in 2007, principally as a result of collections of
reinsurance recoverables on hurricane losses and lower net paid losses, which were partially offset
by payments of quota share reinsurance premiums; and, were favorably impacted in 2006, by
collections of premiums from a large increase in other liability premiums, which were mostly offset
by a greater amount of paid losses and reinstatement reinsurance premiums, due in part to hurricane
losses and partly due to payments on asbestos related losses.
Cash flows used in investing activities were $176.9 million for the year ended December 31, 2008
and resulted primarily from net purchases of fixed maturities and short-term investments. Cash
flows provided by investing activities were $295.7 million for the year ended December 31, 2007 and
resulted primarily from net sales of fixed maturities and short-term investments. Cash flows used
in investing activities were $117.9 million for the year ended December 31, 2006. Net purchases of
fixed maturities and short-term investments were recorded during 2006. Approximately $6.9 million
in uses of cash flows in 2006 also resulted from the effect of deconsolidation of the Altrion
limited partnership investment.
Cash flows used in financing activities were $10.0 million and $2.8 million for the years ended
December 31, 2008 and 2007, respectively. The repurchase of treasury stock accounted for most of
the use of cash flows in each of 2008 and 2007. Cash flows provided by financing activities were
$1.2 million for the year ended December 31, 2006.
Under the Common Stock Repurchase Plan, as amended in 2008, the Company may purchase up to $75
million of the Companys issued and outstanding shares of common stock on the open market. The
Company paid $7.7 million, $7.1 million and $0 to repurchase its common stock during the years
ended December 31, 2008, 2007 and 2006, respectively.
On March 22, 2006, the Company entered into an agreement (the Letter Agreement) to amend the
Option Certificate granted under a Securities Purchase Agreement, dated January 31, 2003, by and
between the Company and Conning Capital Partners VI, L.P. (CCPVI). The Amended and Restated
Option Certificate dated as of March 22, 2006 by and between the Company and CCPVI (Amended and
Restated Option) decreased the number of shares of Company common stock that may be issued upon
the exercise of the Amended and Restated Option from 400,000 to 300,000 and extended the term from
January 31, 2008 to December 31, 2010.
In 2002, the Company signed a sublease at 919 Third Avenue, New York, NY 10022 for approximately
28,000 square feet for its principal offices in New York. The sublease commenced on March 1, 2003
and expires on July 30, 2016. In April 2005, the Company signed an amendment to the sublease, for
approximately 10,000 square feet of additional space. The sublease expires on July 30, 2016. The
minimum monthly rental payments of $141,276 under the amended sublease include the rent paid by the
Company for the original sublease. Such payments began 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.
In May 2007, the Company signed a lease for additional office space for its headquarters located on
the 11th floor of 919 Third Avenue in New York City. The lease term provides for lease payments on
two sections (Space A and Space B) of the 11th floor. The lease term for Space A commenced on
September 1, 2007 and ends on July 30, 2016. Minimum monthly payments of $85,818 commenced on
January 1, 2008 and will increase to $91,355 on the commencement of the sixth lease year. Total
minimum lease rental payments over the term for Space A will amount to $9.4 million. The lease term
for Space B commenced on April 30, 2008, and will end on July 30, 2016. Minimum monthly payments of
$111,904 will increase to $119,123 on the commencement of the sixth lease year following the
initial payment under the Space B lease. Total minimum lease rental payments over the term for
Space B will be at least equal to $11.7 million. In connection with the 11
th
floor
lease, the landlord will reimburse the Company up to $765,375 for qualified renovations.
In 2008, the Company entered into a lease for 2,136 square feet for the office space for its newly
formed MMO Agencies, an underwriting division of the Company. The office is located in Long
Island, New York. Rent payments under the lease end in 2013, with payments amounting to
approximately $370,000, collectively, over the term of the agreement. The lease expires in May
2013.
54
Effective
August 1, 2008, the Company has subleased Space A for a term of
29 months, with an option to extend for an additional
19 months. The monthly
rental income recognized under the sublease agreement is
approximately $82,000 and has reduced overall general and administrative expenses by
$410,000 for the year ended December 31, 2008.
Specific related party transactions and their impact on results of operations are disclosed in Note
18 of the Companys financial statements. The Company adheres to investment guidelines set by
management and approved by the Finance Committee of the Board of Directors. See Investment
Policy.
NYMAGICs 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 Companys domestic insurance company subsidiaries
are limited by statute in the amount of dividends that may be declared or paid during a year.
Within this limitation, the maximum amount which could be paid to the Company out of the domestic
insurance companies surplus was approximately $18.6 million as of December 31, 2008. There were no
dividends declared by the insurance subsidiaries in 2008 and the Company might not receive
dividends from its insurance subsidiaries in 2009.
At December 31, 2008, NYMAGICs investments consist of cash and short-term investments, residential
mortgage-backed securities, limited partnership hedge funds and short-term premium and investment
receivables as follows:
|
|
|
|
|
Description
|
|
Amounts in thousands
|
|
Cash
|
|
$
|
10,852
|
|
U.S. Treasury securities
|
|
|
3,933
|
|
RMBS
|
|
|
2,029
|
|
Limited
partnership hedge funds: Altrion
|
|
|
33,800
|
|
Mariner Voyager
|
|
|
3,618
|
|
Receivables
|
|
|
8,720
|
|
|
|
|
|
Total investments
|
|
$
|
62,952
|
|
|
|
|
|
A significant portion of the Companys invested asserts are in hedge funds. The Company is in the
process of redeeming its investment in both hedge funds. The level of liquidity of invested assets
is impacted by hedge fund investments as one of our hedge funds (Mariner Voyager) has invoked
gated provisions that allow the fund to disperse redemption proceeds to investors over an extended
period. The Company is subject to such restrictions and they will affect the timing of the receipt
of hedge fund proceeds. During January 2009, the Company received redemption proceeds of $2.6
million from Mariner Voyager. The timing of additional redemption proceeds is uncertain. The
Company also maintains a significant investment in Altrion. The Company was previously committed to
providing an additional $15.4 million, or a total of approximately $40 million, in capital to
Altrion by August 1, 2008. Altrion, however, waived its right to require the Company to contribute
its additional capital commitment of $15.4 million and accordingly, the Companys obligation to
make such capital contribution has expired. In addition, the Company withdrew $10 million of its
capital from Altrion during July 2008. Withdrawals require one years prior written notice to the
hedge fund manager. The Company has submitted a redemption notice to Altrion with an indicated
redemption date of December 31, 2009. The Company is uncertain as to whether cash and/or
securities will be received as payment of the redemption proceeds. See Investment Management
Arrangement for a complete discussion of the Companys investment in Altrion.
The Company has capitalized $3.1 million in computer software expenses in 2008. The Company
anticipates additional expenses, in a range of $3-$5 million, to implement a new computer system in
2009.
During 2008, the Company also made capital contributions of $32.5 million to its insurance
subsidiary New York Marine and purchased $6.1 million in overdue receivables from New York Marine.
New York Marine and Gotham collectively paid ordinary dividends of $6,795,000, $14,475,000 and
$13,225,000 in 2008, 2007 and 2006, respectively.
On March 6, 2009, the Company declared a dividend of $.04 to shareholders of record on March 31,
2009, payable on April 7, 2009. The reduction in dividend amount from prior quarters reflected the
Companys cautious economic outlook.
55
On March 7, 2008, the Company declared a dividend of eight cents per share to shareholders of
record on March 31, 2008, payable on April 3, 2008. On May 22, 2008, the Company declared a
dividend of eight cents per share to shareholders of record on June 30, 2008, payable on July 8,
2008. On September 9, 2008, the Company declared a dividend of eight cents per share to
shareholders of record on September 30, 2008, payable on October 7, 2008. On December 4, 2008, the
Company declared a dividend of eight cents per share to shareholders of record on December 31,
2008, payable on January 7, 2009. On March 5, 2007, the Company declared a dividend of eight cents
per share to shareholders of record on March 30, 2007, payable on April 5, 2007. On May 23, 2007,
the Company declared a dividend of eight cents per share to shareholders of record on June 29,
2007, payable on July 5, 2007. On September 14, 2007, the Company declared a dividend of eight
cents per share to shareholders of record on September 28, 2007, payable on October 3, 2007. On
December 7, 2007, the Company declared a dividend of eight cents per share to shareholders of
record on December 31, 2007, payable on January 4, 2008. On February 23, 2006, the Company declared
a dividend of six cents per share to shareholders of record on March 31, 2006, payable on April 5,
2006. On May 26, 2006, the Company declared a dividend of eight cents per share to shareholders of
record on June 30, 2006, payable on July 6, 2006. On September 19, 2006, the Company declared a
dividend of eight cents per share to shareholders of record on September 29, 2006, payable on
October 4, 2006. On December 8, 2006, the Company declared a dividend of eight cents per share to
shareholders of record on December 29, 2006, payable on January 4, 2007.
The Company has established three share-based incentive compensation plans (the Plans), which are
described below. Management believes that the Plans provide a means whereby the Company may attract
and retain persons of ability to exert their best efforts on behalf of the Company. The Plans
generally allow for the issuance of grants and exercises through newly issued shares, treasury
stock, or any combination thereof to officers, key employees and directors who are employed by, or
provide services to the Company. The compensation cost that has been charged against income for the
Plans was $2,535,351, $2,210,615 and $2,116,929 for the years ended December 31, 2008, 2007 and
2006, respectively. Of the $2.1 million expensed in 2006, approximately $343,000 related to the
adoption of accounting for share-based compensation under SFAS 123(R). The approximate total income
tax benefit accrued and recognized in the Companys financial statements for the years ended
December 31, 2008, 2007 and 2006 related to share-based compensation expenses was approximately
$887,000, $774,000 and $741,000, respectively.
In 2003, the Company made an investment of $11.0 million in Altrion. Additional investments of
$4.65 million, $2.7 million and $6.25 million were made in 2004, in 2005 and on April 27, 2007,
respectively. The Company was previously committed to providing an additional $15.4 million, or a
total of approximately $40 million, in capital to Altrion by August 1, 2008. Altrion, however,
waived its right to require the Company to contribute its additional capital commitment of $15.4
million and accordingly, the Companys obligation to make such capital contribution has expired. In
addition, the Company withdrew $10 million of its capital from Altrion during July 2008.
Withdrawals require one years prior written notice to the hedge fund manager. The Company has
submitted a redemption notice to Altrion with an indicated redemption date of December 31, 2009.
The Company is uncertain as to whether cash and/or securities will be received as payment of the
redemption proceeds. See Investment Management Arrangement for a complete discussion of the
Companys investment in Altrion.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Contractual Obligations
The following table presents the Companys contractual obligations as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(in thousands)
|
|
Long-term debt obligations
|
|
$
|
100,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
100,000
|
|
Interest on debt obligations
|
|
|
35,750
|
|
|
|
6,500
|
|
|
|
13,000
|
|
|
|
13,000
|
|
|
|
3,250
|
|
Losses and loss expenses (1)
|
|
|
548,750
|
|
|
|
123,122
|
|
|
|
147,690
|
|
|
|
87,620
|
|
|
|
190,318
|
|
Operating lease obligations
|
|
|
32,331
|
|
|
|
4,282
|
|
|
|
8,392
|
|
|
|
8,550
|
|
|
|
11,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
716,831
|
|
|
$
|
133,904
|
|
|
$
|
169,082
|
|
|
$
|
109,170
|
|
|
$
|
304,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents an estimated payout based upon historical paid loss development patterns.
|
56
Critical accounting policies
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
Companys 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, impairment of investments, investment accounting including limited
partnerships and trading and held to maturity portfolios, reinstatement reinsurance premiums and
stock compensation.
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 $548.7 million and $556.5 million at December 31, 2008 and
2007, respectively. Unpaid losses and loss adjustment expenses, net of reinsurance amounted to
$334.8 million and $306.4 million at December 31, 2008 and 2007, respectively. Management believes
that both the gross and net unpaid loss reserve estimates as of December 31, 2008 have been
reasonably estimated. 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 managements 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
$21.4 million and $14.1 million at December 31, 2008 and 2007, respectively. The allowance for
doubtful accounts on premiums and other receivables each amounted to $300,000 as of December 31,
2008 and 2007, respectively.
Impairment of investments, included in realized investment gains or losses, results from declines
in the fair value of investments which are considered by management to be other-than-temporary.
Management reviews investments for impairment based upon specific criteria that include the
duration and extent of declines in fair value of the security below its cost or amortized cost. The
Company performs a qualitative and quantitative review of all securities in a loss position in
order to determine if any impairment is considered to be other-than-temporary. With respect to
fixed income investments, declines in fair value of less than 10% are normally considered to be
temporary, unless the fixed income security has been downgraded at least two levels by a major
rating agency. Additionally, the Company reviews those securities held for six months or more, with
fair value declines of greater than 10% at the end of each reporting period. The Company also
reviews all securities with any rating agency declines during the reporting period. As a result of
this review, the Company will record an impairment charge to earnings if the fair value decline is
greater than 20%, if the fixed income security has been downgraded at least two levels by a major
rating agency, or if the fair value decline is greater than 10% and the security has been
downgraded one level by a major rating agency. This review includes considering the effect of
rising interest rates and the Companys intent and ability to hold impaired securities in the
foreseeable future to recoup any losses. In addition to subjecting its securities to the objective
tests of percent declines in fair value and downgrades by major rating agencies, when it determines
whether declines in the fair value of its securities are other than temporary, the Company also
considers the facts and circumstances that may have caused the declines in the value of such
securities. As to any specific security, it may consider general market conditions, changes in
interest rates, adverse changes in the regulatory environment of the issuer, the duration for which
the Company has the intent and the ability to hold the security for the length of any forecasted
recovery. Approximately $46.2 million and $6.7 million were charged to results from operations for
2008 and 2007, respectively, resulting from fair value declines considered to be
other-than-temporary. The write-downs in 2008 primarily relate to the Companys investments in
residential mortgage-backed securities. Gross unrealized gains and losses on fixed maturity
investments available for sale amounted to approximately $2.5 million and $6.9 million,
respectively, at December 31, 2008. As of December 31, 2008, there were no unrealized losses
consecutively for twelve months or longer on fixed income securities available for sale. The
Company believes these unrealized losses to be temporary and result from changes in market
conditions, including interest rates or sector spreads. 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 loss before investment fees derived from
investments in limited partnerships amounted to $(26.8) million for the year ended December 31,
2008. For the year ended December 31, 2007, $13.0 million of net investment income before
investment fees was recognized from limited partnership investments. See Item 7A Quantitative and
Qualitative Disclosures About Market Risk with respect to market risks associated with investments
in limited partnership hedge funds.
57
The Company maintained a trading and commercial loan portfolio at December 31, 2008 and
December 31, 2007. At December 31, 2008, the trading portfolio consisted of municipal obligations
and preferred stocks and the commercial loan portfolio consisted of commercial middle market debt
investments. During 2008 and in previous years, the Company has also held positions in
exchange-traded funds, hedge positions, collateralized debt obligations (CDOs), collateralized loan
obligations (CLOs) and US Treasury securities in its trading portfolio. These investments are
marked to market with the change recognized in net investment income during the current period. Any
realized gains or losses resulting from the sales of such securities are also recognized in net
investment income. The Company recorded $(43.8) million and $2.3 million in net trading and
commercial loan portfolio income before investment fees for the years ended December 31, 2008 and
2007, respectively. See Item 7A Quantitative and Qualitative Disclosures About Market Risk with
respect to market risks associated with investments in CDO, CLO and commercial middle market
investments.
The Company has investments in residential mortgage-backed securities (RMBS) amounting to
$61.2 million at December 31, 2008. These securities are classified as held to maturity after the
Company transferred these holdings from the available for sale portfolio effective October 1, 2008.
The adjusted cost basis of these securities is based on a determination of the Fair Value of
these securities on the date they were transferred.
The Fair Value of each RMBS investment is determined under SFAS 157. Fair Value is determined
by estimating the price at which an asset might be sold on the measurement date. There has been a
considerable amount of turmoil in the U.S. housing market in 2007 and 2008, which has led to market
declines in such securities. Because the pricing of these investments is complex and has many
variables affecting price including, projected delinquency rates, projected severity rates,
estimated loan to value ratios, vintage year, subordination levels,
projected prepayment speeds and
expected rates of return required by prospective purchasers, the estimated price of such
securities will differ among brokers depending on these facts and assumptions. While many of the
inputs utilized in pricing are observable, many other inputs are unobservable and will vary
depending upon the broker. During periods of market dislocation, such as the current market
conditions, it is increasingly difficult to value such investments because trading becomes less
frequent and/or market data becomes less observable. As a result, valuations may include inputs and
assumptions that are less observable or require greater estimation and judgment as well as
valuation methods that are more complex. For example, assumptions regarding projected delinquency
and severity rates have become increasingly pessimistic due to market uncertainty connected with
these types of investments and requirements for high expected returns using pessimistic assumptions
as required by the limited number of prospective purchasers of such securities in the present
market. This has resulted in lower estimated quotes of estimated market prices. These inputs are
used in pricing models to assist the broker in estimating a current price for these investments.
Accordingly, the market price or Fair Value may not be reflective of the intrinsic value of a
security or indicative of the ultimate expected receipt of future cash flows. The Fair Value of
such securities at December 31, 2008 was $42.3 million.
The Company performs a cash flow analysis for each of these securities, which attempts to estimate
the likelihood of any future impairment. While the Company does not believe there are any
other-than-temporary impairments (OTTI) currently, future estimates may change
depending upon the actual housing statistics reported for each security to the Company. This may
result in future charges based upon revised estimates for delinquency rates, severity or prepayment
patterns. These changes in estimates may be material. These securities are collateralized by pools
of Alt-A mortgages, and receive priority payments from these pools. The Companys securities
rank senior to subordinated tranches of debt collateralized by each respective pool of mortgages.
The Company has collected all applicable interest and principal repayments on such securities to
date. As of February 25, 2009 the levels of subordination ranged from 27% to 51% of the total debt
outstanding for each pool. Delinquencies within the underlying mortgage pools (defined as payments
60+ days past due plus foreclosures plus real estate owned) ranged from 19.2% to 41.5% of total
amounts outstanding. In March 2008, delinquencies ranged from 3.4% to 21.2%. Delinquency rates are
not the same as severity rates, or actual loss, but are an indication of the potential for losses
of some degree in future periods. In each case, current pool subordination levels by individual
security remain in excess of current pool delinquency rates.
The Company has both the ability and the intent to hold such securities until maturity. Prior
to the transfer to the held to maturity classification, the Company incurred cumulative write-downs
from (OTTI) declines in the Fair Value of these securities after any recapture, amounting to
$40.7 million through September 30, 2008. The collection of principal repayments on these
securities through December 31, 2008 resulted in $2.1 million in realized investment gains as a
result of the recapture of previous write-downs of investment balances. The Company sold two of
its RMBS investments in September 2008 resulting in cumulative realized investment losses of $11.0
million. The net realized loss included previous OTTI declines in Fair Value of $9.7 million
through the dates of sale.
These RMBS investments, as of December 31, 2008 were rated AAA/Aaa by S&P/Moodys. As of March 9,
2009, these securities are rated AAA or AAA- by S&P and Caa1 to A1 by Moodys. On March 9, 2009
S&P announced that 9,430 tranches of mortgage securities had been placed on Credit Watch for
potential downgrades. The tranches of securities owned by the Company were not included in this
list, however, other junior tranches of securities within the RMBS owned by the Company were
included in the list. While the Companys securities were not
included in that S & P Credit Watch
listing, there is the possibility that they may be downgraded in the future.
Reinsurance reinstatement premiums are recorded, as a result of losses incurred by the Company, in
accordance with the provisions of the reinsurance contracts. Upon the occurrence of a large
severity or catastrophe loss, the Company may be obligated to pay additional reinstatement premiums
under its excess of loss reinsurance treaties up to the amount of the original premium paid under
such treaties. Reinsurance reinstatement premiums incurred for the years ended December 31, 2008,
2007 and 2006 were $1.8 million, $3.9 million and $2.4 million, respectively.
58
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123(R) Share-Based Payment (SFAS 123(R)) using the modified prospective method. SFAS 123(R)
establishes standards for the accounting for transactions that involve stock based compensation.
SFAS 123(R) requires that compensation costs be recognized for the fair value of all share options
over their vesting period, including the cost related to the unvested portion of all outstanding
share options as of December 31, 2005. The cumulative effect of the adoption of SFAS 123(R) was not
material. The Company recorded approximately $343,000 of additional compensation cost in results
from operations for the twelve months ended December 31, 2006 relating to the adoption of
accounting for stock based compensation under SFAS 123(R). Total stock compensation expense
recorded in 2008, 2007 and 2006 amounted to $2.5 million, $2.2 million, and $2.1 million,
respectively.
Fair value measurements
Effective January 1, 2008, the Company adopted SFAS 157, which establishes a consistent framework
for measuring fair value. The framework is based on the inputs used in valuation and gives the
highest priority to quoted prices in active markets and requires that observable inputs be used in
the valuations when available. The disclosure of fair value estimates in the SFAS 157 hierarchy is
based on whether the significant inputs into the valuation are observable. In determining the level
of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted
quoted prices in active markets and the lowest priority to unobservable inputs that reflect the
Companys significant market assumptions. The standard describes three levels of inputs that may be
used to measure fair value and categorize the assets and liabilities within the hierarchy:
Level 1
Fair value is based on unadjusted quoted prices in active markets that are accessible to
the Company for identical assets or liabilities. These prices generally provide the most reliable
evidence and are used to measure fair value whenever available. Active markets are defined as
having the following for the measured asset/liability: i) many transactions, ii) current prices,
iii) price quotes not varying substantially among market makers, iv) narrow bid/ask spreads and v)
most information publicly available.
The Companys Level 1 assets are comprised of U.S. Treasury securities and preferred stock, which
are highly liquid and traded in active exchange markets.
The Company uses the quoted market prices as fair value for assets classified as Level 1. The
Company receives quoted market prices from a third party, a nationally recognized pricing service.
Prices are obtained from available sources for market transactions involving identical assets. For
the majority of Level 1 investments, the Company receives quoted market prices from an independent
pricing service. The Company validates primary source prices by back testing to trade data to
confirm that the pricing services significant inputs are observable. The Company also compares the
prices received from the third party service to alternate third party sources to validate the
consistency of the prices received on securities.
Level 2
Fair value is based on significant inputs, other than Level 1 inputs, that are observable
for the asset, either directly or indirectly, for substantially the full term of the asset through
corroboration with observable market data. Level 2 inputs include quoted market prices in active
markets for similar assets, non-binding quotes in markets that are not active for identical or
similar assets and other market observable inputs (e.g., interest rates, yield curves, prepayment
speeds, default rates, loss severities, etc.).
The Companys Level 2 assets include municipal debt obligations and corporate debt securities.
The Company generally obtains valuations from third party pricing services and/or security dealers
for identical or comparable assets or liabilities by obtaining non-binding broker quotes (when
pricing service information is not available) in order to determine an estimate of fair value. The
Company bases all of its estimates of fair value for assets on the bid price as it represents what
a third party market participant would be willing to pay in an arms length transaction. Prices
from pricing services are validated by the Company through comparison to prices from corroborating
sources and are validated by back testing to trade data to confirm that the pricing services
significant inputs are observable. Under certain conditions, the Company may conclude the prices
received from independent third party pricing services or brokers are not reasonable or reflective
of market activity or that significant inputs are not observable, in which case it may choose to
over-ride the third-party pricing information or quotes received and apply internally developed
values to the related assets or liabilities. In such cases, those valuations would be generally
classified as Level 3. Generally, the Company utilizes an independent pricing service to price its
municipal debt obligations and corporate debt securities. Currently, these securities are
exhibiting low trade volume. The Company considers such investments to be in the Level 2 category.
Level 3
Fair value is based on at least one or more significant unobservable inputs that are
supported by little or no market activity for the asset. These inputs reflect the Companys
understanding about the assumptions market participants would use in pricing the asset or
liability.
The Companys Level 3 assets include its residential mortgage-backed securities (RMBS) and
commercial loans, as they are illiquid and trade in inactive markets. These markets are considered
inactive as a result of the low level of trades of such investments.
59
All prices provided by primary pricing sources are reviewed for reasonableness, based on the
Companys understanding of the respective market. Prices may then be determined using valuation
methodologies such as discounted cash flow models, as well as matrix pricing analyses performed on
non-binding quotes from brokers or other market-makers. As of December 31, 2008, the Company
utilized cash flow models, matrix pricing and non-binding broker quotes obtained from the primary
pricing sources to evaluate the fair value of its RMBS and commercial loan investments. Because
pricing of these investments is complex and has many variables affecting price including,
delinquency rate, severity rate, loan to value ratios, vintage year, discount rate, subordination
levels, prepayment speeds, etc., the price of such securities will differ by broker depending on
the weight given to the various inputs. While many of the inputs utilized in pricing are
observable, some inputs are unobservable and the weight given these unobservable inputs will vary
depending upon the broker. During periods of market dislocation, such as the current market
conditions, it is increasingly difficult to value such investments because trading becomes less
frequent and/or market data becomes less observable. As a result, valuations may include inputs and
assumptions that are less observable or require greater estimation and judgment as well as
valuation methods that are more complex. For example, prepayment speeds and severity rates have
become increasingly stressed by brokers due to market uncertainty connected with these types of
investments resulting in lower quoted prices. These inputs are used in pricing models to assist the
broker in determining a current price for these investments. After considering all of the relevant
information at December 31, 2008, the Company adjusted the price received for one commercial loan
investment. As such, because the establishment of fair valuation is significantly reliant upon
unobservable inputs, the Company considers such investments to be in the Level 3 category.
Effect of recent accounting pronouncements
Adoption of new accounting pronouncements:
In September 2006, the FASB issued Statement of Financial Accounting No. 157,
Fair Value
Measurements
(SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair
value in GAAP, and enhances disclosures about fair value measurements. SFAS 157 applies when other
accounting pronouncements require fair value measurements; it does not require new fair value
measurements. SFAS 157 became effective January 1, 2008 and did not have a material effect on the
Companys results of operations, financial position or liquidity.
In February 2007, the FASB issued Statement of Financial Accounting No. 159,
The Fair Value Option
for Financial Assets and Financial Liabilities
( SFAS 159) which provides for an irrevocable
option to report selected financial assets and liabilities at fair value with changes in fair value
recorded in earnings. The option is applied, on a contract-by-contract basis, to an entire contract
and not only to specific risks, specific cash flows or other portions of that contract. Upfront
costs and fees related to a contract for which the fair value option is elected shall be recognized
in earnings as incurred and not deferred. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The Company elected the fair value option
for approximately $8.3 million in commercial loans upon its adoption of SFAS 159 effective
January 1, 2008. At December 31, 2007, the commercial loan balance of $8.3 million was carried at
fair value, which was lower than amortized cost, and included in the Companys trading portfolio,
which was consistent with its overall investment strategy. The adoption of SFAS 159 did not have an
impact on the Companys results of operations, financial position or liquidity. The Company
utilized the fair value election under SFAS 159 for approximately $10.3 million of commercial loan
purchases during the year ended December 31, 2008. The Company has recorded net losses in fair
value of $3.0 million on these investments for the year ended December 31, 2008. The changes in the
fair value of these debt instruments are recorded in investment income.
In June 2007, the FASB issued FSP Emerging Issues Task Force Issues No. 06-11,
Accounting for
Income Tax Benefits of Dividends on Share-Based Payment Awards
(EITF 06-11). EITF 06-11 requires
that realized income tax benefits related to dividend payments that are charged to retained
earnings and paid to employees holding equity shares, nonvested equity share units and outstanding
equity share options should be recognized as an increase in additional paid-in capital. EITF 06-11
shall be applied to share-based payment awards that are declared in fiscal years beginning after
December 15, 2007. The adoption of EITF 06-11, effective January 1, 2008, did not have a material
effect on the Companys results of operations, financial position or liquidity.
On October 10, 2008, the FASB issued FSP FAS 157-3,
Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active
, which clarifies the application of SFAS 157,
Fair
Value
Measurements, in a market that is not active, and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. FSP FAS 157-3 was effective October 10, 2008, and for prior periods
for which financial statements have not been issued. Revisions resulting from a change in the
valuation technique or its application should be accounted for as a change in accounting estimate
following the guidance in FASB Statement of Financial Accounting Standards No. 154,
Accounting
Changes and Error Corrections
(SFAS 154). However, the disclosure provisions in SFAS 154 required
for a change in accounting estimate are not required for revisions resulting from a change in
valuation technique or its application. The adoption of FSP FAS 157-3 did not have a material
effect on the Companys results of operations, financial position or liquidity.
60
In January 2009, the FASB issued FSP Emerging Issues Task Force Issues No. 99-20-1,
Amendments to
the Impairment Guidance of EITF Issue No. 99-20
(EITF 99-20-1). EITF 99-20-1 amends the
impairment guidance in EITF Issue No. 99-20, Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in
Securitized Financial Assets. The FASB believes this guidance will achieve a more consistent
determination of whether an other-than-temporary impairment has occurred. EITF 99-20-1 also retains
and emphasizes the objective of an other-than-temporary impairment assessment and the related
disclosure requirements in FASB Statement No. 115,
Accounting for Certain Investments in Debt and
Equity Securities,
and other related guidance. EITF 99-20-1 is effective for interim and annual
reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective
application to a prior interim or annual reporting period is not permitted. The adoption of EITF
99-20-1 did not have a material effect on the Companys results of operations, financial position
or liquidity.
