-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FQZN+bKQ3F76jWydmcuAwDTXHaXtpWBNfRLBtbnX33T78TJq1VUufCmTe3sMK8jU LMuFL4hO1pLDBfOTOAL1rQ== 0000950124-95-003568.txt : 19951107 0000950124-95-003568.hdr.sgml : 19951107 ACCESSION NUMBER: 0000950124-95-003568 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951106 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPSURE HOLDINGS CORP CENTRAL INDEX KEY: 0000073313 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 341010356 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-03565 FILM NUMBER: 95587550 BUSINESS ADDRESS: STREET 1: 2 N RIVERSIDE PLZ STE 600 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3128791900 MAIL ADDRESS: STREET 1: TWO NORTH RIVERSIDE PLAZA CITY: CHICAGO STATE: IL ZIP: 60606 10-Q 1 FORM 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________________________________ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-3565 CAPSURE HOLDINGS CORP. (Exact name of Registrant as specified in its Charter) DELAWARE 34-1010356 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606 (Address of principal executive offices) (Zip Code)
(312) 879-1900 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No____ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 15,408,749 shares of Common Stock, $.05 par value as of October 31, 1995. 2 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES INDEX
Page ---- Part I. Financial Information (Unaudited): Item 1. Condensed Consolidated Financial Statements: Consolidated Balance Sheets at September 30, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Income for the Periods Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Notes to Consolidated Financial Statements at September 30, 1995 . . . . . . . . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Part II. Other Information: Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
-2- 3 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
September 30, December 31, 1995 1994 ----------------- ----------------- ASSETS Invested assets and cash: Fixed maturities: At fair value (amortized cost: 1995 - $235,502; 1994 - $249,328). . . . . . $ 234,569 $ 235,625 At amortized cost (fair value: 1995 - $11,241; 1994 - $10,326). . . . . . . 11,177 10,968 Equity securities, at fair value (cost: 1995 - $24,439; 1994 - $29,774) . . . 22,958 28,205 Short-term investments, at cost which approximates fair value . . . . . . . . 27,130 22,079 Other investments, at fair value . . . . . . . . . . . . . . . . . . . . . . . 2,839 4,890 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,846 4,131 ------------ ----------- 303,519 305,898 Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . 27,265 25,150 Reinsurance receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,174 39,582 Intangible assets, net of amortization . . . . . . . . . . . . . . . . . . . . . 16,191 18,031 Excess cost over net assets acquired, net of amortization . . . . . . . . . . . . 82,257 84,099 Deferred income taxes, net of valuation allowance . . . . . . . . . . . . . . . . 42,331 54,205 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,850 26,405 ------------ ----------- $ 540,587 $ 553,370 ============ =========== LIABILITIES Reserves: Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . $ 151,395 $ 149,041 Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,540 76,630 ------------ ----------- 229,935 225,671 Reinsurance payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,873 3,373 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,000 71,000 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,288 28,461 ------------ ----------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294,096 328,505 ------------ ----------- Commitments and contingencies STOCKHOLDERS' EQUITY Preferred stock, par value $.01 per share, 5,000,000 shares authorized; none issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . -- -- Common stock, par value $.05 per share, 20,000,000 shares authorized; 15,408,749 shares issued at September 30, 1995; 15,407,815 shares issued at December 31, 1994 . . . . . . . . . . . . . . . . 770 770 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,276 179,250 Retained earnings from August 1, 1986 (date of reorganization) . . . . . . . . . 67,848 54,756 Unrealized loss on securities, net of deferred income taxes . . . . . . . . . . . (1,403) (9,830) Treasury stock, at cost (-0- shares in 1995; 13,666 shares in 1994) . . . . . . . -- (81) ------------ ----------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . 246,491 224,865 ------------ ----------- $ 540,587 $ 553,370 ============ ===========
