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 JUNE 30, 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
-----------------------------------------------------
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 AUGUST 12, 1996, THERE WERE OUTSTANDING 15,753,175 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 SHEETS -JUNE 30, 1996
(UNAUDITED) AND DECEMBER 31, 1995 3
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
SIX MONTHS ENDED JUNE 30,1996 AND JUNE 30, 1995 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY - SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) 5
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30 1995 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-18
PART II OTHER INFORMATION
ITEM 3 EXHIBITS AND REPORTS ON FORM 8-K 19-21
SIGNATURES 22
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands except per share amounts)
June 30, December 31,
1996 1995
---------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Fixed maturity securities
available for sale, at market
amortized cost: $678,685 in
1996 and $652,966 in 1995) $691,382 $687,657
Short-term investments, at cost,
which approximates market 137,317 84,110
------- -------
Total Investments 828,699 771,767
Cash 3,717 4,537
Accrued investment income 10,856 9,481
Deferred acquisition costs 106,751 102,353
Prepaid reinsurance premiums 75,527 62,133
Reinsurance recoverable on
ceded losses 4,891 2,524
Funds held under reinsurance
agreements 3,832 3,832
Premiums receivable 15,894 17,907
Other assets 8,852 7,351
---------- --------
Total Assets $1,059,019 $981,885
========== ========
LIABILITIES
Deferred premium revenue $330,381 $314,451
Reserve for losses and loss
adjustment expenses 18,538 12,783
Profit commission liability 14,968 8,806
Ceded balances payable 5,808 8,000
Deferred federal income
taxes payable 48,831 50,187
Subordinated notes payable 16,000 16,000
Long-term debt 74,762 74,744
Other liabilities 26,144 9,971
-------- --------
Total Liabilities $535,432 $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, 15,728,625 and
14,805,055 shares issued and
outstanding in 1996 and
1995, respectively 159 150
Additional paid-in capital 218,649 191,654
Retained earnings 225,396 201,228
Treasury stock; 189,700 and
182,700 shares in 1996 and
1995, respectively (3,870) (3,638)
Net unrealized gain on fixed
maturities securities available
for sale, net of tax 8,253 22,549
------- -------
Total Stockholders' Equity 448,587 411,943
------- -------
Total Liabilities, Preferred
Securities of Capital Re LLC
and Stockholders' Equity $1,059,019 $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 Six Months Ended
June 30, June 30,
--------------- ----------------
1996 1995 1996 1995
--------------- ----------------
<S> <C> <C> <C> <C>
REVENUES:
Gross premiums written $30,957 $21,202 $65,212 $45,391
Ceded premiums 4,055 1,900 20,250 4,341
------- ------- ------- -------
Net premiums written 26,902 19,302 44,962 41,050
Increase in deferred
premium revenue (4,580) (2,718) (2,536) (10,538)
------- ------- ------- -------
Net premiums earned 22,322 16,584 42,426 30,512
Net investment income 12,497 11,486 24,782 22,761
Net realized (loss)gain (716) 7 (811) 261
Other income 519 26 763 138
------ ------ ------ ------
Total Revenues 34,622 28,103 67,160 53,672
------ ------ ------ ------
EXPENSES:
Loss and loss adjustment
expenses 2,357 1,381 3,766 1,296
Acquisition costs 9,328 7,294 18,185 14,585
Increase in deferred
acquisition costs (2,178) (1,164) (4,399) (3,724)
Profit commission expense 1,387 425 2,340 754
Other operating expenses 2,358 1,998 5,504 5,104
Interest expense 1,740 1,733 3,480 3,441
Foreign exchange loss (11) 0 15 0
Minority interest in
Capital Re LLC 1,434 1,434 2,869 2,869
------ ------ ------ ------
Total Expenses 16,415 13,101 31,760 24,325
------ ------ ------ ------
Income before provision
for federal income taxes 18,207 15,002 35,400 29,347
Provision for federal income taxes
Current 943 2,343 3,005 3,972
Deferred 3,979 1,397 6,343 3,037
------ ------ ------ ------
Total Provision for federal
income taxes 4,922 3,740 9,348 7,009
------ ------ ------ ------
Net Income $13,285 $11,262 $26,052 $22,338
======= ======= ======= =======
