-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ln2XJUXdi2LqGoJZOedi91sxN9YDVkFqeT3BDlk68poHxkDzNArYpN6Ndy7BHNhN y97J1e+U3+uJQh4DGgrJSw== 0000950137-96-001451.txt : 19960816 0000950137-96-001451.hdr.sgml : 19960816 ACCESSION NUMBER: 0000950137-96-001451 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENERE GROUP INC CENTRAL INDEX KEY: 0000922887 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 431675969 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26062 FILM NUMBER: 96612935 BUSINESS ADDRESS: STREET 1: 1903 E BATTLEFIELD CITY: SPRINGFIELD STATE: MO ZIP: 65804 BUSINESS PHONE: 4178620650 MAIL ADDRESS: STREET 1: 1903 E BATTLEFIELD CITY: SPRINGFIELD STATE: MO ZIP: 65804 10-Q 1 FROM 10-Q DATED JUNE 30, 1996 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. 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 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
UNAUDITED 1996 1995 ---- ---- 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 ============ ============
See notes to consolidated financial statements 3 4 THE TENERE GROUP, INC. and Subsidiaries Consolidated Statements of Operations Three Months Ended June 30, 1996 and 1995 UNAUDITED
1996 1995 ---- ---- 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 =========== ===========
See notes to consolidated financial statements 4 5 THE TENERE GROUP, INC. and Subsidiaries Consolidated Statements of Operations Six Months Ended June 30, 1996 and 1995 UNAUDITED
1996 1995 ---- ---- 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 ============ ============
See notes to consolidated financial statements 5 6 THE TENERE GROUP, INC. and Subsidiaries Consolidated Statements of Cash Flows Six Months Ended June 30, 1996 and 1995 UNAUDITED
1996 1995 ---- ---- 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 ============ ===========
See notes to consolidated financial statements 6 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:
June 30, 1996 Gross Gross Estimated Amortized unrealized unrealized market Type of Investment cost gains losses value - ------------------ --------- ------------ ---------- --------- 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 ============ ========= ========= ============
7 8
December 31, 1995 Gross Gross Estimated Amortized unrealized unrealized market Type of Investment cost gains losses value - ------------------ --------- ---------- ---------- --------- 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 ============= ========== ========= ============
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.
Held to maturity Available for sale ----------------- ------------------ Amortized Estimated Amortized Estimated Cost Market Value Cost Market Value --------- ------------ ---------- ------------ 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 =========== =========== ============ ==============
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 9 Net investment income for the six months ended June 30, 1996 and 1995 is comprised of the following:
June 30, June 30, 1996 1995 -------- -------- 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 =========== ============
The net change in unrealized investment gains (losses) are as follows:
June 30, June 30, 1996 1995 -------- -------- Gross unrealized investment gains (losses) ($872,332) $ 3,190,414 Federal income taxes (296,592) 1,084,740 --------- ------------- ($575,740) $ 2,105,674 ========= =============
(3) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES AND REINSURANCE A summary of the reserves for losses and loss adjustment expenses follows:
June 30, December 31, 1996 1995 -------- ------------ 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 ============ ============
9 10 Premiums, premium related reinsurance amounts and reinsurance recoveries for the six months ended June 30, 1996 and 1995 are summarized as follows:
June 30, June 30, 1996 1995 --------- -------- Ceded premiums on an earned basis $ 1,568,978 $ 816,139 =========== ========= Ceded loss and loss adjustment expenses $ 2,267,212 $ 231,023 =========== =========
Activity in the reserve for loss and loss adjustment expenses during the periods ended June 30, 1996 and December 31, 1995 was:
June 30, December 31, 1996 1995 -------- ------------ 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 ============ ============
(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:
June 30, June 30, 1996 1995 -------- -------- Expected tax expense using statutory rates $ 127,193 $ 424,301 Other, net (15,885) (9,844) --------- --------- $ 111,308 $ 414,457 ========= =========
10 11 Income taxes consist of the following at June 30, 1996 and 1995:
June 30, June 30, 1996 1995 -------- -------- Current expense $ 65,390 $176,063 Deferred expense 45,918 238,394 -------- ------- Income taxes $111,308 $414,457 ======== ========
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:
June 30, June 30, 1996 1995 --------- -------- 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 ======= =======
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:
June 30, December 31, 1996 1995 ---------- ------------ 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 ========= =========
11 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:
June 30, June 30, 1996 1995 -------- -------- 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 ========= =========
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:
June 30, December 31, 1996 1995 ----------- ------------ 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 =========== ===========
12 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 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 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 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 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 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 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 EX-27 2 FINANCIAL DATA SCHEDULE
7 6-MOS DEC-31-1996 JAN-01-1996 JUN-06-1996 27,627,216 1,849,418 1,823,222 340 0 0 29,476,974 18,528,214 0 90,848 58,885,053 26,393,912 8,448,762 (9,673) 0 0 0 0 19,998 24,204,328 58,885,053 4,636,147 1,379,857 0 3,348 4,224,656 486,422 948,258 374,096 111,308 262,788 0 0 0 262,788 .13 .13 0 0 0 0 0 0 0
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