The following table sets forth selected consolidated financial data with respect to the Company for the periods indicated. The balance sheet and income statement data have been derived from the audited consolidated 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.
1999 2000 2001 2002 2003 Statement of operations data: Gross premiums written $ 28,623 $97,632 $163,018 $ 159,290 $ 212,667 Gross premiums earned 21,538 63,123 151,139 145,308 184,403 Net premiums earned 18,268 33,516 73,311 73,582 109,334 Net investment income 3,257 3,008 4,064 4,388 5,801 Net realized gains (losses) 174 (518) 752 685 3,139 Real estate sales - - 27,561 51,780 57,555 Total revenue 26,342 41,768 108,418 130,663 175,991 Losses and loss adjustment expenses incurred 7,736 20,090 45,585 42,031 65,834 Acquisition expenses 4,875 8,271 15,859 14,507 21,818 Real estate expenses - 542 25,126 48,527 53,999 Earnings (loss) before income taxes 6,003 (2,520) 5,304 3,403 10,090 Net earnings (loss) 5,920 (1,363) 4,154 2,484 7,414 Net earnings (loss) per share: Basic $ 0.99 $ (0.25) $ 0.87 $ 0.52 $ 1.45 Diluted $ 0.98 $ (0.25) $ 0.84 $ 0.51 $ 1.42 Common shares and common share equivalents used in computing net basic earnings (loss) per share 6,006 5,496 4,797 4,736 5,106 Common shares and common share equivalents used in computing net diluted earnings (loss) per share 6,032 5,497 4,933 4,871 5,234
Balance sheet data (at end of period): Total investments, excluding real estate $ 53,197 $ 67,643 $ 90,078 $111,926 $222,418 Total assets 114,355 230,308 322,520 389,342 514,260 Unpaid losses and loss adjustment expenses 23,709 62,592 137,391 179,164 230,104 Unearned premiums 11,384 48,909 59,768 71,675 99,939 Loan payable - 11,435 16,403 22,182 30,441 Total liabilities 53,317 172,505 262,540 326,890 418,916 Total shareholders' equity 61,038 57,803 59,980 62,452 95,344
GAAP ratios: Loss and loss adjustment expense ratio 42.4% 59.9% 62.1% 57.1% 60.2% Expense ratio 58.6% 57.8% 40.8% 44.2% 36.6% Combined ratio 101.0% 117.7% 102.9% 101.3% 96.8% Net premiums written to equity 0.3X 0.8X 1.4X 1.4X 1.4X
The increase in net earnings from insurance operations was due to strong underwriting profits in the Company’s core environmental, excess and surplus and program business lines. The increase in net earnings from real estate operations was due to increased closings of condominium units and boat slips at Harbour Village. The impairment of the note receivable was established in connection with the preparation of our year end financial statements as a result of the review of the 2003 financial performance of the golf course property which secures the loan, coupled with a general economic decline in the value of golf course properties. Total revenues for the year ended December 31, 2003 increased 35% to $176 million as compared to the same period of 2002 as a result of increased net premiums earned, investment income and realized gains from the sale of investments. Net premiums earned for the year ended December 31, 2003 increased 49% to $109 million from the same period of 2002 due to increases in net premiums earned in the Company’s core lines of business. Net cash flow from operations increased to $80 million for the year ended December 31, 2003 from $38 million in the same period of 2002.
The following table breaks out the significant components of our consolidated revenues:
Year Ended December 31, 2001 2002 to to 2001 2002 2003 2002 2003 (Dollars in thousands) Net premiums earned: Environmental $11,380 $ 11,789 $ 19,872 3.6% 68.5% Excess and Surplus 23,897 37,162 59,093 55.5 59.0 Programs 8,887 13,719 22,910 54.4 66.9 Other 29,147 10,912 7,459 (62.5) (31.6) Total net premiums earned 73,311 73,582 109,334 0.4 48.6
Net investment income 4,064 4,388 5,801 7.9 32.2 Net realized gains 752 685 3,140 (8.9) 358.4 Real estate income 27,561 51,781 57,555 87.8 11.2 Other income 2,730 227 161 (91.6) (29.4)
Environmental. After two years of stable premium production, 2003 was a strong year for our environmental line. We saw revenue generation from our 2001 strategic decision to start ProStar Online (ProStar), an electronic submission, rating and quoting system for our small account business. New business submissions through ProStar increased 100% over the prior year to $3.6 million. Total ProStar production increased 100% over the prior year to $9.4 million. This system has allowed us to significantly increase our policy counts while minimizing additional overhead costs necessary to produce such increased volume. We are also now seeing the benefits of our 2002 strategic decision to open a second sales office in Cherry Hill, New Jersey, allowing us to capitalize on the “favorable” market conditions associated with non-ProStar accounts, the larger accounts in the market we serve. Overall non-ProStar written premium increased 34% to $21.9 million in 2003.
