-----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, P53DijTHCRuKWNKQQlsuR1lSEQaaAWvkitPkN2QS/0iqYgphe3pYVuKP2k8xqcbY hOAHTJ7veRT2dy75xVOlxA== 0000950137-97-001361.txt : 19970401 0000950137-97-001361.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950137-97-001361 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-26062 FILM NUMBER: 97570822 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-K405 1 FORM 10-K DATAED DECEMBER 31, 1996 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 (I.R.S. Employer Identification Number) Incorporation or Organization) 1903 E. Battlefield, Springfield, MO 65804 (Address of Principal Executive Offices) (Zip Code) 417-889-1010 (Registrant's telephone number including area code) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part II of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value as of March 27, 1997 of the voting stock held by non-affiliates of the Registrant cannot be determined since there is no market at this time for the stock. As of March 27, 1997 there were 1,999,774 shares outstanding of the Registrant's Common Stock, $.01 par value. DOCUMENTS INCORPORATED BY REFERENCE As provided herein, portions of the following documents are incorporated herein by reference. Document Part of 10-K -------- ------------ 1996 Annual Report to Stockholders II Proxy Statement for the 1997 Annual Meeting of Stockholders III 2 THE TENERE GROUP, INC. AND SUBSIDIARIES TABLE OF CONTENTS ITEM PAGE - ---- ---- PART I 1. Business............................................................. 3 2. Properties........................................................... 10 3. Legal Proceedings.................................................... 10 4. Submission of Matters to a Vote of Security Holders.................. 10 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters.............................................................. 11 6. Selected Financial Data.............................................. 11 7. Management's Discussion and Analysis of Financial Condition and Results of Operation................................................. 11 8. Financial Statements and Supplementary Data.......................... 11 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures................................................ 12 PART III 10. Directors and Executive Officers..................................... 12 11. Executive Compensation............................................... 13 12. Security Ownership of Certain Beneficial Owners and Management....... 13 13. Certain Relationships and Related Transactions....................... 13 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 14 2 3 PART I ITEM 1. BUSINESS HISTORY Risk Control Associates, Inc., an assessable mutual property and casualty insurance company, was organized in 1976 under Chapter 383 of the Revised Missouri Statutes (RSMo) to provide professional liability coverage to physicians and dentists practicing in the State of Missouri. In 1991, the Company reorganized under Section 379.010 of the RSMo and became a non-assessable mutual property and casualty insurance company. Its name was changed to RCA Mutual Insurance Company (RCA). In 1995, the Company converted from a mutual to a stock property and casualty insurance company and its name was changed to Intermed Insurance Co. (Intermed). Effective with the demutualization, Intermed became a wholly-owned subsidiary of The Tenere Group, Inc. (Tenere), a Missouri holding company formed during the demutualization process, and the policyholders of RCA became the stockholders of Tenere. Tenere has two principal operating subsidiaries, Intermed, which writes medical and dental malpractice insurance, and Interlex Insurance Company (Interlex), which writes legal malpractice insurance. Both companies are admitted and write business in the States of Missouri and Kansas. Interlex was formed in 1994 when RCA merged two of its subsidiaries, Insurance Risks, Ltd., a Cayman Island corporation , and Springfield Casualty Company, a Missouri corporation. Tenere operates its businesses through a wholly-owned management company, Insurance Services, Inc. (ISI), pursuant to a management contract between Intermed, Interlex and ISI. Neither Tenere, Intermed nor Interlex have employees and all persons conducting the businesses of these companies are employees of ISI. The management contract with ISI is, in effect, a cost reimbursement so that ISI makes neither a profit nor a loss. PRODUCTS Intermed currently writes medical and dental malpractice insurance in the States of Missouri, Kansas and, through a purchasing group, Texas. Since the formation in 1976 of a predecessor company, medical and dental malpractice insurance has been its only line of business. Insurance is written on two policy forms, occurrence and claims-made. Prior to September 1, 1995 Intermed also wrote business on a claims-paid policy form. Estimates of losses and loss adjustment expenses on occurrence coverages are charged to income as claims are incurred. Estimates of losses and loss adjustment expenses on claims-made coverages are charged to income as claims are reported. Claims-paid coverages insured against claims which were reported and paid during the period the policy was in effect. Intermed's obligation to defend and pay claims ended upon expiration of a claims-paid policy. Claims-paid losses were incurred at the time of payment so no reserves were required on open claims. Intermed, however, was contractually liable for claims that had been reported during the claims-paid policy period if the Company chose not to renew or discontinued a claims-paid policy. Intermed discontinued writing claims-paid policies effective September 1, 1995. As these policies expired over the twelve-month period ending August 31, 1996, claims-paid policyholders were given the opportunity to convert to claims-made policy. Reserves for all reported claims on claims-paid policies which non-renewed or discontinued during the period September 1, 1995 through August 31, 1996 totaled $3,977,000 at December 31, 1996 net of reinsurance. At December 31, 1996, Intermed had 1,228 policies in force: 485 occurrence and 743 claims-made. This was a decrease of 66 from the prior year end. During the twelve-month period ended August 31, 1996, 367 or 91% of claims-paid policyholders converted to claims-made policies. 3 4 Interlex writes legal malpractice insurance on a claims-made policy form. At December 31, 1996, the Company had 428 policies in force, an increase of 232 over the prior year end. MARKETING Intermed sells its products through salaried employees and agents. For the calendar year 1996, salaried employees wrote 70% and agents wrote 30% of total premiums written. Intermed will continue to market its products through salaried employees and agents, with primary emphasis on direct sales. During 1996, Intermed formed a purchasing group, Intermedical of Texas, Inc., and commenced operations offering medical malpractice insurance to physicians in the State of Texas. Employees of ISI staff the purchasing group from an office in Austin, Texas. During the first quarter of 1997, a second purchasing group, Dental Defense Specialists, Inc. was organized for the purpose of marketing malpractice insurance to dentists in Texas. Interlex also markets legal malpractice insurance through salaried employees and agents. In calendar year 1996, salaried employees produced 82.5% of total premiums written and agents 17.5%. Interlex plans to continue distributing its products through salaried employees and agents, with primary emphasis on direct sales. A purchasing group for lawyers, Lawyers' Liability Association, Inc., has been organized but has not commenced operations. During 1997, Interlex will seek admission to the States of Arkansas, Oklahoma and Texas. COMPETITION The insurance business is highly competitive. In both Missouri and Kansas, Intermed and Interlex compete with both regional and national companies. In 1995, the last year for which statistics are available from the Missouri Department of Insurance, there were 54 companies writing medical malpractice insurance in the state. The top five writers had 67.47% of the market. The largest market share was 20.86%. Intermed, the sixth largest writer in 1995 in the state, had a market share of 8.04%. Eight companies wrote legal malpractice insurance in the State of Missouri in 1995 according to the Missouri Department of Insurance. One company, sponsored by the Missouri Bar Association, had a market share of 72.3%; Interlex, which commenced operations in October 1994, had a market share of 2.3% and was the fifth largest writer. A number of hospitals in Missouri have begun purchasing the medical practices of fee-for-service physicians and making the physicians employees of the hospital or a corporate entity affiliated with the hospital. A number of these physicians formerly purchased their own professional liability insurance through smaller, physician-owned insurance companies such as Intermed . As a result of the consolidation, many of the hospitals purchasing the practices of physicians have self-insured or seek professional liability insurance from professional liability carriers with capital and surplus greater than that of Intermed and at premiums lower than those currently offered by Intermed. The insurance industry is impacted by legislative changes, judicial interpretations, market competition, inflation and statutory requirements. The insurance industry is also subject to cyclical patterns varying between "hard" and "soft" markets. The usual duration of the cycle from one "hard" market through a "soft" market to another "hard" market is approximately six to seven years. During the "hard" part of the cycle, insurance is more difficult to obtain and the price of the product is higher. It is possible to characterize this segment as a "seller's" market. The "soft" part of the cycle is characterized with ready availability of insurance products and com- 4 5 mensurately lower prices for the product. This segment could be characterized as a "buyer's" market. During the soft portion of the cycle there is a downward pressure on pricing, thereby subjecting Intermed to increased pricing pressures which may have an adverse impact on its business and operations. At the present time, the insurance industry has generally been in the soft portion of the cycle for approximately ten years. While the industry has been in the soft portion of the cycle for an unusually long period, no assurance can be given that the industry will enter a hard market in the near future. Intermed currently has excess capacity and could double its current premium volume while maintaining required premium to surplus ratios. UNDERWRITING Underwriting for both Intermed and Interlex is performed by an experienced staff at the Company's home office in Springfield, Missouri. This is augmented by Underwriting Committees composed of physicians and dentists for Intermed and lawyers for Interlex. Because these Committees are geographically broad-based, there is, in most instances, personal knowledge of applicants and renewals. This structure has enabled the Companies to maintain uniformly high underwriting standards. REGULATION The activities of Intermed and Interlex are regulated by the Missouri Department of Insurance. The companies are subject to examination by the Department on a periodic basis. Such examinations pertain to many aspects of the companies' operations and financial condition, including loss reserves, investments, licensing and rates. A financial examination and a limited market conduct examination were conducted by the Missouri Department of Insurance during 1996. There were no major findings or recommendations. LOSS RESERVES AND CLAIMS Loss reserves are the amounts reserved by Intermed and Interlex to provide funds for payment of policyholders' claims in the future. An insurance company must accumulate substantial loss reserves because policies provide for payments of substantial amounts in the future for claims that have occurred in prior contract periods. These loss reserves are established as balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred, including events that have not yet been reported. Loss reserves associated with professional liability coverage tend to be relatively higher than other types of property and casualty insurance for primarily two reasons: the "tail" and the "trend." The time between the occurrence and settlement of a claim is the "tail." Property coverage is generally a "short tail" line of business where loss reserves represent only those claims in the adjustment or reporting stages of the claim and which will, for the most part, be settled within the next year. Liability coverage is generally a "long tail" line and the reserves represent claims that can take up to five to seven years to settle due to the fact that discovery of the injury can take several years and because of the complexity of the issues inherent in the claims. This means that while property loss reserves represent a few months to a year of losses, professional liability loss reserves represent five to seven years of losses at any one time. Also, professional liability loss reserves, due to the length of time before settlement, are more sensitive than property lines to changes in external factors such as increased medical costs, increased jury awards and changes in the litigation environment. These external factors are used to calculate the "trend," which is the yearly change in the overall costs of coverage. The trend is factored into the calculation of the loss reserves and contributes to higher reserves for professional liability. 