NYM Nymagic, Inc.

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 1-11238

NYMAGIC, INC.

(Exact name of registrant as specified in its charter)

New York		13-3534162
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
919 Third Avenue		10022
(Address of principal executive offices)		(Zip Code)

212 551-0600
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No 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):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at August 1, 2010
Common Stock, $1.00 par value per share		8,499,513 shares

 

 

FORWARD — LOOKING STATEMENTS

This report contains certain forward-looking statements concerning the Company’s operations, economic performance and financial condition, including, in particular, the likelihood of the Company’s success in developing and expanding its business. Any forward-looking statements concerning the Company’s operations, economic performance and financial condition contained herein, including statements related to the outlook for the Company’s performance in 2010 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 failure of the Company to close its pending Agreement and Plan of Merger with ProSight Specialty Insurance Holdings, Inc., 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 losses related to the attacks of September 11, 2001, and those associated with catastrophic hurricanes, 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 2010 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.

NYMAGIC, INC.
INDEX

		Page No.
Part I. Financial Information
Item 1. Financial Statements			2
Consolidated Balance Sheets — June 30, 2010 (Unaudited) and December 31, 2009			2
Consolidated Statements of Operations — Six months ended June 30, 2010 (Unaudited) and June 30, 2009 (Unaudited)			3
Consolidated Statements of Operations — Three months ended June 30, 2010 (Unaudited) and June 30, 2009 (Unaudited)			4
Consolidated Statements of Cash Flows — Six months ended June 30, 2010 (Unaudited) and June 30, 2009 (Unaudited)			5
Notes to Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk			36
Item 4. Controls and Procedures			37
Part II. Other Information
Item 1. Legal Proceedings			38
Item 1A. Risk Factors			38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 3. Defaults Upon Senior Securities			38
Item 4. Submission of Matters to a Vote of Security Holders			38
Item 5. Other Information			38
Item 6. Exhibits			39
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Item 1.		Financial Statements

NYMAGIC, INC.

CONSOLIDATED BALANCE SHEETS

		June 30, 2010				December 31, 2009
		(unaudited)
ASSETS
Investments:
Fixed maturities:
Held to maturity at adjusted amortized cost (fair value $53,327,136 and $59,327,813)		$	53,784,511			$	56,589,704
Available for sale at fair value (amortized cost $18,950,707 and $385,378,334)			19,307,300				386,519,408
Equity securities — available for sale at fair value (cost $101,780 and $117,968)			101,780				117,968
Commercial loans at fair value (amortized cost $6,147,214 and $7,738,677)			3,351,132				5,001,118
Limited partnerships at equity (cost $159,970,990 and $127,379,526)			180,305,807				151,891,838
Short-term investments			8,897,261				8,788,718
Cash and cash equivalents			399,299,281				66,755,909
Total cash and investments			665,047,072				675,664,663
Accrued investment income			332,451				3,365,535
Premiums and other receivables, net			33,528,073				24,753,976
Receivable for investments disposed			18,568,300				4,221,356
Reinsurance receivables on unpaid losses, net			187,667,196				205,077,080
Reinsurance receivables on paid losses, net			26,537,800				13,116,607
Deferred policy acquisition costs			20,507,270				16,438,088
Prepaid reinsurance premiums			21,583,108				19,643,170
Deferred income taxes			26,854,161				29,251,550
Property, improvements and equipment, net			14,053,837				14,602,141
Other assets			9,194,065				4,074,424
Total assets		$	1,023,873,333			$	1,010,208,590
LIABILITIES
Unpaid losses and loss adjustment expenses		$	538,483,914			$	555,485,502
Reserve for unearned premiums			107,177,522				89,458,244
Ceded reinsurance payable			17,478,832				13,580,535
Notes payable			100,000,000				100,000,000
Dividends payable			1,146,679				737,308
Other liabilities			28,758,172				34,937,369
Total liabilities			793,045,119				794,198,958
SHAREHOLDERS’ EQUITY
Common stock			15,833,490				15,796,465
Paid-in capital			53,593,923				51,699,572
Accumulated other comprehensive loss			(22,050,646	)			(22,977,781	)
Retained earnings			271,488,038				259,527,967
			318,864,805				304,046,223
Treasury stock, at cost, 7,333,977 shares			(88,036,591	)			(88,036,591	)
Total shareholders’ equity			230,828,214				216,009,632
Total liabilities and shareholders’ equity		$	1,023,873,333			$	1,010,208,590

The accompanying notes are an integral part of these consolidated financial statements.

