UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 0-21988
KAYE GROUP INC.
(Exact name of registrant as specified in charter)
Delaware 13-3719772
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
122 East 42nd Street, New York, N.Y. 10168
(Address of principal executive office)
(Zip code)
212-338-2100
(Registrant's telephone number, including area code)
- - --------------------------------------------------------------------------------
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 10, 1996 - 7,020,000
- - - Total number of pages filed including cover and under pages 18
- - - Exhibit index is located on page 16
<PAGE>
KAYE GROUP INC.
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
March 31, 1996 and December 31, 1995 3
Consolidated Statements of Income for the
three months ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows for the
three months ended March 31, 1996 and 1995 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II OTHER INFORMATION 15
2
<PAGE>
Item 1. - Financial Statements
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and December 31, 1995
(in thousands, except par value per share)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS:
INSURANCE BROKERAGE COMPANIES
Current Assets:
Cash and cash equivalents
( including short term investments and funds held in a fiduciary
capacity of $6,060 and $7,528) $7,427 $10,054
Premiums receivable (net of allowance of $214 and $202) 37,799 76,732
Prepaid expenses and other assets 2,420 2,089
Intercompany receivable 2,780 7,817
-------- --------
Total current assets 50,426 96,692
Fixed assets ( net of accumulated depreciation of $6,839 and $6,622) 2,432 2,565
Expiration lists ( net of accumulated amortization of $1,323 and $1,231) 2,369 2,462
Deferred income taxes 2,226 2,580
Other assets 672 842
-------- --------
Total assets-insurance brokerage companies 58,125 105,141
-------- --------
PROPERTY AND CASUALTY COMPANIES
Investments available-for-sale:
Fixed maturities, at market value (amortized cost 1996, $35,238
1995, $37,558) 35,011 38,002
Equity securities, at market value (cost:1996 and 1995, $1,421) 1,485 1,506
Short term investments, at cost, which approximates market value 3,321 3,150
-------- --------
Total investments 39,817 42,658
Cash and cash equivalents 2,597 1,712
Accrued interest and dividends 889 991
Premium balances receivable 1,513 3,506
Premium balances receivable -Insurance Brokerage Companies 3,099
Prepaid reinsurance premiums 308 383
Funds held under deposit contracts, at market value (amortized cost
1996, $5,615 ; 1995, $5,590) 5,608 5,622
Deferred acquisition costs 2,433 3,703
Deferred income taxes 929 358
Other assets 2,619 2,551
-------- --------
Total assets-property and casualty companies 56,713 64,583
-------- --------
CORPORATE
Cash and cash equivalents 546 2,098
Prepaid income taxes 1,261
Prepaid and other assets 434 432
Investments available-for-sale:
Fixed maturities, at market value (amortized cost 1996 and 1995, $ 8) 8 8
Equity securities, at market value (cost:1996 and 1995, $557) 436 436
Deferred income taxes 41 41
-------- --------
Total assets-corporate 1,465 4,276
-------- --------
Total assets $116,303 $174,000
======== ========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and December 31, 1995
(in thousands, except par value per share)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
INSURANCE BROKERAGE COMPANIES
Current liabilities:
Premiums payable $38,098 $77,636
Premiums payable-Property and Casualty Companies 3,099
Accounts payable and accrued liabilities 3,644 6,256
Notes payable 391 415
Deferred income taxes 715 1,178
Due to affiliates 141 138
-------- --------
Total current liabilities 42,989 88,722
Notes payable 469 579
Notes payable-KILP 6,000 6,000
-------- --------
Total liabilities-insurance brokerage companies 49,458 95,301
-------- --------
PROPERTY AND CASUALTY COMPANIES
Liabilities:
Unpaid losses and loss expenses 12,327 12,671
Unearned premium reserves 7,916 11,914
Deposit contracts 5,057 5,001
Accounts payable and accrued liabilities 3,721 2,918
Reinsurance payable 195 285
Intercompany payable 1,669 84
-------- --------
Total liabilities-property and casualty companies 30,885 32,873
-------- --------
CORPORATE
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities 348 3,222
Income taxes payable 228
Intercompany payable 1,111 7,734
-------- --------
Total current liabilities 1,687 10,956
Notes payable-long-term 7,100 7,100
-------- --------
Total liabilities-corporate 8,787 18,056
-------- --------
Total liabilities 89,130 146,230