The accompanying notes are an integral part of these financial statements. -3- 4 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ------------------------------ 1995 1994 1995 1994 ------------- ------------- ------------- ------------- Revenues: Net earned premiums . . . . . . . . . . . . . $ 24,559 $ 22,620 $ 73,219 $ 66,743 Net investment income . . . . . . . . . . . . 5,056 4,626 15,384 13,789 Net investment gains (losses) . . . . . . . . (184) (112) (152) 1,516 Other income . . . . . . . . . . . . . . . . . 1 42 6 104 ------------- ------------- ------------- ------------- 29,432 27,176 88,457 82,152 ------------- ------------- ------------- ------------- Expenses: Net losses and loss adjustment expenses . . . 3,864 5,631 13,475 17,492 Net commissions, brokerage and other underwriting . . . . . . . . . . . . . . . 15,979 13,477 45,570 38,469 Interest expense . . . . . . . . . . . . . . . 919 892 3,423 3,372 Write-off of unamortized deferred loan fees . . -- -- -- 1,556 Amortization of goodwill and intangibles . . . 908 803 2,749 2,429 Other . . . . . . . . . . . . . . . . . . . . 527 470 1,750 1,452 ------------- ------------- ------------- ------------- 22,197 21,273 66,967 64,770 ------------- ------------- ------------- ------------- Income before income taxes . . . . . . . . . . . 7,235 5,903 21,490 17,382 Income taxes . . . . . . . . . . . . . . . . . . 2,816 2,191 8,398 6,743 ------------- ------------- ------------- ------------- Net income . . . . . . . . . . . . . . . . . . . $ 4,419 $ 3,712 $ 13,092 $ 10,639 ============= ============= ============= ============= Weighted average common and common equivalent shares outstanding . . . . . . . . 15,409 15,114 15,402 15,081 ============= ============= ============= ============= Earnings per common and common equivalent share . . . . . . . . . . . . . . $ .29 $ .25 $ .85 $ .71 ============= ============= ============= =============
The accompanying notes are an integral part of these financial statements. -4- 5 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) (UNAUDITED)
Nine Months Ended September 30, ----------------------------- 1995 1994 ------------ ----------- OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,092 $ 10,639 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,831 3,342 Accretion of bond discount, net. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,959) (2,815) Net investment (gains) losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 (1,516) Changes in: Reserve for unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . 2,354 4,602 Reserve for unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,910 176 Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,425 1,956 Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,108 5,494 ----------- ----------- Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . 24,913 21,878 ----------- ----------- INVESTING ACTIVITIES: Securities available-for-sale: Purchases - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . (77,044) (68,964) Sales - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 31,767 Maturities - fixed maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . 38,865 37,980 Purchases - equity securities. . . . . . . . . . . . . . . . . . . . . . . . . . . -- (28,332) Sales - equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,143 6,517 Securities held-to-maturity: Purchases - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,981) (1,110) Maturities - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . 4,200 -- Change in short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . (5,051) 37,280 Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . -- (26,175) Change in other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,689 1,674 Capital expenditures, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,126) (1,636) ----------- ----------- Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . 12,695 (10,999) ----------- ----------- FINANCING ACTIVITIES: Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 96,000 Principal payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . (37,000) (102,214) Exercise of options and warrants . . . . . . . . . . . . . . . . . . . . . . . . . . 