NYMAGIC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

		Six months ended June 30,
		2010				2009
Revenues:
Net premiums earned		$	89,280,566			$	79,170,667
Net investment income			14,426,444				19,742,704
Net realized investment gains			7,207,898				1,774,543
Total other-than-temporary impairments			(300,199	)			(478,407	)
Portion of loss recognized in OCI (before taxes)			—				—
Net impairment loss recognized in earnings			(300,199	)			(478,407	)
Commission and other income			85,616				127,470
Total revenues			110,700,325				100,336,977
Expenses:
Net losses and loss adjustment expenses incurred			52,482,795				38,011,691
Policy acquisition expenses			20,626,360				17,826,390
General and administrative expenses			22,856,240				20,478,159
Interest expense			3,371,116				3,364,031
Total expenses			99,336,511				79,680,271
Income before income taxes			11,363,814				20,656,706
Income tax provision:
Current			(4,265,530	)			358,790
Deferred			1,898,161				2,615,676
Total income tax (benefit) expense			(2,367,369	)			2,974,466
Net income		$	13,731,183			$	17,682,240
Weighted average number of shares of common stock outstanding-basic			8,485,932				8,417,700
Basic earnings per share		$	1.62			$	2.10
Weighted average number of shares of common stock outstanding-diluted			8,786,342				8,607,700
Diluted earnings per share		$	1.56			$	2.05
Dividends declared per share		$	.20			$	.08

The accompanying notes are an integral part of these consolidated financial statements.

NYMAGIC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

		Three months ended June 30,
		2010				2009
Revenues:
Net premiums earned		$	45,575,199			$	39,041,070
Net investment income			7,381,246				13,190,792
Net realized investment gains			5,384,096				2,191,241
Total other-than-temporary impairments			—				(478,407	)
Portion of loss recognized in OCI (before taxes)			—				—
Net impairment loss recognized in earnings			—				(478,407	)
Commission and other income			81,465				122,272
Total revenues			58,422,006				54,066,968
Expenses:
Net losses and loss adjustment expenses incurred			28,945,533				17,329,363
Policy acquisition expenses			10,393,719				8,529,910
General and administrative expenses			11,584,378				10,433,910
Interest expense			1,687,177				1,683,818
Total expenses			52,610,807				37,977,001
Income before income taxes			5,811,199				16,089,967
Income tax provision:
Current			(984,692	)			1,145,505
Deferred			(88,440	)			740,226
Total income tax (benefit) expense			(1,073,132	)			1,885,731
Net income		$	6,884,331			$	14,204,236
Weighted average number of shares of common stock outstanding-basic			8,499,161				8,424,206
Basic earnings per share		$	.81			$	1.69
Weighted average number of shares of common stock outstanding-diluted			8,823,618				8,625,087
Diluted earnings per share		$	.78			$	1.65
Dividends declared per share		$	.10			$	.04

The accompanying notes are an integral part of these consolidated financial statements.

