<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Commission file number 0-24800
THE TENERE GROUP, INC.
(Exact name of Registrant as specified in its charter)
Missouri 43-1675969
(State or other jurisdiction of incorporation (IRS Employer Identification
or organization) No.)
1903 E. Battlefield, Springfield, MO 65804
(Address of principal executive offices) (Zip code)
417-889-1010
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant 1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and 2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
As of June 30, 1996 there were 1,999,774 shares of Common Stock, $.01 par
value, issued and outstanding.
<PAGE> 2
THE TENERE GROUP, INC.
PAGE NO.
INDEX
PART I. FINANCIAL INFORMATION 3
ITEM 1. Financial Statements (unaudited) 3
Consolidated Balance Sheets - 3
June 30, 1996 and December 31, 1995
Consolidated Statements of Operations - 4
Three Months ended June 30, 1996 and 1995
Consolidated Statements of Operations - 5
Six Months ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows - 6
Six months ended June 30, 1996 and 1995
Notes to Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
PART II. OTHER INFORMATION 16
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBIT INDEX 18
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
THE TENERE GROUP, INC.
and Subsidiaries
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995
ASSETS
<TABLE>
<CAPTION>
UNAUDITED
1996 1995
---- ----
<S> <C> <C>
Investments:
Bonds held to maturity, at amortized cost
(market - $1,823,222 in 1996; $1,854,359 in 1995) $ 1,849,418 $ 1,867,111
Bonds held available for sale, at market value (amortized cost -
$27,924,454 in 1996; $19,961,424 in 1995) 27,627,216 20,536,518
Common stock 340 340
------------ ------------
Total investments 29,476,974 22,403,969
Other assets:
Cash and cash equivalents, including interest-bearing
deposits of $18,647,826 and $29,614,311 in 1996 and 1995,
respectively 18,528,214 31,180,925
Premiums receivable 3,232,532 3,720,202
Reinsurance recoverable 3,166,803 1,162,495
Prepaid reinsurance premiums 350,000 1,175,252
Accrued investment income 596,799 567,306
Deferred policy acquisition costs 90,848 140,450
Deferred income taxes 2,022,989 1,772,314
Reinsurance premium recoverable 312,872 -
Other 1,107,022 491,101
------------ ------------
Total other assets 29,408,079 40,210,045
------------ ------------
Total assets $ 58,885,053 $ 62,614,014
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserve for losses and loss adjustment expenses $ 26,393,912 $ 26,623,138
Unearned premium reserve 8,448,762 10,447,006
Reinsurance premium payable - 137,878
Policyholder dividends payable (9,673) 152,042
Income taxes payable (266,321) 214,444
Other 94,047 502,228
------------ ------------
Total liabilities 34,660,727 38,076,736
Stockholders' equity:
Common stock, $.01 par value; 7,000,000 authorized shares,
1,999,774 issued and outstanding 19,998 19,998
Gross paid in and contributed capital 21,940,828 21,940,828
Retained earnings 2,263,500 2,576,452
------------ ------------
Total stockholders' equity 24,224,326 24,537,278
------------ ------------
$ 58,885,053 $ 62,614,014
============ ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
THE TENERE GROUP, INC.
and Subsidiaries
Consolidated Statements of Operations
Three Months Ended June 30, 1996 and 1995
UNAUDITED
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenues:
Direct premiums written $ 2,672,039 $ 2,551,342
Premiums ceded to reinsurers 995,307 357,272
----------- -----------
Net premiums written 1,676,732 2,194,070
Decrease in unearned premium reserve 671,140 363,441
----------- -----------
Net premiums earned 2,347,872 2,557,511
Net investment income 680,105 691,070
Net realized investment gains ------- 6,298
Other income (expense) 2,238 (674)
----------- -----------
Total revenues 3,030,215 3,254,205
Expenses:
Sales and marketing expenses 170,092 160,219
Other underwriting expenses 428,843 419,308
Loss and loss adjustment expenses 2,324,584 1,617,925
Dividends to policyholders (3,347) 275,048
----------- -----------
Total expenses 2,920,172 2,472,500
----------- -----------
Income before income taxes 110,043 781,705
Income tax expense 21,112 261,137
----------- -----------
Net income $ 88,931 $ 520,568
=========== ===========
Net income per share $ 0.04 $ 0.26
=========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
THE TENERE GROUP, INC.
