The Company owns approximately 7,400 square feet of space in an office condominium building in Warwick, Rhode Island which is utilized by employees. The Company also leases space in two buildings located in New York, New York. One lease relates to approximately 67,000 square feet of office space. The second lease relates to approximately 31,000 square feet of office space. The Company leases a total of approximately 14,000 square feet in Beverly Hills,
The following table should be read in conjunction with, and is supplemented in its entirety by, the consolidated financial statements and the notes thereto. Financial data has been restated to take into effect the Transactions effective October 2, 1995. The financial data for the years 1993 through 1996 has been derived from the audited consolidated financial statements of the Company.
(1) Pro forma net income-Prior to the Transaction and Restructuring, certain entities were partnerships or S corporations under the Internal Revenue Code and therefore not liable for Federal income taxes. Also, Old Lyme Bermuda, as a Bermuda domiciled company, was not liable for income taxes. The charge in lieu of income taxes information 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. See Notes 3(j) and 8 to the consolidated financial statements of the Company.
(5) Dividends paid and declared since the date of the IPO of August 17, 1993.
(7) As a result of a substantial amount of new business written with effective dates in the latter half of 1993, net underwriting gain for 1993 was significantly affected by the statutory accounting practices of charging commissions to income immediately while premiums are earned over the term of the underlying policies. See Note 15 to the consolidated financial statements of the Company.
Kaye Group Inc. (the "Company") owns 82.4% of the issued and outstanding stock of Kaye Holding Corporation ("Holding"), (collectively "Corporate") , which is the primary asset of the Company. The Company's business is conducted principally through the wholly owned subsidiaries of Holding.
Following the Transactions, the Company operates in two business segments - "Insurance Brokerage", which includes the Retail Brokerage Business and the Program Brokerage Business (the "Insurance Brokerage Companies") and "Property and Casualty Insurance" or "Insurance" which comprises the Insurance Companies and Claims Administration (the "Property and Casualty Companies").
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.
Insurance coverage under the Programs is provided through a variety of underwriting structures, including reinsurance arrangements where direct coverage may not be possible. RLI Insurance Company (RLI), an unaffiliated company, has had reinsurance agreements with the Property and Casualty Companies since 1982 to provide direct coverage in certain of such circumstances. RLI writes various policies from the first layer of risk under the Programs and cedes to the Property and Casualty Companies a certain percentage of premiums to purchase a stop loss policy in the event RLI's losses exceed a fixed percentage of net premiums written. In the event losses are less than the fixed percentage, the Insurance Brokerage Business will receive a contingent commission equal to such amount (net of fees paid to RLI). Only the premiums ceded to the Property and Casualty Companies for the stop loss policy are included in the net premiums written and earned for the Insurance business.
A comprehensive analysis of the results of operations of the Company would not be meaningful without consideration of the charge in lieu of taxes. The provision for income taxes, as reported in the historical financial statements, does not provide for any income taxes on certain subsidiaries of the Company prior to the combination on October 2, 1995. Prior to the Transactions on October 2, 1995, the Brokerage Partnerships and Brokerage Corporations were either limited partnerships or S Corporations under the Internal Revenue Code, and therefore, the individual partners or shareholders, rather than the companies were liable for income taxes. Accordingly, the Company has presented a calculation of Pro Forma Income for each of the three years in the period ended December 31, 1996 which reflects a charge in lieu of income taxes, as if all subsidiaries were included in the Company's consolidated Federal income tax return for all years presented. Management believes this presentation will better present current and future comparisons of the effective tax rate and Federal and State income tax expense of the Company.
Total revenues in 1996 were $31,595,000 compared with $34,970,000 in 1995, or a reduction of $3,375,000 (9.7%). The largest component of revenues, net commission and fees, was down $3,373,000 (9.6%) 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.
Salaries and related taxes and fringes decreased by $2,556,000 (12.1%) to $18,569,000 in 1996 compared to $21,125,000 in 1995. The decrease is a result of a reductions in work force, lower compensation earned under incentive contracts, termination of the Company's defined benefit pension plan, refunds received on group medical insurance, utilization of forfeitures in the 401K plan and the one time incentive payment in 1995 relating to the sale of Kaye Administrators.
Interest income increased in 1995 by $211,000 primarily as a result of increased funds available for investment and slightly higher interest rates.
Other operating expenses (including depreciation) increased by $151,000 to $13,951,000 in 1995 compared with $13,800,000 in 1994. Reduced cost of errors and omission insurance created a $265,000 favorable variance from 1994, which combined with an increased recovery of expenses from the insurance company subsidiaries helped offset an increase in professional fees. Professional fees, consisting of accounting, legal and consulting costs, were up $765,000 over 1994 due primarily to legal expenses related to defending various employee actions and increased use of consultants.
Loss before minority interest and income taxes decreased by $1,243,000 to $706,000 from $1,949,000 in 1994. The benefit of significant decreases in salaries and related taxes and fringes, resulting from restructuring efforts, was partially offset by decreased revenues, as discussed above.
Net premiums earned for 1995 decreased by $831,000 (4.7%) to $16,845,000 from $17,676,000 in 1994. This decrease was attributable to increased competition which was the major reason for lost business in the Restaurant and the Real Estate Programs. To be consistent with our overall underwriting philosophy, we chose not to write business if we believed that we could not make a solid underwriting profit on each account.
Income before minority interest and income taxes decreased in 1995 by $467,000 to $8,682,000 in 1995 from $9,149,000 in 1994. The decrease in operations was the result of the increase in the combined ratio of 5.2 percentage points in 1995, offset partially by the increase in investment income, as discussed above.
Total assets decreased by $17,898,000 (10.3%) to $156,102,000 at December 31, 1996 from $174,000,000 at December 31, 1995. Total liabilities decreased by $20,450,000 (14.0%) to $125,780,000 at December 31, 1996 from $146,230,000 at December 31, 1995. The early collections of certain premiums and other receivables and the corresponding payment of premiums payable during December 1996 compared to December 1995 accounted for the major portion of this decrease.
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, Old Lyme Rhode Island 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 Old Lyme Rhode Island and Old Lyme Bermuda in Old Lyme Rhode Island'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 Old Lyme Rhode Island'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 five years, taking into account the effects of certain early call features. The Company intends to continue these investment strategies.
(a) Ratings are assigned primarily by Standard & Poors Corporation with the remaining ratings assigned by Moody's Investors Services, Inc. and converted to the equivalent Standard & Poors ratings.
Investment results of the Company for each of the three years in the period ended December 31, 1996 are shown in the following table:
At or for the years ended December 31, --------------------------------- 1996 1995 1994 ---- ---- ----
Average cash and cash equivalents and invested assets (1) $68,692 $ 64,261 $ 69,351
Net realized investment gains (losses) $ 72 $ (47) $ (50)
Under the terms of the revolving line of credit, there were no principal payments due during 1996. Principal payments commence during 1997 with $225,000 due September 30 and $625,000 per quarter, thereafter.
Management believes the Company's operating cash flow, cash equivalents and short term investments will provide sufficient sources of liquidity and capital to meet the Company's anticipated needs in the next twelve months and the foreseeable future. The Company has no material capital commitments.
Under Rhode Island Insurance law, Old Lyme Rhode Island 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, Old Lyme Rhode Island is restricted (on the basis of the lesser of 10% of Old Lyme Rhode Island's statutory surplus at the end of the preceding twelve-month period or 100% of Old Lyme Rhode Island'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, 1996, $2,403,000 was available for distribution.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share". This statement specifies the computation, presentation, and disclosure requirement for earnings per share.