-----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, QpxM9gnaIgHSalk5L9woJVxkygWTvATwS1B3MM5+p0eft22x5aafOpydpg/aRk3v o2o1HeSAHgkIfyDd+3/BSw== 0000950137-97-002622.txt : 19970808 0000950137-97-002622.hdr.sgml : 19970808 ACCESSION NUMBER: 0000950137-97-002622 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970807 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: 97653250 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 JUNE 30, 1997 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 (I.R.S. Employer Identification No.) incorporation or organization) 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: 15,850,245 shares of Common Stock, $.05 par value as of July 31, 1997. 2 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES INDEX Page ---- Part I. Financial Information (Unaudited): Item 1. Condensed Consolidated Financial Statements: Consolidated Balance Sheets at June 30, 1997 and December 31, 1996........................................... 3 Consolidated Statements of Income for the Periods Ended June 30, 1997 and 1996...................................... 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996................................ 5 Notes to Consolidated Financial Statements at June 30, 1997. 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)
June 30, December 31, 1997 1996 -------- ------------ ASSETS Invested assets and cash: Fixed maturities, at fair value (amortized cost: $133,794; $135,420) ..... $133,968 $135,895 Equity securities, at fair value (cost: $3,687) .......................... -- 4,526 Short-term investments, at cost which approximates fair value ............ 28,219 19,416 Other investments, at fair value ......................................... 2,442 2,695 Cash ..................................................................... 2,951 2,736 -------- -------- 167,580 165,268 Deferred policy acquisition costs ........................................... 31,201 28,523 Reinsurance receivable ...................................................... 8,073 5,642 Intangible assets, net of amortization ...................................... 13,469 14,024 Excess cost over net assets acquired, net of amortization ................... 61,080 61,932 Deferred income taxes, net of valuation allowance ........................... 11,832 16,019 Other assets ................................................................ 24,408 21,731 -------- -------- Total assets ........................................................ $317,643 $313,139 ======== ======== LIABILITIES Reserves: Unpaid losses and loss adjustment expenses ............................... $ 39,301 $ 38,874 Unearned premiums ........................................................ 74,931 69,570 -------- -------- 114,232 108,444 Long-term debt .............................................................. 54,000 60,000 Other liabilities ........................................................... 19,904 22,112 -------- -------- Total liabilities ................................................... 188,136 190,556 -------- -------- 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; 15,850,245 shares issued at June 30, 1997; 15,804,749 shares issued at December 31, 1996 ............................ 793 790 Additional paid-in capital .................................................. 118,580 118,413 Retained earnings ........................................................... 9,847 2,297 Unrealized gain on securities, net of deferred income taxes ................. 287 1,083 -------- -------- Total stockholders' equity .......................................... 129,507 122,583 -------- -------- $317,643 $313,139 ======== ========
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 Six Months Ended June 30, June 30, ------------------ ----------------- 1997 1996 1997 1996 ------- ------- ------- ------- Revenues: Net earned premiums .......................... $22,962 $23,184 $45,258 $46,533 Net investment income ........................ 2,798 4,512 5,924 9,546 Net investment gains ......................... 549 1,132 636 1,655 ------- ------- ------- ------- 26,309 28,828 51,818 57,734 ------- ------- ------- ------- Expenses: Net losses and loss adjustment expenses ...... 1,931 2,801 3,159 6,197 Net commissions, brokerage and other underwriting ....................... 15,909 15,699 31,286 30,455 Interest expense ............................. 995 127 1,998 633 Write-off of unamortized deferred loan fees .. -- 700 -- 700 Amortization of goodwill and intangibles ..... 698 705 1,396 1,418 Other expenses, net .......................... 