and Subsidiaries
Consolidated Statements of Operations
Six Months Ended June 30, 1996 and 1995
UNAUDITED
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenues:
Direct premiums written $ 4,201,707 $ 4,006,971
Premiums ceded to reinsurers 1,485,339 816,139
----------- -----------
Net premiums written 2,716,368 3,190,832
Decrease in unearned premium reserve 1,919,779 1,988,615
----------- -----------
Net premiums earned 4,636,147 5,179,447
Net investment income 1,379,857 1,306,661
Net realized investment gains - 28,427
Other income 3,348 (337)
----------- -----------
Total revenues 6,019,352 6,514,198
Expenses:
Sales and marketing expenses 486,422 420,375
Other underwriting expenses 948,258 819,503
Loss and loss adjustment expenses 4,224,656 3,595,263
Dividends to policyholders (14,080) 431,068
----------- -----------
Total expenses 5,645,256 5,266,209
----------- -----------
Income before income taxes 374,096 1,247,989
Income tax expense 111,308 414,457
----------- -----------
Net income $ 262,788 $ 833,532
=========== ===========
Net income per share $ 0.13 $ 0.42
=========== ===========
Stockholders' equity:
Beginning of period $ 24,537,278 $ 19,368,556
Change in unrealized investment gains
(losses) (575,740) 2,105,674
Net income 262,788 833,532
------------ ------------
End of period $ 24,224,326 $ 22,307,762
============ ============
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
THE TENERE GROUP, INC.
and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995
UNAUDITED
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income $ 262,788 $ 833,532
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized investment gains - (28,427)
Depreciation and amortization expense 93,683 87,782
Amortization of deferred acquisition costs 49,602 60,704
Deferred income taxes (benefit) 45,918 238,394
Net amortization of discount on bonds 60,673 300,665
Change in operating assets and liabilities:
Premiums receivable 487,670 819,937
Reinsurance balances (1,629,806) 100,993
Accrued investment income (29,493) 528,093
Income taxes recoverable - 593,216
Prepaid expenses and other assets (624,390) 785
Reserve for losses and loss adjustment expenses (241,881) (1,106,570)
Unearned premium reserve (1,998,244) (1,988,615)
Income taxes payable (480,765) -
Policyholder dividends payable (161,715) (72,374)
Other liabilities (61,473) (184,733)
----------- -----------
Net cash provided by (used in) operating activities (4,227,433) 183,382
----------- -----------
Cash flows from investing activities:
Maturity of bonds held to maturity or available for sale 1,700,000 -
Sale of bonds held available for sale - 6,570,859
Purchase of bonds held to maturity or available for sale (9,706,011) -
Purchase of furniture and equipment (419,267) (208,171)
----------- -----------
Net cash provided by (used in) investing activities (8,425,278) 6,362,688
----------- -----------
Net increase (decrease) in cash and cash equivalents (12,652,711) 6,546,070
Cash and cash equivalents at beginning of period 31,180,925 1,650,059
------------ -----------
Cash and cash equivalents at end of period $ 18,528,214 $ 8,196,129
============ ===========
</TABLE>
See notes to consolidated financial statements
6
<PAGE> 7
THE TENERE GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited and are
prepared in accordance with the rules and regulations of the Securities
and Exchange Commission with regard to interim financial statements. In
the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been made. Such
adjustments consisted of only normal recurring items. The results of
operations for the three and six months ended June 30, 1996 are not
necessarily indicative of the results which may occur for the full year.
The accompanying unaudited financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the 1995 Annual Report.
