-----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, Mmwd7hl1HpeaPG1EyPS/9Zg7BP0d5TUCbSqWXlvkAKHmEL+2GTIj6Vw5y0kg8+hh llQnKVYQa2q66YYkCLIS0A== 0000950137-96-002173.txt : 19961111 0000950137-96-002173.hdr.sgml : 19961111 ACCESSION NUMBER: 0000950137-96-002173 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961108 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: 96657154 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, 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: 15,748,749 shares of Common Stock, $.05 par value as of October 31, 1996. 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, 1996 and December 31, 1995 . . . . . . . . . . . . 3 Consolidated Statements of Income for the Periods Ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Notes to Consolidated Financial Statements at September 30, 1996 . . . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Part II. Other Information: Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Item 2. Changes in the Rights of the Company's Security Holders . . . . . . . . . . . . . . . . . . . . . 14 Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . 14 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
-2- 3 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
September 30, December 31, 1996 1995 ----------------- ----------------- ASSETS Invested assets and cash: Fixed maturities, at fair value (amortized cost: $133,636; $233,276) . . . . . $ 133,255 $ 235,718 Equity securities, at fair value (cost: $3,687; $27,124) . . . . . . . . . . . 3,826 27,753 Short-term investments, at cost which approximates fair value . . . . . . . . 106,996 37,865 Other investments, at fair value . . . . . . . . . . . . . . . . . . . . . . . 2,829 3,219 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,370 3,001 --------------- --------------- 249,276 307,556 Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . 28,486 27,057 Reinsurance receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,209 40,097 Intangible assets, net of amortization . . . . . . . . . . . . . . . . . . . . . 14,591 15,715 Excess cost over net assets acquired, net of amortization . . . . . . . . . . . . 62,358 68,443 Deferred income taxes, net of valuation allowance . . . . . . . . . . . . . . . . 19,537 29,293 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,722 26,607 --------------- --------------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 408,179 $ 514,768 =============== =============== LIABILITIES Reserves: Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . $ 40,009 $ 126,061 Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,276 76,781 --------------- --------------- 110,285 202,842 Reinsurance payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 773 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 25,000 Dividend payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,247 -- Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,452 28,849 --------------- --------------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288,984 257,464 --------------- --------------- 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; 15,624,749 shares issued at September 30, 1996; 15,408,749 shares issued at December 31, 1995 . . . . . . . . . . . . . . . . 781 770 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,265 179,276 Retained earnings from August 1, 1986 (date of reorganization) . . . . . . . . . -- 75,286 Unrealized gain on securities, net of deferred income taxes . . . . . . . . . . . 149 1,972 --------------- --------------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . 119,195 257,304 --------------- --------------- $ 408,179 $ 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 Nine Months Ended September 30, September 30, ------------------------------ ------------------------------ 1996 1995 1996 1995 ------------- ------------- ------------- ------------- Revenues: Net earned premiums . . . . . . . . . . . . $ 22,856 $ 24,559 $ 69,389 $ 73,219 Net investment income . . . . . . . . . . . 3,985 5,056 13,531 15,384 Net investment gains (losses) . . . . . . . 37 (184) 1,692 (152) Other income . . . . . . . . . . . . . . . . 2 1 4 6 ------------- ------------- ------------- ------------- 26,880 29,432 84,616 88,457 ------------- ------------- ------------- ------------- Expenses: Net losses and loss adjustment expenses . . 2,014 3,864 8,211 13,475 Net commissions, brokerage and other underwriting . . . . . . . . . . . . . 16,177 15,979 46,632 45,570 Interest expense . . . . . . . . . . . . . . 82 919 715 3,423 Write-off of unamortized deferred loan fees -- -- 700 -- Non-recurring compensation . . . . . . . . . 