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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
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COMMISSION FILE NUMBER: 1-5429
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RE CAPITAL CORPORATION
<TABLE>
<S> <C>
DELAWARE 13-3351768
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
TWO STAMFORD PLAZA,
STAMFORD, CONNECTICUT 06904-2148
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER: (203) 977-6100
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Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<S> <C>
Common Stock, $.10 Par Value
5 1/2% Convertible Debentures Due August 1, 2000
</TABLE>
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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 twelve 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 .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock of the Company held by
nonaffiliates of the Company was $71,001,880 on February 10, 1995 (based on the
last reported sale price of the Common Stock of the Company on the NASDAQ
National Market System on February 10, 1995).
The number of shares of the Company's Common Stock, $.10 par value (being
the only class of common stock of the Company), outstanding on February 10, 1995
was 7,052,799 shares (including 126,600 restricted shares).
Portions of the definitive proxy statement for the Company's 1995 Annual
Meeting of Shareholders and of the special proxy statement for its Special
Meeting of Stockholders are incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
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PAGE
ITEM NUMBER
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<C> <S> <C>
PART I
1. Business..................................................................... 1
2. Properties................................................................... 17
3. Legal Proceedings............................................................ 17
4. Submission of Matters to a Vote of Security Holders.......................... 17
PART II
5. Market for Company's Common Stock and Related Stockholder Matters............ 18
6. Selected Financial Data...................................................... 19
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 19
8. Financial Statements and Supplementary Data.................................. 26
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................... 26
PART III
10. Directors and Executive Officers............................................. 26
11. Executive Compensation....................................................... 26
12. Security Ownership of Certain Beneficial Owners and Management............... 26
13. Certain Relationships and Related Transactions............................... 26
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 26
</TABLE>
<PAGE> 4
PART I
ITEM 1. BUSINESS.
GENERAL. Re Capital Corporation (the "Company") was incorporated in New
Jersey in 1950. On August 10, 1989, the Company changed its state of
incorporation to Delaware by merging into a wholly-owned Delaware subsidiary
which had been incorporated in 1986. The Company, headquartered in Stamford,
Connecticut, engages principally in underwriting domestic property and casualty
reinsurance through its wholly-owned subsidiary, Re Capital Reinsurance
Corporation ("Re Cap"). Re Cap was incorporated in New Jersey in August 1986 and
commenced underwriting activities in October 1986. Re Cap writes only treaty
reinsurance and emphasizes working layer excess of loss and proportional
treaties. As a working layer reinsurer, Re Cap's loss experience is determined
more by loss frequency than by loss severity. Re Cap functions principally as a
lead reinsurer. As a lead reinsurer, Re Cap generally conducts underwriting and
claims audits of its reinsureds and negotiates the price, terms and conditions
of the reinsurance treaties it underwrites. Re Cap's business is generated
exclusively through reinsurance intermediaries.
MERGER AGREEMENT. On January 11, 1995, the Company entered into an
Agreement and Plan of Merger (the "Merger Agreement") with Zurich Reinsurance
Centre Holdings, Inc. ("ZRC") and ZRC Merger-Sub Corp., a wholly-owned
subsidiary of ZRC ("ZRC Merger-Sub").
The Merger Agreement provides that, at the effective time (the "Effective
Time") of the merger (the "Merger"), each share of the Company's common stock,
par value $.10 per share ("Common Stock"), outstanding immediately prior to the
Effective Time (which may include a certain number of restricted shares to be
determined) will, without any action on the part of the holder thereof, be
converted into the right to receive $18.50 in cash, without interest. ZRC will
assume all obligations under the Company's existing 5 1/2% Convertible
Debentures (the "Convertible Debentures") due August 1, 2000 ($69 million
outstanding aggregate principal amount as of January 11, 1995) that are not
converted into Common Stock prior to the closing of the Merger.
As more fully described in the Merger Agreement, upon the occurrence of
certain specified events, including the occurrence of certain Third Party
Business Combinations (as defined in the Merger Agreement), the Company will pay
ZRC a fee of $4,500,000 plus an amount equal to the costs and expenses incurred
by ZRC in connection with the Merger Agreement, not exceeding $1,000,000.
Pursuant to an Option and Voting Agreement, dated as of January 11, 1995
(the "Option and Voting Agreement"), between John Deere Insurance Group, Inc.
("Deere Insurance") and ZRC, Deere Insurance has (i) granted ZRC an option (the
"Option") to acquire under the circumstances described in the Option and Voting
Agreement, at $18.50 per share, its 3,087,598 shares of the Common Stock,
comprising approximately 43.8% of the outstanding shares of the Common Stock as
of February 10, 1995, and all future shares of Common Stock that Deere Insurance
may acquire (the "Deere Insurance Shares"), and (ii) agreed to vote the Deere
Insurance Shares in favor of the approval of the Merger and any other related
transactions or matters presented in connection with the Merger and against any
other proposal which provides for any merger, sale of assets or other Third
Party Business Combination, between the Company (or any subsidiary of the
Company) and any person or entity, or which is otherwise inconsistent with the
Merger or the Merger Agreement.
During the term of the Option and Voting Agreement (which term generally
will terminate on the earlier of the Effective Time and the date of termination
of the Merger Agreement), ZRC may exercise the Option, in whole, but not in
part, if (i) a Third Party Business Combination occurs or (ii) the Merger
Agreement is terminated and ZRC is entitled to payment of expenses and a fee
pursuant to applicable provisions of the Merger Agreement. If the Option is
exercised, the closing of the purchase would be subject to the receipt of all
necessary regulatory approvals. During the term of the Option and Voting
Agreement, Deere Insurance may not sell, transfer or otherwise dispose of the
Deere Insurance Shares. See "Relationship with Deere Insurance -- Control of the
Company."
The Merger Agreement contains various agreements on the part of the Company
that restrict its abilities to operate its business prior to the Effective Time.
If the Merger is consummated as planned, the board of
1
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directors of the Company will consist of the directors of ZRC Merger-Sub
immediately prior to the Effective Time.
The closing of the Merger is subject to approval by the Company's
stockholders, certain state insurance regulatory approvals and certain other
customary conditions and approvals. The description contained herein of the
Merger and related agreements is qualified in its entirety by reference to the
Merger Agreement, the Option and Voting Agreement and the Company's Form 8-K,
dated as of January 11, 1995 and filed on January 19, 1995.
INDUSTRY OVERVIEW
GENERAL. Reinsurance is a contractual arrangement in which an insurance
company, the reinsurer, agrees to indemnify another insurance company, the
cedant, against all or a portion of the insurance risks underwritten by the
cedant under one or more insurance policies. Reinsurance can provide a cedant
with several major benefits, including a reduction in net liability on
individual risks, catastrophe protection from large or multiple losses and
assistance in maintaining acceptable financial ratios. Reinsurance also provides
a cedant with additional underwriting capacity by permitting it to accept larger
risks and write more business than would be possible without concomitant
increases in capital and surplus. The reinsurance transaction can be negotiated
directly between the cedant and reinsurer or through a reinsurance intermediary.
In general, casualty insurance protects the insured against financial loss
arising out of its obligation to others for loss or damage to persons or
property. Property insurance protects the insured against financial loss arising
out of the loss of property or its use caused by an insured peril. Property and
casualty reinsurance protects the cedant against loss to the extent of the
reinsurance coverage provided. Property reinsurance involves a high degree of
volatility but losses generally are reported within a relatively short time
period after the event. A greater degree of unpredictability is associated with
casualty risks because there tends to be a greater lag in the reporting and
payment of casualty claims, due to the nature of the risks and the greater
potential for litigation.
TYPES OF REINSURANCE
TREATY AND FACULTATIVE REINSURANCE. There are two basic types of
reinsurance agreements: treaty contracts and facultative certificates. A treaty
is an agreement, usually renewable on an annual basis, between a cedant and a
reinsurer under which the cedant is required to cede and the reinsurer is
required to assume a specified portion of a type or category of risks insured by
the cedant under designated types of policies issued during the term of the
treaty contract. Under a facultative certificate, the cedant cedes and the
reinsurer assumes all or part of the risks insured under a single primary
insurance policy. Facultative reinsurance is negotiated separately for each
insurance policy that is reinsured. Facultative reinsurance typically is
purchased by cedants for individual risks not covered by their reinsurance
treaties, for amounts in excess of limits on risks covered by their reinsurance
treaties and for unusual risks. Because of the transactional nature of the
business and the greater risk generally involved, potential margins on
facultative business are often higher than on treaty business. However, the
reinsurer's losses also may be higher for facultative business because the
reinsurer often assumes a higher potential liability and because the risks
reinsured are often more volatile. Underwriting expenses, and in particular
personnel costs, are higher on facultative business because each risk is
individually underwritten and administered.
PRO RATA AND EXCESS OF LOSS REINSURANCE. Both treaty and facultative
reinsurance can be written on either a pro rata (also known as quota share or
proportional) basis or an excess of loss basis. In reinsurance written on a pro
rata basis, the reinsurer, in return for a predetermined portion or share of the
insurance premium charged by the cedant, indemnifies the cedant against a
predetermined portion of the losses and loss adjustment expenses ("LAE") of the
cedant under the covered insurance policy or policies. In the case of
reinsurance written on an excess of loss basis, the reinsurer indemnifies the
cedant against all or a specified portion of losses and LAE on underlying
insurance policies in excess of a specified dollar amount, known as the cedant's
retention or attachment point, subject to a negotiated reinsurance limit.
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Excess of loss reinsurance often is written in layers. One or a group of
reinsurers accepts the risk just above the cedant's retention up to a specified
amount, at which point another reinsurer or a group of reinsurers accepts the
excess liability or such liability reverts to the cedant. The reinsurer taking
on the risk just above the cedant's retention layer is said to write low layer
or working layer excess of loss reinsurance. A loss that reaches just beyond the
cedant's retention layer will create a loss for the working layer reinsurer, but
not for the reinsurers on the higher layers. Losses incurred in working layer
reinsurance tend to be more predictable than those in higher layers due to their
greater historical frequency. Similarly, premiums for working layer reinsurance
tend to be greater than those for higher excess layers due to this greater loss
frequency.
REINSURANCE UNDERWRITING
GENERAL. Re Cap provides treaty reinsurance principally to insurers of
commercial and personal lines of casualty insurance. In addition, Re Cap
reinsures a limited amount of personal and commercial lines of property
insurance. Re Cap generally does not reinsure the following classes: fidelity,
surety, mortgage guaranty and aggregate loss ratio covers. Re Cap writes
reinsurance through a variety of reinsurance intermediaries representing a
diversity of insurers. Re Cap does not conduct business directly with insurers.
Re Cap also acts as underwriter and claims manager to Deere Insurance. Re
Cap acts on Deere Insurance's behalf and in Deere Insurance's name in
underwriting and servicing various lines of treaty reinsurance business. See
"Relationship with Deere Insurance -- Services Agreements with Deere Insurance."
Re Cap operates primarily as a lead reinsurer of brokered working layer
excess of loss and proportional property and casualty treaty reinsurance. As a
lead reinsurer, Re Cap generally is able to negotiate the pricing, terms and
conditions of the treaties it underwrites. As a working layer reinsurer, Re Cap
writes proportional treaties structured to respond to the "first dollar" of loss
and excess of loss reinsurance treaties with relatively low attachment points
and relatively low limits of liability. In general, the working layer is
"pierced" more frequently than layers which have higher attachment points. This
greater loss frequency is offset by the greater premiums that characterize
working layer reinsurance. In addition, loss severity generally is more
predictable for the working layer than for the higher layers of reinsurance
because of the relatively low level of coverage provided. Re Cap's ability to
derive an underwriting profit from its working layer business depends primarily
on its ability to estimate loss frequency and to a lesser extent on its ability
to estimate loss severity.
Re Cap's casualty treaties are derived largely from insurers concentrating
on small to medium commercial liability accounts and on insurers specializing in
transportation risks. Additionally, Re Cap reinsures professional liability
programs, generally on a claims-made policy form. Reinsurance treaties for such
programs are structured with relatively low limits of liability, and most are
written on a working layer basis. In general, Re Cap seeks to reinsure programs
and lines of casualty insurance in which it believes past experience permits a
reasonably accurate estimation of premium adequacy.
Re Cap's gross written premiums are composed of greater amounts of casualty
business than of property writings. Due to the relatively low per occurrence
limits to which it restricts itself, Re Cap does not now purchase casualty
retrocessions except for the quota share participation of Deere Insurance (see
"Relationship with Deere Insurance -- Services Agreements with Deere
Insurance"). Re Cap does purchase property retrocessions in addition to the
quota share participation of Deere Insurance. Therefore, casualty business
represents a greater percentage of Re Cap's net written premiums than of its
gross written premiums. The composition of Re Cap's book of business reflects
existing market conditions, including the adequacy of reinsurance and insurance
pricing for various classes of business, the availability of retrocessions and
other factors that vary over time.
BUSINESS MIX. Re Cap is, and has been since its formation, exclusively a
treaty reinsurer with no involvement in facultative reinsurance. Re Cap wrote an
aggregate of 133 treaties in 1994 compared with 132 and 125 in 1993 and 1992,
respectively. Re Cap's net premiums written for its principal lines of business
in aggregate dollars and as percentages of the total of all lines are set forth
in the table below for the periods indicated.
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NET PREMIUMS WRITTEN BY LINE OF BUSINESS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1994 1993 1992
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AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Casualty:
Auto Liability........................ $ 52,265 39.5% $ 39,030 33.7% $ 44,685 36.8%
General Liability..................... 38,533 29.1% 36,280 31.3% 38,262 31.6%
Professional Liability................ 16,780 12.7% 19,293 16.7% 17,836 14.7%
Workers Compensation.................. 1,077 .8% 986 .8% 1,192 1.0%
Medical Malpractice................... 705 .5% 1,516 1.3% 1,363 1.1%
-------- ----- -------- ----- -------- -----
Total Casualty................ 109,360 82.6% 97,105 83.8% 103,338 85.2%
-------- ----- -------- ----- -------- -----
Property:
Auto Physical Damage.................. 13,450 10.2% 8,567 7.4% 3,966 3.3%
Commercial Per Risk................... 4,133 3.1% 2,235 1.9% 7,621 6.2%
Aviation, Marine and Other............ 2,269 1.7% 1,670 1.5% 48 --
Mechanical Breakdown.................. 1,609 1.2% 5,336 4.6% 5,531 4.6%
Catastrophe Covers.................... 1,600 1.2% 901 .8% 812 .7%
-------- ----- -------- ----- -------- -----
Total Property................ 23,061 17.4% 18,709 16.2% 17,978 14.8%
-------- ----- -------- ----- -------- -----
Total All Lines......................... $132,421 100.0% $115,814 100.0% $121,316 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Re Cap writes property and casualty treaties on both a pro rata and working
layer excess of loss basis. The distribution of net premiums written by type of
reinsurance in aggregate dollars and as a percentage of total net premiums
written is set forth in the table below for the periods indicated.
NET PREMIUMS WRITTEN BY TYPE OF REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1994 1993 1992
---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Casualty:
Pro Rata.............................. $ 84,416 63.8% $ 75,619 65.3% $ 85,265 70.3%
Excess of Loss........................ 24,944 18.8% 21,486 18.5% 18,073 14.9%
-------- ----- -------- ----- -------- -----
109,360 82.6% 97,105 83.8% 103,338 85.2%
Property:
Pro Rata.............................. 20,851 15.7% 17,449 15.1% 16,869 13.9%
Excess of Loss........................ 2,210 1.7% 1,260 1.1% 1,109 .9%
-------- ----- -------- ----- -------- -----
23,061 17.4% 18,709 16.2% 17,978 14.8%
Summary:
Pro Rata.............................. 105,267 79.5% 93,068 80.4% 102,134 84.2%
Excess of Loss........................ 27,154 20.5% 22,746 19.6% 19,182 15.8%
-------- ----- -------- ----- -------- -----
Total................................... $132,421 100.0% $115,814 100.0% $121,316 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Re Cap's three largest clients accounted for approximately 59.9% of 1994
gross written premiums. The Company's largest cedant in 1994 was Deere Insurance
which contributed $33,953,000 of gross written premium. See "Relationship with
Deere Insurance -- Reinsurance of Deere Insurance Member Companies."
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Gross written premiums from United States Security Insurance Company
("USSIC"), the Company's second largest cedant, totalled $25,586,000. USSIC
writes private passenger auto liability and physical damage business in the
state of Florida.
Re Cap obtained approximately 17.1% of its 1994 gross written premiums from
reinsurance of the Scottsdale Insurance Company and other member companies of
the Nationwide Group ("Scottsdale"). An additional 1.3% of Re Cap's 1994 gross
written premiums represented retrocessions of Deere Insurance with respect to
treaties on which Deere Insurance reinsured Scottsdale. The 18.4% of Re Cap's
1994 gross written premiums derived both directly and indirectly from Scottsdale
was obtained from 22 treaties, the largest of which represented approximately 6%
of Re Cap's 1994 gross written premiums.
Loss of all or a substantial portion of the business provided by Deere
Insurance, USSIC or Scottsdale could have a material adverse effect on Re Cap's
written premiums. If such a loss were to occur, however, the Company believes
that the number of treaties in force and the distribution of annual renewal
dates throughout the fiscal year would reduce the impact of such a loss. In
addition, the Company does not believe that the loss of these treaties would
result in a concurrent material decrease in the Company's earnings because the
invested assets held for these treaties would continue to earn investment income
until paid out over an extended loss payout period.
MARKETING. Re Cap obtains all of its business through intermediaries which
represent the cedant in negotiations for the purchase of reinsurance. The
process of effecting a brokered reinsurance placement typically begins when a
cedant enlists the aid of an intermediary in structuring a reinsurance program.
Often the intermediary will consult with one or more lead reinsurers as to the
pricing and contract terms of the reinsurance protection being sought. Once the
cedant has approved the terms quoted by the lead reinsurer, the intermediary
will offer participation to qualified reinsurers until the program is fully
subscribed to by reinsurers at terms agreed to by all.
By working through intermediaries to originate its business, the Company
need not maintain a substantial sales organization which, during periods of
reduced premium volume, would comprise a significant and non-productive part of
overhead. In addition, management believes that submissions from the
intermediary market are more numerous and diverse, including certain targeted
specialty coverages, than would be available through a salaried sales
organization and that the Company is able to exercise greater selectivity than
would be possible in dealing directly with cedants.