Earnings per common share $0.85 $0.76 $1.68 $1.51
======= ======= ======= =======
Cash dividends per common share $0.06 $0.05 $0.12 $0.10
======= ======= ======= =======
Weighted average number of common
shares outstanding 15,698 14,784 15,483 14,784
======= ======= ======= =======
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 ($3,638)
Net Income - - 26,052 -
Issuance of common stock
(923,570 shares) 9 26,995 - -
Purchase of treasury stock
at cost (7,000 shares) - - - (232)
Fixed maturities securities
available for sale
adjustments - - - -
Dividend ($.06 per
common share) - - (1,884) -
------------------------------------------
Balance, June 30, 1996 $159 $218,649 $225,396 ($3,870)
==========================================
NET UNREALIZED
GAIN/(LOSS) ON
FIXED MATURITIES
SECURITIES TOTAL
AVAILABLE FOR STOCKHOLDERS'
SALE EQUITY
-----------------------------------------
<S> <C> <C>
Balance, January 1, 1996 $22,549 $411,943
Net Income - 26,052
Issuance of common stock
(923,570 shares) - 27,004
Purchase of treasury stock
at cost (7,000 shares) - (232)
Fixed maturities securities
available for sale adjustments (14,296) (14,296)
Dividend ($.06 per
common share) - (1,884)
-------- --------
Balance, June 30, 1996 $8,253 $448,587
======== ========
See accompanying Notes to Unaudited Consolidated Financial Statements.
</TABLE>
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
-------------------------
1996 1995
-------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $26,052 $22,338
Adjustments to reconcile net
income to net cash provided
by operating activities:
Amortization of bond discount
on long-term debt 19 19
Net amortization of security
premiums 637 711
Provision for deferred federal
income taxes 6,343 3,015
Acquisition costs deferred (18,185) (14,585)
Amortization of deferred
acquisition costs 13,787 10,861
Change in accrued investment income (1,375) 674
Change in premiums receivable, net (1,823) (4,330)
Change in deferred premium revenue, net 2,536 10,537
Change in outstanding loss reserves, net 3,389 1,112
Net realized loss (gains) on investments 811 (261)
Other 3,891 (845)
-------- -------
Net Cash Provided by Operating Activities 36,081 29,247
INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases - fixed maturities (304,610) (100,473)
Sales-fixed maturites 273,643 83,022
Maturities- fixed maturities 3,800 0
Securities held-to-maturity:
Maturities- fixed maturities 0 1,969
(Purchases) Maturities of short-term
investments, net (53,207) (6,871)
Other investing activities 18,585 (192)
-------- --------
Net Cash Used by Investing Activities (61,789) (22,546)
FINANCING ACTIVITIES:
Net proceeds from sale of stock 27,005 31
Purchase of treasury stock at cost (232) 0
Dividends paid (1,884) (1,475)
--------- --------
Net Cash Provided (Used) by
Financing Activities 24,889 (1,444)
Effect of exchange rate changes on cash 0 20
--------- --------
(Decrease)Increase in Cash (820) 5,278
Cash at Beginning of Period 4,537 3,523
--------- --------
Cash at End of Period $3,718 $8,801
========= ========
See Accompanying Notes to Unaudited Consolidated Financial Statements.
</TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 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 and six
months ended June 30, 1996 may not be indicative of the results
that may be expected for the year ending December 31, 1996.
2. REINSURANCE
Ceded earned premiums for the three and six months ended June 30,
1996 and 1995 were $3.9 million and $6.9 million, and $1.8
million and $3.8 million, respectively. Ceded losses for the
same periods were $2.1 million and $4.0 million, and $0.9 and
$1.0, respectively.
3. INVESTMENTS
During 1996, the Corporation entered into mortgage dollar roll
transactions. A mortgage dollar roll is a combined sale and
purchase agreement, whereby mortgage-backed securities are sold
to a counterparty with a repurchase agreement of similar
securities at some future date. The Corporation treats these
agreements as financing transactions, and as such, the obligation
under the repurchase agreement is included in other liabilities.
As of June 30, 1996, the repurchase obligation related to
mortgage dollar roll transactions amounted to $18.8 million.
