-----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, H7UHRYwytLOpHf3ScC1IOlAApM3RnrIzZ8YprwE07BAiF2TN/IxNNPMSy0vxRBNf xf+7qQDqRL5Ptpd8GWO/pQ== 0000950137-97-002786.txt : 19970815 0000950137-97-002786.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950137-97-002786 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENERE GROUP INC CENTRAL INDEX KEY: 0000922887 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 431675969 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26062 FILM NUMBER: 97660927 BUSINESS ADDRESS: STREET 1: 1903 E BATTLEFIELD CITY: SPRINGFIELD STATE: MO ZIP: 65804 BUSINESS PHONE: 4178620650 MAIL ADDRESS: STREET 1: 1903 E BATTLEFIELD CITY: SPRINGFIELD STATE: MO ZIP: 65804 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 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 (IRS Employer Identification No.) 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) Indicate by check mark whether the registrant 1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and 2) has been subject to such filing requirements for the past 90 days. Yes x No --------- --------- As of June 30, 1997 there were 1,999,774 shares of Common Stock, $.01 par value, issued and outstanding. 2 THE TENERE GROUP, INC.
PAGE NO. ------- INDEX PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (unaudited) Consolidated Balance Sheets - June 30, 1997 and December 31, 1996 3 Consolidated Statements of Operations - Three Months ended June 30, 1997 and 1996 4 Consolidated Statements of Operations - Six Months ended June 30, 1997 and 1996 5 Consolidated Statements of Cash Flows - Six months ended June 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II. OTHER INFORMATION ITEM 5. Other Information 16 ITEM 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17 EXHIBIT INDEX 18
2 3 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE TENERE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1997 and December 31, 1996
UNAUDITED Assets 1997 1996 ------ ------------ ----------- Investments: Bonds held available for sale, at market value (amortized cost - $27,640,384 in 1997; $29,117,835 in 1996) $27,722,267 $29,370,067 Common stock, at market value 10,239 340 ------------ ----------- Total investments 27,732,506 29,370,407 Other assets: Cash and cash equivalents, including interest-bearing deposits of $17,407,130 in 1997 and $14,889,744 in 1996 17,168,365 16,935,122 Premiums receivable 2,972,835 2,580,691 Reinsurance recoverable 7,696,400 7,458,298 Prepaid reinsurance premiums 250,000 750,000 Accrued investment income 522,323 527,139 Deferred policy acquisition costs 110,933 84,550 Deferred income taxes 2,249,383 2,098,792 Income taxes recoverable 1,345,101 1,680,190 Other 1,004,191 1,084,992 ------------ ----------- Total other assets 33,319,531 33,199,774 ------------ ----------- Total assets $61,052,037 $62,570,181 ============ =========== Liabilities and Stockholders' Equity ------------------------------------ Liabilities: Reserves for losses and loss adjustment expenses $32,044,097 $32,887,407 Unearned premium reserve 7,070,186 6,300,111 Reinsurance premium payable - 1,256,381 Other 806,014 736,579 ------------ ----------- Total liabilities 39,920,297 41,180,478 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) (829,086) (571,123) ------------ ----------- Total stockholders' equity 21,131,740 21,389,703 ------------ ----------- Total liabilities and stockholders' equity $61,052,037 $62,570,181 ============ ===========
See notes to consolidated financial statements 3 4 THE TENERE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended June 30, 1997 and 1996 UNAUDITED
1997 1996 ---------- ---------- Revenues: Direct premiums written $ 2,508,230 $ 2,672,039 Premiums ceded to reinsurers (459,420) (995,307) ----------- ----------- Net premiums written 2,048,810 1,676,732 (Increase) decrease in unearned premium reserve (668,218) 671,140 ----------- ----------- Net premiums earned 1,380,592 2,347,872 Net investment income 644,440 657,733 ----------- ----------- Total revenues 2,025,032 3,005,605 Losses and expenses: Sales and marketing expenses 377,763 170,092 Other underwriting expenses 446,076 404,233 Losses and loss adjustment expenses 950,558 2,324,584 Dividends to policyholders - (3,347) ----------- ----------- Total losses and expenses 1,774,397 2,895,562 Income before income taxes 250,635 110,043 Income tax expense (77,378) (21,112) ----------- ----------- Net income $ 173,257 $ 88,931 =========== =========== Net income per share $ 0.09 $ 0.04 =========== =========== Stockholders' equity: Beginning of period $20,604,853 $24,279,687 Change in unrealized investment gains (losses) 353,630 (144,292) Net income 173,257 88,931 ----------- ----------- End of period $21,131,740 $24,224,326 =========== ===========