632 734 1,300 1,352 ------- ------- ------- ------- 20,165 20,766 39,139 40,755 ------- ------- ------- ------- Income before income taxes ..................... 6,144 8,062 12,679 16,979 Income taxes ................................... 2,407 3,057 5,129 6,454 ------- ------- ------- ------- Net income ..................................... $ 3,737 $ 5,005 $ 7,550 $10,525 ======= ======= ======= ======= Weighted average shares outstanding: Primary ...................................... 16,600 15,955 16,594 15,931 ======= ======= ======= ======= Fully diluted ................................ 16,613 15,968 16,613 15,968 ======= ======= ======= ======= Earnings per share: Primary ...................................... $ .22 $ .31 $ .45 $ .66 ======= ======= ======= ======= Fully diluted ................................ $ .22 $ .31 $ .45 $ .66 ======= ======= ======= =======
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)
Six Months Ended June 30, ------------------- 1997 1996 ------- -------- OPERATING ACTIVITIES: Net income ...................................................................... $ 7,550 $ 10,525 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................................. 2,207 2,341 Accretion of bond discount, net ............................................... (75) (317) Net investment gains .......................................................... (636) (1,655) Changes in: Reserve for unpaid losses and loss adjustment expenses ........................ 427 707 Reserve for unearned premiums ................................................. 5,361 7,091 Deferred income taxes, net .................................................... 4,519 5,896 Other assets and liabilities .................................................. (9,126) (8,198) ------- -------- Net cash provided by operating activities ......................................... 10,227 16,390 ------- -------- INVESTING ACTIVITIES: Securities available-for-sale: Purchases - fixed maturities .................................................. (13,317) (51,725) Sales - fixed maturities ...................................................... -- 59,463 Maturities - fixed maturities ................................................. 15,029 27,507 Purchases - equity securities ................................................. -- (190) Sales - equity securities ..................................................... 4,314 19,813 Change in short-term investments ................................................ (8,803) (74,702) Net proceeds from the sale of UCHC .............................................. -- 28,024 Change in other investments ..................................................... 253 475 Capital expenditures, net ....................................................... (1,606) (1,280) ------- -------- Net cash (used in) provided by investing activities ............................... (4,130) 7,385 ------- -------- FINANCING ACTIVITIES: Principal payments on long-term debt ............................................ (6,000) (25,000) Exercise of stock options ....................................................... 118 5 ------- -------- Net cash used in financing activities ............................................. (5,882) (24,995) ------- -------- Increase (decrease) in cash ....................................................... 215 (1,220) Cash at beginning of period ....................................................... 2,736 3,001 ------- -------- Cash at end of period ............................................................. $ 2,951 $ 1,781 ======= ======== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest ...................................................................... $ 2,017 $ 646 Income taxes, net of refunds .................................................. $ 378 $ 765
The accompanying notes are an integral part of these financial statements. -5- 6 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (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") 1996 Annual Report on Form 10-K. The following Notes to the Consolidated Financial Statements highlight significant changes to the Notes included in the 1996 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 1996 Consolidated Financial Statements to conform with the presentation in the 1997 Consolidated Financial Statements. 2. INVESTMENTS The cost and estimated fair value of investments at June 30, 1997 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 ............................... $ 7,014 $ 45 $ (17) $ 7,042 Collateralized mortgage obligations ............... 34,546 206 (241) 34,511 Mortgage pass-through securities .................. 37,379 383 (66) 37,696 Obligations of states and political subdivisions .... 2,276 4 (17) 2,263 Non-agency collateralized mortgage obligations 19,733 75 (55) 19,753 Asset-backed securities: Second mortgages/home equity loans ................ 26,136 121 (123) 26,134 Other underlying assets ........................... 6,710 23 (164) 6,569 -------- ---- ------ -------- Total available-for-sale securities ............. $133,794 $857 $(683) $133,968 ======== ==== ====== ========
