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, 1998
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. ___


<PAGE>


     The  aggregate  market  value  of the  registrant's  common  stock  held by
non-affiliates  of  the  registrant  as of  March  12,  1999  was  approximately
$39,140,000.

     Number of shares of the registrant's  common stock  outstanding as of March
12, 1999: 8,452,435.


                       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, 1998
(incorporated by reference under Part III).

     Total number of pages filed including cover and under pages 89.

     Index to Exhibits is on page 42.



                                       2
<PAGE>


                                 KAYE GROUP INC.

                                TABLE OF CONTENTS

Part I

Item 1.     Business                                                           4

Item 2.     Properties                                                        21

Item 3.     Legal Proceedings                                                 21

Item 4.     Submission of Matters to a Vote of Security Holders               21


Part II

Item 5.     Market for Common Equity and Related
            Stockholder Matters                                               22

Item 6.     Selected Financial Data                                           23

Item 7.     Management's Discussion and Analysis
            of Financial Condition and Results of Operations                  25

Item 8.     Financial Statements and Supplementary Data                       40

Item 9.     Changes in and Disagreements with Accountants
            on Accounting and Financial Disclosure                            40


Part III

Item 10.    Directors and Executive Officers of the Registrant                40

Item 11.    Executive Compensation                                            40

Item 12.    Security Ownership of Certain
            Beneficial Owners and Management                                  40

Item 13.    Certain Relationships and Related Transactions                    41



Part IV

Item 14.    Exhibits, Financial Statement Schedules
            and  Reports on Form 8-K                                          41

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  includes 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, New York, and in other
offices  located in  Pasadena,  California,  Westport,  Connecticut,  Hollywood,
Florida, Floral Park, New York, Woodbury, New York and Warwick, 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,
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 1998, the Retail Brokerage  Business serviced  approximately  15,000
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 from insureds 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 through which it places insurance
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 65% of PBC's
premium volume was generated by  approximately  450 unrelated  retail  insurance
agents and  brokers  serving  approximately  5,800  insureds  during  1998.  The
remaining  35% was 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,  automobile  service stations,  retail stores,
funeral homes and pharmacies, among others.



                                       5
<PAGE>


     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
$10,000 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,  OLRI has 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, PXRE Reinsurance
Company (rated Ag by A.M. Best Company ("A.M.  Best"), a major rating agency for
insurers).

     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 provides claims administration service to
the unaffiliated Program insurers for a fee.


History of the Company

1952 to 1993

     Prior to the initial public offering  ("IPO") of Holding's  common stock in
August  1993,  the  operations  of 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 placed 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.



                                       6
<PAGE>


     The business growth 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 all of the Insurance  Companies' net
premiums earned.

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 for 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.



                                       7
<PAGE>


          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 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.

1998

     On May 12, 1998 KILP was dissolved and  approximately  6,100,000  shares of
the  Company  were  distributed  by KILP  to its  partners,  consisting  of Kaye
Investments L.P., ZS Kaye, L.P., other entities and individuals.

The chart below reflects the current structure of the Company:


                       ==================================
                                KAYE GROUP INC.
                             (Corporate Operations)
                       ==================================

             100%                                           100%
=================================         ======================================
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 68% of the
Company's 1998 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 37% of the Retail Brokerage Business' 1998 revenues relate to
such affinity groups. Of this 37%, approximately 73% of the related revenues are
derived from unrelated insurance markets. The remaining 27% is derived from PBC.
(The premium volume associated with this 27% 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  450 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 six 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 1998
of $55,000,000 increased 10% over 1997. It is expected that the Production Ratio
will  approach 3:1 during 1999,  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.


                                       9
<PAGE>


     PBC receives  commissions from OLRI and the unaffiliated  Program insurers.
Pursuant to  sub-brokerage  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).

     The Insurance  Companies'  strategy in most cases is to underwrite only the
first "layer" per claim (the deductible range) (primarily inclusive of allocated
loss  expenses)  of the  property  and  casualty  insurance  provided  under the
Programs developed by PBC. This limits their 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 24 A.R.T.  programs.  The
major program groupings 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  1,300
     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 offers 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 500 insureds.


                                       10
<PAGE>


          4. The remaining 21 programs  represent 17% of the net premiums earned
     by the Insurance  Companies in 1998. They have approximately 3,100 insureds
     and include among others the following affinity groups:  catalog showrooms,
     homeowners,  retail  stores,  drug  stores,  funeral  directors,  bars  and
     taverns,   waste  haulers,   laundromats  and  dry  cleaners,  New  England
     restaurants,  Asian  American  restaurants,  automobile  service  stations,
     houses of worship, and main street small businesses.

     The  Restaurant  Program,  Residential  Real Estate Program and Real Estate
Umbrella  Program  accounted for 83% of the net premiums earned by the Insurance
Companies in 1998. 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, 1998, 1997 and 1996.

                                                        Net Premiums Earned
                                                      Years Ended December 31,
                                                    1998        1997        1996
                                                    ----        ----        ----
Residential Real Estate ....................         42%         46%         49%
Restaurant Program .........................         23%         25%         24%
Real Estate Umbrella Program ...............         18%         16%         14%
Other ......................................         17%         13%         13%
                                                    ---         ---         ---
                                                    100%        100%        100%
                                                    ===         ===         ===

Acquisitions

     During  1997,  the  Brokerage   Operations   acquired  certain  assets  and
liabilities of Western Insurance Associates,  Inc. ("WIA"). 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 WIA's competitive advantage is in the production of business from
affinity groups, including churches and homes for the aged.

     During  1998,  the  Brokerage   Operations   acquired  certain  assets  and
liabilities  of Florida  Insurance  Associates,  Inc.  ("FIA"),  Daniel V. Keane
Agency, Inc. ("DVK") and Laub Group of Florida, Inc. ("LGF"). These acquisitions
were accounted for as purchases and are expected to add 7% revenue growth to the
Retail Brokerage Business. FIA, located in Hollywood,  Florida,  represented the
Company's  entrance into the Florida  marketplace.  DVK,  located in Bridgeport,
Connecticut,  was relocated to the Company's  Westport,  Connecticut  office and
added  to  that  office's  personal  lines  and  main  street  (small  business)
operations. LGF, located in Hollywood,  Florida, added alternative risk transfer
capabilities to the FIA operations.


                                       11
<PAGE>


     During the first quarter of 1999, the Brokerage Operations acquired certain
assets and liabilities of Seaman, Ross, & Weiner, Inc. ("SRW"). This acquisition
will be accounted for as a purchase.  SRW,  located in Woodbury,  New York, will
enhance the general  commercial,  group  benefits and life  insurance  Brokerage
Operations in the New York City metropolitan area.

     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, that they will be advantageous to the Company.

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 1998,  1997 and 1996 were earned as
follows.  Amounts  shown  represent  a  percentage  of  the  related  full  year
consolidated revenues.

                                              1998        1997        1996
                                              ----        ----        ----
         First Quarter                         23%         22%         22%
         Second Quarter                        24%         23%         22%
         Third Quarter                         26%         28%         28%
         Fourth Quarter                        27%         27%         28%



                                       12
<PAGE>


Competition, and Industry and Market Risk

     The  Company is the 28th  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. In general,
premium pricing and commission  rate  reductions  continue to impact the Company
and the  insurance  industry  as a whole.  The Company  has been  successful  in
replacing  business lost from such premium and  commission  rate  reductions and
attrition  through new business  developed  from new accounts and programs,  and
extension of service to existing accounts.

     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 OLRI. 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.

     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.

     As part of its ongoing  business,  the Company is exposed to certain market
risks of potential  losses from adverse changes in market rates and prices.  The
Company's  primary market risk exposure is interest rate risk in regard to fixed
rate  domestic  instruments  and  outstanding  debt.  The  Company  has  minimal
investments in equity securities which have no material market risk exposure. It
has no derivative  instruments.  The Company's financial  instruments consist of
the investment  portfolio of OLRI. These  instruments are comprised of Corporate
and  Municipal  Bonds  and  U.S.  Treasury  securities  that are  classified  as
available  for sale.  The  Company  generally  selects  investment  assets  with
characteristics such as duration,  yield,  currency, and liquidity to match cash
flows of related  insurance and  reinsurance  contracts.  It selects medium term
fixed  rate  investments  to  support  general   liability  claims  and  shorter
investments to support property claims. The



                                       13
<PAGE>


fair value of and weighted average interest rate on the investment  portfolio as
of December 31, 1998 was $43,597,000 and 5.6%, respectively.

     The Company has various debt instruments  outstanding at December 31, 1998.
These debt  instruments,  which are due through 2002,  match the Company's  cash
inflow from operations.

Year 2000 Compliance

     Many computers,  software programs and microprocessors  embedded in certain
equipment (collectively,  "systems") were designed to accommodate only two-digit
date fields to  represent  a given year  (e.g.,  "98"  represents  1998).  It is
possible  that  such  systems  will  not be  able  to  accurately  process  data
containing  information relating to dates before, during or after the year 2000.
It is possible that such systems could fail entirely, although in many instances
the  consequences  of a system not being "year 2000  complaint" are unknown.  In
response to this issue, the Company has evaluated its applications and operating
software and is in the process of evaluating its hardware and software products,
end  user  computing   activities,   third-party  data  exchanges  and  business
relationships,  and has  established a project team  responsible  for overseeing
progress on the  Company's  compliance  program and  periodically  reporting  to
management.

     As of December 31, 1998 the Company has completed  approximately 75% of its
efforts to bring its own applications software and hardware in compliance,  with
the objective of having all critical  production  systems year 2000 compliant by
the  middle of 1999.  Testing of  critical  applications  is being  accomplished
through the use of a special system testing  environment  that simulates  system
operations  in the year 2000.  The Company also  purchased and  implemented  new
operational  and  accounting  software  in 1998.  In addition to being year 2000
compliant,  these new systems are intended to add increased functionality to the
Company.  The Company has  completed  its  assessment  of its servers and client
server operating software. The results of this assessment were identification of
hardware and software issues requiring  remediation in order to assure year 2000
compliance.

     The  total  cost  (both  current  and  future)  to  modify  these  existing
production  systems,   which  includes  both  internal  and  external  costs  of
programming,  coding  and  testing  is  estimated  to be  $135,000  and has been
reflected in the financial statements.

     In addition to addressing hardware/software  information technology ("IT"),
the Company  has also been  assessing  year 2000  issues with  respect to non-IT
systems  such as  telephones  and various  building  services  which may rely on
embedded  microprocessors.  Although failure of non-IT systems such as telephone
service could disrupt the Company's business, the Company's  communications with
the relevant vendors have not identified any significant year 2000 problems.



                                       14
<PAGE>


     The  Company   believes  that  if  systems  were  not  complaint  for  year
2000-related  problems there could be a material adverse impact on the Company's
financial  statements.  The  Company  believes  that it is taking the  necessary
measures to address issues that may arise relating to year 2000-related problems
and that its systems should be compliant.  The Company realizes,  however,  that
non-compliance  by these parties could impact its business.  The Company's  plan
addresses  potential year 2000 issues related to the processing of  transactions
with third parties.  The possibility  exists that some of the Company's external
business  contacts  may not be  compliant.  The  Company  began  contacting  its
external  business  contacts and continues to do so to determine their status of
compliance and to assess the impact of noncompliance to the Company. The Company
is working  closely with all  critical  business  relationships  to minimize its
exposure to year 2000-related  problems. It should be noted, however, that there
can be no  assurance  that the  systems  of other  companies  will be year  2000
compliant, or that their conversion will be comparable with information included
in the  Company's  systems  without  having a  material  adverse  effect  on the
Company.

     Although  it has  considered  various  scenarios  concerning  the  possible
effects of the year 2000  issue,  the Company  does not have formal  contingency
plans  relating to either its internal  processing  environment  or its external
business  contacts.  As it completes the upgrading and testing of  non-compliant
systems and continues to monitor the status of its important  external  contacts
into mid 1999, the Company will develop  contingency  plans if deemed  necessary
for critical systems and relationships.

     A  comprehensive  review was  performed  by the  Company  of the  insurance
policies written by its Insurance Companies and their underwriting guidelines to
determine Year 2000 exposure.  The Insurance  Companies primarily issue policies
covering  all or  part  of an  insured's  self-insured  retention,  with  limits
generally  up to $25,000,  that follow the form of the  policies for coverage in
excess of the Insurance  Companies'  policies.  The Insurance Companies have not
issued exclusions on these policies.  The Insurance Companies have also issued a
number of policies  with greater  limits of coverage,  and have  included a year
2000 exclusion on such policies. The Company is aware that year 2000 liabilities
may be deemed not to be fortuitous in nature and,  therefore,  not covered under
the policies underwritten by the Insurance Companies.  Moreover,  based upon the
classes of insurance  primarily  underwritten  by the Insurance  Companies,  the
Company  believes  that its coverage  exposure  with respect to year 2000 losses
will not be material.  However, changes in social and legal trends may establish
coverage  unintended  for  year  2000  exposures  by  re-interpreting  insurance
contracts and exclusions.


                                       15
<PAGE>


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 PXRE  Reinsurance  Company and  Transatlantic  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.

     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.



                                       16
<PAGE>


     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;  and
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, 1998.


