-----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, ATacROhCBmJzcEpNa6Wmvi+e0MnwiNmffHETAAqx5LuYTFgkOR69C9Glv9nKV2+4 3YIf5u7lGUYij0518ohmHA== 0000829277-98-000007.txt : 19980814 0000829277-98-000007.hdr.sgml : 19980814 ACCESSION NUMBER: 0000829277-98-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL RE CORP CENTRAL INDEX KEY: 0000829277 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 521567009 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10995 FILM NUMBER: 98685464 BUSINESS ADDRESS: STREET 1: 1325 AVE OF THE AMERICAS STREET 2: 18TH FLR CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2129740100 MAIL ADDRESS: STREET 1: 1325 AVENUE OF THE AMERICAS STREET 2: 18TH FL CITY: NEW YORK STATE: NY ZIP: 10019 10-Q 1 SECOND QUARTER REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q ---------------------- (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____TO____ ------------------------------------------------------ CAPITAL RE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------------------------------------ DELAWARE 001-10995 52-1567009 (STATE OR OTHER COMMISSION FILE NUMBER) (IRS EMPLOYER JURISDICTION OF IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) 1325 AVENUE OF THE AMERICAS 18TH FLOOR NEW YORK, NEW YORK 10019 (212) 974-0100 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTIONS 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 (REGISTRANT BECAME SUBJECT TO THE FILING REQUIREMENTS ON APRIL 8, 1992.) AS OF AUGUST 10, 1998 THERE WERE 31,914,119 OUTSTANDING SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OF THE REGISTRANT. CAPITAL RE CORPORATION AND SUBSIDIARIES INDEX PART I FINANCIAL INFORMATION PAGE ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) CAPITAL RE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -JUNE 30, 1998 (UNAUDITED) AND 3 DECEMBER 31, 1997 (UNAUDITED) CONSOLIDATED STATEMENTS OF INCOME - THREE AND SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND JUNE 30, 1997 4 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - THREE AND SIX MONTHS ENDED JUNE 30, 1998(UNAUDITED) AND JUNE 30, 1997 (UNAUDITED) 5 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) 6 CONSOLIDATED STATEMENTS OF CASH FLOWS - SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED) AND JUNE 30, 1997 (UNAUDITED) 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8-9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-19 PART II OTHER INFORMATION ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20 ITEM 5 OTHER INFORMATION 21 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 21-23 SIGNATURES 24
CAPITAL RE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands except per share amounts) June 30, December 31, 1998 1997 -------------- --------------- ASSETS Fixed maturity securities available for sale, at market (amortized cost: $972,136 in 1998 and $887,605 in 1997) $1,016,698 $932,823 Short-term investments, at cost, which approximates market 70,264 78,268 -------------- --------------- Total Investments 1,086,962 1,011,091 Cash 15,414 18,878 Accrued investment income 15,938 13,761 Deferred acquisition costs 152,482 135,332 Prepaid reinsurance premiums 71,724 64,953 Reinsurance recoverable on ceded losses 16,350 7,245 Funds held under reinsurance agreements 4,434 3,926 Premiums receivable, net 43,149 25,414 Amounts receivable on ceded annuity reserves 57,421 58,635 Investment in affiliates 22,003 21,858 Goodwill 9,846 12,677 Other assets 10,729 12,032 -------------- --------------- Total Assets $1,506,452 $1,385,802 ============== =============== LIABILITIES Deferred premium revenue $456,790 $402,145 Reserve for losses and loss adjustment expenses 53,911 37,900 Annuity benefit reserves 57,421 58,635 Accident and health reserves 16,094 16,367 Profit commission liability 40,466 30,457 Deferred federal income taxes payable 76,670 72,879 Bank note payable 25,000 25,000 Long-term debt 74,838 74,819 Other liabilities 23,776 23,657 -------------- --------------- Total Liabilities $824,966 $741,859 -------------- --------------- COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF CAPITAL RE LLC 75,000 75,000 STOCKHOLDERS' EQUITY Preferred stock - $.01 par value per share; 25,000,000 shares authorized; no shares issued and outstanding in 1998 and 1997 --- --- Common stock - $.01 par value per share; 75,000,000 shares authorized, 31,866,622 and 31,826,874 shares issued and outstanding in 1998 and 1997, respectively 323 322 Additional paid-in capital 225,505 224,999 Retained earnings 356,686 319,253 Treasury stock; 428,000 and 428,000 shares in 1998 and 1997, respectively (4,891) (4,891) Other Comprehensive Income Net unrealized gain on fixed maturities securities available for sale, net of tax 28,972 29,392 Foreign exchange translation (109) (132) -------------- --------------- Accumulated Other Comprehensive Income 28,863 29,260 -------------- --------------- Total Stockholders' Equity 606,486 568,943 -------------- --------------- Total Liabilities, Preferred Securities of Capital Re LLC and Stockholders' Equity $1,506,452 $1,385,802 -------------- ---------------
CAPITAL RE CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Dollars in thousands except per share amounts) Three Months Ended Six Months Ended June 30, June 30, (Unaudited) (Unaudited) ------------------------------- -------------------------------- 1998 1997 1998 1997 ------------------------------- -------------------------------- REVENUES: Gross premiums written $80,286 $60,431 $173,531 $124,956 Ceded premiums 5,471 1,460 20,833 9,716 ------------------------------- -------------------------------- Net premiums written 74,815 58,971 152,698 115,240 (Increase)/decrease in deferred premium revenue (22,589) (27,097) (47,729) (52,817) ------------------------------- -------------------------------- Net premiums earned 52,226 31,874 104,969 62,423 Net investment income 16,303 13,991 32,433 27,805 Net realized gain/(loss) 1,281 (192) 2,461 2,593 Fee income 555 874 1,039 1,319 Other income 25 107 189 133 Equity income in affiliate 101 237 133 470 ------------------------------- -------------------------------- Total