SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT 0F 1934
For the Fiscal Year Ended December 31, 1996
Commission File Number 0-21988
Kaye Group Inc.
(exact name of registrant as specified in its charter)
Delaware 13-3719772
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
122 East 42nd Street, New York, NY 10168
(Address and Zip Code of Principal Executive Offices)
Registrant's Telephone Number: (212) 338-2100
Securities Registered Under Section 12(b) of the Exchange Act:
Title of Each Class Name of Exchange
------------------- ----------------
Common Stock $.01 par value NASDAQ National Market
Securities Registered Under Section 12(g) of the Exchange Act:
None.
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 __
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
<PAGE>
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of March 10, 1997 was approximately
$11,790,063.
Number of shares of the registrant's common stock outstanding as of March
10, 1997: 7,020,000.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement, which will be filed with
the Securities and Exchange Commission within 120 days after December 31, 1996
(incorporated by reference under Part III).
Index to Exhibits is on page 27.
<PAGE>
KAYE GROUP INC.
TABLE OF CONTENTS
Part I
Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 26
Part III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain
Beneficial Owners and Management 27
Item 13. Certain Relationships and Related Transactions 27
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 27
Financial Statements F-1
<PAGE>
CAUTIONARY STATEMENT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This SEC Form 10K 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 foward-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 which the Company operates. The words "believe",
"expect", "anticipate", "project", "plan", 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.
<PAGE>
Item 1. Business
Overview:
Kaye Group Inc. (the "Company"), formerly Old Lyme Holding Corporation
("Old Lyme") a Delaware corporation, is a holding company which through its
subsidiary, Kaye Holding Corp. ("Holding") and its subsidiaries (collectively
the "Company") are engaged in a broad range of insurance brokerage and insurance
related activities. The Company's activities are conducted in two offices in New
York City, and in offices located in the states of Rhode Island, Connecticut and
California.
On October 2, 1995 Old Lyme combined with the retail insurance
brokerage operations (the "Retail Brokerage Business") of Kaye International
L.P. ("KILP"). On the same date the Company amended its Certificate of
Incorporation to change its name to Kaye Group Inc.
The Retail Brokerage Business operates an insurance brokerage business
which offers commercial clients a full range of insurance brokerage services
including procuring property/casualty insurance, bonding, loss prevention
engineering, and benefit package design services. The Retail Brokerage Business
strategy is to service middle market companies and organizations just below the
Fortune 500 level for which other national brokers intensely compete. Within
this market, the Retail Brokerage Business has developed particular expertise
and knowledge of the risks facing a number of industry sectors including health
care, real estate, manufacturing, restaurants, and retail industries. The Retail
Brokerage Business commitment to these industries has led to the development of
several innovative solutions to the twin insurance problems of price and
availability of coverage, most notably the creation of target market insurance
programs. By organizing pools of similar risks, the Retail Brokerage Business
was one of the pioneers in the application of purchasing groups in the
commercial insurance market.
Holding conducts its property and casualty underwriting business
through two insurance subsidiaries (the "Insurance Companies"), Old Lyme
Insurance Company of Rhode Island, Inc., ("Old Lyme Rhode Island") and Old Lyme
Insurance Company, Ltd. ("Old Lyme Bermuda"). Old Lyme Rhode Island is a
property and casualty insurance company licensed in Rhode Island and eligible as
a surplus lines insurer in New York and New Jersey. Old Lyme Bermuda is a
property and casualty insurance company organized and licensed under the laws of
Bermuda. In states where the Insurance Companies are not admitted insurers or
surplus lines insurers, the Insurance Companies underwrite risks through various
reinsurance agreements.
The Insurance Companies underwrite property risks (loss or physical
damage to property) and casualty risks (legal liability for personal injury or
damaged property of others) for insureds in the United States. Insurance is sold
principally through specially designed programs (see "Programs") which insure
various types of businesses and properties which have similar risk
characteristics, such as restaurants, catalog showrooms, apartments,
condominiums, cooperatives, pharmacies, and building maintenance companies. The
Insurance Companies' strategy is to underwrite only the first layer of the
property and casualty insurance provided under the
1
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Programs. Its exposure to individual insureds on individual losses is thereby
generally limited to between $1,000 and $25,000 (inclusive of allocated loss
expenses), depending on the Program. Under the Programs, the Insurance
Companies' policies are sold in conjunction with policies issued by unaffiliated
Program insurers which provide coverage for losses above the first layer of risk
underwritten by the Insurance Companies. In addition, the Insurance Companies
have issued policies on a selected basis with limits up to $1,000,000, retaining
the first $50,000 of exposure and reinsuring the remaining limits with an
unaffiliated reinsurer.
Claims Administration Corporation ("Claims Administration") is
responsible for the administration of a large majority of the claims submitted
to the Insurance Companies. The administration of claims includes investigation,
engagement of legal counsel, approval of settlements and the making of payments
to, or on behalf of insureds. Claims Administration also provide claims
administration service to the unaffiliated Program insurers for a fee.
Claims Administration is party to an agreement with an unaffiliated
company, whereby it agreed to acquire certain retail service warranty contract
obligations for a fee under this agreement. Claims Administration earned
approximately $165,000, $111,000, and $47,000 in 1996, 1995, and 1994,
respectively, pursuant to this agreement.
History of the Company
Prior to the initial public offering ("IPO") of Old Lyme's Common Stock
in August 1993, the Insurance Brokerage Companies, the Program Brokerage
Business, and Claims Administration were part of a single combined insurance and
brokerage business owned by KILP and certain individuals. Prior to the IPO, KILP
developed the concept of the "deductible" primary layer of insurance business
administered through Programs. This business was conducted through Old Lyme
Bermuda and Old Lyme Rhode Island. In August, 1993 after years of successful
growth, these two insurance companies, certain other assets and those employees
responsible for the wholesale brokerage and claims administration elements of
the Programs were organized under Old Lyme, a holding company, of which
approximately 33% was sold to the public.
At the time of the IPO, management of Old Lyme believed that Old Lyme's
historical marketing efforts and ability to expand its business were hampered by
its small capital base and its lack of a letter rating from A.M. Best Company
("A.M. Best"), a major rating agency for insurers. Approximately $13,000,000 of
the proceeds of the IPO were contributed to Old Lyme Rhode Island to increase
its capital and surplus to permit it to (i) increase its underwriting
capabilities, (ii) obtain a letter rating from A.M. Best, and (iii) enable Old
Lyme Rhode Island to meet certain regulatory capital and surplus requirements.
As a result of the proceeds being contributed, Old Lyme Rhode Island
significantly increased its underwriting capacity. This enabled it to obtain an
A.M. Best rating of A- (Excellent) and meet all regulatory capital and surplus
requirements.
The business of Old Lyme, however, depended on the creation of new
Programs and the addition of insureds into existing and new Programs. Old Lyme
relies on the Program Brokerage Business to develop new Programs. The Program
Brokerage Business is also Old Lyme's most
2
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important and significant producing broker, producing almost all of the
Insurance Companies' net premium earned in 1996.
Because of such dependence between the Insurance Companies and the
Program Brokerage Business, the Insurance Companies' operations and growth
potential are tied, to a significant extent, to the growth and strength of the
Program Brokerage Business. Further, in 1994 the Retail Brokerage Business
completed the integration of its 1992 acquisition of Amalgamated Programs
Corporation and related entities ("Amalgamated") and continued to downsize to
adjust to the continuing "soft market" in the property and casualty business. As
a consequence of such integration and downsizing, the improved operating results
and anticipated outlook for the Retail Brokerage Business and the fact that the
Retail Brokerage Business accounted for approximately half of the Program
Brokerage Business volume, the officers of the general partners of KILP (which
included members of Old Lyme's Board of Directors) concluded that the
combination of Old Lyme and the Retail Brokerage Business would be advantageous
for both Old Lyme and KILP.
In evaluating the combination, Old Lyme's Board of Directors also
considered the fact that the market for Old Lyme Common Stock following the IPO
had been relatively illiquid. The Board believed that the combination of the
Retail Brokerage Business with Old Lyme would increase the size of Old Lyme,
make it a more financially diverse company, and potentially attract a broader
spectrum of investors.
The combination was accounted for as a transfer and exchange between
companies under common control and accordingly, the assets and liabilities of
the Retail Brokerage Business were combined with those of Old Lyme at their
historical cost in a manner similar to a "pooling of interests" (see Notes 1 and
3 to the financial statements). The combination was accomplished as follows (the
"Transactions"):
1. Old Lyme transferred to Holding all of the outstanding stock of the
Insurance Companies and its two other wholly-owned subsidiaries, Program
Brokerage Corporation (the "Program Brokerage Business") and Claims
Administration and its other assets in exchange for (i) 82,400 shares of Holding
Common Stock, representing 82.4% of the total outstanding Holding Common Stock,
and (ii) the assumption by Holding of certain of Old Lyme's liabilities.
2. KILP transferred all of its interest in the limited partnerships
conducting the Retail Brokerage Business (the "Brokerage Partnerships") and
certain related assets to Holding in exchange for (i) 17,200 shares of Holding
Common Stock, representing 17.2% of the total outstanding Holding Common Stock,
and (ii) the assumption by Holding of certain KILP liabilities.
3. Certain individuals transferred to Holding all of their interests in
the corporate general partners of the Brokerage Partnerships (the "Brokerage
Corporations") in exchange for 400 shares of Holding Common Stock, representing
0.4% of the total outstanding Holding Common Stock.
3
<PAGE>
4. Holding contributed its interests in the Brokerage Partnerships to
the Brokerage Corporations thereby causing the dissolution of the Brokerage
Partnerships. As a result, the Brokerage Corporations, as a group, own all of
the assets and are subject to all of the liabilities of the Retail Brokerage
Business.
The chart below reflects the current structure of the Company:
<TABLE>
<S> <C>
Public 32.8%
KILP and Kaye Group
related entity Inc.,
and (formerly Old
individuals 67.2% Lyme Holding
Corp.)
17.6%
82.4%
Kaye Holding Corp.
100% 100%
Insurance Brokerage Companies: Property and Casualty Companies:
Program Brokerage Corporation Old Lyme Insurance Company of Rhode Island, Inc.
Kaye Insurance Associates, Inc. Old Lyme Insurance Company, Ltd. and
Kaye Insurance Services of California, Inc. Park Brokerage Ltd.
Kaye Corporation of Connecticut Claims Administration Corporation
Kaye Administrators, Inc.
Kaye Systems, Inc.
Kaye Services Corp.
</TABLE>
4
<PAGE>
Following the Transactions, the Company operates in two business
segments - "Insurance Brokerage", which is comprised of the Retail Brokerage
Business and the Program Brokerage Business (the "Insurance Brokerage
Companies") and "Property and Casualty Companies" or "Insurance" which is
comprised of the Insurance Companies and Claims Administration ( the "Property
and Casualty Companies").
Programs
The Company's strategy is to underwrite only the first layer of the
property and casualty insurance provided under the Programs, in most cases
limiting its exposure to individual insureds on individual losses to between
$1,000 and $25,000 (inclusive of allocated loss expenses), depending on the
Program. Under the Programs, the Insurance Companies' policies are sold in
conjunction with policies issued by unaffiliated Program insurers which provide
coverage for losses above the first layer of risk underwritten by the Insurance
Companies. The Insurance Companies believe that their rates for the first layer
of risk, when combined with the rates of such other unaffiliated insurers for
the coverage above such layer, are generally competitive with the rates that
other insurance companies would charge to provide comparable insurance coverage.
The Retail Brokerage Business generally services middle market
companies and organizations just below the Fortune 500 level. Within this
market, the Retail Brokerage Business has developed particular expertise and
knowledge of the risks facing a number of industry sectors including health
care, real estate, manufacturing, restaurants, and retail industries. The Retail
Brokerage Business' commitment to these industries has led to the development of
several innovative solutions to the twin insurance problems of price and
availability of coverage, most notably the creation of target market insurance
programs. By organizing pools of similar risks, the Retail Brokerage Business
was one of the pioneers in the application of purchasing groups in the
commercial insurance market.
The Company currently participates in eleven insurance Programs, which
as of February 1, 1997, had approximately 2,600 insureds. The risks underwritten
by the Insurance Companies under each of these Programs are generally limited to
losses of no more than $25,000 (inclusive of allocated loss expenses) per
insured for each occurrence.
The three major Programs are as follows:
1. The Residential Real Estate Program, started in 1990, provides
property and casualty insurance for residential real estate including rental
apartments, cooperatives, and condominiums. Policies protect the owner from
property losses and casualty claims, such as claims brought by a tenant or
member of the public injured on the premises. This Program is offered
principally in the New York City area and has more than 1,100 insureds.
2. The Restaurant Program, started in 1985, insures restaurants against
casualty claims (most typically brought by an injured restaurant patron) and
property losses. Many of the restaurants that participate in this Program are
"white tablecloth" restaurants. The Restaurant Program has approximately 830
insureds
5
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3. The Real Estate Umbrella Program insures residential and commercial
real estate owners against certain types of casualty losses. Insureds are
provided with an extra level of protection in conjunction with a standard
umbrella policy. Coverage is provided for losses that are included within the
broad terms of the policy, but are excluded under the general casualty policy.
This Program also provides high umbrella casualty limits primarily provided by
unaffiliated Program insurance companies to individual real estate owners. The
Insurance Companies have a maximum exposure of $10,000 per claim.
The other Programs include the Comprehensive Office Program, the Retail
Stores Liability Program, the Catalog Showroom Property Program, the Building
Maintenance Program, the Contractors Umbrella Program, the Drug Store Program,
Funeral Directors Program, and the Home Owner Program.
The Home Owner Program provides various types of property insurance to
a group of affiliated home owners. Limits for certain coverage offered by the
Insurance Companies under this Program are as high as $100,000. This program
accounted for approximately 3% of net premiums earned in 1996.
The Restaurant Program, Residential Real Estate Program and Real Estate
Umbrella Program accounted for approximately 87% of the net premiums earned by
the Insurance Companies in 1996. The following table sets forth the percentage
of net premiums earned attributable to such Programs and all other business
during the years ended December 31, 1996, 1995, and 1994. The Restaurant Program
has declined primarily due to restaurant industry conditions, "soft market"
conditions and selective underwriting guidelines.
Net Premiums Earned
Years ended December 31,
----------------------------
1996 1995 1994
---- ---- ----
Residential Real Estate Program ............ 49% 40% 40%
Restaurant Program ......................... 24% 32% 31%
Real Estate Umbrella Program ............... 14% 15% 19%
Other ...................................... 13% 13% 10%
--- --- ---
100% 100% 100%
=== === ===
Once a Program is established, Program Brokerage Business, or one of
the other Insurance Brokerage Companies acts as the placing broker with respect
to insurance under the Program. In such a role, the Insurance Brokerage Company
is a party to agreements with the various unaffiliated Program insurers as well
as the Insurance Companies.
All of the Programs have been designed by the Program Brokerage
Business and are marketed through the Retail Brokerage Business operations and
various unaffiliated independent brokers with which the Program Brokerage
Business has relationships. As of February 1, 1997, there were approximately
2,600 insureds in the eleven Programs.
6
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In 1996, approximately 48% of the net premiums earned by the Insurance
Companies was originated by Retail Brokerage Business operations and
approximately 52% was originated by unaffiliated independent brokers.
The Retail Brokerage Business is compensated for its services primarily
in the form of commissions paid by insurance companies. The commission is
usually a percentage of the premium paid by the insured. Commission rates depend
upon the type of insurance, the particular insurance company, and the role in
which the Retail Brokerage Business acts. In some cases a commission is shared
with other agents or brokers who have acted jointly with the Retail Brokerage
Business in connection with the transaction. The Retail Brokerage Business may
also receive from an insurance company a contingent commission that is generally
based on the profitability and volume of business placed with it by the Retail
Brokerage Business over a given period of time. The Retail Brokerage Business
may also receive fees in connection with consulting services relating to the
marketing of insurance.
The Program Brokerage Business receives commissions from the Insurance
Companies and the unaffiliated Program insurers. Pursuant to subbrokerage
agreements, the Program Brokerage Business pays commissions to independent
brokers based upon all business produced by such independent brokers under the
Programs (including business placed by the Program Brokerage Business with the
unaffiliated Program insurers).
The Insurance Companies underwrite property/casualty insurance and
reinsurance. This business is sold principally through specially designed
programs (the "Programs") covering various types of business and properties
which have similar risk characteristics. The business underwritten by the
Insurance Companies has historically been placed by the Program Brokerage
Business and entities comprising the Insurance Brokerage Companies. Claims
Administration provides claims adjusting services to Old Lyme Rhode Island as
well as other insurance carriers.
The Company has foreign operations in Bermuda. For further details on
segment operations see consolidated balance sheets, consolidated statements of
income and Note 22 to the financial statements.
Competition
The Company operates in a highly competitive industry and faces
competition from world wide brokers and insurers.
The insurance brokerage business is highly competitive. The Company
believes that it is well positioned to compete within its designated market
because of the expertise and knowledge it has developed in servicing middle
market companies and the Programs it has developed.