                                                    Years Ended December 31,
                                                --------------------------------
                                                  1998        1997        1996
                                                --------    --------    --------
                                                          (in thousands)

Balance at January 1,                           $ 19,126    $ 15,227    $ 12,671
         Less reinsurance recoverables            (2,811)       (882)
                                                --------    --------    --------
         Net balance                              16,315      14,345      12,671
                                                --------    --------    --------

Incurred related to:
         Current year                              8,461       8,824       6,621
         Prior years                                  35        (108)        415
                                                --------    --------    --------
         Total incurred                            8,496       8,716       7,036
                                                --------    --------    --------

Paid related to:
         Current year                              1,877       1,802       1,832
         Prior years                               4,587       4,944       3,530
                                                --------    --------    --------
         Total paid                                6,464       6,746       5,362
                                                --------    --------    --------

Net balance at December 31,                       18,347      16,315      14,345
         Plus reinsurance recoverables             3,220       2,811         882
                                                --------    --------    --------

         Balance                                $ 21,567    $ 19,126    $ 15,227
                                                ========    ========    ========


                                       17
<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  during
1989  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 1998 and 1997. The reinsurance recoverable on
unpaid  losses at December  31, 1998 and 1997 were  $3,220,000  and  $2,811,000,
respectively.



                                       18
<PAGE>


KAYE GROUP INC.
LOSS DEVELOPMENT SCHEDULE
(In thousands)

<TABLE>
<CAPTION>
          Year Ended            1988     1989      1990       1991     1992     1993      1994     1995     1996      1997    1998
          ----------            ----     ----      ----       ----     ----     ----      ----     ----     ----      ----    ----
<S>                             <C>      <C>      <C>       <C>       <C>      <C>       <C>      <C>      <C>      <C>      <C>
Reserves for outstanding
  losses and loss expenses
  on December 31,               $6,866   $8,418   $12,555   $16,244   $18,444  $17,929   $14,118  $12,672  $15,227  $19,126  $21,567


Cumulative amount paid as of:

     One year later             $2,018   $2,505    $4,374    $5,569    $6,379   $6,965    $4,161   $3,697   $4,943   $4,587
     Two years later             3,513    5,266     7,545     9,258    11,704   10,002     6,802    6,882    7,780
     Three years later           5,208    7,041     9,245    12,695    13,833   12,278     9,455    8,691
     Four years later            6,113    7,600    11,378    13,813    14,973   14,120    10,917
     Five years later            6,269    8,539    11,705    14,146    15,784   15,281
     Six years later             6,881    8,660    11,768    14,385    16,374
     Seven years later           6,892    8,681    11,877    14,562
     Eight years later           6,895    8,701    11,917
     Nine years later            6,903    8,720
     Ten years later             6,909


Re-estimated liability as of:

     One year later             $6,891   $9,127   $13,665   $16,117   $18,140  $17,856   $14,254  $12,257  $15,494  $18,534
     Two years later             6,692    9,767    13,003    15,182    18,511   18,184    13,487   12,454   15,352
     Three years later           7,343    9,288    11,850    15,609    18,636   16,552    13,990   12,448
     Four years later            7,228    9,002    12,410    15,462    18,177   18,157    13,985
     Five years later            7,120    9,060    12,468    15,312    18,252   17,993
     Six years later             7,140    8,973    12,224    14,982    17,999
     Seven years later           7,063    8,893    12,121    14,872
     Eight years later           6,964    8,847    11,996
     Nine years later            7,012    8,733
     Ten years later             6,909


Cumulative
Redundancy (Deficiency):          ($43)   ($315)     $559    $1,373      $445     ($64)     $133     $225    ($125)    $593
</TABLE>


                                       19
<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  primarily  subject to the
regulatory  oversight  of the Rhode  Island  Department  of Business  Regulation
through its Insurance Division.

     As a Bermuda  property and casualty  insurance  company,  OLB is subject to
regulation of the 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 OLRI has met its  risk-based  capital and
surplus  requirements  at  December  31,  1998.  The  authorized  control  level
risk-based  capital for OLRI,  as of December 31, 1998 was  $4,403,083  and OLRI
exceeded that threshold by $23,463,514.

Employees

     As of December 31, 1998, the Company had 368 employees.  The Company is not
unionized and believes that its employee relationships are satisfactory.


                                       20
<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,  Westport,  Connecticut,  Woodbury,  New York, Hollywood,
Florida,  and Floral Park, New York.  The Company's  total leased space at these
locations is  approximately  114,000 square feet and is 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  were
involved in an  administrative  investigation  commenced in 1992 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 was altered,
which has not had a material  adverse effect on this Program.  While the Company
had discussions with the Department  regarding settlement of such investigation,
this matter has not been pursued for several years.  If the matter is not closed
or settled,  the  Department  could  institute  formal  proceedings  against the
subsidiaries  seeking fines or license  revocation.  Management does not believe
the resolution of this issue will have a material adverse effect on the Company.

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

     No matters  were  submitted  to a vote of  security  holders of the Company
during the fourth quarter of the fiscal year ended December 31, 1998.




                                       21
<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 closing  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
                                          ----           ---          ---------

    1998:
First Quarter                           $7 13/16        $6 1/4       $ .025 cash
Second Quarter                             7 1/2         6 3/8       $ .025 cash
Third Quarter                              7 1/4         6 1/4       $ .025 cash
Fourth Quarter                             7 5/8         5 1/8       $ .025 cash

    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


     The approximate  number of holders of record of the Company's  Common Stock
as of March 12, 1999 was 103.

     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.


                                       22
<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 1994  through 1998 has been
derived from the audited consolidated financial statements of the Company.

<TABLE>
<CAPTION>
                                                                               Years ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                           1998           1997           1996           1995              1994
------------------------------------------------------------------------------------------------------------------------------------
                                                                        (in thousands, except per share data)
<S>                                                      <C>            <C>            <C>            <C>               <C>
Revenues:
Operating revenues (6)                                   $ 60,191       $ 55,309       $ 51,339       $ 51,582          $ 52,906
Net investment income                                       4,735          4,312          3,576          3,912             3,455
Net realized gains (losses) on investments                     85             21             72            (47)              (50)
                                                         --------       --------       --------       --------          --------

Total revenues                                           $ 65,011       $ 59,642       $ 54,987       $ 55,447          $ 56,311
                                                         --------       --------       --------       --------          --------


Net income                                               $  7,282       $  4,357       $  3,071       $  5,181          $  4,347
------------------------------------------------------------------------------------------------------------------------------------

Earnings per share:
  Basic                                                  $   0.86       $   0.62       $   0.44       $   0.74          $   0.62
  Diluted                                                $   0.85       $   0.62       $   0.44       $   0.74          $   0.62
------------------------------------------------------------------------------------------------------------------------------------

PRO FORMA NET INCOME
  Income before minority interest,
  income taxes and cumulative effect
  of change in accounting principles                     $ 10,554       $  7,555       $  5,211       $  6,309          $  6,516

  Provision for income taxes                                3,272          2,267          1,484          1,995(1)          1,861(1)
                                                         --------       --------       --------       --------          --------

  Income before minority interest and
  cumulative effect of change in
  accounting principles                                     7,282          5,288          3,727          4,314             4,655

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

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

  Pro forma net income                                   $  7,282       $  4,357       $  3,071       $  3,555          $  4,734
------------------------------------------------------------------------------------------------------------------------------------

PRO FORMA EARNINGS PER SHARE - BASIC
  Income before cumulative effect
  of change in accounting principles                     $   0.86       $   0.62       $   0.44       $   0.51          $   0.52

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

  Pro forma earnings per share - basic                   $   0.86       $   0.62       $   0.44       $   0.51          $   0.67
------------------------------------------------------------------------------------------------------------------------------------

Weighted average of shares
outstanding - basic                                         8,474          7,024          7,020          7,020             7,020
------------------------------------------------------------------------------------------------------------------------------------

Weighted average of shares and
share equivalents outstanding - diluted                     8,593          7,083          7,021          7,023             7,035
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       23
<PAGE>



Item 6.  Selected Financial Data (Continued)

<TABLE>
<CAPTION>
                                                                            Years ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                   1998               1997             1996             1995               1994
------------------------------------------------------------------------------------------------------------------------------------
                                                                  (in thousands, except per share data and ratios)
<S>                                             <C>               <C>               <C>               <C>               <C>
Balance Sheet data:
Total assets                                    $   167,066       $   141,025       $   156,102       $   174,000       $   185,976
Long-term debt (3)                                    4,672             5,810            12,787            13,679            11,618
Stockholders' equity                                 41,769            35,168            24,984            22,882            16,676
Net book value  per share (4)                          4.93              4.15              3.56              3.26              2.38
Cash dividend per share                                0.10              0.10              0.10              0.10              0.10

GAAP operating data:
Loss ratio                                             34.4%             38.2%             36.4%             28.8%             31.8%
Expense ratio                                          39.3%             41.0%             42.5%             41.1%             32.9%
Combined ratio                                         73.7%             79.2%             78.9%             69.9%             64.7%

Statutory operating data (5):
Net underwriting gain                           $     6,925       $     5,890       $     4,455       $     7,104       $     7,105
Policyholders' surplus                               29,286            25,566            25,485            26,231            22,274

Loss ratio                                             33.1%             36.6%             34.1%             24.4%             30.2%
Expense ratio                                          39.1%             38.6%             40.0%             37.1%             35.5%
Combined ratio                                         72.2%             75.2%             74.1%             61.5%             65.7%
</TABLE>

(1)  Prior  to  the  Transaction   certain  entities  were   partnerships  or  S
     Corporations  under the Internal  Revenue Code and therefore not liable for
     Federal  income taxes.  A charge in lieu of income taxes 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.

(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, 1998 and 1997 and
     7,020,000 outstanding at December 31, 1996, 1995 and 1994.

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

(6)  Subsequent to 1995, commission expense paid to internal producers have been
     reclassified  to salary  expense to more  accurately  reflect  salaries and
     benefits. Previously this expense was netted against operating revenues and
     accordingly operating revenues for 1995 and 1994 are not comparable.

(7)  Certain prior year  information  has been  reclassified to conform with the
     1998 presentation.


                                       24
<PAGE>


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

General

     Kaye Group Inc.  (the  "Company"),  a  Delaware  corporation,  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"),  comprised of the  Insurance  Companies and Claims
Administration  (see  Note 1 to the  consolidated  financial  statements  of the
Company).

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, 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.

     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.


                                       25
<PAGE>


Results of Operations

Year ended December 31, 1998 compared with year ended December 31, 1997

Net Income

     Net income for the year ended  December 31, 1998 increased by $2,925,000 to
$7,282,000 or basic  earnings per share of $0.86 compared to $4,357,000 or $0.62
for the same period last year as explained  below.  $931,000 of the increase was
due to the  elimination  of minority  interest  (see Note 2 to the  consolidated
financial statements of the Company).

Insurance Brokerage Companies

     Income before income taxes increased by $938,000 to $1,705,000 in 1998 from
$767,000 in 1997.  The  improved  operating  result was mainly due to  increased
revenues offset by the increase in salaries and benefits, as discussed below.

     Total revenues in 1998 were $37,202,000  compared with $33,782,000 in 1997,
an increase of $3,420,000  (10%).  Gross  commission and fees grew by $4,222,000
(11%) mainly as a result of new business  exceeding lost business,  acquisitions
and an increase in contingency  commissions due to volume and  profitability  of
1997 premiums placed with certain  insurance  carriers.  The commission  expense
rate  incurred to produce new and renewal  business  increased  from 17% to 18%.
Investment  income  increased  in  1998  by  $281,000  (18%)  primarily  due  to
collection  efficiencies  resulting  in a longer  holding  period for  fiduciary
investments.

     Salaries and benefits  increased by $2,418,000 (13%) to $21,323,000 in 1998
compared to $18,905,000 in 1997. This increase was due to  acquisitions,  salary
increments, increased commission expense to employees and annual incentive based
compensation.

     Amortization  of  intangibles  increased by $172,000 (34%) to $679,000 from
$507,000 in 1997 as a result of increased  amortization  of acquisition  related
intangibles due to 1997 and 1998 acquisitions.

     Other operating  expenses increased by $243,000 (2%) to $13,446,000 in 1998
compared  with  $13,203,000  in 1997.  This  increase was mainly the result of a
reserve for E & O deductibles partially offset by reduced rent costs.

     Interest expense  decreased by $351,000  primarily as a result of the early
payment of the $6,000,000 note payable to KILP in August, 1997.



                                       26
<PAGE>


Property & Casualty Companies

     Income before income taxes  increased by $1,918,000  (25%) to $9,637,000 in
1998 from  $7,719,000  in 1997.  The  increase  in  operating  result was due to
increased net premiums earned, investment income and a decreased combined ratio.

     Net premiums  earned for 1998  increased by $1,842,000  (8%) to $24,689,000
from $22,847,000 in 1997. The Property & Casualty Companies'  efforts,  combined
with the efforts of the Brokerage  segment's Program Brokerage  Corporation,  to
develop new  Alternative  Risk  Transfer  programs and broaden the  distribution
network of the existing  programs and coverage  types,  has  contributed  to the
growth of premium volume.

     Net  investment  income  increased  by  $228,000  (8%) to  $2,920,000  from
$2,692,000  in  1997.  This  increase  was  due to an  increase  in  investments
generated by cash flow from operations.

     Net realized gain on investment  transactions for 1998 increased by $64,000
to $85,000  compared to $21,000 in 1997. 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 1998  decreased by $99,000 to $146,000  from  $245,000 in
1997. This decrease is mainly due to discontinued warranty contracts in 1998.

     Loss and loss  expenses  decreased in 1998 by $220,000  (3%) to  $8,496,000
from $8,716,000 in 1997. The loss ratio (loss incurred expressed as a percentage
of  premiums  earned)  for 1998 and  1997  was 34% and 38%,  respectively.  This
decrease was due to low general  liability losses and an improvement in loss and
loss expense under the property programs resulting from mild weather.

     Acquisition costs and general and administrative expenses increased in 1998
by $337,000  (4%) to  $9,707,000  from  $9,370,000  in 1997.  The expense  ratio
(acquisition  costs and general and  administrative  expenses) for 1998 and 1997
was 39% and 41%,  respectively.  Exclusive of a bad debt recovered,  the expense
ratio would have been 40% and 41%, respectively.  This decrease was due to lower
general and administrative expenses in 1998.

