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 September 30, 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 November 12, 1996 - 7,020,000
<PAGE>
KAYE GROUP INC.
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Income for the three months
and nine months ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows for the
nine months ended September 30, 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 16
2
<PAGE>
Item 1. - Financial Statements
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and December 31, 1995
(in thousands, except par value per share)
<TABLE>
<CAPTION>
September 30, 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 $10,382 and $7,528) $ 11,638 $ 10,054
Premiums receivable 32,483 76,732
Prepaid expenses and other assets 2,099 2,089
Intercompany receivable 1,934 7,817
-------- --------
Total current assets 48,154 96,692
Fixed assets ( net of accumulated depreciation of $7,370 and $6,622) 1,996 2,565
Expiration lists ( net of accumulated amortization of $1,508 and $1,231) 2,185 2,462
Deferred income taxes 800 2,580
Other assets 362 842
-------- --------
Total assets - insurance brokerage companies 53,497 105,141
-------- --------
PROPERTY AND CASUALTY COMPANIES
Investments available-for-sale:
Fixed maturities, at market value (amortized cost 1996, $36,125;
1995, $37,558) 35,935 38,002
Equity securities, at market value (cost:1996 and 1995, $1,421) 1,463 1,506
Short term investments, at cost, which approximates market value 2,336 3,150
-------- --------
Total investments 39,734 42,658
Cash and cash equivalents 5,034 1,712
Accrued interest and dividends 911 991
Premium balances receivable 656 3,506
Premium balances receivable - insurance brokerage companies 239 3,099
Prepaid reinsurance premiums 216 383
Funds held under deposit contracts, at market value (amortized cost
1996, $4,718; 1995, $5,590) 4,715 5,622
Deferred acquisition costs 1,641 3,703
Deferred income taxes 705 358
Other assets 3,597 2,551
-------- --------
Total assets - property and casualty companies 57,448 64,583
-------- --------
CORPORATE
Cash and cash equivalents 669 2,098
Prepaid income taxes 261 1,261
Prepaid expenses and other assets 489 432
Investments available-for-sale:
Fixed maturities, at market value (amortized cost 1996, $9; 1995, $8) 9 8
Equity securities, at market value (cost:1996 and 1995, $557) 513 436
Deferred income taxes 0 41
-------- --------
Total assets - corporate 1,941 4,276
-------- --------
Total assets $112,886 $174,000
======== ========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and December 31, 1995
(in thousands, except par value per share)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ----------
(UNAUDITED)
<S> <C> <C>
INSURANCE BROKERAGE COMPANIES
Current liabilities:
Premiums payable $ 33,570 $ 77,636
Premiums payable - property and casualty companies 239 3,099
Accounts payable and accrued liabilities 5,677 6,256
Notes payable 445 415
Deferred income taxes 0 1,178
Due to affiliates 137 138
-------- --------
Total current liabilities 40,068 88,722
Notes payable 241 579
Notes payable - KILP 6,000 6,000
-------- --------
Total liabilities-insurance brokerage companies 46,309 95,301
-------- --------
PROPERTY AND CASUALTY COMPANIES
Liabilities:
Unpaid losses and loss expenses 14,405 12,671
Unearned premium reserves 5,519 11,914
Deposit contracts 4,259 5,001
Accounts payable and accrued liabilities 4,632 2,918
Reinsurance payable 0 285
Intercompany payable 924 84
-------- --------
Total liabilities - property and casualty companies 29,739 32,873
-------- --------
CORPORATE
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities 324 3,222
Intercompany payable 1,010 7,734
Notes payable 225
Deferred income taxes 9
-------- --------
Total current liabilities 1,568 10,956
Notes payable-long-term 6,875 7,100
-------- --------
Total liabilities-corporate 8,443 18,056
-------- --------
Total liabilities 84,491 146,230
-------- --------
MINORITY INTEREST IN EQUITY OF
KAYE HOLDING CORP. 4,998 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
Appreciation (depreciation) of investments available-for-sale,
net of deferred income tax ( benefit), ( 1996 ,( $59 ) ; 1995 , $121) (115) 236
Retained earnings 15,666 14,800
-------- --------
Total stockholders' equity 23,397 22,882
-------- --------
Total liabilities and stockholders' equity $112,886 $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 and nine months ended September 30, 1996 and 1995
