SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT - 1934

For the Fiscal Year Ended December 31, 1997
Commission File Number 0-21988

                                 Kaye Group Inc.
             (exact name of registrant as specified in its charter)

           Delaware                                        13-3719772
(State or Other Jurisdiction of                (IRS Employer Identification No.)
Incorporation or Organization)

                    122 East 42nd Street, New York, NY 10168
              (Address and Zip Code of Principal Executive Offices)

                  Registrant's Telephone Number: (212) 338-2100

Securities Registered Under Section 12(b) of the Exchange Act:

    Title of Each Class                                      Name of Exchange
    -------------------                                      ----------------
Common Stock $.01 par value                               NASDAQ National Market

Securities Registered Under Section 12(g) of the Exchange Act:

                                      None

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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___

     Check  if  disclosure  of  delinquent  filers  in  response  to Item 405 of
Regulation  S-K is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best  of  registrant's  knowledge  in  definitive  proxy  or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. _X_


<PAGE>


     The  aggregate  market  value  of the  registrant's  common  stock  held by
non-affiliates  of  the  registrant  as of  March  13,  1998  was  approximately
$16,331,392.

     Number of shares of the registrant's  common stock  outstanding as of March
13, 1998: 8,474,435.

                       DOCUMENTS INCORPORATED BY REFERENCE

     The registrant's  definitive proxy statement,  which will be filed with the
Securities  and  Exchange  Commission  within 120 days after  December  31, 1997
(incorporated by reference under Part III).

     Total number of pages including cover and under pages 85.

     Index to Exhibits is on page 37.


                                       2
<PAGE>


                                 KAYE GROUP INC.

                                TABLE OF CONTENTS

Part I

Item 1.  Business                                                            4

Item 2.  Properties                                                          18

Item 3.  Legal Proceedings                                                   18

Item 4.  Submission of Matters to a Vote of Security Holders                 19


Part II

Item 5.  Market for Common Equity and Related
         Stockholder Matters                                                 20

Item 6.  Selected Financial Data                                             21

Item 7.  Management's Discussion and Analysis
         of Financial Condition and Results of Operations                    23

Item 8.  Financial Statements and Supplementary Data                         36

Item 9.  Changes in and Disagreements with Accountants
         on Accounting and Financial Disclosure                              36


Part III

Item 10. Directors and Executive Officers of the Registrant                  36

Item 11. Executive Compensation                                              36

Item 12. Security Ownership of Certain
         Beneficial Owners and Management                                    36

Item 13. Certain Relationships and Related Transactions                      36



Part IV

Item 14. Exhibits, Financial Statement Schedules
         and  Reports on Form 8-K                                            37

Financial Statements                                                         F-1



                                       3
<PAGE>


Item 1. Business

Business Segments

     Kaye Group Inc. (the "Company") a Delaware  corporation,  formerly Old Lyme
Holding  Corporation  ("Holding"),  is a  holding  company  which,  through  its
subsidiaries,  is engaged in a broad range of insurance brokerage,  underwriting
and related activities.  The Company operates in two insurance business segments
-  the  Insurance  Brokerage  Companies  Operations  ("Brokerage   Operations"),
comprised of the Retail Brokerage  Business and the Program Brokerage  Business,
and the Property and Casualty Companies Operations.

     In addition, Corporate Operations include those activities that benefit the
Company in its  entirety  and cannot be  specifically  identified  to either the
Brokerage  Operations or the Property and Casualty  Companies  Operations.  Such
activities  include  debt  servicing  and  public  company  expenses,  including
investor relations costs.

     The Company's  activities  are  conducted in New York City,  and in offices
located in the states of California, Connecticut and Rhode Island.

Insurance Brokerage Companies Operations

     The Retail  Brokerage  Business  operates  insurance  brokerage  businesses
through four subsidiaries of the Company, the "Retail Brokerage  Companies".  It
offers commercial clients a full range of insurance brokerage services including
procurement of property/casualty insurance, risk management consulting, bonding,
insurance  coverage loss  prevention  engineering,  and group  employee  benefit
consulting services.  In addition,  personal lines and life and health insurance
coverage are placed on behalf of individual clients.

     The Retail Brokerage Business' primary strategy is to service middle market
companies  and  organizations  just below the  Fortune 500 level for which other
national  brokers  intensely  compete.  Within  this middle  market,  the Retail
Brokerage Business has developed particular expertise and knowledge of the risks
facing a number of industry sectors including health care, real estate,  retail,
manufacturing, churches, law firms, homes for the aged and fine arts.

     During 1997, the Retail Brokerage  Business serviced  approximately  10,000
insureds.  The  Retail  Brokerage  Business  is  compensated  for  its  services
primarily in the form of commissions paid by insurance companies. The commission
is usually a percentage  of the premium paid by the  insured.  Commission  rates
depend upon the type of insurance,  the particular  insurance  company,  and the
role in which the Retail Brokerage  Business acts. In some cases a commission is
shared  with other  agents or brokers  who have  acted  jointly  with the Retail
Brokerage  Business in connection  with the  transaction.  The Retail  Brokerage
Business may also receive from an insurance company a contingent



                                       4
<PAGE>


commission that is generally based on the  profitability  and volume of business
placed with it by the Retail Brokerage Business over a given period of time. The
Retail  Brokerage  Business may also receive fees in connection  with consulting
services relating to the marketing of insurance.

     Program Brokerage  Corporation or "PBC" (the "Program Brokerage  Business")
is a  subsidiary  of the Company and  operates a wholesale  insurance  brokerage
business which offers retail insurance agents and brokers  innovative  solutions
to the twin  insurance  problems  of price  and  availability  of  coverage.  It
accomplishes  this by organizing pools of similar risks into specially  designed
Alternative  Risk  Transfer   ("A.R.T.")   programs  for  affinity  groups  (the
"Programs").

     The Program Brokerage  Business is one of the leaders in the application of
purchasing groups in the commercial insurance market.  Approximately  two-thirds
of PBC's  premium  volume is generated by  approximately  400  unrelated  retail
insurance agents and brokers serving  approximately  4,300 insureds during 1997.
The  remaining   one-third  is  derived  from  the  Retail  Brokerage  Business.
Approximately  one-half of PBC's premium volume is directly or indirectly placed
with two affiliates,  Old Lyme Insurance Company of Rhode Island,  Inc. ("OLRI")
and Old Lyme Insurance Company, Ltd. (Bermuda) ("OLB").

Property and Casualty Companies Operations

     The Company  conducts  its  property  and  casualty  underwriting  business
through two insurance company subsidiaries (the "Insurance Companies"), OLRI and
OLB. OLRI is a property and casualty  insurance company licensed in Rhode Island
and  eligible as a surplus  lines  insurer in New York and New Jersey.  OLB is a
property and casualty insurance company organized and licensed under the laws of
Bermuda.  In states where the Insurance  Companies are not admitted  insurers or
surplus lines insurers, the Insurance Companies underwrite risks through various
reinsurance agreements.

     The Insurance Companies  underwrite property risks (loss or physical damage
to property) and OLRI  underwrites  casualty risks (legal liability for personal
injury or  damaged  property  of others)  for  insureds  in the  United  States.
Insurance is sold principally  through the Programs marketed by PBC which insure
various   types  of   businesses   and   properties   that  have   similar  risk
characteristics,  such as apartments, condominiums,  cooperatives,  restaurants,
building  maintenance  companies,  retail stores,  funeral homes and pharmacies,
among others.

     The Insurance  Companies'  strategy is to underwrite only the first "layer"
of the property and casualty insurance provided under the Programs.  Exposure to
individual insureds on individual losses is thereby generally limited to between
$1,000 and $25,000 per claim  (inclusive of allocated loss expenses),  depending
on the Program.  Under the Programs,  the Insurance Companies' policies are sold
in  conjunction  with  policies  issued by  unaffiliated  Program  insurers that
provide coverage for losses above the first layer of



                                       5
<PAGE>


risk  underwritten  by the  Insurance  Companies.  In  addition,  the  Insurance
Companies have issued policies on a selected basis with limits up to $1,000,000,
retaining the first $50,000 of exposure and reinsuring the remaining limits with
an unaffiliated  reinsurer,  National Reinsurance Corporation (A.M. Best Company
("A.M.Best"), a major rating agency for insurers, rating of A+).

     The  Property   and   Casualty   Companies   Operations   includes   Claims
Administration  Corporation  ("CAC")  a  subsidiary  of  the  Company  which  is
responsible for the  administration  of a large majority of the claims submitted
to the Insurance Companies. The administration of claims includes investigation,
engagement of legal counsel,  approval of settlements and the making of payments
to, or on behalf of insureds.  CAC also provide claims administration service to
the unaffiliated Program insurers for a fee.

     CAC is party to an  agreement  with an  unaffiliated  company,  whereby  it
agrees to acquire  certain retail service  warranty  contract  obligations for a
fee. CAC earns approximately 17% of its revenue pursuant to this agreement.

History of the Company

1952 to 1993

     Prior to the initial public offering  ("IPO") of Holding's  common stock in
August 1993, the Retail Brokerage  Companies,  PBC, the Insurance  Companies and
CAC were part of a single  combined  insurance and brokerage  business  owned by
Kaye  International  L.P.  ("KILP") and certain  individuals.  KILP, via several
stock and asset acquisitions and mergers, traces its origins back to 1952. Prior
to the IPO, KILP developed the concept of the  "deductible"  primary  "layer" of
insurance coverage  administered  through Programs.  This business was conducted
through the  Insurance  Companies.  In August  1993,  after years of  successful
growth, the Insurance  Companies,  PBC and CAC were organized under Holding,  of
which approximately 33% was sold to the public.

     At the time of the IPO,  management of Holding believed that its historical
marketing  efforts and ability to expand its business were hampered by its small
capital  base and its lack of a letter  rating  from  A.M.  Best.  Approximately
$13,000,000 of the proceeds of the IPO were  contributed to OLRI to increase its
capital and surplus to permit it to (i) increase its underwriting  capabilities,
(ii)  obtain a letter  rating  from A.M.  Best,  and (iii)  enable  OLRI to meet
certain regulatory capital and surplus requirements. As a result of the proceeds
being contributed,  OLRI significantly increased its underwriting capacity. This
enabled it to ultimately  obtain an A.M. Best rating of A-(Excellent)  (which it
currently maintains) and meet all regulatory capital and surplus requirements.

     The  business of OLRI  however  depends on the creation of new Programs and
the addition of insureds into existing  Programs.  OLRI relies on PBC to develop
new  Programs.  PBC is also  OLRI's most  important  and  significant  producing
broker,  historically  producing  almost  all of the  Insurance  Companies'  net
premiums earned.



                                       6
<PAGE>


1994

     In 1994, the Retail  Brokerage  Business  completed the  integration of its
1992  acquisition  of  Amalgamated  Programs  Corporation  and related  entities
("Amalgamated")  and  continued  to downsize to adjust to the  continuing  "soft
market" in property and casualty premium rates. At the time, the officers of the
general  partners  of  KILP  (which  included  members  of  Holding's  Board  of
Directors)  concluded that the  combination of Holding and the Retail  Brokerage
Business would be advantageous for both OLRI and KILP. This conclusion was based
on three factors:  (a) improved  operating  results derived from the Amalgamated
integration  and "soft  market"  downsizing,  (b) the  improved  outlook for the
Retail Brokerage  Business and (c) the fact that the Retail  Brokerage  Business
accounted for approximately one-half of PBC's premium volume.

     In evaluating the combination, Holding's Board of Directors also considered
the fact that the  market  for  Holding's  common  stock  following  the IPO was
relatively  illiquid.  The Board  believed  that the  combination  of the Retail
Brokerage  Business with Holding would  increase the size of Holding,  make it a
more financially  diverse company and potentially  attract a broader spectrum of
investors.

1995

     The  combination  ("Transaction")  was  effective  October  2, 1995 and was
accounted for as a transfer and exchange between companies under common control.
Accordingly,  the assets and liabilities of the Retail  Brokerage  Business were
combined with those of Holding at their historical cost in a manner similar to a
"pooling of interests",  (See Note 2 to the consolidated financial statements of
the Company). The combination was accomplished as follows:

     1. Holding  transferred to then recently formed Kaye Holding Corp.  ("KHC")
all of the  outstanding  stock  of the  Insurance  Companies  and its two  other
subsidiaries, PBC and CAC and its other assets in exchange for (i) 82,400 shares
of KHC common  stock,  representing  82.4% of the total  outstanding  KHC common
stock, and (ii) the assumption by KHC of certain of Holding's liabilities.

     2.  KILP  transferred  all of its  interest  in  the  limited  partnerships
conducting the Retail Brokerage Business (the "Retail Partnerships") and certain
related  assets to KHC in exchange  for (i) 17,200  shares of KHC common  stock,
representing  17.2% of the total  outstanding  KHC  common  stock,  and (ii) the
assumption by KHC of certain KILP liabilities.

     3. Certain  individuals  transferred  to KHC all of their  interests in the
corporate  general partners of the Retail  Partnerships  (the "Retail  Brokerage
Companies") in exchange for 400 shares of KHC common stock, representing 0.4% of
the total outstanding KHC common stock.



                                       7
<PAGE>


     4. KHC contributed  its interests in the Retail  Partnerships to the Retail
Brokerage Companies thereby causing the dissolution of the Retail  Partnerships.
As a result, the Retail Brokerage  Companies,  as a group, own all of the assets
and are subject to all of the liabilities, of the Retail Brokerage Business.

1997

     On December 30, 1997,  stockholders of the Company approved a restructuring
that merged KHC into the Company.  This eliminated the minority  interest in KHC
held by KILP  and  simplified  the  corporate  structure  and  reporting  of the
Company.

The chart below reflects the current structure of the Company:



---------------                                                 ----------------
     KILP,
related entity                                                       Public
      and
  individuals
---------------                                                 ----------------
               72.9%                                       27.1%
                                 ---------------
                                 KAYE GROUP INC.
                                 ---------------

              100.0%                                      100.0%
---------------------------------         --------------------------------------
Insurance Brokerage Companies:            Property and Casualty Companies:
  Kaye Insurance Associates, Inc.           Old Lyme Insurance Company of Rhode
  Kaye Corporation of Connecticut             Island, Inc.
  Kaye-Western Insurance & Risk             Old Lyme Insurance Company, Ltd. and
    Services, Inc.                          Park Brokerage, Ltd.
  Kaye Services Corp.                       Claims Administration Corporation
  Program Brokerage Corporation
---------------------------------         --------------------------------------


                                       8
<PAGE>


Affinity Group Marketing

     Affinity group marketing (including A.R.T. programs) contributes 67% of the
Company's 1997 consolidated revenues, excluding investment income.

Retail Brokerage Operations

     The Retail  Brokerage  Business  generally  services middle market entities
just  below  the  Fortune  500  level.  Within  this  market,  it has  developed
particular  expertise  and  knowledge  of the risks  facing a number of industry
sectors.  Based on this expertise and knowledge,  the Retail Brokerage  Business
has  established  programs for hospitals and  physicians,  churches,  law firms,
mental health practitioners, homes for the aged and fine arts, among others.

     Approximately 38% of the Retail Brokerage Business' 1997 revenues relate to
such affinity  groups.  Of this 38%,  approximately  90% of the related  premium
volume is placed with unrelated  insurance markets.  The remaining 10% is placed
with PBC. (This 10% represents approximately one-third of PBC's premium volume.)
No  premiums  are placed  with the  Insurance  Companies  directly by the Retail
Brokerage Business.

PBC and Insurance Companies Operations

     PBC designs A.R.T.  programs for affinity  groups and markets via a network
of retail insurance  brokers,  including the Retail Brokerage  Companies.  PBC's
distribution  network  includes  approximately  400 unrelated  retail agents and
brokers.  These  unrelated  agents and brokers  account for  two-thirds of PBC's
premium volume. The Insurance Companies underwrite a portion of the Programs and
only underwrite programs designed by PBC.

     During the past five years the  original  1:2 ratio of  insurance  premiums
produced by  unrelated  retail  brokers to  insurance  premiums  produced by the
Retail Brokerage Companies (the "Production Ratio"), respectively, has reversed.
But production from both sources has grown.  PBC's total premium volume for 1997
of $54,100,000  has increased 28% since 1995. It is expected that the Production
Ratio will approach 3:1 during 1998,  consistent  with PBC's strategy of growing
the unrelated retail agents and broker distribution network.

     Once PBC establishes an A.R.T.  program, it acts as the placing broker with
respect  to  insurance  under the  Programs.  In such a role,  PBC is a party to
agreements  with  various  unaffiliated   insurers  as  well  as  the  Insurance
Companies.

     PBC receives  commissions from the Insurance Companies and the unaffiliated
Program insurers.  Pursuant to subbrokerage agreements,  PBC pays commissions to
retail  brokers  based upon all  business  produced  by such  agents and brokers
(including business placed by PBC with the unaffiliated Program insurers).



                                       9
<PAGE>


     The Insurance  Companies'  strategy in most cases is to underwrite only the
first "layer" per claim (the  deductible  range)  (inclusive  of allocated  loss
expenses) of the property and  casualty  insurance  provided  under the programs
developed by PBC. This limits its exposure to individual  insureds on individual
losses to the deductible range depending on the Program. Under the Programs, the
Insurance  Companies'  policies are sold in conjunction  with policies issued by
unaffiliated  insurers that provide  coverage for losses above the first "layer"
of risk underwritten by the Insurance Companies. The Insurance Companies believe
that their rates for the first "layer" of risk,  when combined with the rates of
such other unrelated  insurers for the coverage above such layer,  are generally
competitive  with the rates  that  other  insurance  companies  would  charge to
provide comparable insurance coverage.

     The Insurance  Companies  currently  participate in 14 A.R.T programs.  The
three major programs are as follows:

     1. The Residential Real Estate Program,  started in 1990, provides property
and casualty  insurance for residential real estate including rental apartments,
cooperatives, and condominiums.  Policies protect the owner from property losses
and casualty claims,  such as claims brought by a tenant or member of the public
injured on the  premises.  This program is offered  principally  in the New York
City area and has approximately 1,000 insureds.

     2. The Restaurant  Program,  started in 1985, insures  restaurants  against
casualty claims (most  typically  brought by an injured  restaurant  patron) and
property  losses.  Many of the restaurants  that participate in this Program are
"white  tablecloth"  restaurants.  The Restaurant  Program has approximately 900
insureds.

     3. The Real Estate Umbrella Program insures residential and commercial real
estate owners against  certain types of casualty  losses.  Insureds are provided
with an extra  level of  protection  in  conjunction  with a  standard  umbrella
policy. Coverage is provided for losses that are included within the broad terms
of the policy, but are excluded under the general casualty policy.  This Program
also provides  high umbrella  casualty  limits  primarily  provided by unrelated
Program insurance companies to individual real estate owners. OLRI has a maximum
exposure  of  $10,000  per  claim.   The  Real  Estate   Umbrella   Program  has
approximately 1,400 insureds.

     The other Programs  include the  Comprehensive  Office Program,  the Retail
Stores Liability  Program,  the Catalog Showroom Property Program,  the Building
Maintenance  Contractors  Program,  the Contractors  Umbrella Program,  the Drug
Store Program, the Funeral Directors Program, the Bars,  Restaurants and Taverns
Program,  the New England Restaurant Program, the Waste Haulers Program, and the
Home Owner Program. The other Programs have approximately 1,000 insureds.



                                       10
<PAGE>


     The Home Owner Program  provides  various types of property  insurance to a
group of affiliated  home owners.  Limits for certain  coverage  offered by OLRI
under  this  program  are as  high  as  $100,000.  This  program  accounted  for
approximately 2% of net premiums earned in 1997.

     The  Restaurant  Program,  Residential  Real Estate Program and Real Estate
Umbrella Program  accounted for  approximately 87% of the net premiums earned by
the Insurance  Companies in 1997. The following  table sets forth the percentage
of net premiums  earned  attributable  to the  programs  and all other  business
during the years ended December 31, 1997, 1996 and 1995.

                                                         Net Premiums Earned
                                                      Years Ended December 31,
                                                    1997        1996        1995
                                                    ----        ----        ----
Residential Real Estate ....................         46%         49%         40%
Restaurant Program .........................         25%         24%         32%
Real Estate Umbrella Program ...............         16%         14%         15%
Other ......................................         13%         13%         13%
                                                    ---         ---         ---
                                                    100%        100%        100%
                                                    ===         ===         ===

Acquisitions

     During 1997, the Company acquired certain assets and liabilities of Western
Insurance Associates, Inc. ("Western").  This acquisition was accounted for as a
purchase and achieved  critical  mass for the  brokerage  operations  located in
Pasadena, California. In addition, this acquisition was synergistic as Western's
competitive  advantage is in the  production of business  from affinity  groups,
including churches and homes for the aged.

     The  Company  believes  that  the  effect  of  past,   present  and  future
acquisitions  will be to expand  its  insurance  program  services  to  affinity
groups, thus providing earnings to all operations.

     The  Company  is  considering  and  intends to  consider  from time to time
additional  acquisitions  and divestitures on terms it deems consistent with its
strategies.  The Company at this time is engaged in preliminary discussions with
a number of  candidates  for  possible  future  acquisitions  but has not signed
contracts  or  agreements  in  principle  to make  additional  acquisitions.  No
assurances can be given that any additional acquisitions or divestitures will be
completed, or if completed, will be advantageous to the Company.



                                       11
<PAGE>


Seasonality

     The  Brokerage  Operations'  revenues  vary  significantly  from quarter to
quarter as a result of the timing of policy renewals and their related billings.
This is due to the revenue  recognition  method for brokerage  commissions which
requires  that a full year's  commissions  be  recognized  immediately  upon the
billing  date  of the  business.  However,  premium  revenues  of the  Insurance
Companies are  recognized  ratably over the term of the related  policies.  As a
result,  there is little  variation  from quarter to quarter in the Property and
Casualty Companies Operations revenues.

     Consolidated  revenues  by quarter  for 1997,  1996 and 1995 were earned as
follows.  Amounts  shown  represent  a  percentage  of  the  related  full  year
consolidated revenues.

                                         1997        1996        1995
                                         ----        ----        ----
     First Quarter                        22%         22%         23%
     Second Quarter                       23%         22%         21%
     Third Quarter                        28%         28%         25%
     Fourth Quarter                       27%         28%         31%

Competition

     The  Company is the 17th  largest  insurance  broker in the  United  States
according to "Business Insurance", a leading insurance industry publication.  It
operates in a highly  competitive  industry and faces  competition from regional
brokers, regional offices of worldwide brokers and insurers.

     The  insurance  brokerage  business  is  highly  competitive.  The  Company
believes that it is well  positioned  to compete  within its  designated  market
because of the  expertise  and  knowledge it has  developed in servicing  middle
market companies,  the Programs it has developed and the proprietary database of
affinity group underwriting and claims information it has developed.