Corporate

     Net expenses  before  income taxes  decreased in 1998 by $143,000  (15%) to
$788,000 from $931,000 in 1997.  This decrease was the result of lower  interest
expense and  insurance  costs  partially  offset by a provision  for  investment
decline and costs related to the  restructuring  of debt.



                                       27
<PAGE>


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

Net Income

     Net income for the year ended  December 31, 1997 increased by $1,286,000 to
$4,357,000 or basic  earnings per share of $0.62 compared to $3,071,000 or $0.44
for the same period last year as explained below.

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 $33,782,000  compared with $32,593,000 in 1996,
an increase of $1,189,000  (4%).  Gross  commission  and fews grew by $1,453,000
(4%) mainly as a result of new business exceeding lost business and acquisitions
partially  offset  by a  decrease  in  wholesale  contingency  commissions.  The
Commission  expense rate incurred to produce new and renewal business  increased
form 15% to 17%. Investment income increased in 1997 by $539,000 (53%) primarily
due  to  collection  efficiencies  resulting  in a  longer  holding  period  for
fiduciary investments.

     Salaries and benefits  increased by $142,000  (1%) to  $18,905,000  in 1997
compared to $18,763,000 in 1996. This increase was the result of the acquisition
of Western  Insurance  Associates,  Inc.  ("WIA")  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.

     Amortization  of  intangibles  increased by $68,000  (15%) to $507,000 from
$439,000  as  a  result  of  increased   amortization  of  acquisition   related
intangibles due to the acquisition of WIA.

     Other operating  expenses decreased by $783,000 (6%) to $13,203,000 in 1997
compared  with  $13,986,000  in 1996.  This  decrease  was mainly due to reduced
account servicing  expenses,  expiration of certain management service contracts
and reduced insurance costs.



                                       28
<PAGE>


     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.

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  result 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 an increase in investments generated from cash
flow from operations.

     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 (loss incurred expressed as a
percentage of premiums earned) 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 as a percentage of
premiums earned) 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.



                                       29
<PAGE>


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.

Effective Tax Rate (See Note 8)

     The  effective  tax rate for 1998,  1997,  and 1996 was 31%,  30%, and 28%,
respectively.  The  difference  between the statutory tax rate and the effective
tax rate in 1998,  1997, and 1996 was primarily  related to tax exempt interest.
The rate increase for 1998 and 1997 was  primarily  due to additional  state and
local taxes.

Financial Condition and Liquidity

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

     Total assets increased by $26,041,000 (18%) to $167,066,000 at December 31,
1998 from  $141,025,000  at December 31, 1997 due primarily to general  business
growth resulting in fiduciary cash and cash equivalents and premiums  receivable
from clients and other insurance agents and brokers. Total liabilities increased
by $19,440,000  (18%) to $125,297,000 at December 31, 1998 from  $105,857,000 at
December  31,  1997  primarily  due to  general  business  growth  resulting  in
increased premiums payable to insurance markets.

     Stockholders'  equity  increased  by  $6,601,000  (19%) to  $41,769,000  at
December 31, 1998, from $35,168,000 at December 31, 1997. The increase in equity
resulted  from net  income  of  $7,282,000  and an  increase  in net  unrealized
appreciation of investments of $168,000,  partially  offset by dividends paid of
$849,000.

     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 as of December 31, 1997
and increased  stockholders'  equity of the Company by the same amount. Prior to
its dissolution in May 1998,  KILP was 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
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



                                       30
<PAGE>


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 $14,136,000  for the
year ended December 31, 1998.  Operating activities provided cash of $23,188,000
primarily  as a  result  of  premiums  received  from  assureds  not yet paid to
insurance markets.  Investing  activities used cash of $4,443,000  primarily for
fixed asset purchases (primarily software) and acquisition  payments.  Financing
activities   used  cash  of  $4,609,000  for  payments  of  dividends  and  loan
restructuring,  including a reduction of  approximately  $1,100,000 of corporate
debt.

     The Company paid off its  revolving  credit line of $6,094,000  early,  and
replaced it with a term loan of  $5,000,000,  at an interest  rate  reduction of
approximately   50  basis  points,   thereby   reducing  debt  by  approximately
$1,100,000. As of December 31, 1998, $4,456,000 is outstanding on the term loan.
In addition,  the Company has  available a $4,500,000  revolving  line of credit
with a bank.  Both lines are  collateralized  by the stock of the  Property  and
Casualty  Companies.  The proceeds are available for general operating needs and
acquisitions. As of December 31, 1998, no amount is outstanding on the revolving
line of credit.

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

     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  primarily  subject to the
regulatory  oversight  of the Rhode  Island  Department  of Business  Regulation
through its Insurance Division.

     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, acquisitions
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.


                                       31
<PAGE>


     The table below sets forth the  composition  of the Company's  portfolio of
fixed maturity investments by rating as of December 31, 1998 (in thousands):


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

AAA(b)                   $22,213               $22,574                51.8%
  AA+                      1,116                 1,124                 2.6%
  AA                      13,177                13,393                30.7%
  AA-                      3,860                 3,883                 8.9%
   A+                        351                   352                  .8%
   A                       2,263                 2,271                 5.2%
                         -------               -------               -----
                         $42,980               $43,597               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.

     The  amortized  cost and  estimated  market  value of fixed  maturities  at
December 31, 1998, 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
                                            -----------------------------------
                                                                 Aggregate Fair
                                            Amortized Cost            Value
                                            --------------       --------------

Due in one year or less                        $ 3,769               $ 3,774
Due after one year through five years           21,193                21,624
Due after five years through ten years          13,474                13,599
Due after ten years                              4,544                 4,600
                                               -------               -------

Total                                          $42,980               $43,597
                                               =======               =======

     The Company  maintains a  substantial  level of cash and liquid  short term
investments which are used to meet anticipated payment obligations.  At December
31,  1998 and  1997,  the  Company  had  cash  and  short  term  investments  of
$48,393,000 and $34,737,000,  respectively, of which $33,218,000 and $22,322,000
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.



                                       32
<PAGE>


     Investment results of the Company for each of the three years in the period
ended December 31, 1998 are shown in the following table (in thousands):

                                                          At or for the
                                                    years ended December 31,
                                              ----------------------------------
                                               1998         1997         1996
                                               ----         ----         ----

Average cash and cash equivalents
   and invested assets (1)                    $85,191      $76,534      $68,692

Investment income                              $4,735       $4,312       $3,576

Average yield on total investments                5.6%         5.6%         5.2%

Net realized investment gains                     $85          $21          $72

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

     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,  1998,  the
Insurance  Companies,  with a combined  statutory surplus of $29,286,000,  had a
ratio of  combined  annual  statutory  net  premiums  written to their  combined
statutory surplus of approximately .84 to 1.

Quantitative and Qualitative Disclosures about Market Risk

     As part of its ongoing  business,  the Company is exposed to certain market
risks of potential  losses from adverse changes in market rates and prices.  The
Company's  primary market risk exposure is interest rate risk in regard to fixed
rate  domestic  instruments  and  outstanding  debt.  The  Company  has  minimal
investments in equity  securities  which have no material  market risk exposure.
The Company has no derivative  instruments.  The Company's financial instruments
consist of the investment  portfolio of OLRI. These instruments are comprised of
Corporate and Municipal Bonds and U.S.  Treasury  Securities that are classified
as available for sale.

     The Company generally selects investment assets with  characteristics  such
as  duration,   yield,   currency,  and  liquidity  to  reflect  the  underlying
characteristics  of related  insurance and  reinsurance  contracts.  The Company
selects medium term fixed rate  investments to support general  liability claims
and shorter investments to support property claims.




                                       33
<PAGE>


     The Company has various debt instruments  outstanding at December 31, 1998.
These debt  instruments,  which are due through 2002,  match the Company's  cash
inflow from operations.

     The following table summarizes  information  about the Company's  financial
instruments  that are  sensitive to changes in interest  rate as of December 31,
1998. The table presents  principal and interest cash flow and related  weighted
average  interest rates by expected  maturity dates for assets and  liabilities.
The Company has presumed the call date as the expected  maturity  date for those
asset  instruments  with call  features.  Weighted  average rates are calculated
using the sum of expected  investment  income or interest expense divided by the
sum of the amortized  cost of assets or the sum of the average debt  outstanding
at each respective period.  For variable rate debt,  expected interest cash flow
is calculated using the December 31, 1998 weighted average interest rate without
any adjustments for projected fluctuations in prime rate.

<TABLE>
<CAPTION>
                                                                                  EXPECTED CASH FLOW
                                                                                    (in thousands)
                                                       ----------------------------------------------------------------------------

Assets                                   Fair Value    Total Value    1999       2000       2001      2002      2003     Thereafter
------                                   ----------    -----------    ----       ----       ----      ----      ----     ----------
<S>                                        <C>           <C>           <C>       <C>        <C>        <C>      <C>      <C>
U.S. Treasury Notes
Interest rates ranging from 5.75% to
6.75%                                      $2,162        $2,424        $580      $862       $299       $39      $644

Weighted average interest rate                             5.6%        6.2%      5.3%       5.5%      6.5%      3.2%

Municipal Bonds with call features
Interest rates ranging from 5% to
12.6%                                      12,268        15,016       2,033     1,328      1,169     2,721     4,228       3,537

Weighted average interest rate                             6.7%        7.1%        7%       6.9%      6.8%      5.2%        6.4%

Municipal Bonds without call features
Interest rates ranging from 3.8% to
10.9%                                      24,444        32,521       2,913     2,265      2,221     4,663     3,737      16,722

Weighted average interest rate                             6.1%        6.1%      6.2%       6.2%      6.1%      6.1%        6.2%

Corporate Bonds
Interest rates ranging from 5.6% to
7.5%                                        4,723         5,287         921     2,350      1,350       428       238

Weighted average interest rate                             6.4%        6.4%      5.0%       5.7%      4.3%      5.9%

Total Fixed Rate Instrument               $43,597       $55,248      $6,447   $ 6,805     $5,039    $7,851    $8,847     $20,259

Weighted average interest rate                             6.2%        6.4%      6.2%       6.3%      6.3%      5.8%        6.2%
</TABLE>


                                       34
<PAGE>


<TABLE>
<CAPTION>
                                                                                  EXPECTED CASH FLOW
                                                                                    (in thousands)
                                                       ----------------------------------------------------------------------------

Liabilities                              Fair Value    Total Value    1999       2000       2001      2002      2003     Thereafter
-----------                              ----------    -----------    ----       ----       ----      ----      ----     ----------
<S>                                        <C>           <C>           <C>       <C>        <C>        <C>      <C>        <C>
Debt - Fixed Rate
Interest rates ranging from 7.4%
to 7.8%                                    $5,052        $5,811      $1,777    $1,623     $1,623      $788

Weighted average interest rate                             8.3%        8.1%      8.2%       8.7%      9.8%


Debt - Variable Rate
Interest rates ranging from
prime to prime +1/2%                        1,492         1,715         546       462        415       292

Weighted average interest rate                             8.2%        8.1%      8.1%       8.5%      7.7%


Total Debt                                 $6,544        $7,526      $2,323    $2,085     $2,038    $1,080

Weighted average interest rate                             8.3%        8.0%      8.2%       8.7%      9.2%
</TABLE>

Dividends

     On December 21, 1998 the Board of Directors  declared a quarterly  dividend
of $.025 per  share,  payable  January  20,  1999 to  stockholders  of record on
December 31, 1998.  The Company is largely  dependent  upon  dividends  from its
insurance  subsidiaries  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,  1998,  $2,786,000  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, 1998. At
December 31, 1998,  $419,000 was  available  for  distribution  from OLB and its
subsidiary, Park Brokerage Ltd.


                                       35
<PAGE>


     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.

Newly Adopted Accounting Standards

     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. As of December
31, 1998, the Company has no derivative financial instruments. 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 were effective in 1998
for the Company and are appropriately disclosed.

     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.  In  accordance  with the
statement,  the Consolidated Statements of Comprehensive Income are presented as
a separate statement at December 31, 1998, 1997, and 1996.

     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



                                       36
<PAGE>


statement  is  effective  for year end 1998 and has not  changed  the  Company's
current  segmentation  of its  business.  The  financial  position and operating
results of the Company were not affected by this  statement  (see Note 23 to the
consolidated financial statements).

Accounting Standards Not Yet Adopted

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  ("SFAS") No. 133,  Accounting  for  Derivative
Instruments and Hedging  Activities.  This statement requires all derivatives to
be  recognized  as either  assets or  liabilities  in the statement of financial
position and to be measured at fair value.  This  statement is effective for all
fiscal  quarters and fiscal  years  beginning  after June 15,  1999.  Management
believes  that the  statement  will not have a material  impact on the financial
position of the Company.

     In March 1998,  the  American  Institute of  Certified  Public  Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs of
Computer  Software  Developed  or Obtained  for  Internal  Use,  which  requires
capitalization  of external  and certain  internal  costs  incurred to obtain or
develop internal-use computer software during the application development stage.
SOP 98-1 is effective for fiscal years  beginning  after December 15, 1998. This
statement  is not  expected  to  materially  impact the  Company's  consolidated
financial statements.

     In late 1998, the AICPA issued SOP 98-7, Deposit Accounting: Accounting for
Insurance and  Reinsurance  Contracts that Do Not Transfer  Insurance Risk. This
SOP effective for fiscal years beginning after June 15, 1999,  provides guidance
to both the insured and insurer on how to apply the deposit method of accounting
when it is required for insurance and reinsurance contracts that do not transfer
insurance  risk.  This SOP is not expected to  materially  impact the  Company's
consolidated financial statements.