Many insurance companies which compete with Old Lyme Rhode Island have
a higher A.M. Best letter-rating (Old Lyme Rhode Island is rated A-) and are
larger and have greater financial, marketing and management resources than the
Insurance Companies. Competition is based on many factors, including perceived
overall financial strength of the insurer, premiums
7
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charged, policy terms and conditions, services offered, reputation and
experience. Due to its size, management and operational flexibility, the Company
can respond quickly to, and take advantage of, changing circumstances
encountered in the marketplace.
In the event that admitted insurers (including the unaffiliated Program
insurers) begin to offer the coverage in New York which the Company offers as a
surplus lines insurer, it is possible that the Company may be unable to receive
placements on a surplus lines basis, because brokers are generally required
first to obtain "declinations" from admitted carriers before they can offer the
business to a surplus lines underwriter. In addition, in soft insurance markets,
other insurance companies may be more willing to offer low deductibles which
cover the first layer of risk at prices competitive with or lower than those
under the Programs.
Ceded Reinsurance
The Insurance Companies have from time to time obtained reinsurance for
portions of, or specific risks under, the first layer of risks underwritten by
the Company. Such reinsurance is not and has not been material to the Company.
Reinsurance has been placed with National Reinsurance Corporation, Transatlantic
Reinsurance Company, and USF Reinsurance Company, which are rated A or better by
A.M. Best Company. However, if reinsurance should become more widely available
at economical prices, the Company may increase the amount of reinsurance it
purchases (see Note 13 to the financial statements).
Losses and Loss Expenses
The Insurance Companies are directly liable for losses and loss expense
payments under the terms of insurance policies that they write, and under the
various reinsurance treaties to which they are parties. In many cases, several
years may elapse between the occurrence of an insured loss, the reporting of the
loss to the Insurance Companies and the Insurance Companies payment of that
loss. The Insurance Companies reflect their liability for the ultimate payment
of all incurred losses and loss expenses by establishing loss and loss
adjustment expense reserves, which are balance sheet liabilities representing
estimates of future amounts needed to pay claims and related expenses with
respect to insured events that have occurred.
When a claim involving a probable loss is reported, the Insurance
Companies establish a loss reserve for the estimated amount of the Insurance
Companies' ultimate loss and loss adjustment expense payments. The estimate
reflects an informed judgment based on established reserving practices and the
experience and knowledge of the Insurance Companies' claims examiners regarding
the nature and value of the claim, as well as the estimated expense of settling
the claim, including legal and other fees, and general expenses of administering
the claims adjustment process. The Insurance Companies also establish reserves
on an aggregate basis to provide for losses incurred but not reported ("IBNR
reserves"), as well as future developments on losses reported to the Insurance
Companies. The amount of an insurer's incurred losses in a given period is
determined by adding losses and loss expenses paid during the period to case
loss and loss adjustment expense reserves and IBNR reserves (collectively, "loss
reserves") at the end of the period, and then subtracting loss reserves existing
at the beginning of the period.
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<PAGE>
As part of the reserving process, historical data is reviewed and
consideration is given to the anticipated effect of various factors, including
anticipated legal developments, changes in social attitudes, inflation and
economic conditions. Reserve amounts are necessarily based on management's
estimates, and as other data becomes available and is reviewed, these estimates
are revised, resulting in increases or decreases to existing reserves.
Old Lyme Rhode Island has received claims related to lead paint
exposures it insures under various residential real estate programs. There are
uncertainties in estimating the amount of reserves due to factors including:
difficulty in properly allocating responsibility and/or liability for the lead
paint exposure; changes in the underlying laws and the judicial interpretation
of those laws; questions regarding the interpretation and application of
insurance and reinsurance coverage. Old Lyme Rhode Island has reserves
established for these claims on a case basis and an incurred but not reported
basis. The reserves provided were established based on Management's estimate of
ultimate liabilities. However, due to the nature of the exposures, Management
believes such reserves could not be, and therefore were not, established using
standard actuarial techniques.
To further review the adequacy of the reserves, the Insurance Companies
engage independent actuarial consultants to perform periodic case and ultimate
loss reserve analysis.
The following table sets forth a reconciliation of the change in the
reserves for outstanding losses and loss expenses, including paid losses and
loss expenses, for each year in the three year period ended December 31, 1996.
Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
Balance at January 1, $ 12,671 $ 14,118 $ 17,929
Less reinsurance recoverables
-------- -------- --------
Net Balance at January 1, 12,671 14,118 17,929
Incurred related to:
Current year 6,621 4,986 5,691
Prior year 415 (136) (71)
-------- -------- --------
Total incurred 7,036 4,850 5,620
-------- -------- --------
Paid related to:
Current year 1,832 2,138 2,464
Prior year 3,530 4,159 6,967
-------- -------- --------
Total paid 5,362 6,297 9,431
-------- -------- --------
Net Balance at December 31, 14,345 12,671 14,118
Plus reinsurance recoverables 882
-------- -------- --------
Balance at December 31, $ 15,227 $ 12,671 $ 14,118
======== ======== ========
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The following table presents the development of unpaid losses and loss
expense reserves for the past ten years for the Insurance Companies. During the
ten year period covered by this table, Old Lyme Bermuda changed its fiscal
year-end from July 31 to April 30 and then to December 31 for the year ended
December 31, 1990. In addition, Bermuda domiciled insurance companies, unlike
U.S. domiciled insurers, are not required to file calendar year loss development
information with regulatory authorities. Accordingly, the loss development
information included in the following table with respect to Old Lyme Bermuda
prior to 1992, reflects development data converted from the policy year loss
development data maintained by Old Lyme Bermuda through the use of mathematical
models. The top line of the table shows the estimated reserve for unpaid losses
and loss expenses at the balance sheet date for each of the indicated years.
These figures represent the estimated amount of unpaid losses and loss expenses
for claims arising in the current and all prior years that were unpaid at the
balance sheet date, including losses that had been incurred but not yet
reported. The table also shows the re-estimated amount of the previously
recorded reserve based on experience as of the end of each succeeding year. The
estimate changes as more information becomes available, principally about the
frequency of claims for individual years. The table was presented net of
reinsurance which was immaterial in all years presented.
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LOSS DEVELOPMENT SCHEDULE
<TABLE>
<CAPTION>
Year Ended 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for outstanding
losses and loss expenses
on December 31, $3,201 $4,360 $ 6,866 $ 8,418 $12,555 $16,244 $18,444 $17,929 $14,118 $12,672 $15,227
Cumulative amount paid as of:
One year later $ 746 $1,251 $ 2,018 $ 2,505 $ 4,374 $ 5,569 $ 6,379 $ 6,965 $ 4,161 $ 3,697
Two years later 1,497 2,351 3,513 5,266 7,545 9,258 11,704 10,002 6,802
Three years later 1,773 2,907 5,208 7,041 9,245 12,695 13,833 12,278
Four years later 1,986 3,662 6,113 7,600 11,378 13,813 14,973
Five years later 2,329 4,090 6,269 8,539 11,705 14,146
Six years later 2,609 4,112 6,881 8,660 11,768
Seven years later 2,609 4,204 6,892 8,681
Eight years later 2,609 4,204 6,895
Nine years later 2,609 4,204
Ten years later 2,609
Re-estimated liability as of:
One year later $2,860 $3,875 $ 6,891 $ 9,127 $13,665 $16,117 $18,140 $17,856 $14,254 $12,257
Two years later 2,491 4,483 6,692 9,767 13,003 15,182 18,511 18,184 13,487
Three years later 2,543 4,726 7,343 9,288 11,850 15,609 18,636 16,552
Four years later 2,778 4,850 7,228 9,002 12,410 15,462 18,177
Five years later 2,975 4,703 7,120 9,060 12,468 15,312
Six years later 2,956 4,507 7,140 8,973 12,224
Seven years later 2,835 4,357 7,063 8,893
Eight years later 2,707 4,312 6,964
Nine years later 2,658 4,204
Ten years later 2,609
Cumulative
Redundancy (Deficiency): $ 592 $ 156 ($ 98) ($ 475) $ 331 $ 932 $ 267 $ 1,377 $ 631 $ 415
</TABLE>
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Regulation
The Company is subject to a substantial degree of regulation, which is
designed to protect the interests of insurance policyholders. As a Rhode Island
property and casualty insurance company, Old Lyme Rhode Island is subject to the
primary regulatory oversight of the Rhode Island Department of Business
Regulation through its Insurance Division. On March 28, 1996, the Division
advised the Company that it is reviewing the treatment of certain reinsurance
arrangements between Old Lyme Rhode Island and Old Lyme Bermuda in Old Lyme
Rhode Island's 1995 Statutory Annual Statement filed with the Division. The
Company believes that it treated this arrangement appropriately in its annual
statement and it does not believe that there will be any material modifications
to Old Lyme Rhode Island's surplus at December 31, 1995.
As a Bermuda property and casualty insurance company, Old Lyme Bermuda
is subject to regulation of the primary regulatory body of Bermuda. Such
regulation relates to, among other things, authorized lines of business, capital
and surplus requirements and general standards of solvency, the filing of annual
and other financial reports prepared on the basis of statutory accounting
practices, the filing and form of actuarial reports, the establishment and
maintenance of reserves for unearned premiums, losses and loss expenses,
underwriting limitations, investment parameters, transactions with affiliates,
dividend limitations, changes in control and a variety of other financial and
non-financial matters.
The National Association of Insurance Commissioners has developed
risk-based capital formulas to be applied to all domestic insurance companies.
These formulas calculate a minimum required statutory net worth, based on the
underwriting, investment and other business risks inherent in an individual
company's operations. Any insurance company which does not meet threshold
risk-based capital levels ultimately will be subject to statutory receivership
proceedings. The statutory net worth of Old Lyme Rhode Island is adequate in
light of its current and anticipated future business and has met its risk-based
capital and surplus requirements at December 31, 1996. The minimum risk-based
capital requirement for Old Lyme Rhode Island, as of December 31, 1996 was
$8,459,288 and the Company exceeded that threshold by $15,574,938.
Employees
As of February 1, 1997, the Company has 336 employees. The Company is
not currently unionized. The Company believes that its employee relationships
are satisfactory.
Item 2. Properties
The Company owns approximately 7,400 square feet of space in an office
condominium building in Warwick, Rhode Island which is utilized by employees.
The Company also leases space in two buildings located in New York, New York.
One lease relates to approximately 67,000 square feet of office space. The
second lease relates to approximately 31,000 square feet of office space. The
Company leases a total of approximately 14,000 square feet in Beverly Hills,
12
<PAGE>
California, and Southport, Connecticut. The Company's current office space
leases are suitable for its current needs, and it has no other real property
interests.
Item 3. Legal Proceedings
The Company is a party to lawsuits arising in the normal course of
business. Virtually all pending lawsuits in which the Insurance 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.
The Insurance Brokerage Companies 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 Insurance Brokerage Companies are or may
become party to administrative inquiries and at times to administrative
proceedings commenced by state insurance regulatory bodies. Certain subsidiaries
have been involved since 1992 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. While the companies are 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 Insurance Brokerage
Companies 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 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of its fiscal year ended December 31, 1996.
13
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
In August 1993, in connection with the consummation of the IPO, the
Company's Common Stock was listed on the NASDAQ National Market System under the
symbol "OLHC". On October 2, 1995, in connection with the combination of the
Retail Brokerage Business of Kaye with Old Lyme, Old Lyme changed its name to
Kaye Group Inc. and is now listed under its new symbol "KAYE". The following
table sets forth the high and low prices for the Common Stock as reported on
NASDAQ for the indicated periods and the dividends paid per share during such
periods.
Price Range Dividends
---------------------- Paid
High Low Per Share
---- --- ---------
1996:
First Quarter $8 $7 $ .025 cash
Second Quarter 7 1/2 5 5/8 $ .025 cash
Third Quarter 7 4 5/8 $ .025 cash
Fourth Quarter 6 1/2 4 5/8 $ .025 cash
1995:
First Quarter $10 1/4 $8 3/4 $ .025 cash
Second Quarter 10 3/4 9 $ .025 cash
Third Quarter 9 1/4 7 1/4 $ .025 cash
Fourth Quarter 8 3/4 6 3/4 $ .025 cash
The approximate number of holders of record of the Company's Common
Stock as of March 10 , 1997 was 55. The approximate number of beneficial holders
as of March 10, 1997 was 657.
See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Dividends" for a discussion of dividends
paid by the Company.
14
<PAGE>
Item 6. Selected Financial Data
The following table should be read in conjunction with, and is supplemented in
its entirety by, the consolidated financial statements and the notes thereto.
Financial data has been restated to take into effect the Transactions effective
October 2, 1995. The financial data for the years 1993 through 1996 has been
derived from the audited consolidated financial statements of the Company.
<TABLE>
<CAPTION>
Years ended December 31,
- - ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- - ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Operating revenues $ 50,341 $ 51,582 $ 52,906 $ 54,598 $ 53,358
Net investment income 3,576 3,912 3,455 2,752 2,475
Net realized gains (losses) on investments 72 (47) (50) 611 360
-------- -------- -------- -------- --------
Total revenues 53,989 55,447 56,311 57,961 56,193
-------- -------- -------- -------- --------
Net income $ 3,071 $ 5,181 $ 4,347 $ 1,186 $ 2,685
- - ------------------------------------------------------------------------------------------------------------------------------------
Net income per share:
Net income $ 0.44 $ 0.74 $ 0.62 $ 0.20 $ 0.51
- - ------------------------------------------------------------------------------------------------------------------------------------
PRO FORMA NET INCOME
Income before minority interest, income taxes and
cumulative effect of change in accounting principles $ 5,211 $ 6,309 $ 6,516 $ 2,476 $ 3,513
Charge in lieu of income taxes (1) 1,484 1,995 1,861 699 1,154
-------- -------- -------- -------- --------
Income before minority interest and
cumulative effect of change in accounting principles 3,727 4,314 4,655 1,777 2,359
Minority interest (656) (759) (1,011) (313) (415)
Cumulative effect of change in accounting principles,
net of charge in lieu of income taxes (2) 1,090
-------- -------- -------- -------- --------
Pro forma net income $ 3,071 $ 3,555 $ 4,734 $ 1,464 1,944
-------- -------- -------- -------- --------
PRO FORMA NET INCOME PER SHARE
Income before cumulative effect of change in
accounting principles $ 0.44 $ 0.51 $ 0.52 $ 0.25 $ 0.37
Cumulative effect of change in accounting principles,
net of charge in lieu of income taxes 0.15
-------- -------- -------- -------- --------
Pro forma net income $ 0.44 $ 0.51 $ 0.67 $ 0.25 $ 0.37
- - ------------------------------------------------------------------------------------------------------------------------------------
Weighted average of shares outstanding 7,020 7,020 7,020 5,924 5,295
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Item 6. Selected Financial Data (Continued)
<TABLE>
<CAPTION>
Years ended December 31,
- - ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- - ---------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C>
Balance Sheet data:
Total assets $156,102 $174,000 $185,976 $206,153 $174,536
Long -term debt (3) 12,787 13,679 11,618 13,995 14,247
Stockholders' equity (deficit) 24,984 22,882 16,676 13,688 (4,005)
Net book value (deficit) per share (4) 3.56 3.26 2.38 1.95 (0.57)
Cash dividend per share (5) 0.10 0.10 0.10 0.03
GAAP operating data:
Loss ratio 36.4% 28.8 % 31.8 % 42.9 % 47.1 %
Expense ratio 42.5% 41.1 % 32.9 % 32.9 % 36.4 %
Combined ratio 78.9% 69.9 % 64.7 % 75.8 % 83.5 %
Statutory operating data : (6)
Net underwriting gain $4,455 $7,104 $7,105 $2,599 (7) $4,037
Policyholders' surplus 25,485 26,231 22,274 21,528 7,701
Loss ratio 34.1 % 24.4 % 30.2 % 40.8 % 47.3 %
Expense ratio 40.0 % 37.1 % 35.5 % 33.7 % 36.7 %
Combined ratio 74.1 % 61.5 % 65.7 % 74.5 % 84.0 %
</TABLE>
(1) Pro forma net income-Prior to the Transaction and Restructuring, certain
entities were partnerships or S corporations under the Internal Revenue
Code and therefore not liable for Federal income taxes. Also, Old Lyme
Bermuda, as a Bermuda domiciled company, was not liable for income taxes.
The charge in lieu of income taxes information is presented as if the
income of these entities were taxed to those entities rather than to
partners or stockholders not otherwise included in the Company's
consolidated group. See Notes 3(j) and 8 to the consolidated financial
statements of the Company.
(2) See Note 4 to the Consolidated Financial Statements of the Company.
(3) Excludes that portion of long-term debt maturing in less than one year.
(4) Based upon 7,020,000 shares outstanding.
(5) Dividends paid and declared since the date of the IPO of August 17, 1993.
(6) Based upon statutory accounting practices and derived from the statutory
financial statements of the Insurance Companies.
(7) As a result of a substantial amount of new business written with effective
dates in the latter half of 1993, net underwriting gain for 1993 was
significantly affected by the statutory accounting practices of charging
commissions to income immediately while premiums are earned over the term
of the underlying policies. See Note 15 to the consolidated financial
statements of the Company.
16
<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 Corporation ("Holding"), (collectively
"Corporate") , which is the primary asset of the Company. The Company's business
is conducted principally through the wholly owned subsidiaries of Holding.