     Many  insurance  companies  which compete with OLRI have a higher A.M. Best
-rating  (OLRI  is  rated  A-(Excellent)),  and  are  larger  and  have  greater
financial,  marketing and  management  resources  than the Insurance  Companies.
Competition  is based on many factors,  including  perceived  overall  financial
strength of the insurer, premiums charged, policy terms and conditions, services
offered,  reputation and experience. Due to its size, management and operational
flexibility, the Company can respond quickly to, and take advantage of, changing
circumstances encountered in the marketplace.


                                       12
<PAGE>


     In the event that admitted  insurers  (including the  unaffiliated  Program
insurers)  begin to offer the coverage in New York which the Company offers as a
surplus  lines  insurer,  it is  possible  that OLRI may be  unable  to  receive
placements on a surplus  lines basis,  because  brokers are  generally  required
first to obtain three  "declinations"  from  admitted  carriers  before they can
offer  the  business  to a  surplus  lines  underwriter.  In  addition,  in soft
insurance  markets,  other insurance  companies may be more willing to offer low
deductibles  which cover the first layer of risk at prices  competitive  with or
lower than those under the Programs.

Ceded Reinsurance

     OLRI has  from  time to time  obtained  reinsurance  for  portions  of,  or
specific  risks  under,  the first  layer of risks  underwritten  by OLRI.  Such
reinsurance  is not and has not  been  material  to OLRI.  Reinsurance  has been
placed with National Reinsurance Corporation,  Transatlantic Reinsurance Company
and USF Reinsurance Company, which are rated A or better by A.M. Best . However,
if reinsurance  should become more widely available at economical  prices,  OLRI
may  increase  the  amount  of  reinsurance  it  purchases  (see  Note 13 to the
consolidated financial statements of the Company).

Losses and Loss Expenses

     The  Insurance  Companies  are directly  liable for losses and loss expense
payments  under the terms of insurance  policies that they write,  and under the
reinsurance agreements to which they are party. In many cases, several years may
elapse  between the  occurrence of an insured loss, the reporting of the loss to
the Insurance  Companies and the Insurance  Companies  payment of that loss. The
Insurance  Companies  reflect their  liability  for the ultimate  payment of all
incurred  losses  and loss  expenses  by  establishing  loss  and  loss  expense
reserves,  which are balance sheet liabilities  representing estimates of future
amounts needed to pay claims and related expenses with respect to insured events
that have occurred.

     When a claim involving a probable loss is reported, the Insurance Companies
establish a loss reserve for the estimated  amount of the  Insurance  Companies'
ultimate  loss and loss  expense  payments.  The  estimate  reflects an informed
judgment  based  on  established  reserving  practices  and the  experience  and
knowledge of CAC's claims examiners regarding the nature and value of the claim,
as well as the  estimated  expense of settling  the claim,  including  legal and
other fees, and general expenses of administering the claims adjustment process.
The Insurance Companies also establish reserves on an aggregate basis to provide
for  losses  incurred  but not  reported  ("IBNR  reserves"),  as well as future
developments  on losses  reported to the Insurance  Companies.  The amount of an
insurer's  incurred  losses in a given period is determined by adding losses and
loss expenses paid during the period to case loss and loss expense  reserves and
IBNR reserves  (collectively "loss reserves") at the end of the period, and then
subtracting loss reserves existing at the beginning of the period.



                                       13
<PAGE>


     As  part  of  the  reserving  process,  historical  data  is  reviewed  and
consideration is given to the anticipated  effect of various factors,  including
anticipated  legal  developments,  changes in social  attitudes,  inflation  and
economic  conditions.  Reserve  amounts are  necessarily  based on  Management's
estimates,  and as other data becomes available and is reviewed, these estimates
are revised, resulting in increases or decreases to existing reserves.

     OLRI  receives  claims  related to lead paint  exposures  it insures  under
various Residential Real Estate Programs.  There are uncertainties in estimating
the  amount  of  reserves  due to  factors  including:  difficulty  in  properly
allocating responsibility and/or liability for the lead paint exposure;  changes
in the underlying laws and the judicial  interpretation of those laws; questions
regarding  the  interpretation  and  application  of insurance  and  reinsurance
coverage.  OLRI has reserves established for these claims on a case basis and an
incurred but not reported basis. The reserves  provided are established based on
Management's estimate of ultimate liabilities. However, due to the nature of the
exposures,  such  reserves  cannot be, and are not  established  using  standard
actuarial techniques.

     To further  review the adequacy of the reserves,  the  Insurance  Companies
engage  independent  actuarial  consultants  to perform annual case and ultimate
loss reserve analysis.

     The  following  table  sets  forth a  reconciliation  of the  change in the
reserves for  outstanding  losses and loss  expenses,  including paid losses and
loss expenses, for each year in the three year period ended December 31, 1997.

                                                   Years Ended December 31,
                                                   ------------------------
                                                  1997        1996       1995
                                                  ----        ----       ----
                                                         (in thousands)

Balance at January 1,                           $ 15,227    $ 12,671   $ 14,118
         Less reinsurance recoverables              (882)
                                                --------    --------   --------
         Net balance                              14,345      12,671     14,118
                                                --------    --------   --------

Incurred related to:
         Current year                              8,824       6,621      4,986
         Prior year                                 (108)        415       (136)
                                                --------    --------   --------
         Total incurred                            8,716       7,036      4,850
                                                --------    --------   --------

Paid related to:
         Current year                              1,802       1,832      2,138
         Prior year                                4,944       3,530      4,159
                                                --------    --------   --------
         Total paid                                6,746       5,362      6,297
                                                --------    --------   --------

Net balance at December 31,                       16,315      14,345     12,671
         Plus reinsurance recoverables             2,811         882
                                                --------    --------   --------

         Balance                                $ 19,126    $ 15,227   $ 12,671
                                                ========    ========   ========



                                       14
<PAGE>


     The  following  table  presents the  development  of unpaid losses and loss
expense reserves for the past ten years for the Insurance Companies.  During the
ten year period covered by this table, OLB changed its fiscal year-end from July
31 to April 30 and then to December 31 for the year ended  December 31, 1990. In
addition, Bermuda domiciled insurance companies, unlike U.S. domiciled insurers,
are not  required  to file  calendar  year  loss  development  information  with
regulatory authorities.  Accordingly,  the loss development information included
in the following table with respect to OLB prior to 1992,  reflects  development
data  converted  from the policy year loss  development  data  maintained by OLB
through  the use of  mathematical  models.  The top line of the table  shows the
estimated  reserve for unpaid losses and loss expenses at the balance sheet date
for each of the indicated years. These figures represent the estimated amount of
unpaid losses and loss expenses for claims  arising in the current and all prior
years that were unpaid at the balance sheet date, including losses that had been
incurred but not yet reported.  The table also shows the re-estimated  amount of
the  previously  recorded  reserve  based  on  experience  as of the end of each
succeeding  year. The estimate changes as more  information  becomes  available,
principally  about the frequency of claims for  individual  years.  The table is
presented net of reinsurance  which is immaterial for all years presented except
for 1997. The  reinsurance  recoverable on unpaid losses at December 31, 1997 is
$2,811,000.



                                       15
<PAGE>


KAYE GROUP INC.
LOSS DEVELOPMENT SCHEDULE
(In thousands)

<TABLE>
<CAPTION>
          Year Ended           1987     1988      1989     1990     1991      1992      1993      1994     1995      1996     1997
          ----------           ----     ----      ----     ----     ----      ----      ----      ----     ----      ----     ----
<S>                            <C>      <C>      <C>      <C>      <C>       <C>       <C>      <C>       <C>       <C>      <C>
Reserves for outstanding
  losses and loss expenses
  on December 31,              $4,360   $6,866   $8,418   $12,555  $16,244   $18,444   $17,929  $14,118   $12,672   $15,227  $19,126


Cumulative amount paid as of:

     One year later            $1,251   $2,018   $2,505    $4,374   $5,569    $6,379    $6,965   $4,161    $3,697    $4,943
     Two years later            2,351    3,513    5,266     7,545    9,258    11,704    10,002    6,802     6,882
     Three years later          2,907    5,208    7,041     9,245   12,695    13,833    12,278    9,455
     Four years later           3,662    6,113    7,600    11,378   13,813    14,973    14,120
     Five years later           4,090    6,269    8,539    11,705   14,146    15,784
     Six years later            4,112    6,881    8,660    11,768   14,385
     Seven years later          4,204    6,892    8,681    11,877
     Eight years later          4,204    6,895    8,701
     Nine years later           4,204    6,903
     Ten years later            4,204


Re-estimated liability as of:

     One year later            $3,875   $6,891   $9,127   $13,665  $16,117   $18,140   $17,856  $14,254   $12,257   $15,494
     Two years later            4,483    6,692    9,767    13,003   15,182    18,511    18,184   13,487   $12,454
     Three years later          4,726    7,343    9,288    11,850   15,609    18,636    16,552   13,990
     Four years later           4,850    7,228    9,002    12,410   15,462    18,177    18,157
     Five years later           4,703    7,120    9,060    12,468   15,312    18,252
     Six years later            4,507    7,140    8,973    12,224   14,982
     Seven years later          4,357    7,063    8,893    12,121
     Eight years later          4,312    6,964    8,847
     Nine years later           4,204    7,012
     Ten years later            4,204


Cumulative
Redundancy (Deficiency):         $156    ($146)   ($429)     $434   $1,262      $192     ($228)    $128      $218     ($267)
------------------------
</TABLE>



                                       16
<PAGE>


Regulation

     The  Company is  subject  to a  substantial  degree of  regulation  that is
designed to protect the interests of insurance policyholders.  As a Rhode Island
property  and  casualty  insurance  company,  OLRI  is  subject  to the  primary
regulatory  oversight  of the Rhode  Island  Department  of Business  Regulation
through its  Insurance  Division.  On March 28, 1996,  the Division  advised the
Company that it is reviewing the treatment of certain  reinsurance  arrangements
between OLRI and OLB in OLRI's 1995 Statutory  Annual  Statement  filed with the
Division. The Company believes that it treated this arrangement appropriately in
its annual  statement  and it does not believe  that there will be any  material
modifications to OLRI's surplus at December 31, 1995.

     As a Bermuda  property and casualty  insurance  company,  OLB is subject to
regulation of the primary  regulatory body of Bermuda.  Such regulation  relates
to,  among  other  things,  authorized  lines of  business,  capital and surplus
requirements and general  standards of solvency,  the filing of annual and other
financial reports prepared on the basis of statutory accounting  practices,  the
filing and form of actuarial  reports,  the  establishment  and  maintenance  of
reserves  for  unearned  premiums,   losses  and  loss  expenses,   underwriting
limitations,  investment  parameters,  transactions  with  affiliates,  dividend
limitations,   changes  in  control  and  a  variety  of  other   financial  and
non-financial matters.

     The  National   Association  of  Insurance   Commissioners   has  developed
risk-based capital formulas to be applied to all domestic  insurance  companies.
These formulas  calculate a minimum required  statutory net worth,  based on the
underwriting,  investment  and other  business  risks  inherent in an  insurance
company's  operations.  Any  insurance  company  that  does not  meet  threshold
risk-based  capital levels ultimately will be subject to statutory  receivership
proceedings. The statutory net worth of OLRI is adequate in light of its current
and anticipated  future business and has met its risk-based  capital and surplus
requirements at December 31, 1997. The minimum  risk-based  capital  requirement
for OLRI, as of December 31, 1997 was $6,804,698  and the Company  exceeded that
threshold by $16,857,689.

Employees

     As of December 31, 1997, the Company had 347 employees.  The Company is not
unionized.   The  Company   believes   that  its  employee   relationships   are
satisfactory.



                                       17
<PAGE>


Item 2. Properties

     The  Company  owns  approximately  7,500  square feet of space in an office
condominium building in Warwick,  Rhode Island which is utilized by employees of
PBC and OLRI.  The Company  also  leases  space  located in New York,  New York;
Pasadena,  California,  and Westport,  Connecticut.  The Company's  total leased
space at each  location  is 84,398 sq. ft.,  9,443 sq. ft.,  and 10,370 sq. ft.,
respectively.  The  Company's  current space leases are suitable for its current
needs.

Item 3. Legal Proceedings

     The  Company  is a party  to  lawsuits  arising  in the  normal  course  of
business.  Virtually all pending lawsuits in which the Insurance Companies are a
party,  involve  claims  under  policies   underwritten  or  reinsured  by  such
Companies.  Management believes these lawsuits have been adequately provided for
in its  established  loss and loss expense  reserves and that the  resolution of
these  lawsuits  will  not  have a  material  adverse  effect  on the  Company's
financial condition or results of operations.

     The  Insurance  Brokerage  Companies  are  subject  to  various  claims and
lawsuits from both private and  governmental  parties,  which include claims and
lawsuits in the ordinary  course of business.  The majority of pending  lawsuits
involve insurance claims, errors and omissions,  employment claims, and breaches
of contract. The Company believes that the resolution of these lawsuits will not
have a material adverse effect on the Company's  financial  condition or results
of operations.

     As licensed brokers,  the Insurance  Brokerage  Companies are or may become
party to  administrative  inquiries and at times to  administrative  proceedings
commenced by state insurance  regulatory bodies.  Certain subsidiaries have been
involved since 1992 in an administrative investigation by the New York Insurance
Department  ("Department")  relating to how  property  insurance  policies  were
issued for the Residential Real Estate Program. As a result, the manner in which
policies are  structured  for certain  clients in this Program has been altered,
which has not had a material  adverse effect on this Program.  While the Company
has  had  discussions   with  the  Department   regarding   settlement  of  such
investigation,  if such  discussions  are not successful,  the Department  could
institute formal proceedings  against the subsidiaries  seeking fines or license
revocation. KILP has agreed to indemnify the Company for any fines or settlement
payments in excess of $300,000 relating to such  investigation.  Management does
not believe the resolution of such issue will have a material  adverse effect on
the Company.



                                       18
<PAGE>


Item 4. Submission of Matters to a Vote of Security Holders

     On December 30, 1997, the Company held a special meeting of stockholders to
consider and act upon the following matters:

     1.   Approval of the Merger Agreement and the merger of Kaye Holding Corp.,
          a  Delaware  corporation  ("KHC"),  with  and in to  Kaye  Group  Inc.
          ("Kaye"),  with Kaye being the survivor (the  "Merger")  (Proposal No.
          1), whereby on the effective  date of the Merger,  each share of KHC's
          Common Stock,  par value $.01 per share ("KHC Common  Stock"),  issued
          and outstanding  immediately  prior to the effective date,  other than
          shares held by Kaye,  will be converted  into 82.63835  shares of Kaye
          Common Stock, par value $.01 per share ("Kaye Common Stock"); and

     2.   Approval of a Stock Performance Plan (the "Plan") (Proposal No. 2).

     The votes cast for the Merger and the Plan proposed were:

                                            MERGER                PLAN
                                            ------                ----
          For                              6,636,840           6,603,123
          Against                              3,021             375,621
          Abstain                                  0                 500
          Broker Non-votes                   339,403                  20


                                       19
<PAGE>


                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

     In  August  1993,  in  connection  with the  consummation  of the IPO,  the
Company's Common Stock was listed on the NASDAQ National Market System under the
symbol  "OLHC".  On October 2, 1995, in connection  with the  combination of the
Retail Brokerage Business of Kaye with Holding, Holding changed its name to Kaye
Group Inc. and is now listed under its new symbol  "KAYE".  The following  table
sets forth the high and low prices for the Common  Stock as  reported  on NASDAQ
for the indicated periods and the dividends paid per share during such periods.

                                     Price Range                  Dividends
                               ------------------------             Paid
                                High              Low            Per Share
                                ----              ---            ---------

    1997:
First Quarter                  $5  3/8          $4  1/2         $ .025 cash
Second Quarter                  5  1/8           4  3/8         $ .025 cash
Third Quarter                   9                5  1/8         $ .025 cash
Fourth Quarter                  9                6  3/8         $ .025 cash

    1996:
First Quarter                  $8               $7              $ .025 cash
Second Quarter                  7  1/2           5  5/8         $ .025 cash
Third Quarter                   7                4  5/8         $ .025 cash
Fourth Quarter                  6  1/2           4  5/8         $ .025 cash

     The approximate  number of holders of record of the Company's  Common Stock
as of March 10, 1998 was 45. The approximate  number of beneficial holders as of
March 10, 1998 was 500.

     See "Item 7 -- Management's  Discussion and Analysis of Financial Condition
and Results of Operations --  Dividends"  for a discussion of dividends  paid by
the Company.


                                       20
<PAGE>


Item 6.  Selected Financial Data

The following  table should be read in conjunction  with, and is supplemented in
its entirety by, the  consolidated  financial  statements and the notes thereto.
Financial data has been restated to take into effect the Transactions  effective
October 2, 1995.  The  financial  data for the years 1993  through 1997 has been
derived from the audited consolidated financial statements of the Company.

<TABLE>
<CAPTION>
                                                                                     Years ended December 31,
--------------------------------------------------------------------------------------------------------------------------------
                                                                    1997        1996        1995           1994           1993
--------------------------------------------------------------------------------------------------------------------------------
                                                                             (in thousands, except per share data)
<S>                                                                <C>         <C>         <C>            <C>            <C>
Revenues:
Operating revenues                                                 $54,216     $50,341     $51,582        $52,906        $54,598
Net investment income                                                4,312       3,576       3,912          3,455          2,752
Net realized gains (losses) on investments                              21          72         (47)           (50)           611
                                                                  --------    --------    --------       --------       --------

Total revenues                                                      58,549      53,989      55,447         56,311         57,961
                                                                  --------    --------    --------       --------       --------

Net income                                                          $4,357      $3,071      $5,181         $4,347         $1,186
--------------------------------------------------------------------------------------------------------------------------------

Earnings per share:
  Basic                                                              $0.62       $0.44       $0.74          $0.62          $0.20
  Diluted                                                            $0.62       $0.44       $0.74          $0.62          $0.20
--------------------------------------------------------------------------------------------------------------------------------

PRO FORMA NET INCOME
  Income before minority interest, income taxes and
  cumulative effect of change in accounting principles              $7,555      $5,211      $6,309         $6,516         $2,476

  Provision for income taxes                                         2,267       1,484       1,995(1)       1,861(1)         699(1)
                                                                  --------    --------    --------       --------       --------

  Income before minority interest and
  cumulative effect of change in accounting principles               5,288       3,727       4,314          4,655          1,777

  Minority interest                                                   (931)       (656)       (759)        (1,011)          (313)

  Cumulative effect of change in accounting principles,
  net of charge in lieu of income taxes (2)                                                                 1,090
                                                                  --------    --------    --------       --------       --------

  Pro forma net income                                              $4,357      $3,071      $3,555         $4,734         $1,464
--------------------------------------------------------------------------------------------------------------------------------

PRO FORMA EARNINGS PER SHARE
  Income before cumulative effect of change in
  accounting principles                                              $0.62       $0.44       $0.51          $0.52          $0.25

  Cumulative effect of change in accounting principles,
  net of charge in lieu of income taxes                                                                      0.15
                                                                  --------    --------    --------       --------       --------

  Pro forma earnings per share (8)                                   $0.62       $0.44       $0.51          $0.67          $0.25
--------------------------------------------------------------------------------------------------------------------------------

Weighted average of shares outstanding - basic                       7,024       7,020       7,020          7,020          5,924
--------------------------------------------------------------------------------------------------------------------------------

Weighted average of shares and
share equivalents outstanding - diluted                              7,083       7,021       7,023          7,035          5,924
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>



                                       21
<PAGE>


Item 6.  Selected Financial Data (Continued)

<TABLE>
<CAPTION>
                                                                             Years ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                    1997              1996             1995               1994                1993
------------------------------------------------------------------------------------------------------------------------------------
                                                                 (in thousands, except per share data and ratios)
Balance Sheet  data:
<S>                                              <C>               <C>               <C>               <C>               <C>
Total assets                                     $141,025          $156,102          $174,000          $185,976          $206,153
Long -term debt (3)                                 5,810            12,787            13,679            11,618            13,995
Stockholders' equity                               35,168            24,984            22,882            16,676            13,688
Net book value  per share (4)                        4.15              3.56              3.26              2.38              1.95
Cash dividend per share (5)                          0.10              0.10              0.10              0.10              0.03

GAAP operating data:
Loss ratio                                           38.2%             36.4%             28.8%             31.8%             42.9%
Expense ratio                                        41.0%             42.5%             41.1%             32.9%             32.9%
Combined ratio                                       79.2%             78.9%             69.9%             64.7%             75.8%

Statutory operating data (6):
Net underwriting gain                              $5,890            $4,455            $7,104            $7,105            $2,599(7)
Policyholders' surplus                             25,566            25,485            26,231            22,274            21,528

Loss ratio                                           36.6%             34.1%             24.4%             30.2%             40.8%
Expense ratio                                        38.6%             40.0%             37.1%             35.5%             33.7%
Combined ratio                                       75.2%             74.1%             61.5%             65.7%             74.5%
</TABLE>

(1)  Charge  in  lieu  of  income  taxes,  see  note 3 (l)  to the  Consolidated
     Financial Statements of the Company.

(2)  Commission  income,  together  with the related  accounts  receivable  from
     clients and premiums payable to insurance carriers, is recorded principally
     as of the billing date.  Beginning in 1994,  commission  income  related to
     installment  billing  arrangements  is recorded in total at the date of the
     initial billing. This change was made because in the opinion of management,
     it results in a better  matching of revenues with the related costs.  Prior
     to this change,  commissions  were recorded as each installment was billed.
     As a result of this  change,  additional  commissions  of  $1,471,000  were
     recorded  in 1994 that  would  have been  recorded  under the old policy in
     1995.  The  Company was unable to  determine  the effects of this change in
     years prior to 1994 and, therefore,  pro forma disclosure of this change in
     prior  years  cannot be made.  Accordingly,  the  effect  of the  change in
     accounting on prior years of $ 1,652,000 was treated as a cumulative effect
     adjustment on the 1994 consolidated statement of income.

(3)  Excludes that portion of long-term debt maturing in less than one year.

(4)  Based upon 8,474,435 shares  outstanding at December 31, 1997 and 7,020,000
     outstanding at December 31, 1996, 1995, 1994, and 1993.

(5)  Dividends paid and declared since the date of the IPO of August 17, 1993.

(6)  Based upon  statutory  accounting  practices and derived from the statutory
     financial statements of the Insurance Companies, which excludes the effects
     of CAC.

(7)  As a result of a substantial  amount of new business written with effective
     dates  in the  latter  half of  1993,  net  underwriting  gain for 1993 was
     significantly  affected by the statutory  accounting  practices of charging
     commission expense to income immediately while premiums are earned over the
     term of the underlying policies.