(2) INVESTMENTS
The amortized cost and estimated market values of investments in bonds as
of June 30, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
June 30, 1996 Gross Gross Estimated
Amortized unrealized unrealized market
Type of Investment cost gains losses value
- ------------------ --------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Fixed Maturities
Held-to-maturity:
United States government,
government agencies and
authorities $ 1,849,418 ------- ($26,196) $ 1,823,222
------------ --------- --------- ------------
Available-for-sale:
United States government,
government agencies and
authorities 24,046,500 113,880 (391,968) 23,768,412
States, municipalities and
political subdivisions 3,877,954 2,238 (21,388) 3,858,804
------------ --------- --------- ------------
Total available-for-sale 27,924,454 116,118 (413,356) 27,627,216
------------ --------- --------- ------------
Total fixed maturities $ 29,773,872 $ 116,118 ($439,552) $ 29,450,438
============ ========= ========= ============
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
December 31, 1995 Gross Gross Estimated
Amortized unrealized unrealized market
Type of Investment cost gains losses value
- ------------------ --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed Maturities
Held-to-maturity:
United States government,
government agencies
authorities $ 1,867,111 ------- ($12,752) $ 1,854,359
------------ ---------- --------- ------------
Available-for-sale:
United States government,
government agencies and
authorities 17,960,592 579,886 -------- 18,540,478
States, municipalities and
political subdivisions 2,000,832 ------- (4,792) 1,996,040
------------- ---------- --------- ------------
Total available-for-sale 19,961,424 579,886 (4,792) 20,536,518
------------- ---------- --------- ------------
Total fixed maturities $ 21,828,535 $ 579,886 ($17,544) $ 22,390,877
============= ========== ========= ============
</TABLE>
The amortized cost and estimated market value of investments in fixed
maturities at June 30, 1996 are shown below by contractual maturity.
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Held to maturity Available for sale
----------------- ------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,322,225 $ 1,306,331 $ 3,328,576 $ 3,332,166
Due after one year
through five years 418,869 412,500 2,051,954 2,036,133
Due after five years
through ten years 108,324 104,391 22,543,924 22,258,917
----------- ----------- ------------ --------------
$ 1,849,418 $ 1,823,222 $ 27,924,454 $ 27,627,216
=========== =========== ============ ==============
</TABLE>
Proceeds from the sale of available-for-sale securities were $-0- and
$6,570,859 in 1996 and 1995, respectively. Gross gains of $-0- and
$134,615 and gross losses of $-0-and $106,188 were realized on those
sales for the six months ended June 30, 1996 and 1995, respectively.
8
<PAGE> 9
Net investment income for the six months ended June 30, 1996 and 1995 is
comprised of the following:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
-------- --------
<S> <C> <C>
Investment income:
Interest on certificates of
deposit and interest-bearing
cash accounts $ 706,746 $ 146,851
Interest on bonds 714,759 1,221,251
----------- ------------
Gross investment income 1,421,505 1,368,102
Investment expenses 41,648 61,441
----------- ------------
Net investment income $ 1,379,857 $ 1,306,661
=========== ============
</TABLE>
The net change in unrealized investment gains (losses) are as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
-------- --------
<S> <C> <C>
Gross unrealized investment gains (losses) ($872,332) $ 3,190,414
Federal income taxes (296,592) 1,084,740
--------- -------------
($575,740) $ 2,105,674
========= =============
</TABLE>
(3) RESERVE FOR LOSSES AND LOSS
ADJUSTMENT EXPENSES AND REINSURANCE
A summary of the reserves for losses and loss adjustment expenses
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Undiscounted reserve for losses and loss
adjustment expenses $ 28,239,999 $ 29,555,760
Less discount 1,846,087 2,932,622
------------ ------------
Discounted reserve for losses and loss
adjustment expenses $ 26,393,912 $ 26,623,138
============ ============
</TABLE>
9
<PAGE> 10
Premiums, premium related reinsurance amounts and reinsurance recoveries
for the six months ended June 30, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
--------- --------
<S> <C> <C>
