<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 MARCH 31, 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)
<TABLE>
<CAPTION>
<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)
(312) 879-1900
(Registrant's telephone number, including area code)
</TABLE>
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 April 30, 1996.
<PAGE> 2
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<S> <C>
Part I. Financial Information (Unaudited):
Page
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 1996 and December 31, 1995 . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the Three Months Ended
March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements at March 31, 1996 . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
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<PAGE> 3
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------------- -----------------
<S> <C> <C>
ASSETS
Invested assets and cash:
Fixed maturities, at fair value (amortized cost: $201,953; $233,276) . . . . . $ 201,485 $ 235,718
Equity securities, at fair value (cost: $12,791; $27,124) . . . . . . . . . . 13,720 27,753
Short-term investments, at cost which approximates fair value . . . . . . . . 67,379 37,865
Other investments, at fair value . . . . . . . . . . . . . . . . . . . . . . . 3,275 3,219
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,089 3,001
--------------- ---------------
289,948 307,556
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . 28,570 27,057
Reinsurance receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,645 40,097
Intangible assets, net of amortization . . . . . . . . . . . . . . . . . . . . . 15,289 15,715
Excess cost over net assets acquired, net of amortization . . . . . . . . . . . . 68,016 68,443
Deferred income taxes, net of valuation allowance . . . . . . . . . . . . . . . . 27,030 29,293
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,985 26,607
--------------- ---------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 506,483 $ 514,768
=============== ===============
LIABILITIES
Reserves:
Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . $ 125,940 $ 126,061
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,385 76,781
--------------- ---------------
208,325 202,842
Reinsurance payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 701 773
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 25,000
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,115 28,849
--------------- ---------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,141 257,464
--------------- ---------------
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 March 31, 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) . . . . . . . . . 80,806 75,286
Unrealized gain on securities, net of deferred income taxes . . . . . . . . . . . 485 1,972
--------------- ---------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 261,342 257,304
--------------- ---------------
$ 506,483 $ 514,768
=============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 4
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Revenues:
Net earned premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,349 $ 24,496
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,034 5,093
Net investment gains (losses). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523 (54)
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4
----------- -----------
28,907 29,539
----------- -----------
Expenses:
Net losses and loss adjustment expenses. . . . . . . . . . . . . . . . . . . . . . . . 3,396 5,375
Net commissions, brokerage and other underwriting. . . . . . . . . . . . . . . . . . . 14,756 14,358
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506 1,373
Amortization of goodwill and intangibles. . . . . . . . . . . . . . . . . . . . . . . 713 925
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619 540
----------- ----------
19,990 22,571
----------- ----------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,917 6,968
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,397 2,731
----------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,520 $ 4,237
=========== ==========
Weighted average shares outstanding:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,906 15,394
=========== ==========
Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,907 15,620
=========== ==========
Earnings per share:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .35 $ .28
=========== ==========
Fully diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .35 $ .27
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.............................................................................. $ 5,520 $ 4,237
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization......................................................... 1,208 1,284
Accretion of bond discount, net....................................................... (231) (794)
Net investment (gains) losses......................................................... (523) 54
Changes in:
Reserve for unpaid losses and loss adjustment expenses................................ (121) 2,834
Reserve for unearned premiums......................................................... 5,604 4,257
Deferred income taxes, net............................................................ 3,064 2,592
Other assets and liabilities.......................................................... (6,736) (2,960)
--------- ---------
Net cash provided by operating activities................................................ 7,785 11,504
