SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
----------------------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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CAPITAL RE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------------------------------------------------
DELAWARE 1-10995 52-1567009
(STATE OR OTHER (COMMISSION FILE NUMBER) (IRS EMPLOYER
JURISDICTION OF IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
1325 AVENUE OF THE AMERICAS
18TH FLOOR
NEW YORK, NEW YORK 10019
(212) 974-0100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
(REGISTRANT BECAME SUBJECT TO THE FILING REQUIREMENTS ON APRIL 8, 1992.)
AS OF MAY 6, 1996, THERE WERE OUTSTANDING 15,666,325 SHARES OF COMMON
STOCK, PAR VALUE $.01 PER SHARE, OF THE REGISTRANT.
CAPITAL RE CORPORATION AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CAPITAL RE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET -MARCH 31, 1996
(UNAUDITED) AND DECEMBER 31, 1995 3
CONSOLIDATED STATEMENT OF INCOME - (UNAUDITED)
THREE MONTHS ENDED MARCH 31,1996 AND MARCH 31, 1995 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY - THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED) 5
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31 1995 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8-15
PART II OTHER INFORMATION
ITEM 3 EXHIBITS AND REPORTS ON FORM 8-K 16-18
SIGNATURES 19
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands except per share amounts)
March 31, December 31,
1996 1995
---------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Fixed maturity securities
available for sale, at market
amortized cost: $643,202 in
1996 and $652,966 in 1995) $657,880 $687,657
Short-term investments, at cost,
which approximates market 142,524 84,110
------- -------
Total Investments 800,404 771,767
Cash 5,016 4,537
Accrued investment income 9,184 9,481
Deferred acquisition costs 104,573 102,353
Prepaid reinsurance premiums 75,345 62,133
Reinsurance recoverable on
ceded losses 2,799 2,524
Funds held under reinsurance
agreements 3,832 3,832
Premiums receivable 25,560 17,907
Other assets 7,026 7,351
---------- --------
Total Assets $1,033,739 $981,885
========== ========
LIABILITIES
Deferred premium revenue $325,619 $314,451
Reserve for losses and loss
adjustment expenses 14,781 12,783
Profit commission liability 12,092 8,806
Ceded balances payable 23,029 8,000
Current taxes payable 1,582 ---
Deferred federal income
taxes payable 45,547 50,187
Subordinated notes payable 16,000 16,000
Long-term debt 74,753 74,744
Other liabilities 8,843 9,971
-------- --------
Total Liabilities $522,246 $494,942
-------- --------
COMPANY OBLIGATED MANDATORILY
REDEEMABLE PREFERRED SECURITIES
OF CAPITAL RE LLC 75,000 75,000
STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value
per share; 25,000,000 shares
authorized; no shares issued
and outstanding in 1996 and 1995 --- ---
Common stock - $.01 par value per
share; 75,000,000 shares
authorized, 15,666,325 and
14,805,055 shares issued and
outstanding in 1996 and
1995, respectively 158 150
Additional paid-in capital 217,377 191,654
Retained earnings 213,055 201,228
Treasury stock; 182,700 shares
in 1996 and 1995 (3,638) (3,638)
Net unrealized gain on fixed
maturities securities available
for sale, net of tax 9,541 22,549
------- -------
Total Stockholders' Equity 436,493 411,943
------- -------
Total Liabilities, Preferred
Securities of Capital Re LLC
and Stockholders' Equity $1,033,739 $981,885
========== ========
See Accompanying Notes to Unaudited Consolidated Financial
</TABLE>
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands except per share amounts)
Three Months Ended
March 31,
--------------------
1996 1995
--------------------
<S> <C> <C>
REVENUES:
Gross premiums written $34,255 $24,189
Ceded premiums 16,195 2,441
------- -------
Net premiums written 18,060 21,748
Decrease(increase)
in deferred premium revenue 2,044 (7,819)
------- -------
Net premiums earned 20,104 13,929
Net investment income 12,286 11,276
Net realized (loss)gain (95) 254
Other income 244 114
------ ------
Total Revenues 32,539 25,573
------ ------
EXPENSES:
Loss and loss adjustment
expenses 1,409 (85)
Acquisition costs 8,857 7,291
Increase in deferred
acquisition costs (2,221) (2,560)
Profit commission expense 953 329
Other operating expenses 3,147 3,107
Interest expense 1,741 1,707
Foreign exchange loss 26 ---
Minority interest in