5 6 Intermed employs an independent consulting actuary to make recommendations in the establishment of loss reserves and to render an opinion regarding the adequacy of Intermed's statutory loss reserves. The quantification of reserves is complex and imprecise as a result of the need to project future contingent events and the unpredictability of medical professional liability claims. In determining reserve levels, the actuaries rely primarily on historical loss experience, adjusted for changing circumstances as deemed appropriate. This reliance is based on the assumption that historical loss experience provides a good indication of future loss experience despite uncertainties in loss cost trends and delays in reporting and settling claims. These uncertainties are increased by changes in normal inflation, changing propensities of individuals to file claims and new causes of action. Despite these uncertainties in the determination of reserve levels, management believes that the methods used by Intermed and Interlex in establishing reserves are reasonable and appropriate. As additional information becomes available and is reviewed, estimates reflected in earlier reserves may be revised upward or downward. Any such increases could have an adverse effect on results for the period in which adjustments are made. The uncertainties inherent in estimating ultimate losses on the basis of past experience have grown significantly in recent years as a result of judicial expansion of liability standards and expansive interpretations of insurance contracts. Reserves for losses and loss adjustment expenses are estimated based on Tenere's consolidated historical loss and loss adjustment expense experience supplemented by insurance industry loss data. The reserves are reported on a present value basis discounted at the rate of 3% in 1996, 4% in 1995 and 5% in 1994. At the direction of the Missouri Department of Insurance, the discount will be eliminated ratably over the five-year period ending December 31, 1998. The following Loss Reserve Development Table sets forth the development of losses and loss adjustment expense reserve liabilities of Tenere for the years ended December 31, 1996 through 1986. The top line of the table shows the estimated liability for unpaid losses and loss adjustment expense recorded at the end of each of the periods indicated. These liabilities represent the estimated amount of losses and loss adjustment expense reserve for claims arising in the then current year and all prior years that are unpaid as of the end of each period. 6 7 GUIDE VI DISCLOSURE LOSS RESERVE DEVELOPMENT TABLE (UNAUDITED)
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Reserve for Unpaid Losses and Loss Adjustment Expenses 25,788 25,461 25,695 25,304 23,021 17,070 21,737 29,389 27,120 21,310 Cumulative Amount of Liability Paid as of: One year later 8,399 4,720 4,761 5,740 6,598 7,771 6,787 2,893 1,870 Two years later 11,342 8,085 9,830 12,093 14,080 14,200 9,548 4,646 Three years Later 14,375 13,478 15,096 18,030 19,651 16,636 7,082 Four years later 16,441 16,160 20,433 23,262 21,949 11,496 Five years later 21,922 21,863 24,523 24,731 15,097 Six years later 23,926 25,250 25,251 16,844 Seven years later 27,258 25,730 17,303 Eight years later 26,542 17,704 Nine years later 18,450 Liability reestimated as of: One year later 26,876 23,759 25,850 26,277 26,677 22,351 28,186 26,765 17,612 Two years later 23,550 23,824 27,023 28,436 28,462 26,147 26,217 19,467 Three years Later 23,253 25,280 28,861 28,711 28,835 24,660 18,904 Four years later 24,303 27,309 29,380 30,947 28,899 17,824 Five years later 26,094 28,567 31,136 30,275 16,585 Six years later 26,883 30,822 30,131 20,485 Seven years later 29,592 29,201 20,418 Eight years later 28,101 19,949 Nine years later 19,335 Cumulative redundancy (deficiency) (1,415) 2,145 2,051 718 (9,024) (5,146) (203) (961) 1,975 Gross liability - end of year 32,687 26,623 28,280 Reinsurance recoverable 7,099 1,162 585 ------ ------ ------ Net liability - end of year 25,788 25,461 25,695 ====== ====== ======
8 Tenere's claims philosophy is to defend fully all claims in which an evaluation reveals little or no negligence. In those claims in which liability exists, Tenere moves promptly to settle the claim early in order to minimize indemnity and loss adjustment expenses. The Claims Department is staffed with experienced claims specialists and is supervised by the Vice President-Claims/General Counsel of Tenere. The case load per claims specialist is approximately 120 cases. This is purposefully kept low in order to allow for intensive scrutiny of each claim, close tracking of the progress of each claim and containment of loss adjustment expenses through constant monitoring. Based upon Tenere's data, 80% of claims closed in 1996 were with payment of no indemnity. The average settlement for claims closed in 1996 with the payment of indemnity was approximately $165,000. Average allocated loss adjustment expenses for claims closed in 1996 was approximately $11,000. REINSURANCE Intermed had three reinsurance treaties in place during 1996: (1) A primary excess of loss reinsurance treaty with Lloyd's Underwriters of London, England. The treaty covered the period October 1, 1993 through September 30, 1996 with limits of $1,600,000 excess of $400,000. The treaty was renewed effective October 1, 1996 for a three-year period ending September 30, 1999. Where two or more policies and/or insureds are involved in the same loss occurrence, the limits are $1,600,000 excess of $400,000. The maximum premium ceded under the contract ended September 30, 1996 would be 22.5% of net premiums earned during the contract period. The maximum ceded under the contract ending September 30, 1999 would be 20% assuming the contract remains in effect for the full three year period. In 1996, Intermed ceded earned premiums of approximately $2,208,000 and losses and allocated loss adjustment expenses of approximately $1,674,000. This type of reinsurance provides protection during periods when losses are both frequent and severe and is not intended to cover all losses. (2) A "catastrophic awards made" excess of loss reinsurance with Lloyd's Underwriters of London with limits of $5,000,000 excess of $250,000 for claims made after October 1, 1993 and excess of $1,000,000 for claims made prior to that date, net of all other reinsurance. The period covered by the treaty is through September 30, 1997 at an annual premium of 1.6% of gross net premiums written. In 1996, Intermed ceded written premiums of approximately $144,000 and losses of $-0-. This type of insurance covers the Company for awards made in excess of the policyholder's original policy limit for which the policyholder is able to hold the Company responsible. It also covers claims related to extra-contractual obligations. (3) Effective January 1, 1996, the Company entered into an Accident Year Excess of Loss Reinsurance Agreement with American Re-Insurance Company. Under the terms of the Agreement, the Reinsurer was responsible for 100% of the Company's aggregate ultimate net loss from claims-paid coverages in 1996 in excess of $4,176,000. The Reinsurers' maximum liability was limited to $4,800,000. In 1996, the Company ceded claims-paid losses of $2,886,000 and premiums earned of $450,000 under this section of the Agreement. Under this treaty, the Reinsurer also agreed to indemnify the Company for the aggregate ultimate net loss on occurrence and claims-made coverages in excess of the Company's 8 9 accident year loss ratio for the four years commencing January 1, 1996 and ending December 31, 1999. The 1996 accident year loss ratio was 75%. For subsequent years, the loss ratio shall be the average loss ratio for the three accident years immediately preceding the accident year for which the computation is being made plus 2%-5% as mutually agreed to by the Reinsurer and the Company. In 1996, the Company ceded losses of $2,000,000, the maximum allowable, and premiums earned of $1,600,000 under this section of the Agreement. Interlex had three reinsurance treaties in place during 1996: (1) A primary excess of loss reinsurance treaty with Lloyd's Underwriters of London, England. The treaty covers the period October 1, 1996 through September 30, 1997 with limits of $700,000 excess of $300,000 subject to a maximum recoverable of $2,100,000. However, if the premium income of Interlex exceeds $500,000, the maximum recoverable shall increase to $3,500,000. The premium is 7.5% of gross net premiums written for policy limits of $300,000 or less, 16.5% of gross net premiums written for policies with limits of $500,000 and 36% of gross net written premiums for policies with limits of $1,000,000. In 1996, Interlex ceded written premiums of approximately $208,000 and losses of $-0-. (2) A prior agreement excess of loss reinsurance treaty with Lloyd's Underwriters of London, England covering the period October 1, 1996 through September 30, 1997. Limits of the treaty are $5,000,000 with a minimum underlying of $1,000,000 for each insured and $3,000,000 in the aggregate each policy where applicable. Ceded premium is equal to 100% of the policy premium less a 10% ceding commission. In 1996, Interlex ceded written premiums of approximately $46,000 and losses of $-0-. (3) Effective October 1, 1996, the "catastrophic awards made" treaty with Lloyd's Underwriters of London was expanded to include Interlex Insurance Company under the same terms outlined above. Management has confidence in the financial strength of the Lloyd's syndicates and American Re-Insurance Company with which it reinsures, and believes that amounts shown as due from reinsurers are fully recoverable. INVESTMENTS Both Intermed and Interlex employ Boatmen's Trust Company, headquartered in St. Louis, Missouri, to manage their investment portfolios. Boatmen's Trust Company operates under general investment guidelines which are adopted by the Boards of Directors of Intermed and Interlex and which are reviewed periodically to assure that they are consistent with the companies' philosophy and needs. Under the companies' current guidelines, investments will be in U.S. Treasuries, U.S. Agencies, high grade (Moody's and Standard & Poor's rated A or better) corporate debt, and municipal tax-exempt debt rated Aa or better by Moody's and Standard & Poor's. No security purchased shall have a final maturity longer than ten years. Additionally, the following guidelines are followed to ensure diversification of the portfolio: - direct or guaranteed obligations of the U.S. Government and its agencies may be held without limit. - corporate debt shall not exceed 10% of the portfolio. No more than 2% will be invested in any one issuer. - Municipal (tax-exempt) debt shall not exceed 15% of the portfolio. No more than 2% will be invested in any one issuer. 9 10 - Portfolio investments are limited to U.S. dollar denominated securities. At December 31, 1996, cash and invested assets totaled $46,306,000. Of this total, cash and cash equivalents totaled $16,935,000. During 1996, $13,689,000 was reinvested at a yield of approximately 7%. Tenere also disposed of $4,594,000 in low-yielding bonds without realizing a significant loss. Proceeds from these sales, as well as from other sales and maturities, were invested short-term pending an anticipated increase in interest rates in early 1997. The market value of bonds held available-for-sale and carried at market at December 31, 1996 was $29,370,000 and there was a net unrealized gain of $252,000. At prior year end, the market value of bonds held available for sale was $562,000 above amortized cost. TRENDS Tenere's most significant costs are losses and loss adjustment expenses and the impacts of regulation, medical costs, jury awards and the litigation environment are discussed above. EFFECT OF INFLATION Inflation has an effect on Tenere's general and administration expenses through higher wages and the costs of goods and services. Inflation impacts loss adjustment expenses as attorneys and other consultants pass on their increased costs through increased fees. EMPLOYEES Neither Tenere, Intermed nor Interlex had employees during 1996. Insurance Services had 24 employees at December 31, 1996 and these employees provided all services required by Tenere and the two insurance companies under management contracts approved by each company's Board of Directors. Trout Insurance Services, Inc., was inactive during 1996. ITEM 2. PROPERTIES Neither Tenere nor any of its subsidiaries owned any real estate at December 31, 1996. ISI, a wholly-owned subsidiary of Intermed, leases the Company's home office for approximately $78,000 per year to June 30, 2000 and approximately $89,000 per year thereafter through June 30, 2002. The lease commenced on July 1, 1995 for a period of seven years with an option to renew for an additional three years. ISI also leases office space in Austin, Texas for $28,000 the first year, $28,000 the second year, and $29,000 the third year. The lease commenced on May 7, 1996 for a period of three years. ITEM 3. LEGAL PROCEEDINGS Neither Tenere nor any of its subsidiaries are subject to any material pending legal proceedings other than ordinary routine litigation incidental to its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Tenere did not submit any matters to a vote of its security holders during the quarter ended December 31, 1996. 10 11 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Tenere common stock is not listed on any securities exchange or quoted on any automated quotation system such as the National Association of Securities Dealers Automated Quotations System ("NASDAQ"). There has been no independent market for Tenere common stock and no assurance can be given that an independent market will develop. As of December 31, 1996, there were approximately 1143 holders of record of shares of Tenere common stock. Tenere has not paid a dividend since inception. However, the Company's Board of Directors will, from time to time, consider the issue based upon Tenere's financial condition, results of operations and capital requirements at such time. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data is included on Page 23 of Tenere's 1996 Annual Report to Stockholders and is incorporated by reference herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations is included on Pages 3 through 5 of Tenere's 1996 Annual Report to Stockholders and is incorporated by reference herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements of the Tenere Group, Inc. are included on the following pages of Tenere's 1996 Annual Report to Stockholders and are incorporated by reference herein. Annual Report Page(s) ------- Independent Auditors' Report 7 Consolidated Balance Sheets at December 31, 1996 and 1995 8 Consolidated Statements of Operations Years ended December 31, 1996, 1995 and 1994 9 Consolidated Statements of Stockholders'/Policyholders' Equity Years ended December 31, 1996, 1995 and 1994 10 Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994 11 Notes to Consolidated Financial Statements 12 11 12 Statement of Management's Responsibility 22 Selected Financial Information 23 The following is supplementary financial information of Tenere or RCA for each of the fiscal quarters in the years ended December 31, 1996 and 1995. SUPPLEMENTARY FINANCIAL DATA (Unaudited)
