Selected Financial Data The following table sets forth selected consolidated financial data with respect to the Company for the periods indicated. The balance sheet data and income statement have been derived from the audited financial statements of the Company. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes thereto included elsewhere in this Report.
Revenues: Direct and assumed premiums earned $ 10,590 $ 13,114 $ 18,140 $54,079 $146,765 Ceded premiums earned (2,243) (3,994) (6,015) (27,274) (81,978) --------- --------- ------- -------- ---------- Net premiums earned 8,347 9,120 12,125 26,805 64,787 Net investment income 1,647 2,847 2,878 2,605 3,650 Interest on notes receivable 798 2,409 2,614 1,531 767 Brokerage commission income 2,589 1,183 1,389 3,291 2,410 Management fees from affiliate 601 1,344 1,386 1,425 1,496 Net realized gains (losses) 84 443 174 (518) 652 Real estate income - - - - 27,561 Other income 14 24 921 939 1,026 ---------- ----------- -------- -------- --------- Total revenues 14,080 17,370 21,487 36,078 102,349 ------- -------- ------ ------ -------
Total expenses 10,513 11,615 15,484 38,598 97,034 ------ ------ ------ ------ ------ Earnings (loss) before income taxes 3,567 5,755 6,003 (2,520) 5,315 Income Taxes 356 (199) 83 (1,157) 1,161 ------- ---------- ---------- --------- -------- Net earnings (loss) $ 3,211 $ 5,954 $ 5,920 $(1,363) $ 4,154 ======= ======= ======= ======== ======= Net diluted earnings (loss) per share $ 1.08 $ 1.04 $ 0.98 $(0.25) $0.84 Common shares and common share equivalents used in computing net diluted earnings per share 2,964 5,738 6,032 5,497 4,935
GAAP Ratios: Loss and loss adjustment expense ratio 49.0% 56.8% 56.9% 69.0% 67.9% Expense Ratio 32.8 23.9 16.7 18.6 24.9 Combined ratio 81.8% 80.7% 73.6% 87.6% 92.8% Net premiums written to Equity 0.4x 0.2x 0.3x 0.7x 1.3x
1999 2000 2001 2000 2001 ---- ---- ---- ---- ---- (In thousands)
Surety 1,302 4,539 5,916 248.6 30.3 General Liability - 845 18,423 - 2,080.2 Program Business 221 1,904 7,511 761.5 294.5 ------- -------- ------- ----- ----- Total primary insurance 1,562 10,175 42,423 551.4 316.9 ------- ------ ------ ------- ----- Total net premiums earned 12,125 26,805 64,787 121.1 141.7 ------ ------ ------ ------- -----
2,878 Net Investment Income 2,605 3,650 (9.5) 40.1 Interest on notes receivable 2,614 1,531 767 (41.4) (49.9) Commission and fee income:
Net realized gains (losses) 174 (518) 652 (397.7) 225.9 Real estate income - - 27,561 - - Other income 921 939 1,026 2.0 9.3 -------------- -------- ------- -------- -------- Total Revenues $21,487 $36,078 $102,350 67.9% 183.7% ------- ------- -------- -------- --------
Year Ended December 31, 2001 to Year ended December 31, 2000 Net Premiums Earned. Net premiums earned increased 141.7% from $26.8 million in 2000 to $64.8 million in 2001. The principal factors accounting for the increase were an increase of general liability reinsurance premiums by 77.2% or $4.2 million, an increase in workers’ compensation primary premiums by $6.1 million, an increase in general liability primary premiums by $17.6 million, an increase in commercial lines premiums by $2.6 million, and an increase in program business premiums by 294.5% or $5.6 million.
Net Investment Income. Net investment income increased 40.1% from $2.6 million in 2000 to $3.7 million in 2001 as a result of higher levels of invested assets generated from increased cash flows from operations. The average annual pre-tax yield on investments was 4.8% in 2000 and 5.0% in 2001. The average annual after-tax yield on investments was 4.0% in 2000 and 3.7% in 2001.
Brokerage Commission Income. Income from insurance brokerage operations decreased 26.7% from $3.3 million in 2000 to $2.4 million in 2001 due to reduced levels of insurance premiums being produced through the Company's risk retention group affiliate, and increased levels of insurance premiums being produced by the Company's excess and surplus lines carrier insurance company (which are not recognized as brokerage commission income).