107 10 ----------- ----------- Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . (36,893) (6,204) ----------- ----------- Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 715 4,675 Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,131 3,280 ----------- ----------- Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,846 $ 7,955 =========== =========== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,294 $ 2,751 Income taxes, net of refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 369 $ 421 Supplemental Disclosure of Non-Cash Investing and Financing Activities: Common stock issued in connection with acquisitions . . . . . . . . . . . . . . . $ -- $ 4,000
The accompanying notes are an integral part of these financial statements. -5- 6 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1995 (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Capsure Holdings Corp.'s ("Capsure" or the "Company") 1994 Annual Report on Form 10-K. The following Notes to the Consolidated Financial Statements highlight significant changes to the Notes included in the 1994 Annual Report on Form 10-K and such interim disclosures as required by the Securities and Exchange Commission. Certain financial information that is normally included in annual financial statements prepared in accordance with generally accepted accounting principles but is not required for interim reporting purposes has been condensed or omitted. The accompanying unaudited Consolidated Financial Statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. The financial results for interim periods may not be indicative of financial results for a full year. Certain reclassifications have been made to the 1994 Consolidated Financial Statements to conform with the presentation in the 1995 Consolidated Financial Statements. 2. ACQUISITIONS On September 22, 1994, Capsure, through its wholly owned subsidiary, Capsure Financial Group, Inc. ("CFG"), acquired all of the outstanding common stock of Universal Surety Holding Corp. ("USHC"), the parent company of Universal Surety of America. The following pro forma financial information has been prepared as if the acquisition of USHC had been consummated on January 1, 1993, at the same purchase price, with the consolidated results of operations being adjusted for the effects of the transaction in the same manner as subsequent to the acquisition. In management's opinion, the pro forma financial information is not indicative of results of operations that may have occurred had the acquisition taken place on January 1, 1993, or of future results of operations of the combined companies under the ownership and management of the Company. In the following table, the amounts are in thousands except per share amounts:
Pro Forma for the Nine Months Ended September 30, 1994 ------------------------ Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,457 Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,295 Earnings per common and common equivalent share . . . . . . . $ .73
-6- 7 3. INVESTMENTS The amortized cost and estimated fair value of investments at September 30, 1995 were as follows (dollars in thousands):
Amortized Gross Gross Estimated Cost Unrealized Unrealized Fair or Cost Gains Losses Value ----------------- ------------ ----------- ----------- Available-For-Sale Securities - ----------------------------- Fixed maturities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies: U.S. Treasury notes . . . . . . . . . . . . . . $ 3,849 $ 76 $ -- $ 3,925 Collateralized mortgage obligations . . . . . . 69,674 201 (1,112) 68,763 Mortgage pass-through securities . . . . . . . . 38,825 298 (19) 39,104 Debt securities of foreign governments . . . . . . 5 -- -- 5 Obligations of states and political subdivisions . 8,747 3 (171) 8,579 Corporate bonds . . . . . . . . . . . . . . . . . . 91 -- (17) 74 Other collateralized mortgage obligations . . . . . 18,293 209 (42) 18,460 Asset-backed securities: Second mortgages/home equity loans . . . . . . . 69,888 572 (302) 70,158 Automobile loans . . . . . . . . . . . . . . . . 8,693 36 (560) 8,169 Other underlying assets . . . . . . . . . . . . 17,437 91 (196) 17,332 ------------- ----------- ------------ ------------ 235,502 1,486 (2,419) 234,569 Equity securities . . . . . . . . . . . . . . . . . 21,665 147 (1,544) 20,268 ------------- ----------- ------------ ------------ Total available-for-sale securities . . . . . . $ 257,167 $ 1,633 $ (3,963) $ 254,837 ============= =========== ============ ============ Held-To-Maturity Securities - --------------------------- Fixed maturities - U.S. Government treasury securities . . . . . . . . . . . . . . $ 11,177 $ 169 $ (105) $ 11,241 ============= =========== ============ ============ Trading Securities - ------------------ Equity securities . . . . . . . . . . . . . . . . . $ 2,774 $ 68 $ (152) $ 2,690 ============= =========== ============ ============