The 32% increase in net investment income from 2002 to 2003 is attributable to an increase in our invested assets offset by a decrease in our investment yield. Average invested assets increased from $101 million to $167.2 million for 2003; our pre-tax investment yield decreased from 4.5% to 3.5%, 2002 to 2003. This decrease is consistent with overall market interest rate declines in the last few years. The 8% increase in net investment income from 2001 to 2002 is similarly attributable to increases in our invested assets offset by a decrease in our investment yield. Average invested assets increased from $78.9 million for 2001 to $101 million for 2002; our pre-tax investment yield decreased from 5.6% to 4.5% from 2001 to 2002. This decrease is consistent with overall market interest rate declines in the last few years.
Our 2003 ratio increased 3.1 points from 57.1% to 60.2% due to a combination of factors. Negative reserve development contributed an additional 5 percentage points to the 2003 loss ratio. That development was primarily associated with adverse loss experience on our workers' compensation lines currently in run-off. See discussion under the Loss and Loss Adjustment Expense Reserve heading in Item 1 of this Report for further information. An offsetting factor to such reserve development was the continuing implementation of our growth strategies in our core business lines. Those business lines continue to project overall loss and loss adjustment expense ratios from the mid 40% to high 50% range depending on the line of business.
Our 2002 ratio decreased 5 points from 62.1% to 57.1% due to the following combination of factors. Positively impacting the ratio were the decisions to exit certain workers' compensation classes of business, exit the commercial lines business and to significantly reduce our surety line production. Those lines had overall loss and loss adjustment expense ratio projections of 75% and above and contributed approximately 25% and 4% of the total loss experience during 2001 and 2002, respectively. Primarily offsetting those reductions was the continued implementation of our excess and surplus lines growth strategy, which has overall loss and loss adjustment expense ratio projections in the low 50's and contributed approximately 15% and 27% of the total loss experience during 2001 and 2002, respectively.
Acquisition expenses are amounts that are paid to agents and brokers for the production of premium for the Company offset in part by the ceding commissions we retain from our reinsurers. For our program business, fees are typically earned through ceding commissions and have the effect of lowering our acquisition expenses. Acquisition expenses also include amounts paid for premium taxes to the states where we do business on an admitted basis. Acquisition expenses were $22 million in 2003, $15 million in 2002, and $16 million in 2001. Acquisition expenses as a function of net earned premiums were 20% in both 2003 and 2002, and 22% in 2001. The decrease in 2002 and 2003 over 2001 is a result of lowering commissions that we pay our brokers to 17.5% from 20% during 2002 on our excess and surplus lines business, which accounts for 41% of total gross written premiums in 2003, and 34% in 2002.
2001 2002 2003 Variable 23 44 50 Fixed 2 5 4 Total 25 49 54
Consistent with the discussion above, net cash provided from operations was $80.2 million for the year ended December 31, 2003, $38.4 million for the year ended December 31, 2002 and $27.7 million for the year ended December 31, 2001. During 2003, we received $20.0 million from Berkley Insurance Company, which represented payment in settlement of disputes in historical reinsurance treaties.
In June 2003, our board of directors decided to suspend paying dividends on the common shares so that we could expand our capital base. Our ability to pay future dividends to shareholders will depend, to a significant degree, on the ability of our subsidiaries to generate earnings from which to pay dividends to us. The jurisdictions in which we and our 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 our Company’s growth and the capital requirements associated with that growth, we do not anticipate paying dividends on the common shares in the near future.
Our contractual obligations at the end of 2003 were (in thousands):
The accounting estimates described below are those we consider critical in preparing our 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.
With respect to Reported claims, reserves are established on a case-by-case basis. The reserve amounts on each Reported claim are determined by taking into account the circumstances surrounding each claim and policy provisions relating to the type of loss. Loss reserves are reviewed on a regular basis, and as new information becomes available, appropriate adjustments are made to reserves.
Impairment of Notes Receivable. Impairment is measured based upon analysis of the present value of expected future payments and/or the fair value of the underlying collateral. For our notes receivable, the determination of the present value of expected future payments is currently dependent on the underlying collateral’s value. The determination of the fair value of the underlying collateral is a highly subjective process based on the availability of such things as comparable sales in the market, reliable data on cash flow generated by the collateral and the sufficiency of other information needed for the applicable valuation techniques being applied. All these factors can change significantly based on the economy and other market conditions. As a result, there can be no assurance that impairment recognized in any period will be sufficient or excessive in relation to the ultimate realizable value of the notes receivable.
We are incorporated under the laws of Bermuda and, under current Bermuda law, are not obligated to pay any taxes in Bermuda based upon income or capital gains. We have received an undertaking from the Minister of Finance in Bermuda pursuant to the provisions of The Exempted Undertakings Tax Protection Act 1966, which exempts us and our shareholders, other than shareholders ordinarily resident in Bermuda, from any Bermuda taxes computed on profits, income or any capital asset, gain or appreciation, or any tax in the nature of estate, duty or inheritance until March 28, 2016. Exclusive of our U.S. subsidiaries, we do not consider ourselves to be engaged in a trade or business in the U.S. and accordingly do not expect to be subject to direct United States income taxation. Our U.S. subsidiaries are subject to taxation in the U.S.
The combined ratio of an insurance company measures only the underwriting results of insurance operations and not the profitability of the overall company. Our Reported combined ratio for our insurance operations may not provide an accurate indication of our overall profitability. For instance, depending on our mix of business, the combined ratio may fluctuate from time to time and may not reflect the overall profitability of our insurance operations.