Ceded premiums on an earned basis $ 1,568,978 $ 816,139
=========== =========
Ceded loss and loss adjustment expenses $ 2,267,212 $ 231,023
=========== =========
</TABLE>
Activity in the reserve for loss and loss adjustment expenses during the
periods ended June 30, 1996 and December 31, 1995 was:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Balance at January 1 $ 26,623,138 $ 26,279,977
Less reinsurance 1,162,495 (584,913)
------------ ------------
25,460,643 25,695,064
------------ ------------
Incurred related to:
Current year 3,435,048 8,629,800
Prior year 789,608 (953,312)
------------ ------------
Total incurred 4,224,656 7,676,488
------------ ------------
Paid related to:
Current year 857,052 3,077,457
Prior year 5,451,867 4,833,452
------------ ------------
Total paid 6,308,919 7,910,909
------------ ------------
23,376,380 25,460,643
Plus reinsurance 3,017,532 1,162,495
------------ ------------
Balance at end of period $ 26,393,912 $ 26,623,138
============ ============
</TABLE>
(4) FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return. Income tax
expense varies from the amount which would be provided by applying the
federal income tax rates to income before income taxes. The following
reconciles the expected provision for income tax expense using the
federal statutory tax rate of 34% to the provision for income tax expense
reported herein for the six months ended June 30, 1996 and June 30, 1995:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
-------- --------
<S> <C> <C>
Expected tax expense using statutory
rates $ 127,193 $ 424,301
Other, net (15,885) (9,844)
--------- ---------
$ 111,308 $ 414,457
========= =========
</TABLE>
10
<PAGE> 11
Income taxes consist of the following at June 30, 1996 and 1995:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
-------- --------
<S> <C> <C>
Current expense $ 65,390 $176,063
Deferred expense 45,918 238,394
-------- -------
Income taxes $111,308 $414,457
======== ========
</TABLE>
Deferred income taxes arise from timing differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods. The sources of these differences and the tax effect
of each are as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
--------- --------
<S> <C> <C>
Losses and loss adjustment expenses
incurred for financial reporting
purposes but not deductible for
tax purposes $(87,073) $ 73,680
Unearned premiums not deductible for
tax purposes 130,545 135,227
Other, net 2,446 29,487
------- -------
$ 45,918 $238,394
======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at June
30, 1996 and December 31, 1995 are presented below:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ------------
<S> <C> <C>
Deferred tax assets:
Discounted unpaid loss reserves $1,592,069 $1,504,996
Discounted unearned premium reserves 564,013 694,558
Investments adjusted to market value 101,061 --
Deferred commissions payable 22,989 26,747
Net operating loss carryforwards 186,038 201,591
--------- ---------
Total gross deferred tax assets 2,466,170 2,427,892
Less valuation allowance (400,000) (400,000)
--------- ---------
Net deferred tax assets $2,066,170 $2,027,892
Deferred tax liabilities:
Investments adjusted to market value -- (195,531)
Deferred acquisition costs (30,887) (47,753)
Other (12,294) (12,294)
--------- ---------
Total gross deferred liabilities (43,181) (255,578)
--------- ---------
Net deferred tax asset $2,022,989 $1,772,314
========= =========
</TABLE>
11
<PAGE> 12
The valuation allowance for deferred tax assets at June 30, 1996 was
$400,000. Based on the Company's historical earnings, future
expectations of adjusted taxable income and its ability to change its
investment strategy, as well as reversing gross deferred tax liabilities,
management believes it is more likely than not that the Company will
fully realize the gross deferred tax assets less the valuation allowance.
However, there can be no assurances that the Company will generate the
necessary adjusted taxable income in any future period.
(5) RECONCILIATION TO STATUTORY ACCOUNTING
The Company's two wholly-owned insurance subsidiaries, Intermed Insurance
Co. and Interlex Insurance Co., are required to file statutory financial
statements with state regulatory authorities. Accounting principles used
to prepare the statutory financial statements differ from financial
statements prepared on the basis of generally accepted accounting
principles.