Revenues 70,491 46,891 141,224 94,743 ------------------------------- -------------------------------- EXPENSES: Loss and loss adjustment expenses 9,560 5,031 25,218 9,848 Acquisition costs 21,713 16,069 48,827 33,394 Increase in deferred acquisition costs (7,274) (5,397) (17,071) (12,482) Profit commission expense 7,716 1,971 10,588 3,967 Other operating expenses 6,672 2,870 11,273 5,916 Amortization of goodwill 167 167 334 334 Interest expense 1,851 1,844 3,730 3,722 Foreign exchange (gain)/loss 425 (151) 85 242 Minority interest in Capital Re LLC 1,434 1,434 2,869 2,869 ------------------------------- -------------------------------- Total Expenses 42,264 23,838 85,853 47,810 ------------------------------- -------------------------------- Income before provision for federal income taxes 28,227 23,053 55,371 46,933 Provision for federal income taxes Current 7,414 5,034 11,303 8,864 Deferred 626 1,913 4,087 4,825 ------------------------------- -------------------------------- Total provision for federal income taxes 8,040 6,947 15,390 13,689 ------------------------------- -------------------------------- Net Income $20,187 $16,106 $39,981 $33,244 =============================== -------------------------------- Earnings per common share $0.63 $0.51 $1.26 $1.05 =============================== ================================ Diluted Earnings per common share $0.61 $0.50 $1.21 $1.03 =============================== ================================ Cash dividends per common share $0.04 $0.04 $0.08 $0.07 =============================== ================================ Weighted average number of common shares outstanding 31,865 31,723 31,849 31,723 =============================== ================================ Diluted Weighted average number of common shares outstanding 33,025 32,388 32,951 32,419 =============================== ================================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL RE CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Dollars in thousands) Three Months Ended Six Months Ended June 30, June 30, (unaudited) (unaudited) ------------------------------- -------------------------------- 1998 1997 1998 1997 ------------------------------- -------------------------------- Net Income $20,187 $16,106 $39,981 $33,244 Other Comprehensive Income, net of tax: Change in net unrealized gain on fixed maturities securities available for sale 2,171 11,636 (420) (1,363) Change in foreign exchange translation (161) 142 23 (327) ----- ------ ----- ------- Other Comprehensive Income 2,010 11,778 (397) (1,690) ----- ------ ----- ------- Comprehensive Income $22,197 $27,884 $39,584 $31,554 ======= ======= ======= =======
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL RE CORPORATION AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity (Dollars in thousands except share amounts) ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS ----------------------------------------------- Balance, January 1, 1998 $322 $224,999 $319,253 Net Income -- -- 39,981 Exercise of stock options, including tax benefit (39,748 shares) 1 506 -- Fixed maturities securities available for sale adjustments -- -- -- Foreign exchange translation -- -- -- Dividend ($.08 per common share) -- -- (2,548) -------------------------------------------------- Balance, June 30, 1998 $323 $225,505 $356,686 ================================================== NET UNREALIZED GAIN ON FIXED MATURITIES SECURITIES TOTAL TREASURY FOREIGN EXCH. AVAILABLE FOR STOCKHOLDERS' STOCK TRANSLATION SALE EQUITY --------------------------------------------------------------- Balance, January 1, 1998 ($4,891) ($132) $29,392 $568,943 Net Income -- -- -- 39,981 Exercise of stock options, including tax benefit (39,748 shares) -- -- -- 507 Fixed maturities securities available for sale adjustments -- -- (420) (420) Foreign exchange translation -- 23 -- 23 Dividend ($.08 per common share) -- -- -- (2,548) ---------------------------------------------------------------- Balance, June 30, 1998 ($4,891) ($109) $28,972 $606,486 =================================================================
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
CAPITAL RE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Dollars in thousands) SIX MONTHS ENDED JUNE 30, --------------------------------------- 1998 1997 --------------------------------------- OPERATING ACTIVITIES: Net income $39,981 $33,244 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of bond discount on long-term debt 19 19 Net amortization of security premiums (612) (374) Provision for deferred federal income taxes 4,028 4,825 Acquisition costs deferred (48,827) (33,394) Amortization of deferred acquisition costs 31,730 20,905 Equity Income in affiliates (145) (470) Change in accrued investment income (2,172) (297) Change in premiums receivable, net (27,283) (33,779) Change in deferred premium revenue, net 47,775 52,839 Change in outstanding loss reserves, net 6,871 1,578 Net realized (gain) on investments (2,461) (2,593) Change in ceded balances payable 9,654 6,901 Other 10,847 3,880 --------- --------- Net Cash Provided by Operating Activities 69,405 53,284 INVESTING ACTIVITIES: Securities available-for-sale: Purchases - fixed maturities (398,667) (589,254) Sales-fixed maturities 316,811 579,785 Maturities (purchases) of short-term investments, net 8,404 (76,468) investments in Affiliates 0 (11,000) Other investing activities 2,624 37,565 --------- --------- Net Cash Used in Investing Activities (70,828) (59,372) FINANCING ACTIVITIES: Net proceeds from exercise of stock options 507 856 Purchase of treasury stock at cost 0 (1,021) Dividends paid (2,548) (2,222) --------- --------- Net Cash Used by Financing Activities (2,041) (2,387) Effect of exchange rate changes on cash 0 0 --------- --------- (Decrease) Increase in Cash (3,464) (8,475) Cash at Beginning of Period 18,878 15,285 --------- --------- Cash at End of Period $15,414 $6,810 ========= =========
SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. CAPITAL RE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 1998 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements and footnotes have been prepared in accordance with the instructions to Form 10-Q and the preparation of unaudited interim financial statements under the Rules and Regulations of the Securities and Exchange Commission and do not include all the information and disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the audited consolidated financial statements of Capital Re Corporation and Subsidiaries (the "Corporation") included in the Corporation's 1997 Annual Report on Form 10-K. The accompanying unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Corporation's financial position and results of operations. The results of operations for the six months ended June 30, 1998 may not be indicative of the results that may be expected for the year ending December 31, 1998. As of January 1, 1998, the Company adopted Statement 130, "Reporting Comprehensive Income". Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Corporation income or shareholders' equity. Statement 130 requires unrealized gains or losses on the Corporation's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. For the three months and six months ended June 30, 1998 and 1997, total comprehensive income amounted to $22.2 million and $39.6 million, and $27.9 million and $31.6 million, respectively. 2. REINSURANCE Ceded earned premium for the three and six months ended June 30, 1998 and 1997 were $7.9 million and $14.2 million, and $4.5 million and $8.3 million, respectively. Ceded losses for the same periods were $10.4 million and $11.6 million $0.9 million and $1.8 million, respectively. 3. INCOME TAXES The effective tax rate for the six months ended June 30, 1998 and 1997 is lower than the federal corporate tax rate on ordinary income of 35% due principally to the effect of tax-exempt interest income. Income taxes paid for the six months ended June 30, 1998 and 1997 were $9.1 million and $7.7 million, respectively. 4. OTHER Interest paid for the six months ended June 30, 1998 and 1997 was $3.7 million. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Capital Re Corporation (the "Corporation") was incorporated in the State of Delaware in December 1991, and is the successor by merger to a Maryland corporation incorporated in 1986. The Corporation is an insurance holding company and has six wholly owned operating subsidiaries. Capital Reinsurance Company ("Capital Reinsurance"), domiciled in the State of Maryland, commenced operations in January 1988. Capital Reinsurance is engaged in the business of financial guaranty reinsurance, primarily the reinsurance of municipal and non-municipal bond insurance obligations. Capital Mortgage Reinsurance Company ("Capital Mortgage"), a New York domiciled company, commenced operations in February 1994. Capital Mortgage reinsures only residential mortgage guaranty insurance obligations. KRE Reinsurance Ltd. (formerly Capital Mortgage Reinsurance Company (Bermuda) Ltd.) ("KRE"), a Bermuda domiciled company, commenced operations in March 1994. KRE is engaged in the business of reinsuring financial guaranty, mortgage guaranty, financial insurance, trade credit and other specialty lines of insurance, both as a direct reinsurer of third party primary insurers and as a retrocessionaire of Capital Reinsurance, Capital Mortgage, Capital Credit Reinsurance Company Ltd. ("Capital Credit") and Capital Title Reinsurance Company ("Capital Title"). Capital Credit, also a Bermuda domiciled insurance company, commenced operations in February 1990. Capital Credit reinsures trade credit, political risk, and other specialty insurance lines concentrated in Western Europe and the United States and is a retrocessionaire of Capital Reinsurance and Capital Mortgage. Capital Title, a New York domiciled insurance company, commenced operations in March 1996. Capital Title is engaged in the business of reinsuring title insurance policies. In November 1996, the Corporation acquired, through a United Kingdom holding company, Capital Re (UK) Holdings, 100% of the issued shares of Tower Street Holdings Limited (now known as RGB Holdings, Ltd.), the holding company for RGB Underwriting Agencies Ltd. ("RGB"). RGB is a managing agency and presently manages five syndicates operating in the Lloyd's of London ("Lloyd's") insurance market. In November 1997, RGB Holdings, Ltd. acquired 100% of C.I. de Rougemont Group Limited, the ultimate holding company for C.I. de Rougemont & Co. Ltd. ("CIDR"), another Lloyd's managing agency. CIDR manages two syndicates, one marine and the other non-marine. Effective January 1, 1998, the CIDR non-marine syndicate was merged with the non-marine syndicate of RGB. In connection with its acquisition of RGB, the Corporation established a corporate name at Lloyd's, CRC Capital Ltd. ("CRC"), to provide underwriting capacity to the managed syndicates commencing with the 1997 year of account. CRC currently participates in a marine, a non-marine and two life syndicates. At June 30, 1998, the results of RGB, CIDR and CRC are consolidated in the Corporation's financial statements. In December 1996, the Corporation entered into a joint venture with GCR Holdings Ltd. ("GCR"), to form a Bermuda based insurer, Capital Global Underwriters Limited ("CGUL"), which specializes in financial lines reinsurance. In April 1997, EXEL Limited ("EXEL") acquired GCR. In March 1998, EXEL sold its share of CGUL to Bermuda based ACE Limited and CGUL was renamed ACE Capital Re Ltd. The Corporation, through its subsidiary, KRE, owns a fifty-percent interest in ACE Capital Re Ltd. and controls 9.9% of its voting stock. The Corporation accounts for its investment in ACE Capital Re Ltd. under the equity method. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1998 VERSUS THREE MONTHS ENDED JUNE 30, 1997 Net income for the three months ended June 30, 1998 increased 25.5% to $20.2 million from $16.1 million for the same period of 1997. The Company adopted Statement of Financial Standards No. 128, "Earnings per Share" ("FAS 128"), as of December 31, 1997. FAS 128 requires the calculation and presentation on the face of the income statement of basic earnings per share and, if applicable, diluted earnings per share. Basic earnings per share is calculated based on the weighted average common shares outstanding. All potentially dilutive securities such as stock options and convertible securities are excluded from the basic earnings per share calculation. In calculating diluted earnings per share, the number of shares is increased to include all potentially dilutive securities, including stock options and convertible securities. On June 30, 1998, the Corporation completed a two for one stock split of its outstanding common shares. Prior period financial results have been restated to reflect the stock split. On a per share basis, basic and diluted net income increased to $0.63 and $0.61, respectively, for the three months ended June 30, 1998 from $0.51 and $0.50, respectively, for the same period of 1997, or 23.5% and 22.0%, respectively. In addition, net operating income (net income excluding realized gains and losses and foreign exchange gains and losses) increased 21.7% to $19.6 million for the three months ended June 30, 1998 from $16.1 million for the same period in 1997. On a per share basis, basic and diluted net operating income increased to $0.62 and $0.59, respectively, for the three months ended June 30, 1998 from $0.51 and $0.50, respectively, for the same period of 1997, or 21.6% and 18.0%, respectively. Growth in net premiums earned to $52.2 million from $31.9 million, or 63.6%, and growth in net investment income to $16.3 million from $14.0 million, or 16.4%, were the principal causes of the increase in net income. Gross premiums written increased 32.9% to $80.3 million for the three months ended June 30, 1998 from $60.4 million for the same period of 1997. Growth in gross premiums written was experienced across all lines of business except for the mortgage guaranty reinsurance line. Mortgage guaranty reinsurance premium declined to $21.0 million for the three months ended June 30, 1998 from $24.6 million for the same period of 1997. This decline reflects the Corporation's shift away from producing quota share business and toward producing structured excess of loss business. In 1997, the Company added a financial reinsurance line of business. This line consists of structured financial transactions involving the reinsurance of annuity and accident and health reserves. The following table shows gross premiums written by line of business for the three months ended June 30, 1998 and June 30, 1997. Gross Premiums Written Three Months Ended June 30, 1998 1997 ---- ---- (dollars in millions) Municipal $16.5 $11.7 Non-Municipal 6.2 3.9 Financial Lines 1.4 0.0 Mortgage 21.0 24.6 Title 0.9 0.7 Credit and Specialty 9.8 4.7 Lloyd's 24.5 14.8 ----- ----- $80.3 $60.4 Net premiums written increased by 26.8% to $74.8 million for the three months ended June 30, 1998 from $59.0 million for the same period in 1997. The following table shows net premiums written by line of business for the three months ended June 30, 1998 and June 30, 1997. Net Premiums Written Three Months Ended June 30, 1998 1997 ---- ---- (dollars in millions) Municipal $16.1 $11.5 Non-Municipal 6.2 3.8 Financial Lines 1.4 0.0 Mortgage 21.0 24.5 Title 0.9 0.7 Credit and Specialty 9.8 4.7 Lloyd's 19.4 13.8 ----- ----- $74.8 $59.0 For the three months ended June 30, 1998, net premiums earned increased 63.6% to $52.2 million from $31.9 million for the comparable 1997 period. This increase was primarily due to growth in net premiums earned across all product lines of business. For the three months ended June 30, 1998, net refunded earned premium increased to $4.3 from $1.9 million for the comparable period in 1997. Excluding the effects of net refunded municipal earned premium, net premiums earned increased 59.7% to $47.9 million for the three months ended June 30, 1998 from $30.0 million for the three months ended June 30, 1997. A refunding extinguishes the Corporation's reinsurance liability for the refunded obligation and the Corporation then recognizes revenue equal to the remaining related deferred premium revenue. For the three months ended June 30, 1998 and 1997, ceded earned premium was $7.9 million and $4.5 million, respectively. The following table shows net premiums earned by line of business for the three months ended June 30, 1998 and June 30, 1997. Net Premiums Earned Three Months Ended June 30, 1998 1997 ---- ---- (dollars in millions) Municipal $9.8 $7.2 Non-Municipal 4.9 2.3 Financial Lines 1.4 0.0 Mortgage 14.7 13.8 Title 1.0 0.7 Credit and Specialty 7.4 3.9 Lloyd's 13.0 4.0 ----- ----- $52.2 $31.9 For the three months ended June 30, 1998, net investment income increased 16.4% to $16.3 million from $14.0 million for the comparable period in 1997. Growth in investment income was primarily attributable to a larger investment portfolio caused by an increase in invested assets from positive operating cash flows during the twelve months ended June 30, 1998. In addition, the Corporation recognized net realized gains of $1.3 million for the three months ended June 30, 1998 compared to $0.2 million of net realized losses for same period in 1997. Loss and loss adjustment expenses increased to $9.6 million from $5.0 million for the three months ended June 30, 1998 and 1997, respectively. Losses recorded for the three months ended June 30, 1998 were primarily attributable to the loss recognition associated with the Lloyd's line of business and the addition of the financial line of business, as well as normal loss development in the credit reinsurance line of business. Ceded losses for the three months ended June 30, 1998 and 1997 were $10.4 million and $0.9 million, respectively. Total expenses, including loss and loss adjustment expenses, increased 77.7% to $42.3 million for the three months ended June 30, 1998 from $23.8 million for the same period of 1997. This increase was primarily attributable to the amortization of acquisition expenses associated with the increased level of premiums earned across all lines of business and normal loss development from the credit and financial lines of business. In addition, the increase in expenses was