     In December  1997,  the AICPA issued SOP 97-3,  Accounting by Insurance and
Other Enterprises for Insurance-Related  Assessments. SOP 97-3 provides guidance
for assessments related to insurance  activities and requirements for disclosure
of certain  information.  SOP 97-3 is effective for financial  statements issued
for periods beginning after December 31, 1998.  Restatement of previously issued
financial  statements  is not  required.  SOP  97-3  is not  expected  to have a
material impact on the Company's consolidated financial statements.



                                       37
<PAGE>


Year 2000 Compliance

     Many computers,  software programs and microprocessors  embedded in certain
equipment (collectively,  "systems") were designed to accommodate only two-digit
date fields to  represent  a given year  (e.g.,  "98"  represents  1998).  It is
possible  that  such  systems  will  not be  able  to  accurately  process  data
containing  information relating to dates before, during or after the year 2000.
It is possible that such systems could fail entirely, although in many instances
the  consequences  of a system not being "year 2000  complaint" are unknown.  In
response to this issue, the Company has evaluated its applications and operating
software and is in the process of evaluating its hardware and software products,
end  user  computing   activities,   third-party  data  exchanges  and  business
relationships,  and has  established a project team  responsible  for overseeing
progress on the  Company's  compliance  program and  periodically  reporting  to
management.

     As of December 31, 1998 the Company has completed  approximately 75% of its
efforts to bring its own applications software and hardware in compliance,  with
the objective of having all critical  production  systems year 2000 compliant by
the  middle of 1999.  Testing of  critical  applications  is being  accomplished
through the use of a special system testing  environment  that simulates  system
operations  in the year 2000.  The Company also  purchased and  implemented  new
operational  and  accounting  software  in 1998.  In addition to being year 2000
compliant,  these new systems are intended to add increased functionality to the
Company.  The Company has  completed  its  assessment  of its servers and client
server operating software. The results of this assessment were identification of
hardware and software issues requiring  remediation in order to assure year 2000
compliance.

     The  total  cost  (both  current  and  future)  to  modify  these  existing
production  systems,   which  includes  both  internal  and  external  costs  of
programming,  coding  and  testing  is  estimated  to be  $135,000  and has been
reflected in the financial statements.

     In addition to addressing hardware/software  information technology ("IT"),
the Company  has also been  assessing  year 2000  issues with  respect to non-IT
systems  such as  telephones  and various  building  services  which may rely on
embedded  microprocessors.  Although failure of non-IT systems such as telephone
service could disrupt the Company's business, the Company's  communications with
the relevant vendors have not identified any significant year 2000 problems.

     The  Company   believes  that  if  systems  were  not  complaint  for  year
2000-related  problems there could be a material adverse impact on the Company's
financial  statements.  The  Company  believes  that it is taking the  necessary
measures to address issues that may arise relating to year 2000-related problems
and that its systems should be compliant.  The Company realizes,  however,  that
non-compliance  by these parties could impact its business.  The Company's  plan
addresses  potential year 2000 issues related to the processing of  transactions
with third parties.  The possibility  exists that some of the Company's external
business contacts may not be compliant. The Company began



                                       38
<PAGE>


contacting  its external  business  contacts and continues to do so to determine
their  status of  compliance  and to assess the impact of  noncompliance  to the
Company. The Company is working closely with all critical business relationships
to minimize  its  exposure to year  2000-related  problems.  It should be noted,
however, that there can be no assurance that the systems of other companies will
be year  2000  compliant,  or that  their  conversion  will be  comparable  with
information  included in the Company's systems without having a material adverse
effect on the Company.

     Although  it has  considered  various  scenarios  concerning  the  possible
effects of the year 2000  issue,  the Company  does not have formal  contingency
plans  relating to either its internal  processing  environment  or its external
business  contacts.  As it completes the upgrading and testing of  non-compliant
systems and continues to monitor the status of its important  external  contacts
into mid 1999, the Company will develop  contingency  plans if deemed  necessary
for critical systems and relationships.

     A  comprehensive  review was  performed  by the  Company  of the  insurance
policies written by its Insurance Companies and their underwriting guidelines to
determine year 2000 exposure.  The Insurance  Companies primarily issue policies
covering  all or  part  of an  insured's  self-insured  retention,  with  limits
generally  up to $25,000,  that follow the form of the  policies for coverage in
excess of the Insurance  Companies'  policies.  The Insurance Companies have not
issued exclusions on these policies.  The Insurance Companies have also issued a
number of policies  with greater  limits of coverage,  and have  included a year
2000 exclusion on such policies. The Company is aware that year 2000 liabilities
may be deemed not to be fortuitous in nature and,  therefore,  not covered under
the policies underwritten by the Insurance Companies.  Moreover,  based upon the
classes of insurance  primarily  underwritten  by the Insurance  Companies,  the
Company  believes  that its coverage  exposure  with respect to year 2000 losses
will not be material.  However, changes in social and legal trends may establish
coverage  unintended  for  Year  2000  exposures  by  re-interpreting  insurance
contracts and exclusions.

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



                                       39
<PAGE>


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.

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, 1998, 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, 1998, 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, 1998, and which is incorporated herein by reference.



                                       40
<PAGE>


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, 1998, and which is incorporated herein by reference.


                                     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, 1998 and 1997

          Consolidated  Statements  of Income for the years ended  December  31,
          1998, 1997 and 1996

          Consolidated Statements of Cash Flows for the years ended December 31,
          1998, 1997 and 1996

          Consolidated  Statements of  Stockholders'  Equity for the years ended
          December 31, 1998, 1997 and 1996

          Consolidated  Statements of  Comprehensive  Income for the years ended
          December 31, 1998, 1997 and 1996

          Notes to Consolidated Financial Statements

     2.   Financial Statement Schedules:

          Schedule II -- Condensed Financial Information of Registrant:

                         Balance Sheets at December 31, 1998 and 1997

                         Statements of Income  for the years  ended December 31,
                         1998, 1997 and 1996

                         Statements  of Cash Flows for the years ended  December
                         31, 1998, 1997 and 1996



                                       41
<PAGE>


                         Notes to Condensed Financial Statements

          Schedule IV -- Reinsurance for the years ended December 31, 1998, 1997
                         and 1996

          Schedule VI -- Supplemental   Information  Concerning   Property   and
                         Casualty  Insurance  Operations  for  the  years  ended
                         December 31, 1998, 1997 and 1996

     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).


                                       42
<PAGE>


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).

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     Loan Agreement  among Summit Bank and Kaye Group Inc.,  dated June 24,
          1998.

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).

10.18(i)  Amendment of Employment  Agreement between Kaye Group Inc. and Michael
          Sabanos, dated as of March 18, 1998.

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).


                                       43
<PAGE>


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).

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).

10.22     Asset  Purchase  Agreement  between Kaye Insurance  Associates,  Inc.,
          Seaman,  Ross  &  Weiner,   Inc.,  AMSCO  Coverage  Corp.  and  D.S.I.
          Associates, Inc., dated as of January 1, 1999.

11        Statement regarding computation of earnings per share.

27        Financial Data Schedule


(b)       Reports on Form 8-K

Exhibit
-------

99.5      Kaye Group Inc.  (the  "Company")  announced  on December 17, 1998 the
          authorization of a stock repurchase of its Common Stock.


                                       44
<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 26, 1999


     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 26, 1999


/ s / Howard Kaye             Director                            March 26, 1999
---------------------------
Howard Kaye


/ s / Michael P. Sabanos      Director, Senior Vice President,
---------------------------   Chief Financial Officer (Principal
Michael P. Sabanos            Financial Officer and Accounting
                              Officer)                            March 26, 1999


/ s / Robert Barbanell        Director                            March 26, 1999
---------------------------
Robert Barbanell


/ s / Richard Butler          Director                            March 26, 1999
---------------------------
Richard Butler


/ s / David Ezekiel           Director                            March 26, 1999
---------------------------
David Ezekiel


/ s / Elliot Cooperstone      Director                            March 26, 1999
---------------------------
Elliot Cooperstone


/ s / Ned Sherwood            Director                            March 26, 1999
---------------------------
Ned Sherwood



                                       45
<PAGE>


Item 8.  Financial Statements and Supplementary Data


                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

                                                                            Page
                                                                            ----

Index to Notes to Consolidated Financial Statements                         F-2

Report of Independent Accountants                                           F-3

Consolidated Balance Sheets at December 31, 1998
            and 1997                                                        F-4

Consolidated Statements of Income for the years
   ended December 31, 1998, 1997 and 1996                                   F-6

Consolidated Statements of Cash Flows
   for the years ended December 31, 1998,  1997 and 1996                    F-8

Consolidated Statements of Stockholders' Equity
   for the years ended December 31, 1998, 1997 and 1996                     F-9

Consolidated Statements of Comprehensive Income
   for the years ended December 31, 1998, 1997, and 1996                    F-9

Notes to Consolidated Financial Statements                                  F-10

Financial Statement Schedules:

Schedule II - Condensed Financial Information of Registrant:
         Balance Sheets at December 31, 1998 and 1997                       F-39

         Statements of Income for the years ended
         December 31, 1998, 1997 and 1996                                   F-40

         Statements of Cash Flows for the years ended
         December 31, 1998, 1997 and 1996                                   F-41

         Notes to Condensed Financial Statements                            F-42

Schedule IV - Reinsurance for the years ended
   December 31, 1998, 1997 and 1996                                         F-43

Schedule VI - Supplemental Information Concerning
   Property-Casualty Insurance Operations for the
   years ended December 31, 1998, 1997 and 1996                             F-44

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.
Index to Notes to Consolidated Financial Statements



                                      F-1
<PAGE>


Footnote   Description                                                      Page
--------   -----------                                                      ----
    1      Business ......................................................  F-10
    2      Organization ..................................................  F-12
    3      Significant Accounting Policies ...............................  F-13
    4      Changes in Accounting Policies ................................  F-17
    5      Funds Held in Fiduciary Capacity ..............................  F-19
    6      Investments ...................................................  F-20
    7      Notes Payable .................................................  F-23
    8      Income Taxes ..................................................  F-24
    9      Lease Commitments and Rentals .................................  F-26
   10      Pension and Retirement Plans ..................................  F-26
   11      Management Services Agreement .................................  F-26
   12      Contingent Liabilities ........................................  F-27
   13      Reinsurance ...................................................  F-28
   14      Losses and Loss Expense .......................................  F-29
   15      Statutory Financial Information and Dividend Restrictions .....  F-30
   16      Related Party Transactions ....................................  F-31
   17      Acquisitions ..................................................  F-32
   18      Preferred Stock ...............................................  F-32
   19      Dividends Declared ............................................  F-33
   20      Stock Performance and Stock Option Plans ......................  F-33
   21      Quarterly Financial Information (Unaudited) ...................  F-35
   22      Premiums ......................................................  F-36
   23      Business Segments .............................................  F-36
   24      Supplemental Cash Flow Disclosures ............................  F-38
   25      Subsequent Event ..............................................  F-38



                                      F-2
<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS


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

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements  of  income,  cash  flows,   stockholders'  equity  and
comprehensive  income,  present fairly, in all material respects,  the financial
position of Kaye Group Inc. and its subsidiaries (the "Company") at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended  December 31, 1998,  in  conformity  with
generally accepted  accounting  principles.  These financial  statements are the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards which 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,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.






PricewaterhouseCoopers LLP
New York, New York
February 26, 1999




                                      F-3
<PAGE>



                                 KAYE GROUP INC.
                           CONSOLIDATED BALANCE SHEETS
                     December 31, 1998 and December 31, 1997
                   (in thousands, except par value per share)

<TABLE>
<CAPTION>
                                                                                            1998               1997
                                                                                          --------           --------
<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 $33,218 and $22,322)                                                $ 34,267           $ 24,833
     Premiums and other receivables                                                         40,572             32,790
     Prepaid expenses and other assets                                                       1,895              1,385
                                                                                          --------           --------
     Total  current assets                                                                  76,734             59,008

Fixed assets (net of accumulated depreciation of $5,662 and $4,553)                          3,683              3,145
Intangible assets (net of accumulated amortization of $2,750 and $2,072)                     6,795              4,702
Deferred income taxes                                                                          816                966
Other assets                                                                                   205                181
                                                                                          --------           --------
     Total assets - insurance brokerage companies                                           88,233             68,002
                                                                                          --------           --------

PROPERTY AND CASUALTY COMPANIES
Investments available-for-sale:
     Fixed maturities, at market value (amortized cost: 1998, $42,980;
         1997, $41,529)                                                                     43,597             42,099
     Equity securities, at market value (cost: 1998, $646; 1997, $871)                         732                981
     Short term investments, at cost, which approximates market value                        2,950              3,430
                                                                                          --------           --------
     Total investments                                                                      47,279             46,510

Cash and cash equivalents                                                                   10,806              6,409
Accrued interest and dividends                                                                 961                882
Premiums receivable                                                                          2,644              2,344
Premiums receivable - insurance brokerage companies                                          3,041              3,185
Prepaid reinsurance premiums                                                                   162                262
Reinsurance recoverable on unpaid losses and loss expenses                                   3,220              2,811
Funds held under deposit contracts, at market value, which
     approximates cost                                                                                            173
Deferred acquisition costs                                                                   3,921              3,939
Deferred income taxes                                                                          586                379
Other assets                                                                                 2,354              1,810
Intercompany receivable                                                                        508
                                                                                          --------           --------
     Total assets - property and casualty companies                                         75,482             68,704
                                                                                          --------           --------