6,341 -- 6,341 -- Amortization of goodwill and intangibles . . 702 908 2,120 2,749 Other . . . . . . . . . . . . . . . . . . . 665 527 2,019 1,750 ------------- ------------- ------------- ------------- 25,981 22,197 66,738 66,967 ------------- ------------- ------------- ------------- Income before income taxes . . . . . . . . . . 899 7,235 17,878 21,490 Income taxes . . . . . . . . . . . . . . . . . 342 2,816 6,796 8,398 ------------- ------------- ------------- ------------- Net income . . . . . . . . . . . . . . . . . . $ 557 $ 4,419 $ 11,082 $ 13,092 ============= ============= ============= ============= Weighted average shares outstanding: Primary . . . . . . . . . . . . . . . . . . 16,429 15,409 16,389 15,402 ============= ============= ============= ============= Fully diluted . . . . . . . . . . . . . . . 16,448 15,726 16,430 15,710 ============= ============= ============= ============= Earnings per share: Primary . . . . . . . . . . . . . . . . . . $ .02 $ .29 $ .68 $ .85 ============= ============= ============= ============= Fully diluted . . . . . . . . . . . . . . . $ .02 $ .28 $ .68 $ .83 ============= ============= ============= =============
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, -------------------------- 1996 1995 ----------- ----------- OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,082 $ 13,092 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,456 3,831 Accretion of bond discount, net . . . . . . . . . . . . . . . . . . . . . . . . . . . (376) (1,959) Net investment (gains) losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,692) 152 Non-recurring compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,341 -- Changes in: Reserve for unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . (1,229) 2,354 Reserve for unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,163 1,910 Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,940 6,842 Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,161) (1,309) ----------- ----------- Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . 23,524 24,913 ----------- ----------- INVESTING ACTIVITIES: Securities available-for-sale: Purchases - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (62,082) (77,044) Sales - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,372 53,634 Maturities - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,970 38,865 Purchases - equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . (190) -- Sales - equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,451 6,143 Receivable for securities sold . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,247) (3,634) Securities held-to-maturity: Purchases - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (4,981) Maturities - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 4,200 Change in short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . (86,725) (5,051) Net proceeds from the sale of UCHC . . . . . . . . . . . . . . . . . . . . . . . . . . 28,024 -- Change in other investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390 1,689 Capital expenditures, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,150) (1,126) ----------- ----------- Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . 813 12,695 ----------- ----------- FINANCING ACTIVITIES: Principal payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . (25,000) (37,000) Exercise of stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 107 ----------- ----------- Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . (24,968) (36,893) ----------- ----------- Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (631) 715 Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,001 4,131 ----------- ----------- Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,370 $ 4,846 =========== =========== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 737 $ 3,294 Income taxes, net of refunds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,027 $ 369
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, 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 September 30, 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 . . . . . . . . . . . . . . $ 6,769 $ 47 $ (28) $ 6,788 Collateralized mortgage obligations . . . . . . 29,793 223 (80) 29,936 Mortgage pass-through securities . . . . . . . . 37,440 77 (229) 37,288 Obligations of states and political subdivisions . 3,151 3 (25) 3,129 Non-agency collateralized mortgage obligations . . 22,109 50 (123) 22,036 Asset-backed securities: Second mortgages/home equity loans . . . . . . . 27,096 48 (204) 26,940 Other underlying assets . . . . . . . . . . . . 7,278 24 (164) 7,138 ------------- ----------- ------------ ------------ Total fixed maturities . . . . . . . . . . . . . . 133,636 472 (853) 133,255 Equity securities . . . . . . . . . . . . . . . . . 3,687 185 (46) 3,826 ------------- ----------- ------------ ------------ Total available-for-sale securities . . . . . . $ 137,323 $ 657 $ (899) $ 137,081 ============= =========== ============ ============
