<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 JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-3565
CAPSURE HOLDINGS CORP.
(Exact name of Registrant as specified in its Charter)
DELAWARE 34-1010356
(State or other jurisdiction of (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:
15,409,123 shares of Common Stock, $.05 par value as of July 31, 1996.
<PAGE> 2
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C>
Page
----
Part I. Financial Information (Unaudited):
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 1996 and December 31, 1995 . . . . 3
Consolidated Statements of Income for the Periods Ended
June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements at June 30, 1996 . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . 8
Part II. Other Information:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in the Rights of the Company's Security Holders . . . . 13
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 13
</TABLE>
- 2 -
<PAGE> 3
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
--------------- ---------------
<S> <C> <C>
ASSETS
Invested assets and cash:
Fixed maturities, at fair value (amortized cost: $140,408; $233,276). . . . . $ 140,003 $ 235,718
Equity securities, at fair value (cost: $9,926; $27,124). . . . . . . . . . . 9,690 27,753
Short-term investments, at cost which approximates fair value . . . . . . . . 94,973 37,865
Other investments, at fair value. . . . . . . . . . . . . . . . . . . . . . . 2,744 3,219
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,781 3,001
--------------- ---------------
249,191 307,556
Deferred policy acquisition costs. . . . . . . . . . . . . . . . . . . . . . . 28,535 27,057
Reinsurance receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,423 40,097
Intangible assets, net of amortization . . . . . . . . . . . . . . . . . . . . 14,921 15,715
Excess cost over net assets acquired, net of amortization. . . . . . . . . . . 62,785 68,443
Deferred income taxes, net of valuation allowance. . . . . . . . . . . . . . . 19,677 29,293
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,824 26,607
--------------- ---------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 403,356 $ 514,768
=============== ===============
LIABILITIES
Reserves:
Unpaid losses and loss adjustment expenses. . . . . . . . . . . . . . . . . . $ 41,945 $ 126,061
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,204 76,781
--------------- ---------------
113,149 202,842
Reinsurance payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 773
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 25,000
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,375 28,849
--------------- ---------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,524 257,464
--------------- ---------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 5,000,000 shares authorized;
none issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock, par value $.05 per share, 25,000,000 shares authorized;
15,409,123 shares issued at June 30, 1996;
15,408,749 shares issued at December 31, 1995 . . . . . . . . . . . . . . . . 770 770
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 179,281 179,276
Retained earnings from August 1, 1986 (date of reorganization) . . . . . . . . 85,811 75,286
Unrealized gain (loss) on securities, net of deferred income taxes . . . . . . (30) 1,972
--------------- ---------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 265,832 257,304
--------------- ---------------
$ 403,356 $ 514,768
=============== ===============
</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 Six Months Ended
June 30, June 30,
------------------- -------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Net earned premiums . . . . . . . . . . . . . . . . . . . $ 23,184 $ 24,164 $ 46,533 $ 48,660
Net investment income . . . . . . . . . . . . . . . . . . 4,512 5,235 9,546 10,328
Net investment gains. . . . . . . . . . . . . . . . . . . 1,132 86 1,655 32
Other income. . . . . . . . . . . . . . . . . . . . . . . 1 1 2 5
--------- -------- -------- --------
28,829 29,486 57,736 59,025
--------- -------- -------- --------
Expenses:
Net losses and loss adjustment expenses . . . . . . . . . 2,801 4,236 6,197 9,611
Net commissions, brokerage and
other underwriting . . . . . . . . . . . . . . . . . . 15,699 15,233 30,455 29,591
Interest expense. . . . . . . . . . . . . . . . . . . . . 127 1,131 633 2,504
Write-off of unamortized deferred loan fees . . . . . . . 700 - 700 -
Amortization of goodwill and intangibles. . . . . . . . . 705 916 1,418 1,841
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 735 683 1,354 1,223
--------- -------- -------- --------
20,767 22,199 40,757 44,770
--------- -------- -------- --------
