The Company owns approximately 7,500 square feet of space in an office condominium building in Warwick, Rhode Island, which is utilized by employees of PBC and OLRI. The Company also leases space located in New York, New York, Arcadia, California, Westport, Connecticut and Woodbury, New York. The Company's total leased space at these locations net of sub-leases is approximately 126,000 square feet and is suitable for its current needs.
(2) Excludes that portion of long-term debt maturing in less than one year.
(4) Based upon statutory accounting practices and derived from the statutory financial statements of the Insurance Companies, which excludes the effects of CAC.
The Insurance Companies underwrite property and casualty risks for insureds in the United States, principally through specially designed alternative distribution programs, covering various types of businesses and properties, which have similar risk characteristics. The Insurance Companies generally underwrite the first layer of insurance under the programs and unaffiliated program insurers provide coverage for losses above the first layer of risk. Substantially all of the Insurance Companies' revenues are derived from premiums on this business, plus the investment income generated by the investment portfolio of the Insurance Companies.
Corporate Operations include those activities that benefit the Company and, for the most part, the related expenses are allocated to the Insurance Brokerage Companies or the Property and Casualty Companies. Certain holding company expenses are not allocated and include debt servicing and public company expenses, including investor relations costs. In addition, Corporate Operations include an investment in Arista Investors Corp. ("Arista").
The Company has foreign operations in Bermuda. For further discussion see Note 19 to the consolidated financial statements of the Company.
Year ended December 31, 2000 compared with the year ended December 31, 1999
Income before income taxes increased by $1,913,000 (82%) to $4,235,000 in 2000 from $2,322,000 in 1999, primarily due to higher revenues, as discussed below.
Amortization of intangibles increased $66,000 (6%) to $1,161,000 in 2000 compared with $1,095,000 in 1999 due to the SRW acquisition partially offset by a reduction in certain intangibles acquired in 1998.
Other operating expenses increased by $1,248,000 (10%) to $13,463,000 from $12,215,000. The increase was mainly due to increased consulting and advertising expenses.
Interest expense increased by $95,000 (12%) to $870,000 in 2000 from $775,000 in 1999 as a result of the 1999 SRW acquisition which includes a related note payable to the Property and Casualty Companies and higher interest rates partially offset by lower balances on other acquisitions.
Net realized gains on investments of $804,000 resulted from re-balancing equity investments to include mutual funds. In addition, mutual fund capital gain distributions were received.
Other income increased by $397,000 as a result of non-recurring service fee income.
The loss ratio (losses and loss expenses incurred expressed as a percentage of premiums earned) increased to 40% in 2000 from 36% in 1999. The increase was due to the growth in reinsurance liability business which generally experiences a higher loss frequency, and is reserved for accordingly, offset by favorable property loss developments.
Net Income for the year ended December 31, 1999 increased by $222,000 (3%) to $7,504,000 or basic earnings per share of $0.89 compared to $7,282,000 or $0.86 for the same period last year as explained below. During the fourth quarter of 1999 the Company updated the assumptions used to allocate certain human resource and other operating costs to its insurance brokerage and underwriting units. These costs are corporate administrative expenses, attributable to all of the Company's operations, but not previously allocated to all revenue-generating business segments. The effect of this revision was to move approximately $1,300,000 of expenses from the Insurance Brokerage Companies to the Property and Casualty Companies, but had no effect on the Company's consolidated results.
Income before income taxes increased by $617,000 (36%) to $2,322,000 in 1999 from $1,705,000 in 1998. The increased operating result was primarily due to a reduction of expenses as a result of an increase in inter-company management fees allocated to the Property and Casualty Companies, as discussed above.
Other operating expenses decreased by $1,231,000 (9%) to $12,215,000 in 1999 compared with $13,446,000 in 1998 mainly due to an increase in inter-company management fees allocated to the Property and Casualty Companies (discussed previously) as well as reduced insurance costs.
Income before income taxes decreased by $811,000 (8%) to $8,826,000 in 1999 from $9,637,000 in 1998. The decrease was due to an increase in the combined ratio due to an increase in inter-company management fees (discussed previously) offset by an increase in net premiums earned.
Net premiums earned for 1999 increased by $2,091,000 (8%) to $26,780,000 from $24,689,000 in 1998. The Company's efforts to develop new alternative distribution programs and broaden the distribution network of existing programs and coverage types has contributed to the growth of premium volume.
Net expenses before income taxes decreased in 1999 by $369,000 (47%) to $419,000 from $788,000 in 1998. The segment's sole investment in Arista Investors Corp. was reduced due to an initial liquidating distribution. Arista's management has indicated its intention to sell its remaining asset, its license to operate, and its stock. This initial liquidating distribution, partially offset by the corresponding reduction in fair market value of Arista stock, was accounted for in net investment income and is the primary reason for the positive variance along with lower interest expense due to the June 1998 restructuring of corporate debt.
The provision for income taxes for 1999 and 1998 was $3,225,000 and $3,272,000, respectively. The 1999 provision reflects an adjustment to reflect the tax on the Company's income tax returns resulting in an effective tax rate of 30% and 31% for 1999 and 1998, respectively. The difference between the statutory rate and the effective rate was primarily related to tax exempt interest income.
