(2) Commission income, together with the related accounts receivable from clients and premiums payable to insurance carriers, is recorded principally as of the billing date. Beginning in 1994, commission income related to installment billing arrangements is recorded in total at the date of the initial billing. This change was made because in the opinion of management, it results in a better matching of revenues with the related costs. Prior to this change, commissions were recorded as each installment was billed. As a result of this change, additional commissions of $1,471,000 were recorded in 1994 that would have been recorded under the old policy in 1995. The Company was unable to determine the effects of this change in years prior to 1994 and, therefore, pro forma disclosure of this change in prior years cannot be made. Accordingly, the effect of the change in accounting on prior years of $ 1,652,000 was treated as a cumulative effect adjustment on the 1994 consolidated statement of income.
(5) Based upon statutory accounting practices and derived from the statutory financial statements of the Insurance Companies, which excludes the effects of CAC.
(6) Subsequent to 1995, commission expense paid to internal producers have 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.
Year ended December 31, 1998 compared with year ended December 31, 1997
Income before income taxes increased by $938,000 to $1,705,000 in 1998 from $767,000 in 1997. The improved operating result was mainly due to increased revenues offset by the increase in salaries and benefits, as discussed below.
Total revenues in 1998 were $37,202,000 compared with $33,782,000 in 1997, an increase of $3,420,000 (10%). Gross commission and fees grew by $4,222,000 (11%) mainly as a result of new business exceeding lost business, acquisitions and an increase in contingency commissions due to volume and profitability of 1997 premiums placed with certain insurance carriers. The commission expense rate incurred to produce new and renewal business increased from 17% to 18%. Investment income increased in 1998 by $281,000 (18%) primarily due to collection efficiencies resulting in a longer holding period for fiduciary investments.
Amortization of intangibles increased by $172,000 (34%) to $679,000 from $507,000 in 1997 as a result of increased amortization of acquisition related intangibles due to 1997 and 1998 acquisitions.
Interest expense decreased by $351,000 primarily as a result of the early payment of the $6,000,000 note payable to KILP in August, 1997.
Other income for 1998 decreased by $99,000 to $146,000 from $245,000 in 1997. This decrease is mainly due to discontinued warranty contracts in 1998.
Year ended December 31, 1997 compared with year ended December 31, 1996
Net income for the year ended December 31, 1997 increased by $1,286,000 to $4,357,000 or basic earnings per share of $0.62 compared to $3,071,000 or $0.44 for the same period last year as explained below.
Total revenues in 1997 were $33,782,000 compared with $32,593,000 in 1996, an increase of $1,189,000 (4%). Gross commission and fews grew by $1,453,000 (4%) mainly as a result of new business exceeding lost business and acquisitions partially offset by a decrease in wholesale contingency commissions. The Commission expense rate incurred to produce new and renewal business increased form 15% to 17%. Investment income increased in 1997 by $539,000 (53%) primarily due to collection efficiencies resulting in a longer holding period for fiduciary investments.
Salaries and benefits increased by $142,000 (1%) to $18,905,000 in 1997 compared to $18,763,000 in 1996. This increase was the result of the acquisition of Western Insurance Associates, Inc. ("WIA") 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.
Other operating expenses decreased by $783,000 (6%) to $13,203,000 in 1997 compared with $13,986,000 in 1996. This decrease was mainly due to reduced account servicing expenses, expiration of certain management service contracts and reduced insurance costs.
The effective tax rate for 1998, 1997, and 1996 was 31%, 30%, and 28%, respectively. The difference between the statutory tax rate and the effective tax rate in 1998, 1997, and 1996 was primarily related to tax exempt interest. The rate increase for 1998 and 1997 was primarily due to additional state and local taxes.
Stockholders' equity increased by $6,601,000 (19%) to $41,769,000 at December 31, 1998, from $35,168,000 at December 31, 1997. The increase in equity resulted from net income of $7,282,000 and an increase in net unrealized appreciation of investments of $168,000, partially offset by dividends paid of $849,000.
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 paid off its revolving credit line of $6,094,000 early, and replaced it with a term loan of $5,000,000, at an interest rate reduction of approximately 50 basis points, thereby reducing debt by approximately $1,100,000. As of December 31, 1998, $4,456,000 is outstanding on the term loan. In addition, the Company has available a $4,500,000 revolving line of credit with a bank. Both lines are collateralized by the stock of the Property and Casualty Companies. The proceeds are available for general operating needs and acquisitions. As of December 31, 1998, no amount is outstanding on the revolving line of credit.