Income before income taxes . . . . . . . . . . . . . . . . 8,062 7,287 16,979 14,255
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 3,057 2,851 6,454 5,582
--------- -------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 5,005 $ 4,436 $ 10,525 $ 8,673
========= ======== ======== ========
Weighted average shares outstanding:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . 15,955 15,402 15,931 15,398
========= ======== ======== ========
Fully diluted . . . . . . . . . . . . . . . . . . . . . . 15,968 15,729 15,968 15,718
========= ======== ======== ========
Earnings per share:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . $ .31 $ .28 $ .66 $ .56
========= ======== ======== ========
Fully diluted . . . . . . . . . . . . . . . . . . . . . . $ .31 $ .28 $ .66 $ .55
========= ======== ======== ========
</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>
Six Months Ended
June 30,
-------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,525 $ 8,673
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 2,341 2,562
Accretion of bond discount, net . . . . . . . . . . . . . . . . . . . . . . . . (317) (1,541)
Net investment gains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,655) (32)
Changes in:
Reserve for unpaid losses and loss adjustment expenses. . . . . . . . . . . . . 707 4,302
Reserve for unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . 7,091 3,531
Deferred income taxes, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,896 4,551
Other assets and liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . (8,198) (5,823)
--------- -----------
Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . 16,390 16,223
--------- -----------
INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases - fixed maturities. . . . . . . . . . . . . . . . . . . . . . . . . . (51,725) (42,520)
Sales - fixed maturities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,463 35,012
Maturities - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . 27,507 22,196
Purchases - equity securities . . . . . . . . . . . . . . . . . . . . . . . . . (190) -
Sales - equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,813 3,593
Securities held-to-maturity:
Purchases - fixed maturities. . . . . . . . . . . . . . . . . . . . . . . . . . - (4,640)
Maturities - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . - 4,200
Change in short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . (74,702) (14,069)
Net proceeds from the sale of UCHC. . . . . . . . . . . . . . . . . . . . . . . . 28,024 -
Change in other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 475 850
Capital expenditures, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,280) (895)
--------- -----------
Net cash provided by investing activities. . . . . . . . . . . . . . . . . . . . . 7,385 3,727
--------- -----------
FINANCING ACTIVITIES:
Principal payments on long-term debt. . . . . . . . . . . . . . . . . . . . . . . (25,000) (20,000)
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 107
--------- -----------
Net cash used in financing activities. . . . . . . . . . . . . . . . . . . . . . . (24,995) (19,893)
--------- -----------
Increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,220) 57
Cash at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,001 4,131
--------- -----------
Cash at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,781 $ 4,188
========= ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 646 $ 2,542
Income taxes, net of refunds. . . . . . . . . . . . . . . . . . . . . . . . . . $ 765 $ 181
</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
JUNE 30, 1996
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These unaudited Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included in Capsure Holdings Corp.'s ("Capsure" or the "Company") 1995 Annual
Report on Form 10-K. The following Notes to the Consolidated Financial
Statements highlight significant changes to the Notes included in the 1995
Annual Report on Form 10-K and such interim disclosures as required by the
Securities and Exchange Commission. Certain financial information that is
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles but is not required for interim
reporting purposes has been condensed or omitted. The accompanying unaudited
Consolidated Financial Statements reflect, in the opinion of management, all
adjustments necessary for a fair presentation of the interim financial
statements. All such adjustments are of a normal and recurring nature. The
financial results for interim periods may not be indicative of financial
results for a full year. Certain reclassifications have been made to the 1995
Consolidated Financial Statements to conform with the presentation in the 1996
Consolidated Financial Statements.