-6- 7 3.REINSURANCE The effect of reinsurance on premiums written and earned for the nine months ended September 30, 1996 and 1995 was as follows (dollars in thousands):
1996 1995 -------------------------- --------------------------- Written Earned Written Earned ---------- ----------- ---------- ----------- Direct . . . . . . . . . . . . . . . . . . . . . $ 83,724 $ 80,150 $ 84,634 $ 84,373 Assumed . . . . . . . . . . . . . . . . . . . . 72 46 126 219 Ceded . . . . . . . . . . . . . . . . . . . . . (10,855) (10,807) (10,740) (11,373) ---------- ----------- ---------- ----------- Net premiums . . . . . . . . . . . . . . . . . . $ 72,941 $ 69,389 $ 74,020 $ 73,219 ========== =========== ========== ===========
The effect of reinsurance on losses and loss adjustment expenses incurred for the nine months ended September 30, 1996 and 1995 was as follows (dollars in thousands):
1996 1995 ---------- ---------- Gross losses and loss adjustment expenses . . . . . . . . . . . $ 11,642 $ 18,183 Reinsurance recoveries . . . . . . . . . . . . . . . . . . . . . (3,431) (4,708) ---------- ---------- Net losses and loss adjustment expenses . . . . . . . . . . . . $ 8,211 $ 13,475 ========== ===========
4.SALE OF SUBSIDIARY On May 22, 1996, the Company closed on the sale of United Capitol Holding Company ("UCHC") and its subsidiaries, United Capitol Insurance Company ("United Capitol"), United Capitol Managers, Inc. and Fischer Underwriting Group, Incorporated ("Fischer"), to a subsidiary of Frontier Insurance Group, Inc. The operating results of UCHC and its subsidiaries are reflected in Capsure's results through the closing date. Net proceeds to Capsure were approximately $77 million, which included the purchase price for the capital stock of UCHC and the release of United Capitol's excess statutory surplus at closing. The goodwill associated with the 1990 acquisition of United Capitol was reduced to estimated net realizable value as of December 31, 1995, resulting in a $13.2 million impairment of goodwill in 1995. 5.EQUITY RESTRUCTURING On September 11, 1996, the Company declared a special cash dividend in the amount of $10 per share of common stock, payable to all holders of record as of September 25, 1996. The declaration of the special dividend was the result of the previously announced review of strategic alternatives undertaken by Capsure's Board of Directors. Approximately $86.4 million ($5.53 per share) of the $156.2 million total dividend was paid out of available retained earnings, with the excess of $69.8 million ($4.47 per share) charged to additional paid-in capital. The special dividend was paid on October 4, 1996 and was funded from $62 million of borrowings under Capsure's revolving credit agreement and approximately $94 million from available cash and marketable securities accumulated at the parent company level. In connection with the payment of the special dividend, the Board of Directors also authorized a corresponding repricing of all outstanding stock options. This resulted in a new measurement date for the stock options under applicable accounting pronouncements and required the Company to record in the third quarter of 1996 a non-recurring compensation charge of $4.1 million, after applicable income taxes, or 25 cents per share ($3.6 million, or 22 cents per share, was non-cash). -7- 8 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEPTEMBER 30, 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 periods ended September 30, 1996 compared to the corresponding periods in 1995. The Company, through its principal subsidiaries, Western Surety Company ("Western Surety"), acquired in August 1992, and Universal Surety of America ("Universal Surety"), acquired in September 1994, provides surety and fidelity bonds in all 50 states through a combined network of 120,000 independent agents. On May 22, 1996, the Company closed on the sale of United Capitol Holding Company ("UCHC") and its subsidiaries, United Capitol Insurance Company ("United Capitol"), United Capitol Managers, Inc. and Fischer Underwriting Group, Incorporated ("Fischer"), to a subsidiary of Frontier Insurance Group, Inc. The operating results of UCHC and its subsidiaries are reflected