Following the Transactions, the Company operates in two business
segments - "Insurance Brokerage", which includes the Retail Brokerage Business
and the Program Brokerage Business (the "Insurance Brokerage Companies") and
"Property and Casualty Insurance" or "Insurance" which comprises the Insurance
Companies and Claims Administration (the "Property and Casualty Companies").
The revenues and expenses of the Property and Casualty Insurance
segment will not be comparable to the amounts reported previously by Old Lyme.
Historically, the commission income of the Program Brokerage Business 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 the Program
Brokerage Business in the Insurance Brokerage segment for all periods presented.
Overview
The Insurance Brokerage Companies derive their 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.
Historically, the commission income was recognized at the time coverage
was bound and invoiced. If coverage was invoiced in installments, the commission
was recognized on each installment. Because revenue recognition should be tied
to the performance of the service and not to the cash flow effects of billing
arrangements, in 1994, the Insurance Brokerage Companies adopted a common
industry practice of recognizing all commission on a policy at the time coverage
is bound and invoiced, whether or not installment billing is used. This change
resulted in a cumulative effect adjustment of $1,652,000 which represents
installment invoicing recognized in 1994, which under the new policy would have
been recorded in 1993 and prior years. The amount recognized under the new
policy in 1994, relating to installment billings to be made in 1995 totaled
approximately $1,471,000.
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
17
<PAGE>
businesses and properties which have similar risk characteristics. The Insurance
business generally underwrites the first layer of insurance under the Programs
and unaffiliated Program insurers provide coverage for losses above the first
layer of risk. Substantially all of the Insurance business revenues are derived
from premiums on this business, plus the investment income generated by the
investment portfolio of the Insurance business.
Insurance coverage under the Programs is provided through a variety of
underwriting structures, including reinsurance arrangements where direct
coverage may not be possible. RLI Insurance Company (RLI), an unaffiliated
company, has had reinsurance agreements with the Property and Casualty Companies
since 1982 to provide direct coverage in certain of such circumstances. RLI
writes various policies from the first layer of risk under the Programs and
cedes to the Property and Casualty Companies a certain percentage of premiums to
purchase a stop loss policy in the event RLI's losses exceed a fixed percentage
of net premiums written. In the event losses are less than the fixed percentage,
the Insurance Brokerage Business will receive a contingent commission equal to
such amount (net of fees paid to RLI). Only the premiums ceded to the Property
and Casualty Companies for the stop loss policy are included in the net premiums
written and earned for the Insurance business.
Corporate operations include those expenses not directly related to the
Insurance Brokerage Companies or Insurance businesses. These expenses are
associated with being a public company and interest expense on corporate debt.
The Company has foreign operations in Bermuda. For further discussion
see Note 22 to the consolidated financial statements.
A comprehensive analysis of the results of operations of the Company
would not be meaningful without consideration of the charge in lieu of taxes.
The provision for income taxes, as reported in the historical financial
statements, does not provide for any income taxes on certain subsidiaries of the
Company prior to the combination on October 2, 1995. Prior to the Transactions
on October 2, 1995, the Brokerage Partnerships and Brokerage Corporations were
either limited partnerships or S Corporations under the Internal Revenue Code,
and therefore, the individual partners or shareholders, rather than the
companies were liable for income taxes. Accordingly, the Company has presented a
calculation of Pro Forma Income for each of the three years in the period ended
December 31, 1996 which reflects a charge in lieu of income taxes, as if all
subsidiaries were included in the Company's consolidated Federal income tax
return for all years presented. Management believes this presentation will
better present current and future comparisons of the effective tax rate and
Federal and State income tax expense of the Company.
18
<PAGE>
Results of Operations
Year ended December 31, 1996 compared
with year ended December 31, 1995
Insurance Brokerage Operations
Total revenues in 1996 were $31,595,000 compared with $34,970,000 in
1995, or a reduction of $3,375,000 (9.7%). The largest component of revenues,
net commission and fees, was down $3,373,000 (9.6%) due in part to nonrecurring
items in 1995 of $1,102,000 which consisted of $605,000 relating to the sale of
expiration lists of Kaye Administrators, the Home Owners Program was extended by
an additional six months for commissions of $305,000, and a special contingent
commission of $192,000. The remaining reduction in commissions was mainly due to
lost business of approximately $3,200,000 in commercial lines, group and life,
personal lines and fees earned from public adjusters partially offset by new
business of $1,600,000. This loss in business, equivalent to approximately 9% of
the Company's 1995 volume, results in a business retention of approximately 91%.
This is well within normal industry expectations given the usual attrition in a
highly competitive environment.
Salaries and related taxes and fringes decreased by $2,556,000 (12.1%)
to $18,569,000 in 1996 compared to $21,125,000 in 1995. The decrease is a result
of a reductions in work force, lower compensation earned under incentive
contracts, termination of the Company's defined benefit pension plan, refunds
received on group medical insurance, utilization of forfeitures in the 401K plan
and the one time incentive payment in 1995 relating to the sale of Kaye
Administrators.
Other operating expenses (including depreciation) decreased by $330,000
(2.4%) to $13,621,000 in 1996 compared with $13,951,000 in 1995. The decrease
was primarily due to lower professional fees as a result of the settlement of a
former employee lawsuit partially offset by additional depreciation costs
related to the capital leasing of new computers, and outside rating service fees
related to the Residential Real Estate Program, general insurance and employment
agency fees.
Loss before minority interest and income taxes increased by $489,000 to
$1,195,000 in 1996 from $706,000 in 1995. The benefit of decreased salaries and
related taxes and fringes was offset by lower revenues as discussed above.
Property and Casualty Insurance Operations
Net premiums earned for 1996 increased by $2,482,000 (14.7%) to
$19,327,000 from $16,845,000 in 1995. This increase was primarily attributable
to growth in the Residential Real Estate Program partially offset by lost
business due to increased competition in the Restaurant Program.
19
<PAGE>
Net investment income decreased by $358,000 (12.7%) to $2,461,000 in
1996 from $2,819,000 in 1995 as a result of additional bond amortization for
those bonds which had early call features.
Losses and loss expenses increased in 1996 by $2,186,000 to $7,036,000
from $4,850,000 in 1995. The loss ratio for 1996 was 36.4% compared to 28.8% in
1995. The increase in loss ratio is due to the change in the mix of business
during 1996 from property and umbrella coverages to other general liability
coverage, including exposure to lead paint, which experiences a higher loss
ratio.
Acquisition costs and general and administrative expenses increased in
1996 by $1,290,000 to $8,218,000 from $6,928,000 in 1995. The expense ratio for
1996 and 1995 were 42.5% and 41.1%, respectively. The increase in expense ratio
was mainly due to professional fees.
Income before minority interest and income taxes decreased in 1996 by
$1,631,000 to $7,051,000 from $8,682,000 in 1995. This decrease was the result
of reduced investment income and the increase in the combined ratio in 1996 to
78.9% from 69.9% in 1995 partially offset by an increase in net premiums earned,
as discussed above.
Corporate
Net expenses before minority interest and income taxes decreased in
1996 by $1,022,000 to $645,000 from $1,667,000 in 1995. The decrease in expenses
was the result of nonrecurring reorganization costs incurred in 1995.
Pro Forma Net Income (See Note 8)
The pro forma presentation for 1995 includes the effect of a tax
benefit from the Retail Brokerage Business which was not combined into the
Company until October 2, 1995, resulting in a pro forma effective tax rate of
28.5% and 31.6% for 1996 and 1995, respectively. The rate decrease in 1996 is
primarily due to a one time charge for reorganization costs in 1995 of $863,000
most of which are not deductible for income tax purposes.
Year ended December 31, 1995 compared
with year ended December 31, 1994
Insurance Brokerage Operations
Total revenues in 1995 were $34,970,000 compared with $35,595,000 in
1994, or a reduction of $625,000 (1.8%). The largest component, commissions and
fees, was down $836,000 (2.3%). The year 1995 was the first year the Company
experienced more lost business than new business. This reduction in revenues was
partially offset by increased contingency income from non-affiliated carriers
which increased by $1,357,000 to $2,545,000, and a nonrecurring item of $605,000
related to the sale of expiration lists of Kaye Administrators.
20
<PAGE>
Interest income increased in 1995 by $211,000 primarily as a result of increased
funds available for investment and slightly higher interest rates.
Salaries and related taxes and fringes decreased by $2,019,000 (8.7%)
to $21,125,000 in 1995 compared to $23,144,000 in 1994. The Company began to
realize the full effect of staffing reductions that began in 1994. This decrease
was a result of direct salary expense being reduced by $1,580,000 with a
corresponding reduction in taxes and fringes. The benefit was partially reduced
by an incentive of approximately $226,000 earned by a former executive related
to the sale of the expiration lists of Kaye Administrators.
Other operating expenses (including depreciation) increased by $151,000
to $13,951,000 in 1995 compared with $13,800,000 in 1994. Reduced cost of errors
and omission insurance created a $265,000 favorable variance from 1994, which
combined with an increased recovery of expenses from the insurance company
subsidiaries helped offset an increase in professional fees. Professional fees,
consisting of accounting, legal and consulting costs, were up $765,000 over 1994
due primarily to legal expenses related to defending various employee actions
and increased use of consultants.
Loss before minority interest and income taxes decreased by $1,243,000
to $706,000 from $1,949,000 in 1994. The benefit of significant decreases in
salaries and related taxes and fringes, resulting from restructuring efforts,
was partially offset by decreased revenues, as discussed above.
Property and Casualty Insurance Operations
Net premiums earned for 1995 decreased by $831,000 (4.7%) to
$16,845,000 from $17,676,000 in 1994. This decrease was attributable to
increased competition which was the major reason for lost business in the
Restaurant and the Real Estate Programs. To be consistent with our overall
underwriting philosophy, we chose not to write business if we believed that we
could not make a solid underwriting profit on each account.
Net investment income increased by $305,000 (12.1%) to $2,819,000 in
1995 from $2,514,000 in 1994. An average short-term rate increase of
approximately 0.7% on an average portfolio of about $40,000,000 each year
accounted for the increase.
Losses and loss expenses decreased in 1995 by $770,000 to $4,850,000
from $5,620,000 in 1994. Losses for 1994 include $375,000 from weather related
catastrophe losses. Exclusive of these losses, the loss ratio for 1995 and 1994
would have been 28.8% and 29.7%, respectively. The improved loss ratio is the
result of growth in property and umbrella coverage, which has a lower loss ratio
than other lines of business, combined with a decrease in business in general
liability coverage, which traditionally experiences a higher loss ratio.
Acquisition costs and general and administrative expenses increased in
1995 by $1,105,000 to $6,928,000 from $5,823,000 in 1994. Acquisition costs
increased as a result of a change in commission rate on certain reinsurance
arrangements. The increase in general and
21
<PAGE>
administrative costs was mainly due to audit fees and actuarial fees incurred
for the triennial audit of Old Lyme Rhode Island, increased amount of
contractual management incentive bonuses, and salaries allocated to the
Insurance Companies for services performed by affiliates.
Income before minority interest and income taxes decreased in 1995 by
$467,000 to $8,682,000 in 1995 from $9,149,000 in 1994. The decrease in
operations was the result of the increase in the combined ratio of 5.2
percentage points in 1995, offset partially by the increase in investment
income, as discussed above.
Corporate
Net expenses before minority interest and income taxes increased in
1995 by $983,000 to $1,667,000 from $684,000 in 1994. The increase in expenses
was the result of nonrecurring reorganizational costs related to the
combination.
Pro forma Net Income (See Note 8)
The pro forma presentation for 1995 and 1994 included the effect of a
tax benefit from the Retail Brokerage Business and the effect of a change in
accounting principles for 1995 and 1994, resulting in an effective tax rate of
31.6% and 28.6% for 1995 and 1994 respectively. The rate increase in 1995 is due
to a one time charge for combination costs of $863,000 most of which are not
deducible for income tax purposes.
Financial Condition and Liquidity
Total assets decreased by $17,898,000 (10.3%) to $156,102,000 at
December 31, 1996 from $174,000,000 at December 31, 1995. Total liabilities
decreased by $20,450,000 (14.0%) to $125,780,000 at December 31, 1996 from
$146,230,000 at December 31, 1995. The early collections of certain premiums and
other receivables and the corresponding payment of premiums payable during
December 1996 compared to December 1995 accounted for the major portion of this
decrease.
Stockholders' equity increased by $2,102,000 (9.2%) to $24,984,000 at
December 31, 1996 from $22,882,000 at December 31, 1995. The increase in equity
resulted from net income of $3,071,000 partially offset by an increase in
unrealized depreciation on investments (net of deferred income taxes) of
$267,000 and cash dividends of $702,000. All amounts are net of the effects of
the minority interest in Kaye Holding Corp.
The Company's cash and cash equivalents increased by $14,095,000 for
the year ended December 31, 1996. Cash from operating activities increased by
$16,797,000 primarily due to increased fiduciary funds on hand. Investing
activities used cash of $434,000 mainly due to the leasing of new computers in
the fourth quarter 1996. Financing activities used cash of $2,268,000 to meet
requirements under reinsurance arrangements recorded as deposit contracts, and
payment of dividends.
22
<PAGE>
The Company has calculated risk-based capital and the result is that
the statutory net worth of Old Lyme Rhode Island is adequate in light of the
current requirements. See "Item 1-- Business -- Regulation."
The Company is subject to a substantial degree of regulation, which is
designed to protect the interests of insurance policyholders. As a Rhode Island
property and casualty insurance company, Old Lyme Rhode Island is subject to the
primary regulatory oversight of the Rhode Island Department of Business
Regulation through its Insurance Division. On March 28, 1996, the Division
advised the Company that it is reviewing the treatment of certain reinsurance
arrangements between Old Lyme Rhode Island and Old Lyme Bermuda in Old Lyme
Rhode Island's 1995 Statutory Annual Statement filed with the Division. The
Company believes that it treated this arrangement appropriately in its annual
statement and it does not believe that there will be any material modifications
to Old Lyme Rhode Island's surplus at December 31, 1995.
The Company's primary source of cash is derived from insurance
premiums, insurance brokerage commissions and fees, proceeds from the sale of
investments, and investment income. The Company's principal uses of cash are
payments of insurance premiums, commissions to brokers who produce the business,
losses and loss expenses and operating expenses, and purchases of investments
and fixed assets.
The Company has minimized its investment risk by investing in high
quality tax exempt municipal bonds, U.S. Government and government agency
securities and corporate bonds rated A or better by an accredited rating agency
and by maintaining an average duration of approximately five years, taking into
account the effects of certain early call features. The Company intends to
continue these investment strategies.
The table below sets forth the composition of the Company's portfolio
of fixed maturity investments by rating as of December 31, 1996:
<TABLE>
<CAPTION>
Market Value Percentage
as Reflected of Total
Amortized on Balance at
Rating (a) Cost Sheet Market Value
---------- ---- ----- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
AAA(b) $29,208 $29,192 74.6%
AA 4,827 4,831 12.3%
AA- 1,817 1,826 4.7%
A+ 2,791 2,729 7.0%
A 582 576 1.4%
------- ------- -----
$39,225 $39,154 100.0%
======= ======= =====
</TABLE>
(a) Ratings are assigned primarily by Standard & Poors Corporation with the
remaining ratings assigned by Moody's Investors Services, Inc. and
converted to the equivalent Standard & Poors ratings.
(b) Includes U.S. Government Obligations.
23
<PAGE>
The Company maintains a substantial level of cash and liquid short term
investments which are used to meet anticipated payment obligations. At December
31, 1996 and 1995, the Company had cash and short term investments of
$29,295,000 and $17,014,000 , respectively of which $23,879,000 and $7,528,000
represents premiums collected and held in a fiduciary capacity which are
generally not available for operating needs of the Company. 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.
Investment results of the Company for each of the three years in the
period ended December 31, 1996 are shown in the following table:
At or for the
years ended December 31,
---------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Average cash and cash
equivalents and
invested assets (1) $68,692 $ 64,261 $ 69,351
Investment income $ 3,576 $ 3,912 3,455
Average yield on total investments 5.2% 6.1% 5.0%
Net realized investment gains (losses) $ 72 $ (47) $ (50)
(1) Based upon the average of the beginning and end of the period amortized
cost for fixed maturities and cost for equity securities.
A subsidiary of the Company has a $8,750,000 revolving line of credit
with a bank, collateralized by the stock of the Insurance Companies. The
proceeds are available for general operating needs and acquisitions. As of
December 31, 1996, $7,100,000 has been borrowed under the agreement.
Under the terms of the revolving line of credit, there were no
principal payments due during 1996. Principal payments commence during 1997 with
$225,000 due September 30 and $625,000 per quarter, thereafter.
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, 1996, the
Insurance Companies, with a combined statutory surplus of $25,485,000, had a
ratio of combined annual statutory net premiums written to their combined
statutory surplus of approximately .81 to 1.
24
<PAGE>
Management believes the Company's operating cash flow, cash equivalents
and short term investments will provide sufficient sources of liquidity and
capital to meet the Company's anticipated needs in the next twelve months and
the foreseeable future. The Company has no material capital commitments.