-6- 7 3. REINSURANCE The effect of reinsurance on premiums written and earned for the six months ended June 30, 1997 and 1996 was as follows (dollars in thousands):
1997 1996 ---------------- ---------------- Written Earned Written Earned ------- ------- ------- ------- Direct ................ $52,502 $49,203 $60,776 $55,422 Assumed ............... -- -- 82 31 Ceded ................. (2,136) (3,945) (9,863) (8,920) ------- ------- ------- ------- Net premiums .......... $50,366 $45,258 $50,995 $46,533 ======= ======= ======= =======
The effect of reinsurance on losses and loss adjustment expenses incurred for the six months ended June 30, 1997 and 1996 was as follows (dollars in thousands):
1997 1996 ------- ------- Gross losses and loss adjustment expenses .. $ 6,128 $ 9,184 Reinsurance recoveries ..................... (2,969) (2,987) ------- ------- Net losses and loss adjustment expenses .... $ 3,159 $ 6,197 ======= =======
-7- 8 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS JUNE 30, 1997 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 June 30, 1997 compared to the corresponding periods in 1996. 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, 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. PENDING BUSINESS COMBINATION On December 19, 1996, Capsure and certain direct and indirect subsidiaries of CNA Financial Corporation ("CNAF") entered into a definitive Reorganization Agreement pursuant to which Capsure will merge with a wholly-owned subsidiary of CNA Surety Corporation ("CNA Surety"). CNAF, through its subsidiaries, will be the majority stockholder of CNA Surety, owning 61.75 percent of the shares on a fully diluted basis. The remaining shares will be issued to the existing Capsure stockholders (a portion of these shares will be reserved for issuance to the existing holders of Capsure options who will receive CNA Surety options in the merger) in a tax-free exchange for their Capsure shares on a one-for-one basis. The CNA Surety shares are expected to be traded on the New York Stock Exchange. Equity Capsure Limited Partnership, Capsure's largest stockholder with a 25.6 percent ownership interest, and Messrs. Dammeyer and Esselborn have agreed to vote their shares in favor of the merger. On July 14, 1997, Capsure and CNAF executed an amendment to the definitive Reorganization Agreement to form CNA Surety. The amendment includes, among other items, (i) the payment of a cash dividend to the stockholders of Capsure, (ii) a post closing exchange ratio adjustment mechanism, and (iii) changes to the terms of one of the reinsurance agreements to be entered into by the insurance subsidiaries of CNAF and CNA Surety. Shortly after the closing date, CNA Surety will pay an estimated $10.6 million cash dividend ($0.64 per share based upon the 15,850,245 Capsure shares outstanding as of June 30, 1997 and assuming all vested options are exercised by the record date) to the stockholders of Capsure as of the closing date, based on an estimated late September closing date. The dividend has a $58,600 per diem component that will cause the actual dividend to be paid to increase/decrease in the event the closing date is later/earlier than estimated. -8- 9 The exchange ratio will be adjusted on March 31, 1998 if the 1997 net written premiums of Capsure or of CNAF's surety businesses deviate from specified levels. Adjustments to the exchange ratio, if any, will be effected through the surrender or issuance of shares by or to CNAF. In the event CNAF is to surrender stock, such stock will be surrendered to CNA Surety and in the event CNA Surety stock is to be issued to CNAF, CNA Surety will issue such stock to CNAF. The range of CNAF's ownership percentage after any such adjustment is from 53.87% to 63.53%, assuming CNAF neither acquires nor disposes of any of its CNA Surety shares and the number of outstanding shares of CNA Surety remains unchanged between the closing and March 31, 1998. The continued strong underwriting results in CNA's surety operations are reflected in an expanded loss ratio guarantee