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, 1997
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, 1997, THERE WERE OUTSTANDING 15,878,587 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, 1997
(UNAUDITED) AND DECEMBER 31, 1996 3
CONSOLIDATED STATEMENTS OF INCOME - THREE AND SIX
MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND
JUNE 30, 1996 (UNAUDITED) 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY - SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) 5
CONSOLIDATED STATEMENTS OF CASH FLOWS - SIX MONTHS
ENDED JUNE 30, 1997 (UNAUDITED) AND JUNE 30 1996
(UNAUDITED) 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-19
PART II OTHER INFORMATION
ITEM 3 EXHIBITS AND REPORTS ON FORM 8-K 20-22
SIGNATURES 23
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands except per share amounts)
June 30, December 31,
1997 1996
---------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Fixed maturity securities
available for sale, at market
(amortized cost: $812,530 in
1997 and $800,137 in 1996) $835,974 $825,678
Short-term investments, at cost,
which approximates market 151,893 75,424
------- -------
Total Investments 987,867 901,102
Cash 6,812 15,285
Accrued investment income 12,584 12,287
Deferred acquisition costs 123,966 111,364
Prepaid reinsurance premiums 73,439 72,034
Reinsurance recoverable on
ceded losses 3,313 1,833
Funds held under reinsurance
agreements 3,875 3,861
Premiums receivable, net 32,915 5,745
Other assets 36,364 9,273
Investment in affiliates 21,470 10,000
Goodwill 13,012 13,567
---------- ----------
Total Assets $1,315,617 $1,156,351
========== ==========
LIABILITIES
Deferred premium revenue $391,746 $337,104
Reserve for losses and loss
adjustment expenses 23,012 19,902
Profit commission liability 18,732 13,329
Deferred federal income taxes payable 62,565 58,474
Bank note payable 25,000 25,000
Long-term debt 74,800 74,781
Liability for securities purchased 80,380 42,749
Other liabilities 45,867 20,666
-------- --------
Total Liabilities $722,102 $592,005
-------- --------
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 1997 and 1996 --- ---
Common stock - $.01 par value per
share; 75,000,000 shares
authorized, 15,871,087 and
15,856,762 shares issued and
outstanding in 1997 and
1996, respectively 161 160
Additional paid-in capital 223,381 222,525
Retained earnings 284,830 253,807
Foreign exchange translation (205) 122
Treasury stock; 214,000 and
189,700 shares in 1997 and
1996, respectively (4,891) (3,870)
Net unrealized gain on fixed
maturities securities available
for sale, net of tax 15,239 16,602
------- -------
Total Stockholders' Equity 518,515 489,346
------- -------
Total Liabilities, Preferred
Securities of Capital Re LLC
and Stockholders' Equity $1,315,617 $1,156,351
========== ==========
See Accompanying Notes to Unaudited Consolidated Financial Statements
</TABLE>
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
(Unaudited) (Unaudited)
--------------- ----------------
1997 1996 1997 1996
--------------- ----------------
<S> <C> <C> <C> <C>
REVENUES:
Gross premiums written $60,431 $30,957 $124,956 $65,212
Ceded premiums 1,460 4,055 9,716 20,250
------- ------- ------- -------
Net premiums written 58,971 26,902 115,240 44,962
(Increase)/decrease in
deferred premium revenue (27,097) 2,044 (52,817) (18,004)
------- ------- ------- -------
Net premiums earned 31,874 22,322 62,423 42,426
Net investment income 13,991 12,497 27,805 24,782
Net realized gain/(loss) (192) (716) 2,593 (811)
Fee Income 874 494 1,319 494
Other income 107 25 133 269
Equity income in affiliate 237 0 470 0
------ ------ ------ ------
Total Revenues 46,891 34,622 94,743 67,160
------ ------ ------ ------
EXPENSES:
Loss and loss adjustment
expenses 5,031 2,357 9,848 3,766
Acquisition costs 16,069 9,328 33,394 18,185
Increase in deferred
acquisition costs (5,397) (2,178) (12,482) (4,399)
Profit commission expense 1,971 1,387 3,967 2,340
Other operating expenses 2,870 2,358 5,916 5,504
Amortization of goodwill 167 0 334 0
Interest expense 1,844 1,740 3,722 3,480