Re Cap pays commissions to intermediaries based on negotiated percentages
of the premium it writes. These commissions constitute part of Re Cap's total
acquisition costs and are included in its underwriting expenses. Direct writers
of reinsurance typically incur higher fixed costs that are included in its
underwriting expenses. Reinsurers using intermediaries can lower these costs
during a downturn by writing less business and incurring lower brokerage costs.
Intermediaries do not have the authority to bind Re Cap with respect to
reinsurance agreements nor does Re Cap commit in advance to accept any portion
of the business that intermediaries submit to it. Reinsurance business from any
cedant, whether new or renewal, is subject to acceptance by Re Cap.
In 1994, Aon Re, Inc. and Alexander Reinsurance Intermediaries, Inc.
accounted for 61% and 23%, respectively, of Re Cap's gross written premiums. Of
the 61% of Re Cap's 1994 gross written premiums accounted for by Aon Re, Inc.,
slightly more than one-third (24%) was derived from reinsurance of
transportation business underwritten by Deere Insurance. These two
intermediaries are among the ten largest intermediaries in the reinsurance
industry. Re Cap's concentration of business through a small number of sources
is consistent with the concentration of the property-casualty broker reinsurance
market, in which a majority of the business is written through the top ten
intermediaries. Loss of all or a substantial portion of the business provided by
either of these intermediaries could have a short-term material adverse effect
on the business and operations of Re Cap. The Company does not believe, however,
that the loss of such business would have a long-term material adverse effect
due to the Company's competitive position within the broker reinsurance market
and the availability of business from other intermediaries.
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UNDERWRITING. In evaluating treaty opportunities, Re Cap relies heavily on
an underwriting process that emphasizes close coordination of underwriting,
marketing, claims and accounting functions. As a lead reinsurer, Re Cap is able
to derive the majority of its volume from relatively few accounts, permitting
not only close review of each new treaty opportunity, but also ongoing
monitoring of existing accounts. A substantial amount of Re Cap's premium is
derived from reinsurance treaties that are customarily written with an annual
anniversary date that enables the lead reinsurers to engage in periodic review
and to renegotiate price, terms and conditions when necessary.
In its role as a lead reinsurer, Re Cap analyzes various aspects of a
prospective cedant's business, including, but not limited to, historical loss
and exposure data for the program involved, financial statements, rates, rating
plans, underwriting guides and business projections. A positive review of this
material generally is followed by a claims and underwriting audit conducted at
the prospective cedant's office. In addition to evaluating the integrity of the
prospective cedant's reserves and the quality of the program to be reinsured,
the audit assists in the assessment of the prospective cedant's management and
its business plan.
RELATIONSHIP WITH DEERE INSURANCE
Deere Insurance. Deere Insurance, a wholly-owned subsidiary of Deere &
Company, provides a broad range of property-casualty and life insurance products
throughout the United States through two divisions and six subsidiary companies.
The Deere Insurance property-casualty companies are licensed to transact
business in all 50 states, are currently rated "AA" (Excellent) in claims-paying
ability by Standard & Poor's Insurance Rating Services, "A+" (Superior) by A.M.
Best and, in 1994, had aggregate direct written premiums of approximately $362
million and surplus of $274 million.
Control of the Company. Deere Insurance owns approximately 43.8% of the
outstanding shares of Common Stock (27.9% assuming conversion in full of the
Convertible Debentures). Deere Insurance has filed an amendment, dated January
11, 1995, to its Schedule 13D stating that, pursuant to the Option and Voting
Agreement, Deere Insurance has (i) granted to ZRC the Option to acquire from
Deere Insurance under the circumstances described in the Option and Voting
Agreement all, but not less than all, of the Deere Insurance Shares at a
purchase price (the "Purchase Price") of $18.50 per share in cash, and (ii)
agreed to vote the Deere Insurance Shares in favor of the approval of the Merger
and any other related transactions or matters presented in connection with the
Merger and against any other proposal which provides for any merger, sale of
assets or other Third Party Business Combination, between the Company (or any
subsidiary of the Company) and any person or entity, or which is otherwise
inconsistent with the Merger or the Merger Agreement.
During the term of the Option and Voting Agreement (which term generally
will terminate on the earlier of the Effective Time and the date of termination
of the Merger Agreement), ZRC may exercise the Option, in whole, but not in
part, if (i) a Third Party Business Combination occurs or (ii) the Merger
Agreement is terminated and ZRC is entitled to payment of expenses and a fee
pursuant to applicable provisions of the Merger Agreement. If the Option is
exercised, the closing of the purchase would be subject to the receipt of all
necessary regulatory approvals. During the term of the Option and Voting
Agreement, Deere Insurance may not sell, transfer or otherwise dispose of the
Deere Insurance Shares.
The Option and Voting Agreement also provides that if, after purchasing the
Deere Insurance Shares pursuant to the Option, ZRC or any of its affiliates
receives any cash or non-cash consideration in respect of the Deere Insurance
Shares in connection with a Third Party Business Combination during the period
commencing on the date of the closing of the purchase under the Option and
ending on the first anniversary thereof, ZRC will promptly pay over to Deere
Insurance, as an addition to the Purchase Price, (A) the excess, if any, of the
value of such consideration over the aggregate Purchase Price paid for the Deere
Insurance Shares by ZRC less (B) the amount of any federal, state, local or
other tax paid or payable as a result of, or otherwise attributable to, the sale
or other disposition of the Deere Insurance Shares by ZRC.
The Option and Voting Agreement will terminate on the earlier of (a) the
Effective Time and (b) the date of termination of the Merger Agreement, unless
the Merger Agreement is terminated (i) by ZRC as a result of its conditions not
being satisfied or a material breach by the Company or (ii) by the Company after
a
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reasonable determination by the Board of Directors of the Company that a
Business Combination (as defined in the Merger Agreement) will result in a
Superior Proposal (as defined in the Merger Agreement), in which case the Option
and Voting Agreement will terminate 15 days after termination of the Merger
Agreement; provided, however, that if, during such 15-day period, ZRC delivers
notice of its exercise of the Option, the Option and Voting Agreement will
terminate six months after termination of the Merger Agreement.
In connection with receiving the approval of the Company's Board of
Directors to own more than 15% of the outstanding Common Stock, Deere Insurance
entered into an agreement with the Company in which it agreed to give the
Company a right of first refusal with regard to any proposed sale of any shares
of the Company's Common Stock owned by it, unless such sale is to an entity
acquiring more than 50% of the Company's Common Stock. In the Merger Agreement,
the Company waived these provisions as they relate to the possible exercise by
ZRC of its rights under the Option and Voting Agreement.
As the Company's largest shareholder, Deere Insurance may be in a position
to exert a significant influence on the Company through the election of
directors and otherwise and to affect corporate transactions, including the
blocking of business combinations of which it may not approve. Dennis E.
Hoffmann, Chairman of the Board of Directors of the Company since March 1991,
and its Chief Executive Officer from March 1991 to March 1992, is President of
Deere Insurance. Conor D. Reilly, Secretary of the Company since 1986, and a
partner in the law firm of Gibson, Dunn & Crutcher, counsel to the Company,
became a director of Deere Insurance in 1992. George G. D'Amato, Jr., a senior
partner in the law firm of D'Amato & Lynch, is a director of the Company and of
Deere Insurance. Conflicts of interest could arise with respect to transactions
involving Deere Insurance or its affiliates (other than the Company), on the one
hand, and the Company, on the other hand. Approval of any such transactions
would require the affirmative vote of the disinterested members of the Company's
Board of Directors. If ZRC exercises the Option under the circumstances
described in the Option and Voting Agreement, ZRC would similarly be in a
position to exert a significant influence on the Company. If the Option is
exercised, the closing of the purchase would be subject to the receipt of all
necessary regulatory approvals. Neither the Option and Voting Agreement nor the
Merger Agreement provides ZRC with any right to designate or elect directors of
the Company. However, if ZRC exercises the Option under the circumstances
described in the Option and Voting Agreement, ZRC would be in a position to
significantly influence the designation or election of directors of the Company.
Reinsurance of Deere Insurance Member Companies. Approximately 24% of Re
Cap's gross written premiums in 1994 resulted from reinsurance of long-haul
trucking and other transportation business underwritten by John Deere Insurance
Company, an Illinois corporation and a wholly owned subsidiary of Deere
Insurance ("JDIC"). Approximately 16% and 10% of Re Cap's gross written premiums
were derived from this source in 1993 and 1992, respectively, following the
entry of JDIC into the field of transportation insurance in the second half of
1991.
Services Agreements with Deere Insurance. As of May 1, 1987, Re Cap
entered into underwriting and claims management services agreements with JDIC.
Pursuant to such agreements, JDIC appointed Re Cap as its underwriter and claims
manager to act on its behalf and in its name in underwriting and servicing
various lines of treaty reinsurance business. Under the original terms of such
agreements, JDIC agreed to cede to Re Cap 92.5% of the casualty reinsurance
business and 52.725% of the property reinsurance business written by Re Cap in
its capacity as underwriter for JDIC. Effective January 1, 1988, the agreements
were amended to provide for a 92.5% cession to Re Cap of both property and
casualty business written on behalf of JDIC. Re Cap has also agreed to provide
JDIC with a quota share participation of 7.5% in other insurance business
written by Re Cap. The terms of the agreements as currently in place limit the
reinsurance premiums which may be written by Re Cap in its capacity as
underwriter for JDIC to no more than $50 million in gross written premium per
year. JDIC has informed the Company that it does not currently have any
comparable agreements with other reinsurers. These agreements may be terminated
by Re Cap and JDIC if, among other things, there is a material change in control
of either party.
Because Re Cap was not eligible for a rating from A.M. Best until 1992, and
because it is currently rated "A" (Excellent), the agreements with JDIC have
been of substantial value in permitting the Company to respond to opportunities
requiring a reinsurer rated "A+" by A.M. Best. During 1994, 15.9% of Re Cap's
gross
7
<PAGE> 11
written premium, or $22.8 million, represented business originated by the
Company but written by JDIC. This compares with 21% or $26.5 million,
respectively, for the year ended December 31, 1993.
In addition, Deere Insurance and Re Cap are parties to a Right of First
Acceptance Agreement, dated June 9, 1993, pursuant to which Deere Insurance
agreed to cause its subsidiaries involved in the business of writing property
and casualty insurance to offer to Re Cap, subject to certain exceptions, all
reinsurance placed by such subsidiaries relating to property and casualty
insurance. This agreement may be terminated by either party upon ten days'
written notice.
RESERVES. In many cases, significant amounts of time, ranging up to
several years, may elapse between the occurrence of a loss, the reporting of
such loss to the reinsurer and the reinsurer's payment of such loss. To
recognize liabilities for unpaid losses, Re Cap establishes reserves, which are
balance sheet liabilities representing estimates of amounts needed to pay known
claims, LAE and reserves for claims and LAE that are incurred but not reported
("IBNR"). Reserves are subject to the effects of trends in loss severity and
frequency. Thus, these estimates are reviewed on an ongoing basis and as
experience develops and new information becomes known, the liabilities are
adjusted as necessary. Such adjustments, if any, are reflected in operating
results.
Re Cap's actuarial department employs a computer-based model to estimate
IBNR by reinsurance contract. Reserves are estimated on the basis of individual
treaties, rather than classes of business, because loss development patterns
vary widely from treaty to treaty, even for similar lines and classes of
business. The principal inputs to the model are expected loss ratios and loss
reporting patterns. As part of its underwriting of a reinsurance treaty, Re Cap
develops estimates of expected loss ratios and reporting patterns by reference
to (i) the lines of business underlying the reinsurance treaty, (ii) Re Cap's
prior experience with similar lines of business and (iii) industry data. These
assumptions are reviewed on an ongoing basis and updated periodically. During Re
Cap's initial years of writing reinsurance, it relied primarily on industry data
in establishing the expected loss ratios and reporting patterns for its
actuarial model. As its business has matured, Re Cap increasingly has considered
its own experience in conjunction with the modeled results in establishing
reserves. In addition, Re Cap has retained an independent actuarial consulting
firm to perform an analysis of reserves and to provide general actuarial
consulting services to Re Cap.
The results of casualty lines of business recently have become less
predictable because of latent risks such as asbestos and other pollution
liability, whose effects may not be known for many years, and expanded concepts
of civil liability. Insurers and reinsurers have made and will continue to make
upward adjustments to loss reserves for asbestos and other pollution claims
under policies written prior to 1986, when the industry adopted policy changes
designed to exclude such claims. Re Cap did not begin underwriting activities
until November 1986 and as a result has no known material exposure to latent
environmental claims not contemplated or priced for in the underwriting process.
Since its inception, Re Cap has written treaties accounting for less than 0.1%
of its net written premiums reinsuring policies providing coverage for
environmental hazards. Each such treaty reinsures only claims-made coverage for
narrowly defined environmental hazards.
Re Cap establishes loss and LAE reserves for claims when it receives notice
of such claims. Re Cap's policy is to establish reserves for reported losses in
an amount equal to the greater of the reserve recommended by the cedant or by Re
Cap's Claims Department. In the case of excess of loss reinsurance, reserves are
established on a case-by-case basis using several factors, including the type of
risk involved, knowledge of the circumstances surrounding the claim, severity of
injury or damage, estimated ultimate exposure, experience of Re Cap with the
cedant, and underlying policy provisions. Re Cap conducts periodic claim audits
to determine the adequacy of recommended reserves.
8
<PAGE> 12
The following table represents an analysis of Re Cap's claims and claim
expenses liability, reconciling the beginning and ending liability balances, net
of reinsurance recoverable, for the fiscal years ended December 31, 1994, 1993,
and 1992.
RECONCILIATION OF LIABILITY FOR CLAIMS AND CLAIM EXPENSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Net liability for claims and claim expenses, at the
beginning of year........................................ $191,599 $172,666 $162,985
Provision for claims and claim expenses occurring in the
current year............................................. 94,547 87,165 90,684
Increase (Decrease) in estimated losses for claims
occurring in prior years:
Commutations.......................................... -- -- 2,505
All other business.................................... 248 (3,028) (870)
-------- -------- --------
Total increase (decrease).................................. 248 (3,028) 1,635
-------- -------- --------
Net incurred claims during the current year.............. 94,795 84,137 92,319
Payment for claims and claim expenses occurring during:
The current year...................................... 18,117 13,632 16,715*
Prior years:
Commutations........................................ -- -- 26,378
All other business.................................. 66,739 51,572 39,545
-------- -------- --------
84,856 65,204 82,638
-------- -------- --------
Net liability for claims and claim expenses, at end of
year..................................................... 201,538 191,599 172,666
Reinsurance recoverables on unpaid losses and LAE,
at end of year........................................... 8,859 9,039 12,088
-------- -------- --------
Gross liability for claims and claim expenses, at end of
year..................................................... $210,397 $200,638 $184,754
======== ======== ========
</TABLE>
- - - - ---------------
* Includes $5.3 million in loss payments related to Hurricanes Andrew and Iniki
and the Los Angeles riots.
9
<PAGE> 13
The following table presents the development of the Company's historical
balance sheet liabilities net of ceded reinsurance for the period December 31,
1986 through December 31, 1994. The top of the table shows the estimated
liabilities net of ceded reinsurance at the balance sheet date for each of the
indicated years. This reflects the estimated amounts of claims and claim
expenses for claims arising in that year and in all prior years that are unpaid
at the balance sheet date, including losses that had been incurred but not yet
reported to the Company. The upper portion of the table shows the cumulative
subsequently paid amounts as of successive years with respect to that reserve
liability. The lower portion of the table shows the reestimated amount of the
previously recorded reserve based on experience as of the end of each succeeding
year. The estimates change as more information becomes known about the frequency
and severity of claims for individual years. A redundancy (deficiency) exists
when the reestimated liability at each December 31 is less (greater) than the
prior liability estimate. The "Cumulative Redundancy (Deficiency)" depicted in
the table for any particular calendar year represents the aggregate change in
the initial estimates over all subsequent calendar years.
ANALYSIS OF NET CLAIMS AND CLAIM EXPENSES DEVELOPMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Liability for Unpaid Claims
and Claim Expenses............. $201,538 $191,599 $172,666 $162,985 $130,738 $101,958 $61,661 $17,535 $ 244
Cumulative Amount of Liability
Paid:
One Year Later................. 66,739 51,572 65,923 37,054 24,984 11,418 3,966 167
Two Years Later................ 97,916 95,653 64,955 41,770 20,160 6,556 210
Three Years Later.............. 124,444 79,553 51,415 26,506 8,458 421
Four Years Later............... 94,619 58,868 30,789 9,920 456
Five Years Later............... 66,478 33,129 10,740 456
Six Years Later................ 36,322 11,191 456
Seven Years Later.............. 12,006 456
Eight Years Later.............. 456
Net Liability Reestimated as of:
One Year Later................. 191,847 169,638 164,620 114,322 92,457 60,797 17,633 700
Two Years Later................ 171,640 163,027 114,881 79,323 51,209 16,745 574
Three Years Later.............. 164,725 113,678 77,995 40,667 13,881 491
Four Years Later............... 115,460 76,884 39,748 12,672 461
Five Years Later............... 76,869 39,974 12,715 457
Six Years Later................ 40,469 12,754 456
Seven Years Later.............. 12,967 456
Eight Years Later.............. 456
Cumulative Redundancy
(Deficiency)................... (248) 1,026 (1,740) 15,278 25,089 21,192 4,568 (212)
-------- -------- -------- -------- -------- ------- ------- -----
Cumulative Redundancy
(Deficiency) Resulting from
Commutations................... 0 0 (2,505) 16,675 9,058 1,086 0 0
-------- -------- -------- -------- -------- ------- ------- -----
Cumulative Redundancy
(Deficiency) as adjusted....... $ (248) $ 1,026 $ 765 $ (1,397) $ 16,031 $20,106 $ 4,568 $(212)
======== ======== ======== ======== ======== ======= ======= =====
</TABLE>
The following table presents the development of the Company's historical
gross balance sheet liabilities for the period December 31, 1986 through
December 31, 1994.