Future adoption of new accounting pronouncements:
In December 2007, the FASB issued Statement of Financial Accounting No. 141(R),
Business
Combinations
( SFAS 141(R)), which requires most identifiable assets, liabilities,
non-controlling interests, and goodwill acquired in a business combination to be recorded at full
fair value. Under SFAS 141(R), all business combinations will be accounted for by applying the
acquisition method (referred to as the purchase method in SFAS 141, Business Combinations). SFAS
141(R) is effective for fiscal years beginning on or after December 15, 2008 and is to be applied
to business combinations occurring after the effective date. The adoption of SFAS 141(R) will not
have an impact on the Companys operations, financial position or liquidity unless an acquisition
occurs after the effective date of SFAS 141(R).
In December 2007, the FASB issued Statement of Financial Accounting No. 160,
Non-controlling
Interests in Consolidated Financial Statements
(SFAS 160), which requires non-controlling
interests (previously referred to as minority interests) to be treated as a separate component of
equity, not as a liability or other item outside of permanent equity. SFAS 160 is effective for
fiscal years beginning on or after December 15, 2008. The adoption of SFAS 160 is not expected to
have an impact on the Companys financial condition, results of operations or liquidity.
In February 2008, the FASB issued FSP FAS 157-2,
Effective Date of FASB Statement No. 157
, which
permits a one-year deferral of the application of SFAS 157,
Fair Value Measurements
, for all
non-financial assets and non-financial liabilities, except those that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least annually). The Company
adopted SFAS 157 for non-financial assets and non-financial liabilities on January 1, 2009 and does
not expect the provisions to have a material effect on its results of operations, financial
position or liquidity.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures
about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133
(SFAS
161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging
activities and specifically requires qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of, and gains and losses on,
derivative instruments, and disclosures about credit-risk-related contingent features in derivative
agreements. The provisions of SFAS 161 are effective for financial statements issued for fiscal
years beginning after November 15, 2008. The Company has not yet determined the impact on its
disclosures, if any, of adopting SFAS 161.
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162,
The Hierarchy of
Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles
to be used in preparing financial statements that are presented in conformity with U.S. generally
accepted accounting principles for nongovernmental entities. SFAS 162 is effective 60 days
following the SECs approval of the PCAOB amendments to AU Section 411,
The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles
. The adoption of SFAS 162 is not
expected to have an impact on the Companys financial condition, results of operations or
liquidity.
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 163,
Accounting for
Financial Guarantee Insurance Contracts
(SFAS 163). SFAS 163 clarifies how FASB Statement No. 60,
Accounting and Reporting by Insurance Enterprise,
applies to financial guarantee insurance
contracts issued by insurance enterprises, including the recognition and measurement of premium
revenue and claim liabilities. It also requires expanded disclosures about financial guarantee
insurance contracts. The provisions of SFAS 163 are effective for financial statements issued for
fiscal years beginning after December 15, 2008 and all interim periods within those fiscal years,
except for disclosures about the insurance enterprises risk-management activities, which are
effective the first period (including interim periods) beginning after May 23, 2008. The adoption
of SFAS 163 is not expected to have an impact on the Companys financial condition, results of
operations or liquidity.
On June 16, 2008, the FASB issued FSP Emerging Issues Task Force Issues No. 03-6-1,
Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities
(EITF
03-6-1). EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities
and shall be included in the computation of earnings per share pursuant to the two-class method.
EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December
15, 2008, and interim periods within those years. Upon adoption, a company is required to
retrospectively adjust its earnings per share data (including any amounts related to interim
periods, summaries of earnings and selected financial data) to conform with the provisions in this
FSP. The Company has not yet determined the estimated impact on earnings per share calculations, if
any, of adopting EITF
03-6-1.
61
Impact of Inflation
Periods of inflation have prompted the pools, and consequently the Company, to react quickly to
actual or potential imbalances between costs, including claim expenses, and premium rates. These
imbalances have been corrected mainly through improved underwriting controls, responsive management
information systems and frequent review of premium rates and loss experience.
Inflation also affects the final settlement costs of claims, which may not be paid for several
years. The longer a claim takes to settle, the more significant the impact of inflation on final
settlement costs. The Company periodically reviews outstanding claims and adjusts reserves for the
pools based on a number of factors, including inflation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk includes the potential for future losses due to changes in the fair value of financial
instruments, which relates mainly to the Companys investment portfolio. Those risks associated
with the investment portfolio include the effects of exposure to adverse changes in interest rates,
credit quality, hedge fund and illiquid securities including CDO/CLO, commercial middle market and
residential mortgage-backed securities.
Interest rate risk includes the changes in the fair value of fixed maturities based upon changes in
interest rates. The Company considers interest rate risk and the overall duration of the Companys
loss reserves in evaluating the Companys investment portfolio. The duration of the investment
portfolio, excluding short-term and hedge fund investments, was 5.43 years. The Company maintains
$185 million of cash and short term investments as of December 31, 2008.
The following tabular presentation outlines the expected cash flows of fixed maturities available
for sale for each of the next five years and the aggregate cash flows expected for the remaining
years thereafter based upon maturity dates. Fixed maturities include tax-exempts and taxable
securities with applicable weighted average interest rates.
|
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|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future cash flows of expected principal amounts
|
|
|
|
(Dollars in millions)
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|
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|
|
|
|
|
|
|
|
|
|
Total
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There-
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|
|
|
|
|
|
Fair
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
after
|
|
|
Total
|
|
|
Value
|
|
Tax-exempts
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.5
|
|
|
$
|
4.0
|
|
|
$
|
92.4
|
|
|
$
|
96.9
|
|
|
$
|
90.5
|
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.25
|
%
|
|
|
5.25
|
%
|
|
|
5.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxables
|
|
$
|
0.1
|
|
|
$
|
22.2
|
|
|
$
|
11.6
|
|
|
$
|
0.1
|
|
|
$
|
14.9
|
|
|
$
|
3.5
|
|
|
$
|
52.4
|
|
|
$
|
54.5
|
|
Average interest rate
|
|
|
8.59
|
%
|
|
|
2.74
|
%
|
|
|
4.25
|
%
|
|
|
4.63
|
%
|
|
|
7.58
|
%
|
|
|
4.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.1
|
|
|
$
|
22.2
|
|
|
$
|
11.6
|
|
|
$
|
0.6
|
|
|
$
|
18.9
|
|
|
$
|
95.9
|
|
|
$
|
149.3
|
|
|
$
|
145.0
|
|
Fixed maturities held to maturity consist exclusively of floating rate residential mortgage-backed
securities that have prepayment features. These prepayment features may cause actual cash flows to
differ from those based upon maturity date. Future expected cash flows related to such securities
are expected to be $102.5 million. The average interest rate on these securities is 2.68% and the
interest is taxable.
The Company has investments in residential mortgage-backed securities (RMBS) amounting to
$61.2 million at December 31, 2008. These securities are classified as held to maturity after the
Company transferred these holdings from the available for sale portfolio effective October 1, 2008.
The adjusted cost basis of these securities is based on a determination of the Fair Value of
these securities on the date they were transferred.
The Fair Value of each RMBS investment is determined under SFAS 157. Fair Value is
determined by estimating the price at which an asset might be sold on the measurement date. There
has been a considerable amount of turmoil in the U.S. housing market in 2007 and 2008, which has
led to market declines in such securities. Because the pricing of these investments is complex and
has many variables affecting price including, projected delinquency rates, projected severity
rates, estimated loan to value ratios, vintage year, subordination levels, projected prepayment
speeds, expected rates of return required by prospective purchasers, etc., the estimated price of
such securities will differ among brokers depending on these facts and assumptions. While many of
the inputs utilized in pricing are observable, many other inputs are unobservable and will vary
depending upon the broker. During periods of market dislocation, such as the current market
conditions, it is increasingly difficult to value such investments because trading becomes less
frequent and/or market data becomes less observable. As a result, valuations may include inputs and
assumptions that are less observable or require greater estimation and judgment as well as
valuation methods that are more complex. For example, assumptions regarding projected delinquency
and severity rates have become increasingly pessimistic due to market uncertainty connected with
these types of investments and requirements for high expected returns using pessimistic assumptions
as required by the limited number of prospective purchasers of such securities in the present
market. This has resulted in lower estimated quotes of estimated market prices. These inputs are
used in pricing models to assist the broker in estimating a current price for these investments.
Accordingly, the market price or Fair Value may not be reflective of the intrinsic value of a
security or indicative of the ultimate expected receipt of future cash flows. The Fair Value of
such securities at December 31, 2008 was $42.3 million.
62
The Company performs a cash flow analysis for each of these securities, which attempts to estimate
the likelihood of any future impairment. While the Company does not believe there are any
other-than-temporary impairments (OTTI) currently, future estimates may change
depending upon the actual housing statistics reported for each security to the Company. This may
result in future charges based upon revised estimates for delinquency rates, severity or prepayment
patterns. These changes in estimates may be material. These securities are collateralized by pools
of Alt-A mortgages, and receive priority payments from these pools. The Companys securities
rank senior to subordinated tranches of debt collateralized by each respective pool of mortgages.
The Company has collected all applicable interest and principal repayments on such securities to
date. As of February 25, 2009 the levels of subordination ranged from 27% to 51% of the total debt
outstanding for each pool. Delinquencies within the underlying mortgage pools (defined as payments
60+ days past due plus foreclosures plus real estate owned) ranged from 19.2% to 41.5% of total
amounts outstanding. In March 2008, delinquencies ranged from 3.4% to 21.2%. Delinquency rates are
not the same as severity rates, or actual loss, but are an indication of the potential for losses
of some degree in future periods. In each case, current pool subordination levels by individual
security remain in excess of current pool delinquency rates.
The Company has both the ability and the intent to hold such securities until maturity. Prior to
the transfer to the held to maturity classification, the Company incurred cumulative write-downs
from OTTI declines in the Fair Value of these securities after any recapture, amounting to $40.7
million through September 30, 2008. The collection of principal repayments on these securities
through December 31, 2008 resulted in $2.1 million in realized investment gains as a result of the
recapture of previous write-downs of investment balances. The Company sold two of its RMBS
investments in September 2008 resulting in cumulative realized investment losses of $11.0 million.
The net realized loss included previous OTTI declines in Fair Value of $9.7 million through the
dates of sale.
These RMBS investments, as of December 31, 2008 were rated AAA/Aaa by S&P/Moodys. As of March 9,
2009, these securities are rated AAA or AAA- by S&P and Caa1 to A1 by Moodys. On March 9, 2009
S&P announced that 9,430 tranches of mortgage securities had been placed on Credit Watch for
potential downgrades. The tranches of securities owned by the Company were not included in this
list, however, other junior tranches of securities within the RMBS owned by the Company were
included in the list. While the Companys securities were not
included in that S & P Credit Watch
listing, there is the possibility that they may be downgraded in the future.
Credit quality risk includes the risk of default by issuers of debt securities. As of December 31,
2008, 99.3% of the fair value of the Companys fixed income and short-term investment portfolios were
considered investment grade. As of December 31, 2008, the
Company invested approximately $2.7
million in fixed maturities that are below investment grade, with a concentration in investments
rated B- by S&P. The Company seeks to mitigate market risk associated with such investments by
maintaining a diversified portfolio of such securities that limits the concentration of investment
in any one issuer.
Hedge fund risk includes the potential loss from the diminution in the value of the underlying
investment of the hedge fund. Hedge fund investments are subject to various economic and market
risks. The risks associated with hedge fund investments may be substantially greater than the risks
associated with fixed income investments. Consequently, our hedge fund portfolio may be more
volatile, and the risk of loss greater, than that associated with fixed income investments. In
accordance with the investment policy for each of the Companys New York insurance company
subsidiaries, hedge fund investments are limited to the greater of 30% of invested assets or 50%
of policyholders surplus. The Companys Arizona insurance subsidiary does not invest in hedge
funds.
The Company also seeks to mitigate market risk associated with its investments in hedge funds by
maintaining a diversified portfolio of hedge fund investments. Diversification is achieved through
the use of many investment managers employing a variety of different investment strategies in
determining the underlying characteristics of their hedge funds. The Company is dependent upon
these managers to obtain market prices for the underlying investments of the hedge funds. Some of
these investments may be difficult to value and actual values may differ from reported amounts. The
hedge funds in which we invest usually impose limitations on the timing of withdrawals from the
hedge funds (most are within 90 days), and may affect our liquidity. Some of our hedge funds have
invoked gated provisions that allow the fund to disperse redemption proceeds to investors over an
extended period. The Company is subject to such restrictions and they will affect the timing of the
receipt of hedge fund proceeds. With respect to an investment in Altrion any withdrawals made
require one years prior written notice to the hedge fund manager.
The Company invests in illiquid securities such as commercial loans, which are private placements.
The fair value of each security is provided by securities dealers. The markets for these types of
securities can be illiquid and, therefore, the price obtained from dealers on these securities is
subject to change, depending upon the underlying market conditions of these securities, including
the potential for downgrades or defaults on the underlying collateral of the security. The fair
value of the commercial loan portfolio at December 31, 2008 was $2.7 million.
63
The Company maintains an investment in a limited partnership hedge fund, (Altrion), that invests in
collateralized debt obligation (CDO) securities, commercial loan obligation (CLO) securities,
credit related structured (CRS) securities and other structured products, as well as commercial
loans, that are arranged, managed or advised by a Mariner affiliated company. This investment was
consolidated in the Companys financial statements until August 1, 2006. As of December 31, 2008
and December 31, 2007, the investment in Altrion is included in the balance sheet under the
category of limited partnerships at equity. As a result of the turmoil in the U.S. housing industry
in 2007 and 2008 and its effect on mortgage-backed and illiquid securities, since 2007, Altrion has
not assembled any CDO or CLO assets as market conditions have precluded any such activity. Altrion
also has an investment in Tiptree Financial Partners LP (Tiptree Financial), which was formed in
2008 to trade in CLOs, but because of market conditions a substantial portion of Tiptree
Financials invested assets were as of December 31, 2008 and currently remain in cash. See
Investment Management Arrangement for a complete discussion of the Companys investment in
Altrion.
The Company monitors market risks on a regular basis through meetings with Mariner, examining the
existing portfolio and reviewing potential changes in investment guidelines, the overall effect of
which is to allow management to make informed decisions concerning the impact that market risks
have on the Companys investments.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements required by this item and the reports of the independent
accountants therein required by Item 15(a) of this report commence on page F-3. See accompanying
Index to the Consolidated Financial Statements on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended, as
of the end of the period covered by this annual report on Form 10-K was made under the supervision
and with the participation of our management, including our President and Chief Executive Officer
and Chief Financial Officer. Based upon this evaluation, our President and Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and procedures (a) are
effective to ensure that information required to be disclosed by us in reports filed or submitted
under the Securities Exchange Act is timely recorded, processed, summarized and reported and (b)
include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by us in reports filed or submitted under the Securities Exchange Act is
accumulated and communicated to our management, including our President and Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
Managements Report on Internal Control over Financial Reporting
Managements Report on Internal Control over Financial Reporting, which appears on page F-2, is
incorporated herein by reference.
Changes in Internal Controls
There have been no significant changes in our internal control over financial reporting (as
defined in rule 13a-15(f)) that occurred during the period covered by this report that has
materially affected or is reasonably likely to materially affect our internal control over
financial reporting.
Item 9B. Other Information
None.
64
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated herein by reference from the sections
captioned Election of Directors, Nominees for Directors, Committees of the Board, Executive
Officers of the Company and Section 16(a) Beneficial Ownership Reporting Compliance in NYMAGICs
definitive proxy statement for the 2009 Annual Meeting of Shareholders to be filed within 120 days
after December 31, 2008.
On June 4, 2008 we filed with the New York Stock Exchange (NYSE) the Annual CEO Certification
regarding the Companys compliance with the NYSEs Corporate Governance listing standards as
required by Section 303A-12(a) of the NYSE Listed Company Manual. In addition, the Company has
filed as exhibits to this annual report and to the annual report on Form 10-K for the year ended
December 31, 2008, the applicable certifications of its President and Chief Executive Officer and
its Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002, regarding
the quality of the Companys public disclosures.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference from the sections
captioned Compensation of Directors and Compensation of Executive Officers in NYMAGICs
definitive proxy statement for the 2009 Annual Meeting of Shareholders to be filed within 120 days
after December 31, 2008.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this Item is incorporated herein by reference to the Companys
definitive proxy statement for the 2009 Annual Meeting of Shareholders to be filed within 120 days
after December 31, 2008 with the Securities and Exchange Commission pursuant to Regulation 14A of
the Exchange Act.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference from the section
captioned Certain Relationships and Related Transactions in NYMAGICs Proxy Statement for the
2009 Annual Meeting of Shareholders to be filed within 120 days after December 31, 2008.
Item 14. Principal Accounting Fees and Services
The information required by Item 9(e) of Schedule 14A is incorporated herein by reference to the
Companys definitive proxy statement for the 2009 Annual Meeting of Shareholders to be filed within
120 days after December 31, 2008 with the Securities and Exchange Commission pursuant to
Regulation 14A of the Exchange Act.
65
PART IV
Item 15. Exhibits, Financial Statement Schedules
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(a) 1.
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Financial Statements
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The list of financial statements appears in the accompanying index on page F-1.
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2.
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Financial Statement Schedules
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The list of financial statement schedules appears in the accompanying index on page F-1.
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3.
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Exhibits
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3.1
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Charter of NYMAGIC, INC. (Filed as Exhibit 99.1 to the Registrants Current Report on
Form 8-K filed on December 16, 2003 (Commission File No. 1-11238) and incorporated
herein by reference).
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3.2
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Amended and Restated By-Laws. (Filed as Exhibit 3.3 of the Registrants Annual Report
on Form 10-K for the fiscal year ended December 31, 1999 (Commission File No. 1-11238)
and incorporated herein by reference).
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4.0
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Specimen Certificate of common stock (Filed as Exhibit 4.0 of Amendment No. 2 to the
Registrants Registration Statement No. 33-27665) and incorporated herein by
reference).
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10.1
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Restated Management Agreement dated as of January 1, 1986, by and among Mutual Marine
Office, Inc. and Arkwright-Boston Manufacturers Mutual Insurance Company, Utica Mutual
Insurance Company, Lumber Mutual Insurance Company, the Registrant and Pennsylvania
National Mutual Casualty Insurance Company (Filed as Exhibit 10.2 of the Registrants
Annual Report on Form 10-K for the fiscal year ended December 31, 1986 (Commission File
No. 2-88552) and incorporated herein by reference).
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10.2
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Amendment No. 2 to the Restated Management Agreement, dated as of December 30, 1988, by
and among Mutual Marine Office, Inc. and Arkwright Mutual Insurance Company, Utica
Mutual Insurance Company, Lumber Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit 10.2.2. of
the Registrants Current Report on Form 8-K dated January 6, 1989 (Commission File
No. 2-88552) and incorporated herein by reference).
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10.3
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Amendment No. 3 to the Restated Management Agreement, dated as of December 31, 1990 by
and among Mutual Marine Office, Inc. and Arkwright Mutual Insurance Company, Utica
Mutual Insurance Company, the Registrant and Pennsylvania National Mutual Casualty
Insurance Company (Filed as Exhibit 10.2.3. of the Registrants Annual Report on
Form 10-K for the fiscal year ended December 31, 1990 (Commission File No. 3-27665) and
incorporated herein by reference).
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10.4
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Restated Management Agreement dated as of January 1, 1986, by and among Mutual Inland
Marine Office, Inc. and Arkwright-Boston Manufacturers Mutual Insurance Company, Utica
Mutual Insurance Company, Lumber Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit 10.4 of the
Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 1986
(Commission File No. 2-88552) and incorporated herein by reference).
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10.5
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Amendment No. 2 to the Restated Management Agreement, dated as of December 30, 1988, by
and among Mutual Inland Marine Office, Inc. and Arkwright Mutual Insurance Company,
Utica Mutual Insurance Company, Lumber Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit 10.4.2 of the
Registrants Current Report on Form 8-K, dated January 6, 1989 (Commission File
No. 2-88552) and incorporated herein by reference).
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10.6
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Amendment No. 3 to the Restated Management Agreement, dated as of December 31, 1990, by
and among Mutual Inland Marine Office, Inc. and Arkwright Mutual Insurance Company,
Utica Mutual Insurance Company, the Registrant and Pennsylvania National Mutual
Casualty Insurance Company (Filed as Exhibit 10.4.3. of the Registrants Annual Report
on Form 10-K for the fiscal year ended December 31, 1990 (Commission File No. 3-27665)
and incorporated herein by reference).
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10.7
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Restated Management Agreement dated as of January 1, 1986, by and among Mutual Marine
Office of the Midwest, Inc. and Arkwright-Boston Manufacturers Mutual Insurance
Company, Utica Mutual Insurance Company, Lumber Mutual Insurance Company, the
Registrant and Pennsylvania National Mutual Casualty Insurance Company (Filed as
Exhibit 10.6 of the Registrants Annual Report on Form 10-K for the fiscal year ended
December 31, 1986 (Commission File No. 2-88552) and incorporated herein by reference).
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10.8
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Amendment No. 2 to the Restated Management Agreement dated as of December 30, 1988, by
and among Mutual Marine Office of the Midwest, Inc. and Arkwright Mutual Insurance
Company, Utica Mutual Insurance Company, Lumber Mutual Insurance Company, the
Registrant and Pennsylvania National Mutual Casualty Insurance Company (Filed as
Exhibit 10.6.2 of the Registrants Current Report on Form 8-K, dated January 6, 1989
(Commission File No. 2-88552) and incorporated herein by reference).
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10.9
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Amendment No. 3 to the Restated Management Agreement dated as of December 31, 1990, by
and among Mutual Marine Office of the Midwest, Inc. and Arkwright Mutual Insurance
Company, Utica Mutual Insurance Company, the Registrant and Pennsylvania National
Mutual Casualty Insurance Company (Filed as Exhibit 10.6.3. of the Registrants Annual
Report on Form 10-K for the fiscal year ended December 31, 1990 (Commission File
No. 3-27665) and incorporated herein by reference).
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10.10
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Restated Management Agreement dated as of January 1, 1986, by and among Pacific Mutual
Marine Office, Inc. and Arkwright-Boston Manufacturers Mutual Insurance Company, Lumber
Mutual Insurance Company, Utica Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit 10.8 of the
Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 1986
(Commission File No. 2-88552) and incorporated herein by reference).
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66
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10.11
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Amendment No. 2 to the Restated Management Agreement dated as of December 30, 1988, by
and among Pacific Mutual Marine Office, Inc. and Arkwright Mutual Insurance Company,
Lumber Mutual Insurance Company, Utica Mutual Insurance Company, the Registrant and
Pennsylvania National Mutual Casualty Insurance Company (Filed as Exhibit 10.8.2 of the
Registrants Current Report on Form 8-K, dated January 6, 1989 (Commission File
No. 2-88552) and incorporated herein by reference).
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10.12
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Amendment to Restated Management Agreement dated as of December 31, 1990, by and among
Pacific Mutual Marine Office, Inc. and Arkwright Mutual Insurance Company, Utica Mutual
Insurance Company, the Registrant and Pennsylvania National Mutual Casualty Insurance
Company (Filed as Exhibit 10.8.3. of the Registrants Annual Report on Form 10-K for
the fiscal year ended December 31, 1992 (Commission File No. 1-11238) and incorporated
herein by reference).
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+10.13
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1991 Stock Option Plan (Filed as Exhibit A to the Registrants Proxy Statement for its
1991 Annual Meeting of Shareholders (Commission File No. 1-11238) and incorporated
herein by reference).
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10.14
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Form of Indemnification Agreement (Filed as Exhibit 10.10 of the Registrants Annual
Report on Form 10-K for the fiscal year ended December 31, 1999 (Commission File
No. 1-11238) and incorporated herein by reference).
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+10.15
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1999 NYMAGIC, INC. Phantom Stock Plan (Filed as Exhibit 10.11 of the Registrants
Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (Commission File
No. 1-11238) and incorporated herein by reference).
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+10.16
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Severance Agreement dated as of December 31, 2001 by and between NYMAGIC, INC. and
Thomas J. Iacopelli (Filed as Exhibit 10.2 of the Registrants Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002 (Commission File No. 1-11238) and
incorporated herein by reference).
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+10.17
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Severance Agreement dated as of July 9, 2002 by and between NYMAGIC, INC. and Paul
Hart. Filed as Exhibit 10.17 of the Registrants Annual Report on Form 10-K for the
year ended December 31, 2003 (Commission File No. 1-11238) and incorporated herein by
reference.
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+10.18
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NYMAGIC, INC. 2002 Nonqualified Stock Option Plan (Filed as Exhibit 10.2 of the
Registrants Quarterly Report on Form 10-Q for the quarter ended September 30, 2002
(Commission File No. 1-11238) and incorporated herein by reference).
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+10.19
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NYMAGIC, INC. Amended and Restated 2004 Long-Term Incentive Plan (Filed as
Exhibit 10.19 to the Registrants Annual Report on Form 10-K for the year ended
December 31, 2004 (Commission File No. 1-11238) and incorporated herein by reference).
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+10.20
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NYMAGIC, INC. Employee Stock Purchase Plan (Filed as Appendix C to the Registrants
Proxy Statement for its 2004 Annual Meeting of Stockholders (Commission File
No. 1-11238) and incorporated herein by reference).
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+10.21
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Forms of Election for Deferred Compensation Program (Filed as Exhibit 10.21 to the
Registrants Annual Report on Form 10-K for the year ended December 31, 2004
(Commission File No. 1-11238) and incorporated herein by reference).
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10.22
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Voting Agreement among Mariner Partners, Inc. and certain stockholders of the Company
dated as of February 20, 2002, as amended March 1, 2002 (Filed as Exhibit 99.1 to the
Schedule 13D filed by Mariner Partners, Inc. and the other reporting persons named
therein on March 4, 2002 (Commission File No. 5-40907) and incorporated herein by
reference).
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10.23
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Amendment No. 2 dated as of January 27, 2003 to Voting Agreement among Mariner
Partners, Inc. and certain stockholders of the Company (Filed as Exhibit 99.2 to the
Schedule 13D/A filed by Mariner Partners, Inc. and the other reporting persons named
therein on April 10, 2003 (Commission File No. 5-40907) and incorporated herein by
reference).
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10.24
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Amendment No. 3 dated as of March 12, 2003 to Voting Agreement among Mariner Partners,
Inc. and certain stockholders of the Company (Filed as Exhibit 99.3 to the
Schedule 13D/A filed by Mariner Partners, Inc. and the other reporting person named
therein on April 10, 2003 (Commission File No. 5-40907) and incorporated herein by
reference).
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10.25
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Amendment No. 4 dated as of February 24, 2004 to Voting Agreement among Mariner
Partners, Inc. and certain stockholders of the Company. (Filed as Exhibit 10.22 of the
Registrants Annual Report on Form 10-K for the year ended December 31, 2003
(Commission File No. 1-11238) and incorporated herein by reference).
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10.26
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Resolutions of the Board of Directors of the Companys subsidiary, New York Marine And
General Insurance Company, adopted July 18, 2002, committing not to pay dividends to
the Company without the consent of the New York State Department of Insurance prior to
July 31, 2004 (Filed as Exhibit 10.1 to the Registrants original Form 10-Q for the
quarter ended June 30, 2003 (Commission File No. 1-11238) and incorporated herein by
reference).
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10.27
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Resolutions of the Board of Directors of the Companys subsidiary, Gotham Insurance
Company, adopted July 18, 2002, committing not to pay dividends to the Company without
the consent of the New York State Department of Insurance prior to July 31, 2004 (Filed
as Exhibit 10.2 to the Registrants original Form 10-Q for the quarter ended June 30,
2003 (Commission File No. 1-11238) and incorporated herein by reference).
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10.28
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Amended and Restated Investment Management Agreement between Mariner Partners, Inc. and
NYMAGIC, Inc. and New York Marine And General Insurance Company and Gotham Insurance
Company, dated as of December 6, 2002 (Filed as Exhibit 10.6 of the Registrants
amended Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (Commission
File No. 1-11238) and incorporated herein by reference).
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10.29
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Limited Partnership Agreement of Mariner Tiptree (CDO) Fund I, L.P. dated as of May 1,
2003 (Filed as Exhibit 10.1 of the Registrants Quarterly Report on Form 10-Q for the
quarter ended June 20, 2004 (Commission File No. 1-11238) and incorporated herein by
reference).
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10.30
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Securities Purchase Agreement dated as of January 31, 2003 by and between NYMAGIC, Inc.
and Conning Capital Partners VI, L.P. (Filed as Exhibit 99.1 of the Registrants
Current Report on Form 8-K dated January 31, 2003 (Commission File No. 1-11238) and
incorporated herein by reference).