Dividends
On December 20, 1996, the Board of Directors declared a quarterly
dividend of $.025 per share, payable January 20, 1997 to stockholders of record
on December 31, 1996. The Company is largely dependent upon dividends from its
subsidiary to pay dividends to the stockholders. The Company's insurance
subsidiaries are subject to regulations that restrict their ability to pay
dividends.
Under Rhode Island Insurance law, Old Lyme Rhode Island may pay cash
dividends only from earned surplus determined on a statutory basis, subject to
the maintenance of minimum capital and surplus of $3,000,000. Further, Old Lyme
Rhode Island is restricted (on the basis of the lesser of 10% of Old Lyme Rhode
Island's statutory surplus at the end of the preceding twelve-month period or
100% of Old Lyme Rhode Island's net income, excluding realized capital gains,
for the preceding twelve-month period) as to the amount of dividends it may
declare or pay in any twelve-month period without prior approval of the
Department of Business Regulation of Rhode Island. Without special permission,
at December 31, 1996, $2,403,000 was available for distribution.
Old Lyme Bermuda is required to maintain a minimum statutory capital
and surplus based upon the higher of $1,000,000 or an amount derived by applying
a variable rate to its current premium volume or outstanding losses at December
31, 1996. At December 31, 1996, $451,000 was available for distribution from Old
Lyme Bermuda and its subsidiary, Park Brokerage Ltd.
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.
Other
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
25
<PAGE>
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 has adopted the disclosure for stock-based compensation in
accordance with APB No. 25 and has provided the additional disclosure required
by SFAS No. 123 (see Note 19 to the consolidated financial statement). The
adoption of this standard does not have an impact on the Company's financial
position or results of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share".
This statement specifies the computation, presentation, and disclosure
requirement for earnings per share.
SFAS No. 128 is applicable to all entities with publicly held common
stock or potential common stock. It also applies to an entity that has made a
filing or is in the process of filing with a regulatory agency in preparation
for the sale of securities in a public market. The statement does not apply to
investment companies or to wholly owned subsidiaries that have not issued
options or other potential common shares to employees or others. Management does
not believe that the adoption of this standard will have a material impact on
the Company's present computation of earnings per share.
Item 8. Financial Statements and Supplementary Data
See page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Reference is made to the Registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1996, and which is incorporated herein by reference.
Item 11. Executive Compensation
Reference is made to the Registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1996, and which is incorporated herein by reference.
26
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the Registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1996, and which is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Reference is made to the Registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1996, and which is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial statements and schedules.
1. Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Income for the years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedule II -- Condensed Financial Information of Registrant:
Balance Sheets at December 31, 1996 and 1995
Statements of Income for the years ended
December 31, 1996, 1995, and 1994
27
<PAGE>
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Notes to Condensed Financial Statements
Schedule IV -- Reinsurance for the years ended December 31,
1996, 1995 and 1994
Schedule VI -- Supplemental Information Concerning
Property-Casualty Insurance Operations for the
years ended December 31, 1996, 1995 and 1994
The information for Schedule I is contained in the Notes to the
Consolidated Financial Statements. The information for Schedule III is included
in Schedule VI. The information required for Schedule V is not applicable.
3. Exhibits:
Exhibit
Number Description
2 Acquisition Agreement, dated as of August 3, 1995, among Kaye Group
Inc. (formerly known as Old Lyme Holding Corporation), Kaye
International, L.P., certain individuals and Kaye Holding Corp.,( a
copy of which was filed with the Commission on March 31, 1995
(Registration No. 33-64664), and which is incorporated herein by
this reference).
3 (i) Certificate of Incorporation of Kaye Group Inc. (formerly known as
Old Lyme Holding Corporation) (a copy of which was filed with the
Commission on June 17, 1993 as Exhibit 3.1 to the Company's
Registration Statement on Form S-1, and which is incorporated herein
by this reference).
3 (ii) By-laws of Kaye Group Inc. (formerly known as Old Lyme Holding
Corporation) (a copy of which was filed with the Commission on June
17, 1993 as Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (Registration No. 33-64664), and which is incorporated
herein by this reference).
4.1 Form of certificate representing shares of Common Stock of the
Company (a copy of which was filed with the Commission on March 31,
1995 (Registration No. 33-64664), and which is incorporated herein
by this reference).
10.1 Kaye Group Inc. (formerly known as Old Lyme Holding Corporation)
1993 Stock Option Plan (a copy of which was filed with the
Commission on August 17, 1993 as Exhibit 10.6 to Amendment No. 3 to
the Company's Registration Statement on
28
<PAGE>
Form S-1 (Registration No. 33-64664), and which is incorporated
herein by this reference).
10.1 (i) Kaye Group Inc. Supplemental Stock Option Plan.
10.2 Registration Agreement among Kaye Group Inc. (formerly known as Old
Lyme Holding Corporation), Kaye International, L.P. and Old Lyme
Holdings of Rhode Island, Inc. (a copy of which was filed with the
Commission on August 17, 1993 as Exhibit 10.7 to Amendment No. 3 to
the Company's Registration Statement on Form S-1 (Registration No.
33-64664), and which is incorporated herein by this reference).
10.3 RLI/Kaye Agency Agreement among RLI Insurance Company, Program
Brokerage Corp. and certain other entities, dated as of January 1,
1996.
10.4 Mt. Hawley/Kaye Producer Agreement among Mt. Hawley Insurance
Company, Program Brokerage Corp. and certain other entities, dated
as of January 1, 1996.
10.5 Contingent Commission Agreement among RLI Insurance Company, Program
Brokerage Corp. and certain other entities, dated as of January 1,
1996.
10.6 Contingent Commission Agreement between Mt. Hawley Insurance
Company, Program Brokerage Corp. and certain other entities, dated
as of January 1, 1996.
10.7 Trust Account Agreement among RLI Insurance Company, Mt. Hawley
Insurance Company and Program Brokerage Corp. dated as of January 1,
1995 (a copy of which was filed with the Commission on March 31,
1995 (Registration No.33-64664), as Exhibit 10.7 to the Company's
Form 10-K, and which is incorporated herein by this reference).
. 10.8 Aggregate Excess of Loss Reinsurance Agreement among RLI
Insurance Company, Mt. Hawley Insurance Company and Old Lyme
Insurance Company of Rhode Island, Inc. dated as of January 1, 1995
(a copy of which was filed with the Commission on March 31, 1995
(Registration No.33-64664), as Exhibit 10.8 to the Company's Form
10-K, and which is incorporated herein by this reference).
10.9 Service Agreement among RLI Insurance Company, Mt. Hawley Insurance
Company and Claims Administration Corp., dated as of January 1,
1996.
10.10 Investment Management Agreement among RLI Insurance Company, Mt.
Hawley Insurance Company, Program Brokerage Corp. and Fleet
Investment Advisory (formerly known as Shawmut Investment Advisors,
Inc.), dated as of December 11, 1995, (a copy of which was filed
with the Commission on March 31, 1995 (Registration No.33-64664), as
Exhibit 10.10 to the Company's Form 10-K, and which is incorporated
herein by this reference).
29
<PAGE>
10.11 Credit Agreement among Fleet National Bank ( formerly known as
Shawmut Bank Connecticut, N.A.) and Kaye Group Inc. (formerly known
as Old Lyme Holding Corporation) dated June 30, 1994 (a copy of
which was filed with the Commission on March 31, 1995 (Registration
No.33-64664), as Exhibit 10.16 to the Company's Form 10Q, and which
is incorporated herein by this reference).
10.12 First Amendment to the Credit Agreement, dated March 15, 1995 (a
copy of which was filed with the Commission on March 31, 1995 as
Exhibit 10.17 to the Company's Form 10Q, and which is incorporated
herein by this reference).
10.13 Second Amendment to the Credit Agreement, dated May 19, 1995 (a copy
of which was filed with the Commission on June 30, 1995 as Exhibit
10.19 to the Company's Form 10Q, and which is incorporated herein by
this reference).
10.14 Loan Agreement between Kaye International L.P. and Kaye Group, Inc.
(formerly known as Old Lyme Holding Corporation, dated May 24, 1995
(a copy of which was filed with the Commission on June 30, 1995, as
Exhibit 10.18 to the Company's Form 10Q, and which is incorporated
herein by this reference).
10.15 Credit Agreement between Kaye Holding Corp. and Fleet National Bank
(formerly known as Shawmut Bank Connecticut, N.A., dated October 2,
1995 (a copy of which was filed with the Commission on March 31,
1995, (Registration No.33-64664), as Exhibit 10.15 to the Company's
Form 10-K, and which is incorporated herein by this reference).
10.15 (i) First Amendment to Credit Agreement between Kaye Holding Corp. and
Fleet National Bank (formerly known as Shawmut Bank Connecticut,
N.A., dated March 31, 1996 (a copy of which was filed with the
Commission on May 13, 1996, (Registration No.33-64664), as Exhibit
10.22 to the Company's Form 10Q, and which is incorporated herein by
this reference).
10.15 (ii) Second Amendment to Credit Agreement between Kaye Holding Corp. and
Fleet National Bank (formerly known as Shawmut Bank Connecticut,
N.A., dated May 15, 1996 .
10.16 Stockholders Agreement among Kaye Holding Corp., Kaye International,
L.P., Kaye Group Inc., Howard Kaye, Lawrence Greenfield, Walter
Kaye, Stanley Feinberg, Bruce D. Guthart, Edward Berliner, Michel
Zaleski, Ned Sherwood and Marc N. Silverman, dated October 2, 1995,
(a copy of which was filed with the Commission on March 31, 1995,
(Registration No.33-64664), as Exhibit 10.16 to the Company's Form
10-K, and which is incorporated herein by this reference).
10.17 Executive Employment Agreement between Kaye Group Inc. and Bruce D.
Guthart, dated as of January 2, 1997.
30
<PAGE>
10.18 Employment Agreement between Kaye Group Inc. and Michael P. Sabanos,
dated as of May 15, 1996.
10.19 Employment Agreement between Kaye Insurance Associates, Inc.
(formerly known as Kaye Insurance Associates, L.P.) and Walter Kaye,
dated as of October 31, 1991.
10.19 (i) Amendment to Employment Agreement between Kaye Insurance Associates,
Inc. (formerly known as Kaye Insurance Associates, L.P.) and Walter
Kaye, dated as of February 24, 1995.
10.20 Executive Employment Agreement between Kaye Insurance Associates,
Inc. and Richard Bass, dated as of October 31, 1991 (a copy of which
was filed with the Commission on March 31, 1995, (Registration
No.33-64664), as Exhibit 10.20 to the Company's Form 10-K, and which
is incorporated herein by this reference).
10.20 (i) Amendment to Executive Employment Agreement between Kaye Insurance
Associates, Inc. and Richard Bass, dated as of December 11, 1995.
11 Statement regarding computation of per share earnings.
27 Financial Data Schedule
Location of Documents Pertaining to
Executive Compensation Plans and Arrangements
- - ---------------------------------------------
Name of Document Item in Exhibit Index
- - ---------------- ---------------------
Kaye Group Inc. (formerly known as
Old Lyme Holding Corporation)
1993 Stock Option Plan 10.1
(b) Reports on Form 8-K
There were no reports on Form 8K filed for the period October 1, 1996 to
December 31, 1996.
31
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 31, 1996
and 1995 F-3
Consolidated Statements of Income for the years
ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995
and 1994 F-7
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996, 1995
and 1994 F-8
Notes to Consolidated Financial Statements F-9
Financial Statement Schedules:
Schedule II - Condensed Financial Information of Registrant:
Balance Sheets at December 31, 1996
and 1995 F-36
Statements of Income for the years ended
December 31, 1996, 1995 and 1994 F-37
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-38
Notes to Condensed Financial Statements F-39
Schedule IV - Reinsurance for the years ended
December 31, 1996, 1995 and 1994 F-40
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations for the
years ended December 31, 1996, 1995 and 1994 F-41
The information for Schedule I is contained in the Notes to the Consolidated
Financial Statements. The information for Schedule III is included in Schedule
VI. The information required for Schedule V is not applicable.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Kaye Group Inc.:
We have audited the consolidated financial statements and the financial
statement schedules of KAYE GROUP INC. and SUBSIDIARIES listed in the index on
page F-1 of this Form 10-K. These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of KAYE GROUP INC.