Quarter ended: December 31, September 30, June 30, March 31, In thousands, except per share amounts 1996 1996 1996 1996 ----------- ------------ -------- --------- Net premiums earned $ 1,604 $ 1,406 $2,348 $2,288 Total revenues 2,159 2,081 3,028 2,988 Losses and loss adjustment expenses(1) 2,496 4,505 2,325 1,900 Total expenses 3,857 5,256 2,918 2,724 Net income (1,105) (2,092) 89 174 Net income per common share $ (0.55) $ (1.05) $ 0.04 $ 0.09 December 31, September 30, June 30, March 31, 1995 1995 1995 1995 ----------- ------------ -------- --------- Net premiums earned(2) $ 4,125 $ 2,597 $2,557 $2,622 Total revenues 4,703 3,301 3,255 3,260 Losses and loss adjustment expenses 2,303 1,778 1,618 1,977 Total expenses 2,720 2,700 2,472 2,794 Net income 1,215 461 521 313 Net income per common share $ 0.61 $ 0.23 $ 0.26 $ 0.16
- ---------------- (1) The increase in loss and loss adjustment expenses in the third quarter of 1996 is due to the large number of claims-paid policyholders who converted to claims-made in the third quarter. (2) The increase in net premiums earned in the fourth quarter of 1995 is due to a year-end reduction in the death, disability and retirement reserve as claims-paid policies converted to claims-made. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information regarding Directors set forth under the caption "Election of Directors" of the Registrant's Proxy Statement for its 1997 annual meeting of stockholders is incorporated herein by reference. The other executive officers of Tenere, their ages and principal offices held in Tenere, Intermed, Interlex and ISI are set forth below: ANDREW K. BENNETT, age 45, serves as Vice President - Claims and General Counsel of Tenere, Intermed, Interlex and ISI. He also serves as a Director of ISI. Mr. Bennett joined Tenere in June 1994 as Corporate Counsel and was elected to his current positions in May 1996. Prior to joining Tenere, Mr. Bennett practiced law in Springfield, Missouri for 17 years. He is a member of the Missouri Bar. 12 13 ANDREW C. FISCHER, age 46, serves as Vice President - Underwriting and Policy Services of Tenere, Intermed, Interlex and ISI. He also serves as a Director and Secretary of ISI. Mr. Fischer joined Tenere in 1987 as Chief Operating Officer and was elected to his current positions in May 1996. CLIFTON R. STEPP, age 34, serves as Vice President - Marketing of Tenere, Intermed, Interlex and ISI. Mr. Stepp joined Tenere in 1990 as Marketing Director and was elected to his current positions in May 1996. JOSEPH D. WILLIAMS, CPA, age 60, serves as Vice President - Finance and Chief Financial Officer of Tenere, Intermed, Interlex and ISI. He also serves as Assistant Treasurer of Tenere, Intermed and ISI and as Treasurer of Interlex. Mr. Williams joined Tenere in October 1994 as Chief Financial Officer and was elected to his current positions in May 1996. Prior to joining Tenere, Mr. Williams served as Senior Vice President and Controller of ITT Lyndon Insurance Group from 1987 to 1993 and as Senior Vice President and Deputy Controller of ITT Diversified Financial Corporation from 1990 to 1991. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is included in Tenere's Proxy Statement for the 1997 Annual Meeting of Stockholders under the caption "Compensation of Executive Officers" and is incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management is included in Tenere's Proxy Statement for the 1997 Annual Meeting of Stockholders under the captions "Voting Securities and Principal Holders Thereof" and "Security Ownership by Management," which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption, "Certain Transactions" of the Registrant's Proxy Statement for its 1997 Annual Meeting of Stockholders is incorporated herein by reference. 13 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K (A) FINANCIAL STATEMENTS AND SCHEDULES (1) The financial statements incorporated by reference herein are listed in PART II - Item 8 hereof. (2) The financial statement schedules and auditors' report thereon included herein are listed below: Form 10-K Page No. -------- Report of Independent Accountants on Schedules 16 Schedule I Summary of Investments Other Than Investments in Related Parties 17 Schedule IV Reinsurance 18 Schedule VI Supplemental Information Concerning Property- Casualty Insurance Operations 19 Schedules other than listed above are omitted because they are either not required or not applicable or because the information is presented in the consolidated financial statements or notes thereto. (B) EXHIBITS See exhibit index (C) REPORTS ON FORM 8-K There were no reports on Form 8-K filed by Tenere during the three months ended December 31, 1996. 14 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. THE TENERE GROUP, INC. Date: 3/27/97 By: /s/Raymond A. Christy ------- --------------------- Raymond A. Christy, M.D. President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated: NAME TITLE DATE ---- ----- ---- /s/ T. E. Ashley 3-25-97 ------------------------- ------- Thomas E. Ashley, M.D. Director and Vice President /s/ Gary O. Baker 3-27-97 ------------------------- ------- Gary O. Baker, D.D.S. Director /s/ Albert J. Bonebrake 3-27-97 ------------------------- ------- Albert J. Bonebrake, M.D. Director /s/ Raymond A. Christy 3-27-97 ------------------------- ------- Raymond A. Christy, M.D. Director, President and Chief Executive Officer /s/ Harry O. Cole 3-27-97 ------------------------- ------- Harry O. Cole, M.D. Chairman of the Board of Directors /s/ C. Richard Gulick 3-27-97 ------------------------- ------- C. Richard Gulick, M.D. Director /s/ Michael Hoeman 3-24-97 ------------------------- ------- Michael D. Hoeman, M.D. Director, Secretary and Treasurer /s/ Christopher J. Jung 3-27-97 ------------------------- ------- Christopher H. Jung, M.D. Director /s/ Carroll R. Wetzel 3-27-97 ------------------------- ------- Carroll R. Wetzel, D.O. Director /s/ JD Williams 3-27-97 ------------------------- ------- Joseph D. Williams Vice President-Finance, Chief Financial Officer and Principal Accounting Officer 15 16 The Board of Directors The Tenere Group, Inc.: Under date of March 27, 1997 we reported on the consolidated balance sheets of The Tenere Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations andstockholders'/ policyholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, which are included in The Tenere Group, Inc. Annual Report to Stockholders , incorporated by reference in this Form 10-K. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules in the Form 10-K. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG PEAT MARWICK LLP Houston, Texas March 27, 1997 16 17 SCHEDULE I THE TENERE GROUP, INC. SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1996 (Dollar Amounts in Thousands)
Amount at which shown in the balance Type of investment Cost(A) Value(B) sheet ------------------ -------- -------- ----------- Available for sale: United States Government and government agencies and authorities $27,247 $27,475 $27,475 States, municipalities, and political subdivisions 1,871 1,895 1,895 ------- ------- ------- Total available for sale 29,118 29,370 29,370 ------- ------- ------- Total fixed maturities $29,118 $29,370 $29,370 ======= ======= =======
(A) Cost for fixed maturities represents original cost, reduced by repayments and adjusted for amortization of premiums and accretion of discount. (B) Differences in carrying value as compared to cost for fixed maturities arise because the bonds held available for sale are carried at market value. See accompanying report of independent auditors. 17 18 SCHEDULE IV THE TENERE GROUP, INC. REINSURANCE For the Three Years Ended December 31, 1996, 1995, and 1994 (Dollar Amounts in Thousands)
Percentage Gross Ceded to Assumed Net of amount premiums other from other premiums assumed written companies companies written to net -------- --------- ---------- -------- ---------- 1996: Premiums Medical Malpractice $ 7,503 4,402 - 3,101 0% Legal Malpractice 621 253 - 368 0% ------- ----- ----- ------ ----- Total Premiums $ 8,124 4,655 - 3,469 0% ======= ===== ===== ====== ===== 1995: Premiums Medical Malpractice $ 9,523 1,375 - 8,149 0% Legal Malpractice 351 131 - 220 0% ------- ----- ----- ------ ----- Total Premiums $ 9,874 1,506 - 8,369 0% ======= ===== ===== ====== ===== 1994: Premiums Medical Malpractice $12,272 1,272 - 11,000 0% Legal Malpractice 96 72 - 24 0% ------- ----- ----- ------ ----- Total Premiums $12,368 1,344 - 11,024 0% ======= ===== ===== ====== =====
See accompanying report of independent auditors. 18 19 SCHEDULE VI THE TENERE GROUP, INC. SCHEDULE VI - SUPPLEMENTAL INFORMATION Years Ended December 31, 1996, 1995, and 1994 (In Thousands)
1996 1995 1994 -------- --------- ------- Deferred policy acquisition costs $ 85 $ 140 288 Reserves for unpaid losses and loss adjustment expenses 32,887 26,623 26,280 Discount deducted from unpaid losses and loss adjustment expenses 2,164 2,933 3,627 Unearned premiums 6,300 10,447 13,747 Earned premiums 7,646 11,901 10,657 Net investment income 2,627 2,654 2,639 Losses and loss adjustment expenses incurred related to: Current year 9,813 9,612 8,638 Prior year 1,414 1,936 (441) Amortization of deferred policy acquisition costs 340 431 519 Paid losses and loss adjustment expenses 10,899 7,911 7,806 Gross premiums written 8,124 9,874 12,368 Discount rates utilized are as follows: 3% 4% 5%
See accompanying report of independent auditors. 19 20 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 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. 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, 1996, 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, 1996, 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, 1996, 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.
20 21
EXHIBIT NO. DESCRIPTION - ----------- ----------- 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, 1996, 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, 1996, 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. 10.14 Employment Agreement dated May 6, 1996 between The Tenere Group, Inc. and Raymond A. Christy, M.D., President and Chief Executive Officer, filed as Exhibit 10.14 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference.
21 22 10.15 Employment Agreement dated May 6, 1996 between The Tenere Group, Inc. and Andrew K. Bennett, Vice President-Claims and General Counsel, filed as Exhibit 10.15 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference. 10.16 Employment Agreement dated May 6, 1996 between The Tenere Group, Inc. and Andrew C. Fischer, Vice President-Underwriting and Policy Services, filed as Exhibit 10.16 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference. 10.17 Employment Agreement dated May 6, 1996 between The Tenere Group, Inc. and Clifton R. Stepp, Vice President-Marketing, filed as Exhibit 10.17 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference. 10.18 Employment Agreement dated May 6, 1996 between The Tenere Group, Inc. and Joseph D. Williams, Vice President-Finance, Chief Financial Officer and Assistant Treasurer filed, as Exhibit 10.18 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference. 10.19 The Tenere Group, Inc. Retirement Plan for Directors effective May 17, 1996, filed as Exhibit 10.19 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, is incorporated herein by reference.. 10.20 The Tenere Group, Inc. 1996 Long Term Incentive Plan effective April 17, 1996, filed as Annex A to the Registrant's definitive proxy statements for the 1996 Annual Meeting of Shareholders, is incorporated herein by reference. 10.21 Amendment No. 1 to Employment Agreement, dated February 28, 1997, between the Tenere Group, Inc. and Raymond A. Christy, M.D., President and Chief Executive Officer. 10.22 Amendment No. 1 to Employment Agreement dated February 28, 1997, between The Tenere Group, Inc. and Andrew K. Bennett, Vice President-Claims and General Counsel. 10.23 Amendment No. 1 to Employment Agreement dated February 28, 1997, between The Tenere Group, Inc. and Andrew C. Fischer, Vice President-Underwriting and Policy Services. 10.24 Amendment No. 1 to Employment Agreement dated February 28, 1997, between The Tenere Group, Inc. and Clifton R. Stepp, Vice President-Marketing. 10.25 Amendment No. 1 to Employment Agreement dated February 28, 1997, between The Tenere Group, Inc. and Joseph D. Williams, Vice President-Finance, Chief Financial Officer and Assistant Treasurer.
22 23 13 1996 Annual Report to Shareholders 21 Subsidiaries of the Registrant, filed as Exhibit 21 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 27 Financial Data Schedules.