(8)  Earnings per share for basic and diluted are the same based on the weighted
     average shares outstanding, including share equivalents outstanding.


                                       22
<PAGE>


Item 7. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

General

     Kaye Group Inc. (the "Company"), a Delaware corporation,  formerly Old Lyme
Holding  Corporation  ("Holding"),  is a  holding  company  which,  through  its
subsidiaries,  is engaged in a broad range of insurance brokerage,  underwriting
and related activities.  The Company operates in two insurance business segments
- the Insurance Brokerage Companies Operations comprised of the Retail Brokerage
Business  and the Program  Brokerage  Business,  and the  Property  and Casualty
Companies Operations  ("Property and Casualty Companies" or "Insurance"),  which
comprises the Insurance  Companies and Claims  Administration (see Note 1 to the
consolidated financial statements of the Company).

     The revenues and  expenses of the Property and Casualty  Companies  segment
will  not  be  comparable  to  the  amounts  reported   previously  by  Holding.
Historically,  the  commission  income of the  Program  Brokerage  Business  was
recorded as a reduction of acquisition  costs in the consolidated  statements of
income  of  Holding.  As a  result  of  the  combination  (see  Note  2  to  the
consolidated  financial  statements  of the  Company),  management  includes the
commission  income and the other  revenues  and  operating  costs of the Program
Brokerage Business in the Insurance  Brokerage Companies segment for all periods
presented.

Overview

     The Insurance  Brokerage  Companies  derive their revenue  principally from
commissions  associated  with the placement of insurance  coverage for corporate
clients.  These commissions are paid by the insurance carriers and are usually a
fixed  percentage  of the  total  premiums.  Certain  of these  commissions  are
contingent upon the level of volume and profitability of the related coverage to
the insurance  companies.  There is normally a lag between receipt of funds from
the insured and payment to the insurance company. Investment of these funds over
this period generates additional revenue in the form of interest income.

     The Insurance business underwrites property and casualty risks for insureds
in the  United  States  and  is  sold  principally  through  specially  designed
Programs, covering various types of businesses and properties which have similar
risk  characteristics.  The Insurance business  generally  underwrites the first
layer of insurance under the Programs and unaffiliated  Program insurers provide
coverage  for losses  above the first  layer of risk.  Substantially  all of the
Insurance business revenues are derived from premiums on this business, plus the
investment  income  generated  by the  investment  portfolio  of  the  Insurance
business.


                                       23
<PAGE>


     Corporate  Operations  include those activities that benefit the Company in
its  entirety  and cannot be  specifically  identified  to either the  Insurance
Brokerage  Companies or the Property and  Casualty  Companies.  Such  activities
include debt servicing and public company expenses, including investor relations
costs.

     The Company has foreign  operations in Bermuda.  For further discussion see
Note 23 to the consolidated financial statements of the Company.

     A comprehensive  analysis of the results of operations of the Company would
not be  meaningful  without  consideration  of the charge in lieu of taxes.  The
provision for income taxes, as reported in the historical financial  statements,
does not provide  for any income  taxes on certain  subsidiaries  of the Company
prior to the combination on October 2, 1995. Prior to the combination on October
2, 1995, the Retail  Partnerships and the Retail Brokerage Companies were either
limited  partnerships  or S  Corporations  under the Internal  Revenue Code, and
therefore,  the individual  partners or shareholders,  rather than the companies
were  liable  for  income  taxes.  Accordingly,  the  Company  has  presented  a
calculation of pro forma net income for the year ended December 31, 1995,  which
reflects a charge in lieu of income taxes, as if all subsidiaries  were included
in the Company's  consolidated Federal income tax return for all years presented
(see Note 2 of the consolidated financial statements of the Company). Management
believes this presentation will better present current and future comparisons of
the effective tax rate and income tax expense of the Company.



                                       24
<PAGE>


Results of Operations

Year ended December 31, 1997 compared
with year ended December 31, 1996

Insurance Brokerage Companies

     Income before income taxes increased by $1,962,000 to $767,000 in 1997 from
a loss of $1,195,000 in 1996. The improved operating result was due to increased
revenues,  a significant decrease in other operating expenses and lower interest
expense  partially  offset by a modest  increase in salaries  and  benefits,  as
discussed below.

     Total revenues in 1997 were $32,689,000  compared with $31,595,000 in 1996,
or  an  increase  of  $1,094,000  (3%).  The  largest   component  of  revenues,
commissions  and fees-net,  was up by $555,000  (2%).  Commissions  and fees-net
increased due to new business of $5,948,000 and the  acquisition of Western (see
Note  17  to  the  consolidated  financial  statements  of  the  Company)  which
contributed  $992,000.  Decreases in commissions  and fees-net was the result of
attrition of $4,421,000,  increased commission expense of $896,000 primarily due
to additional new business  acquired,  and a reduction in wholesale  contingency
commissions  of  $1,068,000.  Attrition  includes  lost  accounts,  reduction of
service to existing  accounts,  and lower  premiums and  commission  rates.  The
attrition in business was equivalent to approximately  13% of the Company's 1996
volume which results in a business  retention of approximately 87%. This is well
within  normal  industry  expectations  given  the usual  attrition  in a highly
competitive  environment.  Investment income increased in 1997 by $539,000 (52%)
due  to  collection  efficiencies  resulting  in a  longer  holding  period  for
fiduciary investments.

     Salaries and benefits  increased by $299,000  (2%) to  $18,868,000  in 1997
compared to $18,569,000 in 1996. This increase was the result of the acquisition
of Western partially offset by a modest reduction in work force due to continued
operating efficiencies, lower executive compensation and reduced costs for prior
years' acquisitions.  The Company's board of directors'  compensation  committee
and executive  management  have reviewed and adjusted  executive and  management
compensation,  respectively,  to reflect a continued movement toward performance
based pay.

     Other operating  expenses decreased by $967,000 (7%) to $12,654,000 in 1997
compared  with  $13,621,000  in 1996.  This  decrease  was mainly due to reduced
account servicing expenses, the completion of amortization of organization costs
in the latter part of 1996,  expiration of certain  management service contracts
in 1996 and the third quarter of 1997, and reduced insurance cost.

     Interest expense  decreased by $200,000 as a result of the early payment of
the $6,000,000 note payable to KILP in August 1997.


                                       25
<PAGE>


Property and Casualty Companies

     Income before income taxes increased in 1997 by $668,000 (9%) to $7,719,000
from $7,051,000 in 1996. The increase in operating  results was due to increased
net premiums earned (net of related  expenses) and investment  income  partially
offset by a decrease in other income, as discussed below.

     Net premiums  earned for 1997 increased by $3,520,000  (18%) to $22,847,000
from  $19,327,000  in 1996.  The Company's  efforts to broaden the  distribution
network of the  Programs  and coverage  types has  contributed  to growth in the
Residential Real Estate and Restaurant Programs and the formation of several new
programs.

     Net investment income in 1997 increased by $231,000 (9%) to $2,692,000 from
$2,461,000 in 1996 as a result of the increase in invested assets.

     Net realized gain on investment  transactions for 1997 decreased by $51,000
to $21,000  compared to $72,000 in 1996. The realization of investment gains and
losses is determined by market  conditions and management's  decision  regarding
the holding period of the portfolio.

     Other income for 1997  decreased by $200,000 to $245,000  from  $445,000 in
1996.  This  decrease  is  mainly  due to the  run-off  of  certain  reinsurance
contracts during the first half of 1996.

     Losses  and  loss  expenses  increased  in  1997  by  $1,680,000  (24%)  to
$8,716,000 from $7,036,000 in 1996. The loss ratio for 1997 and 1996 was 38% and
36%,  respectively.  This increase was the result of growth in general liability
coverage  and  reserve  strengthening.  The  increase  in  absolute  dollars was
generally the result of increased net premiums earned.

     Acquisition costs and general and administrative expenses increased in 1997
by $1,152,000  (14%) to $9,370,000  from  $8,218,000 in 1996.  The expense ratio
(acquisition  costs and general and  administrative  expenses) for 1997 and 1996
was 41% and 43%,  respectively.  This  decrease was due to a modest  decrease in
general and  administrative  expenses in 1997. The increase in absolute  dollars
was due mainly to additional acquisition costs related to increased net premiums
earned and the write-off of certain  deferred  acquisition  costs resulting from
the termination of a deposit  reinsurance  contract.  General and administrative
expenses had a modest decrease as a result of lower professional fees.

Corporate

     Net expenses  before  income taxes  increased in 1997 by $286,000  (44%) to
$931,000 from $645,000 in 1996.  This increase was the result of costs  incurred
for acquisition activities and investor relations.


                                       26
<PAGE>


Year ended December 31, 1996
compared with year ended December 31, 1995

Insurance Brokerage Operations

     Loss before  income taxes  increased by $489,000 to $1,195,000 in 1996 from
$706,000  in 1995.  The benefit of  decreased  salaries  and  related  taxes and
fringes was offset by lower revenues as discussed below.

     Total revenues in 1996 were $31,595,000  compared with $34,970,000 in 1995,
or  a  reduction  of  $3,375,000  (10%).  The  largest  component  of  revenues,
commission and fees-net,  was down $3,373,000  (10%) due in part to nonrecurring
items in 1995 of $1,102,000 which consisted of $605,000  relating to the sale of
expiration lists of Kaye Administrators, the Home Owners Program was extended by
an additional six months for commissions of $305,000,  and a special  contingent
commission of $192,000. The remaining reduction in commissions was mainly due to
lost business of approximately  $3,200,000 in commercial lines,  group and life,
personal  lines and fees earned from public  adjusters  partially  offset by new
business of $1,600,000. This loss in business, equivalent to approximately 9% of
the Company's 1995 volume, results in a business retention of approximately 91%.
This is well within normal industry  expectations given the usual attrition in a
highly competitive environment.

     Salaries and benefits  decreased by $2,556,000 (12%) to $18,569,000 in 1996
compared to  $21,125,000  in 1995.  The decrease is a result of a reductions  in
work force, lower compensation earned under incentive contracts,  termination of
the Company's  defined benefit pension plan,  refunds  received on group medical
insurance,  utilization  of  forfeitures  in the  401K  plan  and the  one  time
incentive payment in 1995 relating to the sale of Kaye Administrators.

     Other operating  expenses  (including  depreciation)  decreased by $330,000
(2%) to $13,621,000 in 1996 compared with  $13,951,000 in 1995. The decrease was
primarily  due to lower  professional  fees as a result of the  settlement  of a
former  employee  lawsuit  partially  offset by  additional  depreciation  costs
related to the capital leasing of new computers, and outside rating service fees
related to the Residential Real Estate Program, general insurance and employment
agency fees.

Property and Casualty Insurance Operations

     Income  before  income taxes  decreased in 1996 by $1,631,000 to $7,051,000
from  $8,682,000  in 1995.  This  decrease was the result of reduced  investment
income and the  increase in the  combined  ratio in 1996 to 79% from 70% in 1995
partially offset by an increase in net premiums earned, as discussed below.


                                       27
<PAGE>


     Net premiums  earned for 1996 increased by $2,482,000  (15%) to $19,327,000
from $16,845,000 in 1995. This increase was primarily  attributable to growth in
the  Residential  Real Estate Program  partially  offset by lost business due to
increased competition in the Restaurant Program.

     Net  investment  income  decreased by $358,000  (13%) to $2,461,000 in 1996
from  $2,819,000 in 1995 as a result of additional bond  amortization  for those
bonds which had early call features.

     Losses and loss expenses increased in 1996 by $2,186,000 to $7,036,000 from
$4,850,000 in 1995. The loss ratio for 1996 was 36% compared to 29% in 1995. The
increase in loss ratio is due to the change in the mix of  business  during 1996
from  property  and  umbrella  coverages to other  general  liability  coverage,
including exposure to lead paint, which experiences a higher loss ratio.

     Acquisition costs and general and administrative expenses increased in 1996
by $1,290,000 to $8,218,000  from $6,928,000 in 1995. The expense ratio for 1996
and 1995 were 43% and 41%,  respectively.  The  increase  in  expense  ratio was
mainly due to professional fees.

Corporate

     Net  expenses  before  income  taxes  decreased  in 1996 by  $1,022,000  to
$645,000  from  $1,667,000  in 1995.  The decrease in expenses was the result of
nonrecurring reorganization costs incurred in 1995.

Effective Tax Rate  (See Note 8)

     The pro forma  presentation  for 1995  includes the effect of a tax benefit
from the Retail Brokerage Business which was not combined into the Company until
October  2,  1995,  resulting  in an  effective  tax rate of 32% for  1995.  The
effective  tax  rate for  1997  and  1996  was 30% and  29%,  respectively.  The
difference between the statutory tax rate and the effective tax rate in 1997 and
1996 was primarily  related to tax exempt  interest.  The rate increase for 1997
was primarily due to additional state and local taxes while the decrease in 1996
was  primarily  due to a one time  charge  for  reorganization  costs in 1995 of
$863,000 most of which are not deductible for income tax purposes.

Financial Condition and Liquidity

     Management believes the Company's operating cash flow, cash equivalents and
short term investments will provide  sufficient sources of liquidity and capital
to meet  the  Company's  anticipated  needs in the next  twelve  months  and the
foreseeable future. The Company has no material capital commitments.


                                       28
<PAGE>


     Total assets decreased by $15,077,000 (10%) to $141,025,000 at December 31,
1997 from  $156,102,000  at December 31, 1996.  Total  liabilities  decreased by
$19,923,000  (16%) to  $105,857,000  at December 31, 1997 from  $125,780,000  at
December 31, 1996.  Premiums and other receivables and premiums payable declined
in the brokerage segment due to the timing of certain premium billings.

     The  Company  in  August  1997  paid in full  the note  payable  to KILP of
$6,000,000 from net cash provided by operating activities.

     Stockholders'  equity  increased by  $10,184,000  (41%) to  $35,168,000  at
December 31, 1997 from $24,984,000 at December 31, 1996. The increase in equity,
which  resulted  from  net  income  of  $4,357,000,  the  change  in  unrealized
appreciation  of investments  (net of deferred taxes) of $338,000 and the effect
of the  merger  (discussed  below)  resulting  in the  elimination  of  minority
interest of $6,191,000, was partially offset by dividends paid of $702,000.

     On  December  30,  1997  the   stockholders  of  the  Company   approved  a
restructuring  that merged Kaye Holding  Corp.  ("KHC")  into the Company.  This
eliminated  KILP's  minority  interest in KHC of $6,191,000 at December 31, 1997
and increased  stockholders'  equity of the Company by the same amount.  KILP is
the Company largest shareholder.  The merger was accounted for as a transfer and
exchange  between  entities under common control.  Accordingly,  common stock of
Kaye Group Inc. issued in exchange for the KHC shares was accounted for by using
the closing  NASDAQ market price on October 24, 1997 ($7.00) (the effective date
of the merger). This increased the number of shares of common stock by 1,454,435
at the par value $.01 per share or $14,544.  Paid-in  capital was  increased  by
$10,166,000  which was the  difference  between the market value price per share
and the par value per share. Minority interest in KHC was eliminated as a result
of the merger and  retained  earnings of Kaye Group Inc.  was reduced to account
for the  difference  between the market value of the shares  issued and the book
value of the minority interest in KHC.

     The Company's  cash and cash  equivalents  increased by $3,348,000  for the
year ended December 31, 1997. Operating activities provided cash of $15,845,000,
primarily  as a result of net  income  from  operations  and a net  increase  in
accrued  liabilities.  Investing  activities  used  cash of  $2,204,000  for the
purchase  of new  computer  software  and  the  enhancement  of  our  California
operations through the asset acquisition of Western.  Financing  activities used
cash of $10,293,000 to pay dividends,  notes payable on computer equipment,  the
early payment of the note to KILP and payments  made under  deposit  reinsurance
contracts,  offset by proceeds  received to finance the  Company's  new computer
software.

     The Company has  calculated  risk-based  capital and the result is that the
statutory net worth of Old Lyme Rhode Island is adequate in light of the current
requirements.


                                       29
<PAGE>


     The  Company is subject to a  substantial  degree of  regulation,  which is
designed to protect the interests of insurance policyholders.  As a Rhode Island
property  and  casualty  insurance  company,  OLRI  is  subject  to the  primary
regulatory  oversight  of the Rhode  Island  Department  of Business  Regulation
through its  Insurance  Division.  On March 28, 1996,  the Division  advised the
Company that it is reviewing the treatment of certain  reinsurance  arrangements
between OLRI and OLB in OLRI's 1995 Statutory  Annual  Statement  filed with the
Division. The Company believes that it treated this arrangement appropriately in
its annual  statement  and it does not believe  that there will be any  material
modifications to OLRI's surplus at December 31, 1995.

     The Company's  primary source of cash is derived from  insurance  premiums,
insurance brokerage commissions and fees, proceeds from the sale of investments,
and  investment  income.  The Company's  principal  uses of cash are payments of
insurance premiums,  commissions to brokers who produce the business, losses and
loss expenses and operating  expenses,  and purchases of  investments  and fixed
assets.

     The Company has minimized its investment  risk by investing in high quality
tax exempt municipal bonds, U.S. Government and government agency securities and
corporate  bonds  rated  A or  better  by an  accredited  rating  agency  and by
maintaining an average duration of approximately four years, taking into account
the effects of certain early call  features.  The Company  currently  intends to
continue these investment strategies.

     The table below sets forth the  composition  of the Company's  portfolio of
fixed maturity investments by rating as of December 31, 1997 (in thousands):

                                        Market Value as          Percentage of
                      Amortized           Reflected on          Total at Market
     Rating (a)         Cost             Balance Sheet              Value
     ----------         ----             -------------              -----

        AAA(b)         $26,959              $27,297                 66.1%
         AA              5,480                5,587                 13.5%
         AA-             2,058                2,091                  5.1%
          A+             2,369                2,376                  5.7%
          A              3,905                3,962                  9.6%
                       -------              -------                -----
                       $40,771              $41,313                100.0%
                       =======              =======                =====

(a)  Ratings are  assigned  primarily by Standard & Poors  Corporation  with the
     remaining  ratings  assigned  by  Moody's  Investors  Services,   Inc.  and
     converted to the equivalent Standard & Poors ratings.

(b)  Includes U.S. Government Obligations.


                                       30
<PAGE>


     The  amortized  cost and  estimated  market  value of fixed  maturities  at
December 31, 1997, by  contractual  maturity  date,  are listed below.  Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without penalties.

                                                    Investments Available
                                                           for Sale
                                               ---------------------------------
                                               Amortized          Aggregate Fair
                                                  Cost                Value
                                               ---------          --------------
Due in one year or less                          $3,602               $3,585
Due after one year through five years            15,341               15,594
Due after five years through ten years           19,255               19,520
Due after ten years                               2,573                2,614
                                                -------              -------

Total                                           $40,771              $41,313
                                                =======              =======

     The Company  maintains a  substantial  level of cash and liquid  short term
investments which are used to meet anticipated payment obligations.  At December
31,  1997 and  1996,  the  Company  had  cash  and  short  term  investments  of
$34,737,000 and $29,295,000,  respectively of which  $22,322,000 and $23,879,000
represents  premiums  collected  and  held in a  fiduciary  capacity  which  are
generally not available  for  operating  needs of the Company.  Of the Company's
total invested assets, certain amounts are pledged or deposited into trust funds
to collateralize the Company's obligations under reinsurance agreements.

     Investment results of the Company for each of the three years in the period
ended December 31, 1997 are shown in the following table (in thousands):

                                                       At or for the
                                                  years ended December 31,
                                              --------------------------------
                                                1997        1996        1995
                                              --------    --------    --------

Average cash and cash equivalents
         and invested assets (1)              $ 76,534    $ 68,692    $ 64,261

Investment income                             $  4,312    $  3,576    $  3,912

Average yield on total investments                 5.6%        5.2%        6.1%

Net realized investment gains (losses)        $     21    $     72    $    (47)

(1)  Based upon the  average of the  beginning  and end of the period  amortized
     cost for fixed maturities and cost for equity securities.



                                       31
<PAGE>


     The  Company  has a  $7,031,250  revolving  line  of  credit  with a  bank,
collateralized  by the  stock  of the  Insurance  Companies.  The  proceeds  are
available for general operating needs and acquisitions. As of December 31, 1997,
there was no unused portion of the revolving line of credit.

     Under  the  terms  of the  revolving  line of  credit,  principal  payments
commenced  during 1997 with  $68,750  paid during the year and  $468,750 due per
quarter, through June 30, 2001.

     The Company's  insurance  subsidiaries  require  capital to support premium
writing.  The  guidelines  set forth by the NAIC  suggest  that a  property  and
casualty   insurer's  ratio  of  annual   statutory  net  premiums   written  to
policyholders'  surplus  should not exceed 3 to 1. At  December  31,  1997,  the
Insurance  Companies,  with a combined  statutory surplus of $25,566,000,  had a
ratio of  combined  annual  statutory  net  premiums  written to their  combined
statutory surplus of approximately .87 to 1.

Dividends

     On December 19, 1997, the Board of Directors  declared a quarterly dividend
of $.025 per  share,  payable  January  20,  1998 to  stockholders  of record on
December 31, 1997.  The Company is largely  dependent  upon  dividends  from its
subsidiary  to  pay  dividends  to the  stockholders.  The  Company's  insurance
subsidiaries  are subject to  regulations  that  restrict  their  ability to pay
dividends.

     Under Rhode Island  Insurance  law, OLRI may pay cash  dividends  only from
earned surplus  determined on a statutory  basis,  subject to the maintenance of
minimum capital and surplus of $3,000,000.  Further,  OLRI is restricted (on the
basis  of the  lesser  of 10% of  OLRI's  statutory  surplus  at the  end of the
preceding  twelve-month period or 100% of OLRI's net income,  excluding realized
capital  gains,  for the  preceding  twelve-month  period)  as to the  amount of
dividends  it  may  declare  or pay in any  twelve-month  period  without  prior
approval of the  Department  of Business  Regulation  of Rhode  Island.  Without
special  permission,   at  December  31,  1997,  $2,366,000  was  available  for
distribution.

     OLB is required to maintain a minimum  statutory  capital and surplus based
upon the higher of $1,000,000  or an amount  derived by applying a variable rate
to its current  premium  volume or  outstanding  losses at December 31, 1997. At
December 31, 1997,  $904,000 was  available  for  distribution  from OLB and its
subsidiary, Park Brokerage Ltd.

     The  continued  payment  and the amount of any cash  dividends  will depend
upon, among other factors,  the Company's  operating results,  overall financial
condition, capital requirements and general business conditions.