and SUBSIDIARIES as of December 31, 1996 and 1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
As discussed in Note 4 to the consolidated financial statements, the Company
changed its method of accounting for commission income recognition in 1994.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
New York, New York
February 27, 1997
F-2
<PAGE>
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(in thousands, except par value per share)
<TABLE>
<CAPTION>
1996 1995
================ ================
<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 $23,879 and $7,528) $24,789 $10,054
Premiums and other receivables 56,255 76,732
Prepaid expenses and other assets 1,587 2,089
Intercompany receivable 7,817
---------------- ----------------
Total current assets 82,631 96,692
Fixed assets (net of accumulated depreciation of $7,646 and $6,622) 2,349 2,565
Expiration lists (net of accumulated amortization of $1,600 and $1,231) 2,092 2,462
Deferred income taxes 1,354 2,580
Other assets 237 842
---------------- ----------------
Total assets - insurance brokerage companies 88,663 105,141
---------------- ----------------
PROPERTY AND CASUALTY COMPANIES
Investments available-for-sale:
Fixed maturities, at market value (amortized cost 1996, $39,216;
1995, $37,558) 39,145 38,002
Equity securities, at market value (cost:1996, $2,246; 1995, $1,421) 2,316 1,506
Short term investments, at cost, which approximates market value 1,336 3,150
---------------- ----------------
Total investments 42,797 42,658
Cash and cash equivalents 2,714 1,712
Accrued interest and dividends 969 991
Premiums receivable 4,079 3,506
Premiums receivable - insurance brokerage companies 2,904 3,099
Prepaid reinsurance premiums 283 383
Reinsurance recoverable on unpaid loss and loss expenses 882
Funds held under deposit contracts, at market value (amortized cost
1996, $3,844; 1995, $5,590) 3,847 5,622
Deferred acquisition costs 4,073 3,703
Deferred income taxes 639 358
Other assets 2,266 2,551
Intercompany receivable 556
---------------- ----------------
Total assets - property and casualty companies 66,009 64,583
---------------- ----------------
CORPORATE
Cash and cash equivalents 456 2,098
Prepaid income taxes 1,261
Prepaid expenses and other assets 443 432
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 9 41
---------------- ----------------
Total assets - corporate 1,430 4,276
---------------- ----------------
Total assets $156,102 $174,000
================ ================
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(in thousands, except par value per share)
<TABLE>
<CAPTION>
1996 1995
================ ================
<S> <C> <C>
INSURANCE BROKERAGE COMPANIES
Current liabilities:
Premiums payable $63,081 $77,636
Premiums payable - property and casualty companies 2,904 3,099
Accounts payable and accrued liabilities 6,074 6,394
Notes payable 595 415
Deferred income taxes 1,122 1,178
Intercompany payable 344
---------------- ----------------
Total current liabilities 74,120 88,722
Notes payable 537 579
Notes payable - KILP 6,000 6,000
---------------- ----------------
Total liabilities-insurance brokerage companies 80,657 95,301
---------------- ----------------
PROPERTY AND CASUALTY COMPANIES
Liabilities:
Unpaid losses and loss expenses 15,227 12,671
Unearned premium reserves 13,176 11,914
Deposit contracts 3,448 5,001
Accounts payable and accrued liabilities 4,991 2,918
Reinsurance payable 170 285
Intercompany payable 84
---------------- ----------------
Total liabilities - property and casualty companies 37,012 32,873
---------------- ----------------
CORPORATE
Liabilities:
Current liabilities:
Accounts payable and accrued liabilities 704 3,222
Intercompany payable 212 7,734
Notes payable 850
Income taxes payable 95
---------------- ----------------
Total current liabilities 1,861 10,956
Notes payable-long-term 6,250 7,100
---------------- ----------------
Total liabilities-corporate 8,111 18,056
---------------- ----------------
Total liabilities 125,780 146,230
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN EQUITY OF
KAYE HOLDING CORP. 5,338 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 provision (benefit),
(1996, ($16); 1995, $121) (31) 236
Retained earnings 17,169 14,800
---------------- ----------------
Total stockholders' equity 24,984 22,882
---------------- ----------------
Total liabilities and stockholders' equity $156,102 $174,000
================ ================
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1996, 1995 and 1994
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
======== ======== ========
<S> <C> <C> <C>
INSURANCE BROKERAGE COMPANIES
Revenues:
Commissions and fees, net - Other $ 27,201 $ 31,142 $ 29,379
Commissions and fees, net - Property and Casualty Companies 3,368 2,800 5,399
Interests and dividends 1,026 1,028 817
-------- -------- --------
Total revenues 31,595 34,970 35,595
-------- -------- --------
Expenses:
Salaries and benefits 18,569 21,125 23,144
Other operating expenses 13,621 13,951 13,800
-------- -------- --------
Total operating expenses 32,190 35,076 36,944
-------- -------- --------
Interest expense 600 600 600
-------- -------- --------
Loss before income taxes-insurance brokerage companies (1,195) (706) (1,949)
-------- -------- --------
PROPERTY AND CASUALTY COMPANIES
Revenues:
Net premiums written 20,689 15,160 19,765
Change in unearned premiums (1,362) 1,685 (2,089)
-------- -------- --------
Net premiums earned 19,327 16,845 17,676
Net investment income 2,461 2,819 2,514
Net realized gains (losses) on investments 72 1 (50)
Other income 445 795 452
-------- -------- --------
Total revenues 22,305 20,460 20,592
-------- -------- --------
Expenses:
Losses and loss expenses 7,036 4,850 5,620
Acquisition costs and general
and administrative expenses 8,218 6,928 5,823
-------- -------- --------
Total expenses 15,254 11,778 11,443
-------- -------- --------
Income before income taxes-property and casualty companies 7,051 8,682 9,149
-------- -------- --------
CORPORATE
Revenues:
Net investment income 89 17 124
-------- -------- --------
Expenses:
Other operating expenses 220 133 119
Cost of combining operations 863
-------- -------- --------
Total operating expenses 220 996 119
-------- -------- --------
Interest expense 514 688 689
-------- -------- --------
Net expenses before income taxes-corporate (645) (1,667) (684)
-------- -------- --------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1996, 1995 and 1994
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
======= ======= =======
<S> <C> <C> <C>
Income before minority interest, income taxes and
cumulative effect of change in accounting principles 5,211 6,309 6,516
------- ------- -------
Provision for income taxes:
Current 364 1,276 2,440
Deferred 1,120 1,689 452
Tax effect of change in tax status (2,944)
------- ------- -------
Total income taxes 1,484 21 2,892
------- ------- -------
Income before minority interest and
cumulative effect of change in accounting principles 3,727 6,288 3,624
Minority interest 656 1,107 929
------- ------- -------
Income before cumulative effect of change in accounting principles 3,071 5,181 2,695
Cumulative effect of change in accounting principles 1,652
------- ------- -------
Net income $ 3,071 $ 5,181 $ 4,347
======= ======= =======
NET INCOME PER SHARE
Income before cumulative effect of change in accounting principles $ 0.44 $ 0.74 $ 0.38
Cumulative effect of change in accounting principles 0.24
------- ------- -------
Net income $ 0.44 $ 0.74 $ 0.62
======= ======= =======
PRO FORMA NET INCOME
Income before minority interest , income taxes and
cumulative effect of change in accounting principles $ 5,211 $ 6,309 $ 6,516
Charge in lieu of income taxes 1,484 1,995 1,861
------- ------- -------
Income before minority interest and
cumulative effect of change in accounting principles 3,727 4,314 4,655
Minority interest (656) (759) (1,011)
Cumulative effect of change in accounting principles 1,090
------- ------- -------
Net income $ 3,071 $ 3,555 $ 4,734
======= ======= =======
PRO FORMA NET INCOME PER SHARE
Income before cumulative effect of change in accounting principles $ 0.44 $ 0.51 $ 0.52
Cumulative effect of change in accounting principles, net of income taxes 0.15
------- ------- -------
Net income $ 0.44 $ 0.51 $ 0.67
======= ======= =======
Weighted average of shares outstanding 7,020 7,020 7,020
======= ======= =======
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
======== ======== ========
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,071 $ 5,181 $ 4,347
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Deferred acquisition costs (370) 826 (878)
Amortization of bond premium, net 751 430 374
Deferred income taxes 1,120 (1,268) 452
Net realized (gains) losses on investments (72) 47 50
Depreciation and amortization expense 2,000 1,999 1,677
Minority interest 656 1,107 929
Change in assets and liabilities:
Accrued interest and dividends 22 (102) (166)
Premiums and other receivables 19,217 11,426 (14,469)
Prepaid and other assets 760 (1,043) 1,885
Unpaid losses and loss expenses 2,556 (1,447) (3,811)
Unearned premiums 1,362 (1,685) 2,089
Premiums payable (14,865) (13,639) 1,278
Income taxes payable 1,356 (2,221) (873)
Accounts payable and accrued liabilities (767) 972 2,364
-------- -------- --------
Net cash provided by (used in) operating activities 16,797 583 (4,752)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments available - for - sale :
Purchase of fixed maturities (14,291) (12,506) (8,246)
Purchase of equity securities (825) (45) (549)
Purchase of short term investments (2,450)
Maturities of fixed maturities 3,318 1,755 1,300
Sales of fixed maturities 8,707 9,635 7,111
Sales of equity securities 201 4
Sales of short term investments 1,814 1,103
Funds held under deposit contracts
Purchase of fixed maturities (469) (1,650) (4,988)
Purchase/sales of short term investments (815) 2,199 3,612
Sales of fixed maturities 2,535 2,922
Maturities of fixed maturities 480 829
Purchase of fixed assets (888) (396) (523)
-------- -------- --------
Net cash provided by (used in) investing activities (434) 494 (1,176)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under deposit contracts (1,553) (4,007) 1,190
Notes payable-repayment (416) (6,145) (1,548)
Proceeds from borrowings 553 7,268 389
Payment of dividends (702) (702) 426
Payment of dividends to minority interest shareholders (150)
Increase in net advances from KILP (392) (702)
-------- -------- --------
Net cash used in financing activities (2,268) (3,978) (245)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 14,095 (2,901) (6,173)
Cash and cash equivalents at beginning of period 13,864 16,765 22,938
-------- -------- --------
Cash and cash equivalents at end of period $ 27,959 $ 13,864 $ 16,765
======== ======== ========
Supplemental cash flow disclosure:
Interest expense paid $ 1,114 $ 1,288 $ 1,305
Income taxes paid (refunded) ($ 992) $ 3,521 $ 3,332
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
KAYE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995, and 1994
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Common Stock
------------------ Unrealized Minimum Total
Outstanding Par Paid-In Appreciation/ Pension Retained Stockholders'
Shares Value Capital (Depreciation) Liability Earnings Equity
====== ===== ======= ============= ========= ======== ======
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 7,020 $70 $37,611 $51 ($24,003) $13,729
Cumulative effect of change in accounting for
investments, net of deferred income taxes of $210 410 410
Change in unrealized depreciation net of deferred
income tax benefit of $866 (1,681) (1,681)
Net income 4,347 4,347
Increase in net advances from KILP 977 977
Dividends declared (per share-$0.10) (702) (702)
Minimum pension liability (404) (404)
-------- ------- ---------- ---------- --------- ------------ ---------
Balance, December 31, 1994 7,020 70 38,588 (1,220) (404) (20,358) 16,676
Change in unrealized appreciation net of deferred
income tax of ($750) 1,456 1,456
Net income 5,181 5,181
Decrease in net advances from KILP (133) (133)
Dividends declared (per share-$0.10) (702) (702)
Effect of combining operations (30,679) 30,679 0
Minimum pension liability 404 404
-------- ------- ---------- ---------- --------- ------------ ---------
Balance, December 31, 1995 7,020 70 7,776 236 0 14,800 22,882
Change in unrealized depreciation net of deferred
income tax benefit of $138 (267) (267)
Net income 3,071 3,071
Dividends declared (per share-$0.10) (702) (702)
-------- ------- ---------- ---------- --------- ------------ ---------
Balance, December 31, 1996 7,020 $70 $7,776 ($31) $0 $17,169 $24,984
======== ======= ========== ========== ========= ============ =========
</TABLE>
See notes to consolidated financial statements
F-8
<PAGE>
1. Organization and Basis of Presentation
Effective October 2, 1995 Old Lyme Holding Corporation ("Old Lyme") combined its
operations with the insurance brokerage operations (the "Retail Brokerage
Business") of Kaye International, L.P. ("KILP"). Old Lyme changed its name to
Kaye Group Inc. (the "Company"). The combination was accomplished as follows
(the "Transactions"):
a. Old Lyme transferred all of the outstanding stock of Old Lyme Insurance
Company of Rhode Island, Inc. and Old Lyme Insurance Company, Ltd. (the
"Insurance Companies") and its two other direct wholly owned subsidiaries,
Program Brokerage Corporation (the "Program Brokerage Business") and Claims
Administration Corporation ("Claims Administration"), and its other
assets, to a newly formed subsidiary Kaye Holding Corp. ("Holding") in
exchange for (i) 82,400 shares of Holding Common Stock, representing 82.4%
of the total outstanding Holding Common Stock, and (ii) the assumption by
Holding of Old Lyme's liabilities.
b. KILP transferred all of its interests in certain limited partnerships
conducting the Retail Brokerage Business ("Brokerage Partnerships") and
certain related assets to Holding in exchange for (i) 17,200 shares of
Holding Common Stock, representing 17.2% of the total outstanding Holding
Common Stock, and (ii) the assumption by Holding of certain KILP
liabilities.
c. Certain individuals transferred to Holding all of their interest in the
corporate general partners of the Brokerage Partnerships (the "Brokerage
Corporations") in exchange for 400 shares of Holding Common Stock
representing 0.4% of the total outstanding Holding Common Stock.
d. Holding contributed its interests in the Brokerage Partnerships to the
Brokerage Corporations thereby causing the dissolution of the Brokerage
Partnerships.
Old Lyme was organized on May 26, 1993 by KILP. Prior to the consummation of an
initial public offering (August 17, 1993) of Old Lyme's Common Stock (the
"IPO"), KILP organized Old Lyme through the contribution by KILP and a related
party of 100% of the common stock of the Insurance Companies, the Program
Brokerage Business and Claims Administration to Old Lyme in exchange for
5,295,000 shares of Old Lyme Common Stock and a warrant to purchase 105,000
additional shares (the "Restructuring") (see Note 18). In connection with the
Restructuring, KILP and its affiliates transferred to Old Lyme and its
subsidiaries (i) employees who were previously employed by KILP and its
affiliates and who spent substantially all their time on Claims Administration
or the Programs and (ii) placing brokerage agreements with the various insurance
companies and sub-brokerage agreements with independent unaffiliated brokers
which relate to the Programs and to which the subsidiaries contributed to Old
Lyme were not a party.
As a result of the Transactions and the IPO, the Company owns 82.4% of Holding.
KILP and certain individuals own 67.2% of the Company and 73% of Holding
(directly and indirectly).
F-9
<PAGE>
The accompanying consolidated financial statements give effect to the
Transactions as a transfer and exchange between companies under common control.
Accordingly, the assets and liabilities of the Retail Brokerage Business have
been combined with the operations of Old Lyme at their historical costs in a
manner similar to a pooling of interests. The historical Consolidated Financial
Statements reflect the Transactions as if the pooling of interests was
consummated at the beginning of the earliest year presented and give retroactive
effect to the Restructuring for all periods prior to the IPO.
2. Business
The Retail Brokerage Business operates as an insurance brokerage business which
offers commercial clients a full range of insurance brokerage services including
procuring property/casualty insurance, bonding, loss prevention engineering, and
benefit package design services. The Retail Brokerage Business' strategy is to
service middle market companies and organizations just below the Fortune 500
level for which other national brokers intensely compete. Within this market,
the Retail Brokerage Business has developed particular expertise and knowledge
of the risks facing a number of industry sectors including health care, real
estate, manufacturing, restaurants, and retail industries. The Retail Brokerage
Business' commitment to these industries has led to the development of several
innovative solutions to the twin insurance problems of price and availability of
coverage, most notably the creation of target market insurance programs. By
organizing pools of similar risks in conjunction with the Program Brokerage
Business, the Retail Brokerage Business was one of the pioneers in the
application of purchasing groups in the commercial insurance market.
The Insurance Companies underwrite property/casualty insurance and reinsurance.
This business is sold principally through specially designed programs (the
"Programs") covering various types of business and properties which have similar
risk characteristics. The business underwritten by the Insurance Companies has
historically been placed by the Program Brokerage Business and entities
comprising the Retail Brokerage Business. The Program Brokerage Business is also
a party to various sub-brokerage agreements with independent brokers. Such
independent and unaffiliated brokers produce business under the Programs and
receive a commission on such business paid by the Program Brokerage Business or
the Retail Brokerage Business acting as placing broker. Claims Administration
provides claims adjusting services to Old Lyme Rhode Island as well as to other
insurance carriers.
3) Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") and include
the accounts of the Company for all periods presented restated to give effect to
the Transactions as a transfer and exchange between companies under common
control. Accordingly, the assets and liabilities of the Retail Brokerage
Business have been combined with Old Lyme at the historical costs in a manner
similar
F-10
<PAGE>
to a pooling of interests. All significant intercompany balances and
transactions within segments have been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
The financial statements give effect to the Transactions as if they had occurred
as of January 1, 1993. Accordingly on January 1, 1993 paid-in capital and
retained earnings as previously reported by Old Lyme were restated with
stockholders' equity reduced by $15,030,000 to $4,860,000 due to the accumulated
deficit of the Retail Brokerage Business and the minority interest in the
stockholders' equity of Old Lyme at that date. In addition, income before taxes,
minority interest and cumulative effect of a change in accounting principles was
reduced by $3,032,000 and $4,880,000 for the years ended December 31, 1994 and
1993, respectively.
Effective upon the closing of the Transactions, the entities comprising the
Retail Brokerage Business ceased being either limited partnerships or S
corporations and became taxable corporations (see Note 8 ). Accordingly, the
accumulated deficit of the Retail Brokerage Business at October 1, 1995 of
$30,679,000 was reclassed to paid-in capital, and a deferred tax benefit of
$2,944,000 was recorded as the tax effect of the change in tax status in the
accompanying 1995 Consolidated Statement of Income (see Note 8).
Prior to the Transactions, Old Lyme had total revenues of $21,088,000 and net
income of $6,656,000 for year ended December 31, 1994. The Retail Brokerage
Business had total revenues of $32,436,000 and net loss of $1,380,000 for the
year ended December 31, 1994.
Since the Company owns 82.4% of Holding with the remaining 17.6% being owned by
KILP and certain individuals, the accompanying consolidated financial statements
reflect the minority interest in the equity of Holding.
The accompanying consolidated financial statements have been prepared on a
segmented basis. The segments and their respective operations are as follows:
Insurance Brokerage Companies - This segment includes the Retail Brokerage
Business and the Program Brokerage Business and offers commercial and individual
clients a full range of insurance brokerage services including procuring
property-casualty insurance, bonding, loss prevention engineering, and employee
benefit design services.
Property and Casualty Companies - This segment includes the Insurance Companies
and Claims Administration, which underwrite property risks (loss or physical
damage to property) and casualty risks (legal liability for personal injury or
damaged property of others) for insureds in the Unites States, and provides
claims adjusting services to other insurance carriers.
F-11
<PAGE>
Corporate - Kaye Group Inc. is a holding company which owns 82.4% of Holding.
Holding owns 100% of the capital stock of the Insurance Brokerage Companies and
the Property and Casualty Companies. The Company and Holding comprise the
Corporate segment.
Income (loss) before income taxes of the two operating segments includes
expenses incurred by corporate on behalf of the segments, which are allocated to
operations of the segments. The allocation is based upon total revenues of each
segment except for the allocation of the incentive bonus which is allocated
based on the percentage of profits contributed to the Company.
Identifiable assets by segment are those assets used in the Company's operations
in each business segment. Corporate assets are principally cash and cash
equivalents and investments in equity securities.
Certain prior year information has been reclassified to conform with the 1996
presentation.
(b) Commission Income
Commission income together with the related accounts receivable from clients and
premiums payable to insurance carriers, is recorded principally as of the
billing date, except for commission income related to installment billing
arrangements which, beginning in 1994, is recorded at the date of the initial
billing (see Note 4). Contingent commissions, commissions on premiums billed
directly by insurance carriers and commission adjustments (including
cancellations) are recorded when collected or known.
(c) Fixed Assets
Furniture, equipment and leasehold improvements are carried at cost, less
accumulated depreciation and amortization computed using the straight-line
method. Furniture and equipment are depreciated over periods ranging from three
to seven years, and leasehold improvements are amortized over the remaining
terms of the leases which expire commencing 1997 thru 2001.
(d) Intangible Assets
Acquired expiration lists are carried at cost, less accumulated amortization
which is computed using the straight-line method over a period of ten years.
Corporate organizational costs are carried at cost, less accumulated
amortization and are amortized using the straight-line method over a period of
five years.
(e) Investments
Fixed maturity securities, which include bonds and redeemable preferred stocks,
funds held under deposit contracts and equity securities, which include common
and nonredeemable preferred stocks, are stated at market value. The difference
between the cost and market value of fixed maturity and equity securities is
reflected as unrealized appreciation or depreciation, net of applicable deferred
income taxes, as a separate component of stockholders' equity. Realized gains
F-12
<PAGE>
or losses from the sale of investments are determined on the basis of specific
identification and are reflected as a component of revenues. Investment income
is recognized when earned.
The fair value of fixed maturities is based on the closing price of the
investments on December 31. The fair value of equity securities is based on the
closing sale price on December 31.
If a decline in fair value of an investment is considered to be other than
temporary, the investment is reduced to its net realizable value and the
reduction is accounted for as a realized investment loss. In evaluating whether
a decline is other than temporary, management considers the duration and extent
to which the market value has been less than cost, the financial condition and
near-term prospects of the issuer, including events that may impact the issuer's
operations and impair the earnings potential of the investment, and management's
ability and intent to hold an investment for a sufficient period to allow for an
anticipated recovery in fair value.