Foreign exchange (gain)/loss (151) (11) 242 15
Minority interest in
Capital Re LLC 1,434 1,434 2,869 2,869
------ ------ ------ ------
Total Expenses 23,836 16,415 47,810 31,760
------ ------ ------ ------
Income before provision
for federal income taxes 23,055 18,207 46,933 35,400
Provision for federal income taxes
Current 5,034 943 8,864 3,005
Deferred 1,913 3,979 4,825 6,343
------ ------ ------ ------
Total Provision for federal
income taxes 6,947 4,922 13,689 9,348
------ ------ ------ ------
Net Income $16,108 $13,285 $33,245 $26,052
======= ======= ======= =======
Earnings per common share $1.02 $0.85 $2.10 $1.68
======= ======= ======= =======
Cash dividends per common share $0.07 $0.06 $0.14 $0.12
======= ======= ======= =======
Weighted average number of common
shares outstanding 15,861 15,698 15,862 15,483
======= ======= ======= =======
See Accompanying Notes to Unaudited Consolidated Financial Statements
</TABLE>
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Dollars in thousands except share amounts)
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
-----------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $160 $222,525 $253,807 ($3,870)
Net Income - - 33,245 -
Exercise of stock options,
including tax benefit
(38,625 shares) 1 856 - -
Purchase of treasury stock
at cost (24,300 shares) - - - (1,021)
Fixed maturities securities
available for sale
adjustments - - - -
Foreign exchange translation - - - -
Dividend ($.14 per
common share) - - (2,222) -
------------------------------------------
Balance, June 30, 1997 $161 $223,381 $284,829 ($4,891)
==========================================
NET UNREALIZED
GAIN ON
FIXED
MATURITIES
FOREIGN SECURITIES TOTAL
EXCH. AVAILABLE STOCKHOLDERS'
TRANSLATION FOR SALE EQUITY
-----------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1997 $122 $16,602 $489,346
Net Income - - 33,245
Exercise of stock options,
including tax benefit
(38,625 shares) - - 857
Purchase of treasury stock
at cost (24,300 shares) - - (1,021)
Fixed maturities securities
available for sale
adjustments - (1,363) (1,363)
Foreign exchange translation (327) - (327)
Dividend ($.14 per
common share) - - (2,222)
-------- -------- --------
Balance, June 30, 1997 ($205) $15,239 $518,515
======== ======== ========
See accompanying Notes to Unaudited Consolidated Financial Statements.
</TABLE>
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Six Months Ended
June 30,
-------------------------
1997 1996
-------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $33,245 $26,052
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 (374) 637
Provision for deferred federal
income taxes 4,825 6,343
Acquisition costs deferred (33,394) (18,185)
Amortization of deferred
acquisition costs 20,905 13,787
Equity Income in affiliate (470) 0
Change in accrued investment income (297) (1,375)
Change in premiums receivable, net (33,779) (1,823)
Change in deferred premium revenue, net 52,839 2,536
Change in outstanding loss reserves, net 1,578 3,389
Net realized loss (gain) on investments (2,593) (811)
Change in ceded balances payable 6,901 0
Other 3,881 3,889
-------- -------
Net Cash Provided by Operating Activities 53,286 36,081
INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases - fixed maturities (589,254) (304,610)
Sales-fixed maturities 579,785 273,643
Maturities- fixed maturities 0 3,800
Maturities (purchases) of short-term
investments, net (76,468) (53,207)
Investment in Affiliates (11,000) 0
Other investing activities 37,565 18,585
-------- --------
Net Cash Used in Investing Activities (59,372) (61,790)
FINANCING ACTIVITIES:
Net proceeds from sale of stock 856 27,005
Purchase of treasury stock at cost (1,021) (232)
Dividends paid (2,222) (1,884)
--------- --------
Net Cash Provided (Used) by
Financing Activities (2,386) 24,889
--------- --------
(Decrease)Increase in Cash (8,472) (819)
Cash at Beginning of Period 15,285 4,537
--------- --------
Cash at End of Period $6,812 $3,718
========= ========
See Accompanying Notes to Unaudited Consolidated Financial Statements.
</TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1997
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 the 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 1996 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, 1997 may not be
indicative of the results that may be expected for the year ending
December 31, 1997.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Standards No. 128, "Earnings per Share" ("FAS
128"), effective for years after December 15, 1997. FAS 128 requires the
calculation and presentation on the face of the income statement of
"basic" earnings per share and, if applicable, "diluted" earnings per
share. Basic earnings per share is calculated based on the weighted
average common shares outstanding. In calculating dilutive earnings per
share, the number of shares is increased to include all potentially
dilutive common shares, including stock options. The adoption of FAS 128
is not expected to have a material effect on reported earnings per share.
2. REINSURANCE
Ceded earned premium for the three and six months ended June 30, 1997 and
1996 were $4.5 million and $8.3 million, and $3.9 million and $6.9
million, respectively. Ceded losses for the same periods were $0.9
million and $1.8 million, and $2.1 million and $4.1 million,
respectively.
3. INVESTMENTS
The Corporation enters into mortgage dollar roll transactions. A
mortgage dollar roll is a combined sell 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 liabilities for
securities purchased. As of June 30, 1997, the repurchase commitment
related to mortgage dollar roll transactions amounted to $80.4 million.
4. INCOME TAXES
The effective tax rate for the six months ended June 30, 1997 and 1996 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, 1997 and 1996 were $7.7 million and
$4.6 million, respectively.
5. OTHER
Interest paid for the six months ended June 30, 1997 and 1996 was $3.7
million and $3.4 million, respectively.
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 six wholly owned operating subsidiaries. Capital
Reinsurance Company ("Capital Reinsurance"), domiciled in the State of
Maryland, commenced operations in January 1988. Capital Reinsurance is
engaged in the business of financial guaranty reinsurance, primarily the
reinsurance of municipal and non-municipal bond insurance obligations.
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. KRE Reinsurance, Ltd. (formerly Capital Mortgage Reinsurance
Company (Bermuda) Ltd.) ("KRE"), a Bermuda domiciled company, commenced
operations in March 1994. KRE is engaged in the business of reinsuring
financial guaranty, mortgage guaranty, trade credit and other specialty
lines of insurance, 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,
political risk, and other specialty insurance lines concentrated in
Western Europe and the United States and is 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.
In November 1996, the Corporation acquired, through its newly formed
United Kingdom holding company, Capital Re (UK) Holdings, 100% of the
issued shares of Tower Street Holdings Limited (now known as RGB Holdings,
Ltd.), the holding company for RGB Underwriting Agencies Ltd. ("RGB").
RGB is a managing agency and presently manages four syndicates operating
in the Lloyd's of London insurance market. In connection with this
acquisition, the Corporation established a corporate name at Lloyd's, CRC
Capital, Ltd. ("CRC"), to support underwriting on certain of the managed
syndicates. CRC participates in a non-marine and a life syndicate. At
June 30, 1997, the results of RGB and CRC are consolidated in the
Corporation's financial statements.
In December 1996, the Corporation entered into a joint venture with GCR
Holdings Limited to form a Bermuda based insurer, Capital Global
Underwriters Limited ("CGUL"), which will specialize in financial
reinsurance, including financial guaranty, mortgage guaranty and finite
risk reinsurance. The Corporation, through its subsidiary, KRE, owns a
fifty-percent interest in CGUL and controls 9.9% of its voting stock. The
Corporation accounts for its investment in CGUL under the equity method.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 VERSUS THREE MONTHS ENDED JUNE 30, 1996
Net income for the three months ended June 30, 1997 increased 21.1% to
$16.1 million from $13.3 million for the same period of 1996. On a per
share basis, net income increased to $1.02 for the three months ended June
30, 1997 from $0.85 for the same period of 1996, or 20.0%. In addition,
net operating income (net income excluding realized gains and losses)
increased 17.5% to $16.1 million for the three months ended June 30, 1997
from $13.7 million for the same period in 1996. On a per share basis, net
operating income increased to $1.02 for the three months ended June 30,
1997 from $0.88 for the same period of 1996, or 15.9%. Growth in net
premiums earned to $31.9 million from $22.3 million, or 43.1%, was the
principal cause of the increase in net income. Growth in net premiums
earned is a result of the Corporation's Lloyd's of London ("Lloyd's")
participation through from CRC as well as growth in the mortgage, trade
credit and other specialty reinsurance lines of business.