-------- --------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN EQUITY OF
KAYE HOLDING CORPORATION 4,782 4,888
-------- --------
STOCKHOLDERS' EQUITY:
Stockholders' equity:
Preferred stock, $1.00 par value; 1,000 shares authorized; none issued
or outstanding
Common stock, $.01 par value; 20,000 shares authorized; 7,020 shares
issued and outstanding 70 70
Paid - in capital 7,776 7,776
Unrealized appreciation/(depreciation) of investments available-for-sale,
net of deferred income tax ( benefit), ( 1996, ( $82 ); 1995, $121) (160) 236
Retained earnings 14,705 14,800
-------- --------
Total stockholders' equity 22,391 22,882
-------- --------
Total liabilities and stockholders' equity $116,303 $174,000
======== ========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 1996 and 1995
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
INSURANCE BROKERAGE COMPANIES
Revenues:
Commissions and fees, net $ 6,389 $ 7,275
Commissions and fees, net -Property and Casualty Companies 13 10
Interest and dividends 274 367
------- -------
Total revenues 6,676 7,652
------- -------
Expenses:
Salaries and benefits 5,020 5,672
Other operating expenses 3,239 3,297
------- -------
Total operating expenses 8,259 8,969
------- -------
Interest expense 150 150
------- -------
Loss before income taxes-insurance brokerage companies (1,733) (1,467)
------- -------
PROPERTY AND CASUALTY COMPANIES
Revenues:
Net premiums written 215 1,462
Change in unearned premiums 3,923 3,164
------- -------
Net premiums earned 4,138 4,626
Net investment income 670 666
Net realized gains (losses) on investments 89 (4)
Other income 147 172
------- -------
Total revenues 5,044 5,460
------- -------
Expenses:
Losses and loss expenses 1,433 1,543
Acquisition costs and general and administrative expenses 1,769 1,633
------- -------
Total expenses 3,202 3,176
------- -------
Income before income taxes-property and casualty companies 1,842 2,284
------- -------
CORPORATE
Revenues:
Net investment income 33 14
------- -------
Expenses:
Other operating expenses 57 38
------- -------
Total operating expenses 57 38
------- -------
Interest expense 133 155
------- -------
Loss before income taxes-corporate (157) (179)
------- -------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 1996 and 1995
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Income (loss) before income taxes and minority interest (48) 638
------- -------
Provision (benefit) for income taxes:
Current 288 599
Deferred (395) (15)
------- -------
Total provision (benefit) for income taxes (107) 584
------- -------
Income before minority interest 59 54
Minority interest (11) (10)
------- -------
NET INCOME $ 48 $ 44
======= =======
NET INCOME PER SHARE $ 0.01 $ 0.01
======= =======
PRO FORMA NET INCOME
Income (loss) before charge in lieu of income taxes and minority interest ($ 48) $ 638
Charge (benefit) in lieu of income taxes (107) 160
------- -------
Income before minority interest 59 478
Minority interest (11) (84)
------- -------
PRO FORMA NET INCOME $ 48 $ 394
======= =======
PRO FORMA NET INCOME PER SHARE $ 0.01 $ 0.06
======= =======
Weighted average shares outstanding 7,020 7,020
======= =======
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
Item 1.-Fiancial Statements (continued)
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 1996 and 1995
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 48 $ 44
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Deferred acquisition costs 1,270 1,112
Amortization of bond premium, net 128 101
Deferred income taxes (433) (15)
Net realized (gains) losses on investments (89) 4
Net realized loss on sale of fixed assets 8
Depreciation and amortization expense 456 418
Minority interest 11 10
Change in assets and liabilities:
Accrued interest and dividends 102 166
Premium balances receivable 44,025 54,564
Prepaid and other assets (296) 339
Unpaid losses and loss expenses (344) (40)
Unearned premiums (3,998) (3,162)
Premiums payable (42,637) (51,774)
Due to affiliated companies 3 (401)
Income taxes payable 1,489 (409)
Accounts payable and accrued liabilities (4,773) (1,918)
-------- --------
Net cash used in operating activities (5,030) (961)
-------- --------
Cash flows from investing activities:
Investments available - for - sale :
Purchase of fixed maturities (6,879) (1,912)
Purchase of short term investments (171) (5,600)
Maturities of fixed maturities 350 1,440
Sales of fixed maturities 8,845 701
Funds held under deposit contracts
Purchase of fixed maturities (699)
Purchase/sales of short term investments (707) (366)
Sales of fixed maturities 526
Maturities of fixed maturities 140 150