(f) Insurance Premiums Earned
Insurance premiums are recognized as revenues ratably over the terms of the
related policies in force. Unearned premiums are established to cover the
unexpired portion of premiums written and are calculated using the daily pro
rata method. Premiums earned are net of reinsurance ceded.
(g) Deferred Acquisition Costs
Deferred acquisition costs represent costs to acquire or renew insurance
policies or contracts and are deferred and amortized over the applicable premium
recognition period, generally one year. These deferred costs have been limited
to the amount expected to be recovered from future earned premiums. Acquisition
costs of $6,086,000, $5,190,000, and $4,826,000 were amortized to expense in
1996, 1995 and 1994, respectively.
(h) Unpaid Losses and Loss Expenses
The estimated liability for unpaid losses and loss expenses is based on an
evaluation of claims reported by policyholders. A provision, which is based on
historical experience and modified for current trends, is also included for
losses and loss expenses which have been incurred but not reported. The methods
of determining such estimates and establishing the resulting reserves are
continually reviewed and modified to reflect current conditions, and any
adjustments are reflected currently in results of operations.
The Company has received claims related to lead paint exposures it insures under
various residential real estate programs. There are uncertainties in estimating
the amount of reserves due to factors including: difficulty in properly
allocating responsibility and/or liability for the lead paint exposure; changes
in the underlying laws and the judicial interpretation of those laws; questions
regarding the interpretation and application of insurance and reinsurance
coverage. The Company has reserves established for these claims on a case basis
and an incurred but not reported basis. The reserves provided were established
based on Management's estimate of ultimate liabilities.
F-13
<PAGE>
However, due to the nature of the exposures, Management believes such reserves
could not be, and therefore were not, established using standard actuarial
techniques.
(i) Reinsurance
Assumed reinsurance premiums written, commissions, and unpaid losses are
accounted for based principally on the reports received from the ceding
insurance companies and in a manner consistent with the terms of the related
reinsurance agreements. Liabilities for unpaid losses, loss expenses and
unearned premiums are stated gross of ceded reinsurance recoverables. Deferred
acquisition costs are stated net of the amounts of reinsurance ceded, as are
premiums written and earned, losses and loss expenses incurred, and amortized
acquisition costs. Assumed reinsurance contracts which do not involve the
transfer of risk to the Company are recorded as deposit contracts (see Note 13).
(j) Income Taxes
The Company recognizes deferred tax assets or liabilities for temporary
differences between the financial reporting and tax basis of assets and
liabilities based on enacted tax rates. The principal temporary differences
relate to deferred acquisition costs, unearned premiums, discount for tax
purposes of the unpaid losses and loss expense reserves, amortization of
expiration lists and deferred compensation, accrual adjustment for commission
income and unrealized gains or losses on investments (see Note 8).
(k) Cash and Cash Equivalents
Cash and cash equivalents include money market funds and certificates of
deposit, including funds held in a fiduciary capacity for Insurance Brokerage
Companies, with a maturity of three months or less.
(l) 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.
4) Changes in Accounting Policies
Commission income, together with the related accounts receivable from clients
and premiums payable to insurance carriers, is recorded principally as of the
billing date. Beginning in 1994, commission income related to installment
billing arrangements is recorded in total at the date of the initial billing.
This change was made because in the opinion of management, it results in a
better matching of revenues with the related costs. Prior to this change,
commissions were recorded as each installment was billed. As a result of this
change, additional commissions of $1,471,000 were recorded in 1994 that would
have been recorded under the old policy in 1995.
F-14
<PAGE>
The Company is unable to determine the effects of this change in years prior to
1994 and, therefore, pro forma disclosure of this change in prior years cannot
be made. Accordingly, the effect of the change in accounting on prior years of
$1,652,000 is being treated as a cumulative effect adjustment on the 1994
consolidated statement of income.
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 has adopted the disclosure of stock-based compensation in accordance
with APB No. 25 and has provided the additional disclosures required by SFAS No.
123 (see Note 19). The adoption of this standard does not have an impact on the
Company's financial position or results of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share". This
statement specifies the computation, presentation, and disclosure requirement
for earnings per share.
SFAS No. 128 is applicable to all entities with publicly held common stock or
potential common stock. It also applies to an entity that has made a filing or
is in the process of filing with a regulatory agency in preparation for the sale
of securities in a public market. The statement does not apply to investment
companies or to wholly owned subsidiaries that have not issued options or other
potential common shares to employees or others. Management does not believe that
the adoption of this standard will have a material impact on the Company's
present computation of earnings per share.
5) Funds Held in Fiduciary Capacity
Premiums collected by the Insurance Brokerage Companies but not yet remitted to
insurance carriers, of approximately $23,879,000 and $7,528,000 at December 31,
1996 and 1995 respectively, some of which 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.
F-15
<PAGE>
6) Investments
Net investment income for the years ended December 31, 1996, 1995 and 1994 is
derived from the following sources:
1996 1995 1994
------- ------- -------
(in thousands)
Insurance Brokerage Companies
Short term investments $ 1,026 $ 1,028 $ 817
------- ------- -------
Property and Casualty Companies
Fixed maturities 2,099 2,223 2,373
Equity securities 114 115 123
Short term investments 82 207 124
Other 191 185 158
------- ------- -------
Total investment income 2,486 2,880 2,628
Investment expenses (25) (61) (114)
------- ------- -------
2,461 2,819 2,514
------- ------- -------
Corporate
Other 89 65 124
------- ------- -------
Net investment income $ 3,576 $ 3,912 $ 3,455
======= ======= =======
F-16
<PAGE>
Net realized gains or losses and the increase or decrease in unrealized
appreciation (depreciation) on investments for the years ended December 31,
1996, 1995 and 1994 are summarized below:
1996 1995 1994
------- ------- -------
(in thousands)
Net realized gains (losses):
Fixed maturities:
Gross realized gains $ 82 $ 112 $ 40
Gross realized losses (10) (167) (102)
------- ------- -------
72 (55) (62)
------- ------- -------
Equity securities - Gross realized gains 8 12
------- ------- -------
Net realized gains (losses)
on investments 72 (47) (50)
------- ------- -------
Change in unrealized
appreciation (depreciation):
Cumulative effect of change
in accounting principles 753
Fixed maturities (543) 2,656 (2,933)
Equity securities 48 26 (157)
------- ------- -------
Net change in unrealized
appreciation (depreciation) (495) 2,682 (2,337)
------- ------- -------
Total realized gains (losses)
and changes in unrealized
appreciation (depreciation) ($ 423) $ 2,635 ($2,387)
======= ======= =======
F-17
<PAGE>
The composition, cost (amortized cost for fixed maturities) and estimated market
values of the Company's investments at December 31, 1996 are presented below.
Equity security investments with a cost of $36,000 and a fair value of $19,000
are included in other assets of the Insurance Brokerage Companies in the
accompanying consolidated balance sheets at December 31, 1996.
Gross Gross Un-
Unrealized realized Aggregate
Holding Holding Fair
Cost Gains Losses Value
------- ------ ------- -------
(in thousands)
Investments available for sale:
Fixed Maturities:
U.S. Government (a) $ 6,167 $ 98 ($ 80) $ 6,185
States (b) 31,231 213 (252) 31,192
Corporate 1,827 34 (84) 1,777
------- ------ ------- -------
Total fixed maturities $39,225 $ 345 ($ 416) $39,154
======= ====== ======= =======
Equity securities:
Common stock $ 145 $ 56 $ 201
Preferred stock 2,694 14 ($ 61) 2,647
------- ------ ------- -------
Total equity securities $ 2,839 $ 70 ($ 61) $ 2,848
======= ====== ======= =======
Funds held under deposit contracts:
Fixed Maturities:
U.S. Government (a) $ 519 $ 3 $ 522
States (b) 507 507
Corporate 300 300
------- ------ ------- -------
Total fixed maturities 1,326 3 1,329
Cash and cash equivalents 2,518 2,518
------- ------ ------- -------
Total funds held under deposit contract $ 3,844 $ 3 $ 3,847
======= ====== ======= =======
(a) Includes U.S. Government agencies and authorities
(b) Includes municipalities and subdivisions
F-18
<PAGE>
The composition, cost (amortized cost for fixed maturities) and estimated market
values of the Company's investments at December 31, 1995 are presented below.
Equity security investments with a cost of $36,000 and a fair value of $33,000
are included in other assets of the Insurance Brokerage Companies in the
accompanying consolidated balance sheets at December 31, 1995.
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Aggregate
Holding Holding Fair
Cost Gains Losses Value
---------- ---------- --------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Investments available for sale:
Fixed Maturities:
U.S. Government (a) $5,756 $160 ($5) $5,911
States (b) 27,419 395 (128) 27,686
Corporate 4,091 23 (1) 4,113
Mortgage-backed securities 300 300
---------- ---------- --------- ----------
Total fixed maturities $37,566 $578 ($134) $38,010
========== ========== ========= ==========
Equity securities:
Common stock $738 $68 ($123) $683
Preferred stock 1,276 18 (2) 1,292
---------- ---------- --------- ----------
Total equity securities $2,014 $86 ($125) $1,975
========== ========== ========= ==========
Funds held under deposit contracts:
Fixed Maturities:
U.S. Government (a) $700 $14 $714
States (b) 3,047 23 (5) 3,065
Corporate 140 140
---------- ---------- --------- ----------
Total fixed maturities 3,887 37 (5) 3,919
Cash and cash equivalents 1,703 1,703
---------- ---------- --------- ----------
Total funds held under deposit
contract $5,590 $37 ($5) $5,622
========== ========== ========= ==========
</TABLE>
(a) Includes U.S. Government agencies and authorities
(b) Includes municipalities and subdivisions
F-19
<PAGE>
The amortized cost and estimated market value of fixed maturities at December
31, 1996, 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.
<TABLE>
<CAPTION>
Investments Available Funds Held Under
for Sale Deposit Contract
------------------------- ------------------------
(in thousands)
Aggregate Aggregate
Amortized Fair Aggregate Fair
Cost Value Cost Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 4,844 $ 4,909 $ 650 $ 650
Due after one year through five years 14,293 14,368 676 679
Due after five years through ten years 19,067 18,885
Due after ten years 1,021 992
------- ------- ------ ------
Total $39,225 $39,154 $1,326 $1,329
======= ======= ====== ======
</TABLE>
Fixed maturities, equity securities, and cash carried at market value of
$3,417,000 and $2,946,000 in 1996 and 1995, respectively, were on deposit with
governmental authorities, as required by law. Fixed maturity investments and
cash equivalents carried at market value of $6,670,000 and $9,165,000 in 1996
and 1995, respectively, have been deposited in trust funds or pledged to
collateralize the obligations of Old Lyme Bermuda and Old Lyme Rhode Island to
ceding companies under reinsurance agreements, including intercompany
reinsurance agreements, and to policy holders under policies (see Note 13).
The Company's short term investment of cash is maintained principally with three
banks and an institutional money market fund. To control this risk, the Company
utilizes only high credit quality financial institutions. Additionally, under
the insurance laws of the State of Rhode Island, where Old Lyme Rhode Island is
domiciled, insurers and reinsurers are restricted as to the types of investments
they may purchase and the concentration of risk they may accept in any one
issuer or group of issuers. The Company complies with such laws which insure
that the concentration of risk in its investment portfolio is at an acceptable
and authorized level.
F-20
<PAGE>
7) Notes Payable
Notes payable consist of the following at December 31,:
1996 1995
------ ------
(in thousands)
Insurance Brokerage:
Finance company notes, due through 2000, interest at
prime rate plus 1/2% ................................ $ 578 $ 994
Capital lease due through 8/30/99, interest at 7.375% ...... 554
Subordinated promissory note payable to KILP,
due the later of 8/30/97 or 30 days after repayment
of the revolving line of credit ...................... 6,000 6,000
------ ------
7,132 6,994
Less current portion ....................................... 595 415
------ ------
Notes payable - long term .................................. $6,537 $6,579
====== ======
Corporate:
Revolving line of credit, due through 2000
interest at 5.875% plus 1.5% ......................... $7,100 $7,100
Less current portion ......................................... 850
------ ------
Loans payable- long term ..................................... $6,250 $7,100
====== ======
The Company has a $8,750,000, revolving line of credit with a bank,
collateralized by the stock of the Insurance Companies. 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 December 31, 1996, the Company is
in compliance with the covenants of the debt agreement.
On May 16, 1995, Old Lyme borrowed $7,100,000 under the revolving line of
credit. On May 24, 1995, Old Lyme loaned $7,100,000 to KILP, pursuant to a
promissory note and loan agreement (the "KILP Note"). The proceeds of such loan
were used by KILP in connection with a Debt Satisfaction Agreement entered into
on May 24, 1995 with the creditors under the bank term loan and senior note
whereby the entire principal balance plus accrued interest then outstanding
(aggregating approximately $5,600,000) was repaid in full. In addition, KILP
repurchased 137,500 shares of Old Lyme common stock subject to a put option for
$1,375,000, and received from one creditor 52,500 warrants entitling the holder
to acquire 52,500 shares of newly issued Old Lyme common stock for $10 per
share. Consequently, the creditors waived all events of default existing as of
December 31, 1994 and thereafter, and released KILP from any and all liability
under the loan agreements.
F-21
<PAGE>
As a condition of the Transactions, Old Lyme's credit facility agreement with
the bank was restructured and the borrowings of $7,100,000 were assumed by
Holding. Furthermore, in connection with the Transactions, the KILP Note was
transferred to Holding and the obligation canceled.
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, $1,250,000 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
years ended December 31, 1996 and 1995 were $514,000 and $341,000, respectively.
The aggregate maturities of all notes payable by year are as follows (in
thousands):
1997 ..................................... $1,445
1998 ..................................... 2,804
1999 ..................................... 2,717
2000 ..................................... 7,266
Thereafter .............................. 0
Based on the borrowing rates currently available to the Company for bank loans
with similar terms and average maturities, the fair value of the notes payable
at December 31, 1996 and 1995 approximates their carrying value.
Interest expense in the accompanying consolidated statements of income for the
years ended December 31, 1996, 1995 and 1994 was $1,114,000, $1,288,000, and
$1,289,000 respectively.
F-22
<PAGE>
8) Income Taxes
The Company's effective income tax rate for the years ended December 31, 1996,
1995 and 1994 differs from the statutory rate on ordinary income before income
taxes as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------ ------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Income taxes computed at the statutory
rate ............................... $ 1,772 34.0% $ 2,145 34.0% $ 2,215 34.0%
Increase (decrease) in taxes
resulting from:
Transactions (a) .................... 969 15.4 1,031 15.5
Establishment of deferred taxes (b) .. (2,944) (46.7)
Tax-exempt investment income ......... (403) (7.7) (399) (6.3) (313) (5.0)
Non-deductible costs of combining
operations ........................... 293 4.6
Other ................................ 115 2.2 (43) (0.7) (41) (0.1)
------- ------- ------- ------- ------- -------
Provision for income taxes ........... $ 1,484 28.5% $ 21 0.3% $ 2,892 44.4%
======= ======= ======= ======= ======= =======
</TABLE>
(a) Income (loss) of Brokerage Partnerships and Corporations taxed to their
respective partners or shareholders
(b) Upon 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. Effective upon the closing of the Transactions on October 2,
1995, the income or loss of the Retail Brokerage Business is included in the
consolidated federal income tax return of the Company. The tax effect of the
change in tax status of $2,944,000, reflected in the accompanying consolidated
statements of income for the year ended December 31, 1995, represents the net
deferred tax benefit with respect to temporary differences (at October 2, 1995)
between the financial reporting and tax bases of assets and liabilities of the
Retail Brokerage Business, principally amortization of expiration lists and
deferred compensation, deduction of previously accrued management bonuses, and
accrual adjustments for commission income.
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 of the various partnerships and S corporations,
were taxed to those entities rather than to their partners or shareholders.
F-23
<PAGE>
The source of the significant temporary differences and the related deferred tax
effects are as follows:
1996 1995 1994
------- ------- -------
(in thousands)
Deferred compensation $ 850 $ 255
Expiration lists 393 226
Deferred acquisition costs 126 (281) $ 299
Loss reserve discount 37 193 276
Accrual adjustment (56) 628
Unearned premium reserves (93) 115 (143)
Other (137) 553 20
------- ------- -------
Deferred tax expense $ 1,120 $ 1,689 $ 452
======= ======= =======
The components of the net deferred tax asset, in the accompanying consolidated
balance sheets at December 31, 1996 and 1995, are as follows:
1996 1995
------ ------
(in thousands)
Deferred tax assets:
Expiration lists $1,335 $1,729
Loss and loss expense reserves 1,018 1,055
Unearned premium reserves 877 784
Unrealized losses on investments and other 157
Deferred compensation 850
------ ------
Total deferred tax asset 3,387 4,418
------ ------
Deferred tax liabilities:
Deferred acquisition costs 1,385 1,259
Unrealized gains on investments and other 180
accrual adjustment 1,122 1,178
------ ------
Total deferred tax liability 2,507 2,617
------ ------
Net deferred tax asset $ 880 $1,801
====== ======
Management believes it is more likely than not that all deferred tax assets are
realizable based upon the past earnings history of the Company.