agreed upon in the amendment. The agreement allows CNA Surety to participate in these results through lower loss ratio guarantees and broader account coverage. The Company has obtained antitrust clearance from the Federal Trade Commission, and all insurance regulatory filings are at various stages of the review process. The Company has filed a preliminary merger proxy statement/prospectus with the Securities and Exchange Commission on a confidential basis. The agreement and the transactions contemplated thereby are subject to several conditions, including ratification by the affirmative vote of Capsure stockholders and approval by insurance regulatory authorities. The completion of the merger pursuant to the Reorganization Agreement will cause an ownership change under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), and significantly limits the future utilization of Capsure's net operating tax loss carryforwards ("NOLs"). If the Reorganization Agreement and transactions contemplated thereby are approved by the Capsure stockholders at a special meeting to be held to vote on the transaction, they also will be asked to approve an amendment to the Company's Certificate of Incorporation to delete a provision designed to facilitate the Company's ability to preserve and utilize its NOLs. RESULTS OF OPERATIONS The components of net income for each period are summarized as follows (dollars in thousands):
Three Months Ended Six Months Ended June 30, June 30, ------------------ ----------------- 1997 1996 1997 1996 ------- ------- ------- ------- Underwriting income .......................... $5,122 $4,684 $10,813 $ 9,881 Net investment income ........................ 2,798 4,512 5,924 9,546 Net investment gains ......................... 549 1,132 636 1,655 Interest expense ............................. (995) (127) (1,998) (633) Write-off of unamortized deferred loan fees .. -- (700) -- (700) Amortization of goodwill and intangibles ..... (698) (705) (1,396) (1,418) Other expenses, net .......................... (632) (734) (1,300) (1,352) ------- ------- ------- ------- Income before income taxes ................... 6,144 8,062 12,679 16,979 Income taxes ................................. 2,407 3,057 5,129 6,454 ------- ------- ------- ------- Net income .............................. $3,737 $5,005 $ 7,550 $10,525 ======= ======= ======= =======
-9- 10 INSURANCE UNDERWRITING Underwriting results for the three months ended June 30, 1997 and 1996 are summarized in the following table (dollars in thousands):
Surety and Fidelity Excess and Surplus Lines Consolidated ------------------- ------------------------ ---------------- 1997 1996 1997 1996 1997 1996 ------- ------- -------- ------ ------- ------- Gross written premiums ....... $25,765 $24,201 $ -- $3,545 $25,765 $27,746 ======= ======= ======== ====== ======= ======= Net written premiums ......... $24,718 $22,790 $ -- $1,334 $24,718 $24,124 ======= ======= ======== ====== ======= ======= Net earned premiums .......... $22,962 $21,926 $ -- $1,258 $22,962 $23,184 ------- ------- -------- ------ ------- ------- Net losses and loss adjustment 1,931 1,622 -- 1,179 1,931 2,801 Underwriting expenses ........ 15,909 15,484 -- 215 15,909 15,699 ------- ------- -------- ------ ------- ------- Total losses and expenses .... 17,840 17,106 -- 1,394 17,840 18,500 ------- ------- -------- ------ ------- ------- Underwriting income .......... $ 5,122 $ 4,820 $ -- $ (136) $ 5,122 $ 4,684 ======= ======= ======== ====== ======= ======= Loss ratio ................... 8.4% 7.4% -- 93.7% 8.4% 12.1% Expense ratio ................ 69.3 70.6 -- 17.3 69.3 67.7 ------- ------- -------- ------ ------- ------- Combined ratio ............... 77.7% 78.0% -- 111.0% 77.7% 79.8% ======= ======= ======== ====== ======= =======
Surety and fidelity represents the combined results and are the principal lines of business of Western Surety and Universal Surety. Excess and surplus lines represented 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 7.1%, or $1.9 million, for the three months ended June 30, 1997. Surety and fidelity gross written premiums increased 6.5%, or $1.6 million, due to a 6.3% increase in Western Surety's core miscellaneous surety bond business, and continued strong growth in the contract surety and insurance agents' and brokers' errors and omissions ("E&O") businesses. United Capitol contributed $3.5 million in gross written premiums in the second quarter of 1996. Net earned premiums decreased 1.0%, or $0.2 million, for the three months ended June 30, 1997. Surety and fidelity net earned premiums increased 