-----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, BPuUKY7chN9SwVpTe9+5RMUX9TGhhxD7e+wjpa3zdwIidnCQSF+z0xPJEawpqqji ZC1xX+0ZpuaCcOImmzDJ4w== 0000950124-96-002002.txt : 19960510 0000950124-96-002002.hdr.sgml : 19960510 ACCESSION NUMBER: 0000950124-96-002002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960509 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: 96558358 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 MARCH 31, 1996 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: 15,409,123 shares of Common Stock, $.05 par value as of April 30, 1996. 2 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES INDEX Part I. Financial Information (Unaudited): Page Item 1. Condensed Consolidated Financial Statements: Consolidated Balance Sheets at March 31, 1996 and December 31, 1995 . . . . . . . . . . . . . . 3 Consolidated Statements of Income for the Three Months Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Notes to Consolidated Financial Statements at March 31, 1996 . . . . . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Part II. Other Information: Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
-2- 3 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
March 31, December 31, 1996 1995 ----------------- ----------------- ASSETS Invested assets and cash: Fixed maturities, at fair value (amortized cost: $201,953; $233,276) . . . . . $ 201,485 $ 235,718 Equity securities, at fair value (cost: $12,791; $27,124) . . . . . . . . . . 13,720 27,753 Short-term investments, at cost which approximates fair value . . . . . . . . 67,379 37,865 Other investments, at fair value . . . . . . . . . . . . . . . . . . . . . . . 3,275 3,219 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,089 3,001 --------------- --------------- 289,948 307,556 Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . 28,570 27,057 Reinsurance receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,645 40,097 Intangible assets, net of amortization . . . . . . . . . . . . . . . . . . . . . 15,289 15,715 Excess cost over net assets acquired, net of amortization . . . . . . . . . . . . 68,016 68,443 Deferred income taxes, net of valuation allowance . . . . . . . . . . . . . . . . 27,030 29,293 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,985 26,607 --------------- --------------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 506,483 $ 514,768 =============== =============== LIABILITIES Reserves: Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . $ 125,940 $ 126,061 Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,385 76,781 --------------- --------------- 208,325 202,842 Reinsurance payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 701 773 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 25,000 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,115 28,849 --------------- --------------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,141 257,464 --------------- --------------- 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, 25,000,000 shares authorized; 15,409,123 shares issued at March 31, 1996; 15,408,749 shares issued at December 31, 1995 . . . . . . . . . . . . . . . . 770 770 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,281 179,276 Retained earnings from August 1, 1986 (date of reorganization) . . . . . . . . . 80,806 75,286 Unrealized gain on securities, net of deferred income taxes . . . . . . . . . . . 485 1,972 --------------- --------------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 261,342 257,304 --------------- --------------- $ 506,483 $ 514,768 =============== ==============
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 March 31, --------------------------------- 1996 1995 ------------- ------------- Revenues: Net earned premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,349 $ 24,496 Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,034 5,093 Net investment gains (losses). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523 (54) Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 ----------- ----------- 28,907 29,539 ----------- ----------- Expenses: Net losses and loss adjustment expenses. . . . . . . . . . . . . . . . . . . . . . . . 3,396 5,375 Net commissions, brokerage and other underwriting. . . . . . . . . . . . . . . . . . . 14,756 14,358 Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506 1,373 Amortization of goodwill and intangibles. . . . . . . . . . . . . . . . . . . . . . . 713 925 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619 540 ----------- ---------- 19,990 22,571 ----------- ---------- Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,917 6,968 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,397 2,731 ----------- ---------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,520 $ 4,237 =========== ========== Weighted average shares outstanding: Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,906 15,394 =========== ========== Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,907 15,620 =========== ========== Earnings per share: Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .35 $ .28 =========== ========== Fully diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .35 $ .27 =========== ==========