23 EX-10.1 2 MANAGEMENT CONTRACT 1 Exhibit 10.1 [TO COME] EX-10.21 3 AMEND #1 TO EMPLOYMENT CONTRACT/RAMOND A. CHRISTY 1 EXHIBIT 10.21 THE TENERE GROUP, INC. AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT This Amendment No. 1 to Employment Agreement ("Amendment") has been entered into as of this 28th day of February, 1997, by and between The Tenere Group, Inc., a Missouri corporation ("Company"), and Raymond A. Christy, M.D., an individual ("Executive"). RECITALS WHEREAS, the Company and the Executive are parties to that certain Employment Agreement, dated as of May 6, 1996 (the "Agreement"); and WHEREAS, the Company and the Executive wish to amend the terms of the Agreement to extend the initial Employment Period under the Agreement from May 6, 1999 to May 6, 2000; NOW, THEREFORE, in consideration of the premises, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. AMENDMENT OF SECTION 1.1(g). Section 1.1(g) of the Agreement is hereby deleted in its entirety and replaced with the following: 1.1(g) "EMPLOYMENT PERIOD" means the period beginning on the Effective Date and ending on the later of (i) May 6, 2000, or (ii) May 6 of any succeeding fiscal year during which notice is given by either party (as described in Section 1.1(j)) of such party's intent not to renew this Agreement. 2. AMENDMENT OF SECTION 1.1(j). Section 1.1(g) of the Agreement is hereby deleted in its entirety and replaced with the following: 1.1(j) "TERM" means the period that begins on the Effective Date and ends on the earlier of: (i) the Date of Termination as defined in Section 3.6, or (ii) the close of business on the later of May 6, 2000 or May 6 of any renewed term as set forth in Section 2.1 of this Agreement. 3. EFFECTIVENESS; LIMITED EFFECT. The amendments contained in Sections 1 and 2 hereof shall be effective as of the date of the execution of this Amendment by the Company and the Executive. Except as amended hereby, terms and conditions of the Agreement shall continue in full force and effect and shall be interpreted in light of the amendments contained herein. 2 IN WITNESS WHEREOF, the Executive and the Company, pursuant to the authorization from its Board of Directors, have caused this Amendment to be executed in its name on its behalf, all as of the day and year first above written. EXECUTIVE Raymond A. Christy, M.D. ------------------------ Raymond A. Christy, M.D. THE TENERE GROUP, INC. By Andrew K. Bennett --------------------- Name: Andrew K. Bennett ------------------ Title: General Counsel; Vice Press.-Claims ------------------- ATTEST: Michael D. Hoeman, M.D. ------------------------- Michael D. Hoeman, M.D. Secretary -2- EX-10.22 4 AMEND#1 TO EMPLOYMENT CONTRACT/ANDREW K. BENNET 1 EXHIBIT 10.22 THE TENERE GROUP, INC. AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT This Amendment No. 1 to Employment Agreement ("Amendment") has been entered into as of this 28th day of February, 1997, by and between The Tenere Group, Inc., a Missouri corporation ("Company"), and Andrew K. Bennett, an individual ("Executive"). RECITALS WHEREAS, the Company and the Executive are parties to that certain Employment Agreement, dated as of May 6, 1996 (the "Agreement"); and WHEREAS, the Company and the Executive wish to amend the terms of the Agreement to extend the initial Employment Period under the Agreement from May 6, 1999 to May 6, 2000; NOW, THEREFORE, in consideration of the premises, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. AMENDMENT OF SECTION 1.1(g). Section 1.1(g) of the Agreement is hereby deleted in its entirety and replaced with the following: 1.1(g) "EMPLOYMENT PERIOD" means the period beginning on the Effective Date and ending on the later of (i) May 6, 2000, or (ii) May 6 of any succeeding fiscal year during which notice is given by either party (as described in Section 1.1(j)) of such party's intent not to renew this Agreement. 2. AMENDMENT OF SECTION 1.1(j). Section 1.1(g) of the Agreement is hereby deleted in its entirety and replaced with the following: 1.1(j) "TERM" means the period that begins on the Effective Date and ends on the earlier of: (i) the Date of Termination as defined in Section 3.6, or (ii) the close of business on the later of May 6, 2000 or May 6 of any renewed term as set forth in Section 2.1 of this Agreement. 3. EFFECTIVENESS; LIMITED EFFECT. The amendments contained in Sections 1 and 2 hereof shall be effective as of the date of the execution of this Amendment by the Company and the Executive. Except as amended hereby, terms and conditions of the Agreement shall continue in full force and effect and shall be interpreted in light of the amendments contained herein. 2 IN WITNESS WHEREOF, the Executive and the Company, pursuant to the authorization from its Board of Directors, have caused this Amendment to be executed in its name on its behalf, all as of the day and year first above written. EXECUTIVE Andrew K. Bennett -------------------------- Andrew K. Bennett THE TENERE GROUP, INC. By Raymond A Christy -------------------------- Name: Raymond A. Christy -------------------- Title: President ------------------- ATTEST: Michael D. Hoeman, M.D. ----------------------- Michael D. Hoeman, M.D. Secretary - 2 - EX-10.23 5 AMEND#1 TO EMPLOYMENT CONTRACT/ANDREW C. FISHER 1 EXHIBIT 10.23 THE TENERE GROUP, INC. AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT This Amendment No. 1 to Employment Agreement ("Amendment") has been entered into as of this 25th day of February, 1997, by and between The Tenere Group, Inc., a Missouri corporation ("Company"), and Andrew C. Fischer, an individual ("Executive"). RECITALS WHEREAS, the Company and the Executive are parties to that certain Employment Agreement, dated as of May 6, 1996 (the "Agreement"); and WHEREAS, the Company and the Executive wish to amend the terms of the Agreement to extend the initial Employment Period under the Agreement from May 6, 1999 to May 6, 2000; NOW, THEREFORE, in consideration of the premises, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. AMENDMENT OF SECTION 1.1(g). Section 1.1(g) of the Agreement is hereby deleted in its entirety and replaced with the following: 1.1(g) "EMPLOYMENT PERIOD" means the period beginning on the Effective Date and ending on the later of (i) May 6, 2000, or (ii) May 6 of any succeeding fiscal year during which notice is given by either party (as described in Section 1.1(j)) of such party's intent not to renew this Agreement. 2. AMENDMENT OF SECTION 1.1(j). Section 1.1(g) of the Agreement is hereby deleted in its entirety and replaced with the following: 1.1(j) "TERM" means the period that begins on the Effective Date and ends on the earlier of: (i) the Date of Termination as defined in Section 3.6, or (ii) the close of business on the later of May 6, 2000 or May 6 of any renewed term as set forth in Section 2.1 of this Agreement. 3. EFFECTIVENESS; LIMITED EFFECT. The amendments contained in Sections 1 and 2 hereof shall be effective as of the date of the execution of this Amendment by the Company and the Executive. Except as amended hereby, terms and conditions of the Agreement shall continue in full force and effect and shall be interpreted in light of the amendments contained herein. 2 IN WITNESS WHEREOF, the Executive and the Company, pursuant to the authorization from its Board of Directors, have caused this Amendment to be executed in its name on its behalf, all as of the day and year first above written. EXECUTIVE Andrew C. Fischer ----------------------------- Andrew C. Fischer THE TENERE GROUP, INC. By Raymond A. Christy -------------------------- Name: Raymond A. Christy ----------------------- Title: President ---------------------- ATTEST: Michael D. Hoeman, M.D. ----------------------- Michael D. Hoeman, M.D. Secretary -2- EX-10.24 6 AMEND#1 TO EMPLOYMENT CONTRACT/CLIFTON R. STEPP 1 EXHIBIT 10.24 THE TENERE GROUP, INC. AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT This Amendment No. 1 to Employment Agreement ("Amendment") has been entered into as of this 28th day of February, 1997, by and between The Tenere Group, Inc., a Missouri corporation ("Company"), and Clinton R. Stepp, an individual ("Executive"). RECITALS WHEREAS, the Company and the Executive are parties to that certain Employment Agreement, dated as of May 6, 1996 (the "Agreement"); and WHEREAS, the Company and the Executive wish to amend the terms of the Agreement to extend the initial Employment Period under the Agreement from May 6, 1999 to May 6, 2000; NOW THEREFORE, in consideration of the premises, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. AMENDMENT OF SECTION 1.1(g). Section 1.1(g) of the Agreement is hereby deleted in its entirety and replaced with the following: 1.1(g) "EMPLOYMENT PERIOD" means the period beginning on the Effective Date and ending on the later of (i) May 6, 2000, or (ii) May 6 of any succeeding fiscal year during which notice is given by either party (as described in Section 1.1(j)) of such party's intent to renew this Agreement. 2. AMENDMENT OF SECTION 1.1(j). Section 1.1(g) of the Agreement is hereby deleted in its entirety and replaced with the following: 1.1(j) "TERM" means the period that begins on the Effective Date and ends on the earlier of: (i) the Date of Termination as defined in Section 3.6, or (ii) the close of business on the later of May 6, 2000 or May 6 of any renewed term as set forth in Section 2.1 of this Agreement. 3. EFFECTIVENESS; LIMITED EFFECT. The amendments contained in Sections 1 and 2 hereof shall be effective as of the date of the execution of this Amendment by the Company and the Executive. Except as amended hereby, terms and conditions of the Agreement shall continue in full force and effect and shall be interpreted in light of the amendments contained herein. 2 IN WITNESS WHEREOF, the Executive and the Company, pursuant to the authorization from its Board of Directors, have caused this Amendment to be executed in its name on its behalf, all as of the day and year first above written. EXECUTIVE Clifton R. Stepp ----------------------------- Clifton R. Stepp THE TENERE GROUP, INC. By: Raymond A. Christy -------------------------- Name: Raymond A. Christy ---------------------- Title: President ---------------------- ATTEST: Michael D. Hoeman, M.D. ----------------------- Michael D. Hoeman, M.D. Secretary -2- EX-10.25 7 AMEND#1 TO EMPLOYMENT AGREEMENT/JOSEPH D. WILLIAMS 1 EXHIBIT 10.25 THE TENERE GROUP, INC. AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT This Amendment No. 1 to Employment Agreement ("Amendment") has been entered into as of this 28th day of February, 1997, by and between The Tenere Group, Inc., a Missouri corporation ("Company"), and Joseph D. Williams, an individual ("Executive"). RECITALS WHEREAS, the Company and the Executive are parties to that certain Employment Agreement, dated as of May 6, 1996 (the "Agreement"); and WHEREAS, the Company and the Executive wish to amend the terms of the Agreement to extend the initial Employment Period under the Agreement from May 6, 1999 to May 6, 2000; NOW, THEREFORE, in consideration of the premises, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. AMENDMENT OF SECTION 1.1(g). Section 1.1(g) of the Agreement is hereby deleted in its entirety and replaced with the following: 1.1(g) "EMPLOYMENT PERIOD" means the period beginning on the Effective Date and ending on the later of (i) May 6, 2000, or (ii) May 6 of any succeeding fiscal year during which notice is given by either party (as described in Section 1.1(j)) of such party's intent not to renew this Agreement. 2. AMENDMENT OF SECTION 1.1(j). Section 1.1(g) of the Agreement is hereby deleted in its entirety and replaced with the following: 1.1(j) "TERM" means the period that begins on the Effective Date and ends on the earlier of: (i) the Date of Termination as defined in Section 3.6, or (ii) the close of business on the later of May 6, 2000 or May 6 of any renewed term as set forth in Section 2.1 of this Agreement. 3. EFFECTIVENESS; LIMITED EFFECT. The amendments contained in Sections 1 and 2 hereof shall be effective as of the date of the execution of this Amendment by the Company and the Executive. Except as amended hereby, terms and conditions of the Agreement shall continue in full force and effect and shall be interpreted in light of the amendments contained herein. 2 IN WITNESS WHEREOF, the Executive and the Company, pursuant to the authorization from its Board of Directors, have caused this Amendment to be executed in its name on its behalf, all as of the day and year first above written. EXECUTIVE Joseph D. Williams --------------------------- Joseph D. Williams THE TENERE GROUP, INC. By: Raymond A. Christy ---------------------- Name: Raymond A. Christy --------------------- Title: President -------------------- ATTEST: Michael D. Hoeman, M.D. ----------------------- Michael D. Hoeman, M.D. Secretary -2- EX-13 8 1996 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 THE TENERE GROUP, INC. PROFESSIONAL LIABILITY INSURERS Intermed Insurance Co. Interlex Insurance Co. Insurance Services, Inc. [LOGO] 1996 ANNUAL REPORT 2 CORPORATE PROFILE The Tenere Group, Inc., a publicly held insurance holding company, was organized on April 27, 1995, when the demutualization of RCA Mutual Insurance Company was completed. Policyholders of RCA Mutual on that date became shareholders of The Tenere Group, Inc. in proportion to their premiums over the previous five years. The Tenere Group, Inc. is composed of Intermed Insurance Co. (formerly RCA Mutual Insurance Company), which markets professional liability insurance to physicians, surgeons, dentists, oral surgeons and ancillary healthcare professionals in the States of Missouri and Kansas; Interlex Insurance Co., which markets professional liability insurance to lawyers and judges in Missouri and Kansas; Insurance Services, Inc., a management company; and Trout Insurance Services, Inc., a full-line property/casualty insurance agency. The Tenere Group, Inc. had its origin in 1976 when three physicians in Springfield, Missouri organized Risk Control Associates, Inc., an assessable mutual insurance company, to provide defense for themselves and their associates against claims of medical malpractice. In 1991, the Company was reorganized as a non-assessable mutual property and casualty insurance company, RCA Mutual Insurance Company, and, in 1995, was reorganized as a stock property and casualty insurance company known as Intermed Insurance Co. Intermed is a wholly-owned subsidiary of The Tenere Group, Inc.; Interlex Insurance Co., Insurance Services, Inc. and Trout Insurance Services, Inc. are wholly-owned subsidiaries of Intermed. FINANCIAL HIGHLIGHTS *
DECEMBER 31 CHANGE ----------- ------ 1995 TO 1994 TO ------- ------- 1996 1995 1994 1996 1995 ---- ---- ---- ---- ---- Cash and invested assets $46,306,000 $53,585,000 $49,185,000 -14% + 9% Total assets 62,570,000 62,614,000 61,119,000 -0- + 2% Total reserves, including unearned premiums 39,188,000 37,070,000 40,027,000 +6% - 7% Stockholders' (1995 & 1996)/Policyholders' (1994) equity 21,390,000 24,537,000 19,369,000 -11% + 27% Net premiums written 3,469,000 8,369,000 11,024,000 -54% - 24% Net premiums earned 7,646,000 11,901,000 10,657,000 -32% + 12% Net investment income 2,627,000 2,654,000 2,639,000 +2% + 1% Total revenues 10,256,000 14,519,000 12,873,000 -26% + 13% Dividends to policyholders -------- 617,000 1,289,000 -100% - 52% Net income (loss) (2,934,000) 2,510,000 797,000 -202% +215% Net income (loss) per share (1.47) 1.26 N.A. -202% N.A. Book value per share 10.70 12.27 N.A. -11% N.A.
