2000 2001 2002 2003 2004 Statement of operations data: Gross premiums written $97,632 $163,018 $159,290 $ 212,667 $ 221,576 Gross premiums earned 63,123 151,139 145,308 184,403 227,716 Net premiums earned 33,516 73,311 73,582 109,334 136,391 Net investment income 3,008 4,064 4,388 5,801 9,773 Net realized gains (losses) (518) 752 685 3,139 208 Real estate sales - 27,561 51,780 57,555 67,967 Total revenue 41,768 108,418 130,663 175,991 214,656 Losses and loss adjustment expenses incurred 20,090 45,585 42,031 65,834 93,503 Acquisition expenses 8,271 15,859 15,167 21,818 26,529 Real estate expenses 542 25,126 48,527 53,999 55,480 Earnings (loss) before income taxes (2,520) 5,304 3,403 10,090 18,453 Net earnings (loss) (1,363) 4,154 2,484 7,414 14,757 Net earnings (loss) per share: Basic $ (0.25) $ 0.87 $ 0.52 $ 1.45 $2.15 Diluted $ (0.25) $ 0.87 $ 0.51 $ 1.42 $2.01 Common shares and common share equivalents used in computing net basic earnings (loss) per share 5,496 4,797 4,736 5,106 6,864 Common shares and common share equivalents used in computing net diluted earnings (loss) per share 5,497 4,933 4,871 5,234 7,343
GAAP ratios: Loss and loss adjustment expense ratio 59.9% 62.1% 57.1% 60.2% 68.6% Expense ratio 57.8% 40.8% 44.2% 36.6% 34.1% Combined ratio 117.7% 102.9% 101.3% 96.8% 102.7% Net premiums written to equity 0.8X 1.4X 1.4X 1.4X 1.2X
Year Ended Year Ended Year Ended December 31, 2002 December 31, 2003 December 31, 2004
Insurance Operations $ 3,618 $ 7,076 $4,263 Real Estate Operations 1,900 2,218 7,816 Other, including realized gains and (losses) (3,034) (1,880) 2,678 Net Earnings $ 2,484 $7,414 $14,757
Net earnings from insurance operations for the twelve months ended December 31, 2004 include reserve strengthening of $14.4 million for prior accident years. The increase in net earnings from real estate operations was due to closings of units at Harbour Village with higher profit margins. Earnings from other items include a $2.6 million payment received by the Company in settlement of an impaired note receivable that was written off in the fourth quarter of 2003. Total revenues for the year ended December 31, 2004 increased 22% to $215 million compared to 2003 as a result of increased net premiums earned, real estate and investment income. Net premiums earned for the year ended December 31, 2004 increased 25% to $136 million from 2003 due to increases in the Company’s core business lines. Investment income increased 69% to $9.8 million compared to 2003 as a result of increased invested assets. Net cash flow from operations increased to $90 million for the year ended December 31, 2004 from $80 million in 2003.
The Company’s book value per share increased 16% to $16.04 at December 31, 2004 from $13.80 at December 31, 2003, due primarily to the Company’s net earnings during the year.
Environmental. The environmental business had another year of strong premium growth. This growth was attributable to the Company’s strategy of growing this segment. The Company opened an office in Denver, Colorado in the second quarter of 2004 and the Cherry Hill, New Jersey office began its third full year of operations and expanded its underwriting staff as compared to prior years. The Atlanta, Georgia office also increased its underwriting staff and expanded its distribution of the ProStar online quoting system to qualified brokers (Prostar was introduced by the Company in 2001 as part of its strategy to grow this line of business). While the market has experienced the entrance of new competitors and a general leveling of pricing, the Company believes its growth strategy will continue to be effective
The 69% increase in net investment income from 2003 to 2004 is attributable to an increase in the Company’s invested assets. Average invested assets increased from $167 million to $275 million for 2004, and the pre-tax investment yield increased from 3.5% to 3.6%, 2003 to 2004. This increase is consistent with overall market interest rate increases in the latter part of 2004. The 32% increase in net investment income from 2002 to 2003 is similarly attributable to increases in the Company’s invested assets offset by a decrease in the investment yield. Average invested assets increased from $101 million for 2002 to $167 million for 2003, and the pre-tax investment yield decreased from 4.3% to 3.5% from 2002 to 2003. This decrease is consistent with overall market interest rate declines in 2002 and 2003.
