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 September 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 (State or other jurisdiction of incorporation or organization)		13-3534162 (I.R.S. Employer Identification No.)
919 Third Avenue (Address of principal executive offices)		10022 (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 November 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 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 — September 30, 2010 (Unaudited) and December 31, 2009			2
Consolidated Statements of Operations — Nine months ended September 30, 2010 (Unaudited) and September 30, 2009 (Unaudited)			3
Consolidated Statements of Operations — Three months ended September 30, 2010 (Unaudited) and September 30, 2009 (Unaudited)			4
Consolidated Statements of Cash Flows — Nine months ended September 30, 2010 (Unaudited) and September 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			39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 3. Defaults Upon Senior Securities			39
Item 4. Submission of Matters to a Vote of Security Holders			39
Item 5. Other Information			39
Item 6. Exhibits			40
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Item 1. Financial Statements

NYMAGIC, INC.

CONSOLIDATED BALANCE SHEETS

		September 30, 2010				December 31, 2009
		(unaudited)
ASSETS
Investments:
Fixed maturities:
Held to maturity at adjusted amortized cost (fair value $52,573,853 and $59,327,813)		$	52,483,006			$	56,589,704
Available for sale at fair value (amortized cost $18,926,409 and $385,378,334)			19,258,656				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 $6,299,314 and $7,738,677)			3,018,117				5,001,118
Limited partnerships at equity (cost $116,319,546 and $127,379,526)			132,222,970				151,891,838
Short-term investments			13,900,340				8,788,718
Cash and cash equivalents			420,350,759				66,755,909
Total cash and investments			641,335,628				675,664,663
Accrued investment income			323,856				3,365,535
Premiums and other receivables, net			30,021,257				24,753,976
Receivable for investments disposed			51,845,890				4,221,356
Reinsurance receivables on unpaid losses, net			181,212,201				205,077,080
Reinsurance receivables on paid losses, net			25,097,392				13,116,607
Deferred policy acquisition costs			21,302,824				16,438,088
Prepaid reinsurance premiums			21,095,472				19,643,170
Deferred income taxes			29,097,197				29,251,550
Property, improvements and equipment, net			4,967,512				14,602,141
Other assets			7,607,191				4,074,424
Total assets		$	1,013,906,420			$	1,010,208,590
LIABILITIES
Unpaid losses and loss adjustment expenses		$	538,252,703			$	555,485,502
Reserve for unearned premiums			109,614,222				89,458,244
Ceded reinsurance payable			14,833,012				13,580,535
Notes payable			100,000,000				100,000,000
Dividends payable			1,185,029				737,308
Other liabilities			27,717,805				34,937,369
Total liabilities			791,602,771				794,198,958
SHAREHOLDERS’ EQUITY
Common stock			15,833,490				15,796,465
Paid-in capital			54,187,320				51,699,572
Accumulated other comprehensive loss			(21,353,928	)			(22,977,781	)
Retained earnings			261,673,358				259,527,967
			310,340,240				304,046,223
Treasury stock, at cost, 7,333,977 shares			(88,036,591	)			(88,036,591	)
Total shareholders’ equity			222,303,649				216,009,632
Total liabilities and shareholders’ equity		$	1,013,906,420			$	1,010,208,590

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

NYMAGIC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

		Nine months ended September 30,
		2010				2009
Revenues:
Net premiums earned		$	136,616,078			$	117,676,922
Net investment income			7,640,954				15,365,438
Equity in earnings of limited partnerships			12,605,833				18,955,203
Net realized investment gains			7,207,898				2,320,323
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	)
Other (loss) income, net			(8,069,072	)			3,439,012
Total revenues			155,701,492				157,278,491
Expenses:
Net losses and loss adjustment expenses incurred			83,846,049				57,843,159
Policy acquisition expenses			32,076,067				26,899,347
General and administrative expenses			35,511,326				30,876,796
Interest expense			5,101,160				5,047,269
Total expenses			156,534,602				120,666,571
(Loss) income before income taxes			(833,110	)			36,611,920
Income tax provision:
Current			(4,917,883	)			4,712,535
Deferred			(720,031	)			(357,982	)
Total income tax (benefit) expense			(5,637,914	)			4,354,553
Net income		$	4,804,804			$	32,257,367
Weighted average number of shares of common stock outstanding-basic			8,490,509				8,422,448
Basic earnings per share		$	.57			$	3.83
Weighted average number of shares of common stock outstanding-diluted			8,814,282				8,624,267
Diluted earnings per share		$	.55			$	3.74
Dividends declared per share		$	.30			$	.14