Reconciliations of statutory net income, as determined using statutory
accounting principles, to the amounts included in the accompanying
consolidated financial statements for the six months ended June 30, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
-------- --------
<C> <C> <C>
Net income of insurance companies $ 402,306 $ 881,746
Increase (decrease):
Deferred policy acquisition costs (49,600) (60,748)
Deferred income taxes (45,918) 12,488
Other adjustments, net (44,000) 46
---------- ---------
Net income (loss) as reported herein $ 262,788 $ 833,532
========= =========
</TABLE>
Reconciliations of statutory capital and surplus, as determined using
statutory accounting principles, to stockholders' equity included in the
accompanying consolidated financial statements at June 30, 1996 and
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Statutory capital and surplus of insurance companies $25,592,384 $25,558,424
Stockholder's equity of noninsurance subsidiaries 356,500 500
----------- -----------
Combined capital and surplus 25,948,884 25,558,924
Increase (decrease):
Deferred policy acquistion costs 90,848 140,450
Deferred income taxes 1,934,222 1,772,314
Unrealized gain (loss) on securities available for sale (196,177) 575,094
Excess statutory over statement reserves 1,760,000 1,760,000
Non-admitted assets and other adjustments, net 751,142 561,006
Consolidating eliminations and adjustments (6,064,593) (5,830,510)
----------- -----------
Stockholders' equity as reported herein $24,224,326 $24,537,278
=========== ===========
</TABLE>
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis addresses the Company's financial
condition at June 30, 1996 as compared with December 31, 1995 and results of
operations for the three and six month periods ended June 30, 1996 and 1995.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996
Direct premiums written in the quarter ended June 30, 1996 totaled $2.7
million, approximately 5% over direct premiums written in the comparable period
of 1995. The primary reasons for the increase were (a) increasing sales of
legal malpractice insurance and (b) higher premiums on claims-made policies
issued to policyholders converting from claims-paid coverages. Beginning
September 1, 1995, claims-paid policies have been discontinued on renewal dates
with policyholders given the option of converting to a claims-made policy form.
To date, over 90% of claims-paid policyholders have converted to claims-made
policies upon expiration of their claims-paid policy. Premiums ceded to
reinsurers were $995,000, 179% higher than in the prior year period. The
increase was primarily due to (a) a new treaty effective July 1, 1995 covering
legal malpractice insurance written by Interlex and (b) a new treaty effective
January 1, 1996 covering medical malpractice losses. There was a $671,000
decrease in the unearned premium reserve (UPR) in the quarter compared to a
$363,000 decrease in the prior year period. The higher amount in the 1996
period is due to a release of the death, disability and retirement (DD&R)
reserve associated with claims-paid policies expiring during the period. Net
premiums earned during the period ended June 30, 1996 were $2.3 million or 8%
lower than the prior year period.
Net investment income of $680,000 in the quarter ended June 30, 1996 was
approximately level with the prior year period. There were no realized gains
or losses during the current period. Total revenue during the period ended
June 30, 1996 was $3.0 million, or 7% below the prior year period due to the
lower level in net premiums earned.
Sales and marketing and other underwriting expenses increased approximately 3%
over the prior year period due to (a) the addition of marketing personnel in
Missouri and (b) start-up costs of a new office in Austin, TX for a
Company-sponsored purchasing group. The expense ratio in the 1996 quarter was
22.4% compared with 22.7% in the prior year period.
Losses and loss adjustment expenses in the 1996 quarter were approximately 44%
higher than in the prior year period. The loss ratio in the current year
period was 99% compared with 63.3% in the prior year period. Unfavorable claim
experience in the 1996 quarter was primarily attributable to (a) increased
frequency (21 indemnity payments in the 1996 period vs. 14 in the prior year
period) and (b) $1.5 million (net of reinsurance) losses and loss adjustment
expenses related to discontinuance of the claims-paid program.
Dividends to policyholders were discontinued effective September 1, 1995. The
$3,000 credit in the 1996 quarter represents adjustments to canceled policies.
Total losses and expenses in the
13
<PAGE> 14
1996 period totaled $2.9 million compared with $2.5 million in the comparable
period of 1995 due to unfavorable loss experience in the current year.
Income before taxes in the quarter ended June 30, 1996 was $110,000 compared
with $782,000 in the quarter ended June 30, 1995. Net income was $89,000 or
$.04 per share compared with $521,000 or $.26 per share.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996
Direct premiums written in the first six months of 1996 were $4.2 million, an
increase of approximately 5% over the first six months of 1995. The increase
was primarily due to (a) continued growth in sales of legal malpractice
insurance (premiums written were $223,000 in 1996 vs. $69,000 in 1995) and (b)
higher premiums on claims-made policies issued to policyholders who converted
from claims-paid policies.