2. INVESTMENTS
The cost and estimated fair value of investments at June 30, 1996 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 . . . . . . . . . . . . . . . . . . . $ 6,169 $ 54 $ (30) $ 6,193
Collateralized mortgage obligations . . . . . . . . . . . 27,996 260 (72) 28,184
Mortgage pass-through securities. . . . . . . . . . . . . 39,092 71 (280) 38,883
Obligations of states and political subdivisions . . . . . 3,887 11 (4) 3,894
Non-agency collateralized mortgage obligations . . . . . . 25,566 138 (162) 25,542
Asset-backed securities:
Second mortgages/home equity loans. . . . . . . . . . . . 30,025 60 (287) 29,798
Other underlying assets . . . . . . . . . . . . . . . . . 7,673 24 (188) 7,509
--------- ----------- ----------- ------------
Total fixed maturities . . . . . . . . . . . . . . . . . 140,408 618 (1,023) 140,003
Equity securities. . . . . . . . . . . . . . . . . . . . . 6,611 112 (215) 6,508
--------- ----------- ----------- ------------
Total available-for-sale securities. . . . . . . . . . . $ 147,019 $ 730 $ (1,238) $ 146,511
========= =========== =========== ============
Equity trading securities. . . . . . . . . . . . . . . . . $ 3,315 $ 157 $ (290) $ 3,182
========= =========== =========== ============
</TABLE>
- 6 -
<PAGE> 7
3. REINSURANCE
The effect of reinsurance on premiums written and earned for the six months
ended June 30, 1996 and 1995 was as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
--------------------------- -----------------------------
Written Earned Written Earned
----------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Direct . . . . . . . . . . . . . . . . $ 60,776 $ 55,422 $ 58,329 $ 55,806
Assumed. . . . . . . . . . . . . . . . 82 31 87 181
Ceded. . . . . . . . . . . . . . . . . (9,863) (8,920) (7,093) (7,327)
----------- ------------- ------------- ------------
Net premiums . . . . . . . . . . . . . $ 50,995 $ 46,533 $ 51,323 $ 48,660
=========== ============= ============= ============
</TABLE>
The effect of reinsurance on losses and loss adjustment expenses incurred for
the six months ended June 30, 1996 and 1995 was as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Gross losses and loss adjustment expenses . . . . . . . $ 9,430 $ 12,753
Reinsurance recoveries . . . . . . . . . . . . . . . . . (3,233) (3,142)
------------ -------------
Net losses and loss adjustment expenses . . . . . . . . $ 6,197 $ 9,611
============ =============
</TABLE>
4. SALE OF SUBSIDIARY
On May 22, 1996, the Company closed on the sale of United Capitol Holding
Company ("UCHC") and its subsidiaries, United Capitol Insurance Company
("United Capitol"), United Capitol Managers, Inc. and Fischer Underwriting
Group, Incorporated ("Fischer"), to a subsidiary of Frontier Insurance Group,
Inc. The operating results of UCHC and its subsidiaries are reflected in
Capsure's results through the closing date. Net proceeds to Capsure were
approximately $77 million, which included the purchase price for the capital
stock of UCHC and the release of United Capitol's excess statutory surplus at
closing.
- 7 -
<PAGE> 8
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 1996
GENERAL
The following is a discussion and analysis of the operating results,
financial condition, liquidity, and capital resources of Capsure Holdings Corp.
and subsidiaries ("Capsure" or the "Company") for the periods ended June 30,
1996 compared to the corresponding periods in 1995.
The Company, through its principal subsidiaries, Western Surety Company
("Western Surety"), acquired in August 1992, and Universal Surety of America
("Universal Surety"), acquired in September 1994, provides surety and fidelity
bonds in all 50 states through a combined network of 120,000 independent
agents.
On May 22, 1996, the Company closed on the sale of United Capitol Holding
Company ("UCHC") and its subsidiaries, United Capitol Insurance Company
("United Capitol"), United Capitol Managers, Inc. and Fischer Underwriting
Group, Incorporated ("Fischer"), to a subsidiary of Frontier Insurance Group,
Inc. The operating results of UCHC and its subsidiaries are reflected in
Capsure's results through the closing date. Net proceeds to Capsure were
approximately $77 million, which included the purchase price for the capital
stock of UCHC and the release of United Capitol's excess statutory surplus at
closing. Prior to closing, the Company amended the Credit Facility (as herein
defined) to permit the sale of UCHC.
As announced on May 28, 1996, Capsure has retained Smith Barney Inc. to
advise and assist the Board of Directors in an assessment of the strategic
options available to the Company to enhance long-term value for its
stockholders. Options being explored include recapitalization of Capsure by
means of the payment of a leveraged, special dividend to stockholders and a
possible sale or merger of Capsure or its subsidiaries. At this time, the
Board of Directors is still collecting and evaluating information. Board
action is anticipated in the fourth quarter of this year.