Gross premiums written increased 94.8% to $60.4 million for the three
months ended June 30, 1997 from $31.0 million for the same period of 1996.
This large increase was due to the consolidation of the Lloyds premiums
written from CRC as well as growth in the mortgage and credit lines of
business. Growth in mortgage gross premiums written to $24.6 million in
the second quarter of 1997 from $11.9 million in the second quarter of
1996 was primarily due to the timing of a significant annual installment
transaction recorded in the second quarter of 1997. The following table
shows gross premiums written by line of business for the three months
ended June 30, 1997 and June 30, 1996.
<TABLE>
Gross Premiums Written
Three Months Ended
June 30,
1997 1996
---- ----
(dollars in millions)
<S> <C> <C>
Municipal $11.7 $12.4
Mortgage 24.6 11.9
Non-Municipal 3.9 3.0
Credit and Specialty 4.6 3.4
Title 0.7 0.3
Lloyd's 14.9 0.0
----- -----
$60.4 $31.0
</TABLE>
Net premiums written increased by 119.3% to $59.0 million for the three
months ended June 30, 1997 from $26.9 million for the same period in 1996.
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, 1997 and June 30, 1996.
<TABLE>
Net Premiums Written
Three Months Ended
June 30,
1997 1996
----- -----
(dollars in millions)
<S> <C> <C>
Municipal $11.5 $8.5
Mortgage 24.5 11.7
Non-Municipal 3.9 3.0
Credit and Specialty 4.6 3.4
Title 0.7 0.3
Lloyd's 13.8 0.0
----- -----
$59.0 $26.9
</TABLE>
For the three months ended June 30, 1997, net premiums earned increased
43.1% to $31.9 million from $22.3 million for the comparable 1996 period.
This increase was primarily due to growth in net premiums earned in the
municipal, mortgage, and credit and specialty reinsurance lines of
business as well as the addition of the Lloyd's line of business. For the
three months ended June 30, 1997, net refunded earned premium increased to
$1.9 from $0.6 million for the comparable period in 1996. Excluding the
effects of net refunded earned premium, net premiums earned increased
38.2% to $30.0 million from $21.7 million for the three months ended June
30, 1997 and 1996, 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 June 30, 1997 and June 30,
1996. For the three months ended June 30, 1997 and 1996, ceded earned
premium was $4.5 million and $3.9 million, respectively.
<TABLE>
Net Premiums Earned
Three Months Ended
June 30,
1997 1996
----- -----
(dollars in millions)
<S> <C> <C>
Municipal $7.2 $5.2
Mortgage 13.9 12.4
Non-Municipal 2.3 2.0
Credit and Specialty 3.8 2.5
Title 0.7 0.2
Lloyd's 4.0 0.0
----- -----
$31.9 $22.3
</TABLE>
For the three months ended June 30, 1997, net investment income increased
12.0% to $14.0 million from $12.5 million for the comparable period in
1996. Growth in investment income was primarily attributable to a larger
investment portfolio caused by an increase in invested assets from
positive operating cash flows during the twelve months ended June 30,
1997. In addition, the Corporation recognized net realized losses of $0.2
million for the three months ended June 30, 1997 compared to net realized
losses of $0.7 million for same period in 1996. 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 $5.0 million from $2.4
million for the three months ended June 30, 1997 and 1996, respectively.
Losses recorded in the three months ended June 30, 1997 were primarily
attributable to the expected loss recognition associated with the addition
of the Lloyd's line of business as well as normal loss development in the
mortgage guaranty and credit reinsurance lines of business which
constitute an increasing portion of the Corporation's assumed book of
business. Ceded losses for the three months ended June 30, 1997 and 1996
were $0.9 million and $2.1 million, respectively.
