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; Pasadena, California, and Westport, Connecticut. The Company's total leased space at each location is 84,398 sq. ft., 9,443 sq. ft., and 10,370 sq. ft., respectively. The Company's current space leases are suitable for its current needs.
(1) Charge in lieu of income taxes, see note 3 (l) to the Consolidated Financial Statements of the Company.
(4) Based upon 8,474,435 shares outstanding at December 31, 1997 and 7,020,000 outstanding at December 31, 1996, 1995, 1994, and 1993.
(8) Earnings per share for basic and diluted are the same based on the weighted average shares outstanding, including share equivalents outstanding.
Kaye Group Inc. (the "Company"), a Delaware corporation, formerly Old Lyme Holding Corporation ("Holding"), is a holding company which, through its subsidiaries, is engaged in a broad range of insurance brokerage, underwriting and related activities. The Company operates in two insurance business segments - - the Insurance Brokerage Companies Operations comprised of the Retail Brokerage Business and the Program Brokerage Business, and the Property and Casualty Companies Operations ("Property and Casualty Companies" or "Insurance"), which comprises the Insurance Companies and Claims Administration (see Note 1 to the consolidated financial statements of the Company).
The Insurance business underwrites property and casualty risks for insureds in the United States and is sold principally through specially designed Programs, covering various types of businesses and properties which have similar risk characteristics. The Insurance business generally underwrites 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 business revenues are derived from premiums on this business, plus the investment income generated by the investment portfolio of the Insurance business.
Income before income taxes increased by $1,962,000 to $767,000 in 1997 from a loss of $1,195,000 in 1996. The improved operating result was due to increased revenues, a significant decrease in other operating expenses and lower interest expense partially offset by a modest increase in salaries and benefits, as discussed below.
Total revenues in 1997 were $32,689,000 compared with $31,595,000 in 1996, or an increase of $1,094,000 (3%). The largest component of revenues, commissions and fees-net, was up by $555,000 (2%). Commissions and fees-net increased due to new business of $5,948,000 and the acquisition of Western (see Note 17 to the consolidated financial statements of the Company) which contributed $992,000. Decreases in commissions and fees-net was the result of attrition of $4,421,000, increased commission expense of $896,000 primarily due to additional new business acquired, and a reduction in wholesale contingency commissions of $1,068,000. Attrition includes lost accounts, reduction of service to existing accounts, and lower premiums and commission rates. The attrition in business was equivalent to approximately 13% of the Company's 1996 volume which results in a business retention of approximately 87%. This is well within normal industry expectations given the usual attrition in a highly competitive environment. Investment income increased in 1997 by $539,000 (52%) due to collection efficiencies resulting in a longer holding period for fiduciary investments.
Salaries and benefits increased by $299,000 (2%) to $18,868,000 in 1997 compared to $18,569,000 in 1996. This increase was the result of the acquisition of Western partially offset by a modest reduction in work force due to continued operating efficiencies, lower executive compensation and reduced costs for prior years' acquisitions. The Company's board of directors' compensation committee and executive management have reviewed and adjusted executive and management compensation, respectively, to reflect a continued movement toward performance based pay.
Interest expense decreased by $200,000 as a result of the early payment of the $6,000,000 note payable to KILP in August 1997.
Income before income taxes increased in 1997 by $668,000 (9%) to $7,719,000 from $7,051,000 in 1996. The increase in operating results was due to increased net premiums earned (net of related expenses) and investment income partially offset by a decrease in other income, as discussed below.
Net realized gain on investment transactions for 1997 decreased by $51,000 to $21,000 compared to $72,000 in 1996. The realization of investment gains and losses is determined by market conditions and management's decision regarding the holding period of the portfolio.
Other income for 1997 decreased by $200,000 to $245,000 from $445,000 in 1996. This decrease is mainly due to the run-off of certain reinsurance contracts during the first half of 1996.
Acquisition costs and general and administrative expenses increased in 1997 by $1,152,000 (14%) to $9,370,000 from $8,218,000 in 1996. The expense ratio (acquisition costs and general and administrative expenses) for 1997 and 1996 was 41% and 43%, respectively. This decrease was due to a modest decrease in general and administrative expenses in 1997. The increase in absolute dollars was due mainly to additional acquisition costs related to increased net premiums earned and the write-off of certain deferred acquisition costs resulting from the termination of a deposit reinsurance contract. General and administrative expenses had a modest decrease as a result of lower professional fees.
Net expenses before income taxes increased in 1997 by $286,000 (44%) to $931,000 from $645,000 in 1996. This increase was the result of costs incurred for acquisition activities and investor relations.
Year ended December 31, 1996 compared with year ended December 31, 1995
Total revenues in 1996 were $31,595,000 compared with $34,970,000 in 1995, or a reduction of $3,375,000 (10%). The largest component of revenues, commission and fees-net, was down $3,373,000 (10%) due in part to nonrecurring items in 1995 of $1,102,000 which consisted of $605,000 relating to the sale of expiration lists of Kaye Administrators, the Home Owners Program was extended by an additional six months for commissions of $305,000, and a special contingent commission of $192,000. The remaining reduction in commissions was mainly due to lost business of approximately $3,200,000 in commercial lines, group and life, personal lines and fees earned from public adjusters partially offset by new business of $1,600,000. This loss in business, equivalent to approximately 9% of the Company's 1995 volume, results in a business retention of approximately 91%. This is well within normal industry expectations given the usual attrition in a highly competitive environment.
Other operating expenses (including depreciation) decreased by $330,000 (2%) to $13,621,000 in 1996 compared with $13,951,000 in 1995. The decrease was primarily due to lower professional fees as a result of the settlement of a former employee lawsuit partially offset by additional depreciation costs related to the capital leasing of new computers, and outside rating service fees related to the Residential Real Estate Program, general insurance and employment agency fees.