Capital Re LLC 1,434 1,434
------ ------
Total Expenses 15,346 11,223
------ ------
Income before provision
for federal income taxes 17,193 14,350
Provision for federal income taxes
Current 2,062 1,630
Deferred 2,364 1,643
----- -----
Total provision for federal income taxes 4,426 3,273
----- -----
Net Income $12,767 $11,077
======= =======
Earnings per common share $0.84 $0.75
======= =======
Cash dividends per common share $0.06 $0.05
======= =======
Weighted average number of common
shares outstanding 15,268 14,783
======= =======
See Accompanying Notes to Unaudited Consolidated Financial Statements
</TABLE>
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
(Dollars in thousands except share amounts)
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
-----------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 $150 $191,654 $201,228 ($3,638)
Net Income - - 12,767 -
Issuance of common stock
(861,270 shares) 8 25,723 - -
Fixed maturities securities
available for sale
adjustments - - - -
Dividend ($.06 per
common share) - - (940) -
------------------------------------------
Balance, March 31, 1996 $158 $217,377 $213,055 ($3,638)
==========================================
NET UNREALIZED
GAIN/(LOSS) ON
FIXED MATURITIES
SECURITIES TOTAL
AVAILABLE FOR STOCKHOLDERS'
SALE EQUITY
-----------------------------------------
<S> <C> <C>
Balance, January 1, 1996 $22,549 $411,943
Net Income - 12,767
Issuance of common stock
(861,270 shares) - 25,731
Fixed maturities securities
available for sale adjustments (13,008) (13,008)
Dividend ($.06 per
common share) - (940)
-----------------------------------------
Balance, March 31, 1996 $9,541 $436,493
=========================================
See accompanying Notes to Unaudited Consolidated Financial Statements.
</TABLE>
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
-------------------------
1996 1995
-------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $12,767 $11,077
Adjustments to reconcile net
income to net cash provided
by operating activities:
Amortization of bond discount
on long-term debt 10 10
Net amortization of security
premiums 335 381
Provision for deferred federal
income taxes 2,364 1,643
Acquisition costs deferred (8,857) (7,291)
Amortization of deferred
acquisition costs 6,637 4,731
Change in accrued investment income 297 820
Change in premiums receivable, net 5,732 (6,116)
Change in deferred premium revenue, net (2,045) 7,819
Change in outstanding loss reserves, net 1,724 (153)
Net realized loss (gains) on investments 95 (254)
Other 5,929 1,371
-------- -------
Net Cash Provided by Operating Activities 24,988 14,038
INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases - fixed maturities (19,764) (33,430)
Sales-fixed maturites 26,698 12,046
Maturities- fixed maturities 2,400 5,323
Securities held-to-maturity:
Maturities- fixed maturities 0 1,054
(Purchases) Maturities of short-term
investments, net (58,415) 5,254
Other (219) (71)
-------- --------
Net Cash Used by Investing Activities (49,300) (9,824)
FINANCING ACTIVITIES:
Net proceeds from sale of stock 25,731 31
Dividends paid (940) (739)
--------- --------
Net Cash Provided (Used) by
Financing Activities 24,791 (708)
Effect of exchange rate changes on cash 0 (2)
--------- --------
Increase in Cash 479 3,504
Cash at Beginning of Period 4,537 3,523
--------- --------
Cash at End of Period 5,016 7,027
========= ========
See Accompanying Notes to Unaudited Consolidated Financial Statements.
</TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements and
footnotes have been prepared in accordance with the instructions
to Form 10-Q and the preparation of unaudited interim financial
statements under Rules and Regulations of the Securities and
Exchange Commission and do not include all the information and
disclosures required by generally accepted accounting principles.
These statements should be read in conjunction with the audited
consolidated financial statements of Capital Re Corporation and
Subsidiaries (the "Corporation") included in the Corporation's
1995 Annual Report on Form 10-K. The accompanying unaudited
consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to
present fairly the Corporation's financial position and results
of operations. The results of operations for the three months
ended March 31, 1996 may not be indicative of the results that
may be expected for the year ending December 31, 1996.