in Capsure's results through the closing date. Net proceeds to Capsure were approximately $77 million, which included the purchase price for the capital stock of UCHC and the release of United Capitol's excess statutory surplus at closing. Prior to closing, the Company amended the Credit Facility (as herein defined) to permit the sale of UCHC. On September 11, 1996, the Company declared a special cash dividend in the amount of $10 per share of common stock, payable to all holders of record as of September 25, 1996. The declaration of the special dividend was the result of the previously announced review of strategic alternatives undertaken by Capsure's Board of Directors. The special dividend was paid on October 4, 1996 and was funded from $62 million of borrowings under Capsure's revolving credit agreement and approximately $94 million from available cash and marketable securities accumulated at the parent company level. In connection with the payment of the special dividend, the Board of Directors also authorized a corresponding repricing of all outstanding stock options. This resulted in a new measurement date for the stock options under applicable accounting pronouncements and required the Company to record in the third quarter of 1996 a non-recurring compensation charge of $4.1 million, after applicable income taxes, or 25 cents per share ($3.6 million, or 22 cents per share, was non-cash). -8- 9 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, -------------------------- ------------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ---------- Underwriting income . . . . . . . . . . . . . . . $ 4,665 $ 4,716 $ 14,546 $ 14,174 Net investment income . . . . . . . . . . . . . . 3,985 5,056 13,531 15,384 Net investment gains (losses) . . . . . . . . . . 37 (184) 1,692 (152) Interest expense . . . . . . . . . . . . . . . . (82) (919) (715) (3,423) Write-off of unamortized deferred loan fees . . . -- -- (700) -- Non-recurring compensation . . . . . . . . . . . (6,341) -- (6,341) -- Amortization of goodwill and intangibles . . . . (702) (908) (2,120) (2,749) Other expenses, net . . . . . . . . . . . . . . . (663) (526) (2,015) (1,744) ----------- ----------- ----------- ---------- Income before income taxes . . . . . . . . . . . 899 7,235 17,878 21,490 Income taxes . . . . . . . . . . . . . . . . . . 342 2,816 6,796 8,398 ----------- ----------- ---------- ---------- Net income . . . . . . . . . . . . . . . . . $ 557 $ 4,419 $ 11,082 $ 13,092 =========== =========== ========== ==========
INSURANCE UNDERWRITING Underwriting results for the three months ended September 30, 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 . . $ 22,938 $ 21,378 $ -- $ 4,966 $ 22,938 $ 26,344 ============ =========== =========== =========== ============ ============ Net written premiums . . . $ 21,946 $ 20,499 $ -- $ 2,198 $ 21,946 $ 22,697 ============ =========== =========== =========== ============ ============ Net earned premiums . . . . $ 22,856 $ 21,517 $ -- $ 3,042 $ 22,856 $ 24,559 ------------ ----------- ----------- ----------- ------------ ------------ Net losses and loss adjustment 2,014 2,895 -- 969 2,014 3,864 Underwriting expenses . . . 16,177 14,923 -- 1,056 16,177 15,979 ------------ ----------- ----------- ----------- ------------ ------------ Total losses and expenses . 18,191 17,818 -- 2,025 18,191 19,843 ------------ ----------- ----------- ----------- ------------ ------------ Underwriting income . . . . $ 4,665 $ 3,699 $ -- $ 1,017 $ 4,665 $ 4,716 ============ =========== =========== =========== ============ ============ Loss ratio . . . . . . . . 8.8% 13.5% -- % 31.9% 8.8% 15.7% Expense ratio . . . . . . . 70.8 69.3 -- 34.7 70.8 65.1 ------------ ------------ ----------- ----------- ------------ ------------ Combined ratio . . . . . . 79.6% 82.8% -- % 66.6% 79.6% 80.8% ============ ============ =========== =========== ============ ===========
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 through May 22, 1996. United Capitol's principal lines of business were other liability, product liability and commercial property primarily written on an excess and surplus lines basis. Gross written premiums decreased 12.9%, or $3.4 million, for the three months ended September 30, 1996. Surety and fidelity gross written premiums increased 7.3%, or $1.6 million, due to continued strong growth in the contract surety and insurance agents' and brokers' errors and omissions ("E&O") businesses and modest growth in miscellaneous surety bond premium volume. United Capitol contributed $5.0 million in gross written premiums in the third quarter of 1995. -9- 10 Net earned premiums