NYMAGIC, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

		Six months ended June 30,
		2010				2009
Cash flows (used in) provided by operating activities:
Net income		$	13,731,183			$	17,682,240
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for deferred taxes			1,898,161				2,615,676
Net realized investment gain			(7,207,898	)			(1,774,543	)
Net impairment loss recognized in earnings			300,199				478,407
Equity in earnings of limited partnerships			(6,691,629	)			(9,190,282	)
Net amortization from bonds and commercial loans			(53,628	)			265,796
Depreciation and other, net			419,086				654,111
Trading portfolio activities			3,198				15,470,658
Commercial loan activities			1,673,596				(1,612,331	)
Changes in:
Premiums and other receivables			(8,774,097	)			(12,546,599	)
Reinsurance receivables paid and unpaid, net			3,988,691				8,831,187
Ceded reinsurance payable			3,898,297				1,958,519
Accrued investment income			3,033,084				890,553
Deferred policy acquisition costs			(4,069,182	)			(2,517,641	)
Prepaid reinsurance premiums			(1,939,938	)			(5,559,966	)
Other assets			(5,119,641	)			151,311
Unpaid losses and loss adjustment expenses			(17,001,588	)			3,934,421
Reserve for unearned premiums			17,719,278				14,692,409
Other liabilities			(6,179,197	)			9,309,916
Total adjustments			(24,103,208	)			26,051,602
Net cash (used in) provided by operating activities			(10,372,025	)			43,733,842
Cash flows provided by (used in) investing activities:
Held to maturity fixed maturities matured, repaid and redeemed			5,051,203				3,931,388
Available for sale fixed maturities acquired			(345,751,245	)			(273,469,418	)
Available for sale fixed maturities sold			719,040,449				204,813,774
Available for sale equity securities sold			53,960				—
Capital contributed to limited partnerships			(45,806,966	)			—
Distributions and redemptions from limited partnerships			24,084,631				11,878,489
Net purchase of short-term investments			(108,544	)			(25,179,966	)
Receivable for investments disposed and not yet settled			(14,346,944	)			19,671,995
Acquisition of property & equipment, net			129,218				(3,319,948	)
Net cash provided by (used in) investing activities			342,345,762				(61,673,686	)
Cash flows provided by from financing activities:
Proceeds from stock issuance and other			1,931,376				918,228
Cash dividends paid to stockholders			(1,361,741	)			(794,551	)
Net cash provided by financing activities			569,635				123,677
Net increase (decrease) in cash			332,543,372				(17,816,167	)
Cash and cash equivalents at beginning of period			66,755,909				75,672,102
Cash and cash equivalents at end of period		$	399,299,281			$	57,855,935
Supplemental disclosures:
Interest paid		$	3,250,000			$	3,251,388
Net federal income tax paid		$	1,514,619			$	—

The accompanying notes are an integral part of these consolidated financial statements.

(1) Basis of Presentation and Accounting Policies

Basis of presentation

The interim consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (GAAP) and are unaudited. In the opinion of management, all material adjustments necessary for a fair presentation of results have been reflected for such periods. Adjustments to financial statements consist of normal recurring items. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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.

Adoption of new accounting pronouncements

In June 2010, the FASB issued ASU 2010-09, Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09 is an amendment of ASC 855, Subsequent Events. ASC 855 established that an entity should disclose the date through which subsequent events have been evaluated. ASU 2010-09 amends ASC 855 to state that an SEC filer is not required to disclose the date through which subsequent events have been evaluated. The Company adopted ASU 2010-09 during the second quarter of 2010 and the adoption did not have an effect on its results of operations, financial position or liquidity.

Future adoption of new accounting pronouncements

In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 is an amendment of ASC 820, Fair Value Measurements and Disclosures. ASU 2010-06 provides additional disclosures for transfers in and out of the Levels I and II and for activity in Level III as well as clarifies certain existing disclosure requirements including level of desegregation and disclosures around inputs and valuation techniques. The final amendments to ASU 2010-06 were effective for annual and interim reporting periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity for purchases, sales, issuances, and settlements on a gross basis. That requirement will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company adopted ASU 2010-06 during the first quarter of 2010 and the adoption did not have an effect on its results of operations, financial position or liquidity. The portion of ASU 2010-06 that has not yet been adopted is not expected to have a material impact on our Company’s financial position, cash flows or results of operations.

(2) Investments:

A summary of the Company’s investment portfolio components at June 30, 2010 and December 31, 2009 is presented below:

		June 30, 2010				Percent				December 31, 2009				Percent
Fixed maturities held to maturity (adjusted amortized cost):
Residential mortgage-backed securities		$	53,784,511				8.09	%		$	56,589,704				8.37	%
Total fixed maturities held to maturity		$	53,784,511				8.09	%		$	56,589,704				8.37	%
Fixed maturities available for sale (fair value):
U.S. Treasury securities		$	18,484,492				2.78	%		$	385,715,035				57.09	%
Municipal obligations			822,808				0.12	%			804,373				0.12	%
Total fixed maturities available for sale		$	19,307,300				2.90	%		$	386,519,408				57.21	%
Total fixed maturities		$	73,091,811				10.99	%		$	443,109,112				65.58	%
Equity securities available for sale (fair value):
Common stock		$	101,780				0.02	%		$	117,968				0.02	%
Total equity securities		$	101,780				0.02	%		$	117,968				0.02	%
Cash, cash equivalents and short-term investments		$	408,196,542				61.38	%		$	75,544,627				11.18	%
Total fixed maturities, equity securities, cash, cash equivalents and short-term investments		$	481,390,133				72.39	%		$	518,771,707				76.78	%
Commercial loans (fair value)		$	3,351,132				0.50	%		$	5,001,118				0.74	%
Limited partnership hedge funds (equity)		$	180,305,807				27.11	%		$	151,891,838				22.48	%
Total investment portfolio		$	665,047,072				100.00	%		$	675,664,663				100.00	%