Purchase of fixed assets (114) (191)
-------- --------
Net cash provided by (used in) investing activities 1,990 (6,477)
-------- --------
Cash flows from financing activities:
Receipts under deposit contracts 56 850
Notes payable-repayment (134) (386)
Increase in net advances from KILP 110
Payment of dividends (176) (176)
-------- --------
Net cash provided by (used in) financing activities (254) 398
-------- --------
Net change in cash and cash equivalents (3,294) (7,040)
Cash and cash equivalents at beginning of period 13,864 16,756
-------- --------
Cash and cash equivalents at end of period $ 10,570 $ 9,716
======== ========
Supplemental cash flow disclosure:
Interest expense paid $ 445 $ 424
Income taxes paid (recovered) ($ 1,200) $ 1,008
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
ITEM 1. - FINANCIAL STATEMENTS (continued)
KAYE GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1) General
The consolidated financial statements as of March 31, 1996 and for the three
months ended March 31, 1996 and 1995 are unaudited, and have been prepared in
accordance with generally accepted accounting principles and, in the opinion of
management, reflect all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of the results for such periods.
The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of results for the full year.
These financial statements should be read in conjunction with the financial
statements and related notes in the Company's 1995 Form 10K. The December 31,
1995 consolidated balance sheet was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
2) Organization
Effective October 2, 1995 Old Lyme Holding Corporation ("Old Lyme") combined its
operations with the insurance brokerage operations (the "Brokerage Business") of
Kaye International, L.P. ("KILP") and changed its name to Kaye Group Inc. (the
"Company"). For further details of the combination, reference is hereby made to
the Company's Annual Report on Form 10K for the year ended December 31, 1995, as
previously filed with the Commission.
3) Changes in Accounting Policies
In October 1995 the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". This statement establishes new financial accounting and reporting
standards for stock-based employee compensation plans, including stock option
and stock purchase plans. Compensation resulting from the award of stock-based
compensation must be determined based on the fair value of consideration
received or fair value of the equity instrument issued, whichever is more
reliably measurable. Such compensation expense, net of income taxes, may be
recognized in the Statement of Income over the service period of the employee
(generally the vesting period). In lieu of recording such compensation expense,
entities are permitted to disclose its pro-forma impact net of income taxes, on
reported net income and earnings per share. Entities choosing such disclosure
will continue to measure compensation expense from stock-based compensation in
the Statement of Income based on the intrinsic value method prescribed in
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees".
Management is evaluating the effect of the new pronouncement on its stock option
plans and has not determined which option for implementation will be utilized.
8
<PAGE>
4) Funds Held In Fiduciary Capacity
Premiums collected by the Insurance Brokerage Companies but not yet remitted to
insurance carriers, are restricted as to use by law in certain states in which
the Insurance Brokerage Companies operate. These balances are held in cash and
cash equivalents or short-term investments. The offsetting obligation is
recorded in premiums payable.
5) Notes Payable
The Company has a $10,000,000, revolving line of credit with a bank,
collateralized by the stock of the Insurance Companies. Currently $7,100,000 has
been borrowed under this revolving line of credit. The proceeds are available
for general corporate purposes, which may include acquisitions by the Company or
a subsidiary and the making of a loan to an affiliate. Any borrowings will bear
interest at the bank's equivalent of the prime rate of interest as maintained
from time to time or at the Company's option, a LIBOR based rate. A commitment
fee is assessed in the amount of 1/4% per annum on the unused balance. Among
other covenants, the agreement requires maintenance of minimum consolidated net
worth, statutory surplus, ratios of net premiums written to surplus and minimum
interest coverage. As of March 31, 1996, the Company is in compliance with the
covenants of the debt agreement.