attributable to an increase in overhead to support growth in the Company's lines of businesses as well as operating and loss expenses associated with the consolidation, for accounting purposes, of the Company's Lloyd's operations with the Company's reinsurance operations. Furthermore, the combined ratio, excluding expenses associated with non-insurance operations, increased to 72.9% for the three months ended June 30, 1998 from 63.9% for the comparable 1997 period. This increase is an expected result of the Corporation's diversification strategy, which is producing more business from lines with relatively higher combined ratios than that of the financial guaranty reinsurance business. For the three months ended June 30, 1998, the total federal tax provision increased to $8.0 million from $6.9 million for the same period in 1997. In addition, the effective tax rate decreased to 28.5% for the three months ended June 30, 1998 from 30.1% for the same period of 1997. SIX MONTHS ENDED JUNE 30, 1998 VERSUS SIX MONTHS ENDED JUNE 30, 1997 Net income for the six months ended June 30, 1998 increased 20.5% to $40.0 million from $33.2 million for the same period of 1997. The Company adopted Statement of Financial Standards No. 128, "Earnings per Share" ("FAS 128"), as of December 31, 1997. FAS 128 requires the calculation and presentation on the face of the income statement of basic earnings per share and, if applicable, diluted earnings per share. Basic earnings per share is calculated based on the weighted average common shares outstanding. All potentially dilutive securities such as stock options and convertible securities are excluded from the basic earnings per share calculation. In calculating diluted earnings per share, the number of shares is increased to include all potentially dilutive securities, including stock options and convertible securities. On June 30, 1998, the Corporation completed a two for one stock split of its outstanding common shares. Prior period financial results have been restated to reflect the stock split. On a per share basis, basic and diluted net income increased to $1.26 and $1.21, respectively, for the six months ended June 30, 1998 from $1.05 and $1.03, respectively, for the same period of 1997, or 20.0% and 17.5%, respectively. In addition, net operating income (net income excluding realized gains and losses and foreign exchange gains and losses) increased 21.1% to $38.4 million for the six months ended June 30, 1998 from $31.7 million for the same period in 1997. On a per share basis, basic and diluted net operating income increased to $1.21 and $1.17, respectively, for the six months ended June 30, 1998 from $1.00 and $0.98, respectively, for the same period of 1997, or 21.0% and 19.4%, respectively. Growth in net premiums earned to $105.0 million from $62.4 million, or 68.3%, and growth in net investment income to $32.4 million from $27.8 million, or 16.5%, were the principal causes of the increase in net income. Gross premiums written increased 38.8% to $173.5 million for the six months ended June 30, 1998 from $125.0 million for the same period of 1997. Gross premiums written increased across all product lines. In addition, in 1997 the Company added a financial reinsurance line of business. This line includes structured financial transactions involving the reinsurance of annuity and accident and health reserves. The following table shows gross premiums written by line of business for the six months ended June 30, 1998 and June 30, 1997. Gross Premiums Written Six Months Ended June 30, 1998 1997 ---- ---- (dollars in millions) Municipal $38.7 $29.6 Non-Municipal 12.2 7.2 Financial Lines 5.5 0.0 Mortgage 41.2 40.4 Title 2.0 1.5 Credit and Specialty 18.3 11.0 Lloyd's 55.6 35.3 ------ ------ $173.5 $125.0 Net premiums written increased by 32.6% to $152.7 million for the six months ended June 30, 1998 from $115.2 million for the same period in 1997. This increase is commensurate with the increase in gross premiums written explained above. The following table shows net premiums written by line of business for the six months ended June 30, 1998 and June 30, 1997. Net Premiums Written Six Months Ended June 30, 1998 1997 ---- ---- (dollars in millions) Municipal $37.4 $27.1 Non-Municipal 12.2 7.2 Financial Lines 5.5 0.0 Mortgage 41.2 40.2 Title 2.0 1.5 Credit and Specialty 18.2 11.0 Lloyd's 36.2 28.2 ------ ------ $152.7 $115.2 For the six months ended June 30, 1998, net premiums earned increased 68.3% to $105.0 million from $62.4 million for the comparable 1997 period. This increase was primarily due to growth in net premiums earned across all product lines of business. For the six months ended June 30, 1998, net refunded earned premium increased to $7.9 from $2.4 million for the comparable period in 1997. Excluding the effects of net municipal refunded earned premium, net premiums earned increased 61.8% to $97.1 million for the six months ended June 30, 1998 from $60.0 million for the six months ended June 30, 1997. A refunding extinguishes the Corporation's reinsurance liability for the refunded obligation and the Corporation then recognizes revenue equal to the remaining related deferred premium revenue. For the six months ended June 30, 1998 and 1997, ceded earned premium was $14.2 million and $8.3 million, respectively. The following table shows net premiums earned by line of business for the six months ended June 30, 1998 and June 30, 1997. Net Premiums Earned Six Months Ended June 30, 1998 1997 ---- ---- (dollars in millions) Municipal $19.2 $14.3 Non-Municipal 8.8 5.3 Financial Lines 5.5 0.0 Mortgage 32.7 27.4 Title 2.2 1.4 Credit and Specialty 14.6 8.3 Lloyd's 22.0 5.7 ------ ----- $105.0 $62.4 For the six months ended June 30, 1998, net investment income increased 16.5% to $32.4 million from $27.8 million for the comparable period in 1997. Growth in investment income was primarily attributable to a larger investment portfolio caused by an increase in invested assets from positive operating cash flows during the twelve months ended June 30, 1998. In addition, the Corporation recognized net realized gains of $2.5 