decreased 6.9%, or $1.7 million, for the three months ended September 30, 1996. Surety and fidelity net earned premiums increased 6.2%, or $1.3 million, in 1996 compared to 1995, primarily due to increased contract surety premium volume. United Capitol contributed $3.0 million in net earned premiums in the third quarter of 1995. Underwriting income for the three months ended September 30, 1996 was essentially flat as compared to the prior year quarter despite reduced net earned premiums. At the surety and fidelity operations, underwriting income increased 26.1%, or $1.0 million, on improved loss experience, partially offset by increased underwriting expenses. The consolidated combined ratio decreased to 79.6% in 1996 from 80.8% in 1995. The consolidated loss ratio decreased to 8.8% in 1996 from 15.7% in 1995. The surety and fidelity loss ratio decreased to 8.8% in 1996 from 13.5% in 1995 due to persistent favorable loss trends on the current accident year and positive development of prior years' loss reserves. The consolidated expense ratio increased to 70.8% in 1996, compared to 65.1% in 1995. The surety and fidelity expense ratio increased to 70.8% in 1996 from 69.3% in 1995, reflecting costs associated with ongoing re-engineering and automation efforts in the surety and fidelity operations. Underwriting results for the nine months ended September 30, 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 . . $ 72,733 $ 69,114 $ 11,063 $ 15,646 $ 83,796 $ 84,760 ============ =========== =========== =========== ============ ============ Net written premiums . . . $ 69,114 $ 66,264 $ 3,827 $ 7,756 $ 72,941 $ 74,020 ============ =========== =========== =========== ============ ============ Net earned premiums . . . . $ 66,159 $ 63,043 $ 3,230 $ 10,176 $ 69,389 $ 73,219 ------------ ----------- ----------- ----------- ------------ ------------ Net losses and loss adjustment 6,601 9,075 1,610 4,400 8,211 13,475 Underwriting expenses . . . 46,499 43,304 133 2,266 46,632 45,570 ------------ ----------- ----------- ----------- ------------ ------------ Total losses and expenses . 53,100 52,379 1,743 6,666 54,843 59,045 ------------ ----------- ----------- ----------- ------------ ------------ Underwriting income . . . . $ 13,059 $ 10,664 $ 1,487 $ 3,510 $ 14,546 $ 14,174 ============ =========== =========== =========== ============ ============ Loss ratio . . . . . . . . 10.0% 14.4% 49.8% 43.2% 11.8% 18.4% Expense ratio . . . . . . . 70.3 68.7 4.2 22.3 67.2 62.2 ------------ ----------- ----------- ----------- ------------ ------------ Combined ratio . . . . . . 80.3% 83.1% 54.0% 65.5% 79.0% 80.6% ============ =========== =========== =========== ============ ============
The following discussion highlights significant variances for the nine months ended September 30, 1996 as compared to the corresponding period in 1995. Unless otherwise provided, explanations are consistent with those described in the preceding quarterly discussion. Gross written premiums decreased 1.1%, or $1.0 million, for the nine months ended September 30, 1996. Surety and fidelity gross written premiums increased 5.2% or $3.6 million, reflecting strong growth in the contract surety and insurance agents' and brokers' E&O businesses. United Capitol's gross written premiums decreased $4.6 million in 1996 as compared to a full nine months in 1995. Net earned premiums decreased 5.2%, or $3.8 million, for the nine months ended September 30, 1996, reflecting a decrease of $6.9 million at United Capitol, partially offset by an increase of $3.1 million in surety and fidelity operations. Underwriting income for the nine months ended September 30, 1996 increased 2.6%, or $0.4 million. An increase of $2.4 million in surety and fidelity underwriting income was substantially offset by a decrease of $2.0 million for United Capitol. The consolidated loss ratio decreased to 11.8% for the -10- 11 nine months ended September 30, 1996 from 18.4% in the comparable period in 1995. The surety and fidelity loss ratio decreased to 10.0% in 1996 from 14.4% in 1995. The consolidated expense ratio increased to 67.2% for the nine months ended September 30, 1996 from 62.2% in the comparable period in 1995. The surety and fidelity expense ratio increased to 70.3% in 1996 from 68.7% in 1995. INVESTMENT INCOME Net investment income for the three months ended September 30, 1996 and 1995 was $4.0 million and $5.1 million, respectively, reflecting a net decrease in invested assets as a result of the sale of United Capitol. The average pretax yields of the portfolio for the three months ended September 30, 1996 and 1995 were 6.5% and 6.6%, respectively. Net