The bank's commitment under the revolving line of credit is scheduled to be
reduced commencing September 30, 1996 by $625,000 each quarter. Available credit
as of the end of each respective years is $8,750,000 in 1996, $6,250,000 in
1997, $3,750,000 in 1998, $1,2250,000 in 1999 and none in 2000. The Company's
required payments under the revolving line of credit for the respective years
are $0 in 1996, $850,000 in 1997, $2,500,000 in 1998, $2,500,000 in 1999 and
$1,250,000 in 2000. Interest accrued under the revolving credit line for the
three months ended March 31, 1996 was $133,000.
6) Income Taxes
The data reflecting a charge (benefit) in lieu of income taxes is presented on a
proforma basis in the accompanying consolidated statements of income as if the
income or loss, prior to the Transactions and the Restructuring, of various
partnerships and S corporations, were taxed to those entities rather than to
their partners or shareholders. For further details of the Transaction and
Restructuring, reference is hereby made to the Company's Annual Report on Form
10K for the year ended December 31, 1995, as previously filed with the
Commission.
The 1996 income tax benefit resulted from a taxable loss which was significantly
higher than the financial statement loss due to permanent differences, the
majority of which was tax-exempt income. In 1995 tax-exempt income was the
principal reason for the reduction in the proforma effective tax rate.
7) Net Income Per Share
Net income per share is based on the weighted average number of common shares
outstanding. Common stock equivalents (originating in 1993) are not dilutive.
9
<PAGE>
8) Dividends
On March 20, 1996, the Board of Directors declared a quarterly dividend of $.025
per share, payable April 19, 1996 to stockholders of record on March 29, 1996.
9) Acquisitions
Holding has continued discussions to acquire Arista Investors Corp. ("Arista"),
the holding company of Arista Insurance Company, a New York insurance company
writing statutory disability insurance. Holding's ownership in Arista is 205,000
shares of Common A stock or 10.6%. At March 31, 1996, this stock had a fair
market value of $436,000.
10) Contingent Liabilities
In the ordinary course of business, the Company and its subsidiaries are subject
to various claims and lawsuits consisting primarily of alleged errors and
omissions in connection with the placement of insurance. Subject to specified
limits, the shareholders of predecessors to the Brokerage Business are
responsible for any costs arising from those claims which were asserted prior to
November 1, 1991, the date on which KILP was formed. In the opinion of
management, the ultimate resolution of all asserted and potential claims both
prior and subsequent to the formation of KILP, will not have a material effect
on the consolidated financial position of the Company.
Certain subsidiaries of the Company have been named in two lawsuits by a former
employee relating to such employee's termination and subsequent activities. The
Company does not believe that such lawsuits would have a material adverse effect
on the financial position of the Company.
As licensed brokers, certain subsidiaries of the Company are or may become
parties to administrative inquiries and at times to administrative proceedings
commenced by state insurance regulatory bodies. Certain subsidiaries are
presently involved in an administrative investigation by the New York Insurance
Department ("Department") relating to how property insurance policies were
issued for the Residential Real Estate Program. As a result, the manner in which
policies are structured for certain clients in this Program has been altered,
which has not had a material adverse effect on this Program. Whereas the Company
is in discussions with the Department regarding settlement of such
investigation, if such discussions are not successful, the Department could
institute formal proceedings against the subsidiaries seeking fines or license
revocations. KILP has agreed to indemnify Holding, the Company and its
subsidiaries for any fines or settlement payments in excess of $300,000,
relating to such investigation. Management does not believe the resolution of
such issues will have a material adverse effect on the Company.
10
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Kaye Group Inc. (the "Company") owns 82.4% of the issued and outstanding
stock of Kaye Holding Corp ("Holding") or ("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:
(1) "Insurance Brokerage", which comprises the Brokerage Business and Program
Brokerage (the "Insurance Brokerage Companies") and (2) "Property and Casualty
Insurance", or "Insurance" which comprises the Insurance Companies and Claims
Administration (the "Property and Casualty Companies").
Historically, the commission income of Program Brokerage was recorded as a
reduction of acquisition costs in the consolidated statements of income of Old
Lyme. As a result of the Transactions, management includes the commission income
and the other revenues and operating costs of Program Brokerage in the Insurance
Brokerage segment for all periods presented. Accordingly, the revenues and
expenses of the Property and Casualty Insurance segment will not be comparable
to the amounts reported previously by Old Lyme.
