The following table should be read in conjunction with, and is supplemented in its entirety by, the consolidated financial statements and the notes thereto. The financial data herein has been derived from the audited financial statements of the Company.
(3) Based upon 8,481,481 shares outstanding at December 31, 2000, 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.
Net Income for the year ended December 31, 2000 increased by $1,900,000 (25%) to $9,404,000 or basic earnings per share of $1.11 compared to $7,504,000 or $0.89 for the same period last year, as explained below.
Total revenues in 2000 were $43,405,000 compared with $38,753,000 in 1999, an increase of $4,652,000 (12%). Gross commissions and fees were higher by $6,493,000 (14%) primarily as a result of new business exceeding lost business, price increases on certain lines of business and adjustments on prior period renewals which are recorded when they occur. The commission expense rate (defined as commissions incurred to independent producers as a percentage of gross commissions and fees) to produce new and renewal business increased from 20% to 21% which resulted in a decrease in net commissions and fees of approximately $494,000. Investment income decreased by $35,000 (3%) primarily due to a non-recurring investment gain in 1999.
Compensation and benefits increased by $1,330,000 (6%) to $23,676,000 in 2000 compared to $22,346,000 in 1999. The increase was mainly the result of increased annual incentive based compensation and increased internal commission expense partially offset by compensation reductions due to lower headcount and an increase in inter-company management fees allocated to the Property and Casualty Companies.
Income before income taxes increased by $1,175,000 (13%) to $10,001,000 in 2000 from $8,826,000 in 1999. The increase was due to an increase in net premiums earned, investment income, and service fee income, offset by an increase in the loss ratio, as discussed below.
Net premiums earned increased by $3,706,000 (14%) to $30,486,000 in 2000 from $26,780,000 in 1999. The increase was due to the growth in the Brokerage segment's managed programs which are insured on a direct basis and via facultative reinsurance assumed.
Net investment income increased by $178,000 (6%) to $3,127,000 in 2000 from $2,949,000 in 1999. The increase was due to an increase in investments.
The acquisition costs and general and administrative expenses ratio decreased to 41% in 2000 from 42% in 1999. The decrease was due to a decrease in general and administrative expenses.
Net expenses before income taxes increased by $188,000 (45%) to $607,000 in 2000 from $419,000 in 1999 due to increased consulting fees.
The provision for income taxes for 2000 and 1999 was $4,225,000 and $3,225,000, respectively, resulting in an effective tax rate of 31% and 30% for 2000 and 1999, respectively. The difference between the statutory rate and the effective rate was primarily related to tax exempt interest income.
Total revenues in 1999 were $38,753,000 compared with $37,202,000 in 1998, an increase of $1,551,000 (4%). Gross commissions and fees grew by $3,325,000 (8%) as a result of new business and acquisitions exceeding lost business. The SRW acquisition generated $3,653,000 of gross revenues during 1999. Included in lost business were revenues that had been derived from a certain New York City - based entities' medical malpractice coverage. This portfolio of business represented the majority of the Retail Brokerage Operations revenues in this concentration of coverage placement. The commission expense rate (defined as commissions incurred to independent producers as a percentage of gross commissions and fees) to produce new and renewal business increased from 18% to 20% which resulted in a decrease in net commissions and fees of approximately $860,000. Investment income decreased by $472,000 (26%) primarily due to lower fiduciary investments as a result of certain lost business.
Salaries and benefits increased by $1,023,000 (5%) to $22,346,000 in 1999 compared to $21,323,000 in 1998. The increase was the result of acquisitions and salary increments offset partially by headcount reductions, reduced incentive compensation and an increase in inter-company management fees allocated to the Property and Casualty Companies discussed previously.
Net realized loss was $16,000 in 1999 compared to a realized gain of $85,000 in 1998. The realization of investment gains and losses is determined by market conditions and management's decision regarding the holding period of the portfolio.
The loss ratio (losses and loss expenses incurred expressed as a percentage of premiums earned) was 36% and 34% for 1999 and 1998, respectively. Exclusive of the inter-company management fee increase in 1999 discussed previously, the loss ratio would have been 35% and 34% for 1999 and 1998, respectively. This increase was due to the change in the mix of business toward assumed general liability, which traditionally experiences a higher loss frequency.
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 inter-company management fee increase in 1999 discussed previously, the expense ratio would have been 40% for 1999 and 1998.
Management believes that the Company's operating cash flow, along with its cash and cash equivalents 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.
Stockholders' equity increased by $8,791,000 (19%) to $56,042,000 at December 31, 2000, from $47,251,000 at December 31, 1999. The increase in equity resulted from net income of $9,404,000, an increase in net unrealized appreciation of investments of $21,000, $192,000 for net issuances of treasury stock, and $19,000 related to amortization of unearned compensation under the Company's Stock Performance Plan, offset by dividends paid of $845,000.
As presented in the Consolidated Statements of Cash Flows, the Company's cash and cash equivalents decreased by $3,725,000 for the year ended December 31, 2000. Operating activities provided cash of $11,423,000. Investing activities used cash of $12,840,000 for the net purchase of investments and fixed assets, and acquisition payments. Financing activities used cash of $2,308,000 for payments of dividends and loan repayments.
During 1998, 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 $1,094,000. As of December 31, 2000 and 1999, $2,071,000 and $3,311,000 was 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, 2000 and 1999, no amount was outstanding on the revolving line of credit.
Market Value as Percentage of Amortized Reflected on Total at Market Rating (a) Cost Balance Sheet Value --------- ---- ------------- ----- AAA(b) $29,874 $29,898 69.2% AA+ 1,006 1,003 2.3% AA 6,427 6,531 15.1% AA- 2,800 2,775 6.4% A+ 1,778 1,762 4.1% A 1,272 1,263 2.9% ------- ------- ------ $43,157 $43,232 100.0% ======= ======= ======
The amortized cost and estimated market value of fixed maturities at December 31, 2000, 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.
Due in one year or less $ 3,030 $3,035 Due after one year through five years 19,497 19,683 Due after five years through ten years 18,898 18,790 Due after ten years 1,732 1,724 ------- ------ Total $43,157 $43,232 ======= =======
Investment results of the Company for each of the three years in the period ended December 31, 2000 are shown in the following table (in thousands):
As of and for the years ended December 31, ------------------------------------- 2000 1999 1998 ---- ---- ---- Average cash and cash equivalents and invested assets (1) $90,608 $ 91,097 $85,191
Net realized investment gain (loss) $ 804 ($ 16) $ 85
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 is exposed to the changes in the prices of equity securities. A hypothetical decrease of 10% in the market prices of the equity securities held at December 31, 2000 and 1999 would have resulted in a decrease of $853,000 and $474,000, respectively, in the fair value of the equity securities portfolio. The Company has no derivative instruments. The Company's financial instruments consist 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, 2000. 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, 2000 weighted average interest rate without any adjustments for projected fluctuations in prime rate.
The continued payment and the amount of any cash dividends will depend upon, among other factors, the Company's operating results, overall financial condition, capital requirements and general business conditions.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133 (as amended), 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 December 31, 2000. The statement is not expected to have a material impact on the financial position of the Company.
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 Year 2000 related 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. As of December 31, 2000, the Company is not aware of any Year 2000 exposures.
Immediately prior to the transaction all outstanding stock options shall become vested, and in return for their cancellation, the holders of options will receive a cash payment; and in return for the cancellation of all outstanding and awarded Performance Stock Shares, the holders will receive a cash payment at a later date. On completion of the transaction, the Company will record an expense of approximately $2,400,000 related to the cancellation of the awarded shares of the Stock Performance Plan.