As of June 30, 2010, 91.5% of the Company’s fixed income and short-term investment portfolios were considered investment grade by S&P.

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 Company’s investment in limited partnerships at equity include hedge fund interests in limited partnerships and limited liability companies.

Details of the residential mortgage-backed securities (“RMBS”) portfolio as of June 30, 2010, including publicly available qualitative information, are presented below:

														Weighted
														Average				Average
														Loan to				FICO				D60+				Credit				S&P		Moody’s
Security						Adjusted								Value %				Credit				Delinquency				Support				Rating		Rating
description		Issue date				amortized cost (6)				Fair value				(1)				Score (2)				Rate (3)				Level (4)				(5)		(5)
AHMA 2006-3			7/2006			$	10,666,400			$	9,854,819				84.9				705				38.2				36.9			AA		Caa1
CWALT 2005-69			11/2005				6,865,539				6,414,370				81.1				698				51.6				47.7			CCC		Ba3
CWALT 2005-76			12/2005				6,752,551				6,659,662				81.6				700				54.9				48.1			CCC		B2
RALI 2005-QO3			10/2005				7,178,258				5,948,895				80.4				704				44.6				39.9			B-		B1
WaMu 2005-AR17			12/2005				5,844,676				6,684,510				73.0				715				28.3				49.5			AAA		A1
WaMu 2006-AR9			7/2006				8,048,422				8,550,953				74.2				731				34.0				22.9			B		Ba1
WaMu 2006-AR13			9/2006				8,428,665				9,213,927				75.4				728				33.5				23.7			CCC		B3
						$	53,784,511			$	53,327,136

The Company’s cash flow analysis for each of these securities 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 performance statistics reported for each security to the Company. This may result in future charges based upon revised estimates for delinquency rates, severity rates 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 Company’s 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 July 25, 2010, the levels of subordination ranged from 22.9% to 49.5% of the total debt outstanding for each pool. Delinquencies within the underlying mortgage pools ranged from 28.3% to 54.9% of total amounts outstanding. For comparison purposes, as of July 25, 2009, delinquencies ranged from 25.3% to 47.2%, while subordination levels ranged from 26.2% to 51.2%. 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.

The fair value of each RMBS investment is based on the framework established in ASC 820 (See Note 3). 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 since 2007, which has led to market declines in the Company’s RMBS 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 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 very pessimistic due to uncertainties associated with the residential real estate markets. Additionally, there are only a limited number of prospective purchasers of such securities and such purchasers generally demand high expected returns in the current market. This has resulted in lower quotes from securities dealers, who are, themselves, reluctant to position such securities because of financing uncertainties. Accordingly, the dealer quotes used to establish fair value may not be reflective of the expected future cash flows from a security and, therefore, not reflective of its intrinsic value.

As of June 30, 2010, there was variance in RMBS securities prices from different pricing sources. Management also determined that the few trades of RMBS were not consistent with the prices received and analysis performed at quarter end. This confirmed management’s previously established view that the market is dislocated and illiquid. Accordingly, the Company determined fair value using a matrix pricing analysis. The pricing matrix was based on risk profile and qualitative and quantitative data for similar vintage RMBS that had recently established prices. The securities were evaluated in each of the following 9 categories: sector, collateral, current S&P rating, current credit support, 3 month conditional default rate, 3 month voluntary prepayment, 1 month loss severity, 60+ delinquencies, and FICO score. The price for each RMBS was based upon the prices of those RMBS securities that had the similar underlying characteristics to the Company’s RMBS portfolio.

There are government sponsored programs that may affect the performance of the Company’s RMBS. The Company is uncertain as to the impact, if any, these programs will have on the fair value of the Company’s RMBS. The fair value of such securities at June 30, 2010 was approximately $53.3 million.