* Amounts rounded to nearest thousand, except per share items. 1 3 PRESIDENT'S REPORT The year ended December 31, 1996 was one in which your Company encountered a number of difficulties and a number of exciting opportunities in the marketplace. In my report, I will tell you how your Board of Directors and the management team dealt with each. MEDICAL MALPRACTICE - - The conversion of claims-paid policyholders to claims-made coverages which commenced on September 1, 1995 was completed on August 31, 1996. During that twelve-month period, 323 claims-paid policyholders, more than 90% of the total, chose to convert to a claims-made policy form upon expiration of their claims-paid policy. I believe that this was a strong indication of the loyalty which exists among our policyholders who are now, since the demutualization, also the stockholders of Tenere. Claims-paid coverages insured against claims which were reported and paid during the period the policy was in effect. The Company's obligation to defend and pay claims ended upon expiration of the policy. Claims-paid losses were incurred at time of payment, therefore no reserves were required on open claims. However, when the Company chose to discontinue writing and renewing claims-paid policies, it became contractually liable for all open claims that had been reported during the claims-paid policy period. This resulted in the establishment of reserves of $1,592,000 at December 31, 1995 and $2,575,000, net of reinsurance, at December 31, 1996. The conversion of claims-paid policyholders to claims-made coverages is now complete and the cost is fully reflected in the accompanying financial statements. - - 1996 was the first full year in which Intermed granted claim-free discounts to policyholders. Discounts ranged from 5% for one claim-free year to a maximum of 25% for five claim-free years. Claim-free discounts granted in 1996 totaled approximately 20% of gross premiums, an indication of the high practice standards of our insureds. The claim-free discount program replaced the mutual company practice of paying dividends to policyholders. Dividends generally totaled 12% of gross premiums, so a greater amount of each premium dollar is now being returned to policyholders. The difference is that the dollars are now distributed on the basis of loss experience rather than across-the-board. - - Extreme competitive conditions in Missouri required additional discounts from manual rates in 1996. Market-driven discounts totaled approximately 10% of gross premiums. It appears that these unfavorable market conditions are continuing unabated, and, in response, Intermed will be required to continue granting discounts of this magnitude in 1997. - - In mid 1996 Intermed was recognized as a surplus lines carrier in the State of Texas and began to write professional liability insurance on physicians through a physician-sponsored purchasing group, Intermedical of Texas, Inc. In 1997, the Company will begin to write professional liability insurance on dentists through a second purchasing group, Dental Defense Specialists, Inc. Premium projections for the State of Texas in 1997 are $4,000,000. LEGAL MALPRACTICE - - 1996 was the second full year of operations of Interlex, and the Company exceeded its sales goal of $600,000 for premiums written. The sales goal for 1997 is $1,200,000. - - The marketing staff of Interlex has been augmented by the addition of one new marketing representative in 1997, and marketing efforts will be expanded into the State of Kansas. The Company is currently seeking admission to three additional states, Arkansas, Oklahoma and Texas. It will also commence operations in the State of Illinois through a purchasing group, Lawyers' Liability Association, Inc. 2 4 FINANCIAL RESULTS Primarily because of the conversion of claims-paid policyholders to claims-made coverages there was a net loss of $2,934,000 or $1.47 per share in 1996. The Company decided to discontinue writing claims-paid coverages effective September 1, 1995 because premium rates required for this maturing block of business were equivalent to those charged for claims-made coverages which offer superior protection for policyholders. Operations in 1996 were also impacted by indemnity and loss adjustment expense payments $3,708,000 higher than in the prior year. Management believes that 1996 was an aberration and that paid losses in 1997 will return to the level experienced in prior years. We do not believe that there has been a fundamental change in the historic profitability of the Company's block of medical malpractice business. PLAN OF OPERATION Management will take the following steps in 1997 to return the Company to growth and profitability: 1. Medical malpractice marketing efforts will focus on Texas and Kansas where competitive conditions are not as extreme as in Missouri. 2. A new class plan and rate manual for medical malpractice will be introduced in Missouri and Kansas which will make Intermed more competitive in those specialties in which the Company has had favorable loss experience. Management believes that this will stabilize our current blocks of business in these states and premium income is projected at $8,000,000 in 1997. 3. Legal malpractice marketing efforts will be expanded into Kansas and Illinois and Interlex will seek admission to the States of Arkansas, Oklahoma and Texas. We will continue to augment the marketing staff as the Company is admitted in additional states. /s/ RAYMOND A. CHRISTY, M.D. Raymond A. Christy, M.D. President and Chief Executive Officer Springfield, Missouri March 27, 1997 3 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION PERIODS ENDED DECEMBER 31, 1996 FINANCIAL CONDITION ASSETS Total assets declined slightly in 1996, from $62,614,000 at December 31, 1995 to $62,570,000 at December 31, 1996. Investments increased from $22,404,000 at prior year end to $29,370,000 at the current year end due to the reinvestment of $13,689,000 in long-term bonds with an average yield of 7.18%. Bonds with a book value of $6,294,000 and an average yield of 4.26% were sold during the year. All bonds owned at December 31, 1996 were U.S. Treasury, U.S. Agency or high-quality state obligations. The market value of bonds exceeded amortized cost by $252,000 compared to an unrealized gain of $562,000 at the prior year end. The maturity distribution of bonds held at December 31, 1996 was $1,451,000 (5%) with a maturity of less than one year, $6,552,000 (22%) with a maturity of over one through five years and $21,115,000 (73%) with a maturity of over five years through ten years. Future purchases will be concentrated in the one through five year range. Cash and cash equivalents totaled $16,935,000 at December 31, 1996 compared to $31,181,000 at the prior year end. The decrease was primarily due to the net reinvestment of $7,395,000 in long-term bonds in 1996 as discussed above and a negative cash flow from operations of $6,211,000 discussed below under Liquidity and Capital Resources. Approximately $14,000,000 currently held in cash equivalents will be reinvested long-term when interest rates increase above our current target of 7.25%. Premiums receivable decreased from $3,720,000 at December 31, 1995 to $2,581,000 at the most recent year end due to the decline in net premiums written discussed below in Results of Operations. There was a significant increase in the reinsurance recoverable at December 31, 1996 from $1,162,000 at the prior year end to $7,458,000. The increase was primarily due to an additional reinsurance treaty that was effective January 1, 1996 under which $4,886,000 of losses and loss adjustment expenses were ceded. The remainder of the increase was due to losses ceded under the Company's primary excess of loss treaty, currently in its fourth year. Deferred income taxes at December 31, 1996 were $2,099,000 compared to $1,772,000 at the prior year end. The income tax recoverable of $1,680,000 is taxes paid in early 1996 and prior profitable years that can be recouped because of losses subsequently incurred. Other assets of $1,085,000 at December 31, 1996 consist principally of computer software of $480,000, furniture and equipment of $191,000 and Company-owned automobiles of $94,000. LIABILITIES Reserves for losses and loss adjustment expenses increased from $26,623,000 at December 31, 1995 to $32,887,000 at December 31, 1996, an increase of $6,264,000 or 24%. Of the increase, $6,172,000 was attributable to reserves established for reported claims on policyholders who converted from claims-paid to claims-made coverages during 1996. Claims-paid losses are incurred at the time of payment so no reserves are required on open claims. However, when the Company ceased renewing claims-paid policies effective September 1, 1995, it was required to establish reserves for all open, reported claims at the time of non-renewal. The unearned premium reserve (UPR) declined from $10,447,000 at the prior year end to $6,300,000 at December 31, 1996. There was a decrease of $3,140,000 in the death, disability and retirement component (DD&R) of the UPR due to the conversion of 267 claims-paid policyholders to claims-made coverages 4 6 MANAGEMENT'S DISCUSSION AND ANALYSIS during 1996. The remainder of the decline was attributable to the lower level of premiums written in 1996, discussed below in Results of Operations. Total liabilities increased from $38,077,000 at December 31, 1995 to $41,180,000 at the current year end due primarily to the increase in reserves discussed above. STOCKHOLDERS' EQUITY Stockholders' equity declined from $24,537,000 at December 31, 1995 to $21,390,000 at the current year end, a decline of $3,147,000. The decline was attributable to the net loss of $2,934,000 discussed below in Results of Operations and a $213,000 decrease in the net unrealized gain on bonds at December 31, 1996 compared to prior year end. RESULTS OF OPERATIONS Direct premiums written were $12,368,000 in 1994, $9,874,000 in 1995 and $8,124,000 in 1996. The decline of $2,494,000 from 1994 to 1995 was due to a net loss of 96 insureds for Intermed, primarily due to individual practices being purchased by larger groups or self-insured hospitals and to the implementation of a claims-free discount program effective September 1, 1995. The decline of $1,750,000 from 1995 to 1996 was due to the full year impact of the claims-free discount program and to other market-driven discounts necessitated by competitive conditions in the medical malpractice market in Missouri. In 1996, claims-free discounts approximated 20% of gross premiums and market-driven discounts approximated another 10%. The claims-free discount program will be continued in 1997 and it will be necessary to continue granting market-driven discounts at the same level experienced in 1996. Because of extreme competitive conditions in Missouri, the Company will concentrate its marketing efforts for medical malpractice insurance in Kansas and Texas in 1997. Intermed was recognized as a surplus lines carrier in Texas in 1996 and writes medical malpractice insurance on physicians through a physician-sponsored purchasing group, Intermedical of Texas, Inc. In 1997 the Company will commence writing professional liability insurance on dentists in Texas through a second purchasing group, Dental Defense Specialists, Inc. Interlex increased its number of insureds from 196 to 428 in 1996 and plans to add another 400 insureds in 1997. While there will be some expansion into Kansas during the year, the Company will concentrate its marketing efforts in Missouri. Premiums ceded to reinsurers increased from $1,344,000 in 1994 to $1,505,000 in 1995 to $4,655,000 in 1996. The significant increase of $3,150,000 in 1996 was due to: 1. A new accident year aggregate excess of loss reinsurance treaty effective January 1, 1996 under which premiums of $2,050,000 were ceded. This treaty covered losses incurred in calendar year 1996 in excess of $4,176,000 on claims-paid policies and losses incurred in 1996 on occurrence and claims-made coverages in excess of 75% of premiums earned on those coverages. 2. Losses ceded to a reinsurer under the Company's experience rated primary excess of loss treaty resulted in $1,702,000 of ceded premiums. As a result of the significant increase in premiums ceded to reinsurers, net premiums written in 1996 were $3,469,000 compared to $8,369,000 in 1995 and $11,024,000 in 1994. There was an increase of $367,000 in the unearned premium reserve (UPR) in 1994 due to the increase in premiums written that year. The UPR decreased $3,532,000 in 1995 and $4,178,000 in 1996. The primary reason for the large decreases in 1995 and 1996 was the conversion of claims-paid policyholders to claims-made coverages over the twelve-month period beginning September 1, 1995 and ending August 31, 1996. The death, disability and retirement (DD&R) component of the UPR required for claims-made coverages is substantially less than that required for claims-paid coverages, hence the large releases in 1995 and 1996. 5 7 MANAGEMENT'S DISCUSSION AND ANALYSIS Net investment income was $2,627,000 in 1996 compared to $2,654,000 in 1995 and $2,639,000 in 1994. Total revenues increased from $12,873,000 in 1994 to $14,519,000 in 1995 and decreased to $10,256,000 in 1996. The reasons for these fluctuations have been discussed above. Sales and marketing expenses increased from $857,000 in 1994 to $955,000 in 1995 and $1,758,000 in 1996. The increase in 1995 was due to expansion of the Home Office marketing staff. The significant increase in 1996 was due to continued expansion of the Home Office marketing staff and to start-up costs for a new sales office in Austin, Texas. As discussed above, Intermed was recognized by Texas as an authorized surplus lines carrier in 1996 and the Company opened a sales office staffed by employees of Insurance Services, Inc. Losses and loss adjustment expenses (LAE) declined from $8,197,000 in 1994 to $7,676,000 in 1995. The loss ratios were 77% in 1994 and 65% in 1995. Calendar year 1995 benefited from a net release of $1,935,000 in loss reserves related to prior accident years. Losses and LAE in 1996 totaled $11,226,000, producing a calendar year loss ratio of 140%. The reasons for the unfavorable loss experience in 1996 were: 1. Medical malpractice indemnity and LAE payments totaled $10,768,000 in 1996 compared with $7,060,000 in the prior year, an increase of $3,708,000. Management believes that this significant increase was an aberration and that paid losses in 1997 will return to the level experienced in prior years. There is no reason to believe that there has been a fundamental change in the historic profitability of the Company's block of medical malpractice business. Because individual indemnity payments in 1996 on prior year claims exceeded the reserves established for those claims, there was a charge against current year operations of $1,446,000. 