4.7%, or $1.1 million, in 1997 compared to 1996, primarily due to increased contract surety premium volume. United Capitol contributed $1.3 million in net earned premiums in the second quarter of 1996. Underwriting income for the three months ended June 30, 1997 increased 9.4%, or $0.4 million, as compared to the prior year quarter despite reduced net earned premiums. At the surety and fidelity operations, underwriting income increased 6.3%, or $0.3 million. The consolidated combined ratio decreased to 77.7% in 1997 from 79.8% in 1996. The consolidated loss ratio decreased to 8.4% in 1997 from 12.1% in 1996. The surety and fidelity loss ratio increased to 8.4% in 1997 from 7.4% in 1996. The surety and fidelity loss and combined ratios for the second quarter of 1997 included $0.9 million in favorable loss reserve development compared to $1.1 million for the second quarter of 1996. The consolidated expense ratio increased to 69.3% in 1997, compared to 67.7% in 1996. The surety and fidelity expense ratio decreased to 69.3% in 1997 from 70.6% in 1996. The consolidated expense ratio in 1996 was favorably affected by the recognition of contingent commission income and ceding commission income at United Capitol. -10- 11 Underwriting results for the six months ended June 30, 1997 and 1996 are summarized in the following table (dollars in thousands):
Surety and Fidelity Excess and Surplus Lines Consolidated ------------------- ------------------------ ----------------- 1997 1996 1997 1996 1997 1996 ------- ------- -------- ------- ------- ------- Gross written premiums ....... $52,502 $49,795 $ -- $11,063 $52,502 $60,858 ======= ======= ======== ======= ======= ======= Net written premiums ......... $50,366 $47,168 $ -- $ 3,827 $50,366 $50,995 ======= ======= ======== ======= ======= ======= Net earned premiums .......... $45,258 $43,303 $ -- $ 3,230 $45,258 $46,533 ------- ------- -------- ------- ------- ------- Net losses and loss adjustment 3,159 4,587 1,610 3,159 6,197 Underwriting expenses ........ 31,286 30,322 -- 133 31,286 30,455 ------- ------- -------- ------- ------- ------- Total losses and expenses .... 34,445 34,909 -- 1,743 34,445 36,652 ------- ------- -------- ------- ------- ------- Underwriting income .......... $10,813 $ 8,394 $ -- $ 1,487 $10,813 $ 9,881 ======= ======= ======== ======= ======= ======= Loss ratio ................... 7.0% 10.6% -- 49.8% 7.0% 13.3% Expense ratio ................ 69.1 70.0 -- 4.2 69.1 65.5 ------- ------- -------- ------- ------- ------- Combined ratio ............... 76.1% 80.6% -- 54.0% 76.1% 78.8% ======= ======= ======== ======= ======= =======
The following discussion highlights significant variances for the six months ended June 30, 1997 as compared to the corresponding period in 1996. Unless otherwise provided, explanations are consistent with those described in the preceding quarterly discussion. Gross written premiums decreased 13.7%, or $8.4 million, for the six months ended June 30, 1997. Surety and fidelity gross written premiums increased 5.4%, or $2.7 million, due to a 5.3% increase in Western Surety's core miscellaneous surety bond business, largely due to public official bonds, and continued strong growth in the contract surety and insurance agents' and brokers' E&O businesses. Public official bond premiums were $0.6 million higher than in 1996, as expected, since writings for this product typically increase every other year following the November elections. Net earned premiums decreased 2.7%, or $1.3 million, for the six months ended June 30, 1997, reflecting a decrease of $3.2 million at United Capitol, partially offset by an increase of $1.9 million in surety and fidelity operations. Underwriting income for the six months ended June 30, 1997 increased 9.4%, or $0.9 million. The consolidated loss ratio decreased to 7.0% in the first half of 1997 from 13.3% in the comparable period in 1996. The consolidated expense ratio increased to 69.1% for the six months ended June 30, 1997 from 65.5% in the comparable period in 1996. The surety and fidelity loss ratio decreased to 7.0% in 1997 from 10.6% in 1996. The surety and fidelity loss and combined ratios for the first half of 1997 included $3.0 million in favorable loss reserve development compared to $1.5 million for the first half of 1996. INVESTMENT INCOME Net investment income for the three months ended June 30, 1997 and 1996 was $2.8 million and $4.5 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 June 30, 1997 and 1996 were 6.8% for both periods. Net investment income for the six months ended June 30, 1997 and 1996 was $5.9 