F-24
<PAGE>
Old Lyme Bermuda, as a Bermuda domiciled company is not subject to federal
income taxes but, rather, Holding is subject to federal income taxes based on
Old Lyme Bermuda's taxable income for the entire year. Accordingly, Holding
includes the taxable income of Old Lyme Bermuda in its separate company income
for tax purposes, but for segment reporting the income is included with the
Property and Casualty Companies. Old Lyme Bermuda has received an undertaking
from the Bermuda Government exempting it from all taxes computed on profit or
income, or computed on any capital asset gain or appreciation until 2016.
The Company and its wholly owned subsidiaries are party to a Tax Allocation
Agreement ("the Agreement"). Pursuant to the Agreement, these companies agreed
to file a U.S. consolidated income tax return. The Agreement provides that each
member of the group will compute its separate tax liability or benefit on a
separate return basis and pay or receive such amounts to or from the Company.
For purposes of segment information, amounts due to or from the Company by its
subsidiaries are included in the intercompany receivable/payable in the
accompanying consolidated balance sheets.
9) Lease Commitments and Rentals
Minimum annual rental commitments under various noncancelable operating leases
for office space, automobiles and equipment are as follows (in thousands):
Years Ending December 31,
-------------------------
1997 .............................. $2,588
1998 .............................. 2,335
1999 .............................. 1,552
2000 .......................... 1,453
Thereafter .......................... 1,303
Total ............................. $9,231
======
Leases for office space include various escalation clauses, none of which
individually or in the aggregate are material. Escalation clauses are accounted
for on a straight-line basis over the life of the lease. The leases also contain
provisions for the payment of certain operating expenses and real estate taxes.
Rent expense for the years ended December 31, 1996, 1995 and 1994, amounted to
approximately $2,919,000, $3,002,000, and $3,059,000, respectively.
10) Pension, Retirement and Bonus Plans
Substantially all officers and employees of the Company are entitled to
participate in a qualified retirement savings plan (401K) and in prior years
were entitled to participate in a defined benefit pension plan. The costs to the
Company to participate in these plans included in the accompanying consolidated
statements of income was approximately $55,000, 688,000, and $621,000 for 1996,
1995 and 1994, respectively.
F-25
<PAGE>
The defined benefit pension plan (the "Plan") was frozen effective December 31,
1994, at which time participants became 100% vested in their accrued benefits.
All pension benefits were frozen at then current levels. The termination
resulted in an insignificant curtailment loss pursuant to Statement of Financial
Accounting Standards No. 88 ("SFAS 88") in 1994. During 1995, the Plan's
obligations were settled, resulting in a settlement loss pursuant to SFAS 88 in
the amount of $494,000, which included the additional minimum liability charged
directly to equity at December 31, 1994 in accordance with SFAS No. 87
"Employers Accounting for Pensions".
Holding administered a bonus plan which provided incentives to key personnel
(the "Bonus Plan"). The Bonus Plan provided for an aggregate bonus pool based
upon the combined financial results of the Company. The cost of this plan to the
Company was approximately $476,000, $500,000, and $380,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. The Plan terminated on December
31, 1996.
11) Management Services Agreement
In September 1992, Kaye Insurance Associates, L.P. ("KIA"), one of the entities
comprising the Retail Brokerage Business, entered into a management services
agreement with APCO Corp. (the "Manager"), whereby the Manager provides the
administrative and operational functions of the Amalgamated division which was
acquired in 1992. The Manager is owned by the individuals who sold the
Amalgamated division to KIA. In return, commencing September 1, 1992 and
continuing through August 31, 1997, KIA pays annually to the Manager a base fee
which is subject to certain adjustments as specified in the agreement. KIA
incurred management service fees of $1,536,000, $1,732,000, and $1,764,000 for
the years ended December 31, 1996, 1995 and 1994, respectively, which is
included in other operating expenses of the Insurance Brokerage Companies.
In addition, the Manager is entitled to receive an incentive bonus in an amount
equal to a specified percentage (ranging from 16% to 19%) of gross income of the
Amalgamated division, as defined in the agreement, for each of the five years in
the period ended August 31, 1997. In accordance with the terms of the agreement,
however, in no event shall the cumulative amount paid by KIA, with respect to
this incentive bonus, be less than $2,876,000 or exceed $4,132,000 subject to
the continued employment of certain key personnel by the Manager. The cost of
this bonus to KIA, which is charged to salaries and benefits as the related
gross income is earned, was $364,000, $1,027,000, and $1,138,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
12) 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 Retail 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
F-26
<PAGE>
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.
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 have been
involved since 1992 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. While the companies
are 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.
13) Reinsurance
As of December 31, 1996 and 1995, included in the amounts reflected in the
consolidated financial statements are unearned premiums of $5,173,000 and
$3,981,000, respectively, and unpaid losses and loss expenses of $6,534,000 and
$1,930,000, respectively, for reinsurance assumed from non-affiliates, although
all such reinsurance assumed relates to business produced by the Insurance
Brokerage Companies. The Insurance Companies has established trust funds and
deposited fixed maturities and cash therein to satisfy the collateral
requirements of certain ceded reinsurance agreements. The trust funds
established for the benefit of ceding companies amounted to approximately
$6,670,000 as of December 31, 1996.
In accordance with the normal practice of the insurance industry, Old Lyme Rhode
Island assumes and cedes reinsurance with other insurers or reinsurers. The
reinsurance arrangements provide greater diversification of business and
minimize Old Lyme Rhode Island's maximum net loss arising from large risks. Old
Lyme Rhode Island assumes reinsurance under reinsurance treaty arrangements
generally with limits of $25,000 (inclusive of loss expenses) per occurrence. To
limit Old Lyme Rhode Island's exposure for the reinsurance assumed, Old Lyme
Rhode Island purchased an annual aggregate stop loss policy. This policy insures
Old Lyme Rhode Island in the event the losses under the policy exceed a fixed
percentage of premium earned. Old Lyme Rhode Island will be reimbursed up to
$5,000,000 under this contract.
Old Lyme Rhode Island also has ceded reinsurance on an excess of loss basis with
an unaffiliated company, National Reinsurance Corp. ("Nat Re"). Old Lyme Rhode
Island issues policies on a selected basis with limits up to $1,000,000
retaining the first $50,000 of exposure and reinsuring $950,000 to Nat Re. The
remaining reinsurance arrangements are on a quota share basis with
non-affiliated insurers or reinsurers.
The Insurance Companies also entered into reinsurance agreements, wherein they
reinsure certain general liability and property risks. These reinsurance
agreements include per claim and aggregate
F-27
<PAGE>
limits and provide funds that are placed into trusts for the benefit of the
insurers. Since these reinsurance contracts do not transfer risk to the
Insurance Companies, they are included in "Funds Held Under Deposit Contracts"
in the accompanying consolidated balance sheets.
A contingent liability exists with respect to reinsurance ceded, which would
become an ultimate liability of Old Lyme Rhode Island in the event that the
assuming companies were unable to meet their obligations under the reinsurance
agreements in force at December 31, 1996. The amounts deducted from liabilities,
revenues and expenses for reinsurance ceded by Old Lyme Rhode Island were as
follows in thousands:
1996 1995
---- ----
(in thousands)
Liabilities:
Unpaid losses and loss expenses $882 $118
Revenue and expenses:
Premiums earned 520 110
Losses and loss expenses 764 118
14) Losses and Loss Expenses
The following table sets forth a reconciliation of the changes in the reserves
for outstanding losses and loss expenses, including paid losses and loss
expenses, for each year in the three year period ended December 31, 1996.
Years Ended December 31,
-----------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
Balance at January 1, $ 12,671 $ 14,118 $ 17,929
Less reinsurance recoverables
-------- -------- --------
Net Balance at January 1, 12,671 14,118 17,929
-------- -------- --------
Incurred related to:
Current year 6,621 4,986 5,691
Prior year 415 (136) (71)
-------- -------- --------
Total incurred 7,036 4,850 5,620
-------- -------- --------
Paid related to:
Current year 1,832 2,138 2,464
Prior year 3,530 4,159 6,967
-------- -------- --------
Total paid 5,362 6,297 9,431
-------- -------- --------
Net Balance at December 31, 14,345 $ 12,671 14,118
Add reinsurance recoverables 882
-------- -------- --------
Balance at December 31, $ 15,227 $ 12,671 $ 14,118
======== ======== ========
F-28
<PAGE>
15) Statutory Financial Information and Dividend Restrictions
The Company's insurance subsidiaries file separate financial statements in
accordance with accounting practices prescribed or permitted by the insurance
regulatory authorities where they are domiciled. Statutory financial statements
do not reflect deferred acquisition costs, deferred income taxes, market value
changes and certain other items recognized under GAAP. Old Lyme Bermuda is
required to maintain a minimum statutory capital and surplus based upon the
higher $1,000,000 or an amount derived by applying a variable rate to its
current premium volume or outstanding losses at December 31, 1996. At December
31, 1996, $451,000 was available for distribution from Old Lyme Bermuda and its
subsidiary, Park Brokerage Ltd.
Pursuant to Rhode Island Insurance Law, Old Lyme Rhode Island may pay cash
dividends only from earned surplus determined on a statutory basis, subject to
the maintenance of minimum capital and surplus of $3,000,000. Further, Old Lyme
Rhode Island is restricted (on the basis of the lesser of 10% of Old Lyme Rhode
Island's statutory surplus at the end of the preceding twelve-month period or
100% of Old Lyme Rhode Island's net income, excluding realized capital gains,
for the preceding twelve-month period) as to the amount of the dividends it may
declare or pay in any twelve-month period without prior approval of the
Department of Business Regulation of Rhode Island. At December 31, 1996,
$2,403,000 was available for distribution during 1997, without prior approval.
Statutory information is as follows:
Old Lyme Old Lyme
Rhode Island Bermuda Combined
------------ ------- --------
(in thousands)
Policyholders' surplus at December 31,:
1996 $24,034 $1,451 $25,485
1995 $21,060 $5,171 $26,231
Net income for the years
ended December 31,:
1996 $2,459 $2,890 $5,349
1995 $6,243 $1,890 $8,133
1994 $3,897 $3,672 $7,569
F-29
<PAGE>
The following is a reconciliation of Statutory net income and surplus regarding
Surplus/ policyholders in accordance with statutory accounting principle ("SAP")
as reported to the Rhode Island and Bermuda insurance regulatory authorities to
net income and capital as determined in conformity with generally accepted
accounting principles ("GAAP") basis.
<TABLE>
<CAPTION>
Statutory Surplus/
Stockholders' Equity Net Income for years ended
as of December 31, December 31,
==================== ==================================
1995 1994 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated amount in accordance with GAAP $24,984 $22,882 $3,071 $5,181 $4,347
Equity/deficit in net assets and net loss of
non-insurance companies 5,768 10,186 3,217 2,354 4,047
Combined amount in accordance with GAAP 30,752 33,068 6,288 7,535 8,394
Excess of statutory formula reserves over
GAAP reserves (621) (2,670)
Provisions for reinsurance (43)
Deferred acquisition costs (4,073) (3,703) (370) 826 (878)
Non-admitted assets, deferred income
taxes and other (573) (421) (569) (228) 53
------- ------- ------ ------ ------
Combined amount in accordance with SAP $25,485 $26,231 $5,349 $8,133 $7,569
======= ======= ====== ====== ======
</TABLE>
16) Related Party Transactions
The administrative support for Old Lyme Bermuda is provided by International
Advisory Services, Ltd. ("IAS"), an insurance management company located in
Bermuda. The principal stockholder of IAS is an officer of Old Lyme Bermuda and,
following consummation of the IPO, became a director of the Company. Management
fees paid to IAS under a service contract for the years ended December 31, 1996,
1995 and 1994 were $36,250, $65,000, and $65,000, respectively.
KIA incurred a management fee of $175,000 annually to ZS Kaye, L.P. which is one
of the general partners of KILP. KIA has an accrued payable to ZS Kaye, L.P. as
of December 31, 1996 and 1995 of $175,000 and $625,000, respectively. This
management fee arrangement terminated on December 31, 1996.
F-30
<PAGE>
17) Preferred Stock
The Board of Directors is authorized to issue preferred stock in classes or
series and to fix the designations, preferences, qualifications, limitations or
restrictions of any class or series with respect to the rate and nature of
dividends, the price and terms and conditions on which shares may be redeemed,
the amount payable in the event of voluntary or involuntary liquidation, the
terms and conditions for conversion or exchange into any other class or series
of stock, voting rights and other terms. No preferred stock is currently
outstanding.
18) Common Stock Warrants and Dividends Declared
The Company has issued a warrant to KILP to purchase 105,000 shares of its
common stock. The exercise price of the warrant is the IPO price of such shares
($10.00), subject to certain anti-dilution adjustments. The warrant is
exercisable through February 16, 1998.
The Board of Directors of the Company declared annual dividends of $702,000 for
the years ended December 1996 and 1995, respectively.
19) Stock Option Plans
At December 31, 1996, the Company has a Stock Option Plan and a Supplemental
Stock Option Plan (the "Plans"). Both plans are identical and are stock-based
compensation plans, which are described below. The Company adopted the
disclosure requirements of SFAS No. 123 effective January 1, 1996 and continues
to account for its employee stock-based compensation plans under APB 25.
Accordingly, the adoption of SFAS No. 123 had no impact on the Company's
financial position or results of operations. Had compensation cost for the
Company's stock option program been recognized based on the fair value at the
grant date consistent with the recognition provisions of SFAS No. 123, the
impact on the Company's net income and earnings per share would not have been
material.
Under the Plans a total of 700,000 shares of common stock are reserved for
issuance. The Plans provide for the granting to directors, executives or other
key employees (including officers) of the Company non-qualified stock options
("NQOs") or incentive stock options ("ISOs") within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended. The exercise price of all ISOs
and NQOs under the Plans are generally at least the fair market value of the
common stock of the Company on the date of grant.
The Compensation Committee (the "Committee") determines the terms of the options
including the exercise price, number of shares subject to option and
exercisability.
In addition, the Plans authorize grants of alternative cash settlement rights at
the discretion of the Committee, which entitles participants to receive a
payment in cash equal to the fair market value of such shares on the date of
surrender less the purchase price required to purchase such shares.
F-31
<PAGE>
A summary of the status of the Plans as of December 31, 1996, 1995, and 1994 and
changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
- - ------------- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 323,000 $9.33 194,550 $10.71 198,750 $10.00
Granted 225,000 5.09 155,500 8.49 24,250 11.02
Exercised
Forfeited (19,450) 9.24 (27,050) 10.10 (28,450) 10.07
------- ----- ------- ----- ------- ------
Outstanding at end of year 528,550 $7.53 323,000 $9.33 194,550 $10.71
======= ===== ======= ===== ======= ======
Options exercisable at year-end 124,150 64,480 36,610
======= ====== ======
</TABLE>
The following table summarizes information about the stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisabe
------------------------------------ -----------------------------------------------------
Number Weighted-Average Number
Exercise Prices Outstanding Remaining Weighted-Average Exercisable Weighted-Average
at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- - --------------- ------------- ----------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$11.63 10,500 7.08 $11.63 4,200 $11.63
$10.31 250 10.31 250 10.31
$10.00 148,400 6.63 10.00 90,700 10.00
$ 9.75 13,500 8.08 9.75 2,700 9.75
$ 8.43 115,900 8.83 8.43 23,300 8.43
$ 7.88 15,000 8.70 7.88 3,000 7.88
$ 7.06 10,000 9.37 7.06 7.06
$ 5.00 215,000 10.00 5.00 5.00
-------- ---- ----- ------- -----
$528,500 8.63 $7.53 124,150 $9.70
======== ==== ===== ======= =====
</TABLE>
The options vested and are exercisable at the rate of 20% per year and terminate
ten years from date of grant. At December 31, 1996, 1995 and 1994, 124,150,
64,480, and 36,610 options were exercisable and there were 171,450, 27,000, and
155,450 options available for future grants, respectively.
F-32
<PAGE>
20) Quarterly Financial Information (Unaudited)
The following quarterly financial information for each of the three months ended
March 31, June 30, September 30 and December 31, 1996 and 1995 is unaudited.
However, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the results of operations for
such periods, have been made for a fair presentation of the results shown.
Financial data has been restated to take into effect the Transaction effective
October 2, 1995.
<TABLE>
<CAPTION>
For the three months ended (1)
- - ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except for per share)
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
1996 1995 1996 1995 1996 1995 1996 1995
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $11,753 $13,103 $11,780 $11,436 $15,206 $13,684 $15,250 $17,224
- - ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) ($27) $44 $175 ($405) $1,246 $1,574 $1,677 $3,968
- - ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share $0.00 $0.01 $0.02 ($0.06) $0.18 $0.22 $0.24 $0.57
Average shares outstanding 7,020 7,020 7,020 7,020 7,020 7,020 7,020 7,020
====================================================================================================================================
Pro Forma:
- - ----------
Net income ($27) $395 $175 $13 $1,246 $1,472 $1,677 $1,689
- - ------------------------------------------------------------------------------------------------------------------------------------
Net income per common share $0.00 $0.06 $0.02 $0.00 $0.18 $0.21 $0.24 $0.24
Average shares outstanding 7,020 7,020 7,020 7,020 7,020 7,020 7,020 7,020
====================================================================================================================================
</TABLE>
(1) Reflects restatement of the provision (benefit) for income taxes and pro
forma charge (benefit) in lieu of income taxes for the first quarter 1996
and the second and fourth quarter 1995. The effect of the restatement did
not have an impact on the 1995 full year result.