Total assets increased by $23,799,000 (16%) to $173,011,000 at December 31, 2000 from $149,212,000 at December 31, 1999. Total liabilities increased by $15,008,000 (15%) to $116,969,000 at December 31, 2000 from $101,961,000 at December 31, 1999. These increases were primarily due to increases in brokerage segment fiduciary assets and liabilities (insurance premiums) and general growth in operations.
The Company maintains a substantial level of cash and cash equivalents, which are used to meet anticipated payment obligations. At December 31, 2000 and 1999, the Company had cash and cash equivalents of $39,513,000 and $43,238,000, respectively, of which $25,374,000 and $25,610,000 represents premiums collected and held in a
fiduciary capacity which are generally not available for operating needs of the Company. Of the Company's total invested assets, fixed maturities, cash and cash equivalents carried at market value of $27,328,000 and $22,270,000 as of December 31, 2000 and 1999, respectively, are pledged or deposited into trust funds to collateralize the Company's obligations under reinsurance agreements.
The Company has sought to minimize its investment risk by investing in a mix of cash equivalents; high quality tax exempt municipal bonds; U.S. Government and government agency securities and corporate bonds rated A or better by an accredited rating agency with an average duration of approximately four years; and equity securities. During the first quarter of 2001, the equity portfolio was liquidated and U.S. Treasury Bonds were purchased. A realized loss of approximately $200,000 resulted.
The table below sets forth the composition of the Company's portfolio of fixed maturity investments by rating as of December 31, 2000 (in thousands):
(a) Ratings are assigned primarily by Standard & Poor's Corporation with the remaining ratings assigned by Moody's Investors Services, Inc. and converted to the equivalent Standard & Poor's ratings. (b) Includes U.S. Government Obligations.
Investments Available for Sale -------------------------- Amortized Cost Aggregate Fair Value ------------------ ---------------------
The Company's insurance subsidiaries require capital to support premium writing. The guidelines set forth by the NAIC for OLRI suggest that a property and casualty insurer's ratio of annual statutory net premiums written to policyholders' surplus should not exceed 3 to 1. At December 31, 2000, OLRI, with a statutory surplus of $33,887,000, had a ratio of annual statutory net premiums written to its statutory surplus of .84 to 1.
Under Rhode Island Insurance Law, OLRI may pay cash dividends only from earned surplus determined on a statutory basis, subject to the maintenance of minimum capital and surplus of $3,000,000. Further, OLRI is restricted (on the basis of the lesser of 10% of OLRI's statutory surplus at the end of the preceding twelve-month period or 100% of OLRI's net income, excluding realized capital gains, for the preceding twelve-month period) as to the amount of dividends it may declare or pay in any twelve-month period without prior approval of the Department of Business Regulation of Rhode Island. Without special permission, at December 31, 2000, $3,388,700 was available for distribution.
OLB is required to maintain a minimum statutory capital and surplus based upon the higher of $1,000,000 or an amount derived by applying a variable rate to its current premium volume or outstanding losses at December 31, 2000. At December 31, 2000, $422,000 was available for distribution from OLB and its subsidiary, Park Brokerage Ltd.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101 which provides guidance for applying generally accepted accounting principles relating to the timing of revenue recognition in financial statements filed with the SEC. The Company is recognizing revenue in accordance with SAB No. 101.
The Year 2000 issue arose from computer programs being written using two digits rather than four digits to define the applicable year, resulting in the perception that there would be failures in information technology systems and other equipment containing imbedded technology in the year 2000.
On January 20, 2001, the Company reported that Hub International Limited ("Hub") had entered into a definitive agreement to acquire the Company through a merger transaction.
Upon the merger, each holder of the Company's shares will receive $14.00 per share consisting of cash of $9.33 and $4.67 principal amount of 5 year 8.50% subordinate
convertible debentures of Hub. Hub has the right to amend the merger consideration by replacing any or all of the convertible debentures with an equal amount of cash.
Completion of this transaction, anticipated to occur in the second quarter of 2001, is subject to the receipt of satisfactory applicable regulatory approvals, approval of the merger by the shareholders of the Company, compliance with applicable legal and regulatory requirements and standard closing conditions. The holders of approximately 55% of the shares of the Company, under individual agreements, have agreed to vote in favor of the merger, and have granted Hub an irrevocable option to purchase their shares of the Company in the event that the merger is not completed.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This SEC Form 10-K or any other written or oral statements made by or on behalf of the Company may include forward-looking statements, which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors (which are described in more detail elsewhere in documents filed by the Company with the Securities and Exchange Commission) include, but are not limited to, uncertainties relating to general economic conditions and cyclical industry conditions, uncertainties relating to government and regulatory policies, volatile and unpredictable developments (including storms and catastrophes), the legal environment, the uncertainties of the reserving process and the competitive environment in which the Company operates. The words "believe", "expect", "anticipate", "project", "plan", and similar expressions, identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.