California, and Southport, Connecticut. The Company's current office space leases are suitable for its current needs, and it has no other real property interests.
(2) See Note 4 to the Consolidated Financial Statements of the Company.
(6) Based upon statutory accounting practices and derived from the statutory financial statements of the Insurance Companies.
The revenues and expenses of the Property and Casualty Insurance segment will not be comparable to the amounts reported previously by Old Lyme. Historically, the commission income of the Program Brokerage Business was recorded as a reduction of acquisition costs in the consolidated statements of income of Old Lyme. As a result of the Transactions, management includes the commission income and the other revenues and operating costs of the Program Brokerage Business in the Insurance Brokerage segment for all periods presented.
Historically, the commission income was recognized at the time coverage was bound and invoiced. If coverage was invoiced in installments, the commission was recognized on each installment. Because revenue recognition should be tied to the performance of the service and not to the cash flow effects of billing arrangements, in 1994, the Insurance Brokerage Companies adopted a common industry practice of recognizing all commission on a policy at the time coverage is bound and invoiced, whether or not installment billing is used. This change resulted in a cumulative effect adjustment of $1,652,000 which represents installment invoicing recognized in 1994, which under the new policy would have been recorded in 1993 and prior years. The amount recognized under the new policy in 1994, relating to installment billings to be made in 1995 totaled approximately $1,471,000.
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
Corporate operations include those expenses not directly related to the Insurance Brokerage Companies or Insurance businesses. These expenses are associated with being a public company and interest expense on corporate debt.
The Company has foreign operations in Bermuda. For further discussion see Note 22 to the consolidated financial statements.
Other operating expenses (including depreciation) decreased by $330,000 (2.4%) 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.
Loss before minority interest and income taxes increased by $489,000 to $1,195,000 in 1996 from $706,000 in 1995. The benefit of decreased salaries and related taxes and fringes was offset by lower revenues as discussed above.
Net premiums earned for 1996 increased by $2,482,000 (14.7%) 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 (12.7%) 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.
Losses and loss expenses increased in 1996 by $2,186,000 to $7,036,000 from $4,850,000 in 1995. The loss ratio for 1996 was 36.4% compared to 28.8% in 1995. The increase in loss ratio is due to the change in the mix of business during 1996 from property and umbrella coverages to other general liability coverage, including exposure to lead paint, which experiences a higher loss ratio.
Acquisition costs and general and administrative expenses increased in 1996 by $1,290,000 to $8,218,000 from $6,928,000 in 1995. The expense ratio for 1996 and 1995 were 42.5% and 41.1%, respectively. The increase in expense ratio was mainly due to professional fees.
Net expenses before minority interest and income taxes decreased in 1996 by $1,022,000 to $645,000 from $1,667,000 in 1995. The decrease in expenses was the result of nonrecurring reorganization costs incurred in 1995.
The pro forma presentation for 1995 includes the effect of a tax benefit from the Retail Brokerage Business which was not combined into the Company until October 2, 1995, resulting in a pro forma effective tax rate of 28.5% and 31.6% for 1996 and 1995, respectively. The rate decrease in 1996 is primarily due to a one time charge for reorganization costs in 1995 of $863,000 most of which are not deductible for income tax purposes.
Year ended December 31, 1995 compared with year ended December 31, 1994
Total revenues in 1995 were $34,970,000 compared with $35,595,000 in 1994, or a reduction of $625,000 (1.8%). The largest component, commissions and fees, was down $836,000 (2.3%). The year 1995 was the first year the Company experienced more lost business than new business. This reduction in revenues was partially offset by increased contingency income from non-affiliated carriers which increased by $1,357,000 to $2,545,000, and a nonrecurring item of $605,000 related to the sale of expiration lists of Kaye Administrators.
Salaries and related taxes and fringes decreased by $2,019,000 (8.7%) to $21,125,000 in 1995 compared to $23,144,000 in 1994. The Company began to realize the full effect of staffing reductions that began in 1994. This decrease was a result of direct salary expense being reduced by $1,580,000 with a corresponding reduction in taxes and fringes. The benefit was partially reduced by an incentive of approximately $226,000 earned by a former executive related to the sale of the expiration lists of Kaye Administrators.
Net investment income increased by $305,000 (12.1%) to $2,819,000 in 1995 from $2,514,000 in 1994. An average short-term rate increase of approximately 0.7% on an average portfolio of about $40,000,000 each year accounted for the increase.