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
---------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INSURANCE BROKERAGE COMPANIES
Revenues:
Commissions and fees, net $ 8,673 $ 8,342 $ 21,042 $ 21,488
Commissions and fees, net - property and casualty companies 344 91 754 186
Investment income 390 343 834 924
-------- -------- -------- --------
Total revenues 9,407 8,776 22,630 22,598
-------- -------- -------- --------
Expenses:
Salaries and benefits 4,536 5,078 14,254 15,971
Other operating expenses 3,582 3,424 10,007 10,054
-------- -------- -------- --------
Total operating expenses 8,118 8,502 24,261 26,025
Interest expense 150 150 450 450
-------- -------- -------- --------
Income (loss) before income taxes-insurance brokerage companies 1,139 124 (2,081) (3,877)
-------- -------- -------- --------
PROPERTY AND CASUALTY COMPANIES
Revenues:
Net premiums written 2,636 1,345 7,525 2,520
Change in unearned premiums 2,569 2,530 6,228 10,183
-------- -------- -------- --------
Net premiums earned 5,205 3,875 13,753 12,703
Net investment income 548 693 1,816 2,108
Net realized gains (losses) on investments (12) 17 82 35
Other income 31 406 385 830
-------- -------- -------- --------
Total revenues 5,772 4,991 16,036 15,676
-------- -------- -------- --------
Expenses:
Losses and loss expenses 2,210 763 5,161 3,218
Acquisition costs and general and administrative expenses 2,284 1,596 5,767 4,689
-------- -------- -------- --------
Total expenses 4,494 2,359 10,928 7,907
-------- -------- -------- --------
Income before income taxes-property and casualty companies 1,278 2,632 5,108 7,769
-------- -------- -------- --------
CORPORATE
Revenues:
Net investment income (loss) 27 5 73 (5)
Expenses:
Operating expenses 172 142 307 189
Interest expense 115 136 380 554
-------- -------- -------- --------
Loss before income taxes-corporate (260) (273) (614) (748)
-------- -------- -------- --------
</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 and nine months ended September 30, 1996 and 1995
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
---------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income before income taxes and minority interest 2,157 2,483 2,413 3,144
-------- -------- -------- --------
Provision (benefit) for income taxes:
Current 510 667 200 1,950
Deferred 136 (93) 524 (279)
-------- -------- -------- --------
Total provision for income taxes 646 574 724 1,671
-------- -------- -------- --------
Income before minority interest 1,511 1,909 1,689 1,473
Minority interest 265 336 297 260
-------- -------- -------- --------
NET INCOME $ 1,246 $ 1,573 $ 1,392 $ 1,213
======== ======== ======== ========
NET INCOME PER SHARE $ 0.18 $ 0.22 $ 0.20 $ 0.17
======== ======== ======== ========
PRO FORMA NET INCOME (Note 6)
Income before charge in lieu of income taxes and
minority interest $ 2,157 $ 2,483 $ 2,413 $ 3,144
Charge in lieu of income taxes 646 695 724 880
-------- -------- -------- --------
Income before minority interest 1,511 1,788 1,689 2,264
Minority interest 265 315 297 398
-------- -------- -------- --------
PRO FORMA NET INCOME $ 1,246 $ 1,473 $ 1,392 $ 1,866
======== ======== ======== ========
PRO FORMA NET INCOME PER SHARE $ 0.18 $ 0.21 $ 0.20 $ 0.27
======== ======== ======== ========
Weighted average shares outstanding 7,020 7,020 7,020 7,020
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
Item 1. - Financial Statements (continued)
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 1996 and 1995
(in thousands)
UNAUDITED
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,392 $ 1,213
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Deferred acquisition costs 2,062 3,544
Amortization of bond premium, net 575 311
Deferred income taxes 524 (324)
Net realized (gains) losses on investments (82) 15
Depreciation and amortization expense 1,546 1,324
Minority interest 186 260
Change in assets and liabilities:
Accrued interest and dividends 80 61
Premium balances receivable 50,126 91,394
Prepaid and other assets (1,172) (1,515)
Unpaid losses and loss expenses 1,734 (1,329)
Unearned premiums (6,395) (10,181)
Premiums payable (47,211) (90,931)
Due to affiliated companies (1) (449)
Income taxes payable 1,000 (777)
Accounts payable and accrued liabilities (1,763) (735)
-------- --------
Net cash provided by (used in)
operating activities 2,601 (8,119)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments available - for - sale :
Purchase of fixed maturities (10,153) (9,071)