4. INCOME TAXES
The effective tax rate for the three months ended June 30, 1996
and 1995 is 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 six months ended June
30, 1996 and 1995 was $4.6 million and $3.3 million,
respectively.
5. OTHER
Interest paid for each of the six months ended June 30, 1996 and
1995 was $3.4 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, 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. 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.
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 June 30, 1996 versus Three Months Ended June
30, 1995
Net income for the three months ended June 30, 1996, increased
17.7% to $13.3 million from $11.3 million for the same period of
1995. On a per share basis, net income increased to $0.85 for
the three months ended June 30, 1996 from $0.76 for the same
period of 1995, or 11.8%. Also, net operating income (net income
excluding realized gains and losses) increased 22.1% to $13.8
million for the three months ended June 30, 1996 from $11.3
million for the same period in 1995. On a per share basis, net
operating income increased to $0.88 for the three months ended
June 30, 1996 from $0.76 for the same period of 1995, or 15.8%.
Growth in net premiums earned to $22.3 million from $16.6
million, or 34.3%, was the principal cause of the increase in net
income. Growth in net premiums earned is a result of the
Corporation's successful diversification into the mortgage, trade
credit and other specialty reinsurance lines of business.
Gross premiums written increased 46.2% to $31.0 million for the
three months ended June 30, 1996 from $21.2 million for the same
period of 1995. This increase was primarily due to growth in the
mortgage guaranty, trade credit and other specialty lines of
business. In addition, Capital Title established its first
reinsurance relationships in the second quarter of 1996, which
contributed $0.3 million in premiums written for the quarter. The
following table shows gross written premiums by line of business
for the three months ended June 30, 1996 and June 30, 1995.
<TABLE>
Gross Premiums Written
Three Months Ended
June 30,
1996 1995
(dollars in millions)
<S> <C> <C>
Municipal $12.4 $10.6
Mortgage and Title 12.2 6.4
Non-Municipal 3.0 2.4
Credit and Specialty 3.4 1.8
----- -----
$31.0 $21.2
</TABLE>
Net premiums written increased by 39.4% to $26.9 million for the
three months ended June 30, 1996 from $19.3 million for the same
period in 1995. This increase is commensurate with the increase
in gross premiums written explained above. The following table
shows net premiums written by line of business for the three
months ended June 30, 1996 and June 30, 1995.
<TABLE>
Net Premiums Written
Three Months Ended
June 30,
1996 1995
(dollars in millions)
<S> <C> <C>
Municipal $8.5 $10.7
Mortgage and Title 12.0 4.8
Non-Municipal 3.0 2.4
Credit and Specialty 3.4 1.4
---- -----
$26.9 $19.3
</TABLE>
For the three months ended June 30, 1996, net premiums earned
increased 34.3% to $22.3 million from $16.6 million for the
comparable 1995 period. This increase was primarily due to
growth in net premiums earned in the mortgage, non-municipal and
credit and specialty reinsurance lines of business. For the
three months ended June 30, 1996, net refunded earned premium
increased to $0.6 from $0.0 million for the comparable period in
1995. Excluding the effects of net refunded earned premium, net
premiums earned increased 31.3% to $21.8 million from $16.6
million for the three months ended June 30, 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. For the three month period
ended June 30, 1996 and 1995, ceded earned premiums were $3.9
million and $1.8 million, respectively. The following table
shows net premiums earned by line of business for the three
months ended June 30, 1996 and June 30, 1995.
<TABLE>
Net Premiums Earned
Three Months Ended
June 30,
1996 1995
(dollars in millions)
<S> <C> <C>
Municipal $5.2 $5.7
Mortgage and Title 12.7 6.8
Non-Municipal 2.0 0.9
Credit and Specialty 2.4 3.2
---- ----
$22.3 $16.6
</TABLE>
For the three months ended June 30, 1996, net investment income
increased 8.7% to $12.5 million from $11.5 million for the
comparable period in 1995. Growth in investment income was
primarily attributable to an investment portfolio enlarged by (i)
an increase in invested assets from positive operating cash flows
during the twelve months ended June 30, 1996 and (ii) a public
offering in the first quarter of 1996 of the Corporation's common
stock which generated $25.9 million in net proceeds to the
Corporation. In addition, the Corporation recognized net
realized losses of $0.7 million for the three months ended June
30, 1996 compared to net realized gains of $70.0 thousand for
same period in 1995. Realized gains and losses are expected in
connection with the Corporation's new emphasis on a total return
investment strategy implemented during 1996.