-7- 8 4. REINSURANCE The effect of reinsurance on premiums written and earned for the nine months ended September 30, 1995 and 1994 was as follows (dollars in thousands):
1995 1994 -------------------------- --------------------------- Written Earned Written Earned ---------- ----------- ---------- ----------- Direct . . . . . . . . . . . . . . . . . . . . . $ 84,634 $ 83,344 $ 74,629 $ 74,506 Assumed . . . . . . . . . . . . . . . . . . . . 126 1,248 191 487 Ceded . . . . . . . . . . . . . . . . . . . . . (10,740) (11,373) (7,897) (8,250) ---------- ----------- ---------- ----------- Net premiums . . . . . . . . . . . . . . . . . . $ 74,020 $ 73,219 $ 66,923 $ 66,743 ========== =========== ========== ===========
The effect of reinsurance on losses and loss adjustment expenses incurred for the nine months ended September 30, 1995 and 1994 was as follows (dollars in thousands):
1995 1994 ----------- ----------- Gross losses and loss adjustment expenses . . . . . . . . . . . $ 18,183 $ 20,742 Reinsurance recoveries . . . . . . . . . . . . . . . . . . . . . (4,708) (3,250) ----------- ----------- Net losses and loss adjustment expenses . . . . . . . . . . . . $ 13,475 $ 17,492 =========== ===========
-8- 9 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEPTEMBER 30, 1995 GENERAL The following is a discussion and analysis of the operating results, financial condition, liquidity, and capital resources of Capsure Holdings Corp. and subsidiaries ("Capsure" or the "Company") for the three and nine months ended September 30, 1995 compared to the corresponding periods in 1994. The Company operates in the property and casualty insurance business through its subsidiaries, Western Surety Company ("Western Surety"), acquired in August 1992, United Capitol Insurance Company ("United Capitol"), acquired in February 1990, and Universal Surety of America ("Universal Surety"), acquired in September 1994. RESULTS OF OPERATIONS The components of net income for each period are summarized as follows (dollars in thousands):
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ------------------------- 1995 1994 1995 1994 ----------- ----------- ----------- ---------- Underwriting income . . . . . . . . . . . . . . . $ 4,716 $ 3,512 $ 14,174 $ 10,782 Net investment income . . . . . . . . . . . . . . 5,056 4,626 15,384 13,789 Net investment gains (losses) . . . . . . . . . . (184) (112) (152) 1,516 Interest expense . . . . . . . . . . . . . . . . (919) (892) (3,423) (3,372) Write-off of unamortized deferred loan fees . . . -- -- -- (1,556) Amortization of goodwill and intangibles . . . . (908) (803) (2,749) (2,429) Other expenses, net . . . . . . . . . . . . . . . (526) (428) (1,744) (1,348) ---------- ---------- --------- --------- Income before income taxes . . . . . . . . . . . 7,235 5,903 21,490 17,382 Income taxes . . . . . . . . . . . . . . . . . . 2,816 2,191 8,398 6,743 ----------- ----------- ---------- ---------- Net income . . . . . . . . . . . . . . . . . $ 4,419 $ 3,712 $ 13,092 $ 10,639 =========== =========== ========== ==========
-9- 10 INSURANCE UNDERWRITING Underwriting results for the three months ended September 30, 1995 and 1994 are summarized in the following table (dollars in thousands):
Three Months Ended September 30, ------------------------------------------------------------------------------------ Surety and Fidelity Excess and Surplus Consolidated ------------------------- ------------------------ ------------------------ 1995 1994 1995 1994 1995 1994 ----------- ----------- ---------- ---------- ---------- ----------- Gross written premiums . . . $ 21,378 $ 17,282 $ 4,966 $ 5,864 $ 26,344 $ 23,146 =========== ========== ========== ========== ========== =========== Net written premiums . . . . $ 20,499 $ 16,863 $ 2,198 $ 3,758 $ 22,697 $ 20,621 =========== ========== ========== ========== ========== =========== Net earned premiums . . . . . $ 21,517 $ 17,823 $ 3,042 $ 4,797 $ 24,559 $ 22,620 ----------- ---------- ---------- ---------- ---------- ----------- Net losses and loss adjustment 2,895 2,699 969 2,932 3,864 5,631 Underwriting expenses . . . . 