CORPORATE
Cash and cash equivalents                                                                      370                 65
Prepaid expenses and other assets                                                              248                107
Investments available-for-sale:
     Equity securities, at market value (cost: 1998, $497, and 1997, $557)                     615                442
Deferred income taxes                                                                                              41
Intercompany receivable                                                                      2,118              3,664
                                                                                          --------           --------
     Total assets - corporate                                                                3,351              4,319
                                                                                          --------           --------

     Total assets                                                                         $167,066           $141,025
                                                                                          ========           ========
</TABLE>


                 See notes to consolidated financial statements


                                      F-4
<PAGE>


                                 KAYE GROUP INC.
                           CONSOLIDATED BALANCE SHEETS
                     December 31, 1998 and December 31, 1997
                   (in thousands, except par value per share)


<TABLE>
<CAPTION>
                                                                                            1998               1997
                                                                                          --------           --------
<S>                                                                                       <C>                <C>
LIABILITIES:

INSURANCE BROKERAGE COMPANIES
Current liabilities:
     Premiums payable                                                                     $ 59,472           $ 40,872
     Premiums payable - property and casualty companies                                      3,041              3,185
     Accounts payable and accrued liabilities                                                9,045              7,983
     Notes payable                                                                             718                434
     Deferred income taxes                                                                     978              1,063
     Intercompany payable                                                                    2,626              3,342
                                                                                          --------           --------
     Total current liabilities                                                              75,880             56,879
Notes payable                                                                                1,369                654
Other liabilities                                                                            1,005              1,466
                                                                                          --------           --------
     Total liabilities-insurance brokerage companies                                        78,254             58,999
                                                                                          --------           --------

PROPERTY AND CASUALTY COMPANIES
Liabilities:
     Unpaid losses and loss expenses                                                        21,567             19,126
     Unearned premium reserves                                                              12,327             12,578
     Accounts payable and accrued liabilities                                                7,451              6,661
     Other liabilities                                                                         143                350
     Intercompany payable                                                                                         322
                                                                                          --------           --------
     Total liabilities - property and casualty companies                                    41,488             39,037
                                                                                          --------           --------

CORPORATE
Current liabilities:
     Accounts payable and accrued liabilities                                                  511                774
     Note and loan payable                                                                   1,153              1,875
     Deferred income taxes                                                                      20
     Income taxes payable                                                                      568                 16
                                                                                          --------           --------
     Total current liabilities                                                               2,252              2,665
Loan payable-long-term                                                                       3,303              5,156
                                                                                          --------           --------
     Total liabilities-corporate                                                             5,555              7,821
                                                                                          --------           --------

     Total liabilities                                                                     125,297            105,857
                                                                                          --------           --------

COMMITMENTS AND CONTINGENCIES

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;
          8,474 shares issued and outstanding                                                   85                 85
     Paid - in capital                                                                      17,942             17,942
     Accumulated other comprehensive income, net of deferred
          income tax  liability  (1998, $280; 1997, $192)                                      541                373
     Retained earnings                                                                      23,201             16,768
                                                                                          --------           --------

     Total stockholders' equity                                                             41,769             35,168
                                                                                          --------           --------

     Total liabilities and stockholders' equity                                           $167,066           $141,025
                                                                                          ========           ========
</TABLE>


                 See notes to consolidated financial statements


                                      F-5
<PAGE>


                                 KAYE GROUP INC.
                        CONSOLIDATED STATEMENTS OF INCOME
              For the years ended December 31, 1998, 1997 and 1996
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                    1998             1997             1996
                                                                                  --------         --------         --------
<S>                                                                               <C>              <C>              <C>
INSURANCE BROKERAGE COMPANIES
Revenues:
     Commissions and fees - net                                                    $35,356          $32,217          $31,567
     Investment income                                                               1,846            1,565            1,026
                                                                                  --------         --------         --------

     Total revenues                                                                 37,202           33,782           32,593
                                                                                  --------         --------         --------

Expenses:
     Salaries and benefits                                                          21,323           18,905           18,763
     Amortization of intangibles                                                       679              507              439
     Other operating expenses                                                       13,446           13,203           13,986
                                                                                  --------         --------         --------

     Total operating expenses                                                       35,448           32,615           33,188
                                                                                  --------         --------         --------

     Interest expense                                                                   49              400              600
                                                                                  --------         --------         --------

     Income (loss) before income taxes-insurance brokerage companies                 1,705              767           (1,195)
                                                                                  --------         --------         --------

PROPERTY AND CASUALTY COMPANIES
Revenues:
     Net premiums written                                                           24,538           22,270           20,689
     Change in unearned premiums                                                       151              577           (1,362)
                                                                                  --------         --------         --------

     Net premiums earned                                                            24,689           22,847           19,327
     Net investment income                                                           2,920            2,692            2,461
     Net realized gains on investments                                                  85               21               72
     Other income                                                                      146              245              445
                                                                                  --------         --------         --------

     Total revenues                                                                 27,840           25,805           22,305
                                                                                  --------         --------         --------

Expenses:
     Losses and loss expenses                                                        8,496            8,716            7,036
     Acquisition costs and general and administrative expenses                       9,707            9,370            8,218
                                                                                  --------         --------         --------

     Total expenses                                                                 18,203           18,086           15,254
                                                                                  --------         --------         --------

     Income before income taxes-property and casualty companies                      9,637            7,719            7,051
                                                                                  --------         --------         --------

CORPORATE
Revenues:
     Net investment income (loss)                                                      (31)              55               89

Expenses:
     Other operating expenses                                                          314              438              220

     Interest expense                                                                  443              548              514
                                                                                  --------         --------         --------

     Net expenses before income taxes-corporate                                       (788)            (931)            (645)
                                                                                  --------         --------         --------
</TABLE>


See notes to consolidated financial statements


                                      F-6
<PAGE>


                                 KAYE GROUP INC.
                        CONSOLIDATED STATEMENTS OF INCOME
            For the years ended December 31, 1998, 1997 and 1996
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                    1998             1997             1996
                                                                                  --------         --------         --------
<S>                                                                               <C>              <C>              <C>
Income before income taxes and  minority interest                                  $10,554           $7,555           $5,211
                                                                                  --------         --------         --------

Provision (benefit) for income taxes

     Current                                                                         3,422            1,921              364
     Deferred                                                                         (150)             346            1,120
                                                                                  --------         --------         --------

     Total provision for income taxes                                                3,272            2,267            1,484
                                                                                  --------         --------         --------

Income before minority interest                                                      7,282            5,288            3,727

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

Net income                                                                          $7,282           $4,357           $3,071
                                                                                  ========         ========         ========

EARNINGS PER SHARE

     Basic                                                                           $0.86            $0.62            $0.44
                                                                                  ========         ========         ========

     Diluted                                                                         $0.85            $0.62            $0.44
                                                                                  ========         ========         ========


Weighted average of shares outstanding - basic                                       8,474            7,024            7,020
                                                                                  ========         ========         ========

Weighted average shares outstanding and
share equivalents outstanding - diluted                                              8,593            7,083            7,021
                                                                                  ========         ========         ========
</TABLE>


See notes to consolidated financial statements


                                      F-7
<PAGE>



                                 KAYE GROUP INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              For the years ended December 31, 1998, 1997 and 1996
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                    1998                1997                1996
                                                                  --------            --------            --------
<S>                                                                <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                          $7,282              $4,357              $3,071
Adjustments to reconcile net income to net
    cash provided by (used in) operating activities:
    Deferred acquisition costs                                          18                 134                (370)
    Amortization of bond premium - net                                 599                 650                 751
    Deferred income taxes                                             (150)                346               1,120
    Net realized gains on investments                                  (85)                (21)                (72)
    Depreciation and amortization expense                            1,813               1,667               2,000
    Minority interest                                                                      931                 656
    Change in assets and liabilities:
       Accrued interest and dividends                                  (79)                 87                  22
       Premiums and other receivables                               (8,125)             23,011              19,217
       Prepaid expenses and other assets                            (1,253)             (1,785)                760
       Unpaid losses and loss expenses                               2,441               3,899               2,556
       Unearned premium reserves                                      (251)               (598)              1,362
       Premiums payable                                             18,371             (21,870)            (14,865)
       Income taxes payable                                            552                 (79)              1,356
       Accounts payable and accrued liabilities                      2,055               5,116                (767)
                                                                  --------            --------            --------

       Net cash provided by operating activities                    23,188              15,845              16,797
                                                                  --------            --------            --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Investments available - for - sale :
Purchase of fixed maturities                                       (15,012)            (11,907)            (14,291)
Purchase of equity securities                                         (200)               (500)               (825)
Purchase of short term investments                                                      (2,094)
Maturities of fixed maturities                                       4,861               4,487               3,318
Sales of fixed maturities                                            8,158               5,297               8,707
Sales of equity securities                                             425               1,100
Sales of short term investments                                        480                                   1,814
Funds held under deposit contracts:
Purchase of fixed maturities                                                              (976)               (469)
Sales of short term investments                                        173               2,344                (815)
Sales of fixed maturities                                                                1,851               2,535
Maturities of fixed maturities                                                             452                 480
Purchase of fixed assets                                            (2,089)             (1,481)               (888)
Acquisition payments                                                (1,239)               (777)
                                                                  --------            --------            --------

       Net cash used in investing activities                        (4,443)             (2,204)               (434)
                                                                  --------            --------            --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under deposit contracts                                      (122)             (3,326)             (1,553)
Acquisition debt-repayment                                            (657)
Notes and loan payable-repayment                                    (7,981)             (6,757)               (416)
Proceeds from borrowings                                             5,000                 642                 553
Payment of dividends                                                  (849)               (702)               (702)
Payment of dividends to minority stockholders                                             (150)               (150)
                                                                  --------            --------            --------

       Net cash used in financing activities                        (4,609)            (10,293)             (2,268)
                                                                  --------            --------            --------

NET CHANGE IN CASH AND CASH EQUIVALENTS                             14,136               3,348              14,095
Cash and cash equivalents at beginning of period                    31,307              27,959              13,864
                                                                  --------            --------            --------

Cash and cash equivalents at end of period                         $45,443             $31,307             $27,959
                                                                  ========            ========            ========
</TABLE>


See notes to consolidated financial statements


                                      F-8
<PAGE>



                                 KAYE GROUP INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              For the years ended December 31, 1998, 1997 and 1996
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                            Common Stock                    Accumulated
                                                        ---------------------                   Other                     Total
                                                        Outstanding     Par       Paid-In   Comprehensive   Retained   Stockholders'
                                                          Shares       Value      Capital       Income      Earnings     Equity
                                                        -----------  --------    --------   -------------  ----------  -------------
<S>                                                         <C>           <C>     <C>            <C>        <C>          <C>
Balance, January 1, 1996                                    7,020         $70      $7,776        $236       $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)       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        16,768       35,168

Change in unrealized appreciation, net of deferred
    income tax of ($88)                                                                           168                        168
Net income                                                                                                    7,282        7,282
Dividends declared (per share-$0.10)                                                                           (849)        (849)
                                                         --------    --------    --------    --------      --------     --------

Balance, December 31, 1998                                  8,474         $85     $17,942        $541       $23,201      $41,769
                                                         ========    ========    ========    ========      ========     ========
</TABLE>

                                 KAYE GROUP INC.
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
              For the years ended December 31, 1998, 1997 and 1996
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                                   1998         1997          1996
                                                                                                  -------      -------      -------
<S>                                                                                                <C>          <C>          <C>
NET INCOME                                                                                         $7,282       $4,357       $3,071

Other comprehensive income:

  Unrealized appreciation (depreciation) of investments available -for-sale,  net of
  deferred  income tax liability (benefit)  (1998, $116; 1997, $214; 1996, ($114) )                   221          417         (219)

  Less: reclassification adjustment for gain included in net income,
  net of deferred  income tax liability  (1998, $28; 1997, $6; 1996, $24 )                            (53)         (13)         (48)
                                                                                                  -------      -------      -------

  Total other comprehensive income                                                                    168          404         (267)
                                                                                                  -------      -------      -------

COMPREHENSIVE INCOME                                                                               $7,450       $4,761       $2,804
                                                                                                  =======      =======      =======
</TABLE>


See notes to consolidated financial statements


                                      F-9
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  Years ended December 31, 1998, 1997 and 1996

1) Business

Kaye Group Inc. (the "Company"),  a Delaware  corporation,  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,
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  1998,  the  Retail  Brokerage  Business  serviced  approximately  15,000
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 may also receive fees in connection with consulting  services  relating
to the  marketing of  insurance.




                                      F-10
<PAGE>


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
450 unrelated retail insurance  agents and brokers serving  approximately  5,800
insureds  during  1998.  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 its
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,  gas  stations,  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
$10,000 and $25,000 per claim (primarily  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,  OLRI has 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>


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  provides  claims  administration  service to the
unaffiliated Program insurers for a fee.

2) Organization

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") (a subsidiary)
     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.


                                      F-12
<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.

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 as of December 31, 1997 and increased  stockholders' equity of
the Company by the same amount. KILP was 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.

Effective  May 12, 1998,  KILP,  the  Company's  then largest  stockholder,  was
dissolved, and its shares in the Company were distributed to its partners.

3) Significant Accounting Policies

(a) Basis of Presentation

The  accompanying  consolidated  financial  statements  have  been  prepared  in
accordance  with  generally  accepted  accounting   principles   ("GAAP").   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.

Certain prior year  information  has been  reclassified to conform with the 1998
presentation.

(b) Segment Reporting

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



                                      F-13
<PAGE>


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.

(c) 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.

(d) 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 through 2002.

(e) Intangible Assets

Acquired expiration lists, covenants not to complete and goodwill are carried at
cost, less accumulated  amortization  which is computed using the  straight-line
method over a period of not more than  twenty  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) Investments

Fixed  maturity  securities,  funds  held  under  deposit  contracts  and equity
securities,  which  include  common and preferred  stocks,  are stated at market
value as the  Company  considers  these  investments  available  for  sale.  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.