2. As discussed above in the comments related to Liabilities, it was necessary to establish reserves of $2,527,000, net of reinsurance, for reported claims on claims-paid policies that converted to claims-made coverages during 1996. Primarily because of the factors discussed above, there was a net loss before income taxes of $4,499,000 in 1996 compared with net income before taxes of $3,833,000 in 1995 and $899,000 in 1994. There was an income tax expense of $102,000 in 1994 and $1,323,000 in 1995 due to profitable operations in those years. There was an income tax benefit of $1,564,000 in 1996 due to the net loss incurred. Net income in 1994 was $797,000, increasing to $2,510,000 in 1995. There was a net loss of $2,934,000 in 1996. LIQUIDITY AND CAPITAL RESOURCES Due to the continued restructuring of the bond portfolio and to a negative cash flow from operations of $6,211,000, cash and cash equivalents totaled $16,935,000 at December 31, 1996 compared to $31,181,000 at the prior year. At December 31, 1996, approximately $14,000,000 invested short-term will be re-invested in long-term bonds when interest rates improve above the current level. Normal operations are financed by premium and investment income. To provide a margin of safety against unexpected cash calls, the maturity distribution of the bond portfolio is carefully monitored to preclude forced liquidations which could result in realized losses. 6 8 MANAGEMENT'S DISCUSSION AND ANALYSIS GENERAL In June 1995, the Company received a B+ (very good) rating from A.M. Best Company, the premier rating agency of insurance companies. Best ratings are divided into two groups, "Secure" and "Vulnerable" and the B+ rating is classified as "Secure". In 1996, A.M. Best increased the Company's rating from B+ to B++. INDEPENDENT AUDITORS' REPORT The Board of Directors The Tenere Group, Inc.: We have audited the accompanying consolidated balance sheets of The Tenere Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations and stockholders'/policyholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Tenere Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Houston, Texas March 27, 1997 7 9 CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995
1996 1995 ---- ---- ASSETS Investments: Bonds held to maturity, at amortized cost (market - $1,854,359 in 1995) $ -- 1,867,111 Bonds held available for sale, at market value (amortized cost - $29,117,835 in 1996; $19,961,424 in 1995) 29,370,067 20,536,518 Common stock 340 340 ----------- ---------- Total investments 29,370,407 22,403,969 Other assets: Cash and cash equivalents, including interest- bearing deposits of $14,889,744 in 1996 and $29,614,311 in 1995 16,935,122 31,180,925 Premiums receivable 2,580,691 3,720,202 Reinsurance recoverable 7,458,298 1,162,495 Prepaid reinsurance premiums 750,000 1,175,252 Accrued investment income 527,139 567,306 Deferred policy acquisition costs 84,550 140,450 Deferred income taxes 2,098,792 1,772,314 Income taxes recoverable 1,680,190 -- Other 1,084,992 491,101 ----------- ---------- Total other assets 33,199,774 40,210,045 ----------- ---------- $62,570,181 62,614,014 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for losses and loss adjustment expenses $32,887,407 26,623,138 Unearned premium reserve 6,300,111 10,447,006 Reinsurance premium payable 1,256,381 137,878 Income taxes payable -- 214,444 Other 736,579 654,270 ----------- ---------- Total liabilities 41,180,478 38,076,736 Stockholders' equity: Common stock, $.01 par value; 7,000,000 shares authorized; 1,999,774 shares issued and outstanding 19,998 19,998 Contributed capital 21,940,828 21,940,828 Retained earnings (accumulated deficit) (571,123) 2,576,452 Commitments and contingencies (see note 9) ----------- ---------- Total stockholders' equity 21,389,703 24,537,278 ----------- ---------- $62,570,181 62,614,014 =========== ==========
See notes to consolidated financial statements 8 10 CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994 ---- ---- ---- REVENUES: Direct premiums written $ 8,124,319 9,874,270 12,367,991 Premiums ceded to reinsurers 4,655,382 1,505,427 1,343,902 ----------- ---------- ---------- Net premiums written 3,468,937 8,368,843 11,024,089 (Increase) decrease in unearned premium reserve 4,177,545 3,532,480 (367,216) ----------- ---------- ---------- Net premiums earned 7,646,482 11,901,323 10,656,873 Net investment income 2,626,983 2,654,037 2,639,266 Net realized investment losses (17,135) (36,263) (423,264) ----------- ---------- ---------- Total revenues 10,256,330 14,519,097 12,872,875 LOSSES AND EXPENSES: Sales and marketing expenses 1,758,312 955,021 857,422 Other underwriting expenses 1,784,324 1,437,718 1,631,124 Losses and loss adjustment expenses 11,226,461 7,676,488 8,196,665 Dividends to policyholders (13,921) 616,948 1,288,641 ----------- ---------- ---------- Total losses and expenses 14,755,176 10,686,175 11,973,852 ----------- ---------- ---------- Income before income taxes (4,498,846) 3,832,922 899,023 Income tax (benefit) expense (1,564,360) 1,323,066 101,997 ----------- ---------- ---------- Net income (loss) $(2,934,486) 2,509,856 797,026 ----------- ---------- ---------- Net income (loss) per share $(1.47) 1.26 N/A =========== ========== ==========
See notes to consolidated financial statements 9 11 CONSOLIDATED STATEMENTS OF STOCKHOLDERS'/POLICYHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
RETAINED EARNINGS/ COMMON CONTRIBUTED (ACCUMULATED POLICYHOLDERS' STOCK CAPITAL DEFICIT) EQUITY TOTAL ------- ----------- ------------ -------------- ---------- Balance at December 31, 1993 $ -- -- -- 20,844,790 20,844,790 Change in unrealized investment gains (losses) -- -- -- (2,273,260) (2,273,260) Net income -- -- -- 797,026 797,026 ------- ---------- ---------- ----------- ---------- Balance at December 31, 1994 -- -- -- 19,368,556 19,368,556 Demutualization (note 1) $19,998 21,940,828 (2,592,270) (19,368,556) -- Change in unrealized investment gains (losses) -- -- 2,658,866 -- 2,658,866 Net income -- -- 2,509,856 -- 2,509,856 ------- ---------- ---------- ----------- ---------- Balance at December 31, 1995 19,998 21,940,828 2,576,452 -- 24,537,278 Change in unrealized investment gains (losses) -- -- (213,089) -- (213,089) Net income -- -- (2,934,486) -- (2,934,486) ------- ---------- ---------- ----------- ---------- Balance at December 31, 1996 $19,998 21,940,828 (571,123) -- 21,389,703 ======= ========== ========== =========== ==========
See notes to consolidated financial statements. 10 12 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ---- ---- ---- Net income (loss) $ (2,934,486) 2,509,856 797,026 Adjustments to reconcile net income (loss) to net cash from operating activities: Net realized investment losses 17,135 36,263 423,264 Depreciation and amortization expense 187,418 160,634 127,288 Equity in loss of real estate partnership -- -- 2,225 Net change in deferred acquisition costs 55,900 147,172 (26,167) Deferred income tax expense (benefit) (216,705) 487,427 (324,346) Net amortization of discount on bonds 105,218 516,508 759,368 Change in deferred tax valuation allowance -- -- 6,028 Change in operating assets and liabilities: Premiums receivable 1,139,511 423,063 (1,065,577) Reinsurance balances (4,752,048) (1,308,346) (717,802) Accrued investment income 40,167 795,427 (429,753) Income taxes recoverable (1,894,634) 650,715 743,241 Other assets (158,515) 1,208 (24,620) Reserve for losses and loss adjustment expenses 6,244,114 245,816 824,064 Unearned premium reserve (4,146,895) (3,299,570) 367,216 Policyholder dividends payable (152,042) (277,596) 96,918 Other liabilities 254,507 86,240 (177,081) ------------ ---------- ----------- Net cash provided by (used in) operating activities (6,211,355) 1,174,817 1,381,292 ------------ ---------- ----------- Cash flows from investing activities: Maturity of bonds held to maturity or available for sale 1,700,000 1,360,000 -- Sale of bonds held to maturity 1,826,094 -- -- Sale of bonds available for sale 2,750,826 27,246,304 24,697,159 Purchase of bonds held to maturity or available for sale (13,688,573) -- (25,576,587) Purchase of furniture and equipment (622,795) (250,255) (270,167) ------------ ---------- ----------- Net cash provided by (used in) investing activities (8,034,448) 28,356,049 (1,149,595) ------------ ---------- ----------- Net increase (decrease) in cash and cash equivalents (14,245,803) 29,530,866 231,697 Cash and cash equivalents at beginning of period 31,180,925 1,650,059 1,418,362 ------------ ---------- ----------- Cash and cash equivalents at end of period $ 16,935,122 31,180,925 1,650,059 ============ ========== ===========
See notes to consolidated financial statements. 11 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of The Tenere Group, Inc. (Tenere, the Company) and its wholly-owned subsidiaries, Intermed Insurance Company (Intermed), Interlex Insurance Company (Interlex) and Insurance Services, Inc. (ISI), is presented to assist in understanding the Company's financial statements. The financial statements herein represent the operations of Intermed and its subsidiaries, Interlex and ISI. Tenere, the holding company, currently has no operations other than ownership of Intermed. The consolidated financial statements and notes thereto are representations of the Company's management, which is responsible for their integrity and objectivity. The consolidated financial statements have been prepared on the basis of generally accepted accounting principles which differ from the statutory basis of accounting followed in reporting to insurance regulatory authorities. All significant intercompany transactions and accounts have been eliminated in consolidation. DESCRIPTION OF COMPANY Effective April 27, 1995, RCA Mutual Insurance Company (RCA), a non-assessable mutual property and casualty insurance company, completed the demutualization process begun in 1993 and became a stock property and casualty insurance company. The Company's name was changed from RCA Mutual Insurance Company to Intermed Insurance Company. Also effective April 27, 1995, Intermed became a wholly-owned subsidiary of The Tenere Group, Inc., an insurance holding company organized under the laws of the State of Missouri, and the policyholders of RCA became the stockholders of Tenere. This transaction was accounted for using policyholders' equity as of April 1, 1995. Issued in exchange for $21,960,826 of membership interests were 1,999,774 shares of Tenere Group stock which approximated one share of $.01 par value Tenere Group stock for every $10.98 of policyholder surplus attributable to the policyholder. Intermed writes medical and dental professional liability insurance on occurrence and claims-made bases in the States of Missouri and Kansas. Prior to September 1, 1995, the Company also wrote coverages on a claims-paid basis in the State of Missouri. Effective August 1, 1996 Intermed was recognized as a surplus lines carrier in the State of Texas and began writing professional liability insurance on physicians through a physician-sponsored purchasing group, Intermedical of Texas, Inc. In 1997, the Company will begin to write professional liability insurance on dentists in Texas through a second physician-sponsored purchasing group, Dental Defense Specialists, Inc. Coverages in Texas are written on both occurrence and claims-made policy forms. Interlex writes legal professional liability insurance on a claims-made basis in the States of Missouri and Kansas. Since operations are currently conducted in only three states, they are subject to changes in the legal and economic climates of those states. Estimates of losses and loss adjustment expenses on occurrence coverages are charged to income as claims are incurred. Estimates of losses and loss adjustment expenses on claims-made coverages are charged to income as claims are reported. Claims-paid coverages insured against claims which were reported and paid during the period the policy was in effect. The Company's obligation to defend and pay claims ended upon expiration of a claims-paid policy. Claims-paid losses were incurred at the time of payment so no reserves were required on open claims. However, when the Company discontinued writing or renewing claims-paid policies effective September 1, 1995, it became liable for all open claims that had been reported during the claims-paid policy period. 12 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CASH AND CASH EQUIVALENTS Excess cash is invested on a short-term basis in an interest-bearing money market fund and under an interest-bearing repurchase agreement. For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. INVESTMENTS Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (Statement 115). Statement 115 required a change in accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. In general this statement requires that securities must be classified in three categories, with the accounting and reporting as follows: Held-to-maturity securities - Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Trading securities - Securities bought with the purpose of selling them in the near term are classified as trading securities. Securities in this category are reported at fair market value, with unrealized gains and losses included in earnings. Available-for-sale securities - Securities which are not classified in one of the other categories are held as available-for-sale and are reported at fair market value. Unrealized gains and losses for this category are excluded from earnings and are reported as a separate component of stockholders' equity, net of income tax. The adoption of Statement 115 had no effect on the net income of the Company. Gains and losses from the sale of investments are calculated using the specific identification method. PREMIUMS RECEIVABLE Premiums receivable represent unpaid premium balances due directly from the insured and are secured by the related unearned premiums. The Company cancels all policies with receivable balances outstanding more than 90 days. PREMIUMS Premium income is recognized on a pro rata basis over the terms of the respective policy contracts. The unearned premium reserve represents the portion of premiums written which are applicable to the unexpired terms of policies in force. In addition, the unearned premium reserve includes the liability for death, disability and retirement waiver benefit (see note 5). POLICY ACQUISITION COSTS Policy acquistion costs, consisiting primarily of commissions, are deferred and amortized in proportion to the premium revenue recognized. 