14,923 12,378 1,056 1,099 15,979 13,477 ----------- ---------- ---------- ---------- ---------- ----------- Total losses and expenses . . 17,818 15,077 2,025 4,031 19,843 19,108 ----------- ---------- ---------- ---------- ---------- ----------- Underwriting income . . . . . $ 3,699 $ 2,746 $ 1,017 $ 766 $ 4,716 $ 3,512 =========== ========== ========== ========== ========== =========== Loss ratio . . . . . . . . . 13.5% 15.1% 31.9% 61.1% 15.7% 24.9% Expense ratio . . . . . . . . 69.3 69.5 34.7 22.9 65.1 59.6 ----------- ---------- ---------- ---------- ---------- ----------- Combined ratio . . . . . . . 82.8% 84.6% 66.6% 84.0% 80.8% 84.5% =========== ========== ========== ========== ========== ===========
Surety and fidelity represents the combined results of Western Surety and Universal Surety, since its September 22, 1994 acquisition. Surety and fidelity are the principal lines of business of Western Surety and Universal Surety. Excess and surplus represents the results of United Capitol. United Capitol's principal lines of business are other liability, product liability and commercial property primarily written on an excess and surplus lines basis. Gross written premiums for the three months ended September 30, 1995 increased 13.8%, or $3.2 million, principally due to the inclusion of the full quarter results of Universal Surety in 1995. Universal Surety contributed $4.0 million of gross written premiums in the third quarter of 1995. United Capitol's gross written premiums decreased 13.4% in the third quarter of 1995, as its premium volume, particularly in the increasingly competitive asbestos abatement line, continued to be significantly affected by prolonged soft market conditions. Net earned premiums increased $1.9 million for the three months ended September 30, 1995, principally due to the inclusion of the full quarter results of Universal Surety in 1995. Universal Surety contributed net earned premiums of $3.7 million in the third quarter of 1995. Western Surety's net earned premiums increased 1.8% in the third quarter of 1995 compared to the same period in 1994. United Capitol's net earned premiums decreased 36.6%, or $1.8 million in the third quarter of 1995, reflecting decreases in both gross written premiums and net retentions. The lower net retentions are due primarily to the increased use of reinsurance for primary casualty risks in an effort to limit the potential loss volatility associated with a diminished premium base. United Capitol's net earned premiums for the three months ended September 30, 1995 and 1994 included $0.5 million and $0.6 million, respectively, of contingent premiums recognized under its reinsurance agreements. Underwriting income for the three months ended September 30, 1995 increased 34.3% as compared to the prior year quarter, principally due to an increase of $0.6 million in underwriting income from Universal Surety and improved claims experience at United Capitol and Western Surety. The consolidated combined ratio decreased to 80.8% in the third quarter of 1995 from 84.5% in the same period in 1994. -10- 11 The consolidated loss ratio decreased to 15.7% in the third quarter of 1995 from 24.9% in 1994. The surety and fidelity loss ratio decreased to 13.5% in the third quarter of 1995 from 15.1% in 1994, primarily due to favorable development of prior years' loss reserves and increased salvage recoveries at Western Surety. United Capitol's loss ratio decreased to 31.9% in the third quarter of 1995 from 61.1% in 1994 on reduced net earned premiums, reflecting improved current accident year claims experience and continued favorable development of prior years' loss reserves. United Capitol's claims development has been favorable relative to expectations based on industry experience. However, given the limited prior operating experience of the company and the long-tail nature of its business, the company and its independent actuaries have, historically, relied principally upon industry development patterns and expected loss ratios in estimating reserves for loss and loss adjustment expense. While actual loss emergence and implications to expected future loss emergence have been reflected in accordance with the credibility ascribed to each, management believes it may be appropriate to give more credence