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67
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10.31
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Registration Rights Agreement dated as of January 31, 2003 by and between NYMAGIC, Inc.
and Conning Capital Partners VI, L.P. (Filed as Exhibit 99.2 of the Registrants
Current Report on Form 8-K dated January 31, 2003 (Commission File No. 1-11238) and
incorporated herein by reference).
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10.32
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Option Certificate dated as of January 31, 2003 by and between NYMAGIC, INC. and
Conning Capital Partners VI, L.P. (Filed as Exhibit 99.3 of the Registrants Current
Report on Form 8-K dated January 31, 2003 (Commission File No. 1-11238) and
incorporated herein by reference).
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10.33
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Registration Rights Agreement dated as of March 11, 2004 by and among NYMAGIC, INC. and
Keefe, Bruyette and Woods, Inc. and the other initial purchasers referred to therein.
(Filed as Exhibit 10.31 of the Registrants Annual Report on Form 10-K for the year
ended December 31, 2003 (Commission File No. 1-11238) and incorporated herein by
reference).
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10.34
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Indenture dated as of March 11, 2004 by and between NYMAGIC, INC. and Wilmington Trust
Company, as trustee related to the Companys 6.50% Senior Notes due 2014. (Filed as
Exhibit 10.32 of the Registrants Annual Report on Form 10-K for the year ended
December 31, 2003 (Commission File No. 1-11238) and incorporated herein by reference).
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10.35
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First Supplemental Indenture dated as of March 11, 2004 by and between NYMAGIC, INC.
and Wilmington Trust Company, as trustee. (Filed as Exhibit 10.33 of the Registrants
Annual Report on Form 10-K for the year ended December 31, 2003 (Commission File
No. 1-11238) and incorporated herein by reference).
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10.36
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Sublease dated as of December 12, 2002 by and between BNP Paribas and New York Marine
And General Insurance Company (Filed as Exhibit 10.20 of the Registrants Annual Report
on Form 10-K for the fiscal year ended December 31, 2002 (Commission File No. 1-11238)
and incorporated herein by reference).
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10.37
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Stock Purchase Agreement, dated as of January 7, 2005, by and among the Company and the
sellers named therein (Filed as Exhibit 10.1 of the Registrants Current Report on
Form 8-K dated January 10, 2005 (Commission File No. 1-11238) and incorporated herein
by reference).
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+10.38
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Consulting Agreement, dated as of April 6, 2005, by and between the Company and William
D. Shaw, Jr. (Filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K
(File No. 1-11238) filed on April 6, 2005 and incorporated herein by reference).
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+10.39
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Form of Unrestricted Share Award Agreement. (Filed as Exhibit 10.1 to the Registrants
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2005 (Commission File
No. 1-11238) and incorporated herein by reference).
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10.40
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Amended and Restated Voting Agreement dated as of October 12, 2005, by and among Mark
W. Blackman, Lionshead Investments, LLC, Robert G. Simses, and Mariner Partners, Inc.
(Filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K (File
No. 1-11238) filed on October 14, 2005, and incorporated herein by reference).
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10.41
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Sale and Purchase Agreement dated August 31, 2005 by and among the Robertson Group
Limited and the Edinburgh Woollen Mill (Group) Limited and MMO EU Limited. (Filed as
Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005 (Commission File No. 1-11238) and incorporated herein by reference).
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10.42
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Taxation Deed. (Filed as Exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q
for the quarter ended September 30, 2005 (Commission File No. 1-11238) and incorporated
herein by reference).
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+10.43
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Form of Restricted Share Award Agreement. (Filed as Exhibit 10.3 to the Registrants
Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (Commission File
No. 1-11238) and incorporated herein by reference).
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10.44
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Letter Agreement dated as of March 22, 2006 by and between NYMAGIC, INC. and Conning
Capital Partners VI, L.P. (Filed as Exhibit 99.1 to the Registrants Current Report on
Form 8-K (File No. 1-11238) filed on March 28, 2006 and incorporated herein by
reference).
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10.45
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Amended and Restated Option Certificate dated as of March 22, 2006 by and between
NYMAGIC, INC. and Conning Capital Partners VI, L.P (Filed as Exhibit 99.1 to the
Registrants Current Report on Form 8-K (File No. 1-11238) filed on March 28, 2006 and
incorporated herein by reference).
|
+10.46
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Consulting Agreement, dated as of March 30, 2006, by and between William D. Shaw, Jr.
and NYMAGIC, INC.( (Filed as Exhibit 10.1 to the Registrants Current Report on
Form 8-K (File No. 1-11238) filed on March 31, 2006 and incorporated herein by
reference).
|
+10.47
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Employment Agreement, dated as of April 17, 2006, by and between A. George Kallop and
NYMAGIC, INC. (Filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K
(File No. 1-11238) filed on April 20, 2006 and incorporated herein by reference).
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+10.48
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|
Performance Share Award Agreement, dated as of April 17, 2006, by and between A. George
Kallop and NYMAGIC, INC. (Exhibits omitted. Will be provided to the
SEC upon request.) (Filed as Exhibit 10.2 to the Registrants Current Report on Form 8-K (File
No. 1-11238) filed on April 20, 2006 and incorporated herein by reference).
|
+10.49
|
|
Employment Agreement, dated as of April 18, 2006, by and between George R. Trumbull,
III and NYMAGIC, INC. (Filed as Exhibit 10.3 to the Registrants Current Report on
Form 8-K (File No. 1-11238) filed on April 20, 2006 and incorporated herein by
reference).
|
+10.50
|
|
Performance Share Award Agreement, dated as of April 18, 2006, by and between George R.
Trumbull, III and NYMAGIC, INC. (Filed as Exhibit 10.4 to the Registrants Current
Report on Form 8-K (File No. 1-11238) filed on April 20, 2006 and incorporated herein
by reference).
|
10.51
|
|
Amended and Restated Limited Partnership Agreement by and between NYMAGIC, INC.,
Tricadia CDO Fund, L.P., as general partner, and the limited partners named therein,
dated as of August 1, 2006. (Filed as Exhibit 99.1 to the Registrants Current Report
on Form 8-K (File No. 1-11238) filed on August 23, 2006 and incorporated herein by
reference).
|
68
|
|
|
+10.52
|
|
Employment Agreement, dated January 9, 2007, by and between George R. Trumbull, III and
NYMAGIC, INC. (Filed as Exhibit 10.52 of the Registrants Annual Report on Form 10-K
for the year ended December 31, 2006, (Commission File no. 1-11238) and incorporated
herein by reference).
|
+10.53
|
|
2004 Amended and Restated Long-Term Incentive Plan Award Agreement, dated January 9,
2007, by and between NYMAGIC, INC. and George R. Trumbull, III. (Filed as Exhibit 10.53
of the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2006,
(Commission File no. 1-11238) and incorporated herein by reference).
|
+10.54
|
|
Amendment to Employment Agreement, dated January 9, 2007, by and between A. George
Kallop and NYMAGIC, INC. (Filed as Exhibit 10.54 of the Registrants Annual Report on
Form 10-K for the year ended December 31, 2006, (Commission File no. 1-11238) and
incorporated herein by reference).
|
+10.55
|
|
2004 Amended and Restated Long-Term Incentive Plan Award Agreement, dated January 9,
2007, by and between NYMAGIC, INC. and A. George Kallop. (Filed as Exhibit 10.55 of the
Registrants Annual Report on Form 10-K for the year ended December 31, 2006,
(Commission File no. 1-11238) and incorporated herein by reference.
|
+10.56
|
|
Consulting Agreement, dated as of March 22, 2007 by and between William D. Shaw, Jr.
and NYMAGIC, INC. (Filed as Exhibit 10.5 to the Registrants Quarterly Report on Form
10-Q for the quarter ended March 31, 2007 (Commission File no. 1-11238) and
incorporated herein by reference).
|
+10.57
|
|
2004 Amended and Restated Long-term Incentive Plan Award Agreement, dated January 9,
2008, between A. George Kallop and NYMAGIC, INC. (Filed as Exhibit 10.57 of the
Registrants Annual Report on Form 10-K for the year ended December 31, 2007,
(Commission File no. 1-11238) and incorporated herein by reference).
|
+10.58
|
|
2004 Amended and Restated Long-term Incentive Plan Award Agreement, dated January 10,
2008, between George R. Trumbull, III and NYMAGIC, INC. (Filed as Exhibit 10.58 of the
Registrants Annual Report on Form 10-K for the year ended December 31, 2007,
(Commission File no. 1-11238) and incorporated herein by reference).
|
+10.59
|
|
Employment Agreement, dated January 10, 2008, between NYMAGIC, INC. and George R.
Trumbull, III. (Filed as Exhibit 10.53 of the Registrants Annual Report on Form 10-K
for the year ended December 31, 2006, (Commission File no. 1-11238) and incorporated
herein by reference. (Filed as Exhibit 10.59 of the Registrants Annual Report on Form
10-K for the year ended December 31, 2007, (Commission File no. 1-11238) and
incorporated herein by reference).
|
+10.60
|
|
Severance Agreement, dated February 15, 2007, between Mutual Marine Office, Inc and
Craig Lowenthal. (Filed as Exhibit 10.60 of the Registrants Annual Report on Form 10-K
for the year ended December 31, 2007, (Commission File no. 1-11238) and incorporated
herein by reference).
|
10.61
|
|
Lease, dated June 5, 2007 by and between Metropolitan 919 Third Avenue LLC and New York
Marine And General Insurance Company. (Filed as Exhibit 10.61 of the Registrants
Annual Report on Form 10-K for the year ended December 31, 2007, (Commission File
no. 1-11238) and incorporated herein by reference).
|
+10.62
|
|
Consulting Agreement, effective January 1, 2008 and entered into April 4, 2008 between
William D. Shaw, Jr. and NYMAGIC, INC. (Filed as Exhibit 10.1 to the Registrants
Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 (Commission File
no. 1-11238) and incorporated herein by reference.
|
+10.63
|
|
Consulting Agreement, effective May 21, 2008 and entered into June 16, 2008 between
George R. Trumbull, III and NYMAGIC, INC. (Filed as Exhibit 10.1 to the Registrants
Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 (Commission File
no. 1-11238) and incorporated herein by reference.
|
+10.64
|
|
Engagement Agreement, effective May 21, 2008 and entered into July 8, 2008 between
Robert G. Simses and NYMAGIC, INC. (Filed as Exhibit 10.2 to the Registrants Quarterly
Report on Form 10-Q for the quarter ended June 30, 2008 (Commission File no. 1-11238)
and incorporated herein by reference.
|
+10.65
|
|
NYMAGIC, INC. 2004 Amended and Restated Long-Term Incentive Plan, as amended May 21,
2008. (Filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K File No.
1-11238) filed on May 28, 2008 and incorporated herein by reference).
|
+10.66
|
|
Employment Agreement, dated as of January 1, 2009, by and between A. George Kallop and
NYMAGIC, INC. (Filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K
(File No. 1-11238) filed on February 4, 2009 and incorporated herein by reference).
|
+10.67
|
|
Performance Share Award Agreement,
dated as of January 1, 2009, by and between A. George
Kallop and NYMAGIC, INC. (Exhibit omitted. Will be provided to the SEC upon request.)
|
*+10.68
|
|
Form of Indemnification Agreement by and between NYMAGIC, INC. and members of its Board
of Directors, approved as of December 3, 2008.
|
*+10.69
|
|
Amended and Restated Voting Agreement by and among Mark W. Blackman, Lionshead
Investments, LLC and Robert G. Simses, Trustee, and Mariner Partners, Inc. dated
October 15, 2008.
|
*+10.70
|
|
Letter Agreement by and among Mariner Partners, Inc. and Mark W. Blackman, Lionshead
Investments, LLC and Robert G. Simses, Trustee, and Mariner Partners, Inc. dated
October 15, 2008.
|
*10.71
|
|
2007 financial statements of Tricadia CDO Fund, L.P.
|
*+10.72
|
|
Employment Agreement, dated as of
April 7, 2008, by and between Glenn R. Yanoff and NYMAGIC, INC.
|
+10.73
|
|
Performance Share Award Agreement,
dated as of April 7, 2008, by and between Glenn R. Yanoff and
NYMAGIC INC. (Exhibit omitted. Will be provided to the SEC upon
request.)
|
*21.1
|
|
Subsidiaries of the Registrant.
|
*23.1
|
|
Consent of KPMG LLP.
|
*23.2
|
|
Consent of Grant Thornton LLP.
|
69
|
|
|
*31.1
|
|
Certification of A. George Kallop, President and Chief Executive Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
*31.2
|
|
Certification of Thomas J. Iacopelli, Chief Financial Officer, as adopted pursuant to
section 302 of the Sarbanes-Oxley Act of 2002.
|
*32.1
|
|
Certification of A. George Kallop, President and Chief Executive Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*32.2
|
|
Certification of Thomas J. Iacopelli, Chief Financial Officer, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
*
|
|
Filed herewith.
|
|
+
|
|
Represents a management contract or compensatory plan or arrangement.
|
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
NYMAGIC, INC.
(Registrant)
|
|
|
By:
|
/s/ A. George Kallop
|
|
|
|
A. George Kallop
|
|
|
|
President and Chief Executive Officer
|
|
Date: March 12, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the date
indicated.
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
/s/ John R. Anderson
|
|
Director
|
|
March 12, 2009
|
|
|
|
|
|
John R. Anderson
|
|
|
|
|
|
|
|
|
|
/s/ Glenn J. Angiolillo
|
|
Director
|
|
March 12, 2009
|
|
|
|
|
|
Glenn J. Angiolillo
|
|
|
|
|
|
|
|
|
|
/s/ Ronald J. Artinian
|
|
Director
|
|
March 12, 2009
|
|
|
|
|
|
Ronald J. Artinian
|
|
|
|
|
|
|
|
|
|
/s/ John T. Baily
|
|
Director
|
|
March 12, 2009
|
|
|
|
|
|
John T. Baily
|
|
|
|
|
|
|
|
|
|
/s/ David E. Hoffman
|
|
Director
|
|
March 12, 2009
|
|
|
|
|
|
David E. Hoffman
|
|
|
|
|
|
|
|
|
|
/s/ A. George Kallop
|
|
Director and President and
|
|
March 12, 2009
|
|
|
|
|
|
A. George Kallop
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
/s/ William J. Michaelcheck
|
|
Director
|
|
March 12, 2009
|
|
|
|
|
|
William J. Michaelcheck
|
|
|
|
|
|
|
|
|
|
/s/ William D. Shaw, Jr.
|
|
Director
|
|
March 12, 2009
|
|
|
|
|
|
William D. Shaw, Jr.
|
|
|
|
|
|
|
|
|
|
/s/ Robert G. Simses
|
|
Director and Chairman
|
|
March 12, 2009
|
|
|
|
|
|
Robert G. Simses
|
|
|
|
|
|
|
|
|
|
/s/ George R. Trumbull, III
|
|
Director
|
|
March 12, 2009
|
|
|
|
|
|
George R. Trumbull, III
|
|
|
|
|
|
|
|
|
|
/s/ David W. Young
|
|
Director
|
|
March 12, 2009
|
|
|
|
|
|
David W. Young
|
|
|
|
|
|
|
|
|
|
/s/ Thomas J. Iacopelli
|
|
Principal Accounting Officer and
|
|
March 12, 2009
|
|
|
|
|
|
Thomas J. Iacopelli
|
|
Chief Financial Officer
|
|
|
71
NYMAGIC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
F-2
|
|
|
|
|
|
F-3
|
|
|
|
|
|
F-4
|
|
|
|
|
|
F-5
|
|
|
|
|
|
F-6
|
|
|
|
|
|
F-7
|
|
|
|
|
|
F-8
|
|
|
|
|
|
F-9
|
|
|
|
|
|
F-41
|
|
|
|
|
|
F-44
|
|
|
|
|
|
F-45
|
|
|
|
|
|
F-45
|
|
|
|
F-1
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial
reporting, and for performing an assessment of the effectiveness of internal control over financial
reporting as of December 31, 2008. Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. The Companys system of internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and, (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Companys assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Management performed an assessment of the effectiveness of the Companys internal control over
financial reporting as of December 31, 2008 based upon criteria in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our assessment, management determined that the Companys internal control over financial
reporting was effective as of December 31, 2008 based on the criteria in Internal
Control-Integrated Framework issued by COSO.
Dated: March 12, 2009
|
|
|
|
|
|
|
A. George Kallop,
|
|
|
|
|
President and
|
|
Thomas J. Iacopelli,
|
|
|
Chief Executive Officer
|
|
Chief Financial Officer
|
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
NYMAGIC, INC.:
We have audited NYMAGIC, INC. and subsidiaries internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). NYMAGIC, INC.s
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Managements Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, NYMAGIC, INC. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of NYMAGIC, INC. and subsidiaries as of
December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders
equity, and cash flows for each of the years in the three-year period ended December 31, 2008, and
our report dated March 12, 2009 expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG
LLP
New York, New York
March 12, 2009
F-3
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
NYMAGIC, INC.:
We have audited the accompanying consolidated balance sheets of NYMAGIC, INC. and subsidiaries as
of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders
equity, and cash flows for each of the years in the three-year period ended December 31, 2008. In
connection with our audits of the consolidated financial statements, we also have audited financial
statement schedules as listed in the accompanying index. These consolidated financial statements
and financial statement schedules are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of NYMAGIC, INC. and subsidiaries as of December 31, 2008
and 2007, and the results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), NYMAGIC, INC. and subsidiaries internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 12, 2009, expressed an unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
/s/ KPMG
LLP
New York, New York
March 12, 2009
F-4
NYMAGIC, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
Held to maturity at amortized cost (fair value $42,329,432 and $0)
|
|
$
|
61,246,212
|
|
|
$
|
|
|
Available for sale at fair value (amortized cost $149,402,001 and $162,579,526)
|
|
|
144,978,426
|
|
|
|
162,890,600
|
|
Trading at fair value (amortized cost $22,203,883 and $80,671,102)
|
|
|
17,399,090
|
|
|
|
78,537,285
|
|
Equity securities trading at fair value (cost $15,159,200 and $65,001,440)
|
|
|
11,822,620
|
|
|
|
66,325,265
|
|
Commercial loans at fair value (amortized cost $6,907,368 and $0)
|
|
|
2,690,317
|
|
|
|
|
|
Limited partnerships at equity (cost $98,101,553 and $148,915,402)
|
|
|
122,927,697
|
|
|
|
188,295,547
|
|
Short-term investments
|
|
|
110,249,779
|
|
|
|
165,000
|
|
Cash and cash equivalents
|
|
|
75,672,102
|
|
|
|
204,913,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and investments
|
|
|
546,986,243
|
|
|
|
701,127,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income
|
|
|
4,978,920
|
|
|
|
2,590,664
|
|
Premiums and other receivables, net
|
|
|
23,426,525
|
|
|
|
26,275,077
|
|
Receivable for investments disposed
|
|
|
25,415,261
|
|
|
|
22,885,923
|
|
Reinsurance receivables on unpaid losses, net
|
|
|
213,906,569
|
|
|
|
250,129,540
|
|
Reinsurance receivables on paid losses, net
|
|
|
28,429,945
|
|
|
|
38,804,022
|
|
Deferred policy acquisition costs
|
|
|
14,663,710
|
|
|
|
14,989,585
|
|
Prepaid reinsurance premiums
|
|
|
19,225,185
|
|
|
|
21,749,663
|
|
Deferred income taxes
|
|
|
35,514,597
|
|
|
|
14,443,675
|
|
Property, improvements and equipment, net
|
|
|
10,033,489
|
|
|
|
4,816,836
|
|
Other assets
|
|
|
23,895,902
|
|
|
|
10,164,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
946,476,346
|
|
|
$
|
1,107,976,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses
|
|
$
|
548,749,589
|
|
|
$
|
556,535,344
|
|
Reserve for unearned premiums
|
|
|
83,364,396
|
|
|
|
87,577,497
|
|
Ceded reinsurance payable
|
|
|
23,809,871
|
|
|
|
27,071,178
|
|
Notes payable
|
|
|
100,000,000
|
|
|
|
100,000,000
|
|
Payable for investments acquired
|
|
|
|
|
|
|
28,678,666
|
|
Dividends payable
|
|
|
671,059
|
|
|
|
815,267
|
|
Other liabilities
|
|
|
25,808,669
|
|
|
|
27,853,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
782,403,584
|
|
|
|
828,531,035
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
15,742,215
|
|
|
|
15,672,090
|
|
Paid-in capital
|
|
|
49,539,886
|
|
|
|
47,313,015
|
|
Accumulated other comprehensive (loss) income
|
|
|
(2,875,317
|
)
|
|
|
202,196
|
|
Retained earnings
|
|
|
189,702,569
|
|
|
|
296,641,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
252,109,353
|
|
|
|
359,828,536
|
|
Treasury stock, at cost, 7,333,977 and 6,965,077 shares
|
|
|
(88,036,591
|
)
|
|
|
(80,382,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
164,072,762
|
|
|
|
279,445,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
946,476,346
|
|
|
$
|
1,107,976,582
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF OPERATONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
167,072,696
|
|
|
$
|
166,095,871
|
|
|
$
|
151,834,141
|
|
Net investment (loss) income
|
|
|
(63,502,847
|
)
|
|
|
35,489,369
|
|
|
|
47,897,224
|
|
Net realized investment losses
|
|
|
(47,664,766
|
)
|
|
|
(6,902,852
|
)
|
|
|
(402,554
|
)
|
Commission and other income (loss), net
|
|
|
275,836
|
|
|
|
(4,245,541
|
)
|
|
|
1,137,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
56,180,919
|
|
|
|
190,436,847
|
|
|
|
200,466,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses incurred
|
|
|
109,958,363
|
|
|
|
89,844,108
|
|
|
|
86,135,655
|
|
Policy acquisition expenses
|
|
|
38,669,739
|
|
|
|
37,694,535
|
|
|
|
31,336,186
|
|
General and administrative expenses
|
|
|
38,611,754
|
|
|
|
36,018,289
|
|
|
|
31,401,429
|
|
Interest expense
|
|
|
6,716,208
|
|
|
|
6,725,542
|
|
|
|
6,712,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
193,956,064
|
|
|
|
170,282,474
|
|
|
|
155,585,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(137,775,145
|
)
|
|
|
20,154,373
|
|
|
|
44,881,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(14,026,280
|
)
|
|
|
10,508,537
|
|
|
|
16,776,694
|
|
Deferred
|
|
|
(19,413,786
|
)
|
|
|
(3,726,514
|
)
|
|
|
(1,745,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
|
(33,440,066
|
)
|
|
|
6,782,023
|
|
|
|
15,030,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(104,335,079
|
)
|
|
$
|
13,372,350
|
|
|
$
|
29,850,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common
stock outstanding-basic
|
|
|
8,533,924
|
|
|
|
8,895,729
|
|
|
|
8,806,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(12.23
|
)
|
|
$
|
1.50
|
|
|
$
|
3.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common
stock outstanding-diluted
|
|
|
8,533,924
|
|
|
|
9,190,228
|
|
|
|
9,177,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(12.23
|
)
|
|
$
|
1.46
|
|
|
$
|
3.25
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
15,672,090
|
|
|
$
|
15,505,815
|
|
|
$
|
15,415,790
|
|
Shares issued
|
|
|
70,125
|
|
|
|
166,275
|
|
|
|
90,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
15,742,215
|
|
|
|
15,672,090
|
|
|
|
15,505,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
47,313,015
|
|
|
$
|
42,219,900
|
|
|
$
|
38,683,462
|
|
Shares issued and other
|
|
|
2,226,871
|
|
|
|
5,093,115
|
|
|
|
3,536,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
49,539,886
|
|
|
|
47,313,015
|
|
|
|
42,219,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
202,196
|
|
|
$
|
87,432
|
|
|
$
|
(569,153
|
)
|
Unrealized (loss) gain on securities, net of
reclassification adjustment
|
|
|
(3,077,513
|
)
|
|
|
114,764
|
|
|
|
656,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
(3,077,513
|
)
|
|
|
114,764
|
|
|
|
656,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(2,875,317
|
)
|
|
|
202,196
|
|
|
|
87,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
296,641,235
|
|
|
$
|
286,147,400
|
|
|
$
|
259,015,028
|
|
Net (loss) income
|
|
|
(104,335,079
|
)
|
|
|
13,372,350
|
|
|
|
29,850,480
|
|
Dividends declared
|
|
|
(2,603,587
|
)
|
|
|
(2,878,515
|
)
|
|
|
(2,718,108
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
189,702,569
|
|
|
|
296,641,235
|
|
|
|
286,147,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
(80,382,989
|
)
|
|
$
|
(73,261,001
|
)
|
|
$
|
(73,261,001
|
)
|
Net purchase of treasury shares
|
|
|
(7,653,602
|
)
|
|
|
(7,121,988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
(88,036,591
|
)
|
|
|
(80,382,989
|
)
|
|
|
(73,261,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
164,072,762
|
|
|
|
279,445,547
|
|
|
|
270,699,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(104,335,079
|
)
|
|
$
|
13,372,350
|
|
|
$
|
29,850,480
|
|
Other comprehensive (loss) income
|
|
|
(3,077,513
|
)
|
|
|
114,764
|
|
|
|
656,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
|
(107,412,592
|
)
|
|
|
13,487,114
|
|
|
|
30,507,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
|
Common stock, par value $1 each:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued, beginning of year
|
|
|
15,672,090
|
|
|
|
15,505,815
|
|
|
|
15,415,790
|
|
Shares issued
|
|
|
70,125
|
|
|
|
166,275
|
|
|
|
90,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued, end of year
|
|
|
15,742,215
|
|
|
|
15,672,090
|
|
|
|
15,505,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, authorized shares, par value $1 each
|
|
|
30,000,000
|
|
|
|
30,000,000
|
|
|
|
30,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, shares outstanding, end of year
|
|
|
8,408,238
|
|
|
|
8,707,013
|
|
|
|
8,858,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
|
$
|
.32
|
|
|
$
|
.32
|
|
|
$
|
.30
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
NYMAGIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(104,335,079
|
)
|
|
$
|
13,372,350
|
|
|
$
|
29,850,480
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for deferred taxes
|
|
|
(19,413,786
|
)
|
|
|
(3,726,514
|
)
|
|
|
(1,745,824
|
)
|
Net realized investment losses
|
|
|
47,664,766
|
|
|
|
6,902,852
|
|
|
|
402,554
|
|
Equity in loss (earnings) of limited partnerships
|
|
|
26,805,322
|
|
|
|
(12,985,185
|
)
|
|
|
(16,474,693
|
)
|
Net amortization from bonds and commercial loans
|
|
|
487,334
|
|
|
|
141,774
|
|
|
|
200,614
|
|
Depreciation and other, net
|
|
|
1,414,538
|
|
|
|
1,295,852
|
|
|
|
968,818
|
|
Trading portfolio activities
|
|
|
78,614,981
|
|
|
|
(116,177,935
|
)
|
|
|
109,763,613
|
|
Commercial loan activities
|
|
|
5,609,915
|
|
|
|
|
|
|
|
|
|
Loss on abandonment of computer equipment and software
|
|
|
|
|
|
|
5,315,965
|
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other receivables
|
|
|
2,848,552
|
|
|
|
2,991,276
|
|
|
|
(3,933,720
|
)
|
Reinsurance receivables paid and unpaid, net
|
|
|
46,597,048
|
|
|
|
44,852,353
|
|
|
|
(6,098,829
|
)
|
Ceded reinsurance payable
|
|
|
(3,261,307
|
)
|
|
|
(17,721,643
|
)
|
|
|
9,064,476
|
|
Accrued investment income
|
|
|
(2,388,256
|
)
|
|
|
(556,719
|
)
|
|
|
792,120
|
|
Deferred policy acquisition costs
|
|
|
325,875
|
|
|
|
(1,617,953
|
)
|
|
|
(1,379,904
|
)
|
Prepaid reinsurance premiums
|
|
|
2,524,478
|
|
|
|
7,829,765
|
|
|
|
(7,386,000
|
)
|
Other assets
|
|
|
(13,731,345
|
)
|
|
|
(3,311,785
|
)
|
|
|
(1,343,180
|
)
|
Unpaid losses and loss adjustment expenses
|
|
|
(7,785,755
|
)
|
|
|
(22,643,290
|
)
|
|
|
(9,686,515
|
)
|
Reserve for unearned premiums
|
|
|
(4,213,101
|
)
|
|
|
(6,072,330
|
)
|
|
|
10,411,836
|
|
Other liabilities
|
|
|
(133,227
|
)
|
|
|
(4,244,598
|
)
|
|
|
(2,832,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
161,966,032
|
|
|
|
(119,728,115
|
)
|
|
|
80,723,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
57,630,953
|
|
|
|
(106,355,765
|
)
|
|
|
110,573,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity fixed maturities matured, repaid and redeemed
|
|
|
1,713,687
|
|
|
|
|
|
|
|
|
|
Available for sale fixed maturities acquired
|
|
|
(172,844,616
|
)
|
|
|
(23,946,795
|
)
|
|
|
(313,966,624
|
)
|
Available for sale fixed maturities sold
|
|
|
58,699,634
|
|
|
|
179,432,179
|
|
|
|
220,876,103
|
|
Available for sale fixed maturities matured, repaid and redeemed
|
|
|
17,651,152
|
|
|
|
2,081,000
|
|
|
|
15,845,000
|
|
Capital contributed to limited partnerships
|
|
|
(46,459,990
|
)
|
|
|
(43,750,000
|
)
|
|
|
(55,570,000
|
)
|
Distributions and redemptions from limited partnerships
|
|
|
85,022,517
|
|
|
|
50,763,951
|
|
|
|
55,905,244
|
|
Net (purchase) sale of short-term investments
|
|
|
(111,478,461
|
)
|
|
|
136,671,984
|
|
|
|
(56,575,517
|
)
|
Receivable for investments disposed and not yet settled
|
|
|
(2,529,338
|
)
|
|
|
(4,080,290
|
)
|
|
|
34,206,452
|
|
Acquisition of property & equipment, net
|
|
|
(6,631,191
|
)
|
|
|
(1,478,683
|
)
|
|
|
(2,660,398
|
)
|
Payable for investments acquired and not yet settled
|
|
|
|
|
|
|
|
|
|
|
(9,000,000
|
)
|
Deconsolidation of investment in Altrion limited partnership
|
|
|
|
|
|
|
|
|
|
|
(6,940,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(176,856,606
|
)
|
|
|
295,693,346
|
|
|
|
(117,880,268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock issuance and other
|
|
|
2,296,996
|
|
|
|
5,259,390
|
|
|
|
3,626,463
|
|
Cash dividends paid to stockholders
|
|
|
(2,747,795
|
)
|
|
|
(2,852,228
|
)
|
|
|
(2,465,648
|
)
|
Net purchase of treasury stock
|
|
|
(7,653,602
|
)
|
|
|
(7,121,988
|
)
|
|
|
|
|
Payable for treasury stock purchased and not yet settled
|
|
|
(1,911,187
|
)
|
|
|
1,911,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(10,015,588
|
)
|
|
|
(2,803,639
|
)
|
|
|
1,160,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(129,241,241
|
)
|
|
|
186,533,942
|
|
|
|
(6,145,887
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
204,913,343
|
|
|
|
18,379,401
|
|
|
|
24,525,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
75,672,102
|
|
|
$
|
204,913,343
|
|
|
$
|
18,379,401
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-8
NYMAGIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary Of Significant Accounting Policies:
Nature of operations
NYMAGIC, INC. (the Company or NYMAGIC), through its subsidiaries, specialize in underwriting
ocean marine, inland marine/fire, other liability and aircraft insurance through insurance pools
managed by Mutual Marine Office, Inc. (MMO), Pacific Mutual Marine Office, Inc. (PMMO), and
Mutual Marine Office of the Midwest, Inc. (Midwest). MMO, located in New York, PMMO located in
San Francisco, and Midwest, located in Chicago, manage the insurance pools in which the Companys
insurance subsidiaries, New York Marine And General Insurance Company (New York Marine) and
Gotham Insurance Company (Gotham), participate. All premiums, losses and expenses are prorated
among pool members in accordance with their pool participation percentages. Effective January 1,
1997 and subsequent, the Company increased to 100% its participation in the business produced by
the pools. In 2007, the Company closed PMMOs San Francisco office and its operations were absorbed
by MMO. MMO UK, Ltd. (MMO UK) and MMO EU, Ltd. (MMO EU) were a Lloyds corporate capital
vehicle. Both MMO UK and MMO EU have been inactive since 2002. MMO UK was sold in 2005 and MMO EU
was liquidated in February 2007. Neither of these transactions had a material impact on the
Companys results of operations.