2. REINSURANCE
Ceded earned premium for the three months ended March 31, 1996
and 1995, was $3.0 million and $1.9 million, respectively. Ceded
losses for the same periods were $1.9 million and $0.1 million,
respectively.
3. INCOME TAXES
The effective tax rate for the three months ended March 31, 1996
and 1995 was lower than the federal corporate tax rate on
ordinary income of 35% due principally to the effect of tax-
exempt interest income. Income taxes paid for the three months
ended March 31, 1996 and 1995 were $0.5 million and $0 million,
respectively.
4. OTHER
Interest paid for each of the three months ended March 31, 1996
and 1995 was $0.5 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Capital Re Corporation (the "Corporation") was incorporated in
the State of Delaware in December 1991, and is the successor by
merger to a Maryland corporation incorporated in 1986. The
Corporation is an insurance holding company and has as operating
subsidiaries five wholly owned specialized professional
reinsurance companies. Capital Reinsurance Company ("Capital
Reinsurance"), domiciled in the state of Maryland, commenced
operations in January 1988. Capital Reinsurance is principally
engaged in the business of financial guaranty reinsurance, which
includes the reinsurance of municipal and non-municipal bond
insurance policies. Capital Mortgage Reinsurance Company
("Capital Mortgage"), a New York domiciled company, commenced
operations in February 1994. Capital Mortgage reinsures only
residential mortgage guaranty insurance obligations. Capital
Mortgage Reinsurance Company (Bermuda) Ltd. ("Capital Mortgage
Bermuda"), a Bermuda domiciled company, commenced operations in
March 1994. Capital Mortgage Bermuda is engaged in the business
of reinsuring financial guaranty, mortgage guaranty and trade
credit and other specialty insurance policies, both as a direct
reinsurer of third party primary insurers and as a
retrocessionaire of Capital Reinsurance, Capital Mortgage, and
Capital Credit Reinsurance Company, Ltd. ("Capital Credit").
Capital Credit, also a Bermuda-domiciled insurance company,
commenced operations in February 1990. Capital Credit reinsures
trade credit and other specialty insurance lines, financial
guaranty insurance, mortgage guaranty insurance and also assumes
business as a retrocessionaire of Capital Reinsurance and Capital
Mortgage. Capital Title Reinsurance Company ("Capital Title"),
a New York domiciled insurance company, commenced operations in
March 1996. Capital Title is engaged in the business of
reinsuring title insurance policies.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 VERSUS THREE MONTHS ENDED MARCH
31, 1995
Net income for the three months ended March 31, 1996, increased
15.3% to $12.8 million from $11.1 million for the same period of
1995. On a per share basis, net income increased to $0.84 for the
three months ended March 31, 1996 from $0.75 for the same period
of 1995, or 12.0%. Growth in net premiums earned to $20.1 million
from $13.9 million, or 44.6%, was the principal cause of the
increase in net income. Growth in net premiums earned is a
result of the Corporation's continued diversification efforts
into the mortgage, trade credit and other specialty reinsurance
lines of business.
Gross premiums written increased 41.7% to $34.3 million for the
three months ended March 31, 1996 from $24.2 million for the same
period of 1995. This increase was primarily due to growth in the
mortgage guaranty and non-municipal lines of business. The
following table shows gross written premiums by line of business
for the three months ended March 31, 1996 and March 31, 1995.
<TABLE>
GROSS PREMIUMS WRITTEN
THREE MONTHS ENDED
MARCH 31,
1996 1995
---- ----
(dollars in millions)
<S> <C> <C>
Municipal $9.1 $9.8
Mortgage 17.6 10.2
Non-Municipal 4.2 1.8
Credit 3.4 2.4
----- -----
$34.3 $24.2
</TABLE>
Net premiums written decreased by 16.6% to $18.1 million for the
three months ended March 31, 1996 from $21.7 million for the same
period in 1995. This decrease was related to a significant
increase in ceded premiums partially offset by the 41.7% increase
in gross premiums written. Ceded premiums for the first quarter
of 1996 increased to $16.2 million from $2.4 million in the first
quarter of 1995. Of the $16.2 million in premiums ceded, $13.6
million represents a non-recurring upfront premium cession
associated with a single mortgage guaranty reinsurance
transaction. Gross premiums written under the corresponding
assumed contract are payable to the Corporation in annual
installments and, therefore, to date, although 100% of ceded
premiums have been paid, the Corporation has only collected
approximately 30% of all premiums expected under the assumed
contract. As a result of the non-recurring ceded premium
transaction, the majority of the Corporation's 1996 ceded premium
budget has been realized in the first quarter of 1996. The
following table shows net premiums written by line of business
for the three months ended March 31, 1996 and March 31, 1995.