                                       32
<PAGE>


Other

     In October 1995, the Financial  Accounting  Standards Board ("FASB") issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 123,  Accounting for
Stock-Based  Compensation.  This statement  establishes new financial accounting
and reporting standards for stock-based employee  compensation plans,  including
stock option and stock purchase plans.  Compensation resulting from the award of
stock-based  compensation  must  be  determined  based  on  the  fair  value  of
consideration received or fair value of the equity instrument issued,  whichever
is more reliably measurable. Such compensation expense, net of income taxes, may
be recognized in the statement of income over the service period of the employee
(generally the vesting period). In lieu of recording such compensation  expense,
entities are permitted to disclose its pro forma impact net of income taxes,  on
reported net income and earnings per share.  Entities  choosing such  disclosure
will continue to measure compensation  expense from stock-based  compensation in
the  statement  of income based on the  intrinsic  value  method  prescribed  in
Accounting  Principles  Board  ("APB") No. 25,  "Accounting  for Stock Issued to
Employees".

     In 1996,  the  Company  adopted the  disclosure  provision  of  stock-based
compensation  in  accordance  with SFAS No. 123. The adoption of this  statement
does not have an  impact on the  Company's  financial  position  or  results  of
operations.

     In February  1997,  the FASB issued SFAS No. 128,  Earnings Per Share.  The
statement  establishes a new standard for computing and presenting  earnings per
share data. The statement is effective for financial  statements issued for both
interim and annual  periods  ending  after  December 15,  1997.  This  statement
supersedes  APB  Opinion  No.  15,   Earnings  Per  Share,   and  requires  dual
presentation  of basic and diluted  earnings per share on the face of the income
statement.  Basic  earnings  per share  exclude  dilution  and are  computed  by
dividing income available to common stockholders by the weighted-average  number
of common shares outstanding for the period.  Diluted earnings per share include
the effect of all potentially dilutive securities. All prior period earnings per
share presented were restated.

     Also in February  1997,  the  Securities  and Exchange  Commission  ("SEC")
issued Financial Reporting Release No. 48, Disclosure of Accounting Policies for
Derivative  Financial  Instruments  and  Derivative  Commodity  Instruments  and
Disclosure  of  Quantitative  and  Qualitative  Information  about  Market  Risk
Inherent in Derivative Financial Instruments,  Other Financial Instruments,  and
Derivative Commodity Instruments ("FRR No. 48").

     FRR  No.  48  amends   rules  and  forms  for   registrants   and  requires
clarification  and expansion of existing  disclosures  for derivative  financial
instruments,  other financial instruments and derivative commodity  instruments,
as defined therein.  The amendments require enhanced  disclosure with respect to
these  derivative  instruments  in the  notes  to  financial  statements.  As of
December 31, 1997, the Company has no derivative financial instruments.


                                       33
<PAGE>


     Additionally,  the amendments  expand existing  disclosure  requirements to
include  quantitative  and qualitative  discussions  with respect to market risk
inherent in market risk sensitive  instruments such as equity and fixed maturity
securities,  as well as derivative instruments which investors can use to better
understand and evaluate market risk exposures of registrants.  These disclosures
will be effective in 1998.

     In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This  statement   establishes   standards  for  the  reporting  and  display  of
comprehensive   income  and  its  components  in  the   consolidated   financial
statements.  The  purpose  of  reporting  comprehensive  income is to report the
change in equity of a business  enterprise for the period from  transactions and
other events and circumstances from non-owner  sources.  It includes all changes
in equity during a period except those resulting from  investments by owners and
distributions to owners.  These items include currency  translation  adjustments
and unrealized  appreciation  of  investments,  which are currently  reported as
separate  components of equity in the balance sheet.  The statement is effective
in 1998 and  will  change  the  presentation  of  information  in the  financial
statements  but will not have any effect on the  financial  position  or results
from operations of the Company.

     Also in June 1997, the FASB issues SFAS No. 131,  Disclosure about Segments
of an Enterprise and Related Information. This statement requires that companies
report  certain  information  about their  operating  segments in the  financial
statements  including,  information  about the products and services  from which
revenues are derived, the geographic areas of operations,  and information about
major customers. Operating segments are determined by the way management decides
how  to  allocate  resources  and  how  it  assesses  performance.   Descriptive
information about the method used to identify the reportable  operating segments
must  also be  disclosed.  The  statement  also  requires  a  reconciliation  of
revenues, net income, and assets and other amounts disclosed for the segments to
the  corresponding  amounts  in  the  consolidated  financial  statements.   The
statement  is  effective  for year end 1998 and is not  expected  to change  the
Company's  current  segmentation  of its business.  The  financial  position and
operating results of the Company will not be affected by this statement.

Year 2000 Issue

     The year 2000 issue is the result of computer  programs being written using
two  digits  rather  than four to define  the  applicable  year.  Many  computer
programs have  date-sensitive  computer software that may not recognize the date
with the year 2000.  This could  result in system  failures  or  miscalculations
causing disruptions of operations.

     The  Company has  determined  that it will be required to modify or replace
significant  portions  of software it uses so that the  affected  software  will
properly  recognize  dates  beyond  December  31,  1999.  The Company  presently
believes that with  modifications  to existing  software and  conversions to new
software, the year 2000 issue will be mitigated.  However, if such modifications
and conversions are not made, or are



                                       34
<PAGE>


not completed in a timely manner, the year 2000 issue may have a material impact
on the operations of the Company.  The Company has assessed the problem,  has an
action plan in place with  resources  dedicated to resolution and the work is in
progress.

     The Company will utilize both internal and external  resources,  reprogram,
or replace,  and test the software for year 2000 modifications.  The Company has
purchased and will be implementing new operational and accounting software which
is year 2000 compliant.  Certain other software that was developed internally is
being  reprogrammed.  Other  software  purchased  such  as  word-processing  and
spreadsheet   programs  are   guaranteed  to  be  year  2000  compliant  by  the
manufacturers. We will test this software accordingly.

     While the cost for the new operational and accounting software is material,
only a small  portion of such cost is related  to year 2000  programming.  Other
costs to the  Company  related  to year 2000  compliance  will not be  material.
Management has concluded that year 2000 procedures will be completed in a timely
fashion.  It is not  anticipated  that the year 2000  issue will have a material
affect on future financial results.

     The Company will initiate formal communications with all of its significant
insurance  markets to determine the extent to which the Company is vulnerable to
those third parties' year 2000 concerns. It should be noted, however, that there
can be no  guarantee  that  the  systems  of  other  companies  will  be  timely
converted, or that their conversion will be comparable with information included
in the  Company's  systems,  without  having a  material  adverse  effect on the
Company.

Safe Harbor Disclosure

     The  Private  Securities  Litigation  Reform  Act of 1995  provides a "safe
harbor" for forward-looking  statements. This SEC Form 10-K or any other written
or  oral   statements   made  by  or  on  behalf  of  the  Company  may  include
forward-looking  statements  which  reflect  the  Company's  current  views with
respect  to future  events  and  financial  performance.  These  forward-looking
statements  are subject to certain  uncertainties  and other  factors that could
cause  actual  results  to  differ   materially  from  such  statements.   These
uncertainties and other factors (which are described in more detail elsewhere in
documents  filed by the Company with the  Securities  and  Exchange  Commission)
include,  but are not limited  to,  uncertainties  relating to general  economic
conditions  and  cyclical  industry   conditions,   uncertainties   relating  to
government  and regulatory  policies,  volatile and  unpredictable  developments
(including storms and catastrophes), the legal environment, the uncertainties of
the  reserving  process  and the  competitive  environment  in which the Company
operates. The words "believe",  "expect",  "anticipate",  "project", "plan", and
similar expressions,  identify forward-looking statements. Readers are cautioned
not to place undue  reliance on these  forward-looking  statements,  which speak
only as of their dates. The Company  undertakes no obligation to publicly update
or  revise  any  forward-looking   statements,   whether  as  a  result  of  new
information, future events or otherwise.


                                       35
<PAGE>


Item 8. Financial Statements and Supplementary Data

     See page F-1.

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
          Financial Disclosure

     None.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

     Reference is made to the Registrant's  definitive  proxy  statement,  which
will be filed with the Securities and Exchange  Commission within 120 days after
December 31, 1997, and which is incorporated herein by reference.

Item 11. Executive Compensation

     Reference is made to the Registrant's  definitive  proxy  statement,  which
will be filed with the Securities and Exchange  Commission within 120 days after
December 31, 1997, and which is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     Reference is made to the Registrant's  definitive  proxy  statement,  which
will be filed with the Securities and Exchange  Commission within 120 days after
December 31, 1997, and which is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

     Reference is made to the Registrant's  definitive  proxy  statement,  which
will be filed with the Securities and Exchange  Commission within 120 days after
December 31, 1997, and which is incorporated herein by reference.


                                       36
<PAGE>


                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)  Financial statements and schedules.

     1.   Financial Statements:

          Report of Independent Accountants

          Consolidated Balance Sheets at December 31, 1997 and 1996

          Consolidated  Statements  of Income for the years ended  December  31,
          1997, 1996, and 1995

          Consolidated Statements of Cash Flows for the years ended December 31,
          1997, 1996, and 1995

          Consolidated  Statements of  Stockholders'  Equity for the years ended
          December 31, 1997, 1996, and 1995

          Notes to Consolidated Financial Statements

     2.   Financial Statement Schedules:

          Schedule II -- Condensed Financial Information of Registrant:

               Balance Sheets at December 31, 1997 and 1996

               Statements of Income for the years ended December 31, 1997, 1996,
               and 1995

               Statements  of Cash Flows for the years ended  December 31, 1997,
               1996, and 1995

               Notes to Condensed Financial Statements

          Schedule IV --  Reinsurance  for the years ended  December  31,  1997,
          1996, and 1995

          Schedule  VI  --  Supplemental  Information  Concerning  Property  and
          Casualty  Insurance  Operations for the years ended December 31, 1997,
          1996, and 1995



                                       37
<PAGE>


     The   information  for  Schedule  I  is  contained  in  the  Notes  to  the
Consolidated Financial Statements.  The information for Schedule III is included
in Schedule VI. The information required for Schedule V is not applicable.

     3.   Exhibits:


Exhibit
Number   Description

2           Acquisition Agreement,  dated as of August 3, 1995, among Kaye Group
            Inc.  (formerly  known  as  Old  Lyme  Holding  Corporation),   Kaye
            International,  L.P., certain individuals and Kaye Holding Corp.,( a
            copy of which  was  filed  with the  Commission  on March  31,  1995
            (Registration  No.  33-64664),  and which is incorporated  herein by
            this reference).

3(i)        Certificate of Incorporation  of Kaye Group Inc.  (formerly known as
            Old Lyme  Holding  Corporation)  (a copy of which was filed with the
            Commission  on  June  17,  1993  as  Exhibit  3.1 to  the  Company's
            Registration Statement on Form S-1 (Registration No. 33-64664),  and
            which is incorporated herein by this reference).

3(ii)       By-laws  of Kaye  Group  Inc.  (formerly  known as Old Lyme  Holding
            Corporation)  (a copy of which was filed with the Commission on June
            17, 1993 as Exhibit 3.2 to the Company's  Registration  Statement on
            Form S-1  (Registration  No.  33-64664),  and which is  incorporated
            herein by this reference).

4.1         Form of  certificate  representing  shares  of  Common  Stock of the
            Company (a copy of which was filed with the  Commission on March 31,
            1995 (Registration No. 33-64664),  and which is incorporated  herein
            by this reference).

10.1        Kaye Group Inc.  (formerly  known as Old Lyme  Holding  Corporation)
            1993  Stock  Option  Plan  (a copy  of  which  was  filed  with  the
            Commission  on August 17, 1993 as Exhibit 10.6 to Amendment No. 3 to
            the Company's  Registration  Statement on Form S-1 (Registration No.
            33-64664), and which is incorporated herein by this reference).

10.1(i)     Kaye Group Inc.  Supplemental Stock Option Plan (a copy of which was
            filed with the Commissioner on March 31, 1997) (Registration  No.33-
            64664),  as Exhibit 10.1(i) to the Company's Form 10-K, and which is
            incorporated herein by this reference).


                                       38
<PAGE>


10.2        Registration  Agreement among Kaye Group Inc. (formerly known as Old
            Lyme Holding  Corporation),  Kaye  International,  L.P. and Old Lyme
            Holdings of Rhode  Island,  Inc. (a copy of which was filed with the
            Commission  on August 17, 1993 as Exhibit 10.7 to Amendment No. 3 to
            the Company's  Registration  Statement on Form S-1 (Registration No.
            33- 64664), and which is incorporated herein by this reference).

10.11       Credit  Agreement  among  Fleet  National  Bank ( formerly  known as
            Shawmut Bank Connecticut,  N.A.) and Kaye Group Inc. (formerly known
            as Old Lyme  Holding  Corporation)  dated  June 30,  1994 (a copy of
            which was filed with the Commission on March 31, 1995  (Registration
            No.33-  64664),  as Exhibit  10.16 to the Company's  Form 10-Q,  and
            which is incorporated herein by this reference).

10.12       First  Amendment  to the Credit  Agreement,  dated March 15, 1995 (a
            copy of which was filed  with the  Commission  on March 31,  1995 as
            Exhibit 10.17 to the Company's Form 10-Q, and which is  incorporated
            herein by this reference).

10.13       Second Amendment to the Credit Agreement, dated May 19, 1995 (a copy
            of which was filed with the  Commission  on June 30, 1995 as Exhibit
            10.19 to the Company's Form 10-Q, and which is  incorporated  herein
            by this reference).

10.14       Loan Agreement between Kaye  International  L.P. and Kaye Group Inc.
            (formerly known as Old Lyme Holding Corporation,  dated May 24, 1995
            (a copy of which was filed with the  Commission on June 30, 1995, as
            Exhibit 10.18 to the Company's Form 10-Q, and which is  incorporated
            herein by this reference).

10.15       Credit Agreement  between Kaye Holding Corp. and Fleet National Bank
            (formerly known as Shawmut Bank Connecticut,  N.A., dated October 2,
            1995 (a copy of which was  filed  with the  Commission  on March 31,
            1995, (Registration No.33-64664),  as Exhibit 10.15 to the Company's
            Form 10-K, and which is incorporated herein by this reference).

10.15(i)    First Amendment to Credit  Agreement  between Kaye Holding Corp. and
            Fleet  National Bank  (formerly  known as Shawmut Bank  Connecticut,
            N.A.,  dated  March 31,  1996 (a copy of which  was  filed  with the
            Commission on May 13, 1996, (Registration  No.33-64664),  as Exhibit
            10.22 to the Company's Form 10-Q, and which is  incorporated  herein
            by this reference).


                                       39
<PAGE>


10.15(ii)   Second Amendment to Credit Agreement  between Kaye Holding Corp. and
            Fleet  National Bank  (formerly  known as Shawmut Bank  Connecticut,
            N.A.) (a copy of which was filed  with the  Commission  on March 31,
            1997,  (Registration  No.33-64664),  as  Exhibit  10.15(ii)  to  the
            Company's  Form  10-K,  and  which is  incorporated  herein  by this
            reference).

10.15(iii)  Third amendment to Credit  Agreement  between Kaye Holding Corp. and
            Fleet National Bank, dated September 30, 1997.

10.16       Stockholders Agreement among Kaye Holding Corp., Kaye International,
            L.P.,  Kaye Group Inc.,  Howard Kaye,  Lawrence  Greenfield,  Walter
            Kaye, Stanley Feinberg,  Bruce D. Guthart,  Edward Berliner,  Michel
            Zaleski, Ned Sherwood and Marc N. Silverman,  dated October 2, 1995,
            (a copy of which was filed with the  Commission  on March 31,  1995,
            (Registration  No.33-64664),  as Exhibit 10.16 to the Company's Form
            10-K, and which is incorporated herein by this reference).

*10.17      Executive  Employment Agreement between Kaye Group Inc. and Bruce D.
            Guthart, dated as of January 2, 1997 (a copy of which was filed with
            the  Commission on March 31, 1997,  (Registration  No.33-64664),  as
            Exhibit 10.17 to the Company's Form 10-K, and which is  incorporated
            herein by this reference).

*10.18      Employment Agreement between Kaye Group Inc. and Michael P. Sabanos,
            dated  as of May 15,  1996  (a copy of  which  was  filed  with  the
            Commission on March 31, 1997, (Registration No.33-64664), as Exhibit
            10.18 to the Company's Form 10-K, and which is  incorporated  herein
            by this reference).

*10.20      Executive  Employment  Agreement between Kaye Insurance  Associates,
            Inc. and Richard Bass, dated as of October 31, 1991 (a copy of which
            was  filed  with the  Commission  on March 31,  1997,  (Registration
            No.33-  64664),  as Exhibit  10.20 to the Company's  Form 10-K,  and
            which is incorporated herein by this reference).

*10.20(i)   Amendment to Executive  Employment  Agreement between Kaye Insurance
            Associates,  Inc. and Richard Bass, dated as of December 11, 1995 (a
            copy of which  was filed  with the  Commission  on March  31,  1997,
            (Registration  No.33-64664),  as Exhibit  10.20 (i) to the Company's
            Form 10-K, and which is incorporated herein by this reference).



                                       40
<PAGE>


*10.21      Kaye Group Inc. Stock  Performance Plan dated as of October 2, 1997.
            (a copy of which was filed with the  Commission on December 8, 1997,
            as Annex B to Schedule  14(a),  Information  to the Company's  Proxy
            Statement,  pursuant  to Section  14(a),  and which is  incorporated
            herein by this reference).

11          Statement regarding computation of earnings per share.

23          Consent of Independent Accountants

27          Financial Data Schedule

Location of Documents Pertaining to
Executive Compensation Plans and Arrangements

Name of Document                                           Item in Exhibit Index
*Executive Compensation and Arrangement                              *

* Documents noted by "*" in exhibits

(b)  Reports on Form 8-K


Exhibit

99.2        Kaye Group Inc.  (the  "Company")  announced on October 28, 1997 the
            merger of Kaye Holding  Corp.  into Kaye Group Inc. A press  release
            announcing the merger was issued by the Company on October 28, 1997.



                                       41
<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) 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.

                                                 KAYE GROUP INC.

                                                 By: /s/ Bruce D. Guthart
                                                 -------------------------------
                                                 Bruce D. Guthart, Chairman


Dated: March 27, 1998

     Pursuant to the  requirements  of the  Securities  Exchange Act of 1934, as
amended,  this report has been signed by the following persons in the capacities
and on the dates indicated.

Signature                        Title                                 Date
---------                        -----                                 ----

/s/ Bruce D. Guthart       Director, Chairman, President
-----------------------    Chief Executive Officer
Bruce D. Guthart           (Principal Executive Officer)          March 27, 1998



/s/ Howard Kaye            Director                               March 27, 1998
-----------------------
Howard Kaye


/s/ Michael P. Sabanos     Director, Senior Vice President,
-----------------------    Chief Financial Officer (Principal
Michael P. Sabanos         Financial Officer and Accounting
                           Officer)                               March 27, 1998



/s/ Robert Barbanell       Director                               March 27, 1998
-----------------------
Robert Barbanell


/s/ Richard Butler         Director                               March 27, 1998
-----------------------
Richard Butler


/s/ David Ezekiel          Director                               March 27, 1998
-----------------------
David Ezekiel


/s/ Elliot Cooperstone     Director                               March 27, 1998
-----------------------
Elliot Cooperstone


/s/ Ned Sherwood           Director                               March 27, 1998
-----------------------
Ned Sherwood


                                       42
<PAGE>


Item 8. Financial Statements and Supplementary Data

                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

                                                                            Page

Index to Notes to Consolidated Financial Statement                          F-2

Report of Independent Accountants                                           F-3

Consolidated Balance Sheets at December 31, 1997
   and 1996                                                                 F-4

Consolidated Statements of Income for the years
   ended December 31, 1997, 1996 and 1995                                   F-5

Consolidated Statements of Cash Flows
   for the years ended December 31, 1997,  1996
   and 1995                                                                 F-8

Consolidated Statements of Stockholders' Equity
   for the years ended December 31, 1997, 1996
   and 1995                                                                 F-9

Notes to Consolidated Financial Statements                                  F-10

Financial Statement Schedules:

Schedule II - Condensed Financial Information of Registrant:
         Balance Sheets at December 31, 1997 and 1996                       F-38

         Statements of Income for the years ended
         December 31, 1997, 1996 and 1995                                   F-39

         Statements of Cash Flows for the years ended
         December 31, 1997, 1996 and 1995                                   F-40

         Notes to Condensed Financial Statements                            F-41

Schedule IV - Reinsurance for the years ended
   December 31, 1997, 1996 and 1995                                         F-42

Schedule VI - Supplemental Information Concerning
   Property-Casualty Insurance Operations for the
   years ended December 31, 1997, 1996 and 1995                             F-43

The  information  for Schedule I is  contained in the Notes to the  Consolidated
Financial  Statements.  The information for Schedule III is included in Schedule
VI. The information required for Schedule V is not applicable.


                                      F-1
<PAGE>


INDEX TO NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Footnote   Description                                                     Page
--------   -----------                                                     ----

   1       Business                                                        F-10
   2       Organization and Basis of Presentation                          F-12
   3       Significant Accounting Policies                                 F-13
   4       Changes in Accounting Policies                                  F-18
   5       Funds Held in Fiduciary Capacity                                F-18
   6       Investments                                                     F-19
   7       Notes Payable                                                   F-22
   8       Income Taxes                                                    F-23
   9       Lease Commitments and Rentals                                   F-25
   10      Pension and Retirement Plans                                    F-26
   11      Management Services Agreement                                   F-26
   12      Contingent Liabilities                                          F-27
   13      Reinsurance                                                     F-27
   14      Losses and Loss Expenses                                        F-29
   15      Statutory Financial Information and Dividend Restrictions       F-29
   16      Related Party Transactions                                      F-31
   17      Acquisitions                                                    F-31
   18      Preferred Stock                                                 F-31
   19      Common Stock Warrants and Dividends Declared                    F-32
   20      Stock Performance and Stock Option Plans                        F-32
   21      Quarterly Financial Information (Unaudited)                     F-34
   22      Premiums                                                        F-35
   23      Business Segments                                               F-35
   24      Supplemental Cash Flow Disclosures                              F-37


                                      F-2
<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Kaye Group Inc.:

We have  audited the  accompanying  consolidated  financial  statements  and the
financial statement schedules of KAYE GROUP INC. listed in the index on page F-1
of this  Form  10-K.  These  consolidated  financial  statements  and  financial
statement  schedules are the  responsibility  of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements and financial statement schedules 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 financial  statements  referred to above present fairly, in
all material respects, the consolidated financial position of KAYE GROUP INC. as
of December 31, 1997 and 1996, and the consolidated  results of their operations
and their cash flows for each of the three  years in the period  ended  December
31, 1997,  in conformity  with  generally  accepted  accounting  principles.  In
addition,  in our opinion,  the financial statement schedules referred to above,
when considered in relation to the basic consolidated financial statements taken
as a whole,  present fairly, in all material respects,  the information required
to be included therein.