investment income for the nine months ended September 30, 1996 and 1995 was $13.5 million and $15.4 million, respectively. The average pretax yields of the portfolio for the nine months ended September 30, 1996 and 1995 were 6.5% and 6.8%, 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 negligible in the third quarter of 1996 and were $(0.2) million in the third quarter of 1995. Net investment losses on securities held at the parent company level were $(0.1) million in the third quarter of 1996 compared to $(0.3) million in the third quarter of 1995. Net investment gains of $0.1 million in both the third quarter of 1996 and 1995 were recognized at the insurance operations. Net investment gains (losses) were $1.7 million for the first nine months of 1996 compared to $(0.2) million in the first nine months of 1995. Net investment gains on securities held at the parent company level were $0.8 million in the first nine months of 1996 compared to $0.4 million in the comparable period in 1995. Net investment gains (losses) of $0.9 million in the first nine months of 1996 and $(0.6) million in the comparable period in 1995 were recognized at the insurance operations. Amortization expense was $0.7 million and $0.9 million for the three months ended September 30, 1996 and 1995, respectively. Amortization expense in the third quarter of 1996 and 1995 included $0.3 million of amortization of intangible assets in both periods, 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. 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 over 40 years. Other intangible assets are amortized over periods ranging from three to 20 years. Amortization expense was $2.1 million for the nine months ended September 30, 1996 and $2.7 million in 1995. Interest expense was $0.1 million and $0.9 million for the three months ended September 30, 1996 and 1995, respectively. During the third quarter of 1996, the Company did not have any outstanding debt, and interest expense primarily resulted from a commitment fee based on the unused availability under the Credit Facility (as herein defined). The Company's average debt outstanding for the three months ended September 30, 1995 was approximately $44.0 million, with a weighted average interest rate on outstanding balances of 6.9%. Interest expense was $0.7 million and $3.4 million for the nine months ended September 30, 1996 and 1995, respectively. The Company's average debt outstanding for the nine months ended September 30, 1996 was approximately $7.8 million compared to $55.7 million in 1995. The weighted average interest rates on outstanding balances were 6.3% and 7.0% for the nine months ended -11- 12 September 30, 1996 and 1995, respectively. In connection with the amendment of the Credit Facility during the second quarter of 1996, the Company incurred a $0.7 million write-off of unamortized deferred loan fees. In connection with the payment of the $10 per share special cash dividend, the Board of Directors also authorized a corresponding repricing of all outstanding stock options. This resulted in a new measurement date for the stock options under applicable accounting pronouncements and required the Company to record in the third quarter of 1996 a non- recurring compensation charge of $4.1 million, after applicable income taxes, or 25 cents per share ($3.6 million, or 22 cents per share, was non-cash). INCOME TAXES Income taxes were $0.3 million and $2.8 million for the three months ended September 30, 1996 and 1995, respectively. Income taxes were $6.8 million and $8.4 million for the nine months ended September 30, 1996 and 1995, respectively. The effective income tax rates for the nine months ended September 30, 1996 and 1995 were 38.0% and 39.1%, respectively. The decrease in the 1996 effective tax rate was principally attributable to a decreased level of nondeductible goodwill amortization. The Company's income tax expense does not approximate actual taxes paid, primarily due to the utilization of the Company's NOLs. Actual taxes paid were $1.0 million and $0.4 million for the nine months ended September 30, 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 $23.5 million and $24.9 million for the nine months ended September 30, 1996 and 1995, respectively. Consolidated operating cash flow (pretax income excluding the write-off of deferred loan fees, non-recurring compensation, net investment gains (losses) and amortization of goodwill and intangibles) for the nine months ended September 30, 1996, was $25.3 million as compared to $24.4 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"). 