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The Company enjoyed another year of
record results as the implementation of our strategy continues to be
successful. In 2004, we far exceeded the record results of the previous
year and look set to continue the trend.
Earnings from continuing operations for 2004 grew 45% to $159.0 million,
or $2.41 per diluted share, compared to $106.9 million, or $1.66 per
diluted share, in 2003. Net earnings for 2004 increased 11% to $163.0
million, or $2.47 per diluted share, from $143.6 million, or $2.23 per
diluted share in 2003.
Total revenue for 2004 increased 36% to $1.3 billion compared to 2003.
In 2004, net earned premium grew 37% to $1.0 billion, fee and commission
income increased 28% to $182.3 million and net investment income grew
37% to $64.9 million, all compared to 2003. Cash flow from operations
was at its highest level ever during 2004 rising 27% from 2003 to $668.7
million.
Although the mix will be different in 2005, overall revenue is expected
to rise significantly. We expect net earned premium and net investment
income to continue to grow, although this will be somewhat offset by
reductions in agency revenue due to a reduction in ceded reinsurance and
the consolidation of one of our largest underwriting agencies into our
life insurance company. The reduction in agency revenues should be
overcome by increased revenue in our insurance companies.
Our business is fairly stable and margins are at very acceptable levels
in most of our lines. Our surety and professional indemnity business are
both growing profitably and we are actively seeking further acquisitions
in this part of our group. D&O, much maligned in some circles, is still
looking reasonably good to us, although we are reducing some of our
limits and aggregate exposures to certain industries and large market
capitalization public companies. London market business is becoming
questionable and further softness will cause us to take a hard look at
this line. Aviation and medical stop-loss are relatively stable at this
time and we are expecting things to stay that way through at least 2005.
2004 results, as good as they were, would have been much better with one
or two fewer hurricanes. At the end of the day, however, we had far less
financial impact from these storms than we initially anticipated and
with more than adequate reinsurance, the net effect was easily contained
within the third quarter 2004 result. Due partly to this catastrophe,
our reinsurance recoverables continued to increase in 2004, but we
believe they have peaked. In 2005, we are buying less reinsurance, which
will result in recoverables rising much slower. As losses are settled
and with the positive effect of recent commutations, we expect total
recoverables to begin to decline in the second half of 2005.
M&A activity was busy as usual in 2004, culminating in the acquisitions
of American Contractors Indemnity Company (surety insurance company),
RA&MCO (professional indemnity agency), United States Surety Company
(surety insurance company) and cineFinance (surety insurance agency). In
addition, we made a strategic investment in De Montfort Insurance
Company and have subsequently reached an agreement to purchase it
outright. Although some of these transactions are small, they represent
meaningful contributions to our business plan and we intend to continue
with this philosophy of accumulating complementary specialty insurance
operations, which has been so successful to the formation and growth of
HCI.
Our financial strength continues to be solid and is evident with the
Company's continued high ratings: AA (Very Strong) from Standard &
Poor's and A+ (Superior) from A.M. Best Company. We added $100 million
in equity in December 2004 to keep pace with the growth of our net
written premium expected in 2005.
The Board of Directors and Executive Management have long believed that
underwriting profits are the key to our success and we have always
adhered to that philosophy. We have continued to increase our retentions
in most of our lines of business, as we believe in the ability of our
talented and very experienced underwriting staff and for the most recent
years, in the quality of our marketplace.
But let's not fool ourselves, it ain't easy being disciplined, I've
always said that! The investment community pushes for more (of
everything) and expects growth (always). Strong balance sheets and
disciplined underwriting can often be viewed as negatives in the world
of short-term investors. Therefore, in order to remain steadfast and
disciplined, it is sometimes necessary for CEO's of publicly traded
insurance companies to ignore the short term share price and focus on
protecting the capital it took so long to earn. Sometimes the truth
hurts, but we have practiced full disclosure for 31 years, long before
it was popular (mandatory). We will see how others manage to do in this
new corporate environment.
Fortunately, we are currently in an
insurance market that is showing remarkable resilience to over
indulgence. So far, we have not seen any irrational competition in our
lines of business, but the market is fragile and it might only take one
insurance or reinsurance company to spoil it for everyone. Clearly the
margins have reduced in our specialty lines, but they are a long way
from being unprofitable. While we prefer under these conditions not to
chase new business with the same gusto as we have for the past few
years, we are very comfortable to retain more of the business that we
currently write.
Growing our business through acquiring small specialty insurance
operations has greatly increased our distribution network, and done so
at a relatively low cost. Also, by moving into business with lower
policy limits and premiums, we have become considerably less reliant on
overly competitive "national accounts" and are able to retain
substantially more premium due to the lack of volatility or catastrophe
exposures. We plan on continuing this strategy.
During the 12 years since we became a public company, we have been able
to build shareholders' equity at a very solid pace, averaging more than
a 15% return on equity during that period. With profits more predictable
from many of our specialty lines and investment income growing rapidly,
we are certainly very optimistic about the future.
As always, we would like to thank our clients, producers and
shareholders for their continuing support during the past year. We also
appreciate our employees for their hard work, loyalty and the results
that would not be as great without their contributions. |
