Management's Discussion and Analysis of Results of Operations and Financial Condition
Year Ended December 31, 1999 to Year ended December 31, 1998
Net Premiums Earned. Net premiums earned increased 48.8% from $9.2 million in 1998 to $13.7 million in 1999. The principal factors accounting for the result were an increase of workers' compensation reinsurance premiums by 26.8% or $1,644,000, and an increase of general liability reinsurance premiums by 32.2% or $768,000 and an increase of surety premiums by 356.6% or $2,057,000 which can be attributed to increased bail bond premium production which produced $1.3 million in net earned premium in such year.
Net Investment Income. Net investment income increased 1.1% from $2.8 million in 1998 to $2.9 million in 1999 as a result of the investment of additional cash flows from insurance operations offset by additional investments in notes receivable and real estate. The average annual pre-tax yield on investments was 7.1% in 1998 and 5.8% in 1999. The average annual after-tax yield on investments was 6.7% in 1998 and 5.4% in 1999.
Acquisition Expenses. Policy acquisition expenses increased 80.1% from $1 million in 1998 to $1.8 million in 1999 as a result of increased premium production and the Company's new reinsurance program for surety business.
Other Expenses. Other expenses increased 37.3% from $3.5 million in 1997 to $4.8 million in 1998 which is primarily due to salary and employee benefit increases resulting from additional staffing for new and existing programs.
The Company historically has met its cash requirements and financed its growth principally through cash flows generated from operations. During the past decade, the Company has operated in a soft market cycle which is characterized by excess insurance capacity and declining insurance premium rates. The Company's primary sources of cash flow are proceeds from the sale or maturity of invested assets, premiums earned, investment income, commission income and management fees. The Company's short-term cash requirements are primarily for claims payments, reinsurance premiums, commissions, salaries, employee benefits and other operating expenses, and the purchase of investment securities, which have historically been satisfied 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. 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 $9.4 million for 1997, $2.4 million for 1998 and $5.5 million for 1999. The positive cash flows for said periods were primarily attributable to net premiums written, net earnings, and increases in reserves for unpaid losses. Because workers' compensation and general liability claims may be paid 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.
Management believes that the Company will be able to obtain a bank credit facility which, together with anticipated cash flows from marketing and sales operations, will meet the liquidity needs for the construction and development of Phase I of Harbour Village during the first 24 months of development. There can be no assurance, however, that the amounts available from the Company's sources of liquidity will be sufficient to meet the Company's future capital needs.
In the context of the Year 2000 issue, the Company identified the following general categories of business partners as material to the Company's ability to conduct its operations: software, hardware and telecommunication providers, banks and investment managers, insurance brokers, agents and producers, reinsurers and reinsurance intermediaries and utilities. The Company contacted with its material business partners to determine their
state of readiness with regard to Year 2000 compliance and the potential impact on the Company. Based on the information available to the Company, the Company could not identify a material business partner that was not compliant with respect to the Year 2000 issue.
The Company has conducted a review of its underwriting guidelines and policies, and has determined that the insurance policies issued by the Company did not insure Year 2000 claims. However, changing social and legal trends may create unintended coverage for claims by reinterpreting insurance contracts and exclusions. It is impossible to predict what, if any, exposure insurance companies may ultimately have for Year 2000 claims whether coverage for the issue was specifically excluded or included.
The Company spent less than $100,000 on hardware and software relating to Year 2000 compliance and the Company does not anticipate any significant additional expenditures with respect to the Year 2000 issue.
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. Forward-looking statements involve risks and uncertainties which may cause actual results to differ, and are subject to change based on various insurance industry factors, including, without limitation, competitive conditions in the insurance industry, unpredictable developments in loss trends, adequacy and changes in loss reserves, market acceptance of new coverages and enhancements, 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, 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 new construction, 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. 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. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could over time prove to be inaccurate and therefore, there can be no assurance that the forward-looking statements included in this Report will themselves prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.