RESULTS OF OPERATIONS
The components of net income for each period are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Underwriting income. . . . . . . . . . . . . . $ 4,684 $ 4,695 $ 9,881 $ 9,458
Net investment income. . . . . . . . . . . . . 4,512 5,235 9,546 10,328
Net investment gains . . . . . . . . . . . . . 1,132 86 1,655 32
Interest expense . . . . . . . . . . . . . . . (127) (1,131) (633) (2,504)
Write-off of unamortized deferred loan fees. . (700) - (700) -
Amortization of goodwill and intangibles . . . (705) (916) (1,418) (1,841)
Other expenses, net. . . . . . . . . . . . . . (734) (682) (1,352) (1,218)
--------- -------- -------- --------
Income before income taxes . . . . . . . . . . 8,062 7,287 16,979 14,255
Income taxes . . . . . . . . . . . . . . . . . 3,057 2,851 6,454 5,582
--------- -------- -------- --------
Net income . . . . . . . . . . . . . . . . $ 5,005 $ 4,436 $ 10,525 $ 8,673
========= ========= ========= =========
</TABLE>
-8-
<PAGE> 9
Insurance Underwriting
Underwriting results for the three months ended June 30, 1996 and 1995 are
summarized in the following table (dollars in thousands):
<TABLE>
<CAPTION>
Surety and Fidelity Excess and Surplus Lines Consolidated
-------------------- ------------------------ ----------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross written premiums . . . . . . $ 24,201 $ 22,321 $ 3,545 $ 4,298 $ 27,746 $ 26,619
========= ========= ======== ======== ========= ==========
Net written premiums . . . . . . . $ 22,790 $ 21,454 $ 1,334 $ 2,274 $ 24,124 $ 23,728
========= ========= ======== ======== ========= ==========
Net earned premiums. . . . . . . . $ 21,926 $ 20,838 $ 1,258 $ 3,326 $ 23,184 $ 24,164
--------- --------- -------- -------- --------- ----------
Net losses and loss adjustment . . 1,622 3,056 1,179 1,180 2,801 4,236
Underwriting expenses. . . . . . . 15,484 14,194 215 1,039 15,699 15,233
--------- --------- -------- -------- --------- ----------
Total losses and expenses. . . . . 17,106 17,250 1,394 2,219 18,500 19,469
--------- --------- -------- -------- --------- ----------
Underwriting income. . . . . $ 4,820 $ 3,588 $ (136) $ 1,107 $ 4,684 $ 4,695
========= ========= ======== ======== ========= ==========
Loss ratio . . . . . . . . 7.4% 14.7% 93.7% 35.5% 12.1% 17.5%
Expense ratio. . . . . . . 70.6 68.1 17.3 31.2 67.7 63.1
--------- --------- -------- -------- --------- ----------
Combined ratio . . . . . . 78.0% 82.8% 111.0% 66.7% 79.8% 80.6%
========= ========= ======== ======== ========= ==========
</TABLE>
Surety and fidelity represents the combined results of Western Surety and
Universal Surety. Surety and fidelity are the principal lines of business of
Western Surety and Universal Surety. Excess and surplus lines represents the
results of United Capitol through May 22, 1996. United Capitol's principal
lines of business are other liability, product liability and commercial
property primarily written on an excess and surplus lines basis.
Gross written premiums increased 4.2%, or $1.1 million, for the three months
ended June 30, 1996. Surety and fidelity gross written premiums increased
8.4%, or $1.9 million, due to strong growth in the contract surety and
insurance agents' and brokers' errors and omissions ("E&O") businesses and
modest growth in miscellaneous surety bond premium volume. United Capitol's
gross written premiums decreased 17.5%, or $0.8 million, in 1996 as compared to
a full quarter in 1995.
Net earned premiums decreased 4.1%, or $1.0 million, for the three months
ended June 30, 1996. Surety and fidelity net earned premiums increased 5.2%,
or $1.1 million, in 1996 compared to 1995. United Capitol's net earned
premiums decreased 62.2%, or $2.1 million in 1996, reflecting decreased premium
volume and lower net retentions.
Underwriting income for the three months ended June 30, 1996 was essentially
flat as compared to the prior year quarter despite reduced net earned premiums.
At the surety and fidelity operations, improved loss experience was partially
offset by increased underwriting expenses. The consolidated combined ratio
decreased to 79.8% in 1996 from 80.6% in 1995. The consolidated loss ratio
decreased to 12.1% in 1996 from 17.5% in 1995. The surety and fidelity loss
ratio decreased to 7.4% in 1996 from 14.7% in 1995 due to favorable loss trends
on the current accident year and positive development of prior years' loss
reserves. United Capitol's loss ratio increased to 93.7% in 1996 from 35.5% in
1995 on reduced net earned premiums, reflecting increased incurred loss
activity in the second quarter of 1996.
