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, Westport, Connecticut, Woodbury, New York and Floral Park, New York. The Company's total leased space at these locations is approximately 116,000 square feet and is suitable for its current needs.
(1) Subsequent to 1995, commission expense paid to internal producers has been reclassified to salary expense to more accurately reflect salaries and benefits. Previously this expense was netted against operating revenues and accordingly operating revenues for 1995 and 1994 are not comparable. Operating revenues include transactions between segments. These transactions have not been eliminated.
(2) Prior to the Transaction certain entities were partnerships or S Corporations under the Internal Revenue Code and therefore not liable for Federal income taxes. A charge in lieu of income taxes is presented as if the income of these entities were taxed to those entities rather than to partners or stockholders not otherwise included in the Company's consolidated group.
(4) Based upon 8,458,295 shares outstanding at December 31, 1999 and 8,474,435 shares outstanding at December 31, 1998 and 1997 and 7,020,000 outstanding at December 31, 1996, and 1995.
(6) Certain information prior to 1998 has been reclassified to conform with the 1998 and forward year presentation.
The Insurance business underwrites 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 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.
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.
The Company has foreign operations in Bermuda. For further discussion see Note 20 to the consolidated financial statements of the Company.
Net Income for the year ended December 31, 1999 increased by $222,000 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.
Interest expense increased by $726,000 as a result of the SRW acquisition, which includes a related note payable to the Property and Casualty Companies.
The acquisition costs and general and administrative expenses ratio was 42% and 39% for 1999 and 1998, respectively. Exclusive of a bad debt recovered in 1998, the ratio would have been 42% and 40% for 1999 and 1998, respectively. Exclusive of the intercompany management fee increase in 1999 discussed previously, the expense ratio would have been 40% for 1999 and 1998.
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.
Net premiums earned for 1998 increased by $1,842,000 (8%) to $24,689,000 from $22,847,000 in 1997. The Property & Casualty Companies' efforts, combined with the efforts of the Brokerage segment's Program Brokerage Corporation, to develop new alternative distribution programs and broaden the distribution network of the existing programs and coverage types, has contributed to the growth of premium volume.
Net investment income increased by $228,000 (8%) to $2,920,000 from $2,692,000 in 1997. This increase was due to an increase in investments generated by cash flow from operations.
Acquisition costs and general and administrative expenses increased in 1998 by $337,000 (4%) to $9,707,000 from $9,370,000 in 1997. The expense ratio (acquisition costs and general and administrative expenses) for 1998 and 1997 was 39% and 41%, respectively. Exclusive of a bad debt recovered, the expense ratio would have been 40% and 41%, respectively. This decrease was due to lower general and administrative expenses in 1998.
Management believes that the Company's operating cash flow, along with the cash equivalents and short term investments will provide sufficient sources of liquidity and capital to meet the Company's anticipated needs during the next twelve months and the foreseeable future. The Company has no capital commitments that are material individually or in the aggregate.
Total assets decreased by $11,371,000 (7%) to $149,212,000 at December 31, 1999 from $160,583,000 at December 31, 1998. Total liabilities decreased by $16,853,000 (14%) to $101,961,000 at December 31, 1999 from $118,814,000 at December 31, 1998. These reductions were primarily due to reductions in brokerage segment fiduciary assets and liabilities (insurance premiums).
Stockholders' equity increased by $5,482,000 (13%) to $47,251,000 at December 31, 1999, from $41,769,000 at December 31, 1998. The increase in equity resulted from net income of $7,504,000 and $35,000 for shares issued related to the exercise of stock options, offset by an increase in net unrealized depreciation of investments of $769,000, dividends paid of $847,000, $229,000 for net purchases of treasury stock, and $212,000 related to shares issued for the Stock Performance Plan, net of amortization.
As presented in the Consolidated Statements of Cash Flows, the Company's cash and cash equivalents decreased by $7,705,000 for the year ended December 31, 1999. Operating activities provided cash of $8,359,000. Investing activities used cash of $12,309,000 primarily for the purchase of investments and acquisition payments. Financing activities used cash of $3,755,000 for payments of dividends, loan repayments and treasury stock purchases.
