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, Hollywood, Florida, and Floral Park, New York. The Company's total leased space at these locations is approximately 114,000 square feet and is suitable for its current needs.
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 1994 through 1998 has been derived from the audited consolidated financial statements of the Company.
(1) 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.
(3) Excludes that portion of long-term debt maturing in less than one year.
(4) Based upon 8,474,435 shares outstanding at December 31, 1998 and 1997 and 7,020,000 outstanding at December 31, 1996, 1995 and 1994.
(7) Certain prior year information has been reclassified to conform with the 1998 presentation.
Kaye Group Inc. (the "Company"), a Delaware corporation, 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"), comprised of 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, 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.
Corporate Operations include those activities that benefit the Company in its entirety and cannot be specifically identified to either the Insurance Brokerage Companies or the Property and Casualty Companies. Such activities include debt servicing and public company expenses, including investor relations costs.
Salaries and benefits increased by $2,418,000 (13%) to $21,323,000 in 1998 compared to $18,905,000 in 1997. This increase was due to acquisitions, salary increments, increased commission expense to employees and annual incentive based compensation.
Other operating expenses increased by $243,000 (2%) to $13,446,000 in 1998 compared with $13,203,000 in 1997. This increase was mainly the result of a reserve for E & O deductibles partially offset by reduced rent costs.
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 Risk Transfer programs and broaden the distribution network of the existing programs and coverage types, has contributed to the growth of premium volume.
Net realized gain on investment transactions for 1998 increased by $64,000 to $85,000 compared to $21,000 in 1997. The realization of investment gains and losses is determined by market conditions and management's decision regarding the holding period of the portfolio.
Loss and loss expenses decreased in 1998 by $220,000 (3%) to $8,496,000 from $8,716,000 in 1997. The loss ratio (loss incurred expressed as a percentage of premiums earned) for 1998 and 1997 was 34% and 38%, respectively. This decrease was due to low general liability losses and an improvement in loss and loss expense under the property programs resulting from mild weather.
Amortization of intangibles increased by $68,000 (15%) to $507,000 from $439,000 as a result of increased amortization of acquisition related intangibles due to the acquisition of WIA.
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 result 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 premiums earned for 1997 increased by $3,520,000 (18%) to $22,847,000 from $19,327,000 in 1996. The Company's efforts to broaden the distribution network of the Programs and coverage types has contributed to growth in the Residential Real Estate and Restaurant Programs and the formation of several new programs.
Net investment income in 1997 increased by $231,000 (9%) to $2,692,000 from $2,461,000 in 1996 as a result of an increase in investments generated from cash flow from operations.
Losses and loss expenses increased in 1997 by $1,680,000 (24%) to $8,716,000 from $7,036,000 in 1996. The loss ratio (loss incurred expressed as a percentage of premiums earned) for 1997 and 1996 was 38% and 36%, respectively. This increase was the result of growth in general liability coverage and reserve strengthening. The increase in absolute dollars was generally the result of increased net premiums earned.
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 as a percentage of premiums earned) 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.
Total assets increased by $26,041,000 (18%) to $167,066,000 at December 31, 1998 from $141,025,000 at December 31, 1997 due primarily to general business growth resulting in fiduciary cash and cash equivalents and premiums receivable from clients and other insurance agents and brokers. Total liabilities increased by $19,440,000 (18%) to $125,297,000 at December 31, 1998 from $105,857,000 at December 31, 1997 primarily due to general business growth resulting in increased premiums payable to insurance markets.
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 as of December 31, 1997 and increased stockholders' equity of the Company by the same amount. Prior to its dissolution in May 1998, KILP was the Company's 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
The Company's cash and cash equivalents increased by $14,136,000 for the year ended December 31, 1998. Operating activities provided cash of $23,188,000 primarily as a result of premiums received from assureds not yet paid to insurance markets. Investing activities used cash of $4,443,000 primarily for fixed asset purchases (primarily software) and acquisition payments. Financing activities used cash of $4,609,000 for payments of dividends and loan restructuring, including a reduction of approximately $1,100,000 of corporate debt.
The amortized cost and estimated market value of fixed maturities at December 31, 1998, 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 ----------------------------------- Aggregate Fair Amortized Cost Value -------------- --------------
Investment results of the Company for each of the three years in the period ended December 31, 1998 are shown in the following table (in thousands):
At or for the years ended December 31, ---------------------------------- 1998 1997 1996 ---- ---- ----
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, 1998, the Insurance Companies, with a combined statutory surplus of $29,286,000, had a ratio of combined annual statutory net premiums written to their combined statutory surplus of approximately .84 to 1.
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 and outstanding debt. The Company has minimal investments in equity securities which have no material market risk exposure. 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 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, 1998. 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, 1998 weighted average interest rate without any adjustments for projected fluctuations in prime rate.
On December 21, 1998 the Board of Directors declared a quarterly dividend of $.025 per share, payable January 20, 1999 to stockholders of record on December 31, 1998. The Company is largely dependent upon dividends from its insurance subsidiaries to pay dividends to the stockholders. The Company's insurance subsidiaries are subject to regulations that restrict their ability to pay dividends.
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"). FRR No. 48 amends rules and forms for registrants and requires clarification and expansion of existing disclosures for derivative financial instruments, other financial instruments and derivative commodity instruments, as defined therein. The amendments require enhanced disclosure with respect to these derivative instruments. As of December 31, 1998, the Company has no derivative financial instruments. 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 were effective in 1998 for the Company and are appropriately disclosed.
Also in June 1997, the FASB issues SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. This statement requires that companies report certain information about their operating segments in the financial statements including information about the products and services from which revenues are derived, the geographic areas of operations, and information about major customers. Operating segments are determined by the way management decides how to allocate resources and how it assesses performance. Descriptive information about the method used to identify the reportable operating segments must also be disclosed. The statement also requires a reconciliation of revenues, net income, and assets and other amounts disclosed for the segments to the corresponding amounts in the consolidated financial statements. The
As of December 31, 1998 the Company has completed approximately 75% of its efforts to bring its own applications software and hardware in compliance, with the objective of having all critical production systems year 2000 compliant by the middle of 1999. Testing of critical applications is being accomplished through the use of a special system testing environment that simulates system operations in the year 2000. The Company also purchased and implemented new operational and accounting software in 1998. In addition to being year 2000 compliant, these new systems are intended to add increased functionality to the Company. The Company has completed its assessment of its servers and client server operating software. The results of this assessment were identification of hardware and software issues requiring remediation in order to assure year 2000 compliance.
In addition to addressing hardware/software information technology ("IT"), the Company has also been assessing year 2000 issues with respect to non-IT systems such as telephones and various building services which may rely on embedded microprocessors. Although failure of non-IT systems such as telephone service could disrupt the Company's business, the Company's communications with the relevant vendors have not identified any significant year 2000 problems.
contacting its external business contacts and continues to do so to determine their status of compliance and to assess the impact of noncompliance to the Company. The Company is working closely with all critical business relationships to minimize its exposure to year 2000-related problems. It should be noted, however, that there can be no assurance that the systems of other companies will be year 2000 compliant, or that their conversion will be comparable with information included in the Company's systems without having a material adverse effect on the Company.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This SEC Form 10-K or any other written or oral statements made by or on behalf of the Company may include forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors (which are described in more detail elsewhere in documents filed by the Company with the Securities and Exchange Commission) include, but are not limited to, uncertainties relating to general economic conditions and cyclical industry conditions, uncertainties relating to government and regulatory policies, volatile and unpredictable developments (including storms and catastrophes), the legal environment, the uncertainties of the reserving process and the competitive environment in