million for the six months ended June 30, 1998 compared to $2.6 million for same period in 1997. Loss and loss adjustment expenses increased to $25.2 million from $9.8 million for the six months ended June 30, 1998 and 1997, respectively. Losses recorded for the six months ended June 30, 1998 were primarily attributable to the loss recognition associated with the Lloyd's line of business and the addition of the financial line of business, as well as normal loss development in the credit reinsurance line of business. Ceded losses for the six months ended June 30, 1998 and 1997 were $11.6 million and $1.8 million, respectively. Total expenses, including loss and loss adjustment expenses, increased 79.7% to $85.9 million for the six months ended June 30, 1998 from $47.8 million for the same period of 1997. This increase was primarily attributable to the amortization of acquisition expenses associated with the increased level of premiums earned across all lines of business and normal loss development from the credit and financial lines of business. In addition, the increase in expenses was attributable to an increase in overhead to support growth in the Company's lines of businesses as well as operating and loss expenses associated with the consolidation, for accounting purposes, of the Company's Lloyd's operations with the Company's reinsurance operations. Furthermore, the combined ratio, excluding expenses associated with non-insurance operations, increased to 74.5% for the six months ended June 30, 1998 from 64.0% for the comparable 1997 period. This increase is an expected result of the Corporation's diversification strategy, which is producing more business from lines with relatively higher combined ratios than that of the financial guaranty reinsurance business. For the six months ended June 30, 1998, the total federal tax provision increased to $15.4 million from $13.7 million for the same period in 1997. In addition, the effective tax rate decreased to 27.8% for the six months ended June 30, 1998 from 29.2% for the same period of 1997. LIQUIDITY AND CAPITAL RESOURCES The Corporation relies on dividends from Capital Reinsurance to fund its payment of dividends on its capital stock and interest on its outstanding debt. The major sources of liquidity for Capital Reinsurance are funds generated from reinsurance premiums, net investment income and maturing investments. Capital Reinsurance is domiciled in the State of Maryland, and, under Maryland insurance law, the amount of the surplus of Capital Reinsurance available for distribution as dividends is subject to certain statutory restrictions. The amount available for distribution from Capital Reinsurance during 1998 with notice to, but without prior approval of, the Maryland Insurance Commissioner is limited to 10% of Capital Reinsurance's policyholders' surplus as of December 31, 1997, or approximately $34.6 million. For the six months ended June 30, 1998, Capital Reinsurance paid $5.0 million in dividends to the Corporation. Credit Re Corporation, a wholly owned subsidiary of the Corporation, relies on dividends from its wholly owned subsidiary, Capital Credit, for funds to be provided to the Corporation. Capital Credit's major sources of liquidity are funds generated from reinsurance premiums, net investment income and maturing investments. Capital Credit is a Bermuda domiciled insurer whose distributions are governed by Bermuda law. Under Bermuda law and the by-laws of Capital Credit, dividends may be paid out of the profits of the company (defined as accumulated realized profits less accumulated realized losses). Distributions to shareholders may also be paid out of Capital Credit's surplus limited by requirements that such company must at all times (i) maintain the minimum share capital required under Bermuda law and (ii) have relevant assets in an amount equal to or greater than 75% of relevant liabilities, all as defined under Bermuda law. Since its organization, Capital Credit has not declared nor paid any dividends. Capital Mortgage is subject to the dividend restrictions imposed under New York insurance law. Accordingly, dividends may only be declared and distributed out of earned surplus (as defined under New York insurance law). Additionally, no dividend may be declared or distributed by Capital Mortgage in an amount which, together with all dividends declared or distributed by Capital Mortgage during the preceding twelve months, exceeds the lesser of 10% of such company's surplus to policyholders as shown by its last Annual Statutory Statement on file with the New York insurance department, or 100% of adjusted net investment income (as defined under New York insurance law) during such period, unless, upon prior application, the New York Superintendent of Insurance approves a greater dividend distribution based upon his finding that Capital Mortgage will retain sufficient surplus to support its obligations and writings. KRE's dividends and distributions to its sole shareholder, Capital Mortgage, are governed by Bermuda law and are subject to the same restrictions as those for Capital Credit described in the preceding paragraph. To date, Capital Mortgage and KRE have not declared nor paid any dividends. The maximum dividend payable by Capital Mortgage during 1998 is $0 since its earned surplus was ($0.4) million as of December 31, 1997. Capital Title is subject to the New York insurance laws and regulations governing title insurers. Accordingly, dividends may only be declared and distributed out of earned surplus as defined under New York insurance law and only if such dividends do not reduce the company's surplus to less than 50% of its outstanding capital shares, i.e., the value of its outstanding common equity. Additionally, no dividend may be declared or distributed in an amount which, together with all dividends declared or distributed by the company during the preceding twelve months, exceeds 10% of the company's outstanding capital shares, unless, after deducting such dividends, it has a surplus at least equal to 50% of its statutory reinsurance reserve or a surplus at least equal