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 primarily subject to the regulatory oversight of the Rhode Island Department of Business Regulation through its Insurance Division.
The Company's primary source of cash is derived from insurance premiums (fiduciary assets), 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 (fiduciary liabilities), commissions to brokers who produce the business, losses and loss expenses and operating expenses, and purchases of investments, acquisitions and fixed assets.
Market Value as Percentage of Amortized Reflected on Total at Market Rating (a) Cost Balance Sheet Value ---------- ---- ------------- ----- AAA(b) $28,977 $28,213 68.3% AA+ 609 598 1.4% AA 4,944 4,911 11.9% AA- 2,916 2,837 6.9% A+ 2,283 2,230 5.4% A 2,544 2,515 6.1% ------- ------- ----- $42,273 $41,304 100.0% ======= ======= =====
The amortized cost and estimated market value of fixed maturities at December 31, 1999, 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 $3,231 $3,218 Due after one year through five years 19,687 19,414 Due after five years through ten years 15,171 14,654 Due after ten years 4,184 4,018 ------- -------
Investment results of the Company for each of the three years in the period ended December 31, 1999 are shown in the following table (in thousands):
Net realized investment gain (loss) ($ 16) $ 85 $ 21
As part of its ongoing business, the Company is exposed to certain market risks of potential losses from adverse changes in market rates and prices. The Company's primary market risk exposure is interest rate risk in regard to fixed rate domestic instruments, equity securities and outstanding debt. The Company is exposed to the changes in the prices of equity securities owned by the Company. The equity price risk related to the Company's current investments in equity securities are not material. The Company has no derivative instruments. The Company's financial instruments consist of the investment portfolio of OLRI. These instruments are comprised of Corporate and Municipal Bonds, equity securities, and U.S. Treasury Securities that are classified as available for sale.
The following table summarizes information about the Company's financial instruments that are sensitive to changes in interest rate as of December 31, 1999. The table presents principal and interest cash flow and related weighted average interest rates by expected maturity dates for assets and liabilities. The Company has presumed the call date as the expected maturity date for those asset instruments with call features. Weighted average rates are calculated using the sum of expected investment income or interest expense divided by the sum of the amortized cost of assets or the sum of the average debt outstanding at each respective period. For variable rate debt, expected interest cash flow is calculated using the December 31, 1999 weighted average interest rate without any adjustments for projected fluctuations in prime rate.
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, 1999. At December 31, 1999, $414,000 was available for distribution from OLB and its subsidiary, Park Brokerage Ltd.
In late 1998, the AICPA issued SOP 98-7, Deposit Accounting: Accounting for Insurance and Reinsurance Contracts that Do Not Transfer Insurance Risk. This SOP effective for fiscal years beginning after June 15, 1999, provides guidance to both the insured and insurer on how to apply the deposit method of accounting when it is required for insurance and reinsurance contracts that do not transfer insurance risk. This SOP did not materially impact the Company's consolidated financial statements.
A comprehensive review was performed by the Company of the insurance policies written by its Insurance Companies and their underwriting guidelines to determine year 2000 exposure. The Insurance Companies primarily issued policies covering all or part of an insured's self-insured retention, with limits generally up to $25,000 that follow the form of the policies for coverage in excess of the Insurance Companies' policies. The Insurance Companies did not issue exclusions on these policies. The Insurance Companies also issued a number of policies with greater limits of coverage, and included a year 2000 exclusion on such policies. The Company is aware that year 2000 liabilities may be deemed not to be fortuitous in nature and, therefore, not covered under the policies underwritten by the Insurance Companies. Moreover, based upon the classes of insurance primarily underwritten by the Insurance Companies, the Company believes that its coverage exposure with respect to year 2000 losses will not be material. However, changes in social and legal trends may establish coverage unintended for Year 2000 exposures by re-interpreting insurance contracts and exclusions.