Loss and loss adjustment expenses increased to $2.4 million from
$1.4 million for the three months ended June 30, 1996 and 1995,
respectively. Losses recorded in the three months ended June 30,
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
June 30, 1996 and 1995 were $2.1 million and $0.9 million,
respectively.
Total expenses increased 25.2% to $16.4 million for the three
months June 30, 1996 from $13.1 million in the same period of
1995. This increase was primarily attributable to commissions
associated with the increased level of premiums assumed, normal
loss development from the mortgage and credit lines of business
and net profit commissions incurred under certain of the
Corporation's reinsurance contracts. In addition, the combined
ratio decreased slightly to 59.4% for the three months ended June
30, 1996 from 59.9% for the comparable 1995 period.
For the three months ended June 30, 1996, the total tax provision
increased to $5.2 million from $3.7 million for the same period
in 1995. In addition, the effective tax rate increased to 27.3%
in the first quarter of 1996 from 24.9% 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 1996.
Six Months Ended June 30, 1996 versus Six Months Ended June 30,
1995
Net income for the six months ended June 30, 1996, increased
17.0% to $26.1 million from $22.3 million for the same period of
1995. On a per share basis, net income increased to $1.68 for
the six months ended June 30, 1996 from $1.51 for the same period
of 1995, or 11.3%. Also, net operating income (net income
excluding realized gains and losses) increased 19.8% to $26.6
million for the six months ended June 30, 1996 from $22.2 million
for the same period in 1995. On a per share basis, net operating
income increased to $1.72 for the six months ended June 30, 1996
from $1.50 for the same period of 1995, or 14.7%. Growth in net
premiums earned to $42.4 million from $30.5 million, or 39.0%,
was the principal cause of the increase in net income. Growth in
net premiums earned is a result of the Corporation's successful
diversification into the mortgage, trade credit and other
specialty reinsurance lines of business.
Gross premiums written increased 43.6% to $65.2 million for the
six months ended June 30, 1996 from $45.4 million for the same
period of 1995. This increase was primarily due to growth in the
mortgage guaranty, non-municipal, trade credit and other
specialty lines of business. In addition, as discussed above,
Capital Title established its first reinsurance relationships in
the second quarter of 1996, which contributed $0.3 million in
premiums written for the first six months of 1996. The following
table shows gross written premiums by line of business for the
six months ended June 30, 1996 and June 30, 1995.
<TABLE>
Gross Premiums Written
Six Months Ended
June 30,
1996 1995
(dollars in millions)
<S> <C> <C>
Municipal $21.4 $20.4
Mortgage and Title 29.8 16.6
Non-Municipal 7.2 4.2
Credit and Specialty 6.8 4.2
----- -----
$65.2 $45.4
</TABLE>
Net premiums written increased by 9.5% to $45.0 million for the
six months ended June 30, 1996 from $41.1 million for the same
period in 1995. This increase was offset by an increase in ceded
premiums. Ceded premiums for the first six months of 1996
increased to $20.3 million from $4.3 million in the first six
months of 1995. Of the $20.3 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 six months of 1996. The
following table shows net premiums written by line of business
for the six months ended June 30, 1996 and June 30, 1995.
<TABLE>
Net Premiums Written
Six Months Ended
June 30,
1996 1995
(dollars in millions)
<S> <C> <C>
Municipal $14.9 $18.1
Mortgage and Title 16.0 14.9
Non-Municipal 7.3 4.2
Credit and Specialty 6.8 3.9
----- -----
$45.0 $41.1
</TABLE>
For the six months ended June 30, 1996, net premiums earned
increased 39.0% to $42.4 million from $30.5 million for the
comparable 1995 period. This increase was primarily due to
growth in net premiums earned in the mortgage, non-municipal and
credit and specialty reinsurance lines of business. For the six
months ended June 30, 1996, net refunded premiums earned
increased to $2.4 from $0.8 million for the comparable period in
1995. Excluding the effects of net refunded earned premiums, net
premiums earned increased 34.7% to $40.0 million from $29.7
million for the six months ended June 30, 1996 and 1995,
respectively. The following table shows net premiums earned by
line of business for the three months ended June 30, 1996 and
June 30, 1995. For the six month period ended June 30, 1996 and
1995, ceded earned premium was $6.9 million and $3.8 million,
respectively.