Management Fees. Management fees received from the Company’s risk retention group affiliate increased 5.0% from $1.43 million in 2000 to $1.5 million in 2001 and is consistent with the prior year.
Real Estate Income. Real estate sales at the Harbour Village project were $27.6 million in 2001. These sales were realized from the closing of 102 condominium units and 59 boat slips for the year ended December 31, 2001. See Exhibit 99 included in this Report for further information regarding Harbour Village.
Payroll and other expenses increased 23.4% from $12.2 million in 2000 to $15.1 million in 2001 due to increases in payroll and litigation costs, write-off of certain workers' compensation receivables, and costs associated with the Company's financial service subsidiary.
Expense Due to Rescission. Expense for rescission was $600,000 for 2001, as compared to $3.5 million in 2000, which is associated with the rescission of the previously acquired Michigan agency and two related insurance companies.
Brokerage Commission Income. Income from insurance brokerage operations increased 136.9% from $1.4 million in 1999 to $3.3 million in 2000 as a result of increased commissions derived from insurance premiums produced through the Company’s risk retention group affiliate. However, commencing in late fiscal 2000 a portion of these insurance premiums are being written by the Company (rather than the Company’s risk retention group affiliate), and revenues will be recognized as premiums earned over the life of the underlying policies and not recognized as brokerage commission income.
Payroll and Other Expenses. Payroll and other expenses increased 66.2% from $7.7 million in 1999 to $12.8 million in 2000. The principal factors accounting for the result were payroll and related expenses increased $2.5 million in part due to increased staffing of the Company’s newer business units; operating expenses associated with the Company’s financial services subsidiary increased to $430,000 for the year due to additional staff and related expenses; noncapitalized expenses associated with the Company’s Harbour Village real estate development were $542,000; and expenses for licenses and fees increased $525,000 as the Company expanded its capability to direct write more lines of insurance business.
Expense Due to Rescission. Expense for rescission was $3.5 million for 2000 as a result of the rescission of the previously acquired Michigan agency and two related insurance companies.
Income Taxes. Federal and state income taxes decreased from an expense of $82,722 in 1999 to a benefit of $1.2 million in 2000 due to decreased taxable income in the Company's U.S. subsidiaries and as a result of the acquisition rescission charge.
from operating cash flows. Due to the uncertainty regarding settlement of unpaid claims, the long-term liquidity requirements of the Company may vary, and the Company has attempted to structure its investment portfolio to take into account the historical payout patterns. Notwithstanding the Company's dispute with one of its former reinsurers, Berkley Insurance Company, as disclosed elsewhere in this Report, management believes that the Company's current cash flows are sufficient for the short-term needs of its insurance business and the Company's invested assets are sufficient for the long-term needs of its insurance business. The Company also purchases reinsurance to mitigate the effect of large claims and to help stabilize demands on its liquidity.
On a consolidated basis, net cash provided from operations was $5.5 million for 1999, $24.4 million for 2000 and $28.1 million for 2001. The positive cash flows for said periods were primarily attributable to net premiums written, income from real estate development sales and net earnings. Because workers’ compensation and general liability claims may be reported over an extended period of time, the Company has established loss reserves for such lines of business. The assets supporting the Company’s reserves continue to earn investment income until claim payments are made.
Harbour Village Development. The Company announced in March 2000 its plans to complete development of the Harbour Village Golf and Yacht Club (“Harbour Village”), located in Ponce Inlet, Florida, consisting of 786 residential condominium units, a marina containing 142 boat slips, a par 3 golf course and beach club. The Harbour Village property (comprising 173 acres) was acquired by the Company through foreclosure in April 1999, and has been under development by its subsidiary, Ponce Lighthouse Properties, Inc. and its contracting subsidiary, Rivermar Contracting Company. The number of residential condominium units planned for the project has been increased from 786 to 809. As of February 28, 2002, the Company’s marketing efforts had generated approximately $118 million of pre-sales of condominium units and boat slips.
Management believes that the bank loan facility, together with anticipated cash flows from marketing and sales operations, will meet the liquidity needs for the construction and development of Phase I of the Harbour Village project during the first 24 months of development. There can be no assurance, however, that the amounts available from the Company’s sources of liquidity, exclusive of the bank loan facility for the project, will be sufficient or available to meet the Company’s future capital needs for the project. See Exhibit 99 for further information regarding Harbour Village.