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. The Company borrowed $28 million for the acquisition of Universal Surety in September 1994. -12- 13 Concurrent with the sale of UCHC and its subsidiaries, Capsure and its lenders entered into an agreement to amend and restate the Credit Facility. The amendment reduced the commitment to $100 million from $135 million and permits an initial draw of up to $70 million for a special dividend to stockholders. The remaining availability may be used for additional dividends, stock repurchases, acquisitions, and for general corporate purposes. Transaction costs totaled approximately $0.5 million. The credit available under the Credit Facility reduces semi-annually commencing March 31, 1997 and expires March 31, 2003. Interest on borrowings under the facility varies based on leverage. There were no outstanding balances under the Credit Facility as of September 30, 1996. On September 11, 1996, the Company declared a special cash dividend in the amount of $10 per share of common stock, payable to all holders of record as of September 25, 1996. The declaration of the special dividend was the result of the previously announced review of strategic alternatives undertaken by Capsure's Board of Directors and was paid on October 4, 1996. The special dividend was funded from $62 million of borrowings under the Credit Facility and approximately $94 million from available cash and marketable securities accumulated at the parent company level. Principal and interest payments required under the Credit Facility are funded principally by dividend and income tax sharing payments received from Capsure's insurance subsidiaries. In the nine months ended September 30, 1996 and 1995, Capsure received $64.2 million (including $64.1 million of dividends requiring prior approval from state regulatory authorities) and $30.6 million (including $17.6 million of dividends requiring prior approval from state regulatory authorities), respectively, in dividends from its insurance subsidiaries. Capsure received $14.2 million and $17.6 million in dividends from its surety and fidelity subsidiaries for the nine months ended September 30, 1996 and 1995, respectively. Capsure received tax sharing payments from its subsidiaries of $14.3 million and $8.9 million in the nine months ended September 30, 1996 and 1995, respectively, of which $7.8 million and $5.5 million were from its surety and fidelity subsidiaries. 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 September 30, 1996, no shares have been repurchased under this plan. -13- 14 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 1. Legal Proceedings - None. ITEM 2. Changes in the Rights of the Company's Security Holders - None. ITEM 3. Defaults Upon Senior Securities - None. ITEM 4. Submission of Matters to a Vote of Security Holders - None. ITEM 5. Other Information - None. ITEM 6. Exhibits and Reports on Form 8-K: (a) Exhibits: 27. Financial Data Schedule. (b) Reports on Form 8-K: None. ____________________________ "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: The statements which are not historical facts contained in this Form 10-Q are forward-looking statements that involve risks and uncertainties, including, but not limited to, product and policy demand and market response risks, the effect of economic conditions, the impact of competitive products, policies and pricing, product and policy development, regulatory changes and conditions, rating agency policies and practices, development of claims and the effect on loss reserves, the performance of reinsurance companies under reinsurance contracts with the Company, investment portfolio developments and reaction to market conditions, the results of financing efforts, the actual closing of contemplated transactions and agreements, the effect of the Company's accounting policies, and other risks detailed in the Company's Securities and Exchange Commission filings. No assurance can be given that the actual results of operations and financial condition will conform to the forward-looking statements contained herein. -14- 15 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: November 11, 1996 ----------------------------- -15- EX-27 2 FINANCIAL DATA SCHEDULE
7 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CAPSURE HOLDING 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 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 133,255 0 0 3,826 0 0 246,906 2,370 7,209 28,486 408,179 40,009 70,276 0 0 0 781 0 0 118,414 408,179 69,389 13,531 1,692 4 8,211 27,897 18,735 17,878 6,796 11,082 0 0 0 11,082 .68 .68 0 0 0 0 0 0 0
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