10
<PAGE> 14
ANALYSIS OF GROSS CLAIMS AND CLAIM EXPENSES DEVELOPMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- -------- -------- -------- -------- -------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Liability -- End
of Year................ $201,538 $191,599 $172,666 $162,985 $130,738 $101,958 $61,661 $17,535 $ 244
Reinsurance
Recoverable............ 8,859 9,039 12,088 10,412 10,398 7,902 3,302 528 --
-------- -------- -------- -------- -------- -------- ------- ------- -----
Gross Liability -- End of
Year................... 210,397 200,638 184,754 173,397 141,136 109,860 64,963 18,063 244
Gross Liability
Reestimated as of:
One Year Later......... 201,252 181,404 174,270 122,346 99,889 63,762 18,258 575
Two Years Later........ 183,702 172,317 122,761 85,009 53,788 17,334 575
Three Years Later...... 174,329 121,262 83,520 42,211 14,362 502
Four Years Later....... 123,332 81,947 41,427 12,824 461
Five Years Later....... 81,789 41,584 13,003 456
Six Years Later........ 42,000 13,079 456
Seven Years Later...... 13,272 456
Eight Years Later...... 456
Cumulative Redundancy
(Deficiency)........... $ (614) $ 1,052 $ (932) $ 17,804 $ 28,071 $22,963 $ 4,791 $(212)
======== ======== ======== ======== ======== ======= ======= =====
</TABLE>
In evaluating the information contained in the "Analysis of Net Claims and
Claim Expenses Development" table ("Net table"), it should be noted that each
amount includes the effects of all changes in amounts for prior periods. For
example, if a loss determined in 1990 to be $100,000 was first reserved in 1987
at $125,000, the $25,000 redundancy (original estimate minus actual loss) would
be included in the Cumulative Redundancy (Deficiency) for each of the years
1987-1990 shown above. This table does not present accident or policy year
development data. Conditions and trends that have affected the development of
liability in the past may not necessarily occur in the future. Accordingly, it
may not be appropriate to extrapolate future redundancies or deficiencies based
on this table.
Additionally, a majority of the Company's business consists of pro rata
treaties with sliding scale commission arrangements under which lower than
anticipated loss ratios may result in higher ceding commissions and higher than
anticipated loss ratios may result in lower ceding commissions. Consequently,
the positive impact of favorable loss development on the Company's results may
be diminished and the negative impact of adverse loss development may be
mitigated, by the existence of such commission arrangements. This fact should be
considered in analyzing the tables above.
The trend depicted in the Net table indicates that reserves held as of
December 31, 1990 have developed redundantly due to favorable developments for
losses occurring from 1987 through 1990. Specifically, the cumulative
redundancies in the Company's Estimates of Liability for Unpaid Claims and Claim
Expenses as of December 31, 1990, 1989 and 1988 were $15,278,000, $25,089,000
and $21,192,000, respectively. These redundancies have resulted principally from
three factors.
First, the Company's commutation of certain of its reinsurance agreements
with the Integral Insurance Company in the fourth quarter of 1991 caused a
decrease in reserves of $10,615,000 from amounts held as of December 31, 1990,
and a decrease in reserves of $3,708,000 from amounts held as of December 31,
1989. The decrease in 1990 reserves of $10,615,000 was more than offset by an
increase in commissions of $10,945,000 (pursuant to the terms of the
commutation).
Second, a total of four smaller commutations with other cedants during 1990
and 1991 caused a decrease in reserves of $6,060,000 from amounts held as of
December 31, 1990, and a decrease in reserves of $5,350,000 and $1,086,000 from
amounts held as of December 31, 1989 and 1988, respectively. The decrease in
1990 reserves of $6,060,000 was partially offset by an increase in commissions
of $1,114,000 and a reduction in premium accruals of $3,050,000.
11
<PAGE> 15
Third, and finally, the remaining redundancies of $16,031,000 and
$20,106,000 for reserves as of December 31, 1989 and 1988, respectively, have
resulted from favorable loss development, principally for treaties written
during 1987 and 1988. The Company's experience for treaties written during these
years has been consistent with the favorable development experienced by a
majority of its surplus lines client base for this period and reflects the
Company's emphasis on pro rata reinsurance.
For net reserves at December 31, 1991, the table shows a cumulative
deficiency of $1,740,000 as of December 31, 1994. As the table indicates, this
deficiency resulted from the commutation of certain reinsurance agreements in
the fourth quarter of 1992. Excluding the effects of this commutation, which
increased reserves by $2,505,000 from December 31, 1991 levels, the Company
would have recorded a redundancy of $765,000 for that period.
Reinsurers may enter into a commutation agreement for a variety of reasons.
Such reasons may include, but are not limited to, a desire to close a given
underwriting year or to terminate and fully settle a reinsurance relationship
because of a change in the reinsurer's evaluation of the cedant. For these and
other reasons, Re Cap anticipates that from time to time it may enter into
additional commutations.
RETROCESSIONS. Re Cap does not generally offer limits greater than
$1,000,000 per occurrence per treaty on property catastrophe business. For
casualty and property per risk business, commitments are generally limited to
$750,000 per occurrence, per treaty, but larger commitments may be made subject
to the approval of Re Cap's Chief Executive Officer. In practice, Re Cap's
commitments for casualty, property per risk, and property catastrophe business
average significantly less than $500,000 per occurrence per treaty.
Due to the relatively low limits afforded by Re Cap on the business it
underwrites, it does not now purchase treaty retrocessions on a per risk or per
treaty basis except for the quota share participation of Deere Insurance and
certain account specific protections. See "Relationship with Deere
Insurance -- Services Agreements with Deere Insurance."
Re Cap maintains a property catastrophe retrocessional agreement to protect
itself against an aggregation of losses resulting from a single event. Factors
that have resulted recently in a contraction of capacity for property
catastrophe reinsurance have also reduced the availability of property
catastrophe retrocessions. Effective April 1, 1994, Re Cap secured
retrocessional protection for one year that management believes is adequate for
the property treaties that Re Cap writes. Re Cap anticipates that it will extend
retrocessional protection through the Merger on acceptable terms.
Although retrocessional protection does not legally discharge the
retroceding reinsurer for its liability for the full amount of coverage provided
by its reinsurance agreements, it does make the retrocessionaire liable to the
retroceding reinsurer for the portion of the reinsurance retroceded to the
retrocessionaire. Regardless of whether a retrocessionaire is able to meet its
assumed obligations, Re Cap is liable for these obligations. All
retrocessionaires must conform to the Company's security standards and must be
specifically approved by the Company's Security Committee which consists of four
members of senior management and the Chief Executive Officer. The Security
Committee reevaluates the financial condition of the Company's retrocessionaires
at least annually. The evaluation process involves financial analysis of current
audited financial data and comparative analysis of such data in accordance with
guidelines established by Re Cap. Business may not be conducted with
retrocessionaires who are not approved by the Security Committee.
Of the property catastrophe retrocessional coverage obtained by the Company
effective April 1, 1994, approximately one-third is provided by domestic
companies rated "A-" (Excellent) or better by A.M. Best. The remaining coverage
is obtained by the Company principally from Underwriters at Lloyd's of London,
LaSalle Re and Zurich Re (UK) Limited. At December 31, 1994, Re Cap had no
material uncollectible amounts due from retrocessionaires. Amounts recoverable
from all retrocessionaires represented 5.8% of Re Cap's surplus at December 31,
1994, of which more than three-quarters (5% of surplus) was from JDIC.
CLAIMS. Claims are managed by Re Cap's professional claims department. Its
responsibilities include the review of initial loss reports, creation of claim
files, determination of whether further investigation is required, establishment
of proper reserves and payment of claims. In addition, the Claims Department
conducts periodic audits of specific claims and overall claims procedures at the
offices of cedants. Prior to Re
12
<PAGE> 16
Cap's acceptance of most working layer casualty treaties, the Claims Department
conducts claims audits at the offices of prospective cedants. Such companies are
not reinsured unless the audit results are satisfactory to Re Cap. The Claims
Department also conducts annual audits, principally of reserve adequacy, at the
offices of Re Cap's cedants. The Claims Department monitors the progress and
ultimate outcome of claims to ensure that subrogation, salvage and other cost
recovery opportunities are fully explored.
INVESTMENTS. Re Cap's investments must comply with the insurance laws of
the State of New Jersey. These laws prescribe the type, quality and
concentration of investments that may be made. In general, these laws permit
investments in federal, state and municipal obligations, corporate bonds,
preferred stocks and common stocks, real estate mortgages and real estate,
within specified limits and subject to certain qualifications. Moreover, in
order to be considered an acceptable reinsurer by cedants and intermediaries, a
reinsurer must offer financial security. The quality and liquidity of invested
assets are important considerations in determining such security.
The Company is party to an investment advisory agreement with Conning &
Company ("Conning"), an insurance research firm providing specialty research,
trading, consulting and financial advisory services to the insurance industry.
Pursuant to that agreement, Conning advises Re Cap and the Investment Committee
of the Company's Board of Directors (the "Investment Committee") as to
recommended investment strategies and relevant economic trends and executes all
investment transactions on behalf of Re Cap. The investment advisory agreement
may be terminated by either party upon written notice. Maurice W. Slayton, a
member of the Board of Directors of the Company, is Chairman of the Board,
President and Chief Executive Officer of Conning. See Item 12, "Security
Ownership of Certain Beneficial Owners and Management" and Item 13, "Certain
Relationships and Related Transactions."
Re Cap's investment policy is determined by the Investment Committee, which
also periodically reviews the quality and composition of Re Cap's investments.
The Investment Committee sets and regularly revises guidelines to be followed by
Conning in making investments for Re Cap. The guidelines currently in place
provide that (i) Re Cap's portfolio shall consist entirely of corporate and
municipal bonds and a limited amount (less than 10% of the portfolio) of
mortgage backed securities, (ii) securities purchased shall have Moody's and
Standard & Poors ratings of "A" or better, (iii) corporate and municipal bond
issues shall not exceed 5% of any one issue, (iv) funds invested in securities
of any single issuer (other than the U.S. Government) shall not exceed 5% of
invested assets and (v) maturities of fixed income investments shall not exceed
30 years from the date of purchase. There is no assurance that these guidelines
will not be changed in the future by the Investment Committee.
The Company's current investment strategy seeks to maximize after-tax
investment income through a high quality diversified taxable bond and tax-exempt
municipal bond portfolio, while maintaining an adequate level of liquidity.
Diversification is an important factor in providing the balance necessary to
maintain safety of principal, predictability of income, growth of surplus, a
strong liquidity position and appropriate asset/liability matching. Although it
is difficult to estimate precisely the duration of its liabilities (due to the
uncertainty surrounding payout patterns), Re Cap believes that there is a
reasonable matching of its assets and liabilities. Re Cap generally invests in
securities with contractual maturities of less than 10 years. At December 31,
1994, the average duration of the portfolio was 2.8 years. Re Cap believes (i)
it does not face a significant risk of asset/liability mismatching, and (ii) a
substantial movement in interest rates would not have a material adverse impact
on liquidity, capital resources or results of operations. The Company and Re Cap
have no investments in high yield bonds, common or preferred stocks or real
estate, which are more susceptible to market fluctuation.
13
<PAGE> 17
The table below sets forth the distribution of the Company's consolidated
investment portfolio at December 31, 1994, by type, expected maturity and
quality rating.
<TABLE>
<CAPTION>
AVERAGE
INVESTMENTS MATURITY MARKET AMORTIZED
(DOLLARS IN THOUSANDS) IN YEARS VALUE COST
-------- -------- ---------
<S> <C> <C> <C>
TYPE
Tax-exempt bonds(1).......................................... 2.5 $161,252 $159,682
Other taxable bonds.......................................... 3.8 101,194 105,669
Mortgage-backed securities(2)................................ 5.6 29,576 32,226
Asset-backed securities...................................... 3.7 18,589 19,211
U.S. treasury and government agency securities............... 4.0 26,085 27,640
Short-term investments, invested cash and cash............... 0.7 6,198 6,198
-------- -------- --------
Total investments and cash......................... 3.3 $342,894 $350,626
======== ========
EXPECTED MATURITY
Due in one year or less...................................... 0.5 $ 56,571 $ 56,162
Due after one year through five years........................ 2.9 202,107 203,924
Due after five years through ten years....................... 6.1 84,216 90,540
-------- -------- --------
Total investments and cash......................... 3.3 $342,894 $350,626
======== ========
</TABLE>
<TABLE>
<CAPTION>
MARKET AMORTIZED
VALUE COST
--------- --------
<C> <C>
QUALITY (FIXED MATURITY INVESTMENTS)(3)
<S> <C>
Aaa -- Tax-exempt bonds.............................................. $118,492 $117,718
Other taxable bonds........................................... 14,381 15,097
Mortgage-backed securities.................................... 29,576 32,226
Asset-backed securities....................................... 18,589 19,211
U.S. treasury and government agency securities................ 26,085 27,640
-------- --------
207,123 211,892
-------- --------
Aa -- Tax-exempt bonds.............................................. 33,540 32,781
Other taxable bonds........................................... 32,691 35,071
-------- --------
66,231 67,852
-------- --------
A -- Other taxable bonds........................................... 54,122 55,501
Tax-exempt bonds.............................................. 9,220 9,183
-------- --------
63,342 64,684
-------- --------
Total fixed maturity investments.............................. $336,696 $344,428
======== ========
</TABLE>
- - - - ---------------
(1) Includes, at market value, $8,579,000 escrowed to maturity, $55,547,000
pre-refunded in U.S. Government Securities and $60,941,000 insured by
Municipal Bond Investors Assurance Corporation, Financial Guaranty Insurance
Company, AMBAC Indemnity Corporation and Financial Security Assurance
Corporation.
(2) The mortgage-backed securities held in the Company's consolidated investment
portfolio consist entirely of real estate mortgage conduits ("REMICs"),
which are all in planned amortization class ("PAC") tranches. These
securities, which had a market value of $29,576,000 (amortized cost of
$32,225,000), are backed by U.S. Government agencies and therefore have the
highest credit rating. All mortgage-backed securities held in the portfolio
are actively traded in the public markets. The risk inherent in holding
mortgage-backed securities is a prepayment risk resulting from possible
decreases in interest rates. The Company believes that its exposure to
prepayment risk is largely mitigated because the majority of its REMIC
securities were purchased in 1993 in a low interest rate environment.
Further, the Company's holdings consist entirely of PAC bonds. Such
instruments have reduced prepayment risk because they are structured to
provide a more certain cash flow to the investor and thereby create a more
certain
14
<PAGE> 18
asset/liability match than pass-throughs. Additionally, PAC instruments
significantly reduce the Company's likelihood of material capital gains or
losses from prepayment.
(3) Ratings as assigned by Moody's Investors Service, Inc. Such ratings are
generally assigned upon the issuance of the securities and are subject to
revision on the basis of ongoing evaluations.
COMPETITION. Competitive conditions currently prevail in all sectors of
the reinsurance industry. The Company competes with many domestic and foreign
insurers and reinsurers, many of which have greater financial, marketing and
management resources than the Company. Re Cap competes with both reinsurers that
obtain business directly from cedants and with reinsurers that obtain their
business through intermediaries. Increased competition in recent years has
resulted in a deterioration of reinsurance rates, terms and conditions. The
industry is moving toward greater consolidation and to compete effectively, size
and financial strength are increasingly important. Transactions tend to have
fewer and larger participants, thereby negatively affecting the availability of
underwriting opportunities for smaller reinsurers such as the Company. Ceding
companies have become more specialized, however, which management believes will
favor reinsurers such as the Company with technical underwriting and risk
assessment skills and a focus on specialty business.
Extraordinary catastrophe loss activity since 1989 has caused a contraction
in capacity for property catastrophe reinsurance and retrocessions. The
reduction in supply precipitated moderate rate increases in this market segment
beginning in late 1991. By late 1992, and continuing through 1994, these
increases had become significant. Management cannot predict if and when market
conditions will change for the remainder of the industry.
Re Cap received its initial rating of "A-" (Excellent) from A.M. Best in
June 1992 (Re Cap was not eligible for a rating by A.M. Best until it had at
least five years of operating history). A.M. Best reviews its rating at least
annually and, in May 1994, upgraded its "A-" (Excellent) rating to a rating of
"A" (Excellent) for Re Cap. A.M. Best's ratings are based on an analysis of the
financial condition and operating performance of a reinsurance company as they
relate to the industry in general. These ratings represent an independent
opinion of a company's financial strength and ability to meet its obligations.
Certain insurers use A.M. Best's ratings to assist them in assessing reinsurers.
Prior to receiving its A.M. Best rating, Re Cap entered into a reinsurance
arrangement with Deere Insurance, which has an A.M. Best rating of "A+," that
permits the Company to respond to opportunities requiring a reinsurer rated "A+"
by A.M. Best. See "Relationship with Deere Insurance -- Services Agreements with
Deere Insurance."
In September 1993, Re Cap received an initial claims-paying ability rating
of "A" (Good) from Standard & Poor's Insurance Rating Services. This rating was
affirmed in December 1994. The claims-paying ability rating addresses the
financial capacity of the Company to meet its reinsurance obligations.
REGULATION. Reinsurance agreements generally are not subject to regulation
by any government authority with respect to rates or contract terms. In
contrast, the rates and policy terms of insurance contracts generally are
regulated closely by state insurance departments. As a practical matter, the
rates charged by insurers may limit the rates that can be charged by reinsurers.
Re Cap, as a reinsurer, is subject to regulation and supervision in the
states in which it does business. The regulation and supervision relates
primarily to the standards of solvency that must be met and maintained,
licensing requirements for reinsurers, the nature of and limitations on
investments, restrictions on the size of risks which may be reinsured, deposits
of securities for the benefit of a cedant, methods of accounting, periodic
examinations of the financial condition and affairs of reinsurers, the form and
content of reports of financial condition required to be filed, and reserves for
unearned premiums, losses and other purposes.
In addition, the Company and Re Cap are and will be subject to regulation
under the insurance statutes, including the insurance holding company statutes,
of the states in which Re Cap is licensed. These regulations vary from state to
state but generally require insurance holding companies and insurers and
reinsurers that are subsidiaries of holding companies to register and file
reports concerning their capital structure, ownership, financial condition and
business operations. Such regulations also generally require prior regulatory
agency approval of (i) changes in control of insurers and reinsurers, (ii)
transactions within the holding company
15
<PAGE> 19
structure and (iii) extraordinary dividends. The regulatory agencies of each
state have statutory authorization to enforce their laws and regulations through
administrative orders and enforcement proceedings.