Total expenses, including loss and loss adjustment expenses, increased
45.1% to $23.8 million for the three months ended June 30, 1997 from $16.4
million in the same period of 1996. This increase was primarily
attributable to commissions associated with the increased level of
premiums written, normal loss development from the mortgage and credit
lines of business and increased net profit commissions payable under
certain of the Corporation's reinsurance contracts. In addition, the
increase in expenses was attributable to operating and loss expenses
associated with the consolidations of RGB and CRC's share of the RGB
managed syndicates. Furthermore, the combined ratio, excluding expenses
associated with non insurance operations, increased to 63.9% for the three
months ended June 30, 1997 from 59.4% for the comparable 1996 period.
This increase is an expected result of the Corporation's diversification
strategy, which is producing more business from lines with relatively
higher combined ratios than the financial guaranty reinsurance business.
For the three months ended June 30, 1997, the total tax provision
increased to $6.9 million from $4.9 million for the same period in 1996.
In addition, the effective tax rate increased to 30.1% in the first
quarter of 1997 from 27.0% in the same period of 1996. 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, 1997 VERSUS SIX MONTHS ENDED JUNE 30, 1996
Net income for the six months ended June 30, 1997 increased 27.2% to $33.2
million from $26.1 million for the same period of 1996. On a per share
basis, net income increased to $2.10 for the three months ended June 30,
1997 from $1.68 for the same period of 1996, or 25.0%. In addition, net
operating income (net income excluding realized gains and losses)
increased 19.2% to $31.7 million for the six months ended June 30, 1997
from $26.6 million for the same period in 1996. On a per share basis, net
operating income increased to $2.00 for the six months ended June 30, 1997
from $1.72 for the same period of 1996, or 16.3%. Growth in net premiums
earned to $62.4 million from $42.4 million, or 47.2%, was the principal
cause of the increase in net income. Growth in net premiums earned is a
result of the Corporation's Lloyd's participation through CRC as well as
growth in the mortgage, trade credit and other specialty reinsurance lines
of business.
Gross premiums written increased 91.7% to $125.0 million for the six
months ended June 30, 1997 from $65.2 million for the same period of 1996.
This large increase was due to the addition of the new Lloyd's line of
business from CRC as well as growth in the municipal, mortgage and credit
lines of business. Growth in the municipal line of business was
principally due to two large structured facultative transactions. The
following table shows gross premiums written by line of business for the
six months ended June 30, 1997 and June 30, 1996.
<TABLE>
Gross Premiums Written
Six Months Ended
June 30,
1997 1996
----- -----
(dollars in millions)
<S> <C> <C>
Municipal $29.6 $21.4
Mortgage 40.4 29.5
Non-Municipal 7.2 7.2
Credit and Specialty 11.0 6.8
Title 1.5 0.3
Lloyd's 35.3 0.0
------ -----
$125.0 $65.2
</TABLE>
Net premiums written increased by 156.0% to $115.2 million for the six
months ended June 30, 1997 from $45.0 million for the same period in 1996.
This increase is commensurate with the increase in gross premiums written
explained above as well as due to a large increase in mortgage premiums
written beneficially influenced by the timing of assumed and ceded
premiums related to a significant transaction in the first quarter of
1996. The following table shows net premiums written by line of business
for the six months ended June 30, 1997 and June 30, 1996.
<TABLE>
Net Premiums Written
Six Months Ended
June 30,
1997 1996
------ -----
(dollars in millions)
<S> <C> <C>
Municipal $27.0 $14.9
Mortgage 40.2 15.8
Non-Municipal 7.2 7.2
Credit and Specialty 11.0 6.8
Title 1.5 0.3
Lloyd's 28.3 0.0
------ -----
$115.2 $45.0
</TABLE>
For the six months ended June 30, 1997, net premiums earned increased
47.2% to $62.4 million from $42.4 million for the comparable 1996 period.
This increase was primarily due to growth in net premiums earned in the
mortgage, and credit and specialty reinsurance lines of business as well
as the addition of the new Lloyd's line of business. For the six months
ended June 30, 1997 and 1996, net refunded earned premium was $2.4
million. Excluding the effects of net refunded earned premium, net
premiums earned increased 47.2% to $62.4 million from $42.4 million for
the three months ended June 30, 1997 and 1996, 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 six months ended June 30, 1997
and June 30, 1996. For the six months ended June 30, 1997 and 1996, ceded
earned premium was $8.3 million and $6.9 million, respectively.