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)
Three Months Ended March 31, -------------------------- 1996 1995 ----------- ----------- OPERATING ACTIVITIES: Net income.............................................................................. $ 5,520 $ 4,237 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......................................................... 1,208 1,284 Accretion of bond discount, net....................................................... (231) (794) Net investment (gains) losses......................................................... (523) 54 Changes in: Reserve for unpaid losses and loss adjustment expenses................................ (121) 2,834 Reserve for unearned premiums......................................................... 5,604 4,257 Deferred income taxes, net............................................................ 3,064 2,592 Other assets and liabilities.......................................................... (6,736) (2,960) --------- --------- Net cash provided by operating activities................................................ 7,785 11,504 --------- --------- INVESTING ACTIVITIES: Securities available-for-sale: Purchases - fixed maturities.......................................................... (15,331) (3,685) Sales - fixed maturities ............................................................. 30,984 6,078 Maturities - fixed maturities......................................................... 15,771 3,404 Purchases - equity securities......................................................... (190) -- Sales - equity securities............................................................. 15,367 1,243 Receivable for securities sold........................................................ (7,319) -- Securities held-to-maturity: Purchases - fixed maturities.......................................................... -- (4,026) Change in short-term investments........................................................ (29,514) (1,381) Change in other investments............................................................. (56) 955 Capital expenditures, net............................................................... (414) (512) --------- --------- Net cash provided by investing activities................................................ 9,298 2,076 --------- --------- FINANCING ACTIVITIES: Principal payment on long-term debt.................................................... (16,000) (12,000) Exercise of stock options.............................................................. 5 32 --------- --------- Net cash used in financing activities..................................................... (15,995) (11,968) --------- --------- Increase in cash......................................................................... 1,088 1,612 Cash at beginning of period.............................................................. 3,001 4,131 --------- --------- Cash at end of period.................................................................... $ 4,089 $ 5,743 ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest............................................................................. $ 441 $ 1,404 Income taxes, net of refunds......................................................... $ 265 $ 51
The accompanying notes are an integral part of these financial statements. -5- 6 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996 (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") 1995 Annual Report on Form 10-K. The following Notes to the Consolidated Financial Statements highlight significant changes to the Notes included in the 1995 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 1995 Consolidated Financial Statements to conform with the presentation in the 1996 Consolidated Financial Statements. 2.INVESTMENTS The cost and estimated fair value of investments at March 31, 1996 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 . . . . . . . . . . . . . . $ 15,487 $ 207 $ (137) $ 15,557 Collateralized mortgage obligations . . . . . . 40,574 194 (708) 40,060 Mortgage pass-through securities . . . . . . . . 41,037 251 (96) 41,192 Debt securities of foreign governments . . . . . . 5 -- -- 5 Obligations of states and political subdivisions . 4,275 2 (102) 4,175 Non-agency collateralized mortgage obligations . . 41,915 267 (308) 41,874 Asset-backed securities: Second mortgages/home equity loans . . . . . . . 42,212 392 (263) 42,341 Automobile loans . . . . . . . . . . . . . . . . 5,489 8 -- 5,497 Other underlying assets . . . . . . . . . . . . 10,959 43 (218) 10,784 ------------- ----------- ------------ ------------ Total fixed maturities . . . . . . . . . . . . 201,953 1,364 (1,832) 201,485 Equity securities . . . . . . . . . . . . . . . . . 9,906 818 (98) 10,626 ------------- ----------- ------------ ------------ Total available-for-sale securities . . . . . . $ 211,859 $ 2,182 $ (1,930) $ 212,111 ============= =========== ============= ============ Equity trading securities . . . . . . . . . . . . . $ 2,885 $ 322 $ (113) $ 3,094 ============= =========== ============ ============