--------- ---------
INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases - fixed maturities.......................................................... (15,331) (3,685)
Sales - fixed maturities ............................................................. 30,984 6,078
Maturities - fixed maturities......................................................... 15,771 3,404
Purchases - equity securities......................................................... (190) --
Sales - equity securities............................................................. 15,367 1,243
Receivable for securities sold........................................................ (7,319) --
Securities held-to-maturity:
Purchases - fixed maturities.......................................................... -- (4,026)
Change in short-term investments........................................................ (29,514) (1,381)
Change in other investments............................................................. (56) 955
Capital expenditures, net............................................................... (414) (512)
--------- ---------
Net cash provided by investing activities................................................ 9,298 2,076
--------- ---------
FINANCING ACTIVITIES:
Principal payment on long-term debt.................................................... (16,000) (12,000)
Exercise of stock options.............................................................. 5 32
--------- ---------
Net cash used in financing activities..................................................... (15,995) (11,968)
--------- ---------
Increase in cash......................................................................... 1,088 1,612
Cash at beginning of period.............................................................. 3,001 4,131
--------- ---------
Cash at end of period.................................................................... $ 4,089 $ 5,743
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest............................................................................. $ 441 $ 1,404
Income taxes, net of refunds......................................................... $ 265 $ 51
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 6
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 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 . . . . . . . . . . . . . . $ 15,487 $ 207 $ (137) $ 15,557
Collateralized mortgage obligations . . . . . . 40,574 194 (708) 40,060
Mortgage pass-through securities . . . . . . . . 41,037 251 (96) 41,192
Debt securities of foreign governments . . . . . . 5 -- -- 5
Obligations of states and political subdivisions . 4,275 2 (102) 4,175
Non-agency collateralized mortgage obligations . . 41,915 267 (308) 41,874
Asset-backed securities:
Second mortgages/home equity loans . . . . . . . 42,212 392 (263) 42,341
Automobile loans . . . . . . . . . . . . . . . . 5,489 8 -- 5,497
Other underlying assets . . . . . . . . . . . . 10,959 43 (218) 10,784
------------- ----------- ------------ ------------
Total fixed maturities . . . . . . . . . . . . 201,953 1,364 (1,832) 201,485
Equity securities . . . . . . . . . . . . . . . . . 9,906 818 (98) 10,626
------------- ----------- ------------ ------------
Total available-for-sale securities . . . . . . $ 211,859 $ 2,182 $ (1,930) $ 212,111
============= =========== ============= ============
Equity trading securities . . . . . . . . . . . . . $ 2,885 $ 322 $ (113) $ 3,094
============= =========== ============ ============
</TABLE>
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<PAGE> 7
3.REINSURANCE
<TABLE>
The effect of reinsurance on premiums written and earned for the three months ended March 31, 1996 and 1995 was as
follows (dollars in thousands):
1996 1995
-------------------------- ---------------------------
Written Earned Written Earned
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Direct . . . . . . . . . . . . . . . . . . . . . $ 33,018 $ 28,059 $ 31,625 $ 27,966
Assumed . . . . . . . . . . . . . . . . . . . . 94 121 172 95
Ceded . . . . . . . . . . . . . . . . . . . . . (6,241) (4,831) (4,202) (3,565)
---------- ----------- ------------ -----------
Net premiums . . . . . . . . . . . . . . . . . . $ 26,871 $ 23,349 $ 27,595 $ 24,496
========== =========== ========== ===========
The effect of reinsurance on losses and loss adjustment expenses incurred for the three months ended March 31, 1996
and 1995 was as follows (dollars in thousands):
1996 1995
----------- -----------
Gross losses and loss adjustment expenses . . . . . . . . . . . $ 4,595 $ 6,921
Reinsurance recoveries . . . . . . . . . . . . . . . . . . . . . (1,199) (1,546)
---------- ----------
Net losses and loss adjustment expenses . . . . . . . . . . . . $ 3,396 $ 5,375
=========== ===========
</TABLE>
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<PAGE> 8
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARCH 31, 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 three months ended March
31, 1996 compared to the corresponding period in 1995.
The Company operates in the property and casualty insurance business through
its principal 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.
On February 29, 1996, the Company announced that it had signed an agreement
to sell United Capitol Holding Company ("UCHC") and its subsidiaries, United
Capitol, United Capitol Managers, Inc. and Fischer Underwriting Group,
Incorporated ("Fischer"), to a subsidiary of Frontier Insurance Group, Inc.