Critical Accounting Policies The accounting policies described below are those the Company considers critical in preparing its financial statements. These policies include significant estimates made by management using information available at the time the estimates are made. However, as described below, these estimates could change materially if different information or assumptions were used. The descriptions below are summarized and have been simplified for clarity. A more detailed description of the significant accounting policies used by the Company in preparing its financial statements is included in Note (1) of Notes to the Consolidated Financial Statements.
Reinsurance. One of the Company’s former reinsurers, Berkley Insurance Company, has disputed its obligations under several reinsurance treaties entered into during the “soft reinsurance market” that existed in 1998 and 1999. As of December 31, 2001, unreimbursed paid claims totaled $6.5 million and additional ceded case and incurred but not reported reserves totals approximately $25.8 million. A reserve for this dispute has not been established since the Company does not believe it is probable a loss will occur nor is any potential loss estimatable. If any of these factors change in the future, the Company will establish a reserve at that time, which could be material.
Unpaid Losses &amp; Loss Adjustment Expenses. The Company is required to estimate its liability for loss and loss adjustment expenses. The estimated liability for unpaid losses and loss adjustment expenses recorded on the Company’s balance sheet at the end of any given period should be adequate to cover all future payments required to be made on account of insured events that occurred on or before the balance sheet date. However, because the future cannot be predicted with certainty, the actual future payments are usually different from the previously recorded estimates, and sometimes the differences may be material. These differences are included in the Company’s results of operations in the future periods in which they become known.
Construction Accounting. The Company recognizes revenue on Harbour Village, its real estate development project, when title to each condominium unit and boat slip transfers to the purchaser. When title transfers, the Company uses a percentage of completion method based on actual costs to total estimated costs (including allocated common costs) to recognize revenue. The estimated future common costs of amenities at December 31, 2001 were $4.5 million, of which $665,000 related to condominium units that were closed in 2001. The percentage of completion method is based upon future estimated costs, and actual costs may vary greatly from these estimated costs requiring an adjustment to be recorded in future periods.
Property and casualty insurance premiums are established before the amounts of losses and loss adjustment expenses are known and therefore before the extent by which inflation may affect such expenses is known. Consequently, the Company attempts, in establishing its premiums, to anticipate the potential impact of inflation. However, for competitive and regulatory reasons, the Company may be limited in raising its premiums consistent with anticipated inflation, in which event the Company, rather than its insureds, would absorb inflation costs. Inflation also affects the rate of investment return on the
The combined ratio of an insurance company measures only the underwriting results of insurance operations and not the profitability of the overall company. The Company’s reported combined ratio for its insurance operations may not provide an accurate indication of the Company’s overall profitability from insurance and reinsurance programs due to the exclusion of fee and commission income and expenses generated in related management and agency subsidiaries. Depending on the Company’s mix of business going forward, the combined ratio may fluctuate from time to time and may not reflect the overall profitability of insurance programs to the Company.
This Report contains certain forward-looking statements within the meaning of United States’ securities laws which are intended to be covered by the safe harbors created thereby. The use of such statements include estimations of future insurance claims and losses and estimated profits from Harbour Village as reflected in the Company’s consolidated financial statements and Exhibit 99 to this Report. In addition, all statements, other than statements of historical facts, included or incorporated by reference in this Report that address activities, events or developments that the Company expects or anticipates will or may occur in the future constitute forward-looking statements.
Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially, and are subject to change based on various insurance industry factors, including, without limitation, competitive conditions in the insurance industry, levels of new and renewal insurance business, unpredictable developments in loss trends, adequacy and changes in loss reserves, collectibility of reinsurance receivables, market acceptance of new coverages and enhancements, changes in reinsurance costs and availability, and changes in levels of general business activity and economic conditions. With respect to the development of the Harbour Village property, such forward-looking statements involve risks and uncertainties which may cause actual results to differ materially, and are subject to change based on various real estate development industry factors, including competitive housing conditions in the local market area, risks inherent in real estate development and new construction, increases in construction costs, construction delays, weather, zoning, litigation, changes in interest rates and the availability of mortgage financing for prospective purchasers of condominium units and boat slips, and changes in local and national levels of general business activity and economic conditions.