million and $9.5 million, respectively. The average pretax yields of the portfolio for the six months ended June 30, 1997 and 1996 were 7.2% and 6.9%, 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") have been Capsure's principal investment objectives. -11- 12 ANALYSIS OF OTHER OPERATIONS Net investment gains were $0.5 million and $1.1 million for the three months ended June 30, 1997 and 1996, respectively, of which $0.5 million and $0.3 million, respectively, were recognized at the insurance operations. Net investment gains were $0.6 million and $1.7 million for the six months ended June 30, 1997 and 1996, respectively, of which $0.6 million and $0.9 million, respectively, were recognized at the insurance operations. Amortization expense was $0.7 million for the three months ended June 30, 1997 and 1996. Amortization expense in the second quarter of both years included $0.3 million of amortization of intangible assets and $0.4 million of amortization of excess cost over net assets acquired related to the acquisitions of Western Surety and Universal Surety. Excess cost over net assets acquired is amortized substantially over 40 years. Other intangible assets are amortized principally over 20 years. Amortization expense was $1.4 million for the six months ended June 30, 1997 and 1996. Interest expense was $1.0 million and $0.1 million for the three months ended June 30, 1997 and 1996, respectively. The Company's average debt outstanding for the three months ended June 30, 1997 was approximately $55.0 million compared to $3.4 million in 1996. The weighted average interest rates on outstanding balances were 6.7% and 6.2% for the three months ended June 30, 1997 and 1996, respectively. Interest expense was $2.0 million and $0.6 million for the six months ended June 30, 1997 and 1996, respectively. The Company's average debt outstanding for the six months ended June 30, 1997 was approximately $57.2 million compared to $11.7 million in 1996. The weighted average interest rates on outstanding balances were 6.6% and 6.3% for the six months ended June 30, 1997 and 1996, respectively. In connection with the amendment of the Credit Facility (as herein defined) during the second quarter of 1996, the Company incurred a $0.7 million write-off of unamortized deferred loan fees. INCOME TAXES Income taxes were $2.4 million and $3.1 million for the three months ended June 30, 1997 and 1996, respectively. Income taxes were $5.1 million and $6.5 million for the six months ended June 30, 1997 and 1996, respectively. The effective income tax rates for the six months ended June 30, 1997 and 1996 were 40.5% and 38.0%, respectively. 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 $0.4 million and $0.8 million for the six months ended June 30, 1997 and 1996, 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. -12- 13 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 $10.2 million and $16.4 million for the six months ended June 30, 1997 and 1996, respectively. Consolidated operating cash flow (pretax income excluding the write-off of deferred loan fees, net investment gains (losses) and amortization of goodwill and intangibles) for the six months ended June 30, 1997, was $13.4 million as compared to $17.4 million in 1996. 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"). 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 permitted an initial draw of up to $70 million for a special distribution 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. On March 31, 1997, total borrowings available were reduced to $93.75 million. Interest on borrowings under the facility varies based on leverage. 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. Capsure received $6.3 million and $10.2 million in dividends from its surety and fidelity insurance subsidiaries for the six months ended June 30, 1997 and 1996, respectively. Capsure received tax sharing payments from its subsidiaries of $5.5 million and $12.2 million in the six months ended June 30, 1997 and 1996, respectively, of which $5.5 million and $5.4 million were from its surety and fidelity subsidiaries. -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: August 7, 1997 ---------------------- -15- EX-27 2 FINANCIAL DATA SCHEDULE
7 THIS 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 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 133,968 0 0 0 0 0 164,629 2,951 8,073 31,201 317,643 39,301 74,931 0 0 54,000 0 0 793 128,714 317,643 45,258 5,924 636 0 3,159 19,275 12,011 12,679 5,129 7,550 0 0 0 7,550 .45 .45 0 0 0 0 0 0 0
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