Overview
The Insurance Brokerage business derives its revenue principally from
commissions associated with the placement of insurance coverage for corporate
clients. These commissions are paid by the insurance carriers and are usually a
fixed percentage of the total premiums. There is normally a lag between receipt
of funds from the insured and payment to the insurance company. Investment of
these funds over this period generates additional revenue in the form of
interest income.
The Insurance business underwrites property and casualty risks for insureds
in the United States and is sold 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.
Insurance coverage under the Programs is provided through a variety of
underwriting structures, including reinsurance arrangements where direct
coverage may not be possible. 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. Effective for policies written by RLI
subsequent to January 1, 1992, 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
11
<PAGE>
policy are included in the net premiums written and earned for the Insurance
business. For policies written by RLI prior to 1992, RLI ceded to the Property
and Casualty Companies, on a quota share basis, substantially all of the
premiums received by RLI on such policies.
Corporate operations include those expenses not directly related to the
Insurance Brokerage or Insurance businesses. These expenses are associated with
being a public company and interest expense on corporate debt.
A comprehensive analysis of the results of operations of the Company would
not be meaningful without consideration of the following:
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 and the public offering on August 17, 1993. Prior to August 17,
1993, only one subsidiary (the domestic Insurance Company), was liable
for Federal income taxes, while income taxes on Old Lyme Bermuda,
Claims Administration, and Program Brokerage were paid by the
shareholders or partners of the subsidiaries, and not by the Company.
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 the three months ended
March 31, 1995 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 periods 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.
Results of Operations
Three Months ended March 31, 1996 compared
with three months ended March 31, 1995
Insurance Brokerage Operations
Total revenues in 1996 were $6,676,000 compared with $7,652,000 in 1995, a
decrease of $976,000 (12.8%). The largest component, net earned commissions, was
down $1,171,000 as a result of lost business exceeding new business. This
decrease was partially offset by an increase of $288,000 in contingency income
earned from non-affiliated carriers. Interest income decreased in 1996 by
$93,000 primarily as a result of decreased funds available for investment and
slightly lower interest rates. Salaries and related benefits decreased by
$652,000 to $5,020,000 in 1996 compared to $5,672,000 in 1995. The Company
continues to realize the effect of consolidating certain responsibilities which
began in the latter part of 1994 and continued into 1995.
Operating expenses (including depreciation) decreased by $58,000 to
$3,239,000 in 1996 compared with $3,297,000 in 1995. The effects of
consolidating responsibilities have resulted in savings in certain operating
expenses.
12
<PAGE>
Loss before income taxes and minority interest increased by $266,000 to
$1,733,000 in 1996 from $1,467,000 in 1995. The benefit of significant decreases
in salaries and related benefits, resulting from restructuring efforts, was
offset by decreased revenues as discussed above.
Property and Casualty Insurance Operations
Net premiums earned for 1996 decreased $488,000, or 10.5%, to $4,138,000
from $4,626,000 in 1995. 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.
Net realized gains on investments were $89,000 for 1996 compared to a loss
of $4,000 in 1995. The realization of investment gains and losses is determined
by market conditions, call features on certain securities and management's
decision regarding the duration of maturity of the portfolio.
The loss ratios for 1996 and 1995 were 34.6% and 33.4%, respectively. The
increase in loss ratio is the result of an increase in the mix of business from
property and umbrella coverage to general liability coverage, which
traditionally experiences a higher loss ratio.
The expense ratio (acquisition costs and general and administrative
expenses) for 1996 and 1995 were 42.8% and 35.3%, respectively. The increase in
expense ratio is due mainly to salaries allocated to the Insurance Companies for
services performed by the Insurance Brokerage business contracted management
incentive bonuses and additional fees for accounting and actuarial services.
Income before income taxes and minority interest for the Insurance
Companies is $1,842,000 in 1996 compared to $2,284,000, a decrease of $442,000
(19.4%). The decrease in operations was the result of the increase in combined
ratio (loss ratio and expense ratio) of 8.7%, as discussed above.
Corporate
The loss before income taxes and minority interest for Corporate, which
includes those expenses not related to brokerage or insurance and interest
expense on corporate debt, decreased by $22,000 to $157,000 in 1996 compared to
$179,000 in 1995. This decrease was the result of restructuring of debt with a
lower interest rate in the latter part of 1995.