Net realized gains decreased in 2004 as compared to 2003. As a result of the historically low interest rate environment of early 2003, the Company chose to realize certain interest sensitive gains on its bond portfolio. This sale of bonds contributed $3 million to the total net realized gains in 2003.
2002 2003 2004 Condominium Units 160 197 203 Boat Slips 62 17 4 Total 222 214 207
These variable costs, when applied to real estate revenue, produced gross margins of 30% in 2004, 14% in 2003, and 15% in 2002. The increase in gross margin was due to higher average sales price on the Links units in 2004 as compared to units closed in 2003 and 2002.
Assets. Assets from Bermuda operations have increased to $134.8 million at the end of 2004 compared to $104.1 million at the end of 2003 and $49.7 million at the end of 2002. This increase is a result of a public stock offering in 2003 and an increase in premium writings assumed from growing United States operations. Assets from US operations at the end of 2004 were $449.3 million, compared to $410.2 million at the end of 2003 and $339.6 million at the end of 2002. This change was a result of increased premium writings as the Company has capitalized on favorable market conditions off set by a decrease in real estate assets at the end of 2004. Real estate assets decreased at the end of 2004 as the Harbour Village project nears completion.
The Company meets its cash requirements and finances its growth principally through cash flows generated from operations. Since 2000 the Company has operated in a hardening market with increased insurance premium rates for general liability coverages and increased fees for program business opportunities. During 2004, the Company began to experience a leveling of premium rates due to entrance of new insurance competitors and overall market conditions. The Company’s primary sources of short-term cash flow are premium writings, investment income and income from real estate development sales. Short-term cash requirements relate to claims payments, reinsurance premiums, commissions, salaries, employee benefits, real estate development expenses, and other operating expenses. Due to the uncertainty regarding the timing and amount of settlements of unpaid claims, the Company’s future liquidity requirements may vary; therefore, the Company has structured its investment portfolio maturities to allow for variations in those factors. The Company believes its current cash flows are sufficient for the short-term needs of its business and its invested assets are sufficient for the long-term needs of our insurance business.
The Company’s ability to pay future dividends to shareholders will depend, to a significant degree, on the ability of its subsidiaries to generate earnings from which to pay dividends. The jurisdictions in which the Company and its insurance and reinsurance subsidiaries are domiciled place limitations on the amount of dividends or other distributions payable by insurance companies in order to protect the solvency of insurers. Given the Company’s growth and the capital requirements associated with that growth, the Company does not anticipate paying dividends on the common shares in the near future.
Investments. We routinely review our investments that have experienced declines in fair value to determine if the decline is other than temporary. These reviews are performed with consideration of the facts and circumstances of an issuer in accordance with the Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 59, Accounting for Non-Current Marketable Equity Securities; Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities; and related guidance. The identification of distressed investments, and the assessment of whether a decline is other than temporary involve significant management judgment and require evaluation of factors including but not limited to:
Adverse changes in the issuer's availability of production resources, revenue sources, technological conditions, and
Reserves. Certain of our insurance policies and reinsurance assumed, including general and pollution liability policies covering environmental remediation, excess and surplus, and workers' compensation risks, may be subject to claims brought years after an incident has occurred or the policy period has ended. We are required to maintain reserves to cover the unpaid portion of our ultimate liability for losses and loss adjustment expenses with respect to (i) reported claims and (ii) incurred but not reported claims. A full actuarial analysis is performed to provide this estimate of all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements. In evaluating whether the reserves make a reasonable provision for unpaid loss and loss adjustment expense, it is necessary to project future loss and loss adjustment expense payments. It is certain that the actual future losses and loss adjustment expenses will not develop exactly as projected and may, in fact, vary significantly from the projections. If the net reserves were to change by plus 5% this would reduce pre-tax income by $9.2 million. If the net loss reserves were to change to minus 5% this would increase pre-tax income by $9.2 million.
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. The Company expressly disclaims any obligation to update any forward-looking statements except as required by law.