See notes to consolidated financial statements 4 5 THE TENERE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Six Months Ended June 30, 1997 and 1996 UNAUDITED
1997 1996 ----------- ----------- Revenues: Direct premiums written $ 4,700,294 $ 4,201,707 Premiums ceded to reinsurers (1,106,244) (1,485,339) ----------- ----------- Net premiums written 3,594,050 2,716,368 (Increase) decrease in unearned premium reserve (809,224) 1,919,779 ----------- ----------- Net premiums earned 2,784,826 4,636,147 Net investment income 1,285,696 1,335,113 ----------- ----------- Total revenues 4,070,522 5,971,260 Losses and expenses: Sales and marketing expenses 788,019 486,422 Other underwriting expenses 984,148 900,166 Losses and loss adjustment expenses 2,546,519 4,224,656 Dividends to policyholders - (14,080) ----------- ----------- Total losses and expenses 4,318,686 5,597,164 Income (loss) before income taxes (248,164) 374,096 Income tax benefit (expense) 96,059 (111,308) ----------- ----------- Net income (loss) $ (152,105) $ 262,788 =========== =========== Net income (loss) per share $ (0.08) $ 0.13 =========== =========== Stockholders' equity: Beginning of period $21,389,703 $24,537,278 Change in unrealized investment gains (losses) (105,858) (575,740) Net income (loss) (152,105) 262,788 ----------- ----------- End of period $21,131,740 $24,224,326 =========== ===========
See notes to consolidated financial statements 5 6 THE TENERE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1997 AND 1996 UNAUDITED
1997 1996 ------------- ------------- Cash flows from operating activities Premiums received from policyholders $ 4,149,886 $ 4,442,065 Premiums paid to reinsurers (1,841,411) (1,337,134) Dividends paid to policyholders - (147,635) Losses and loss adjustment expenses paid (3,666,005) (5,838,945) Commissions paid (101,719) (102,858) Cash paid to suppliers and employees (1,453,924) (1,749,456) Interest received 1,403,659 1,452,685 Income taxes received (paid) 335,089 (546,155) ------------- ------------- Net cash used in operating activities (1,174,425) (3,827,433) Cash flows from investing activities: Maturity of bonds held to maturity or available for sale 1,450,000 1,700,000 Purchase of bonds held to maturity or available for sale - (9,706,011) Redemption on stock rights 56 - Purchase of intangible asset - (400,000) Purchase of furniture and equipment (42,388) (419,267) ------------- ------------- Net cash provided by (used in) investing activities 1,407,668 (8,825,278) Net increase (decrease) in cash and cash equivalents 233,243 (12,652,711) Cash and cash equivalents at beginning of period 16,935,122 31,180,925 ------------- ------------- Cash and cash equivalents at end of period $ 17,168,365 18,528,214 ============= ============= Reconciliation of net income to net cash used in operating activities Net income (loss) $ (152,105) 262,788 Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization expense 130,959 160,350 Net change in deferred acquisition costs (26,383) 49,602 Deferred income tax (benefit) (96,059) 45,918 Net amortization of discount on bonds 27,451 60,673 Change in operating assets and liabilities Premiums receivable (392,144) 487,670 Reinsurance balances (994,483) (1,629,806) Accrued investment income 4,816 (29,493) Income taxes recoverable (payable) 335,089 (480,765) Other assets (10,662) (291,057) Reserve for losses and loss adjustment expenses (843,310) (241,881) Unearned premium reserve 770,075 (1,998,244) Policyholder dividends payable - (161,715) Other liabilities 72,331 (61,473) ------------- ------------- Net cash used in operating activities $ (1,174,425) $ (3,827,433) ============= =============
See notes to consolidated financial statements 6 7 THE TENERE GROUP, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements are prepared in accordance with the rules and regulations of the Securities and Exchange Commission with regard to interim financial statements. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been made. Such adjustments consisted of only normal recurring items. The results of operations for the six months ended June 30, 1997 are not necessarily indicative of the results which may occur for the full year. The accompanying unaudited financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 1996 Annual Report. Certain reclassifications to 1996 amounts were made to conform with 1997 presentation. Included in such reclassifications was the following material item: As Reported As Restated Net cash used in operating activities (4,227,433) (3,827,433) Net cash used in investing activities (8,425,278) (8,825,278) (2) INVESTMENTS The amortized cost and estimated market values of investments in bonds as of June 30, 1997 and December 31, 1996 are as follows:
June 30, 1997 Gross Gross Estimated Amortized unrealized unrealized market Type of Investment cost gains losses value - ------------------ ---- ----- ------ ----- Available-for-sale: United States government, government agencies and authorities $25,774,944 263,516 (208,859) 25,829,601 States, municipalities and political subdivisions 1,865,440 27,226 -- 1,892,666 ----------- ------- --------- ---------- Total available-for-sale $27,640,384 290,742 (208,859) 27,722,267 =========== ======= ========= ==========
7 8
December 31, 1996 Gross Gross Estimated Amortized unrealized unrealized market Type of Investment cost gains losses value - ------------------ ---- ----- ------ ----- 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 =========== ======= ======== ==========
The amortized cost and market values of debt securities at June 30, 1997, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay.
Amortized Market cost value ---- ----- Due in one year or less $ 50,453 50,727 Due after one year through five years 6,470,178 6,455,376 Due after five years through ten years 21,119,753 21,216,164 ------------ ---------- $ 27,640,384 27,722,267 ============ ==========
Net investment income for the six months ended June 30, 1997 and 1996 is comprised of the following:
June 30, June 30, 1997 1996 ---------- --------- Investment income: Interest on cash equivalents and repurchase agreements $425,295 706,746 Interest on bonds 946,097 714,759 ---------- --------- Gross investment income 1,371,392 1,421,505 Investment expenses (85,696) (86,392) ---------- --------- Net investment income $1,285,696 1,335,113 ========== =========
Bonds with an amortized cost of $1,794,650 at June 30, 1997 and $1,790,138 at December 31, 1996 were on deposit with the Department of Insurance of the State of Missouri. These bonds and the interest income thereon are included in the above amounts. The net change in unrealized investment gains/losses are as follows:
June 30, June 30. 1997 1996 ---- ---- Net unrealized investment gains/losses $(160,390) (872,332) Federal income (taxes) benefit 54,532 296,592 --------- -------- $(105,858) (575,740) ========= ========
8 9 (3) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES AND REINSURANCE A summary of the reserves for losses and loss adjustment expenses follows:
June 30, December 31, 1997 1996 ---- ---- Undiscounted reserve for losses and loss adjustment expenses $34,393,233 35,051,777 Less discount (2,349,136) (2,164,370) Discounted reserve for losses and loss ----------- ---------- adjustment expenses $32,044,097 32,887,407 =========== ==========
Premiums, premium related reinsurance amounts and reinsurance recoveries for the six months ended June 30, 1997 and 1996 are summarized as follows:
June 30 June 30 1997 1996 ---- ---- Ceded premiums $1,106,244 1,485,339 ========== ========= Ceded loss and loss adjustment expenses $374,614 2,267,212 ========== =========
Activity in the reserve for loss and loss adjustment expenses during the periods ended June 30, 1997 and 1996 was:
June 30, June 30 1997 1996 ---- ---- Balance at January 1 $32,887,407 26,623,138 Less reinsurance recoverable on unpaid loss and loss adjustment expenses 7,099,463 1,162,495 ----------- ---------- 25,787,944 25,460,643 Incurred related to: Current year 2,373,847 3,435,048 Prior year 172,672 789,608 ----------- ---------- Total incurred 2,546,519 4,224,656 ----------- ---------- Paid related to: Current year 375,041 857,052 Prior year 3,389,402 5,451,867 ----------- ---------- Total paid 3,764,443 6,308,919 ----------- ---------- 24,570,020 23,376,380 Plus reinsurance recoverable on unpaid loss and loss adjustment expenses 7,474,077 3,017,532 ----------- ---------- Balance at June 30 $32,044,097 26,393,912 =========== ==========
9 10 (4) FEDERAL INCOME TAXES The Company files a consolidated federal income tax return. Income tax expense (benefit) varies from the amount which would be provided by applying the federal income tax rates to income (loss) before income taxes. The following reconciles the expected income tax expense (benefit) using the federal statutory tax rate of 34% to the income tax expense (benefit) reported herein for the six months ended June 30, 1997 and 1996:
June 30, June 30, 1997 1996 ---- ---- Expected tax expense (benefit) using statutory rates $(84,375) 127,193 Other, net (11,684) (15,885) -------- ------- $(96,059) 111,308 ======== =======