The gross unrealized gains and losses on fixed maturities held to maturity and available for sale at June 30, 2010 and December 31, 2009 are as follows:

		June 30, 2010
						OTTI				Adjusted				Gross				Gross
		Amortized				Recognized				Amortized Cost				Unrealized				Unrealized				Fair
		Cost				In OCI (a)				(after OTTI)				Gains				Losses				Value
RMBS		$	88,065,174			$	(34,280,663	)		$	53,784,511			$	2,127,627			$	(2,585,002	)		$	53,327,136
U.S. Treasury securities available for sale			18,210,304				—				18,210,304				274,188				—				18,484,492
Municipal obligations available for sale			740,404				—				740,404				82,404				—				822,808
Totals		$	107,015,882			$	(34,280,663	)		$	72,735,219			$	2,484,219			$	(2,585,002	)		$	72,634,436

		December 31, 2009
						OTTI				Adjusted				Gross				Gross
		Amortized				Recognized				Amortized Cost				Unrealized				Unrealized				Fair
		Cost				In OCI (a)				(after OTTI)				Gains				Losses				Value
RMBS		$	93,081,210			$	(36,491,506	)		$	56,589,704			$	5,077,950			$	(2,339,841	)		$	59,327,813
U.S. Treasury securities available for sale			384,638,048				—				384,638,048				1,317,809				(240,822	)			385,715,035
Municipal obligations available for sale			740,286				—				740,286				64,087				—				804,373
Totals		$	478,459,544			$	(36,491,506	)		$	441,968,038			$	6,459,846			$	(2,580,663	)		$	445,847,221

Net investment income from each major category of investments for the periods indicated is as follows:

		Six months ended								Three months ended
		June 30,								June 30,
		2010				2009				2010				2009
		(in millions)
Fixed maturities held to maturity		$	0.6			$	1.1			$	0.3			$	0.5
Fixed maturities available for sale			3.4				4.7				0.8				2.7
Trading securities			3.4				3.7				3.4				0.7
Commercial loans			0.2				1.9				0.2				1.8
Equity in earnings of limited partnerships			7.9				9.2				3.2				8.0
Short-term investments			—				0.3				—				0.1
Total investment income			15.5				20.9				7.9				13.8
Investment expenses			(1.1	)			(1.2	)			(0.5	)			(0.6	)
Net investment income		$	14.4			$	19.7			$	7.4			$	13.2

Details related to investment income from commercial loans and trading activities presented in the preceding table are as follows:

		Six months ended								Three months ended
		June 30,								June 30,
		2010				2009				2010				2009
		(in millions)
Interest and dividends earned		$	0.5			$	0.7			$	0.4			$	0.3
Net realized gains (losses)			3.2				(0.3	)			3.2				—
Net unrealized (depreciation) appreciation			(0.1	)			5.2				—				2.2
Total investment income from commercial loans and trading activities		$	3.6			$	5.6			$	3.6			$	2.5

The following tables summarize all fixed maturity securities in an unrealized loss position at June 30, 2010 and December 31, 2009, disclosing the aggregate fair value and gross unrealized loss for less than as well as more than 12 months:

		2010
		Less than 12 months								12 months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss (1)
Residential mortgage-backed securities held to maturity		$	—			$	—			$	53,327,136			$	(34,738,039	)		$	53,327,136			$	(34,738,039	)
Total temporarily impaired securities		$	—			$	—			$	53,327,136			$	(34,738,039	)		$	53,327,136			$	(34,738,039	)

		2009
		Less than 12 months								12 months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss (1)
Residential mortgage-backed securities held to maturity		$	—			$	—			$	59,327,813			$	(33,753,397	)		$	59,327,813			$	(33,753,397	)
U.S. Treasury Securities			198,588,058				(240,822	)			—				—				198,588,058				(240,822	)
Total temporarily impaired securities		$	198,588,058				(240,822	)		$	59,327,813			$	(33,753,397	)		$	257,915,871			$	(33,994,219	)

At June 30, 2010, the Company was holding seven 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. The Company does not intend to sell nor does it expect to be required to sell the securities outlined above.