-6- 7 3.REINSURANCE The effect of reinsurance on premiums written and earned for the three months ended March 31, 1996 and 1995 was as follows (dollars in thousands): 1996 1995 -------------------------- --------------------------- Written Earned Written Earned ---------- ----------- ---------- ----------- Direct . . . . . . . . . . . . . . . . . . . . . $ 33,018 $ 28,059 $ 31,625 $ 27,966 Assumed . . . . . . . . . . . . . . . . . . . . 94 121 172 95 Ceded . . . . . . . . . . . . . . . . . . . . . (6,241) (4,831) (4,202) (3,565) ---------- ----------- ------------ ----------- Net premiums . . . . . . . . . . . . . . . . . . $ 26,871 $ 23,349 $ 27,595 $ 24,496 ========== =========== ========== =========== The effect of reinsurance on losses and loss adjustment expenses incurred for the three months ended March 31, 1996 and 1995 was as follows (dollars in thousands): 1996 1995 ----------- ----------- Gross losses and loss adjustment expenses . . . . . . . . . . . $ 4,595 $ 6,921 Reinsurance recoveries . . . . . . . . . . . . . . . . . . . . . (1,199) (1,546) ---------- ---------- Net losses and loss adjustment expenses . . . . . . . . . . . . $ 3,396 $ 5,375 =========== ===========
-7- 8 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARCH 31, 1996 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 months ended March 31, 1996 compared to the corresponding period in 1995. The Company operates in the property and casualty insurance business through its principal 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. On February 29, 1996, the Company announced that it had signed an agreement to sell United Capitol Holding Company ("UCHC") and its subsidiaries, United Capitol, United Capitol Managers, Inc. and Fischer Underwriting Group, Incorporated ("Fischer"), to a subsidiary of Frontier Insurance Group, Inc. Estimated net proceeds to Capsure will be approximately $75 million, which includes the purchase price for the capital stock of UCHC and the release of United Capitol's excess statutory surplus on or before closing. The agreement is subject to several conditions including approval by insurance regulatory authorities. The transaction is expected to close in the second quarter of 1996. Short-term investments held at United Capitol are expected to increase in contemplation of the closing. Prior to closing, the Company must obtain a waiver from the lenders under the Credit Facility (as herein defined), or otherwise amend the agreement to permit the sale of United Capitol. The sale of United Capitol will liberate approximately $75 million of Capsure's capital. Capsure is considering alternative uses of this capital including funding of acquisitions, stock repurchases, payment of stockholder dividends or some combination of the foregoing. RESULTS OF OPERATIONS The components of net income for each period are summarized as follows (dollars in thousands): Three Months Ended March 31, -------------------------------- 1996 1995 ------------- ------------- Underwriting income . . . . . . . . . . . . . . . . . . $ 5,197 $ 4,763 Net investment income . . . . . . . . . . . . . . . . . 5,034 5,093 Net investment gains (losses) . . . . . . . . . . . . . 523 (54) Interest expense . . . . . . . . . . . . . . . . . . . . (506) (1,373) Amortization of goodwill and intangibles . . . . . . . . (713) (925) Other expenses, net . . . . . . . . . . . . . . . . . . (618) (536) ------------ ------------ Income before income taxes . . . . . . . . . . . . . . . 8,917 6,968 Income taxes . . . . . . . . . . . . . . . . . . . . . . 3,397 2,731 ------------- ------------- Net income . . . . . . . . . . . . . . . . . . . . $ 5,520 $ 4,237 ============= =============
-8- 9 INSURANCE UNDERWRITING Underwriting results for the three months ended March 31, 1996 and 1995 are summarized in the following table (dollars in thousands): Surety and Fidelity Excess and Surplus Lines Consolidated ---------------------------- ------------------------- ------------- 1996 1995 1996 1995 1996 1995 ------------ ------------ ----------- ----------- ------------ ------------ Gross written premiums . . $ 25,593 $ 25,415 $ 7,519 $ 6,382 $ 33,112 $ 31,797 ============ =========== =========== =========== ============ ============ Net written premiums . . . $ 24,378 $ 24,311 $ 2,493 $ 3,284 $ 26,871 $ 27,595 ============ =========== =========== =========== ============ ============ Net earned premiums . . . . $ 21,377 $ 20,688 $ 1,972 $ 3,808 $ 23,349 $ 24,496 ------------ ----------- ----------- ----------- ------------ ------------ Net losses and loss adjustment 2,965 3,124 431 2,251 3,396 5,375 Underwriting expenses . . . 14,839 14,187 (83) 171 14,756 14,358 ------------ ----------- ---------- ----------- ------------ ------------ Total losses and expenses . 17,804 17,311 348 2,422 18,152 19,733 ------------ ----------- ----------- ----------- ------------ ------------ Underwriting income . . . . $ 3,573 $ 3,377 $ 1,624 $ 1,386 $ 5,197 $ 4,763 ============ =========== =========== =========== ============ ============ Loss ratio . . . . . . . . 13.9% 15.1% 21.8% 59.1% 14.5% 22.0% Expense ratio . . . . . . . 69.4 68.6 (4.2) 4.5 63.2 58.6 ------------ ------------ ----------- ----------- ------------ ------------ Combined ratio . . . . . . 83.3% 83.7% 17.6% 63.6% 77.7% 80.6% ============ ============ =========== ========== =========== ============