Re Cap is domiciled in New Jersey. New Jersey insurance law provides that
no corporation or other person, except an authorized insurer, may acquire
control of an insurance holding company, and thus indirect control of its New
Jersey insurance and reinsurance subsidiary, unless it has given notice to such
subsidiary and obtained the prior written approval of the Commissioner of
Insurance of the State of New Jersey for such acquisition. Any purchaser of ten
percent of the Common Stock of the Company would be presumed to have acquired
control of the Company, unless such presumption is rebutted. In 1990, Deere
Insurance obtained such approval from the Commissioner of Insurance of the State
of New Jersey for such acquisition of control of the Company. Pursuant to the
Merger Agreement, ZRC has applied for such approval and that application is
pending.
The Company is a holding company and the principal source of its funds will
be cash dividends and tax payments from Re Cap pursuant to a tax sharing
agreement. The payment of cash dividends by Re Cap is restricted by state
insurance regulations. Under New Jersey law, Re Cap will be permitted to pay
dividends only from its statutory surplus, which at December 31, 1994 aggregated
$166,596,000. In general, Re Cap cannot pay within any twelve-month period,
without prior approval of the New Jersey Insurance Commissioner, dividends which
exceed the lesser of 10% of surplus at the end of the previous year or 100% of
net investment income for the previous year. The maximum amount of dividends
which could be paid by Re Cap to the Company during 1995, without prior
regulatory approval, is approximately $16,660,000. To date, Re Cap has never
paid a dividend to the Company.
Re Cap is required to file annual and other reports relating to its
financial condition and other matters with the New Jersey Insurance Department.
The New Jersey Insurance Department conducts triennial examinations of insurance
companies domiciled in New Jersey. Representatives of the New Jersey Insurance
Department completed a regular triennial examination of Re Cap's records and
business affairs during 1991, for the period ended December 31, 1990, and issued
a final report on January 11, 1993, which reported no material deficiencies. Re
Cap has been advised that the New Jersey Insurance Department will be conducting
an examination during 1995. Re Cap may also be subject to periodic examinations
by the insurance departments of other states in which it is currently licensed
or becomes licensed.
Re Cap is licensed in Arizona, California, Delaware, the District of
Columbia, Idaho, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan,
Minnesota, Nebraska, New Jersey, New Mexico, New York, North Dakota, Oregon,
Pennsylvania, Texas, Utah and Washington as an insurer and a reinsurer; and in
Connecticut, Florida, Georgia, Louisiana, Massachusetts, Montana, Nevada, Ohio,
Puerto Rico, Rhode Island, South Carolina, South Dakota, Tennessee, and
Wisconsin as a reinsurer. Re Cap is an admitted reinsurer in Colorado, Missouri,
North Carolina, Vermont and Virginia. Re Cap has filed applications for a
license in the states of Arkansas, Mississippi and Oklahoma. In addition to the
above listed states, Re Cap believes that insurers domiciled in Hawaii and
Wyoming may presently take credit for reinsurance ceded to Re Cap.
In addition to the regulatory requirements imposed by the jurisdictions in
which they are licensed, reinsurers are subject to indirect regulatory
requirements imposed by jurisdictions in which their cedants are licensed
through the credit for reinsurance mechanism. The effect of reinsurance on
statutory financial statements is a principal reason for a cedant to enter into
a reinsurance agreement. In general, an insurer which obtains reinsurance from a
reinsurer that is licensed or accredited by the state in which the insurer files
financial statements is permitted to take credit on its statutory financial
statements in an aggregate amount equal to the liability for unearned premiums
and for loss and LAE reserves ceded to the reinsurer. The great majority of
states, however, permits the reduction in statutory surplus resulting from
reinsurance obtained from an unlicensed or nonaccredited reinsurer to be offset
to the extent that the reinsurer provides a letter of credit or other qualified
form of funding to the ceding insurer to support its obligation under the
reinsurance agreement.
Recently, the insurance and reinsurance regulatory framework has been
subject to increased scrutiny by the National Association of Insurance
Commissioners (the "NAIC"), state legislatures, insurance regulators and the
United States Congress. State legislatures have considered or enacted
legislative proposals that alter, and in many cases increase, state authority to
regulate insurance companies and holding company systems.
16
<PAGE> 20
The NAIC and state insurance regulators have been reexamining existing laws and
regulations, with an emphasis on insurance company investment and solvency
issues. Legislation has been introduced in Congress that could result in the
federal government assuming some role in the regulation of the insurance
industry. It is not possible to predict the future impact of changing state and
federal regulation on the operations of the Company.
In December 1993, the NAIC adopted final minimum capitalization
requirements for property-casualty insurance and reinsurance companies known as
the risk-based capital model. The NAIC's stated objective in developing these
risk-based capital standards is to improve solvency monitoring. Formal
implementation of these new minimum capitalization requirements will occur
concurrent with the filing of 1994 annual statements. Re Cap believes that its
capital and surplus are adequate to meet the risk-based capital requirements
contained in the NAIC's model.
The NAIC's Insurance Regulatory Information System ("IRIS") was developed
by a committee of state insurance regulators and is intended primarily to assist
state insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their respective states.
IRIS identifies eleven industry ratios and specifies "usual values" for each
ratio. Departure from the usual values on four or more of the ratios can lead to
inquiries from state insurance commissioners. As of December 31, 1994, Re Cap's
results were within the usual values for eleven of the twelve ratios.
Some states have adopted, or are considering adopting, laws and regulations
that limit the right of offset by reinsurers. Offset permits two contracting
parties with reciprocal obligations to set off those obligations against each
other to arrive at a net balance due and to pay only that balance. The right of
offset is important primarily for reinsurers which both cede business to and
assume business from the same entities, and would then become relevant if and
when any such entity becomes insolvent. There is currently only one entity
(JDIC) which Re Cap both cedes business to and assumes business from. The NAIC
recently amended its Insurers Rehabilitation and Liquidation Model Act to limit
offset under certain circumstances. These provisions have been adopted in only a
few states, and have been rejected by several others. Some states have no laws
governing offset and rely on common law principles; other states have adopted a
wide range of offset provisions. Because liquidation of insurers is generally
governed by the insurance insolvency laws of the state of domicile of the
insolvent insurer or reinsurer, and those laws may vary widely and are subject
to possible change, it is difficult to predict what impact, if any, these
provisions will have on Re Cap.
EMPLOYEES. At January 31, 1995, the Company employed 41 persons. No
employees are represented by a labor union, and the Company's management
believes that its employee relations are good.
ITEM 2. PROPERTIES.
The Company's corporate offices are located at Two Stamford Plaza, 281
Tresser Boulevard, Stamford, Connecticut 06904-2148. The Company's corporate
office is occupied pursuant to a lease covering approximately 26,295 square feet
of office space. This lease expires in 2001. The lease has minimum annual
rentals, not including costs of certain escalation clauses, of $1,067,000
through 1996 and 85% of the fair market value from 1997 to 2001. In addition, Re
Cap maintains a corporate office in Fort Lee, New Jersey.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company or any
of its subsidiaries is a party or of which any of the property of the Company or
its subsidiaries is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of 1994.
17
<PAGE> 21
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Effective June 23, 1993, the Company's Common Stock began trading on the
NASDAQ National Market System under the symbol RCAP. Previously the Company's
stock was listed on the American Stock Exchange under the symbol RCC. The
following table sets forth, for the periods indicated, the high and low closing
sales prices per share of the Company's Common Stock as reported by the NASDAQ
National Market System and dividends declared and subsequently paid.
<TABLE>
<CAPTION>
MARKET PRICE
--------------
HIGH LOW DIVIDENDS
---- --- ---------
<S> <C> <C> <C> <C>
1994 First Quarter................................. 14 3/4 13 $ .08
Second Quarter................................ 14 12 1/4 $ .08
Third Quarter................................. 13 1/4 12 1/2 $ .08
Fourth Quarter................................ 13 1/4 12 $ .08
1993 First Quarter................................. 16 1/2 14 5/8 $ .07
Second Quarter................................ 15 1/2 14 $ .07
Third Quarter................................. 15 1/4 13 1/4 $ .07
Fourth Quarter................................ 15 1/2 13 1/4 $ .07
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" for information
regarding statutory restrictions on the payment of dividends by the Company's
subsidiary, Re Cap. As of February 8, 1995, there were approximately 245
shareholders of record.
18
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is certain selected consolidated financial information for
the last five fiscal years. This information should be read in conjunction with
the consolidated financial statements of Re Capital Corporation and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31
Premiums written.................... $132,421 $115,814 $121,316 $140,533 $106,615
======== ======== ======== ======== ========
Premiums earned..................... 129,398 $112,681 $118,443 $134,846 $102,523
Net investment income............... 21,696 18,934 17,270 15,953 12,658
Net realized investment gains
(losses).......................... 39 694 342 118 (19)
-------- -------- -------- -------- --------
Total revenues...................... 151,133 132,309 136,055 150,917 115,162
======== ======== ======== ======== ========
Net income.......................... $ 7,907 $ 8,037 $ 2,309(1) $ 8,929 $ 9,772
======== ======== ======== ======== ========
Per share data:
Primary earnings per share........ $ 1.14 $ 1.18 $ .35(1) $ 1.24 $ 1.44
Fully diluted earnings per
share.......................... .95 1.06 .35(1) 1.24 1.44
Cash dividends declared per
share.......................... .32 .28 .24 .15 --
AT YEAR-END
Total investments and cash.......... $342,894(3) $344,087(3) $256,036 $254,040 $192,955
Total assets(2)..................... 466,232(3) 458,617(3) 366,728 348,692 290,889
Long-term debt...................... 69,000 69,000 10,000 10,000 --
Shareholders' equity................ 121,207(3) 130,773(3) 103,893 109,666 104,126
Equity per share outstanding........ 17.19(3) 18.56(3) 16.42 16.07 15.05
</TABLE>
- - - - ---------------
(1) Includes a nonrecurring addition of $868,000 or $.13 per share, as the
result of the Company's adoption, effective January 1, 1992, of SFAS No.
109, "Accounting for Income Taxes."
(2) 1992 and all prior balances have been reclassified for comparative purposes
to reflect the provisions of SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts."
(3) Effective December 31, 1993, the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company is engaged primarily in property and casualty reinsurance
underwriting through its wholly-owned subsidiary, Re Cap.
MERGER AGREEMENT
On January 11, 1995, the Company entered into the Merger Agreement with ZRC
and ZRC Merger-Sub.
The Merger Agreement provides that, at the Effective Time of the Merger,
each share of the Company's Common Stock, outstanding immediately prior to the
Effective Time (which may include a certain number of restricted shares to be
determined) will, without any action on the part of the holder thereof, be
converted into the right to receive $18.50 in cash, without interest. ZRC will
assume all obligations under the Company's Convertible Debentures due August 1,
2000 ($69 million outstanding aggregate principal amount as of January 11, 1995)
that are not converted into Common Stock prior to the closing of the Merger.
19
<PAGE> 23
As more fully described in the Merger Agreement, upon the occurrence of
certain specified events, including the occurrence of certain Third Party
Business Combinations, the Company will pay ZRC a fee of $4,500,000 plus an
amount equal to the costs and expenses incurred by ZRC in connection with the
Merger Agreement, not exceeding $1,000,000.
Pursuant to the Option and Voting Agreement, between Deere Insurance and
ZRC, Deere Insurance has (i) granted ZRC the Option to acquire under the
circumstances described in the Option and Voting Agreement, at $18.50 per share,
the Deere Insurance Shares, and (ii) agreed to vote the Deere Insurance Shares
in favor of the approval of the Merger and any other related transactions or
matters presented in connection with the Merger and against any other proposal
which provides for any merger, sale of assets or other Third Party Business
Combination, between the Company (or any subsidiary of the Company) and any
person or entity, or which is otherwise inconsistent with the Merger or the
Merger Agreement.
During the term of the Option and Voting Agreement (which term generally
will terminate on the earlier of the Effective Time and the date of termination
of the Merger Agreement), ZRC may exercise the Option, in whole, but not in
part, if (i) a Third Party Business Combination occurs or (ii) the Merger
Agreement is terminated and ZRC is entitled to payment of expenses and a fee
pursuant to applicable provisions of the Merger Agreement. If the Option is
exercised, the closing of the purchase would be subject to the receipt of all
necessary regulatory approvals. During the term of the Option and Voting
Agreement, Deere Insurance may not sell, transfer or otherwise dispose of the
Deere Insurance Shares. See "Relationship with Deere Insurance -- Control of the
Company."
The Merger Agreement contains various agreements on the part of the Company
that restrict its abilities to operate its business prior to the Effective Time.
If the Merger is consummated as planned, the board of directors of the Company
will consist of the directors of ZRC Merger-Sub immediately prior to the
Effective Time.
The closing of the Merger is subject to approval by the Company's
stockholders, certain state insurance regulatory approvals and certain other
customary conditions and approvals. The description contained herein of the
Merger and related agreements is qualified in its entirety by reference to the
Merger Agreement, the Option and Voting Agreement and the Company's Form 8-K,
dated as of January 11, 1995 and filed on January 19, 1995.
OVERVIEW
The operating results of the Property and Casualty Industry (the "P&C
Industry"), including the Company, are subject to significant fluctuations due
to numerous factors including premium rate competition, catastrophic and
unpredictable events (including man-made and natural disasters), general
economic and social conditions, interest rates and changes in tax laws and
regulatory developments. The P&C Industry has been characterized by cycles in
which a period of improved profitability has led to increased capacity and more
competition, which has resulted in diminished profitability. This part of the
cycle has been followed by a reduction in capacity and the partial or complete
withdrawal or the insolvency of a number of insurers and reinsurers, leading to
decreased competition and improved rates and profitability.
The industry experienced an extended down cycle from 1979 to the end of
1984. Underwriting losses in that period grew significantly as a result of
severe price competition and an increase in the frequency and severity of
reported losses. The industry was affected by expanding theories of tort and
insurer liability and by growing exposure to long-tail risks, such as asbestos
and other pollution claims, which were not adequately taken into account in the
pricing, terms and conditions of insurance and reinsurance being written. At the
same time, premium rates declined as competition in the industry increased.
These conditions led to a decline in the surplus of insurers and reinsurers and
a number of insurance and reinsurance companies became insolvent or voluntarily
withdrew from the market. From 1985 to 1987, the demand for reinsurance
increased and reinsurance pricing and underwriting results improved. This
attracted increased capacity into the industry as insurers and reinsurers
strengthened their surplus through capital infusions and retained earnings. From
mid-1987 and continuing through 1994, the P&C Industry experienced increased
competition and reduced premium rates. This competition has been much more
pronounced in certain areas than in others.
20
<PAGE> 24
Competition has been most severe in the areas of commercial property insurance
and excess limits of casualty insurance for larger insureds. In addition,
cedants have raised their retentions, resulting in a reduction in demand for
reinsurance and concomitant overcapacity in the reinsurance industry.
The catastrophe losses in the property insurance market in 1992 and again
in 1994 negatively affected the surplus of many property insurers and
reinsurers, most of which also write casualty business. At the same time, cash
flows are under continuing pressure from both large catastrophe loss payments
and continued low rates of premium growth caused by the persistence of
competitive market conditions. Additionally, the historically low interest rates
that prevailed during 1993 have had a negative impact on the P&C Industry's
investment income. Despite these factors, competitive market conditions prevail
in the P&C industry.
UNDERWRITING RESULTS
The underwriting results of a property and casualty insurer or reinsurer
typically are evaluated by reference to its loss ratio, expense ratio and
combined ratio, determined on the basis of statutory accounting practices
("SAP"). Underwriting profit is only one element of overall profitability, which
also includes investment results, interest expense and the effects of income
taxation. Accordingly, the combined ratio alone should not be used to measure
overall profitability.
The historical changes in Re Cap's losses and LAE principally result from
changes in its premiums earned, the mix of business between pro rata and excess
of loss reinsurance and the profitability of the treaties written. During the
period 1992-1994, the casualty lines of business reinsured by Re Cap did not
change significantly, other than an increase in auto liability business. During
the same three year period the composition of the property lines of business
reinsured by the Company changed dramatically. Auto physical damage premiums
increased 239% while premiums for the mechanical breakdown and commercial per
risk lines decreased 71% and 46%, respectively. In the aggregate, however,
property premiums as a percentage of net premiums written, increased only
marginally from 15% to 17%.
Re Cap writes a significant amount of business with sliding scale
commission arrangements. Lower loss ratios (subject to minimums) will thus
result in higher commissions, while higher loss ratios (subject to maximums)
will result in lower commissions. For this reason, the Company focuses on the
combined ratios rather than comparing loss and expense ratios from different
years. Based on this important benchmark, Re Cap equaled or outperformed the
reinsurance industry in each of the eight full years of its existence.
Management attributes these favorable comparisons to the adherence to strict
underwriting standards and overhead cost controls.
The following table sets forth, for the periods indicated, Re Cap's SAP
combined ratios and the components thereof, and the combined ratios for the
reinsurance industry (based on the Company's analysis of Reinsurance Association
of America data).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loss Ratio..................... 73.3% 74.7% 77.8% 61.1% 61.6% 68.8% 67.4% 64.2%
Underwriting Expense Ratio:
Commission and Brokerage..... 25.1 25.5 28.8 35.6 30.9 24.3 24.3 25.6
Other Operating Expenses..... 6.0 6.7 6.6 5.3 6.5 6.2 6.7 9.0
----- ----- ----- ----- ----- ----- ----- -----
Total Expense Ratio....... 31.1 32.2 35.4 40.9 37.4 30.5 31.0 34.6
----- ----- ----- ----- ----- ----- ----- -----
Combined Ratio................. 104.4% 106.9% 113.2% 102.0% 99.0% 99.3% 98.4% 98.8%
===== ===== ===== ===== ===== ===== ===== =====
Reinsurance Industry Combined
Ratio........................ 107.1%* 106.9% 119.0% 107.1% 106.1% 106.9% 102.7% 102.4%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- - - - ---------------
* As of September 30, 1994.
21
<PAGE> 25
COMPARISON OF FISCAL YEARS 1994-1992
The Company's 1994 net income of $7,907,000 decreased by 1.6% from net
income of $8,037,000 for the year ended December 31, 1993. Operating income,
excluding after-tax realized investment gains and the expenses associated with a
possible merger or other corporate transactions in 1994, increased by 18.9% from
$7,579,000 in 1993 to $9,015,000 for the year ended December 31, 1994. Primary
and fully diluted earnings per share for the year ended December 31, 1994 were
$1.14 and $.95, respectively, versus $1.18 and $1.06, respectively for the year
ended December 31, 1993. The improvement in the Company's 1994 operating results
principally reflects a significant decrease in property losses during the year.