Purchase of equity securities (45)
Purchase of short term investments (1,081)
Maturities of fixed maturities 2,451 1,755
Sales of fixed maturities 8,707 7,267
Sales of equity securities 201
Sales of short term investments 814
Funds held under deposit contracts
Purchase of fixed maturities (469) (1,650)
Purchase/sales of short term investments (344) 888
Sales of fixed maturities 1,535 2,037
Maturities of fixed maturities 140 1,018
Purchase of fixed assets (229) (304)
-------- --------
Net cash provided by investing activities 2,452 1,015
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under deposit contracts (742) (2,402)
Notes payable-repayment (308) (7,772)
Proceeds from borrowings 7,618
Increase in net advances from KILP 291
Payment of dividends (526) (528)
-------- --------
Net cash used in financing activities (1,576) (2,793)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,477 (9,897)
Cash and cash equivalents at beginning of period 13,864 16,756
-------- --------
Cash and cash equivalents at end of period $ 17,341 $ 6,859
======== ========
Supplemental cash flow disclosure:
Interest expense paid $ 830 $ 1,381
Income taxes paid (refunds) ($ 800) $ 2,793
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
ITEM 1. - FINANCIAL STATEMENTS (continued)
KAYE GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) General
The consolidated financial statements as of September 30, 1996 and for the three
months and nine months ended September 30, 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 and nine months ended
September 30, 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 Kaye Group Inc.'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 ("SFAS") 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 ("APB") No. 25, "Accounting for Stock Issued to
Employees".
The Company plans to continue accounting for stock-based compensation in
accordance with APB No. 25 and will provide the additional disclosures required
by SFAS No. 123. The adoption of this standard will not have an impact on the
Company's financial position or results of operations.
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 September 30, 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 year is $8,750,000 in 1996, $6,250,000 in 1997,
$3,750,000 in 1998, $1,250,000 in 1999 and $0 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 nine months ended
September 30, 1996 was approximately $380,000.
6) Income 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 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 these 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.
The data reflecting a charge in lieu of income taxes is presented on a pro forma
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.
9
<PAGE>
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.
8) Dividends
On September 20, 1996, the Board of Directors declared a quarterly dividend of
$.025 per share, payable October 18, 1996 to stockholders of record on September
30, 1996.
9) 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 adverse
effect on the consolidated 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 2. 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"), collectively, "Corporate", which is the
primary asset of the Company. The Company's business is conducted 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 Old Lyme Insurance Company of Rhode
Island, Inc. ("OLRI"), Old Lyme Insurance Company, Ltd. ("Old Lyme Bermuda") and
Claims Administration Corporation (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 Corp. ("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 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.
11
<PAGE>
Corporate operations include those revenues and expenses not directly related to
the Insurance Brokerage or Insurance businesses. The expenses primarily 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 these 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 and nine months
ended September 30, 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 September 30, 1996 compared
with three months ended September 30, 1995
Insurance Brokerage Operations
Total revenues in 1996 were $9,407,000 compared with $8,776,000 in 1995, an
increase of $631,000 (7%). The largest component of revenues, net commissions
and fees, was up $584,000 (7%) due to an increase in contingent income earned
and new business exceeding lost business. Investment income increased in 1996 by
$47,000.
