Fitch Downgrades NYMAGIC's IDR to 'BBB-'; Sr. Debt to 'BB+'; Outlook Negative

CHICAGO--(BUSINESS WIRE)--Fitch Ratings-Chicago-Nov. 5, 2008: Fitch Ratings has downgraded the following ratings:

NYMAGIC, INC.

--Issuer Default Rating (IDR) to 'BBB-' from 'BBB';

--$100 million senior debt 6.5% due March 15, 2014 to 'BB+' from 'BBB-'.

The Outlook is Negative.

The rating action follows NYMAGIC's announcement that the company posted a third-quarter year-to-date net loss of $85 million, including $30 million of after-tax realized investment losses, net investment losses of $48 million, and after-tax catastrophe losses of $5 million. In addition, the results include an after-tax charge of $8 million as a result of a settlement of certain disputed reinsurance receivables taken in the second quarter.

The combination of these issues has negatively affected the organization's capital position and financial flexibility. NYMAGIC's debt-to-total capital ratio was roughly 35% at Sept. 30, 2008, up from 26% at Dec. 31, 2007, due to a 34% drop in shareholders' equity through the first nine months of 2008.

The Negative Rating Outlook reflects the significant unrealized market value losses that have impacted almost all insurers due to unprecedented market volatility. The Negative Outlook also reflects uncertainty as to the timing and extent of any recovery in market values and concerns related to ongoing market volatility that has the potential for significant further reductions in capital if market values decline further, and additional impairments are recognized.

Fitch expects NYMAGIC's GAAP earnings-based interest coverage to be negative in 2008. Fitch notes that NYMAGIC held almost $36 million of cash and $46 million of investments at the holding company at Sept. 30, 2008 (down from $120 million at year-end 2007) that can be used to service debt. However, Fitch expects NYMAGIC's ability to upstream statutory dividends from the operating subsidiaries to the holding company will be reduced in 2009 by regulatory restrictions that limit the amount of dividends that can be paid without prior approval to the lesser of statutory net income or 10% of policyholders' surplus (PHS). Additionally, the company infused $20 million in capital to the operating subsidiaries earlier this year and Fitch believes the company may downstream an additional amount if PHS continues to decline.

Fitch believes NYMAGIC's results in 2008 demonstrate a higher level of financial volatility than what was anticipated at the prior rating level. NYMAGIC employs a non-traditional investment strategy with 45% of the portfolio in hedge funds, residential mortgage backed securities (RMBS) and preferred stock. These securities were the primary drivers of the large investment losses. Fitch believes NYMAGIC's exposure to additional investment losses during the remainder of 2008 and into 2009 is greater than many of its property-casualty peers whose portfolios are weighted more heavily to U.S. treasuries and municipal bonds.

NYMAGIC's investment portfolio includes seven Alt-A, super senior RMBS with a fair value of $62.3 million on a GAAP basis, or 11.2% of its total cash and investment portfolio at Sept. 30, 2008. As a result of the housing market turmoil and uncertainty regarding the asset valuations of these securities given market illiquidity, the company recorded other-than-temporary impairment (OTTI) charges of $7 million in 2007 and $40 million thus far in 2008. On a statutory basis, these securities are carried at an amortized cost of $100 million, or 55% of PHS. Should these securities experience economic losses or suffer a ratings downgrade to below investment grade (they are currently rated 'AAA'), PHS would be negatively impacted.

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