Losses and loss expenses decreased in 1995 by $770,000 to $4,850,000 from $5,620,000 in 1994. Losses for 1994 include $375,000 from weather related catastrophe losses. Exclusive of these losses, the loss ratio for 1995 and 1994 would have been 28.8% and 29.7%, respectively. The improved loss ratio is the result of growth in property and umbrella coverage, which has a lower loss ratio than other lines of business, combined with a decrease in business in general liability coverage, which traditionally experiences a higher loss ratio.
Acquisition costs and general and administrative expenses increased in 1995 by $1,105,000 to $6,928,000 from $5,823,000 in 1994. Acquisition costs increased as a result of a change in commission rate on certain reinsurance arrangements. The increase in general and
Net expenses before minority interest and income taxes increased in 1995 by $983,000 to $1,667,000 from $684,000 in 1994. The increase in expenses was the result of nonrecurring reorganizational costs related to the combination.
The pro forma presentation for 1995 and 1994 included the effect of a tax benefit from the Retail Brokerage Business and the effect of a change in accounting principles for 1995 and 1994, resulting in an effective tax rate of 31.6% and 28.6% for 1995 and 1994 respectively. The rate increase in 1995 is due to a one time charge for combination costs of $863,000 most of which are not deducible for income tax purposes.
Stockholders' equity increased by $2,102,000 (9.2%) to $24,984,000 at December 31, 1996 from $22,882,000 at December 31, 1995. The increase in equity resulted from net income of $3,071,000 partially offset by an increase in unrealized depreciation on investments (net of deferred income taxes) of $267,000 and cash dividends of $702,000. All amounts are net of the effects of the minority interest in Kaye Holding Corp.
The Company's cash and cash equivalents increased by $14,095,000 for the year ended December 31, 1996. Cash from operating activities increased by $16,797,000 primarily due to increased fiduciary funds on hand. Investing activities used cash of $434,000 mainly due to the leasing of new computers in the fourth quarter 1996. Financing activities used cash of $2,268,000 to meet requirements under reinsurance arrangements recorded as deposit contracts, and payment of dividends.
The Company has calculated risk-based capital and the result is that the statutory net worth of Old Lyme Rhode Island is adequate in light of the current requirements. See "Item 1 - - Business -- Regulation."
The Company's primary source of cash is derived from insurance premiums, insurance brokerage commissions and fees, proceeds from the sale of investments, and investment income. The Company's principal uses of cash are payments of insurance premiums, commissions to brokers who produce the business, losses and loss expenses and operating expenses, and purchases of investments and fixed assets.
The table below sets forth the composition of the Company's portfolio of fixed maturity investments by rating as of December 31, 1996:
The Company maintains a substantial level of cash and liquid short term investments which are used to meet anticipated payment obligations. At December 31, 1996 and 1995, the Company had cash and short term investments of $29,295,000 and $17,014,000 , respectively of which $23,879,000 and $7,528,000 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.
A subsidiary of the Company has a $8,750,000 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, 1996, $7,100,000 has been borrowed under the agreement.
The Company's insurance subsidiaries require capital to support premium writing. The guidelines set forth by the NAIC 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, 1996, the Insurance Companies, with a combined statutory surplus of $25,485,000, had a ratio of combined annual statutory net premiums written to their combined statutory surplus of approximately .81 to 1.
On December 20, 1996, the Board of Directors declared a quarterly dividend of $.025 per share, payable January 20, 1997 to stockholders of record on December 31, 1996. 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.
Old Lyme Bermuda 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, 1996. At December 31, 1996, $451,000 was available for distribution from Old Lyme Bermuda and its subsidiary, Park Brokerage Ltd.
In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". This statement establishes new financial accounting and reporting standards for stock-based employee compensation plans, including stock option and stock purchase plans. Compensation resulting from the award of stock-based compensation must be determined based on the fair value of consideration received or fair value of the equity instrument issued, whichever is more reliably measurable. Such compensation expense, net of income taxes, may be recognized in the Statement of Income over the service period of the employee (generally the vesting period). In lieu of recording such compensation expense, entities are permitted to disclose its pro-forma impact net of income taxes, on reported net income and earnings per share. Entities choosing such disclosure will continue to measure compensation expense from stock-based compensation
in the Statement of Income based on the intrinsic value method prescribed in Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees".
SFAS No. 128 is applicable to all entities with publicly held common stock or potential common stock. It also applies to an entity that has made a filing or is in the process of filing with a regulatory agency in preparation for the sale of securities in a public market. The statement does not apply to investment companies or to wholly owned subsidiaries that have not issued options or other potential common shares to employees or others. Management does not believe that the adoption of this standard will have a material impact on the Company's present computation of earnings per share.