to the company's own development patterns and emerging loss ratios in estimating loss reserves given the availability of eight full years of experience as of September 30, 1995 and growing evidence of favorable loss trends relative to industry indications. Accordingly, United Capitol has engaged its independent actuaries to conduct an interim actuarial evaluation of the company's loss reserves as of September 30, 1995, and expects to report the results of this review in the fourth quarter. The consolidated expense ratio increased to 65.1% in the third quarter of 1995, compared to 59.6% in the third quarter of 1994. The surety and fidelity expense ratio decreased slightly to 69.3% in the third quarter of 1995 from 69.5% in 1994. United Capitol's expense ratio increased to 34.7% in the third quarter of 1995 compared to 22.9% in 1994. This was principally due to reduced net earned premiums, and also reflected reduced agency income. Underwriting results for the nine months ended September 30, 1995 and 1994 are summarized in the following table (dollars in thousands):
Nine Months Ended September 30, ------------------------------------------------------------------------------------ Surety and Fidelity Excess and Surplus Consolidated ------------------------- ------------------------ ------------------------ 1995 1994 1995 1994 1995 1994 ----------- ----------- ---------- ---------- ---------- ----------- Gross written premiums . . . $ 69,114 $ 55,015 $ 15,646 $ 19,805 $ 84,760 $ 74,820 =========== ========== ========== ========== ========== =========== Net written premiums . . . . $ 66,264 $ 53,876 $ 7,756 $ 13,047 $ 74,020 $ 66,923 =========== ========== ========== ========== ========== =========== Net earned premiums . . . . . $ 63,043 $ 51,891 $ 10,176 $ 14,852 $ 73,219 $ 66,743 ----------- ---------- ---------- ---------- ---------- ----------- Net losses and loss adjustment 9,075 8,417 4,400 9,075 13,475 17,492 Underwriting expenses . . . . 43,304 35,233 2,266 3,236 45,570 38,469 ----------- ---------- ---------- ---------- ---------- ----------- Total losses and expenses . . 52,379 43,650 6,666 12,311 59,045 55,961 ----------- ---------- ---------- ---------- ---------- ----------- Underwriting income . . . . . $ 10,664 $ 8,241 $ 3,510 $ 2,541 $ 14,174 $ 10,782 =========== ========== ========== ========== ========== =========== Loss ratio . . . . . . . . . 14.4% 16.2% 43.2% 61.1% 18.4% 26.2% Expense ratio . . . . . . . . 68.7 67.9 22.3 21.8 62.2 57.6 ----------- ----------- ---------- ---------- ---------- ----------- Combined ratio . . . . . . . 83.1% 84.1% 65.5% 82.9% 80.6% 83.8% =========== ========== ========== ========== ========== ===========
The following discussion highlights significant variances for the nine months ended September 30, 1995 as compared to the corresponding period in 1994. Unless otherwise provided, explanations are consistent with those described in the preceding quarterly discussion. -11- 12 Gross written premiums increased 13.3%, or $9.9 million, for the nine months ended September 30, 1995, primarily due to an increase of $12.0 million for Universal Surety, partially offset by reduced premium volume at United Capitol. Net earned premiums increased by 9.7%, or $6.5 million, for the nine months ended September 30, 1995, reflecting an increase of $10.3 million for Universal Surety, partially offset by a decrease of $4.7 million at United Capitol. Underwriting income for the nine months ended September 30, 1995 increased 31.5% as compared to the comparable period in 1994, principally due to an increase of $1.8 million in underwriting income from Universal Surety and improved claims experience at United Capitol and Western Surety. United Capitol's loss ratio decreased to 43.2% in the first nine months of 1995 from 61.1% in 1994 on reduced net earned premiums, reflecting improved current accident year claims experience and continued favorable development of prior years' loss reserves. The consolidated loss ratio decreased to 18.4% in the first nine months of 1995 from 26.2% in the comparable period in 1994. The consolidated expense ratio increased to 62.2% in the first nine months of 1995 from 57.6% in the comparable period in 1994, principally due to reduced net earned premiums at United Capitol. United Capitol's expense ratio for the first nine months of 1995 increased to 22.3% from 21.8% in the first nine months of 1994. Absent the recognition