The consolidated expense ratio increased to 67.7% in 1996, compared to 63.1%
in 1995. The surety and fidelity expense ratio increased to 70.6% in 1996 from
68.1% in 1995, reflecting the effects of expansion of the contract surety
business and costs associated with ongoing reengineering and automation efforts
in the surety and fidelity operations. United Capitol's expense ratio
decreased significantly to 17.3%
-9-
<PAGE> 10
in 1996 compared to 31.2% in 1995. The expense ratios in both periods were
favorably affected by the recognition of contingent commission income.
Underwriting results for the six months ended June 30, 1996 and 1995 are
summarized in the following table (dollars in thousands):
<TABLE>
<CAPTION>
Surety and Fidelity Excess and Surplus Lines Consolidated
-------------------- ------------------------ ---------------------
1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Gross written premiums . . . . . . $ 49,795 $ 47,736 $ 11,063 $ 10,680 $ 60,858 $ 58,416
========= ======== ========== =========== ========== =========
Net written premiums . . . . . . . $ 47,168 $ 45,765 $ 3,827 $ 5,558 $ 50,995 $ 51,323
========= ======== ========== =========== ========== =========
Net earned premiums. . . . . . . . $ 43,303 $ 41,526 $ 3,230 $ 7,134 $ 46,533 $ 48,660
--------- -------- ---------- ----------- ---------- ---------
Net losses and loss adjustment . . 4,587 6,180 1,610 3,431 6,197 9,611
Underwriting expenses. . . . . . . 30,322 28,381 133 1,210 30,455 29,591
--------- -------- ---------- ----------- ---------- ---------
Total losses and expenses. . . . . 34,909 34,561 1,743 4,641 36,652 39,202
--------- -------- ---------- ----------- ---------- ---------
Underwriting income. . . . . . . . $ 8,394 $ 6,965 $ 1,487 $ 2,493 $ 9,881 $ 9,458
========= ======== ========== =========== ========== =========
Loss ratio . . . . . . . . . . . . 10.6% 14.9% 49.8% 48.1% 13.3% 19.8%
Expense ratio. . . . . . . 70.0 68.3 4.2 17.0 65.5 60.8
--------- -------- ---------- ----------- ---------- ---------
Combined ratio . . . . . . 80.6% 83.2% 54.0% 65.1% 78.8% 80.6%
========= ======== ========== =========== ========== =========
</TABLE>
The following discussion highlights significant variances for the six months
ended June 30, 1996 as compared to the corresponding period in 1995. Unless
otherwise provided, explanations are consistent with those described in the
preceding quarterly discussion.
Gross written premiums increased 4.2%, or $2.4 million, for the six months
ended June 30, 1996. Surety and fidelity gross written premiums increased
4.3%, or $2.1 million, reflecting strong growth in the contract surety and
insurance agents' and brokers' E&O businesses. Public official bond premiums
were lower than in 1995, as expected, since writings for this product typically
increase every other year following the November elections. Net earned
premiums decreased 4.4%, or $2.1 million, for the six months ended June 30,
1996, reflecting a decrease of $3.9 million at United Capitol, partially offset
by an increase of $1.8 million in surety and fidelity operations. Underwriting
income for the six months ended June 30, 1996 increased 4.5%, or $0.4 million.
The consolidated loss ratio decreased to 13.3% in the first half of 1996 from
19.8% in the comparable period in 1995. The consolidated expense ratio
increased to 65.5% for the six months ended June 30, 1996 from 60.8% in the
comparable period in 1995.
INVESTMENT INCOME
Net investment income for the three months ended June 30, 1996 and 1995 was
$4.5 million and $5.2 million, respectively. The average pretax yields of the
portfolio for the three months ended June 30, 1996 and 1995 was 6.8% for both
years. Net investment income for the six months ended June 30, 1996 and 1995
was $9.5 million and $10.3 million, respectively. The average pretax yields of
the portfolio for the six months ended June 30, 1996 and 1995 were 6.9% and
6.7%, respectively.
Capsure's insurance companies invest funds provided by operations
predominantly in high-quality, short-duration, taxable fixed income securities.
The preservation of capital and utilization of the Company's available net
operating tax loss carryforwards ("NOLs") are Capsure's principal investment
objectives.