COOPERS & LYBRAND L.L.P.
New York, New York
February  25, 1998


                                      F-3
<PAGE>


                                 KAYE GROUP INC.
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1997 and 1996
                   (in thousands, except par value per share)

<TABLE>
<CAPTION>
                                                                                                           1997               1996
                                                                                                         ========           ========
<S>                                                                                                      <C>                <C>
ASSETS:

INSURANCE BROKERAGE COMPANIES
Current assets:
     Cash and cash equivalents
     (including short term investments, and funds held in a fiduciary
     capacity of $22,322 and $23,879)                                                                     $24,833            $24,789
     Premiums and other receivables                                                                        32,790             56,255
     Prepaid expenses and other assets                                                                      1,385              1,587
                                                                                                         --------           --------
     Total  current assets                                                                                 59,008             82,631

Fixed assets (net of accumulated depreciation of $4,553 and $7,646)                                         3,145              2,349
Expiration lists (net of accumulated amortization of $1,969 and $1,600)                                     4,702              2,092
Deferred income taxes                                                                                         966              1,354
Other assets                                                                                                  181                237
                                                                                                         --------           --------
     Total assets - insurance brokerage companies                                                          68,002             88,663
                                                                                                         --------           --------

PROPERTY AND CASUALTY COMPANIES
Investments available-for-sale:
     Fixed maturities, at market value (amortized cost: 1997, $40,771;
          1996, $39,216)                                                                                   41,313             39,145
     Equity securities, at market value (cost:1997, $1,629; 1996, $2,246)                                   1,767              2,316
     Short term investments, at cost, which approximates market value                                       3,430              1,336
                                                                                                         --------           --------
     Total investments                                                                                     46,510             42,797

Cash and cash equivalents                                                                                   6,409              2,714
Accrued interest and dividends                                                                                882                969
Premiums receivable                                                                                         2,344              4,079
Premiums receivable - insurance brokerage companies                                                         3,185              2,904
Prepaid reinsurance premiums                                                                                  262                283
Reinsurance recoverable on unpaid losses and loss expenses                                                  2,811                882
Funds held under deposit contracts, at market value (amortized cost:
         1997, $173; 1996, $3,842)                                                                            173              3,847
Deferred acquisition costs                                                                                  3,939              4,073
Deferred income taxes                                                                                         379                639
Other assets                                                                                                1,810              2,266
Intercompany receivable                                                                                                          556
                                                                                                         --------           --------
     Total assets - property and casualty companies                                                        68,704             66,009
                                                                                                         --------           --------

CORPORATE
Cash and cash equivalents                                                                                      65                456
Prepaid expenses and other assets                                                                             107                443
Investments available-for-sale:
     Equity securities, at market value (cost:1997, and 1996, $557)                                           442                513
     Fixed maturities, at market value (amortized cost :1996, $9)                                                                  9
Deferred income taxes                                                                                          41                  9
Intercompany receivable                                                                                     3,664
                                                                                                         --------           --------
     Total assets - corporate                                                                               4,319              1,430
                                                                                                         --------           --------

     Total assets                                                                                        $141,025           $156,102
                                                                                                         ========           ========
</TABLE>


     See notes to consolidated financial statements



                                      F-4
<PAGE>


                                 KAYE GROUP INC.
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1997 and 1996
                   (in thousands, except par value per share)

<TABLE>
<CAPTION>
                                                                                                           1997             1996
                                                                                                        =========         =========
<S>                                                                                                      <C>               <C>
LIABILITIES:

INSURANCE BROKERAGE COMPANIES
Current liabilities:
     Premiums payable                                                                                     $40,872           $63,081
     Premiums payable - property and casualty companies                                                     3,185             2,904
     Accounts payable and accrued liabilities                                                               7,983             6,074
     Notes payable                                                                                            434               595
     Deferred income taxes                                                                                  1,063             1,122
     Intercompany payable                                                                                   3,342               344
                                                                                                        ---------         ---------
     Total current liabilities                                                                             56,879            74,120
Notes payable                                                                                                 654               537
Note payable - KILP                                                                                                           6,000
Other liabilities                                                                                           1,466
                                                                                                        ---------         ---------
     Total liabilities-insurance brokerage companies                                                       58,999            80,657
                                                                                                        ---------         ---------

PROPERTY AND CASUALTY COMPANIES
Liabilities:
     Unpaid losses and loss expenses                                                                       19,126            15,227
     Unearned premium reserves                                                                             12,578            13,176
     Deposit contracts                                                                                        122             3,448
     Accounts payable and accrued liabilities                                                               6,661             4,991
     Reinsurance payable                                                                                      228               170
     Intercompany payable                                                                                     322
                                                                                                        ---------         ---------
     Total liabilities - property and casualty companies                                                   39,037            37,012
                                                                                                        ---------         ---------

CORPORATE
Current liabilities:
     Accounts payable and accrued liabilities                                                                 774               704
     Intercompany payable                                                                                                       212
     Note payable                                                                                           1,875               850
     Income taxes payable                                                                                      16                95
                                                                                                        ---------         ---------
     Total current liabilities                                                                              2,665             1,861
Note payable-long-term                                                                                      5,156             6,250
                                                                                                        ---------         ---------
     Total liabilities-corporate                                                                            7,821             8,111
                                                                                                        ---------         ---------

     Total liabilities                                                                                    105,857           125,780
                                                                                                        ---------         ---------

COMMITMENTS AND CONTINGENCIES

MINORITY INTEREST IN EQUITY OF
     KAYE HOLDING CORP                                                                                                        5,338
                                                                                                        ---------         ---------

STOCKHOLDERS' EQUITY:
     Preferred stock, $1.00 par value; 1,000 shares authorized;
          none issued or outstanding
     Common stock, $.01 par value; 20,000 shares authorized;
          1997, 8,474; 1996, 7,020 shares issued and outstanding                                               85                70
     Paid - in capital                                                                                     17,942             7,776
     Appreciation (depreciation) of investments available-for-sale, net of
          deferred income tax  liability (benefit) ( 1997, $192; 1996, ($16))                                 373               (31)
     Retained earnings                                                                                     16,768            17,169
                                                                                                        ---------         ---------

     Total stockholders' equity                                                                            35,168            24,984
                                                                                                        ---------         ---------

     Total liabilities and stockholders' equity                                                          $141,025          $156,102
                                                                                                        =========         =========
</TABLE>


     See notes to consolidated financial statements


                                      F-5
<PAGE>


                                 KAYE GROUP INC.
                        CONSOLIDATED STATEMENTS OF INCOME
              For the years ended December 31, 1997, 1996 and 1995
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                           1997             1996             1995
                                                                                         ========         ========         ========
<S>                                                                                       <C>              <C>              <C>
INSURANCE BROKERAGE COMPANIES
Revenues:
     Commissions and fees - net                                                           $27,294          $27,201          $31,142
     Commissions and fees - net  - Property and Casualty Companies                          3,830            3,368            2,800
     Interest and dividends                                                                 1,565            1,026            1,028
                                                                                         --------         --------         --------

     Total revenues                                                                        32,689           31,595           34,970
                                                                                         --------         --------         --------


Expenses:
     Salaries and benefits                                                                 18,868           18,569           21,125
     Other operating expenses                                                              12,654           13,621           13,951
                                                                                         --------         --------         --------

     Total  operating expenses                                                             31,522           32,190           35,076
                                                                                         --------         --------         --------

     Interest expense                                                                         400              600              600
                                                                                         --------         --------         --------

     Income (loss) before income taxes-insurance brokerage companies                          767           (1,195)            (706)
                                                                                         --------         --------         --------

PROPERTY AND CASUALTY COMPANIES
Revenues:
     Net premiums written                                                                  22,270           20,689           15,160
     Change in unearned premiums                                                              577           (1,362)           1,685
                                                                                         --------         --------         --------

     Net premiums earned                                                                   22,847           19,327           16,845
     Net investment income                                                                  2,692            2,461            2,819
     Net realized gains on investments                                                         21               72                1
     Other income                                                                             245              445              795
                                                                                         --------         --------         --------

     Total revenues                                                                        25,805           22,305           20,460
                                                                                         --------         --------         --------

Expenses:

     Losses and loss expenses                                                               8,716            7,036            4,850
     Acquisition costs  and general
        and administrative expenses                                                         9,370            8,218            6,928
                                                                                         --------         --------         --------

     Total expenses                                                                        18,086           15,254           11,778
                                                                                         --------         --------         --------

     Income before income taxes-property and casualty companies                             7,719            7,051            8,682
                                                                                         --------         --------         --------

CORPORATE
Revenues:

     Net investment income                                                                     55               89               17
                                                                                         --------         --------         --------

Expenses:
     Other operating expenses                                                                 438              220              133
     Cost of combining operations                                                                                               863
                                                                                         --------         --------         --------

     Total operating expenses                                                                 438              220              996
                                                                                         --------         --------         --------

     Interest expense                                                                         548              514              688
                                                                                         --------         --------         --------

     Net expenses before income taxes-corporate                                              (931)            (645)          (1,667)
                                                                                         --------         --------         --------
</TABLE>


See notes to consolidated financial statements


                                      F-6
<PAGE>


                                 KAYE GROUP INC.
                        CONSOLIDATED STATEMENTS OF INCOME
              For the years ended December 31, 1997, 1996 and 1995
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                             1997             1996            1995
                                                                                           =======          =======         =======
<S>                                                                                         <C>              <C>             <C>
Income before minority interest and income taxes                                            $7,555           $5,211          $6,309
                                                                                           -------          -------         -------

Provision for income taxes:
     Current                                                                                 1,921              364           1,276
     Deferred                                                                                  346            1,120           1,689
     Tax effect of change in tax status                                                                                      (2,944)
                                                                                           -------          -------         -------

     Total income taxes                                                                      2,267            1,484              21
                                                                                           -------          -------         -------


Income before minority interest                                                              5,288            3,727           6,288

Minority interest                                                                              931              656           1,107
                                                                                           -------          -------         -------

Net income                                                                                  $4,357           $3,071          $5,181
                                                                                           =======          =======         =======

EARNINGS PER SHARE

     Basic                                                                                   $0.62            $0.44           $0.74
                                                                                           =======          =======         =======

     Diluted                                                                                 $0.62            $0.44           $0.74
                                                                                           =======          =======         =======

PRO FORMA NET INCOME

     Income before minority interest and income taxes                                       $7,555           $5,211          $6,309

     Provision for income taxes/charge in lieu of income taxes                               2,267            1,484           1,995
                                                                                           -------          -------         -------


     Income before minority interest                                                         5,288            3,727           4,314

     Minority interest                                                                         931              656             759
                                                                                           -------          -------         -------

     Net income                                                                             $4,357           $3,071          $3,555
                                                                                           =======          =======         =======

PRO FORMA EARNINGS PER SHARE

     Basic                                                                                   $0.62            $0.44           $0.51
                                                                                           =======          =======         =======

     Diluted                                                                                 $0.62            $0.44           $0.51
                                                                                           =======          =======         =======

Weighted average of shares outstanding - basic                                               7,024            7,020           7,020
                                                                                           =======          =======         =======

Weighted average shares outstanding and
share equivalents outstanding - diluted                                                      7,083            7,021           7,023
                                                                                           =======          =======         =======
</TABLE>


See notes to consolidated financial statements


                                      F-7
<PAGE>


                                 KAYE GROUP INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              For the years ended December 31, 1997, 1996 and 1995
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                         1997              1996              1995
                                                                                       ========          ========          ========
<S>                                                                                     <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                                               $4,357            $3,071            $5,181
Adjustments to reconcile net income to net
     cash provided by (used in) operating activities:
     Deferred acquisition costs                                                             134              (370)              826
     Amortization of bond premium - net                                                     650               751               430
     Deferred income taxes                                                                  346             1,120            (1,268)
     Net realized (gains) losses on investments                                             (21)              (72)               47
     Depreciation and amortization expense                                                1,667             2,000             1,999
     Minority interest                                                                      931               656             1,107
     Change in assets and liabilities:
         Accrued interest and dividends                                                      87                22              (102)
         Premiums and other receivables                                                  23,011            19,217            11,426
         Prepaid expenses and other assets                                               (1,785)              760            (1,043)
         Unpaid losses and loss expenses                                                  3,899             2,556            (1,447)
         Unearned premium reserves                                                         (598)            1,362            (1,685)
         Premiums payable                                                               (21,870)          (14,865)          (13,639)
         Income taxes payable                                                               (79)            1,356            (2,221)
         Accounts payable and accrued liabilities                                         5,116              (767)              972
                                                                                       --------          --------          --------

         Net cash provided by operating activities                                       15,845            16,797               583
                                                                                       --------          --------          --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Investments available-for-sale :
   Purchase of fixed maturities                                                         (11,907)          (14,291)          (12,506)
   Purchase of equity securities                                                           (500)             (825)              (45)
   Purchase of short term investments                                                    (2,094)                             (2,450)
   Maturities of fixed maturities                                                         4,487             3,318             1,755
   Sales of fixed maturities                                                              5,297             8,707             9,635
   Sales of equity securities                                                             1,100                                 201
   Sales of short term investments                                                                          1,814
Funds held under deposit contracts
   Purchase of fixed maturities                                                            (976)             (469)           (1,650)
   Sales (purchases) of short term investments                                            2,344              (815)            2,199
   Sales of fixed maturities                                                              1,851             2,535             2,922
   Maturities of fixed maturities                                                           452               480               829
Purchase of fixed assets                                                                 (1,481)             (888)             (396)
Purchase of expiration list                                                                (777)
                                                                                       --------          --------          --------

         Net cash provided by (used in) investing activities                             (2,204)             (434)              494
                                                                                       --------          --------          --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under deposit contracts                                                         (3,326)           (1,553)           (4,007)
Notes payable-repayment                                                                  (6,757)             (416)           (6,145)
Proceeds from borrowings                                                                    642               553             7,268
Payment of dividends                                                                       (702)             (702)             (702)
Payment of dividends to minority shareholders                                              (150)             (150)
Increase in net advances from KILP                                                                                             (392)
                                                                                       --------          --------          --------

         Net cash used in financing activities                                          (10,293)           (2,268)           (3,978)
                                                                                       --------          --------          --------

NET CHANGE IN CASH AND CASH EQUIVALENTS                                                   3,348            14,095            (2,901)
Cash and cash equivalents at beginning of period                                         27,959            13,864            16,765
                                                                                       --------          --------          --------

Cash and cash equivalents at end of period                                              $31,307           $27,959           $13,864
                                                                                       ========          ========          ========
</TABLE>


See notes to consolidated financial statements



                                      F-8
<PAGE>


                                 KAYE GROUP INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              For the years ended December 31, 1997, 1996, and 1995
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                            Common Stock
                                       ----------------------                 Unrealized       Minimum                    Total
                                       Outstanding       Par      Paid-In    Appreciation/     Pension    Retained     Stockholders'
                                          Shares        Value     Capital   (Depreciation)    Liability   Earnings        Equity
                                       -----------      -----     -------   --------------    ---------   --------     -------------
<S>                                       <C>            <C>      <C>          <C>             <C>        <C>            <C>
Balance, January 1, 1995                  7,020          $70      $38,588      ($1,220)        ($404)     ($20,358)      $16,676

Change in unrealized appreciation,
    net of deferred
    income tax of ($750)                                                         1,456                                     1,456
Net income                                                                                                   5,181         5,181
Decrease in net advances from KILP                                   (133)                                                  (133)
Dividends declared (per share-$0.10)                                                                          (702)         (702)
Effect of combining operations                                    (30,679)                                  30,679             0
Minimum pension liability                                                                        404                         404
                                          -----          ---      -------      -------         -----      --------       -------

Balance, December 31, 1995                7,020           70        7,776          236             0        14,800        22,882

Change in unrealized depreciation,
    net of deferred
    income tax benefit of $138                                                    (267)                                     (267)
Net income                                                                                                   3,071         3,071
Dividends declared (per share-$0.10)                                                                          (702)         (702)
                                          -----          ---      -------      -------         -----      --------       -------

Balance, December 31, 1996                7,020           70        7,776          (31)            0        17,169        24,984

Change in unrealized appreciation,
    net of deferred
    income tax of ($174)                                                           338                                       338
Net income                                                                                                   4,357         4,357
Dividends declared (per share-$0.10)                                                                          (702)         (702)
Shares issued to purchase minority
    interest, net of
   deferred income tax of $34             1,454           15       10,166           66                      (4,056)        6,191
                                          -----          ---      -------      -------         -----      --------       -------

Balance, December 31, 1997                8,474          $85      $17,942         $373            $0       $16,768       $35,168
                                          =====          ===      =======      =======         =====      ========       =======
</TABLE>


See notes to consolidated financial statements


                                      F-9
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  Years ended December 31, 1997, 1996, and 1995

1) Business

Kaye Group  Inc.  (the  "Company")  a Delaware  corporation,  formerly  Old Lyme
Holding  Corporation  ("Holding"),  is a  holding  company  which,  through  its
subsidiaries,  is engaged in a broad range of insurance brokerage,  underwriting
and related activities.  The Company operates in two insurance business segments
-  the  Insurance  Brokerage  Companies  Operations  ("Brokerage   Operations"),
comprised of the Retail Brokerage  Business and the Program Brokerage  Business,
and the Property and Casualty Companies Operations.

In addition,  Corporate  Operations  include those  activities  that benefit the
Company in its  entirety  and cannot be  specifically  identified  to either the
Insurance Brokerage Companies or the Property and Casualty Companies Operations.
Such activities  include debt servicing and public company  expenses,  including
investor relations costs.

Insurance Brokerage Companies Operations

The Retail Brokerage  Business operates an insurance  brokerage business through
four subsidiaries of the Company,  the "Retail Brokerage  Companies".  It offers
commercial  clients  a full  range of  insurance  brokerage  services  including
procurement of property/casualty insurance, risk management consulting, bonding,
insurance  coverage loss  prevention  engineering,  and group  employee  benefit
consulting services.  In addition,  personal lines and life and health insurance
coverage are placed on behalf of individuals.

The Retail  Brokerage  Business'  primary  strategy is to service  middle market
companies  and  organizations  just below the  Fortune 500 level for which other
national brokers  intensely  compete.  Within this market,  the Retail Brokerage
Business has developed  particular expertise and knowledge of the risks facing a
number of industry sectors  including  health care, real estate,  manufacturing,
churches, law firms, homes for the aged and fine arts.

During  1997,  the  Retail  Brokerage  Business  serviced  approximately  10,000
insureds.  The  Retail  Brokerage  Business  is  compensated  for  its  services
primarily in the form of commissions paid by insurance companies. The commission
is usually a percentage  of the premium paid by the  insured.  Commission  rates
depend upon the type of insurance,  the particular  insurance  company,  and the
role in which the Retail Brokerage  Business acts. In some cases a commission is
shared  with other  agents or brokers  who have  acted  jointly  with the Retail
Brokerage  Business in connection  with the  transaction.  The Retail  Brokerage
Business may also receive from an insurance company a contingent commission that
is generally based on the profitability and volume of business placed with it by
the Retail Brokerage  Business over a given period of time. The Retail Brokerage
Business


                                      F-10
<PAGE>


may also receive fees in connection  with  consulting  services  relating to the
marketing of insurance.

Program  Brokerage  Corporation or "PBC" (the Program  Brokerage  Business) is a
subsidiary of the Company and operates a wholesale  insurance brokerage business
which offers retail  insurance  agents and brokers  innovative  solutions to the
twin insurance  problems of price and availability of coverage.  It accomplishes
this by organizing pools of similar risks into specially designed Affinity Group
Insurance Programs (the "Programs").

Approximately  two thirds of PBC's premium volume is generated by  approximately
400 unrelated retail insurance  agents and brokers serving  approximately  4,300
insureds  during  1997.  The  remaining  one third is  derived  from the  Retail
Brokerage  Business.  Approximately  half of PBC's premium volume is directly or
indirectly  placed  with two  affiliates,  Old Lyme  Insurance  Company of Rhode
Island, Inc. ("OLRI") and Old Lyme Insurance Company, Ltd. (Bermuda) ("OLB").

Property and Casualty Companies Operations

The Company conducts its property and casualty underwriting business through two
insurance company subsidiaries (the "Insurance  Companies"),  OLRI and OLB. OLRI
is a property  and  casualty  insurance  company  licensed  in Rhode  Island and
eligible  as a  surplus  lines  insurer  in New  York and New  Jersey.  OLB is a
property and casualty insurance company organized and licensed under the laws of
Bermuda.  In states where the Insurance  Companies are not admitted  insurers or
surplus lines insurers, the Insurance Companies underwrite risks through various
reinsurance agreements.

The Insurance  Companies  underwrite  property risks (loss or physical damage to
property)  and OLRI  underwrites  casualty  risks (legal  liability for personal
injury or  damaged  property  of others)  for  insureds  in the  United  States.
Insurance is sold principally  through the Programs marketed by PBC which insure
various   types  of   businesses   and   properties   that  have   similar  risk
characteristics,  such as apartments, condominiums,  cooperatives,  restaurants,
building maintenance companies,  churches,  funeral homes and pharmacies,  among
others.

The Insurance Companies' strategy is to underwrite only the first "layer" of the
property and casualty  insurance  provided  under the Programs.  Its exposure to
individual insureds on individual losses is thereby generally limited to between
$1,000 and $25,000 per claim  (inclusive of allocated loss expenses),  depending
on the Program.  Under the Programs,  the Insurance Companies' policies are sold
in  conjunction  with  policies  issued by  unaffiliated  Program  insurers that
provide  coverage for losses above the first layer of risk  underwritten  by the
Insurance Companies.  In addition,  the Insurance Companies have issued policies
on a selected basis with limits up to $1,000,000, retaining the first $50,000 of
exposure and reinsuring the remaining limits with an unaffiliated reinsurer.



                                      F-11
<PAGE>


Property  and  Casualty  Companies  Operations  includes  Claims  Administration
Corporation  ("CAC"),  a subsidiary of the Company which is responsible  for the
administration  of a large  majority of the claims  submitted  to the  Insurance
Companies.  The administration of claims includes  investigation,  engagement of
legal  counsel,  approval of  settlements  and the making of payments  to, or on
behalf of  insureds.  CAC also  provide  claims  administration  service  to the
unaffiliated Program insurers for a fee.