<TABLE>
Net Premiums Earned
Six Months Ended
June 30,
1997 1996
----- -----
(dollars in millions)
<S> <C> <C>
Municipal $14.3 $13.3
Mortgage 27.4 21.0
Non-Municipal 5.3 3.3
Credit and Specialty 8.3 4.6
Title 1.4 0.2
Lloyd's 5.7 0.0
----- -----
$62.4 $42.4
</TABLE>
For the six months ended June 30, 1997, net investment income increased
12.1% to $27.8 million from $24.8 million for the comparable period in
1996. Growth in investment income was primarily attributable to a larger
investment portfolio caused by (i) an increase in invested assets from
positive operating cash flows during the twelve months ended March 31,
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
gains of $2.6 million for the six months ended June 30, 1997 compared to
net realized losses of $0.8 million for same period in 1996. 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 $9.8 million from $3.8
million for the six months ended June 30, 1997 and 1996, respectively.
Losses recorded in the six months ended June 30, 1997 were primarily
attributable to the expected loss recognition associated with the addition
of the Lloyd's line of business as well as normal loss development in the
mortgage guaranty and credit reinsurance lines of business which
constitute an increasing portion of the Corporation's assumed book of
business. Ceded losses for the six months ended June 31, 1997 and 1996
were $1.8 million and $4.1 million, respectively.
Total expenses, including loss and loss adjustment expenses, increased
50.3% to $47.8 million for the six months ended June 30, 1997 from $31.8
million in the same period of 1996. This increase was primarily
attributable to commissions associated with the increased level of
premiums written, normal loss development from the mortgage and credit
lines of business and increased net profit commissions payable under
certain of the Corporation's reinsurance contracts. In addition, the
increase in expenses was attributable to operating and loss expenses
associated with the consolidations of RGB and CRC's share of the Lloyd's
syndicates. Furthermore, the combined ratio, excluding expenses
associated with non insurance operations, increased to 64.0% for the six
months ended June 30, 1997 from 59.9% for the comparable 1996 period.
This increase is an expected result of the Corporation's diversification
strategy, which is producing more business from lines with relatively
higher combined ratios than the financial guaranty reinsurance business.
For the six months ended June 30, 1997, the total tax provision increased
to $13.7 million from $9.3 million for the same period in 1996. In
addition, the effective tax rate increased to 29.2% in the six months of
1997 from 26.4% in the same period of 1996. 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 1997 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,
1996, or approximately $33.0 million. For the six months ended June 30,
1997, Capital Reinsurance paid $8.0 million in dividends to the
Corporation.
Credit Re Corporation, a wholly owned subsidiary of the 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 by Capital Mortgage or Capital Title in an amount which,
together with all dividends declared or distributed by Capital Mortgage or
Capital Title, as the case may be, during the preceding twelve months,
exceeds the lesser of 10% of such 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 or
Capital Title, as the case may be, will retain sufficient surplus to
support its obligations and writings. KRE'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 and KRE have not
declared or paid any dividends. For the six months ended Capital Title
declared $1.1 million in dividends to KRE.
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. 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.
In June 1997, Capital Reinsurance invested approximately $10.9 million in
CGA Group Ltd. ("CGA"). CGA was formed to provide financial guaranty
insurance of structured securities, including commercial real estate and
asset backed transactions. Capital Reinsurance also has a commitment to
invest an additional $7.5 million in CGA to the extent that it would be
necessary to maintain a triple-A rating from Duff & Phelps for CGA's
operating subsidiary, Commercial Guaranty Assurance, Ltd. Also, Capital
Reinsurance invested $0.1 million in St. George Holdings Ltd. ("St.
George"). Through its operating subsidiary St. George Investments Ltd.,
St. George will purchase securities to be held to maturity, selectively
resold, or repackaged with CGA insurance and then resold.