Results for 1993 were adversely impacted by the unfavorable runoff of quota
share commercial property treaties cancelled prior to 1993. Both net income of
$2,309,000 and operating income of $1,215,000, for the year ended December 31,
1992, were substantially reduced by property catastrophe losses and a
commutation charge.
REVENUES
Net premiums written and net premiums earned for the year ended December
31, 1994 of $132,421,000 and $129,398,000 increased 14.3% and 14.8%,
respectively from $115,814,000 and $112,681,000 for the year ended December 31,
1993. The increase in net premiums written in 1994 resulted from a combination
of new business and increased participations on existing treaties. The growth in
premium volume was concentrated in the auto liability and auto physical damage
lines of business. The 33.9% growth in the auto liability premiums was primarily
attributable to an increase in the cessions from Re Cap's two largest cedants.
Similarly, the increase of $4,883,000 or 57% in auto physical damage premiums
relates almost entirely to an increase in Re Cap's share of premiums assumed
from its second largest client. These increases were partially offset by a 71%
decrease in mechanical breakdown premiums as a result of an adjustment to a
retrocessional program.
In 1993, net premiums written of $115,814,000 and net premiums earned of
$112,681,000 declined 4.5% and 4.9%, respectively, when compared to 1992. These
decreases were almost entirely attributable to the cancellation or non-renewal
in 1992 of a majority of the Company's commercial property per risk treaties.
Due to the inadequate pricing which prevailed in this segment of the market, the
Company reduced its pro rata commercial property writings by 71%, from
$7,621,000 in 1992 to $2,235,000 in 1993. Conversely, the Company increased its
writings of auto physical damage business during 1993 by approximately
$4,600,000. This increase was principally attributable to market opportunities
presented in the wake of Hurricane Andrew. Also, during 1993, auto liability
premiums declined 12.6%, primarily as a result of the nonrenewal of two
commercial trucking treaties. The following table summarizes the Company's net
premiums written by line of business for the years 1992-1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1993 1992
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Casualty:
Auto Liability....................................... $ 52,265 $ 39,030 $ 44,685
General Liability.................................... 38,533 36,280 38,262
Professional Liability............................... 16,780 19,293 17,836
Workers Compensation................................. 1,077 986 1,192
Medical Malpractice.................................. 705 1,516 1,363
-------- -------- --------
Total Casualty............................... 109,360 97,105 103,338
-------- -------- --------
Property:
Auto Physical Damage................................. 13,450 8,567 3,966
Commercial Per Risk.................................. 4,133 2,235 7,621
Aviation, Marine and Other........................... 2,269 1,670 48
Mechanical Breakdown................................. 1,609 5,336 5,531
Catastrophe Covers................................... 1,600 901 812
-------- -------- --------
Total Property............................... 23,061 18,709 17,978
-------- -------- --------
Total All Lines........................................ $132,421 $115,814 $121,316
======== ======== ========
</TABLE>
22
<PAGE> 26
CLAIMS AND CLAIM EXPENSES
Re Cap's statutory combined ratio improved by 2.5 points to 104.4% in 1994,
reflecting a reduction in property losses between 1993 and 1994. The impact of
property catastrophe losses was comparable in both years. In 1994, the
Northridge earthquake increased the combined ratio by 1.0 point and reduced
fully diluted earnings by $.08 per share. The World Trade Center bombing and
Midwest floods increased the 1993 combined ratio by 0.9 points and also
decreased fully diluted earnings by $.08 per share. In 1992, Hurricanes Andrew
and Iniki and the Los Angeles riots added 5.9 points to the combined ratio and
reduced earnings per share by $.65.
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Combined ratio.............................................. 104.4% 106.9% 113.2%
Property catastrophe losses................................. (1.0) (0.9) (5.9)
----- ----- -----
Catastrophe adjusted combined ratio......................... 103.4% 106.0% 107.3%
===== ===== =====
</TABLE>
Excluding catastrophe losses, the Company's combined ratio in 1994 and 1993
exceeded its average of 102.7% for its first six full years of operation
(1987-1992) by 0.7 and 3.3 points, respectively. In 1994, the strengthening of
certain casualty loss reserves involving the 1993 and 1994 underwriting years
increased the combined ratio by 1.1 points. This strengthening was confined to a
limited number of treaties and reduced net income by $.14 and $.09 per share on
a primary and fully diluted basis, respectively.
The 3.3 point difference in the combined ratio for 1993 was the result of
property claim activity related to the runoff of quota share treaties cancelled
prior to 1993. Results from these treaties, excluding catastrophe losses,
increased the 1993 combined ratio by 4.3 points and reduced primary and fully
diluted earnings per share by $.42 and $.33, respectively.
AMORTIZATION OF DEFERRED ACQUISITION COSTS
The Company's amortization of its deferred acquisition costs increased by
16.9% in 1994 from $28,455,000 to $33,272,000. In 1993, this expense decreased
by 17.8% from $34,624,000 in 1992. This expense represents that portion of the
costs of obtaining reinsurance business, principally ceding and brokerage
commissions, related to the net premiums earned for the year. The 16.9% increase
in 1994 is a direct function of the corresponding 14.8% increase in earned
premiums. Likewise, the 17.8% decrease in 1993 is a result of a reduction in the
Company's net premiums earned as well as a modest shift in the composition of
its business to a greater percentage of excess of loss treaties. Excess of loss
treaties typically do not provide for ceding commission, which are the largest
component of deferred acquisition costs.
INTEREST EXPENSE
Interest expense increased in 1994 to $3,795,000 from $2,348,000 in 1993.
This increase resulted from the inclusion of a full year's interest expense for
the $69,000,000 of Convertible Debentures issued on July 27, 1993. From 1992 to
1993, interest expense increased by $985,000 from $1,363,000 primarily as a
result of the issuance of the aforementioned convertible debentures.
OTHER OPERATING EXPENSES
Other operating expenses which include compensation, employee benefits and
overhead, increased by $1,607,000 or 16.8% for the year ended December 31, 1994.
Included within this increase is $1,134,000 of non-recurring expenses,
principally legal and financial advisory costs, associated with the
aforementioned pending acquisition by ZRC. The balance of the change relates to
normal increases in salaries, pension and travel expenses as well as a full
year's amortization of the costs incurred in 1993 in connection with the
convertible debenture offering. The 2.4% decrease in other operating expenses
from 1992 to 1993 was a result of a reduction in pension expense partially
offset by increases in the Company's state and franchise taxes.
23
<PAGE> 27
INVESTMENT INCOME
Net investment income, excluding net realized gains, increased 14.6% in
1994, from $18,934,000 to $21,696,000. In 1993, net investment income increased
9.6% over the 1992 level of $17,270,000. These increases were the result of
growth in invested assets attributable to cash flow from operations and the
proceeds of the 1993 offering of $69,000,000 in convertible debentures.
Exclusive of investment income allocable to the proceeds of this offering, the
Company's net investment income for the year ended December 31, 1994 increased
by 5.8% over the comparable 1993 amount. The pre-tax yield on investments
declined in 1994 to 6.6% from 6.7% in 1993 and 7.0% in 1992. On an after-tax
basis, the investment yield declined to 5.2% in 1994 from 5.4% in 1993 and 5.7%
in 1992. This downward trend in yields is a direct result of the decline in
interest rates that occurred during 1993 concurrent with the Company's purchase
of more than $105,000,000 in fixed income securities, $52,000,000 of which were
purchased from the proceeds of the Company's convertible debenture offering.
While interest rates increased progressively through 1994, such increases have
not yet offset the impact of the 1993 purchases.
Net realized investment gains for 1994 were $39,000 versus $694,000 and
$342,000 in 1993 and 1992, respectively. The 1993 gains were the result of the
Company selectively selling certain taxable securities and replacing them with
tax-exempt securities in order to increase after-tax yield.
FEDERAL INCOME TAXES
For the year ended December 31, 1994, the Company recorded a Federal income
tax provision of $195,000 versus tax benefits of $230,000 and $3,490,000 in 1993
and 1992, respectively. As a result of Re Cap's underwriting losses in each of
the three years, the Company's pre-tax results include a proportionally higher
component of tax-exempt income, thereby reducing the effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1994, the Company had total shareholders' equity of
$121,207,000. During 1994, shareholders' equity decreased by $9,566,000 from
$130,773,000 at December 31, 1993. This decrease resulted principally from
unrealized depreciation on the Company's fixed income portfolio, net of tax, of
$15,564,000 offset by net income less cash dividends declared of $5,651,000.
Effective December 31, 1993, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." In
connection therewith, the Company classified its entire portfolio of fixed
income securities as available for sale. In accordance with the new standard,
these securities are being carried at their market value. The unrealized
depreciation on these bonds, net of tax, of $5,103,000 as of December 31, 1994
has been included as a component of shareholders' equity.
On July 27, 1993, the Company successfully completed an offering of
$69,000,000 of the Convertible Debentures. The Convertible Debentures are due on
August 1, 2000, and are convertible into common stock of Re Capital at a
conversion price of $17.1875 per share. The Company contributed $45,250,000 of
the net proceeds of the offering of the Convertible Debentures to the surplus of
Re Cap. In addition, $15,000,000 of the net proceeds was used to repay the
Company's revolving bank loan, which was then terminated. The balance of the
proceeds of approximately $7,000,000 was retained for general corporate
purposes. Management believes that the Company has sufficient liquidity to meet
its anticipated reinsurance obligations and operating expenses, including debt
financing costs and principal repayments.
On June 1, 1993, the Company announced the suspension of its share
repurchase program. This program, which had been ongoing since October 20, 1987,
resulted in the aggregate repurchase of 2,378,888 shares at an average price of
$11.74. At the time the share repurchase program was suspended, there remained
approximately $2,500,000 authorized for future repurchases.
Cash flow from operations totaled $26,824,000 in 1994, compared to
$22,978,000 in 1993. Cash flow in 1994 was increased by approximately
$10,000,000 as the result of the restructuring of a cedant trust agreement in
the second quarter. The Company anticipates that its cash flow from operations
in 1995 will continue to be sufficient to fulfill its operational and financing
needs.
24
<PAGE> 28
At December 31, 1994, the Company had investments and cash of $342,894,000,
a decrease of $1,193,000 or .3% from 1993. This decrease was due principally to
cash flow from operations of $26,824,000 net of unrealized depreciation in the
fixed income portfolio of $23,583,000 and cash dividends paid to shareholders of
$2,184,000.
In 1993, the Company's invested assets and cash increased by $88,051,000 or
34.4% from the 1992 level. This increase was due to cash flow from operations
and the proceeds of the Company's offering of the Convertible Debentures net of
the repayment of its bank loan. Also included in this increase was an adjustment
to reflect the implementation of SFAS No. 115. In 1993, the Company sold
$12,789,000 of fixed income securities. These sales, from the Company's then
held-for-sale portfolio, were made to replace certain taxable securities with
tax-exempt securities.
The Company continues to maintain a disciplined investment policy whereby
the investment portfolio is invested exclusively in fixed income securities
rated "A" or better. This policy is an outgrowth of the Company's investment
strategy, which seeks to maximize after-tax investment income through a
high-quality, diversified taxable bond and tax-exempt municipal bond portfolio,
while maintaining an adequate level of liquidity. Consistent with this policy,
the Company has elected to manage its portfolio to maintain yield rather than to
pursue a strategy of realizing investment gains. The Company seeks to achieve an
appropriate matching of its investments with its reinsurance liabilities. The
average effective maturity of the investment portfolio was 3.3 years at December
31, 1994 versus 3.9 years at December 31, 1993.
As a holding company, the Company's principal sources of cash are cash
dividends and tax payments from Re Cap, borrowings and the issuance of equity or
debt securities. Generally, dividends that can be paid by Re Cap without the
prior approval of the New Jersey Insurance Commissioner are limited for any
twelve month period to the lesser of 10% of surplus or net investment income. At
December 31, 1994, the surplus of Re Cap was $166,596,000 and net investment
income for the year then ended was $21,514,000. Accordingly, dividends for 1994
not requiring prior approval of the New Jersey Insurance Commissioner are
limited to approximately $16,660,000. To date, Re Cap has never paid a dividend
to the Company. The Company and Re Cap are parties to a tax sharing agreement,
which requires Re Cap to compute its hypothetical tax liability on a separate
company basis. The amount of such liability, which has historically exceeded the
amount of the Company's actual tax liability, is then remitted to the Company.
For the years ended December 31, 1994 and 1993, the excess of such payments over
actual payments by the Company was approximately $1,380,000 and $1,440,000,
respectively.
ACCOUNTING STANDARDS AND REGULATION
In November 1992, the FASB issued SFAS No. 112, "Employers' Accounting for
Post Employment Benefits." SFAS No. 112, which is effective for fiscal years
beginning after December 15, 1993, establishes accounting standards for
employers who provide benefits to former or inactive employees after employment
but before retirement. The Company's adoption of SFAS No. 112, effective January
1, 1994, did not have a material impact on its financial statements.
In June 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement, which was effective
for fiscal years beginning after December 15, 1993, requires that securities be
classified in one of three categories. Debt securities that the Company has the
intent and ability to hold to maturity are to be classified as held to maturity
and reported at amortized cost. Debt and equity securities that are held for
resale are to be classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings. Debt and equity
securities not so classified would be considered available for sale and reported
at fair value with unrealized gains and losses, net of tax, included in
shareholders' equity. As previously noted, the Company elected to adopt this new
standard effective December 31, 1993. In connection therewith, the Company
classified all of its fixed income portfolio as available for sale and recorded
such securities at their market value. The Company's classification of its
portfolio as available for sale provides the Company with the flexibility to
adjust its portfolio as needed in response to operating, tax and regulatory
conditions.
25
<PAGE> 29
In December 1993, the National Association of Insurance Commissioners (the
"NAIC") adopted final minimum capitalization requirements for property-casualty
reinsurance companies known as the Risk-Based Capital model. The NAIC's stated
objective in developing these risk-based capital standards is to improve
solvency monitoring. Formal implementation of these new minimum capitalization
requirements will occur concurrent with the filing of the 1994 annual statement.
Management believes that its capital and surplus are adequate to meet the
risk-based capital requirements contained in the NAIC's model.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Consolidated Financial Statements and Notes thereto and the
Schedules on pages F-1 through F-18 and S-1 through S-4 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
See the information under captions "Election of Directors" and "Directors
and Executive Officers" in the Registrant's definitive proxy statement (the
"Proxy Statement") for its 1995 Annual Meeting of Shareholders, which is hereby
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
See the information under the caption "Compensation of Directors and
Executive Officers" in the Proxy Statement, which is hereby incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information under the caption "Security Ownership of Principal
Stockholders" in the Registrant's special proxy statement (the "Special Proxy
Statement") for its Special Meeting of Stockholders to be held to vote on the
Merger, which is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information under the caption "Interests of Certain Persons in the
Merger" in the Special Proxy Statement, and information under the caption
"Certain Relationships and Related Transactions" in the Proxy Statement, which
are hereby incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS AND SCHEDULES. The Financial Statements and
schedules listed in the accompanying Index to Financial Statements and Schedules
at page F-1 are filed as part of this Annual Report on Form 10-K, and are
included in Item 8.
EXHIBITS. The exhibits listed in the accompanying Index to Exhibits at
page E-1 are filed as part of this Annual Report on Form 10-K.
(B) REPORTS ON FORM 8-K. A Form 8-K was filed on January 19, 1995,
announcing the Company's execution of the Merger Agreement.
26
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Stamford, State of Connecticut on the 14th day February, 1995.
RE CAPITAL CORPORATION
(Registrant)
By: /s/ JAMES E. ROBERTS
------------------------------------
James E. Roberts, President, Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
- - - - ----------------------------------- ----------------------------------- ------------------
<S> <C> <C>
/s/ JAMES E. ROBERTS President, Chief Executive Officer February 14, 1995
- - - - ----------------------------------- and Director (Principal Executive
James E. Roberts Officer)
/s/ R. RICHARD MUELLER Vice President, Chief Financial February 14, 1995
- - - - ----------------------------------- Officer and Treasurer (Principal
R. Richard Mueller Accounting and Financial Officer)
/s/ DENNIS E. HOFFMANN Chairman and Director February 14, 1995
- - - - -----------------------------------
Dennis E. Hoffmann
/s/ DONALD E. CHISHOLM Vice Chairman and Director February 14, 1995
- - - - -----------------------------------
Donald E. Chisholm
/s/ GEORGE G. D'AMATO, JR. Director February 14, 1995
- - - - -----------------------------------
George G. D'Amato, Jr.
/s/ HAROLD R. HISER, JR. Director February 14, 1995
- - - - -----------------------------------
Harold R. Hiser, Jr.
/s/ JEAN R. PERRETTE Director February 14, 1995
- - - - -----------------------------------
Jean R. Perrette
/s/ MAURICE W. SLAYTON Director February 14, 1995
- - - - -----------------------------------
Maurice W. Slayton
/s/ RICHARD R. WEST Director February 14, 1995
- - - - -----------------------------------
Richard R. West
</TABLE>
27
<PAGE> 31
INDEX TO
FINANCIAL STATEMENTS AND SCHEDULES
The following report and financial statements and schedules of Re Capital
Corporation and subsidiaries are included in response to Item 14(a).
<TABLE>
<CAPTION>
PAGE(S)
-----------
<S> <C>
REPORT
Report of independent auditors on the consolidated financial statements and
schedules...................................................................... F-2
FINANCIAL STATEMENTS
Consolidated balance sheets as of December 31, 1994 and 1993..................... F-3
Consolidated statements of income for the years ended December 31, 1994, 1993
and 1992....................................................................... F-4
Consolidated statements of shareholders' equity for the years ended December 31,
1994, 1993 and 1992........................................................... F-5
Consolidated statements of cash flows for the years ended December 31, 1994, 1993
and 1992....................................................................... F-6
Notes to consolidated financial statements....................................... F-7 - F-18
SCHEDULES
Schedule II -- Condensed Financial Information of Registrant for the years ended
December 31, 1994, 1993 and 1992............................................... S-1 - S-3
Schedule VI -- Supplemental information covering Property/Casualty Insurance
Operations for the years ended December 31, 1994, 1993 and 1992................ S-4
</TABLE>
------------------------------------------
Schedules other than those listed above have been omitted
because the required information is inapplicable or the
information is presented in the financial statements or related
notes.