2) Organization and Basis of Presentation

In 1994 the Retail  Brokerage  Business  completed the  integration  of its 1992
acquisition   of  Amalgamated   Programs   Corporation   and  related   entities
("Amalgamated")  and  continued  to downsize to adjust to the  continuing  "soft
market" in property and casualty premium rates. At the time, the officers of the
general partners of Kaye  International L.P. ("KILP") (which included members of
Holding's Board of Directors)  concluded that the combination of Holding and the
Retail  Brokerage  Business would be  advantageous  for both OLRI and KILP. This
conclusion was based on three factors:  (a) improved  operating  results derived
from the Amalgamated integration and "soft market" downsizing,  (b) the improved
outlook  for the  Retail  Brokerage  Business  and (c) the fact that the  Retail
Brokerage Business accounted for approximately half of the PBC's premium volume.

The  combination  was  effective  October  2,  1995 and was  accounted  for as a
transfer and exchange between companies under common control.  Accordingly,  the
assets and liabilities of the Retail Brokerage Business were combined with those
of  Holding  at their  historical  cost in a manner  similar  to a  "pooling  of
interests". The combination was accomplished as follows:

     1. Holding transferred to Kaye Holding Corp. ("KHC") all of the outstanding
stock of the Insurance Companies and its two other subsidiaries, PBC and CAC and
its  other  assets in  exchange  for (i)  82,400  shares  of KHC  common  stock,
representing  82.4% of the total  outstanding  KHC  common  stock,  and (ii) the
assumption by KHC of certain of Holding's liabilities.

     2.  KILP  transferred  all of its  interest  in  the  limited  partnerships
conducting the Retail Brokerage Business (the "Retail Partnerships") and certain
related  assets to KHC in exchange  for (i) 17,200  shares of KHC common  stock,
representing  17.2% of the total  outstanding  KHC  common  stock,  and (ii) the
assumption by KHC of certain KILP liabilities.

     3. Certain  individuals  transferred  to KHC all of their  interests in the
corporate  general partners of the Retail  Partnerships  (the "Retail  Brokerage
Companies") in exchange for 400 shares of KHC common stock, representing 0.4% of
the total outstanding KHC common stock.

     4. KHC contributed  its interests in the Retail  Partnerships to the Retail
Brokerage Companies thereby causing the dissolution of the Retail  Partnerships.
As a result, the



                                      F-12
<PAGE>


Retail Brokerage Companies, as a group, own all of the assets and are subject to
all of the liabilities, of the Retail Brokerage Business.

On December 30, 1997, the  stockholders of the Company  approved a restructuring
that merged KHC into the Company.  This eliminated  KILP's minority  interest in
KHC of $6,191,000 at December 31, 1997 and increased stockholders' equity of the
Company by the same  amount.  KILP is the  Company's  largest  shareholder.  The
merger was  accounted  for as a transfer and  exchange  between  entities  under
common control. Accordingly,  common stock of Kaye Group Inc. issued in exchange
for the KHC shares was accounted for by using the closing NASDAQ market price on
(the effective date of the merger) October 24, 1997 ($7.00).  This increased the
number of shares of common stock by 1,454,435 at the par value $.01,  per share,
or  $14,544.  Paid-in  capital  was  increased  by  $10,166,000  which  was  the
difference between the market value price per share and the par value per share.
Minority  interest in KHC was  eliminated as a result of the merger and retained
earnings of Kaye Group Inc.  was reduced to account for the  difference  between
the  market  value of the  shares  issued,  and the book  value of the  minority
interest in KHC.

3) Significant Accounting Policies

(a) Basis of Presentation

The  accompanying  consolidated  financial  statements  have  been  prepared  in
accordance with generally accepted  accounting  principles  ("GAAP") and include
the accounts of the Company for all periods presented and restated  effective in
1995 to give  effect to the  combination  as a  transfer  and  exchange  between
companies under common control.  Accordingly,  the assets and liabilities of the
Retail  Brokerage  Business have been  combined  with Holding at the  historical
costs in a manner similar to a pooling of interests. The historical Consolidated
Financial  Statements reflect the combination as if the pooling of interests was
consummated at the beginning of the earliest year presented and give retroactive
effect to the  restructuring  for all periods prior to the IPO. All  significant
intercompany balances and transactions within segments have been eliminated.

The  preparation  of  financial  statements  in  conformity  with GAAP  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 revenue and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.

Effective upon the closing of the October 2, 1995  combination (see Note 2), the
entities  comprising the Retail  Brokerage  Business ceased being either limited
partnerships or S corporations  and became taxable  corporations  (see Note 8 ).
Accordingly, the accumulated deficit of the Retail Brokerage Business at October
1, 1995 of  $30,679,000  was  reclassed to paid-in  capital,  and a deferred tax
benefit of $2,944,000 was recorded as the tax effect of the change in tax status
in the accompanying 1995 Consolidated Statement of Income (see Note 8).


                                      F-13
<PAGE>


The  accompanying  consolidated  financial  statements  have been  prepared on a
segmented basis. See Note 1 for segments and their respective operations.

Income  (loss)  before  income  taxes  of the two  operating  segments  includes
expenses incurred by Corporate on behalf of the segments, which are allocated to
operations of the segments.  The allocation is based upon total revenues of each
segment  except for the  allocation  of the  incentive  bonus which is allocated
based on the percentage of profits contributed to the Company.

Identifiable assets by segment are those assets used in the Company's operations
in each  business  segment.  Corporate  assets  are  principally  cash  and cash
equivalents and investments in equity securities.

Certain prior year  information  has been  reclassified to conform with the 1997
presentation.

(b) Commission Income

Commission income together with the related accounts receivable from clients and
premiums  payable to  insurance  carriers,  is  recorded  principally  as of the
billing date.  Commission income related to installment billing  arrangements is
recorded at the date of the initial billing. Contingent commissions, commissions
on premiums  billed  directly by insurance  carriers and commission  adjustments
(including cancellations) are recorded when collected or known.

(c) Fixed Assets

Furniture, equipment, computer hardware and software, and leasehold improvements
are carried at cost, less accumulated  depreciation  and  amortization  computed
using the  straight-line  method.  Fixed  assets are  depreciated  over  periods
ranging from three to seven years, and leasehold improvements are amortized over
the remaining terms of the leases which expire commencing 1997 through 2001.

(d) Intangible Assets

Acquired  expiration  lists are carried at cost, less  accumulated  amortization
which is computed using the straight-line  method over a period of not more than
fifteen  years.  Corporate  organizational  costs  are  carried  at  cost,  less
accumulated amortization and are amortized using the straight-line method over a
period of five years. Such costs were fully amortized at December 31, 1996.


                                      F-14
<PAGE>


(e) Investments

Fixed  maturity  securities,  funds  held  under  deposit  contracts  and equity
securities,  which  include  common and preferred  stocks,  are stated at market
value.  The  difference  between the cost and market value of fixed maturity and
equity securities is reflected as unrealized  appreciation or depreciation,  net
of applicable  deferred income taxes, as a separate  component of  stockholders'
equity.  Realized gains or losses from the sale of investments are determined on
the  basis of  specific  identification  and are  reflected  as a  component  of
revenues. Investment income is recognized when earned.

The fair  value  of  fixed  maturities  is  based  on the  closing  price of the
investments on December 31. The fair value of equity  securities is based on the
closing sale price on December 31.

If a decline  in fair  value of an  investment  is  considered  to be other than
temporary,  the  investment  is  reduced  to its net  realizable  value  and the
reduction is accounted for as a realized  investment loss. In evaluating whether
a decline is other than temporary,  management considers the duration and extent
to which the market value has been less than cost,  the financial  condition and
near-term prospects of the issuer, including events that may impact the issuer's
operations and impair the earnings potential of the investment, and management's
ability and intent to hold an investment for a sufficient period to allow for an
anticipated recovery in fair value.

(f) Insurance Premiums Earned

Insurance  premiums  are  recognized  as revenues  ratably over the terms of the
related  policies  in force.  Unearned  premiums  are  established  to cover the
unexpired  portion of premiums  written and are  calculated  using the daily pro
rata method. Premiums earned are net of reinsurance ceded.

(g) Deferred Acquisition Costs

Deferred  acquisition  costs  represent  costs to  acquire  or  renew  insurance
policies or contracts and are deferred and amortized over the applicable premium
recognition  period,  generally one year. These deferred costs have been limited
to the amount expected to be recovered from future earned premiums.  Acquisition
costs of $7,269,000,  $6,086,000,  and  $5,193,000  were amortized to expense in
1997, 1996 and 1995, respectively.

(h) Unpaid Losses and Loss Expenses

The  estimated  liability  for unpaid  losses and loss  expenses  is based on an
evaluation of claims reported by policyholders.  A provision,  which is based on
historical  experience  and modified for current  trends,  is also  included for
losses and loss expenses which have been incurred but not reported.  The methods
of determining such estimates and establishing the



                                      F-15
<PAGE>


resulting  reserves are  continually  reviewed  and modified to reflect  current
conditions,   and  any  adjustments  are  reflected   currently  in  results  of
operations.

The Company has received claims related to lead paint exposures it insures under
various residential real estate programs.  There are uncertainties in estimating
the  amount  of  reserves  due to  factors  including:  difficulty  in  properly
allocating responsibility and/or liability for the lead paint exposure;  changes
in the underlying laws and the judicial  interpretation of those laws; questions
regarding  the  interpretation  and  application  of insurance  and  reinsurance
coverage.  The Company has reserves established for these claims on a case basis
and an incurred but not reported basis.  The reserves  provided were established
based on  Management's  estimate of ultimate  liabilities.  However,  due to the
nature of the exposures such reserves cannot be, and are not  established  using
standard actuarial techniques.

(i) Reinsurance

Assumed  reinsurance  premiums  written,   commission,  and  unpaid  losses  are
accounted  for  based  principally  on the  reports  received  from  the  ceding
insurance  companies  and in a manner  consistent  with the terms of the related
reinsurance  agreements.  Liabilities  for  unpaid  losses,  loss  expenses  and
unearned premiums are stated gross of ceded reinsurance  recoverables.  Deferred
acquisition  costs are stated net of the amounts of  reinsurance  ceded,  as are
premiums written and earned,  losses and loss expenses  incurred,  and amortized
acquisition  costs.  Assumed  reinsurance  contracts  which do not  involve  the
transfer of risk to the Company are recorded as deposit contracts (see Note 13).

(j) Income Taxes

The  Company  recognizes  deferred  tax  assets  or  liabilities  for  temporary
differences  between  the  financial  reporting  and tax  basis  of  assets  and
liabilities  based on enacted tax rates.  The  principal  temporary  differences
relate to  deferred  acquisition  costs,  unearned  premiums,  discount  for tax
purposes  of the  unpaid  losses  and loss  expense  reserves,  amortization  of
expiration lists and deferred  compensation,  accrual  adjustment for commission
income and unrealized gains or losses on investments (see Note 8).

(k) Cash and Cash Equivalents

Cash and cash  equivalents  include  money  market  funds  and  certificates  of
deposit,  including funds held in a fiduciary  capacity for Insurance  Brokerage
Companies, with a maturity of three months or less.

(l)  Pro forma Net Income

Prior to the Transaction  certain  entities were  partnerships or S Corporations
under the Internal  Revenue  code and  therefore  not liable for Federal  income
taxes.  Also,  OLB, as a Bermuda  domiciled  company,  was not liable for income
taxes. The charge in lieu of



                                      F-16
<PAGE>


income taxes  information  is presented as if the income of these  entities were
taxed to those entities  rather than to partners or  stockholders  not otherwise
included in the Company's consolidated group.

(m) Earnings Per Share

Effective  December  31,  1997,  the  Company  adopted  Statement  of  Financial
Accounting  Standards  ("SFAS")  No. 128  Earnings  Per Share which  requires an
enterprise  to present  basic and diluted  earnings per share on the face of the
income statement.  Basic earnings per share, which is calculated by dividing net
income by the weighted  average  number of common shares  outstanding,  replaces
primary earnings per share from the prior standard.  For all periods  previously
reported  by the  Company,  basic  earnings  per  share is the  same as  primary
earnings per share,  since the impact of the Company's common stock  equivalents
for those periods did not reach the significance threshold prescribed to require
adjustment  under the prior  standard.  Diluted  earnings per share  include the
effect of all potentially dilutive securities.

Earnings per common share has been computed  below in  accordance  with SFAS No.
128, based upon weighted  average  common and dilutive  shares  outstanding  (in
thousands, except per share accounts):

                                                 1997          1996        1995
                                                 ----          ----        ----

Net income (numerator)                          $4,357        $3,071      $5,181
                                                ------        ------      ------

Pro Forma net income (numerator)                $4,357        $3,071      $3,555
                                                ------        ------      ------

Weighted average common shares and effect
of dilutive shares used in the
computation of earnings per share:
     Average shares outstanding-basic
          (denominator)                          7,024         7,020       7,020
     Effect of dilutive shares                      59             1           3
                                                ------        ------      ------
     Average shares outstanding - diluted
          (denominator)                          7,083         7,021       7,023
                                                ------        ------      ------
Earnings per common share:
     Basic                                       $0.62         $0.44       $0.74
     Diluted                                     $0.62         $0.44       $0.74
Pro Forma earnings per share
     Basic                                       $0.62         $0.44       $0.51
     Diluted                                     $0.62         $0.44       $0.51

Options and the warrant to purchase 284,000,  419,000, and 300,000 common shares
at prices from $7.06 to $11.63,  $7.06 to $11.63,  and $9.75 to $11.63 per share
were  outstanding at December 31, 1997, 1996, and 1995,  respectively,  but were
not included in the computation of earnings per diluted share for the respective
years,  because the options'  exercise price was greater than the average market
price of the common



                                      F-17
<PAGE>


shares. The options,  which expire through December 31, 2007, December 27, 2006,
and October 20, 2005, respectively, were still outstanding at the end of 1997.

4) Changes in Accounting Policies

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This
statement  establishes  standards for the reporting and display of comprehensive
income and its components in the consolidated financial statements.  The purpose
of  reporting  comprehensive  income  is to  report  the  change  in equity of a
business  enterprise  for the  period  from  transactions  and other  events and
circumstances from nonowner sources.  It includes all changes in equity during a
period except those resulting from  investments by owners and  distributions  to
owners.  These items include  currency  translation  adjustments  and unrealized
appreciation of investments, which are currently reported as separate components
of equity in the balance  sheet.  The  statement  is  effective in 1998 and will
change the presentation of information in the financial  statements but will not
have any effect on the  financial  position or results  from  operations  of the
Company.

Also in June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of an
Enterprise  and Related  Information.  This  statement  requires that  companies
report  certain  information  about their  operating  segments in the  financial
statements  including,  information  about the products and services  from which
revenues are derived, the geographic areas of operations,  and information about
major customers. Operating segments are determined by the way management decides
how  to  allocate  resources  and  how  it  assesses  performance.   Descriptive
information about the method used to identify the reportable  operating segments
must  also be  disclosed.  The  statement  also  requires  a  reconciliation  of
revenues, net income, and assets and other amounts disclosed for the segments to
the  corresponding  amounts  in  the  consolidated  financial  statements.   The
statement  is  effective  for year end 1998 and is not  expected  to change  the
Company's  current  segmentation  of its business.  The  financial  position and
operating results of the company will not be affected by this statement.

5) Funds Held in Fiduciary Capacity

Premiums collected by the Insurance  Brokerage Companies but not yet remitted to
insurance carriers are approximately  $22,322,000 and 23,879,000 at December 31,
1997 and 1996  respectively,  some of which are  restricted  as to use by law in
certain  states  in which  the  Insurance  Brokerage  Companies  operate.  These
balances are held in cash and cash  equivalents or short term  investments.  The
offsetting obligation is recorded in premiums payable.


                                      F-18
<PAGE>


6) Investments

Net investment  income for the years ended  December 31, 1997,  1996 and 1995 is
derived from the following sources (in thousands):

                                              1997          1996          1995
                                            -------       -------       -------

Insurance Brokerage Companies
Short term investments                       $1,565        $1,026        $1,028
                                            -------       -------       -------

Property and Casualty Companies
Fixed maturities                              2,083         2,099         2,373
Equity securities                               119           114           115
Short term investments                          382            82           207
Other                                           143           191           185
                                            -------       -------       -------
Total Investment income                       2,727         2,486         2,880
Investment expenses                             (35)          (25)          (61)
                                            -------       -------       -------

                                              2,692         2,461         2,819
                                            -------       -------       -------

Corporate
Short term investments                           55            89            65
                                            -------       -------       -------

Net investment income                        $4,312        $3,576        $3,912
                                            =======       =======       =======

Net  realized  gains or  losses  and the  increase  or  decrease  in  unrealized
appreciation  (depreciation)  on  investments  for the years ended  December 31,
1997, 1996 and 1995 are summarized below (in thousands):

<TABLE>
<CAPTION>
                                                      1997      1996      1995
                                                    -------   -------   -------
<S>                                                    <C>      <C>      <C>
Net realized gains (losses):
   Fixed maturities:
         Gross realized gains                           $26       $82      $112
         Gross realized losses                           (5)      (10)     (167)
                                                    -------   -------   -------
                                                         21        72       (55)
                                                    -------   -------   -------

Equity securities - Gross realized gains                                      8
                                                    -------   -------   -------

Net realized gains (losses) on investments              $21       $72      $(47)
                                                    =======   =======   =======

Change in unrealized appreciation
(depreciation):
   Fixed maturities                                    $608     $(543)   $2,656
   Equity securities                                     14        48        26
                                                    -------   -------   -------
   Net change in unrealized appreciation
   (depreciation)                                      $622     $(495)   $2,682
                                                    =======   =======   =======
</TABLE>



                                      F-19
<PAGE>


The composition, cost (amortized cost for fixed maturities) and estimated market
values of the Company's  investments at December 31, 1997 and 1996 are presented
below.  Equity security  investments  with a cost of $36,000 and a fair value of
$19,000 are included in other assets of the Insurance Brokerage Companies in the
accompanying consolidated balance sheet at December 31, 1996.

<TABLE>
<CAPTION>
                                                                          Gross Unrealized Holding          Aggregate
                                                                         --------------------------           Fair
                                                         Cost             Gains             Losses            Value
                                                       -------           -------            -------          -------
                                                                                (in thousands)
<S>                                                    <C>                  <C>               <C>            <C>
1997
Investments available for sale:
      Fixed Maturities:
         U.S. Government (a)                            $3,641               $10               $(24)          $3,627
         States (b)                                     34,013               591                 (3)          34,601
         Corporate                                       3,117                16                (48)           3,085
                                                       -------           -------            -------          -------

      Total fixed maturities                           $40,771              $617               $(75)         $41,313
                                                       -------           -------            -------          -------

      Equity Securities:
         Common Stock                                     $703               111              $(115)            $699
         Preferred Stock                                 1,483                27                               1,510
                                                       -------           -------            -------          -------

      Total equity securities                           $2,186              $138              $(115)          $2,209
                                                       -------           -------            -------          -------

Funds held under deposit contracts
    - Cash and cash equivalents                           $173                                                  $173
                                                       -------                              -------          -------


1996
Investments available for sale:
      Fixed Maturities:
         U.S. Government (a)                            $6,167               $98               $(80)          $6,185
         States (b)                                     31,231               213               (252)          31,192
         Corporate                                       1,827                34                (84)           1,777
                                                       -------           -------            -------          -------

      Total fixed maturities                           $39,225              $345              $(416)         $39,154
                                                       -------           -------            -------          -------

      Equity Securities:
         Common Stock                                     $145               $56                                $201
         Preferred Stock                                 2,694                14               $(61)           2,647
                                                       -------           -------            -------          -------

      Total equity securities                           $2,839               $70               $(61)          $2,848
                                                       -------           -------            -------          -------

Funds held under deposit contracts:
      Fixed Maturities
         U.S. Government (a)                              $517                $5                                $522
         States (b)                                        507                                                   507
         Corporate                                         300                                                   300
                                                       -------           -------                             -------

      Total fixed maturities                             1,324                 5                               1,329

      Cash and cash equivalents                          2,518                                                 2,518
                                                       -------           -------                             -------

      Total funds held under deposit contracts          $3,842                $5                              $3,847
                                                       =======           =======                             =======
</TABLE>

(a)  Includes U.S. Government agencies and authorities

(b)  Includes municipalities and subdivisions



                                      F-20
<PAGE>


The amortized  cost and estimated  market value of fixed  maturities at December
31, 1997, by contractual  maturity date, are listed below.  Expected  maturities
may differ from contractual  maturities  because borrowers may have the right to
call or prepay obligations with or without penalties.

                                                      Investments Available
                                                            for Sale
                                                 -------------------------------
                                                          (in thousands)

                                                 Amortized        Aggregate Fair
                                                   Cost               Value
                                                 ---------        --------------
Due in one year or less                           $3,602              $3,585

Due after one year through five years             15,341              15,594

Due after five years through ten years            19,255              19,520

Due after ten years                                2,573               2,614
                                                 -------             -------

Total                                            $40,771             $41,313
                                                 =======             =======

Fixed  maturities,  equity  securities,  and cash  carried  at  market  value of
$3,511,000, and $3,417,000 in 1997 and 1996, respectively,  were on deposit with
governmental  authorities,  as required by law. Fixed maturity  investments  and
cash  equivalents  carried at market value of $11,733,000 and $6,670,000 in 1997
and 1996,  respectively,  have  been  deposited  in trust  funds or  pledged  to
collateralize  the  obligations  of OLB  and  OLRI  to  ceding  companies  under
reinsurance agreements,  including intercompany  reinsurance agreements,  and to
policy holders under policies (see Note 13).

The Company's short term investment of cash is maintained  principally with five
banks and an institutional  money market fund. To control this risk, the Company
utilizes only high credit quality financial  institutions.  Additionally,  under
the  insurance  laws of the  State of Rhode  Island,  where  OLRI is  domiciled,
insurers and reinsurers  are restricted as to the types of investments  they may
purchase  and the  concentration  of risk they may  accept in any one  issuer or
group of issuers.  The  Company  complies  with such laws which  insure that the
concentration  of risk  in its  investment  portfolio  is at an  acceptable  and
authorized level.