In 2005, the Company formed Arizona Marine And General Insurance Company, which was renamed
Southwest Marine And General Insurance Company (Southwest Marine) in July 2006, as a wholly owned
subsidiary in the State of Arizona. Southwest Marine writes, among other lines of insurance, excess
and surplus lines in New York.
Basis of reporting
The consolidated financial statements have been prepared on the basis of accounting principles
generally accepted in the United States of America (GAAP), which differ in certain material
respects from the accounting principles prescribed or permitted by state insurance regulatory
authorities for the Companys domestic insurance subsidiaries. The principal differences recorded
under GAAP are limited partnership changes in fair value recognized through operations, deferred
policy acquisition costs, an allowance for doubtful accounts, limitations on deferred income taxes,
and fixed maturities held for sale and held for trading are carried at fair value.
The preparation of the consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and claims and expenses during the
reporting period. Actual results could differ from those estimates.
Consolidation
The consolidated financial statements include the accounts of the Company, three insurance
subsidiaries, New York Marine, Gotham and Southwest Marine, and three agency subsidiaries. Gotham
is owned 25% by the Company and 75% by New York Marine. New York Marine owns 100% of Southwest
Marine. Southwest Marine and Gotham are consolidated in the financial statements, as they are 100%
indirect subsidiaries of NYMAGIC, INC. All other subsidiaries are wholly owned by NYMAGIC. Since
2003, the Company has been the only limited partner in Altrion, a limited partnership, which
invests in CDO securities, CLO securities, CRS securities and other structured products, as well as
commercial loans. Altrions financial statements were included in the consolidated financial
statements of the Company until August 1, 2006, when it was deconsolidated. As of December 31, 2008
and December 31, 2007, the investment in Altrion is included in the balance sheet under the
category of limited partnerships at equity. See Note 18 Related Party Transactions for a complete
discussion of the Companys investment in Altrion.
As of the date of the Altrion deconsolidation, reclassification adjustments to the trading, limited
partnership, cash and cash equivalents, accrued investment income, other assets and the other
liabilities financial statement captions as disclosed on the Companys balance sheet amounted to
$18,584,600, $26,594,107, $6,940,528, $10,187, $1,806,687 and $747,895, respectively. Trading
portfolio activities in 2006 include cash flows of $18,584,600 resulting from the effect of
deconsolidation of the Altrion limited partnership investment. Approximately $6,940,528 in uses of
cash flows in 2006 resulted from the effect of deconsolidation of the Altrion limited partnership
investment. The deconsolidation had no impact on the Companys Statement of Income for the year
ended December 31, 2006.
F-9
Investments
Fixed maturities categorized as held to maturity are reported at amortized cost and include those
fixed income investments where the Company has the ability and the positive intent to hold such
investments to maturity. The Company has transferred its residential mortgage-backed securities to
the held to maturity classification effective October 1, 2008 and has used the fair value of these
securities on such date as its adjusted cost basis. The Company has both the ability and the
intent to hold such securities to their respective maturities. Fixed maturities categorized as
available for sale are reported at estimated fair value and include those fixed income investments
where the Companys intent to carry such investments to maturity may be affected in future periods
by changes in market interest rates, tax position or credit quality. Unrealized gains and losses,
net of related deferred income taxes, on available for sale securities are reflected in accumulated
other comprehensive (loss) income in shareholders equity. All other fixed maturities are
categorized as trading and are also reported at estimated fair value. Trading securities are marked
to fair value with the change recognized in net investment income during the current period. Any
realized gains and losses resulting from the sales of such securities are also recognized in net
investment income. The cost of fixed maturities is adjusted for the amortization of any purchase
premiums and the accretion of purchase discounts from the time of purchase of the security to its
sale or maturity. This amortization of premium and accretion of discount is recorded in net
investment income.
For residential mortgage-backed securities, interest income is recognized using an effective yield
based upon anticipated prepayments and the estimated economic life of the securities. The effective
yield reflects actual payments-to-date plus anticipated future payments. Quarterly, prepayments
received are compared to scheduled prepayments to recalculate the effective yield. Any resulting
difference from this comparison is included as an adjustment to net investment income and future
income is recognized using the effective yield arising from the revised changes in assumptions of
cash flows.
Equity securities, categorized as trading, are comprised of non-redeemable preferred stock and are
reported at estimated fair value. Trading securities are marked to fair value with the change
recognized in net investment income during the current period. Any realized gains and losses
resulting from the sales of such securities are also recognized in net investment income.
Investments in limited partnerships are reported under the equity method, which includes the cost
of the investment and the subsequent proportional share of any partnership earnings or losses.
Under the equity method, the partnership earnings or losses are recorded as investment income. The
Companys investments in limited partnership hedge funds include interests in limited partnerships
and limited liability companies.
Investment transactions are recorded on their trade date with balances pending settlement reflected
in the consolidated balance sheets as a receivable for investments disposed or payable for
investments securities acquired. Short-term investments, which have maturity of one year or less
from the date of purchase, are carried at amortized cost, which approximates fair value. The
Company considers all highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
The carrying value of our hedge fund investments is based upon our equity interest in the financial
statements of the limited partnership, whose general partners use various methods to estimate the
net asset value of the hedge fund. Most funds generally utilize the market approach whereby prices
are used from market-generated transactions involving identical or comparable assets or
liabilities.
Net realized investment gains and losses (determined on the basis of first in first out) also
include any declines in value which are considered to be other-than-temporary. Management reviews
investments for other-than-temporary impairments based upon quantitative and qualitative criteria
that include, but not limited to, downgrades in rating agency levels for securities, the duration
and extent of declines in fair value of the security below its cost or amortized cost, interest
rate trends, the Companys intent to hold the security, market conditions, and the regulatory
environment for the securitys issuer. The Company may also consider cash flow models and matrix
analyses in connection with its other-than-temporary impairment evaluation.
Derivatives
The Company enters into derivatives in the course of its operations. Changes in the fair value of
any derivatives are recorded to results of operations. The Company did not hold any derivatives at
December 31, 2008.
Premium and policy acquisition cost recognition
Premiums and policy acquisition costs are reflected in income and expense on a monthly pro-rata
basis over the terms of the respective policies. Accordingly, unearned premium reserves are
established for the portion of premiums written applicable to unexpired policies in force, and
acquisition costs, consisting mainly of net brokerage commissions and premium taxes relating to
these unearned premiums, are deferred to the extent recoverable. The determination of acquisition
costs to be deferred considers historical and current loss and loss adjustment expense experience.
In measuring the carrying value of deferred policy acquisition costs, consideration is also given
to anticipated investment income using an interest rate of up to 5% for 2008, 2007 and 2006. The
Company has provided an allowance for uncollectible premiums receivables of $300,000 as of
December 31, 2008 and 2007.
F-10
Revenue recognition
Profit commission revenue derived from the reinsurance transactions of the insurance pools is
recognized when such amount becomes earned as provided in the treaties to the respective
reinsurers. The profit commission becomes due shortly after the treaty expires.
Reinsurance
The Companys insurance subsidiaries participate in various reinsurance agreements on both an
assumed and ceded basis. The Company uses various types of reinsurance, including quota share,
excess of loss and facultative agreements, to spread the risk of loss among several reinsurers and
to limit its exposure from losses on any one occurrence. Any recoverable due from reinsurers is
recorded in the period in which the related gross liability is established.
Reinsurance reinstatement premiums are incurred by the Company based upon the provisions of the
reinsurance contracts. In the event of a loss, the Company may be
obligated to pay additional reinstatement premiums under its excess
of loss reinsurance treaties.
The Company generally accounts for reinsurance receivables and prepaid reinsurance premiums as
assets.
The
Company maintains an allowance for doubtful accounts, which is based on managements review of amounts
due from insolvent or financially impaired companies. Management continually reviews and updates
such estimates for any changes in the financial status of these companies.
Depreciation
Property, equipment and leasehold improvements are depreciated over their estimated useful lives,
which are approximately 3 to 12 years. Costs incurred in developing or obtaining software are
capitalized and depreciated over their estimated useful lives.
Income taxes
The Company and its subsidiaries file a consolidated federal income tax return. The Company
provides deferred income taxes on temporary differences between the financial reporting basis and
the tax basis of the Companys assets and liabilities based upon enacted tax rates. The effect of a
change in tax rates is recognized in income in the period of change. The Company provides for a
valuation allowance on certain deferred tax assets primarily as a result of the uncertainty that
the Company can fully utilize all deferred taxes that arose from capital losses incurred. This
uncertainty stems from issues relating to the current economic conditions, limitations on the
period that such losses can be carried forward prior to expiring, and the limitation or nature of
gains that can be used to offset the capital losses. To the extent that the Company generates
future capital gains to offset these losses, it may recover some or all of this entire amount.
Fair values of financial instruments
For fixed maturities and equity securities, quoted prices in active markets are used to determine
the fair value. When such information is not available, as in the case of securities that are not
publicly traded, other valuation techniques are employed. These valuation techniques may include,
but are not limited to, using independent pricing sources (dealer marks), identifying comparable
securities with quoted market prices and using internally prepared valuations based on certain
modeling and pricing methods.
The fair value of the Companys investments, including commercial loans, is disclosed in Note 3.
See Note 10 for the fair value of the Companys 6.5% senior notes.
Incurred losses
Unpaid losses are based on individual case estimates for losses reported. A provision is also
included, based on past experience, for incurred but not reported (IBNR) claims, salvage and
subrogation recoveries and for loss adjustment expenses. The method of making such estimates and
for establishing the resulting reserves is continually reviewed and updated and any changes
resulting there from are reflected in operating results currently. See Note 5 for further
discussion.
Debt issuance costs
Debt issuance costs associated with the $100 million 6.5% senior notes due March 15, 2014 are being
amortized over the term of the senior debt using the interest method.
F-11
Share-based compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard No.
123(R) (As Amended),
Share-Based Payment
(SFAS 123(R)), using the modified prospective method.
SFAS 123(R) establishes standards for the accounting for transactions that involve stock based
compensation. SFAS 123R requires that compensation costs be recognized for the fair value of all
share awards. Compensation expense is recorded pro-rata over the vesting period of the award.
Basic and diluted earnings per share
Basic earnings per share is calculated by dividing net income by the weighted average number of
common shares outstanding during the year. Diluted earnings per share is calculated by dividing net
income by the weighted average number of common shares outstanding during the year and the dilutive
effect of vested and non-vested equity awards and stock options that would be assumed to be
exercised as of the balance sheet date, as determined using the treasury stock method. See Note 14
for a reconciliation of the shares outstanding in determining basic and diluted earnings per share.
Reclassification
Certain accounts in the prior years financial statements have been reclassified to conform to the
2008 presentation.
Effects of recent accounting pronouncements
Adoption of new accounting pronouncements:
In September 2006, the FASB issued Statement of Financial Accounting No. 157,
Fair Value
Measurements
(SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair
value in GAAP, and enhances disclosures about fair value measurements. SFAS 157 applies when other
accounting pronouncements require fair value measurements; it does not require new fair value
measurements. SFAS 157 became effective January 1, 2008 and did not have a material effect on the
Companys results of operations, financial position or liquidity.
In February 2007, the FASB issued Statement of Financial Accounting No. 159,
The Fair Value Option
for Financial Assets and Financial Liabilities
( SFAS 159) which provides for an irrevocable
option to report selected financial assets and liabilities at fair value with changes in fair value
recorded in earnings. The option is applied, on a contract-by-contract basis, to an entire contract
and not only to specific risks, specific cash flows or other portions of that contract. Upfront
costs and fees related to a contract for which the fair value option is elected shall be recognized
in earnings as incurred and not deferred. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The Company elected the fair value option
for approximately $8.3 million in commercial loans upon its adoption of SFAS 159 effective
January 1, 2008. At December 31, 2007, the commercial loan balance of $8.3 million was carried at
fair value, which was lower than amortized cost, and included in the Companys trading portfolio,
which was consistent with its overall investment strategy. The adoption of SFAS 159 did not have an
impact on the Companys results of operations, financial position or liquidity. The Company
utilized the fair value election under SFAS 159 for
approximately $10.3 million of commercial loan purchases during the year ended December 31, 2008.
The Company has recorded net losses in fair value of $3.0 million on these investments for the year
ended December 31, 2008. The changes in the fair value of these debt instruments are recorded in
investment income.
In June 2007, the FASB issued FSP Emerging Issues Task Force Issues No. 06-11,
Accounting for
Income Tax Benefits of Dividends on Share-Based Payment Awards
(EITF 06-11). EITF 06-11 requires
that realized income tax benefits related to dividend payments that are charged to retained
earnings and paid to employees holding equity shares, nonvested equity share units and outstanding
equity share options should be recognized as an increase in additional paid-in capital. EITF 06-11
shall be applied to share-based payment awards that are declared in fiscal years beginning after
December 15, 2007. The adoption of EITF 06-11, effective January 1, 2008, did not have a material
effect on the Companys results of operations, financial position or liquidity.
On October 10, 2008, the FASB issued FSP FAS 157-3,
Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active
, which clarifies the application of SFAS 157,
Fair
Value
Measurements, in a market that is not active, and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the market for that
financial asset is not active. FSP FAS 157-3 was effective October 10, 2008, and for prior periods
for which financial statements have not been issued. Revisions resulting from a change in the
valuation technique or its application should be accounted for as a change in accounting estimate
following the guidance in FASB Statement of Financial Accounting Standards No. 154,
Accounting
Changes and Error Corrections
(SFAS 154). However, the disclosure provisions in SFAS 154 required
for a change in accounting estimate are not required for revisions resulting from a change in
valuation technique or its application. The adoption of FSP FAS 157-3 did not have a material
effect on the Companys results of operations, financial position or liquidity.
F-12
In January 2009, the FASB issued FSP Emerging Issues Task Force Issues No. 99-20-1,
Amendments to
the Impairment Guidance of EITF Issue No. 99-20
(EITF 99-20-1). EITF 99-20-1 amends the
impairment guidance in EITF Issue No. 99-20, Recognition of Interest Income and Impairment on
Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in
Securitized Financial Assets. The FASB believes this guidance will achieve a more consistent
determination of whether an other-than-temporary impairment has occurred. EITF 99-20-1 also retains
and emphasizes the objective of an other-than-temporary impairment assessment and the related
disclosure requirements in FASB Statement No. 115,
Accounting for Certain Investments in Debt and
Equity Securities,
and other related guidance. EITF 99-20-1 is effective for interim and annual
reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective
application to a prior interim or annual reporting period is not permitted. The adoption of EITF
99-20-1 did not have a material effect on the Companys results of operations, financial position
or liquidity.
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162,
The Hierarchy of
Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles
to be used in preparing financial statements that are presented in conformity with U.S. generally
accepted accounting principles for nongovernmental entities. SFAS 162 became effective on November
15, 2008 and the adoption did not have an impact on the Companys financial condition, results of
operations or liquidity.
Future adoption of new accounting pronouncements:
In December 2007, the FASB issued Statement of Financial Accounting No. 141(R),
Business
Combinations
( SFAS 141(R)), which requires most identifiable assets, liabilities,
non-controlling interests, and goodwill acquired in a business combination to be recorded at full
fair value. Under SFAS 141(R), all business combinations will be accounted for by applying the
acquisition method (referred to as the purchase method in SFAS 141, Business Combinations). SFAS
141(R) is effective for fiscal years beginning on or after December 15, 2008 and is to be applied
to business combinations occurring after the effective date. The adoption of SFAS 141(R) will not
have an impact on the Companys operations, financial position or liquidity unless an acquisition
occurs after the effective date of SFAS 141(R).
In December 2007, the FASB issued Statement of Financial Accounting No. 160,
Non-controlling
Interests in Consolidated Financial Statements
(SFAS 160), which requires non-controlling
interests (previously referred to as minority interests) to be treated as a separate component of
equity, not as a liability or other item outside of permanent equity. SFAS 160 is effective for
fiscal years beginning on or after December 15, 2008. The adoption of SFAS 160 is not expected to
have an impact on the Companys financial condition, results of operations or liquidity.
In February 2008, the FASB issued FSP FAS 157-2,
Effective Date of FASB Statement No. 157
, which
permits a one-year deferral of the application of SFAS 157,
Fair Value Measurements
, for all
non-financial assets and non-financial liabilities, except those that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least annually). The Company
adopted SFAS 157 for non-financial assets and non-financial liabilities on January 1, 2009 and does
not expect the provisions to have a material effect on its results of operations, financial
position or liquidity.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures
about Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133
(SFAS
161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging
activities and specifically requires qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of, and gains and losses on,
derivative instruments, and disclosures about credit-risk-related
contingent features in derivative agreements. The provisions of SFAS 161 are effective for
financial statements issued for fiscal years beginning after November 15, 2008. The Company has not
yet determined the impact on its disclosures, if any, of adopting SFAS 161.
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 163,
Accounting for
Financial Guarantee Insurance Contracts
(SFAS 163). SFAS 163 clarifies how FASB Statement No. 60,
Accounting and Reporting by Insurance Enterprise,
applies to financial guarantee insurance
contracts issued by insurance enterprises, including the recognition and measurement of premium
revenue and claim liabilities. It also requires expanded disclosures about financial guarantee
insurance contracts. The provisions of SFAS 163 are effective for financial statements issued for
fiscal years beginning after December 15, 2008 and all interim periods within those fiscal years,
except for disclosures about the insurance enterprises risk-management activities, which are
effective the first period (including interim periods) beginning after May 23, 2008. The adoption
of SFAS 163 is not expected to have an impact on the Companys financial condition, results of
operations or liquidity.
On June 16, 2008, the FASB issued FSP Emerging Issues Task Force Issues No. 03-6-1,
Determining
Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities
(EITF
03-6-1). EITF 03-6-1 provides that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities
and shall be included in the computation of earnings per share pursuant to the two-class method.
EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December
15, 2008, and interim periods within those years. Upon adoption, a company is required to
retrospectively adjust its earnings per share data (including any amounts related to interim
periods, summaries of earnings and selected financial data) to conform with the provisions in this
FSP. The Company has not yet determined the estimated impact on earnings per share calculations, if
any, of adopting
EITF 03-6-1.
F-13
(2) Investments:
A summary of the Companys investment components at December 31, 2008 and December 31, 2007 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
Percent
|
|
|
December 31, 2007
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities held to maturity (amortized
cost):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities (2)
|
|
$
|
61,246,212
|
|
|
|
11.20
|
%
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities held to maturity
|
|
$
|
61,246,212
|
|
|
|
11.20
|
%
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities available for sale (fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
40,783,969
|
|
|
|
7.46
|
%
|
|
$
|
14,335,541
|
|
|
|
2.04
|
%
|
Municipal obligations
|
|
|
90,483,461
|
|
|
|
16.54
|
%
|
|
|
7,810,318
|
|
|
|
1.11
|
%
|
Corporate securities
|
|
|
13,710,996
|
|
|
|
2.51
|
%
|
|
|
5,853,942
|
|
|
|
0.83
|
%
|
Mortgage-backed securities (2)
|
|
|
|
|
|
|
|
|
|
|
134,890,799
|
|
|
|
19.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities available for sale
|
|
$
|
144,978,426
|
|
|
|
26.51
|
%
|
|
$
|
162,890,600
|
|
|
|
23.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities trading (fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal obligations
|
|
$
|
17,399,090
|
|
|
|
3.18
|
%
|
|
$
|
70,243,560
|
|
|
|
10.02
|
%
|
Commercial middle market debt (1)
|
|
|
|
|
|
|
|
|
|
|
8,293,725
|
|
|
|
1.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities trading
|
|
$
|
17,399,090
|
|
|
|
3.18
|
%
|
|
$
|
78,537,285
|
|
|
|
11.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
223,623,728
|
|
|
|
40.89
|
%
|
|
$
|
241,427,885
|
|
|
|
34.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities trading (fair value):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
$
|
11,822,620
|
|
|
|
2.16
|
%
|
|
$
|
66,325,265
|
|
|
|
9.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
$
|
11,822,620
|
|
|
|
2.16
|
%
|
|
$
|
66,325,265
|
|
|
|
9.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
|
185,921,881
|
|
|
|
33.99
|
%
|
|
|
205,078,343
|
|
|
|
29.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities, equity securities, cash
and short-term investments
|
|
$
|
421,368,229
|
|
|
|
77.04
|
%
|
|
$
|
512,831,493
|
|
|
|
73.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans (fair value) (1)
|
|
|
2,690,317
|
|
|
|
0.49
|
%
|
|
|
|
|
|
|
|
|
Limited partnership hedge funds (equity)
|
|
|
122,927,697
|
|
|
|
22.47
|
%
|
|
|
188,295,547
|
|
|
|
26.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment portfolio
|
|
$
|
546,986,243
|
|
|
|
100.00
|
%
|
|
$
|
701,127,040
|
|
|
|
100.00
|
%
|
|
|
|
(1)
|
|
See Note 1 discussion under Effects of recent accounting pronouncements caption.
|
|
(2)
|
|
See Note 1 discussion under Investments caption.
|
As of December 31, 2008, 97% of the fair value of the Companys fixed income and short-term
investment portfolios were considered investment grade. As of December 31, 2008, the Company
invested approximately $11.3 million in fixed maturities that were below investment grade.
F-14
Details
of the mortgage-backed securities portfolio as of December 31,
2008 are presented below based on publicly available information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
FICO
|
|
|
D60+
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan to
|
|
|
Credit
|
|
|
Delinquency
|
|
|
Support
|
|
|
S&P
|
|
|
Moodys
|
|
Security description
|
|
Issue date
|
|
|
Amortized cost
|
|
|
Fair value
|
|
|
Value % (1)
|
|
|
Score (2)
|
|
|
Rate (3)
|
|
|
Level (4)
|
|
|
Rating
|
|
|
Rating
|
|
AHMA 2006-3
|
|
|
7/2006
|
|
|
$
|
12,213,748
|
|
|
$
|
8,511,737
|
|
|
|
85.9
|
|
|
|
704
|
|
|
|
31.6
|
|
|
|
45.2
|
|
|
AAA
|
|
Aaa
|
|
CWALT 2005-69
|
|
|
11/2005
|
|
|
|
7,900,234
|
|
|
|
6,051,403
|
|
|
|
82.0
|
|
|
|
697
|
|
|
|
39.7
|
|
|
|
49.4
|
|
|
AAA
|
|
Aaa
|
|
CWALT 2005-76
|
|
|
12/2005
|
|
|
|
7,865,446
|
|
|
|
5,944,599
|
|
|
|
82.8
|
|
|
|
700
|
|
|
|
41.5
|
|
|
|
50.5
|
|
|
AAA
|
|
Aaa
|
|
RALI 2005-QO3
|
|
|
10/2005
|
|
|
|
7,921,593
|
|
|
|
5,528,142
|
|
|
|
82.1
|
|
|
|
704
|
|
|
|
35.3
|
|
|
|
48.8
|
|
|
AAA
|
|
Aaa
|
|
WaMu 2005-AR17
|
|
|
12/2005
|
|
|
|
6,746,777
|
|
|
|
4,639,000
|
|
|
|
75.4
|
|
|
|
714
|
|
|
|
19.7
|
|
|
|
47.2
|
|
|
AAA
|
|
Aaa
|
|
WaMu 2006-AR9
|
|
|
7/2006
|
|
|
|
9,170,145
|
|
|
|
6,229,337
|
|
|
|
75.8
|
|
|
|
730
|
|
|
|
21.4
|
|
|
|
27.1
|
|
|
AAA
|
|
Aaa
|
|
WaMu 2006-AR13
|
|
|
9/2006
|
|
|
|
9,428,269
|
|
|
|
5,425,214
|
|
|
|
76.5
|
|
|
|
728
|
|
|
|
19.2
|
|
|
|
27.8
|
|
|
AAA
|
|
Aaa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
61,246,212
|
|
|
$
|
42,329,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The dollar-weighted average amortized loan-to-original value of the underlying loans at February 25 2009.
|
|
(2)
|
|
Average FICO of remaining borrowers in the loan pool at February 25, 2009.
|
|
(3)
|
|
The sum of the percentage of loans that are grouped within the 60 days delinquent, 90 days delinquent, foreclosure and real
estate owned categories at February 25, 2009.
|
|
(4)
|
|
The current credit support provided by subordinate ranking tranches within the overall security structure at February 25, 2009.
|
The Company has investments in residential mortgage-backed securities (RMBS) amounting to
$61.2 million at December 31, 2008. These securities are classified as held to maturity after the
Company transferred these holdings from the available for sale portfolio effective October 1, 2008.
The adjusted cost basis of these securities is based on a determination of the Fair Value of
these securities on the date they were transferred.
The Fair Value of each RMBS investment is determined under SFAS 157. Fair Value is determined
by estimating the price at which an asset might be sold on the measurement date. There has been a
considerable amount of turmoil in the U.S. housing market in 2007 and 2008, which has led to market
declines in such securities. Because the pricing of these investments is complex and has many
variables affecting price including, projected delinquency rates, projected severity rates,
estimated loan to value ratios, vintage year, subordination levels,
projected prepayment speeds and
expected rates of return required by prospective purchasers, the estimated price of such
securities will differ among brokers depending on these facts and assumptions. While many of the
inputs utilized in pricing are observable, many other inputs are unobservable and will vary
depending upon the broker. During periods of market dislocation, such as the current market
conditions, it is increasingly difficult to value such investments because trading becomes less
frequent and/or market data becomes less observable. As a result,
valuations may include inputs and assumptions that are less observable or require greater
estimation and judgment as well as valuation methods that are more complex. For example,
assumptions regarding projected delinquency and severity rates have become increasingly pessimistic
due to market uncertainty connected with these types of investments and requirements for high
expected returns using pessimistic assumptions as required by the limited number of prospective
purchasers of such securities in the present market. This has resulted in lower estimated quotes
of estimated market prices. These inputs are used in pricing models to assist the broker in
estimating a current price for these investments. Accordingly, the market price or Fair Value may
not be reflective of the intrinsic value of a security or indicative of the ultimate expected
receipt of future cash flows. The Fair Value of such securities at December 31, 2008 was $42.3
million.