Surety and fidelity represents the combined results of Western Surety and Universal Surety. Surety and fidelity are the principal lines of business of Western Surety and Universal Surety. Excess and surplus lines 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 increased 4.1%, or $1.3 million, for the three months ended March 31, 1996. Surety and fidelity gross written premiums increased $0.2 million, as strong growth in the contract surety and insurance agents' and brokers' errors and omissions ("E&O") business was partially offset by reduced miscellaneous surety bond premium volume. Public official bond premiums were lower than in 1995, as expected, since writings for this product typically increase every other year following the November elections. United Capitol's gross written premiums increased 17.8%, or $1.1 million, in 1996 due to increased writings in the commercial property and primary casualty lines of business, partially offset by a decrease in asbestos abatement writings. Net earned premiums decreased 4.7%, or $1.1 million, for the three months ended March 31, 1996. Surety and fidelity net earned premiums increased 3.3%, or $0.7 million, in 1996 compared to 1995. United Capitol's net earned premiums decreased 48.2%, or $1.8 million in 1996, reflecting decreased net retentions in 1995 and 1996. The lower net retentions were 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 March 31, 1996 and 1995 were increased by $0.1 million and $0.5 million, respectively, for contingent premiums recognized under its reinsurance agreements. Underwriting income for the three months ended March 31, 1996 increased 9.1%, or $0.4 million, as compared to the prior year quarter despite reduced net earned premiums. The increase reflected favorable loss development in surety and fidelity and excess and surplus lines and higher ceding commission income at United Capitol, partially offset by increased underwriting expenses in surety and fidelity operations. The consolidated combined ratio decreased to 77.7% in 1996 from 80.6% in 1995. The consolidated loss ratio decreased to 14.5% in 1996 from 22.0% in 1995. The surety and fidelity loss ratio decreased to 13.9% in 1996 from 15.1% in 1995, primarily due to favorable development of prior years' loss reserves. United Capitol's loss ratio decreased to 21.8% in 1996 from 59.1% in 1995, reflecting continued favorable -9- 10 development of prior years' loss reserves. The effect of this favorable development on the loss ratio was amplified in 1996 due to reduced net earned premiums. The consolidated expense ratio increased to 63.2% in 1996, compared to 58.6% in 1995. The surety and fidelity expense ratio increased to 69.4% in 1996 from 68.6% in 1995, reflecting the effects of expansion of the contract surety and insurance agents' and brokers' E&O businesses and costs associated with ongoing reengineering and automation efforts in the surety and fidelity operations. United Capitol's expense ratio decreased significantly to (4.2)% in 1996 compared to 4.5% in 1995. The expense ratios in both periods were favorably affected by the recognition of contingent commission income. First quarter 1996 was further impacted by higher ceding commission income on current business, reflective of lower net premium retentions. INVESTMENT INCOME Net investment income for the three months ended March 31, 1996 and 1995 was $5.0 million and $5.1 million, respectively. The average pretax yields of the portfolio for the three months ended March 31, 1996 and 1995 were 6.8% and 6.7%, respectively. Capsure's insurance companies invest funds provided by operations predominantly in high-quality, short-duration, taxable fixed income securities. The preservation of capital and utilization of the Company's available net operating tax loss carryforwards ("NOLs") are Capsure's principal investment objectives. ANALYSIS OF OTHER OPERATIONS Net investment gains (losses) were $0.5 million and $(0.1) million for the three months ended March 31, 1996 and 1995, respectively. Net investment gains on securities held at the parent company level were negligible in 1996 compared to $0.4 million in 1995. Net investment gains (losses) of $0.5 million in 1996 and $(0.5) million in 1995 were recognized at the insurance operations. The net investment losses from insurance operations in 1995 principally related to a writedown to estimated fair value for a single security for which an other than temporary decline in value occurred. Amortization expense was $0.7 million for the three months ended March 31, 1996 and $0.9 million in 1995. Amortization expense in 1996 and 1995 included $0.3 million of amortization of intangible assets and $0.4 million and $0.6 million, respectively, of amortization of excess cost over net assets acquired related to the acquisitions of Western Surety, Universal Surety, United Capitol and Fischer. Amortization expense was not recorded in 1996 for the goodwill associated with the United Capitol operations held for sale. Such goodwill was reduced at December 31, 1995 to reflect the estimated net realizable value on the sale of those operations. 