                                      F-14
<PAGE>


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.

(g) 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.

(h) 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  $7,630,000,  $7,269,000  and  $6,086,000  were amortized to expense in
1998, 1997 and 1996, respectively.

(i) 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  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;  and
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



                                      F-15
<PAGE>


nature of the exposures such reserves cannot be, and are not  established  using
standard actuarial techniques.

(j) 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).

(k) 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).

(l) 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. The Company  maintains cash
with banks in excess of  federally  insured  limits and is exposed to the credit
risk from this concentration of cash.

(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.


                                      F-16
<PAGE>


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):

                                                         1998     1997     1996
                                                        ------   ------   ------
Net income (numerator)                                  $7,282   $4,357   $3,071
                                                        ------   ------   ------

Weighted average common shares and effect of
dilutive shares used in the computation of earnings
per share:

   Average shares outstanding-basic                      8,474    7,024    7,020
   Effect of dilutive shares                               119       59        1
                                                        ------   ------   ------
   Average shares outstanding - diluted
   (denominator)                                         8,593    7,083    7,021
                                                        ------   ------   ------
Earnings per common share:
   Basic                                                 $0.86    $0.62    $0.44
   Diluted                                               $0.85    $0.62    $0.44

A warrant that expired in February 1998,  (relating to 1997 and 1996,  only) and
options to purchase 161,450,  284,000,  and 419,000 common shares at prices from
$7.06 to $11.63, $7.06 to $11.63, and $7.06 to $11.63 per share were outstanding
at December 31, 1998, 1997, and 1996, respectively, but were not included in the
computation  of earnings per diluted  share for the  respective  years,  because
their  exercise  price was greater  than the average  market price of the common
shares. The options,  which expire through December 31, 2008, December 31, 2007,
and December 27, 2006, respectively, were still outstanding at the end of 1998.

4) Changes in Accounting Policies

(a) Newly Adopted Accounting Standards

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. As of December
31, 1998, the Company has no derivative financial instruments. 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



                                      F-17
<PAGE>


registrants.  These  disclosures  were effective in 1998 for the Company and are
appropriately disclosed.

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.  In  accordance  with  the  statement,  the
Consolidated  Statements  of  Comprehensive  Income are  presented as a separate
statement at December 31, 1998, 1997 and 1996.

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 Company
implemented  SFAS No. 131  effective  December  31,  1998 and  identified  three
operating segments: Insurance Brokerage, Property & Casualty, and Corporate. The
financial  position  and  operating  results of the Company were not affected by
this statement.

(a) Accounting Standards Not Yet Adopted

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  ("SFAS") No. 133,  Accounting  for  Derivative
Instruments and Hedging  Activities.  This statement requires all derivatives to
be  recognized  as either  assets or  liabilities  in the statement of financial
position and to be measured at fair value.  This  statement is effective for all
fiscal  quarters and fiscal  years  beginning  after June 15,  1999.  Management
believes  that the  statement  will not have a material  impact on the financial
position of the Company.

In March 1998, the American Institute of Certified Public Accountants  ("AICPA")
issued Statement of Position ("SOP") 98-1,  Accounting for the Costs of Computer
Software  Developed or Obtained for Internal Use, which requires  capitalization
of  external  and  certain   internal   costs  incurred  to  obtain  or  develop
internal-use  computer  software during the application  development  stage. SOP
98-1 is effective for fiscal years beginning after



                                      F-18
<PAGE>


December 15, 1998.  This  statement  is not  expected to  materially  impact the
Company's consolidated financial statements.

In late 1998,  the AICPA issued SOP 98-7.  Deposit  Accounting:  Accounting  for
Insurance and  Reinsurance  Contracts that Do Not Transfer  Insurance Risk. This
SOP effective for fiscal years beginning after June 15, 1999,  provides guidance
to both the insured and insurer on how to apply the deposit method of accounting
when it is required for insurance and reinsurance contracts that do not transfer
insurance  risk.  This SOP is not expected to  materially  impact the  Company's
consolidated financial statements.

In December 1997,  the AICPA issued SOP 97-3,  Accounting by Insurance and Other
Enterprises for  Insurance-Related  Assessments.  SOP 97-3 provides guidance for
assessments  related to insurance  activities and requirements for disclosure of
certain  information.  SOP 97-3 is effective for financial statements issued for
periods  beginning  after December 31, 1998.  Restatement  of previously  issued
financial  statements  is not  required.  SOP  97-3  is not  expected  to have a
material impact on the Company's consolidated financial statements.

5) Funds Held in Fiduciary Capacity

Premiums collected by the Insurance  Brokerage Companies but not yet remitted to
insurance carriers are approximately $33,218,000 and $22,322,000 at December 31,
1998 and 1997,  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-19
<PAGE>


6) Investments

Net investment  income for the years ended  December 31, 1998,  1997 and 1996 is
derived from the following sources (in thousands):

                                              1998          1997          1996
                                             ------        ------        ------
Insurance Brokerage Companies
Short term investments                       $1,846        $1,565        $1,026
                                             ------        ------        ------

Property and Casualty Companies
Fixed maturities                              2,031         2,083         2,099
Equity securities                                67           119           114
Short term investments                          791           382            82
Other                                            98           143           191
                                             ------        ------        ------
Total Investment income                       2,987         2,727         2,486
Investment expenses                             (67)          (35)          (25)
                                             ------        ------        ------
                                              2,920         2,692         2,461
                                             ------        ------        ------

Corporate
Short term investments                          (31)           55            89

Net investment income                        $4,735        $4,312        $3,576
                                             ======        ======        ======

Net  realized  gains or  losses  and the  increase  or  decrease  in  unrealized
appreciation  (depreciation)  on  investments  for the years ended  December 31,
1998, 1997 and 1996 are summarized below (in thousands):

                                                         1998     1997      1996
                                                         ----     ----      ----

Net realized gains (losses):
   Fixed maturities:
         Gross realized gains                             $85      $26      $82
         Gross realized losses                                      (5)     (10)
                                                         ----     ----    -----
Net realized gains on investments                         $85      $21      $72
                                                         ----     ----    -----

Change in unrealized appreciation (depreciation):
   Fixed maturities                                       $47     $636    $(543)
   Equity securities                                      209      (14)      48
                                                         ----     ----    -----
   Net change in unrealized appreciation
   (depreciation)                                        $256     $622    $(495)
                                                         ====     ====    =====


                                      F-20
<PAGE>


The composition, cost (amortized cost for fixed maturities) and estimated market
values of the Company's  investments at December 31, 1998 and 1997 are presented
below.

                                                        Gross          
                                                  Unrealized Holding   Aggregate
                                                  ------------------     Fair
                                         Cost      Gains     Losses     Value
                                       -------    -------    -------   ---------
                                                     (in thousands)

1998
Investments available for sale:
      Fixed Maturities:
         U.S. Government (a)            $2,144       $18                $2,162
         States (b)                     36,144       643       $(75)    36,712
         Corporate                       4,692        42        (11)     4,723
                                       -------      ----      -----    -------

      Total fixed maturities           $42,980      $703       $(86)   $43,597
                                       -------      ----      -----    -------

      Equity Securities:
         Common Stock                     $643      $204                  $847
         Preferred Stock                   500                             500
                                       -------      ----               -------

      Total equity securities           $1,143      $204                $1,347
                                       -------      ----               -------



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                       3,875        44        (48)     3,871
                                       -------      ----      -----    -------

      Total fixed maturities           $41,529      $645       $(75)   $42,099
                                       -------      ----      -----    -------

      Equity Securities:
         Common Stock                     $703      $111      $(115)      $699
         Preferred Stock                   725                   (1)       724
                                       -------      ----      -----    -------

      Total equity securities           $1,428      $111      $(116)    $1,423
                                       -------      ----      -----    -------

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

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

(b)  Includes municipalities and subdivisions



                                      F-21
<PAGE>


The amortized  cost and estimated  market value of fixed  maturities at December
31, 1998, 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 Cost   Aggregate Fair Value
                                           --------------   --------------------

Due in one year or less                          $3,769             $3,774

Due after one year through five years            21,193             21,624

Due after five years through ten years           13,474             13,599

Due after ten years                               4,544              4,600
                                                -------            -------

Total                                           $42,980            $43,597
                                                =======            =======

Fixed maturities and cash carried at market value of $3,560,000,  and $3,511,000
in 1998 and 1997, respectively, were on deposit for governmental authorities, as
required by law. Fixed maturity, equity securities, and cash equivalents carried
at market value of $13,747,000 and  $11,733,000 in 1998 and 1997,  respectively,
have been deposited in trust funds or pledged to  collateralize  the obligations
of OLB and OLRI to ceding companies under reinsurance agreements.

The Company's short term investment of cash is maintained principally with three
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-22
<PAGE>


7) Notes Payable

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

                                                                  1998     1997
                                                                 ------   ------
Insurance Brokerage:

Acquisition debt due to seller, due through 7/1/2002,
    interest at prime                                            $1,406
Finance company notes, due through 2000, interest at
    prime rate plus 1/2%                                             86     $179

Finance company notes, due through 2002, interest at 7.75%          445      546
Capital lease due through 8/30/99, interest at 7.375%               150      363
                                                                 ------   ------
                                                                  2,087    1,088
Less current portion                                                718      434
                                                                 ------   ------
Notes payable - long term                                        $1,369     $654
                                                                 ======     ====

Corporate:

Term loan, due through 2000, interest at 7.8%                    $4,456
Revolving line of credit, due through 2001
    interest at 5.9375% plus 2.5%                                         $7,031
Less current portion                                              1,153    1,875
                                                                 ------   ------
Notes payable-long term                                          $3,303   $5,156
                                                                 ======   ======

On June 23, 1998 the Company paid in full the $6,094,000  bank revolving line of
credit,  and replaced it with a  $5,000,000  term loan (the "Loan") with another
bank.  The Loan is  collateralized  by the stock of the  Property  and  Casualty
Companies. The Loan bears interest at a fixed rate per year of 7.8%. At December
31, 1998,  $4,456,000 was outstanding  under the Loan. In addition,  the Company
has  available  a  $4,500,000  revolving  line of  credit  with the  same  bank,
collateralized by the stock of the Property and Casualty Companies. The proceeds
are available for general operating needs and  acquisitions.  As of December 31,
1998, no amount was outstanding on the revolving line of credit. A quarterly fee
is assessed in the amount of 0.05% on the unused balance. Among other covenants,
the Loan agreement requires  maintenance of minimum consolidated GAAP net worth,
statutory  surplus,  ratio of net premiums written to surplus,  and minimum debt
service  coverage.  As of December 31, 1998, the Company was in compliance  with
the covenants of the Loan agreement.

The  Company's  required  payments  on the Loan  for the  respective  years  are
$1,153,000  in 1999,  $1,245,000 in 2000,  $1,345,000  in 2001,  and $713,000 in
2002. Interest expense for the loans mentioned above for the year ended December
31, 1998, 1997, and 1996 were $443,000, $548,000 and $514,000, respectively.




                                      F-23
<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
then  existing  bank  agreement.  The due date of the note  pursuant to the then
existing bank 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 and 1996 was $400,000 and $600,000, respectively.

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

       1999 ..................................................   $1,871
       2000 ..................................................    1,773
       2001 ..................................................    1,866
       2002 ..................................................    1,033
       Thereafter ............................................       0

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, 1998 and 1997 approximates their carrying value.

Interest expense in the accompanying  consolidated  statements of income for the
years  ended  December  31,  1998,  1997 and 1996 was  $492,000,  $948,000,  and
$1,114,000, respectively.

8) Income Taxes

The Company's  effective  income tax rate for the years ended December 31, 1998,
1997 and 1996 differs from the statutory  rate on ordinary  income before income
taxes as follows (in thousands):

<TABLE>
<CAPTION>
                                                           1998                      1997                      1996
                                                     -----------------        -------------------       ------------------
                                                                 % of                       % of                     % of
                                                                Pretax                     Pretax                   Pretax
                                                     Amount     Income        Amount       Income       Amount      Income
                                                     ------     ------        ------       ------       ------      ------
<S>                                                  <C>         <C>          <C>           <C>         <C>          <C>  
Income taxes computed at the                         $3,588      34.0%        $2,569        34.0%       $1,772       34.0%
statutory rate

Increase (decrease) in taxes resulting from:

Tax-exempt investment income                           (456)     (4.3)          (516)       (6.8)         (403)      (7.7)

State and local income taxes and other                  140       1.3            214         2.8           115        2.2
                                                     ------      ----         ------        ----        ------       ----

Provision for income taxes                           $3,272        31%        $2,267        30.0%       $1,484       28.5%
                                                     ======      ====         ======        ====        ======       ====
</TABLE>



                                      F-24
<PAGE>


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

                                              1998          1997          1996
                                            -------       -------       -------
                                                       (in thousands)

Expiration lists                               $394          $394          $393
Unearned premium reserves                        10            40           (93)
Deferred compensation                                                       850
Deferred acquisition costs                       (6)          (46)          126
Accrual adjustment                              (85)          (59)          (56)
Other                                          (217)           47          (137)
Loss reserve discount                          (246)          (30)           37
                                            -------       -------       -------

Deferred tax (benefit) expense                $(150)         $346        $1,120
                                            =======       =======       =======

The components of the net deferred tax asset, in the  accompanying  consolidated
balance sheets at December 31, 1998 and 1997, are as follows:

                                                              1998         1997
                                                             ------       ------
                                                               (in thousands)
Deferred tax assets:
  Loss and loss expense reserves                             $1,296       $1,048
  Expiration lists                                              547          941
  Unearned premium reserves                                     827          837
  Unrealized losses on investments and other                    304           91
                                                             ------       ------

  Total deferred tax asset                                    2,974        2,917
                                                             ------       ------

Deferred tax liabilities:
  Deferred acquisition costs                                  1,333        1,339
  Unrealized gains on investments and other
  accrual adjustments                                         1,237        1,255
                                                             ------       ------

  Total deferred tax liability                                2,570        2,594
                                                             ------       ------

Net deferred tax asset                                         $404         $323
                                                             ======       ======

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.