F-15
The Company performs a cash flow analysis for each of these securities, which attempts to estimate
the likelihood of any future impairment. While the Company does not believe there are any
other-than-temporary impairments (OTTI) currently, future estimates may change
depending upon the actual housing statistics reported for each security to the Company. This may
result in future charges based upon revised estimates for delinquency rates, severity or prepayment
patterns. These changes in estimates may be material. These securities are collateralized by pools
of Alt-A mortgages, and receive priority payments from these pools. The Companys securities
rank senior to subordinated tranches of debt collateralized by each respective pool of mortgages.
The Company has collected all applicable interest and principal repayments on such securities to
date. As of February 25, 2009 the levels of subordination ranged from 27% to 51% of the total debt
outstanding for each pool. Delinquencies within the underlying mortgage pools (defined as payments
60+ days past due plus foreclosures plus real estate owned) ranged from 19.2% to 41.5% of total
amounts outstanding. In March 2008, delinquencies ranged from 3.4% to 21.2%. Delinquency rates are
not the same as severity rates, or actual loss, but are an indication of the potential for losses
of some degree in future periods. In each case, current pool subordination levels by individual
security remain in excess of current pool delinquency rates.
The Company has both the ability and the intent to hold such securities until maturity. Prior to
the transfer to the held to maturity classification, the Company incurred cumulative write-downs
from OTTI declines in the Fair Value of these securities after any recapture, amounting to $40.7
million through September 30, 2008. The collection of principal repayments on these securities
through December 31, 2008 resulted in $2.1 million in realized investment gains as a result of the
recapture of previous write-downs of investment balances. The Company sold two of its RMBS
investments in September 2008 resulting in cumulative realized investment losses of $11.0 million.
The net realized loss included previous OTTI declines in Fair Value of $9.7 million through the
dates of sale.
These RMBS investments, as of December 31, 2008 were rated AAA/Aaa by S&P/Moodys. As of March 9,
2009, these securities are rated AAA or AAA- by S&P and Caa1 to A1 by Moodys. On March 9, 2009
S&P announced that 9,430 tranches of mortgage securities had been placed on Credit Watch for
potential downgrades. The tranches of securities owned by the Company were not included in this
list, however, other junior tranches of securities within the RMBS owned by the Company were
included in the list. While the Companys securities were not
included in that S & P Credit Watch
listing, there is the possibility that they may be downgraded in the future.
The gross unrealized gains and losses on fixed maturities held to maturity and available for sale
at December 31, 2008 and December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities held to maturity
|
|
$
|
61,246,212
|
|
|
$
|
|
|
|
$
|
(18,916,780
|
)
|
|
$
|
42,329,432
|
|
U.S. Treasury securities available for sale
|
|
|
38,917,878
|
|
|
|
1,866,091
|
|
|
|
|
|
|
|
40,783,969
|
|
Municipal obligations available for sale
|
|
|
97,166,677
|
|
|
|
220,718
|
|
|
|
(6,903,934
|
)
|
|
|
90,483,461
|
|
Corporate securities available for sale
|
|
|
13,317,446
|
|
|
|
395,344
|
|
|
|
(1,794
|
)
|
|
|
13,710,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
210,648,213
|
|
|
$
|
2,482,153
|
|
|
$
|
(25,822,508
|
)
|
|
$
|
187,307,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities available for sale
|
|
$
|
13,938,993
|
|
|
$
|
408,146
|
|
|
$
|
(11,598
|
)
|
|
$
|
14,335,541
|
|
Municipal obligations available for sale
|
|
|
7,792,131
|
|
|
|
18,187
|
|
|
|
|
|
|
|
7,810,318
|
|
Corporate securities available for sale
|
|
|
5,957,603
|
|
|
|
59,441
|
|
|
|
(163,102
|
)
|
|
|
5,853,942
|
|
Mortgage-backed securities available for sale
|
|
|
134,890,799
|
|
|
|
|
|
|
|
|
|
|
|
134,890,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
162,579,526
|
|
|
$
|
485,774
|
|
|
$
|
(174,700
|
)
|
|
$
|
162,890,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
The following tables summarize all securities in an unrealized loss position at December 31, 2008
and December 31, 2007, disclosing the aggregate fair value and gross unrealized loss for less than
as well as more than 12 months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities held to maturity
|
|
$
|
42,329,432
|
|
|
$
|
(18,916,780
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
42,329,432
|
|
|
$
|
(18,916,780
|
)
|
Municipal obligations available for sale
|
|
|
79,343,141
|
|
|
|
(6,903,934
|
)
|
|
|
|
|
|
|
|
|
|
|
79,343,141
|
|
|
|
(6,903,934
|
)
|
Corporate securities available for sale
|
|
|
100,068
|
|
|
|
(1,794
|
)
|
|
|
|
|
|
|
|
|
|
|
100,068
|
|
|
|
(1,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
121,772,641
|
|
|
$
|
(25,822,508
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
121,772,641
|
|
|
$
|
(25,822,508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities available for sale
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,829,008
|
|
|
$
|
(11,598
|
)
|
|
$
|
3,829,008
|
|
|
$
|
(11,598
|
)
|
Corporate securities available for sale
|
|
|
103,957
|
|
|
|
(320
|
)
|
|
|
4,071,690
|
|
|
|
(162,782
|
)
|
|
|
4,175,647
|
|
|
|
(163,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
103,957
|
|
|
$
|
(320
|
)
|
|
$
|
7,900,698
|
|
|
$
|
(174,380
|
)
|
|
$
|
8,004,655
|
|
|
$
|
(174,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, the Company was holding 29 fixed maturity securities that were in an
unrealized loss position. The Company believes these unrealized losses are temporary, as they
resulted from changes in market conditions, including interest rates or sector spreads, and are not
considered to be credit risk related. Further, the Company has the intent and the ability to hold
the securities prior to full recovery.
The amortized cost and fair value of debt securities at December 31, 2008 by contractual maturity
are shown below. Expected maturities will differ from contractual maturities, because borrowers may
have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
113,578
|
|
|
$
|
137,831
|
|
Due after one year through five years
|
|
|
49,272,481
|
|
|
|
51,363,514
|
|
Due after five years through ten years
|
|
|
96,368,319
|
|
|
|
90,700,355
|
|
Due after ten years
|
|
|
3,647,623
|
|
|
|
2,776,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,402,001
|
|
|
|
144,978,426
|
|
Mortgage-backed securities
|
|
|
61,246,212
|
|
|
|
42,329,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
210,648,213
|
|
|
$
|
187,307,858
|
|
|
|
|
|
|
|
|
There were no non-income producing fixed maturity investments for any of the years presented
herein.
The Company is the only limited partner in Altrion (formerly Tricadia) and reports its investment
using the equity method of accounting. The amounts reported in the balance sheet caption Limited
partnerships related to Altrion at December 31, 2008 and 2007 were $33.8 million and
$42.6 million, respectively.
F-17
A summary of the GAAP basis information pertaining to Altrions financial position and results of
operations, as of and for the years ended December 31, respectively, for each of the years reported
on herein, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
(audited)
|
|
Total assets
|
|
$
|
34,046,145
|
|
|
$
|
44,409,665
|
|
|
$
|
28,978,975
|
|
Total liabilities
|
|
$
|
89,270
|
|
|
$
|
147,307
|
|
|
$
|
152,686
|
|
Total partners capital
|
|
$
|
33,956,875
|
|
|
$
|
44,262,358
|
|
|
$
|
28,826,289
|
|
Total revenue
|
|
$
|
725,135
|
|
|
$
|
10,033,567
|
|
|
$
|
5,478,485
|
|
Net income
|
|
$
|
427,188
|
|
|
$
|
8,749,649
|
|
|
$
|
4,739,308
|
|
Since 2003, the Company has been the only limited partner in Altrion, a limited partnership, which
invests in CDO securities, CLO securities, CRS securities and other structured products, as well as
commercial loans. Altrions financial statements were included in the consolidated financial
statements of the Company until August 1, 2006, when it was deconsolidated. As of December 31, 2008
and December 31, 2007, the investment in Altrion is included in the balance sheet under the
category of limited partnerships at equity. See Note 18 Related Party Transactions for a complete
discussion of the Companys investment in Altrion.
In addition to its investment in Altrion, the Company held $89.1 and $145.7 million of limited
partnership and limited liability company hedge funds at December 31, 2008 and 2007, respectively.
A summary of all of the Companys investments in limited partnership and limited liability company
hedge funds at December 31, 2008, accounted for under the equity method, is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership
|
|
|
|
Amount
|
|
|
%
|
|
Alpha Energy Partners Class C
|
|
$
|
359,265
|
|
|
|
4.67
|
|
Altrion Capital, L.P. (1)
|
|
|
33,799,883
|
|
|
|
99.41
|
|
Alydar QP Fund
|
|
|
3,015,576
|
|
|
|
0.72
|
|
Brocade Fund, L.P.
|
|
|
2,454,966
|
|
|
|
3.66
|
|
Caspian Capital Partners, L.P. (1)
|
|
|
3,527,690
|
|
|
|
1.89
|
|
Caspian Select Credit Fund, L.P. (1)
|
|
|
4,428,591
|
|
|
|
2.09
|
|
Dolphin Limited Partnership A
|
|
|
1,141,250
|
|
|
|
3.94
|
|
Element Capital US Feeder Fund LLC
|
|
|
12,229,772
|
|
|
|
14.91
|
|
Five Mile Capital SIF
|
|
|
1,894,243
|
|
|
|
3.15
|
|
Horizon Portfolio, L.P.
|
|
|
2,911,066
|
|
|
|
2.53
|
|
Ivory Flagship Fund L.P.
|
|
|
2,359,641
|
|
|
|
0.72
|
|
Loeb Arbitrage Fund
|
|
|
3,873,392
|
|
|
|
1.27
|
|
Lubben Fund, L.P.
|
|
|
2,440,923
|
|
|
|
2.03
|
|
Mariner CRA Relative Fund (1)
|
|
|
551,141
|
|
|
|
10.81
|
|
Mariner Dolphin Special Opportunities Fund (1)
|
|
|
2,917,248
|
|
|
|
18.23
|
|
Mariner Opportunities Fund (1)
|
|
|
3,702,221
|
|
|
|
1.88
|
|
Mariner Silvermine (1)
|
|
|
10,568,554
|
|
|
|
38.29
|
|
Mariner Voyager LP (1)
|
|
|
3,618,393
|
|
|
|
10.02
|
|
MKP Credit II, L.P.
|
|
|
5,460,447
|
|
|
|
1.88
|
|
Newsmith Credit Fund, LP
|
|
|
1,435,786
|
|
|
|
8.97
|
|
Riva Ridge Capital Partners, L.P.
|
|
|
7,102,171
|
|
|
|
7.48
|
|
Rockwood Partners, L.P.
|
|
|
3,911,453
|
|
|
|
3.23
|
|
SLS Investors
|
|
|
1,352,179
|
|
|
|
1.59
|
|
Taconic Opportunity Fund, L.P.
|
|
|
1,578,748
|
|
|
|
0.08
|
|
TAMI Macro Fund, L.P.
|
|
|
1,348,742
|
|
|
|
5.00
|
|
Wexford Spectrum Fund I, LP
|
|
|
4,944,356
|
|
|
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total limited partnership and limited liability company hedge funds
|
|
$
|
122,927,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Indicates limited partnership or limited liability company hedge fund
directly managed by Mariner Partners, Inc. (Mariner). As of
December 31, 2008, the aggregate net asset value of these investments
was $63,113,721.
|
F-18
The
carrying values used for hedge fund investments and other privately held equity securities
generally are established on the basis of the valuations provided monthly by the managers of such
investments. These valuations generally are determined based upon the valuation criteria
established by the governing documents of such investments or utilized in the normal course of such
managers business, which are generally reflective of GAAP fair value. Such valuations may differ
significantly from the values that would have been used had available markets for these investments
existed and the differences could be material.
The hedge funds in which the Company invests usually impose limitations on the timing of
withdrawals from the hedge funds (most are within 90 days), and may affect our liquidity. Some of
our hedge funds have invoked gated provisions that allow the fund to disperse redemption proceeds
to investors over an extended period. The Company is subject to such restrictions and they will
affect the timing of the receipt of hedge fund proceeds. With respect to the Companys investment
in the Altrion limited partnership hedge fund managed by a Mariner affiliated Company, the
withdrawal of funds requires one years prior written notice to the hedge fund manager.
The components for net realized losses and change in unrealized net investment gains (losses) for
the years ended December 31, 2008, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Realized (losses) gains on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
(46,531,390
|
)
|
|
$
|
(7,138,381
|
)
|
|
$
|
(384,878
|
)
|
Short-term investments
|
|
|
(1,133,376
|
)
|
|
|
235,529
|
|
|
|
(17,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment losses
|
|
$
|
(47,664,766
|
)
|
|
$
|
(6,902,852
|
)
|
|
|
(402,554
|
)
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from redemptions in investments held to maturity or disposals of
investments available for sale for the years ended December 31,
2008, 2007 and 2006 were $78,064,473, $181,513,179 and $236,721,103,
respectively. Gross gains of $683,584 were realized on repayments of held to maturity investments for the year
ended December 31, 2008. Gross gains of $1,477,588, $252,149 and $518,457 and gross losses of
$2,459,242, $708,964 and $532,195 were realized on sales, maturities, repayments and/or
redemptions of available for sale investments for the years ended December 31, 2008, 2007 and
2006, respectively. The Company recorded declines in values of investments considered to be
other-than-temporary of $46,233,320, $6,681,566 and $371,140 for the years ended December 31,
2008, 2007 and 2006, respectively. Approximately $46.0 million and $6.5 million
other-than-temporary declines in 2008 and 2007, respectively, was related to the residential
mortgage-backed securities portfolio. The decision to write down such securities in 2008 and 2007
was based upon the Companys uncertainty that such securities would be held until the fair value
decline recovered.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (depreciation) appreciation on fixed maturities
|
|
$
|
(4,734,649
|
)
|
|
$
|
176,563
|
|
|
$
|
1,010,131
|
|
Deferred income tax benefit (expense)
|
|
|
1,657,136
|
|
|
|
(61,799
|
)
|
|
|
(353,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized investment (losses) gains, net of
deferred income taxes
|
|
$
|
(3,077,513
|
)
|
|
$
|
114,764
|
|
|
|
656,585
|
|
|
|
|
|
|
|
|
|
|
|
F-19
Net investment (loss) income from each major category of investments for the years indicated is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities held to maturity
|
|
$
|
819,596
|
|
|
$
|
|
|
|
$
|
|
|
Fixed maturities available for sale
|
|
|
7,390,001
|
|
|
|
13,944,630
|
|
|
|
11,793,544
|
|
Trading securities
|
|
|
(42,265,670
|
)
|
|
|
2,302,469
|
|
|
|
15,785,074
|
|
Commercial loans
|
|
|
(1,556,937
|
)
|
|
|
|
|
|
|
|
|
Equity in (loss) earnings of limited partnerships
|
|
|
(26,805,322
|
)
|
|
|
12,985,185
|
|
|
|
16,474,691
|
|
Short-term investments
|
|
|
2,990,597
|
|
|
|
8,687,536
|
|
|
|
7,816,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment (loss) income
|
|
|
(59,427,735
|
)
|
|
|
37,919,820
|
|
|
|
51,870,246
|
|
Investment expenses (see note 18)
|
|
|
(4,075,112
|
)
|
|
|
(2,430,451
|
)
|
|
|
(3,973,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
$
|
(63,502,847
|
)
|
|
$
|
35,489,369
|
|
|
$
|
47,897,224
|
|
|
|
|
|
|
|
|
|
|
|
Details related to investment (loss) income from trading activities presented in the preceding
table are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividends earned on trading securities
|
|
$
|
8,212,419
|
|
|
$
|
2,932,968
|
|
|
$
|
5,518,455
|
|
Net realized (losses) gains on trading securities
|
|
|
(40,390,174
|
)
|
|
|
603,636
|
|
|
|
7,384,967
|
|
Net unrealized depreciation on trading securities
|
|
|
(9,020,155
|
)
|
|
|
(809,992
|
)
|
|
|
(217,604
|
)
|
Other, net
|
|
|
(1,067,760
|
)
|
|
|
(424,143
|
)
|
|
|
3,099,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment (loss) income from trading activities
|
|
$
|
(42,265,670
|
)
|
|
$
|
2,302,469
|
|
|
$
|
15,785,074
|
|
|
|
|
|
|
|
|
|
|
|
Securities Lending
The Company terminated its securities lending agreement with a bank in 2008. There were no loaned
securities at December 31, 2008. At December 31, 2007, the Company had loaned securities with an
aggregate fair value of $354,265 and held corresponding collateral of $367,888.
General
The Company invests in commercial loans, which are private placements. An estimate of price for
each security is provided by securities dealers, which management evaluates for relevant other
observable market inputs. The markets for these types of securities can be illiquid and, therefore,
the price obtained from dealers in these securities is subject to change depending upon the
underlying market conditions of these securities, including the potential for downgrades or
defaults on the underlying collateral of the security.
The investment portfolio has exposure to market risks, which include the effect of adverse changes
in interest rates, credit quality, hedge fund value and illiquid securities including commercial
loans and residential mortgage-backed securities values on the portfolio. Interest rate risk
includes the changes in the fair value of fixed maturities based upon changes in interest rates.
Credit quality risk includes the risk of default by issuers of debt securities. Hedge fund and
illiquid securities risks include the potential loss from the diminution in the value of the
underlying investment of the hedge fund and the potential loss from changes in the fair value of
commercial loans and residential mortgage-backed securities.
Included in investments at December 31, 2008 are securities required to be held by the Company or
those that are on deposit with various regulatory authorities as required by law with a fair value
of $17,890,197.
F-20
(3) Fair Value Measurements:
The Companys estimates of fair value for financial assets and financial liabilities are based on
the framework established in SFAS 157. The framework is based on the inputs used in valuation and
gives the highest priority to quoted prices in active markets and requires that observable inputs
be used in the valuations when available. The disclosure of fair value estimates in the SFAS 157
hierarchy is based on whether the significant inputs into the valuation are observable. In
determining the level of the hierarchy in which the estimate is disclosed, the highest priority is
given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs
that reflect the Companys significant market assumptions. The standard describes three levels of
inputs that may be used to measure fair value and categorize the assets and liabilities within the
hierarchy:
Level 1
Fair value is based on unadjusted quoted prices in active markets that are accessible to
the Company for identical assets or liabilities. These prices generally provide the most reliable
evidence and are used to measure fair value whenever available. Active markets are defined as
having the following for the measured asset/liability: i) many transactions, ii) current prices,
iii) price quotes not varying substantially among market makers, iv) narrow bid/ask spreads and v)
most information publicly available.
The Companys Level 1 assets are comprised of U.S. Treasury securities and preferred stock, which
are highly liquid and traded in active exchange markets.
The Company uses the quoted market prices as fair value for assets classified as Level 1. The
Company receives quoted market prices from a third party, a nationally recognized pricing service.
Prices are obtained from available sources for market transactions involving identical assets. For
the majority of Level 1 investments, the Company receives quoted market prices from an independent
pricing service. The Company validates primary source prices by back testing to trade data to
confirm that the pricing services significant inputs are observable. The Company also compares the
prices received from the third party service to alternate third party sources to validate the
consistency of the prices received on securities.
Level 2
Fair value is based on significant inputs, other than Level 1 inputs, that are observable
for the asset or liability, either directly or indirectly, for substantially the full term of the
asset through corroboration with observable market data. Level 2 inputs include quoted market
prices in active markets for similar assets, non-binding quotes in markets that are not active for
identical or similar assets and other market observable inputs (e.g., interest rates, yield
curves, prepayment speeds, default rates, loss severities, etc.).
The Companys Level 2 assets include municipal debt obligations and corporate debt securities.
The Company generally obtains valuations from third party pricing services and/or security dealers
for identical or comparable assets or liabilities by obtaining non-binding broker quotes (when
pricing service information is not available) in order to determine an estimate of fair value. The
Company bases all of its estimates of fair value for assets on the bid price as it represents what
a third party market participant would be willing to pay in an arms length transaction. Prices
from pricing services are validated by the Company through comparison to prices from corroborating
sources and are validated by back testing to trade data to confirm that the pricing services
significant inputs are observable. Under certain conditions, the Company may conclude the prices
received from independent third party pricing services or brokers are not reasonable or reflective
of market activity or that significant inputs are not observable, in which case it may choose to
over-ride the third-party pricing information or quotes received and apply internally developed
values to the related assets or liabilities. In such cases, those valuations would be generally
classified as Level 3. Generally, the Company utilizes an independent pricing service to price its
municipal debt obligations and corporate debt securities. Currently, these securities are
exhibiting low trade volume. The Company considers such investments to be in the Level 2 category.
Level 3
Fair value is based on at least one or more significant unobservable inputs that are
supported by little or no market activity for the asset. These inputs reflect the Companys
understanding about the assumptions market participants would use in pricing the asset or
liability.
The Companys Level 3 assets include its residential mortgage-backed securities (RMBS) and
commercial loans, as they are illiquid and trade in inactive markets. These markets are considered
inactive as a result of the low level of trades of such investments.
F-21
All prices provided by primary pricing sources are reviewed for reasonableness, based on the
Companys understanding of the respective market. Prices may then be determined using valuation
methodologies such as discounted cash flow models, as well as matrix pricing analyses performed on
non-binding quotes from brokers or other market-makers. As of December 31, 2008, the Company
utilized cash flow models, matrix pricing and non-binding broker quotes obtained from the primary
pricing sources to determine the fair value of its RMBS and
commercial loan investments. Because pricing of these investments is complex and has many variables
affecting price including, delinquency rate, severity rate, loan to value ratios, vintage year,
discount rate, subordination levels, prepayment speeds, etc., the price of such securities will
differ by broker depending on the weight given to the various inputs. While many of the inputs
utilized in pricing are observable, some inputs are unobservable and the weight given these
unobservable inputs will vary depending upon the broker. During periods of market dislocation, such
as the current market conditions, it is increasingly difficult to value such investments because
trading becomes less frequent and/or market data becomes less observable. As a result, valuations
may include inputs and assumptions that are less observable or require greater estimation and
judgment as well as valuation methods that are more complex. For example, prepayment speeds and
severity rates have become increasingly stressed by brokers due to market uncertainty connected
with these types of investments resulting in lower quoted prices. These inputs are used in pricing
models to assist the broker in determining a current price for these investments. After considering
all of the relevant information at December 31, 2008, the Company adjusted the price received for
one commercial loan investment. As such, because the establishment of fair valuation is
significantly reliant upon unobservable inputs, the Company considers such investments to be in the
Level 3 category.
The following are the major categories of assets measured at fair value on a recurring basis during
the year ended December 31, 2008, using quoted prices in active markets for identical assets (Level
1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
Level 3:
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
Total at
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
December 31,
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities available for sale
|
|
$
|
40,783,969
|
|
|
$
|
104,194,457
|
|
|
$
|
|
|
|
$
|
144,978,426
|
|
Fixed maturities trading
|
|
|
|
|
|
|
17,399,090
|
|
|
|
|
|
|
|
17,399,090
|
|
Equity securities trading
|
|
|
11,822,620
|
|
|
|
|
|
|
|
|
|
|
|
11,822,620
|
|
Commercial loans
|
|
|
|
|
|
|
|
|
|
|
2,690,317
|
|
|
|
2,690,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,606,589
|
|
|
$
|
121,593,547
|
|
|
$
|
2,690,317
|
|
|
$
|
176,890,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The investments classified as Level 3 in the above table consist of commercial loans, for which the
Company has determined that quoted market prices of similar investments are not determinative of
fair value. Since the broker quotes do not reflect current market information from actual
transactions, the Company has elected to deviate from quoted prices using a matrix pricing
analysis. The following table presents a reconciliation of the beginning and ending balances for
all investments measured at fair value using Level 3 inputs during the year ended December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008
|
|
|
|
Commercial
|
|
|
|
RMBS
|
|
|
Loans
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings (or changes in net assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, sales, maturities, repayments,
redemptions and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers from Level 3
|
|
|
(62,285,058
|
)
|
|
|
|
|
|
|
(62,285,058
|
)
|
Transfers to Level 3
|
|
|
62,285,058
|
|
|
|
2,690,317
|
|
|
|
64,975,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
|
|
|
$
|
2,690,317
|
|
|
$
|
2,690,317
|
|
|
|
|
|
|
|
|
|
|
|
F-22
The $65 million transfer to Level 3 during 2008 consisted of RMBS and commercial loan investments.
The RMBS investments were transferred effective September 30, 2008 in the amount of $62,285,058.
The effective date of transfer of the commercial loan investments was December 31, 2008 in the
amount of $2,690,317. Both of these classes of investments had previously been included in Level 2
using observable inputs.
The $62 million transfer into Level 3 was effective September 30, 2008 and resulted from seven
securities being priced with both observable and unobservable inputs that in prior periods were
included in Level 2 using observable inputs. The price as of September 30, 2008 reflected an
increased weighting towards unobservable inputs. There were no unrealized gains or losses on the
transferred securities as of September 30, 2008. Net realized investment losses on such securities
as of the date of transfer to the held to maturity classification were $45.9 million.
The RMBS investments have been transferred out of Level 3 for the purposes of tabular disclosure,
because they have been transferred to held to maturity category effective October 1, 2008. Held
to maturity investments are not measured at fair value on a recurring
basis and as such do not fall within the scope of
SFAS 157.
The Company elected the fair value option for approximately $8.3 million in commercial loans upon
its adoption of SFAS 159 effective January 1, 2008. At December 31, 2007, the commercial loan
balance of $8.3 million was carried at fair value, which was lower than amortized cost, and
included in its trading portfolio, which was consistent with its overall investment strategy. The
adoption of SFAS 159 did not have an impact on the Companys results of operations, financial
position or liquidity. The Company utilized the fair value election under SFAS 159 for all of its
$10.3 million of commercial loan purchases during 2008. Management believes that the use of the
fair value option to record commercial loan purchases is consistent with its objective for such
investments. As such, the entire commercial loan portfolio of $2.7 million at December 31, 2008 was
recorded at fair value. The amortized cost of the commercial loan portfolio at December 31, 2008
was $6.9 million. All loans are current with respect to interest payments.
The changes in the fair value of the commercial loans were recorded in investment income.
Investment income for the year ended December 31, 2008 reflected net realized losses from sales and
repayments of $46,775, unrealized losses from fair value changes of $2,528,276 and interest income
earned of $1,018,114.
(4) Fiduciary Funds:
The Companys insurance agency subsidiaries maintain separate underwriting accounts, which record
all of the underlying insurance transactions of the insurance pools, which they manage. These
transactions primarily include collecting premiums from the insureds, collecting paid receivables
from reinsurers, paying claims as losses become payable, paying reinsurance premiums to reinsurers
and remitting net account balances to member insurance companies in the pools which MMO manages.
Unremitted amounts to members of the insurance pools are held in a fiduciary capacity and interest
income earned on such funds inures to the benefit of the members of the insurance pools based on
their pro-rata participation in the pools.
A summary of the pools underwriting accounts as of December 31, 2008 and December 31, 2007 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
Cash and short-term investments
|
|
$
|
38,242
|
|
|
$
|
7,690,777
|
|
Premiums receivable
|
|
|
20,584,595
|
|
|
|
23,646,503
|
|
Reinsurance and other receivables
|
|
|
92,473,524
|
|
|
|
95,577,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
113,096,361
|
|
|
$
|
126,915,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to insurance pool members
|
|
|
54,053,792
|
|
|
|
66,215,850
|
|
Reinsurance payable
|
|
|
23,667,084
|
|
|
|
27,299,729
|
|
Funds withheld from reinsurers
|
|
|
29,205,424
|
|
|
|
30,487,673
|
|
Other liabilities
|
|
|
6,170,061
|
|
|
|
2,911,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
113,096,361
|
|
|
$
|
126,915,079
|
|
|
|
|
|
|
|
|
A portion of the pools underwriting accounts above have been included in the Companys insurance
subsidiaries operations based upon their pro-rata participation in the MMO insurance pools.
F-23
(5) Insurance Operations:
Reinsurance transactions
Approximately 24%, 27% and 36% of the Companys insurance subsidiaries direct and assumed gross
premiums written for the years ended December 31, 2008, 2007 and 2006, respectively, have been
ceded to reinsurance companies. Two former pool members, Utica Mutual and Arkwright, which is
currently part of the FM Global Group, withdrew from the pools in 1994 and 1996, respectively, and
retained liability for their effective pool participation for all loss reserves, including IBNR and
unearned premium reserves attributable to policies effective prior to their withdrawal from the
pools.