21) Premiums
Of the Company's net premiums earned approximately 63%, 55%, and 59% related to
the residential real estate program and 24%, 32%, and 31% related to the
restaurant program for the years 1996, 1995, and 1994, respectively. Of the
Company's net premiums earned approximately 83%, 98%, and 83% related to
insureds located in New York State for the years 1996, 1995, and 1994,
respectively.
Premiums earned for the three years ended December 31, 1996, 1995 and 1994 are
summarized below:
1996 1995 1994
---- ---- ----
(in thousands)
Direct $ 9,979 $13,063 $13,133
Assumed 9,869 3,892 4,543
------- ------- -------
Total 19,848 16,955 17,676
Ceded (521) (110) 0
------- ------- -------
Net $19,327 $16,845 $17,676
======= ======= =======
F-33
<PAGE>
Included in Property and Casualty Companies net premiums earned are assumed
premiums relating to reinsurance agreements with RLI of $3,878,000, $2,409,000,
and $904,000 in 1996, 1995 and 1994, respectively.
22) Business Segments
The Company operates in two business segments, the procuring of property and
casualty insurance ("Insurance Brokerage Companies") and the underwriting of
property and casualty risks ("Property and Casualty Companies"). The
identifiable segment assets, operating profits and income before income taxes
and minority interests are shown on the accompanying consolidated financial
statements.
The following table is a summary of certain other segment information for the
years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Industry Segments - 1996
- - ----------------------------------------------------------------------------------------------------
Insurance Property &
(in thousands) Brokerage Casualty Consolidated
- - -------------- --------- -------- ------------
<S> <C> <C> <C>
Depreciation expense $1,024 $23 $1,047
Amortization expense $ 953 $ 953
Capital expenditures $ 888 $ 888
<CAPTION>
Industry Segments - 1995
- - ----------------------------------------------------------------------------------------------------
Insurance Property &
(in thousands) Brokerage Casualty Consolidated
- - -------------- --------- -------- ------------
<S> <C> <C> <C>
Depreciation expense $ 940 $18 $ 958
Amortization expense $1,041 $1,041
Capital expenditures $ 396 $ 396
<CAPTION>
Industry Segments - 1994
- - ----------------------------------------------------------------------------------------------------
Insurance Property &
(in thousands) Brokerage Casualty Consolidated
- - -------------- --------- -------- ------------
<S> <C> <C> <C>
Depreciation expense $ 849 $14 $ 863
Amortization expense $ 814 $ 814
Capital expenditures $ 424 $99 $ 523
</TABLE>
F-34
<PAGE>
The foreign operations set forth below, relate solely to the operations of Old
Lyme Bermuda and include reinsurance assumed from Old Lyme Rhode Island, as well
as from third party insurance companies. All such risks assumed originate in the
United States.
1996
--------------------------------------
Foreign Domestic Total
------- -------- -----
(in thousands)
Revenues $ 2,104 $ 51,885 $ 53,989
Income before minority
interest and income taxes 2,857 2,354 5,211
Identifiable assets 4,925 151,177 156,102
<TABLE>
<CAPTION>
1995 1994
------------------------------ -----------------------------
Foreign Domestic Total Foreign Domestic Total
------- -------- ----- ------- -------- -----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues $2,828 $52,619 $55,447 $4,278 $52,033 $56,311
Income before minority
interest and income
taxes 2,062 4,247 6,309 3,615 2,901 6,516
Identifiable assets 15,579 158,421 174,000 17,953 168,040 185,993
</TABLE>
There were no material intercompany revenue transactions between Old Lyme
Bermuda and Old Lyme Rhode Island.
During 1996, Old Lyme Rhode Island entered into the following reinsurance
agreements:
1. Commutation Agreement: Old Lyme Rhode Island commuted all liabilities
and obligations arising out of reinsurance agreements between Old Lyme
Rhode Island and Old Lyme Bermuda for the sum of $3,337,729. This
transaction increased Old Lyme Rhode Island's reserves by $4,466,384
and decreased statutory underwriting income by $1,128,655.
2. Novation Agreement: Old Lyme Rhode Island has agreed to replace Old
Lyme Bermuda under all reinsurance agreements in either RLI and/or Mt.
Hawley. Old Lyme Bermuda offered and Old Lyme Rhode Island accepted in
full and final satisfaction arising out of Old Lyme Bermuda's
participation in all reinsurance agreements with either RLI or Mt.
Hawley, the sum of $1,203,974. This transaction increased Old Lyme
Rhode Island's premium written by $1,203,974, reserves by $1,611,098
and decreased statutory underwriting income by $407,124.
F-35
<PAGE>
<TABLE>
<CAPTION>
Schedule II
KAYE GROUP INC.
(Parent Company Only)
Condensed Balance Sheets
December 31, 1996 and 1995
(in thousands, except par value per share)
1996 1995
========= =========
<S> <C> <C>
ASSETS
Cash and cash equivalents $1 $1
Investment in subsidiary 24,983 22,881
Due from subsidiary 271 176
Prepaid income taxes 1,261
--------- ---------
Total assets $25,255 $24,319
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Income taxes payable- current $95
Dividends payable 176 $176
Due to subsidiary 1,261
--------- ---------
Total liabilities 271 1,437
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000 shares authorized;
none issued and 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, net of deferred
income tax provision (benefit), (1996, $(16); 1995, $121) (31) 236
Retained earnings 17,169 14,800
--------- ---------
Total stockholders' equity 24,984 22,882
--------- ---------
Total liabilities and stockholders' equity $25,255 $24,319
========= =========
The condensed financial statements should be read in conjunction with the consolidated
financial statements and notes thereto and the accompanying notes.
</TABLE>
F-36
<PAGE>
<TABLE>
<CAPTION>
Schedule II
KAYE GROUP INC.
(Parent Company Only)
Condensed Statements of Income
For the years ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
=========== =========== ===========
REVENUES:
<S> <C> <C> <C>
Equity in income of subsidiary net of taxes $3,071 $5,181 $4,347
----------- ----------- -----------
NET INCOME $3,071 $5,181 $4,347
=========== =========== ===========
The condensed financial statements should be read in conjunction with the consolidated
financial statements and notes thereto and the accompanying notes.
</TABLE>
F-37
<PAGE>
<TABLE>
<CAPTION>
Schedule II
KAYE GROUP INC.
(PARENT COMPANY ONLY)
Condensed Statements of Cash Flows
For the years ended December 31, 1996, 1995 and 1994
(in thousands)
1996 1995 1994
========== ========== =========
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $3,071 $5,181 $4,347
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in net income of subsidiary (3,071) (5,181) (4,347)
Dividends received from subsidiary 702 702 702
Change in assets and liabilities:
Due from subsidiary (1,356) 2,222 864
Income taxes payable 1,356 (2,221) (864)
-------- ------- -------
Net cash provided by operations 702 703 702
-------- ------- -------
Dividends paid (702) (702) (702)
-------- ------- -------
Net cash used in financing activities (702) (702) (702)
-------- ------- -------
Net change in cash and cash equivalents 1
Cash and cash equivalents at beginning of period 1
-------- ------- -------
Cash and cash equivalents at end of period $1 $1
======== ======= =======
Income taxes paid (refunded) ($992) $3,521 $3,332
======== ======== =======
The condensed financial statements should be read in conjunction with the consolidated
financial statements and notes thereto and the accompanying notes.
</TABLE>
F-38
<PAGE>
Schedule II
KAYE GROUP INC.
(Parent Company Only)
Notes to Condensed Financial Statements
1. Condensed Financial Statements
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the Company's
consolidated financial statements and the notes thereto.
2. Significant Accounting Policies
The Parent Company carries its investment in subsidiary under the equity
method.
F-39
<PAGE>
<TABLE>
<CAPTION>
Schedule IV
KAYE GROUP INC.
REINSURANCE
For The Years Ended December 31, 1996, 1995 and 1994
(in thousands)
====================================================================================================================================
Column A Column B Column C Column D Column E Column F
====================================================================================================================================
Percentage
Insurance Gross Ceded To Other Assumed from of Amount
Premiums Earned Amount Companies Other Companies Net Amount Assumed to Net
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 $9,979 $521 $9,869 $19,325 51%
1995 $13,063 $110 $3,892 $16,845 23%
1994 $13,133 $0 $4,543 $17,676 26%
</TABLE>
F-40
<PAGE>
<TABLE>
<CAPTION>
KAYE GROUP INC
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
For the years ended December 31, 1996, 1995 and 1994
(in thousands)
================================================================================================================================
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J
================================================================================================================================
Claims and Claim
Reserves For Adjustment Expenses Paid
Unpaid Claims Discount Incurred Related to Amortization Claims
Affiliation Deferred And Claim If Any Net (1) (2) Of Deferred and Claim
With Acquisition Adjustment Deducted In Unearned Earned Investment Current Prior Acquisition Adjustment
Registrant Costs Expenses Column C Premiums Premiums Income Year Years Costs Expenses
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Foreign $295 $160 N/A $1,311 $1,542 $271 $313 ($1,580) $347 $3,637
Domestic 3,778 15,067 N/A 11,865 17,785 2,190 7,216 1,087 5,739 1,725
-------------------------------------------------------------------------------------------------------------------
1996 $4,073 $15,227 N/A $13,176 $19,327 $2,461 $7,529 ($493) $6,086 $5,362
===================================================================================================================
Foreign $325 $6,268 N/A $1,443 $1,399 $742 $260 $39 $316 $2,630
Domestic 3,378 6,403 N/A 10,471 15,446 2,077 4,455 98 4,878 3,668
-------------------------------------------------------------------------------------------------------------------
1995 $3,703 $12,671 N/A $11,914 $16,845 $2,819 $4,715 $137 $5,194 $6,298
===================================================================================================================
Foreign $161 $8,599 N/A $714 $3,513 $892 $484 $330 $176 $5,834
Domestic 4,368 5,519 N/A 12,500 14,163 1,622 5,207 (401) 4,650 3,597
-------------------------------------------------------------------------------------------------------------------
1994 $4,529 $14,118 N/A $13,214 $17,676 $2,514 $5,691 ($71) $4,826 $9,431
===================================================================================================================
</TABLE>
========================================
Column A Column K Column L
========================================
Affiliation Other
With Premiums Operating
Registrant Written Expenses
- - ----------------------------------------
Foreign $1,411 $167
Domestic 19,279 1,965
-------------------------
1996 $20,690 $2,132
=========================
Foreign $2,127 $161
Domestic 13,033 1,573
-------------------------
1995 $15,160 $1,734
=========================
Foreign $3,284 $86
Domestic 16,481 911
-------------------------
1994 $19,765 $997
=========================
F-41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Howard Kaye
----------------------------------
Howard Kaye, Chairman
Dated: March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C>
/s/ Howard Kaye
- - ----------------------------- Director, March 26, 1997
Howard Kaye Chairman
/s/ Lawrence Greenfield
- - ----------------------------- Director,
Lawrence Greenfield Vice-Chairman March 26, 1997
/s/ Bruce D. Guthart
- - ----------------------------- Director, President
Bruce D. Guthart Chief Executive Officer
(Principal Executive Officer) March 26, 1997
/s/ Michael P. Sabanos
- - ----------------------------- Senior Vice President
Michael P. Sabanos Chief Financial Officer
(Principal Financial and
Accounting Officer) March 26, 1997
/s/ Robert Barbanell
- - ----------------------------- Director March 26, 1997
Robert Barbanell
/s/ Richard Butler
- - ----------------------------- Director March 26, 1997
Richard Butler
/s/ David Ezekiel
- - ----------------------------- Director March 26, 1997
David Ezekiel
/s/ Henrik Falktoft
- - ----------------------------- Director March 26, 1997
Henrik Falktoft
s/ Ned Sherwood
- - ----------------------------- Director March 29, 1997
Ned Sherwood
</TABLE>
F-42
Exhibit 11
Page 2 of 2
KAYE GROUP INC.
Earnings Per Share Calculation
For the year ended December 31, 1996
<TABLE>
<CAPTION>
Twelve months
ended
Dec. 31, 1996 LINE NO.
============= ========
<S> <C> <C>
Net Income $3,071,000 (1)
I. Weighted Average Shares 7,020,000 (2)
E/P/S $0.4375 (3)=(1)/(2)
II. Primary E/P/S
Weighted Average Shares 7,020,000 (2)(Re.:I)
Dilution 497 (4)(Re.:VI)
---------------
7,020,497 (5)=(2)+(4)
===============
Diluted E/P/S $0.4374 (6)=(1)/(5)
===============
97 % of E/P/S $0.4243 (7)=(3)x97%
===============
Is dilution 3 % or larger? NO
(Is line (6) < line (7)?
If yes, show dilution)
III. Fully Diluted E/P/S
Weighted Average Shares 7,020,000 (2)(Re.:I)
Dilution 497 (8)(Re.:VII)
---------------
7,020,497 (9)=(2)+(8)
===============
Diluted E/P/S $0.4374 (10)=(1)/(9)
===============
97 % of E/P/S $0.4243 (7)=(3)x97%
===============
Is dilution 3 % or larger? NO
(Is line (10) < line (7)?
If yes, show dilution)
</TABLE>
<PAGE>
Exhibit 11
Page 2 of 2
KAYE GROUP INC.
Earnings Per Share Calculation
For the year ended December 31, 1996
<TABLE>
<CAPTION>
Units Price/Share Proceeds LINE NO.
============ =============== ============== =========
<S> <C> <C> <C> <C>
A. Options (8/17/93) 148,400 $ 10.000 $ 1,484,000
Warrants (8/17/93) 105,000 10.000 1,050,000
Options (1/24/94 & 2/2/94) 10,500 11.625 122,063
Options (5/25/94) 250 10.310 2,578
Options (2/1/95) 13,500 9.750 131,625
Options (9/13/95) 15,000 7.880 118,200
Options (10/25/95) 115,900 8.430 977,037
Options (5/15/96) 10,000 7.060 70,600
Options (12/27/96) 215,000 (16) 5.000 1,075,000 (15)
------------ --------------
633,550 (13) $ 5,031,102 (11)
------------ --------------
V. Average market value/share
Average Average Average Close on
High Low Close last day
============ =============== ============== =========
Jan. $7.625 $7.563 $7.625
Feb. 7.500 7.417 7.417
Mar 7.263 7.163 7.163 $7.000
--------------
Hash total 3 months $22.205
==============
April $7.242 $7.141 $7.156
May 6.920 6.817 6.817
June 6.098 5.912 5.964 $6.000
--------------
Hash total 3 months $19.937
==============
July $5.646 $5.377 $5.377
Aug. 5.256 5.176 5.210
Sept. 6.473 6.321 6.402 $6.500
--------------
Hash total 3 months $16.989
==============
Oct. $6.194 $6.104 $6.132
Nov. 5.825 5.763 5.788
Dec. 5.029 4.904 4.990 $5.250 (B)
--------------
Hash total 3 months $16.910
==============
--------------
Hash total 12 months $76.041
==============
/ 12
--------------
Average price per share twelve months $6.337 (A)
==============
VI. Primary For 12 months
===============
Total Proceeds from exercise $1,075,000 (15)
Divided by average price 6.337 (A)
Repurchase shares of: 169,645 (12) = (11)/(A)
Shares issued (options) 215,000 (16)
---------------
Dilution - Shares 45,355 (4) = (13)-(12)
===============
Dilution - Weighted Shares 497
===============
VII. Fully Diluted
Total Proceeds from exercise $1,075,000 (15)
Divided by greater of closing price
or average price 6.337 Higher of (A) or (B)
Repurchase shares of 169,645 (14) = (11)/(A)
Shares issued (options) 215,000 (16)
---------------
Dilution - Shares 45,355 (8) = (16)-(14)
===============
Dilution - Weighted Shares 497
===============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 40,483
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,848
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 44,667
<CASH> 30,477
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 4,073
<TOTAL-ASSETS> 156,102
<POLICY-LOSSES> 15,227
<UNEARNED-PREMIUMS> 13,176
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 3,448
<NOTES-PAYABLE> 14,232
0
0
<COMMON> 70
<OTHER-SE> 30,322
<TOTAL-LIABILITY-AND-EQUITY> 156,102
19,327
<INVESTMENT-INCOME> 3,576
<INVESTMENT-GAINS> 72
<OTHER-INCOME> 31,014
<BENEFITS> 7,036
<UNDERWRITING-AMORTIZATION> 8,218
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 5,211
<INCOME-TAX> 1,484
<INCOME-CONTINUING> 3,727
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,071
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
<RESERVE-OPEN> 12,671
<PROVISION-CURRENT> 7,503
<PROVISION-PRIOR> 415
<PAYMENTS-CURRENT> 1,832
<PAYMENTS-PRIOR> 3,530
<RESERVE-CLOSE> 15,227
<CUMULATIVE-DEFICIENCY> 415
</TABLE>