to $250,000, whichever is greater. During 1997, Capital Title paid a dividend in the amount of $1.1 million to its immediate parent, KRE. As of December 31, 1997, Capital Title's maximum amount payable as a dividend during 1998 is approximately $1.3 million. In January 1994, the Corporation formed and capitalized, through the purchase of common shares, Capital Re LLC. Capital Re LLC exists solely for the purpose of issuing preferred and common shares and lending the proceeds of such issuance to the Corporation to fund its business operations. In January 1994, Capital Re LLC issued $75.0 million of company obligated mandatorily redeemable preferred securities, the proceeds of which were loaned to the Corporation. The Corporation has, among other undertakings, unconditionally guaranteed all legally declared and unpaid dividends of Capital Re LLC. The company obligated mandatorily redeemable preferred securities were issued at $25 par value per share and pay monthly dividends at a rate of 7.65% per annum. Also in January 1994, Capital Reinsurance and Capital Credit invested an aggregate of $120.0 million to capitalize Capital Mortgage. Of the total original contribution of $120.0 million, Capital Reinsurance invested $94.8 million and Capital Credit invested $25.2 million. On February 12, 1996, the Corporation completed a public offering of approximately 3.5 million shares of common stock. Of the 3.5 million shares, an institutional shareholder sold 2.6 million shares and the Corporation sold 853,120 shares in the public offering generating net proceeds to the Corporation of approximately $25.9 million of which $21.5 million was used to complete the $25 million capitalization of Capital Title. The remaining $4.4 million was used for Corporation expenses associated with the public offering and general corporate purposes. The Corporation received no proceeds from the institutional shareholder's sale of shares. In June 1997, Capital Reinsurance invested approximately $10.9 million in CGA Group, Ltd. ("CGA"). CGA was formed to provide financial guaranty insurance of structured securities, including commercial real estate and asset backed transactions. Capital Reinsurance also has a commitment to invest an additional $7.5 million in CGA to the extent that such investment would be necessary in order for CGA's operating subsidiary, Commercial Guaranty Assurance, Ltd, to maintain a triple-A rating from Duff & Phelps. Also, Capital Reinsurance invested $0.1 million in St. George Holdings Ltd. ("St. George"). Through its operating subsidiary, St. George Investments Ltd., St. George will purchase securities to be held to maturity, selectively resold, or repackaged with CGA insurance and then resold. In December 1997, the Corporation's Board of Directors authorized an increase of the quarterly common stock dividend rate to $0.04 per share, or $0.16 annually. For the six months ended June 30, 1998, common dividends were declared and paid in the amount of $2.6 million or $0.08 per share. Cash flows from operations for the six months ended June 30, 1998 and 1997, consisting of reinsurance premiums collected net of expenses, investment income and income taxes, were $69.4 million and $53.3 million, respectively. The Corporation believes that current levels of cash flow from operations provide the Corporation with sufficient liquidity to meet its operating needs. The Corporation's non-operating cash outflows are primarily dedicated to (i) fixed-income investment activity, (ii) the payment of dividends on its common shares, (iii) payments of interest on long-term debt and (iv) the payment of its loan obligations to Capital Re LLC. At June 30, 1998, cash and investments approximated $1.10 billion, an increase of $70.0 million, or 6.8%, from $1.03 billion at December 31, 1997. In managing its investment portfolio, the Corporation places a high priority on quality and liquidity. As of June 30, 1998, the entire investment portfolio was invested in highly rated fixed income securities. At June 30, 1998, approximately $185.0 million, or 16.8%, of the Corporation's investment portfolio was comprised of mortgage-backed securities ("MBS"). Of the MBS portfolio, approximately $160.6 million, or 86.8%, is backed by agencies or entities sponsored by the U.S. government as to the full amount of principal and interest. As of June 30, 1998, the entire MBS portfolio was invested in triple A rated securities. Prepayment risk is an inherent risk of holding MBS. However, the degree of prepayment risk is particular to the type of MBS held. The Corporation limits its exposure to prepayments by purchasing less volatile types of MBS. As of June 30, 1998, $3.7 million, or approximately 2.0%, of the MBS portfolio was invested in collateralized mortgage obligations ("CMOs") which are characterized as planned amortization class CMOs ("PACs"). PACs are securities whose cash flows are designed to remain constant over a variety of mortgage prepayment environments. Other classes in the CMO security are structured to accept the volatility of mortgage prepayment changes, thereby insulating the PAC class. Of the remaining MBS portfolio, $181.3 million, or 98.0%, was invested in mortgage-backed pass-throughs or sequential CMOs. Pass-throughs are securities in which the monthly cash flows of principal and interest (both scheduled and prepayments) generated by the underlying mortgages are distributed on a pro-rata basis to the holders of securities. A sequential MBS is structured to divide the CMO security into sequentially ordered classes. Receipt of principal payments within classes is contingent on the retirement of all previously paying classes. Generally, interest payments are made currently on all classes. While these securities are more sensitive to prepayment risk than PACs, they are not considered highly volatile securities. While the Corporation may consider investing in any tranche of a sequential MBS, the individual security's characteristics (duration, relative value, underlying collateral, etc.) along with aggregate portfolio risk management determine which tranche of sequential MBS will be