13 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES Reserves for losses and loss adjustment expenses are estimated based on the Company's historical loss and loss adjustment expense experience supplemented by insurance industry loss data. The reserves are reported on a present value basis discounted at the rate of 3% in 1996 and 4% in 1995. At the direction of the Missouri Department of Insurance, the discount will be eliminated ratably over the five year period ending December 31, 1998. The reserve for losses and loss adjustment expenses is based on long-range projections subject to uncertainty. Uncertainty regarding reserves of a given accident year are gradually reduced as new information emerges each succeeding year, allowing more reliable re-evaluations of such reserves. While management believes the reserve for losses and loss adjustment expenses at December 31, 1996 makes a good and reasonable provision for claim liabilities, uncertainties inherent in the reserving process could cause such reserves to develop favorably or unfavorably. Any adjustments to reserves are reflected in the operating results of the periods in which they are made. Changes in reserves which are small relative to the total amount of such reserves could significantly impact future reported income. FEDERAL INCOME TAXES The Company and its subsidiaries file a consolidated Federal income tax return. Current Federal income taxes are charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. Deferred income tax assets and liabilities are recognized based on the difference between financial statement carrying amounts and income tax bases of assets and liabilities using enacted income tax rates and laws. ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. The reserves for losses and loss adjustment expenses represent the most significant estimate in the accompanying financial statements. (2) INVESTMENTS AND OTHER FINANCIAL INSTRUMENTS The amortized cost and estimated market values of investments in bonds as of December 31, 1996 and December 31, 1995 are presented below. The estimated market values presented in this footnote were determined using quoted market prices, where available, or independent pricing services. 14 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross Gross Amortized unrealized unrealized Market Type of Investment cost gains losses value - ------------------ ------------ ---------- ----------- ---------- December 31, 1996 Available-for-sale: United States government, government agencies and authorities $27,246,527 364,640 (136,238) 27,474,929 States, municipalities and political subdivisions 1,871,308 23,830 ------- 1,895,138 ----------- --------- --------- ---------- Total available-for-sale $29,117,835 388,470 (136,238) 29,370,067 =========== ========= ========= ========== December 31, 1995 Held-to-maturity: United States government, government agencies and 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 market value of investments in fixed maturities at December 31, 1996 by contractual maturity are shown below. 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. 15 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Available-for-sale Amortized Market cost value ----------- ---------- Due in one year or less $ 1,450,700 1,457,482 Due after one year through five years 6,552,441 6,572,525 Due after five years through ten years 21,114,694 21,340,060 ----------- ---------- $29,117,835 29,370,067 =========== ==========
Proceeds from sales of available-for sale securities were $2,750,826 in 1996, $28,606,304 in 1995, and $24,697,159 in 1994. Gross gains and losses on those sales were: $2,120 and $9,130 in 1996; $383,816 and $420,079 in 1995; and $66,015 and $489,279 in 1994, respectively. In 1996, the Company continued the restructuring of its investment portfolio which resulted in the sale of low-yielding bonds on deposit with the State of Missouri which were classified held to maturity. Proceeds from sales of held to maturity securities were $1,826,094 and realized losses were $10,125. Net investment income for the years ended December 31, 1996, 1995 and 1994 is comprised of the following:
1996 1995 1994 ---- ---- ---- Investment income: Interest on cash equivalents and repurchase agreements $1,115,565 616,621 48,735 Interest on federal income tax refund ----- ----- 103,484 Interest on bonds 1,695,754 2,217,427 2,610,672 ---------- --------- --------- Gross investment income 2,811,319 2,834,048 2,762,891 Investment expenses (184,336) (180,011) (123,625) ---------- --------- --------- Net investment income $2,626,983 2,654,037 2,639,266 ========== ========= =========
Bonds with an amortized cost $1,790,138 at December 31, 1996 and $1,867,111 at December 31, 1995 were on deposit with the Department of Insurance of the State of Missouri. The amortized cost of these bonds and the interest income thereon are included in the above amounts. The net changes in unrealized investment gains are as follows:
December 31, December 31, December 31, 1996 1995 1994 ---- ---- ---- Net unrealized investment gains (losses) ($322,862) 4,028,585 (3,444,336) Federal income (taxes) benefit 109,773 (1,369,719) 1,171,076 ----------- ----------- ----------- ($213,089) 2,658,866 (2,273,260) =========== =========== ===========
16 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The carrying values of cash and cash equivalents, premiums receivable and other liabilities approximate their fair values at December 31, 1996 and 1995. (3) RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES A summary of the reserves for losses and loss adjustment expenses follows:
December 31, December 31, 1996 1995 ------------ ------------ Undiscounted reserves for losses and loss adjustment expenses $35,051,777 29,555,760 Less discount (see note 1) (2,164,370) (2,932,622) ----------- ---------- Discounted reserves for losses and loss adjustment expenses $32,887,407 26,623,138 =========== ==========
Following is the activity in the reserves for losses and loss adjustment expenses:
1996 1995 1994 ---- ---- ---- Balance at January 1 $26,623,138 26,279,977 25,553,413 Less reinsurance recoverable on unpaid loss and loss adjustment expenses (1,162,495) (584,913) (248,721) ----------- ---------- ---------- 25,460,643 25,695,064 25,304,692 ----------- ---------- ---------- Incurred related to: Current year 9,812,694 9,612,075 8,638,000 Prior year 1,413,767 (1,935,587) (441,335) ----------- ---------- ---------- Total incurred 11,226,461 7,676,488 8,196,665 ----------- ---------- ---------- Paid related to: Current year 2,499,788 3,190,397 3,045,000 Prior year 8,399,372 4,720,512 4,761,293 ----------- ---------- ---------- Total paid 10,899,160 7,910,909 7,806,293 ----------- ---------- ---------- 25,787,944 25,460,643 25,695,064 Plus reinsurance recoverable on unpaid loss and loss adjustment expenses 7,099,463 1,162,495 584,913 ----------- ---------- ---------- Balance at December 31: $32,887,407 26,623,138 26,279,977 =========== ========== ==========
The reserves for losses and loss adjustment expenses are estimated based on development information available at each reporting date. As a result of the nature of the risks underwritten, claims development may occur over an extended period of time. The changes in the incurred amounts disclosed above related to prior years are the result of utilizing improved claim development information as that information becomes available. In particular, the $1,413,767 increase in prior year incurred amounts for 1996 reflect adverse development on several large claims which were settled in 1996. (4) REINSURANCE As is customary in the insurance industry, the Company reinsures portions of certain insurance policies it writes, thereby providing a greater diversification of risk and minimizing exposure on larger risks. The Company remains contingently at risk with respect to any reinsurance ceded and would incur an additional loss if an assuming company were unable to meet its obligation under the reinsurance treaty. 17 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company monitors the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company believes that the failure of any single reinsuring syndicate or company to meet its obligations would not have a significant effect on the Company's financial position. Amounts recoverable from one reinsurer at December 31, 1996 represent 69% of total reserves for losses and loss adjustment expenses ceded. Premiums and premium related reinsurance amounts for the years ended December 31, 1996, 1995 and 1994 are summarized as follows:
1996 1995 1994 ---------- --------- --------- Ceded premiums $4,655,382 1,505,427 1,343,902 ========== ========= ========= Ceded losses and loss adjustment expenses $6,560,538 577,582 336,192 ========== ========= =========
At December 31, 1996, the Company recorded reinsurance recoverable on unpaid loss and loss adjustment expenses of $7,099,463, reinsurance recoverable on paid loss adjustment expenses of $98,438 and reinsurance premium recoverable of $260,397. At December 31, 1995, the Company recorded reinsurance recoverable on unpaid loss and loss adjustment expenses of $1,162,495. (5) UNEARNED PREMIUMS The Company reserves for future utilization of the death, disability and retirement waiver benefit on a full funding basis. This reserve was estimated to be $1,628,000 at December 31, 1996 and $4,776,000 at December 31, 1995, and is reflected in the unearned premium reserve. (6) STOCKHOLDERS' EQUITY The NAIC requires a risk-based capital (RBC) calculation as part of the information to be filed with the annual statutory statement. This risk-based capital calculation and analysis is an attempt to measure the theoretical capital and surplus needs of a company compared with its adjusted capital and surplus. The capital and surplus of Intermed and Interlex substantially exceeds the NAIC's RBC requirements for Property and Casualty companies at the end of 1996 and 1995. In 1996 the shareholders of the Company adopted the 1996 Long Term Incentive Plan. The Plan is to encourage certain employees, officers and directors of the Company and its subsidiaries to acquire Common Stock of the Company or to receive monetary payments based on the value of such stock or based upon achieving certain goals on a basis mutually advantageous to such employees and the Company. The authorized number of shares of Common Stock reserved for issuance under the Plan is 350,000. The options and stock appreciation rights are generally granted at a price not less than 100% of the fair market value at the date of grant. No awards were made in 1996. On February 28, 1997, subsequent to year end, the compensation committee of the board of directors granted options to purchase 182,052 shares of stock to certain officers of the Company and non employee directors. The exercise price is $5.45 per share and the options become fully exerciseable on July 31, 1997. Dividends paid to the Company by insurance subsidiaries are restricted by regulatory requirements of the subsidiaries' state of domicile. The maximum amount of dividends which can be paid by insurance companies domiciled in the State of Missouri to stockholders without prior approval of the Insurance Director is limited to the lesser of (a) 10% of the Company's statutory capital and surplus as of December 31 of the preceding year or (b) net investment income for the twelve-month period ending December 31 of the preceding year. At December 31, 1996 and 1995, statutory capital and surplus of In- 18 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS termed was $18,401,550 and $19,728,912 respectively. For the years ended December 31, 1996 and 1995, net investment income of Intermed was $2,264,106 and $2,354,522, respectively. The maximum dividend which can be paid in 1996 by Intermed without the prior approval of the Missouri Insurance Director is, therefore, $1,840,155. (7) 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 years ended December 31, 1996, 1995 and 1994:
1996 1995 1994 ---- ---- ---- Expected tax (benefit) expense using statutory rates ($1,529,607) 1,303,787 305,667 Other, net (34,753) 19,279 (203,670) ----------- --------- -------- ($1,564,360) 1,323,066 101,997 =========== ========= ========
Income taxes consist of the following at December 31:
1996 1995 1994 ---- ---- ---- Current (benefit) expense ($1,347,655) 835,639 420,315 Deferred (benefit) expense (216,705) 487,427 (324,346) Change in valuation allowance ----- ----- 6,028 ----------- --------- -------- Income taxes ($1,564,360) 1,323,066 101,997 =========== ========= ========
Deferred income taxes arise from temporary differences resulting from income and expense items reported for financial ac counting and tax purposes in different periods. The sources of these differences and the tax effect of each are as follows:
1996 1995 1994 ---------- -------- --------- Losses and loss adjustment expenses incurred for financial reporting purposes but not deductible for tax purposes ($348,223) 70,676 (153,537) Unearned premiums not deductible for tax purposes 284,074 240,209 (13,954) Deferred compensation (88,400) ----- ----- NOL Carryforward (86,660) ----- ----- Other, net 22,504 176,542 (156,855) --------- -------- -------- ($216,705) 487,427 (324,346) ========= ======== ========
19 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and December 31, 1995 are presented below:
1996 1995 ---- ---- Deferred tax assets: Discounted unpaid loss reserves $1,853,219 1,504,996 Discounted unearned premium reserves 410,485 694,558 Deferred compensation payable 88,400 ----- Deferred commissions payable 26,916 26,747 Net operating loss carryforward 246,571 201,592 ---------- --------- Total gross deferred tax assets 2,625,591 2,427,893 Less valuation allowance (400,000) (400,000) ---------- --------- Net deferred tax assets $2,225,591 2,027,893 Deferred tax liabilities: Investments adjusted to market value (85,758) (195,532) Deferred acquisition costs (28,747) (47,753) Other (12,294) (12,294) ---------- --------- Total gross deferred liabilities (126,799) (255,579) ---------- --------- Net deferred tax asset $2,098,792 1,772,314 ========== =========
The valuation allowance for deferred tax assets at December 31, 1996 and 1995 was $400,000. Based on the Company's historical earnings, future expectations of adjusted taxable income, 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. Cash payments for Federal income taxes were $546,983, $184,925 and $322,926 in 1996, 1995 and 1994, respectively. (8) EMPLOYEE BENEFIT PLANS The Company sponsors a defined contribution pension plan that covers substantially all employees. Contributions to the plan are discretionary, but may not exceed 15% of the participant's annual compensation. Pension expense was approximately $178,068, $141,325 and $106,000 in 1996, 1995 and 1994, respectively. (9) COMMITMENTS AND CONTINGENCIES The Company has non-cancellable operating leases for office space which expire in June 2000. Future minimum lease payments are $106,000 in 1997, $107,000 in 1998, $88,000 in 1999, $78,000 in 2000 and $89,000 in 2001. The Company is involved in claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a materially adverse effect on its financial condition or results of operations. The Company has entered into three year employment agreements with five executives and one key employee which include severance provisions granting the executives the right to receive certain benefits, including among others, their annual base salary and bonus if terminated. (As defined in the respective agreements) within the term of the agreements. As of December 31, 1996, the maximum contingent liability under the severance provisions of the agreements was approximately $2,200,000. 20 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The agreements also contain a provision whereby the executives, in the event of termination due to a change in control, would receive severance payments in an amount 2.99 times their then current base salaries. The Company provides a retirement plan for the chief executive (executive) of the Company. The agreement entitles the executive or the estate of the executive to receive an $80,000 annual annuity for ten years upon retirement and after attainment by the executive of 70 years of age. The Company accrued $260,000 in 1996 and will accrue the remaining amount, approximately $300,000, in 1997. (10) RECONCILIATION TO STATUTORY ACCOUNTING Intermed and Interlex are required to file statutory financial statements with state regulatory authorities. Accounting principles used to prepare the statutory financial statements differ from financial state ments 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 years ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994 ------------ ---------- -------- Statutory net income (loss) of insurance ($2,737,211) 2,968,644 420,581 Net income of non-insurance subsidiaries (98,080) ----- ----- ----------- --------- -------- Combined statutory net income ($2,835,291) 2,968,644 420,581 Increase (decrease): Deferred policy acquisition costs (55,900) (147,172) 26,167 Deferred income taxes 216,705 (487,427) 324,346 Deferred compensation (260,000) ----- ----- Other adjustments, net ----- 175,811 25,932 ----------- --------- -------- Net income (loss) as reported herein ($2,934,486) 2,509,856 797,026 =========== ========= ========
Reconciliations of statutory capital and surplus, as determined using statutory accounting principles, to stockholders' equity included in the accompanying consolidated financial statements at December 31, 1996 and 1995 are as follows:
1996 1995 ----------- ----------- Statutory capital and surplus of insurance companies $24,305,304 25,558,424 Stockholder's equity in non-insurance subsidiary 196,652 500 ----------- ---------- Combined capital and surplus $24,501,956 25,558,924 Increase (decrease): Deferred policy acquisition costs 84,550 140,450 Deferred income taxes 2,098,792 1,772,314 Net unrealized gain (loss) on securities available for sale 166,473 575,094 Deferred compensation (260,000) ----- Excess statutory reserve over statement reserve ----- 1,760,000 Non-admitted assets and other adjustments, net 799,624 561,006 Consolidating eliminations and adjustments (6,001,692) (5,830,510) ----------- ---------- Stockholders' equity as reported herein $21,389,703 24,537,278 =========== ==========
21 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (11) CLAIMS PAID POLICIES The Company discontinued writing claims-paid policies effective September 1, 1995. As these policies expired over the twelve-month period ending August 31, 1996, claims-paid policyholders were given the opportunity to convert to claims-made coverage. Upon non-renewal or discontinuance of the claims-paid contract the Company became liable for reported claims. Reserves of $3,976,528, net of reinsurance, have been established as of December 31, 1996 for all reported and open claims on those claims-paid policies non-renewed or discontinued during the period September 1, 1995 through August 31, 1996. STATEMENT OF MANAGEMENT'S RESPONSIBILITY The financial statements and related information of The Tenere Group, Inc. and Subsidiaries presented in this Report were prepared by management, which has sole responsibility for their integrity and objectivity. The financial statements have been prepared in conformity with generally accepted accounting principles, applying certain estimates and judgments based upon the best available information and management's view of current conditions and circumstances. Management has developed and maintains a system of internal accounting control designed to provide reasonable assurance that the Company's assets are protected from improper use and that accounting records provide a reliable basis for the preparation of financial statements. This system is continually reviewed, improved and modified in response to changing business conditions and operations and to recommendations made by the Company's independent auditors. While no system of internal control can provide absolute assurance that irregularities will not take place, management believes that Tenere's internal control system provides reasonable assurance that assets are safeguarded and financial information is reliable. The Company's independent auditors, KPMG Peat Marwick LLP, are engaged to express an opinion on the fairness of presentation of the Company's consolidated financial statements, taken as a whole. Their opinion is based on procedures which they believe to be sufficient to provide reasonable, but not absolute, assurance that the financial statements contain no material errors. During the course of their examination, the independent auditors were given unrestricted access to all financial records and related data. Management believes that all representations made to the independent auditors were accurate and complete. /s/ J.D. WILLIAMS Joseph D. Williams, CPA Vice President-Finance and Chief Financial Officer Springfield, Missouri March 27, 1997 22 24 SELECTED FINANCIAL INFORMATION (in thousands)
Year Ended December 31 CONSOLIDATED STATEMENTS OF 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- OPERATIONS DATA: Net premiums $ 7,646 $11,901 $10,657 $ 8,154 $ 5,060 Net investment income 2,627 2,654 2,639 2,754 2,944 Net realized investment gains (losses) (17) (36) (423) 1,318 243 -------- ------- ------- ------- -------- Total revenues 10,256 14,519 12,873 12,226 8,247 -------- ------- ------- ------- -------- Losses and loss adjustment expenses 11,226 7,676 8,197 8,503 3,000 Dividends to policyholders (14) 617 1,289 1,091 378 Amortization of net assets acquired in excess of cost(2) -- -- -- (1,484) (1,484) Other expenses 3,543 2,393 2,488 2,865 2,014 -------- ------- ------- ------- -------- Total expenses 14,755 10,686 11,974 10,975 3,908 Income (loss) before income taxes (4,499) 3,833 899 1,251 4,339 Income tax expense (benefit) (1,564) 1,323 102 (117) 1,002 Cumulative effect of change in accounting for income taxes -- -- -- 67 -- -------- ------- ------- ------- -------- Net income (loss) ($2,935) $ 2,510 $ 797 $ 1,435 $ 3,337 ======== ======= ======= ======= ======== Net income (loss) per common share $ (1.47) $ 1.26 N.A. N.A. N.A. ======== ======= ======= ======= ======== CONSOLIDATED BALANCE SHEETS DATA Investments $ 29,370 $22,404 $47,534 $51,284 $ 44,234 Cash and cash equivalents 16,935 31,181 1,650 1,418 7,523 Premiums receivable 2,581 3,720 4,143 3,078 2,951 Total assets 62,570 62,614 61,119 62,128 58,886 Reserve for losses and loss adjustment expenses 32,887 26,623 26,280 25,553 25,021 Unearned premium reserve 6,300 10,447 13,747 13,379 12,082 Stockholders'/policyholders' equity 21,390 $24,537 $19,369 $20,845 $ 19,431 ======== ======= ======= ======= ========
(1) On January 2, 1992, Intermed acquired all of the outstanding stock of Insurance Risks, Ltd. for $2,500,048 in cash. The acquisition was recorded as a purchase and, accordingly, the purchase price was allocated to the estimated fair value of assets acquired and liabilities assumed as of the date of acquisition. The fair value of the net assets acquired in excess of the purchase price was $2,967,008 calculated as follows: Fair value of assets acquired $ 14,833,461 Liabilities assumed (12,973,636) Net cash from the purchase 1,107,183 ------------- Net assets acquired in excess of cost $ 2,967,008 =============
Net assets acquired in excess of cost were amortized over the estimated period of benefit of two years. The amortization caused a favorable non-recurring impact on net income for the years ended 1993 and 1992 in the amount of $1,483,500. If these amounts are excluded from net income before income taxes, 1993 net income before income tax would decrease 119% from $1,251,000 to ($232,500) and 1992 net income before income tax would decrease 34% from $4,339,000 to $2,856,000. The selected consolidated financial data for each of the five years in the period ended December 31, 1996 has been derived from audited consolidated financial statements of Tenere as of and for the years ended December 31, 1996 and 1995 and of its predecessor, RCA Mutual Insurance Company, as of and for the years ended December 31, 1994, 1993 and 1992. These data include all adjustments which are, in the opinion of the management of Tenere, necessary to present a fair statement of the financial condition and results of operations of Tenere for these periods and are of a normal and recurring nature. The information should be read in conjunction with and is qualified by reference to such statements and the related notes thereto. 23 25 DIRECTORS AND OFFICERS THE TENERE GROUP, INC. INTERMED INSURANCE CO. THOMAS E. ASHLEY, M.D. GARY O. BAKER, D.D.S. ALBERT J. BONEBRAKE, VICE PRESIDENT Southwest Oral Surgery, Inc. Woman's Clinic, Inc. Springfield, Missouri St. Louis, Missouri Springfield, Missouri RAYMOND A. CHRISTY, M.D. HARRY O. COLE, M.D. C. RICHARD GULICK, M.D. PRESIDENT AND CHIEF CHAIRMAN OF THE BOARD OB/GYN Associates, Inc. EXECUTIVE OFFICER Neurosurgical Associates, Inc. St. Louis, Missouri Springfield, Missouri St. Louis, Missouri MICHAEL D. HOEMAN, M.D. CHRISTOPHER H. JUNG, M.D. CARROLL R. WETZEL, D.O. SECRETARY AND TREASURER Southeast Missouri ENT Wetzel Clinic, Inc., The Diagnostic Clinic, Inc. Consultants Clinton, Missouri Springfield, Missouri Cape Girardeau, Missouri INTERLEX INSURANCE CO. ALBERT J. BONEBRAKE, M.D. LLOYD J. CARMICHAEL RAYMOND A. CHRISTY, M.D. Woman's Clinic, Inc., Carmichael, Gardner & Clark PRESIDENT AND CHIEF Springfield, Missouri Springfield, Missouri EXECUTIVE OFFICER Springfield, Missouri B. H. CLAMPETT MARILYN P. DUNN MAX W. LILLEY Springfield, Missouri SECRETARY CHAIRMAN OF THE BOARD Foley & Lardner Springfield, Missouri Chicago, Illinois PETER F. SPATARO CARROLL R. WETZEL, D.O. STEVEN W. WHITE VICE PRESIDENT Wetzel Clinic, Inc. White, Allinder & Graham Moser & Marsalek Clinton, Missouri Independence, Missouri St. Louis, Missouri OFFICERS ANDREW K. BENNETT SAM T. BRANHAM ANDREW C. FISCHER VICE PRESIDENT-CLAIMS VICE PRESIDENT-TEXAS VICE PRESIDENT- AND GENERAL COUNSEL UNDERWRITING AND POLICY SERVICES CLIFTON R. STEPP JOSEPH D. WILLIAMS, CPA JULIE D. WROBLESKI VICE PRESIDENT-MARKETING VICE PRESIDENT-FINANCE ASSISTANT SECRETARY AND CHIEF FINANCIAL OFFICER
25 26 CORPORATE INFORMATION CORPORATE HEADQUARTERS: 1903 E. Battlefield Springfield, MO 65804 Tel: 417-889-1010 800-865-0650 417-889-1099 (FAX) INDEPENDENT ACCOUNTANTS: KPMG Peat Marwick LLP Houston, TX CORPORATE COUNSEL: Thompson Coburn St. Louis, MO CONSULTING ACTUARIES: Tillinghast - Towers Perrin St. Louis, MO INVESTMENT MANAGER: Boatmen's Trust Company St. Louis, MO ADVERTISING AGENCY: Schilling/Sellmeyer & Associates, Inc. Springfield, MO TRANSFER AGENT AND REGISTRAR: Boatmen's Trust Company P.O. Box 14737 St. Louis, MO 63178 Tel: 314-466-1357 MARKET INFORMATION: The Company's Common Stock is not listed on any securities exchange or quoted on any automated quotation system. There has been no independent market established for the stock. As of March 18, 1997 there were 1143 holders of Common Stock. No dividends have been declared on Common Stock. STOCKHOLDER INFORMATION: The Tenere Group, Inc.'s Annual Report on Form 10-K as filed with the Securities and Exchange Commission is available at no cost by writing to: Chief Financial Officer The Tenere Group, Inc. 1903 E. Battlefield Springfield, MO 65804 ANNUAL MEETING: The 1997 Annual Meeting will be held at the Company's Corporate Headquarters at 10 a.m. on Friday, May 16, 1997. 26 EX-27 9 FINANCIAL DATA SCHEDULE
7 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 29,370,067 0 0 340 0 0 29,370,407 16,935,122 98,438 84,550 62,570,181 32,887,407 6,300,111 0 (9,291) 0 0 0 19,998 21,369,705 62,570,181 7,646,482 2,626,983 (17,135) 0 11,226,461 1,758,312 1,784,324 (4,498,846) (1,564,360) 0 0 0 0 (2,954,486) ($1.47) ($1.47) 25,460,643 9,812,694 1,413,767 2,498,788 8,399,372 25,787,944 1,725,000
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