<TABLE>
NET PREMIUMS WRITTEN
THREE MONTHS ENDED
MARCH 31,
1996 1995
---- ----
(dollars in millions)
<S> <C> <C>
Municipal $6.4 $7.4
Mortgage 4.0 10.1
Non-Municipal 4.2 1.8
Credit 3.5 2.4
----- -----
$18.1 $21.7
</TABLE>
For the three months ended March 31, 1996, net premiums earned
increased 44.6% to $20.1 million from $13.9 million for the
comparable 1995 period. This increase was primarily due to
growth in net premiums earned in the mortgage and credit
reinsurance lines of business. For the three months ended March
31, 1996, net refunded earned premium increased to $1.9 from $0.8
million for the comparable period in 1995. Excluding the effects
of net refunded earned premium, net premiums earned increased
38.9% to $18.2 million from $13.1 million for the three months
ended March 31, 1996 and 1995, respectively. A refunding
extinguishes the Corporation's reinsurance liability for the
refunded obligation and the Corporation then recognizes revenue
equal to the remaining related deferred premium revenue. The
following table shows net premiums earned by line of business for
the three months ended March 31, 1996 and March 31, 1995. For
the three month period ended March 31, 1996 and 1995, ceded
earned premium was $3.0 million and $1.9 million, respectively.
<TABLE>
NET PREMIUMS EARNED
THREE MONTHS ENDED
MARCH 31,
1996 1995
---- ----
(dollars in millions)
<S> <C> <C>
Municipal $8.1 $7.4
Mortgage 8.6 4.5
Non-Municipal 1.2 1.1
Credit 2.2 0.9
----- -----
$20.1 $13.9
</TABLE>
For the three months ended March 31, 1996, net investment income
increased 8.8% to $12.3 million from $11.3 million for the
comparable period in 1995. Growth in investment income was
primarily attributable to an investment portfolio enlarged by an
increase in invested assets from positive operating cash flows
during the twelve months ended March 31, 1996. In addition, the
Corporation recognized net realized losses of ($0.1) million for
the three months ended March 31, 1996 compared to net realized
gains of $0.3 million for the same period in 1995.
Loss and loss adjustment expenses increased to $1.4 million from
($0.1) million for the three months ended March 31, 1996 and
1995, respectively. Losses recorded in the three months ended
March 31, 1996 were primarily attributable to the mortgage
guaranty and credit reinsurance lines of business. This increase
is reflective of the maturation of the books of business assumed
in prior years and is consistent with the expected loss
development pattern for these lines of business. Ceded losses for
the three months ended March 31, 1996 and 1995 were $1.9 million
and $0.1 million, respectively.
Total expenses increased 36.6% to $15.3 million for the three
months ended March 31, 1996 from $11.2 million in the same period of
1995. This increase was attributable to the increase in loss and
loss adjustment expenses described above, as well as, an increase
in acquisition costs incurred, primarily commissions, related to
new business. As a result, the combined ratio increased to
60.4% for the three months ended March 31, 1996 from 58.0% for
the comparable 1995 period.