Income taxes consist of the following at June 30, 1997 and 1996:
June 30, June 30, 1997 1996 ---- ---- Current expense $ - 65,390 Deferred expense (benefit) (96,059) 45,918 -------- -------- Income taxes $(96,059) $111,308 ======== ========
Deferred income taxes arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. The sources of these differences and the tax effect of each are as follows:
June 30, June 30, 1997 1996 ---- ---- Losses and loss adjustment expenses incurred for financial reporting purposes but not deductible for tax purposes $24,924 (87,073) Unearned premiums not deductible for tax purposes (55,028) 130,545 Deferred compensation (102,642) - Net operating loss carryforward 31,623 - Other, net 5,064 2,446 -------- ------ $(96,059) 45,918 ======== ======
10 11 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30, 1997 and December 31, 1996 are presented below:
June 30, December 31, 1997 1996 ---- ---- Deferred tax assets: Discounted unpaid loss reserves $1,828,295 1,853,219 Discounted unearned premium reserves 465,513 410,485 Investments adjusted to market value - 88,400 Deferred commissions payable 30,822 26,916 Deferred compensation 191,042 - Net operating loss carryforward 214,948 246,571 ---------- ---------- Total gross deferred tax assets 2,730,620 2,625,591 Less valuation allowance (400,000) (400,000) ---------- ---------- Net deferred tax assets 2,330,620 2,225,591 Deferred tax liabilities: Investments adjusted to market value (31,226) (85,758) Deferred acquisition costs (37,717) (28,747) Other (12,294) (12,294) ---------- ---------- Total gross deferred liabilities (81,237) (126,799) ---------- ---------- Net deferred tax asset $2,249,383 2,098,792 ========== ==========
The valuation allowance for deferred tax assets at June 30, 1997 was $400,000. Based on the Company's historical earnings, future expectations of adjusted taxable income and its ability to change its investment strategy, as well as reversing gross deferred tax liabilities, management believes it is more likely than not that the Company will fully realize the gross deferred tax assets less the valuation allowance. However, there can be no assurances that the Company will generate the necessary adjusted taxable income in any future period. (5) RECONCILIATION TO STATUTORY ACCOUNTING The Company's two wholly-owned insurance subsidiaries, Intermed Insurance Co. and Interlex Insurance Co., are required to file statutory financial statements with state regulatory authorities. Accounting principles used to prepare the statutory financial statements differ from financial statements prepared on the basis of generally accepted accounting principles. Reconciliations of statutory net income (loss), as determined using statutory accounting principles, to the amounts included in the accompanying consolidated financial statements for the six months ended June 30, 1997 and 1996 are as follows:
June 30, June 30, 1997 1996 ---- ---- Net income of insurance companies $76,382 402,306 Increase (decrease): Deferred policy acquisition costs 26,383 (49,600) Deferred income taxes 96,059 (45,918) Deferred compensation (301,887) - Other adjustments, net (49,042) (44,000) --------- ------- Net income (loss) as reported herein $(152,105) 262,788 ========= =======
11 12 Reconciliations of statutory capital and surplus, as determined using statutory accounting principles, to stockholders' equity included in the accompanying consolidated financial statements at June 30, 1997 and December 31, 1996 are as follows:
June 30, December 31, 1997 1996 ---- ---- Statutory capital and surplus of insurance companies $24,362,178 24,305,304 Stockholder's equity in non-insurance subsidiary 33,846 196,652 ----------- ----------- Combined capital and surplus 24,396,024 24,501,956 Increase (decrease): Deferred policy acquisition costs 110,933 84,550 Deferred income taxes 2,249,383 2,098,792 Net unrealized gain (loss) on investments booked at 81,883 166,473 market Deferred compensation 561,887 (260,000) Non-admitted assets and other adjustments, net 687,981 799,624 Consolidating eliminations and adjustments (6,956,351) (6,001,692) ----------- ----------- Stockholders' equity as reported herein 21,131,740 21,389,703 =========== ===========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis addresses the Company's financial condition at June 30, 1997 and results of operations for the three and six months ended June 30, 1997 and 1996. RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1997 Direct premiums written in the three months ended June 30, 1997 totaled $2.5 million, $164,000 or 6% below the prior year period. Results by line of business were:
THREE MONTHS ENDED JUNE 30 1997 1996 CHANGE ---- ---- ------ MEDICAL Direct premiums written $2,280,000 $2,574,000 -11.4% Premiums ceded to reinsurers 362,000 961,000 -62.3% ---------- ---------- ----- Net premiums written $1,918,000 1,613,000 18.9% LEGAL Direct premiums written $229,000 98,000 133.1% Premiums ceded to reinsurers 97,000 34,000 186.3% ---------- ---------- ----- Net premiums written $132,000 64,000 105.1%
Net premiums written were $2.0 million, $372,000 or 22% higher than the comparable period of 1996. The favorable variance in net premiums written was due to a $536,000 reduction in premiums ceded to reinsurers in the current period. The reduction was due to (a) completion of the conversion from claims-made to claims-paid coverages in 1996, which was covered by reinsurance, and (b) favorable loss experience in 1997. There was a $668,000 increase in the unearned premium reserve (UPR) in the three months ended June 30, 1997 compared to a $671,000 decrease in the prior year period. This $1.3 million variance was due in part to the increase in net premiums written in the 1997 period. Addition- 12 13 ally, the death, disability and retirement (DDR) reserve, a component of UPR, was reduced by $923,000 in the three months ended June 30, 1996 due to the claims paid conversion. The conversion was completed by the end of 1996. The DDR was increased in the three months ended June 30, 1997 by $358,000 due to an increase in the number of policyholders. Net investment income totaled $644,000 in the current year period versus $658,000 in the same period of 1996. The decline of $13,000, or 2%, was primarily due to a change in the mix of short- and long-term investments between periods. Sales, marketing and other underwriting expenses were approximately $824,000 in the 1997 period compared to $574,000 in the same period of 1996. The increase of $250,000, or 43%, was primarily attributable to an increase in the Home Office marketing staff, the establishment of a sales office in Austin, Texas and accrual of certain post-retirement benefits. The expense ratio in the current year period was 33% compared to 21% in the three months ended June 30, 1996 due to the increase in expenses without a corresponding increase in premiums written. Losses and loss adjustment expenses in the quarter ended June 30, 1997 totaled $951,000 compared to $2.3 million in the same period in 1996. The loss ratio in the three months ended June 30, 1997 was 69% compared to 99% in the prior year period. Fewer claims were settled in the 1997 period at a lower average cost than in the prior year period:
THREE MONTHS ENDED: JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- Claims settled with indemnity 8 16 Average indemnity paid $100,837 $174,885
The $1.4 million reduction in losses and loss adjustment expenses in the 1997 period compared to the same period of 1996 was the primary reason for the $1.1 million reduction in total losses and expenses. Income before income taxes was $251,000 in the 1997 period compared to $110,000 in the comparable period of 1996. Net income for the three month period ended June 30, 1997 was $173,000 or $.09 per share compared to $89,000 or $.04 per share in the same period of 1996. Favorable claim experience in the 1997 period was the primary reason for the improvement over the comparable period of 1996. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1997 Direct premiums written totaled $4.7 million in the first six months of 1997 compared to $4.2 million in the comparable period of 1996. The $499,000, or 12%, increase was due to increased writing of legal malpractice insurance in the States of Missouri and Kansas and sales of medical malpractice insurance in the State of Texas through Intermedical of Texas, a physician-sponsored purchasing group located in Austin, Texas. Medical malpractice premiums in the State of Missouri were approximately 23% below the prior year period. Results by line of business were: 13 14
SIX MONTHS ENDED JUNE 30 1997 1996 CHANGE ---- ---- ------ MEDICAL Direct premiums written $4,155,000 3,978,000 4.4% Premiums ceded to reinsurers 860,000 1,400,000 -38.6% ---------- --------- ------ Net premiums written $3,295,000 2,578,000 27.8% LEGAL Direct premiums written $ 546,000 223,000 144.8% Premiums ceded to reinsurers 246,000 85,000 189.4% ---------- --------- ------ Net premiums written $ 300,000 138,000 116.8%