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. Interest expense was $0.5 million and $1.4 million for the three months ended March 31, 1996 and 1995, respectively. The Company's average debt outstanding for the three months ended March 31, 1996 was approximately $20.1 million compared to $68.1 million in 1995. The weighted average interest rates on outstanding balances were 6.3% and 7.1% for the three months ended March 31, 1996 and 1995, respectively. INCOME TAXES Income taxes were $3.4 million and $2.7 million for the three months ended March 31, 1996 and 1995, respectively. The effective income tax rates were 38.1% and 39.2%, respectively. The decrease in the 1996 effective tax rate was principally attributable to a decreased level of nondeductible goodwill -10- 11 amortization. The Company's income tax expense does not approximate actual taxes paid, primarily due to the utilization of the Company's NOLs. Actual income taxes paid were $0.3 million and $0.1 million for the three month periods ended March 31, 1996 and 1995, respectively. 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. The Company believes total invested assets, including cash and short-term investments, are sufficient in the aggregate and have suitably scheduled maturities to satisfy all policy claims and other operating liabilities, including anticipated income tax sharing payments of its insurance operations. Management believes the duration of each insurance subsidiary's portfolio is properly matched with the expected duration of its liabilities. Cash flow at the parent company level is derived principally from dividend and tax sharing payments from its insurance subsidiaries. The principal obligations at the parent company level are to service debt and pay operating expenses. The Company's consolidated net cash flow provided by operating activities was $7.8 million and $11.5 million for the three months ended March 31, 1996 and 1995, respectively. Consolidated operating cash flow (pretax income excluding net investment gains (losses) and amortization of goodwill and intangibles) for the three months ended March 31, 1996, was $9.1 million as compared to $7.9 million in 1995. On March 29, 1994, the Company entered into a senior reducing revolving credit agreement with a syndicate of banks for $135 million (the "Credit Facility"). Total borrowings available under the Credit Facility were reduced to $122.5 million at March 31, 1996. 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 $87 million and borrowings of $28 million for the acquisition of Universal Surety have occurred since then. The remaining availability under the Credit Facility of $113.5 million at March 31, 1996 may be used to finance future acquisitions and for general corporate purposes. Principal and interest payments required under the Credit Facility are funded principally by dividend and intercompany tax sharing payments received from Capsure's insurance subsidiaries. In the three months ended March 31, 1996 and 1995, Capsure received $7.6 million (including $7.5 million of dividends requiring prior approval from state regulatory authorities) and $10.3 million (including $3.5 million of dividends requiring prior approval from state regulatory authorities), respectively, in dividends from its insurance subsidiaries. Capsure received tax sharing payments from its subsidiaries of $6.6 million and $0.5 million in the three months ended March 31, 1996 and 1995, respectively. On May 24, 1995, the Board of Directors of the Company approved a stock repurchase plan. The plan authorizes the Company to repurchase up to 500,000 shares of its common stock. These shares may be purchased from time to time in the public market or through privately negotiated transactions. As of March 31, 1996, no shares have been repurchased under this plan. -11- 12 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: January 16, 1996 - United Capitol expected reduction in loss reserves. March 4, 1996 - Sale of United Capitol to Frontier Insurance.
-12- 13 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 Vice President and Controller (Principal Accounting Officer) Date: May 10 , 1996 --------------------------------- -13- 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. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 201,485 0 0 13,720 0 0 285,859 4,089 40,645 28,570 506,483 125,940 82,385 0 0 9,000 0 0 770 260,572 506,483 23,349 5,034 523 1 3,396 8,349 6,407 8,917 3,397 5,520 0 0 0 5,520 .35 .35 0 0 0 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----