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

NYMAGIC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

		Three months ended September 30,
		2010				2009
Revenues:
Net premiums earned		$	47,335,512			$	38,506,255
Net investment income			85,903				3,792,061
Equity in earnings of limited partnerships			5,734,440				10,785,876
Net realized investment gains			—				545,780
Total other-than-temporary impairments			—				—
Portion of loss recognized in OCI (before taxes)			—				—
Net impairment loss recognized in earnings			—				—
Other (loss) income, net			(8,154,688	)			3,311,542
Total revenues			45,001,167				56,941,514
Expenses:
Net losses and loss adjustment expenses incurred			31,363,254				19,831,468
Policy acquisition expenses			11,449,707				9,072,957
General and administrative expenses			12,655,086				10,398,637
Interest expense			1,730,044				1,683,238
Total expenses			57,198,091				40,986,300
(Loss) income before income taxes			(12,196,924	)			15,955,214
Income tax provision:
Current			(652,353	)			4,353,745
Deferred			(2,618,192	)			(2,973,658	)
Total income tax (benefit) expense			(3,270,545	)			1,380,087
Net (loss) income		$	(8,926,379	)		$	14,575,127
Weighted average number of shares of common stock outstanding-basic			8,499,573				8,431,788
Basic (loss) earnings per share		$	(1.05	)		$	1.73
Weighted average number of shares of common stock outstanding-diluted			8,499,573				8,657,247
Diluted (loss) earnings per share		$	(1.05	)		$	1.68
Dividends declared per share		$	.10			$	.06

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

NYMAGIC, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

		Nine months ended September 30,
		2010				2009
Cash flows (used in) provided by operating activities:
Net income		$	4,804,804			$	32,257,367
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for deferred taxes			(720,031	)			(357,982	)
Net realized investment gain			(7,207,898	)			(2,320,323	)
Net impairment loss recognized in earnings			300,199				478,407
Equity in earnings of limited partnerships			(12,143,046	)			(20,492,356	)
Net amortization from bonds and commercial loans			(55,183	)			821,888
Depreciation and other, net			958,621				1,024,857
Trading portfolio activities			3,198				29,217,972
Commercial loan activities			2,019,817				(1,615,100	)
Loss on abandonment of computer equipment and software			8,176,225				—
Changes in:
Premiums and other receivables			(5,267,281	)			(5,029,248	)
Reinsurance receivables paid and unpaid, net			11,884,094				13,248,570
Ceded reinsurance payable			1,252,477				(236,064	)
Accrued investment income			3,041,679				1,558,475
Deferred policy acquisition costs			(4,864,736	)			(2,425,142	)
Prepaid reinsurance premiums			(1,452,302	)			(3,862,221	)
Other assets			(3,532,766	)			18,492,809
Unpaid losses and loss adjustment expenses			(17,232,799	)			10,015,374
Reserve for unearned premiums			20,155,978				12,177,356
Other liabilities			(7,219,564	)			6,862,546
Total adjustments			(11,903,318	)			57,559,818
Net cash (used in) provided by operating activities			(7,098,514	)			89,817,185
Cash flows provided by (used in) investing activities:
Held to maturity fixed maturities matured, repaid and redeemed			7,461,777				6,712,876
Available for sale fixed maturities acquired			(345,751,451	)			(423,889,045	)
Available for sale fixed maturities sold			719,040,449				264,735,655
Available for sale equity securities sold			53,960				—
Capital contributed to limited partnerships			(45,929,970	)			(27,235,000	)
Distributions and redemptions from limited partnerships			77,741,891				11,856,894
Net purchase of short-term investments			(5,111,622	)			45,254,806
Receivable for investments disposed and not yet settled			(47,624,534	)			23,843,597
Payable for securities not yet settled			—				5,445,700
Acquisition of property & equipment, net			499,783				(4,759,347	)
Net cash provided by (used in) investing activities			360,380,283				(98,033,864	)
Cash flows provided by from financing activities:
Proceeds from stock issuance and other			2,524,773				1,569,104
Cash dividends paid to stockholders			(2,211,692	)			(1,133,072	)
Net cash provided by financing activities			313,081				436,032
Net increase (decrease) in cash			353,594,850				(7,780,647	)
Cash and cash equivalents at beginning of period			66,755,909				75,672,102
Cash and cash equivalents at end of period		$	420,350,759			$	67,891,455
Supplemental disclosures:
Interest paid		$	6,542,867			$	6,501,388
Net federal income tax received		$	100,763			$	9,148,020