Premiums ceded to reinsurers in the six month period ended June 30, 1997 were $1.1 million, a decrease of $379,000, or 25%, from the prior year period. The reduction was due to (a) completion of the conversion from claims-made to claims-paid coverages in 1996, which was covered by reinsurance, and (b) favorable loss experience in 1997. Net premiums written in the six month period ended June 30, 1997 were $3.6 million, an increase of $878,000 or 32% over the prior year period. The favorable increase was due to the increase of $499,000 in direct premiums written and the decrease of $379,000 in premiums ceded to reinsurers. There was an $809,000 increase in the unearned premium reserve (UPR) in the six months ended June 30, 1997 compared to a $1.9 million decrease in the prior year period. This $2.7 million variance was due in part to an increase in premiums written in the 1997 period. Additionally, the death, disability and retirement (DDR) reserve, a component of UPR, was reduced by $1.3 million in the six months ended June 30, 1996 due to the claims paid conversion. The conversion was completed by the end of 1996. The DDR was increased in the six months ended June 30, 1997 by $358,000 due to an increase in the number of policyholders. Net premiums earned in the six months ended June 30, 1997 were $2.8 million compared to $4.6 million in the prior year period. The $809,000 increase in the UPR in the 1997 period contrasted to a $1.9 million decrease in the 1996 period accounted for the decrease in net premiums earned. Net investment income was $1.3 million in both the 1997 and 1996 periods. The increase in sales, marketing and other underwriting expenses, $1.8 million in 1997 versus $1.4 million in the comparable period of 1996, was primarily due to expansion of the Home Office marketing staff, the establishment of a sales office in Austin, Texas and accrual of certain post-retirement benefits. The expense ratio in the six months ended June 30, 1997 was 38%, compared to 33% in the prior year period. Losses and loss adjustment expenses were $2.5 million in the six month period ended June 30, 1997 compared to $4.2 million in the prior year period. 14 15 Fewer claims were settled in the 1997 period at a lower average cost than in the prior year period:
SIX MONTHS ENDED: JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- Claims settled with indemnity 18 30 Average indemnity paid $123,671 $157,489
The loss ratio in the six months ended June 30, 1997 and 1996 was 91%. Total losses and expenses were $4.3 million in 1997 compared to $5.6 million in 1996 due primarily to the improvement in losses and loss adjustment expenses. The Company incurred a loss before income taxes of $248,000 in the current year period compared to a gain of $374,000 in the prior year period. A tax benefit of $96,000 in the 1997 period reduced the net loss to $152,000 or $.08 per share. A federal income tax expense of $111,000 in the 1996 period reduced net income to $263,000 or $.13 per share in 1996. FINANCIAL CONDITION ASSETS: Total assets declined $1.5 million in the six months ended June 30, 1997, from a $62.6 million at December 31, 1996 to $61.1 million. Cash and invested assets declined $1.4 million in the period due primarily to a negative cash flow from operations of $1.2 million. Reasons for the negative cash flow are discussed below under Liquidity and Capital Resources. Approximately $15 million currently held in cash and cash equivalents will be re-invested long-term when interest rates improve above their current level. Future investments will be concentrated in one through five year maturities. There was an unrealized gain of $82,000 in the bond portfolio at June 30, 1997 compared to an unrealized gain of $252,000 at prior year end. The Company's investment in common stock increased in market value from $340 at prior year end to $10,239 at June 30, 1997. The increase was due to an exchange of stock in one company for stock in the company which acquired it. Changes in unrealized gains are reflected in the Stockholders' Equity section of the Balance Sheet. LIABILITIES Total liabilities declined $1.3 million in the six months ended June 30, 1997 due primarily to settlement of the reinsurance premium that was payable at prior year end. The reserve for losses and loss adjustment expense declined $843,000 due to settlement of a number of prior year claims during the current period. The unearned premium reserve increased $770,000 during the six months ended June 30, 1997 due to the increase in net premiums written in the current year period. 15 16 EQUITY Stockholders' equity declined $258,000 in the six month period ended June 30, 1997 due to a net loss of $152,000 and a reduction in unrealized gains of $106,000. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations in the six months ended June 30, 1997 was a negative $1.2 million compared to a negative $3.8 million in the prior year period. The $2.6 million improvement in cash flow was primarily the result of the $2.2 million reduction in paid losses and loss adjustment expense in the 1997 period. The Company anticipates that net investment income of $2.6 million in 1997 and a cash position of $17.2 million at June 30, 1997 will provide sufficient liquidity to fund operations without the necessity of liquidating investments or obtaining alternative financing to meet cash requirements. PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION The FASB has issued Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share," which is effective for periods ending after December 15, 1997, including interim periods. SFAS 128 establishes standards for computing and presenting earnings per share and applies to all entities with publicly held common stock or potential common stock. The Company will implement the statement in the required period. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: See Exhibit Index (b) Reports on Form 8-K: None 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE TENERE GROUP, INC. (Registrant) August 12, 1997 /s/ J D Williams - --------------- ------------------------------ Date Joseph D. Williams, CPA Vice President - Finance Chief Financial Officer and Principal Accounting Officer 17 18 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., filed as Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10.2 Lease Agreement, dated December 7, 1994, by and between Georgetown Square II, Ltd. and Insurance Services, Inc., filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.3 Medical Practitioners' Liability Primary Excess of Loss Reinsurance Contract, dated October 1, 1993, by and between RCA Mutual Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.4 Addendum No. 1 to Medical Practitioners' Liability Primary Excess of Loss Reinsurance Contract, dated February 1, 1995, by and between RCA Mutual Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.5 Addendum No. 2 to Medical Practitioners' Liability Primary Excess of Loss Reinsurance Contract, effective April 27, 1995, by and between RCA Mutual Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.6 Reinsurance Cover Note: 95/1146/RM to Medical Practitioners' Liability Primary Excess of Loss Reinsurance Contract, dated October 16, 1995, by and between RCA Mutual Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference.
18 19
EXHIBIT 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, 1995, by and between Interlex Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.11 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.12 Prior Agreement Excess of Loss Reinsurance Contract, commencing July 1, 1995, by and between Interlex Insurance Company and Certain Reinsurers of Lloyd's of London, filed as Exhibit 10.12 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1995, is incorporated herein by reference. 10.13 Draft Reinsurance Slip by and between Intermed Insurance Company and American Re-Insurance Company filed as Exhibit 10.13 to the Registrant's Quarterly Report on Form 10-Q for the three months ended March 31, 1996, is incorporated herein by reference. 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. 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.
19 20
EXHIBIT NO. DESCRIPTION - -- ----------- 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, filed as Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 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, filed as Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 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, filed as Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 10.24 Amendment No. 1 to Employment Agreement dated February 28, 1997, between The Tenere Group, Inc. and Clifton R. Stepp, Vice President-Marketing, filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 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, filed as Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 27 Financial Data Schedules
20 EX-27 2 FINANCIAL DATA SCHEDULE
7 3-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 27,722,267 0 0 10,239 0 0 27,732,506 17,168,365 0 110,933 61,052,037 32,044,097 7,070,186 0 0 0 0 0 19,998 21,111,742 61,052,037 2,784,826 1,285,696 0 0 2,546,519 788,019 984,148 (248,164) (96,059) (152,105) 0 0 0 (152,105) (.08) (.08) 0 0 0 0 0 0 0
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