Estimated net proceeds to Capsure will be approximately $75 million, which
includes the purchase price for the capital stock of UCHC and the release of
United Capitol's excess statutory surplus on or before closing. The agreement
is subject to several conditions including approval by insurance regulatory
authorities. The transaction is expected to close in the second quarter of
1996. Short-term investments held at United Capitol are expected to increase
in contemplation of the closing.
Prior to closing, the Company must obtain a waiver from the lenders under the
Credit Facility (as herein defined), or otherwise amend the agreement to permit
the sale of United Capitol. The sale of United Capitol will liberate
approximately $75 million of Capsure's capital. Capsure is considering
alternative uses of this capital including funding of acquisitions, stock
repurchases, payment of stockholder dividends or some combination of the
foregoing.
RESULTS OF OPERATIONS
<TABLE>
The components of net income for each period are summarized as follows (dollars in thousands):
Three Months Ended
March 31,
--------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Underwriting income . . . . . . . . . . . . . . . . . . $ 5,197 $ 4,763
Net investment income . . . . . . . . . . . . . . . . . 5,034 5,093
Net investment gains (losses) . . . . . . . . . . . . . 523 (54)
Interest expense . . . . . . . . . . . . . . . . . . . . (506) (1,373)
Amortization of goodwill and intangibles . . . . . . . . (713) (925)
Other expenses, net . . . . . . . . . . . . . . . . . . (618) (536)
------------ ------------
Income before income taxes . . . . . . . . . . . . . . . 8,917 6,968
Income taxes . . . . . . . . . . . . . . . . . . . . . . 3,397 2,731
------------- -------------
Net income . . . . . . . . . . . . . . . . . . . . $ 5,520 $ 4,237
============= =============
</TABLE>
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<PAGE> 9
INSURANCE UNDERWRITING
<TABLE>
Underwriting results for the three months ended March 31, 1996 and 1995 are
summarized in the following table (dollars in thousands):
Surety and Fidelity Excess and Surplus Lines Consolidated
---------------------------- ------------------------- -------------
1996 1995 1996 1995 1996 1995
------------ ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gross written premiums . . $ 25,593 $ 25,415 $ 7,519 $ 6,382 $ 33,112 $ 31,797
============ =========== =========== =========== ============ ============
Net written premiums . . . $ 24,378 $ 24,311 $ 2,493 $ 3,284 $ 26,871 $ 27,595
============ =========== =========== =========== ============ ============
Net earned premiums . . . . $ 21,377 $ 20,688 $ 1,972 $ 3,808 $ 23,349 $ 24,496
------------ ----------- ----------- ----------- ------------ ------------
Net losses and loss adjustment 2,965 3,124 431 2,251 3,396 5,375
Underwriting expenses . . . 14,839 14,187 (83) 171 14,756 14,358
------------ ----------- ---------- ----------- ------------ ------------
Total losses and expenses . 17,804 17,311 348 2,422 18,152 19,733
------------ ----------- ----------- ----------- ------------ ------------
Underwriting income . . . . $ 3,573 $ 3,377 $ 1,624 $ 1,386 $ 5,197 $ 4,763
============ =========== =========== =========== ============ ============
Loss ratio . . . . . . . . 13.9% 15.1% 21.8% 59.1% 14.5% 22.0%
Expense ratio . . . . . . . 69.4 68.6 (4.2) 4.5 63.2 58.6
------------ ------------ ----------- ----------- ------------ ------------
Combined ratio . . . . . . 83.3% 83.7% 17.6% 63.6% 77.7% 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. 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 4.1%, or $1.3 million, for the three months
ended March 31, 1996. Surety and fidelity gross written premiums increased
$0.2 million, as strong growth in the contract surety and insurance agents' and
brokers' errors and omissions ("E&O") business was partially offset by reduced
miscellaneous surety bond premium volume. 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. United Capitol's
gross written premiums increased 17.8%, or $1.1 million, in 1996 due to
increased writings in the commercial property and primary casualty lines of
business, partially offset by a decrease in asbestos abatement writings.