                                      F-25
<PAGE>


9) Lease Commitments and Rentals

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

                               Years Ending December 31,
                               -------------------------
               1999 .......................................          $2,656
               2000 .......................................           2,493
               2001 .......................................           2,203
               2002 .......................................             351
               Thereafter .................................              22
                                                                    -------
                                                                      7,725
      Sub-lease rental income .............................            (139)
                                                                    -------
      Net rental commitments ..............................          $7,586
                                                                    =======

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, 1998,  1997 and 1996,  amounted to
approximately  $2,928,000,  $2,992,000  and  $2,857,000,  respectively,  net  of
sublease rental income of $117,000, $193,000 and $197,000, respectively.

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 cost to the Company to  participate  in these  plans  included in the
accompanying  consolidated  statements  of income  was  approximately  $255,000,
$385,000, and $55,000 for 1998, 1997 and 1996, respectively.

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 was subject to certain



                                      F-26
<PAGE>


adjustments as specified in the agreement.  KIA incurred management service fees
of  $911,000  and  $1,536,000  for the years ended  December  31, 1997 and 1996,
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 and $364,000 for the years ended December 31, 1997
and 1996, respectively. These agreements expired on August 31, 1997.

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,  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 were involved in an
administrative  investigation  commenced  in  1992  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 was altered,  which
has not had a material  adverse  effect on this  Program.  While the Company had
discussions with the Department regarding settlement of such investigation, this
matter has not been  pursued for several  years.  If the matter is not closed or
settled,   the  Department  could  institute  formal  proceedings   against  the
subsidiaries  seeking fines or license  revocation.  Management does not believe
the resolution of this issue will have a material adverse effect on the Company.


                                      F-27
<PAGE>


13)      Reinsurance

As of December  31, 1998 and 1997,  included  in the  amounts  reflected  in the
consolidated  financial  statements  are  unearned  premiums of  $4,779,000  and
$4,963,000, respectively, and unpaid losses and loss expenses of $16,068,000 and
$12,445,000, 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,  equity securities,  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
$13,747,000 and $11,872,000 as of December 31, 1998 and 1997, respectively.

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  with limits
varying from $25,000 to $100,000 per occurrence.  OLRI retains the first $25,000
of exposure  and cedes  $75,000 in excess of $25,000 for  business  assumed with
$100,000 per occurrence to an unaffiliated  company,  PXRE  Reinsurance  Company
("PXRE")  (A.M.  Best rated Ag). In addition,  OLRI  purchased  annual stop loss
policies to limit its exposure from reinsurance  assumed.  These policies insure
OLRI in the event the  losses  under the  policy  exceed a fixed  percentage  of
premium earned. OLRI will be reimbursed up to $3,000,000.

OLRI's ceded  reinsurance  is on an excess of loss basis with PXRE.  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 PXRE.

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.



                                      F-28
<PAGE>


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,  1998.  The amounts  deducted  from  revenues  and expenses for
reinsurance ceded by OLRI were as follows:

                                                           1998             1997
                                                           ----             ----
                                                              (in thousands)

Revenue and expenses:
   Premiums earned                                         $355            $ 558
   Commission expense                                        45               88
   Losses and loss expenses                                 409            1,929

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, 1998.

                                                   Years Ended December 31,
                                                --------------------------------
                                                  1998        1997        1996
                                                --------    --------    --------
                                                        (in thousands)

Balance at January 1, .......................    $19,126     $15,227     $12,671
         Less: reinsurance recoverables .....     (2,811)       (882)
                                                --------    --------    --------

         Net balance ........................     16,315      14,345      12,671
                                                --------    --------    --------

Incurred related to:
         Current year .......................      8,461       8,824       6,621
         Prior years ........................         35        (108)        415
                                                --------    --------    --------
         Total incurred .....................      8,496       8,716       7,036
                                                --------    --------    --------

Paid related to:
         Current year .......................      1,877       1,802       1,832
         Prior years ........................      4,587       4,944       3,530
                                                --------    --------    --------
         Total paid .........................      6,464       6,746       5,362
                                                --------    --------    --------

Net balance at December 31, .................     18,347      16,315      14,345
         Add: reinsurance recoverables ......      3,220       2,811         882
                                                --------    --------    --------

         Balance ............................    $21,567     $19,126     $15,227
                                                ========    ========    ========



                                      F-29
<PAGE>


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, 1998. At December
31, 1998,  $419,000 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% 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 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, 1998,  $2,786,000 is available for distribution  during 1999,  without prior
approval. Statutory information is as follows:

                                         Old Lyme        Old Lyme
                                       Rhode Island       Bermuda      Combined
                                       ------------       -------      --------
                                                      (in thousands)
Policyholders' surplus at
December 31,
         1998                             $27,867          $1,419       $29,286
         1997                             $23,662          $1,904       $25,566

Net income for the years ended
December 31,
         1998                              $5,703          $1,215        $6,918
         1997                              $5,178          $1,453        $6,631
         1996                              $2,459          $2,890        $5,349



                                      F-30
<PAGE>


The  following  is  a  reconciliation   of  net  income  and  surplus  regarding
policyholders  in accordance  with statutory  accounting  principles  ("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,
                                                                   ----------------------      ------------------------------------
                                                                     1998          1997          1998          1997          1996
                                                                   --------      --------      --------      --------      --------
                                                                                         (in thousands)
<S>                                                                 <C>           <C>            <C>           <C>           <C>
Consolidated amount in accordance with GAAP                         $41,769       $35,168        $7,282        $4,357        $3,071

Deficit (equity) in net assets and net loss
of non-insurance companies                                           (7,273)       (4,388)         (141)        2,086         3,217
                                                                   --------      --------      --------      --------      --------

Combined amount in accordance with GAAP                              34,496        30,780         7,141         6,443         6,288

Excess of statutory formula reserves over
GAAP reserves                                                                        (890)

Deferred acquisition costs                                           (3,921)       (3,939)           18           134          (370)


Non-admitted assets, deferred income taxes and other                 (1,289)         (385)         (241)           54          (569)
                                                                   --------      --------      --------      --------      --------

Combined amount in accordance with SAP                              $29,286       $25,566        $6,918        $6,631        $5,349
                                                                   ========      ========      ========      ========      ========
</TABLE>

16) Related Party Transactions

The  administrative  support  for  OLB is  provided  by  International  Advisory
Services,  Ltd. ("IAS"),  an insurance  management company located in Bermuda. A
director  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,  1998,   1997  and  1996  were   $30,000,   $37,500  and  $36,250,
respectively.

The director of IAS, who is a director of the Company,  is also a director of an
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 $0, $38,114 and
$7,000 in 1998, 1997 and 1996, 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 was
one of the general  partners of KILP (prior to KILP's  dissolution).  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.


                                      F-31
<PAGE>


In January 1997, KIA entered into a management  agreement with KILP, whereby the
KIA provided certain  administrative  services for a fee of $50,000 per year. At
December  31, 1998 and 1997,  the  Company  recorded  $50,000 for such  services
provided.   This  management  fee  arrangement   terminated  in  1998  with  the
dissolution of KILP.

A  director  of the  Company is also a  director  of, and has shared  beneficial
ownership  of more  than ten  percent  of the  outstanding  common  stock of Sun
Television and Appliances,  Inc. ("Sun TV"). In 1994, Sun TV and a subsidiary of
the Company entered into two agreements whereby the Company's  subsidiary agreed
to assume  certain  service  contracts  that  were sold by Sun TV to its  retail
customers (the  "Agreement")  and contracted  with Sun TV to have Sun TV provide
repair services under certain service contracts. The Board of Directors believes
that the agreements were commercially reasonable.  On September 11, 1998, Sun TV
filed  bankruptcy  petitions  under  Chapter  11 of  the  Bankruptcy  Code.  The
Company's  subsidiary  filed a proof of claim on March 11,  1999 for any and all
amounts that are due and owing under the Agreement.

17) Acquisitions

During 1998,  the Company  acquired  certain  assets and  liabilities of Florida
Insurance  Associates,  Inc. ("FIA"),  Daniel V. Keane Agency, Inc. ("DVK"), and
Laub  Group of  Florida,  Inc.  ("LGF")  for  cash of  $250,000,  $657,000,  and
$200,000,  respectively  and  estimated  amounts  payable  in future  periods of
$14,000  (FIA),   $1,406,000  (DVK)  and  $550,000  (LGF).  The  total  acquired
intangible assets (including  expiration lists) were $263,000,  $2,063,000,  and
$750,000 for FIA, DVK, and LGF, respectively.  These acquisitions were accounted
for under the purchase method.

During 1997,  the Company  acquired  certain  assets and  liabilities of Western
Insurance Associates,  Inc. ("WIA") for cash of $1,567,000 paid through December
31,  1998 and  amounts  payable in future  periods of  $1,330,000.  The  amounts
payable  are the  Company's  estimate  of the  costs it will  incur.  The  total
acquired  expiration list was $2,897,000 and $3,062,000 at December 31, 1998 and
1997, respectively. 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-32
<PAGE>


19) Dividends Declared

The Board of Directors of the Company  declared annual dividends of $849,000 and
$702,000, respectively for the years ended December 1998 and 1997, respectively,
of which $212,000 and $175,000,  respectively,  were unpaid at December 31, 1998
and 1997, 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).
During 1998,  185,282 shares of performance  stock were granted under this plan.
At  December  31,  1998,  no  performance  stock  under this plan was awarded or
vested.

At December  31, 1998,  the Company has a Stock  Option Plan and a  Supplemental
Stock Option Plan (the  "Plans").  The 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-33
<PAGE>


A summary of the status of the Plans as of December 31, 1998,  1997 and 1996 and
changes during the years ended on those dates is presented below:

<TABLE>
<CAPTION>
                                                  1998                           1997                          1996
                                          ----------------------------------------------------------------------------------------
                                                     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          624,850         $6.12         528,550          $7.53         323,000          $9.33


Granted                                    54,500          6.46         450,750           5.14         225,000           5.09


Exercised

Forfeited                                 (20,150)         7.88        (354,450)          6.87         (19,450)          9.24

Outstanding at end of year                659,200         $6.15         624,850          $6.12         528,550          $7.53
                                          -------                      --------                        -------

Options exercisable at year-end           232,900                       143,450                        124,150
                                          -------                      --------                        -------

Weighted-average fair value of
options granted during the year             $2.17                         $1.29                          $1.21
                                          -------                      --------                        -------
</TABLE>

The following table summarizes  information about the stock options  outstanding
at December 31, 1998:

<TABLE>
<CAPTION>
                                         Options Outstanding                                Options Exercisable
                       ----------------------------------------------------------     -------------------------------
                         Number              Weighted-Average        Weighted-          Number           Weighted-
                       Outstanding               Remaining            Average         Exercisable         Average
Exercise Prices        at 12/31/98           Contractual Life      Exercise Price     at 12/31/98      Exercise Price
                       ----------------------------------------------------------     -------------------------------
<S>                    <C>                      <C>                    <C>             <C>                 <C>
    $11.63                 500                  5.08 years             $11.63              400             $11.63

    $10.91               5,000                  5.08                    10.91            4,000              10.91
                                                            
    $10.00              75,750                  4.63                    10.00           75,750              10.00
                                                            
     $8.43              40,200                  6.83                     8.43           24,300               8.43
                                                            
     $8.03              15,000                  8.83                     8.03            3,000               8.03
                                                            
     $7.88              15,000                  6.70                     7.88            9,000               7.88
                                                            
     $7.06              10,000                  7.37                     7.06            4,000               7.06
                                                            
     $6.70              10,000                  9.50                     6.70
                                                            
     $6.64               5,000                  9.00                     6.64            1,000               6.64
                                                            
     $6.60              24,500                  9.94                     6.60
                                                            
     $6.17              20,000                  9.84                     6.17
                                                            
     $5.06             178,250                  8.15                     5.06           36,450               5.06
                                                            
     $5.00             250,000                  8.20                     5.00           73,000               5.00
                                                            
     $4.97              10,000                  8.49                     4.97            2,000               4.97
                       -------                                                         -------
                                                            
                       659,200                  7.78                    $6.15          232,900              $7.30
                       =======                                                         =======
</TABLE>                                              



                                      F-34
<PAGE>


Unless otherwise specified, the options vest and are exerciseable at the rate of
20% per year and terminate  ten years from date of grant.  At December 31, 1998,
1997 and 1996, 232,900,  143,450 and 124,150 options were exerciseable and there
were  40,800,   75,150  and  171,450   options   available  for  future  grants,
respectively.