                                      F-21
<PAGE>


7) Notes Payable

Notes payable consist of the following in thousands at December 31,:

                                                               1997       1996
                                                              ------     ------
Insurance Brokerage:

Finance company notes, due through 2000, interest at
    prime rate plus 1/2%                                        $179       $578

Finance company notes, due through 2002, interest at 7.75%       546
Capital lease due through 8/30/99, interest at 7.375%            363        554
Subordinated promissory note payable to KILP,
   due the later of 8/30/97 or 30 days after repayment of
   the revolving line of credit                                           6,000
                                                              ------     ------
                                                               1,088      7,132
Less current portion                                             434        595
                                                              ------     ------
Notes payable - long term                                       $654     $6,537
                                                              ======     ======

Corporate:

Revolving line of credit, due through 2001
    interest at 5.9375% plus 2.5%                             $7,031     $7,100
Less current portion                                           1,875        850
                                                              ------     ------
Notes payable - long term                                     $5,156     $6,250
                                                              ======     ======

The Company has a $7,031,250, revolving line of credit (the "Loan") with a bank,
collateralized  by the  stock  of the  Insurance  Companies.  The  proceeds  are
available for general corporate purposes,  which may include acquisitions by the
Company or a subsidiary and the making of a loan to an affiliate. Any borrowings
will bear  interest  at the bank's  equivalent  of the prime rate of interest as
maintained from time to time or at the Company's option, a LIBOR based rate plus
2.5%. A commitment fee is assessed in the amount of 1/4% per annum on the unused
balance.  Among other covenants,  the agreement requires  maintenance of minimum
consolidated  net worth,  statutory  surplus,  ratios of net premiums written to
surplus and minimum interest  coverage.  As of December 31, 1997, the Company is
in compliance with the covenants of the debt agreement.

The bank's  commitment  under the Loan has been  renegotiated  to  decrease  the
quarterly reduction  commitment to $468,750 from $625,000  commencing  September
30, 1997 and to extend the due date one year to June 30, 2001. In addition,  the
interest  rate  increased  from 1.5% to 2.5%  plus  LIBOR.  All other  terms and
conditions remain unchanged.  The revised available credit as of the end of each
respective year is $4,687,500 in 1998, $2,812,500 in 1999, $937,500 in 2000, and
none in 2001.  The  Company's  required  payments for the  respective  years are
$1,875,000 in 1998 through 2000 and $1,406,250 in 2001.  Interest  expense under
the Loan for the years ended December 31, 1997, 1996, and 1995 was approximately
$548,000, $514,000, and $688,000, respectively.


                                      F-22
<PAGE>


On  August  29,  1997,  the  Company  paid in full the note  payable  to KILP of
$6,000,000.  This note was subject to repayment  restrictions  stipulated in the
Loan  agreement.  The due date of the note pursuant to the Loan agreement  would
have  been in 2001.  The bank  consented  to the  payment  on August  25,  1997.
Interest  expense  for the year ended  December  31,  1997,  1996,  and 1995 was
$400,000, $600,000, and $600,000, respectively.

The  aggregate  maturities  of all  notes  payable  by year are as  follows  (in
thousands):

                  1998 ......................................    $2,309
                  1999 ......................................     2,222
                  2000 ......................................     2,021
                  2001 ......................................     1,535
                  Thereafter  ...............................        32

Based on the borrowing rates  currently  available to the Company for bank loans
with similar terms and average  maturities,  the fair value of the notes payable
at December 31, 1997 and 1996 approximates their carrying value.

Interest expense in the accompanying  consolidated  statements of income for the
years ended  December  31, 1997,  1996 and 1995 was  $948,000,  $1,114,000,  and
$1,288,000, respectively.

8) Income Taxes

The Company's  effective  income tax rate for the years ended December 31, 1997,
1996 and 1995 differs from the statutory  rate on ordinary  income before income
taxes as follows (in thousands):

<TABLE>
<CAPTION>
                                                                   1997                       1996                     1995
                                                           --------------------       --------------------      --------------------
                                                                          % of                       % of                     % of
                                                                         Pretax                     Pretax                    Pretax
                                                           Amount        Income       Amount        Income      Amount        Income
                                                           ------        ------       ------        ------      ------        ------
<S>                                                        <C>            <C>         <C>            <C>        <C>            <C>
Income taxes computed at the statutory rate                $2,569         34.0%       $1,772         34.0%      $2,145         34.0%

Increases (decrease) in taxes resulting from:

Transactions (a)                                                                                                   969         15.4


Establishment of deferred taxes (b)                                                                             (2,944)       (46.7)

Tax-exempt investment income                                 (516)        (6.8)         (403)        (7.7)        (399)        (6.3)

Non-deductible costs of combining operations                                                                       293          4.6

State and local income taxes and other                        214          2.8           115          2.2          (43)        (0.7)
                                                           ------         ----        ------         ----       ------         ----

Provision for income taxes                                 $2,267         30.0%       $1,484         28.5%         $21          0.3%
                                                           ======         ====        ======         ====       ======         ====
</TABLE>

(a)  Income  (loss)  of  Retail  Partnerships  and  Corporations  taxed to their
     respective partners and shareholders

(b)  See Note 3(a)

                                      F-23
<PAGE>


The  Retail  Partnerships  and the Retail  Brokerage  Corporations  were  either
limited  partnerships  or S  Corporations  under the Internal  Revenue Code, and
therefore,  the individual partners or shareholders,  rather than the companies,
were liable for income taxes.  Effective upon the closing of the October 2, 1995
combination (see Note 2), the entities  comprising the Retail Brokerage Business
ceased being either limited  partnerships  or S corporations  and became taxable
corporations.  Accordingly,  the  accumulated  deficit of the  Retail  Brokerage
Business at October 1, 1995 of $30,679,000 was reclassed to paid-in capital, and
a deferred  tax  benefit of  $2,944,000  was  recorded  as the tax effect of the
change in tax status in the accompanying 1995 Consolidated  Statement of Income.
The net deferred tax benefit  relates to  temporary  differences  (at October 2,
1995) between the financial reporting and tax basis of assets and liabilities of
the Retail Brokerage Business,  principally amortization of expiration lists and
deferred  compensation,  deduction of previously accrued management bonuses, and
accrual adjustments for commission income.

The data reflecting a charge in lieu of income taxes is presented on a pro forma
basis in the accompanying  consolidated statements of income as if the income or
loss,  prior to the combination of the various  partnerships and S corporations,
were taxed to those entities rather than to their partners or shareholders.

The source of the significant temporary differences and the related deferred tax
effects are as follows:

                                              1997          1996          1995
                                            -------       -------       -------
                                                       (in thousands)
Expiration lists                               $394          $393          $226
Other                                            47          (137)          553
Unearned premium reserves                        40           (93)          115
Deferred compensation                                         850           255
Loss reserve discount                           (30)           37           193
Deferred acquisition costs                      (46)          126          (281)
Accrual adjustment                              (59)          (56)          628
                                            -------       -------       -------


Deferred tax expense                           $346        $1,120        $1,689
                                            =======       =======       =======

The components of the net deferred tax asset, in the  accompanying  consolidated
balance sheets at December 31, 1997 and 1996, are as follows:

                                                                  1997     1996
                                                                 ------   ------
                                                                  (in thousands)
Deferred tax assets:
  Loss and loss expense reserves                                 $1,048   $1,018
  Expiration lists                                                  941    1,335
  Unearned premium reserves                                         837      877
  Unrealized losses on investments and other                         91      157
                                                                 ------   ------

  Total deferred tax asset                                        2,917    3,387
                                                                 ------   ------

Deferred tax liabilities:
  Deferred acquisition costs                                      1,339    1,385
  Unrealized gains on investments and other accrual adjustments   1,255    1,122
                                                                  -----    -----

  Total deferred tax liability                                    2,594    2,507
                                                                 ------   ------

Net deferred tax asset                                             $323     $880
                                                                 ======   ======



                                      F-24
<PAGE>


Management  believes it is more likely than not that all deferred tax assets are
realizable based upon the past earnings history of the Company.

OLB, as a Bermuda  domiciled company is not subject to federal income taxes but,
rather,  the Company is subject to federal  income taxes based on OLB's  taxable
income for the entire year. Accordingly, the Company includes the taxable income
of OLB in its  separate  company  income  for  tax  purposes,  but  for  segment
reporting the income is included with the Property and Casualty  Companies.  OLB
has received an undertaking  from the Bermuda  Government  exempting it from all
taxes  computed on profit or income,  or  computed on any capital  asset gain or
appreciation until 2016.

The  Company and its wholly  owned  subsidiaries  are party to a Tax  Allocation
Agreement (the  "Agreement").  The Agreement  requires these companies to file a
U.S.  consolidated income tax return. The Agreement provides that each member of
the group will  compute  its  separate  tax  liability  or benefit on a separate
return  basis  and pay or  receive  such  amounts  to or from the  Company.  For
purposes  of  segment  information,  amounts  due to or from the  Company by its
subsidiaries  are  included  in  the  intercompany   receivable/payable  in  the
accompanying consolidated balance sheets.

9) Lease Commitments and Rentals

Minimum annual rental commitments under various  noncancelable  operating leases
for office space, automobiles and equipment are as follows (in thousands):

                   Years Ending December 31,
                   -------------------------
                   1998.............................  $2,587
                   1999.............................   2,518
                   2000.............................   2,400
                   2001.............................   2,113
                   Thereafter.......................     263
                                                      ------
                                                       9,881
       Sub-lease rental income......................    (186)
                                                      ------
       Net rental commitments.......................  $9,695
                                                      ======

Leases  for office  space  include  various  escalation  clauses,  none of which
individually or in the aggregate are material.  Escalation clauses are accounted
for on a straight-line basis over the life of the lease. The leases also contain
provisions for the payment of certain operating expenses and real estate taxes.

Rent expense for the years ended December 31, 1997,  1996 and 1995,  amounted to
approximately  $2,992,000,  $2,857,000,  and  $2,946,000,  respectively,  net of
sublease rental income of $193,000, $197,000, and $168,000, respectively.


                                      F-25
<PAGE>


10) Pension and Retirement Plans

Substantially  all  officers  and  employees  of the  Company  are  entitled  to
participate in a qualified  retirement savings plan (defined  contribution plan)
and prior to 1995 were  entitled to  participate  in a defined  benefit  pension
plan.  The costs to the Company to  participate  in these plans  included in the
accompanying  consolidated  statements  of income  was  approximately  $385,000,
$55,000, and 688,000 for 1997, 1996 and 1995, respectively.

The defined benefit pension plan (the "Plan") was frozen effective  December 31,
1994, at which time  participants  became 100% vested in their accrued benefits.
All  pension  benefits  were  frozen at then  current  levels.  The  termination
resulted in an insignificant curtailment loss pursuant to Statement of Financial
Accounting  Standards  No. 88  ("SFAS  88") in 1994.  During  1995,  the  Plan's
obligations were settled,  resulting in a settlement loss pursuant to SFAS 88 in
the amount of $494,000,  which included the additional minimum liability charged
directly  to  equity  at  December  31,  1994 in  accordance  with  SFAS No.  87
"Employers Accounting for Pensions".

11) Management Services Agreement

In September 1992, Kaye Insurance Associates, L.P. ("KIA"), a predecessor of one
of the  entities  comprising  the  Retail  Brokerage  Business,  entered  into a
management  services  agreement  with APCO Corp.  (the  "Manager"),  whereby the
Manager was obliged to provide the administrative and operational  functions for
the  Amalgamated  Division,  from  which  certain  assets and  liabilities  were
acquired  in  1992.  The  Manager  was  owned  by the  individuals  who sold the
Amalgamated  Division to KIA. In return for the Manager's  services,  commencing
September 1, 1992 and continuing through August 31, 1997, KIA was obliged to pay
annually  to the Manager a base fee which is subject to certain  adjustments  as
specified in the agreement.  KIA incurred  management  service fees of $911,000,
$1,536,000,  and  $1,732,000  for the years ended  December 31, 1997,  1996, and
1995,  respectively,  which was  included  in other  operating  expenses  of the
Insurance Brokerage Companies.

In addition, the Manager was entitled to receive an incentive bonus in an amount
equal to a specified percentage (ranging from 16% to 19%) of gross income of the
Amalgamated division, as defined in the agreement, for each of the five years of
the period ended August 31, 1997. In accordance with the terms of the agreement,
however,  in no event should the cumulative  amount paid by KIA, with respect to
this incentive  bonus, be less than $2,876,000 or exceed  $4,220,000  subject to
the continued  employment  of certain key personnel by the Manager.  The cost of
this bonus to KIA,  which was  charged to salaries  and  benefits as the related
gross  income  earned,  was $0,  $364,000,  and  $1,027,000  for the years ended
December 31, 1997,  1996 and 1995,  respectively.  These  agreements  expired on
August 31, 1997.


                                      F-26
<PAGE>


12) Contingent Liabilities

In the ordinary course of business, the Company and its subsidiaries are subject
to various  claims  and  lawsuits  consisting  primarily  of alleged  errors and
omissions in connection  with the  placement of insurance.  Subject to specified
limits,  the shareholders of predecessors to the Retail  Brokerage  Business are
responsible for any costs arising from those claims which were asserted prior to
November  1,  1991,  the  date on which  KILP  was  formed.  In the  opinion  of
management,  the ultimate  resolution of all asserted and potential  claims both
prior and subsequent to the formation of KILP,  will not have a material  effect
on the consolidated financial position of the Company.

As  licensed  brokers,  certain  subsidiaries  of the  Company are or may become
parties to administrative  inquiries and at times to administrative  proceedings
commenced by state insurance  regulatory bodies.  Certain subsidiaries have been
involved since 1992 in an administrative investigation by the New York Insurance
Department  ("Department")  relating to how  property  insurance  policies  were
issued for the Residential Real Estate Program. As a result, the manner in which
policies are  structured  for certain  clients in this Program has been altered,
which has not had a material  adverse effect on this Program.  While the Company
has  been in  discussions  with  the  Department  regarding  settlement  of such
investigation,  if such  discussions  are not successful,  the Department  could
institute formal proceedings  against the subsidiaries  seeking fines or license
revocations.  KILP has agreed to indemnify the Company and its  subsidiaries for
any  fines or  settlement  payments  in  excess of  $300,000,  relating  to such
investigation.  Management  does not believe the  resolution of such issues will
have a material adverse effect on the Company.

13) Reinsurance

As of December  31, 1997 and 1996,  included  in the  amounts  reflected  in the
consolidated  financial  statements  are  unearned  premiums of  $4,963,000  and
$5,173,000, respectively, and unpaid losses and loss expenses of $12,445,000 and
$6,534,000, respectively, for reinsurance assumed from non-affiliates,  although
all such  reinsurance  assumed  relates to business  produced  by the  Insurance
Brokerage  Companies.  The Insurance  Companies have established trust funds and
deposited   fixed   maturities  and  cash  therein  to  satisfy  the  collateral
requirements of certain reinsurance agreements.  The trust funds established for
the benefit of ceding  companies  amounted to  approximately  $11,812,000  as of
December 31, 1997.

In accordance with the normal practice of the insurance  industry,  OLRI assumes
and cedes  reinsurance  with  other  insurers  or  reinsurers.  The  reinsurance
arrangements  provide  greater  diversification  of business and minimize OLRI's
maximum net loss  arising  from large  risks.  OLRI  assumes  reinsurance  under
reinsurance treaty  arrangements  generally with limits of $25,000 (inclusive of
loss  expenses) per  occurrence.  To limit OLRI's  exposure for the  reinsurance
assumed, OLRI purchased an annual aggregate stop loss



                                      F-27
<PAGE>


policy. This policy insures OLRI in the event the losses under the policy exceed
a fixed percentage of premium earned. OLRI will be reimbursed up to $7,500,000.

OLRI's  ceded  reinsurance  is on an excess of loss basis  with an  unaffiliated
company,  National Reinsurance Corporation ("Nat Re"). OLRI issues policies on a
selected  basis with  limits up to  $1,000,000  retaining  the first  $50,000 of
exposure  and  reinsuring   $950,000  to  Nat  Re.  The  remaining   reinsurance
arrangements  are on a quota share basis and excess of loss with  non-affiliated
insurers or reinsurers.

The Insurance Companies also entered into reinsurance  agreements,  wherein they
reinsured  certain  general  liability  and property  risks.  These  reinsurance
agreements  include per claim and  aggregate  limits and provide  funds that are
placed  into  trusts for the benefit of the  insurers.  Since these  reinsurance
contracts do not transfer risk to the Insurance Companies,  they are included in
"Funds Held Under Deposit  Contracts" in the accompanying  consolidated  balance
sheets.

A contingent  liability  exists with respect to reinsurance  ceded,  which would
become an ultimate  liability of OLRI in the event that the  assuming  companies
were unable to meet their obligations under the reinsurance  agreements in force
at December  31,  1997.  The amounts  deducted  from  liabilities,  revenues and
expenses for reinsurance ceded by OLRI were as follows:

                                                            1997            1996
                                                            ----            ----
                                                                (in thousands)

Liabilities - Unpaid losses and loss expenses              $2,811           $882

Revenue and expenses:
         Premiums earned                                      558            520
         Losses and loss expenses                           1,929            764



                                      F-28
<PAGE>


14) Losses and Loss Expenses

The following table sets forth a  reconciliation  of the changes in the reserves
for  outstanding  losses  and loss  expenses,  including  paid  losses  and loss
expenses, for each year in the three year period ended December 31, 1997.

                                                   Years Ended December 31,
                                            -----------------------------------
                                              1997          1996         1995
                                            --------      --------     --------
                                                       (in thousands)

Balance at January 1,                        $15,227       $12,671      $14,118
  Less reinsurance recoverables                 (882)
                                            --------      --------     --------

  Net balance                                 14,345        12,671       14,118
                                            --------      --------     --------

Incurred related to:
  Current year                                 8,824         6,621        4,986
  Prior year                                    (108)          415         (136)
                                            --------      --------     --------

  Total incurred                               8,716         7,036        4,850
                                            --------      --------     --------

Paid related to:
  Current year                                 1,802         1,832        2,138
  Prior year                                   4,944         3,530        4,159
                                            --------      --------     --------
  Total paid                                   6,746         5,362        6,297
                                            --------      --------     --------

Net balance at December 31,                   16,315        14,345       12,671
  Add reinsurance recoverables                 2,811           882
                                            --------      --------     --------

  Balance                                    $19,126       $15,227      $12,671
                                            ========      ========     ========

15) Statutory Financial Information and Dividend Restrictions

The  Company's  insurance  subsidiaries  file separate  financial  statements in
accordance  with accounting  practices  prescribed or permitted by the insurance
regulatory authorities where they are domiciled.  Statutory financial statements
do not reflect deferred  acquisition costs,  deferred income taxes, market value
changes and certain other items recognized under GAAP.

OLB is required to maintain a minimum  statutory  capital and surplus based upon
the higher of $1,000,000 or an amount derived by applying a variable rate to its
current  premium volume or outstanding  losses at December 31, 1997. At December
31, 1997,  $904,000 was available for distribution  from OLB and its subsidiary,
Park  Brokerage Ltd.  Pursuant to Rhode Island  Insurance Law, OLRI may pay cash
dividends only from earned surplus  determined on a statutory basis,  subject to
the maintenance of minimum capital and surplus of $3,000,000.  Further,  OLRI is
restricted (on the basis of the lesser of 10%



                                      F-29
<PAGE>


of OLRI's statutory surplus at the end of the preceding  twelve-month  period or
100% of OLR's net income,  excluding  realized  capital gains, for the preceding
twelve-month  period) as to the amount of the dividends it may declare or pay in
any  twelve-month  period  without prior  approval of the Department of Business
Regulation  of Rhode Island.  At December 31, 1997,  $2,366,000 is available for
distribution  during 1998, without prior approval.  Statutory  information is as
follows:


                                       Old Lyme         Old Lyme
                                     Rhode Island       Bermuda         Combined
                                     ------------       -------         --------
                                                    (in thousands)
Policyholders' surplus at
December 31,
         1997                          $23,662           $1,904         $25,566
         1996                          $24,034           $1,451         $25,485

Net income for the years ended
December 31,
         1997                           $5,178           $1,453          $6,631
         1996                           $2,459           $2,890          $5,349
         1995                           $6,243           $1,890          $8,133

The  following  is  a  reconciliation   of  net  income  and  surplus  regarding
policyholders  in accordance  with  statutory  accounting  principle  ("SAP") as
reported to the Rhode Island and Bermuda insurance regulatory authorities to net
income  and  capital  as  determined  in  conformity  with  generally   accepted
accounting principles ("GAAP") basis.

<TABLE>
<CAPTION>
                                                                     Statutory Surplus /
                                                                     Stockholders' Equity           Net Income for years ended
                                                                      as of December 31,                   December 31,
                                                                    ----------------------      -----------------------------------
                                                                      1997          1996          1997         1996          1995
                                                                    --------      --------      --------     --------      --------
                                                                                              (in thousands)
<S>                                                                  <C>           <C>            <C>          <C>           <C>
Consolidated amount in accordance with GAAP                          $35,168       $24,984        $4,357       $3,071        $5,181

Deficit (equity) in net assets and net
loss of non-insurance companies                                       (4,388)        5,768         2,086        3,217         2,354
                                                                    --------      --------      --------     --------      --------

Combined amount in accordance with GAAP                               30,780        30,752         6,443        6,288         7,535

Excess of statutory formula reserves over
GAAP reserves                                                           (890)         (621)

Deferred acquisition costs                                            (3,939)       (4,073)          134         (370)          826

Non-admitted assets, deferred income taxes and other                    (385)         (573)           54         (569)         (228)
                                                                    --------      --------      --------     --------      --------

Combined amount in accordance with SAP                               $25,566       $25,485        $6,631       $5,349        $8,133
                                                                    ========      ========      ========     ========      ========
</TABLE>



                                      F-30
<PAGE>


16) Related Party Transactions

The  administrative  support  for  OLB is  provided  by  International  Advisory
Services,  Ltd. ("IAS"), an insurance management company located in Bermuda. The
principal  stockholder  of IAS is an  officer  of OLB and is a  director  of the
Company.  Management  fees paid to IAS under a  service  contract  for the years
ended  December  31, 1997,  1996 and 1995 were  $37,500,  $36,250,  and $65,000,
respectively.

The principal  stockholder  of IAS, who is a director of the Company,  is also a
stockholder in a insurance  brokerage company, H & H Reinsurance  Brokers,  Ltd.
("H & H Reinsurance"). H & H Reinsurance has a reinsurance contract between OLRI
and unrelated  insurance  carriers,  (Transatlantic  Reinsurance Company and USF
Reinsurance Company). H & H Reinsurance received commissions of $38,114, $7,000,
and  $24,587  in  1997,  1996,  and  1995,  respectively,  as a  result  of such
transaction.

The Company had a $6,000,000  note payable to KILP which was paid in full during
1997 (see Note 7).

KIA incurred a management fee of $175,000 annually to ZS Fund, L.P. which is one
of the general  partners of KILP. KIA had an accrued payable to ZS Fund, L.P. as
of December 31, 1996 of $175,000.  This management fee arrangement terminated on
December 31, 1996.

In January 1997, KIA entered into a management  agreement with KILP, whereby the
Company provides certain administrative  services for a fee of $50,000 per year.
At December 31, 1997, the Company recorded $50,000 for such services provided.