For the three months ended March 31, 1996, the total tax
provision increased to $4.4 million from $3.3 million for the
same period in 1995. In addition, the effective tax rate
increased to 25.7% in the first quarter of 1996 from 22.8% in
the same period of 1995. This increase occurred in response to
the Corporation's strategy of using a greater proportion of new
cash flow to purchase taxable securities during 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation relies on dividends from Capital Reinsurance for
funds used in its operations. The major sources of liquidity for
Capital Reinsurance are funds generated from reinsurance
premiums, net investment income and maturing investments. Capital
Reinsurance is domiciled in the state of Maryland, and under
Maryland insurance law, the amount of the surplus of Capital
Reinsurance available for distribution as dividends is subject to
certain statutory restrictions. The amount available for
distribution from Capital Reinsurance during 1996 with notice to,
but without prior approval of, the Maryland Insurance
Commissioner is limited to 10% of Capital Reinsurance's
policyholders' surplus as of December 31, 1995, or approximately
$32.9 million. For the three months ended March 31, 1996,
Capital Reinsurance paid $4.0 million in dividends to the
Corporation.
Credit Re Corporation relies on dividends from its wholly owned
subsidiary, Capital Credit, for funds which it provides the
Corporation. Capital Credit's major sources of liquidity are also
funds generated from reinsurance premiums, net investment income
and maturing investments. Capital Credit is a Bermuda domiciled
insurer whose distributions are governed by Bermuda law. Under
Bermuda law and the by-laws of Capital Credit, dividends may be
paid out of the profits of the company (defined as accumulated
realized profits less accumulated realized losses). Distributions
to shareholders may also be paid out of Capital Credit's surplus
limited by requirements that such company must at all times (i)
maintain the minimum share capital required under Bermuda Law,
and (ii) have relevant assets in an amount equal to or greater
than 75% of relevant liabilities, all as defined under Bermuda
Law. Since its organization, Capital Credit has not declared nor
paid any dividends.
Capital Mortgage and Capital Title are subject to the dividend
restrictions imposed under New York Insurance Law. Accordingly,
dividends may only be declared and distributed out of earned
surplus (as defined under New York Insurance Law). Additionally,
no dividend may be declared or distributed in an amount which,
together with all dividends declared or distributed by Capital
Mortgage during the preceding twelve months, exceeds the lesser
of 10% of the company's surplus to policyholders as shown by its
last Annual Statutory Statement on file with the New York
Insurance Department, or 100% of adjusted net investment income
(as defined under New York Insurance Law) during such period,
unless, upon prior application, the Superintendent of Insurance
approves a greater dividend distribution based upon his finding
that Capital Mortgage will retain sufficient surplus to support
its obligations and writings. Capital Mortgage Bermuda's
dividends and distributions to its sole shareholder, Capital
Mortgage, are governed by Bermuda law, and are subject to the
same restrictions as those described in the preceding paragraph
for Capital Credit. To date, Capital Mortgage, Capital Mortgage
Bermuda and Capital Title have not declared or paid any
dividends.
In January 1994, the Corporation formed and capitalized, through
the purchase of common shares, Capital Re LLC. Capital Re LLC
exists solely for the purpose of issuing preferred and common
shares and lending the proceeds of such issuance to the
Corporation to fund its business operations. In January 1994,
Capital Re LLC issued $75.0 million of Company obligated
mandatorily redeemable preferred securities, the proceeds of
which were loaned to the Corporation. The Corporation has, among
other undertakings, unconditionally guaranteed all legally
declared and unpaid dividends of Capital Re LLC. The Company
obligated mandatorily redeemable preferred securities were issued
at $25 par value per share and pay monthly dividends at a rate of
7.65% per annum. Also in January 1994, Capital Reinsurance and
Capital Credit invested an aggregate of $120.0 million to
capitalize Capital Mortgage. Of the total original contribution
of $120.0 million, Capital Reinsurance invested $94.8 million and
Capital Credit invested $25.2 million.
On February 12, 1996, the Corporation completed a public offering
of approximately 3.5 million shares of common stock. Of the 3.5
million shares, an institutional shareholder sold 2.6 million
shares and the Corporation sold 853,120 shares in the public
offering generating net proceeds to the Corporation of
approximately $25.9 million of which $21.5 million was used to
complete the $25 million capitalization of Capital Title
Reinsurance Company. The remaining $4.4 million was used for
Corporation expenses associated with the public offering and
general corporate purposes. The Corporation received no proceeds
from the institutional shareholder's sale of shares.