In the event that all or any of the pool companies might be unable to meet their obligations to the
pools, the remaining companies would be liable for such defaulted amounts on a pro-rata pool
participation basis.
The Company is not aware of any uncertainties that could result in any possible defaults by either
Arkwright or Utica Mutual with respect to their pool obligations, which might impact liquidity or
results of operations of the Company, but there can be no assurance that such events will not occur
in the future.
Reinsurance ceded transactions generally do not relieve the Company of its primary obligation to
the policyholder, so that such reinsurance recoverable would become a liability of the Companys
insurance subsidiaries in the event that any reinsurer might be unable to meet the obligations
assumed under the reinsurance agreements. As established by the pools, all reinsurers must meet
certain minimum standards of financial condition.
The Companys largest unsecured reinsurance receivables at December 31, 2008 were from the
following reinsurers:
|
|
|
|
|
|
|
|
|
Reinsurer
|
|
Amounts
|
|
|
A.M. Best Rating
|
|
|
|
(in millions)
|
|
|
|
|
|
Lloyds Syndicates (1)
|
|
$
|
57.2
|
|
|
A (Excellent)
|
Swiss Reinsurance America Corporation
|
|
|
15.0
|
|
|
A (Excellent)
|
Transatlantic Reinsurance Company
|
|
|
7.9
|
|
|
A (Excellent)
|
Platinum Underwriters Reinsurance Company
|
|
|
7.3
|
|
|
A (Excellent)
|
FM Global (Arkwright)
|
|
|
4.3
|
|
|
A+ (Superior)
|
XL Reinsurance America Inc.
|
|
|
4.2
|
|
|
A (Excellent)
|
Munich Reinsurance America
|
|
|
4.0
|
|
|
A+ (Superior)
|
White Mountains Reinsurance Company of America
|
|
|
3.9
|
|
|
A- (Excellent)
|
General Reinsurance Corporation
|
|
|
3.8
|
|
|
A++ (Superior)
|
Liberty Mutual Insurance Company
|
|
|
3.7
|
|
|
A (Excellent)
|
Berkley Insurance Company
|
|
|
2.9
|
|
|
A+ (Superior)
|
Allianz Global Corporate & Specialty
|
|
|
2.4
|
|
|
A+ (Superior)
|
Everest Reinsurance
|
|
|
2.0
|
|
|
A+ (Superior)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
118.6
|
|
|
|
|
|
|
|
|
(1)
|
|
Lloyds maintains a trust fund, which was established for the benefit of all United States
ceding companies. Lloyds receivables represent amounts due from approximately 100 different
Lloyds syndicates.
|
The reinsurance contracts with the above listed companies are generally entered into annually and
provide coverage for claims occurring while the relevant agreement was in effect, even if claims
are made in later years. The contract with Arkwright was entered into with respect to its
participation in the pools.
The Companys exposure to reinsurers, other than those indicated above, includes reinsurance
receivables from approximately 500 reinsurers or syndicates, and as of December 31, 2008, no single
one was liable to the Company for an unsecured amount in excess of approximately $2 million.
Funds withheld of approximately $12.2 million and letters of credit of approximately $110.0 million
as of December 31, 2008 were obtained as collateral for reinsurance receivables as provided under
various reinsurance treaties. Reinsurance receivables as of December 31, 2008 and 2007 included an
allowance for uncollectible reinsurance receivables of $21.4 million and $14.1 million,
respectively. Uncollectible reinsurance resulted in charges to operations of approximately $15.8
million, $3.6 million and $2.7 million in 2008, 2007 and 2006, respectively.
In 2008,
the Company resolved disputed reinsurance receivables with Equitas, a Lloyds of
London company established to settle claims for underwriting years
1992 and prior, and reevaluated the reserve for reinsurance
receivables amounting in total to $12.4 million.
F-24
Reinsurance ceded and assumed relating to premiums written were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Ceded
|
|
|
Assumed
|
|
|
|
|
|
|
Percentage
|
|
|
|
(direct)
|
|
|
to other
|
|
|
from other
|
|
|
|
|
|
|
of Assumed
|
|
Year ended
|
|
Amount
|
|
|
Companies
|
|
|
Companies
|
|
|
Net amount
|
|
|
to Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
$
|
209,078,072
|
|
|
$
|
51,869,681
|
|
|
$
|
8,175,680
|
|
|
$
|
165,384,071
|
|
|
|
5
|
%
|
December 31, 2007
|
|
|
219,599,494
|
|
|
|
60,534,715
|
|
|
|
8,788,527
|
|
|
|
167,853,306
|
|
|
|
5
|
%
|
December 31, 2006
|
|
|
230,779,540
|
|
|
|
86,449,224
|
|
|
|
10,529,662
|
|
|
|
154,859,978
|
|
|
|
7
|
%
|
Reinsurance ceded and assumed relating to premiums earned were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Ceded
|
|
|
Assumed
|
|
|
|
|
|
|
Percentage
|
|
|
|
(direct)
|
|
|
to other
|
|
|
from other
|
|
|
|
|
|
|
of Assumed
|
|
Year ended
|
|
Amount
|
|
|
Companies
|
|
|
Companies
|
|
|
Net amount
|
|
|
to Net
|
|
|
|
|
|
|
December 31, 2008
|
|
$
|
215,121,723
|
|
|
$
|
54,404,393
|
|
|
$
|
6,355,366
|
|
|
$
|
167,072,696
|
|
|
|
4
|
%
|
December 31, 2007
|
|
|
225,002,917
|
|
|
|
68,364,479
|
|
|
|
9,457,433
|
|
|
|
166,095,871
|
|
|
|
6
|
%
|
December 31, 2006
|
|
|
216,737,670
|
|
|
|
79,063,222
|
|
|
|
14,159,693
|
|
|
|
151,834,141
|
|
|
|
9
|
%
|
Losses and loss adjustment expenses incurred are net of ceded reinsurance recoveries of
$27,040,650, $31,062,222 and $63,334,283 for the years ended December 31, 2008, 2007 and 2006,
respectively.
Unpaid losses
Unpaid losses are based on individual case estimates for losses reported and include a provision
for losses incurred but not reported and for loss adjustment expenses. The following table provides
a reconciliation of the Companys consolidated liability for losses and loss adjustment expenses
for the years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
Net liability for losses and loss adjustment expenses at beginning of year
|
|
$
|
306,405
|
|
|
$
|
292,941
|
|
|
$
|
289,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for losses and loss adjustment expenses occurring in current year
|
|
|
107,275
|
|
|
|
103,664
|
|
|
|
93,803
|
|
Increase (decrease) in estimated losses and loss adjustment expenses for
claims occurring in prior years (1)
|
|
|
2,683
|
|
|
|
(13,820
|
)
|
|
|
(7,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expenses incurred
|
|
|
109,958
|
|
|
|
89,844
|
|
|
|
86,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expense payments for claims occurring during:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
9,887
|
|
|
|
12,136
|
|
|
|
9,641
|
|
Prior years
|
|
|
71,633
|
|
|
|
64,244
|
|
|
|
72,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,520
|
|
|
|
76,380
|
|
|
|
82,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability for losses and loss adjustment expenses at end of year
|
|
|
334,843
|
|
|
|
306,405
|
|
|
|
292,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded unpaid losses and loss adjustment expenses at end of year
|
|
|
213,907
|
|
|
|
250,130
|
|
|
|
286,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and loss adjustment expenses at end of year
|
|
$
|
548,750
|
|
|
$
|
556,535
|
|
|
$
|
579,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The adjustment to the consolidated liability for losses and loss
adjustment expenses for losses occurring in prior years reflects the
net effect of the resolution of losses for other than full reserve
value and subsequent readjustments of loss values.
|
F-25
The adverse loss reserve development of $2.7 million in 2008 resulted primarily from the resolution
of a dispute over reinsurance receivables with a reinsurer and the reevaluation of the reserve for
doubtful reinsurance receivables that contributed $12.4 million of adverse development in 2008 for
both the other liability and ocean marine lines of business for accident years prior to 1999.
Further contributing to adverse loss development was
$3.2 million from asbestos and environmental losses in the other
liability line for accident years prior to 1999. Partially offsetting this adverse development in the other liability line was favorable development
in the contractors class as a result of lower than anticipated
incurred loss development of approximately $3.6 million in the
2004-2006 accident years. The ocean marine line also reported
favorable development of approximately $14.0 million in the
2004-2006 accident years largely as a result of lower reported and paid loss trends. The inland
marine/fire segment also reported favorable loss development partially due to larger than expected
reinsurance recoveries in accident years 2005-2006. Contributing to the adverse development in 2008
was approximately $3.5 million in adverse development from the runoff aviation class relating to
accident years prior to 2002.
The $13.8 million decrease in 2007 was largely caused by favorable development in the
2003-2005 accident years for the ocean marine line, which generally resulted from favorable loss
trends in the risk class. Another factor contributing to the decrease was $6.2 million recorded on
the novation of excess workers compensation policies in the other liability line for accident
years 2004-2006, which was partially offset by adverse development of $3.0 million in the
professional liability class as a result of two large claims in the 2006 accident year. The inland
marine/fire segment also reported favorable loss development partially due to lower reported
severity losses. The favorable development in 2007 was partially offset by approximately
$3.3 million in adverse development from the runoff aviation class.
The $7.7 million decrease in 2006 primarily reflected favorable development in the 2005 and 2004
accident years in ocean marine due in part to lower settlements of case reserve estimates, higher
than expected receipts of salvage and subrogation recoveries and a lower emergence of actual
versus expected losses. Partially offsetting this benefit was adverse development in the 2005 and
2004 accident years in both of the commercial auto and surety classes as a result of higher than
initially anticipated loss ratios. The Companys first full year of writing commercial auto and
surety premiums was 2004.
The insurance pools participated in both the issuance of umbrella casualty insurance for various
Fortune 1000 companies and the issuance of ocean marine liability insurance for various oil
companies during the period from 1978 to 1985. Depending on the accident year, the insurance pools
net retention per occurrence after applicable reinsurance ranged from $250,000 to $2,000,000. The
Companys effective pool participation on such risks varied from 11% in 1978 to 59% in 1985, which
exposed the Company to asbestos losses. Subsequent to this period, the pools substantially reduced
their umbrella writings and coverage was provided to smaller insureds. In addition, ocean marine
and non-marine policies issued during the past three years provide coverage for certain
environmental risks.
At December 31, 2008 and December 31, 2007, the Companys gross, ceded and net loss and loss
adjustment expense reserves for all asbestos/environmental policies amounted to $48.8 million,
$37.3 million and $11.5 million, and $52.4 million, $41.5 million and $10.9 million, respectively.
The Company believes that the uncertainty surrounding asbestos/environmental exposures, including
issues as to insureds liabilities, ascertainment of loss date, definitions of occurrence, scope of
coverage, policy limits and application and interpretation of policy terms, including exclusions,
all affect the estimation of ultimate losses. Under such circumstances, it is difficult to
determine the ultimate loss for asbestos/environmental related claims. Given the uncertainty in
this area, losses from asbestos/environmental related claims may develop adversely and,
accordingly, management is unable to estimate the range of possible loss that could arise from
asbestos/environmental related claims. However, the Companys net unpaid loss and loss adjustment
expense reserves, in the aggregate, as of December 31, 2008, represent managements best estimate.
In 2001, the Company recorded losses in its aircraft line of business as a result of the terrorist
attacks of September 11, 2001 on the World Trade Center, the Pentagon and the hijacked airliner
that crashed in Pennsylvania (collectively, the WTC Attack). At the time, because of the amount
of the potential liability to our insureds (United Airlines and American Airlines) occasioned by
the WTC Attack, we established reserves based upon our estimate of our insureds policy limits for
gross and net liability losses. In 2004 we determined that a reduction in the loss reserves
relating to the terrorist attacks of September 11, 2001 on the Pentagon and the hijacked airliner
that crashed in Pennsylvania was warranted, because a significant number of claims that could have
been made against our insureds were waived by prospective claimants when they opted to participate
in the September 11th Victim Compensation Fund of 2001 (the Fund), and the statutes of
limitations for wrongful death in New York and for bodily injury and property damage, generally,
had expired, the latter on September 11, 2004. Our analysis of claims against our insureds,
undertaken in conjunction with the industrys lead underwriters in London, indicated that, because
such a significant number of claims potentially emanating from the attack on the Pentagon and the
crash in Shanksville had been filed with the Fund, or were time barred as a result of the
expiration of relevant statutes of limitations, those same claims would not be made against our
insureds. Therefore, we concluded that our insureds liability and our ultimate insured loss would
be substantially reduced. Consequently, we re-estimated our insureds potential liability for the
terrorist attacks of September 11, 2001 on the Pentagon and the hijacked airliner that crashed in
Pennsylvania, and we reduced our gross and net loss reserves by $16.3 million and $8.3 million,
respectively.
F-26
In light of the magnitude of the potential losses to our insureds resulting from the WTC Attack, we
did not reduce reserves for these losses until we had a high degree of certainty that a substantial
amount of these claims were waived by victims participation in the Fund, or were time barred by
the expiry of statutes of limitations, and we did not reach that level of certainty until September
2004, when the last of the significant statutes of limitations, that applicable to bodily injury
and property damage, expired.
In 2006 the Company recorded adverse loss development of approximately $850,000 in the aircraft
line of business resulting primarily from changes in estimates for the terrorist attacks occurring
on September 11, 2001. These increases were partially offset by a reduction in reserves relating to
the loss sustained at the Pentagon after re-estimating the reserve based upon lower than expected
settlements of claims paid during the year. There were no material changes in loss estimates for
the WTC attack in 2007 or 2008.
Overall, the aviation line of business has experienced adverse development in 2008, 2007 and 2006
largely related to the unfavorable settlement of large losses and the impact of uncollectible
reinsurance.
Salvage and subrogation
Estimates of salvage and subrogation recoveries on paid and unpaid losses have been recorded as a
reduction of unpaid losses amounting to $6,545,226 and $6,850,648 at December 31, 2008 and December
31, 2007, respectively.
Deferred policy acquisition costs
Deferrable policy acquisition costs amortized to expense amounted to $38,669,739, $37,694,535 and
$31,336,186 for the years ended December 31, 2008, 2007 and 2006, respectively.
(6) Property, Improvements and Equipment, Net:
Property, improvements and equipment, net at December 31, 2008 and December 31, 2007 include the
following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Office furniture and equipment
|
|
$
|
2,401,612
|
|
|
$
|
1,706,122
|
|
Computer equipment
|
|
|
2,105,196
|
|
|
|
1,604,437
|
|
Computer software
|
|
|
4,440,945
|
|
|
|
1,245,014
|
|
Leasehold improvements
|
|
|
5,795,382
|
|
|
|
3,695,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,743,135
|
|
|
|
8,251,337
|
|
Less: accumulated depreciation and amortization
|
|
|
(4,709,646
|
)
|
|
|
(3,434,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, improvements and equipment, net
|
|
$
|
10,033,489
|
|
|
$
|
4,816,836
|
|
|
|
|
|
|
|
|
Depreciation and amortization and other expenses for the years ended December 31, 2008, 2007 and
2006 amounted to $1,414,538, $1,295,929 and $968,817, respectively.
During 2007, the Companys management determined that certain computer equipment and software was
inefficient and no longer possessed any future service potential and accounted for it as an
abandoned asset under the guidance of Statement of Financial Accounting Standard No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.
The cost basis and accumulated
depreciation of the computer equipment and software treated as if abandoned were $5,547,094 and
$231,129, respectively, resulting in a charge against income before income taxes of $5,315,965
during the year ended December 31, 2007.
F-27
(7) Income Taxes:
The components of deferred tax assets and liabilities as of December 31, 2008 and December 31, 2007
are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Loss reserves
|
|
$
|
13,557,347
|
|
|
$
|
13,106,353
|
|
Unearned premiums
|
|
|
4,489,745
|
|
|
|
4,607,948
|
|
Net operating loss carryforwards
|
|
|
5,880,130
|
|
|
|
4,589,456
|
|
Capital loss carryforwards
|
|
|
12,530,316
|
|
|
|
|
|
Bad debt reserve
|
|
|
1,986,752
|
|
|
|
564,356
|
|
Unrealized depreciation of investments
|
|
|
20,418,996
|
|
|
|
2,531,762
|
|
Hedge fund loss
|
|
|
3,862,875
|
|
|
|
|
|
Deferred compensation
|
|
|
2,187,622
|
|
|
|
3,058,090
|
|
Other
|
|
|
|
|
|
|
251,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
64,913,783
|
|
|
|
28,709,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Valuation allowance
|
|
|
23,527,654
|
|
|
|
4,998,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
41,386,129
|
|
|
|
23,710,682
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
5,132,299
|
|
|
|
5,246,355
|
|
Hedge fund income
|
|
|
|
|
|
|
3,339,644
|
|
Accrued salvage and subrogation
|
|
|
208,408
|
|
|
|
238,882
|
|
Other
|
|
|
530,825
|
|
|
|
442,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
5,871,532
|
|
|
|
9,267,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
35,514,597
|
|
|
$
|
14,443,675
|
|
|
|
|
|
|
|
|
Loss carryforwards consist of $9,046,354 state net operating loss (NOL) carryforwards and
$35,800,903 federal capital loss carryforwards. The range of years in which the state NOL
carryforwards, which are primarily in the State of New York, can be carried forward against future
tax liabilities is from 2009 to 2028. The range of years in which the federal capital loss
carryforwards can be carried forward is from 2009 to 2013. The
estimate for capital losses may differ from the actual amount
ultimately filed in the Companys tax return.
The Companys valuation allowance account with respect to the deferred tax asset and the change in
the account is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
4,998,520
|
|
|
$
|
4,193,440
|
|
|
$
|
4,176,558
|
|
Change in valuation allowance
|
|
|
18,529,134
|
|
|
|
805,080
|
|
|
|
16,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
23,527,654
|
|
|
$
|
4,998,520
|
|
|
$
|
4,193,440
|
|
|
|
|
|
|
|
|
|
|
|
The
change in the valuation allowance relates primarily to capital losses in the amount of
$50,174,271, accounting for $17,560,995 of the change. There is uncertainty that the Company can
fully utilize all deferred taxes that arose from capital losses incurred. This uncertainty stems
from issues relating to the current economic conditions, limitations on the period such losses can
be carried forward prior to expiring and the limitation or nature of gains that can be used to
offset the capital losses. To the extent that the Company generates future capital gains to offset
these losses, it may recover some or this entire amount. The remaining valuation allowance of
$968,139 relates to state and local tax loss carryforwards.
F-28
Income tax provisions differ from the amounts computed by applying the federal statutory rate to
income before income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
Income taxes at the federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Tax exempt interest and dividend received deduction
|
|
|
1.4
|
|
|
|
(1.1
|
)
|
|
|
(0.2
|
)
|
Valuation allowance
|
|
|
(13.5
|
)
|
|
|
4.0
|
|
|
|
0.0
|
|
State taxes
|
|
|
0.7
|
|
|
|
(4.1
|
)
|
|
|
(1.0
|
)
|
Other, net
|
|
|
0.7
|
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provisions
|
|
|
24.3
|
%
|
|
|
33.7
|
%
|
|
|
33.5
|
%
|
|
|
|
|
|
|
|
|
|
|
There was no federal income tax paid in 2008. Federal income tax paid amounted to $14,028,238 and
$13,670,275 for the years ended December 31, 2007 and 2006, respectively.
At December 31, 2008 and December 31, 2007, the federal income tax recoverable included in other
assets amounted to $16,242,026 and $2,675,546, respectively.
Reduction of income taxes as a result of the deduction triggered by employee exercise of stock
options for the years ended December 31, 2008, 2007 and 2006 amounted to $398,188, $1,128,108 and
$583,726, respectively. The benefit received was recorded in paid-in capital.
The Company files tax returns subject to the tax regulations of federal, state and local tax
authorities. A tax benefit taken in the tax return but not in the financial statements is known as
an unrecognized tax benefit. The Company had no unrecognized tax benefits at either December 31,
2008 or December 31, 2007. The Companys policy is to record interest and penalties related to
unrecognized tax benefits to income tax expense. The Company did not incur any interest or
penalties related to unrecognized tax benefits for the years ended December 31, 2008 and 2007.
The Company is subject to federal, state and local examinations by tax authorities for tax year
2006 and subsequent.
(8) Statutory Income and Surplus:
NYMAGICs principal source of income is dividends from its subsidiaries, which are used for payment
of operating expenses, including interest expense, loan repayments and payment of dividends to
NYMAGICs shareholders. The Companys domestic insurance subsidiaries are limited under state
insurance laws, in the amount of ordinary dividends they may pay without regulatory approval.
Within this limitation, the maximum amount which could be paid to the Company out of the domestic
insurance companies surplus was approximately $18.6 million as of December 31, 2008. There were no
dividends declared by the insurance subsidiaries in 2008.
Combined statutory net income, surplus and dividends declared by the Companys domestic insurance
subsidiaries were as follows for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Dividends
|
|
|
|
Statutory
|
|
|
Statutory
|
|
|
Declared
|
|
Year ended
|
|
Net (Loss) Income
|
|
|
Surplus
|
|
|
To Parent
|
|
December 31, 2008 (unaudited)
|
|
$
|
(38,487,000
|
)
|
|
$
|
189,383,000
|
|
|
$
|
|
|
December 31, 2007
|
|
$
|
25,654,000
|
|
|
$
|
207,233,000
|
|
|
$
|
15,745,000
|
|
December 31, 2006
|
|
$
|
28,880,000
|
|
|
$
|
197,289,000
|
|
|
$
|
17,600,000
|
|
The Company made capital contributions of $32.5 million to New York Marine in 2008. The Company
also purchased certain receivables from New York Marine in the amount of $6.1 million as of
December 31, 2008.
The National Association of Insurance Commissioners (the NAIC) provided a comprehensive basis of
accounting for reporting to state insurance departments. Included in the codified accounting rules
was a provision for the state insurance commissioners to modify such accounting rules by practices
prescribed or permitted for insurers in their state. However, there were no differences reported in
the statutory financial statements for the years ended December 31, 2008, 2007 and 2006 between
prescribed state accounting practices and those approved by the NAIC.
The domestic insurance company subsidiaries also file statutory financial statements with each
state in the format specified by the NAIC. The NAIC provides accounting guidelines for companies to
file statutory financial statements and provides minimum solvency standards for all companies in
the form of risk-based capital requirements. The policyholders surplus (the statutory equivalent
of net worth) of each of the domestic insurance companies is above the minimum amount required by
the NAIC.
F-29
The
statutory guidance for evaluating impairment on mortgage-backed securities has been modified
effective January 1, 2009. Under the prior guidance, impairment was recognized by a review of cash
flows on an undiscounted basis and no impairment has been recognized by the Company as of December
31, 2008. This compares to $40.7 million in cumulative impairment charges recorded under a GAAP
basis as of December 31, 2008. In 2009, the statutory guidance for impairment will be evaluated
utilizing a review of discounted cash flows. While the Company does not anticipate that the
evaluation in 2009 will result in any impairment charges, if there are impairment charges they
could be material to statutory surplus.
(9) Employee Retirement Plans:
The Company maintains a retirement plan for the benefit of our employees in the form of a Profit
Sharing Plan and Trust. The Profit Sharing Plan and Trust provides for an annual mandatory
contribution of 7.5% of compensation for each year of service during which the employee has
completed 11 months of service and is employed on the last day of the plan year. The Company may
also make an additional discretionary annual contribution of up to 7.5% of compensation. The plan
provides for 100% vesting upon completion of one year of service. Employee retirement plan expenses
for the years ended December 31, 2008, 2007 and 2006 amounted to $971,507, $1,161,441 and
$1,293,472, respectively.
(10) Debt:
On March 11, 2004, the Company issued $100,000,000 in 6.5% senior notes due March 15, 2014. The
notes provide for semi-annual interest payments and are to be repaid in full on March 15, 2014. The
indenture contains certain covenants that restrict our and our restricted subsidiaries ability to,
among other things, incur indebtedness, make restricted payments, 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 remains in compliance
with these covenants.
The fair value of the senior debt at December 31, 2008 approximated a price equal to 75% of the par
value.
Interest paid amounted to $6,500,055, $6,523,830 and $6,523,133 for the years ended December 31,
2008, 2007 and 2006, respectively.
On November 5, 2008, Fitch Ratings downgraded the Companys rating on its senior debt from BBB- to
BB+.
(11) Commitments:
The Company maintains various operating leases to occupy office space. The lease terms expire on
various dates through July 2016.
The aggregate minimum annual rental payments under various operating leases for office facilities
as of December 31, 2008 are as follows:
|
|
|
|
|
|
|
Amount
|
|
2009
|
|
|
4,281,816
|
|
2010
|
|
|
4,209,129
|
|
2011
|
|
|
4,182,923
|
|
2012
|
|
|
4,224,471
|
|
2013
|
|
|
4,325,742
|
|
Thereafter
|
|
|
11,107,413
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,331,494
|
|
The operating leases also include provisions for additional payments based on certain annual cost
increases. Rent expenses for the years ended December 31, 2008, 2007 and 2006 amounted to
$3,921,632, $2,216,707 and $1,856,238, respectively.
In 2003, the Company entered into a sublease for approximately 28,000 square feet for its principal
offices in New York City. The sublease commenced on March 1, 2003 and expires on July 30, 2016. In
April 2005, the Company signed an amendment to the sublease pursuant to which it added
approximately 10,000 square feet of additional space. The amended sublease expires on July 30,
2016. The minimum monthly rental payments of $141,276 under the amended sublease include the rent
paid by the Company for the original sublease. Rent payments under the amended sublease commenced
in 2005 and end in 2016, with payments amounting to $20.8 million, collectively, over the term of
the agreement.
In June 2007, the Company leased an additional 30,615 square feet at the New York City location.
The lease provides for a minimum monthly rental payment of $197,722 beginning in 2008 and $210,478
beginning in 2013. The lease expires on July 30, 2016.
F-30
Effective August 1, 2008, the Company has subleased a portion of its office space in New York City
for a term of 29 months, with an option to extend for an
additional 19 months. The monthly rental income recognized
under the sublease agreement is approximately $82,000 and reduces
overall general and administrative expenses by $410,000 for the year ended December 31, 2008.
The Company made a first amendment to a lease dated May 4, 2004 for its office in Chicago. The
minimum monthly rental payments of $4,159 commenced in 2005 and will end in 2010.
In 2008, the Company entered into a lease for 2,136 square feet for the office space for its newly
formed MMO Agencies, an underwriting division of the Company. The office is located in Long
Island, New York. Rent payments under the lease end in 2013, with payments amounting to
approximately $370,000, collectively, over the term of the agreement. The lease expires in May
2013.
(12) Comprehensive Income:
The Companys comparative comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(104,335,079
|
)
|
|
$
|
13,372,350
|
|
|
$
|
29,850,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income, net of deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding (losses) gains on securities, net
of deferred tax (benefit) expense of $(5,809,488),
$(2,354,199) and $212,652
|
|
|
(46,589,927
|
)
|
|
|
(4,372,090
|
)
|
|
|
394,925
|
|
Less: reclassification adjustment for losses
realized in net income, net of tax benefit of
$4,152,352, $2,415,998 and $140,894
|
|
|
(43,512,414
|
)
|
|
|
(4,486,854
|
)
|
|
|
(261,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
(3,077,513
|
)
|
|
|
114,764
|
|
|
|
656,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(107,412,592
|
)
|
|
$
|
13,487,114
|
|
|
$
|
30,507,065
|
|
|
|
|
|
|
|
|
|
|
|
The Company reported unrealized holding (losses) gains on available for sale securities, net of
deferred taxes, of $(2,875,317) and $202,196 at December 31, 2008 and December 31, 2007,
respectively.
(13) Common Stock Repurchase Plan and Shareholders Equity:
The Company has a Common Stock Repurchase Plan, as amended in 2008, which authorizes the repurchase
of up to $75 million, at prevailing market prices, of the Companys issued and outstanding shares
of common stock on the open market. As of December 31, 2008, the Company has repurchased a total of
3,457,298 shares of common stock under this plan at a total cost of $62,855,338 at market prices
ranging from $12.38 to $28.81 per share. The Company repurchased 368,900 shares of common stock
under the Plan in 2008 at a total cost of $7,653,602. In 2007, the Company repurchased 317,700
shares of common stock under the Plan at a total cost of $7,121,988. There were no repurchases made
under the Plan during 2006.
In connection with the acquisition of MMO in 1991, the Company also acquired 3,215,958 shares of
its own common stock held by MMO and recorded such shares as treasury stock at MMOs original cost
of $3,919,129.
The Company entered into a Securities Purchase Agreement with Conning Capital Partners VI, L.P.
(CCPVI) on January 31, 2003. Under the terms of the agreement, the Company sold 400,000
investment units to CCPVI, which consisted of one share of the Companys 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. In accordance with the Option Certificate,
the options would have expired on January 31, 2008. The exercise price is based on a variable
formula (which was attached as an exhibit to the Companys Form 8-K filed on February 4, 2003).
