1
EXHIBIT 13
THE TENERE GROUP, INC.
PROFESSIONAL LIABILITY INSURERS
Intermed Insurance Co. Interlex Insurance Co.
Insurance Services, Inc.
[LOGO]
1996 ANNUAL REPORT
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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.
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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.
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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
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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
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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.
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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.
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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
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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
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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
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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.
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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.
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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.
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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
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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.
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