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.

Beginning in the third quarter of 2010, the Company presents the equity in earnings of partnership separately from net investment income on the income statement.

Adoption of new accounting pronouncements

In June 2009, the FASB issued ASC 860, Transfers and Servicing (“ASC 860”). ASC 860 amends the derecognition guidance in Statement 140 and eliminates the concept of qualifying special-purpose entities (“QSPEs”). ACS 860 is effective for fiscal years and interim periods beginning after November 15, 2009. Early adoption of ASC 860 was prohibited. The Company adopted ASC 860 during the first quarter of 2010 and the adoption did not have an effect on its results of operations, financial position or liquidity.

In June 2009, the FASB issued ASC 810, (“ASC 810”), which amends the consolidation guidance applicable to variable interest entities (“VIE”). An entity would consolidate a VIE, as the primary beneficiary, when the entity has both of the following characteristics: (a) The power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) The obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Ongoing reassessment of whether an enterprise is the primary beneficiary of a VIE is required. ASC 810 amends interpretation 46(R) to eliminate the quantitative approach previously required for determining the primary beneficiary of a VIE. This Statement is effective for fiscal years and interim periods beginning after November 15, 2009. The Company adopted ASC 810 during the first quarter of 2010 and the adoption did not have an effect on its results of operations, financial position or liquidity.

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 third 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.

In October 2010, the FASB issued ASU 2010-26, Financial Services — Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. ASU 2010-26 clarifies the definition of acquisition costs that are eligible for deferral. Acquisition costs are to include only those costs that are directly related to the successful acquisition or renewal of insurance contracts; incremental direct costs of contract acquisition that are incurred in transactions with either independent third parties or employees; and advertising costs meeting the capitalization criteria for direct-response advertising. This guidance will be effective for fiscal years beginning after December 15, 2011, and interim periods within those years. This guidance may be applied prospectively upon the date of adoption, with retrospective application permitted, but not required. Early adoption is permitted. The Company will adopt this guidance in the first quarter of 2012. The Company has not yet determined the impact adoption will have on its results of operations, financial position or liquidity.

(2) Investments:

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

		September 30, 2010				Percent				December 31, 2009				Percent
Fixed maturities held to maturity (adjusted amortized cost):
Residential mortgage-backed securities		$	52,483,006				8.18	%		$	56,589,704				8.37	%
Total fixed maturities held to maturity		$	52,483,006				8.18	%		$	56,589,704				8.37	%
Fixed maturities available for sale (fair value):
U.S. Treasury securities		$	18,434,108				2.87	%		$	385,715,035				57.09	%
Municipal obligations			824,548				0.13	%			804,373				0.12	%
Total fixed maturities available for sale		$	19,258,656				3.00	%		$	386,519,408				57.21	%
Total fixed maturities		$	71,741,662				11.18	%		$	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		$	434,251,099				67.71	%		$	75,544,627				11.18	%
Total fixed maturities, equity securities, cash, cash equivalents and short-term investments		$	506,094,541				78.91	%		$	518,771,707				76.78	%
Commercial loans (fair value)		$	3,018,117				0.47	%		$	5,001,118				0.74	%
Limited partnership hedge funds (equity)		$	132,222,970				20.62	%		$	151,891,838				22.48	%
Total investment portfolio		$	641,335,628				100.00	%		$	675,664,663				100.00	%

As of September 30, 2010, 92.1% 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.