of $0.5 million in contingent commission income at United Capitol's Fischer Underwriting Group, Incorporated ("Fischer") subsidiary during the first quarter of 1995, United Capitol's expense ratio for the first nine months of 1995 would have been approximately 27.2%. United Capitol's 1995 expense ratio has also been reduced by increased ceding commissions from lower net retentions. The surety and fidelity expense ratio increased slightly to 68.7% in 1995 from 67.9% in 1994, reflecting increased operating expenses, particularly, wage and postal expense increases. INVESTMENT INCOME Net investment income for the three months ended September 30, 1995 and 1994 was $5.1 million and $4.6 million, respectively. The 9.3% increase reflected the addition of Universal Surety, as well as higher investment yields. The average pretax yields of the portfolio for the three months ended September 30, 1995 and 1994 were 6.6% and 6.1%, respectively. Net investment income for the nine months ended September 30, 1995 and 1994 was $15.4 million and $13.8 million, respectively. The average pretax yields of the portfolio for the nine months ended September 30, 1995 and 1994 were 6.8% and 5.9%, respectively. Capsure's insurance companies invest funds provided by operations predominantly in high-quality, short-duration, taxable fixed income securities. Beginning in 1994, the Investment Committees of the Board of Directors of the Company and its insurance subsidiaries have approved for the investment of up to $26 million in the aggregate by the insurance subsidiaries and at the parent company level in publicly traded nonaffiliated real estate investment trust ("REIT") equity securities. At September 30, 1995 and December 31, 1994, the carrying value of the Company's REIT portfolio was approximately $19.5 million and $24.3 million, respectively. ANALYSIS OF OTHER OPERATIONS Net investment gains (losses) were $(0.2) million and $(0.1) million for the three months ended September 30, 1995 and 1994, respectively. Net investment gains (losses) of $0.1 million in the third quarter of 1995 and $(0.3) million in 1994 were from the insurance operations. Included in 1995 and 1994 third quarter net investment gains (losses) were $(0.3) million and $0.2 million, respectively, of net investment gains (losses) on the trading securities portfolio held at the parent company level. Net investment gains (losses) were $(0.2) million for the first nine months of 1995 compared to $1.5 million in the first nine months of 1994. Net investment gains (losses) from the insurance operations were $(0.6) million and $(0.3) million for the nine months ended September 30, 1995 and 1994, respectively. Net investment gains (losses) on securities held at the parent company level were $0.4 million and $1.8 million for the nine months ended September 30, 1995 and 1994, respectively. -12- 13 Amortization expense was $0.9 million and $0.8 million for the three months ended September 30, 1995 and 1994, respectively. Amortization expense in the third quarter of 1995 and 1994 included $0.3 million of amortization of intangible assets and $0.6 million and $0.5 million, respectively, of amortization of excess cost over net assets acquired related to the acquisitions of Western Surety, Universal Surety, United Capitol and Fischer. Excess cost over net assets acquired is amortized substantially over 40 years. Other intangible assets are amortized over periods ranging from three to 20 years. Amortization expense was $2.7 million and $2.4 million for the nine months ended September 30, 1995 and 1994, respectively. Interest expense was $0.9 million for the three months ended September 30, 1995 and 1994, and $3.4 million for the first nine months of both years. The Company's average debt outstanding for the three months ended September 30, 1995 was approximately $44.0 million compared to $58.6 million in the third quarter of 1994. The weighted average interest rates were 6.9% and 5.6% for the three months ended September 30, 1995 and 1994, respectively. The Company's average debt outstanding for the nine months ended September 30, 1995 was approximately $55.7 million compared to $69.6 million in 1994. The weighted average interest rates were 7.0% and 5.5% for the nine months ended September 30, 1995 and 1994, respectively. In connection with the early retirement of the Company's bank term loans in 1994, the Company incurred a $1.6 million write-off of