Net earned premiums decreased 4.7%, or $1.1 million, for the three months
ended March 31, 1996. Surety and fidelity net earned premiums increased 3.3%,
or $0.7 million, in 1996 compared to 1995. United Capitol's net earned
premiums decreased 48.2%, or $1.8 million in 1996, reflecting decreased net
retentions in 1995 and 1996. The lower net retentions were 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 March 31, 1996
and 1995 were increased by $0.1 million and $0.5 million, respectively, for
contingent premiums recognized under its reinsurance agreements.
Underwriting income for the three months ended March 31, 1996 increased 9.1%,
or $0.4 million, as compared to the prior year quarter despite reduced net
earned premiums. The increase reflected favorable loss development in surety
and fidelity and excess and surplus lines and higher ceding commission income
at United Capitol, partially offset by increased underwriting expenses in
surety and fidelity operations. The consolidated combined ratio decreased to
77.7% in 1996 from 80.6% in 1995. The consolidated loss ratio decreased to
14.5% in 1996 from 22.0% in 1995. The surety and fidelity loss ratio decreased
to 13.9% in 1996 from 15.1% in 1995, primarily due to favorable development of
prior years' loss reserves. United Capitol's loss ratio decreased to 21.8% in
1996 from 59.1% in 1995, reflecting continued favorable
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<PAGE> 10
development of prior years' loss reserves. The effect of this favorable
development on the loss ratio was amplified in 1996 due to reduced net earned
premiums.
The consolidated expense ratio increased to 63.2% in 1996, compared to 58.6%
in 1995. The surety and fidelity expense ratio increased to 69.4% in 1996 from
68.6% in 1995, reflecting the effects of expansion of the contract surety and
insurance agents' and brokers' E&O businesses and costs associated with ongoing
reengineering and automation efforts in the surety and fidelity operations.
United Capitol's expense ratio decreased significantly to (4.2)% in 1996
compared to 4.5% in 1995. The expense ratios in both periods were favorably
affected by the recognition of contingent commission income. First quarter
1996 was further impacted by higher ceding commission income on current
business, reflective of lower net premium retentions.
INVESTMENT INCOME
Net investment income for the three months ended March 31, 1996 and 1995 was
$5.0 million and $5.1 million, respectively. The average pretax yields of the
portfolio for the three months ended March 31, 1996 and 1995 were 6.8% 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.
ANALYSIS OF OTHER OPERATIONS
Net investment gains (losses) were $0.5 million and $(0.1) million for the
three months ended March 31, 1996 and 1995, respectively. Net investment gains
on securities held at the parent company level were negligible in 1996 compared
to $0.4 million in 1995. Net investment gains (losses) of $0.5 million in 1996
and $(0.5) million in 1995 were recognized at the insurance operations. The
net investment losses from insurance operations in 1995 principally related to
a writedown to estimated fair value for a single security for which an other
than temporary decline in value occurred.
Amortization expense was $0.7 million for the three months ended March 31,
1996 and $0.9 million in 1995. Amortization expense in 1996 and 1995 included
$0.3 million of amortization of intangible assets 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 held for sale. 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 substantially over 40 years. Other intangible assets are amortized
over periods ranging from three to 20 years.
Interest expense was $0.5 million and $1.4 million for the three months ended
March 31, 1996 and 1995, respectively. The Company's average debt outstanding
for the three months ended March 31, 1996 was approximately $20.1 million
compared to $68.1 million in 1995. The weighted average interest rates on
outstanding balances were 6.3% and 7.1% for the three months ended March 31,
1996 and 1995, respectively.