Pursuant to certain covenants in the Agreement and Plan of Merger with ProSight Specialty Insurance Holdings, Inc., dated July 15, 2010, the Company has submitted redemption notices for all of its hedge fund investments except for its investment in Tiptree Financial Partners, LP.

The Company’s investment in Tiptree Financial Partners, LP is valued at approximately $35 million at September 30, 2010. During the quarter, Tiptree Financial Partners, LP completed the acquisition of an entity for which the initial acquisition accounting is not yet completed. While the Company believes the purchase price approximates the fair value of identifiable assets acquired and liabilities assumed, the ultimate valuation of such assets and liabilities, including intangibles, which is still in process, may result in the recording of goodwill or a gain on bargain purchase.

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

														Weighted
														Average				Average
						Adjusted								Loan to				FICO				D60+				Credit				S&P				Moody’s
Security						amortized cost								Value %				Credit				Delinquency				Support				Rating				Rating
description		Issue date				(6)				Fair value				(1)				Score (2)				Rate (3)				Level (4)				(5)				(5)
AHMA 2006-3			7/2006			$	10,457,012			$	9,707,649				84.8				705				34.3				35.3			AA				Caa1
CWALT 2005-69			11/2005				6,677,549				6,077,223				80.1				698				55.3				47.6			CCC				Ba3
CWALT 2005-76			12/2005				6,605,873				6,341,236				81.4				699				54.1				47.1			CCC				B2
RALI 2005-QO3			10/2005				7,042,417				5,525,030				80.2				704				43.2				38.3				B-			B1
WaMu 2005-AR17			12/2005				5,688,359				6,976,057				72.4				715				29.2				49.3			AAA				A1
WaMu 2006-AR9			7/2006				7,842,748				8,649,699				73.7				731				33.4				22.5				B			Ba1
WaMu 2006-AR13			9/2006				8,169,048				9,296,959				75.1				728				32.8				22.9			CCC				B3
						$	52,483,006			$	52,573,853

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 October 25, 2010, the levels of subordination ranged from 22.5% to 49.3% of the total debt outstanding for each pool. Delinquencies within the underlying mortgage pools ranged from 29.2% to 55.3% of total amounts outstanding. For comparison purposes, as of October 25, 2009, delinquencies ranged from 28.7% to 51.1%, while subordination levels ranged from 25.7% to 51.0%. 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 September 30, 2010, there was no significant variance in RMBS securities prices from different pricing sources. Accordingly, the Company determined fair value using prices obtained from its custodian. From September 30, 2009 to June 30, 2010, there was variance in RMBS securities prices from different pricing sources, therefore, the Company determined fair value using a matrix pricing analysis.

There are government sponsored programs that may affect the performance of the Company’s RMBS. Further there has been recent moratoriums on foreclosures and extensive litigation regarding placing mortgages back to the originators, The Company is uncertain as to the impact, if any, these programs or events will have on the fair value of the Company’s RMBS. The fair value of such securities at September 30, 2010 was approximately $52.6 million.

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

		September 30, 2010
						OTTI				Adjusted				Gross				Gross
		Amortized				Recognized				Amortized Cost				Unrealized				Unrealized				Fair
		Cost				In OCI (a)				(after OTTI)				Gains				Losses				Value
RMBS		$	85,667,249			$	(33,184,243	)		$	52,483,006			$	3,222,560			$	(3,131,713	)		$	52,573,853
U.S. Treasury securities available for sale			18,185,942				—				18,185,942				248,166				—				18,434,108
Municipal obligations available for sale			740,467				—				740,467				84,081				—				824,548
Totals		$	104,593,658			$	(33,184,243	)		$	71,409,415			$	3,554,807			$	(3,131,713	)		$	71,832,509

		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:

		Nine months ended								Three months ended
		September 30,								September 30,
		2010				2009				2010				2009
		(in millions)
Fixed maturities held to maturity		$	0.9			$	1.5			$	0.3			$	0.4
Fixed maturities available for sale			3.5				7.1				0.1				2.5
Trading securities			3.4				4.5				—				0.8
Commercial loans			—				2.1				(0.3	)			0.1
Short-term investments			—				0.4				—				0.1
Total investment income			7.8				15.6				0.1				3.9
Investment expenses			(0.2	)			(0.2	)			—				(0.1	)
Net investment income		$	7.6			$	15.4			$	0.1			$	3.8

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

		Nine months ended								Three months ended
		September 30,								September 30,
		2010				2009				2010				2009
		(in millions)
Interest and dividends earned		$	0.7			$	1.0			$	0.2			$	0.3
Net realized gains (losses)			3.2				(1.0	)			—				(0.7	)
Net unrealized (depreciation) appreciation			(0.5	)			6.6				(0.5	)			1.3
Total investment income from commercial loans and trading activities		$	3.4			$	6.6			$	(0.3	)		$	0.9

The following tables summarize all fixed maturity securities in an unrealized loss position at September 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		$	—			$	—			$	52,573,853			$	(33,093,396	)		$	52,573,853			$	(33,093,396	)
Total temporarily impaired securities		$	—			$	—			$	52,573,853			$	(33,093,396	)		$	52,573,853			$	(33,093,396	)

		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 September 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 September 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		$	15,864,433			$	15,956,866
Due after one year through five years			2,321,509				2,477,242
Due after five years through ten years			482,492				528,505
Due after ten years			257,975				296,043
Subtotal			18,926,409				19,258,656
Residential mortgage-backed securities			52,483,006				52,573,853
Totals		$	71,409,415			$	71,832,509

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

		Nine months ended								Three months ended
		September 30,								September 30,
		2010				2009				2010				2009
Realized gains (losses) on investments:
Fixed maturities gains		$	7,424,553			$	4,830,332			$	—			$	1,035,485
Equity securities gains			37,772				—				—				—
Fixed maturities losses			(254,427	)			(2,378,981	)			—				(496,513	)
Short-term investments			—				(131,028	)			—				6,808
Net realized investment gains before impairments			7,207,898				2,320,323				—				545,780
Fixed maturities impairments			(300,199	)			(478,407	)			—				—
Net realized investment gains after impairments		$	6,907,699			$	1,841,916			$	—			$	545,780

Proceeds from redemptions in investments held to maturity or disposals of fixed income investments available for sale for the nine months ended September 30, 2010 and 2009 were $726,502,226 and $271,448,477, respectively.

The OTTI of $300,199 recognized for the nine months ended September 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 nine months ended September 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 $825,000 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

AA+

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 September 30, 2010, the Company did not utilize an alternate valuation methodology for its RMBS, 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 September 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):

		September 30, 2010
		Level 1:
		Quoted
		Prices in				Level 2:
		Active				Significant				Level 3:
		Markets for				Other				Significant				Total at
		Identical				Observable				Unobservable				September 30,
		Assets				Inputs				Inputs				2010
Fixed maturities available for sale		$	18,434,108			$	824,548			$	—			$	19,258,656
Commercial loans			—				—				3,018,117				3,018,117
Common stock			—				—				101,780				101,780
Total		$	18,434,108			$	824,548			$	3,119,897			$	22,378,553

		December 31, 2009
		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 nine months and three months ended September 30, 2010.

		Nine months ended September 30, 2010												Three months ended September 30, 2010
		Commercial				Common								Commercial				Common
		Loans				Stocks				Total				Loans				Stocks				Total
Beginning balance		$	5,001,118			$	117,968			$	5,119,086			$	3,351,132			$	101,780			$	3,452,912
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)			(517,862	)			37,772				(480,090	)			(485,114	)			—				(485,114	)
Included in other comprehensive income			—				—				—				—				—				—
Purchases, sales, maturities, repayments, redemptions and amortization			(1,465,139	)			(53,960	)			(1,519,099	)			152,099				—				152,099
Transfers from Level 3			—				—				—				—				—				—
Transfers to Level 3			—				—				—				—				—				—
Ending balance		$	3,018,117			$	101,780			$	3,119,897			$	3,018,117			$	101,780			$	3,119,897