unamortized deferred loan fees in the nine months ended September 30, 1994. INCOME TAXES Income taxes were $2.8 million and $2.2 million for the three months ended September 30, 1995 and 1994, respectively. Income taxes were $8.4 million and $6.7 million for the nine months ended September 30, 1995 and 1994, respectively. The effective income tax rates for the nine months ended September 30, 1995 and 1994 were 39.1% and 38.8%, respectively. The Company's income tax expense does not approximate actual taxes paid, primarily due to the utilization of the Company's net operating tax loss carryforwards. Actual income taxes paid were $0.4 million for the nine months ended September 30, 1995 and 1994. LIQUIDITY AND CAPITAL RESOURCES The Company's insurance subsidiaries are highly liquid. The insurance operations derive liquidity from net premium collections, reinsurance recoveries and investment earnings and use these funds to pay claims and operating expenses. The operations of an insurance company generally result in cash being collected from customers in the form of premiums in advance of cash outlays for claims. Each insurance company invests its collected premiums, generating investment income, until such time cash is needed to pay claims and associated expenses. Cash flow at the parent company level is derived principally from dividend and tax sharing payments from its insurance subsidiaries. The Company's consolidated net cash flow provided by operating activities was $24.9 million and $21.9 million for the nine months ended September 30, 1995 and 1994, respectively. Consolidated operating cash flow (pretax income excluding the write-off of deferred loan fees, net investment gains and amortization of goodwill and intangibles) for the nine months ended September 30, 1995, was $24.4 million as compared to $19.9 million in 1994. -13- 14 On March 29, 1994, the Company formed a direct, wholly owned subsidiary, Capsure Financial Group, Inc. ("CFG"), to which Capsure contributed substantially all its assets and liabilities. Concurrently, CFG entered into a senior reducing revolving credit agreement with a syndicate of banks for $135 million (the "Credit Facility"). At closing, $68 million of funds drawn under the Credit Facility, together with a portion of the Company's cash, were used to repay $84.6 million of previously existing bank term debt. Paydowns of $62 million and borrowings of $28 million for the acquisition of Universal Surety have occurred since then. The remaining availability under the Credit Facility of $101 million at September 30, 1995 may be used to finance future acquisitions and for general corporate purposes. The Company continues to pursue acquisitions of financial services businesses with a particular focus on the insurance industry. Although the emphasis is on financial services and insurance, the Company may consider other investments that would further enhance the Company's value. Principal and interest payments required under the Credit Facility are funded principally by dividend and tax sharing payments received from Capsure's insurance subsidiaries. In the nine months ended September 30, 1995 and 1994, Capsure received $30.6 million (including $17.6 million of dividends requiring prior approval from state regulatory authorities) and $16.0 million, respectively, in dividends from its insurance subsidiaries. Capsure received tax sharing payments from its subsidiaries of $8.9 million and $9.0 million in the nine months ended September 30, 1995 and 1994, respectively. -14- 15 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K: (a) Exhibits: 27 Financial Data Schedule (b) Reports on Form 8-K: None. -15- 16 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. CAPSURE HOLDINGS CORP. (Registrant) /s/ Mary Jane Robertson -------------------------------------- Mary Jane Robertson Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ John S. Heneghan -------------------------------------- John S. Heneghan Controller (Principal Accounting Officer) Date: November 6, 1995 ------------------------------ -16- EX-27 2 FINANCIAL DATA SCHEDULE
7 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 234,569 11,177 11,241 22,958 0 0 298,673 4,846 39,174 27,265 540,587 151,395 78,540 0 0 34,000 770 0 0 245,721 540,587 73,219 15,384 (152) 6 13,475 26,741 18,829 21,490 8,398 13,092 0 0 0 13,092 .85 .85 0 0 0 0 0 0 0
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