F-1
<PAGE> 32
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Re Capital Corporation
We have audited the accompanying consolidated balance sheets of Re Capital
Corporation and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1994. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Re Capital Corporation and subsidiaries at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the
Company made certain accounting changes in 1993 and 1992.
ERNST & YOUNG LLP
New York, New York
February 8, 1995
F-2
<PAGE> 33
RE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1993
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at market value
(amortized cost: 1994 -- $344,428 and 1993 -- $318,868)........... $336,696 $334,719
Short-term........................................................... 5,137 8,676
-------- --------
Total Investments............................................ 341,833 343,395
Cash................................................................... 1,061 692
Accrued investment income.............................................. 6,612 6,280
Premiums receivable.................................................... 64,261 57,227
Reinsurance balances recoverable....................................... 14,829 12,557
Deferred acquisition costs............................................. 13,376 13,389
Funds held by ceding companies......................................... 1,602 11,947
Other assets........................................................... 22,658 13,130
-------- --------
Total Assets................................................. $466,232 $458,617
======== ========
LIABILITIES
Claims and claim expenses.............................................. $210,397 $200,638
Unearned premiums...................................................... 52,221 46,487
Convertible debentures................................................. 69,000 69,000
Other liabilities...................................................... 13,407 11,719
-------- --------
Total Liabilities............................................ 345,025 327,844
SHAREHOLDERS' EQUITY
Preferred stock, $.10 par value; authorized: 1,000,000 shares; none
issued...............................................................
Common stock, $.10 par value; authorized: 50,000,000 shares;
issued 9,540,174 shares (1994) and 9,536,159 shares (1993)........... 954 954
Additional paid-in capital............................................. 93,242 93,194
Unrealized (depreciation) appreciation on fixed maturities
available for sale, net of tax....................................... (5,103) 10,461
Retained earnings...................................................... 61,541 55,890
Unearned compensation -- restricted common stock....................... (1,333) (1,632)
Treasury stock, at cost: 2,490,284 shares.............................. (28,094) (28,094)
-------- --------
Total Shareholders' Equity................................... 121,207 130,773
-------- --------
Total Liabilities and Shareholders' Equity................... $466,232 $458,617
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 34
RE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
REVENUES
Premiums written........................................... $132,421 $115,814 $121,316
Increase in unearned premiums.............................. 3,023 3,133 2,873
-------- -------- --------
Premiums earned............................................ 129,398 112,681 118,443
Net investment income...................................... 21,696 18,934 17,270
Net realized investment gains.............................. 39 694 342
-------- -------- --------
Total Revenues........................................... 151,133 132,309 136,055
EXPENSES
Claims and claim expenses.................................. 94,795 84,137 92,319
Amortization of deferred acquisition costs................. 33,272 28,455 34,624
Other operating expenses................................... 11,169 9,562 9,798
Interest expense........................................... 3,795 2,348 1,363
-------- -------- --------
Total Expenses........................................... 143,031 124,502 138,104
Income (Loss) before Federal income taxes.................. 8,102 7,807 (2,049)
Federal income tax expense (benefit)....................... 195 (230) (3,490)
-------- -------- --------
Income before cumulative effect of accounting change..... 7,907 8,037 1,441
Cumulative effect of change in method of accounting for
income taxes............................................. -- -- 868
-------- -------- --------
Net Income............................................... $ 7,907 $ 8,037 $ 2,309
======== ======== ========
PER SHARE DATA
PRIMARY EARNINGS PER SHARE:
Weighted average shares outstanding........................ 6,959 6,834 6,533
======== ======== ========
Primary earnings per share before cumulative effect of
accounting change........................................ $ 1.14 $ 1.18 $ 0.22
Cumulative effect of change in method of accounting for
income taxes............................................. -- -- 0.13
-------- -------- --------
Primary earnings per share................................. $ 1.14 $ 1.18 $ 0.35
======== ======== ========
FULLY DILUTED EARNINGS PER SHARE:
(assuming conversion of convertible debentures)
Weighted average shares outstanding........................ 10,974 8,792 7,074
======== ======== ========
Fully diluted earnings per share before cumulative effect
of accounting change..................................... $ .95 $ 1.06 $ 0.22
Cumulative effect of change in method of accounting for
income taxes............................................. -- -- 0.13
-------- -------- --------
Fully diluted earnings per share........................... $ .95 $ 1.06 $ 0.35
======== ======== ========
Cash dividends declared per share.......................... $ .32 $ 0.28 $ 0.24
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 35
RE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
(DEPRECIATION)
APPRECIATION
ON FIXED UNEARNED
SHARES OF MATURITIES COMPENSATION --
COMMON STOCK ADDITIONAL AVAILABLE RESTRICTED COMMON TOTAL
---------------- COMMON PAID-IN FOR SALE, RETAINED COMMON STOCK IN SHAREHOLDERS'
ISSUED TREASURY STOCK CAPITAL NET OF TAX EARNINGS STOCK TREASURY EQUITY
----- -------- ------ ---------- ----------------- -------- -------------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1,
1992.......... 8,817 1,990 $ 882 $ 81,310 $ -- $48,981 $ -- $(21,507) $ 109,666
Exercise of
common stock
options....... 2 2
Treasury shares
acquired...... 499 (6,569) (6,569)
Dividends to
shareholders... (1,515) (1,515)
Net Income...... 2,309 2,309
----- ------- ----- --------- -------- ------- ------- -------- -----------
Balance at
December 31,
1992.......... 8,817 2,489 882 81,312 -- 49,775 -- (28,076) 103,893
Exercise of
common stock
options....... 8 1 93 94
Treasury shares
acquired...... 1 (18) (18)
Dividends to
shareholders... (1,922) (1,922)
Exercise of
convertible
note
payable....... 588 59 9,941 10,000
Issuance of
restricted
common
stock --
employees..... 123 12 1,848 (1,860) --
Restricted stock
compensation
expense --
employees..... 228 228
Net Income...... 8,037 8,037
Cumulative
effect, net of
tax, of a
change in
accounting for
investments in
debt
securities.... 10,461 10,461
----- ------- ----- --------- -------- ------- ------- -------- -----------
Balance at
December 31,
1993.......... 9,536 2,490 954 93,194 10,461 55,890 (1,632) (28,094) 130,773
Exercise of
common stock
options....... 4 4
Dividends to
shareholders... (2,256) (2,256)
Issuance of
restricted
common
stock --
directors..... 4 44 (44) --
Restricted stock
compensation
expense --
directors..... 33 33
Restricted stock
compensation
expense --
employees..... 310 310
Net Income...... 7,907 7,907
Decrease in
unrealized
appreciation
on fixed
maturities
available for
sale, net of
tax........... (15,564) (15,564)
----- ------- ----- --------- -------- ------- ------- -------- ---------
Balance at
December 31,
1994.......... 9,540 2,490 $ 954 $ 93,242 $ (5,103) $61,541 $ (1,333) $(28,094) $ 121,207
===== ======= ===== ========= ========= ======= ======== ======== =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 36
RE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1993 1992
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 7,907 $ 8,037 $ 2,309
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in claim liabilities.......................... 10,198 19,767 8,592
Increase in unearned premiums.......................... 3,023 3,133 2,873
Decrease (Increase) in deferred acquisition costs...... 13 (1,162) (306)
Increase in reinsurance balances, net.................. (6,591) (8,655) (7,190)
Decrease (Increase) in funds held, net................. 10,311 (462) (1,049)
(Increase) Decrease in accrued investment income....... (332) (963) 1
Amortization of net investment premium................. 2,192 1,806 1,713
Net realized investment gains.......................... (39) (694) (342)
Change in deferred tax asset, net...................... (1,647) (2,243) (4,946)
Change in other assets and liabilities, net............ 1,789 4,414 408
-------- -------- -------
Net Cash Provided by Operating Activities................. 26,824 22,978 2,063
INVESTING ACTIVITIES
Maturities or calls of fixed maturities..................... 22,446 16,622 19,157
Sales of fixed maturities................................... -- 11,380 5,878
Purchases of fixed maturities............................... (50,158) (105,280) (32,901)
Net sales of short-term investments......................... 3,539 2,657 5,297
Net additions to property and equipment..................... (102) (364) (2)
-------- -------- -------
Net Cash Used in Investing Activities..................... (24,275) (74,985) (2,571)
FINANCING ACTIVITIES
Cash dividends to shareholders.............................. (2,184) (1,811) (1,477)
Net proceeds from issuance of convertible debentures........ -- 67,282 --
Acquisition of treasury stock............................... -- (18) (6,569)
Short-term debt (repayments) borrowings, net................ -- (14,850) 9,350
Exercise of common stock options............................ 4 94 2
-------- -------- -------
Net Cash (Used in) Provided by Financing Activities....... (2,180) 50,697 1,306
-------- -------- -------
INCREASE (DECREASE) IN CASH................................. 369 (1,310) 798
Cash at Beginning of Year................................... 692 2,002 1,204
-------- -------- -------
Cash at End of Year....................................... $ 1,061 $ 692 $ 2,002
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 37
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
NOTE 1 ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles which differ from statutory accounting
practices prescribed by regulatory authorities for the Company's reinsurance
subsidiary, Re Capital Reinsurance Corporation ("Re Cap"). Certain accounts have
been reclassified in the 1993 and 1992 financial statements to conform to the
1994 presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Re Capital
Corporation (the "Company") and its wholly-owned subsidiaries, principally Re
Cap. All material intercompany accounts and transactions have been eliminated in
consolidation.
INVESTMENTS
Effective December 31, 1993, the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." This statement requires
that securities be classified in one of three categories: held-to-maturity,
available-for-sale and/or trading. The Company has categorized all of its fixed
income portfolio as available-for-sale and recorded such securities at their
market value as determined by quoted market prices. Unrealized appreciation
(depreciation) on these securities is recorded as a separate component of
shareholders' equity, net of tax.
Investment income is recognized when earned. Realized gains and losses on
sales of investments are recognized in net income on the specific identification
basis.
REVENUE RECOGNITION
Premiums are earned over the terms of the reinsurance contracts. Unearned
premiums are computed by pro rata methods based on statistical data or reports
received from ceding companies. Premium and commission adjustments are accrued
on an estimated basis throughout the policy terms.
ACQUISITION COSTS
Acquisition costs, consisting of commission and brokerage expenses, are
deferred and amortized over the period in which related premiums are earned.
Deferred acquisition costs are limited to their estimated realizable value after
consideration of anticipated claims and claim expenses and anticipated
investment income.
LIABILITIES FOR CLAIMS AND CLAIM EXPENSES
The liabilities for claims and claim expenses are based on reports and
individual case estimates received from ceding companies. An estimate is
provided for claims and claim expenses incurred but not reported on the basis of
the experience of Re Cap, the reinsurance industry, and of the ceding companies
on the business reinsured by Re Cap. Although considerable variability is
inherent in such estimates, management believes that the liabilities for unpaid
claims and claim expenses are adequate. These estimates are regularly reviewed
and as experience develops and new information becomes known, the estimated
liabilities are adjusted as necessary. Such adjustments, if any, are reflected
in results of operations in the period in which they become known.
F-7
<PAGE> 38
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
Federal income tax provisions are based on income reported for financial
statement purposes. Deferred Federal income taxes are recognized using the
liability method, whereby tax rates are applied to cumulative temporary
differences based on when and how they are expected to affect the tax return.
Effective January 1, 1992, the Company adopted the provisions of SFAS No. 109,
"Accounting for Income Taxes." The cumulative effect of adopting this new
standard as of January 1, 1992, was to increase net income for the year ended
December 31, 1992 by $868,000, or $.13 per share.
EARNINGS PER SHARE OF COMMON STOCK
Primary earnings per share of common stock are based on the weighted
average number of common shares and common stock equivalents outstanding
computed by the "treasury stock" method. Fully diluted earnings per share
assumes conversion of dilutive convertible debentures and the assumed exercise
of all common stock equivalents.
REINSURANCE
Effective January 1, 1993, the Company adopted the provisions of SFAS No.
113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts." This statement requires the Company to report its
statement of financial position gross of the effects of its retrocessional
program. Additionally, this standard establishes criteria for determining what
constitutes a reinsurance contract for accounting purposes. SFAS No. 113 did not
have a material impact on the Company's results of operations.
On July 22, 1993, the FASB's Emerging Issues Task Force (EITF) issued
consensus 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by
Ceding and Assuming Companies," which established new accounting guidelines for
multi-year retrospectively rated reinsurance contracts. These guidelines did not
have an impact on the Company's financial statements.
NOTE 2 INVESTMENTS
Major categories of net investment income are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Fixed maturities...................................... $21,788 $18,757 $17,688
Short-term investments................................ 556 772 781
------- ------- -------
22,344 19,529 18,469
Net investment expenses............................... (648) (595) (1,199)*
------- ------- -------
Net investment income............................... $21,696 $18,934 $17,270
======= ======= =======
</TABLE>
- - - - ---------------
* Includes $575,000 of interest expense related to a commutation payment made by
Re Cap.
F-8
<PAGE> 39
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 INVESTMENTS (CONTINUED)
Realized and unrealized investment gains (losses) were as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993 1992
-------- ------ -----
<S> <C> <C> <C>
Net realized gains on calls/sales of fixed maturities........... $ 39 $ 694 $ 342
Tax expense..................................................... (13) (236) (116)
-------- ------ -----
Net realized investment gains, net of tax..................... $ 26 $ 458 $ 226
======== ====== =====
Change in unrealized appreciation (depreciation)
of fixed maturities........................................ $(23,583) $2,567 $(230)*
======== ====== =====
</TABLE>
- - - - ---------------
* Includes $617,000 of unrealized appreciation on securities classified as held
for sale and recorded at the lower of amortized cost or market value.
The amortized cost and estimated market value of debt securities at
December 31, 1994 and 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Municipal securities............................ $159,682 $ 2,751 $ (1,181) $161,252
Corporate securities............................ 105,669 325 (4,800) 101,194
Mortgage- and asset-backed securities........... 51,437 8 (3,280) 48,165
U.S. Treasury and government agency
securities.................................... 27,640 -- (1,555) 26,085
-------- ------- -------- --------
December 31, 1994............................. $344,428 $ 3,084 $(10,816) $336,696
======== ======= ======== ========
Municipal securities............................ $161,922 $10,606 $ -- $172,528
Corporate securities............................ 97,164 4,698 (298) 101,564
Mortgage- and asset-backed securities........... 42,079 910 (27) 42,962
U.S. Treasury and government agency
securities.................................... 17,703 177 (215) 17,665
-------- ------- -------- --------
December 31, 1993............................. $318,868 $16,391 $ (540) $334,719
======== ======= ======== ========
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1994, by contractual maturity dates are shown below (in thousands).
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
--------- ---------
<S> <C> <C>
Due in one year or less................................................ $ 15,547 $ 15,616
Due after one year through five years.................................. 165,393 164,391
Due after five years through ten years................................. 89,212 85,348
Due after 10 years..................................................... 22,839 23,176
-------- --------
292,991 288,531
Mortgage- and asset-backed securities.................................. 51,437 48,165
-------- --------
Totals............................................................... $344,428 $336,696
======== ========
</TABLE>
F-9
<PAGE> 40
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 INVESTMENTS (CONTINUED)
There were no gains or losses realized on the sale of investments in 1994.
Gross gains of $582,000 and gross losses of $7,000 were realized on the sale of
investments during 1993, as compared to realized gross gains of $100,000 in
1992.
NOTE 3 CLAIMS AND CLAIM EXPENSES
The following table represents an analysis of Re Cap's claims and claim
expenses liability, reconciling the beginning and ending liability balances, net
of reinsurance recoverable, for the fiscal years ended December 31, 1994, 1993,
and 1992.
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net liability for claims and claim expenses, at the
beginning of year........................................ $191,599 $172,666 $162,985
Provision for claims and claim expenses occurring in the
current year............................................. 94,547 87,165 90,684
Increase (Decrease) in estimated losses for claims
occurring in prior years:
Commutations.......................................... -- -- 2,505
All other business.................................... 248 (3,028) (870)
-------- -------- --------
Total increase (decrease).................................. 248 (3,028) 1,635
-------- -------- --------
Net incurred claims during the current year.............. 94,795 84,137 92,319
Payment for claims and claim expenses occurring during:
The current year...................................... 18,117 13,632 16,715*
Prior years:
Commutations........................................ -- -- 26,378
All other business.................................. 66,739 51,572 39,545
-------- -------- --------
84,856 65,204 82,638
-------- -------- --------
Net liability for claims and claim expenses, at end of
year..................................................... 201,538 191,599 172,666
Reinsurance recoverables on unpaid losses and LAE,
at end of year........................................... 8,859 9,039 12,088
-------- -------- --------
Gross liability for claims and claim expenses, at end of
year..................................................... $210,397 $200,638 $184,754
======== ======== ========
</TABLE>
- - - - ---------------
* Includes $5.3 million in loss payments related to Hurricanes Andrew and Iniki
and the Los Angeles riots.
NOTE 4 CONVERTIBLE DEBENTURES
On July 27, 1993, the Company completed a public offering of $69,000,000 in
convertible debentures (the "Debentures") due August 1, 2000. The Debentures
bear interest at 5 1/2% and are convertible into shares of Re Capital
Corporation common stock at a price of $17.1875 per share, subject to adjustment
in certain circumstances. The Debentures are redeemable at any time on or after
August 3, 1996, in whole or in part, at the option of the Company, at a
redemption price of 103.14%, decreasing to par at maturity (see Note 13). The
expenses incurred in the offering of $1,718,000 were deferred and are being
amortized over the life of the
F-10
<PAGE> 41
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 CONVERTIBLE DEBENTURES (CONTINUED)
Debentures. At December 31, 1994, the fair value of the debentures was
approximately $62,790,000 ($72,450,000 at February 8, 1995), based on quoted
market prices.
In October 1991, the Company sold a $10,000,000 convertible note to John
Deere Insurance Company ("JDIC"). During 1993, the terms of the convertible note
were amended to provide for (i) conversion at $17.00 per share and (ii) a
reduction in the stated interest rate to 5 1/2%. On June 15, 1993, JDIC
converted the note into 588,235 shares of the Company's common stock.
Interest paid in 1994 and 1993 was $3,837,000 and $1,078,000, respectively.
NOTE 5 FEDERAL INCOME TAXES
The provision for Federal income taxes differs from amounts currently
payable due to certain items reported for financial statement purposes in
periods which differ from those in which they are reported for tax purposes.