17) Acquisitions

During 1997,  the Company  acquired  certain  assets and  liabilities of Western
Insurance Associates,  Inc. ("Western") for cash of $777,000 and amounts payable
in future periods of $2,285,000.  The amounts payable are the Company's estimate
of the probable  costs it will incur.  The total  acquired  expiration  list was
$3,062,000  at December  31,  1997.  This  acquisition  was  accounted  for as a
purchase.

18) Preferred Stock

The Board of  Directors is  authorized  to issue  preferred  stock in classes or
series and to fix the designations, preferences, qualifications,  limitations or
restrictions  of any  class or series  with  respect  to the rate and  nature of
dividends,  the price and terms and  conditions on which shares may be redeemed,
the amount  payable in the event of voluntary or  involuntary  liquidation,  the
terms and  conditions  for conversion or exchange into any other class or series
of stock,  voting  rights  and other  terms.  No  preferred  stock is  currently
outstanding.



                                      F-31
<PAGE>


19) Common Stock Warrants and Dividends Declared

The  Company  has issued a warrant  to KILP to  purchase  105,000  shares of its
common stock.  The exercise price of the warrant is the IPO price of such shares
($10.00),  subject  to  certain  anti-dilution   adjustments.   The  warrant  is
exercisable through February 16, 1998.

The Board of Directors of the Company  declared annual dividends of $702,000 for
the years ended December 1997 and 1996, respectively,  of which $175,000 remains
unpaid at December 1997 and 1996, respectively.

20) Stock Performance and Stock Option Plans

On December 30, 1997, the Company adopted a Stock  Performance Plan, under which
up to 350,000 shares of the Company's common stock may be granted and awarded to
key  employees.  The grant of stock under this plan is contingent  upon criteria
established by the Company's  Compensation  Committee of the Board of Directors.
Awards  are  based  on  performance  targets  of the  Company's  stock  based on
increases  in the market value of the  Company's  common stock from the price on
the date the stock is initially granted by the Company.  Shares must be granted,
awarded,  and vested  before  participants  take full  title to the  performance
stock. Awards vest on the occurrence of any of the following events, (i) fifteen
years of continuous service with the Company from the date shares are granted to
the participant, (ii) death or disability of the participant,  (iii) immediately
before a change of control (as defined under the plan),  (iv)  attaining the age
of 65, or (v)  immediately  before a sale or merger (as defined under the plan).
At  December  31,  1997,  no  performance  stock  under this plan was granted or
awarded.

At December  31, 1997,  the Company has a Stock  Option Plan and a  Supplemental
Stock Option Plan (the  "Plans").  Both plans are identical and are  stock-based
compensation   plans,  which  are  described  below.  The  Company  adopted  the
disclosure  requirements of SFAS 123 effective  January 1, 1996 and continues to
account  for  its  employee   stock-based   compensation  plans  under  APB  25.
Accordingly,  the adoption of SFAS 123 had no impact on the Company's  financial
position or results of operations.

Under the Plans a total of  700,000  shares of  common  stock are  reserved  for
issuance.  The Plans provide for the granting to directors,  executives or other
key employees  (including  officers) of the Company  non-qualified stock options
("NQOs") or incentive  stock options  ("ISOs") within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended. The exercise price of all ISOs
and NQOs under the Plans are  generally  at least the fair  market  value of the
common stock of the Company on the date of grant.

The Compensation Committee (the "Committee") determines the terms of the options
including  the  exercise   price,   number  of  shares  subject  to  option  and
exercisability.



                                      F-32
<PAGE>


In addition, the Plans authorize grants of alternative cash settlement rights at
the  discretion  of the  Committee,  which  entitles  participants  to receive a
payment in cash  equal to the fair  market  value of such  shares on the date of
surrender less the purchase price required to purchase such shares. A summary of
the status of the Plans as of  December  31,  1997,  1996,  and 1995 and changes
during the years ended on those dates is presented below:

<TABLE>
<CAPTION>
                                                   1997                             1996                         1995
                                          ==========================================================================================
                                                       Weighted-Average                Weighted-Average             Weighted-Average
                                                          Exercise                        Exercise                      Exercise
Fixed Options                               Shares          Price        Shares             Price        Shares           Price
                                          ==========================================================================================
<S>                                       <C>               <C>          <C>                <C>          <C>              <C>
Outstanding at beginning of year           528,550          $7.53        323,000            $9.33        194,550          $10.71


Granted                                    450,750           5.14        225,000             5.09        155,500            8.49

Exercised

Forfeited                                 (354,450)          6.87        (19,450)            9.24        (27,050)          10.10
                                          --------                       -------                         -------

Outstanding at end of year                 624,850          $6.12        528,550            $7.53        323,000           $9.33
                                          ========                       =======                         =======

Options exercisable at year-end            143,450                       124,150                          64,480
                                          ========                       =======                         =======

Weighted-average fair value
of options granted during the year           $1.29                         $1.21                           $2.31
                                          ========                       =======                         =======
</TABLE>

The following table summarizes  information about the stock options  outstanding
at December 31, 1997:

<TABLE>
<CAPTION>
                                         Options Outstanding                            Options Exercisable
                         ----------------------------------------------------   --------------------------------
                            Number        Weighted-Average   Weighted-Average     Number        Weighted-Average
  Exercise Prices        Outstanding        Remaining           Exercise        Exercisable        Exercise
                         at 12/31/97     Contractual Life        Price          at 12/31/97          Price
<S>                        <C>                 <C>               <C>             <C>                <C>
       $11.63                  500             6.08 years        $11.63              300            $11.63

       $10.91                5,000             6.08               10.91            3,000             10.91

       $10.00               84,750             5.63               10.00           69,600             10.00

       $ 8.43               43,850             7.83                8.43           19,550              8.43

       $ 8.03               15,000             9.83                8.03

       $ 7.88               15,000             7.70                7.88            6,000              7.88

       $ 7.06               10,000             8.37                7.06            2,000              7.06

       $ 6.64                5,000            10.00                6.64

       $ 5.06              185,750             9.15                5.06

       $ 5.00              250,000             9.20                5.00           43,000              5.00

       $ 4.97               10,000             9.49                4.97
                           -------                                               -------

                           624,850             8.56               $6.12          143,450             $8.20
                           =======                                               =======
</TABLE>

The options vest and are  exercisable  at the rate of 20% per year and terminate
ten years from date of grant.  At December  31,  1997,  1996 and 1995,  143,450,
124,150, and 64,480 options were exercisable and there were 75,150, 171,450, and
27,000 options available for future grants,  respectively.



                                      F-33
<PAGE>


Had the compensation cost for the Company's stock based  compensation plans been
determined  based on the fair value at the grant for awards  under  those  plans
consistent  with the  method of SFAS No.  123,  the  Company's  net  income  and
earnings  per share would have been reduced to the pro forma  amounts  indicated
below:

                                                     1997      1996       1995
                                                     ----      ----       ----
Net Income                      As reported         $4,357    $3,071     $3,555
                                Pro forma            4,280     3,060      3,517

Earnings per share - basic      As reported           .62       .44        .51
                                Pro forma             .61       .44        .50

Earnings per share - diluted    As reported           .62       .44        .51
                                Pro forma             .60       .44        .50

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:  (i) dividend
yield of 1.6%, (ii) expected  volatility range of 25%, (iii) risk-free  interest
rate of 6.4%, and (iv) expected life of 5 years.

21) Quarterly Financial Information (Unaudited)

The following quarterly financial information for each of the three months ended
March 31, June 30,  September 30 and  December  31, 1997 and 1996 is  unaudited.
However,  in the opinion of management,  all  adjustments  (consisting of normal
recurring adjustments) necessary to present fairly the results of operations for
such periods, have been made for a fair presentation of the results shown.


<TABLE>
<CAPTION>
                                                                        For the three months ended
====================================================================================================================================
                                                                    (in thousands, except for per share)

                                                    March 31,              June 30,           September 30,         December 31,
                                                    ---------              --------           -------------         ------------
                                                1997        1996       1997       1996       1997       1996       1997       1996
====================================================================================================================================
<S>                                           <C>        <C>         <C>        <C>        <C>        <C>        <C>        <C>
Revenues                                      $ 12,866   $ 11,753    $ 13,545   $ 11,780   $ 16,466   $ 15,206   $ 15,672   $ 15,250
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)                             $    228   $    (27)   $    724   $    175   $  1,547   $  1,246   $  1,858   $  1,677
------------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
         Basic                                $   0.03   $   0.00    $   0.11   $   0.02   $   0.22   $   0.18   $   0.26   $   0.24
         Diluted                                  0.03       0.00        0.11       0.02       0.22       0.18       0.26       0.24
------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
         Basic                                   7,020      7,020       7,020      7,020      7,020      7,020      7,036      7,020
         Diluted                                 7,020      7,020       7,020      7,020      7,161      7,020      7,164      7,021
====================================================================================================================================
</TABLE>



                                      F-34
<PAGE>


22) Premiums

Of the Company's net premiums earned  approximately 62%, 63%, and 55% related to
the  residential  real  estate  program  and 25%,  24%,  and 32%  related to the
restaurant  program for the years 1997,  1996,  and 1995,  respectively.  Of the
Company's  net  premiums  earned  approximately  82%,  83%,  and 98%  related to
insureds  located  in New  York  State  for the  years  1997,  1996,  and  1995,
respectively.

Premiums  earned for the three years ended  December  31,  1997,  1996 and 1995,
which include in assumed premiums relating to reinsurance agreements with RLI of
$4,272,000, $3,878,000, and $2,409,000 in 1997, 1996 and 1995, respectively, are
summarized below:

                                     1997              1996              1995
                                   --------          --------          --------
                                                   (in thousands)

     Direct                        $ 11,496          $  9,979          $ 13,063
     Assumed                         11,909             9,869             3,892
                                   --------          --------          --------

     Total                           23,405            19,848            16,955
     Ceded                             (558)             (521)             (110)
                                   --------          --------          --------

     Net                           $ 22,847          $ 19,327          $ 16,845
                                   ========          ========          ========

23) Business Segments

The Company  operates in two business  segments,  the  procuring of property and
casualty  insurance  ("Insurance  Brokerage  Companies") and the underwriting of
property  and  casualty   risks   ("Property  and  Casualty   Companies").   The
identifiable  segment assets,  operating  profits and income before income taxes
and minority interests are shown on the accompanying consolidated balance sheets
and statements of income.

The following  table is a summary of certain other segment  information  for the
years ended December 31, 1997, 1996 and 1995:

                            Business Segments - 1997
--------------------------------------------------------------------------------

                                 Insurance         Property &
(in thousands)                   Brokerage         Casualty         Consolidated
--------------------------------------------------------------------------------
Depreciation expense             $1,123            $24              $1,147
Amortization expense             $  520                             $  520
Capital expenditures             $1,481                             $1,481


                                      F-35
<PAGE>


                            Business Segments - 1996
--------------------------------------------------------------------------------

                                 Insurance         Property &
(in thousands)                   Brokerage         Casualty         Consolidated
--------------------------------------------------------------------------------
Depreciation expense             $1,024            $23              $1,047
Amortization expense             $  953                             $  953
Capital expenditures             $  888                             $  888

                            Business Segments - 1995
--------------------------------------------------------------------------------

                                 Insurance         Property &
(in thousands)                   Brokerage         Casualty         Consolidated
--------------------------------------------------------------------------------
Depreciation expense             $  940            $18              $  958
Amortization expense             $1,041                             $1,041
Capital expenditures             $  396                             $  396

The foreign operations set forth below,  relate solely to the operations of OLB,
and its wholly owned subsidiary Park Brokerage,  and include reinsurance assumed
from  OLRI,  as well as from third  party  insurance  companies.  All such risks
assumed originate in the United States.

                                                      1997
                                 ===============================================
                                 Foreign            Domestic             Total
                                 ===============================================
                                                (in thousands)
Revenues                         $2,246             $56,303              $58,549
Income before minority interest
and income taxes                  1,398               6,157               7,555
Identifiable assets               3,575             137,450             141,025

<TABLE>
<CAPTION>
                                                 1996                                 1995
                                     =============================        ===============================
                                     Foreign   Domestic     Total         Foreign    Domestic     Total
                                     =============================        ===============================
                                                                  (in thousands)
<S>                                  <C>        <C>        <C>            <C>        <C>         <C>
Revenues                             $2,104     $51,885    $53,989        $2,828     $52,619     $55,447
Income before minority interest
and income taxes                      2,857       2,354      5,211         2,062       4,247       6,309
Identifiable assets                   4,925     151,177    156,102        15,579     158,421     174,000
</TABLE>

There were no material intercompany revenue transactions between OLB and OLRI.


                                      F-36
<PAGE>


In 1997, OLRI entered into a novation reinsurance  agreement with National Union
Fire Insurance Company of Pittsburgh, PA. ("N.U."),  pursuant to which OLRI paid
$807,000 and transferred its $950,000 IBNR liability to N.U.

In 1996, OLRI entered into the following reinsurance agreements:

1.   Commutation  Agreement:  OLRI  commuted  all  liabilities  and  obligations
     arising out of reinsurance  agreements  between OLRI and OLB for the sum of
     $3,337,729.  This  transaction  increased OLRI's reserves by $4,466,384 and
     decreased statutory underwriting income by $1,128,655.

2.   Novation  Agreement:  OLRI has agreed to replace OLB under all  reinsurance
     agreements in either RLI and/or Mt.  Hawley.  OLB offered and OLRI accepted
     in full and final  satisfaction  arising out of OLB's  participation in all
     reinsurance   agreements  with  either  RLI  or  Mt.  Hawley,  the  sum  of
     $1,203,974. This transaction increased OLR's premium written by $1,203,974,
     reserves by  $1,611,098  and  decreased  statutory  underwriting  income by
     $407,124.

24) Supplemental Cash Flow Disclosures

                                                     1997        1996      1995
                                                     ----        ----      ----

Cash paid during the period for:
   Interest expense                                   $948      $1,114    $1,288
   Income taxes (refunded)                          $2,000       ($992)   $3,521

Noncash investing and financing activities:
   Stock issued to purchase minority interest      $10,181

Details of expiration list acquisition:
   Fair value                                       $3,062
   Amounts payable in future periods                (2,285)
                                                   -------
   Cash paid for purchase of expiration list          $777
                                                   -------



                                      F-37
<PAGE>


                                                                     Schedule II

                                 KAYE GROUP INC.
                              (Parent Company Only)
                            Condensed Balance Sheets
                           December 31, 1997 and 1996
                   (in thousands, except par value per share)

<TABLE>
<CAPTION>
                                                                                           1997               1996
                                                                                         ========           ========
<S>                                                                                       <C>                <C>
ASSETS

Cash and cash equivalents                                                                     $65                 $1
Prepaid expenses and other assets                                                             590
Due from subsidiaries                                                                       3,664                271
Investment in subsidiaries                                                                 38,670             24,983
                                                                                         --------           --------

    Total assets                                                                          $42,989            $25,255
                                                                                         ========           ========


LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Accounts payable and other liabilities                                                       $774               $176
Note payable                                                                                1,875
Income taxes payable                                                                           16                 95
                                                                                         --------           --------

Total current liabilities                                                                   2,665                271
Note payable - long term                                                                    5,156
                                                                                         --------           --------

    Total liabilities                                                                       7,821                271
                                                                                         --------           --------

STOCKHOLDERS' EQUITY:

Preferred stock, $1.00 par value; 1,000 shares authorized;
  none issued or outstanding
Common stock, $.01 par value; 20,000 shares authorized;
  1997, 8,474; 1996, 7,020 shares issued and outstanding                                       85                 70
Paid-in capital                                                                            17,942              7,776
Unrealized appreciation (depreciation) of investments, net of deferred
  income tax provision (benefit), (1997, $192; 1996, ($16))                                   373                (31)
Retained earnings                                                                          16,768             17,169
                                                                                         --------           --------

    Total stockholders' equity                                                             35,168             24,984
                                                                                         --------           --------


    Total liabilities and stockholders' equity                                            $42,989            $25,255
                                                                                         ========           ========
</TABLE>

   The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.



                                      F-38
<PAGE>


                                                                     Schedule II

                                 KAYE GROUP INC.
                              (Parent Company Only)
                         Condensed Statements of Income
              For the years ended December 31, 1997, 1996 and 1995
                                 (in thousands)


                                                       1997      1996      1995
                                                      ======    ======    ======
REVENUES:

Equity in income of subsidiaries net of taxes         $4,357    $3,071    $5,181
                                                      ------    ------    ------

NET INCOME                                            $4,357    $3,071    $5,181
                                                      ======    ======    ======


   The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.



                                      F-39
<PAGE>


                                                                     Schedule II

                                 KAYE GROUP INC.
                              (PARENT COMPANY ONLY)
                          Condensed Statements of Cash
           Flows For the years ended December 31, 1997, 1996 and 1995
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                1997                 1996                 1995
                                                              ========             ========             ========
<S>                                                            <C>                   <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                    $4,357               $3,071               $5,181
                                                              --------             --------             --------

Adjustment  to reconcile  net income to net cash
provided by (used in) operating activities:
  Equity in net income of subsidiaries                          (6,590)              (3,071)              (5,181)
  Dividends received from subsidiaries                           6,350                  702                  702
  Minority interest                                                931
  Change in assets and liabilities:
    Prepaid expenses and other assets                             (199)
    Due from subsidiaries                                       (3,892)              (1,356)               2,222
    Income taxes payable                                          (137)               1,356               (2,221)
                                                              --------             --------             --------

  Net cash provided by operating activities                        820                  702                  703
                                                              --------             --------             --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Payment of dividends                                            (852)                (702)                (702)
  Notes payable-repayment                                          (69)
  Contribution to subsidiaries                                    (300)
                                                              --------             --------             --------

  Net cash used in financing activities                         (1,221)                (702)                (702)
                                                              --------             --------             --------

NET CHANGE IN CASH AND CASH EQUIVALENTS                           (401)                                        1

Cash and cash equivalents at beginning of period                   466                    1
                                                              --------             --------             --------

Cash and cash equivalents at end of period                         $65                   $1                   $1
                                                              ========             ========             ========

SUPPLEMENTAL CASH FLOW DISCLOSURES

Cash paid during the period for:
  Interest expense                                                $548                 $514                 $688
  Income taxes (refunded)                                       $2,000                ($992)              $3,521

Noncash investing and financing activities:
  Stock issued to purchase minority interest                   $10,181
</TABLE>

   The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto and the accompanying notes.



                                      F-40
<PAGE>


                                                                     Schedule II

                                 KAYE GROUP INC.
                              (Parent Company Only)
                     Notes to Condensed Financial Statements

1.   Condensed Financial Statements

     Certain information and footnote disclosures normally included in financial
     statements prepared in accordance with generally accepted accounting
     principles have been condensed or omitted. It is suggested that these
     condensed financial statements be read in conjunction with the Company's
     consolidated financial statements and the notes thereto.

2.   Significant Accounting Policies

     The Parent Company carries its investment in subsidiaries under the equity
     method.



                                      F-41
<PAGE>


                                                                     Schedule IV

                                KAYE GROUP INC.
                                  REINSURANCE
              For The Years Ended December 31, 1997, 1996 and 1995
                                 (in thousands)

<TABLE>
<CAPTION>
==============================================================================================
    Column A       Column B     Column C           Column D         Column E       Column F
==============================================================================================
                                                                                  Percentage
   Insurance        Gross    Ceded To Other      Assumed from                     of Amount
Premiums Earned     Amount      Companies       Other Companies    Net Amount   Assumed to Net
----------------------------------------------------------------------------------------------
<S>                <C>            <C>               <C>             <C>              <C>
     1997          $11,496        $558              $11,909         $22,847          52%
     1996           $9,979        $511               $9,869         $19,327          51%
     1995          $13,063        $110               $3,892         $16,845          23%
</TABLE>



                                      F-42
<PAGE>


                                                                     Schedule VI

                                 KAYE GROUP INC

 SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
              For the years ended December 31, 1997, 1996 and 1995
                                 (in thousands)

<TABLE>
<CAPTION>
==========================================================================================================================
  Column A       Column B       Column C       Column D       Column E     Column F   Column G           Column H
==========================================================================================================================
                                                                                                     Claims and Claim
                              Reserves For                                                          Adjustment Expenses
                              Unpaid Claims    Discount                                             Incurred Related to
Affiliation      Deferred       And Claim       If Any                                    Net         (1)          (2)
    With        Acquisition    Adjustment     Deducted In     Unearned      Earned    Investment    Current       Prior
 Registrant        Costs        Expenses       Column C       Premiums     Premiums     Income       Year         Years
--------------------------------------------------------------------------------------------------------------------------
<S>              <C>             <C>              <C>        <C>          <C>          <C>         <C>         <C>
Foreign            $240             $204          N/A         $1,132       $2,118        $127        $326         ($47)
Domestic          3,699           18,922          N/A         11,446       20,729       2,565       8,498          (61)
                ----------------------------------------------------------------------------------------------------------

1997             $3,939          $19,126          N/A        $12,578      $22,847      $2,692      $8,824        ($108)
                ==========================================================================================================

Foreign            $295             $160          N/A         $1,311       $1,542        $271        $313      ($1,580)
Domestic          3,778           15,067          N/A         11,865       17,785       2,190       6,308        1,995
                ----------------------------------------------------------------------------------------------------------

1996             $4,073          $15,227          N/A        $13,176      $19,327      $2,461      $6,621         $415
                ==========================================================================================================

Foreign            $325           $6,268          N/A         $1,443       $1,399        $742        $338         ($38)
Domestic          3,378            6,403          N/A         10,471       15,446       2,077       4,648          (98)
                ----------------------------------------------------------------------------------------------------------

1995             $3,703          $12,671          N/A        $11,914      $16,845      $2,819      $4,986        ($136)
                ==========================================================================================================

<CAPTION>
===========================================================================
  Column A          Column I         Column J     Column K       Column L
===========================================================================

                                      Paid
                  Amortization       Claims
Affiliation       Of Deferred       and Claim                     Other
    With          Acquisition      Adjustment     Premiums      Operating
 Registrant          Costs          Expenses      Written        Expenses
---------------------------------------------------------------------------
<S>                <C>              <C>          <C>              <C>
Foreign              $456             $234        $1,938            $113
Domestic            6,813            6,512        20,332           1,988
                -----------------------------------------------------------

1997               $7,269           $6,746       $22,270          $2,101
                ===========================================================

Foreign              $347           $3,637        $1,411            $167
Domestic            5,739            1,725        19,278           1,965
                -----------------------------------------------------------

1996               $6,086           $5,362       $20,689          $2,132
                ===========================================================

Foreign              $316           $2,629        $2,127            $161
Domestic            4,878            3,668        13,033           1,573
                -----------------------------------------------------------

1995               $5,194           $6,297       $15,160          $1,734
                ===========================================================
</TABLE>


                                      F-43