The amortized cost and fair value of debt securities that are not included in the Company’s commercial loan portfolio at June 30, 2010 are shown below by contractual maturity. 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		$	6,361,027			$	6,456,957
Due after one year through five years			11,849,276				12,027,535
Due after five years through ten years			482,054				529,205
Due after ten years			258,350				293,603
Subtotal			18,950,707				19,307,300
Residential mortgage-backed securities			53,784,511				53,327,136
Totals		$	72,735,218			$	72,634,436

The components for net realized gains (losses) for the six months ended June 30, 2010 and 2009 are as follows:

		Six months ended								Three months ended
		June 30,								June 30,
		2010				2009				2010				2009
Realized gains (losses) on investments:
Fixed maturities gains		$	7,424,553			$	3,794,847			$	5,583,882			$	2,463,459
Equity securities gains			37,772				—				37,772				—
Fixed maturities losses			(254,427	)			(1,882,468	)			(237,558	)			(271,993	)
Short-term investments			—				(137,836	)			—				(225	)
Net realized investment gains before impairments			7,207,898				1,774,543				5,384,096				2,191,241
Fixed maturities impairments			(300,199	)			(478,407	)			—				(478,407	)
Net realized investment gains after impairments		$	6,907,699			$	1,296,136			$	5,384,096			$	1,712,834

Proceeds from redemptions in investments held to maturity or disposals of fixed income investments available for sale for the six months ended June 30, 2010 and 2009 were $724,091,652 and $208,745,162, respectively.

The OTTI of $300,199 recognized for the six months ended June 30, 2010 resulted from the Company’s intention to sell certain U.S. Treasury securities under circumstances in which those securities are not expected to recover their entire amortized cost prior to sale. The Company recorded declines in values of investments considered to be OTTI of $478,407 for the six months ended June 30, 2009, resulting from the Company’s intention to sell certain municipal securities whereby those securities were not expected to recover their entire amortized cost prior to sale.

The Company maintains a portfolio of municipal bonds that has an average S&P rating of AAA. The average S&P rating includes certain municipal bonds that carry the benefit of insurance that provides credit enhancement. Excluding the benefit of this credit enhancement, the portfolio of municipal bonds has an average underlying S&P rating of A. The Company purchases municipal bonds with the intent to rely upon the underlying credit rating of the security exclusive of the credit enhancement provided by any financial guarantor.

The following table lists the financial guarantors, as well as the average S&P ratings and the average underlying S&P ratings, excluding the impact of credit enhancement, of the guaranteed municipal bonds in our investment portfolio in which there are a total of two municipal securities with a fair value of approximately $823,000 containing credit enhancements. The Company does not have any investments directly in the following financial guarantors.

		Fair				Average		Average
		Value				S&P		Underlying
Financial Guarantors		(in millions)				Rating		Rating
Financial Guaranty Insurance Company			0.3			AAA		AAA
Assured Guaranty Municipal Corporation			0.5			AAA		BBB-
Total		$	0.8

(3) Fair Value Measurements:

The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in ASC 820. 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 ASC 820 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 Company’s 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 Company’s Level 1 assets are comprised of U.S. Treasury securities, 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 service’s significant inputs are observable. The Company also compares the prices received from the third party service to other 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 Company’s Level 2 assets include municipal debt obligations.

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 arm’s 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 service’s 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. 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 Company’s understanding about the assumptions market participants would use in pricing the asset or liability.

The Company’s Level 3 assets include its RMBS, commercial loans and common stocks 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. The RMBS investments are not considered within the Level 3 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 ASC 820. See Note 2, “Investments” for a complete discussion regarding the Company’s RMBS portfolio.

The primary pricing sources for the Company’s commercial loan and common stock portfolios are reviewed for reasonableness, based on the Company’s 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 June 30, 2010, the Company did not utilize an alternate valuation methodology for its commercial loan or common stock portfolios.

The following are the major categories of assets measured at fair value on a recurring basis for the periods ended June 30, 2010 and December 31, 2009, 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				June 30,
		Assets				Inputs				Inputs				2010
Fixed maturities available for sale		$	18,484,492			$	822,808			$	—			$	19,307,300
Commercial loans			—				—				3,351,132				3,351,132
Common stock			—				—				101,780				101,780
Total		$	18,484,492			$	822,808			$	3,452,912			$	22,760,212

		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				2009
Fixed maturities available for sale		$	385,715,035			$	804,373			$	—			$	386,519,408
Commercial loans			—				—				5,001,118				5,001,118
Common stock			—				—				117,968				117,968
Total		$	385,715,035			$	804,373			$	5,119,086			$	391,638,494

The investments classified as Level 3 in the above table consist of commercial loans and common stock, for which the Company has determined that quoted market prices of similar investments are not determinative of fair value. 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 six months and three months ended June 30, 2010.