Premiums ceded to reinsurers totaled $1.5 million in the first half of 1996
compared with $816,000 in the comparable period of 1995. The increase was due
to two new reinsurance treaties, one effective July 1, 1995 and the other
effective January 1, 1996. The unearned premium reserve (UPR) decreased $1.9
million in the 1996 period compared with $2.0 million in 1995. The decrease in
the 1996 period was primarily due to release of the death, disability and
retirement (DD & R) reserve associated with non-renewed claims-paid policies;
the decrease in the 1995 period was primarily due to decreased premium writings
compared to the 1994 period.
Net premiums earned in the 1996 period were $4.6 million compared with $5.2
million in the comparable period of 1995, a decrease of approximately 10%.
Net investment income was $1.4 million in the first six months of 1996, an
increase of approximately 6% over the prior year period. There were no
realized gains or losses in the 1996 period. Total revenue in the six months
ended June 30, 1996 was $6.0 million, a decrease of approximately 8% compared
to the prior period level due to the lower level of net premiums earned.
Sales and marketing and other underwriting expenses totaled $1.4 million in the
six months ended June 30, 1996, an increase of approximately 16% compared to
the prior year period. The increase was primarily due to the addition of two
marketing representatives in Missouri and start-up costs of a marketing office
in Austin, Texas. The expense ratio in the 1996 period was 34% compared with
31% in the prior year period.
Losses and loss adjustment expenses in the first half of 1996 totaled $4.2
million, an increase of 17.5% over the comparable period in 1995. The increase
was primarily due to (a) increased frequency (31 indemnity payments in 1996 vs.
25 in 1995) and (b) the establishment of loss reserves for reported claims on
claims-paid policies which expired in the 1996 period which added $2.2 million
(net of reinsurance) to loss and loss adjustment expenses in the six months
ended June 30, 1996. The loss ratio for the six months ended June 30, 1996 was
91% compared with 69% in the prior year period.
14
<PAGE> 15
Dividends to policyholders were eliminated effective September 1, 1995. The
$14,000 credit in this account is due to adjustments on canceled policies.
Total losses and expenses were $5.6 million in the first six months of 1996
compared with $5.3 million in the prior year period.
Income before income taxes in the six month period ended June 30, 1996 was
$374,000 compared with $1.2 million in the prior year period. Net income was
$263,000 or $.13 per share compared with $834,000 or $.42 per share.
FINANCIAL CONDITION
Assets declined from $62.6 million at December 31, 1995 to $58.9 million at
June 30, 1996, a decline of approximately 6%. The decline in assets was
primarily due to a $5.6 million reduction in cash and invested assets in the
period. $4.2 million of cash was used in operations compared with an addition
of $183,000 in the first half of 1995. Higher claim settlements in the current
year period (discussed further in the Results of Operations section) were the
primary reason for the significant decrease.
Bonds with a par value of $9.85 million and an effective yield of slightly over
7% were purchased during the first six months of 1996. An additional $17
million earmarked for long-term investment is currently invested short-term
until long-term rates increase above the current level.
There was an unrealized loss of $297,000 in the portfolio of bonds held
available for sale at June 30, 1996 compared with an unrealized gain of
$575,000 at December 31, 1995. (Changes in unrealized gains and losses in that
portion of the bond portfolio held available for sale are reflected in the
equity account net of taxes).
The increase in the reinsurance recoverable at June 30, 1996 over the prior
year-end is attributable to a new reinsurance treaty which was effective
January 1, 1996. Prepaid reinsurance premiums are expensed as the policy year
progresses, which resulted in the decrease in this account from $1.2 million at
December 31, 1995 to $350,000 at June 30, 1996.
The increase in deferred income taxes payable is primarily due to the change in
the market value of bonds held available for sale discussed above.