Net premiums earned for 1996 increased by $2,482,000 (15%) to $19,327,000 from $16,845,000 in 1995. This increase was primarily attributable to growth in the Residential Real Estate Program partially offset by lost business due to increased competition in the Restaurant Program.
Net investment income decreased by $358,000 (13%) to $2,461,000 in 1996 from $2,819,000 in 1995 as a result of additional bond amortization for those bonds which had early call features.
Total assets decreased by $15,077,000 (10%) to $141,025,000 at December 31, 1997 from $156,102,000 at December 31, 1996. Total liabilities decreased by $19,923,000 (16%) to $105,857,000 at December 31, 1997 from $125,780,000 at December 31, 1996. Premiums and other receivables and premiums payable declined in the brokerage segment due to the timing of certain premium billings.
The Company in August 1997 paid in full the note payable to KILP of $6,000,000 from net cash provided by operating activities.
On December 30, 1997 the stockholders of the Company approved a restructuring that merged Kaye Holding Corp. ("KHC") into the Company. This eliminated KILP's minority interest in KHC of $6,191,000 at December 31, 1997 and increased stockholders' equity of the Company by the same amount. KILP is the Company largest shareholder. The merger was accounted for as a transfer and exchange between entities under common control. Accordingly, common stock of Kaye Group Inc. issued in exchange for the KHC shares was accounted for by using the closing NASDAQ market price on October 24, 1997 ($7.00) (the effective date of the merger). This increased the number of shares of common stock by 1,454,435 at the par value $.01 per share or $14,544. Paid-in capital was increased by $10,166,000 which was the difference between the market value price per share and the par value per share. Minority interest in KHC was eliminated as a result of the merger and retained earnings of Kaye Group Inc. was reduced to account for the difference between the market value of the shares issued and the book value of the minority interest in KHC.
The Company is subject to a substantial degree of regulation, which is designed to protect the interests of insurance policyholders. As a Rhode Island property and casualty insurance company, OLRI is subject to the primary regulatory oversight of the Rhode Island Department of Business Regulation through its Insurance Division. On March 28, 1996, the Division advised the Company that it is reviewing the treatment of certain reinsurance arrangements between OLRI and OLB in OLRI's 1995 Statutory Annual Statement filed with the Division. The Company believes that it treated this arrangement appropriately in its annual statement and it does not believe that there will be any material modifications to OLRI's surplus at December 31, 1995.
The Company has minimized its investment risk by investing in 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 and by maintaining an average duration of approximately four years, taking into account the effects of certain early call features. The Company currently intends to continue these investment strategies.
The amortized cost and estimated market value of fixed maturities at December 31, 1997, by contractual maturity date, are listed below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
Investments Available for Sale --------------------------------- Amortized Aggregate Fair Cost Value --------- -------------- Due in one year or less $3,602 $3,585 Due after one year through five years 15,341 15,594 Due after five years through ten years 19,255 19,520 Due after ten years 2,573 2,614 ------- -------
The Company maintains a substantial level of cash and liquid short term investments which are used to meet anticipated payment obligations. At December 31, 1997 and 1996, the Company had cash and short term investments of $34,737,000 and $29,295,000, respectively of which $22,322,000 and $23,879,000 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, certain amounts are pledged or deposited into trust funds to collateralize the Company's obligations under reinsurance agreements.
Average cash and cash equivalents and invested assets (1) $ 76,534 $ 68,692 $ 64,261
(1) Based upon the average of the beginning and end of the period amortized cost for fixed maturities and cost for equity securities.
The Company has a $7,031,250 revolving line of credit with a bank, collateralized by the stock of the Insurance Companies. The proceeds are available for general operating needs and acquisitions. As of December 31, 1997, there was no unused portion of the revolving line of credit.
Under the terms of the revolving line of credit, principal payments commenced during 1997 with $68,750 paid during the year and $468,750 due per quarter, through June 30, 2001.
On December 19, 1997, the Board of Directors declared a quarterly dividend of $.025 per share, payable January 20, 1998 to stockholders of record on December 31, 1997. The Company is largely dependent upon dividends from its subsidiary to pay dividends to the stockholders. The Company's insurance subsidiaries are subject to regulations that restrict their ability to pay dividends.
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, 1997, $2,366,000 was available for distribution.
In 1996, the Company adopted the disclosure provision of stock-based compensation in accordance with SFAS No. 123. The adoption of this statement does not have an impact on the Company's financial position or results of operations.
Also in February 1997, the Securities and Exchange Commission ("SEC") issued Financial Reporting Release No. 48, Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments ("FRR No. 48").
Additionally, the amendments expand existing disclosure requirements to include quantitative and qualitative discussions with respect to market risk inherent in market risk sensitive instruments such as equity and fixed maturity securities, as well as derivative instruments which investors can use to better understand and evaluate market risk exposures of registrants. These disclosures will be effective in 1998.
The Company will utilize both internal and external resources, reprogram, or replace, and test the software for year 2000 modifications. The Company has purchased and will be implementing new operational and accounting software which is year 2000 compliant. Certain other software that was developed internally is being reprogrammed. Other software purchased such as word-processing and spreadsheet programs are guaranteed to be year 2000 compliant by the manufacturers. We will test this software accordingly.
The Company will initiate formal communications with all of its significant insurance markets to determine the extent to which the Company is vulnerable to those third parties' year 2000 concerns. It should be noted, however, that there can be no guarantee that the systems of other companies will be timely converted, or that their conversion will be comparable with information included in the Company's systems, without having a material adverse effect on the Company.