On March 22, 2006, the Company entered into an agreement (the Letter Agreement) to amend and
restate the original Option Certificate granted under a Securities Purchase Agreement, dated
January 31, 2003. The Amended and Restated Option Certificate, dated March 22, 2006, decreased the
number of shares of Company common stock that are to be issued upon the exercise of the option from
400,000 to 300,000 and extended the term from January 31, 2008 to December 31, 2010. There were no
options exercised by CCPVI during any of the years presented herein. The option exercise price
calculated at December 31, 2008 was $24.09 per share.
F-31
(14) Earnings per share:
A reconciliation of the numerators and denominators of the basic and diluted earnings per share
(EPS) computations for each of the years ended December 31, 2008, 2007 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Net
|
|
|
Shares
|
|
|
|
|
|
|
Net
|
|
|
Shares
|
|
|
|
|
|
|
Net
|
|
|
Shares
|
|
|
|
|
|
|
Loss
|
|
|
Outstanding
|
|
|
Per
|
|
|
Income
|
|
|
Outstanding
|
|
|
Per
|
|
|
Income
|
|
|
Outstanding
|
|
|
Per
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Share
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Share
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Share
|
|
|
|
(In thousands, except for per share data)
|
|
Basic EPS
|
|
$
|
(104,335
|
)
|
|
|
8,534
|
|
|
$
|
(12.23
|
)
|
|
$
|
13,372
|
|
|
|
8,896
|
|
|
$
|
1.50
|
|
|
$
|
29,850
|
|
|
|
8,807
|
|
|
$
|
3.39
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity awards and
purchased options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
294
|
|
|
$
|
(.04
|
)
|
|
|
|
|
|
|
370
|
|
|
$
|
(.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
(104,335
|
)
|
|
|
8,534
|
|
|
$
|
(12.23
|
)
|
|
$
|
13,372
|
|
|
|
9,190
|
|
|
$
|
1.46
|
|
|
$
|
29,850
|
|
|
|
9,177
|
|
|
$
|
3.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15) Incentive Compensation:
Share-based Plans:
Effective January 1, 2006, the Company adopted, on a prospective basis, SFAS 123(R) (As Amended),
Share-Based Payment
, which is a revision of SFAS 123,
Accounting for Stock-Based Compensation
, and
supersedes APB 25,
Accounting for Stock Issued to Employees
. Using the
modified-prospective-transition method requires the application of the fair value based method to
transactions that involve share-based compensation awards granted, modified or settled on or after
the date of adoption. The approach to account for share-based payments in SFAS 123(R) is similar to
the approach described in SFAS 123, however, SFAS 123(R) requires the recognition of compensation
costs related to all share-based payments to employees be made using the grant-date fair value of
all requisite shares over their vesting period, including the cost
related to the unvested portion of all outstanding requisite shares as of December 31, 2005. The
Company had previously accounted for share-based compensation using the expense recognition
provision of SFAS 123, on a prospective basis, from January 1, 2003 to December 31, 2005 for all
awards granted, modified or settled subsequent to January 1, 2003. The cumulative effect of
adopting SFAS 123(R) did not have a material effect on the Companys results of operations or
financial position.
The Company has established three share-based incentive compensation plans (the Plans), which are
described below. Management believes that the Plans provide a means whereby the Company may attract
and retain persons of ability to exert their best efforts on behalf of the Company. The Plans
generally allow for the issuance of grants and exercises through newly issued shares, treasury
stock, or any combination thereof to officers, key employees and directors who are employed by, or
provide services to the Company. The compensation cost that has been charged against income for the
Plans was $2,535,351, $2,210,615 and $2,116,929 for the years ended December 31, 2008, 2007 and
2006, respectively. Of the $2.1 million expensed in 2006, approximately $343,000 related to the
adoption of accounting for share-based compensation under SFAS 123(R). The approximate total income
tax benefit accrued and recognized in the Companys financial statements for the years ended
December 31, 2008, 2007 and 2006 related to share-based compensation expenses was approximately
$887,000, $774,000 and $741,000, respectively.
2004 Long-Term Incentive Plan
The NYMAGIC, INC. Amended and Restated 2004 Long-Term Incentive Plan (the LTIP) was adopted by
the Companys Board of Directors and approved by its shareholders in 2004. The LTIP authorizes the
Board of Directors to grant non-qualified options to purchase shares of Companys common stock,
share appreciation rights, restricted shares, restricted share units, unrestricted share awards,
deferred share units and performance awards. The LTIP allows for the issuance of share-based awards
up to the equivalent of 450,000 shares of the Companys common stock at not less than 95 percent of
the fair market value at the date of grant. Share grants awarded under the LTIP are exercisable
over the period specified in each contract and expire at a maximum term of ten years. The LTIP was
amended and restated in 2008 to change the amount of share equivalents that may be issued under it
from 450,000 to 900,000.
Under the LTIP, the Company has granted restricted share units (RSUs), deferred share units
(DSUs) and performance share awards (performance shares), as well as unrestricted common
stock awards (i.e., vested and unencumbered shares). Grantees generally have the option to defer
the receipt of shares of common stock that would otherwise be acquired upon vesting of restricted
share units, which allows for preferential tax treatment by the recipient of the award.
F-32
RSUs, as well as restricted shares, become vested and convertible into shares of common stock when
the restrictions applicable to them lapse. In accordance with SFAS 123(R), the fair value of
nonvested shares is estimated on the date of grant based on the market price of the Companys stock
and is amortized to compensation expense on a straight-line basis over the related vesting periods.
As of December 31, 2008, there was $2,871,946 of unrecognized compensation cost related to RSUs,
which is expected to be recognized over a remaining weighted-average vesting period of 1.3 years.
The total fair value of RSUs vested and converted to shares of common stock during the years ended
December 31, 2008, 2007 and 2006 was $603,076, $492,092 and $642,120, respectively. As of
December 31, 2008, the aggregate fair value was $4,123,373 for RSUs outstanding (vested and
unvested) and $2,607,945 for nonvested RSUs.
The Company has settled annual Board of Directors fees, in part, through the issuance of DSUs. DSUs
are vested immediately and are converted into shares of the Companys common stock upon the
departure of the grantee director. For the years ended December 31, 2008, 2007 and 2006, fees of
$262,500, $227,500 and $227,500, respectively, have been settled by the grant of 11,559, 5,366 and
7,123 DSUs, respectively. The deferred share units outstanding at December 31, 2008 carried a total
fair value of $786,440.
The following table sets forth activity for the LTIP as it relates to RSUs and DSUs for the years
ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average Grant
|
|
|
|
|
|
|
Average Grant
|
|
|
|
|
|
|
Average Grant
|
|
|
|
|
|
|
|
Date Fair
|
|
|
|
|
|
|
Date Fair
|
|
|
|
|
|
|
Date Fair
|
|
|
|
Number of
|
|
|
Value
|
|
|
Number of
|
|
|
Value
|
|
|
Number of
|
|
|
Value
|
|
RSUs and DSUs
|
|
Shares
|
|
|
Per Share
|
|
|
Shares
|
|
|
Per Share
|
|
|
Shares
|
|
|
Per Share
|
|
Outstanding, beginning
of year
|
|
|
212,924
|
|
|
$
|
28.68
|
|
|
|
180,959
|
|
|
$
|
25.73
|
|
|
|
144,236
|
|
|
$
|
24.31
|
|
Granted
|
|
|
73,059
|
|
|
$
|
22.42
|
|
|
|
51,365
|
|
|
$
|
39.47
|
|
|
|
55,123
|
|
|
$
|
30.03
|
|
Vested and Converted to
Shares of Common Stock
|
|
|
(28,250
|
)
|
|
$
|
30.46
|
|
|
|
(19,400
|
)
|
|
$
|
29.74
|
|
|
|
(18,400
|
)
|
|
$
|
27.49
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
257,733
|
|
|
$
|
26.71
|
|
|
|
212,924
|
|
|
$
|
28.68
|
|
|
|
180,959
|
|
|
$
|
25.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, end of year
|
|
|
136,900
|
|
|
$
|
27.14
|
|
|
|
133,200
|
|
|
$
|
29.84
|
|
|
|
136,600
|
|
|
$
|
26.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance share units have been awarded under the LTIP to the Companys President and Chief
Executive Officer. As discussed further under the caption Executive Compensation Agreements, the
award is contingent upon the satisfaction of certain market conditions relating to the fair market
value of the Companys stock. Depending on the performance of the Companys common stock for each
of the years ended December 31, 2008, 2007 and 2006, an award may be issued up to 12,000
performance share units per year upon the achievement of certain predetermined share closing price
requirements. The fair value of the performance share award has been estimated as of the initial
grant-date using a Monte Carlo Simulation. The inputs for expected dividends, expected volatility,
expected term and risk-free interest rate used in the calculation of the grant-date fair value of
this award were 0.84%, 25.3%, 2.7 years and 4.85%, respectively. The grant-date fair value for the
years ended December 31, 2008, 2007 and 2006 was $144,180, $155,992 and $156,951, respectively.
Pursuant to the completion of the 2007 and 2006 annual performance periods, the Company awarded
12,000 performance shares for each year, which vest on the second anniversary of the last day of
the applicable performance period, provided that the executive is employed by the Company on that
date. The 2006 award was settled in the Companys common stock on December 31, 2008, and the 2007
award will be settled in the Companys common stock on December 31, 2009, provided that the
executive is employed by the Company on that date. Since market conditions relating to this award
were not satisfied for the 2008 performance period, the executive will not receive any performance
shares for this period. The outstanding performance share units had an approximate fair value
of $229,000 at December 31, 2008.
On April 7, 2008, the Company entered into an award agreement, which became effective May 1, 2008
with various officers of the Company and members of the senior management team of MMO Agencies, an
underwriting division of the Company. Included in the agreement are provisions pertaining to
performance unit awards. In accordance with the guidance of SFAS 123(R), the awards are deemed to
be performance-based compensation awards. The first measurement period is May 1, 2008 to December
31, 2008. The remaining measurement periods will incept on January 1, 2009, 2010 and 2011 and will
expire at the end of each respective year. The performance-based compensation awards that
ultimately vest will be based on the satisfaction of minimum gross written premiums and maximum
loss ratio requirements. The Company records compensation based on the pro-rata portion of the
performance units anticipated to vest, assuming the attainment of the minimum required gross
written premiums threshold and satisfaction of the total loss ratio requirement for the current
requisite service period. The Company does not anticipate the vesting of any of these awards for
the measurement period ending December 31, 2008 and has therefore not recorded any compensation
expense related to the awards in 2008.
F-33
Unrestricted shares of the Companys common stock have been granted pursuant to the LTIP. 9,750
shares were granted to certain directors and officers during 2007. The unrestricted stock awards
settled compensation costs of $384,248 for the year ended December 31, 2007. There were no
unrestricted stock awards granted during 2008 and 2006.
1991 and 2002 Stock Option Plans
The 1991 and 2002 Stock Option Plans (the Option Plans) have been adopted by the Companys Board
of Directors and approved by its shareholders in each of their respective years. The plans provide
for the grant of non-qualified options to purchase shares of the Companys common stock. Both of
the plans authorize the issuance of options to purchase up to 500,000 shares of the Companys
common stock at not less than 95 percent of the fair market value at the date of grant. Option
awards are exercisable over the period specified in each contract and expire at a maximum term of
ten years.
The fair value of each option award has been estimated as of the respective grant-date using the
Black-Scholes option-pricing model. The weighted-average grant-date fair value of options granted
during 2008 was $5.31 per share. In calculating the fair value of the 2008 grants, the following
assumptions were used: 1) expected dividend yield ranging between 1.35%-1.46%; 2) expected
volatility approximating 31%; 3) expected term of 4 years; and 4) risk-free interest rate ranging
between 2.32%-2.89%. The Company did not grant any stock option awards through the Option Plans
during the years ended December 31, 2007 and 2006. There was $87,725 of unrecognized compensation
cost related to unvested options awarded pursuant to the Option Plans as of December 31, 2008,
which will be recognized over the remaining weighted-average vesting period of approximately 1.8
years. The total intrinsic value of options exercised during the years ended December 31, 2008,
2007 and 2006 was approximately $306,000, $2,347,000 and $1,026,000, respectively. As of
December 31, 2008, the aggregate intrinsic value was $623,252 for both options outstanding and
vested and exercisable. There were no stock options granted during 2007 and 2006, respectively.
The following table sets forth stock option activity for the Option Plans for the years ended
December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
|
|
Number of
|
|
|
Price
|
|
|
Number of
|
|
|
Price
|
|
|
Number of
|
|
|
Price
|
|
Shares Under Option
|
|
Shares
|
|
|
Per Share
|
|
|
Shares
|
|
|
Per Share
|
|
|
Shares
|
|
|
Per Share
|
|
Outstanding, beginning
of year
|
|
|
195,825
|
|
|
$
|
15.69
|
|
|
|
333,200
|
|
|
$
|
15.43
|
|
|
|
407,850
|
|
|
$
|
15.26
|
|
Granted
|
|
|
20,000
|
|
|
$
|
22.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(29,875
|
)
|
|
$
|
15.58
|
|
|
|
(136,725
|
)
|
|
$
|
15.07
|
|
|
|
(72,025
|
)
|
|
$
|
14.46
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
(650
|
)
|
|
$
|
14.47
|
|
|
|
(2,625
|
)
|
|
$
|
14.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
185,950
|
|
|
$
|
16.48
|
|
|
|
195,825
|
|
|
$
|
15.69
|
|
|
|
333,200
|
|
|
$
|
15.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year
|
|
|
165,950
|
|
|
$
|
15.71
|
|
|
|
193,325
|
|
|
$
|
15.56
|
|
|
|
323,200
|
|
|
$
|
15.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average remaining contractual term as of December 31, 2008 for options outstanding and
options vested and exercisable was 4.3 and 3.7 years, respectively. For the years ended
December 31, 2008, 2007 and 2006, the Company received approximately $466,000, $2,060,000 and
$1,042,000, respectively, in cash for the exercise of stock options granted under the Option Plans.
Other Plans:
Employee Stock Purchase Plan
The Company established the Employee Stock Purchase Plan (the ESPP) in 2004. The ESPP allows
eligible employees of the Company and its designated affiliates to purchase, through payroll
deductions, shares of common stock of the Company. The ESPP is designed to retain and motivate the
employees of the Company and its designated affiliates by encouraging them to acquire ownership in
the Company on a tax-favored basis. The price per common share sold under the ESPP is 85% (or more
if the Board of Directors or the committee administering the plan so provides) of the closing price
of the Companys shares on the New York Stock Exchange on the day the Common Stock is offered. The
Company has reserved 50,000 shares for issuance under the ESPP. There were no shares issued under
the ESPP during any of the years ended December 31, 2008, 2007 and 2006.
F-34
Phantom Stock Plan
The Company established the NYMAGIC, INC. Phantom Stock Plan (the PSP) in 1999. The purpose of
the PSP is to build and retain a capable and experienced long-term management team and to
incentivize key personnel to promote the success of the Company. Each share of phantom stock
granted under the PSP constitutes a right to receive the appreciation in the fair market value of
one share of the Companys stock in the equivalent cash value, as determined on the date of
exercise of such share of phantom stock over the measurement value of such phantom shares. In 1999,
100,000 shares of phantom stock were granted to employees with a five-year vesting schedule. There
have been no grants of phantom stock by the Company since 1999. There were 4,000, 3,500 and 7,500
shares exercised for the years ended December 31, 2008, 2007 and 2006, respectively. The Company
recorded an expense (benefit) of $7,800, $(40,755), and $140,400 for the years ended December 31,
2008, 2007 and 2006, respectively. As of December 31, 2008, all shares of phantom stock granted
under the PSP have been exercised.
Executive Compensation Agreements:
On April 17, 2006, the Company entered into an employment agreement with A. George Kallop, the
Companys President and Chief Executive Officer (the Kallop Employment Agreement), effective
October 1, 2005 through December 31, 2008. This term automatically renewed for successive one-year
periods and expired in accordance with its terms on December 31, 2008. Under the Kallop Employment
Agreement, Mr. Kallop was entitled to a base salary of $400,000 per annum (effective January 9,
2007, base salary was increased to $450,000 per annum pursuant to an amendment to the agreement)
and a target annual cash incentive bonus of $300,000. Mr. Kallop also received grants of 8,000
restricted share units as of the execution date of the agreement and on each of January 1, 2007 and
January 1, 2008. These shares vested on December 31, 2006, 2007 and 2008, respectively. The
agreement also provided for a long-term incentive award with maximum, target and threshold awards
of 12,000, 6,000 and 3,000 performance units, respectively, in each of three one-year performance
periods beginning with the calendar year ended December 31, 2006. Mr. Kallop is also entitled to
receive a supplemental performance compensation award in the amount of 25,000 performance units
pursuant to a Change in Control of the Company as defined in the Kallop Employment Agreement. A
performance unit is an award which is based on the achievement of specific goals with respect to
the Company or any affiliate or individual performance of the participant, or a combination
thereof, over a specified period of time. Each of the performance awards is subject to the
conditions described in the award agreement entered into contemporaneously with the Kallop
Employment Agreement. The Kallop Employment Agreement also provides for reimbursement of reasonable
expenses incurred in the performance of Mr. Kallops duties, and includes provisions governing
termination for death, disability, cause, without cause and change of control, which include a
severance benefit of one years salary, pro-rata annual incentive awards at target, and accelerated
vesting of stock and performance unit grants in the event of his termination without cause prior to
a change of control.
In connection with the Kallop Employment Agreement, the Company entered into a Performance Share
Award Agreement (the Kallop Award Agreement) with Mr. Kallop on the same date. The performance
units were earned for each of the two one-year performance periods ending on December 31, 2006 and
December 31, 2007, based on predetermined market price targets of the daily closing price of the
Companys
common stock in each of those performance periods. Since market conditions relating to this award
were not satisfied for the 2008 performance period, the executive did not receive any performance
shares at December 31, 2008. See Subsequent event Note 20.
(16) Segment Information:
The Companys subsidiaries include three domestic insurance companies and three domestic agencies.
These subsidiaries underwrite commercial insurance in four major lines of business. The Company
considers ocean marine, inland marine/fire, other liability, and aircraft as appropriate segments
for purposes of evaluating the Companys overall performance; however, the Company has ceased
writing any new policies covering aircraft risks subsequent to March 31, 2002.
The Company evaluates revenues and income or loss by the aforementioned segments. Revenues include
premiums earned and commission income. Income or loss includes premiums earned and commission
income less the sum of losses incurred and policy acquisition costs.
F-35
Investment income represents a material component of the Companys revenues and income. The Company
does not maintain its investment portfolio by segment because management does not consider revenues
and income by segment as being derived from the investment portfolio. Accordingly, an allocation of
identifiable assets, investment income and realized investment gains is not considered practicable.
As such, other income, general and administrative expenses, interest expense, and income taxes are
also not considered by management for purposes of providing segment information. The financial
information by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
Income
|
|
Segments
|
|
Revenues
|
|
|
(Loss)
|
|
|
Revenues
|
|
|
(Loss)
|
|
|
Revenues
|
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ocean marine
|
|
$
|
64,861
|
|
|
$
|
29,712
|
|
|
$
|
71,998
|
|
|
$
|
29,141
|
|
|
$
|
78,898
|
|
|
$
|
31,691
|
|
Inland marine/Fire
|
|
|
5,714
|
|
|
|
(381
|
)
|
|
|
7,016
|
|
|
|
1,084
|
|
|
|
7,792
|
|
|
|
(53
|
)
|
Other liability
|
|
|
96,430
|
|
|
|
(7,493
|
)
|
|
|
87,388
|
|
|
|
11,971
|
|
|
|
65,402
|
|
|
|
3,721
|
|
Aircraft
|
|
|
222
|
|
|
|
(3,239
|
)
|
|
|
108
|
|
|
|
(3,225
|
)
|
|
|
284
|
|
|
|
(455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
167,227
|
|
|
|
18,599
|
|
|
|
166,510
|
|
|
|
38,971
|
|
|
|
152,376
|
|
|
|
34,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss), net
|
|
|
122
|
|
|
|
122
|
|
|
|
(4,659
|
)
|
|
|
(4,659
|
)
|
|
|
596
|
|
|
|
596
|
|
Net investment (loss) income
|
|
|
(63,503
|
)
|
|
|
(63,503
|
)
|
|
|
35,489
|
|
|
|
35,489
|
|
|
|
47,897
|
|
|
|
47,897
|
|
Net realized investment
losses
|
|
|
(47,665
|
)
|
|
|
(47,665
|
)
|
|
|
(6,903
|
)
|
|
|
(6,903
|
)
|
|
|
(403
|
)
|
|
|
(403
|
)
|
General and administrative
expenses
|
|
|
|
|
|
|
(38,612
|
)
|
|
|
|
|
|
|
(36,018
|
)
|
|
|
|
|
|
|
(31,401
|
)
|
Interest expense
|
|
|
|
|
|
|
(6,716
|
)
|
|
|
|
|
|
|
(6,726
|
)
|
|
|
|
|
|
|
(6,712
|
)
|
Income tax benefit (expense)
|
|
|
|
|
|
|
33,440
|
|
|
|
|
|
|
|
(6,782
|
)
|
|
|
|
|
|
|
(15,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,181
|
|
|
$
|
(104,335
|
)
|
|
$
|
190,437
|
|
|
$
|
13,372
|
|
|
$
|
200,466
|
|
|
$
|
29,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys gross written premiums cover risks in the following geographic locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
United States
|
|
$
|
204,769
|
|
|
$
|
216,417
|
|
|
$
|
226,352
|
|
Europe
|
|
|
3,096
|
|
|
|
5,659
|
|
|
|
9,084
|
|
Asia
|
|
|
1,161
|
|
|
|
1,751
|
|
|
|
2,647
|
|
Latin America
|
|
|
388
|
|
|
|
313
|
|
|
|
479
|
|
Other
|
|
|
7,840
|
|
|
|
4,248
|
|
|
|
2,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Written Premiums
|
|
$
|
217,254
|
|
|
$
|
228,388
|
|
|
$
|
241,309
|
|
|
|
|
|
|
|
|
|
|
|
F-36
(17) Quarterly Financial Data (unaudited):
The quarterly financial data for 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(in thousands, except per share data)
|
|
Total revenues
|
|
$
|
(300
|
)
|
|
$
|
48,981
|
|
|
$
|
(13,953
|
)
|
|
$
|
21,453
|
|
Loss before income taxes
|
|
$
|
(46,599
|
)
|
|
$
|
(8,750
|
)
|
|
$
|
(63,470
|
)
|
|
$
|
(18,955
|
)
|
Net loss
|
|
$
|
(29,748
|
)
|
|
$
|
(4,746
|
)
|
|
$
|
(50,074
|
)
|
|
$
|
(19,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(3.42
|
)
|
|
$
|
(.55
|
)
|
|
$
|
(5.96
|
)
|
|
$
|
(2.36
|
)
|
Diluted loss per share
|
|
$
|
(3.42
|
)
|
|
$
|
(.55
|
)
|
|
$
|
(5.96
|
)
|
|
$
|
(2.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(in thousands, except per share data)
|
|
Total revenues
|
|
$
|
52,101
|
|
|
$
|
52,558
|
|
|
$
|
48,963
|
|
|
$
|
36,815
|
|
Income (loss) before income taxes
|
|
$
|
11,556
|
|
|
$
|
15,904
|
|
|
$
|
5,751
|
|
|
$
|
(13,056
|
)
|
Net income (loss)
|
|
$
|
7,519
|
|
|
$
|
10,325
|
|
|
$
|
3,799
|
|
|
$
|
(8,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
.85
|
|
|
$
|
1.16
|
|
|
$
|
.43
|
|
|
$
|
(.93
|
)
|
Diluted earnings (loss) per share
|
|
$
|
.82
|
|
|
$
|
1.12
|
|
|
$
|
.41
|
|
|
$
|
(.93
|
)
|
(18) Related Party Transactions:
The following information is unaudited: Effective December 31, 2004, Mr. Trumbull, who had
previously been a shareholder of Mariner, ceased to be a shareholder of Mariner. Currently, he has
a consulting agreement with Mariner pursuant to which Mariner holds on his behalf an option to
purchase 337,500 shares of NYMAGIC. Effective January 1, 2005, Mr. Shaw, who previously had a
contractual relationship with Mariner relating to investing services, and on whose behalf Mariner
agreed to hold as nominee a portion of the option covering 315,000 shares of NYMAGIC, terminated
his contractual relationship with Mariner, waived his interest in the option covering 315,000
shares of NYMAGIC and became a shareholder of Mariner. Mr. Kallop has a consulting agreement with
Mariner and Mariner holds on his behalf as nominee a portion of the option covering 236,250 shares
of NYMAGIC.
The Company entered into an investment management agreement with Mariner effective October 1, 2002,
which was amended and restated on December 6, 2002. Under the terms of this agreement, Mariner
manages the Companys and its subsidiaries, New York Marine And General Insurance Companys and
Gotham Insurance Companys investment portfolios. Fees to be paid to Mariner are based on a
percentage of the investment portfolios as follows: .20% of liquid assets, .30% of fixed maturity
investments and 1.25% of limited partnership (hedge fund) and equity security investments. Another
of the Companys subsidiaries, Southwest Marine and General Insurance Company, entered into an
investment management agreement, the substantive terms of which are identical to those set forth
above, with a subsidiary of Mariner, Mariner Investment Group, Inc. (Mariner Group) effective
March 1, 2007. William J. Michaelcheck, a director of the Company, is the Chairman and the
beneficial owner of a substantial number of shares of Mariner. A. George Kallop, President and
Chief Executive Officer and a director of the Company, William D. Shaw, Jr., Vice Chairman and a
director of the Company and George R. Trumbull, a director of the Company, are also associated with
Mariner. Investment fees incurred under the agreements with Mariner and Mariner Group were
$2,894,022, $2,951,404 and $2,887,985 for the years ended December 31, 2008, 2007 and 2006,
respectively.
The Company entered into a consulting agreement on April 6, 2005 with William D. Shaw, Jr., Vice
Chairman and a director of the Company (the Shaw Consulting Agreement), which was renewed through
December 31, 2008, pursuant to which he provided certain consulting services to the Company
relating to the Companys asset management strategy including (i) participation in meetings with
rating agencies; (ii) participation in meetings with research analysts; and (iii) participation in
certain other investor relations services. For the year ended December 31, 2008, Mr. Shaw was paid
$125,000 under this agreement, of which $25,000 relates to services performed in 2007. This
compares to $75,000 and $100,000 paid under his consulting agreements during the years ended
December 31, 2007 and 2006, respectively. The Company may also pay Mr. Shaw a bonus up to a maximum
of $100,000 at the discretion of the Human Resources Committee of the Companys Board of Directors
upon the recommendation of the Companys Chairman. Mr. Shaw was not awarded a bonus in 2008 for
services he provided in 2007. In April 2007, the Company awarded Mr. Shaw a $25,000 cash bonus and
1,000 shares of common stock with a fair value of $39,410 for services performed in 2006. In
February 2006 Mr. Shaw was awarded a cash bonus of $30,000 for his services provided in 2005. The
Company
was also obligated to reimburse Mr. Shaw for all reasonable and necessary expenses incurred in
connection with the services he provides under the Consulting Agreement. The Shaw Consulting
Agreement terminated on December 31, 2008 and was not renewed for 2009.
F-37
On May 21, 2008, George R. Trumbull stepped down as Chairman of the Board of Directors. Effective
as of that date, the Company entered into a consulting agreement with Mr. Trumbull, pursuant to
which the Trumbull Employment Agreement, which was previously filed as Exhibit 10.59 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2007, was novated and the
vesting of 5,000 restricted share units granted to Mr. Trumbull on January 1, 2008, was accelerated
to May 21, 2008.
The Company entered into the consulting agreement with Mr. Trumbull, a member of the Companys
Board of Directors, on June 16, 2008 (the Trumbull Consulting Agreement), which was made
effective as of May 21, 2008. Pursuant to the terms of this agreement, Mr. Trumbull will perform
consulting services in the form of providing assistance to the Companys Chairman of the Board of
Directors as he may request in connection with Board matters and to the President and Chief
Executive Officer of the Company as he may request in connection with various issues that may arise
in the Companys operating and risk bearing subsidiaries. Mr. Trumbulls compensation under the
Trumbull Consulting Agreement is $100,000 per year, payable in four equal quarterly payments of
$25,000 each, the first of which was paid on August 21, 2008. For the year ended December 31, 2008,
he has been paid $50,000 under the Trumbull Consulting Agreement. The Company is also obligated to
reimburse Mr. Trumbull for all reasonable and necessary expenses incurred in connection with the
services he provides under the Trumbull Consulting Agreement. Unless extended by mutual agreement,
the Trumbull Consulting Agreement terminates on May 21, 2009. The Trumbull Consulting Agreement is
also subject to termination by Mr. Trumbull or the Company on 30 days prior notice. The Company may
terminate the Trumbull Consulting Agreement at any time in the event Mr. Trumbull ceases to be a
member of the Companys Board of Directors. The agreement automatically terminates immediately
upon the merger or consolidation of the Company into another corporation; the sale of all or
substantially all of its assets; its dissolution and/or liquidation; or, the death of Mr. Trumbull.