The increase in other assets from $491,000 at December 31, 1995 to $1.1 million
at June 30, 1996 is due to (a) purchase of a new software package for $300,000
and (b) goodwill of approximately $333,000 associated with the purchase of
Trout Insurance Services effective January 1, 1996. The goodwill is being
amortized over the three-year period of a non-compete agreement.
The unearned premium reserve declined from $10.4 million at December 31, 1995
to $8.4 million at June 30, 1996. Approximately $1.1 million of the decline
was attributable to the take-down of death, disability and retirement (DD&R)
reserves associated with claims-paid policies
15
<PAGE> 16
which were non-renewed during the period (discussed further under Results of
Operations) and the remainder was due to cyclical fluctuations.
The recoverable in income taxes payable represents overpayments during the
first two quarters of 1996 based on early estimates of the current year tax
liability. The decline in other liabilities is due to a recoverable in premium
taxes payable. Premium tax expense is lower in 1996 due to a credit taken for
the cost of a financial examination conducted by the Missouri Department of
Insurance.
There were no changes in capital accounts during the six month period ended
June 30, 1996. The $313,000 decline in retained earnings was due to the
$576,000 change in unrealized investment gains (losses) discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations was a negative $4.2 million in the six months ended
June 30, 1996 compared with a positive cash flow of $183,000 in the same period
of 1995. (The reasons for this variance are discussed under Results of
Operations). Claims paid in the 1996 period were $1.1 million higher than the
comparable period of 1995 and ceded reinsurance premiums exceeded the prior
year period by $1.7 million. Prepaid expenses and purchases of other assets
exceeded the prior year period by $625,000 and federal income taxes paid were
$481,000 higher.
The Company anticipates net investment income of $2.8 million in 1996 which,
together with a cash position of $18.5 million at June 30, 1996, will provide
sufficient liquidity to fund operations without the necessity of selling bonds
or obtaining other financing to meet cash requirements.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS: SEE INDEX
(b) REPORTS ON FORM 8-K: NONE
16
<PAGE> 17
SIGNATURES
Pursuant to the Requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE TENERE GROUP, INC.
(Registrant)
August 12, 1996 /s/ J D Williams
- --------------- -----------------
Date Joseph D. Williams, CPA
Vice President - Finance,
Chief Financial Officer and
Chief Accounting Officer
17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT DESCRIPTION
No. -----------
- -------
3.1 Articles of Incorporation of the Registrant, filed as Exhibit 3.1
to the Registrant's Registration Statement on Forms S-1 (Reg. No.
33-78702) is incorporated herein by this reference.
3.2 Bylaws of the Registrant, filed as Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1 (Reg. No.
33-78702) is incorporated herein by this reference.
4.1 Form of common stock certificate, filed as Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1 (Reg. No.
33-78702) is incorporated herein by this reference.
10.1 Management Contract, dated July 8, 1994, by and between RCA
Mutual Insurance Company, Interlex Insurance Co. and Insurance
Services, Inc., filed as Exhibit 10.1 to the Registrant's Annual
Report on Form 10K for the year ended December 31, 1995, is
incorporated herein by reference.
10.2 Lease Agreement, dated December 7, 1994, by and between
Georgetown Square II, Ltd. and Insurance Services, Inc., filed as
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q
for the nine months ended September 30, 1995, is incorporated
herein by reference.
10.3 Medical Practitioners' Liability Primary Excess of Loss
Reinsurance Contract, dated October 1, 1993, by and between RCA
Mutual Insurance Company and Certain Reinsurers of Lloyd's of
London, filed as Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-Q for the nine months ended September 30, 1995,
is incorporated herein by reference.
10.4 Addendum No. 1 to Medical Practitioners' Liability Primary Excess
of Loss Reinsurance Contract, dated February 1, 1995, by and
between RCA Mutual Insurance Company and Certain Reinsurers of
Lloyd's of London, filed as Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the nine months ended September
30, 1995, is incorporated herein by reference.
10.5 Addendum No. 2 to Medical Practitioners' Liability Primary Excess
of Loss Reinsurance Contract, effective April 27, 1995, by and
between RCA Mutual Insurance Company and Certain Reinsurers of
Lloyd's of London, filed as Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q for the nine months ended September
30, 1995, is incorporated herein by reference.