Federal income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax on income:
Current............................................. $ 1,842 $ 2,013 $ (510)
Deferred............................................ (1,647) (2,243) (2,980)
------- ------- -------
Federal income tax expense (benefit)........... $ 195 $ (230) $(3,490)
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets (included in other assets) and liabilities as
of December 31, 1994 and 1993 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1993
------- -------
<S> <C> <C>
Deferred tax assets:
Loss reserve discounting....................................... $14,069 $13,608
Unrealized depreciation on fixed maturities available for
sale........................................................ 2,629 --
Unearned premiums.............................................. 3,202 2,996
Pension expense................................................ 1,970 1,717
AMT credit carryforwards....................................... 2,206 1,550
Other.......................................................... 474 279
------- -------
Total deferred tax assets................................... 24,550 20,150
------- -------
Deferred tax liabilities:
Unrealized appreciation on fixed maturities available for
sale........................................................ -- 5,390
Deferred acquisition costs..................................... 4,548 4,552
Other.......................................................... 662 534
------- -------
Total deferred tax liabilities.............................. 5,210 10,476
------- -------
Net deferred tax assets..................................... $19,340 $ 9,674
======= =======
</TABLE>
Federal income taxes paid during the years ended December 31, 1994, 1993,
and 1992 were $1,720,000, $1,460,000, and $1,923,000, respectively.
F-11
<PAGE> 42
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 FEDERAL INCOME TAXES (CONTINUED)
The Company's effective income tax rate on income varied from the statutory
Federal income tax rate as a result of the following items:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax expense (benefit) at Federal statutory rate....... $ 2,755 $ 2,654 $ (696)
(Decrease) Increase in taxes resulting from:
Tax-exempt investment income........................ (2,987) (2,898) (2,815)
Other............................................... 427 14 21
------- ------- -------
Federal income tax expense (benefit)............. $ 195 $ (230) $(3,490)
======= ======= =======
</TABLE>
NOTE 6 EMPLOYEE BENEFITS
RESTRICTED COMMON STOCK
During 1993, the shareholders of the Company approved the adoption of the
Restricted Stock Incentive Compensation Plan (the "Plan"). Under the Plan,
certain key employees have been awarded 123,000 shares of the Company's common
stock at an aggregate market value of $1,860,000. Such shares vest only upon
achievement of certain designated financial performance targets or after ten
years, whichever is sooner. The related expense for the Plan was $310,000 and
$228,000 for 1994 and 1993, respectively.
STOCK OPTIONS
The Company's Long-Term Incentive Plan (the "Incentive Plan"), adopted in
1987 and amended in 1992, provides for awarding stock grants and options to key
employees. There are a maximum of 1,000,000 shares of common stock issuable
under the Incentive Plan, of which 127,678 shares have been granted and 751,935
options have been awarded (net of cumulative forfeitures of 12,088 shares) as of
December 31, 1994, including 11,169 options which have been exercised as of
December 31, 1994. Options granted, at the market value of the common stock on
the date of grant, are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year ($9.325 to $17.875 per
share)........................................................ 743 751 620
Granted ($14.00 to $14.125 per share)........................... -- -- 141
Exercised ($9.325 per share).................................... (1) (8) --
Forfeited....................................................... (1) -- (10)
--- --- ---
Outstanding at end of year ($9.325 to $17.875 per share)........ 741 743 751
=== === ===
Options exercisable............................................. 704 656 576
=== === ===
Shares available for future options............................. 120 120 120
=== === ===
</TABLE>
STOCK APPRECIATION RIGHTS
At December 31, 1994, 1993, and 1992, there were 17,687 stock appreciation
rights ("SARs") outstanding at an exercise price of $14.525. The SARs are
payable in cash or common stock at the Company's option.
F-12
<PAGE> 43
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 EMPLOYEE BENEFITS (CONTINUED)
EMPLOYEES' RETIREMENT PLAN
In 1990, the Employees' Retirement Plan of Re Capital Corporation (the
"Retirement Plan") was adopted. The Retirement Plan is a defined benefit,
noncontributory plan covering substantially all full-time employees. Benefits
are based on years of credited service and average compensation. The Company's
funding policy is to contribute amounts that are necessary to maintain the
Retirement Plan on a sound actuarial basis and to meet the minimum funding
standards prescribed by law. Assets of the Retirement Plan are invested in trust
funds composed of equity and fixed income securities. The components of pension
expense applicable to this plan for the years ended December 31, 1994, 1993, and
1992 were as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned during the year.................. $248 $247 $197
Interest cost on projected benefit obligation................. 95 87 56
Actual return on plan assets.................................. (99) (65) (46)
Net amortization and deferral................................. 2 16 14
---- ---- ----
Net pension expense......................................... $246 $285 $221
==== ==== ====
</TABLE>
The projected benefit obligation for 1994 and 1993 was determined using
assumed discount rates of 8.25% and 7.25%, and assumed compensation increases of
6.25% and 5.5%, respectively. The assumed long-term rate of return on plan
assets for both years was 8.25%.
<TABLE>
<CAPTION>
RECONCILIATION OF
FUNDED STATUS AS OF
DECEMBER 31,
-------------------
1994 1993
------- -------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$828,000 and $739,000 in 1994 and 1993, respectively....... $ (857) $ (807)
======= =======
Projected benefit obligation..................................... $(1,448) $(1,628)
Plan assets at fair value........................................ 1,294 1,114
------- -------
Funded status.................................................... (154) (514)
Remaining portion of unrecognized net obligation existing at
January 1, 1990................................................ 230 247
Unrecognized prior service cost.................................. (285) --
Unrecognized net loss............................................ 53 183
------- -------
Accrued pension cost included in other liabilities............. $ (156) $ (84)
======= =======
</TABLE>
SUPPLEMENTAL EMPLOYEE BENEFITS
In connection with contractual employment arrangements, certain officers of
the Company have been granted retirement benefits, net of amounts provided by
the Retirement Plan, based on various fixed percentages of final average
compensation, as defined. These retirement benefits are accounted for as
deferred compensation arrangements and are accrued over the expected periods of
employment of the individuals. The liability for these retirement benefits at
December 31, 1994 and 1993 aggregated $5,640,000 and $4,880,000, respectively,
and the related expense for the years ended December 31, 1994, 1993, and 1992
was $715,000, $461,000, and $1,421,000, respectively.
F-13
<PAGE> 44
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 EMPLOYEE BENEFITS (CONTINUED)
SEVERANCE COMPENSATION ARRANGEMENTS
The Company has in place severance compensation agreements for two senior
officers of the Company which could become effective if a change in control of
the Company's outstanding common stock is proposed or occurs. The severance
agreements provide for the payment of additional compensation, accelerated
pension vesting, and other employee welfare benefits if certain specified
"takeover" actions occur without the approval of not less than two-thirds of the
Board of Directors prior to such takeover actions.
EMPLOYEE SAVINGS PLAN
The Company sponsors an employee savings plan (401k) whereby the Company
matches 50% of each employee's contribution up to 6% of the employee's salary.
The Company's contribution for 1994, 1993, and 1992 were $87,000, $83,000, and
$75,000, respectively.
NOTE 7 COMMON STOCK
On May 20, 1992, the Company's shareholders approved an amendment to the
Company's charter increasing the number of authorized shares of common stock
from 15,000,000 to 50,000,000. Previously, on May 5, 1987, the Company's
shareholders had authorized 1,000,000 shares of a new class of Preferred Stock,
par value $.10 per share. The relative rights, preferences and limitations of
any issuance of preferred stock are to be determined by the Company's Board of
Directors.
Since October 20, 1987, the Company has announced fourteen stock repurchase
programs totalling $30,460,000. As of December 31, 1993, the Company had
purchased 2,378,888 shares for approximately $27,916,000, or $11.74 a share, and
had $2,544,000 authorized for future repurchases. On June 1, 1993, the Company
announced the suspension of its share repurchase program.
NOTE 8 DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION
The ability of the Company to pay dividends is largely dependent upon the
ability of Re Cap to pay dividends to the Company. Dividends of Re Cap may be
paid only out of its statutory surplus. The maximum amount of dividends that may
be paid in any twelve-month period without prior approval of the New Jersey
Insurance Department is the lesser of net investment income or 10% of statutory
surplus. Accordingly, for 1994, dividends are limited to approximately
$16,660,000. Loans and advances from Re Cap to the Company are subject to
regulatory approval.
Re Cap's statutory surplus was $166,596,000 and $155,530,000 at December
31, 1994 and 1993, respectively. Re Cap's statutory net income for the years
ended December 31, 1994 and 1993 was $11,839,000 and $7,988,000, respectively,
as compared to a statutory net loss of $204,000 for the year ended December 31,
1992.
For Re Cap, the differences between generally accepted accounting
principles (GAAP) and statutory accounting practices are the treatment of
acquisition costs, deferred income taxes and other deferred charges. The
following tables set forth a reconciliation of Re Cap's net income (loss) and
statutory surplus, as filed
F-14
<PAGE> 45
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION (CONTINUED)
with the insurance regulatory authorities, to its net income and shareholders'
equity as determined in accordance with GAAP for the years ended and as of
December 31 (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME
Statutory net income (loss) of Re Capital
Reinsurance Corporation.................................. $ 11,839 $ 7,988 $ (204)
Change in deferred acquisition costs....................... (13) 1,162 306
Provision for deferred income taxes........................ 957 1,640 3,632
Cumulative effect of change in accounting for income
taxes.................................................... -- -- 462
Other...................................................... -- (78) (209)
-------- -------- --------
GAAP net income of Re Capital Reinsurance Corporation...... $ 12,783 $ 10,712 $ 3,987
======== ======== ========
RECONCILIATION OF SURPLUS
Statutory capital and surplus of Re Capital
Reinsurance Corporation.................................. $166,596 $155,530 $102,088
Deferred acquisition costs................................. 13,376 13,389 12,227
Unrealized (depreciation) appreciation of investments, net
of tax................................................... (5,091) 10,456 --
Deferred income taxes...................................... 15,838 14,882 13,242
Unauthorized reinsurance................................... 862 96 330
Non-admitted assets........................................ 44 37 6
Other...................................................... -- -- 78
-------- -------- --------
GAAP shareholders' equity of Re Capital
Reinsurance Corporation.................................. $191,625 $194,390 $127,971
======== ======== ========
</TABLE>
NOTE 9 COMMITMENTS AND CONTINGENCIES
Rental expense for all leases aggregated $1,021,000 in 1994, $944,000 in
1993, and $1,150,000 in 1992. Future minimum payments under noncancelable
operating leases at December 31, 1994 are; $1,128,000 in 1995, $1,082,000 in
1996, $935,000 in 1997, $939,000 in 1998, $939,000 in 1999, and $2,041,000
thereafter. Several of the leases have renewable options with rental rate
adjustments.
Re Cap is contingently liable under standby letters of credit totalling
$217,000 at December 31, 1994, issued to guarantee its obligations for claim
liabilities and unearned premium reserves owed to ceding companies. Fixed income
securities with an amortized cost of $408,000 are pledged as collateral to the
bank issuing the letters of credit. In addition, fixed income securities with an
amortized cost of $107,322,000 are pledged to secure trust agreements with three
ceding companies.
NOTE 10 REINSURANCE
All of Re Cap's premiums written are assumed from other insurance
companies. Re Cap also cedes reinsurance to other companies. Risks are reinsured
(retroceded) with other companies to permit the recovery of a portion of Re
Cap's losses. Re Cap remains liable regardless of whether the reinsuring
companies meet their obligations under these reinsurance treaties.
F-15
<PAGE> 46
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 REINSURANCE (CONTINUED)
The components of the Company's reinsurance balances recoverable at
December 31, 1994 and 1993 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Ceded claims and claim expenses.................................. $ 8,859 $ 9,039
Prepaid reinsurance premiums..................................... 5,135 2,424
Reinsurance recoverable on paid claims........................... 835 1,094
------- -------
Reinsurance balances recoverable............................... $14,829 $12,557
======= =======
</TABLE>
The effect of the Company's retrocessional program on premiums written,
premiums earned and claims and claim expenses for the years ended December 31,
1994, 1993 and 1992 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ ------
<S> <C> <C> <C>
Ceded premiums written.................................. $11,329 $7,459 $5,668
Ceded premiums earned................................... 8,618 6,749 5,483
Ceded claims and claim expenses......................... 4,388 3,209 9,865
</TABLE>
NOTE 11 RELATED PARTY TRANSACTIONS
In 1987, Re Cap entered into an underwriting and claims management
agreement with John Deere Insurance Company ("JDIC") under which Re Cap writes
certain reinsurance business on behalf of JDIC and assumes 92.5% of such
business, and cedes approximately 7.5% of most of its other reinsurance business
to JDIC. At December 31, 1994, Deere Insurance's ownership in the Company's
common stock was 43.8% of outstanding shares (see Note 13). Significant balances
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Amounts due Re Cap:
Premium balances......................................... $21,524 $18,785
Ceded claims and claim expenses.......................... 7,611 7,370
Deferred acquisition costs............................... 4,115 2,636
------- -------
Totals........................................... $33,250 $28,791
======= =======
Amounts due JDIC:
Gross claims and claim expenses.......................... $81,620 $69,375
Unearned premiums........................................ 14,216 8,936
Other, net............................................... 1,325 575
------- -------
Totals........................................... $97,161 $78,886
======= =======
</TABLE>
F-16
<PAGE> 47
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 RELATED PARTY TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Assumed from JDIC:
Premiums earned..................................... $51,454 $42,334 $47,415
Claims and claim expenses........................... 39,562 33,772 38,472
Amortization of deferred acquisition costs.......... 12,538 7,926 11,884
Ceded to JDIC:
Premiums earned..................................... $ 5,731 $ 4,840 $ 4,645
Claims and claim expenses........................... 3,800 3,330 3,606
Amortization of deferred acquisition costs.......... 1,749 1,435 1,555
</TABLE>
In addition, premiums assumed from two unrelated parties represent 17.9%
and 16.5%, respectively, of net written premiums for the year ended December 31,
1994.
NOTE 12 QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly results for the years
ended December 31, 1994 and 1993.
<TABLE>
<CAPTION>
1994
-------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Premiums earned..................................... $29,207 $35,020 $32,102 $33,069
Net investment income............................... 5,197 5,346 5,506 5,647
Net realized investment gains (losses).............. 41 (3) 1 --
Net income.......................................... 1,537 2,854 2,637 879
Primary earnings per share.......................... .22 .40 .38 .13
Fully diluted earnings per share.................... .20 .31 .30 .13
Cash dividends declared per share................... .08 .08 .08 .08
</TABLE>
<TABLE>
<CAPTION>
1993
-------------------------------------------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Premiums earned..................................... $28,732 $29,624 $27,007 $27,318
Net investment income............................... 4,383 4,510 4,907 5,134
Net realized investment gains....................... -- 388 306 --
Net income.......................................... 2,008 2,851 1,321 1,857
Primary earnings per share.......................... .31 .43 .19 .26
Fully diluted earnings per share.................... .31 .43 .18 .22
Cash dividends declared per share................... .07 .07 .07 .07
</TABLE>
F-17
<PAGE> 48
RE CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 SUBSEQUENT EVENT
On January 11, 1995, the Company entered into an Agreement and Plan of
Merger with Zurich Reinsurance Centre Holdings, Inc. ("ZRC") and ZRC Merger-Sub
Corp., a wholly owned subsidiary of ZRC.
Under the terms of the agreement, shareholders of the Company's common
stock will receive cash consideration of $18.50 per share, and ZRC will assume
all obligations under the Company's existing 5 1/2% Convertible Debentures that
are not converted into common shares prior to the closing. The transaction,
expected to be completed in the first half of 1995, is conditioned upon approval
by the Company's stockholders, certain state insurance regulatory approvals and
certain other customary conditions and approvals. Deere Insurance, owner of
43.8% of the Company's outstanding shares of common stock, has agreed to vote
that stock in favor of the acquisition.
F-18
<PAGE> 49
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
RE CAPITAL CORPORATION
(PARENT COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1993
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
Fixed maturities available for sale, at market value (amortized cost,
1994 -- $2,998 and 1993 -- $3,001)................................ $ 2,980 $ 3,009
Short-term investments............................................... -- 3,954
Investment in subsidiaries........................................... 191,421 194,187
Deferred debt issuance costs......................................... 1,370 1,616
Other assets......................................................... 2,491 1,669
-------- --------
Total Assets................................................. $198,262 $204,435
======== ========
LIABILITIES
Convertible debentures............................................... $ 69,000 $ 69,000
Due to subsidiaries.................................................. 4,321 1,551
Interest payable..................................................... 1,581 1,623
Other liabilities.................................................... 2,153 1,488
-------- --------
Total Liabilities............................................ 77,055 73,662
SHAREHOLDERS' EQUITY
Preferred stock, $.10 par value; authorized:
1,000,000 shares, none issued.....................................
