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