Salaries and benefits decreased by $542,000 (11%) to $4,536,000 in 1996 compared
to $5,078,000 in 1995. This decrease is the result of the lower compensation
earned under incentive contracts, termination of the Company's defined benefit
pension plan, and the consolidation of certain responsibilities.
Other operating expenses (including depreciation) increased by $158,000 (5%) to
$3,582,000 in 1996 compared with $3,424,000 in 1995. The increase was primarily
the result of legal costs incurred in resolving a lawsuit with a former
employee.
Income before income taxes increased by $1,015,000 (819%) to $1,139,000 in 1996
from $124,000 in 1995. The improved operating results were primarily due to
increased revenues and the decrease in salaries and benefits, as discussed
above.
12
<PAGE>
Property and Casualty Insurance Operations
Net premiums earned for 1996 increased $1,330,000 (34%) to $5,205,000 from
$3,875,000 in 1995. This increase was primarily attributable to growth in the
Residential Real Estate Program.
Net investment income for 1996 decreased $145,000 (21%) to $548,000 from
$693,000 in 1995 as a result of a decline in investments caused by the
redemption of Old Lyme Bermuda's preferred stock.
Other income for 1996 decreased $375,000 (92%) to $31,000 from $406,000 in 1995.
The decrease was attributable to lower contingency income earned on reinsurance
treaties.
The loss ratios for 1996 and 1995 were 42% and 20%, respectively. The increase
in the loss ratio was a result in a change in the mix of business from property
and umbrella coverage to general liability coverage, which traditionally
experiences a higher loss ratio.
The expense ratios (acquisition costs and general and administrative expenses)
for 1996 and 1995 were 44% and 41%, respectively. The increase in the expense
ratio is due primarily to additional professional fees.
Income before income taxes decreased by $1,354,000 (51%) to $1,278,000 in 1996
compared to $2,632,000 in 1995. This decrease was the result of reduced
investment income and the increase in the combined ratio from 61% to 86%, as
discussed above.
Corporate
The loss before income taxes, which includes those expenses not related to
brokerage or insurance operations and interest expense on corporate debt,
decreased by $13,000 (5%) to $260,000 in 1996 compared to $273,000 in 1995.
Pro forma Net Income (See Note 6)
The pro forma presentation for 1995 includes the effect of a tax benefit from
the Brokerage Business which were not combined into the Company until October 2,
1995.
13
<PAGE>
Nine months ended September 30, 1996 compared
with nine months ended September 30, 1995
Insurance Brokerage Operations
Total revenues in 1996 were $22,630,000 compared with $22,598,000 in 1995, an
increase of $32,000. The largest component of revenues, net commissions and
fees, was up $122,000 due to an increase in contingent income. Investment income
decreased in 1996 by $90,000 (10%) as a result of decreased fiduciary funds
available for investment and slightly lower interest rates.
Salaries and benefits decreased by $1,717,000 (11%) to $14,254,000 in 1996
compared to $15,971,000 in 1995. This decrease is the result of lower
compensation earned under incentive contracts, termination of the Company's
defined benefit pension plan, refunds received on group medical insurance and
the consolidation of certain responsibilities.
Other operating expenses (including depreciation) decreased by $47,000 to
$10,007,000 in 1996 compared with $10,054,000 in 1995, due to the consolidation
of certain responsibilities.
The loss before income taxes decreased by $1,796,000 (46%) to $2,081,000 in 1996
from $3,877,000 in 1995. The main factor for improved operating results is the
significant decreases in salaries and benefits resulting from restructuring
efforts, as discussed above.
Property and Casualty Insurance Operations
Net premiums earned for 1996 increased $1,050,000 (8%), to $13,753,000 from
$12,703,000 in 1995. This increase was attributable to growth in the Residential
Real Estate Program partially offset by a reduction in the Restaurant Program.