Proforma Net Income (See Note 6)
Charge (benefit) in lieu of income taxes for 1996 and 1995 was ($107,000)
and $160,000, respectively. The 1996 benefit in lieu of income taxes resulted
from a taxable loss which was significantly higher than the financial statement
loss due to permanent differences, the majority of which were tax-exempt income.
In addition, for 1995, tax-exempt income was the principal reason for the
reduction in the proforma effective tax rate to 25%.
13
<PAGE>
Financial Condition and Liquidity
Total assets and liabilities decreased by approximately $58,000,000. Due to
the cyclical nature of the business, accounts receivable and premiums payable
fluctuate significantly from quarter to quarter. The collection of premiums
receivable and the amortization of acquisition costs, with the corresponding
payments to underwriters and the amortization of unearned premiums related to
the renewal of the Residential Real Estate Program, effective December 20, 1995,
accounted for the major portion of this decrease.
Stockholders' equity decreased by $491,000 to $22,391,000 in 1996 from
$22,882,000 in 1995. This decrease in equity resulted primarily from an increase
in unrealized depreciation of investments (net of deferred taxes) of $480,000
and dividends paid of $176,000, offset by net income before minority interest of
$59,000 and the decrease in minority interest of $106,000.
The Company maintains a substantial level of cash and liquid short term
investments which are used to meet anticipated payment obligations. As of March
31, 1996, the Company had cash and short term investments of $13,891,000. 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.
The Company has available a $10,000,000 revolving line of credit with a
bank, the proceeds of which are available for general operating needs and
acquisitions. At March 31, 1996, $7,100,000 is outstanding under the revolving
line of credit. The loan is collateralized by the stock of the Insurance company
subsidiaries.
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.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to lawsuits arising in the normal course of
business. Virtually all pending lawsuits in which the Property and Casualty
Companies are a party, involve claims under policies underwritten or reinsured
by such Companies. Management believes these lawsuits have been adequately
provided for in its established loss and loss expense reserves and that the
resolution of these lawsuits will not have a material adverse effect on the
Company's financial condition or results of operations.
As licensed brokers, the Brokerage Businesses are subject to various claims
and lawsuits from both private and governmental parties, which include claims
and lawsuits in the ordinary course of business. The majority of pending
lawsuits involve insurance claims, errors and omissions, employment claims, and
breaches of contract. The Company believes that the resolution of these lawsuits
will not have a material adverse effect on the Company's financial condition or
results of operations.
The Company and various of its subsidiaries have been named in two lawsuits
by a former employee of Kaye Insurance Associates, L.P., relating to such
employee's termination and subsequent activities. The Company does not believe
that such lawsuits will have a material adverse effect on the financial position
of the Company.
As licensed brokers, the Brokerage Businesses are or may become parties to
administrative inquiries and at times to administrative proceedings commenced by
state insurance regulatory bodies. Certain subsidiaries are presently involved
in an administrative investigation by the New York Insurance Department relating
to how property insurance policies were issued for the Residential Real Estate
Program. As a result, the manner in which policies are structured for certain
clients in this Program has been altered, which has not had a material adverse
effect on this Program. Whereas the Company is in discussions with the
Department regarding settlement of such investigation, if such discussions are
not successful, the Department could institute formal proceedings against the
subsidiaries seeking fines or license revocation. KILP has agreed to indemnify
Holding, the Company and the Brokerage Business for any fines or settlement
payments in excess of $300,000 relating to such investigation. Management does
not believe the resolution of such issue will have a material adverse effect on
the Company.
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of
Securities Holders - None
Item 5. Other Information - None
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Item 6. Exhibits and Reports on Form 8K
a) Exhibits:
Exhibit
Number Description
- - ------ -----------
10.22 First Amendment to the Credit Agreement between Fleet
National Bank Connecticut and Kaye Group Inc. dated March
31, 1996.
b) Reports on Form 8K
There were no reports on Form 8K filed for the period January
1, 1996 to March 31, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KAYE GROUP INC.
-----------------------------------
Registrant
May 13, 1996 /s/ Bruce D. Guthart
-----------------------------------
Bruce D. Guthart, President & CEO
May 13, 1996 /s/ Frank Shechter
-----------------------------------
Frank Shechter Senior Vice President-Finance
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