In December 1996, the Corporation's Board of Directors authorized an
increase of the quarterly common stock dividend rate to $0.07 per share,
or $0.28 annually. For the six months ended June 30, 1997, common
dividends were declared and paid in the amount of $2.2 million or $0.14
per share.
Cash flows from operations for the six months ended June 30, 1997 and
1996, consisting of reinsurance premiums collected net of expenses,
investment income and income taxes, were $53.3 million and $36.1 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, 1997, cash and investments approximated $994.7 million, an
increase of $78.3 million, or 8.5%, from $916.4 million at December 31,
1996. In managing its investment portfolio, the Corporation places a high
priority on quality and liquidity. As of June 30, 1997, the entire
investment portfolio was invested in highly rated fixed income securities.
At June 30, 1997, approximately $171.9 million or 17.4% of the
Corporation's investment portfolio was comprised of mortgage-backed
securities ("MBS"). Of the MBS portfolio, approximately $149.8 million or
87.2% 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, 1997, the
entire MBS portfolio was invested in 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, 1997, $4.2 million or approximately 2.4% 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,
$167.7 million, or 97.6%, 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, 1997, the
Corporation has 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 31, 1997, 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 26, 1998. Capital Reinsurance also entered
into an agreement on January 31, 1994 with Deutsche Bank AG for a credit
facility (the "DB 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. The Corporation has not borrowed under either the DB
Liquidity Facility or the DB Credit Facility.
In addition, on August 20, 1996, the Corporation entered into a credit
agreement with Chase Manhattan Bank for the provision of a $25.0 million
credit facility (the "Chase Facility") which is available for general
corporate purposes. Furthermore, on August 26, 1996, the Corporation
utilized $16 million of the Chase Facility for purposes of paying
subordinated notes which came due. Interest on the bank note issued under
the Chase Facility is payable quarterly based upon the Corporation's
chosen interest rate option under the terms of the Chase Facility. In
November of 1996, the Corporation utilized the remaining $9 million of the
Chase Facility for purposes of acquiring RGB.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE
- -------- ----------- ----
11 STATEMENT RE: COMPUTATION OF
PER SHARE EARNINGS (UNAUDITED) 22
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 13, 1997 BY /S/DAVID A. BUZEN
---------------
DAVID A. BUZEN
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
DATE: AUGUST 13, 1997 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
------------------ ----------------
1997 1996 1997 1996
------------------ ----------------
<S> <C> <C> <C> <C>
Earnings per common share
(Primary and Fully Diluted)
Average shares outstanding
during the period 15,861 15,698 15,862 15,483
Net Income 16,108 13,285 33,245 26,052
Earnings per common share $1.02 $0.85 $2.10 $1.68
====== ====== ====== ======
Notes: The per share data for 1997 and 1996 does not include the net
effect of dilutive stock options, since the dilution from the earnings
per share amount is less than 3%.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 987,867
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 987,867
<CASH> 6,812
<RECOVER-REINSURE> 732
<DEFERRED-ACQUISITION> 123,966
<TOTAL-ASSETS> 1,315,617
<POLICY-LOSSES> 23,012
<UNEARNED-PREMIUMS> 391,746
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 99,800
75,000
0
<COMMON> 161
<OTHER-SE> 518,354
<TOTAL-LIABILITY-AND-EQUITY> 1,315,617
31,874
<INVESTMENT-INCOME> 13,991
<INVESTMENT-GAINS> (192)
<OTHER-INCOME> 1,218
<BENEFITS> 5,031
<UNDERWRITING-AMORTIZATION> 10,672
<UNDERWRITING-OTHER> 2,870
<INCOME-PRETAX> 23,055
<INCOME-TAX> 6,947
<INCOME-CONTINUING> 16,108
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,108
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.02
<RESERVE-OPEN> 17,759
<PROVISION-CURRENT> 6,464
<PROVISION-PRIOR> 3,384
<PAYMENTS-CURRENT> 391
<PAYMENTS-PRIOR> 7,391
<RESERVE-CLOSE> 19,825
<CUMULATIVE-DEFICIENCY> 0<F1>
<FN>
<F1>Not Applicable for mortgage guaranty and specialty reinsurer
</FN>
</TABLE>