10.6 Reinsurance Cover Note: 95/1146/RM to Medical Practitioners'
Liability Primary Excess of Loss Reinsurance Contract, dated
October 16, 1995, by and between RCA Mutual Insurance Company and
Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.6 to
the Registrant's Quarterly Report on Form 10-Q for the nine
months ended September 30, 1995, is incorporated herein by
reference.
18
<PAGE> 19
EXHIBIT DESCRIPTION
NO. -----------
- ---
10.7 Reinsurance Cover Note: 95/1212/RM(A) to Catastrophe "Awards
Made" Excess of Loss Reinsurance Contract, dated October 16,
1995, by and between RCA Mutual Insurance Company and Certain
Reinsurers of Lloyd's of London, filed as Exhibit 10.7 to the
Registrant's Quarterly Report on Form 10-Q for the nine months
ended September 30, 1995, is incorporated herein by reference.
10.8 Catastrophe "Awards Made" Excess of Loss Reinsurance Contract,
commencing February 1, 1995, by and between RCA Mutual Insurance
Company and Certain Reinsurers of Lloyd's of London including
Amendment No. 1, effective April 27, 1995, filed as Exhibit 10.8
to the Registrant's Quarterly Report on Form 10-Q for the nine
months ended September 30, 1995, is incorporated herein by
reference.
10.9 Reinsurance Cover Note: 95/1249/IP to Lawyers' Professional
Liability Primary Excess of Loss Reinsurance Treaty, dated
October 16, 1995, by and between Interlex Insurance Company and
Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.9 to
the Registrant's Quarterly Report on Form 10-Q for the nine
months ended September 30, 1995, is incorporated herein by
reference.
10.10 Lawyers' Professional Liability Primary Excess of Loss
Reinsurance Contract, commencing July 1, 1995, by and between
Interlex Insurance Company and Certain Reinsurers of Lloyd's of
London, filed as Exhibit 10.10 to the Registrant's Quarterly
Report on Form 10-Q for the nine months ended September 30, 1995,
is incorporated herein by reference.
10.11 Reinsurance Cover Note: 95/1250/IP to Prior Agreement Excess of
Loss Reinsurance Contract, dated October 16, 1995, by and between
Interlex Insurance Company and Certain Reinsurers of Lloyd's of
London, filed as Exhibit 10.11 to the Registrant's Quarterly
Report on Form 10-Q for the nine months ended September 30, 1995,
is incorporated herein by reference.
10.12 Prior Agreement Excess of Loss Reinsurance Contract, commencing
July 1, 1995, by and between Interlex Insurance Company and
Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.12
to the Registrant's Quarterly Report on Form 10-Q for the nine
months ended September 30, 1995, is incorporated herein by
reference.
10.13 Draft Reinsurance Slip by and between Intermed Insurance Company
and American Re-Insurance Company filed as Exhibit 10.13 to the
Registrant's Quarterly Report on Form 10-Q for the three months
ended March 31, 1996, is incorporated herein by reference.
27 Financial Data Schedules
19
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-06-1996
<DEBT-HELD-FOR-SALE> 27,627,216
<DEBT-CARRYING-VALUE> 1,849,418
<DEBT-MARKET-VALUE> 1,823,222
<EQUITIES> 340
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 29,476,974
<CASH> 18,528,214
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 90,848
<TOTAL-ASSETS> 58,885,053
<POLICY-LOSSES> 26,393,912
<UNEARNED-PREMIUMS> 8,448,762
<POLICY-OTHER> (9,673)
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 19,998
<OTHER-SE> 24,204,328
<TOTAL-LIABILITY-AND-EQUITY> 58,885,053
4,636,147
<INVESTMENT-INCOME> 1,379,857
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 3,348
<BENEFITS> 4,224,656
<UNDERWRITING-AMORTIZATION> 486,422
<UNDERWRITING-OTHER> 948,258
<INCOME-PRETAX> 374,096
<INCOME-TAX> 111,308
<INCOME-CONTINUING> 262,788
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 262,788
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
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