-10-
<PAGE> 11
ANALYSIS OF OTHER OPERATIONS
Net investment gains were $1.1 million and $0.1 million for the three months
ended June 30, 1996 and 1995, respectively. Net investment gains on securities
held at the parent company level were $0.8 million in the second quarter of
1996 compared to $0.3 million in the second quarter of 1995. Net investment
gains (losses) of $0.3 million in the second quarter of 1996 and ($0.2) million
in the second quarter of 1995 were recognized at the insurance operations. Net
investment gains were $1.7 million for the six months ended June 30, 1996, and
were negligible in the same period in 1995. Net investment gains on securities
held at the parent company level were $0.8 million in 1996 compared to $0.7
million in 1995. Net investment gains (losses) of $0.9 million in 1996 and
$(0.7) million in 1995 were recognized at the insurance operations.
Amortization expense was $0.7 million and $0.9 million for the three months
ended June 30, 1996 and 1995, respectively. Amortization expense in the
second quarter of 1996 and 1995 included $0.3 million of amortization of
intangible assets in both periods, and $0.4 million and $0.6 million,
respectively, of amortization of excess cost over net assets acquired related
to the acquisitions of Western Surety, Universal Surety, United Capitol and
Fischer. Amortization expense was not recorded in 1996 for the goodwill
associated with the United Capitol operations. Such goodwill was reduced at
December 31, 1995 to reflect the estimated net realizable value on the sale of
those operations. Excess cost over net assets acquired is amortized over 40
years. Other intangible assets are amortized over periods ranging from three
to 20 years. Amortization expense was $1.4 million for the six months ended
June 30, 1996 and $1.8 million in 1995.
Interest expense was $0.1 million and $1.1 million for the three months
ended June 30, 1996 and 1995, respectively. The Company's average debt
outstanding for the three months ended June 30, 1996 was approximately $3.4
million compared to $55.3 million in 1995. The weighted average interest rates
on outstanding balances were 6.2% and 7.1% for the three months ended June 30,
1996 and 1995, respectively. Interest expense was $0.6 million and $2.5
million for the six months ended June 30, 1996 and 1995, respectively.
The Company's average debt outstanding for the six months ended June 30,
1996 was approximately $11.7 million compared to $61.6 million in 1995.
The weighted average interest rates on outstanding balances were 6.3% and
7.1% for the six months ended June 30, 1996 and 1995, 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 $3.1 million and $2.9 million for the three months ended
June 30, 1996 and 1995, respectively. Income taxes were $6.5 million and $5.6
million for the six months ended June 30, 1996 and 1995, respectively. The
effective income tax rates for the six months ended June 30, 1996 and 1995 were
38.0% and 39.2%, respectively. The decrease in the 1996 effective tax rate was
principally attributable to a decreased level of nondeductible goodwill
amortization. The Company's income tax expense does not approximate actual
taxes paid, primarily due to the utilization of the Company's NOLs. Actual
taxes paid were $0.8 million and $0.2 million for the six months ended June 30,
1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's insurance subsidiaries are highly liquid. The insurance
operations derive liquidity from net premium collections, reinsurance
recoveries and investment earnings and use these funds to pay claims and
operating expenses. The operations of an insurance company generally result in
cash being collected from customers in the form of premiums in advance of cash
outlays for claims. Each insurance company invests its collected premiums,
generating investment income, until such time cash is needed to pay claims and
associated expenses.
-11-
<PAGE> 12
The Company believes total invested assets, including cash and short-term
investments, are sufficient in the aggregate and have suitably scheduled
maturities to satisfy all policy claims and other operating liabilities,
including anticipated income tax sharing payments of its insurance operations.
Management believes the duration of each insurance subsidiary's portfolio is
properly matched with the expected duration of its liabilities.
Cash flow at the parent company level is derived principally from dividend
and tax sharing payments from its insurance subsidiaries. The principal
obligations at the parent company level are to service debt and pay operating
expenses.
The Company's consolidated net cash flow provided by operating activities was
$16.4 million and $16.2 million for the six months ended June 30, 1996 and
1995, 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,
1996, was $17.4 million as compared to $16.1 million in 1995.