Common stock, $.10 par value; authorized:
50,000,000 shares, issued: 9,540,174 shares (1994)
and 9,536,159 shares (1993)....................................... 954 954
Additional paid-in capital........................................... 93,242 93,194
Unrealized (depreciation) appreciation on fixed maturities
available for sale, net of tax.................................... (5,103) 10,461
Retained earnings.................................................... 61,541 55,890
Unearned compensation -- restricted common stock..................... (1,333) (1,632)
Treasury stock, at cost: 2,490,284 shares............................ (28,094) (28,094)
-------- --------
Total Shareholders' Equity................................... 121,207 130,773
-------- --------
Total Liabilities and Shareholders' Equity................... $198,262 $204,435
======== ========
</TABLE>
S-1
<PAGE> 50
SCHEDULE II (CONTINUED)
RE CAPITAL CORPORATION
(PARENT COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Interest income................................................ $ 182 $ 129 $ 24
------ ------ ------
Total.................................................. 182 129 24
------ ------ ------
EXPENSES
Interest expense............................................... 3,795 2,348 1,363
Legal and consulting expenses.................................. 1,066 261 313
Other operating expenses....................................... 2,105 1,541 1,483
------ ------ ------
Total.................................................. 6,966 4,150 3,159
------ ------ ------
Loss before Federal income tax benefit......................... (6,784) (4,021) (3,135)
Federal income tax benefit..................................... (1,910) (1,354) (1,057)
------ ------ ------
Loss before equity in net income of consolidated
subsidiaries................................................ (4,874) (2,667) (2,078)
Equity in net income of consolidated subsidiaries.............. 12,781 10,704 3,519
------ ------ ------
Income before cumulative effect of accounting change........... 7,907 8,037 1,441
Cumulative effect of change in method of accounting for
income taxes................................................ -- -- 868
------ ------ ------
Net Income............................................. $7,907 $8,037 $2,309
====== ====== ======
</TABLE>
S-2
<PAGE> 51
SCHEDULE II (CONTINUED)
RE CAPITAL CORPORATION
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Cash (Used in) Provided by Operating
Activities....................................... $(1,757) $ 1,561 $(1,228)
INVESTING ACTIVITIES
Purchases of fixed maturities.............................. -- (3,002) --
Net sales (purchases) of short-term investments............ 3,954 (3,954) --
Net additions to property and equipment.................... (17) (120) (55)
------- -------- -------
Net Cash Provided by (Used in) Investing
Activities....................................... 3,937 (7,076) (55)
FINANCING ACTIVITIES
Cash dividends to shareholders............................. (2,184) (1,811) (1,477)
Net proceeds from issuance of convertible debentures....... -- 67,282 --
Acquisition of treasury stock.............................. -- (18) (6,569)
Short-term debt (repayments) borrowings, net............... -- (14,850) 9,350
Exercise of common stock options........................... 4 94 2
Surplus contribution to subsidiary......................... -- (45,250) --
------- -------- -------
Net Cash (Used in) Provided by Financing
Activities....................................... (2,180) 5,447 1,306
------- -------- -------
(Decrease) Increase in Cash................................ -- (68) 23
Cash at Beginning of Year.................................. -- 68 45
------- -------- -------
Cash at End of Year................................ $ -- $ -- $ 68
======= ======== =======
</TABLE>
S-3
<PAGE> 52
SCHEDULE VI
RE CAPITAL CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1994
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN H
-----------------
CLAIMS & CLAIM
COLUMN C ADJUSTMENT
COLUMN B ------------- COLUMN D EXPENSES
COLUMN A ----------- RESERVES FOR ----------- COLUMN G INCURRED RELATED
- - - - ------------------- DEFERRED UNPAID CLAIMS DISCOUNT COLUMN E COLUMN F ---------- TO
AFFILIATION POLICY AND CLAIM IF ANY, ----------- -------- NET (1) (2)
WITH ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED INVESTMENT CURRENT PRIOR
REGISTRANT COSTS EXPENSES(*) COLUMN C PREMIUMS(*) PREMIUMS INCOME YEAR YEARS
- - - - ------------------- ----------- ------------- ----------- ----------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994
Consolidated
Property/Casualty
Entities......... $13,376 $ 210,397 $ 0 $52,221 $129,398 $ 21,514 $94,547 $ 248
========== ============= ========== ============ ========= ========= ======== ========
1993
Consolidated
Property/Casualty
Entities......... $13,389 $ 200,638 $ 0 $46,487 $112,681 $ 18,805 $87,165 $(3,028)
========== ============= ========== ============ ========= ========= ======== ========
1992
Consolidated
Property/Casualty
Entities......... $12,227 $ 184,754 $ 0 $42,644 $118,443 $ 17,245 $90,684 $ 1,635
========== ============= ========== ============ ========= ========= ======== ========
<CAPTION>
COLUMN I COLUMN J
------------------- -----------
COLUMN A AMORTIZATION PAID
- - - - ------------------- OF DEFERRED CLAIMS COLUMN K
AFFILIATION POLICY AND CLAIM ---------
WITH ACQUISITION ADJUSTMENT PREMIUMS
REGISTRANT COSTS EXPENSES WRITTEN
- - - - ------------------- ------------------- ----------- ---------
<S> <C> <C> <C>
1994
Consolidated
Property/Casualty
Entities......... $33,272 $84,856 $132,421
================= =========== ==========
1993
Consolidated
Property/Casualty
Entities......... $28,455 $65,204 $115,814
================= =========== ==========
1992
Consolidated
Property/Casualty
Entities......... $34,624 $82,638 $121,316
================= =========== ==========
</TABLE>
- - - - ---------------
(*) 1992 balances have been reclassified for comparative purposes to reflect the
provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts."
S-4
<PAGE> 53
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
ITEM EXHIBIT PAGE
- - - - ------------ ----------------------------------------------------------------------- ----
<S> <C> <C>
(3)(a)(1) Restated Certificate of Incorporation of Re Capital Corporation.
(Incorporated by reference to Appendix B of Re Capital Corporation's
Proxy Statement for 1989 Annual Meeting of Shareholders.)
(3)(a)(2) December 29, 1992 amendment to the Restated Certificate of
Incorporation of Re Capital Corporation. (Incorporated by reference to
Exhibit 3(a)(2) of Re Capital Corporation's Form 10-K for the year
ended December 31, 1992.)
(3)(b) By-Laws of Re Capital Corporation. (Incorporated by reference to
Exhibit 3(b) of Re Capital Corporation's Form 10-K for the year ended
December 31, 1991.)
(10)(a) Letter Agreement, dated June 16, 1986, by and between Re Capital
Reinsurance Corporation and Conning & Company relating to financial
advisory and portfolio management services provided by Conning &
Company. (Incorporated by reference to Exhibit 10-17 of Re Capital
Corporation's Registration Statement No. 33-8680 on Form S-2.)
(10)(b) Lease, dated September 16, 1986, between Stamford New-Urban Associates
and Re Capital Corporation. (Incorporated by reference to Exhibit
(10)(v) of Re Capital Corporation's Form 10-K for the year ended
December 31, 1986.)
(10)(c)# Long-Term Incentive Compensation Plan of Re Capital Corporation, as
amended as of May 20, 1992. (Incorporated by reference to Exhibit 10(c)
of Re Capital Corporation's Form 10-K for the year ended December 31,
1992.)
(10)(d)# Restricted Stock Incentive Compensation Plan of Re Capital Corporation.
(Incorporated by reference to Exhibit A of Re Capital Corporation's
Proxy Statement for the 1993 Annual Meeting of Shareholders.)
(10)(e) Multiple Line Quota Share Retrocessional Agreement, No. 80A, between
John Deere Insurance Company and Re Capital Reinsurance Corporation.
(Incorporated by reference to Exhibit 10(z) of Re Capital Corporation's
Form 10-K for the year ended December 31, 1987.)
(10)(f) Multiple Line Quota Share Retrocessional Agreement Policy, No. 050187,
between John Deere Insurance Company and Re Capital Reinsurance
Corporation. (Incorporated by reference to Exhibit 10(aa) of Re Capital
Corporation's Form 10-K for the year ended December 31, 1987.)
(10)(g) Amended and Restated Tax Allocation Agreement, dated as of January 1,
1993, among Re Capital Corporation, Re Capital Reinsurance Corporation
and RCI Systems, Inc. (Incorporated by reference to Exhibit 10(i) of Re
Capital Corporation's Form 10-K for the year ended December 31, 1992.)
(10)(h) Underwriting and Claims Management Services Agreement, made as of May
1, 1987, between John Deere Insurance Company and Re Capital
Reinsurance Corporation, as amended by Endorsements 1 through 6.
(Incorporated by reference to Exhibit 10(s) of Re Capital Corporation's
Form 10-K for the year ended December 31, 1988.)
(10)(i)# Amended and Restated Employment Agreement, dated as of March 6, 1991,
between Re Capital Corporation and Donald E. Chisholm. (Incorporated by
reference to Exhibit 10(o) of Re Capital Corporation's Form 10-K for
the year ended December 31, 1990.)
(10)(j)# Amended and Restated Employment Agreement, dated as of June 1, 1988,
between Re Capital Corporation and James E. Roberts. (Incorporated by
reference to Exhibit 10(u) of Re Capital Corporation's Form 10-K for
the year ended December 31, 1988.) (Agreement with David C. Smith is
identical.)
(10)(k)# Severance Compensation Agreement, dated as of February 15, 1989,
between Re Capital Corporation and James E. Roberts. (Incorporated by
reference to Exhibit 10(y) of Re Capital Corporation's Form 10-K for
the year ended December 31, 1988.) (Agreement with David C. Smith is
identical.)
(10)(l)# Amendment Agreement, dated as of January 15, 1990, amending Exhibit
(10)(j) hereto. (Incorporated by reference to Exhibit 10(y) of Re
Capital Corporation's Form 10-K for the year ended December 31, 1989.)
(Agreement with David C. Smith is identical.)
</TABLE>
E-1
<PAGE> 54
<TABLE>
<CAPTION>
ITEM EXHIBIT PAGE
- - - - ------------ ----------------------------------------------------------------------- ----
<S> <C> <C>
(10)(m) Endorsement 7, amending Exhibit 10(h) hereto, effective January 1,
1990. (Incorporated by reference to Re Capital Corporation's Form 10-K
for the year ended December 31, 1989.)
(10)(n)# Employees' Retirement Plan of Re Capital Corporation. (Incorporated by
reference to Re Capital Corporation's Form 10-Q for the quarter-year
ended September 30, 1990.)
(10)(o)# Employees' Retirement Plan of Re Capital Corporation -- Trust
Agreement, dated as of November 1, 1990, between Re Capital Corporation
and Union Trust Company. (Incorporated by reference to Re Capital
Corporation's Form 10-Q for the quarter-year ended September 30, 1990.)
(10)(p) Right of First Refusal Agreement, dated as of October 31, 1990, among
John Deere Insurance Group, Inc., John Deere Insurance Company, Tahoe
Insurance Company, Rock River Insurance Company and Re Capital
Corporation. (Incorporated by reference to Re Capital Corporation's
Form 10-Q for the quarter-year ended September 30, 1990.)
(10)(q) Amendment Agreement, dated as of December 20, 1990, amending Exhibit
10(f). (Incorporated by reference to Exhibit 10(dd) of Re Capital
Corporation's Form 10-K for the year ended December 31, 1990.)
(10)(r) Amendment Agreement, dated as of December 20, 1990, amending Exhibit
10(e). (Incorporated by reference to Exhibit 10(ee) of Re Capital
Corporation's Form 10-K for the year ended December 31, 1990.)
(10)(s) Endorsement 8, amending Exhibit 10(h) hereto, effective January 1,
1991. (Incorporated by reference to Exhibit 10(v) of the Re Capital
Corporation's Form 10-K for the year ended December 31, 1991.)
(10)(t) Right of First Acceptance Agreement, dated June 9, 1993, between John
Deere Insurance Group, Inc. and Re Capital Reinsurance Corporation.
(Incorporated by reference to Exhibit 10.22 of Re Capital Corporation's
Registration Statement No. 33-63590 on Form S-2).
(10)(u)# Amendment Agreement, dated as of March 29, 1994, amending Exhibit E-3
10(j). (Agreement with David C. Smith is identical.)
(10)(v) Agreement and Plan of Merger dated as of January 11, 1995 among Zurich
Reinsurance Centre Holdings, Inc., ZRC Merger-Sub Corp. and the
Registrant. (Incorporated by reference to Exhibit 1 of Re Capital
Corporation's Form 8-K dated as of January 11, 1995, filed on January
19, 1995.)
(10)(w) Option and Voting Agreement between Zurich Reinsurance Centre Holdings,
Inc. and John Deere Insurance Group, Inc. (Incorporated by reference to
Exhibit 2 of Re Capital Corporation's Form 8-K dated as of January 11,
1995, filed on January 19, 1995.)
(11) Statement regarding computation of earnings per share. E-4
(12) Statement regarding ratio of earnings to fixed charges. E-5
(22) Subsidiaries of Re Capital Corporation: Re Capital Reinsurance
Corporation (N.J.) and RCI Systems, Inc. (Delaware)
(24) Consent of Independent Auditors relating to Form S-8 filed on December E-6
13, 1990.
(29) Schedule P filed by Re Capital Reinsurance Corporation with state *
regulatory authorities.
(99) Special Proxy Statement for Re Capital Corporation's Special Meeting of
Stockholders to be held to vote on the Agreement and Plan of Merger.
(Incorporated by reference to the Special Proxy Statement.)
</TABLE>
- - - - ---------------
* Filed under cover of Form SE.
# A management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(c) of this report.
E-2
<PAGE> 1
AMENDMENT AGREEMENT
AMENDMENT AGREEMENT dated as of the 29th day of March, 1994, between James
E. Roberts (the "Executive") and Re Capital Corporation, a Delaware corporation
(the "Company").
WHEREAS, the Company and the Executive are parties to an amended and
restated employment agreement dated as of June 1, 1988 and amended as of January
15, 1990 (the "Agreement"); and
WHEREAS, the Company and the Executive desire to amend the Agreement as set
forth below, in accordance with the resolutions of the Compensation Committee of
the Board of Directors of the Company approved at a meeting of such committee
held on March 29, 1994 and the mutual considerations received by the Company and
the Executive pursuant thereto.
NOW, THEREFORE, the parties hereto agree as follows:
1. Section 3(a) of the Agreement is amended to read as follows: Period of
Employment. The period of the Executive's employment under this Agreement (the
"Period of Employment") shall be deemed to have commenced as of May 26, 1986 and
shall continue through May 31, 1995, subject to extension or termination as
herein provided. If the Company, within three months of May 31, 1995, fails to
attempt in good faith to negotiate a new employment agreement with the
Executive, the Executive shall have the right to extend the Period of Employment
to May 31, 1996. Notwithstanding the foregoing, the Period of Employment shall
cease prior to either May 31, 1995 or May 31, 1996 if it is terminated sooner as
provided in paragraph 6(a) (disability), 7 (death), 8(c) (termination of
employment) or 10 (retirement).
2. Except as amended hereby, all terms of the Agreement shall remain in
full force and effect after the effectiveness hereof. After such effectiveness,
all references in the Agreement to "this Agreement" shall refer to the Agreement
as amended hereby.
3. This Amendment Agreement may be executed in two counterparts, each of
which shall be deemed an original, but both of which together shall constitute
one and the same agreement.
4. This Amendment Agreement (a) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral,
between the parties, with respect to the subject matter hereof, other than the
terms of the Agreement not affected hereby, (b) is not intended to confer upon
any other persons any rights or remedies hereunder, (c) shall be amended or
waived in whole or in part only by a written instrument, signed by both parties
hereto, (d) in case any provision of this Amendment Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby, and
(e) shall be governed in all respects, including validity, interpretation and
effect, by the laws of the State of Connecticut.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the date first above written.
RE CAPITAL CORPORATION
By /s/ Conor D. Reilly
-------------------------
Name: Conor D. Reilly
Title: Secretary
/s/ James E. Roberts
-------------------------
James E. Roberts
E-3
<PAGE> 1
RE CAPITAL CORPORATION AND SUBSIDIARIES
EXHIBIT 11.0 -- COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993 1992
------- ------ ------
<S> <C> <C> <C>
PRIMARY
Average shares outstanding...................................... 6,923 6,729 6,439
Weighted average shares of common stock
equivalents associated with stock options, net................ 36 105 94
------- ------ ------
Total........................................................... 6,959 6,834 6,533
======= ====== ======
Net Income...................................................... $ 7,907 $8,037 $2,309
======= ====== ======
Per share amount................................................ $ 1.14 $ 1.18 $ .35
======= ====== ======
FULLY DILUTED
Average shares outstanding...................................... 6,923 6,729 6,439
Weighted average shares of common stock
equivalents associated with stock options, net................ 36 105 159
Assumed conversion of convertible debentures and note........... 4,015 1,958 476
------- ------ ------
Total........................................................... 10,974 8,792 7,074
======= ====== ======
Net Income...................................................... $ 7,907 $8,037 $2,309
Add convertible debenture and note interest,
net of Federal income tax effect.............................. 2,505 1,304 528
------- ------ ------
Adjusted Net Income............................................. $10,412 $9,341 $2,837
======= ====== ======
Per share amount................................................ $ .95 $ 1.06 $ .40
======= ====== ======
</TABLE>
E-4
<PAGE> 1
RE CAPITAL CORPORATION AND SUBSIDIARIES
EXHIBIT 12.0 -- COMPUTATION OF RATIOS OF
EARNINGS TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
-------- ------- -------
<S> <C> <C> <C>
Income (Loss) before Federal income taxes..................... $ 8,102 $ 7,807 $(2,049)
Add: Fixed charges............................................ 4,114 2,663 1,746
-------- ------- -------
Income (Loss) before Federal income taxes and fixed charges... $ 12,234 $10,470 $ (303)
======= ======= =======
Fixed charges:
Interest expense............................................ $ 3,795 $ 2,348 $ 1,363
One-third rental expense*................................... 337 315 383
-------- ------- -------
Total fixed charges................................. $ 4,132 $ 2,663 $ 1,746
======= ======= =======
Ratio of earnings to fixed charges............................ 3.0X 3.9X NM
======= ======= =======
</TABLE>
- - - - ---------------
*Portion of rental expense representative of a reasonable interest factor.
E-5
<PAGE> 1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-38237) pertaining to the Long-Term Incentive Plan of Re Capital
Corporation of our report dated February 8, 1995, with respect to the
consolidated financial statements and schedules of Re Capital Corporation and
subsidiaries included in the Annual Report (Form 10-K) for the year ended
December 31, 1994.
New York, New York
February 21, 1995
E-6
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 336,696
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 341,833
<CASH> 1,061
<RECOVER-REINSURE> 835
<DEFERRED-ACQUISITION> 13,376
<TOTAL-ASSETS> 466,232
<POLICY-LOSSES> 210,397
<UNEARNED-PREMIUMS> 52,221
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 69,000
<COMMON> 954
0
0
<OTHER-SE> 120,253
<TOTAL-LIABILITY-AND-EQUITY> 466,232
129,398
<INVESTMENT-INCOME> 21,696
<INVESTMENT-GAINS> 39
<OTHER-INCOME> 0
<BENEFITS> 94,795
<UNDERWRITING-AMORTIZATION> 33,272
<UNDERWRITING-OTHER> 11,169
<INCOME-PRETAX> 8,102
<INCOME-TAX> 195
<INCOME-CONTINUING> 7,907
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,907
<EPS-PRIMARY> 1.14
<EPS-DILUTED> .95
<RESERVE-OPEN> 191,599
<PROVISION-CURRENT> 94,547
<PROVISION-PRIOR> 248
<PAYMENTS-CURRENT> 18,117
<PAYMENTS-PRIOR> 66,739
<RESERVE-CLOSE> 201,538
<CUMULATIVE-DEFICIENCY> (248)
</TABLE>