During 1992, the Corporation's Board of Directors established an
initial policy of declaring quarterly dividends at the rate of
$0.05 per share, or $0.20 annually, on the Corporation's issued
common stock. In October of 1995, the Corporation's Board of
Directors authorized an increase of the quarterly common stock
dividend rate to $0.06 per share, or $0.24 annually. For the
three months ended March 31, 1996, common dividends were declared
and paid in the amount of $0.9 million or $0.06 per share.
Cash flows from operations for the three months ended March 31,
1996 and 1995, consisting of reinsurance premiums collected net
of expenses, investment income and income taxes, were $25.3
million and $14.0 million, respectively. The Corporation believes
that current levels of cash flow from operations provide the
Corporation with sufficient liquidity to meet its operating
needs. The Corporation's non-operating cash outflows are
primarily dedicated to (i) fixed-income investment activity, (ii)
the payment of dividends on its common shares, (iii) payments of
interest on long-term debt and (iv) the payment of its loan
obligations to Capital Re LLC.
At March 31, 1996, cash and investments approximated $805.4
million, an increase of $29.1 million, or 3.8%, from $776.3
million at December 31, 1995. In managing its investment
portfolio, the Corporation places a high priority on quality and
liquidity. As of March 31, 1996, the entire investment portfolio
was invested in highly-rated fixed income securities.
On November 30, 1995, the Corporation reclassified all
investments previously categorized as "held to maturity" to
"available for sale", under the provisions of "A Guide to
Implementation of SFAS 115, Accounting for Certain Investments in
Debt and Equity Securities" issued November 15, 1995 by the
Financial Accounting Standards Board. This allows enterprises a
one-time reassessment of the appropriateness of the
classifications of securities and permits them to account for any
resulting reclassifications between categories at fair value in
accordance with SFAS 115. At December 31, 1995, this
reclassification had the effect of increasing stockholders'
equity by $8.8 million.
Approximately $153.2 million or 19.1% of the Corporation's
investment portfolio is comprised of mortgage-backed securities
("MBS") at March 31, 1996. Of the MBS portfolio, approximately
$67.8 million or 44.3% is backed by agencies or entities
sponsored by the U.S. government as to the full amount of
principal and interest.
The following is a summary of the Corporation's MBS portfolio as
of March 31, 1996.
<TABLE>
TYPE:
DOLLARS IN AMORTIZED MARKET PERCENTAGE ESTIMATED
THOUSANDS) COST VALUE OF AVERAGE
INVESTMENT LIFE
PORTFOLIO (IN YEARS)
<S> <C> <C> <C> <C>
Agency -
Pass-throughs $61,232 $61,074 7.6% 10.4
Sequentials 1,879 2,028 0.2% 6.8
Planned Amortization
Interest Only
Certificates 4,151 4,680 0.6% 4.6
Total Agency 67,262 67,782 8.4%
Non-Agency -
Planned Amortization
Classes 36,300 36,658 4.6% 5.6
Sequentials 47,806 48,713 6.1% 10.9
Total Non-Agency 84,106 85,371 10.7%
Total Mortgage-Backed
Securities $151,368 $153,153 19.1%
</TABLE>
Because all of the Corporation's investment securities are
allocated to the available-for-sale portfolio, the carrying value
of these securities is equivalent to market value at March 31,
1996. This valuation caused an increase in stockholders' equity
from the MBS portfolio of approximately $1.2 million, net of tax,
because, at March 31, 1996, the market value of the
Corporation's MBS portfolio exceeded amortized cost by
approximately $1.8 million. The Corporation's MBS are of the type
that are actively traded in a liquid market. Market values are
obtained by using external securities industry computer services
which also provide prepayment experience. As of March 31, 1996,
the entire MBS portfolio was invested in high quality triple A
rated securities.
Prepayment risk is an inherent risk of holding MBS. However, the
degree of prepayment risk is particular to the type of MBS held.
The Corporation limits its exposure to prepayments by purchasing
less volatile types of MBS. As of March 31, 1996, $36.7 million
or approximately 23.9% of the MBS portfolio was invested in
collateralized mortgage obligations ("CMOs") which are
characterized as planned amortization class CMOs (''PACs''). PACs
are securities whose cash flows are designed to remain constant
over a variety of mortgage prepayment environments. Other classes
in the CMO security are structured to accept the volatility of
mortgage prepayment changes, thereby insulating the PAC class. Of
the remaining MBS portfolio, $111.8 million, or 73.0%, was
invested in mortgage-backed pass-throughs or sequential CMOs.