		Six months ended June 30, 2010												Three months ended June 30, 2010
		Commercial				Common								Commercial				Common
		Loans				Stocks				Total				Loans				Stocks				Total
Beginning balance		$	5,001,118			$	117,968			$	5,119,086			$	3,324,857			$	117,968			$	3,442,825
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)			(32,748	)			37,772				5,024				(37,202	)			37,772				570
Included in other comprehensive income			—				—				—				—				—				—
Purchases, sales, maturities, repayments, redemptions and amortization			(1,617,238	)			(53,960	)			(1,671,198	)			63,477				(53,960	)			9,517
Transfers from Level 3			—				—				—				—				—				—
Transfers to Level 3			—				—				—				—				—				—
Ending balance		$	3,351,132			$	101,780			$	3,452,912			$	3,351,132			$	101,780			$	3,452,912

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, consisting of three securities, of $3.4 million at June 30, 2010 was recorded at fair value. All loans are current with respect to interest payments. The Company also has one small common stock position at June 30, 2010, which was recorded at fair value.

(4) Income Taxes:

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 June 30, 2010 or June 30, 2009. The Company’s 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 each of the six months ended June 30, 2010 and June 30, 2009.

At June 30, 2010, state net operating losses that can be carried forward are $12,490,002. 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 2010 to 2029. At June 30, 2010, federal realized capital losses that can be carried forward are $4,069,677. The range of years in which the federal capital loss carryforwards can be carried forward is from 2010 to 2014. The estimate for federal capital losses may differ from the actual amount ultimately filed in the Company’s tax return.

As of June 30, 2010, the Company has recorded a valuation allowance of $4,960,384 with respect to the uncertainty in the realization of capital loss carryforwards. The Company considered various tax planning strategies to support the recoverability of existing deferred income taxes for capital loss carryforwards. This included an analysis of the timing and availability of unrealized positions in the Company’s investment portfolio. Included in changes in the valuation allowance were tax benefits of $6,359,026 for the six months ended June 30, 2010, as a result of the reversal of the deferred tax valuation allowance previously provided for capital losses that are now considered ordinary and a reversal of the deferred tax valuation resulting from sales of US Treasury securities. For the six months ended June 30, 2009, the Company recorded tax benefits of $3,269,735 as a result of the partial reversal of the deferred tax valuation previously provided for capital losses. This resulted from capital gains achieved within the investment portfolio. Management believes the deferred tax asset, net of the recorded valuation allowance account, as of June 30, 2010 will more-likely-than-not be fully realized.

The provision for federal income (benefit) expense is different from that which would be obtained by applying the statutory federal income tax rate to income before taxes. The significant items causing this difference for the six months and three months ended June 30, 2010 and 2009 are as follows:

		Six months ended June 30,																Three months ended June 30,
		2010								2009								2010								2009
		(in thousands)								(in thousands)								(in thousands)								(in thousands)
Provision computed at statutory rate		$	3,977				35.0	%		$	7,230				35.0	%		$	2,034				35.0	%		$	5,631				35.0	%
Tax-exempt interest			(7	)			(0.1	)			(1,216	)			(5.9	)			(3	)			(0.1	)			(627	)			(3.9	)
Dividends received deduction			—				—				(37	)			(0.2	)			—				—				—				—
Proration			1				—				179				0.9				—				—				88				0.5
Valuation allowance			(5,769	)			(50.8	)			(2,629	)			(12.7	)			(2,843	)			(48.9	)			(2,976	)			(18.5	)
State taxes			(582	)			(5.1	)			(623	)			(3.0	)			(269	)			(4.6	)			(279	)			(1.7	)
Other			13				0.2				70				0.3				8				0.1				49				0.3
Total income tax (benefit) expense		$	(2,367	)			(20.8)	%		$	2,974				14.4	%		$	(1,073	)			(18.5)	%		$	1,886				11.7	%