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, acquisitions and fixed assets.
Market Value as Percentage of Amortized Reflected on Total at Market Rating (a) Cost Balance Sheet Value - ---------- --------- --------------- ---------------
AAA(b) $22,213 $22,574 51.8% AA+ 1,116 1,124 2.6% AA 13,177 13,393 30.7% AA- 3,860 3,883 8.9% A+ 351 352 .8% A 2,263 2,271 5.2% ------- ------- ----- $42,980 $43,597 100.0% ======= ======= =====
The Company maintains a substantial level of cash and liquid short term investments which are used to meet anticipated payment obligations. At December 31, 1998 and 1997, the Company had cash and short term investments of $48,393,000 and $34,737,000, respectively, of which $33,218,000 and $22,322,000 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) $85,191 $76,534 $68,692
The Company has various debt instruments outstanding at December 31, 1998. These debt instruments, which are due through 2002, match the Company's cash inflow from operations.
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, 1998, $2,786,000 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, 1998. At December 31, 1998, $419,000 was available for distribution from OLB and its subsidiary, Park Brokerage Ltd.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This statement establishes standards for the reporting and display of comprehensive income and its components in the consolidated financial statements. The purpose of reporting comprehensive income is to report the change in equity of a business enterprise for the period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. These items include currency translation adjustments and unrealized appreciation of investments, which are currently reported as separate components of equity in the balance sheet. In accordance with the statement, the Consolidated Statements of Comprehensive Income are presented as a separate statement at December 31, 1998, 1997, and 1996.
statement is effective for year end 1998 and has not changed the Company's current segmentation of its business. The financial position and operating results of the Company were not affected by this statement (see Note 23 to the consolidated financial statements).
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement requires all derivatives to be recognized as either assets or liabilities in the statement of financial position and to be measured at fair value. This statement is effective for all fiscal quarters and fiscal years beginning after June 15, 1999. Management believes that the statement will not have a material impact on the financial position of the Company.
In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which requires capitalization of external and certain internal costs incurred to obtain or develop internal-use computer software during the application development stage. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. This statement is not expected to materially impact the Company's consolidated financial statements.
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 is not expected to materially impact the Company's consolidated financial statements.
In December 1997, the AICPA issued SOP 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments. SOP 97-3 provides guidance for assessments related to insurance activities and requirements for disclosure of certain information. SOP 97-3 is effective for financial statements issued for periods beginning after December 31, 1998. Restatement of previously issued financial statements is not required. SOP 97-3 is not expected to have a material impact on the Company's consolidated financial statements.
Many computers, software programs and microprocessors embedded in certain equipment (collectively, "systems") were designed to accommodate only two-digit date fields to represent a given year (e.g., "98" represents 1998). It is possible that such systems will not be able to accurately process data containing information relating to dates before, during or after the year 2000. It is possible that such systems could fail entirely, although in many instances the consequences of a system not being "year 2000 complaint" are unknown. In response to this issue, the Company has evaluated its applications and operating software and is in the process of evaluating its hardware and software products, end user computing activities, third-party data exchanges and business relationships, and has established a project team responsible for overseeing progress on the Company's compliance program and periodically reporting to management.
The total cost (both current and future) to modify these existing production systems, which includes both internal and external costs of programming, coding and testing is estimated to be $135,000 and has been reflected in the financial statements.
The Company believes that if systems were not complaint for year 2000-related problems there could be a material adverse impact on the Company's financial statements. The Company believes that it is taking the necessary measures to address issues that may arise relating to year 2000-related problems and that its systems should be compliant. The Company realizes, however, that non-compliance by these parties could impact its business. The Company's plan addresses potential year 2000 issues related to the processing of transactions with third parties. The possibility exists that some of the Company's external business contacts may not be compliant. The Company began
Although it has considered various scenarios concerning the possible effects of the year 2000 issue, the Company does not have formal contingency plans relating to either its internal processing environment or its external business contacts. As it completes the upgrading and testing of non-compliant systems and continues to monitor the status of its important external contacts into mid 1999, the Company will develop contingency plans if deemed necessary for critical systems and relationships.
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 issue 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 have not issued exclusions on these policies. The Insurance Companies have also issued a number of policies with greater limits of coverage, and have 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.
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.