Net investment income for 1996 decreased $292,000 (14%) to $1,816,000 from
$2,108,000 in 1995 as a result of a decline in investments caused by the
redemption of Old Lyme Bermuda's preferred stock.
Net realized gains on investments were $82,000 for 1996 compared to $35,000 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.
Other income for 1996 decreased $445,000 (54%) to $385,000 from $830,000 in
1995. The decrease was attributable to lower contingency income earned on
reinsurance treaties.
The loss ratios for 1996 and 1995 were 38% and 25%, respectively. The increase
in the loss ratio was the result of a change 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% and 37%, respectively. The increase in the expense
ratio is due primarily to additional professional fees.
Income before income taxes was $5,108,000 in 1996 compared to $7,769,000 in
1995, a decrease of $2,661,000 (34%). This decrease was the result of lower
investment income and the increase in the combined ratio from 62% to 80%, as
discussed above.
14
<PAGE>
Corporate
The loss before income taxes, which includes those expenses not related to
brokerage or insurance operations and interest expense on corporate debt,
decreased by $134,000 (18%) to $614,000 in 1996 compared to $748,000 in 1995.
This decrease was mainly the result of additional costs incurred in the
restructuring of debt to a lower interest rate during the second quarter of
1995.
Pro forma Net Income (See Note 6)
The pro forma presentation for 1995 includes the effect of a tax benefit from
the Brokerage Business which were not combined into the Company until October 2,
1995.
Financial Condition and Liquidity
Total assets and liabilities decreased from December 31, 1995 to September 30,
1996 by approximately $61,114,000 and $61,739,000, respectively. Due to the
cyclical nature of the business, premiums receivable and payable fluctuate
significantly from quarter to quarter. The collection of premiums receivable and
the accretion 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 and June 20,
accounted for the major portion of this decrease.
Stockholders' equity increased by $515,000 to $23,397,000 at September 30, 1996
from $22,882,000 at December 31, 1995. This increase in equity resulted
primarily from net income of $1,392,000 partially offset by unrealized
depreciation of investments (net of deferred taxes) of $351,000 and dividends
paid of $526,000.
The Company maintains a substantial level of cash and liquid short term
investments which are used to meet anticipated payment obligations. As of
September 30, 1996, the Company had cash and short term investments of
$19,677,000. Of the Company's total invested assets, certain amounts are held in
a fiduciary capacity on behalf of underwriters and assureds, and pledged or
deposited into trust funds to collateralize the Company's obligations under
reinsurance treaties.
The Company has available $9,375,000 under a revolving line of credit with a
bank, the proceeds of which are available for general operating needs and
acquisitions. At September 30, 1996, $7,100,000 is outstanding under the
revolving line of credit. The loan is collateralized by the stock of the OLRI
and Old Lyme Bermuda.
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.
15
<PAGE>
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.
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
("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. 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
Item 6. Exhibits and Reports on Form 8K
a) Exhibits:
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
16
<PAGE>
b) Reports on Form 8K
On August 12, 1996 the Company filed Form 8-K/A pursuant to the
combination of Old Lyme Holding Corp. and the insurance brokerage
companies of KILP. Such combination was effective October 2, 1995. The
following is a listing of items reported:
Unaudited Financial Statements of business acquired as of June
30, 1995 and for the six month periods ended June 30, 1995 and
1994.
Unaudited Proforma Condensed Financial Statements as of June 30,
1995 and for the six month periods ended June 30, 1995 and 1994.
17
<PAGE>
CAUTIONARY STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Form 10-Q 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 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 which the Company operates. The words "believe", "anticipate",
"project", "plan", "expect" 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.
18
<PAGE>
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
November 12, 1996 /s/ Bruce D. Guthart
-------------------------------------------
Bruce D. Guthart, President &
Chief Executive Officer
November 12, 1996 /s/ Michael P. Sabanos
-------------------------------------------
Michael P. Sabanos, Senior Vice President &
Chief Financial Officer
19
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