<TABLE>
Net Premiums Earned
Six Months Ended
June 30,
1996 1995
(dollars in millions)
<S> <C> <C>
Municipal $13.3 $13.1
Mortgage and Title 21.3 11.3
Non-Municipal 3.2 2.0
Credit and Specialty 4.6 4.1
----- -----
$42.4 $30.5
</TABLE>
For the six months ended June 30, 1996, net investment income
increased 8.8% to $24.8 million from $22.8 million for the
comparable period in 1995. Growth in investment income was
primarily attributable to an investment portfolio enlarged by,
(i) an increase in invested assets from positive operating cash
flows during the twelve months ended June 30, 1996 and (ii) a
public offering in the first quarter of 1996 of the Corporation's
common stock which generated $25.9 million in net proceeds to the
Corporation. In addition, the Corporation recognized net
realized losses of $0.7 million for the six months ended June 30,
1996 compared to net realized gains of $0.3 million for same
period in 1995.
Loss and loss adjustment expenses increased to $3.8 million from
$1.3 million for the six months ended June 30, 1996 and 1995,
respectively. Losses recorded in the six months ended June 30,
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 six months ended
June 30, 1996 and 1995 were $4.0 million and $1.0 million,
respectively.
Total expenses increased 30.9% to $31.8 million for the six
months June 30, 1996 from $24.3 million in the same period of
1995. This increase was primarily attributable to commissions
associated with the increased level of premiums assumed, normal
loss development from the mortgage and credit lines of business
and net profit commissions payable under certain of the
Corporation's reinsurance contracts. In addition, the combined
ratio increased slightly to 59.9% for the six months ended June
30, 1996 from 59.0% for the comparable 1995 period.
For the six months ended June 30, 1996, the total tax provision
increased to $9.6 million from $6.9 million for the same period
in 1995. In addition, the effective tax rate increased to 26.6%
in the first six months of 1996 from 23.8% 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 1996.
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 six months ended June 30, 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, 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. 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 six
months ended June 30, 1996, common dividends were declared and
paid in the amount of $1.9 million or $0.06 per share.
Cash flows from operations for the six months ended June 30, 1996
and 1995, consisting of reinsurance premiums collected net of
expenses, investment income and income taxes, were $36.1 million
and $29.2 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 June 30, 1996, cash and investments approximated $832.4
million, an increase of $56.1 million, or 7.2%, 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 June 30, 1996, the entire investment portfolio
was invested in highly-rated fixed income securities.
At June 30, 1996, approximately $143.5 million or 17.3% of the
Corporation's investment portfolio is comprised of mortgage-
backed securities ("MBS"). Of the MBS portfolio, approximately
$92.1 million or 64.2% is backed by agencies or entities
sponsored by the U.S. government as to the full amount of
principal and interest. As of June 30, 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 June 30, 1996, $49.5 million
or approximately 34.5% 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, $94.0 million, or 65.5%, 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 June 30, 1996, the Corporation had no
securities such as interest only securities, principal only
securities, or MBS purchased at a substantial premium to par that
have the potential for loss of a significant portion of the
original investment due to changes in the prepayment rate of the
underlying loans supporting the security.
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 SECOND QUARTER 1996.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE
- -------- ----------- ----
11 STATEMENT RE: COMPUTATION OF
PER SHARE EARNINGS (UNAUDITED) 21
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: AUGUST 12, 1996 BY /S/DAVID A. BUZEN
---------------
DAVID A. BUZEN
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
DATE: AUGUST 12, 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 Six Months Ended
June 30, June 30
------------------ ----------------
1996 1995 1996 1995
------------------ ----------------
<S> <C> <C> <C> <C>
Earnings per common share
(Primary and Fully Diluted)
Average shares outstanding
during the period 15,698 14,784 15,483 14,784
Net Income 13,285 11,260 26,052 22,338
Per share amount $0.85 $0.76 $1.68 $1.51
====== ====== ====== ======
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>