purchased. At June 30, 1998, the Corporation had no securities such as interest only securities, principal only securities, or MBS purchased at a substantial premium to par that have the potential for loss of a significant portion of the original investment due to changes in the prepayment rate of the underlying loans supporting the security. On January 22, 1998, the Corporation extended its existing agreement with Deutsche Bank AG for the provision of a $25.0 million liquidity facility (the "DB Liquidity Facility") which is available for general corporate purposes. The DB Liquidity Facility was extended for one year and is scheduled to expire on January 22, 1999. Capital Reinsurance also renewed an agreement on January 27, 1998 with Deutsche Bank AG for a credit facility (the "DB Credit Facility") of up to $75.0 million specifically designed to provide rating agency qualified capital to further support Capital Reinsurance's claims-paying resources. This agreement expires January 27, 2005. The Corporation has not borrowed under either the DB Liquidity Facility or the DB Credit Facility. In addition, on August 20, 1996, the Corporation entered into a credit agreement with Chase Manhattan Bank for the provision of a $25.0 million credit facility (the "Chase Facility") which is available for general corporate purposes. Furthermore, on August 26, 1996, the Corporation utilized $16 million of the Chase Facility for purposes of paying subordinated notes which came due. Interest on the bank note issued under the Chase Facility is payable quarterly based upon the Corporation's chosen interest rate option under the terms of the Chase Facility. In November 1996, the Corporation utilized the remaining $9 million of the Chase Facility for purposes of acquiring RGB. The Corporation is addressing the Year 2000 issue. The Company has initiated a plan to review its internal computer systems. It also has initiated discussions with its significant clients and other entities to ensure that those parties have appropriate plans to correct Year 2000 issues where their systems interface with the Corporation's systems or otherwise impact its operations. While the Corporation believes its planning efforts are adequate to address its Year 2000 concerns, there can be no guarantee that the systems of other companies on which the Corporation's systems and operations rely will be converted on a timely basis. In conclusion, the Corporation does not expect that there will be any major Year 2000 impact to its computer systems, nor does it expect that the cost of the Year 2000 initiative will be material. PART II - OTHER INFORMATION ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the annual meeting of the Corporation's shareholders held on May 20, 1998, the nine nominees listed below were elected as directors of the Corporation to hold office until the 1999 annual meeting and until their successors shall have been elected and qualified. The number of votes cast for, against or withheld and the number of abstentions with respect to each such matters is set forth below, as are the number of broker non-votes, where applicable. Name Votes For Votes Withheld - ---- --------- -------------- Michael E. Satz 14,274,046 3,043 Harrison W. Conrad, Jr. 14,274,046 3,043 Richard L. Huber 14,274,046 3,043 Steven D. Kesler 14,273,826 3,263 Philip H. Robinson 14,273,846 3,243 Edwin L. Russell 14,273,826 3,263 Dan R. Skowronski 14,273,826 3,263 Barbara D. Stewart 14,274,046 3,043 Jeffrey F. Stuermer 14,274,046 3,043 ITEM 5 OTHER INFORMATION Information Regarding Shareholder Proposals at the 1999 Annual Meeting In order to present a proposal at the 1999 Annual Meeting of Stockholders, a Capital Re Stockholder must provide written notice of the proposal to the Company no later than March 6, 1999. The Company intends to use discretionary voting authority with respect to any matter that brought before the 1999 annual meeting of stockholders of which the Company has not received written notice by March 6, 1999. Capital Re Corporation 1325 Avenue of the Americas New York, NY 10019 Attn.: Alan S. Roseman Senior Vice President, General Counsel and Secretary ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (A) THE FOLLOWING IS ANNEXED AS AN EXHIBIT: EXHIBIT NUMBER DESCRIPTION ------ ----------- 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) (B) REPORTS ON FORM 8-K: NONE INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION PAGE 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) 23
CAPITAL RE CORPORATION AND SUBSIDIARIES EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) (Dollars in thousands except per share amounts) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- ------------------------- 1998 1997 1998 1997 ------------------------- ------------------------- EARNINGS PER COMMON SHARE (BASIC AND DILUTED) Net Income 20,187 16,106 39,981 33,244 Basic weighted average shares outstanding during the period 31,865 31,723 31,849 31,723 Potentially dilutive employee stock options 1,160 665 1,102 696 ------ ------ ------ ------ Diluted weighted average shares outstanding during the period 33,025 32,388 32,951 32,419 ====== ====== ====== ====== Basic earnings per common share $0.63 $0.51 $1.26 $1.05 ====== ====== ====== ====== Diluted earnings per common share $0.61 $0.50 $1.21 $1.03 ====== ====== ====== ======
SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. CAPITAL RE CORPORATION DATE: AUGUST 10, 1998 BY: /S/ DAVID A. BUZEN ------------------ DAVID A. BUZEN EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER DATE: AUGUST 10, 1998 BY: /S/ ALAN S. ROSEMAN ------------------- ALAN S. ROSEMAN SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY EX-27 2 FDS --
7 1,000 6-mos DEC-31-1997 APR-01-1998 JUN-30-1998 1,086,962 0 0 0 0 0 1,086,962 15,414 16,350 152,482 1,506,452 53,911 456,790 0 0 99,838 75,000 0 323 606,163 1,506,452 152,698 32,433 2,461 1,361 25,218 31,756 11,273 55,371 15,390 39,981 0 0 0 39,981 1.26 1.21 30,644 5,512 15,436 23 14,111 37,458 0 Not Applicable for mortgage guaranty and specialty reinsurer
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