On March 29, 1994, the Company entered into a senior reducing revolving
credit agreement with a syndicate of banks for $135 million (the "Credit
Facility"). At closing, $68 million of funds drawn under the Credit Facility,
together with a portion of the Company's cash, were used to repay $84.6 million
of previously existing bank term debt. The Company borrowed $28 million for the
acquisition of Universal Surety in September 1994.
Concurrent with the sale of UCHC, Capsure and its lenders entered into an
agreement to amend and restate the Credit Facility. The amendment reduced the
commitment to $100 million from $135 million and permits an initial draw of up
to $70 million for a special dividend to stockholders. The remaining $30
million of availability may be used for additional dividends, stock
repurchases, acquisitions, and for general corporate purposes. Transaction
costs totaled approximately $0.5 million. The credit available under the
Credit Facility reduces semi-annually commencing March 31, 1997 and expires
March 31, 2003. Interest on borrowings under the facility varies based on
leverage. There were no outstanding balances under the Credit Facility as of
June 30, 1996.
Principal and interest payments required under the Credit Facility are funded
principally by dividend and income tax sharing payments received from Capsure's
insurance subsidiaries. In the six months ended June 30, 1996 and 1995,
Capsure received $60.0 million (including $59.9 million of dividends requiring
prior approval from state regulatory authorities) and $14.2 million (including
$7.0 million of dividends requiring prior approval from state regulatory
authorities), respectively, in dividends from its insurance subsidiaries.
Capsure received $10.2 million and $7.2 million in dividends from its surety
and fidelity subsidiaries for the six months ended June 30, 1996 and 1995,
respectively. Capsure received tax sharing payments from its subsidiaries of
$12.2 million and $5.8 million in the six months ended June 30, 1996 and 1995,
respectively, of which $5.4 million and $3.7 million were from its surety and
fidelity subsidiaries.
On May 24, 1995, the Board of Directors of the Company approved a stock
repurchase plan. The plan authorizes the Company to repurchase up to 500,000
shares of its common stock. These shares may be purchased from time to time in
the public market or through privately negotiated transactions. As of June 30,
1996, no shares have been repurchased under this plan.
-12-
<PAGE> 13
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:
At the Annual Meeting of Shareholders held on May 23, 1996,
shareholders voted to elect twelve directors to serve one-year terms.
Those elected were:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
----------------- ---------- -------
<S> <C> <C>
Rod F. Dammeyer 11,666,445 497,481
Herbert A. Denton 11,666,748 497,178
Bradbury Dyer III 11,666,748 497,178
Talton R. Embry 11,653,990 509,936
Bruce A. Esselborn 11,666,348 497,578
Dan L. Kirby 11,666,348 497,578
Joe P. Kirby 11,666,348 497,578
Donald W. Phillips 11,666,484 497,442
Sheli Z. Rosenberg 11,666,709 497,217
L.G. Schafran 11,666,709 497,217
Richard I. Weingarten 11,666,484 497,442
Samuel Zell 11,666,709 497,217
</TABLE>
In addition, shareholders voted to approve the Amended and Restated
1990 Stock Option Plan. Those votes were cast as follows:
Votes For: 10,443,383; Votes Against: 1,693,148; Abstentions: 27,395.
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:
June 3, 1996 -- Sale of United Capitol to a subsidiary of Frontier
Insurance Group, Inc. completed and Capsure retained Smith Barney
to assess strategic options.
- --------------------------------
"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.
-13-
<PAGE> 14
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 12 , 1996
-------------------------------------
-14-
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCUEDULE CONTAINS SUMMARY FINANCIAL INFORMATION ETRACTED 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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 140,003
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 9,690
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 247,410
<CASH> 1,781
<RECOVER-REINSURE> 7,423
<DEFERRED-ACQUISITION> 28,535
<TOTAL-ASSETS> 403,356
<POLICY-LOSSES> 41,945
<UNEARNED-PREMIUMS> 71,204
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 770
0
0
<OTHER-SE> 265,062
<TOTAL-LIABILITY-AND-EQUITY> 403,356
46,533
<INVESTMENT-INCOME> 9,546
<INVESTMENT-GAINS> 1,655
<OTHER-INCOME> 2
<BENEFITS> 6,197
<UNDERWRITING-AMORTIZATION> 17,903
<UNDERWRITING-OTHER> 12,552
<INCOME-PRETAX> 16,979
<INCOME-TAX> 6,454
<INCOME-CONTINUING> 10,525
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,525
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