Pass-throughs are securities in which the monthly cash flows of
principal and interest (both scheduled and prepayments) generated
by the underlying mortgages are distributed on a pro-rata basis
to the holders of securities. A sequential MBS is structured to
divide the CMO security into sequentially ordered classes.
Receipt of principal payments within classes is contingent on the
retirement of all previously paying classes. Generally, interest
payments are made currently on all classes. While these
securities are more sensitive to prepayment risk than PACs, they
are not considered highly volatile securities. While the
Corporation may consider investing in any tranche of a sequential
MBS, the individual security's characteristics (duration,
relative value, underlying collateral, etc.) along with aggregate
portfolio risk management determine which tranche of sequential
MBS will be purchased. At March 31, 1996, the Corporation has
investments in two PAC interest-only certificates which are
considered highly volatile. Interest-only certificates are those
in which all of the interest from a MBS is distributed to one
bond class, the interest-only class. These securities have
synthetic coupon rates and perform differently from the
underlying collateral when interest rates change. These coupon
rates are defined as synthetic because all of the cash flows from
an interest-only security are derived from the coupon payment,
which differs from a traditional fixed income security which has
cash flows from both coupon payments and returns of principal.
Traditional fixed income securities usually increase in market
value when interest rates fall and decrease in market value when
interest rates rise. Because of the structure of interest-only
securities, they are ''negative duration'' securities that
increase in value when rates rise and decrease in value when
rates fall. These securities pay interest and return principal
based upon the prepayments of the mortgage collateral but do not
track the market value of the underlying collateral. The market
or carrying value of these two PAC interest-only certificates
totaled $4.7 million or approximately 0.6% of the Corporation's
entire investment portfolio at March 31, 1996.
On January 27, 1996, the Corporation extended its existing
agreement with Deutsche Bank AG for the provision of a $25.0
million liquidity facility (the ''DB Liquidity Facility'') which
is available for general corporate purposes. The DB Liquidity
Facility was extended for one year and is scheduled to expire on
January 27, 1997. The Corporation has not borrowed under the DB
Liquidity Facility. Capital Reinsurance also entered into an
agreement on January 31, 1994 with Deutsche Bank AG for a credit
facility of up to $75.0 million specifically designed to provide
rating agency qualified capital to further support Capital
Reinsurance's claims-paying resources. This agreement expires
January 27, 2003.
PART II - OTHER INFORMATION
ITEM 3 - EXHIBITS AND REPORTS ON FORM 8-K
(A) THE FOLLOWING IS ANNEXED AS AN EXHIBIT:
EXHIBIT
NUMBER DESCRIPTION
-------- ------------
11 STATEMENT RE: COMPUTATION OF
PER SHARE EARNINGS (UNAUDITED)
(B) REPORTS ON FORM 8-K
NO REPORTS ON FORM 8-K WERE FILED COVERING EVENTS
OCCURRING DURING THE FIRST QUARTER 1996.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE
- - -------- ----------- ----
11 STATEMENT RE: COMPUTATION OF
PER SHARE EARNINGS (UNAUDITED) 18
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
CAPITAL RE CORPORATION
DATE: MAY 6, 1996 BY /S/DAVID A. BUZEN
---------------
DAVID A. BUZEN
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
DATE: MAY 6, 1996 BY /S/ALAN S. ROSEMAN
-----------------
ALAN S. ROSEMAN
SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND
SECRETARY
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Exhibit 11 Statement Re: Computation of Per Share Earnings
(Unaudited)
(Dollars in thousands except per share amounts)
Three Months Ended
March 31,
---------------------
1996 1995
---------------------
<S> <C> <C>
Earnings per common share
(Primary and Fully Diluted)
Average shares outstanding
during the period 15,268 14,783
Net Income 12,767 11,077
Per share amount $0.84 $0.75
====== ======
Notes: The per share data for 1996 and 1995 does not include the net
effect of dilutive stock options, since the dilution from the earnings
per share amount is less than 3%.
</TABLE>