Had the compensation cost for the Company's stock based  compensation plans been
determined  based on the fair  value at the grant date 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 (in thousands, except per share amounts):

                                                      1998       1997      1996
                                                      ----       ----      ----
Net Income                         As reported       $7,282     $4,357    $3,071
                                   Pro forma          7,167      4,280     3,060

Earnings per share - basic         As reported        .86        .62       .44
                                   Pro forma          .85        .61       .44

Earnings per share - diluted       As reported        .85        .62       .44
                                   Pro forma          .84        .60       .44

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 30%, (iii) risk-free  interest
rate of 4.7%, 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, 1998 and 1997 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,
                                                       -----------------   -----------------   -----------------   -----------------
                                                         1998      1997     1998      1997      1998      1997      1998      1997
====================================================================================================================================
<S>                                                    <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Revenues                                               $14,809   $12,952   $15,548   $13,787   $17,230   $16,744   $17,424   $16,159
------------------------------------------------------------------------------------------------------------------------------------
Net income                                                $971      $228    $1,734      $724    $2,296    $1,547    $2,281    $1,858
------------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
         Basic                                           $0.11     $0.03     $0.20     $0.11     $0.27     $0.22     $0.27     $0.26
         Diluted                                          0.11      0.03      0.20      0.11      0.27      0.22      0.27      0.26
------------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
         Basic                                           8,474     7,020     8,474     7,020     8,474     7,020     8,474     7,036
         Diluted                                         8,596     7,020     8,595     7,020     8,591     7,161     8,580     7,164
====================================================================================================================================
</TABLE>



                                      F-35
<PAGE>


22) Premiums

Of the Company's net premiums earned  approximately  60%, 62% and 63% related to
the  residential  real  estate  program  and  23%,  25% and 24%  related  to the
restaurant  program  for the years  1998,  1997 and 1996,  respectively.  Of the
Company's net premiums earned approximately 90%, 82% and 83% related to insureds
located in New York State for the years 1998, 1997 and 1996, respectively.

Premiums  earned for the three years ended  December  31,  1998,  1997 and 1996,
which include assumed  premiums  relating to reinsurance  agreements with RLI of
$6,229,000,  $4,272,000 and $3,878,000 in 1998, 1997 and 1996, respectively, are
summarized below:

                                         1998            1997            1996
                                       --------        --------        --------
                                                    (in thousands)

         Direct                         $11,652         $11,496          $9,979

         Assumed                         13,392          11,909           9,869
                                       --------        --------        --------


         Total                           25,044          23,405          19,848

         Ceded                             (355)           (558)           (521)
                                       --------        --------        --------

         Net Premiums Earned            $24,689         $22,847         $19,327
                                       ========        ========        ========

23) Business Segments

The Company  operates in two  insurance  business  segments,  the  procuring  of
property  and  casualty  insurance  ("Insurance  Brokerage  Companies")  and the
underwriting of property and casualty risks ("Property and Casualty Companies").
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.  Such
activities  include  debt  servicing  and  public  company  expenses,  including
investor relations costs. 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.


                                      F-36
<PAGE>


The following  table is a summary of certain other segment  information  for the
years ended December 31, 1998, 1997 and 1996:


                            Business Segments - 1998
--------------------------------------------------------------------------------
                                             Insurance             Property &
(in thousands)                               Brokerage              Casualty
--------------------------------------------------------------------------------
Revenue from external sources                 $31,324               $24,689
Revenue from other segments                     4,032                    69
Depreciation expense                            1,114                    21
Amortization expense                              678                 7,630
Capital expenditures                            2,089

                            Business Segments - 1997
--------------------------------------------------------------------------------
                                             Insurance             Property &
(in thousands)                               Brokerage              Casualty
--------------------------------------------------------------------------------
Revenue from external sources                 $28,387               $22,847
Revenue from other segments                     3,830                    65
Depreciation expense                            1,123                    24
Amortization expense                              520                 7,269
Capital expenditures                            1,481

                            Business Segments - 1996
--------------------------------------------------------------------------------
                                             Insurance             Property &
(in thousands)                               Brokerage              Casualty
--------------------------------------------------------------------------------
Revenue from external sources                 $28,199               $19,327
Revenue from other segments                     3,368                    62
Depreciation expense                            1,024                    23
Amortization expense                              953                 6,086
Capital expenditures                              888

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.

                                                  1998
                               --------------------------------------------
                                  Foreign         Domestic       Total
                               --------------------------------------------
                                              (in thousands)
Consolidated Revenues             $2,092          $62,919        $65,011
Income before minority
  interest and income taxes        1,169            9,385         10,554
Identifiable assets                2,936          164,130        167,066


                                      F-37
<PAGE>


<TABLE>
<CAPTION>
                                                  1997                                 1996
                                     --------------------------------    ----------------------------------
                                      Foreign    Domestic    Total         Foreign    Domestic     Total
                                     --------------------------------    ----------------------------------
                                                                  (in thousands)

<S>                                   <C>        <C>        <C>            <C>         <C>        <C>
Consolidated  Revenues                $2,246     $57,396    $59,642        $2,104      $52,883    $54,987
Income before minority interest
  and income taxes                     1,398       6,157      7,555         2,857        2,354      5,211
Identifiable assets                    3,575     137,450    141,025         4,925      151,177    156,102
</TABLE>

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

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.

24)  Supplemental Cash Flow Disclosures

<TABLE>
<CAPTION>
                                                         1998        1997        1996
                                                         ----        ----        ----
<S>                                                     <C>        <C>          <C>
Cash paid during the period for:
         Interest expense                                 $501        $948      $1,114
         Income taxes (refunded)                        $2,870      $2,000       ($992)

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

Details of acquisitions:
         Purchase price                                 $5,196      $3,062
         Amounts payable in future periods              (3,300)     (2,285)
         Less acquisition debit repayment                 (657)
                                                      --------    --------

         Cash paid for acquisitions                     $1,239        $777
                                                      ========    ========
</TABLE>

25)  Subsequent Event

On February  25, 1999,  the  Company,  through its  brokerage  subsidiary,  Kaye
Insurance Associates,  Inc., purchased the assets, including customer lists, and
certain liabilities of Seaman,  Ross, & Wiener, Inc. and related entities for an
initial purchase price of $2,930,000 in cash and stock of the Company, effective
January 1, 1999.  The total  purchase  price is  contingent  on future  billings
related to the  acquired  customer  list and could vary  significantly  from the
initial purchase price.


                                      F-38
<PAGE>


                                                                     Schedule II
                                 KAYE GROUP INC.
                              (Parent Company Only)
                            Condensed Balance Sheets
                           December 31, 1998 and 1997
                   (in thousands, except par value per share)

<TABLE>
<CAPTION>
                                                                              1998                   1997
                                                                             -------               -------
<S>                                                                          <C>                   <C>
ASSETS

Cash and  cash equivalents                                                      $370                   $65
Prepaid expenses and other assets                                                863                   549
Deferred income taxes                                                                                   41
Due from subsidiaries                                                          2,118                 3,664
Investment in subsidiaries                                                    43,973                38,670
                                                                             -------               -------

    Total assets                                                             $47,324               $42,989
                                                                             =======               =======


LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Accounts payable and other liabilities                                          $511                  $774
Note payable                                                                   1,153                 1,875
Deferred income taxes                                                             20
Income taxes payable                                                             568                    16
                                                                             -------               -------

Total current liabilities                                                      2,252                 2,665
Note payable - long term                                                       3,303                 5,156
                                                                             -------               -------

    Total liabilities                                                          5,555                 7,821
                                                                             -------               -------

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;
  8,474 shares issued and outstanding                                             85                    85
Paid-in capital                                                               17,942                17,942
Unrealized appreciation  of investments, net of deferred
  income tax provision , (1998, $280; 1997, $192)                                541                   373
Retained earnings                                                             23,201                16,768
                                                                             -------               -------

    Total stockholders' equity                                                41,769                35,168
                                                                             -------               -------


    Total liabilities and stockholders' equity                               $47,324               $42,989
                                                                             =======               =======
</TABLE>

        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 Income
              For the years ended December 31, 1998, 1997 and 1996
                                 (in thousands)

                                                      1998       1997      1996
                                                    -------    -------   -------
REVENUES:

  Net investment loss                                   (31)
  Equity in income of subsidiaries                   11,342      7,555     5,211

EXPENSES:

  Other operating expenses                              314
  Interest expense                                      443
                                                    -------    -------   -------

Income before income taxes and minority interest     10,554      7,555     5,211

  Provision for income taxes                          3,272      2,267     1,484
                                                    -------    -------   -------

Income before  minority interest                      7,282      5,288     3,727

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

NET INCOME                                            7,282      4,357     3,071
                                                    =======    =======   =======

        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)
                       Condensed Statements of Cash Flows
              For the years ended December 31, 1998, 1997 and 1996
                                 (in thousands)

<TABLE>
<CAPTION>
                                                         1998          1997          1996
                                                       --------      --------      --------
<S>                                                      <C>          <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                             $7,282        $4,357        $3,071

Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
  Deferred income tax benefit                              (150)
  Equity in net income of subsidiaries                   (7,826)       (6,590)       (3,071)
  Dividends received from subsidiaries                    4,060         6,350           702
  Minority interest                                                       931
  Change in assets and liabilities:
    Prepaid expenses and other assets                       (20)         (199)
    Due from subsidiaries                                 1,294        (3,892)       (1,356)
    Accounts payable and other liabilities                 (263)
    Income taxes payable                                    552          (137)        1,356
                                                       --------      --------      --------

  Net cash provided by operating activities               4,929           820           702
                                                       --------      --------      --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Payment of dividends                                     (849)         (852)         (702)
  Notes payable-repayment                                (7,575)          (69)
  Proceeds from borrowing                                 5,000
  Capital contribution to subsidiary                     (1,200)         (300)
                                                       --------      --------      --------

  Net cash used in financing activities                  (4,624)       (1,221)         (702)
                                                       --------      --------      --------

NET CHANGE IN CASH AND CASH EQUIVALENTS                     305          (401)

Cash and cash equivalents at beginning of period             65           466
                                                       --------      --------      --------

Cash and cash equivalents at end of period                 $370           $65
                                                       ========      ========      ========


SUPPLEMENTAL CASH FLOW DISCLOSURES

Cash paid during the period for:
  Interest expense                                         $480          $548          $514
  Income taxes (refunded)                                $2,870        $2,000         ($992)

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-41
<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.   Basis of Presentation

     As  detailed  in Note 2 to the  consolidated  financial  statements  of the
     Company,  Kaye Holding Corp.  ("KHC"),  (a subsidiary)  was merged into the
     Company on December 30, 1997. Accordingly, prior to 1998 corporate expenses
     and  investment  income  were  recorded  by KHC  and are  reflected  in the
     condensed   statements   of  income   included   in  equity  in  income  of
     subsidiaries.

3.   Significant Accounting Policies

     The Company carries its investment in subsidiaries under the equity method.
     All other accounting policies are consistent with those of the Company on a
     consolidated basis.



                                      F-42
<PAGE>


                                                                     Schedule IV


                                 KAYE GROUP INC.
                                   REINSURANCE
              For The Years Ended December 31, 1998, 1997 and 1996
                                 (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>
        1998               $11,652               $355                  $13,392                $24,689                54%

        1997               $11,496               $558                  $11,909                $22,847                52%

        1996                $9,979               $521                   $9,869                $19,327                51%
</TABLE>



                                      F-43
<PAGE>


<TABLE>
<CAPTION>
                                                                                                                         Schedule VI


                                                           KAYE GROUP INC

                           SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS
                                        For the years ended December 31, 1998, 1997 and 1996
                                                           (in thousands)

==============================================================================================================================

  Column A            Column B           Column C          Column D          Column E           Column F       Column G
==============================================================================================================================

                                        Reserves For
                                       Unpaid Claims        Discount
Affiliation            Deferred          And Claim           If Any                                               Net
    With             Acquisition         Adjustment       Deducted In       Unearned            Earned         Investment
 Registrant             Costs             Expenses          Column C        Premiums           Premiums          Income
------------------------------------------------------------------------------------------------------------------------------
<S>                     <C>              <C>                  <C>           <C>                <C>               <C>
Foreign                   $193              $295              N/A              $916             $1,957             $135
Domestic                 3,728            21,272              N/A            11,411             22,732            2,453
                    ----------------------------------------------------------------------------------------------------------

1998                    $3,921           $21,567              N/A           $12,327            $24,689           $2,588
                    ==========================================================================================================

Foreign                   $240              $204              N/A            $1,132             $2,118             $127
Domestic                 3,699            18,922              N/A            11,446             20,729            2,565
                    ----------------------------------------------------------------------------------------------------------

1997                    $3,939           $19,126              N/A           $12,578            $22,847           $2,692
                    ==========================================================================================================

Foreign                   $295              $160              N/A            $1,311             $1,542             $271
Domestic                 3,778            15,067              N/A            11,865             17,785            2,190
                    ----------------------------------------------------------------------------------------------------------

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

<CAPTION>
==================================================================================================================================

  Column A                   Column H                      Column I              Column J           Column K           Column L
==================================================================================================================================
                           Claims and Claim
                         Adjustment Expenses                                      Paid
                         Incurred Related to            Amortization             Claims
Affiliation              (1)               (2)           Of Deferred            and Claim                                Other
    With               Current            Prior          Acquisition            Adjustment          Premiums           Operating
 Registrant             Year              Years             Costs                Expenses           Written             Expenses
----------------------------------------------------------------------------------------------------------------------------------
<S>                    <C>                  <C>             <C>                   <C>               <C>                  <C>
Foreign                  $313                $95              $414                  $317             $1,742                $102
Domestic                8,148                (60)            7,216                 6,147             22,796               2,178
                    --------------------------------------------------------------------------------------------------------------

1998                   $8,461                $35            $7,630                $6,464            $24,538              $2,280
                    ==============================================================================================================

Foreign                  $326               ($47)             $456                  $234             $1,938                $113
Domestic                8,498                (61)            6,813                 6,512             20,332               1,988
                    --------------------------------------------------------------------------------------------------------------

1997                   $8,824              ($108)           $7,269                $6,746            $22,270              $2,101
                    ==============================================================================================================

Foreign                  $313            ($1,580)             $347                $3,637             $1,411                $167
Domestic                6,308              1,995             5,739                 1,725             19,278               1,965
                    --------------------------------------------------------------------------------------------------------------

1996                   $6,621               $415            $6,086                $5,362            $20,689              $2,132
                    ==============================================================================================================
</TABLE>


                                                                F-44