INCOME TAXES
Income taxes were $3.4 million and $2.7 million for the three months ended
March 31, 1996 and 1995, respectively. The effective income tax rates were
38.1% and 39.2%, respectively. The decrease in the 1996 effective tax rate was
principally attributable to a decreased level of nondeductible goodwill
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<PAGE> 11
amortization. The Company's income tax expense does not approximate actual
taxes paid, primarily due to the utilization of the Company's NOLs. Actual
income taxes paid were $0.3 million and $0.1 million for the three month
periods ended March 31, 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's insurance subsidiaries are highly liquid. The insurance
operations derive liquidity from net premium collections, reinsurance
recoveries and investment earnings and use these funds to pay claims and
operating expenses. The operations of an insurance company generally result in
cash being collected from customers in the form of premiums in advance of cash
outlays for claims. Each insurance company invests its collected premiums,
generating investment income, until such time cash is needed to pay claims and
associated expenses.
The Company believes total invested assets, including cash and short-term
investments, are sufficient in the aggregate and have suitably scheduled
maturities to satisfy all policy claims and other operating liabilities,
including anticipated income tax sharing payments of its insurance operations.
Management believes the duration of each insurance subsidiary's portfolio is
properly matched with the expected duration of its liabilities.
Cash flow at the parent company level is derived principally from dividend
and tax sharing payments from its insurance subsidiaries. The principal
obligations at the parent company level are to service debt and pay operating
expenses.
The Company's consolidated net cash flow provided by operating activities was
$7.8 million and $11.5 million for the three months ended March 31, 1996 and
1995, respectively. Consolidated operating cash flow (pretax income excluding
net investment gains (losses) and amortization of goodwill and intangibles) for
the three months ended March 31, 1996, was $9.1 million as compared to $7.9
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"). Total borrowings available under the Credit Facility were reduced
to $122.5 million at March 31, 1996. 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
$87 million and borrowings of $28 million for the acquisition of Universal
Surety have occurred since then. The remaining availability under the Credit
Facility of $113.5 million at March 31, 1996 may be used to finance future
acquisitions and for general corporate purposes.
Principal and interest payments required under the Credit Facility are funded
principally by dividend and intercompany tax sharing payments received from
Capsure's insurance subsidiaries. In the three months ended March 31, 1996 and
1995, Capsure received $7.6 million (including $7.5 million of dividends
requiring prior approval from state regulatory authorities) and $10.3 million
(including $3.5 million of dividends requiring prior approval from state
regulatory authorities), respectively, in dividends from its insurance
subsidiaries. Capsure received tax sharing payments from its subsidiaries of
$6.6 million and $0.5 million in the three months ended March 31, 1996 and
1995, respectively.
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 March
31, 1996, no shares have been repurchased under this plan.
-11-
<PAGE> 12
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
<TABLE>
<S> <C>
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
January 16, 1996 - United Capitol expected reduction in loss reserves.
March 4, 1996 - Sale of United Capitol to Frontier Insurance.
</TABLE>
-12-
<PAGE> 13
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: May 10 , 1996
---------------------------------
-13-
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 201,485
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 13,720
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 285,859
<CASH> 4,089
<RECOVER-REINSURE> 40,645
<DEFERRED-ACQUISITION> 28,570
<TOTAL-ASSETS> 506,483
<POLICY-LOSSES> 125,940
<UNEARNED-PREMIUMS> 82,385
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 9,000
0
0
<COMMON> 770
<OTHER-SE> 260,572
<TOTAL-LIABILITY-AND-EQUITY> 506,483
23,349
<INVESTMENT-INCOME> 5,034
<INVESTMENT-GAINS> 523
<OTHER-INCOME> 1
<BENEFITS> 3,396
<UNDERWRITING-AMORTIZATION> 8,349
<UNDERWRITING-OTHER> 6,407
<INCOME-PRETAX> 8,917
<INCOME-TAX> 3,397
<INCOME-CONTINUING> 5,520
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,520
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
