The following table sets forth selected consolidated financial data with respect to the Company for the periods indicated. The balance sheet data 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.
Year Ended December 31, 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- (In thousands, except per share and ratio data) Income Statement Data: Revenues: Direct and assumed premiums earned $ 5,316 $ 10,590 $ 13,114 $ 18,140 $54,079 Ceded premiums earned......... (1,044) (2,243) (3,994) (6,015) (27,274) ------- --------- --------- ------- -------- Net premiums earned........... 4,272 8,347 9,120 12,125 26,805 Net investment income......... 1,207 1,647 2,847 2,878 2,605 Interest on notes receivable.. 885 798 2,409 2,614 1,531 Brokerage commission income... 2,341 2,589 1,183 1,389 3,291 Management fees from affiliate 479 601 1,344 1,386 1,425 Net realized gains (losses) 177 84 443 174 (518) Other income.................. 5 14 24 921 939 ---------- ---------- ----------- -------- --------- Total revenues............ 9,366 14,080 17,370 21,487 36,078 ------- ------- -------- ------ ------
Statutory Ratios: Loss and loss adjustment expense ratio 48.1% 49.0% 56.8% 56.9% 69.1% Expense ratio 27.1 30.5 22.6 14.0 11.8 Combined ratio 75.2% 79.5% 79.4% 70.9% 80.9%
Percent Increase Year Ended December 31, Decrease ----------------------- -------- 1998 to 1999 to 1998 1999 2000 1999 2000 ---- ---- ---- ---- ---- (In thousands)
Interest from Notes Receivable. Interest from notes receivable decreased 41.4% from $2.6 million in 1999 to $1.5 million in 2000. The main reason for the decrease relates to repayment of various loans. Average notes receivable has decreased to $10.9 million from $14.6 million. The average annual pretax yield on notes receivable was 18.0% and 12.2% in 1999 and 2000, respectively.
Losses and Loss Adjustment Expenses. Loss and loss adjustment expenses increased 168.3% from $6.9 million in 1999 to $18.5 million in 2000 primarily due to an increase in net earned premiums and release of reserve redundancies in 1999. Increases in general liability, workers’ compensation and surety business accounted for the largest portion of the increase in loss and loss adjustment expenses.
Acquisition Expenses. Acquisition expenses increased 324.3% to $3.8 million from $894,000 as a result of increased production of surety, commercial lines and powersports premiums, which are product lines that produce higher acquisition expenses. Premium tax expense has increased to $1.0 million from $341,000 due to higher volumes of direct premiums earned.
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.
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 rescission charge.
Year ended December 31, 1999 to Year ended December 31, 1998
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 after-tax yield on investments was 6.7% in 1998 and 5.4% in 1999. The average annual after-tax yield on investments was 5.4% in 1999 and 4.0% in 1999.
Interest from Notes Receivable. Interest from notes receivable increased 8.5% from $2.4 million in 1998 to $2.6 million in 1999 as a result of an increase of the average outstanding secured notes receivable. The average annual pretax yield on notes receivable was 22.4% and 18.0% in 1998 and 1999, respectively.
Management Fees. Management fees increased 3.1% from $1.3 million in 1998 to $1.4 million in 1999 as a result of increased service levels provided by the Company to its risk retention group affiliate.
Acquisition Expenses. Policy acquisition expenses decreased 25% from $1.2 million in 1998 to $894,000 in 1999.
Certain items reflected in the Net Premiums Earned, Brokerage Commission Income, Management Fees, Acquisition Expenses and Payroll and Other Expenses categories above have been reclassified to conform to the presentation in the Company’s consolidated financial statements for fiscal year 2000. These reclassified items had no effect on the previously reported net earnings or shareholders’ equity of the Company.
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 was characterized by excess insurance capacity and declining insurance premium rates; however, commencing in fiscal year 2000 the Company has operated in a hardening market with increased insurance premium rates for workers’ compensation and excess and surplus lines. 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.
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 general 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, 2001, the Company’s marketing efforts had generated approximately $80 million of pre-sales of condominium units and boat slips.
It is anticipated that Harbour Village will be developed in three Phases over the next three to five years, depending on future sales activities and economic conditions that may impact the marketing of the condominium units. In July 2000, the Company closed a $37 million acquisition, development and construction loan facility in order to commence construction of Phase I of the project. Through December 31, 2001, the Company had borrowed approximately $11 million from this loan facility. The estimated construction and development cost for the entire Harbour Village project is approximately $200 million over a three to five year period. Phase I of the development currently under construction consists of site work including a 142-boat slip marina, 294 residential units, and related amenities. No assurance can be given, however, as to either future sales activities of the condominium units or the impact of local and national economic conditions on the Company's marketing efforts for the development of the Harbour Village project.
Management believes that the bank credit 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 credit facility for the project, will be sufficient or available to meet the Company’s future capital needs for the project.