The Trumbull Consulting Agreement was previously filed as Exhibit 10.1 to the Companys Quarterly
Report on Form 10-Q for the quarter ended June 30, 2008.
On July 8, 2008, the Company entered into a three-year engagement agreement with Robert G. Simses,
the Companys Chairman of the Board of Directors (the Simses Engagement Agreement), effective May
21, 2008 through May 21, 2011. Under the terms of the Simses Engagement Agreement, Mr. Simses is
entitled to an annual retainer, payable quarterly, beginning on August 21, 2008, of not less than
$150,000, subject to review for increase at the discretion of the Human Resource Committee of the
Board of Directors. For the year ended December 31, 2008, he has been paid $75,000 under the Simses
Engagement Agreement. Mr. Simses also received a grant of 30,000 restricted share units as of the
effective date of the agreement. These shares will vest ratably over the term of the agreement,
beginning on May 21, 2009. The Simses Engagement Agreement also provides for reimbursement of
reasonable expenses incurred in the performance of Mr. Simses duties, and includes provisions
governing termination for death, disability, cause, without cause and change of control, which
includes payment through the end of the term of the agreement and accelerated vesting of stock unit
grants in the event of his termination without cause, for good cause or upon a change of control.
The Simses Engagement Agreement was previously filed as Exhibit 10.2 to the Companys Quarterly
Report on Form 10-Q for the quarter ended June 30, 2008.
In 2003, the Company acquired a 100% interest in a limited partnership hedge fund, Mariner Tiptree
(CDO) Fund I, L.P. (Tiptree), subsequently known as Tricadia CDO Fund, L.P. (Tricadia) and
since June 2008 known as Altrion Capital, L.P. (Altrion). Altrion was originally established to
invest in collateralized debt obligation (CDO) securities, commercial loan obligation (CLO)
securities, credit related structured (CRS) securities and other structured products, as well as
commercial loans, that are arranged, managed or advised by a Mariner affiliated company. See
Relationship with Mariner Partners, Inc. Under the provisions of the limited partnership
agreement, the Mariner affiliated company was entitled to 50% of the net profit realized upon the
sale of certain collateralized debt obligations held by the Company. The investment in Altrion was
previously consolidated in the Companys financial statements. On August 18, 2006, the Company
entered into an Amended and Restated Limited Partnership Agreement, effective August 1, 2006, with
Tricadia Capital, LLC (Tricadia Capital), the general partner, and the limited partners named
therein (the Amended Agreement), to amend and restate the existing Limited Partnership Agreement
of Mariner Tiptree (CDO) Fund I, L.P. entered into in 2003 (the Original Agreement). The Amended
Agreement changed the name of the partnership, amended and restated in its entirety the Original
Agreement and provides for the continuation of the partnership under applicable law upon the terms
and conditions of the Amended Agreement. The Amended Agreement, among other items, substantially
changed the fee income structure, as well as provides for the potential conversion of limited
partnership interests to equity interests. The fee income was changed in the Amended Agreement from
50% of the fee received by the investment manager in connection with the management of CDOs in
Altrion to a percentage of fees equal to the pro-rata portion of the CDO equity interest held by
Altrion, but in any event, no less than 12.5%. The Amended Agreement also provides for an
additional CDO fee to be determined based upon the management fees earned by the investment
manager. These changes resulted in a reduction in the variability of Altrion thereby lowering or
decreasing its expected losses as well as represented a change in the entitys governing documents
or contractual arrangements that changed the characteristics of Altrions equity investment at
risk. As a result of these substantive changes to the Original Agreement, the Company concluded
that it is no longer the party most closely associated with Altrion and deconsolidated Altrion from
its financial statements as of August 1, 2006 and has since included Altrion as a limited
partnership investment at equity in the financial statements. Approximately $6.9 million in uses
of cash flows in 2006 resulted from the effect of deconsolidation of the Altrion limited
partnership investment. The deconsolidation had no impact on the Companys Statement of Income for
the year ended December 31, 2006.
F-38
In 2003, the Company made an investment of $11.0 million in Altrion. Additional investments of
$4.65 million, $2.7 million and $6.25 million were made in 2004, in 2005 and on April 27, 2007,
respectively. The Company was previously committed to providing an additional $15.4 million, or a
total of approximately $40 million, in capital to Altrion by August 1, 2008. Altrion, however,
waived its right to require the Company to contribute its additional capital commitment of $15.4
million and accordingly, the Companys obligation to make such capital contribution has expired. In
addition, the Company withdrew $10 million of its capital from Altrion during July 2008.
Withdrawals require one years prior written notice to the hedge fund manager. The Company has
submitted a redemption notice to Altrion. The Company is uncertain as to whether cash and/or
securities will be received as payment of the redemption proceeds.
As a result of the turmoil in the U.S. housing industry in 2007 and 2008 and its effect on
mortgage-backed securities and illiquid securities, Altrion has not assembled any CDO or CLO assets
as market conditions have precluded any such activity. Altrion also has an investment in Tiptree
Financial Partners LP (Tiptree Financial), which was formed in 2008 to trade CLOs, but because of
market conditions a substantial portion of Tiptree Financials invested assets were as of December
31, 2008 and currently remain in cash.
Investment expenses incurred under this agreement at December 31, 2008, 2007 and 2006 amounted to
$844,387, $(812,646) and $792,144, respectively, and were based upon the fair value of those
securities held and sold for the years ended December 31, 2008, 2007 and 2006, respectively. The
limited partnership agreement also provides for other fees payable to the manager based upon the
operations of the hedge fund. There were no other fees incurred during the years ended December 31,
2008, 2007 and 2006.
The
Company had gross premiums of $9.0 million in 2008, $13.6 million in 2007 and $14.2 million in 2006
written through Arthur J. Gallagher & Co., an insurance brokerage at which Glenn R. Yanoff, a
director of the Company from June 1999 until May 2004 and from September 2005 until March 2008, was
an employee. In connection with the placement of such business, gross commission expenses of
$1,757,000, $2,534,000 and $2,580,000 in 2008, 2007 and 2006, respectively, were incurred by the
Company on these transactions. Mr. Yanoff resigned from our Board of Directors in March 2008 and
has been an Executive Vice President of the Company since May 2008.
Robert G. Simses, the Chairman of our Board of Directors, serves on the board of directors of
Tiptree Financial, a limited partnership in which Tricadia Capital, which is associated with
Mariner, is the general partner. Tricadia Capital is also the General Partner of Altrion, which has
a $29.2 million interest in Tiptree Financial. The Company is a limited partner of Altrion, in
which it has a $33.8 million interest. Mr. Simses is not compensated for his service as a director
of Tiptree Financial.
(19) Legal Proceedings:
The Company previously entered into reinsurance contracts with a reinsurer that is now in
liquidation. On October 23, 2003, the Company was served with a Notice to Defend and a Complaint by
the Insurance Commissioner of the Commonwealth of Pennsylvania, who is the liquidator of this
reinsurer, alleging that approximately $3 million in reinsurance claims paid to the Company in 2000
and 2001 by the reinsurer are voidable preferences and are therefore subject to recovery by the
liquidator. The liquidator subsequently revised the claim to approximately $2 million. The Company
filed Preliminary Objections to Plaintiffs Complaint, denying that the payments are voidable
preferences and asserting affirmative defenses. These Preliminary Objections were overruled on May
24, 2005 and the Company filed its Answer in the proceedings on June 15, 2005. On December 7, 2006
the liquidator filed a motion of summary judgment to which the Company responded on December 19,
2006 by moving for a stay, pending the resolution of a similar case currently pending before the
Supreme Court of the Commonwealth of Pennsylvania. As of March 1, 2009, the Supreme Court of the
Commonwealth of Pennsylvania issued a ruling in the similar case that supports the Companys
position, but there has been no ruling on the Companys position, and no trial date has been set
for this matter. The Company intends to defend itself vigorously in connection with this lawsuit,
and the Company believes it has strong defenses against these claims; however, there can be no
assurance as to the outcome of this litigation.
In the second quarter of 2008, the Company settled disputed reinsurance receivable balances with
Equitas, a Lloyds of London company established to settle claims for underwriting years 1992 and
prior, which resulted in a charge to results of operations on a pre-tax basis of $9.4 million.
F-39
(20) Subsequent Event:
On January 30, 2009, the Company entered into an employment agreement with A. George Kallop, the
Companys President and Chief Executive Officer (the 2009 Kallop Employment Agreement), effective
January 1, 2009 through December 31, 2010. This term will be automatically renewed for successive
one-year periods unless either party provides notice 90 days prior to the expiration date of its
intent to terminate the agreement at the end of the applicable term. Under the 2009 Kallop
Employment Agreement, Mr. Kallop is entitled to a base salary of $525,000 and a target annual
incentive award of $393,750. Mr. Kallop is also entitled to receive a grant of 8,000 shares of
restricted stock as of the execution date of the Kallop Employment Agreement and 8,000 shares of
restricted stock on January 1, 2010. These shares will vest on December 31, 2009 and 2010,
respectively. Mr. Kallop is also entitled to a long-term incentive award with maximum, target and
threshold awards of 12,000, 6,000 and 3,000 performance units, respectively, in each of two
one-year performance periods beginning on January 1, 2009 and January 1, 2010. Mr. Kallop is also
entitled to receive a supplemental performance compensation award in the amount of 25,000
performance units. Each of the performance awards is subject to the conditions described in the
award agreement entered into contemporaneously with the 2009 Kallop Employment Agreement. The 2009
Kallop Employment Agreement also provides for reimbursement of reasonable expenses incurred in the
performance of Mr. Kallops duties, and includes provisions governing termination for death,
disability, cause, without cause and change of control, which include a severance benefit of one
year salary, pro rata annual incentive awards at target, and accelerated vesting of stock and
performance unit grants in the event of his termination without cause prior to a change of control.
In connection with the 2009 Kallop Employment Agreement, on January 30, 2009 the Company entered
into a Performance Share Award Agreement (the 2009 Kallop Award Agreement) with Mr. Kallop.
Under the terms of the 2009 Kallop Award Agreement, Mr. Kallop was granted 8,000 restricted share
units as of the execution date of the 2009 Kallop Employment Agreement, which vest on December 31,
2009, provided that Mr. Kallop continues to be employed by the Company on that date, as well as
long-term performance incentive awards for each of 2009 and 2010. The number of performance units
eligible to be earned for each of these two one-year performance periods is based on target
increases in the market price of the Companys stock in the applicable performance period. The
supplemental performance compensation award of 25,000 units is earned if there is a change in
control of the Company as defined in the 2009 Kallop Employment Agreement.
F-40
FINANCIAL STATEMENT SCHEDULES
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NYMAGIC, INC.
Balance Sheets
(Parent Company)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
10,851,532
|
|
|
$
|
65,597,032
|
|
Investments
|
|
|
43,380,057
|
|
|
|
54,766,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and investments
|
|
|
54,231,589
|
|
|
|
120,363,288
|
|
Investment in subsidiaries
|
|
|
179,150,176
|
|
|
|
237,489,115
|
|
Due from subsidiaries
|
|
|
13,531,308
|
|
|
|
18,700,906
|
|
Premiums receivable
|
|
|
6,099,930
|
|
|
|
|
|
Receivable for investments disposed
|
|
|
2,620,394
|
|
|
|
|
|
Computer software
|
|
|
3,133,069
|
|
|
|
|
|
Other assets
|
|
|
7,753,800
|
|
|
|
6,423,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
266,520,266
|
|
|
$
|
382,976,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
100,000,000
|
|
|
$
|
100,000,000
|
|
Dividend payable
|
|
|
671,059
|
|
|
|
815,267
|
|
Other liabilities
|
|
|
1,776,445
|
|
|
|
2,716,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
102,447,504
|
|
|
|
103,531,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
15,742,215
|
|
|
|
15,672,090
|
|
Paid-in capital
|
|
|
49,539,886
|
|
|
|
47,313,015
|
|
Accumulated other comprehensive (loss) income
|
|
|
(2,875,317
|
)
|
|
|
202,196
|
|
Retained earnings
|
|
|
189,702,569
|
|
|
|
296,641,235
|
|
Treasury stock
|
|
|
(88,036,591
|
)
|
|
|
(80,382,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
164,072,762
|
|
|
|
279,445,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
266,520,266
|
|
|
$
|
382,976,828
|
|
|
|
|
|
|
|
|
F-41
FINANCIAL STATEMENT SCHEDULES
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NYMAGIC, INC.
Statements of Operations
(Parent Company)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends from subsidiaries
|
|
$
|
|
|
|
$
|
15,745,000
|
|
|
$
|
18,500,000
|
|
Net investment and other (loss) income
|
|
|
(9,086,940
|
)
|
|
|
12,241,488
|
|
|
|
7,763,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,086,940
|
)
|
|
|
27,986,488
|
|
|
|
26,263,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
5,206,095
|
|
|
|
6,023,143
|
|
|
|
3,686,841
|
|
Interest expense
|
|
|
6,715,354
|
|
|
|
6,701,711
|
|
|
|
6,688,932
|
|
Income tax (benefit) expense
|
|
|
(4,434,736
|
)
|
|
|
453,140
|
|
|
|
(608,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,486,713
|
|
|
|
13,177,994
|
|
|
|
9,767,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before equity income
|
|
|
(16,573,653
|
)
|
|
|
14,808,494
|
|
|
|
16,496,061
|
|
Equity in undistributed (loss)
earning of subsidiaries
|
|
|
(87,761,426
|
)
|
|
|
(1,436,144
|
)
|
|
|
13,354,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(104,335,079
|
)
|
|
$
|
13,372,350
|
|
|
$
|
29,850,480
|
|
|
|
|
|
|
|
|
|
|
|
F-42
FINANCIAL STATEMENT SCHEDULES
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NYMAGIC, INC.
Statements of Cash Flows
(Parent Company)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(104,335,079
|
)
|
|
$
|
13,372,350
|
|
|
$
|
29,850,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to net income to cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed loss (earnings) of subsidiaries
|
|
|
87,761,426
|
|
|
|
1,436,144
|
|
|
|
(13,354,419
|
)
|
Equity in loss (earnings) of limited partnerships
|
|
|
226,352
|
|
|
|
(9,032,711
|
)
|
|
|
(4,986,865
|
)
|
(Increase) decrease in due from subsidiaries
|
|
|
5,169,598
|
|
|
|
2,282,876
|
|
|
|
(5,229,654
|
)
|
(Increase) in premiums receivable
|
|
|
(6,099,930
|
)
|
|
|
|
|
|
|
|
|
(Increase) decrease in other assets
|
|
|
(1,330,281
|
)
|
|
|
634,200
|
|
|
|
(988,934
|
)
|
Increase (decrease) in other liabilities
|
|
|
971,618
|
|
|
|
(863,124
|
)
|
|
|
(124,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(17,636,296
|
)
|
|
|
7,829,735
|
|
|
|
5,166,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (purchase) sale of other investments
|
|
|
(1,811,776
|
)
|
|
|
65,941,989
|
|
|
|
(2,326,169
|
)
|
Limited partnerships sold (acquired)
|
|
|
12,971,623
|
|
|
|
(6,250,000
|
)
|
|
|
(40,029,555
|
)
|
(Increase) decrease in receivable for investments disposed
|
|
|
(2,620,394
|
)
|
|
|
|
|
|
|
34,735,775
|
|
Acquisition of computer software
|
|
|
(3,133,069
|
)
|
|
|
|
|
|
|
|
|
Investment in subsidiary
|
|
|
(32,500,000
|
)
|
|
|
|
|
|
|
1,607,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(27,093,616
|
)
|
|
|
59,691,989
|
|
|
|
(6,012,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows in financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock issuance and other
|
|
|
2,296,996
|
|
|
|
5,259,390
|
|
|
|
3,626,463
|
|
Cash dividends paid to stockholders
|
|
|
(2,747,795
|
)
|
|
|
(2,852,228
|
)
|
|
|
(2,465,648
|
)
|
Net purchase of treasury stock
|
|
|
(7,653,602
|
)
|
|
|
(7,121,988
|
)
|
|
|
|
|
(Decrease) increase in payable for treasury stock purchased
|
|
|
(1,911,187
|
)
|
|
|
1,911,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(10,015,588
|
)
|
|
|
(2,803,639
|
)
|
|
|
1,160,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(54,745,500
|
)
|
|
|
64,718,085
|
|
|
|
314,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
65,597,032
|
|
|
|
878,947
|
|
|
|
564,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
10,851,532
|
|
|
$
|
65,597,032
|
|
|
$
|
878,947
|
|
|
|
|
|
|
|
|
|
|
|
The condensed financial information of NYMAGIC, INC. for the years ended December 31, 2008, 2007
and 2006 should be read in conjunction with the consolidated financial statements of NYMAGIC, INC.
and subsidiaries and notes thereto.
F-43
NYMAGIC, INC.
SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
|
Column B
|
|
|
Column C
|
|
|
Column D
|
|
|
Column E
|
|
|
Column F
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FUTURE POLICY
|
|
|
|
|
|
|
POLICY
|
|
|
|
|
|
|
|
|
|
|
DEFERRED
|
|
|
BENEFITS,
|
|
|
|
|
|
|
CLAIMS
|
|
|
|
|
|
|
|
|
|
|
POLICY
|
|
|
LOSSES
|
|
|
|
|
|
|
AND
|
|
|
|
|
|
|
|
|
|
|
ACQUISITION
|
|
|
CLAIMS AND
|
|
|
UNEARNED
|
|
|
BENEFITS
|
|
|
PREMIUM
|
|
|
|
SEGMENTS
|
|
|
COST
|
|
|
LOSS EXPENSES
|
|
|
PREMIUMS
|
|
|
PAYABLE
|
|
|
REVENUE
|
|
|
|
|
|
|
|
(caption 7)
|
|
|
(caption 13-a-1)
|
|
|
(caption 13-a-2)
|
|
|
(caption 13-a-3)
|
|
|
(caption 1)
|
|
|
2008
|
|
Ocean marine
|
|
$
|
3,948
|
|
|
$
|
169,478
|
|
|
$
|
27,966
|
|
|
|
|
|
|
$
|
64,713
|
|
|
|
Inland marine/Fire
|
|
|
227
|
|
|
|
21,057
|
|
|
|
6,396
|
|
|
|
|
|
|
|
5,710
|
|
|
|
Other liability
|
|
|
10,489
|
|
|
|
239,026
|
|
|
|
49,002
|
|
|
|
|
|
|
|
96,428
|
|
|
|
Aircraft
|
|
|
|
|
|
|
119,189
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,664
|
|
|
$
|
548,750
|
|
|
$
|
83,364
|
|
|
$
|
|
|
|
$
|
167,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
Ocean marine
|
|
$
|
5,370
|
|
|
$
|
197,511
|
|
|
$
|
34,985
|
|
|
|
|
|
|
$
|
71,637
|
|
|
|
Inland marine/Fire
|
|
|
521
|
|
|
|
22,693
|
|
|
|
8,512
|
|
|
|
|
|
|
|
6,978
|
|
|
|
Other liability
|
|
|
9,099
|
|
|
|
211,182
|
|
|
|
44,080
|
|
|
|
|
|
|
|
87,373
|
|
|
|
Aircraft
|
|
|
|
|
|
|
125,149
|
|
|
|
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,990
|
|
|
$
|
556,535
|
|
|
$
|
87,577
|
|
|
$
|
|
|
|
$
|
166,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
Ocean marine
|
|
$
|
5,907
|
|
|
$
|
212,581
|
|
|
$
|
38,760
|
|
|
|
|
|
|
$
|
78,350
|
|
|
|
Inland marine/Fire
|
|
|
363
|
|
|
|
26,038
|
|
|
|
9,514
|
|
|
|
|
|
|
|
7,793
|
|
|
|
Other liability
|
|
|
7,102
|
|
|
|
204,600
|
|
|
|
45,376
|
|
|
|
|
|
|
|
65,402
|
|
|
|
Aircraft
|
|
|
|
|
|
|
135,960
|
|
|
|
|
|
|
|
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,372
|
|
|
$
|
579,179
|
|
|
$
|
93,650
|
|
|
$
|
|
|
|
$
|
151,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
|
Column G
|
|
|
Column H
|
|
|
Column I
|
|
|
Column J
|
|
|
Column K
|
|
|
|
|
|
|
|
|
|
|
|
BENEFITS,
|
|
|
AMORTIZATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLAIMS,
|
|
|
OF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSSES
|
|
|
DEFERRED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
|
|
|
AND
|
|
|
POLICY
|
|
|
OTHER
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT
|
|
|
SETTLEMENT
|
|
|
ACQUISITION
|
|
|
OPERATING
|
|
|
PREMIUMS
|
|
|
|
SEGMENTS
|
|
|
(LOSS) INCOME
|
|
|
EXPENSES
|
|
|
COSTS
|
|
|
EXPENSES
|
|
|
WRITTEN
|
|
|
|
|
|
|
|
(caption 2)
|
|
|
(caption 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
Ocean marine
|
|
|
|
|
|
$
|
21,823
|
|
|
$
|
13,326
|
|
|
|
|
|
|
$
|
59,200
|
|
|
|
Inland marine/Fire
|
|
|
|
|
|
|
5,096
|
|
|
|
999
|
|
|
|
|
|
|
|
4,538
|
|
|
|
Other liability
|
|
|
|
|
|
|
79,583
|
|
|
|
24,340
|
|
|
|
|
|
|
|
101,424
|
|
|
|
Aircraft
|
|
|
|
|
|
|
3,456
|
|
|
|
5
|
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(63,503
|
)
|
|
$
|
109,958
|
|
|
$
|
38,670
|
|
|
$
|
38,612
|
|
|
$
|
165,384
|
|
|
2007
|
|
Ocean marine
|
|
|
|
|
|
$
|
27,723
|
|
|
$
|
15,134
|
|
|
|
|
|
|
$
|
68,192
|
|
|
|
Inland marine/Fire
|
|
|
|
|
|
|
4,810
|
|
|
|
1,122
|
|
|
|
|
|
|
|
6,935
|
|
|
|
Other liability
|
|
|
|
|
|
|
53,988
|
|
|
|
21,429
|
|
|
|
|
|
|
|
92,618
|
|
|
|
Aircraft
|
|
|
|
|
|
|
3,323
|
|
|
|
10
|
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,489
|
|
|
$
|
89,844
|
|
|
$
|
37,695
|
|
|
$
|
36,018
|
|
|
$
|
167,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
Ocean marine
|
|
|
|
|
|
$
|
31,065
|
|
|
$
|
16,142
|
|
|
|
|
|
|
$
|
75,243
|
|
|
|
Inland marine/Fire
|
|
|
|
|
|
|
7,036
|
|
|
|
809
|
|
|
|
|
|
|
|
7,097
|
|
|
|
Other liability
|
|
|
|
|
|
|
47,304
|
|
|
|
14,377
|
|
|
|
|
|
|
|
72,231
|
|
|
|
Aircraft
|
|
|
|
|
|
|
731
|
|
|
|
8
|
|
|
|
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,897
|
|
|
$
|
86,136
|
|
|
$
|
31,336
|
|
|
$
|
31,401
|
|
|
$
|
154,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-44
NYMAGIC, INC.
SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COLUMN A
|
|
COLUMN B
|
|
|
COLUMN C
|
|
|
COLUMN D
|
|
|
COLUMN E
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
beginning
|
|
|
|
|
|
|
|
|
|
|
close of
|
|
DESCRIPTION
|
|
of period
|
|
|
Additions
|
|
|
Deductions
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
Allowance for
doubtful accounts
|
|
$
|
14,366,923
|
|
|
$
|
15,647,193
|
|
|
$
|
(8,331,002
|
)
|
|
$
|
21,683,114
|
|
December 31, 2007
Allowance for
doubtful accounts
|
|
$
|
14,151,028
|
|
|
$
|
3,679,854
|
|
|
$
|
(3,463,959
|
)
|
|
$
|
14,366,923
|
|
December 31, 2006
Allowance for
doubtful accounts
|
|
$
|
17,016,018
|
|
|
$
|
2,958,349
|
|
|
$
|
(5,823,339
|
)
|
|
$
|
14,151,028
|
|
The allowance for doubtful accounts on reinsurance receivables amounted to $21,383,114, $14,066,923
and 13,851,028 at December 31, 2008, December 31, 2007 and December 31, 2006, respectively. The
allowance for doubtful accounts on premiums and other receivables amounted to $300,000 for each of
the years ended December 31, 2008, December 31, 2007 and December 31, 2006.
NYMAGIC, INC.
SCHEDULE VI SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
RESERVE FOR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED
|
|
|
UNPAID
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFFILIATION
|
|
POLICY
|
|
|
CLAIMS
|
|
|
|
|
|
|
UNEARNED
|
|
|
NET
|
|
|
NET
|
|
WITH
|
|
ACQUISITION
|
|
|
AND CLAIMS
|
|
|
|
|
|
|
PREMIUM
|
|
|
EARNED
|
|
|
INVESTMENT
|
|
REGISTRANT
|
|
COSTS
|
|
|
EXPENSES
|
|
|
DISCOUNT
|
|
|
RESERVE
|
|
|
PREMIUMS
|
|
|
(LOSS) INCOME
|
|
|
|
|
|
|
DECEMBER 31, 2008
CONSOLIDATED
SUBSIDIARIES
|
|
$
|
14,664
|
|
|
$
|
548,750
|
|
|
$
|
|
|
|
$
|
83,364
|
|
|
$
|
167,073
|
|
|
$
|
(56,106
|
)
|
DECEMBER 31, 2007
CONSOLIDATED
SUBSIDIARIES
|
|
$
|
14,990
|
|
|
$
|
556,535
|
|
|
$
|
|
|
|
$
|
87,577
|
|
|
$
|
166,096
|
|
|
$
|
22,852
|
|
DECEMBER 31, 2006
CONSOLIDATED
SUBSIDIARIES
|
|
$
|
13,372
|
|
|
$
|
579,179
|
|
|
$
|
|
|
|
$
|
93,650
|
|
|
$
|
151,834
|
|
|
$
|
40,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLAIMS AND CLAIMS
|
|
|
AMORTIZATION
|
|
|
|
|
|
|
|
|
|
EXPENSES INCURRED
|
|
|
OF DEFERRED
|
|
|
|
|
|
|
|
AFFILIATION
|
|
RELATED TO
|
|
|
POLICY
|
|
|
PAID CLAIMS
|
|
|
NET
|
|
WITH
|
|
CURRENT
|
|
|
PRIOR
|
|
|
ACQUISITION
|
|
|
AND CLAIMS
|
|
|
PREMIUMS
|
|
REGISTRANT
|
|
YEAR
|
|
|
YEARS
|
|
|
COSTS
|
|
|
EXPENSES
|
|
|
WRITTEN
|
|
|
|
|
|
|
DECEMBER 31, 2008
CONSOLIDATED
SUBSIDIARIES
|
|
$
|
107,276
|
|
|
$
|
2,683
|
|
|
$
|
38,670
|
|
|
$
|
81,521
|
|
|
$
|
165,384
|
|
DECEMBER 31, 2007
CONSOLIDATED
SUBSIDIARIES
|
|
$
|
103,664
|
|
|
$
|
(13,820
|
)
|
|
$
|
37,695
|
|
|
$
|
76,380
|
|
|
$
|
167,853
|
|
DECEMBER 31, 2006
CONSOLIDATED
SUBSIDIARIES
|
|
$
|
93,803
|
|
|
$
|
(7,667
|
)
|
|
$
|
31,336
|
|
|
$
|
82,412
|
|
|
$
|
154,860
|
|
F-45
EXHIBIT INDEX
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
*+10.68
|
|
Form of Indemnification Agreement by and between NYMAGIC, INC. and
members of its Board of Directors, approved as of December 3,
2008.
|
|
|
|
*+10.69
|
|
Amended and Restated Voting Agreement by and among Mark W.
Blackman, Lionshead Investments, LLC and Robert G. Simses,
Trustee, and Mariner Partners, Inc. dated October 15, 2008.
|
|
|
|
*+10.70
|
|
Letter Agreement by and among Mariner Partners, Inc. and Mark W.
Blackman, Lionshead Investments, LLC and Robert G. Simses,
Trustee, and Mariner Partners, Inc. dated October 15, 2008.
|
|
|
|
*10.71
|
|
2007 financial statements of Tricadia CDO Fund, L.P.
|
|
|
|
*+10.72
|
|
Employment
Agreement, dated as of April 7, 2008, by and between Glenn R. Yanoff
and NYMAGIC, INC.
|
|
|
|
*21.1
|
|
Subsidiaries of the Registrant.
|
|
|
|
*23.1
|
|
Consent of KPMG LLP.
|
|
|
|
*23.2
|
|
Consent
of Grant Thornton LLP.
|
|
|
|
*31.1
|
|
Certification of A. George Kallop, President and Chief Executive
Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
*31.2
|
|
Certification of Thomas J. Iacopelli, Chief Financial Officer, as
adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
*32.1
|
|
Certification of A. George Kallop, President and Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
*32.2
|
|
Certification of Thomas J. Iacopelli, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
*
|
|
Filed herewith.
|
|
+
|
|
Represents a management contract or compensatory plan or arrangement.
|
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